CITIZENS INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended JUNE 30, 2002

or

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

For the transition period from to
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Commission File Number: 1-13004
-------------------------------------------------------

CITIZENS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Colorado 84-0755371
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

400 East Anderson Lane, Austin, Texas 78752
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(512) 837-7100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No

As of June 30, 2002, Registrant had 29,303,287 shares of Class A common
stock, No Par Value, outstanding and 817,696 shares of Class B common stock, No
Par Value, outstanding.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

INDEX

2

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 2002 AND DECEMBER 31, 2001

See accompanying notes to consolidated financial statements. (Continued)

3

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
JUNE 30, 2002 AND DECEMBER 31, 2001

See accompanying notes to consolidated financial statements.

4

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001

(UNAUDITED)

See accompanying notes to consolidated financial statements.

5

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(UNAUDITED)

See accompanying notes to consolidated financial statements.

6

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(UNAUDITED)

See accompanying notes to consolidated financial statements. (Continued)

7

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(UNAUDITED)

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

In the first quarter of 2002, the Company issued 752,701 Class A common shares
to purchase all the capital stock of Combined Underwriters Life Insurance
Company and issued 304,928 Class A common shares to purchase all the capital
stock of Lifeline Underwriters Life Insurance Company. In conjunction with the
acquisitions, cash and cash equivalents were provided by acquisitions as
follows:

See accompanying notes to consolidated financial statements.

8

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

(UNAUDITED)

(1) FINANCIAL STATEMENTS

The interim consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state of
Colorado on November 8, 1977, and its wholly-owned subsidiaries, Citizens
Insurance Company of America (CICA), Computing Technology, Inc. (CTI),
Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc. (III),
Central Investors Life Insurance Company of Illinois (CILIC), First
Investors Group, Inc. (Investors), Excalibur Insurance Corporation
(Excalibur), Combined Underwriters Life Insurance Company (Combined) and
Lifeline Underwriters Life Insurance Company (Lifeline). Citizens and its
consolidated subsidiaries are collectively referred to as "the Company."

The statement of financial position for June 30, 2002, the statements of
operations for the three-month and six-month periods ended June 30, 2002
and 2001, and the statements of cash flows for the six-month periods then
ended have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and changes in cash flows at June 30, 2002 and for
comparative periods presented have been made.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) have been
omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's December 31, 2001 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the
period ended June 30, 2002 are not necessarily indicative of the
operating results for the full year.

(2) ACQUISITION

On March 19, 2002, Citizens consummated the acquisition of Combined and
Lifeline. Pursuant to the terms of the agreements, which were approved by
Combined's and Lifeline's shareholders and regulatory authorities,
Citizens issued approximately 753,000 shares of its Class A Common Stock
to acquire Combined and approximately 305,000 shares of its Class A
Common Stock to acquire Lifeline. The aggregate market value of the
consideration was approximately $12.0 million. The transactions were
accounted for as purchases. The excess of cost over net assets acquired
amounted to approximately $2.9 million.

9

(3) SEGMENT INFORMATION

The Company has two reportable segments identified by geographic area:
international business and domestic business. International business,
consisting of ordinary whole-life business, is offered worldwide. The
Company has no assets, offices or employees outside of the United States
of America (U.S.) and requires that all transactions be in U.S. dollars,
paid in the U.S. Domestic business, consisting of traditional life and
burial insurance, pre-need policies, accident and health specified
disease, hospital indemnity and accidental death policies, is sold
throughout the southern U.S. The accounting policies of the segments are
in accordance with U.S. GAAP and are the same as those described in the
summary of significant accounting policies. The Company evaluates
performance based on U.S. GAAP income before federal income taxes for its
two reportable segments.

Geographic Areas - The following summary represents financial data of the
Company's continuing operations based on their location for the six
months ended June 30, 2002 and 2001.

