AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2002
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------
CITIZENS, INC.
--------------
(Exact name of registrant as specified in its charter)
<Table>
<Caption>
COLORADO 6311 84-0755371
-------- ---- ----------
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
</Table>
400 EAST ANDERSON LANE
AUSTIN, TEXAS 78752
(512) 837-7100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------
MARK A. OLIVER, PRESIDENT
400 EAST ANDERSON LANE
AUSTIN, TEXAS 78752
(512) 837-7100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------
COPIES TO:
REID A. GODBOLT, ESQ. JAMES L. SHAWN, III, ESQ.
NATHAN D. SIMMONS, ESQ. SNEED, VINE & PERRY, P.C.
JONES & KELLER, P.C. 901 CONGRESS AVENUE
1625 BROADWAY, 16TH FLOOR AUSTIN, TEXAS 78767
DENVER, COLORADO 80202 (512) 476-6955
(303) 573-1600
---------
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
Title of each class of Proposed maximum Proposed Amount of
securities to be Amount to offering price maximum aggregate registration
registered be registered per share offering price fee
---------------------- ------------- ---------------- ----------------- ------------
Class A Common Stock, ______(1) $____(1) $12,140,000 $1,117(2)
No Par Value shares
</Table>
(1) Amount left blank pursuant to Rule 457(o).
(2) Fee calculated pursuant to Rule 457(o).
================================================================================
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
WHAT: Special Shareholders' Meeting
WHEN: _________, 2002, 10:00 a.m. Central Standard Time
WHERE:
We are having a Special Shareholders' Meeting of Combined Underwriters Life
Insurance Company ("Combined") to:
o Vote on an exchange of our common stock for Class A common stock of
Citizens, Inc. ("Citizens"); and
o Transact any other business that may properly come before the
meeting or any adjournment.
IF THE COMBINED EXCHANGE IS APPROVED
o Combined shareholders will exchange their shares for Citizens Class A common
stock as described in the accompanying document.
o Combined will become a subsidiary of Citizens, Inc.
WHO CAN VOTE
o Only Combined shareholders at the close of business on ______, 2002, may
vote at the meeting.
RIGHT TO DISSENT
If you disagree with the Combined Exchange, you may seek
payment for your Combined shares by strictly following the
procedures described in Appendix C.
Shareholders are cordially invited to attend the meeting. Whether or
not you plan to attend the meeting, please fill in, date, sign, and return
promptly the enclosed proxy card in the enclosed postage-prepaid envelope. With
your proxy, your shares will be voted at the meeting as instructed if you cannot
attend in person. Even if you send in your proxy, you may reclaim your right to
vote in person when you attend the meeting.
By Order of the Board of Directors
Gary C. Cole, President
Tyler, Texas
_______________, 2002
(ii)
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
WHAT: Special Shareholders' Meeting
WHEN: _________, 2002, 11:00 a.m. Central Standard Time
WHERE:
We are having a Special Shareholders' Meeting of Lifeline Underwriters Life
Insurance Company ("Lifeline") to:
o Vote on an exchange of our common stock for Class A common stock of
Citizens, Inc. ("Citizens"); and
o Transact any other business that may properly come before the
meeting or any adjournment.
IF THE LIFELINE EXCHANGE IS APPROVED
o Lifeline shareholders will exchange their shares for Citizens Class A common
stock as described in the accompanying document.
o Lifeline will become a subsidiary of Citizens, Inc.
WHO CAN VOTE
o Only Lifeline shareholders at the close of business on ______, 2002, may vote
at the meeting.
RIGHT TO DISSENT
If you disagree with the Lifeline Exchange, you may seek
payment for your Lifeline shares by strictly following the
procedures described in Appendix C.
Shareholders are cordially invited to attend the meeting. Whether or
not you plan to attend the meeting, please fill in, date, sign, and return
promptly the enclosed proxy card in the enclosed postage-prepaid envelope. With
your proxy, your shares will be voted at the meeting as instructed if you cannot
attend in person. Even if you send in your proxy, you may reclaim your right to
vote in person when you attend the meeting.
By Order of the Board of Directors
Gary C. Cole, President
Tyler, Texas
____________, 2002
(iii)
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
PROXY STATEMENT FOR SPECIAL SHAREHOLDERS' MEETING
TO BE HELD _______, 2002
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
PROXY STATEMENT FOR SPECIAL SHAREHOLDERS' MEETING
TO BE HELD _______, 2002
[CITIZENS LOGO] CITIZENS, INC. PROSPECTUS
CLASS A COMMON STOCK, NO PAR
VALUE
UP TO _______ SHARES
This document:
o is furnished by the Board of Directors of Combined Underwriters Life
Insurance Company ("Combined") to request a proxy for voting your
Combined common stock on the Plan and Agreement of Exchange dated
November 20, 2001 (the "Combined Exchange Agreement") between Combined
and Citizens; and
o is furnished by the Board of Directors of Lifeline Underwriters Life
Insurance Company ("Lifeline") to request a proxy for voting your
Lifeline common stock on the Plan and Agreement of Exchange dated
November 20, 2001 (the "Lifeline Exchange Agreement") between Lifeline
and Citizens, Inc. ("Citizens"); and
o registers the shares of Class A common stock of Citizens to be issued
in exchange for Combined shares if the Combined Exchange for each
company occurs. Citizens Class A common stock is traded on the American
Stock Exchange under the symbol "CIA." On _______, 2002, the closing
price of Citizens Class A common stock was $___ per share; and
o registers the shares of Class A common stock of Citizens to be issued
in exchange for Lifeline shares if the Lifeline Exchange for each
company occurs. Citizens Class A common stock is traded on the American
Stock Exchange under the symbol "CIA." On _______, 2002, the closing
price of Citizens Class A common stock was $___ per share.
----------
THE COMBINED EXCHANGE
If the Combined Exchange occurs, you will receive a number of shares of
Citizens Class A common stock having an aggregate market value equal to
the agreed value of the shares of Combined common stock owned by you.
The per share market value of Citizens Class A common stock will equal
its average closing price as reported on the American Stock Exchange
for the 20 trading days immediately preceding the effective date of the
Combined Exchange. The Combined Board of Directors has agreed to a
value of your Combined common stock of $8.64 per share. Fractional
shares will be rounded up to the nearest whole share of Citizens Class
A common stock. If the Combined Exchange occurs, Combined will mail you
instructions for exchanging your Combined shares for Citizens Class A
common stock.
The Combined Board Of Directors UNANIMOUSLY RECOMMENDS that
shareholders APPROVE the Combined Exchange Agreement.
(iv)
THE LIFELINE EXCHANGE
If the Lifeline Exchange occurs, you will receive a number of shares of
Citizens Class A common stock having an aggregate market value equal to
the agreed value of the shares of Lifeline common stock owned by you.
The per share market value of Citizens Class A common stock will equal
its average closing price as reported on the American Stock Exchange
for the 20 trading days immediately preceding the effective date of the
Lifeline Exchange. The Lifeline Board of Directors has agreed to a
value of your Lifeline common stock of $5.00 per share. Fractional
shares will be rounded up to the nearest whole share of Citizens Class
A common stock. If the Lifeline Exchange occurs, Lifeline will mail you
instructions for exchanging your Lifeline shares for Citizens Class A
common stock.
The Lifeline Board Of Directors UNANIMOUSLY RECOMMENDS that
shareholders APPROVE the Lifeline Exchange Agreement.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this proxy statement-prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
----------
THE SECURITIES OF CITIZENS INVOLVE SIGNIFICANT RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE ___.
----------
The date of this proxy statement-prospectus is ______, 2002,
and it is first being mailed to the shareholders of Combined and
Lifeline on or about _________, 2002.
(v)
<Table>
<Caption>
TABLE OF CONTENTS Page
----
AVAILABLE INFORMATION.....................................................................................................1
INCORPORATION OF DOCUMENTS BY REFERENCE...................................................................................1
FORWARD-LOOKING STATEMENTS................................................................................................3
SUMMARY .................................................................................................................4
PLANS AND AGREEMENTS OF EXCHANGE..........................................................................................7
SUMMARY SELECTED FINANCIAL DATA..........................................................................................11
RISK FACTORS.............................................................................................................16
SPECIAL MEETINGS OF COMBINED AND LIFELINE................................................................................22
PROPOSED EXCHANGES - COMBINED AND LIFELINE...............................................................................27
COMBINED'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................42
LIFELINE'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................47
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................................................................51
INFORMATION CONCERNING COMBINED..........................................................................................56
INFORMATION CONCERNING LIFELINE..........................................................................................62
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................................................................65
COMPARISON OF RIGHTS OF SECURITYHOLDERS..................................................................................66
EXPERTS ................................................................................................................69
LEGAL MATTERS............................................................................................................69
OTHER MATTERS............................................................................................................69
</Table>
(vi)
APPENDIX A -- Combined -- Plan and Agreement of Exchange-Combined Underwriters
Life Insurance Company and Citizens, Inc.
APPENDIX B -- Lifeline -- Plan and Agreement of Exchange-Lifeline Underwriters
Life Insurance Company and Citizens, Inc.
APPENDIX C -- Part Five, Articles 5.11, 5.12 and 5.13 of the Texas Business
Corporation Act
(vii)
AVAILABLE INFORMATION
Citizens files annual, quarterly, and special reports, proxy statements
and other information with the Securities and Exchange Commission (the "SEC").
Those reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the SEC at the SEC's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, telephone
(800) SEC-0330, and at the regional offices of the SEC at 233 Broadway, New
York, New York 10279, and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661. Copies can be obtained at prescribed rates from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, copies may be inspected at the offices of
the American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881 and
on the SEC Internet website at http://www.sec.gov.
Citizens has filed with the SEC a registration statement on Form S-4
under the Securities Act of 1933, for the shares of Citizens Class A common
stock to be issued in connection with the transactions described in this proxy
statement-prospectus. In accordance with SEC rules and regulations, this proxy
statement-prospectus does not contain all the information in the registration
statement. For further information, please see the registration statement,
including its exhibits. Statements contained in this proxy statement-prospectus
concerning the provisions of documents are not necessarily complete, and in each
instance, reference is made to the copy of such document filed as an exhibit to
the registration statement or otherwise filed with the SEC. Each such statement
is qualified in its entirety by reference to the registration statement.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents have been filed by Citizens with the SEC
pursuant to the Securities Exchange Act of 1934 (File No. 0-16509) and are
incorporated by reference into this proxy statement-prospectus:
o Citizens' Annual Report on Form 10-K filed on March 29, 2001,
for the year ended December 31, 2000;
o the description of Citizens' Class A common stock contained in
its Registration Statement on Form 8-A declared effective by
the SEC on April 14, 1994;
o Citizens' Quarterly Reports on Form 10-Q filed on or about (i)
May 15, 2001 for the period ended March 31, 2001, (ii) August
14, 2001, for the period ended June 30, 2001, and (iii)
November 7, 2001, for the period ended September 30, 2001; and
o Citizens' Current Report on Form 8-K dated November 20, 2001,
filed on or about November 26, 2001.
1
All documents filed by Citizens pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this proxy statement-prospectus and
prior to the shareholder meetings of Lifeline and Combined are incorporated by
reference into this proxy statement-prospectus from the date of the filing of
the documents. Any statement contained in this proxy statement-prospectus or in
a document incorporated by reference into this proxy statement-prospectus will
be deemed to be modified or superseded for purposes of this proxy
statement-prospectus to the extent that a statement contained in this proxy
statement-prospectus or in any subsequently filed document that is also
incorporated by reference in this proxy statement-prospectus modifies or
supersedes such statement. The foregoing sentence does not apply to Lifeline,
Combined or any of their affiliates.
2
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT CITIZENS THAT IS NOT INCLUDED OR DELIVERED
WITH THIS DOCUMENT. YOU MAY OBTAIN THIS INFORMATION WITHOUT CHARGE BY
REQUEST TO SECRETARY, CITIZENS, INC., P.O. BOX 149151, AUSTIN, TEXAS
78714-9151; TELEPHONE (512) 837-7100. TO ENSURE TIMELY DELIVERY, ANY
REQUEST SHOULD BE MADE AT LEAST FIVE BUSINESS DAYS BEFORE _______.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this proxy statement-prospectus are not
statements of historical fact and constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act. These statements
include specifically identified forward-looking statements within this proxy
statement-prospectus. In addition, statements in future filings by Citizens with
the SEC, in press releases, and in oral and written statements made by or with
the approval of Citizens, Lifeline or Combined which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Act. Examples of forward-looking statements, include: (i) projections of
revenues, income or loss, earnings or loss per share, the payment or non-payment
of dividends, capital structure, and other financial items; (ii) statements of
plans and objectives of Citizens, Lifeline or Combined or any of their
management or Boards of Directors; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying those statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted,"
"may," "will" and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements. Factors
that could cause actual results to differ from those discussed in the
forward-looking statements include: (i) the strength of foreign and U.S.
economies in general and the strength of the local economies in which operations
are conducted; (ii) the effects of and changes in trade, monetary and fiscal
policies and laws; (iii) inflation, interest rates, market and monetary
fluctuations and volatility; (iv) the timely development of and acceptance of
new products and services and perceived overall value of these products and
services by existing and potential customers; (v) changes in consumer spending,
borrowing and saving habits; (vi) concentrations of business from persons
residing in third world countries; (vii) the ability of Citizens to consummate
and integrate acquisitions; (viii) the persistency of existing and future
insurance policies sold by Citizens, Lifeline and Combined; (ix) the dependence
of Citizens on its Chairman of the Board; (x) the ability to control expenses;
(xi) the effect of changes in laws and regulations, including those concerning
insurance, with which Citizens, Lifeline and Combined must comply; (xii) the
effect of changes in accounting policies and practices, as may be adopted by the
regulatory agencies as well as the Financial Accounting Standards Board; (xiii)
changes in the organization and compensation plans of Citizens, Lifeline and
Combined; (xiv) the costs and effects of litigation and of unexpected or adverse
outcomes in litigation; and (xv) the success of Citizens, Lifeline and Combined
at managing the above risks.
These forward-looking statements speak only as of the date on which the
statements are made, and Citizens, Lifeline and Combined undertake no obligation
to update any forward-looking statement to reflect events or circumstances after
the date on which a statement is made to reflect the occurrence of unanticipated
events.
3
SUMMARY
This is a summary. Please read the entire proxy statement-prospectus
before you make an investment decision.
PARTIES TO THE COMBINED EXCHANGE AND THE LIFELINE EXCHANGE
Citizens, a Colorado corporation, is a life insurance holding company.
Citizens' principal executive office is located at 400 East Anderson Lane,
Austin, Texas 78752, and its telephone number there is (512) 837-7100.
Combined is a Texas stipulated premium life insurance company. Combined
has the same principal office and telephone number as Lifeline.
Lifeline is a Texas legal reserve life insurance company. Lifeline's
principal executive office is located at 307 North Glenwood Boulevard, Tyler,
Texas 75702 and the telephone number there is (800) 872-6339.
Neither Combined, Lifeline, nor any of their officers or directors are
affiliated with Citizens, nor are any officers or directors of Citizens
affiliated with Combined or Lifeline. If the Combined Exchange and Lifeline
Exchange are approved, Combined and Lifeline will become subsidiaries of
Citizens.
Neither the common stock of Combined nor Lifeline is listed on a stock
exchange or traded regularly through security brokerage firms, and there is
virtually no trading activity. Consequently, Combined and Lifeline are unable to
determine a reliable market value for their stock. For an explanation of the
manner in which Citizens, Combined and Lifeline negotiated the share exchange
ratios, see "Proposed Exchanges -- Background and Reasons-Combined and
Lifeline."
<Table>
PERSONS ENTITLED TO VOTE; RECORD DATE The record date for shareholders of both
Combined and Lifeline is the close of
business on ______, 2002. Only shareholders
as of the record date will be notified of,
and be entitled to vote at, the special
meetings of shareholders of Combined and
Lifeline.
DATE, TIME AND PLACE OF SPECIAL MEETINGS OF Combined - The special meeting of Combined
LIFELINE AND COMBINED shareholders will be held on _______, 2002 at
10:00 a.m., Central Standard Time, at
_______, _______.
Lifeline - The special meeting of Lifeline
shareholders will be held on _______, 2002 at
11:00 a.m., Central Standard Time, at
_______, _______.
</Table>
4
<Table>
BUSINESS TO BE TRANSACTED At each respective special meeting,
shareholders of Combined and Lifeline will be
asked to vote upon an Exchange Agreement
under which their shares of Combined and
Lifeline will be exchanged for Class A common
stock of Citizens.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS Combined - The Combined Board of Directors
OF LIFELINE AND COMBINED has unanimously approved the Combined
Exchange Agreement and RECOMMENDS that the
shareholders vote FOR APPROVAL of the
Combined Exchange. The Combined Board of
Directors reviewed several factors in
reaching its decision to recommend that
shareholders vote to approve the Combined
Exchange, although it did not solicit or
receive an outside fairness opinion with
respect to the Combined Exchange. See
"Proposed Exchanges--Background and
Reasons-Combined and Lifeline--Recommendation
of Combined's Board of Directors."
Lifeline - The Lifeline Board of Directors
has unanimously approved the Lifeline
Exchange Agreement and RECOMMENDS that the
shareholders vote FOR APPROVAL of the
Lifeline Exchange. The Lifeline Board of
Directors reviewed several factors in
reaching its decision to recommend that
shareholders vote to approve the Lifeline
Exchange, although it did not solicit or
receive an outside fairness opinion with
respect to the Lifeline Exchange. See
"Proposed Exchanges--Background and
Reasons-Combined and Lifeline--Recommendation
of Lifeline's Board of Directors."
INTERESTS OF CERTAIN PERSONS IN THE COMBINED The Chairman of the Board and Chief Executive
EXCHANGE AND THE LIFELINE EXCHANGE Officer of Combined, Walden P. "Red" Little
and Regina Little Rooney, an officer and
director of Combined, have interests in the
Combined Exchange and the Lifeline Exchange
in addition to their interests as
shareholders of Combined and Lifeline. Upon
the closings of the Combined Exchange and the
Lifeline Exchange, both companies will enter
into one overall marketing development
allowance agreement with the Red Little
Combined Agency, Inc., a wholly-owned
insurance agency of Mr. Little. Under this
agreement Combined and Lifeline will provide
working capital to the insurance agency to be
used as a marketing development allowance and
for other purposes deemed necessary by the
insurance agency to strengthen and enhance
the
</Table>
5
<Table>
operations of the insurance agency for a
period of 36 months. The payment rate to the
agency will be $25,000 per month. In
addition, upon the closing of the Combined
Exchange, Combined will enter into two lease
extension and modification agreements with
Little, Rooney & Little Associates which
provide that Combined will extend its
existing leases on its offices for a term of
60 months on the same terms and conditions
that presently exist. The existing lease rate
for both leases is $10,121 per month. Little,
Rooney & Little Associates is 50% owned by
Mr. Little and 50% owned by Ms. Rooney.
PROXY REVOCABILITY Proxies of shareholders of Combined and
Lifeline are revocable at any time prior to
voting at the meetings. See "The Special
Meetings--Revocability of Proxies."
REQUIRED VOTES Combined - Approval of the Combined Exchange
Agreement and the transactions contemplated
thereby requires the affirmative vote of
two-thirds of the outstanding Combined common
stock. See "The Special Meetings--Voting
Securities." No shareholder vote of Citizens
is required by the Exchange Agreements or
applicable law. Walden P. "Red" Little,
Chairman of the Board of Combined, and Regina
Little Rooney, an officer and director of
Combined, who have an aggregate ownership of
approximately 92.6% of the shares of Combined
common stock, have indicated that they intend
to vote for the Combined Exchange. This vote
will virtually assure that the Combined
Exchange will occur absent unfulfilled
conditions to complete the Combined Exchange.
Lifeline - Approval of the Lifeline Exchange
Agreement and the transactions contemplated
thereby requires the affirmative vote of
two-thirds of the outstanding Lifeline common
stock. See "The Special Meetings--Voting
Securities." No shareholder vote of Citizens
is required by the Exchange Agreements or
applicable law. Walden P. "Red" Little, the
majority shareholder of Lifeline, and Regina
Little Rooney, a significant shareholder of
Lifeline, who have an aggregate ownership of
approximately 85.8% of the shares of Lifeline
common stock, have indicated that they intend
to vote for the Lifeline Exchange. This vote
will virtually assure that
</Table>
6
<Table>
the Lifeline Exchange will occur absent
unfulfilled conditions to complete the
Lifeline Exchange.
OUTSTANDING SHARES Combined - As of the record date there were
outstanding 1,000,000 shares of Combined
common stock. As of the record date,
Combined's directors, executive officers and
their affiliates held 925,858 shares of
Combined common stock or a total of 92.6% of
the shares entitled to vote.
Lifeline - As of the record date there were
outstanding 700,000 shares of Lifeline common
stock. As of the record date, Lifeline's
directors, executive officers and their
affiliates held 625,793 shares of Lifeline
common stock or a total of 89.4% of the
shares entitled to vote.
PLANS AND AGREEMENTS OF EXCHANGE
CONSIDERATION FOR YOUR SHARES Combined - If the Combined Exchange occurs,
you will receive a number of shares of
Citizens Class A common stock equal in market
value to the shares of Combined common stock
owned by you. The per share market value of
Citizens Class A common stock will equal its
average closing price as reported on the
American Stock Exchange for the 20 trading
days immediately preceding the effective date
of the Combined Exchange. The market value of
your Combined common stock has been agreed to
be $8.64 per share. Fractional shares will be
rounded up to the nearest whole share of
Citizens Class A common stock. Fractional
shares will not be issued. Any Combined
shareholder who perfects dissenters' rights
under Texas law will receive cash in lieu of
Citizens Class A common stock. See "Proposed
Exchange--Receipt of Citizens Shares" and
"Rights of Dissenting Shareholders."
Lifeline - If the Lifeline Exchange occurs,
you will receive a number of shares of
Citizens Class A common stock equal in market
value to the shares of Lifeline common stock
owned by you. The per share market value of
Citizens Class A common stock will equal its
average closing price as reported on the
American Stock Exchange for the 20 trading
days immediately preceding the effective date
of the Lifeline Exchange. The market value of
your Lifeline common stock has been agreed to
be $5.00 per share. Fractional shares will be
rounded up
</Table>
7
<Table>
to the nearest whole share of Citizens Class
A common stock. Fractional shares will not be
issued. Any Lifeline shareholder who perfects
dissenters' rights under Texas law will
receive cash in lieu of Citizens Class A
common stock. See "Proposed Exchange--Receipt
of Citizens Shares" and "Rights of Dissenting
Shareholders."
CLOSING DATES The parties believe that the Closing will
occur and the Combined Exchange and Lifeline
Exchange will become effective shortly after
the conditions in the Exchange Agreements
(including shareholder approval) are
satisfied.
CONDUCT OF BUSINESS PRIOR TO CLOSINGS Combined and Lifeline have each agreed that
they will not: (1) enter into any
transactions prior to the Exchanges with
Citizens other than in the ordinary course of
business, (2) pay shareholder dividends or
increase the compensation of officers, nor
(3) enter into any agreement or transaction
which will adversely affect their respective
financial conditions. See "Proposed
Exchanges--Conduct of Business Pending the
Exchanges; the Covenants of the Parties."
DISSENTERS' RIGHTS Combined and Lifeline shareholders may
dissent from the Exchange applicable to them
and demand payment of their share values in
cash. If holders of more than 2.5% of the
outstanding shares of Combined (approximately
25,000 shares) or Lifeline (approximately
17,500 shares) perfect their dissenter's
rights, Citizens may cancel the Exchanges.
See "Rights of Dissenting Shareholders,"
"Proposed Exchanges--Combined and
Lifeline--Other Conditions to Consummation of
the Exchanges," and Appendix C which contains
copies of the Texas statutes for dissenting
shareholder procedures.
CONDITIONS TO THE COMBINED EXCHANGE AND THE In addition to approval by the shareholders
LIFELINE EXCHANGE of Combined and Lifeline, the Exchanges are
subject to satisfaction of other conditions
including: (1) approval by the Texas
Commissioner of Insurance; (2) the
performance by each party of its obligations;
(3) the absence of any legal proceeding
relating to the transactions contemplated by
the Exchange Agreements; (4) the continued
material accuracy of representations made by
each party; and (5) the delivery of legal
opinions. See "Proposed Exchanges--Combined
and Lifeline--Other Conditions."
</Table>
8
<Table>
OPERATIONS OF COMBINED AND LIFELINE AFTER THE Combined - Following the Combined Exchange,
EXCHANGES Combined will continue to operate in its
locations under a joint management team, with
the consolidation of computer data processing
in Citizens' system. Citizens will continue
to evaluate the personnel, business practices
and opportunities for Combined and may make
such changes as it deems appropriate
following the Combined Exchange.
Lifeline - Following the Lifeline Exchange,
Lifeline will continue to operate in its
location under a joint management team, with
the consolidation of computer data processing
in Citizens' system. Citizens will continue
to evaluate the personnel, business practices
and opportunities for Lifeline and may make
such changes as it deems appropriate
following the Lifeline Exchange.
SUMMARY OF FEDERAL INCOME TAX CONSIDERATIONS The Combined Exchange and the Lifeline
Exchange are each intended to be treated as a
reorganization. Accordingly, for federal
income tax purposes it is anticipated that:
o no gain or loss will generally be
recognized by holders of Combined or
Lifeline common stock on the exchange of
their shares of stock for Citizens Class
A common stock;
o the holding period for Citizens Class A
common stock received in the Exchanges
will include the holding period for the
Combined and Lifeline common stock
surrendered in exchange therefor; and
o the aggregate adjusted tax basis of
Citizens Class A common stock received
by a Combined shareholder and a Lifeline
shareholder will be the same as the
basis of the stock surrendered in
exchange therefor.
Consummation of each of the Combined Exchange
and the Lifeline Exchange is conditioned upon
receipt of an opinion of counsel substantially
to such effect. However, a ruling from the
Internal Revenue Service is
</Table>
9
<Table>
not being sought in connection with the
Combined Exchange or the Lifeline Exchange.
The opinions of counsel are subject to
certain assumptions and qualifications and
are not binding on the Internal Revenue
Service. If the Combined Exchange or the
Lifeline Exchange were not to so qualify as a
reorganization, the non-qualifying exchange
of shares would be taxable. See "Certain
Federal Income Tax Consequences."
TERMINATION AND AMENDMENT OF THE COMBINED Either the Combined Exchange Agreement or the
AND LIFELINE EXCHANGE AGREEMENTS Lifeline Exchange Agreement may be terminated
by any party if the Texas Commissioner of
Insurance does not approve the Combined
Exchange and the Lifeline Exchange by April
2, 2002. See "Proposed Exchanges--Combined
and Lifeline--Other Conditions." The Exchange
Agreements may also be terminated at any time
prior to becoming effective:
o by unanimous consent of the parties;
o by any beneficiary of a condition
precedent to the Exchanges if the
condition has not been met or waived;
o by any party if a suit, action, or
proceeding threatens to prohibit the
Exchanges; or
o by any party who discovers a material
error in the representations of another
party.
OTHER MATTERS Combined - The Combined Board knows of no
other matters that will come before the
Combined meeting. If any additional matters
come before the Combined meeting, the proxies
will be voted at the discretion of the proxy
holders.
Lifeline - The Lifeline Board knows of no
other matters that will come before the
Lifeline meeting. If any additional matters
come before the Lifeline meeting, the proxies
will be voted at the discretion of the proxy
holders.
FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated
by reference in this proxy
statement-prospectus relate to future matters
which are qualified in certain respects. See
"Forward-Looking Statements," "Available
Information" and "Incorporation of Documents
by Reference."
</Table>
10
SUMMARY SELECTED FINANCIAL DATA
The tables below set forth in summary certain selected financial data
of Citizens, Combined and Lifeline.
Citizens financial data at or for the nine months ended September 30,
2001 and 2000 is derived from the unaudited consolidated financial statements of
Citizens, Inc. and subsidiaries included elsewhere or incorporated by reference
in this prospectus. Citizens financial data at or for the years ended December
31, 1996 through 2000 is derived from audited consolidated financial statements
of Citizens, Inc. and subsidiaries included elsewhere or incorporated by
reference in this prospectus. The data for Citizens is presented in conformity
with U.S. Generally Accepted Accounting Principles ("GAAP").
Combined and Lifeline financial information presented below in
accordance with GAAP is derived from the unaudited financial statements of each
respective company. Additional Combined and Lifeline financial data on a GAAP
basis is not readily available and Combined and Lifeline management believe that
development of additional GAAP basis financial information would represent a
significant burden and cost to the companies. Combined and Lifeline prepare
financial statements in the normal course of business on the basis of accounting
principles prescribed or permitted by the Texas Department of Insurance
(Statutory Basis), which basis differs from GAAP. A description of the more
significant differences between GAAP and Statutory basis financial data of
Combined and Lifeline is presented below. Combined and Lifeline's selected
statutory financial data at or for the nine months ended September 30, 2001 and
2000 is derived from the unaudited financial statements of Combined and
Lifeline. Combined and Lifeline statutory financial data at or for the years
ended December 31, 1996 through 2000 is derived from audited financial
statements of Combined and Lifeline. Combined and Lifeline's financial
information presented elsewhere in this prospectus is presented on a Statutory
basis and should be read in conjunction with the description below of
differences between Statutory basis financial data and financial data presented
in accordance with GAAP.
CITIZENS, INC.
(in thousands, except per share amounts)
<Table>
<Caption>
At or for the Nine Months At or for the Year Ended
Ended September 30, December 31,
------------------------- --------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues $ 49,418 $ 48,667 $ 66,678 $ 71,877 $ 72,685 $ 65,027 $ 63,822
Net income (loss) 2,464 362 2,053 1,271 (6,721) 3,426 2,214
Basis and diluted earnings
(loss) per share .10 .01 .08 .05 (.27) .14 .10
Total assets 287,195 261,556 267,842 255,485 253,384 249,519 218,277
Total liabilities 204,222 187,719 190,529 183,218 178,480 169,938 151,394
Total shareholders' equity 82,973 73,837 77,313 72,267 74,904 79,581 66,883
Book value per share 3.30 2.94 3.08 2.88 3.06 3.33 2.89
</Table>
11
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
(in thousands, except per share amounts)
<Table>
<Caption>
At or for the Nine Months At or for the Year Ended
Ended September 30, December 31,
------------------------- ------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- ----------- ---------- ---------- ---------- ---------- ----------
Revenues (a) (a) $ 15,677 (a) (a) (a) (a)
Net loss (a) (a) (69) (a) (a) (a) (a)
Net loss per share (a) (a) (.07) (a) (a) (a) (a)
Total assets (a) (a) 24,901 $ 24,090 (a) (a) (a)
Total liabilities (a) (a) 18,603 17,703 (a) (a) (a)
Total shareholders'
equity (a) (a) 6,298 6,387 (a) (a) (a)
Book value per share (a) (a) 6.30 6.39 (a) (a) (a)
Fully diluted book value
per share (a) (a) 6.30 6.39 (a) (a) (a)
</Table>
- ----------
(a) Information not available on a GAAP basis.
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
(in thousands, except per share amounts)
<Table>
<Caption>
At or for the Nine Months At or for the Year Ended
Ended September 30, December 31,
--------------------------- -------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- --------- --------- --------- --------- ---------
Revenues (a) (a) $ 838 (a) (a) (a) (a)
Net income (a) (a) 156 (a) (a) (a) (a)
Net income per share (a) (a) .22 (a) (a) (a) (a)
Total assets (a) (a) 4,106 $ 4,136 (a) (a) (a)
Total liabilities (a) (a) 726 891 (a) (a) (a)
Total shareholders'
equity (a) (a) 3,380 3,245 (a) (a) (a)
Book value per share (a) (a) 4.83 4.64 (a) (a) (a)
Fully diluted book value
per share (a) (a) 4.83 4.64 (a) (a) (a)
</Table>
- ----------
(a) Information not available on a GAAP basis.
A reconciliation of Combined's and Lifeline's statutory basis surplus
to its GAAP basis shareholders' equity at December 31, 2000 and 1999 is as
follows (an explanation of the reconciling items is summarized below):
12
Combined Underwriters Life Insurance Company
(in thousands)
Reconciliation of Statutory Basis to GAAP Basis
<Table>
<Caption>
2000 1999
------------ ------------
Statutory basis surplus, December 31 $ 3,319 $ 3,891
Deferred acquisition costs(1) 8,918 8,499
Accident and health reserves(2) (6,851) (6,389)
Deferred income taxes(3) 827 430
Life insurance reserves(2) 18 (112)
Asset valuation and interest maintenance
reserves(4) 59 65
Other 8 3
------------ ------------
GAAP basis shareholders' equity, December 31 $ 6,298 $ 6,387
============ ============
</Table>
Lifeline Underwriters Life Insurance Company
(in thousands)
Reconciliation of Statutory Basis to GAAP Basis
<Table>
<Caption>
2000 1999
------------ ------------
Statutory basis surplus, December 31 $ 2,984 $ 2,900
Deferred acquisition costs(1) 280 386
Accident and health reserves(2) (208) (260)
Life insurance reserves(2) 424 285
Deferred income taxes(3) (74) (55)
Asset valuation and interest maintenance
reserves(4) (8) 8
Other (18) (19)
------------ ------------
GAAP basis shareholders' equity, December 31 $ 3,380 $ 3,245
============ ============
</Table>
A reconciliation of Combined's and Lifeline's statutory basis surplus
to its GAAP basis net income (loss) for the year ended December 31, 2000, is as
follows (an explanation of the reconciling items is summarized below):
13
Combined Underwriters Life Insurance Company
(in thousands)
Reconciliation of Statutory Basis to GAAP Basis Net Income (Loss)
<Table>
<Caption>
2000
--------
Statutory basis net loss $ (569)
Capitalization of deferred acquisition costs(1) 3,382
Amortization of deferred acquisition costs(1) (2,963)
Increase in future policy benefit reserves(2) (307)
Deferred income tax benefit(3) 387
Other 1
--------
GAAP basis net loss $ (69)
========
</Table>
Lifeline Underwriters Life Insurance Company
(in thousands)
Reconciliation of Statutory Basis to GAAP Basis Net Income
<Table>
<Caption>
2000
-------
Statutory basis net income $ 85
Capitalization of deferred acquisition costs(1) 95
Amortization of deferred acquisition costs(1) (201)
Decrease in future policy benefit reserves(2) 201
Deferred income tax expense(3) (30)
Other 6
-------
GAAP basis net income $ 156
=======
</Table>
The significant differences between Combined's and Lifeline's statutory
basis and GAAP basis financial statements are as follows:
- ----------
(1) The costs related to acquiring business such as commissions, premium
taxes, and other items, are charged to income in the year incurred and
thus are not amortized over the periods benefitted, whereas the related
premiums are taken into income on a pro rata basis over the periods
covered by the policies for statutory accounting purposes. For GAAP
accounting purposes, costs that vary and are directly related to the
acquisition of new and renewal business are capitalized and amortized
over the revenue recognition period.
(2) Reserves for life and accident and health insurance are based on
statutory mortality and interest requirements without consideration of
withdrawals, which may differ from reserves based on reasonably
conservative estimates of mortality, interest, and withdrawals for GAAP
accounting purposes.
(3) Deferred federal income taxes are not provided for in statutory
accounting purposes for unrealized investment gains or losses,
differences in policy reserves, and other temporary differences between
book and tax bases of existing asset and liabilities.
(4) An asset valuation reserve and an interest maintenance reserve are
established for statutory accounting purposes.
On March 16, 1998, the National Association of Insurance Commissioners
("NAIC") approved the codification of statutory accounting practices that was
generally adopted by the Texas Department of
14
Insurance. The codification will constitute the only source of "prescribed"
statutory accounting practices and was effective January 1, 2001. The primary
difference between the Texas statutes and the codified rules involved the
admission of 100% of all fixed assets for Texas domiciled companies. In NAIC
codification, fixed assets are not admitted. Such is the case for Combined. As a
result, Combined will not nonadmit approximately $70,000 in its 2001 statutory
financial statements. In addition, Combined and Lifeline began to account for
deferred income taxes during 2001 in accordance with the codification of
statutory accounting principles. Upon adoption, Combined's surplus increased by
$180,000 and the impact on Lifeline was insignificant.
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
STATUTORY BASIS
(in thousands, except per share amounts)
<Table>
<Caption>
At or for the Nine Months At or for the Year Ended
Ended September 30, December 31,
-------------------------- ----------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ---------- ---------- ----------
Revenues $ 11,552 $ 11,659 $ 15,677 $ 15,484 16,678 15,754 16,099
Net income (loss) 362 (811) (569) 2,586 (1,704) (635) (656)
Net income (loss) per
share .36 (.81) (.57) 2.59 (1.70) (.64) (.66)
Total admitted assets 15,165 14,724 15,115 15,158 17,825 18,986 19,145
Total liabilities 11,484 11,634 11,796 11,267 16,535 15,981 15,546
Total capital and surplus 3,681 3,090 3,319 3,891 1,290 3,005 3,599
Statutory book value per share 3.68 3.09 3.32 3.89 1.29 3.01 3.60
Fully diluted statutory book
value per share 3.68 3.09 3.32 3.89 1.29 3.01 3.60
</Table>
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
STATUTORY BASIS
(in thousands, except per share amounts)
<Table>
<Caption>
At or for the Nine Months At or for the Year Ended
Ended September 30, December 31,
---------------------------- ----------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- -------- -------- -------- -------- --------
Revenues $ 770 $ 620 $ 829 $ 957 $ 1,054 $ 1,096 $ 1,095
Net income 70 5 85 160 365 162 57
Net income per share .10(a) .01(a) .12(a) .23(a) .66(a) .33(a) .18(a)
Total admitted assets 3,971 3,806 3,861 3,782 3,579 3,178 3,011
Total liabilities 918 902 877 882 839 802 800
Total capital and surplus 3,053 2,904 2,984 2,900 2,740 2,376 2,211
Statutory book value per share 4.36(a) 4.15(a) 4.26(a) 4.14(a) 4.98(a) 4.75(a) 4.42(a)
Fully diluted statutory book
value per share 4.36(a) 4.15(a) 4.26(a) 4.14(a) 4.98(a) 4.75(a) 4.42(a)
</Table>
- ----------
(a) Lifeline's issued and outstanding shares increased from 500,000 in 1996
and 1997, to 550,000 in 1998 and finally to 700,000 in 1999, 2000 and
2001.
15
RISK FACTORS
You should consider carefully the risks described below in assessing
the Combined Exchange and the Lifeline Exchange and an investment in Citizens
Class A common stock.
A SUBSTANTIAL NUMBER OF SHARES OF CLASS A COMMON STOCK HAVE BEEN REGISTERED FOR
SALE BY EXISTING CITIZENS SHAREHOLDERS, WHICH COULD DEPRESS THE MARKET PRICE OF
THE STOCK.
Sales of significant amounts of shares of Citizens Class A common
stock in the public market could depress the price of the stock. Further, even
without actual sales, the prospect of significant amounts of shares being
offered into the public market may depress the price of Class A common stock.
There is an effective registration statement with the SEC permitting the public
offer and sale by certain holders of Citizens Class A common stock, including
Harold E. Riley, Chairman of the Board. Mr. Riley, as of December 31, 2001,
owned 4,374,108 shares of Class A common stock or approximately 17.9% of
Citizens outstanding Citizens Class A common stock.
LOSS OF THE SERVICES OF THE CITIZENS CHAIRMAN OF THE BOARD WOULD LIKELY HINDER
FURTHER DEVELOPMENT OF THE OPERATING AND MARKETING PROGRAMS OF CITIZENS AND ITS
STRATEGY FOR EXPANDING ITS BUSINESS.
Citizens relies heavily on the active participation of its Chairman of
the Board, Harold E. Riley, in connection with the development and execution of
operating and marketing plans and strategy for expanding its business. For
instance, in the past Citizens has expanded business significantly through the
acquisition of other insurance companies. Mr. Riley's experience with mergers
and acquisitions has been of considerable value in pursuing these opportunities.
Citizens anticipates that this expertise will continue to be of substantial
value in connection with any future acquisitions of insurance companies. The
loss of his services would likely have a significant adverse effect on Citizens
in these respects. Citizens does not have an employment agreement with Mr.
