1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO 2 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) SEPTEMBER 22, 1995
CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
KENTUCKY 0-20148 61-1187135
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
The Marketplace, Suite 300
12910 SHELBYVILLE ROAD, LOUISVILLE, KENTUCKY 40243
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (502) 244-2420
(Former name or former address, if changed since last report)
This Form consists of 22 sequentially numbered pages.
2
This Current Report on Form 8-K was filed by Citizens Financial
Corporation (the "Company") to report its acquisition of Integrity National
Life Insurance Company ("INLIC"). The audited financial statements of
INLIC filed as a part of this Report pursuant to Item 7 were prepared on
the basis of statutory accounting principles, which were the only
historical financial statements of INLIC then available.
The purpose of this second amendment is to further amend the
Report to file, pursuant to Item 7, audited financial statements of the
individual life and disability insurance business of INLIC acquired by the
Company in the transaction, prepared on the basis of generally accepted
accounting principles.
The Company has included the audited financial statements filed
as a part of this Report after consultation with, and the receipt of no-
action advice from, the staff of the Division of Corporation Finance of the
Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following is an index of the historical financial statements
of INLIC and the pro forma financial information filed as a part of this
Current Report on Form 8-K. The financial statements previously filed as a
part of this Report were prepared on the basis of statutory accounting
principles, instead of generally accepted accounting principles, because
historical financial statements of INLIC prepared in accordance with
GAAP were not then available.
INDEX TO FINANCIAL STATEMENTS
OF INTEGRITY NATIONAL LIFE
INSURANCE COMPANY
(filed herewith)
PAGE OF FILING
Report of Independent Auditors.............................. 6
Statement of Income and Expenses
for the eight months ended August 31, 1995.................. 8
Statement of Assets and
Liabilities at August 31, 1995.............................. 9
Notes to Financial Statements............................... 11
2
3
INDEX TO FINANCIAL STATEMENTS
OF INTEGRITY NATIONAL LIFE
INSURANCE COMPANY
(previously filed)
PAGE OF FILING
Financial Statements For Full Fiscal Years
Report of Independent Auditors............................... **
Statements of Admitted Assets, Liabilities and Capital
and Surplus (Statutory Basis) at December 31, 1994
and 1993................................................ **
Statements of Operations (Statutory Basis) for the years
ended December 31, 1994 an 1993......................... **
Statements of Capital and Surplus (Statutory Basis) for
the years ended December 31, 1994 and 1993.............. **
Statements of Cash Flows (Statutory Basis) for the years
ended December 31, 1994 and 1993........................ **
Notes to Statutory Financial Statements...................... **
Quarterly Statement (Statutory Basis) for the six months
ended June 30, 1995..................................... **
INDEX TO PRO FORMA FINANCIAL STATEMENTS
OF CITIZENS FINANCIAL CORPORATION
AND SUBSIDIARIES
(previously filed and filed herewith)
PAGE OF FILING
Pro Forma Condensed Consolidated Statements of Operations
for the nine months ended September 30, 1995.......... 19
Pro Forma Condensed Consolidated Statements of Operations
for the year ended December 31, 1994.................. 20
Notes to Pro Forma Condensed Consolidated
Financial Statements................................. 21
**Previously filed as a part of the first amendment to this Report
3
4
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 hereunto duly authorized.
Citizens Financial Corporation
By:/S/ Lane A. Hersman
Lane A. Hersman,
Executive Vice President
Date: March 30, 1998
4
5
Statement of Assets and Liabilities and
Statement of Income and Expenses
Integrity National Life Insurance Company
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995
WITH REPORT OF INDEPENDENT AUDITORS
6
INTEGRITY NATIONAL LIFE INSURANCE COMPANY
PAGE
Report of Independent Auditors..................................... 2
Statement of Income and Expenses
for the eight months ended August 31, 1995 ...................... 3
Statement of Assets and
Liabilities at August 31, 1995.................................... 4
Notes to Financial Statements..................................... 6
1
7
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Integrity National Life Insurance Company
We have audited the accompanying Statement of Assets and Liabilities of
Integrity National Life Insurance Company (exclusive of its medicare supplement
and long-term care segment) as of August 31, 1995, and the related Statement of
Income and Expenses for the eight months then ended. These Statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these Statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether these Statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in these Statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of these
Statements. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statements were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion
in a registration statement of Citizens Financial Corporation as described in
Note 1, and are not intended to be a complete presentation of the Company's
assets and liabilities or income and expenses.
