UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1997
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Anderson Lane, Austin, Texas 78752
(Address of principal executive offices) (Zip Code)
(512) 837-7100
(Registrant's telephone number, including area code)
7801 North Interstate 35, Austin, Texas 78753
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of September 30, 1997, Registrant had 20,469,084 shares
of Class A common stock, No Par Value, outstanding and 621,049
shares of Class B common stock, No Par Value, outstanding.
CITIZENS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Balance sheets, September 30, 1997
(Unaudited) and December 31, 1996 3
Statements of Operations, Three-Months
Ended September 30, 1997 and 1996
(Unaudited) 5
Statements of Operations, Nine-Months
Ended September 30, 1997 and 1996
(Unaudited) 6
Statements of Cash Flows, Three-Months
Ended September 30, 1997 and 1996
(Unaudited) 7
Statements of Cash Flows, Nine-Months
Ended September 30, 1997 and 1996
(Unaudited) 9
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results
of Operations 13
Part Other Information 2117
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(Unaudited)
September December
30, 31,
1997 1996
Assets
Investments:
Fixed maturities held for investment,
at amortized cost (market $5,146,000
in 1997 and $5,050,000 in 1996)
$5,619,663 $5,627,256
Fixed maturities available for sale,
at lower of cost or market (cost
$119,882,725 in 1997 and
$110,759,634 in 1996) 125,338,896 109,723,050
Equity securities, at market (cost $
971,765 in 1997 and $89,580 in 1996) 931,840 50,155
Mortgage loans on real estate (net of
reserve of $50,000 in 1997 and 1996)
1,321,292 1,672,522
Policy loans 20,144,579 19,819,125
Guaranteed student loans (net of
reserve of $10,000 in 1997 and 1996)
107,112 298,683
Other long-term investments 893,041 920,345
Short-term investments 1,200,000
200,000
Total investments 155,556,423 138,311,136
Cash 4,760,091 6,085,383
Prepaid reinsurance 572,412 -
Reinsurance recoverable 2,280,467 1,773,541
Other receivables 771,133 594,088
Accrued investment income 1,426,240 1,682,084
Deferred policy acquisition costs 37,552,730 36,933,753
Cost of insurance acquired 8,625,449 7,219,594
Other intangible assets 1,493,600 1,633,625
Federal income tax receivable 0
357,608
Excess of cost over net assets 15,488,417
acquired 13,677,800
Property, plant and equipment 5,865,747 5,442,578
Other assets 1,108,088
743,636
Total assets 235,500,797 214,454,826
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(Unaudited)
September December
30, 31,
1997 1996
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves 141,215,224 132,401,079
Dividend accumulations 4,812,771 3,961,603
Premium deposits 1,924,110 1,803,358
Policy claims payable 2,696,357 2,966,818
Other policyholders' funds 2,150,306 1,958,992
Total policy liabilities 152,798,768 143,091,850
Other liabilities 1,961,551 2,052,001
Commissions payable 827,778 928,288
Notes payable 897,367 489,166
Deferred Federal income tax 1,534,512 842,250
Amounts held on deposit 274,562 168,255
Total liabilities 158,294,538 147,571,810
Stockholders' Equity:
Common stock:
Class A, no par value, 50,000,000
shares authorized, 22,413,819 shares
issued in 1997 and 21,761,894 in
1996, including shares in treasury
of 1,944,735 in 1997 and 2,077,947
in 1996
52,586,069 45,941,552
Class B, no par value, 1,000,000
shares authorized, 621,049 shares
issued and outstanding in 1997 and
1996 283,262 283,262
Unrealized gain (loss) on investments
1,073,912 (710,166)
Retained earnings 25,191,625 23,430,634
79,134,868 68,945,282
Treasury stock, at cost 1,928,609 (2,062,266)
Total stockholders' equity 77,206,259 66,883,016
Commitments and contingencies
Total liabilities and stockholders' 235,500,797 214,454,826
equity
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended September 30, 1997 and 1996
(Unaudited)