Riley.
THE COMBINED EXCHANGE AND LIFELINE EXCHANGE HAVE BEEN STRUCTURED SO AS TO RESULT
IN A TAX-DEFERRED EXCHANGE OF YOUR STOCK FOR THE CITIZENS CLASS A COMMON STOCK.
HOWEVER, THERE CAN BE NO ASSURANCES IN THIS REGARD, AND IF TAX-DEFERRED
TREATMENT WERE TO BE DENIED, YOU COULD OWE FEDERAL INCOME TAXES ON ANY GAIN
DEEMED TO BE REALIZED BY YOU UPON THE EXCHANGE OF YOUR STOCK.
The transactions contemplated by both the Combined Exchange Agreement
and the Lifeline Exchange Agreement are intended to be a tax-deferred exchange.
However, neither Citizens, Combined nor Lifeline has obtained a ruling from the
Internal Revenue Service concerning whether the Combined Exchange or the
Lifeline Exchange will in fact be treated as a tax-deferred exchange. Combined
and Lifeline will each, however, obtain an opinion of counsel which will support
the conclusions contained in this proxy statement-prospectus regarding the
material federal income tax consequences of the Combined Exchange Agreement and
the Lifeline Exchange Agreement and transactions contemplated thereby to its
shareholders. You should understand that an opinion of counsel is not binding on
the Internal Revenue Service and the Internal Revenue Service could successfully
assert a contrary position. Also, the conditions and assumptions upon which
counsel's opinion is qualified may not continue to exist and the laws or
regulations affecting the material federal income tax consequences of the
Combined Exchange and the Lifeline Exchange may change. In either event, the tax
aspects of the Combined Exchange and the Lifeline Exchange may be adversely
affected, and such effect may be material. As a result, there can be no
assurance
16
that the Combined Exchange or the Lifeline Exchange will be accorded the tax
treatment intended and that you will realize the tax consequences described in
this proxy statement-prospectus. See "Certain Federal Income Tax Consequences."
HOLDERS OF CLASS A COMMON STOCK RECEIVED IN THE COMBINED EXCHANGE AND THE
LIFELINE EXCHANGE WILL BE MINORITY STOCKHOLDERS. THESE MINORITY STOCKHOLDERS
WILL NOT CONTROL CITIZENS, WILL HAVE A LIMITED ABILITY TO INFLUENCE CITIZENS'
BUSINESS POLICIES AND CORPORATE ACTIONS, AND WILL NOT BE ABLE TO ELECT ANY
DIRECTORS OF CITIZENS.
It is difficult for minority stockholders of Citizens to elect any of
its directors or otherwise exert influence over its business. Citizens'
outstanding Class B common stock elects a majority of the board of directors of
Citizens. All of the Class B common stock is owned indirectly by Harold E.
Riley, Chairman of the Board, through the Harold E. Riley Trust. Additionally,
Mr. Riley is the largest Class A stockholder. Therefore, as a practical matter,
Mr. Riley has effective control over significant corporate transactions.
Additionally, cumulative voting of shares is not permitted by Citizens' articles
of incorporation. These factors would also make it more difficult and time
consuming for a third party to acquire control of Citizens or to change the
board of directors of Citizens.
ALMOST 80% OF CITIZENS' REVENUES COME FROM OVERSEAS. THIS INVOLVES RISKS
ASSOCIATED WITH BUSINESS IN THIRD WORLD COUNTRIES, SUCH AS MIGHT RESULT FROM
POLITICAL OR ECONOMIC INSTABILITY, HUMAN RIGHTS VIOLATIONS OR NEW LAWS OR
REGULATIONS.
There is a risk of loss of a significant portion of sales overseas
should adverse events occur in the countries from which Citizens receives
applications. Almost 80% of Citizens' revenues come from Latin America. Its
international operations consist of issuance of ordinary whole-life insurance
policies around the world. These policies have an average face amount of $70,000
and are marketed by independent marketing firms primarily to heads of households
in the top 3% to 5% income bracket around the world.
YOU SHOULD NOT ANTICIPATE RECEIVING CASH DIVIDENDS ON YOUR CITIZENS CLASS A
COMMON STOCK, BECAUSE CITIZENS HAS NOT PAID ANY CASH DIVIDENDS AND DOES NOT
ANTICIPATE DOING SO IN THE FORESEEABLE FUTURE.
To date Citizens has not paid cash dividends on its Class A common
stock or Class B common stock. It is Citizens' policy to retain earnings for use
in the operations and expansion of its business.
POLICY LAPSES IN EXCESS OF THOSE ACTUARIALLY ANTICIPATED WOULD HAVE A NEGATIVE
IMPACT ON CITIZENS' FINANCIAL PERFORMANCE.
The profitability of Citizens could be reduced if its lapse and
surrender rate were to exceed the assumptions upon which it priced its insurance
policies. Policy sales costs are deferred and recognized over the life of a
policy. Excess policy lapses, however, cause the immediate expensing or
amortizing of deferred policy sales costs.
17
CITIZENS OPERATES IN A HIGHLY COMPETITIVE, MATURE INDUSTRY, WHICH COULD LIMIT
ITS ABILITY TO GAIN OR MAINTAIN ITS POSITION IN THE INDUSTRY.
Citizens competes with 1,500 to 2,000 other life insurance companies in
the United States, some of which Citizens also competes with internationally.
The life insurance business is highly competitive. This is in part because it is
a mature industry in the United States which, in recent years, has experienced
no growth in life insurance sales. Competition has also increased because the
life insurance industry is consolidating, with larger, more efficient
organizations emerging from consolidation. Furthermore, mutual insurance
companies are converting to stock ownership, which should give them greater
access to capital markets, resulting in greater competition with respect to
corporate finance as well. Additionally, legislation became effective in 2000
permitting commercial banks, insurance companies and investment banks to
combine. This law permits, for instance, a commercial bank to acquire or form an
insurance company. These factors have increased competitive pressures in
general.
Many life insurance companies have greater financial resources, longer
business histories, and more diversified lines of insurance coverage than
Citizens has. These companies also generally have larger sales forces. Citizens
also faces competition from companies operating in foreign countries and
marketing in person as well as with direct mail sales campaigns. Although
Citizens may be at a competitive disadvantage to these entities, it believes
that its products are competitive in the marketplace.
Citizens' international marketing plan stresses making available
dollar-denominated life insurance products to high net worth individuals
residing around the world. Citizens experiences competition primarily from the
following sources around the world:
LOCALLY OPERATED COMPANIES WITH LOCAL CURRENCY POLICIES.
Citizens competes with companies formed and operated in the country in
which the insureds reside. Generally, these companies are subject to
risks of currency fluctuations, and use mortality tables based on
experience of the local population as a whole. These mortality tables
are typically based on significantly shorter life spans than those
Citizens uses. As a result, the economic return of policies issued by
locally operated companies is more uncertain than for U.S. dollar
policies, such as Citizens issues. Also, as a result of the foregoing
factors, the statistical cost of insurance for these companies tends to
be higher than Citizens.
FOREIGN OPERATED COMPANIES WITH LOCAL CURRENCY POLICIES.
Another group of competitors consists of companies which are foreign to
the countries in which the policies are sold but use the local
currencies of those countries. Local currency policies entail risks of
uncertainty due to local currency fluctuations as well as the perceived
instability and weakness of local currencies. Citizens has observed
that local currency policies, whether issued by foreign or locally
operated companies, tend to focus on universal life insurance and
annuities instead of whole life insurance as Citizens does.
FOREIGN OPERATED COMPANIES WITH U.S. DOLLAR POLICIES. Citizens
also faces direct competition from companies that operate in the same
manner as Citizens does. Citizens competes using its history of
performance and its products.
18
Citizens' ability to compete is dependent upon, among other things, its
ability:
o to market its insurance products;
o to develop competitive and profitable products; and
o its ability to maintain low unit costs.
TAX LAW CHANGES COULD REDUCE CERTAIN COMPETITIVE ADVANTAGES WHICH CITIZENS LIFE
INSURANCE PRODUCTS MAY HAVE OVER NON-INSURANCE PRODUCTS.
Under the Internal Revenue Code, income taxes payable by policyholders
on investment earnings are deferred during the accumulation period of certain
life insurance and annuity products. This favorable tax treatment may give
certain Citizens products a competitive advantage over other non-insurance
products. To the extent that the Internal Revenue Code is revised to reduce the
tax-deferred status of life insurance and annuity products, or to increase the
tax-deferred status of competing products, all life insurance companies,
including those of Citizens, would be adversely affected with respect to their
ability to sell products. Also, depending on grandfathering provisions, the
surrenders of existing annuity contracts and life insurance policies might
increase. In addition, life insurance products are often used to fund estate tax
obligations. Legislation was enacted in June 2001 under which the estate tax
will be repealed during the year 2010, but in the absence of interim legislation
extending the repeal, it will expire at the end of that year. There may be
interim legislation which will modify or do away with this estate tax repeal or
otherwise modify the estate tax. If the estate tax is eliminated, the demand for
certain life insurance products would be adversely affected. Citizens cannot
predict what future tax initiatives may be proposed with respect to the estate
tax or other taxes which may affect Citizens, although Citizens' international
clients are generally not subject to U.S. income taxes.
THE INSURANCE INDUSTRY IS HIGHLY REGULATED AND CITIZENS' ACTIVITIES ARE
RESTRICTED AS A RESULT. CITIZENS EXPENDS SUBSTANTIAL AMOUNTS OF TIME AND INCURS
SUBSTANTIAL EXPENSES IN CONNECTION WITH COMPLYING WITH APPLICABLE REGULATIONS,
AND CITIZENS IS SUBJECT TO THE RISK THAT MORE BURDENSOME REGULATIONS COULD BE
IMPOSED ON IT.
Compliance with regulation in the United States by Citizens is costly
and time consuming. Insurance companies in the U.S. are subject to extensive
regulation in the states where they do business. This regulation primarily
protects policyholders rather than stockholders. The regulations require:
o prior approval of acquisitions of insurance companies;
o certain solvency standards; licensing of insurers and their
agents; investment limitations;
o deposits of securities for the benefit of policyholders;
o approval of policy forms and premium rates;
o triennial examinations; and
o reserves for unearned premiums, losses and other matters.
19
Citizens is subject to this regulation in each state in the U.S. in which it is
licensed to do business. This regulation involves additional costs and restricts
operations. Citizens cannot predict the form of any future regulatory
initiatives.
Citizens is regulated by the Colorado Division of Insurance under the
Colorado Insurance Holding Company Act. Certain "extraordinary" intercorporate
transfers of assets and dividend payments from its life insurance subsidiaries
require prior approval by the Colorado Insurance Commissioner. Citizens also
files detailed annual reports with the Colorado Division of Insurance and all of
the states in which it is licensed. The business and accounts of its life
insurance subsidiaries are subject to examination by the Colorado Division of
Insurance, as well as inquiries and follow up, including investigations, of the
various insurance regulatory authorities of the states in which Citizens'
insurance subsidiaries are licensed.
The principal insurance subsidiary of Citizens is qualified to do
business as an insurance company only in the U.S. It does not have any assets or
employees in foreign countries. In connection with business from foreign
countries, Citizens only accepts applications at its main office. In addition,
Citizens requires premium payments to be in U.S. dollars, which may include
checks drawn on U.S. banks. Citizens is not currently subject to regulation in
the various foreign countries from which it receives applications for insurance.
Although Citizens provides insurance to foreign citizens, independent marketing
firms, rather than employees of Citizens, submit the applications. In this way
Citizens avoids conducting business in the foreign countries. However, Citizens
is unable to predict if foreign regulation will be implemented and, if so, the
effect of any such regulation on Citizens' business.
FLUCTUATING INTEREST RATES COULD REDUCE CITIZENS' PROFITABILITY.
Rapid interest rate changes can result in increases in the lapse rates
of policies in-force and hamper an insurance company's ability to achieve a
profit. Citizens does not issue interest-sensitive or universal life insurance
policies and it has only a small amount of annuity business. Citizens does,
however, have an investment portfolio that would likely be adversely affected in
the event of material increases in interest rates. An insurance company's
profitability depends, in large part, on investing premiums and policy reserves
at a higher interest rate than the returns distributed to existing policies.
CITIZENS' INVESTMENTS ARE SUBJECT TO RISKS OF DEFAULT AND REDUCTIONS IN MARKET
VALUES.
The invested assets of Citizens are subject to customary risks of
defaults and changes in market values. Factors that may affect the overall
default rate on, and market value of, the invested assets of Citizens include
interest rate levels, financial market performance, and general economic
conditions.
THERE IS A RISK THAT CITIZENS MAY NOT CONTINUE ITS PAST STRATEGY OF ACQUIRING
OTHER U.S. LIFE INSURANCE COMPANIES, AND THAT IT MAY NOT REALIZE IMPROVEMENTS TO
ITS FINANCIAL RESULTS AS A RESULT OF PAST AND FUTURE ACQUISITIONS.
Over the past several years, Citizens has acquired a number of small
U.S. life insurance companies. Citizens' objective in pursuing this acquisition
strategy has been to increase the size of the U.S. segment of its business,
improve its competitive position and increase its earnings, in part by allowing
it to realize certain operating efficiencies associated with economies of scale.
However, there can be no assurance that
20
suitable acquisitions, presenting opportunities for continued growth and
operating efficiencies, will continue to be available to Citizens, or that it
will realize the anticipated financial results from its acquisitions.
REINSURERS WITH WHICH CITIZENS DOES BUSINESS MAY NOT HONOR THEIR OBLIGATIONS,
LEAVING CITIZENS LIABLE FOR THE REINSURED COVERAGE, AND CITIZENS' REINSURERS
COULD INCREASE THEIR PREMIUM RATES.
Citizens cedes a substantial amount of its insurance to other insurance
companies. However, Citizens remains liable with respect to ceded insurance
should any reinsurer fail to meet the obligations assumed by it. The cost of
reinsurance is, in some cases, reflected in its premium rates. Under certain
reinsurance agreements, the reinsurer may increase the rate it charges Citizens
for the reinsurance. However, if the cost of reinsurance were to increase with
respect to policies for which Citizens has guaranteed the rates, Citizens could
be adversely affected.
CITIZENS IS SUBJECT TO A RISK OF LOSING CASH BALANCES THAT ARE NOT INSURED.
Citizens maintains cash balances in one bank, J.P. Morgan Chase,
Austin, Texas, that are significantly in excess of Federal Deposit Insurance
Corporation coverage. If this bank were to fail, Citizens would likely lose a
substantial amount of its cash. Citizens monitors the solvency of this bank and
does not believe a material risk of loss exists because this bank is
substantially above the federally mandated levels of capital and liquidity.
INCREASED UNCERTAINTY DUE TO TERRORIST ATTACKS AND WAR.
Terrorists attacks, such as the attacks that occurred in New York,
Pennsylvania and Washington, D.C., on September 11, 2001, and current and future
war risks may adversely impact the results of operation, financial condition,
ability to raise capital or future growth of Citizens. The impact that the
terrorist attacks of September 11, 2001, may have on the life insurance industry
in general, and on Citizens in particular, is not known at this time. Citizens
does not conduct business in New York, Pennsylvania or Washington, D.C. and has
not received any claims as a result of the terrorist acts. Uncertainty
surrounding retaliatory military strikes or a sustained military campaign may
impact the operations of Citizens in unpredictable ways, including general
disruptions to commerce and the possibility that financial infrastructure
facilities could be direct targets of, or indirect casualties of, an act of
terror or war. In addition, war or the risk of war may also have an adverse
effect on national and global economies. A lower level of economic activity
could result in a decline in the use of life and accidental health insurance
services and could increase lapse ratios of insurance inforce.
21
SPECIAL MEETINGS OF COMBINED AND LIFELINE
Date, Time and Place of Meetings
COMBINED SPECIAL MEETING
A special meeting of Combined shareholders will be held on _____,
_______, 2002 at 10:00 a.m., Central Standard Time, at _______, _______.
LIFELINE SPECIAL MEETING
A special meeting of Lifeline shareholders will be held on _____,
_______, 2002 at 11:00 a.m., Central Standard Time, at _______, _______.
BUSINESS TO BE TRANSACTED AT THE SPECIAL MEETINGS
This proxy statement-prospectus was mailed to Combined shareholders on
______, 2002 to solicit proxies to vote for the exchange of Combined common
stock for Class A common stock of Citizens. This proxy statement-prospectus was
mailed to Lifeline shareholders on ______, 2002 to solicit proxies to vote for
the exchange of Lifeline common stock for Class A common stock of Citizens.
As of the date of this proxy statement-prospectus, neither Citizens,
Combined nor Lifeline are aware of other business that will come before the
Combined special meeting or the Lifeline special meeting. Should any other
matter requiring a vote of shareholders arise, the proxies named in the enclosed
forms of proxy will vote the shares in their discretion with respect to any such
matter.
VOTING SECURITIES
COMBINED. Only Combined shareholders of record at the close of business
on ______, 2002 will be entitled to vote at the Combined special meeting. On
that date, there were issued and outstanding 1,000,000 shares of Combined common
stock. Each share of Combined common stock is entitled to one vote per share
with respect to the Combined Exchange. The affirmative vote of two-thirds of the
outstanding common stock of Combined is necessary to approve the Combined
Exchange in favor of the Combined Exchange. Walden P. "Red" Little, Chairman of
the Board of Combined, and Regina Little Rooney, a Board member of Combined, who
have an aggregate ownership of approximately 92.6% of the shares of Combined
common stock, have indicated that they intend to vote for the Combined Exchange.
This vote will virtually assure that the Combined Exchange will occur absent
unfulfilled conditions to complete the Combined Exchange.
LIFELINE. Only Lifeline shareholders of record at the close of business
on ______, 2002 will be entitled to vote at the Lifeline special meeting. On
that date, there were issued and outstanding 700,000 shares of Lifeline common
stock. Each share of common stock is entitled to one vote per share with respect
to the Lifeline Exchange. The affirmative vote of two-thirds of the outstanding
common stock of Lifeline is necessary to approve the Lifeline Exchange. Walden
P. "Red" Little, the majority shareholder of Lifeline, and Regina Little Rooney,
who have an aggregate ownership of approximately 85.8% of the shares of Lifeline
common stock, have indicated that they intend to vote for the Lifeline Exchange.
This vote will
22
virtually assure that the Lifeline Exchange will occur absent unfulfilled
conditions to complete the Lifeline Exchange.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF - COMBINED
The following table sets forth, as of January 17, 2002, the shares of
Combined common stock (i) beneficially owned by each director and executive
officer, (ii) for all directors and executive officers as a group, and (iii)
each person who is known to Combined to be the beneficial owner of more than 5%
of the Combined stock, its only class of voting securities.
<Table>
<Caption>
Name and Address Nature and Amount Percent
of Beneficial Owner of Ownership(1) of Class
- ------------------- ----------------- --------
Walden P. "Red" Little 781,854(2) 78.2%
P.O. Box 2503
Tyler, Texas 75710
Regina Little Rooney 143,933(3) 14.4%
13155 CR 461
Tyler, Texas 75708
Gary C. Cole (4) (4)
Rte. 2, Box 1213
Bullard, Texas 75757
Betty M. Mitchell (4) (4)
1103 Russell Drive
Whitehorse, Texas 75791
Jimmie M. Procell (4) (4)
330 West Charnwood
Tyler, Texas 75701
Donald F. Bagozzi -- --
307 North Glenwood
Tyler, Texas 75702
Milo Reamy (4) (4)
17966 Briarcrest ------- --------
Flint, Texas 75762
All directors and 925,858 92.6%
executive officers as a ======= ========
group (7 persons)
</Table>
- ----------
(1) All ownership is direct unless otherwise noted.
23
(2) These shares are owned of record by the W.P. Little Family Limited
Partnership of which Mr. Little is the general partner.
(3) Includes 58,510 shares over which Ms. Rooney serves as a trustee and
85,423 shares over which Ms. Rooney has sole or joint ownership.
(4) Less than 1%.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF - LIFELINE
The following table sets forth, as of January 17, 2002, the shares of
Lifeline common stock (i) beneficially owned by each director and executive
officer, (ii) for all directors and executive officers as a group, and (iii)
each person who is known to Lifeline to be the beneficial owner of more than 5%
of the Lifeline stock, its only class of voting securities.
<Table>
<Caption>
Name and Address Nature and Amount Percent
of Beneficial Owner of Ownership(1) of Class
- ------------------- ----------------- --------
Walden P. "Red" Little(2) 450,950.125 64.4%
P.O. Box 2503
Tyler, Texas 75710
Regina Little Rooney(3) 149,943.25(3) 21.4%
13155 CR 461
Tyler, Texas 75708
Gary C. Cole 18,004 2.5%
Rte. 2, Box 1213
Bullard, Texas 75757
Betty M. Mitchell (4) (4)
1103 Russell Drive
Whitehorse, Texas 75791
Robert C. Norman (4) (4)
307 North Glenwood
Tyler, Texas 75702
Jimmie M. Procell (4) (4)
330 West Charnwood
Tyler, Texas 75701
Donald F. Bagozzi -- --
307 North Glenwood
Tyler, Texas 75702
Milo Reamy (4) (4)
17966 Briarcrest
Flint, Texas 75762
Tommy Rowell -- --
307 North Glenwood ---------- ----------
Tyler, Texas 75701
All directors and 24,899.62 3.6%
executive officers as a ========== ==========
Group (7 persons)
</Table>
24
- ----------
(1) All ownership is direct unless otherwise noted.
(2) Mr. Little is the majority shareholder of Lifeline, but he does not
serve as an officer or director of Lifeline.
(3) Ms. Rooney does not serve as an officer or director of Lifeline.
Includes 20,973.5 shares over which Ms. Rooney serves as trustee and
128,969.75 shares over which Ms. Rooney has sole or joint ownership.
(4) Less than one percent.
REVOCABILITY OF PROXIES
COMBINED - Any Combined proxy may be revoked before its exercise at the
Combined special meeting or any adjournment thereof by:
o giving written notice of revocation to the Secretary of
Combined prior to the Combined special meeting;
o giving written notice of revocation to the Secretary at the
Combined special meeting; or
o signing and delivering a proxy bearing a later date.
The presence of a shareholder at the Combined special meeting will not revoke
his or her proxy. However, being present at the Combined special meeting allows
a shareholder to vote in person and revoke any prior proxy.
LIFELINE - Any Lifeline proxy may be revoked before its exercise at the
Lifeline special meeting or any adjournment thereof by:
o giving written notice of revocation to the Secretary of
Lifeline prior to the Lifeline special meeting;
o giving written notice of revocation to the Secretary at the
Lifeline special meeting; or
o signing and delivering a proxy bearing a later date.
25
The presence of a shareholder at the Lifeline special meeting will not revoke
his or her proxy. However, being present at the Lifeline special meeting allows
a shareholder to vote in person and revoke any prior proxy.
PROXY SOLICITATION
Combined and Lifeline will pay the costs of soliciting their respective
proxies. Officers and employees of Combined and Lifeline may solicit proxies by
telephone and personally, in addition to solicitation by mail. These persons
will receive their regular salaries but no special compensation for soliciting
proxies. Because no shares of Combined or Lifeline are held by brokers, nominees
or other fiduciaries, neither Combined nor Lifeline will reimburse brokers,
custodians, nominees or other fiduciaries for their charges and expenses in
forwarding materials to beneficial owners of shares.
26
PROPOSED EXCHANGES - COMBINED AND LIFELINE
BACKGROUND AND REASONS - COMBINED AND LIFELINE
In early July 2001, the Chairman of the Board of Citizens, Harold E.
Riley, called Walden P. "Red" Little, Chairman of the Board and Chief Executive
Officer of Combined and the controlling shareholder of Combined and Lifeline.
The purpose of Mr. Riley's call was to discuss whether Combined and Lifeline
would be interested in affiliating with Citizens. Mr. Riley had been acquainted
with Mr. Little for more than 30 years through insurance industry meetings and
gatherings. In the call, Mr. Riley and Mr. Little discussed in general the
nature the business of each of Citizens, Combined and Lifeline, and whether
Combined and Lifeline would consider becoming part of the Citizens organization.
A meeting date of July 18, 2001, was scheduled by Messrs. Riley and Little to
continue the discussions in person.
At the July 18th meeting, Mr. Riley met with Mr. Little in Tyler,
Texas. The parties discussed whether Combined and Lifeline could be acquired by
Citizens and the general nature of any acquisition transaction. Gary Cole,
President of both Combined and Lifeline, attended the July 18th meeting as did
Donna Smith, a former controller and treasurer of Combined and Lifeline. At the
July 18th meeting, Mr. Riley set forth a preliminary structure under which
Citizens would acquire the stock of both Combined and Lifeline. The parties took
the issues discussed at the meeting under consideration. Another meeting between
the parties occurred in Tyler, Texas, on August 9, 2001. On August 15, 2001,
another meeting, occurred with Messrs. Little and Cole and Ms. Smith traveling
to the offices of Citizens in Austin, Texas, to meet with Mr. Riley and several
executive officers of Citizens. After the August 15th meeting, the parties began
circulating drafts of acquisition contracts. On August 28, 2001, Mr. Riley again
met with Messrs. Little and Cole and Ms. Smith in Tyler, Texas. The parties
further discussed the structure, amount and timing of an acquisition of Combined
and Lifeline. On September 19, 2001, Messrs. Little, Cole, Riley, Rick Riley,
Vice Chairman of Citizens, and Mark A. Oliver, President of Citizens, met for
several hours at the offices of the attorney for Combined and Lifeline to
discuss the proposed acquisition transactions. After revisions to the contracts
were made and after further discussions among the parties, the share exchange
ratios were finalized. For the next several weeks the parties worked on
revisions to the drafts of the exchange agreements. Citizens, Combined and
Lifeline executed Exchange Agreements on November 20, 2001, subject to the
various conditions, including approval by the respective shareholders of
Combined and Lifeline.
The valuation of the companies to the proposed transactions centered on
a share exchange ratio. Management of Citizens, Combined and Lifeline recognized
that, due to the lack of any ascertainable market for the shares of Combined and
Lifeline, an alternative valuation would be necessary. In contrast, the American
Stock Exchange market for the shares of Citizens permitted the parties to select
a fair market valuation for Citizens.
COMBINED
Management of Citizens and Messrs. Little and Cole reviewed carefully
the assets and liabilities of Combined, and it was concluded that determination
of the exchange ratio value for Combined should use a statutory book value
basis, adjusted to reflect values which are standard within the life insurance
industry. The capital and surplus of Combined was reviewed as well as its annual
insurance premium revenue valued at multiple factors depending upon the
profitability of the products and paid-up policy reserves. State
27
licenses, agency force, and non-admitted capital and surplus assets of life
insurance subsidiaries were reviewed. These values are summarized in the table
below.
<Table>
<Caption>
Combined
------------
Capital and surplus $ 3,319,000
Asset valuation reserve 51,000
Value of building over carrying value 50,000
Life insurance in force as a multiple of annual
premium revenue 3,144,000
Accident and health premium multiple 618,443
Paid-up policy reserves and future dividends reserves 9,933
State licenses 550,000
Agency force (new life premium written) 900,000
------------
Combined adjusted book value per share 8,642,376
============
Number of shares issued and outstanding 1,000,000
Combined total adjusted book value per share $ 8.64
</Table>
The resulting values have been reviewed carefully by Citizens and Mr.
Little and the resulting total adjusted book value per share was reviewed by the
Combined Board. Also discussed at length were how payment would be made to
Combined shareholders, and the tax consequences of the Combined Exchange. The
Board of Combined agreed to the final total adjusted book value per share.
LIFELINE
Management of Citizens and Messrs. Little and Cole reviewed carefully
the assets and liabilities of Lifeline, and it was concluded that determination
of the exchange ratio value for Lifeline should use a statutory book value
basis, adjusted to reflect values which are standard within the life insurance
industry. The capital and surplus of Lifeline was reviewed as well as its annual
insurance premium revenue valued at multiple factors depending upon the
profitability of the products and paid-up policy reserves. State licenses,
agency force, and non-admitted capital and surplus assets of life insurance
subsidiaries were reviewed. These values are summarized in the table below.
28
<Table>
<Caption>
Lifeline
------------
Capital and surplus $ 2,984,000
Asset valuation and interest maintenance reserve 9,000
Life insurance in force as a multiple of annual
premium revenue 109,501
Accident and health premium multiple 129,686
Paid-up policy reserves and future dividends reserves 11,891
State licenses 100,000
Agency force (new life premium written) 160,000
------------
Combined adjusted book value per share 3,504,078
============
Number of shares issued and outstanding 700,000
Lifeline total adjusted book value per share $ 5.00
</Table>
The resulting values were reviewed carefully by Citizens and Mr. Little
and the resulting total adjusted book value per share was reviewed by the
Lifeline Board. Also discussed at length were how payment would be made to
Lifeline shareholders, and the tax consequences of the Lifeline Exchange. The
Board of Lifeline agreed to the final total adjusted book value per share.
RECOMMENDATION OF COMBINED'S BOARD OF DIRECTORS
The Combined Board of Directors RECOMMENDS APPROVAL OF THE COMBINED
EXCHANGE. The Board believes that the exchange ratio to the Combined
shareholders is fair. The management and Board of Directors of Combined, after
careful study and evaluation of the economic, financial, legal and market
factors, also believe that the Combined Exchange could provide Citizens with
increased opportunity for profitable expansion of its business, which in turn
should benefit Combined shareholders who become shareholders of Citizens.
The terms of the Combined Exchange Agreement were the result of
arm's-length negotiations between Citizens and Combined over a several month
period, with a significant effort by Combined management with assistance of
legal counsel. Among the factors considered by the Boards of Directors of
Combined in deciding to approve and recommend the Combined Exchange were:
1. The terms and conditions of the Combined Exchange Agreement,
which the Combined Board and management believes results in a
fair price for the Combined shares;
2. The financial condition, business assets and liabilities and
management of Citizens;
29
3. The financial and business prospects of Citizens;
4. The increased liquidity to Combined shareholders including:
o the market on the American Stock Exchange for
Citizens Class A common stock;
o the lack of market for the Combined common stock;
o the demographics of Combined shareholder base and
their expressed concerns regarding liquidity and
estate settlement;
o the ability to sell Citizens Class A common stock for
cash to satisfy obligations of a decedent's estate;
5. Economies of scale available in the event of combination of
the companies including, in particular, reduction in the total
number of regulatory filings;
6. The business, operations, financial condition, earnings and
prospects of Combined;
7. The expectation that the Combined Exchange will generally be a
tax-deferred transaction to Combined and its shareholders (see
"Certain Federal Income Tax Considerations");
8. The growth and liquidity potential to Combined shareholders as
future holders of Citizens Class A common stock compared to
the historical growth and liquidity of the Combined common
stock;
9. The current and prospective economic environment and
competitive constraints facing small insurance companies,
including Combined;
10. The Combined Board of Directors' evaluation of the risks to
consummation of the Combined Exchange, including the risk
associated with obtaining necessary regulatory approvals; and
11. The possible alternatives to the Combined Exchange, the range
of possible values to the Combined shareholders of such
alternatives, and the timing and likelihood of actually
receiving, and risks and rewards associated with seeking to
obtain, those values.
The Combined Board did not assign any specific or relative weight to
these factors in its consideration. All of the above factors contributed in
determining the consideration received.
The exchange of Combined shares solely for Citizens shares is also
intended to be a tax-deferred exchange, thereby giving Combined shareholders the
equity participation in Citizens without initially incurring taxes. See "Certain
Federal Income Tax Consequences."
The Combined Board of Directors made this determination without the
assistance or cost of a financial adviser for a so-called "fairness opinion."
The Combined Board believes that it reviewed in sufficient depth the respective
conditions of Combined, Citizens and their subsidiaries as well as the terms of
the Combined Exchange Agreement.
RECOMMENDATION OF LIFELINE'S BOARD OF DIRECTORS
The Lifeline Board of Directors RECOMMENDS APPROVAL OF THE LIFELINE
EXCHANGE. The Board believes that the exchange ratio to the Lifeline
shareholders is fair. The management and Board of Directors of Lifeline, after
careful study and evaluation of the economic, financial, legal and market
factors, also believe that the Lifeline Exchange could provide Citizens with
increased opportunity for profitable expansion of its business, which in turn
should benefit Lifeline shareholders who become shareholders of Citizens.
30
The terms of the Lifeline Exchange Agreement were the result of
arm's-length negotiations between Citizens and management of Lifeline over a
several month period, with a significant effort by Lifeline management with
assistance of legal counsel. In addition to the factors regarding Lifeline
discussed above under "--Recommendation of Combined's Board of Directors," other
factors considered by the Boards of Directors of Lifeline in deciding to approve
and recommend the Lifeline Exchange were:
1. The terms and conditions of the Lifeline Exchange Agreement,
which the Lifeline Board and management believes results in a
fair price for the Lifeline shares;
2. The increased liquidity to Lifeline shareholders including:
o the market on the American Stock Exchange for
Citizens Class A common stock;
o the lack of market for the Lifeline common stock;
o the demographics of Lifeline shareholder base and
their expressed concerns regarding liquidity and
estate settlement;
o the ability to sell Citizens Class A common stock for
cash to satisfy obligations of a decedent's estate;
3. Economies of scale available in the event of combination of
the companies including, in particular, reduction in the total
number of regulatory filings;
4. Lifeline's Board of Directors familiarity with and review of
the business, operations, financial condition, earnings and
prospects of Lifeline;
5. The expectation that the Lifeline Exchange will generally be a
tax-deferred transaction to Lifeline and its shareholders (see
"Certain Federal Income Tax Considerations");
6. The growth and liquidity potential to Lifeline shareholders as
future holders of Citizens Class A common stock compared to
the historical growth and liquidity of the Lifeline common
stock;
7. The current and prospective economic environment and
competitive constraints facing small insurance companies,
including Lifeline;
8. The Lifeline Board of Directors' evaluation of the risks to
consummation of the Lifeline Exchange, including the risk
associated with obtaining necessary regulatory approvals; and
9. The possible alternatives to the Lifeline Exchange, the range
of possible values to the Lifeline shareholders of such
alternatives, and the timing and likelihood of actually
receiving, and risks and rewards associated with seeking to
obtain, those values.
The Lifeline Board did not assign any specific or relative weight to
these factors in its consideration. All of the above factors contributed in
determining the consideration received.
The Lifeline Board of Directors considers the Lifeline Exchange
particularly advantageous to Lifeline shareholders in that shareholders will
receive a security which, in the opinion of the Lifeline Board, has the
potential to achieve a greater growth and market value and which now has
significantly greater market liquidity than the Lifeline common stock. The
exchange of Lifeline shares for Citizens shares is also intended to be a
tax-deferred exchange, thereby giving Lifeline shareholders the equity
participation in Citizens without initially incurring taxes. See "Certain
Federal Income Tax Consequences."
The Lifeline Board of Directors made this determination without the
assistance or cost of a financial adviser for a so-called "fairness opinion."
The Lifeline Board believes that it reviewed in sufficient depth the respective
conditions of Lifeline, Citizens and their subsidiaries as well as the terms of
the Lifeline Exchange Agreement.
31
INTERESTS OF CERTAIN PERSONS IN THE COMBINED EXCHANGE AND THE LIFELINE EXCHANGE
In considering the recommendation of the Combined Board with regard to
the Combined Exchange Agreement and the recommendation of the Lifeline Board
with regard to the Lifeline Exchange Agreement, Combined and Lifeline
shareholders should be aware that the controlling shareholder of Combined and
Lifeline, Walden P. "Red" Little and Regina Little Rooney, an officer and
director of Combined and daughter of Mr. Little, have interests in both
transactions that are in addition to the interests of Combined and Lifeline
shareholders generally. Upon effectiveness of the Combined Exchange and the
Lifeline Exchange, both companies intends to enter into one overall marketing
development allowance agreement with the Red Little Combined Agency, Inc., a
Texas corporation wholly-owned by Mr. Little, under which the agency will be
provided working capital to be used as a marketing development allowance and for
such other purposes as deemed necessary to strengthen and enhance the operations
of the agency. The purpose of this agreement is to provide such services as are
reasonably required to preserve and increase the insurance business in force on
the books of Combined and Lifeline. Combined and/or Lifeline or their designees
will pay to the agency $25,000 per month for 36 months or a total of $900,000.
The agency is authorized to use the marketing development allowance to, among
other things, make commission advance arrangements with producing agents of
Combined and Lifeline, entertain current agents and recruit new agents, pay
operational expenses of the agency, pay advertising costs that benefit the sales
efforts of Combined and Lifeline, provide the agency with transportation, office
equipment, and other expenses as necessary, assist the agency with salary and
operating expenses, and loan money to Mr. Little and Ms. Rooney of the agency as
deemed necessary. In addition, in order to facilitate the operations of the
agency during the 36 month term of the agreement, Combined has agreed to make
available at its sole expense office space suitable for Mr. Little and Ms.
Rooney and provide a secretary for Mr. Little and Ms. Rooney.
In addition, upon the closing of the Combined Exchange, Combined will
enter into two lease extension and modification agreements with Little, Rooney &
Little Associates which provide that Combined will extend its existing leases by
60 months at $10,121 per month. Little, Rooney & Little Associates is 50% owned
by Mr. Little and 50% owned by Ms. Rooney. The total payments under the
extensions will be $607,260. Lifeline is paying for a portion of the cost of
Combined's home office through a cost sharing agreement determined to be market
value by the Texas Department of Insurance. Lifeline's portion of shared rent
and equipment payments was $29,584 in 1999, $29,202 in 2000, and $25,586 for the
nine months ended September 30, 2001.
The members of the Combined Board were aware of the foregoing interests
and considered them, among other matters, in approving the Combined Exchange
Agreement and the transactions contemplated thereby. The members of the Lifeline
Board were aware of these interests and considered them, among other matters, in
approving the Lifeline Exchange Agreement and the transactions contemplated
thereby.
REGULATORY REQUIREMENTS - COMBINED
The Combined Exchange is subject to approval of the Texas Commissioner
of Insurance. An application for approval was filed on or about December 3,
2001. The parties do not believe the Combined Exchange is subject to any other
insurance regulatory approval. Neither Citizens nor Combined is aware of any
other governmental or regulatory approvals required for consummation of the
Combined Exchange.
32
REGULATORY REQUIREMENTS - LIFELINE
The Lifeline Exchange is subject to approval of the Texas Commissioner
of Insurance. An application for approval was filed on or about December 3,
2001. The parties do not believe the Lifeline Exchange is subject to any other
insurance regulatory approval. Neither Citizens nor Lifeline is aware of any
other governmental or regulatory approvals required for consummation of the
Lifeline Exchange.
SUMMARY OF THE COMBINED EXCHANGE AGREEMENT
This is a summary of the Combined Exchange Agreement, which is
incorporated herein and attached hereto as Appendix A. You should read the
Combined Exchange Agreement in addition to this Summary. See "Available
Information" and "Incorporation of Documents by Reference."
Delivery of Citizens Class A Common Stock; Closing Date. If the
Combined Exchange occurs, Citizens Class A common stock will be available for
distribution at a closing ("Closing") on a closing date ("Closing Date") as soon
as possible after all regulatory approvals and shareholder approvals are
obtained in accordance with Texas law. In order for the Combined Exchange to be
consummated, the Combined Exchange Agreement must be approved by two-thirds of
the Combined common stock. The Combined Exchange between Citizens and Combined
will become effective ("Effective Date") on or as soon after the meeting as
possible (assuming shareholder approval). It is presently anticipated that the
Effective Date will occur on or before April 2, 2002, but there can be no
assurance that the conditions to the Combined Exchange will be satisfied and
that the Combined Exchange will be consummated on that date or any other date.
The parties to the Combined Exchange Agreement have agreed to take all actions
reasonably necessary to consummate the proposed transactions.
Representations, Warranties and Covenants; Legal Proceedings
Disclosure. Each party to the Combined Exchange Agreement has represented to the
other with respect to organization, good standing, capitalization and other
related matters, as well as certain matters with respect to pending legal
proceedings, none of which are deemed material by Citizens. For a description of
those legal proceedings see Exhibits B and C to the Combined Exchange Agreement.
