<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Amendment No. 1 Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
AMERICAN INVESTMENT NETWORK, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
Harold Crumpler, Executive Vice President, Treasurer and Chief Operating Officer
660 Lakeland East Drive, Suite 204, Flowood, Mississippi 39208, (601) 936-2090
- -------------------------------------------------------------------------------
(Name of Person Filing Proxy Statement, on behalf of the Registrant)
COPIES TO:
Reid A. Godbolt, Esq. E.O. Spencer, III, Esq.
Jones & Keller, P.C. Spencer & Tyra
1625 Broadway, Suite 1600 660 Lakeland East Drive, Suite 100
Denver, Colorado 80202 Jackson, Mississippi 39208
(303) 573-1600 (601) 939-9193
<PAGE> 2
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON June 19, 1997
---------
To the Shareholders of American Investment Network, Inc.:
Notice is hereby given that a Special Meeting (the "Meeting") of
shareholders of American Investment Network, Inc. ("American") will be held on
June 19, 1997, at 10:00 a.m., Central Daylight Time, at the Clubhouse of
LeFleur's Bluff State Park, Highland Drive, Jackson, Mississippi, to consider
and act upon the following:
1. To vote upon approval and adoption of a Plan and Agreement of
Exchange dated October 28, 1996, as amended ("Exchange Agreement"), under which
holders of Class A and Class B Common Stock of American will exchange their
shares for shares of Citizens, Inc. Class A Common Stock held by Citizens
Insurance Company of America ("CICA"), as described in the accompanying
Proxy-Information Statement.
2. No other business will be transacted at the Special Meeting or at
any adjournment thereof. The Special Meeting may be adjourned by the vote of a
majority of the shares represented.
Only shareholders of record of American Class A and Class B Common
Stock as of the close of business on May 2, 1997 will be entitled to notice of
and to vote at the Meeting.
SHAREHOLDERS OF AMERICAN CLASS A AND CLASS B COMMON STOCK ARE ENTITLED
TO DISSENT FROM THE EXCHANGE AND OBTAIN PAYMENT FOR SHARES, AS DESCRIBED IN THE
ACCOMPANYING PROXY-INFORMATION STATEMENT. A COPY OF ARTICLE 13 OF THE
MISSISSIPPI BUSINESS CORPORATION ACT, WHICH SETS FORTH THE RIGHTS OF
DISSENTERS, IS ATTACHED TO THE PROXY-INFORMATION STATEMENT AS APPENDIX B.
Shareholders are cordially invited to attend the Meeting. Whether or
not you intend to attend the Meeting, please fill in, date, sign, and return
promptly the enclosed proxy card in the enclosed postage-prepaid envelope so
that your shares may be voted at the Meeting if you are unable to attend in
person. The giving of a proxy will not affect your right to vote in person if
you attend the Meeting.
By Order of the Board of Directors
Phillip E. Faller, Secretary
Flowood, Mississippi
May 9, 1997
<PAGE> 3
AMERICAN INVESTMENT NETWORK, INC.
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD June 19, 1997
CITIZENS, INC.
INFORMATION STATEMENT
CLASS A COMMON STOCK, NO PAR VALUE
UP TO 697,815 SHARES
This Proxy-Information Statement is furnished in connection with the
solicitation by the Board of Directors of American Investment Network, Inc.
("American") of proxies from holders of shares of American Class A and Class B
Common Stock, for use at the Special Meeting of American Shareholders (the
"Meeting") to be held on June 19, 1997. This Proxy-Information Statement also
pertains to the number of shares of Class A Common Stock, no par value, of
Citizens, Inc. ("Citizens") to be issued in connection with a statutory stock
exchange ("Exchange") under a Plan and Agreement of Exchange dated October 28,
1996, as amended ("Exchange Agreement"), between Citizens Insurance Company of
America ("CICA," a wholly-owned subsidiary of Citizens) and American. The
Exchange Agreement sets forth certain conditions to the Exchange, including a
fairness hearing and approval by the Mississippi Commissioner of Insurance in
which American shareholders may participate pursuant to Miss. Code Ann. Section
83-19-105. With approval of the Exchange by the Mississippi Commissioner of
Insurance, the Citizens Class A Common Stock will be issued pursuant to an
exemption from registration under Section 3(a)(10) of the Securities Act of
1933. Upon consummation of the Exchange, each 7.2 outstanding shares of
American Class A or Class B Common Stock will be converted into one share of
Citizens Class A Common Stock, as described in this Proxy-Information
Statement. No fractional shares of Citizens Class A Common Stock will be
issued in the Exchange; rather, share fractions will evidence the right to
receive the cash value of such share based on the average closing price of the
Citizens Class A Common Stock as reported on the American Stock Exchange for
the five trading days prior to the effective date of the Exchange. At present,
the directors of American know of no other matters to be presented at the
Meeting. All information contained in the Proxy-Information Statement with
respect to Citizens and CICA has been furnished by Citizens, and all
information with respect to American has been furnished by American. The
approximate date of mailing of this Proxy-Information Statement to shareholders
of American is May 9, 1997.
The proxy in the form enclosed is solicited by the Board of Directors of
American for use at the Meeting. Only shareholders of record at the close of
business on May 2, 1997 are entitled to notice of and to vote at the Meeting.
On May 2, 1997, the number of outstanding shares of American Class A Common
Stock entitled to be voted at the Meeting was 5,021,764, each of which is
entitled to one vote; the number of outstanding shares of American Class B
Common Stock was 2,500, each of which is entitled to one vote per share. Under
the bylaws and the pertinent provisions of the Mississippi Business Corporation
Act, the Class A and Class B Common Stock will vote as separate classes on the
matters at the Meeting. If the accompanying proxy form is signed and returned,
the shares represented thereby will be voted as instructed. In the event no
instructions are given, the proxy will be voted for the Exchange and upon such
other matters as may properly come before the Meeting. If, after sending in
your proxy, you decide to vote in person or decide to revoke your proxy for any
other reason, you may do so by notifying the Secretary of American in writing
prior to the voting of the proxy or attending the Meeting in person and
revoking your proxy.
The expenses of soliciting proxies and the cost of preparing, assembling and
mailing material in connection with the solicitation of proxies will be borne
by American. In addition to the use of the mails, certain directors, officers
or regular employees of American or its subsidiaries, who receive no
compensation for their services other than their regular salaries or fees, if
any, may solicit proxies personally.
The directors and management of American know of no matters to be brought
before the Meeting other than those mentioned herein. If, however, any other
matters properly come before the Meeting, it is intended that the proxies will
be voted in accordance with the judgment of the person or persons voting such
proxies.
The Citizens Class A Common Stock is listed on the American Stock Exchange
under the symbol "CIA." On April 30, 1997, the closing price of Citizens
Class A Common Stock was $7.875 per share.
---------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR
HAS THE COMMISSION OR ANY STATE REGULATORY AUTHORITY PASSED UPON THE ACCURACY
OR ADEQUACY OF THE PROXY-INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES SIGNIFICANT RISKS. SEE
"RISK FACTORS."
i
<PAGE> 4
---------
No person is authorized to give any information or to make any representation
not contained in the Proxy-Information Statement, and if given or made, such
information or representation should not be relied upon as having been
authorized. The Proxy-Information Statement does not constitute an offer to
exchange or sell, or a solicitation of an offer to exchange or purchase, the
securities offered hereby, or the solicitation of a proxy, in any jurisdiction
to or from any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of the Proxy-Information Statement
nor any distribution of the securities to which the Proxy-Information Statement
relates shall, under any circumstances, create an implication that there has
been no change in the affairs of Citizens, CICA or American.
The Proxy-Information Statement does not cover any resales of shares of the
securities offered hereby to be received by shareholders of American upon
consummation of the Exchange Agreement. No person is authorized to use the
Proxy-Information Statement in connection with such resales, although such
securities may be traded without use of the Proxy-Information Statement by
those shareholders of American not deemed to be "affiliates" of either American
or Citizens.
---------
The principal executive offices of both Citizens and CICA are located at 400
East Anderson Lane, Austin, Texas 78752, telephone (512) 837-7100. The
principal executive offices of American are located at 660 Lakeland East Drive,
Suite 204, Flowood, Mississippi 39208, telephone (601) 936-2090.
---------
Information included in this Proxy-Information Statement includes "forward
looking statements," which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate," or
"continue," or the negative thereof or other variations thereon or comparable
terminology. The statements in "Risk Factors" and other statements and
disclaimers in this Proxy-Information Statement constitute cautionary
statements identifying important factors, including certain risks and
uncertainties, with respect to such forward-looking statements that could cause
actual results to differ materially from those reflected in such
forward-looking statements.
---------
The date of the Proxy-Information Statement is May 1, 1997.
ii
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<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
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<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PROPOSED EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
BACKGROUND AND REASONS FOR THE EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
RECOMMENDATION OF THE BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
REGULATORY REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
TERMS OF THE EXCHANGE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
RECEIPT OF CITIZENS SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
FRACTIONAL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
OTHER CONDITIONS TO CONSUMMATION OF THE EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
STOCK EXCHANGE LISTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
TERMINATION OR AMENDMENT OF THE EXCHANGE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
EXPENSES AND LIABILITY FOR TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
CONDUCT OF BUSINESS PENDING THE EXCHANGE; OTHER COVENANTS OF THE PARTIES . . . . . . . . . . . . . . . . . . 10
STOCK TRANSFER RESTRICTIONS APPLICABLE TO "AFFILIATES" OF AMERICAN . . . . . . . . . . . . . . . . . . . . . 10
INTERESTS OF CERTAIN PERSONS IN THE EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
INFORMATION CONCERNING CITIZENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
GENERAL DEVELOPMENT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
NARRATIVE DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
DESCRIPTION OF PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 26
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
FINANCIAL ACCOUNTING STANDARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
MARKET PRICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CERTAIN SECURITY OWNERSHIP OF CITIZENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
MANAGEMENT OF CITIZENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SOURCE OF CITIZENS SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
RIGHTS OF AMERICAN DISSENTING SHAREHOLDERS TO RECEIVE PAYMENT FOR SHARES . . . . . . . . . . . . . . . . . . . . . . 35
COMPARISON OF RIGHTS OF SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
AUTHORIZED SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PREEMPTIVE RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
LIABILITY OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
LIQUIDATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
INFORMATION CONCERNING AMERICAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
UNITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
REGULATION AND SPECIAL ACCOUNTING PRACTICES RELATING TO LIFE INSURANCE COMPANIES . . . . . . . . . . . . . . 42
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
THE GAIN AGENCY, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
U.S. STAR INTERNATIONAL, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
MARKET AND DIVIDENDS ON AMERICAN CLASS A AND CLASS B COMMON EQUITIES AND RELATED STOCKHOLDER MATTERS . . . . 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 47
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>
iii
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<TABLE>
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MANAGEMENT OF AMERICAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
DEADLINE FOR CITIZENS SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
CITIZENS, INC. AND SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
AMERICAN INVESTMENT NETWORK, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
</TABLE>
APPENDIX A -- PLAN AND AGREEMENT OF EXCHANGE - AMERICAN INVESTMENT NETWORK,
INC., CITIZENS INSURANCE COMPANY OF AMERICA, INC. AND CITIZENS,
INC., DATED OCTOBER 28, 1996, AS AMENDED
APPENDIX B -- ARTICLE 13 OF THE MISSISSIPPI BUSINESS CORPORATION ACT GOVERNING
RIGHTS OF DISSENTING AMERICAN SHAREHOLDERS
APPENDIX C -- ORDER OF MISSISSIPPI COMMISSIONER OF INSURANCE APPROVING THE
EXCHANGE
iv
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AVAILABLE INFORMATION
Both Citizens and American are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Those
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC at the 13th Floor, 7 World Trade Center, New York, New York
10048, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such materials can be obtained at prescribed rates
from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Also, the SEC maintains a Web site
(http://www.sec.gov) that contains such materials of Citizens and American. In
addition, such reports, proxy statements and other information concerning
Citizens may be inspected at the offices of the American Stock Exchange, 86
Trinity Place, New York, New York 10006-1881.
v
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy-Information Statement. This Summary is not intended to be
complete and is qualified in its entirety by reference to the more detailed
information appearing in this Proxy-Information Statement, including the
Appendices. Shareholders of American are urged to read this Proxy-Information
Statement in its entirety.
THE PARTIES TO THE EXCHANGE
The three parties to the Exchange Agreement are Citizens, Inc., a
Colorado corporation ("Citizens"), Citizens Insurance Company of America, a
Colorado corporation ("CICA"), and American.
Citizens is an insurance holding company. CICA is a life insurance
company which is wholly-owned by Citizens. The principal executive office of
both Citizens and CICA is located at 400 East Anderson Lane, Austin, Texas
78752, and the telephone number at such office is (512) 837-7100.
American is a Mississippi corporation which is a financial holding
company. The principal executive office of American is located at 660 Lakeland
East Drive, Suite 204, Flowood, Mississippi 39208. The telephone number at
such office is (601) 936-2090. Neither American nor any of its officers or
directors are affiliated with Citizens or CICA, nor are any officers or
directors of Citizens or CICA affiliated with American.
United Security Life Insurance Company ("United") is a Mississippi
domestic insurance company which is wholly-owned by American. United has the
same principal executive office as American. It is contemplated that United
will act as a separate indirect subsidiary of Citizens after the Exchange.
<TABLE>
<CAPTION>
AMERICAN INVESTMENT NETWORK, INC. SPECIAL
MEETING OF SHAREHOLDERS
<S> <C>
PERSONS ENTITLED TO VOTE; RECORD DATE Holders of record of shares of American Class A and Class B Common
Stock, at the close of business on May 2, 1997 ("Record Date"), will
be entitled to notice of and to vote at the Special Meeting of
Shareholders (the "Meeting").
DATE, TIME AND PLACE OF MEETING The Meeting will be held on June 19, 1997, at 10:00 a.m., Central
Daylight Time, at the Clubhouse of LeFleur's Bluff State Park,
Highland Drive, Jackson, Mississippi.
BUSINESS TO BE TRANSACTED At the Meeting, shareholders of American will be asked to consider
and vote upon approval of a Plan and Agreement of Exchange, as
amended (the "Exchange Agreement"), under which CICA and American
will effect an exchange of Class A Common Stock of Citizens held by
CICA for the Class A and Class B Common Stock of American, with
shareholders of American receiving shares of Citizens Class A Common
Stock (the "Exchange").
THE EXCHANGE AGREEMENT Citizens, CICA and American have entered into the Exchange Agreement,
in which American shareholders will receive Citizens Class A Common
Stock in exchange for their American shares.
The Exchange will be accounted for by the purchase method of
accounting.
Pursuant to the Exchange Agreement, holders of American Class A and
Class B Common Stock will receive one share of Citizens Class A
Common Stock for each seven and two-tenths (7.2) shares of American
Class A or Class B Common Stock held. Fractional shares will not be
issued in the Exchange; rather, such fractional shares will evidence
the right to receive the cash value of such share based on the
average closing price of the Citizens Class A Common Stock as
reported on the American Stock Exchange for the five trading days
prior to the effective date of the Exchange. Any holder of American
Class A or Class B Common Stock who shall have properly perfected the
dissenters' rights under Mississippi law will not have the right to
receive Citizens Class A Common Stock, but only cash, in an amount
equal to the fair value of his or her American shares. See "Proposed
Exchange--Receipt of Citizens Shares" and "Rights
</TABLE>
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<TABLE>
<S> <C>
of American Dissenting Shareholders to Receive Payment For Shares."
PROXY REVOCABILITY Proxies are revocable at any time prior to voting at the Meeting.
See "The Special Meeting--Revocability of Proxies."
REQUIRED VOTE Approval of the Exchange Agreement and the transactions contemplated
thereby requires the affirmative vote of holders of 66 2/3% of the
outstanding American Common Stock (Class A and Class B voting as
separate classes). See "The Special Meeting--Voting Securities."
Citizens, as sole shareholder of CICA, has approved the Exchange
Agreement. No shareholder vote of Citizens is required by the
Exchange Agreement or applicable law. As of March 31, 1997 there
were 19,892,159 issued and outstanding shares of Citizens Class A
Common Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS The American Board of Directors has unanimously approved the Exchange
Agreement and recommends that the shareholders vote FOR approval of
the Exchange. This recommendation is based on factors described under
"Proposed Exchange--Background and Reasons for the Exchange," and
that based upon considerations set forth therein, the exchange ratio
in the Exchange Agreement is fair, from a financial point of view to
all of the shareholders of American.
APPROVAL OF THE MISSISSIPPI COMMISSIONER The Exchange has been approved by the Mississippi
OF INSURANCE Commissioner of Insurance. A copy of the order dated April 1, 1997
approving the Exchange is included herewith as Appendix C.
OUTSTANDING SHARES OF AMERICAN As of the Record Date, there were outstanding 5,021,764 shares of
American Class A Common Stock and 2,500 shares of Class B Common
Stock. As of the Record Date, American directors, executive officers
and their affiliates held 947,958 shares of Class A Common Stock and
1,666 shares of Class B Common Stock, or 18.9% of the Class A Common
Stock, and 66.7% of the Class B Common Stock entitled to vote on the
Exchange. See "The Special Meeting--Voting Securities."
CLOSING DATE The Exchange Agreement provides that the actions contemplated thereby
will be completed at a closing (the "Closing") on a closing date (the
"Closing Date") which will be as soon as possible after all
regulatory approvals and shareholder approvals are obtained in
accordance with law and shall become effective on or as soon as
possible after the Closing Date. The Exchange has been approved by
the Mississippi Commissioner of Insurance. It is fully anticipated
that the Closing will occur and the Exchange will be effective on or
shortly after the American shareholder approval is obtained, but
there can be no assurance that the conditions to the Exchange will be
satisfied or that the Exchange will be consummated.
CONDUCT OF BUSINESS OF AMERICAN American has agreed that it will not enter into any
PRIOR TO CLOSING transactions prior to the effective date of the Exchange other than
in the ordinary course of business and will pay no shareholder
dividends nor increase the compensation of officers and will not
enter into any agreement or transaction which will adversely affect
its financial condition. See "Proposed Exchange--Conduct of Business
Pending the Exchange; Other Covenants of the Parties."
DISSENTERS' RIGHTS Under the Mississippi Business Corporation Act, shareholders of
American have the right to dissent from the Exchange and demand
payment of the fair value of their shares in cash. If holders of
more than 2.5% of the outstanding shares of American qualify as
dissenters, CICA may, at its option, decline to proceed with the
Exchange.
</TABLE>
vii
<PAGE> 10
<TABLE>
<S> <C>
See "Rights of American Dissenting Shareholders to Receive Payment
for Shares," "Proposed Exchange--Other Conditions to Consummation of
the Exchange," and Appendix B which sets forth the relevant
Mississippi statutes concerning rights of dissenting shareholders.
CONDITIONS PRECEDENT TO THE EXCHANGE In addition to approval by the holders of American Class A and Class
B Common Stock, the Exchange is subject to the satisfaction (or
waiver by the party entitled to the benefit thereof) of a number of
conditions including (1) the performance by each party of its
respective obligations, (2) the absence of any legal proceedings
relating to the transactions contemplated by the Exchange Agreement,
(3) the continued material accuracy of representations made by each
party and (4) the delivery of certain legal opinions. See "Proposed
Exchange--Other Conditions to Consummation of the Exchange."
SUMMARY OF FEDERAL INCOME TAX The Exchange is intended to be treated as a reorganization
CONSIDERATIONS within the meaning of Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"). Accordingly, for federal income tax
purposes both Citizens and American believe: (i) no material gain or
loss will be recognized by American or CICA as a result of the
Exchange; (ii) no gain or loss will generally be recognized by
holders of American Class A or Class B Common Stock on the exchange
of their shares for Citizens Class A Common Stock pursuant to the
Exchange; and (iii) the aggregate adjusted tax basis of the Citizens
Class A Common Stock received by an American shareholder in exchange
for Citizens Class A Common Stock will be the same as the basis of
the American Class A or Class B Common Stock surrendered in exchange
therefor. If the Exchange were not to so qualify, the exchange of
shares would be taxable. The Exchange may be terminated by any party
if it is determined by counsel of any party that the Exchange will
not constitute a reorganization within the meaning of Section 368(a)
of the Code. The parties are not requesting a legal opinion on the
Exchange, nor is a ruling from the Internal Revenue Service being
sought in connection with the Exchange. See "Certain Federal Income
Tax Consequences."
AMERICAN SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE, AS
WELL AS ANY APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX
CONSEQUENCES, IN LIGHT OF THEIR OWN PARTICULAR TAX SITUATIONS.
TERMINATION OF THE EXCHANGE AGREEMENT The Exchange Agreement may be terminated by either party if the
effective date does not occur by June 30, 1997. See "Proposed
Exchange--Other Conditions to Consummation of the Exchange." The
Exchange Agreement may be amended upon the approval of the Board of
Directors of each party provided that the number of shares of
Citizens Class A Common Stock to be issued cannot be changed without
the approval of the shareholders of American. In addition, the
Exchange Agreement may be terminated and amended at any time prior to
the effective date by unanimous consent of the parties; by any of the
beneficiaries of the conditions precedent to the consummation of the
Exchange unless the condition has been satisfied or waived; by any
party if any suit, action, or proceeding pending in a court or
governmental agency threatens to prohibit the transactions
contemplated by the Exchange; or if any party has discovered any
material error in the representations of the other parties. See
"Proposed Exchange--Termination or Amendment of the Exchange
Agreement."
OTHER MATTERS The American Board of Directors knows of no other matters that will
come before the Meeting. If any additional matters come before the
Meeting, the proxies will be voted at the discretion of the proxy
holder.
</TABLE>
viii
<PAGE> 11
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere
in this Proxy-Information Statement, should be considered carefully in
evaluating Citizens and its business.
LACK OF FAIRNESS OPINION OR APPRAISAL. The American Board has not
retained nor sought investment banking or appraisal services to value American
or provide advice regarding the fairness of the terms of the Exchange.
However, on April 1, 1997 the Mississippi Commissioner of Insurance approved
the Exchange and determined under applicable Mississippi law that it was fair
to the shareholders of American. See Appendix C attached hereto. The lack of
a fairness opinion or appraisal from an investment banker or appraisal firm
conceivably could have negatively impacted the amount of consideration to be
received by the holders of American Class A and Class B Common Stock.
TAX RISKS. The Exchange is intended to be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, for federal income tax purposes, no gain or
loss will generally be recognized by holders of American Class A or Class B
Common Stock on the exchange of their shares for Citizens Class A Common Stock
pursuant to the Exchange, and the aggregate adjusted tax basis of the Citizens
Class A Common Stock received by an American shareholder in exchange for
Citizens Class A Common Stock will be the same as the basis of the American
Class A or Class B Common Stock surrendered in exchange therefor. If the
Exchange were not to so qualify, the exchange of shares would be taxable. No
party to the Exchange nor any of their affiliates is seeking an opinion of
counsel with respect to the tax treatment of the Exchange. No party to the
Exchange has requested and the parties do not intend to request a ruling from
the Internal Revenue Service in connection with the Exchange. However, the
Exchange may be terminated by any party if it is determined by counsel of any
party that the Exchange will not constitute a reorganization within the meaning
of Section 368(a) of the Code. For additional discussion of this risk and
other tax risks, see "Certain Federal Income Tax Consequences."
NO DIVIDENDS. To date, Citizens has not paid cash dividends in
respect of its common stock and its current policy is to retain earnings for
use in the operations and expansion of its business. Hence, it is highly
unlikely that cash dividends will be paid in the near future. Also, the
Citizens Class A Common Stock has a right to twice the cash dividends of the
Citizens Class B Common Stock. Because the Class B shareholders control
Citizens, there is little economic incentive for the Class B shareholders to
determine that cash dividends should be paid when they will receive only
one-half of the per share cash dividends of the Class A common shares, except
that the beneficiaries and trustee of the Harold E. Riley Trust, which holds
the Citizens Class B Common Stock, are also the largest holders of Citizens
Class A Common Stock.
SIGNIFICANT MARKET OVERHANG. A registration statement of Citizens on
Form S-3 with the SEC is in effect relating to the public offer and sale by
certain holders of Citizens Class A Common Stock, including Harold E. Riley,
Chairman of the Board of Citizens. The registration statement relates to
approximately 6,099,657 shares of Class A Common Stock or approximately 30% of
the Citizens Class A Common Stock outstanding. It may be assumed that sales of
significant amounts of these shares in the public market could have a
depressive effect on the price of the Citizens Class A Common Stock. Further,
the prospect, even without the actual sales, of such significant amounts of
shares being offered into the public market place may have a depressive effect
on the price of the Citizens Class A Common Stock.
CONTROL. The shares of outstanding Citizens Class B Common Stock,
100% of which is owned indirectly by Harold E. Riley, Chairman of the Board of
Citizens (through the Harold E. Riley Trust), have the right to elect a simple
majority of the Board of Directors of Citizens. This right may make it more
difficult and time consuming for a third party to acquire control of Citizens
or to change the Board of Directors of Citizens. Additionally, Mr. Riley is
the largest holder of Class A Common Stock. As a practical matter, Mr. Riley
has veto power over significant corporate transactions.
INABILITY TO ELECT DIRECTORS. The Citizens Class A Common Stock being
offered hereby represents a minority interest in Citizens. As cumulative
voting of shares is not permitted by the Articles of Incorporation of Citizens,
the minority shareholders of Citizens cannot through their votes alone elect
any of Citizens' directors or otherwise control Citizens. Also, the Citizens
Class B Common Stock elects a simple majority of the Citizens' Board.
Therefore, as a practical matter, control of Citizens lies outside the Class A
shareholders. See "Comparison of Rights of Security holders."
PROPOSED OFFERING OF 3,500,000 SHARES OF CITIZENS CLASS A COMMON STOCK
OUTSIDE THE UNITED STATES AND EFFECT THEREOF. In May 1995, Citizens commenced
an offering of up to 3,500,000 shares of Class A Stock outside the United
States pursuant to a safe harbor rule relating to an exemption from
registration under the Securities Act of 1933. Citizens has restricted the
transfer of such shares for a period of three years following the initial
purchase, and a legend to such effect will be placed on each certificate for
such shares. The offering price is $7.50 per share. Management is unable to
determine how successful the offering will be. As of March 31, 1997,
approximately 135,000 shares had been sold in the offering. Subsequent resale
of these shares in the United States could have a depressive effect upon the
price of the Class A common shares, and it may be assumed that overseas
1
<PAGE> 12
investors would have more of an incentive to sell their Class A common shares
because the price they paid for such stock will probably be lower than the
trading price of the Class A Common Stock.
DEPENDENCE ON CITIZENS' CHAIRMAN. Citizens relies heavily on the
active participation of its Chairman of the Board and Chief Executive Officer,
Mr. Harold E. Riley. The loss of Mr. Riley's services would likely create a
significant adverse effect on Citizens. Citizens does not have an employment
agreement with Mr. Riley, but does have "key man" life insurance on him
totaling $1.25 million of which Citizens is the beneficiary. Citizens has no
disability insurance regarding Mr. Riley.
CONCENTRATION OF BUSINESS FROM PERSONS RESIDING IN THIRD WORLD
COUNTRIES. For the years ended December 31, 1996 and 1995, approximately 91.8%
per year of Citizens' total insurance premium revenue was derived from policies
issued on the lives of foreign residents, most of whom reside in Latin America.
The policies issued to such persons are ordinary, whole-life policies with an
average face amount of $60,000 and are marketed by independent marketers
primarily to heads of households who are in the top 5% of the population in
terms of household income. There is a risk of loss of a significant portion of
sales in Latin America should adverse events occur in the countries from which
Citizens receives applications. To minimize inherent risk, Citizens is not
chartered as an insurance company in any foreign country, maintains no assets
or employees in foreign countries, accepts only applications and premiums
remitted directly to its main office in United States currency drawn on U.S.
banks, and includes various limitations to coverage which are designed to
minimize exposure to loss caused by social, economic and political conditions.
Citizens is not aware of any adverse trends in these countries which would have
a material adverse impact on Citizens' business. Furthermore, management
believes that political or economic instability in these countries would likely
have a favorable impact on Citizens' business since such instability would
generally strengthen the demand for U.S. dollar-denominated policies.
PERSISTENCY. Persistency is the extent to which policies sold remain
in-force. Policy lapses over those actuarially anticipated could have an
adverse effect on the financial performance of Citizens. Policy sales costs
are deferred and recognized over the life of a policy. Excess policy lapses,
however, cause the immediate expensing or amortizing of deferred policy sales
costs. As long as Citizens maintains its lapse and surrender rate within its
pricing assumptions for its insurance policies, Citizens believes that its
present lapse and surrender rate should not have a material adverse effect on
its financial results. For the years ended December 31, 1996, 1995 and 1994,
the Citizens' lapse ratio on ordinary business as a percentage of mean life
insurance in force was 4.6%, 4.1% and 4.0%, respectively.
COMPETITION. The life insurance business is highly competitive and
consists of a number of companies, many of which have greater financial
resources, longer business histories, and more diversified lines of insurance
coverage than Citizens. Such companies also generally have larger sales
forces. Citizens also faces competition from companies located within foreign
countries that conduct marketing in person and have direct mail sales
campaigns. Citizens may be at a competitive disadvantage in competing with
these entities although management believes the products of Citizens purchased
by its policyholders are competitive in the marketplace. Competition in the
market in which Citizens competes is from three sources. First, Citizens
competes with companies which are formed and operated within a particular
country. These types of companies are subject to risks of currency
fluctuations and generally use mortality tables which are based on the
experience of the local population as a whole. As a result, their prospects of
providing an economic return to policyholders are more uncertain than for U.S.
dollar-based policies, and their statistical cost of insurance is much higher
than Citizens because they use mortality tables that are based on significantly
shorter life spans than those that Citizens uses. The second source of
competition is from companies which are not formed within a given country but
are using local currencies. Again, the use of local-based currencies entails
greater risks of uncertainty, due to fluctuations of local currencies and
perceived instability and weakness of local currencies. Management has
observed that these first two types of companies tend to sell universal life
and annuities versus whole life, which is the predominant type of life
insurance sold by Citizens. Finally, Citizens faces competition from companies
which operate in the same mode as Citizens. Management believes that Citizens'
competitive advantages include its history of performance, its sales force and
its product, which has consistently paid a cash dividend on the policies
issued.
REGULATION. Insurance companies are subject to comprehensive
regulation in the jurisdictions in which they do business under statutes and
regulations administered by state insurance commissioners. Such regulation
relates to, among other things, prior approval of an acquisition of a
controlling interest in an insurance company; standards of solvency which must
be met and maintained; licensing of insurers and their agents; the nature of
and limitations on investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; triennial
examinations of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes; and
requirements regarding reserves for unearned premiums, losses and other
matters. Citizens and its life insurance subsidiaries are subject to this type
of regulation in any state in which they are licensed to do business. Such
regulation could involve additional costs and restrict operations.
2
<PAGE> 13
Citizens is currently subject to regulation in Colorado under the
Colorado Insurance Holding Company Act. Intercorporate transfers of assets and
dividend payments from Citizens Life Insurance Company of America ("CICA"), a
wholly-owned subsidiary of Citizens that is a Colorado domiciled life insurance
company, are subject to prior notice and approval if they are deemed
"extraordinary" under this statute. Citizens and CICA are required under
Colorado insurance laws to file detailed annual reports with the Colorado
Division of Insurance and all of the states in which it is licensed. The
business and accounts of CICA are subject to examination by the Colorado
Division of Insurance. The most recent triennial examination of CICA was for
the year ended December 31, 1991, and Citizens has been advised by the Colorado
Division of Insurance that an examination as of December 31, 1996 will commence
in 1997.
Citizens is currently not subject to regulation in the various
countries in which its independent marketing consultants solicit applications
for insurance policies because acceptance of the applications and issuance of
the policies in the U.S. do not constitute conducting business in such
countries. However, there can be no assurance that such lack of regulation
will continue. Management is not able to predict the effect of any such
regulation on the business of Citizens.
UNINSURED CASH BALANCES. Citizens maintains average cash balances in
its primary depository, Texas Commerce Bank, Austin, Texas, that are
significantly in excess of Federal Deposit Insurance Corporation coverage. If
this depository were to cease business, Citizens would likely lose a
substantial amount of its cash. At December 31, 1996, Citizens had
approximately $3 million in this depository. However, management monitors the
solvency of this depository and does not believe a material risk of loss exists
since this financial institution is currently above the federally mandated
levels of capital and liquidity. Management utilizes short-term U.S. Treasury
securities as well as top-rated commercial paper issues as vehicles for
managing temporary excess cash balances, and expects to continue the practice
for the foreseeable future.
INTEREST RATE VOLATILITY; INVESTMENT SPREAD RISKS. Profitability in
the insurance industry is affected by fluctuations in interest rates. Of prime
importance in achieving profitability is an insurance company's ability to
invest premiums at a higher interest rate than the interest rate credited to
existing policies. Rapid decreases or increases in interest rates may affect
an insurance company's ability to maintain a positive spread between the yield
on invested assets and the assumed interest rate credited to policy reserves.
Rapid interest rate changes could cause increased lapses of policies in-force,
although management believes the effect of such rate changes would be minimal
since Citizens does not issue interest sensitive or universal life insurance
policies and has only a small block of annuity business.
3
<PAGE> 14
THE SPECIAL MEETING
Date, Time and Place of Meeting
A Special Meeting of Shareholders (the "Meeting") of American
Investment Network, Inc. ("American") will be held on June 19, 1997, at 10:00
a.m., Central Daylight Time, at the Clubhouse of LeFleur's Bluff State Park,
Highland Drive, Jackson, Mississippi.
BUSINESS TO BE TRANSACTED AT THE MEETING
The Proxy-Information Statement, the mailing of which commenced on
approximately May 9, 1997, is being furnished to shareholders of American in
connection with the solicitation of proxies by the Board of Directors of
American for use at the Meeting and at any adjournments thereof. At the
Meeting, holders of American Class A and Class B Common Stock will be asked to
consider and vote upon approval of a Plan and Agreement of Exchange dated
October 28, 1996, as amended ("Exchange Agreement"), under which Citizens
Insurance Company of America ("CICA") will exchange shares of Class A Common
Stock of Citizens, Inc. ("Citizens," the sole owner of CICA) for common shares
of American. Pursuant to the Exchange Agreement, American shareholders will
receive in the Exchange one (1.0) share of Citizens Class A Common Stock for
each seven and two-tenths (7.2) shares of either American Class A or Class B
Common Stock held. The Exchange was approved by the Mississippi Commissioner
of Insurance on April 1, 1997 after a hearing thereon held by the Commissioner
pursuant to Miss. Code Ann. Title 83, Chapters 6 and 9. With the approval of
the Exchange by the Mississippi Commissioner of Insurance, the Citizens Class A
Common Stock will be issued pursuant to an exemption from registration under
Section 3(a)(10) of the Securities Act of 1933.
As of the date of the Proxy-Information Statement, the Board of
Directors of American knows of no other business that will come before the
Meeting. Should any other matter requiring a vote of shareholders arise, the
proxies named in the enclosed form of proxy will vote the American shares in
accordance with their discretion with respect to any such matter.
VOTING SECURITIES
Only shareholders of record of American Class A and Class B Common
Stock, at the close of business on May 2, 1997, will be entitled to vote at the
Meeting. On that date, there were issued and outstanding 5,021,764 shares of
Class A Common Stock and 2,500 shares of Class B Common Stock of American.
Each share of American Class A and Class B Common Stock is entitled to one vote
per share.
A majority of the number of shares of outstanding American Common
Stock of each of Class A and Class B will constitute a quorum for the
transaction of business at the Meeting. An affirmative vote of 66 2/3% of the
outstanding American Class A and Class B Common Stock, voting as separate
classes, is required to approve the Exchange. This two-thirds voting
requirement is necessitated by the interpretation placed upon the pertinent
insurance statutes (Title 83, Chapters 6 and 19, of the Miss. Code Ann.) by the
Mississippi Department of Insurance.
AMERICAN VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information with respect to the
only persons known to American to be beneficial owner of more than 5% of either
class of American common shares outstanding, and the number and percent of each
class of shares beneficially owned at that date by each director and officer of
American and by all of the directors and officers as a group. Each director or
officer has sole voting and investment power over the shares listed opposite
his or her name.
<TABLE>
<CAPTION>
NUMBER OF SHARES OWNED BENEFICIALLY AND
PERCENTAGE OF EACH CLASS OF SHARES
NAME, ADDRESS CLASS A CLASS A CLASS B CLASS B
AND TITLE OF OWNER COMMON PERCENTAGE COMMON PERCENTAGE
- ------------------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Walter L. Shelton 312,930 6.2% 833 33.3%
Jackson, Mississippi 39211
Chairman, Director
Jesse L. Byrd 238,998 4.8% 833 33.3%
Brandon, Mississippi 39042
Vice Chairman, Director
John S. Camara 100 0% -0- 0%
Madison, Mississippi 39110
President and Director
</TABLE>
4
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C>
H. Elton Cook 81,834 1.6% -0- 0%
Jackson, Mississippi 39211
Director
H. Harold Crumpler 6,394 .13% -0- 0%
Brandon, Mississippi 39042
Executive Vice President/
Treasurer and Director
Phillip E. Faller 18,000 .4% -0- 0%
Brandon, Mississippi 39042
Vice President/Secretary
and Director
Thomas S. Hayes 60,300 1.2% -0- 0%
Clarksdale, Mississippi 38614
Director
Billy George Janous 10,400 .2% -0- 0%
Belzoni, Mississippi 39038
Director
John T. Keeton, Jr 118,668 2.4% -0- 0%
Grenada, Mississippi 38901
Director
L. Homer Martin, Jr 59,000 1.2% -0- 0%
Belzoni, Mississippi 39038
Director
Linda M. Pepper 5,000 .09% -0- 0%
Madison, Mississippi 39110
Assistant Secretary
H. Shannon Williford 36,334 .7% -0- 0%
Vicksburg, Mississippi 39180
Director
All Directors and Officers
as a Group (12 persons) 947,958 18.9% 1,667 66.6%
Ben S. Yandell 234,000 4.7% 833 33.3%
Jackson, Mississippi 39216
</TABLE>
REVOCABILITY OF PROXIES
Any American shareholder has the power to revoke his or her proxy
before its exercise at the Meeting or any adjournment thereof by (i) giving
written notice of such revocation to the Secretary of American, Phillip E.
Faller, 660 Lakeland East Drive, Suite 204, Flowood, Mississippi 39208, prior
to the Meeting; (ii) giving written notice of such revocation to the Secretary
at the Meeting; or (iii) signing and delivering a proxy bearing a later date.
The mere presence at the Meeting of a shareholder who has executed and
delivered a valid proxy will not revoke such proxy. However, being present at
the Meeting allows a shareholder vote in person and revoke any prior proxy.
PROXY SOLICITATION
The cost of soliciting proxies will be borne by American. In addition
to solicitation by mail, officers and employees of American and its
subsidiaries may solicit proxies by telephone and personally, although these
persons will receive no compensation for such solicitation other than their
regular salaries. American will reimburse brokers, custodians, nominees and
other fiduciaries for their charges and expenses in forwarding materials to
beneficial owners of American shares. American is obligated under the Exchange
Agreement to bear certain expenses concerning the preparation, including the
printing of this Proxy-Information Statement.
5
<PAGE> 16
PROPOSED EXCHANGE
BACKGROUND AND REASONS FOR THE EXCHANGE
American (formerly Great American Investment Network, Inc.) was
incorporated in 1987 for the purpose of acquiring stock in existing insurance
companies and organizing and operating other companies in the financial
services industry. American has two wholly-owned subsidiaries, United Security
Life Insurance Company ("United") and The Gain Agency, Inc. (the "Agency") and,
prior to 1995, owned a 50% interest in U.S. Star International, Inc. ("U.S.
Star") an inactive foreign corporation. In 1995 American conveyed its interest
in U.S. Star to nonaffiliated parties. Prior to April 1995, the Agency was a
general insurance agency selling property and casualty insurance. In April
1995, the Agency sold all of its inforce business and certain assets. In 1990
United began selling and underwriting a participating modified whole life
insurance policy. In 1993 United began a mass marketing program to offer
limited benefit, accident and health policies. The sale of accident and health
products has been United's major focus since 1994. Shareholders of American
are urged to review "Information Concerning American--Business," for further
information concerning the business of American.
For continued expansion of its operations, American is dependent upon
obtaining and maintaining profitable operations, possible additional equity
offerings and obtaining such additional financing as may be required from time
to time. Management has been aware that American's ability to raise additional
financing is limited by the size and scope of American's operations. In
addition, the American Class A Common Stock has been traded on an extremely
limited basis. Although the American Class A Common Stock has been quoted on
the Nasdaq Over-the-Counter Electronic Bulletin Board, trades have been
sporadic. Therefore, in 1996 management undertook to determine the feasibility
of a business combination with a larger, better capitalized corporation, which
in addition, would afford American shareholders greater liquidity in their
stock.
In mid-1996, the management of Citizens and CICA approached management
of American with respect to a possible business combination of the parties.
After several discussions and meetings held over a several month period, the
Exchange Agreement between American and CICA was executed on October 28, 1996.
The Exchange Agreement was approved unanimously by the boards of directors of
both American and CICA.
VALUATION
The valuation of American and Citizens centered on a share exchange
ratio. Management of Citizens and American reviewed carefully the market value
of Citizens Class A Common Stock (see "Information Concerning Citizens--Market
Prices") and, lacking a similar market upon which to determine a fair price,
evaluated the assets and liabilities of American and its subsidiaries, and
decided that determination of the exchange ratio should begin with a book value
basis of American, adjusted to a substantial degree to reflect values which are
standard within the life insurance industry. The management of Citizens and
American reviewed the capital and surplus of their respective insurance
subsidiaries, along with annual life insurance premium revenue valued at
certain multiple factors depending upon the profitability of the product and
paid up policy reserves. In addition, state licenses, agency force, and
nonadmitted capital and surplus assets of the life insurance subsidiaries were
reviewed. These values are summarized in the table below.
<TABLE>
<CAPTION>
AMERICAN
-----------
<S> <C>
Capital and surplus of subsidiaries, along with a securities
valuation reserve and investment reserves $ 2,372,000
Life insurance in force as a multiple of annual premium revenue 1,191,000
Accident and health insurance in force as a factor of annual
premium revenue 791,000
Market value of real estate 694,000
State licenses 500,000
Agency force 600,000
Other miscellaneous values 83,000
(Less outstanding obligations) (a) (946,000)
-----------
TOTAL ADJUSTED BOOK VALUE $ 5,285,000
-----------
</TABLE>
- ----------
(a) Includes mortgage payable to bank on real estate.
6
<PAGE> 17
The adjusted book value for American was divided by the shares
outstanding to arrive at an adjusted value per share of $1.05. This value was
compared to the trading prices of Citizens' shares on the American Stock
Exchange. The resulting comparison led to the ratio of one share of Citizens
for each 7.2 shares of American.
The resulting values were reviewed carefully by each party. Also
discussed at length were how payment would be made to American shareholders,
and the tax consequences of the Exchange. The fairness of the terms and
conditions of the Exchange, as well as fairness to the shareholders of
American, were approved on April 1, 1997 by the Mississippi Commissioner of
Insurance after a hearing held in March 1997.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of American believes that the Exchange should
be effectuated because the Board believes a fair exchange ratio will result to
the shareholders of American. Also, the market price of Citizens Class A
Common Stock was nearly eight times the adjusted book value of American Common
Stock at the time of the negotiations, and such ratio has continued since that
time, thus making the trade fair from a market price viewpoint. Accordingly,
the American Board of Directors believes the exchange ratio and, hence the
price to be received for the American shares in the Exchange, is fair.
