<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K / AMENDMENT NO. 1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
-----------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-16509
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
(State of incorporation) (IRS Employer Identification No.)
400 East Anderson Lane, Austin, Texas 78752
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 512/837-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ( ).
---
As of March 15 , 1995, aggregate market value of the Class A voting stock held
by non-affiliates of the Registrant was approximately $82,864,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 1995 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 15, 1995
Class A: 16,980,340
Class B: 621,049
This report contains a total of 79 pages.
The index to exhibits is found on page 78.
<PAGE> 2
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. ("Citizens") operates primarily as an insurance
holding company. It was incorporated in 1977 as Continental
Investors Life, Inc. Citizens is the parent holding company that
directly or indirectly owns 100% of Citizens Insurance Company of
America ("CICA"), Computing Technology, Inc. ("CTI"), and
Insurance Investors, Inc. ("III"). Collectively, Citizens and its
subsidiaries are referred to herein as "the Company." Pertinent
information relating to Citizens' subsidiary companies is set
forth below:
<TABLE>
<CAPTION>
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- --------
<S> <C> <C> <C>
CICA 1968 Colorado Life insurance
CTI 1986 Colorado Data processing
III 1965 Texas Aircraft transportation
</TABLE>
During 1987, Citizens Insurance Company of America (Texas), a
Texas corporation, acquired 47.93% of the outstanding stock of
Continental Investors Life, Inc. which subsequently changed its
name to Citizens. On November 3, 1987, the Board of Directors of
Citizens, CICA, Texas and Insurance Company of America ("ICA"), an
affiliate of Texas, approved a Plan and Agreement of Merger
("Plan") wherein ICA and Texas would merge with and into CICA in
exchange for shares of Citizens. This transaction was a downstream
merger. The basis for the exchange was an adjusted book value
applied consistently to all parties. Following shareholder and
insurance regulatory approvals the Plan became effective January
1, 1988.
On March 3, 1988, CICA entered into a purchase agreement to
acquire 41.57% of the outstanding common stock of Equities
International Life Insurance Company ("Equities") of Fort Worth,
Texas. Following the receipt of regulatory approval from the
Commissioner of Insurance of the State of Texas, on June 21, 1988
the transaction was effected. Through the transaction, CICA
acquired 417,776 shares of Equities common stock for $1,044,440.
The source of funding was a Surplus Debenture issued by CICA in
the principal amount of $1,000,000 to HERMAR Corporation, a
privately owned company owned 100 percent by Harold E. Riley and
members of his family ("HERMAR"). The debenture included interest
at the rate of 8%, with payments to be made over a 15-year period.
The debenture was later acquired by Citizens in its acquisition of
HERMAR's assets. At December 31, 1994, CICA owed $600,000 on the
debenture.
Following an extensive review by the management of both companies
regarding the advantages to be gained by consolidation, on
November 3, 1988, an agreement was entered into whereby Equities
agreed to merge into CICA in exchange for shares of
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Citizens. The exchange ratio was based on the relative market
values of the common stock of Equities and Citizens with the
latter having a value of $5.00 per share and Equities $2.50 per
share, so that Equities shareholders would receive one share of
the Citizens' Class A common stock for each two shares of
Equities' common stock owned. Following the approval of the
shareholders of CICA and Equities, as well as regulatory
authorities in Texas and Colorado, the merger became effective as
of January 1, 1989. The merger increased invested assets by
$4,735,895, total assets by $6,188,181 and stockholders' equity by
$1,468,060 at January 1, 1989.
On April 25, 1991, the Board of Directors of Citizens, with Harold
Riley and Rick Riley abstaining, approved an Asset Transfer
Agreement ("Agreement") whereby, under the terms of the Agreement,
Citizens acquired all of the assets and liabilities of HERMAR in
exchange for Class A and Class B shares of stock of Citizens in
conjunction with a plan of dissolution and liquidation of HERMAR.
The Agreement was approved by the Board of Directors and
shareholders of HERMAR on April 26, 1991. In accordance with the
provisions of the Colorado Corporation Code, approval by the
shareholders of Citizens was not required. Under the terms of the
Agreement, HERMAR transferred to Citizens all of its business
assets, consisting primarily of commercial real estate and a
Management Services Agreement, along with its Class A and Class B
stock of Citizens at net book value at July 1, 1991. In
consideration for the net assets transferred, the Company issued
665,162 Class A shares and exchanged the 7,047,474 Class A and
621,049 Class B shares held by HERMAR for 7,047,074 Class A and
621,049 Class B shares. The exchange was based on the market value
of the net assets transferred compared to the mean of the bid and
ask price of Citizens' stock for the period from April 1, 1991 to
April 19, 1991. Following the exchange of shares, HERMAR was
liquidated and the Class A and Class B shares of Citizens were
transferred to Harold Riley and members of his family. The
transaction was consummated in July, 1991, with an effective date
of April 1.
On February 27, 1992, Citizens entered into a definitive Plan and
Agreement of Exchange with First Centennial Corporation ("FCC"), a
Colorado life insurance holding company, to acquire the net assets
of FCC in exchange for Citizens Class A common stock.
The valuation of the companies centered on a share exchange ratio.
Management of Citizens and FCC reviewed carefully the assets and
liabilities of each company and began with a book value basis of
each company, adjusted a substantial degree to reflect values
which were standard within the life insurance industry. The
management of Citizens and FCC reviewed the capital and surplus of
their respective insurance subsidiaries, along with annual life
insurance premium revenue valued at a multiple factor depending
upon the profitability of the product and paid-up policy reserves.
In addition, State licenses, agency forces, and nonadmitted
capital and surplus assets of the life insurance subsidiaries were
reviewed.
The adjusted book value per share of Citizens was calculated by
dividing the adjusted book value by the number of equivalent
shares outstanding for a result of $4.35 per
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share. The various classes of FCC stock were calculated in the
same manner for a result of $.88 per share for FCC Class A common
stock, $2.05 per share for FCC 1988 Series 1 preferred stock and
$8.80 per share for FCC 1991 Series 1 preferred stock.
The exchange ratios for the classes of FCC stock were determined
by dividing their adjusted book values into the adjusted book
value per share of Citizens. After approval by the respective
Boards of Directors of the companies, the Colorado Division of
Insurance, and the shareholders of FCC, the acquisition was
consummated on July 31, 1992. FCC thereafter distributed to its
shareholders the shares issued to it by Citizens in dissolution
and liquidation pursuant to a Plan of Liquidation.
FCC's primary asset acquired by Citizens was First Centennial Life
Insurance Company ("FCLIC"). After the change in control and an
analysis of the facts and circumstances of the operations of
FCLIC, the respective Boards of Directors of Citizens, FCLIC, and
CICA approved a plan wherein CICA would acquire ownership of FCLIC
from Citizens and FCLIC would simultaneously merge with and into
CICA. CICA acquired FCLIC, which was determined by the respective
Boards of Directors to have an adjusted statutory book value of
$3.5 million, for the satisfaction of approximately $3.5 million
in debt owed CICA and FCLIC by Citizens (directly and assumed from
FCC). The acquisition and merger, which streamlined operations and
increased efficiency of the Company, was approved by the Colorado
Division of Insurance and such was effected on December 31, 1992.
On December 9, 1994, Citizens announced that it had signed
definitive written agreements for the acquisition of (i) American
Liberty Financial Corporation, a Baton Rouge, Louisiana based life
insurance holding company with $26 million in assets, $8 million
of stockholders' equity, annual revenues of $9 million and $45
million of life insurance in force and (ii) Insurance Investors &
Holding Co., a Peoria, Illinois based life insurance holding
company with approximately $2.5 million in assets, $1 million of
stockholders' equity, approximately $140,000 of annual revenues
and $6 million of insurance in force.
The American Liberty agreement provides that following the
acquisition by Citizens, American Liberty shareholders will
receive 1.10 shares of Citizens' Class A Common Stock for each
share of American Liberty Common Stock owned and 2.926 shares of
Citizens' Class A Common Stock for each one share of American
Liberty Preferred Stock owned. Citizens expects to issue
approximately 2.3 million Class A shares in connection with the
transaction, which will be accounted for as a purchase. The
companies will continue to operate in their respective locations
under a combined management team with consolidation of computer
data processing on the Citizens' system. The agreement is subject
to approval by American Liberty's shareholders and regulatory
authorities and may be terminated by either party if the
transaction is not effected by May 9, 1995. This date was extended
to August 31, 1995 by the parties on May 1, 1995.
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ALFC conducts certain non-insurance businesses through
subsidiaries. In the early 1980's, ALFC incorporated several
corporations which became general partners in oil and gas
partnerships. These partnerships, which hold essentially only
cash, are currently dormant. In 1981, ALFC formed a subsidiary to
market certain securities, but this corporation has been
relatively inactive since 1983. In addition, in 1984, ALFC
incorporated First American Investment Corporation which, in turn,
has formed two funeral home subsidiaries. After the merger,
Citizens intends to assess, from a business perspective, if it
will continue or dispose of the non-insurance businesses. Citizens
has no current plans to participate in the oil and gas business.
It should be noted that ALFC's non-insurance businesses are
immaterial to Citizens. In 1994, ALFC's Other Income of $187,000
which included the revenues from the non-insurance businesses, was
only 0.4% of Citizens' Total Revenues of $49,157,000. Citizens
intends to continue to devote virtually all of its resources to
the development and operation of its insurance business.
The Insurance Investors agreement provides that following the
acquisition by Citizens, Investors' shareholders will receive one
share of Citizens' Class A Common Stock for each eight shares of
Investors Common Stock owned. Additionally, Citizens will acquire
all shares of Central Investors Life Insurance Company, a
subsidiary of Insurance Investors & Holding, not wholly-owned by
Insurance Investors, based upon an exchange ratio of one share of
Citizens' Class A common stock for each four shares of Central
Investors owned. The transaction will involve issuance of
approximately 170,000 of Citizens' Class A shares and will also be
accounted for as a purchase. The agreement is subject to approval
by Investors' shareholders. Approval was obtained from the
Illinois Department of Insurance on March 10, 1995.
(B) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA, currently operates principally in one
business segment, that of selling selected lines of individual
life insurance. Except as explained above in conjunction with the
acquisition of American Liberty Financial Corporation, Citizens
has no present intention to engage in any non-insurance related
business. The following tables set forth certain statistical
information concerning the operations of CICA for each of the five
years ended December 31, 1994. The information is presented in
accordance with generally accepted accounting principles.
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TABLE I
The following table sets forth (i) life insurance in force and (ii)
mean life insurance in force.
<TABLE>
<CAPTION>
IN FORCE MEAN OF LIFE
BEGINNING IN FORCE INSURANCE
OF YEAR END OF YEAR IN FORCE
(a)(b) (a)(b) (a)(b)
------------- --------------- ---------------
<S> <C> <C> <C>
1994 $2,030,615 $2,144,709 $2,087,662
1993 1,696,606 2,030,615 1,863,610
1992 1,339,964 1,696,606 1,518,285
1991 1,006,300 1,339,964 1,173,132
1990 866,798 1,006,300 936,549
</TABLE>
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(a) In thousands (000s)
(b) Before ceding reinsurance to reinsurers.
The increases in insurance in force as shown above reflect the volumes of new
business written by the Company over the past five years. Additionally, the
change from 1991 to 1992 reflects the acquisition of FCC described above.
TABLE II
The following table sets forth (i) the ratio of lapses and surrenders
to mean life insurance in force and (ii) life reinsurance ceded.
<TABLE>
<CAPTION>
RATIO OF REINSURANCE CEDED(B)
LAPSES AND ------------------------------------------
SURRENDERS AMOUNT REINSURANCE
LAPSES AND TO MEAN OF PREMIUM
SURRENDERS (a) IN FORCE REINSURANCE (a) CEDED
--------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C>
1994 $84,390 4.0% $285,104 $2,309,672
1993 98,712 5.3 303,727 1,939,425
1992 83,305 5.5 238,677 1,486,531
1991 57,922 4.9 236,757 1,317,406
1990 63,319 6.8 206,119 1,022,549
</TABLE>
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(a) In thousands (000s)
(b) Approximately 95 percent of the reinsurance is yearly renewable term
insurance, with the remainder being coinsurance.
The lapse ratio for 1990 was adversely affected by the merger of Equities
International Life Insurance Company. It is common following such a merger, to
see increased surrender activity in a block of business. Following the
acquisition of FCC in July 1992, a similar increase in lapsation was
experienced.
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TABLE III
The following table sets forth information with respect to total
insurance premiums.
<TABLE>
<CAPTION>
ORDINARY ANNUITY & ACCIDENT
LIFE (a) UNIVERSAL LIFE GROUP LIFE AND HEALTH TOTAL
-------- -------------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
1994 $42,984,741 $ 75,564 $ 541,370 $ 259,250 $ 43,860,925
1993 36,491,962 106,955 1,106,590 284,510 37,990,017
1992 28,415,877 3,067 469,514 316,395 29,204,853
1991 22,210,299 6,991 400,324 350,875 22,968,489
1990 16,254,268 5,957 239,776 386,846 16,886,847
</TABLE>
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(a) After deduction for reinsurance ceded.
Premium income has grown dramatically since 1989 due to the volume of new
business written. In 1992, the FCC acquisition added a small block of Universal
Life business to the Company's portfolio. Additionally, during 1992, the Federal
Government increased the amount of insurance for veterans under the Servicemen's
Group Life Insurance program, causing a one-time increase in group life
premiums. The growth in 1994 was impacted by a decision by Management to slow
the rate of premium writings by the Company for the year while efforts were made
to increase capitalization.
TABLE IV
The following table sets forth information relating to the ratio of
underwriting and other expenses to insurance revenues.
<TABLE>
<CAPTION>
COMMISSIONS, UNDERWRITING
AND OPERATING EXPENSES,
POLICY RESERVE INCREASES,
COMMISSIONS, UNDERWRITING POLICYHOLDER BENEFITS AND
AND OPERATING EXPENSES DIVIDENDS TO POLICYHOLDERS
---------------------------- -----------------------------
RATIO TO RATIO TO
INSURANCE INSURANCE INSURANCE
PREMIUMS (a) AMOUNT PREMIUMS AMOUNT PREMIUMS
------------ ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
1994 $43,860,925 $17,461,910 39.8% $48,763,076 111.2%
1993 37,990,017 15,918,491 42.6 43,644,554 114.9
1992 29,204,853 13,546,624 46.4 35,301,078 120.8
1991 22,968,489 11,187,768 48.7 27,853,117 121.3
1990 16,886,847 9,302,343 55.1 22,414,055 132.7
</TABLE>
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(a) After premiums ceded to reinsurers.
The ratios of expenses to premiums has declined each year since 1989. These
declines are the result of three factors: 1) underwriting and operating expenses
have generally not increased at the same rate as premium income due to the
Company's efficient method of operation; 2) total commissions as a percentage of
premium are declining annually as the business enters renewal stages and
commissions are paid at a lower rate than first year; and 3) the amount of new
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insurance writings annually reflects a smaller percentage of the Company's total
amount of premium income.
TABLE V
The following table sets forth changes in new business produced
between participating and nonparticipating policies.
<TABLE>
<CAPTION>
PARTICIPATING NONPARTICIPATING
TOTAL NEW --------------------------- ---------------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
1994 $380,281 $352,535 92.7% $27,739 7.3%
1993 376,460 345,882 91.9 30,578 8.1
1992 315,142 278,694 88.4 36,448 11.6
1991 274,066 240,212 87.6 33,854 12.4
1990 225,168 186,601 82.9 38,567 17.1
</TABLE>
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(a) In thousands (000s)
The percentage of the new business produced that is participating has increased
steadily due to the fact that the Ultra Expansion products are all participating
and represent the majority of new business
TABLE VI
The following table sets forth changes in new business issued according to
policy types.
<TABLE>
<CAPTION>
WHOLE LIFE
AND ENDOWMENT TERM UNIVERSAL LIFE
TOTAL NEW ----------------------- ----------------------- -----------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 $380,281 $352,357 92.7% $27,924 7.3% $ 0 -
1993 376,460 345,516 91.9 30,777 8.1 0 -
1992 315,142 279,941 88.8 34,243 10.9 958 0.3%
1991 274,066 239,932 87.6 34,134 12.4 0 -
1990 225,168 186,601 82.9 38,567 17.1 0 -
</TABLE>
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(a) In thousands (000s)
This table reflects the fact that virtually all of the new business written is
ordinary whole life.
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TABLE VII
The following table sets forth deferred policy acquisition costs
capitalized and amortized compared to new business issued.
