CITIZENS, INC. — Interim / Quarterly Report 2004

Nov 9, 2004

10-Q 1 d19977e10vq.htm FORM 10-Q e10vq PAGEBREAK

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2004

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 1-13004

CITIZENS, INC.

(Exact name of registrant as specified in its charter)

Colorado	84-0755371
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
400 East Anderson Lane, Austin, Texas	78752
(Address of principal executive offices)	(Zip Code)

(512) 837-7100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange.

[X] Yes [ ] No

As of November 1, 2004, the Registrant had 34,954,815 shares of Class A common stock, no par value, outstanding and 874,935 shares of Class B common stock, no par value, outstanding.

PAGEBREAK

TOC

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

INDEX

Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Position,
September 30, 2004 (Unaudited) and December 31, 2003	3
Consolidated Statements of Operations, Three Months
Ended September 30, 2004 and 2003 (Unaudited)	5
Consolidated Statements of Operations, Nine Months
Ended September 30, 2004 and 2003 (Unaudited)	6
Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 2004 and 2003 (Unaudited)	7
Notes to Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis
of Financial Conditions and Results
of Operations	21
Item 3. Quantitative and Qualitative
Disclosures about Market Risk	37
Item 4. Controls and Procedures	38
Part II. Other Information	39
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

/TOC

2

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

September 30, 2004 and December 31, 2003

	(Unaudited) — September 30,	December 31,
	2004	2003
Assets
Investments:
Fixed maturities held-to-maturity, at
amortized cost (fair value $8,763,151
in 2004 and $13,478,770 in 2003)	$ 7,485,129	$ 11,699,899
Fixed maturities available-for-sale, at
fair value (cost $199,341,290 in
2004 and $235,934,858 in 2003)	198,463,488	237,505,966
Equity securities, available-for-sale, at fair value
(cost $748,428 in 2004 and $786,026 in 2003)	1,040,363	1,142,352
Mortgage loans on real estate (net of reserve
of $50,000 in 2004 and 2003)	309,304	547,469
Policy loans	20,995,580	21,873,634
Other long-term investments	2,523,428	2,418,812
Total investments	230,817,292	275,188,132
Cash and cash equivalents	67,686,437	15,016,254
Accrued investment income	2,537,615	3,341,483
Reinsurance recoverable	18,569,701	3,337,761
Deferred policy acquisition costs	52,910,766	49,730,572
Other intangible assets	3,008,320	3,086,165
Deferred Federal income tax asset	1,950,883	1,887,048
Cost of customer relationships acquired	12,263,351	16,884,456
Excess of cost over net assets acquired	12,401,990	12,938,862
Property, plant and equipment	8,322,200	5,942,726
Other assets	3,127,195	2,739,838
Total assets	$ 413,595,750	$ 390,093,297

See accompanying notes to consolidated financial statements. (Continued)

3

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED September 30, 2004 and December 31, 2003

	(Unaudited) — September 30,	December 31,
	2004	2003
Liabilities and Stockholders’ Equity
Liabilities:
Future policy benefit reserves	$ 244,723,130	$	233,564,458
Dividend accumulations	4,802,923		4,823,504
Premium deposits	7,395,094		6,509,089
Policy claims payable	4,672,412		5,648,288
Other policyholders’ funds	4,303,850		3,876,787
Total policy liabilities	265,897,409		254,422,126
Commissions payable	1,776,917		2,272,216
Federal income tax payable	525,376		613,123
Payable for securities in the process of settlement	4,250,000		3,750,000
Liabilities for options and warrants	2,363,579		—
Other liabilities	2,369,655		2,009,110
Total liabilities	277,182,936		263,066,575
Cumulative convertible preferred stock – Series A-1
($500 stated value, 50,000 shares authorized, 25,000
shares issued and outstanding in 2004)	5,537,372		—
Stockholders’ Equity:
Common stock:
Class A, no par value, 100,000,000 shares
authorized, 37,674,293 shares issued in 2004 and
2003, including shares in treasury of 2,738,874 in
2004 and 2003	181,254,963		178,065,965
Class B, no par value, 2,000,000 shares
authorized, 874,935 shares issued and
outstanding in 2004 and 2003	2,437,052		2,437,052
Retained deficit	(43,758,593	)	(46,077,094	)
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on securities, net of tax	(386,672	)	1,272,107
	139,546,750		135,698,030
Treasury stock, at cost	(8,671,308	)	(8,671,308	)
Total stockholders’ equity	130,875,442		127,026,722
Total liabilities and stockholders’ equity	$ 413,595,750	$	390,093,297

See accompanying notes to consolidated financial statements.

4

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2004 and 2003

(Unaudited)

	Three months ended September 30, — 2004	2003
Revenues:
Premiums	$ 18,309,202	$	20,451,093
Annuity and universal life considerations	500,230		81,346
Net investment income	3,444,307		3,720,331
Realized gains	478,923		523,275
Decrease in fair value of options and warrants	630,571		—
Other income	170,720		238,202
Total revenues	23,533,953		25,014,247
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit reserves	4,333,921		2,693,965
Policyholders’ dividends	1,141,695		978,665
Claims and surrenders	8,351,117		10,136,813
Total insurance benefits paid or provided	13,826,733		13,809,443
Commissions	4,896,033		4,772,855
Other underwriting, acquisition and insurance expenses	4,206,260		4,949,190
Capitalization of deferred policy acquisition costs	(4,973,716	)	(4,808,408	)
Amortization of deferred policy acquisition costs	2,626,288		3,561,968
Amortization of cost of customer relationships acquired
and other intangibles	727,875		881,857
Gain on coinsurance agreements	(23,846	)	—
Total benefits and expenses	21,285,627		23,166,905
Income before Federal income tax	2,248,326		1,847,342
Federal income tax expense	755,341		532,898
Net income	$ 1,492,985	$	1,314,444
Per Share Amounts:
Basic and diluted income per share of
common stock	$ 0.03	$	0.04
Weighted average shares outstanding	35,810,354		34,969,715

See accompanying notes to consolidated financial statements.

5

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2004 and 2003

(Unaudited)

	Nine months ended September 30, — 2004	2003
Revenues:
Premiums	$ 50,298,907	$	55,867,983
Annuity and universal life considerations	2,270,050		247,158
Net investment income	11,108,639		10,521,530
Realized gains	735,308		989,847
Decrease in fair value of options and warrants	630,571		—
Other income	481,127		609,249
Total revenues	65,524,602		68,235,767
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit reserves	11,573,790		4,736,044
Policyholders’ dividends	2,871,708		2,559,430
Claims and surrenders	24,640,495		29,734,285
Total insurance benefits paid or provided	39,085,993		37,029,759
Commissions	13,158,566		12,564,190
Other underwriting, acquisition and insurance expenses	11,825,431		14,675,995
Capitalization of deferred policy acquisition costs	(12,972,220	)	(11,718,064	)
Amortization of deferred policy acquisition costs	7,594,592		9,222,629
Amortization of cost of customer relationships acquired
and other intangibles	2,087,890		5,147,240
Loss on coinsurance agreements	586,767		—
Total benefits and expenses	61,367,019		66,921,749
Income before Federal income tax	4,157,583		1,314,018
Federal income tax expense	1,407,907		372,901
Net income	$ 2,749,676	$	941,117
Per Share Amounts:
Basic and diluted income per share of
common stock	$ 0.06	$	0.03
Weighted average shares outstanding	35,810,354		34,472,408

See accompanying notes to consolidated financial statements.

6

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004 and 2003

(Unaudited)

	Nine months ended September 30, — 2004	2003
Cash flows from operating activities:
Net income	$ 2,749,676	$	941,117
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized gains on sale of investments
and other assets	(735,308	)	(989,847	)
Loss on coinsurance agreements	586,767		—
Decrease in fair value of options and
warrants	(630,571	)	—
Net deferred policy acquisition costs	(5,377,628	)	(2,495,435	)
Amortization of cost of customer
relationships acquired and other
intangibles	2,087,890		5,147,240
Depreciation	625,911		552,469
Deferred Federal income tax	790,687		519,325
Change in:
Accrued investment income	803,868		(61,353	)
Reinsurance recoverable	(10,711,362	)	(943,036	)
Future policy benefit reserves	11,158,672		5,824,128
Other policy liabilities	316,611		1,028,316
Federal income tax	(87,747	)	(623,924	)
Commissions payable and other liabilities	(134,754	)	(704,503	)
Other, net	(2,287	)	(274,619	)
Net cash provided by operating
activities	1,440,425		7,919,878
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	28,543,402		11,826,358
Sale of equity securities, available-for-sale	37,500		838,416
Maturity of fixed maturities, available-for-sale	75,049,276		130,410,853
Purchase of equity securities, available-for-sale	—		(1,671	)
Purchase of fixed maturities, available-for-sale	(61,695,187	)	(164,547,000	)
Principal payments on mortgage loans	52,247		169,880
Sale of other long-term investments and property,
plant and equipment	436,563		194,707
Cash from acquisitions	—		3,869,228
Decrease (increase) in policy loans, net	878,054		(92,485	)

See accompanying notes to consolidated financial statements. (Continued)

7

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Nine Months Ended September 30, 2004 and 2003

(Unaudited)

	Nine months ended September 30, — 2004		2003
Purchase of other long-term investments and
property, plant and equipment	$ (3,361,442	)	$ (376,778	)
Net cash provided by (used in)
investing activities	39,940,413		(17,708,492	)
Cash flows from financing activities:
Proceeds from issuance of convertible preferred
stock	12,500,000		—
Payment of convertible preferred stock issuance
costs	(1,210,655	)	—
Net cash provided by financing
activities	11,289,345		—
Net increase (decrease) in cash and cash
equivalents	52,670,183		(9,788,614	)
Cash and cash equivalents at beginning of period	15,016,254		19,211,802
Cash and cash equivalents at end of period	$ 67,686,437		$ 9,423,188
Supplemental:
Cash paid during the period for income taxes	$ 704,967		$ 477,500

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

In the first quarter of 2003, the Company issued 2,560,994 Class A common shares in connection with the acquisition of First Alliance Corporation. In conjunction with the acquisition, cash and cash equivalents were provided as follows:

Fair value of capital stock issued	$
Fair value of tangible assets acquired
excluding cash and cash equivalents	(21,448,888	)
Fair value of intangible assets acquired	(12,243,483	)
Liabilities assumed	20,367,086
Cash and cash equivalents provided by
mergers and acquisitions	$ 3,869,228
Issuance of 2,560,994 Class A shares	$ 17,194,513

See accompanying notes to consolidated financial statements. (Continued)

8

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Nine Months Ended September 30, 2004 and 2003

(Unaudited)

Supplemental Disclosure of Non-Cash Investing and Financing Activities (Continued):

On March 9, 2004, the Company entered into coinsurance agreements, effective January 1, 2004, ceding the majority of its accident and health premiums and corresponding benefits and claims. Due to this cession, the Company ceded its January 1, 2004, deferred policy acquisition costs and cost of customer relationships acquired and increased reinsurance recoverable and funds withheld under coinsurance agreements by $2,197,434, $2,886,060, $14,960,408 and $10,439,830, respectively, resulting in a loss of $634,461 and a deferred gain of $71,545. Of that deferred gain, $23,846 was amortized to earnings in third quarter of 2004. The remaining deferred gain at September 30, 2004, amounting to $23,851, will be amortized to earnings over the remaining settlement period of the accident and health coinsurance agreements.

On July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1 Senior Convertible Preferred Stock to four unaffiliated institutional investors. The Company initially recognized deferred issuance costs of $1,210,655, discounts on beneficial conversion features of $3,073,204 and discounts on fair value of options and warrants of $2,994,150, respectively. The Company has subsequently recognized accretion of those deferrals and discounts amounting to $315,381. These discounts and deferrals have decreased the carrying amount of the Convertible Preferred Stock in the statement of financial position.

See accompanying notes to consolidated financial statements.