American believes that Citizens' goal to build a profitable, expanding
life insurance holding company is consistent with the goals of American. The
Board of Directors and management of American, after careful study and
evaluation of the economic, financial, legal and market factors, believes that
the Exchange will provide Citizens with increased opportunity for profitable
expansion of its business, which in turn should benefit American shareholders
who become shareholders of Citizens.
The terms of the Exchange Agreement were the result of arm's length
negotiations between representatives of American and Citizens. Among the
positive factors considered by the Board of Directors of American in deciding
to approve and recommend the Exchange were:
1. The terms and conditions of the Exchange Agreement, which
management of American believes is a fair price for the shares of American;
2. The financial condition, business assets and liabilities and
management of Citizens;
3. The financial and business prospects of Citizens because it is a
larger company than American;
4. An active market exists in the Citizens Class A Common Stock,
something that is substantially lacking for the American Class A Common Stock;
5. Economies of scale will be achieved by the two companies,
particularly given that fewer regulatory filings will be required of the
resulting single entity;
6. American's directors' familiarity with and review of American's
and Citizens' business, operations, financial condition, earnings and
prospects;
7. American's directors' belief that the exchange ratio is fair to
American shareholders, particularly given the capital needs if United is to
expand;
8. The expectation that the Exchange will generally be a nontaxable
transaction to American and to the American shareholders (see "Certain Federal
Income Tax Consequences");
9. The growth and liquidity potential to holders of Citizens Class A
Common Stock compared to the historical growth and liquidity of the American
Class A and Class B Common Stock;
10. The demographics of American's shareholder base and their
expressed concerns regarding estate settlement, and, in that connection, desire
for liquidity;
11. The American Board's review of the business, operations, earnings
and financial condition of Citizens on a historical and prospective basis, and
the enhanced growth opportunities for growth that the Exchange makes possible;
12. The current and prospective economic environment and competitive
constraints facing small insurance companies, including United;
13. The American Board's evaluation of the risks to consummation of
the Exchange, including the risk associated with obtaining all necessary
regulatory approvals;
14. The increased liquidity that the Exchange would provide to
current American shareholders; and
7
<PAGE> 18
15. The American Board's review of the possible alternatives to the
Exchange, the range of possible values to the American shareholders of such
alternatives and the timing and likelihood of actually receiving, and risks and
rewards associated with seeking to obtain, those values.
The American Board did not assign any specific or relative weight to
these factors in its consideration. All of the above factors contributed in
determining the consideration received.
The Board of Directors of American considers the Exchange particularly
advantageous to American shareholders in that shareholders will receive a
security which, in the opinion of the American Board, has the potential to
achieve a greater growth and market value and which now has significantly
greater market liquidity than the American Class A and Class B Common Stock.
The Exchange is also intended to be a nontaxable exchange, thereby giving
American shareholders the equity participation in Citizens without initially
incurring taxes. See "Certain Federal Income Tax Consequences."
A conceivable detriment to the shareholders of American of the
Exchange is the fact that the percentages for extraordinary growth in company
size may be less for Citizens than for American, because it may be considered
easier to expand the size of a small company versus a company several times its
size. However, based upon Citizens' growth record, American management
believes Citizens, under present circumstances, has better growth prospects
than American. Management is unaware of any other possible detriments of the
Exchange to American shareholders.
The Board of Directors of American made this determination without the
assistance of an outside, independent financial adviser, or a so-called
"fairness opinion." The Board believes that its members spent a sufficient
amount of time assessing the respective conditions of American and Citizens and
the terms of the Exchange Agreement, and believes that the Board is in a better
position to determine the fairness of the Exchange than is an outside party.
However, the Mississippi Commissioner of Insurance, in approving the Exchange,
determined that it was fair to American shareholders pursuant to applicable
Mississippi law.
THE AMERICAN BOARD OF DIRECTORS HAS CONCLUDED THAT THE EXCHANGE IS IN
THE BEST INTERESTS OF AMERICAN, ITS SHAREHOLDERS AND THE POLICYHOLDERS OF
UNITED SECURITY, AND RECOMMENDS UNANIMOUSLY THAT AMERICAN SHAREHOLDERS APPROVE
THE EXCHANGE AGREEMENT AT THE MEETING.
REGULATORY REQUIREMENTS
A condition to consummation of the Exchange is the approval of the
Mississippi Commissioner of Insurance. In addition, a self executing filing
was made with the Colorado Division of Insurance in respect of the proposed
transaction. The parties do not believe the Exchange is subject to any other
insurance regulatory approvals or filings. A public hearing by the Mississippi
Commissioner of Insurance was held on March 5, 1997 at the offices of the
Mississippi Department of Insurance. On April 1, 1997 the Mississippi
Commissioner of Insurance issued an order approving the Exchange. A copy of
the order is included herewith as Appendix C.
Neither Citizens nor American is aware of any other governmental or
regulatory approvals required for consummation of the Exchange.
TERMS OF THE EXCHANGE AGREEMENT
The discussion below contains a summary of the Exchange Agreement
attached hereto as Appendix A, which is incorporated by reference herein.
Shareholders of American are urged to read Appendix A in its entirety.
The Exchange Agreement provides that the Citizens Class A Common Stock
will be delivered to the Exchange Agent to be distributed at a closing (the
"Closing") on a closing date (the "Closing Date") which shall be as soon as
possible after all regulatory approvals and shareholder approvals are obtained
in accordance with the law. The Exchange will become effective (the "Effective
Date") on or as soon after the Closing Date as possible. It is presently
anticipated that the Effective Date will occur on or before June 30, 1997, but
there can be no assurance that the conditions to the Exchange will be satisfied
or that the Exchange will be consummated on that date or any other date. The
parties agreed to work diligently to consummate the proposed transaction.
RECEIPT OF CITIZENS SHARES
If the Exchange is approved at the Meeting, American shareholders who
do not perfect dissenters' rights will be notified prior to the Closing Date of
the approvals and of the anticipated Closing Date. Shareholders will also be
furnished with a "Letter of Transmittal" to an exchange agent ("Exchange
Agent") that will be identified in the Letter of Transmittal. DO NOT SUBMIT
YOUR SHARES OF AMERICAN AT THIS TIME. IF THE EXCHANGE IS CONSUMMATED YOU WILL
BE SENT A LETTER OF TRANSMITTAL AND YOU MAY SUBMIT YOUR AMERICAN SHARES WITH
THE LETTER.
As soon as administratively feasible after the Effective Time and
after receiving a properly completed Letter of Transmittal and the associated
certificates from American shareholders involved,
8
<PAGE> 19
the Exchange Agent will distribute the Citizens Class A Common Stock to the
American shareholders. Presently, Citizens plans to appoint its current stock
transfer agent, American Stock Transfer and Trust Company, New York, New York,
as Exchange Agent. The instructions accompanying the Letter of Transmittal
will provide details with respect to the surrender of certificates for American
shares and the procedure for obtaining certificates for Citizens Class A Common
Stock, including instructions for obtaining certificates for Citizens Class A
Common Stock for lost or destroyed certificates of American shares.
The Exchange Agent will not be entitled to vote or exercise any rights
of ownership with respect to American shares held by it from time to time prior
to the issuance of Citizens Class A Common Stock to former holders of American
shares, except that it will receive any such distributions paid or distributed
with respect to the American shares for the account of the persons entitled to
those American shares. It is not contemplated that any such distributions will
be made in respect of the Citizens Class A Common Stock.
After the Effective Date, there will be no transfers on the books of
American of its common shares which were issued and outstanding immediately
prior to the Effective Date. If after the Effective Date certificates
representing American shares are properly presented to American, they will be
canceled and exchanged for certificates representing Citizens Class A Common
Stock in the ratio set forth above.
FRACTIONAL SHARES
No fractional shares of Citizens Class A Common Stock will be issued
as a result of the Exchange Agreement; rather, such shares will evidence the
right to receive the cash value of such share based on the average closing
price of the Citizens Class A Common Stock as reported on the American Stock
Exchange for the five trading days prior to the Effective Date.
ACCOUNTING
It is anticipated that the Exchange will be accounted for as a
purchase in accordance with generally accepted accounting principles.
OTHER CONDITIONS TO CONSUMMATION OF THE EXCHANGE
In addition to approval of the Exchange by the holders of the American
Class A and Class B Common Stock at the Meeting, the obligations of CICA and
American to consummate the Exchange are subject to the satisfaction (or waiver
by the party entitled to benefit thereof) of a number of conditions, including:
1. The performance by each party of its respective obligations;
2. Approval of the Commissioner of Insurance of Mississippi in
accordance with the laws of Mississippi (which was obtained in
April 1, 1997) and compliance with the laws of Colorado;
3. The absence of any proceedings instituted or threatened to
restrain or prohibit the transactions contemplated by the
Exchange Agreement;
4. The continued accuracy in all material respects of the
representations and warranties made by each party in the
Exchange Agreement;
5. The delivery of certain legal opinions and closing
certificates;
6. CICA may, at its option, decline to proceed with the Exchange
if dissenters' rights are perfected by the holders of more
than 2.5% of the outstanding shares of stock of American; or
7. Any party to the Exchange Agreement may decline to proceed
with the Exchange if the Effective Date does not occur by June
30, 1997.
Either party may waive any conditions to its obligations to complete
the Exchange, except those which are required by law (such as shareholder and
regulatory approval).
STOCK EXCHANGE LISTING
The Citizens Class A Common Stock is listed on the American Stock
Exchange ("AMEX"), and the additional shares of Citizens Class A Common Stock
issuable upon consummation of the Exchange must first be approved for listing
on the AMEX upon official notice of issuance. Citizens has filed an Additional
Listing Application with the AMEX and expects approval of the application in
the near future.
9
<PAGE> 20
TERMINATION OR AMENDMENT OF THE EXCHANGE AGREEMENT
The Exchange Agreement may be amended upon approval of the Board of
Directors of each party provided that the number of shares of Citizens Class A
Common Stock issuable cannot be amended without approval of the shareholders of
American.
The Exchange Agreement may be terminated and abandoned at any time
(whether before or after the approval and adoption by American shareholders)
prior to the Effective Date by mutual consent of the Boards of Directors of
CICA and American; by any of the parties who are beneficiaries of the
conditions precedent to the consummation of the Exchange unless the matter has
been satisfied or waived; by any party if any suit, action, or other proceeding
is pending or threatened before any court or governmental agency in which it is
sought to restrain, prohibit or otherwise affect the consummation of the
transactions contemplated by the Exchange Agreement; by any party if there is
discovered any material error, misstatement or omission in the representations
and warranties of any other party; by CICA if dissenters' rights are perfected
in accordance with Mississippi law for more than 2.5% of the outstanding shares
of American; by any party if the Agreement Effective Date does not occur by
June 30, 1997; or by any party whose counsel determines that the Exchange will
not constitute a reorganization under Internal Revenue Code Section 368(a).
Any of the terms or conditions of the Exchange Agreement may be waived
at any time by the party which is entitled to the benefit thereof by action
taken by its Board of Directors.
EXPENSES AND LIABILITY FOR TERMINATION
Each of the parties to the Exchange Agreement will pay its own fees
and expenses incurred in connection with the transaction contemplated by the
Exchange Agreement, including costs incurred in connection with the termination
of the Exchange Agreement.
CONDUCT OF BUSINESS PENDING THE EXCHANGE; OTHER COVENANTS OF THE PARTIES
American has agreed that it will not enter into any transactions prior
to the Effective Date other than in the ordinary course of business and will
not pay shareholder dividends nor increase the compensation of officers and
will not enter into any agreement or transaction which would adversely affect
its financial condition. Each party has agreed to provide the other with
information as to any significant corporate developments during the term of the
Exchange Agreement and to promptly notify the other parties if it discovers
that any of its representations, warranties or covenants contained in the
Exchange Agreement or any document delivered in connection therewith was not
true and correct in all material respects or became untrue or incorrect in any
material respect. All of the parties to the Agreement have agreed to take all
such actions as may be reasonably necessary and appropriate in order to
consummate the transactions contemplated by the Exchange Agreement.
The Board of Directors of American, subject to its fiduciary
obligations to shareholders, has agreed to use its best efforts to obtain the
requisite approval of American shareholders for the Exchange Agreement and the
transactions contemplated thereby.
STOCK TRANSFER RESTRICTIONS APPLICABLE TO "AFFILIATES" OF AMERICAN
The Exchange Agreement provides that any American shareholder who is
an "affiliate" of American as defined in the rules adopted under the Securities
Act of 1933 will enter into an agreement to not dispose of any Citizens shares
received by him in violation of certain transfer restrictions under SEC Rules
144 and 145.
INTERESTS OF CERTAIN PERSONS IN THE EXCHANGE
Prior to the Proposed Exchange, there was no affiliation between
Citizens and CICA (including their directors, officers and affiliates) and
American and its directors, officers and affiliates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes all material federal income tax
considerations relevant to the exchange of shares of American Class A and Class
B Common Stock for Citizens Class A Common Stock pursuant to the Exchange.
This discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to CICA, American or American's
shareholders as described herein. There can be no assurance that such changes
will not occur.
American shareholders should be aware that this discussion does not
deal with all federal income tax considerations that may be relevant to
particular American shareholders in light of their particular circumstances,
such as shareholders who are: dealers in securities; financial institutions;
persons subject to the alternative minimum tax provisions of the Code; foreign
persons; persons who do
10
<PAGE> 21
not hold their American Class A or Class B Common Stock as capital assets; or
persons who acquired their shares in connection with stock option or stock
purchase plans or in other compensatory transactions. In addition, the
following discussion does not address the tax consequences of the Exchange
under foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to or concurrently with, the Exchange (whether
or not any such transactions are undertaken in connection with the Exchange),
including without limitation any transaction in which shares of American Class
A or Class B Common Stock are acquired or shares of Citizens Class A Common
Stock are disposed of. It should be noted that no party to the Exchange nor
any of their affiliates is seeking an opinion of counsel with respect to the
tax treatment of the Exchange. However, the Exchange may be terminated by any
party if it is determined by counsel of any party that the Exchange will not
constitute a reorganization within the meaning of Section 368(a) of the Code.
No party to the Exchange has requested and the parties do not intend to request
a ruling from the Internal Revenue Service in connection with the Exchange.
ACCORDINGLY, AMERICAN SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE EXCHANGE.
The Exchange is intended to constitute a "reorganization" within the
meaning of Section 368(a) of the Code (a "Reorganization"). As a
Reorganization, subject to the limitations and qualifications referred to
herein, the Exchange will result in the following federal income tax
consequences:
(a) No gain or loss will be recognized by holders of American
Class A or Class B Common Stock solely upon their receipt in the Exchange of
Citizens Class A Common Stock in exchange therefor (except to the extent of
cash received in lieu of a fractional share of Citizens Class A Common Stock).
(b) The aggregate tax basis of the Citizens Class A Common Stock
received by American shareholders in the Exchange (including any fractional
share of Citizens Class A Common Stock not actually received) will be the same
as the aggregate tax basis of the American Class A or Class B Common Stock
surrendered in exchange therefor.
(c) The holding period of the Citizens Class A Common Stock
received by each American shareholder in the Exchange will include the period
for which the American Class A or Class B Common Stock surrendered in exchange
therefor was considered to be held, provided that the American Common Stock so
surrendered is held as a capital asset at the time of the Exchange.
(d) Cash payments received by holders of American Class A or Class
B Common Stock in lieu of a fractional share will be treated as if such
fractional share of Citizens Class A Common Stock had been issued in the
Exchange and then redeemed by Citizens. An American shareholder receiving such
cash will recognize gain or loss, upon such payment, measured by the difference
(if any) between the amount of cash received and the basis in such fractional
share. Provided the fractional share was held as a capital asset at the time
of the redemption, such gain or loss will constitute capital gain or loss, and
such gain or loss will be long term capital gain or loss if the holding period
for such share (taking into account the holding period of the stock
surrendered) was greater than one year. It is possible the distribution of
cash may be treated as a dividend taxable as ordinary income if the Internal
Revenue Service (the "IRS") determines that the distribution in redemption is
essentially equivalent to a dividend.
(e) Cash received by the American shareholders who properly
exercise their dissenters' rights will be treated as having been received in
redemption of the shares so cashed out, and may result in taxable gain or loss,
measured by the difference (if any) between the amount of cash received and
such shareholder's basis in the American Class A or Class B Common Stock.
Provided the shares were held as a capital asset at the time of the redemption,
such gain or loss will constitute capital gain or loss, and such gain or loss
will be long term capital gain or loss if the holding period for such shares
was greater than one year. It is possible that for some shareholders, the
distribution of cash may be treated as a dividend taxable as ordinary income.
(f) Neither Citizens, CICA nor American will recognize material
amounts of gain solely as a result of the Exchange. After the Exchange,
utilization of American net operating losses or built-in losses, if any, will
be subject to certain limitations contained in Section 382 of the Code. Code
Section 383 will similarly limit the utilization of excess credits, net capital
losses, and foreign tax credits, if any. In addition, Code Section 384 will
limit the use of preacquisition losses to offset built-in gains, if any.
American shareholders should also be aware that the IRS may examine
transactions taking place before, contemporaneously with, or after a
reorganization to determine whether reorganization treatment is appropriate, or
in some cases to determine whether shareholders will be taxed on other economic
benefits that are included as part of the overall transaction. Thus, any loan
transactions between parties, compensation arrangements, noncompete agreements,
consulting arrangements and other transactions could be reviewed by the IRS and
determined to constitute taxable income to specific parties to the Exchange.
Gain could also have to be recognized to the extent that an American
shareholder was treated as receiving (directly or indirectly) consideration
other than Citizens Class A Common Stock in exchange for the shareholder's
Class A or Class B Common Stock of American. Furthermore, if the IRS were to
establish as to some American shareholders that part of the Citizens
11
<PAGE> 22
Class A Common Stock received in the Exchange is severable from the Exchange,
resulting in a proportionally increased equity interest being received in the
Exchange by other American shareholders, the American shareholders whose equity
interests were deemed to be constructively increased by the Exchange may be
treated as having received a taxable stock dividend. Thus, American
shareholders should consult with their tax advisors as to the tax consequences
to them of the Exchange.
Under Section 3406 of the Code, American shareholders may be subject
to "backup withholding" at the rate of 31% on "reportable payments", if any, to
be received by them if they fail to furnish their correct taxpayer
identification numbers to Citizens or for certain other reasons. Citizens will
report to these persons and to the IRS for each calendar year the amount of any
reportable payments during that year and the amount of tax withheld, if any,
with respect to those reportable payments.
The parties are not requesting and will not request a ruling from the
IRS in connection with the Exchange. One of the requirements for nontaxable
reorganization treatment is that shareholders of the acquired corporation
acquire a substantial and continuing interest in the acquiring corporation,
i.e., have "continuity of interest." To satisfy the continuity of interest
requirement, American shareholders must not, pursuant to a plan or intent
existing at or prior to the Exchange, dispose of or transfer so much of either
(i) their American Class A or Class B Common Stock in anticipation of the
Exchange or (ii) the Citizens Class A Common Stock to be received in the
Exchange (collectively, "Planned Dispositions"), such that American
shareholders, as a group, would no longer have a significant equity interest in
the American business being conducted after the Exchange. American
shareholders will generally be regarded as having a significant equity interest
as long as the number of shares of Citizens Class A Common Stock received in
the Exchange less the number of shares subject to Planned Dispositions (if any)
represents, in the aggregate, a substantial portion of the entire consideration
received by the American shareholders in the Exchange. No assurance can be
made that the "continuity of interest" requirement will be satisfied, and if
such requirement is not satisfied, the Exchange would not be treated as a
Reorganization.
Although literal compliance with Code Section 368 is a prerequisite to
nonrecognition of gain or loss, such compliance does not guarantee the desired
result. Regulation Section 1.368-1 describes the purpose of the reorganization
provisions as being to exempt from the general rule of taxation, specifically
described exchanges incident to such readjustments of corporate structures made
in one of the particular ways specified in the Code, as are required by
business exigencies and which effect only a readjustment of continuing interest
in property under modified corporate forms. A plan of reorganization having no
business or corporate purpose will not constitute a qualified reorganization
plan. The reasons for the reorganization set forth in "Proposed
Exchange--Background of and Reasons for the Exchange" contained in this
Proxy-Information Statement provide several corporate business purposes. Based
upon the disclosure contained in this Proxy-Information Statement and on other
considerations both American and CICA management believe that valid business
purposes exist for the transaction.
Considered in conjunction with the business purpose test is the
"continuity of business enterprise" requirement. Regulation Section
1.368-1(d)(2) provides the general rule that continuity of business enterprise
requires the acquiring corporation to either (i) continue the acquired
corporation's historic business or (ii) use a significant portion of acquired
corporation's historic business assets in a business. The application of this
general rule to certain transactions will depend on all of the facts and
circumstances. The policy underlying the general rule, which is to ensure that
reorganizations are limited to adjustments of continuing interests in property
under modified corporate form, provides the guidance necessary to make these
facts and circumstances determinations.
The historic business of a holding company generally comprises the
business operations of its subsidiary. Revenue Ruling 85-197, 1985-2 C.B. 120,
states that the continuity of business enterprise requirement is satisfied when
a holding company is merged into its wholly-owned operating subsidiary, because
the historic business of the holding company is the business of its operating
subsidiary. Revenue Ruling 81-247, 1981-2 C.B. 87 holds that where a
significant portion of an acquired corporation's historical business assets
received by the acquiring corporation remain with the acquiring corporation, or
corporations directly controlled by the acquiring corporation, the continuity
of business enterprise rules of Regulation Section 1.368-1(d) will be
satisfied. These rulings indicate that the historic business of American is
the business operated by its subsidiary United. Although subject to challenge
by the IRS, the continuity of business enterprise requirement should be
satisfied because after the Exchange, the historic business of American will be
continued by United as a second tier subsidiary of Citizens.
Pursuant to Section 1.368-3(b) of the Regulations, the shareholders of
American must file with their income tax returns for the year in which the
Exchange is consummated, a statement which provides details pertinent to the
nonrecognition of gain or loss on the Exchange, including the cost or other
basis of stock transferred in the exchange, and the amount of stock received.
A successful IRS challenge to the reorganization status of the
Exchange (as a result of a failure of the "continuity of interest" requirement
or otherwise) would result in American shareholders recognizing taxable gain or
loss with respect to each share of Class A or Class B Common Stock of
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<PAGE> 23
American surrendered equal to the difference between the shareholder's basis in
such share and the fair market value, as of the effective time of the Exchange,
of the Citizens Class A Common Stock received in exchange therefor. In such
event, a shareholder's aggregate basis in the Citizens Class A Common Stock so
received would equal its fair market value, and the shareholder's holding
period for such stock would begin the day after the Exchange.
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<PAGE> 24
INFORMATION CONCERNING CITIZENS
GENERAL DEVELOPMENT OF BUSINESS
Citizens, which was formed under Colorado law in 1977, operates
primarily as an insurance holding company. Citizens is the parent holding
company that directly or indirectly owns 100% of Citizens Insurance Company of
America ("CICA"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc.
("III"), Insurance Investors & Holding Co. ("IIH"), Central Investors Life
Insurance Company ("CILIC") American Liberty Life Insurance Company ("ALLIC"),
First American Investment Corporation ("FAIC"), Funeral Homes of Louisiana,
Inc. ("FHL") and Funeral Homes of America, Inc. ("FHA"). Pertinent
information relating to Citizens' subsidiaries 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
ALLIC 1978 Louisiana Life insurance
FAIC 1984 Louisiana Holding company
FHL 1989 Louisiana Funeral home
FHA 1993 Louisiana Dormant
IIH 1963 Illinois Dormant holding company
CILIC 1965 Illinois Life insurance
</TABLE>
On September 14, 1995, Citizens acquired American Liberty Financial
Corporation ("ALFC"), 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 $40 million of insurance in force. In the
transaction, ALFC shareholders received 1.10 shares of Citizens Class A Common
Stock for each share of ALFC Common Stock owned and 2.926 shares of Citizens
Class A Common Stock for each one share of ALFC Preferred Stock owned.
Citizens issued approximately 2,340,000 Class A shares in connection with the
transaction, which was accounted for as a purchase. Citizens recently began a
consolidation process under which ALFC was merged into Citizens in early 1997
and ALLIC will merge into CICA, which transaction is expected to be completed
in the first half of 1997. In addition, in March 1997 CICA acquired the
remaining 5.5% minority interest in FAIC (94.5% owned by ALLIC), in exchange
for 133,000 shares of Citizens Class A Common Stock held by CICA. This
transaction was accounted for as a purchase.
On March 12, 1996 Citizens acquired IIH, 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 IIH agreement provided that IIH's
shareholders would receive one share of Citizens Class A Common Stock for each
eight shares of IIH Common Stock owned. Additionally, Citizens acquired all
shares of CILIC (a subsidiary of IIH) not already owned by IIH, based upon an
exchange ratio of one share of Citizens Class A Common Stock for each four
shares of CILIC common stock owned. The acquisition of IIH and CILIC involved
the issuance of approximately 170,000 of Citizens Class A shares and was
accounted for as a purchase.
FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA, ALLIC and CILIC, currently operates
principally in one business segment, that of selling selected lines of
individual life and accident and health insurance policies. Except for certain
insignificant operations acquired as a part of ALFC's holdings, Citizens has no
present intention to engage in any non-insurance related business. The
following tables set forth certain statistical information concerning the
consolidated operations of Citizens for each of the five years ended December
31, 1996. The information is presented in accordance with generally accepted
accounting principles.
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<PAGE> 25
TABLE I
The following table sets forth (i) life insurance in force and (ii)
mean life insurance in force.
<TABLE>
<CAPTION>
IN FORCE MEAN LIFE
BEGINNING IN FORCE INSURANCE
OF YEAR END OF YEAR IN FORCE
YEAR (a)(b) (a)(b) (a)(b)
---- ---------- ----------- ----------
<S> <C> <C> <C>
1996 $2,151,955 $2,231,017 $2,191,486
1995 2,144,709 2,151,955 2,148,332
1994 2,030,615 2,144,709 2,087,662
1993 1,696,606 2,030,615 1,863,611
1992 1,339,964 1,696,606 1,518,285
</TABLE>
- ----------
(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 over the past five years. Approximately $40,243,000 of
the 1995 increase relates to the acquisition of ALFC 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>
REINSURANCE CEDED(b)
RATIO OF -----------------------------------------
LAPSES AND
SURRENDERS AMOUNT REINSURANCE
LAPSES AND TO MEAN OF PREMIUM
YEAR SURRENDERS(a) IN FORCE REINSURANCE(a) CEDED
- ---- ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
1996 $101,860 4.6% $296,378 $2,511,318
1995 87,273 4.1% $290,677 2,241,111
1994 84,390 4.0% 285,104 2,309,672
1993 98,712 5.3% 303,727 1,939,425
1992 83,305 5.5% 238,677 1,486,531
</TABLE>
- ------
(a) In thousands (000s).
(b) Approximately 95% of the reinsurance is yearly renewable term
insurance, with the remainder being coinsurance.
The increased lapsation during 1996 reflects the inclusion of the
ALLIC insurance business.
TABLE III
The following table sets forth information with respect to total
insurance premiums.
<TABLE>
<CAPTION>
ORDINARY ANNUITY & ACCIDENT
YEAR LIFE(a) UNIVERSAL LIFE GROUP LIFE AND HEALTH(a) TOTAL
- ----- ----------- -------------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
1996 $49,563,720 $389,084 $ 309,953 $4,040,608 $54,303,445
1995 45,120,631 119,335 306,256 698,206 46,244,428
1994 42,984,741 75,564 541,370 259,250 43,860,925
1993 36,491,961 106,955 1,106,590 284,510 37,990,016
1992 28,415,877 3,067 469,514 316,395 29,204,853
</TABLE>
- ---------
(a) After deduction for reinsurance ceded.
Premium income has grown substantially since 1991 due to the volume of
new business written each year. However, new sales of life insurance decreased
in 1995, and remained at similar levels in 1996; therefore, the overall
increase since 1995 is less than for previous years. The acquisition of ALLIC
mitigated the total decline in new life insurance sales, although only three
months of ALLIC's premiums are reflected in the above table for 1995. In 1992,
the FCC acquisition added a small block of Universal Life business to Citizens'
portfolio. During 1992, the Federal Government increased the
15
<PAGE> 26
amount of insurance for veterans under the Servicemen's Group Life Insurance
program, causing a one-time increase in group life premiums.
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>
1996 $54,303,445 $21,948,637 40.4% $59,113,575 108.9%
1995 46,244,428 17,375,574 37.6 50,767,435 109.8
1994 43,860,925 17,461,910 39.8 48,763,076 111.2
1993 37,990,017 15,918,491 41.9 43,644,554 114.9
1992 29,204,853 13,546,624 46.4 35,301,078 120.8
- ---------
</TABLE>
(a) After premiums ceded to reinsurers.
Prior to 1996, the ratios of expenses to premiums had declined each
year since 1989. These declines are the result of three factors: 1)
underwriting and operating expenses have generally not increased at the same
rate as premium income due to economies of scale; 2) sales commissions as a
percentage of total premium income are declining annually as the business
enters renewal stages and commissions are paid at a lower rate than first year;
and 3) the amount of new insurance written annually represents a smaller
percentage of Citizens' total premium income. However, in 1996, with the
addition of ALLIC and the considerable expense associated with a new marketing
program, the ratio reached its highest level since 1993.
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>
1996 $337,051 $294,408 87.3% $42,643 12.7%
1995 296,811 271,108 91.3 25,703 8.7
1994 380,281 352,542 92.7 27,739 7.3
1993 376,460 345,882 91.9 30,578 8.1
1992 315,142 278,694 88.4 36,448 11.6
- --------
</TABLE>
(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. The decline in new
business during 1995 was caused in part by disruptions in the international
market. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
16
<PAGE> 27
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>
1996 $337,051 $296,985 88.1% $40,066 11.9% $ 0 -
1995 296,811 270,963 91.3 25,848 8.7 0 -
1994 380,281 352,357 92.7 27,924 7.3 0 -
1993 376,460 345,683 91.8 30,777 8.2 0 -
1992 315,142 279,941 88.8 34,243 10.9 958 0.3%
- -------
</TABLE>
(a) In thousands (000s).
This table illustrates that virtually all of the new business written
is whole life. The 1995 results reflect a decrease in new business during the
year.
TABLE VII
The following table sets forth deferred policy acquisition costs
capitalized and amortized compared to new business issued.
<TABLE>
<CAPTION>
DEFERRED POLICY
ACQUISITION COSTS
TOTAL NEW ---------------------------
BUSINESS
ISSUED CAPITALIZED AMORTIZED
------------- ----------- ---------
<S> <C> <C> <C>
1996 $337,051,000 $10,531,222 $10,221,917
1995 296,811,000 10,579,704 8,511,876
1994 380,281,000 13,128,049 7,203,593
1993 376,460,000 13,472,064 6,455,401
1992 315,142,000 10,670,569 4,412,007
</TABLE>
Capitalized policy acquisition expenses increased steadily until 1994,
reflecting the growing amount of new business issued. In 1994, the rate of
capitalization was affected by an adjustment due to lower interest rates.
Amortization of these costs has grown as the aggregate deferred acquisition
cost asset has increased. In 1996 this amortization increased due to the
increase in surrender activity. For 1995 and 1996, the capitalized costs
decrease reflects the reduction in the amount of new business produced and the
resulting lower commission expenses.
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>
1996 $134,167,938 $9,185,506 6.8%
1995 111,926,695 7,026,909 6.3
1994 90,419,823 5,295,784 5.9
1993 82,598,407 4,771,079 5.8
1992 66,704,026 3,929,495 5.9
- ---------
</TABLE>
(a) The years 1992 forward includes assets acquired from First Centennial
Corporation on July 31, 1992. The year
1995 includes assets acquired from ALFC on September 14, 1995. The
year 1996 includes assets acquired from CILIC on March 12, 1996.
(b) Does not include realized and unrealized gains and losses on
investments.
Available yields began to increase in mid-1994 and Citizens was able
to obtain a slight growth in the return on invested assets. This growth
continued throughout most of 1995, and continued through 1996. Citizens
retained an investment advisor in 1995, and this action contributed to the
increased yield in 1996.
17
<PAGE> 28
NARRATIVE DESCRIPTION OF BUSINESS
BUSINESS OF CITIZENS. Citizens' principal business is ownership of
CICA, ALLIC and their affiliates. Additionally, Citizens provides management
services to these companies under a management services agreement. Citizens
has approximately 75 full and part-time employees.
BUSINESS OF CICA. Historically, CICA's revenues have been derived
from insurance premiums and revenues from investments. CICA is a
Colorado-domiciled life insurance company marketing primarily ordinary
whole-life products on an international basis through marketing companies.
During the fiscal year ended December 31, 1996, 99.2% of CICA's premium income
was attributable to life, endowment and term insurance; 0.2% to individual
annuities; and 0.6% to accident and health insurance. Of the life policies in
force at December 31, 1996 and 1995, 13.0% and 13.2% were nonparticipating and
87.0% and 86.8% were participating, respectively. All intercompany fees and
expenses have been eliminated in the Consolidated Financial Statements of
Citizens.
CICA's Ultra Expansion products are a series of participating whole
life policies targeted for international markets. All of the Ultra products
are participating with dividends ranging from 2% of the premium in the first
year to 123% 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 flexible amount deposit
rider as a new feature to the Ultra products. All of these products carry
surrender charges for the first 14 years and continuing 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 CICA underwriting policy requires a medical examination of
applicants for ordinary insurance in excess of certain prescribed limits.
These limits are graduated according to the age of the applicant and the amount
of insurance. Generally, the maximum amount of ordinary life insurance issued
domestically without a medical examination is $200,000 for ages 0 through 35;
$100,000 for ages 36 through 45; $50,000 for ages 46 through 50; $15,000 for
ages 51 through 55; and $10,000 for ages 56 and over. Limits for insuring non-
United States applicants without a medical examination are: $150,000 for ages
0 through 39; $50,000 for ages 40 through 65; and all amounts over age 65.
On life policies CICA's maximum coverage on any one life is not
limited by corporate policy. However, CICA reinsures the amount of coverage
which is in excess of its retention policy. See "--CICA Reinsurance." CICA
does not accept substandard risks above Table 6 (generally policyholders who
cannot qualify for standard ordinary insurance because of past medical history)
in exchange for which CICA would charge higher premiums.
At December 31, 1996 CICA had $21.8 million of insurance in force on
individuals that are classified as substandard risks, the majority of such
business having been acquired in the purchase of other companies. Management
believes the exposure to loss as a result of insuring these individuals is
minimal, since the premiums are increased to cover the nature of the risk,
additional reserves are established, and the amount of insurance represents
less than 1.0% of CICA's total insurance in force.
CICA's GEOGRAPHICAL DISTRIBUTION OF BUSINESS. For the year ended
December 31, 1996, insurance policies held by residents of Texas accounted for
1.8% of CICA's total premium income from direct business, and policies held by
residents of Colorado represented 1.2% of premium income from direct business
for the same period. All other states of the United States totaled 5.2% of the
premium income from direct business, with no single state, except as set forth
above, accounting for as much as 1% of CICA's premium income. Business on
foreign residents accounted for the remaining 91.8%. For the years ended
December 31, 1995 and 1994, residents of the State of Texas accounted for 2.7%
and 3.0%, respectively of CICA's total premium income. Residents of Colorado
provided 2.1% of such income during both of each years. No other states in the
U.S. amounted to 1% of total premium income during those two years. Business
on foreign citizens represented 91.8% of 1995 and 1994 premium income of CICA.
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 persons in the top 5% of
household incomes in their respective countries.
CICA accepts applications for international insurance policies
marketed by several independent international marketing firms with whom CICA
has nonexclusive marketing contracts. These firms market life insurance
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.
The international marketing firms have many years' experience
marketing life insurance products for CICA. The contract with the marketers
provides that they have the responsibility for recruiting and training sales
consultants. The marketers are responsible for all of their overhead costs and
bear the expense of sales incentives. These marketing firms are guarantors for
any advances against future commissions made by CICA to sales consultants. In
consideration for the services rendered, the
18
<PAGE> 29
marketing firms receive an override commission on all new policies sold by them
or their sales consultants. See "--CICA Commissions." The marketing contracts
may be terminated for various causes, at any time by mutual consent of the
parties or upon 30 days' notice by either party. These marketing firms provide
recruitment, training and supervision of their managers and sales consultants
in the sale of dollar-denominated life insurance products; however, all
managers and sales consultants contract directly with CICA and receive their
commissions from CICA. Accordingly, should the marketing arrangement between
any firm and CICA be canceled for any reason, CICA believes it could continue
suitable marketing arrangements with the individuals of the marketing firms
without appreciable loss of present and future sales. There is, however,
always a risk that sales could decrease.
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 that flow out of such countries were to become
restricted and the improbable necessity that incorporating an insurance
subsidiary in such countries would become required. Based on more than 30
years' experience in the marketplace in which CICA competes, management
believes such risks are not material. CICA maintains no assets outside the
U.S. and requires all premiums to be paid in the U.S. with U.S. dollars via
drafts drawn on banks in the U.S.; therefore, it could lose no funds from
currency devaluation or foreign appropriation. Further, 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.
Management believes that such insureds are actively involved in business
leadership roles in their communities and would be 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 these factors encourage 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.
CICA MARKETING OPERATIONS. CICA holds licenses to do business in 12
states and accepts applications from numerous foreign countries. Additionally,
CICA has applications pending for admission in one state. CICA's operations
are conducted through sales consultants, with 1,319 consultants at December 31,
1996 and 1,308 consultants at December 31, 1995.
CICA COMMISSIONS. CICA's marketing managers are independent
contractors, responsible for their respective expenses, that 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 110% of the
first year premium, 10% of the premium for each of the next nine years and 2%
of the premium for the eleventh and subsequent years as a continuing service
fee. Percentage amounts paid to sales consultants on individual term, annuity
and accident and health insurance are substantially less than the levels paid
for individual ordinary life insurance. The marketing managers receive
overriding first year and renewal commissions on business written by sales
consultants under their supervision and all marketing expenses except sales
conventions related thereto are included in the above percentages.
CICA RESERVES. CICA establishes actuarial reserves as liabilities to
meet obligations on all outstanding policies. Reserves and deferred
acquisition costs are prepared in conformity with the American Academy of
Actuaries Committee on Financial Reporting Principles. In determining such
reserves CICA used the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and
Ultimate Mortality Tables with interest rates at 4% or in a range graded from
9% to 5% with recent issues reserved at 7% graded to 6 1/2%. Withdrawal
assumptions are based primarily on actual historical experience. Statutory
reserves are used for paid-up life business. Claims reserves include an amount
equal to the expected benefit to be paid on reported claims in addition to an
estimate of claims that are incurred but not reported, based on actual
historical experience. CICA receives an independent actuarial certification of
its reserves prepared in accordance with both Generally Accepted Accounting
Principles and Statutory Accounting Principles. The certifications have noted
no deficiencies for the years presented herein.
CICA 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.
CICA INSURANCE CEDED. CICA generally retains $75,000 of risk on any
one person. As of December 31, 1996, the aggregate amount of life insurance
ceded amounted to $293,864,000 or 13.5% of total direct and assumed life
insurance in force and $289,675,000 or 13.7% at December 31, 1995. CICA is
contingently liable with respect to ceded insurance should any reinsurer be
unable to meet the obligations reinsured.
As of December 31, 1996 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,
19
<PAGE> 30
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 ("ERC") has historically been 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 to ERC. On July 1, 1993, the treaty
was amended and a like agreement was executed with Businessmen's Assurance
("BMA"). During 1995, a third carrier was added as a principal reinsurer,
Riunione Adriatica di Sicurta, of Italy ("RAS").
The ERC and BMA agreements provide that on risks reinsured in
specified countries on and after July 1, 1993, 70% of each risk in excess of
CICA's retention will be ceded to ERC and 30% to BMA. The RAS agreement
provides that on risks reinsured in specified countries on or after January 1,
1995, 100% of the risk in excess of CICA's retention will be ceded to RAS.
CICA pays the premium to ERC, BMA and RAS on an annual basis and is responsible
for the production of the reporting monthly and annually to ERC, BMA and RAS to
allow proper accounting for the treaties.
The cessions are on a yearly renewable term basis and are automatic up
to $300,000 for ERC and RAS and $425,000 for BMA at which point the reinsurance
is subject to a facultative review by the reinsurers. At December 31, 1996,
CICA had ceded $189,449,000 in face amount of insurance to ERC, $26,669,000 to
BMA and $41,813,000 to RAS under these agreements.
RAS is an unauthorized reinsurer in the state of Colorado; however RAS
has agreed to comply with all Colorado statutes regarding such companies.
Under these statutes, RAS will provide a letter of credit, issued by a U.S.
bank meeting the Colorado requirements, equal to any liabilities it incurs
under this agreement.
A reinsurance treaty with Connecticut General Life Insurance Company
("CG") covers all of CICA's accidental death insurance supplementing its life
insurance policies. These cessions are on a renewable term basis and occur
automatically if total accidental death benefits known to CICA are less than
$250,000 or otherwise on a facultative review basis. At December 31, 1996,
CICA had ceded $1,327,293,000 in face amount to CG under this treaty.
CICA closely monitors the solvency of its reinsurers to minimize the
risk of loss in the event of a failure by one of the parties. ERC, BMA, CG and
RAS, the primary reinsurers of CICA, are large, well capitalized entities which
have no current or prior history of financial difficulty.
CICA INSURANCE ASSUMED. At December 31, 1996, CICA had in force
reinsurance assumed as follows:
<TABLE>
<CAPTION>
TYPE OF AMOUNT
BUSINESS IN FORCE AT
NAME OF COMPANY LOCATION ASSUMED END OF YEAR
--------------- -------- ------------ -----------
<S> <C> <C> <C>
Prudential Insurance Newark, Ordinary
Company (Prudential) New Jersey Group Life $304,380,000
</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.
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.
CICA INVESTMENTS. State insurance statutes prescribe the quality and
percentage of the various types of investments which may be made by insurance
companies and generally permit investment in qualified state, municipal,
federal and foreign government obligations, high quality corporate bonds,
preferred and common stock, real estate and mortgage loans by certain specified
percentages. CICA's invested assets at December 31, 1996 were distributed as
follows: fixed maturities - 70.9%, equity securities - 8.2%, mortgage loans -
1.2%, policy loans - 14.8%, government insured student loans - 0.3%, and other
long-term investments - 2.9% (see Note 2 of Notes to Consolidated Financial
Statements). CICA did not foreclose on any mortgage loans in 1995 or 1996.
All mortgage loans are supported by independently appraised real estate. The
investment policy of CICA with regard to mortgage loans is consistent with the
provisions of the Colorado Insurance Code.
At December 31, 1996, 95.9% of CICA's investments in fixed maturities
were comprised of U.S. Treasury securities and obligations of U.S. government
corporations and agencies, including U.S. government guaranteed mortgage-backed
securities, compared to 97.2% at December 31, 1995. Of these
20
<PAGE> 31
mortgage-backed securities, all were guaranteed by U.S. government agencies or
corporations that are backed by the full faith and credit of the U.S.
government or that bear the implied full faith and credit of the U.S.
government.