<TABLE>
<CAPTION>
TOTAL NEW DEFERRED POLICY
BUSINESS ACQUISITION COSTS
------------------------------------
ISSUED CAPITALIZED AMORTIZED
------ ----------- ----------
<S> <C> <C> <C>
1994 $380,274,000 $13,128,049 $7,203,593
1993 376,460,000 13,472,064 6,455,401
1992 315,142,000 10,670,569 4,412,007
1991 274,066,000 8,136,789 2,789,659
1990 225,168,000 5,281,381 1,753,859
</TABLE>
Capitalized policy acquisition expenses have increased steadily, such increases
reflecting the growing amount of new business issued. In 1994, the rate of
capitalization slowed due to an adjustment to reflect the lower interest
environment. The amortization of these costs has grown as the aggregate deferred
acquisition cost asset has increased.
TABLE VIII
The following table sets forth investment results.
<TABLE>
<CAPTION>
RATIO OF NET
INVESTMENT INCOME
MEAN AMOUNT OF NET INVESTMENT TO MEAN AMOUNT
INVESTED ASSETS (a) INCOME (b) OF INVESTED ASSETS (a)
------------------- ---------- ----------------------
<S> <C> <C> <C>
1994 $90,419,823 $5,295,784 5.9%
1993 82,598,407 4,771,079 5.8
1992 66,704,026 3,929,495 5.9
1991 50,920,030 4,117,165 8.1
1990 41,826,528 3,578,880 8.6
</TABLE>
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(a) 1992 includes assets acquired from FCC on July 31, 1992.
(b) Does not include realized and unrealized gains and losses on investments.
The rate of return on invested assets declined in 1992 primarily due to the sale
of higher yielding bonds to realize capital gains. Since these gains were not a
component of investment income, and the proceeds were reinvested at lower
prevailing interest rates, 1993 results were also impacted. Available returns
continued to be lower in 1994 than in earlier periods of time, however, in mid
to late 1994, yields began to increase and the Company was able to slightly
increase the return on invested assets.
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<PAGE> 10
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA and its
affiliates. Additionally, it provides management services to
these companies under a management services agreement. At
December 31, 1994, the Company had 71 full and part-time
employees.
(ii) BUSINESS OF CICA
Historically, CICA's revenues have been derived from
insurance premiums and revenues from investments. CICA is a
Colorado-domiciled life insurance company marketing primarily
ordinary, whole-life products on an international basis
through general agents. During the fiscal year ended December
31, 1994, 98.8% of CICA's premium income was attributable to
life, endowment and term insurance; 0.6% to individual
annuities; and 0.6% to accident and health insurance. Of the
life policies in force at December 31, 1994, 13.1% were
nonparticipating and 86.9% were participating.
The Ultra Expansion products are a series of ordinary whole
life policies targeted for the international marketplace. All
of the Ultra products are participating, i.e., they pay
dividends that range from 3-5% of the premium in the first
year to 76% in the 20th year. A unique feature of the Ultra
products is that the dividends are payable immediately upon
payment of the annual premium. In late 1990, an immediate
endowment was added to the product line. This endowment is
paid annually in an amount determined by the insured at the
time the policy is sold. In December, 1992, CICA added a new
feature to the ultra products, a flexible deposit rider. All
of the Ultra products carry surrender charges for the first
14 years. Additionally, they contain benefit limitations to
exclude certain causes of death that are not anticipated in
standard mortality ratings. There are no other material
policies or products offered by CICA.
The underwriting policy of CICA is to require medical
examination of applicants for ordinary insurance in excess of
certain prescribed limits. These limits are graduated
according to the age of the applicant and the amount of
insurance. Generally, the maximum amount of ordinary life
insurance issued domestically without a medical examination
is $200,000 for ages 0 through 35; $100,000 for ages 36
through 45; $50,000 for ages 46 through 50; $15,000 for ages
51 through 55; and $10,000 for ages 56 and over. Medical
examinations are required of all non-U.S. applicants for
ordinary life insurance, except children.
On life policies, CICA's maximum coverage on any one life is
not limited by company policy. However, CICA reinsures the
amount of coverage which is in excess of the its retention
policy. (See "Business of CICA - Reinsurance.") CICA does not
accept substandard risks (generally policyholders who cannot
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<PAGE> 11
qualify for standard ordinary insurance because of past
medical history) in exchange for which CICA would charge
higher premiums.
CICA, however, does have $22.5 million of insurance in force
on individuals that are classified as substandard risks, the
majority of such business having been acquired in the
purchase of other companies. Management believes the exposure
to loss as a result of insuring these individuals is minimal,
since the premiums are increased to cover the nature of the
risk, additional reserves are established, and the amount of
insurance represents less than 1.2% of the total insurance in
force of CICA.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS. For the year ended
December 31, 1994, insurance policies held by residents of
the State of Texas accounted for 3.0% of CICA's total premium
income from direct business, and policies held by residents
of Colorado represented 2.1% of premium income from direct
business for the same period. All other states of the United
States totaled 3.1% of the premium income from direct
business with no single state, except as set forth above,
accounting for as much as 1% of premium income. Business on
foreign residents accounted for the remaining 91.8%. For the
years ended December 31, 1993 and 1992, residents of the
State of Texas accounted for 3.9% and 5.9%, respectively of
CICA's total premium income. Residents of Colorado provided
2.6% and 4.8%, respectively, during the same period. No other
states in the U.S. amounted to 1% of total premium income
during the periods. Business on foreign citizens represented
92.5% of 1993 and 82.8% of 1992 premium income.
The participating whole life policies accepted by CICA on
high net worth residents of foreign countries have an average
face amount of approximately $60,000 and are marketed
primarily to the top 3% of the population in terms of
household income.
CICA accepts applications for international insurance
policies marketed by several independent international
marketing firms with whom CICA has nonexclusive managing
agency contracts. These firms market life products to
citizens of foreign countries, with a present emphasis in
Latin America. Such life products are specially designed by
CICA to be compatible with marketing methods and commission
requirements.
CICA's independent marketing firms have many years'
experience acting as agents for CICA. The contract with the
managers provides that they, acting as managing agent on a
nonexclusive basis, have the responsibility for recruiting
and training agents. They are responsible for all of their
overhead costs and bear the expense of agent awards.
Additionally, as manager for the agents they recruit, these
firms act as guarantor for any advances against future
commissions made to "sub-agents" by CICA. In consideration
for the services rendered, the managers receive an override
commission on all new policies sold by them or the
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<PAGE> 12
subagents. (See "Business of CICA - Commissions.") The
contract may be terminated by mutual consent of the parties
or by 30 days' notice by either party.
These firms provide the recruitment, training and supervision
of national managers and general agents in the sale of
dollar-denominated life insurance products; however, such
agents contract directly with CICA and receive their
commission from CICA. Accordingly, should the marketing
arrangement between any firm and CICA be canceled for any
reason, CICA believes it could arrange for the continuation
of suitable marketing management without appreciable loss of
present and future sales.
At present, CICA is dependent on the non-U.S. markets for
virtually all of its new business. This subjects CICA to
potential risks with regard to the continued ability to write
such business should adverse events occur in the countries
from which CICA receives applications. These potential risks
include lapses of policies if funds flow out of such
countries were to become restricted and the improbable
necessity that incorporating an insurance subsidiary in such
countries would become required. Management does not believe
such risks are material and, further, management has over 30
years' experience in the marketplace in which CICA competes
and believes it has taken steps to protect CICA from these
risks. The Company has no assets outside the U.S. and
requires all premiums to be paid in the U.S. with U.S.
dollars or drafts drawn on U.S. banks; therefore, it would
lose no funds from foreign appropriation. Secondly,
management does not believe that the flow of funds will be
restricted in the future, because almost all of the insureds
are in the upper percentiles of incomes in their country.
Such insureds are actively involved in business leadership
roles in their communities and would be vehemently opposed to
funds flow restriction. Many of the inherent risks in foreign
countries, such as political instability, hyper-inflation and
economic disruptions tend to improve rather than hurt CICA's
business because it encourages individuals to convert assets
out of local currencies to the more stable U.S. dollar.
Additionally, management has made a concerted effort to
expand the number of foreign countries from which it accepts
business in an effort to reduce the impact on CICA of
political or economic problems in any one country or region.
AGENCY OPERATION. CICA currently holds licenses to do
business in 12 states and accepts applications from numerous
foreign countries. CICA's operations are conducted on the
general agency basis, with an agency force at December 31,
1994 of 1,328 agents and December 31, 1993 of 1,418 agents.
COMMISSIONS. CICA's marketing managers, general agents and
agents are independent contractors, responsible for their
respective agency-related expenses, and they are compensated
on a percentage of premium basis. The maximum amount of
commission expense which may be incurred by CICA on an
individual life insurance policy is 105% of the first year
premium, 10% of the second year premium, 5% of the premium
for each of the next eight years and
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<PAGE> 13
2% of the premium for the eleventh and subsequent years as a
continuing service fee. Percentage amounts paid to an agent
on term, annuity and accident and health insurance are
substantially less than the levels paid for individual
ordinary life insurance. Marketing managers and general
agents receive overriding first year and renewal commissions
on business written by agents under their supervision and all
marketing expenses related thereto are included in the above
percentages.
RESERVES. CICA records actuarial reserves established to meet
obligations on outstanding policies as liabilities. Reserves
and deferred acquisition costs are prepared in conformity
with the American Academy of Actuaries Committee on Financial
Reporting Principles. In determining such reserves CICA used
the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and
Ultimate Mortality Tables with interest rates at 4% or in a
range graded from 9% to 5%. Withdrawal assumptions are based
primarily on actual historical experience. Statutory reserves
are used for paid-up life business. Claims reserves include
an amount equal to the expected benefit to be paid on
reported claims in addition to an estimate of claims that are
incurred but not reported, based on actual historical
experience. CICA receives an independent actuarial
certification of its reserves prepared in accordance with
both Generally Accepted Accounting Principles and Statutory
Accounting Principles. The certifications have noted no
deficiencies for the years presented herein.
REINSURANCE. CICA assumes and cedes insurance with other
insurers, reinsurers and members of various reinsurance
pools. Reinsurance arrangements are utilized to provide
greater diversification of risk and minimize exposure on
larger risks.
(a) INSURANCE CEDED. CICA generally retains $75,000 of
risk on any one person. As of December 31, 1994, the
aggregate amount of life insurance ceded amounted to
$285,104,000 or 13.3% of total direct and assumed life
insurance in force. CICA is contingently liable with respect
to ceded insurance should any reinsurer be unable to meet the
obligations assumed by it.
As of December 31, 1994, CICA had in effect automatic
reinsurance agreements that provide for cessions of ordinary
insurance from CICA. Additionally, CICA has reinsurance
treaties in force with several reinsurers of life and
accident and health insurance. These treaties provide for
both automatic and facultative reinsurance of standard and
substandard risks ceded to them by CICA for life, accident
and health and supplemental benefits above CICA's retention
limit on a yearly renewable term, coinsurance or modified
coinsurance basis.
A treaty with Employers Reassurance is the primary vehicle
utilized by CICA for its international business. The treaty
is structured in such a way as to allow CICA to "self
administer" the cessions on a reduced cost basis. Prior to
July 1, 1993, 100% of the risk up to $300,000 in excess of
CICA's retention was ceded
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<PAGE> 14
to Employers. On July 1, 1993, the treaty was amended and a
like agreement was executed with Businessmen's Assurance
(BMA).
The agreements provide that on risks reinsured on and after
July 1, 1993, 70% of each risk in excess of CICA's retention
will be ceded to Employers and 30% to BMA. CICA pays the
premium to Employers and BMA on an annual basis and is
responsible for the production of the reporting monthly and
annually to Employers and BMA to allow proper accounting for
the treaties.
The cessions are on a yearly renewable term basis and are
automatic up to $300,000 for Employers and $425,000 for BMA
at which point the reinsurance is subject to a facultative
review by the reinsurers. At December 31, 1994, CICA had
ceded $224,665,000 in face amount of insurance to Employers
and $19,307,000 to BMA under these agreements.
Equities International Life Insurance Company entered into a
Surplus Relief Coinsurance Agreement with Alabama Reassurance
several years prior to the acquisition and merger of Equities
by Citizens. For statutory purposes, CICA has been
recapturing approximately $350,000 per year of the "relief"
due to the runoff of the block of business covered under the
treaty, such block being closed since 1989. During 1993, CICA
recaptured the remaining policies covered under the treaty.
For GAAP, the effect of this treaty was eliminated, therefore
it had no impact on the consolidated financial statements of
the Company. At December 31, 1994, CICA had no surplus relief
reinsurance in force.
The Colorado Division of Insurance adopted a new regulation
that restricted the use of certain reinsurance agreements
after June 30, 1993. Such regulation disallows the reserve
credits associated with the Alabama Reassurance treaty for
statutory accounting purposes. Management believes that this
regulation has had no material impact on CICA since the
business was fully recaptured before June 30, 1993. The
recapture had resulted from the termination by the
policyholders who were originally policyholders of Equities
International Life Insurance Company and through the normal
recapture provided for in the reinsurance treaty, rather than
as a result of any action taken by management.
Citizens closely monitors the solvency of its reinsurers to
minimize the risk of loss in the event of a failure by one of
the parties. The primary reinsurers of the Company, Employers
Reassurance and BMA are large, well capitalized entities
which have no current or prior history of financial
difficulty.
(b) INSURANCE ASSUMED. At December 31, 1994, CICA had
in force reinsurance assumed as follows:
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<PAGE> 15
<TABLE>
<CAPTION>
TYPE OF AMOUNT
BUSINESS IN FORCE AT
NAME OF COMPANY LOCATION ASSUMED END OF YEAR
--------------- -------- -------- -----------
<S> <C> <C> <C> <C>
Prudential Insurance Newark, Ordinary
Company (Prudential) New Jersey Group Life $384,794,000
</TABLE>
The reinsurance agreement with Prudential provides for CICA
to assume a portion of the insurance under a group insurance
policy issued by Prudential to the Administrator of Veterans'
Affairs, in accordance with the Servicemen's Group Life
Insurance provisions of Sub-Chapter III of Chapter 19, of
Title 38, United States Code. CICA's portion of the total
insurance under the policy is allocated to CICA in accordance
with the criteria established by the Administrator. The
agreement continues in full force and effect at December 31,
1994.
CICA has also entered into a Serviceman's Group Life
Insurance Conversion Pool Agreement with Prudential, under
the above described agreement, whereby CICA assumed a portion
of the risk of Prudential under the group policy due to
excess mortality under the conversion pool agreement
resulting from issuing conversion policies as prescribed for
membership in the conversion pool.
INVESTMENTS. State insurance statutes prescribe the quality
and percentage of the various types of investments which may
be made by insurance companies and generally permit
investment in qualified state, municipal, federal and foreign
government obligations, high quality corporate bonds,
preferred and common stock, real estate and mortgage loans by
certain specified percentages. The Company's invested assets
at December 31, 1994 were distributed as follows: fixed
maturities - 79.9%, equity securities - none, mortgage loans
- 2.8%, policy loans - 16.2%, government insured student
loans - 0.3%, short-term investments - none and other
long-term investments - 0.8% (see Note 2 of the "Notes to
Consolidated Financial Statements"). Citizens did not
foreclose on any mortgage loans in 1994. In 1993, Citizens
foreclosed on two loans acquired in the purchase of First
Centennial Corporation with an aggregate balance of $197,000.
All mortgage loans are supported by independently appraised
real estate. The investment policy of Citizens with regard to
mortgage loans is consistent with the provisions of the
Colorado Insurance Code
At December 31, 1994, 99.7% of Citizens investments in fixed
maturities were comprised of U.S. Treasury Securities and
obligations of U.S. government corporations and agencies,
including U.S. government guaranteed mortgage backed
securities. Of these mortgage-backed securities, all were
guaranteed by U.S. government agencies or corporations that
are backed by the full faith and credit of the U.S.
government.
REGULATION. CICA is subject to regulation and supervision by
the insurance department of each state or other jurisdiction
in which it is licensed to do business.
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<PAGE> 16
These insurance departments have broad administrative powers
relating to the granting and revocation of licenses to
transact business, the licensing of agents, the approval of
policy forms, the advertising and solicitation of insurance,
the form and content of mandatory financial statements, the
reserve requirements, and the type of investments which may
be made. CICA is required to file detailed annual reports
with each such insurance department, and its books and
records are subject to examination at any time. In accordance
with state laws and the rules and practices of the National
Association of Insurance Commissioners, CICA is examined
periodically by examiners of its domiciliary state and by
representatives (on an "association" or "zone" basis) of the
other states in which it is licensed to do business. CICA's
most recent examination which was completed during 1992, was
for the six years ended December 31, 1991, and was conducted
by the Colorado Division of Insurance. CICA has been notified
by the Colorado Division of Insurance to expect an
examination in late 1995. See also "Management's Discussion
and Analysis of Results of Operations."
