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As filed with the Securities and Exchange Commission on January 28, 2009
Registration No. 333-156721
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4/A
AMENDMENT NO. 1 TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OF 1933
Citizens, Inc.
(Exact name of registrant as specified in its charter)
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Colorado
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6311
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84-0755371 |
(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number) |
400 East Anderson Lane
Austin, Texas 78752
512-837-7100
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
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Copies to: |
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Rick D. Riley,
Vice Chairman and President
400 East Anderson Lane
Austin, Texas 78752
512-837-7100
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Reid A. Godbolt, Esq.
Jones & Keller, P.C.
1625 Broadway, 16th Floor
Denver, Colorado 80202
303-573-1600 |
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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.
o
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. o
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. o
Indicate by check
mark whether the
registrant is a
large accelerated filer, an accelerated filer, a non-accelerated
filer, or a
smaller reporting company.
See the definitions of large accelerated
filer, accelerated
filer
and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company
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If applicable, place an X in the box to designate the appropriate rule provision relied upon in
conducting this transaction:
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Exchange Act Rule 13e-4(i)(Cross-Border Issuer Tender Offer)
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Exchange Act rule 14d-1(d)(Cross-Border Third Party Tender Offer)
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CALCULATION OF REGISTRATION FEE
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Proposed maximum |
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Proposed maximum |
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Title of each class of |
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Amount to be |
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offering price per |
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aggregate offering |
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Amount of |
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securities to be registered |
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registered |
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share |
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price |
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registration fee |
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Class A Common Stock |
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1,296,000 shares(1) |
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$8.33(1) |
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$10,795,680 |
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$425(2) |
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(1) |
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Amount left blank pursuant to Rule 457(o). |
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(2) |
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Fee calculated pursuant to Rule 457(o) and already paid. |
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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.
Integrity Capital Corporation
65 Airport Parkway
Suite 118
Greenwood, Indiana 46143
Dear Shareholder:
You are cordially invited to attend the special meeting of shareholders of Integrity Capital
Corporation (ICC), to be held on Monday, February 23, 2009, at 10:00 a.m. local time, at the
Valle Vista Conference Center, 755 East Main Street, Greenwood, Indiana 46143.
ICC, Citizens, Inc. and a newly formed subsidiary of Citizens have entered into an agreement
and plan of merger (the Merger Agreement). Under the terms of the Merger Agreement, Citizens
will acquire ICC through the merger of ICC with the Citizens subsidiary. Upon completion of the
merger, each three shares of ICC common stock you own will be converted into the right to receive
one share of Class A common stock of Citizens.
Citizens Class A common stock is traded on the New York Stock Exchange under the symbol
CIA. The closing price of Citizens Class A common stock on January 27, 2009 was $8.38 per
share.
At the special meeting, we will ask you to approve the Merger Agreement and the transactions
contemplated by it. Approval of the Merger Agreement requires the affirmative vote of the holders
of at least a majority of ICCs common stock outstanding and entitled to vote at the special
meeting.
The ICC board of directors has carefully considered the terms of the Merger Agreement and the
transactions contemplated therein and has determined that the merger is in the best interests of
the ICC shareholders. Accordingly, the ICC board of directors has unanimously approved the Merger
Agreement and the transactions contemplated by the Merger Agreement and recommends that you vote
FOR the approval of the Merger Agreement.
Your vote is important. Only holders of record of ICCs common stock at the close of business
on January 15, 2009 will be entitled to vote at the special meeting.
We urge you to read this proxy statement-prospectus, and the documents incorporated by
reference into this proxy statement-prospectus, carefully and in their entirety, in particular, see
Risk Factors beginning on page 14.
M. Bruce VanDyke
President
Integrity Capital Corporation
This proxy statement-prospectus is dated January ___2009, and is first being mailed to ICC
shareholders on or about February 2, 2009.
Integrity Capital Corporation
65 Airport Parkway
Suite 118
Greenwood, Indiana 46143
Notice of Special Meeting of Shareholders
To Shareholders of
Integrity Capital Corporation:
A special meeting of shareholders of Integrity Capital Corporation (ICC) will be held on
Monday, February 23, 2009, at 10:00 a.m., local time at the Valle Vista Conference Center, 755 East
Main Street, Greenwood, Indiana 46143, for the following purposes:
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To consider and vote upon a proposal to approve the Plan and Agreement of Merger,
dated as of November 11, 2008, and amended as of December 16, 2008, among ICC, Citizens,
Inc., and Citizens Acquisition, Inc., a wholly owned subsidiary of Citizens, (the
Merger Agreement), pursuant to which Citizens Acquisition, Inc. and ICC will merge,
(the Merger), as described in the attached proxy statement-prospectus; |
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To grant authority to ICC to adjourn or postpone the special meeting in order to
solicit additional proxies; |
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To transact such other business as may properly come before the special meeting or
any adjournments or postponements thereof. |
We will transact no other business at the special meeting except such business as may properly
be brought before the special meeting or any adjournments or postponements thereof.
Only holders of record of our common stock at the close of business on January 15, 2009, the
record date for the special meeting, are entitled to notice of, and to vote at, the special meeting
and any adjournments or postponements thereof.
This proxy statement-prospectus describes the proposed merger and the actions to be taken in
connection with the merger and provides additional information about the parties involved. Please
give this information your careful attention. A copy of the Merger Agreement is attached as
Appendix A to this proxy statement-prospectus.
Under Indiana law, in connection with the merger you will be entitled to dissent from the
Merger Agreement and merger and receive payment of the fair value of your shares in cash, but
only if you comply with the Indiana law procedures explained in this proxy statement-prospectus.
See Rights of Dissenting Shareholders on page 56.
The ICC board of directors has carefully considered the terms of the Merger Agreement and the
merger and has determined that the merger is advisable and in the best interests of ICC
shareholders. Accordingly, the ICC board of directors unanimously recommends that ICC shareholders
vote FOR the approval of the Merger Agreement.
We cannot complete the merger unless the Merger Agreement is approved by the shareholders of
ICC. Approval of the Merger Agreement requires the affirmative vote of holders of at least a
majority of the common stock outstanding and entitled to vote at the special meeting.
Whether or not you plan to attend the special meeting, please complete, sign and date the
enclosed proxy and return it promptly in the enclosed postage-paid return envelope. You may revoke
the proxy at any time prior to its exercise at the special meeting in the manner described in this
proxy statement-prospectus. If you attend the special meeting, including any adjournments or
postponements thereof, you may revoke your proxy and vote personally on the proposal to approve the
Merger Agreement. Your vote at the special meeting will supersede any instructions or directions
you may have previously made. Executed proxies with no instructions indicated thereon will be
voted FOR the approval of the Merger Agreement.
Please complete, date and sign the enclosed proxy card and return it in the enclosed
postage-paid return envelope. Please do not send any share certificates at this time.
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By Order of the Board of Directors, |
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/s/ R. Dean Branan |
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R. Dean Branan |
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Secretary |
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INTEGRITY CAPITAL CORPORATION
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
To Be Held February 23, 2009
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CITIZENS, INC. PROSPECTUS
CLASS A COMMON STOCK
Up to 1,296,000 Shares |
This document:
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is furnished by the Board of Directors of ICC to request a proxy for voting your ICC common
stock on the Plan and Agreement of Merger dated November 11, 2008 and amended as of December
16, 2008, (the Merger Agreement) among ICC, Citizens and Citizens Acquisition, Inc.
(Acquisition), a recently formed subsidiary of Citizens; |
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requests your proxy to adjourn or postpone the special meeting to another place and/or
time, if necessary to solicit additional votes for the Merger Agreement; and |
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registers the shares of Class A common stock of Citizens
to be issued in exchange for ICC shares if the Merger occurs. The Class A common stock of Citizens is traded on the New York
Stock Exchange under the symbol CIA. On January 27, 2009, the closing price of Citizens
Class A common stock was $8.38 per share. |
The Merger
If the Merger occurs, and you do not dissent to the Merger in accordance with the procedures
described in Appendix B, you will receive one share of Citizens Class A common stock for each three
shares of ICC common stock owned by you. Fractional shares will be rounded up to the next whole
share of Citizens Class A common stock. If the Merger occurs, Citizens will mail you instructions
for exchanging your ICC shares for Citizens Class A common stock.
Citizens has two classes of common stock, Class A and Class B. Both classes of common stock are
equal in rights except that:
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if Citizens declares cash dividends, each share of Class A common stock is entitled to
twice the amount of cash dividends declared and paid on each share of Class B common stock;
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holders of Class B common stock have the exclusive right to elect a simple majority of the
members of Citizens Board of Directors. |
The ICC Board Of Directors Unanimously Recommends that shareholders Approve the Merger.
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 shares of Class A common stock of Citizens involve significant risks. See Risk Factors
beginning on page 14.
TABLE OF CONTENTS
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APPENDIX A
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Plan and Agreement of Merger dated November 11, 2008
Integrity Capital Corporation, Citizens, Inc. and Citizens
Acquisition, Inc., including an amendment thereto dated
December 16, 2008. |
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APPENDIX B
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Indiana Statute Regarding Dissenters Rights Chapter 44
of the Indiana Business Corporation Law. |
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APPENDIX C
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Audited Consolidated Financial Statements of ICC and
subsidiary as of and for the years ended December 31, 2006
and 2007 and unaudited Consolidated Financial Statements of
ICC and subsidiary as of and for the quarters and nine
months ended September 30, 2007 and 2008. |
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 upon your written or oral request by contacting Rick D. Riley, Vice Chairman,
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 the date of the
meeting, or February 16, 2009. See also Available Information on page 1.
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 SECs Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, telephone
1-800-SEC-0330. 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 New York Stock Exchange, 11 Wall Street, New York, New York 10005.
Citizens SEC filings may be viewed 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.
Citizens corporate policy prohibits it from monetarily influencing an analysts evaluation or
purchasing ratings from rating agencies such as AM Best, Moodys, Fitch or Standard & Poors.
Therefore, Citizens is not rated by such entities. Instead, Citizens uses Standard Analytical
Service, Inc. to provide pure analytical data about Citizens which it believes is free from the
subjective judgment of those entities which sell ratings for a price. ICC shareholders can review
Standard Analytical Service, Inc.s report on Citizens at its web site at www.citizensinc.com.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents have been filed by Citizens (File No. 1-13004) with the SEC pursuant to the
Securities Exchange Act of 1934 (the Exchange Act) and are incorporated by reference into this
proxy statement-prospectus:
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Citizens Annual Report on Form 10-K for the year ended December 31, 2007, filed with the
SEC on March 17, 2008; |
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Citizens Proxy Statement on 14A filed with the SEC on April 21, 2008; |
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Citizens Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed with
the SEC on May 12, 2008; |
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Citizens Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed with the
SEC on August 11, 2008; |
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Citizens Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed
with the SEC on November 7, 2008; |
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Item 5.02 of Citizens Current Report on Form 8-K dated November 6, 2008, filed with the
SEC on November 10, 2008; |
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Citizens Current Report on Form 8-K dated January 16, 2009, filed with the SEC on January
16, 2009; and |
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The description of the Class A common stock and Class B common stock of Citizens contained
in its Registration Statement on Form 8-A, declared effective by the SEC on April 14, 1994,
and, with respect to the subsequent registration of its Class A common stock and its Class B
common stock under Section 12(b) of the Exchange Act, in its Registration Statement on Form
8-A, filed on July 19, 2002, and Amendment No. 1 thereto filed on July 25, 2002, and declared
effective by the SEC on or about August 22, 2002. |
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 special meeting 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 incorporated in this document by
reference will be deemed to be modified or superseded for purposes of this proxy
statement-prospectus to the extent that a statement contained in this document or in any
subsequently filed document that is also incorporated by reference in this proxy
statement-prospectus modifies or supersedes such statement.
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 (the Act). Many of these statements contain risk factors as well. In
addition, certain statements in future filings by Citizens with the SEC and in press releases, and
in oral and written statements made by or with the approval of ICC or Citizens, which are not
statements of historical fact constitute forward-looking statements within the meaning of the Act.
Examples of forward-looking statements, include, but are not limited to: (i) projections of
revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends,
capital structure, and other financial items, (ii) statements of plans and objectives by management
or boards of directors including those relating to products or services, (iii) statements of future
economic performance and (iv) statements of assumptions underlying such statements. Words such as
believes, anticipates, expects, intends, targeted, may, will and similar expressions
are intended to identify forward-looking statements but are not the exclusive means of identifying
such statements.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors
that may cause actual results to differ materially from those contemplated by the forward-looking
statements. Factors that could cause future results of Citizens or ICC to differ materially from
expected results include, but are not limited to:
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Changes in U.S. and foreign general economic conditions, including the performance of
financial markets and interest rates; |
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Changes in consumer behavior, which may affect any ability to sell products and retain
business; |
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The timely development of and acceptance of new products of Citizens and ICC and perceived
overall value of these products and services by existing potential customers; |
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Fluctuations in experience regarding current mortality, morbidity, persistency and interest
rates relative to expected amounts used in pricing our products; |
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Changes in assumptions related to deferred acquisition costs and the value business
acquired; |
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The ability of Citizens to consummate and integrate acquisitions; |
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The costs and effects of litigation and of unexpected adverse outcomes in litigation; |
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Regulatory, accounting or tax changes that may affect the cost of, or the demand for,
products or services; |
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A concentration of Citizens business from persons residing in Latin America, the Pacific
Rim and Louisiana; and |
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The success of Citizens and ICC at managing the risks involved in the foregoing. |
Such forward-looking statements speak only as of the date on which such statements are made, and
neither Citizens nor ICC undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made to reflect the
occurrence of unanticipated events.
CAUTIONARY STATEMENT CONCERNING REPRESENTATIONS AND WARRANTIES
CONTAINED IN THE MERGER AGREEMENT
You should not rely upon the representations and warranties contained in the Merger Agreement
or the descriptions of such representations and warranties in this proxy statement-prospectus, as
factual information about Citizens or ICC. These representations and warranties were made only for
purposes of the Merger Agreement and the related agreements, were made solely to Citizens or ICC,
as applicable, as of the dates indicated therein and are subject to modification or qualification
by other disclosures made in this proxy statement-prospectus. The representations and warranties
are reproduced and summarized in this proxy statement-prospectus solely to provide information
regarding the terms of the Merger Agreement and not to provide you with any other information
regarding Citizens or ICC. Information about Citizens can be found elsewhere in this proxy
statement-prospectus and in other public filings Citizens makes with the SEC. Information about ICC
can also be found elsewhere in this proxy statement-prospectus.
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SUMMARY
This is a summary. Please read the entire proxy statement-prospectus before you make an investment
decision.
Parties to the Merger
ICC, an Indiana corporation, is a life insurance holding company. The principal executive office of
ICC is located at 65 Airport Parkway, Suite 118, Greenwood, Indiana 46143, and its telephone number
is 317-889-9798. ICC has one subsidiary, Integrity Capital Insurance Company (ICIC), an Indiana
life insurance company.
Citizens, a Colorado corporation, is an insurance holding company. Citizens principal executive
office is located at 400 East Anderson Lane, Austin, Texas 78752, and its telephone number is
512-837-7100.
Citizens Acquisition, Inc., an Indiana corporation, (Acquisition) is a wholly-owned subsidiary of
Citizens which was formed solely for the purpose of merging with and into ICC as part of the
Merger. In the Merger, ICC will be the surviving corporation, and it will become a wholly-owned
subsidiary of Citizens. Acquisition will cease to exist after the Merger.
In February 2003, Citizens acquired First Alliance Corporation, a Kentucky insurance holding
company, which in turn held 585,000 shares of common stock of ICC, or approximately 13.1% of the
outstanding shares of common stock of ICC. These shares are presently held by CICA Life Insurance
Company of America (CICA), a wholly-owned subsidiary of Citizens.
Since May 1, 2004, Citizens and ICC have been parties to a service agreement under which Citizens
provides administrative and bookkeeping services to ICC for a monthly fee. For the years ended
December 31, 2007 and 2006, ICC paid $255,782 and $257,217, respectively, for these services. Upon
the closing of the Merger, Citizens expects to enter into a similar agreement with ICIC, and the
existing service agreement with ICC will be terminated.
Effective March 1, 2004, CICA, Optimum Re and ICIC entered into a reinsurance agreement whereby
CICA reinsures 30% and Optimum Re reinsures 70% of all ICIC insurance claim amounts above $30,000.
For the years ended December 31, 2007 and 2006, ICIC paid $13,186 and $7,419 respectively to CICA
pursuant to this agreement.
Other than the transactions described above, neither ICC, nor any of its officers, affiliates or
directors are affiliated with Citizens and its affiliates, nor are any officers, affiliates or
directors of Citizens affiliated with ICC and its affiliates.
The common stock of ICC is not listed on a stock exchange or traded through security brokerage
firms, and there is virtually no trading activity in the stock. Consequently, ICC is unable to
determine a reliable market value for its stock. For disclosure regarding the manner in which
Citizens and ICC negotiated the share exchange ratios of the Merger, see Proposed Merger
Background and Reasons ICC.
The Class A common stock of Citizens is traded on the New York Stock Exchange under the symbol
CIA. On November 10, 2008, the day preceding the day that Citizens and ICC signed the Merger
Agreement, the closing price of Citizens Class A common stock was $8.31 per share.
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During the fourth quarter of 2008 Citizens completed the acquisition of Ozark National Life
Insurance Company, an Arkansas home service pre-need insurer, for cash consideration of $8,000,000.
Its assets at September 30, 2008 were $19,477,582. Its revenues for 2006, 2007, and for the nine
months ended September 30, 2008 were $3,159,322, $3,449,969, and $2,969,527, respectively. Also, in
the fourth quarter of 2008, holders of Citizens series A-1 preferred stock contributed $5.125
million in cash to Citizens representing increases to the stated value of their series A-1
preferred stock. Two of the holders then immediately converted all of their outstanding series A-1
preferred shares into Citizens Class A common stock resulting in the issuance of a total of
1,796,999 shares of Class A common stock. As of January 27, 2009, Citizens had 45,647,516 shares of
its Class A common stock outstanding.
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Date, Time and
Place of Special
Meeting of ICC
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The special meeting of ICC shareholders will be held on
Monday, February 23, 2009 at 10:00 a.m. Eastern Standard
Time, at the Valle Vista Conference Center, 755 East Main
Street, Greenwood, Indiana 46143. |
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Persons Entitled to
Vote; Record Date
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The record date for shareholders of ICC to vote at the
special meeting is the close of business on January 15,
2009. Only shareholders as of the record date will be
notified of, and be entitled to vote at, the special
meeting. |
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Business to be
Transacted
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At the special meeting, shareholders of ICC will be asked
to vote upon the Merger Agreement under which Acquisition
will be merged into ICC, and ICC shares for which
dissenters rights have not been perfected will be
converted into the right to receive Class A common stock
of Citizens. ICC shareholders may also be asked to vote on
any adjournment or postponement of the special meeting to
another time and/or place (for purposes including, but not
limited to adjournment or postponement of the meeting to
allow for additional solicitation of shareholder votes in
order to obtain a quorum or more votes in favor of the
Merger.) |
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Recommendation of
the Board of
Directors of ICC
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The ICC Board of Directors has unanimously approved of the
Merger Agreement and recommends that the shareholders vote
FOR APPROVAL of the Merger Agreement and Merger. The ICC
Board reviewed several factors in reaching its decision to
recommend that shareholders vote to approve the Merger,
and believe that the Merger is fair from a financial point
of view to the shareholders of ICC. See Proposed Merger
Background and Reasons Recommendation of ICCs Board
of Directors. |
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Interests of
Certain Persons in
the Merger
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Citizens indirectly owns, through a wholly-owned
subsidiary, 585,000 shares of common stock of ICC, or
approximately 13.1% of the outstanding common stock of
ICC. Citizens intends to cause these shares to be voted in
favor of the Merger. |
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Proxy Revocability
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Proxies of shareholders of ICC are revocable at any time
prior to voting at the special meeting and can be revoked
at the special meeting. See Special Meeting of ICC
Shareholders Revocability of Proxies. |
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Required Votes
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Approval of the Merger and the transactions contemplated
thereby requires the affirmative vote of a majority of the
outstanding shares of ICC common stock. No voting
agreements or other similar arrangements have been entered
into with any ICC shareholders. However, certain officers,
directors and significant shareholders of ICC, including
Citizens, who are entitled to vote 1,691,950 shares, or
approximately 37.9% of ICCs outstanding common stock,
have indicated that they intend to vote in favor of the
Merger. See Special Meeting of ICC Shareholders Voting
Securities. No shareholder vote of Citizens is required
by the Merger Agreement or applicable law. |
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Outstanding Shares
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As of the record date there were 4,462,206 shares of ICC
common stock outstanding. As of the record date, ICCs
directors, executive officers and their affiliates held
1,106,950 shares of ICC common stock or a total of 24.8%
of the shares entitled to vote. |
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Risk Factors
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Unless you exercise and perfect your dissenters rights,
you will receive shares of Citizens Class A common stock
in consideration for your ICC shares if the Merger is
completed. Thus, you will be subject to the risks related
to Citizens and its business. These risks include, but are
not limited to, a heavy reliance on revenues generated
from overseas, a possible depressed price in the Class A
common stock of Citizens due to sales by significant
shareholders, significant competition and a very limited
ability by you to influence Citizens policies. In
considering whether to approve the Merger, you should
consider risks related to the Merger and to Citizens.
Please see Risk Factors beginning on page 14 for more
detailed discussion of these risks. |
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Other Matters
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Other than the proposed Merger, the ICC Board knows of no
other matters that will come before the special meeting.
However, your proxy is also solicited to vote your shares
in the case of a motion to postpone or adjourn the special
meeting for purpose of soliciting additional proxies. |
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Forward-Looking
Statements
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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 Certain Documents by Reference. |
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PLAN AND AGREEMENT OF MERGER |
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Consideration for
Your Shares
|
|
If the Merger is consummated, you will receive one share
of Citizens Class A common stock for each three shares of
ICC common stock you own. The value of your ICC common
stock has been determined by the ICC Board of Directors to
be in the range of $2.50 per share. Fractional shares will
be rounded up to the next whole share of Citizens Class A
common stock. Fractional shares will not be issued. For
example, a person holding 301 shares of ICC common stock
will receive 101 shares of Class A Citizens common stock.
Assuming no holders of ICC common stock dissent to the
Merger, former ICC shareholders would receive
approximately 1,296,000 shares of Citizens Class A common
stock, or approximately 2.9% of the outstanding Class A
common stock after the issuance. Any ICC shareholder who
properly asserts dissenters rights under the Indiana
Business Corporation Law (the IBCL) will receive cash in
lieu of Citizens Class A common stock. See Proposed
Merger Receipt of Citizens Shares and Rights of
Dissenting Shareholders. |
|
|
|
Closing Date
|
|
The parties anticipate that the closing of the Merger will
occur and the Merger will become effective shortly after
the conditions in the Merger Agreement (including
shareholder approval) are satisfied. |
|
|
|
Conduct of Business
|
|
ICC has agreed that it will not: |
Prior to Closing |
|
|
|
|
|
enter into any transactions prior to the Merger
other than in the ordinary course of business; |
|
|
|
|
pay shareholder dividends or increase the
compensation of its officers; nor |
|
|
|
|
enter into any agreement or transaction which will
adversely affect its financial condition. See Proposed
Merger Conduct of Business Pending the Merger;
Covenants. |
8
|
|
|
Dissenters Rights
|
|
ICC shareholders may dissent from the Merger Agreement and
Merger and demand payment of the fair value of their ICC
shares in cash. If holders of more than 2.0% of the
outstanding shares of ICC common stock (approximately
89,250 shares) assert their dissenters rights, Citizens
may terminate the Merger Agreement. See Rights of
Dissenting Shareholders, Proposed Merger Other
Conditions to Consummation of the Merger, and Appendix B
which contains a copy of Chapter 44 of the IBCL. |
|
|
|
Conditions to the
Merger
|
|
In addition to approval by the shareholders of ICC, the
Merger is subject to satisfaction of other conditions
including: |
|
|
|
obtaining approval from the Indiana Insurance
Commissioner of the change of control of ICIC as
contemplated by the Merger Agreement; |
|
|
|
|
the performance by each party of its obligations
under the Merger Agreement; |
|
|
|
|
the absence of any legal proceeding relating to
the transactions contemplated by the Merger Agreement; |
|
|
|
|
the continued material accuracy of representations
made by each party; and |
|
|
|
|
the delivery of legal opinions. See Proposed
Merger Other Conditions. |
|
|
|
Operations of ICC
after the Merger
|
|
Following the Merger, Citizens expects to merge ICC into
Citizens, and Citizens would continue to operate ICIC at
its location in Greenwood, Indiana under a joint
management team, with the consolidation of computer data
processing in Citizens system and an administrative
services agreement substantially similar to the existing
administrative agreement Citizens has had with ICC since
May 1, 2004. Citizens will continue to evaluate the
personnel, business practices and opportunities for ICIC
and may make such changes as it deems appropriate
following the Merger. |
|
|
|
Summary of Federal
Income Tax
Considerations
|
|
The Merger is intended to be treated as a reorganization.
Accordingly, for federal income tax purposes it is
anticipated that: |
9
|
|
|
no gain or loss should generally be recognized by
holders of ICC common stock on the exchange of their shares of ICC common stock for shares of Citizens Class A
common stock; |
|
|
|
|
the holding period for Citizens Class A common
stock received in the Merger should include the holding
period for the ICC common stock surrendered in exchange
therefor; and |
|
|
|
|
the aggregate adjusted tax basis of Citizens Class
A common stock received by an ICC shareholder should be
the same as the basis of the stock surrendered in exchange
therefor. |
|
|
|
|
holders of ICC common stock who properly exercise
dissenters rights and receive cash in lieu of Citizens
Class A common stock will recognize a taxable gain if the
amount of cash received exceeds their basis in the ICC shares. For some ICC shareholders the cash received may
be taxable as a dividend distribution. |
|
|
|
|
|
Consummation of the Merger is conditioned upon receipt of
an opinion of counsel substantially to such effect.
However, a ruling from the Internal Revenue Service is not
being sought in connection with the Merger. The opinion of
counsel is subject to certain assumptions and
qualifications and is not binding on the Internal Revenue
Service. If the Merger were not to qualify as a
reorganization, the exchange of shares would be taxable.
See Federal Income Tax Consequences. |
|
|
|
Termination and
Amendment of the
ICC Merger
Agreement
|
|
The Merger Agreement may be terminated by any party if the
Merger does not become effective by April 10, 2009. See
Proposed Merger Other Conditions. The Merger
Agreement may also be terminated at any time prior to
becoming effective: |
|
|
|
by mutual written consent of ICC and Citizens; |
|
|
|
|
by any party if a suit, action, or proceeding
threatens to prohibit the Merger; |
|
|
|
|
by any party who discovers a material error in the
representations of another party; or |
|
|
|
|
by Citizens if dissenters rights are asserted
under Indiana law for more than 2.0% of the outstanding shares of ICC. |
10
|
|
|
|
|
In the event that the Merger is not approved, ICC
shareholders will continue to hold their shares of ICC
common stock. ICC may apply to obtain quotation or
listing of its common stock on a stock quotation system or
exchange; however, approval of such an application would
likely be difficult to achieve due to ICCs limited
financial resources. If the Merger is not approved,
Citizens will continue its business in the ordinary
course. |
Summary Selected Financial Data
The tables below set forth in summary certain selected financial data of Citizens and ICC.
Citizens financial data at or for the nine months ended September 30, 2008 and 2007 is derived
from the unaudited consolidated financial statements of Citizens and its subsidiaries which are
incorporated by reference in this proxy statement-prospectus. Citizens financial data at or for
the years ended December 31, 2003 through 2007 is derived from audited consolidated financial
statements of Citizens and its subsidiaries. The data for Citizens is presented in conformity with
U.S. Generally Accepted Accounting Principles (GAAP).
ICCs financial data at or for the nine months ended September 30, 2008 and 2007 is derived from
the unaudited consolidated financial statements of ICC and its subsidiaries which are included
elsewhere in this proxy statement-prospectus. ICCs financial data at or for the years ended
December 31, 2003 through 2007 is derived from audited consolidated financial statements of ICC and
its subsidiaries. The data for ICC is presented in conformity with GAAP.
11
Citizens, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Nine Months |
|
At or for the Year |
|
|
Ended September 30, |
|
Ended December 31, |
|
|
2008 |
|
2007 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
(In thousands, except per share data) |
Total Revenues |
|
$ |
123,370 |
|
|
$ |
120,869 |
|
|
$ |
169,637 |
|
|
$ |
154,189 |
|
|
$ |
139,024 |
|
|
$ |
96,644 |
|
|
$ |
88,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
4,913 |
|
|
|
10,623 |
|
|
|
16,557 |
|
|
|
8,677 |
|
|
|
7,302 |
|
|
|
7,732 |
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
Earnings (loss) Per
Class A Share |
|
|
0.07 |
|
|
|
0.22 |
|
|
|
0.35 |
|
|
|
0.16 |
|
|
|
0.13 |
|
|
|
0.17 |
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
812,896 |
|
|
|
740,205 |
|
|
|
787,909 |
|
|
|
711,184 |
|
|
|
661,889 |
|
|
|
661,212 |
|
|
|
390,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
635,610 |
|
|
|
575,449 |
|
|
|
597,532 |
|
|
|
558,690 |
|
|
|
513,380 |
|
|
|
520,179 |
|
|
|
263,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders
Equity |
|
|
164,904 |
|
|
|
150,870 |
|
|
|
176,157 |
|
|
|
139,611 |
|
|
|
136,963 |
|
|
|
135,131 |
|
|
|
127,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Share (1) |
|
|
3.68 |
|
|
|
3.65 |
|
|
|
4.00 |
|
|
|
3.38 |
|
|
|
3.33 |
|
|
|
3.29 |
|
|
|
3.10 |
|
|
|
|
(1) |
|
Reflects 7% common stock dividends paid on December 31, 2005, 2004 and 2003. |
12
Integrity Capital Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Nine Months |
|
At or for the Year |
|
|
Ended September 30, |
|
Ended December 31, |
|
|
2008 |
|
2007 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
(In thousands, except per share data) |
Total Revenues |
|
$ |
2,066 |
|
|
$ |
2,075 |
|
|
$ |
2,705 |
|
|
$ |
2,433 |
|
|
$ |
1,610 |
|
|
$ |
827 |
|
|
$ |
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
34 |
|
|
|
172 |
|
|
|
75 |
|
|
|
40 |
|
|
|
89 |
|
|
|
2 |
|
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
Earnings (loss) Per
Share |
|
|
0.01 |
|
|
|
0.04 |
|
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
|
|
|
|
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
11,173 |
|
|
|
9,594 |
|
|
|
9,975 |
|
|
|
8,250 |
|
|
|
6,732 |
|
|
|
5,687 |
|
|
|
6,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
5,747 |
|
|
|
4,007 |
|
|
|
4,584 |
|
|
|
3,086 |
|
|
|
1,598 |
|
|
|
544 |
|
|
|
1,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders
Equity |
|
|
5,426 |
|
|
|
5,587 |
|
|
|
5,391 |
|
|
|
5,164 |
|
|
|
5,134 |
|
|
|
5,143 |
|
|
|
4,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Share |
|
|
1.22 |
|
|
|
1.25 |
|
|
|
1.21 |
|
|
|
1.16 |
|
|
|
1.15 |
|
|
|
1.18 |
|
|
|
1.13 |
|
Comparative Per Share Information
The following table presents historical per share data of Citizens and ICC. The comparative per
share data are derived from, and should be read together with, the audited historical financial
statements of Citizens that are incorporated by reference into this proxy statement-prospectus and
the audited historical financial statements of ICC included elsewhere in this proxy
statement-prospectus. See Available Information and ICCs annual financial statements included as
Appendix C to this proxy statement-prospectus.
|
|
|
|
|
|
|
|
|
|
|
Citizens |
|
ICC |
Earnings per share basic fiscal year ended December 31, 2007 |
|
$ |
0.35 |
|
|
$ |
0.02 |
|
|
Earnings per share diluted fiscal year ended December 31, 2007 |
|
$ |
0.18 |
|
|
$ |
0.02 |
|
|
Book value per share as of December 31, 2007 |
|
$ |
4.00 |
|
|
$ |
1.21 |
|
13
RISK FACTORS
You should consider carefully the risks described below in assessing the Merger and an investment
in the Class A common stock of Citizens.