The following summary, representing revenues, amortization expense and
pre-tax income from continuing operations and identifiable assets for the
Company's reportable segments as of and for the six months ended June 30,
2002 and 2001, is as follows:

Major categories of premiums are summarized as follows:

(4) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

For the three and six months ended June 30, 2002, the other comprehensive
income amounts included in total comprehensive income consisted of
unrealized gains on investments in fixed maturities and equity securities
available-for-sale of $2,658,537 and $325,738, respectively, net of tax
and for the same period in 2001 unrealized gains (losses) of $(915,305)
and $575,435, respectively. Total comprehensive income for the three and
six months ended June 30, 2002 was $3,832,438 and $3,002,442 and for the
same period in 2001 total comprehensive income (loss) of $(334,293) and
$1,678,623, respectively.

(5) EARNINGS PER SHARE

Basic and diluted earnings per share have been computed using the
weighted average number of shares of common stock outstanding during each
period. The weighted average shares outstanding for the three and six
months ended June 30, 2002 was 30,120,983 and 29,600,689, respectively.
The weighted average shares outstanding

11

for both the three and six months ended June 30, 2001 was 28,897,382. The
per share amounts have been adjusted retroactively for all periods
presented to reflect the change in capital structure resulting from a 15%
stock dividend declared on March 26, 2002, payable on June 1, 2002 to
holders of record as of May 1, 2002. The stock dividend resulted in the
issuance of 4,162,414 Class A shares (including 333,873 shares in
treasury) and 106,656 Class B shares.

(6) ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 142 "Goodwill and Other Intangible Assets." Under the
guidelines of SFAS No. 142, excess of cost over net assets acquired
(goodwill) amounting to $9,688,669 and other intangible assets amounting
to $2,018,125 as of June 30, 2002 were determined to have an indefinite
useful life and will no longer be amortized. Instead goodwill and other
intangible assets will be subjected to annual impairment analyses under
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Prior to the adoption of SFAS No. 142, the amortization of
goodwill and other intangible assets (primarily state insurance licenses)
for the six months ended June 30, 2001 was $308,216 and $153,600,
respectively. Had SFAS No. 142 been adopted for the six months ended June
30, 2001, pro forma net income would approximate $1,565,000 or $0.05 per
share.

(7) LEGAL PROCEEDINGS

The Company is from time to time involved in litigation which is
incidental to its business. Other than as set forth below, the Company is
not a party to any material legal proceedings.

On July 31, 2002, class action certification was granted by a Travis
County, Texas district court judge to the plaintiffs in a lawsuit filed
in 1999 style Delia Bolanos Andrade, et al v. Citizens Insurance Company
of America, Citizens, Inc., Negocios Savoy, S.A., Harold E. Riley, and
Mark A. Oliver, Case Number 99-09099. The suit alleges that life
insurance policies sold to certain non-U.S. residents by Citizens
Insurance Company of America are securities and were sold in violation of
the registration provisions of the Texas securities laws. The suit seeks
class action status naming as a class all non-U.S. residents who made
premium payments since August 1996 and assigned policy dividends to a
trust for the purchase of Citizens, Inc. Class A common stock. The remedy
sought is rescission of the insurance premium payments. An appeal of the
class action certification by the district court will be made shortly to
the Texas Court of Appeals. Litigation counsel and defendants believe
that the district court ruling is significantly in error and that there
are substantial grounds for reversal. During the time of the appeal, the
district court proceedings will be stayed. In the event the case proceeds
to a trial, the defendants intend to defend vigorously against the
claims. The Registrant is unable to determine the potential magnitude of
the claims in the event of a final class action certification and the
plaintiffs prevailing in the substantive action.

12

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS

Certain statements contained in this Form 10Q are not statements of historical
fact and constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act (the "Act"), including, without limitation, the
italicized statements and the statements specifically identified as
forward-looking statements within this document. In addition, certain statements
in future filings by the Company with the Securities and Exchange Commission, in
press releases, and in oral and written statements made by or with the approval
of the Company 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 of the Company or its management or Board 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 involve risks and uncertainties that may cause actual
results to differ materially from those in such statements. Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of foreign and U.S.
economies in general and the strength of the local economies in which operations
are conducted; (ii) the effects of and changes in trade, monetary and fiscal
policies and laws; (iii) inflation, interest rates, market and monetary
fluctuations and volatility; (iv) the timely development and acceptance of new
products and services and perceived overall value of these products and services
by existing and potential customers; (v) changes in consumer spending, borrowing
and saving habits; (vi) concentrations of business from persons residing in
third world countries; (vii) acquisitions; (viii) the persistency of existing
and future insurance policies sold by the Company and its subsidiaries; (ix) the
dependence of the Company on its Chairman of the Board; (x) the ability to
control expenses; (xi) the effect of changes in laws and regulations (including
laws and regulations concerning insurance) with which the Company and its
subsidiaries must comply; (xii) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as the Financial
Accounting Standards Board; (xiii) changes in the Company's organization and
compensation plans; (xiv) the costs and effects of litigation and of unexpected
or adverse outcomes in such litigation; and (xv) the success of the Company 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 the Company undertakes no 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.