CICA REGULATION. CICA is subject to regulation and supervision by the
insurance department of each state or other jurisdiction in which it is
licensed to do business. These departments have broad administrative powers
relating to the granting and revocation of licenses to transact business, the
licensing of marketing persons, the approval of policy forms, the advertising
and solicitation of insurance, the form and content of mandatory financial
statements, the reserve requirements, and the type of investments which may be
made. CICA is required to file detailed annual reports with each such
insurance department, and its books and records are subject to examination at
any time. In accordance with state laws and the rules and practices of the
National Association of Insurance Commissioners, CICA is examined periodically
by examiners of its domiciliary state and by representatives (on an
"association" or "zone" basis) of the other states in which it is licensed to
do business. CICA's most recent examination which was completed during 1992,
was for the six years ended December 31, 1991, and was conducted by a public
accounting firm representing the Colorado Division of Insurance. The Colorado
Division of Insurance recently informed CICA to expect an examination to be
conducted as of December 31, 1996. CICA is audited annually by an independent
public accounting firm.
Various states, including Colorado, have enacted "Insurance Holding
Company" legislation which requires the registration and periodic reporting by
insurance companies which control, or are controlled by, other corporations or
persons. Under most of such legislation, control is presumed to exist with the
ownership of 10% or more of an insurance company's voting securities. 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 CICA does not physically conduct business in countries outside
the U.S. but rather accepts applications from overseas marketers, it is not
subject to regulation in countries where most of its insureds are residents.
The prospect of such regulation is viewed as remote by management of Citizens
because obtaining insurance through application by mail outside of one's
country is a common practice in many foreign countries, particularly those
where CICA's insureds reside.
CICA COMPETITION. The life insurance business is highly competitive,
and CICA competes with a large number of stock and mutual insurance companies,
many of which are larger than CICA. CICA believes that its premium rates and
its policies are generally competitive with those of other life insurance
companies.
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 91.8% of CICA's total
first year and renewal premium income during 1996 and 1995 came from that
market. See "--CICA's 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. CICA also 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
products are usually acquired by persons in the top 5% of income of their
respective countries. The policies sold by foreign companies are sold broadly
and are priced based on the mortality of the entire populace of the respective
geographic region. Because of the predominance of lower incomes in most of
these countries, the mortality experience tends to be very high on the average,
causing mortality charges which are considered unreasonable based on the life
mortality experience of the upper 5% of income of the population.
Additionally, the assets that back up the policies issued by foreign companies
are invested in the respective countries, and thus, are exposed to the
inflationary risks and economic crises that historically have impacted many
foreign countries. A competitive advantage of U.S. based insurance companies
is that many 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
U.S. and European insurers in countries where CICA's insureds reside. CICA's
experience has been that its market niche is in attracting insureds who want
the safety and security of a U.S. domestic insurer. Management 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,
CICA does not have market share data to confirm management's belief.
21
<PAGE> 32
In CICA's limited block of accident and health insurance, (0.5% of
total premium income in 1996), it is in competition with many casualty and life
insurance companies as well as with voluntary and government-sponsored plans
for meeting hospitalization and medical expenses such as Blue Cross/Blue
Shield, "Medicare" and "Medicaid." Future expansion of such programs or the
establishment of additional government health programs could adversely affect
the future of accident and health insurance on CICA's books, most of which has
been acquired in the acquisition of other companies.
CICA 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 qualifies 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. As
indicated above, CICA and ALLIC are in the process of merging ALLIC into CICA.
Management believes this merger should not adversely affect CICA's
qualification as a small company under the Code.
The Omnibus Reconciliation Act of 1993 (the "1993 Act") was signed
into law on August 10, 1993. Among its provisions was an increase in 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 Citizens.
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 files a consolidated Federal income tax return with Citizens and
its subsidiaries. At December 31, 1996, CICA had net operating loss
carryforwards of $81,000 available to offset taxable income in future years.
BUSINESS OF ALLIC. As discussed previously herein, ALLIC and CICA
have entered into a merger agreement under which ALLIC will be merged into
CICA. The regulatory clearances and approvals of their respective domicile
states have been received, and management expects to complete the merger in the
near future. Historically, ALLIC's revenues have been derived from insurance
premiums and revenues from investments. ALLIC is a Louisiana-domiciled life
insurance company which markets primarily ordinary, whole-life products and
accident and health specified disease, hospital indemnity and accidental death
policies. During the fiscal year ended December 31, 1996, 47.9% of ALLIC's
premium income was attributable to life, endowment and term insurance; 2.8% to
individual annuities; and 49.3% to accident and health insurance. Of the life
policies in force at December 31, 1996, 66.9% were nonparticipating and 33.1%
were participating. During the fiscal year ended December 31, 1995, 48.1% of
ALLIC's premium income was attributable to life, endowment and term insurance;
4.0% to individual annuities; and 47.9% to accident and health insurance. Of
the life policies in force at December 31, 1995, 80.9% were nonparticipating
and 19.1% were participating. All intercompany fees and expenses have been
eliminated in the Consolidated Financial Statements of Citizens.
The products offered by ALLIC are focused on niche markets. The
primary niches currently targeted include the sale of "pre-need" burial
policies and daily hospital indemnity policies for specified illness. On life
policies, ALLIC's maximum coverage on any one life is not limited by corporate
policy. However, ALLIC reinsures the amount of coverage which is in excess of
the its retention policy. See "--ALLIC Reinsurance."
GEOGRAPHICAL DISTRIBUTION OF ALLIC's BUSINESS. For the year ended
December 31, 1996, insurance policies held by residents of Oklahoma accounted
for 49.7% of ALLIC's total premium income from direct business. Policies held
by residents of Mississippi represented 16.5%, Louisiana - 11.6%, Georgia -
8.3%, and Texas - 7.9%, of premium income of ALLIC from direct business for the
same period. All other states of the United States totaled 6.0% of the premium
income from direct business, with no single state, except as set forth above,
accounting for as much as 2% of premium income. For the year ended December
31, 1995, residents of Oklahoma accounted for 48.5% of ALLIC's total premium
income from direct business. Policies held by residents of Mississippi
represented 15.1%, Louisiana - 12.4%, Georgia - 9.9%, Texas - 8.1%, and Florida
- - 2.2% of premium income of ALLIC for the same period. No other states in the
United States amounted to 2% of total premium income during the period.
The life policies written by ALLIC have an average face amount of
approximately $4,000. The low face amount is typical for pre-need and burial
business. At December 31, 1996, ALLIC had approximately 9,800 such policies in
force.
ALLIC MARKETING OPERATIONS. ALLIC holds licenses to do business in 20
states. ALLIC's operations are conducted through independent contractors on a
basis similar to a general agency approach, with a marketing force at December
31, 1996 of 200 representatives.
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<PAGE> 33
ALLIC COMMISSIONS. ALLIC's marketing representatives are independent
contractors, responsible for their respective marketing-related expenses, and
they are compensated on a percentage of premium basis. During 1996, the
maximum amount of commission expense incurred by ALLIC on an individual life
insurance policy was 105% of the first year premium, and 15% of the second
through tenth year premium. For accident and health insurance, the maximum
commission was 100% of premium in the first year and 18% thereafter. Marketing
managers receive overriding first year and renewal commissions on business
written by individuals under their supervision.
ALLIC RESERVES. ALLIC 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 ALLIC used the 1965 to 1970 Select and Ultimate Mortality Tables with
interest rates at 7% level for Life Purchase GAAP reserves. Statutory reserves
are used for paid-up life business. Withdrawal assumptions are based primarily
on actual historical termination rates. Accident and Health Purchase GAAP
reserves are determined using various percentages of published 1974 Cancer
Tables with Linton C termination rates and 1984 NAIC Cancer Tables with Linton
CC termination rates and interest at 7% level. Historic GAAP reserves for
pre-need life insurance were calculated using a graded death benefit and 100%
of the 1965 to 1970 Ultimate Table, 7% interest, with terminations on single
premium business assumed to be 2% per year and Linton A rates on all other
plans. 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. ALLIC 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.
ALLIC REINSURANCE. ALLIC 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.
ALLIC generally retains $30,000 of risk on any one person for life
insurance and retains 10% of each accidental benefit risk on accident and
health insurance policies. As of December 31, 1996, the aggregate amount of
life insurance ceded amounted to $995,000 or 2.3% of total direct and assumed
life insurance in force. ALLIC is contingently liable with respect to ceded
insurance should any reinsurer be unable to meet the obligations assumed by it.
As of December 31, 1996 ALLIC had in effect one automatic reinsurance
agreement that provides for cessions of ordinary insurance from ALLIC in excess
of its retention of $30,000 with a minimum cession of $2,000. On accident and
health insurance, there is an additional agreement which provides for automatic
cession of 100% of accidental death risks for policies issued after 1996.
A treaty with Businessmen's Assurance ("BMA") is the primary vehicle
utilized by ALLIC for its life reinsurance and Life Reassurance for its
accidental death risks. ALLIC closely monitors the solvency of its reinsurers
to minimize the risk of loss in the event of a failure by one of the parties.
BMA and Life Re, the primary reinsurers of ALLIC, are large, well capitalized
entities which have no current or prior history of financial difficulty.
At December 31, 1996, ALLIC had in force no reinsurance assumed.
ALLIC 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. ALLIC's invested assets at December 31, 1996 were distributed as
follows: fixed maturities - 90.5%, equity securities - 2.5%, mortgage loans -
none, policy loans - 1.5%, government insured student loans - none, cash and
short-term investments - 4.5% and other long-term investments - 0.6%.
At December 31, 1996, 32.9% of ALLIC's investments in fixed maturities
were comprised of U.S. Treasury Securities and obligations of U.S. government
corporations and agencies, including U.S. government guaranteed mortgage backed
securities. Of these mortgage-backed securities, all were guaranteed by U.S.
government agencies or corporations that are backed by the full faith and
credit of the U.S. government or that bear the implied full faith and credit of
the U.S. government. Of the remaining fixed maturities, 63.0% were corporate
securities and 4.1% were issued by States or Territories of the U.S. and
Canada. None of ALLIC's bonds are less than investment grade.
ALLIC REGULATION. ALLIC is subject to regulation and supervision by
the insurance department of each state or other jurisdiction in which it is
licensed to do business. See "--CICA Regulation" above for further description
of the type of regulation applicable to ALLIC. ALLIC's most recent examination
which was completed during 1995, was for the three years ended December 31,
1994, and was conducted by the Louisiana Division of Insurance.
ALLIC COMPETITION. The life insurance business is highly competitive,
and ALLIC competes with a large number of stock and mutual insurance companies,
many of which are larger than ALLIC. ALLIC
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<PAGE> 34
believes that its premium rates and its policies are generally competitive with
those of other life insurance companies.
ALLIC's marketing plan stresses the sale of pre-need or burial
policies as its primary life insurance product. Approximately 48% of ALLIC's
total first year and renewal premium income during 1996 came from that market.
ALLIC faces competition from several other life insurance companies that also
sell pre-need and burial policies, 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 the special features of the pre-need program allows ALLIC to
compete effectively in maintaining and pursuing new business. However, the
high cost associated with expansion in this market may inhibit ALLIC's ability
to penetrate to a significant degree.
The second aspect of ALLIC's marketing program is the sale of hospital
indemnity policies for specified illnesses. This block of business accounted
for approximately 49% of total first year and renewal premium in 1996. ALLIC
competes with many life insurance companies as well as with voluntary and
government-sponsored plans for meeting hospitalization and medical expenses
such as Blue Cross/Blue Shield, "Medicare" and "Medicaid." Future expansion of
such programs or the establishment of additional government health programs
could adversely affect the future of accident and health insurance on ALLIC's
books; however, ALLIC believes that it can continue to compete in this field
due to the uniqueness of its products.
ALLIC FEDERAL INCOME TAXATION. ALLIC is a "small company" as that
term is defined in the Code. As such, ALLIC qualifies 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 ALLIC.
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 ALLIC'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." ALLIC presently qualifies for a small company exception which
allows it to deduct the costs over a shorter five-year period.
In 1996 ALLIC filed a separate Federal income tax return. ALLIC filed
a consolidated Federal income tax return with ALFC and its subsidiaries prior
to the acquisition by Citizens in 1995. At December 31, 1996 ALLIC had net
operating loss carryforwards of $613,000 to offset taxable income in future
years.
BUSINESS OF CTI. CTI is a wholly-owned subsidiary of CICA that
provides data processing services and acquisition and leasing of furniture and
equipment for its parent, as well as data processing services and software to
other companies. CTI provides data processing services to CICA for a fixed fee
of $53,000 per month. As of and for the year ended December 31, 1996, CTI's
total assets were $787,000 and revenues were $674,000. All intercompany fees
and expenses have been eliminated in the Consolidated Financial Statements of
Citizens.
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 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 different airplane for use in providing
aviation transportation and services to Citizens and the airplane previously
owned by III was sold. As of and for the year ended December 31, 1996, III's
total assets were $790,000 and revenues were $166,000. All intercompany fees
and expenses have been eliminated in the Consolidated Financial Statements of
Citizens.
BUSINESS OF FAIC AND ITS SUBSIDIARIES, FHL AND FHA. FAIC was formed
in November 1984 for the purpose of organizing and financing proposed funeral
home companies (FHL and FHA) and a proposed Louisiana life insurance company.
FAIC offered stock to residents of the State of Louisiana during 1993 and 1994,
raising approximately $1,200,000 in gross proceeds. FHL was capitalized with
approximately $530,000 of the offering proceeds and FHA was capitalized with
approximately $500,000. The offering was terminated in 1995. FAIC's
activities are limited to ownership of FHL and FHA, comprising its total assets
of $1.0 million at December 31, 1996 with total revenues of $4,700. FHL owns
and operates a funeral home in Baker, Louisiana. Management intends to operate
the funeral home
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<PAGE> 35
for the foreseeable future. FHA was formed in 1993 to construct an additional
funeral home but those plans have been suspended and this subsidiary is
dormant. All intercompany fees and expenses have been eliminated in the
Consolidated Financial Statements of Citizens.
BUSINESS OF IIH AND CILIC. IIH is the holding company whose primary
asset is CILIC. IIH conducts no other operations. CILIC is an Illinois
domiciled life insurer admitted to do business in four states. Dormant for
several years, CILIC services a closed block of life insurance policies. As of
and for the year ended December 31, 1996, CILIC had assets of $2.7 million and
revenues of $179,000. All intercompany fees and expenses have been eliminated
in the Consolidated Financial Statements of Citizens.
DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of an
80,000 square foot office building. Approximately 27,000 square feet is
occupied by CICA and its affiliates with most of the remainder of the building
being leased. The occupancy rate of the property is approximately 95%.
CICA also owns 1.10 acres of land with a 13,000 square foot office
building which previously served as its executive offices. The property has a
book value of $158,000. A triple-net lease was executed by an unaffiliated
third party during 1995 on the building for a term of three years, with a
purchase option at a price of $850,000 during the period.
During 1995, CICA acquired through foreclosure a 7,500 square foot
office property in Wheat Ridge, Colorado for $116,000. Subsequently, CICA
renovated the property bringing its investment to $230,000. CICA recently
accepted a written bid to purchase the building for $350,000.
FHL also owns a 6,324 square foot funeral home in Baker, Louisiana
with a total cost of $473,000. Management plans to continue to operate the
funeral home for the foreseeable future.
LEGAL PROCEEDINGS
Citizens and its subsidiaries from time to time may be parties to
various legal proceedings incidental to their business. Management does not
expect the ultimate resolution of these legal proceedings to have a material
adverse impact on the financial condition of Citizens.
SELECTED FINANCIAL DATA
The tables below set forth, in summary form, selected financial data
of Citizens. 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).
CITIZENS, INC.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1993 1992
1996 1995 1994 (AS RESTATED) (AS RESTATED)
----------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET OPERATING
REVENUES $ 63,822 $ 53,130 $ 49,212 $ 42,761 $ 33,134
NET INCOME $ 2,214 $ 2,750 $ 4,175 $ 5,526 $ 3,907
NET INCOME
PER SHARE $ .11 $ .16 $ .25 $ .34 $ .24
TOTAL ASSETS $ 214,455 $ 205,486 $ 149,798 $ 134,105 $ 116,230
TOTAL LIABILITIES $ 147,572 $ 140,773 $ 114,742 $ 106,090 $ 93,442
TOTAL SHAREHOLDERS'
EQUITY $ 66,883 $ 64,713 $ 35,056 $ 28,015 $ 22,787
BOOK VALUE PER
SHARE $ 3.29 $ 3.24 $ 1.99 $ 1.68 $ 1.37
</TABLE>
Citizens adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standard No. 109 "Accounting for
Income Taxes" in 1993 and applied the provisions of Statement 109 retroactively
to January 1, 1991. The above table reflects the restatement for adoption of
Statement 109 as of and for the year ended December 31, 1992.
In 1993, Citizens extended for 36 months the exercise date of stock
options held by a consultant relating to 100,000 shares of Citizens Class A
Stock. As a result, Citizens 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 1993 financial statements were restated to
reflect the compensation expense described above.
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<PAGE> 36
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 ("American Liberty"), a Baton Rouge, Louisiana-based life insurance
holding company with $26 million in assets, $8 million of stockholders' equity,
revenues of $9 million and $40 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 acquisition was completed on September 14, 1995,
with American Liberty shareholders receiving 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 share of American Liberty
Preferred Stock owned. Citizens issued approximately 2.3 million Class A
shares in connection with the transaction, which was accounted for as a
purchase.
Pursuant to the IIH agreement, the acquisition by Citizens was
consummated on March 12, 1996, with shareholders of IIH receiving one share of
Citizens' Class A Common Stock for each eight shares of IIH common stock owned.
Additionally, Citizens acquired all shares of CILIC, a 95% owned subsidiary of
IIH, based upon an exchange ratio of one share of Citizens' Class A Common
Stock for each four shares of CILIC owned. The transaction, which was
accounted for as a purchase, involved the issuance of approximately 171,000
shares.
Upon consummation of the acquisition of the minority interest in FAIC,
Citizens expects to incur a non-recurring charge to earnings of approximately
$500,000 to $600,000. This charge is based upon the fair market value of the
shares to be issued, less the minority interest acquired, and approximately
$300,000 of goodwill.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1996 was $2,213,726 or $.11
per share compared to $2,750,212 or $.16 per share in 1995 and $4,174,558 or
$.25 per share in 1994. Increases in expenses associated with ALLIC's
marketing activities and a minimal increase in the sale of new international
life insurance premiums caused the decline in earnings in 1996. Decreased
writing of new life insurance premiums contributed to the lower earnings in
1995, coupled with increased operating expenses incurred to acquire and convert
ALLIC into Citizens' operating systems, which continued into 1996.
Total revenues for the year ended December 31, 1996 were $63,822,160
compared to $53,130,172 in 1995, an increase of 20.1%. The substantial revenue
growth in 1996 is attributable to the inclusion of ALLIC for the entire year,
which contributed approximately $9,200,000 to revenues. The 1995 revenues were
7.9% greater than 1994 when total revenues were $49,211,998. The smaller
increase in revenues during 1995 resulted primarily from a reduction in new
premium sales, whose decline offset increased investment income during the
year. In 1995, the revenues of ALLIC are included only from the purchase date
of September 14, 1995, and as such, only $2.6 million of ALLIC's total revenues
of $9 million were included in Citizens' results.
Premium income reached $53,914,361 in 1996, a 16.9% increase over the
previous year when premium income totaled $46,125,093. The 1995 amount
represented a 5.3% increase over 1994 when premiums amounted to $43,785,361.
Premiums for 1996 were boosted by the inclusion of ALLIC. ALLIC contributed
$3.8 million of accident and health premium and an additional $4.1 million of
life premiums. Additionally, CICA increased new premium sales to $9.7 million
during the year from $9.5 million in 1995, which was a decrease from $11.8
million in 1994. In 1994 and 1995, management did not emphasize new business
production due to its desire to increase capitalization before further
expanding premium writing. Additionally, during 1995, significant disruption
in the Argentina economy occurred, lowering sales from that region which had
been a major contributor to overall sales in recent years. Management believes
the disruption has passed in that market and expects to see improved production
from that area in the future although these expectations may not be realized
for a variety of reasons including political and governmental disturbances,
economic disturbances and other factors beyond the control of Citizens.
Additionally, only a small portion of the premium revenues of ALLIC are
included in the 1995 results as described above.
During late 1995 and 1996, management made a significant effort to
expand the writing of pre-need insurance on the part of ALLIC. Included in
this effort was the addition of several field agency managers, the design of
new products, and printing of promotional materials. Despite this commitment
and incurrence of approximately $700,000 in expenses, management abandoned
these efforts late in 1996. It is management's belief that ALLIC is better
served to continue to exploit its niche selling specialty accident and health
life products through existing distribution channels although factors such as
the reaction of the remaining ALLIC sales representatives to discontinuation of
this effort as well as general competitive factors will affect the actual
outcome. Because only a nominal amount of new premium was written through the
now discontinued expansion efforts, management does not expect the change in
focus to have a material effect on new sales. Management does, however,
believe that the loss of momentum as a result of withdrawal of the program will
cause a disruption in ALLIC's sales. The annual sales of new premiums produced
by ALLIC represents less than 10% of total new
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<PAGE> 37
premiums produced by Citizens; therefore, management does not believe this will
have an adverse effect on Citizens.
Net investment income increased 30.7% during 1996 to $9,185,506 from
$7,026,909 in 1995. In 1994, such income was $5,295,784. The 1996 results
reflect actions taken during late 1994 and early 1995 to extend the duration of
the investment portfolio slightly to take advantage of higher yields. Overall,
the duration was increased to approximately six years from four to five years.
Additionally, the acquisition of ALLIC which increased invested assets by
approximately $17.8 million, contributed, along with internal growth. ALLIC
represented $550,000 of 1995's investment income; however, this amount
represented only slightly more than three months of earnings on that asset
base. In 1996, the contribution was $1.2 million. The low yields available in
the bond market during Citizens' growth period have made it difficult to
increase the return on invested assets without exposing the portfolio to undue
risk; however, management believes that as yields rise (which occurred during
1994 and early 1995 and again in late 1996) Citizens is positioned to take
advantage of the investment opportunities that will present themselves and,
thus, enhance future returns. Management hired the investment advisory firm of
Asset Allocation and Management, Inc. of Chicago ("AAM"), Illinois in late 1995
to manage the fixed maturity portfolio. Management believes that an overall
increase in returns can be achieved by implementing the strategies of AAM to
provide more diversity in the portfolio without significantly increasing risk.
During 1996, a nominal reconfiguration was begun. In lieu of purchasing U.S.
Treasury instruments, Citizens began to purchase U.S. Government guaranteed
mortgage pass-through securities. Management believes that an approximate 50
basis point increase in return can be achieved through the switch assuming
current market yields do not decline. Additionally, approximately $3 million
of A to AA rated private placement bonds were acquired. Management expects to
continue this strategy throughout 1997 as opportunities present themselves.
Future policy benefit reserves increased $8,198,243 in 1996, compared
to $11,033,763 in 1995 and $11,910,751 in 1994. Increased surrender activity
during the year was the primary reason for the lower reserve increase in 1996.
The decreased production in 1995, coupled with lower reserves a result of a
lower capitalization rate on policy acquisition costs, along with higher
surrender activity in the international market as a result of the disruption
described above, were the reasons for the lower reserve increase in 1995.
Increasing premium income and favorable persistency in relation to premiums are
the primary reasons for the increase in 1994. Increases in surrender on the
block of Universal Life business acquired in the First Centennial Corp.
acquisition in 1992 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. The
reserves are certified annually by an independent actuary. Such certification
noted no deficiencies for the years presented.
Overall policyholder dividends remained relatively stable in 1996
amounting to $2,363,201 from $2,422,168 in 1995 and $2,381,581 in 1994. 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 recent years have not been growing. Virtually
all CICA's policies that have been sold since 1989 are participating.
Participating policies represent a large majority (87%) of the business in
force and over 90% of new issues in 1996 and 1995. As a result, management
expects continued growth in this item subject to factors such as persistency
and future sales; 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 34.4% in 1996, reaching $25,919,054
from $19,282,954 in 1995. In 1994, such expenses were $16,635,259. The 1995
increases result primarily from growth in surrenders and endowments.
Death benefits increased to $3,667,159 in 1996, compared to $2,923,339
in 1995. In 1994, such benefits were $2,533,569. ALLIC claims amounted to
$1,313,390 of the 1996 results. A large portion of the 1995 increase
($290,945) is attributable to the acquisition of ALLIC in September. The
remaining increase in 1995 is due to the growth in the in force business.
During 1994, the claims incurred on the Servicemen's Group Life Insurance
("Segli") program returned to levels seen prior to 1993, declining by
approximately $500,000. Additionally, during 1994 claims on the in force
business remained static with those incurred in 1993, despite the increasing
block of business in force. Citizens has historically adhered to a strict
underwriting policy which requires complete medical examinations on all
applicants who are foreign residents, except children, regardless of age or
face amount of the policy applied for. For 1996 and future years, management
initiated a change to more selective medical examinations in conjunction with
dry spot blood tests and extensive medical questions on the application in
order to lower the cost of new business without sacrificing necessary
information for the underwriter. Additionally, X-rays and electrocardiograms
are required depending on age and face amount of the policy. On all policies
of $150,000 or more, inspection reports are required which detail the
background resources and lifestyle of the applicant. CICA has developed
numerous contacts throughout Latin America with which its underwriters can
validate information contained in the application, medical or inspection
report. The relatively high death claims experienced on the ALLIC
27
<PAGE> 38
block of business are expected due to the nature of the business (burial
insurance) and the higher ages associated with such business.
Endowment expense grew from $4,631,261 in 1995 to $5,192,607 in 1996,
a 12.1% increase. In 1994, such expenses were $4,475,462. Beginning in late
1990, Citizens introduced a new series of plans called "Ultra Expansion Plus"
which carried an immediate endowment benefit of an amount elected by the policy
owner. This endowment is factored into the premium of the policy and is paid
annually. Management does not expect this benefit to adversely impact
profitability since it is factored into the cost of the policy.
Policy surrenders were $14,421,683 in 1996, compared to $10,611,335 in
1995 and $8,637,306 in 1994. The increase in surrenders is, in the opinion of
management, due to acquisitions and the growing block of business in force, as
well as representative of the economic problems seen in Argentina during 1995
and early 1996.
During 1996, commissions increased to $12,447,664 from $10,273,173 in
1995. During 1995, commissions declined to $10,273,173 from $12,382,372 in
1994. The majority of such amounts paid relates to first year commissions
which were $8,677,297, $7,292,264 and $9,925,028, respectively, in 1996, 1995,
and 1994. The 1996 increases relate to improved sales activity in CICA and
approximately $1.5 million associated with ALLIC. The decline in first year
commissions during 1995 relates to the slowdown in new sales discussed earlier.
Underwriting, acquisition and insurance expenses increased to
$9,500,973 in 1996 from $7,102,401 in 1995 and $5,079,538 in 1994. The 1996
expenses include approximately $3.2 associated with ALLIC. Due to the
consolidation of ALLIC's operations with CICA, management believes significant
reductions can be achieved through economies of scale. In order to convert a
majority of CICA's marketing overhead from fixed to variable, management began
discussions in early 1997 with an independent international marketing company
to serve as managing agent for the international marketing activities. This
firm would receive an overriding commission on all new business sold
internationally in exchange for the absorption of all marketing management and
promotion activities. By taking such actions, management believes
approximately $900,000 of fixed overhead can be converted to a variable expense
in 1997 and thereafter.
Management has utilized firms such as this in previous periods with
great success at obtaining increases in sales and expense reductions.
Additionally, management undertook the expense reductions associated with
ALLIC's marketing operations discussed previously. These actions should result
in an additional $700,000 of annual overhead reduction in future periods based
upon the 1996 level of expenditures and the factors described earlier regarding
the discontinued marketing operations. The 1995 expense increase reflects the
growth experienced in recent years, particularly in the marketing area. As a
result of a change in late 1993 in the management of marketing efforts,
Citizens absorbed a greater portion of the expense in exchange for paying lower
first year commissions. The growth in expense in 1994 is primarily related to
the increased home office marketing costs.
Capitalized deferred policy acquisition costs were $10,531,222 in
1996, compared to $10,579,704 in 1995 and $13,128,049 in 1994. The decline in
amounts in 1995 reflects the lower level of new sales experienced during the
year, as well as the lower interest rate environment. There was an adjustment
of capitalization for 1994 and after issued policies to reflect the lower
interest rates available to be earned on the investment portfolio compared to
earlier years. Amortization of these costs was $10,221,917, $8,511,876 and
$7,203,593 respectively in 1996, 1995, and 1994. The increased surrender
activity discussed above contributed to the increased amortization in 1996.
Amortization of cost of insurance acquired and excess of cost over net
assets acquired increased to $1,398,859 in 1996 from $678,997 in 1995 and
$606,487 in 1994. The increase is attributable to the goodwill and cost of
insurance recorded on the acquisitions of ALLIC and IIH.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased to $66,830,016 at December 31, 1996
from $64,712,990 in 1995. The acquisition of IIH and the income earned during
the period were the primary reasons for the growth in equity during 1996. The
IIH acquisition discussed previously, increased invested assets by $2,995,000
and stockholders' equity by $1,542,501. The increase in equity during the year
would have been greater but for a $1,978,000 unrealized loss (net of tax) on
Citizens' available-for-sale bond portfolio. This unrealized loss was
attributable to decreases in prices in the bond market in 1996.
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
permits shares offered outside of the United States to non-United Stated
persons pursuant to its 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). Citizens sold 916,375 shares, generating gross proceeds of
more than $6.4 million, and net proceeds of approximately
28
<PAGE> 39
$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, a
second offering was initiated in May 1995. The second offering, to Citizens'
international policyholders, expires on October 31, 1997. It currently prices
the shares at $7.50 and requires a three-year holding period. As of December
31, 1996, approximately 135,000 shares had been purchased through the second
Reg. S offering, resulting in a net increase to capital of $1,084,000.
Invested assets grew to $138,311,136 in 1996 from $130,024,739 at
December 31, 1995, an increase of 6.4%. The acquisition of IIH contributed
approximately $2 million to said increase. The balance of the growth is
attributable to the internal growth achieved by Citizens. At December 31,
1996, 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. Citizens does not
plan to make material dispositions of fixed maturities during 1997; however,
because of continued uncertainty regarding long-term interest rates, management
will not rule out sales during 1997. Fixed maturities held to maturity,
amounting to $5,627,256 consist primarily of U.S. Treasury securities.
Management has the intent and believes Citizens has the ability to hold the
securities to maturity.
Citizens' mortgage loan portfolio, which constitutes 1.2% of invested
assets at December 31, 1996, (1.5% at December 31,1995) has historically been
composed of small residential loans in Texas. At December 31, 1996, no
mortgage loans were in default. At December 31, 1995, one mortgage loan was in
default with a principal balance of approximately $92,000. During 1995, the
loan to an affiliate described below was foreclosed. Management has established
a reserve of $50,000 at December 31, 1996 (approximately 3% of the mortgage
portfolio's balance) to cover potential unforeseen losses in the mortgage
portfolio.
Policy loans comprise 14.3% of invested assets at December 31, 1996
compared to 14.5% at December 31, 1995. 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 Citizens maintains more than adequate
liquidity despite the uncertain maturities of these loans.
Cash balances of Citizens in its primary depository, Texas Commerce
Bank Austin, Texas, were significantly in excess of Federal Deposit Insurance
Corporation (FDIC) coverage at December 31, 1996. Management monitors the
solvency of the financial institutions in which Citizens has funds to minimize
the exposure for loss. At December 31, 1996, management does not believe
Citizens is at risk for such a loss. During 1997, Citizens 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, Citizens paid cash for an 80,000 square foot office
building in Austin, Texas to serve as Citizens' primary office. This building
will, in the opinion of management, provide adequate space for Citizens'
operations for many years. Renovation and remodeling of the property began in
the third quarter of 1992 and Citizens relocated to the building in September
1993. Citizens occupies approximately 27,000 square feet of space in the
building. Citizens' former office property, consisting of approximately 13,000
square feet in Austin, with a carrying value of $158,000 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
$1.5 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 and 1995. 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
($8,310,000), which differs from prescribed statutory accounting practices.
Statutory accounting practices prescribed by Colorado require that Citizens
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
Consolidated Financial Statements of Citizens, this stock is shown as treasury
stock. During 1995, Citizens reacquired 115,943 of these shares and retired
them.
CICA had outstanding at December 31, 1996, a $466,000 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 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
29
<PAGE> 40
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
Citizens would begin. At December 31, 1996 and 1995, CICA, ALLIC and CILIC
were well above required minimum levels.
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 Citizens' 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
Citizens' 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. Citizens 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 Citizens 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 accredited 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. Citizens
adopted Statement 115 at January 1, 1994.
MARKET PRICES
Citizens Class A Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol "CIA." The high and low prices per share as supplied
by the AMEX Monthly Statistical Report are as follows.
<TABLE>
<CAPTION>
1997 1996 1995 1994
------------- --------------- --------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
------------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $ 8.81 $7.63 $ 9.25 $ 8.25 $ 9.25 $ 7.13 $ 8.00 $ 7.75
June 30 -- -- 8.94 5.13 9.69 8.25 8.25 8.12
September 30 -- -- 8.13 5.88 15.63 7.25 8.38 7.63
December 31 -- -- 9.75 7.69 9.88 8.06 9.13 7.63
</TABLE>
The approximate number of record owners of Citizens Class A Common
Stock is 15,000. Citizens has not paid a cash dividend and does not expect to
pay cash dividends in the foreseeable future.
30
<PAGE> 41
CERTAIN SECURITY OWNERSHIP OF CITIZENS
The following table sets forth information regarding the persons known
to Citizens to be the beneficial owners of more than 5% of Citizens Class A and
Class B Common Stock as of the date of this Proxy-Information Statement.
<TABLE>
<CAPTION>
SHARES OWNED AND
NAME AND ADDRESS NATURE OF OWNERSHIP PERCENT OF CLASS
- ----------------- ------------------- ----------------
<S> <C> <C>
Harold E. Riley 5,399,687 Class A 27.1%
P.O. Box 149151 direct and indirect(1)
Austin, TX 621,049 Class B indirect(1) 100.0%
Marjorie D. Riley 1,060,000 Class A direct(2) 5.3%
30222 Briarcrest
Georgetown, TX
- --------------
</TABLE>
(1) See footnote (1) in the table immediately below.
(2) In record name.
The following table sets forth information as of the date of this
Proxy-Information Statement with regard to the beneficial ownership of Citizens
common shares by each director, the named executive officers and by the
executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES OWNED AND
NAME AND ADDRESS NATURE OF OWNERSHIP PERCENT OF CLASS
- ---------------- ------------------- ----------------
<S> <C> <C>
Harold E. Riley 5,399,687 Class A direct and indirect (1) 27.1%
621,049 Class B indirect (1) 100.0
Rick D. Riley 372,208 Class A direct and indirect (2) 1.9
Joe R. Reneau, M.D. 42,652 Class A direct (3)
Flay F. Baugh 34,459 Class A direct and indirect (4) (3)
Timothy T. Timmerman 40,800 Class A direct (3)
T. Roby Dollar 31,697 Class A direct and indirect (5) (3)
Ralph M. Smith, Th.D. 19,772 Class A direct and indirect (6) (3)
Steven F. Shelton 3,720 Class A direct (3)
Clayton D. Dunham 240 Class A direct (3)
Mark A. Oliver 240 Class A direct (3)
All executive officers 5,945,581 Class A direct and indirect 29.9
and directors as a group 621,049 Class B direct 100.0
(12 persons)
- ----------
</TABLE>
(1) Owns 5,144,200 shares of Class A Common Stock directly and spouse owns
255,487 shares of Class A Common Stock. The Harold E. Riley Trust, of
which Mr. Riley is the controlling Trustee, owns all of the 621,049
issued and outstanding shares of Class B Common Stock.
(2) Son of Harold E. Riley. Owns 264,044 shares of Class A Common Stock
directly, 16,700 shares of Class A Common Stock as joint tenant with
spouse, and 89,040 and 2,424 shares of Class A Common Stock indirectly
as trustee for minor children and spouse, respectively.
(3) Less than one percent (1%).
(4) Owns 8,873 shares of Class A Common Stock directly and 25,586 shares
of Class A Common Stock as joint tenant with spouse.
(5) Owns 16,697 shares of Class A Common Stock directly and spouse owns
15,000 shares of Class A Common Stock.
(6) Owns 11,088 shares of Class A Common Stock directly and spouse owns
8,684 shares of Class A Common Stock.
Citizens is not aware of any arrangement, including any pledge by any
person of securities of Citizens, the operation of which may at a subsequent
date result in a change in control of Citizens.
31
<PAGE> 42
MANAGEMENT OF CITIZENS
DIRECTORS. The following table sets forth certain information
regarding the directors of Citizens.
<TABLE>
<CAPTION>
PRINCIPAL DIRECTOR
NAME AGE OCCUPATION SINCE
- ----- --- ---------- ---------
<S> <C> <C> <C>
Harold E. Riley 68 Chairman of the Board of Citizens 1987
Austin, Texas
Rick D. Riley (1) 43 Executive Vice President 1989
of Citizens
Austin, Texas
T. Roby Dollar 59 Vice Chairman, Chief 1993
Actuary of Citizens
Austin, Texas
Mark A. Oliver 38 President of Citizens 1997
Austin, Texas
Joe R. Reneau, M.D. 65 Physician, Medical Consultant 1989
Austin, Texas
Flay F. Baugh 83 Investments 1989
Temple, Texas
Ralph M. Smith, Th.D. 66 Pastor Emeritus 1993
Hyde Park Baptist Church
Austin, Texas
Steven F. Shelton 41 Farmer/Rancher 1993
Lamar, Colorado
Timothy T. Timmerman 36 President, Texas Cable Systems 1989
Inc., TCSI-Huntsville and
Timmerman Investments, Inc.
Round Rock, Texas
</TABLE>
- ----------
(1) Son of Harold E. Riley. There are no other family relationships
between or among Board members and the executive officers of Citizens.
HAROLD E. RILEY, controlling shareholder; Chairman of the Board of
Citizens and its affiliates from 1994 to present; Chairman of the Board and
Chief Executive Officer of Citizens and its affiliates from 1992 to present;
President of Citizens and its affiliates from November 1996 to March 1997;
Chairman of the Board, Chief Executive Officer and President of Citizens and
its affiliates, from 1987 to 1992; Chairman of the Board, President and Chief
Executive Officer, Continental Investors Life Insurance Company, from 1989 to
1992.
RICK D. RILEY, Executive Vice President of Citizens and its
affiliates from September 1995 to present; Chief Operating Officer of Citizens
and its affiliates from September 1995 to March 1997; Chief Administrative
Officer of Citizens and its affiliates from 1994 to June 1995, and President
thereafter until September 1995; Executive Vice President and Chief Operating
Officer of Citizens and its affiliates, from 1990 to 1991 and 1992 to 1994;
President, Computing Technology, Inc. from 1991 to 1992; Executive Vice
President, Data Processing, Citizens and its affiliates, from 1987 to 1991;
Executive Vice President, Continental Investors Life Insurance Company from
1989 to 1992.
T. ROBY DOLLAR, Vice Chairman, Chief Actuary of Citizens and its
affiliates from 1994 to present; President of Citizens and its affiliates from
1992 to 1994; Executive Vice President and Chief Actuary of Citizens and its
affiliates from 1987 to 1992.
MARK A. OLIVER, President of Citizens and its affiliates from March
1997 to present; Executive Vice President, Chief Financial Officer, Secretary
and Treasurer of Citizens and its affiliates from 1990 to 1997; Treasurer and
Chief Financial Officer of Citizens and its affiliates from 1988 to 1990;
Treasurer and Controller of Citizens and its affiliates from 1984 to 1988.
JOE R. RENEAU, M.D., Physician - Medical Consultant, Abbott
Laboratories, Austin, Texas, from 1987 to present and IBM, Austin, Texas, from
1992 to present; Medical Director of Citizens and its affiliates from 1987 to
present.
32
<PAGE> 43
FLAY F. BAUGH, Investments; President, Baugh's Inc., Temple, Texas, a
company engaged in shoe manufacturing, from 1954 to present; Director of
Citizens Insurance Company of America (Texas), former parent of Citizens, from
1978 to 1988. Director of Citizen, from 1989 to present.
RALPH M. SMITH, Th.D., Pastor Emeritus, Hyde Park Baptist Church,
Austin, Texas, from 1960 to March 1996. Director of Citizens from 1989 to 1990
and 1993 to present; Advisory Director of Citizens from 1991 to 1993.
STEVEN F. SHELTON, Rancher and Farmer from 1974 to present; Director,
First Centennial Corporation, from January to October 1989 and August 1990 to
1992. Director of Citizens from 1993 to present.
TIMOTHY T. TIMMERMAN, President, Texas Cable Systems, Inc.; President,
TCSI-Huntsville; President, Northeast Cablevision, Inc.; President, Timmerman
Investments Inc., Round Rock, Texas, from 1984 to present. Director of
Citizens from 1989 to present.
No director of Citizens is a director of any other company with a
class of securities registered under the Securities Exchange Act of 1934 or any
investment company registered under the Investment Company Act of 1940.
EXECUTIVE OFFICERS. The following table sets forth certain
information concerning the executive officers of Citizens. Executive officers
are elected annually by the Citizens Board at the first meeting of the Citizens
Board of Directors following the Annual Meeting of Shareholders of Citizens:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----- --- -----------
<S> <C> <C>
Harold E. Riley (1) 68 Chairman of the Board
Mark A. Oliver (1) 38 President
Clayton D. Dunham (3) 53 Executive Vice President and Chief Operating Officer
T. Roby Dollar (1) 58 Vice Chairman, Chief Actuary and Assistant
Treasurer
Rick D. Riley (2) 43 Executive Vice President
John K. Drisdale, Jr. (4) 42 Vice President, Chief Counsel and Secretary
William P. Barnhill (5) 45 Vice President and Treasurer
- ----------
</TABLE>
(1) Messrs. H. Riley, Dollar, and Oliver have served since 1987. Mr.
Oliver became President in March 1997. Prior to becoming President,
Mr. Oliver served as Executive Vice President, Chief Financial Officer
and Secretary/Treasurer. These persons hold similar positions in
affiliated subsidiaries of Citizens.
(2) Rick D. Riley has served from 1987 to 1991 and 1992 to present and
holds similar positions in affiliated subsidiaries. From 1991 to
1992, he was President of Computing Technology, Inc.
(3) Clayton D. Dunham was named Executive Vice President and Chief
Operating Officer in March 1997. He served as Senior Vice President
and Director of Marketing of Citizens and its affiliates from November
1994 to March 1997. From 1990 to 1994, he served as President of DIA
International. From 1987 through 1990, he was General Manager of
Negocios Savoy, S.A.
(4) John K. Drisdale, Jr., joined Citizens in December 1995 as Vice
President and Chief Counsel. In March 1997 he became Secretary. From
1987 to 1992, he was Vice President and General Counsel of Exeter
Holdings Corp., an acquisition and investments company. In 1992, Mr.
Drisdale entered private law practice as a partner in Forman, Perry,
Watkins & Krutz. In 1993, he started the law firm of Drisdale &
Lindstrom PLLC from which he joined Citizens.
(5) William P. Barnhill joined Citizens in June 1996 as Vice President and
Controller. In March 1997 he became Treasurer. From 1981 to June
1996, Mr. Barnhill worked for Western General Life Insurance Company
in various capacities ultimately attaining the position of Senior Vice
President and Treasurer in 1991, in which capacity he served until
joining Citizens.