Various states, including Colorado, have enacted "Insurance
Holding Company" legislation which requires the registration
and periodic reporting by insurance companies which control,
or are controlled by, other corporations or persons. Under
most of such legislation, control is presumed to exist with
the ownership of ten percent or more of an insurance
company's voting securities. Citizens is subject to such
regulation and has registered under such statutes as a member
of an "insurance holding company system." The legislation
typically requires periodic disclosure concerning the
transactions between the registered insurer, the ultimate
controlling party, and all affiliates and subsidiaries of the
ultimate controlling party, and in many instances requires
prior approval of intercorporate transfers of assets
(including in some instances payment of dividends by the
insurance subsidiary) within the holding company system.
Since Citizens does not physically conduct business in
countries outside the U.S. but rather accepts applications
for consideration of coverage, it is not subject to
regulation in countries where most of its insureds are
residents. The prospect of such regulation is viewed as
remote by management of Citizens because obtaining insurance
through application outside of one's country is a common
practice in many foreign countries, particularly those where
CICA's insureds reside.
COMPETITION. The life insurance business is highly
competitive and CICA competes with a large number of stock
and mutual companies. CICA believes that its premium rates
and its policies are generally competitive with those of
other life insurance companies, many of which are larger than
CICA, selling similar types of insurance.
CICA's marketing plan stresses the sale of dollar-denominated
life insurance products to high net worth individuals
residing in foreign countries, with present emphasis in Latin
America. Approximately ninety-two percent (92%) of the
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<PAGE> 17
Company's total first year and renewal premium income during
1994 came from that market and a similar percentage of new
insurance production during 1993 and 1992 was derived from
that source (see "Business of CICA - Geographical
Distribution of Business"). Management believes that CICA is
a significant competitor in this market and attributes its
success in penetrating that market to the expertise of
management, the uniqueness of its life insurance products and
competitiveness of its pricing methods.
CICA faces competition from several other American life
insurance companies that also sell U.S. dollar denominated
policies to non-U.S. citizens, with no one company being
dominant in the market. Some companies may be deemed to have
a competitive advantage due to histories of successful
operations and large agency forces. Management believes that
its experience, combined with the special features of the
Ultra Expansion policies allows CICA to compete effectively
in maintaining and pursuing new business.
Management believes that CICA competes indirectly with
non-U.S. companies in its business, particularly with respect
to Latin American companies. CICA, as a U.S. domestic insurer
paying claims in U.S. dollars in the U.S., has a different
clientele and product than foreign-domiciled companies.
CICA's product is usually acquired by persons in the top
three percent of income of their respective countries. The
policies sold by foreign companies are sold broadly and are
priced based on the mortality of the entire populace of the
respective geographic region. Because of the predominance of
lower incomes in most of these countries, the mortality
experience tends to be very high on the average, causing
mortality charges which are considered unreasonable based on
the life mortality experience of the upper three percent of
income of the population.
Additionally, the assets that back up the policies issued by
foreign companies are invested in the country, and thus, are
exposed to the inflationary risks and economic crises that
historically have impacted many foreign countries. Another
reason that CICA experiences an advantage is that many of its
policyholders desire to transfer capital out of their
countries due to the perceived financial strength and
security of the United States by foreigners. Also, management
realizes that CICA competes indirectly with other
non-licensed insurers in countries where CICA's insureds
reside. CICA's experience has been that its market niche is
in attracting insureds who want the safety and security of a
U.S. domestic insurer. Management of Citizens considers it to
be difficult and speculative to estimate the potential of the
foreign market for U.S. insurers. However, based upon the
volume of new premium generated by CICA that originates from
several countries in Latin America, management believes that
CICA receives a substantial share of such business. However,
Citizens does not have market share data to confirm
management's belief.
In CICA's limited block of accident and health insurance,
(0.6% of total premium income), it is in competition with
many casualty and life insurance
-17-
<PAGE> 18
companies as well as with voluntary and government-sponsored
plans for meeting hospitalization and medical expenses such
as Blue Cross/Blue Shield, "Medicare" and "Medicaid." Future
expansion of such programs or the establishment of additional
government health programs could adversely affect the future
of accident and health insurance on CICA's books, most of
which has been acquired in the acquisition of other
companies.
FEDERAL INCOME TAXATION. CICA is a "small company" as that
term is defined in the Internal Revenue Code (the "Code"),
section 806. As such, CICA qualified for a special small
company deduction (presently equal to 60% of "tentative life
insurance company taxable income") which serves to decrease
significantly the amount of tax which might otherwise have to
be paid.
The Omnibus Reconciliation Act of 1993 (the "1993 Act") was
signed into law on August 10, 1993. Among its provisions was
an increase to corporate tax rates to 35% on taxable income
between $10,000,000 and $15,000,000 and to 38% on taxable
income between $15,000,000 and $18,300,000. This legislation
had no material impact on the financial position of the
Company.
The Revenue Reconciliation Act of 1990 revised the method in
which insurance companies claim deductions for policy
acquisition costs. Previously, insurance companies were
allowed to deduct actual policy acquisition costs as they
were incurred. Beginning in 1990, policy acquisition costs
are determined as a percentage of annual net premiums and are
then deductible on a straight-line basis over a ten-year
period rather than treated as an immediate deduction. This
change in treatment for acquisition costs has had a
significant impact on CICA's taxable income due to the
relatively large amounts of such deferrals caused by the
increases in new business, (see "Management's Discussion and
Analysis of Financial Conditions and Results of Operations").
CICA presently qualifies for a small company exception which
allows it to deduct the costs over a shorter five-year
period.
CICA files a consolidated Federal income tax return with
Citizens and its subsidiaries. At December 31, 1994, the
Company had net operating loss carryforwards of $497,526
available to offset taxable income in future years and
$400,242 in net operating loss carryforwards available to
offset future alternative minimum taxable income.
(iii) BUSINESS OF CTI
CTI is a wholly-owned subsidiary of CICA and engages in the
business of providing data processing services and
acquisition and leasing of furniture and equipment for its
parent as well as data processing services and software to
the insurance industry. Pursuant to an Information Systems
Management and Services Contract dated October 1, 1991, CTI
provides data processing services to the Company for a fixed
fee of $60,000 per month. In October, 1992, this fee
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<PAGE> 19
was lowered to $53,000. As of and for the year ended December
31, 1994, CTI's total assets were $618,000 and revenues were
$677,000. The intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(iv) BUSINESS OF III
For much of the past decade, III has been dormant. In August,
1993, Citizens sold the stock of III to CICA for its book
value. CICA subsequently contributed agent debit balances
receivable of approximately $169,000 to III. III collected
such receivables and, as additional consideration, received
an airplane which it operates for Citizens and CICA. During
1994, CICA made an additional capital contribution of
$200,000 to III. Also, during 1994, III acquired a second
airplane for use in providing aviation transportation and
services to Citizens and the airplane previously owned by III
was placed for sale. As of and for the year ended December
31, 1994, III's total assets were $875,000 and revenues were
$345,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
ITEM 2. DESCRIPTION OF PROPERTIES
CICA acquired a new principal office property in Austin, Texas in
February 1992, consisting of an 80,000 square foot office
building. The Company transferred its operations to this property
in September, 1993 and occupies approximately 27,000 square feet
with the remainder of the building being leased or for lease, with
an occupancy rate of approximately 86%. The Company has submitted
a 13,000 square foot lease agreement for a proposed tenant to
increase occupancy of the facility to approximately 97%. At March
1, 1995, the lease had not been executed, but Management believes
it probable that such lease will be consummated during the second
quarter of 1995, with occupancy of the tenant to commence on
December 1, 1995.
CICA owns property in Austin, Texas consisting of approximately
1.10 acres of land with a 13,000 square foot office building which
previously served as the Company's executive offices. Vacant since
the Company relocated to its present offices, this property with a
book value of $158,000, had been listed for sale at $1,500,000.
After lengthy negotiations, a net, net, net lease has been agreed
to on the building for a term of three years, with a purchase
option at a price of $850,000 during the period.
In the HERMAR asset acquisition (see Item 1. herein), Citizens
acquired 14 parcels of real estate in and around Austin, Texas.
One such parcel acquired was the site of a previous underground
fuel line leak. Remediation of contamination began on April 18,
1990 and efforts at the site were suspended in April, 1994 with
the permission of the TNRCC.. Management is not aware of any
additional remediation costs related to the site See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
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<PAGE> 20
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time may be a party to various legal
proceedings incidental to its business. Management does not expect
the ultimate resolution of these legal proceedings to have a
material adverse impact on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of Citizens during the
fourth calendar quarter of 1994.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Citizens' Class A common stock is traded on the American
Stock Exchange (Amex). The high and low prices per share as
supplied by the Amex Monthly Statistical Report are as
follows. Prior to April, 1994, Citizens' Class A common stock
was traded over the counter on the NASDAQ National Market
System and the prices were supplied by the NASDAQ Monthly
Statistical Report. These prices represent inter-dealer
quotes and therefore may not represent actual transactions.
<TABLE>
<CAPTION>
1994 1993
------------------ -------------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 $8.00 $7.75 $6.38 $6.00
June 30 8.25 8.12 7.00 6.88
September 30 8.38 7.63 7.88 7.50
December 31 9.13 7.63 8.50 8.00
</TABLE>
(b) Citizens' Class A common stock is listed on the American
Stock Exchange under the symbol CIA.
(c) As of December 31, 1994, the approximate number of record
owners of Citizens' Class A common stock was 10,000.
Management estimates the number of beneficial owners to be
approximately 35,000.
(d) Citizens has not paid dividends in any of the past three
years and does not intend to pay cash dividends in the
immediate future. For restrictions on the present and future
ability to pay dividends, see Note 7 of the "Notes to
Consolidated Financial Statements."
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<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth, in summary form, selective data of the
Company. This data, which is not covered in the report of the
independent auditors, should be read in conjunction with the
consolidated financial statements and notes which are included
elsewhere herein (amounts in thousands except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
-------------------------------------------------------------------------
1993 1992 1991 1990
1994 (AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET OPERATING REVENUES $ 49,157 $ 42,761 $ 33,134 $ 27,086 $ 20,466
NET INCOME $ 4,175 $ 5,526 $ 3,907 $ 4,720 $ 1,493
NET INCOME FROM
CONTINUING OPERATIONS
PER SHARE $ .25 $ .34 $ .24 $ .31 $ .10
NET INCOME PER SHARE $ .25 $ .34 $ .24 $ .31 $ .10
TOTAL ASSETS $149,798 $134,105 $116,230 $ 76,482 $ 61,740
TOTAL LIABILITIES $114,742 $106,090 $ 93,442 $ 63,282 $ 53,704
TOTAL STOCKHOLDERS' EQUITY $ 35,056 $ 28,015 $ 22,787 $ 13,083 $ 8,036
BOOK VALUE PER SHARE $ 1.99 $ 1.68 $ 1.37 $ .83 $ .53
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 9, 1994, Citizens announced that it had signed
definitive written agreements for the acquisition of (i) American
Liberty Financial Corporation, a Baton Rouge, Louisiana based life
insurance holding company with $26 million in assets, $8 million of
stockholders' equity, revenues of $9 million and $45 million of
life insurance in force and (ii) Insurance Investors & Holding Co.,
a Peoria, Illinois based life insurance holding company with $2.5
million in assets and $1 million of stockholders' equity.
The American Liberty agreement provides that following the
acquisition by Citizens, American Liberty shareholders will receive
1.10 shares of Citizens' Class A Common Stock for each share of
American Liberty Common Stock owned and 2.926 shares of Citizens'
Class A Common Stock for each one share of American Liberty
Preferred Stock owned. Citizens expects to issue approximately 2.3
million Class A shares in connection with the transaction, which
will be accounted for as a purchase. The companies will continue to
operate in their respective locations under a combined management
team with consolidation of computer data processing on the
Citizens' system. The agreement is subject to approval by American
Liberty's shareholders and regulatory authorities.
The Insurance Investors agreement provides that following the
acquisition by Citizens, Investors' shareholders will receive one
share of Citizens' Class A Common Stock for
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<PAGE> 23
each eight shares of Investors Common Stock owned. Additionally,
Citizens will acquire all shares of Central Investors Life
Insurance Company, a subsidiary of Insurance Investors & Holding,
not wholly-owned by Insurance Investors, based upon an exchange
ratio of one share of Citizens' Class A common stock for each four
shares of Central Investors owned. The transaction will involve
issuance of approximately 170,000 of Citizens' Class A shares and
will also be accounted for as a purchase. The agreement is subject
to approval by Investors' shareholders. The transaction was
approved by the Illinois Department of Insurance on March 9, 1995.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1994 was $4,174,558 or
$.25 per share compared to $5,526,393 or $.34 per share in 1993
and $3,907,952 or $.24 per share in 1992. The smaller amount of
capital gains on the Company's fixed maturity portfolio in 1994
compared to prior years was the primary reason for the reduction
in net income. Realized losses in 1994 were $9,356, compared to
gains of $2,120,837 in 1993 and $1,500,749 in 1992. The growth in
income from 1992 to 1993 was the result of the growing level of
premium income as well as the increase in realized capital gains.
Total revenues for the year ended December 31, 1994 were
$49,156,709 compared to $42,761,095 in 1993, an increase of 15%.
The 1993 revenues were 29.1% greater than 1992 when total revenues
were $33,134,348. The predominant reason for the increase in
revenues is the growth in premium income, which has increased by
49.9% over the three-year period ended December 31, 1994. The
acquisition of FCC did not have a material effect on revenues for
1992 or 1993, due to the effective date of the purchase, the
relative size of FCC's revenue base and the application of
purchase accounting.
Premium income reached $43,785,361 in 1994, a 15.6% increase over
the previous year when premium income totaled $37,883,061. The
1993 amount represented a 29.7% increase over 1992 when premiums
amounted to $29,201,786. The increase during this three year
period is attributable to the success of the Company's Ultra
Expansion products that were introduced to the market in late
1987. Sales of the products were relatively insignificant until
mid 1988 at which time the sales force obtained a thorough
understanding of the features of the products and how to market
them. New business began to increase almost immediately after the
second calendar quarter of 1988 and continues to grow each year.
In 1989, the Company's agency force produced $4.5 million of new
ordinary life premium. In 1990, this production grew to $6
million, increased to $8 million in 1991 and grew to $10.6 million
in 1992. In 1993, new premium submitted continued to increase and
totaled $11.3 million and in 1994 exceeded $11.8 million. In 1994,
Management did not emphasize the increase in new business because
it perceived it appropriate for the Company to increase its level
of capitalization before further expanding its premium writing.
With the additional capital raised during 1994, Management expects
to see a return to the higher levels of annual increase in writing
seen by the Company in prior
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<PAGE> 24
years. However, as the Company grows and the size of its premium
base expands, it will be more difficult to achieve the dramatic
increases in premium levels seen in earlier years when the Company
was smaller. During 1994, insurance in force, measured in face
amount, exceeded $2.1 billion.
In late 1990, a new feature, called a retirement fund benefit
("RFB") consisting of an immediate endowment, was added to the
Ultra product. In 1991, this feature contributed approximately
$1.1 million to the increase in premium income. In 1992, the RFB
contributed $2.6 million to the Company's premium income, grew to
$3.3 million in 1993 and in 1994 amounted to $4.8 million.
Beginning in 1993, the Company added another feature to the Ultra
products, a special deposit rider; however, due to the fact that
the rider is a cash accumulation feature, it has had little effect
on premium income, which was expected by management. An additional
factor that has enhanced the sales efforts of the Company has been
an improved recruitment and training program for agents by the
Company's managing agents. The increases in agency force
production coupled with favorable reception and persistency of the
Ultra products are the predominant reasons for the growth in
premium income experienced in recent years. Most of the Company's
premium income is derived from ordinary whole-life insurance
premiums, a fact that management believes will contribute to the
Company's profit growth for many years, as well as make it rather
unique in an industry in which a majority of premiums written in
recent years have been Universal Life products.
Net investment income increased 11% during 1994 to $5,295,784 from
$4,771,079 in 1993. In 1992, such income was $3,929,495. The
increase in 1994 reflects the growth in the Company's invested
asset base, which grew by 9.5%. The 1993 results were impacted by
actions taken by management during the first and fourth quarters
of that year to take advantage of volatility in the bond market.
During those quarters management made substantial sales of bonds,
to realize gains of approximately $800,000 which are included in
other income. The proceeds were temporarily invested in short-term
Treasury Bills until the volatility subsided at which time the
funds were reinvested in longer term instruments. Management
estimates that the reduction in investment income during the
period the funds were invested in such short-term instruments to
be approximately $400,000; however, management believes the
transactions to be beneficial in that the net effect was to
increase net income for 1993 by approximately $800,000. Similar
actions were taken by Management during the third quarter of 1993
when bond yields reached a low point. The low yields available in
the bond market during the Company's growth period have made it
difficult to increase the return on the Company's invested assets
without exposing the portfolio to undue risk; however, Management
believes that as yields rise (which occurred during 1994) the
Company is positioned to take advantage of the investment
opportunities that will present themselves and, thus, enhance
future returns.
