-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, iyc4FF1WyPP+mBjPl1bVDtLkAEbFiZ7ItlNad1QCBJYtBnH7uStsrmeQlI1iN80f oRXPwqxx85BdHBTOW3k9vA== 0000950134-95-000878.txt : 19950504 0000950134-95-000878.hdr.sgml : 19950504 ACCESSION NUMBER: 0000950134-95-000878 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950502 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS INC CENTRAL INDEX KEY: 0000024090 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840755371 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-59039 FILM NUMBER: 95533948 BUSINESS ADDRESS: STREET 1: P O BOX 149151 CITY: AUSTIN STATE: TX ZIP: 78714 BUSINESS PHONE: 5128377100 MAIL ADDRESS: STREET 1: P O BOX 149151 CITY: AUSTIN STATE: TX ZIP: 78714 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL INVESTORS LIFE INC DATE OF NAME CHANGE: 19881222 S-4 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1995 Registration No. 33- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------- CITIZENS, INC. (Exact name of registrant as specified in its charter) COLORADO 6311 84-0755371 (State or other jurisdiction of (Primary standard industrial (I.R.S. Employer incorporation or organization) classification code number) Identification No.) 400 EAST ANDERSON LANE AUSTIN, TEXAS 78752 (512) 837-7100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------- HAROLD E. RILEY, CHAIRMAN OF THE BOARD CITIZENS, INC. 400 EAST ANDERSON LANE AUSTIN, TEXAS 78752 (512) 837-7100 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------- COPIES TO: REID A. GODBOLT, ESQ. PATRICK J. BROWNE, ESQ. JONES & KELLER, P.C. MONTGOMERY, BARNETT, BROWN, READ, 1625 BROADWAY, SUITE 1600 HAMMOND & MINTZ, L.L.P. DENVER, COLORADO 80202 3200 ENERGY CENTRE, 1100 POYDRAS STREET (303) 573-1600 NEW ORLEANS, LOUISIANA 70163-3200 (504) 585-3200 ---------- Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / CALCULATION OF REGISTRATION FEE
============================================================================================================================= Title of each class of Amount to Proposed maximum Proposed Amount of securities to be registered be registered offering price maximum aggregate registration fee per share offering price - ----------------------------------------------------------------------------------------------------------------------------- Class A Common Stock, 2,341,334(1) $8.50(2) $19,901,339(2) $6,863 No Par Value shares =============================================================================================================================
(1) Represents the maximum number of shares of the Registrant's Class A Common Stock to be issued in connection with the Merger described herein. (2) Estimated pursuant to Rule 457(f)(1) and (2) solely for the purpose of calculating the registration fee based on the market value of the securities to be received by the Registrant as determined on April 27, 1995. ================================================================================ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(a), may determine. ---------- This Registration Statement consists of 171 consecutively numbered pages. The Exhibit Index is on consecutively numbered page 139. 2 CITIZENS, INC. Cross-Reference Sheet For Registration Statement on Form S-4 and Prospectus-Proxy Statement
Form S-4 Item No. Item Caption Heading in Prospectus - --------- ------------ --------------------- 1 Forepart of Registration Statement Outside Front Cover and Outside Front Cover Page of Prospectus 2 Inside Front and Outside Back Cover Inside Front Cover Pages of Prospectus 3 Risk Factors, Ratio of Earnings to Summary; Risk Factors; The Merger Fixed Charges and Other Information 4 Terms of the Transaction Summary; The Merger 5 Pro Forma Financial Information Unaudited Pro Forma Combined Financial Statements and Selected Comparative and Pro Forma Financial Data 6 Material Contacts with the Company Summary; The Merger - Background Being Acquired and Reasons For The Merger 7 Additional Information Required for Not applicable Reoffering by Persons and Parties Deemed to be Underwriters 8 Interests of Named Experts and Not applicable Counsel 9 Disclosure of Commission Position Not applicable on Indemnification for Securities Act Liabilities 10 Information with Respect to S-3 Incorporation of Certain Documents Registrants by Reference; Risk Factors 11 Incorporation of Certain Information Incorporation of Certain Documents by Reference by Reference
ii 3 12 Information with Respect to S-2 or Information Concerning ALFC; S-3 Registrant Incorporation of Certain Documents by Reference 13 Incorporation of Certain Information Incorporation of Certain Documents by Reference by Reference 14 Information with Respect to Not applicable Registrants Other Than S-2 or S-3 Registrants 15 Information with Respect to S-3 Not applicable Companies 16 Information with Respect to S-2 or Summary; Information Concerning ALFC S-3 Companies 17 Information with Respect to Not applicable Companies Other than S-2 or S-3 Companies 18 Information if Proxies, Consents Summary; Combined Annual and Special Meeting or Authorizations are to be Solicited 19 Information if Proxies, Consents Not applicable or Authorizations Are Not To Be Solicited or in an Exchange Offer
iii 4 NOTICE OF COMBINED ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 27, 1995 ________________________________________ To the Shareholders of American Liberty Financial Corporation: Notice is hereby given that a Combined Annual and Special Meeting (the "Meeting") of shareholders of American Liberty Financial Corporation ("ALFC") will be held on Thursday, July 27, 1995 at 10:00 a.m. Central Time, at Baton Rouge Country Club, Fairway Room, Second Floor, 8551 Jefferson Highway, Baton Rouge, Louisiana to consider and act upon the following: 1. To vote upon approval and adoption of a Plan and Agreement of Merger dated December 8, 1994 ("Merger Agreement") under which Citizens Acquisition, Inc., a wholly-owned subsidiary of Citizens, Inc., will merge (the "Merger") with and into ALFC, with ALFC being the survivor, and shareholders of ALFC will receive shares of Citizens, Inc. Class A Common Stock for their ALFC Common and Preferred shares as described in the accompanying Proxy Statement-Prospectus. 2. To elect a full board of six Directors to serve until (i) the Merger is consummated; or (ii) if the Merger is not consummated, until the next annual meeting and until their successors are elected and qualified. 3. To transact such other business, if any, as may properly come before the Meeting or any adjournment thereof. Only shareholders of record of ALFC Common Stock as of the close of business on June 8, 1995 will be entitled to notice of and to vote at the Meeting. No holders of ALFC Preferred Stock have voting rights with respect to the matters to be addressed at the Meeting. Shareholders, including holders of ALFC preferred stock, may, under certain circumstances, dissent from the Merger and obtain payment for shares, as described in the accompanying Proxy Statement-Prospectus. A copy of Part XIII of the Louisiana Business Corporation Law, which sets forth the rights of dissenters, is attached to the Proxy Statement-Prospectus as Appendix B. Shareholders are cordially invited to attend the Meeting. Whether or not you intend to attend the Meeting, please fill in, date, sign, and return promptly the enclosed proxy card in the enclosed postage-prepaid envelope so that your shares may be voted at the Meeting if you are unable to attend in person. The giving of a proxy will not affect your right to vote in person if you attend the Meeting. ALFC's Annual Report to shareholders is enclosed. By Order of the Board of Directors W.P. Duplessis, Secretary Baton Rouge, Louisiana June 23, 1995 iv 5 AMERICAN LIBERTY FINANCIAL CORPORATION PROXY STATEMENT FOR COMBINED ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JULY 27, 1995 CITIZENS, INC. PROSPECTUS CLASS A COMMON STOCK, NO PAR VALUE UP TO 2,341,334 SHARES This Proxy Statement-Prospectus is furnished in connection with the solicitation by the Board of Directors of American Liberty Financial Corporation ("ALFC") of proxies from holders of shares of ALFC Common Stock, for use at the Combined Annual and Special Meeting of ALFC Shareholders (the "Meeting") to be held on July 27, 1995. This Prospectus pertains to the number of shares of Class A Common Stock, no par value, of Citizens, Inc. ("Citizens") to be issued in connection with a Plan and Agreement of Merger dated December 8, 1994 ("Merger Agreement") by and among Citizens, ALFC, Citizens Acquisition, Inc. ("Acquisition") and American Liberty Life Insurance Company ("ALLIC"). Upon consummation of the Merger, each outstanding share of ALFC Common Stock, will be converted into 1.10 shares of Citizens Class A Common Stock, and each outstanding share of ALFC Preferred Stock, will be converted into 2.926 shares of Citizens Class A Common Stock, all as described in this Proxy Statement-Prospectus. No fractional shares of Citizens Class A Common Stock will be issued in the Merger; rather, share fractions will evidence the right to receive a cash value per fractional share of Citizens Class A Common stock which will equal the average closing price of the Class A Common Stock as reported on the American Stock Exchange for the five trading days prior to the effective date of the Merger. At present, the directors of ALFC know of no other matters to be presented at the Meeting, other than the election of directors of ALFC. All information contained in the Proxy Statement-Prospectus with respect to Citizens and Acquisition has been furnished by Citizens and all information with respect to ALFC and ALLIC has been furnished by ALFC. The approximate date of mailing of this Proxy Statement- Prospectus to shareholders of ALFC is June 23, 1995. ________________________ Your proxy in the form enclosed is solicited by the Board of Directors of ALFC for use at the Meeting. Only shareholders of record at the close of business on June 8, 1995 are entitled to notice of and to vote at the Meeting. On June 8, 1995, the number of outstanding shares of ALFC Common Stock entitled to be voted at the Meeting was 2,099,296, each of which is entitled to one vote; the number of outstanding shares of ALFC's Preferred Stock was 10,485, which are not entitled to vote. If the accompanying proxy form is signed and returned, the shares represented thereby will be voted as instructed. In the event no instructions are given, it will be voted for the Merger and for the election of the nominees listed below and upon such other matters as may properly come before the Meeting. If, after sending in your proxy, you decide to vote in person or decide to revoke your proxy for any other reason, you may do so by notifying the Secretary in writing prior to the voting of the proxy. The expenses of soliciting proxies and the cost of preparing, assembling and mailing material in connection with the solicitation of proxies will be borne by ALFC. In addition to the use of the mails, certain directors, officers or regular employees of ALFC or its subsidiaries, who receive no compensation for their services other than their regular salaries or fees, if any, may solicit proxies personally. The Directors and management of ALFC know of no matters to be brought before the Meeting other than those mentioned herein. If, however, any other matters properly come before the Meeting, it is intended that the proxies will be voted in accordance with the judgment of the person or persons voting such proxies. This proxy statement and the material which accompany it are expected to be mailed to ALFC shareholders on or about June 23, 1995. The ALFC 1994 Annual Report to shareholders is enclosed. ________________________ The Citizens Class A Common Stock is listed on the American Stock Exchange under the symbol "CIA." On ______________, 1995, the closing price of Citizens Class A Common Stock was $ per share. ________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS THE COMMISSION OR ANY STATE REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ________________________ AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS." ________________________ 6 No person is authorized to give any information or to make any representation not contained in this Proxy Statement-Prospectus, and if given or made, such information or representation should not be relied upon as having been authorized. This Proxy Statement- Prospectus does not constitute an offer to exchange or sell, or a solicitation of an offer to exchange or purchase, the securities offered hereby, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Proxy Statement-Prospectus nor any distribution of the securities to which this Proxy Statement-Prospectus relates shall, under any circumstances, create an implication that there has been no change in the affairs of Citizens, Acquisition, ALFC or ALLIC. This Proxy Statement-Prospectus does not cover any resales of shares of the securities offered hereby to be received by shareholders of ALFC upon consummation of the Merger Agreement. No person is authorized to use this Proxy Statement-Prospectus in connection with such resales, although such securities may be traded without use of this Proxy Statement-Prospectus by those shareholders of ALFC not deemed to be "affiliates" of either ALFC or Citizens. ________________________ The principal executive offices of both Citizens and Acquisition are located at 400 East Anderson Lane, Austin, Texas 78752, telephone (512) 837-7100. The principal executive offices of ALFC are located at Suite 302, 4962 Florida Boulevard, Baton Rouge, Louisiana 70896, telephone (504) 927-9630. ________________________ The date of this Proxy Statement-Prospectus is June 23, 1995. I-II 7 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-V INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-VI SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-VII COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-XIV SELECTED SUMMARY FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-XV RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 COMBINED ANNUAL AND SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 PROPOSED MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 INFORMATION CONCERNING CITIZENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SOURCE OF CITIZENS SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 RIGHTS OF ALFC DISSENTING SHAREHOLDERS TO RECEIVE PAYMENT FOR SHARES . . . . . . . . . . . . . . . . . . . . . . . 25 INFORMATION CONCERNING ALFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ALFC and its Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ALFC MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 31 Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 35 COMPARISON OF RIGHTS OF SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
I-III 8 Liability of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Assessment and Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 DEADLINE FOR CITIZENS SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
APPENDIX A -- PLAN AND AGREEMENT OF MERGER - AMERICAN LIBERTY FINANCIAL CORPORATION, AMERICAN LIBERTY LIFE INSURANCE COMPANY, CITIZENS, INC. AND CITIZENS ACQUISITION, INC., DATED DECEMBER 8, 1994 APPENDIX B -- PART XIII OF THE LOUISIANA BUSINESS CORPORATION LAW GOVERNING RIGHTS OF DISSENTING ALFC SHAREHOLDERS I-IV 9 AVAILABLE INFORMATION Both Citizens and ALFC are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Those reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC at 13th Floor, 7 World Trade Center, New York, New York 10048, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such reports, proxy statements and other information concerning Citizens may be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881. Citizens has filed with the SEC a Registration Statement on Form S-4 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Citizens Class A Common Stock to be issued in the Merger. This Proxy Statement-Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to Citizens and the Citizens Class A Common Stock, reference is made to the Registration Statement, including the exhibits thereto. Statements contained herein concerning the provisions of certain documents are not necessarily complete, and in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. I-V 10 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following document, which has been filed by ALFC with the SEC pursuant to the Exchange Act (File No. 0-8873), is incorporated by reference into this Proxy Statement-Prospectus and is deemed to be a part hereof: (a) ALFC's Annual Report on Form 10-KSB for the year ended December 31, 1994 (the "ALFC Form 10-KSB"). The following documents, which have been filed by Citizens with the SEC pursuant to the Exchange Act (File No. 0-16509), are incorporated by reference into this Proxy Statement-Prospectus and are deemed to be a part hereof: (a) Citizens' Annual Report on Form 10-K for the year ended December 31, 1994 (the "Citizens Form 10-K"); and (b) the description of the Citizens' Class A Common Stock contained in its Registration Statement on Form 8-A declared effective by the SEC on April 14, 1994. All documents filed by Citizens pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement-Prospectus and prior to the Meeting shall be deemed to be incorporated by reference into this Proxy Statement-Prospectus and to be part hereof from the date of the filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein will be deemed to be modified or superseded for purposes of this Proxy Statement-Prospectus to the extent that a statement contained herein or in any subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed to constitute a part of this Proxy Statement-Prospectus, except as so modified or superseded. THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (EXCLUDING EXHIBITS THERETO, UNLESS SUCH EXHIBITS ARE INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE TO EACH PERSON TO WHOM THIS PROXY STATEMENT-PROSPECTUS IS SENT (INCLUDING BENEFICIAL OWNERS OF ALFC COMMON STOCK AND PREFERRED STOCK), UPON WRITTEN OR ORAL REQUEST. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO W.P. DUPLESSIS, SECRETARY, AMERICAN LIBERTY FINANCIAL CORPORATION, 4962 FLORIDA BOULEVARD, SUITE 302, P.O. BOX 64626, BATON ROUGE, LOUISIANA 70896. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JULY 14, 1995. _____________________________ I-VI 11 SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement-Prospectus. This Summary is not intended to be complete and is qualified in its entirety by reference to the more detailed information appearing in this Proxy Statement-Prospectus, including the Appendices. Shareholders of ALFC are urged to read this Proxy Statement-Prospectus in its entirety. THE PARTIES TO THE MERGER Citizens, Inc. ("Citizens") is a Colorado corporation which is an insurance holding company. The principal executive office of Citizens is located at 400 East Anderson Lane, Austin, Texas 78752, and the telephone number at such office is (512) 837-7100. Citizens Acquisition, Inc. ("Acquisition"), a Louisiana corporation, is a wholly-owned subsidiary of Citizens which was formed solely to effectuate the Merger. Acquisition has the same principal executive office as Citizens. American Liberty Financial Corporation ("ALFC") is a Louisiana corporation which is a financial holding company. The principal executive office of ALFC is located at Suite 302, 4962 Florida Boulevard, Baton Rouge, Louisiana 70896. The telephone number at such office is (504) 927-9630. Neither ALFC nor any of its officers or directors are affiliated with Citizens, nor are any officers or directors of Citizens affiliated with ALFC. American Liberty Life Insurance Company ("ALLIC") is a Louisiana domestic insurance company which is wholly-owned by ALFC. ALLIC has the same principal executive office as ALFC. It is contemplated that ALLIC will act as a separate indirect subsidiary of Citizens after the Merger. AMERICAN LIBERTY FINANCIAL CORPORATION MEETING OF SHAREHOLDERS PERSONS ENTITLED TO VOTE; RECORD DATE Holders of record of shares of ALFC Common Stock, $.125 par value, at the close of business on June 8, 1995 ("Record Date"), will be entitled to notice of and to vote at the Combined Annual and Special Meeting of Shareholders (the "Meeting"). Holders of ALFC Preferred Stock do not have voting rights on any matters to be considered at the Meeting, but have the right to dissent from the proposed Merger described below. See "Rights of ALFC Dissenting Shareholders to Receive Payment For Shares" and "Combined Annual and Special Meeting -- Voting Securities."
I-VII 12 DATE, TIME AND PLACE OF MEETING The Meeting will be held on July 27, 1995, at 10:00 a.m. Central Time, at the Baton Rouge Country Club, Second Floor, Fairway Room, 8551 Jefferson Highway, Baton Rouge, Louisiana. BUSINESS TO BE TRANSACTED At the Meeting, shareholders will be asked to consider and vote upon approval of a Plan and Agreement of Merger ("Merger Agreement") under which Citizens Acquisition, Inc. will merge with and into ALFC with shareholders of ALFC receiving shares of Citizens Class A Common Stock ("the Merger") and vote upon the election of six directors. Pursuant to the Merger Agreement, ALFC common shareholders will receive 1.10 shares of Citizens Class A Common Stock for each one share of ALFC common stock owned, and ALFC preferred shareholders will receive 2.926 shares of Citizens Class A Common Stock for each one share of ALFC Preferred Stock owned. PROXY REVOCABILITY Proxies are revocable at any time prior to voting at the Meeting. See "Combined Annual and Special Meeting -- Revocability of Proxies." REQUIRED VOTE Approval of the Merger Agreement and the transactions contemplated thereby requires the affirmative vote of holders of a majority of ALFC Common Shares present and voting at the Meeting. See "Combined Annual and Special Meeting -- Voting Securities." No shareholder vote of Citizens is required by the Merger Agreement or applicable law. As of the Record Date there were 16,980,340 issued and outstanding shares of Citizens Class A Common Stock.
I-VIII 13 RECOMMENDATION OF THE BOARD OF DIRECTORS The ALFC Board of Directors has unanimously approved the Merger Agreement and recommends that the shareholders vote FOR approval of the Merger. This recommendation is based on factors described under "Proposed Merger -- Background and Reasons for the Merger," and that based upon considerations set forth therein, the exchange ratio in the Merger Agreement is fair, from a financial point of view to all of the shareholders of ALFC. OUTSTANDING SHARES OF ALFC As of the Record Date, there were outstanding 2,099,296 and up to 1,138 presently in scrip shares of ALFC Common Stock. As of the record date, ALFC directors, executive officers and their affiliates held 812,967 shares of ALFC Common Stock (not including ALFC Preferred Stock not converted into ALFC Common Stock as of the Record Date) or approximately 38.7% of the outstanding ALFC shares of ALFC Common Stock entitled to vote on the Merger. An affirmative vote of a majority of the voting shares present at a duly called meeting of ALFC shareholders is required to approve the Merger. Citizens has the option of not completing the Merger if the holders of more than 2.5% of outstanding ALFC shares of stock perfect dissenters' rights. See "Combined Annual and Special Meeting -- Voting Securities: and "Rights of Dissenting Shareholders." THE MERGER AGREEMENT SUMMARY OF THE TRANSACTION Citizens, Acquisition, ALFC and ALLIC have entered into a Plan and Agreement of Merger dated December 8, 1994 ("Merger Agreement") in which Citizens Acquisition will merge with and into ALFC and ALFC shareholders will receive shares of Citizens Class A Common Stock (the "Merger").
I-IX 14 CONSIDERATION FOR EACH SHARE OF ALFC Pursuant to the Merger Agreement, ALFC Common Stock shareholders (including holders of scrip shares) will receive 1.10 shares of Citizens Class A Common Stock for each one share of ALFC common stock held and each ALFC Preferred Stock shareholder will receive 2.926 shares of Citizens Class A Common Stock for each one share of ALFC Preferred Stock held. Fractional shares will not be issued in the Merger; rather, such fractional shares shall evidence the right to receive a cash value per fractional share of Citizens Class A Common Stock equal to the average closing price of the Citizens Class A Common Stock as reported on the American Stock Exchange for the five trading days prior to the effective date of the Merger. Any holder of ALFC stock who shall have properly perfected the dissenters' rights under Louisiana law shall not have the right to receive Citizens Class A Common Stock, but only cash. See "Proposed Merger--Receipt of Citizens Shares" and "Rights of ALFC Dissenting Shareholders to Receive Payment For Shares." CLOSING DATE The Merger Agreement provides that the actions contemplated thereby will be completed at closing ("Closing") on a closing date ("Closing Date") which shall be as soon as possible after all regulatory approvals and shareholder approvals are obtained in accordance with law and shall become effective ("Effective Date") on or as soon as possible after the Closing Date. It is fully anticipated that the Closing will occur and the Merger will be effective on or shortly after shareholder approval is obtained, but there can be no assurance that the conditions to the Merger will be satisfied or that the Merger will be consummated.
I-X 15 CONDUCT OF BUSINESS OF ALFC PRIOR TO ALFC and ALLIC have agreed that they will not enter into any CLOSING transactions prior to the Effective Date of the Merger other than in the ordinary course of business and will pay no stockholder dividends nor increase the compensation of officers and will not enter into any agreement or transaction which will adversely affect their respective financial conditions. See "Proposed Merger--Conduct of Business Pending the Merger; Other Covenants of the Parties." DISSENTERS' RIGHTS Under the Louisiana Business Corporation Law, shareholders of ALFC have the right to dissent from the Merger and demand payment of the value of their shares in cash. If holders of more than 2.5% of the outstanding shares of ALFC qualify as dissenters, Citizens may, at its option, decline to proceed with the Merger. See "Rights of ALFC Dissenting Shareholders to Receive Payment for Shares," "Proposed Merger--Other Conditions to Consummation of the Merger," and Appendix B which sets forth the relevant Louisiana statutes concerning rights of dissenting shareholders. CONDITIONS PRECEDENT TO THE MERGER In addition to approval by holders of ALFC Common Stock, the Merger is subject to the satisfaction (or waiver by the party entitled to the benefit thereof) of a number of conditions including (1) the performance by each party of its respective obligations, (2) the absence of any legal proceedings relating to the transactions contemplated by the Merger Agreement, (3) the continued material accuracy of representations made by each party, and (4) the delivery of certain legal opinions. See "Proposed Merger--Other Conditions to Consummation of the Merger."
I-XI 16 SUMMARY OF FEDERAL INCOME TAX CONSIDERATIONS The Merger is intended to be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that, accordingly, for federal income tax purposes: (i) no material gain or loss will be recognized by ALFC or Citizens as a result of the Merger; (ii) no gain or loss will generally be recognized by holders of ALFC Common Stock and ALFC Preferred Stock on the exchange of their shares of their ALFC stock for Citizens Class A Common Stock pursuant to the Merger; and (iii) the aggregate adjusted tax basis of the Citizens Class A Common Stock received by an ALFC shareholder in exchange for Citizens Class A Common Stock will be the same as the basis of the ALFC stock surrendered in exchange therefor. If the Merger were not to so qualify, the exchange of shares would be taxable. Consummation of the Merger is conditioned upon receipt by ALFC of an opinion of counsel substantially to such effect. See "Certain Federal Income Tax Consequences." ALFC SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AS WELL AS ANY APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES, IN LIGHT OF THEIR OWN PARTICULAR TAX SITUATIONS.
I-XII 17 TERMINATION OF THE MERGER AGREEMENT The Merger Agreement may be terminated by either party if the Effective Date does not occur by August 31, 1995. See "Proposed Merger--Other Conditions to Consummation of the Merger." The Merger Agreement may be amended upon the approval of the Board of Directors of each party provided that the number of shares of Citizens Class A Common Stock to be issued cannot be changed without the approval of the shareholders of ALFC. In addition, the Merger Agreement may be terminated and amended at any time prior to the Effective Date by unanimous consent of the parties; by any of the beneficiaries to conditions precedent to the consummation of the Merger unless the condition has been satisfied or waived; by any party if any suit, action, or proceedings pending in a court or governmental agency threatens to prohibit the transactions contemplated by the Merger; or if any party has discovered any material error in the representations of the other parties. See "Proposed Merger--Termination or Amendment of the Merger Agreement." ELECTION OF DIRECTORS An additional item to be considered at the Meeting is the election of a Board of Directors consisting of six members to hold office until (i) the Merger is consummated; or (ii) if the Merger is not consummated, until the next annual meeting of shareholders and until their successors shall be elected and shall qualify. See "Election of Directors." OTHER MATTERS The ALFC Board knows of no other matters that will come before the Meeting. If any additional matters come before the Meeting, the proxies will be voted at the discretion of the proxy holder.
I-XIII 18 COMPARATIVE PER SHARE DATA The following table compares the historical and pro forma per share data for Citizens and ALFC. The pro forma data reflects the Merger as if it were accounted for as a purchase. The data contained in the table is based upon the historical and pro forma financial statements appearing elsewhere herein and should be read in conjunction with the financial statements and the related notes (all data in thousands, except per share amounts).