33
<PAGE> 44
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION
The following table presents the aggregate compensation which was
earned by the Chief Executive Officer of Citizens for each of the past three
years, for the other most highly compensated executive officers for 1996 and
for all other officers whose aggregate compensation exceeded $100,000 in 1996,
1995 and 1994 and whose compensation is required to be reported herein.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------- ----------- -------
RESTRICTED
NAME AND PRINCIPAL POSITION OTHER ANNUAL STOCK OPTIONS LTIP ALL OTHER
DURING COVERED PERIOD YEAR SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUT COMPENSATION
- ---------------------------- ---- ------ ----- ------------ -------- ---- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harold E. Riley, Chairman
1996 $325,000 N/A N/A N/A N/A N/A $12,268 (1)
1995 $312,700 N/A N/A N/A N/A N/A $ 3,761 (1)
1994 $260,616 N/A N/A N/A N/A N/A $ 6,691 (1)
Randall H. Riley, 1996 $160,200 N/A N/A N/A N/A N/A $ 4,514 (1)
Vice Chairman and Chief 1995 $161,431 N/A N/A N/A N/A N/A $ 4,415 (1)
Operating Officer (2) 1994 $150,200 N/A N/A N/A N/A N/A N/A
Clayton Dunham, Senior VP and
Director of Marketing 1996 $143,533 N/A N/A N/A N/A N/A $ 3,084 (1)
1995 $120,200 N/A N/A N/A N/A N/A N/A
James I. Dunham (3) 1996 $150,000 N/A N/A N/A N/A N/A N/A
Rick D. Riley, Executive 1996 $107,680 N/A N/A N/A N/A N/A $10,709 (1)
Vice President 1995 $100,200 N/A N/A N/A N/A N/A $1,903
Mark A. Oliver, Executive Vice
President, Chief Financial
Officer and Secretary/Treasurer 1996 $103,437 N/A N/A N/A N/A N/A $3,178
- ----------
</TABLE>
(1) Profit-sharing plan allocation made in year indicated for the
preceding year. The determinations for 1996 are not expected to be
made until mid 1997.
(2) Randall H. Riley resigned in March 1997.
(3) Mr. Dunham, formerly President, resigned in November 1996.
All employees of Citizens are covered under a non-contributory
profit-sharing plan. Under the terms of the plan, all employees who have
completed one year of service are eligible to participate. Vesting begins
following completion of two years' service and employees become fully vested
after seven years' service. Citizens made $50,000 annual contributions to the
plan in 1994 and 1995 and a $100,000 contribution in 1996. Messrs. H.E. Riley,
R.H. Riley, C. Dunham, R.D. Riley and Oliver had $68,099, $1,785, $0, $64,670
and $7,944, respectively, vested under the plan as of December 31, 1995, the
last allocation date.
The members of Citizens Board who are not officers of Citizens are
paid $300 per meeting, while Committee members who are not officers are paid
$150. Total directors' fees paid during 1996 were approximately $6,000.
Messrs. Reneau and Smith were paid $15,000 and $1,800, respectively, in 1996
for services performed as consultants to Citizens.
SECTION 16(B) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16 of
the Securities Exchange Act of 1934 requires directors, executive officers and
persons who own more than 10% of a registered class of Citizens' equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely upon a review of such reports
and amendments thereto furnished to Citizens, it believes that during 1996 all
such reports were filed on a timely basis except that, due to an incapacitating
illness, Dr. Ralph M. Smith filed on November 1996 five late reports regarding
two transactions in 1996, two transactions in 1995, and one transaction in
1994.
SOURCE OF CITIZENS SHARES
The Citizens Class A Common Stock which will be transferred in the
Exchange will have been issued to CICA. The Citizens shares, when delivered
pursuant to the Exchange Agreement, will be duly authorized and validly issued,
fully paid and non-assessable.
34
<PAGE> 45
RIGHTS OF AMERICAN DISSENTING SHAREHOLDERS TO RECEIVE PAYMENT FOR SHARES
The following is a summary of dissenters' rights available to
shareholders of American, which summary is not intended to be a complete
statement of applicable Mississippi law and is qualified in its entirety by
reference to Article 13 of the Mississippi Business Corporation Act, set forth
in its entirety as Appendix B.
CICA HAS CONDITIONED THE EXCHANGE ON, SUBJECT TO ITS RIGHT TO WAIVE,
AND HAS RESERVED THE RIGHT TO ABANDON THE EXCHANGE AGREEMENT IN THE EVENT THAT
HOLDERS OF GREATER THAN 2.5% OF THE OUTSTANDING SHARES OF CLASS A AND CLASS B
COMMON STOCK OF AMERICAN DISSENT FROM THE EXCHANGE AND SEEK PAYMENT FOR THEIR
SHARES IN ACCORDANCE WITH THE MISSISSIPPI BUSINESS CORPORATION ACT.
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS. A shareholder of
American who wishes to assert dissenters' rights must file with American, prior
to or at the Meeting, a written notice of his or her intent to demand payment
for his or her shares if the Exchange is effectuated, and must not vote his or
her shares in favor of the Exchange. A shareholder who does not satisfy the
foregoing notice requirement will not be entitled to payment for his or her
shares under Mississippi law.
If the Exchange is approved, American will deliver a written
dissenters' notice to all shareholders who satisfied the above notice
requirement. The notice to dissenters must be sent no later than 10 days after
the Effective Date of the Exchange and must: (1) state where the payment
demand from the shareholder must be sent and where and when certificates for
certificated shares must be deposited; (2) inform holders of uncertificated
shares to what extent transfer of shares will be restricted after the payment
demand is received; (3) supply a form for demanding payment that includes the
date of the first announcement to news media or to shareholders of the terms of
the Exchange and requires that the person asserting dissenters' rights certify
whether or not he acquired beneficial ownership of the shares before that date;
(4) set a date by which American must receive the payment demand, which date
may not be fewer than 30 nor more than 60 days after the date the notice from
the shareholder demanding payment for his or her shares is delivered to
American; and (5) be accompanied by a copy of Article 13 of the Mississippi
Business Corporation Act.
A shareholder sent a dissenters' notice from American must demand
payment, certify he or she acquired beneficial ownership of the shares before
the date required to be set forth in the notice from American and deposit his
or her certificates in accordance with the terms of the notice from American.
A shareholder who demands payment and deposits his or her shares will retain
all other rights as a shareholder until his or her rights are canceled or
modified by the Exchange becoming effective. A shareholder who does not demand
payment or deposit his certificates where required, each by the date set in the
notice sent by American, will not be entitled to payment for his or her shares
under the Mississippi Business Corporation Act.
Except for after acquired shares of a shareholder, as soon as the
Exchange is effective, or upon receipt of a payment demand, American will pay
to each dissenter who complied with the Mississippi Business Corporation Act
the amount American estimates to be the fair value of the shares of the
dissenting shareholders, plus accrued interest. The payment must be
accompanied by: (1) a balance sheet of American as of December 31, 1996, an
income statement for such year or years, a statement of changes in
shareholders' equity for such year and the latest available interim financial
statements of American, if any; (2) a statement of the estimate of American of
the fair value of the shares; (3) an explanation of how interest was
calculated; (4) a statement of the right of the dissenter to demand payment if
the shareholder is dissatisfied with the payment or offer; and (5) a copy of
Article 13 of the Mississippi Business Corporation Act.
If American does not effect the Exchange within 60 days after the date
set for demanding payment and depositing share certificates, American will
return the deposited certificates and release the transfer restrictions imposed
on uncertificated shares. If, after returning deposited certificates and
releasing transfer restrictions, American effects the Exchange, it must send a
new notice to dissenters under Article 13 of the Mississippi Business
Corporation Act and repeat the payment demand procedure.
American may elect to withhold payment required above from a dissenter
unless such dissenter was the beneficial owner of the shares before the date
set forth in the notice to dissenters as the date of the first announcement to
news media or to shareholders of the terms of the Exchange. To the extent
American elects to withhold payment as set forth in the foregoing sentence,
after the Exchange is effected, American will estimate the fair value of the
shares, plus accrued interest, and will pay this amount to each dissenter who
agrees to accept it in full satisfaction of his or her demand. American shall
send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how interest was calculated and a statement of the
right of the dissenter to demand payment if the dissenter is dissatisfied with
the payment or offer.
A dissenter may notify American in writing of his or her own estimate
of the fair value of his or her shares and the amount of interest due, and
demand payment of his or her estimate (less any payment made theretofore) or
reject American's offer and payment of the fair value of his or her shares and
interest due if: (1) the dissenter believes that the amount paid or offered is
less than the fair value of his or her shares or that the interest due is
incorrectly calculated; (2) American fails to
35
<PAGE> 46
make payment in 60 days after the date set for demanding payment; or (3)
American, having failed to effect the Exchange, does not return the deposited
certificates or release the transfer restrictions imposed on uncertificated
shares within 60 days after the date set for demanding payment. A dissenter
waives his or her right to demand payment under the foregoing procedure unless
he or she notifies American of his or her demand in writing within 30 days
after American made or offered payment for his or her shares.
JUDICIAL APPRAISAL OF SHARES. If a demand for payment remains
unsettled, American will commence a proceeding within 60 days after receiving
the payment demand and petition a court to determine the fair value of the
shares and accrued interest. If American does not commence the proceeding
within the 60-day period, it will pay each dissenter whose demand remains
unsettled the amount demanded. American will commence the proceeding in the
chancery court of the county where its principal office is located, Hinds
County, Mississippi, and it will make all dissenters whose demands remain
unsettled parties to the proceeding as in an action against their shares and
all parties must be served with a copy of the petition. The jurisdiction of
the court in which the proceeding is commenced will be exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
the decision on the question of fair value. The dissenters will be entitled to
the same discovery rights as parties in other civil proceedings. Each
dissenter made a party to the proceeding is entitled to judgment (1) for the
amount, if any, by which the court finds that fair value of his or her shares,
plus interest, exceeds the amount paid by American, or (2) for the fair value,
plus accrued interest, of his after acquired shares for which American elected
to withhold payment.
The court in an appraisal proceeding will determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court will assess the costs against American,
except that the court may assess costs against all or some of the dissenters,
in amounts the court finds equitable, to the extent the court finds the
dissenters acted arbitrarily, vexatiously or not in good faith in demanding
payment. The court may also assess the fees and expenses of counsel and
experts for the respective parties in amounts the court finds equitable: (1)
against American and in favor of any or all dissenters if the court finds
American did not substantially comply with the requirements of the Mississippi
Business Corporation Act; or (2) against either American or a dissenter, in
favor of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by Article 13 of the Mississippi
Business Corporation Act. If the court finds that the services of counsel for
any dissenter were of substantial benefit to other dissenters similarly
situated, and that the fees for those services should not be assessed against
American, the court may award to the counsel reasonable fees to be paid out of
the amounts awarded to dissenters who were benefitted.
COMPARISON OF RIGHTS OF SECURITYHOLDERS
Upon consummation of the Exchange, the holders of issued and
outstanding American Class A and Class B Common Stock will receive Citizens
Class A Common Stock. The rights of the holders of Citizens shares are
governed by Citizens' Articles of Incorporation, its bylaws and Colorado law,
while the rights of holders of American shares are governed by American's
Articles of Incorporation, its bylaws and Mississippi law. In most respects,
the rights of holders of Citizens Class A Common Stock and holders of American
Class A or Class B Common Stock are similar. The following is a brief
comparison of the rights of the holders of American Class A or Class B Common
Stock with those of Citizens Class A Common Stock.
AUTHORIZED SHARES
The aggregate number of shares which Citizens is authorized to issue
is 50,000,000 shares of Class A Common Stock with no par value and 1,000,000
shares of Class B Common Stock, with no par value; of which, as of March 31,
1997, 19,892,159 shares of such Class A Common Stock and 621,049 shares of
Class B Common Stock were issued and outstanding, fully paid and
non-assessable. These numbers do not include treasury shares.
The aggregate number of shares which American is authorized to issue
is 15,000,000 shares of Class A Common Stock, no par value, and 2,500 shares
Class B Common Stock, $1.00 par value, of which 5,021,764 shares of Class A
Common Stock are issued and outstanding, fully paid and nonassessable, and
2,500 shares of Class B Common Stock are issued and outstanding, fully paid and
nonassessable.
Both Colorado and Mississippi law allow corporations to authorize one
or more classes of stock with or without par value and such designations,
preferences, limitations and other rights as allowed by the articles of
incorporation.
DIVIDEND RIGHTS
The cash dividends paid upon each share of Citizens Class A Common
Stock are twice the cash dividends paid on each share of Citizens Class B
Common Stock. No such differences exist in the dividend rights of American
Class A or Class B Common Stock.
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<PAGE> 47
Generally, both Colorado and Mississippi law allow the Board of
Directors to declare dividends from time to time as long as such payment of
dividends would not make the corporation insolvent or the corporation's net
assets after such payment are sufficient that upon dissolution or liquidation
the corporation can satisfy any preferential rights of shareholders other than
those receiving the dividend.
VOTING RIGHTS
Those who hold American shares on the date of the Exchange becomes
effective will be entitled as a group to hold approximately 697,815 shares of
Citizens Class A Common Stock or approximately 3.4% of Citizens Class A shares
that Citizens anticipates will then be outstanding.
The voting rights of Citizens Class A Common Stock and Class B Common
Stock are equal in all respects except that the holders of Class B Common Stock
have the exclusive right to elect a simple majority of the members of Citizens'
Board of Directors, and the holders of the Class A Common Stock have the
exclusive right to elect the remaining directors.
The holders of American Class A and Class B Common Stock are entitled
to one vote for each share of stock held. No holders of Citizens Common Stock
have cumulative voting rights in the election of directors; however, the
holders of Class A and Class B Common Stock of American have the right to
cumulate their votes in the election of directors. The lack of cumulative
voting rights with respect to the Citizens Class A Common Stock makes it more
difficult for minority groups to effect election of one or more directors to
represent their interests.
The Articles of Incorporation of Citizens provide that when, with
respect to any action to be taken by Citizens shareholders the Colorado
Business Corporation Act requires the affirmative vote of the holders of
two-thirds of the outstanding shares entitled to vote thereon, or of any class
or series, such action may be taken by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote on such action. The power
to amend the Articles of Incorporation, approve mergers and approve
extraordinary asset transfers are all subject to this provision.
The Mississippi Business Corporation Act provides that, with respect
to any action to be taken by American shareholders including, but not limited
to shareholder approval of amendments, mergers, consolidations, or asset
transfers, such action may be taken by the affirmative vote of a majority of
the shares entitled to vote at a meeting called and held on due notice, at
which a quorum is present or represented. However, in some circumstances a
two-thirds vote may be required, such as in the Exchange. Such requirement has
been communicated to American by the Mississippi Insurance Department.
American's bylaws provide that the power to alter, amend, or repeal
American's bylaws or to adopt new bylaws is vested in the Board of Directors.
However, the Mississippi Business Corporation Act gives shareholders the right
to amend and repeal bylaws even if not so provided for in the bylaws
themselves. Citizens' Articles of Incorporation provide that Citizens' Board
of Directors has the power to enact, alter, amend and repeal Citizens' bylaws
not inconsistent with the laws of Colorado or Citizens' Articles of
Incorporation, as the Board of Directors deems best for the management of
Citizens; however, the Colorado Business Corporation Act gives shareholders the
right to amend and repeal bylaws even if not so provided for in the bylaws
themselves.
Special meetings of American shareholders may be called by American's
President, its Board of Directors, or the holders of 10% or more of all the
American shares entitled to vote. Special meetings of Citizens' shareholders
may be called by the Chairman of the Board, the Board of Directors, or the
holders of 10% or more of all the Citizens shares entitled to vote. A majority
of the shares of the outstanding capital stock entitled to vote constitutes a
quorum of shareholders under the bylaws of American. The bylaws of Citizens
provide that one-third of the votes entitled to be cast on a matter by a voting
group shall constitute a quorum of that voting group. The bylaws of Citizens
provide that shareholders can take action without a meeting provided that all
the shareholders entitled to vote have consented to the action in writing.
American's Articles of Incorporation provide that written consents signed by a
majority of the voting shares outstanding shall be sufficient to authorize an
action without a meeting.
PREEMPTIVE RIGHTS
Authorized American and Citizens shares may be issued at any time, and
from time to time, in such amounts and for such consideration as may be fixed
by the Board of Directors of American and Citizens, respectively. No holder of
Citizens or American shares has any preemptive or preferential right to
purchase or to subscribe for any shares of capital stock or other securities
which may be issued by Citizens or American.
LIABILITY OF DIRECTORS
As authorized by Colorado law, Citizens' Articles of Incorporation
contain a provision to the effect that no director of Citizens shall be
personally liable to Citizens or any of its shareholders for damages for any
breach of duty as a director except to the extent limited by law. The Articles
of
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<PAGE> 48
Incorporation of American contain no such provision; however, the bylaws of
American provide broad indemnification of American directors, officers,
employees and others.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution, or winding up of
Citizens, whether voluntary or involuntary, the holders of Citizens common
shares are entitled to share, on a share-for-share basis, any of the assets or
funds of Citizens which are distributable to its shareholders upon such
liquidation, dissolution, or winding up.
In the event of any liquidation, dissolution, or winding up of
American, whether voluntary or involuntary, American common shareholders will
be entitled to share, on a share-for-share basis, any of the remaining amounts
or funds of American which are distributable to its shareholders upon such
liquidating, dissolution or winding up.
ASSESSMENT
The Citizens shares to be distributed upon consummation of the
Exchange will be, upon issuance, fully paid and non-assessable. American
shares, for which full consideration has been paid, are fully paid and
non-assessable.
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<PAGE> 49
INFORMATION CONCERNING AMERICAN
American, formerly Great American Investment Network, Inc., was
incorporated under Mississippi law on January 15, 1987. American was organized
to serve as a parent company of a life insurance company and other subsidiary
companies dealing with insurance and financial services. In 1996 the name of
American was changed to its present name from "Great American Investment
Network, Inc."
Presently, American owns 100% of the outstanding capital stock of
United Security Life Insurance Company, a Mississippi domestic life insurance
company ("United") and The Gain Agency, Inc., a Mississippi corporation (the
"Agency").
From the inception of American in January 1987, until May 1990,
American was in a development stage of organizational planning, receiving
capital through a private intrastate offering and a public intrastate offering,
establishing operating procedures, training a staff of United, acquiring its
insurance agency business, and buying and renting an office building. Its
principal revenues were from interest on invested capital, rental from the
portion of its building rented to outsiders and agency commissions.
UNITED. Effective December 31, 1994, American purchased Financial
Security Life of Mississippi ("FSL"), a Mississippi domestic life insurance
company and United and FSL were merged. FSL was the surviving company and
simultaneously with the merger the name of the surviving company was changed to
United. In compliance with the requirements of the Mississippi Department of
Insurance, certain operating transactions of both companies were combined in
the annual statutory financial statement for 1994. The statutory gain in 1996
and 1995 was approximately $4,000 and $13,000, respectively. On a generally
accepted accounting principle basis, net income (loss) of United approximated
$(203,000) in 1996 and $293,000 in 1995.
As of December 31, 1996, United had $55,585,000 of life insurance in
force and $19,277,000 in accidental death benefits. Of the life insurance in
force, United reinsured $30,760,000 and retained $24,825,000. The maximum
retention by United on any one life for life insurance policies is $20,000. It
reinsured all of the accidental death benefit coverage. United had 6,214
accident and health policies with $2,037,000 of annualized premium in-force.
Reinsurance is provided for amounts in excess of $25,000 on any one claim in
any calendar year on the cancer policy. Additionally, during 1996, United
entered into reinsurance agreements which provide coverage of claims in excess
of various amounts on several of its other accident and health policies and
riders.
United has approximately 300 full and part time licensed
representatives. These agents are licensed to sell life, accident and health
insurance products and United will be recruiting additional agents in the nine
states it is authorized to sell its products.
INSURANCE PRODUCTS. United offers customary forms of life insurance,
including non-participating whole life, decreasing term, level term policies,
and a participating whole life policy. It has begun offering a limited line of
supplementary health policies. Its leading life policy in the past has been
the "Lifetime Accumulator," a participating whole life insurance policy. This
policy differs from the usual offering of life insurance in that the premium is
uniform but the amount of insurance varies by the age of the proposed insured.
The product is sold, therefore, in premium units rather than in face amount
units. While this policy is written only on persons at ages 0 - 40, other life
insurance products are offered at ages 0 - 70.
The Lifetime Accumulator, by being sold at ages less than 40 and in
small insurance amounts, does not usually require a medical examination of the
proposed insured. Examinations are obtained if the amounts exceed the usual
published guidelines of United. These guidelines affect all of its life
insurance products. Electrocardiograms, X-rays, blood profiles and urinalysis
are obtained. United can, and does, request records from the proposed
insured's attending physician, and it obtains investigative consumer reports as
well. Applications must be submitted on every proposed insured with questions
of a medical nature asked. Also questions regarding driving, habits, hazardous
sports and flying are asked. Supplementary questionnaires are also obtained
where required on aviation and hazardous avocations. The underwriting
department may always request additional information of this nature where
indicated by responses on the application.
Through 1993, United had written primarily the Lifetime Accumulator,
which accounted for approximately 98% of premium income. During latter 1993,
United shifted its marketing thrust to non-participating ordinary life products
and supplementary accident and health products. For 1996, 36% of premium
income was from life policies and 64% was from accident and health policies.
The persistency of the products has followed United's actuarial projection for
the products and lapses have not exceeded the assumptions. It is anticipated
that a major portion of the premium revenues in 1997 will come from the
accident and health products.
As mentioned above, United writes various forms of life insurance, and
since early 1994 it has developed several new supplementary health insurance
products, i.e., cancer, hospital indemnity, mental illness, outpatient
sickness, catastrophic illness, emergency accident, intensive care and
disability income and Medicare supplement.
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<PAGE> 50
United plans to aggressively mass market these products through
various companies employee groups. Premiums will be employer paid or paid
through payroll deduction. United has been selective in its acceptance of the
life insurance risks. United can issue life insurance on a rated premium
substandard basis up through Table 16 (400% extra mortality), but in so doing
it will reinsure all of the risk. United only issues through Table 4 (100%
extra mortality) on its Lifetime Accumulator policy to improve the mortality
and potential profitability on that product line. The substandard risks are
those that by reason of health, occupation or avocation fall outside the normal
anticipated mortality levels of the general population as developed by the
actuarial sciences. United, prior to January 8, 1993, retained $15,000 of life
insurance on any one life; on January 8, 1993 it increased its retention to
$20,000 on any one life. It reinsures all of its accidental death risk.
United also has a reinsurance agreement on its cancer policy which limits its
claim risk to $25,000 in any calendar year on any one claim. It also reinsures
various amounts on several other health products.
The applications for accident and health policies which United issues
are underwritten. Applications or applicants personal medical history records
which show pre-existing medical conditions will be declined or the policy will
be issued with exclusion endorsements. In those instances where the employer
pays a portion of the premium and at least 75% of the employees apply for the
coverage, the policies may be issued covering pre-existing conditions.
United's selling efforts are not usually concentrated on any one
economic, occupational, hazard or age group. The Lifetime Accumulator is the
only exception, and that is an exception due to limiting the age of proposed
insureds to a maximum of 40. As a result of the acquisition of FSL, the
marketing territory for United was expanded from three to nine states. The
direct sale of policies for the immediate future is limited to Alabama,
Arizona, Arkansas, Indiana, Louisiana, Mississippi, Oklahoma, Tennessee and
Texas. United's products are generally competitive with those of other
insurers in those states.
United's actual lapse ratios are well within the lapse assumptions
used in the development of the liability for future policy benefits.
United has a conservation program in place where a representative of
United contacts any policyholder whose policy has lapsed in an attempt to
retain the business. Because the Lifetime Accumulator product was sold
primarily to shareholders of American as opposed to sophisticated product
shoppers in a competitive environment, no excess lapsation is expected to occur
even though dividend reductions have and will occur.
Substandard life risk will not be offered with the supplementary
health insurance products. Standard and substandard life risk are offered
separately from the health products. All of United's life policies may be
issued substandard whereby an extra premium is charged the insured provided
there is an increased mortality risk due to health or life style of the
individual. Additionally, a special guaranteed issue whole life policy is
offered exclusively to individuals who are substandard risk.
ADMINISTRATION. Prior to 1996, the issuance of policies, billing,
preparation of commission and production statements, posting of premium
payments and serving policyholders through computerized communications was
performed by Wakely & Associates, an unaffiliated service company in Florida.
In 1995 management developed data processing equipment and programs for the
administration of the accident and health business, life products and general
accounting. All policy administration and general accounting functions began
being processed in United's home office effective March 31, 1996, eliminating
approximately $5,000 per month in service fee expenses. Actuarial services for
the development of new policies and rates are performed by the actuarial firm
of Allen Bailey and Associates, Austin, Texas.
SALES. United's policies are being sold by direct licensed
representatives and licensed general agents. None of these agents has
underwriting authority. The commissions paid are believed by management to be
competitive with commissions paid by other life insurance companies in the
states in which United is licensed to operate. United is aware that there is
considerable competition for obtaining qualified agents and that it will be
competing with well-established life insurance companies for agents to sell its
policies. United will also recruit agents from among persons who are not now
engaged in the selling of life and accident and health insurance, and United
expects to train such agents. United presently has approximately 300 licensed
agents. The agents recruited and licensed by United hold licenses with other
companies and possibly could sell other companies' policies that are similar in
some respects to United's policies. This arrangement is quite common with
companies that recruit and license general agents.
Effective with the acquisition and merger of FSL on December 31, 1994,
United became licensed in the states of Alabama, Arizona, Arkansas, Georgia,
Indiana, Louisiana, Mississippi, Oklahoma, Tennessee and Texas. United's
insurance policies are being submitted to all these states Insurance
Departments for approval and agents are being recruited to sell the products in
those states, except Georgia, in which United does not meet that states minimum
capital and surplus requirements in order to sell its products.
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<PAGE> 51
INVESTMENTS. United invests and reinvests certain of its reserves and
other funds. A part of its income will be derived from this source. The
investments of United are limited as to type and amount by the Mississippi
insurance laws which are designed to insure prudent investment policies.
The investment of capital, paid-in and operating surplus and other
funds of insurers organized under the laws of the State of Mississippi is
specified by Mississippi Insurance Code 83-19-51. This statute includes
general and specific limitations on investments, records of investments and
other matters. The Mississippi insurance law regulating investments and other
aspects of the management of insurance companies is designed primarily for the
protection of policyholders rather than investors.
The administration of United's investment portfolio is handled by a
committee of its Board of Directors with consultation and advice from
experienced professional investment experts from J. C. Bradford and Company.
The guidelines used require that bonds, both government and corporate, are of
the highest quality and comprise a majority of the investment portfolio. The
assets selected are intended to mature in accordance with the average maturity
of the insurance products and to provide the cash flow for United to meet its
policyholder obligations. The type, quality and mix will enable United to
compete effectively in the life insurance marketplace and to provide
appropriate interest margins to assure its continued solvency and attain
profitability.
The Mississippi Insurance Code allows an insurance company a lesser
premium tax if up to 25% of its investments are invested in the State of
Mississippi including Mississippi corporation, state, county, and other
subdivision bonds. It is and has been the policy of United to invest its
assets in a percentage in excess of the Mississippi requirement, contingent on
the availability in the market of these securities, both for purposes of
incurring the lower premium tax and returning United's appreciation for the
support given to it by the American shareholders and United policyholders.
In both 1996 and 1995 net investment income represented approximately
9.4%, and 9.0% respectively of American's total revenues. Investment balances,
which are held principally by United and investment results for the years ended
December 31, 1995, are as follows:
<TABLE>
<CAPTION>
NET
INVESTMENTS AT UNRESTRICTED INVESTMENT INVESTMENT
AMORTIZED COSTS CASH TOTAL INCOME YIELD
--------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996 $3,702,365 $282,277 $3,984,642 $290,417 7.3%
1995 $3,599,517 $121,102 $3,720,619 $294,807 7.6%
</TABLE>
Investment yield reflects net investment income on the sum of average
invested assets plus average investment income accrued.
The following table compares United's fixed maturity investment
portfolio at amortized cost by investment rating category as of December 31,
1996 and 1995.
<TABLE>
<CAPTION>
12/31/96 RATING 12/31/95 RATING
CLASS AMOUNT PERCENT CLASS AMOUNT PERCENT
----- ------ ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury and other
government agencies $ 461,608 17.0 $ 580,371 22.2
Public utilities and industrial
and miscellaneous:
Class 1 1,344,680 49.5 1 1,056,888 40.5
Class 2 810,167 29.9 2 876,574 33.6
Class 3 98,673 3.6 3 98,447 3.7
---------- -------- ---------- --------
$2,715,128 100.0 $2,612,280 100.0
</TABLE>
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The ratings used in the above schedule are those used by the
Securities Valuation Office of the National Association of Insurance
Commissioners and compare generally to the Moody's and Standard and
Poor's bond ratings as follows:
<TABLE>
<CAPTION>
SVO RATING MOODY'S & STANDARD & POOR'S QUALITY RATING
- ----------- ----------------------- --------------
<S> <C> <C>
1 AAA, AA, A Highest Quality
2 Baa, BBB High Quality
3 Ba, BB Medium Quality
4 B Low Quality
5 Caa, Ca, CCC, CC Lower Quality
6 CI, D In or Near Default
</TABLE>
American has classified all its investments as securities
available-for-sale which are carried at fair value. As of December 31, 1996,
the unrealized loss of American's available-for-sale security portfolio
approximated $15,000 and was presented as a component of stockholders' equity.
REINSURANCE. As is customary among insurance companies, United will
reinsure with other companies portions of the life insurance risks it will
underwrite. The two principal types of reinsurance treaties commonly in use in
the industry are the "automatic" and the "facultative" agreements. Under an
"automatic" treaty, the reinsurer agrees that it will assume liability
automatically for the excess over the retention limits on any application
acceptable to United. Under a "facultative" treaty, the reinsurer retains the
right to accept or reject any reinsurance submitted, after a survey of each
individual application. In order to gain advantage of the reinsurer's
underwriting experience in evaluating applications for insurance, United may
submit some applications for insurance to the reinsurer on a facultative basis,
and, if the reinsurer rejects any such application as an unsatisfactory risk,
United will also reject the application.
If the application exceeds United's automatic binding limit, it must
send the application and all underwriting papers to the appropriate reinsurer
according to the alphabetical split (per the reinsurance treaty) for its
underwriting action. The amount of the automatic binding limit is set at
$200,000. This limit is 10 times United's life retention, and it may be
increased as United's retention increases. United may send any application on
a facultative basis to the appropriate reinsurer, if after evaluation of the
underwriting information, United's underwriter wishes to take advantage of the
reinsurer's enlarged data base and experience for additional underwriting
input. If the case is rejected by the reinsurer, United must also reject the
application.
The primary purpose of reinsurance agreements is to enable an
insurance company to reduce the amount of its risk on any particular policy
and, by reinsuring the amount exceeding the maximum amount the insurance
company is willing to retain, to write policies in amounts larger than it could
without such agreements. The effect of reinsurance is to transfer a portion of
the profit, if any, on the insurance ceded to the reinsurer. Even though a
portion of the risk may be reinsured, United will remain liable to perform all
obligations imposed by the policies issued by it and is liable if its reinsurer
should be unable to meet its obligation under the reinsurance agreements. It
should be noted that when insurance is reinsured under either a facultative or
automatic arrangement, a portion of the premium received on that policy is
still utilized to post the required actuarial reserves to cover the risk.
United's general policy is to reinsure business with insurance companies with
an A.M. Best and Company rating of "A" or better.
United's life reinsurance is being ceded through automatic and
facultative treaties to two unaffiliated insurance companies. These
reinsurance companies are Business Men's Assurance Company, Kansas City,
Missouri, and Optimum Re, Irving, Texas, both rated "A" by A.M. Best and
Company. It is the practice of United to reinsure all accidental death benefit
risks that are written with the Participating Lifetime Accumulator product of
United or with other forms of insurance. United has reinsurance agreements
with Reliastar Financial Corporation, Minneapolis, Minnesota, Life Reassurance
Corporation of America, Stamford, Connecticut, and Reassurance Company of
Hanover, Orlando, Florida which provide coverage of claims in excess of various
amounts on several of United's accident and health policies.
RESERVES. In accordance with the Mississippi insurance laws and
regulations under which operates, United has set up actuarially computed
reserves as liabilities to meet the obligations on the policies it writes.
These reserves are the amounts which, with additions from premiums to be
received and with interest on such reserves, compounded annually at certain
assumed rates, are calculated to be sufficient according to accepted actuarial
principles to meet policy obligations as they mature. The various actuarial
factors are determined from mortality tables and interest rates in effect when
the policies are issued. The reserves to be included in statutory filings will
be valued on a basis that meets the requirements of law in Mississippi.
REGULATION AND SPECIAL ACCOUNTING PRACTICES RELATING TO LIFE INSURANCE
COMPANIES. Mississippi insurance laws and regulations generally govern the
accounting practices and prescribe the procedures and forms for financial
reports of insurance companies. Reports prepared in accordance with the
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<PAGE> 53
prescribed statutory accounting practices are primarily intended to insure the
ability of an insurance company to meet its obligations to policyholders and do
not necessarily reflect going concern value. Balance sheets prepared in
accordance with statutory accounting practices are designed primarily to
reflect the financial position of insurance companies from the standpoint of
solvency. Certain of the prescribed or permitted accounting practices differ
in some respects from generally accepted accounting principles (GAAP) followed
by other business enterprises in determining financial position and results of
operations.
Basically, a life insurance company's gross income is generated from
two sources, premiums and investment income. The cost of placing new policies
in force may exceed the premiums received for the first year. In subsequent
policy years some of these costs, such as commissions, medical examinations and
investigative expenses, are reduced substantially or do not recur. Also,
policy lapses and surrenders are generally greater in the first few years that
policies are in force. Although the costs of acquiring new business are large
and generally not duplicated thereafter, statutory accounting procedures for
insurance companies and state laws and regulations designed to protect
policyholders provide that the entire amount of acquisition costs must be
charged to operations currently, instead of being spread over the life of the
policies. As a result of this and other factors, new insurance companies
normally show no profit on a statutory accounting basis in their early years of
operation.
The interests of policyholders and of the public in the financial
integrity of the life insurance industry make it important and proper that the
solvency of life insurance companies be demonstrated to insurance regulatory
authorities. Solvency must be continuously demonstrated for a life insurance
company to be permitted to offer its services to the public.
The National Association of Insurance Commissioners has established a
model act for insurance companies regarding risk-based capital. Risk based
capital is a method of measuring the amount of capital appropriate for an
insurance company to support its overall business operations in light of its
size and risk profile. It provides a means of setting the capital requirement
in which the degrees of risk taken by the insurer is the primary determinant.
The four major risks involved are:
Asset risk: This is the risk of asset default.
Insurance risk: This is the risk of adverse mortality and morbidity
experience.
Interest rate risk: This is the disintermediation risk of policyholders
withdrawing funds.
Business risk: This is normal business and management risk.
A company's risk based capital is calculated by applying a factor to
various assets, premium and reserve items, where the factor is higher for those
items with greater underlying risk and lower for less risky items. The
adequacy of a company's actual capital may then be measured by its risk based
capital ratio, that is, the ratio of its total capital, as defined by the
formula, to its risk based capital. In addition to providing a new standard
for minimum capital, risk based capital standards will be used by regulations
to set in motion appropriate regulatory actions relating to insurers which show
signs of weak or deteriorating condition. The first level requires company
action. The three levels of regulatory action and involvement are:
Level A: Identifies situations requiring the initial level of
regulatory scrutiny.
Level B: Identifies situations requiring a detailed investigation
of the company.
Level C: Identifies the minimum level of total adjusted capital
below which state conservatorship shall be required.
As of December 31, 1996, United had a statutory-basis paid-in capital
and surplus of $2,325,096. This capital and surplus is invested in government
obligations, corporate bonds, and other investments currently permitted by the
insurance company investment laws of the State of Mississippi.
Pursuant to the laws and regulations of the State of Mississippi,
United is presently required to maintain minimum capital of $400,000 and
minimum surplus of $600,000. These minimum requirements may require amendment
as a result of recently adopted risk based capital requirements effective for
1993 as issued by the National Association of Insurance Commissioners. The
Total Adjusted Capital for United at December 31, 1996 was $2,388,568 and the
Risk Based Capital was $112,211. No action is required by United regarding its
capital and surplus.
The insurance laws of the State of Mississippi also provide that a
life insurance company will be assessed a lower premium tax if up to 25% of the
life company's investments are in Mississippi securities. The management of
United has invested its assets in a manner to incur the lower tax rate.
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Statutory accounting requires that the policy reserve liabilities be
increased in each year that a policy is in force. The amount of the reserves
is recorded as an expense for statutory accounting purposes. Cash received
from renewal premiums, net of amounts used for current operations, is invested
by a life insurance company in accordance with applicable state law. Income
earned on invested assets becomes operating income to the life insurance
company to the extent that it exceeds the interest required to be added to
reserves.
The financial statements presented to shareholders, the public, and
the Securities and Exchange Commission are required to be prepared in
conformity with generally accepted accounting principles. The objective of
these statements is to provide reliable financial information about economic
resources and obligations of a business enterprise and changes in net resources
resulting from its business activities, measured as a going concern. To the
extent that the accounting practices prescribed or permitted by state
regulatory authorities differ from generally accepted accounting principles,
appropriate adjustments will be made including, but not limited to the
following:
1. Premiums are recognized as revenues over the premium-paying
period and future benefits and expenses are related to such premium revenues
resulting in the recognition of profits over the life of the insurance
contracts. This relationship is accomplished by a provision for future policy
benefit liabilities and amortization of deferred policy acquisition costs.
2. Certain assets designated as "non-admitted assets" for
statutory purposes (normally office equipment and agents' balances) are
included in the balance sheet. In this connection, American will purchase all
office equipment and lease it to United at prevailing lease rates for purposes
of generating operating revenues for American.
3. The Asset Valuation Reserve is reclassified as retained
earnings rather than as a liability.
4. Deferred federal income taxes are provided for differences in
the timing of recognition of certain items of income or expense for tax and
financial statement purposes. These temporary differences relate primarily to
different methods of calculating policy reserves, treatment of acquisition
costs, and recognition of deferred and uncollected premiums.
In common with other insurance companies operating in Mississippi,
United is subject to the regulation and supervision of the Mississippi
Insurance Commissioner. After making application for admission and receiving
proper license, United may operate in other states and, at that time, will be
subject to regulation and supervision in any other state where it may be
permitted to transact business. Such regulation is primarily for the benefit
and protection of insurance policyholders rather than shareholders of insurance
companies. Broad administrative powers are possessed by the Mississippi
Department of Insurance and other supervising agencies. Although the powers
differ from state to state, in general they include authority to grant and
revoke licenses to transact business, to be an agent, to supervise premium
rates, to approve the form of insurance contracts, to supervise the form of
financial statements filed with such agency, to regulate capital requirements,
to regulate the investment portfolio, to regulate insurable interest on one
life and to require the filing of detailed annual reports. United's business
and accounts will be subject to examination by the Mississippi Department of
Insurance. Such regulation includes the filing of financial statements by
United, periodic reporting and examination by the insurance regulatory
authorities, and review of transactions between members of the holding company
group.
State laws regulating insurance holding companies such as American may
significantly limit the ability of United to pay, or American's ability to
cause United to pay or make dividends, loans or advances to American.
Under insurance guaranty fund laws, insurers doing business in states
having such laws can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Mississippi and the other states in
which United is licensed have guaranty fund laws and United has been assessed
amounts under these laws of $41,695 for 1996 and $446 for 1995. While actual
assessments for the last three years have been immaterial, the amount of any
future assessments on United under this law cannot be reasonably estimated.
State laws provide for carrying the assessed amounts as an asset and amortizing
the amount over a five year period by deductions from premium taxes.
Management is not aware of any known uncertainties relating to future
assessments that would materially impact American's liquidity or results of
operations. Additional discussion regarding the guaranty fund is included in
the "Management's Discussion and Analysis."
Mississippi, in which United is licensed to do business, regulates
insurers and their affiliates under insurance holding company legislation.
Under such laws, transactions by United with American or any other future
affiliates may be subject to prior notice or approval depending on the size of
the transaction in relation to their financial position.
Although the federal government generally does not directly regulate
the business of insurance, federal initiatives often have an impact on the
business in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit
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regulation, securities regulation concerning insurance products, tax law
changes affecting the taxation of insurance companies, the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles and proposed legislation to more fully subject
insurance companies to antitrust laws.
COMPETITION. The life insurance industry is highly competitive.
There are approximately 2,100 life insurance companies in the United States and
approximately 750 life insurance companies licensed to do business in
Mississippi. Many of them are well-established firms with fine reputations,
offering a broader line of insurance policies, having larger selling
organizations and having greater financial resources than United. Many of
these companies operate on a mutual basis, which may give them a competitive
advantage over United on certain types of policies due to the fact that all
profits accrue to the policyholders.
EMPLOYEES. As of December 31, 1996, American had 18 full time and
four temporary employees. A major portion of American's data processing and
accounting functions were performed by a service bureau, Wakely and Associates,
Clearwater, Florida (as of April 1, 1996, those functions were assumed by
American). Agents marketing United's insurance portfolio are designated by
United as independent contractors and are not considered employees.
THE GAIN AGENCY, INC. (the "Agency"). Prior to April 1995 the Agency
was a general insurance agency selling property and casualty insurance for
various insurance companies. In April 1995, the Agency sold its inforce
business and certain net assets. Prior to this sale, the Agency received
commissions from various insurance companies on the premiums collected from the
policies sold by the Agency. Commission and other income received by the
Agency approximated $65,000 in 1995. The Agency had no business activity in
1996 except the receipt of principal and interest on a note receivable executed
in April 1995 for the sale of its assets.
After negotiations between the Agency's management and Mr. John U.
White, Jr., the manager of the Agency, an agreement was reached to sell to Mr.
White the in-force property and casualty business which had been produced by
the Agency. The agreement also included the sale of net book value of certain
assets and liabilities in the Agency. After an independent appraisal of the
in-force business and the other assets, the Board of Directors approved the
sale for the sum of $180,000 and a definitive contract was executed effective
April 1, 1995. The gain on disposition and the income (loss) from operations
of the Agency have been accounted for as discontinued operations. The Board of
Directors has no immediate plans for the future use of the Agency.
U.S. STAR INTERNATIONAL, INC. On November 5, 1993, American acquired
controlling interest in U. S. Star International, Inc., a Cayman Island
corporation. This company was acquired to serve as an entity to purchase the
foreign reinsurance license in Mexico for United and to serve as the marketing
agency for United's international sales operation. United was licensed in
Mexico as a foreign reinsurer on March 14, 1994.
The Board of Directors determined that the objective to get United
licensed in Mexico as a foreign reinsurer had been accomplished and that U. S.
Star International could not serve any other immediate useful purpose. The
Board decided to terminate the Agency's interest in U.S. Star International and
a contract was executed to this effect on April 28, 1995. Accordingly, the
investment of $30,000 was written off in 1995 as foreign operations marketing
expense.
DESCRIPTION OF PROPERTY. American owns a two story brick building and
lot located at 660 Lakeland East Drive, Flowood, Mississippi. There is
approximately 13,600 square feet in the building which is leased to United.
American and its subsidiaries occupy approximately 7,500 square feet. The
remaining space in the building is leased to third party tenants at
approximately $8 per square foot per year. As of December 31, 1995, the
building and lot had a cost basis of approximately $564,000. The building is
being depreciated over 32 years by the straight-line method. Its carrying
value as of December 31, 1996 approximated $371,000.
On December 19, 1994, the mortgage on the property was refinanced with
Merchants and Farmers Bank, Brandon, Mississippi. The refinancing allowed
American to receive cash of $175,000 from the equity in the property which was
used to purchase Financial Security Life of Mississippi. The property received
a current appraisal of $925,000. The mortgage amount at December 31, 1996 was
approximately $509,000 with an interest rate of prime plus 1 1/2%. Principal
and interest payments are approximately $5,800 per month. The note is secured
by a deed of trust on the building and lot. The rental income received from
third party tenants totaled $54,000 in 1996 and $52,000 in 1995.