Future policy benefit reserves increased $11,910,751 in 1994,
compared to $10,160,523 in 1993 and $8,590,693 in 1992. The
increasing premium income and favorable persistency in relation to
premiums are the primary reasons for the increases
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<PAGE> 25
in each of the years. Increases in surrender activity on the block
of Universal Life business acquired in the FCC acquisition slowed
the level of increase, particularly in 1994. These surrenders,
which were expected by Management, were increased by the
relatively low interest rates paid on these plans during 1994
compared to the rates that were in effect several years ago when
the plans were sold. Additionally, in the early years of a policy,
the net reserves (benefit reserve less deferred acquisition costs)
are small due to the large capitalized costs in the first and
second policy years. As the policy matures, the reserve increases.
Also, approximately 18% of new premium is passed through to the
policyowner in the form of endowments (dividends) and therefore
not reserved. The Company's reserves are certified annually by an
independent actuary. Such certification noted no deficiencies for
the years presented.
Policyholder dividends declined 1.5% in 1994 to $2,381,581 from
$2,418,456 in 1993. The 1993 results reflected a 33.4% increase
over 1992 when dividend expense was $1,813,081. In late 1993,
Management reduced the dividends paid on various plans to reflect
the lower levels of return that were available in the bond market.
As a result, the dividends paid in 1994 were less than those paid
in 1993. Virtually all of the Company's policies that have been
sold since 1989 are participating. Participating policies
represent a large majority (87%) of the Company's business in
force and 92.7% of new issues in 1994. As a result, management
expects continued growth in this item; however, dividends are
factored into the policies' premiums and thus management does not
believe continued increases in dividend expense will impair or
dilute future profitability.
Claims and surrenders increased 17.4% in 1994; reaching
$16,635,259 from $14,166,018 in 1993. In 1992, such expenses were
$11,165,717. The 1993 increases result primarily from growth in
three categories: 1) death benefits, 2) endowments and 3)
surrenders. The increase from 1993 to 1994 was caused by higher
levels of surrenders and endowments.
Death benefits decreased to $2,533,569 in 1994, compared to
$3,115,247 in 1993. In 1992, such benefits were $2,262,928. During
1994, the claims incurred on the Servicemen's Group Life Insurance
program returned to levels seen in 1992 and prior years, declining
by approximately $500,000. Additionally, during 1994 claims on the
Company's in force business remained static with those incurred in
1993, despite the increasing block of business in force. The 1993
results were impacted by an approximately $500,000 increase in
claims assumed under the Segli program which were incurred as a
result of an increase in the amount of insurance provided to
participants in the program and the increased level of
participation that the Company obtained due to its growth in
recent years. An increase in premium income received from the
program offset such increase. Another large portion of the
increase from 1992 to 1993 represents claims on the FCC block of
business. The 1992 results include only six months of the claims
on this block of business. The Company continues to adhere to its
strict underwriting policy which requires complete medical
examinations on all applicants who are foreign residents,
regardless of age or face amount of the policy applied for.
Additionally, X-rays and electrocardiograms are
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<PAGE> 26
required depending on age and face amount of the policy. On all
policies of $150,000 or more, inspection reports are required
which detail the background resources and lifestyle of the
applicant. The Company has developed numerous contacts throughout
Latin America with which the underwriter can validate the
information contained in the application, medical or inspection
report.
Endowment expense has grown from $2,684,681 in 1992 to $4,475,462
in 1994, a 66.7% increase over the three-year period. Beginning in
late 1990, Citizens introduced a new plan called "Ultra Expansion
Plus" which carried an immediate endowment benefit of an amount
elected by the policyowner. This endowment is factored into the
premium of the policy and is paid annually, including when the
initial premium is paid. Management does not expect this benefit
to adversely impact profitability, since it is factored into the
premium of the policy.
Policy surrenders were $8,637,306 in 1994, compared to $5,761,190
in 1993 and $5,379,054 in 1992. Management believes such
surrenders to be impacted by the expected disruption in the
policyholder base of FCC as a result of the acquisition and lower
interest rates. The increase in surrenders on the Citizens block
is, in the opinion of Management, due to acquisitions and the
growing block of business in force.
Commissions increased 3.1% in 1994 to $12,382,372 from $12,011,822
in 1993. An increase of 21.8% was realized in 1993 compared to
1992 when commissions were $9,860,304. The majority of such
amounts paid relates to first year commissions which were
$9,925,028, $10,423,669 and $8,424,627, respectively, in 1994,
1993, and 1992. The increase in commissions is directly related to
the increased levels of production in recent years discussed
above.
The increase in commissions would have been greater; however, the
Company and Negocios Savoy, S.A., its international marketing
manager, agreed to terminate the International Marketing Managers
contract effective September 1, 1993. The primary reason for the
termination was that management believed it could oversee the
Company's marketing operations more economically from the Home
Office.
Field management responsibilities were assumed by eight
"international managers" who were previously supervised by
Negocios Savoy. Management believes the termination of the Savoy
contract will have a positive impact on the Company's earnings.
Commission expense on new business was reduced by approximately
10%. Although additional overhead expenses were incurred to manage
the function from the Home Office, management believes a net
annual savings of approximately $300,000 will be achieved.
The agents who represent the Company contract directly with CICA
and are commissioned by the Company. As a result, there has been
no negative impact on production or recruitment since the Savoy
termination and management is not aware of any such trends.
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<PAGE> 27
Underwriting, acquisition and insurance expenses increased 21.3%
in 1994 to $5,079,538 compared to $4,188,280 in 1993. The 1993
expenses represented a 13.6% increase over the $3,686,320 incurred
in 1992. The growth in expense in 1994 is primarily related to the
increased home office marketing expense incurred as a result of
the termination of Savoy discussed above. Although the increase
was substantial, it was offset in a large part by the reduction in
first year commission that would otherwise have been paid out to
Savoy. Additionally, a portion of the 1993 increase relates to a
one-time charge of $425,000 related to the extension of options to
purchase 100,000 shares of the Company's Class A common stock. The
charge represents the difference between the exercise price and
the fair market value of the shares as of the extension date.
Capitalized deferred policy acquisition costs were $13,128,049 in
1994, compared to $13,472,064 in 1993 and $10,670,569 in 1992. The
increase between 1992 and 1993 result primarily from the increased
first year commission expenses as well as increased Home Office
costs relating to the acquisition of new business. The decrease
from 1993 to 1994 relates to the adjustment of capitalization for
1994 issued policies to reflect the lower interest rates available
to be earned on the Company's investment portfolio compared to
earlier years. Amortization of these costs was $7,203,593,
$6,455,401 and $4,412,007, respectively in 1994, 1993, and 1992.
Realized losses on investments were $9,356 in 1994, compared to
gains of $2,120,837 in 1993 and $1,500,749 in 1992. Management
made several moves during 1993 and 1992 to take advantage of the
price volatility in the bond market to achieve gains. During the
second and third quarters of 1993 and first and fourth quarters of
1992, management sold securities, realized profits on the sales
and held the proceeds in short-term investments before reinvesting
at rates similar to those on bonds that were sold.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased 25.1% during 1994 to $35,055,373
from $28,014,704 at December 31, 1993. The earnings achieved in
1994, as well as the additional capital raised through an offering
sold to non-United States policyholders of CICA were the primary
reason for the substantial growth.
On October 27, 1994, Citizens completed the 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 Stated persons
pursuant to certain specific guidelines may be resold in the
United States by persons who are not an issuer, underwriter or
dealer following a certain period after the close of the offering
period. The offering price was $7.00 per share. The closing market
price of the Class A common shares on the date of the offering
commencement was $7.75 per share (as reported by the American
Stock Exchange. The Company had succeeded in
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<PAGE> 28
placing 916,375 shares, generating gross proceeds of more than
$6.4 million, and net proceeds of approximately $5.4 million.
Management was pleased with the amount of capital generated
through the offering; however, it believes that the offering
period was too short in light of the manner in which business is
typically transacted overseas. Because of the success of the
offering in the limited time period, Management is contemplating
the initiation of a second such offering to commence in 1995.
Invested assets grew to $93,828,650 at December 31, 1994 from
$87,010,996 in 1993, an increase of 7.8%. Management made a
concerted effort during 1992 and 1993 to maximize the investment
of the Company's growing cash flow. All investments in fixed
maturities during 1993 were in U.S. Treasury securities or
obligations of U.S. Government corporations and agencies. As a
result of this investment philosophy, 99.6% of the Company's
investments in fixed maturities at December 31, 1993 were in such
instruments. During 1992 and 1993, management took advantage of
volatility in the bond market and made substantial gains out of
the bond portfolio. The Company realized gains (net) of $3.0
million from this activity during the two-year period (the
remaining gains emanated from the sale of equity securities). At
December 31, 1994, fixed maturities have been categorized into two
classifications: Fixed maturities held to maturity, which are
valued at amortized cost, and fixed maturities available for sale
which are valued at market. The Company does not have a plan to
make material dispositions of fixed maturities during 1995;
however, because of continued uncertainty regarding long-term
interest rates, management cannot rule out additional sales during
1995. Fixed maturities held to maturity, amounting to $18,415,026
consist primarily of U.S. Treasury securities. Management has the
intent and believes the Company has the ability to hold the
securities to maturity.
The Company's mortgage loan portfolio, which constitutes 2.8% of
invested assets at December 31, 1994, has historically been
composed of small residential loans in Texas. The 1992 acquisition
of FCC added a block of mortgages to the portfolio. During 1994,
in conjunction with the sale of certain parcels of real estate
owned by the Company approximately $340,000 in new mortgage loans
were made. At December 31, 1994, approximately 38.9% of the
Company's mortgage portfolio (1.1% of invested assets) consisted
of commercial mortgages with an average balance of $66,381. The
remaining residential mortgages have an average balance of
$27,839. During 1993 and 1994, significant reductions were
achieved in the Company's portfolio through aggressive management
of such loans. Two FCC mortgages were foreclosed during 1993 - one
in Colorado with an unpaid balance of $27,900 and one in Texas
with an unpaid balance of $170,000. Management sold the smaller
parcel at a slight loss in 1994, and expects to dispose of the
remaining parcel during 1995. At December 31, 1994, two mortgage
loans were in default; one to an affiliate of the Company,
Continental Investors Life Insurance Company, in the amount of
$112,794, and another in the principal amount of $30,665.
Management believes that in the event of foreclosure there is more
than adequate collateralization on both loans, to avoid exposure
to loss. Management has established a reserve of
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<PAGE> 29
$145,080 (approximately 5.2% of the mortgage portfolio's balance)
to cover potential unforeseen losses in the Company's mortgage
portfolio.
Policy loans comprise 16.2% of invested assets at December 31,
1994 compared to 16.1% at December 31, 1993. These loans, which
are secured by the underlying policy values, have yields ranging
from 5% to 10% percent and maturities that are related to the
maturity or termination of the applicable policies. Management
believes that the Company maintains more than adequate liquidity
despite the uncertain maturities of these loans.
Cash balances of the Company in its primary depositories, Texas
Commerce Bank Austin, Texas and Frost Bank, N.A., Austin, Texas,
were significantly in excess of Federal Deposit Insurance
Corporation (FDIC) coverage at December 31, 1994. Management
monitors the solvency of all financial institutions in which it
has funds to minimize the exposure for loss. At December 31, 1994,
Management does not believe the Company is at risk for such a
loss. During 1995, the Company intends to utilize short-term
Treasury Bills as a cash management tool to minimize excess cash
balances and enhance return.
Investments in real estate comprise a very small portion of the
Company's invested assets (0.8%). The properties owned by the
Company were predominantly acquired in the acquisition of HERMAR's
assets and consist of small tracts used for light retail or light
industrial purposes. No single tract accounts for as much as 0.5%
of the Company's invested assets and virtually all are
revenue-producing holdings. The Company has not established loss
reserves on real estate at December 31, 1994 because management
believes the Company has no significant exposure to loss on its
holdings. During 1994, the bulk of the real estate acquired from
HERMAR was sold to the parties leasing the properties. As part of
the transaction, CICA provided mortgage financing on the
transactions totaling approximately $340,000; however, down
payments of 15-20% were made in each case.
One parcel of real estate acquired from HERMAR and still owned at
December 31, 1994, was the site of a previous underground fuel
line leak. HERMAR, having previously initiated action to abate the
leak, had contracted with an environmental consulting firm to
supervise and coordinate the remediation of any contamination at
the site. Following the acquisition of HERMAR's assets, the
Company continued the remediation efforts. During 1994, all
remediation efforts at the site were discontinued with the
permission of the Texas Natural Resource Conservation Commission
(TNRCC). Management is not aware of any remaining costs associated
with the remediation. There is no pending or threatened legal
action by state agencies, area governments or citizenry relating
to the leak; therefore, the Company has not established reserves
for the leak. In the event the TNRCC program may not cover the
remediation costs, appropriate reserves will be established.
In February 1992, the Company paid cash for an 80,000 square foot
office building in Austin, Texas to serve as its primary office.
This building will, in the opinion of
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<PAGE> 30
management, provide adequate space for the Company's operations
for many years. Renovation and remodeling of the property began in
the third quarter of 1992 and the Company relocated to the
building in September, 1993. The Company occupies approximately
27,000 square feet of space in the building. The Company's former
office property, consisting of approximately 13,000 square feet in
Austin, with a carrying value of $158,000, was listed for sale
during 1994 for $1.5 million. In February, 1995, a lease-purchase
agreement was reached with a third party on the former office
property. The lease, a three year agreement on a net, net, net
basis, provides that the party can purchase the building during
the first 18 months of the lease for $850,000 cash, with no lease
payments applying to the purchase price.
CICA owned 2,075,685 shares of Citizens Class A common stock at
December 31, 1994 (2,088,185 shares at December 31, 1993). For
statutory accounting purposes, CICA received written approval from
the Colorado Insurance Department to carry its investment in
Citizens at 50% of the fair market value limited to 8% of admitted
assets, ($8,562,000) which differs from prescribed statutory
accounting practices. Statutory accounting practices prescribed by
Colorado require that the Company carry its investment at market
value reduced by the percentage ownership of the Parent by CICA,
limited to 2% of admitted assets. As of December 31, 1994, that
permitted transaction increased statutory surplus by $4,711,023
over what it would have been had prescribed accounting practice
been followed. In the Citizens' consolidated financial statements,
this stock is shown as treasury stock.
CICA had outstanding at December 31, 1994, a $600,000 surplus
debenture payable to Citizens. For statutory accounting purposes,
this debenture is a component of surplus, while for GAAP it is
eliminated in consolidation. Citizens has recognized a liability
for its related obligation to a bank in a like amount.
The National Association of Insurance Commissioners ("NAIC")
monitors twelve ratios each year to determine whether the
Statutory accounting results of insurers exceed certain "expected"
ranges. For the year ended December 31, 1994, Citizens Insurance
Company of America exceeded the expected results in five of these
categories. The ratios can be exceeded by either positive or
negative results. Two of the five relate to the change in capital
and surplus during the year. CICA exceeded both of these,
primarily because of the additional capital infused during 1994.
Another ratio compares net gain from operations on a Statutory
basis to total income. CICA incurred a net loss from operations
primarily because of federal taxes and because the result was a
loss, exceeded the ratio. A fourth ratio compares the level of net
investment income to dividend and endowment benefits paid.
CICA's margin of 117% was slightly lower than the expected value
of 125%. Finally, the ratio of investments in affiliates to total
capital and surplus was 103%, just above the expected value of
100% or below. Management is not concerned about the results above
or below the expected ranges primarily due to the fact that 1)
risk based capital levels are far in excess of minimum
requirements; 2) several of the excess results for 1994 were
because of the additional capital infused during the year and as
such are favorable, rather than negative results; and 3) the level
of investment in affiliates is
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approved by the state of domicile and has steadily declined over
the past several years.
The NAIC established new minimum capital requirements in the form
of Risk Based Capital ("RBC"). Risk-based capital factors the type
of business written by a company, the quality of its assets, and
various other factors into account to develop a minimum level of
capital called "authorized control level risk-based capital" and
compares this level to an adjusted statutory capital that includes
capital and surplus as reported under Statutory Accounting
Principles, plus certain investment reserves. Should the ratio of
adjusted statutory capital to control level risk-based capital
fall below 200%, a series of actions by insurance regulators
begins. At December 31, 1994 and 1993, CICA's ratios were 560.6%
and 421.5%, respectively, well above minimum levels.
The Deficit Reduction Act of 1984 added Section 807 to the
Internal Revenue Code ("IRC") which mandated the use of a new
method for computing tax reserves. In general, Section 807
provides that tax reserves can never exceed the amount taken into
account in computing statutory reserves. The applicable reserve is
the higher of the net surrender value of the contract or the
reserve determined by means of a formula. The term "net surrender
value" means the cash value of the policy reduced by any penalty
or charge imposed upon surrender.