9

PAGEBREAK

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004

(Unaudited)

(1)	Financial Statements
	The interim 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), Funeral Homes of America, Inc. (FHA), Insurance Investors,
Inc. (III), Citizens USA Life Insurance Company (CUSA), Citizens
National Life Insurance Company (Citizens National), formerly Combined
Underwriters Life Insurance Company, First Alliance Insurance Company
(FAIC), KYWIDE Insurance Management, Inc. (KYWIDE), Mid-American
Alliance Corporation (Mid-American), Mid American Century Life
Insurance Company (MACLIC), Security Alliance Insurance Company (SAIC),
Mid-American Associates Agency, Inc. (MAAAI) and Mid-American Alliance
Insurance Agency, Inc. (MAAIA). Citizens and its consolidated
subsidiaries are collectively referred to as “the Company.”
	The statement of financial position for September 30, 2004, the
statements of operations for the three-month and nine-month periods
ended September 30, 2004 and 2003, and the statements of cash flows for
the nine-month periods then ended have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in cash flows
at September 30, 2004, and for comparative periods presented have been
made.
	Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) have
been omitted. It is suggested that these financial statements be read
in conjunction with the financial statements and notes thereto included
in the Company’s December 31, 2003, Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The results of operations
for the period ended September 30, 2004, are not necessarily indicative
of the operating results for the full year.
(2)	Coinsurance Agreements
	On March 9, 2004, the Company entered into coinsurance agreements,
effective January 1, 2004, and ceded approximately $15 million of its
annual accident and health premium and corresponding benefits and
claims. In consideration for these cessions, the Company made a
closing settlement payment of $10,439,830 to the reinsurer in June
2004. Due to this cession, the Company reduced its January 1, 2004
deferred policy acquisition costs, cost of customer relationships
acquired and policy benefit reserve of $2,197,434, $2,886,060 and
$14,960,408, respectively, and recorded an amount payable to the
reinsurer of $10,439,830, resulting in a loss of $634,461 and a
deferred gain of $71,545. Of that deferred gain, $23,848 and $23,846
was amortized

10

PAGEBREAK

Table of Contents

| | to earnings in second and third quarter 2004, respectively. The
remaining deferred gain at September 30, 2004, amounting to $23,851,
will be amortized to earnings over the remaining settlement period of
the accident and health coinsurance agreement. The coinsurance
agreement provides that this ceded business will revert to the
reinsurer when a parallel assumption reinsurance agreement is approved
by the various state insurance departments holding jurisdiction. Such
status is expected during 2004. The Company also participates in
future profits on the accident and health business subject to the
coinsurance agreements over a 10-year period. |
| --- | --- |
| (3) | Subsequent Event—Acquisition |
| | On October 1, 2004, the Company consummated the acquisition of Security
Plan Life Insurance Company (Security Plan), a Louisiana life insurance company with marketing operations
primarily in Louisiana. Pursuant to the terms of the agreement, which
was approved by insurance regulatory authorities, CICA acquired all of the
outstanding shares of Security Plan for $85 million. The transaction
will be accounted for as a purchase. The acquisition was reported on a
Current Report on Form 8-K; an amendment to this Form 8-K containing
pro forma financial information will be filed with the SEC by December
14, 2004. |
| (4) | Revolving Line of Credit |
| | On March 22, 2004, the Company entered into a revolving loan agreement
with a bank establishing a commitment for a line of credit of
$30,000,000 that matures on March 22, 2005. The line of credit has a
maximum of $5,000,000 for general corporate purposes not related to
acquisition of insurance companies and any borrowings up to the maximum
for general corporate purposes are unsecured. The line of credit bears
interest at the lesser of the thirty-day LIBOR (London InterBank
Offered Rate) plus 180 basis points or the highest lawful rate. The
Company paid a loan origination fee ($112,500) equal to 37.5 basis
points of the line of credit. The loan is secured by 100% of the
common stock of any company acquired by the Company or any of its
subsidiaries if the line of credit is used for any part of an
acquisition. As of September 30, 2004, the Company had not made any
draws against this revolving line of credit. |
| | On October 1, 2004, the Company entered into a Second Amendment to the
Loan Agreement that converted into a term loan a $30 million advance
against the line of credit made for the purpose of acquiring Security
Plan. Under the term loan, the Company is to repay the principal
portion of the loan in ten semi-annual installments of $3,000,000
beginning on May 1, 2005, with the final installment of principal and
any accrued and unpaid interest on November 1, 2009. Interest on the
unpaid principal balance of the loan is to be paid on the fifth day of
each month following the end of the fiscal quarter of the Company. The
interest rate is equal to a 30-day LIBOR plus 1.8% per year. In
connection with the acquisition of Security Plan, the Company’s
borrowed funds on its term loan were loaned to CICA. |
| | Because the maximum borrowing authorized on the Company’s line of
credit is $30 million, the line has been drawn down to zero. Under the
Amended Loan Agreement, upon any prepayment or repayment of the term
loan described above, the line of credit will be reinstated to an
aggregate amount equal to the difference between (a) $30 million minus
(b) the aggregate outstanding principal amount under the term loan. |

11

PAGEBREAK

Table of Contents

| | Because CICA is an insurance company formed under the laws of
Colorado, under the subordinated debenture, any principal and accrued
interest is not a legal liability of CICA until repayment of interest
or principal has received the prior written approval of the
Commissioner of Insurance for the State of Colorado. CICA has pledged
100% the stock of Security Plan to the bank as collateral. |
| --- | --- |
| (5) | Convertible Preferred Stock |
| | On July 12, 2004, the Company completed a private placement of $12.5
million of Series A-1 Senior Convertible Preferred Stock to four
unaffiliated institutional investors. The 25,000 shares of Series A-1
Convertible Preferred Stock carry a 4% per annum dividend, payable in
cash or shares of the Company’s Class A common stock, are convertible
at the option of the investor at any time into Class A common shares at
a conversion price of $7.24 per share and are mandatorily redeemable in
five years. The Company may, if certain conditions have been met, pay
dividends and redemptions in shares of Class A common stock at a
minimum price of $4.00. The Company may, at its option, subject to
certain conditions, increase the issue to $25 million. |
| | In connection with the sale of the Series A-1 Convertible Preferred
Stock, the Company issued to the investors and finders seven-year warrants to purchase up to 474,792 and 86,326,
respectively, Class A common shares at an exercise price of $7.96 per
share. To the extent the Company increases the issue from $12.5
million, the number of Class A common shares purchased pursuant to the
seven-year warrants would increase proportionately. |
| | The Company also issued to the investors unit warrants entitling the
investors to purchase from the Company for a period of approximately 12
months up to $5 million of Series A-2 Convertible Preferred Stock
(5,000 shares) and additional seven-year warrants to purchase
approximately 120,000 to 200,000 additional Class A common shares at an exercise
price of $7.96. If issued, the Series A-2 Convertible Preferred Stock
would be convertible into Class A common shares at a conversion price
calculated as 110% of the average market closing price of the Class A
common stock for the 30 trading days prior to the date of issuance of
the Series A-2 Convertible Preferred Stock, but not less than $7.00 or
greater than $11.50 per share. Otherwise, the Series A-2 Convertible
Preferred Stock has substantially identical terms to the Series A-1
Convertible Preferred Stock. The Company utilized the net proceeds
from the sale of the Series A-1 Convertible Preferred Stock as part of
the purchase price of the acquisition of Security Plan discussed above. |
| | The Company would be required to redeem the Preferred stock no earlier
than seven months after the issuance date if the average market price
(for a consecutive 42 day trading period) is $5.50 per share or less.
The Company can choose to redeem for cash or common stock. If the
average price is less than $4.00 per share, the redemption must be in
cash. The holder may receive cash in place of Class A common stock if
the price is above $4. Redemption rights terminate if the Class A
common stock |

12

PAGEBREAK

Table of Contents

| | exceeds 130% ($9.41) of the conversion price of the Series A-1
Convertible Preferred Stock for any 25 consecutive trading days period. |
| --- | --- |
| | At July 12, 2004, the Company initially recognized deferred issuance
costs of $1,210,655, discount on beneficial conversion feature of
$3,073,204 and discounts on fair values of options and warrants of
$2,994,150, respectively, as offsets against the $12.5 million issuance
of the Series A-1 Convertible Preferred Stock. (The beneficial
conversion feature represents the difference at July 12, 2004 between
the $7.24 redemption price per share of the Series A-1 Convertible
Preferred Stock and the effective conversion price, taking into account
embedded warrants and options based upon the number of shares to be
converted at inception. This intrinsic value of the beneficial
conversion feature at July 12, 2004 reduced the carrying value of the
Series A-1 Convertible Preferred Stock on the statement of financial
position with an equal amount credited to the Class A common stock.
This discount for the beneficial conversion feature is reduced and
amortized to retained earnings over the five-year redemption period of
the Series A-1 Convertible Preferred Stock using the effective interest
method.) These deferred issuance and discount costs are being
amortized to retained deficit over the period until redemption using
the effective interest method. At September 30, 2004, there was
$1,158,193 in unaccreted deferred issuance costs and $5,804,435 in
unaccreted discount costs. |
| | The initial July 12, 2004 recognition of the beneficial conversion
feature and discounts on fair values of options and warrants resulted
in $3,073,204 of additional paid-in capital for the Class A common
stock and $2,994,150 of liabilities for options and warrants. Changes
in the fair value of options and warrants are recognized in the
statement of operations with a corresponding change in the liabilities
for options and warrants. For the period ended September 30, 2004,
there was a decrease in fair value of options and warrants of $630,571
and corresponding decrease in the related liabilities. |
| | On September 30, 2004, the Company declared its initial 4% dividend to
the Series A-1 Convertible Preferred Stock shareholders. The Company
paid the dividend by issuing 19,396 shares of its Class A common stock
valued at $115,794. |
| (6) | Segment Information |
| | The Company has three reportable segments: International Life Business,
Domestic Health Business and Domestic Life Business. |
| | International Life Business, consisting of ordinary whole life
business, is offered primarily throughout Central and South America.
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 and paid in the U.S. Domestic Health Business, consisting of
accident and health, specified disease, hospital indemnity and
accidental death policies, is sold throughout the southern U.S.
Domestic Life Business, consisting of traditional whole life, burial
insurance and pre-need policies, is sold throughout the southern U.S.
The accounting policies of the segments are in accordance with U.S.
GAAP and are the same as those described in the summary of significant
accounting policies included in the Company’s annual consolidated
financial statements for the |

13

PAGEBREAK

Table of Contents

| year ended December 31, 2003. The Company evaluates performance based
on U.S. GAAP income (loss) before federal income taxes for its three
reportable segments. |
| --- |
| Geographic Areas - The following summary represents financial data of
the Company’s continuing operations based on their location. |

	Nine months ended September 30, — 2004	2003
Revenues:
U.S.	$ 13,410,319	$ 23,773,815
Non-U.S.	52,114,283	44,461,952
Total Revenues	$ 65,524,602	$ 68,235,767

The following summary, representing revenues, amortization expense and pre-tax income from continuing operations and identifiable assets for the Company’s reportable segments for the periods indicated is as follows:

	Nine months ended September 30, — 2004	2003
Revenue, excluding net investment income and realized
gains:
Domestic Life	$ 10,465,511	$ 8,832,111
Domestic Health	520,816	10,931,060
International Life	42,694,328	36,961,219
Total consolidated revenue, excluding net investment
income and realized gains	$ 53,680,655	$ 56,724,390
Net investment income:
Domestic Life	$ 2,273,503	$ 3,520,280
Domestic Health	—	145,494
International Life	8,835,136	6,855,756
Total consolidated net investment income	$ 11,108,639	$ 10,521,530
Realized gains:
Domestic Life	$ 150,489	$ 344,870
Domestic Health	—	—
International Life	584,819	644,977
Total consolidated realized gains	$ 735,308	$ 989,847
Revenue:
Domestic Life	$ 12,889,503	$ 12,697,261
Domestic Health	520,816	11,076,554
International Life	52,114,283	44,461,952
Total consolidated revenue	$ 65,524,602	$ 68,235,767