Risks Relating to the Merger
The merger consideration is fixed and will not be adjusted to reflect changes in Citizens stock
value prior to the effective time of the Merger.
The Merger Agreement provides that each share of ICC common stock will be converted into the right
to a fixed number of shares of Citizens Class A common stock. The merger consideration will not be
adjusted to reflect any changes in the value of either of Citizens Class A common stock or ICCs
common stock between the date of the Merger Agreement and the effective time of the Merger. As a
result, the value of the merger consideration to be paid to ICCs shareholders will not be known at
the time of the ICC special meeting, and you will not know when you vote the exact value of the
shares of Citizens Class A common stock that you will receive. You are urged to obtain current
market price quotations for Citizens Class A common stock prior to voting on the Merger.
Moreover, the value of Citizens Class A common stock may also rise or fall after the Merger. Stock
price changes may result from a variety of factors, including completion of the Merger, general
market and economic conditions, changes in the respective businesses, operations and prospects and
regulatory considerations. Many of these factors are beyond Citizens control, and it is possible
that the market value of Citizens Class A common stock at the time of the Merger and afterward may
be substantially lower than current market value.
Some of the directors and executive officers of ICC have interests and arrangements that could have
affected their respective decision to support or approve the Merger.
The interests of some of the directors and executive officers of ICC in the Merger are different
from, and may be in addition to, those of ICC shareholders generally, and could have affected their
decision to support or approve the Merger. These interests include:
|
|
a proposed consulting agreement with M. Bruce VanDyke, the President and a director of ICC
in the event the Merger is consummated; |
|
|
a proposed consulting agreement with Michael N. Fink, Chairman of the Board of Directors of
ICC in the event the Merger is consummated; |
As a result, these directors and executive officers of ICC may be more likely to recommend to ICC
shareholders the approval of the Merger Agreement than if they did not have these interests.
ICC shareholders will not control the future operations of Citizens.
Currently, ICC shareholders have the power to approve or reject any matters requiring shareholder
approval under Indiana law and ICCs articles of incorporation and bylaws. After the Merger, ICC
shareholders will own up to approximately 2.9% of the outstanding shares of Citizens Class A common
stock. Even if all former ICC shareholders vote together on all matters presented to Citizens
14
shareholders, from time to time, the former ICC shareholders will not have a significant impact on
the approval or rejection of future proposals of Citizens submitted to a shareholder vote.
Citizens may not be able to integrate ICIC successfully.
Realization of the anticipated benefits in the Merger will depend on Citizens ability to
successfully integrate the operations of ICIC into the insurance operations of Citizens.
The process of integrating Citizens and ICIC operations could cause an interruption of or loss of
momentum in business or financial performance of Citizens after the Merger. The diversion of
managements attention and any delays or difficulties encountered in connection with the Merger and
the integration of these operations could have an adverse effect on the business, results of
operations, financial condition and price of Citizens Class A common stock. The integration
process may also result in additional and unforeseen expenses. Any contemplated expense savings
and synergies anticipated from the Merger may not be realized.
Failure to complete the Merger could negatively impact the share price, future business and
financial results of Citizens and ICC.
If any condition to the Merger is not satisfied or, if applicable, waived, the Merger will not be
completed. In addition, Citizens and ICC may terminate the Merger Agreement under certain
circumstances. Citizens and ICC will also be obligated to pay certain legal and accounting fees
and related expenses in connection with the Merger, whether or not the Merger is completed. In
addition, Citizens and ICC have each diverted significant management resources in an effort to
complete the Merger and are subject to restrictions contained in the Merger Agreement on the
conduct of their businesses. If the Merger is not completed, each of Citizens and ICC will have
incurred costs, including the diversion of management resources, for which it will have received
little or no benefit.
Obtaining required approvals may delay the completion of the Merger or reduce the anticipated
benefits.
Completion of the Merger is conditioned upon filings with, and the receipt of required approvals
from, the Indiana Insurance Commissioner. The required approvals have not yet been obtained, and
if they are obtained, they may impose conditions on the divisions, operations or assets of
Citizens, ICC, or ICIC that may jeopardize or delay completion of the Merger or reduce the
anticipated benefits of the Merger.
Risks Relating to the Business of Citizens
Note: References in the risk factors below to we, us, our, Citizens and like terms relate
to Citizens, Inc. and its subsidiaries on a consolidated basis. We operate our subsidiaries as
separate and distinct entities.
A substantial amount of our revenue comes from foreign residents. This involves risks associated
with the possible application of foreign insurance and securities laws and regulations to our
business, as well as risks from political and economic instability and currency or asset transfer
restrictions.
15
A substantial part of our insurance policy sales are from foreign countries, primarily those
located in Latin America and the Pacific Rim. There is a risk that we may lose a significant
portion of these sales should adverse events occur in these countries.
We do not accept insurance applications outside of the United States. All of our assets are in the
United States and all policy premiums must be paid to us in U.S. Dollars drawn on U.S. banks. As a
result, we have never qualified to do business in any foreign country and have never submitted our
insurance policies issued to foreign residents for review by any insurance regulatory agency. We
sell our policies to foreign residents using foreign independent marketing firms and consultants,
and we rely on those persons to comply with applicable laws in selling our products and offering
policyholders the opportunity to participate in our stock investment plan, which is administered in
the United States by our transfer agent.
The government of a foreign country could determine that its residents may not buy life insurance
from us unless we became qualified to do business in that country or unless our policies purchased
by its residents receive prior approval of its insurance regulators. If this were to occur, our
policy sales to that countrys residents would cease before any such approvals could be obtained.
Also, there is no assurance that we would be able to qualify to do business in any foreign country
or that its insurance regulatory authorities would approve our policies. We could also face
sanctions, including fines and penalties, if a countrys authorities determined any failure to
qualify or otherwise comply with its laws was willful or ongoing, and we decided to continue making
policy sales through independent marketing consultants to that countrys residents. Any of the
foregoing could reduce our revenues and materially adversely affect our results of operations and
financial condition. Additionally, we do not determine whether the independent marketing
consultants are required to be licensed to sell insurance in the countries in which they make
insurance sales. If our marketing consultants were not in compliance with applicable laws,
including licensing laws, they could be required to cease operations, which would reduce our
revenues and materially, adversely affect our results of operations and financial condition. We
have not obtained any advice of counsel in any foreign jurisdictions with respect to these matters.
We are unable to quantify the effect of foreign regulation on our business if regulation were to
be imposed on us, but we believe we could expend substantial amounts of time and incur substantial
expense in complying with any foreign regulation, and we may decide to avoid a market if regulation
were imposed.
The offer and sale of our Class A common stock under our stock investment plan is registered under
the Securities Act of 1933. Many of our foreign policyholders invest certain cash benefits they
receive with respect to their policies in our Class A common stock through this plan, which is not
registered in any foreign jurisdiction. Prior to October 2005, many of our foreign policyholders
assigned these cash benefits to two non-U.S. trusts for the purpose of accumulating ownership of
our Class A common stock. We have not obtained any advice of counsel in any foreign jurisdiction as
to whether any such participation by foreign residents is subject to foreign securities laws or
regulations or whether the independent marketing consultants are subject to licensing requirements
in connection with the foregoing investments. If a securities regulatory authority were to
determine the offer and sale of our Class A common stock were contrary to applicable laws and
regulations, we could be faced with cease and desist orders, fines and penalties.
16
We could also be faced with private disputes relating to the non-U.S. trusts or our stock
investment plan, including the possibility of securities law claims within the United States. In
the absence of countervailing considerations, we would expect to defend any such claims and we
could incur significant defense costs, including not only attorneys fees and other direct
litigation costs, but also the expenditure of substantial amounts of management time that otherwise
would be devoted to our business. This could materially, adversely affect our results of operations
and financial condition.
We are unable to quantify the effect of foreign regulation on our business if regulation were to be
imposed on us, but we believe we could expend substantial amounts of time and incur substantial
expense in complying with any foreign regulation, and we may decide to avoid a market if regulation
were imposed.
Additionally, if economic or political crises were to occur in any of the countries where our
foreign policyowners reside, our revenues would likely decline. Also, currency control laws,
regulations and decrees in foreign countries, if implemented, could materially adversely affect our
revenues by imposing restrictions on asset transfers outside of a country where our insureds
reside.
While our management has more than 40 years of experience in writing life insurance policies for
foreign residents without any significant regulatory action or any lengthy currency controls
relating to our foreign resident insureds, there can be no assurance that such situations will not
occur and that our revenues, results of operations and financial condition will not be materially,
adversely affected if they do occur.
Our actual claims losses may exceed our reserves for claims and we may be required to establish
additional reserves, which in turn may adversely impact our results of operations and financial
condition.
We maintain reserves to cover our estimated exposure for claims relating to our issued insurance
policies. Reserves, whether calculated under accounting principles generally accepted in the United
States, or GAAP, or statutory accounting practices prescribed by various state insurance
regulators, do not represent an exact calculation of exposure, but instead represent our best
estimates, generally involving actuarial projections, of what we expect claims will be based on
mortality assumptions that are determined by various regulatory authorities. Many reserve
assumptions are not directly quantifiable, particularly on a prospective basis. In addition, when
we acquire other domestic life insurance companies, our assessment of the adequacy of acquired
policy liabilities is subject to our estimates and assumptions. Reserve estimates are refined as
experience develops, and adjustments to reserves are reflected in our statements of operations for
the period in which such estimates are updated. Because establishment of reserves is an inherently
uncertain process involving estimates of future losses, future developments may require us to
increase claims reserves, which may have a material adverse effect on our results of operations and
financial condition in the period in which such increase is made.
Lack of market acceptance of our new insurance products for our non-U.S. residents could negatively
impact our financial results.
During 2008, we introduced new insurance products for non-U.S. residents. Our new production of
insurance from non-U.S. residents slowed in the first nine months of 2008 due to our marketing
forces
17
lack of familiarity with, and lower than anticipated acceptance of, these new policies. Also,
disruptions in some of our key markets, both governmental and internal within marketing structures,
further slowed sales during the first nine months. If our foreign independent marketing consultants
and marketing firms are not able to achieve sales of the new policies consistent with past levels
of policy sales, we may be faced with a decrease in the number of these consultants and marketing
firms, which would hinder our growth objectives. In addition, continued disruption of our foreign
independent marketing consultants and marketing firms could reduce our new insurance policy sales
significantly and have a material adverse effect on our results of operations and financial
conditions.
We may be required to accelerate the amortization of deferred acquisition costs and the costs of
customer relationships acquired, which would increase our expenses and adversely affect our results
of operations and financial condition.
At September 30, 2008, we had $106.0 million of deferred policy acquisition costs, or DAC. DAC
represents costs that vary with and are primarily related to the sale and issuance of our insurance
policies and are deferred and amortized over the estimated life of the related insurance policies.
These costs include commissions in excess of ultimate renewal commissions, solicitation and
printing costs, sales material and some support costs, such as underwriting and contract and policy
issuance expenses. Under GAAP, DAC is amortized to income over the lives of the underlying
policies, in relation to the anticipated recognition of premiums.
In addition, when we acquire a block of insurance policies, we assign a portion of the purchase
price to the right to receive future net cash flows from existing insurance and investment
contracts and policies. This intangible asset, called the cost of customer relationships acquired,
or CCR, represents the actuarially estimated present value of future cash flows from the acquired
policies. At September 30, 2008, we had $29.5 million of CCR. We amortize the value of this
intangible asset in a manner similar to the amortization of DAC.
Our amortization of DAC and CCR generally depends upon anticipated profits from investments,
surrender and other policy charges, mortality, morbidity and maintenance expense margins. For
example, if our insurance policy lapse and surrender rates were to exceed the assumptions upon
which we priced our insurance policies, or if actual persistency proves to be less than our
persistency assumptions, especially in the early years of a policy, we would be required to
accelerate the amortization of expenses we deferred in connection with the acquisition of the
policy. We regularly review the quality of our DAC and CCR to determine if they are recoverable
from future income. If these costs are not recoverable, they are charged to expenses in the
financial period in which we make this determination.
Unfavorable experience with regard to expected expenses, investment returns, surrender and other
policy changes, mortality, morbidity, lapses or persistency may cause us to increase the
amortization of DAC or CCR, or both, or to record a current period expense to increase benefit
reserves, any of which could have a material adverse effect on our results of operations and
financial condition.
We may be required to recognize other than temporary impairment in the value of our goodwill, which
would increase our expenses and materially adversely affect our results of operations and financial
condition.
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Goodwill represents the excess of the amount paid to acquire various life insurance companies over
the fair value of their net assets at the date of the acquisition. Under GAAP, we test the carrying
value of goodwill for impairment at least annually at the reporting unit level, which is either
an operating segment or a business one level below the operating segment. Goodwill is impaired if
its carrying value exceeds its implied fair value. This may occur for various reasons, including
changes in actual or expected earnings or cash flows of a reporting unit, generation of earnings by
a reporting unit at a lower rate than similar businesses or declines in market prices for publicly
traded businesses similar to our reporting units. If any portion of our goodwill becomes impaired,
we would be required to recognize the amount of the impairment as a current-period expense, which
could have a material adverse effect on our results of operations and financial condition. We
performed assessments of whether goodwill was impaired on December 31, 2006 and wrote off $1.0
million of goodwill in 2006. No impairment of goodwill was identified by us in 2005 or 2007.
Gross unrealized losses may be realized or result in future impairments.
Our gross unrealized losses on our securities portfolio at September 30, 2008 were $21.3 million
net of tax compared to $2.1 million net of tax at December 31, 2007. While we intend to hold these
instruments to maturity, realized losses or impairments on them may have a material adverse impact
on our results of operation and financial position.
We are a defendant in lawsuits, which may adversely affect our financial condition and detract from
the time our management is able to devote to our business, and we are subject to risks related to
litigation and regulatory matters.
We and certain of our insurance subsidiaries are defendants in various lawsuits described in the
SEC reports we incorporated by reference into this proxy statement-prospectus, if determined
adversely to us or our subsidiaries, could expose us to class action damages which could have a
material adverse affect on our results of operating and financial condition. These lawsuits are in
various stages of discovery and procedural processes, and it is not possible to evaluate potential
monetary exposure to us or our subsidiaries. In addition, litigating these cases is costly and can
be time consuming.
Reinsurers with which we do business could increase their premium rates and may not honor their
obligations, leaving us liable for the reinsured coverage.
We reinsure certain risks underwritten by our various operating segments. Market conditions beyond
our control determine the availability and cost of the reinsurance protection we purchase. The high
cost of reinsurance or lack of affordable coverage could adversely affect our results of operations
and financial condition.
Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain
our current reinsurance facilities and, even if highly desirable or necessary, we may not be able
to obtain replacement reinsurance facilities in adequate amounts or at favorable rates. If we are
unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net
exposures would increase or, if we are unwilling or unable to bear an increase in net exposures, we
may have to reduce the level of our underwriting commitments. In addition, our reinsurance
facilities may be cancelled, pursuant to their
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terms, upon the occurrence of certain specified events, including a change of control of Citizens
(generally defined as the acquisition of 10% or more of our voting equity securities) or the
failure of our insurance company subsidiaries to maintain the minimum required levels of statutory
surplus. Any of these potential developments could materially adversely affect our revenues,
results of operations and financial condition.
For the majority of our business, we retain only the first $100,000 of risk on any one life and
cede the remaining risk to our reinsurers. In 2007, we reinsured $274 million of face amount of our
life insurance policies, and in 2006 we reinsured $259 million of face amount of our life insurance
policies. Amounts reinsured in 2007 and 2006 represented 5.7% and 5.6%, respectively, of the face
amount of life insurance in effect in both years. Although the cost of reinsurance is, in some
cases, reflected in premium rates, under certain reinsurance agreements, the reinsurer may increase
the rate it charges us for reinsurance. If our cost of reinsurance were to increase, we might not
be able to recover these increased costs, and our results of operations and financial condition
could be materially and adversely affected.
Although our reinsurers are liable to us to the extent of the ceded reinsurance, we remain liable
to our policyholders as the direct insurer with respect to all reinsured risks. As a result, ceded
reinsurance arrangements do not eliminate our obligation to pay claims. We are subject to the
credit risks of our reinsurers. Our reinsurers may not pay the reinsurance recoverables that they
owe to us or they may not pay such recoverables on a timely basis. A reinsurers insolvency,
underwriting results or investment returns may affect its ability to fulfill its reinsurance
obligations to us. Our receivable from reinsurers was $16.0 million at December 31, 2006 and $13.5
million at December 31, 2007.
In addition, effective January 1, 2004, one of our insurance subsidiaries entered into a
coinsurance agreement with an unaffiliated company under which it ceded substantially all of the
accident and health insurance policies issued. At December 31, 2007, the coinsurance company had
established statutory accounting liabilities for these policies of $6.2 million. Our subsidiary has
established trust accounts totaling $6.8 million for payment to the coinsurance company for claims
under these policies. To the extent the sums in the trust accounts are not sufficient to cover
claims under such policies and the coinsurance company does not meet its obligations under the
coinsurance agreement, our subsidiary would be contingently liable to the policyholders.
We may not be able to continue our past strategy of acquiring other U.S. life insurance companies,
and we may not realize improvements to our financial results as a result of our past or any future
acquisitions.
We have acquired 15 U.S. life insurance companies since 1987. Our objective in this strategy has
been to increase our assets, revenues and capital, improve our competitive position and increase
our earnings, in part by realizing certain operating efficiencies associated with economies of
scale. Prior to 2004, increases in earnings from the completed acquisitions were not significant.
We evaluate possible acquisitions of other insurance companies on an ongoing basis. While our
business model is not dependent primarily upon acquisitions, the time frame for achieving or
further improving our market positions can be shortened through acquisitions. There can be no
assurance that suitable
20
acquisitions presenting opportunities for continued growth and operating efficiencies will be
available to us, or that we will realize the anticipated financial results from the acquisitions we
do complete.
Even if we identify and complete insurance company acquisitions, we may be unable to integrate them
on an economically favorable basis. Implementation of an acquisition strategy entails a number of
risks, including, among others:
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inaccurate assessment of liabilities, contingent liabilities or the adequacy of claims
reserves; |
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difficulties in realizing projected efficiencies, synergies and cost savings; |
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failure to achieve anticipated revenues, earnings or cash flow; |
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an increase in indebtedness and a limitation on our ability to access additional capital
when needed; and |
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adverse changes in the economies of geographic regions in which the businesses of our
acquisitions are concentrated, due to natural disasters, changing population demographics,
governmental actions and other causes. |
The occurrence of any of these events could have a material adverse effect on our results of
operations and financial condition.
Our international and domestic operations face significant competition.
Our international marketing plan focuses on making available U.S. Dollar-denominated life insurance
products to high net worth, high income individuals residing in more than 35 countries. New
competition could cause the supply of insurance to change, which could affect our ability to price
our products at attractive rates thereby adversely affecting our revenues, results of operations
and financial condition. Although there are some impediments facing potential competitors that wish
to enter the foreign markets we serve, the entry of new competitors into these markets may occur,
affording our customers reason to change to other insurance providers. We experience competition
primarily from the following sources with respect to our business with foreign residents, many of
which have substantially greater financial, marketing and other resources than we have:
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Foreign operated companies with U.S. Dollar policies. We face direct competition from
companies that operate in the same manner as we operate in our international markets. These
competitors include National Western Life Insurance Company, Best Meridian Insurance Company
and, to a lesser extent, Pan American Life Insurance Company and American International Group. |
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Companies foreign to the countries in which policies are sold but that issue local currency
policies. Another group of our competitors in the international marketplace consists of
companies that are foreign to the countries in which the policies are sold but issue life
insurance policies denominated in the local currencies of those countries. Local currency
policies provide the benefit of assets located in the country of foreign residents but entail
risks of uncertainty due to local currency fluctuations as well as the perceived instability
and weakness of local currencies. |
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Locally operated companies with local currency policies. We compete with companies formed
and operated in the country in which our foreign insureds reside. Generally, these companies
are subject to risks of currency fluctuations, and they primarily 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 we use. As a result, the cost of insurance from
these companies tends to be higher than ours. Although these companies typically market their
policies to a broader section of the population than do our independent marketing firms and
consultants, there can be no assurance that these companies will not endeavor to place a
greater emphasis on our target market and compete more directly with us. |
In the United States, we compete with more than 1,000 other life insurance companies of various
sizes. The life insurance business in the United States is highly competitive, in part because it
is a mature industry that, in recent years, has experienced little to no growth in life insurance
sales. Many domestic life insurance companies have substantially greater financial resources,
longer business histories and more diversified lines of insurance coverage than we do. These
companies also have larger sales forces than we have. Competition in the United States has also
increased recently because the life insurance industry is consolidating, with larger, more
efficient organizations emerging from the consolidation. In addition, legislation became effective
in 2000 that permits commercial banks, insurance companies and investment banks to combine. This
legislation permits, for instance, a commercial bank to acquire or form an insurance company. We
believe these factors have increased competitive pressures in the life insurance market in general.
In addition, from time to time, companies enter and exit the markets in which we operate, thereby
increasing competition at times when there are new entrants. We may lose business to competitors
offering competitive products at lower prices, or for other reasons.
There can be no assurance that we will be able to compete effectively in any of our markets. If we
do not, our business, results of operations and financial condition will be materially and
adversely affected.
Sales of our products may be reduced if we are unable to (i) establish and maintain commercial
relationships with independent marketing firms and consultants (ii) attract and retain employee
agents or (iii) develop and maintain our distribution sources.
We distribute our insurance products through several distribution channels, including independent
marketing firms and consultants and our employee agents. These relationships are significant for
both our revenues and our profits. In our life insurance segment, we depend almost exclusively on
the services of independent marketing firms and consultants. In our home service insurance segment,
we depend on employee agents whose role in our distribution process is integral to developing and
maintaining client relationships. Significant competition exists among insurers to form
relationships with marketers of demonstrated ability. Some of our competitors may offer better
compensation packages for marketing firms, consultants and agents and broader arrays of products
and have a greater diversity of distribution resources, better brand recognition, more competitive
pricing, lower cost structures and greater financial strength or claims paying ratings than we do.
We compete with other insurers for marketing firms, independent consultants and employee agents
primarily on the basis of our compensation and support services. Any reduction in our ability to
attract and retain effective sales representatives could materially adversely affect our revenues,
results of operations and financial condition.
22
Loss of the services of our senior management team would likely hinder development of our operating
and marketing programs and our strategy for expanding our business.
We rely on the active participation of our Chairman of the Board and Chief Executive Officer,
Harold E. Riley (age 80), and our Vice Chairman of the Board and President, Rick D. Riley (age 55),
in connection with the development and execution of our operating and marketing plans and strategy
for expanding our business. We anticipate that their expertise will continue to be of substantial
value in connection with our operations. The loss of the services of either of these individuals
could have a significant adverse effect on our business and prospects. We do not have an
employment agreement with either of these persons nor do we carry a key-man insurance policy on
either of their lives.
We are subject to extensive governmental regulation in the United States, which increases our costs
of doing business and could restrict the conduct of our business.
We are subject to extensive regulation and supervision in the U.S. jurisdictions in which we do
business as well as anti-money laundering regulations adopted under the U.S. Patriot Act. Insurance
company regulation is generally designed to protect the interests of policyholders, with
substantially lesser protections to the shareholders of the regulated insurance companies. To that
end, the laws of the various states in which we do business establish insurance regulatory agencies
with broad powers with respect to such things as:
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licensing companies to transact business; |
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authorizing lines of business; |
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mandating capital and surplus requirements; |
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imposing dividend limitations; |
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approving changes in control; |
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licensing agents and distributors of insurance products; |
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placing limitations on the minimum size and certain other provisions of life insurance
contracts; |
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restricting companies ability to enter and exit markets; |
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admitting statutory assets; |
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mandating certain insurance benefits; |
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restricting companies ability to terminate or cancel coverage; |
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requiring companies to provide certain types of coverage; |
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regulating premium rates, including the ability to increase premium rates; |
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approving policy forms; |
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regulating trade and claims practices; |
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imposing privacy requirements; |
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establishing reserve requirements and solvency standards; |
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restricting certain transactions between affiliates; |
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mandating assessments or other surcharges for guaranty funds; |
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regulating market conduct and sales practices of insurers and their marketing agents; and |
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restricting contact with consumers, such as the recently created national do not call
list, and imposing consumer protection measures. |
The capacity for an insurance companys growth in premiums is partially a function of its statutory
regulatory surplus. Maintaining appropriate levels of statutory surplus, as measured by statutory
accounting practices prescribed or permitted by a companys state of domicile, is considered
important by insurance regulatory authorities. Failure to maintain required levels of statutory
surplus could result in increased regulatory scrutiny and enforcement action by regulatory
authorities.
Most insurance regulatory authorities have relatively broad discretion to grant, renew, suspend and
revoke licenses and approvals, and could preclude or temporarily suspend us from carrying on some
or all of our activities, including acquisitions of other insurance companies, require us to add
capital to our insurance company subsidiaries, or fine us. If we are unable to maintain all
required licenses and approvals, or if our U.S. domestic insurance business is determined not to
comply fully with the wide variety of applicable laws and regulations, including the U.S. Patriot
Act, or a relevant authoritys interpretation of the laws and regulations, our revenues, results of
operations and financial condition could be materially adversely affected.
Changes in U.S. regulation may adversely affect our results of operations and financial condition
and limit our prospective growth.
Currently, the U.S. federal government does not regulate directly the insurance business. However,
federal legislation and administrative policies in several areas can materially and adversely
affect insurance companies, including our Company. These areas include the U.S. Patriot Act,
financial services regulation, securities regulation, including the Sarbanes-Oxley Act of 2002,
pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of
direct federal regulation of insurance have been proposed from time to time.
Our failure to maintain effective information systems could adversely affect our business.
Our business is dependent upon our ability to keep up to date with technological advances. This is
particularly important in our life insurance operations, where our information systems are critical
to the
24
operation of our business. Our failure to update these systems to reflect technological
advancements or to protect our systems may adversely affect our business.
We must maintain and enhance our existing information systems and develop new information systems
in order to keep pace with continuing changes in information processing technology, evolving
industry and regulatory standards and changing customer preferences. If we do not maintain adequate
systems, we could experience adverse consequences, including:
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inadequate information on which to base pricing, underwriting and reserve decisions; |
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the loss of existing customers; |
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difficulty in attracting new customers; |
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disputes with customers and our independent marketing firms, consultants and employee
agents; |
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regulatory problems, such as failure to meet prompt payment obligations; |
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litigation exposure; and |
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increases in administrative expenses. |
Some of our information technology systems and software are mainframe-based, legacy-type systems
and require an ongoing commitment of resources to maintain current standards. We continuously
enhance and update our systems to keep pace with changes in our products and business models,
information processing technology, evolving industry and regulatory standards and policyholder
needs. Our success is in large part dependent on maintaining and enhancing the effectiveness of
existing systems, as well as continuing to integrate, develop and enhance our information systems
to support business processes in a cost-effective manner.
Our failure to maintain effective and efficient information systems, or our failure to efficiently
and effectively consolidate our information systems to eliminate redundant or obsolete
applications, could have a material adverse effect on our results of operations and financial
condition.
We have in the past identified material weaknesses in our disclosure controls and controls over
financial reporting. To the extent that we may have not remedied these weaknesses or fail to
maintain our current system of internal controls to an effective level with regard to material
weaknesses, we may not be able to report our financial results accurately. As a result, we could be
required to restate our financial statements and be exposed to increased regulatory scrutiny and
litigation from investors and others.
Effective internal controls are necessary for us to provide reliable financial reports. If we are
unable to provide reliable financial reports, we could become subject to SEC and other regulatory
review and sanctions, as well as litigation that could result in substantial fines, penalties or
liabilities, and our results of operations and financial condition, and the market value of our
securities, could be materially and adversely affected as a result. We have in the past discovered,
and may in the future discover, areas of our internal controls that need improvement.
25
Our failure to protect confidential information and privacy could result in the loss of customers,
subject us to fines and penalties and adversely affect our results of operations and financial
condition.
Our insurance subsidiaries are subject to privacy regulations and to confidentiality obligations.
We also have legal obligations to protect certain confidential information we obtain from our
existing vendors. These obligations generally include protecting confidential information in the
same manner and to the same extent as we protect our own confidential information. The actions we
take to protect confidential information include among other things:
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monitoring our record retention plans and policies and any changes in state or federal
privacy and compliance requirements; |
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maintaining secure storage facilities for tangible records; and |
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limiting access to electronic information in order to safeguard certain current
information. |
In addition, the Gramm-Leach-Bliley Act requires that we deliver a notice regarding our privacy
policy both at the delivery of an insurance policy and annually thereafter. Certain exceptions are
allowed for sharing of information under joint marketing agreements. However, certain state laws
may require us to obtain a policyholders consent before we share information.
We have, and maintain, a written information security program with appropriate administrative,
technical and physical safeguards to protect such confidential information. If we do not comply
with privacy regulations and protect confidential information, we could experience adverse
consequences, including regulatory sanctions, loss of reputation and litigation, any of which could
have a material adverse effect on our business, results of operations and financial condition.
The insurance industry in which we operate may be subject to periodic negative publicity, which may
negatively impact our financial results.
We interface with and distribute our products to individual consumers. There may be a perception
that these purchasers may be unsophisticated and in need of consumer protection. Accordingly, from
time to time, consumer advocate groups or the media may focus attention on our products, thereby
subjecting us to periodic negative publicity. We may also be negatively impacted if another
insurance company engages in practices resulting in increased public attention to our businesses.
Negative publicity may result in lower sales of insurance, lower persistency of our insurance
products, increased regulation and legislative scrutiny of industry practices as well as increased
litigation, which may further increase our costs of doing business and impede our ability to market
our products. As a result, our business, results of operations and financial condition could be
materially and adversely affected.
26
General economic, financial market and political conditions may materially and adversely affect our
results of operations and financial condition.
Our results of operations and financial condition may be materially and adversely affected from
time to time by general economic, financial market and political conditions, both in the United
States and in the foreign countries where our policy owners reside. These conditions include
economic cycles such as:
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insurance industry cycles; |
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levels of consumer spending; |
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movements of the financial markets; |
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fluctuations in interest rates, monetary policy, demographics; and |
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legislative and competitive changes. |
During periods of economic downturn, our insureds may choose not to purchase our insurance
products, may terminate existing policies or contracts, permit them to lapse or may choose to
reduce the amount of coverage purchased, any of which could have a material adverse effect on our
results of operations and financial condition.
Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of
fees, dividends and other distributions they may make to us. The inability of our subsidiaries to
make payments to us in sufficient amounts for us to conduct our operations could adversely affect
our ability to meet our obligations or expand our business.
As a holding company, our principal asset is the capital stock of our subsidiaries. We rely
primarily on statutorily permissible payments from our insurance company subsidiaries, principally
through service agreements we have with our subsidiaries, to meet our working capital and other
corporate expenses. The ability of our insurance company subsidiaries to make payments to us is
subject to regulation by the states in which they are domiciled, and these payments depend
primarily on approved service agreements between us and these subsidiaries and, to a lesser extent,
the statutory surplus (which is the excess of assets over liabilities as determined under statutory
accounting practices prescribed by an insurance companys state of domicile), future statutory
earnings (which are earnings as determined in accordance with statutory accounting practices) and
regulatory restrictions.
Generally, the net assets of our insurance company subsidiaries available for dividends are limited
to either the lesser or greater (depending on the state of organization) of the subsidiary net gain
from operations during the preceding year and 10% of the subsidiarys net statutory surplus as of
the end of the preceding year as determined in accordance with accounting practices prescribed by
insurance regulatory authorities. Total capital and surplus of CICA as of December 31, 2007 was
approximately
27
$51.6 million. Based upon statutory net gain from operations and surplus of CICA for the year ended
December 31, 2007, approximately $4.8 million of dividends could be paid to us in 2008 without
prior regulatory approval. In late 2007 and 2008, SPLIC paid a $4.6 million and $5.6 million
dividend to CICA, respectively. Funeral Homes of America paid a $255,000 dividend to CICA in 2007.
Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims
of our subsidiaries creditors, including policyholders, have priority with respect to the assets
and earnings of the subsidiaries over the claims of our creditors and shareholders. If any of our
subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders
will have no right to proceed in their own right against the assets of that subsidiary or to cause
the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation,
bankruptcy or winding-up laws.
Adverse capital and credit market conditions may significantly affect our access to debt and equity
capital and our cost of capital in seeking to expand our business.
The capital and credit markets have been experiencing extreme volatility and disruption for over a
year. In recent months, the volatility and disruption reached unprecedented levels. In some cases,
the markets exerted downward pressure on availability of debt and equity capital for certain
issuers, including short term liquidity and credit capacity.
The availability of equity and debt financing to us will depend on a variety of factors such as
market conditions, the general availability of credit, the overall availability of credit to the
financial services industry, our credit capacity, as well as the possibility that investors or
lenders could develop a negative perception of our long- or short-term financial prospects.
Disruptions, uncertainty or volatility in the capital markets may also limit our access to equity
capital for us to seek to expand our business. As such, we may be forced to delay raising capital,
or bear an unattractive cost of capital which could decrease our profitability.
Difficult conditions in the global capital markets and the world economy generally may materially
adversely affect our business and results of operations and we do not expect these conditions to
improve in the near future.
Our results of operations are materially affected by conditions in the economy generally, both in
the U.S. and elsewhere around the world. The stress experienced by global capital markets that
began in the second half of 2007 continued and substantially increased during the third quarter of
2008. Recently, concerns over inflation, energy costs, geopolitical issues, the availability and
cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have
contributed to increased volatility and diminished expectations for the world economy and the
equity and debt markets going forward. These factors, combined with volatile commodity prices,
declining business and consumer confidence and increased unemployment, have precipitated a global
recession. As a result, domestic and international equity markets have been experiencing heightened
volatility and turmoil, with issuers in the financial services industry particularly affected.
These events and the continuing market upheavals may have an adverse effect on us, in part because
we are dependent upon customer behavior. Our revenues could decline in such circumstances and our
profit margins could erode.
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Factors such as consumer spending, business investment, government spending, the volatility and
strength of the capital markets, and inflation all affect the business and economic environment
and, ultimately, the amount and profitability of our business. In an economic downturn
characterized by higher unemployment, lower personal incomes, lower corporate earnings, lower
business investment and lower consumer spending, the demand for our insurance products could be
adversely affected. In addition, we may experience an elevated incidence of lapses or surrenders of
our insurance policies. Our policyholders may choose to defer paying insurance premiums or stop
paying insurance premiums altogether. Adverse changes in the global economy could therefore affect
earnings negatively and could have a material adverse effect on our business, results of operations
and financial condition.
There can be no assurance that actions of the U.S. Government, the Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will
achieve the intended effect.
In response to the financial crises affecting the U.S. banking system and financial markets and
going concern threats to investment banks and other financial institutions, on October 3, 2008,
President Bush signed the Emergency Economic Stabilization Act of 2008 (the EESA) into law.
Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to
$700 billion of mortgage-backed and other securities from financial institutions for the purpose of
stabilizing the financial markets and invest in financial services companies. The Federal
Government, the Federal Reserve and other governmental and regulatory bodies have taken or are
considering taking other actions to address the current financial crisis, including purchases of
commercial paper. There can be no assurance as to what impact such actions will have on the
financial markets, including the high levels of volatility currently being experienced. Such
continued volatility could materially and adversely affect our business, financial condition and
results of operations, or the trading price of our Class A common stock.
Risks Relating to Our Class A Common Stock
The price of our Class A common stock may be volatile and may be affected by market conditions
beyond our control.
Our Class A common stock price is likely to fluctuate in the future and could decline materially
because of the volatility of the stock market in general and as a result of a variety of other
factors, many of which are beyond our control, including:
|
|
quarterly or annual variations in actual or anticipated results of our operations; |
|
|
interest rate fluctuations; |
|
|
changes in financial estimates by securities analysts; |
|
|
valuations of similarly situated companies in our industry; |
|
|
our failure to meet the expectations of securities analysts and investors; |
|
|
actions or announcements by our competitors; |
29
|
|
competition and other factors affecting the life insurance business generally; and |
|
|
conditions in the U.S. and world economies. |
Our Class A common shareholders will not control us for the foreseeable future, will have a limited
ability to influence our business policies and corporate actions and will not by themselves be able
to elect any directors.
It is difficult for minority shareholders to elect any of our directors or otherwise exert
influence over our business. Holders of our outstanding Class B common stock are entitled to elect
a simple majority of our board of directors and are therefore deemed our ultimate controlling
party. All of our Class B common stock is currently owned indirectly by the Harold E. Riley Trust
of which Harold E. Riley, our Chairman of the Board and Chief Executive Officer, is the sole
trustee. Additionally, Harold E. Riley beneficially owns approximately 9.6% of the outstanding
shares of our Class A common stock.
Our articles of incorporation and bylaws, as well as applicable state insurance laws, may
discourage takeovers and business combinations that our shareholders might consider to be in their
best interests.
Our articles of incorporation and bylaws, as well as various state insurance laws, may delay,
deter, render more difficult or prevent a takeover attempt that our shareholders might consider in
their best interests. As a result, our shareholders will be prevented from receiving the benefit
from any premium to the market price of our Class A common stock that may be offered by a bidder in
a takeover context. Even in the absence of a takeover attempt, the existence of these provisions
may adversely affect the prevailing market price of our Class A common stock if they are viewed as
discouraging takeover attempts in the future.
The following provisions in our articles of incorporation and bylaws make it difficult for our
Class A shareholders to replace or remove our directors and have other anti-takeover effects that
may delay, deter or prevent a takeover attempt:
|
|
holders of shares of our Class B common stock elect a simple majority of our board of
directors, and all of these shares are owned by the Harold E. Riley Trust; and |
|
|
our board of directors may issue one or more series of preferred stock without the approval
of our shareholders. |
State insurance laws generally require prior approval of a change in control of an insurance
company. Generally, such laws provide that control over an insurer is presumed to exist if any
person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies
representing 10% or more of the voting securities of the insurer. In considering an application to
acquire control of an insurer, an insurance commissioner generally will consider such factors as
the experience, competence and financial strength of the applicant, the integrity of the
applicants board of directors and executive officers, the acquirers plans for the management and
operation of the insurer, and any anti-competitive results that may arise from the acquisition. In
addition, a person seeking to acquire control of an insurance company is required in some states to
make filings prior to completing an acquisition if the
30
acquirer and the target insurance company and their affiliates have sufficiently large market
shares in particular lines of insurance in those states. These laws may discourage potential
acquisition proposals and may delay, deter or prevent a change of control involving us, including
through transactions, and in particular unsolicited transactions, that some or most of our
shareholders might consider to be desirable and in which our shareholders may receive a premium.
We have never paid any cash dividends on our Class A common stock and do not anticipate doing so in
the foreseeable future.
We have never paid cash dividends on our Class A common stock, as it is our policy to retain
earnings for use in the operation and expansion of our business.
There are a substantial number of shares of our Class A common stock eligible for future sale in
the public market. The sale of a large number of these shares could cause the market price of our
Class A common stock to fall.
There were 45,647,516 shares of our Class A common stock issued and outstanding as of January 8,
2009. Members of our management and other affiliates owned approximately 5,800,000 shares of our
Class A common stock as of this date, representing approximately 13.0% of our outstanding Class A
common stock. These shares have been registered for public resale and may be sold freely.
In addition, a total of 2,649,227 shares of our Class A common stock are issuable upon the
conversion of our Series A-1 and Series A-2 preferred stock and the exercise of warrants granted in
connection therewith. We have a registration statement currently in effect that allows the public
resale of all such shares of Class A common stock.
If our preferred and common shareholders sell a large number of shares of our Class A common stock,
the market price of shares of our Class A common stock could decline significantly. Moreover, the
perception in the public market that our shareholders might sell shares of our Class A common stock
could depress the market price of our Class A common stock.
Holders of our Series A preferred stock may obtain the right to require us to redeem their Series A
preferred stock and we will be required to redeem any shares of Series A preferred stock that
remain outstanding on July 12, 2009.
We will be required to redeem any shares of our Series A preferred stock that remain outstanding on
July 12, 2009 at the original investment price, plus all accrued but unpaid dividends.
We can elect to pay the redemption price in shares of our Class A common stock if:
|
|
the average closing price of the stock is in excess of $3.50 per share for a period of ten
consecutive trading days prior to (but not including) the date that is three trading days
prior to the date of redemption; |
|
|
the stock is listed on NYSE or other eligible market; and |
31
|
|
the stock to be issued is registered under a registration statement effective with the SEC. |
We intend to pay the redemption price of our Series A preferred stock in shares of our Class A
common stock to the extent the conditions described above are satisfied and we are permitted to do
so. The number of shares of our Class A common stock that we issue to redeem these shares of Series
A preferred stock could have a dilutive effect on the book value of the shares of Class A common
stock held by existing holders. However, provisions of our Series A preferred stock could require
us to pay part or all of the redemption price in cash, rather than in shares of our Class A common
stock, under certain circumstances, including failure to meet the conditions described above.
The provisions of our Series A preferred stock require that if (i) the closing price of our Class A
common stock for any 42 trading days, including a period not less than five consecutive trading
days, is less than $4.80, or (ii) we issue Class A common stock or common stock equivalents for
less than $6.11 per share, then the holders of our Series A preferred stock may require us to
redeem their shares of Series A preferred stock at a price equal to the amount of the original
holders original investment, plus all accrued but unpaid dividends thereon to the date of payment.
If we are required, or elect, to redeem shares of our Series A preferred stock for cash, we may
have to curtail our growth and acquisition plans.
Provisions applicable to our Series A preferred stock may make it more difficult or prevent us from
raising funds or taking certain other actions.
Certain provisions applicable to the outstanding shares of our Series A preferred stock trigger
rights of first refusal or payment provisions and require us to obtain the approval of the holders
of such shares to (i) incur debt or allow liens on our property, other than certain permitted debt
and liens, (ii) amend our articles of incorporation so as to affect adversely any rights of the
preferred shareholders, (iii) authorize or create a new class of stock that will be senior or equal
to our Series A preferred stock in terms of dividends, redemption or distribution of assets or (iv)
take other specified actions. These provisions may make it more difficult for us to take certain
corporate actions and could delay, deter or prevent future financings. Our Series A preferred
stock does not have any preemptive rights relating to the shares of Class A common stock proposed
to be issued in the Merger.
In all other offerings of our shares of Class A common stock, such as a private placement of
shares, unless certain limited exceptions apply, the holders of our Series A preferred stock will
generally be entitled to purchase up to 50% of the number of shares of our Class A common stock
offered by us. These preemptive rights could delay, deter or prevent future equity financings.
32
SPECIAL MEETING OF ICC SHAREHOLDERS
Date, Time and Place of Meeting
ICC Special Meeting
A special meeting of ICC shareholders will be held on Monday, February 23, 2009, at 10:00 a.m.,
Eastern Standard Time, at the Valle Vista Conference Center, 755 East Main Street, Greenwood,
Indiana 46143.
Business to Be Transacted at the Special Meeting
This proxy statement-prospectus was mailed to ICC shareholders on or about February 2, 2009 to
solicit proxies to vote on the proposed Merger of ICC and Acquisition under which ICC will become a
wholly-owned subsidiary of Citizens. This proxy statement-prospectus also solicits proxies to vote
on any motion to adjourn or postpone the special meeting to another time and/or place. A vote for
the proposal on the proxy card authorizing the named proxies to vote the shares covered by the
proxy in their discretion with respect to adjourning or postponing the special meeting would allow
the proxies to adjourn or postpone the special meeting in order to solicit additional proxies for
purposes of obtaining a quorum or more votes in favor of the Merger.
As of the date of this proxy statement-prospectus, neither Citizens nor ICC are aware of other
business that will come before the ICC special meeting.
Voting Securities
Only ICC shareholders of record at the close of business on January 15, 2009 will be entitled to
vote at the special meeting. On that date, there were issued and outstanding 4,462,206 shares of
ICC common stock. Each share of ICC common stock is entitled to one vote per share with respect to
the Merger. The affirmative vote of a majority of the outstanding common stock of ICC is necessary
to approve the Merger.
Voting Securities and Principal Holders Thereof
The following table sets forth information as of January 15, 2009, regarding ownership of common
stock of ICC by (i) by its executive officers and directors, (ii) by its executive officers and
directors as a group, and (iii) the persons known by ICC to own beneficially 5% or more of its shares.
33
Ownership of ICC Common Stock
|
|
|
|
|
|
|
|
|
|
|
Ownership of Common Stock |
|
|
|
|
|
|
|
Percent of |
|
Name and Present Positions with ICC |
|
Shares |
|
|
Class |
|
Michael N. Fink, Chairman of the Board |
|
|
67,000 |
|
|
|
1.5 |
% |
|
M. Bruce VanDyke, President, Treasurer and Director |
|
|
585,000 |
|
|
|
13.1 |
|
|
Gerald A. Eastlund, Director |
|
|
50,000 |
|
|
|
1.1 |
|
|
George R. Likens, Director |
|
|
146,950 |
|
|
|
3.3 |
|
|
Robert H. Menke, Jr., Director |
|
|
58,000 |
|
|
|
1.3 |
|
|
Dale L. Orem, Director |
|
|
55,000 |
|
|
|
1.2 |
|
|
Robert T. Smith, II, Director |
|
|
70,000 |
|
|
|
1.6 |
|
|
R. Dean Branan, Secretary and Assistant Treasurer |
|
|
75,000 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
Officers and Directors as a Group (8 persons) |
|
|
1,106,950 |
|
|
|
24.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% or more Shareholders |
|
|
|
|
|
|
|
|
|
M. Bruce VanDyke
65 Airport Parkway, Suite 118
Greenwood, IN 46143 |
|
|
585,000 |
|
|
|
13.1 |
% |
|
CICA Insurance Company of America (1)
400 East Anderson Lane
Austin, TX 78752 |
|
|
585,000 |
|
|
|
13.1 |
% |
|
|
|
(1) |
|
Citizens is the beneficial owner of these shares through CICA. |
Revocability of Proxies
Any ICC proxy may be revoked before its exercise at the special meeting or any adjournment thereof
by:
|
|
giving written notice of revocation to the Secretary of ICC prior to the special meeting; |
|
|
giving written notice of revocation to the Secretary of ICC at the special meeting; or |
34
|
|
signing and delivering a proxy bearing a later date. |
The presence of a shareholder at the special meeting will not revoke his or her proxy. However,
being present at the special meeting allows a shareholder to revoke any prior proxy and to vote in
person.
Proxy Solicitation
ICC will pay the costs of soliciting proxies. Officers and employees of ICC 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. ICC will reimburse brokers,
custodians, nominees or other fiduciaries for their reasonable charges and expenses in forwarding
materials to beneficial owners of shares.
35
PROPOSED MERGER
Background and Reasons
During 2008, management and the Board of Directors of ICC in informal discussions among themselves
considered whether ICC should explore strategic alternatives, including a sale of the company. ICC
had conducted its initial operations for several years and management had concerns that taking ICC
to the next level would involve significant capital, human resources and additional business
risk. ICC was incorporated under Indiana law on May 23, 2000 for the primary purpose of organizing
a life insurance subsidiary. ICIC commenced insurance operations on March 6, 2004. ICIC had
developed its initial insurance product and management felt in 2008 that it was time for ICIC to
develop new policies or consider other alternatives for growth. The development of new policies
and a new marketing thrust would require significant management time and would require significant
capital.
During the summer of 2008, with the domestic economy in a downturn, management began to consider
seriously whether the sale of the company should be pursued, particularly in light of ICCs capital
needs in order to expand its business and grow. Mike Fink, Chairman of Board of ICC, was
acquainted with Citizens through the 2003 sale of a company he founded, First Alliance Corporation,
to Citizens, and Mr. Fink had worked for Citizens in various capacities for a few years thereafter.
ICC has an existing services agreement with Citizens and CICA has a reinsurance agreement with
ICIC. Further, the initial insurance product marketed by ICIC was modeled on a product that
Citizens had developed. Thus, management of ICC was well acquainted with Citizens, its history and
its capabilities. In late August, M. Bruce VanDyke, President and Treasurer of ICC, and Mr. Fink
determined to call Rick Riley, Vice Chairman and President of Citizens, to discuss whether Citizens
would be interested in pursuing a possible acquisition of ICC by Citizens.
Based on preliminary telephone discussions, the parties agreed that Rick Riley would travel to
Lexington, Kentucky to further explore the matter. On September 5, 2008, Mr. Riley traveled to
Lexington and met with Messrs. VanDyke and Fink. There the parties discussed at length their
respective businesses, including life insurance operations of each party, the agency forces,
investment portfolios, the policies that were being sold and developed by Citizens and the
insurance policies of ICIC. Also discussed were the benefits ICC shareholders would have in owning
Citizens Class A common stock, an equity security which is traded on the New York Stock Exchange,
as well as opportunities for growth of Citizens, and that shareholders of ICC could participate in
those potential growth opportunities. In addition, it was discussed whether management of ICC and
ICIC would remain as is and whether Messrs. VanDyke and Fink would continue in some sort of working
or consulting capacity with ICIC and Citizens in the event of a business combination of the
parties.
Over the following weeks, further discussions and negotiations occurred over the telephone with
respect to valuing the respective companies and the structure of a business combination. Citizens
prepared a nonbinding term sheet and distributed it to ICC management under which the transaction
structure would be a tax deferred or tax free merger. Management of ICC reviewed the book value of
the company under generally accepted accounting principles (approximately $1.22 per share, as well
as the capital and surplus of ICIC, the market value of its investments, the premium income of
ICIC, policy reserves, its agency force, and the value of its state insurance license. Management
of ICC reviewed the financial statements of Citizens and the trading history of the Class A common
stock of Citizens over the past several years. On September 22, 2008, the ICC Board of Directors
met to discuss possible
36
business combination of ICC and Citizens and approved further negotiations by ICC with management
of Citizens.
On October 15, 2008, ICC received a draft of the Merger Agreement which had been prepared by
Citizens. In the draft Merger Agreement, Citizens offered a merger transaction structured to be
tax deferred to the shareholders of ICC, with merger consideration to the ICC shareholders of one
share of Citizens Class A common stock for each three shares of ICC common stock. October 30,
2008, Messrs. VanDyke and Fink met with Mr. Riley in Chicago, Illinois to discuss and review the
Merger Agreement. A subsequent draft of the Merger Agreement was distributed to the parties on
November 10, 2008. On November 11, 2008, the Board of Directors of ICC met and approved the Merger
Agreement, and it was executed on November 11, 2008 by the parties.
Value of Integrity Capital Corporation
Management of ICC and management of Citizens reviewed carefully the assets and liabilities of ICC,
and it was concluded that determination of the value for ICC should be based upon an embedded value
basis of ICIC and then the other assets of ICC consisting of bonds and cash, were added to the
overall value. The statutory book value of ICIC was considered by Citizens based on its experience
in acquiring small insurance companies over the past 30 years. Accordingly, the capital and
surplus of ICIC was reviewed as well as its annual insurance premium revenue valued based upon the
anticipated profitability of the inforce policies and paid-up policy reserves. State licenses,
projected agency force production, and non-admitted assets were also considered. The table below
sets forth the values that were used by the parties.
Integrity Capital Corporation and ICIC
Embedded Value Calculation
|
|
|
|
|
Item |
|
Amount |
|
ICIC
|
|
$ |
2,373,908 |
|
Capital & Surplus |
|
$ |
2,373,908 |
|
Interest Maintenance Reserve |
|
|
651 |
|
Ordinary Premium Valuation |
|
|
3,730,071 |
|
Paid Up and Other Reserve Profitability |
|
|
33,400 |
|
State License |
|
|
35,000 |
|
Marketing Force (New Life Premium Written) |
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
ICIC Adjusted Book Value |
|
$ |
6,573,030 |
|
|
|
|
|
|
Other Assets ICC Bonds and Cash |
|
|
3,129,947 |
|
|
|
|
|
|
ICC Total Adjusted Book Value |
|
$ |
9,702,977 |
|
|
|
|
|
|
|
|
|
|
ICC Common Shares Outstanding |
|
|
4,462,206 |
|
|
|
|
|
|
ICC adjusted book value per share |
|
$ |
2.17 |
|
37
The resulting values were reviewed at length by Citizens and by the ICC management. Also discussed
at length were how payment would be made to ICC shareholders, and the tax consequences of the
Merger. The Board of Directors of ICC concurred with ICC managements final total valuation for
ICC.
There were no other valuation methods used other than as described above. Management of Citizens
believes the embedded valuation basis approximates what a purchaser would pay for a small insurance
company, and Citizens has used this valuation method in substantially all of its acquisitions of
small insurance holding companies. Citizens did not include a value for its beneficial ownership
of ICC common shares, but was willing to pay a premium to book value to the other shareholders of
ICC based upon a one share of Citizens Class A common stock for three shares of ICC common stock
exchange ratio. Other valuation methods may indicate a higher or lower value for ICC.
Determining the value for Citizens shares was based upon a review of the trading history of the
Class A common stock of Citizens. Management of ICC determined that a value of $7.50 represented a
fair value of the Class A common stock of Citizens. Thus, the exchange ratio of one share of
Citizens Class A common stock for each three shares of ICC common stock was agreed to by the
parties.
Recommendation of the Board of Directors of ICC
The ICC Board of Directors RECOMMENDS THE ICC SHAREHOLDERS APPROVE THE MERGER. The Board believes
the merger consideration to the ICC shareholders is fair. The management and Board of Directors of
ICC, after careful study and evaluation of the economic, financial, legal and market factors, also
believe the Merger could provide Citizens with increased opportunity for profitable expansion of
its business, which in turn should benefit ICC shareholders who become shareholders of Citizens.
The terms of the Merger were the result of arms-length negotiations between Citizens and ICC over
a several month period, with a significant effort by ICC management. Among the factors considered
by the Board of Directors of ICC in deciding to approve and recommend the Merger were:
1. |
|
The significantly increased liquidity for ICC shareholders by virtue of owning Citizens Class
A common stock including: |
|
|
|
the market on the New York Stock Exchange for Citizens Class A common stock; |
|
|
|
|
the lack of any market for the ICC common stock and likelihood that ICC would not
quantitatively qualify for its own listing on a reputable stock exchange or quotation
system, due to the time and expense of the application process and lack of market makers
willing to sponsor the ICC common stock; |
2. |
|
The terms and conditions of the Merger Agreement, including the exchange ratio which the ICC
Board of Directors and management believe results in a fair price for the ICC shares; |
3. |
|
The growth and liquidity potential to ICC shareholders as future holders of Citizens Class A
common stock compared to the historical lack of growth and limited liquidity of the ICC common
stock; |
38
4. |
|
The financial condition, business assets and liabilities and management of Citizens would
likely be able to provide capital to fuel future growth of ICCs insurance business which is
currently not experiencing meaningful growth due to ICCs financial limitations and lack of
meaningful net income; |
5. |
|
The financial and business prospects of Citizens, including the fact that Citizens insurance
products would be a good fit for ICICs future insurance business; |
6. |
|
The ICC Board of Directors evaluation of the likelihood of consummation of the Merger; |
7. |
|
The business, operations, financial condition, earnings and prospects of ICC, including ICCs
existing and potential liabilities; |
8. |
|
Economies of scale available in the event of combination of the companies; and |
9. |
|
The expectation that the Merger will generally be a tax-deferred transaction to ICC and its
shareholders thereby giving ICC shareholders the equity participation in Citizens without
initially incurring taxes (see Federal Income Tax Considerations). |
The ICC Board of Directors believes it reviewed in sufficient depth the respective financial
condition of ICC, Citizens and their subsidiaries as well as the terms of the Merger Agreement.
The ICC Board of Directors reviewed and discussed all of the above factors but did not weigh or
order the factors over one another. Further, the Board of ICC believes it is capable of evaluating
the value of ICC and Citizens without the assistance of an investment banker, particularly because
ICC is a small insurance holding company, Citizens Class A common stock is traded on the New York
Stock Exchange and the cost of an investment banker would be significant compared to the small
asset size of ICC.
Interests of Certain Persons in the Merger
In considering the recommendation of the ICC Board with regard to the Merger, ICC shareholders
should be aware that Messrs. Fink and VanDyke have interests in the Merger that are in addition to
the interests of ICC shareholders generally. Upon effectiveness of the Merger, Citizens intends to
enter into three-year consulting agreements with each of Messrs. Fink and VanDyke, under which they
will render consulting services to Citizens. Mr. VanDykes monthly consulting fee will be $10,417.
Mr. Finks consulting fee will be $7,084 per month. The members of the ICC Board other than
Messrs. Fink and VanDyke were aware of the foregoing interests and considered them, among other
matters, in approving the Merger Agreement and the transactions contemplated thereby and
recommending that ICC shareholders vote for the Merger.
ICC shareholders should also be aware that Citizens currently owns indirectly 585,000 shares of ICC
common stock, representing 13.1% of ICCs outstanding shares of common stock. Citizens intends to
cause its shares of ICC common stock to be voted in favor of the Merger at the special meeting of
shareholders.
39
Regulatory Requirements
The Merger is subject to making the appropriate filings with and receiving approval from, the
Commissioner of Insurance of the State of Indiana. ICC and Citizens believe that no other
affirmative regulatory approvals, findings or orders need to be obtained from any other regulator
or governmental authority.
Receipt of Shares of Citizens Class A Common Stock Procedures
If the Merger is approved at the special meeting, ICC shareholders who do not perfect dissenters
rights will be notified of the approval and furnished with a Letter of Transmittal instructing
such ICC shareholders to send to Citizens exchange agent (who will be identified in the Letter of
Transmittal) their ICC share certificates. Do not submit your ICC share certificates at this time.
If the Merger is completed:
|
|
a Letter of Transmittal will be sent to you; |
|
|
you should send in your ICC share certificates with the Letter of Transmittal; and |
|
|
the exchange agent will exchange your ICC shares for Citizens Class A common stock in the
ratio set forth in the Merger Agreement after it receives your Letter of Transmittal and your
ICC share certificates. |
Exchange Agent
Citizens will appoint Computershare Trust Company, N.A., Transfer Agent and Registrar, 250 Royall
Street, Canton, Massachusetts 02021, (Citizens current stock transfer agent) as exchange agent.
The instructions accompanying the Letter of Transmittal will provide details for surrendering
certificates of ICC 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 ICC shares.
Shareholder Rights Prior to Share Exchange
The exchange agent will not be entitled to vote or exercise any rights of ownership of the ICC
shares held by it prior to the issuance of Citizens Class A common stock to former holders of such
ICC shares, except that it will receive any distributions paid or distributed with respect to the
ICC shares for the account of the persons exchanging such shares. No distributions are expected
with respect to the Citizens Class A common stock.
After the effective date of the Merger there will be no transfers on the ICC stock transfer books
of shares which were issued and outstanding immediately prior to the Effective Date. If after the
Effective Date certificates representing ICC shares are properly presented to the exchange agent or
directly to ICC or Citizens, they will be canceled and exchanged for certificates representing
Citizens Class A common stock in the ratio set forth in the Merger Agreement.
40
Unclaimed Shares or Cash
If outstanding certificates for ICC shares or payment for any 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 (the state of incorporation of Citizens) 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 states 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 Merger will be liable to any ICC 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.
Summary of the Merger Agreement
Below is a summary of the Merger Agreement, which is attached to this proxy statement-prospectus as
Appendix A. You should read the Merger Agreement in addition to this Summary. See Available
Information and Incorporation of Certain Documents by Reference.
Delivery of Citizens Class A Common Stock; Closing Date. If the Merger 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 Indiana law. In order for the Merger to be consummated, the Merger must
be approved by a majority of the outstanding shares of the ICC common stock entitled to vote at the
special meeting. The Merger between Acquisition and ICC will become effective on or as soon after
the special meeting as possible (assuming shareholder approval) (Effective Date). The Effective
Date is anticipated to occur on or before March 2, 2009, but there can be no assurance that the
conditions to the Merger will be satisfied and that the Merger will be consummated on that date or
any other date. The parties to the Merger have agreed to take all actions reasonably necessary to
consummate the proposed transactions.
Representations, Warranties and Covenants; Legal Proceedings Disclosure. Each party to the Merger
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.
Fractional Shares. Fractional shares of Citizens Class A common stock will not be issued under the
Merger Agreement. Instead, fractional shares will be rounded up to the next whole share of Citizens
Class A common stock. For example, an ICC shareholder who owns 100 shares of ICC common stock will
be entitled to receive 34 shares of Citizens Class A common stock even though the exchange ratio of
the shares of ICC for one share of Citizens Class A common stock would result in 33.333 shares of
Class A common stock for such shareholder.
41
Accounting. It is anticipated that the Merger will be accounted for as a purchase in accordance
with accounting principles generally accepted in the United States of America. See Federal Income
Tax Consequences beginning on p. 46.
Other Conditions; Termination or Amendment of the Merger. In addition to ICC shareholder approval
of the Merger Agreement, the obligations of Citizens and ICC to complete the Merger are subject to
the satisfaction of a number of closing conditions, including:
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performance by each party to the Merger Agreement of its respective obligations; |
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approval by the Commissioner of Insurance of the State of Indiana of the change of control
of ICC and ICIC contemplated by the Merger Agreement ; |
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absence of any proceedings instituted or threatened to restrain, enjoin or prohibit the
transactions contemplated by the Merger; |
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continued accuracy in all material respects of the representations and warranties made by
each party in the Merger Agreement; |
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delivery of certain legal opinions and closing certificates; |
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filing Articles of Merger for the Merger with the requisite governmental authority; and |
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the closing of the Merger. |
In addition, Citizens may decline to proceed with the Merger if dissenters rights are asserted for
more than 2.0% of the outstanding ICC shares.
The Merger may be terminated and abandoned at any time (whether before or after approval by the ICC
shareholders) by unanimous consent of Citizens and ICC, or by any party for whose benefit a closing
condition has not been satisfied or waived. Any terms or conditions of the Merger Agreement, except
those required by law, may be waived by the Board of Directors of the party entitled to the benefit
thereof. The Merger Agreement may be amended by agreement of the Board of Directors of the parties.
Expenses and Liability for Termination. Each of the parties to the Merger will pay its own fees
and expenses incurred in connection with the transactions contemplated by the Merger, including
costs incurred in connection with the termination of the Merger.
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 Merger
Agreement, there are no conditions precedent which must be waived by any party in order for the
Merger to be consummated, nor does any party intend to seek to modify or terminate the Merger
Agreement based on existing circumstances.
Conduct of Business Pending the Merger; Other Covenants. ICC has agreed that, prior to the Merger,
it will not:
42
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enter into any transactions except in the ordinary course of business; |
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pay any dividends nor increase the compensation of any of its officers or directors; or |
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enter into any transaction which would adversely affect its financial condition. |
Each party has agreed to provide the other with information as to any significant corporate
developments in performance of the Merger Agreement during its term and to notify promptly the
other parties if it discovers that any of its representations, warranties or covenants contained in
the Merger 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 Merger Agreement have agreed to take all such actions as may be reasonably necessary and
appropriate in order to consummate the transactions contemplated by the Merger Agreement.
The ICC Board of Directors, subject to its fiduciary obligations to the ICC shareholders, has
agreed to use its best efforts to obtain the requisite approval of the ICC shareholders for the
Merger Agreement and the transactions contemplated thereby.
Operations of ICC after the Merger. Following the Merger, Citizens expects to merge ICC into
Citizens but Citizens will continue to operate ICIC in its location in Greenwood, Indiana, with the
consolidation of computer data processing in Citizens system. Citizens will also enter into a
services agreement with ICIC that is substantially similar to the one that Citizens has currently
with ICC, will continue to evaluate the personnel, business practices and opportunities for ICIC
and may make such changes as it deems appropriate following the Merger.