The principal provisions of the outside party lease agreements provide
for a term ranging from one to five years and the right to terminate the
agreement without penalty on and after the first year anniversary by giving 30
days advance written notice. The lessor agrees to give the lessees the right
of refusal to obtain a new lease on the premises 120 days prior to the
termination date. The leases state the purpose and business of the lessees,
the right of the lessor to enter said premises, the utilities and maintenance
to be furnished by the lessor and the lessees' covenants to hold the lessor
harmless from any liability and expenses arising out of their use of the lease
premises.
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There are several commercial office buildings located in the area of
the property which have rentable office space. This creates a highly
competitive market and there may be periods of time when American is unable to
find suitable tenants.
American carries insurance on the property of $750,000 which
represents approximately $200,000 more than the purchase price paid by
American. It is management's judgment that there is adequate insurance
coverage on the property. The occupancy rate of the property was 100% as of
December 31, 1996. The rental income received by American represents
approximately 100% of American's revenues excluding the revenues in the
subsidiaries. Due to existing net operating loss carry forwards, American is
in a non-taxable position and no federal taxes are paid. The tax value is
carried at $438,000 with a tax base of approximately $66,000. Annual realty
taxes are approximately $7,000. Management believes that its corporate office
building will be adequate for American and its subsidiaries' anticipated growth
for the next several years.
LEGAL PROCEEDINGS
American was a party to legal proceeding filed on December 20, 1990 in
the Chancery Court, First Judicial District, Hinds County, Mississippi. The
principal parties were: plaintiffs - Tillman Insurance Agency, Inc. and Robert
Tillman. The defendants - the Agency, American, Walter L. Shelton, Jesse L.
Byrd, and Sam Dunlap. A description of facts underlying the proceeding is as
follows: In 1988, the Agency bought the book of business of a general
insurance agency in Philadelphia, Mississippi; namely, the Tillman Insurance
Agency, Inc. The purchase price was to be 25% of the commission income from
the book of business for the life of the plaintiff, Robert Tillman. The
commission income was not as great as the plaintiff anticipated and in fact
ceased altogether. The plaintiff claims the conduct of the defendants caused
this reduction in the commission income and was seeking actual damages of
$500,000 and punitive damage of $5,000,000.
On March 3, 1995, an out of court settlement agreement was executed by
all parties wherein the defendants will pay to the plaintiffs the sum of
$180,000 including attorneys fees (discounted to a present value of $150,000).
An initial amount of $35,000 was paid on the settlement date and the balance
will be paid in installments over a period of five years beginning April 1,
1995. Nothing contained in any of the settlement documents is an admission by
any party thereto for purposes of the Civil Action. Adequate reserve
provisions have been included in the 1994 and 1995 consolidated financial
statement of American.
United is a party to legal proceedings filed on December 5, 1995 with
the Circuit Court of Lee County, Mississippi. The principal parties are Donald
and Karen Mayo, plaintiffs, and United, defendant. The complaint results from
United's denial of a claim for benefits under a policy issued by United. The
policy provides benefits for up to 12 outpatient treatments for chiropractic
service for an individual and up to 36 for a family. The complainant had 32
treatments. United paid for the first 12 and denied benefits for the
additional treatments which is in accordance with the policy provisions. The
plaintiff contends she was entitled to benefits for the additional treatments
because she purchased a policy with family coverage. The plaintiff is
requesting in her suit that she be awarded actual and punitive damages in an
amount to be determined by a jury, but no less than $100,000. Legal counsel is
unable to render an opinion on the estimated outcome of these matters as they
are presently in discovery stage. However, management intends to vigorously
defend these matters and, is of the opinion that the ultimate outcome of these
matters will not result in a material adverse effect on the consolidated
financial statements. Accordingly, no provision for any loss or liability has
been provided in the consolidated financial statements of American.
United is a party to legal proceedings filed on February 5, 1996 in
the Circuit Court of Lee County, Mississippi. The principal parties are David
Anderson and Marty Stanford, d/b/a Premier Insurance Agency and Chiropractic
National Associations, plaintiffs and United, defendant. The plaintiffs were
licensed in 1994 with United as insurance agents to solicit and sell insurance
policies to pay primarily for chiropractic services. The plaintiffs allege the
following: (1) that the defendant refused to pay claims which were owed, (2)
that the defendant arbitrarily refused to pay the chiropractic doctors 5% fees
claiming that it was illegal, (3) that the defendant placed "riders" on certain
of the policies which were so broad to eliminate any coverage at all, (4) that
United threatened plaintiffs with potential criminal prosecution if false
claims were made of which the purpose for this was to discourage the making of
claims. The plaintiffs allege that they have suffered damages because their
reputations have been greatly damaged and they have suffered extreme mental
anxiety and stress by reason of the defendant's action in these matters. The
plaintiffs are claiming for unspecified punitive damages. Legal counsel is
unable to render an opinion on the estimated outcome of these matters as they
are presently in discovery stage. However, management intends to vigorously
defend these matters and, is of the opinion that the ultimate outcome of these
matters will not result in a material adverse effect on the consolidated
financial statements. Accordingly, no provision for any loss or liability has
been provided in the consolidated financial statements of American.
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MARKET AND DIVIDENDS ON AMERICAN CLASS A AND CLASS B COMMON EQUITIES AND
RELATED STOCKHOLDER MATTERS
The American Class A Common Stock has been traded on a very limited
basis. On January 30, 1996, the National Association of Securities Dealers,
Inc. cleared a request to allow the buy and sell transactions of the Class A
Common Stock to be displayed on Over-The-Counter Electronic Bulletin Board. The
Over-The-Counter Electronic Bulletin Board is an electronic computer system
whereby securities dealers have access to information regarding the trading of
shares of various companies' stock. The symbol for the American Class A Common
Stock is "GANI." Morgan Keegan and Company has agreed to match buyers and
sellers of the stock to the best of their ability in an effort to create a
market. None of the American Class B Common stock has traded and there is no
market.
The present policy of American's Board of Directors is to retain funds
for the operation and expansion of American and its subsidiaries. There have
been no cash dividends paid on the Class A Common Stock or the Class B Common
Stock, and the Board of Directors of American has no immediate plans for the
payment of dividends but, from time to time will review this policy in light of
American's earnings, financial condition and other relevant factors. American
currently intends to retain the major portion of any future earnings to finance
the development and expansion of its business and does not contemplate the
payment of cash dividends in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
This section discusses and analyzes American's results of operations,
financial condition, and the changes in financial condition. Also included is
information regarding American's operations that may not be evident in the
financial statements. This analysis should be read in conjunction with
American's Consolidated Financial Statements and related notes included
elsewhere herein.
PROPOSED SALE OF AMERICAN
On October 25, 1996, American signed a definitive written agreement
whereby Citizens Insurance Company of America, ("CICA"), Austin, Texas, a
wholly-owned subsidiary of Citizens, Inc. ("Citizens") will acquire 100% of the
outstanding shares of American for shares of Citizens Class A common stock.
Pursuant to the terms of the agreement CICA will issue one share of
Citizens Class A common stock it owns for each 7.2 shares of American's Class A
and Class B common stock issued and outstanding. CICA expects to issue
approximately 700,000 shares of Citizens common stock to consummate the
transaction. Management anticipates that the sale will occur during 1997.
LIQUIDITY AND CAPITAL RESOURCES
American was initially capitalized though a private placement of stock
followed by two intrastate stock offerings. A total of $4,481,000, net of
commissions and other costs of issuance, was received through these offerings,
and was used principally for the purchase and capitalization of United and the
Agency.
The capital funds contributed to United were invested in fixed
maturities and equity securities. The fair values of the total portfolio
approximated $3,687,000 as of December 31, 1996. The net investment income
received from these investments, plus unrestricted cash (effective yield of
7.3% in 1996) and premiums received from insurance policies represent the
primary sources of operating funds for United. Investment income and portions
of the asset account provide sources for operating funds as needed. In
addition, American receives rental income from the lease of office space in its
home office building. United leases the entire building from American, and in
1996 and 1995 paid approximately $136,000 in rental income (approximately $10
per square foot) to American. Another possible source of operating funds to
American is dividends from its subsidiaries. There have been no dividends paid
to American by either subsidiary. Mississippi insurance regulations limit the
amount of dividends United is permitted to pay without prior approval by the
Mississippi Department of Insurance to the lesser of statutory earnings, as
defined to include the prior two years, or 10% of capital and surplus. As of
December 31, 1996, approximately $201,000 was available for dividends to
American without such approval.
Management believes that American's retained cash, its investment and
lease income, and its source for subsidiary dividends, as well as principal and
interest collections received from a note receivable relating to the sale,
during 1995, of its in-force business and certain other net assets of the
Agency will be sufficient to finance its short term operations and its present
forecast of long term needs.
For its principal subsidiary, United, management believes that cash
flows from operations and proceeds from investment maturities will be
sufficient to finance current and forecasted operations, which do not
anticipate significant outlays of cash for ordinary life claim settlements
within the next three to five years due to the type of insureds covered.
During 1996, United continued a significant increase in the volume of accident
and health claims as a result of its penetration and emphasis into
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the limited benefit accident and health insurance business. Total claims paid
increased to $618,000 in 1996 compared to $490,000 in 1995. United anticipates
that the volume of accident and health claims will increase in 1997. However,
American's positive cash flow in 1996 and the maturities of investments should
provide proceeds more than sufficient for its operations. American has
classified its marketable securities as available-for-sale which will provide
an additional source of liquidity as needed.
Since 1993, American has had an aggressive mass marketing program to
sell limited benefit accident and health policies the premiums for which are
collected through company monthly payroll deduction from the policyholder's
employer. Total revenues in 1996 included approximately $1,725,000 of accident
and sickness premiums. The accident and health polices in force on December
31, 1996, will generate approximately $2,037,000 in annualized premiums.
Management anticipates this program will generate additional sources for
liquidity and operational needs for United through increased revenues.
A regular triennial examination of United was conducted by the
Mississippi Department of Insurance in 1994 for the period of January 1, 1990
through December 31, 1993. Recommendations of the examiners had no material
effect on the financial conditions or operational results of American.
Neither American nor United are a party to any surplus relief
reinsurance or any other agreement wherein reserve credits would be disallowed,
and the likelihood of such an agreement is remote. Further, there are no
transaction or items in United's statutory surplus which has enhanced the
statutory surplus and which has been eliminated in the preparation of the
Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets as of December 31, 1996 were $7,688,000, an increase of
$200,000 from December 31, 1995. Significant changes within the composition of
assets and liabilities compared to the 1995 year end related principally to (i)
a general decline in the fair values of fixed maturity and preferred stock
securities resulting from market and economic changes, (ii) anticipated
increases in assets and liabilities related to growth in the accident and
health insurance market, and (iii) the payment of contingent liabilities
resulting from a prior acquisition. As of December 31, 1996, the unrealized
loss on marketable securities available for sale was $15,000 compared to an
unrealized gain of $48,000 as of December 31, 1995.
Cash and cash equivalents increased $66,000 compared to December 31,
1995, exclusive of the decrease in cash previously restricted. Included in
this amount were the proceeds from the issuer of one of the fixed maturity
investments held by United, the proceeds of which were invested in cash
equivalents. Restricted cash decreased $95,000 (as well as the corresponding
liability included in accounts payable and other liabilities at December 31,
1995) as a result of the settlement of certain liabilities and contingencies of
a prior acquisition for which seller funds were escrowed. As of December 31,
1996, deferred policy acquisition costs increased $64,000 compared to December
31, 1995 and future policy benefit and unpaid claims liabilities increased an
aggregate of $429,000. Substantially all of this increase is related primarily
to accident and health products. Other policyholder funds increased $105,000
principally as a result of dividend accumulations relating to United's life
products (principally the Lifetime Accumulator Policy, which is a participating
policy requiring dividend benefit accruals).
Notes and accounts receivable decreased $33,000 compared to December
31, 1995. Of this decrease, approximately $12,000 related to collections on a
note receivable pursuant to the sale of the inforce business and certain net
assets of the Agency to a former officer. This sale occurred in 1995 and the
note, which bears interest at 7.5% per annum, is payable in monthly
installments of $2,006, including interest, and approximated $152,000 in
principal as of December 31, 1996. Additionally, due and unreceived premiums
which are included in notes and accounts receivable, decreased approximately
$21,000 due to remittances by corporate employers of the premiums collected
through payroll deductions.
Other assets increased $41,000 compared to December 31, 1995. This
was primarily due to guaranty fund assessments of approximately $40,000 for
which American is entitled to future credits against future premium taxes.
Included in accounts payable and other liabilities as of December 31,
1996 and 1995 was approximately $55,000 accrued as a minimum obligation under
an executive compensation plan for two executives. The plan provides for
future and past services in the form of benefits that could range from a
minimum fixed benefit of $20,000 to a maximum benefit of $100,000 annually for
each of the executives over a 10 year period. Benefits in excess of the fixed
minimum are based upon a specified ratio of statutory net gain from operations
to gross statutory premiums of the insurance subsidiary. Payments under the
plan approximated $40,000 in 1996 and $27,000 in 1995. Management evaluates
the propriety of the recorded obligation for past services at each reporting
period based upon their best estimates of anticipated future statutory premium
revenues and statutory operating gains.
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RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
Total revenues for 1996 were $3,105,000 compared to $3,151,000 for
1995, or a decrease of $46,000. Total premiums earned by United in 1996
decreased $44,000 compared to 1995, primarily due to a decrease in United's
life business. Life premiums decreased approximately $187,000 to $1,028,000
from $1,215,000 due to policy lapses which management believes resulted from a
general decline in life insurance business and related marketing efforts.
Accident and health premiums increased in 1996 to $1,725,000 from $1,582,000 in
1995. United began issuing accident and health products in 1993 and
anticipates that these products will represent its major market emphasis in
1997. United offers limited pay accident and health products principally
through a mass marketing corporate payroll deduction process.
Net investment income decreased $4,000 or 1.5%. Included in net
investment income was approximately $7,000 of interest income on the note
receivable from the sale of the Agency.
Policy benefits and claims increased $299,000, principally due to the
growth in accident and health business. In 1996 accident and health benefits
approximated $1,057,000 compared to $557,000 in 1995. This included an
increase in claims paid of approximately $128,000 and an increase in accident
and health future policy benefits and unpaid claim liabilities of $372,000.
Future policy benefits relating to life insurance policies decreased by $17,000
as policyholders allowed coverage to lapse during 1996 as a result of the
general decline in life insurance business and related marketing efforts. As a
result, the change in future policy benefits decreased by $192,000. Also,
claims paid net of reinsurance on life policies decreased by approximately
$25,000. The remaining change related to a net increase in policyholder
dividends of approximately $16,000.
Amortization of deferred policy acquisition costs increased $196,000.
Approximately $87,000 of this increase is due to anticipated increases related
to the amortization of accident and health acquisition cost which approximated
$257,000 in 1996 compared to $170,000 in 1995. The remaining increase relates
to anticipated run-off of the insurance subsidiary's life insurance business
and related policy lapses or terminations during the year.
Interest expense decreased $9,000 as a result of variable interest
rate changes and reductions of amounts outstanding on the mortgage obligation.
Depreciation and amortization approximated $77,000 during both 1996
and 1995. Approximately $85,000 of data processing equipment and related
software was acquired during 1995, however the resulting increase in
depreciation was offset by assets which became fully depreciated in 1995.
Other general operating expenses decreased approximately $68,000
primarily due to a decrease in computer expenses of approximately $58,000.
This decrease resulted from management's efforts to better utilize data
processing capabilities available from existing computer equipment.
Additionally, United's renewal commissions decreased by approximately $26,000.
In 1995, American conveyed its interest in U.S. Star International, Inc., an
inactive corporation, to U.S. Star's other shareholder and wrote-off the
remaining investment of $30,000 which was included in 1995 operating expenses
as a reduction of the foreign marketing subsidiary investment.
Management believes that the cash flow generated from insurance
operations, investment income and proceeds from sales and maturities of
investments will be sufficient to meet current and future operating
requirements. Management is monitoring the volume of new accident and health
business written in order to manage the possible cash flow and statutory
surplus effects resulting from the related acquisition expenses to secure such
business in the first year of the policies.
All insurers licensed to transact a life and health insurance business
in Mississippi are members of the Mississippi Life and Health Insurance
Guaranty Association. Membership in the association is required as a condition
for authority to transact insurance in the State. For the purpose of providing
funds necessary to carry out the powers and duties of the association, each
member insurer is assessed amounts that are required to pay the administrative,
legal, and other expenses of the association and assessed amounts necessary to
carry out the duties of the association regarding impaired or insolvent
insurers operating in Mississippi. Actual assessments during 1996 approximated
$42,000 while assessments in 1995 were immaterial. Future assessments cannot
be reasonably estimated. Assessments are based on a factor calculated by the
amount of premiums received by each company as it relates to the total premiums
collected by all companies operating in the State and the amount of funds
needed by the Association. United is subject to assessments by each state's
Life and Health Guaranty Association in the states in which it is licensed to
operate. Generally, each state will allow a percentage of the assessment as a
credit against premium taxes each year until the total of the credits equal the
assessment.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
American maintains regular bank checking and money market accounts at
a local bank of which one of American's founders and shareholders is a
director. This bank also holds the mortgage on American's home office
building. No compensation has been paid to this shareholder as a result of
these accounts.
Non-management directors of American and its life insurance subsidiary
receive director's fees in the amount of $200 plus reimbursement for
out-of-pocket travel expenses in connection with the attendance of each meeting
of the Board of Directors. Messrs. Elton Cook, and Shannon Williford,
non-management directors, who are members of the Executive and Finance
Committees, also receive $500 each month in connection with the monthly or more
frequent meetings of the Executive and Finance committees.
During September 1992, American entered into consulting arrangements
with 13 of its original founders who subscribed for stock pursuant to its 1992
intrastate offering for purposes of solicitation of their advice, support and
promotion of American through a consulting group. Consulting fees are based
upon an 8.33% return on each respective founder's investment during the 1992
intrastate offering and payable over twelve years. Consulting fees paid
approximated $42,000 in 1996 and in 1995. Future consulting fees will be
approximately $42,000 annually.
As indicated above, the primary purpose of the consulting arrangements
with American's founders is for American to benefit from the expertise and
influence through the advice, support, and promotion of a group of very
successful business and professional individuals located in various areas of
the State of Mississippi. American invites these founders to an annual meeting
at the home office at which the management solicits their advice regarding
marketing, investments and various other aspects of its operations. All
through the year these founders are contacted by management and sales
representatives for their recommendations as to prospects for insurance agents
in their communities and applicants for life insurance coverage and, in
addition, for property and casualty insurance written through American's
subsidiary, the American Agency. During American's stock offerings, numerous
stock sales were made as a result of the promotion and recommendations given by
these founders. None of the founders received any commission from stock sold
during the offering which began October 2, 1991 and ended September 30, 1992.
On August 23, 1996, American entered into employment agreements with
four executive officers of American for a five year period. Under the terms of
the agreements, severance benefits equal to one year's annual salary are
available to these officers in the event American is sold or merged and the
officers are required to relocate or terminate employment. No liability
existed under these agreements at December 31, 1996.
MANAGEMENT OF AMERICAN
The following table sets forth the beneficial ownership of American
Class A and Class B Common Stock as of the date of this Proxy-Information
Statement of named directors and officers of American and by all such persons,
as a group. Each director or officer has sole voting and investment power over
the shares listed opposite his or her name.
<TABLE>
<CAPTION>
# OF PRINCIPAL DIRECTOR
NAME CLASS SHARES OCCUPATION SINCE
- ---- ----- ------ ---------- ---------
<S> <C> <C> <C> <C>
Jesse L. Byrd Class "A" 238,998 Vice Chairman 1987
(age - 72) Common of the Board
Class "B" 833 1/3
Common
John S. Camara Class "A" 100 President 1993
(age - 66) Common
H. Elton Cook Class "A" 81,834 President 1988
(age - 63) Common Miss. Materials
H. Harold Crumpler Class "A" 6,394 Executive Vice 1991
(age - 68) Common President & Treasurer
Phillip E. Faller Class "A" 18,000 Vice President 1991
(age - 56) Common & Secretary
Thomas S. Hayes Class "A" 60,300 Planter 1992
(age - 69) Common
Billy George Janous Class "A" 10,400 Catfish Farmer 1990
(age - 54) Common (Continued)
</TABLE>
50
<PAGE> 61
<TABLE>
<S> <C> <C> <C>
John T. Keeton, Jr Class "A" 118,668 Attorney 1993
(age - 73) Common
L. Homer Martin, Jr Class "A" 59,000 Planter 1987
(age - 66) Common
Linda M. Pepper Class "A" 5,000 Assistant Secretary --
(age - 45) Common
Walter L. Shelton Class "A" 312,930 Director 1987
(age - 76) Common
Class "B" 833 1/3
Common
H. Shannon Williford Class "A" 36,334 Chairman of 1988
(age - 64) Common the Board
ALL DIRECTORS & OFFICERS
AS A GROUP Class "A" 947,958
Common
Class "B" 1,666 2/3
Common
</TABLE>
Additional information concerning the officers and directors of
American is set forth below.
Mr. Jesse L. Byrd, Vice Chairman, was a founder and has been a member
of the Board of Directors since 1987. He served as President until his
retirement on August 31, 1993. Since receiving his Bachelor of Commercial
Science degree from the University of Georgia in 1951, Mr. Byrd has spent his
entire career in insurance and related businesses.
Mr. John S. Camara was elected to the position of Vice President and
Chief Marketing Officer effective January 1, 1993 and to the office of
President and a Director effective September 1, 1993. From April 1976 until
October 31, 1992, Mr. Camara was President and Chief Executive Officer of
Commonwealth National Life Insurance Company, Cleveland, Mississippi. He
earned a Bachelor of Arts degree in accounting in 1952 from Herricks College.
From 1952 to 1954, Mr. Camara did post graduate study in International Finance
at the University of Frieburg, Frieburg, Germany.
Mr. H. Elton Cook was a founder and elected a Director of American in
1988. He is President of Mississippi Materials, a position he has held since
April, 1988. Mississippi Materials is a concrete and building supplies company
located in Jackson, Mississippi.
Mr. H. Harold Crumpler joined American in May, 1991 as Vice President,
Treasurer and Director. He was elected Executive Vice President, Treasurer,
and Chief Operating Officer on September 1, 1993. From 1986 to 1991, he was
Vice President and Chief Financial Officer of Franklin American Corporation,
Franklin American Life Insurance Company, Franklin American Life Insurance
Company of Texas and Franklin American Insurance Agency. He earned a Bachelor
of Science degree from Wake Forest University in 1949 and has done graduate
work in accounting, finance, and business.
Mr. Phillip E. Faller, ALHC, has been Vice President, Secretary, and
Director of American since May, 1991. Mr. Faller has been associated with
American since 1990. From 1985 to 1990, he served as Vice President and
Secretary of National Affiliated Investors Life Insurance Company and of
Federal Life Assurance Guarantee Corporation.
Mr. Thomas S. Hayes was a founder and elected a Director of American
in 1992. He has been a self-employed farmer near Clarksdale, Mississippi since
1953.
Mr. Billy George Janous was elected a Director of American in 1990.
He is owner of Janous Fish Farms.
Mr. John T. Keeton, Jr. was a founder and elected a Director of
American in 1988. He is a practicing attorney and a member of the Mississippi
Bar Association. From 1983 until 1992 he served as a Senator in the
Mississippi State Senate. He earned a Bachelor of Science Degree in 1947 from
the University of Mississippi and a Law Degree in 1954 from the University of
Mississippi Law School.
Mr. L. Homer Martin, Jr. was a founder and elected a Director of
American in 1987. He has been a cotton producer since 1949.
Mr. Walter L. Shelton, Chairman of the Board from 1987 to 1996, was a
founder of American and has been a member of the Board of Directors since 1987.
Mr. Shelton has a diverse business background, having served as founder and
president of Progressive Citizen Life Insurance Company of Jackson,
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<PAGE> 62
Mississippi, President of Highland Inns Corporation; a motel company, Secretary
of First Sunflower Savings and Loan of Sunflower County, Mississippi, President
of Yazoo Barge Lines, and President of Humphreys County Development Company.
Mr. Shelton served in the United States Air Force as a Combat Intelligence
Officer and also served as a special assistant to the Billy Graham Evangelistic
Association. He attended Davidson College, University of Mississippi and
Bowling Green Business University.
Mr. H. Shannon Williford was a founder, has been a Director since
1987, and has been Chairman of the Board since September 1996. Mr. Williford
is President and owner of Vicksburg Terminal Company, Inc., a gasoline and
diesel fuel terminal in Vicksburg, Mississippi. He graduated from the
University of Alabama with a B.S. Degree in Aeronautical Engineering.
MEETINGS AND COMMITTEES OF THE BOARD. During 1996 the Board of
Directors held five meetings. Each Director attended at least 75% of the
meetings except directors Mr. Cook and Mr. Martin.
The Board of Directors has a compensation committee which meets once
annually prior to the annual meeting of the Board of Directors. The members
consist of H. Elton Cook, Thomas S. Hayes, and Billy G. Janous. The duty of
the Compensation Committee is to review and recommend to the Board of Directors
the annual salary of the officers of American and its subsidiaries.
The Board of Directors has an Executive Committee consisting of Walter
L. Shelton, Jesse L. Byrd, H. Elton Cook, John T. Keeton, Jr., and H. Shannon
Williford. The Executive Committee held one meeting in 1996 of which three
members attended. The duty of the Executive Committee is to meet, advise and
direct management generally on a monthly basis regarding American's general
operations.
The Board of Directors has a Finance and Nominating committee
consisting of Jesse L. Byrd, H. Elton Cook, Walter L. Shelton, and H. Shannon
Williford. The duties of the Finance and Nominating Committee are as follows:
(a) recommend and approve investments made by management, (b) review periodic
financial statements, (c) recommend to the shareholders as to selection of
independent accountants, (d) recommend to the shareholders nominees for
directors. The committee held one meeting in 1996 of which three members
attended. Numerous conferences and consultations were had with various members
of the Executive and Finance committees for advice and guidance without any
official minutes.
COMPENSATION OF DIRECTORS. American's directors are paid $200 per
meeting in which they attend. The directors who also serve on the Finance and
Nominating Committees are paid $500 per month. Walter L. Shelton, Chairman,
and Jesse L. Byrd, Vice Chairman, are paid under a compensation plan approved
by shareholders which provides a monthly based compensation of $1,666 plus
bonus contingent on premium income and statutory profits. Directors who are
also officers receive no fees other than their normal salary.
COMPENSATION OF EXECUTIVES. American's officers compensation program
is administered by the Compensation Committee. The officers compensation
policy is designed to provide a competitive compensation that will enable the
company to attract, motivate, reward and retain officers who have the skills,
experience and talents required to promote short and long term financial
performance and growth of American. The compensation policy is based on the
principle that the financial rewards to the officers must be aligned with the
financial interest of the shareholders of American.
The Compensation Committee determines the salary of each officer based
upon the level and scope of responsibilities of the officer and the pay levels
of similarly positioned officers in comparable companies. Due to the
relatively short period American has been in operation and the fact that
American is still in a developing stage to a large degree, salaries have been
at the lower end of comparable salary ranges and increases have been very
nominal. All officer salaries and increases are presented for approval to the
Board of Directors at its annual meeting in May.
The following table sets forth certain compensation information for
the Chief Executive Officer of American. No executive officer of the
corporation received compensation which exceeded $100,000.
<TABLE>
<CAPTION>
NAME AND INCENTIVE STOCK
PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
- ------------------ ---- -------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C>
John S. Camara 1996 $ 70,000 $12,350 $4,800(2) 35,000(1)
President, Chief 1995 $ 70,000 $16,565 $4,800(2) 35,000(1)
Executive Officer
All Executive Officers
as a Group 1996 $231,000 $16,850 $ -0- 112,000
</TABLE>
- ---------
(1) The Stock Options were granted on May 3, 1994. The exercise price per
share is $1.80, being 100% of the fair market value on the date of
grant. The term of the option expires on November 29, 2003 and is
non-transferable. No options have been exercised.
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<PAGE> 63
(2) Other compensation represents travel allowance.
American formed a consulting group in 1992 composed of 17 influential
persons who are shareholders from various locations throughout the State of
Mississippi. The purpose of this committee is to seek advice and support for
the promotion of American and to promote the sale of American's products. The
annual consulting fees range from $250 to $16,667. The total annual fees for
all members will not exceed $42,177. Four members of the Board of Directors
and the various committees are also members of the consulting group. The fees
paid to these four persons for membership on the Board of Directors, committees
and consulting group in 1996 were $1,950 to Mr. Foster, $2,150 to Mr. Hayes,
$17,267 to Mr. Keeton, and $2,150 to Mr. Martin.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a)
of the Securities Exchange Act of 1934 requires directors and executive
officers of American to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of equity
securities of American. To American's knowledge, all Section 16(a) filing
requirements applicable to reporting persons were complied with during the year
ended December 31, 1996.
INDEPENDENT ACCOUNTANTS'
The Consolidated Financial Statements of American Investment Network,
Inc. (formerly Great American Investment Network, Inc.) as of and for the years
ended December 31, 1996 and 1995 included in this Proxy-Information Statement
have been audited by Deloitte & Touche, LLP, independent auditors, as stated in
their report appearing herein.
The Consolidated Financial Statements (and the statement schedules) of
Citizens, Inc. and subsidiaries as of December 31, 1996 and 1995, and for each
of the years in the three-year period ended December 31, 1996, included in this
Proxy-Information Statement have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as stated in their report appearing
herein. The report of KPMG Peat Marwick LLP covering the aforementioned
financial statements refers to the adoption of the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
LEGAL MATTERS
The legal status of the Citizens Class A Common Stock to be
distributed pursuant to the Exchange has been passed upon by Jones & Keller,
P.C., Denver, Colorado.
OTHER MATTERS
The American Board does not intend to bring any matters before the
Meeting other than those specifically set forth in the notice of meeting
accompanying this Proxy-Information Statement and does not know of any matters
to be brought before the Meeting by others. If any other matters properly come
before the Meeting, it is the intention of the persons named in the
accompanying proxy to vote such proxy in accordance with the judgment of the
American Board.
DEADLINE FOR CITIZENS SHAREHOLDER PROPOSALS
Any Citizens shareholder who wishes to present a proposal for action
at the 1998 Annual Meeting of the Citizens Shareholders must submit his or her
proposal in writing by Certified Mail -- Return Receipt Requested, to Citizens,
Inc., 400 East Anderson Lane, Austin, Texas 78752, by January 15, 1998.
53
<PAGE> 64
APPENDIX A
PLAN AND AGREEMENT OF EXCHANGE
This Plan and Agreement of Exchange ("Agreement") is entered into
between and among CITIZENS INSURANCE COMPANY OF AMERICA, a Colorado-domiciled
insurance company ("CICA") and AMERICAN INVESTMENT NETWORK, INC., a Mississippi
corporation ("American").
WITNESSETH
WHEREAS, CICA, which was chartered on February 13, 1968 in Colorado as
Continental Investors Life Insurance Company, Inc. ("CILIC"), and by Articles
of Merger filed with the Secretary of State of Colorado on August 31, 1988,
CILIC changed its corporate name to Citizens Insurance Company of America is a
wholly owned subsidiary of Citizens, Inc., a Colorado corporation ("Citizens");
and
WHEREAS, American, which was chartered in 1987 in the State of
Mississippi as Great American Investment Network, Inc., and in 1995 changed its
name to American Investment Network, Inc., owns all of the issued and
outstanding capital stock of United Security Life Insurance Company, a
Mississippi-domiciled stock insurance company ("USLI"), which was chartered in
1967 in the State of Mississippi as American Empire Life Insurance Company,
which name was changed in 1973 to Financial Security Life of Mississippi, which
was in 1994 merged with United Security Life Insurance Company, a corporation
chartered in 1987 in the State of Mississippi, and at which time the name of
the merged corporation was changed to United Security Life Insurance Company;
and
WHEREAS, CICA and American desire to effect a share exchange pursuant to
Mississippi Code Ann. 79-4-11.01 et seq. and 83-19-99 et seq. (together the
"Exchange Act") in which all the outstanding shares of Class "A" Common Stock
and Class "B" Common Stock of American will be exchanged for shares of Class A
Common Stock of Citizens owned and held by CICA;
NOW, THEREFORE, it is agreed among the parties as follows:
ARTICLE I
The Exchange
1.1 Subject to the terms and conditions set forth herein, the
transactions contemplated by this Agreement shall be completed at a closing
("Closing") on a closing date ("Closing Date") to occur as soon as possible
after all regulatory approvals and shareholder approvals are obtained in
accordance with law and as required by this Agreement. On the Closing Date, all
of the documents to be furnished to American and CICA, including the documents
to be furnished pursuant to Article VII of this Agreement, shall be delivered
to Jones & Keller, P.C., counsel to CICA ("Jones & Keller") to be held in
escrow until the Effective Date or the date of termination of this Agreement,
whichever first occurs and thereafter shall be promptly distributed to the
parties as their interests may appear.
1.2 The terms of the Exchange shall be:
(i) The Exchange shall be effective ("Effective Date")
as of the filing of the Certificate of Exchange by
American and CICA with the Secretary of State and
the Commissioner of Insurance of the State of
Mississippi or, if later, the date specified
therein.
(ii) At and as of the Effective Date:
(a) each shareholder of American prior to the Effective
Date shall cease to be a shareholder of American;
(b) The ownership of all issued and outstanding stock
of American (other than shares for which dissenter's
rights are perfected in accordance with the Exchange Act)
shall vest in CICA automatically without any physical
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<PAGE> 65
transfer or deposit of the certificates representing such
shares, and CICA will become the sole shareholder of
American;
(c) the holders of each issued and outstanding share of
American Class A or Class B Common Stock prior to the
Effective Date (other than any shares for which
dissenter's rights are perfected in accordance with the
Exchange Act) shall have the right to receive from CICA in
accordance with Article II of the Agreement one (1) share
of Citizens Class A Common Stock, no par value, for each
seven and two-tenths (7.2) shares of American Class A or
Class B Common Stock prior to the Effective Date,
provided, however, that all consideration to be received
shall be subject to equitable adjustment in the event of
any stock split, stock dividend, reverse stock split, or
other change in the number of American shares outstanding;
and
(d) the holders of each issued and outstanding share of
American Class A or Class B Common Stock prior to the
Effective Date for which dissenter's rights are perfected
in accordance with the Exchange Act shall have the right
to receive from American payment therefor in accordance
with the Exchange Act.
(iii) The directors and officers of American shall be
removed as of the Effective Date, and the directors
and officers of CICA shall become the directors and
officers of American as of the Effective Date.
(iv) The Exchange shall have the effect set forth in the
Exchange Act.
1.3 On the Closing Date, American and CICA will file with the
Secretaries of State of Mississippi and Colorado Articles of Share Exchange in
the forms attached hereto as Exhibit A.
ARTICLE II
Exchange of Shares
2.1 At the Effective Date, the shares of Citizens Class A Common
Stock to be exchanged as provided in Section 1.2 shall be distributed by CICA
to shareholders of American (other than those shares as to which dissenters'
rights have been perfected in accordance with the Exchange Act).
2.2 The stock transfer books of American shall be closed on the
Effective Date, and thereafter no transfers of the stock of American shall be
made. CICA shall appoint an exchange agent ("Exchange Agent"), which is
expected to be Citizens' then stock transfer agent ("Stock Transfer Agent"), to
accept surrender of the certificates representing the shares of American and to
deliver for such surrendered certificates, shares of Class A Common Stock of
Citizens. If outstanding certificates for shares of American are not
surrendered or the payment for them is not claimed prior to such date on which
such payments would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by abandoned property and other applicable law, become the property of CICA
(and to the extent not in its possession shall be paid over to it), free and
clear of all claims or interest of any persons previously entitled to such
items. Notwithstanding the foregoing, neither the Exchange Agent nor any party
to this Agreement shall be liable to any holder of American shares for any
amount paid to any governmental unit or agency having jurisdiction of such
unclaimed item pursuant to the abandoned property or other applicable law of
such jurisdiction.
2.3 No fractional shares of Citizens stock shall be exchanged as a
result of the Agreement; rather, such shares shall evidence the right to
receive the cash value of such share based on the average closing price of the
Class A Common Stock of Citizens as reported on the American Stock Exchange for
the five trading days prior to the Effective Date. In the event the exchange of
shares results in any shareholder being entitled to a fraction less than a
whole share of Citizens stock, such shareholder shall be given a cash payment
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<PAGE> 66
by American for such fractional share at the rate per share as calculated in
the previous sentence.
2.4 At the Effective Date, each holder of a certificate or
certificates representing shares of American, upon presentation and surrender
of such certificate or certificates to the Exchange Agent, shall be entitled to
receive the consideration set forth herein, except that holders of those shares
as to which dissenters' rights shall have been asserted and perfected pursuant
to the Exchange Act shall not be converted into shares of Citizens Class A
Common Stock, but shall represent only such dissenters' rights. Upon such
presentation, surrender, and exchange as provided in this Section 2.4,
certificates representing shares of American previously held shall be canceled.
Until so presented and surrendered, each certificate or certificates which
represented issued and outstanding shares of American at the Effective Date
shall be deemed for all purposes to evidence the right to receive the
consideration set forth in Section 1.2 of this Agreement. If the certificates
representing shares of American have been lost, stolen, mutilated or destroyed,
the Exchange Agent shall require the submission of an indemnity agreement and
may require the submission of a bond in lieu of such certificate.
ARTICLE III
Representations , Warranties and Covenants of CICA
No representations or warranties are made by any director, officer,
employee or shareholder of CICA as individuals, except as and to the extent
stated in this Agreement or in a separate written statement (the "CICA
Disclosure Statement"). CICA hereby represents, warrants and covenants to
American, except as stated in the CICA Disclosure Statement, as follows:
3.1 Citizens and CICA are, respectively, a corporation and an
insurance company, each duly organized, validly existing and in good standing
under the laws of the State of Colorado, and each have the corporate power and
authority to own or lease its properties and to carry on its business as it is
now being conducted. The Articles of Incorporation and Bylaws of Citizens and
CICA, copies of which have been delivered to American, are complete and
accurate, and the minute books of Citizens and CICA contain a record, which is
complete and accurate in all material respects, of all meetings, and all
corporate actions of the shareholders and Board of Directors of Citizens and
CICA.
3.2 The aggregate number of shares which Citizens is authorized to
issue is 50,000,000 shares of Class A Common Stock, no par value, and 1,000,000
shares of Class B common stock, no par value; of which 21,651,161 shares of
such Class A Common Stock are issued and 19,572,614 shares are outstanding,
fully paid and nonassessable and 621,049 shares of Class B common stock are
issued and outstanding, fully paid and nonassessable. There are 1,955,457
shares of Class A Common Stock of Citizens owned and held by CICA that will be
used to satisfy the exchange obligations of CICA under the Agreement. Citizens
has no outstanding options, warrants, or other rights to purchase, or subscribe
to, or securities convertible into or exchangeable for any shares of capital
stock, except an option for 76,000 shares of Class A Common Stock. The two (2)
classes of stock of Citizens are equal in all respects, except (a) the Class B
common stock elects a simple majority of the Board of Directors of Citizens,
and the Class A Common Stock elects the remaining directors; and (b) each Class
A share receives twice the cash dividends paid on a per share basis to the
Class B common stock.
3.3 CICA has complete and unrestricted power to enter into and, upon
the appropriate approvals as required by law, to consummate the transactions
contemplated by this Agreement. None of Citizens, and its subsidiaries have
any liability or obligation to pay any fee or commission to any broker, agent
or finder with respect to the transaction contemplated hereby except to Merger
& Acquisition Profiles, Inc.
3.4 Neither the making of nor the compliance with the terms and
provisions of this Agreement and consummation of the transactions contemplated
herein by CICA will conflict with or result in a breach or violation of the
Articles of Incorporation or Bylaws of CICA.
3.5 The execution, delivery and performance of this Agreement have
been duly authorized and approved by the Board of Directors of CICA.
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<PAGE> 67
3.6 CICA has delivered to American consolidated financial statements
of Citizens and its subsidiaries, dated December 31, 1995 and June 30, 1996.
All such statements, herein sometimes called "Citizens Financial Statements,"
are complete and correct in all material respects and, together with the notes
to these financial statements, present fairly the financial position and
results of operations of Citizens and its subsidiaries for the periods
included. The December 31, 1995 and June 30, 1996 Citizens consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles.
3.7 Since the dates of the Citizens Financial Statements there have
not been any material adverse changes in the business or condition, financial
or otherwise, of Citizens. Citizens and its subsidiaries do not have any
material liabilities or obligations, secured or unsecured (whether accrued,
absolute, contingent or otherwise) except as disclosed in the Citizens
Financial Statement.
3.8 CICA has delivered to American a list and description of all
pending legal proceedings involving Citizens, none of which will materially
adversely affect it, and, except for these proceedings, there are no legal
proceedings or regulatory proceedings involving material claims pending, or to
the knowledge of the officers of Citizen, threatened against Citizens or
affecting any of its assets or properties, and Citizens is not in any material
breach or violation of or default under any contract or instrument to which
Citizens is a party, and no event has occurred which with the lapse of time or
action by a third party could result in a material breach or violation of or
default by Citizens under any contract or other instrument to which Citizens is
a party or by which it or any of its properties may be bound or affected, or
under its respective Articles of Incorporation or Bylaws, nor is there any
court or regulatory order pending, applicable to Citizens or its subsidiaries.
3.9 Citizens shall not enter into or consummate any transactions
prior to the Effective Date other than (i) in the ordinary course of business
or (ii) business acquisitions, combinations and exchanges. Citizens will not
pay any dividend or, except in the ordinary course of business, enter into an
agreement or transaction which would adversely affect its financial condition.
3.10 Neither CICA nor Citizens is a party to any contract performable
in the future except insurance policies, customary agent contracts, normal
reinsurance agreements, agreements with subsidiaries, and those which will not
adversely affect it.
3.11 The representations and warranties of CICA shall be true and
correct as of the date hereof and as of the Effective date.
3.12 CICA has delivered, or will deliver within two weeks of the date
of this Agreement, to American true and correct copies of Citizens Annual
Report to Shareholders for the years ended December 31, 1995 and 1994. CICA
will also deliver to American on or before the Closing Date any reports
relating to the financial and business condition of Citizens which are filed
with the SEC after the date of this Agreement and any other reports sent
generally to its shareholders after the date of this Agreement. Citizens has
duly filed all reports required to be filed by it under the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended (the
"Federal Securities Laws"). No such reports, or any reports sent to the
shareholders of Citizens generally as of their respective dates, contained any
untrue statement of material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements in such
reports, in light of the circumstances under which they were made, not
misleading.
3.13 CICA has delivered to American a copy of each of the consolidated
federal income tax returns of Citizens and its subsidiaries for the year ended
December 31, 1994 and for any additional open years. The provisions for taxes
paid by Citizens are believed by Citizens to be sufficient for payment of all
accrued and unpaid federal, state, county and local taxes of Citizens
(including any penalties or interest payable) whether or not disputed for the
periods then ended and for all prior fiscal periods. All returns and reports or
other information required or requested by federal, state, county, and local
tax authorities have been filed or supplied in a timely fashion, and all such
information is true and correct in all material respects. Provision has been
made for the payment of all taxes due to date by Citizens.
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<PAGE> 68
3.14 Citizens has no employee benefit plan, except for a
noncontributory, qualified profit-sharing plan and a group accident and health
insurance plan.
3.15 No representation or warranty by CICA in this Agreement, the CICA
Disclosure Statement or any certificate delivered pursuant hereto contains any
untrue statement of a material fact or omits to state any material fact
necessary to make such representation or warranty not misleading.