In our opinion, the Statements referred to above present fairly, in all
material respects, the assets and liabilities of Integrity National Life
Insurance Company (exclusive of its medicare supplement and long-term care
segment) at August 31, 1995, and its related income and expenses for the eight
months then ended, in conformity with generally accepted accounting principles.
Louisville, Kentucky
May 2, 1997
2
8
INTEGRITY NATIONAL LIFE INSURANCE COMPANY
Statement of Income and Expenses
Eight Months Ended August 31 1995
Income:
Premiums and other considerations $5,396,198
Net investment and other income 1,373,280
Net realized investment gains 29,339
Total Income 6,798,817
Benefits and Expenses:
Policyholder benefits 2,195,477
Increase in net benefit reserves 843,710
Interest credited on policyholder deposits 616
Commissions 1,736,655
General expenses 1,002,977
Policy acquisition costs deferred (575,721)
Amortization expense:
Deferred policy acquisition costs 483,291
Value of insurance acquired 106,000
Total Benefits and Expenses 5,793,005
Income before Federal Income Tax 1,005,812
Federal Income Tax Expense 352,034
Net Income $ 653,778
Net Income Per Common Share: $ 5.95
See Notes to Financial Statements.
3
9
INTEGRITY NATIONAL LIFE INSURANCE COMPANY
Statement of Assets and Liabilities
August 31 1995
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost of $23,674,420) $24,068,466
Equity securities (cost of $8,560) 8,832
Short-term investments 32,536
Policy loans 1,166,880
Mortgage loans on real estate 635,662
Other invested assets 128,565
Total Investments 26,040,941
Cash and cash equivalents 5,042,120
Accrued investment income 360,366
Premiums receivable 365,140
Deferred policy acquisition costs 3,958,573
Value of insurance acquired 1,206,000
Other assets 38,955
Total Assets $37,012,095
See Notes to Financial Statements.
4
10
August 31 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Policy liabilities:
Future policy benefits $24,651,931
Policy and contract claims 517,154
Other policy liabilities 71,211
Total Policy Liabilities 25,240,296
Accrued expenses and other liabilities 666,737
Federal income tax payable 419,893
Deferred federal income tax 624,761
Total Liabilities 26,951,687
Commitments and Contingencies
Shareholders' Equity
Common stock, 110,000 shares authorized; 109,969 shares issued
and outstanding 1,539,566
Additional paid-in capital 68,765
Unrealized appreciation of investments 256,307
Retained earnings 8,195,770
Total Shareholders' Equity 10,060,408
Total Liabilities and Shareholders' Equity $37,012,095
See Notes to Financial Statements.
5
11
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
As of August 31, 1995, Integrity National Life Insurance Company
(the "Company") was a 98.85%-owned subsidiary to Southwestern
Life Insurance Company ("Southwestern"). As discussed in Note
12, on September 22, 1995, 98.85% of the Company's common stock
was acquired by Citizens Financial Corporation ("Citizens"). As
a condition of this acquisition, the Company entered into a
coinsurance and assumption reinsurance agreement with Union
Bankers Insurance Company ("Union Bankers"), an affiliate of
Southwestern, to divest the Company's 14,500 individual long-
term care and medicare supplement insurance policies with
annualized premium of approximately $14,800,000, leaving the
remaining life and accident and health insurance business with
the Company.
The accompanying Statement of Assets and Liabilities and
Statement of Income and Expenses (the "Statements") were
prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for
inclusion in a registration statement of Citizens. As the
primary purpose of these Statements is to provide financial
information regarding the ongoing operations of Citizens, the
accompany Statements exclude the assets, liabilities and results
of operations of the Company's long-term care and medicare
supplement business, which was subsequently divested to Union
Bankers.
NOTE 2--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Company was incorporated in 1903 in
Pennsylvania as an insurance company engaged in the business of
life insurance and accident and health insurance. The Company
offers life and accident and health insurance products to
individuals through independent agents.
The individual life insurance products currently offered by the
Company consist primarily of traditional whole life insurance
policies. The Company's individual accident and health
insurance products provide coverage for monthly income during
periods of hospitalization, scheduled reimbursement for specific
hospital and surgical expenses, and lump sum payments for
accidental death or dismemberment.