Receipt of Citizens Shares - Procedures. If the Combined Exchange
Agreement is approved at the meeting, Combined shareholders who do not perfect
dissenters' rights will be notified of the approval and furnished with a "Letter
of Transmittal" to send to an exchange agent ("Exchange Agent") that will be
identified in the Letter of Transmittal. DO NOT SUBMIT YOUR COMBINED SHARES AT
THIS TIME. If the Combined Exchange is completed:
o a Letter of Transmittal will be sent to you;
o you should send in your shares with the Letter of Transmittal;
and
o the Exchange Agent will exchange your Combined shares for
Citizens Class A common stock in the ratio set forth in the
Combined Exchange Agreement after it receives your Letter of
Transmittal and Combined stock certificates.
Exchange Agent. Combined will appoint Mellon Investor Services LLC,
Dallas, Texas (Citizens' current stock transfer agent) as Exchange Agent and may
appoint one or more forwarding agents to accept delivery of the Combined's stock
certificates for forwarding to the Exchange Agent. The instructions
33
accompanying the Letter of Transmittal will provide details for surrendering
certificates for Combined shares and the procedure for obtaining certificates
for Citizens Class A common stock, including instructions for obtaining
certificates for Citizens Class A common stock for lost or destroyed
certificates of Combined shares.
Authorization of the Exchange Agent may be terminated by Citizens at
any time after six months following the Effective Date. If terminated, any
shares and funds held by the Exchange Agent for Combined shareholders will be
transferred to Citizens or its designee, who will thereafter serve as Exchange
Agent.
Shareholder Rights Prior to Share Exchange. The Exchange Agent will not
be entitled to vote or exercise any rights of ownership of the Combined shares
held by it prior to the issuance of Citizens Class A common stock to former
holders of such shares, except that it will receive any distributions paid or
distributed with respect to the Combined shares for the account of the persons
exchanging such shares. No distributions are expected with respect to Citizens
Class A common stock.
After the Effective Date, there will be no transfers on the Combined
stock transfer books of shares which were issued and outstanding immediately
prior to the Effective Date. If after the Effective Date certificates
representing Combined shares are properly presented to the Exchange Agent or
directly to Combined or Citizens, they will be canceled and exchanged for
certificates representing Citizens Class A common stock in the ratio set forth
in the attached Exchange Agreement.
Unclaimed Shares or Cash. If outstanding certificates for Combined
shares or payment for any fractional or dissenting shares are not claimed, they
may be turned over to a governmental authority in accordance with the respective
abandoned property laws of the various jurisdictions.
In Colorado (Citizens' state of incorporation) if an owner of stock
cannot be located and does not come forward for a period of five years, and if
the last known address of the shareholder is in Colorado, then the stock must be
turned over to the state treasurer. If the last known address of the shareholder
is in another state, the stock must be turned over to the other state if that
state's laws so provide, otherwise the stock must be turned over to the state of
Colorado.
Abandoned property laws vary from state to state. However, to the
extent it might be permitted by abandoned property and other applicable law,
such unclaimed items shall become the property of Citizens (and to the extent
not in its possession shall be paid over to it) free and clear of all claims or
interest of any persons previously entitled to such items. Notwithstanding the
foregoing, neither the Exchange Agent nor any party to the Combined Exchange
Agreement will be liable to any Combined shareholder for amounts paid to any
governmental authority having jurisdiction of such unclaimed item pursuant to
abandoned property or other applicable laws of such jurisdiction.
Fractional Shares. Fractional shares of Citizens stock will not be
issued under the Combined Exchange Agreement. Instead, fractional shares will be
rounded up to the nearest whole share of Citizens Class A common stock.
Accounting. It is anticipated that the Combined Exchange will be
accounted for as a purchase in accordance with accounting principles generally
accepted in the United States of America.
34
Other Conditions; Termination or Amendment of the Combined Exchange
Agreement. In addition to Combined shareholder approval of the Combined Exchange
Agreement, the obligations of Citizens and Combined to complete the Combined
Exchange are subject to the satisfaction of a number of closing conditions,
including:
o performance by each party to the Combined Exchange Agreement
of its respective obligations;
o approval of the Commissioner of Insurance of the State of
Texas (and any other governmental entity with jurisdiction
over the transaction);
o absence of any proceedings instituted or threatened to
restrain, enjoin or prohibit the transactions contemplated by
the Combined Exchange Agreement;
o continued accuracy in all material respects of the
representations and warranties made by each party in the
Combined Exchange Agreement;
o delivery of certain legal opinions and closing certificates;
o filing Articles of Exchange consistent with the Combined
Exchange Agreement, for the transaction with the requisite
governmental authorities;
o the closing of the Lifeline Exchange Agreement; and
o the implementation by Combined of a plan to replace certain
insurance policy assets with cash or other liquid, admissible
assets of equal value.
In addition, Citizens may decline to proceed with the Combined Exchange
if dissenters' rights are perfected by more than 2.5% of the outstanding
Combined shares.
Any party may waive its unsatisfied conditions to complete the Combined
Exchange, except those which are required by law (such as shareholder and
regulatory approval).
The Combined Exchange Agreement may be terminated and abandoned at any
time (whether before or after approval by the Combined shareholders) by
unanimous consent of Citizens and Combined, or by any party for whose benefit a
closing condition has not been satisfied or waived. Any terms or conditions of
the Combined Exchange Agreement, except those required by law, may be waived by
the Board of Directors of the party entitled to the benefit thereof.
The Combined Exchange Agreement may be amended by mutual agreement of
the Board of Directors of each party; provided that the definition of Market
Value for the stock of Combined and/or Citizens cannot be amended without
approval of the requisite shareholders of Combined.
Expenses and Liability for Termination. Each of the parties to the
Combined Exchange Agreement will pay its own fees and expenses incurred in
connection with the transaction contemplated by the
35
Combined Exchange Agreement, including costs incurred in connection with the
termination of the Combined Exchange Agreement.
Status Regarding Possible Waiver, Modification, or Termination of
Agreement. As of the date of this proxy statement-prospectus, to the best of the
knowledge of the parties to the Combined Exchange Agreement, there are no
conditions precedent which must be waived by any party in order for the Combined
Exchange to be consummated, nor does any party intend to seek to modify or
terminate the Combined Exchange Agreement based on existing circumstances.
Conduct of Business Pending the Combined Exchange; Other Covenants of
the Parties. Combined and Citizens agreed that neither of them will, prior to
the Combined Exchange:
o enter into any transactions except in the ordinary course of
business;
o pay any dividends nor increase the compensation of any officer
or directors; or
o enter into any transaction which would adversely affect its
respective financial conditions.
Each party has agreed to provide the other with information as to any
significant corporate developments during the term of the Combined Exchange
Agreement and to promptly notify the other parties if it discovers that any of
its representations, warranties or covenants contained in the Combined Exchange
Agreement or any document delivered in connection therewith was not true and
correct in all material respects or became untrue or incorrect in any material
respect. All of the parties to the Combined Exchange Agreement have agreed to
take all such actions as may be reasonably necessary and appropriate in order to
consummate the transactions contemplated by the Combined Exchange Agreement.
The Combined Board of Directors, subject to its fiduciary obligations
to its shareholders, has agreed to use its best efforts to obtain the requisite
approval of Combined shareholders for the Combined Exchange Agreement and the
transactions contemplated thereby.
Operations of Combined after the Combined Exchange. Following the
Combined Exchange, Combined will continue to operate in its locations under a
joint management team, with the consolidation of computer data processing in
Citizens' system. Citizens will continue to evaluate the personnel, business
practices and opportunities for Combined and may make such changes as it deems
appropriate following the Combined Exchange.
It is anticipated that the following individuals will serve as
executive officers of Combined upon effectiveness of the Combined Exchange:
36
<Table>
<Caption>
Name Office
---- ------
Rick D. Riley Chairman of the Board and Chief Executive Officer
Mark A. Oliver Vice Chairman and Chief Investment Officer
Gary C. Cole President and Assistant Treasurer
Clayton D. Dunham Executive Vice President and Chief Marketing Officer
Jeffrey J. Wood Executive Vice President, Treasurer, Chief Financial Officer and
Assistant Secretary
Betty Mitchell Corporate Secretary
</Table>
The Board of Directors of Combined upon effectiveness of the Combined
Exchange is expected to be the composed of the following individuals:
Harold E. Riley
Rick D. Riley
Mark A. Oliver
Jeffrey Yeatman
Jeffrey J. Wood
In addition, with the approval of the Texas Commissioner of Insurance,
Citizens intends to enter into a management services agreement with Combined
under which Citizens would provide data processing systems, management expertise
and staff to Combined on a "cost plus 12.5%" basis. This agreement is similar in
substance to agreements that Citizens has with its other insurance subsidiaries.
Stock Transfer Restrictions Applicable to "Affiliates" of Combined. The
Combined Exchange Agreement provides that any shareholder who is an "affiliate"
of Combined, as defined in the rules adopted under the Securities Act of 1933,
will enter into an agreement to not dispose of any Citizens shares received by
him or her in violation of certain transfer restrictions under SEC Rules 144 and
145.
SUMMARY OF THE LIFELINE EXCHANGE AGREEMENT
This is a summary of the Lifeline Exchange Agreement, which is
incorporated herein and attached hereto as Appendix B. You should read the
Lifeline Exchange Agreement in addition to this Summary. See "Available
Information" and "Incorporation of Documents by Reference."
Delivery of Citizens Class A Common Stock; Closing Date. If the
Lifeline Exchange occurs, Citizens Class A common stock will be available for
distribution at a closing ("Closing") on a closing date ("Closing Date") as soon
as possible after all regulatory approvals and shareholder approvals are
obtained in accordance with Texas law. In order for the Lifeline Exchange to be
consummated, the Lifeline Exchange Agreement must be approved by two-thirds of
the Lifeline common stock. The Lifeline Exchange between Citizens and Lifeline
will become effective ("Effective Date") on or as soon after the meeting as
possible (assuming shareholder approval). It is presently anticipated that the
Effective Date will occur on or before April 2, 2002, but there can be no
assurance that the conditions to the Lifeline Exchange will be satisfied and
that the Lifeline Exchange will be consummated on that date or any other date.
The parties to the Lifeline Exchange Agreement have agreed to take all actions
reasonably necessary to consummate the proposed transactions.
37
Representations, Warranties and Covenants; Legal Proceedings
Disclosure. Each party to the Lifeline Exchange Agreement has represented to the
other with respect to organization, good standing, capitalization and other
related matters, as well as certain matters with respect to pending legal
proceedings, none of which are deemed material by Citizens. For a description of
those legal proceedings see Exhibits B and C to the Lifeline Exchange Agreement.
Receipt of Citizens Shares - Procedures. If the Lifeline Exchange
Agreement is approved at the meeting, Lifeline shareholders who do not perfect
dissenters' rights will be notified of the approval and furnished with a "Letter
of Transmittal" to send to an exchange agent ("Exchange Agent") that will be
identified in the Letter of Transmittal. DO NOT SUBMIT YOUR LIFELINE SHARES AT
THIS TIME. If the Lifeline Exchange is completed:
o a Letter of Transmittal will be sent to you;
o you should send in your shares with the Letter of Transmittal;
and
o the Exchange Agent will exchange your Lifeline shares for
Citizens Class A common stock in the ratio set forth in the
Lifeline Exchange Agreement after it receives your Letter of
Transmittal and Lifeline stock certificates.
Exchange Agent. Lifeline will appoint Mellon Investor Services LLC,
Dallas, Texas (Citizens' current stock transfer agent) as Exchange Agent and may
appoint one or more forwarding agents to accept delivery of the Lifeline's stock
certificates for forwarding to the Exchange Agent. The instructions accompanying
the Letter of Transmittal will provide details for surrendering certificates for
Lifeline shares and the procedure for obtaining certificates for Citizens Class
A common stock, including instructions for obtaining certificates for Citizens
Class A common stock for lost or destroyed certificates of Lifeline shares.
Authorization of the Exchange Agent may be terminated by Citizens at
any time after six months following the Effective Date. If terminated, any
shares and funds held by the Exchange Agent for Lifeline shareholders will be
transferred to Citizens or its designee, who will thereafter serve as Exchange
Agent.
Shareholder Rights Prior to Share Exchange. The Exchange Agent will not
be entitled to vote or exercise any rights of ownership of the Lifeline shares
held by it prior to the issuance of Citizens Class A common stock to former
holders of such shares, except that it will receive any distributions paid or
distributed with respect to the Lifeline shares for the account of the persons
exchanging such shares. No distributions are expected with respect to Citizens
Class A common stock.
After the Effective Date, there will be no transfers on the Lifeline
stock transfer books of shares which were issued and outstanding immediately
prior to the Effective Date. If after the Effective Date certificates
representing Lifeline shares are properly presented to the Exchange Agent or
directly to Lifeline or Citizens, they will be canceled and exchanged for
certificates representing Citizens Class A common stock in the ratio set forth
in the attached Lifeline Exchange Agreement.
Unclaimed Shares or Cash. If outstanding certificates for Lifeline
shares or payment for any fractional or dissenting shares are not claimed, they
may be turned over to a governmental authority in accordance with the respective
abandoned property laws of the various jurisdictions.
38
In Colorado (Citizens' state of incorporation) if an owner of stock
cannot be located and does not come forward for a period of five years, and if
the last known address of the shareholder is in Colorado, then the stock must be
turned over to the state treasurer. If the last known address of the shareholder
is in another state, the stock must be turned over to the other state if that
state's laws so provide, otherwise the stock must be turned over to the state of
Colorado.
Abandoned property laws vary from state to state. However, to the
extent it might be permitted by abandoned property and other applicable law,
such unclaimed items shall become the property of Citizens (and to the extent
not in its possession shall be paid over to it) free and clear of all claims or
interest of any persons previously entitled to such items. Notwithstanding the
foregoing, neither the Exchange Agent nor any party to the Lifeline Exchange
Agreement will be liable to any Lifeline shareholder for amounts paid to any
governmental authority having jurisdiction of such unclaimed item pursuant to
abandoned property or other applicable laws of such jurisdiction.
Fractional Shares. Fractional shares of Citizens stock will not be
issued under the Lifeline Exchange Agreement. Instead, fractional shares will be
rounded up to the nearest whole share of Citizens Class A common stock.
Accounting. It is anticipated that the Lifeline Exchange will be
accounted for as a purchase in accordance with accounting principles generally
accepted in the United States of America.
Other Conditions; Termination or Amendment of the Lifeline Exchange
Agreement. In addition to Lifeline shareholder approval of the Lifeline Exchange
Agreement, the obligations of Citizens and Lifeline to complete the Lifeline
Exchange are subject to the satisfaction of a number of closing conditions,
including:
o performance by each party to the Lifeline Exchange Agreement
of its respective obligations;
o approval of the Commissioner of Insurance of the State of
Texas (and any other governmental entity with jurisdiction
over the transaction);
o absence of any proceedings instituted or threatened to
restrain, enjoin or prohibit the transactions contemplated by
the Lifeline Exchange Agreement;
o continued accuracy in all material respects of the
representations and warranties made by each party in the
Lifeline Exchange Agreement;
o delivery of certain legal opinions and closing certificates;
o filing Articles of Exchange consistent with the Lifeline
Exchange Agreement, for the transaction with the requisite
governmental authorities; and
o the closing of the Combined Exchange Agreement.
In addition, Citizens may decline to proceed with the Lifeline Exchange
if dissenters' rights are perfected by more than 2.5% of the outstanding
Lifeline shares.
39
Any party may waive its unsatisfied conditions to complete the Lifeline
Exchange, except those which are required by law (such as shareholder and
regulatory approval).
The Lifeline Exchange Agreement may be terminated and abandoned at any
time (whether before or after approval by the Lifeline shareholders) by
unanimous consent of Citizens and Lifeline, or by any party for whose benefit a
closing condition has not been satisfied or waived. Any terms or conditions of
the Lifeline Exchange Agreement, except those required by law, may be waived by
the Board of Directors of the party entitled to the benefit thereof.
The Lifeline Exchange Agreement may be amended by mutual agreement of
the Board of Directors of each party; provided that the definition of Market
Value for the stock of Lifeline and/or Citizens cannot be amended without
approval of the requisite shareholders of Lifeline.
Expenses and Liability for Termination. Each of the parties to the
Lifeline Exchange Agreement will pay its own fees and expenses incurred in
connection with the transaction contemplated by the Lifeline Exchange Agreement,
including costs incurred in connection with the termination of the Lifeline
Exchange Agreement.
Status Regarding Possible Waiver, Modification, or Termination of
Agreement. As of the date of this proxy statement-prospectus, to the best of the
knowledge of the parties to the Lifeline Exchange Agreement, there are no
conditions precedent which must be waived by any party in order for the Lifeline
Exchange to be consummated, nor does any party intend to seek to modify or
terminate the Lifeline Exchange Agreement based on existing circumstances.
Conduct of Business Pending the Lifeline Exchange; Other Covenants of
the Parties. Lifeline and Citizens agreed that neither of them will, prior to
the Lifeline Exchange:
o enter into any transactions except in the ordinary course of
business;
o pay any dividends nor increase the compensation of any officer
or directors; or
o enter into any transaction which would adversely affect its
respective financial conditions.
Each party has agreed to provide the other with information as to any
significant corporate developments during the term of the Lifeline Exchange
Agreement and to promptly notify the other parties if it discovers that any of
its representations, warranties or covenants contained in the Lifeline Exchange
Agreement or any document delivered in connection therewith was not true and
correct in all material respects or became untrue or incorrect in any material
respect. All of the parties to the Lifeline Exchange Agreement have agreed to
take all such actions as may be reasonably necessary and appropriate in order to
consummate the transactions contemplated by the Lifeline Exchange Agreement.
The Lifeline Board of Directors, subject to its fiduciary obligations
to its shareholders, has agreed to use its best efforts to obtain the requisite
approval of Lifeline shareholders for the Lifeline Exchange Agreement and the
transactions contemplated thereby.
Operations of Lifeline after the Lifeline Exchange. Following the
Lifeline Exchange, Lifeline will continue to operate in its location under a
joint management team, with the consolidation of computer data processing in
Citizens' system. Citizens will continue to evaluate the personnel, business
practices and
40
opportunities for Lifeline and may make such changes as it deems appropriate
following the Lifeline Exchange.
It is expected that the following individuals will serve as executive
officers of Lifeline upon effectiveness of the Lifeline Exchange:
<Table>
<Caption>
Name Office
---- ------
Rick D. Riley Chairman of the Board and Chief Executive Officer
Mark A. Oliver Vice Chairman and Chief Investment Officer
Gary C. Cole President and Assistant Treasurer
Clayton D. Dunham Executive Vice President and Chief Marketing Officer
Jeffrey J. Wood Executive Vice President, Treasurer, Chief Financial Officer and
Assistant Secretary
Betty Mitchell Corporate Secretary
</Table>
The Board of Directors of Lifeline upon effectiveness of the Lifeline
Exchange is expected to be the composed of the following individuals:
Harold E. Riley
Rick D. Riley
Mark A. Oliver
Jeffrey Yeatman
Jeffrey J. Wood
In addition, with the approval of the Texas Commissioner of Insurance,
Citizens intends to enter into a management services agreement with Lifeline
under which Citizens would provide data processing systems, management expertise
and staff to Lifeline on a "cost plus 12.5%" basis. This agreement is similar in
substance to agreements that Citizens has with its other insurance subsidiaries.
Stock Transfer Restrictions Applicable to "Affiliates" of Lifeline. The
Lifeline Exchange Agreement provides that any shareholder who is an "affiliate"
of Lifeline, as defined in the rules adopted under the Securities Act of 1933,
will enter into an agreement to not dispose of any Citizens shares received by
him or her in violation of certain transfer restrictions under SEC Rules 144 and
145.
41
COMBINED'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below compares the year ended December 31, 2000 to the
year ended December 31, 1999, on a statutory basis of accounting. The following
discussion should be read in conjunction with the description of differences
between the GAAP basis and statutory basis financial information included under
the heading "Summary Selected Financial Data" included in this proxy
statement-prospectus.
FINANCIAL POSITION
Combined's statutory financial position at December 31, 2000 and 1999
was as follows:
<Table>
<Caption>
2000 1999
------------ ------------
ADMITTED ASSETS
Bonds $ 12,020,976 $ 12,120,125
Preferred Stocks 452,813 453,400
Common Stocks 90,465 93,758
Real Estate 14,000 14,000
Policy Loans 9,663 9,217
Cash and Short-term Investments 1,335,592 1,295,730
Other Assets 1,191,405 1,172,097
------------ ------------
TOTAL ADMITTED ASSETS $ 15,114,914 $ 15,158,327
============ ============
LIABILITIES
Policy Reserves $ 8,409,010 $ 8,090,043
Claim Reserves 2,767,386 2,732,747
Other Policy Liabilities 50,807 37,758
Amounts Due or Accrued 162,681 100,413
Amounts Held for Others 355,465 250,135
Asset Valuation Reserve 50,548 56,443
------------ ------------
TOTAL LIABILITIES $ 11,795,897 $ 11,267,539
============ ============
TOTAL CAPITAL AND SURPLUS $ 3,319,017 $ 3,890,788
</Table>
Total assets reflected little change, decreasing less than 1%. Bond and
stock holdings decreased minimally, while cash and short-term investments
increased 3%. Cash generated through prepayments of loan-backed securities was
sufficient to cover operating losses for the year without liquidating other
investments. Combined continued to expand its holdings in investment grade
corporate bonds, as well as preferred stocks, while reducing its exposure to
mortgage-backed securities. Combined did not hold any non-investment grade
securities as of December 31, 2000.
With the exception of due and unpaid premiums, all assets remained
fairly level during the year. As payroll deduction sales become a greater
percentage of total business, due premiums continue to increase. Combined bills
groups for the initial premium after issue, resulting in many groups paying in
arrears. Due premiums increased 35% from 1999 to 2000.
42
Total liabilities rose 5%. Policy reserves increased from $8.1 million
at December 31, 1999, to $8.4 million at December 31, 2000. Life and A&H claim
reserves both reflected little change. In management's opinion, claim reserves
are more than adequate to cover the current levels of life and accident and
health claims experienced by Combined.
Capital and surplus declined from $3.9 million at December 31, 1999, to
$3.3 million at December 31, 2000. Although the sale of a block of life business
on January 1, 1999, contributed approximately $3.7 million to surplus as of
December 31, 1999, the loss of profits generated from this block of business
created additional pressures on earnings in 2000, as well as continuing losses
on certain accident and health lines of business.
RESULTS OF OPERATIONS
Combined's core product lines include individual life insurance and
individual accident and health insurance, including hospitalization, accident
and disability insurance. Additionally, Combined's A&H specialty products are
marketed within worksite markets.
In 1998 Combined adopted a new marketing/business plan under which it
planned to utilize the underlying value of a portion of its life business to
stabilize surplus while eliminating losses and returning the Company to
profitable operations. As a result of emerging loss trends, Combined
re-evaluated the decision made in 1997 to re-enter the major medical market. The
decision was made to non-renew its in- force block of major medical policies in
Texas and de-emphasize the sale of major medical policies in all operating
areas. The decision was also make to discontinue marketing Medicare supplemental
policies due to continuing losses and to increase emphasis on worksite marketing
of limited benefit A&H specialty products. The above financial information for
1999, 2000 and the nine-month period ending September 30, 2001 reflect the
successful implementation of the marketing/business plan.
Combined sold a portion of its in-force life business via an assumption
reinsurance treaty on January 1, 1999. The transaction provided $3.7 million of
income which eliminated the 1999 operational loss of $1.1 million, resulting in
a reported income of $2.6 million for 1999. The operational loss for 1999 was
generated by losses within Combined's major medical, Medicare supplement and
cancer lines of business.
Combined began non-renewing its in-force block of Texas major medical
policies in January 1999 with the last segments of the block non-renewed in
January 2000. Annualized in-force major medical premiums have decreased from
$4.9 million in 1998, $3.4 million in 1999, $2.7 million in 2000 to $2.5 million
at September 30, 2001. Under the terms of the non-renewal, policyholders had the
option to purchase on a guaranteed issue basis the major medical policy then
being marketed by the Company. The rate structure and margins under that policy
were significantly improved over the in-force block. Claims runoff from the
non-renewed block continued to negatively impact operations during the first two
quarters of 2000.
The non-renewal of Texas major medical policies coupled with the
implementation of rate increases have reduced the Company's loss on its major
medical policies from 107% in 1998 to 104% in both 1999 and 2000 to 89% for the
nine-month period ended September 30, 2001. The dollar amounts of major medical
claims have decreased from $4.9 million in 1998, $4.3 million in 1999, $2.9
million in 2000 to $1.7 million for the nine-month period ended September 30,
2001.
43
Combined discontinued marketing Medicare Supplement policies in May
1999 and has continually implemented rate increases to the extent permitted by
regulatory authorities since that time. Annualized in- force Medicare supplement
premiums have correspondingly decreased from $1.9 million in 1998, to $1.7
million in 1999, to $1.6 million in 2000 to $1.4 million at September 30, 2001,
related to Combined's withdrawal from the Medicare supplement market.
Combined implemented a new loss review program in 1999 which
consolidated multiple policy forms for expense purposes to enable the company to
more aggressively implement rate increases within of regulatory guidelines.
Overall Company loss ratios on a paid basis decreased from 74% in 1999 to 65% in
2000 to 62% for the nine-month period ended September 30, 2001.
Combined's withdrawal from the Medicare supplement and major medical
markets impacted premium income in 1999. Premium income decreased 6.4% from
$15.6 million in 1998 to $14.6 million in 1999. The continued expansion of
Combined's worksite marketing activities increased premium income in 2000.
Premium income increased 1.7% from $14.6 million in 1999 to $14.9 million in
2000. Premium income for the nine-month period ended September 30, 2001 was
$10.9 million reflecting a decrease in new worksite marketing activity of the
Company's largest general agency.
Accident and health benefits were $8.6 million for 2000 compared to
$9.7 million for 1999. This 12.6% decrease in accident and health benefits is
directly related to the withdrawal from the Medicare supplement and major
medical markets discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The cash flows of Combined for 2000 and 1999 are summarized below:
<Table>
<Caption>
2000 1999
------------ ------------
Operations
Cash to insurance operations $ (1,002,965) $ (3,565,999)
Investment income received 547,370 646,375
Federal income taxes 0 0
------------ ------------
Cash used by operations (455,595) (2,919,624)
Investment Activities
Proceeds from sales or maturity of
long-term assets 706,829 2,914,711
Cost of long-term investments acquired (346,224) (986,065)
------------ ------------
Cash provided by investment activities 360,605 1,928,646
Financing Activities
Other - Net 134,852 19,364
------------ ------------
Cash provided by financing activities 134,852 19,364
------------ ------------
Net change in cash and short-term
investments $ 39,862 $ (971,614)
============ ============
</Table>
44
In 1999, the cash used by operations included a $1.7 million ceding
commission expense. Excluding that non-recurring item, the cash used by
operations would have been for 1999 $1.2 million. Accident and health benefits
associated with the non-renewed major medical policies were more significant
than expected in early 2000, producing temporary liquidity pressures during
second quarter 2000. Overall, cash and short- term investments reflected a
modest increase of $39,862 for 2000. Combined does not anticipate any
significant liquidity needs in 2001. Cash flows should be more than sufficient
to accommodate Combined's cash requirements.
The payroll deduction market continues to be the main thrust of
Combined's marketing plan. Emphasis is also being placed on life insurance
sales. Combined does not anticipate making any material capital expenditures
during 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2000
The discussion below compares Combined's results for the nine months
ended September 30, 2001 with the nine months ended September 30, 2000. The
following discussion should be read in conjunction with the description of
differences between the GAAP basis and statutory basis financial information
included under the heading "Summary Selected Financial Data" included in this
proxy statement-prospectus.
Effective January 1, 2001, Combined adopted codification statutory
accounting practices. The primary difference between the Texas statutes and the
NAIC's codified rules involve the admission of 100% of all fixed assets for
Texas domiciled companies. In NAIC codification fixed assets are not admitted.
The 2001 nine month results discussed below include the impact of the adoption
of codifications. The most significant impact of which is the adoption of
deferred income taxes which increased surplus at September 30, 2001 by $108,000.
Total assets increased 0.3% to $15,165,000 at September 30, 2001, from
$15,115,000 at December 31, 2000. Bond and stock holdings decreased 0.6% from
$12,474,000 at December 31, 2000 to $12,405,000 at September 30, 2001. Cash and
short-term investments increased 10.1% from $1,336,000 at December 31, 2000 to
$1,470,000 at September 30, 2001.
Total liabilities decreased 2.6% from $11,796,000 at December 31, 2000
to $11,484,000 at September 30, 2001. The major cause of the decrease was a
18.0% decrease in accident and health claims from $2,564,000 at December 31,
2000 to $2,104,000 at September 30, 2001, related to Combined's withdrawal from
the Medicare supplement and individual major medical markets.
Capital and surplus increased from $3,891,000 at December 31, 2000 to
$3,681,466 primarily due to $362,000 of net income for the nine months ended
September 30, 2001.
Premium revenue decreased from $11,029,000 in 2000 to $10,919,000 in
2001 due to Combined's decision to discontinue marketing Medicare supplement
policies. Other items of revenue were essentially unchanged. Total revenue for
2001 was $11,552,000 versus $11,659,000 for 2000. Death benefits increased from
$737,000 in 2000 to $771,000 in 2001 due to higher claims. Accident and health
claims decreased from $6,798,000 in 2000 to $5,549,000 in 2001 due to the
withdrawal from the Medicare supplement and major medical markets. Total death
benefits and increases in reserves and other expenses were $6,590,000 for 2000
versus $7,808,000 for 2001. Commissions decreased from $2,616,000 in 2000 to
$2,493,000 in
45
2001. General insurance expenses increased 4.5% from $1,712,000 for the first
nine months of 2000 to $1,790,000 for the same period in 2001, due to legal
expenses. The net gain from operations for the first nine months of 2001 was
$362,000 versus a net loss from operations of $811,000 for the same period of
2000.
LIQUIDITY AND CAPITAL RESOURCES
The capital and surplus of Combined as of September 30, 2001, was
$3,681,000 versus $3,319,000 as of December 31, 2000. Management of Combined
believes that Combined's cash and other liquid assets on hand are sufficient for
it to undertake its operations as contemplated for the foreseeable future.
46
LIFELINE'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below compares the year ended December 31, 2000 to the
year ended December 31, 1999, on a statutory basis of accounting. The following
discussion should be read in conjunction with the description of differences
between the GAAP basis and statutory basis financial information included under
the heading "Summary Selected Financial Data" included in this proxy
statement-prospectus. Effective January 1, 2001, Lifeline adopted codified
statutory accounting practices. The adoption did not have a significant impact
on Lifeline's financial position or results of operations.
FINANCIAL POSITION
Lifeline's statutory financial position at December 31, 2000 and 1999
was as follows:
<Table>
<Caption>
2000 1999
------------ ------------
ADMITTED ASSETS
Bonds $ 2,963,832 $ 2,936,000
Preferred Stocks 273,402 275,418
Policy Loans 4,386 2,753
Cash and Short-term Investments 539,909 444,006
Other Assets 79,531 123,773
------------ ------------
TOTAL ADMITTED ASSETS $ 3,861,060 $ 3,781,950
============ ============
LIABILITIES
Policy Reserves $ 610,857 $ 608,465
Claim Reserves 168,040 185,152
Other Policy Liabilities 67,136 61,607
Amounts Due or Accrued 23,090 19,382
Asset Valuation Reserve 8,358 7,706
------------ ------------
TOTAL LIABILITIES $ 877,481 $ 882,312
============ ============
TOTAL CAPITAL AND SURPLUS $ 2,983,579 $ 2,899,638
</Table>
Assets reflected a modest increase of 2%, from $3.8 million to $3.9
million. Cash and short-term investments represented the most significant
portion of that growth, increasing 22% due to the earnings through the first
nine months of 2001. Lifeline has continued to reduce investments in loan-backed
securities, while investing available funds in corporate bonds and short-term
investments. Although 29% of the portfolio continues to be invested in
loan-backed securities, Lifeline's exposure to extension risk and yield loss is
minimal. The average life of Lifeline's loan-backed portfolio decreased from 4.8
years to 3.7 years. As of December 31, 2000, Lifeline did not hold any
non-investment grade securities.
Accident and health policy reserves increased slightly. Life reserves
decreased minimally as a result of an increase in surrender activity during the
year. Claim reserves fell 9% from $185,152 to $168,040 due to a downward trend
in paid claims. All other liabilities remained fairly consistent with prior year
levels. Life and accident and health claim reserves have consistently been more
than adequate to support the level of benefits paid by Lifeline.
47
Capital and surplus continued to show a moderate increase from $2.9
million to $3.0 million. This growth in earnings was less than the previous
three years, primarily due to the loss of premium income associated with a block
of life policies, which became fully paid-up during 2000.
The declaration of a stock dividend in 1999 enabled Lifeline to
finalize compliance with minimum capital requirements according to Article
3.02(c) of the Texas Insurance Code. No further capital increases will be
necessary. Lifeline's total adjusted capital is substantially in excess of
authorized control level risk- based capital.
RESULTS OF OPERATIONS
Lifeline's product lines include small face amount whole life insurance
and accidental and indemnity insurance with primary emphasis on the sale of
limited benefit A&H specialty products within worksite markets. Lifeline also
markets PPO major medical policy on a limited basis.
During 1999 and the first three quarters of 2000 Lifeline discontinued
all recruiting and sales efforts while evaluating alternative business plans. A
new business plan was implemented during the fourth quarter of 2000 emphasizing
the sale of limited benefit A&H specialty products within worksite markets. The
new business plan did not impact operations in 2000, but has positively impacted
2001 operations.
Operations were negatively impacted by the absence of new marketing
initiatives in 1999 and the first three quarters of 2000. Premium income
decreased 15.6% from $837,903 in 1998 to $707,506 in 1999 and decreased an
additional 16.5% in 2000 to $590,586. Net income decreased from $364,673 in 1998
to $160,286 in 1999 and $84,540 in 2000.
The new business plan implemented during the fourth quarter of 2000 has
favorably impacted Lifeline's operations in 2001. Premium income for the
nine-month period ended September 30, 2001 totaled $560,762 and net income for
the period totaled $70,162.
48
LIQUIDITY AND CAPITAL RESOURCES
The cash flows of Lifeline for 2000 and 1999 are summarized below:
<Table>
<Caption>
2000 1999
------------ ------------
Operations
Cash to insurance operations $ (126,388) $ (8,656)
Investment income received 221,663 213,892
Federal income taxes 0 (17,724)
------------ ------------
Cash provided by operations 95,275 187,512
Investment Activities
Proceeds from sales or maturity of
long-term assets 356,235 614,986
Cost of long-term assets (381,557) (752,103)
------------ ------------
Cash provided (used) by investment
activities (25,322) (137,117)
Financing Activities
Other - Net 25,951 (24,456)
------------ ------------
Net change in cash and short-term
investments $ 95,904 $ 25,939
============ ============
</Table>
Cash flow from insurance operations was significantly affected by the
decline in both life and accident and health premium. Cash provided by
operations decreased 49%, from $187,512 in 1999 to $95,275 in 2000. Due to the
expected decrease in cash provided by operations as a result of the decline in
life premium, excess cash was invested predominantly in short-term investments
to maintain adequate liquidity for operating needs. As a result, cash and
short-term investments continued to be sufficient to meet Lifeline's liquidity
needs in 2000.
Lifeline has accelerated marketing activities for 2001, including the
introduction of a payroll deduction product. This expansion of marketing efforts
is expected to favorably impact cash flow and earnings for 2001. Lifeline does
not expect to make any material capital expenditures during 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2000
The discussion below compares Lifeline's results for the nine months
ended September 30, 2001 with the nine months ended September 30, 2000. The
following discussion should be read in conjunction with the description of
differences between the GAAP basis and statutory basis financial information
included under the heading "Summary Selected Financial Data" included in this
proxy statement-prospectus.
Effective January 1, 2001, Lifeline adopted codification statutory
accounting practices. This adopted did not significantly impact the financial
position or results of operations of Lifeline as of and for the nine months
ended September 30, 2001. The 2001 nine month results discussed below include
the impact of the adoption of codification.
49
Assets increased 2.8% from $3,861,000 at December 31, 2000 to
$3,971,000 at September 30, 2001. Investments in bonds and stocks decreased
10.2% from $3,237,000 at December 31, 2000 to $2,905,000. This decrease was
primarily offset by a 76.5% increase in cash from $540,000 at December 31, 2000
to $953,000 at September 30, 2001, due to the sale of bonds.
Liabilities increased 4.6% from $877,000 at December 31, 2000 to
$917,000 at September 30, 2001. The primary reason for the increase was a 25.4%
increase in accident and health claims which increased from $138,000 at December
31, 2000 to $173,000 at September 30, 2001.
Capital and surplus increased 2.3% from $2,984,000 at December 31, 2000
to $3,053,000 at September 30, 2001, primarily due net income of $70,000 for the
nine months ended September 30, 2001.
Premiums increased significantly from $436,000 in 2000 to $561,000 in
2001 due to the accelerated marketing activities in 2001 discussed above. Net
investment income also increased from $175,000 in 2000 to $201,000 in 2001 due
to increased production related to the 2001 marketing activities. The other
items of income remain essentially unchanged.
Death benefits decreased from $26,000 in 2000 to $12,000 in 2001 while
accident and health benefits increased from $338,000 in 2000 to $419,000 in
2001. The increase in accident and health benefits was due to increased claim
volume directly related to the increased production discussed above. Surrender
benefits also increased from $11,000 in 2000 to $26,000 in 2001 due to higher
lapse experience. In 2001 there was a decrease in reserves for life, accident
and health policies of $7,000 versus an increase of $30,000 in 2000. Commissions
increased in 2001 to $139,000 versus $74,000 in 2000 due to a higher volume of
business written. However, general insurance expenses decreased to $97,000 in
2001 from $116,000 in 2000 due to non-recurring claim investigation expenses.
Net income in 2001 was $70,000 versus net income of $5,000 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, Lifeline had capital and surplus of $3,053,000
versus $2,984,000 as of December 31, 2000. Cash on hand and other liquid assets
are sufficient for Lifeline to undertake its operations for the foreseeable
future.
50
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the exchange of shares of Combined common stock and
Lifeline common stock for Citizens Class A common stock pursuant to the Combined
Exchange and the Lifeline Exchange, that are generally applicable to holders of
Combined common stock and Lifeline common stock. This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to Combined shareholders and Lifeline shareholders, as described
below. There can be no assurance that such changes will not occur.
Shareholders of Combined and Lifeline should be aware that this
discussion does not deal with all federal income tax considerations that may be
relevant to particular shareholders in light of their particular circumstances,
or to certain types of shareholders such as shareholders who are dealers in
securities, who are financial institutions, who are insurance companies, who are
foreign persons, who are real estate investment trusts, who are regulated
investment companies, who are tax-exempt persons, who hold their stock as part
of a position in a "straddle" or as part of a "hedging" or other integrated
transaction, who do not hold their stock as capital assets, or who acquired
their shares in connection with stock option or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of the Combined Exchange or the Lifeline Exchange
under foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to or concurrently with, the transactions
discussed in this prospectus (whether or not any such transactions are
undertaken in connection with the Combined Exchange or the Lifeline Exchange),
including any transaction in which shares of Combined or Lifeline stock are
acquired or shares of Citizens Class A common stock are disposed of, or the tax
consequences of the alternative minimum tax provisions of the Code. Accordingly,
COMBINED SHAREHOLDERS AND LIFELINE SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE COMBINED EXCHANGE AND
THE LIFELINE EXCHANGE, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM.
The anticipated federal income tax consequences to Combined and
Lifeline shareholders are as follows:
COMBINED
(a) No gain or loss will be recognized by holders of Combined stock
solely upon their receipt in the Combined Exchange of Citizens Class A common
stock in exchange therefor.
(b) The aggregate tax basis of Citizens Class A common stock received
by Combined shareholders in the Combined Exchange will be the same as the
aggregate tax basis of the Combined stock surrendered in exchange therefor.
(c) The holding period of Citizens Class A common stock received by
each Combined shareholder in the Combined Exchange will include the period for
which the Combined stock surrendered
51
in exchange therefor was considered to be held, provided that the Combined stock
so surrendered is held as a capital asset at the time of the Combined Exchange.