Three-months ended
September 30,
1997 1996
Revenues:
Premiums 15,423,872 14,619,278
Annuity and Universal life
considerations 90,425 179,468
Net investment income 2,672,981 2,177,548
Other income 296,584 53,495
Realized gains (losses) on
investments (292,029) 80,667
Interest expense (19,162) (14,100)
18,172,671 17,096,356
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit
reserves 2,865,160 2,541,236
Policyholders' dividends 1,203,584 629,079
Claims and surrenders 6,978,631 7,319,704
Annuity expenses 104,400 168,791
11,151,775 10,658,810
Commissions 3,317,928 3,182,045
Underwriting, acquisition and
insurance expenses 2,265,672 1,973,659
Capitalization of deferred policy
acquisition costs (2,709,440) (2,558,902)
Amortization of deferred policy
acquisition costs 1,756,304 2,784,806
Amortization of cost of insurance
acquired and excess of cost over net 485,453 92,434
assets acquired
16,267,692 16,132,852
Income (loss) before federal income
tax 1,904,979 $963,504
Federal income tax:
Federal income tax expense (benefit) 543,363 317,969
Net Income (Loss) $1,361,616 $645,535
Per Share Amounts:
Net income (loss) per share of $0.07 $0.03
common stock
Weighted average shares outstanding 20,591,574 19,497,613
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine-Months Ended September 30, 1997 and 1996
(Unaudited)
Nine-months ended
September 30,
1997 1996
Revenues:
Premiums 40,013,752 39,301,429
Annuity and Universal life 289,187 272,703
considerations
Net investment income 7,567,693 6,582,091
Other income 490,396 89,573
Realized gains (losses) on (96,224) 93,376
investments
Interest expense (33,442) (43,004)
48,231,362 46,296,168
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 6,531,145 6,549,858
reserves
Policyholders' dividends 2,261,711 1,733,240
Claims and surrenders 20,772,899 19,283,265
Annuity expenses 323,239 597,466
29,888,994 28,163,829
Commissions 8,767,090 8,630,952
Underwriting, acquisition and 6,283,652 6,374,934
insurance expenses
Capitalization of deferred policy (7,467,372) (7,526,271)
acquisition costs
Amortization of deferred policy 6,848,395 7,525,764
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 1,367,358 858,709
assets acquired
45,688,117 44,027,917
Income (loss) before federal income $2,543,2 $2,268,2
tax 45 51
Federal income tax:
Federal income tax expense (benefit) 782,254 956,253
Net Income (Loss) 1,760,991 1,311,998
Per Share Amounts:
Net income (loss) per share of $0.09 $0.07
common stock
Weighted average shares outstanding 20,362,324 19,497,613
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended September 30, 1997 and 1996
(Unaudited)
Three-months ended
September 30,
1997 1996
Cash flows from operating
activities:
Net gain (loss) 1,361,616 645,535
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 434,410 514,659
Deferred policy acquisition costs (953,136) 225,904
Amortization of cost of insurance
acquired and excess cost over net
assets acquired (741,880) 92,434
Prepaid reinsurance 572,412 582,211
Reinsurance recoverable (159,416) (100,152)
Other receivables 342,379 162,012
Property, plant and equipment 186,693 78,028
Future policy benefit reserves 1,019,402 2,541,236
Other policy liabilities 448,174 244,704
Commissions payable and other 452,049 415,767
liabilities
Amounts received (paid out) as trustee 50,135 (38,234)
Deferred Federal income tax payable 754,673 904,605
Other, net 1,811,028 (615,095)
Net cash provided (used) by operating
activities 5,578,539 5,653,614
Cash flows from investing
activities:
Maturity of fixed maturities 225,000 1,672,058
Sale of fixed maturities available for 2,300,076 3,042,929
sale
Purchase of fixed maturities available (14,024,225) (8,507,482)
for sale
Net change in mortgage loans 148,415 (31,036)
Net change in guaranteed student loans 11,232 (42,640)
Change in other long-term investments 5,205 106,861
Increase in policy loans (net) 396,384 (226,748)
Net cash provided (used)