The Company is licensed to sell products in the District of
Columbia and nineteen states primarily located in the East and
Southeast. The Company markets its portfolio of products
through the personal producing general agent distribution system
and has approximately 320 sales representatives, all of whom are
independent agents who may also represent other insurers. The
majority of these agents specialize in the home service market.
That market consists primarily of individuals who desire whole
life policies with policy limits typically below $10,000.
USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
INVESTMENTS. Investments are reported in accordance with
Statement of Financial Accounting Standards ("SAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." All of the Company's fixed maturities and equity
securities are classified as "available-for-sale", as they are
not bought and held principally for the purpose of selling them
in the near term (e.g. "trading securities") or, if fixed
maturities, are not intended to be "held to maturity".
Available-for-sale securities are carried at fair value, with
unrealized gains and losses included in shareholders' equity,
net of applicable deferred taxes.
Fixed maturities and equity securities having a decline in value
considered by management to be other than temporary are adjusted
to an amount which, in management's judgment, reflects such
declines. Such amounts are included in net realized investment
gains and losses. For purposes of computing realized gains
and losses on fixed maturities and equity securities sold, the
carrying value is determined using the specific-identification
method. Mortgage loans and policy loans are carried at unpaid
balances. Other invested assets consist of a note receivable,
which is carried at unpaid
6
12
NOTE 2--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
balance, and investment real estate, which is carried at
depreciated cost. Short-term investments are carried at cost
which approximates fair value. Cash and cash equivalents
consist of highly liquid investments with maturities of three
months or less at the date of purchase and are also carried at
cost which approximates fair value.
DEFERRED POLICY ACQUISITION COSTS. Commissions and other policy
acquisition costs which vary with, and are primarily related to,
the production of new insurance contracts are deferred, to the
extent recoverable from future policy revenues and gross
profits, and amortized over the life of the related contracts.
See Premiums, Benefits and Expenses regarding amortization
methods.
VALUE OF INSURANCE ACQUIRED. Value of insurance acquired is
recorded for the estimated value assigned to the insurance in
force of purchased business at the date of acquisition by
Southwestern. The assigned value is amortized over the expected
remaining life of the insurance in force using methods
consistent with that used for amortization of policy acquisition
costs (as described under Premiums, Benefits and Expenses). At
August 31, 1995, accumulated amortization was $2,241,851.
BENEFIT RESERVES. Traditional life and accident and health
insurance products include those contracts with fixed and
guaranteed premiums and benefits and consist principally of
whole-life and term insurance policies, and limited-payment life
insurance policies. Reserves on such policies are based on
assumed investment yields which range from 6% to 8%. Reserves
on traditional life and accident and health insurance products
are determined using the net level premium method based on
future investment yields, mortality, withdrawals and other
assumptions. Such assumptions are based on past experience and
include provisions for possible unfavorable deviation. The
Company has no participating insurance business.
PREMIUMS, BENEFITS AND EXPENSES. Premiums for traditional
individual life and accident and health policies are reported as
earned when due. Benefit claims (including an estimated
provision for claims incurred but not reported), benefit reserve
changes and expenses (except those deferred) are charged to
expense as incurred. Deferred policy acquisition costs related
to traditional life and accident and health policies are charged
to expense over the life of the policy using methods and
assumptions consistent with those used in estimating liabilities
for future policy benefits. In determining whether a premium
uration policies, management does not give consideration to
investment income.
LIABILITIES FOR POLICY CLAIMS. Policy claim liabilities are
based on known liabilities plus estimated future liabilities
developed from trends of historical data applied to current
exposures. These liabilities are closely monitored and
adjustments for changes in experience are made in the period
identified.
FEDERAL INCOME TAXES. The Company uses the liability method of
accounting for income taxes. Deferred income taxes are provided
for cumulative temporary differences between balances of assets
and liabilities determined under generally accepted accounting
principles and balances determined for tax reporting purposes.
EARNINGS PER SHARE. Earnings per share amounts are based on
109,969 weighted average common shares outstanding during the
eight months ended August 31, 1995.
7
13
NOTE 3--INVESTMENTS
The cost and fair value of investments in fixed maturities and
equity securities are shown below. The cost amounts are
adjusted for amortization of premium and accretion of discount
on fixed maturities.