(d) Cash received by the Combined shareholders who properly exercise
their dissenters' rights will be treated as having been received in redemption
of the shares so cashed out, and may result in taxable gain or loss, measured by
the difference (if any) between the amount of cash received and such
shareholder's basis in the Combined stock. Provided the shares were held as a
capital asset at the time of the redemption, such gain or loss will constitute
capital gain or loss. It is possible that for some shareholders, the
distribution of cash may be treated as a dividend taxable as ordinary income.
LIFELINE
(a) No gain or loss will be recognized by holders of Lifeline stock
solely upon their receipt in the Lifeline Exchange of Citizens Class A common
stock in exchange therefor.
(b) The aggregate tax basis of Citizens Class A common stock received
by Lifeline shareholders in the Lifeline Exchange will be the same as the
aggregate tax basis of the Lifeline stock surrendered in exchange therefor.
(c) The holding period of Citizens Class A common stock received by
each Lifeline shareholder in the Lifeline Exchange will include the period for
which the Lifeline stock surrendered in exchange therefor was considered to be
held, provided that the Lifeline stock so surrendered is held as a capital asset
at the time of the Lifeline Exchange.
(d) Cash received by the Lifeline shareholders who properly exercise
their dissenters' rights will be treated as having been received in redemption
of the shares so cashed out, and may result in taxable gain or loss, measured by
the difference (if any) between the amount of cash received and such
shareholder's basis in the Lifeline stock. Provided the shares were held as a
capital asset at the time of the redemption, such gain or loss will constitute
capital gain or loss. It is possible that for some shareholders, the
distribution of cash may be treated as a dividend taxable as ordinary income.
RELATED TAX ISSUES
The parties are not requesting and will not request a ruling from the
IRS in connection with either the Combined Exchange or the Lifeline Exchange.
Combined and Lifeline, however, will receive an opinion from counsel for
Citizens to the effect that the Combined Exchange and the Lifeline Exchange will
each constitute a reorganization resulting in the anticipated federal tax
consequences (the "Tax Opinions"). Combined and Lifeline shareholders should be
aware that the Tax Opinions do not bind the IRS or the courts. There is no
assurance that the IRS will not assert a contrary position regarding the tax
consequences of either Exchange, nor is there any assurance that the IRS would
not prevail in the event the tax consequences of either Exchange were litigated.
The Tax Opinions will not address the tax consequences of either Exchange to the
shareholders of Combined or Lifeline under applicable foreign, state or local
income tax laws. The Tax Opinions are subject to certain assumptions and
qualifications, including but not limited to the truth and accuracy of
representations made by Citizens, Combined and Lifeline, including
representations in certain certificates to be delivered to counsel by the
respective managements of Citizens, Combined and Lifeline.
52
Combined and Lifeline shareholders should be aware that the IRS may
examine transactions taking place before, contemporaneously with, or after a
reorganization to determine whether reorganization treatment is appropriate, or
in some cases to determine whether shareholders will be taxed on other economic
benefits that are included as part of the overall transaction. Thus, loan
transactions between parties, compensation arrangements, noncompete agreements,
consulting arrangements and other transactions could be reviewed by the IRS.
Gain could also have to be recognized by all Combined shareholders in the
Combined Exchange, and by all Lifeline shareholders in the Lifeline Exchange, if
any Combined or Lifeline shareholder was treated as receiving (directly or
indirectly) in that Exchange consideration other than Citizens Class A common
stock in exchange for the shareholder's stock. Furthermore, if the IRS were to
establish as to some shareholders that part of Citizens Class A common stock
received in either the Combined Exchange or the Lifeline Exchange is severable,
resulting in a proportionally increased equity interest being received by other
shareholders, the shareholders whose equity interests were deemed to be
constructively increased may be treated as having received a taxable stock
dividend.
A successful IRS challenge to the reorganization status of the either
the Combined Exchange or the Lifeline Exchange would result in shareholders of
the challenged entity recognizing taxable gain or loss with respect to each
share of stock surrendered equal to the difference between the shareholder's
basis in such shares and the fair market value, as of the effective time of the
transaction, of Citizens Class A common stock received in exchange therefor. In
such event, a shareholder's aggregate basis in Citizens Class A common stock
received would equal its fair market value, and the shareholder's holding period
for such stock would begin the day after the transaction is completed.
Pursuant to Section 1.368-3(b) of the Regulations, the shareholders of
Combined and Lifeline must file with their income tax returns for the year in
which the transaction is consummated, a statement which provides details
pertinent to the nonrecognition of gain or loss arising from that Exchange,
including the cost or other basis of stock transferred in the Exchange and the
amount of stock received in the Exchange.
Under Section 3406 of the Code, Combined and Lifeline shareholders may
be subject to "backup withholding" on "reportable payments," if any, to be
received by them if they fail to furnish their correct taxpayer identification
numbers to Citizens or for certain other reasons. Citizens will report to these
persons and to the IRS for each calendar year the amount of any reportable
payments during that year and the amount of tax withheld, if any, with respect
to those reportable payments.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY OR MAY NOT BE APPLICABLE DEPENDING UPON A SHAREHOLDER'S
PARTICULAR SITUATION. COMBINED AND LIFELINE SHAREHOLDERS SHOULD CONSULT THEIR
TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF EACH EXCHANGE,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAW.
53
RIGHTS OF DISSENTING SHAREHOLDERS
The following summary of dissenters' rights available to Combined and
Lifeline shareholders identifies and discusses all of the material information
necessary to perfect dissenters' rights. However, this summary is not intended
to be a complete statement of applicable Texas law and is qualified in its
entirety by reference to Part 5, Articles 5.11 through 5.13 of the Texas
Business Corporation Act (the "Act"), set forth in their entirety in Appendix C.
CITIZENS HAS CONDITIONED BOTH THE COMBINED EXCHANGE AND THE LIFELINE
EXCHANGE, SUBJECT TO ITS RIGHT TO WAIVE, AND HAS RESERVED THE RIGHT TO ABANDON
EITHER EXCHANGE IN THE EVENT THAT HOLDERS OF GREATER THAN 2.5% OF THE
OUTSTANDING SHARES OF COMBINED OR LIFELINE DISSENT FROM THEIR RESPECTIVE
EXCHANGE AND SEEK PAYMENT FOR THEIR SHARES IN ACCORDANCE WITH THE ACT.
FULL AND EXACT COMPLIANCE WITH THE STATUTORY REQUIREMENTS IS ESSENTIAL
FOR A SHAREHOLDER TO EXERCISE DISSENTERS' RIGHTS SUCCESSFULLY. SHAREHOLDERS ARE
URGED TO READ AND UNDERSTAND THIS DISCUSSION AND THE STATUTORY PROVISIONS
ATTACHED AS APPENDIX C TO THIS PROXY-STATEMENT PROSPECTUS.
Right to Dissent. A shareholder of Combined is entitled to dissent and
obtain payment of the fair value of its shares assuming that the Combined
Exchange is completed. A shareholder of Lifeline is entitled to dissent and
obtain payment of the fair value of its shares assuming that the Lifeline
Exchange is completed. A shareholder entitled to dissent and obtain payment for
his or her shares under Article 5.11 of the Act may not challenge the corporate
action creating his or her entitlement unless the action is or would be
fraudulent.
Procedure for Exercise of Dissenters' Rights. In order for a
shareholder to exercise dissenters' rights and receive payment for such
shareholder's shares, the shareholder must comply exactly with the requirements
in Article 5.11 through 5.13 of the Act. To briefly summarize, subject to
certain other requirements, the shareholder must, before the vote is taken at
the meeting of shareholders, file a written objection to the Combined Exchange
or the Lifeline Exchange with Combined or Lifeline, as the case may be, setting
out that the right to dissent will be exercised if the Combined Exchange or the
Lifeline Exchange is approved by shareholders, and stating the shareholder's
address. Written notice must be sent to Combined, which is located at 307 North
Glenwood Boulevard, Tyler, Texas 75702. Written notice must be sent to Lifeline,
which is also located at 307 North Glenwood Boulevard, Tyler, Texas 75702.
Furthermore, the shareholder must not vote in favor of the applicable Exchange.
If the Combined Exchange or the Lifeline Exchange is approved, Combined
or Lifeline, as the case may be, will send written notice to the dissenting
shareholders within 10 days, indicating that the applicable Exchange was
approved. A shareholder then has 10 days after being notified of the approval to
demand in writing to Combined or Lifeline, as appropriate, at the addresses
above, the fair value of the shareholder's shares. The written demand must state
the number and class of the shares owned, and the shareholder's estimate of the
fair value of their shares. Fair value under Article 5.12 of the Act is the
value as of the day immediately preceding the meeting of shareholders, excluding
any appreciation or depreciation in anticipation of the proposed action.
Combined or Lifeline, within 20 days of receipt of the shareholder's
notice, will provide written notice that: a) it accepts the amount claimed and
agrees to pay that amount within 90 days of the approval
54
of the applicable Exchange (or in the case of shares represented by
certificates, upon the surrender of the certificates), or b) contains an
estimate of the fair value together with an offer to pay that amount within 90
days of the approval of the applicable Exchange (or in the case of shares
represented by certificates, upon the surrender of the certificates), if the
shareholder accepts the offer within 60 days of the approval of the applicable
Exchange.
The holders of certificated shares must submit their certificates to
Combined or Lifeline, as appropriate, for notation within 20 days of their
demand for payment, or risk terminating their dissenter's rights.
A shareholder may withdraw such demand for payment of his or her shares
any time before payment for the shares, or before any petition for judicial
review is filed.
Judicial Appraisal of Shares. If a shareholder fails to accept
Combined's or Lifeline's offer within 60 days following approval of the
applicable Exchange, then within an additional 60 days, either the shareholder
or the corporation may file a petition in any court of competent jurisdiction in
Smith County, Texas, requesting the court to determine the fair value. If the
shareholder files the petition, the shareholder must provide a copy to the
corporation within 10 days. The clerk of the court will give notice of the time
and place fixed for the hearing of the petition by registered mail to the
corporation and all dissenting shareholders. All shareholders notified as well
as the corporation will be bound by the final judgment of the court.
The court will appoint one or more appraisers to assist in making the
determination of the fair value of the shares. The appraiser will give the
shareholders and the corporation an opportunity to submit pertinent evidence as
to the value of the shares. The court will make the final decision of the fair
value of the shares, and will direct the corporation to pay that amount,
together with interest, beginning 91 days after the date on which the applicable
Exchange was approved to the date of the judgment. The sum will be payable to
holders of uncertificated shares immediately, and to holders of certificated
shares simultaneously with their surrender of the certificates. Upon payment,
the dissenting shareholders will cease to have any interest in those shares or
in the corporation. The court will allow the appraisers a reasonable fee as
court costs, and all court costs will be allotted between the parties in a
manner that the court determines to be fair and equitable.
55
INFORMATION CONCERNING COMBINED
Combined, a Texas stipulated premium life insurance company chartered
in 1965, is licensed in 11 states. Its business is primarily conducted in Texas.
In addition to Texas, Combined presently writes business in five other states,
Arizona, Arkansas, Louisiana, Mississippi and Oklahoma. Combined currently
distributes through master managing general agents and 1,200 personal producing
general agents. The quarterly statement as of September 30, 2001 of Combined
filed with the Texas Commissioner of Insurance reflects admitted assets of
$15,071,994, capital and surplus of $3,681,466, and premiums for the nine months
ended September 30, 2001 of $10,918,872.
The core product lines of Combined include individual accident and
health insurance and individual life, with the former presently representing
most of total direct premium writings. Coverages offered include accident,
disability income, hospitalization and voluntary payroll deduction. During 1998,
Combined adopted a new business plan under which it would utilize the underlying
profitability of its life business to stabilize surplus while eliminating losses
and returning Combined to a profitable operation. One of the primary components
of this plan was the sale of a portion of its older inforce whole life business,
via an assumption reinsurance agreement. That transaction provided an additional
$3.75 million of surplus. In addition, Combined began non-renewing its inforce
block of Texas major medical policies in January 1999, with the last segment of
the block non-renewed in January 2000. Combined is not currently promoting a
major medical policy and premium of its inforce block of major medical policies
has decreased.
Combined also ceased writing new Medicare supplement business effective
May 1999 and has implemented rate increases to the extent permitted by
regulatory authorities in each of the last several years. Another rate increase
was adopted in 2001. Combined has developed products to penetrate the payroll
deduction market, which complement its existing supplement health and life
insurance products. Combined's current focus is on its hospitalization and life
products.
PREMIUM ANALYSIS
<Table>
<Caption>
Direct Premiums (000's) 2000 1999 1998 1997 1996
- ----------------------- ----------- ----------- ----------- ----------- -----------
Ordinary life $ 1,989 $ 1,978 $ 3,171 $ 3,236 $ 3,359
Individual A&H 13,049 12,976 12,063 11,095 11,387
Group A&H 494 492 622 606 529
----------- ----------- ----------- ----------- -----------
Total $ 15,532 $ 15,446 $ 15,856 $ 14,937 $ 15,275
=========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
Reinsurance Ceded
Premiums (000's) 2000 1999 1998 1997 1996
- ------------------ ----------- ----------- ----------- ----------- -----------
Ordinary life $ 24 $ 21 $ 19 $ 26 $ 27
Individual A&H 650 813 247 244 287
Group A&H 2 2 4 7 0
----------- ----------- ----------- ----------- -----------
Total $ 676 $ 836 $ 270 $ 277 $ 314
=========== =========== =========== =========== ===========
</Table>
56
<Table>
<Caption>
Net Premiums &
Deposit Funds (000's) 2000 1999 1998 1997 1996
- --------------------- ----------- ----------- ----------- ----------- -----------
Ordinary life $ 1,965 $ 1,957 $ 3,152 $ 3,210 $ 3,332
Individual A&H 12,399 12,163 11,816 10,851 11,100
Group A&H 492 490 618 599 529
----------- ----------- ----------- ----------- -----------
Total $ 14,856 $ 14,610 $ 15,586 $ 14,660 $ 14,961
=========== =========== =========== =========== ===========
</Table>
PROPERTIES
Combined's offices are located at 307 North Glenwood Boulevard, Tyler,
Texas. Combined owns the land and building at this address. Combined also leases
office space at 320 North Glenwood Boulevard, Tyler, Texas, for $2,236 per
month, and at 300 North Hill Street, Tyler, Texas, for $7,885 per month. All of
the space for the two offices is shared with Lifeline under an expense sharing
agreement. Total rental expense for Combined was $121,449 for 1999, $121,449 for
2000, and $91,087 for the nine months ended September 30, 2001.
LEGAL PROCEEDINGS
Combined was initially included as a Third Party Defendant in Civil
Action No. 660cv442 styled as Nathan L. Johnson et al v. East Texas Medical
Center, et al v. Aetna Health and Life Insurance Company, et al. This suit is
pending in the United States District Court for the Eastern District of Texas,
Tyler Division. In the suit, the plaintiff alleges that the defendant hospitals
mishandled patient accounts and wrongly forwarded patient funds to health
insurance companies. Plaintiff's Motion for Severance of Third Party Claimants
was granted by the court on April 16, 2001, and Combined was severed from the
case. Depending on the outcome of the case as now postured, Combined could be
reintroduced as a defendant. Combined's management believes that Combined's
exposure under the suit is not material. Combined is unaware of any other
pending litigation to which it is a party or to which any of its property is
subject.
MARKET FOR COMBINED COMMON STOCK AND RELATED SECURITYHOLDER MATTERS
Combined common stock is not listed or actively traded through security
brokerage firms, and there is no over-the-counter trading activity. There have
been no dividends paid since the inception of Combined. The number of record
holders of Combined common stock is 30.
57
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS - COMBINED
The following information is furnished with respect to each director
and executive officer of Combined.
<Table>
<Caption>
YEAR FIRST
ELECTED AS
NAME OF DIRECTOR OR DIRECTOR OF POSITIONS WITH PRINCIPAL OCCUPATION FOR
EXECUTIVE OFFICER AGE COMBINED COMBINED THE PAST FIVE YEARS
- ------------------- --- ----------- -------------- ------------------------
Walden P. "Red" Little 81 1965 Chairman of the Chairman of the Board of
Board of Directors, Directors of and Chief
Chief Executive Officer of
Executive Officer Combined
Regina Little Rooney 48 1976 Director, Vice Vice President-Underwriting
President- of Combined
Underwriting
Gary C. Cole 58 1988 Director, President, President and Chief Operating
Chief Operating Officer of Combined and
Officer President of Lifeline
Donald F. Bagozzi 64 n/a Vice President- Vice President-Marketing of
Marketing Combined and Lifeline; VP
Marketing of Statesman
National Life
Betty M. Mitchell 51 1983 Director, Corporate Corporate Secretary of
Secretary Combined and Lifeline
Jimmie M. Procell 73 1985 Director Retired; President of
Combined from April 1984,
through January 1988, and
President of Lifeline from July
1985, through January 1988
Milo V. Reamy 72 n/a Vice President- Vice President-Claims of
Claims Combined and Lifeline
</Table>
All directors and officers are elected for a term of one year or until
their successors have been duly elected and qualified.
Regina Little Rooney is the daughter of Walden P. "Red" Little. There
are no other family relationships among the officers or directors listed, and
there are no arrangements or understandings pursuant to which any of them were
elected as officers or directors.
58
During the past five years, there have been no events under any
bankruptcy act, no criminal proceedings and no judgments or injunctions material
to the evaluation of the ability and integrity of any director or executive
officer of Combined who is expected to serve in such capacity after the Combined
Exchange.
EXECUTIVE COMPENSATION - COMBINED
The following table sets forth compensation of the Chief Executive
Officer of Combined for 1999 and 2000. No executive officer of Combined received
compensation exceeding $100,000 for any of the last two fiscal years. Combined
does not have any restricted stock awards, stock appreciation rights or
long-term incentive plans for its executive officers.
SUMMARY COMPENSATION TABLE
Annual Compensation
<Table>
<Caption>
Other
Annual
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
Walden P. "Red" Little 1999 $29,640 -- $ --
Chairman of the Board and 2000 $29,640 -- $ --
Chief Executive Officer
</Table>
No employees are covered by a group accident and health insurance plan.
No option has been granted to any employee to purchase securities from Combined.
There are no pension or retirement benefit plans. For the two years ended
December 31, 2000, the Combined directors received an aggregate of $200 in
director's fees from Combined.
CERTAIN TRANSACTIONS - COMBINED
The control person of Combined is W.P. Little. Other companies or
business ventures owned by Mr. Little which do business with Combined and his
ownership interest therein are:
<Table>
W.P. Red Little dba East Texas Funding and Leasing 100%
Little Rooney & Little 50%
W.P. Red Little dba Rose City Advertising Corporation 85.9%
W.P. Red Little dba Little Insurance Agency 100%
W.P. Red Little dba Underwriters Advance Funding 100%
Lifeline Underwriters Life Insurance Company 64.4%
</Table>
Ms. Rooney owns the other 50% of Little Rooney & Little.
Combined has periodically entered into agreements with East Texas
Funding & Leasing to lease items used in the normal course of business. There
were no such agreements in effect during 1999, 2000 or the nine months ended
September 30, 2001 and there were no payments made by Combined to East Texas
Funding & Leasing during those periods. All transactions and record keeping of
East Texas Funding &
59
Leasing are conducted by employees of Combined. For this service, East Texas
Funding & Leasing pays Combined a fee of $50 per month.
Combined has lease agreements with Little, Rooney & Little for
facilities and equipment used by Combined. Amounts paid by Combined to Little,
Rooney & Little under such lease agreements was $121,449 in each of 1999 and
2000 and was $91,087 for the nine months ended September 30, 2001. All
transactions and record keeping of Little, Rooney & Little are conducted by
employees of Combined. For this service, Little, Rooney & Little pays Combined a
fee of $10 per month.
Combined has an agreement with Rose City Advertising Corporation under
which Rose City Advertising Corporation serves as an advertising agency for
Combined. No payments were made during 1999, 2000 or the nine months ended
September 30, 2001. All transactions and record keeping of Rose City Advertising
Corporation are conducted by employees of Combined for a monthly fee of 10% of
the profit made by Rose City Advertising Corporation acting as an advertising
agency. The amount of such fees paid by Rose City Advertising Corporation to
Combined was $475 in 1999, $337 in 2000 and $1,094 for the nine-month period
ended September 30, 2001.
A cost sharing agreement exists between Combined and Little Insurance
Agency which provides for Little Insurance Agency's reimbursement of
telemarketing salaries and related telephone expenses to Combined. The amount
Little Insurance Agency reimbursed to Combined was $-0- in 1999, $34,156 in 2000
and was $35,663 for the nine-month period ended September 30, 2001.
Combined has a General Agents Contract and Agreement with Little
Insurance Agency which provides for the payment of commissions and override
commissions by Combined to Little Insurance Agency. Combined also has a number
of Override Agreements with Little Insurance Agency which provide for payment of
override commissions and/or portions of one-time application fees by Combined to
Little Insurance Agency on policy forms developed and promoted by Walden P.
"Red" Little. The total amount paid by Combined to Little Insurance Agency under
the General Agent's Contract and Agreement and all Override Agreements in 1999
was $289,993 in 1999 and $280,761 in 2000 and was $200,240 for the nine- month
period ended September 30, 2001.
Combined has an agreement with Underwriters Advance Funding under which
Underwriters Advance Funding pays advance commissions which would otherwise be
payable by Combined to its agents/agencies. The commissions payable for such
advanced business are assigned by the agents/agencies to Underwriters Advance
Funding and Combined pays the assigned commissions to Underwriters advance
Funding. The amount of such assigned commissions paid by Combined to
Underwriters Advance Funding was $1,396,595 in 1999, $1,920,220 in 2000 and was
$1,212,922 for the nine-month period ended September 30, 2001. All transactions
and record keeping of Underwriters Advance Funding are conducted by employees of
Combined for a fee of $50 per month.
A cost sharing agreement exists between Combined and Lifeline for home
office facilities and equipment and for employee salaries. The amount paid by
Lifeline to Combined for home office facilities and equipment was $29,584 in
1999, $29,202 in 2000 and was $25,586 for the nine-month period ended September
30, 2001. The amount paid by Lifeline to combined for employee salaries was
$29,873 in 1999, $36,375 in 2000 and was $32,162 for the nine-month period ended
September 30, 2001
60
Combined is the owner, premium payer and beneficiary of a $90,000 life
insurance policy and a $500,000 life insurance policy on the life of Mr. Little.
Additionally, Combined has executed a Split-Dollar Insurance Agreement with
Regina Little Rooney, Trustee of The Walden P. "Red" Little Insurance Trust
Number One under which the Trustee has purchased a $2,000,000 life Insurance
policy of the life of Mr. Little. Combined pays the premium for the policy and
is reimbursed a portion of the premium by the Trustee. The net amount paid by
Combined in each 1999, 2000 and the nine-month period ended September 30,2001
was $3,562. The Trustee has granted Combined a collateral security interest in
the proceeds of the policy upon death, maturity or surrender of the policy with
respect to the net premium paid on the policy by Combined. These three "key man"
policies provide Combined with interim financial protection in the event of Mr.
Little's death in view of his importance to Combined's current operations. The
Split-Dollar Insurance Agreement and related life insurance policy provide
estate planning benefit to Mr. Little's personal estate. Combined reflects asset
values for these policies as described above on its statutory financial
statement, and these values have been accepted by regulatory examiners as
admitted assets. The cash surrender value of these three policies as of December
31, 2000 was $766,757. Under the terms of the Combined Exchange Agreement,
Citizens may terminate and abandon the Exchange if Combined on or before the
Closing has not implemented a plan reasonably acceptable to Citizens that will
replace these three insurance policy assets with cash or other liquid admissible
assets of equal values acceptable to Citizens. Combined intends to implement
such an asset replacement plan assuming the Combined Exchange is approved by
Combined's shareholders and the Combined Exchange closes.
61
INFORMATION CONCERNING LIFELINE
Lifeline is a Texas legal reserve life insurance company chartered in
1985. Lifeline's operations are conducted in Louisiana and Texas, where Lifeline
writes ordinary life and individual accident and health contracts on a
non-participating basis. Lifeline uses approximately 300 general agents to
market its products consisting of traditional whole life insurance, individual
term life, hospitalization, PPO major medical policy, accident and disability
income. During 1999, management of Lifeline reduced its marketing efforts, while
it contemplated alternate business plans. In 2000, management of Lifeline
developed a new marketing plan for Lifeline. Existing products were analyzed and
new products were introduced to existing agents during the fourth quarter 2000,
with an emphasis within the payroll deduction market. Those actions had little
impact on 2000 operating results of Lifeline, but have resulted in significant
improvements during 2001.
Lifeline has an agreement with Combined to use Combined's facilities
and equipment and pays expenses associated with their use. Lifeline's quarterly
statement as of September 30, 2001, filed with the Texas Commissioner of
Insurance, reflects admitted assets of $3,970,857, capital and surplus of
$3,053,360, and premiums for the nine months ended September 30, 2001, of
$500,762.
PREMIUM ANALYSIS
<Table>
<Caption>
Direct Premiums (000's) 2000 1999 1998 1997 1996
- ----------------------- ----------- ----------- ----------- ----------- -----------
Ordinary life $ 77 $ 108 $ 165 $ 164 $ 160
Individual A&H 521 606 647 753 778
Group A&H 22 22 24 13 --
----------- ----------- ----------- ----------- -----------
Total $ 620 $ 736 $ 836 $ 930 $ 938
=========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
Reinsurance Ceded
Premiums (000's) 2000 1999 1998 1997 1996
- ----------------- ----------- ----------- ----------- ----------- -----------
Ordinary life $ 9 $ 8 $ 8 $ 10 $ 9
Individual A&H 20 21 22 20 22
Group A&H 0 0 -- -- --
----------- ----------- ----------- ----------- -----------
Total $ 29 $ 29 $ 30 $ 30 $ 31
=========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
Net Premiums &
Deposit Funds (000's) 2000 1999 1998 1997 1996
- --------------------- ----------- ----------- ----------- ----------- -----------
Ordinary life $ 68 $ 100 $ 157 $ 154 $ 151
Individual A&H 501 585 625 733 756
Group A&H 22 22 24 13 --
----------- ----------- ----------- ----------- -----------
Total $ 591 $ 707 $ 806 $ 900 $ 907
=========== =========== =========== =========== ===========
</Table>
62
Lifeline's payments to Combined under a cost sharing agreement for home
office facilities, equipment and employee salaries are as follows:
<Table>
<Caption>
Year Home Office Facilities and Equipment Employee Salaries
- ---- ------------------------------------ -----------------
1999 $29,584 $29,873
2000 29,202 36,375
Nine months ended
September 30, 2001 25,586 32,162
</Table>
LEGAL PROCEEDINGS
Lifeline is unaware of any pending litigation to which it is a party or
to which any of its property is subject.
MARKET FOR LIFELINE COMMON STOCK AND RELATED SECURITYHOLDER MATTERS
Lifeline common stock is not listed or actively traded through security
brokerage firms, and there is no over-the-counter trading activity. There have
been no cash dividends paid since the inception of Lifeline. There are 34
holders of record of Lifeline common stock.
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS - LIFELINE
The following information is furnished with respect to each director
and executive officer of Lifeline.
<Table>
<Caption>
YEAR FIRST
ELECTED AS
NAME OF DIRECTOR OR DIRECTOR OF POSITIONS PRINCIPAL OCCUPATION
EXECUTIVE OFFICER AGE LIFELINE WITH LIFELINE FOR THE PAST FIVE YEARS
- ------------------- --- ----------- ------------- -----------------------
Gary C. Cole 58 1988 Director, President President of Lifeline and
President and Chief Operating
Officer of Combined
Donald F. Bagozzi 64 n/a Vice President- Vice President-Marketing of
Marketing Lifeline and Combined; VP
Marketing of Statesman
National Life
Betty M. Mitchell 51 1985 Director, Corporate Corporate Secretary of
Secretary Lifeline and Combined
Robert C. Norman 38 1996 Director Executive Vice President of
Texas State Bank
Jimmie M. Procell 73 1985 Director Retired; President of
Combined from April 1984,
through January 1988, and
President of Lifeline from July
1985, through January 1988
Milo V. Reamy 72 1986 Director, Vice Vice President-Claims of
President-Claims Lifeline and Combined
Tommy D. Rowell 61 n/a Vice President- Vice President-Underwriting
Underwriting of Lifeline and Second Vice
President-Underwriting of
Combined
</Table>
63
All directors and officers are elected for a term of one year or until
their successors have been duly elected and qualified.
There are no family relationships among the officers or directors
listed, and there are no arrangements or understandings pursuant to which any of
them were elected as officers or directors.
During the past five years, there have been no events under any
bankruptcy act, no criminal proceedings and no judgments or injunctions material
to the evaluation of the ability and integrity of any director or executive
officer of Lifeline who is expected to serve in such capacity after the Lifeline
Exchange.
EXECUTIVE COMPENSATION - LIFELINE
There are no officers' salaries of Lifeline. No employees are covered
by a group insurance plan. No option has been granted to any employee to
purchase securities from Lifeline. There are no pension or retirement benefit
plans. Lifeline directors received an aggregate of $100 in director's fees from
Lifeline in 1999 and none since then.
CERTAIN TRANSACTIONS - LIFELINE
W.P. "Red" Little and Regina Little Rooney are control persons of
Lifeline. Other companies and business ventures owned by Mr. Little and Ms.
Rooney which do business with Lifeline and their ownership interest are:
<Table>
<Caption>
Mr. Little Ms. Rooney
---------- ----------
Little Rooney & Little 50% 50%
Combined Underwriters Life Insurance Company 78.2% 14.4%
Regina Little Rooney dba Little Rooney Agency none 100%
W.P. "Red" Little dba Underwriters Advance Funding 100% none
</Table>
Lifeline has a general agents agreement with Little & Rooney Insurance
Agency which provides for payment of commissions and override commissions by
Lifeline to Little & Rooney Insurance Agency. The
64
amount paid by Lifeline to Little & Rooney Insurance Agency was $33,357 in 1999,
$25,083 in 2000 and was $16,550 for the nine-month period ended September 30,
2001.
Lifeline has an agreement with Underwriters Advanced Funding under
which Underwriters Advance Funding pays advance commissions which would
otherwise be payable by Lifeline to its agents/agencies. The renewal commissions
payable for such advanced business are assigned by agents/agencies to
Underwriters Advance Funding and Lifeline pays the assigned commissions to
Underwriters Advance Funding. The amount of such assigned commissions paid by
Lifeline to Underwriters Advance Funding was $18,447 in 1999, $25,993 in 2000
and was $68,205 for the nine-month period ended September 30, 2001.
A cost sharing agreement exists between Lifeline and Combined
Underwriters Life Insurance Company for home office facilities and equipment and
for employee salaries. The amount paid by Lifeline to Combined for home office
facilities and equipment was $29,584 in 1999, $29,202 in 2000 and was $25,585
for the nine-month period ended September 30, 2001. The amount paid by Lifeline
to Combined for employee salaries was $29,873 in 1999, $36,375 in 2000, and was
$32,162 for the nine-month period ended September 30, 2001.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Combined and Lifeline have had no disagreements with its certified
public accountants regarding accounting and financial matters required to be
disclosed herein during the past two fiscal years.
65
COMPARISON OF RIGHTS OF SECURITYHOLDERS
Upon consummation of the Combined Exchange and the Lifeline Exchange,
the holders of issued and outstanding Combined and Lifeline stock will receive
Citizens Class A common stock. The rights of the holders of Citizens shares are
governed by Citizens' Articles of Incorporation, its bylaws and Colorado law,
while the rights of holders of Combined and Lifeline shares are governed by
their respective Articles of Incorporation, bylaws and Texas law. In most
respects, the rights of holders of Citizens Class A common stock and holders of
Combined and Lifeline shares are similar. The following is a brief comparison of
the rights of the holders of Combined and Lifeline stock, and Citizens Class A
common stock.
AUTHORIZED SHARES
The aggregate number of shares which Citizens is authorized to issue is
50,000,000 shares of Class A common stock with no par value and 1,000,000 shares
of Class B common stock with no par value; of which 24,417,118 shares of such
Class A common stock and 711,040 shares of Class B common stock are issued,
fully paid and non-assessable.
The aggregate number of shares which Combined is authorized to issue is
1,500,000 shares of common stock with a par value of $1.00 per share, of which
1,000,000 shares of such Combined stock are issued and outstanding, fully paid
and non-assessable.
The aggregate number of shares which Lifeline is authorized to issue is
700,000 shares of common stock with a par value of $1.00 per share, of which
700,000 shares of such Lifeline stock are issued and outstanding, fully paid and
non-assessable.
The foregoing numbers do not include treasury shares.
DIVIDEND RIGHTS
If Citizens were to declare and pay any cash dividends, the cash
dividends paid upon each share of Citizens Class A common stock would be twice
the cash dividends paid on each share of Citizens Class B common stock.
If Combined were to declare and pay any dividends, the dividends paid
upon the shares of Combined stock would be the same for all shares.
If Lifeline were to declare and pay any dividends, the dividends paid
upon the shares of Lifeline stock would be the same for all shares.
VOTING RIGHTS
Those who hold Combined stock on the date the Combined Exchange becomes
effective will be entitled as a group to hold approximately _______ shares of
Citizens Class A common stock (assuming a market value of Citizens Class A
common stock of $__ per share), or approximately ___% of the Class A shares that
Citizens anticipates will then be outstanding. Those who hold Lifeline stock on
the date the Lifeline Exchange becomes effective will be entitled as a group to
hold approximately _______ shares of
66
Citizens Class A common stock (assuming a market value of Citizens Class A
common stock of $__ per share), or approximately ___% of Class A shares that
Citizens anticipates will then be outstanding.
The voting rights of Citizens Class A common stock and Class B common
stock are equal in all respects except that the holders of Class B common stock
have the exclusive right to elect a simple majority of the members of Citizens'
Board of Directors, and the holders of the Class A common stock have the
exclusive right to elect the remaining directors. The holders of Citizens common
stock do not have cumulative voting rights in the election of directors.
Each outstanding share of Combined stock is entitled to one vote upon
each matter submitted to a vote of the shareholders of Combined. Each
outstanding share of Lifeline stock is entitled to one vote upon each matter
submitted to a vote of the shareholders of Lifeline. Neither the Combined nor
Lifeline shareholders have cumulative voting rights in the election of directors
of the respective companies.
The Articles of Incorporation of Citizens provide that when, with
respect to any action to be taken by Citizens shareholders, the Colorado
Corporation Code (now superseded by the Colorado Business Corporation Act)
requires the affirmative vote of the holders of two-thirds of the outstanding
shares entitled to vote thereon, or of any class or series, such action may be
taken by the affirmative vote of the holders of a majority of the outstanding
shares entitled to vote on such action. The power to amend the Articles of
Incorporation, approve mergers and approve extraordinary asset transfers are all
subject to this requirement. For Combined and Lifeline, the Texas Business
Corporation Act requires the affirmative vote of two-thirds of the outstanding
shares to approve the same transactions. With respect to the Combined Exchange
and the Lifeline Exchange, respectively, the approval of two-thirds of the
outstanding Combined shares and two- thirds of the outstanding Lifeline shares
entitled to vote is required. Each share of Combined stock is entitled to one
vote, with respect to the Combined Exchange. Each share of Lifeline stock is
entitled to one vote, with respect to the Lifeline Exchange.
The bylaws of Combined and Lifeline provide that the power to alter,
amend, or repeal their respective bylaws or to adopt new bylaws is vested in the
respective Boards of Directors. However, under the Texas Business Corporation
Act, the Combined and Lifeline shareholders have the right to amend and repeal
the respective bylaws of Combined and Lifeline even thought the respective
Boards of Directors also have this right. Citizens' Articles of Incorporation
provide that Citizens' Board of Directors has the power to enact, alter, amend
and repeal Citizens' bylaws not inconsistent with the laws of Colorado or
Citizens' Articles of Incorporation, as the Board of Directors deems best for
the management of Citizens; however, Colorado statutes give shareholders the
right to amend and repeal bylaws even if not so provided for in the bylaws
themselves.
Special meetings of Combined shareholders may be called by Combined's
President, its Board of Directors or by the holders of 10% or more of all
Combined shares entitled to vote. Special meetings of Lifeline shareholders may
be called by Lifeline's President, or its Board of Directors, and shall be
called by the President or Secretary at the written request of the holders of
not less than one-fourth of all outstanding shares of stock of Lifeline. Special
meetings of Citizens' shareholders may be called by the Chairman of the Board,
by the Board of Directors, or by the holders of 10% or more of all Citizens'
shares entitled to vote.
67
A majority of the shares of stock entitled to vote constitutes a quorum
under the bylaws of both Combined and Lifeline. The bylaws of Citizens provide
that one-third of the votes entitled to be cast on a matter by a voting group
shall constitute a quorum of that voting group.
The bylaws of Citizens, Combined and Lifeline all provide that the
shareholders may take action without a meeting, and all shareholders entitled to
vote must consent to the action in writing.
PREEMPTIVE RIGHTS
Authorized Combined, Lifeline and Citizens shares may be issued at any
time, and from time to time, in such amounts and for such consideration as may
be fixed by the Boards of Directors of the respective corporations. No holder of
shares has any pre-emptive or preferential right to purchase or to subscribe for
any shares of capital stock or other securities which may be issued by their
respective corporations.
LIABILITY OF DIRECTORS
As authorized by Colorado law, Citizens' Articles of Incorporation
contain a provision to the effect that no director of Citizens shall be
personally liable to Citizens or any of its shareholders for damages for any
breach of duty as a director except to the extent this provision is limited by
law. There is no provision in the Articles of Incorporation of either Combined
or Lifeline limiting the liability of directors.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of Citizens,
Combined, or Lifeline, whether voluntary or involuntary, the holders of shares
are entitled to share, on a share-for share basis, any of the assets or funds in
their respective corporations which are distributable to the shareholders upon
such liquidation, dissolution or winding up.
ASSESSMENT AND REDEMPTION
Citizens shares to be issued upon consummation of the Combined Exchange
and the Lifeline Exchange will be fully paid and nonassessable. Combined and
Lifeline shares are deemed to be fully paid and nonassessable. Citizens',
Combined's and Lifeline's shares of stock of all classes are not subject to
redemption, conversion or further assessment.
TRANSFER AGENT
The transfer agent for shares of Combined stock is Combined. The
transfer agent for shares of Lifeline stock is Lifeline. The transfer agent for
Citizens shares is Mellon Investor Services LLC, Dallas, Texas.
68
EXPERTS
The consolidated financial statements of Citizens, Inc. and
subsidiaries as of December 31, 2000 and 1999, and for each of the years in the
three year period ended December 31, 2000, are incorporated herein by reference
to Citizens, Inc.'s Annual Report on Form 10-K for the Year Ended December 31,
2000 and are so included herein in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing in such Annual Report on
Form 10-K and upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality under Colorado law of Citizens Class A common stock to be
issued pursuant to the Combined Exchange and the Lifeline Exchange will be
passed upon by Jones & Keller, P.C., Denver, Colorado. Jones & Keller, P.C. has
also given the tax opinions referred to under "Certain Federal Income Tax
Consequences." Certain legal matters in connection with the Combined Exchange
the Lifeline Exchange will be passed upon for Combined and Lifeline by Pye,
Dobbs & Berry.
OTHER MATTERS
COMBINED. The Combined Board does not intend to bring any matters
before the meeting other than those specifically set forth in the notice of the
meeting accompanying this proxy statement-prospectus and it does not know of any
matters to be brought before the meeting by others. If any other matters
properly come before the meeting, it is the intention of the persons named in
the accompanying proxies to vote such proxies in accordance with the judgment of
the Combined Board.
LIFELINE. The Lifeline Board does not intend to bring any matters
before the meeting other than those specifically set forth in the notice of the
meeting accompanying this proxy statement-prospectus and it does not know of any
matters to be brought before the meeting by others. If any other matters
properly come before the meeting, it is the intention of the persons named in
the accompanying proxies to vote such proxies in accordance with the judgment of
the Lifeline Board.
69
APPENDIX A
PLAN AND AGREEMENT OF EXCHANGE
CITIZENS, INC.
AND
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
APPENDIX A
PLAN AND AGREEMENT OF EXCHANGE
CITIZENS, INC.