The formula approach used in computing the reserve consists of the
following:
(1) The tax reserve method applicable to the contract - generally
the Commissioners' Reserve Valuation Method (CRVM) for life
insurance contracts, the Commissioners' Annuities Reserve
Valuation Method (CARVM) for annuity contracts, and the
two-year full preliminary term method for noncancellable
accident and health contracts;
(2) The greater of the applicable Federal interest rate or the
prevailing state assumed interest rate which is the highest
assumed interest rate permitted by 26 states for computing
reserves of a life insurance or an annuity contract at the
time the contract is issued; and
(3) The most recent commissioner's standard table permitted under
the insurance laws of 26 states at the time the contract is
issued.
Generally, under prior law, a life insurance company's deduction
for increases in its reserves was based upon reserves required for
state law purposes which were computed using lower conservative
interest rate assumptions. The 1984 Act's required use of higher
interest rates results in substantially lower tax reserves and
lower increases in reserves, and thereby higher levels of taxable
income and tax.
The Budget Reconciliation Act of 1990 added IRC Section 848 which
requires insurance companies, beginning in 1990, to capitalize and
amortize policy acquisition
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<PAGE> 32
expenses. For statutory accounting purposes, these acquisition
expenses are deducted in the year incurred.
The enactment of the two provisions above has had a severe impact
upon the effective tax rate paid by CICA with effective tax rates
exceeding 100% in each of the last three years. The impact of such
high effective tax rates is that CICA is forced to pay Federal
income taxes out of surplus, rather than income, thereby limiting
the statutory surplus available for use in writing new business.
Although these provisions have little effect on the Company's
overall results on a GAAP basis as a result of the recognition of
deferred taxes, they do have a considerable impact on the results
under Statutory Accounting Principles which do not recognize such
items. For the year ended December 31, 1994, CICA incurred tax
expenses on a Statutory basis at an effective rate of
approximately 289% of income before tax. For 1993, the incurred
rate was 131%. In the event that CICA was unable to attract
additional capital, as it did in 1994, its ability to write new
business would be severely limited due to the ongoing drain on
Statutory surplus. Management does not expect to grow to the stage
where such levels of taxation return to reasonable limits for
several years; however, Management believes the Company has
adequate levels of capital on hand with the additional capital
infused during 1994 to continue to expand the Company's writing of
new business.
FINANCIAL ACCOUNTING STANDARDS
In February 1992, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Statement 109 requires a
change from the deferred method of accounting for income taxes of
APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement
109, deferred tax asset and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date. The Company adopted Statement 109 in 1993 and
applied the provisions of Statement 109 retroactively to January
1, 1991
In December 1990, the FASB issued Statement 106, "Employers'
Accounting for Post Retirement Benefits Other than Pensions."
Statement 106 establishes accounting standards for employers'
accounting for, primarily, post retirement health care benefits.
The statement was effective for fiscal years beginning after
December 15, 1992. Since the Company currently pays no such
benefits, implementation had no impact on the results of
operations of the Company.
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In December 1992, the FASB issued Statement 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" (Statement 113). Statement 113 eliminated the net
reporting of reinsurance amounts in the balance sheet previously
required by Statement 60 "Accounting by Insurance Enterprises."
Statement 113 also provides accounting guidance for ceding
enterprises as well as disclosure requirements and guidance on
assessing transfer of risk in reinsurance contracts. Furthermore,
it precludes immediate recognition of gains related to reinsurance
contracts unless the ceding enterprises liability to its
policyholders is extinguished.
The Company adopted Statement 113 in the first quarter of 1993.
There was no impact on the consolidated financial statements due
to implementation of the risk transfer provisions.
In May 1993, the FASB issued Statement 114 "Accounting by
Creditors for Impairment of a Loan" ("Statement 114"). Statement
114 requires impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective
interest rate or at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent.
Statement 114 is effective for years beginning after December 15,
1994. The Company does not expect Statement 114 to have a material
impact on its financial statements.
Also in 1993, the FASB issued Statement 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("Statement
115"). Statement 115 requires the classification of debt and
equity securities as held to maturity, trading or available for
sale based on established criteria. Trading securities are bought
and held principally for the purpose of selling them in the near
term. The Company had no investment securities classified as
trading at January 1, 1994 or December 31, 1994. Held-to-maturity
securities are those in which the Company has the ability and
intent to hold the security until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or
discounts. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair
value at the date of transfer. Unrealized holding gains and losses
are recognized in earnings for transfers into trading securities.
Unrealized holding gains or losses associated with transfers of
securities from held-to-maturity to available-for-sale are
recorded as a separate component of stockholders' equity. The
unrealized holding gains or losses included in the separate
component of equity for securities transferred from
available-for-sale to held-to-maturity are maintained and
amortized into earnings over the remaining life of the
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<PAGE> 34
security as an adjustment to yield in a manner consistent with the
amortization or accretion of premium or discount on the associated
security.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of
a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings
and are derived using the specific identification method for
determining the cost of securities sold. Investment securities at
December 31, 1993 were primarily designated and classified as
being available-for-sale. The Company adopted Statement 115 at
January 1, 1994. The impact on the consolidated stockholders'
equity due to the implementation was $690,388 relating to the
unrealized gains on the available-for-sale portfolio, net of
deferred tax.
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ITEM 8. FINANCIAL STATEMENTS
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent auditor's report 42
Consolidated balance sheets at
December 31, 1994 and 1993 43 - 44
Consolidated statements of operations
- years ended December 31, 1994, 1993 and 1992 45 - 46
Consolidated statements of stockholders' equity
- years ended December 31, 1994, 1993 and 1992 47
Consolidated statements of cash flows
- years ended December 31, 1994, 1993 and 1992 48 - 49
Notes to consolidated financial statements 50 - 72
Schedules at December 31, 1994 and 1993:
Schedule III - Condensed Financial
Information of Registrant 73 - 75
Schedules for each of the years in the three-year
period ended December 31, 1994:
Schedule VI - Reinsurance 76
</TABLE>
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
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<PAGE> 36
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited financial
statements of Citizens included herein, there has been no change
of accountants made by Citizens, nor has it reported on Form 8-K
any disagreements between Citizens and its independent
accountants.
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PART III
Items 10, 11, 12, and 13 of this Report incorporate by reference the information
in the Company's definitive proxy material under the headings "Stock and
Principal Stockholders," "Control of the Company," and "Election of Directors."
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 1994.
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<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 AND 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules listed on the
following index to financial statements and financial
statement schedules are filed as part of this Form
10-K.
(a) 3 EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<S> <C> <C>
(1) Underwriting Agreement N/A
(2) Plan of Acquisition, reorganization, arrangement, liquidation
or Succession (e)
(3) 3.1 Articles of Incorporation; as amended (d)
3.2 Bylaws (b)
(4) Instruments defining the rights of security holders,
including debentures
(5) Opinion re: Legality N/A
(6) Opinion re: Discount on Capital Shares N/A
(7) Opinion re: Liquidation Preference N/A
(8) Opinion re: Tax Matters N/A
(9) Voting Trust Agreement N/A
(10) Material Contracts
10.1 Plan and Agreement of Exchange by and among First
Centennial Corporation, First Centennial Life
Insurance Company, and Citizens, Inc., as amended (a)
10.2 Kenneth R. Bearden Conversion Agreement with
Citizens, Inc. dated February 27, 1992 (a)
10.3 Agreement to Cancel First Centennial Class B Common
Stock dated February 27, 1992 (a)
10.4 Termination of Agreement between First Centennial
Corporation, Global Management Corporation and
American Trust Insurance Company, Ltd. (a)
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 (a)
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C> <C>
10.6 Summary of Coinsurance Agreement between Citizens
Insurance Company of America and Alabama Reassurance
Company dated December 31, 1985 (a)
10.7 International Marketing Agreement - Citizens
Insurance Company of America and Negocios Savoy,
S.A. (a)
10.8 Articles and Plan of Merger between Citizens
Insurance Company of America and First Centennial
Life Insurance Company (a)
10.9 Stock Purchase Agreement between Citizens Insurance
Company of America and Citizens, Inc. (c)
(11) Statement re: Computation of per share earnings N/A
(12) Statement re: Computation of ratios N/A
(13) Annual report to security holders, Form 10-Q or quarterly
report to security holders N/A
(14) Material foreign patents N/A
(15) Letter re: Unaudited interim financial statements N/A
(16) Letter re: Change in certifying accountant N/A
(18) Letter re: Change in accounting principles N/A
(19) Previously unfiled documents N/A
(20) Report furnished to security holders N/A
(21) Other documents or statements to security holders N/A
(22) Subsidiaries of the registrant Filed herewith Filed
herewith
(23) Published report regarding matters submitted to a vote of
security holders N/A
(24) Consents of expert and counsel N/A
(25) Power of Attorney See
signature
page
(26) Statement of eligibility of trustee N/A
(27) Financial Data Schedule N/A
(27.1) Invitations for competitive bids N/A
(28) Additional exhibits N/A
(29) Information from reports furnished to state insurance
regulatory authorities N/A
</TABLE>
_______________
(a) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--47531, filed on or about May 2, 1992.
(b) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by reference.
(c) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by reference.
(d) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by reference.
(e) Filed with or referenced in the Registrant's Current Report on Form 8-K
dated December 9, 1994 and incorporated herein by reference.
-39-
<PAGE> 40
(b) REPORTS ON FORM 8-K
One report on Form 8-K under Item 5 was filed by Citizens during the
fourth quarter of 1994 relating to the proposed acquisition of American
Liberty Financial Corporation and Insurance Investors and Holding Company,
Inc.
-40-
<PAGE> 41
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent auditors' report 42
Consolidated balance sheets at
December 31, 1994 and 1993 43 - 44
Consolidated statements of operations
- years ended December 31, 1994, 1993 and 1992 45 - 46
Consolidated statements of stockholders' equity
- years ended December 31, 1994, 1993 and 1992 47
Consolidated statements of cash flows
- years ended December 31, 1994, 1993 and 1992 48 - 49
Notes to consolidated financial statements 50 - 72
Schedules at December 31, 1994 and 1993:
Schedule III - Condensed Financial
Information of Registrant 73 - 75
Schedules for each of the years in the three-year
period ended December 31, 1994:
Schedule VI - Reinsurance 76
</TABLE>
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
-41-
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes"
and Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As discussed in Note 13 to the
consolidated financial statements, the consolidated financial statements of the
Company as of and for the year ended December 31, 1992 have been restated for
adoption of Statement 109.
/s/ KPMG PEAT MARWICK LLP
----------------------------------
KPMG Peat Marwick LLP
Dallas, Texas
March 3, 1995
-42-
<PAGE> 43
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1993
ASSETS 1994 (AS RESTATED)
------ ---- -------------
<S> <C> <C>
Investments (note 2):
Fixed maturities held to maturity,
at amortized cost (market $14,846,900
in 1994 and $2,547,281 in 1993) $ 18,415,026 $ 2,532,147
Fixed maturities available for sale,
(cost $61,049,170 in 1994 and
$51,065,197 in 1993) at market in 1994 and
lower of cost or market in 1993 56,573,764 50,724,270
Equity securities, at market (cost $23,329
in 1994 and $147,679 in 1993) 1,892 136,233
Mortgage loans on real estate (net of reserve
of $145,080 in 1994 and $241,801 in 1993) 2,623,531 3,121,457
Policy loans 15,220,005 14,005,485
Guaranteed student loans (net of reserve of
$10,000 in 1994 and $40,000 in 1993) 240,243 417,210
Other long-term investments 754,189 1,085,465
Short-term investments 0 14,988,729
------------ ------------
Total investments 93,828,650 87,010,996
Cash 4,259,887 3,765,331
Other receivables 1,592,607 132,476
Accrued investment income 1,569,945 1,058,859
Reinsurance recoverable 1,680,287 2,852,079
Deferred policy acquisition costs 34,537,464 28,613,008
Deferred Federal income tax 1,521,296 0
Cost of insurance acquired (note 3) 2,271,866 2,692,389
Excess of cost over net assets acquired 3,344,844 3,530,808
Property, plant and equipment 4,694,022 3,730,249
Other assets 496,736 719,265
------------ ------------
$149,797,604 $134,105,460
============ ============
</TABLE>
-43-
<PAGE> 44
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1993
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 (AS RESTATED)
------------------------------------ ---- -------------
<S> <C> <C>
Liabilities:
Future policy benefit reserves (notes 4 and 5):
Life insurance $ 97,579,380 $ 85,437,065
Annuities 3,408,745 3,626,905
Accident and health 766,710 780,114
Dividend accumulations 2,899,573 2,978,874
Premium deposits 1,648,697 1,528,093
Policy claims payable (notes 5 and 10) 2,149,631 3,514,972
Other policyholders' funds 1,611,908 1,507,167
------------- -------------
Total policy liabilities 110,064,644 99,373,190
Other liabilities 1,671,892 1,825,155
Commissions payable 916,886 918,133
Notes payable (note 6) 712,373 1,100,732
Deferred Federal income tax 0 390,826
Federal income tax payable 1,066,004 2,048,201
Amounts held on deposit 310,432 434,519
------------- -------------
Total liabilities 114,742,231 106,090,756
------------- -------------
Stockholders' equity (notes 7, 8, 9, and 11):
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 19,178,515 shares issued
in 1994 and 18,262,140 in 1993, including
shares in treasury of 2,198,175 in 1994
and 2,210,675 in 1993 21,457,303 15,985,344
Class B, no par value, 1,000,000 shares
authorized, 621,049 shares issued and
outstanding in 1994 and 1993 283,262 283,262
Unrealized holding loss (note 2) (2,970,597) (352,374)
Retained earnings 18,466,696 14,292,138
------------- -------------
37,236,664 30,208,370
Treasury stock, at cost (2,181,291) (2,193,666)
------------- -------------
Total stockholders' equity 35,055,373 28,014,704
------------- -------------
Commitments and contingencies (notes 5, 8,
10 and 11)
$ 149,797,604 $ 134,105,460
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-44-
<PAGE> 45
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
1994 (AS RESTATED) (AS RESTATED)
---- ------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums (notes 5 and 12):
Life insurance $ 43,526,111 $ 37,598,551 $ 28,885,391
Accident and health 259,250 284,510 316,395
Annuity and universal life
considerations 75,564 106,955 3,067
Net investment income (note 2) 5,295,784 4,771,079 3,929,495
------------- ------------- -------------
Total revenues 49,156,709 42,761,095 33,134,348
------------- ------------- -------------
Other income and expense:
Other income 94,364 80,794 40,038
Realized gains (losses) on
investments (note 2) (9,356) 2,120,837 1,500,749
Interest expense (29,719) (198,719) (108,889)
------------- ------------- -------------
Total revenues and other income
and expense 49,211,998 44,764,007 34,566,246
------------- ------------- -------------
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 11,910,751 10,160,523 8,590,693
Policyholders' dividends 2,381,581 2,418,456 1,813,081
Claims and surrenders (note 5) 16,635,259 14,166,018 11,165,717
Annuity expenses 373,575 699,455 184,963
------------- ------------- -------------
Total insurance benefits
paid or provided 31,301,166 27,444,452 21,754,454
------------- ------------- -------------
Commissions 12,382,372 12,011,822 9,860,304
Other underwriting, acquisition
and insurance expenses 5,079,538 4,331,669 3,686,320
Capitalization of deferred policy
acquisition costs (13,128,049) (13,472,064) (10,670,569)
Amortization of deferred policy
acquisition costs 7,203,593 6,455,401 4,412,007
Amortization of cost of insurance
acquired and excess of cost
over net assets acquired 606,487 512,619 313,476
------------- ------------- -------------
Total benefits and expenses 43,445,107 37,283,899 29,355,992
------------- ------------- -------------
(Continued)
</TABLE>
-45-
<PAGE> 46
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1993 1992
1994 (AS RESTATED) (AS RESTATED)
---- ------------- -------------
<S> <C> <C> <C>
Income before Federal income
taxes $5,766,891 $7,480,108 $5,210,254
Federal income tax expense 1,592,333 1,953,715 1,302,302
---------- ---------- ----------
Net income $4,174,558 $5,526,393 $3,907,952
========== ========== ==========
Net income per share
of common stock (note 8) $ .25 $ .34 $ .24
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-46-
<PAGE> 47
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED TOTAL
-------------------- HOLDING RETAINED TREASURY STOCKHOLDERS'
CLASS A CLASS B GAINS (LOSSES) EARNINGS STOCK EQUITY
---------- ------- -------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991 10,387,772 283,262 (57,042) 4,857,793 (2,271,620) 13,200,165
Net income (as restated) - - - 3,907,952 - 3,907,952
Unrealized investment gains - - 3,485 - - 3,485
Acquisition of assets of FCC (note 9) 5,275,452 - - - - 5,275,452
Sale of treasury stock 322,120 - - - 77,954 400,074
---------- ------- -------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1992 15,985,344 283,262 (53,557) 8,765,745 (2,193,666) 22,787,128
Net income (as restated) - - - 5,526,393 - 5,526,393
Unrealized investment losses - - (298,817) - - (298,817)
---------- ------- -------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1993 15,985,344 283,262 (352,374) 14,292,138 (2,193,666) 28,014,704
Cumulative effect of adoption of
Statement No. 115 at January 1,
1995, net of taxes - - 690,388 - - 690,388
Net income - - - 4,174,558 - 4,174,558
Unrealized investment losses, net - - (3,308,611) - - (3,308,611)
Sale of stock 5,384,334 - - - - 5,384,334
Sale of treasury stock 87,625 - - - 12,375 100,000
----------- -------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 $21,457,303 $283,262 ($2,970,597) $18,466,696 ($2,181,291) $35,055,373
=========== ======== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
-47-
<PAGE> 48
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1993 1992
1994 (AS RESTATED) (AS RESTATED)
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,174,558 $ 5,526,393 $ 3,907,952
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized gains on sale of investments 9,356 (2,120,837) (1,500,749)
Accrued investment income (511,086) (454,000) 444,127
Net deferred policy acquisition costs (5,924,456) (7,016,663) (6,258,562)
Amortization of cost of insurance
acquired and excess cost over
net assets acquired 606,487 656,008 313,476
Other receivables (1,460,131) 552,769 (80,875)
Future policy benefit reserves 11,910,751 10,160,523 8,591,248
Other policy liabilities (1,219,297) 1,366,012 671,801
Deferred Federal income tax (383,195) 275,416 411,835
Federal income tax (982,197) 892,354 0
Commissions payable and other
liabilities (154,510) 242,877 (388,488)
Amounts held on deposit (124,087) 182,840 110,753
Other, net 2,110,818 78,532 282,826
------------ ------------ -------------
Net cash provided by
operating activities 8,053,011 10,342,224 6,505,344
------------ ------------ -------------
Cash flows from investing activities:
Maturity of fixed maturities held to maturity 51,625 0 0
Sale of fixed maturities available for sale 13,152,225 83,532,049 105,150,335
Maturity of fixed maturities available for sale 963,151 7,474,997 12,017,189
Purchase of fixed maturities available for sale (40,486,808) (88,980,557) (116,871,545)
Sale of equity securities 174,761 0 758
Principal payments on mortgage loans 935,276 1,526,838 538,507
Mortgage loans funded (340,474) 0 (170,000)
Guaranteed student loans funded (335,440) (721,963) (956,303)
Guaranteed student loans sold 475,796 756,567 885,479
Principal payments on guaranteed student loans 0 0 16,022
Sale of other long-term investments 331,276 41,152 0
Cash and short-term investments
provided by merger 0 0 783,578
Increase in policy loans (net) (1,214,520) (1,937,838) (1,000,046)
Purchase of property, plant and equipment (1,237,652) (2,048,024) (1,646,222)
------------ ------------ -------------
Net cash used by investing activities (27,530,784) (356,779) (1,252,248)
------------ ------------ -------------
(Continued)
</TABLE>
-48-
<PAGE> 49
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1993 1992
1994 (AS RESTATED) (AS RESTATED)
---- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Notes payable 0 0 210,384
Payments on notes payable (388,359) (259,377) (405,532)
Sale of stock 5,371,959 0 393,132
------------ ------------ ------------
Net cash provided (used) by
financing activities 4,983,600 (259,377) 197,984
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (14,494,173) 9,726,068 5,451,080
------------ ------------ ------------
Cash and cash equivalents at
beginning of year 18,754,060 9,027,992 3,576,912
------------ ------------ ------------
Cash and cash equivalents
at end of year $ 4,259,887 $ 18,754,060 $ 9,027,992
============ ============ ============
</TABLE>
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 61,304 $ 88,184 $ 89,806
========== ========== ==========
Income taxes $2,957,724 $ 785,915 $1,610,000
========== ========== ==========
</TABLE>
Supplemental disclosures of noncash investing activities (see also Note 9):
The Company exchanged 1,000 shares of treasury stock for equipment valued at
$6,942 in 1992.