Directors and Executive Officers of ICIC after the Merger
It is anticipated that the following individuals will serve as directors and executive officers of
ICIC after the Merger as follows:
Harold E. Riley, Director. Mr. Riley, age 80, is Chairman of the Board of Citizens and its
Chief Executive Officer. He has more than 50 years experience in the life insurance business,
substantially all in top management positions, and has directed the building of three life
insurance companies. He has been directly responsible for the acquisition of more than 27 life
insurance companies and designed marketing programs that have produced billions of dollars of
guaranteed cash value whole life insurance. He started Citizens (through a predecessor company) 40
years ago with $2.5 million of personal funds and has brought it to over $800 million of assets and
more than $6 billion of insurance in force.
Rick D. Riley, Director, Chairman of the Board, President and Chief Executive Officer.
Rick Riley, age 55, is Vice Chairman and President of Citizens, and has served in various
capacities with Citizens since 1976, including Chief Operating Officer of Citizens and its
affiliates from 1987 to 1995. Mr. Riley has more than 30 years experience in the life insurance
industry with particular expertise in life insurance accounting and data processing systems.
43
Geoffrey M. Kolander, Director, Vice President, General Counsel and Corporate Secretary.
Mr. Kolander, age 33, is Vice President, General Counsel and Corporate Secretary of Citizens, and
joined Citizens in 2006 after serving as General Counsel of Tejas Industries from 2005 to 2006.
Prior to that Mr. Kolander served as an attorney at the Underwood Law Firm from 2001 to 2005. Mr.
Kolander is a licensed attorney in Texas, Colorado and New York. Mr. Kolander also serves as a
Trustee of Southwestern Baptist Theological Seminary located in Fort Worth, Texas.
Thomas F. Kopetic, Director, Vice President, Treasurer and Chief Financial Officer. Mr.
Kopetic, age 49, is Vice President, Treasurer and Chief Financial Officer of Citizens, and joined
Citizens in 2006 after serving as Controller at United Teacher Associates Insurance Company,
located in Austin, Texas from 2003 to 2006. Prior to that Mr. Kopetic served as Finance Manager
with Unitrin P&C Insurance Group located in Dallas, Texas from 1998 to 2003.
Ray A. Riley, Director, Executive Vice President and Chief Marketing Officer. Ray Riley,
age 47, is Executive Vice President and Chief Marketing Officer of CICA, and he has served in
various capacities for Citizens since 1995, including Chief Operations Officer, Chief Pilot, Vice
President of Corporate Development and Vice President of International Marketing.
George N. Likens, Director. Mr. Likens, age 65, has been a partner in Likens Farms,
Madison County, Indiana, for over the past five years, and a director of ICC since 2000.
Larry D. Welch, Executive Vice President, Chief Operating Officer. Mr. Welch, age 41, is
Executive Vice President and Chief Operating Officer of Citizens, and Mr. Welch joined Citizens in
2003 after serving as Vice President and Director of Operations for Capital Synergies in McHenry,
Illinois from 1999 to 2003.
Larry E. Carson, Vice President, Financial Reporting and Tax. Mr. Carson, age 54, serves
in similar capacities for Citizens, and he served as Citizens Vice President, Chief Financial
Officer and Treasurer from 2006 to 2007. Prior to that Mr. Carson served as Assistant Vice
President and Assistant Controller of National Western Life Insurance Company in Austin from 1987
to 2005.
Jonathan M. Pollio, Vice President, Chief Actuary. Mr. Pollio, age 42, serves in similar
capacities for CICA, and he joined Citizens after serving as Actuary Supervisor for Genworth
Financial, Lynchburg, Tennessee, from 2003 to 2006. Prior to that Mr. Pollio served as Associate
Actuary for Canada Life Insurance Company in Atlanta, Georgia from 2001 to 2003.
Michael P. Buchweitz, Vice President, Chief Underwriter. Mr. Buchweitz, age 51, serves in
similar capacities for CICA, and he joined CICA in 1996 after serving as Senior Life Underwriter
Specialist for Aid Association for Lutherans from 1984 to 1996.
Sarah C. Morris, Vice President, Claims. Ms. Morris, age 63, serves in a similar capacity
for CICA, and she joined CICA in 1981 after serving as Claims Supervisor for National Western Life
Insurance in Austin, Texas from 1965 to 1981.
Robert E. Rainey, Jr., Vice President, Electronic Systems. Mr. Rainey, age 55, serves in
a similar capacity for CICA, and he joined CICA in 1991 after serving as Systems Administrator for
the U.S.
44
District Court Eastern Texas in 1981. Prior to that he served as Director of Data Processing for
Promoters Supply, Inc. from 1988 to 1991.
Kay E. Osbourn, Vice President, Internal Audit. Ms. Osbourn, age 42, serves in a similar
capacity for Citizens, and she joined Citizens as Vice President, Internal Audit for Citizens in
2008. Prior to that Ms. Osbourn served as Vice President, Controller for National Western Life
Insurance Company from 1992 to 2008.
Joshua G. Arnold, Assistant Vice President, Investment Officer. Mr. Arnold, age 26,
serves in similar capacities for Citizens, and joined Citizens as Financial Analyst in 2005.
Prior to that Mr. Arnold was with Arnold Oil Company in Waco, Texas from 2002 to 2005.
Brent W. Balke, Assistant Vice President, Controller. Mr. Balke, age 37, serves in a
similar capacity for Citizens, and he served as Citizens Controller from 1998 to 2008. Prior to
that, Mr. Balke was a Loan Officer for WFS Financial Services from 1996 to 1997.
Jennifer K. Hunter, Assistant Vice President, Systems Training. Ms. Hunter, age 58,
serves in a similar capacity for CICA, and she joined CICA in 1993 after serving as a Manager for
National Western Life Insurance Company from 1981 to 1993.
Michael R. Hopkins, Assistant Vice President, Office Services. Mr. Hopkins, age 45, serves
in a similar capacity for Citizens. Prior to joining Citizens, Mr. Hopkins was Sales, Customer
Service and Operations Manager for Golfsmith International from 1995 to 2001. Prior to that he
served as manager of Venture Maps and Globe from 1988 1995.
45
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material U.S. federal income tax consequences to U.S.
holders who exchange ICC common stock for Citizens Class A common stock pursuant to the Merger, and
is not a summary of all potential tax consequences of the transactions contemplated by the Merger
agreement or the Merger itself. The discussion which follows is based on the U.S. Internal Revenue
Code of 1986, as amended (the Code), U.S. Treasury Regulations adopted under the Code,
administrative rulings and pronouncements and judicial decisions as of the date of this proxy
statement-prospectus, all of which are subject to change, possibly with retroactive effect. Any
such change could alter the tax consequences to ICC shareholders, as described below. There can be
no assurance that such changes will not occur.
Shareholders of ICC should be aware that this discussion does not deal with all federal income tax
considerations that may be relevant to shareholders in light of their particular circumstances.
This discussion also does not apply to shareholders which:
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are certain types of persons, such as securities dealers, financial institutions, insurance
companies, foreign persons, real estate investment trusts, regulated investment companies, or
tax-exempt entities; |
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hold their stock as part of a hedge, straddle, constructive sale, conversion or other
integrated transaction; |
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do not hold their stock as capital assets; or |
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are individuals who acquired their shares in connection with the exercise of employee stock
options, under stock purchase plans or otherwise as compensation. |
In addition, the following discussion does not address any tax consequences of:
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the Merger under foreign, state or local tax laws; |
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transactions effectuated prior to, after or concurrently with the transactions discussed in
this proxy statement-prospectus (whether or not any such transactions are undertaken in
connection with the Merger), including any transaction in which shares of ICC stock are
acquired or shares of Citizens Class A common stock are disposed of; or |
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the alternative minimum tax provisions of the Code. |
ACCORDINGLY, ICC SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING ANY APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM.
46
The anticipated federal income tax consequences to ICC shareholders are as follows:
(a) No gain or loss should be recognized by holders of ICC stock solely upon their receipt in
the Merger of Citizens Class A common stock in exchange therefor.
(b) The aggregate tax basis of Citizens Class A common stock received by an ICC shareholder in
the Merger should be the same as the aggregate tax basis of the ICC stock surrendered by that
shareholder in exchange therefor.
(c) The holding period of Citizens Class A common stock received by each ICC shareholder in
the Merger should include the period for which the ICC stock surrendered in exchange therefor was
held.
(d) Cash received by the ICC 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 shareholders basis in the ICC 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 ICC 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 the
Merger. Citizens will receive an opinion from its counsel, Jones & Keller, P.C., to the effect that
the Merger will constitute a reorganization resulting in the anticipated federal tax consequences
(the Tax Opinion). ICC shareholders should be aware that the Tax Opinion does 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 the Merger, nor is there any assurance that the IRS would not prevail in the
event the tax consequences of the Merger were litigated. The Tax Opinion will not address any tax
consequences of the Merger under applicable foreign, state or local income tax laws. The Tax
Opinion is subject to certain assumptions and qualifications, including but not limited to the
truth and accuracy of representations made by Citizens and ICC, including representations in
certain certificates to be delivered to counsel by the respective managements of Citizens and ICC.
ICC 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.
A successful IRS challenge to the reorganization status of the Merger would result in shareholders
of ICC recognizing taxable gain or loss with respect to each share of stock surrendered equal to
the difference between the shareholders basis in such shares and the fair market value of Citizens
Class A common stock received in exchange therefor. In such event, a shareholders aggregate basis
in Citizens Class A common stock received would equal its fair market value at the time of the
exchange, and the shareholders holding period for such stock would begin the day after the Merger
is completed.
47
Pursuant to Section 1.368-3(b) of the Regulations, the shareholders of ICC must file with their
income tax returns for the year in which the Merger is consummated, a statement which provides
details pertinent to the nonrecognition of gain or loss arising from the Merger, including the cost
or other basis of stock transferred in the Merger and the amount of stock received in the Merger.
Under Section 3406 of the Code, ICC 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. For each calendar year,
Citizens will report to these persons and to the IRS the amount of any reportable payments during
that year and the amount of tax withheld, if any, with respect to the reportable payments.
48
INTEGRITY CAPITAL CORPORATION AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with ICCs audited and
unaudited consolidated financial statements, including the notes thereto contained elsewhere in
this proxy statement-prospectus. This discussion contains forward-looking statements that involve
risks, uncertainties, and assumptions. ICCs actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of factors, such as:
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the persistency of existing and possible future insurance policies sold by ICIC; |
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the ability to control expenses; |
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the strength of the U.S. economy in general and the strength of the Indiana economy where
our policyholders reside; |
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inflation, interest rates, market and monetary fluctuations and volatility; |
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changes in consumer spending, borrowing and saving habits; |
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the effect of changes in laws and regulations (including laws and regulations concerning
insurance) with which ICC and ICIC must comply; |
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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; and |
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the costs and effects of any litigation and of unexpected or adverse outcomes in such
litigation. |
Overview
ICC was incorporated in Indiana on May 23, 2000, for the primary purpose of organizing a life
insurance subsidiary. After incorporation, ICC sold its common stock through private placement
offerings and an Indiana intrastate public stock offering. The Indiana intrastate public offering
commenced on March 5, 2001, and was completed on March 5, 2004. Total proceeds raised from the
public offering were $6,861,030. On January 12, 2003, ICC capitalized its wholly-owned subsidiary,
ICIC, with $2,000,000 of net offering proceeds. On October 22, 2003, the Indiana Department of
Insurance issued a certificate of authority to ICIC to transact life and annuity business in the
state of Indiana. ICIC commenced insurance operations on March 6, 2004.
ICICs initial product was a twenty-pay whole-life participating policy referred to as the
Integrity First Plan. The Integrity First Plan offers a level death benefit plus an annual
income death benefit payable through the 20th year if death occurs in the first 20
years. The Integrity First Plan has been sold based on
49
premium units of $1,000 which may be purchased in fractional or multiple increments. ICIC is
licensed and only offers its products in Indiana.
On November 11, 2008, ICC entered into the Merger Agreement with Citizens and Acquisition, whereby
Acquisition will merge into ICC and ICC shareholders will receive Class A common stock at an
exchange ratio of one share of Citizens Class A common stock for each three shares of ICC common
stock. ICC will become a wholly owned subsidiary of Citizens. The Merger Agreement is subject to
approval by ICC shareholders and the Indiana Commissioner of Insurance.
Results of Operations Years Ended December 31, 2007 and 2006
The discussion below states the 2007 results first, followed by 2006 results, unless the context
provides otherwise.
Net income increased to $74,590 compared to $40,489 or an increase to $0.02 per share from $0.01
per share. Total revenues increased to $2,705,421 from $2,433,227, reflecting a rise in premium
income to $2,383,582 from $2,155,774. The rise in premium income was due to some new business but
was mainly due to good persistency of our insurance product. Net investment income increased to
$292,735 from $256,453 due to higher yields on investment assets as well as a larger investment
portfolio.
Policy holder benefits, including dividends, increased to $1,521,720 from $1,414,720 but improved
as a percentage of earned premiums, 63.8% in 2007 compared to 65.3% in 2006. Interest on policy
funds increased to $24,055 from $16,800 due to a larger amount of policies inforce.
Policy acquisition costs deferred decreased to $252,834 from $588,411 due to lower first year
issues in 2007 compared to 2006. There were 456 policies issued in 2007 compared to 899 in 2006.
Amortization of deferred policy acquisition costs remained fairly constant due to good persistency
of inforce policies. Commissions decreased to $267,971 from $534,980 due mainly to lower first
year issues. Selling, administrative and general expenses increased slightly to $119,284 from
$103,111 due to the overall increased general expenses. Salaries, wages and employee benefits
remained constant. Professional fees remained fairly constant as well. ICC continues to monitor
its costs carefully. Net expense was up slightly. Overall total benefits and expenses increased
to $2,591,329 from $2,395,440 due to the factors discussed above. The Federal income tax expense
increased to $39,502 compared to a benefit of $2,702 was due to greater income from operations of
$114,092 compared to $37,787.
Critical Accounting Policies
The critical accounting policies of ICC are set forth in Note A of its Consolidated Financial
Statements as of and for the years ended December 31, 2007 and 2006 contained in Appendix C
in this proxy statement-prospectus.
Results of Operations Three Months Ended September 30, 2008 and 2007
The discussion below states the 2008 results first, followed by 2007 unless the context provides
otherwise.
Premium income increased slightly to $594,676 from $582,092 due to continued favorable persistency
and, to a lesser degree, new business generated. Net investment income decreased to $46,803 from
$75,545 due to the lower interest earning environment experienced in 2008. Policyholder benefits
50
including dividends increased for the quarter but were consistent with the increase in policies.
Commissions decreased due to renewal premiums. Deferred policy acquisition costs decreased to
$27,714 from $56,644 due to lower first year policies being issued. Amortization of deferred
acquisition costs remained fairly constant. Expenses increased to $268,278 from $207,720
primarily due to higher salaries. As a result, ICC incurred a net loss of $15,241 compared to net
income of $64,824.
Results of Operations Nine months ended September 30, 2008 and 2007
The discussion below states the 2008 results first followed by 2007, unless the context provides
otherwise.
Premium income rose slightly to $1,885,144 from $1,857,116 due mainly to persistency of the inforce
block. Net investment income decreased to $179,998 from $217,690 due to significant long-term
bonds being called with proceeds invested in certificates of deposit with lower yields than the
bonds. Policyholder benefits nearly doubled to $85,053 from $45,014 due to higher death claims and
interest. Policyholder benefits, including dividends, were up slightly in amount and as a
percentage of earned premiums driven by increased dividends applicable to the larger inforce block
and an error in the prior year dividend liability at September 30, which was corrected at December
31, 2007. Commissions decreased significantly to $145,170 from $207,878 due to less new business
generated. Deferred policy acquisition costs decreased significantly to $124,090 from $202,586 due
to less first year commissions on new business. Amortization expense of deferred policy
acquisition costs decreased to $103,248 from $129,626 due to lower deferred costs. Expenses
increased modestly from $657,860 from $618,978 due to an increased overall level of operations.
The result was net income of $34,041 versus net income of $172,325.
Liquidity and Capital Resources September 30, 2008
As of September 30, 2008, ICC had over $8,500,000 of cash. ICC continues to believe it has
adequate liquidity and capital resources to conduct operations on its ongoing basis. However, it
does not have significant capital to expand or to undertake significant marketing activities as
management believes it assets should be used to provide for ongoing insurance operations.
51
INFORMATION CONCERNING INTEGRITY CAPITAL CORPORATION
AND SUBSIDIARY
ICC is an insurance holding company with one subsidiary, ICIC. On October 22, 2003, the Indiana
Department of Insurance issued a certificate of authority to ICIC to transact life and annuity
business in the state of Indiana. ICIC commenced insurance operations on March 6, 2004. ICICs
initial product was a twenty-pay whole-life participating policy referred to as the Integrity
First Plan. The Integrity First Plan offers a level death benefit plus an annual income death
benefit payable through the 20th year if death occurs in the first 20 years. The
Integrity First Plan is sold based on premium units of $1,000 which may be purchased in fractional
or multiple increments. ICIC is licensed and only offers its products in the state of Indiana.
ICIC has recruited, hired and trained agents who sell insurance products for it. ICIC currently
has four full-time insurance agents.
Operations
Operating Results. There are certain factors peculiar to the life insurance business which
tend to have an adverse effect on operating results which are reported in conformity with the
accounting practices prescribed or permitted by the insurance regulatory authorities (the
Statutory Accounting Basis). The cost of putting a new policy in force is usually greater than
the amount of the first years premiums on that policy and, accordingly, in the early years of a
new life insurance company, these initial costs and their required provisions for reserves tend to
have an adverse effect on operating results and may require the life insurance subsidiary to
increase its capital and surplus. ICIC, as is common among new life insurance companies, has
operated at essentially a breakeven basis (on a Statutory Accounting Basis) since beginning
operations in 2004 because of the substantial cost of writing new insurance. The aggregate cost of
writing new life insurance includes such significant nonrecurring items as first year commissions,
medical and investigation expenses, and other expenses incident to the issuance of new policies,
together with the initial reserves to be established.
Administration. The daily administration of policies of ICIC is from its home office located
in Greenwood, Indiana. Policy administration includes the issuance of policies, billing,
preparation of commission and production statements, posting of premium payments and servicing of
policyholders. Citizens, through its services agreement with ICC, provides administration and
billing for ICIC policies.
Investments. ICIC has adopted an investment policy in compliance with the insurance laws of
the State of Indiana. The type and amount of investments which can be made by a life insurance
company domiciled in the State of Indiana are specifically controlled by Indiana Code Section
27-1-12-2 of the Indiana Insurance Law. ICIC has a conservative investment policy in seeking to
minimize its investment risk.
Reinsurance. ICIC reinsures with other companies, including CICA and Optimum Re as discussed
below, portions of the life insurance risks of ICIC. The primary purpose of reinsurance is to
allow an insurance company to reduce the amount of its risk on any particular policy. The effect
of reinsurance is to transfer a portion of the risk to the reinsurers. However, ICIC remains
contingently
52
liable for the risk in the event the reinsurer is not able to meet its obligations under the
reinsurance agreement. Further, when life insurance risks are ceded to another insurer, the
ceding company must pay a reinsurance premium to the reinsurance company as consideration for the
risk being transferred. The payment of this reinsurance premium to the reinsurer represents a
reduction of the premium income received by the ceding company. This reduction in premium income
has a direct impact on the profitability of the ceding company.
Reserves. ICIC has set up as liabilities actuarially computed reserves to meet the
obligations on the policies it has written, in accordance with the insurance laws and the
regulations of the Indiana Department of Insurance for statutory accounting and GAAP for financial
reporting to shareholders. These reserves are the amounts which, with additions from premiums to
be received and with interest on such reserves, compounded annually at certain assumed rates, will
be calculated to be sufficient according to accepted actuarial principles to meet ICICs policy
obligations as they mature. The various actuarial factors are determined from mortality tables
and interest rates in effect when the policies are issued.
ICIC has retained an independent certified consulting actuary to make the computations
required to establish its reserves and to perform other duties required by law by certified
actuaries in the conduct of its general life insurance business.
Regulation. ICIC is subject to regulation and supervision by the Indiana Department of
Insurance. This regulation is primarily for the benefit and protection of the insurance
policyholders, rather than shareholders of ICIC or ICC.
Broad administrative powers are possessed by the Indiana Department of Insurance. These
powers include authority in general to grant and revoke licenses to transact business and to be an
agent, to supervise premium rates, to approve the form of insurance contracts, to supervise the
form of financial statements, to regulate capital requirements, to regulate the character of
permitted investments, to regulate the size of risk on one life, and to require deposits for the
protection of policyholders. The Indiana Insurance Law requires the filing of a detailed annual
report, and the business and accounts of ICIC are be subject to periodic examination by the Indiana
Department of Insurance.
ICC is subject to the requirements of Indiana Insurance laws insurance holding company system
regulations in its dealings with ICIC. Under these laws, an insurance company, which is a member
of a holding company system, is required to register as such with the Indiana Department of
Insurance, and thereafter file reports as to various aspects of its business. These laws also
establish standards for material transactions between registered insurers and their affiliates,
which standards require that those transactions must be fair and reasonable, that each party to the
transaction maintain books of account so as to clearly and accurately disclose the precise nature
and details of the transactions, and that the insurers surplus following any dividends or
distributions to its affiliates are adequate for its own financial needs. Various factors
prescribed are applied in determining whether the surplus requirement has been met. These laws also
set forth various procedures and requirements in connection with any tender offer or agreement,
whereby any person would acquire control of a registered insurance company or any corporation, such
as ICC, controlling an insurance company.
Competition. The life insurance industry is highly competitive. There are approximately
2,500 life and health insurance companies in the United States and approximately 750 doing business
in
53
Indiana. Many of these companies are well established firms offering a broader line of
insurance policies and having significantly larger selling organizations with greater financial
resources than ICC and ICIC. Competitors include banks, securities brokerage firms and other
organizations that market insurance and competing products.
Market for Common Stock and Related Securityholder Matters
The ICC common stock is not listed on a stock exchange or actively traded through security
brokerage firms, and there is no over-the-counter trading activity. There have been no dividends
paid on ICC common stock since the inception of ICC. The number of record holders of ICC common
stock is approximately 3,600.
Executive Compensation
The following table provides certain summary information concerning compensation paid or accrued by
ICC to or on behalf of its President, Chief Executive Officer and Principal Accounting Officer for
the years ended December 31, 2006, and 2007. Disclosure for the remaining executive officers is
not required because none had annual salary and bonus that exceeded $100,000.
Summary Compensation Table
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Other Annual |
Name and Principal Position |
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Compensation (1) |
M. Bruce VanDyke,
President and Treasurer |
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2006 |
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$ |
85,000 |
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$ |
65,000 |
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2007 |
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|
$ |
85,000 |
|
|
$ |
79,400 |
|
|
|
|
|
|
|
|
(1) |
|
Other Annual compensation consists of automobile allowance. The aggregate
cost to ICC of such personal benefits did not exceed the lesser of $50,000 or
10% of the aggregate annual salary and bonus for Mr. VanDyke. |
ICC employees are covered by a health insurance plan. No option has been granted to any employee to
purchase ICC common stock from ICC. There are no pension or retirement benefit plans of ICC.
Information Concerning Directors and Executive Officers
The following table sets forth certain information with respect to each of the directors and
officers of ICC:
|
|
|
|
|
|
|
Name of Director or |
|
|
|
Year First Elected as |
|
|
Executive Officer |
|
Age |
|
Director and/or Officer |
|
Positions with ICC |
Michael N. Fink |
|
52 |
|
2000 |
|
Chairman of the Board |
|
M. Bruce VanDyke |
|
50 |
|
2000 |
|
President, Treasurer and Director |
54
|
|
|
|
|
|
|
Name of Director or |
|
|
|
Year First Elected as |
|
|
Executive Officer |
|
Age |
|
Director and/or Officer |
|
Positions with ICC |
Gerald A. Eastlund |
|
65 |
|
2000 |
|
Director |
|
George R. Likens |
|
65 |
|
2000 |
|
Director |
|
Robert H. Menke, Jr. |
|
56 |
|
2000 |
|
Director |
|
Dale L. Orem |
|
70 |
|
2000 |
|
Director |
|
Robert T. Smith, II |
|
62 |
|
2000 |
|
Director |
|
R. Dean Branan |
|
53 |
|
2004 |
|
Secretary and Assistant Treasurer |
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 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.
None of the current officers or directors of ICC other than Mr. Likens are expected to serve as an
officer or director of ICC or ICIC after the Merger. Mr. Likens is expected to remain as a
director of ICIC after the Merger.
Directors Fees
Directors who are not employees of ICC currently receive $1,000 for each Board meeting they attend.
Additionally, the directors receive a $1,000 annual retainer. Directors receive $200 for
committee meetings held on days other than regular Board meetings. For meetings held
telephonically, directors receive $200.
Certain Transactions
ICC has contracted with Citizens for administrative and bookkeeping services pursuant to a services
agreement. The agreement was effective May 1, 2004. During 2006, ICC paid fees to Citizens of
$257,217. During 2007, ICC paid fees to Citizens of $255,782.
Effective March 1, 2004, a wholly-owned subsidiary of Citizens, CICA, Optimum Re and ICIC entered
into a reinsurance agreement whereby CICA reinsures 30% and Optimum Re reinsures 70% of all ICIC
insurance claim amounts above $30,000. For the years ended December 31, 2007 and 2006, ICIC paid
$13,186 and $7,419 respectively, as reinsurance premiums to CICA pursuant to such agreement.
Upon effectiveness of the Merger, Citizens intends to enter into three-year consulting agreements
with each of Messrs. Fink and VanDyke, under which they will render consulting services to
Citizens. Mr. VanDykes monthly consulting fee will be $10,417. Mr. Finks consulting fee will be
$7,084 per month. The members of the ICC Board of Directors other than Messrs. Fink and VanDyke
were aware of the foregoing interests and considered them, among other matters, in approving the
Merger
Agreement and the transactions contemplated thereby and reconsidering that ICC shareholders vote
for the Merger.
55
RIGHTS OF DISSENTING SHAREHOLDERS
The following summary of dissenters rights available to ICC shareholders identifies and discusses
all of the material information necessary to assert dissenters rights. However, this summary is
not intended to be a complete statement of applicable Indiana law and is qualified in its entirety
by reference to Chapter 44 of the IBCL, Indiana Code 23-1-44-1 et seq., set forth in its entirety
in Appendix B.
Under the Merger Agreement, Citizens has the right to abandon the Merger if the holders of more
than 2.0% of the outstanding shares of ICC dissent from the Merger and seek payment for their
shares in accordance with the IBCL.
In order to exercise dissenters rights, a shareholder must fully and exactly comply with the
statutory requirements discussed below and set forth in Appendix B to this proxy
statement-prospectus. ICC and Citizens urge shareholders to read and understand this discussion
and the statutory provisions attached as Appendix B.
Right to Dissent. A shareholder of ICC is entitled to dissent from the Merger Agreement and Merger
and, if the Merger is consummated, receive payment of the fair value for his or her shares in cash.
Fair value is defined in Section 23-1-44-3 of the IBCL as the value of the dissenters shares
immediately before the completion of the Merger, excluding any appreciation or depreciation in
anticipation of the Merger unless exclusion would be inequitable. In order to be entitled to
dissent and obtain payment for his or her shares, a dissenting shareholder cannot challenge the
Merger.
Procedure for Exercise of Dissenters Rights. In order for a shareholder to exercise dissenters
rights and receive payment for the shareholders shares he or she must comply exactly with the
requirements in Chapter 44 of the IBCL.
To briefly summarize, subject to certain other requirements, a dissenting shareholder must, before
the vote is taken at the special meeting, deliver to ICC, at 65 Airport Parkway, Suite 118,
Greenwood, Indiana 46143, Attention: R. Dean Branan, a written notice of intent to demand payment
for his or her shares if the Merger is effectuated. In addition, a dissenting shareholder must not
vote his or her shares in favor of the Merger.
If the Merger is approved at the special meeting, then within 10 days thereafter, ICC will send a
written notice to the dissenting shareholders who meet the requirements in the foregoing paragraph.
The notice will state where the payment demand must be sent and where and when certificates for
certificated shares must be deposited, and will also include a form for demanding payment, identify
a date, not less than 30 nor more than 60 days after the date the notice is delivered, by which ICC
must receive the payment demand, inform holders of uncertificated shares to what extent transfer of
the dissenters shares will be restricted after the payment demand is received, and include the
instructions for the dissenter to surrender the certificates for the shares. The form for demanding
payment will include the date of the first announcement to news media or to the shareholders of the
terms of the Merger and require the shareholder to certify whether he or she acquired beneficial
ownership of the shares before that date. The notice will also be accompanied by a copy of Chapter
44 of the IBCL.
56
A person receiving a dissenters notice from ICC must demand payment, certify whether he or she
acquired beneficial ownership of the shares before the date of the first announcement to news media
or to shareholders of the terms of the Merger, and deposit the shareholders certificates in
accordance with the terms of the notice. A shareholder who demands payment and deposits his or her
shares in accordance with the foregoing will retain all of the rights of a shareholder until his
rights are cancelled or modified by the Merger. A shareholder who does not demand payment or
deposit the shareholders share certificates in the manner required, each by the date set forth in
the notice from ICC, will not be entitled to payment for his or her shares under Chapter 44 of the
IBCL, and will be considered to have voted his or her shares in favor of the Merger.
ICC may restrict the transfer of uncertificated shares from the date the demand for their payment
is received until the Merger is completed or the restrictions are released in the event the Merger
is not completed. The person for whom dissenters rights are asserted as to uncertificated shares
will retain all of the rights of a shareholder until these rights are cancelled or modified by the
completion of the Merger. A dissenting shareholder who was not the beneficial owner of his or her
ICC shares before the first announcement to news media or shareholders of the terms of the Merger
may be subject to the election by ICC to withhold payment required to dissenters, and to the extent
ICC elects to withhold payment after the Merger, ICC will estimate the fair value of the shares and
will pay the estimated fair value of the shares to each dissenter who agrees to accept the fair
value estimated by ICC in full satisfaction of such dissenters demand. ICC will send with its
offer a statement of its estimate of the fair value of the shares and a statement of a dissenters
right to demand payment using the dissenters own estimate of the fair value of his or her shares.
As soon as the Merger is completed, upon receipt of a payment demand ICC will pay each dissenting
shareholder who complied with the terms of demand for payment and deposit of shares as set forth
above, the amount ICC estimates to be the fair value of the dissenters shares. The payment must
be accompanied by: (1) a balance sheet of ICC as of the end of the fiscal year ending not more
than 16 months before the date of payment; (2) an income statement for that year; (3) a statement
of changes in shareholders equity for that year; (4) the latest available interim financial
statement of ICC; (5) a statement of ICCs estimate of the fair value of the shares; and (6) a
statement of the right of the dissenter to demand payment to notify ICC in writing of the
dissenting shareholders own estimate of the fair value of his or her shares pursuant to the
following.
A dissenting shareholder may notify ICC in writing of his or her own estimate of the fair value of
the dissenters shares and demand payment for his or her estimate, or in the case of a dissenter
who became a beneficial owner of the shares of ICC after the date of the first announcement to news
media or to shareholders of the terms of the Merger, reject ICCs offer if:
|
|
the dissenter believes that the amount paid or to be offered is less than the fair value of
the dissenting shareholders shares; |
|
|
ICC fails to make payment within 60 days after the date set forth for demanding payment; or |
|
|
ICC, having failed to consummate the Merger, does not return the deposited certificates or
release the transfer restrictions imposed on uncertificated shares within 60 days after the
date set for demanding payment. |
57
A dissenting shareholder waives the right to demand payment under these terms unless he or she
notifies ICC of his or her demand in writing within 30 days after ICC made or offered payment for
the shares of the dissenter.
Judicial Appraisal of Shares. If a dissenting shareholders demand, as set forth above, remains
unsettled, ICC will commence a proceeding within 60 days after receiving the demand and petition
the court of Johnson County, Indiana to determine the fair value of the shares. If such a
proceeding were to be commenced, ICC would be required to make all other dissenting shareholders,
whose demands for payment remain unsettled, parties to the proceeding. If ICC does not commence a
proceeding within the 60 day period, it shall pay each dissenting shareholder whose demand remains
unsettled the amount demanded by the shareholder.