14

PAGEBREAK

Table of Contents

	Nine months ended September 30, — 2004		2003
Amortization expense:
Domestic Life	$ 2,994,029		$ 2,862,677
Domestic Health	—		4,600,303
International Life	6,688,453		6,906,889
Total consolidated amortization expense	$ 9,682,482		$ 14,369,869
Income (loss) before Federal income tax:
Domestic Life	$ (254,923	)	$ 732,593
Domestic Health	(714,491	)	(1,217,798	)
International Life	5,126,997		1,799,223
Total consolidated income (loss) before
Federal income tax	$ 4,157,583		$ 1,314,018

	September 30, 2004	December 31, 2003
Assets:
Domestic Life	$ 143,625,260	$ 139,642,798
Domestic Health	16,849,891	15,827,325
International Life	253,120,599	234,623,174
Total	$ 413,595,750	$ 390,093,297

Major categories of premiums and annuity and universal life considerations are summarized as follows:

	Nine months ended	Nine months ended
	September 30, 2004	September 30, 2003
Premiums and annuity and
universal life
considerations:
Ordinary life	$ 49,430,369	$ 44,726,763
Annuity and
universal life	2,270,050	247,158
Group life	347,722	210,160
Accident and health	520,816	10,931,060
Total premiums	$ 52,568,957	$ 56,115,141

| (7) |
| --- |
| For the three and nine months ended September 30, 2004, the other
comprehensive income (loss) amounts included in total comprehensive
income (loss) consisted of unrealized gains (losses) on investments in
fixed maturities and equity securities available-for-sale of
$2,095,980 and $(1,658,779), respectively, net of tax, and for the
same period in 2003 unrealized losses of $(1,656,312) and
$(886,083), respectively, net of tax. Total comprehensive income for
the three and nine months ended September 30, 2004, was $3,588,965 and
$1,090,897, respectively, net of tax, and for the same period in 2003,
total comprehensive income (loss) of $(341,868) and $55,034,
respectively, net of tax. |

15

PAGEBREAK

Table of Contents

| (8) |
| --- |
| Basic and diluted earnings per share have been computed using the
weighted average number of shares of common stock outstanding during
each period. The weighted average shares outstanding for both the
three and nine months ended September 30, 2004, were 35,810,354. The
weighted average shares outstanding for the three and nine months
ended September 30, 2003, were 34,969,715 and 34,472,408,
respectively. The per share amounts have been adjusted retroactively
for all periods presented to reflect the change in capital structure
resulting from a 7% stock dividend paid in 2003. The 2003 stock
dividend resulted in the issuance of 2,447,050 Class A shares
(including 179,181 shares in treasury) and 57,239 Class B shares. In
addition, 2,560,994 Class A shares were issued in February 2003 in
conjunction with the acquisition of First Alliance and 774,229 Class A
shares were issued in November 2003 for the acquisition of
Mid-American. |
| On March 4, 2004, at a special meeting of the Company’s shareholders,
the Company’s Articles of Incorporation were amended to increase the
number of authorized shares of its Class A and Class B common stock
from 50,000,000 to 100,000,000 and from 1,000,000 to 2,000,000,
respectively. In addition, a class of 25,000,000 shares of preferred
stock was authorized to be available for future issuance in series
with terms and preferences designated by the Company’s Board of
Directors. As discussed above, the Company completed a private
placement of $12.5 million of Series A-1 Convertible Preferred Stock
in July 2004. In addition, on September 30, 2004, the Company
declared its initial 4% dividend to the Series A-1 Convertible
Preferred Stock shareholders. The Company paid the dividend in early
October 2004 by issuing 19,396 shares of its Class A common stock
valued at $115,794. |
| The following table sets forth the computation of basic and dilutive
earnings per share: |

	Three months ended			Nine months ended
	September 30,			September 30,
	2004	2003		2004	2003
Basic and diluted income per share:
Numerator:
Net income	$ 1,492,985	$	1,314,444	$ 2,749,676	$	941,117
Less: Preferred stock dividend	(115,794	)	—	(115,794	)	—
Accretion of deferred
issuance costs and
discounts
on
preferred stock	(315,381	)	—	(315,381	)	—
Net income to common stockholders	$ 1,061,810	$	1,314,444	$ 2,318,501	$	941,117
Denominator:
Weighted average shares
outstanding	35,810,354		34,969,715	35,810,354		34,472,408
Basic and diluted income per share	$ 0.03	$	0.04	$ 0.06	$	0.03

16

PAGEBREAK

Table of Contents

| | The effects of Series A-1 Convertible Preferred Stock and warrants are
antidilutive for both periods; therefore, diluted loss per share is
reported the same as basic loss per share. The Series A-1 Convertible
Preferred Stock is antidilutive because the amount of the dividend and
accretion of deferred issuance costs and discounts for the three
months and nine months ended September 30, 2004 per common stock
obtainable on conversion exceeds basic income per share. The warrants
are antidilutive because the exercise price is in excess of the
average Class A common stock market price for the three months and
nine months ended September 30, 2004. |
| --- | --- |
| | The Series A-1 Convertible Preferred Stock is convertible at the
option of the holders at any time into Class A common shares at a
conversion price of $7.24 per share, and are mandatorily redeemable in
five years. Conversion can be exercised into an aggregate of
1,726,520 Class A common shares. The Company may, if certain
conditions have been met, redeem the Series A-1 Convertible Preferred
Stock into shares of its Class A common shares at a minimum price of
$7.00 per share. This redemption would result in the issuance of
1,785,715 Class A common shares. |
| | On July 12, 2004, the Company also issued to the purchasers of Series
A-1 Convertible Preferred Stock unit warrants entitling the investors
to purchase from the Company for a period of approximately 12 months
up to $5 million of Series A-2 Convertible Preferred Stock. If
issued, the Series A-2 Convertible Preferred Stock would be
convertible into Class A common shares at a conversion price
calculated as 110% of the average market closing price of the Class A
common stock for the 30 trading days prior to the date of issuance of
the Series A-2 Convertible Preferred Stock, but not less than $7.00 or
greater than $11.50 per share. Using the floor price of $7.00 per
share and the ceiling price of $11.50 per share, the holders at
conversion could acquire an aggregate of between 434,783 and 714,286
shares of the Company’s Class A common stock if the Series A-2
Convertible Preferred Stock were issued. If issued, the Series A-2
Convertible Preferred Stock’s redemption period would expire on July
12, 2009. |
| | Series A-1 Convertible Preferred Stock warrants can be exercised by
the investors and finder to purchase an aggregate of 474,792 shares
and 86,326 shares of Class A common stock, respectively, at an
exercise price of $7.96 per share. These warrants expire on July 12,
2009. Series A-2 Convertible Preferred Stock warrants could be
exercised to purchase an aggregate of between approximately 120,000 to
200,000 shares of Class A common stock if the Series A-2 Convertible
Preferred Stock is issued. These warrants, if issued, would expire on
July 12, 2009. |
| (9) | Accounting Pronouncements |
| | In December 2003 the Financial Accounting Standards Board (FASB)
issued a revision to Interpretation No. 46, “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51.” that was
originally issued in January 2003. This Interpretation as revised
addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31,
2003. This interpretation requires certain disclosures in financial
statements issued |

17

PAGEBREAK

Table of Contents

| after January 31, 2003. On December 31, 2003, the Company adopted
FASB Interpretation No. 46. This revised Interpretation did not have a
material effect on the financial position, results of operations or
liquidity of the Company. |
| --- |
| In April 2003, the FASB issued Statement of Financial Accounting
Standard (SFAS) No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.” This statement clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities. This statement is generally effective for
contracts entered into or modified after September 30, 2003, and all
provisions should be applied prospectively. The Company adopted SFAS
No. 149 on September 30, 2003. SFAS No. 149 did not have a material
effect on the financial position, results of operations or liquidity
of the Company. |
| In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equities.” This statement established standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires
that an issuer classify a financial instrument within its scope as a
liability (or an asset in some circumstances). Many of the
instruments within the scope of SFAS No. 150 were previously
classified as equity. The Company adopted SFAS No. 150 on July 1,
2003. SFAS No. 150 did not have a material effect on the financial
position, results of operations or liquidity of the Company. |
| In December 2003, the FASB issued a revision to SFAS No. 132,
“Employers’ Disclosures about Pensions and Other Postretirement
Benefits.” This statement requires that companies provide more
details about their plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. This statement is
effective for fiscal years ending after December 15, 2003. The
Company adopted the revision to SFAS No. 132 on December 31, 2003.
SFAS No. 132, as revised, did not have a material effect on the
financial position, results of operations or liquidity of the Company. |
| On March 17 – 18, 2004, the Emerging Issues Task Force (EITF) reached
a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments.” EITF Issue
No. 03-1 requires evaluations and disclosures about unrealized losses
on available-for-sale debt and equity securities accounted for under
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities” and SFAS No. 124 “Accounting for Certain Investments Held
by Not-for-Profit Organizations.” The evaluation under EITF Issue No.
03-1 prescribes three sequential steps, the second and third required
only if the prior step indicates that it is necessary. The first step
is to determine whether an investment is impaired. If an investment
is impaired, the second step is to determine whether the impairment is
other than temporary. If the impairment is other than temporary, the
third step is to recognize the impairment loss in earnings. The
guidance for evaluating whether an investment is other than
temporarily impaired is effective for reporting periods beginning
after June 15, 2004. The disclosures were effective for investments
accounted for under SFAS No. 115 and SFAS No. 124 in annual financial
statements for fiscal years ended after December 15, 2003. For all
other investments within the |

18

PAGEBREAK

Table of Contents

| | scope of EITF Issue No. 03-1, the disclosures are effective for fiscal
years ending after June 15, 2004. However, the guidance contained in
paragraphs 10 through 20 of EITF Issue No. 03-1 has been delayed by
proposed FASB Staff Position (FSP) EITF Issue 03-1-1, “Effective Date
of Paragraphs 10-20 of EITF Issue No. 03-1” posted on September 30,
2004. The delay of the effective date for paragraphs 10-20 will be
superseded concurrent with the final issuance of proposed FSP EITF
Issue 03-1-a “Implication Guidance for the Application of Paragraph 16
of EITF Issue No. 03-1.” The Company followed the disclosures
required by paragraphs 21 and 22 of EITF Issue No. 03-1 on December
31, 2003. Based on current operations, the Company does not
anticipate that the impairment evaluation promulgated by EITF Issue
No. 03-1, FSP EITF Issue 03-1-1 and FSP EITF Issue 03-1-a will have a
material effect on the financial position, results of operations or
liquidity of the Company. |
| --- | --- |
| (10) | Legal Proceedings |
| | On April 24, 2003, the Court of Appeals for the Third District of
Texas affirmed in part and modified in part, a July 31, 2002, class
action certification granted by a Travis County, Texas district court
judge to the plaintiffs in a lawsuit filed in 1999 styled Delia
Bolanos Andrade, et al v. Citizens Insurance Company of America,
Citizens, Inc., Negocios Savoy, S.A., Harold E. Riley, and Mark A.
Oliver, Case Number 99-09099. The suit alleges that life insurance
policies sold to certain non-U.S. residents by CICA are actually
securities that were offered or sold in Texas by unregistered dealers
in violation of the registration provisions of the Texas securities
laws. The suit seeks class action status naming as a class all
non-U.S. residents who purchased insurance policies or made premium
payments since August 1996 and assigned policy dividends to an
overseas trust for the purchase of the Company’s Class A common stock.
The remedy sought is rescission of the insurance premium payments.
The Company has filed a Petition for Review with the Supreme Court of
Texas for review of the decision of the Court of Appeals. Review by
the Texas Supreme Court is discretionary. The Company believes the
Plaintiffs’ claim under the Texas Securities Act is not valid and the
class defined is not appropriate for class certification and does not
meet the legal requirements for class action treatment under Texas
law. Recent decisions from the Texas Supreme Court indicate a more
defense-oriented approach to class certification cases, especially in
class action cases encompassing claimants from more than one state or
jurisdiction. |
| | The Texas Supreme Court granted the Company’s Petition for Review and
heard oral arguments on the case on October 21, 2004. The Company
expects the Texas Supreme Court will ultimately rule in the Company’s
favor, decertify the class and remand the matter to district court for
further action. It is the Company’s intention to vigorously defend
the request for class certification, as well as to defend vigorously
against the individual claims. During the time of the Company’s
appeal to the Texas Supreme Court, there will be no further district
court proceedings in the case. The Company is unable to determine the
potential magnitude of claims in the event of a final class
certification and the plaintiffs prevailing on the substantive action,
although the Company would expect a significant adverse financial
impact relating to any final class action judgment. |

19

PAGEBREAK

Table of Contents

The Company has been named as a defendant in various legal actions incidental to its business seeking payments for claims denied by the Company and other monetary damages. In the opinion of management, the ultimate liability, if any, resulting from any contingent liabilities that might arise from litigation are not considered material in relation to the financial position or results of operations of the Company. Liabilities 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 liabilities until the claims are adjudicated and paid.