HISTORICAL CITIZENS HISTORICAL CLASS A ALFC EQUIVALENT SHARE COMMON STOCK COMMON STOCK PRO FORMA ALFC COMMON ------------ ------------ --------- ---------------- Income per share before extraordinary items Year Ended December $0.25 $(0.20) $0.25 $0.28 31, 1994 Book value per share at December 31, 1994 $1.99 $3.82 $2.75 $3.03
Equivalent per share data was computed by multiplying the pro forma per share amounts by the exchange rate. No cash dividends have been paid by either Citizens or ALFC. I-XIV 19 SELECTED SUMMARY FINANCIAL INFORMATION CITIZENS, INC. INTRODUCTION TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated balance sheet reflects the purchase of ALFC by Citizens as if it occurred on December 31, 1994. The unaudited pro forma condensed consolidated income statement reflects the purchase of ALFC as if it had occurred on January 1, 1994. These financial statements should be read in conjunction with the accompanying notes and the separate historical financial statements of Citizens and ALFC included elsewhere herein. These pro forma financial statements include also the planned acquisition of Insurance Investors & Holding Co. ("Insurance Investors" or "II"). Management's estimate of the impact of applying purchase accounting, as if the two acquisitions had occurred as of January 1, 1994, is presented below. The unaudited pro forma financial information is not necessarily indicative either of the results of operations that would have occurred had the acquisition been consummated at the beginning of 1994 or of future results of operations of the consolidated entities. I-XV 20 PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (AMOUNTS IN THOUSANDS) PRO-FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1994 (UNAUDITED)
HISTORICAL ASSETS CITIZENS INC. HISTORICAL HISTORICAL PURCHASE ------ AND ALFC AND INSURANCE ADJUSTMENTS AND PRO-FORMA SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED ------------ ------------ --------- ------------ ------------ Long term Investments $93,829 14,339 2,173 (1,328) (a) 109,013 Short term Investments 0 734 0 734 - --- - --- Total Investments 93,829 15,073 2,173 (1,328) 109,747 Cash 4,259 712 165 5,136 Other receivables 1,593 668 0 2,261 Accrued investment income 1,570 307 34 1,911 Deferred policy acquisition costs 34,537 6,950 52 (7,002) (b) 34,537 Cost of Insurance acquired 2,272 0 0 6,106 (b) 8,378 Excess of cost over net assets acquired 3,345 0 0 11,360 (c) 14,705 Deferred taxes 1,521 1,831 0 (946) (e) 2,406 Other assets 6,872 772 3 7,647 --------- -------- -------- -------- Total Assets 149,798 26,313 2,427 8,190 186,728
I-XVI 21 PRO-FORMA CONSOLIDATED BALANCE SHEET (CONTINUED) DECEMBER 31, 1994 (UNAUDITED)
LIABILITIES AND HISTORICAL ---------------- CITIZENS INC HISTORICAL HISTORICAL PURCHASE STOCKHOLDERS EQUITY AND ALFC AND INSURANCE ADJUSTMENTS AND PRO-FORMA -------------------- SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED ------------ ------------ --------- ------------ ------------ Future policy benefit reserves 101,755 14,183 720 692 (d) 117,350 Other policyholder liabilities 8,310 1,745 366 10,421 Other liabilities 3,965 392 17 4,374 Notes payable 712 0 268 980 Deferred tax liability 0 1,870 0 (1,827) (f) 43 Minority interest 0 17 94 (111) (f) 0 ------ ----- ----- ------- ------ Total liabilities 114,742 18,207 1,465 (1,246) 133,168 Class A common stock 21,457 262 819 17,423 (f) 39,961 Class B common stock 283 0 47 (47) (f) 283 Preferred stock 0 262 0 (262) (f) 0 Additional Paid-in capital 0 6,019 576 (6,595) (f) 0 Unrealized loss on investments (2,970) 0 (19) 19 (f) (2,970) Retained earnings 18,467 1,563 (452) (1,111) (f) 18,467 ------ ----- ----- ------- ------ 37,237 8,106 971 9,427 55,741 Treasury stock (2,181) 0 (9) 9 (2,181) ------- - --- - ------- Total stockholders equity 35,056 8,106 962 9,436 53,560 ------ ----- --- ----- ------ Total liabilities and stockholders equity 149,798 26,313 2,427 8,190 186,728
I-XVII 22 PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
HISTORICAL CITIZENS INC HISTORICAL HISTORICAL PURCHASE AND ALFC AND INSURANCE ADJUSTMENTS AND PRO-FORMA SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED ------------ ------------ --------- ------------ ------------ Revenues: Premiums $43,861 7,698 12 $51,571 Net investment income 5,296 1,026 26 6,348 Other 55 190 0 245 ------- ----- -- ------- Total revenues 49,212 8,914 38 58,164 Benefits and Expenses Policy benefits 31,301 4,970 25 36,296 Commissions 12,382 513 0 12,895 Capitalization of DAC (13,128) (1,737) 0 190 (b) (14,675) Amortization of DAC 7,204 1,453 0 (726) (b) 7,931 Amortization of cost of insurance acquired 421 0 0 305 (b) 726 Amortization of excess of cost over net assets acquired 186 0 0 568 (c) 754 Other expenses 5,079 4,260 39 9,378 ------- ----- -- ------- Total benefits and expenses 43,445 9,459 64 337 53,305 ------ ----- -- --- ------ Income before taxes 5,767 (545) (26) (337) $4,859 Net income per share $0.25 (g)
I-XVIII 23 EXPLANATION OF PRO-FORMA ADJUSTMENTS: (a) Adjustment necessary to record acquired fixed maturities at market value. (b) Reverse ALFC and II policy acquisition costs at December 31, 1994 and establish cost of insurance acquired. Cost of insurance acquired represents the estimated present value of future profits in the acquired business This amount was calculated as the difference between ALFCs and II s historical future policy benefit reserves and the estimated gross premium reserve at December 31, 1994. The gross premium reserve was estimated assuming a level interest yield of 7%. Life mortality was based on appropriate multiples of the 1965-70 Select and Ultimate and the Ultimate Intercompany Table and withdrawals based on Linton B and BB tables as deemed appropriate based on individual life plan experience. Accident and health morbidity was based on multiples of 1974 Cancer tables, Stroke/Heart Attack Indemnity Table, 1985 NAIC Cancer Tables and published claim costs and withdrawals based on Linton C and CC Tables as deemed appropriate based on individual health plan experience. Cost of acquired is being amortized in proportion to the profit over the lives of the respective policies. (c) Excess of cost over net assets acquired was calculated as follows: (in thousands)
ALFC II ---- -- Acquisition of common stock $17,575 929 Estimated fair value of (6,204) ------- net assets acquired (940) ----- Excess of cost (purchase price) over net assets acquired $11,371 (11) ======= ====
The excess of cost over net assets acquired is being amortized over a 20-year period. (d) Revaluation of policy benefit reserves to reflect Company reserve assumption with regard to interest rates, lapse rates and surrenders. (e) Establish deferred taxes for basis differences between book and tax value of assets and liabilities at December 31, 1994. (f) Eliminate ALFC and II capital, minority interest, and retained earnings and record the cost of net assets acquired as increased capital of the Company due to the issuance of additional Class A common shares. I-XIX 24 (g) Calculated using estimated common shares outstanding of 19,433,080. I-XX 25 RISK FACTORS The following risk factors, in addition to those discussed elsewhere in this Proxy Statement-Prospectus, should be considered carefully in evaluating Citizens and its business. SIGNIFICANT MARKET OVERHANG. Citizens has filed a registration statement on Form S-3 with the Securities and Exchange Commission ("SEC") relating to the public offer and sale by certain holders of Citizens Class A Common Stock, including Harold E. Riley, Chairman of the Board of Citizens. The registration statement relates to approximately 6,296,000 shares of Class A Common Stock or approximately 39.2% of the Citizens Class A Common Stock outstanding before the Merger. This registration statement has not been declared effective by the SEC, although Citizens intends to request effectiveness as soon as possible. It may be assumed that sales of significant amounts of these shares in the public market could have a depressive effect on the price of the Citizens Class A Common Stock. Further, the prospect of such significant amounts of shares being offered into the public market place may have a depressive effect on the price of the Citizens Class A Common Stock. RECENT SALE OF SHARES AND EFFECT THEREOF. On October 27, 1994, Citizens completed an offering of 916,375 shares of its Class A Common Stock under an exemption from registration under the Securities Act of 1933. The offering was made under Regulation S, which provides that shares which are offered outside of the United States to non-United States persons pursuant to certain specific guidelines may be resold in the United States by persons who are not issuers, underwriters or dealers following the expiration of a 40-day period after the close of the offering period. The offering price per share was $7.00. The closing market price of the Class A common shares on the date the offering commenced (May 2, 1994) was $7.75 per share (as reported on the American Stock Exchange). Gross proceeds raised were $6,414,625 and net proceeds were approximately $5,400,000. On December 21, 1994, Citizens contributed $5,200,000 to its wholly-owned life insurance subsidiary. The subsequent resale of the Citizens Class A shares sold in this offering into the public market could adversely affect the price of the Citizens Class A Common Stock and it may be assumed that overseas investors would have more of an incentive to sell their Class A common shares because the price they paid for such stock is $7.00 per share. PROPOSED OFFERING OF 3,500,000 SHARES OF CITIZENS CLASS A COMMON STOCK OUTSIDE THE UNITED STATES AND EFFECT THEREOF. In the late Spring of 1995, Citizens intends to conduct an offering of up to 3,500,000 shares of Class A Common Stock outside the United States pursuant to a safe harbor rule relating to an exemption from registration under the Securities Act of 1933. The safe harbor, Regulation S, provides that shares which are offered outside of the United States to non-United States persons, pursuant to certain specific guidelines may be resold in the United States by persons who are not issuers, underwriters or dealers following the expiration of a 40-day period after the close of the offering period. The offering price will be at a discount to the then current market 1 26 price of the Citizens Class A Common Stock as quoted on the American Stock Exchange when the offering commences. Management is unable to determine how successful the offering will be. In the event all 3,500,000 shares are sold, the Company would realize gross proceeds that management estimates would be in the range of $25 to $30 million, based upon the current trading price of the Citizens Class A Common Stock. Assuming the Merger is consummated, the issuance of the shares would have the effect of increasing the aggregate number of Class A common shares outstanding by approximately 18%. Subsequent resale of these shares in the United States could have a depressive effect upon the price of the Class A common shares, and it may be assumed that overseas investors would have more of an incentive to sell their Class A common shares because the price they paid for such stock will probably be lower than the trading price of the Class A Common Stock. DEPENDENCE ON CITIZENS' CHAIRMAN. Citizens relies heavily on the active participation of its Chairman of the Board, Harold E. Riley. The loss of his services would likely create a significant adverse effect on Citizens. Citizens does not have an employment agreement with Mr. Riley, but does have "key man" life insurance on Mr. Riley totaling $1.25 million of which Citizens is the beneficiary. Citizens has no disability insurance regarding Mr. Riley. CONTROL. The shares of outstanding Class B Common Stock of Citizens, 100% of which is owned indirectly (through the Harold E. Riley Trust) by Harold E. Riley, Chairman of the Board of Citizens, have the right to elect a simple majority of the Board of Directors of Citizens. This right may make it more difficult and time consuming for a third party to acquire control of Citizens or to change the Board of Directors of Citizens. Additionally, Mr. Riley is the largest Class A shareholder. As a practical matter, Mr. Riley has veto power over significant corporate transactions. CONCENTRATION OF BUSINESS FROM PERSONS RESIDING IN THIRD WORLD COUNTRIES. For the years ended December 31, 1994 and 1993, approximately 91.8% and 92.5%, respectively, of Citizens' total insurance premium revenue was derived from policies issued on the lives of Latin Americans. The policies issued to such persons are ordinary, whole-life policies with an average face amount of $60,000 and are marketed by independent marketing firms primarily to heads of households which are in the top 3% to 5% income bracket of such countries. Virtually all of the new business of Citizens' present life insurance subsidiary comes from Latin America as well. There is a risk of loss of a significant portion of sales to Latin Americans should adverse events occur in the countries from which Citizens receives applications. To minimize inherent risk, Citizens is not chartered as an insurance company in any foreign country, maintains no assets or employees in foreign countries, accepts only applications and premiums remitted directly to its main office in United States currency drawn on U.S. banks, and includes various limitations to coverage which are designed to minimize exposure to loss caused by social, 2 27 economic and political conditions. Citizens is not aware of any adverse trends in these countries which would have a material adverse impact on the Company's business. Furthermore, management believes that political or economic instability in these countries would likely have a favorable impact on its business since such instability would generally strengthen the demand for U.S. dollar-denominated policies. INABILITY TO ELECT DIRECTORS. The Class A Common Stock of Citizens being offered hereby represents a minority interest in Citizens. As cumulative voting of shares is not permitted by the Articles of Incorporation of Citizens, the shareholders of Citizens will not be in a position to elect any of Citizens' directors or to otherwise control Citizens. Also, the Class B Common Stock of Citizens elects a simple majority of the Citizens' Board. Therefore, as a practical matter, control of Citizens lies outside the Class A shareholders. See "Comparison of Rights of Security Holders." NO DIVIDENDS. To date, Citizens has not paid cash dividends and its current policy is to retain earnings for use in the operations and expansion of its business. Hence, it is highly unlikely that cash dividends will be paid in the near future. Also, the Class A Common Stock of Citizens has a right to twice the cash dividends of the Class B shares. Because the Class B shareholders control Citizens, there is little economic incentive for the Class B shareholders to decide that cash dividends should be paid when they will receive only one-half of the per share cash dividends of the Class A Common shares, except that the holders of Class B Common shares are also the largest holders of Class A Common shares of Citizens. PERSISTENCY. Persistency is the extent to which policies sold remain in force. Policy lapses over those actuarially anticipated could have an adverse effect on the financial performance of Citizens. Policy sales costs are deferred and recognized over the life of a policy. Excess policy lapses, however, cause the immediate expensing or amortizing of deferred policy sales costs. As long as Citizens maintains lapse and surrender rates within its pricing assumptions for its insurance policies, Citizens believes that the present lapse and surrender rate should not have a material adverse effect on financial results. For the years ended December 31, 1994, 1993 and 1992, the Citizens' lapse ratio on ordinary business was 5.1%, 6.7% and 6.5%, respectively. In addition, most of Citizens' ordinary whole life policies are sold to residents of Latin American countries. Most of the foreign policyholders have elected, through independent third party trustees located outside the United States, to have their cash dividends be used to accumulate ownership of the Citizens Class A Common Stock in the open market. Management believes that this arrangement serves to maintain persistency which is high by industry standards. COMPETITION. The life insurance business is highly competitive and consists of a number of companies, many of which have greater financial resources, longer business histories, and more diversified lines of insurance coverage than Citizens. Such companies also generally have larger sales forces. Citizens also faces competition from companies located within foreign countries that conduct marketing in person and have direct mail 3 28 sales campaigns. Citizens may be at a competitive disadvantage in competing with these entities although management believes the products of Citizens purchased by its policyholders are competitive in the marketplace. Competition in the market in which Citizens competes is from three sources. First, Citizens competes with companies who are formed and operated within a particular county. These type of companies are subject to risks of currency fluctuations and generally use mortality tables which are based on the experience of the local population as a whole. As a result, their prospects of providing an economic return to policyholders is more uncertain than a U.S. dollar-based policy and their statistical cost of insurance is much higher than Citizens because they use mortality tables that are based on significantly shorter life spans than those that Citizens uses. The second source of competition is from companies who are not formed within a given country but are using local currencies. Again, the use of local-based currencies entails greater risks of uncertainty, due to fluctuations of local currencies and perceived instability and weakness of local currencies. Management has observed that these first two types of companies tend to sell universal life and annuities versus whole or ordinary life, which is the predominant type of life insurance sold by Citizens. Citizens sells primarily whole life policies. Finally, Citizens faces competition from companies who operate in the same mode as Citizens. Management believes that Citizens' competitive advantages include a history of performance, its sales force and its product, which has consistently paid a policy cash dividend. REGULATION. Insurance companies are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; triennial examinations of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding reserves for unearned premiums, losses and other matters. Citizens is subject to this type of regulation in any state in which it is licensed to do business. Such regulation could involve additional costs and restrict operations. Citizens is currently subject to regulation in Colorado under the Colorado Insurance Holding Company Act. Intercorporate transfers of assets and dividend payments from Citizens' life insurance subsidiaries are subject to prior notice and approval if they are deemed "extraordinary" under these statutes. Citizens is required under Colorado insurance laws to file detailed annual reports with the Colorado Division of Insurance and all of the states in which it is licensed. The business and accounts of life insurance subsidiaries of Citizens are subject to examination by the Colorado Division of Insurance. The most recent triennial examination of Citizens' life insurance subsidiary was for the year ended December 31, 1991. 4 29 Citizens is currently not subject to regulation in the various countries in which its independent agents sell insurance policies, because it provides persons insurance that is not available in the country in which such persons reside and does not conduct business in such countries. However, there can be no assurance that such lack of regulation will continue. Management is not able to predict the effect of any such regulation of the business of Citizens. TRANSACTIONS WITH AFFILIATES. In the past, Citizens has completed a number of substantial transactions with its affiliates. The largest such transaction occurred on April 25, 1991 when the Board of Directors of Citizens, with Harold Riley and Rick Riley abstaining, approved an Asset Transfer Agreement ("Agreement") whereby Citizens acquired all of the assets and liabilities of HERMAR Corporation ("HERMAR"), a corporation 100% owned by Harold E. Riley and members of his family, in exchange for Citizens Class A and Class B Common Stock. Under the terms of the Agreement, HERMAR transferred to Citizens all of its assets, principally commercial real estate and Citizens Class A and B Common Stock, in exchange for 665,162 shares of newly issued Citizens Class A Common Stock plus the exchange of 7,047,474 Class A and 621,049 Class B common shares. The consideration was based on the market value of the net assets transferred compared to the mean of the bid and ask price of Citizens Class A Common Stock for the period from April 1, 1991 to April 19, 1991. The transaction was consummated in July 1991 with an effective date of April 1, 1991. Management does not believe that the frequency or magnitude of these transactions will occur in the future, although as a practical matter, Citizens and its affiliates are not restricted from entering into additional business relationships in the future. The transactions entered into with affiliates have been, in the opinion of management, on terms as favorable to Citizens as were obtainable from unaffiliated third parties. Citizens requires that all officers and directors disclose conflicts of interest to the Board of Directors. Additionally, all material contracts that involve affiliates are approved by the Board of Directors, and in such approval, affiliates have abstained from participation in the voting process. UNINSURED CASH BALANCES. Citizens maintains average cash balances in two primary depositories that are significantly in excess of Federal Deposit Insurance Corporation coverage, Texas Commerce Bank, Austin, Texas and Frost National Bank, Austin, Texas. If these depositories were to cease business, Citizens would likely lose a substantial amount of its cash. At December 31, 1994, Citizens had approximately $1.69 million in Texas Commerce Bank and approximately $1.27 million in Frost National Bank. However, management monitors the solvency of these depositories and does not believe a material risk of loss exists since both institutions are currently above the federally mandated levels of capital and liquidity. Management utilizes short-term U.S. Treasury securities as well as top-rated commercial paper issues as vehicles for managing temporary excess cash balances, and expects to continue the practice during 1995. ECONOMIC STATE OF THE INSURANCE INDUSTRY. The United States life insurance industry as a whole has, during the past several years, suffered substantial losses on investments, which has reduced the financial stability of several insurance companies. 5 30 Management believes that the main causes of industry losses have been excessive investment in high yield bonds and real estate. The life insurance subsidiary of Citizens has minimal holdings in high yield bonds, and its real estate holdings are primarily limited to relatively small, seasoned first mortgages on homes. Although the mortgage loans do create credit risk, management believes the risk exposure to such loss is relatively minor, since the average size of each mortgage is $28,000. Management believes that these factors leave Citizens with a small investment loss risk compared to that which the industry as a whole is exposed. However, Citizens and every insurance company are subject to the effects of fluctuating interest rates and investment spread risks. INTEREST RATE VOLATILITY: INVESTMENT SPREAD RISKS. Profitability in the insurance industry is affected by fluctuations in interest rates. Of prime importance in achieving profitability is an insurance company's ability to invest premiums at a higher interest rate than the interest rate credited to existing policies. Rapid decreases or increases in interest rates may affect an insurance company's ability to maintain a positive spread between the yield on invested assets and the assumed interest rate credited to policy reserves. Rapid interest rate changes could cause increased lapses of policies in force, although management believes the effect of such rate changes would be minimal since Citizens does not issue interest sensitive or Universal Life insurance policies and has only a small block of annuity business. 6 31 COMBINED ANNUAL AND SPECIAL MEETING Date, Time and Place of Meeting A Combined Annual and Special Meeting of Shareholders (the "Meeting") of American Liberty Financial Corporation ("ALFC") will be held on July 27, 1995 at 10:00 a.m., Central Time, at the Baton Rouge Country Club, Second Floor, Fairway Room, 8551 Jefferson Highway, Baton Rouge, Louisiana. BUSINESS TO BE TRANSACTED AT THE MEETING This Proxy Statement-Prospectus, the mailing of which commenced on June 23, 1995, is being furnished to shareholders of ALFC in connection with the solicitation of proxies by the Board of Directors of ALFC for use at the Meeting and at any adjournments thereof. At the Meeting, holders of ALFC Common Stock will be asked to consider and vote upon approval of a Plan and Agreement of Merger dated December 8, 1994 ("Merger Agreement") under which Citizens Acquisition, Inc., a wholly-owned subsidiary of Citizens, Inc. will merge with and into ALFC, with the shareholders of ALFC receiving shares of Citizens, Inc. as consideration in the transaction (the "Merger"). Pursuant to the Merger Agreement, ALFC shareholders will receive in the Merger one and one-tenth (1.10) share of Citizens, Inc. Class A Common Stock for each share of ALFC Common Stock held, and 2.926 shares of Citizens, Inc. Class A Common Stock for each share of ALFC Preferred Stock held. Nominees to act as directors of ALFC until the Merger is consummated, or for the ensuing year if the Merger is not consummated, will also stand for election at the Meeting. As of the date of this Proxy Statement-Prospectus, the Board of Directors of ALFC knows of no other business that will come before the Meeting. Should any other matter requiring a vote of shareholders arise, the proxies named in the enclosed form of proxy will vote the ALFC shares in accordance with their discretion with respect to any such matter. VOTING SECURITIES Only shareholders of record of ALFC Common Stock, $.125 par value, at the close of business on June 8, 1995, will be entitled to vote at the Meeting. On that date, there were issued and outstanding 2,099,296 shares of ALFC Common Stock. Each share of Common Stock is entitled to one vote per share. In addition, as of June 8, 1995, there were issued and outstanding, 10,485 shares of 8% non-cumulative, non voting Preferred Stock outstanding. The Preferred shareholders have no voting rights on any matter before the Meeting, but have the right to dissent from the Merger. See "Rights of ALFC Dissenting Shareholders to Receive Payment for Shares." 7 32 A majority of the number of shares of outstanding ALFC Common Stock will constitute a quorum for the transaction of business at the Meeting. An affirmative vote of a majority of the voting shares present at the Meeting is required to approve the Merger. EXECUTIVE COMPENSATION Current Compensation - -------------------- The following table sets forth compensation of the President of ALFC and its subsidiaries individually whereby compensation exceeds $100,000. ALFC has no restricted stock awards, stock appreciation rights or long-term incentive plans for its executive officers. SUMMARY COMPENSATION TABLE Annual Compensation
==================================================================================================================== (a) (b) (c) (d) (e) Other Annual Name and Principal Position Year Salary Bonus Compensation - -------------------------------------------------------------------------------------------------------------------- James Ira Dunham, 1994 $139,054 -0- $ 14,208 President and Chairman 1993 95,134 -0- 15,699 of the Board 1992 90,010 -0- 17,824 ====================================================================================================================
Included in (e) "Other Annual Compensation" is insurance payments totaling $10,046 in 1992, $12,106 in 1993 and $11,764 in 1994; Board fees of $2,400 a year in 1992, 1993 and 1994; and commissions of $5,378 in 1992, $1,193 in 1993 and $44 in 1994. Compensation of Directors - ------------------------- ALFC and its subsidiaries have no arrangements by which directors are compensated for services as Directors, for committee participation or special assignment, other than a directors' attendance fee of $400 per meeting adopted November 1988. ALFC VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF The following table sets forth, as of June 8, 1995, the shares of ALFC Common Stock held by each person who is known to ALFC to be the beneficial owner of more than 5% of the ALFC's voting securities. Mr. Dunham, a nominee, is a control person of ALFC. 8 33
Name and Address Amount and Nature of Percent Title of Class of Beneficial Owner Beneficial Ownership of Class - -------------------------------------------------------------------------------------------------- Common Stock James Ira Dunham Record & 564,561 26.9% 13882 Lovett Road Beneficial Shares Baton Rouge, LA 70818 Common Stock Wilfred Paul Duplessis Record & 106,480 5.1 % 14261 Tiggy Duplessis Rd. Beneficial Shares Gonzales, LA 70737 Common Stock J.D. Weldon Record & 106,478 5.1 % 62280 Belleview Beneficial Shares Plaquemine, LA 70764
The following table sets forth, as of June 8, 1995, the shares of ALFC Common Stock beneficially owned by all Directors and nominees, naming them, and directors, nominees and officers of ALFC as a group, without naming them.
Amount and Nature of Percent Directors and Nominees Title of Class Beneficial Ownership of Class - ---------------------- -------------- ------------------------------------------------------------ James Ira Dunham Common Record and Beneficial Owner of 564,561 Shares 26.9% Wilfred Paul Duplessis Common Record and Beneficial Owner of 106,480 Shares 5.1 Charles Elliot Broussard Common Record and Beneficial Owner of 33,674 Shares 1.6 Dr. Monroe Jackson Common Record and Rathbone, Jr. Beneficial Owner of 34,073 Shares 1.6 Frank W. Harrison, Jr. Common Record and Beneficial Owner of 399 Shares (a) John Roy Melton Common Record and Beneficial Owner of 73,780 Shares 3.5 -------- ---- Directors, Nominees and Officers as a Group Common Record and (six persons) Beneficial Owner of 812,967 Shares 38.7% ======= ====
(a) Less than 1%. REVOCABILITY OF PROXIES Any ALFC shareholder has the power to revoke his proxy before its exercise at the Meeting or any adjournment thereof by (1) giving written notice of such revocation to the Secretary of ALFC, Wilfred P. Duplessis, P.O. Box 64626, Baton Rouge, Louisiana 70896, prior to the Meeting; (2) giving written notice of such revocation to the Secretary at the 9 34 Meeting; or (3) signing and delivering a proxy bearing a later date. The mere presence at the Meeting of a shareholder who has executed and delivered a valid proxy will not revoke such proxy. However, being present at the Meeting allows a shareholder to vote in person and revoke any prior proxy. PROXY SOLICITATION The cost of soliciting proxies will be borne by ALFC. In addition to solicitation by mail, officers and employees of ALFC may solicit proxies by telephone and personally, although these persons will receive no compensation for such solicitation other than their regular salaries. ALFC will reimburse brokers, custodians, nominees and other fiduciaries for their charges and expenses in forwarding materials to beneficial owners of ALFC shares, which charges are not estimated to exceed $5,000 plus expenses. ALFC is obligated under the Merger Agreement to bear certain expenses concerning the preparation, including the printing of this Proxy Statement-Prospectus. 10 35 PROPOSED MERGER BACKGROUND AND REASONS FOR THE MERGER ALFCs principal business is life insurance and its life insurance subsidiary, ALLIC, needs adequate capital and surplus to conduct and expand its business. In December 1992 ALLIC was notified by the Insurance Department of the state of Georgia that a new requirement increased the minimum capital and surplus to $1,500,000 each for all licensed companies. During the period subsequent to December 1992, ALLIC explored various possibilities that would have enabled it to meet this new minimum capital and surplus requirement. An analysis of these various possibilities convinced management that none of the available alternatives could be financially justified. As a result, ALLIC voluntarily terminated all agent contracts in Georgia effective June 30, 1993, and its license was suspended in Georgia on July 1, 1994. These capital commitments are the first of what management believes many states will require in the years to come. Thus, it is difficult for a small company such as ALLIC to conduct its business without adequate capital. See also "ALFC Management's Discussion and Analysis of Financial Condition and Results of Operations." In the Fall of 1994 ALFC management approached management of Citizens with respect to a possible business combination of the parties. Due to the continuing requirements of ALLIC to have sufficient capital and surplus to conduct its operations, ALFC considered the possibility of a capital injection or business combination in 1994, although it had not conducted any significant activities in this regard. After several discussions and meetings held over a several week period, a definitive agreement was executed on December 8, 1994, after it had been approved unanimously by the Board of Directors of both ALFC and Citizens. The valuation of the companies centered on a share exchange ratio. Management of Citizens and ALFC reviewed carefully the assets and liabilities of each company, and decided that determination of the exchange ratio should begin with a book value basis of each company, adjusted to a substantial degree to reflect values which are standard within the life insurance industry. The management of Citizens and ALFC reviewed the capital and surplus of their respective insurance subsidiaries, along with annual life insurance premium revenue valued at multiple factor depending upon the profitability of the product and paid up policy reserves. In addition, state licenses, agency force, and nonadmitted capital and surplus assets of the life insurance subsidiaries were reviewed. These values are summarized in the following table. 11 36
CITIZENS ALFC ------------- ------------- Capital and surplus of subsidiaries, along with a securities valuation reserve and investment reserves $9,368,000 $2,093,000 Life insurance in force as a multiple of annual premium revenue 92,500,000 7,732,000 Accident and health insurance in force as a factor of annual premium revenue 214,000 2,737,000 Paid up policy reserves and other reserves 1,753,000 270,000 State licenses 600,000 1,050,000 Agency force 12,500,000 700,000 Nonadmitted capital and surplus assets of subsidiaries and other miscellaneous values 11,506,000 3,139,000 Additional capital raised through 1994 offering 4,500,000 0 of securities (Less outstanding obligations) (787,000)(a) 0 ------------ ----------- Total adjusted book value $132,154,000 $17,721,000 ============ ===========
- ----------- (a) Includes notes payable to banks. Non-admitted capital and surplus assets of Citizens were comprised of common stock market values in excess of permitted admissible values and the excess of market value over book value of real estate holdings. For ALFC, such amounts represented the value of subsidiaries of ALFC. The adjusted book value per share of Citizens was calculated by dividing the adjusted book value ($132,154,000) by the number of equivalent shares outstanding (17,443,000) for a result of $7.58 per share. For ALFC, the adjusted book values per share was determined by dividing the ALFC adjusted book value of $17,721,000 by the number of equivalent common shares issued and outstanding (approximately 2,127,000) for a result of $8.33 per share. 12 37 The resulting values were reviewed carefully by each party. Also discussed at length were how payment would be made to ALFC shareholders, and the tax consequences of the Merger to ALFC shareholders. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of ALFC believes that the Merger should be effectuated because the Board believes a fair exchange ratio will result to the shareholders of ALFC. The Board believes the exchange ratio is fair to the shareholders of ALFC because the valuation of ALFC and Citizens was performed by both parties on a consistent basis. In other words, both sides agreed that their respective companies would be valued using procedures which the management of ALFC and Citizens determined to be reasonable. In addition, the market price of Citizens Class A Common Stock was nearly eight times the price of ALFC Common Stock, thus making the trade fair from a market price viewpoint. Accordingly, the Board of Directors believes the exchange ratio and, hence the price to be received for the ALFC shares in the Merger, is fair. ALFC believes that Citizens goal to build a profitable, expanding life insurance holding company is consistent with the goals of ALFC. The Board of Directors and management of ALFC, after careful study and evaluation of the economic, financial, legal and market factors, believes that the Merger will provide Citizens with increased opportunity for profitable expansion of its business, which in turn should benefit ALFC shareholders who become shareholders of Citizens. The terms of the Merger Agreement were the result of arm s length negotiations between representatives of ALFC and Citizens. Among the positive factors considered by the Board of Directors of ALFC in deciding to approve and recommend the Merger were: 1. The terms and conditions of the Merger Agreement, which management of ALFC believes is a fair price for the shares of ALFC; 2. The financial condition, business assets and liabilities and management of Citizens; 3. The financial and business prospects of Citizens as a result of being a larger company; 4. An active market exists in the Citizens Class A Common Stock, something that is substantially lacking for the ALFC Common Stock; 5. Economies of scale will be achieved by the two companies, particularly given that fewer regulatory filings will be required of the resulting single entity; 6. ALFC's directors' familiarity with and review of ALFC's and Citizens' business, operations, financial condition, earnings and prospects; 13 38 7. ALFC's directors' belief that the exchange ratio is fair to ALFC shareholders, particularly given the capital needs of ALLIC; 8. The expectation that the Merger will generally be a tax-free transaction to ALFC and to the ALFC shareholders (see "Certain Federal Income Tax Considerations"); 9. The growth and liquidity potential to holders of Citizens Class A Common Stock compared to the historical growth and liquidity of the ALFC Common Stock and ALFC Preferred Stock; 10. The demographics of ALFC's shareholder base and their expressed concerns regarding estate settlement, and, in that connection, desire for liquidity; 11. The ALFC Board's review of the business, operations, earnings and financial condition of Citizens on a historical, prospective and pro forma basis, and the enhanced growth opportunities for growth that the Merger makes possible; 12. The current and prospective economic environment and competitive constraints facing small insurance companies, including ALFC; 13. The ALFC Board's evaluation of the risks to consummation of the Merger, including the risk associated with obtaining all necessary regulatory approvals; 14. The increased liquidity that the Merger would provide to current ALFC shareholders; and 15. The ALFC Board's review of the possible alternatives to the Merger, the range of possible values to the ALFC shareholders of such alternatives and the timing and likelihood of actually receiving, and risks and rewards associated with seeking to obtain, those values. The ALFC Board did not assign any specific or relative weight to these factors in its consideration. All of the above factors contributed in determining the consideration received. The Board of Directors of ALFC considers the Merger particularly advantageous to ALFC shareholders in that shareholders will receive a security which, in the opinion of the ALFC Board, has the potential to achieve a greater growth and market value and which now has significantly greater market liquidity than the ALFC Common Stock. The exchange of ALFC shares solely for Citizens shares is also intended to be a tax-free exchange, thereby giving ALFC shareholders the equity participation in Citizens without initially incurring taxes. See "Certain Federal Income Tax Consequences." A conceivable detriment to the shareholders of ALFC of the Merger is the fact that the percentages for extraordinary growth in company size may be less for Citizens than 14 39 for ALFC, because it may be considered easier to expand the size of a small company versus a company several times its size. However, based upon Citizens recent growth record, ALFC management believes Citizens, under present circumstances, has better growth prospects than ALFC. Management is unable to articulate any other possible detriments of the Merger to ALFC shareholders. Citizens has indicated that in connection with future operations of ALLIC, Citizens intends to maintain capital and surplus of ALLIC above the required minimums under Louisiana law. The Board of Directors of ALFC made this determination without the assistance of a financial adviser, or a so-called "fairness opinion." The Board believes that its members spent a sufficient amount of time assessing the respective conditions of ALFC and Citizens and the terms of the Merger Agreement, and believes that the Board is in a better position to determine the fairness of the Merger than is an outside party. BOARD RECOMMENDATION THE ALFC BOARD OF DIRECTORS HAS CONCLUDED THAT THE MERGER IS IN THE BEST INTERESTS OF ALFC, ITS SHAREHOLDERS AND ITS INSURANCE POLICYHOLDERS AND RECOMMENDS UNANIMOUSLY THAT ALFC SHAREHOLDERS APPROVE THE MERGER AGREEMENT AT THE MEETING. REGULATORY REQUIREMENTS A condition to consummation of the Merger is the approval of the Louisiana Commissioner of Insurance, which is pending. The parties expect such approval to be forthcoming and do not believe the Merger is subject to any other insurance regulatory approval. The provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") are applicable to the Merger. Under the HSR Act and the rules and regulations adopted thereunder, the Merger cannot be consummated until notifications have been given and certain information has been furnished to the Federal Trade Commission and the Department of Justice and specified waiting-period requirements have been satisfied. Citizens and ALFC have filed notification and report forms under the HSR Act, along with requests for early termination of the waiting period, which have been granted. At any time before or after the consummation of the Merger, the Department of Justice, the Federal Trade Commission or any state could take such action under applicable antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the Merger or seeking divestiture of substantial assets by Citizens or ALFC. In addition, private parties may also seek to take legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Merger will not be made or, if such a challenge is made, that Citizens and ALFC will prevail. 