by
investing activities (10,937,913) (3,986,058)
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended September 30, 1997 and 1996
(Unaudited)
Three-months ended
September 30,
1997 1996
Cash flows from financing
activities:
Repayment of note payable (13,431) (49,433)
Sale of stock 0 81,047
Net cash provided (used) by financing
activities (13,431) 31,614
Net increase (decrease) in cash and
short- (5,372,805) 1,699,170
term investments
Cash and short term investments at
beginning 11,332,896 7,654,522
of period
Cash and short term investments at end $5,960,091 $9,344,692
of period
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1997 and 1996
(Unaudited)
Nine-months ended
September 30,
1997 1996
Cash flows from operating
activities:
Net gain (loss) $1,760,991 1,311,998
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 255,844 618,280
Deferred policy acquisition costs (618,977) (507)
Amortization of cost of insurance
acquired, excess cost over
net assets acquired, and
other intangibles 140,025 858,709
Prepaid reinsurance (572,412) (582,915)
Reinsurance recoverable (506,926) (181,832)
Other receivables (177,045) 646,089
Property, plant and equipment (423,169) (72,066)
Future policy benefit reserves 8,814,145 6,549,858
Other policy liabilities 892,773 1,820,325
Commissions payable and other (90,451) (326,219)
liabilities
Amounts received (paid out) as trustee 106,307 (61,917)
Federal income tax receivable 357,608 (1,025,106)
(payable)
Deferred Federal income tax 692,262 (1,021,663)
Other, net (2,812,510) (919,761)
Net cash provided (used) by operating
activities 7,818,465 7,613,273
Cash flows from investing
activities:
Maturity of fixed maturities 6,574,893 4,985,682
Sale of fixed maturities available for 13,027,102 15,214,840
sale
Purchase of fixed maturities available (28,989,900) (24,896,186)
for sale
Net change in mortgage loans 321,230 133,433
Net change in guaranteed student loans 191,571 42,868
Cash from merger 138,138 78,436
Change in other long-term investments 27,304 144,352
Increase in policy loans (net) 325,454 (1,174,098)
Net cash provided (used)
by
investing activities (8,384,208) (5,470,673)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1997 and 1996
(Unaudited)
Nine-months ended
September 30,
1997 1996
Cash flows from financing
activities:
Exercise of stock options 140,500 0
Repayment of note payable (92,475) (273,167)
Sale of stock 192,426 226,406
Net cash provided (used) by financing
activities 240,451 (46,761)
Net increase (decrease) in cash and
short- (325,292) 2,095,839
term investments
Cash and short term investments at
beginning 6,285,383 7,248,853
of period
Cash and short term investments at end $5,960,091 $9,344,692
of period
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
(1) Financial Statements
The balance sheet for September 30, 1997, the statements
of operations for the three and nine-month periods ended
September 30, 1997 and 1996, and the statements of cash
flows for the three and nine-month periods then ended have
been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes
in cash flows at September 30, 1997 and for comparative
periods presented have been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles have been
omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1996
annual 10-K report filed with the Securities and Exchange
Commission. The results of operations for the period
ended September 30, 1997 are not necessarily indicative of
the operating results for the full year.
(2) Merger and Pending Acquisition
On October 28, 1996, Citizens announced that it had signed
definitive written agreements for the acquisition of
American Investment Network, Inc. (American Investment), a
Jackson, Mississippi, based life insurance holding company
with $7.5 million in assets, $3.4 million of stockholders'
equity, revenues of $3.2 million and $67 million of life
insurance in force.