13

On March 19, 2002, Citizens acquired all outstanding shares of Combined
Underwriters Life Insurance Company (Combined) and Lifeline Underwriters Life
Insurance Company (Lifeline), two Texas life Insurers, for shares of Citizens
Class A Common stock. The exchange was based upon a market value of $8.64 per
share for Combined and $5.00 per share for Lifeline. The price for Citizens
shares of $11.479 was based upon its average closing price for the 20-days
preceding closing, which occurred on March 19, 2002. The total aggregate
consideration issued by Citizens amounted to approximately 1.1 million shares of
Class A common stock.

Combined and Lifeline continue to operate from their offices in Tyler, with a
combined management team. Management believes that the acquisitions will enhance
premium income and total revenue and provide the Company an established domestic
marketing program. The marketing operations of these companies will continue to
write the supplemental accident and health products that have historically been
the foundation of their new business, but will also provide a new division to
offer the domestic ordinary life products developed by CICA.

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Net income for the six months ended June 30, 2002 was $2,676,704 or $0.09 per
share, compared to net income of $1,103,188, or $0.04 per share, for the same
period in 2001. The acquistion of Combined and Lifeline increased net income for
the six months ended June 30, 2002 by $354,465. SFAS No. 142 was adopted on
January 1, 2002 which changed the accounting for goodwill and intangibles. Had
SFAS No. 142 been adopted for the six months ended June 30, 2001, pro forma net
income would approximate $1,565,000 or $0.05 per share. Increased production of
new business coupled with improved persistency and a 6.6% increase in net
investment income contributed to the increased earnings for the six months ended
June 30, 2002.

Total revenues increased 16.4% in 2002 to $37,065,741 compared to the first six
months of 2001 when revenues were $31,835,530. The acquisition of Combined and
Lifeline increased 2002 total revenues for the six months ended June 30, 2002 by
$3,624,452. The increase in revenues for the first six months of 2002 compared
to the same period in 2001 was related to a 16.8% increase in new life sales
(measured in issued and paid, annualized premium), a 6.6% increase in net
investment income and a 89.7% increase in accident and health premiums.

Premium income for the first six months of 2002 was $29,490,183 compared to
$24,927,381 for the same period in 2001. The 2002 increase is comprised of a
$2,147,908 increase in life premiums and a $2,414,894 increase in accident and
health premiums. The March 19, 2002 acquisition of Combined and Lifeline
discussed above increased life premiums by $520,913 and accident and health
premiums by $2,968,471, offsetting a $553,577 reduction in the Company's
existing book of accident and health premium as a result of previous
terminations and rate increases. Management's plan to continue to implement
significant rate increases in supplemental non-cancelable accident and health
products if loss ratios increase may contribute to future decreases in accident
and health premiums.

Production of new life insurance premiums by the associates of CICA, measured in
issued and paid, annualized premiums, increased 16.8% in the first six months of
2002. In addition, management instituted a domestic ordinary life sales program
in late 2000. This program,

14

coupled with the marketing activities of Combined and Lifeline should, in the
opinion of management, enhance 2002 revenues. Based upon historical analysis,
Combined and Lifeline are expected to generate approximately $4.0 million of new
accident and health and $300,000 of new life premiums during the year.