15 40 Neither Citizens nor ALFC is aware of any other governmental or regulatory approvals required for consummation of the Merger, other than approval of the acquisition of control of ALLIC by the Louisiana Commissioner of Insurance and compliance with applicable securities laws. TERMS OF THE MERGER AGREEMENT The discussion below contains a summary of the Merger Agreement attached hereto as Appendix A, which is incorporated by reference herein. Shareholders desiring to obtain a copy of the Merger Agreement may obtain it by contacting W. P. Duplessis, Suite 302, 4962 Florida Boulevard, Baton Rouge, Louisiana 70806, phone number (504) 927-9630. The Merger Agreement is also on file with the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and is available during normal business hours for inspection at such offices. The Merger Agreement provides that the Citizens Class A Common Stock will be delivered to be distributed at a closing ("Closing") on a closing date ("Closing Date") which shall be as soon as possible after all regulatory approvals and shareholder approvals are obtained in accordance with the law. In order for the Merger to be consummated, the Merger Agreement must be approved by the Louisiana Commissioner of Insurance and by holders of ALFC Common Stock. The Merger will become effective ("Effective Date") on or as soon after the Closing Date as possible. It is presently anticipated that the Effective Date will occur on or before August 31, 1995, but there can be no assurance that the conditions to the Merger will be satisfied or that the Merger will be consummated on that date or any other date. The parties agreed to work diligently to consummate the proposed transaction. RECEIPT OF CITIZENS SHARES If the Merger is approved at the Meeting, ALFC shareholders who do not perfect dissenters rights will be notified prior to the Closing Date of the approvals and of the anticipated Closing Date. Shareholders will also be furnished with a "Letter of Transmittal" to an exchange agent ("Exchange Agent") that will be identified in the Letter of Transmittal. DO NOT SUBMIT YOUR ALFC SHARES AT THIS TIME. IF THE MERGER IS CONSUMMATED YOU WILL BE SENT A LETTER OF TRANSMITTAL AND YOU MAY SUBMIT YOUR ALFC SHARES WITH THE LETTER. As soon as administratively feasible after the Effective Time and after receiving a properly completed Letter of Transmittal and the associated certificates from ALFC shareholders involved, the Exchange Agent will distribute the Citizens Class A Common Stock to the ALFC shareholders. Presently, Citizens plans to appoint its current stock transfer agent, American Stock Transfer and Trust Company, New York, New York, as Exchange Agent and may appoint one or more forwarding agents to accept delivery of the ALFC shares for forwarding to the Exchange Agent. The instructions accompanying the Letter of Transmittal will provide details with respect to the surrender of certificates for ALFC shares and the procedure for obtaining certificates for Citizens Class A Common Stock, including instructions for obtaining 16 41 certificates for Citizens Class A Common Stock for lost or destroyed certificates of ALFC shares. The Exchange Agent will not be entitled to vote or exercise any rights of ownership with respect to ALFC shares held by it from time to time prior to the issuance of Citizens Class A Common Stock to former holders of ALFC shares, except that it will receive any such distributions paid or distributed with respect to the ALFC shares for the account of the persons entitled to those ALFC shares. It is not contemplated that any such distributions will be made in respect of the Citizens Class A Common Stock. After the Effective Date, there will be no transfers on the stock transfer books of ALFC of ALFC shares which were issued and outstanding immediately prior to the Effective Date. If after the Effective Date certificates representing ALFC shares are properly presented to ALFC, they will be canceled and exchanged for certificates representing Citizens Class A Common Stock in the ratio set forth above. Authorization of the Exchange Agent may be terminated by Citizens at any time after six months following the Effective Date. Upon termination of such authorization, any shares of ALFC and funds held by the Exchange Agent will be transferred to Citizens or its designee, who shall thereafter perform the obligations of the Exchange Agent. If outstanding certificates for ALFC shares are not surrendered or the payment for them not claimed prior to such date on which such payment would otherwise escheat or become the property of any governmental party, the unclaimed items shall, to the extent permitted by abandoned property and other applicable law, become the property of Citizens (and to the extent not in its possession shall be paid over to it) free and clear of all claims or interest of any persons previously entitled to such items. Notwithstanding the foregoing, neither the Exchange Agent nor any party to the Merger Agreement will be liable to any holder of ALFC shares for any amount paid to any governmental authority having jurisdiction of such unclaimed item pursuant to the abandoned property or other applicable law of such jurisdiction. FRACTIONAL SHARES No fractional shares of Citizens stock shall be issued as a result of the Merger Agreement; rather, such shares shall evidence the right to receive a cash value per fractional share of Citizens Class A common stock equal to the average closing price of the Class A common stock of Citizens as reported on the American Stock Exchange for the five trading days prior to the Effective Date. In the event the exchange of shares results in any shareholder being entitled to a fraction less than a whole share of Citizens stock, such shareholder shall be given a cash payment of fractions thereof at the rate per share from Citizens for one share of Citizens Class A common stock as calculated in the preceding sentence. 17 42 ACCOUNTING It is anticipated that the Merger will be accounted for as a purchase in accordance with Generally Accepted Accounting Principles. For accounting purposes, the effective date of the transaction is proposed to be January 1, 1995. OTHER CONDITIONS TO CONSUMMATION OF THE MERGER In addition to approval of the Merger by the holders of the ALFC Common Stock at the Meeting, the obligations of Citizens and ALFC to consummate the Merger are subject to the satisfaction (or waiver by the party entitled to benefit thereof) of a number of conditions, including: 1. The performance by each party of its respective obligations; 2. Approval of the Commissioner of Insurance of Louisiana in accordance with the laws of Louisiana; 3. The absence of any proceedings instituted or threatened to restrain or prohibit the transactions contemplated by the Merger Agreement; 4. The continued accuracy in all material respects of the representations and warranties made by each party in the Merger Agreement; 5. The delivery of certain legal opinions and closing certificates, including an opinion from counsel to ALFC and Citizens to the effect that if the transactions contemplated in the Merger Agreement are consummated in accordance with the terms of the Merger Agreement, they will constitute a tax-free reorganization within the meaning of the Internal Revenue Code of 1986; 6. Citizens may, at its option, decline to proceed with the Merger if dissenters rights are perfected by the holders of more than 2.5% of the outstanding shares of stock of ALFC (this percentage includes the common stock and the preferred stock); or 7. Any party to the Merger Agreement may decline to proceed with the Merger if the Effective Date does not occur by August 31, 1995. Either party may waive any conditions to its obligations to complete the Merger, except those which are required by law (such as shareholder and regulatory approval). 18 43 TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT The Merger Agreement may be amended upon approval of the Board of Directors of each party provided that the number of shares of Citizens Class A Common Stock issuable cannot be amended without approval of the shareholders of ALFC. The Merger Agreement may be terminated and abandoned at any time (whether before or after the approval and adoption by ALFC shareholders) prior to the Effective Date by unanimous consent of Citizens, ALFC and ALLIC; by any of the parties who are beneficiaries to conditions precedent to the consummation of the Merger unless the matter has been satisfied or waived; by any party if any suit, action, or other proceeding is pending or threatened before any court or governmental agency in which it is sought to restrain, prohibit or otherwise affect the consummation of the transactions contemplated by the Merger Agreement; by any party if there is discovered any material error, misstatement or omission in the representations and warranties of any other party; by Citizens if dissenters rights are perfected in accordance with Louisiana law for more than 2.5% of the outstanding shares of ALFC; or by any party if the Agreement Effective Date does not occur by August 31, 1995. Any of the terms or conditions of the Merger Agreement may be waived at any time by the party which is entitled to the benefit thereof by action taken by its Board of Directors. EXPENSES AND LIABILITY FOR TERMINATION Each of the parties to the Merger Agreement will pay its own fees and expenses incurred in connection with the transaction contemplated by the Merger Agreement, including costs incurred in connection with the termination of the Merger Agreement. CONDUCT OF BUSINESS PENDING THE MERGER; OTHER COVENANTS OF THE PARTIES ALFC and ALLIC have agreed that they will not enter into any transactions prior to the Effective Date other than in the ordinary course of business and will pay no stockholder dividends nor increase the compensation of officers and will not enter into any transaction which would adversely affect their respective financial conditions. Each party has agreed to provide the other with information as to any significant corporate developments during the term of the Merger Agreement and to promptly notify the other parties if it discovers that any of its representations, warranties or covenants contained in the Merger Agreement or any document delivered in connection therewith was not true and correct in all material respects or became untrue or incorrect in any material respect. All of the parties to the Agreement have agreed to take all such actions as may be reasonably necessary and appropriate in order to consummate the transactions contemplated by the Merger Agreement. 19 44 The Board of Directors of ALFC, subject to its fiduciary obligations to shareholders, has agreed to use its best efforts to obtain the requisite approval of ALFC shareholders for the Merger Agreement and the transactions contemplated thereby. STOCK TRANSFER RESTRICTIONS APPLICABLE TO "AFFILIATES" OF ALFC The Merger Agreement provides that any ALFC shareholder who is an "affiliate" of ALFC as defined in the rules adopted under the Securities Act of 1933 will enter into an agreement to not dispose of any Citizens shares received by him in violation of certain transfer restrictions under SEC Rules 144 and 145. The Merger Agreement also provides that Citizens will satisfy the public information requirements of SEC Rules 144 and 145. INTERESTS OF CERTAIN PERSONS IN THE MERGER Prior to the proposed Merger, there was no affiliation between Citizens (including its directors, officers and affiliates) and ALFC and its directors, officers and affiliates. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes the material federal income tax considerations relevant to the exchange of shares of ALFC Common and Preferred Stock for Citizens Common Class A Stock ("Citizens Class A Common Stock") pursuant to the Merger, that are generally applicable to holders of ALFC Common and Preferred Stock. This discussion is based on currently existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury Regulations thereunder and current administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to Citizens, ALFC or ALFC's shareholders as described herein. There can be no assurance that such changes will not occur. ALFC shareholders should be aware that this discussion does not deal with all federal income tax considerations that may be relevant to particular ALFC shareholders in light of their particular circumstances, such as shareholders who are dealers in securities, who are financial institutions, who are subject to the alternative minimum tax provisions of the Code, who are foreign persons, who do not hold their ALFC Common and Preferred Stock as capital assets, or who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions. In addition, the following discussion does not address the tax consequences of the Merger under foreign, state or local tax laws, the tax consequences of transactions effectuated prior or subsequent to or concurrently with, the Merger (whether or not any such transactions are undertaken in connection with the Merger), including without limitation any transaction in which shares of ALFC Common and Preferred Stock are acquired or shares of Citizens Class A Common Stock are disposed of. Accordingly, ALFC SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX 20 45 CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER. The Merger is intended to constitute a "reorganization" within the meaning of Section 368(a) of the Code (a "Reorganization"). Provided that the Merger does so qualify as a Reorganization, then, subject to the limitations and qualifications referred to herein, the Merger will generally result in the following federal income tax consequences: (a) No gain or loss will be recognized by holders of ALFC Common and Preferred Stock solely upon their receipt in the Merger of Citizens Class A Common Stock in exchange therefor (except to the extent of cash received in lieu of a fractional share of Citizens Class A Common Stock). (b) The aggregate tax basis of the Citizens Class A Common Stock received by ALFC shareholders in the Merger (including any fractional share of Citizens Class A Common Stock not actually received) will be the same as the aggregate tax basis of the ALFC Common and Preferred Stock surrendered in exchange therefor. (c) The holding period of the Citizens Class A Common Stock received by each ALFC shareholder in the Merger will include the period for which the ALFC Common and Preferred Stock surrendered in exchange therefor was considered to be held, provided that the ALFC Common and Preferred Stock so surrendered is held as a capital asset at the time of the Merger. (d) Cash payments received by holders of ALFC Common and Preferred Stock in lieu of a fractional share will be treated as if such fractional share of Citizens Class A Common Stock had been issued in the Merger and then redeemed by Citizens. An ALFC shareholder receiving such cash will recognize gain or loss, upon such payment, measured by the difference (if any) between the amount of cash received and the basis in such fractional share. (e) Cash received by the ALFC shareholders who properly exercise their dissenters' rights will be treated as having been received in redemption of the shares so cashed out, and may result in taxable gain or loss, measured by the difference (if any) between the amount of cash received and such shareholder's basis in the ALFC Common and Preferred Stock. Provided the shares were held as a capital asset at the time of the redemption, such gain or loss will constitute capital gain or loss, and such gain or loss will be long term capital gain or loss if the holding period for such shares was greater than one year. It is possible that for some shareholders, the distribution of cash may be treated as a dividend taxable as ordinary income. (f) Neither Citizens, Citizens Acquisition, Inc. nor ALFC will recognize material amounts of gain solely as a result of the Merger. After the Merger, utilization of ALFC net operating losses or built-in losses, if any, will be subject to certain limitations contained in Section 382 of the Code. 21 46 ALFC shareholders should also be aware that the IRS may examine transactions taking place before, contemporaneously with, or after a reorganization to determine whether reorganization treatment is appropriate, or in some cases to determine whether shareholders will be taxed on other economic benefits that are included as part of the overall transaction. Thus, loan transactions between parties, compensation arrangements, noncompete agreements, consulting arrangements and other transactions could be reviewed by the IRS and determined to constitute taxable income to specific parties to the Merger. Gain could also have to be recognized to the extent that an ALFC shareholder was treated as receiving (directly or indirectly) consideration other than Citizens Class A Common Stock in exchange for the shareholder's Common and Preferred Stock of ALFC. Furthermore, if the IRS were to establish as to some ALFC shareholders that part of the Citizens Class A Common Stock received in the Merger is severable from the Merger, resulting in a proportionally increased equity interest being received in the merger by other ALFC shareholders, the ALFC shareholders whose equity interests were deemed to be constructively increased by the Merger may be treated as having received a taxable stock dividend. Thus, ALFC shareholders should consult with their tax advisors as to the tax consequences to them of the Merger. Under Section 3406 of the Code, ALFC shareholders may be subject to "backup withholding" at the rate of 31% on "reportable payments", if any, to be received by them if they fail to furnish their correct taxpayer identification numbers to Citizens or for certain other reasons. Citizens will report to these persons and to the IRS for each calendar year the amount of any reportable payments during that year and the amount of tax withheld, if any, with respect to those reportable payments. The parties are not requesting and will not request a ruling from the Internal Revenue Service (the "IRS") in connection with the Merger. Citizens and ALFC, however, will receive an opinion from their counsel to the effect that the Merger will constitute a Reorganization (the "Tax Opinion"). ALFC shareholders should be aware that the Tax Opinion does not bind the IRS or the courts. The IRS is not precluded from successfully asserting a contrary position. The Tax Opinion will not address the consequences of the Merger on the ALFC shareholders under applicable foreign, state or local income tax laws. The Tax Opinion is subject to certain assumptions and qualifications, including but not limited to the truth and accuracy of certain representations made by Citizens, ALFC and certain shareholders of ALFC, including representations in certain certificates to be delivered to counsel by the respective managements of Citizens and ALFC and by certain shareholders of ALFC. Of particular importance are certain representations relating to the Code's "continuity of interest" requirement. One of the requirements for tax-free reorganization treatment is that shareholders of the acquired corporation acquire a substantial and continuing interest in the acquiring corporation, i.e., have "continuity of interest." To satisfy the continuity of interest requirement, ALFC shareholders must not, pursuant to a plan or intent existing at or prior to the Merger, dispose of or transfer so much of either (i) their ALFC Common or Preferred Stock in anticipation of the Merger or 22 47 (ii) the Citizens Class A Common Stock to be received in the Merger (collectively, "Planned Dispositions"), such that ALFC shareholders, as a group, would no longer have a significant equity interest in the ALFC business being conducted after the Merger. ALFC shareholders will generally be regarded as having a significant equity interest as long as the number of shares of Citizens Class A Common Stock received in the Merger less the number of shares subject to Planned Dispositions (if any) represents, in the aggregate, a substantial portion of the entire consideration received by the ALFC shareholders in the Merger. The Tax Opinion will be based on the assumption that the ALFC shareholders have no plan or intention at the time of the Merger to engage in Planned Dispositions that would reduce their aggregate ownership of Citizens Class A Common Stock to a number of shares having in the aggregate a value at the time of the Merger of less than 50% of the total value of the ALFC Common and Preferred Stock outstanding immediately prior to the Merger. For purposes of such determination, shares of ALFC Common and Preferred Stock that are exchanged for cash or other property, or surrendered by dissenters will be treated as outstanding shares of ALFC Common and Preferred Stock immediately prior to the Merger. No assurance can be made that the "continuity of interest" requirement will be satisfied, and if such requirement is not satisfied, the Merger would not be treated as a Reorganization. Although literal compliance with Code Section 368 is a prerequisite to nonrecognition of gain or loss, such compliance does not guarantee the desired result. Regulation Section 1.368-1 describes the purpose of the reorganization provisions as being to exempt from the general rule of taxation, specifically described exchanges incident to such readjustments of corporate structures made in one of the particular ways specified in the Code, as are required by business exigencies and which effect only a readjustment of continuing interest in property under modified corporate forms. A plan of reorganization having no business or corporate purpose will not constitute a qualified reorganization plan. The reasons for the reorganization set forth in "Proposed Merger--Background of and Reasons for the Merger" contained in this Proxy Statement-Prospectus provide several corporate business purposes. Based upon the disclosure contained in this Proxy Statement- Prospectus and on other considerations, ALFC and Citizens management believe that valid business purposes exist for the transaction. Considered in conjunction with the business purpose test is the "continuity of business enterprise" requirement. Regulation Section 1.368-1(d)(2) provides the general rule that continuity of business enterprise requires the acquiring corporation to either (i) continue the acquired corporation's historic business or (ii) use a significant portion of acquired corporation's historic business assets in a business. The application of this general rule to certain transactions, such as mergers of holding companies, will depend on all facts and circumstances. The policy underlying the general rule, which is to ensure that reorganizations are limited to adjustments of continuing interests in property under modified corporate form, provides the guidance necessary to make these facts and circumstances determinations. 23 48 The historic business of a holding company generally comprises the business operations of its subsidiary. Revenue Ruling 85-197, 1985-2 C.B. 120, states that the continuity of business enterprise requirement is satisfied when a holding company is merged into its wholly owned operating subsidiary, because the historic business of the holding company is the business of its operating subsidiary. Revenue Ruling 81-247, 1981-2 C.B. 87, holds that where a significant portion of an acquired corporation's historical business assets, received by the acquiring corporation, remain with the acquiring corporation, or corporations directly controlled by the acquiring corporation, the continuity of business enterprise rules of Regulation Section 1.368-1(d) will be satisfied. These rulings indicate that the historic business of ALFC is the business operated by its subsidiary ALLIC. Although subject to challenge by the IRS, the continuity of business enterprise requirement should be satisfied because after the merger, the historic business of ALFC will be continued by ALLIC as a second tier subsidiary of Citizens. Pursuant to Section 1.368-3(b) of the Regulations, the shareholders of ALFC must file with their income tax returns for the year in which the transaction is consummated, a statement which provides details pertinent to the nonrecognition of gain or loss on the exchange, including the cost or other basis of stock transferred in the exchange, the amount of stock received and liabilities, if any, assumed in the exchange. A successful IRS challenge to the reorganization status of the Merger (as a result of a failure of the "continuity of interest" requirement or otherwise) would result in ALFC shareholders recognizing taxable gain or loss with respect to each share of Common and Preferred Stock of ALFC surrendered equal to the difference between the shareholder's basis in such share and the fair market value, as of the effective time of the merger, of the Citizens Class A Common Stock received in exchange therefor. In such event, a shareholder's aggregate basis in the Citizens Class A Common Stock so received would equal its fair market value, and the shareholder's holding period for such stock would begin the day after the Merger. INFORMATION CONCERNING CITIZENS Citizens, Inc. ("Citizens") is a Colorado corporation which is an insurance holding company. The principal executive office of Citizens is located at 400 East Anderson Lane, Austin, Texas 78752, and the telephone number at such office is (512) 837-7100. Specific information on Citizens is contained in its Annual Report on Form 10-K for the Year Ended December 31, 1994, which is incorporated herein by reference. SOURCE OF CITIZENS SHARES The Citizens Class A Common Stock which will be issuable in the Merger will be newly issued from authorized but unissued shares. Citizens has 50,000,000 Class A Common shares authorized, of which 16,980,340 shares were outstanding as of April 27, 1995. Citizens is obligated to reserve sufficient shares of its Class A Common Stock to enable it to perform its obligations under the Merger Agreement. The Citizens shares, 24 49 when delivered pursuant to the Merger Agreement, will be duly authorized and validly issued, fully paid and non-assessable. RIGHTS OF ALFC DISSENTING SHAREHOLDERS TO RECEIVE PAYMENT FOR SHARES The following is a summary of dissenters' rights available to shareholders of ALFC, which summary is not intended to be a complete statement of applicable Louisiana law and is qualified in its entirety by reference to Part XIII of the Louisiana Business Corporation Law, set forth in its entirety as Appendix B. CITIZENS HAS CONDITIONED THE MERGER ON, SUBJECT TO ITS RIGHT TO WAIVE, AND HAS RESERVED THE RIGHT TO ABANDON THE MERGER AGREEMENT IN THE EVENT THAT HOLDERS OF GREATER THAN 2.5% OF THE OUTSTANDING SHARES OF COMMON OR PREFERRED STOCK OF ALFC DISSENT FROM THE MERGER AND SEEK PAYMENT FOR THEIR SHARES IN ACCORDANCE WITH THE LOUISIANA BUSINESS CORPORATION LAW. NOTE: UNDER Section 131 OF PART XIII OF THE LOUISIANA BUSINESS CORPORATION LAW, IF THE MERGER AGREEMENT IS APPROVED BY AT LEAST 80% OF THE TOTAL VOTING POWER OF ALFC, A SHAREHOLDER WHO VOTED AGAINST THE CORPORATE ACTION SHALL NOT HAVE A RIGHT TO DISSENT. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS. A shareholder of ALFC who wishes to assert dissenters' rights must file with ALFC, prior to or at the Meeting of shareholders to vote upon the Merger, a written objection to the Merger Agreement, and must vote his or her shares against the Merger. If the Merger is approved by less than 80% of the total voting power of ALFC, ALFC shall promptly thereafter give written notice thereof, by registered mail, to each shareholder who filed a written objection to, and voted his or her shares against the Merger, at such shareholder's last address on ALFC's records. Each such shareholder may, within 20 days after the mailing of such notice, but not thereafter, file with ALFC a demand in writing for the fair cash value of his or her shares as of the day before such vote was taken. The shareholder must state in writing the value demanded, and give a post office address to which the reply of ALFC may be sent. At the same time the dissatisfied shareholder must deposit in escrow in a chartered bank or trust company located in East Baton Rouge Parish (the parish of the registered office of ALFC), the certificate representing his or her shares, duly endorsed and transferred to ALFC upon the sole condition that said certificates shall be delivered to ALFC upon payment of the value of the shares determined in accordance with the provisions of this Section 131 of Part XIII of the Louisiana Business Corporation Law. The shareholder must also deliver to ALFC, the written acknowledgment of such bank or trust company that it so holds his or her certificates of stock. UNLESS THE OBJECTION, DEMAND AND ACKNOWLEDGMENT MENTIONED IN THE PARAGRAPH ABOVE IS MADE AND DELIVERED BY THE SHAREHOLDER WITHIN THE NECESSARY 20 25 50 DAY PERIOD, HE OR SHE SHALL CONCLUSIVELY BE PRESUMED TO HAVE ACQUIESCED TO THE MERGER. If ALFC does not agree to the value stated and demanded by the shareholder, or does not agree that a payment is due, it shall, within 20 days after receipt of the shareholder's demand and acknowledgment, notify in writing the shareholder, at the designated post office address, of ALFC's disagreement, and shall state in such notice the value it will agree to pay if a payment should be held to be due; otherwise ALFC will be liable for, and shall pay to the dissatisfied shareholder, the value demanded by him or her for the shares. JUDICIAL APPRAISAL OF SHARES. If ALFC and the shareholder cannot agree upon the fair cash value or whether any payment is due, the dissatisfied shareholder must, within 60 days after receipt of notice in writing of ALFC's disagreement, file suit against ALFC, in the district court of East Baton Rouge Parish (the parish in which ALFC has its registered office). The shareholder must request the court to fix and decree the fair cash value of the dissatisfied shareholder's shares as of the day before the Merger occurred. The court shall determine whether any payment is due, and if so, award such cash value and render judgment accordingly. Any shareholder entitled to file such suit may, within 60 days but not thereafter, intervene as a plaintiff in such suit filed by another shareholder, and recover therein judgment against ALFC for the fair cash value of his or her shares. No order or decree shall be made by the court staying the Merger, and the Merger may be carried to completion notwithstanding any such suit. FAILURE OF THE SHAREHOLDER TO BRING SUIT, OR TO INTERVENE IN SUCH A SUIT WITHIN 60 DAYS AFTER RECEIPT OF NOTICE OF DISAGREEMENT BY ALFC SHALL CONCLUSIVELY BIND THE SHAREHOLDER (1) BY ALFC'S STATEMENT THAT NO PAYMENT IS DUE, OR (2) IF ALFC DOES NOT CONTEND THAT NO PAYMENT IS DUE, TO ACCEPT THE VALUE OF HIS OR HER SHARES AS FIXED BY ALFC IN ITS NOTICE OF DISAGREEMENT. A shareholder will have only five years from the below applicable date in which to bring an action to recover the value of the shareholder's stock: (1) the date the fair value of the shares has been agreed upon by the shareholder and ALFC; (2) the date ALFC becomes liable for the value demanded by the shareholder due to ALFC's failure to give notice of disagreement as to value; or (3) the date the shareholder become bound by ALFC's valuation of the stock due to the shareholder's failure to bring suit within 60 days after receipt of notice of ALFC's disagreement as to value. In the event that a dissatisfied shareholder rejects ALFC's offer to pay the amount in cash deemed by ALFC to be the fair cash value for the shares, ALFC shall deposit, in the registry of the court the amount of money it had offered the dissatisfied shareholder. This amount shall remain in the court's registry until a final determination on the cause is made. If the amount finally awarded such a dissatisfied shareholder, exclusive of interest and costs, is more than the amount offered and deposited by ALFC, the costs of the court 26 51 proceedings shall be borne by ALFC. HOWEVER IF THE AMOUNT FINALLY AWARDED SUCH A DISSATISFIED SHAREHOLDER, EXCLUSIVE OF INTEREST AND COSTS IS LESS THAN THE AMOUNT OFFERED AND DEPOSITED BY ALFC, THEN THE COSTS OF THE PROCEEDING SHALL BE BORNE BY SUCH A SHAREHOLDER. Under Section 131(H) of Part XIII of the Louisiana Business Corporation Law, a shareholder, upon filing a demand for the value of his or her shares, shall cease to have any of the rights of a shareholder except as described above in that section. Such a demand may be withdrawn by the shareholder at any time before ALFC gives notice of disagreement. However, after such notice of disagreement is given, withdrawal of notice of the election will require the written consent of ALFC. If a notice of election is withdrawn or the proposed Merger is abandoned or rescinded, or a court determines that the shareholder is not entitled to receive payment for his or her shares, or the shareholder otherwise loses his or her dissenter's rights, then that dissenter will not have the right to receive payments for his or her shares, and the share certificates will be returned or new certificates will be issued upon request. Additionally, the dissatisfied shareholder will then be reinstated to all rights as a shareholder as of the filing of the demand for value. If any such rights shall have expired or any dividends or distributions, other than cash, have been completed, the dissatisfied shareholder may receive at the election of ALFC, the fair cash value as determined by the board of directors of ALFC as of the time of such expiration or completion, but without prejudice otherwise to any ALFC proceeding that may have been taken in the interim. 27 52 INFORMATION CONCERNING ALFC ALFC AND ITS SUBSIDIARIES American Liberty Financial Corporation ("ALFC") was incorporated in Louisiana on March 31, 1977 for the purpose of organizing and financing a proposed life insurance company. ALFC incorporated American Liberty Life Insurance Company ("ALLIC"), a Louisiana based life insurance company, on January 26, 1978. ALFC incorporated American Liberty Exploration Corporation, American Liberty Exploration Corporation 1981-1 and American Liberty Exploration Corporation, 1982-1 on October 23, 1980, July 6, 1981 and January 7, 1982 respectively, under the laws of the state of Louisiana. These corporations were established for the purpose of forming partnerships in commendam, in which the corporations are the general partners, with the intent to invest in leasing, exploration, development, production and operation of various oil and gas properties. At the present time there are two drilling partnerships that have a total of 26 producing wells of which 20 are presently producing oil and/or gas revenues for the partnerships. American Liberty Securities Corporation was incorporated on July 1, 1981 under the laws of the state of Louisiana for the purpose of recruiting and training a sales staff to market specific qualifying securities. This corporation has been relatively inactive since 1983 and is wholly-owned by ALFC. First American Investment Corporation was formed in November 1984 for the purpose of organizing and financing proposed funeral home companies (Funeral Homes of Louisiana, Inc. and Funeral Homes of America, Inc.) and a proposed Louisiana life insurance company (First Investment Life Insurance Company). Funeral Homes of Louisiana, Inc. was formed in 1989, and Funeral Homes of America, Inc was formed in 1993. First American Investment Corporation and Funeral Homes of Louisiana, Inc. were in the development stage until 1993. First American Investment Corporation currently has a prospectus pending approval for a public stock offering (see Notes I, J and N to the audited consolidated financial statements of ALFC). All of the above subsidiaries, except for First American Investment Corporation and its wholly-owned subsidiaries, are wholly-owned by ALFC. The principal business of ALFC is insurance, which is conducted through ALLIC, which offers life insurance, annuities and accident and health specified disease, hospital indemnity and accidental death policies through approximately 59 Managing General Agents, 180 General Agents and 100 licensed sales representatives. Life insurance sales revolve principally around the burial insurance and pre-need markets. ALFC employed 32 persons on a full-time basis at year end and employs part-time individuals on an as-need basis depending on the volume of work during the year. Neither ALFC nor its subsidiaries has any employment contracts, retirement plans, stock incentive plans or any other type of compensation plan, other than the normal salary arrangements with employees. ALLIC is licensed to sell insurance in 20 states. In December 1992, ALLIC 28 53 was notified by the Insurance Department of the state of Georgia that a new requirement increased the minimum capital and surplus to $1,500,000 each for all licensed companies. During the period subsequent to December 1992, ALLIC explored various possibilities that would have enabled ALLIC to meet this new minimum capital and surplus requirement. An analysis of these various possibilities convinced management that none of the available alternatives could be financially justified. As a result, ALLIC voluntarily terminated all agent contracts in the state of Georgia effective June 30, 1993. Sales efforts were redirected to different areas with an effort to not only maintain sales volume but also to improve the persistency on the business being sold. ALLIC agreed to a voluntary suspension of its certificate of authority in the state of Georgia in 1994. ALLIC will still be able to service and collect premiums on business that is active in the state of Georgia and is only prohibited from soliciting new insurance in that state. ALLIC invests and reinvests certain of its reserves and other funds, and a part of its income is derived from these sources. The investments of ALLIC are limited as to type and amount by the applicable state insurance laws and regulations, which are designed to ensure prudent investment policies. Administration of the investment activity of ALLIC is overseen by its Board of Directors which has established a policy requiring all bonds purchased be of investment grade based on ratings published by Standard & Poor's Corporation. Insurance companies are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulations relate to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; triennial examinations of the affairs of insurance companies; annual and other reports required to be filed regarding the financial condition of insurers or for other purposes; and requirements regarding reserves for policyholders' future benefits, losses and other matters. ALLIC is subject to this type of regulation in each state in which it is licensed to do business. Such regulation could involve additional costs and restrict operations. Neither ALFC nor its subsidiaries has any material patents, trademarks, licenses, franchises, or concessions, other than licenses to operate in various states as an insurance company. The business of ALFC and its subsidiaries is not seasonal nor is it dependent on a single customer or a few customers. Working capital in the traditional sense is not material to a life insurance company,i.e., it is generally not needed by ALFC or its subsidiaries to carry significant amounts of inventory or to provide ALFC with a continuous allotment of goods. However, the aggregate amount which a life insurance company expends in writing a new policy (in addition to providing for reserves) is usually greater than the first year's premium since in the year in which a policy is written it is necessary to provide for such items as agents' first 29 54 year commissions, medical and investigation expenses, costs of issuing the policy, extraordinary bookkeeping and accounting costs and other special first year expenses. The life insurance industry is highly competitive. There are more than 2,000 legal reserve life insurance companies in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price and customer service. ALLIC believes that its policies, benefits thereunder and premium rates are generally competitive with those of other insurers. ALLIC's data processing requirements are currently provided by a service bureau located in Oklahoma City, Oklahoma. ALLIC utilizes data processing in almost every area of its operations. ALLIC's data processing requirements are supplemented with personal computers used in all operating departments. ALLIC's data processing system enables it to identify, on a daily basis, the status of its policies in force and to provide other information on a periodic basis. ALFC leases approximately 9,345 square feet of office space at 4962 Florida Boulevard, Baton Rouge, Louisiana from an unaffiliated entity for approximately $5,010 per month. This lease expired March 31, 1994, and rent is currently being paid on a month to month basis. Funeral Homes of Louisiana, Inc. completed construction of a 6,324 square foot funeral home in Baker, Louisiana in September 1992 at a total cost of $472,911. An additional $75,740 was expended on furniture and equipment and $55,015 on automobiles. Because construction costs were significantly higher than that estimated, a mortgage loan was placed with an affiliate for $125,000. The remaining balance of the mortgage loan was $106,532 at December 31, 1994. The mortgage loan is fully amortizable at 9% interest over ten years and provides for equal monthly installments of $1,583. This funeral home is currently being operated by Funeral Homes of Louisiana, Inc. and is known as the Baker Funeral Home. Funeral Homes of America, Inc. had planned to start construction of a second funeral home, similar to the Baker Funeral Home, sometime during 1994. However, construction has been delayed due to problems encountered in the negotiations for real estate selected as the site for the new funeral home. This matter is still pending, but it is hoped that construction will begin sometime in 1995. Management believes that site selection is extremely important for the project as it will affect the future profitability of the operation. In the normal course of its business operation ALFC is involved in litigation from time to time with claimants, beneficiaries and others. In the opinion of management, the ultimate liability, if any, would not have a material adverse financial effect upon ALFC and its subsidiaries. 