<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended MARCH 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------- ----------
Commission File Number: 1-13004
---------
CITIZENS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Anderson Lane, Austin, Texas 78752
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(512) 837-7100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of March 31, 2000, Registrant had 22,800,525 shares of Class A common
stock, No Par Value, outstanding and 664,523 shares of Class B common stock, No
Par Value, outstanding.
<PAGE> 2
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position, March 31,
2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Operations, Three-Months
Ended March 31, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows, Three-Months
Ended March 31, 2000 and 1999 (Unaudited) 6
Notes to Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS 11
PART II. OTHER INFORMATION 16
</TABLE>
2
<PAGE> 3
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held-for-investment, at
amortized cost (market $5,593,500
in 2000 and $5,206,260 in 1999) $ 5,591,709 $ 5,594,745
Fixed maturities available-for-sale, at
fair value (cost $152,732,216 in
2000 and $149,839,493 in 1999) 144,377,794 144,214,555
Equity securities, at fair value (cost
$716,293 in 2000 and 1999) 636,717 717,812
Mortgage loans on real estate (net of reserve
of $50,000 in 2000 and 1999) 1,338,346 1,374,204
Policy loans 21,452,483 21,556,344
Other long-term investments 934,713 880,901
------------ ------------
Total investments 174,331,762 174,338,561
Cash 7,987,808 11,149,084
Accrued investment income 1,151,653 1,761,071
Prepaid reinsurance 1,568,924 --
Reinsurance recoverable 2,357,888 2,183,729
Deferred policy acquisition costs 36,321,616 36,518,037
Other intangible assets 1,905,725 1,982,525
Federal income tax recoverable 290,870 --
Deferred federal income tax 7,138,360 6,182,764
Cost of insurance acquired 6,990,575 7,186,494
Excess of cost over net assets acquired 7,856,438 8,021,044
Property, plant and equipment 5,199,780 5,071,735
Other assets 1,141,094 1,089,742
------------ ------------
Total assets $254,242,493 $255,484,786
============ ============
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
3
<PAGE> 4
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefit reserves $ 168,524,909 $ 167,413,196
Dividend accumulations 4,820,969 4,854,835
Premium deposits 2,708,612 2,725,016
Policy claims payable 3,997,903 3,591,289
Other policyholders' funds 1,976,077 2,070,950
------------- -------------
Total policy liabilities 182,028,470 180,655,286
Other liabilities 1,919,983 901,636
Commissions payable 182,726 530,928
Federal income tax payable -- 1,129,967
------------- -------------
Total liabilities 184,131,179 183,217,817
STOCKHOLDERS' EQUITY:
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 24,880,731 shares issued and
outstanding in 2000 and 1999, including
shares in treasury of 2,080,206 in 2000
and 1999 67,510,026 67,510,026
Class B, no par value, 1,000,000 shares
authorized, 664,523 shares issued and
outstanding in 2000 and 1999 584,863 584,863
Retained earnings 10,456,128 10,756,800
Accumulated other comprehensive loss:
Unrealized investment loss, net of tax (5,566,439) (3,711,456)
------------- -------------
72,984,578 75,140,233
Treasury stock, at cost (2,873,264) (2,873,264)
------------- -------------
Total stockholders' equity 70,111,314 72,266,969
------------- -------------
Total liabilities and stockholders' equity $ 254,242,493 $ 255,484,786
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Premiums $ 12,376,601 $ 13,534,945
Annuity and universal life considerations 66,427 69,283
Net investment income 2,976,711 3,004,958
Realized gains 11,163 31,200
Other income 147,538 183,517
Interest expense -- (5,833)
------------ ------------
Total revenues 15,578,440 16,818,070
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 1,119,916 1,173,649
Policyholders' dividends 550,671 501,634
Claims and surrenders 8,238,358 8,207,261
Annuity expenses 89,211 134,129
------------ ------------
Total insurance benefits paid or provided 9,998,156 10,016,673
Commissions 2,863,834 2,866,678
Other underwriting, acquisition and insurance expenses 2,503,213 2,347,720
Capitalization of deferred policy acquisition costs (2,105,985) (1,685,220)
Amortization of deferred policy acquisition costs 2,302,406 2,584,102
Amortization of cost of insurance acquired, excess of cost over
net assets acquired and other intangibles 437,325 351,882
------------ ------------
Total benefits and expenses 15,998,949 16,481,835
Income (loss) before Federal income tax $ (420,509) $ 336,235
Federal income tax expense (benefit) (119,837) 58,484
------------ ------------
NET INCOME (LOSS) $ (300,672) $ 277,751