Net investment income increased 6.6% for the six months ended June 30, 2002,
amounting to $7,057,233 compared to $6,620,958 for the first six months of 2001.
This increase reflects continued expansion of the Company's asset base that was
accelerated by the March 19, 2002 acquisition of Combined and Lifeline. The
acquisition increased invested assets by $15.4 million and investment income by
$106,879. In 2001, management shifted the mix of the portfolio to place less
emphasis on government guaranteed mortgage pass-through instruments and more
emphasis on investments in callable instruments issued by U.S. government
agencies.

Policyholder dividends increased to $1,576,915 during the first six months of
2002, up 13.0% over dividends of $1,395,753 during the same period of 2001.
Virtually all of CICA's policies that have been sold since 1984 are
participating. Participating policies represent, approximately 54% of the
Company's business in-force, although the percentage of participating business
has declined due to acquisitions in recent years. Management expects continued
growth in participating policies because CICA will continue to focus on
participating products internationally.

Claims and surrenders expense increased 15.4% from $14,161,037 for the six
months ended June 30, 2001 to $16,343,129 for the same period in 2002.
Management believes that the primary reason for the increases was the
acquisition of Combined and Lifeline. Death claims increased 23.9% from
$2,800,552 for the first six months of 2001 to $3,471,273 for the first six
months of 2002 due to increases in claim volume and average claim amount, as
well as the impact of the 2002 acquisitions. Combined and Lifeline increased
such expenses by approximately $276,000. After review of the incurred claims,
management does not believe the increase reflects a negative trend in the
overall mortality of the Company's life business but rather, an aberration in
the historical experience. Surrender expense decreased 3.8% from $7,235,300 for
the first six months of 2001 to $6,963,391 for the first six months of 2002.
Improving persistency on the Company's book of international whole life
insurance business was the primary reason for the decreased surrender activity.
Endowments increased 8.1% from $2,409,634 for the first six months of 2001 to
$2,605,125 for the first six months of 2002. Like policy dividends, endowments
are factored into the premiums and as such the increase should have no adverse
impact on profitability. Accident and health benefits were $3,140,940 for the
first six months of 2002 compared to $1,529,850 for the same period of 2001.
This increase in accident and health benefits is directly related to the
acquisition of Combined and Lifeline discussed above, which generated $1,875,199
in claims, offsetting a $264,109 reduction in the Company's existing book of
accident and health business.

The remaining components of claims and surrenders amounted to $162,400 for the
first six months of 2002, compared to $185,701 for the first six months of 2001.
These are made up of supplemental contract benefits, interest on policy funds
and assorted other miscellaneous policy benefits.

15

Underwriting, acquisition and insurance expenses increased from $5,365,020 for
the first six months of 2001 to $6,177,401 for the same period in 2002, an
increase of 15.1%. The increase is attributable to the acquisition of Combined
and Lifeline discussed above, whose operating expenses were $620,180 for the
period.

Deferred policy acquisition costs capitalized for the first six months of 2002
were $5,931,225 compared to $4,904,249 for the same period of the previous year.
Amortization of these costs was $4,088,328 for the first six months of 2002
compared to $4,124,050 for the same period of 2001. Amortization of cost of
insurance acquired, excess of cost over net assets acquired ("goodwill") and
other intangible assets decreased to $788,557 during the first six months of
2002 from $842,636 for the same period in 2001. The decrease relates to the
amortization of cost of insurance acquired with respect to the acquisition of
Combined and Lifeline that did not offset the Company's adoption of the new
Financial Accounting Standards Board's (FASB) accounting rule where amortization
of goodwill and other intangibles ceased since management determined that these
intangibles have an indefinite life. The Company's analysis of goodwill and
other intangibles indicated that there was no impairment as of June 30, 2002.

THREE MONTHS ENDED JUNE 30, 2002 AND 2001

Net income for the three months ended June 30, 2002 was $1,173,901 or $0.04 per
share, compared to net income of $581,012, or $0.02 per share, for the same
period in 2001. The acquistion of Combined and Lifeline increased net income for
the three months ended June 30, 2002 by $354,465. SFAS No. 142 was adopted on
January 1, 2002 which changed the accounting for goodwill and intangibles. Had
SFAS No. 142 been adopted for the quarter ended June 30, 2001, pro forma net
income would approximate $801,000 or $0.03 per share. Increased production of
new business coupled an 8.8% increase in net investment income contributed to
the increased earnings for the quarter ended June 30, 2002.