AND
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
This Plan and Agreement of Exchange ("Agreement") is by and between
Citizens, Inc. ("Citizens"), a Colorado corporation and Combined Underwriters
Life Insurance Company ("Combined"), a Texas insurance corporation.
WITNESSETH:
WHEREAS, Combined is a stipulated premium life insurance company duly
organized and existing under the laws of the State of Texas; and
WHEREAS, Citizens is a corporation duly organized and existing under
the laws of the State of Colorado; and
WHEREAS, the respective Boards of Directors of Combined and Citizens
have voted to effect a statutory exchange under both the Texas Business
Corporation Act and the Colorado Business Corporation Act whereby Citizens will
acquire all of the issued and outstanding common stock of Combined in exchange
for shares of Class A Common Stock of Citizens upon the conditions hereinafter
stated;
NOW, THEREFORE, for good and valuable consideration consisting of the
premises below it is agreed between the parties as follows:
ARTICLE I
THE TRANSACTION
1.1 Subject to approval of this Agreement by the Insurance Commissioner
of the State of Texas, and subject to the conditions set forth herein, on the
"Effective Date" as herein defined, Citizens shall acquire all of the issued and
outstanding common stock of Combined for shares of Citizens Class A Common Stock
pursuant to a share exchange (the "Exchange") under Part Five of the Texas
Business Corporation Act and Article 111 of the Colorado Business Corporation
Act as set forth herein, and for no cash or other property. The Exchange shall
be completed at a closing ("Closing") on a date ("Closing Date") which shall be
as soon as reasonably possible, and as mutually agreed between the parties, on
or before the tenth business day after regulatory and stockholder approvals are
obtained in accordance with applicable law.
1.2 On the Effective Date, the separate corporate existence of Combined
shall be unaffected and unimpaired and it shall continue to be a Texas
stipulated premium life insurance corporation subject to and governed by the
laws of the State of Texas, with all of its rights, powers, duties, purposes,
franchises and licenses as are in existence on the Effective Date. Articles of
Exchange, in the form attached hereto as Exhibit A subject to any modifications
as may be authorized or required in accordance with applicable law
A-1
(collectively the "Exchange Filings"), shall be completed and executed by the
parties and filed by Citizens as contemplated by this Agreement as soon as
reasonably possible, and on or before the tenth business day after all
regulatory and shareholder approvals are obtained in accordance with applicable
law.
1.3 If this Agreement is duly adopted by the holders of the requisite
number of shares of Combined, in accordance with the applicable laws and subject
to the other provisions hereof, such documents as may be required by law to
accomplish the acquisition of Combined by Citizens shall be delivered to and
filed with the Commissioner of Insurance of the State of Texas (and any other
governmental entity with which a filing is required), by Citizens and upon the
approval of this Agreement as required by requisite states' laws, the
appropriate documents to accomplish the Exchange shall then be filed as required
by law to effectuate the transactions contemplated hereby, and the Exchange
shall become effective at the Closing Date. The Closing Date shall be the
Effective Date for the Exchange.
ARTICLE II
ISSUANCE AND EXCHANGE OF SHARES
2.1 The manner and basis of exchanging shares of Combined into Citizens
pursuant to the Exchange is as follows: As set forth in Section 2.2 and Section
2.4, on the Effective Date each shareholder of Combined shall receive a number
of shares of Citizens Class A Common Stock equal in market value ("Market
Value") to the Combined stock owned by such shareholder. For purposes of this
Agreement, the per share Market Value of Citizens Class A Common Stock shall be
equal to the average closing price of such stock as reported by the American
Stock Exchange for the 20 trading days immediately preceding (but not including)
the Effective Date; and the Market Value of the Combined stock shall be $8.64
per share. The offer and sale of the Citizens Class A Common Stock to be issued
hereunder shall be registered by Citizens pursuant to the Securities Act of 1933
and applicable state securities laws, as provided in Section 5.3 hereof.
2.2 Upon the Effective Date, each holder of a certificate or
certificates representing shares of Combined, upon presentation and surrender of
such certificate or certificates to the Exchange Agent of Citizens, shall be
entitled to receive the consideration set forth herein, except that holders of
those shares as to which dissenters' rights shall have been asserted and
perfected pursuant to Texas law shall not be converted into shares of Citizens
Class A Common Stock, but shall represent only such rights as are permitted
under the Texas Business Corporation Act. Combined shall pay or otherwise
satisfy payment relating to shares as to which dissenters' rights have been
asserted and perfected pursuant to Texas law solely out of its own funds;
Citizens shall not contribute or otherwise be liable for any payments to such
persons arising from the Exchange. Upon such presentation, surrender, and
exchange as provided in this Section 2.2, certificates representing shares of
Combined previously held shall be canceled. Until so presented and surrendered,
each certificate or certificates which represented issued and outstanding shares
of Combined at the Effective Date shall be deemed for all purposes to evidence
the right to receive the consideration set forth in Section 2.1 of this
Agreement. If a certificate or the certificates representing shares of Combined
have been lost, stolen, mutilated or destroyed, the Exchange Agent shall require
the submission of an indemnity agreement and may require the submission of a
bond in lieu of such certificate.
2.3 The stock transfer books of Combined shall be closed on the Closing
Date, and thereafter no transfers of the common stock of Combined will be made.
A-2
2.4 No fractional shares of Citizens stock shall be issued as a result
of the Exchange. In the event the exchange of shares results in any shareholder
being entitled to a fraction of a whole share of Citizens stock, the number of
shares to be issued to such shareholder shall be rounded up to the nearest whole
share.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMBINED
To the best of its knowledge and belief, Combined hereby represents,
warrants and covenants to Citizens as follows, except as stated in the Combined
Disclosure Statement attached hereto as Exhibit B:
3.1 Combined is a life insurance corporation duly organized, validly
existing and in good standing under the insurance laws of Texas with full
corporate power and authority to own the respective properties which it now
owns; and is qualified or licensed to conduct its business and is in good
standing in all states where such qualifications or licensing is required, and
has full corporate power to enter into and, upon the appropriate approvals as
required by law, to consummate the transactions contemplated by this Agreement.
3.2 The Articles of Incorporation and Bylaws of Combined, copies of
which have been delivered to Citizens, are complete and accurate and the minute
books of Combined contain a record of all meetings and corporate actions of the
shareholders and Board of Directors of Combined that is complete and accurate in
all material respects.
3.3 The aggregate number of shares which Combined is authorized to
issue is one million five hundred thousand (1,500,000) shares of $1.00 par value
common stock and 1,000,000 such shares are issued and outstanding, fully paid
and non-assessable. Combined has no outstanding options, warrants or other
rights to purchase, or subscribe to, or securities convertible into or exchange
for any shares of capital stock.
3.4 Combined has complete and unrestricted power to enter into and,
upon the appropriate approvals as required by law, to consummate the
transactions contemplated by this Agreement.
3.5 Neither the making of nor the compliance with the terms and
provisions of this Agreement and consummation of the transactions contemplated
herein by Combined will conflict with or result in a breach or violation of the
Articles of Incorporation or Bylaws of Combined or any contracts, agreements,
pledges, loans or any other obligations of Combined.
3.6 Combined has delivered to Citizens its annual convention statement
for the year ended December 31, 2000. Also, Combined has delivered to Citizens
its quarterly financial statement for the quarter and six months ended June 30,
2001. All such statements, herein sometimes called "Combined Financial
Statements", present fairly, in all material respects, the admitted assets,
liabilities and surplus of Combined as of the dates thereof, and the results of
operations and its cash flows for the year then ended, in conformity with the
accounting practices prescribed or permitted by the Insurance Department of the
State of Texas.
A-3
3.7 The assets of Combined have admissible values at least equal to the
amounts attributed to them on its June 30, 2001 statutory financial statement
and will have a value at least equal to those set forth in the December 31, 2000
annual convention statement.
3.8 Combined has delivered to Citizens a copy of each of the Federal
income tax returns of Combined for the years ended December 31, 1999 and
December 31, 2000. The provisions for taxes paid by Combined are believed by
Combined to be sufficient for payment of all accrued and unpaid Federal, state,
county and local taxes of Combined (including any penalties or interest payable)
whether or not disputed for the periods then ended and for all prior fiscal
periods. All returns and reports of information required or requested by
Federal, state, county and local tax authorities have been filed or supplied in
a timely fashion and all such information is true and correct in all material
respects. Provision has been made in Combined financial statements for the
payment of all taxes due to date by Combined, including accrued taxes for the
current year ended December 31, 2001. No Federal income tax return of Combined
is currently under audit.
3.9 Since December 31, 2000, there has not been any material adverse
change in the business or condition, financial or otherwise, of Combined,
including any loss or damages to any of its assets, properties or rights as
shown on December 31, 2000 Combined statutory statement as filed with the Texas
Department of Insurance that would be material to Combined taken as a whole.
3.10 Attached to Exhibit B is a listing of all pending legal
proceedings or known regulatory inquiries involving Combined and, except for
these proceedings, there are no legal proceedings or regulatory proceedings
involving claims pending, or to the knowledge of the officers of Combined,
threatened against Combined or affecting any of its assets, or properties.
Combined is not in any breach or violation of or default under any contract or
instrument to which Combined is a party, and no event has occurred which with
the lapse of time or action by a third party could result in a breach or
violation of or default by Combined under any contract or other instrument to
which Combined is a party or by which it or any of its property may be bound or
affected, or under its Articles of Incorporation or Bylaws, or any court order,
statute, ruling or regulation applicable to Combined which breach or violation
of or default could have a material adverse effect on Combined.
3.11 The execution and delivery of this Agreement has been duly
authorized and approved by Combined's Board of Directors.
3.12 Combined has provided Citizens a copy of Combined's employee
manual and related documents which include a description of Combined's employee
benefits. Except as shown in the material provided, Combined has no employment
agreements.
3.13 Combined will call and hold a meeting of its shareholders as soon
as practicable after the date hereof, at which meeting the Board of Directors
will, subject to its fiduciary obligations to shareholders, submit and recommend
the Agreement and transactions described herein to its shareholders, and, if the
requisite approval by such shareholders is obtained, will undertake promptly to
consummate the Exchange as set forth herein.
3.14 Combined shall not enter into or consummate any transactions prior
to the Effective Date other than in the ordinary course of business, will pay no
shareholder dividend and will not intentionally enter into any agreement or
transaction that would materially and adversely affect its financial condition,
A-4
and will not increase the compensation of any of its employees other than in the
usual course of business consistent with past practices.
3.15 Combined has provided to Citizens all contracts, other than
insurance policies issued or assumed by Combined, to which Combined is a party.
3.16 The representations and warranties of Combined shall be true and
correct as of the Effective Date as well as the date hereof.
3.17 Combined has delivered, or will deliver to Citizens, any reports
relating to the financial and business condition of Combined which are prepared
after the date of this Agreement and sent to regulators after the execution date
of this Agreement.
3.18 No representation or warranty by Combined in this Agreement, the
Combined Disclosure Statement or any certificate delivered pursuant hereto
contains any untrue statement of a material fact or omits to state any material
fact necessary to make such representation or warranty not misleading.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF CITIZENS
To the best of its knowledge and belief, Citizens hereby represents,
warrants and covenants to Combined as follows, except as stated in the Citizens
Disclosure Statement attached hereto as Exhibit C:
4.1 Citizens is a corporation duly organized, validly existing and in
good standing under the laws of Colorado, with full power and authority to own
the respective properties which it now owns; and is qualified or licensed to
conduct its business and is in good standing in all states where such
qualifications or licensing is required.
4.2 The total number of shares of both classes of capital stock which
Citizens is authorized to issue is 50,000,000 shares of Class A Common Stock
with no par value and 1,000,000 shares of Class B common stock of no par value.
As of the date hereof, there are 26,642,938 shares of Class A Common Stock
issued, of which 24,417,118 are outstanding and 711,040 shares of Class B common
stock are issued and outstanding. Citizens has no outstanding options, warrants
or other rights to purchase, or subscribe to, or securities convertible into or
exchangeable for any shares of capital stock. The shares to be issued in
connection with the Exchange shall be, and all Citizens stock currently issued
or outstanding is, validly issued, fully paid and nonassessable.
4.3 Neither the making of nor the compliance with the terms and
provisions of this Agreement and consummation of the transactions contemplated
herein by Citizens will conflict with or result in a breach or violation of the
Articles of Incorporation or Bylaws of Citizens.
4.4 The execution of this Agreement has been duly authorized and
approved by Citizens' Board of Directors. Citizens has complete and unrestricted
power to enter into and, upon the appropriate approvals as required by law
(which such approvals are listed on the attached Exhibit D), to consummate the
transaction contemplated by this Agreement.
A-5
4.5 Citizens has delivered to Combined its annual consolidated
financial statement for the year ended December 31, 2000. Also, Citizens has
delivered to Combined its consolidated financial statements for the quarter and
six months ended June 30, 2001. All such statements, herein sometimes called
"Citizens Financial Statements", are complete and correct in all material
respects and, together with the notes to these financial statements, present
fairly the financial position and results of operations of Citizens for the
period included and have been prepared in accordance with generally accepted
accounting principles consistently applied.
4.6 Since December 31, 2000, there has not been any material adverse
change in the business or condition, financial or otherwise, of Citizens and its
subsidiaries taken as a whole, including any material loss or damages to any of
its assets, properties or rights from that shown on the Citizens Financial
Statements.
4.7 Citizens has delivered to Combined a listing of all pending legal
proceedings involving Citizens and its consolidated subsidiaries as set forth on
Exhibit C and, except for these proceedings, there are no legal proceedings
pending, or to the knowledge of the officers of Citizens, threatened against
Citizens or affecting any of its assets or properties and Citizens is not in any
material breach or violation of or default under any contract or instrument to
which Citizens is a party, and no event has occurred which with the lapse of
time or action by a third party could result in a material breach or violation
of or default by Citizens under any contract or other instrument to which
Citizens is a party or by which it or any of its properties may be bound or
affected, or under its Articles of Incorporation or Bylaws, or any court order,
statute, ruling or regulation applicable to Citizens. The execution, delivery
and performance of the Agreement by Citizens will not with the lapse of time or
action by a third party result in a material breach or violation of or default
by Citizens under any contract or other instrument to which Citizens is a party
or by which it or any of its properties may be bound of affected, or under its
Articles of Incorporation or Bylaws, or any court order, statute, ruling or
regulation applicable to Citizens.
4.8 Citizens' shareholders are not required to approve the issuance of
shares pursuant to this Agreement.
4.9 Citizens is the owner of all of the issued and outstanding stock of
Citizens Insurance Company of America.
4.10 Citizens has delivered to Combined true and correct copies of
Citizens Annual Report to Shareholders for the years ended December 31, 1999 and
2000 and each of its other reports to shareholders and filings with the
Securities and Exchange Commission ("SEC") for the years ended December 31,
1998, 1999, and for 2000. Citizens will also deliver to Combined on or before
the Closing Date any reports relating to the financial and business condition of
Citizens which are filed with the SEC after the date of this Agreement and any
other reports sent generally to its shareholders after the date of this
Agreement.
4.11 Citizens has duly filed all reports required to be filed by it
under the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended, (the "Federal Securities Laws"). No such reports, or any
reports sent to the shareholders of Citizens generally, contained any untrue
statement of material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements in such report, in light of
the circumstances and time under which they were made, not misleading.
A-6
4.12 Citizens has received, and to the extent it deems necessary,
reviewed the various agent contracts, commission agreements and the other
contracts included in Exhibit B between Combined and Little Insurance Agency.
4.13 The representations and warranties of Citizens shall be true and
correct as of the Effective Date as well as the date hereof.
ARTICLE V
OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE
5.1 This Agreement shall be duly submitted to the shareholders of
Combined for the purpose of considering and acting upon this Agreement in the
manner required by law at a meeting of shareholders on a date selected by
Combined, such date to be the earliest practicable date after the proxy
statement may first be sent to Combined shareholders without objection by
applicable governmental authorities, provided that Combined will have at least
30 days to solicit proxies. Citizens will furnish to Combined the information
relating to Citizens required by the Federal Securities Laws to be included in
the proxy statement. Citizens represents and warrants that at the time of the
Combined shareholders' meeting, the proxy statement, insofar as it relates to
Citizens and contains information furnished by Citizens specifically for use in
such proxy statement, (a) will comply in all material respects with the
provisions of the Federal Securities Laws and (b) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Combined represents
and warrants that at the time of the Combined shareholder meeting, the proxy
statement, insofar as it relates to Combined and contains information furnished
by Combined specifically for use in such proxy statement, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Board of Directors
of Combined, subject to its fiduciary obligations to shareholders, shall use
reasonable efforts to obtain the requisite approval of Combined shareholders of
this Agreement and the transactions contemplated herein. Citizens and Combined
shall take all reasonable and necessary steps and actions to comply with and to
secure Combined's shareholder approval of this Agreement and the transactions
contemplated herein as may be required by applicable law.
5.2 At all times prior to the Effective Date, but during regular
business hours, each party will permit the other to examine its books and
records and the books and records of its affiliates and will furnish copies
thereof on request. It is recognized that, during the performance of this
Agreement, each party may provide the other party with information that is
confidential or proprietary in nature. During the term of this Agreement, and
for four years following the termination of this Agreement, the recipient of
such information shall protect such information from disclosure to persons,
other than members of its own or affiliated organizations and its professional
advisers, in the same manner as it protects its own confidential or proprietary
information from unauthorized disclosure and shall not use such information to
the competitive detriment of the disclosing party. In addition, if this
Agreement is terminated for any reason, each party shall promptly return or
cause to be returned all documents or other written records of such confidential
or proprietary information together with all copies of such writings and, in
addition, shall destroy or shall maintain the information with the standard of
care that is exercised with respect to its own confidential or proprietary
information. No information shall be considered confidential or proprietary if
it is (a)
A-7
information already in the possession of the party to whom disclosure is made,
(b) information acquired by the party to whom the disclosure is made from other
sources, or (c) information in the public domain or generally available to
interested persons or which at a later date passes into the public domain or
becomes available to the party to whom disclosure is made without any wrongdoing
by the party or any of its affiliates or any third party to whom the disclosure
is made.
5.3 Citizens and Combined shall promptly provide each other with
information as to any significant developments that materially hinder the
performance of this Agreement, and shall promptly notify the other if it
discovers that any of its representations, warranties and covenants contained in
this Agreement or in any document delivered in connection with this Agreement
was not true and correct in all material respects or became untrue or incorrect
in any material respect.
As promptly as practicable after the execution of this Agreement,
Citizens will prepare and file with the Securities and Exchange Commission
("Commission") a registration statement on Form S-4 (the "Registration
Statement") covering the issuance of Citizens shares in the Exchange. Each of
Citizens and Combined will use all reasonable efforts to have or cause the
Registration Statement to become effective as promptly as practicable, and will
take any action required to be taken under any applicable federal or state
securities laws in connection with the issuance of shares of Citizens Common
Stock in the Exchange. Citizens will use all reasonable efforts to cause the
Registration Statement to remain effective through the Effective Date. Citizens
and Combined will furnish all information concerning it and the holders of its
capital stock as the other may reasonably request in connection with such
actions.
Citizens will use all reasonable efforts to obtain all necessary state
securities laws or "blue sky" permits, approvals and registrations in connection
with the issuance of the Citizens Class A Common Stock in the Exchange.
As promptly as practicable after the Registration Statement shall have
become effective, Combined will mail a notice of special meeting to its
stockholders entitled to notice of and to vote at the Combined Stockholders'
Meeting.
If at any time prior to the Effective Date any event or circumstance
relating to Combined or any of its Affiliates, or its or their respective
officers or directors should be discovered by Combined that should be set forth
in an amendment to the Registration Statement, Combined will promptly inform
Citizens, and Citizens will undertake to amend or supplement the Registration
Statement and the prospectus contained therein accordingly.
If at any time prior to the Effective Date any event or circumstance
relating to Citizens or any of its Affiliates, or to their respective officers
or directors, should be discovered by Citizens that should be set forth in an
amendment to the Registration Statement, Citizens will promptly inform Combined,
and Citizens will undertake to amend or supplement the Registration Statement
and the prospectus contained therein accordingly.
No amendment or supplement to the Registration Statement will be made
by Citizens without prior consultation with Combined. Citizens and Combined each
will advise the other, promptly after it receives notice thereof, of the time
when the Registration Statement has become effective or any supplement or
amendment has been filed, the issuance of any stop order suspending the
effectiveness of the Registration
A-8
Statement, the suspension of the qualification of Citizens Common Stock issuable
in connection with the Exchange for offering or sale in any jurisdiction, any
request by the staff of the Commission for amendment of the Registration
Statement or the Proxy Statement, the receipt from the staff of the Commission
of comments thereon or any request by the staff of the Commission for additional
information with respect thereto.
Citizens will use all reasonable efforts to cause the shares of
Citizens Common Stock to be issued in the Exchange to be approved for listing
(subject to official notice of issuance) on the American Stock Exchange prior to
the Effective Date. To the knowledge of Citizens, there are no facts and
circumstances that would preclude Citizens Common Stock to be issued in the
Exchange from being approved for listing on the American Stock Exchange.
5.4 The parties to this Agreement shall take all such action as may be
reasonably necessary and appropriate and shall use their best efforts in order
to consummate the transactions contemplated hereby as promptly as reasonably
practicable.
ARTICLE VI
REGULATORY FILINGS
6.1 Within 15 days after the execution of this Agreement, Citizens
shall file with the Insurance Commissioner of Texas all of the regulatory
approval documents required by Texas law in order to close this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT TO THE CONSUMMATION OF THE EXCHANGE
The following are conditions precedent to the consummation of the
Exchange, on or before the Effective Date:
7.1 Citizens and Combined shall have performed and complied with all of
their respective obligations hereunder which are to be complied with or
performed on or before the Effective Date and shall provide one another at the
Closing with a certificate to the effect that such party has performed each of
the acts and undertakings required to be performed by it on or before the
Closing Date pursuant to the terms of this Agreement.
7.2 This Agreement shall have been duly and validly authorized,
approved and adopted, at a meeting of the shareholders of Combined duly and
properly called for such purpose in accordance with the applicable law.
7.3 This Agreement is in all things subject to the provisions of the
applicable insurance laws and the regulations promulgated thereunder, and shall
not become effective until approval of the Exchange is obtained from the
Commissioner of Insurance of the State of Texas (and any other governmental
entity with jurisdiction over the transaction) in accordance with the provisions
of the laws of said state. Citizens and Combined agree, as soon as practical
after the execution and delivery of this Agreement, to file and to use
A-9
commercially reasonable efforts to obtain such approval of the transactions
contemplated by this Agreement. Neither Citizens nor Combined shall be obligated
to file a suit or to appeal from any adverse ruling by the Commissioner of
Insurance of the State of Texas, and neither Citizens nor Combined shall be
obligated to make any material changes in any lawful, good faith management
policy in order to gain such approval.
7.4 No action, suit or proceeding shall have been instituted or shall
have been threatened in writing before any court or other governmental body or
by any public authority to restrain, enjoin or prohibit the Exchange, or which
might subject any of the parties hereto or their directors or officers to any
material liability, fine, forfeiture or penalty on the ground that the
transactions contemplated hereby, the parties hereto or their directors or
officers, have violated any applicable law or regulation, or have otherwise
acted improperly in connection with the transactions contemplated hereby, and
the parties hereto have been advised by counsel that, in the opinion of such
counsel, such action, suit or proceeding raises substantial questions of law or
fact which could reasonably be decided adversely to any party hereto or its
directors or officers.
7.5 The representations and warranties made by Citizens and Combined in
this Agreement shall be true in all material respects as though such
representation and warranties had been made or given on and as of the Closing
Date, except to the extent that such representations and warranties may be
untrue on and as of the Closing Date because of (1) changes caused by
transactions suggested or approved in writing by each party hereto or (2) events
or changes (which shall not, in the aggregate, have materially and adversely
affected the business, assets, or financial condition of Citizens or Combined)
during or arising after the date of this Agreement.
7.6 Combined shall have furnished Citizens with:
(1) a certified copy of a resolution or resolutions duly
adopted by the Board of Directors of Combined approving this Agreement and the
transactions contemplated by it and directing the submission thereof to a vote
of the shareholders of Combined;
(2) a certified copy of a resolution or resolutions duly
adopted by the requisite number of shareholders of Combined approving this
Agreement and the transactions contemplated by it in accordance with applicable
law;
(3) an opinion of Sneed, Vine & Perry, P.C., counsel to
Combined. dated as of the Effective Date as set forth in Exhibit E attached
hereto; and
(4) an agreement from each "affiliate" of Combined, in the
form attached as Exhibit F.
7.7 Citizens shall furnish Combined with:
(1) a certified copy of a resolution or resolutions duly
adopted by the Board of Directors of Citizens, approving this Agreement and the
transactions contemplated by it; and
(2) opinions of Jones & Keller, P.C., counsel for Citizens,
dated as of the Effective Date, as set forth in Exhibits G and H attached
hereto.
A-10
7.8 Citizens and Combined shall approve and file the Articles of
Exchange, consistent with this Agreement, for this transaction with the
requisite governmental authorities.
7.9 The Closing of the Plan and Agreement of Exchange for the common
stock of Lifeline Underwriters Life Insurance Company ("Lifeline") shall occur
simultaneously with the closing of the Exchange.
7.10 On or before Closing Date, Combined will implement a plan
reasonably acceptable to Citizens that will replace the three insurance policy
assets shown on page two of Combined's statutory statement (the "Policies") with
cash or other liquid, admissible assets of equal values acceptable to Citizens.
ARTICLE VIII
TERMINATION AND ABANDONMENT
8.1 Anything contained in this Agreement to the contrary
notwithstanding, the Exchange may be terminated and abandoned at any time
(whether before or after the approval and adoption thereof by the shareholders
of Combined) prior to the Effective Date of such Exchange:
(1) By mutual written consent of Citizens and Combined;
(2) By Citizens or Combined, if any condition set forth in
Article VII has not been met or has not been waived;
(3) By Citizens or Combined, if any suit, action or other
proceeding shall be pending or threatened by the federal or a state government
before any court or governmental agency, in which it is sought to restrain,
prohibit or otherwise affect the consummation of the Exchange;
(4) By Citizens or Combined, if there is discovered any
material error, misstatement or omission in the representations and warranties
of another party made herein;
(5) By Citizens or Combined, if more than 2.5% of the shares
of Combined are properly perfected as to rights to dissent to the Exchange under
Section 5.11 of the Texas Business Corporation Act;
(6) If the Texas Commissioner of Insurance issues an order
denying the application of Citizens to acquire control of Combined or Lifeline
or fails to approve both applications within 120 days from its filing, this
Agreement shall terminate in totality; or
(7) Any of the terms or conditions of this Agreement may be
waived at any time by the party which is entitled to the benefit thereof, by
action taken by its Board of Directors; provided, however, that such action
shall be taken only if, in the judgment of the Board of Directors taking the
action, such waiver will not have a material adverse effect on the benefits
intended under this Agreement to the party (or shareholders of the party)
waiving such term or condition.
A-11
ARTICLE IX
TERMINATION OF REPRESENTATIONS AND WARRANTIES AND CERTAIN AGREEMENTS
9.1 The respective representations, warranties, covenants and
agreements of the parties hereto, shall expire with, and be terminated and
extinguished by, the Exchange or at the time of the consummation thereof.
Neither Party shall be under any liability whatsoever with respect to any such
representation, warranty, covenant or agreement which does not so survive, it
being intended that the sole remedy of the parties for a breach of any such
representation, warranty, covenant or agreement shall be to elect not to proceed
with the Exchange if such breach has resulted in the failure to satisfy a
condition precedent to such party's obligation to consummate the transactions
contemplated hereby.
ARTICLE X
MISCELLANEOUS
10.1 This Agreement embodies the entire agreement between the parties,
and there have been and are no agreements, representations or warranties among
the parties other than those set forth herein or those provided for herein.
10.2 To facilitate the execution of this Agreement, any number of
counterparts hereof may be executed, and each such counterpart shall be deemed
to be an original instrument, but all such counterparts shall constitute but one
instrument.
10.3 Each of the parties hereto will pay its own fees and expenses
incurred in connection with the transactions contemplated by this Agreement.
Citizens and Combined each represent to the other that it has not employed any
investment bankers, brokers, finders or intermediaries in connection with the
transaction contemplated hereby who might be entitled to any fee or other
payment from Citizens or Combined or any subsidiary of any of them because of
the consummation of the transactions contemplated by this Agreement.
10.4 All parties to this Agreement agree that if it becomes necessary
or desirable to execute further instruments or to make such other assurances as
are deemed necessary, the party requested to do so will use its best efforts to
provide such executed instruments or do all things necessary or proper to carry
out the purpose of this Agreement.
10.5 This Agreement may be amended upon approval of the Board of
Directors of each party; provided that the definition of Market Value for the
stock of Combined and/or Citizens shall not be amended without approval of the
requisite shareholders of Combined.
10.6 Any notices, requests, or other communications required or
permitted hereunder shall be delivered personally or sent by overnight courier
service, fees prepaid, addressed as follows:
<Table>
<Caption>
To Citizens: To Combined:
Citizens, Inc. Combined Underwriters Life Insurance Company
400 E. Anderson Lane 307 N. Glenwood
Austin, Texas 78752 Tyler, Texas 75702
Attn: Mark A. Oliver Attn: Gary C. Cole
President President
</Table>
A-12
<Table>
with copies to: with copies to:
Jones & Keller, P.C. Sneed, Vine & Perry, P.C.
1625 Broadway, Suite 1600 901 Congress Ave.
Denver, CO 80202 Austin, Texas 78701
Attn: Reid Godbolt, Esq. Attn: Jim Shawn, Esq.
</Table>
or such other addresses as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
received.
10.7 No press release or public statement will be issued relating to
the transaction contemplated by this Agreement without prior approval of
Citizens or Combined. However, either Citizens or Combined may issue at any time
any press release or other public statement it believes on the advice of its
counsel it is obligated to issue to avoid liability under the law relating to
disclosures, but the party issuing such press release or public statement shall
make a reasonable effort to give the other party prior notice of and opportunity
to participate in such release or statement.
10.8 This Agreement shall be governed, construed and enforced in
accordance with the laws of Texas, without regard to any conflicts of law
provisions.
10.9 This Agreement shall be deemed to have been drafted by both
parties, and therefore the rule against construing ambiguities against the party
drafting a contract shall be inapplicable to this Agreement.
10.10 If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
A-13
IN WITNESS THEREOF, the parties have set their hands this the 20th day
of November, 2001.
COMBINED UNDERWRITERS LIFE INSURANCE
COMPANY
By: /s/ Gary C. Cole
--------------------------------
Gary C. Cole, President
CITIZENS, INC.
By: /c/ Mark A. Oliver
---------------------------------
Mark A. Oliver, President
A-14
EXHIBIT A
ARTICLES OF EXCHANGE
CITIZENS, INC.
AND
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
ARTICLES OF EXCHANGE entered into this ___ day of ___________, 2001, by
and between Citizens, Inc., a Colorado corporation ("Citizens") and Combined
Underwriters Life Insurance Company, a Texas corporation ("Combined").
THIS IS TO CERTIFY:
FIRST: The parties which are parties to these Articles of Exchange are
Combined Underwriters Life Insurance Company, a Texas corporation and Citizens,
Inc., a Colorado corporation, and each of said corporations agrees to have the
$1.00 par value common stock of Combined (hereinafter the "Common Stock")
acquired by Citizens in a share exchange (the "Exchange") as provided by these
Articles of Exchange.
SECOND: The name and state of incorporation of each party to these
Articles of Exchange are as follows: Combined Underwriters Life Insurance
Company is a corporation incorporated under the laws of the State of Texas, and
Citizens, Inc. is a corporation incorporated under the laws of the State of
Colorado.
THIRD: As to the Common Stock:
A. On the Effective Date (as defined in Article TENTH below), each one
share of the Common Stock of Combined issued and outstanding immediately prior
thereto shall automatically be converted into and shall be exchanged for
________ shares of the Citizens' Class A Common Stock subject to D. below.
B. Upon the Effective Date, each holder of a certificate or
certificates representing shares of Common Stock, upon presentation and
surrender of such certificate or certificates to the exchange agent for
Citizens, shall be entitled to receive the consideration set forth in this
Article THIRD, except that holders of those shares as to which dissenters'
rights shall have been asserted and perfected pursuant to Texas law shall not be
converted into shares of Citizens' Common Stock, but shall represent only such
rights as are perfected under the Texas Business Corporation Act. Upon such
presentation, surrender and exchange as provided in this Article THIRD,
certificates representing shares of Common Stock previously held shall be
canceled. Until so presented and surrendered, each certificate or certificates
which represented issued and outstanding shares of Common Stock at the Effective
Date shall be deemed for all purposes to evidence the right to receive the
consideration set forth in this Article THIRD. If the certificate or
certificates representing shares of Common Stock have been lost, stolen,
mutilated or destroyed, the exchange agent of Citizens shall require the
submission of an indemnity agreement and may require the submission of a bond in
lieu of such certificate.
C. The stock transfer books of Combined shall be closed on the
Effective Date, and thereafter no transfers of the Combined Common Stock will be
made.
A-15
No fractional shares of Citizens' Class A Common Stock will be issued
as a result of the Exchange. In the event the exchange of shares results in any
shareholder being entitled to a fraction less than whole share of Citizens'
Class A Common Stock, such fraction will be rounded up to the nearest whole
share.
FOURTH: A Plan and Agreement of Exchange between Citizens and Combined
has been approved by the boards of directors of Citizens and Combined and the
requisite vote of shareholders of Combined. Approval by shareholders of Citizens
is not required.
FIFTH: The Board of Directors of Combined by [minutes at the
__________, 2001 meeting or by unanimous written action signed by all of the
directors] duly authorized and adopted a resolution declaring that the Plan and
Agreement of Exchange as herein set forth and the performance of its terms is
duly authorized and advisable and directing that these Articles of Exchange be
submitted for action thereon by the shareholders of Combined, all in the manner
and by the vote required by the Texas Business Corporation Act and the Articles
of Incorporation of Combined.
SIXTH: At a meeting of common shareholders of Combined held on
________, 2001, _______ shares were outstanding and entitled to vote on the
matters set forth in these Articles of Exchange. ________ shares voted in favor
of the Plan and Agreement of Exchange and ______ shares voted against the Plan
and Agreement of Exchange; ________ shares abstained. The number of shares
voting on the Plan and Agreement of Exchange was sufficient for approval by the
common shareholders.
SEVENTH: The Board of Directors of Citizens by [minutes at the
________, 2001 meeting or by unanimous written action signed by all of the
directors] duly authorized and adopted a resolution declaring that the Plan and
Agreement of Exchange as herein set forth and the performance of its terms is
duly authorized and advisable, all in the manner and by the vote required by the
Colorado Business Corporation Act and the Articles of Incorporation of Citizens.
EIGHTH: An executed Plan and Agreement of Exchange is on file at the
principal place of business of Citizens located at 400 E. Anderson Lane, Austin,
Texas 78752.
NINTH: A copy of the Plan and Agreement of Exchange will be furnished
by each surviving, acquiring or new domestic or foreign corporation or other
entity, on written request and without charge, to any shareholder of Combined.
TENTH: The Exchange provided for by these Articles of Exchange shall
become effective at the time of filing the last document required by law (the
"Effective Date").
ELEVENTH: The name and address of the Registered Agent and principal
office of the acquiring entity is:
Agent: CSC Principal Office:
1675 Broadway -------------------
Denver, Colorado 80202
------------------------------------
------------------------------------
A-16
IN WITNESS WHEREOF, Citizens and Combined, parties to these Articles of
Exchange, have caused these Articles of Exchange to be signed and acknowledged
by their respective Presidents and attested by their respective Secretaries all
as of the ________ day of _________________, 2001.
ATTEST: COMBINED UNDERWRITERS LIFE
INSURANCE COMPANY
- ---------------------------- By:
-----------------------
Gary C. Cole, President
ATTEST: CITIZENS, INC.
- ---------------------------- By:
-----------------------
Mark A. Oliver, President
A-17
EXHIBIT B
COMBINED DISCLOSURE STATEMENT
Pursuant to the provisions of Article III of the Plan and Agreement of
Exchange ("Agreement") by and between Combined and Citizens, Combined hereby
makes the following disclosures respecting the similarly numbered sections in
the Agreement:
3.1 Combined is currently qualified and licensed to conduct its
business and is in good standing in the following states except where
otherwise indicated:
1. Alabama (not currently marketing in this
state due to legal climate)
2. Arizona
3. Arkansas
4. Florida (not currently marketing in this
state due to rate regulation environment)
5. Louisiana
6. Mississippi
7. Missouri (see attached Order and Consent
effective September 1, 1990)
8. New Mexico
9. Oklahoma
10. Texas
11. Virginia (see attached February 3, 1992
Order Suspending License to transact the
business of Insurance and January 17, 1992
Order to Take Notice.)
3.10 Pending Legal Proceedings
Civil Action no. 600cv442; Nathan L. Johnson et al v. East
Texas Medical Center Athens, et al v. Aetna Health and Life
Insurance Company, et al; In the United States District Court
for the Eastern District of Texas, Tyler Division.
Regulatory Inquiries
Combined has previously provided Citizens with a copy of its
June 14, 2001 response to the Texas Department of Insurance
Life Insurance Survey.
A-18
EXHIBIT C
CITIZENS DISCLOSURE STATEMENT
Pursuant to the provisions of Article IV of the Plan and Agreement of
Exchange ("Agreement") by and between Citizens and Combined, Citizens hereby
makes the following disclosures respecting the similarly numbered sections in
the Agreement:
4.2 Citizens filed a Form S-3 ("Statement") Registration Statement
under the Securities Act of 1933 with the Securities and Exchange Commission
("SEC") which became effective on August 30, 2001. The Statement registers
2,000,000 shares of Citizens Class A Common Stock for sale to the public through
the Citizens, Inc. Stock Investment Plan ("the Plan"), the creation of which is
included in the Statement. Although the Statement by definition registers shares
for sale to the public, the activities of the Plan involve the acquisition of
Citizens Class A Common Stock through the public market, rather than directly
from the public. The Plan provides for the participation by owners of insurance
policies issued by the Citizens' subsidiaries, existing holders of Citizens
Class A Common Stock, employees of Citizens, Inc., members of the marketing
force of any of Citizens' subsidiaries, or any member of the public in general
who elects to participate. The Plan is sponsored by Citizens, Inc. and will be
administered by Mellon Bank.
4.7 Delia Bolanos Andrade, Luis Martin Tapia Alberti, Sonio Lucia
Montoya Botero, Luisa F. Botero and Carlos A Botero, Roberto Carlos Paniagua
Cardona, Luis Rberto Paniagua Grisales, Blanca Numbia Cardona, and Fernando
Hakim Daccach v. Citizens Insurance Company of America, Citizens, Inc., Negocios
Savoy, S.A., Harold E. Riley, and Mark A. Oliver, Cause Number 99-09099 Travis
County, Texas. A lawsuit seeking class action status with Fernando Hakim as the
class representative and naming a class of all persons who made premium payments
who are not residents of the United States as potential members of the class.
The suit alleges that the policies are unregistered securities in violation of
the Texas Blue Sky laws. In addition, the other plaintiffs made individual
claims primarily under the Texas Deceptive Trade Practices Act. The DTPA claims
relate to limitations and exclusions stated in the policies, excessive surrender
charges stated in the policies, and the amount of premiums charged. The
individual claimants also claim breach of contract (failure to provide the
insurance as represented, not alleged but stated), fraud in the inducement,
negligent misrepresentation, breach of duty of good faith and fair dealing. The
plaintiffs have filed a motion for class certification. Defendants have filed an
answering motion denying that the case is properly certifiable. Additionally, a
motion for summary judgment has been filed by defendants on the issue of whether
insurance policies issued to members of the putative class are unregistered
securities in violation of the Texas Blue Sky laws. A hearing was held on
October 16, 2001, regarding defendants' motion for summary judgment. On October
29, 2001, a hearing on the Class Certification was held.