Amortized GROSS UNREALIZED Fair Value
August 31, 1995 Cost Gains Losses (Carrying Value)
Fixed Maturities:
U. S. government obligations $ 2,371,410 $ 93,534 $ 3,112 $ 2,461,832
Corporate securities 12,272,776 334,930 40,727 12,566,979
Mortgage-backed securities 9,030,234 220,123 210,702 9,039,655
Total $ 23,674,420 $ 648,587 $ 254,541 $ 24,068,466
Equity Securities $ 8,560 $ 2,324 $ 2,052 $ 8,832
The fair values for investments in fixed maturities and equity
securities are based on quoted market prices, where available.
For investments in fixed maturities and equity securities not
actively traded, fair values are estimated using values obtained
from independent pricing services.
The change in net unrealized investment appreciation or
depreciation, for the eight months ended August 31, 1995 and the
amount of net realized investment gain or loss included in net
income for such period are as follows:
Eight Months Ended August 31 1995
FIXED MATURITIES:
Change in net unrealized appreciation $ 1,874,247
Net realized gain $ 29,339
EQUITY SECURITIES:
Change in net unrealized appreciation $ 143
Net realized gain $ ---
The amortized cost and fair value of investments in fixed
maturities at August 31, 1995, by contractual maturity are shown
below. Expected maturities for investments in fixed maturities
will differ from contractual maturities because borrowers may
have the right to call or prepay obligations, sometimes without
prepayment penalties.
August 31, 1995 Amortized Cost Fair Value
Due in one year or less $ 741,716 $ 743,418
Due after one year through five years 2,756,645 2,757,933
Due after five years through ten years 7,377,127 7,535,823
Due after ten years 3,768,698 3,991,637
Subtotal 14,644,186 15,028,811
Mortgage-backed securities 9,030,234 9,039,655
Total $23,674,420 $24,068,466
Gross gains of $29,748 and gross losses of $409 were realized on
the sale of available-for-sale fixed maturities during the eight
months ended August 31, 1995. Gross proceeds from the sale of
fixed maturities during the eight months ended August 31, 1995
totaled $564,815. No realized gains or losses were recognized
on equity securities during the eight months ended August 31,
1995.
8
14
NOTE 3--INVESTMENTS (Continued)
Net unrealized appreciation (depreciation) of available-for-sale
securities is summarized as follows:
August 31 1995
Net appreciation (depreciation):
Fixed maturities $394,046
Equity securities 272
Deferred income taxes (138,011)
Net Unrealized Appreciation $256,307
Major categories of investment income are summarized as follows:
Eight Months Ended August 31 1995
Fixed maturities $1,198,316
Equity securities 369
Mortgage loans on real estate 32,919
Policy loans 43,290
Investment real estate 7,925
Short-term investments and other 135,155
Subtotal $1,417,961
Investment expenses (44,694)
Net Investment Income $1,373,280
The Company limits credit risk by diversifying its investment
portfolio among government and corporate fixed maturities and
common and preferred equity securities. It further diversifies
these investment portfolios within industry sectors. As a
result, management believes that significant concentrations of
credit risk do not exist.
At August 31, 1995, the Company had no investments which had not
been income producing for a period of at least twelve months
prior to year end.
Pursuant to requirements of certain state insurance departments,
the Company has investments with a carrying value of $1,990,600
at August 31, 1995, placed on deposit at various financial
institutions which are restricted from withdrawal without prior
regulatory approval.
NOTE 4--VALUE OF INSURANCE ACQUIRED
The value of insurance acquired is an asset which represents the
present value of future profits on business acquired, using, for
amortization, interest rates grading from 7.5% to 6%. An
analysis of the value of insurance acquired for the eight months
ended August 31, 1995 is as follows:
Eight Months ended August 31 1995
Balance at beginning of year $1,312,000
Accretion of interest 52,480
Amortization (158,480)
Balance at end of year $1,206,000
9
15
NOTE 4--VALUE OF INSURANCE ACQUIRED (Continued)
Amortization of the value of insurance acquired (net of interest
accretion) during the last four months of 1995 and in each of
the following five years will be approximately: 1995 - $52,000;
1996 - $156,600; 1997 - $155,000; 1998 - $154,000; 1999 -
$153,000; and 2000 - $152,000.