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK $ (0.01) $ 0.01
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 23,465,048 23,351,961
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED MARCH 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (300,672) $ 277,751
Adjustments to reconcile net gain to net cash provided by
operating activities, net of assets acquired:
Realized gains on sale of investments and
other assets (11,163) (31,200)
Net deferred policy acquisition costs 196,421 898,882
Amortization of cost of insurance
acquired, excess cost over
net assets acquired and other intangibles 437,325 351,882
Depreciation 131,726 127,077
Change in:
Accrued investment income 609,418 546,875
Reinsurance recoverable and prepaid
reinsurance (1,743,083) (1,345,773)
Future policy benefit reserves 1,111,713 960,796
Other policy liabilities 261,471 317,199
Deferred federal income tax -- 496,598
Federal income tax (1,420,837) (1,120,960)
Commissions payable and other liabilities 670,145 (591,737)
Other, net (15,692) (377,037)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (73,228) 510,353
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed maturities, available-for-sale -- 268,090
Maturity of fixed maturities, available-for-sale 1,403,763 1,687,161
Purchase of fixed maturities, available-for-sale (4,317,947) --
Sale of equity securities, available-for-sale -- 92,500
Principal payments on mortgage loans 35,858 39,443
Guaranteed student loans funded -- (4,673)
Sale of other long-term investments and property,
plant and equipment 3,901 68,100
Cash and cash equivalents provided by mergers and
acquisitions -- 1,512,255
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
6
<PAGE> 7
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE-MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Change in policy loans (net) $ 103,861 $ (309,217)
Purchase of other long-term investments and property,
plant and equipment (317,484) (204,777)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (3,088,048) 3,148,882
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,161,276) 3,659,235
Cash and cash equivalents at beginning of period 11,149,084 10,168,728
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,987,808 $ 13,827,963
============ ============
Supplemental:
Cash paid during the period for
Interest $ -- $ 5,833
============ ============
Income taxes $ 1,301,000 $ 620,000
============ ============
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
The Company issued Class A stock to purchase all the capital stock of First
Investors Group, Inc. in 1999. In conjunction with the acquisitions, cash and
cash equivalents were provided by mergers and acquisitions as follows:
<TABLE>
<S> <C>
Fair value of capital stock issued $ 3,427,138
Fair value of intangible assets acquired
Excluding cash and cash equivalents (1,658,547)
Fair value of intangible assets acquired (353,703)
Liabilities assumed 97,367
Cash and cash equivalents provided by
mergers and acquisitions $ 1,512,255
===========
Issuance of 609,269 Class A shares $ 3,427,138
===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) FINANCIAL STATEMENTS
The statement of financial position for March 31, 2000, the statements of
operations for the three-month periods ended March 31, 2000 and 1999, and
the statements of cash flows for the three-month periods then ended have
been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and changes
in cash flows at March 31, 2000 and for comparative periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles (GAAP) have been omitted. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1999 annual 10-K report
filed with the Securities and Exchange Commission. The results of
operations for the period ended March 31, 2000 are not necessarily
indicative of the operating results for the full year.
(2) ACQUISITION
On September 15, 1998, Citizens announced that a definitive agreement had
been reached between Citizens and First Investors Group, Inc. (Investors)
of Springfield, Illinois whereby Citizens would acquire 100% of the
outstanding shares of Investors for shares of Citizens Class A Common
stock. Investors is the parent of Excalibur Insurance Corporation
(Excalibur), also of Springfield, Illinois. Pursuant to the terms of the
Agreement, which was approved by Investors' shareholders and regulatory
authorities, Citizens issued one share of Citizens Class A Common stock for
each 6.6836 shares of Investors common and preferred stock issued and
outstanding. This transaction closed on January 26, 1999. Citizens issued
609,269 shares of its Class A Common stock to consummate the transaction,
which was accounted for as a purchase. The excess of cost over net assets
acquired amounted to $303,703 and is being amortized over 10 years.