The Company foreclosed on certain mortgage loans on real estate during 1993 in
the amount of $216,217. Such amount, if any, is reported with other long-term
investments in the consolidated balance sheets if the property was owned at
December 31.
See accompanying notes to consolidated financial statements.
-49-
<PAGE> 50
CITIZENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993, AND 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), formerly Continental
Investors Life, Inc., incorporated in the state of Colorado on
November 8, 1977 and its wholly-owned subsidiaries, Citizens
Insurance Company of America (CICA), Computing Technology, Inc.
(CTI), formerly Continental Leasing Company, and Insurance
Investors, Inc. (III). Citizens and its subsidiaries are
collectively referred to as "the Company." All significant
intercompany accounts and transactions have been eliminated.
The Company's financial statements have been prepared in
conformity with generally accepted accounting principles using
accounting policies predominantly followed by the insurance
industry. The differences between the Company's statutory
financial statements, prepared for regulatory authorities, and
these consolidated financial statements prepared in accordance
with generally accepted accounting principles are described in
note 7.
(b) INVESTMENTS, OTHER THAN AFFILIATES
Investments are shown on the following basis:
1. Fixed maturities, primarily consisting of bonds which the
Company has the ability and intent to hold to maturity are
considered held for investment and carried at amortized
cost. Fixed maturities which may be sold prior to maturity
to support the Company's investment strategies are
considered held as available for sale and carried at the
lower of the aggregate amortized cost or market value as of
the balance sheet date.
2. Equity securities include non-redeemable preferred stock
and are reported at fair market value at December 31, 1994.
At December 31, 1993, such securities included investments
in common stock and non redeemable preferred stock and were
reported at fair market value..
3. Mortgage loans on real estate, policy loans, and guaranteed
student loans are reported at unpaid principal balances
less an allowance for uncollectible amounts, if any.
4. Other long-term investments consist primarily of real
estate which is reported at cost not to exceed fair market
value net of accumulated depreciation.
-50-
<PAGE> 51
5. Short-term investments consist of Treasury Bills with a
maturity of ninety days or less and are carried at cost,
which approximates market.
Unrealized appreciation (depreciation) of equity securities and
fixed maturities held for sale is shown as a separate component of
stockholders' equity, net of tax in 1994, and is not included in
the determination of net income.
Costs of investments sold are determined using the specific
identification method. Net realized gains and losses are included
in other income and expenses as incurred.
The Company has assets with a carrying value of $4,021,000 at
December 31, 1994 on deposit with various state regulatory
authorities to fulfill statutory requirements.
(c) PREMIUM REVENUE AND RELATED EXPENSES
Premiums on life and accident and health policies are reported as
earned when due or, for short duration contracts, over the
contract periods. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the
estimated life of the contracts. This matching is accomplished by
means of provisions for future benefits and the capitalization and
amortization of deferred policy acquisition costs.
Annuities are accounted for in a manner consistent with accounting
for interest bearing financial instruments. Premium receipts are
not reported as revenues but rather as deposits to annuity
contracts.
(d) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
Acquisition costs, consisting of commissions and policy issuance
and underwriting expenses which relate to and vary with, the
production of new business are deferred. These deferred policy
acquisition costs are amortized primarily over the estimated
premium paying period of the related policies in proportion to the
ratio of the annual premium recognized to the total premium
revenue anticipated using the same assumptions as were used in
computing liabilities for future policy benefits
The Company uses the factor method to determine the amount of
costs to be capitalized and the ending asset balance. During 1994,
the factors used to determine costs capitalized were modified to
more accurately reflect the costs attributable to each issue year.
The capitalized costs and amortized costs for each year presented
have been reclassified to reflect this factor revision. This
reclassification did not change the ending asset balance for any
year nor did it change the net impact on earnings in any year. The
method followed in computing deferred policy acquisition costs
limits the amount of such deferred cost to their estimated
realizable value.
The value of insurance acquired in the Company's various
acquisitions, which is included in cost of insurance acquired in
the accompanying consolidated financial statements, was determined
based on the present value of future profits discounted at
-51-
<PAGE> 52
a risk rate of return. The cost of insurance acquired is being
amortized over 30 years in proportion to the profit over the lives
of the related policies.
(e) POLICY LIABILITIES AND ACCRUALS
Future policy benefit reserves have been computed by the net level
premium method with assumptions as to investment yields, dividends
on participating business, mortality and withdrawals based upon
the Company's and industry experience, which provide for possible
unfavorable deviation (see note 4).
Annuity benefits are carried at accumulated contract values based
on premiums paid by participants, annuity rates of return ranging
from 2.5% to 7% (primarily at 5.5%) and annuity withdrawals.
Premium deposits accrue interest at rates ranging from 3.5% to
8.25% per annum. Premiums are credited to income when due and
accrued interest is credited annually to the deposit account.
Policy and contract claims are based on case-basis estimates for
reported claims, and on estimates, based on experience, for
incurred but unreported claims and loss expenses.
(f) EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over the fair value of net assets acquired in
the 1989 merger with Equities International Life Insurance Co. and
the 1992 acquisition of the net assets of First Centennial
Corporation (FCC) are amortized on a straight-line basis over 20
years.
(g) PARTICIPATING POLICIES
At December 31, 1994, participating business approximated 87% of
life insurance in force and premium income. At December 31, 1993,
participating business approximated 86% of life insurance in force
and premium income. The amount of dividends to be paid is
determined annually by the Board of Directors.
(h) EARNINGS PER SHARE
Earnings per share have been computed using the weighted average
number of shares of common stock outstanding during each period.
The effects of outstanding stock options and warrants have not
been included in the calculations because they are either not
material or are antidilutive. The weighted average shares
outstanding for the years ended December 31, 1994, 1993 and 1992
were 16,882,164, 16,672,514, and 16,205,026, respectively.
(i) INCOME TAXES
-52-
<PAGE> 53
In February 1992, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Statement 109 requires a
change from the deferred method of accounting for income taxes of
APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement
109, deferred tax asset and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
The Company adopted Statement 109 in 1993 and has applied the
provisions of Statement 109 retroactively to January 1, 1991. The
cumulative effect of the change in the method of accounting for
income taxes as of January 1, 1991 is reported separately in the
1991 consolidated statement of earnings (see notes 7 and 12).
(j) ACCOUNTING PRONOUNCEMENTS
In December 1992, the FASB issued Statement 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" (Statement 113). Statement 113 eliminated the net
reporting of reinsurance amounts in the balance sheet previously
required by Statement 60 "Accounting by Insurance Enterprises."
Statement 113 also provides accounting guidance for ceding
enterprises as well as disclosure requirements and guidance on
assessing transfer of risk in reinsurance contracts. Furthermore,
it precludes immediate recognition of gains related to reinsurance
contracts unless the ceding enterprises liability to its
policyholders is extinguished.
The Company adopted Statement 113 in the first quarter of 1993 and
has restated prior year financial statements for the gross
reporting provisions. There was no impact on the consolidated
financial statements due to implementation of the risk transfer
provisions.
In May 1993, the FASB issued Statement 114 "Accounting by
Creditors for Impairment of a Loan" ("Statement 114"). Statement
114 requires impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective
interest rate or at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent.
Statement 114 is effective for years beginning after December 15,
1994. The Company does not expect Statement 114 to have a material
impact on its financial statements.
In May 1993, the FASB issued Statement 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("Statement 115").
Statement 115 requires the classification of debt and equity
securities as held to maturity, trading or available for sale
based on established criteria. Held to maturity debt securities
will be carried at amortized cost while trading and available for
sale securities will be carried at fair
-53-
<PAGE> 54
value. Unrealized holding gains and losses for trading securities
will be included in earnings. Unrealized holding gains or losses
for available for sale securities will be included as a component
of equity on a net of tax basis. The Company adopted Statement 115
on January 1, 1994. The impact on the consolidated stockholders'
equity due to the implementation was $690,388 relating to the
unrealized gains on the available for sale portfolio, net of tax
expense.
(k) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed three months at the date of acquisition.
These securities are reflected as short-term investments in the
accompanying consolidated financial statements.
(l) RECLASSIFICATIONS
Certain reclassifications have been made to the 1992 and 1993
amounts.
(m) DEPRECIATION
Depreciation is calculated on a straight line basis using
estimated useful lives ranging from 3 to 10 years. Leasehold
improvements are depreciated over the estimated life of 30 years.
(2) INVESTMENTS
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of
a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings
and are derived using the specific identification method for
determining the cost of securities sold.
The amortized cost and estimated market values of investments in
debt securities as of December 31, 1994 and 1993, respectively,
are as follows:
-54-
<PAGE> 55
<TABLE>
<CAPTION>
1994
------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturities held for investment:
US Treasury securities and
obligations of US government
corporations and agencies $18,192,415 $ 0 $3,552,415 $ 14,640,000
Public Utilities 111,265 0 9,665 101,600
Corporate securities 111,346 0 6,046 105,300
----------- ----------- ---------- --------------
Total $18,415,026 0 $3,568,126 $ 14,846,900
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies $56,214,724 $ 67,569 $4,489,231 $ 51,793,062
US Government guaranteed
mortgage backed securities 4,834,446 229,312 283,056 4,780,702
----------- ----------- ---------- --------------
Total $ $ 296,881 $ $
=========== =========== ========== ==============
61,049,170 4,772,287 56,573,764
=========== ========== ==============
</TABLE>
<TABLE>
<CAPTION>
1993
(AS RESTATED)
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturities held for investment:
US Government guaranteed
mortgage backed securities $ 2,532,147 $ 32,807 $ 17,672 $ 2,547,282
-------------- ----------- ------------- --------------
Subtotal 2,532,147 32,807 17,672 2,547,282
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies $ 50,792,810 $ 932,366 $ 1,273,606 $ 50,451,570
Public Utilities 160,990 4,550 1,440 164,100
Corporate securities 111,397 162 2,959 108,600
-------------- ----------- ------------- --------------
Subtotal 51,065,197 937,078 1,278,005 50,724,270
-------------- ----------- ------------- --------------
Total $ 53,597,344 $ 969,885 $ 1,295,677 $ 53,271,552
============== =========== ============= ==============
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1994, by contractual maturity are shown below. Expected
maturities will differ from contractual
-55-
<PAGE> 56
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
FIXED MATURITIES HELD FOR INVESTMENT
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
---- ------------
<S> <C> <C>
Due in one year or less - -
Due after one year through five years 319 -
Due after five years through ten years 10,006 7,600
Due after ten years 18,404,701 14,839,300
------------- -------------
18,415,026 14,846,900
US Government guaranteed
mortgage-backed securities - -
Totals $ 18,415,026 $ 14,846,900
============= =============
</TABLE>
FIXED MATURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
---- ------------
<S> <C> <C>
Due in one year or less $ 5,622,413 $ 5,609,362
Due after one year through five years 23,938,206 22,872,000
Due after five years through ten years 7,169,234 6,397,700
Due after ten years 19,484,871 16,914,000
------------- -------------
56,214,724 51,793,062
US Government guaranteed
mortgage-backed securities 4,834,446 4,780,702
------------- -------------
Totals $ 61,049,170 $ 56,573,764
============= =============
</TABLE>
The Company had no investments in any one entity which exceeded 0.5% of
stockholders' equity at December 31, 1994.
The Company's investment in mortgage loans is concentrated 53.6% in
Colorado, 33.9% in Texas and 12.5% in other states as of December 31,
1994.
Major categories of investment income are summarized as follows:
-56-
<PAGE> 57
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Investment income on:
Fixed maturities $ 4,045,481 $ 3,635,469 $ 2,699,135
Equity securities 0 2,099 6,423
Mortgage loans on real estate 242,331 367,342 319,515
Policy loans 1,001,939 943,373 821,759
Short-term investments 123,119 81,712 302,121
Other 795,352 413,552 353,913
--------------- --------------- -------------
6,208,222 5,443,547 4,502,866
Investment expenses 912,438 672,468 573,371
--------------- --------------- -------------
Net investment income $ 5,295,784 $ 4,771,079 $ 3,929,495
=============== =============== =============
</TABLE>
Equity securities of $1,892 and $136,233, mortgage loans of $30,665 and
$-0-, and other long-term assets of $448,763 and $415,384 held by the
Company as of December 31, 1994 and 1993, respectively, did not produce
income during the preceding 12 months.