NOTE 5--FEDERAL INCOME TAXES
The Company's taxable income is included in Southwestern's
consolidated Federal income tax return. Tax expense is
allocated to the Company based on a separate company calculation
as defined in a written tax sharing agreement. Federal income
taxes for the eight months ended August 31, 1995 consist of the
following:
Eight Months Ended August 31 1995
Current tax expense $488,103
Deferred tax benefit 136,069
Federal Income Tax Expense $352,034
Deferred income taxes are provided for cumulative temporary
differences between balances of assets and liabilities
determined under generally accepted accounting principles and
balances determined for tax reporting purposes. Significant
components of the Company's deferred tax liabilities and assets
as of August 31, 1995 are as follows:
August 31 1995
DEFERRED TAX LIABILITIES:
Deferred policy acquisition costs $ 705,584
Value of insurance acquired 422,100
Net unrealized gains on available-for-sale securities 138,011
Investments 44,051
Other 10,199
Total deferred tax liabilities 1,319,945
DEFERRED TAX ASSETS:
Policy and contract reserves 623,033
Other 72,151
Total deferred tax assets 695,184
NET DEFERRED TAX LIABILITIES $ 624,761
The Company's effective income tax rate equals the statutory
rate of 35%. During 1995, the Company paid $116,799 of Federal
income taxes to Southwestern, pursuant to its tax sharing
agreement.
NOTE 6--STATUTORY ACCOUNTING PRACTICES AND SHAREHOLDERS' EQUITY
Integrity is domiciled in Pennsylvania and prepares its
statutory-basis financial statements in accordance with
statutory accounting practices ("SAP") prescribed or permitted
by the Pennsylvania Department of Insurance. Principal
differences between SAP and GAAP include: a) costs of acquiring
new policies are deferred and amortized for GAAP; b) value of
insurance inforce acquired is established as an asset for GAAP;
c) benefit reserves are calculated using more
10
16
NOTE 6--STATUTORY ACCOUNTING PRACTICES AND SHAREHOLDERS' EQUITY
(Continued)
realistic investment, mortality and withdrawal assumptions for
GAAP; d) deferred income taxes are provided for GAAP; e)
available-for-sale fixed maturity investments are reported at
fair value with unrealized gain and losses reported as a
separate component of shareholders' equity for GAAP; and f)
statutory asset valuation reserves and interest maintenance
reserves are not required for GAAP.
"Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a
variety of publications of the National Association of
Insurance Commissioners ("NAIC"). "Permitted" statutory
accounting practices encompass all accounting practices that are
not prescribed; such practices may differ from state to state,
may differ from company to company within a state, and may
change in the future. The NAIC currently is in the process of
codifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory
accounting practices. Accordingly, that project, which is
expected to be completed in 1998, will likely change, to some
extent, prescribed statutory accounting practices, and may
result in changes to the accounting practices that insurance
enterprises use to prepare their statutory-basis financial
statements.
Statutory restrictions limit the amount of dividends which the
Company may pay. Generally, dividends during any year may not
be paid, without prior regulatory approval, in excess of the
lesser of (a) 10% of statutory shareholder's surplus as of the
preceding December 31, or (b) statutory net operating income for
the preceding year. In addition, the Company must maintain the
minimum capital and surplus, $1,650,000 required for life
insurance companies domiciled in Pennsylvania.
The Pennsylvania Department of Insurance imposes minimum risk-
based capital ("RBC") requirements on insurance enterprises that
were developed by the NAIC. The formulas for determining the
amount of RBC specify various weighting factors that are applied
to financial balances and various levels of activity based on
the perceived degree of risk. Regulatory compliance is
determined by a ratio (the "Ratio") of the enterprise's
regulatory total adjusted capital, as defined by the NAIC, to
its authorized control level RBC, as defined by the NAIC.
Enterprises below specific trigger points or ratios are
classified within certain levels, each of which requires
specified corrective action. The Company has a Ratio that is at
least 200% of the minimum RBC requirements; accordingly, the
Company meets the RBC requirements.
NOTE 7--REINSURANCE
The Company maintains reinsurance coverage for life insurance
policies with benefits exceeding $25,000. To the extent that
reinsurance companies are unable to meet obligations under
reinsurance agreements, the Company would remain liable.
However, the majority of the Company's life insurance policies
provide benefits of less than $10,000 and very few policies
exceed $25,000.
As discussed in Note 1, on September 22, 1995, the Company
entered into a coinsurance and assumption reinsurance agreement
with Union Bankers covering the Company's long term care and
Medicare supplement business. Under the agreement, Union
Bankers directly assumed these liabilities.
NOTE 8--CONTINGENCIES
In the normal course of business, the Company is party to a
number of lawsuits. Management believes recorded claims
liabilities are adequate to ensure these suits will be resolved
without material financial impact to the Company.