Total revenues increased 30.2% in 2002 to $21,296,992 compared to the second
quarter of 2001 when revenues were $16,353,749. The acquisition of Combined and
Lifeline increased total revenues for the three months ended June 30, 2002 by
$3,624,452. The second quarter 2002 increase in revenues compared to second
quarter 2001 was related to a 13.9% increase in new life sales (measured in
issued and paid, annualized premium), an 8.8% increase in net investment income
and a 216.6% increase in accident and health premiums.

Premium income for the second quarter of 2002 was $17,415,565 compared to
$12,878,266 for the same period in 2001. The 2002 increase is comprised of a
$1,852,830 increase in life premiums and a $2,684,469 increase in accident and
health premiums. The March 19, 2002 acquisition of Combined and Lifeline
discussed above increased life premiums by $520,913 and accident and health
premiums by $2,968,471, offsetting a $284,002 reduction in the Company's
existing book of accident and health premiums as a result of previous
terminations and rate increases. Management's plan to continue to implement
significant rate increases in supplemental non-cancelable accident and health
products if loss ratios increase may contribute to future decreases in accident
and health premiums.

Production of new life insurance premiums by the associates of CICA, measured in
issued and paid, annualized premiums, increased 13.9% during second quarter
2002. In addition,

16

management instituted a domestic ordinary life sales program in late 2000. This
program, coupled with the marketing activities of Combined and Lifeline should,
in the opinion of management, enhance 2002 revenues. Based upon historical
analysis, Combined and Lifeline are expected to generate approximately $4.0
million of new accident and health and $300,000 of life premiums during the
year.

Net investment income increased 8.8% in second quarter 2002, amounting to
$3,602,721 compared to $3,312,720 for second quarter 2001. This increase
reflects continued expansion of the Company's asset base that was accelerated by
the March 19, 2002 acquisition of Combined and Lifeline. The acquisition
increased invested assets by $15.4 million and invested income by $106,879. In
2001, management shifted the mix of the portfolio to place less emphasis on
government guaranteed mortgage pass-through instruments and more emphasis on
investments in callable instruments issued by U.S. government agencies.

Policyholder dividends increased to $858,469 during second quarter 2002, up 7.6%
over dividends of $798,039 during second quarter 2001. Virtually all of CICA's
policies that have been sold since 1984 are participating. Participating
policies represent, approximately 54% of the Company's business in-force,
although the percentage of participating business has declined due to
acquisitions in recent years. Management expects continued growth in
participating policies because CICA will continue to focus on participating
products internationally.

Claims and surrenders expense increased 47.0% from $6,983,040 for second quarter
2001 to $10,265,200 for the same period in 2002. Management believes that the
primary reason for the increases was the acquisition of Combined and Lifeline.
Death claims increased 47.6% from $1,342,453 for second quarter 2001 to
$1,981,237 for second quarter 2002 due to increases in claim volume and average
claim amount, as well as the impact of the 2002 acquisition. Combined and
Lifeline increased such expense by approximately $276,000. After review of the
incurred claims, management does not believe the increase reflects a negative
trend in the mortality of the Company's life business but rather, an aberration
in the historical experience. Surrender expense increased 19.3% from $3,560,185
for second quarter 2001 to $4,246,710 for second quarter 2002. The South
American current economic situation was the primary reason for the increased
surrender activity. Endowments increased 12.7% from $1,264,857 in second quarter
2001 to $1,425,639 in second quarter 2002. Like policy dividends, endowments are
factored into the premiums and as such the increase should have no adverse
impact on profitability. Accident and health benefits were $2,516,951 for second
quarter 2002 compared to $721,861 for the same period of 2001. This increase in
accident and health benefits is directly related to the acquisition of Combined
and Lifeline discussed above, which generated $1,875,199 in claims, offsetting a
$80,109 reduction in the Company's existing book of accident and health
business.

The remaining components of claims and surrenders amounted to $94,663 for the
second quarter of 2002, compared to $93,684 for the same period in 2001. These
are made up of supplemental contract benefits, interest on policy funds and
assorted other miscellaneous policy benefits.