20

PAGEBREAK

Table of Contents

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information within this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the insurance industry, the world economy and the Company itself. Words such as “may,’ “will,” “expect,” “anticipate,” “estimate,” or “continue,” or comparable words are intended to identify such forward-looking statements. In addition, all statements other than statements of historical facts that address activities that the Company expects or anticipates will or may occur in the future are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed for forecasted in such forward-looking statements. Furthermore, the Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Readers are encouraged to read the SEC filings of the Company, particularly its Form 10-K for the year ended December 31, 2003, for meaningful cautionary language and discussion of risk factors disclosing why actual results may vary materially from those anticipated by management.

Overview

On October 1, 2004, the Company consummated the acquisition of Security Plan Life Insurance Company (Security Plan), a Louisiana life insurance company with marketing operations primarily in Louisiana. Pursuant to the terms of the agreements, Citizens Insurance Company of America (“CICA”), a wholly owned subsidiary of the Company, acquired all of the outstanding shares of Security Plan for $85 million. The transaction was accounted for as a purchase. Management believes that the acquisition should enhance premium income and total revenue and augment our domestic marketing program, as well as be accretive to earnings.

During 2004, management has focused on several key areas. The Company’s international life business continues to grow, despite economic problems in some Latin American markets that historically have been large sources of new premiums. During 2003, new marketing organizations were contracted in the Pacific Rim and other locations, which are making contributions to new business in the current year. Management believes that the remainder of 2004 will result in further increases in new production.

In March 2004, the Company entered into a reinsurance arrangement where most of our in force accident and health business was ceded to another reinsurer effective January 1, 2004 (See discussion of Accident and Health business below). As a result, overhead reductions of approximately $1,144,000 have been achieved in the first nine months of 2004 and management expects to achieve overhead reductions of approximately $1.4 million for the 2004 year.

Development of our U.S. marketing operations has continued. Changes were made in the management of this program in late 2003 and early 2004, and senior company executives have taken over the development program. Management believes that the acquisition of Security Plan will expand our U.S. operations significantly.

21

PAGEBREAK

Table of Contents

Management continues to seek acquisitions that are accretive to the Company. During 2003, two transactions were completed. Because of the growth in the Company’s asset base and level of capital, management expects to seek opportunities for larger acquisition transactions (those in the $30 million to $75 million purchase price range). As discussed above, on October 1, 2004, the Company consummated the acquisition of Security Plan for $85 million. A $30 million line of credit was entered into with Regions Bank during the first quarter of 2004 and was fully drawn down on October 1, 2004 and converted into a term loan due on November 1, 2009, in connection with the purchase of Security Plan. In addition, the Company completed a private placement of $12.5 million of Series A-1 Senior Convertible Preferred Stock to four unaffiliated institutional investors in July 2004. Management utilized both of these capital sources, as well as available cash on hand, to fund the Security Plan acquisition.

Results of Operations

The Company’s operations have historically focused on three areas: international life insurance; U.S. life insurance; and acquisition of other U.S. life insurance companies. Beginning in 2002 with the acquisition of Citizens National (formerly Combined), a new area was added, that of U.S. supplemental accident and health business. As discussed below, the Company significantly decreased its accident and health segment through the cession of most of such business, effective January 1, 2004.

International Operations

The acceptance of applications for U.S. dollar-denominated ordinary whole life insurance from high net worth foreign nationals has been the core business for the Company for more than 30 years. This niche allows the Company to participate in a marketplace where the policies are typically large face amount, the premiums are paid annually, the persistency is high compared to U.S. policies, the mortality is as good as or better than that experienced in the U.S., the caliber of the marketers from whom applications are received for consideration is above the average, and there is no advancing of commissions to producers. Overall, we expect our international operations to continue to expand. The number of independent marketers contracted has grown over the past few years. Historically, the majority of such business was focused on Central and South America. During the past two years, applications have been received from thirty-six countries, with the Pacific Rim representing a growing presence of new applications. Our foreign life insurance business occurs through our primary insurance subsidiary, CICA. Foreign business made up more than 86% of CICA’s premium revenues in 2003.

For the first nine months of 2004, submitted annualized international premiums were $11.1 million or 24.2% higher than $8.9 million for the same period in 2003, reflecting a broad-based increase in new life production. Total premium income from the international market amounted to $42,694,328 during the first nine months of 2004 compared to $36,961,219 for the same period of 2003, an increase of 15.5%. (See Note 6 of the “Notes to Consolidated Financial Statements” for an analysis of the International Life segment.)

Management is pleased with the growth in international production, because two countries from which significant numbers of applications have been received, Argentina and Venezuela, have undergone financial crises over the past few years. These two countries represented more than 18% of the annual premium income of the Company in 2003. During the late 1980’s Argentina

22

PAGEBREAK

Table of Contents

became the largest source of new business for CICA, particularly as a new middle class emerged in that country’s society. Because of this emerging middle class, CICA (which has historically only focused on the upper income groups) began offering a plan in Argentina that was designed for this group that was popularly received. When the economic crises occurred, the middle class was severely impacted and CICA experienced a decrease in new business and an increase in surrenders. Since that time, management has refocused the marketing organizations in this area on the high net worth individuals that have historically been the core group of insureds. During 2003, international surrenders declined compared to 2002 and have continued to decline for the first nine months of 2004. Management is optimistic that in future years, production will increase from this area as Argentina’s economy recovers. Also during 2003, Venezuela’s economy was dramatically disrupted as the export of oil was halted. This event caused the volume of new business from that country to drop significantly during the year. Management believes that once this situation is resolved, the volume of new business received from that market should improve .

U.S. Operations

The Company’s focus historically has been on the international market because of the key advantages described above. However, throughout the Company’s history, it has always written U.S. business, and through the acquisition of other U.S. life insurers, including the recently consummated acquisition of Security Plan on October 1, 2004. The Company has now accumulated more than $50 million of annual U.S. life premium.

Security Plan has traditionally offered smaller policies primarily designed to fund funeral costs and offered the convenience of home service collection of premiums. Management intends to continue to grow Security Plan’s traditional business and market additional products to its customer base.

Total premium income from the life domestic market amounted to $10,465,511 during the first nine months of 2004 compared to $8,832,111 for the same period of 2003. Given that Security Plan’s annual premium income is approximately $40 million, management expects considerable accretion as Security Plan will be included in operating results after September 30, 2004. Management intends to broaden the portfolio of ordinary whole life products available in the United States to include products similar to those available to overseas clients as well.

Other recent acquisitions, such as our acquisition of Mid-American Alliance Corporation in Missouri (MAAC), have created opportunities to increase U.S. production. Mid American Century Life Insurance Company, a Missouri-domiciled life insurer acquired in the acquisition of MAAC, is writing approximately $1 million of annual life premium. Through this and contacts developed therefrom, marketing operations are being conducted in several states.

Additionally, through the 2002 acquisition of Combined Underwriters Life Insurance Company, (now Citizens National), the Company acquired a “Stipulated Premium” company, which has the capacity to recruit and train marketers and permit them to begin selling based upon a “certificate of authority” issued by the Company. This means that a potential recruit can begin to sell insurance immediately without the delays required by today’s agent licensing requirements. Marketing associates under contract to Citizens National submitted approximately $1 million of new life premium in 2003, and management expects similar production in 2004. Additionally, the Company has a block of Credit Life and Disability business written through furniture stores

23

PAGEBREAK

Table of Contents

in Texas, Louisiana and Arkansas. This business is typically single premium, and amounted to more than $850,000 in 2003. During the first nine months of 2004, credit premiums were more than $830,000.

Accident and Health Business

We have historically maintained a small block of U.S. accident and health business primarily through acquisitions in the mid-1990’s that brought other books of accident and health business, including some major medical business. However, the acquisition of Citizens National in 2002, substantially increased both the amount of accident and health business in force, as well as the volume of new business. Most of the accident and health business we have acquired has been unprofitable when we acquired it. Significant rate increases, coupled with the non-renewal of the major medical business, over time would improve the performance of these acquired blocks. The accident and health book of business acquired in the Citizens National acquisition did not result in operating profits either.

Management determined in late 2003 to seek a buyer for the block of accident and health business due to increased costs, regulatory limits on rate increases, a reduced reinsurance market and high administrations costs relating to our accident and health segment. In early 2004, management reached an agreement to transfer most of the in force accident and health business to a Texas-domiciled reinsurer effective January 1, 2004. The consideration for the transfer, which was initially accomplished through a 100% coinsurance arrangement until the various state insurance departments can approve an assumption reinsurance agreement, will be a participation in any future profits on the book of business over a 10-year period.

For the first nine months of 2004, accident and health premium decreased by $10.4 million, compared to the same period in 2003. Upon closing of the transaction, CICA transferred reserves of $8,101,000, and Citizens National transferred reserves of $6,859,000 to the assuming carrier. Management estimates that this action will result in a decrease of approximately $14 million of annual premium income but should improve long-term profitability. We anticipate that overhead savings of more than $1.4 million annually will be achieved through the transfer of this business . (See Note 4 of the “Notes to Consolidated Financial Statements”.)

Due to the cession of most of the accident and health business effective January 1, 2004, the operations related to our domestic health segment decreased significantly as discussed below. During the first nine months of 2004, premium revenues from accident and health business were $521,000 compared to $10,931,000 in the first nine months of 2003. Claims expenses totaled $195,000 in the first nine months of 2004 compared to $7,058,000 for the same period in 2003. Commission expenses for the nine months ended September 30, 2004 were $167,000 compared to $2,098,000 for the comparable period in 2003. Administrative expenses were approximately $288,000 in the first nine months of 2004 compared to $2,630,000 in the first nine months of 2003. Additionally, due to the high lapsation experienced in Citizens National’s accident and health block of business during the first nine months of 2003, the amortization of cost of customers relationships acquired in the acquisition accelerated. During the nine months ended September 30, 2003, $3.6 million of such cost was amortized. Due to the cession, the Company reduced its January 1, 2004 deferred policy acquisition costs, cost of customer relationships acquired and policy benefit reserves of approximately $2.2 million, $2.9 million and $15.0 million, respectively, and recorded an initial amount payable to the reinsurer of $10.4 million (settled in June 2004), resulting in a charge of approximately $634,000 and a deferred gain of

24

PAGEBREAK

Table of Contents

approximately $72,000 that will be amortized to earnings over the remaining settlement period of the accident and health coinsurance agreements.