(3) SEGMENT INFORMATION
The Company has two reportable segments identified by geographic area:
International business and Domestic business. International business
consisting of ordinary whole-life business is sold throughout Central and
South America and other regions around the world. The Company has no
assets, offices or employees outside of the United States of America (U.S.)
and requires that all transactions be in U.S. dollars paid in the U.S.
Domestic business, consisting of traditional life and burial insurance,
pre-need
8
<PAGE> 9
policies, accident and health specified disease, hospital indemnity and
accidental death policies, is sold throughout the Southern U.S. The
accounting policies of the segments are in accordance with GAAP and are the
same as those described in the summary of significant accounting policies.
The Company evaluates performance based on GAAP net income (loss) before
federal income taxes for its two reportable segments.
Geographic Areas - The following summary represents financial data of the
Company's continuing operations based on their location for the quarter
ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
REVENUES
U.S. Domestic $ 3,748,149 $ 5,210,596
International 11,830,291 11,607,474
----------- -----------
Total Revenues $15,578,440 $16,818,070
=========== ===========
</TABLE>
The following summary, representing revenues and pre-tax income from
continuing operations and identifiable assets for the Company's reportable
segments as of and for the quarters ended March 31, 2000 and 1999, is as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 2000 1999
----------- -----------
<S> <C> <C>
Revenue, excluding net investment income
and realized gain on investments:
Domestic $ 3,029,271 $ 4,269,930
International 9,561,295 9,511,982
----------- -----------
Total consolidated revenue, excluding net
investment income and realized gain on
investments $ 2,590,566 $13,781,912
=========== ===========
Net investment income:
Domestic $ 716,192 $ 931,000
International 2,260,519 2,073,958
----------- -----------
Total consolidated net investment income $ 2,976,711 $ 3,004,958
=========== ===========
Amortization expense:
Domestic $ 736,253 $ 906,260
International 2,003,478 2,029,724
----------- -----------
Total consolidated amortization expense $ 2,739,731 $ 2,935,984
=========== ===========
Realized gain on investments:
Domestic $ 2,686 $ 9,666
International 8,477 21,534
----------- -----------
Total consolidated realized gain $ 11,163 $ 31,200
=========== ===========
Income (loss) before federal income tax:
Domestic $ (87,072) $ 166,817
International (333,437) 169,418
----------- -----------
Total consolidated income (loss) before
federal income tax $ (420,509) $ 336,235
=========== ===========
</TABLE>
9
<PAGE> 10
(Continued from page nine)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Assets:
Domestic $ 92,306,995 $ 94,273,886
International 160,935,498 161,210,900
------------ ------------
Total $254,232,493 $255,484,786
------------ ------------
</TABLE>
(4) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2000, the other comprehensive loss amounts
included in total comprehensive loss consisted of unrealized losses on
investments in fixed maturities and equity securities available-for-sale of
$1,854,983, net of tax, and for the same period in 1999, unrealized losses of
$2,224,843. Total comprehensive loss for the three months ended March 31, 2000
and 1999, was $2,155,655 and $1,947,092, respectively.
(5) EARNINGS PER SHARE
Basic and diluted earnings per share have been computed using the weighted
average number of shares of common stock outstanding during each period. The
weighted average shares outstanding for the three-months ended March 31, 2000
and 1999 were 23,465,048 and 23,351,961, respectively. The per share amounts
have been adjusted retroactively for all periods presented to reflect the change
in capital structure resulting from a 7% stock dividend declared on November 2,
1999, payable on December 31, 1999 to holders of record as of December 1, 1999.
The stock dividend resulted in the issuance of 1,763,805 Class A shares
(including 136,091 shares in treasury) and 43,474 Class B shares.
10
<PAGE> 11
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 that 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.