Underwriting, acquisition and insurance expenses increased from $2,814,477 in
second quarter 2001 to $3,515,998 for the same period in 2002, an increase of
24.9%. The increase is

17

attributable to the acquisition of Combined and Lifeline discussed above, whose
operating expenses were $620,180 for the period.

Deferred policy acquisition costs capitalized in second quarter 2002 were
$3,457,659 compared to $2,717,361 for the same period of the previous year.
Amortization of these costs was $2,261,174 in second quarter 2002 compared to
$1,927,793 for the same period of 2001. Amortization of cost of insurance
acquired, excess of cost over net assets acquired ("goodwill") and other
intangible assets increased to $664,050 during second quarter 2002 from $356,241
for the same period in 2001. The increase relates to the amortization of cost of
insurance acquired with respect to the acquisition of Combined and Lifeline that
more than offset the Company's adoption of the new Financial Accounting
Standards Board's (FASB) accounting rule where amortization of goodwill and
other intangibles ceased since management determined that these intangibles have
an indefinite life. The Company's analysis of goodwill and other intangibles
indicated that there was no impairment as of June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Stockholders' equity increased to $97,686,024 at June 30, 2002 from $82,721,798
at December 31, 2001. The increase was attributable to $11,961,784 of Class A
common stock issued for the acquisition of Combined and Lifeline, net income of
$2,676,704 earned during the first six months of 2002 and unrealized gains, net
of tax, increasing by $325,783 during the period. Increases in the market value
of the Company's available-for-sale bond portfolio caused by higher bond prices
resulted in the change in unrealized gains, net of tax.

Invested assets increased from $206,695,811 at December 31, 2001 to $220,136,611
at June 30, 2002. The acquisitions described above were the primary reason for
the increase, adding $15.4 million to invested assets. At June 30, 2002 and
December 31, 2001, fixed maturities have been categorized into two
classifications: Fixed maturities held-to-maturity, which were valued at
amortized cost, and fixed maturities available-for-sale which were valued at
fair value. Fixed maturities available-for-sale and fixed maturities
held-to-maturity were 84.3% and 5.2%, respectively, of invested assets at June
30, 2002. Fixed maturities held-to-maturity, amounting to $11,340,017, consist
primarily of U.S. Treasury and U.S. government agency securities. Management has
the intent and believes the Company has the ability to hold the securities to
maturity. The Company has only minimal investments in equity securities, and as
such has not incurred significant losses as a result of recent significant
downturns in equity markets. Additionally, Citizens held no bonds issued by
recent high-profile corporations that have either filed bankruptcy or made
significant restatements of prior earnings.

The Company's mortgage loan portfolio, which constituted 0.3% of invested assets
at June 30, 2002, has historically been composed primarily of small residential
loans in Texas. During 2002, a purchase money mortgage in the amount of
approximately $358,000 originated in 1998 was paid in full. Management continues
to hold a reserve of $50,000 at June 30, 2002 (approximately 7% of the mortgage
portfolio's balance) to cover potential unforeseen losses in the Company's
mortgage portfolio. At June 30, 2002, no loans were past due more than ninety
days.

18

Policy loans comprised 9.5% of invested assets at June 30, 2002. These loans,
which are secured by the underlying policy values, have yields ranging from 5%
to 10% percent and maturities that are related to the maturity or termination of
the applicable policies. Management believes that the Company maintains more
than adequate liquidity despite the uncertain maturities of these loans.

Cash balances of the Company in its primary depository, J.P. Morgan Chase,
Austin, Texas, were significantly in excess of Federal Deposit Insurance
Corporation coverage at June 30, 2002 and December 31, 2001. Management monitors
the solvency of all financial institutions in which it has funds to minimize the
exposure for loss. Management does not believe the Company is at risk for such a
loss.