30 55 ALFC MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below should be read in conjunction with the ALFC Consolidated Financial Statements which have been prepared in accordance with generally accepted accounting principles. FEDERAL INCOME TAXES Deferred tax assets ($1,831,268) are those items that are expected to reduce income tax liabilities in the future. For ALFC, those items are primarily the excess of the liability for future policy benefits over reserves determined for tax purposes ($1,247,000), net operating loss carryovers ($303,000 after valuation allowance), alternative minimum tax credit carryforwards ($238,000), and other miscellaneous items. Prior thereto, such carryforwards could only be recognized if their future realization was assured. If a portion of the deferred tax asset may expire before being used to offset taxable income, a valuation account is established. Net operating losses of non-life companies total approximately $892,000 after reduction for valuation allowance, and if not used would expire in the years 2002 through 2009. In view of the extended carryover period available, management believes it is more likely than not that these losses, after reduction for the valuation allowance, will be utilized against future taxable income. Future taxable income is estimated to include non-life profits being realized from the recently organized funeral home subsidiaries, expected revisions of inter-company cost charges, and increased levels of life insurance taxable income. To the extent that such estimates are not realized or circumstances otherwise indicate a further increase in the valuation account, future net income would be reduced. For ALFC, deferred tax liabilities are mostly caused by the balance sheet asset for deferred acquisition costs ($1,870,000), treated as an asset for financial accounting purposes but currently deducted for tax purposes. Deferred taxes are provided at the federal tax rate of 34%, although the tax is actually paid at lower rates because of significant special life insurance deductions available to ALFC. Because of this and effects of the alternative minimum tax, in a given year actual income tax payments by ALFC may exceed the income tax expense shown by the income statement. The preceding discussion applies to ALFC as it is presently organized. Deferred tax assets and liabilities are not adjusted for effects of the proposed merger with Citizens, Inc. or proposed restructuring of ALFC's subsidiaries. RESULTS OF OPERATIONS ALFC realized a net loss of $415,107 in 1994 as compared to a net loss of $176,053 in 1993. Included in the losses are net investment gains of $2,677 in 1994 and $12,889 in 1993. The following discussion focuses on the components of the operating results. 31 56 Total ALFC revenues were $8,913,924 in 1994 and $9,061,760 in 1993. This $147,836 decrease is attributable primarily to a decrease in ALFC's life insurance revenues. Insurance revenues were $7,698,317 in 1994 and $7,930,753 in 1993. Insurance revenues decreased $232,436 from 1993 to 1994. This decrease is comprised of a $313,252 decrease in life insurance revenues and a $80,816 increase in accident and health revenues. Commencing 1994, ALFC redirected its marketing efforts away from the brokerage business in an attempt to improve its persistency results and fully expected a decline in insurance sales through the first six months of 1994. By the third quarter of 1994 it became apparent that ALLIC was not getting the kind of market penetration it had expected in life insurance sales as new insurance sales lagged severely behind the previous year. Subsequently, a complete review of ALLIC's life insurance products and those of its competition was undertaken. As a result of this review, ALLIC has changed some of its product line and is developing a new product that has been targeted for ALLIC's specific market segment. The resulting new products are scheduled for introduction during the second quarter of 1995. Even if successful, life insurance revenues are expected to continue to decline through the first six months of 1995 and then start to increase during the last six months of 1995. It takes both time and money to develop marketing concepts and to build a marketing organization. It is not something that happens overnight. The lapse rate of ALLIC improved from 28.9 % in 1993 to 13.1% in 1994. Management believes that this improvement is reflective of management's efforts to de-emphasize sales in the brokerage area. Further improvement in the current lapse rate, below the current level, is not expected because of the market segment ALLIC operates in. Net investment income totaled $1,026,343 in 1994 compared to $868,962 in 1993. This is a $157,381 increase over 1993. Average investment return on restricted cash and invested assets during 1994 was 7.08% compared to 6.86% in 1993. This modest increase in investment return is reflective of improving investment yields that were available in the market place. The majority of the increase in investment income is attributable to an increase in the amount of invested assets and not because of the modest increase in investment yield. Investment income produced by ALLIC exceeded the interest required on its insurance portfolio by $361,058 in 1994 and $297,543 in 1993. The primary investments consist of certificates of deposit and bonds. The bond investments include 98.57% investment grade securities and 1.43% securities below investment grade. None of the certificates of deposits exceed the FDIC guaranteed amount. The below investment grade securities are a result of two bonds being downgraded by Standard & Poor's in 1994 from A and A+ to BB. One of the bonds is already on the upgrade list by Standard & Poor's. Management does not expect a problem with the collectability of the maturity value of either bond at this time. Net realized gains on investments totaled $2,677 in 1994 and $12,889 in 1993. These net investment gains are a result of bond investments that were called prior to their stated maturity date. 32 57 Other income consists principally of sales from the funeral home operation. The net sales income in 1994 was $184,910 compared to $223,807 in 1993. The balance of other income consists of $1,677 of miscellaneous income in 1994 and $25,349 in 1993. The cause of the $38,897 reduction in net funeral homes sales was seven fewer funerals and a reduction of $246 in the average funeral sale. The funeral home business is subject to a certain volatility beyond the control of management. On the average, over a number of years, management expects the funeral home business to produce positive operating results which was not the case in 1994. Total benefits, claims and settlement expense were $4,886,508 in 1994 and $4,996,354 in 1993. In total, this $109,846 decrease was the result of a lower increase in the change in life liabilities for future policy benefits. Death benefits totaled $1,094,776 in 1994 compared to $1,168,548 in 1993. We believe the $73,772 decrease in death benefits can be attributed to a reduction in the anti-selection experienced in the brokerage business. An analysis of the life insurance business indicates that in 1994 the life insurance subsidiary experienced an 84.43% of expected mortality compared to 104.83% in 1993. Management does not expect much further improvement in the mortality percentage of life insurance policies because of the type of products being sold. Accident and health benefits were $1,805,499 in 1994 and $1,678,926 in 1993. Accident and health benefits increased $126,573 in 1994 and $364,255 in 1993. As a percent of collected premium, accident and health benefits were 47.4% in 1994 and 45.0% in 1993. This incurred benefit percentage is higher than management would like. ALLIC increased accident and health premiums on three of its policy forms in 1994 and has scheduled another rate increase on a policy form during the first quarter of 1995. Management expects that accident and health claim ratios will improve in 1995. The increase in reserve for life future policy benefits was $1,137,331 in 1994 compared to $1,459,882 in 1993. Reserve increase for accident and health future policy benefits was $524,693 in 1994 and $361,973 in 1993. The $322,551 decrease in the amount of life reserve increase from 1993 to 1994 was caused by a significant decrease in life insurance sales combined with normal life insurance terminations; while the $162,720 increase in accident and health reserve was the result of new sales and the normal ageing of the accident and health portfolio. Policy guaranteed additional benefits were $33,790 in 1994 and $45,716 in 1993. This $11,926 decrease was caused by policies reaching various option dates where the policyholder can select either to surrender or convert the policy to paid-up insurance. These benefits will continue to decline in the future as the company no longer sells this particular policy form. Cash surrender values paid totaled $209,229 in 1994 and $210,101 in 1993 with a resulting decrease of only $872. Interest paid to policyholders was $81,190 in 1994 and $71,208 in 1993. The principal cause of the $9,982 increase was interest credited to annuity contract holders. The amount of interest credited is based on not only the amount of annuity, dividend and guaranteed additional cash benefits on hand, but also 33 58 on the interest rate credited on these funds that is declared annually by the Board of Directors. Policyholders' share of earnings on participating policies totaled $88,675 in 1994 and $99,546 in 1993. Policyholder dividends have been declining since 1989. This trend is caused by the fact that prior to 1993 ALLIC had not issued participating insurance policies for a number of years. New participating policies were developed and introduced in 1993, and this trend could reverse itself in the future. Total underwriting, acquisition, insurance and operating expenses were $4,489,493 in 1994 and $4,337,206 in 1993. This reflects an increase of $152,287 in 1994 and $108,428 in 1993. In 1994 amortization of deferred policy acquisition costs increased $6,418, general expenses and commissions increased $160,992, taxes, licenses and fees increased $6,100 and advances in excess of commissions earned decreased $21,223. Benefit and expenses totaled $9,464,158 in 1994, $9,433,054 in 1993. This represents a $31,104 increase in 1994 and $914,264 in 1993. In summary, management believes that the operating loss in 1994 can primarily be attributed to continued high accident and health claims and money spent in the market area without an improvement in the sales of new life insurance policies. Inasmuch as rate increases have been implemented and will be implemented in the accident and health segment when justified in the future, better operating performance in this area is expected in 1995. If current anticipated increased life sales come to fruition in 1995, better performance should be seen in the life insurance line. LIQUIDITY AND CAPITAL RESOURCES ALFC anticipates that ongoing operations of its subsidiaries will provide sufficient funds for the foreseeable future. ALFC's principal business is life insurance, which generally provides cash flow in years subsequent to the year in which policies are written. In the first year of a policy, significant costs are incurred. A major portion of these costs are capitalized for financial reporting purposes because the primary products being sold by ALLIC have a higher first year agent commissions, underwriting and policy issue costs. These capitalized costs are then amortized over the life of the policies. ALFC's invested assets increased by $1,906,427 in 1994 and $417,350 in 1993. The reason for the small increase in 1993 was caused by the repayment of a $1,433,000 loan that was originated in December 1992 and repaid in January 1993. In 1993, ALFC was required to make an election, pursuant to SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities", regarding the valuation of its investments in bonds. ALFC elected to value its bond portfolio as Held-To-Maturity and, as a result, the statement value of bond investments in ALFC's financial statement is based on amortized cost. Statement value of these securities was $1,305,742 more than market value at December 31, 1994, and market value exceeded amortized cost by $367,004 at December 34 59 31, 1993. An analysis of cash flows indicates that the majority of these increases were the result of net cash provided by operating activities and reinvestment of maturing assets. ALFC does plan on constructing a new funeral home sometime in 1995. ALFC has $529,818 of funds on hand dedicated for construction costs. If total costs exceeds this amount, ALFC intends to secure a mortgage loan to provide such additional funds as may be required. It should be noted that because of accounting standard, SFAS 109, and the effects of the alternative minimum tax, in a given year actual income tax payments by ALFC may exceed the income tax expense shown by the income statement. In order to provide financial protection for policyholders, the majority of the life insurance subsidiary assets are required by statute to be invested in investment grade securities. Bonds are reported in the financial statement at their amortized cost, as opposed to market values, provided they meet certain tests conducted by the Valuation Committee of the National Association of Insurance Commissioners and are intended to be held to maturity. At the end of December 1994, $14,134,698 of ALFC's bond portfolio was rated as investment grade and $204,719 was rated as below investment grade. The below investment grade securities are two bonds rated BB that were downgraded by Standard & Poor's during 1994. ALFC has no plans to sell fixed maturity investments in 1995. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ALFC has had no disagreements with its certified public accountants regarding accounting and financial matters required to be disclosed herein. 35 60 COMPARISON OF RIGHTS OF SECURITYHOLDERS Upon consummation of the Merger, the holders of issued and outstanding ALFC common and preferred shares will receive Citizens Class A Common Stock. The rights of the holders of Citizens shares are governed by Citizens Articles of Incorporation, its bylaws and Colorado law, while the rights of holders of ALFC shares are governed by ALFC s Articles of Incorporation, its bylaws and Louisiana law. In most respects, the rights of holders of Citizens Class A shares and holders of ALFC common shares are similar. The following is a brief comparison of the rights of the holders of ALFC Common Stock and Preferred Stock with those of Citizens Class A Common Stock. AUTHORIZED SHARES The aggregate number of shares which Citizens is authorized to issue is 50,000,000 shares of Class A Common Stock with no par value and 1,000,000 shares of Class B Common Stock , with no par value; of which 16,980,340 shares of such Class A Common Stock and 621,049 shares of Class B Common Stock are issued and outstanding, fully paid and non-assessable. These numbers do not include treasury shares. The aggregate number of shares which ALFC is authorized to issue is 2,129,600 shares of Common Stock with par value of $.125 per share and 200,000 shares of non-cumulative, non-voting, callable, convertible 8% Preferred Stock, par value $24.875 per share, of which 2,099,296 shares of such ALFC Common Stock and 10,545 shares of ALFC Preferred Stock are issued and outstanding, fully paid and non-assessable. These numbers do not include treasury shares, if any. ALFC's Articles of Incorporation do not permit the issuance of any additional classes of preferred stock. DIVIDEND RIGHTS The cash dividends paid upon each share of Citizens Class A Common Stock is twice the cash dividends paid on each share of Citizens Class B Common Stock. Because ALFC has only one class of Common Stock, no such difference exists in the dividend rights of its Common Stock. VOTING RIGHTS Those who hold ALFC shares on the date the Merger becomes effective will be entitled as a group to hold approximately 2,340,000 shares of Citizens Class A Common Stock or approximately 12.1% of Citizens Class A shares that Citizens anticipates will then be outstanding. The voting rights of Citizens Class A Common Stock and Class B Common Stock are equal in all respects except that the holders of Class B Common Stock have the exclusive right to elect a simple majority of the members of Citizens Board of Directors, 36 61 and the holders of the Class A Common Stock have the exclusive right to elect the remaining directors. The holders of ALFC Common Stock are entitled to one vote for each share of stock held. Holders of ALFC Preferred Stock have no voting rights in the affairs of ALFC, except that the holders of Preferred Stock have the right to dissent from the merger. Neither the holders of ALFC Common Stock or Citizens Common Stock have cumulative voting rights in the election of directors. The Articles of Incorporation of Citizens provide that when, with respect to any action to be taken by Citizens shareholders the Colorado Corporation Code (now superseded by the Colorado Business Corporation Act) requires the affirmative vote of the holders of two-thirds of the outstanding shares entitled to vote thereon, or of any class or series, such action may be taken by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote on such action. The power to amend the Articles of Incorporation, approve mergers and approve extraordinary asset transfers are all subject to this requirement. ALFCs Articles of Incorporation provide that, with respect to any action to be taken by ALFC shareholders including, but not limited to shareholder approval of amendments, mergers, consolidations, or asset transfers, such action may be taken by the affirmative vote of a majority of the voting shareholders present or represented at a meeting duly called and held on due notice, at which a quorum is present or represented. ALFC's bylaws provide that, subject to repeal or change by action of ALFC's shareholders, the power to alter, amend, or repeal ALFC's bylaws or to adopt new bylaws is vested in the Board of Directors. Citizens' Articles of Incorporation provide that Citizens' Board of Directors has the power to enact, alter, amend and repeal Citizens' bylaws not inconsistent with the laws of Colorado or Citizens' Articles of Incorporation, as the Board of Directors deems best for the management of Citizens; however, Colorado statutes give shareholders the right to amend and repeal bylaws even if not so provided for in the bylaws themselves. Special meetings of ALFC shareholders may be called by ALFC's President, its Board of Directors, or the holders of one fifth (1/5) or more of all the ALFC shares entitled to vote. Special meetings of Citizens' shareholders may be called by the Chairman of its Board, the Board of Directors, or the holders of 10% or more of all the Citizens shares entitled to vote. A majority of the shares of the outstanding capital stock entitled to vote constitutes a quorum of shareholders under the bylaws of ALFC. The bylaws of Citizens provide that one-third (1/3) of the votes entitled to be cast on a matter by a voting group shall constitute a quorum of that voting group. The bylaws of Citizens provide that shareholders can take action without a meeting provided that all the shareholders of the corporation entitled to vote have consented to the action in writing. ALFC's Articles of Incorporation provide that written consents signed by a majority of the voting shares outstanding shall be sufficient to authorize an action without a meeting. 37 62 PREEMPTIVE RIGHTS Authorized ALFC and Citizens shares may be issued at any time, and from time to time, in such amounts and for such consideration as may be fixed by the Board of Directors of ALFC and Citizens, respectively. No holder of Citizens or ALFC shares has any preemptive or preferential right to purchase or to subscribe for any shares of capital stock or other securities which may be issued by Citizens or ALFC. LIABILITY OF DIRECTORS As authorized by Colorado law, Citizens Articles of Incorporation contain a provision to the effect that no director of Citizens shall be personally liable to Citizens or any of its shareholders for damages for any breach of duty as a director except to the extent limited by law. The Articles of Incorporation of ALFC contain no such provision. LIQUIDATION RIGHTS In the event of any liquidation, dissolution, or winding up of Citizens, whether voluntary or involuntary, the holders of Citizens common shares are entitled to share, on a share-for-share basis, any of the assets or funds of Citizens which are distributable to its shareholders upon such liquidation, dissolution, or winding up. In the event of any liquidation, dissolution, or winding up of ALFC, whether voluntary or involuntary, the holders of ALFC preferred shares will have a preferential right to the distributable net assets of ALFC to the extent of $24.875 per share, which amounts to about $262,000 in the aggregate, plus all declared and unpaid dividends to the date of liquidation. Thereafter, ALFC common shareholders will be entitled to share, on a share-for-share basis, any of the remaining amounts or funds of ALFC which are distributable to its shareholders upon such liquidating, dissolution or winding up. ASSESSMENT AND REDEMPTION Citizens shares to be issued upon consummation of the Merger will be fully paid and non-assessable. ALFC shares, for which full consideration has been paid, are deemed to the fully paid and non-assessable. ALFC preferred shares are callable at $25.00 per share by ALFC at any time. Additionally, such preferred shares are convertible into ALFC Common Stock, at any time, at the option of the holder. The original conversion ratio was two shares of ALFC Common Stock for each one share of preferred. As a result of subsequent common stock dividends, the conversion ratio has changed to 2.66 shares of common stock for each one share of preferred stock owned. 38 63 TRANSFER AGENT The transfer agent for ALFC shares is Hancock Bank of Louisiana, Baton Rouge, Louisiana. The transfer agent for Citizens shares is American Stock Transfer and Trust Company, New York, New York. 39 64 EXPERTS The consolidated financial statements included in this Proxy Statement-Prospectus of American Liberty Financial Corporation and subsidiaries as of December 31, 1994 and 1993 and for each of the years in the two-year period ended December 31, 1994, have been audited by Amend, Smith & Co., P.C., independent certified public accountants, as stated in their report appearing herein and have been so included in reliance upon such report given upon the authority of that firm as experts in accounting and auditing. The consolidated financial statements of Citizens, Inc. and subsidiaries as of December 31, 1994 and 1993, and for each of the years in the three year period ended December 31, 1994, incorporated by reference in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, as incorporated by reference, and upon the authority of such firm as experts in accounting and auditing. LEGAL MATTERS The legal status of the Citizens Class A Common Stock to be issued pursuant to the Merger will be passed upon by Jones & Keller, P.C., 1625 Broadway, Suite 1600, Denver, Colorado 80202. An opinion as to the tax consequences of the Merger to ALFC and its shareholders will be rendered by Jones & Keller, P.C. ELECTION OF DIRECTORS Six directors are to be elected to serve until (i) the Merger is consummated; or (ii) if the Merger is not consummated, until the 1996 Annual Meeting of Shareholders and until their respective successors are elected and qualified. It is intended that the stock in respect of which proxies are given pursuant to this solicitation will be voted for the election of the persons listed below, unless a shareholder specifies in the proxy that authority to vote for the election of directors is withheld. In the event any of the nominees should become unavailable for election, which is not now expected, the proxy will be voted for any substitute nominee or nominees designated by the management. The names of the nominees for whose election the proxies will be voted, and certain information regarding each are as follows: 40 65
Number of common shares Principal Corporation owned as of Name Age Occupation Office held April 27, 1995 - --------------------------------------------------------------------------------------------------------------------- James Ira Dunham 53 President and Chairman President and Chairman 564,561 of the Board of ALFC of the Board of ALFC Wilfred Paul Duplessis 84 Rancher and Farmer Secretary 106,480 Charles Elliot Broussard 70 Rancher and Farmer 33,674 Dr. Monroe Jackson Rathbone, Jr. 68 Physician Medical Director 34,073 Frank W. Harrison, Jr. 66 Geologist and Investor 399 John Roy Melton 63 Geologist and Investor 73,780
Each nominee has been a director since March 31, 1977 (except Mr. Harrison and Mr. Melton, who were elected on May 20, 1988), and has been elected to serve until the 1995 Annual Meeting of Shareholders and until each nominee's respective successor is elected and qualified. Mr. Dunham of Baton Rouge, Louisiana, has been President and Chairman of the Board of Directors of ALFC since its inception on March 31, 1977. Mr. Dunham has been President and Chairman of the Board of Directors of ALLIC since its inception on January 26, 1978, and all other subsidiaries since their respective inceptions. Mr. Dunham is a salaried executive officer of ALFC and of its subsidiary ALLIC. From 1965 to 1966 he was a life insurance agent for National Foundation Life Insurance Company, Oklahoma City, Oklahoma. From 1966 to 1969 he was promoted in succession to Zone, District, State and Regional Manager where he served until he became Assistant to the President in 1969 and served in this capacity for National Foundation Life until 1973. From 1973 to 1977, Mr. Dunham was Director of Corporate Development for Investors Trust, Inc. and its life insurance subsidiary in Indianapolis, Indiana. Since 1979 he has been involved in various aspects of oil and gas exploration, production and financing. Mr. Dunham is President and Chairman of the Board of First American Investment Corporation. Mr. Duplessis of Gonzales, Louisiana, is a rancher and farmer. He is a partner in a real estate development and director of the New River Soil Conversation District and Community Land Development Company, Inc. Mr. Duplessis is also a former member of the Ascension Parish School Board, Louisiana School Board Legislative Committee and Past President of the Louisiana Cattlemen's Association. He was also elected a Vice President of the Area V Soil and Water Conservation of Louisiana. He has held oil and gas mineral interests as a landowner for over 40 years. He is also a director of First American Investment Corporation. Mr. Broussard of Kaplan, Louisiana, is a rice farmer and rancher. Mr. Broussard is a Past President of the National Rice Growers Association. He is also on the Board of 41 66 Directors of Universal Fabricators, Inc. In addition, he is Past President of the Beef Industry Council. He has held and managed oil and gas mineral interests for a number of years, and was an oil and gas mineral lease broker. In 1986 Mr. Broussard was selected Acadian Man of the Year by the International Relationship Association of Acadiana. He is also a Director of First American Investment Corporation and President of Inexpo. In 1985 he was ABWA Man of the Year and Past President of Gulf Intercoastal Canal Association and Vice President of the Midwinter Fair Association, LA Livestock Sanitary Board Commission and director for Acadian District Livestock Show. He is also a member of the Wetlands Task Force. Dr. Rathbone has practiced surgery in Baton Rouge, Louisiana, since 1958. He is Medical Director of Our Lady of the Lake Regional Medical Center and Chairman of the Board of the Cancer Radiation and Research Foundation, Inc. He is a director of Gulf States Utilities Company and also a director of First American Investment Corporation. Mr. Harrison of Lafayette, Louisiana, is an independent oil operator and consulting geologist. Mr. Harrison serves as a board member of Premier Bank of Baton Rouge. He is a Past President of the American Association of Petroleum Geologists, the Lafayette Geological Society, and the Gulf Coast Association of Geological Societies. Additionally, he serves on the Board of Directors of the Independent Petroleum Association of America, is Past President of the American Geologist Institute, and is a member of the Houston Geological Society, New Orleans Geological Society, and the Baton Rouge Geologist Society. He is also a director of First American Investment Corporation and Gulf States Utilities Company and Premier Bank Corp. Mr. Melton of Dallas, Texas, has been a Geologist since 1956. His primary business is oil and gas exploration and production. He is a partner of Dynamic Oil & Gas, an active member of the American Association of Petroleum Geologists since 1958, and a member of the Dallas Geological Society. He is also a director of First American Investment Corporation. ALFC does not have an audit, nominating, or compensation committee or any similar committee of the Board of Directors. The 1994 Annual Directors' meeting was held on May 12, 1994; five other meetings of the directors were held in 1994. The average attendance at all meetings of the Board was 88.9%. All directors individual attendance at 1994 Board meetings was at least 75%, except for Dr. Rathbone, who attended two-thirds of the Board meetings. OTHER MATTERS The ALFC Board does not intend to bring any matters before the Meeting other than those specifically set forth in the notice of meeting accompanying this Proxy Statement-Prospectus and does not know of any matters to be brought before the Meeting by others. If any other matters properly come before the Meeting, it is the intention of the persons 42 67 named in the accompanying proxy to vote such proxy in accordance with the judgment of the ALFC Board. In the event that the Merger is not approved by the ALFC shareholders, any ALFC shareholder who wishes to present a proposal for consideration at the 1996 annual meeting, which is anticipated to be held on Friday, May 12, 1996, of ALFC shareholders must submit such proposal in accordance with the rules promulgated by the SEC. In order for a proposal to be included in ALFC proxy materials relating to the 1996 annual meeting, the shareholder must have submitted such proposal in writing to ALFC not later than December 31, 1995. Such proposals should be addressed to: Office of the Secretary, Mr. Wilfred P. Duplessis, American Liberty Financial Corporation, P.O. Box 64626, Baton Rouge, Louisiana 70896. 43 68 DEADLINE FOR CITIZENS SHAREHOLDER PROPOSALS Any Citizens shareholder who wishes to present a proposal for action at the 1996 Annual Meeting of the Citizens shareholders must submit his or her proposal in writing by Certified Mail -- Return Receipt Requested, to Citizens, Inc., 400 East Anderson Lane, Austin, Texas 78752. 44 69 Audited Consolidated Financial Statements AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 Audited Consolidated Financial Statements Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Operations. . . . . . . . . . . . . . . . . 4 Consolidated Statements of Changes in Stockholders' Equity . . . . . . 5 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 8 70 AMEND, SMITH & CO., P.C. CERTIFIED PUBLIC ACCOUNTANTS Bill D. Amend 1100 Oklahoma Tower Joseph E. Brueggen 210 Park Avenue Kenneth L. Carney Oklahoma City, OK 73102-5602 Carl E. Denning BUS: (405) 272-1040 Joseph W. Hornick FAX: (405) 235-6180 Kevin D. Howard 1-800-570-1040 Van R. Minelli H. Kirby Smith Nora M. Vinyard INDEPENDENT AUDITORS' REPORT The Board of Directors American Liberty Financial Corporation Baton Rouge, Louisiana We have audited the accompanying consolidated balance sheets of American Liberty Financial Corporation and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of American Liberty Financial Corporation and Subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Amend, Smith & Co., P.C. ----------------------------- AMEND, SMITH & CO., P.C. Oklahoma City, Oklahoma February 27, 1995 -1- 71 CONSOLIDATED BALANCE SHEETS AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, --------------------------- 1994 1993 ----------- ----------- ASSETS Investments Fixed maturity bonds, held-to-maturity (fair value of $12,881,320 in 1994 and $11,905,843 in 1993) $14,172,110 $11,533,518 Mortgage-backed securities (fair value of $152,355 in 1994 and $207,609 in 1993) 167,307 212,930 Policy loans 193,000 139,189 Short-term investments 764,022 1,504,375 ----------- ----------- Total Investments 15,296,439 13,390,012 ----------- ----------- Restricted Cash Funds in escrow per public offering of stock 529,818 512,731 ----------- ----------- Cash 152,132 131,201 ----------- ----------- Investments--Related Parties--Oil and Gas Partnerships 1,039 641 ----------- ----------- Accrued Investment Income 307,164 260,657 ----------- ----------- Accounts and Notes Receivable Agents' notes receivable -- 5,219 Agents' accounts receivable, net of allowance for uncollectible accounts of $184,721 in 1994 and $185,025 in 1993 406,157 567,604 Income tax receivable 2,777 -- Receivable from oil and gas partnerships 8,906 14,900 Other receivables, net of allowance of $2,665 in 1994 59,278 46,693 ----------- ----------- Total Accounts And Notes Receivable 477,118 634,416 ----------- ----------- Recoverable on Reinsurance 9,093 5,493 ----------- ----------- Deferred Policy Acquisition Costs 6,950,147 7,236,055 ----------- ----------- Property and Equipment Building 477,130 477,130 Fixtures and equipment 581,925 589,483 Less: Accumulated depreciation (474,495) (407,952) ----------- ----------- 584,560 658,661 ----------- ----------- Deferred Offering Costs 69,087 68,047 ----------- ----------- Deferred Tax Asset 1,831,268 1,821,795 ----------- ----------- Other Assets 107,902 89,068 ----------- ----------- TOTAL ASSETS $26,315,767 $24,808,777 =========== ===========
See notes to consolidated financial statements. -2- 72 CONSOLIDATED BALANCE SHEETS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, ------------------------------------ 1994 1993 ----------- ---------- LIABILITIES Policy Liabilities and Accruals Future policy benefits: Life $10,893,707 $ 9,403,394 Accident and health 3,290,216 2,765,523 Policy claims payable: Life 128,297 157,205 Accident and health 813,000 752,685 ----------- ---------- Total Policy Liabilities and Accruals 15,125,220 13,078,807 ----------- ---------- Other Policyholders' Funds Policy guaranteed additonal benefits and accrued interest 372,360 404,328 Dividends and accrued interest 434,443 412,671 Amounts submitted with unprocessed applications 5,412 21,351 ----------- ---------- Total Other Policyholders' Funds 812,215 838,350 ----------- ---------- Other Liabilities Accounts payable, trade 95,199 49,828 Payable for costs of public offering of stock of subsidiary 1,516 2,600 Amounts held for Agents 89,113 78,644 Accrued taxes, other than income taxes 99,339 122,216 Other withholdings payable 37,399 35,777 Income taxes payable -- 8,094 Deferred income taxes 1,870,328 2,019,807 Unearned interest income on policy loans 7,114 5,183 Note from stockholder 30,620 -- ----------- ---------- Total Other Liabilities 2,230,628 2,322,149 ----------- ---------- Total Liabilities 18,168,063 16,239,306 ----------- ---------- Deferred Credit -- Sales Proceeds Collected from Public Offering of Stock of Subsidiary, net of subscriptions receivable 15,351 11,050 ----------- ---------- Minority Interest in Consolidated Subsidiary 14,954 23,488 ----------- ---------- Related Party Transactions and Contingent Liabilities -- 2,428 ----------- ---------- STOCKHOLDERS' EQUITY Capital shares: Preferred stock, 8% non-cumulative, convertible and callable, par value $24.875, 200,000 shares authorized, issued and outstanding, 10,525 shares in 1994 and 10,885 shares in 1993 261,809 270,764 Common stock, par value $.125, 2,129,600 shares authorized, issued and outstanding, 2,099,187 shares in 1994 and 2,098,229 shares in 1993 262,398 262,278 Other stockholders' equity: Additional paid-in capital 6,018,187 6,009,351 Syndication costs on oil and gas partnership (80) (80) Retained earnings (exceeds accumulated deficit as determined in accordance with statutory accounting requirements by $4,356,536 in 1994 and $4,675,437 in 1993) 1,575,085 1,990,192 ----------- ---------- Total Stockholders' Equity 8,117,399 8,532,505 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,315,767 $24,808,777 =========== ===========
See notes to consolidated financial statements. -3- 73 CONSOLIDATED STATEMENTS OF OPERATIONS AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES
Year Ended December 31, -------------------------- 1994 1993 ---------- ---------- REVENUES Premiums: Life $3,888,940 $4,202,192 Accident and health 3,809,377 3,728,561 ---------- ---------- Total Premiums 7,698,317 7,930,753 Net investment income 1,026,343 868,962 Realized gains on investments 2,677 12,889 Other income 186,587 249,156 ---------- ---------- Total Revenues 8,913,924 9,061,760 ---------- ---------- BENEFITS AND EXPENSES Benefits, Claims, and Settlement Expenses Death benefits 1,094,776 1,168,548 Accident and health benefits 1,805,499 1,678,926 Policy guaranteed additional benefits and interest 33,790 45,716 Cash surrender values paid 209,229 210,101 Interest paid to policyholders 81,190 71,208 Change in liabilities for future policy benefits: Life 1,137,331 1,459,882 Accident and health 524,693 361,973 ---------- ---------- Total Benefits, Claims, and Settlement Expenses 4,886,508 4,996,354 ---------- ---------- Policyholders' Share of Earnings on Participating Policies 88,675 99,546 ---------- ---------- Underwriting, Acquisition, Insurance, and Operating Expenses Amortization of deferred policy acquisition costs 1,452,826 1,446,408 Other: General, administrative, and commission expenses 2,652,500 2,491,508 Taxes, licenses and fees 384,167 378,067 Advances in excess of commissions earned -- 21,223 ---------- ---------- Total Underwriting, Acquisition, Insurance, and Operating Expenses 4,489,493 4,337,206 ---------- ---------- Other (Income) Expenses -- Equity in (Gains) Losses of Partnerships (518) (52) ---------- ---------- Total Benefits and Expenses 9,464,158 9,433,054 Loss Before Provision For Income Taxes and Minority Interest in Net Loss of Consolidated Subsidiary (550,234) (371,294) ---------- ---------- PROVISION FOR (BENEFIT FROM) INCOME TAXES Current 32,359 60,758 Deferred (158,952) (254,238) ---------- ---------- Total Provision For (Benefit From) Income Taxes (126,593) (193,480) ---------- --------- MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY (8,534) (1,761) ---------- --------- NET LOSS $ (415,107) $ (176,053) ========== ========== NET LOSS PER COMMON PRIMARY SHARE $ (.20) $ (.08) ========== ========== NET LOSS PER FULLY DILUTED SHARE $ (.20) $ (.08) ========== ==========
See notes to consolidated financial statements. -4- 74 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES
Additional Preferred Common Paid-In Syndication Retained Stock Stock Capital Costs Earnings --------- --------- ----------- ---------- ----------- BALANCE AT DECEMBER 31, 1992 $270,764 $262,277 $5,542,332 $(80) $2,166,245 Scrip stock redeemed -- 1 -- -- -- Increase in equity resulting from issuance of stock by consolidated subsidiary -- -- 467,019 -- -- Net loss -- -- -- -- (176,053) -------- -------- ---------- ---- ---------- BALANCE AT DECEMBER 31, 1993 270,764 262,278 6,009,351 (80) 1,990,192 Conversion of preferred shares to common shares (8,955) 120 8,836 -- -- Net loss -- -- -- -- (415,107) -------- -------- ---------- ---- ---------- BALANCE AT DECEMBER 31, 1994 $261,809 $262,398 $6,018,187 $(80) $1,575,085 ======== ======== ========== ==== ==========
See notes to consolidated financial statements. -5- 75 CONSOLIDATED STATEMENTS OF CASH FLOWS AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES
Year Ended December 31, ----------------------------------- 1994 1993 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (415,107) $ (176,053) Adjustments to reconcile net income to net cash provided (used) by operating activities: Net amortization of premiums and discounts on fixed maturity bonds 15,510 8,006 Realized gains on investments (2,677) (12,889) Loss on sale of property and equipment 1,549 468 Equity in (gains) losses of partnerships (518) (52) Provision for losses on Agents' and other accounts receivable 3,463 18,551 Amortization of deferred policy acquisition costs 1,452,826 1,446,408 Depreciation and amortization of property and equipment 77,539 86,858 Amortization or organization costs 2,836 2,836 Change in deferred tax asset (9,473) (253,416) Change in deferred income tax liability (149,479) (822) Minority interest in net income (loss) of consolidated subsidiary (8,534) (1,761) Changes in operating assets and liabilities: Decrease (increase) in policy loans (53,811) (26,571) Decrease (increase) in accrued investment income (46,507) (43,699) Decrease (increase) in Agents' accounts receivable 166,970 320,149 Decrease (increase) in income taxes receivable (2,777) 9,909 Decrease (increase) in receivable from oil and gas partnerships 5,994 (5,109) Decrease (increase) in other receivables (15,250) (35,371) Decrease (increase) in recoverable on reinsurance (3,600) 1,373 Decrease (increase) in deferred policy acquisition costs (1,166,918) (1,736,700) Decrease (increase) in other assets before amortization of organization costs (21,670) (38,921) Increase (decrease) in policy liabilities and accruals 2,046,413 2,170,445 Increase (decrease) in policy guaranteed additional benefits and accrued interest (31,968) 39,039 Increase (decrease) in dividends and accrued interest 21,772 (17,581) Increase (decrease) in amounts submitted with unprocessed applications (15,939) 8,040 Increase (decrease) in accounts payable, trade 45,371 (27,812) Increase (decrease) in amounts held for Agents 10,469 (6,379) Increase (decrease) in accrued taxes other than income taxes (22,877) 71,839 Increase (decrease) in other withholdings payable 1,622 14,851 Increase (decrease) in income taxes payable (8,094) (7,815) Increase (decrease) in related party transactions (2,428) 2,428 Increase (decrease) in unearned interest income on policy loans 1,931 1,016 ----------- ----------- Net Cash Provided By Operating Activities 1,876,638 1,811,265 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and calls before maturity of fixed maturity bonds 170,134 1,362,966 Purchases of fixed maturity bonds (2,775,934) (5,736,322) Purchases of certificates of deposit (67,564) (41,642) Redemption of certificates of deposit 698,784 4,164,552 Decrease (increase) in other short-term investments 109,133 (135,451) Distributions from oil and gas partnership 120 107 Proceeds from sales of property and equipment 1,200 2,775 Purchases of property and equipment (6,190) (28,728) ----------- ----------- Net Cash Used In Investing Activities (1,870,317) (411,743) ----------- -----------
-6- 76 CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES
Year Ended December 31, ----------------------------- 1994 1993 -------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Sales proceeds collected from public offering of stock of subsidiary $ 3,200 $ 59,050 Deferred offering costs incurred (1,039) (29,068) Increase (decrease) in payable for costs of public offering of stock of subsidiary (1,084) 2,321 Repayment of borrowings -- (1,432,929) Proceeds from borrowing 30,620 -- -------- ----------- Net Cash Provided By Financing Activities 31,697 (1,400,626) -------- ----------- Increase (Decrease) In Cash And Restricted Cash 38,018 (1,104) CASH AND RESTRICTED CASH AT BEGINNING OF YEAR 643,932 645,036 -------- ----------- CASH AND RESTRICTED CASH AT END OF YEAR $681,950 $ 643,932 ======== =========== See notes to consolidated financial statements.