The court may appoint one or more appraisers to assist in making the determination of the fair
value of the shares. After the court determines the fair value, each dissenting shareholder joined
to the proceeding will be entitled to judgment for either:
|
|
the amount by which the fair value, plus interest, exceeds the amount previously paid by
ICC, if any, or, |
|
|
if ICC did not previously pay its estimate to the dissenting shareholder, the fair value
determined by the court, plus interest. |
The court in an appraisal proceeding will determine all costs of the proceeding, including the
reasonable compensation and expenses of any appraisers appointed by the court. The court will
assess the costs against such parties and in such amounts as the court finds equitable. The court
may also assess the fees and expenses of counsel and experts for the respective parties in amounts
the court finds equitable.
58
COMPARISON OF RIGHTS OF SECURITYHOLDERS
Upon consummation of the Merger, the holders of issued and outstanding ICC common stock will be
entitled to receive Citizens Class A common stock. The rights of the holders of Citizens Class A
common stock are governed by Citizens Articles of Incorporation, its bylaws and Colorado law,
while the rights of holders of ICC common shares are governed by the Articles of Incorporation of
ICC, its bylaws and Indiana law. In most respects, the rights of holders of Citizens Class A common
stock and holders of ICC shares are similar. Although it is impractical to compare all aspects in
which Colorado law and Indiana law and Citizens and ICCs governing documents differ with respect
to rights of shareholders, the following is a brief discussion summarizing certain differences
between them.
Authorized Shares
The aggregate number of shares that Citizens is authorized to issue is 100,000,000 shares of Class
A common stock, 2,000,000 shares of Class B common stock and 25,000,000 shares of preferred stock
that may be issued from time to time by the Citizens Board of Directors in shares of one or more
series. As of January 27, 2009, there were 45,647,516 shares of Class A common stock and 1,001,714
shares of Class B common stock, issued and outstanding. Also, as of January 27, 2009, there were
6,250 shares of Citizens Series A-1 preferred stock and 4,014 shares of Citizens Series A-2
preferred stock issued and outstanding. The foregoing numbers do not include treasury shares.
The aggregate number of shares which ICC is authorized to issue is 10,000,000 shares of common
stock, of which 4,462,206 shares are issued and outstanding, fully paid and non-assessable.
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. Citizens has never paid a cash dividend on any of its common shares and does
not contemplate doing so. Rather, it intends to retain earnings to provide for future operations.
As ICC has only one class of stock, if ICC were to declare and pay any dividends, the dividends
paid upon the shares of ICC common stock would be the same for all shares.
Voting Rights
Those who hold ICC stock on the date the Merger becomes effective will be entitled as a group to
receive approximately 1,296,000 shares of Citizens Class A common stock, or approximately 2.9% of
the 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 Class A
common stock do not have cumulative voting rights in the election of directors.
Each outstanding share of ICC common stock is entitled to one vote upon each matter submitted to a
vote of the shareholders of ICC. ICC shareholders do not have cumulative voting rights in the
election of directors.
59
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 certain significant mergers and
approve extraordinary asset transfers are all subject to this requirement. Under Colorado law, the
holders of the Citizens Class A common stock and Class B common stock must vote as two separate
groups, respectively, and a sufficient vote by each voting group would be required in connection
with the foregoing actions.
For ICC, the IBCL requires the affirmative vote of a majority of the outstanding shares entitled to
vote thereon with respect to the approval of mergers, extraordinary asset transfers, and
liquidation of the corporation and certain amendments to its articles of incorporation.
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.
The IBCL provides that, unless the articles of incorporation provide otherwise, only the Board of
Directors may amend the bylaws. ICCs bylaws provide that the power to amend or repeal the bylaws
or adopt new bylaws is reserved to the ICC Board of Directors upon a vote of not less than a
majority of the ICC Board.
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. Special
meetings of ICC shareholders may be called by a majority of the Board of Directors, the President,
or upon the written request of the holders of 10% or more of outstanding shares entitled to vote.
The bylaws of Citizens provide that one-third of the votes entitled to be cast on a matter by a
voting group constitutes a quorum of that voting group. The bylaws of ICC provide that one half or
more of the shares of stock outstanding and entitled to vote constitutes a quorum of the
shareholders of ICC.
Both Citizens and ICCs bylaws provide that the shareholders may take action without a meeting if
all shareholders entitled to vote consent to the action in writing.
Preemptive Rights
ICC 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.
Neither of the common shares of either ICC or Citizens has, by their terms, 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 either such corporation.
Liability of Directors
60
Citizens Articles of Incorporation, as authorized under Colorado law contain a provision to the
effect that no director shall be personally liable to the corporation 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.
The IBCL provides that a director is not liable for any action taken as a director, or any failure
to act, unless the director has breached or failed to perform the duties of the directors office
in compliance with the IBCL and the breach or failure to perform constitutes willful misconduct or
recklessness. Subject to this standard, a director who votes for or assents to distributions in
violation of the IBCL is personally liable to the corporation for the amount of the illegal
distribution and is entitled to contribution from the other directors who voted for or assented to
such distribution and the shareholders who received the distribution. The exoneration from
liability under the IBCL does not affect the liability of directors for violations of the federal
securities laws.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of Citizens or ICC, 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
The Citizens shares to be issued upon consummation of the Merger will be duly authorized, fully
paid and nonassessable. No outstanding shares of common stock of either Citizens or ICC is subject
to redemption, conversion or further assessment.
Preferred Stock of Citizens
As indicated above, Citizens has authorized 25,000,000 shares of preferred stock that may be issued
from time to time by its Board of Directors as shares of one or more series. Citizens has Series
A-1 convertible preferred stock and Series A-2 convertible preferred stock outstanding. The
designations, rights and preferences of the Series A-1 and Series A-2 preferred stock are set forth
in an amendment to the Articles of Incorporation of Citizens which sets forth the terms of dividend
payments, liquidation rights, conversion rights, redemption rights, events that may require
redemption, and the ability for holders to increase the stated value of their shares. The Series
A-1 and A-2 preferred stock have voting rights in the election of directors on a similar basis as
the Class A common stock of Citizens, and the other rights of such stock are generally senior to
the common stock of Citizens. It should be assumed that any future issuance of Citizens preferred
stock in a new or different series will have rights designated in such series of preferred stock
that will be senior to and in priority to the Class A common stock of Citizens.
ICC has no preferred stock.
EXPERTS
The consolidated financial statements of Citizens, Inc. as of December 31, 2007 and 2006 and for
each of the years then ended included in Citizens, Inc.s Annual Report (Form 10-K) for the year
ended
61
December 31, 2007 (including schedules appearing therein), and the effectiveness of Citizens,
Inc.s internal control over financial reporting as of December 31, 2007 have been audited by Ernst
& Young LLP, independent registered public accounting firm, as set forth in their reports thereon,
included therein, and incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such reports given on the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements and financial statement schedules of Citizens, Inc. for the
year ended December 31, 2005 have been incorporated by reference herein in reliance upon the report
of KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of ICC and its subsidiary as of December 31, 2007 and 2006,
and for each of the years in the two year period ended December 31, 2007, are included herein and
have been audited by Kerber, Eck & Braeckel, LLP, independent certified public accountants, as set
forth in their report thereon, included therein. Such consolidated financial statements are
included herein in reliance upon such report 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
Merger will be passed upon by Jones & Keller, P.C., Denver, Colorado. Jones & Keller, P.C. has also
given the tax opinion to Citizens referred to under Federal Income Tax Consequences. Certain
legal matters in connection with the Merger will be passed upon for ICC by Baker & Daniels LLP,
Indianapolis, Indiana.
APPROVAL OF ADJOURNMENT OF SPECIAL MEETING FOR PURPOSE OF SOLICITING
ADDITIONAL PROXIES IF NECESSARY TO APPROVE THE MERGER.
If there are not sufficient votes at the time of the special meeting in favor of the proposal to
approve the Merger, ICC may propose to adjourn the special meeting to a date not later than 120
days after February 23, 2009 for the purpose of soliciting additional proxies in favor of the
Merger. ICC currently does not intend to propose adjournment at the special meeting if there are
sufficient votes to approve the Merger. If it is submitted at the special meeting, the proposal to
adjourn or postpone the special meeting for the purpose of soliciting additional proxies requires
the affirmative vote of the holders of a majority of the shares of common stock present in person
or by proxy, even if less than a quorum.
THE ICC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE ICC SHAREHOLDERS VOTE FOR THE PROPOSAL
TO ADJOURN OR POSTPONE THE SPECIAL MEETING, IF NECESSARY, FOR THE PURPOSE OF SOLICITING ADDITIONAL
PROXIES IN FAVOR OF THE MERGER.
OTHER MATTERS
The ICC 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.
62
APPENDIX A
Plan and Agreement of Merger dated November 11, 2008
Integrity Capital Corporation, Citizens, Inc. and Citizens Acquisition, Inc., including an amendment
thereto dated December 16, 2008
PLAN AND AGREEMENT OF MERGER
Integrity Capital Corporation
Citizens, Inc.
and
Citizens Acquisition, Inc.
This Plan and Agreement of Merger (Agreement) is by and among Integrity Capital Corporation
(ICC), Citizens, Inc. (Citizens) and Citizens Acquisition, Inc. (Acquisition).
WITNESSETH:
WHEREAS, Citizens is a corporation duly organized under the laws of the State of Colorado and
Acquisition, a wholly owned subsidiary of Citizens, is a corporation duly organized under the laws
of the State of Indiana; and
WHEREAS, ICC is a corporation duly organized under the laws of the State of Indiana; and
WHEREAS, Citizens desires to acquire ICC through a merger of Acquisition into ICC under
Indiana law;
NOW, THEREFORE, it is agreed among the parties as follows:
ARTICLE I
The Transaction
1.1 Subject to approval of this Agreement by the Insurance Commissioner of the State of
Indiana, and subject to the conditions set forth herein on the Effective Date (as herein
defined), ICC and Acquisition shall enter into and file Articles of Merger, attached hereto as
Exhibit A, under which Acquisition shall merge with and into ICC (the Merger), and ICC shall be
the surviving corporation, and shareholders of ICC other than CICA Life Insurance Company of
America (CICA Life), a wholly owned subsidiary of Citizens, that do not dissent to the Merger in
accordance with the Indiana Business Corporation Law shall receive Class A Common Stock of Citizens
as set forth in Section 1.3, and all of the shares of ICC stock shall no longer be deemed
outstanding and shall automatically be canceled and represent only the right to receive Citizens
Class A Common Stock. The transaction contemplated by this Agreement shall be completed at a
closing (the Closing) on a closing date (the Closing Date), which shall be as soon as possible,
and mutually agreed among the parties, on or before the tenth business day after all regulatory
approvals and shareholder approvals are obtained in accordance with applicable law.
A-1
1.2 If this Agreement is duly adopted by the holders of the requisite number of shares of ICC,
in accordance with the applicable laws and subject to the other provisions hereof, such documents
as may be required by law to consummate the Merger shall be filed as required by law to effectuate
same, and it shall become effective. The time of filing the last document required by law to
consummate the Merger shall be the effective date for this Agreement (the Effective Date). For
accounting purposes, this Agreement shall be effective as of 11:59 p.m., on the last day of the
month equal to or following the Effective Date.
1.3 On the Effective Date, all shareholders of ICC other than CICA who do not dissent in
accordance with the Indiana Business Corporation Law shall receive as consideration one share of
Citizens Class A common stock for every three shares of ICC stock owned by such shareholders.
ARTICLE II
Issuance and Exchange of Shares
2.1 The shares of Citizens Class A common stock shall be distributed to ICC shareholders
(other than those shares as to which dissenters rights have been perfected in accordance with the
Indiana Business Corporation Law) as set forth in Sections 2.2 and 2.3.
2.2 On the Effective Date, each holder of a certificate or certificates representing shares of
ICC, 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
Indiana law shall not be converted into shares of Citizens Class A Common Stock, but shall
represent only such rights as are permitted under the Indiana Business Corporation Law. ICC shall
pay or otherwise satisfy payment relating to shares as to which dissenters rights have been
asserted and perfected pursuant to Indiana law solely out of its own funds; Citizens shall not
contribute or otherwise be liable for any payments to such persons arising from the Merger. Until
so presented and surrendered, each certificate or certificates that represented issued and
outstanding shares of ICC at the Effective Date shall be deemed for all purposes to evidence the
right to receive the consideration set forth in Section 1.3 of this Agreement. If a certificate or
certificates representing shares of ICC 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 No fractional shares of Citizens stock shall be issued as a result of the Merger. In the
event the issuance 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 next whole share.
A-2
2.4 The stock transfer books of ICC shall be closed on the Closing Date, and thereafter no
transfers of the common stock of ICC will be made.
ARTICLE III
Representations, Warranties and Covenants of Citizens
No representations or warranties are made by any director, officer, employee or shareholder of
Citizens as individuals. Citizens hereby represents, warrants and covenants to ICC, subject to the
disclosures made in the Citizens Disclosure Statement attached hereto
as Exhibit B, as follows:
3.1 Citizens is a corporation duly organized, validly existing and in good standing under the
laws of the State of Colorado, having the corporate power and authority to own or lease its
properties and to carry on its business as it is now being conducted.
3.2 Citizens has complete and unrestricted power and authority to enter into and, upon the
appropriate approvals as required by law, to consummate the transactions contemplated by this
Agreement except as may be limited by applicable bankruptcy or similar laws and otherwise subject
to general principles of equity. Neither Citizens, nor its subsidiaries have any liability or
obligation to pay any fee or commission to any broker, agent or finder with respect to the
transactions contemplated hereby.
3.3 The execution, delivery and performance of this Agreement has been duly authorized and
approved by the Board of Directors of Citizens. This Agreement constitutes the valid and legally
binding obligations of Citizens, enforceable in accordance with its terms and conditions except as
may be limited by applicable bankruptcy or similar laws and otherwise subject to general principles
of equity.
3.4 The aggregate number of shares which Citizens is authorized to issue is 100,000,000 shares
of Class A common stock with no par value and 2,000,000 shares of Class B common stock with no par
value; of which 46,959,855 shares of such Class A common stock (not including treasury shares) and
1,001,714 shares of Class B common stock are issued and outstanding, fully paid and non-assessable
as of the date of this Agreement. The two classes of stock of Citizens are equal in all respects,
except that (a) the Class B common stock elects a simple majority of the Board of Directors of
Citizens, and the Class A common stock elects the remaining directors, and (b) the Class A common
stock receives twice the cash dividends on a per share basis compared to the Class B common stock.
There were 3,135,738 shares of Class A common stock held as treasury stock of Citizens as of the
date of this Agreement. The shares of Class A common stock to be issued pursuant to the Merger
will, upon issuance, be fully paid and non-assessable and listed with the New York Stock Exchange.
The offer 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.
A-3
3.5 Neither the execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (a) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Citizens is subject or any provision of its articles of
incorporation or bylaws, or (b) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any person the right to accelerate, terminate, modify, or
cancel, or require any notice under any agreement, contract, lease, license, instrument, or other
arrangement to which Citizens is a party or by which it is bound or to which any of its assets is
subject.
3.6 Citizens has delivered to ICC consolidated financial statements of Citizens and its
subsidiaries, dated December 31, 2007 and September 30, 2008 (unaudited), and the annual convention
statement of CICA Life for the year ended December 31, 2007. All such statements, herein sometimes
called Citizens Financial Statements, are complete and correct in all material respects and,
together with the notes to these financial statements, present fairly the financial position and
results of operations of Citizens and Citizens Insurance Company of America for the periods
included. The December 31, 2007 and September 30, 2008 consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, and the December 31, 2007
annual convention statement of CICA Life has been prepared in accordance with statutory accounting
principles.
3.7 Since the dates of the Citizens Financial Statements there have not been any material
adverse changes in the business or condition, financial or otherwise, of Citizens or CICA Life.
3.8 Citizens has delivered to ICC a list and description of all pending legal and regulatory
proceedings involving Citizens or CICA Life and, except for these proceedings, there are no legal
proceedings or regulatory proceedings involving material claims pending, or to the knowledge of the
officers of Citizens, threatened against Citizens or CICA Life or adversely affecting in any
material respect any of their assets, or properties, and neither Citizens nor CICA Life is in any
material breach, violation, or default under any material contract or instrument to which Citizens
or CICA Life is a party, and no event has occurred which with the lapse of time or action by a
third party would result in a material breach, violation, or default by Citizens or CICA Life under
any material contract or other instrument to which Citizens or CICA Life is a party or by which
they or any of their properties may be bound or affected, or under their respective Articles of
Incorporation or Bylaws.
3.9 The assets of CICA Life have admissible values at least equal to the amounts attributed to
them on its December 31, 2007 annual convention statement.
3.10 In all material respects the policy and claim reserves of CICA Life have been properly
provided for and are adequate to comply with all regulatory requirements regarding same.
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3.11 The representations and warranties of Citizens shall be true and correct in all material
respects as of the date hereof and as of the Effective Date.
3.12 Citizens has delivered, or will deliver within two weeks of the date of this Agreement,
to ICC true and correct copies of Citizens Annual Report to Shareholders for the years ended
December 31, 2006 and 2007 and each of its other reports to shareholders and filings with the
Securities and Exchange Commission (SEC) for the years ended December 31, 2005, 2006, and 2007
and for 2008 year-to-date. Citizens will also deliver to ICC on or before the Closing Date any
reports relating to the financial and business condition of Citizens which are filed with the SEC
after the date of this Agreement and any other reports sent generally to its shareholders after the
date of this Agreement.
Citizens has duly filed all reports required to be filed by it under the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended.
3.13 Citizens has delivered to ICC a copy of each of the federal income tax returns of
Citizens for the year ended December 31, 2007 and for any additional open years. The provisions
for taxes in Citizens accounting records are believed by Citizens to be sufficient for payment of
all accrued and unpaid federal, state, county and local taxes of Citizens (including any penalties
or interest payable) whether or not disputed for the periods then ended and for all prior fiscal
periods. All returns and reports of other information required or requested by federal, state,
county, and local tax authorities have been filed or supplied in a timely fashion, and all such
information is true and correct in all material respects. Provision has been made for the payment
of all taxes due to date by Citizens, including taxes for the current year ending December 31,
2008. There are no audits pending or threatened by any federal, state, county or local taxing
authority for the years ended December 31, 2005, 2006 and 2007 and for any additional open years.
3.14 Citizens employee benefit plans include an employee profit sharing plan, employee stock
purchase plan and a group accident and health and dental plan.
3.15 No representation or warranty by Citizens in this Agreement, the Citizens 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 ICC
No representations or warranties are made by any director, officer, employee or shareholder of
ICC as individuals. ICC hereby represents, warrants and covenants to Citizens, subject to the
disclosures made in the ICC Disclosure Statement attached hereto as Exhibit C, as follows:
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4.1 Each of ICC and Integrity Capital Insurance Company (ICIC) is a corporation duly
organized, validly existing and in good standing under the laws of the State of Indiana, having the
full corporate power and authority to own or lease its properties and to carry on its business as
it is now being conducted. ICC and ICIC each holds or shall hold all licenses, franchises, permits
or other governmental authorizations required to enable it to conduct its business or own its
properties in every jurisdiction in which it currently conducts business or owns property and where
the failure to do so would have a material adverse effect on the business of the subsidiary. The
Articles of Incorporation and Bylaws of ICC and ICIC as in effect on the date hereof, copies of
which have been delivered to Citizens, are complete and accurate, and the minute books of ICC and
ICIC contain a record, which is complete and accurate in all material respects, of all meetings,
and all corporate actions of the shareholders and Board of Directors of ICC and ICIC.
4.2 The entire aggregate number of shares which ICC is authorized to issue is 10,000,000
shares of common stock, $.10 stated value, of which 4,461,706 (not including treasury shares) are
issued and outstanding, fully paid, nonassessable. There were 110,000 shares of common stock held
as treasury stock of ICC as of September 30, 2008. All issued and outstanding shares of ICC are
owned of record and held by the stockholders of ICC as set forth in the ICC stock record books and
are not subject to any security interests, liens, charges, encumbrances, restrictions or rights of
any third parties of any kind or nature. All outstanding shares of capital stock of ICIC are owned
by ICC. All outstanding shares of capital stock of ICC and ICIC are duly and validly authorized
and issued, fully paid and non-assessable. Neither ICC nor ICIC has any outstanding options,
warrants or other rights to purchase or subscribe to, or securities convertible into or
exchangeable for any shares of capital stock.
4.3 ICC and ICIC have complete and unrestricted power to enter into and, upon the appropriate
approvals as required by law, to consummate the transactions contemplated by this Agreement except
as may be limited by applicable bankruptcy or similar laws and otherwise subject to general
principles of equity. This Agreement constitutes the valid and legally binding obligation of ICC,
enforceable in accordance with its terms and conditions except as may be limited by applicable
bankruptcy or similar laws and otherwise subject to general principles of equity. Neither ICC nor
its affiliates have any liability or obligation to pay any fee or commission to any broker, agent
or finder with respect to the transactions contemplated hereby.
4.4 Neither the execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (a) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which ICC and ICIC are subject, or any provision of their articles
of incorporation or bylaws, (b) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any person the right to accelerate, any instrument, or
other arrangement to which ICC and
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ICIC are a party or by which they are bound or to which any of their assets are subject, or (c)
result in the imposition or creation of lien upon or with respect to any of the Shares.
4.5 The execution of this Agreement has been duly authorized and approved by the Board of
Directors of ICC.
4.6 ICC has delivered to Citizens the consolidated financial statements of ICC, as of December
31, 2006 and 2007 and for the years then ended, and as of September 30, 2008 and for the nine
months and quarter then ended (unaudited), the annual convention statements of ICIC as of December
31, 2006 and 2007 and for the years then ended, and the convention statements as of September 30,
2008 and for the nine months and quarter then ended. All such statements, herein sometimes called
ICC and ICIC Financial Statements are complete and correct. The December 31, 2006 and 2007, and
September 30, 2008 consolidated financial statements of ICC have been prepared in accordance with
generally accepted accounting principles, are true and correct and present fairly the financial
condition of ICC as of such dates, and the results of operations and cash flows of ICC for such
periods. The December 31, 2006 and 2007 annual convention statements and September 30, 2008
convention statement of ICIC were prepared in accordance with statutory accounting practices
(SAP), are true and correct and present fairly the financial position of ICIC as of the dates
thereof and the related results of operations and changes in capital and surplus and cash flows of
ICIC for and during the periods covered thereby. No deficiency has been asserted by any regulatory
authority with respect to such SAP financial statements of ICIC. All amounts owed as set forth in
the ICC and ICIC Financial Statements (including, without limitation, agent balances) to ICC and
ICIC are recoverable in the ordinary course of business and are not subject to offset or reduction.
4.7 Since the dates of the ICC and ICIC Financial Statements, there have not been any adverse
changes in the business or condition, financial or otherwise, of ICC or ICIC. ICC and ICIC have no
material liabilities or obligations, secured or unsecured (whether accrued, absolute, contingent or
otherwise), except as disclosed in the ICC and ICIC Financial Statements.
4.8 ICC has delivered to Citizens a list and description of all pending legal proceedings
involving ICC and ICIC. Except for these proceedings, there are no legal proceedings or regulatory
proceedings involving, or to the knowledge of the officers of ICC, after due inquiry, threatened
against ICC or affecting any of its respective assets or properties. The aggregate adverse
consequences to ICC and ICIC of all pending legal proceedings does not exceed $50,000. As used in
this Agreement, the term adverse consequences means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities,
obligations, taxes, liens, losses, expenses, and fees, including court costs and reasonable
attorneys fees and expenses. Neither of ICC nor ICIC is in any material breach or violation of or
default under any contract or instrument to which it 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
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violation of or default by ICC or ICIC under any contract or other instrument to which ICC or ICIC
is a party or by which they or any of their properties may be bound or affected, or under their
Articles of Incorporation or Bylaws, nor is there any pending court or regulatory order applicable
to ICC or ICIC.
4.9 Neither ICC nor ICIC shall enter into or consummate any transactions prior to the Closing
other than in the ordinary course of business and shall pay no dividend, or increase the
compensation of officers or employees and shall not enter into any agreement or transaction which
would adversely affect its financial condition in a material manner. The ICC employment agreements
with M. Bruce VanDyke and Michael N. Fink, both dated June 30, 2008 (Employment Agreements),
shall immediately be terminated upon Closing of this Agreement. ICC shall present to Citizens a
certificate signed by M. Bruce VanDyke and Michael N. Fink, dated the Closing Date, acknowledging
that the terms and provisions of the Employment Agreements have been terminated.
4.10 The assets of ICIC had admissible values at least equal to those attributed to them on
its December 31, 2006 and 2007 and September 30, 2008 SAP financial statements.
4.11 ICC is not a party to any sales, agency, lease, rental, license, royalty, union or other
material contracts or agreement, written or otherwise, other than insurance policies issued or
assumed by ICIC and those contracts or agreements disclosed in the ICC Disclosure Statement.
4.12 All policy and claim reserves of ICIC have been properly provided for and are adequate to
comply with all regulatory requirements regarding same.
4.13 ICC will deliver to Citizens, within two weeks of the date of this Agreement, any reports
relating to the financial and business condition of ICC and ICIC that are filed with any
governmental authority after the date of this Agreement. No such reports will contain any untrue
statement of material fact or omit to state any material fact required to be stated therein or
necessary to make the statements in such report, in light of the circumstances under which they
were made, not misleading. With respect to any financial statements of ICC and ICIC filed
subsequent to the latest financial statements referenced in Section 4.6, the representations and
warranties contained in Sections 4.6, 4.7, 4.10 and 4.12 shall apply thereto at, and subject to,
Closing.
4.14 ICC has delivered to Citizens a copy of each of the federal income tax returns of ICC and
ICIC for the taxable year ending on or after December 31, 2001 and for any additional open years.
All accrued and unpaid federal, state, county and local taxes of ICC and ICIC (including any
penalties or interest payable) whether or not disputed for the periods then ended and for all prior
fiscal periods shall have been included in the provision for taxes reflected in the September 30,
2008 financial statements, and accurately reflect any tax refunds received for the years ended
December 31, 2005, 2006 and 2007 and for any additional open years. All returns and reports or
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other information required or requested by federal, state, county, and local tax authorities have
been filed or supplied in a timely fashion, and all such information is true and correct in all
material respects. Neither ICC nor ICIC is in default in the payment of any tax liability with
respect to it. There are no audits pending or threatened by any federal, state, county or local
taxing authority for the years ended December 31, 2005, 2006 and 2007 and for any additional open
years.
4.15 ICC and ICIC do not have nor have they ever had any employee benefit plan as such term
is defined in Section 3(3) of the Employee Retirement Income Security Act, or any other retirement
plans (individual account or defined benefit), deferred compensation, post-employment benefits,
compensated absences plans or other post-retirement benefit plans.
4.16 Since December 31, 2007, ICC and ICIC have continued actively in the conduct of their
business, meeting and performing all of their obligations in the regular course of business, and
(i) there has been no material adverse change in the assets or liabilities or in the condition,
business, financial or otherwise, of ICC or ICIC; (ii) Neither ICC nor ICIC have transferred,
conveyed, or acquired any material assets or property or entered into any transaction which by
reason of its size or otherwise is not in the ordinary course of its business, including any
business relationship with their shareholders, officers or directors; (iii) ICC and ICIC have not
paid to any employee any bonus or special compensation; (iv) ICC has not declared or paid any
dividend or authorized or made any other distribution of any kind to its shareholders, or issued or
sold, or issued rights or options to purchase or subscribe to, or subdivided or otherwise changed,
or agreed to repurchase or redeem, any shares of its capital stock; and (v) ICC has not made or
agreed to make any changes with respect to its capital stock as regards to dividends, redemption,
voting powers or restriction or qualifications of voting powers as presently exist in its Articles
of Incorporation.
4.17 Neither ICC nor ICIC is in default in the payment of any of its obligations. Other than
those normal liabilities incurred by ICC and ICIC since December 31, 2007 in the ordinary course of
their ordinary business affairs, there are no material liabilities, whether such liabilities are
contingent, absolute, direct, or indirect, matured, unmatured or otherwise, and including, but not
limited to, liabilities for federal, state or local taxes, penalties and assessments, which do not
appear on the aforesaid ICC and ICIC Financial Statements.
4.18 ICC and ICIC have no outstanding corporate bonds, debentures, trust or premium
certificates or other income, surplus, debt or capital obligations of a similar nature.
4.19 ICC has now, and at Closing will have, good and indefeasible title to all of its
properties and assets, including the property and assets set forth in the balance sheets of ICC and
ICIC as of December 31, 2007 and September 30, 2008, and in each case other than deposits held in
joint custody with insurance regulatory authorities such assets
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and properties are free and clear of all mortgages, pledges, liens, leases, restrictions, security
interests, encumbrances or charges whatsoever, and of every kind and nature.
4.20 Until this Agreement is terminated by Citizens, ICC will not and will cause its
directors, officers, employees, shareholders and affiliates (as defined in Federal Securities
laws) not to engage in any discussions with any third parties to offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any of the outstanding shares or assets of
ICC or ICIC, enter into a transaction which would have the same effect, or enter into any other
arrangement that would transfer, in whole or in part, any of the economic consequences of ownership
of the said shares or assets, whether any such aforementioned transaction is to be settled by
delivery of the shares or assets, publicly disclose the intention to make any such offer, sale,
pledge or disposition, or to enter into any such transaction or other arrangement, without, in each
case, prior written consent of Citizens. Any attempted transfer without such consent shall be null
and void.
4.21 None of the shareholders, the members of the ICC Board of Directors or ICC officers or
their affiliates has been involved in any material business arrangement or relationship with ICC
within the past 12 months and none of the shareholders, members of the Board of Directors or ICC
officers or their affiliates owns any material asset, tangible or intangible, that is used in the
business of ICC or ICIC.
4.22 Both ICC and ICIC are duly authorized to conduct business and are in good standing under
the laws of each jurisdiction where such qualification is required. ICC and ICIC have full
corporate power and authority to carry on the business in which they are engaged and to own and use
the properties owned and used by them.
4.23 No representation or warranty by ICC in this Agreement, the ICC 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.
4.24 ICC has delivered, or will deliver within two weeks of the date of this Agreement, to
Citizens true and correct copies of ICCs Annual Report to Shareholders for the years ended
December 31, 2005, 2006, and for 2007. ICC will also deliver to Citizens on or before the Closing
Date any reports relating to the financial and business condition of ICC which are prepared after
the date of this Agreement and any other reports sent generally to its shareholders after the date
of this Agreement.
4.25 ICC 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 ICC generally, contained any
untrue statement of material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements in such report, in light of the circumstances under
which they were made, not misleading.
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ARTICLE V
Obligations of the Parties Pending the Closing
5.1 This Agreement shall be duly submitted to the shareholders of ICC for the purpose of
considering and acting upon this Agreement in the manner required by the Indiana Code at a meeting
of shareholders on a date selected by ICC, such date to be the earliest practicable date after the
proxy statement is first sent to ICC shareholders without objection by applicable governmental
authorities. Citizens will furnish to ICC 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 ICC shareholders meeting contemplated hereby, 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.
As promptly as practicable after the execution of this Agreement, Citizens will prepare and
file with the U. S. Securities and Exchange Commission a registration statement on Form S-4 (the
Registration Statement) covering the issuance of Citizens Class A shares in the Merger. Each of
Citizens and ICC 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 Class A common stock in the Merger. Citizens will use all reasonable efforts to cause the
Registration Statement to remain effective through the Effective Date. Citizens and ICC will
furnish all information concerning it and the holders of its capital stock as the other may
reasonably request in connection with such actions. As promptly as practicable after the
Registration Statement shall have become effective, ICC will mail a notice of special meeting to
its shareholders entitled to notice of and to vote at the ICC shareholders Meeting.
5.1A ICC represents and warrants that at the time of the ICC shareholder meeting, the proxy
statement, insofar as it relates to ICC and contains information furnished by ICC 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
ICC, subject to its fiduciary obligations to shareholders, shall use its best efforts to obtain the
requisite approval of ICC shareholders of this Agreement and the transactions contemplated herein.
ICC, ICIC and Citizens shall take all reasonable and necessary steps and actions to comply with and
to secure ICC shareholder approval of this Agreement by a the requisite number of votes entitled to
be cast upon the transactions contemplated by this Agreement as may be required by the Indiana
Business Corporation Law and the Articles of Incorporation of ICC.