Velma U Bayhi and David Bayhi v. Donald G. Welsh, Funeral Homes of
Louisiana, Inc. dba Baker Funeral Home, Citizens, Inc., Lumbermens Mutual
casualty Company and Kemper Insurance Companies, Cause number 468864 division M
in the 19th District Court, Parish of East Baton Rouge, Louisiana. The funeral
home is a subsidiary of Citizens Insurance Company of America. Mrs. Bayhi is
making a claim for injuries from a collision between a hearse driven by Mr.
Welsh and her stalled car. The hearse was insured with Lumbermens through
Kemper. Mr. Bayhi also claims that he suffered emotional distress because he
observed the crash. Kemper is defending Baker Funeral Home in this matter.
George M. Campbell v. American Liberty Life Insurance Company, Case
number 94-1625. Originally filed in the Parish of Ouachita, Louisiana in
1994--re-filed in 1998. Mr. Campbell had a
A-19
hospitalization policy covering cancer. He filed a claim for two hospital stays
at a V. A. hospital, but did not submit any bills from the hospital. The claim
was denied because the policy required that the hospital provide services
"...for compensation from its patients...." There was no activity in the case,
until July, 2001, when defendant received a Request for Production of a
certified copy of Mr. Campbell's policy.
Juanita Hall v. Citizens Insurance Company of America and Rex
Beverly, Civil Action Number CV 99-190, Marengo County, Alabama. Mrs. Hall
claims that Rex Beverly and Assured Investors Life Insurance Company
misrepresented the death benefit payable upon her husband's death. Following
defendant's motion for summary judgment the court dismissed all tort claims and
left open only a contract claim that the amount of the death benefit paid was
incorrect. A rehearing was granted, however plaintiff's motion was denied.
Velma Jenkins v. United Security Life Insurance Company, Jack
Lane, and fictitious defendants. Filed as Cause Number 2001-142 in the Circuit
Court of Noxubee County, Mississippi and removed to the United States District
Court for the Southern District of Mississippi Eastern Division as Civil Action
Number 4:01-CV-156LN. Remanded to County Court and all claims above $75,000 have
been dismissed with prejudice. Plaintiff alleges that she intended to purchase a
supplement to her major medical insurance coverage, but was sold a
hospitalization policy. Plaintiff alleges that the agent and the insurance
company engaged in a pattern and practice of misrepresentation and fraud as to
the benefits and coverage on policies sold to consumers in the State of
Mississippi. Plaintiff made claims under her policy for medication and for out
patient treatments all of which were denied because the policy covered
hospitalization. Plaintiff filed Interrogatories and Requests for Production
with her original complaint. No hearings have been set.
Mary Hart Whittington, Mayoda C. Parker, Sharon P. Browning, Patricia
M. Brown, Mary Catherine Rawles, and Barry Maricelli v. Citizens Insurance
Company of America f/k/a United Security Life Insurance Company, American
Investment Network f/k/a Great American Investment Network, Larry T. Reynolds,
Virgil Styles, and Jesse L. Byrd. Cause number 251-01-713CIV, filed in the
Circuit Court of the First Judicial District of Hinds County, Mississippi.
Plaintiffs allege that the whole-life nature of the insurance policies was
misrepresented to them as an investment because the policies would pay
dividends. The plaintiff's allege fraud, negligent misrepresentation,
negligence, civil conspiracy, breach of contract, conversion, and violation of
Mississippi Securities laws.
A-20
EXHIBIT D
APPROVALS REQUIRED BY LAW
1. Texas Insurance Department
2. U.S. Securities and Exchange Commission
(approval not required; however, must declare Registration Statement
Effective)
3. Colorado Division of Insurance
(approval not required; however, notice required pursuant to Form B)
A-21
EXHIBIT E
_____________, 2001
Citizens, Inc.
Citizens Insurance Company of America
400 East Anderson Lane
Austin, Texas 78752
Re: Plan and Agreement of Exchange between Citizens, Inc. and
Combined Underwriters Life Insurance Company
Ladies and Gentlemen:
We have acted as counsel to Combined Underwriters Life Insurance
Company ("Combined") in connection with the above referenced agreement. This
letter is provided to you pursuant to Paragraph 7.6(3) of the Plan and Agreement
of Exchange, dated as of ____________________, 2001 (the "Agreement"), between
Citizens, Inc. ("Citizens") and Combined. Except as otherwise indicated herein,
capitalized terms used in this letter are defined as set forth in the Agreement
or the Accord (see below).
This letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be read in
conjunction therewith.
Our opinions are limited in all respects to the substantive law of the
State of Texas, and the federal law of the United States, and we assume no
responsibility as to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction.
We have relied upon factual representations made by Combined in Article
III of the Agreement and we have reviewed such documents and given consideration
to such matters of law and fact as we have deemed appropriate to render this
opinion. We have been furnished with, and examined originals or copies,
certified or otherwise identified to our satisfaction, of all such records of
Combined, agreements and other instruments, certificates of officers and
representatives of Combined, certificates of public officials, and other
documents, as we have deemed necessary or desirable as a basis for the opinions
hereinafter expressed. As to questions of fact material to such opinions, we
have, where relevant facts were not independently verified or established,
relied upon certificates of officers of Combined.
Based upon and subject to the foregoing and the other qualifications
and limitations stated in this letter, we are of the opinion that:
1. To our knowledge, execution, delivery and performance of the
Agreement by Combined shall not result in a breach of, or constitute a default
(or an event which, with or without notice or lapse of time or both, would
constitute a default) under any contract, commitment, agreement, indenture,
mortgage, pledge
A-22
agreement, note, bond, license, or other instrument or obligation to which
Combined is a party or by which Combined is bound or the charter or bylaws of
Combined or other governing instruments of Combined.
2. The Agreement has been duly authorized, executed and delivered by
Combined and is a legal, valid and binding obligation of Combined enforceable
against Combined in accordance with its terms (subject to the applicability of
equitable principles or the effect of bankruptcy or creditors' rights laws on
the enforceability of the Agreement);
3. Combined is a Texas insurance corporation validly existing and in
good standing under the laws of the State of Texas;
4. Combined has full corporate power and authority to enter into the
Agreement and to carry out the transactions contemplated by the Agreement;
5. To our knowledge, there are no civil or criminal actions, suits,
arbitrations, administrative or other proceedings or governmental investigations
pending or threatened against Combined which will constitute a breach of the
representations, warranties or covenants under the Agreement or will prevent
Combined from consummating the transactions contemplated by the Agreement;
6. The authorized and, to our knowledge, outstanding capital stock of
Combined is as stated in Section 3.3 of the Agreement.
7. To our knowledge, except as set forth in the Agreement or Combined
Disclosure Statement, there are no outstanding subscriptions, options, warrants,
rights, convertible securities, calls, commitments, privileges or other
arrangements, preemptive or contractual, calling for or requiring the
acquisition of, or the issuance, transfer, sale or other disposition of any
shares of the capital stock of Combined, or calling for or requiring the
issuance of any securities or rights convertible into or exchangeable for shares
of capital stock of Combined; and
8. The execution, delivery, and performance of the Agreement, and the
performance by Combined of its obligations thereunder, are not in contravention
of any law, ordinance, rule or regulation of Texas or of the United States and
will not contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having jurisdiction, and
will not cause the suspension or revocation of any authorization, consent,
approval, or license presently in effect, which affects or binds Combined or any
of its material properties, and will not have a material adverse effect on the
validity of the Agreement or on the validity of the consummation of the
transactions contemplated by the Agreement or constitute grounds for the loss or
suspension of any permits, licenses, or other authorizations used in the
business of Combined.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated. This opinion is
rendered pursuant to Section 7.6(3) of the Agreement and, to the extent, if any,
that the law of the State of Texas permits you to rely upon it, it is to be
limited in its use to reliance by you in consummating the transactions described
herein and no other person or entity may rely or claim reliance upon this
opinion.
A-23
This opinion is rendered as of the date hereof, and we undertake no,
and hereby disclaim any, obligation to advise you of any changes in or new
developments which might affect any matters or opinions set forth herein.
The use of the words "to our knowledge" means that during the course of
our current and past representation of Combined no information has come to the
attention of the attorneys involved in the transaction described herein that
could give any such attorney actual knowledge of the existence of the documents
or facts so qualified. Except as set forth herein, this Firm has not undertaken
any investigation to determine the existence of such documents or facts, and no
inference as to our knowledge thereof shall be drawn from the fact of our
representation of any party or otherwise.
Very truly yours,
Sneed Vine & Perry P.C.
A-24
EXHIBIT F
AFFILIATE AGREEMENT
Citizens, Inc.
400 East Anderson Lane
Austin, Texas 78752
Ladies and Gentlemen:
I have been advised that I have been identified as a possible
"affiliate" of Combined Underwriters Life Insurance Company, a Texas corporation
(the "Company"), as that term is defined for purposes of paragraphs (c) and (d)
of Rule 145 of the General Rules and Regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933 (the "Securities Act"), although nothing contained herein
should be construed as an admission of such fact.
Pursuant to the terms of that certain Plan and Agreement of Exchange,
dated as of _______________, 2001 (the "Exchange Agreement"), between the
Company and Citizens, Inc., a Colorado corporation ("Citizens"), Citizens shall
acquire all of the issued and outstanding $1.00 par value common stock of the
Company ("Company Stock") for shares of no par value Class A Common Stock of
Citizens ("Citizens Stock") pursuant to a share exchange (the "Exchange"). As a
result of the Exchange, I will receive shares of Citizens Stock in exchange for
shares of Company Stock owned by me on the Effective Date (as defined in the
Exchange Agreement) of the Exchange as determined pursuant to the Exchange
Agreement.
A. In connection therewith, I represent, warrant and agree that:
1. I will not make any sale, transfer or other disposition of
Citizens Stock I receive as a result of the Exchange in violation of the
Securities Act or the Rules and Regulations.
2. I have been advised that the issuance of Citizens Stock to
me as a result of the Exchange has been registered with the Commission under the
Securities Act on a Registration Statement on Form S-4. However, I have also
been advised that, because at the time the Exchange was submitted for a vote of
the stockholders of the Company I may have been an "affiliate" of the Company,
and the distribution by me of the shares of Citizens Stock I receive as a result
of the Exchange has not been registered under the Securities Act, such shares
must be held by me indefinitely unless (i) such distribution of such shares has
been registered under the Securities Act, (ii) a sale of such shares is made in
conformity with the provisions of Rule 145 promulgated by the Commission under
the Securities Act or (iii) such sale is pursuant to a transaction which, in the
opinion of counsel reasonably satisfactory to Citizens or as described in a
"no-action" or interpretive letter from the staff of the Commission, is not
required to be registered under the Securities Act.
3. I have carefully read this letter and the Exchange
Agreement and have discussed the requirements of the Exchange Agreement and
other limitations upon the sale, transfer or other disposition
A-25
of the shares of Citizens Stock to be received by me, to the extent I have felt
necessary, with my counsel or with counsel for the Company.
B. Furthermore, in connection with the matters set forth herein, I
understand and agree that:
1. Citizens is under no further obligation to register the
sale, transfer or other disposition of the shares of Citizens Stock received by
me as a result of the Exchange or to take any other action necessary in order to
make compliance with an exemption from registration available, except as set
forth in paragraph C below.
2. Stop transfer instructions will be given to the transfer
agent of Citizens with respect to the shares of Citizens Stock I will receive as
a result of the Exchange, and there will be placed on the certificates
representing such shares, or any certificates delivered in substitution
therefor, a legend stating in substance:
The shares represented by this certificate were issued in a transaction
to which Rule 145 under the Securities Act of 1933 applies. The shares
represented by this certificate may be transferred only in accordance
with the terms of an agreement dated ________, 2001 between the
registered holder hereof and Citizens, Inc., a copy of which agreement
is on file at the principal offices of Citizens, Inc.
3. Unless the transfer by me of my shares of Citizens Stock is
a sale made in conformity with the provisions of Rule 145 of the Rules and
Regulations or made pursuant to a registration under the Securities Act,
Citizens reserves the right to put on the certificates issued to my transferee a
legend stating in substance:
The shares represented by this certificate have not been registered
under the Securities Act of 1933 and were acquired by the holder not
with a view to, or for resale in connection with, any distribution
thereof within the meaning of the Securities Act of 1933 and may not be
sold, pledged or otherwise transferred except pursuant to a
registration statement or in accordance with an exemption from the
registration requirements of the Securities Act of 1933.
It is understood and agreed that the legends set forth above shall be
removed, and substitute certificates shall be delivered without any such legend,
and the transfer agent will be instructed to effectuate transfers of shares of
Citizens Stock if the undersigned delivers to Citizens a letter from the staff
of the Commission or an opinion of counsel in form and substance reasonably
satisfactory to Citizens to the effect that such legend is not required for the
purposes of the Securities Act.
A-26
C. By Citizens's acceptance of this letter, Citizens hereby agrees with
me as follows:
1. For so long as and to the extent necessary to permit me to
sell the Citizens Stock pursuant to Rule 145 and, to the extent applicable, Rule
144 under the Act, Citizens will: (a) use its reasonable efforts to (i) file, on
a timely basis, all reports and data required to be filed with the Commission by
it pursuant to Section 13 of the Securities Exchange of 1934, as amended (the
"1934 Act"), and (ii) furnish to me upon request a written statement as to
whether Citizens has complied with such reporting requirements during the 12
months preceding any proposed sale of the Citizens Stock by me under Rule 145;
and (b) otherwise use its reasonable efforts to permit such sales pursuant to
Rule 145 and Rule 144. Citizens hereby represents to me that it has filed all
reports required to be filed with the Commission under Section 13 of the 1934
Act during the preceding 12 months.
2. It is understood and agreed that certificates with the
legends set forth in paragraphs B.2. and B.3. above will be substituted by
delivery of certificates without such legend if (i) one year shall have elapsed
from the date the undersigned acquired the Citizens Stock received in the
Exchange and the provisions of Rule 145(d)(2) are then available to the
undersigned, (ii) two years shall have elapsed from the date the undersigned
acquired the Citizens Stock received in the Exchange and the provisions of Rule
145(d)(3) are then applicable to the undersigned, or (iii) Citizens has received
either an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to Citizens, or a "no action" letter obtained by the undersigned
from the staff of the Commission, to the effect that the restrictions imposed by
Rule 145 under the Act no longer apply to the undersigned.
Very truly yours,
Date: [Name of Affiliate]
------------------------
ACCEPTED:
CITIZENS, INC.
By:
--------------------------
Mark A. Oliver, President
Date:
------------------------
A-27
EXHIBIT G
_____________, 2001
Combined Underwriters Life Insurance Company
307 N. Glenwood
Tyler, Texas 75702
Re: Plan and Agreement of Exchange between Citizens, Inc. and
Combined Underwriters Life Insurance Company
Ladies and Gentlemen:
We have acted as counsel to Citizens, Inc. ("Citizens") in connection
with the above referenced agreement. This letter is provided to you pursuant to
Paragraph 7.7(2) of the Plan and Agreement of Exchange, dated as of
____________________, 2001 (the "Agreement") between Citizens, Inc. ("Citizens")
and Combined Underwriters Life Insurance Company ("Combined"). Except as
otherwise indicated herein, capitalized terms used in this letter are defined as
set forth in the Agreement or the Accord (see below).
This letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be read in
conjunction therewith.
In giving the opinion expressed below, insofar as such opinion relates
to other than Federal law or the laws of jurisdiction other than the State of
Colorado, we advise that our opinion is with respect to Federal law and the laws
of the State of Colorado only and that, to the extent such opinion is derived
from laws of other jurisdictions, the statements are based on examinations of
relevant authorities and are believed to be correct, but we have obtained no
legal opinions as to such matters from attorneys licensed to practice in such
other jurisdictions. Accordingly, the law covered by the opinion expressed
herein is limited to the Federal law of the United States and the law of the
State of Colorado.
We have relied upon factual representations made by Citizens in Article
IV of the Agreement and we have reviewed such documents and given consideration
to such matters of law and fact as we have deemed appropriate to render this
opinion. We have been furnished with, and examined originals or copies,
certified or otherwise identified to our satisfaction, of all such records of
Citizens, agreements and other instruments, certificates of officers and
representatives of Citizens, certificates of public officials, and other
documents, as we have deemed necessary or desirable as a basis for the opinions
hereinafter expressed. As to questions of fact material to such opinions, we
have, where relevant facts were not independently verified or established,
relied upon certificates of officers of Citizens.
Based upon and subject to the foregoing and the other qualifications
and limitations stated in this letter, we are of the opinion that:
A-28
1. To our knowledge, execution, delivery and performance of the
Agreement by Citizens shall not result in a breach of, or constitute a default
(or an event which, with or without notice or lapse of time or both, would
constitute a default) under any contract, commitment, agreement, indenture,
mortgage, pledge agreement, note, bond, license, or other instrument or
obligation to which Citizens is a party or by which Citizens is bound or the
charter or bylaws of Citizens or other governing instruments of Citizens.
2. The Agreement has been duly authorized, executed and delivered by
Citizens and is a legal, valid and binding obligation of Citizens enforceable
against Citizens in accordance with its terms (subject to the applicability of
equitable principles or the effect of bankruptcy or creditors' rights laws on
the enforceability of the Agreement);
3. Citizens is a Colorado corporation validly existing and in good
standing under the laws of the State of Colorado;
4. Citizens has full corporate power and authority to enter into the
Agreement and to carry out the transactions contemplated by the Agreement;
5. To our knowledge, there are no civil or criminal actions, suits,
arbitrations, administrative or other proceedings or governmental investigations
pending or threatened against Citizens which will constitute a breach of the
representations, warranties or covenants under the Agreement or will prevent
Citizens from consummating the transactions contemplated by the Agreement;
6. The authorized and, to our knowledge, outstanding capital stock of
Citizens is as stated in Section 4.2 of the Agreement;
7. To our knowledge, except as set forth in the Agreement or Citizens'
Disclosure Statement, there are no outstanding subscriptions, options, warrants,
rights, convertible securities, calls, commitments, privileges or other
arrangements, preemptive or contractual, calling for or requiring the
acquisition of, or the issuance, transfer, sale or other disposition of any
shares of the capital stock of Citizens, or calling for or requiring the
issuance of any securities or rights convertible into or exchangeable for shares
of capital stock of Citizens; and
8. The execution, delivery, and performance of the Agreement, and the
performance by Citizens of its obligations thereunder, are not in contravention
of any law, ordinance, rule or regulation of Colorado or of the United States
and will not contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having jurisdiction, and
will not cause the suspension or revocation of any authorization, consent,
approval, or license presently in effect, which affects or binds Citizens or any
of its subsidiaries or any of their material properties, and will not have a
material adverse effect on the validity of the Agreement or on the validity of
the consummation of the transactions contemplated by the Agreement or constitute
grounds for the loss or suspension of any permits, licenses, or other
authorizations used in the business of Citizens.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated. This opinion is
rendered pursuant to Section 7.7(2) of the Agreement and, to the extent, if any,
that the law of the State of Colorado permits you to rely upon it, it is to be
limited
A-29
in its use to reliance by you in consummating the transactions described herein
and no other person or entity may rely or claim reliance upon this opinion.
This opinion is rendered as of the date hereof, and we undertake no,
and hereby disclaim any, obligation to advise you of any changes in or new
developments which might affect any matters or opinions set forth herein.
The use of the words "to our knowledge" means that during the course of
our current and past representation of Citizens and our past representation of
Citizens no information has come to the attention of the attorneys involved in
the transaction described herein that could give any such attorney actual
knowledge of the existence of the documents or facts so qualified. Except as set
forth herein, this Firm has not undertaken any investigation to determine the
existence of such documents or facts, and no inference as to our knowledge
thereof shall be drawn from the fact of our representation of any party or
otherwise.
Very truly yours,
Jones & Keller, P.C.
A-30
EXHIBIT H
November_______, 2001
Combined Underwriters Life Insurance Company
307 N. Glenwood
Tyler, Texas 75702
Ladies and Gentlemen:
Our opinions as expressed below are based solely upon: (1) the
information contained in the Proxy- Information Statement dated
_______________________ (hereafter "Proxy Statement") as filed with the
Securities and Exchange Commission; (2) the Plan and Agreement of Exchange ("the
Plan") dated __________________ between Citizens, Inc. ("Citizens") and Combined
Underwriters Life Insurance Company ("Combined"), together with Exhibits
thereto; (3) the Lease Extension Agreement dated __________ between Combined and
Little, Rooney & Little Associates; (4) the Marketing Development Agreement
dated __________ between Combined, Lifeline Underwriters Life Insurance Company
and the Red Little Combined Agency, Inc. (the "Agency"); (5) relevant
information provided by the principals; (6) the Internal Revenue Code of 1986,
as amended (hereinafter "IRC"), the regulations promulgated thereunder and the
current administrative positions of the Internal Revenue Service ("IRS")
contained in published Revenue Rulings and Revenue Procedures; and (7) existing
judicial decisions. All of the above are subject to change or modification by
subsequent legislative, regulatory, administrative or judicial decisions which
could adversely affect our opinions.
This letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be read in
conjunction therewith.
"Exchange" refers to the transaction set forth in the Plan. Capitalized
terms herein have the same meaning as in the Plan.
Shareholders residing or conducting business in foreign countries,
states or municipalities having tax laws could be required to pay tax with
respect to transactions in that country, state or municipality. We do not
express any opinion as to foreign, state or local tax consequences of the
Exchange. We do not express any opinion regarding alternative minimum tax
consequences of the Exchange to any shareholder.
The consequences described herein are not applicable to nonresident
aliens, to foreign corporations, to debtors under the jurisdiction of a court in
a case under Title 11 of the United States Code or in a receivership,
foreclosure, or similar proceeding, to shareholders that are real estate
investment trusts, to shareholders that are regulated investment companies, to
shareholders that are tax exempt persons, to shareholders that are persons that
hold their Combined Common Stock as part of a position in a "straddle" or as
part of a "hedging" or other integrated transaction, to shareholders that are
investment companies within the meaning of IRC Section 351(e), to shareholders
who are dealers in securities, to shareholders who do not hold their common
stock as capital assets, to shareholders who are financial institutions, or to
A-31
shareholders who acquired or will acquire their shares in connection with stock
option or stock purchase plans or in other compensatory transactions.
The principal reasons for the Exchange can be summarized as follows:
(1) to become part of a combined entity with greater financial
strength and an enhanced competitive position as compared to the
separate entities;
(2) to achieve improved capitalization and economies of scale;
and
(3) to provide greater liquidity and diversity to Combined
shareholders.
This letter is conditioned on the accuracy of the factual information,
assumptions and representations contained in the Proxy Statement and provided by
Citizens and Combined, including the principal reasons for the Exchange
expressed above and the following:
(1) that Citizens and Combined, in arriving at the method used
to determine the number of shares of Citizens Class A Common Stock to
be received by each Combined shareholder, attempted in good faith to
value the Combined Common Stock to be transferred and to value the
Citizens Class A Common Stock to be Exchanged for such Combined Common
Stock in an effort to ensure that each shareholder receiving Citizens
Class A Common Stock pursuant to the Exchange received a number of
shares of such stock approximately equal in value to the Combined
Common Stock exchanged therefor;
(2) that Combined has no plan or intention to issue additional
shares of its stock that would result in Citizens losing control of
Combined within the meaning of Section 368(c) of the IRC;
(3) that none of Citizens, Combined, any entity related
thereto, or shareholder thereof, have any plan or intention to redeem
or otherwise reacquire any Citizens Class A Common Stock to be issued
to Combined shareholders in the Exchange, and will not so redeem or
otherwise reacquire such stock;
(4) that Citizens has no plan or intention to liquidate
Combined; to merge Combined with or into another corporation; to cause
Combined to sell or otherwise dispose of any of its assets, except for
dispositions made in the ordinary course of business; or to sell or
otherwise dispose of the stock of Combined except for transfers
described in Section 368(a)(2)(C) of the IRC; preserving the nature of
Combined's charter makes avoidance of such transactions necessary;
(5) that following the Exchange, Citizens will continue the
historic business of Combined or use a significant portion of its
historic business assets in a business;
(6) that Citizens and Combined will assume and pay their
respective reorganization expenses, if any, incurred in connection with
the Plan and Exchange;
A-32
(7) that there is no corporate indebtedness between Citizens
or Combined that was issued, acquired or will be settled at a discount;
(8) that in the Exchange, shares of Combined Common Stock will
be exchanged solely for Citizens Class A voting Common Stock, with
Citizens thereby obtaining control of Combined as defined in Section
368(c) of the IRC;
(9) that on the Effective Date of the Exchange, Combined will
not have outstanding any warrants, options, convertible securities or
any other type of right pursuant to which any person could acquire
stock in Combined that, if exercised or converted, would affect
Citizens' acquisition or retention of control of Combined, as defined
in Section 368(c) of the IRC;
(10) that Citizens does not own, nor has it owned during the
past five (5) years, directly or indirectly, any shares of Combined
stock;
(11) that neither Citizens nor Combined are investment
companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the IRC;
(12) that neither Citizens nor Combined are under the
jurisdiction of a court in a Title 11 or similar case within the
meaning of IRC Section 368(a)(3)(A);
(13) that the Exchange will be consummated and qualify as a
statutory exchange in full compliance with Texas law and will be
consummated in accordance with the terms of the Plan;
(14) that in the event more than 2.5 percent of the
shareholders of Combined dissent to the Exchange, Citizens would
exercise its option not to proceed with the Exchange (as permitted
under the Plan) and the Exchange consequently would not be consummated;
(15) that no Combined Common Stock will be acquired for
consideration other than solely Citizens Class A Common Stock. For
purposes of this representation, Combined Common Stock redeemed for
cash or other property furnished by Citizens will be considered as
acquired by Citizens. Further, no liabilities of Combined or the
Combined shareholders will be assumed by Citizens, nor will any of the
Combined Common Stock be subject to any liabilities;
(16) that Citizens will not assume nor repay any Combined debt
guaranteed by Combined shareholders nor will Citizens assume or repay
any outstanding loans between Combined and its shareholders;
(17) that no compensation or agreement for services received
by any shareholder of Combined, or any entity related to a Combined
shareholder, will be separate consideration for, or allocable to, any
of their shares of Combined Common Stock; no shares of Citizens Class A
Common Stock received by any Combined shareholder, or any entity
related to any Combined shareholder, will be separate consideration
for, or allocable to, any employment agreement or compensation
agreement; and the compensation paid to any Combined shareholder, or
any entity related to a Combined shareholder, will be for services
actually performed and/or property actually
A-33
leased and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;
(18) that Combined will pay its dissenting shareholders the
value of their Combined Common Stock out of its own funds. No funds
will be supplied or are required to be supplied (by law or otherwise)
for that purpose, directly or indirectly, by Citizens, nor will
Citizens, directly or indirectly, reimburse Combined for any payments
to dissenters;
(19) that on the Effective Date of the Exchange, the fair
market value of the assets of Combined will exceed the sum of its
liabilities plus the liabilities, if any, to which its assets are
subject;
(20) that the Marketing Development Allowance Agreement (the
"MDA Agreement") between Combined, Lifeline Underwriters Life Insurance
Company and the Red Little Combined Agency, Inc. ("Agency") was
negotiated at arms-length; that the consideration to be paid by
Combined to the Agency pursuant to the MDA Agreement will be for
services actually to be performed and is reasonable in light of the
services to be performed and the benefit to Combined and Citizens of
retaining the Agency to preserve and increase the business in force
issued by Combined;
(21) that Combined has sufficient cash-flow to make payments
required to be made to the Agency pursuant to the MDA Agreement;
(22) that Citizens will not render Combined unable to honor
its payments under the MDA Agreement such that Citizens would be
required to make payments thereunder; and
(23) that after the Exchange, the space leased pursuant to the
two (2) real estate leases between Combined and Little, Rooney & Little
Associates, will continue to be used for business purposes, including
the occupancy by businesses or agencies of Combined, Citizens or
related entities and the profitable sublease of any space not so used,
and the lease payments are commensurate with amounts paid to third
parties bargaining at arms-length.
We have relied on the truthfulness and accuracy of certificates of
officers of Combined and Citizens regarding the above factual information,
assumptions and representations. In the course of our representation of Citizens
in connection with the transaction described herein, no facts have come to our
attention that would give us actual knowledge that the certificates are not
accurate. However, we have not undertaken any independent investigation to
verify the accuracy of such factual information, assumptions and
representations, and no inference as to our knowledge thereof shall be drawn
from the fact of our representation of any party or otherwise.
In rendering an opinion on the federal income tax consequences of such
a transaction, reasonable steps have been taken to assure that all material tax
issues are considered in light of the facts, and that all of such issues
involving a reasonable possibility of challenge by the IRS are fully and fairly
addressed. A "material tax issue" includes any tax issue that could have a
significant impact (either beneficial or adverse) on any Combined shareholder
participating in the Exchange under any reasonably foreseeable circumstances.
A-34
The opinions expressed below are rendered only with respect to the
specific matters described herein, and we express no opinion with respect to any
other federal income tax aspects of the Exchange. Should any of the facts,
circumstances or assumptions specified herein be subsequently determined
incorrect or inaccurate, our conclusions may vary from those set forth below and
such variance could be material. In addition, we do not opine as to the taxable
or nontaxable status of any previous transactions not considered to be part of
the Exchange.
Accordingly, in our opinion, the material tax consequences of the
Exchange are as follows:
(1) The Exchange will constitute a reorganization within the
meaning of IRC Section 368(a)(1)(B) and Citizens and Combined will each
be a "party to a reorganization" within the meaning of IRC Section
368(b). No gain or loss will be recognized by the shareholders of
Combined upon the exchange of their shares of Combined Common Stock for
shares of Citizens Class A Common Stock. IRC Section 354(a).
(2) The tax basis of the shares of Citizens Class A Common
Stock received by a shareholder of Combined will be the same as the
basis of the Combined Common Stock surrendered by that shareholder in
the Exchange. IRC Section 358(a); IRC Regulation Section 1.358-1(a).
(3) The holding period of the shares of Citizens Class A
Common Stock received by a shareholder of Combined will include the
period during which such shareholder held the Combined Common Stock
exchanged therefor, to the extent that such stock was held by the
shareholder as a capital asset on the date of the consummation of the
Exchange. IRC Section 1223(1).
(4) Cash received by Combined shareholders who properly
exercise their dissenters' rights will be treated as having been
received in redemption of the shares so cashed out, and may result in
taxable gain or loss, measured by the difference (if any) between the
amount of cash received and such shareholder's basis in the Combined
Common Stock. Provided the shares were held as capital assets at the
time of the redemption, such gain or loss will constitute capital gain
or loss, and such gain or loss will be long term capital gain or loss
if the holding period for such shares was greater than one year. It is
possible, that for some Combined shareholders, the distribution of cash
may be treated as a dividend taxable as ordinary income. IRC Sections
302, 301.
(5) No material gain or loss will be recognized by Citizens or
Combined as a result of the Exchange. IRC Sections 361 and 1032.
(6) Section 382 limits the Net Operating Loss carryover of a
company following an ownership change. Combined will be deemed to have
an ownership change. After an ownership change, the amount of income
that a corporation may offset each year by Net Operating Losses that
occurred before the change is generally limited to an amount determined
by multiplying the value of the equity of the corporation immediately
prior to this change by the federal long-term tax exempt rate in effect
on the date of the change. Any unused limitation may be carried forward
and added to the next year's limitation, subject to certain
limitations. To the extent Combined also has built-in losses as defined
in IRC Section 382(h) as of the date of the Exchange, IRC Section 382
limits the utilization of such losses after the ownership change. IRC
Section 383 will similarly limit the utilization of excess credits, net
capital losses, and foreign tax credits, if any, after the ownership
A-35
change. In addition, IRC Section 384 limits the use of preacquisition
losses to offset built-in gains, if any, after the ownership change.
Regulations under IRC Sections 382 and 1502 implement the above
restrictions.
(7) Each shareholder of Combined must file pursuant to IRS
Regulation 1.368-3(b), with his or her income tax return for the year
in which the Exchange is consummated, a statement which provides
details relating to the property transferred and securities received in
the Exchange.
The preceding discussion and opinions are based on our interpretations
of the facts and assumptions, based on the IRC, the regulations thereunder and
judicial and administrative interpretations thereof. They are subject to change
by subsequent regulatory, administrative, legislative or judicial actions which
could have an adverse effect on the validity of our opinions. Our opinions are
effective as of the Effective Date for the Exchange as described in the Plan.
We do not express an opinion on the valuations of Combined or Citizens
assets or common stock or the ratio of exchange of Combined Common Stock for
Citizens Class A Common Stock.
If the Exchange is transacted as outlined in the facts given, the
material tax issues addressed singularly and in the aggregate will more likely
than not be upheld under challenge by the IRS.
Each Combined shareholder should consult his own qualified tax advisor
to evaluate the tax effects of the Exchange based on his personal facts and
circumstances.
Very truly yours,
JONES & KELLER, P.C.
A-36
APPENDIX B
PLAN AND AGREEMENT OF EXCHANGE
CITIZENS, INC.
AND
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
APPENDIX B
PLAN AND AGREEMENT OF EXCHANGE
CITIZENS, INC.
AND
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
This Plan and Agreement of Exchange ("Agreement") is by and between
Citizens, Inc. ("Citizens"), a Colorado corporation and Lifeline Underwriters
Life Insurance Company ("Lifeline"), a Texas insurance corporation.
WITNESSETH:
WHEREAS, Lifeline is a stock life insurance company duly organized and
existing under the laws of the State of Texas; and
WHEREAS, Citizens is a corporation duly organized and existing under
the laws of the State of Colorado; and
WHEREAS, the respective Boards of Directors of Lifeline and Citizens
have voted to effect a statutory exchange under both the Texas Business
Corporation Act and the Colorado Business Corporation Act whereby Citizens will
acquire all of the issued and outstanding common stock of Lifeline in exchange
for shares of Class A Common Stock of Citizens upon the conditions hereinafter
stated;
NOW, THEREFORE, for good and valuable consideration consisting of the
premises below it is agreed between the parties as follows:
ARTICLE I
THE TRANSACTION
1.1 Subject to approval of this Agreement by the Insurance Commissioner
of the State of Texas, and subject to the conditions set forth herein, on the
"Effective Date" as herein defined, Citizens shall acquire all of the issued and
outstanding common stock of Lifeline for shares of Citizens Class A Common Stock
pursuant to a share exchange (the "Exchange") under Part Five of the Texas
Business Corporation Act and Article 111 of the Colorado Business Corporation
Act as set forth herein, and for no cash or other property. The Exchange shall
be completed at a closing ("Closing") on a date ("Closing Date") which shall be
as soon as reasonably possible, and as mutually agreed between the parties, on
or before the tenth business day after regulatory and stockholder approvals are
obtained in accordance with applicable law.
1.2 On the Effective Date, the separate corporate existence of Lifeline
shall be unaffected and unimpaired and it shall continue to be a Texas life
insurance corporation subject to and governed by the laws of the State of Texas,
with all of its rights, powers, duties, purposes, franchises and licenses as are
in existence on the Effective Date. Articles of Exchange, in the form attached
hereto as Exhibit A subject to any modifications as may be authorized or
required in accordance with applicable law (collectively the
B-1
"Exchange Filings"), shall be completed and executed by the parties and filed by
Citizens as contemplated by this Agreement as soon as reasonably possible, and
on or before the tenth business day after all regulatory and shareholder
approvals are obtained in accordance with applicable law.
1.3 If this Agreement is duly adopted by the holders of the requisite
number of shares of Lifeline, in accordance with the applicable laws and subject
to the other provisions hereof, such documents as may be required by law to
accomplish the acquisition of Lifeline by Citizens shall be delivered to and
filed with the Commissioner of Insurance of the State of Texas (and any other
governmental entity with which a filing is required), by Citizens and upon the
approval of this Agreement as required by requisite states' laws, the
appropriate documents to accomplish the Exchange shall then be filed as required
by law to effectuate the transactions contemplated hereby, and the Exchange
shall become effective at the Closing Date. The Closing Date shall be the
Effective Date for the Exchange.
ARTICLE II
ISSUANCE AND EXCHANGE OF SHARES
2.1 The manner and basis of exchanging shares of Lifeline into Citizens
pursuant to the Exchange is as follows: As set forth in Section 2.2 and Section
2.4, on the Effective Date each shareholder of Lifeline shall receive a number
of shares of Citizens Class A Common Stock equal in market value ("Market
Value") to the Lifeline stock owned by such shareholder. For purposes of this
Agreement, the per share Market Value of Citizens Class A Common Stock shall be
equal to the average closing price of such stock as reported by the American
Stock Exchange for the 20 trading days immediately preceding (but not including)
the Effective Date; and the Market Value of the Lifeline stock shall be $5.00
per share. The offer and sale of the Citizens Class A Common Stock to be issued
hereunder shall be registered by Citizens pursuant to the Securities Act of 1933
and applicable state securities laws, as provided in Section 5.3 hereof.
2.2 Upon the Effective Date, each holder of a certificate or
certificates representing shares of Lifeline, upon presentation and surrender of
such certificate or certificates to the Exchange Agent of Citizens, shall be
entitled to receive the consideration set forth herein, except that holders of
those shares as to which dissenters' rights shall have been asserted and
perfected pursuant to Texas law shall not be converted into shares of Citizens
Class A Common Stock, but shall represent only such rights as are permitted
under the Texas Business Corporation Act. Lifeline shall pay or otherwise
satisfy payment relating to shares as to which dissenters' rights have been
asserted and perfected pursuant to Texas law solely out of its own funds;
Citizens shall not contribute or otherwise be liable for any payments to such
persons arising from the Exchange. Upon such presentation, surrender, and
exchange as provided in this Section 2.2, certificates representing shares of
Lifeline previously held shall be canceled. Until so presented and surrendered,
each certificate or certificates which represented issued and outstanding shares
of Lifeline at the Effective Date shall be deemed for all purposes to evidence
the right to receive the consideration set forth in Section 2.1 of this
Agreement. If a certificate or the certificates representing shares of Lifeline
have been lost, stolen, mutilated or destroyed, the Exchange Agent shall require
the submission of an indemnity agreement and may require the submission of a
bond in lieu of such certificate.
2.3 The stock transfer books of Lifeline shall be closed on the Closing
Date, and thereafter no transfers of the common stock of Lifeline will be made.
B-2
2.4 No fractional shares of Citizens stock shall be issued as a result
of the Exchange. In the event the exchange of shares results in any shareholder
being entitled to a fraction of a whole share of Citizens stock, the number of
shares to be issued to such shareholder shall be rounded up to the nearest whole
share.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS OF LIFELINE
To the best of its knowledge and belief, Lifeline hereby represents,
warrants and covenants to Citizens as follows, except as stated in the Lifeline
Disclosure Statement attached hereto as Exhibit B:
3.1 Lifeline is a life insurance corporation duly organized, validly
existing and in good standing under the insurance laws of Texas with full
corporate power and authority to own the respective properties which it now
owns; and is qualified or licensed to conduct its business and is in good
standing in all states where such qualifications or licensing is required, and
has full corporate power to enter into and, upon the appropriate approvals as
required by law, to consummate the transactions contemplated by this Agreement.
3.2 The Articles of Incorporation and Bylaws of Lifeline, copies of
which have been delivered to Citizens, are complete and accurate and the minute
books of Lifeline contain a record of all meetings and corporate actions of the
shareholders and Board of Directors of Lifeline that is complete and accurate in
all material respects.
3.3 The aggregate number of shares which Lifeline is authorized to
issue is 700,000 shares of $1.00 par value common stock and 700,000 such shares
are issued and outstanding, fully paid and non-assessable. Lifeline has no
outstanding options, warrants or other rights to purchase, or subscribe to, or
securities convertible into or exchange for any shares of capital stock.
3.4 Lifeline has complete and unrestricted power to enter into and,
upon the appropriate approvals as required by law, to consummate the
transactions contemplated by this Agreement.
3.5 Neither the making of nor the compliance with the terms and
provisions of this Agreement and consummation of the transactions contemplated
herein by Lifeline will conflict with or result in a breach or violation of the
Articles of Incorporation or Bylaws of Lifeline or any contracts, agreements,
pledges, loans or any other obligations of Lifeline.
3.6 Lifeline has delivered to Citizens its annual convention statement
for the year ended December 31, 2000. Also, Lifeline has delivered to Citizens
its quarterly financial statement for the quarter and six months ended June 30,
2001. All such statements, herein sometimes called "Lifeline Financial
Statements", present fairly, in all material respects, the admitted assets,
liabilities and surplus of Lifeline as of the dates thereof, and the results of
operations and its cash flows for the year then ended, in conformity with the
accounting practices prescribed or permitted by the Insurance Department of the
State of Texas.