Three months ended September 30, 2004 and 2003

The following table sets forth the Company’s net income for periods indicated:

Three Months — Ended		Net Income Per
September 30	Net Income	Common Share
2004	$ 1,493,000	$ 0.03
2003	1,314,000	0.04

As further discussed below, an increase in life premiums and decrease in the fair value of options and warrants and decreases in claims and general insurance expenses offset by decreased net investment income and the impact of coinsurance agreements effective January 1, 2004 contributed to the earnings in third quarter 2004 compared to third quarter 2003.

The Company entered into coinsurance agreements, effective January 1, 2004, and ceded approximately $15 million of its annual accident and health premium and corresponding benefits and claims. In consideration for these cessions, the Company made a closing settlement payment of $10,440,000 to the reinsurer in June 2004. Due to this cession, the Company also reduced its January 1, 2004 deferred policy acquisition costs, cost of customer relationships acquired and policy benefit reserves by $2,197,000, $2,886,000 and $14,960,000, respectively, and recorded an initial amount payable to the reinsurer of $10,440,000, resulting in a first quarter 2004 charge of $634,000 and a deferred gain of $72,000. Of that deferred gain, $24,000 was amortized to earnings in third quarter 2004. The remaining deferred gain at September 30, 2004, amounting to $24,000, will be amortized to earnings over the settlement period of the agreements. The coinsurance agreements provide that this ceded business will revert to the reinsurer when parallel assumption reinsurance agreements are approved by the various state insurance departments holding jurisdiction. Such approval is expected during 2004. The Company also participates in future profits on the accident and health business subject to the coinsurance agreements over a 10-year period.

Total revenues for third quarter 2004 were $23,534,000 compared to $25,014,000 in 2003, a decrease of 5.9%. The cession of the majority of our accident and health premiums decreased revenues for the third quarter of 2004 by $3,587,000 compared to the comparable period of 2003, while the acquisition of Mid-American increased third quarter 2004 revenues by $751,000. New life premiums increased 4.6%, renewal life premiums increased 11.0%, and net investment income decreased by 7.4%. The increase in new life revenues was due to the continued expansion of both the international and domestic markets. The increase in renewal life premiums was due to improved persistency. Third quarter 2004 revenues also increased $631,000 due to the quarterly decrease in the fair value of the Series A-1 and Series A-2 options and warrants associated with the issuance of the convertible preferred stock on July 12, 2004.

Premiums and annuity and universal life considerations for the three-month period decreased 8.4% from $20,532,000 in 2003 to $18,809,000 in 2004. The 2004 decrease resulted from the $3,587,000 decrease in accident and health premiums due to the coinsurance cession discussed

25

PAGEBREAK

Table of Contents

above. The acquisition of Mid-American increased life premiums and annuity and universal life considerations for third quarter 2004 by $698,000 compared to third quarter 2003. Annualized new life insurance premiums written by CICA increased 10.4% for the three months ended September 30, 2004 compared to third quarter 2003, due to a broad based international and domestic production increases. Management is optimistic about the prospects for the remainder of 2004; however, there is no assurance such increase can be maintained throughout the year. Additionally, as discussed above, renewal life insurance premiums increased 11.0% from third quarter 2003 to third quarter 2004 because of improving persistency.

Net investment income decreased 7.4% during third quarter 2004 to $3,444,000 from $3,720,000 during third quarter 2003. The decline reflected a decrease in our invested asset base from $266,105,000 at September 30, 2003 to $230,817,000 at September 30, 2004. During the second and third quarters of 2004, approximately $50 million of bonds were sold or matured to provide cash for the Security Plan acquisition. In addition, approximately $10 million of bonds were sold or matured so that cash in an amount equal to the accident and health reserves and claims payable could be transferred to the assuming reinsurers under the coinsurance agreements described above.

A majority of new investment activity over the past three years has focused on the acquisition of bonds issued by public agencies that carry the implied full faith and credit of the Federal government, such as FNMA and FHLMC. These bonds typically have stated maturities of 15 years, but will carry a call feature (at par) that varies between three months and two years. All bonds purchased are at par or at a discount, so that the yield to call will be equal to or greater than the yield to maturity. By choosing to invest in these securities, the Company is exposed to reinvestment risk in the event that interest rates fall for an extended period because the securities will typically be called and the likelihood of increases in market value above par is unlikely because the expectation is that the bond will be called. Such events may require reinvestment of the proceeds at levels lower than the yields of the called bonds.

During 2003, such a period occurred; however, in many cases, the Company was able to reinvest in bonds at levels at or near those of the called bonds. These recently purchased bonds offer yields of 100 to 200 basis points above the Treasury curve and carry minimal credit risk. Recent scrutiny and concern expressed over the levels of mortgages owned by the various government backed corporations (FNMA and FHLMC) has not resulted in decreases in the credit ratings of such entities and management continues to make investments in these bonds in 2004.

The change in future policy benefit reserves increased from $2,694,000 in third quarter 2003 to $4,334,000 in third quarter 2004. CICA’s life reserves increased $4.1 million in third quarter 2004 compared to an increase of $3.1 million in third quarter 2003 predominantly due to increased persistency. Due to the cession of the majority of the accident and health business, CICA has experienced a minimal change in accident and health reserves for the three months ended September 30, 2004.

Citizens National’s life reserves increased approximately $6,000 in the third quarter of 2004 compared to an increase of approximately $34,000 in third quarter 2003. These increases are primarily related to sales of newly developed whole life products that carry increased reserves contrasted with the existing life business that was in force at the acquisition date. Due to the cession of the majority of its accident and health business, Citizens National had no change in its accident and health reserves for the three months ended September 30, 2004. Citizens National’s

26

PAGEBREAK

Table of Contents

accident and health reserves, however, decreased by approximately $308,000 in third quarter 2003. The decrease in third quarter 2003 was the result of Citizens National experiencing high lapsation on new accident and health policies issued.

The remaining change in future policy benefit reserves primarily relates to $40,000 decrease in the change in First Alliance’s life reserves comparing third quarter 2003 and 2004 and a $329,000 increase in Mid-American’s reserves in third quarter 2004. First Alliance’s decrease was primarily related to increased surrender activity. The Mid-American increase is primarily related to the sales production and persistency of its life insurance block.

Policyholder dividends increased 16.7% during third quarter 2004 to $1,142,000 from 2003 third quarter dividends of $979,000 due to increased persistency. Virtually all of CICA’s overseas policies are participating, representing approximately 48% of our business in-force . Policyholder dividends are factored into premiums and as such dividend increases should have no adverse impact on profitability.

As noted in the table below, claims and surrenders decreased 17.6% from $10,137,000 for third quarter 2003 to $8,351,000 for third quarter 2004. The 2004 decrease primarily related to the cession of most of our accident and health business as discussed above.

	Three months ended September 30, — 2004	2003
Death claims	$ 1,431,000	$ 1,501,000
Surrender expenses	4,765,000	4,661,000
Accident and health benefits	56,000	1,865,000
Endowments	1,943,000	1,779,000
Other policy benefits	156,000	331,000
Total claims and surrenders	$ 8,351,000	$ 10,137,000

Death benefits decreased 4.7% from $1,501,000 in 2003 to $1,431,000 in 2004 primarily due to improved mortality. CICA has historically adhered to an underwriting policy that requires thorough medical examinations including x-rays and electrocardiograms on all applicants who are foreign residents, except children, regardless of age or face amount of the policy applied for. 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 with which our underwriters can validate information contained in applications and inspection and medical reports. CICA also retains the first $100,000 of risk and cedes to other reinsurers the excess.

Accident and health benefits decreased for the three-month period from $1,865,000 in 2003 to $56,000 in 2004 due to the cession of most of the Company’s accident and health business in force, as discussed above, pursuant to coinsurance agreements effective January 1, 2004.

Endowment benefits increased 9.2% from $1,779,000 in third quarter of 2003 to $1,943,000 in the comparable period of 2004. CICA has a series of international policies that carry an immediate endowment benefit of an amount elected by the policyowner. This endowment is factored into the premium of the policy and is paid annually. Like policy dividends, endowments are factored into the premium and as such the increase should have no adverse impact on profitability.

27

PAGEBREAK

Table of Contents

Policy surrenders increased 2.2% from $4,661,000 in 2003 to $4,765,000 in 2004 but decreased as a percentage of business in force due to higher persistency of policies.

During the three months ended September 30, 2004, commissions increased 2.6% to $4,896,000 from $4,773,000 in third quarter 2003 primarily due to the 10.4% increase in production of new life premiums discussed above. Accident and health commissions on the business ceded in 2004 were approximately $725,000 for the three months ended September 30, 2003. In addition, the acquisitions of First Alliance and Mid-American contributed an additional $356,000 of commissions to the third quarter 2004 increase.

Underwriting, acquisition and insurance expenses decreased 15.0% to $4,206,000 in third quarter 2004 compared to $4,949,000 in third quarter 2003 due primarily to economies of scale being achieved in the administration of the business of First Alliance and Citizens National. The third quarter of 2003 also included severance related expenses from the acquisitions of First Alliance and Citizens National. Administration costs on the ceded accident and health business in third quarter 2004 were reduced by $381,000. The acquisition of Mid-American contributed $257,000 to these third quarter 2004 expenses. Management expects to achieve expense reductions over the balance of 2004 due to the accident and health business being assumed by a reinsurer as discussed above .

Capitalized deferred policy acquisition costs increased 3.4% from $4,808,000 in third quarter 2003 to $4,974,000 in third quarter 2004. Due to the cession of the accident and health business, capitalization of accident and health related deferred policy and acquisition costs were minimal in 2004, compared to $463,000 during third quarter of 2003. Amortization of these costs was $2,626,000 and $3,562,000, respectively, in the third quarter of 2004 and 2003. During third quarter 2003, the amortization of deferred policy acquisition costs on accident and health policies was $366,000. Amortization of these costs in 2004 was minimal due to the cession of the majority of the accident and health business discussed above.

Amortization of cost of customer relationships acquired and other intangibles decreased from $882,000 in the third quarter of 2003 to $728,000 in the third quarter of 2004. With most of the accident and health business ceded in 2004, amortization of these costs was minimal in third quarter 2004. During the three months ended September 30, 2003, $579,000 of these accident and health costs were amortized. The acquisitions of First Alliance and Mid-American contributed an additional $299,000 of amortization of these costs in 2004. Amortization of other intangibles was $68,000 during third quarter 2004.

For the three months ended September 30, 2004, the Company’s effective tax rate increased to 33.6% from the 28.8% effective tax rate of the comparable 2003 period due to the Company no longer being eligible for the small life insurance company deduction available under the Internal Revenue Code due to the October 1, 2004 acquisition of Security Plan discussed above. The Company’s policy is to make its best estimate of the effective tax rate it expects to be applicable for the full year in its provision for income taxes on an interim basis. The acquisition of Security Plan will result in the life insurance company assets of the Company’s life insurance controlled group exceeding $500 million, making it ineligible for the small life insurance company deduction going forward.

28

PAGEBREAK

Table of Contents

Nine months ended September 30, 2004 and 2003

The following table sets forth the Company’s net income (loss) for periods indicated:

Nine Months — Ended		Net Income Per
September 30	Net Income	Common Share
2004	$ 2,750,000	$ 0.06
2003	941,000	0.03

As further discussed below, increases in life premiums and net investment income and decreases in claims, general insurance expenses and amortization of cost of customer relationships acquired in excess of losses on the accident and health business related to the impact of coinsurance agreements effective January 1, 2004 contributed to the increased earnings in first nine months of 2004 compared to first nine months of 2003.

The Company entered into coinsurance agreements, effective January 1, 2004 as discussed above under “Three months ended September 30, 2004 and 2003.”