ARTICLE IV
Representations, Warranties and Covenants of American
No representations or warranties are made by any director, officer,
employee or shareholder of American as individuals, except as and to the extent
stated in this Agreement or in a separate written statement (the "American
Disclosure Statement"). American hereby represents, warrants and covenants to
CICA, except as stated in the American Disclosure Statement, as follows:
4.1 American and USLI are, respectively, a corporation and an
insurance company duly organized, validly existing and in good standing under
the laws of the State of Mississippi, each having the corporate power and
authority to own or lease its properties and to carry on its business as it is
now being conducted. The Articles of Incorporation and Bylaws of American and
USLI, copies of which have been delivered to CICA, are complete and accurate,
and the minute books of American and USLI contain a record, which is complete
and accurate in all material respects, of all meetings, and all corporate
actions of the shareholders and Board of Directors of American and USLI.
4.2 The aggregate number of shares which American is authorized to
issue is 15,000,000 shares of Class A Common Stock, participating, no par
value, and 2,500 shares of Class B Common Stock, participating (by virtue of a
1994 amendment to the Articles of Incorporation), $1.00 par value; of which
5,025,490 shares of such Class A Common Stock are issued and 5,021,764 are
outstanding, fully paid and nonassessable and 2,500 shares of Class B Common
Stock are issued and outstanding, fully paid and nonassessable. American has no
outstanding options, warrants or other rights to purchase or subscribe to, or
securities convertible into or exchangeable for any shares of capital stock,
except as shown on the American Disclosure Statement attached to and made a
part of this Agreement. There are 3,726 shares of Class A Common Stock owned
and held by USLI.
The aggregate number of shares which USLI is authorized to issue is
4,000 shares of Common Stock, participating, $500.00 par value, of which 2,000
shares are issued and outstanding, fully paid and nonassessable. USLI has no
outstanding options, warrants or other rights to purchase or subscribe to, or
securities convertible into or exchangeable for any shares of capital stock.
All issued and outstanding shares of USLI stock are owned and held by American.
The subsidiaries of American are each an association, corporation, or
other entity duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or association; each has the
power and authority to lease its properties and to carry on its business as now
being conducted and is qualified to do business; and each holds or shall hold
all licenses, franchises, permits or other governmental authorizations required
to enable it to conduct its business or own its properties in every
jurisdiction in which it currently conducts business or owns property and where
the failure to do so would have a material adverse effect on the business of
the subsidiary. All outstanding shares of capital stock of each subsidiary are
duly and validly authorized and issued, fully paid and nonassessable. American
directly or indirectly owns all of the issued and outstanding capital stock of
such subsidiaries, including USLI. There are no outstanding options, warrants
or other rights to purchase or subscribe to, or securities convertible into or
exchangeable for any shares of capital stock of any subsidiary of American or
USLI, except as shown on the American Disclosure Statement.
4.3 American and USLI each have complete and unrestricted power to
enter into and, upon the appropriate approvals as required by law, to
consummate the transactions contemplated by this Agreement. None of American
and its subsidiaries have any liability or obligation to pay any fee or
commission to any broker, agent or finder with respect to the transactions
contemplated hereby.
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4.4 Neither the making of nor the compliance with the terms and
provisions of this Agreement and consummation of the transaction contemplated
herein by American will conflict with or result in a breach or violation of any
Articles of Incorporation or Bylaws of American or its subsidiaries.
4.5 The execution of this Agreement has been duly authorized and
approved by American's Board of Directors.
4.6 American has delivered to CICA consolidated financial statements
of American and its subsidiaries, dated December 31, 1995 and June 30, 1996,
and the annual and quarterly convention statements of USLI as of December 31,
1995 and the six months ended June 30, 1996, as filed with the Mississippi
Department of Insurance. All such statements, herein sometimes called "American
Financial Statements," are complete and correct in all material respects and,
together with the notes to these financial statements, present fairly the
financial position and results of operations of American and USLI for the
periods indicated. The December 31, 1995 and June 30, 1996 American
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and the December 31, 1995 and June 30,
1996 convention statements have been prepared in accordance with statutory
accounting practices.
4.7 Since the dates of the American Financial Statements there have
not been any material adverse changes in the business or condition, financial
or otherwise, of American or any of its subsidiaries. None of American or its
subsidiaries have any material liabilities or obligations, secured or unsecured
(whether accrued, absolute, contingent or otherwise), except as disclosed in
the American Financial Statements
4.8 American has delivered to CICA a list and description of all
pending legal proceedings involving American or any of its subsidiaries, all of
which are listed on the American Disclosure Statement, none of which will
materially adversely affect American or such subsidiary, and, except for these
proceedings, there are no legal proceedings or regulatory proceedings involving
material claims pending, or to the knowledge of the officers of American,
threatened against American or USLI or affecting any of its assets or
properties, and American and USLI are not in any material breach or violation
of or default under any contract or instrument to which American or USLI is a
party, and no event has occurred which with the lapse of time or action by a
third party could result in a material breach or violation of or default by
American or USLI under any contract or other instrument to which American or
USLI is a party or by which either of them or any of their respective
properties may be bound or affected, or under their respective Articles of
Incorporation or Bylaws, nor is there any court or regulatory order pending,
applicable to American or USLI.
4.9 Neither American nor USLI shall enter into or consummate any
transactions prior to the Effective Date other than in the ordinary course of
business and will pay no dividend, or increase the compensation of officers and
will not enter into any agreement or transaction which would adversely affect
their financial condition in a material manner.
4.10 The assets of USLI had admissible values at least equal to those
attributed to them on its December 31, 1995 or June 30, 1996 convention
statements.
4.11 Neither American nor USLI nor any subsidiary of American or USLI
is a party to any contract performable in the future except insurance policies,
customary agent contracts, normal reinsurance agreements and those which will
not adversely affect them, except as set out on the American Disclosure
Statement attached to this Agreement.
4.12 All policy and claim reserves of USLI have been properly provided
for and are adequate to comply with all regulatory requirements regarding same.
4.13 The representations and warranties of American shall be true and
correct as of the date hereof and as of the Effective Date.
4.14 American has delivered, or will deliver within two weeks of the
date of this Agreement, to CICA true and correct copies of American's Annual
Report to Shareholders for the years ended December 31, 1995 and 1994 and each
of its other reports to shareholders and filings with the Securities and
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Exchange Commission ("SEC") for the years ended December 31, 1995, 1994 and
1993. American will also deliver to CICA on or before the Closing Date any
reports relating to the financial and business condition of American which are
filed with the SEC after the date of this Agreement and any other reports sent
generally to its shareholders after the date of this Agreement. American has
duly filed all reports required to be filed by it under the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended (the
"Federal Securities Laws"). No such reports, or any reports sent to the
shareholders of American generally, contained any untrue statement of material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements in such report, in light of the circumstances
under which they were made, not misleading.
4.15 American has delivered to CICA a copy of each of the federal
income tax returns of American for the years ended December 31, 1995, 1994 and
1993 and for any additional open years. The provisions for taxes paid by
American are believed by American to be sufficient for payment of all accrued
and unpaid federal, state, county and local taxes of American (including any
penalties or interest payable) whether or not disputed for the periods then
ended and for all prior fiscal periods. All returns and reports or other
information required or requested by federal, state, county and local tax
authorities have been filed or supplied in a timely fashion, and all such
information is true and correct in all material respects. Provision has been
made for the payment of all taxes due to date by American.
4.16 Neither American nor USLI have any employee benefit plans, except
for a noncontributory 401K plan and a group accident, health and life insurance
plans.
4.17 No representation or warranty by American in this Agreement, the
American Disclosure Statement or any certificate delivered pursuant hereto
contains any untrue statement of a material fact or omits to state any material
fact necessary to make such representation or warranty not misleading.
ARTICLE V
Obligations of the Parties Pending the Effective Date
5.1 This Agreement shall be duly submitted to the shareholders of
American for the purpose of considering and acting upon this Agreement in the
manner required by law at a meeting of shareholders on a date selected by
American, such date to be the earliest practicable date after the proxy
statement may first be sent to American shareholders without objection by
applicable governmental authorities. CICA will furnish to American the
information relating to Citizens required by the Federal Securities Laws to be
included in the proxy statement. CICA represents and warrants that at the time
of the American shareholders' meeting, the proxy statement, insofar as it
relates to Citizens and contains information furnished by CICA specifically for
use in such proxy statement, (a) will comply in all material respects with the
provisions of the Federal Securities Laws; and (b) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Board of
Directors of American, subject to its fiduciary obligations to shareholders,
shall use its best efforts to obtain the requisite approval of American
shareholders of this Agreement and the transactions contemplated herein.
American and CICA shall take all reasonable and necessary steps and actions to
comply with and to secure American shareholders approval of this Agreement and
the transactions contemplated herein as may be required by the statutes, rules
and regulations of such states.
5.2 At all times prior to the Effective Date, during regular business
hours each party will permit the other to examine its books and records and the
books and records of any subsidiaries and will furnish copies thereof on
request. It is recognized that, during the performance of this Agreement, each
party may provide the other parties with information which is confidential or
proprietary information. During the term of this Agreement, and for four years
following the termination of this Agreement, the recipient of such information
shall protect such information from disclosure to persons, other than members
of its own or affiliated organizations and its professional advisors in the
same manner as it protects its own confidential or proprietary information from
unauthorized disclosure, and not use such information to the competitive
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detriment of the disclosing party. In addition, if this Agreement is terminated
for any reason, each party shall promptly return or cause to be returned all
documents or other written records of such confidential or proprietary
information, together with all copies of such writings and, in addition, shall
either furnish or cause to be furnished, or shall destroy, or shall maintain
with such standard of care as is exercised with respect to its own confidential
or proprietary information, all copies of all documents or other written
records developed or prepared by such party on the basis of such confidential
or proprietary information.
No information shall be considered confidential or proprietary if it is (a)
information already in the possession of the party to whom disclosure is made;
(b) information acquired by the party to whom the disclosure is made from other
sources; or (c) information in the public domain or generally available to
interested persons or which at a later date passes into the public domain or
becomes available to the party to whom disclosure is made without any
wrongdoing by the party to whom the disclosure is made.
5.3 American and CICA shall promptly provide each other with
information as to any significant developments in the performance of this
Agreement, and shall promptly notify the other if it discovers that any of its
representations, warranties and covenants contained in this Agreement or in any
document delivered in connection with this Agreement was not true and correct
in all material respects or became untrue or incorrect in any material respect.
5.4 All parties to this Agreement shall take all such action as may
be reasonably necessary and appropriate and shall use their best efforts in
order to consummate the transactions contemplated hereby as promptly as
practicable.
ARTICLE VI
Procedure for Exchange
6.1 As soon as practical and in any event within 30 days after the
Execution of this Agreement, the parties shall file with the Insurance
Commissioner of Mississippi all of the documents required by Mississippi law.
ARTICLE VII
Conditions Precedent to the Consummation of the Exchange
The following are conditions precedent to the consummation of the
Agreement on or before the Effective Date:
7.1 CICA and American shall have performed and complied with all of
their respective obligations hereunder which are to be complied with or
performed on or before the Effective Date and American and CICA shall provide
one another at the Closing with a certificate to the effect that such party has
performed each of the acts and undertakings required to be performed by it on
or before the Closing Date pursuant to the terms of this Agreement.
7.2 This Agreement and the transactions contemplated herein shall
have been duly and validly authorized, approved and adopted, at a meeting of
the shareholders of American duly and properly called for such purposes in
accordance with the applicable laws.
7.3 This Agreement is in all things subject to the provisions of the
applicable insurance laws and the regulations promulgated thereunder, and shall
not become effective until all necessary approvals are obtained from the
Commissioners of Insurance of the States of Colorado and Mississippi in
accordance with the provisions of the laws of said states. CICA and American as
soon as practical after the execution and delivery of this Agreement, agree to
file and to use their best efforts to obtain such approvals of the transactions
contemplated by this Agreement. Neither CICA nor American shall be obligated to
file a suit or to appeal from any Commissioner's adverse ruling, nor shall CICA
or American be obligated to make any material changes in any lawful, good faith
management policy in order to gain such approval. In the event either approval
is denied, this Agreement shall terminate.
7.4 No action, suit or proceeding shall have been instituted or shall
have been threatened before any court or other governmental body or by any
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public authority to restrain, enjoin or prohibit the transactions contemplated
herein, or which might subject any of the parties hereto or their directors or
officers to any material liability, fine, forfeiture or penalty on the grounds
that the transactions contemplated hereby, the parties hereto or their
directors or officers, have violated any applicable law or regulation, or have
otherwise acted improperly in connection with the transactions contemplated
hereby, and the parties hereto have been advised by counsel that, in the
opinion of such counsel, such action, suit or proceeding raises substantial
questions of law or fact which could reasonably be decided adversely to any
party hereto or its directors or officers.
7.5 All actions, proceedings, instruments and documents required to
carry out this Agreement and the transactions contemplated hereby and the form
and substance of all legal proceedings and related matters shall have been
approved by counsel for CICA and American.
7.6 The representations and warranties by CICA and American in this
Agreement shall be true as though such representations and warranties had been
made or given on and as of the Effective Date, except to the extent that such
representations and warranties may be untrue on and as of the Effective Date
because of (1) changes caused by transactions suggested or approved in writing
by CICA; or (2) events or changes (which shall not in the aggregate, have
materially and adversely affected the business, assets, or financial condition
of American or Citizens) during or arising after the date of this Agreement.
7.7 American shall have furnished CICA with:
(1) a certified copy of a resolution or resolutions duly
adopted by the Board of Directors of American approving
this Agreement and the transactions contemplated by it in
accordance with applicable law and directing the
submission thereof to a vote of the shareholders of
American;
(2) a certified copy of a resolution or resolutions duly
adopted by the shareholders of American approving this
Agreement and the transactions contemplated by it in
accordance with applicable law;
(3) an opinion of Spencer, Tyra & Crecink, counsel for
American, dated as of the Closing Date as set forth in
"Exhibit B" attached hereto;
(4) an agreement from each "affiliate" of American as defined
in the rules adopted under the Securities Act of 1933, as
amended, to the effect that (a) the affiliate is familiar
with SEC Rule 144; (b) none of the shares of Citizens
Class A Common Stock will be transferred by or through the
affiliate in violation of the Federal Securities Laws; (c)
the affiliate will not sell or in any way reduce his risk
relative to any Citizens Class A Common Stock received
pursuant to this Agreement until such time as financial
results covering at least 30 days of post-closing date
combined operations shall have been published by Citizens
on SEC Form 10-Q or otherwise.
7.8 CICA shall furnish American with:
(1) a certified copy of a resolution or resolutions duly
adopted by the Board of Directors approving this Agreement
and the transactions contemplated by it; and
(2) an opinion dated the Effective Date of Jones & Keller,
P.C., counsel for CICA, as set forth in "Exhibit C"
attached hereto.
ARTICLE VIII
Termination and Abandonment
8.1 Anything contained in this Agreement to the contrary
notwithstanding, the Agreement may be terminated and abandoned at any time
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<PAGE> 73
(whether before or after the approval and adoption thereof by the shareholders
of American and/or CICA) prior to the Effective date.
(a) By mutual consent of the Boards of Directors of CICA and
American:
(b) By CICA or American, if any condition set forth in Article
VII relating to the other party has not been satisfied or
has not been waived;
(c) By CICA or American, if any suit, action or other
proceeding shall be pending or threatened by the federal
or a state government before any court or governmental
agency, in which it is sought to restrain, prohibit or
otherwise affect the consummation of the transactions
contemplated hereby;
(d) By any party, if there is discovered any material error,
misstatement or omission in the representations and
warranties of another party; or
(e) By CICA, if dissenters' rights are perfected in accordance
with the Exchange Act for more than 2.5% of the
outstanding shares of American; or
(f) By either party if the Effective Date does not occur
within ninety (90) days from the date hereof.
(g) By any party, if it is determined by counsel of either
party that the transaction will not constitute a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended.
8.2 Any of the terms or conditions of the Agreement may be waived at
any time by the party which is entitled to the benefit thereof, by action by
its Board of Directors; provided, however, that such action shall be taken only
if, in the judgment of the Board of Directors taking the action, such waiver
will not have a materially adverse effect on the benefits intended under this
Agreement to the party waiving such term or condition.
ARTICLE IX
Termination of Representation and
Warranties and Certain Agreements
9.1 The respective representations and warranties of the parties
hereto shall expire with, and be terminated and extinguished by consummation of
the Agreement; provided, however, that the covenants and agreements of the
parties hereto shall survive in accordance with their terms.
ARTICLE X
Miscellaneous
10.1 This Agreement embodies the entire agreement between the parties,
and there have been and are no agreements, representations or warranties among
the parties other than those set forth herein or those provided for herein.
10.2 To facilitate the execution of this Agreement, any number of
counterparts hereof may be executed, and each such counterpart shall be deemed
to be an original instrument, but all such counterparts together shall
constitute but one instrument.
10.3 Each of the parties hereto will pay its own fees and expenses
incurred in connection with the transactions contemplated by this Agreement.
Except as otherwise disclosed in their respective Disclosure Statements, CICA
and American each represent to the other that it has not employed any
investment bankers, brokers, finders, or intermediaries in connection with the
transaction contemplated hereby who might be entitled to any fee or other
payment from American or Citizens or any of their respective subsidiaries upon
consummation of the transactions contemplated by this Agreement.
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10.4 All parties to this Agreement agree that if it becomes necessary
or desirable to execute further instruments or to make such other assurances as
are deemed necessary, the party requested to do so will use its best efforts to
provide such executed instruments or do all things necessary of proper to carry
out the purpose of this Agreement.
10.5 This Agreement may be amended upon approval of the Board of
Directors of each party provided that the share exchange ratio hereunder shall
not be amended without approval of the requisite shareholders of American.
10.6 Any notices, requests, or other communications required or
permitted hereunder shall be delivered personally or sent by overnight courier
service, fees prepaid, addressed as follows:
To CICA, Inc.: and to American:
Citizens Insurance Company American Investment Network, Inc.
of America United Security Life Insurance
Post Office Box 149151 Company
Austin, Texas 78714-9159 660 Lakeland East Drive
Attn: Harold E. Riley Flowood, Mississippi 39208
Chairman Attn: John S. Camara, President
Phone: (512) 837-7100 Phone: (601) 936-2090
Fax: (512) 836-9334 Fax: (691) 939-4372
with copies to: with copies to:
Jones & Keller, P.C. Spencer, Tyra & Crecink
1625 Broadway, Ste 1600 660 Lakeland East Drive, Ste 100
Denver, Colorado 80202 Jackson, Mississippi 39208
Attn: Reid A. Godbolt, Esq. Attn: Ernest O. Spencer, III, Esq.
Phone: (303) 573-1600 Phone: (601) 939-9193
Fax: (303) 573-0769 Fax: (601) 939-9195
or such other addresses as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
received.
10.7 No press release or public statement will be issued relating to
the transactions contemplated by this Agreement without prior approval of CICA
and American. However, either CICA or American may issue at any time any press
release or other public statement it believes on the advise of its counsel it
is obligated to issue to avoid liability under the law relating to disclosures
to itself or any of its affiliates, but the party issuing such press release or
public statement shall make a reasonable effort to give the other party prior
notice of and opportunity to participate in h release or statement.
10.8 The parties have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any of the provisions of
this Agreement. Any references to any federal, state, local, or foreign statute
or law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context otherwise requires. The word "including" shall
mean including without limitation.
10.9 The Exhibits and Schedules identified in this Agreement are
incorporated herein by reference and made a part hereof.
10.10 This Agreement shall be governed by and construed in accordance
with the domestic laws of the State of Mississippi without giving effect to any
choice or conflict of law provision or rule (whether of the State of
Mississippi or any other jurisdiction) that would cause the application of the
laws or any jurisdiction other than the State of Mississippi.
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IN WITNESS WHEREOF, the parties have set their hands and seals this 28th
day of October, 1996.
CITIZENS INSURANCE COMPANY AMERICAN INVESTMENT NETWORK,
OF AMERICA INC.
By:/s/ Mark A. Oliver By:/s/ John S. Camara
------------------------ --------------------------------
Mark A. Oliver John S. Camara, President
Executive Vice-President
and Treasurer
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<PAGE> 76
EXHIBIT A
OFFICE OF THE MISSISSIPPI SECRETARY OF STATE
P.O. BOX 136, JACKSON, MS 39205-0135, (601) 359-1333
ARTICLES OF MERGER OR SHARE EXCHANGE
PROFIT CORPORATION
The undersigned corporation pursuant to Section 79-1-1.05, as amended, hereby
executes the following document and sets forth:
1. Name of Corporation 1: American Investment Network, Inc.
2. Name of Corporation 2: Citizens Insurance Company of America.
3. Name of Corporation 3:
4. The future effective date is _______________, 1997.
5. The plan of merger or share exchange (attach page).
6. Mark appropriate box.
(a) Shareholder approval of the plan of merger or share exchange was
- ------ not required.
x (b) If approval of the shareholders of one or more corporations
- ------ party to the merger or share exchange was required
(i) the designation, number of outstanding shares, and number of
votes entitled to be cast by each class entitled to vote
separately on the plan as to each corporation were
<TABLE>
<CAPTION>
NAME OF CORPORATION DESIGNATION NO. OF OUTSTANDING SHARES NO. OF VOTES ENTITLED TO BE CAST
- ------------------- ----------- ------------------------- --------------------------------
<S> <C> <C> <C>
American Investment Class A Common
Network, Inc. Stock 5,021,764 5,021,764
American Investment Class B Common
Network, Inc. Stock 2,500 2,500
</TABLE>
AND the total number of votes cast for and against the plan by each class
entitled to vote separately on the plan was
<TABLE>
<CAPTION>
NAME OF CORPORATION CLASS TOTAL NO. OF VOTES CAST FOR PLAN NO. OF VOTES CAST AGAINST PLAN
- ------------------- ----- -------------------------------- ------------------------------
<S> <C>
American Investment Class A Common
Network, Inc. Stock
American Investment Class B Common
Network, Inc. Stock
Citizens Insurance Common Stock
Company of America
</TABLE>
and the number of votes cast for the plan by each class was sufficient for
approval by that class.
Name of Corporation 1
AMERICAN INVESTMENT NETWORK, INC.
By:
-----------------------------------
President
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Name of Corporation 2
CITIZENS INSURANCE COMPANY OF AMERICA
By:
-----------------------------------
Executive Vice President and Treasurer
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<PAGE> 78
ATTACHMENT TO ARTICLES OF SHARE EXCHANGE
OF
AMERICAN INVESTMENT NETWORK, INC.
AND
CITIZENS INSURANCE COMPANY OF AMERICA
In accordance with Mississippi Code Ann. 79-4-11.01 et seq. and 83-19-99
et. seq. (together the "Exchange Act"), a plan and agreement of exchange ("Plan
of Exchange") has been approved, adopted and executed by American Investment
Network, Inc. and Citizens Insurance Company of America as follows:
1. The Exchange shall be effective as of _________, 1997 ("Effective
Date").
2. At and as of the Effective Date:
(a) each shareholder of American prior to the Effective Date
shall cease to be a shareholder of American:
(b) the ownership of all issued and outstanding stock of
American (other than shares for which dissenter's rights are
perfected in accordance with the Exchange Act) shall vest in CICA
automatically without any physical transfer or deposit of the
certificates representing such shares, and CICA will become the
sole shareholder of American;
(c) the holders of each issued and outstanding share of
American Class A or Class B Common Stock prior to the Effective
Date (other than any shares for which dissenter's rights are
perfected in accordance with the Exchange Act) shall have the
right to receive from CICA in accordance with Article II of the
Plan of Exchange one (1) share of Citizens, Inc. Class A Common
Stock, no par value, for each seven and two-tenths (7.2) shares
of American Class A or Class B Common Stock; provided, however,
that all consideration to be received shall be subject to
equitable adjustment in the event of any stock split, stock
dividend, reverse stock split, or other change in the number of
American shares outstanding; and
(d) the holders of each issued and outstanding share of
American Class A or Class B Common Stock prior to the Effective
Date for which dissenter's rights are perfected in accordance
with the Exchange Act shall have the right to receive from
American payment therefor in accordance with the Exchange Act.
3. The Exchange shall have the effect set forth in the Exchange Act.
4. The Plan of Share Exchange has been approved by the Shareholders
of American. No shareholder approval by the shareholders CICA, Colorado stock
insurance company, was required, pursuant to Section 7-111-103(7) of the
Colorado Business Corporation Act and Sections 79-4-11.01 et seq. of the
Mississippi Code of 1972, as amended.
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<PAGE> 79
ARTICLES OF SHARE EXCHANGE
Pursuant to the provisions of the Colorado Business Corporation Act,
AMERICAN INVESTMENT NETWORK, INC., a Mississippi corporation ('American"), and
CITIZENS INSURANCE COMPANY OF AMERICA, a stock insurance company organized
under the laws of the State of Colorado ("CICA"), adopt the following articles
of share exchange:
FIRST: The plan of share exchange (the "Plan of Exchange") is summarized
as follows: At and as of the effective time set forth below (the "Effective
Date"):
(a) each shareholder of American Prior to the Effective Date
shall cease to be a shareholder of American;
(b) the ownership of all issued and outstanding stock of
American (other than shares for which dissenter's rights are perfected
in accordance with applicable law) shall vest in CICA automatically
without any physical transfer or deposit of the certificates
representing such shares, and CICA will become the sole shareholder of
American;
(c) the holders of each issued and outstanding share of
American Class A or Class B Common Stock prior to the Effective Date
(other than any shares for which dissenter's rights are perfected in
accordance with applicable law) shall have the right to receive from
CICA in accordance with Article II of the Plan of Exchange one (1) share
of Citizens Class A Common Stock, no par value, for each seven and two-
tenths (7.2) shares of American Class A or Class B Common Stock;
provided, however, that all consideration to be received shall be
subject to equitable adjustment in the event of any stock split, stock
dividend, reverse stock split, or other change in the number of American
shares outstanding; and
(d) the holders of each issued and outstanding share of
American Class A or Class B Common Stock prior to the Effective Date for
which dissenter's rights are perfected in accordance with applicable law
shall have the right to received from American payment therefor in
accordance with applicable law.
SECOND: The plan of share exchange was approved by the
shareholders of American. Approval by the shareholders of CICA was not
required.
THIRD: As to American, whose shareholders were required to vote for
approval, the number of votes cast for the plan by each voting group entitled
to vote separately on the share exchange was sufficient for approval by that
voting group.
FOURTH: These articles are to become effective on January 1, 1997
at 12:01 a.m., unless prior to the effective date they are abandoned and a
statement of abandonment if filed prior to the effective date.
Dated: __________, 1997
AMERICAN INVESTMENT NETWORK, INC. CITIZENS INSURANCE COMPANY
OF AMERICA, INC.
By: By:
------------------------------ ------------------------------
John S. Camara Mark A. Oliver
Title: President Title: Executive Vice President and
Treasurer
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<PAGE> 80
EXHIBIT B
Opinion of Counsel for American
At the Closing, American shall deliver to CICA an opinion, in form and
substance satisfactory to CICA and its counsel, dated the Closing Date, of
Spencer, Tyra & Crecink, counsel to American, to the effect that:
(i) The execution, delivery, and performance of the Agreement by
American shall not result in a breach of, or constitute a default
(or an event which, with or without notice or lapse of time or
both, would constitute a default) under any contract, commitment,
agreement, indenture, mortgage, pledge agreement, note, bond,
license, or other instrument or obligation to which American is a
party or by which American is bound or the charter or bylaws of
American or other governing instruments of American
(ii) The Agreement has been duly authorized, executed and delivered by
American and is a legal, valid and binding obligation of American
enforceable against American in accordance with its terms
(subject to the applicability of equitable principles or the
effect of bankruptcy or creditors' rights laws on the
enforceability of the Agreement);
(iii) American and USLI are, respectively, a corporation and a stock
insurance company duly organized, validly existing and in good
standing under the laws of the State of Mississippi;
(iv) American has full corporate power and authority to enter into
Agreement and to carry out the transactions contemplated by the
Agreement;
(v) To such counsel's knowledge, after due inquiry, there are no
civil or criminal actions, suits, arbitrations, administrative or
other proceedings or governmental investigations pending or
threatened against American or its subsidiaries which will
constitute a breach of the representations, warranties or
covenant under the Agreement or will prevent American from
consummating the transactions contemplated by the Agreement;
(vi) The authorized and outstanding capital stock of American and USLI
are as stated in Section 4.2 of the Agreement, and such shares
have been duly authorized, are fully paid and nonassessable and
were not issued in violation of the preemptive rights of any
party;
(vii) To such counsel's knowledge, after due inquiry, except as set
forth in the Agreement, there are no outstanding subscriptions,
options, warrants, rights, convertible securities, calls,
commitments, privileges or other arrangements, preemptive or
contractual, calling for or requiring the acquisition of, or the
issuance, transfer, sale, or other disposition of any shares of
the capital stock of American or USLI, or calling for or
requiring the issuance of any securities or rights convertible
into or exchangeable for shares of capital stock of American or
USLI, except as disclosed in the Agreement; and
(viii) The execution, delivery, and performance of the Agreement, and
the performance by American of its obligations thereunder, is not
in contravention of any law, ordinance, rule, or regulation, or
contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having
jurisdiction, will not cause the suspension or revocation of any
authorization, consent, approval, or license, presently in
effect, which affects or binds, American, USLI or any of their
material properties.
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EXHIBIT C
Opinion of Counsel for CICA
At the Closing, CICA shall deliver to American, an opinion, in form and
substance satisfactory to American and its counsel, dated the Closing Date, of
Jones & Keller, P.C., counsel to CICA, to the effect that:
(i) The execution, delivery, and performance of the Agreement by CICA
shall not result in a breach of, or constitute a default (or an
event which, with or without notice or lapse of time or both,
would constitute a default) under any contract, commitment,
agreement, indenture, mortgage, pledge agreement, note, bond,
license, or other instrument or obligation to which CICA is a
party or by which CICA is bound or the charter or bylaws of CICA
or other governing instruments of CICA;
(ii) The Agreement has been duly authorized, executed and delivered by
CICA and is a legal, valid and binding obligation of CICA
enforceable against CICA in accordance with its terms (subject to
the applicability of equitable principles or the effect of
bankruptcy or creditors' rights laws on the enforceability of the
Agreement);
(iii) Citizens and CICA respectively are a corporation and a stock
insurance company, duly organized, validly existing and in good
standing under the laws of the State of Colorado;
(iv) CICA has full corporate power and authority to enter into the
Agreement and to carry out the transactions contemplated by the
Agreement;
(v) To such counsel's knowledge, after due inquiry, there are no
civil or criminal actions, suits, arbitrations, administrative or
other proceedings or governmental investigations pending or
threatened against CICA which will constitute a breach of the
representations, warranties or covenants under the Agreement or
will prevent CICA from consummating the transactions contemplated
by the Agreement;
(vi) The authorized and outstanding capital stock of Citizens is as
stated in Section 3.2 of the Agreement, and each of the shares of
Class A Common Stock to be issued pursuant to the agreement has
been duly authorized and when issued pursuant to the terms of the
Agreement shall be validly issued and fully paid and
non-assessable and issued in violation of the preemptive rights
of any party;
(vii) To such counsel's knowledge, after due inquiry, except as set
forth in the Agreement or CICA's Disclosure Statement, there are
no outstanding subscriptions, options, warrants, rights,
convertible securities, calls, commitments, privileges or other
arrangements, preventive or contractual, calling for or requiring
the acquisition of, or the issuance, transfer, sale, or other
disposition of any shares of the capital stock of Citizens, or
calling for or requiring the issuance of any securities or rights
convertible into or exchangeable for shares of capital stock of
Citizens;
(viii) The execution, delivery, and performance of the Agreement, and
the performance by CICA of its obligations thereunder, is not in
contravention of any law, ordinance, rule, or regulation, or
contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having
jurisdiction, will not cause the suspension or revocation of any
authorization, consent, approval, or license presently in effect,
which affects or binds CICA or any of its subsidiaries or any of
its or their material properties;
(xi) Consummation of the transaction in accordance with the terms of
the Agreement will constitute a reorganization within the meaning
of the Internal Revenue Code of 1986, as amended (the "Code");
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American and CICA will each be a party to the reorganization; no
gain or loss will be recognized pursuant to the Code by American
as a consequence of the transactions contemplated hereby; CICA
will succeed to and take into account the items of American
described in the Code; when a American shareholder receives
solely Citizens Class A Common Stock in accordance with the
transactions contemplated hereby, such American shareholder will
not recognize gain or loss; the basis for the Citizens Class A
Common Stock to be received by American shareholders will be the
same as the basis for the shares of American stock they surrender
in connection with the transactions contemplated hereby; the
holding period for any American shareholder of the Citizens Class
A Common Stock received in the transactions contemplated hereby
will include the period during which the shares of the American
stock surrendered were held provided that the American stock was
a capital asset in the hands of such American shareholder on the
Effective Date; and the payment of cash to any American
shareholder in lieu of a fractional share of Citizens Class A
Common Stock will be treated as received as a distribution and
redemption of the fractional share interest, subject to the
limitations of Section 302 of the Code; and
(x) The exchange of Citizens Class A Common Stock for shares of
American stock is exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 3(a)(10) thereof
and, with respect to state securities laws and the securities
laws of other applicable jurisdictions, if any, is either exempt
from qualification or registration thereunder or such
qualification or registration requirements have been satisfied.
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CICA DISCLOSURE STATEMENT
Pursuant to the provisions of Article III of the Plan and Agreement of
Exchange between and among CICA and American, CICA hereby makes the following
disclosures respecting the similarly numbered sections in the Plan and
Agreement of Exchange:
3.3 At the Effective Date, brokerage commissions will be owed to
Merger & Acquisition Profiles, Inc.
3.7 Citizens has the liabilities disclosed in the Citizens Financial
Statements and those incurred thereafter in the ordinary course
of business.
3.10 Computer Maintenance Agreement between Computing Technology, Inc.
and Wang Laboratories, effective 7/1/91 and amended 8/26/91.
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AMERICAN DISCLOSURE STATEMENT
Pursuant to the provisions of Article IV of the Plan and Agreement of
Exchange between and among CICA and American, American hereby makes the
following disclosures respecting the similarly numbered sections in the Plan
and Agreement of Exchange:
4.2 Outstanding warrants, options, or other rights to purchase or
subscribe to, or securities convertible into, or exchangeable
for, shares of capital stock of American:
(1) Stock Incentives issued to certain key employees of Great
American Investment Network, Inc. and USLI pursuant to the
1994 Stock Incentive Plan, adopted by the Board of
Directors on November 30, 1994, and approved by the
Shareholders on May 3, 1994.
4.7 American has liabilities disclosed in their financial statements
and those incurred thereafter in the ordinary course of business.
4.8 Pending litigation: As of the date of execution hereof, the
following litigation against American and/or USLI was ending:
(1) David Anderson and Marty Stanford, D/B/A Premiere
Insurance Agency, and Chiropractic National Association,
Plaintiffs, versus United Security Life Insurance Company,
Defendant, Civil Action No. 96-002(r)L, in the Circuit
Court of Lee County, Mississippi.
(2) Donald and Karen Mayo, Plaintiffs, versus United Security
Life Insurance Company, Defendant, Civil Action No.
95-268(f)L, in the Circuit Court of Lee County,
Mississippi.
4.11 American is subject to the following contracts and agreements
which are, or may be, performable in the future, copies of which
have heretofore been furnished to CICA:
(1) Settlement Agreement dated March 2, 1995, among Robert
Tillman and Tillman Insurance Agency, Inc. ("Plaintiffs"),
and The Gain Agency, Inc., Great American Investment
Network, Inc., Walter L. Shelton and Jesse Byrd
(Defendants).
(2) Executive Compensation Plan and Agreement adopted November
11, 1994 by the Directors, and approved by the
Shareholders on May 2, 1995, between Great American
Investment Network, Inc. and Walter L. Shelton and Jesse
L. Byrd.
(3) Employment Agreement dated August 23, 1996, between,
American, USLI and John S. Camara.
(4) Employment Agreement dated August 23, 1996, between,
American, USLI and H. Harold Crumpler.
(5) Employment Agreement dated August 23, 1996, between,
American, USLI and Phillip E. Faller.
(6) Employment Agreement dated August 23, 1996, between,
American, USLI and Linda M. Pepper.
(7) Contract Agreements between Great American Investment
Network, Inc. and the individual members of Magnolia
Consulting Group, an unincorporated
(8) Promissory Note dated December 19, 1994, in favor of
Merchants and Farmers Bank, in the original principal
amount of $535,562.62, with a final maturity date of
December 15, 1999. The Promissory Note is secured by a
Deed of Trust between the parties dated as of the same
date, and recorded in the Office of the Chancery Clerk of
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Rankin County, Mississippi in Book 1018 at Page 89.
(9) Second Deed of Trust dated March 2, 1995, securing the
Settlement Agreement referenced as Item No. (1), above,
among Great American Investment Network, Inc., Mark T.
Davis as Trustee, and Dale Hubbard, Tillman Insurance
Agency, Inc. and Robert Tillman, beneficiaries. This
instrument is recorded in the Office of the Chancery Clerk
of Rankin County, Mississippi in Book 1031 at Page 649.
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AMENDMENT TO PLAN AND AGREEMENT OF EXCHANGE
This Amendment to Plan and Agreement of Exchange ("Amendment") is
entered into among CITIZENS, INC., a Colorado corporation ("Citizens"),
CITIZENS INSURANCE OF AMERICA, a Colorado-domiciled insurance company ("CICA")
and AMERICAN INVESTMENT NETWORK, INC., a Mississippi corporation ("American").
WITNESSETH
WHEREAS, CICA and American have heretofore entered into a Plan and
Agreement of Exchange dated October 28, 1996 (the "Plan"), to effect a share
exchange between them under Mississippi law, provided in the Plan; and
WHEREAS, CICA and American desire to amend the Plan, as adopted, as to
the source of stock to be used to implement the exchange, said stock to be
additional shares of Citizens Class A Common Stock to be issued by Citizens and
distributed to CICA;
NOW, THEREFORE, Citizens, CICA and American hereby agree that the Plan
should be, and hereby is, amended as follows:
I.
Article III, Section 3.2 of the Plan, is hereby amended to read as
follows:
"3.2 The aggregate number of shares which Citizens is authorized to
issue is 50,000,000 shares of Class A Common Stock, no par value, and 1,000,000
shares of Class B Common Stock, no par value; of which 21,651,161 shares of
such Class A Common Stock were issued and 19,572,614 shares were outstanding,
fully paid and nonassessable and 621,049 shares of Class B Common Stock are
issued and outstanding, fully paid and nonassessable, as of October 28, 1996,
the date of the Plan. A total of 700,000 shares of Class A Common Stock of
Citizens, previously authorized but unissued, will be issued by Citizens and
distributed to CICA to satisfy the exchange obligations of CICA under the
Agreement. Citizens has no outstanding options, warrants or other rights to
purchase, or to subscribe to, or securities convertible into or exchangeable
for any shares of capital stock, except an option for 76,000 shares of Class A
Common Stock. The two (2) classes of stock of Citizens are equal in all
respects, except: (a) the Class B Common Stock elects a simple majority of the
Board of Directors of Citizens, and the Class A Common Stock elects the
remaining directors; and (b) each Class A share receives twice the cash
dividends paid on a per share basis to the Class B Common Stock."
II.
Article VIII, Section 8.1(f) of the Plan, is hereby amended to read as
follows:
"(f) By either party, if the Effective Date does not occur on or
before March 31, 1997."
III.
Except as amended herein, the Plan remains in full force and effect,
without change.
IN WITNESS WHEREOF, Citizens, CICA and American have set their hands and
seals this 17th day of January, 1997, but effective as of the 31st of December,
1996.
CITIZENS INSURANCE COMPANY AMERICAN INVESTMENT NETWORK, INC.
OF AMERICA
By: /s/ Mark A. Oliver By: /s/ John S. Camara
------------------------------ -----------------------------------
Mark A. Oliver, Executive Vice John S. Camara, President
President and Treasurer
CITIZENS, INC.
By: /s/ Mark A. Oliver
-------------------------------
Mark A. Oliver, Executive Vice
President and Treasurer
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AMENDMENT NO. 2 TO PLAN AND AGREEMENT OF EXCHANGE
This Amendment No. 2 to Plan and Agreement of Exchange is entered into
among CITIZENS, INC., a Colorado corporation ("Citizens"), CITIZENS INSURANCE
OF AMERICA, a Colorado-domiciled insurance company ("CICA") and AMERICAN
INVESTMENT NETWORK, INC., a Mississippi corporation ("American").
WITNESSETH
WHEREAS, CICA and American have heretofore entered into a Plan and
Agreement of Exchange dated October 28, 1996 (the "Plan"), to effect a share
exchange between them under Mississippi law, provided in the Plan; and
WHEREAS, CICA and American amended the Plan on January 27, 1997
("Amendment No. 1") to reflect the contribution by Citizens of stock to CICA
for the share exchange and to extend the closing date; and
NOW, THEREFORE, Citizens, CICA and American hereby agree that the Plan
should be, and hereby is, amended as follows:
I.
Article VIII, Section 8.1(f) of the Plan, is hereby amended to read as
follows:
"(f) By either party, if the Effective Date does not occur on or before
June 30, 1997."
II.
Except as amended herein, the Plan as amended by Amendment No. 1 remains
in full force and effect, without change.
IN WITNESS WHEREOF, Citizens, CICA and American have set their hands and
seals as of March 31, 1997.
CITIZENS INSURANCE COMPANY AMERICAN INVESTMENT NETWORK, INC.
OF AMERICA
By: /s/ Mark A. Oliver By: /s/ John S. Camara
----------------------- -----------------------------------
Mark A. Oliver, John S. Camara, President
President
CITIZENS, INC.
By: /s/ Mark A. Oliver
-----------------------
Mark A. Oliver,
President
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APPENDIX B
ARTICLE 13
DISSENTERS' RIGHTS
SUBARTICLE A. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
79-4-13.01 DEFINITIONS--In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 79-4-13.02 and who exercises that right when and
in the manner required by Sections 79-4-13.20 through 79-4-13.28.
(3) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
79-4-13.02 RIGHT TO DISSENT--(a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any
of the following corporate action:
(1) Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by Section 79-4-11.03 or
the articles of incorporation and the shareholder is entitled to vote on the
merger, or (ii) if the corporation is a subsidiary that is merged with its
parent under Section 79-4-11.04;
(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all
of the net proceeds of the sale will be distributed to the shareholders within
one (1) year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) Alters or abolishes a preferential right of the shares;
(ii) Creates, alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(iii) Alters or abolishes a preemptive right of the holder of the shares
to acquire shares or other securities;
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(iv) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights; or
(v) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fraction share so created is to be acquired for cash
under Section 79-4-6.04, or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) Nothing in subsection (a)(4) shall entitle a shareholder of a
corporation to dissent and obtain payment for his shares as a result of an
amendment of the articles of incorporation exclusively for the purpose of
either (i) making such corporation subject to application of the Mississippi
Control Share Act, or (ii) making such act inapplicable to a control share
acquisition of such corporation.
(c) A shareholder entitled to dissent and obtain payment for his
shares under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
79-4-13.03 DISSENT BY NOMINEES AND BENEFICIAL OWNERS--(a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered
in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
(1) He submits to the corporation the record shareholder 's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
79-4-13.20 NOTICE OF DISSENTERS' RIGHTS--(a) If proposed corporate
action creating dissenters' rights under Section 79-4-13.02 is submitted to a
vote at a shareholders' meeting, the meeting notice must state that
shareholders are or may be entitled to assert dissenters' rights under this
article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under Section
79-4-13.02 is taken without a vote of shareholders, the corporation shall
notify in writing all shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in Section
79-4-13.22.