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5.2 At all times prior to the Effective Date, during regular business hours each party will
permit the other to examine its books and records and the books and records of its subsidiaries and
will furnish copies thereof on request. It is recognized that, during the performance of this
Agreement, each party may provide the other parties with information which is confidential or
proprietary information. During the term of this Agreement, and for four years following the
termination of this Agreement, the recipient of such information shall protect such information
from disclosure to persons, other than members of its own or affiliated organizations and its
professional 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. No
information shall be considered confidential or proprietary if it is (a) information already in the
possession of the party to whom disclosure is made, (b) information acquired by the party to whom
the disclosure is made from other sources not under any obligation of confidentiality, 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 to whom the disclosure is made.
5.3 ICC and Citizens shall promptly provide each other with information as to any significant
developments in the performance of this Agreement, and shall promptly notify the other if it
discovers that any of its representations, warranties or 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.
If at any time prior to the Effective Date any event or circumstance relating to ICC or any of
its Affiliates, or its or their respective officers or directors should be discovered by ICC that
should be set forth in an amendment to the Registration Statement, ICC 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 ICC, 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 ICC. Citizens and ICC 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 Class A common stock
issuable in connection with the
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Merger for offering or sale in any jurisdiction, any request by the staff of the SEC for amendment
of the Registration Statement or the Proxy Statement, the receipt from the staff of the SEC of
comments thereon or any request by the staff of the SEC for additional information with respect
thereto.
Citizens will use all reasonable efforts to cause the shares of Citizens Class A common stock
to be issued in the Merger to be approved for listing (subject to official notice of issuance) on
the New York 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 Merger
from being approved for listing on the New York Stock Exchange.
5.4 All parties to this Agreement shall take all such action as may be reasonably necessary
and appropriate and shall use their best efforts in order to consummate the transactions
contemplated hereby as promptly as practicable.
ARTICLE VI
Regulatory Filings
Within 30 days after the execution of this Agreement, Citizens shall file with the Insurance
Commissioner of the State of Indiana, and any other regulatory authority, all of the regulatory
approval documents required by applicable law in order to close this Agreement, as well as any
other regulatory filing required to consummate the transactions contemplated hereby.
ARTICLE VII
Conditions Precedent
Each of the following are conditions precedent to the consummation of the Agreement by
Citizens and ICC to the extent failure of any such condition is not caused by any willful, reckless
or negligent act or omission of such party or any affiliate (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934) of the party seeking to rely thereon:
7.1 This Agreement is in all things subject to the provisions of the applicable insurance laws
and the regulations promulgated thereunder, and shall not become effective until all necessary
approvals are obtained from the Commissioner of Insurance of the State of Indiana and any other
applicable governmental authority. Citizens agrees to file and to use its reasonable business
efforts to obtain such approvals of the transactions contemplated by this Agreement. Neither
Citizens nor ICC shall be obligated to file a suit or to appeal from any Commissioners adverse
ruling, nor shall Citizens or ICC be obligated to make any material changes in any lawful, good
faith management policy in order to gain such approval. In the event any applicable regulatory
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approval is denied, this Agreement shall immediately terminate and the parties shall have no
further liability hereunder.
7.2 Citizens and ICC shall have performed and complied with all of their respective
obligations hereunder which are to be complied with or performed on or before the Closing Date
pursuant to the terms of this Agreement.
7.3 No action, suit or proceeding shall have been instituted or shall have been threatened
before any court or other governmental body or by any public authority to restrain, enjoin or
prohibit the transactions contemplated herein, or which might subject any of the parties hereto or
their directors or officers to any material liability, fine, forfeiture or penalty on the grounds
that the transactions contemplated hereby, the parties hereto or their directors or officers, have
violated any applicable law or regulation, or have otherwise acted improperly in connection with
the transactions contemplated hereby, and the parties hereto have been advised by counsel that, in
the opinion of such counsel, such action, suit or proceeding raises substantial questions of law or
fact which could reasonably be decided adversely to any party hereto or its directors or officers.
7.4 All actions, proceedings, instruments and documents required to carry out this Agreement
and the transactions contemplated hereby and the form and substance of all legal proceedings and
related matters shall have been approved by counsel for Citizens and ICC.
7.5 The representations and warranties by Citizens and ICC in this Agreement shall be true as
though such representations and warranties had been made or given on and as of the Closing, except
to the extent that such representations and warranties may be untrue on and as of the Closing
because of (1) changes caused by transactions suggested or approved in writing by the other party,
or (2) events or changes (which shall not, in the aggregate, have materially and adversely affected
the business, assets, or financial condition of ICC or Citizens) arising after the date of this
Agreement.
7.6 The parties shall believe that:
(1) The Merger will constitute a reorganization within the meaning of Internal Revenue Code
(IRC) Section 368(a)(2)(E) or Section 368(a)(1)(A), and Citizens and ICC 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 ICC shareholders upon the exchange of their shares for shares of Citizens Class A common stock
pursuant to the Merger.
(2) The tax basis of the shares of Citizens Class A common stock received by an ICC
shareholder will be the same as the basis of the ICC shares surrendered by that shareholder in the
Merger.
(3) The holding period for tax purposes of the shares of Citizens Class A common stock
received by a ICC shareholder will include the period during which such
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shareholder held the ICC shares exchanged therefor as a capital asset on the date of the
consummation of the Merger.
(4) Cash received by ICC 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 shareholders basis in the ICC common stock. Provided the shares were held as capital assets
at the time of the redemption, such gain or loss should constitute capital gain or loss, and such
gain or loss should be long term capital gain or loss if the holding period for such shares is
greater than one year. It is possible, that for some ICC shareholders, the distribution of cash
may be treated as a dividend taxable as ordinary income.
(5) No material gain or loss will be recognized by Citizens, Acquisition or ICC as a result of
the Merger.
7.7 ICC shall have supplied Citizens with:
(a) a certified copy of a resolution or resolutions duly adopted by the Board of Directors of
ICC and the shareholders of ICC approving this Agreement and the transactions contemplated by it in
accordance with applicable law;
(b) a certificate of ICC dated the Closing Date to the effect that each of the conditions
specified above in Sections 7.1 through 7.6 have been, to the extent applicable to ICC or ICIC,
satisfied in all respects;
(c) a legal opinion letter from counsel for ICC dated as of the Closing Date, substantially in
the form as set forth in Exhibit D attached hereto; and
7.8 Citizens shall have furnished ICC with:
(a) 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;
(b) a certificate of Citizens dated the Closing Date to the effect that each of the conditions
specified above in Sections 7.1 through 7.6 have been, to the extent applicable to Citizens,
satisfied in all respects; and
(c) a legal and tax opinion letter from counsel for Citizens dated as of the Closing Date
substantially in the form as set forth in
Exhibit E and Exhibit F, respectively, and attached
hereto.
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ARTICLE VIII
Termination and Abandonment
8.1 Anything contained in this Agreement to the contrary notwithstanding, the Agreement may be
terminated and abandoned at any time prior to the Effective Date:
|
(a) |
|
By Citizens or ICC, within 60 days of the date of this
Agreement, should either companys due diligence disclose any information that
causes the management of either Citizens or ICC to deem it prudent in either
companys sole judgment to no longer proceed to close the Merger; |
|
|
(b) |
|
By mutual written consent of the Boards of Directors of
Citizens and ICC; |
|
|
(c) |
|
By Citizens or ICC for failure of a condition precedent in
Article VII if such failure was not caused by any willful, reckless or
negligent act or omission of such party or any affiliate of such party seeking
to rely thereon; |
|
|
(d) |
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By Citizens or ICC, if any suit, action or other proceeding
shall be pending or threatened by the federal or a state government before any
court or governmental agency, in which it is sought to restrain, prohibit or
otherwise affect the consummation of the transactions contemplated hereby; |
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(e) |
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By Citizens or ICC, if there is discovered any material
error, misstatement or omission in the representations and warranties of the
other party; |
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(f) |
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By Citizens or ICC if the Closing does not occur within
ninety (90) days from the date hereof; or |
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(g) |
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By Citizens, if holders of 2.0% or more of the outstanding
common stock of ICC notify ICC in writing of their intent to dissent from the
Merger in accordance with the Indiana Business Corporation Law. |
8.2 Any of the terms or conditions of this Agreement may be waived (by action of its Board of
Directors) at any time by the party entitled to the benefit thereof. This Agreement may be amended
upon approval of the Board of Directors of each party.
A-16
ARTICLE IX
Confidentiality; Survival of Representations and Warrants
9.1 Each party shall maintain the confidentiality of all information concerning the other
party and its business which is confidential or proprietary, refrain from using any of such
information except in connection with this Agreement, and deliver promptly to the other party or
destroy, at the request and option of the other party, all tangible embodiments (and all copies) of
such information which are in its possession. In the event a party is requested or required (by
oral question or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any such information, the
other party will be promptly notified of the request or requirement so that the other party may
seek an appropriate protective order or waive compliance with the provisions of this Section. If a
party is, on the advice of counsel, compelled to disclose any such information to any tribunal or
else stand liable for contempt, it may disclose such information to the tribunal; provided,
however, that the disclosing party shall use his best efforts to obtain, at the request of the
other party, an order or other assurance that confidential treatment will be accorded to such
portion of the information required to be disclosed as Citizens shall designate.
9.2 The representations and warranties in Article IV hereof shall survive the Closing
hereunder and continue in full force and effect for a period of three years thereafter. All other
representations and warranties of the parties contained in this Agreement shall survive the Closing
hereunder and continue in full force and effect for a period of one year thereafter.
ARTICLE X
Miscellaneous
10.1 This Agreement (including the schedules and exhibits referred to herein and which are
hereby incorporated herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or between the parties, written or oral, to
the extent related to the subject matter hereof.
10.2 To facilitate the execution of this Agreement, any number of counterparts hereof may be
executed, and each such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one instrument.
10.3 Each of the parties hereto will pay its own fees and expenses incurred in connection with
the transactions contemplated by this Agreement.
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 reasonable business efforts to provide such executed instruments or do all
things necessary or proper to carry out the purpose of this Agreement.
A-17
10.5 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:
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To Citizens:
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To ICC: |
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Citizens, Inc.
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Integrity Capital Corporation |
400 E. Anderson Lane
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65 Airport Parkway, Suite 118 |
Austin, Texas 78752
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Greenwood, Indiana 46143 |
Attn: Rick D. Riley, President
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Attn: Marvin Bruce VanDyke, President |
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Phone: (512) 837-7100
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Phone: (317) 889-9798 |
Fax: (512) 836-9334
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Fax: (317) 889-8977 |
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.
10.6 No press release or public statement will be issued relating to the transactions
contemplated by this Agreement without prior mutual approval of Citizens and ICC. However, either
Citizens or ICC 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 applicable securities
laws, 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.
10.7 The parties have participated jointly in the negotiation and drafting of this Agreement.
In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the provisions of this
Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed
also to refer to all rules and regulations promulgated thereunder, unless the context otherwise
requires. The word including shall mean including without limitation. The headings contained in
this Agreement are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.8 This Agreement shall be binding upon and inure to the benefit of the parties named herein
and their respective successors and permitted assigns. No party may assign either this Agreement
or any of his or its rights, interests, or obligations hereunder.
10.9 Each party acknowledges and agrees that the other parties would be damaged irreparably in
the event any of the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each party agrees that the other parties
shall be entitled to an injunction or
A-18
injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically
this Agreement and the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the parties and the matter in addition
to any other remedy to which they may be entitled, at law or in equity. All remedies identified in
this Agreement are cumulative of any remedies available at law or in equity.
10.10 This Agreement shall be governed by and construed in accordance with the domestic laws
of the State of Texas without giving effect to any choice or conflict of law provision or rule
(whether of the State of Texas or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Texas. Any term or provision of this Agreement
that is invalid or unenforceable shall not affect the validity or enforceability of the remaining
terms and provisions hereof.
IN WITNESS WHEREOF, the parties hereby execute this Agreement on November 11, 2008.
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CITIZENS, INC.
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By: |
/s/ Rick D. Riley
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Rick D. Riley, President |
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INTEGRITY CAPITAL CORPORATION
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By: |
/s/ Marvin Bruce VanDyke
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Marvin Bruce VanDyke, President |
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CITIZENS ACQUISITION, INC.
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By: |
/s/ Rick D. Riley
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Rick D. Riley, President |
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A-19
AMENDMENT TO PLAN AND AGREEMENT OF MERGER
This Amendment to the Plan and Agreement of Merger (this Amendment) dated as of December 16,
2008 is entered into by and among Integrity Capital Corporation (ICC), Citizens, Inc.
(Citizens) and Citizens Acquisition, Inc. (Acquisition).
WHEREAS, ICC, Citizens and Acquisition entered into a Plan and Agreement of Merger dated as of
November 11, 2008 (the Merger Agreement); and
WHEREAS, the parties desire to amend the Merger Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and
in the Merger Agreement and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
1. Capitalized terms used herein and not defined herein shall have the meanings set forth in
the Merger Agreement.
2. The first sentence of Article VI of the Merger Agreement is hereby amended by substituting
60 for 30.
3. Section 8.1(f) of the Merger Agreement is amended by substituting one hundred fifty (150)
for ninety (90).
4. Except as herein provided, the terms of the Merger Agreement shall remain in full force and
effect.
5. This Amendment may be executed in several counterparts, and by the parties on separate
counterparts, and all such counterparts, when so executed and delivered, shall constitute but one
and the same agreement.
[SIGNATURE PAGE TO FOLLOW]
A-20
IN WITNESS HEREOF, the parties have executed this Amendment as of the date first written
above.
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CITIZENS, INC.
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By: |
/s/ Rick D. Riley
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Rick D. Riley, President |
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INTEGRITY CAPITAL CORPORATION
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By: |
/s/ Marvin Bruce VanDyke
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Marvin Bruce VanDyke, President |
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CITIZENS ACQUISITION, INC.
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By: |
/s/ Rick D. Riley
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Rick D. Riley, President |
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A-21
EXHIBIT A
Articles of Merger
Integrity Capital Corporation
Citizens, Inc.
and
Citizens Acquisition, Inc.
ARTICLES OF MERGER
OF
CITIZENS ACQUISITION, INC.
(hereinafter the nonsurviving corporation)
INTO
INTEGRITY CAPITAL CORPORATION
(hereinafter the surviving corporation)
ARTICLE I SURVIVING CORPORATION
SECTION 1:
The name of the corporation surviving the merger is Integrity Capital Corporation, and such name
has not been changed as a result of the merger.
SECTION 2:
The surviving corporation is a domestic corporation existing pursuant to the provisions of
the Indiana Business Corporation Law, incorporated on May 23, 2000.
ARTICLE II NONSURVIVING CORPORATION
The name, state of incorporation, and date of incorporation of each Indiana domestic corporation,
other than the surviving corporation, which is party to the merger is as follows:
Name of Corporation:
Citizens Acquisition, Inc.
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State of Domicile:
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Date of Incorporation or qualification in Indiana: |
Indiana
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November 11, 2008 |
ARTICLE III PLAN OF MERGER OR SHARE EXCHANGE
The plan of Merger or Share Exchange, containing such information as required by Indiana Code 23-1-
40-l(b), is set forth in Exhibit A, attached thereto and made a part hereof.
ARTICLE IV MANNER OF ADOPTION AND VOTE OF SURVIVING CORPORATION
The designation number of outstanding shares, number of votes entitled to be cast by each voting
group entitled to vote separately on the merger and the number of votes of each voting group
represented at the meeting is set forth below:
Vote of shareholders during a meeting called by the Board of Directors.
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TOTAL |
DESIGNATION OF EACH VOTING GROUP Common Stock |
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4,462,206 |
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NUMBER OF OUTSTANDING SHARES |
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NUMBER OF VOTES ENTITLED TO BE CAST |
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NUMBER OF VOTES REPRESENTED AT MEETING |
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SHARES VOTED IN FAVOR |
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SHARES VOTED AGAINST |
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ARTICLE V MANNER OF ADOPTION AND VOTE OF NONSURVIVING
CORPORATION
The designation number of outstanding shares, number of votes entitled to be cast by each voting
group entitled to vote separately on the merger and the number of votes of each voting group
represented at the meeting is set forth below:
Unanimous written consent executed on , 200___ and signed by all shareholders
entitled to vote.
In Witness Whereof, the undersigned, being the President of the surviving corporation, executed
these Articles of Merger and verifies, subject to penalties of perjury that the statements
contained herein are
true, this day of , 200___.
EXHIBIT B
Citizens Disclosure Statement
Pursuant to the provisions of Article III of the Agreement by and among ICC, Citizens, and
Acquisition, Citizens hereby makes the following disclosures respecting the similarly numbered
sections in the Agreement:
3.4 Citizens has 100,000,000 Class A shares authorized with 43,824,117 Class A shares
outstanding (not including treasury shares). CICA Life holds 3,135,738 shares of Citizens Class A
treasury stock. In addition, the Acquiring Party has 2,000,000 Class B shares authorized with
1,001,714 Class B shares issued and outstanding.
In July 2004, Citizens completed a private placement of $12.5 million of Series A-l
Convertible Preferred Stock (Series A-l Preferred) to four unaffiliated institutional
investors. Citizens also issued to the investors warrants to purchase 544,000 shares of Class A
common stock, at an exercise price of $6.95 per share, and unit warrants to purchase Series A-2
Convertible Preferred Stock (Series A-2 Preferred). Citizens has 25,000 shares of series A-l
Preferred authorized with 15,158 shares outstanding and 5,000 shares of Series A-2 Preferred
authorized with 4,014 shares outstanding.
The conversion, exercise and redemption prices set forth herein, along with the numbers of
shares and warrants (except for the 25,000 Series A-l Preferred shares referenced below), have
been adjusted for the common stock dividends paid December 31, 2004 and December 31, 2005.
The Series A-l and A-2 Preferred Stock is mandatorily redeemable in 2009. Both may also
become redeemable at the option of the holder if certain conditions exist. The shares will be
redeemed in shares of Class A common stock unless certain conditions are met to allow redemption
in cash. If redeemed in stock, the redemption price is based on a defined formula.
In the third quarter of 2008, one of the Series A-l Preferred Stock investors converted out of
its position into Class A common stock at a conversion price of $6.33. This resulted in the
issuance of 493,680 shares of Class A common stock plus their accrued dividend worth 3,846 shares.
Also during the third quarter of 2008, another holder of the Series A-l Preferred Stock increased
its stated value from $500 a share to $680 a share by making a capital contribution to Citizens in
the amount of $1.1 million. The holder then immediately converted the capital contribution, at a
conversion price of $6.33, into Class A common stock, resulting in the issuance of 177,725 shares
of Class A common stock.
One of the finders of the Series A Preferred Stock also exercised warrants to purchase 8,000
shares of Class A common stock in the third quarter of 2008 at a strike
price of $6.95. The redemption value of the series A-l and A-2 convertible stock was $13,126,000
at September 30, 2008.
EXHIBIT C
ICC Disclosure Statement
Pursuant to the provisions of Article IV of the Agreement by and among ICC, Citizens, and
Acquisition, ICC hereby makes the following disclosures respecting the similarly numbered sections
in the Agreement.
4.2 The entire aggregate number of shares which ICC is authorized to issue is 10,000,000
shares of common stock, of which 4,462,206 are issued and outstanding, fully paid, nonassessable.
EXHIBIT D
To
Plan and Agreement of Merger
[Closing Date]
Citizens, Inc.
400 East Anderson Lane
Austin, Texas 78752
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Re:
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Plan and Agreement of Merger among Integrity Capital Corporation, Citizens,
Inc. and Citizens Acquisition, Inc., dated as of November 11, 2008 (the Agreement) |
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Ladies and Gentlemen:
We have acted as counsel for Integrity Capital Corporation, an Indiana corporation (ICC),
and Integrity Capital Insurance Company, an Indiana insurance company (ICIC), in connection with
the Closing under the Agreement. This Opinion Letter is provided to you pursuant to Section 7.7(c)
of the Agreement. Except as otherwise indicated herein, capitalized terms used in this Opinion
Letter are defined as set forth in the Agreement or the Accord (see below).
As such counsel, we have examined: (i) the Agreement; (ii) the Articles of Incorporation of
ICC and ICIC; (iii) the By-Laws of ICC and ICIC; (iv) Certificates of Existence with respect
to ICC and ICIC issued by the Secretary of State of Indiana on , 2009 and a Certificate of
Compliance with respect to ICIC issued by the Indiana Department of Insurance on , 2009;
(v) resolutions of the Boards of Directors of ICC and ICIC regarding the Agreement and the
transactions contemplated thereby, as certified by the Secretary of ICC and ICIC; (vi) resolutions
of the shareholders of ICC with regard to the Merger, as certified by the Secretary of ICC; (vii)
the Articles of Merger, dated , 2009, as filed with the Indiana Secretary of State on ,
2009 (the Articles of Merger), pursuant to which Citizens Acquisition, Inc. is being merged with
and into ICC, with ICC surviving as a direct or indirect wholly owned subsidiary of
Citizens, Inc.; and (viii) the Findings of Fact, Conclusions of Law and Order issued as of ,
2009 by the Indiana Insurance Commissioner with respect to the acquisition of control of ICIC by
Citizens, Inc. pursuant to the Agreement and the Merger. In addition, we have examined such other
documents and matters of law as we have deemed necessary or appropriate to enable us to express the
opinions expressed below. In our examination, we have assumed the genuineness of all signatures
(other than those on behalf of ICC and ICIC), the legal capacity of all natural
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Citizens, Inc.
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December ,2008 |
persons, the authenticity of documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such certified or photostatic copies.
This Opinion 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. The law covered by the opinions expressed herein is limited to the federal
law of the United States and the law of the State of Indiana. This Opinion Letter should not be
construed as expressing an opinion on any matters, legal or otherwise, not specifically mentioned
herein; and in that regard we note expressly that we are not expressing any opinion with regard to
tax, securities or antitrust matters.
With respect to factual matters, we have relied upon certificates of public officials and
authorized representatives of ICC and ICIC, the representations and warranties made by ICC in the
Agreement, and other information furnished to us (including the discussions described in numbered
paragraph 6 below), as we have deemed appropriate as a basis for our opinions set forth below. We
have not independently investigated or verified any such factual matters.
Based upon and subject to the foregoing and the qualifications and limitations otherwise
stated in this Opinion Letter, we are of the opinion that:
1. ICC is a corporation, and ICIC is an insurance company, each validly existing in good
standing under the laws of the State of Indiana. The term good standing as used herein means
that: ICC has filed its most recent report required by Indiana law with the Indiana Secretary of
State; that no notice of withdrawal, dissolution or expiration has been filed with or by the
Indiana Secretary of State with respect to ICC or ICIC; and that ICICs certificate of authority
issued by the Indiana Department of Insurance remains in effect and has not been withdrawn or
suspended by such Department or surrendered by ICIC.
2. ICC has the corporate power and authority to execute, deliver and perform all of its
obligations under the Agreement; and the execution and delivery of the Agreement and the
consummation of the transactions contemplated thereby, in accordance with the terms thereof, have
been duly authorized by all requisite corporate action on the part of the Board of Directors and
shareholders of ICC.
3. The Agreement has been duly executed and delivered by ICC and is a legal, valid and binding
obligation of ICC, enforceable against ICC in accordance with its terms.
4. Neither the execution, delivery or performance by ICC of the Agreement nor the compliance
by ICC with the terms and provisions thereof will: (a) contravene any provision of
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Citizens, Inc.
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December , 2008 |
the Articles of Incorporation or By-laws of ICC or ICIC; or (b) 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 ICC or ICIC is a party
or by which ICC or ICIC is bound and identified to us as a Material Contract in the Identified
Material Contracts Certificate dated the date of this Opinion Letter and provided to us by ICC (a
copy of which Certificate has been provided to you with this Opinion Letter).
5. Neither the execution, delivery or performance by ICC of the Agreement nor the compliance
by ICC with the terms and provisions thereof will: (a) contravene any provision of any statute,
ordinance, rule or regulation of the State of Indiana or of the federal law of the United States;
(b) contravene any order, writ, judgment, injunction, decree, determination, or award known to us
of any court or other governmental authority having jurisdiction over ICC or ICIC; (c) cause the
loss, suspension or revocation of, or constitute grounds for the loss, revocation or suspension of,
any authorization, consent, approval or license known to us to be held by ICC or ICIC and issued by
any governmental authority of the State of Indiana or by any federal governmental authority.
6. To the best of our knowledge, based solely on our discussions with officers of ICC and
review of ICCs and ICICs corporate records provided to us and identified in the Corporate Records
Certificate dated the date of this Opinion Letter and provided to us by ICC (a copy of which
Certificate has been provided to you with this Opinion Letter): (a) ICC is authorized to issue
10,000,000 shares of common stock, without par value, of which shares are issued and outstanding and are fully paid and nonassessable; (b) ICIC
is authorized to issue 500,000 shares of common stock, $100 par value per share, of which shares are issued and outstanding and are fully paid and nonassessable; and (c)
except as set forth in the Agreement or the ICC 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 ICC or ICIC, or
calling for or requiring the issuance of any securities or rights convertible into or exchangeable
for shares of capital stock of ICC or ICIC.
This Opinion Letter 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 General Qualifications of the Accord apply to the opinions set forth in this Opinion
Letter, For purposes of this Opinion Letter, the phrases to our knowledge, to the best of our
knowledge, we do not know, we have no knowledge or known to us mean the conscious awareness
of the facts or other information by the lawyers in our firm who have rendered
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Citizens, Inc.
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December , 2008 |
substantive legal representation to ICC in connection with the Closing under the Agreement, In
that regard, we bring to your attention that our firm has not regularly or previously represented
ICC or ICIC, that we did not participate in or represent ICC or ICIC in connection with the
negotiation or execution of the Agreement, and that our only legal representation of ICC or ICIC
is our representation of ICC in connection with the Closing.
This Opinion Letter is rendered solely to you and is not to be quoted in whole or in part or
otherwise referred to, and is not to be filed with any governmental entity, by you or any other
person without our prior written consent, and it may not be relied upon by anyone other than you.
Yours very truly,
EXHIBIT E
Legal Opinion of Citizens Counsel
EXHIBIT E
, 200___
Integrity Capital Corporation
65
Airport Parkway, Suite 118
Greenwood, Indiana 46143
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Re:
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Plan and Agreement of Merger among Integrity Capital Corporation,
Citizens, Inc. and Citizens Acquisition, Inc. |
Ladles 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 Section 7.8(c) of the Plan and
Agreement of Merger, dated as of November 11, 2008 (the Agreement) among Integrity Capital
Corporation, Citizens and Citizens Acquisition, Inc. 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 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 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.
Integrity Capital Corporation
, 2008
Page2
Based upon and subject to the foregoing and the other qualifications and limitations stated
in this letter, we are of the opinion that:
1. The execution, delivery and performance of the Agreement by Citizens will 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 the articles of incorporation or bylaws of Citizens, or,
to our knowledge, 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 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, except as set forth in the Citizens Disclosure Statement, 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 outstanding capital stock of Citizens is as stated in Section 3.4 of the
Agreement and as updated by the Citizens Disclosure Statement.
7. To our knowledge, except as set forth in the Agreement or the 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.
8. The execution, delivery, and performance of the Agreement, and the performance by Citizens
of its obligations thereunder:
Integrity Capital Corporation
, 2008
Page3
(a) are not in contravention of any iaw, ordinance, rule or regulation (any or all such laws,
ordinances, rules or regulations, together, Applicable Laws) of Colorado or of the United
States, and, to our knowledge, will not contravene any order, writ, judgment, injunction, decree,
determination, or award (any or all such orders, writs, judgments, injunctions, decrees,
determinations or awards, together, Applicable Orders) of any court or other authority
having jurisdiction; and
(b) to our knowledge, 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.
9. No Applicable Laws will, nor, to our knowledge, will any Applicable Orders, 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 7.8(c)
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 in its use to reliance by you in consummating the transactions
described therein and no other person or entity may rely or claim reliance upon this opinion.
The use of the words to our knowledge means that during the course of our current and 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 review or other procedures 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.
This is a legal opinion only and not a guarantee or warranty of the matters discussed herein.
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.
Very truly yours,
Jones & Keller, P.C.
EXHIBIT F
Tax Opinion of Citizens Counsel
, 2008
Citizens, Inc.
400 East Anderson Lane
Austin, Texas 78752
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Re:
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Plan and Agreement of Merger among Integrity Capital Corporation,
Citizens, Inc. and Citizens Acquisition, Inc. |
Ladies and Gentlemen:
Our opinions as expressed below are based solely upon: (1) the information
contained in the Proxy Statement, dated , 2008 (the Proxy
Statement), as filed with the Securities and Exchange Commission; (2) the Plan and
Agreement of Merger (the Agreement), dated , 2008, among
Integrity Capital Corporation (ICC), Citizens, Inc. (Citizens) and Citizens Acquisition, Inc.,
together with the Exhibits thereto; (3) relevant information provided by the principal executive
officers of the parties to the Agreement; (4) the Internal Revenue Code of 1986, as amended (the
IRC), the regulations promulgated thereunder and the current administrative positions of the
Internal Revenue Service (the IRS) contained in published Revenue Rulings and Revenue
Procedures; and (5) 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 OPINION LETTER IS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED BY AN ICC
SHAREHOLDER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE ICC SHAREHOLDER.
THIS OPINION LETTER IS WRITTEN TO SUPPORT THE MERGER AND ISSUANCE BY CITIZENS OF THE CITIZENS
CLASS A COMMON STOCK. EACH ICC SHAREHOLDER SHOULD CONSULT ITS, HIS OR HER OWN QUALIFIED TAX
ADVISOR TO EVALUATE THE TAX EFFECTS OF THE MERGER AND THE RECEIPT OF THE CITIZENS CLASS A COMMON
STOCK BASED ON ITS, HIS OR HER PARTICULAR FACTS AND CIRCUMSTANCES.
Merger refers to the merger transaction set forth in the Proxy Statement and the Agreement.
All capitalized terms used in this opinion letter and not otherwise defined herein, have the
meanings set forth in the Agreement.
The consequences described herein are not applicable to shareholders who may be subject to
special tax treatment, such as banks, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt investors,
non-United States Persons or persons that will hold the Citizens Class
A Common Stock as part of a position in a straddle or as part of a hedging or other
integrated transaction, to shareholders who do not hold their common stock as capital assets or
to shareholders who acquired or will acquire their shares in connection with stock option or
stock purchase plans or in other compensatory transactions. This opinion letter does not include
any description of alternative minimum tax consequences or the tax consequences of any state,
local or foreign laws that may be applicable to an ICC shareholder. 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 any such country, state or municipality. In
addition, we do not opine as to the taxable or nontaxable status of any previous transactions not
considered to be part of the Merger. Further, we do not express an opinion on the valuations of
ICC or Citizens assets or stock or the ratio of exchange of ICC common stock for Citizens Class A
common stock.
We have examined the Proxy Statement and the originals or certified, conformed or reproduced
copies of, among other things, the Agreement.
We have also examined such other documents, as we have deemed necessary in order to enable us
to deliver this opinion letter, including certificates (originals or copies certified to our
satisfaction) of public officials delivered to us and upon which we have relied.
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 opinion letter should be
read in conjunction therewith.
This opinion letter is based upon our interpretations of current law, including court
authority and existing final and temporary Treasury Regulations, which are subject to change both
prospectively and retroactively, and upon the facts and assumptions discussed herein. Future
changes in the law, or administrative or judicial interpretations thereof, may cause the tax
treatment of the transactions referred to herein to be materially different from that described
below. This opinion letter is limited to the matters set forth herein, and no opinions are intended
to be implied or may be inferred beyond those expressly stated herein. Our opinion herein
represents only our best legal judgment on the matters presented and others may disagree with our
conclusion. Our opinion herein is not binding on the Internal Revenue Service or the courts and
there can be no assurance that the Internal Revenue Service will not take a contrary position. In
the event any one of the statements, representations or assumptions we have relied upon to issue
this opinion letter is incorrect, our opinion herein may be adversely affected and may not be
relied upon.