The American Investment agreement provided that following
the acquisition, American Investment shareholders would
receive 1 share of Citizens Class A Common Stock for each
7.2 shares of American Investment Common Stock owned.
Approximately 700,000 Class A shares were issued in
connection with the transaction, which was 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 closed on June 19, 1997.
On August 13, 1997, Citizens signed a definitive agreement
to acquire 100% of the outstanding shares of National
Security Life and Accident Insurance Company of Arlington,
Texas for $1.7 million in cash and restricted stock. The
Agreement, which is subject to approval by regulatory
authorities in Texas, provides that Citizens will pay $1
million in cash and $700,000 in restricted stock for all
of the outstanding shares of National, a privately-owned,
Texas domiciled life and accident and health insurer. The
transaction is expected to increase assets by
approximately $6 million, revenues by $5 million and
capital by $1 million and is expected to close in
November, 1997.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Certain statements contained in this Form 10Q are not statements
of historical fact and constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act (the "Act"), including, without limitation, the italicized
statements and the statements specifically identified as forward-
looking statements within this document. In addition, certain
statements in future filings by the Company with the Securities
and Exchange Commission, in press releases, and in oral and
written statements made by or with the approval of the Company
which are not statements of historical fact constitute forward-
looking statements within the meaning of the Act. Examples of
forward-looking statements, include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital
structure, and other financial items, (ii) statements of plans
and objectives of the Company or its management or Board of
Directors including those relating to products or services, (iii)
statements of future economic performance and (iv) statements of
assumptions underlying such statements. Words such as
"believes", "anticipates", "expects", "intends", "targeted",
"may", "will" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties which
may cause actual results to differ materially from those in such
statements. Factors that could cause actual results to differ
from those discussed in the forward-looking statements include,
but are not limited to: (i) the strength of foreign and U.S.
economies in general and the strength of the local economies in
which operations are conducted; (ii) the effects of and changes
in trade, monetary and fiscal policies and laws; (iii)
inflation, interest rates, market and monetary fluctuations and
volatility; (iv) the timely development and acceptance of new
products and services and perceived overall value of these
products and services by existing and potential customers; (v)
changes in consumer spending, borrowing and saving habits; (vi)
concentrations of business from persons residing in third world
countries; (vii) acquisitions; (viii) the persistency of
existing and future insurance policies sold by the Company and
its subsidiaries; (ix) the dependence of the Company on its
Chairman of the Board; (x) the ability to control expenses; (xi)
the effect of changes in laws and regulations (including laws and
regulations concerning insurance) with which the Company and its
subsidiaries must comply, (xii) the effect of changes in
accounting policies and practices, as may be adopted by the
regulatory agencies as well as the Financial Accounting Standards
Board, (xiii) changes in the Company's organization and
compensation plans; (xiv) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; and
(xv) the success of the Company at managing the risks involved
in the foregoing.
Such forward-looking statements speak only as of the date on
which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events.
On October 28, 1996, Citizens announced that it had signed
definitive written agreements for the acquisition of American
Investment Network, Inc. (American Investment), a Jackson,
Mississippi, based life insurance holding company with $7.5
million in assets, $3.4 million of stockholders' equity, revenues
of $3.2 million and $67 million of life insurance in force.
The American Investment agreement provided that following the
acquisition, American Investment shareholders would receive 1
share of Citizens Class A Common Stock for each 7.2 shares of
American Investment Common Stock owned. Approximately 700,000
Class A shares were issued in connection with the transaction,
which was 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 closed on June
19, 1997.
On August 13, 1997, Citizens signed a definitive agreement to
acquire 100% of the outstanding shares of National Security Life
and Accident Insurance Company of Arlington, Texas for $1.7
million in cash and restricted stock. The Agreement, which is
subject to approval by regulatory authorities in Texas, provides
that Citizens will pay $1 million in cash and $700,000 in
restricted stock for all of the outstanding shares of National, a
privately-owned, Texas domiciled life and accident and health
insurer. The transaction is expected to increase assets by
approximately $6 million, revenues by $5 million and capital by
$1 million and is expected to close in November, 1997.