NOTE 9--LEASE COMMITMENTS
The Company leases its home office space through June 30, 1999
and certain computer equipment through June 30, 1996. On or
after December 31, 1996, the Company may terminate the home
office space lease after providing six
11
17
NOTE 9--LEASE COMMITMENTS (Continued)
months of advance notice. Presented below is a schedule of
future minimum rental payments required under this lease.
.
Period Rental
Four months ended December 31, 1995 $ 60,397
Year ended December 31, 1996 135,920
Year ended December 31, 1997 45,325
Total $241,642
The Company incurred approximately $121,000 of rental expense
during the eight months ended August 31, 1995.
NOTE 10--FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments, and the methods and
assumptions used in estimating their fair values, are as
follows:
FIXED MATURITIES: The fair values for fixed maturities are
based on quoted market prices, where available. For those fixed
maturities which are not actively traded, fair values are
estimated using values obtained from independent pricing
services. Available-for-sale fixed maturities are carried at
fair value in the accompanying Statement of Assets and
Liabilities. At August 31, 1995, the fair value of available-
for-sale fixed maturities was $24,068,466.
EQUITY SECURITIES: The fair values for equity securities are
based on quoted market prices. Equity securities are carried at
fair value in the accompanying Statement of Assets and
Liabilities. At August 31, 1995, the fair value of equity
securities was $8,832.
Short-Term Investments: The carrying amount of short-term
investments approximates their fair value. At August 31, 1995,
the fair value of short-term investments was $32,536.
POLICY LOANS: The carrying amount of policy loans approximates
their fair value. At August 31, 1995, the fair value of policy
loans was $1,166,880.
MORTGAGE LOANS: The carrying amount of mortgage loans
approximates their fair value. At August 31, 1995, the fair
value of mortgage loans was $635,662.
OTHER INVESTED ASSETS: The carrying amount of other invested
assets, which consist of a note receivable and investment real
estate, approximates their fair value. At August 31, 1995, the
fair value of the note receivable and investment real estate is
$75,000 and $53,565, respectively.
CASH AND CASH EQUIVALENTS: The carrying amount of cash and cash
equivalents approximates their fair value. At August 31, 1995
the fair value of cash and cash equivalents was $5,042,120
NOTE 11--RELATED PARTY TRANSACTIONS
The Company is a party to a management and service agreement
with Facilities Management Installation Inc. ("FMI"), a
subsidiary of Southwestern. FMI provides substantially all
administrative, management, investment, personnel, data
processing and certain other services for the Company. FMI also
administers all benefit plans available to such personnel.
During the eight months ended August 31, 1995, the Company
incurred approximately $688,000 of fees for such services in
accordance with the agreement. At August 31, 1995, the Company
has net advances receivable of $18,306 from FMI.
12
18
NOTE 12--SUBSEQUENT EVENTS
As indicated in Note 1, on September 22, 1995, 98.85% of the
Company's common stock was acquired by Citizens. The remaining
1.15% of common stock was also acquired by Citizens during the
fourth quarter of 1995. The aggregate purchase price of the
Company's stock was $9,419,000 (including net cost associated
with the purchase of $437,000 and the purchase of minority
shareholder stock). Effective December 31, 1995, the Company
was merged into Citizens Security Life Insurance Company, a
wholly owned subsidiary of Citizens. The real estate lease
described in Note 9 was terminated effective March 31, 1997.
As also indicated in Note 1, a condition of the acquisition
required the Company to assumptively reinsure it's long-term
care and Medicare Supplement insurance business. In conjunction
with this assumptive reinsurance, the Company transferred
approximately $9,200,000 of assets and reserves to Union
Bankers. As indicated in Note 1, these amounts have been
excluded from the accompanying Statements.
On September 21, 1995, the Company received approval from the
Pennsylvania Department of Insurance to pay an extraordinary
dividend of $593,809 to Southwestern. Such dividend was paid on
September 22, 1995.