11
<PAGE> 12
THREE-MONTHS ENDED MARCH 31, 2000 AND 1999
Net loss for the three-months ended March 31, 2000 was $300,672, or $(0.01) per
share, compared to net income of $277,571, or $0.01 per share, for the same
period in 1999. Revenues decreased 7.4% in 2000 to $15,578,440 compared to the
first three months of 1999 when revenues were $16,818,070. The decrease in
revenues was driven by a 37.2% decrease in accident and health premiums.
Premium income for the first three months of 2000 was $12,376,601 compared to
$13,534,945 for the same period in 1999. The decrease is attributable to the
$1,107,918 decrease in accident and health premiums which were $1,866,898 for
the three months ended March 31, 2000 compared to $2,974,816 for the same period
in 1999. There was a significant increase in group dental business sold by
agents of United Security Life Insurance Company ("USLIC") from July 1998
through March 1999. During the second half of 1998, the Company began to
experience a significant increase in the volume of accident and health claims.
The increase was created by the high early utilization by holders of the USLIC
dental certificates. As a result of the substantial increase in the volume of
claims plus an increase in the accident and health loss ratio, management moved
to cancel a large portion of the existing blocks of USLIC's group dental
business and National Security Life and Accident Insurance Company's ("NSLIC")
major medical business during the third quarter of 1999 in order to curtail both
claims and operating expenses. Most of the terminations were effective prior to
January 1, 2000. This action will result in a decrease of approximately $3.8
million of annual accident and health premium income in 2000 and $5.3 million of
annual accident and health premium income in 2001; however, due to the claims
experience as well as the overhead necessary to administer such, management
believes this action will enhance near and long-term profitability. Because of
increases in loss ratios, management has implemented significant rate increases
effective in April 2000 on several of the supplemental accident and health
products which are non-cancelable.
Production of new life insurance premiums by the agents of Citizens Insurance
Company of America ("CICA") was higher during the first quarter of 2000 than in
the previous year. In addition, management began developing a domestic ordinary
life sales program during 1999 and received regulatory approval of the product
and related sales material in Texas during April of 2000. Management began
recruiting efforts for associates in the State of Texas for the new product in
early 2000. This program, targeting rural areas of the United States, is
expected to provide a new entre into the domestic life market for the Company in
future years. The Company intends to expand sales effort beyond Texas to other
states in which CICA is licensed.
Net investment income decreased slightly in the first three months of 2000
compared to the same period in 1999. Net investment income for the three months
ended March 31, 2000 was $2,976,711 compared to $3,004,958 in 1999. This
decrease reflects a small decline in the Company's asset base as a result of the
significant utilization on accident and health products along with decreases in
the level of persistency on the Company's life business. Management terminated
the Company's outside investment advisor effective March 31, 2000. The Company
feels that it can more effectively achieve its investment objectives by
overseeing the investment activities in-house.
12
<PAGE> 13
Claims and surrenders expense increased from $8,207,261 at March 31, 1999 to
$8,238,358 for the same period in 2000. Death claims increased from $1,350,376
in 1999 to $1,464,142 in 2000. Surrender expense increased to $4,052,440 in 2000
from $3,181,778 in 1999. An extended economic downturn in several international
markets has negatively impacted the Company's persistency over the past two
years. Management believes its products are competitive and that persistency
will return to historical levels over the next few years. Coupons and endowments
decreased to $1,120,609 in 2000 from $1,165,656 in 1999. Accident and health
benefits were $1,365,271 in 2000, compared to $2,306,778 in 1999. This decrease
in Accident and health benefits is directly related to the cancellation of the
USLIC and NSLIC blocks of business discussed above.
The remaining components of claims and surrenders, consisting of supplemental
contracts and payments of dividends and endowments previously earned and held at
interest, amounted to $235,896 in 2000, compared to $202,673 in 1999.
Deferred policy acquisition costs capitalized in 2000 were $2,105,985 compared
to $1,685,220 in the previous year. Increased production of life business during
the first quarter of 2000 was the primary reason for the increase. Amortization
of these costs was $2,302,406 for the first quarter of 2000 compared to
$2,584,102 for 1999.