Nine-months ended September 30, 1997 and 1996
Net gain for the nine-months ended September 30, 1997 was
$1,760,991, or $.09 per share compared to $1,311,998, or $.07 for
the same period in 1996. Revenues increased to $48,231,362
compared to the first nine-months of 1996 when revenues were
$46,296,168. The increase in revenues was driven by an 14.9%
increase in investment income. The earnings in 1997 include a
non-recurring charge of approximately $400,000 related to the
acquisition of the minority interest not already owned of First
American Investment Corporation for shares of the Company's stock
previously held in treasury. A slight decline in expenses,
coupled with the increased revenues contributed to the increased
profitability in 1997.
Premium income for the first nine-months of 1997 was $40,013,752
compared to $39,301,429 for the same period in 1996. Production
of new premiums by Citizens Insurance Company of America ("CICA")
during the first nine months of 1997 trailed the previous year.
During the past several years, management had not promoted new
sales and recruiting so as to emphasize the growth of capital
through the profitability of CICA on a statutory accounting
basis. Additionally, beginning in January, 1998 an entire new
line of products will be introduced to the Company's marketing
consultants. Called the Millennia 2000 series, the portfolio of
ten new products will replace the Ultra Expansion series that has
been sold since mid 1987. The new products will continue to
offer participating ordinary whole life insurance with new
features such as terminal illness benefits, and an increased
focus on providing retirement income. The Millennia products
will also retain the assignment of benefit provisions that have
proven popular with the Company's clients over the past several
years. These new programs will, in the opinion of management,
have considerable impact on new production once they are
assimilated by the marketing force. Premium income was
negatively impacted during 1997 due to the pending merger of
American Liberty Life Insurance Company, acquired in 1995, into
CICA and the conversion of the administrative functions
previously performed by American Liberty in Baton Rouge,
Louisiana being transferred to Austin, Texas in late 1996.
American Liberty was merged into CICA in June, 1997.
Additionally, management re-evaluated the commission contracts
offered by American Liberty and in late 1996 notified the
majority of marketing representatives writing new business that
there would be a substantial reduction in the first year
commission they had been receiving. Management believes that
such actions will limit the production of new business by the
former American Liberty agents; however, the business produced
will offer significantly greater opportunity for profit for the
company than that previously sold. The field force of United
Security Life Insurance Company, acquired in mid-1997, is
expected to produce approximately $2 million of new premium for
the entire year 1997. Due to the purchase accounting applied to
this acquisition, only three months of activity are included in
this 3rd quarter 10Q. The majority of premium written through
United Security is individual "specialty" accident and health
business.
Net investment income increased 14.9% in the first nine-months of
1997 compared to the same period in 1996. Net investment income
for the nine-months ended September 30, 1997 was $7,567,693
compared to $6,582,091 in 1996. This increase reflects the
earnings on the growth in the Company's asset base that is
occurring, as well as the higher yields that have been available
in the bond market during the past year. A shift in investment
strategy implemented in 1996 to shift away from U.S. Treasury
instruments to government guaranteed mortgage backed securities
and agency issues will, in the opinion of management continue to
offer greater return with a minimum amount of additional risk.
Claims and surrenders expense increased from $19,283,265 at
September 30, 1996 to $20,772,899 for the same period in 1997.
Death claims increased slightly to $3,331,080 in 1997 from
$3,312,101. Surrender expense increased to $10,784,581 from
$10,291,360. Management constantly monitors this activity to
insure that the Company's persistency is holding at levels equal
to or above assumptions. The increase in 1997 is, in
management's opinion, a carryover from the impact of the
termination of several well established agents during 1996.