3.7 The assets of Lifeline have admissible values at least equal to the
amounts attributed to them on its June 30, 2001 statutory financial statement
and will have a value at least equal to those set forth in the December 31, 2000
annual convention statement.
B-3
3.8 Lifeline has delivered to Citizens a copy of each of the Federal
income tax returns of Lifeline for the years ended December 31, 1999 and
December 31, 2000. The provisions for taxes paid by Lifeline are believed by
Lifeline to be sufficient for payment of all accrued and unpaid Federal, state,
county and local taxes of Lifeline (including any penalties or interest payable)
whether or not disputed for the periods then ended and for all prior fiscal
periods. All returns and reports of information required or requested by
Federal, state, county and local tax authorities have been filed or supplied in
a timely fashion and all such information is true and correct in all material
respects. Provision has been made in Lifeline financial statements for the
payment of all taxes due to date by Lifeline, including accrued taxes for the
current year ended December 31, 2001. No Federal income tax return of Lifeline
is currently under audit.
3.9 Since December 31, 2000, there has not been any material adverse
change in the business or condition, financial or otherwise, of Lifeline,
including any loss or damages to any of its assets, properties or rights as
shown on December 31, 2000 Lifeline statutory statement as filed with the Texas
Department of Insurance that would be material to Lifeline taken as a whole.
3.10 Attached to Exhibit B is a listing of all pending legal
proceedings or known regulatory inquiries involving Lifeline and, except for
these proceedings, there are no legal proceedings or regulatory proceedings
involving claims pending, or to the knowledge of the officers of Lifeline,
threatened against Lifeline or affecting any of its assets, or properties.
Lifeline is not in any breach or violation of or default under any contract or
instrument to which Lifeline is a party, and no event has occurred which with
the lapse of time or action by a third party could result in a breach or
violation of or default by Lifeline under any contract or other instrument to
which Lifeline is a party or by which it or any of its property may be bound or
affected, or under its Articles of Incorporation or Bylaws, or any court order,
statute, ruling or regulation applicable to Lifeline which breach or violation
of or default could have a material adverse effect on Lifeline.
3.11 The execution and delivery of this Agreement has been duly
authorized and approved by Lifeline's Board of Directors.
3.12 Lifeline has provided Citizens a copy of Lifeline's employee
manual and related documents which include a description of Lifeline's employee
benefits. Except as shown in the material provided, Lifeline has no employment
agreements.
3.13 Lifeline will call and hold a meeting of its shareholders as soon
as practicable after the date hereof, at which meeting the Board of Directors
will, subject to its fiduciary obligations to shareholders, submit and recommend
the Agreement and transactions described herein to its shareholders, and, if the
requisite approval by such shareholders is obtained, will undertake promptly to
consummate the Exchange as set forth herein.
3.14 Lifeline shall not enter into or consummate any transactions prior
to the Effective Date other than in the ordinary course of business, will pay no
shareholder dividend and will not intentionally enter into any agreement or
transaction that would materially and adversely affect its financial condition,
and will not increase the compensation of any of its employees other than in the
usual course of business consistent with past practices.
B-4
3.15 Lifeline has provided to Citizens all contracts, other than
insurance policies issued or assumed by Lifeline, to which Lifeline is a party.
3.16 The representations and warranties of Lifeline shall be true and
correct as of the Effective Date as well as the date hereof.
3.17 Lifeline has delivered, or will deliver to Citizens, any reports
relating to the financial and business condition of Lifeline which are prepared
after the date of this Agreement and sent to regulators after the execution date
of this Agreement.
3.18 No representation or warranty by Lifeline in this Agreement, the
Lifeline Disclosure Statement or any certificate delivered pursuant hereto
contains any untrue statement of a material fact or omits to state any material
fact necessary to make such representation or warranty not misleading.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF CITIZENS
To the best of its knowledge and belief, Citizens hereby represents,
warrants and covenants to Lifeline as follows, except as stated in the Citizens
Disclosure Statement attached hereto as Exhibit C:
4.1 Citizens is a corporation duly organized, validly existing and in
good standing under the laws of Colorado, with full power and authority to own
the respective properties which it now owns; and is qualified or licensed to
conduct its business and is in good standing in all states where such
qualifications or licensing is required.
4.2 The total number of shares of both classes of capital stock which
Citizens is authorized to issue is 50,000,000 shares of Class A Common Stock
with no par value and 1,000,000 shares of Class B common stock of no par value.
As of the date hereof, there are 26,642,938 shares of Class A Common Stock
issued, of which 24,417,118 are outstanding and 711,040 shares of Class B common
stock are issued and outstanding. Citizens has no outstanding options, warrants
or other rights to purchase, or subscribe to, or securities convertible into or
exchangeable for any shares of capital stock. The shares to be issued in
connection with the Exchange shall be, and all Citizens stock currently issued
or outstanding is, validly issued, fully paid and nonassessable.
4.3 Neither the making of nor the compliance with the terms and
provisions of this Agreement and consummation of the transactions contemplated
herein by Citizens will conflict with or result in a breach or violation of the
Articles of Incorporation or Bylaws of Citizens.
4.4 The execution of this Agreement has been duly authorized and
approved by Citizens' Board of Directors. Citizens has complete and unrestricted
power to enter into and, upon the appropriate approvals as required by law
(which such approvals are listed on the attached Exhibit D), to consummate the
transaction contemplated by this Agreement.
4.5 Citizens has delivered to Lifeline its annual consolidated
financial statement for the year ended December 31, 2000. Also, Citizens has
delivered to Lifeline its consolidated financial statements for
B-5
the quarter and six months ended June 30, 2001. All such statements, herein
sometimes called "Citizens Financial Statements", are complete and correct in
all material respects and, together with the notes to these financial
statements, present fairly the financial position and results of operations of
Citizens for the period included and have been prepared in accordance with
generally accepted accounting principles consistently applied.
4.6 Since December 31, 2000, there has not been any material adverse
change in the business or condition, financial or otherwise, of Citizens and its
subsidiaries taken as a whole, including any material loss or damages to any of
its assets, properties or rights from that shown on the Citizens Financial
Statements.
4.7 Citizens has delivered to Lifeline a listing of all pending legal
proceedings involving Citizens and its consolidated subsidiaries as set forth on
Exhibit C and, except for these proceedings, there are no legal proceedings
pending, or to the knowledge of the officers of Citizens, threatened against
Citizens or affecting any of its assets or properties and Citizens is not in any
material breach or violation of or default under any contract or instrument to
which Citizens is a party, and no event has occurred which with the lapse of
time or action by a third party could result in a material breach or violation
of or default by Citizens under any contract or other instrument to which
Citizens is a party or by which it or any of its properties may be bound or
affected, or under its Articles of Incorporation or Bylaws, or any court order,
statute, ruling or regulation applicable to Citizens. The execution, delivery
and performance of the Agreement by Citizens will not with the lapse of time or
action by a third party result in a material breach or violation of or default
by Citizens under any contract or other instrument to which Citizens is a party
or by which it or any of its properties may be bound of affected, or under its
Articles of Incorporation or Bylaws, or any court order, statute, ruling or
regulation applicable to Citizens.
4.8 Citizens' shareholders are not required to approve the issuance of
shares pursuant to this Agreement.
4.9 Citizens is the owner of all of the issued and outstanding stock of
Citizens Insurance Company of America.
4.10 Citizens has delivered to Lifeline true and correct copies of
Citizens Annual Report to Shareholders for the years ended December 31, 1999 and
2000 and each of its other reports to shareholders and filings with the
Securities and Exchange Commission ("SEC") for the years ended December 31,
1998, 1999, and for 2000. Citizens will also deliver to Lifeline on or before
the Closing Date any reports relating to the financial and business condition of
Citizens which are filed with the SEC after the date of this Agreement and any
other reports sent generally to its shareholders after the date of this
Agreement.
4.11 Citizens has duly filed all reports required to be filed by it
under the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended, (the "Federal Securities Laws"). No such reports, or any
reports sent to the shareholders of Citizens generally, contained any untrue
statement of material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements in such report, in light of
the circumstances and time under which they were made, not misleading.
B-6
4.12 Citizens has received, and to the extent it deems necessary,
reviewed the various agent contracts, commission agreements and the other
contracts included in Exhibit B between Lifeline and Little & Rooney Insurance
Agency.
4.13 The representations and warranties of Citizens shall be true and
correct as of the Effective Date as well as the date hereof.
ARTICLE V
OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE
5.1 This Agreement shall be duly submitted to the shareholders of
Lifeline for the purpose of considering and acting upon this Agreement in the
manner required by law at a meeting of shareholders on a date selected by
Lifeline, such date to be the earliest practicable date after the proxy
statement may first be sent to Lifeline shareholders without objection by
applicable governmental authorities, provided that Lifeline will have at least
30 days to solicit proxies. Citizens will furnish to Lifeline the information
relating to Citizens required by the Federal Securities Laws to be included in
the proxy statement. Citizens represents and warrants that at the time of the
Lifeline shareholders' meeting, the proxy statement, insofar as it relates to
Citizens and contains information furnished by Citizens specifically for use in
such proxy statement, (a) will comply in all material respects with the
provisions of the Federal Securities Laws and (b) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Lifeline represents
and warrants that at the time of the Lifeline shareholder meeting, the proxy
statement, insofar as it relates to Lifeline and contains information furnished
by Lifeline specifically for use in such proxy statement, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Board of Directors
of Lifeline, subject to its fiduciary obligations to shareholders, shall use
reasonable efforts to obtain the requisite approval of Lifeline shareholders of
this Agreement and the transactions contemplated herein. Citizens and Lifeline
shall take all reasonable and necessary steps and actions to comply with and to
secure Lifeline's shareholder approval of this Agreement and the transactions
contemplated herein as may be required by applicable law.
5.2 At all times prior to the Effective Date, but during regular
business hours, each party will permit the other to examine its books and
records and the books and records of its affiliates and will furnish copies
thereof on request. It is recognized that, during the performance of this
Agreement, each party may provide the other party with information that is
confidential or proprietary in nature. During the term of this Agreement, and
for four years following the termination of this Agreement, the recipient of
such information shall protect such information from disclosure to persons,
other than members of its own or affiliated organizations and its professional
advisers, in the same manner as it protects its own confidential or proprietary
information from unauthorized disclosure and shall not use such information to
the competitive detriment of the disclosing party. In addition, if this
Agreement is terminated for any reason, each party shall promptly return or
cause to be returned all documents or other written records of such confidential
or proprietary information together with all copies of such writings and, in
addition, shall destroy or shall maintain the information with the standard of
care that is exercised with respect to its own confidential or proprietary
information. No information shall be considered confidential or proprietary if
it is (a) information already in the possession of the party to whom disclosure
is made, (b) information acquired by
B-7
the party to whom the disclosure is made from other sources, or (c) information
in the public domain or generally available to interested persons or which at a
later date passes into the public domain or becomes available to the party to
whom disclosure is made without any wrongdoing by the party or any of its
affiliates or any third party to whom the disclosure is made.
5.3 Citizens and Lifeline shall promptly provide each other with
information as to any significant developments that materially hinder the
performance of this Agreement, and shall promptly notify the other if it
discovers that any of its representations, warranties and covenants contained in
this Agreement or in any document delivered in connection with this Agreement
was not true and correct in all material respects or became untrue or incorrect
in any material respect.
As promptly as practicable after the execution of this Agreement,
Citizens will prepare and file with the Securities and Exchange Commission
("Commission") a registration statement on Form S-4 (the "Registration
Statement") covering the issuance of Citizens shares in the Exchange. Each of
Citizens and Lifeline will use all reasonable efforts to have or cause the
Registration Statement to become effective as promptly as practicable, and will
take any action required to be taken under any applicable federal or state
securities laws in connection with the issuance of shares of Citizens Common
Stock in the Exchange. Citizens will use all reasonable efforts to cause the
Registration Statement to remain effective through the Effective Date. Citizens
and Lifeline will furnish all information concerning it and the holders of its
capital stock as the other may reasonably request in connection with such
actions.
Citizens will use all reasonable efforts to obtain all necessary state
securities laws or "blue sky" permits, approvals and registrations in connection
with the issuance of the Citizens Class A Common Stock in the Exchange.
As promptly as practicable after the Registration Statement shall have
become effective, Lifeline will mail a notice of special meeting to its
stockholders entitled to notice of and to vote at the Lifeline Stockholders'
Meeting.
If at any time prior to the Effective Date any event or circumstance
relating to Lifeline or any of its Affiliates, or its or their respective
officers or directors should be discovered by Lifeline that should be set forth
in an amendment to the Registration Statement, Lifeline will promptly inform
Citizens, and Citizens will undertake to amend or supplement the Registration
Statement and the prospectus contained therein accordingly.
If at any time prior to the Effective Date any event or circumstance
relating to Citizens or any of its Affiliates, or to their respective officers
or directors, should be discovered by Citizens that should be set forth in an
amendment to the Registration Statement, Citizens will promptly inform Lifeline,
and Citizens will undertake to amend or supplement the Registration Statement
and the prospectus contained therein accordingly.
No amendment or supplement to the Registration Statement will be made
by Citizens without prior consultation with Lifeline. Citizens and Lifeline each
will advise the other, promptly after it receives notice thereof, of the time
when the Registration Statement has become effective or any supplement or
amendment has been filed, the issuance of any stop order suspending the
effectiveness of the Registration Statement, the suspension of the qualification
of Citizens Common Stock issuable in connection with the Exchange for
B-8
offering or sale in any jurisdiction, any request by the staff of the Commission
for amendment of the Registration Statement or the Proxy Statement, the receipt
from the staff of the Commission of comments thereon or any request by the staff
of the Commission for additional information with respect thereto.
Citizens will use all reasonable efforts to cause the shares of
Citizens Common Stock to be issued in the Exchange to be approved for listing
(subject to official notice of issuance) on the American Stock Exchange prior to
the Effective Date. To the knowledge of Citizens, there are no facts and
circumstances that would preclude Citizens Common Stock to be issued in the
Exchange from being approved for listing on the American Stock Exchange.
5.4 The parties to this Agreement shall take all such action as may be
reasonably necessary and appropriate and shall use their best efforts in order
to consummate the transactions contemplated hereby as promptly as reasonably
practicable.
ARTICLE VI
REGULATORY FILINGS
6.1 Within 15 days after the execution of this Agreement, Citizens
shall file with the Insurance Commissioner of Texas all of the regulatory
approval documents required by Texas law in order to close this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT TO THE CONSUMMATION OF THE EXCHANGE
The following are conditions precedent to the consummation of the
Exchange, on or before the Effective Date:
7.1 Citizens and Lifeline shall have performed and complied with all of
their respective obligations hereunder which are to be complied with or
performed on or before the Effective Date and shall provide one another at the
Closing with a certificate to the effect that such party has performed each of
the acts and undertakings required to be performed by it on or before the
Closing Date pursuant to the terms of this Agreement.
7.2 This Agreement shall have been duly and validly authorized,
approved and adopted, at a meeting of the shareholders of Lifeline duly and
properly called for such purpose in accordance with the applicable law.
7.3 This Agreement is in all things subject to the provisions of the
applicable insurance laws and the regulations promulgated thereunder, and shall
not become effective until approval of the Exchange is obtained from the
Commissioner of Insurance of the State of Texas (and any other governmental
entity with jurisdiction over the transaction) in accordance with the provisions
of the laws of said state. Citizens and Lifeline agree, as soon as practical
after the execution and delivery of this Agreement, to file and to use
commercially reasonable efforts to obtain such approval of the transactions
contemplated by this Agreement. Neither Citizens nor Lifeline shall be obligated
to file a suit or to appeal from any adverse ruling by the
B-9
Commissioner of Insurance of the State of Texas, and neither Citizens nor
Lifeline shall be obligated to make any material changes in any lawful, good
faith management policy in order to gain such approval.
7.4 No action, suit or proceeding shall have been instituted or shall
have been threatened in writing before any court or other governmental body or
by any public authority to restrain, enjoin or prohibit the Exchange, or which
might subject any of the parties hereto or their directors or officers to any
material liability, fine, forfeiture or penalty on the ground that the
transactions contemplated hereby, the parties hereto or their directors or
officers, have violated any applicable law or regulation, or have otherwise
acted improperly in connection with the transactions contemplated hereby, and
the parties hereto have been advised by counsel that, in the opinion of such
counsel, such action, suit or proceeding raises substantial questions of law or
fact which could reasonably be decided adversely to any party hereto or its
directors or officers.
7.5 The representations and warranties made by Citizens and Lifeline in
this Agreement shall be true in all material respects as though such
representation and warranties had been made or given on and as of the Closing
Date, except to the extent that such representations and warranties may be
untrue on and as of the Closing Date because of (1) changes caused by
transactions suggested or approved in writing by each party hereto or (2) events
or changes (which shall not, in the aggregate, have materially and adversely
affected the business, assets, or financial condition of Citizens or Lifeline)
during or arising after the date of this Agreement.
7.6 Lifeline shall have furnished Citizens with:
(1) a certified copy of a resolution or resolutions duly
adopted by the Board of Directors of Lifeline approving this Agreement and the
transactions contemplated by it and directing the submission thereof to a vote
of the shareholders of Lifeline;
(2) a certified copy of a resolution or resolutions duly
adopted by the requisite number of shareholders of Lifeline approving this
Agreement and the transactions contemplated by it in accordance with applicable
law;
(3) an opinion of Sneed, Vine & Perry, P.C., counsel to
Lifeline. dated as of the Effective Date as set forth in Exhibit E attached
hereto; and
(4) an agreement from each "affiliate" of Lifeline, in the
form attached as Exhibit F.
7.7 Citizens shall furnish Lifeline with:
(1) a certified copy of a resolution or resolutions duly
adopted by the Board of Directors of Citizens, approving this Agreement and the
transactions contemplated by it; and
(2) opinions of Jones & Keller, P.C., counsel for Citizens,
dated as of the Effective Date, as set forth in Exhibits G and H attached
hereto.
7.8 Citizens and Lifeline shall approve and file the Articles of
Exchange, consistent with this Agreement, for this transaction with the
requisite governmental authorities.
B-10
7.9 The Closing of the Plan and Agreement of Exchange for the common
stock of Combined Underwriters Life Insurance Company ("Combined") shall occur
simultaneously with the closing of the Exchange.
ARTICLE VIII
TERMINATION AND ABANDONMENT
8.1 Anything contained in this Agreement to the contrary
notwithstanding, the Exchange may be terminated and abandoned at any time
(whether before or after the approval and adoption thereof by the shareholders
of Lifeline) prior to the Effective Date of such Exchange:
(1) By mutual written consent of Citizens and Lifeline;
(2) By Citizens or Lifeline, if any condition set forth in
Article VII has not been met or has not been waived;
(3) By Citizens or Lifeline, if any suit, action or other
proceeding shall be pending or threatened by the federal or a state government
before any court or governmental agency, in which it is sought to restrain,
prohibit or otherwise affect the consummation of the Exchange;
(4) By Citizens or Lifeline, if there is discovered any
material error, misstatement or omission in the representations and warranties
of another party made herein;
(5) By Citizens or Lifeline, if more than 2.5% of the shares
of Lifeline are properly perfected as to rights to dissent to the Exchange under
Section 5.11 of the Texas Business Corporation Act;
(6) If the Texas Commissioner of Insurance issues an order
denying the application of Citizens to acquire control of Lifeline or Combined
or fails to approve both applications within 120 days from its filing, this
Agreement shall terminate in totality; or
(7) Any of the terms or conditions of this Agreement may be
waived at any time by the party which is entitled to the benefit thereof, by
action taken by its Board of Directors; provided, however, that such action
shall be taken only if, in the judgment of the Board of Directors taking the
action, such waiver will not have a material adverse effect on the benefits
intended under this Agreement to the party (or shareholders of the party)
waiving such term or condition.
ARTICLE IX
TERMINATION OF REPRESENTATIONS AND WARRANTIES AND CERTAIN AGREEMENTS
9.1 The respective representations, warranties, covenants and
agreements of the parties hereto, shall expire with, and be terminated and
extinguished by, the Exchange or at the time of the consummation thereof.
Neither Party shall be under any liability whatsoever with respect to any such
representation, warranty, covenant or agreement which does not so survive, it
being intended that the sole remedy of the parties for a breach of any such
representation, warranty, covenant or agreement shall be to elect not to
B-11
proceed with the Exchange if such breach has resulted in the failure to satisfy
a condition precedent to such party's obligation to consummate the transactions
contemplated hereby.
ARTICLE X
MISCELLANEOUS
10.1 This Agreement embodies the entire agreement between the parties,
and there have been and are no agreements, representations or warranties among
the parties other than those set forth herein or those provided for herein.
10.2 To facilitate the execution of this Agreement, any number of
counterparts hereof may be executed, and each such counterpart shall be deemed
to be an original instrument, but all such counterparts shall constitute but one
instrument.
10.3 Each of the parties hereto will pay its own fees and expenses
incurred in connection with the transactions contemplated by this Agreement.
Citizens and Lifeline each represent to the other that it has not employed any
investment bankers, brokers, finders or intermediaries in connection with the
transaction contemplated hereby who might be entitled to any fee or other
payment from Citizens or Lifeline or any subsidiary of any of them because of
the consummation of the transactions contemplated by this Agreement.
10.4 All parties to this Agreement agree that if it becomes necessary
or desirable to execute further instruments or to make such other assurances as
are deemed necessary, the party requested to do so will use its best efforts to
provide such executed instruments or do all things necessary or proper to carry
out the purpose of this Agreement.
10.5 This Agreement may be amended upon approval of the Board of
Directors of each party; provided that the definition of Market Value for the
stock of Lifeline and/or Citizens shall not be amended without approval of the
requisite shareholders of Lifeline.
10.6 Any notices, requests, or other communications required or
permitted hereunder shall be delivered personally or sent by overnight courier
service, fees prepaid, addressed as follows:
<Table>
<Caption>
To Citizens: To Lifeline:
Citizens, Inc. Lifeline Underwriters Life Insurance Company
400 E. Anderson Lane 307 N. Glenwood
Austin, Texas 78752 Tyler, Texas 75702
Attn: Mark A. Oliver Attn: Gary C. Cole
President President
</Table>
B-12
<Table>
with copies to: with copies to:
Jones & Keller, P.C. Sneed, Vine & Perry, P.C.
1625 Broadway, Suite 1600 901 Congress Ave.
Denver, CO 80202 Austin, Texas 78701
Attn: Reid Godbolt, Esq. Attn: Jim Shawn, Esq.
</Table>
or such other addresses as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
received.
10.7 No press release or public statement will be issued relating to
the transaction contemplated by this Agreement without prior approval of
Citizens or Lifeline. However, either Citizens or Lifeline may issue at any time
any press release or other public statement it believes on the advice of its
counsel it is obligated to issue to avoid liability under the law relating to
disclosures, but the party issuing such press release or public statement shall
make a reasonable effort to give the other party prior notice of and opportunity
to participate in such release or statement.
10.8 This Agreement shall be governed, construed and enforced in
accordance with the laws of Texas, without regard to any conflicts of law
provisions.
10.9 This Agreement shall be deemed to have been drafted by both
parties, and therefore the rule against construing ambiguities against the party
drafting a contract shall be inapplicable to this Agreement.
10.10 If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
B-13
IN WITNESS THEREOF, the parties have set their hands and seals this the
20th day of November, 2001.
LIFELINE UNDERWRITERS LIFE INSURANCE
COMPANY
By: /s/ Gary C. Cole
------------------------------
Gary C. Cole, President
CITIZENS, INC.
By: /s/ Mark A. Oliver
------------------------------
Mark A. Oliver, President
B-14
EXHIBIT A
ARTICLES OF EXCHANGE
CITIZENS, INC.
AND
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
ARTICLES OF EXCHANGE entered into this ___ day of ___________, 2001, by
and between Citizens, Inc., a Colorado corporation ("Citizens") and Lifeline
Underwriters Life Insurance Company, a Texas corporation ("Lifeline").
THIS IS TO CERTIFY:
FIRST: The parties which are parties to these Articles of Exchange are
Lifeline Underwriters Life Insurance Company, a Texas corporation and Citizens,
Inc., a Colorado corporation, and each of said corporations agrees to have the
$1.00 par value common stock of Lifeline (hereinafter the "Common Stock")
acquired by Citizens in a share exchange (the "Exchange") as provided by these
Articles of Exchange.
SECOND: The name and state of incorporation of each party to these
Articles of Exchange are as follows: Lifeline Underwriters Life Insurance
Company is a corporation incorporated under the laws of the State of Texas, and
Citizens, Inc. is a corporation incorporated under the laws of the State of
Colorado.
THIRD: As to the Common Stock:
A. On the Effective Date (as defined in Article TENTH below), each one
share of the Common Stock of Lifeline issued and outstanding immediately prior
thereto shall automatically be converted into and shall be exchanged for
________ shares of the Citizens' Class A Common Stock subject to D. below.
B. Upon the Effective Date, each holder of a certificate or
certificates representing shares of Common Stock, upon presentation and
surrender of such certificate or certificates to the exchange agent for
Citizens, shall be entitled to receive the consideration set forth in this
Article THIRD, except that holders of those shares as to which dissenters'
rights shall have been asserted and perfected pursuant to Texas law shall not be
converted into shares of Citizens' Common Stock, but shall represent only such
rights as are perfected under the Texas Business Corporation Act. Upon such
presentation, surrender and exchange as provided in this Article THIRD,
certificates representing shares of Common Stock previously held shall be
canceled. Until so presented and surrendered, each certificate or certificates
which represented issued and outstanding shares of Common Stock at the Effective
Date shall be deemed for all purposes to evidence the right to receive the
consideration set forth in this Article THIRD. If the certificate or
certificates representing shares of Common Stock have been lost, stolen,
mutilated or destroyed, the exchange agent of Citizens shall require the
submission of an indemnity agreement and may require the submission of a bond in
lieu of such certificate.
C. The stock transfer books of Lifeline shall be closed on the
Effective Date, and thereafter no transfers of the Lifeline Common Stock will be
made.
B-15
D. No fractional shares of Citizens' Class A Common Stock will be
issued as a result of the Exchange. In the event the exchange of shares results
in any shareholder being entitled to a fraction less than whole share of
Citizens' Class A Common Stock, such fraction will be rounded up to the nearest
whole share.
FOURTH: A Plan and Agreement of Exchange between Citizens and Lifeline
has been approved by the boards of directors of Citizens and Lifeline and the
requisite vote of shareholders of Lifeline. Approval by shareholders of Citizens
is not required.
FIFTH: The Board of Directors of Lifeline by [minutes at the
__________, 2001 meeting or by unanimous written action signed by all of the
directors] duly authorized and adopted a resolution declaring that the Plan and
Agreement of Exchange as herein set forth and the performance of its terms is
duly authorized and advisable and directing that these Articles of Exchange be
submitted for action thereon by the shareholders of Lifeline, all in the manner
and by the vote required by the Texas Business Corporation Act and the Articles
of Incorporation of Lifeline.
SIXTH: At a meeting of common shareholders of Lifeline held on
________, 2001, _______ shares were outstanding and entitled to vote on the
matters set forth in these Articles of Exchange. ________ shares voted in favor
of the Plan and Agreement of Exchange and ______ shares voted against the Plan
and Agreement of Exchange; ________ shares abstained. The number of shares
voting on the Plan and Agreement of Exchange was sufficient for approval by the
common shareholders.
SEVENTH: The Board of Directors of Citizens by [minutes at the
________, 2001 meeting or by unanimous written action signed by all of the
directors] duly authorized and adopted a resolution declaring that the Plan and
Agreement of Exchange as herein set forth and the performance of its terms is
duly authorized and advisable, all in the manner and by the vote required by the
Colorado Business Corporation Act and the Articles of Incorporation of Citizens.
EIGHTH: An executed Plan and Agreement of Exchange is on file at the
principal place of business of Citizens located at 400 E. Anderson Lane, Austin,
Texas 78752.
NINTH: A copy of the Plan and Agreement of Exchange will be furnished
by each surviving, acquiring or new domestic or foreign corporation or other
entity, on written request and without charge, to any shareholder of Lifeline.
TENTH: The Exchange provided for by these Articles of Exchange shall
become effective at the time of filing the last document required by law (the
"Effective Date").
ELEVENTH: The name and address of the Registered Agent and principal
office of the acquiring entity is:
Agent: Principal Office:
------------------ ---------------
- ------------------------ --------------------------------
- ------------------------ --------------------------------
- ------------------------ --------------------------------
B-16
IN WITNESS WHEREOF, Citizens and Lifeline, parties to these Articles of
Exchange, have caused these Articles of Exchange to be signed and acknowledged
by its Chairman and attested by the Secretary all as of the ________ day of
_________________, 2001.
ATTEST: LIFELINE UNDERWRITERS LIFE
INSURANCE COMPANY
By:
- ------------------------------ -----------------------
Gary C. Cole, President
ATTEST: CITIZENS, INC.
By:
- ------------------------------ -----------------------
Mark A. Oliver, President
B-17
EXHIBIT B
LIFELINE DISCLOSURE STATEMENT
Pursuant to the provisions of Article III of the Plan and Agreement of
Exchange ("Agreement") by and between Lifeline and Citizens, Lifeline hereby
makes the following disclosures respecting the similarly numbered sections in
the Agreement:
(No Additional Disclosure Required)
B-18
EXHIBIT C
CITIZENS DISCLOSURE STATEMENT
Pursuant to the provisions of Article IV of the Plan and Agreement of
Exchange ("Agreement") by and between Citizens and Lifeline, Citizens hereby
makes the following disclosures respecting the similarly numbered sections in
the Agreement:
4.2 Citizens filed a Form S-3 ("Statement") Registration Statement
under the Securities Act of 1933 with the Securities and Exchange Commission
("SEC") which became effective on August 30, 2001. The Statement registers
2,000,000 shares of Citizens Class A Common Stock for sale to the public through
the Citizens, Inc. Stock Investment Plan ("the Plan"), the creation of which is
included in the Statement. Although the Statement by definition registers shares
for sale to the public, the activities of the Plan involve the acquisition of
Citizens Class A Common Stock through the public market, rather than directly
from the public. The Plan provides for the participation by owners of insurance
policies issued by the Citizens' subsidiaries, existing holders of Citizens
Class A Common Stock, employees of Citizens, Inc., members of the marketing
force of any of Citizens' subsidiaries, or any member of the public in general
who elects to participate. The Plan is sponsored by Citizens, Inc. and will be
administered by Mellon Bank.
4.7 Delia Bolanos Andrade, Luis Martin Tapia Alberti, Sonio Lucia
Montoya Botero, Luisa F. Botero and Carlos A Botero, Roberto Carlos Paniagua
Cardona, Luis Rberto Paniagua Grisales, Blanca Numbia Cardona, and Fernando
Hakim Daccach v. Citizens Insurance Company of America, Citizens, Inc., Negocios
Savoy, S.A., Harold E. Riley, and Mark A. Oliver, Cause Number 99-09099 Travis
County, Texas. A lawsuit seeking class action status with Fernando Hakim as the
class representative and naming a class of all persons who made premium payments
who are not residents of the United States as potential members of the class.
The suit alleges that the policies are unregistered securities in violation of
the Texas Blue Sky laws. In addition, the other plaintiffs made individual
claims primarily under the Texas Deceptive Trade Practices Act. The DTPA claims
relate to limitations and exclusions stated in the policies, excessive surrender
charges stated in the policies, and the amount of premiums charged. The
individual claimants also claim breach of contract (failure to provide the
insurance as represented, not alleged but stated), fraud in the inducement,
negligent misrepresentation, breach of duty of good faith and fair dealing. The
plaintiffs have filed a motion for class certification. Defendants have filed an
answering motion denying that the case is properly certifiable. Additionally, a
motion for summary judgment has been filed by defendants on the issue of whether
insurance policies issued to members of the putative class are unregistered
securities in violation of the Texas Blue Sky laws. A hearing was held on
October 16, 2001, regarding defendants' motion for summary judgment. On October
29, 2001, a hearing on the Class Certification was held.
Velma U Bayhi and David Bayhi v. Donald G. Welsh, Funeral Homes of
Louisiana, Inc. dba Baker Funeral Home, Citizens, Inc., Lumbermens Mutual
casualty Company and Kemper Insurance Companies, Cause number 468864 division M
in the 19th District Court, Parish of East Baton Rouge, Louisiana. The funeral
home is a subsidiary of Citizens Insurance Company of America. Mrs. Bayhi is
making a claim for injuries from a collision between a hearse driven by Mr.
Welsh and her stalled car. The hearse was insured with Lumbermens through
Kemper. Mr. Bayhi also claims that he suffered emotional distress because he
observed the crash. Kemper is defending Baker Funeral Home in this matter.
B-19
George M. Campbell v. American Liberty Life Insurance Company, Case
number 94-1625. Originally filed in the Parish of Ouachita, Louisiana in
1994--re-filed in 1998. Mr. Campbell had a hospitalization policy covering
cancer. He filed a claim for two hospital stays at a V. A. hospital, but did not
submit any bills from the hospital. The claim was denied because the policy
required that the hospital provide services "...for compensation from its
patients...." There was no activity in the case, until July, 2001, when
defendant received a Request for Production of a certified copy of Mr.
Campbell's policy.
Juanita Hall v. Citizens Insurance Company of America and Rex Beverly,
Civil Action Number CV 99-190, Marengo County, Alabama. Mrs. Hall claims that
Rex Beverly and Assured Investors Life Insurance Company misrepresented the
death benefit payable upon her husband's death. Following defendant's motion for
summary judgment the court dismissed all tort claims and left open only a
contract claim that the amount of the death benefit paid was incorrect. A
rehearing was granted, however plaintiff's motion was denied.
Velma Jenkins v. United Security Life Insurance Company, Jack Lane, and
fictitious defendants. Filed as Cause Number 2001-142 in the Circuit Court of
Noxubee County, Mississippi and removed to the United States District Court for
the Southern District of Mississippi Eastern Division as Civil Action Number
4:01-CV-156LN. Remanded to County Court and all claims above $75,000 have been
dismissed with prejudice. Plaintiff alleges that she intended to purchase a
supplement to her major medical insurance coverage, but was sold a
hospitalization policy. Plaintiff alleges that the agent and the insurance
company engaged in a pattern and practice of misrepresentation and fraud as to
the benefits and coverage on policies sold to consumers in the State of
Mississippi. Plaintiff made claims under her policy for medication and for out
patient treatments all of which were denied because the policy covered
hospitalization. Plaintiff filed Interrogatories and Requests for Production
with her original complaint. No hearings have been set.
Mary Hart Whittington, Mayoda C. Parker, Sharon P. Browning, Patricia
M. Brown, Mary Catherine Rawles, and Barry Maricelli v. Citizens Insurance
Company of America f/k/a United Security Life Insurance Company, American
Investment Network f/k/a Great American Investment Network, Larry T. Reynolds,
Virgil Styles, and Jesse L. Byrd. Cause number 251-01-713CIV, filed in the
Circuit Court of the First Judicial District of Hinds County, Mississippi.
Plaintiffs allege that the whole-life nature of the insurance policies was
misrepresented to them as an investment because the policies would pay
dividends. The plaintiff's allege fraud, negligent misrepresentation,
negligence, civil conspiracy, breach of contract, conversion, and violation of
Mississippi Securities laws.
B-20
EXHIBIT D
APPROVALS REQUIRED BY LAW
1. Texas Insurance Department
2. U.S. Securities and Exchange Commission
(approval not required; however, must declare Registration Statement
Effective)
3. Colorado Division of Insurance
(approval not required; however, notice required pursuant to Form B)
B-21
EXHIBIT E
_____________, 2001
Citizens, Inc.
Citizens Insurance Company of America
400 East Anderson Lane
Austin, Texas 78752
Re: Plan and Agreement of Exchange between Citizens, Inc. and
Lifeline Underwriters Life Insurance Company
Ladies and Gentlemen:
We have acted as counsel to Lifeline Underwriters Life Insurance
Company ("Lifeline") in connection with the above referenced agreement. This
letter is provided to you pursuant to Paragraph 7.6(3) of the Plan and Agreement
of Exchange, dated as of ____________________, 2001 (the "Agreement"), between
Citizens, Inc. ("Citizens") and Lifeline. Except as otherwise indicated herein,
capitalized terms used in this letter are defined as set forth in the Agreement
or the Accord (see below).
This letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be read in
conjunction therewith.
Our opinions are limited in all respects to the substantive law of the
State of Texas, and the federal law of the United States, and we assume no
responsibility as to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction.
We have relied upon factual representations made by Lifeline in Article
III of the Agreement and we have reviewed such documents and given consideration
to such matters of law and fact as we have deemed appropriate to render this
opinion. We have been furnished with, and examined originals or copies,
certified or otherwise identified to our satisfaction, of all such records of
Lifeline, agreements and other instruments, certificates of officers and
representatives of Lifeline, certificates of public officials, and other
documents, as we have deemed necessary or desirable as a basis for the opinions
hereinafter expressed. As to questions of fact material to such opinions, we
have, where relevant facts were not independently verified or established,
relied upon certificates of officers of Lifeline.
Based upon and subject to the foregoing and the other qualifications
and limitations stated in this letter, we are of the opinion that:
1. To our knowledge, execution, delivery and performance of the
Agreement by Lifeline shall not result in a breach of, or constitute a default
(or an event which, with or without notice or lapse of time or both, would
constitute a default) under any contract, commitment, agreement, indenture,
mortgage, pledge
B-22
agreement, note, bond, license, or other instrument or obligation to which
Lifeline is a party or by which Lifeline is bound or the charter or bylaws of
Lifeline or other governing instruments of Lifeline.
2. The Agreement has been duly authorized, executed and delivered by
Lifeline and is a legal, valid and binding obligation of Lifeline enforceable
against Lifeline in accordance with its terms (subject to the applicability of
equitable principles or the effect of bankruptcy or creditors' rights laws on
the enforceability of the Agreement);
3. Lifeline is a Texas insurance corporation validly existing and in
good standing under the laws of the State of Texas;
4. Lifeline has full corporate power and authority to enter into the
Agreement and to carry out the transactions contemplated by the Agreement;
5. To our knowledge, there are no civil or criminal actions, suits,
arbitrations, administrative or other proceedings or governmental investigations
pending or threatened against Lifeline which will constitute a breach of the
representations, warranties or covenants under the Agreement or will prevent
Lifeline from consummating the transactions contemplated by the Agreement;
6. The authorized and, to our knowledge, outstanding capital stock of
Lifeline is as stated in Section 3.3 of the Agreement.
7. To our knowledge, except as set forth in the Agreement or Lifeline
Disclosure Statement, there are no outstanding subscriptions, options, warrants,
rights, convertible securities, calls, commitments, privileges or other
arrangements, preemptive or contractual, calling for or requiring the
acquisition of, or the issuance, transfer, sale or other disposition of any
shares of the capital stock of Lifeline, or calling for or requiring the
issuance of any securities or rights convertible into or exchangeable for shares
of capital stock of Lifeline; and
8. The execution, delivery, and performance of the Agreement, and the
performance by Lifeline of its obligations thereunder, are not in contravention
of any law, ordinance, rule or regulation of Texas or of the United States and
will not contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having jurisdiction, and
will not cause the suspension or revocation of any authorization, consent,
approval, or license presently in effect, which affects or binds Lifeline or any
of its material properties, and will not have a material adverse effect on the
validity of the Agreement or on the validity of the consummation of the
transactions contemplated by the Agreement or constitute grounds for the loss or
suspension of any permits, licenses, or other authorizations used in the
business of Lifeline.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated. This opinion is
rendered pursuant to Section 7.6(3) of the Agreement and, to the extent, if any,
that the law of the State of Texas permits you to rely upon it, it is to be
limited in its use to reliance by you in consummating the transactions described
herein and no other person or entity may rely or claim reliance upon this
opinion.
B-23
This opinion is rendered as of the date hereof, and we undertake no,
and hereby disclaim any, obligation to advise you of any changes in or new
developments which might affect any matters or opinions set forth herein.