-7- 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of certain significant accounting policies followed in the preparation of these financial statements. Principles of Consolidation: The consolidated financial statements include the accounts of American Liberty Financial Corporation (the Company) and its wholly-owned subsidiaries, which are: American Liberty Life Insurance Company; American Liberty Exploration Corporation; American Liberty Exploration Corporation, 1981-1; American Liberty Exploration Corporation, 1982-1, and American Liberty Securities Corporation; and majority-owned subsidiary, First American Investment Corporation, which includes Funeral Homes of Louisiana, Inc. and Funeral Homes of America, Inc. (both wholly-owned subsidiaries of First American Investment Corporation). All material intercompany accounts and transactions have been eliminated. Investments: Debt securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for amortization of premiums and accrual of discounts, using methods approximating the interest method. Cost of securities sold or redeemed prior to maturity date is recognized using the specific identification method. Short-term investments composed of money market accounts, mutual fund accounts, and certificates of deposit are carried at cost, which approximates market. Mortgage-Backed Securities: Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Mortgage-backed securities are carried at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using methods approximating the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Management intends, and has the ability, to hold such securities to maturity. Should any be sold, cost of securities sold is determined using the specific identification method. Cash Equivalents: For the purposes of cash flows, the Company considers cash and cash equivalents to be composed of non-interest bearing cash accounts and restricted cash, and cash in escrow (interest bearing) related to the subsidiary public offering of stock. Basis of Oil and Gas Accounting: American Liberty Financial Corporation and its subsidiaries have elected to use the "successful efforts" method of costing for their oil and gas operations through investments in oil and gas partnerships. Under successful efforts costing, except for acquisition costs of properties, a direct relationship between costs incurred and specific reserves discovered is required before costs are identified with assets. An acquired property is regarded as an asset until either a determination is made that it does not contain oil and gas reserves or the property is surrendered. Capitalized costs relating to producing properties are amortized as the reserves underlying those properties are produced. Allowance for Uncollectible Accounts: Receivable accounts are periodically reviewed by management for collectibility. An allowance account has been established for the estimated uncollectible balance at the end of each year. Deferred Policy Acquisition Costs: American Liberty Life Insurance Company currently issues only individual ordinary life and individual accident and health policies. Certain costs of acquiring insurance policies are deferred at the time -8- 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Deferred Policy Acquisition Costs--Continued the Company incurs the cost. The deferred costs are then amortized against income over the benefit period up to a maximum of 20 years. Amortization is based on the same assumptions used for future policy benefits as described below. Depreciation and Amortization: Depreciation and amortization are computed by the double-declining and straight-line methods at rates estimated to recover the cost of the related assets over their expected useful lives. The range of such lives is from 3 to 31.5 years. Deferred Offering Cost: Specific incremental costs directly attributable to a public offering of common stock of First American Investment Corporation currently in process (See Notes J and N.) have been deferred and will be charged against the gross proceeds of the offering, or charged to expense if the offering is terminated. Organization Costs: Organization costs incurred in 1990 for Funeral Homes of Louisiana, Inc. are being amortized on a straight-line basis over a 60 month period. Intangible Assets: Intangible assets acquired by First American Investment Corporation are being amortized on a straight-line basis over a 60 month period. Future Policy Benefits: Reserves for future policy benefits for all of the Company's traditional plans of life insurance have been computed principally by the net level premium method with assumptions as to investment yields, mortality, and withdrawals based upon Company and industry experience, adjusted to provide for possible unfavorable deviation from the mortality table and investment yield assumptions. Reserves for accident and health benefits have been computed with assumptions that consider investment yields, morbidity, and withdrawals based upon Company and industry experience, adjusted to provide for possible unfavorable deviation from the morbidity table and investment yield assumption. The benefit reserves for annuities are stated at full fund accumulation balance with allowance for surrender charges. Policy Claims Payable: The liability for policy claims payable is composed of claims reported but not paid and claims incurred but not reported. American Liberty Life Insurance Company has developed a procedure for calculating incurred but unreported health benefit claim costs based on averaging prior year claims using dates that claims are incurred, reported to the insurance company, and subsequently paid by the insurance company. In addition, the insurance company, in 1993, initiated procedures to specifically identify and reserve for "jumbo claims" based on claimant's medical history and similar experience. Deferred Income Taxes: The Company computes and records income taxes payable based upon current taxable income. Deferred tax liabilities and assets are provided for termporary differences between book and tax asset and liability basis in accordance with SFAS 109 at current income tax rates. The actual tax liability or credit will depend on subsequent operations of the Company and its subsidiaries and the rates in effect at the time such differences in basis are taxed. Items relating to the deferred income tax liabilities arise from temporary differences related to capitalization of deferred acquisition costs. -9- 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Deferred Income Taxes -- Continued The deferred tax asset is the result of items relating principally to temporary differences between accounting and tax reserve methods for the insurance subsidiary and to net operating loss carryovers and minimum tax credit carryovers. A valuation account has been established for a portion of the deferred tax asset which may expire before being used to offset taxable income. Issuance of Stock by Subsidiary: Changes in American Liberty Financial Corporation's proportionate share of equity in first American Investment Corporation, which resulted from the additional equity raised by the subsidiary through issuance of its stock (See Note N.), are accounted for as an equity transaction in consolidation. Recognition of Revenue: Insurance premium revenues are recognized as income when earned. Premiums are reflected net of reinsurance ceded. (See Note G.) Earnings Per Share: Primary earnings per share are computed on the weighted average number of shares of common stock and equivalents (convertible preferred stock) assumed outstanding during the year of computation. Fully diluted earnings per share are computed based on the weighted average number of shares of common stock and equivalents assumed outstanding during the year as if the convertible preferred stock had been converted at the beginning of the period. Reclassification: Certain prior year amounts have been reclassified to conform with current year presentation. NOTE B -- NATURE OF BUSINESS The Company was incorporated under the Louisiana Business Corporation Act for the purpose of organizing and financing a proposed Louisiana life insurance company. American Liberty Life Insurance Company began insurance marketing operations in March, 1979. American Liberty Exploration Corporation, American Liberty Exploration Corporation, 1981-1, and American Liberty Exploration Corporation, 1982-1 were incorporated on October 23, 1980, July 6, 1981, and January 7, 1982, respectively, under the laws of the State of Louisiana. These corporations were established for the purpose of forming partnerships in commendam (similar to limited partnerships in other states) in which the corporations are general partners, and with the intent to invest in leasing, exploration, development, production, and operation of various oil and gas properties. American Liberty Securities Corporation was incorporated on July 1, 1981 under the laws of the State of Louisiana. American Liberty Securities Corporation was established for the purpose of recruiting and training a sales staff to market specific qualifying securities. First American Investment Corporation was formed in November, 1984 for the purpose of organizing and financing proposed funeral home companies (Funeral Homes of Louisiana, Inc. and Funeral Homes of America, Inc.), and a proposed -10- 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE B -- NATURE OF BUSINESS -- Continued Louisiana life insurance company (First Investment Life Insurance Company). Funeral Homes of Louisiana, Inc. was formed in 1989 and Funeral Homes of America was formed in 1993. See Notes J and N for a discussion of First American Investment Corporation's stock offering. NOTE C--NET INVESTMENT INCOME, FIXED MATURITY BONDS, MORTGAGE-BACKED SECURITIES, AND SHORT-TERM INVESTMENTS Interest income from fixed maturity bonds, short-term investments, and policy loans are as follows:
1994 1993 ---------- -------- Fixed maturity bonds, held-to-maturity $ 951,392 $716,061 Mortgage-backed securities 11,937 18,325 Short-term investments and policy loans 90,522 169,421 ---------- -------- Total Interest 1,053,851 903,807 Less: Investment expenses (27,508) (34,845) ---------- -------- Net Investment Income $1,026,343 $868,962 ========== ========
Fixed maturity bonds held-to-maturity are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- -------- ---------- ----------- 1994 U.S. Treasury Securities and obligations of U.S. Government and agencies $ 2,041,057 $ 1,685 $ 39,052 $ 2,003,690 Corporate Securities 6,789,555 6,830 518,755 6,277,630 Debt Securities issued by states and political subdivisions: U.S. 289,679 -- 28,679 261,000 Other countries 403,201 -- 41,201 362,000 Other Debt Securities (Public Utilities): U.S. 4,337,480 1,072 630,552 3,708,000 Other countries 311,138 -- 42,138 269,000 ----------- -------- ---------- ----------- Total Fixed Maturity Bonds at 12/31/94 $14,172,110 $ 9,587 $1,300,377 $12,881,320 =========== ======== ========== =========== 1993 U.S. Treasury Securities and obligations of U.S. Government and agencies $ 1,128,795 $115,858 $ -- $ 1,244,653 Corporate Securities 6,045,007 322,039 20,856 6,346,190 Debt Securities issued by states and political subdivisions: U.S. 104,301 5,699 -- 110,000 Other countries 107,663 -- 6,663 101,000 Other Debt Securities (Public Utilities): U.S. 3,939,943 46,366 93,309 3,893,000 Other countries 207,809 3,191 -- 211,000 ----------- -------- ---------- ----------- Total Fixed Maturity Bonds at 12/31/93 $11,533,518 $493,153 $ 120,828 $11,905,843 =========== ======== ========== ===========
-11- 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE C -- NET INVESTMENT INCOME, FIXED MATURITY BONDS, MORTGAGE-BACKED SECURITIES, AND SHORT-TERM INVESTMENTS -- Continued Mortgage-backed securities consist of the following: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- -------- 1994 GNMA $167,307 $ - $14,952 $152,355 ======== ========== ======= ======== 1993 GNMA $212,930 $ - $ 5,321 $207,609 ======== ========== ======= ======== The amortized cost and estimated market value of debt securities at December 31, 1994, by contractual maturity, are as follows: Amortized Fair Cost Value ----------- ----------- Due on one year or less $ 226,815 $ 228,500 Due after one year through five years 1,082,094 1,062,880 Due after five years through ten years 5,528,793 5,201,550 Due after ten years 7,334,408 6,388,390 ----------- ----------- 14,172,110 12,881,320 Mortgage-backed securities 167,307 152,355 ----------- ----------- $14,339,417 $13,033,675 =========== =========== Short-term investments and restricted cash included $876,026 and $845,025 invested in Merrill Lynch U.S.A. Government Reserves at December 31, 1994 and 1993, respectively. NOTE D -- INVESTMENTS IN OIL AND GAS PARTNERSHIPS The Company accounts for its interest in oil and gas partnerships through its subsidiaries which are the general partners on the equity method of accounting. Investment balances in the partnership at December 31, 1994 and 1993 were $1,039 and $641, respectively. NOTE E -- DEFERRED POLICY ACQUISITION COSTS Details of deferred policy acquisition costs are as follows: 1994 1993 ---------- ---------- Beginning balance $7,236,055 $6,945,763 Deferrable costs incurred, commissions on first year and renewal business 1,098,193 1,522,485 Other 68,725 214,215 ---------- ---------- 8,402,973 8,682,463 Charged against income 1,452,826 1,446,408 ---------- ---------- Ending Balance $6,950,147 $7,236,055 ========== ========== Net (decrease) increase in balance $ (285,908) $ 290,292 ========== ========== First year gross premiums $1,016,056 $1,631,227 ========== ========== Renewal year gross premiums $6,714,438 $6,348,472 ========== ========== -12- 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE F -- INDIVIDUAL PARTICIPATING LIFE POLICIES Individual participating life insurance policies are 17 percent of the amounts for insurance in force and seven percent of premium income for life insurance related plans. Insurance earnings and dividends on individual participating life policies are determined by actuarial assumptions included in asset share studies prepared at the time the policies are developed. The policies become eligible for dividends when the policies have been paid to the end of the second year. The amount of dividends to be paid to policyholders is determined annually as a percentage of the basic gross annual premium of the policies and is declared by the Board of Directors based on mortality and persistency experience on the participating policies during the year. Dividends are not guaranteed on individual participating life policies. NOTE G -- REINSURANCE Liability for future policy benefits is reported before the effects of reinsurance. Reinsurance receivables (including amounts related to insurance liabilities) are reported as assets. Estimated reinsurance receivables are recognized in a manner consistent with the liabilities related to the underlying reinsurance contracts. Such amounts have been presented in accordance with Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short Duration and Long Duration Contracts. The Company is liable if the reinsuring companies are unable to meet their obligations under the reinsurance agreements.
Percentage Ceded To Assumed Of Amount December 31, Gross Other From Other Net Assumed 1994 Amount Companies Companies Amount To Net - -------------- ---------- --------- ---------- ---------- ---------- Life insurance in force (in thousands) $ 40,735 $ 884 $ - $ 39,851 $ - Premiums, life insurance $3,643,028 $(2,489) $ - $3,645,517 $ -
American Liberty Life Insurance Company retains life insurance risk up to a maximum of $32,000. If the policy coverage exceeds $32,000, the Company reinsures the portion of the policy amount over $30,000. The portion over $30,000 is reinsured at various reinsurance premium rates with other insurance companies. Total reinsured ordinary life amounts were $884,000 at December 31, 1994 and $1,400,000 at December 31, 1993. Generally, in the event of impairment of a reinsurer, the Company must reassume the insurance risk. Reinsurance costs or ordinary life insurance are expensed with appropriate credits to reserves on the risk reinsured. American Liberty Life Insurance Company also reinsures all accidental death policies through a coinsurance arrangement whereby 90 percent of the benefit risk is assumed by the reinsurer. The reinsurance agreement may be terminated by either party sending to the other written notice of not less than 60 days. Reinsurnce costs on the accidental death policies are expensed with appropriate credits to reserves on the risk reinsured. NOTE H -- INCOME TAXES The Company's insurance subsidiary files its income tax returns as a life insurance company. Under provisions of the Tax Reform Act of 1984, life insurance companies are subject to federal income tax on life insurance company -13- 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE H -- INCOME TAXES -- Continued taxable income, which is life insurance gross income minus life insurance deductions. Life insurance company gross income consists of amounts generally include in gross income; and life insurance company deductions are the sum of (i) general deductions and (ii), if applicable, the small life insurance company deduction. The Company adopted SFAS 109, which mandates the liability method for computing deferred income taxes. A deferred asset has been established for temporary differences that will result in deductible amounts and for carryforwards. Management feels it is possible that a portion of these deferred tax assets may not be used to offset taxable income within the time allowed. Therefore, a valuation allowance has been established. The approximate tax effects of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets are as follows:
1994 1993 ---------- ---------- Capitalization of deferred acquisition cost $1,870,328 $2,019,807 ---------- ---------- Deferred Tax Liability $1,870,328 $2,019,807 ========== ========== Difference in reserve basis $1,247,452 $1,206,709 Bad debt reserve 56,348 62,910 Other 3,604 6,035 Net operating loss carryovers 456,501 384,974 Alternative minimum tax credit carryovers 237,948 217,280 ---------- ---------- Deferred Tax Asset 2,001,853 1,877,908 Valuation allowance (170,585) (56,113) ---------- ---------- Net Deferred Tax Asset $1,831,268 $1,821,795 ========== ==========
Provisions for income taxes in the Consolidated Statements of Operations are different than the federal statutory rates of 34 percent applied to income before taxes. The reasons for this are as follows:
1994 1993 ---------- ---------- Federal income tax statutory rate on taxable income $ (187,078) $ (126,240) Rate brackets (11,750) (9,694) Change in life insurance temporary differences 12,798 1,088 Small business deduction (75,258) (110,727) Valuation allowance 114,472 56,113 Other 20,223 (4,020) ---------- ---------- Federal Income Tax Expense (126,593) (193,480) State income taxes -- -- ---------- ---------- Provision For Income Taxes Per Financial Statements $ (126,593) $ (193,480) ========== ==========
Deferred income taxes are provided on amounts that represent temporary differences between financial and tax reporting. Sources of temporary differences and the related provision for deferred income taxes in the Consolidated Statements of Operations are as follows: -14- 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE H -- INCOME TAXES -- Continued 1994 1993 ---------- ---------- Taxes effects of temporary differences: Life insurance subsidiary $(192,952) $(252,118) Advances in excess of commissions earned - - Net operating losses from non-life subsidiaries 34,000 (2,120) --------- --------- Provision For (Benefit From) Deferred Income Taxes $(158,952) $(254,238) ========= ========= There is approximately $29,000 in policyholders' surplus for the life insurance company related to pre-1984 tax law that would become taxable if dividend distributions exceeded shareholders' surplus. Under SFAS 109, a deferred liability is not provided for this item. If policyholder surplus became taxable, income taxes of approximately $9,860 would result. American Liberty Financial Corporation and its subsidiaries have available, at December 31, 1994, unused non-life insurnace company operating loss carryforwards of approximately $1,342,000, which may be applied against future consolidated federal taxable income. The operating loss carryforwards will expire from 2002 to 2009. The 1994 current tax expense reflects no use of net operating loss carryforwards or alternative minimum tax operating loss carryforwards. American Liberty Financial Corporation has available, at December 31, 1994, unused operating loss carryforwards of $1,876,000, which may be applied against future State of Louisiana taxable income. These carryforwards expire in various years from 1999 to 2009. American Liberty Securities Corporation has operating loss carryforwards of $23,480, which may be applied against future State of Louisiana taxable income. These carryforwards will expire form 1999 to 2009. NOTE I -- RELATED PARTY TRANSACTIONS American Liberty Financial Corporation, in the normal course of business, is involved in transactions with its subsidiaries. Such transactions are summarized as follows: 1994 1993 --------- --------- Rental income to Company from American Liberty Life Insurance Company $ 50,265 $ 46,685 ========= ========= Expenses paid by subsidiaries and allocated to the Company $ 37,592 $ 38,156 ========= ========= Expenses and costs paid by the Company and allocated to subsidiaries $ 47,165 $ 52,524 ========= ========= With respect to the above transactions and those related to income taxes, accounts receivable balances from the subsidiaries at December 31, 1994 and 1993 are as follows: 1994 1993 --------- --------- Accounts receivable, net $ 61,681 $ 229,521 ========= ========= -15- 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE I -- RELATED PARTY TRANSACTIONS -- Continued Although payments of the intercompany accounts receivable any payable are usually expected to be by funds and activities during the normal course of business, certain payments were made subsequent to year end other than in the normal course of business. (See Note Q.) At December 31, 1994 and 1993, the oil and gas exploration subsidiaries of American Liberty Financial Corporation had accounts receivable for expenses incurred by oil and gas partnerships in which the subsidiaries are the general partners. The receivable also includes an amount from the subsidiary, First American Investment Corporation, which acquired the rights to intangible assets and assumed a payable. The amounts receivable by American Liberty Exploration Corporation are from the following:
1994 1993 ------- ------- American Liberty Exploration Partnerships $ 8,906 $14,900 First American Investment Corporation 10,299 10,299 ------- ------- Total $19,205 $25,199 ======= =======
In addition, receivables of approximately $460,000 related to First American Investment Corporation are subject to the contingency described in Note J. The subsidiary of First American Investment Corporation, Funeral Homes of Louisiana, Inc., incurred certain operating costs prior to production of income which were paid by the affiliate company, American Liberty Life Insurance Company. This amount of $28,777 is an accounts payable/receivable between the affiliates. In conjunction with construction of the funeral home for Funeral Homes of Louisiana, Inc., a ten year, 9% mortgage in the amount of $125,000 was funded by American Liberty Life Insurance Company. The balance at December 31, 1994 is $106,532. In 1994, a subsidiary, First American Investment Corporation, paid an officer salaries for 1990 through 1994 previously approved by the Board of Directors. Of $42,923 paid, the officer had loaned $30,620 back, with interest of 8.5%. The balance is due December 29, 1995. NOTE J -- CONTINGENT LIABILITIES American Liberty Exploration Corporation and American Liberty Exploration Corporation, 1981-1, as General Partners of American Liberty Exploration Partners, 1980, and American Liberty Exploration Partners, 1981-1 (See Note D.), may have liability with respect to partnership operations in accordance with the respective partnership articles and Louisiana Law. State insurance laws restrict the ability of insurance companies to pay dividends or make loans to affiliates. The Company's insurance subsidiary is restricted as to the amount it can dividend to the parent company without giving prior notice, or, in some cases, receiving prior approval from the Insurance Commissioner of Louisiana. In addition, First American Investment Corporation is similarly restricted by prospectus requirements. These constraints do not -16- 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE J -- CONTINGENT LIABILITIES -- Continued affect subsidiary liquidity; however, they can limit the ability of the parent to use cash generated by the subsidiaries to fund dividends and obligations of the parent. These restrictions are not expected to affect the ability of the Company to meet its obligations. As described in Note N, First American Investment Corporation (FAIC) has raised capital through an offering of common stock. In 1993, a dispute arose as to which Louisiana agency had jurisdiction over the offering. While this was being resolved, and to the present, FAIC was unable to obtain approval to sell shares. It was ultimately determined, in 1994, that the Insurance Commissioner of Louisiana had jurisdiction over the offering. Prior prospectuses indicated that the offering was to terminate on December 31, 1994, but the Company has applied to the Insurance Commissioner for an extended offering period. The Insurance Commissioner has indicated that if certain conditions are met, he will review a current prospectus for the purpose of determining whether he will allow the offering to resume. The plan discussed with the Insurance Commissioner requires FAIC to purchase a life insurance company and fund it for an agreed capital amount, presently thought to be $300,000. For part of the funding, FAIC would contribute the stock of its funeral home subsidiaries to the capital of the insurance subsidiary. FAIC is reviewing life insurance companies available for purchase, but a purchase has not yet been made. Final outcome of the acquisition of a suitable life insurance subsidiary, obtaining other funding for the life insurance subsidiary and offering, and approval in general of the request to extend the offering is unknown at this time. Should the offering not be continued, certain assets related to the offering will be expensed (approximately $105,000) and payment of liabilities may require capital contributions of the majority stockholder, American Liberty Financial Corporation. These financial statements have been presented on the basis that First American Investment Corporation is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. On June 30, 1993, the subsidiary, American Liberty Life Insurance Company, voluntarily agreed to cease writing new business in the State of Georgia pending compliance with recent law changes requiring all insurance companies to increase capital to $1,500,000. Since capital requirements were not met by June 30, 1994, the company's Georgia license was suspended until the capital is increased to $1,500,000. The company can continue to collect premiums and service renewal business and the suspension is not expected to have a material effect on operations. Premiums collected in Georgia comprises approximately 14% of gross premiums in 1993. NOTE K -- CAPITAL SHARES The 8% non-cumulative, non-voting preferred stock (par value $24.875) can be converted to common stock at any time. The conversion ratio, prior to May 19, 1989, was two shares of common stock for each share of preferred, as determined and approved by the Louisiana Commissioner of Insurance. As a result of common stock dividends, the conversion ratio has changed to 2.66 shares of common stock for each share of preferred converted after May 17, 1991. If not converted, preferred stock may be called at $25 per share by the Company at any time. In the event of liquidation, the holders of the preferred stock -17- 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE K -- CAPITAL SHARES -- Continued will have a preferential right to the net assets of the Company to the extent of $28.875 per share plus all declared and unpaid dividends to the date of liquidation. Accordingly, common stockholders will be entitled to all remaining assets of the company. Shares of common stock were issued based on conversion ratios in effect at time of issue as follows: Year Preferred Common ---- --------- ------ 1994 360 958 1993 - - NOTE L -- STATUTORY STOCKHOLDERS' EQUITY AND STATUTORY NET GAIN Statutory stockholders' equity and statutory net gain from operations for each year for American Liberty Life Insurance Company are as follows: Statutory Statutory Net Gain Stockholders' (Loss) From Equity Operations ------------ ------------ December 31, 1994 $2,374,920 $ (92,197) December 31, 1993 2,136,904 (138,973) NOTE M -- REALIZED GAINS ON INVESTMENTS During 1994 and 1993, certain fixed maturity bonds held by the Company for investment were called for redemption prior to their scheduled maturity dates, which resulted in net realized gains. 1994 1993 --------- ----------- Proceeds on the redemptions of fixed maturity bonds $ 170,134 $ 1,362,966 Amortized cost of bonds redeemed (167,457) (1,350,077) --------- ----------- Net Realized Gains $ 2,677 $ 12,889 ========= =========== There is no investment income or realized gains allocable to policyholders and separate accounts included in the amounts reported in these financial statements. NOTE N -- PUBLIC OFFERING OF STOCK OF FIRST AMERICAN INVESTMENT CORPORATION The offering of shares of First American Investment Corporation (FAIC) (a wholly-owned subsidiary of the Company) to the public (only to bona fide residents of Louisiana) on a best efforts basis consists of 20,000,000 shares of common stock at a price of $1.00 per share or maximum gross proceeds of $20,000,000. Uncertainties concerning the status of the offering are discussed in Note J. The cumulative sales proceeds of $1,215,750 and $1,212,550 had been collected at December 31, 1994 and 1993, respectively. In addition, subscriptions receivable were $400 and $2,600 at December 31, 1994 and 1993, respectively. If all shares in FAIC that are offered are sold, the shares owned by the Company will equal approximately 51% of the voting power of all outstanding shares of FAIC. -18- 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE N -- PUBLIC OFFERING OF STOCK OF FIRST AMERICAN INVESTMENT CORPORATION -- Continued Through December 31, 1994, 1,198,900 shares of common stock of FAIC have been issued (-0- in 1994 and 606,388 shares in 1993). In 1993, $545,060 was released from escrow to organize Funeral Homes of America, Inc. In accordance with the 1989 issue of 562,150 shares, $500,000 was released from escrow to organize Funeral Homes of Louisiana, Inc. The funeral home owned by Funeral Homes of Louisiana, Inc. was completed in 1992. Total cost of the building and equipment was $606,534. The mortgage described in Note I was required to complete the construction. Upon the issuance of the above shares of stock, American Liberty Financial Corporation's ownership percentage of the outstanding stock of FAIC was reduced from 100% to 94.5%. The asset entitled Deferred Offering Costs represents commissions, costs, and expenses directly attributable to the marketing of these securities which will not exceed 20% or $.20 per public share. At December 31, 1994 and 1993, the payable for costs of public offering of stock of subsidiary included $1,516 and $2,600, respectively, payable to a Company Officer. As a result of the shares of stock issued in 1993, the balance in the Deferred Offering Costs Account has been reduced by $121,278. These costs have been charged against the offering proceeds from the stock which was issued. The expense entitled Advances in Excess of Commissions Earned represents a provision for non-recoverability of certain advances to Agents. Any recovery of such advances will be recorded as income. NOTE O -- STATEMENTS OF CASH FLOWS For cash flow reporting purposes, interest paid was $-0- in 1994 and $7,480 in 1993. The Company made income tax payments of $43,000 and $58,935 in 1994 and 1993, respectively. NOTE P -- LEASES There is a 50 year non-cancellable lease between the City of Baker, Louisiana and the subsidiary, First American Investment Corporation. Initial cost of the lease is $1,000 per acre annually and subject to adjustment at the end of each five year period based on changes in the Consumer Price Index. The Company has the option to renew the lease for two successive 24 year periods. At the end of the lease period, the lessee retains the rights to all leasehold improvements. The lease expense for 1994 and 1993 was $3,411. Future minimum lease payments, based on current contract terms, are as follows: 1995 $ 3,411 1996 3,411 1997 3,411 1998 3,411 1999 3,411 Thereafter 139,851 -------- $156,906 -------- -------- -19- 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued AMERICAN LIBERTY FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1994 NOTE Q -- SUBSEQUENT EVENTS To meet regulatory capital requirements, the Company repaid accounts payable to the life insurance subsidiary (ALLIC) with cash of $315,000 and plans to repay the balance by tendering its stock in First American Investment Corporation (FAIC). The cash was provided from the wholly-owned exploration corporations. The stock realignment of FAIC to ALLIC requires approval of the Louisiana Life Insurance Commissioner. ALLIC will become the majority shareholder of FAIC (94.5%). This transaction would increase capital and surplus of ALLIC to the extent determined under statutory insurance accounting practices. The Company, as of December 31, 1994, has proposed to merge with Citizens, Inc. As part of the merger agreement, all of the outstanding shares of common stock of ALFC will be converted to newly issued shares of common stock of Citizens, Inc. at a rate of one share of the Company for 1.1 shares of Citizens, Inc., and each share of the Company preferred stock will be converted to 2.926 shares of common stock of Citizens, Inc. The merger has yet to be approved by the shareholders and state insurance officials. As a result of this merger, which would be accounted for as a purchase, the Company would become a wholly-owned subsidiary of Citizens, Inc. -20- 90 APPENDIX A PLAN AND AGREEMENT OF MERGER AMERICAN LIBERTY FINANCIAL CORPORATION AMERICAN LIBERTY LIFE INSURANCE COMPANY CITIZENS, INC. AND CITIZENS ACQUISITION, INC. This Plan and Agreement of Merger ("Agreement") is by and among American Liberty Financial Corporation ("ALFC"), American Liberty Life Insurance Company ("ALLIC"), Citizens, Inc. ("Citizens") and Citizens Acquisition, Inc. ("Acquisition"). WITNESSETH WHEREAS, Citizens is a corporation duly organized under the laws of the State of Colorado; and WHEREAS, Citizens wholly owns Acquisition, a corporation duly organized under the laws of Louisiana; and WHEREAS, ALLIC and ALFC are corporations duly organized under the laws of the State of Louisiana with ALLIC being a wholly-owned subsidiary of ALFC; and WHEREAS, the parties hereto wish to enter into this Agreement. NOW, THEREFORE, it is agreed among the parties as follows. ARTICLE I The Merger 1.1 Subject to approval of this Agreement by the Insurance Commissioner of the State of Louisiana and subject to the conditions set forth herein on the "Effective Date" (as herein defined). Acquisition will merge with and into ALFC (the "Merger"). ALFC shall be the corporation surviving the Merger (the "Surviving Corporation"). The transactions contemplated by this Agreement shall be completed at a closing ("Closing") on a closing date ("Closing Date") which shall be as soon as possible after all regulatory approvals and shareholder approvals are obtained in accordance with law as set forth in this Agreement. On the Closing Date, all of the documents to be furnished to ALFC and Citizens, including the documents to be furnished pursuant to Article VII of this Agreement, shall be delivered to Jones & Keller, P.C., counsel to Citizens ("Jones & Keller") to be held in escrow until the Effective Date or the date of termination of this Agreement, whichever first occurs and thereafter shall be promptly distributed to the parties as their interests may appear. -1- 91 1.2 The effect of the Merger shall be: (i) The Merger shall become effective at the time ALFC and Acquisition file a Certificate of Merger with the Secretary of State of the State of Louisiana. The Merger shall have the effect set forth in the Louisiana Business Corporation Law. The Surviving Corporation may, at any time after the Effective Date, take any action (including executing and delivering any document) in the name and on behalf of either ALFC or Acquisition in order to carry out and effectuate the transactions contemplated by this Agreement. (ii) The Articles of Incorporation of ALFC shall be the Articles of Incorporation of the Surviving Corporation. (iii) The Bylaws of ALFC shall be the Bylaws of the Surviving Corporation. (iv) The directors and officers of Acquisition shall become the directors and officers of the Surviving Corporation at and as of the Effective Date. (v) At and as of the Effective Date, (a) each issued and outstanding share of ALFC Common Stock, $.125 par value (other than any shares for which dissenter's rights are perfected in accordance with Louisiana law), shall be converted into the right to receive an amount equal to one and one-tenth (1.10) shares of Class A common stock of Citizens and each share of issued and outstanding shares of ALFC Preferred Stock, $24.875 par value (other than any shares for which dissenter's rights are perfected under Louisiana law), shall receive 2.926 shares of Class A common stock of Citizens; (b) each share of capital stock of ALFC shall be converted into the right to receive payment from Citizens with respect thereto in accordance with the provisions of the Louisiana Business Corporation Law; provided, however, that all consideration to be received shall be subject to equitable adjustment in the event of any stock split, stock dividend, reverse stock split, or other change in the number of ALFC shares outstanding. No shares of ALFC shall be deemed to be outstanding or to have any rights other than those set forth above in this Section 1.2 after the Effective Date. -2- 92 (vi) Conversion of Capital Stock of Acquisition. At and as of the Effective Date, each share of Common Stock, $.01 par value per share, of Acquisition shall be converted into one share of Common Stock, $.125 par value per share, of the Surviving Corporation. 1.3 If this Agreement is duly adopted by the holders of the requisite number of shares, in accordance with the applicable laws and subject to the other provisions hereof, such documents as may be required by law to accomplish the Agreement shall be filed as required by law to effectuate same, and it shall become effective. The time of filing the last document required by law shall be the Effective Date for the Agreement. At the Effective Date, ALFC and Acquisition will file with the Secretary of State of Louisiana, a certificate of merger in the form attached hereto as Exhibit A. For accounting purposes, the Agreement shall be effective as of 12:01 a.m., on January 1, 1995. ARTICLE II Issuance of Shares 2.1 At the Effective Date, the shares of no par value Class A common stock of Citizens to be issued as provided in Section 1.2 shall be distributed to shareholders of ALFC (other than those shares as to which dissenters' rights have been perfected in accordance with Louisiana law). 