Coupons and endowments increased to $3,870,832 in 1997 from
$3,698,624 in 1996. The endowment benefits are factored into the
premium much like dividends and therefor, the increase does not
pose a threat to future profitability. Management expects to see
further increases in this category in the future. Accident and
Health benefits were $1,936,896 in 1997, compared to $1,294,922
in 1996. This increase is directly related to the American
Liberty and United Security blocks of business which consist of a
large block of scheduled benefit daily indemnity policies. The
remaining components of claims and expenses, consisting of
supplemental contracts and payments of dividends and endowments
previously earned and held at interest, amounted to $849,510 in
1997, compared to $686,258 in 1996.
Commission expense remained flat at $8,767,090 compared to
$8,630,952. The level reflects a decline in the amount of
business issued during the year compared to the prior year.
Additionally, the agreement with WPA described below contributed
to the decline. Deferred policy acquisition costs capitalized in
1997 were $(7,467,372) compared to $(7,526,271) in the prior
year. The decline is related to the relatively flat level of new
sales during the year. Amortization of these costs was
$6,848,395 through the third quarter of 1997 compared to
$7,525,764 for 1996.
Underwriting, acquisition and insurance expenses declined to
$6,283,652 in 1997 from $6,374,934. A one-time charge of
approximately $400,000 was incurred during the first quarter of
1997 as the result of the acquisition of a 5.52% interest in
First American Investment Corporation, a 94.48% subsidiary of
American Liberty. Management believes such acquisition, which
entailed the issuance of 133,212 shares of the Company's Class A
shares previously held in treasury, will prove to be of
significant benefit to the Company in the long term. The removal
of First American allows the merger of American Liberty and CICA
to proceed as well as remedying an unhappy block of minority
holders of First American who were left without a market for
their First American shares as the result of an intrastate
offering that was only marginally successful. Management expects
to achieve significant reductions in expenses beginning late in
the second quarter of 1997 due to the execution of an agreement
with Worldwide Professional Associates, Inc., "WPA", an
international marketing company, to manage the Company's
international sales activities in exchange for an overriding
commission on new sales. As a result of this agreement, the
Company will eliminate approximately $900,000 of fixed overhead
on an annual basis, in exchange for the variable cost of the
commission override. The decline in spite of the one-time charge
is representative of the cost savings that are being realized
following the consolidation of American Liberty, as well as the
WPA agreement. Management expects these reductions to continue
throughout the year.
Three-months ended September 30, 1997 and 1996
Net income for the three-months ended September 30, 1997 was
$1,361,616 or $.07 per share, an increase of 187.1% over the same
period in 1996 when income was $645,535, or $.03 per share.
Total revenues for the quarter were $18,172,671, compared to
$17,096,356 for the same period in 1996.
Premium income for the quarter was $15,423,872, a 5.5% increase
from 1996 when premiums totaled $14,619,278. Production from
United Security offset declines in the writing of new business by
CICA.
Investment income increased to $2,672,981 from $2,177,548. The
increase relates to the growing asset base of the Company as well
as the higher yields available in the past year in the bond
market.
Policy benefits increased from $10,658,810 in 1996 to $11,151,775
in the current year. Decreases in death claims and policy
surrenders were the primary causes.
Commissions increased from $3,182,045 to $3,317,928 due to the
agreement with WPA described above. Management expects to see
further increases in this area due to the WPA agreement.
Expenses increased in the quarter to $2,265,672 compared to
$1,973,659 for the same period in 1996. The inclusion of the
expenses of United Security for the quarter was the primary
reason for the increase.
Liquidity and Capital Resources
Stockholders' equity increased to $77,206,259 at September 30,
1997 from $66,883,016 at December 31, 1996. The First American
and American Investment Network acquisitions and the exercise of
certain stock options that had been outstanding for some time
were the primary reasons for the growth.