13
19
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1995
AS REPORTED
Citizens Financial
CORPORATION Pro Forma Pro Forma
ADJUSTMENTS COMPANY
REVENUES
Premiums and other considerations $ 7,956,944 $5,260,449 3H $13,217,393
Premiums ceded (612,982) (6,133) 3H (619,115)
7,343,962 5,254,316 12,598,278
Investment income, net of expenses 1,571,450 1,364,928 3D&H 2,936,378
Net realized gain on investment securities 1,257,006 19,018 3D&H 1,276,024
Other income 7,600 13 3H 7,613
10,180,018 6,638,275 16,818,293
BENEFITS AND EXPENSES
Policyholder benefits 5,040,475 2,221,523 3H 7,261,998
Policyholder benefits ceded (572,911) (10,631) 3H (583,542)
4,467,564 2,210,892 6,678,456
Interest credited on policyholder deposits 683,591 616 3H 684,207
Increase in benefit reserves 134,011 1,417,611 3F&H 1,551,622
Commissions 1,231,518 1,735,198 3H 2,966,716
Salaries and wages 842,863 80,691 3H 923,554
Other general expenses 1,481,230 623,445 3H 2,104,675
Interest expense 211,105 505,021 3E 716,126
Policy acquisition costs deferred (496,898) (546,642) 3G&H (1,043,540)
Amortization of deferred policy acquisition costs
and value of insurance acquired 584,543 343,392 3G&H 927,935
9,139,527 6,370,224 15,509,751
GAIN FROM OPERATIONS BEFORE FEDERAL
INCOME TAXES 1,040,491 268,051 1,308,542
Federal income taxes (benefits) 268,308 (4,543) 263,765
NET INCOME $ 772,183 $ 272,594 $ 1,044,777
NET INCOME PER SHARE:
Primary $ 0.72 $ 0.87
Fully diluted N/A $ 0.85
Weighted average number of shares outstanding
during the period:
Primary 1,075,615 1,075,615
Fully Diluted N/A 1,167,023
20
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
AS REPORTED
Integrity
National Life
Insurance
Citizens Company
Financial (Statutory- Pro Forma Pro Forma
CORPORATION BASIS ADJUSTMENTS COMPANY
REVENUES
Premiums and other considerations $ 8,987,190 $21,415,646 $(13,661,764) 3A&C $16,741,072
Premiums ceded (1,025,612) (13,129) (1,038,741)
7,961,578 21,402,517 (13,661,764) 15,702,331
Investment income, net of expenses 2,019,926 2,501,383 (572,350) 3A&D 3,948,959
Net realized loss on investment securities (398,890) (70) 3D (398,960)
Other income 5,340 65,667 71,007
9,587,954 23,969,567 (14,234,184) 19,323,337
BENEFITS AND EXPENSES
Policyholder benefits 5,836,219 13,006,446 (9,915,820) 3A 8,926,845
Policyholder benefits ceded (813,902) (14,175) (828,077)
5,022,317 12,992,271 (9,915,820) 8,098,768
Interest credited on policyholder deposits 903,327 903,327
Increase (decrease) in benefit reserves (40,344) 1,661,869 (146,506) 3A,C&F 1,475,019
Commissions 1,205,891 5,183,381 (2,636,885) 3A 3,752,387
Salaries and wages 1,294,550 1,258,485 (1,017,485) 3A 1,535,550
Other general expenses 1,485,849 1,722,526 (652,365) 3A,B&C 2,556,010
Interest expense 345,287 701,124 3E 1,046,411
Policy acquisition costs deferred (473,179) (706,929) 3G (1,180,108)
Amortization of deferred policy acquisition
costs and value of insurance acquired 517,070 419,750 936,820
10,260,768 22,818,532 (13,955,116) 19,124,184
GAIN (LOSS) FROM OPERATIONS BEFORE FEDERAL
INCOME TAXES (672,814) 1,151,035 (279,068) 199,153
Federal income taxes (benefits) (227,145) 557,226 (408,992) (78,911)
NET INCOME (LOSS) $ (445,669) $ 593,809 $ 129,924 $ 278,064
NET INCOME (LOSS) PER SHARE:
Primary $ (0.41) $ 0.15
Fully diluted N/A $ 0.19
Weighted average number of shares
outstanding during the period:
Primary 1,078,369 1,078,369
Fully Diluted N/A 1,181,109
21
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
In connection with the Acquisition, the following pro forma adjustments are
being made to the historical consolidated statements of operations of the
Company at September 30, 1995, (Integrity National Life Insurance Company
(INLIC) was consolidated into the Company at September 30, 1995) and the
Company (excluding INLIC) and INLIC (on a statutory basis) for the year ended
December 31, 1994.
The objective of these adjustments is to illustrate the possible scope of the
change in the Company's and INLIC's historical consolidated results of
operations and financial position as a result of the Acquisition. The pro forma
condensed consolidated statements of operations assume the Acquisition occurred
as of January 1, 1994. No pro forma consolidated balance sheet amounts have
been provided as an actual consolidated balance sheet has already been released
as part of the September 30, 1995, 10-Q.