2.2 The stock transfer books of ALFC shall be closed on the Effective Date, and thereafter no transfers of the stock of ALFC shall be made. Citizens shall appoint an exchange agent ("Exchange Agent"), which is expected to be Citizens' then stock transfer agent ("Stock Transfer Agent"), to accept surrender of the certificates representing the shares of ALFC, and to deliver for such surrendered certificates, shares of Class A common stock of Citizens. The authorization of the Exchange Agent may be terminated by Citizens after six months following the Effective Date. Upon termination of such authorization, any shares of ALFC and funds held by the Exchange Agent for payment to ALFC shareholders pursuant to this Agreement shall be transferred to Citizens or its designated agent who shall thereafter perform the obligations of the Exchange Agent. If outstanding certificates for shares of ALFC are not surrendered or the payment for them not claimed prior to such date on which such payments would otherwise escheat to or become the property of any governmental unit or agency, the unclaimed items shall, to the extent permitted by abandoned property and other applicable law, become the property of Citizens (and to the extent not in its possession shall be paid over to it), free and clear of all claims or interest of any persons previously entitled to such items. Notwithstanding the foregoing, neither the -3- 93 Exchange Agent nor any party to this Agreement shall be liable to any holder of ALFC shares for any amount paid to any governmental unit or agency having jurisdiction of such unclaimed item pursuant to the abandoned property or other applicable law of such jurisdiction. 2.3 No fractional shares of Citizens stock shall be issued as a result of the Agreement; rather, such shares shall evidence the right to receive a cash value per fractional share of Citizens Class A common stock which shall be the average closing price of the Class A common stock of Citizens as reported on the American Stock Exchange for the five trading days prior to the Effective Date. In the event the exchange of shares results in any shareholder being entitled to a fraction less than a whole share of Citizens stock, such shareholder shall be given a cash payment of fractions thereof at the rate per share from Citizens for one share of Citizens Class A common stock as calculated in the previous sentence. 2.4 At the Effective Date, each holder of a certificate or certificates representing shares of ALFC, upon presentation and surrender of such certificate or certificates to the Exchange Agent, shall be entitled to receive the consideration set forth herein, except that holders of those shares as to which dissenters' rights shall have been asserted and perfected pursuant to Louisiana law shall not be converted into shares of Citizens Class A common stock, but shall represent only such dissenters' rights. Upon such presentation, surrender, and exchange as provided in this Section 2.4, certificates representing shares of ALFC previously held shall be canceled. Until so presented and surrendered, each certificate or certificates which represented issued and outstanding shares of ALFC at the Effective Date shall be deemed for all purposes to evidence the right to receive the consideration set forth in Section 1.2 of this Agreement. If the certificates representing shares of ALFC have been lost, stolen, mutilated or destroyed, the Exchange Agent shall require the submission of an indemnity agreement and may require the submission of a bond in lieu of such certificate. ARTICLE III Representations, Warranties and Covenants of Citizens No representations or warranties are made by any director, officer, employee or shareholder of Citizens as individuals, except as and to the extent stated in this Agreement or in a separate written statement (the "Citizens Disclosure Statement"). Citizens hereby represents, warrants and covenants to ALFC and ALLIC, except as stated in the Citizens Disclosure Statement, as follows: -4- 94 3.1 Citizens is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado, and has the corporate power and authority to own or lease its properties and to carry on its business as it is now being conducted. The Articles of Incorporation and Bylaws of Citizens, copies of which have been delivered to ALFC and ALLIC, are complete and accurate, and the minute books of Citizens contain a record, which is complete and accurate in all material respects, of all meetings, and all corporate actions of the shareholders and Board of Directors of Citizens. 3.2 The aggregate number of shares which Citizens is authorized to issue is 50,000,000 shares of Class A common stock with no par value and 1,000,000 shares of Class B common stock with no par value; of which 16,941,523 shares of such Class A common stock and 621,049 shares of Class B common stock are issued and outstanding, fully paid and nonassessable. There are 122,490 shares of Class A common stock held as treasury stock of Citizens. Citizens has no outstanding options, warrants, or other rights to purchase, or subscribe to, or securities convertible into or exchangeable for any shares of capital stock, except an option for 100,000 shares of Class A common stock. The two (2) 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. The subsidiaries of Citizens are each an association, corporation, or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or association; each has the power and authority to lease its properties and to carry on its business as now being conducted and is qualified to do business; and each holds or shall hold all licenses, franchises, permits or other governmental authorizations required to enable it to conduct its business or own its properties in every jurisdiction in which it currently conducts business or owns property and where the failure to do so would have a material adverse effect on the business of the subsidiary. All outstanding shares of capital stock of each subsidiary are duly and validly authorized and issued, fully paid and nonassessable. Citizens directly or indirectly owns all of the issued and outstanding capital stock of such subsidiaries, except for Continental Investors Life Insurance Company of which it owns 90 percent of the outstanding capital stock. Acquisition was formed solely to effectuate this Agreement and has minimal assets and no liabilities. 3.3 Citizens and Acquisition have complete and unrestricted power to enter into and, upon the appropriate approvals as required by law, to consummate the transactions contemplated by this Agreement. None of Citizens and its subsidiaries has -5- 95 any liability or obligation to pay any fee or commission to any broker, agent or finder with respect to the transactions contemplated hereby. 3.4 Neither the making of nor the compliance with the terms and provisions of this Agreement and consummation of the transactions contemplated herein by Citizens will conflict with or result in a breach or violation of the Articles of Incorporation or Bylaws of Citizens or the Articles of Incorporation or Bylaws of Acquisition. 3.5 The execution, delivery and performance of this Agreement has been duly authorized and approved by Citizens' Board of Directors and the Board of Directors and sole shareholder of Acquisition. 3.6 Citizens has delivered to ALFC and ALLIC consolidated financial statements of Citizens and its subsidiaries, dated September 30, 1994, and the annual convention statement of Citizens Insurance Company of America ("CICA") for the year ended December 31, 1993. All such statements, herein sometimes called "Citizens Financial Statements," are complete and correct in all material respects and, together with the notes to these financial statements, present fairly the financial position and results of operations of Citizens and CICA for the periods included. The September 30, 1994 statements have been prepared in accordance with generally accepted accounting principles and the December 31, 1993 statement has been prepared in accordance with statutory accounting principles. 3.7 Since the dates of the Citizens Financial Statements there have not been any material adverse changes in the business or condition, financial or otherwise, of Citizens or CICA. Citizens and CICA do not have any material liabilities or obligations, secured or unsecured (whether accrued, absolute, contingent or otherwise) except as disclosed in the Citizens Financial Statement. 3.8 Citizens has delivered to ALFC and ALLIC a list and description of all pending legal proceedings involving Citizens or CICA, none of which will materially adversely affect them, and, except for these proceedings, there are no legal proceedings or regulatory proceedings involving material claims pending, or to the knowledge of the officers of Citizens and CICA, threatened against Citizens or CICA or affecting any of their assets, or properties and neither Citizens nor CICA is in any material breach or violation of or default under any contract or instrument to which Citizens or CICA is a party, and no event has occurred which with the lapse of time or action by a third party could result in a material breach or violation of or default by Citizens or CICA under any contract or other instrument to which Citizens or CICA is a party or by which they or any of their properties may be bound or affected, or under their respective Articles of -6- 96 Incorporation or Bylaws, nor is there any court or regulatory order pending, applicable to Citizens or CICA. 3.9 Neither Citizens nor CICA shall enter into or consummate any transactions prior to the Effective Date other than in the ordinary course of business, except for the consummation of a Plan and Agreement of Exchange with Insurance Investors & Holding, Inc. and Central Investors Life Insurance Co. and will pay no dividend, or increase the compensation of officers and will enter into no agreement or transaction which would adversely affect its financial condition. 3.10 The assets of CICA had admissible values at least equal to the amounts attributed to them on its December 31, 1993 and September 30, 1994 convention statements. 3.11 Neither CICA nor Citizens is a party to any contract performable in the future except insurance policies, customary agent contracts, normal reinsurance agreements, the consummation of a Plan and Agreement of Exchange with Insurance Investors & Holding, Inc. and Central Investors Life Insurance Co. and those which will not adversely affect it. 3.12 All policy and claim reserves of CICA have been properly provided for and are adequate to comply with all regulatory requirements regarding same. 3.13 The representations and warranties of Citizens shall be true and correct as of the date hereof and as of the Effective Date. 3.14 Citizens has delivered, or will deliver within two weeks of the date of this Agreement, to ALFC and ALLIC true and correct copies of Citizens' Annual Report to Shareholders for the years ended December 31, 1993 and 1992 and each of its other reports to shareholders and filings with the Securities and Exchange Commission ("SEC") for the years ended December 31, 1991, 1992 and for 1993. Citizens will also deliver to ALFC and ALLIC on or before the Closing Date any reports relating to the financial and business condition of Citizens which are filed with the SEC after the date of this Agreement and any other reports sent generally to its shareholders after the date of this Agreement. Citizens has duly filed all reports required to be filed by it under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (the "Federal Securities Laws"). No such reports, or any reports sent to the shareholders of Citizens generally as of their respective dates, contained any untrue statement of material fact or omitted to state any material fact required to be stated -7- 97 therein or necessary to make the statements in such report, in light of the circumstances under which they were made, not misleading. 3.15 Citizens has delivered to ALFC and ALLIC a copy of each of the consolidated federal income tax returns of Citizens and its subsidiaries for the year ended December 31, 1993 and for any additional open years. The provisions for taxes paid by Citizens and CICA are believed by Citizens and CICA to be sufficient for payment of all accrued and unpaid federal, state, county and local taxes of Citizens and CICA (including any penalties or interest payable) whether or not disputed for the periods then ended and for all prior fiscal periods. All returns and reports or other information required or requested by federal, state, county, and local tax authorities have been filed or supplied in a timely fashion, and all such information is true and correct in all material respects. Provision has been made for the payment of all taxes due to date by Citizens and CICA, including taxes for the current year ended December 31, 1994. 3.16 Citizens has no employee benefit plan, except for a noncontributory qualified Profit Sharing Plan. 3.17 No representation or warranty by Citizens or CICA in this Agreement, the Citizens Disclosure Statement or any certificate delivered pursuant hereto contains any untrue statement of a material fact or omits to state any material fact necessary to make such representation or warranty not misleading. 3.18 Citizens agrees that all rights to indemnification now existing in favor of the employees, agents, directors or officers of ALFC and ALLIC and its subsidiaries, as provided in the Articles of Incorporation or Bylaws or otherwise in effect on the date hereof shall survive the transactions contemplated hereby in accordance with their terms and Citizens expressly assumes such indemnification obligations of ALFC and ALLIC. ARTICLE IV Representations, Warranties and Covenants of ALFC and ALLIC No representations or warranties are made by any director, officer, employee or shareholder of ALFC or ALLIC as individuals, except as and to the extent stated in this Agreement or in a separate written statement (the "ALFC and ALLIC Disclosure Statement"). ALFC and ALLIC hereby represent, warrant and covenant to Citizens, except as stated in the ALFC Disclosure Statement, as follows: -8- 98 4.1 ALFC and ALLIC are each a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana, and have the corporate power and authority to own or lease their properties and to carry on their business as they are now being conducted. The Articles of Incorporation and Bylaws of ALFC and ALLIC, copies of which have been delivered to Citizens, are complete and accurate, and the minute books of ALFC and ALLIC contain a record, which is complete and accurate in all material respects, of all meetings, and all corporate actions of the shareholders and Board of Directors of ALFC and ALLIC. 4.2 The aggregate number of shares which ALFC is authorized to issue is 2,129,600 shares of common stock with a par value of $.125 per share of which 2,099,134 shares are issued and outstanding, fully paid and nonassessable and 200,000 shares of nonvoting preferred stock with a par value of $24.875 per share, of which 10,545 shares are issued and outstanding, fully paid and nonassessable. The preferred stock is convertible into common stock at the rate of 2.66 shares of ALFC common stock for each one (1) share of preferred stock. Additionally, the preferred shares are callable at any time by ALFC at $25.00 per share. ALFC has no outstanding options, warrants or other rights to purchase or subscribe to, or securities convertible into or exchangeable for any shares of capital stock except for scrip representing fractional shares of common stock convertible into 1,140 shares of common stock which are not included in the above-referenced shares outstanding. There are no shares of common stock held as treasury stock of ALFC. The subsidiaries of ALFC are each an association, corporation, or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or association; each has the power and authority to lease its properties and to carry on its business as now being conducted and is qualified to do business; and each holds or shall hold all licenses, franchises, permits or other governmental authorizations required to enable it to conduct its business or own its properties in every jurisdiction in which it currently conducts business or owns property and where the failure to do so would have a material adverse effect on the business of the subsidiary. All outstanding shares of capital stock of each subsidiary are duly and validly authorized and issued, fully paid and nonassessable. ALFC directly or indirectly owns all of the issued and outstanding capital stock of such subsidiaries, including ALLIC, except for First American Investment Corporation, in which ALFC owns 94.48 percent of the issued and outstanding capital stock. 4.3 ALFC and ALLIC each have complete and unrestricted power to enter into and, upon the appropriate approvals as required by law, to consummate the transactions contemplated by this Agreement. None of ALFC and its subsidiaries has -9- 99 any liability or obligation to pay any fee or commission to any broker, agent or finder with respect to the transactions contemplated hereby. 4.4 Neither the making of nor the compliance with the terms and provisions of this Agreement and consummation of the transactions contemplated herein by ALFC and ALLIC will conflict with or result in a breach or violation of the Articles of Incorporation or Bylaws of ALFC and ALLIC. 4.5 The execution of this Agreement has been duly authorized and approved by ALFC's and ALLIC's Board of Directors. 4.6 ALFC has delivered to Citizens financial statements of ALFC, dated September 30, 1994, and it will deliver to Citizens the annual convention statement of ALLIC as of December 31, 1993, as filed with the Louisiana Department of Insurance. All such statements, herein sometimes called "ALFC Financial Statements," are complete and correct in all material respects and, together with the notes to these financial statements, present fairly the financial position and results of operations of ALFC for the periods indicated. The September 30, 1994 statements of ALFC have been prepared in accordance with generally accepted accounting principles and the December 31, 1993 annual convention statement of ALLIC has been prepared in accordance with statutory accounting practices permitted or prescribed by the Louisiana Department of Insurance. 4.7 Since the dates of the ALFC Financial Statements there have not been any material adverse changes in the business or condition, financial or otherwise, of ALFC. ALFC and ALLIC do not have any material liabilities or obligations, secured or unsecured (whether accrued, absolute, contingent or otherwise). 4.8 ALFC has delivered to Citizens a list and description of all pending legal proceedings involving ALFC and ALLIC, none of which will materially adversely affect them, and, except for these proceedings, there are no legal proceedings or regulatory proceedings involving material claims pending, or to the knowledge of the officers of ALFC or ALLIC, threatened against ALFC or ALLIC or affecting any of their assets, or properties and neither ALFC or ALLIC is in any material breach or violation of or default under any contract or instrument to which ALFC or ALLIC is a party, and no event has occurred which with the lapse of time or action by a third party could result in a material breach or violation of or default by ALFC or ALLIC under any contract or other instrument to which ALFC or ALLIC is a party or by which they or any of their respective properties may be bound or affected, or under their respective Articles of Incorporation or Bylaws, nor is there any court or regulatory order pending, applicable to ALFC or ALLIC. -10- 100 4.9 Neither ALFC nor ALLIC shall enter into or consummate any transactions prior to the Effective Date other than in the ordinary course of business and will pay no dividend, or increase the compensation of officers and will not enter into any agreement or transaction which would adversely affect their financial condition in a material manner. 4.10 The assets of ALLIC had admissible values at least equal to those attributed to them on its December 31, 1993 and September 30, 1994 convention statements. 4.11 Neither ALFC nor ALLIC nor any subsidiary of ALFC or ALLIC is a party to any contract performable in the future except insurance policies, customary agent contracts, normal reinsurance agreements and those which will not adversely affect them. 4.12 All policy and claim reserves of ALLIC have been properly provided for and are adequate to comply with all regulatory requirements regarding same. 4.13 The representations and warranties of ALFC and ALLIC shall be true and correct as of the date hereof and as of the Effective Date. 4.14 ALFC has delivered, or will deliver within two weeks of the date of this Agreement, to Citizens true and correct copies of ALFC's Annual Report to Shareholders for the years ended December 31, 1992 and 1993 and each of its other reports to shareholders and filings with the Securities and Exchange Commission ("SEC") for the years ended December 31, 1991, 1992 and for 1993. ALFC will also deliver to Citizens on or before the Closing Date any reports relating to the financial and business condition of ALFC which are filed with the SEC after the date of this Agreement and any other reports sent generally to its shareholders after the date of this Agreement. ALFC has duly filed all reports required to be filed by it under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (the "Federal Securities Laws"). No such reports, or any reports sent to the shareholders of ALFC generally, contained any untrue statement of material fact or omitted to state any material fact required to be stated therein or necessary to make the statements in such report, in light of the circumstances under which they were made, not misleading. 4.15 ALFC and ALLIC has delivered to Citizens a copy of each of the federal income tax returns of ALFC and ALLIC for the years ended December 31, 1991, 1992 and 1993 and for any additional open years. The provisions for taxes paid by ALFC -11- 101 and ALLIC are believed by ALFC and ALLIC to be sufficient for payment of all accrued and unpaid federal, state, county and local taxes of ALFC and ALLIC (including any penalties or interest payable) whether or not disputed for the periods then ended and for all prior fiscal periods. All returns and reports or other information required or requested by federal, state, county, and local tax authorities have been filed or supplied in a timely fashion, and all such information is true and correct in all material respects. Provision has been made for the payment of all taxes due to date by ALFC and ALLIC, including taxes for the current year ended December 31, 1994. 4.16 Neither ALFC nor ALLIC have any employee benefit plans except for group health and group life benefits payable to full time employees of ALFC and ALLIC. As is common in the industry, ALFC and ALLIC treat their sales force members as independent contractors and therefore, such persons are not eligible for any employee benefit plans. 4.17 No representation or warranty by ALFC or ALLIC in this Agreement, the ALFC and ALLIC Disclosure Statement or any certificate delivered pursuant hereto contains any untrue statement of a material fact or omits to state any material fact necessary to make such representation or warranty not misleading. ARTICLE V Obligations of the Parties Pending the Effective Date 5.1 This Agreement shall be duly submitted to the shareholders of ALFC for the purpose of considering and acting upon this Agreement in the manner required by law at a meeting of shareholders on a date selected by ALFC, such date to be the earliest practicable date after the proxy statement may first be sent to ALFC shareholders without objection by applicable governmental authorities, provided that ALFC will have at least 45 days to solicit proxies. Citizens will furnish to ALFC the information relating to Citizens required by the Federal Securities Laws to be included in the proxy statement. Citizens represents and warrants that at the time of the ALFC shareholders' meeting, the proxy statement, insofar as it relates to Citizens and contains information furnished by Citizens specifically for use in such proxy statement, (a) will comply in all material respects with the provisions of the Federal Securities Laws; and (b) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Board of Directors of ALFC, subject to its fiduciary obligations to shareholders, shall use its best efforts to obtain the requisite approval of ALFC shareholders of this Agreement and the transactions contemplated herein. ALFC and Citizens shall take all reasonable and necessary steps and actions to comply with and to secure ALFC shareholder approval of -12- 102 this Agreement and the transactions contemplated herein as may be required by the statutes, rules and regulations of such states. 5.2 At all times prior to the Effective Date, during regular business hours each party will permit the other to examine its books and records and the books and records of its subsidiaries and will furnish copies thereof on request. It is recognized that, during the performance of this Agreement, each party may provide the other parties with information which is confidential or proprietary information. During the term of this Agreement, and for four years following the termination of this Agreement, the recipient of such information shall protect such information from disclosure to persons, other than members of its own or affiliated organizations and its professional advisers, in the same manner as it protects its own confidential or proprietary information from unauthorized disclosure, and not use such information to the competitive detriment of the disclosing party. In addition, if this Agreement is terminated for any reason, each party shall promptly return or cause to be returned all documents or other written records of such confidential or proprietary information, together with all copies of such writings and, in addition, shall either furnish or cause to be furnished, or shall destroy, or shall maintain with such standard of care as is exercised with respect to its own confidential or proprietary information, all copies of all documents or other written records developed or prepared by such party on the basis of such confidential or proprietary information. No information shall be considered confidential or proprietary if it is (a) information already in the possession of the party to whom disclosure is made; (b) information acquired by the party to whom the disclosure is made from other sources; or (c) information in the public domain or generally available to interested persons or which at a later date passes into the public domain or becomes available to the party to whom disclosure is made without any wrongdoing by the party to whom the disclosure is made. 5.3 ALFC, ALLIC and Citizens shall promptly provide each other with information as to any significant developments in the performance of this Agreement, and shall promptly notify the other if it discovers that any of its representations, warranties and covenants contained in this Agreement or in any document delivered in connection with this Agreement was not true and correct in all material respects or became untrue or incorrect in any material respect. 5.4 All parties to this Agreement shall take all such action as may be reasonably necessary and appropriate and shall use their best efforts in order to consummate the transactions contemplated hereby as promptly as practicable. -13- 103 ARTICLE VI Procedure for Exchange 6.1 The parties shall file with the Insurance Commissioner of Louisiana within 30 days from this date, all of the documents required by the Louisiana law. ARTICLE VII Conditions Precedent to the Consummation of the Merger The following are conditions precedent to the consummation of the Agreement on or before the Effective Date: 7.1 Citizens, Acquisition, ALFC and ALLIC shall have performed and complied with all of their respective obligations hereunder which are to be complied with or performed on or before the Effective Date and ALFC and Citizens shall provide one another at the Closing with a certificate to the effect that such party has performed each of the acts and undertakings required to be performed by it on or before the Closing Date pursuant to the terms of this Agreement. 7.2 This Agreement and the transactions contemplated herein shall have been duly and validly authorized, approved and adopted, at meetings of the shareholders of ALFC and ALLIC duly and properly called for such purpose in accordance with the applicable laws. 7.3 This Agreement is in all things subject to the provisions of the applicable insurance laws and the regulations promulgated thereunder, and shall not become effective until approval is obtained from the Commissioner of Insurance of the State of Louisiana in accordance with the provisions of the laws of said state. Citizens and ALFC, as soon as practical after the execution and delivery of this Agreement, agree to file and to use their best efforts to obtain such approval of the transactions contemplated by this Agreement. Neither Citizens, ALFC nor ALLIC shall be obligated to file a suit or to appeal from any Commissioner's adverse ruling, nor shall Citizens or ALFC or ALLIC be obligated to make any material changes in any lawful, good faith management policy in order to gain such approval. In the event approval is denied, this Agreement shall terminate. 7.4 No action, suit or proceeding shall have been instituted or shall have been threatened before any court or other governmental body or by any public authority to restrain, enjoin or prohibit the transactions contemplated herein, or which might subject any of the parties hereto or their directors or officers to any material liability, fine, -14- 104 forfeiture or penalty on the grounds that the transactions contemplated hereby, the parties hereto or their directors or officers, have violated any applicable law or regulation, or have otherwise acted improperly in connection with the transactions contemplated hereby, and the parties hereto have been advised by counsel that, in the opinion of such counsel, such action, suit or proceeding raises substantial questions of law or fact which could reasonably be decided adversely to any party hereto or its directors or officers. 7.5 All actions, proceedings, instruments and documents required to carry out this Agreement and the transactions contemplated hereby and the form and substance of all legal proceedings and related matters shall have been approved by counsel for Citizens, ALFC and ALLIC. 7.6 The representations and warranties by Citizens, ALFC and ALLIC in this Agreement shall be true as though such representations and warranties had been made or given on and as of the Effective Date, except to the extent that such representations and warranties may be untrue on and as of the Effective Date because of (1) changes caused by transactions suggested or approved in writing by Citizens; or (2) events or changes (which shall not, in the aggregate, have materially and adversely affected the business, assets, or financial condition of ALFC, ALLIC or Citizens) during or arising after the date of this Agreement. 7.7 ALFC will have sought and obtained from Montgomery, Barnett, Brown, Read, Hammond & Mintz an opinion in form and substance satisfactory to ALFC to the effect that: if the transactions contemplated hereby are consummated in accordance with the terms of this Agreement, they will constitute a reorganization within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"); ALFC and Citizens will each be a party to the reorganization; no gain or loss will be recognized pursuant to the Code by ALFC as a consequence of the transactions contemplated hereby, Citizens will succeed to and take into account the items of ALFC described in the Code; when a ALFC shareholder receives solely Citizens Class A common stock in accordance with the transactions contemplated hereby, such ALFC shareholder will not recognize gain or loss; the basis for the Citizens Class A common stock to be received by ALFC shareholders will be the same as the basis for the shares of ALFC stock they surrender in connection with the transactions contemplated hereby; the holding period for any ALFC shareholder of the Citizens Class A common stock received in the transactions contemplated hereby will include the period during which the shares of the ALFC stock surrendered were held provided that the ALFC stock was a capital asset in the hands of such ALFC shareholder on the Effective Date; and the payment of cash to any ALFC shareholder in lieu of a fractional share of Citizens Class A common stock will be treated as received as a distribution and redemption of the fractional share interest, subject to the limitations of Section 302 of the Code. The opinion shall also -15- 105 address such other subjects as ALFC may reasonably request. Said opinion shall be subject to such representations and warranties as Montgomery, Barnett, Brown, Read Hammond & Mintz may require of all parties to the transaction and said opinion shall be subject to such conditions as reasonably determined by Montgomery, Barnett, Brown, Read Hammond & Mintz. 7.8 ALFC AND ALLIC SHALL HAVE FURNISHED CITIZENS WITH: (1) a certified copy of a resolution or resolutions duly adopted by the Board of Directors of ALFC approving this Agreement and the transactions contemplated by it and directing the submission thereof to a vote of the shareholders of ALFC and ALLIC. (2) a certified copy of a resolution or resolutions duly adopted by a majority of all of the classes of outstanding shares of ALFC capital stock approving this Agreement and the transactions contemplated by it; (3) an opinion of Montgomery, Barnett, Brown, Read, Hammond and Mintz dated as of the Closing Date as set forth in "Exhibit B" attached hereto; (4) an agreement from each "affiliate" of ALFC as defined in the rules adopted under the Securities Act of 1933, as amended, to the effect that (a) the affiliate is familiar with SEC Rules 144 and 145; (b) none of the shares of Citizens Class A common stock will be transferred by or through the affiliate in violation of the Federal Securities Laws; (c) the affiliate will not sell or in any way reduce his risk relative to any Citizens Class A common stock received pursuant to this Agreement until such time as financial results covering at least 30 days of post-closing date combined operations shall have been published by Citizens on SEC Form 10-Q or otherwise; and (d) the affiliate acknowledges that Citizens is under no obligation to register the sale, transfer, or the disposition of Citizens Class A common stock by the affiliate or to take any action necessary in order to make an exemption from registration available to the affiliate, but understands that Citizens will satisfy the public information requirements of Rules 144 and 145 during the three-year period following the Closing Date. 7.9 Citizens shall furnish ALFC and ALLIC with: -16- 106 (1) a certified copy of a resolution or resolutions duly adopted by the Board of Directors of Citizens and the Board of Directors and sole shareholder of Acquisition, approving this Agreement and the transactions contemplated by it; and (2) an opinion dated the Effective Date of Jones & Keller, P.C., counsel for Citizens, as set forth in "Exhibit C" attached hereto. ARTICLE VIII Termination and Abandonment 8.1 Anything contained in this Agreement to the contrary notwithstanding, the Agreement may be terminated and abandoned at any time (whether before or after the approval and adoption thereof by the shareholders of ALFC) prior to the Effective Date: (a) By mutual consent of Citizens and ALFC and ALLIC; (b) By Citizens, ALFC or ALLIC, if any condition set forth in Article VII relating to the other party has not been met or has not been waived; (c) By Citizens, ALFC or ALLIC, if any suit, action or other proceeding shall be pending or threatened by the federal or a state government before any court or governmental agency, in which it is sought to restrain, prohibit or otherwise affect the consummation of the transactions contemplated hereby; (d) By any party, if there is discovered any material error, misstatement or omission in the representations and warranties of another party; or (e) By Citizens, if dissenters' rights are perfected in accordance with Louisiana law for more than 2.5% of the outstanding shares of ALFC; or (f) By any party if the Effective Date is not within 150 days from the date hereof. (g) By any party, if it determined by counsel of either party that the transaction will not constitute a reorganization within the meaning -17- 107 of Section 368(a) of the Internal Revenue Code of 1986, as amended. 8.2 Any of the terms or conditions of this Agreement may be waived at any time by the party which is entitled to the benefit thereof, by action taken by its Board of Directors provided; however, that such action shall be taken only if, in the judgment of the Board of Directors taking the action, such waiver will not have a materially adverse effect on the benefits intended under this Agreement to the party waiving such term or condition. ARTICLE IX Termination of Representation and Warranties and Certain Agreements 9.1 The respective representations and warranties of the parties hereto, shall expire with, and be terminated and extinguished by consummation of the Agreement; provided, however, that the covenants and agreements of the parties hereto shall survive in accordance with their terms. ARTICLE X Miscellaneous 10.1 This Agreement embodies the entire agreement between the parties, and there have been and are no agreements, representations or warranties among the parties other than those set forth herein or those provided for herein. 10.2 To facilitate the execution of this Agreement, any number of counterparts hereof may be executed, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. 10.3 Each of the parties hereto will pay its own fees and expenses incurred in connection with the transactions contemplated by this Agreement. Citizens, ALFC and ALLIC each represent to the others that it has not employed any investment bankers, brokers, finders, or intermediaries in connection with the transaction contemplated hereby who might be entitled to any fee or other payment from ALFC, ALLIC or Citizens or any subsidiary of any of them upon consummation of the transactions contemplated by this Agreement. 10.4 All parties to this Agreement agree that if it becomes necessary or desirable to execute further instruments or to make such other assurances as are deemed -18- 108 necessary, the party requested to do so will use its best efforts to provide such executed instruments or do all things necessary or proper to carry out the purpose of this Agreement. 10.5 This Agreement may be amended upon approval of the Board of Directors of each party provided that the shares issuable hereunder shall not be amended without approval of the requisite shareholders of ALFC. 10.6 Any notices, requests, or other communications required or permitted hereunder shall be delivered personally or sent by overnight courier service, fees prepaid, addressed as follows: To Citizens, Inc.: and to ALFC or ALLIC: Citizens, Inc. American Liberty Financial Corporation Post Office Box 149151 American Liberty Life Insurance Company Austin, Texas 78714-9151 Post Office Box 64626 ATTN: Harold E. Riley Baton Rouge, Louisiana 70906 Chairman ATTN: James I. Dunham Chairman and President Phone: (512) 837-7100 Fax: (512) 836-9334 Phone: (504) 927-9630 Fax: (504) 925-2715 with copies to: with copies to: Jones & Keller, P.C. Montgomery, Barnett, Brown, Read 1625 Broadway, Suite 1600 Hammond and Mintz Denver, Colorado 80202 3200 Energy Centre ATTN: Reid A. Godbolt, Esq. 1100 Poydras Street New Orleans, Louisiana 70163-3200 Phone: (303) 573-1600 ATTN: Patrick J. Browne Fax: (303) 573-0608 Phone: (504) 585-3200 Fax: (504) 585-7688