The use of the words "to our knowledge" means that during the course of
our current and past representation of Lifeline no information has come to the
attention of the attorneys involved in the transaction described herein that
could give any such attorney actual knowledge of the existence of the documents
or facts so qualified. Except as set forth herein, this Firm has not undertaken
any investigation to determine the existence of such documents or facts, and no
inference as to our knowledge thereof shall be drawn from the fact of our
representation of any party or otherwise.
Very truly yours,
Sneed Vine & Perry P.C.
B-24
EXHIBIT F
AFFILIATE AGREEMENT
Citizens, Inc.
400 East Anderson Lane
Austin, Texas 78752
Ladies and Gentlemen:
I have been advised that I have been identified as a possible
"affiliate" of Lifeline Underwriters Life Insurance Company, a Texas corporation
(the "Company"), as that term is defined for purposes of paragraphs (c) and (d)
of Rule 145 of the General Rules and Regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933 (the "Securities Act"), although nothing contained herein
should be construed as an admission of such fact.
Pursuant to the terms of that certain Plan and Agreement of Exchange,
dated as of _______________, 2001 (the "Exchange Agreement"), between the
Company and Citizens, Inc., a Colorado corporation ("Citizens"), Citizens shall
acquire all of the issued and outstanding $1.00 par value common stock of the
Company ("Company Stock") for shares of no par value Class A Common Stock of
Citizens ("Citizens Stock") pursuant to a share exchange (the "Exchange"). As a
result of the Exchange, I will receive shares of Citizens Stock in exchange for
shares of Company Stock owned by me on the Effective Date (as defined in the
Exchange Agreement) of the Exchange as determined pursuant to the Exchange
Agreement.
A. In connection therewith, I represent, warrant and agree that:
1. I will not make any sale, transfer or other disposition of
Citizens Stock I receive as a result of the Exchange in violation of the
Securities Act or the Rules and Regulations.
2. I have been advised that the issuance of Citizens Stock to
me as a result of the Exchange has been registered with the Commission under the
Securities Act on a Registration Statement on Form S-4. However, I have also
been advised that, because at the time the Exchange was submitted for a vote of
the stockholders of the Company I may have been an "affiliate" of the Company,
and the distribution by me of the shares of Citizens Stock I receive as a result
of the Exchange has not been registered under the Securities Act, such shares
must be held by me indefinitely unless (i) such distribution of such shares has
been registered under the Securities Act, (ii) a sale of such shares is made in
conformity with the provisions of Rule 145 promulgated by the Commission under
the Securities Act or (iii) such sale is pursuant to a transaction which, in the
opinion of counsel reasonably satisfactory to Citizens or as described in a
"no-action" or interpretive letter from the staff of the Commission, is not
required to be registered under the Securities Act.
3. I have carefully read this letter and the Exchange
Agreement and have discussed the requirements of the Exchange Agreement and
other limitations upon the sale, transfer or other disposition
B-25
of the shares of Citizens Stock to be received by me, to the extent I have felt
necessary, with my counsel or with counsel for the Company.
B. Furthermore, in connection with the matters set forth herein, I
understand and agree that:
1. Citizens is under no further obligation to register the
sale, transfer or other disposition of the shares of Citizens Stock received by
me as a result of the Exchange or to take any other action necessary in order to
make compliance with an exemption from registration available, except as set
forth in paragraph C below.
2. Stop transfer instructions will be given to the transfer
agent of Citizens with respect to the shares of Citizens Stock I will receive as
a result of the Exchange, and there will be placed on the certificates
representing such shares, or any certificates delivered in substitution
therefor, a legend stating in substance:
The shares represented by this certificate were issued in a
transaction to which Rule 145 under the Securities Act of 1933
applies. The shares represented by this certificate may be
transferred only in accordance with the terms of an agreement
dated ____ , 2001 between the registered holder hereof and
Citizens, Inc., a copy of which agreement is on file at the
principal offices of Citizens, Inc.
3. Unless the transfer by me of my shares of Citizens Stock is
a sale made in conformity with the provisions of Rule 145 of the Rules and
Regulations or made pursuant to a registration under the Securities Act,
Citizens reserves the right to put on the certificates issued to my transferee a
legend stating in substance:
The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired
by the holder not with a view to, or for resale in connection
with, any distribution thereof within the meaning of the
Securities Act of 1933 and may not be sold, pledged or
otherwise transferred except pursuant to a registration
statement or in accordance with an exemption from the
registration requirements of the Securities Act of 1933.
It is understood and agreed that the legends set forth above shall be
removed, and substitute certificates shall be delivered without any such legend,
and the transfer agent will be instructed to effectuate transfers of shares of
Citizens Stock if the undersigned delivers to Citizens a letter from the staff
of the Commission or an opinion of counsel in form and substance reasonably
satisfactory to Citizens to the effect that such legend is not required for the
purposes of the Securities Act.
C. By Citizens's acceptance of this letter, Citizens hereby agrees with
me as follows:
1. For so long as and to the extent necessary to permit me to
sell the Citizens Stock pursuant to Rule 145 and, to the extent applicable, Rule
144 under the Act, Citizens will: (a) use its reasonable efforts to (i) file, on
a timely basis, all reports and data required to be filed with the Commission
B-26
by it pursuant to Section 13 of the Securities Exchange of 1934, as amended (the
"1934 Act"), and (ii) furnish to me upon request a written statement as to
whether Citizens has complied with such reporting requirements during the 12
months preceding any proposed sale of the Citizens Stock by me under Rule 145;
and (b) otherwise use its reasonable efforts to permit such sales pursuant to
Rule 145 and Rule 144. Citizens hereby represents to me that it has filed all
reports required to be filed with the Commission under Section 13 of the 1934
Act during the preceding 12 months.
2. It is understood and agreed that certificates with the
legends set forth in paragraphs B.2. and B.3. above will be substituted by
delivery of certificates without such legend if (i) one year shall have elapsed
from the date the undersigned acquired the Citizens Stock received in the
Exchange and the provisions of Rule 145(d)(2) are then available to the
undersigned, (ii) two years shall have elapsed from the date the undersigned
acquired the Citizens Stock received in the Exchange and the provisions of Rule
145(d)(3) are then applicable to the undersigned, or (iii) Citizens has received
either an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to Citizens, or a "no action" letter obtained by the undersigned
from the staff of the Commission, to the effect that the restrictions imposed by
Rule 145 under the Act no longer apply to the undersigned.
Very truly yours,
Date: [Name of Affiliate]
----------------------------
ACCEPTED:
CITIZENS, INC.
By:
------------------------------
Mark A. Oliver, President
Date:
----------------------------
B-27
EXHIBIT G
_____________, 2001
Lifeline Underwriters Life Insurance Company.
307 N. Glenwood
Tyler, Texas 75702
Re: Plan and Agreement of Exchange between Citizens, Inc. and
Lifeline Underwriters Life Insurance Company
Ladies and Gentlemen:
We have acted as counsel to Citizens, Inc. ("Citizens") in connection
with the above referenced agreement. This letter is provided to you pursuant to
Paragraph 7.7(2) of the Plan and Agreement of Exchange, dated as of
____________________, 2001 (the "Agreement") between Citizens, Inc. ("Citizens")
and Lifeline Underwriters Life Insurance Company ("Lifeline"). Except as
otherwise indicated herein, capitalized terms used in this letter are defined as
set forth in the Agreement or the Accord (see below).
This letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be read in
conjunction therewith.
In giving the opinion expressed below, insofar as such opinion relates
to other than Federal law or the laws of jurisdiction other than the State of
Colorado, we advise that our opinion is with respect to Federal law and the laws
of the State of Colorado only and that, to the extent such opinion is derived
from laws of other jurisdictions, the statements are based on examinations of
relevant authorities and are believed to be correct, but we have obtained no
legal opinions as to such matters from attorneys licensed to practice in such
other jurisdictions. Accordingly, the law covered by the opinion expressed
herein is limited to the Federal law of the United States and the law of the
State of Colorado.
We have relied upon factual representations made by Citizens in Article
IV of the Agreement and we have reviewed such documents and given consideration
to such matters of law and fact as we have deemed appropriate to render this
opinion. We have been furnished with, and examined originals or copies,
certified or otherwise identified to our satisfaction, of all such records of
Citizens, agreements and other instruments, certificates of officers and
representatives of Citizens, certificates of public officials, and other
documents, as we have deemed necessary or desirable as a basis for the opinions
hereinafter expressed. As to questions of fact material to such opinions, we
have, where relevant facts were not independently verified or established,
relied upon certificates of officers of Citizens.
Based upon and subject to the foregoing and the other qualifications
and limitations stated in this letter, we are of the opinion that:
B-28
1. To our knowledge, execution, delivery and performance of the
Agreement by Citizens shall not result in a breach of, or constitute a default
(or an event which, with or without notice or lapse of time or both, would
constitute a default) under any contract, commitment, agreement, indenture,
mortgage, pledge agreement, note, bond, license, or other instrument or
obligation to which Citizens is a party or by which Citizens is bound or the
charter or bylaws of Citizens or other governing instruments of Citizens.
2. The Agreement has been duly authorized, executed and delivered by
Citizens and is a legal, valid and binding obligation of Citizens enforceable
against Citizens in accordance with its terms (subject to the applicability of
equitable principles or the effect of bankruptcy or creditors' rights laws on
the enforceability of the Agreement);
3. Citizens is a Colorado corporation validly existing and in good
standing under the laws of the State of Colorado;
4. Citizens has full corporate power and authority to enter into the
Agreement and to carry out the transactions contemplated by the Agreement;
5. To our knowledge, there are no civil or criminal actions, suits,
arbitrations, administrative or other proceedings or governmental investigations
pending or threatened against Citizens which will constitute a breach of the
representations, warranties or covenants under the Agreement or will prevent
Citizens from consummating the transactions contemplated by the Agreement;
6. The authorized and, to our knowledge, outstanding capital stock of
Citizens is as stated in Section 4.2 of the Agreement;
7. To our knowledge, except as set forth in the Agreement or Citizens'
Disclosure Statement, there are no outstanding subscriptions, options, warrants,
rights, convertible securities, calls, commitments, privileges or other
arrangements, preemptive or contractual, calling for or requiring the
acquisition of, or the issuance, transfer, sale or other disposition of any
shares of the capital stock of Citizens, or calling for or requiring the
issuance of any securities or rights convertible into or exchangeable for shares
of capital stock of Citizens; and
8. The execution, delivery, and performance of the Agreement, and the
performance by Citizens of its obligations thereunder, are not in contravention
of any law, ordinance, rule or regulation of Colorado or of the United States
and will not contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having jurisdiction, and
will not cause the suspension or revocation of any authorization, consent,
approval, or license presently in effect, which affects or binds Citizens or any
of its subsidiaries or any of their material properties, and will not have a
material adverse effect on the validity of the Agreement or on the validity of
the consummation of the transactions contemplated by the Agreement or constitute
grounds for the loss or suspension of any permits, licenses, or other
authorizations used in the business of Citizens.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated. This opinion is
rendered pursuant to Section 7.7(2) of the Agreement and, to the extent, if any,
that the law of the State of Colorado permits you to rely upon it, it is to be
limited
B-29
in its use to reliance by you in consummating the transactions described herein
and no other person or entity may rely or claim reliance upon this opinion.
This opinion is rendered as of the date hereof, and we undertake no,
and hereby disclaim any, obligation to advise you of any changes in or new
developments which might affect any matters or opinions set forth herein.
The use of the words "to our knowledge" means that during the course of
our current and past representation of Citizens and our past representation of
Citizens no information has come to the attention of the attorneys involved in
the transaction described herein that could give any such attorney actual
knowledge of the existence of the documents or facts so qualified. Except as set
forth herein, this Firm has not undertaken any investigation to determine the
existence of such documents or facts, and no inference as to our knowledge
thereof shall be drawn from the fact of our representation of any party or
otherwise.
Very truly yours,
Jones & Keller, P.C.
B-30
EXHIBIT H
_____________, 2001
Lifeline Underwriters Life Insurance Company.
307 N. Glenwood
Tyler, Texas 75702
Re: Plan and Agreement of Exchange between Citizens, Inc. and
Lifeline Underwriters Life Insurance Company
Ladies and Gentlemen:
Our opinions as expressed below are based solely upon: (1) the
information contained in the Proxy-Information Statement dated
_______________________ (hereafter "Proxy Statement") as filed with the
Securities and Exchange Commission; (2) the Plan and Agreement of Exchange ("the
Plan") dated __________________ between Citizens, Inc. ("Citizens") and Lifeline
Underwriters Life Insurance Company ("Lifeline"), together with Exhibits
thereto; (3) the Marketing Development Agreement dated __________ between
Lifeline, Combined Underwriters Life Insurance Company and the Red Little
Combined Agency, Inc. (the "Agency"); (4) relevant information provided by the
principals; (5) the Internal Revenue Code of 1986, as amended (hereinafter
"IRC"), the regulations promulgated thereunder and the current administrative
positions of the Internal Revenue Service ("IRS") contained in published Revenue
Rulings and Revenue Procedures; and (7) existing judicial decisions. All of the
above are subject to change or modification by subsequent legislative,
regulatory, administrative or judicial decisions which could adversely affect
our opinions.
This letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be read in
conjunction therewith.
"Exchange" refers to the transaction set forth in the Plan. Capitalized
terms herein have the same meaning as in the Plan.
Shareholders residing or conducting business in foreign countries,
states or municipalities having tax laws could be required to pay tax with
respect to transactions in that country, state or municipality. We do not
express any opinion as to foreign, state or local tax consequences of the
Exchange. We do not express any opinion regarding alternative minimum tax
consequences of the Exchange to any shareholder.
The consequences described herein are not applicable to nonresident
aliens, to foreign corporations, to debtors under the jurisdiction of a court in
a case under Title 11 of the United States Code or in a receivership,
foreclosure, or similar proceeding, to shareholders that are real estate
investment trusts, to shareholders that are regulated investment companies, to
shareholders that are tax exempt persons, to shareholders that are persons that
hold their Lifeline Common Stock as part of a position in a "straddle" or as
part of a "hedging" or other integrated transaction, to shareholders that are
investment companies within
B-31
the meaning of IRC Section 351(e), to shareholders who are dealers in
securities, to shareholders who do not hold their common stock as capital
assets, to shareholders who are financial institutions, or to sharehold ers who
acquired or will acquire their shares in connection with stock option or stock
purchase plans or in other compensatory transactions.
The principal reasons for the Exchange can be summarized as follows:
(1) to become part of a combined entity with greater financial
strength and an enhanced competitive position as compared to the
separate entities;
(2) to achieve improved capitalization and economies of scale;
and
(3) to provide greater liquidity and diversity to Lifeline
shareholders.
This letter is conditioned on the accuracy of the factual information,
assumptions and representations contained in the Proxy Statement and provided by
Citizens and Lifeline, including the principal reasons for the Exchange
expressed above and the following:
(1) that Citizens and Lifeline, in arriving at the method used
to determine the number of shares of Citizens Class A Common Stock to
be received by each Lifeline shareholder, attempted in good faith to
value the Lifeline Common Stock to be transferred and to value the
Citizens Class A Common Stock to be Exchanged for such Lifeline Common
Stock in an effort to ensure that each shareholder receiving Citizens
Class A Common Stock pursuant to the Exchange received a number of
shares of such stock approximately equal in value to the Lifeline
Common Stock exchanged therefor;
(2) that Lifeline has no plan or intention to issue additional
shares of its stock that would result in Citizens losing control of
Lifeline within the meaning of Section 368(c) of the IRC;
(3) that none of Citizens, Lifeline, any entity related
thereto, or shareholder thereof, have any plan or intention to redeem
or otherwise reacquire any Citizens Class A Common Stock to be issued
to Lifeline shareholders in the Exchange, and will not so redeem or
otherwise reacquire such stock;
(4) that Citizens has no plan or intention to liquidate
Lifeline; to merge Lifeline with or into another corporation; to cause
Lifeline to sell or otherwise dispose of any of its assets, except for
dispositions made in the ordinary course of business; or to sell or
otherwise dispose of the stock of Lifeline except for transfers
described in Section 368(a)(2)(C) of the IRC;
(5) that following the Exchange, Citizens will continue the
historic business of Lifeline or use a significant portion of its
historic business assets in a business;
(6) that Citizens and Lifeline will assume and pay their
respective reorganization expenses, if any, incurred in connection with
the Plan and Exchange;
B-32
(7) that there is no corporate indebtedness between Citizens
or Lifeline that was issued, acquired or will be settled at a discount;
(8) that in the Exchange, shares of Lifeline Common Stock will
be exchanged solely for Citizens Class A voting Common Stock, with
Citizens thereby obtaining control of Lifeline as defined in Section
368(c) of the IRC;
(9) that on the Effective Date of the Exchange, Lifeline will
not have outstanding any warrants, options, convertible securities or
any other type of right pursuant to which any person could acquire
stock in Lifeline that, if exercised or converted, would affect
Citizens' acquisition or retention of control of Lifeline, as defined
in Section 368(c) of the IRC;
(10) that Citizens does not own, nor has it owned during the
past five (5) years, directly or indirectly, any shares of Lifeline
stock;
(11) that neither Citizens nor Lifeline are investment
companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the IRC;
(12) that neither Citizens nor Lifeline are under the
jurisdiction of a court in a Title 11 or similar case within the
meaning of IRC Section 368(a)(3) (A);
(13) that the Exchange will be consummated and qualify as a
statutory exchange in full compliance with Texas law and will be
consummated in accordance with the terms of the Plan;
(14) that in the event more than 2.5 percent of the
shareholders of Lifeline dissent to the Exchange, Citizens would
exercise its option not to proceed with the Exchange (as permitted
under the Plan) and the Exchange consequently would not be consummated;
(15) that no Lifeline Common Stock will be acquired for
consideration other than solely Citizens Class A Common Stock. For
purposes of this representation, Lifeline Common Stock redeemed for
cash or other property furnished by Citizens will be considered as
acquired by Citizens. Further, no liabilities of Lifeline or the
Lifeline shareholders will be assumed by Citizens, nor will any of the
Lifeline Common Stock be subject to any liabilities;
(16) that Citizens will not assume nor repay any Lifeline debt
guaranteed by Lifeline shareholders nor will Citizens assume or repay
any outstanding loans between Lifeline and its shareholders;
(17) that no compensation or agreement for services received
by any shareholder of Lifeline, or any entity related to a Lifeline
shareholder, will be separate consideration for, or allocable to, any
of their shares of Lifeline Common Stock; no shares of Citizens Class A
Common Stock received by any Lifeline shareholder, or any entity
related to any Lifeline shareholder, will be separate consideration
for, or allocable to, any employment agreement or compensation
agreement; and the compensation paid to any Lifeline shareholder, or
any entity related to a Lifeline shareholder, will be for services
actually performed and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services;
B-33
(18) that Lifeline will pay its dissenting shareholders the
value of their Lifeline Common Stock out of its own funds. No funds
will be supplied or are required to be supplied (by law or otherwise)
for that purpose, directly or indirectly, by Citizens, nor will
Citizens, directly or indirectly, reimburse Lifeline for any payments
to dissenters;
(19) that on the Effective Date of the Exchange, the fair
market value of the assets of Lifeline will exceed the sum of its
liabilities plus the liabilities, if any, to which its assets are
subject;
(20) that the Marketing Development Allowance Agreement (the
"MDA Agreement") between Lifeline, Combined Underwriters Life Insurance
Company and the Red Little Lifeline Combined, Inc. ("Agency") was
negotiated at arms-length; that the consideration to be paid by
Lifeline to the Agency pursuant to the MDA Agreement will be for
services actually to be performed and is reasonable in light of the
services to be performed and the benefit to Lifeline and Citizens of
retaining the Agency to preserve and increase the business in force
issued by Lifeline;
(21) that Lifeline has sufficient cash-flow to make payments
required to be made to the Agency pursuant to the MDA Agreement; and
(22) that Citizens will not render Lifeline unable to honor
its payments under the MDA Agreement such that Citizens would be
required to make payments thereunder.
We have relied on the truthfulness and accuracy of certificates of
officers of Lifeline and Citizens regarding the above factual information,
assumptions and representations. In the course of our representation of Citizens
in connection with the transaction described herein, no facts have come to our
attention that would give us actual knowledge that the certificates are not
accurate. However, we have not undertaken any independent investigation to
verify the accuracy of such factual information, assumptions and
representations, and no inference as to our knowledge thereof shall be drawn
from the fact of our representation of any party or otherwise.
In rendering an opinion on the federal income tax consequences of such
a transaction, reasonable steps have been taken to assure that all material tax
issues are considered in light of the facts, and that all of such issues
involving a reasonable possibility of challenge by the IRS are fully and fairly
addressed. A "material tax issue" includes any tax issue that could have a
significant impact (either beneficial or adverse) on any Lifeline shareholder
participating in the Exchange under any reasonably foreseeable circumstances.
The opinions expressed below are rendered only with respect to the
specific matters described herein, and we express no opinion with respect to any
other federal income tax aspects of the Exchange. Should any of the facts,
circumstances or assumptions specified herein be subsequently determined
incorrect or inaccurate, our conclusions may vary from those set forth below and
such variance could be material. In addition, we do not opine as to the taxable
or nontaxable status of any previous transactions not considered to be part of
the Exchange.
Accordingly, in our opinion, the material tax consequences of the
Exchange are as follows:
(1) The Exchange will constitute a reorganization within the
meaning of IRC Section 368(a)(1)(B) and Citizens and Lifeline will each
be a "party to a reorganization" within the meaning
B-34
of IRC Section 368(b). No gain or loss will be recognized by the
shareholders of Lifeline upon the exchange of their shares of Lifeline
Common Stock for shares of Citizens Class A Common Stock. IRC Section
354(a).
(2) The tax basis of the shares of Citizens Class A Common
Stock received by a shareholder of Lifeline will be the same as the
basis of the Lifeline Common Stock surrendered by that shareholder in
the Exchange. IRC Section 358(a); IRC Regulation Section 1.358-1(a).
(3) The holding period of the shares of Citizens Class A
Common Stock received by a shareholder of Lifeline will include the
period during which such shareholder held the Lifeline Common Stock
exchanged therefor, to the extent that such stock was held by the
shareholder as a capital asset on the date of the consummation of the
Exchange. IRC Section 1223(1).
(4) Cash received by Lifeline shareholders who properly
exercise their dissenters' rights will be treated as having been
received in redemption of the shares so cashed out, and may result in
taxable gain or loss, measured by the difference (if any) between the
amount of cash received and such shareholder's basis in the Lifeline
Common Stock. Provided the shares were held as capital assets at the
time of the redemption, such gain or loss will constitute capital gain
or loss, and such gain or loss will be long term capital gain or loss
if the holding period for such shares was greater than one year. It is
possible, that for some Lifeline shareholders, the distribution of cash
may be treated as a dividend taxable as ordinary income. IRC Sections
302, 301.
(5) No material gain or loss will be recognized by Citizens or
Lifeline as a result of the Exchange. IRC Sections 361 and 1032.
(6) Section 382 limits the Net Operating Loss carryover of a
company following an ownership change. Lifeline will be deemed to have
an ownership change. After an ownership change, the amount of income
that a corporation may offset each year by Net Operating Losses that
occurred before the change is generally limited to an amount determined
by multiplying the value of the equity of the corporation immediately
prior to this change by the federal long-term tax exempt rate in effect
on the date of the change. Any unused limitation may be carried forward
and added to the next year's limitation, subject to certain
limitations. To the extent Lifeline also has built-in losses as defined
in IRC Section 382(h) as of the date of the Exchange, IRC Section 382
limits the utilization of such losses after the ownership change. IRC
Section 383 will similarly limit the utilization of excess credits, net
capital losses, and foreign tax credits, if any, after the ownership
change. In addition, IRC Section 384 limits the use of preacquisition
losses to offset built-in gains, if any, after the ownership change.
Regulations under IRC Sections 382 and 1502 implement the above
restrictions.
(7) Each shareholder of Lifeline must file pursuant to IRS
Regulation 1.368-3(b), with his or her income tax return for the year
in which the Exchange is consummated, a statement which provides
details relating to the property transferred and securities received in
the Exchange.
The preceding discussion and opinions are based on our interpretations
of the facts and assumptions, based on the IRC, the regulations thereunder and
judicial and administrative interpretations thereof. They are subject to change
by subsequent regulatory, administrative, legislative or judicial actions which
could
B-35
have an adverse effect on the validity of our opinions. Our opinions are
effective as of the Effective Date for the Exchange as described in the Plan.
We do not express an opinion on the valuations of Lifeline or Citizens
assets or common stock or the ratio of exchange of Lifeline Common Stock for
Citizens Class A Common Stock.
If the Exchange is transacted as outlined in the facts given, the
material tax issues addressed singularly and in the aggregate will more likely
than not be upheld under challenge by the IRS.
Each Lifeline shareholder should consult his own qualified tax advisor
to evaluate the tax effects of the Exchange based on his personal facts and
circumstances.
Very truly yours,
JONES & KELLER, P.C.
B-36
APPENDIX C
TEXAS BUSINESS CORPORATION ACT
PART FIVE, ARTICLES 5.11, 5.12 AND 5.13
APPENDIX C
TEXAS BUSINESS CORPORATION ACT
PART FIVE, ARTICLES 5.11, 5.12 AND 5.13
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if shareholder
approval is required by Article 5.03 or 5.16 of this Act and the shareholder
holds shares of a class or series that was entitled to vote thereon as a class
or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any pledge,
mortgage, deed of trust or trust indenture unless otherwise provided in the
articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation if special authorization of
the shareholders is required by this Act and the shareholders hold shares of a
class or series that was entitled to vote thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which the
shares of the corporation of the class or series held by the shareholder are to
be acquired.
B. Notwithstanding the provisions of Section A of this Article, a shareholder
shall not have the right to dissent from any plan of merger in which there is a
single surviving or new domestic or foreign corporation, or from any plan of
exchange, if:
(1) the shares held by the shareholder are part of a class or series, shares of
which are on the record date fixed to determine the shareholders entitled to
vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation system) or
designated as a national market security on an interdealer quotation system by
the National Association of Securities Dealers, Inc., or successor entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger or plan
of exchange to accept for the shareholder's shares any consideration that is
different than the consideration (other than cash in lieu of fractional shares
that the shareholder would otherwise be entitled to receive) to be provided to
any other holder of shares of the same class or series of shares held by such
shareholder; and
(3) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for the shareholder's shares any consideration other
than:
C-1
(a) shares of a domestic or foreign corporation that, immediately after the
effective time of the merger or exchange, will be part of a class or series,
shares of which are:
(i) listed, or authorized for listing upon official notice of issuance, on a
national securities exchange;
(ii) approved for quotation as a national market security on an interdealer
quotation system by the National Association of Securities Dealers, Inc., or
successor entity; or
(iii) held of record by not less than 2,000 holders;
(b) cash in lieu of fractional shares otherwise entitled to be received; or
(c) any combination of the securities and cash described in Subdivisions (a) and
(b) of this subsection.
Art. 5.12. Procedure for Dissent by Shareholders as to Said Corporate Actions
A. Any shareholder of any domestic corporation who has the right to dissent from
any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1)(a) With respect to proposed corporate action that is submitted to a vote of
shareholders at a meeting, the shareholder shall file with the corporation,
prior to the meeting, a written objection to the action, setting out that the
shareholder's right to dissent will be exercised if the action is effective and
giving the shareholder's address, to which notice thereof shall be delivered or
mailed in that event. If the action is effected and the shareholder shall not
have voted in favor of the action, the corporation, in the case of action other
than a merger, or the surviving or new corporation (foreign or domestic) or
other entity that is liable to discharge the shareholder's right of dissent, in
the case of a merger, shall, within ten (10) days after the action is effected,
deliver or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery or
mailing of the notice, make written demand on the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, for
payment of the fair value of the shareholder's shares. The fair value of the
shares shall be the value thereof as of the day immediately preceding the
meeting, excluding any appreciation or depreciation in anticipation of the
proposed action. The demand shall state the number and class of the shares owned
by the shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the ten (10) day
period shall be bound by the action.
(b) With respect to proposed corporate action that is approved pursuant to
Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall be
accompanied by a copy of this Article and any articles or documents filed by the
corporation with the Secretary of State to effect the action. If the shareholder
shall not have consented to the taking of the action, the shareholder may,
within twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the shareholder's
C-2
shares. The fair value of the shares shall be the value thereof as of the date
the written consent authorizing the action was delivered to the corporation
pursuant to Section A of Article 9.10 of this Act, excluding any appreciation or
depreciation in anticipation of the action. The demand shall state the number
and class of shares owned by the dissenting shareholder and the fair value of
the shares as estimated by the shareholder. Any shareholder failing to make
demand within the twenty (20) day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate action was
effected, the value of the shares is agreed upon between the shareholder and the
existing, surviving, or new corporation (foreign or domestic) or other entity,
as the case may be, payment for the shares shall be made within ninety (90) days
after the date on which the action was effected and, in the case of shares
represented by certificates, upon surrender of the certificates duly endorsed.
Upon payment of the agreed value, the shareholder shall cease to have any
interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the shareholders
who have complied with the provisions of this Article and have become entitled
to the valuation of and payment for their shares, and shall appoint one or more
qualified appraisers to determine that value. The appraisers shall have power to
examine
C-3
any of the books and records of the corporation the shares of which they are
charged with the duty of valuing, and they shall make a determination of the
fair value of the shares upon such investigation as to them may seem proper. The
appraisers shall also afford a reasonable opportunity to the parties interested
to submit to them pertinent evidence as to the value of the shares. The
appraisers shall also have such power and authority as may be conferred on
Masters in Chancery by the Rules of Civil Procedure or by the order of their
appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the date of
the filing of the articles of merger, the surviving corporation is the owner of
all the outstanding shares of the other corporations, domestic or foreign, that
are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
Art. 5.13. Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in accordance with
either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to vote
or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an
C-4
appropriate action to obtain relief on the ground that the corporate action
would be or was fraudulent, and the respective shares for which payment has been
demanded shall not thereafter be considered outstanding for the purposes of any
subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance with
either Article 5.12 or 5.16 of this Act may withdraw such demand at any time
before payment for his shares or before any petition has been filed pursuant to
Article 5.12 or 5.16 of this Act asking for a finding and determination of the
fair value of such shares, but no such demand may be withdrawn after such
payment has been made or, unless the corporation shall consent thereto, after
any such petition has been filed. If, however, such demand shall be withdrawn as
hereinbefore provided, or if pursuant to Section B of this Article the
corporation shall terminate the shareholder's rights under Article 5.12 or 5.16
of this Act, as the case may be, or if no petition asking for a finding and
determination of fair value of such shares by a court shall have been filed
within the time provided in Article 5.12 or 5.16 of this Act, as the case may
be, or if after the hearing of a petition filed pursuant to Article 5.12 or
5.16, the court shall determine that such shareholder is not entitled to the
relief provided by those articles, then, in any such case, such shareholder and
all persons claiming under him shall be conclusively presumed to have approved
and ratified the corporate action from which he dissented and shall be bound
thereby, the right of such shareholder to be paid the fair value of his shares
shall cease, and his status as a shareholder shall be restored without prejudice
to any corporate proceedings which may have been taken during the interim, and
such shareholder shall be entitled to receive any dividends or other
distributions made to shareholders in the interim.
C-5
PROXY
COMBINED UNDERWRITERS LIFE INSURANCE COMPANY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned shareholder of Combined Underwriters Life Insurance
Company ("Combined") acknowledges receipt of the Notice of Special Meeting of
Shareholders, to be held on _____, _______, 2002, at _______, _______, at 10:00
a.m., Central Standard Time, and hereby appoints _________ and
_________________, each of them with the power of substitution, as attorneys and
proxies to vote all the shares of the undersigned at said special meeting and at
all adjournments thereof, hereby ratifying and confirming all that said
attorneys and proxies may do or cause to be done by virtue hereof. The above-
named attorneys and proxies are instructed to vote all of the undersigned's
shares as follows:
THE DIRECTORS RECOMMEND A VOTE FOR THE ITEMS INDICATED BELOW:
1. A proposal to approve and adopt the Plan and Agreement of Exchange
dated November 20, 2001 under which Combined shareholders will exchange
their shares for Citizens, Inc. ("Citizens") Class A common stock, and
Combined will become a subsidiary of Citizens.
FOR AGAINST ABSTAIN
----- ----- -----
2. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL 1.
Dated this ______ day of ________________, 2002.
Number of Shares Voted* ----------------------------
Signature
- ------------------
----------------------------
Signature
*If the number of shares voted is not
indicated, all shares in your name on
Combined's stock register will be voted
for the Combined Exchange.
Please sign your name
exactly as it appears on
your stock certificate(s).
If shares are held jointly,
each holder should sign.
Executors, trustees, and
other fiduciaries should so
indicate when signing.
Please sign, date and return
this proxy immediately.
PROXY
LIFELINE UNDERWRITERS LIFE INSURANCE COMPANY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned shareholder of Lifeline Underwriters Life Insurance
Company ("Lifeline") acknowledges receipt of the Notice of Special Meeting of
Shareholders, to be held on _____, _______, 2002, at _______, _______, at 11:00
a.m., Central Standard Time, and hereby appoints _________ and
_________________, each of them with the power of substitution, as attorneys and
proxies to vote all the shares of the undersigned at said special meeting and at
all adjournments thereof, hereby ratifying and confirming all that said
attorneys and proxies may do or cause to be done by virtue hereof. The above-
named attorneys and proxies are instructed to vote all of the undersigned's
shares as follows:
THE DIRECTORS RECOMMEND A VOTE FOR THE ITEMS INDICATED BELOW:
1. A proposal to approve and adopt the Plan and Agreement of Exchange
dated November 20, 2001 under which Lifeline shareholders will exchange
their shares for Citizens, Inc. ("Citizens") Class A common stock, and
Lifeline will become a subsidiary of Citizens.
FOR AGAINST ABSTAIN
----- ----- -----
2. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL 1.
Dated this ______ day of ________________, 2002.
Number of Shares Voted* ----------------------------
Signature
- ------------------
----------------------------
Signature
*If the number of shares voted is not Please sign your name
indicated, all shares in your name on exactly as it appears on
Lifeline's stock register will be voted your stock certificate(s).
for the Lifeline Exchange. If shares are held jointly,
each holder should sign.
*If the number of shares voted is not Executors, trustees, and
indicated, all shares in your name on other fiduciaries should so
Combined's stock register will be voted indicate when signing.
for the Combined Exchange.
Please sign, date and return
this proxy immediately.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 109 of Title Seven of the Colorado Revised Statutes enables a
Colorado corporation to indemnify its officers, directors, employees and agents
against liabilities, damages, costs and expenses for which they are liable if:
(i) they acted in good faith; (ii) in their official capacities (as defined by
this statute) they reasonably believed that their conduct was in the
corporation's best interests; (iii) in all other cases, they reasonably believed
that their conduct was at least not opposed to the corporation's best interests;
and (iv) in the case of any criminal proceeding, they had no reasonable cause to
believe their conduct was unlawful. Article 109 also requires a corporation to
indemnify its directors and officers if they are wholly successful, on the
merits or otherwise, in defending any proceeding to which they are made parties
because they are directors or officers.
The Registrant's Articles of Incorporation limit the liability of
directors to the fullest extent provided by Colorado law.
The Registrant's Bylaws provide indemnification to officers, directors,
employees and agents to the fullest extent provided by Colorado law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<Table>
<Caption>
Exhibit Number Description of Exhibits
- -------------- -----------------------
2.1 Plan and Agreement of Exchange - Citizens, Inc. and
Combined Underwriters Life Insurance Company, dated
November 20, 2001 - See Appendix B
2.2 Plan and Agreement of Exchange - Citizens, Inc. and
Lifeline Underwriters Life Insurance Company, dated
November 20, 2001 - See Appendix A
3.1 Articles of Incorporation, as amended(a)
3.2 Bylaws(b)
5.1 Opinion and consent of Jones & Keller, P.C. as to the
legality of Citizens, Inc. common stock**
8.1 Opinion and consent of Jones & Keller, P.C. re: tax
matters**
</Table>
II-1
<Table>
10.1 Automatic Yearly Renewable Term (NR) Life Reinsurance
Agreement between Citizens Insurance Company of
America and The Centennial Life Insurance Company
dated March 1, 1982(c)
10.3 Self-Administered Automatic Reinsurance Agreement -
Citizens Insurance Company of America and Riunione
Adriatica di Sicurta, S.p.A.(d)
10.9 Bulk Accidental Death Benefit Reinsurance Agreement
between Connecticut General Life Insurance Company
and Citizens Insurance Company of America, as
amended(e)
10.14 Self-Administered Automatic Reinsurance Agreement
between Citizens Insurance Company of America and
Business Men's Assurance Company**
11 Statement re: Computation of per share earnings(d)
22 Subsidiaries of the Registrant(d)
23.1 Consent of Jones & Keller, P.C.**
23.2 Consent of Jones & Keller, P.C. (see exhibit 5.1)
23.3 Consent of KPMG LLP*
25 Power of Attorney (see signature page)
</Table>
- ----------
* Filed herewith.
** To be filed by amendment.
(a) Filed with the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated by reference.
(b) Filed with the Registrant's Registration Statement on Form S-4,
Registration No. 33-59039, filed with the Commission on May 2, 1995.
(c) Filed with the Registrant's Amendment No. 1 to Registration Statement
on Form S-4, Registration No. 33-4753, filed with the Commission on or
about June 19, 1992.
(d) Filed as part of the Registration Statement on Form S-4, SEC File No.
333-16163, filed on or about November 14, 1996.
(e) Filed with on referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
(f) Filed with the Registrant's Annual Report on Form 10-K for the Year
Ended December 31, 2000, and incorporated herein by reference.
(b) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
See "Financial Statements."
II-2
ITEM 22. UNDERTAKINGS
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended (the "1933 Act"), each
filing of The Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934, as amended), that is incorporated
by reference in the Registration Statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
The Registrant hereby undertakes that every prospectus (i) that is
filed pursuant to the paragraph immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the 1933 Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
part of an amendment to the Registration Statement and will not be used until
such amendment is effective; and that, for purposes of determining any liability
under the 1933 Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the Effective Time of the Registration Statement through the date
of responding to the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired, that was not the subject of and included in the Registration Statement
when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the Effective Time of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement.
Provided, however, that paragraphs (1)(i) and (1)(ii), above, do not apply if
the Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on January 16, 2002.
CITIZENS, INC.
By: /s/ HAROLD E. RILEY
--------------------------------------
Harold E. Riley, Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers or
directors of the Registrant, by virtue of their signatures to this Registration
Statement appearing below, hereby constitute and appoint Harold E. Riley and
Mark A. Oliver, attorneys-in-fact in their names, place, and stead to execute
any and all amendments to this Registration Statement in the capacities set
forth opposite their names and hereby ratify all that said attorneys-in-fact may
do by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
Signatures Title Date
- ---------- ----- ----
/s/ HAROLD E. RILEY
- --------------------------- Chairman of the Board January 16, 2002
Harold E. Riley
/s/ RICK D. RILEY
- --------------------------- Chief Executive Officer January 16, 2002
Rick D. Riley and Director
/s/ MARK A. OLIVER
- --------------------------- President and Director January 16, 2002
Mark A. Oliver
/s/ JEFFREY J. WOOD
- --------------------------- Executive Vice President, Chief January 16, 2002
Jeffrey J. Wood Financial Officer, and Secretary/
Treasurer
/s/ JOE R. RENEAU
- --------------------------- Director January 16, 2002
Joe R. Reneau
/s/ STEVEN F. SHELTON
- --------------------------- Director January 16, 2002
Steven F. Shelton
</Table>
II-5
<Table>
/s/ RALPH M. SMITH. TH.D. Director January 16, 2002
- ---------------------------
Ralph M. Smith. Th.D.
/s/ TIMOTHY T. TIMMERMAN
- --------------------------- Director January 16, 2002
Timothy T. Timmerman
/s/ DR. E. DEAN GAGE
- --------------------------- Director January 16, 2002
Dr. E. Dean Gage
/s/ DR. RICHARD C. SCOTT
- --------------------------- Director January 16, 2002
Dr. Richard C. Scott
</Table>
II-6
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.3 Consent of KPMG LLP
</Table>