Underwriting, acquisition and insurance expenses increased from $2,347,720 in
the first quarter of 1999 to $2,503,985 in 2000, an increase of 6.7%. The
increase is attributed to the start-up costs of the domestic marketing program
and the expenses associated with the administration of accident and health
business. Management expects to achieve expense reductions over the next twelve
to eighteen months as the book of accident and health business continues to
diminish. Additionally, several steps were taken during the first quarter of
2000 to achieve additional reductions through the elimination of outside
consultants, including the Company's outside investment managers, which will
result in annual expense savings of approximately $200,000 for 2000, and
approximately $500,000 in 2001. Additionally, the consolidation of several
subsidiaries during the year 2000 will, in the opinion of management, afford
increased economies of scale.
Amortization of cost of insurance acquired, excess of cost over net assets
acquired ("goodwill") and other intangible assets increased to $437,325 in 2000
from $351,882 in 1999. The increase in amortization is related to the
amortization of goodwill related to the 1999 purchase of First Investors Group,
Inc. and accelerated amortization of cost of insurance acquired as several of
the companies previously purchased closed books of business lapse over time.
Should production by the former agents of American Liberty Life Insurance
Company, acquired in 1995, now representing CICA, fall below assumed levels,
additional write-offs of the American Liberty goodwill beyond the third quarter
1998 write-off of $9.5 million could result. Management is monitoring this
production in 2000 and expects to meet the targeted production levels. There
remains approximately $2.9 million of goodwill related to American Liberty at
March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity decreased to $70,111,314 at March 31, 2000 from $72,266,969
at December 31, 1999. The decrease was attributable to unrealized losses
declining by $1,854,983 during the three months ended March 31, 2000 resulting
in an unrealized loss of $5,566,439, net of tax at March 31, 2000. Declines in
the market value of the Company's available-for-sale bond and
13
<PAGE> 14
stock portfolio caused by lower bond and stock prices resulted in the change in
unrealized losses, net of tax.
Invested assets decreased slightly from $174,338,561 at December 31, 1999 to
$174,331,762 at March 31, 2000. At March 31, 2000 and December 31, 1999, fixed
maturities have been categorized into two classifications: Fixed maturities
held-to-maturity, which are valued at amortized cost, and fixed maturities
available-for-sale which are valued at fair value. Fixed maturities
available-for-sale and fixed maturities held-to-maturity are 82.8% and 3.2%,
respectively, of invested assets at March 31, 2000. The Company does not have a
plan to make material dispositions of fixed maturities during 2000; however,
because of continued uncertainty regarding long-term interest rates, management
cannot rule out sales during 2000. Fixed maturities held-to-maturity, amounting
to $5,591,709, consist primarily of U.S. Treasury securities. Management has the
intent and believes the Company has the ability to hold the securities to
maturity.
The Company's mortgage loan portfolio, which constitutes 0.8% of invested assets
at December 31, 1999 and March 31, 2000, has historically been composed of small
residential loans in Texas. Management has established a reserve of $50,000 at
March 31, 2000 and December 31, 1999 (approximately 3% of the mortgage
portfolio's balance) to cover potential unforeseen losses in the Company's
mortgage portfolio.
Policy loans comprise 12.3% of invested assets at March 31, 2000. These loans,
which are secured by the underlying policy values, have yields ranging from 5%
to 10% percent and maturities that are related to the maturity or termination of
the applicable policies. Management believes that the Company maintains more
than adequate liquidity despite the uncertain maturities of these loans.
Cash balances of the Company in its primary depository, Chase Bank, Austin,
Texas, were significantly in excess of Federal Deposit Insurance Corporation
(FDIC) coverage at March 31, 2000 and December 31, 1999. Management monitors the
solvency of all financial institutions in which it has funds to minimize the
exposure for loss. At March 31, 2000, management does not believe the Company is
at risk for such a loss. During 2000, 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.
CICA owned 1,821,332 shares of Citizens Class A common stock at March 31, 2000
and December 31, 1999. Statutory accounting practices prescribed by Colorado
require that the Company carry its investment at market value reduced by the
percentage ownership of Citizens by CICA, limited to 2% of admitted assets. As
of March 31, 2000 and December 31, 1999, the Company valued the shares in
accordance with prescribed statutory accounting practices. In the Company's
consolidated financial statements, this stock is included in treasury stock.