Total revenues for the first nine months of 2004 were $65,525,000 compared to $68,236,000 in 2003, a decrease of 4.0%. The cession of most of our accident and health premiums decreased revenues for the first nine months of 2004 by $10,410,000 compared to the comparable period of 2003, while the acquisition of Mid-American increased 2004 revenues by $2,351,000. New life premiums increased 19.3%, renewal life premiums increased 12.7%, and net investment income increased by 5.6%. The increase in new life revenues was due to the continued expansion of both the international and domestic markets. The increase in renewal life premiums was due to increased persistency. During 2004 revenues also increased $631,000 due to a decrease in the fair value of the Series A-1 and Series A-2 options and warrants for the period ended September 30, 2004 associated with the issuance of the convertible preferred stock on July 12, 2004.

Premiums and annuity and universal life considerations for the nine-month period decreased 6.3% from $56,115,000 in 2003 to $52,569,000 in 2004. The decrease resulted from a $10,410,000 decrease in accident and health premiums. The acquisition of Mid-American increased life premiums and annuity and universal life considerations for the first nine months of 2004 by $2,142,000. Annualized new life insurance premiums written by CICA increased 22.9% for the first nine months of 2004 compared to the first nine months of 2003, due to broad based international and domestic production increases. Management is optimistic about the prospects for the remainder of 2004; however, there is no assurance such increase can be maintained throughout the year . Additionally, as discussed above, renewal life insurance premiums increased 12.7% from 2003 to 2004 because of improved persistency.

Net investment income increased 5.6% during first nine months of 2004 to $11,109,000 from $10,522,000 during the first nine months of 2003. The increase reflected expansion of our asset base from $369,698,000 at September 30, 2003 to $413,595,750 at September 30, 2004. The 2003 acquisition of Mid-American increased 2004 net investment income by $203,000. During the second and third quarters of 2004, approximately $50 million of bonds were sold or matured to provide cash for the Security Plan acquisition. In addition, approximately $10 million of

29

PAGEBREAK

Table of Contents

bonds were sold or matured so that cash in an amount equal to the accident and health reserves and claims payable could be transferred.

As discussed above, a majority of our new investment activity over the past three years has focused on the acquisition of bonds issued by public agencies that carry the implied full faith and credit of the Federal government, such as FNMA and FHLMC.

The change in future policy benefit reserves increased from $4,736,000 in the first nine months of 2003 to $11,574,000 in the first nine months of 2004. CICA’s life reserves increased $10.8 million in first nine months of 2004 compared to an increase of $7.0 million in first nine months of 2003 predominantly due to increased persistency on the Company’s business. Due to the cession of the majority of the accident and health business, CICA experienced a minimal change in accident and health reserves for the nine months ended September 30, 2004.

Citizens National’s life reserves increased approximately $282,000 in the first nine months of 2004 compared to a decrease of approximately $445,000 in the first nine months of 2003 due primarily to sales of newly developed whole life products that carry increased reserves contrasted with the existing life business that was in force at the acquisition date. Due to the cession of all of its accident and health business, Citizens National had no change in its accident and health reserves for the nine months ended September 30, 2004. Citizens National’s accident and health reserves, however, decreased by approximately $2.8 million in first nine months of 2003. The non-renewal of the major medical block of accident and health business accounted for $1.2 million of the 2003 decrease. In addition, during the first nine months of 2003, Citizens National experienced high lapsation on new accident and health policies issued.

The remaining change in future policy benefit reserves primarily related to a $1.6 million decrease in the change in First Alliance’s life reserves between the first nine months of 2003 and 2004 and a $1.0 million increase in Mid-American’s reserves in 2004. The First Alliance decrease in the change in reserves was primarily related to the high surrender activity discussed below. The Mid-American increase was primarily related to the sales production and persistency of its life insurance block.

Policyholder dividends increased 12.2% during the first nine months of 2004 to $2,872,000 from 2003 dividends of $2,559,000 due to improved persistency . Virtually all of CICA’s overseas policies are participating, and participating policies represent approximately 48% of our business in-force. Policyholder dividends are factored into the premium and as such the increase should have no adverse impact on profitability.

As noted in the table below, claims and surrenders decreased 17.1% from $29,734,000 for the first nine months of 2003 to $24,640,000 for the first nine months of 2004. The 2004 decrease primarily related to the cession of most of our accident and health business as discussed above.

30

PAGEBREAK

Table of Contents

	Nine months ended September 30, — 2004	2003
Death claims	$ 4,733,000	$ 4,671,000
Surrender expenses	13,930,000	12,752,000
Accident and health benefits	195,000	7,058,000
Endowments	5,301,000	4,631,000
Other policy benefits	481,000	622,000
Total claims and
surrenders	$ 24,640,000	$ 29,734,000

Death benefits increased 1.3% from $4,671,000 in 2003 to $4,733,000 in 2004. The impact of the Mid-American acquisition increased death claims by $98,000. As discussed above, CICA has historically adhered to an underwriting policy, which requires thorough medical examinations on all applicants who are foreign residents.

Accident and health benefits decreased for the nine-month period from $7,058,000 in 2003 to $195,000 in 2004 as discussed above due to the cession of most of the Company’s accident and health business in force pursuant to coinsurance agreements effective January 1, 2004.

Endowment benefits increased 14.5% from $4,631,000 in the first nine months of 2003 to $5,301,000 in the comparable period of 2004. CICA has a series of international policies that carry an immediate endowment benefit of an amount elected by the policyowner. This endowment is factored into the premium of the policy and is paid annually. Like policy dividends, endowments are factored into the premium and as such the increase should have no adverse impact on profitability.

Policy surrenders increased 9.2% from $12,752,000 in 2003 to $13,930,000 in 2004. The 2004 increase was primarily related to the acquisitions of First Alliance and Mid-American, discussed above, which generated $1,397,000 in additional surrenders. First Alliance has experienced significantly higher surrender activity since its acquisition in 2003 due to the actions of former marketing associates of First Alliance placing numerous policies with other companies. Surrenders of our international business declined during the period by 2.5%. While the dollar value of international policy surrenders declined slightly, the amount of surrender benefits as a percentage of business in force declined.

During 2004, commissions increased 4.7% to $13,159,000 from $12,564,000 in 2003 primarily due to the 22.9% increase in the production of new life premiums during the first nine months of 2004 discussed above. Accident and health commissions on the business that has been ceded in 2004 were approximately $2,098,000 for the nine months ended September 30, 2003. In addition, the acquisitions of First Alliance and Mid-American contributed an additional $635,000 of commissions to the 2004 increase.

Underwriting, acquisition and insurance expenses decreased 19.4% to $11,825,000 in 2004 compared to $14,676,000 in 2003 due primarily to the economies of scale being achieved in the administration of the business of First Alliance and Citizens National. In addition, the first nine months of 2003 included severance related expenses from the acquisitions of First Alliance and Citizens National. Administration costs on the ceded accident and health business in 2004 reduced expenses by $1,144,000. Management expects to achieve expense reductions over the balance of 2004 due to the accident and health business being assumed by a reinsurer .

31

PAGEBREAK

Table of Contents

Capitalized deferred policy acquisition costs increased 10.7% from $11,718,000 in the first nine months of 2003 to $12,972,000 in the first nine months of 2004 primarily due to the 22.9% increase in new life production discussed above. Due to the cession of the accident and health business, capitalization of accident and health related deferred policy and acquisition costs was minimal in 2004, compared to $1,176,000 during the first nine months of 2003. Amortization of these costs was $7,595,000 and $9,223,000, respectively, in the first nine months of 2004 and 2003. During the first nine months of 2003, the amortization of deferred policy acquisition costs on accident and health policies was $990,000. Amortization of these costs in 2004 was minimal due to the cession of the majority of the accident and health business discussed above.

Amortization of cost of customer relationships acquired and other intangibles decreased from $5,147,000 in the first nine months of 2003 to $2,088,000 in the first nine months of 2004. With most of the accident and health business ceded effective January 1, 2004, amortization of these costs was minimal in the first nine months of 2004. During the nine months ended September 30, 2003, $3,610,000 of these accident and health costs were amortized. The acquisitions of First Alliance and Mid-American contributed an additional $565,000 of amortization of these costs in 2004. Amortization of other intangibles was $353,000 during the first nine months of 2004.

For the nine months ended September 30, 2004, the Company’s effective tax rate increased to 33.9% from the 28.4% effective tax rate of the comparable 2003 period due to the Company no longer being eligible for the small life insurance company deduction available under the Internal Revenue Code due to the October 1, 2004 acquisition of Security Plan discussed above. The Company’s policy is to make its best estimate of the effective tax rate it expects to be applicable for the full year in its provision for income taxes on an interim basis. The acquisition of Security Plan will result in the life insurance company assets of the Company’s life insurance controlled group exceeding $500 million, making it ineligible for the small life insurance company deduction going forward.

Liquidity and Capital Resources

Liquidity refers to a company’s ability to generate sufficient cash flows to meet the needs of its operations. Liquidity is managed on insurance operations to ensure stable and reliable sources of cash flows to meet all obligations and is provided by a variety of sources.

Liquidity requirements are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds while investment purchases, policy benefits, and operating expenses are the primary uses of funds. Although the Company historically has not been put in the position of liquidating invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. The Company includes provisions within its annuity and universal life insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Since these contractual withdrawals, as well as the level of surrenders experienced, were consistent with the Company’s assumptions in asset liability management, the associated cash outflows did not have an adverse impact on overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur

32

PAGEBREAK

Table of Contents

surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds.

In the past, cash flows from the Company’s insurance operations have been sufficient to meet current needs. Cash flows from operating activities were $1.4 million and $7.9 million for the nine months ended September 30, 2004 and 2003, respectively. The Company also has traditionally had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $39.9 million and $(17.7) million for the nine months ended September 30, 2004 and 2003, respectively. The cash outflow for investment activities for the nine months ended September 30, 2003 primarily related to the investment of excess cash and cash equivalents generated from operations during 2003.

Stockholders’ equity increased from $127,027,000 at December 31, 2003 to $130,875,000 at September 30, 2004 primarily due to $2,750,000 of income earned during the period and recognition of a $2,940,000 beneficial conversion feature, net of accretion, in excess of unrealized losses, net of tax, of $(1,659,000) for the first nine months of 2004. Decreases in the market value of our bond portfolio caused by lower bond prices resulted in the increase in unrealized losses since December 31, 2003.

Invested assets decreased to $230,817,000 at September 30, 2004 from $275,188,000 at December 31, 2003, a decrease of 16.1%. The decrease relates to sales and call activity in the first nine months of 2004 increasing cash on hand. The increase in cash on hand at September 30, 2004 ($68 million versus $15 million at December 31, 2003) was generated through the sale and maturity of fixed maturities to fund the purchase for $85 million in cash of Security Plan that closed on October 1, 2004. The excess cash on hand was invested in cash equivalents throughout third quarter 2004 with maturities of approximately 30 days. A 16.4% decrease in fixed maturities available-for-sale from $237,506,000 at December 31, 2003 to $198,463,000 at September 30, 2004 was the primary reason for the decrease in invested assets. Fixed maturities are categorized into two classifications: fixed maturities held-to-maturity, which are valued at amortized cost, and fixed maturities available-for-sale, which are valued at fair value. Fixed maturities available-for-sale and fixed maturities held-to-maturity were 86.0% and 3.2%, respectively, of invested assets at September 30, 2004. Fixed maturities held-to-maturity, amounting to $7,485,000 at September 30, 2004, consist of U.S. Treasury and U.S. government agency securities. Management has the intent and believes we have the ability to hold the held-to-maturity securities to maturity .

Policy loans comprised 9.1% of invested assets at September 30, 2004 compared to 7.9% at December 31, 2003. These loans, which are secured by the underlying policy values, have annual yields ranging from 5% to 10% percent and maturities that are related to the maturity or termination of the applicable policies. Management believes that we maintain adequate liquidity despite the uncertain maturities of these loans .

Our cash balances at our primary depositories were significantly in excess of Federal Deposit Insurance Corporation coverage at September 30, 2004 and December 31, 2003. Management monitors the solvency of all financial institutions in which we have funds to minimize the exposure for loss. Management does not believe we are at significant risk for such a loss.