Proceeds from available for sale securities in 1994, 1993 and 1992 were
$13,152,225, $83,532,049, $105,150,335, respectively. Gross realized
gains and losses on such sales were $645,912 and $420,119, respectively,
for the year ended December 31, 1994, and $2,737,133 and $250,471,
respectively, for the year ended December 31, 1993 and $1,586,770 and
$2,457,430, respectively, for the year ended December 31, 1992. Realized
and unrealized gains (losses) on investments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities $ 281,052 $ 2,443,730 $ 1,446,458
Equity securities (67,309) 0 54,768
Other (223,099) (322,893) (477)
------------- ------------- -------------
Net realized gains (losses) on
investments (9,356) 2,120,837 1,500,749
Changes in unrealized gains (losses)
on investments, net of tax benefits
in 1994 (2,618,223) (298,817) 3,485
------------- ------------- -------------
Net gains on investments $ (2,627,579) $ 1,822,020 $ 1,504,234
============= ============= =============
Changes in unrealized gains (losses)
on fixed maturities during the year,
net of tax benefits in 1994 $ (2,604,289) ($ 718,452) $ (2,434,969)
============= ============= =============
</TABLE>
-57-
<PAGE> 58
(3) COST OF INSURANCE ACQUIRED
Cost of insurance acquired is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 2,692,389 $ 3,065,986 $ 472,695
Purchase of FCC 0 0 2,797,723
Interest 198,121 270,334 119,595
Amortization (618,644) (643,931) (324,027)
------------- ------------- -------------
Balance at end of period $ 2,271,866 $ 2,692,389 $ 3,065,986
============= ============= =============
</TABLE>
Accretion of interest on cost of insurance acquired is calculated based
on the rates of interest used in setting the related policy reserves.
These rates range from 6 -1/2% to 8 -1/2%.
Estimated amortization in each of the next five years is as follows.
Actual future amortization will differ from these estimates due to
variances from estimated future withdrawal assumptions.
1995 $126,406
1996 127,387
1997 125,729
1998 116,070
1999 93,958
Thereafter 1,682,316
(4) FUTURE POLICY BENEFIT RESERVES
In applying purchase accounting to the future policy benefit reserves
acquired through mergers prior to FCC, the Company calculated future
policy benefits using reasonable assumptions as of the date of each
merger. Future policy benefits calculated under these assumptions
approximate 13.4% of such reserves reflected in the December 31, 1994
consolidated balance sheet.
In applying purchase accounting to the FCC policy benefit reserves
acquired in 1992, the Company determined that reserves as calculated
under statutory accounting practices approximated the purchase accounting
reserves. These reserves approximate 8.4% of total future policy benefit
reserves in the consolidated balance sheet as of December 31, 1994. The
remaining future policy benefits are calculated using reasonable
assumptions at date of issue.
The significant assumptions used to determine the future policy benefit
reserves are set forth below:
-58-
<PAGE> 59
<TABLE>
<CAPTION>
1992
PRIOR MERGERS MERGER OTHER
------------- ------ -----
<S> <C> <C> <C>
Valuation interest rate 7.5% level 6.5% 4-9%
Mortality 1965-70 Modified 1975-80 ALB 1955-60 and 1965-70
Select & Ultimate Select & Ultimate Modified Select &
Ultimate
Withdrawals Company experience --- Company experience,
100% and 150% of
Linton A
</TABLE>
(5) REINSURANCE
The Company cedes all risks generally in excess of $75,000 per insured to
other companies through yearly renewable term insurance or coinsurance
contracts. Risks are reinsured with other companies to permit the
recovery of a portion of any direct losses. The Company remains
contingently liable to the extent that the reinsuring companies cannot
meet their obligations under these reinsurance treaties.
At December 31, 1994 and 1993, life insurance in force aggregating
approximately $384,794,000 and $462,775,000, respectively, was assumed
and $285,104,000 and $303,727,000, respectively, was ceded to other
insurance companies out of a total in force of approximately
$2,144,709,000 and $2,030,615,000, respectively. Premiums assumed were
approximately $541,000, $1,106,000, and $467,000 in the years ended
December 31, 1994, 1993 and 1992, respectively. Premiums ceded were
approximately $2,310,000, $1,939,000, and $1,487,000 in the years ended
December 31, 1994, 1993 and 1992, respectively. Claims and surrenders
assumed were approximately $530,000, $1,083,000 and $455,000 and claims
and surrenders ceded were approximately $2,080,000, $994,000 and $468,000
in the years ended December 31, 1994, 1993 and 1992, respectively.
Amounts paid for reinsurance contracts are recorded as reinsurance
receivables. The cost of reinsurance related to long duration contracts
is accounted for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
-59-
<PAGE> 60
(6) NOTES PAYABLE
Notes payable as of December 31, 1994 and 1993 consist of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Note payable to bank, 7%, dated June 20, 1988, payable in nine annual
installments of $66,667 beginning June 30, 1989, with remainder due June
30, 1998. $ 600,000 $ 666,667
Note payable to bank, prime minus 2%, (4.0% at December 31, 1993) dated July 28,
1993, payable in four quarterly installments of $27,530 beginning October
28, 1993, with remainder due January 28, 1995. -- 137,640
Note payable to bank, prime (8.75% at December 31, 1994) dated June 30, 1992,
payable in monthly installments of $3,506 plus interest beginning July 30,
1992. 105,191 149,805
Other obligations 7,182 146,620
------------- -------------
$ 712,373 $ 1,100,732
============= =============
</TABLE>
The first note payable to bank is secured by 419,666 shares of Citizens,
Inc., Class A common stock owned by Harold E. Riley, proceeds from two
life insurance policies and proceeds from the surplus debenture between
CICA and Citizens, Inc.
The second note payable to bank, which was paid off in December, 1994,
was secured by the same 419,666 shares of Citizens, Inc. Class A common
stock as the first note.
The third note payable to bank is secured by computer equipment and a
partial assignment of the proceeds of an information systems and
management agreement.
The other obligations consist of notes principally secured by real
estate, due on varying dates from 1994 to 1995. The notes generally bear
interest ranging from eight percent to nine percent.
(7) STOCKHOLDERS' EQUITY AND RESTRICTIONS
Approximately $9,500,000 of consolidated stockholders' equity at December
31, 1994 represented net assets of the Company's insurance subsidiary
that are restricted as to their distribution to the Company. In addition,
the Company's insurance subsidiary is required to maintain a minimum
total statutory capital and surplus of $2,037,000. The net assets of the
Company's insurance subsidiary available for transfer to the parent
company are limited to the amounts that the insurance subsidiary's net
assets, as determined in accordance with statutory accounting practices,
exceed minimum statutory capital requirements; however, payments of such
amounts as dividends may be subject to approval by regulatory
authorities.
-60-
<PAGE> 61
In order to meet insurance regulatory financial reporting requirements
for various states, net income and stockholders' equity, which reflect
the effects of the mergers discussed in note 9 as reported by the
Company's insurance subsidiary in accordance with statutory accounting
practices, for the years ended December 31, 1994, 1993 and 1992 are shown
in the accompanying consolidated financial statements as follows:
<TABLE>
<CAPTION>
NET INCOME FOR YEAR STOCKHOLDERS' EQUITY
ENDED DECEMBER 31, AT DECEMBER 31,
-------------------------------------------- -------------------------
1993 1992 1993
1994 (AS RESTATED) (AS RESTATED) 1994 (AS RESTATED)
---- ------------- ------------- ---- -------------
<S> <C> <C> <C> <C> <C>
Statutory ($ 1,887,050) ($ 275,087) ($ 586,882) $ 9,560,117 $ 6,241,177
Adjustments:
Future policy benefit reserves (912,159) (86,964) (314,524) (3,649,054) (2,736,895)
Due and deferred premiums (436,001) (881,904) (649,058) (5,162,785) (4,719,904)
Deferred policy acquisition costs 5,924,456 7,016,663 6,258,562 34,537,464 28,613,008
Cost of insurance acquired (420,523) (373,597) (204,431) 2,271,866 2,692,389
Excess of cost over net assets
acquired (185,964) (139,022) (109,045) 3,344,844 2,347,261
Participating dividend and
endowment provision (68,935) (154,508) (548,537) (1,199,138) (1,188,858)
Investment in Citizens, Inc. 0 0 0 (8,562,201) (8,008,040)
Asset valuation reserve 0 0 0 2,498,488 2,346,410
Interest maintenance reserve 239,172 1,337,141 822,178 2,012,099 2,159,319
Surplus debentures 0 0 0 (564,566) (666,667)
Federal income tax expense 2,577,643 (907,066) (692,971) 455,292 (1,903,535)
Other, net (835,906) 68,781 (242,664) (1,365,124) 2,421,293
------------ ------------ ------------
Insurance subsidiary 3,994,733 5,466,875 3,732,628 34,177,302 27,596,958
Non-insurance entities 179,825 59,518 175,324 878,071 417,746
------------ ------------ ------------
On the basis of generally accepted
accounting principles $ 4,174,558 $ 5,526,393 $ 3,907,952 $ 35,055,373 $ 28,014,704
============ ============ ============ ============ ============
</TABLE>
(8) STOCK OPTIONS
During 1989, the Company entered into an agreement granting Stephen B.
Booke, a financial public relations consultant providing services to the
Company, the right and option to purchase 100,000 shares of Class A no
par common stock of the Company at $2.50 per share, the fair market value
of the common stock at the date of the agreement. Such option is for
authorized but unissued shares at the date of the agreement. The option
which would have expired on February 8, 1994 was extended for an
additional 30 months during 1993. As a result, the Company recognized
compensation expense of $425,000 in 1993 which represents the amount the
market value at the date of extension exceeded the option price. The 10-K
originally filed by the Company did not reflect this expense, therefore,
the 1993 financial statements have been restated to reflect the
compensation expense described above. This restatement resulted net of
tax in a decrease in net income and net income per share of $280,500 and
$.01 per share, respectively. Transfer of this option is limited by the
agreement. As of December 31, 1994, no options had been exercised.
-61-
<PAGE> 62
(9) ACQUISITION AND PROPOSED ACQUISITION AND MERGER
On February 27, 1992, Citizens entered into a definitive Plan and
Agreement of Exchange (the Plan) with First Centennial Corporation (FCC),
a Colorado life insurance holding company, to acquire the net assets of
FCC in exchange for Citizens Class A common stock. The exchange ratios
for the classes of FCC stock were determined based upon the ratio of
FCC's adjusted book value per share to Citizens' adjusted book value per
share. After approval by the respective Boards of Directors of FCC and
Citizens, the shareholders of FCC and the Colorado Division of Insurance,
the acquisition was consummated on July 31, 1992, with the issuance of
754,950 Citizens Class A shares. In accordance with the provisions of the
Plan, the effective date of the acquisition was June 30, 1992. The
acquisition was accounted for as a purchase on Citizens' books.
Assets received and liabilities assumed were as follows on June 30, 1992:
<TABLE>
<S> <C>
Fair value of assets acquired $ 19,737,232
Liabilities assumed 17,743,234
------------
Fair value of net assets acquired $ 1,993,998
============
</TABLE>
The excess of cost over net assets acquired in the amount of $3,281,454
has been recorded as of June 30, 1992. The cost of this acquisition is
established as the fair market value of the Class A stock issued,
$5,275,452.
The pro forma unaudited results of operations for the years ended
December 31, 1992 and 1991, assuming the purchase of FCC had been
consummated as of the beginning of fiscal 1991, are presented below.
Adjustments have been made for amortization of amounts assigned to the
fair value of historical assets. It is assumed in the pro-forma earnings
per share calculations that the shares issued in connection with the FCC
acquisition were outstanding from the beginning of the period presented.
(Stated in thousands other than per share amounts.)
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Revenue $ 35,074 $ 31,339
========== ==========
Net income $ 3,494 $ 4,088
========== ==========
Net income per share $ .22 $ .25
========== ==========
</TABLE>
On December 9, 1994, Citizens announced that it had signed
definitive written agreements for the acquisition of (i) American
Liberty Financial Corporation, a Baton Rouge, Louisiana based life
insurance holding company and (ii) Insurance Investors & Holding
Co., a Peoria, Illinois based life insurance holding company.
The American Liberty agreement provides that following the
acquisition by Citizens, American Liberty shareholders will receive
1.10 shares of Citizens' Class A Common Stock for each share of
American Liberty Common Stock owned and 2.926 shares of Citizens'
Class A Common Stock for each one share of American Liberty
Preferred Stock owned. Citizens expects to issue approximately 2.3
million Class A shares in connection with the transaction, which
will be accounted for as a purchase. The
-62-
<PAGE> 63
companies will continue to operate in their respective locations
under a combined management team with consolidation of computer
data processing on the Citizens' system. The agreement is subject
to approval by American Liberty's shareholders and regulatory
authorities.
The Insurance Investors agreement provides that following the
acquisition by Citizens, Investors' shareholders will receive one
share of Citizens' Class A Common Stock for each eight shares of
Investors Common Stock owned. Additionally, Citizens will acquire
all shares of Central Investors Life Insurance Company, a
subsidiary of Insurance Investors & Holding, not wholly-owned by
Insurance Investors, based upon an exchange ratio of one share of
Citizens' Class A common stock for each four shares of Central
Investors owned. The transaction will involve issuance of
approximately 170,000 of Citizens' Class A shares and will also be
accounted for as a purchase. The agreement is subject to approval
by Investors' shareholders. The Illinois Department of Insurance
approved the transaction on March 10, 1995.
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.
-63-
<PAGE> 64
PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
------------------------------------------------------
(AMOUNTS IN THOUSANDS)
PRO-FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PURCHASE
CITIZENS INC HISTORICAL HISTORICAL ADJUSTMENTS
ASSETS AND ALFC AND INSURANCE AND PRO-FORMA
SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Long term Investments $ 93,829 14,532 2,116 (1,328) (a) 109,149
Short term Investments 0 76 0 76
Total Investments 93,829 15,296 2,173 (1,328) 109,913
Cash 4,259 682 207 5,148
Other receivables 1,593 487 0 2,080
Accrued investment
income 1,570 307 27 1,904
Deferred policy
acquisition costs 34,537 6,950 51 (6,493) (b) 35,045
Cost of insurance
acquired 2,272 0 0 6,106 (c) 8,378
Other intangible assets 1,869 (d) 1,869
- -----------------------
Excess of cost over net
assets acquired 3,345 0 0 8,336 (e) 11,681
Deferred taxes 1,521 1,831 0 (858) (g) 2,494
Other assets 6,872 763 1 7,636
Total Assets 149,798 26,316 2,402 7,632 186,148
</TABLE>
-64-
<PAGE> 65
PRO-FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PURCHASE
LIABILITIES AND CITIZENS INC HISTORICAL HISTORICAL ADJUSTMENTS
STOCKHOLDERS' AND ALFC AND INSURANCE AND PRO-FORMA
EQUITY SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Future policy benefit
reserves 101,755 14,185 785 692 (f) 117,417
Other policyholder
liabilities 8,310 1,754 293 10,357
Other liabilities 3,965 374 30 4,369
Notes payable 712 0 268 980
Deferred tax liability 0 1,870 0 (1,870) (h) 0
Minority interest 0 15 93 (111) (h) (3)
------- ------ ----- ------ -------
Total liabilities 114,742 18,198 1,469 (1,289) 133,120
Class A common stock 21,457 262 819 17,423 (h) 39,961
Class B common stock 283 0 47 (47) (h) 283
Preferred stock 0 262 0 (262) (h) 0
Additional Paid-in
capital 0 6,019 576 (6,595) (h) 0
Unrealized loss on
investments (2,970) 0 (22) 19 (h) (2,973)
Retained earnings 18,467 1,575 (478) (1,626) (h) 17,938
------- ------ ----- ------ -------
37,237 8,118 942 8,912 55,209
Treasury stock (2,181) 0 (9) 9 (2,181)
------- ------ ----- ------ -------
Total stockholders'
equity 35,056 8,118 933 8,921 53,028
------- ------ ----- ------ -------
Total liabilities and
stockholders' equity 149,798 26,316 2,402 7,632 186,148
</TABLE>
-65-
<PAGE> 66
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PURCHASE
CITIZENS INC HISTORICAL HISTORICAL ADJUSTMENTS
AND ALFC AND INSURANCE AND PRO-FORMA
SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums $43,861 7,698 53 $51,612
Net investment income 5,296 1,026 108 6,430
Other 55 189 0 244
------- ----- --- -------
Total revenues 49,212 8,913 161 58,286
Benefits and Expenses
Policy benefits 31,301 4,975 93 36,369
Commissions 12,382 513 0 12,895
Capitalization of DAC (13,128) (1,166) 0 658 (b) (13,636)
Amortization of DAC 7,204 1,453 4 (1,385) (b) 7,276
Amortization of cost
of insurance acquired 421 0 0 611 (c) 1,032
Amortization of other
intangibles 207 (d) 207
Amortization of excess
of cost over net assets
acquired 186 0 0 438 (e) 624
Other expenses 5,079 3,688 192 8,959
------- ----- --- -------
Total benefits and
expenses 43,445 9,463 289 529 53,726
------- ----- --- -------
Income before taxes 5,767 (550) (128) (529) $4,560
Net income per share $0.25
(i)
</TABLE>
-66-
<PAGE> 67
EXPLANATION OF PRO-FORMA ADJUSTMENTS:
(a) Adjustment necessary to record acquired fixed maturities at
market value.