Factual Assumptions
In rendering the opinion herein, with respect to ail documents specifically referred to
herein or, if not specifically referred to, upon which we relied in connection with the opinion
herein stated: (1) we have assumed the genuineness of all signatures; (2) the due authorization,
execution and delivery by the parties thereto of all such documents; (3) the full power,
authority and legal right of such parties to execute and deliver, and to perform and observe the
provisions of, such documents to which they are a party and that such documents are the legal,
valid and binding obligations of such parties; (4) the authenticity of all such documents
submitted to us as originals; (5) the conformity to original documents of all such documents
submitted to us as copies; and (6) the authenticity of the originals of all such documents
submitted to us as copies. In addition, we also have assumed that the transactions related to the
Merger will be consummated in accordance with the terms and forms of the Agreement.
Factual Representations
As to the following facts which are material to the opinions expressed herein and which were
not independently established or verified other than by a review of the Agreements, we have
relied upon oral or written statements and representations of officers, members and other
representatives of Citizens, ICC and others.
The principal reasons for the Merger are to become part of a combined entity with greater
financial strength and an enhanced competitive position as compared to the separate entities, to
achieve improved capitalization and economies of scale and to provide greater liquidity and
diversity to ICC shareholders.
Citizens and ICC, in arriving at the method used to determine the number of shares of
Citizens Class A common stock to be received by each ICC shareholder, attempted in good faith to
value the ICC common stock to be transferred and to value the Citizens Class A common stock to be
exchanged for such ICC common stock in an effort to ensure that each shareholder receiving
Citizens Class A common stock pursuant to the Merger received a number of shares of such stock
approximately equal in value to the ICC common stock exchanged therefor.
ICC has no plan or intention to issue additional shares of its stock that would result in
Citizens losing control of ICC within the meaning of Section 368(c) of the IRC.
None of Citizens, ICC, 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 ICC
shareholders in the Merger, and will not so redeem or otherwise reacquire such stock.
Citizens intends to merge ICC into Citizens. Except for such proposed merger, Citizens has no
plan or intention to liquidate ICC; to merge ICC with or into another corporation; to cause ICC 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 ICC except for transfers described in Section 368(a)(2)(C) of the IRC.
Following the Merger, Citizens will continue the historic business of ICC or use a
significant portion of its historic business assets in such a business.
Citizens and ICC will assume and pay their respective reorganization expenses, if any,
incurred in connection with the Agreement and Merger.
There is no corporate indebtedness between Citizens or ICC that was issued, acquired or will
be settled at a discount.
In the Merger, shares of ICC common stock will be exchanged solely for Citizens Class A
voting common stock, with Citizens thereby obtaining control of ICC as defined in Section 368(c)
of the IRC.
On the Effective Date of the Merger, ICC will not have outstanding any warrants, options,
convertible securities or any other type of right pursuant to which any person could acquire
stock in ICC that, if exercised or converted, would affect Citizens acquisition or retention of
control of ICC, as defined in Section 368(c) of the IRC.
Citizens, through its wholly owned subsidiary, owns 13% of the common stock of ICC. Except
for such ownership, Citizens does not own, nor has it owned during the past five (5) years,
directly or indirectly, any other shares of ICC stock.
Neither Citizens nor ICC are investment companies as defined in Section 368(a)(2)(F)(iii) and
(iv) of the IRC.
Neither Citizens nor ICC are under the jurisdiction of a court in a Title 11 or similar case
within the meaning of IRC Section 368(a)(3)(A).
In the event that shareholders holdings more than 2.0 percent of the outstanding shares of
ICC common stock dissent to the Merger, Citizens would exercise its option not to proceed with the
Merger (as permitted under the Agreement) and the Merger consequently would not be consummated.
No ICC common stock will be acquired for consideration other than solely Citizens Class A
common stock. Further, no liabilities of ICC or the ICC shareholders will be assumed by Citizens,
nor will any of the ICC common stock be subject to any liabilities.
Citizens will not assume or repay any ICC debt guaranteed by ICC shareholders nor will
Citizens assume or repay any outstanding loans between ICC and its shareholders.
No compensation or agreement for services received by any shareholder of ICC, or any entity
related to any ICC shareholder, will be separate consideration for, or allocable to, any of
their shares of ICC common stock. No shares of Citizens Class A common stock received by any ICC
shareholder, or any entity related to any ICC shareholder, will be separate consideration for,
or allocable to, any employment agreement or compensation agreement. The compensation paid to
any ICC shareholder, or any entity related to any ICC shareholder, will be for services actually
performed and/or property actually leased and will be commensurate with amounts paid to third
parties bargaining at arms-length for similar services.
ICC will pay its shareholders that exercise their appraisal rights under the Indiana
Business Corporation Law the value of their ICC 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 ICC for any
payments to shareholders exercising such appraisal rights.
On the Effective Date of the Merger, ICC will hold substantially all its assets and the fair
market value of its assets will exceed the sum of its liabilities plus the liabilities, if any,
to which its assets are subject.
Assumed Favorable Resolution
This opinion letter assumes that the Merger will be consummated and qualify as a statutory
merger in full compliance with Indiana law and will be consummated in accordance with the terms
of the Agreement.
Significant Tax Consequences of the Merger
Based upon the above facts, assumed favorable resolution and the applicable law, in our
opinion, the significant tax consequences of the Merger to ICC shareholders are as follows:
(1) The Merger should constitute a reorganization within the meaning of Section 368(a)(2)(E)
or Section 368(a)(l)(A) of the IRC, and Citizens and ICC should each be a party to a
reorganization within the meaning of Section 368(b) of the IRC. No gain or loss should be
recognized by the shareholders of ICC upon the exchange of their shares of ICC 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
ICC should be the same as the basis of the ICC common stock surrendered by that shareholder in the
Merger. IRC Section 358(a); IRC Regulation Section 1.358- l(a).
(3) The holding period of the shares of Citizens Class A common stock received by a
shareholder of ICC should include the period during which such shareholder held the ICC 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 Merger. IRC Section
1223(1).
(4) Cash received by ICC shareholders who properly exercise their appraisal rights should 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 shareholders basis in the ICC common stock. Provided the shares were held as capital assets
at the time of the redemption, such gain or loss should constitute capital gain or loss, and such
gain or loss should 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 ICC shareholders, the distribution of cash
may be treated as a dividend taxable as ordinary income. IRC Sections 302, 301.
(5) Certain shareholders of ICC must file, pursuant to IRS Regulation 1.368-3, with its, his
or her income tax return for the year in which the Merger is consummated, a statement which
provides details relating to the property transferred and securities received in the Merger.
Each ICC shareholder should consult such shareholders own qualified tax advisor to evaluate
the tax effects of the Merger based on the shareholders personal facts and circumstances.
Other than the specific tax opinion set forth in this letter, we render no other opinion with
respect to the tax treatment of the Merger, including, but not limited to, the tax treatment of
any conditions existing at the time of, or effects resulting from, the proposed transactions that
are not specifically covered by the above opinion, or the tax treatment of the proposed
transactions under state, local, foreign or any other tax laws.
For the reasons stated above, the significant tax issues related to the Merger, addressed
singularly and in the aggregate, constitute the proper federal tax treatment and more likely than
not will be upheld under challenge by the IRS.
This opinion letter is rendered pursuant to Section 7.8(c) of the Agreement and it is to be
limited in its use to reliance by you in consummating the transactions described therein and no
other person or entity may rely or claim reliance upon this opinion letter. This opinion letter is
rendered as of the date hereof, and we undertake no, and hereby disclaim any, obligation to advise
you or to update or supplement this opinion letter or any matter related to this opinion letter to
reflect any change of fact, circumstances or law after the date hereof which might affect any
matters or the opinion set forth herein.
We hereby consent to the filing of this letter as an exhibit to the Proxy Statement and the
use of our name in the Proxy Statement under the captions Capital Federal Income Tax
Consequences. In giving such consent, we do not concede that this consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
JONES & KELLER, P.C.
APPENDIX B
Indiana Statute Regarding Dissenters Rights -
Chapter 44 of the Indiana Business Corporation Law.
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IC 23-1-44
Chapter 44. Dissenters Rights
IC 23-1-44-1
Corporation defined
Sec. 1. As used in this chapter, corporation means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-2
Dissenter defined
Sec. 2. As used in this chapter, dissenter means a shareholder who is entitled to dissent
from corporate action under section 8 of this chapter and who exercises that right when and in the
manner required by sections 10 through 18 of this chapter.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-3
Fair value defined
Sec. 3. As used in this chapter, fair value, with respect to a dissenters shares, means
the value of the shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-4
Interest defined
Sec. 4. As used in this chapter, interest means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable under all the
circumstances.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-5
Record shareholder defined
Sec. 5. As used in this chapter, record shareholder means the person in whose name shares
are registered in the records of a corporation or the beneficial owner of shares to the extent
that treatment as a record shareholder is provided under a recognition procedure or a disclosure
procedure established under IC 23-1-30-4.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-6
Beneficial shareholder defined
Sec. 6. As used in this chapter, beneficial shareholder means the person who is a
beneficial owner of shares held by a nominee as the
record shareholder.
As
added by P.L.149-1986, SEC.28.
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IC 23-1-44-7
Shareholder defined
Sec. 7. As used in this chapter, shareholder means the record shareholder or the beneficial
shareholder.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-8
Right to dissent and obtain payment for shares
Sec. 8. (a) A shareholder is entitled to dissent from, and obtain payment of the fair value
of the shareholders shares in the event of, any of the following corporate actions:
(1) Consummation
of a plan of merger to which the corporation
is a party if:
(A) shareholder approval is required for the merger by
IC 23-1-40-3 or the articles of incorporation; and
(B) the shareholder is entitled to vote on the merger.
(2) Consummation of a plan of share exchange to which the corporation is a party as the
corporation whose shares will be acquired, if the shareholder is entitled to vote on the
plan.
(3) Consummation of a sale or exchange of all, or substantially all, of the property of the
corporation other than in the usual and regular course of business, if the shareholder is
entitled to vote on the sale or exchange, including a sale in dissolution, but not
including a sale pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to the
shareholders within one (1) year after the date of sale.
(4) The
approval of a control share acquisition under
IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain
payment for their shares.
(b) This section does not apply to the holders of shares of any
class or series if, on the date fixed to determine the shareholders
entitled to receive notice of and vote at the meeting of shareholders
at which the merger, plan of share exchange, or sale or exchange of
property is to be acted on, the shares of that class or series were:
(1) registered on a United States securities exchange registered under the Exchange Act (as
defined in IC 23-1-43-9); or
(2) traded on the National Association of Securities Dealers, Inc. Automated Quotations
System Over-the-Counter Markets National Market Issues or a similar market.
(c) A shareholder:
(1) who is entitled to dissent and obtain payment for the shareholders shares under this
chapter; or
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(2) who would be so entitled to dissent and obtain payment but
for the provisions of subsection (b);
may not challenge the corporate action creating (or
that, but for the provisions of subsection (b), would have created) the shareholders entitlement.
As added by P.L.149-1986, SEC.28. Amended by P.L.107-1987, SEC.19.
IC 23-1-44-9
Dissenters rights of beneficial shareholder
Sec. 9. (a) A record shareholder may assert dissenters rights as to fewer than all the shares
registered in the shareholders name only if the shareholder dissents with respect to all shares
beneficially owned by any one (1) person and notifies the corporation in writing of the name and
address of each person on whose behalf the shareholder asserts dissenters rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to which the shareholder
dissents and the shareholders other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters rights as to shares held on the
shareholders behalf only if:
(1) the beneficial shareholder submits to the corporation the record shareholders written
consent to the dissent not later than the time the beneficial shareholder asserts
dissenters rights; and
(2) the beneficial shareholder does so with respect to all the beneficial shareholders shares or those shares over which the beneficial shareholder has power to direct the vote.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-10
Proposed action creating dissenters rights; notice
Sec. 10. (a) If proposed corporate action creating dissenters rights under section 8 of this
chapter is submitted to a vote at a shareholders meeting, the meeting notice must state that
shareholders are or may be entitled to assert dissenters rights under this chapter.
(b) If corporate action creating dissenters rights under section 8 of this chapter is taken
without a vote of shareholders, the corporation shall notify in writing all shareholders entitled
to assert dissenters rights that the action was taken and send them the dissenters notice
described in section 12 of this chapter.
As added by P.L.149-1986, SEC.28. Amended by P.L.107-1987, SEC.20.
IC 23-1-44-11
Proposed action creating dissenters rights; assertion of dissenters rights
Sec. 11. (a) If proposed corporate action creating dissenters rights under section 8 of this
chapter is submitted to a vote at a shareholders meeting, a shareholder who wishes to assert
dissenters
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rights:
(1) must deliver to the corporation before the vote is taken written notice of the
shareholders intent to demand payment for the shareholders shares if the proposed action
is effectuated; and
(2) must not vote the shareholders shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is not entitled to
payment for the shareholders shares under this chapter.
As
added by P.L.149-1986, SEC.28.
IC 23-1-44-12
Dissenters notice; contents
Sec. 12. (a) If proposed corporate action creating dissenters rights under section 8 of this
chapter is authorized at a shareholders meeting, the corporation shall deliver a written
dissenters notice to all shareholders who satisfied the requirements of section 11 of this
chapter.
(b) The dissenters notice must be sent no later than ten (10) days after approval by the
shareholders, or if corporate action is taken without approval by the shareholders, then ten (10)
days after the corporate action was taken. The dissenters notice must:
(1) state where the payment demand must be sent and where and when certificates for
certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent transfer of the shares will be
restricted after the payment demand is received;
(3) supply a form for demanding payment that includes the date of the first announcement to
news media or to shareholders of the terms of the proposed corporate action and requires
that the person asserting dissenters rights certify whether or not the person acquired
beneficial ownership of the shares before that date;
(4) set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty (30)
nor more than sixty (60) days after the date the subsection (a)
notice is delivered; and
(5) be accompanied by a copy of this chapter.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-13
Demand for payment and deposit of shares by shareholder
Sec.
13. (a) A shareholder sent a dissenters notice described in IC 23-1-42-11 or in section
12 of this chapter must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the dissenters notice under
section 12(b)(3) of this chapter, and deposit the shareholders certificates in accordance with the
terms of the notice.
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(b) The shareholder who demands payment and deposits the
shareholders shares under subsection (a) retains all other rights of a shareholder until
these rights are cancelled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the shareholders share certificates
where required, each by the date set in the dissenters notice, is not entitled to payment for the
shareholders shares under this chapter and is considered, for purposes of this article, to have
voted the shareholders shares in favor of the proposed corporate action.
As
added by P.L.149-1986, SEC.28.
IC 23-1-44-14
Uncertificated shares; restriction on transfer; dissenters rights
Sec. 14. (a) The corporation may restrict the transfer of uncertificated shares from the date
the demand for their payment is received until the proposed corporate action is taken or the
restrictions released under section 16 of this chapter.
(b) The person for whom dissenters rights are asserted as to uncertificated shares retains
all other rights of a shareholder until these rights are cancelled or modified by the taking of the
proposed corporate action.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-15
Payment to dissenter
Sec. 15. (a) Except as provided in section 17 of this chapter, as soon as the proposed
corporate action is taken, or, if the transaction did not need shareholder approval and has been
completed, upon receipt of a payment demand, the corporation shall pay each dissenter who complied
with section 13 of this chapter the amount the corporation estimates to be the fair value of the
dissenters shares.
(b) The payment must be accompanied by:
(1) the corporations balance sheet as of the end of a fiscal year ending not more than
sixteen (16) months before the date of payment, an income statement for that year, a
statement of changes in shareholders equity for that year, and the latest available
interim financial statements, if any;
(2) a statement of the corporations estimate of the fair value of the shares; and
(3) a statement of the dissenters right to demand payment under section 18 of this
chapter.
As added by P.L.149-1986, SEC.28. Amended by P.L.107-1987, SEC.21.
IC 23-1-44-16
Failure to take action; return of certificates; new action by corporation
Sec. 16. (a) If the corporation does not take the proposed action within sixty (60) days
after the date set for demanding payment and depositing share certificates, the corporation shall
return the
deposited certificates and release the transfer restrictions imposed on uncertificated
shares.
B-6
(b) If after returning deposited certificates and releasing transfer restrictions, the
corporation takes the proposed action, it must send a new dissenters notice under section 12 of
this chapter and repeat the payment demand procedure.
As
added by P.L.149-1986, SEC.28.
IC 23-1-44-17
Withholding payment by corporation; corporations estimate of fair value; after-acquired shares
Sec. 17. (a) A corporation may elect to withhold payment required by section 15 of this
chapter from a dissenter unless the dissenter was the beneficial owner of the shares before the
date set forth in the dissenters notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under subsection (a), after
taking the proposed corporate action, it shall estimate the fair value of the shares and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of the dissenters
demand. The corporation shall send with its offer a statement of its estimate of the fair value of
the shares and a statement of the dissenters right to demand payment under section 18 of this
chapter.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-18
Dissenters estimate of fair value; demand for payment; waiver
Sec. 18. (a) A dissenter may notify the corporation in writing of the dissenters own estimate
of the fair value of the dissenters shares and demand payment of the dissenters estimate (less
any payment under section 15 of this chapter), or reject the corporations offer under section 17
of this chapter and demand payment of the fair value of the dissenters shares, if:
(1) the dissenter believes that the amount paid under section 15 of this chapter or offered
under section 17 of this chapter is less than the fair value of the dissenters shares;
(2) the corporation fails to make payment under section 15 of this chapter within sixty
(60) days after the date set for demanding payment; or
(3) the corporation, having failed to take the proposed action, does not return the
deposited certificates or release the transfer restrictions imposed on uncertificated
shares within sixty (60) days after the date set for demanding payment.
(b) A dissenter waives the right to demand payment under this section unless the dissenter
notifies the corporation of the dissenters demand in writing under subsection (a) within thirty
(30) days after the corporation made or offered payment for the dissenters shares.
As added by P.L.149-1986, SEC.28.
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IC 23-1-44-19
Court proceeding to determine fair value; judicial appraisal
Sec. 19. (a) If a demand for payment under IC 23-1-42-11 or under section 18 of this chapter
remains unsettled, the corporation shall commence a proceeding within sixty (60) days after
receiving the payment demand and petition the court to determine the fair value of the shares. If
the corporation does not commence the proceeding within the sixty (60) day period, it shall pay
each dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit or superior court of the
county where a corporations principal office (or, if none in Indiana, its registered office) is
located. If the corporation is a foreign corporation without a registered office in Indiana, it
shall commence the proceeding in the county in Indiana where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of this state) whose
demands remain unsettled parties to the proceeding as in an action against their shares and all
parties must be served with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under subsection (b)
is plenary and exclusive. The court may appoint one (1) or more persons as appraisers to receive
evidence and recommend decision on the question of fair value. The appraisers have the powers
described in the order appointing them or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) for the amount, if any, by which the court finds the fair value of the dissenters shares, plus interest, exceeds the amount paid by the corporation; or
(2) for the fair value, plus accrued interest, of the dissenters after-acquired shares for
which the corporation elected to withhold payment under section 17 of this chapter.
As added by P.L.149-1986, SEC.28.
IC 23-1-44-20
Costs; fees; attorneys fees
Sec. 20. (a) The court in an appraisal proceeding commenced under section 19 of this chapter
shall determine all costs of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against such parties and in
such amounts as the court finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts for the respective
parties, in amounts the court finds equitable:
(1) against the corporation and in favor of any or all dissenters if the court finds the
corporation did not substantially comply
B-8
with the requirements of sections 10 through 18 of this chapter; or
(2) against either the corporation or a dissenter, in favor of any other party, if the court finds
that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or
not in good faith with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly
situated and that the fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
As added by P.L.149-1986, SEC.28.
B-9
Appendix C
CONSOLIDATED FINANCIAL STATEMENTS
INTEGRITY CAPITAL CORPORATION AND SUBSIDIARY
December 31, 2007 and 2006
CONTENTS
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2 |
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AUDITED CONSOLIDATED FINANCIAL STATEMENTS |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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1
Independent Auditors Report
Board of Directors
Integrity Capital Corporation
We have audited the accompanying consolidated balance sheets of Integrity Capital Corporation
(an Indiana corporation) and subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of operations, comprehensive income, changes in shareholders equity and
cash flows for the years the ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Integrity Capital Corporation and
subsidiary as of December 31, 2007 and 2006, and the consolidated results of its operations and its
cash flows for the years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Kerber, Eck & Braeckel LLP
Springfield, Illinois
May 5, 2008
2
Integrity Capital Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31
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2007 |
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2006 |
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(Restated) |
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ASSETS |
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities, at fair value |
|
$ |
5,208,827 |
|
|
$ |
5,840,487 |
|
Investments in related-party stock, at cost |
|
|
22,500 |
|
|
|
22,500 |
|
Cash and cash equivalents |
|
|
2,945,052 |
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|
|
749,179 |
|
Accrued investment income |
|
|
29,823 |
|
|
|
41,349 |
|
Net deferred tax assets |
|
|
122,808 |
|
|
|
104,507 |
|
Reinsurance recoverable |
|
|
63,989 |
|
|
|
52,265 |
|
Premiums receivable |
|
|
49,623 |
|
|
|
|
|
Deferred policy acquisition costs |
|
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1,524,185 |
|
|
|
1,431,359 |
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Other assets |
|
|
8,510 |
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|
|
8,557 |
|
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|
|
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Total assets |
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$ |
9,975,317 |
|
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$ |
8,250,203 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Policy and contract liabilities |
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|
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Future policy benefits |
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$ |
3,435,585 |
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$ |
2,226,880 |
|
Policy and contract claims |
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6,000 |
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|
36,000 |
|
Policyholder funds on deposit |
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726,633 |
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|
494,744 |
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Deposits on pending policy applications |
|
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74,587 |
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|
43,309 |
|
Policyholder dividends |
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|
260,156 |
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|
184,607 |
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|
|
|
|
|
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|
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|
|
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Total policy and contract liabilities |
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4,502,961 |
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|
|
2,985,540 |
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|
|
|
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Payables to related parties |
|
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20,760 |
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|
28,339 |
|
Agents credit balances |
|
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5,238 |
|
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|
8,274 |
|
Accrued expenses and other liabilities |
|
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24,764 |
|
|
|
15,832 |
|
Federal income taxes payable |
|
|
30,778 |
|
|
|
47,687 |
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|
|
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|
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|
|
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|
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Total liabilities |
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4,584,501 |
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|
3,085,672 |
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Shareholders equity |
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Common stock, no par value, $.10 stated value
10,000,000 shares authorized; 4,571,706
shares issued and outstanding |
|
|
457,170 |
|
|
|
457,170 |
|
Additional paid in capital |
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|
6,284,295 |
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|
|
6,284,295 |
|
Accumulated other comprehensive loss |
|
|
(5,274 |
) |
|
|
(156,969 |
) |
Accumulated deficit |
|
|
(1,334,375 |
) |
|
|
(1,408,965 |
) |
Less treasury stock, 110,000 shares at cost |
|
|
(11,000 |
) |
|
|
(11,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total shareholders equity |
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5,390,816 |
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|
5,164,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities and shareholders equity |
|
$ |
9,975,317 |
|
|
$ |
8,250,203 |
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these statements.
3
Integrity Capital Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31
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2007 |
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2006 |
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(Restated) |
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REVENUES |
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Premium income |
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$ |
2,383,582 |
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$ |
2,155,774 |
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Net investment income |
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|
292,735 |
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|
256,453 |
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Service fee income, related party |
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28,000 |
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21,000 |
|
Realized gains on investments |
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1,104 |
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|
|
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Total revenues |
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2,705,421 |
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2,433,227 |
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BENEFITS AND EXPENSES |
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Policyholder benefits |
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1,521,720 |
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|
1,414,720 |
|
Interest on policy funds |
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|
24,055 |
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|
16,800 |
|
Policy acquisition costs deferred |
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(252,834 |
) |
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|
(588,411 |
) |
Amortization of deferred policy acquisition costs |
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|
160,008 |
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|
158,542 |
|
Commissions |
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|
267,971 |
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|
534,980 |
|
Selling, administrative and general expense |
|
|
119,284 |
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|
|
103,111 |
|
Salaries, wages and employee benefits |
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|
375,762 |
|
|
|
375,176 |
|
Professional fees |
|
|
307,505 |
|
|
|
305,161 |
|
Rent expense |
|
|
44,786 |
|
|
|
39,648 |
|
Depreciation expense |
|
|
|
|
|
|
3,231 |
|
Taxes and licenses |
|
|
4,820 |
|
|
|
19,586 |
|
Other expenses |
|
|
18,252 |
|
|
|
12,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
2,591,329 |
|
|
|
2,395,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
114,092 |
|
|
|
37,787 |
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
39,502 |
|
|
|
(2,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
74,590 |
|
|
$ |
40,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE -
BASIC AND DILUTED |
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
4
Integrity Capital Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(Restated) |
|
Net income |
|
$ |
74,590 |
|
|
$ |
40,489 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Reclassification adjustment of unrealized loss of
securities called |
|
|
1,473 |
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities |
|
|
150,222 |
|
|
|
(10,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
226,285 |
|
|
$ |
30,199 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
Integrity Capital Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
capital |
|
|
loss |
|
|
deficit |
|
|
stock |
|
|
Total |
|
Balance at January 1, 2006 |
|
$ |
457,170 |
|
|
$ |
6,284,295 |
|
|
$ |
(146,679 |
) |
|
$ |
(1,449,454 |
) |
|
$ |
(11,000 |
) |
|
$ |
5,134,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,489 |
|
|
|
|
|
|
|
40,489 |
|
Net unrealized loss on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
(10,290 |
) |
|
|
|
|
|
|
|
|
|
|
(10,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006, as restated |
|
|
457,170 |
|
|
|
6,284,295 |
|
|
|
(156,969 |
) |
|
|
(1,408,965 |
) |
|
|
(11,000 |
) |
|
|
5,164,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,590 |
|
|
|
|
|
|
|
74,590 |
|
Net unrealized gain on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
151,695 |
|
|
|
|
|
|
|
|
|
|
|
151,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
457,170 |
|
|
$ |
6,284,295 |
|
|
$ |
(5,274 |
) |
|
$ |
(1,334,375 |
) |
|
$ |
(11,000 |
) |
|
$ |
5,390,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
6
Integrity Capital Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(Restated) |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
74,590 |
|
|
$ |
40,489 |
|
Adjustments to reconcile net income to net cash
provided by operating activities
Realized gains on investments |
|
|
(1,104 |
) |
|
|
|
|
Accrual of discount on fixed maturities |
|
|
(541 |
) |
|
|
|
|
Provision for depreciation |
|
|
|
|
|
|
3,231 |
|
Decrease (increase) in accrued investment income |
|
|
11,526 |
|
|
|
(12,504 |
) |
Increase in deferred policy acquisition costs, net |
|
|
(92,826 |
) |
|
|
(429,869 |
) |
Decrease in federal income tax recoverable |
|
|
|
|
|
|
3,800 |
|
Increase in net deferred tax assets |
|
|
(18,301 |
) |
|
|
(89,701 |
) |
Increase in reinsurance recoverable |
|
|
(11,724 |
) |
|
|
(13,985 |
) |
Increase in premiums receivable |
|
|
(49,623 |
) |
|
|
|
|
Decrease in other assets |
|
|
47 |
|
|
|
3,523 |
|
Increase in policy and contract liabilities |
|
|
1,254,254 |
|
|
|
1,261,402 |
|
Increase (decrease) in payables and accrued expenses |
|
|
(18,592 |
) |
|
|
47,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,147,706 |
|
|
|
814,197 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Calls of available-for-sale securities |
|
|
785,000 |
|
|
|
|
|
Purchase of available-for-sale fixed maturities |
|
|
|
|
|
|
(603,362 |
) |
Purchase of affiliated stock |
|
|
|
|
|
|
(22,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
785,000 |
|
|
|
(625,862 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Increase in policyholder deposits |
|
|
263,167 |
|
|
|
178,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
263,167 |
|
|
|
178,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
2,195,873 |
|
|
|
366,643 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
749,179 |
|
|
|
382,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
$ |
2,945,052 |
|
|
$ |
749,179 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
7
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
NATURE OF OPERATIONS
Integrity Capital Corporation, (the Company) was incorporated in Indiana on May 30, 2000, for
the primary purpose of organizing a life insurance subsidiary. After incorporation, common
stock of the Company was sold through private placement offerings and an Indiana intrastate
public stock offering. The public stock offering commenced on March 5, 2001, and was completed
on March 5, 2004. Total proceeds raised from the public offering were $6,858,530. On January
12, 2003, the Company capitalized its wholly-owned subsidiary, Integrity Capital Insurance
Company (ICIC), with $2,000,000 of net offering proceeds. On October 22, 2003, the Indiana
Department of Insurance issued a certificate of authority to ICIC to transact life and annuity
business in the state of Indiana. ICIC commenced insurance operations on March 6, 2004.
ICICs initial product is a twenty-pay whole-life participating policy referred to as the
Integrity First Plan. The Integrity First Plan offers a level death benefit plus an annual
income death benefit payable through the 20th year if death occurs in the first 20
years. The Integrity First Plan is sold based on premium units of $1,000 which may be purchased
in fractional or multiple increments. ICIC is licensed and only offers its products in the
state of Indiana.
NOTE A ORGANIZATION AND ACCOUNTING POLICIES
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts and operations of the
Company and Integrity Capital Insurance Company. All inter-company accounts and transactions
are eliminated in consolidation.
2. Managements Estimates
The preparation of the financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact the amounts
reported and disclosed herein.
8
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE A ORGANIZATION AND ACCOUNTING POLICIES Continued
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents are defined as cash
deposits with financial institutions and highly-liquid short-term investments with an original
maturity of three months or less.
4. Investments
The Company classifies all of its fixed maturity securities as available-for-sale.
Available-for-sale securities are carried at fair value, based on quoted market prices, with
unrealized gains and losses, net of applicable deferred taxes, reported in other comprehensive
income. The investment in related party stock is carried at cost.
Realized gains and losses on sales of investments are recognized in operations on the specific
identification basis. Interest and dividends earned on investments are included in net
investment income.
5. Deferred Policy Acquisition Costs
Commissions and other costs of acquiring life insurance, which vary with, and are primarily
related to, the production of new insurance contracts, have been deferred to the extent
recoverable from future policy revenues and gross profits. The acquisition costs are amortized
over the life of the related policies using assumptions consistent with those used in computing
policy reserves.
6. Life Policy Reserves
The liabilities for future policy benefits on the Companys life insurance products are computed
using the net level premium method and assumptions as to investment yields, mortality,
withdrawals, and other assumptions, modified as necessary to reflect anticipated trends and to
include provisions for possible unfavorable deviations. The assumptions utilized were 4.5% and
4.0% interest for yields for policies issued beginning in 2006 and the 2001 CSO male age last
birthday for mortality.
7. Liability for Policy Claims
Policy claim liabilities are based on estimated future liabilities developed from trends of
historical data applied to current exposures.
9
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE A ORGANIZATION AND ACCOUNTING POLICIES Continued
8. Participating Insurance
ICIC had $81,371,000 and $69,590,000 of participating insurance in force at December 31, 2007
and 2006, respectively, which represents 54.9% and 53.3%, respectively, of insurance in force.
Participating dividends are determined at the discretion of the board of directors. Dividends
in the amount of $184,607 and $99,190 were paid during 2007 and 2006, respectively.
9. Premiums
Premiums on life policies are recognized as earned when due. Benefits and expenses are
associated with earned premiums so as to result in the recognition of profits over the estimated
lives of the contracts. This matching is accomplished by means of a provision for future policy
benefits and the capitalization and amortization of deferred policy acquisition costs.
10. Federal Income Taxes
Federal income taxes are charged or credited to operations based upon amounts estimated to be
payable or recoverable as a result of taxable operations for the current year. Deferred income
taxes are provided for cumulative temporary differences between balances of assets and
liabilities determined under accounting principles generally accepted in the United States of
America and balances determined for tax reporting purposes.
NOTE B NET INCOME PER COMMON SHARE
Net income per common share for basic and diluted earnings per share is based upon the weighted
average number of common shares outstanding during the year. The weighted average outstanding
common shares was 4,461,706 for the years ended December 31, 2007 and December 31, 2006.