33

PAGEBREAK

Table of Contents

During 2004, we intend to continue to utilize callable securities issued by Federal agencies as cash management tools to minimize excess cash balances and enhance returns except for the excess cash that is being generated to fund the acquisition of Security plan as discussed above. During 2003, the Company transferred its primary banking relationship from JP Morgan Chase to Regions Bank.

We do not utilize special purpose entities as investment vehicles. Nor are there any such entities in which we have an investment that engage in speculative activities of any description, and we do not use such investments to hedge our investment positions.

The NAIC has established minimum capital requirements in the form of Risk-Based Capital (“RBC”), which factors the type of business written by an insurance company, the quality of its assets, and various other factors into account to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to an adjusted statutory capital that includes capital and surplus as reported under Statutory Accounting Principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of actions by the affected company would begin. At September 30, 2004 and December 31, 2003, all of the Company’s insurance subsidiaries were above required minimum levels.

Effective January 1, 2001, the NAIC implemented codified rules for statutory accounting. These rules were approved and implemented by each state in which all of our insurance subsidiaries operations are domiciled. CICA is domiciled in Colorado, Citizens National is domiciled in Texas, FAIC in Kentucky, MACLIC in Missouri, SAIC in Arkansas and CUSA in Illinois. CICA follows certain Colorado state laws that differ from NAIC’s codified rules. The primary difference between the Colorado statutes and the codified rules involve the establishment of a liability for future policy dividends payable. Under codification such reserve is mandated; however, Colorado has an exception if the difference between the premium charged and the mortality factor included in the premium on participating policies exceeds the reserve that would be established. Such is the case for CICA. As a result, CICA did not establish a reserve of approximately $3 million in its statutory financial statements as of and for the nine months ended September 30, 2004 and for the year ended December 31, 2003. Texas, Illinois, Kentucky, Missouri and Arkansas codified rules must be followed unless the Commissioner of Insurance permits specific practices that differ from codified rules. None of our insurance subsidiaries has requested any permission to deviate from NAIC codified rules.

During March 2004, the Company’s shareholders approved amendments to the Articles of Incorporation increasing the number of authorized Class A and Class B shares and authorizing preferred stock that could be issued upon approval of the Board of Directors.

On July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1 Senior Convertible Preferred Stock to four unaffiliated institutional investors. The terms and conditions of the Series A-1 Senior Convertible Preferred Stock are discussed in Note 5 to our consolidated financial statements. The initial recognition of the beneficial conversion feature and discounts on fair values of options and warrants issued in connection with the private placement resulted in $3,073,204 of additional paid-in capital for the Class A common stock and $2,994,150 of liabilities for options and warrants. Changes in the fair value of options and warrants are recognized in the statement of operations with a corresponding change in the liabilities for options and warrants. For the period ended September 30, 2004, there was a

34

PAGEBREAK

Table of Contents

decrease in fair value of options and warrants of $630,571 and corresponding decrease in the related liabilities.

On September 30, 2004, the Company declared and paid a 4% quarterly dividend to the Series A-1 Senior Convertible Preferred Stock shareholders. The Company paid the dividend by issuing 19,396 shares of its Class A common stock valued at $115,794.

The Company signed a revolving line of credit agreement from Regions Bank for a $30 million credit facility for use in acquisitions in March 2004. As of September 30, 2004, no amounts have been borrowed under this revolving line of credit. However, on October 1, 2004, the Company entered into a Second Amendment to the Loan Agreement that converted into a term loan its $30 million advance against the line of credit made in connection with the acquisition of Security Plan. Under the term loan, the Company is to repay the principal portion of the loan in ten semi-annual installments of $3,000,000 beginning on May 1, 2005, with the final installment of principal and any accrued and unpaid interest on November 1, 2009. Interest on the unpaid principal balance of the loan is to be paid on the fifth day of each month following the end of the fiscal quarter of the Company. the interest rate is equal to a 30-day LIBOR (London InterBank Offered Rate) plus 1.8% per year.

Because the maximum borrowing authorized on the Company’s line of credit is $30 million, the line has been drawn down to zero. Under the Amended Loan Agreement, upon any prepayment or repayment of the term loan described above, the line of credit is to be reinstated to an aggregate amount equal to the difference between (a) $30 million minus (b) the aggregate outstanding principal amount under the term loan.

In connection with the Security Plan acquisition, funds borrowed by the Company were re-loaned to CICA. CICA has issued to the Company a Subordinated Debenture in the principal amount of $30 million plus interest equal to 30-day LIBOR plus 1.8% per year. Because CICA is an insurance company formed under the laws of Colorado, under the subordinated debenture, any principal and accrued interest is not a legal liability of CICA until repayment of interest or principal has received the prior written approval of the Commissioner of Insurance for the State of Colorado.

The Sarbanes-Oxley Act of 2002 (“the Act”) established significant new guidelines for corporate governance. Subsequently, the New York Stock Exchange adopted new rules that relate to such matters as the composition of listed companies’ Boards of Directors and various committees thereof, the need to adopt specific policies as well as the establishment of a Code of Ethics. The Company’s Board of Directors, Compensation Committee and Audit Committee were already configured in such a way as to comply with the Act. Citizens has operated under a “Principles, Purposes, Philosophy and Beliefs” for numerous years that sets forth the manner in which the Company and its officers, directors and employees are expected to function. However, the Board of Directors has implemented a formal Code of Ethics applicable to all officers, directors and employees.

Additionally, the Act imposes a duty upon public companies to document and test all internal controls and have such audited by independent auditors. The Company has begun the process of documenting all such control procedures and expects to complete the documentation and testing in 2004.

35

PAGEBREAK

Table of Contents

The Company has committed to the following contractual obligations as of September 30, 2004 with the payments due by the period indicated below:

Contractual		Less than	1 to 3	More than
Obligation	Total	1 year	years	3 years
Operating leases	$ 356,881	$ 167,958	$ 188,923	—
Other	684,000	309,000	375,000	—
Total operating leases and other	$ 1,040,881	$ 476,958	$ 563,923	—
Future policy benefit reserves:
Life insurance	$ 215,472,850
Annuities	16,190,083
Accident and health	13,060,197
Total future policy benefit
reserves	$ 244,723,130
Policy claims payable:
Life insurance	$ 2,460,748
Accident and health	2,211,664
Total policy claims payable	$ 4,672,412
Convertible preferred stock	$ 5,537,372
Total contractual obligations	$ 255,973,795

Financial Accounting Standards

See Note 9 of our Consolidated Financial Statements for a discussion of recently promulgated accounting standards and interpretations, which we have adopted, and our estimates of their impact upon us.

36

PAGEBREAK

Table of Contents

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, mortgage loans on real estate and policy loans, all of which comprised almost 99% of our investment portfolio as of September 30, 2004. These investments are mainly exposed to changes in treasury rates. Our fixed maturities investments include U.S. government bonds, securities issued by government agencies, and corporate bonds. Approximately 97% of the fixed maturities we owned at September 30, 2004 are instruments of the United States government or are backed by U.S. government agencies or private corporations carrying the implied full faith and credit backing of the U.S. government.

To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest rate sensitivity with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward 100 basis point shifts in the prevailing interest rates. The following tables set forth the potential amount of unrealized gains (losses) that could be caused by 100 basis point upward and downward shifts on our available-for-sale fixed maturities investments as of the dates indicated:

Decreases in Interest Rates — 300 Basis	200 Basis	100 Basis	Increases in Interest Rates — 100 Basis		200 Basis		300 Basis
Points	Points	Points	Points		Points		Points
$9,892,000	$ 7,709,000	$ 4,909,000	$ (11,035,000	)	$ (23,602,000	)	$ (36,293,000	)

While the test scenario is for illustrative purposes only and does not reflect our expectations regarding future interest rates or the performance of fixed-income markets, it is a near-term change that illustrates the potential impact of such events. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due an interest rate increase that would force us to dispose of our fixed maturities at a loss.

The Company’s bond portfolio is more sensitive to sharp increases in interest rates because of the large number of callable securities in the Company’s portfolio. As interest rates fall, the presumption is that higher-yielding securities will be called, rather than appreciating in value.

There are no fixed maturities or other investments that we classify as trading instruments.

Market Risk Related to Equity Prices

Changes in the level or volatility of equity prices affect the value equity securities we hold as investments. However, our equity investments portfolio was less than 1% of our total investments at September 30, 2004 and December 31, 2003. Thus, we believe that significant decreases in the equity markets would have an immaterial impact on our total investment portfolio. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations.

37

PAGEBREAK

Table of Contents

ITEM 4

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and President and Treasurer, the effectiveness of the design and operation of our disclosure controls and procedures over financial reporting pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our President and Treasurer concluded that our disclosure controls and procedures over financial reporting are adequate and effective in timely alerting them to material information required to be included in this quarterly report on Form 10-Q.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or because of intentional circumvention of the established process.

During the period covered by this report, there have been no significant changes in our internal controls over financial reporting or in other factors, which could significantly affect internal controls over financial reporting, including any corrective actions with regard to significant deficiencies or material weaknesses.

38

PAGEBREAK

Table of Contents

PART II. OTHER INFORMATION

| Item 1. |
| --- |
| On April 24, 2003, the Court of Appeals for the Third District of
Texas affirmed in part and modified in part, a July 31, 2002, class
action certification granted by a Travis County, Texas district court
judge to the plaintiffs in a lawsuit filed in 1999 styled Delia
Bolanos Andrade, et al v. Citizens Insurance Company of America,
Citizens, Inc., Negocios Savoy, S.A., Harold E. Riley, and Mark A.
Oliver, Case Number 99-09099. The suit alleges that life insurance
policies sold to certain non-U.S. residents by CICA are actually
securities that were offered or sold in Texas by unregistered dealers
in violation of the registration provisions of the Texas securities
laws. The suit seeks class action status naming as a class all
non-U.S. residents who purchased insurance policies or made premium
payments since August 1996 and assigned policy dividends to an
overseas trust for the purchase of the Company’s Class A common stock.
The remedy sought is rescission of the insurance premium payments.
The Company has filed a Petition for Review with the Supreme Court of
Texas for review of the decision of the Court of Appeals. Review by
the Texas Supreme Court is discretionary. The Company believes the
Plaintiffs’ claim under the Texas Securities Act is not valid and the
class defined is not appropriate for class certification and does not
meet the legal requirements for class action treatment under Texas
law. Recent decisions from the Texas Supreme Court indicate a more
defense-oriented approach to class certification cases, especially in
class action cases encompassing claimants from more than one state or
jurisdiction. |
| The Texas Supreme Court granted the Company’s Petition for Review and
heard oral arguments on the case on October 21, 2004. The Company
expects the Texas Supreme Court will ultimately rule in the Company’s
favor, decertify the class and remand the matter to district court for
further action. It is the Company’s intention to vigorously defend
the request for class certification, as well as to defend vigorously
against the individual claims. During the time of the Company’s
appeal to the Texas Supreme Court, there will be no further district
court proceedings in the case. The Company is unable to determine the
potential magnitude of the claims in the event of a final class
certification and the plaintiffs prevailing on the substantive action,
although the Company would expect a significant adverse financial
impact relating to any final class action judgment. |
| The Company has been named as a defendant in various legal actions
incidental to its business seeking payments for claims denied by the
Company and other monetary damages. In the opinion of management, the
ultimate liability, if any, resulting from any contingent liabilities
that might arise from litigation are not considered material in
relation to the financial position or results of operations of the
Company. Liabilities 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 liabilities until the claims are adjudicated and paid. |

39

PAGEBREAK

Table of Contents

Item 2.	Changes in Securities
	During the quarterly period ended September 30, 2004, the Company sold
and issued in a private placement $12.5 million of Series A-1 Senior
Convertible Preferred Stock and seven-year warrants to purchase up to
474,792 shares of Class A common stock to four unaffiliated investors.
The securities were issued pursuant to the exemption set forth in
Section 4(2) of the Securities Act of 1933, as amended, in that there
were four offerees who were institutional investors, each of whom
was a purchaser, each investor represented that it was acquiring the
securities for investment purposes and not with a view towards
distribution and the securities were affixed with a restrictive legend
noting their issuance under exemption from registration and
restrictions on subsequent resale or assignment without compliance
with applicable securities registration laws or exemptions therefrom.
The private placement was disclosed and reported by the Company in a
Current Report on Form 8-K filed on July 15, 2004, which is
incorporated herein by reference.
Item 3.	Defaults upon Senior Securities
	None.
Item 4.	Submission of Matters to a Vote of Security Holders
	None.
Item 5.	Other Information
	None.