79-4-13.21 NOTICE OF INTENT TO DEMAND PAYMENT--(a) If proposed corporate
action creating dissenters' rights under Section 79-4-13.02 is submitted to a
vote at a shareholders' meeting, a shareholder who wishes to assert dissenters'
rights (1) must deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action is
effectuated, and (2) must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirement of subsection (a)
is not entitled to payment for his shares under this article.
79-4-13.22 DISSENTERS' NOTICE--(a) If proposed corporate action creating
dissenters' rights under Section 79-4-13.02 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of Section 79-4-13.21.
(b) The dissenters' notice must be sent no later than ten (10) days
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after the corporate action was taken, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial ownership of the shares
before that date;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty (30) nor more that sixty (60) days
after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this article.
79-4-13.23 DUTY TO DEMAND PAYMENT--(a) A shareholder sent a dissenters'
notice described in Section 79-4-13.22 must demand payment, certify whether he
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenters' notice pursuant to Section 79-4-13.22(b)(3), and
deposit his certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his shares under
subsection (a) retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
79-4-13.24 SHARE RESTRICTIONS--(a) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is taken or the restrictions
released under Section 79-4-13.26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
79-4-13.25 PAYMENT--(a) Except as provided in Section 79-4-13.27, as
soon as the proposed corporate action is taken, or upon receipt of a payment
demand, the corporation shall pay each dissenter who complied with Section
79-4-13.23 the amount the corporation estimates to be the fair value of his
shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenters' right to demand payment under Section
79-4-13.28; and
(5) A copy of this article.
79-4-13.26 FAILURE TO TAKE ACTION--(a) If the corporation does not take
the proposed action within sixty (60) days after the date set for demanding
payment and depositing share certificates, the corporation shall return the
deposited certificates and release the transfer restrictions imposed on
uncertificated shares.
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(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Section 79-4-13.22 and repeat the payment demand
procedure.
79-4-13.27 AFTER-ACQUIRED SHARES--(a) A corporation may elect to
withhold payment required by Section 79-4-13.25 from a dissenter unless he was
the beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders
of the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall pay this amount
to each dissenter who agrees to accept it in full satisfaction of his demand.
The corporation shall send with its offer a statement of its estimate of the
fair value of the shares, an explanation of how the interest was calculated and
a statement of the dissenter's right to demand payment under Section
79-4-13.28.
79-4-13.28 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER--
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
his estimate (less any payment under Section 79-4-13.25), or reject the
corporation's offer under Section 79-4-13.27 and demand payment of the fair
value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under Section 79-4-13.25
or offered under Section 79-4-13.27 is less than the fair value of his shares
or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under Section 79-4-13.25
within sixty (60) days after the date set for demanding payment; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty (60) days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection
(a) within thirty (30) days after the corporation made or offered payment for
his shares.
SUBARTICLE C. JUDICIAL APPRAISAL OF SHARES
79-4-13.30 COURT ACTION--(a) If a demand for payment under Section
79-4-13.28 remains unsettled, the corporation shall commence a proceeding
within sixty (60) days after receiving the payment demand and petition the
court to determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the 60-day period, it shall
pay each dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the chancery court
of the county where a corporation's principal office (or, if none in this
state, its registered office) is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters (whether or not residents
of this state) whose demands remain unsettled parties to the proceeding as in
an action against their shares and all parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
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appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment (1) for the amount, if any, by which the court finds the fair value of
his or her shares, plus interest, exceeds the amount paid by the corporation,
or (2) for the fair value, plus accrued interest, of his after-acquired shares
for which the corporation elected to withhold payment under Section 79-4-13.27.
79-4-13.31 COURT COSTS AND COUNSEL FEES--(a) The court in an appraisal
proceeding commenced under Section 79-4-13.30 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously or not in good faith in demanding
payment under Section 79-4-13.28.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of Sections 79-4-13.20 through 79-4-13.28; or
(2) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously or not in good faith with respect to
the rights provided by this article.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
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APPENDIX C
BEFORE THE COMMISSION OF INSURANCE
STATE OF MISSISSIPPI
RE: PLAN AND AGREEMENT OF SHARE EXCHANGE, ACQUISITION OF CONTROL OF
INSURER, ADMISSION OF FOREIGN INSURANCE COMPANY, AND APPROVAL OF
MANAGEMENT SERVICES AGREEMENT, relating to American
Investment Network Inc., and its subsidiary, United Security
Life Insurance Company (a Mississippi insurance company), and
Citizens, Inc. and its subsidiary, Citizens Insurance Company
of America (a Colorado insurance company) Cause No. 96-2987
ORDER
On November 22, 1996, preacquisition notification and application were
filed with the Commissioner of Insurance of the State of Mississippi by
Citizens, Inc., a Colorado corporation and insurance holding company
("Citizens"), and its wholly-owned subsidiary, Citizens Insurance Company of
America, a Colorado insurance company ("CICA"), requesting approval of the
Commissioner of Insurance of the State of Mississippi ("Commissioner") for (i)
the acquisition of control of American Investment Network Inc., a Mississippi
corporation ("American"), and its wholly-owned subsidiary, United Security Life
Insurance Company, a Mississippi stock insurance company ("United"), (ii) a
Plan and Agreement of Share Exchange dated October 28, 1996 between American
and CICA, as amended on January 27, 1997 (collectively the "Plan of Exchange")
to reflect the contribution by Citizens of stock to CICA for the share
exchange, (iii) the issuance of a certificate of authority to CICA to transact
life, health and accident insurance in the State of Mississippi, and (iv) the
Management Services Agreements (the "Management Agreements") between Citizens,
and respectively, American and United.
Pursuant to the provisions of Section 83-6-24 and Sections 83-19-99, et.
seq., Mississippi Insurance Laws, and Sections 79-4-11.02, et. seq.,
Mississippi Business Corporation Act, and the authority set forth therein, at
9:30 a.m. on the 5th day of March, 1997, a public hearing was convened by and
held before the Commissioner of Insurance and his designated Hearings Officer,
to consider the application of Citizens to acquire control of United pursuant
to the Plan of Exchange.
Based upon the documents, evidence and testimony presented at such
hearing, and in consideration thereof, the Commissioner of Insurance makes the
following findings of fact and conclusions of law relating to such
notification, application and Plan of Exchange.
Findings of Fact
(1) Notice of the date, time and place of the hearing before the
Commissioner was published in a newspaper having general circulation in the
cities of the principal offices of the parties to the Plan of Exchange as
follows: The Clarion Ledger, a daily newspaper published in Jackson, Hinds
County, Mississippi, on February 18, 1997 and February 25, 1997; and the Austin
American-Statesman, a daily newspaper published in Austin, Travis County,
Texas, on February 18, 1997 and February 25, 1997. Written notice of the
hearing was also mailed to the shareholders of American, United and CICA at
least 10 days prior to the hearing.
(2) A Form A application statement dated November 18, 1996 was filed by
Citizens with the Commissioner of Insurance relating to the Plan of Exchange
and the proposed acquisition of control by Citizens of United. All information
required by Mississippi Code Section 83-6-24, et. seq., and Sections 83-19-99,
et. seq., and other relevant information to adequately inform the Commission
of such transactions were included within such filing.
(3) CICA has previously submitted an application for a Mississippi
certificate of authority pursuant to Mississippi Code Ann. Sections 83-21,
et.seq., in connection with the proposed merger of American Liberty Life
Insurance Company, a Louisiana domiciled insurance company and subsidiary of
Citizens, with and into CICA with CICA being the survivor.
C-1
<PAGE> 94
(4) Citizens is a publicly held Colorado corporation which owns 100% of
the outstanding capital stock of CICA, a Colorado insurance corporation. The
executive offices of Citizens and CICA are located in Austin, Texas.
(5) Citizens has issued 21,651,161 Class A common shares and 621,049
Class B common shares. The Class A common shares are registered with the
Securities and Exchange Commission, listed on the American Stock Exchange and
are publicly traded in the market. As of the date of the hearing, the Class A
shares were quoted with a market value in excess of $8.00 per share. The Class
B common shares are privately held by The Harold E. Riley Trust for the benefit
of certain members of Harold E. Riley's family. The Class A shares receive
twice the amount of cash dividends per share as do the Class B shares, and the
Class B shares elect a simple majority of Citizens' Board of Directors, and the
Class A shares elect the remainder of the Board of Directors.
(6) American has outstanding 5,021,764 Class A shares and 2,500 Class B
shares. The shares are registered with the Securities and Exchange Commission,
but he shares are not listed or traded on any exchange. The shares are not
actively traded in "over the counter" markets, and they do not currently have
an identifiable "market value."
(7) The Plan of Exchange requires CICA to exchange on (1) share of
Citizens' Class A common stock for each 7.2 American Class A and Class B common
shares outstanding. Citizens will issue and contribute a sufficient number of
its Class A shares to CICA in order to make the exchange. The Plan of Exchange
has been approved by the Boards of Directors of Citizens, CICA and American,
and is subject to the approval of American's stockholders by a vote of
two-thirds (2/3) of the outstanding shares of American. Approximately 700,000
shares of Citizens' Class A common stock will be exchanged by CICA for 100% of
American's Class A and Class B stock outstanding. As a "stock for stock"
exchange, the exchange would be a tax free transaction to the American
stockholders under the Internal Revenue Code.
(8) As of September 30, 1996, Citizens had consolidated assets of
$214,192,098, reserves and liabilities of $147,431,866, and stockholders'
equity of $66,760,232. Its 1996 earnings through September 30, 1996 were
$1,311,998. Citizens has three insurance subsidiaries: CICA, American Liberty
Life Insurance Company, a Louisiana corporation ("American Liberty"), and
Central Investors Life Insurance Company, an Illinois corporation("Central").
American Liberty is in the process of being merged into CICA.
(9) As of December 31, 1996, CICA had total assets of $144,539,817,
reserves and liabilities of $129,475,285 and total capital and surplus of
$15,064,532. CICA had a 1996 gain from operations before taxes of $4,968,824,
and a net income for 1996 of $2,895,443.
(10) CICA is licensed to transact life, health and accident insurance
in 11 states and has made application for a certificate of authority to do
business in Mississippi. In 1996, CICA received approximately $45,888,871 of
insurance premiums and annuity considerations. CICA accepts applications from
and issues policies of insurance to persons internationally, particularly in
Central and South America.
(11) United is licensed to write life, health and accident insurance.
As of December 31, 1996, it had total assets of $4,293,405, reserves and
liabilities of $1,968,309, and capital and surplus of $2,325,096. During 1996
it had a net income of $3,665. It had approximately $2,713,005 of insurance
premiums received during 1996.
(12) As of September 30, 1996, American and its subsidiaries, including
United, had consolidated total assets of $7,573,028, total liabilities of
$4,151,292, and stockholders' equity of $3,421,736. At September 30, 1996,
American and its subsidiaries, including United, had a consolidated nine
month's net loss in income of $166,447.
(13) As the outstanding shares of American do not have a discernable
"market value" similar to the American Stock Exchange trading market value of
the Citizens' Class A stock, American and CICA engaged in arms-length, bona
fide, good faith negotiations between themselves to
C-2
<PAGE> 95
determine a fair and reasonable adjusted book value for the American shares.
The parties determined and gave value to American's shares for the (i)capital
and surplus of its subsidiaries, including the asset valuation reserves and
interest maintenance reserves, (ii) life insurance in force as a multiple of
annual premium revenue, (iii) accident and health insurance in force as a
factor of annual premium revenue, (iv) market value of real estate in excess of
book value, (v) state licenses, (vi) agency force, (vii) miscellaneous values,
and less (viii) outstanding obligations in American.
(14) American and Citizens are unrelated, unaffiliated and have had no
prior business dealings or relations. There are no conflicts of interest among
the parties, no side agreements, no fee, commission, compensation or other
valuable consideration to any director, officer, agent or employee of American
or United whatsoever in any manner to aid, promote, or assist in the adoption
or approval of the Plan of Exchange, other than the same share exchange
described herein available to all American shareholders.
(15) There were other parties interested in acquiring American and
United, but the offer of Citizens was accepted by American as the highest and
best offer. As a result of their negotiations, American and CICA determined
and agreed that the exchange at 7.2 shares of American's outstanding Class A
and Class B stock for one (1) share of Citizens' Class A stock was fair, just,
equitable and reasonable to American and its shareholders and to Citizens and
its shareholders.
(16) Harold E. Riley is Chairman of the Board of Directors of Citizens
and its ultimate controlling person. He owns all of the Class B stock and 28%
of the Class A stock of Citizens. He has more than 40 years' experience in the
life insurance business, most of which in executive officer positions. Randall
H. Riley is Vice Chairman and Chief Operating Officer of Citizens, where he
has been employed since 1987. T. Roby Dollar is Vice Chairman and Chief
Actuarial Officer of Citizens, with more than 30 years' experience in life
insurance as an actuary and management executive. Rick D. Riley is Executive
Vice President of Citizens with more than 20 years' experience in the life
insurance industry with expertise in data processing systems and operations.
Mark A. Oliver is President and Chief Financial Officer of Citizens with more
than 16 years' experience in statutory accounting and financial reporting to
insurance departments and the Securities and Exchange Commission.
The Boards of Directors of Citizens and CICA are composed of persons
with extensive experience in business, professions, insurance backgrounds and
educational preparation.
(17) The directors of American will be replaced by the directors of
CICA. The officers of United will remain with the company, but will be joined
by Harold E. Riley as Chairman and the officers of CICA.
(18) The books and records of United will be maintained in its offices
in Jackson, Mississippi. United will enter into a Management Services
Agreement with Citizens, which will provide data processing systems, management
expertise and professional staff to United, on a "cost plus 12.5%" basis. A
copy of this Agreement has been filed with the Commissioner pursuant to
Mississippi Code Sections 83-6-21, et. seq.
(19) Citizens has no plans to liquidate United, sell its assets, merge
or consolidate it with any other entity, make any material changes in its
business, corporate structure or management. Citizens will comply with all
valid contracts and obligations of United.
(20) The acquisition of control and the Plan of Exchange will not
adversely affect United's (i) financial stability, (ii) management, (iii)
general capacity as an insurance company, (iv) intention to continue the safe
and prudent transaction of insurance business, (v) contractual obligations to
its policyholders, or (iv) ability or tendency to render service to its
policyholders in the future.
C-3
<PAGE> 96
(21) There was no evidence that:
(i) After the change of control, United would not be able to satisfy
the requirements for the issuance of a license to write the lines of insurance
for which it is presently licensed;
(ii) The effect of the acquisition of control would be to
substantially lessen competition in insurance in the State of Mississippi or
tend to create a monopoly therein;
(iii) The financial condition of Citizens or CICA is such as might
jeopardize the financial stability of United, or prejudice the interest of its
policyholders;
(iv) There are any plans or proposals which Citizens or CICA has to
liquidate United, sell its assets or consolidate or merge it with any person,
or to make any other material change in its business or corporate structure or
management, or, that are unfair and unreasonable to United's policyholders or
not in the public interest;
(v) The competence, experience and integrity of those persons who
would control the operation of United are such that it would not be in the
interest of policyholders of United or of the public to permit the Plan of
Exchange or other acquisition of control; or
(vi) The acquisition is likely to be hazardous or prejudicial to the
insurance buying public.
In fact, the evidence and testimony were to the contrary on each of such
issues.
(22) A number of stockholders of American appeared at the public
hearing, and three persons presented testimony relating to the present
management of American, but were generally supportive of the Plan of Exchange
and the acquisition of control of United by Citizens and CICA. Although the
Commissioner has express statutory authority to determine the matters described
in this Order, resolution of stockholder complaints with management of American
is more properly an exercise of common law rights in the courts. Sanders v.
Neely, 19 So.2d 434 (Miss.Sup.Ct. 1944).
Conclusions of Law
Wherefore, based upon such findings of fact, and all premises being
considered, the Commissioner of Insurance of the State of Mississippi makes the
following conclusions of law:
(1) The terms and conditions of the Plan and Agreement of Share
Exchange between Citizens, CICA, American and United are consistent with law,
Mississippi Code Sections 83-19-99, et. seq., and are fair and reasonable to
the shareholders, policyholders and the general public;
(2) The acquisition of control of United by Citizens and CICA pursuant
to the Plan of Exchange is in compliance with law, Mississippi Code Section
83-6-24, et. seq.
(3) CICA has complied with Mississippi Code Sections 83-21, et. seq.,
and qualifies for the issuance of a certificate of authority to transact life,
health and accident insurance in the State of Mississippi; and
(4) The terms of and charges for the Management Services Agreement are
fair and reasonable to United and in compliance with Mississippi Code Section
83-6-21.
Order
Wherefore, after consideration of all documents, testimony, evidence,
findings of fact and conclusions of law, it is the Order of the Commission of
Insurance of the State of Mississippi that (i) the application by Citizens,
Inc. and its subsidiary, Citizens Insurance Company of America, to acquire
control of United Security Life Insurance Company, Jackson, Mississippi,(ii)
the Plan and Agreement of
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<PAGE> 97
Share Exchange between Citizens Insurance Company of America and American
Investment Network, Inc., Jackson, Mississippi, (iii) the issuance of a
certificate of authority to Citizens Insurance Company of America to transact
life, health and accident insurance in the State of Mississippi, and (iv) the
Management Services Agreement between Citizens, Inc. and United Security Life
Insurance Company, are each hereby APPROVED, this 1st day of April, 1997.
/S/ George Dale
--------------------------------------------------
George Dale
Commissioner of Insurance
State of Mississippi
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<PAGE> 98
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
CITIZENS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent auditor's report F-2
Consolidated balance sheets at
December 31, 1996 and 1995 F-3
Consolidated statements of operations
- years ended December 31, 1996, 1995 and 1994 F-5
Consolidated statements of stockholders' equity
- years ended December 31, 1996, 1995 and 1994 F-7
Consolidated statements of cash flows
- years ended December 31, 1996, 1995 and 1994 F-8
Notes to consolidated financial statements F-10
Schedules at December 31, 1996 and 1995:
Schedule II - Condensed Financial
Information of Registrant F-23
Schedules for each of the years in the three-year
period ended December 31, 1996:
Schedule IV - Reinsurance F-26
</TABLE>
F-1
<PAGE> 99
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, 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. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
KPMG PEAT MARWICK LLP
Dallas, Texas
February 21, 1997
F-2
<PAGE> 100
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ------------ ------------
<S> <C> <C>
Investments (note 2):
Fixed maturities held to maturity,
at amortized cost (market $5,217,000
in 1996 and $5,700,000 in 1995) $ 5,627,256 $ 5,636,785
Fixed maturities available for sale at market,
(cost $110,759,634 in 1996 and
$97,515,359 in 1995) 109,723,050 99,464,551
Equity securities, at market (cost $89,580
in 1996 and $23,329 in 1995) 50,155 --
Mortgage loans on real estate (net of reserve
of $50,000 in 1996 and $145,080 in 1995) 1,672,522 1,910,608
Policy loans 19,819,125 18,911,275
Guaranteed student loans (net of reserve of
$10,000 in 1996 and 1995) 298,683 333,387
Other long-term investments 920,345 679,436
Short-term investments 200,000 3,088,697
------------ ------------
Total investments 138,311,136 130,024,739
Cash 6,085,383 4,160,156
Other receivables 594,088 1,219,107
Accrued investment income 1,682,084 2,022,809
Reinsurance recoverable 1,773,541 1,857,900
Deferred policy acquisition costs 36,933,753 36,624,448
Other intangible assets 1,633,625 1,820,325
Federal income tax receivable 357,608 --
Cost of insurance acquired (note 3) 7,219,594 7,522,827
Excess of cost over net assets acquired 13,677,800 14,045,848
Property, plant and equipment 5,442,578 5,546,075
Other assets 743,636 642,013
------------ ------------
$214,454,826 $205,486,247
============ ============
</TABLE>
F-3
<PAGE> 101
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ ------------- -------------
<S> <C> <C>
Liabilities:
Future policy benefit reserves (notes 4 and 5):
Life insurance $ 123,812,996 $ 114,727,748
Annuities 3,936,178 4,261,847
Accident and health 4,651,905 4,337,782
Dividend accumulations 3,961,603 3,602,706
Premium deposits 1,803,358 1,553,414
Policy claims payable (notes 5 and 10) 2,966,818 3,197,291
Other policyholders' funds 1,958,992 1,945,332
------------- -------------
Total policy liabilities 143,091,850 133,626,120
Other liabilities 2,052,001 2,001,320
Commissions payable 928,288 692,578
Notes payable (note 6) 489,166 772,834
Deferred Federal income tax (note 12) 842,250 2,372,742
Federal income tax payable -- 1,025,106
Minority interest -- 14,954
Amounts held on deposit 168,255 267,603
------------- -------------
Total liabilities 147,571,810 140,773,257
------------- -------------
Stockholders' equity (notes 7, 8, and 9):
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 21,761,894 shares issued
in 1996 and 21,415,872 shares issued
in 1995, including shares in treasury of
2,077,947 in 1996
45,941,552 44,007,339
Class B, no par value, 1,000,000 shares
authorized, 621,049 shares issued and
outstanding in 1996 and 1995 283,262 283,262
Unrealized investment gain (loss) (note 2) (710,166) 1,267,747
Retained earnings 23,430,634 21,216,908
------------- -------------
68,945,282 66,775,256
Treasury stock, at cost (2,062,266) (2,062,266)
------------- -------------
Total stockholders' equity 66,883,016 64,712,990
------------- -------------
Commitments and contingencies (notes 5, 8, and 10) $ 214,454,826 $ 205,486,247
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 102
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums (notes 5 and 11):
Life insurance $ 49,873,673 $ 45,426,887 $ 43,526,111
Accident and health 4,040,688 698,206 259,250
Annuity and universal life
considerations 389,084 119,335 75,564
Net investment income (note 2) 9,185,506 7,026,909 5,295,784
Realized gains (losses) on
investments (note 2) 226,212 (109,096) (9,356)
Other income 136,566 75,062 94,364
Interest expense (29,569) (107,131) (29,719)
------------ ------------ ------------
Total revenues 63,822,160 53,130,172 49,211,998
------------ ------------ ------------
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 8,198,243 11,033,763 11,910,751
Policyholders' dividends 2,363,201 2,422,168 2,381,581
Claims and surrenders (note 5) 25,919,054 19,282,954 16,635,259
Annuity expenses 684,440 652,976 373,575
------------ ------------ ------------
Total insurance benefits
paid or provided 37,164,938 33,391,861 31,301,166
------------ ------------ ------------
Commissions 12,447,664 10,273,173 12,382,372
Other underwriting, acquisition
and insurance expenses 9,500,973 7,102,401 5,079,538
Capitalization of deferred policy
acquisition costs (10,531,222) (10,579,704) (13,128,049)
Amortization of deferred policy
acquisition costs 10,221,917 8,511,876 7,203,593
Amortization of cost of insurance
acquired and excess of cost
over net assets acquired 1,398,859 678,997 606,487
------------ ------------ ------------
Total benefits and expenses 60,203,129 49,378,604 43,445,107
------------ ------------ ------------
</TABLE>
(Continued)
F-5
<PAGE> 103
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 1996 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income before Federal income
taxes $3,619,031 $3,751,568 $5,766,891
Federal income tax expense 1,405,305 1,001,356 1,592,333
---------- ---------- ----------
(note 12)
Net income $2,213,726 $2,750,212 $4,174,558
---------- ---------- ----------
Net income per share
of common stock (note 8) $ .11 $ .16 $ .25
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 104
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED TOTAL
----------------------- INVESTMENT RETAINED TREASURY STOCKHOLDERS'
CLASS A CLASS B GAINS (LOSSES) EARNINGS STOCK EQUITY
------------ -------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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, 1994
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
============ ======== =========== =========== =========== ============
Net income -- -- -- 2,750,212 -- 2,750,212
Unrealized investment gains, net -- -- 4,238,344 -- -- 4,238,344
Acquisition of ALFC (note 9) 22,246,163 -- -- -- -- 22,246,163
Sale of stock 638,980 -- -- -- -- 638,980
Stock issuance costs (257,495) -- -- -- -- (257,495)
Retire shares held in treasury
stock (114,782) -- -- -- 114,782 --
Sale of treasury stock 37,170 -- -- -- 4,243 41,413
------------ -------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1995 $ 44,007,339 $283,262 $ 1,267,747 $21,216,908 $(2,062,266) $ 64,712,990
============ ======== =========== =========== =========== ============
Net income -- -- -- 2,213,726 -- 2,213,726
Unrealized investment gains, net -- -- (1,977,913) -- -- (1,977,913)
Acquisition of IIH(note 9) 1,542,501 -- -- -- -- 1,542,501
Sale of stock 445,462 -- -- -- -- 445,462
Stock issuance costs (157,500) -- -- -- -- (157,500)
Exercise of options (note 8) 103,750 -- -- -- -- 103,750
------------ -------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 $ 45,941,552 $283,262 $ ( 710,166) $23,430,634 $(2,062,266) $ 66,883,016
============ ======== =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 105
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,213,726 $ 2,750,212 $ 4,174,558
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized gains (losses) on sale of
investments and other assets 226,212 (109,096) 9,356
Accrued investment income 372,781 (131,835) (511,086)
Net deferred policy acquisition costs (309,305) (2,086,984) (5,924,456)
Amortization of cost of insurance
acquired and excess cost over
net assets acquired 1,398,859 678,997 606,487
Other receivables 626,300 602,662 (1,460,131)
Future policy benefit reserves 8,357,859 9,929,505 11,910,751
Other policy liabilities 34,343 1,527,695 (1,219,297)
Deferred Federal income tax (407,226) (981,068) (383,195)
Federal income tax (1,368,629) (104,424) (982,197)
Commissions payable and other liab 226,675 (224,308) (154,510)
Amounts held on deposit (99,348) (42,829) (124,087)
Other, net 672,085 613,198 2,110,818
------------ ------------ ------------
Net cash provided by
operating activities 11,944,332 12,421,725 8,053,011
------------ ------------ ------------
Cash flows from investing activities:
Maturity of fixed maturities held to maturity -- 2,600,000 51,625
Sale of fixed maturities available for sale 16,403,929 28,419,387 13,152,225
Maturity of fixed maturities available for sale 5,811,179 -- 963,151
Purchase of fixed maturities available for sale (33,759,945) (38,614,148) (40,486,808)
Sale of equity securities 66,251 1,892 174,761
Principal payments on mortgage loans 391,804 652,819 935,276
Mortgage loans funded (203,718) (54,875) (340,474)
Guaranteed student loans funded (100,902) (272,635) (335,440)
Guaranteed student loans sold 135,606 179,491 475,796
Sale of other long-term investments and property plant
and equipment (303,567) 474,257 331,276
Cash and short-term investments
provided by merger 355,654 1,178,600 --
Increase in policy loans (net) (801,105) (3,491,760) (1,214,520)
Purchase of other long-term investments and property,
plant and equipment (691,632) (947,733) (1,237,652)
------------ ------------ ------------
Net cash used by investing activities (12,696,446) (9,874,705) (27,530,784)
------------ ------------ ------------
</TABLE>
F-8
<PAGE> 106
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Additional borrowings on notes payable -- 60,461 --
Payments on notes payable (603,068) -- (388,359)
Sale of stock 391,712 381,485 5,371,959
------------ ------------ ------------
Net cash provided (used) by
financing activities (211,356) 441,946 4,983,600
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (963,470) 2,988,966 (14,494,173)
------------ ------------ ------------
Cash and cash equivalents at
beginning of year 7,248,853 4,259,887 18,754,060
------------ ------------ ------------
Cash and cash equivalents
at end of year 6,285,383 7,248,853 4,259,887
============ ============ ============
</TABLE>
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 38,826 $ 53,030 $ 61,304
============ ============ ============
Income taxes $ 3,195,245 $ 2,000,000 $ 2,957,724
============ ============ ============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities (see
also Note 9):
The Company issued Class A stock to purchase all of the capital stock of
IIH in 1996 and ALFC in 1995.
<TABLE>
<S> <C> <C> <C>
$ 1,542,501 $ 22,246,163 $ --
============ ============ ============
</TABLE>
In conjunction with the acquisitions, liabilities were assumed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Fair value of tangible assets acquired $ 2,381,252 $ 18,744,097 $ --
Fair value of intangible assets acquired 614,665 18,574,952 --
------------ ------------ ------------
Net assets acquired 2,995,917 37,319,049 --
Capital stock issued (1,542,501) (22,246,163) --
------------ ------------ ------------
Liabilities assumed $ 1,453,416 $ 15,072,886 $ --
============ ============ ============
Issuance of 4,248 treasury shares
of stock $ -- $ 41,413 $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 107
CITIZENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
The consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state
of Colorado on November 8, 1977 and its wholly-owned subsidiaries,
Citizens Insurance Company of America (CICA), Computing
Technology, Inc. (CTI), formerly Continental Leasing Company,
Insurance Investors, Inc. (III), American Liberty Financial Corp.
(ALFC), and Insurance Investors and Holding Company (IIH). ALFC
and its subsidiaries, American Liberty Life Insurance Company
(ALLIC), First American Investment Corp. (FAIC), and American
Liberty Exploration Company (ALEC) were acquired by Citizens in
September 1995. IIH, which was acquired in March 1996, owns
Central Investors Life Insurance Company of Illinois (CILIC).
Citizens and its subsidiaries are collectively referred to as "the
Company." All significant intercompany accounts and transactions
have been eliminated.
Citizens, Inc. provides life insurance policies through three of
its subsidiaries - CICA, ALLIC, and CILIC. CICA sells ordinary
whole-life policies internationally, with approximately 94% of
premium income derived outside the United States. ALLIC issues
life policies primarily as burial insurance and pre-need policies.
Additionally, ALLIC offers accident and health specified disease,
hospital indemnity, and accidental death policies, as well as
annuities. CILIC does not actively market insurance policies, but
does administer an in force block of life insurance.
(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
carried at amortized cost. Fixed maturities which may be sold
prior to maturity to support the Company's investment
strategies are considered held as available for sale and
carried at fair value as of the balance sheet date.
2. Equity securities include non-redeemable preferred stock and
are reported at fair value.
3. Mortgage loans on real estate, policy loans, and guaranteed
student loans are reported at unpaid principal balances less
an allowance for uncollectible amounts, 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.
5. Short-term investments consist of treasury bills and
commercial paper with maturities of ninety days or less, or
commercial paper, 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 1996 and 1995, 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.
F-10
<PAGE> 108
The Company has assets with a fair value of $8,382,149 at December
31, 1996 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 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 3.0% to 7% (primarily at 4.00% - 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-11
<PAGE> 109
(f) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS
The excess of cost over the fair value of net assets acquired in
the merger with Equities International Life Insurance Co., the
1992 acquisition of the net assets of First Centennial Corporation
(FCC), the 1995 acquisition of ALFC and the 1996 acquisition of
IIH are amortized on a straight-line basis ranging from 5 to 20
years.
Other intangible assets, primarily the value of state licenses,
are amortized on a straight-line basis over 10 years.
(g) PARTICIPATING POLICIES
At December 31, 1996 and 1995, participating business approximated
86% and 91%, respectively, 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, 1996, 1995 and 1994
were 19,615,420, 17,668,047, and 16,882,164, respectively.
(i) INCOME TAXES
At December 31, 1995 the Company filed one consolidated return
which included Citizens, Inc., CICA, and all direct non-life
subsidiaries, excluding FAIC. Two additional returns were filed
at December 31, 1995 which included FAIC and its subsidiaries and
ALLIC.
For the year ended December 31, 1996 the Company will file four
separate tax returns as follows: 1) Citizens, Inc., CICA, and all
direct non-life subsidiaries, excluding FAIC, 2) ALLIC, 3) CILIC,
and 4) FAIC and its subsidiaries.
Deferred tax asset and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) ACCOUNTING PRONOUNCEMENTS
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 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.
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
F-12
<PAGE> 110
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.
(k) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed ninety days 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 1995 and 1994
amounts to conform with the 1996 presentation.
(m) DEPRECIATION
Depreciation is calculated on a straight line basis using
estimated useful lives ranging from 3 to 10 years. Leasehold
improvements are depreciated over the estimated life of 30 years.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(2) INVESTMENTS
A decline in the fair value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of
a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings
and are derived using the specific identification method for
determining the cost of securities sold.
The amortized cost and estimated fair values of investments in
debt securities as of December 31, 1996 and 1995 respectively, are
as follows:
F-13
<PAGE> 111
<TABLE>
<CAPTION>
1996
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturities held to maturity:
US Treasury securities $ 5,627,256 $ -- $ 410,256 $ 5,217,000
------------ ----------- ----------- ------------
Total 5,627,256 -- 410,256 5,217,000
============ =========== =========== ============
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies 67,828,066 639,107 (1,148,240) 67,318,933
Public Utilities 4,691,540 19,497 (237,212) 4,473,825
Debt securities issued by States
of the United States and political
subdivisions of the States 207,968 4,894 (8,252) 204,610
Debt securities issued by
foreign governments 291,219 11,807 (466) 302,560
Corporate securities 9,061,298 176,078 (352,721) 8,884,655
Mortgage-backed securities 28,679,543 233,705 (374,781) 28,538,467
------------ ----------- ----------- ------------
Total $110,759,634 $ 1,085,088 $(2,121,672) $109,723,050
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturities held to maturity:
US Treasury securities $ 5,636,785 $ 63,215 $ -- $ 5,700,000
----------- ---------- ----------- ------------
Total 5,636,785 63,215 $ -- 5,700,000
=========== ========== =========== ============
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies 55,793,997 1,151,978 (171,686) 56,774,289
Public Utilities 5,146,972 111,606 (66,978) 5,191,600
Debt securities issued by State
of the United States and
political subdivisions of the
States 290,418 17,582 -- 308,000
Debt securities issued by
foreign governments 400,398 30,091 (2,489) 428,000
Corporate securities 7,522,769 368,746 (40,375) 7,851,140
Mortgage-backed securities 28,360,805 550,760 (43) 28,911,522
----------- ---------- ----------- ------------
Total $97,515,359 $2,230,763 $ (281,571) $ 99,464,551
=========== ========== =========== ============
</TABLE>
Concurrent with the adoption of the implementation guidance related to
Statement 115, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities" issued by the
Financial Accounting Standards Board, the Company reclassified certain
investments from the held to maturity category to available for sale. The
amortized cost of securities transferred was $12,778,241 and the unrealized
gain on the date of transfer amounted to $145,937, net of taxes.
The amortized cost and fair value of fixed maturities at December 31, 1996,
by contractual maturity are shown below. Expected maturities will differ
F-14
<PAGE> 112
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
FIXED MATURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
---------- ------------
<S> <C> <C>
Due after ten years $5,627,256 $ 5,217,000
---------- ------------
$5,627,256 $ 5,217,000
========== ============
</TABLE>
FIXED MATURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------ ------------
<S> <C> <C>
Due in one year or less $ 5,892,729 $ 5,874,870
Due after one year through five years 26,636,077 26,892,633
Due after five years through ten years 27,249,273 26,718,714
Due after ten years 22,302,012 21,698,366
------------ ------------
82,080,091 81,184,583
Mortgage-backed securities 28,679,543 28,538,467
------------ ------------
Totals $110,759,634 $109,723,050
============ ============
</TABLE>
The Company had no investments in any one entity which exceeded 10% of
stockholders' equity at December 31, 1996 other than investments guaranteed
by the U.S. Government.
The Company's investment in mortgage loans is concentrated 34% in Colorado,
50% in Texas and 16% in other states as of December 31, 1996.
At December 31, 1996 and 1995, unrealized depreciation of equity securities
of $39,425 and $23,329, respectively, consisted of gross unrealized losses.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Investment income on:
Fixed maturities $ 6,999,425 $5,208,785 $4,045,481
Equity securities -- 15,823 --
Mortgage loans on real estate 178,330 195,321 242,331
Policy loans 1,442,423 1,478,333 1,001,939
Short-term investments 526,910 106,872 123,119
Other 910,223 900,341 795,352
----------- ---------- ----------
10,057,311 7,905,475 6,208,222
Investment expenses 871,805 878,566 912,438
----------- ---------- ----------
Net investment income $ 9,185,506 $7,026,909 $5,295,784
=========== ========== ==========
</TABLE>
Equity securities of $23,328 and other long-term assets of $231,156 held by the
Company as of December 31, 1996, did not produce income during the preceding 12
months.
Proceeds from available for sale securities in 1996, 1995 and 1994 were
$22,215,108, $29,132,810 and $13,152,225, respectively. Gross realized gains
and losses on such sales were $175,125 and $199,890, respectively, for the year
ended December 31, 1996, and $346,370 and $426,841, respectively, for the year
ended December 31, 1995, and $645,912 and $420,119, respectively, for the year
F-15
<PAGE> 113
ended December 31, 1994. Realized gains (losses) on investments are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities $ (24,765) $ (80,471) $ 281,052
Equity securities -- -- (67,309)
Other 250,977 (28,625) (223,099)
--------- --------- ---------
Net realized gains (losses) on
investments 226,212 (109,096) (9,356)
========= ========= =========
</TABLE>
(3) COST OF INSURANCE ACQUIRED
Cost of insurance acquired is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period $ 7,522,827 $ 2,271,866 $ 2,692,389
Increase related to acquisitions 121,000 5,562,574 --
Interest 564,212 171,541 198,121
Amortization (988,445) (483,154) (618,644)
----------- ----------- -----------
Balance at end of period $ 7,219,594 $ 7,522,827 $ 2,271,866
=========== =========== ===========
</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 6.5% to 8.5%.
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.
<TABLE>
<S> <C>
1997 1,055,521
1998 1,055,718
1999 943,009
2000 889,187
2001 853,990
Thereafter 2,731,116
</TABLE>
(4) FUTURE POLICY BENEFIT RESERVES
In applying purchase accounting to the future policy benefit reserves
acquired through mergers, the Company revalued policy benefit reserves to
reflect the Company's reserve assumptions with regard to interest rates,
lapse rates and surrenders. The percentage of future policy benefits
calculated under these assumptions at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pre-American Liberty acquisitions 16.5% 20.4%
American Liberty 9.0 12.7
Central 1.0 --
</TABLE>
Various assumptions used to determine the future policy benefit reserves
include the following: a) valuation interest rates from 4 - 9%, b) the
mortality assumptions are from the 1955-60, 1965-70, and 1975-80 Select and
Ultimate mortality tables, and c) withdrawals are based primarily on
actual historical termination rates.
F-16
<PAGE> 114
(5) REINSURANCE
CICA cedes all risks to other companies generally in excess of $75,000 per
insured and 100% of accidental death benefits through yearly renewable term
insurance or coinsurance contracts. ALLIC and CILIC cede life risks in
excess of approximately $35,000 per insured to other companies through
yearly renewable term insurance or coinsurance contracts. In addition,
ALLIC reinsures all accidental death policies through a coinsurance
arrangement whereby 90% of the benefit risk is assumed by the reinsurer.
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, 1996 and 1995, life insurance in force aggregating
approximately $304,380,000 and $285,001,000, respectively, was assumed and
$296,378,000 and $290,677,000, respectively, was ceded to other insurance
companies out of a total in force of approximately $2,231,017,000 and
$2,151,955,000, respectively. Premiums assumed were approximately
$310,000, $306,000, and $541,000 in the years ended December 31, 1996, 1995
and 1994, respectively. Premiums ceded were approximately $2,583,000,
$2,241,000, and $2,310,000 in the years ended December 31, 1996, 1995 and
1994, respectively. Claims and surrenders assumed were approximately
$314,000, $286,000 and $530,000 and claims and surrenders ceded were
approximately $264,000, $377,000 and $928,000 in the years ended December
31, 1996, 1995 and 1994, respectively.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account
for the underlying policies.
(6) NOTES PAYABLE
Notes payable as of December 31, 1996 and 1995 consist of:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note A; 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 $466,666 $533,334
Note B; payable to bank, prime (8.25% at December 31,
1996) dated May 24, 1995, payable in monthly installments
of $3,000 plus interest beginning June 30, 1995 22,500 64,500
Note C; payable to individual, 6%, dated April 27, 1995,
with principal and interest payable at maturity, April
26, 1996 -- 175,000
-------- --------
$489,166 $772,834
======== ========
</TABLE>
Note A is secured by two life insurance policies and proceeds from the
surplus debenture between CICA and the Company.
Note B is secured by computer equipment.
(7) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of Citizens are equal in all respects, except (a)
the Class B common stock elects a simple majority of the Board of Directors
of Citizens and the Class A common stock elects the remaining directors;
and (b) each Class A share receives twice the cash dividends paid on a per
share basis to the Class B common stock.
Generally, the net assets of the insurance subsidiaries available for
transfer to the Company are limited to the greater of the subsidiary net
gain from operations during the preceding year or 10% of the subsidiary net
F-17
<PAGE> 115
statutory surplus as of the end of the preceding year as determined in
accordance with accounting practices prescribed or permitted by insurance
regulatory authorities. Payments of dividends in excess of such amounts
would generally require approval by the regulatory authorities. Based upon
statutory net gain from operation and surplus of the individual insurance
companies as of and for the year ended December 31, 1996, approximately
$1,640,000 of dividends could be paid to the Company without prior
regulatory approval.
CICA, ALLIC, and CILIC have calculated their risk based capital (RBC) in
accordance with the National Association of Insurance Commissioners' Model
Rule and the RBC rules as adopted by their state of domicile, Colorado,
Louisiana, and Illinois respectively. The RBC as calculated exceeded
levels requiring company or regulatory action.
(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
36 months during 1993. Transfer of this option is limited by the
agreement. During 1996, 41,500 shares were issued in conjunction with the
exercise of this option.
(9) ACQUISITION, MERGER AND PROPOSED ACQUISITION
The IIH agreement closed on March 12, 1996 and provided that Investors'
shareholders would receive one share of Citizens' Class A Common Stock for
each eight shares of Investors Common Stock owned. Additionally, Citizens
acquired all shares of Central Investors Life Insurance Company (a 94%
owned subsidiary of Investors) not already owned by Investors, based upon
an exchange ratio of one share of Citizens' Class A common stock for each
four shares of Central Investors owned. The acquisition of these two
companies involved the issuance of approximately 171,000 of Citizens' Class
A shares which was accounted for as a purchase.
On October 28, 1996, CICA 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 provides that following the acquisition
by CICA, American Investment shareholders will receive 1 share of Citizens,
Inc. Class A Common Stock for each 7.2 shares of American Investment Common
Stock owned. Registrant expects to issue approximately 700,000 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 Company's system. The agreement is subject to
approval by American Investment's shareholders and regulatory authorities.
The Mississippi Department of Insurance held a public hearing on March 6,
1997 to consider the matter.
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 ALFC agreement provided that following the acquisition by Citizens,
ALFC shareholders would receive 1.10 shares of Citizens' Class A ALFC for
each share of ALFC Common Stock owned and 2.926 shares of Citizens' Class A
Common Stock for each one share of AFLC Preferred Stock owned. Citizens
issued approximately 2.3 million Class A shares 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
F-18
<PAGE> 116
the Citizens' system. The transaction was consummated on September 14,
1995.
(10) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. Contingent liabilities that might arise from litigation are not
considered material in relation to the financial position of the Company.
Reserves for claims payable are based on the expected claim amount to be
paid after a case by case review of the facts and circumstances relating
to each claim. A contingency exists with regard to these reserves until
such time as the claims are adjudicated and paid.