(b) Deferred policy acquisition costs are reflected in the
accompanying pro-forma financial statements as follows:
<TABLE>
<S> <C>
Historical Citizens $34,537
Reversed Historical ALFC and II 7,001
Capitalization of post-purchase DAC 580
Amortization of post-purchase DAC (72)
Net DAC $35,045
</TABLE>
(c) 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
ALFC's and II's historical future policy benefit reserves and the
estimated gross premium reserve at March 31, 1995. 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 insurance acquired is being amortized in proportion to the
profit over the lives of the respective policies.
Cost of insurance acquired is presented in the accompanying pro-forma
financial statements as follows:
<TABLE>
<S> <C>
Historical Citizens $2,272
ALFC and II cost of insurance capitalized 6,717
Interest accrued @ 7% 470
Amortization of ALFC and II cost of insurance (1,081)
Pro-forma cost of insurance
</TABLE>
-67-
<PAGE> 68
<TABLE>
<S> <C>
acquired $8,378
</TABLE>
(d) Allocation of purchase price to identifiable intangible
assets, net of amortization of $207,000. Identifiable
intangible assets include state licenses and agency force and
are being amortized over 10 years.
(e) Excess of cost over net assets acquired was calculated as
follows: (in thousands)
<TABLE>
<CAPTION>
ALFC II TOTAL
<S> <C> <C> <C>
Acquisition of common stock $17,575 929 18,504
Estimated fair value of net
assets acquired (8,790) (940) (9,730)
Excess of cost (purchase
price) over net assets acquired $ 8,785 (11) 8,774
</TABLE>
The excess of cost over net assets acquired is being amortized over a
20-year period and is shown on the accompanying pro forma financial
statements net of accumulated amortization of $438,000.
(f) Revaluation of policy benefit reserves to reflect Company
reserve assumption with regard to interest rates, lapse rates
and surrenders.
(g) Establish deferred taxes for basis differences between book
and tax value of assets and liabilities at December 31, 1994.
(h) 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) Calculated using estimated common shares outstanding of
19,433,080.
(10) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. Contingent liabilities that might arise from litigation are not
considered material in relation to the financial position of the Company.
Reserves for claims payable are based on the expected claim amount to be
paid after a case by case review of the facts and circumstances relating
to each claim. A contingency exists with regard to these reserves until
such time as the claims are adjudicated and paid.
On April 1, 1991, the Company acquired a piece of property in
Pflugerville, Texas with confirmed gas and liquid phase hydrocarbon
contamination. The contamination was reported to the Texas Natural
Resource Conservation Commission ("TNRCC") on April 17, 1990. Remediation
began on the property on April 18, 1990 and was concluded in April, 1994.
Through December 31, 1994, approximately $750,000 was incurred for
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<PAGE> 69
remediation. Under the provision of Texas State law, the TNRCC will
reimburse the Company up to $1 million per release of contaminants on the
property for remediation. Currently, three releases have been found on
the property. The Company contracted with a third party to perform the
remediation. The contract with the third party provides that in the event
costs are not reimbursed by TNRCC, the Company will not be required to
remit payment for that amount to the contractor.
The Company has not recorded an accrual related to this liability in its
December 31, 1994 and 1993 financial statements as it believes it
probable that the full cost of remediation will be reimbursed by the
TNRCC. Any liability arising from damage to third party property is not
covered by TNRCC; however no such liability is pending or threatened at
December 31, 1994.
(11) INTERNATIONAL SALES
A significant portion of the Company's business is derived through sales
in Latin America. Approximately 77%, 87%, 83% of premiums recorded in the
1994, 1993, and 1992 consolidated statements of operations, respectively,
represent policies sold to residents of Central and South America. Sales
in Argentina and Columbia represented approximately 49% and 23% of
reported premiums in 1994, 43% and 23% in 1993, and 38% and 24% in 1992,
respectively. The Company has no assets, offices or employees outside of
the United States of America (U.S.) and requires that all transactions be
in U.S. dollars paid in the U.S.
The Company contracted with Negocios Savoy, S.A. ("Savoy"), a Panamanian
Corporation, as the marketing manager for its international marketing
operations prior to September, 1993. On September 1, 1993, the Company
and Savoy mutually agreed to terminate the contract. Several
International managers previously under contract with the Company assumed
the role previously managed by Savoy. The international manager contract
defines the commissions structure and other requirements of the
relationship, including the responsibility of an international manager
for all of its expenses and the subagents' debit balances.
-69-
<PAGE> 70
(12) INCOME TAXES
As discussed in note 1, the Company adopted Statement 109 in 1993 and has
applied the provisions of Statement 109 retroactively in January 1, 1991
The financial statements for the year ended December 31, 1992 have been
restated to comply with the provisions of Statement 109. The impact of
applying Statement 109 resulted in a decrease of $93,359 in net income
and a decrease of $0.01 in earnings per share for the year ended December
31, 1992.
A reconciliation of Federal income tax expense computed by applying the
Federal income tax rate of 34% to income before Federal income tax
expense for the years ended December 31, 1994, 1993 and 1992 follows:
<TABLE>
<CAPTION>
1993 1992
1994 (AS RESTATED) (AS RESTATED)
---- ------------- -------------
<S> <C> <C> <C>
Computed normal tax expense $ 1,960,743 $ 2,543,237 $ 1,771,486
Small life insurance company deduction (437,489) (446,313) (577,856)
Decrease in beginning of the year
balance of the valuation allowance
for deferred tax assets 0 (286,422) 0
Amortization of excess of costs over
net assets acquired 63,228 47,267 40,641
Other 5,850 95,946 68,031
------------- ------------- -------------
Federal income tax expense $ 1,592,332 $ 1,953,715 $ 1,302,302
============= ============= =============
</TABLE>
Income tax expense for the years ended December 31, 1994, 1993 and 1992
consists of:
<TABLE>
<CAPTION>
1993 1992
1994 (AS RESTATED) (AS RESTATED)
---- ------------- -------------
<S> <C> <C> <C>
Current $ 1,975,527 $ 1,678,269 $ 566,843
Deferred (383,195) 275,446 735,459
------------- ------------- -------------
$ 1,592,332 $ 1,953,715 $ 1,302,302
============= ============= =============
</TABLE>
For the year ended December 31, 1993, a valuation allowance of $286,428
is included as a component of deferred income tax expense.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1993 are presented below.
-70-
<PAGE> 71
<TABLE>
<CAPTION>
1993
1994 (AS RESTATED)
---- -------------
<S> <C> <C>
Deferred tax assets:
Future policy benefit reserves $ 9,930,982 $ 7,950,367
Net operating loss carryforwards 89,249 230,019
Investments, available for sale 1,528,927 0
Other 418,240 471,988
------------- -------------
Total gross deferred tax assets 11,967,398 8,652,374
Less valuation allowance 0 0
------------- -------------
Net deferred tax assets 11,967,398 8,652,374
------------- -------------
Deferred tax liabilities:
Deferred policy acquisition costs 9,392,481 7,941,414
Cost of insurance acquired 772,434 915,412
Other 281,187 186,374
------------- -------------
Total gross deferred tax liabilities 10,446,102 9,043,200
------------- -------------
Net deferred tax asset (liability) $ 1,521,297 $ (390,826)
============= =============
</TABLE>
The Company and its subsidiaries have net operating losses at December
31, 1994 available to offset future taxable income of approximately
$678,000 for Federal income tax and $400,000 for Federal alternative
minimum tax purposes which expire through 2008. The net operating loss
carryforward is subject to limitations under Section 382 of the Internal
Revenue Code. As realization of the deferred tax asset is more likely
than not, no valuation allowance is considered necessary as of December
31, 1994.
At December 31, 1994, the Company had accumulated approximately
$2,315,000 in its "policyholders' surplus account." This is a special
memorandum tax account into which certain amounts not previously taxed,
under prior tax laws, were accumulated. No new additions will be made to
this account. Federal income taxes will become payable thereon at the
then current tax rate (a) when and if distributions to the shareholder,
other than stock dividends and other limited exceptions, are made in
excess of the accumulated previously taxed income; or (b) when a company
ceases to be a life insurance company as defined by the Internal Revenue
Code and such termination is not due to another life insurance company
acquiring its assets in a nontaxable transaction. The Company does not
anticipate any transactions that would cause any part of this amount to
become taxable. However, should the balance at December 31, 1994 become
taxable, the tax computed at present rates would be approximately
$787,000.
-71-
<PAGE> 72
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter.
<TABLE>
<CAPTION>
1994
-------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 13,752,088 $ 13,526,681 $12,114,056 $ 9,763,884
Expenses 11,982,416 11,810,114 10,461,651 9,190,926
Other (160,527) 74,999 (358,273) 499,090
Net income 878,741 1,447,695 929,361 918,761
Net income per share 0.03 0.09 0.06 0.06
</TABLE>
<TABLE>
<CAPTION>
1993
(AS RESTATED)
-------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 13,568,969 $ 11,038,464 $ 9,725,014 $ 8,428,649
Expenses 11,622,467 9,613,840 8,504,857 7,424,860
Other 338,960 1,346,395 255,299 62,258
Net income 1,649,289 1,631,497 1,336,178 909,429
Net income per share 0.10 0.10 0.08 0.06
</TABLE>
<TABLE>
<CAPTION>
1992
(AS RESTATED)
-------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 10,251,515 $ 9,445,832 $ 7,416,171 $ 6,020,830
Expenses 9,412,090 8,149,124 6,174,353 5,620,425
Other 606,050 139,867 (9,616) 695,597
Net income 808,726 994,128 1,215,840 889,258
Net income per share 0.05 0.05 0.07 0.05
</TABLE>
-72-
<PAGE> 73
SCHEDULE III
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1993
1994 (AS RESTATED)
---- -------------
<S> <C> <C>
Assets
Investment in subsidiaries $ 32,246,248 $ 27,111,200
Accrued investment income 26,589 28,489
Equity securities 0 136,183
Real estate 442,148 694,530
Cash 972,320 441,246
Notes receivable (1) 726,028 777,050
Other assets 642,040 285,799
------------ ------------
$ 35,055,373 $ 29,474,497
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 607,182 $ 950,928
Accrued expense and other 271,992 508,865
------------ ------------
$ 879,174 $ 1,459,793
Stockholders' equity:
Common stock:
Class A $ 21,457,303 $ 15,985,344
Class B 283,262 283,262
Unrealized loss on equity securities of
unconsolidated subsidiary 0 (352,374)
Retained earnings 14,616,925 14,292,138
Treasury stock (2,181,291) (2,193,666)
------------ ------------
34,176,199 28,014,704
------------ ------------
$ 35,055,373 $ 29,474,497
============ ============
</TABLE>
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
-73-
<PAGE> 74
SCHEDULE III, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1993 AND 1992
<TABLE>
<CAPTION>
1993
1994 (AS RESTATED) 1992
---- ------------- ----
<S> <C> <C> <C>
Revenues:
Management service fees (1) $6,749,976 $5,316,157 $4,933,410
Investment income (1) 131,933 161,036 135,996
Other 7,691 417 511
---------- ---------- ----------
6,889,600 5,477,610 5,069,917
---------- ---------- ----------
Expenses:
General $6,189,677 $5,416,683 $4,757,325
Interest 20,583 106,403 101,080
Federal income tax 263,917 (134,835) 33,073
Capital gain (loss) (147,691) 0 0
---------- ---------- ----------
$6,326,486 $5,388,251 $4,891,478
---------- ---------- ----------
Income (loss) before equity in income of
unconsolidated subsidiaries 563,114 89,359 178,439
Equity in income of unconsolidated
subsidiaries 3,611,444 5,437,034 3,729,513
---------- ---------- ----------
Net income $4,174,558 $5,526,393 $3,907,952
========== ========== ==========
</TABLE>
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
-74-
<PAGE> 75
SCHEDULE III, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1993
1994 (AS RESTATED) 1992
---- ------------- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,174,558 $ 5,526,393 $ 3,907,952
Adjustments to reconcile net loss to net cash
used by operating activities:
Realized gains on sales of investments 313,796 0 0
Depreciation 36,214 32,487 31,680
Equity in net income of unconsolidated
subsidiaries (8,984,819) (5,420,150) (3,729,513)
Accrued expenses and other liabilities (290,422) ,504 94,575
Amounts withheld as trustee 53,549 0 0
Accrued investment income 1,900 3,004 50,493
Other, net (243,866) 351,152 (200,135)
----------- ----------- -----------
Net cash provided (used) by operating
activities (4,939,090) 494,390 155,052
----------- ----------- -----------
Cash flows from investing activities:
Sale of equity securities 174,761 0 0
Payments on notes receivable 51,022 88,775 91,877
Cash acquired in acquisition 0 0 (364,349)
(Purchase) sale of real estate 216,168 17,387 (29,155)
----------- ----------- -----------
Net cash provided (used) by investing
activities 441,951 106,162 (301,627)
----------- ----------- -----------
Cash flows from financing activities:
Sale of treasury stock 0 0 393,132
Sale of common stock 5,371,959 0 0
Payment on notes payable (343,746) (219,836) (384,493)
Payment on note payable to subsidiary 0 0 212,134
----------- ----------- -----------
Net cash provided (used) by financing
activities 5,028,213 (219,836) 220,773
----------- ----------- -----------
Net increase in cash 531,074 380,716 74,198
Cash at beginning of year 441,246 60,530 (13,668)
----------- ----------- -----------
Cash at end of year $ 972,320 $ 441,246 $ 60,530
=========== =========== ===========
</TABLE>
See accompanying independent auditor's report.
-75-
<PAGE> 76
SCHEDULE VI
CITIZENS, INC. AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- ---------- ------ --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force $1,759,915,000 $ 285,104,000 $ 384,794,000 $1,859,605,000 20.7%
-------------- -------------- -------------- --------------
Premiums:
Life insurance 45,294,285 2,309,544 541,370 43,526,111 1.2%
Accident and health insurance 259,378 128 0 259,250 --
-------------- -------------- -------------- --------------
Total premiums $ 45,553,663 2,309,672 541,370 43,785,361 1.2%
============== ============== ============== ==============
Year ended December 31, 1993:
Life insurance in force $1,567,840,000 $ 303,727,000 $ 462,775,000 $1,726,888,000 26.8%
============== ============== ============== ==============
Premiums:
Life insurance 38,431,240 1,939,279 1,106,590 37,598,551 2.9%
Accident and health insurance 284,656 146 0 284,510 --
-------------- -------------- -------------- --------------
Total premiums $ 38,715,896 1,939,425 1,106,590 37,883,061 2.9%
============== ============== ============== ==============
Year ended December 31, 1992:
Life insurance in force $1,362,015,000 238,677,000 334,591,000 1,457,929,000 22.9%
============== ============== ============== ==============
Premiums:
Life insurance 29,904,911 1,486,531 467,011 28,885,391 1.6%
-------------- -------------- -------------- --------------
Accident and health insurance 316,547 152 -0- 316,395 --
-------------- -------------- -------------- --------------
Total premiums 30,221,458 1,486,683 467,011 29,201,786 1.6%
============== ============== ============== ==============
</TABLE>
See accompanying independent auditor's report.
-76-
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
CITIZENS, INC.
Date: June 29, 1995 By /s/ Mark A. Oliver
-----------------------------------------
Mark A. Oliver, Executive Vice President,
Chief Financial Officer and Secretary/
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Each individual whose signature appears below hereby designates and appoints
Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and
lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power
of substitution and resubstitution, for each person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K, which
amendments may make such changes in this Annual Report on Form 10-K as either
Attorney-in-Fact deems appropriate and to file therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and think
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, in
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
by: /s/ Mark A. Oliver by /s/ Mark A. Oliver
- --------------------------------- --------------------------------
Randall H. Riley, Director Harold E. Riley, Chairman of the
Board and Director
by /s/ Mark A. Oliver by /s/ Mark A. Oliver
- --------------------------------- --------------------------------
Ralph M. Smith, Director Joe R. Reneau, Director
by /s/ Mark A. Oliver by /s/ Mark A. Oliver
- --------------------------------- --------------------------------
Flay F. Baugh, Director Timothy T. Timmerman, Director
by /s/ Mark A. Oliver by /s/ Mark A. Oliver
- --------------------------------- --------------------------------
Rick D. Riley, Director Steve Shelton, Director
-77-
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ------------------- ----
<S> <C> <C>
22 Subsidiaries of the 79
registrant
</TABLE>
-78-
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE OF PERCENTAGE
COMPANY NAME INCORPORATION TAX I.D. OWNERSHIP
------------ ------------- -------- ----------
<S> <C> <C> <C>
Citizens Insurance Company of
America Colorado 84-0583103 100% Direct
Insurance Investors, Inc. Texas 74-1458561 100% Indirect
Continental Investors Life
Insurance Company Alabama 63-0514221 90% Indirect
Industrial Benefits, Inc. Texas 76-0159854 100% Indirect
Computing Technology, Inc. Colorado 84-1037266 100% Indirect
</TABLE>