In May 1995 an offering under Regulation S was initiated to the
Company's international policyholders which was terminated in
June, 1997. As of June 30, 1997, an additional $1.1 million had
been raised through the offering.
Invested assets grew to $155,556,423 in 1997 from $138,311,136 at
December 31, 1996. At December 31, 1996, and September 30, 1997,
fixed maturities have been categorized into two classifications:
Fixed maturities held to maturity, which are valued at amortized
cost, and fixed maturities available for sale which are valued at
market. The Company does not have a plan to make material
dispositions of fixed maturities during 1997; however, because of
continued uncertainty regarding long-term interest rates,
management cannot rule out sales during 1997. Fixed maturities
held to maturity, amounting to $5,619,663 ($5,627,256 at December
31), 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 less
than 1% of invested assets at September 30, 1997, (1.2% at
December 31, 1997) has historically been composed of small
residential loans in Texas. At September 30, 1997 one loan of
less than $35,000 was in default, and at December 31, 1996, no
mortgage loans were in default. Management has established a
reserve of $50,000 at September 30, 1997 and December 31, 1996
(approximately 3% of the mortgage portfolio's balance) to cover
potential unforeseen losses in the Company's mortgage portfolio.
Policy loans comprise 12.9% of invested assets at September 30,
1997 and 14.3% at December 31, 1996. These loans, which are
secured by the underlying policy values, have yields ranging from
5% to 10% percent and maturities that are related to the maturity
or termination of the applicable policies. Management believes
that the Company maintains more than adequate liquidity despite
the uncertain maturities of these loans.
Cash balances of the Company in its primary depository, Texas
Commerce Bank Austin, Texas, were significantly in excess of
Federal Deposit Insurance Corporation (FDIC) coverage at
September 30, 1997 and December 31, 1996. Management monitors
the solvency of all financial institutions in which it has funds
to minimize the exposure for loss. At September 30, 1997,
management does not believe the Company is at risk for such a
loss. During 1997, the Company intends to utilize short-term
Treasury Bills and highly-rated commercial paper as cash
management tools to minimize excess cash balances and enhance
return.
In February 1992, the Company paid cash for an 80,000 square foot
office building in Austin, Texas to serve as its primary office.
This building will, in the opinion of management, provide
adequate space for the Company's operations for many years.
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 $146,000 was leased to a third
party on a triple-net basis for three years during 1995. The
lease provided 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. The option period
expired in 1996. The property is being re-marketed with a $1.0
million asking price. The tenant retains a right of first
refusal for the remainder of the lease.
CICA owned 1,955,457 shares of Citizens Class A common stock at
December 31, 1996 ( at September 30, 1997). 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 7% of admitted assets
($4,000,000), 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 Citizens by CICA, limited
to 2% of admitted assets. As of December 31, 1996, that
permitted transaction increased statutory surplus by $4,000,000
over what it would have been had prescribed accounting practices
been followed. In the Citizens' consolidated financial
statements, this stock is shown as treasury stock. During 1997,
approximately 133,212 shares were issued in conjunction with the
First American transaction.
CICA had outstanding at September 30, 1997 and December 31, 1996,
a $400,000 ($466,000 at December 31, 1996) surplus debenture
payable to Citizens. For statutory accounting purposes, this
debenture is a component of surplus, while for GAAP it is
eliminated in consolidation. Citizens has recognized a liability
for its related obligation to a bank in a like amount.
The NAICNational Association of Insurance Commissioners ("NAIC")
has established minimum capital requirements in the form of Risk-
Based Capital ("RBC"). Risk-based capital factors the type of
business written by a company, the quality of its assets, and
various other factors into account to develop a minimum level of
capital called "authorized control level risk-based capital" and
compares this level to an adjusted statutory capital that
includes capital and surplus as reported under Statutory
Accounting Principles, plus certain investment reserves. Should
the ratio of adjusted statutory capital to control level risk-
based capital fall below 200%, a series of actions by the Company
would begin. At December 31, 1996 and 1995, CICA, ALLIC and
CILIC were well above required minimum levels.