(11) INTERNATIONAL SALES
A significant portion of the Company's business is derived through sales
in Latin America. Approximately 74%, 64% and 77% of premiums recorded in
the 1996, 1995, and 1994 consolidated statements of operations,
respectively, represent policies sold to residents of Central and South
America. Sales in Argentina and Columbia represented approximately 38% and
18% of reported premiums in 1996, 40% and 19% in 1995, and 49% and 23% in
1994, 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.
(12) INCOME TAXES
A reconciliation of Federal income tax expense computed by applying the
Federal income tax rate of 34% to income before Federal income tax expense
for the years ended December 31, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Computed normal tax expense $ 1,230,470 $ 1,275,533 $ 1,960,743
Small life insurance company deduction (472,541) (423,084) (437,489)
Change in valuation allowance (10,097) (62,355) --
Small life deduction rate change 218,438 -- --
Amortization of excess of costs over
net assets acquired 331,373 109,041 63,228
Other 107,662 102,221 5,851
----------- ----------- -----------
Federal income tax expense $ 1,405,305 $ 1,001,356 $ 1,592,333
=========== =========== ===========
</TABLE>
Income tax expense for the years ended December 31, 1996, 1995 and 1994
consists of:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 1,812,531 $ 1,982,424 $ 1,975,528
Deferred (407,226) (981,068) (383,195)
----------- ----------- -----------
$ 1,405,305 $ 1,001,356 $ 1,592,333
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996
and 1995 are presented below.
F-19
<PAGE> 117
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Future policy benefit reserves $ 11,027,119 $ 10,804,429
Net operating loss carryforwards 762,809 614,071
Investments, available for sale 365,843 --
Other 836,098 1,007,636
------------ ------------
Total gross deferred tax assets 12,991,869 12,426,136
Less valuation allowance 545,860 555,957
------------ ------------
Net deferred tax assets 12,446,009 11,870,179
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 9,257,148 9,315,657
Cost of insurance acquired 2,454,662 2,557,761
Investments available for sale -- 757,423
Other 1,576,449 1,612,080
------------ ------------
Total gross deferred tax liabilities 13,288,259 14,242,921
------------ ------------
Net deferred tax liability $ (842,250) $ (2,372,742)
============ ============
</TABLE>
The Company has established a valuation allowance for net operating losses of
ALFC and IIH which may not be used prior to their expiration. The Company and
its subsidiaries have net operating losses at December 31, 1996 available to
offset future taxable income of approximately $2,243,557 for Federal income tax
and $227,000 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.
At December 31, 1996, the Company had accumulated approximately $3,291,143 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, 1996 become taxable, the
tax computed at present rates would be approximately $1,119,000.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are made at a specific point in time, based on
relevant market prices and information about the financial instrument. The
estimated fair values of financial instruments presented below are not
necessarily indicative of the amounts the Company might realize in actual
market transactions. The carrying amount and fair value for the financial
assets and liabilities on the consolidated balance sheets at each year-end
were:
F-20
<PAGE> 118
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities $115,350,306 114,940,050 $105,101,336 105,164,551
Equity securities 50,155 50,155 -- --
Cash and
short-term 6,285,383 6,285,383 7,248,853 7,248,853
investments
Mortgage Loans 1,672,522 1,672,522 1,910,608 1,910,608
Student Loans 298,683 298,683 333,387 333,387
Financial Liabilities:
Note Payable 489,166 489,166 772,834 772,834
</TABLE>
Fair values for fixed income securities and equity securities are based on
quoted market prices. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
assumptions, including the discount rate and estimates of future cash
flows.
Mortgage loans are secured principally by residential properties. Weighted
average interest rate for these loans as of December 31, 1996, was
approximately 9.6% with maturities ranging from one to fifteen years.
Management believes that reported amounts approximate fair value.
Student loans are guaranteed by the government. Weighted average interest
rate for these loans as of December 31, 1996, was approximately 7.9%.
Management believes that the reported amounts approximate fair value as
these loans are sold as soon as possible.
The carrying value of the note payable approximates fair value as the
interest rate charged on the note payable is indexed with the prime rate.
Policy loans have a weighted average interest rate of 7.6% as of December
31, 1996 and 1995 and have no specified maturity dates. The aggregate
market value of policy loans approximates the carrying value reflected on
the consolidated balance sheet. These loans typically carry an interest
rate that is tied to the crediting rate applied to the related policy and
contract reserves. Policy loans are an integral part of the life insurance
policies which the Company has in force and cannot be valued separately.
For cash, and short-term investments, accrued investment income, amounts
recoverable from reinsurers, other assets, federal income tax payable and
receivable, dividend accumulations, commissions payable, amounts held on
deposit, and other liabilities, the carrying amounts approximate fair
value because of the short maturity of such financial instruments.
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter.
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 17,666,077 $ 16,976,294 $ 15,484,789 $ 13,695,000
Expenses 16,221,781 16,093,457 14,936,524 12,951,367
Other (542,568) (237,302) (366,799) (258,636)
Net income 901,728 645,535 181,466 484,997
Net income per share .04 .03 .01 .03
</TABLE>
F-21
<PAGE> 119
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 16,115,722 $ 13,420,798 $ 12,872,679 $ 10,862,138
Expenses 15,659,326 11,727,114 11,488,128 10,497,876
Other (61,739) (31,757) (19,262) (28,407)
Net income 558,290 901,266 1,017,773 272,883
Net income per share .03 .05 .06 .02
</TABLE>
<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 0.04 0.09 0.06 0.06
</TABLE>
F-22
<PAGE> 120
SCHEDULE II
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Assets
Investment in subsidiaries 64,241,647 63,481,741
Accrued investment income 20,089 24,346
Real estate 356,339 287,979
Cash 1,318,221 884,241
Notes receivable (1) 521,686 673,953
Other assets 1,073,825 680,502
------------ ------------
$ 67,531,807 $ 66,032,762
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 466,667 $ 533,333
Accrued expense and other 182,124 786,439
------------ ------------
$ 648,791 $ 1,319,772
Stockholders' equity:
Common stock:
Class A $ 45,941,552 $ 44,007,339
Class B 283,262 283,262
Retained earnings 23,430,634 21,216,908
Unrealized investment gain (loss) of securities held
by subsidiaries, net (710,166) 1,267,747
Treasury stock (2,062,266) (2,062,266)
------------ ------------
66,883,016 64,712,990
------------ ------------
$ 67,531,807 $ 66,032,762
============ ============
</TABLE>
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
F-23
<PAGE> 121
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Management service fees (1) $10,428,468 $ 8,068,030 $ 6,749,976
Investment income (1) 83,957 118,103 131,933
Other 2,357 11,551 7,691
Realized (gain) loss 151,334 (1,573) 147,691
----------- ----------- -----------
10,666,116 8,196,111 7,037,291
----------- ----------- -----------
Expenses:
General 9,374,706 7,710,834 $ 6,189,677
Interest 34,853 42,113 20,583
Taxes 447,450 327,815 263,917
----------- ----------- -----------
$ 9,857,009 $ 8,080,762 $ 6,474,177
----------- ----------- -----------
Income (loss) before equity in income of
unconsolidated subsidiaries 809,107 115,349 563,114
Equity in income of unconsolidated
subsidiaries 1,404,619 2,634,863 3,611,444
----------- ----------- -----------
Net income $ 2,213,726 $ 2,750,212 $ 4,174,558
=========== =========== ===========
</TABLE>
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
F-24
<PAGE> 122
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,213,726 $ 2,750,212 $ 4,174,558
Adjustments to reconcile net loss to net cash
used by operating activities:
Realized (gains) loss on sales of investments (151,334) -- 313,796
Depreciation -- -- 36,214
Equity in net income of unconsolidated subsidiaries
(795,318) (3,871,812) (3,784,819)
Accrued expenses and other liabilities (604,315) 514,447 (236,873)
Accrued investment income 4,257 2,243 1,900
Other assets (393,323) 2,951 (243,866)
----------- ----------- -----------
Net cash provided (used) by
operating activities 273,693 (601,959) 260,910
----------- ----------- -----------
Cash flows from investing activities:
Capital contribution to subsidiary (400,000) -- (5,200,000)
Sale of equity securities -- -- 174,761
Payments on notes receivable 152,267 52,075 51,022
Sale of real estate 82,974 154,169 216,168
----------- ----------- -----------
Net cash provided (used) by investing
activities (164,759) 206,244 (4,758,049)
----------- ----------- -----------
Cash flows from financing activities:
Sale of common stock, net 391,712 381,485 5,371,959
Payment on notes payable (66,666) (73,849) (343,746)
----------- ----------- -----------
Net cash provided by financing
activities 325,046 307,636 5,028,213
----------- ----------- -----------
Net increase (decrease) in cash 433,980 (88,079) 531,074
Cash at beginning of year 884,241 972,320 441,246
----------- ----------- -----------
Cash at end of year $ 1,318,221 $ 884,241 $ 972,320
=========== =========== ===========
</TABLE>
See accompanying independent auditor's report.
F-25
<PAGE> 123
SCHEDULE IV
CITIZENS, INC. AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1996:
Life insurance in force $2,213,017,000 $ 296,378,000 $ 304,380,000 $2,221,019,000 13.7%
============== ============== ============== ==============
Premiums:
Life insurance 51,338,427 2,511,318 309,953 49,137,062 0.6%
Accident and health insurance 4,111,969 71,281 0 4,040,688 -%
-------------- -------------- -------------- --------------
Total premiums $ 55,450,396 2,582,599 309,953 53,177,750 0.6%
============== ============== ============== ==============
Year ended December 31, 1995:
Life insurance in force $1,866,954,000 $ 290,677,000 $ 285,001,000 $1,861,278,000 15.3%
============== ============== ============== ==============
Premiums:
Life insurance 47,361,742 2,241,111 306,256 45,426,887 0.7%
Accident and health insurance 698,206 0 0 698,206 --
-------------- -------------- -------------- --------------
Total premiums $ 48,059,948 2,241,111 306,256 46,125,093 0.7%
============== ============== ============== ==============
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%
============== ============== ============== ==============
</TABLE>
See accompanying independent auditor's report.
F-26
<PAGE> 124
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN INVESTMENT NETWORK, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Independent Auditors Report F-28
Consolidated Balance Sheets - December 31, 1996 and 1995 F-29
Consolidated Statements of Operations - Years Ended
December 31, 1996 and 1995 F-31
Consolidated Statements of Changes in Stockholders Equity - Years Ended
December 31, 1996 and 1995 F-33
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996 and 1995 F-34
Notes to Consolidated Financial Statements F-36
</TABLE>
F-27
<PAGE> 125
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
American Investment Network, Inc. Jackson, Mississippi
We have audited the consolidated balance sheets of American Investment Network,
Inc. (formerly Great American Investment Network, Inc.) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of American Investment
Network, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Jackson, Mississippi
March 17, 1997
F-28
<PAGE> 126
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE - AT FAIR VALUE
Fixed maturities $2,706,059 $2,666,979
Equity securities 981,163 980,600
---------- ----------
3,687,222 3,647,579
OTHER ASSETS:
Cash and cash equivalents 282,277 121,102
Restricted cash 95,000
Accrued investment income 86,830 76,737
Notes and accounts receivable, no allowance for uncollectible
accounts deemed necessary 305,795 339,172
Reinsurance receivable 34,552 35,393
Property and equipment - net 738,522 723,864
Deferred policy acquisition costs 2,305,365 2,241,403
Intangibles and other assets, net of accumulated
amortization of $18,000 (1996) and $7,000 (1995) 247,423 206,338
---------- ----------
TOTAL ASSETS $7,687,986 $7,486,588
========== ==========
</TABLE>
(Continued)
See notes to consolidated financial statements.
F-29
<PAGE> 127
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
LIABILITIES:
Future policy benefits $2,405,250 $1,998,386
Unpaid claims 163,214 140,777
Unearned premiums 110,336 71,724
Policyholders' dividend accumulations 836,352 731,454
Accounts payable and other liabilities 202,559 315,976
Note payable 509,128 526,447
---------- ----------
Total liabilities 4,226,839 3,784,764
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, participating,
no par value; authorized 15,000,000
shares, issued 5,025,490 4,480,620 4,480,620
Class B common stock participating,
$1 par value; 2,500 shares authorized,
issued and outstanding 2,500 2,500
Unrealized (loss) gain on securities
available for sale (15,143) 48,062
Retained earnings (deficit) (999,378) (821,906)
---------- ----------
3,468,599 3,709,276
Less cost of treasury stock - 3,726 shares (7,452) (7,452)
---------- ----------
Total stockholders' equity 3,461,147 3,701,824
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,687,986 $7,486,588
========== ==========
</TABLE>
(Concluded)
F-30
<PAGE> 128
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUE:
Premiums (net of ceded premium of $149,000 (1996) and
$70,000 (1995) $2,752,914 $2,797,260
Net investment income 290,417 294,807
Rental income 54,008 51,608
Realized investment losses (2,325)
Other income 8,064 9,365
--------- --------
3,105,403 3,150,715
BENEFITS AND EXPENSES:
Benefits and claims 1,406,297 1,107,183
Amortization of deferred policy acquisition costs 644,754 449,204
Interest expense 61,517 70,148
Salaries and employee costs 696,054 743,640
Actuarial and other professional fees 156,725 175,620
Depreciation and amortization 76,926 77,721
Other expenses 240,602 308,273
--------- ---------
Reduction of foreign marketing subsidiary investment 30,000
3,282,875 2,961,789
---------- ----------
(LOSS) EARNINGS FROM CONTINUING OPERATIONS (177,472) 188,926
DISCONTINUED OPERATIONS:
Loss from operations (9,871)
47,138
-----------
Gain or sale of agency subsidiary
37,262
---------- -----------
Net (Loss) Earnings ($177,472) $226,188
======= =======
</TABLE>
(Continued)
F-31
<PAGE> 129
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
NET (LOSS) EARNINGS PER COMMON SHARE:
Continuing operations $ (0.04) $ 0.04
Discontinued operations 0.01
-------- ---------
Net (loss) earnings $ (0.04) $ 0.05
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,024,264 5,024,264
========= =========
</TABLE>
(Concluded)
See notes to consolidated financial statements
F-32
<PAGE> 130
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
CLASS A CLASS B
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 5,025,490 $4,480,620 2,500 $ 2,500
Unrealized gain on securities
available for sale
Net earnings
--------- --------- ------ ------
BALANCE, DECEMBER 31, 1995 5,025,490 4,480,620 2,500 2,500
Unrealized (loss) on securities
available for sale
--------- --------- ----- ------
Net (loss) 5,025,490 4,480,620 2,500 $2,500
========= ========= ========= =========
</TABLE>
F-33
<PAGE> 131
See notes to consolidated financial statements
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) RETAINED TOTAL
ON MARKETABLE EARNINGS TREASURY STOCKHOLDERS'
SECURITIES (DEFICIT) STOCK EQUITY
<S> <C> <C> <C>
$ (374,653) $(1,048,094) $ (7,452) $ 3,052,921
422,715 422,715
226,188 226,188
------------ ----------- ------- ---------
48,062 (821,906) (7,452) 3,701,824
(63,205) (63,205)
(177,472) (177,472)
------------ ----------- ------- ---------
$ (15,143) $ (999,378) $(7,452) $3,461,147
=========== =========== ======= ==========
</TABLE>
F-34
<PAGE> 132
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) earnings $(177,472) $ 226,188
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Discontinued operations (37,262)
Realized loss on sale of investments 2,325
Reduction of foreign marketing subsidiary 30,000
investment
Provision for doubtful accounts 3,140 4,243
Amortization on investment premium and discounts 192 (157)
Depreciation and amortization 76,926 77,721
Amortization of deferred policy acquisition costs 644,754 449,204
Policy acquisition costs deferred (708,716) (849,139)
Decrease in restricted cash 95,000 161,000
Increase in accrued investment income (10,092) (26,417)
Decrease (increase) in accounts receivable 18,062 (27,544)
Decrease (increase) in other assets (48,085) (5,335)
Decrease (increase) in reinsurance receivables 841 1,282
Increase in liability for future policy benefits 406,864 212,382
Increase in unpaid claims 22,437 27,448
Increase in unearned premiums and policyholders'
dividend accumulations 143,510 160,593
Increase in accounts payable and other liabilities (113,417) (297,291)
Decrease in net assets of discontinued operations 16,676
-------- --------
Net cash provided by operating activities 353,943 125,917
-------- --------
INVESTING ACTIVITIES:
Cost of investments acquired (330,220) (429,368)
Proceeds from sale of investments 210,000 238,000
Proceeds from maturities and repayments of
fixed-maturities investments 17,180 22,053
Property and equipment purchased (115,886)
(84,584)
Collections on note receivable 12,175 5,755
-------- --------
Net Cash used in investing activities (175,449) (279,446)
--------- ---------
</TABLE>
(Continued)
F-35
<PAGE> 133
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
FINANCING ACTIVITIES:
Repayments on notes payable $(17,319) $ (9,116)
Net cash used in financing activities (17,319) (9,116)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 161,175 (162,645)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 121,102 283,747
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $282,277 $121,102
======== ========
SUPPLEMENTAL INFORMATION:
Change in unrealized (loss) gain on securities available for sale $(63,000) $423,000
======== ========
Sale of agency subsidiary in exchange for note receivable $170,000
========
Interest paid $ 54,000 $ 60,000
========= ========
</TABLE>
(Concluded)
See notes to consolidated financial statements.
F-36
<PAGE> 134
AMERICAN INVESTMENT NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - American Investment Network, Inc. (formerly Great
American Investment Network, Inc.) (AIN) was incorporated in 1987 for the
purpose of acquiring stock in existing insurance companies and organizing and
operating other companies in the financial services industry. AIN has two
wholly-owned subsidiaries, United Security Life Insurance Company (USLI) and
The Gain Agency, Inc. (The Agency). Prior to 1995, AIN owned a 50.025%
interest in U. S. Star International, Inc. (US Star), an inactive Cayman
Island Corporation. In 1995, the Company conveyed its interest in US Star to
US Stars other shareholder and wrote-off its remaining investment of $30,000,
which is included in reduction of foreign marketing subsidiary investment.
Prior to April 1995, the Agency was a general insurance agency selling property
and casualty insurance. In April 1995, the Agency sold all of its inforce
business and certain net assets (see Note 2).
On May 10, 1990, USLI began selling and underwriting a participating modified
whole life insurance policy which accounts for over 98% of its inforce life
insurance policies and, in latter 1993, began a mass marketing program to offer
limited benefit accident and health policies. The sale of accident and health
products has been USLIs major focus during the past three years and presently
it plans to offer additional competitive insurance products.
Prior to 1990 the Company incurred operating losses resulting from its
developmental stages and as of December 31, 1996 had a cumulative deficit in
retained earnings of approximately $999,000. For continued expansion of its
operations, the Company will be dependent on (i) attaining and maintaining
profitable operations, (ii) possible additional equity offerings, and (iii)
obtaining such additional financing as may be required from time to time. See
Note 2 to the consolidated financial statements concerning a proposed sale of
the Company.
a. BASIS OF PRESENTATION - The accounts of AIN and its subsidiaries are
stated on the basis of generally accepted accounting principles. For USLI,
these principles differ in some respects from the statutory basis of
accounting required by the Mississippi Insurance Department.
b. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of AIN and its wholly- owned subsidiaries, USLI and The
Agency (collectively the Company). All significant intercompany balances
and transactions have been eliminated.
In preparing the consolidated financial statements, the Company is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of
the dates of the balance sheets and the reported amounts of revenues and
expenses for the years then ended. Actual results could differ
significantly from those estimates.
c. SECURITIES AVAILABLE FOR SALE - Fixed maturities of the Company include
all debt securities and consists of bonds and notes with maturities beyond
one year. Equity securities consist of non-redeemable preferred stocks.
The Company has classified all its equity and fixed maturity securities as
securities available for sale, which are carried at fair value. Unrealized
gains and losses are excluded from earnings and reported net of tax, as a
separate component of stockholders equity. Securities within the available
for sale portfolio may be used as part of the Company's asset/liability
strategy and may be sold in response to changes in interest rate risk,
prepayment risk or other similar economic factors. The specific
identification method is used to compute gains or losses on the sale of
these assets. Interest and dividends earned on these assets are included in
net investment income.
Fixed maturities and equity securities that reflect a market decline below
cost or amortized cost that is deemed other than temporary are written down
to net realizable value by a charge to earnings. Investment premiums and
discounts are amortized by a method which approximates the interest method.
d. CASH AND CASH EQUIVALENTS - For purposes of the consolidated statements of
cash flows, the Company considers checking accounts and cash on hand to be
cash and cash equivalents. Short-term investments are included in the
investments category in order to conform to insurance company reporting
requirements.
e. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and betterments are charged to the property accounts while
replacements, maintenance and repairs which do not improve or extend the
lives of the respective assets are expensed. Depreciation of property and
equipment is provided using the straight-line method over the estimated
useful lives of the related assets which range from five to thirty-two
years.
F-37
<PAGE> 135
f. DEFERRED POLICY ACQUISITION COSTS - The costs (consisting of commissions,
premium taxes and other costs) which both vary with and are primarily
related to the production of new insurance business are deferred and
amortized over the anticipated premium paying period of the related policies
in proportion to the ratio of the annual premium revenue to the total
premium revenue anticipated. Such anticipated premium revenue is estimated
using the same assumptions as are used for computing liabilities for future
policy benefits.
g. INTANGIBLE ASSETS - Intangible assets consist of the cost of noncompete
and employment agreements, acquired insurance license agreements, and the
excess of cost over net assets of businesses acquired. These intangibles
are being amortized by the straight-line method over their estimated lives,
which range from five to twenty-five years.
h. FUTURE POLICY BENEFITS - The liabilities for future policy benefits have
been determined by the net level premium method. The significant
assumptions used to determine these liabilities are as follows:
<TABLE>
<CAPTION>
LIFE ACCIDENT AND HEALTH
<S> <C> <C>
Interest rates 8% first five years graded to
7% at the fifteenth year 7%
Mortality and 85% of 1965-70 Male Select 50% (cancer) and 60%
Morbidity and Ultimate Table (non-cancer) of Underwriting
Selection graded to 100%
after five years, 1980 CSO ALB
Withdrawals 22.5% first year graded to 5% 25% first year graded to 7.5%
(Lapse Rates) in years eleven and later (cancer) and 10% (non-cancer)
in years five and later
</TABLE>
i. UNPAID CLAIMS - Unpaid claims represent the estimated liabilities on
claims reported to the Company plus a provision for claims incurred but not
yet reported. The liability for unpaid claims is determined using both
evaluations of each claim and statistical analyses and represents the
estimated ultimate net cost of all claims incurred through the end of the
reporting period.
j. INCOME TAXES - Prior to 1995, AIN and The Agency filed a consolidated
income tax return and USLI filed its income tax return on a separate company
basis. Beginning in 1995, the Company included USLI in a consolidated
income tax return.
Deferred tax liabilities and assets are determined based on the differences
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse.
k. PREMIUM AND COMMISSION REVENUE RECOGNITION - Premiums are recognized as
revenue when due from policyholders. Benefits and expenses are associated
with the earned premiums to result in recognition of profits over the life
of the insurance contracts. This association is accomplished by accrual of
the liability for future policy benefits on insurance in force and the
amortization of deferred policy acquisition costs.
Loss from discontinued operations includes commission income (none of which
was received from USLI) for insurance coverage, principally property and
casualty, placed with underwriters. These revenues are recognized at the
effective date of the policy.
l. NET (LOSS) EARNINGS - Net (loss) earnings per common share is computed on
the basis of the weighted average number of shares outstanding during the
year.
m. FAIR VALUES OF FINANCIAL INSTRUMENTS - The following methods and
assumptions were used by the Company to estimate the fair value of each
class of financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheets for these financial instruments, including restricted cash,
approximate their fair value.
Securities Available for Sale: Fair values for these financial instruments
are based upon quoted market prices or dealer quotes, where available. If
quoted market prices are not available, fair values are based upon quoted
market prices of comparable instruments.
Note Receivable for Sale of Agency Assets: The fair value of the note
receivable from the sale of agency assets is estimated by discounting the
future cash flows using current rates at which a similar loan would be made
to the borrower for the same remaining maturity.
Note Payable: The fair value of the note payable is estimated using rates
currently available to the Company for debt with a similar term and
remaining maturity.
F-38
<PAGE> 136
n. STOCK-BASED COMPENSATION - During 1996, the Company adopted Statement of
Accounting Financial Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation" and has applied the measurement requirements to the Agent's
Stock Option Plan adopted in 1996 (see Note 9). No compensation cost has
been recognized as no options have been granted under this plan.
The Company continues to measure compensation cost for the employee stock
incentive plan (see Note 9), using the intrinsic value based method of
accounting prescribed by Accounting Principles Board No. 25 "Accounting for
Stock Issued to Employees".
2. PROPOSED SALE OF COMPANY AND OTHER BUSINESS DISPOSITIONS
On October 25, 1996, the Company signed a definitive written agreement whereby
Citizens Insurance Company of America, (CICA), Austin, Texas, a wholly-owned
subsidiary of Citizens, Inc. (Citizens) will acquire 100% of the outstanding
shares of the Company for shares of Citizens Class A common stock.
Pursuant to the terms of the Agreement, which is subject to approval of
regulatory authorities and shareholders of the Company, CICA will issue one
share of Citizens Class A common stock it owns for each 7.2 shares of the
Company's Class A and Class B common stock issued and outstanding. CICA expects
to issue approximately 700,000 shares of Citizens common stock to consummate the
transaction. Management of the Company anticipates that the sale will occur
during 1997.
In April 1995, The Agency sold all of the inforce business and certain net
assets to a former officer of The Agency for approximately $180,000 of which
$170,000 was received in the form of a five year note receivable. The sale
resulted in a net gain of approximately $47,000. The gain on disposition of
this business segment has been accounted for as discontinued operations.
Revenues of the agency approximated $65,000 in 1995 prior to the sale. The note
receivable from the former officer, which is included in notes and accounts
receivables, approximated $152,000 (1996) and $164,000 (1995).
3. RESTRICTED CASH
Pursuant to a business acquisition in 1994, the Company and the seller entered
into certain agreements to indemnify the Company and the acquired company from
certain liabilities and contingencies. In connection therewith, an escrow
agreement was executed wherein $256,000 of the acquired company's assets, which
would have been transferred to the seller, were deposited in an escrow account.
In 1995, these assets were presented as restricted cash of the Company with a
corresponding liability in accounts payable and other liabilities for certain
potential contingencies. During March 1996, these contingencies were resolved
and the Company released the remaining funds which were distributed to the
seller and approximated $95,000.
4. SECURITIES
The amortized cost and related approximate fair value of securities available
for sale were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ ------
<S> <C> <C> <C> <C>
1996
Fixed Maturities:
U.S. Treasury and other U.S.
government agencies obligations $305,253 $ - 11,253 $294,000
State, county and municipal
obligations 409,258 6,442 415,700
FHLB and GNMA certificates 156,355 5,996 150,359
Public utility bonds 781,614 14,614 767,000
Industrial bonds 1,062,648 16,352 - 1,079,000
---------- ------- ------ ----------
$2,715,128 $22,794 $31,863 $2,706,059
========== ======= ======= ==========
Equity Securities $ 987,237 $12,448 $18,522 $ 981,163
========== ======= ======= ==========
</TABLE>
F-39
<PAGE> 137
<TABLE>
<S> <C> <C> <C> <C>
1995
Fixed Maturities:
U.S. Treasury and other U.S.
government agencies obligations $306,458 $1,000 $4,458 $303,000
State, county and municipal
obligations 214,188 3,862 218,050
FHLB and GNMA certificates 273,913 2,000 4,985 270,928
Public utility bonds 806,544 10,671 3,714 813,501
Industrial bonds 1,011,177 50,323 1,061,500
---------- ------- ------- ----------
$2,612,280 $67,856 $13,157 $2,666,979
========== ======= ======= ==========
Equity Securities $ 987,237 $ $ 6,637 $ 980,600
========== ======= ======= ==========
</TABLE>
Fixed maturity investments with an amortized cost of $1,161,000 in 1996 and
$1,156,000 in 1995 (fair values of $1,160,000 in 1996 and $1,189,000 in 1995)
were held by and pledged to various states in which the Company is licensed
pursuant to regulatory requirements.
The components of net investment income were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Fixed maturities $193,246 $ 185,487
Equity securities 91,225 95,483
Short-term investments 4,033 3,860
Other 1,913 9,977
-------- --------
Net investment income $290,417 $294,807
-------- --------
</TABLE>
Investment expenses were not material for any of the years presented.
The following is an analysis of the amortized cost and fair value of
investments in fixed maturities at December 31, 1996, by contractual maturity:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year $ 100,080 $ 101,000
Due after one year through five years 350,996 353,700
Due after five years through ten years 1,356,091 1,349,500
Due after ten years 908,302 901,859
---------- ----------
$2,715,128 $2,706,059
========== ==========
</TABLE>
Actual maturities may differ from contractual maturities because of the
borrowers right to call or prepay obligations.
Proceeds from sales of fixed maturity securities approximated $210,000 in 1996
and $238,000 in 1995. There were no gross realized gains in 1996 and 1995.
Gross realized losses approximately $2,000 in 1995 (none in 1996).
F-40
<PAGE> 138
5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 80,000 $80,000
Buildings 483,749 483,749
Furniture and equipment 427,783 385,704
-------- --------
991,532 949,453
Less accumulated depreciation 253,010 225,589
-------- --------
Property and equipment, net $738,522 $723,864
======== ========
</TABLE>
6. REINSURANCE
The maximum amount of risk that USLI retains on any one life is $20,000. Life
insurance coverage in excess of this retention limit, accidental death benefit
coverage and substandard insurance risks are ceded to other reinsurers. For
accident and health policies, the Company reinsures all of its cancer policies
to provide reinsurance for all individual claims over $25,000 in any calendar
year. In addition during 1996, the Company entered into other reinsurance
agreements which provide coverage of claims in excess of various amounts on
several other accident and health policies and riders. Under the terms of the
life reinsurance contracts dated in May 1990, USLI received a commission
allowance equal to 100% of first year premiums to be paid on the excess life
coverage. Premiums ceded for the excess life coverage relating to the second
and subsequent years approximated $71,000 in 1996 and $67,000 in 1995.
Accident and health premiums ceded approximated $79,000 in 1996 and $3,000 in
1995.
Although ceding of insurance does not discharge the primary liability of the
original insurer, insurance liabilities are presented net of reinsurance. The
reinsured portion of the liabilities for future policy benefits for life
products approximated $31,000 in 1996 and $35,000 in 1995 relating to insurance
in force of $39,760,000 and $39,236,000, respectively, and is included in
re-insurance receivables.
7. NOTE PAYABLE
Note payable consisted of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Prime plus 1.5% mortgage note (effective rates of
9.75% in 1996 of 10.25% in 1995) payable in
monthly installments of $5,751, including
interest, with a balloon payment due on
December 19, 1999 and collateralized by
property with a carrying value of $371,000
in 1996 and $386,000 in 1995 509,128 526,447
======= =======
</TABLE>
Aggregate future principal payments on the note payable were as follows:
<TABLE>
<S> <C>
Year Ended December 31, 1997:
1997 $ 20,161
1998 22,328
1999 466,539
--------
$509,128
========
</TABLE>
8. REGULATORY DISCLOSURES AND RESTRICTIONS
Pursuant to the laws and regulations of the State of Mississippi, USLI is
required to maintain minimum capital of $400,000 and minimum surplus of
$600,000. The approximate statutory capital and surplus and net income of
USLI, as determined in accordance with statutory accounting practices required
by the Department of Insurance of the State of Mississippi (the Department),
were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Statutory capital and surplus $2,325,000 $2,372,000
========== ==========
Statutory net income and realized gains
and losses $ 4,000 $ 13,000
========== ==========
</TABLE>
F-41
<PAGE> 139
Stockholders' dividends are payable out of statutory surplus of USLI with the
approval of the Department, based upon limitations relating to statutory
capital and surplus and statutory net income. As of December 31, 1996,
approximately $201,000 was available for dividends to GAIN without prior
approval by the Department.
The National Association of Insurance Commissioners (NAIC) adopted certain
risk-based capital requirements effective for all insurance companies. These
requirements provide a measurement of minimum capital appropriate for an
insurance company to support its overall business operations based upon its
size and risk profile which considers (i) asset risk, (ii) insurance risk,
(iii) interest rate risk, and (iv) business risk. An insurance company's
risk-based capital is calculated by applying a defined factor to various
statutory based assets, premiums and reserve items, wherein the factor is
higher for items with greater underlying risk. The adequacy of a company's
capital is then measured by its risk-based capital ratio (the ratio of its
total capital, as defined, to its risk-based capital).
The NAIC has provided levels of progressively increasing regulatory action for
remedies when an insurance company's risk-based capital ratio falls below a
ratio of 1:1. USLI was in compliance with these new minimum capital
requirements as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total adjusted capital $2,389,000 $2,431,000
Authorized control level risk-based capital 112,000 107,000
Ratio (in percentages) 2133% 2272%
</TABLE>
9. STOCKHOLDERS' EQUITY
Prior to 1995, the Company amended its articles of incorporation to equalize
the rights of its two classes of common stock and provided for identical voting
and participating rights.
On May 7, 1996, stockholders of the Company approved the adoption of an Agents'
Stock Option Plan for eligible agents licensed with the Company wherein 200,000
shares of Class A common stock were reserved for option as directed by the
Board of Directors. Under the terms of the plan, agents writing premiums which
exceed certain minimum levels will be granted options at an exercise price
equal to fair value at the date of grant. There have been no options granted
under the arrangement.
Prior to 1995, the Company adopted a stock incentive plan for employees wherein
500,000 shares of unissued Class A common stock were reserved for option as
directed by the Board of Directors. As of December 31, 1996, the Company had
granted options to acquire 150,000 shares of Class A common stock at an
exercise price of $1.80 per share (estimated fair value at date of grant) which
were still outstanding. These options are exercisable at any time and expire
at the earlier of November 29, 2003 or termination of employment. During 1996,
2,500 shares of the options previously granted were forfeited due to the
termination of an employee.
10. PARTICIPATING POLICIES
Approximately 98% of the Company's life insurance in force and 37% of total
premium revenue in 1996 is participating whole life insurance. Dividends on
these policies are payable at the discretion of the Board of Directors from
divisible surplus as calculated using statutory accounting practices as
required by law. All amounts allocable to policyholders have been accrued and
none of the Company's retained earnings as reported was allocable to
participating policies. No dividends are paid until the second annual premium
has been paid in full. The accrued dividends on participating policies have
been included in the liability for future policy benefits. Dividends, included
in benefits and claims expense, approximated $356,000 in 1996 and $336,000 in
1995.
F-42
<PAGE> 140
11. LIABILITY FOR UNPAID CLAIMS
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at January 1 $140,777 $113,329
Less reinsurance recoverables:
Net Balance at January 1 140,777 113,329
Incurred related to:
Current year 533,977 444,384
Prior years 106,319 73,514
-------- -------
Total incurred 640,296 517,898
Paid related to:
Current year 511,540 416,936
Prior years 106,319 73,514
-------- --------
Total paid 617,859 490,450
Net Balance at December 31 163,214 140,777
Plus reinsurance recoverables:
Balance at December 31 $163,214 $140,777
======== ========
</TABLE>
Recoveries of settlements paid relating to reinsurance ceded approximated
$42,000 in 1995 and 1996.
12. INCOME TAXES
There was no provision for income taxes in 1996 and 1995 as a result of the
utilization of net operating loss carryforwards and the offset of potential net
deferred tax assets by valuation allowances.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
carryforwards. The tax effects of significant items comprising the Company's
net deferred tax asset as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ (61,754) $(34,900)
Deferred policy acquisition costs (682,993) (681,889)
Unrealized gain on securities available for sale - 17,927
--------- --------
(744,747) (734,716)
--------- --------
Deferred tax assets:
Unrealized loss on securities available for sale $ 5,657 $ --
Future policy benefit liabilities 810,763 646,926
Deferred compensation liability 20,515 20,515
Accrual for litigation 25,664 35,127
Operating loss carryforwards 306,979 281,283
--------- -------
1,169,578 983,851
Valuation allowance (424,831) (249,135)
--------- --------
744,747 734,716
--------- --------
Net deferred tax asset $ - $ -
========= ========
</TABLE>
The valuation allowance increased by approximately $170,000 in 1996 and
decreased by approximately $115,000 in 1995, exclusive of valuation changes
related to the 1996 unrealized loss on securities available for sale.
F-43
<PAGE> 141
The provision for federal income taxes differs from the amount computed by
applying the federal income tax statutory rate to income from operations before
income taxes as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Taxes calculated at federal statutory rate $(60,340) $76,904
Increases (decreases) resulting from:
Change in deferred tax valuation allowance
and utilization of operating loss
carryforwards 63,750 (61,888)
-------- -------
Other (3,410) (15,016)
$ - $ -
======== =======
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
income tax reporting purposes available to offset future taxable income as
follows:
<TABLE>
<CAPTION>
Year of Expiration USLI Gain
<S> <C> <C>
2004 $ 263,000
2005 220,000
2006 46,000
2007 60,000
2008 96,000
2009 53,000
2010 58,000
2011 $ 24,000 3,000
-------- ---------
$ 24,000 $ 796,000
</TABLE>
The Company has not been examined by the Internal Revenue Service for any of
the periods presented.
13. TRANSACTIONS WITH RELATED PARTIES
In a prior year, the Board of Directors approved the expenditure of up to
$200,000 for purposes of determining the feasibility of marketing certain of
its products in Mexico and obtaining license approval of USLI as a foreign
reinsurer. As of December 31, 1994, the Company had expended the $200,000,
including the purchase of an investment in an inactive foreign corporation
approximating $30,000. Expenses charged to operations include the write-off of
the investment of the foreign corporation, US Star, in 1995 of $30,000.
Considering the current economic conditions in Mexico and the instability of
the current Mexican government, management has suspended any additional foreign
operations marketing activities and conveyed its interest in US Star to US
Star's other shareholder.
On May 2, 1995, shareholders of the Company approved an executive compensation
plan and agreement for the Company's Chairman and Vice Chairman of the Board.
Pursuant to the non-qualified compensation plan, the executives will receive
the greater of fixed annual compensation of $20,000 each or 1% of statutory
premium revenues of USLI up to a maximum premium amount of $10,000,000
(equivalent to annual benefits of $100,000 each). The 1% is reduced based upon
the ratio of statutory net gain from operations to gross statutory revenues.
The plan is effective for a ten year period beginning May 2, 1995. In
connection with the adoption of this plan, the Company accrued the minimum
obligation relative to past services, based upon its best estimates of
anticipated future statutory premium revenues and statutory operating gains.
This obligation, which approximated $55,000 at December 31, 1996 and 1995, is
included in accounts payable and other liabilities. Compensation expense paid
to the executive officers pursuant to this plan approximated $40,000 in 1996
and $27,000 in 1995.
The Company entered into consulting arrangements with certain of its original
founders who subscribed for stock for purposes of solicitation of their advice,
support and promotion of the Company through a consulting group. Consulting
fees are based upon an 8.33% return on each respective founder's original
investment and payable over twelve years. Consulting fees incurred
approximated $42,000 in 1996 and in 1995.
Prior to the sale of its inforce business and certain net assets in April 1995,
The Agency had entered into an employment and non-competition agreement with an
officer of The Agency which provided for payment to the officer of amounts
equal to 40% of all commissions earned by The Agency while the officer was
employed. The agreement further provided that the officer would own 50% of all
new business produced after the date of his employment with a first right of
refusal between The Agency and the officer for the purchase or sell of its
respective 50% ownership at such time as the officer retired or terminated
employment. This arrangement was considered in the negotiation and sale of the
inforce business (see Note 2). Compensation expense paid to the officer under
this arrangement approximated $18,000 in 1995.
F-44
<PAGE> 142
14. COMMITMENTS AND CONTINGENCIES
The Company has been named defendant in two litigation matters resulting from
the denial of claim benefits under a policy issued by USLI. Legal counsel is
unable to render an opinion on the estimated outcome of these matters as they
are presently in discovery stage. However, management intends to vigorously
defend these matters and is of the opinion that the ultimate outcome of these
matters will not result in a material adverse effect on the consolidated
financial statements. Accordingly, no provision for any loss or liability has
been provided in the consolidated financial statements.
Prior to 1995, the Company was a defendant in litigation filed by the former
owner of an insurance agency acquired by the Agency wherein the plaintiff
sought damages for alleged failure to make payments due under a purchase
agreement for a specified percentage of renewal commissions. On March 3, 1995,
an out-of-court settlement was reached wherein the Company agreed to pay over a
five year period installments aggregating $180,000, including plaintiff legal
costs. The Company accrued the present value of this settlement which is
included in accounts payable and other liabilities and approximated $68,000 and
$94,000, respectively, as of December 31, 1996 and 1995.
On August 23, 1996, the Company entered into employment agreements with four
executive officers of the Company for a five year period. Under the terms of
these agreements, severance benefits equal to one year's annual salary are
available to these officers in the event the Company is sold or merged and the
officers are required to relocate or terminate employment. No liability
existed under these agreements at December 31, 1996.
15. FAIR VALUE DISCLOSURES
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
Financial Assets:
Securities available for sale $3,687,222 $3,687,222 $3,647,579 $3,647,579
Cash and cash equivalents 282,277 282,277 121,102 121,102
Restricted cash 95,000 95,000
Note receivable from sale of
agency assets 152,070 179,000 164,245 184,444
Financial Liabilities -
Notes payable $ 509,128 $ 510,000 $ 526,447 $ 522,337
</TABLE>
The estimated fair values are significantly affected by assumptions used,
principally the timing of future cash flows, the discount rate, judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. Because assumptions are inherently
subjective in nature, the estimated fair values cannot be substantiated by
comparison to independent quotes and, in many cases, the estimated fair values
could not necessarily be realized in an immediate sale or settlement of the
instrument. Potential tax ramifications related to the realization of
unrealized gains or losses that would be incurred in an actual sale and/or
settlement have not been taken into consideration.
F-45
<PAGE> 143
PROXY PROXY
AMERICAN INVESTMENT NETWORK, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned shareholder of American Investment Network, Inc.
("American") acknowledges receipt of the Notice of Special Meeting of
Shareholders, to be held on June 19, 1997, at 10:00 a.m., Central Daylight
Time, at the Clubhouse of LeFleur's Bluff State Park, Highland Drive, Jackson,
Mississippi, and hereby appoints H. Harold Crumpler and Phillip E. Faller, each
of them with the power of substitution, as attorneys and proxies to vote all
the shares of the undersigned at said Special Meeting and at all adjournments
thereof, hereby ratifying and confirming all that said attorneys and proxies
may do or cause to be done by virtue hereof. The above- named attorneys and
proxies are instructed to vote all of the undersigned's shares as follows:
THE DIRECTORS RECOMMEND A VOTE FOR THE ITEMS INDICATED BELOW:
1. A proposal to approve and adopt the Plan and Agreement of Exchange dated
October 28, 1996, as amended, under which shareholders of American will
receive shares of Citizens, Inc. Class A Common Stock for their American
Class A and Class B Common Stock as described in the accompanying Proxy-
Information Statement.
FOR _____ AGAINST _____ ABSTAIN _____
2. No other business will be transacted at the Special Meeting or at any
adjournment thereof. The Special Meeting may be adjourned by the vote
of a majority of the shares represented.
THIS PROXY, WHEN PROPERTY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL 1.
Dated this ______ day of ________________, 1997.
___________________________________________
Signature
___________________________________________
Signature
Please sign your name exactly as it appears
on your stock certificate. If shares are
held jointly, each holder should sign.
Executors, trustees, and other fiduciaries
should so indicate when signing.
Please sign, date and return this proxy
immediately.