CICA owned 2,398,031 shares of Citizens Class A common stock at June 30, 2002
and 2,085,244 at December 31, 2001. (CICA received 312,787 shares on June 1,
2002 related to the 15% stock dividend on Class A common stock discussed above.)
In the Citizens consolidated financial statements, the shares of Citizens Class
A common stock owned by CICA are combined with the other treasury shares and the
aggregate treasury shares are reported at cost in conformity with U.S. GAAP. The
Statutory Accounting Practices for these shares prescribed by the National
Association of Insurance Commissioners (NAIC) and the State of Colorado are not
applicable to the U.S. GAAP consolidated financial statements of Citizens. Those
Statutory Accounting Practices are only followed with respect to filings made in
accordance with the rules and regulations of the various state insurance
departments and the NAIC and require that CICA carry its investment in Citizens
shares at market value reduced by the percentage ownership of Citizens by CICA,
limited to 2% of admitted assets.

The NAIC has established minimum capital requirements in the form of Risk-Based
Capital ("RBC"). Risk-based capital factors the type of business written by a
company, the quality of its assets, and various other factors into account to
develop a minimum level of capital called "authorized control level risk-based
capital" and compares this level to an adjusted statutory capital that includes
capital and surplus as reported under Statutory Accounting Principles, plus
certain investment reserves. Should the ratio of adjusted statutory capital to
control level risk-based capital fall below 200%, a series of actions by the
Company would begin. At December 31, 2001 and June 30, 2002, all life insurance
subsidiaries were above required minimum levels.

On March 26, 2002, the Board of Directors of the Company declared a 15% stock
dividend payable June 1, 2002 to holders of record as of May 1, 2002. This
dividend resulted in the issuance of 4,162,414 shares of Class A common stock
(including 333,873 in treasury) and 106,656 shares of Class B common stock. A
charge to retained earnings of $35,416,772 was recorded at the time the dividend
was paid.

FINANCIAL ACCOUNTING STANDARDS

Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, was effective
January 1, 2001. The Company adopted SFAS No. 133, as amended during 2001.
Implementation did not have an impact on the Company's financial statements
since it has no derivative instruments and does not participate in any hedging
activities. Based on current operations, the Company does not anticipate that
SFAS No. 133 will have a material effect on the financial position, results of
operation or liquidity of the Company.

19

SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of FASB Statement 125" was
effective after March 31, 2001. The Company adopted SFAS No. 140 during 2001.
Implementation did not have an impact on the Company's financial statements
since it was not involved in any such transfers, servicing or extinguishments.
Based on current operations, the Company does not anticipate that SFAS No. 140
will have a material effect on the financial position, results of operation or
liquidity of the Company.

In December 2000, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises
for Demutualizations and Formations of Mutual Life Insurance Holding Companies
and for Certain Long-Duration Participating Contracts." SOP 00-3 provided
guidance on accounting by insurance enterprises for demutualizations and the
formation of mutual insurance holding companies. SOP 00-3 also applies to stock
insurance enterprises that apply SOP 95-1, "Accounting for Certain Insurance
Activities of Mutual Life Insurance Enterprises" to account for participating
policies. This SOP is effective for financial statements for fiscal years ending
after December 15, 2001. Management does not believe that SOP 00-3 will have any
impact on the Company since it is already a stock life insurance company and
does not pay dividends based on actual experience of the Company. The Company
utilizes contractual life insurance dividend scales as shown in published
dividend illustrations at the date the insurance contracts are issued in
determining policyholder dividends.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," (SFAS No.
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 141 required that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, as well as all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specified criteria that intangible assets acquired in a business combination
must meet to be recognized and reported separately from goodwill. SFAS No. 142
will require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Company adopted the provisions of SFAS No.
141 as of July 1, 2001, and adopted the provisions of SFAS No. 142 as of January
1, 2002.

At adoption of SFAS No. 142 on January 1, 2002, the Company evaluated its
existing intangible assets and goodwill that were acquired in purchase business
combinations and made necessary reclassifications in order to conform with the
new classification criteria in SFAS No. 141 for recognition separate from
goodwill. The Company's analysis determined that all intangible assets had an
indefinite useful life. The Company tested the intangible assets for impairment
in accordance with the provisions of SFAS No. 142 during the first quarter of
2002. The Company's analysis determined that no intangible assets were impaired.