or such other addresses as shall be furnished in writing by any party, and any such notice or communication shall be deemed to have been given as of the date received. 10.7 No press release or public statement will be issued relating to the transactions contemplated by this Agreement without prior approval of Citizens and -19- 109 ALFC. However, either Citizens or ALFC may issue at any time any press release or other public statement it believes on the advice of its counsel it is obligated to issue to avoid liability under the law relating to disclosures, but the party issuing such press release or public statement shall make a reasonable effort to give the other party prior notice of and opportunity to participate in such release or statement. 10.8 The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context otherwise requires. The word "including" shall mean including without limitation. 10.9 The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 10.10 This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Louisiana without giving effect to any choice or conflict of law provision or rule (whether of the State of Louisiana or any other jurisdiction) that would cause the application of the laws or any jurisdiction other than the State of Louisiana. -20- 110 IN WITNESS WHEREOF, the parties have set their hands and seals this 8th day of December, 1994. CITIZENS, INC. By: /s/ HAROLD E. RILEY ------------------- Harold E. Riley Chairman CITIZENS ACQUISITION, INC. By: /s/ HAROLD E. RILEY ------------------- Harold E. Riley Chairman AMERICAN LIBERTY FINANCIAL CORPORATION By: /s/ JAMES I. DUNHAM ------------------- James I. Dunham President AMERICAN LIBERTY LIFE INSURANCE COMPANY By: /s/ JAMES I. DUNHAM ------------------- James I. Dunham President -21- 111 EXHIBIT A Certificate of Merger American Liberty Financial Corporation American Liberty Life Insurance Co. Citizens, Inc. and Citizens Acquisition, Inc. Pursuant to the provisions of the Louisiana Business Corporation Law, the undersigned corporations adopt the following Certificate of Merger: First: In accordance with Section 12:112 of the Louisiana Business Corporation Law, a plan and agreement of merger has been approved, adopted, certified, executed and acknowledged by the undersigned corporations: (1) American Liberty Financial Corporation, a corporation duly organized under the laws of the State of Louisiana; (2) American Liberty Life Insurance Company, a wholly-owned subsidiary of American Liberty Financial Corporation, duly organized corporation under the laws of the State of Louisiana; (3) Citizens, Inc. a corporation duly organized under the laws of the State of Colorado; and (4) Citizens Acquisition, Inc., a wholly-owned subsidiary of Citizens, Inc., duly incorporation under the laws of the State of Louisiana. Second: As a result of this agreement of merger, Citizens Acquisition, Inc. will merge with and into American Liberty Financial Corporation effective as of the time of filing of this Certificate of Merger with the Louisiana Secretary of State. American Liberty Financial Corporation will be the corporation surviving the merger. Third: The Articles of Incorporation of American Liberty Financial Corporation shall be the Articles of Incorporation for the surviving corporation. Fourth: The executed agreement of merger is on file at American Liberty Financial Corporation's offices at ____________________________. -22- 112 Fifth: A copy of the Plan and Agreement of Merger will be furnished by American Liberty Financial Corporation, on request and without cost, to any shareholder of any corporation that is a party to the merger. Dated this _______ day of ____________________, 1994. CITIZENS, INC. By: ______________________ Harold E. Riley Chairman CITIZENS ACQUISITION, INC. By: ______________________ Harold E. Riley Chairman AMERICAN LIBERTY FINANCIAL CORPORATION By: ______________________ James I. Dunham President AMERICAN LIBERTY LIFE INSURANCE COMPANY By: ______________________ James I. Dunham President -23- 113 EXHIBIT B Opinion of Counsel for ALFC and ALLIC At the Closing, ALFC and ALLIC shall deliver to Citizens, an opinion, in form and substance satisfactory to Citizens and its counsel, dated the Closing Date, of Montgomery, Barnett, Brown, Read, Hammond and Mintz, P.C., counsel to ALFC and ALLIC, to the effect that: (i) The execution, delivery, and performance of the Agreement by ALFC and ALLIC shall not result in a breach of, or constitute a default (or an event which, with or without notice or lapse of time or both, would constitute a default) under any contract, commitment, agreement, indenture, mortgage, pledge agreement, note, bond, license, or other instrument or obligation to which ALFC or ALLIC is a party or by which ALFC or ALLIC is bound or the charter or bylaws of ALFC or ALLIC or other governing instruments of ALFC or ALLIC: (ii) The Agreement has been duly authorized, executed and delivered by ALFC or ALLIC and is a legal, valid and binding obligation of ALFC enforceable against ALFC or ALLIC in accordance with its terms (subject to the applicability of equitable principles or the effect of bankruptcy or creditors' rights laws on the enforceability of the Agreement); (iii) ALFC and ALLIC is each a Louisiana corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana; (iv) ALFC and ALLIC have full corporate power and authority to enter into Agreement and to carry out the transactions contemplate by the Agreement; (v) To such counsel's knowledge, after due inquiry, there are no civil or criminal actions, suits, arbitration's, administrative or other proceedings or governmental investigations pending or threatened against ALFC or ALLIC which will constitute a breach of the representations, warranties or covenants under the Agreement or will prevent ALFC or ALLIC from consummating the transactions contemplated by the Agreement: -24- 114 (vi) The authorized and outstanding capital stock of ALFC is as stated in Section 4.2 of the Agreement, and such shares have been duly authorized, are fully paid and nonassessable and were not issued in violation of the preemptive rights of any party; (vii) To such counsel's knowledge, after due inquiry, except as set forth in the Agreement, there are no outstanding subscriptions, options, warrants, rights, convertible securities, calls, commitments, privileges or other arrangements, preemptive or contractual, calling for or requiring the acquisition of, or the issuance, transfer, sale, or other disposition of any shares of the capital stock of ALFC or ALLIC, or calling for or requiring the issuance of any securities or rights convertible into or exchangeable for shares of capital stock of ALFC or ALLIC; and (viii) The execution, delivery, and performance of the Agreement, and the performance by ALFC and ALLIC of its obligations thereunder, is not in contravention any law, ordinance, rule, or regulation, or contravene any order, writ, judgment, injunction, decree, determination, or award of any court or other authority having jurisdiction, will not cause the suspension or revocation of any authorization, consent, approval, or license, presently in effect, which affects or binds, ALFC or any of its subsidiaries or any of its or their material properties. -25- 115 EXHIBIT C Opinion of Counsel for Citizens At the Closing, Citizens shall deliver to ALFC and ALLIC, an opinion, in form and substance satisfactory to ALFC and its counsel, dated the Closing Date, of Jones & Keller, P.C., counsel to Citizens, to the effect that: (i) The execution, delivery, and performance of the Agreement by Citizens shall not result in a breach of, or constitute a default (or an event which, with or without notice or lapse of time or both, would constitute a default) under any contract, commitment, agreement, indenture, mortgage, pledge agreement, note, bond, license, or other instrument or obligation to which Citizens is a party or by which Citizens is bound or the charter or bylaws of Citizens or other governing instruments or Citizens; (ii) The Agreement has been duly authorized, executed and delivered by Citizens and is a legal, valid and binding obligation of Citizens enforceable against Citizens in accordance with its terms (subject to the applicability of equitable principles or the effect of bankruptcy or creditors' rights laws on the enforceability of the Agreement); (iii) Citizens is a Colorado corporation duly organized, validly existing and in good standing under the laws of the State of Colorado; (iv) Citizens has full corporate power and authority to enter into the Agreement and to carry out the transactions contemplated by the Agreement; (v) To such counsel's knowledge, after due inquiry, there are no civil or criminal actions, suits, arbitrations, administrative or other proceedings or governmental investigations pending or threatened against Citizens which will constitute a breach of the representations, warranties or covenants under the Agreement or will prevent Citizens from consummating the transactions contemplated by the Agreement; (vi) The authorized and outstanding capital stock of Citizens is as stated in Section 3.2 of the Agreement, and each of the shares of Class A common stock to be issued pursuant to the agreement has been duly authorized and when issued pursuant to the terms of the Agreement shall be validly issued and fully paid and non-assessable and issued in violation of the preemptive rights of any party; -26- 116 (vii) The such counsel's knowledge, after due inquiry, except as set forth in the Agreement or Citizens' Disclosure Statement, there are no outstanding subscriptions, options, warrants, rights, convertible securities, calls, commitments, privileges or other arrangements, preventive or contractual, calling for or requiring the acquisition of, or the issuance, transfer, sale, or other disposition of any shares of the capital stock of Citizens, or calling for or requiring the issuance of any securities or rights convertible into or exchangeable for shares of capital stock of Citizens; and (viii) The execution, delivery, and performance of the Agreement, and the performance by Citizens of its obligations thereunder, is not in contravention any law, ordinance, rule, or regulation, or contravene any order, writ, judgment, injunction, decree, determination, or award of any court or other authority having jurisdiction, will not cause the suspension or revocation of any authorization, consent, approval, or license presently in effect, which affects or binds Citizens or any of its subsidiaries or any of its or their material properties. -27- 117 CITIZENS DISCLOSURE STATEMENT Pursuant to the provisions of Article III of the Plan and Agreement of Exchange by and among American Liberty Financial Corporation, American Liberty Life Insurance Company and Citizens, Inc., Citizens, Inc. hereby makes the following disclosures respecting the similarly numbered sections in the Plan and Agreement of Exchange: 3.7 Citizens has the liabilities disclosed in the Citizens Financial Statements and those incurred thereafter in the ordinary course of business. 3.8 Civil Action No. C-3687-93E, Dary Luz Sierra de Romera, et. al., v. Rafael Alvarez Carbonel, Hector A. Tamara and Citizens Insurance Company of America. The plaintiff sued for alleged failure to pay policy death benefits and breach of contract in the amount of $300,000.00 plus attorney's fees of $10,000.00. 3.11 Management Service Agreement between Citizens, Inc. and Citizens Insurance Company of America, effective 7/1/92. Management Service Agreement between Citizens, Inc. and Computing Technology, Inc., effective 10/1/91. Information Systems Management and Service Contract between Citizens, Inc. and Computing Technology, Inc., effective 10/1/91. Computer Maintenance Agreement between Computing Technology, Inc. and Wang Laboratories, effective 7/1/91 and amending 8/26/91. 3.16 Citizens is a party to a noncontributory qualified profit sharing plan operated under a separate trust. -28- 118 ALFC AND ALLIC DISCLOSURE STATEMENT Pursuant to the provisions of Article IV of the Plan and Agreement of Exchange by and among American Liberty Financial Corporation ("ALFC"), American Liberty Life Insurance Company ("ALLIC") and Citizens, Inc. ("Citizens"). ALFC hereby makes the following disclosures respecting the similarly numbered sections in the Plan and Agreement of Exchange: 4.7 ALFC and ALLIC have liabilities disclosed in their financial statements and those incurred thereafter in the ordinary course of business. 4.8 Civil Action No. P1867-D, Chancery Court of Forrest County, Mississippi, Estate of Merrill Lee Barnes vs. American Liberty Life Insurance Company. The claim, by children of the deceased who are not named beneficiaries of a life insurance policy seeks $3,000 in actual damages and $100,000 in punitive damages. 4.11 Agreement of License for Electronic Data Processing and Related Consultation and Service between Virtual Item Processing Systems, Inc. and American Liberty Financial Corporation, effective January 1, 1993. Lease agreement on ALFC and ALLIC offices with Hancock Bank, Baton Rouge, Louisiana, Month to Month. 4.17 First American Investment Corporation Communications: Letter to Louisiana Attorney General dated May 23, 1994. Louisiana Attorney General Opinion No. 94-251 dated June 27, 1994. Letter to Louisiana Commissioner of Securities dated July 7, 1994. Letter to Louisiana Deputy Commissioner of Insurance dated July 8, 1994. Letter to Louisiana Attorney General dated July 13, 1994. Louisiana Attorney General Opinion No. 94-251(A) dated August 9, 1994. Letter to Louisiana Commissioner of Securities dated August 26, 1994. Letter to Louisiana Commissioner of Insurance dated August 29, 1994. -29- 119 APPENDIX B LOUISIANA BUSINESS CORPORATION LAW PART XIII. DISSENTING SHAREHOLDERS' RIGHTS, FAIR PRICE PROTECTION, AND CONTROL SHARE ACQUISITION 12:130 DEFINITIONS.--(1) "Safeguard period" shall mean the twenty-four month period immediately following any merger, consolidation or any other change in majority voting ownership of a corporation covered by this Chapter. (2) "Safeguarded entity" shall mean any pension plan, retirement system, or any other fund that inures to the benefit of the employees of a corporation covered under this Chapter. (3) "interested person" shall mean any member, participant, regular or disability retiree, beneficiary, or creditor of any safeguarded entity. (4) "Intentional misconduct" shall mean the intentional conduct of any person which occurs during the safeguard period and which has the effect of deleting, depleting or otherwise diminishing the assets being held in trust by any safeguarded entity in a manner that is adverse to any interested person as defined by R.S. 12: 130(3). 12:130.1 STANDARD OF CARE; REVIEW.--A. Any conduct which violates the provisions of this Part which occurs during the safeguard period shall give rise to the presumption that such conduct is intentional misconduct. B. Any transaction that is executed during the safeguard period which involves the assets of a safeguarded entity shall be subject to judicial review under the standard of strict scrutiny. 12:130.2 INTENTIONAL MISCONDUCT; INJUNCTIVE RELIEF; CIVIL PENALTY.--A. Any person who is found by a court to be liable for intentional misconduct under this Part shall be subject to the penalties of this Section, regardless of whether the person is or is not involved in the administration of the safeguarded entity. Person as referred to in this Section includes any individual, partnership, unincorporated association of individuals, joint stock company, or corporation. B. Any interested person may petition a court for injunctive relief on the basis of another person's intentional misconduct, provided that he can show the intentional misconduct will cause irreparable harm to the interested person or to the safeguarded entity. C. Any person whose intentional misconduct causes the insolvency of a safeguarded entity shall oblige the person by whose misconduct caused the insolvency to restore the safeguarded entity to a condition of solvency. If such intentional misconduct causes damage to any interested person, the person whose conduct caused the damage shall be obliged to repair it, as ordered by any court, including the payment of prejudgment interest and reasonable attorney's fees. D. Jurisdiction for the enforcement of this Section shall be in accordance with the provisions contained in Article 42 of the Louisiana Code of Civil Procedure. 12:131 RIGHTS OF SHAREHOLDER DISSENTING FROM CERTAIN CORPORATE ACTIONS.--A. Except as provided in subsection B of this Section, if a corporation has, by vote of its shareholders, authorized a sale, lease or exchange of all of its assets, or has, by vote of its shareholders, become a party to a merger or consolidation, then, unless such authorization or action shall have been given or approved by at least eighty per cent of the total voting power, a shareholder who voted against such corporate action shall have the right to dissent. If a corporation has become a party to a merger pursuant to R.S. 12:112(H), the shareholders of any subsidiaries party to the merger shall have the right to dissent without regard to the proportion of the voting power which approved the merger and despite the fact that the merger was not approved by vote of the shareholders of any of the corporations involved. B. The right to dissent provided by this Section shall not exist in the case of: (1) A sale pursuant to an order of a court having jurisdiction in the premises. (2) A sale for cash on terms requiring distribution of all or substantially all of the net proceeds to the shareholders in accordance with their respective interests within one year after the date of the sale. 1 120 (3) Shareholders holding shares of any class of stock which, at the record date fixed to determine shareholders entitled to receive notice of and to vote at the meeting of shareholders at which a merger or consolidation was acted on, were listed on a national securities exchange, or were designated as a national market system security on an inter-dealer quotation system by the National Association of Securities Dealers, unless the articles of the corporation issuing such stock provide otherwise or the shares of such shareholders were not converted by the merger or consolidation solely into shares of the surviving or new corporation. C. Except as provided in the last sentence of this subsection, any shareholder electing to exercise such right of dissent shall file with the corporation, prior to or at the meeting of shareholders at which such proposed corporate action is submitted to a vote, a written objection to such proposed corporate action, and shall vote his shares against such action. If such proposed corporate action be taken by the required vote, but by less than eighty per cent of the total voting power, and the merger, consolidation or sale, lease or exchange of assets authorized thereby be effected, the corporation shall promptly thereafter give written notice thereof, by registered mail, to each shareholder who filed such written objection to, and voted his shares against, such action, at such shareholder's last address on the corporation's records. Each such shareholder may, within twenty days after the mailing of such notice to him, but not thereafter, file with the corporation a demand in writing for the fair cash value of his shares as of the day before such vote was taken; provided that he state in such demand the value demanded, and a post office address to which the reply of the corporation may be sent, and at the same time deposit in escrow in a chartered bank or trust company located in the parish of the registered office of the corporation, the certificates representing his shares, duly endorsed and transferred to the corporation upon the sole condition that said certificates shall be delivered to the corporation upon payment of the value of the shares determined in accordance with the provisions of this Section. With his demand the shareholder shall deliver to the corporation, the written acknowledgment of such bank or trust company that it so holds his certificates of stock. Unless the objection, demand and acknowledgment aforesaid be made and delivered by the shareholder within the period above limited, he shall conclusively be presumed to have acquiesced in the corporate action proposed or taken. In the case of a merger pursuant to R.S. 12:112(H), the dissenting shareholder need not file an objection with the corporation nor vote against the merger, but need only file with the corporation, within twenty days after a copy of the merger certificate was mailed to him, a demand in writing for the cash value of his shares as of the day before the certificate was filed with the Secretary of State, state in such demand the value demanded and a post office address to which the corporation's reply may be sent, deposit the certificates representing his shares in escrow as hereinabove provided, and deliver to the corporation with his demand the acknowledgment of the escrow bank or trust company as hereinabove prescribed. D. If the corporation does not agree to the value so stated and demanded, or does not agree that a payment is due, it shall, within twenty days after receipt of such demand and acknowledgment, notify in writing the shareholder, at the designated post office address, of its disagreement, and shall state in such notice the value it will agree to pay if any payment should be held to be due; otherwise it shall be liable for, and shall pay to the dissatisfied shareholder, the value demanded by him for his shares. E. In the case of disagreement as to such fair cash value, or as to whether any payment is due, after compliance by the parties with the provisions of subsections C and D of this Section, the dissatisfied shareholder, within sixty days after receipt of notice in writing of the corporation's disagreement, but not thereafter, may file suit against the corporation, or the merged or consolidated corporation, as the case may be, in the district court of the parish in which the corporation or the merged or consolidated corporation, as the case may be, has its registered office, praying the court to fix and decree the fair cash value of the dissatisfied shareholder's shares as of the day before such corporate action complained of was taken, and the court shall, on such evidence as may be adduced in relation thereto, determine summarily whether any payment is due, and, if so, such cash value, and render judgment accordingly. Any shareholder entitled to file such suit may, within such sixty-day period but not thereafter, intervene as a plaintiff in such suit filed by another shareholder, and recover therein judgment against the corporation for the fair cash value of his shares. No order or decree shall be made by the court staying the proposed corporate action, and any such corporate action may be 2 121 carried to completion notwithstanding any such suit. Failure of the shareholder to bring suit, or to intervene in such a suit, within sixty days after receipt of notice of disagreement by the corporation shall conclusively bind the shareholder (1) by the corporation's statement that no payment is due, or (2) if the corporation does not contend that no payment is due, to accept the value of his shares as fixed by the corporation in its notice of disagreement. F. When the fair value of the shares has been agreed upon between the shareholder and the corporation, or when the corporation has become liable for the value demanded by the shareholder because of failure to give notice of disagreement and of the value it will pay, or when the shareholder has become bound to accept the value the corporation agrees is due because of his failure to bring suit within sixty days after receipt of notice of the corporation's disagreement, the action of the shareholder to recover such value must be brought within five years from the date the value was agreed upon, or the liability of the corporation became fixed. G. If the corporation or the merged or consolidated corporation, as the case may be, shall, in its notice of disagreement, have offered to pay to the dissatisfied shareholder on demand an amount in cash deemed by it to be the fair cash value of his shares, and if, on the institution of a suit by the dissatisfied shareholder claiming an amount in excess of the amount so offered, the corporation, or the merged or consolidated corporation, as the case may be, shall deposit in the registry of the court, there to remain until the final determination of the cause, the amount so offered, then, if the amount finally awarded such shareholder, exclusive of interest and costs, be more than the amount offered and deposited as aforesaid, the costs of the proceeding shall be taxed against the corporation, or the merged or consolidated corporation, as the case may be; otherwise the costs of the proceeding shall be taxed against such shareholder. H. Upon filing a demand for the value of his shares, the shareholder shall cease to have any of the rights of a shareholder except the rights accorded by this Section. Such a demand may be withdrawn by the shareholder at any time before the corporation gives notice of disagreement, as provided in subsection D of this Section. After such notice of disagreement is given, withdrawal of a notice of election shall require the written consent of the corporation. If a notice of election is withdrawn, or the proposed corporate action is abandoned or rescinded, or a court shall determine that the shareholder is not entitled to receive payment for his shares, or the shareholder shall otherwise lose his dissenter's rights, he shall not have the right to receive payment for his shares, his share certificates shall be returned to him (and, on his request, new certificates shall be issued to him in exchange for the old ones endorsed to the corporation), and he shall be reinstated to all his rights as a shareholder as of the filing of his demand for value, including any intervening preemptive rights, and the right to payment of any intervening dividend or other distribution, or, if any such rights have expired or any such dividend or distribution other than in cash has been completed, in lieu thereof, at the election of the corporation, the fair value thereof in cash as determined by the board as of the time of such expiration or completion, but without prejudice otherwise to any corporate proceedings that may have been taken in the interim. 3 122 12:132 DEFINITIONS. -- The following terms as used in R.S. 12:133 and R.S. 12:134 shall have the following meanings (1) "Affiliate," including the term "affiliated person," means a person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with a specified person. (2) "Associate," when used to indicate a relationship with any person, means the following: (a) Any corporation or organization other than the corporation or a subsidiary of the corporation, of which such person is an officer, director, or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities. (b) Any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity. (c) Any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the corporation or any of its affiliates. (3) "Beneficial owner," when used with respect to any voting stock, means any of the following: (a) A person who individually or with any of its affiliates or associates beneficially owns voting stock, directly or indirectly. (b) A person who individually or with any of its affiliates or associates has either of the following rights: (i) To acquire voting stock, whether such right is exercisable immediately or only after the passage of time, pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise. (ii) To vote voting stock pursuant to any agreement, arrangement, or understanding. (c) A person who has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of voting stock with any other person who beneficially owns or whose affiliates beneficially own, directly or indirectly, such shares of voting stock. (4) "Business combination" means any of the following: (a) Unless the merger, consolidation, or share exchange does not alter the contract rights of the stock as expressly set forth in the articles or change or convert in whole or in part the outstanding shares of the corporation, any merger, consolidation, or share exchange of the corporation or any subsidiary with: (i) Any interested shareholder, or (ii) Any other corporation, whether or not itself an interested shareholder, which is, or after the merger, consolidation, or share exchange would be, an affiliate of an interested stockholder that was an interested shareholder prior to the transaction. (b) Any sale, lease, transfer, or other disposition, other than in the ordinary course of business, in one transaction or a series of transactions in any twelve-month period to any interested shareholder or any affiliate of any interested shareholder, other than the corporation of any of its subsidiaries, of any assets of the corporation or any subsidiary having, measured at the time the transaction or transactions are approved by the board of directors of the corporation, an aggregate book value as of the end of the corporation's most recently ended fiscal quarter of ten percent or more of the total market value of the 4 123 outstanding stock of the corporation or of its net worth as of the end of its most recently ended fiscal quarter. (c) The issuance or transfer by the corporation or any subsidiary, in one transaction or a series of transactions, of any equity securities of the corporation or any subsidiary which has an aggregate market value of five percent or more of the total market value of the outstanding stock of the corporation, to any interested shareholder or any affiliate of any interested shareholder, other than the corporation or any of its subsidiaries, except pursuant to the exercise of warrants or rights to purchase securities offered pro rata to all holders of the corporation's voting stock or any other method affording substantially proportionate treatment of the holders of voting stock. (d) The adoption of any plan or proposal for the liquidation or dissolution of the corporation in which anything other than cash will be received by an interested shareholder or any affiliate of any interested shareholder. (e) Any reclassification of securities including any reverse stock split or recapitalization of the corporation or any merger, consolidation, or share exchange of the corporation with any of its subsidiaries which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing by five percent or more of the total number of outstanding shares the proportionate amount of the outstanding shares of any class of equity securities of the corporation or any subsidiary which is directly or indirectly owned by any interested shareholder or any affiliate of any interested shareholder. (5) "Common stock" means any stock other than preferred or preference stock. (6) "Control," including the terms "controlling," "controlled by," and "under common control with" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. The beneficial ownership of ten percent or more of the votes entitled to be cast by a corporation's voting stock creates a presumption of control. (7) "Corporation" means any corporation which has been granted a certificate of incorporation by the state of Louisiana. (8) "Equity security" means any of the following: (a) Any stock or similar security, certificate of interest, or participation in any profit sharing agreement, voting trust certificate, or certificate of deposit for an equity security. (b) Any security convertible, with or without consideration, into an equity security, or any warrant or other security carrying any right to subscribe to or purchase an equity security. (c) Any put, call, straddle, or other option or privilege of buying an equity security from or selling an equity security to another without being bound to do so. (9)(a) "Interested shareholder" means any person other than the corporation or any subsidiary or any of the corporation's employee plans or related trusts that is either of the following: 5 124 (i) The beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting stock of the corporation. (ii) An affiliate of the corporation who at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding voting stock of the corporation. (b) For the purpose of determining whether a perseon is an interested shareholder, the number of shares of voting stock deemed to be outstanding shall include shares deemed owned by the person through application of Subsection (3) of this Section, but may not include any other shares of voting stock which may be issuable pursuant to any agreement, arrangement, or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (10) "Market value" means the following: (a) In the case of stock, the highest closing sale price during the thirty-day period immediately preceding the date in question of a share of such stock on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty-day period preceding the date in question on the National Association of Securities Dealers, Inc., Automated Quotations Systems or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the board of directors of the corporation in good faith. (b) In the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the board of directors of the corporation in good faith. (11) "Subsidiary" means any corporation of which voting stock having a majority of the votes entitled to be cast is owned, directly or indirectly, by the corporation. (12) "Voting stock" means shares of capital stock of a corporation entitled to vote generally in the election of directors. 12:133 VOTE REQUIRED IN BUSINESS COMBINATIONS.--In addition to any vote otherwise required by law or the charter of the corporation, a business combination shall be recommended by the board of directors and approved by the affirmative vote of at least each of the following: (1) Eighty percent of the votes entitled to be cast by outstanding shares of voting stock of the corporation voting together as a single voting group. (2) Two-thirds of the votes entitled to be cast by holders of voting stock other than voting stock held by the interested shareholder who is or whose affiliate is a party to the business combination or an affiliate or associate of the interested shareholder, voting together as a single voting group. 12:134 WHEN VOTING REQUIREMENTS NOT APPLICABLE. A. For purposes of Subsection (B) of this Section, the following terms shall have the meanings ascribed to them: (1) "Announcement date" means the first general public announcement of the proposal or intention to make a proposal of the business combination or its first communication generally to shareholders of the corporation, whichever is earlier. (2) "Determination date" means the date on which an interested shareholder first became an interested shareholder. (3) "Valuation date" means the following: (a) For a business combination voted upon by shareholders, the latter of the date prior to the date of the shareholders vote or the day twenty days prior to the consummation of the business combination. (b) For a business combination not voted upon by shareholders, the date of the consummation of the business combination. B. The vote required by R.S. 12:133 of this Chapter does not apply to a business combination as defined in R.S. 12:132(4)(a) if each of the following conditions is met: 6 125 (1) The aggregate amount of the cash and the market value as the valuation date of consideration other than cash to be received per share by holders of common stock in such business combination is at least equal to the highest of the following: (a) The highest per share price, including any brokerage commission, transfer taxes, and soliciting dealers' fees, paid by the interested shareholders for any shares of common stock of the same class or series acquired by it: (i) Within the two-year period immediately prior to the announcement date of the proposal of the business combination; or (ii) In the transaction in which it became an interested stockholder, whichever is higher; or (b) The market value per share of common stock of the same class or series on the announcement date or on the determination date, whichever is higher; or (c) The price per share equal to the market value per share of common stock of the same class or series determined pursuant to Subparagraph (b) of this Paragraph, multiplied by the fraction of: (i) The highest per share price, including any brokerage commissions, transfer taxes, and soliciting dealers' fees, paid by the interested shareholder for any shares of common stock of the same class or series acquired by it within the two-year period immediately prior to the announcement date, over (ii) The market value per share of common stock of the same class or series on the first day in such two-year period on which the interested shareholder acquired any shares of common stock. (2) The aggregate amount of the cash and the market value as of the valuation date of consideration other than cash to be received per share by holders of shares of any class or series of outstanding stock other than common stock is at least equal to the highest of the following, whether or not the interested shareholder has previously acquired any shares of a particular class or series of stock: (a) The highest per share price, including any brokerage commissions, transfer taxes, and soliciting dealers' fees, paid by the interested shareholder for any shares of such class of stock acquired by it: (i) Within the two-year period immediately prior to the announcement date of the proposal of the business combination; or (ii) In the transaction in which it became an interested stockholder, whichever is higher; or (b) The highest preferential amount per share to which the holders of shares of such class of stock are entitled in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation; or (c) The market value per share of such class of stock on the announcement date or on the determination date, whichever is higher; or (d) The price per share equal to the market value per share of such class of stock determined pursuant to Subparagraph (c) of this Paragraph, multiplied by the fraction of: (i) The highest per share price, including any brokerage commissions, transfer taxes, and soliciting dealers' fees, paid by the interested shareholder for any shares of any class of voting stock acquired by it within the two-year period immediately prior to the announcement date, over (ii) The market value per share of the same class of voting stock on the first day in such two-year period on which the interested shareholder acquired any shares of the same class of voting stock. (3) The consideration to be received by holders of any class or series of outstanding stock is to be in cash or in the same form as the interested shareholder has previously paid for shares of the same class or series of stock. If the interested shareholder has paid for shares of any class of stock with varying forms of consideration, the form of consideration for such class of stock shall be either cash or the form used to acquire the largest number of shares of such class or series of stock previously acquired by it. (4)(a) After the interested stockholder has become an interested shareholder and prior to the consummation of such business combination: 7 126 (i) There shall have been no failure to declare and pay at the regular date therefor any full periodic dividends, cumulative or not, on any outstanding preferred stock of the corporation; (ii) There shall have been: (aa) No reduction in the annual rate of dividends paid on any class or series of stock of the corporation that is not preferred stock except as necessary to reflect any subdivision of the stock; and (bb) An increase in such annual rate of dividends as necessary to reflect any reclassification, including any reverse stock split, recapitalization, reorganization, or any similar transaction which has the effect of reducing the number of outstanding shares of the stock; and (iii) The interested shareholder did not become the beneficial owner of any additional shares of stock of the corporation except as part of the transaction which resulted in such interested shareholder's becoming an interested shareholder or by virtue of proportionate stock splits or stock dividends. (b) The provisions of (i) and (ii) of Subparagraph (a) shall not apply if no interested shareholder or an affiliate or associate of the interested shareholder voted as a director of the corporation in a manner inconsistent with (i) and (ii), and the interested shareholder, within ten days after any act or failure to act inconsistent with such Sub-subparagraphs, notifies the board of directors of the corporation in writing that the interested shareholder disapproves thereof and requests in good faith that the board of directors rectify such act or failure to act. (5) After the interested stockholder has become an interested shareholder, the interested stockholder may not have received the benefit, directly or indirectly, except proportionately as a shareholder, of any loans, advances, guarantees, pledges, or other financial assistance, or any tax credits, or other tax advantages provided by the corporation or any of its subsidiaries, whether in anticipation of or in connection with such business combination or otherwise. C.