On September 22, 1997, Citizens was notified that class action
certification was granted September 15, 1997 to plaintiffs in a
lawsuit (Dwain Kirkham et al. v. American Liberty Life Insurance
Company et al., No. 25,954, 2nd Judicial District, Jackson
Parish, Louisiana) filed against American Liberty Life Insurance
Company ("ALLIC") on August 19, 1996 and against Citizens, Inc.
on December 20, 1996 (collectively "Defendants"). In the same
ruling, Defendants' motion for summary judgment and exception of
prescription (statute of limitations) were denied. Defendants
believe that these rulings are significantly in error.
Defendants will appeal these rulings, during which time, the
trial court proceedings will be stayed. Defendants intend to
vigorously defend against these claims.
The lawsuit was filed by four individuals who purchased from
ALLIC, prior to August 1, 1986, life insurance policies on their
children and grandchildren. In the complaint, plaintiffs allege
that the insurance policies were fraudulently misrepresented to
be "retirement" and "insured savings" plans in which, after six
or seven years, additional premiums would be unnecessary and
monthly retirement income would be generated for plaintiffs.
Plaintiffs also allege other causes of action including breach of
contract and are seeking rescission, unspecified damages,
interest and attorneys' fees. Prior to the class certification
ruling, rescission of the insurance policies purchased by the
four plaintiffs would have resulted in a total payment of $31,000
(including 33% for contingent attorneys fees). The activities
described in plaintiffs' complaint allegedly occurred over 10
years ago with respect to certain types of insurance policies
sold by an independent general agent. Prior to its recent merger
into Citizens' principal subsidiary, CICA, ALLIC was a separate
subsidiary of Citizens since its acquisition in September 1995.
As part of the acquisition, not all historical records of ALLIC
were loaded on the computer system currently used. Further, no
officers or managers of ALLIC are currently employed by Citizens
or any of its affiliates. Management has been advised by counsel
that the class action certification is in error and will
vigorously appeal the decision. Because of the significant
errors on the part of the court, Management does not believe the
Company to have significant loss exposure as a result of the
litigation. Management is performing an ongoing evaluation of
the matter.
There has been much recent publicity regarding the cost of
converting data processing systems to deal with the year 2000.
Citizens has performed an evaluation of its systems and
determined that the significant majority are already year 2000
compliant. The small percentage that are not currently compliant
should be ready well before the turn of the century. In
addition, management has been making inquiries of consultants,
etc. to insure that their systems will be compliant as well.
Because of the method of coding in the Company's core systems,
there is virtually no cost with the year 2000 compliance.
Financial Accounting Standards
In May 1993, the FASB issued Statement 114 "Accounting by
Creditors for Impairment of a Loan" ("Statement 114"). Statement
114 requires impaired loans to 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. Implementation did not have a material impact
on the Company's financial statements.
In March 1995, the FASB issued Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of." Statement 121 established accounting standards for
the recognition and measurement of impairment on long-lived
assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and
certain intangibles to be disposed of. This statement does not
apply to long-lived assets such as deferred policy acquisition
costs and deferred tax assets. Statement 121 is effective for
fiscal years beginning after December 15, 1995. The Statement
did not have a material impact on the Company's 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 resale in the near
term. The Company had no investment securities classified as
trading at January 1, 1994, December 31, 1996 or December 31,
1995. 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 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. The Company adopted Statement 115 at January 1, 1994.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 2 Changes in Securities
None, other than disclosed in the Notes to the Financial
Statements or Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Current Report dated September 2, 1997 regarding sales
of Common Stock via Reg. S.
Current Report dated September 22, 1997 regarding a
Class Action lawsuit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CITIZENS, INC.
By:/s/ Mark A. Oliver_____
Mark A. Oliver, FLMI
President
Date: November 14, 1997
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