The National Association of Insurance Commissioners 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
14
<PAGE> 15
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, 1999
and March 31, 2000, all life insurance subsidiaries were above required minimum
levels.
INFORMATION SYSTEMS AND THE YEAR 2000
The Company successfully addressed the impact of the Year 2000 on its systems,
procedures, customers and business processes. There was no adverse impact on any
Company operations for the calendar change from 1999 to 2000.
The Company used internal resources to modify, replace and test the Year 2000
modifications. The total cost for the project was negligible, was performed with
existing staff and the associated costs were expensed as incurred.
All critical suppliers or customers (external relationships) resolved their own
third party Year 2000 issues and were all able to interact with the Company. The
Company encountered no loss of data or functionality related to the Year 2000.
FINANCIAL ACCOUNTING STANDARDS
In December 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-3 "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." SOP 97-3 provides: 1) guidance
for determining when an entity should recognize a liability for guaranty fund
and other insurance-related assessments, 2) guidance on how to measure a
liability, 3) guidance on when an asset may be recognized for a portion or all
of the assessment liability or paid assessment that can be recovered through
premium tax offsets or policy surcharges and 4) requirements for disclosure of
certain information. This SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company adopted SOP 97-3 during
1999. Implementation did not have a material impact on the Company's financial
statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance for
determining whether costs of software developed or obtained for internal use
should be capitalized or expensed when incurred. In the past, the Company has
expensed such costs as they were incurred. This SOP is also effective for fiscal
years beginning after December 15, 1998. The Company adopted SOP 98-1 during
1999. Implementation did not have a material impact on the Company's financial
statements.
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," is effective January 1, 2001.
Management does not believe SFAS No. 133 and SFAS No. 137 will have a
significant effect on the financial position, results of operations or liquidity
of the Company.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None, other than disclosed in the Notes to the Financial Statements or
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Annual meeting of stockholders will be held on Tuesday, June 6,
2000, at 10:00 a.m. at the Company's executive offices. The record
date for the meeting was April 17, 2000.
T. Roby Dollar resigned as Executive Vice President and Chief Actuary,
as well as from the Company's Board of Directors effective April 30,
2000, in preparation for retirement. Mr. Dollar, 62, who has been
associated with the Company and its predecessors for more than 30
years, will remain an employee until his retirement on January 31,
2001. Jeffrey L. Yeatman was named Vice President and Chief Actuary to
fill the vacancy created by Mr. Dollar's resignation. Mr. Yeatman
joined Citizens in 1998. A member of the American Academy of
Actuaries, he has ten (10) years of industry experience.
The vacancy on the Board of Directors has not yet been filled.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS, INC.
By: /s/ Mark A. Oliver
----------------------------
Mark A. Oliver, FLMI
President
By: /s/ Jeffrey J. Wood
----------------------------
Jeffrey J. Wood, CPA
Executive Vice President,
Secretary/Treasurer and CFO
Date: May 8, 2000
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5,591,709
<DEBT-MARKET-VALUE> 144,377,794
<EQUITIES> 636,717
<MORTGAGE> 1,338,346
<REAL-ESTATE> 934,713
<TOTAL-INVEST> 174,331,762
<CASH> 7,987,808
<RECOVER-REINSURE> 3,926,812
<DEFERRED-ACQUISITION> 36,321,616
<TOTAL-ASSETS> 254,242,493
<POLICY-LOSSES> 168,524,909
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 11,527,484
<POLICY-HOLDER-FUNDS> 1,976,077
<NOTES-PAYABLE> 0
0
0
<COMMON> 68,094,889
<OTHER-SE> 4,889,689
<TOTAL-LIABILITY-AND-EQUITY> 254,242,493
12,376,601
<INVESTMENT-INCOME> 2,976,711
<INVESTMENT-GAINS> 11,163
<OTHER-INCOME> 213,965
<BENEFITS> 9,998,156
<UNDERWRITING-AMORTIZATION> 2,739,631
<UNDERWRITING-OTHER> 3,261,062
<INCOME-PRETAX> (420,509)
<INCOME-TAX> (119,837)
<INCOME-CONTINUING> (300,672)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (300,672)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