The pro forma condensed consolidate results of operations do not purport to be
indicative of the financial position or operating results which would have been
achieved had the Acquisition been consummated as of the dates indicated and
should not be construed as representation of future operating results. The pro
forma results of operations reflect preliminary allocations of the purchase
price based upon the estimated fair value of the assets acquired and
liabilities assumed. The actual allocation will be based on further studies and
valuations as of August 31, 1995, the designated effective date of the
Acquisition.
The following describes the pro forma adjustments reflected in the accompanying
pro forma condensed consolidated financial statements.
1. FINANCING AND STRUCTURE OF THE ACQUISITION
To consummate the Acquisition, the Company obtained a $6,400,000 bank
loan.
In order to obtain required approvals from insurance regulatory
authorities of the state of Pennsylvania [i] the Company agreed to
authorize a private placement of up to $4,070,000 of preferred stock to
accredited investors, [ii] the Principal Shareholder personally guaranteed
that at least $1,500,000 of the preferred stock would be sold, and [iii]
the Company agreed that at least $1,500,000 of the proceeds of such sale
would be used to pay down the principal amount of the $6,400,000 bank
loan. The Company is required to satisfy these conditions on or before
December 15, 1995.
The actual amount to be placed in excess of the $1,500,000, and the use of
such excess, is unknown at this time. Accordingly the pro forma financials
reflect only the placement of the $1,500,000 personally guaranteed
portion. If amounts in excess of the $1,500,000 are placed, they could be
used for additional paydown of bank debt or to strengthen the insurance
company's financial position.
2. REINSURANCE
Prior to the acquisition, INLIC entered into a coinsurance and assumption
reinsurance agreement with Union Bankers Insurance Company (Union
Bankers), another affiliate of the seller, covering INLIC's 14,500
individual long-term care and Medicare Supplement insurance policies with
annualized premium of approximately $14,800,000, leaving the remaining
life and accident and health insurance business with INLIC. INLIC also
transferred approximately $9,200,000 in reserves to Union Bankers.
Completion of these transactions was a condition to the Company's
obligations under the Stock Purchase Agreement with Southwestern Life
Insurance Company because the reinsured business did not fit into the
Company's current business plans. Under the agreement, Union Bankers is
currently in the process of contacting INLIC policyholders and directly
assuming
22
the liability. Accordingly, these statements of operations do not
reflect the activity relating to this business.
3. PURCHASE ACCOUNTING MATTERS
The Acquisition will be accounted for using the purchase method. The
aggregate purchase price is allocated based on the estimated fair value of
total assets less the estimated fair value of liabilities. The primary pro
forma effects relate to the assumption the reinsurance transaction
discussed above and the amortization of value assigned to the value of
insurance in force, resulting from the Acquisitions. Accordingly, the
following adjustments are made:
a. Premiums, policyholder benefits and reserve commissions, salaries and
wages, and general expenses are reduced to reflect the reinsurance of
100% of INLIC's Medicare Supplement and Long Term Care policies. In
addition, investment income was reduced to reflect the reduction in
investments which were used to support the reinsured liabilities.
b. Other general expense reductions primarily related to the elimination
of duplicate facilities, personnel and functions.
c. Premiums and increase in reserves are adjusted to eliminate the
effect of statutory deferred premiums on such amounts.
d. Net investment income and net realized gain (loss) on investment
securities were adjusted to eliminate the statutory accounting effect
of the Interest Maintenance Reserve.
e. Interest expense was increased to reflect interest on bank borrowings
to finance the Acquisition.
f. Increase in reserves were increased to adjust INLIC reserve from a
statutory basis to a basis acceptable under Generally Accepted
Accounting Principles (GAAP).
g. Policy acquisition costs deferred and amortization of deferred policy
acquisition cost and value of insurance acquired were increased to
reflect the effect of INLIC on those amounts in accordance with GAAP.
h. Adjusted to reflect activity, excluding the effect of business
reinsured discussed above, for the period January 1, to August 31,
1995 (effective date of Acquisition).
4. IMPACT OF FEDERAL INCOME TAXES
Income tax effects resulting from the above transactions have been
reflected at a rateof 17%.
5. Earnings Per Share
Earning per share amounts were computed assuming an issuance of $1,500,000
shares of preferred convertible stock on March 31, 1994, at a conversion
price of $5.50.