40

PAGEBREAK

Table of Contents

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number	The following exhibits are filed herewith:
2.1	Stock Purchase Agreement between Citizens Insurance Company of American
and Mayflower National Life Insurance Company dated June 17, 2004 (a)
3.1	Restated and Amended Articles of Incorporation (b)
3.2	Bylaws (c)
4.1	Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock
(d)
10.1	Self-Administered Automatic Reinsurance Agreement — Citizens Insurance
Company of America and Riunione Adriatica di Sicurta, S.p.A. (e)
10.2	Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut
General Life Insurance Company and Citizens Insurance Company of America,
as amended (f)
10.3	Plan and Agreement of Exchange between Citizens, Inc. and Combined
Underwriters Life Insurance Company (g)
10.4	Plan and Agreement of Exchange between Citizens, Inc. and Lifeline
Underwriters Life Insurance Company (h)
10.5	Plan and Agreement of Merger by and among Citizens, Inc., Citizens
Acquisition, Inc. and First Alliance Corporation (i)
10.6	Plan and Agreement of Merger by and among Citizens, Inc., Citizens
Acquisition, Inc. and Mid-American Alliance Corporation. (j)
10.7	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement,
Administrative Services Agreement dated March 9, 2004, between Citizens
Insurance Company of America and Texas International Life Insurance
Company, Reinsurance Trust Agreement dated March 9, 2004, by and among
Citizens Insurance Company of America, Texas International Life Insurance
Company and Wells Fargo Bank, N.A. (k)
10.8	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement,
Administrative Services Agreement dated March 9, 2004, between Combined
Underwriters Life Insurance Company and Texas International Life Insurance
Company, Reinsurance Trust Agreement dated March 9, 2004, by and among
Combined Underwriters Life Insurance Company, Texas International Life
Insurance Company and Wells Fargo Bank, N.A. (l)
10.9	Loan Agreement, Security Agreement and Note dated March 22, 2004 between
Citizens, Inc. and Regions Bank (m)
10.9(a)	Second Amendment to Loan Agreement between Citizens, Inc. and Regions
Bank dated October 1, 2004 (o)
10.9(b)	Security Agreement between Citizens Insurance Company of America and
Regions Bank dated October 1, 2004 (o)
10.9(c)	Subordinated Debenture dated October 1, 2004, issued by Citizens
Insurance Company of America to Citizens, Inc. (o)

41

PAGEBREAK

Table of Contents

Exhibit Number	The following exhibits are filed herewith:
10.10(a)	Securities Purchase Agreement dated July 12, 2004 among Citizens,
Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside
Growth and Opportunity Fund, and Smithfield Fiduciary LLC (m)
10.10(b)	Registration Rights Agreement dated July 12, 2004 among Citizens,
Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside
Growth and Opportunity Fund, and Smithfield Fiduciary LLC (n)
10.10(c)	Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (n)
10.10(d)	Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (n)
10.10(e)	Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity
Fund (n)
10.10(f)	Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (n)
10.10(g)	Warrant to Purchase Class A Common Stock to Mainfield Enterprises,
Inc. (n)
10.10(h)	Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd.
(n)
10.10(i)	Warrant to Purchase Class A Common Stock to Portside Growth and
Opportunity Fund (n)
10.10(j)	Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC
(n)
10.10(k)	Subordination Agreement among Regions Bank, the Purchasers and
Citizens, Inc. dated July 12, 2004 (n)
10.10(l)	Non-Exclusive Finder’s Agreement dated September 29, 2003, between
Citizens, Inc. and the Shemano Group, Inc. (n)
11	Statement re: Computation of per share earnings (see financial statements)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*

*	Filed herewith.
(a)	Filed on June 21, 2004, with the Registrant’s Current Report on Form 8-K
and incorporated herein by reference.
(b)	Filed with the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2003, and incorporated herein by reference.
(c)	Filed with the Registrant’s Registration Statement on Form S-4,
Registration No. 33-59039, on May 2, 1995, and incorporated herein by
reference.
(d)	Filed on July 15, 2004, with the Registrant’s Current Report on Form 8-K
and incorporated herein by reference.
(e)	Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC
File No. 333-16163, filed on or about November 14, 1996.
(f)	Filed as Exhibit 10.9 with the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by reference.

42

PAGEBREAK

Table of Contents

| (g) | Filed as Appendix A with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-76926 dated January 18, 2002 and incorporated
herein by reference. |
| --- | --- |
| (h) | Filed as Appendix B with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-76926 dated January 18, 2002, and incorporated
herein by reference. |
| (i) | Filed as Appendix A with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-102016 dated December 19, 2002, and incorporated
herein by reference. |
| (j) | Filed as Appendix A with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-106128 dated June 13, 2003, and incorporated
herein by reference. |
| (k) | Filed on March 22, 2004 as Exhibit 10.8 with the Registrant’s Current
Report on Form 8-K and incorporated herein by reference. |
| (l) | Filed on March 22, 2004 as Exhibit 10.9 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |
| (m) | Filed on March 26, 2004 as Exhibit 10.10 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |
| (n) | Filed on July 15, 2004 under Exhibit 10.12 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |
| (o) | Filed on October 1, 2004 as Exhibit 10.11 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |
| (b) | Form 8-K Reports |
| (i) | Form 8-K filed on or about July 12, 2004, under Item 5 and Item 7,
disclosing that the Company had completed a private placement of $12.5
million of Convertible Preferred Stock to four unaffiliated institutional
investors. |
| (ii) | Form 8-K filed on or about August 10, 2004, under Item 7, filing the
Company’s press release of August 9, 2004 relating to its earnings
information for the second quarter ended June 30, 2004. |

43

PAGEBREAK

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CITIZENS, INC.
By:	/s/ Rick D. Riley
	Rick D. Riley
	Chief Executive Officer

By:
Mark A. Oliver, FLMI
President and Treasurer
(Chief Financial Officer)

Date: November 9, 2004

44

PAGEBREAK

Table of Contents

EXHIBIT INDEX

(a) Exhibits

Exhibit Number	The following exhibits are filed herewith:
2.1	Stock Purchase Agreement between Citizens Insurance Company of American
and Mayflower National Life Insurance Company dated June 17, 2004 (a)
3.1	Restated and Amended Articles of Incorporation (b)
3.2	Bylaws (c)
4.1	Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock
(d)
10.1	Self-Administered Automatic Reinsurance Agreement — Citizens Insurance
Company of America and Riunione Adriatica di Sicurta, S.p.A. (e)
10.2	Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut
General Life Insurance Company and Citizens Insurance Company of America,
as amended (f)
10.3	Plan and Agreement of Exchange between Citizens, Inc. and Combined
Underwriters Life Insurance Company (g)
10.4	Plan and Agreement of Exchange between Citizens, Inc. and Lifeline
Underwriters Life Insurance Company (h)
10.5	Plan and Agreement of Merger by and among Citizens, Inc., Citizens
Acquisition, Inc. and First Alliance Corporation (i)
10.6	Plan and Agreement of Merger by and among Citizens, Inc., Citizens
Acquisition, Inc. and Mid-American Alliance Corporation. (j)
10.7	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement,
Administrative Services Agreement dated March 9, 2004, between Citizens
Insurance Company of America and Texas International Life Insurance
Company, Reinsurance Trust Agreement dated March 9, 2004, by and among
Citizens Insurance Company of America, Texas International Life Insurance
Company and Wells Fargo Bank, N.A. (k)
10.9	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement,
Administrative Services Agreement dated March 9, 2004, between Combined
Underwriters Life Insurance Company and Texas International Life Insurance
Company, Reinsurance Trust Agreement dated March 9, 2004, by and among
Combined Underwriters Life Insurance Company, Texas International Life
Insurance Company and Wells Fargo Bank, N.A. (l)
10.9	Loan Agreement, Security Agreement and Note dated March 22, 2004 between
Citizens, Inc. and Regions Bank (m)
10.9(a)	Second Amendment to Loan Agreement between Citizens, Inc. and Regions
Bank dated October 1, 2004 (o)
10.9(b)	Security Agreement between Citizens Insurance Company of America and
Regions Bank dated October 1, 2004 (o)
10.9(c)	Subordinated Debenture dated October 1, 2004, issued by Citizens
Insurance Company of America to Citizens, Inc. (o)

45

PAGEBREAK

Table of Contents

Exhibit Number	The following exhibits are filed herewith:
10.10(a)	Securities Purchase Agreement dated July 12, 2004 among Citizens,
Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside
Growth and Opportunity Fund, and Smithfield Fiduciary LLC (m)
10.10(b)	Registration Rights Agreement dated July 12, 2004 among Citizens,
Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside
Growth and Opportunity Fund, and Smithfield Fiduciary LLC (n)
10.10(c)	Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (n)
10.10(d)	Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (n)
10.10(e)	Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity
Fund (n)
10.10(f)	Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (n)
10.10(g)	Warrant to Purchase Class A Common Stock to Mainfield Enterprises,
Inc. (n)
10.10(h)	Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd.
(n)
10.10(i)	Warrant to Purchase Class A Common Stock to Portside Growth and
Opportunity Fund (n)
10.10(j)	Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC
(n)
10.10(k)	Subordination Agreement among Regions Bank, the Purchasers and
Citizens, Inc. dated July 12, 2004 (n)
10.10(l)	Non-Exclusive Finder’s Agreement dated September 29, 2003, between
Citizens, Inc. and the Shemano Group, Inc. (n)
11	Statement re: Computation of per share earnings (see financial statements)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*

*	Filed herewith.
(a)	Filed on June 21, 2004, with the Registrant’s Current Report on Form 8-K
and incorporated herein by reference.
(b)	Filed with the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2003, and incorporated herein by reference.
(c)	Filed with the Registrant’s Registration Statement on Form S-4,
Registration No. 33-59039, on May 2, 1995, and incorporated herein by
reference.
(d)	Filed on July 15, 2004, with the Registrant’s Current Report on Form 8-K
and incorporated herein by reference.
(e)	Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC
File No. 333-16163, filed on or about November 14, 1996.
(f)	Filed as Exhibit 10.9 with the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by reference.

46

PAGEBREAK

Table of Contents

| (g) | Filed as Appendix A with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-76926 dated January 18, 2002 and incorporated
herein by reference. |
| --- | --- |
| (h) | Filed as Appendix B with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-76926 dated January 18, 2002, and incorporated
herein by reference. |
| (i) | Filed as Appendix A with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-102016 dated December 19, 2002, and incorporated
herein by reference. |
| (j) | Filed as Appendix A with the Registrant’s Registration Statement on Form
S-4, Registration No. 333-106128 dated June 13, 2003, and incorporated
herein by reference. |
| (k) | Filed on March 22, 2004 as Exhibit 10.8 with the Registrant’s Current
Report on Form 8-K and incorporated herein by reference. |
| (l) | Filed on March 22, 2004 as Exhibit 10.9 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |
| (m) | Filed on March 26, 2004 as Exhibit 10.10 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |
| (n) | Filed on July 15, 2004 under Exhibit 10.12 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |
| (o) | Filed on October 1, 2004 as Exhibit 10.11 with the Registrant’s Current
Report on Form 8-K as incorporated herein by reference. |

47