(1) Whether or not such business combinations are authorized or consummated in whole or in part after January 1, 1985, or after the interested shareholder became an interested stockholder, the requirements of R.S. 12:133 shall not apply to business combinations that specifically, generally, or generally by types, as to specifically identified or unidentified existing or future interested shareholders or their affiliates, have been approved or exempted therefrom by resolution of the board of directors of the corporation: (a) Prior to January 1, 1985, or such earlier date as may be irrevocably established by resolution of the board of directors; or (b) If involving transactions with a particular interested shareholder or its existing or future affiliates, at any time prior to the time that the interested shareholder first became an interested shareholder. (2) Unless by its terms a resolution adopted under this Subsection is made irrevocable, it may be altered or repealed by the board of directors, but this shall not affect any business combinations that have been consummated or are the subject of an existing agreement entered into prior to the alteration or repeal. D.(1) Unless the articles or bylaws of the corporation specifically provide otherwise, the requirements of R.S. 12:133 shall not apply to business combinations of a corporation that on January 1, 1985, had an existing interested shareholder, whether a business combination is with the existing shareholder or with any other person that becomes an interested shareholder after January 1, 1985, or their present or future affiliates unless at any time after January 1, 1985, the board of directors of the corporation elects by resolution to be subject, in whole or in part, specifically, generally, or generally by types as to specifically identified or unidentified interested shareholders to the requirements of R.S. 12:133. (2) The articles or bylaws of the corporation may provide that if the board of directors adopts a resolution under Subsection (D)(1) of this Section, the resolution shall be subject to approval of the shareholders in the manner and by the vote specified in the articles or the bylaws. 8 127 (3) An election under this Subsection may be added to but may not be altered or repealed except by an amendment to the articles adopted by a vote of shareholders meeting the requirements of Subsection (E)(1)(b) of this Section. (4) If a corporation elects under this Subsection to be included within the provisions of R.S. 12:132, R.S. 12:133, and R.S. 12:134 generally, without qualification or limitation, it shall file with the secretary of state articles supplementary including a copy of the resolution making the election and a statement describing the manner in which the resolution was adopted. The articles supplementary shall be executed in the manner required by R.S. 12:32 of the Chapter. The articles supplementary constitute articles of amendment under R.S. 12:31 of this Chapter. E.(1) Unless the articles of the corporation provide otherwise, the requirements of R.S. 12:133 shall not apply to any business combination of any of the following: (a) A corporation having fewer than one hundred beneficial owners of its stock. (b) A corporation whose original articles of incorporation have a provision, or whose shareholders adopt an amendment to its articles after January 1, 1985, by a vote of at least eighty percent of the votes entitled to be cast by outstanding shares of voting stock of the corporation, voting together as a single voting group and two-thirds of the votes entitled to be cast by persons who are not interested shareholders of the corporation, voting together as a single voting group, expressly electing not to be governed by R.S. 12:132, R.S. 12:133 and R.S. 12:134. (c) An investment company registered under the Investment Company Act of 1940. (2) For purposes of Subparagraph (1) of this Subsection, all shareholders of a corporation that have executed an agreement to which the corporation is an executing party governing the purchase and sale of stock of the corporation or a voting trust agreement governing stock of the corporation shall be considered a single beneficial owner of the stock covered by the agreement. F. A business combination of a corporation that has a provision in its articles permitted by R.S. 12:112 or R.S. 12:121(B), which allows for reduction of the vote required for the transactions described therein is subject to the voting requirements of R.S. 12:133 unless one of the requirements or exemptions of Subsection (B), (C), (D), or (E) of this Section have been met. 12:135 DEFINITIONS.--As used in R.S. 12:135 through 140.2: (1) "Control shares" means shares that, except for the provisions of R.S. 12:135 through 140.2, would have voting power with respect to shares of an issuing public corporation that, when added to all other shares of the issuing public corporation owned by a person or in respect to which that person may exercise or direct the exercise of voting power, would entitle that person, immediately after acquisition of the shares, directly or indirectly, alone or as a part of a group, to exercise or direct the exercise of the voting power of the issuing public corporation in the election of directors within any of the following ranges of voting power: (a) One-fifth or more but less than one-third of all voting power. (b) One-third or more but less than a majority of all voting power. (c) A majority or more of all voting power. (2)(a) "Control share acquisition" means the acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. (b) For purposes of this Paragraph, shares acquired within ninety days or shares acquired pursuant to a plan to make a control share acquisition are considered to have been acquired in the same acquisition. (c) For purposes of this Paragraph, a person who acquires shares in the ordinary course of business for the benefit of others in good faith and not for the purpose of circumventing the provisions of R.S. 12:135 through 140.2 has voting power only of shares in respect of which that person would be able to exercise or direct the exercise of votes without further instruction from others. (d) The acquisition of any shares of an issuing public corporation does not constitute a control share acquisition if the acquisition is consummated in any of the following circumstances: (i) Before May 4, 1987. 9 128 (ii) Pursuant to a contract existing before May 4, 1987 or pursuant to a tender offer or exchange offer made in writing before May 4, 1987 for any securities of an issuing public corporation whether the time for acceptance is extended on or after May 4, 1987, whether the offeror waives any conditions of the offer on or after May 4, 1987, and whether the transaction is closed on or after May 4, 1987. (iii) Pursuant to the laws of successions, descent, and distribution. (iv) Pursuant to the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing the provisions of R.S. 12:135 through 140.2. (v) Pursuant to a merger, consolidation, or share exchange effected in compliance with Part XI of this Chapter if the issuing public corporation, or a wholly-owned subsidiary thereof, is a party to the agreement of merger or consolidation or the plan of exchange. (vi) By an employee benefit plan or related trust of the issuing public corporation. (e) The acquisition of shares of an issuing public corporation in good faith and not for the purpose of circumventing the provisions of R.S. 12:135 through 140.2 by or from: (i) Any person whose voting rights had previously been authorized by shareholders in compliance with the provisions of R.S. 12:135 through 140.2; or (ii) Any person whose previous acquisition of shares of an issuing public corporation would have constituted a control share acquisition but for Subparagraph (d) of this Paragraph does not constitute a control share acquisition, unless the acquisition entitles any person, directly or indirectly, alone or as a part of a group, to exercise or direct the exercise of voting power of the corporation in the election of directors in excess of the range of the voting power otherwise authorized. (3) "interested shares" means the shares of an issuing public corporation in respect of which any of the following persons may exercise or direct the exercise of the voting power of the corporation in the election of directors: (a) An acquiring person or member of a group with respect to a control share acquisition. (b) Any officer of the issuing public corporation. (c) Any employee of the issuing public corporation who is also a director of the corporation. (4) "Issuing public corporation" means a corporation that has: (a) One hundred or more shareholders; (b) Its principal place of business, its principal office, or substantial assets, whether owned directly or through one or more wholly-owned subsidiaries, within Louisiana; and (c) One or more of the following: (i) More than ten percent of its shareholders reside in Louisiana. (ii) More than ten percent of its shares owned by Louisiana residents. (iii) Ten thousand shareholders reside in Louisiana. (5) The residence of a shareholder is presumed to be the address appearing in the records of the corporation. Shares held by banks, except when held as trustee, guardian, or tutor, by brokers, or by nominees shall be disregarded for purposes of calculating the percentages or numbers described in Paragraph (4). (6) For purposes of Paragraph (4): (a) "Substantial assets" means assets having a value of at least five million dollars; (b) "Value" means: (i) in the case of assets other than cash or securities, the value of the property as determined in good faith by the board of directors of the corporation; and (ii) In the case of securities, the highest closing sale price during the thirty day period immediately preceding the date in question of a security on the composite tape for New York Stock Exchange listed securities or, if the securities are not quoted on the composite tape or not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which the securities are listed or, if the securities are not listed on any such exchange, on the National Association of Securities Dealers, Inc., Automated Quotations National Market System or, if the securities are not quoted on the National Association of Securities Dealers, Inc., Automated Quotations National Market System, the highest closing bid quotation during the thirty day period preceding the date in question of a security on the National Association of 10 129 Securities Dealers, Inc., Automated Quotations System or any system then in use or, if no such quotation is available, the fair market value on the date in question of a security determined in good faith by the board of directors of the corporation; and (c) "Within Louisiana" means: (i) In a case of corporeal property, the presence of such corporeal property within Louisiana; (ii) In the case of incorporeal property represented by a written instrument, the presence of such written instrument within Louisiana; and (iii) In the case of incorporeal property not represented by a written instrument, the presence of the commercial domicile of the corporation within Louisiana. 12:136 LAW APPLICABLE TO CONTROL SHARE VOTING RIGHTS.--Unless the corporation's articles of incorporation or bylaws, as in effect before a control share acquisition has occurred, provide that the provisions of R.S. 12:135 through 140.2 do not apply to control share acquisitions of shares of the corporation, control shares of an issuing public corporation acquired in a control share acquisition have only such voting rights as are conferred by R.S. 12:140. 12:137 NOTICE OF CONTROL SHARE ACQUISITION.--A. Any person who proposes to make or has made a control share acquisition may at the person's election deliver an acquiring person statement to the issuing public corporation at the issuing public corporation's registered office. B. However, if any of the shares to be acquired are being held in a trust account or any other type of account or fund on behalf of a safeguarded entity as defined in R.S. 12:130(2), the acquiring person statement shall be mandatory and shall be provided to the chairman of the board of trustees of the safeguarded entity or the administrator, or the corporate employee who is responsible for managing the entity. The trustee, administrator, or manager shall upon receipt of such statement distribute copies to all interested persons as defined in R.S. 12:130(3). C. The acquiring person statement shall set forth all of the following: (1) The identity of the acquiring person and each other member of any group of which the person is a part for purposes of determining control shares. (2) A statement that the acquiring person statement is given pursuant to this Section. (3) The number of shares of the issuing public corporation owned, directly or indirectly, by the acquiring person and each other member of the group. (4) The range of voting power under which the control share acquisition falls or would, if consummated, fall. (5) If the control share acquisition has not taken place: (a) A description in reasonable detail of the terms of the proposed control share acquisition; and (b) Representations of the acquiring person. together with a statement in reasonable detail of the facts upon which they are based, that the proposed control share acquisition, if consummated, will not be contrary to law, and that the acquiring person has the financial capacity to make the proposed control share acquisition. 12:138 SHAREHOLDER MEETING TO DETERMINE CONTROL SHARE VOTING RIGHTS.--A. (1) If the acquiring person so requests at the time of delivery of an acquiring person statement and gives an undertaking to pay the corporation's expenses of a special meeting, within ten days thereafter, the directors of the issuing public corporation shall call a special meeting of shareholders of the issuing public corporation for the purpose of considering the voting rights to be accorded the shares acquired or to be acquired in the control share acquisition. (2) The directors of the issuing public corporation shall not be required to call such special meeting of shareholders with respect to a proposed control share acquisition unless such acquisition will be lawful and the acquiring person has obtained, and shall have 11 130 furnished to the corporation, copies of commitments for financing of any cash portion of the consideration to be paid with respect to the acquisition or otherwise has demonstrated that the acquiring person has the financial capacity to make the acquisition. B. Unless the acquiring person agrees in writing to another date, the special meeting of shareholders shall be held within fifty days after receipt by the issuing public corporation of the request or, if the issuing public corporation is subject to Section 14(a) of the Securities Exchange Act of 1934, as amended, the date on which definitive proxy materials (within the meaning of such act and the regulations thereunder) related to the special meeting on behalf of the acquiring person and the board of directors of the issuing public corporation have been filed with the Securities and Exchange Commission, which shall be done as promptly as practicable following receipt of the request. C. If no request is made, the voting rights to be accorded the shares acquired in the control share acquisition shall be presented to the next special or annual meeting of shareholders. D. If the acquiring person so requests in writing at the time of delivery of the acquiring person statement, the special meeting shall not be held sooner than thirty days after receipt by the issuing public corporation of the acquiring person statement. 12:139 NOTICE OF SHAREHOLDER MEETING. -- A. If a special meeting is requested, notice of the special meeting of shareholders shall be given as promptly as reasonably practicable by the issuing public corporation to all shareholders of record as of the record date set for the meeting, whether or not entitled to vote at the meeting. B. Notice of the special or annual shareholder meeting at which the voting rights are to be considered shall include or be accompanied by both of the following: (1) A copy of the acquiring person statement delivered to the issuing public corporation pursuant to R.S. 12:137. (2) A statement by the board of directors of the corporation, authorized by its directors, of its position or recommendation, or that it is taking no position or making no rec- 12 131 commendation, with respect to the proposed control share acquisition. 12:140 RESOLUTION GRANTING CONTROL SHARE VOTING RIGHTS.-- A. Control shares acquired in a control share acquisition have the same voting rights as were accorded the shares before the control share acquisition only to the extent granted by resolution approved by the shareholders of the issuing public corporation. B. To be approved under this Section, the resolution shall be approved by: (1) Each voting group entitled to vote separately on the proposal by a majority of all the votes entitled to be cast by that voting group, with the holders of the outstanding shares of a class being entitled to vote as a separate voting group if the proposed control share acquisition would, if fully carried out, result in any of the changes described in R.S. 12:31(C); and (2) Each voting group entitled to vote separately on the proposal by a majority of all the votes entitled to be cast by that group, excluding all interested shares. 12:140.1 REDEMPTION OF CONTROL SHARES,-- A. If authorized in a corporation's articles of incorporation or bylaws before a control share acquisition has occurred, control shares acquired in a control share acquisition with respect to which no acquiring person statement has been filed with the issuing public corporation may, at any time during the period ending sixty days after the last acquisition of control shares by the acquiring person, be subject to redemption by the corporation at the fair value thereof pursuant to the procedures adopted by the corporation. B. Control shares acquired in a control share acquisition are not subject to redemption after an acquiring person statement has been filed unless the shares are not accorded full voting rights by the shareholders as provided in R.S. 12:140. 12:140.2 RIGHTS OF DISSENTING SHAREHOLDERS.--A. Unless otherwise provided in a corporation's articles of incorporation or bylaws before a control share acquisition has occurred, in the event control shares acquired in a control share acquisition are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of all voting power, all shareholders of the issuing public corporation have dissenters' rights as provided in this Section. B. As soon as practicable after such events have occurred, the board of directors shall cause a notice to be sent to all shareholders of the corporation advising them of the facts and that they have dissenters' rights to receive the fair cash value of their shares. C. As used in this Section, "fair cash value" means a value not less than the highest price paid per share by the acquiring person in the control share acquisition. D. As used in this Section, "dissenters' rights" means the right to require the issuing public corporation to purchase shares at fair cash value. 13 132 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article 109 of Title Seven of the Colorado Revised Statutes enables a Colorado corporation to indemnify its officers, directors, employees and agents against liabilities, damages, costs and expenses for which they are liable if: (i) in their Official Capacities (as defined by this statute) if they acted in good faith and had no reasonable basis to believe their conduct was not in the best interest of the Registrant; (ii) in all other cases, that their conduct was at least not opposed to the Registrant's best interests; and (iii) in the case of any criminal proceeding, they had no reasonable cause to believe their conduct was unlawful. The Registrant's Articles of Incorporation limits the liability of directors to the full extent provided by Colorado law. The Registrant's Bylaws provide indemnification to officers, directors, employees and agents to the fullest extent provided by Colorado law. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
Exhibit Number Description of Exhibits - -------------- ----------------------- 2.2 Plan and Agreement of Merger - American Liberty Financial Corporation, American Liberty Life Insurance Company, Citizens, Inc. and Citizens Acquisition, Inc., dated December 8, 1994(c) 3.1 Articles of Incorporation, as amended(a) 3.2 Bylaws(c) 5.1 Opinion and consent of Jones & Keller, P.C. as to the legality of Citizens, Inc. Common Stock(c) 8.1 Opinion re: tax matters (to be filed by amendment) 10.5 Automatic Yearly Renewable Term (NR) Life Reinsurance Agreement between Citizens Insurance Company of America and The Centennial Life Insurance Company dated March 1, 1982(b) 10.6 Summary of Coinsurance Agreement between Citizens Insurance Company of America and Alabama Reassurance Company dated December 31, 1985(b)
II-I 133 10.7 International Marketing Agreement - Citizens Insurance Company of America and Negocios Savoy, S.A.(b) 11 Statement re: Computation of per share earnings(d) 22 Subsidiaries of the Registrant(d) 23.1 Consent of Jones & Keller, P.C.(c) 23.2 Consent of KPMG Peat Marwick LLP(c) 23.3 Consent of Amend, Smith & Co., P.C., Independent Auditors(c) 25 Power of Attorney(c) (see signature pages) - ----------
(a) Filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference. (b) Filed with the Registrant's Amendment No. 1 to Registration Statement on Form S-4, Registration No. 33- 4753, filed with the Commission on or about June 19, 1992. (c) Filed herewith. (d) Filed with the Registrant's Annual Report on Form 10-K For the Year Ended December 31, 1994, and incorporated herein by reference. (B) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. See "Financial Statements." ITEM 22. UNDERTAKINGS The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, as amended (the "1933 Act"), each filing of The Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. II-II 134 The Registrant hereby undertakes that every prospectus (I) that is filed pursuant to the paragraph immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the 1933 Act and is used in connection with an offering of securities subject to Rule 415, will be filed as part of an amendment to the registration statement and will not be used until such amendment is effective; and that, for purposes of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the Effective Time of the registration statement through the date of responding to the request. The Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired, that was not the subject of and included in the registration statement when it became effective. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (I) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the Effective Time of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; II-III 135 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Provided, however, that paragraphs (1)(I) and (1)(ii), above, do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post- effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-IV 136 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Austin, State of Texas, on May 2, 1995. CITIZENS, INC. By: /s/ Harold E. Riley ------------------------- Harold E. Riley, Chairman KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers or directors of the Registrant, by virtue of their signatures to this Registration Statement appearing below, hereby constitute and appoint Harold E. Riley and Mark A. Oliver, attorneys-in-fact in their names, place, and stead to execute any and all amendments to this Registration Statement in the capacities set forth opposite their names and hereby ratify all that said attorneys-in-fact may do by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Signatures Title Date - ---------- ----- ---- /s/ Harold E. Riley Chairman of the Board and May 2, 1995 - ----------------------- Director Harold E. Riley /s/ Randall Riley Vice Chairman, Chief Executive May 2, 1995 - ----------------------- Officer and Director Randall Riley Vice Chairman, Chief Actuary May 2, 1995 - ----------------------- and Assistant Secretary T. Roby Dollar /s/ Rick D. Riley President, Chief Administrative May 2, 1995 - ----------------------- Officer and Director Rick D. Riley /s/ Mark A. Oliver Executive Vice President, May 2, 1995 - ----------------------- Chief Financial Officer, Mark A. Oliver Secretary and Treasurer /s/ John A. Templeton Vice President and Controller May 2, 1995 - ------------------------ John A. Templeton
II-V 137 /s/ Flay F. Baugh Director May 2, 1995 - -------------------------- Flay F. Baugh /s/ Joe R. Renau, M.D. Director May 2, 1995 - -------------------------- Joe R. Reneau, M.D. /s/ Steven F. Shelton Director May 2, 1995 - -------------------------- Steven F. Shelton Director May 2, 1995 - -------------------------- Ralph M. Smith. Th.D. /s/ Timothy T. Timmerman Director May 2, 1995 - -------------------------- Timothy T. Timmerman
II-VI 138 PROXY PROXY AMERICAN LIBERTY FINANCIAL CORPORATION THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned shareholder of American Liberty Financial Corporation ("ALFC") acknowledges receipt of the Notice of Special Meeting of Shareholders, to be held on July 27, 1995, at the Baton Rouge Country Club, Fairway Room, Second Floor, 8551 Jefferson Highway, Baton Rouge, Louisiana, at 10:00 a.m., Central Time, and hereby appoints James I. Dunham, W.P. Duplessis and Charles E. Broussard, each of them with the power of substitution, as attorneys and proxies to vote all the shares of the undersigned at said Combined Annual and Special Meeting and at all adjournments thereof, hereby ratifying and confirming all that said attorneys and proxies may do or cause to be done by virtue hereof. The above-named attorneys and proxies are instructed to vote all of the undersigned's shares as follows: THE DIRECTORS RECOMMEND A VOTE FOR THE ITEMS INDICATED BELOW: 1. A proposal to approve and adopt the Plan and Agreement of Merger dated December 8, 1994 under which Citizens Acquisition, Inc., a wholly-owned subsidiary of Citizens, Inc., will merge with and into ALFC, with ALFC being the survivor, and shareholders of ALFC will receive shares of Citizens, Inc. Class A Common Stock for their ALFC Common and Preferred shares as described in the accompanying Proxy Statement-Prospectus. FOR _____ AGAINST _____ ABSTAIN _____ 2. Election of six directors. [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to below (except as marked vote for all nominees to the contrary below) listed below Nominees: James Ira Dunham, Wilfred Paul Duplessis, Charles Elliot Broussard, Dr. Monroe Jackson Rathbone, Jr., Frank W. Harrison, Jr., and John Roy Melton INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name on the space provided _______________________________________________________________________ 3. To transact such other business as may properly come before the Special Meeting or any adjournment thereof. THIS PROXY, WHEN PROPERTY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND FOR THE NOMINEES IN PROPOSAL 2. Dated this ______ day of ________________, 1995. _______________________________ Signature _______________________________ Signature Please sign your name exactly as it appears on your stock certificate. If shares are held jointly, each holder should sign. Executors, trustees, and other fiduciaries should so indicate when signing. Please sign, date and return this proxy immediately. 139 INDEX TO EXHIBITS
Exhibit Number Description Page - ------ ----------- -------------- 2.2 Plan and Agreement of Merger - American Liberty Financial Corporation, American Liberty Life Insurance Company, Citizens, Inc. and Citizens Acquisition, Inc., dated as of the 8th Day of December, 1994 Appendix A 3.2 Bylaws Filed herewith 5.1 Opinion and consent of Jones & Keller, P.C. as to the legality of Citizens, Inc. Common Stock Filed herewith 8.1 Opinion re: tax matters (To Be Filed By Amendment) 11 Statement re: Computation of per share earnings (See Financial Statements) 22 Subsidiaries of the Registrant (See Registrant's Form 10-k for year ended December 31, 1994) 23.1 Consent of Jones & Keller, P.C. (See Exhibit 5.1) 23.2 Consent of KPMG Peat Marwick LLP Filed herewith 23.3 Consent of Amend, Smith & Co., P.C. Filed herewith 25 Power of Attorney (See Signature Page)
EX-3.2 2 BY-LAWS 1 EXHIBIT 3.2 CITIZENS, INC. RESTATED BYLAWS November 8, 1994 2 INDEX TO RESTATED BYLAWS
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 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 . . . . . . . . . . . . . . . . . . 5 Section 2.12 Meetings by Telecommunication . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.01 Management of the Corporation . . . . . . . . . . . . . . . . . . . . 6 Section 3.02 Number and Qualifications . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.03 Change in Number . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.04 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.10 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.11 Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . 8 Section 3.12 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . 8 Sextion 3.13 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.14 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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ARTICLE III (continued) Page ---- Section 3.15 Advisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.16 Interested Directors, Officers and Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (a) Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (b) Disclosure; Approval . . . . . . . . . . . . . . . . . . . . . . . 9 (c) Non-exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . 9 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 . . . . . . . . . . . . . . . . . . . . 12 Section 5.01 Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 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
-ii- 4
ARTICLE III (continued) Page ---- 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 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 9.06 Right to Indemnification . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9.07 Effect of Termination of Action . . . . . . . . . . . . . . . . . . . 20 Section 9.08 Groups Authorized to Make Indemnification Determination . . . . . . . . . . . . . . . . . . . 21 Section 9.09 Court-ordered Indemnification . . . . . . . . . . . . . . . . . . . . 21 Section 9.10 Advance of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.11 Witness Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.12 Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 9.13 Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE X AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 10.01 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
-iii- 5 RESTATED BYLAWS 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 provided 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 6 transacted at all special meetings shall be confined to the subjects stated in the notice of the meeting. 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 place, day, and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered 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 the 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, 2 7 a majority of the votes so represented may adjourn the meeting from time to time 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: (i) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; 4 9 (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. 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 5 10 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 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; 6 11 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. 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 7 12 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. 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; 8 13 (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 (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 9 14 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 to be reliable and competent in the matters presented, (ii) legal counsel, public accountant, or other person 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 10 15 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 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 11 16 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 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. 12 17 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 Chairman and may delegate all or any of his powers or duties to a Vice Chairman, 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. 13 18 Section 7.09. President. The President shall be the chief administrative officer of the Corporation. 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: cause the employment or appointment of and the discharge of employees and agents of the Corporation under his supervision, other than officers, and fix their compensation; suspend for cause pending final action by the authority which shall have elected or appointed him an officer subordinate to the President; 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. The President shall put into operation the business policies of the Corporation as determined by the Chairman of the Board, or the Vice Chairman, or the executive committee or the Board of Directors and as communicated to him by such officers and bodies. In carrying out such business policies, the President shall, subject to the supervision of the Chairman of the Board, the Vice Chairman, the executive committee and the Board of Directors, have general management and control of the day-to-day internal operations of the Corporation. The President 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 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 14 19 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. 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 15 20 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 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 16 21 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 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 17 22 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. 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 that 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 18 23 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. 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 19 24 independent legal counsel selected by a majority vote of the full board (including directors who are partes 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 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 20 25 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. 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. 21 EX-5.1 3 OPINION & CONSENT OF JONES & KELLER P.C. 1 Exhibit 5.1 JONES & KELLER [Letterhead] May 2, 1995 Citizens, Inc. 400 East Anderson Lane Austin, Texas 78714-9151 Gentlemen: We have acted as special counsel for Citizens, Inc. in connection with a Registration Statement on Form S-4, to be filed by the Company under the Securities Act of 1933 with the Securities and Exchange Commission. The Registration Statement relates to the proposed issuance of up to 2,341,334 shares of Common Stock, no par value, to be issued in connection with the Plan and Agreement of Merger dated as of the 8th day of December, 1994 by and between American Liberty Financial Corporation, American Liberty Life Insurance Company, Citizens, Inc. (the "Company"), and Citizens Acquisition, Inc. The Registration Statement and exhibits thereto to be filed with the Securities and Exchange Commission under such Act are referred to herein as the "Registration Statement". This letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991). As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, and this letter should be read in conjunction therewith. We have examined the Articles of Incorporation of the Company as filed with the Colorado Secretary of State, the Bylaws of the Company, and the minutes of the meetings and records of proceedings of the Board of Directors of the Company, the applicable laws of the State of Colorado and a copy of the Registration Statement. Based upon the foregoing, and having regard for such legal considerations as we deemed relevant, we are of the opinion that when issued pursuant to the Registration Statement, the above-referenced 2,341,334 shares of Common Stock of the Company shall have been legally issued, fully paid and non-assessable. We hereby consent to the use of this opinion as part of the Registration Statement and to the reference to our name under the heading "Legal Matters" in the Prospectus/Proxy Statement constituting a part of the Registration Statement. Very truly yours, /s/ Jones & Keller, P.C. Jones & Keller, P.C. EX-23.2 4 CONSENT OF KPMG PEAT MARWICK LLP 1 [KPMG LOGO] EXHIBIT 23.2 The Board of Directors Citizens, Inc.: We consent to the use of our reports incorporated herein by reference and to the reference to our Firm under the heading "Experts" in the Form S-4. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Dallas, Texas April 28, 1995 EX-23.3 5 CONSENT OF AMEND, SMITH & CO., P.C. 1 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the inclusion in this Registration Statement of Citizens, Inc. on Form S-4 of our report dated February 27, 1995 on our audits of the Consolidated Financial Statements of American Liberty Financial Corporation and Subsidiaries as of December 31, 1994 and 1993, and for each of the years in the two-year period ended December 31, 1994, appearing in the Proxy-Statement Prospectus, which is part of this Registration Statement, and to the reference to us under the heading of "Experts" in such Proxy-Statement Prospectus. /s/ AMEND, SMITH & CO., P.C. AMEND, SMITH & CO., P.C. Oklahoma City, Oklahoma May 1, 1995 -----END PRIVACY-ENHANCED MESSAGE-----