10
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE C INVESTMENTS
The amortized cost and fair value of investments in fixed maturities at December 31, 2007 and
2006, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency bonds |
|
$ |
5,214,101 |
|
|
$ |
2,392 |
|
|
$ |
(7,666 |
) |
|
$ |
5,208,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency bonds |
|
$ |
5,997,456 |
|
|
$ |
|
|
|
$ |
(156,969 |
) |
|
$ |
5,840,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 7, the Company purchased common stock of an insurance holding company for
$22,500. The investment is being recorded using the cost method as there is no market for the
stock.
The Company realized gross gains from the sale of fixed maturity securities of $1,104 for the
year ended December 31, 2007. Proceeds from the sale of fixed maturity securities were $785,000
in 2007. There were no realized gains or losses in 2006.
The amortized cost and fair value of fixed maturities at December 31, 2007, by contractual
maturity, are shown below. Actual maturities may differ from contractual maturities because
certain borrowers may have the right to call or prepay obligations.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Due after one year through five years |
|
$ |
3,981,102 |
|
|
$ |
3,980,174 |
|
Due after five years through ten years |
|
|
1,232,999 |
|
|
|
1,228,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,214,101 |
|
|
$ |
5,208,827 |
|
|
|
|
|
|
|
|
11
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE C INVESTMENTS Continued
The following table shows the Companys investments gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
More than 12 months |
|
|
Total |
|
|
|
|
|
2007 |
|
Fair Unrealized |
|
|
|
|
|
|
Fair Unrealized |
|
|
|
|
|
|
Fair Unrealized |
|
|
|
|
|
|
|
|
Description of Securities |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
U.S. government agency |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,842,334 |
|
|
$ |
(7,666 |
) |
|
$ |
1,842,334 |
|
|
$ |
(7,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
More than 12 months |
|
|
Total |
|
|
|
|
|
2006 |
|
Fair Unrealized |
|
|
|
|
|
|
Fair Unrealized |
|
|
|
|
|
|
Fair Unrealized |
|
|
|
|
|
|
|
|
Description of Securities |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
U.S. government agency |
|
$ |
2,346,248 |
|
|
$ |
(48,088 |
) |
|
$ |
3,494,239 |
|
|
$ |
(108,881 |
) |
|
$ |
5,840,487 |
|
|
$ |
(156,969 |
) |
|
|
|
|
The Company experienced no other-than-temporary declines in value of their investments during
2007 or 2006. The Companys decision to record an impairment loss is primarily based on whether
the securitys fair value is likely to remain significantly below its book value in light of all
the factors considered. Factors that are considered include the length of time the securitys
fair value has been below carrying value, the credit worthiness of the issuer, and the coupon
and/or dividend payment history of the issuer. For securities that are other-than-temporarily
impaired, the security is adjusted to fair value and the resulting losses are recognized in
realized gains (losses) in the statements of operations.
The Company limits credit risk by emphasizing securities which are backed by the full faith and
credit of the United States Government. As a result, management believes that significant
concentrations of credit risk do not exist.
12
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE D INCOME TAXES
The Company does not file a consolidated federal income tax return with ICIC. ICIC is taxed as
a life insurance company under the provisions of the Internal Revenue Code and must file a
separate tax return for its initial six years of existence. Federal income tax expense for the
years ended December 31, 2007 and 2006, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Current |
|
$ |
57,803 |
|
|
$ |
86,999 |
|
Deferred |
|
|
(18,301 |
) |
|
|
(89,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense |
|
$ |
39,502 |
|
|
$ |
(2,702 |
) |
|
|
|
|
|
|
|
Deferred Federal income taxes reflect the impact of temporary differences between the amount of
assets and liabilities for financial reporting purposes and such amounts as measured by tax laws
and regulations. Significant components of the Companys net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
248,780 |
|
|
$ |
275,507 |
|
Dividend payable |
|
|
32,977 |
|
|
|
32,122 |
|
Advance premium |
|
|
1,913 |
|
|
|
|
|
AMT credit |
|
|
|
|
|
|
1,393 |
|
Unrealized loss on investments |
|
|
1,793 |
|
|
|
33,376 |
|
Net operating loss |
|
|
512,717 |
|
|
|
239,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
798,180 |
|
|
|
582,017 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Premiums receivable |
|
|
(6,529 |
) |
|
|
|
|
Deferred policy acquisition costs |
|
|
(154,333 |
) |
|
|
(204,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(160,862 |
) |
|
|
(204,515 |
) |
|
Net deferred tax asset before allowances |
|
|
637,318 |
|
|
|
377,502 |
|
Allowance for unrealized loss on investments |
|
|
(1,793 |
) |
|
|
(33,376 |
) |
Allowance for net operating loss |
|
|
(512,717 |
) |
|
|
(239,619 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
122,808 |
|
|
$ |
104,507 |
|
|
|
|
|
|
|
|
13
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE D INCOME TAXES Continued
The Company has tax net operating loss carry-forwards of approximately $1.5 million expiring in
2020 through 2025. These tax net operating losses may be available to offset future taxable
income. These operating losses are not available to offset ICICs income. The Company has
established an allowance equal to the deferred tax asset created by the net operating loss
carry-forwards due to the uncertainty of recovery.
In addition, a valuation allowance of 100% was established for the deferred tax asset resulting
from the unrealized holding losses on securities during 2007 and 2006 due to the uncertainty of
recovery.
The Companys effective income tax rate is lower than what would be expected if the federal
statutory rate were applied to income from continuing operations primarily because of expenses
deductible for financial reporting purposes that are not deductible for tax purposes and the
small life insurance company deduction.
During 2007 and 2006, the Company made income tax payments totaling $74,463 and $35,512,
respectively.
NOTE E REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its exposure to large losses.
The Company retains a maximum of $30,000 of coverage per individual life. Such reinsurance
permits recovery of a portion of losses from reinsurers, although it does not discharge the
primary liability of the Company as direct insurer of the risks reinsured. The Company
evaluates the financial strength of potential reinsurers and continually monitors the financial
condition of reinsurers. The following table includes premium amounts ceded to other companies:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Life insurance premiums, direct |
|
$ |
2,450,459 |
|
|
$ |
2,197,273 |
|
Life insurance premiums, ceded |
|
|
(66,877 |
) |
|
|
(41,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium income |
|
$ |
2,383,582 |
|
|
$ |
2,155,774 |
|
|
|
|
|
|
|
|
14
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE F CONCENTRATION OF CREDIT RISK
The Company maintains balances at a financial institution, which is insured by the Federal
Deposit Insurance Corporation up to $100,000. Uninsured balances aggregate $282,026 at December
31, 2007 and $119,114 at December 31, 2006. The Company has not experienced any losses in such
amounts and believes it is not exposed to any significant credit risk on cash.
NOTE G RELATED-PARTY TRANSACTIONS
Citizens, Inc. (Citizens) is a financial services holding company based in Austin, Texas.
Citizens is a shareholder of the Company and owns 585,000 shares (or 13%) of the Companys
outstanding common stock at December 31, 2007. Citizens provides the Company with accounting
and administrative services in exchange for a monthly fee. For the years ended December 31,
2007 and 2006, the Company incurred $255,782 and $257,217, respectively, for these services. At
December 31, 2007 and 2006, accounts payable to Citizens totaled $20,760 and $28,339,
respectively.
During 2006, the Company purchased $22,500 of common stock of an insurance holding company in
the development stage of operation, Crossroads Capital Corporation. Crossroads and the Company
have similar officers. The investment is being carried at cost. In addition, the Company
receives monthly rental income from Crossroads for use of the Companys office space. The
Company received $28,000 and $21,000 in rental income during 2007 and 2006, respectively.
NOTE H COMPREHENSIVE INCOME
In 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standard (SFAS) No. 130, Reporting Comprehensive Income. SFAS 130 requires the detail of
comprehensive income for the reporting period be disclosed in the financial statements.
Comprehensive income consists of net income or loss for the current period adjusted for income,
expenses, gains and losses that are reported as a separate component of shareholders equity
rather than in the statement of operations. An analysis of changes in components of accumulated
other comprehensive income is presented in the statement of changes in shareholders equity.
15
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE I SHAREHOLDERS EQUITY AND STATUTORY ACCOUNTING PRACTICES
ICIC is domiciled in Indiana and prepares its statutory-basis financial statements on the basis
of accounting principles prescribed or permitted by the Indiana Department of Insurance (SAP).
Net income for 2007 and 2006 and shareholders equity at December 31, 2007 and 2006, for ICICs
operations as reported in these financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) as compared to amounts
reported in accordance with SAP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
SAP |
|
|
Net |
|
Shareholders' |
|
Net |
|
Capital and |
|
|
Income (loss) |
|
Equity |
|
Income |
|
Surplus |
2007 |
|
$ |
(2,568 |
) |
|
$ |
2,205,082 |
|
|
$ |
235,553 |
|
|
$ |
2,276,182 |
|
2006 |
|
|
144,426 |
|
|
|
2,307,014 |
|
|
|
162,370 |
|
|
|
2,198,033 |
|
Principal differences between GAAP and SAP include: a) cost of acquiring new policies are
deferred and amortized for GAAP; b) benefit reserves are calculated using more realistic
investment, mortality and withdrawal assumptions for GAAP; c) reinsurance recoverables on future
policy benefits are shown gross for GAAP; and d) available-for-sale fixed maturity investments
are reported at fair value with unrealized gains and losses reported as a separate component of
shareholders equity for GAAP.
Statutory restrictions limit the amount of dividends which may be paid by ICIC to the Company.
Generally, dividends during any year may not be paid with out regulatory approval in excess of
the greater of (a) 10% of statutory shareholders surplus as the of the preceding December 31,
or (b) statutory net operating income of the preceding year. In addition, ICIC must maintain
minimum statutory capital and surplus of $1,250,000, required for life insurance companies
domiciled in the state of Indiana.
16
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE J OFFICE LEASE
The Company leases approximately 2,500 square feet of office space pursuant to a three-year
lease agreement ending July 31, 2009. The Company paid $37,728 during 2007 and $36,720 during
2006 for rent pursuant to the lease. The minimum future lease payments under the terms of the
lease are as follows:
|
|
|
|
|
2008 |
|
$ |
37,728 |
|
2009 |
|
|
22,008 |
|
NOTE K RESTATEMENT
The accompanying financial statements for 2006 have been restated to correct an error related to
estimated policyholder dividends payable in the following year. The effect of the restatement
was to decrease net income $152,485 ($0.03 per share), net of income tax benefit of $32,122.
17
CONSOLIDATED FINANCIAL STATEMENTS
INTEGRITY CAPITAL CORPORATION AND SUBSIDIARY
September 30, 2008 and 2007
CONTENTS
|
|
|
|
|
|
|
Page |
|
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6 |
|
1
Integrity Capital Corporation and Subsidiary
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities, at fair value
(amortized cost, $778,000 and $5,214,101 at
September 30, 2008
and December 31, 2007 , respectively) |
|
$ |
773,381 |
|
|
|
5,208,827 |
|
Other long term investments |
|
|
22,500 |
|
|
|
22,500 |
|
Cash |
|
|
8,504,273 |
|
|
|
2,945,052 |
|
Accrued investment income |
|
|
2,742 |
|
|
|
29,823 |
|
Deferred
policy acquisitions costs |
|
|
1,545,027 |
|
|
|
1,524,185 |
|
Deferred tax asset |
|
|
155,579 |
|
|
|
122,808 |
|
Reinsurance recoverable |
|
|
67,281 |
|
|
|
63,989 |
|
Other assets |
|
|
102,293 |
|
|
|
58,133 |
|
|
|
|
|
|
|
|
Total assets |
|
|
11,173,076 |
|
|
|
9,975,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Policy and contract liabilities: |
|
|
|
|
|
|
|
|
Life policy reserves |
|
|
4,328,119 |
|
|
|
3,435,585 |
|
Policy and contract claims |
|
|
6,000 |
|
|
|
6,000 |
|
Other policy holder funds |
|
|
1,044,716 |
|
|
|
726,633 |
|
Deposits on pending policy applications |
|
|
28,850 |
|
|
|
74,587 |
|
Policyholder dividends |
|
|
305,000 |
|
|
|
260,156 |
|
|
|
|
|
|
|
|
Total policy
and contract liabilities |
|
|
5,712,685 |
|
|
|
4,502,961 |
|
Payables to related parties |
|
|
19,605 |
|
|
|
20,760 |
|
Agents credit balances |
|
|
4,175 |
|
|
|
5,238 |
|
Federal income tax payable |
|
|
8,939 |
|
|
|
30,778 |
|
Accrued
expenses and other liabilities |
|
|
2,160 |
|
|
|
24,764 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,747,564 |
|
|
|
4,584,501 |
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, no par value, $0.10 stated value
10,000,000
shares authorized; 4,571,706 shares issued and
outstanding
at September 30, 2008 and December 31, 2007 |
|
|
457,170 |
|
|
|
457,170 |
|
Additional paid in capital |
|
|
6,284,295 |
|
|
|
6,284,295 |
|
Accumulated other comprehensive loss |
|
|
(4,619 |
) |
|
|
(5,274 |
) |
Retained deficit |
|
|
(1,300,334 |
) |
|
|
(1,334,375 |
) |
Less: Treasury stock, 110,000 shares at cost |
|
|
(11,000 |
) |
|
|
(11,000 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
5,425,512 |
|
|
|
5,390,816 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
11,173,076 |
|
|
|
9,975,317 |
|
|
|
|
|
|
|
|
2
Integrity Capital Corporation and Subsidiary
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
REVENUES |
|
|
|
|
|
|
|
|
Premium income |
|
$ |
594,676 |
|
|
|
582,092 |
|
Net investment income |
|
|
46,803 |
|
|
|
75,545 |
|
Service fee income, related party |
|
|
|
|
|
|
7,000 |
|
Realized gains |
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
641,855 |
|
|
|
664,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS AND EXPENSES |
|
|
|
|
|
|
|
|
Policyholder benefits other than dividends |
|
|
24,675 |
|
|
|
13,184 |
|
Policyholder dividends |
|
|
66,802 |
|
|
|
48,130 |
|
Increase in policy reserve |
|
|
260,455 |
|
|
|
270,367 |
|
Commissions |
|
|
30,525 |
|
|
|
61,696 |
|
Policy
acquisition costs deferred |
|
|
(27,714 |
) |
|
|
(56,644 |
) |
Amortization expense of deferred
acquisition costs |
|
|
34,286 |
|
|
|
40,324 |
|
Expenses |
|
|
268,278 |
|
|
|
214,720 |
|
Taxes |
|
|
3,206 |
|
|
|
(2,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
660,513 |
|
|
|
589,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
|
(18,658 |
) |
|
|
75,030 |
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
(3,417 |
) |
|
|
10,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(15,241 |
) |
|
|
64,824 |
|
|
|
|
|
|
|
|
Other Comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized net gain (loss) on fixed maturities
available-for-sale |
|
|
(195 |
) |
|
|
114,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(15,436 |
) |
|
|
178,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE-
BASIC AND DILUTED |
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
3
Integrity Capital Corporation and Subsidiary
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
REVENUES |
|
|
|
|
|
|
|
|
Premium income |
|
$ |
1,885,144 |
|
|
|
1,857,116 |
|
Net investment income |
|
|
179,998 |
|
|
|
217,690 |
|
Service fee income, related party |
|
|
7,500 |
|
|
|
22,000 |
|
Realized gains |
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
2,073,413 |
|
|
|
2,096,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS AND EXPENSES |
|
|
|
|
|
|
|
|
Policyholder benefits other than dividends |
|
|
85,053 |
|
|
|
45,014 |
|
Policyholder dividends |
|
|
250,133 |
|
|
|
151,124 |
|
Increase in policy reserve |
|
|
889,242 |
|
|
|
916,066 |
|
Commissions |
|
|
145,170 |
|
|
|
207,878 |
|
Policy
acquisition costs deferred |
|
|
(124,090 |
) |
|
|
(202,586 |
) |
Amortization expense of deferred acquisition costs |
|
|
103,248 |
|
|
|
129,626 |
|
Expenses |
|
|
665,360 |
|
|
|
640,978 |
|
Taxes |
|
|
16,535 |
|
|
|
12,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
2,030,651 |
|
|
|
1,900,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
42,762 |
|
|
|
196,073 |
|
|
|
|
|
|
|
|
|
|
Federal income tax expense |
|
|
8,721 |
|
|
|
23,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
34,041 |
|
|
|
172,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized net gain on fixed maturities
available-for-sale |
|
|
655 |
|
|
|
97,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
34,696 |
|
|
|
269,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE-
BASIC AND DILUTED |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
4
Integrity Capital Corporation and Subsidiary
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
34,041 |
|
|
|
172,325 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Decrease in
accrued investment income |
|
|
27,081 |
|
|
|
818 |
|
Increase in
deferred policy acquisition costs, net |
|
|
(20,842 |
) |
|
|
(72,960 |
) |
Increase in deferred tax asset |
|
|
(32,771 |
) |
|
|
(39,129 |
) |
Increase in other assets |
|
|
(47,452 |
) |
|
|
(64,466 |
) |
Increase in policy reserves |
|
|
892,534 |
|
|
|
921,293 |
|
Decrease in claims liabilities |
|
|
|
|
|
|
(23,925 |
) |
Increase in other policy holder funds |
|
|
318,083 |
|
|
|
166,610 |
|
Decrease in payable to related party |
|
|
(1,155 |
) |
|
|
(9,107 |
) |
Increase
(decrease) in accrued expenses and other
liabilities |
|
|
(22,604 |
) |
|
|
38,844 |
|
Increase (decrease) in agents credit balances |
|
|
(1,063 |
) |
|
|
2,178 |
|
Increase in Policyholder dividends |
|
|
44,844 |
|
|
|
65,170 |
|
Increase (decrease) in federal income taxes payable-current |
|
|
(21,839 |
) |
|
|
20,537 |
|
Other |
|
|
(45,082 |
) |
|
|
(108,060 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,123,775 |
|
|
|
1,070,129 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Call of available-for-sale fixed maturities |
|
|
4,435,446 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
4,435,446 |
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
5,559,221 |
|
|
|
1,070,129 |
|
Cash, beginning of year |
|
|
2,945,052 |
|
|
|
749,179 |
|
|
|
|
|
|
|
|
CASH, END OF PERIOD |
|
$ |
8,504,273 |
|
|
|
1,819,308 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
5
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 and 2007
(1) |
|
Financial Statements |
|
|
|
Integrity Capital Corporation (ICC), was incorporated in Indiana on May 30, 2000, for the
primary purpose of organizing a life insurance subsidiary. After incorporation, common stock
of the Company was sold through private placement offerings and an Indiana intrastate public
stock offering. The public stock offering commenced on March 5, 2001, and was completed on
March 5, 2004. Total proceeds raised from the public offering were $6,858,530. On January
12, 2003, the Company capitalized its wholly-owned subsidiary, Integrity Capital Insurance
Company (ICIC), with $2,000,000 of net offering proceeds. On October 22, 2003, the Indiana
Department of Insurance issued a certificate of authority to ICIC to transact life and
annuity business in the state of Indiana. ICIC commenced insurance operations on March 6,
2004. ICC and its subsidiary are collectively referred to as the Company, we, or
our. |
|
|
|
The consolidated statement of financial position as of September 30, 2008, the consolidated
statements of operations for the three and nine-month periods ended September 30, 2008 and
2007, and the consolidated statements of cash flows for the nine-month periods then ended
have been prepared by the Company without audit. In the opinion of management, all
adjustments to present fairly the financial position, results of operations and changes in
cash flows at September 30, 2008, and for comparative periods presented have been made. |
|
|
|
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with United States of America (U.S.) Generally Accepted Accounting
Principles (U.S. GAAP) have been omitted. The results of operations for the nine months
ended September 30, 2008, are not necessarily indicative of the operating results for the
full year. |
|
(2) |
|
Accounting Pronouncements |
|
|
|
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 141 (Revised 2007), Business Combinations (FAS
141R) and SFAS No. 160, Accounting and Reporting of Non-controlling Interests in
Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160). These two
standards must be adopted in conjunction with each other on a prospective basis. FAS 141R
will significantly change the accounting for business combinations in a number of areas
including the treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition, under FAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a
business combination after the measurement period will impact income taxes. FAS 141R is
effective for fiscal years beginning after December 15, 2008. The Company will determine the
impact of adopting FAS 141R on its consolidated financial statements, should applicable
transactions occur in the future. |
|
|
|
In April 2008, the FASB issued Staff Position (FSP) No. 142-3, Determining the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in determining
the useful life of intangible assets. Its intent is to improve the consistency between the
useful life of an intangible asset and the period of expected cash flows used to measure such
assets fair |
6
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 and 2007
|
|
value. FSP 142-3 is effective for fiscal years beginning after December 15,
2008. The Company is currently assessing the potential impact, if any, of FSP 142-3 on its
financial statements. |
|
|
|
As of January 1, 2008, the Company adopted SFAS No. 157 (FAS 157), Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The adoption of FAS 157 did not have a
material impact on our consolidated financial statements. Additionally, on January 1, 2008,
the Company elected the partial adoption of FAS 157 under the provisions of FSP No. 157-2,
which amends FAS 157 to allow an entity to delay the application of this statement until
January 1, 2009 for certain non-financial assets and liabilities. Under the provisions of
the FSP, we will delay the application of FAS 157 for fair value measurements used in the
impairment testing of goodwill and indefinite-lived intangible assets and eligible
non-financial assets and liabilities included within a business combination. In January,
2008, FASB also issued proposed FSP FAS No. 157-c that would amend FAS 157 to clarify the
principles on fair value measurement of liabilities. Management is monitoring the status of
this proposed FSP for any impact on our consolidated financial statements. On October 10,
2008, the FASB issued FSP FAS No. 157-3 to clarify the application of fair value measurements
of a financial asset when the market for that asset is not active. This clarifying guidance
became effective upon issuance, including prior periods for which financial statements had
not been issued, such as the period ended September 30, 2008 for the Company. The adoption
of FSP FAS 157-3 had no impact on the Companys results of operations or financial position.
See Note 3 for additional disclosures about fair value measurement. |
|
|
|
As of January 1, 2008, the Company adopted SFAS No. 159 (FAS 159), The Fair Value Option
for Financial Assets and Financial Liabilities. This Statement provides an option, on
specified election dates, to report selected financial assets and liabilities, including
insurance contracts, at fair value. Subsequent changes in fair value for designated items
are reported in income in the current period. The adoption of FAS 159 did not impact our
consolidated financial statements, as no items were elected for measurement at fair value
upon initial adoption. We will continue to evaluate eligible financial assets and
liabilities on their election dates. Any future elections will be disclosed in accordance
with the provisions outlined in the Statement. |
|
(3) |
|
Fair Value Measurements |
|
|
|
As defined in FAS 157, fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date. We hold fixed maturity and equity securities that are carried at fair
value. |
|
|
|
Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our view of market assumptions in the absence of observable market information.
We utilize valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. FAS 157 requires all assets and liabilities carried at fair value
to be classified and disclosed in one of the following three categories: |
|
|
|
Level 1 Quoted prices for identical instruments in active markets. |
7
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 and 2007
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not active, and
model-derived valuations whose inputs or whose significant value drivers are
observable. |
|
|
|
|
Level 3 Instruments whose significant value drivers are unobservable. |
Level 1 primarily consists of financial instruments whose value is based on quoted market
prices such as U. S. Treasury securities and actively traded mutual fund investments.
Level 2 includes those financial instruments that are valued by independent pricing services
or broker quotes. These models are primarily industry-standard models that consider various
inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying
financial instruments. All significant inputs are observable, or derived from observable
information in the marketplace or are supported by observable levels at which transactions are
executed in the marketplace. Financial instruments in this category primarily include
corporate fixed maturity securities, U.S. Government-sponsored enterprise securities,
municipal securities and certain mortgage and asset-backed securities.
Level 3 is comprised of financial instruments whose fair value is estimated based on
non-binding broker prices utilizing significant inputs not based on, or corroborated by,
readily available market information. This category consists of two private placement
mortgage-backed securities where we cannot corroborate the significant valuation inputs with
market observable data.
The following table sets forth our assets that are measured at fair value on a recurring basis
as of the date indicated:
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities Available-for-Sale |
|
$ |
773,382 |
|
|
|
|
|
|
|
773,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial Assets |
|
$ |
773,382 |
|
|
|
|
|
|
|
773,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We review the fair value hierarchy classifications each reporting period. Changes in the
observability of the valuation attributes may result in a reclassification of certain
financial assets. Such reclassifications, if any, are reported as transfers in and out of
Level 3 at the beginning fair value for the reporting period in which the changes occur. |
|
(4) |
|
Legal Proceedings |
|
|
|
We may from time to time be subject to a variety of legal and regulatory actions relating to
our future, current and past business operations, including, but not limited to: |
|
|
|
disputes over insurance coverage or claims adjudication; |
|
|
|
|
regulatory compliance with insurance and securities laws in the United States and
in foreign countries; |
|
|
|
|
disputes with our marketing firms, consultants and employee agents over
compensation and termination of contracts and related claims; |
8
Integrity Capital Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 and 2007
|
|
|
disputes regarding our tax liabilities; |
|
|
|
|
disputes relative to reinsurance and coinsurance agreements; and |
|
|
|
|
disputes relating to businesses acquired and operated by us. |
In the absence of countervailing considerations, we would expect to defend any such claims
vigorously. However, in doing so, we could incur significant defense costs, including not
only attorneys fees and other direct litigation costs, but also the expenditure of
substantial amounts of management time that otherwise would be devoted to our business. If we
suffer an adverse judgment as a result of any claim, it could have a material adverse effect
on our business, results of operations and financial condition. We have not established any
material reserve account on our consolidated financial statements for the adverse financial
impact of any of our litigation matters.
9
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
corporations best interests; (iii) in all other cases, they reasonably believed that their conduct
was at least not opposed to the corporations 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 Registrants Articles of Incorporation limit the liability of directors to the fullest extent
provided by Colorado law.
The Registrants 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
|
|
|
Exhibit Number |
|
|
|
|
|
2.1
|
|
Plan and Agreement of Merger, Integrity Capital Corporation * |
|
|
|
3.1
|
|
Restated and Amended Articles of Incorporation (a) |
|
|
|
3.2
|
|
Bylaws (b) |
|
|
|
|
|
4.1
|
|
Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c) |
|
|
|
|
5.1
|
|
Opinion regarding legality filed with this registration statement on January 14, 2009 |
|
|
|
|
10.1
|
|
Self-Administered Automatic Reinsurance Agreement Citizens Insurance Company of
America and Riunione Adriatica di Sicurta, S.p.A. (d) |
|
|
|
10.2
|
|
Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (e) |
|
|
|
10.3
|
|
Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative
Services Agreement dated March 9, 2004, between Citizens Insurance Company of America
and Texas International Life Insurance Company, Reinsurance Trust Agreement dated March
9, 2004, by and among Citizens Insurance Company of America, Texas International Life
Insurance Company and |
II-1
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Exhibit Number |
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Wells Fargo Bank, N.A. (f) |
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10.4
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Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative
Services Agreement dated March 9, 2004, between Combined Underwriters Life Insurance
Company and Texas International Life Insurance Company, Reinsurance Trust Agreement
dated March 9, 2004, by and among Combined Underwriters Life Insurance Company, Texas
International Life Insurance Company and Wells Fargo Bank, N.A. (g) |
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10.5 (a)
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Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund,
and Smithfield Fiduciary LLC (h) |
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10.5 (b)
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Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund,
and Smithfield Fiduciary LLC (h) |
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10.5 (c)
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Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h) |
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10.5 (d)
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Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h) |
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10.5 (e)
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Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h) |
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10.5 (f)
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Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h) |
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10.5 (g)
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Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h) |
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10.5 (h)
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Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h) |
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10.5 (i)
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Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h) |
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10.5 (j)
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Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h) |
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10.5 (k)
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Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated
July 12, 2004 (h) |
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10.6
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Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Converium Reinsurance (Germany) Ltd.(i) |
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10.7
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Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Scottish Re Worldwide (England) (j) |
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11
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Statement re: Computation of per share earnings (m) |
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21
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Subsidiaries of Registrant (k) |
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23.1
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Consent of Jones & Keller, P.C. (l) |
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23.2
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Consent of Ernst & Young LLP (l) |
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23.3
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Consent of KPMG LLP (l) |
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23.4
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Consent of Kerber, Eck & Braeckel LLP (l) |
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24
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Power of Attorney filed with this registration statement on January 14, 2009 |
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II-2
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Exhibit Number |
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99.1
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Form of Proxy Card (l) |
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* |
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Filed herewith as Appendix A to the Proxy Statement-prospectus. |
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(a) |
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Filed on March 15, 2004 with the Registrants Annual Report on Form
10-K for the Year Ended December 31, 2003 as Exhibit 3.1, and
incorporated herein by reference. |
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(b) |
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Filed with the Registrants Annual Report on Form 10-K for the Year
Ended December 31, 1998, as Exhibit 3.2, and incorporated herein by
reference. |
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(c) |
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Filed on July 15, 2004, with the Registrants Current Report on Form
8-K as Exhibit 4.1, and incorporated herein by reference. |
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(d) |
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Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC
File No. 333-16163, on November 14, 1996 and incorporated herein by
reference. |
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(e) |
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Filed on April 9, 1997 as Exhibit 10.9 with the Registrants Annual
Report on Form 10-K for the Year Ended December 31, 1996, Amendment
No. 1, and incorporated herein by reference. |
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(f) |
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Filed on March 22, 2004 as Exhibit 10.8 of the Registrants Current
Report on Form 8-K, and incorporated herein by reference. |
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(g) |
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Filed on March 22, 2004 as Exhibit 10.9 of the Registrants Current
Report on Form 8-K, and incorporated herein by reference. |
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(h) |
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Filed on July 15, 2004 as part of Exhibit 10.12 with the Registrants
Current Report on Form 8-K, and incorporated herein by reference. |
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(i) |
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Filed on March 31, 2005, with the Registrants Annual Report on Form
10-K for the Year Ended December 31, 2004, as Exhibit 10.10(m), and
incorporated herein by reference. |
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(j) |
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Filed on March 31, 2005, with the Registrants Annual Report on Form
10-K for the Year Ended December 31, 2004, as Exhibit 10.10(n), and
incorporated herein by reference. |
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(k) |
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Filed on March 30, 2007 with the Registrants Annual Report on Form
10-K for the Year Ended December 31, 2006 as Exhibit 21, and
incorporated herein by reference. |
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(l) |
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Filed herewith. |
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(m) |
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Filed with financial statements in Form 10-K of the Registrant for the
Year Ended December 31, 2007, and incorporated herein by reference,
and filed with the Registrants Form 10-Q for the Quarter Ended
September 30, 2008 and incorporated herein by reference. |
(b) |
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Financial Statements and Financial Statement Schedules. |
See Financial Statements.
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 Registrants annual report
pursuant to
II-3
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 plans 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.
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:
II-4
(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-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused
Amendment No. 1 to 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 28, 2009.
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CITIZENS, INC.
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By: |
/s/ Rick D. Riley
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Rick D. Riley, |
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Vice Chairman |
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Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1 to this Registration
Statement has been signed by the following persons in the capacities indicated on January 28, 2009.
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/s/ Harold E. Riley
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/s/ Rick D. Riley |
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Harold E. Riley, Chairman of the
Board and Principal Executive
Officer
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Rick D. Riley, Vice Chairman and Director |
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/s/ Thomas F. Kopetic
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/s/ Rick D. Riley |
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Thomas F. Kopetic, Chief Financial
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Dr. Robert B. Sloan, Jr., Director |
Officer and Principal Accounting
Officer
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By: Rick D. Riley, Power of Attorney |
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/s/ Rick D. Riley
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/s/ Rick D. Riley |
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Richard C. Scott, Director
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Dr. E. Dean Gage, Director |
By: Rick D. Riley, Power of Attorney
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By: Rick D. Riley, Power of Attorney |
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/s/ Rick D. Riley
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/s/ Rick D. Riley |
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Grant G. Teaff, Director
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Steven F. Shelton, Director |
By: Rick D. Riley, Power of Attorney
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By: Rick D. Riley, Power of Attorney |
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/s/ Rick D. Riley
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/s/ Rick D. Riley |
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Timothy T. Timmerman, Director
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Dottie S. Riley, Director |
By: Rick D. Riley, Power of Attorney
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By: Rick D. Riley, Power of Attorney |