20

The Company performed an assessment of whether there was indication that
goodwill was impaired as of January 1, 2002. To accomplish this, the Company
identified its reporting units and determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January 1, 2002.
The Company determined the fair value of each reporting unit and compared it to
the carrying amount of the reporting unit. The fair value of the reporting units
exceeded the carrying amount, and the Company concluded that no goodwill was
impaired. This same analysis was performed with respect to the intangible assets
and goodwill recognized in the acquisition of Combined and Lifeline. That
analysis concluded that there was no goodwill or intangible asset impairment as
of June 30, 2002.

As of June 30, 2002, the Company had unamortized goodwill in the amount of
$9,688,669 and unamortized identifiable intangible assets in the amount of
$2,018,125. Amortization expense related to goodwill and intangible assets was
$461,816 for the six months ended June 30, 2001.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development or normal operations of a
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. Management does not believe SFAS No. 143 will have a significant
effect on the financial position, results of operations or liquidity of the
Company.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 superseded and amended SFAS No. 121
and relevant portions of SFAS No. 30. SFAS No. 144 was adopted on January 1,
2002. SFAS No. 144 did not have a material effect on the financial position,
results of operation or liquidity of the Company.

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS 145 will affect income statement classification of gains and losses from
extinguishment of debt and make certain other technical corrections. Based on
current operations, the Company does not anticipate that SFAS No. 145 will have
a material effect on the financial position, results of operations or liquidity
of the Company.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 spreads out the reporting of
expenses related to restructurings initiated after 2002. Commitment to a plan to
exit an activity or dispose of long-lived assets will no longer be enough
evidence to record a one-time charge for most anticipated exit or disposal
activities. Companies will instead record exit or disposal costs when they are
"incurred" and can be measured by fair value and the recorded liability will
subsequently be adjusted for changes in estimated cash flows. SFAS No. 146 will
also revise accounting for specified employee and contract terminations that are
part of restructuring activities. Based on current operations, the Company does
not anticipate that SFAS No. 146 will have a material effect on the financial
position, results of operations or liquidity of the Company.

21

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The unrealized gains (losses) that could be caused by decreases and increases in
the interest rates of 100, 200 and 300 basis points, respectively, on the
Company's available-for-sale fixed maturities is as follows at June 30, 2002:

At June 30, 2002 and December 31, 2001, there were no fixed maturities or other
investments that the Company classified as trading instruments. At June 30, 2002
and December 31, 2001, there were no investments in derivative instruments.

22

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is from time to time involved in litigation which is
incidental to its business. Other than as set forth below, the Company
is not a party to any material legal proceedings.

On July 31, 2002, class action certification was granted by a Travis
County, Texas district court judge to the plaintiffs in a lawsuit filed
in 1999 style Delia Bolanos Andrade, et al v. Citizens Insurance
Company of America, Citizens, Inc., Negocios Savoy, S.A., Harold E.
Riley, and Mark A. Oliver, Case Number 99-09099. The suit alleges that
life insurance policies sold to certain non-U.S. residents by Citizens
Insurance Company of America are securities and were sold in violation
of the registration provisions of the Texas securities laws. The suit
seeks class action status naming as a class all non-U.S. residents who
made premium payments since August 1996 and assigned policy dividends
to a trust for the purchase of Citizens, Inc. Class A common stock. The
remedy sought is rescission of the insurance premium payments. An
appeal of the class action certification by the district court will be
made shortly to the Texas Court of Appeals. Litigation counsel and
defendants believe that the district court ruling is significantly in
error and that there are substantial grounds for reversal. During the
time of the appeal, the district court proceedings will be stayed. In
the event the case proceeds to a trial, the defendants intend to defend
vigorously against the claims. The Registrant is unable to determine
the potential magnitude of the claims in the event of a final class
action certification and the plaintiffs prevailing in the substantive
action.

ITEM 2 CHANGES IN SECURITIES

On March 26, 2002, the Company's Board of Directors declared a 15%
Class A and Class B common stock dividend, payable on June 1, 2002 to
holders of record as of May 1, 2002.

The Company filed a Form 8-A regarding the listing of its Class A
Common Stock on the New York Stock Exchange on July 25, 2002. The
listing is to be effective on August 22, 2002.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

23

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 4, 2002, the Company's annual stockholders' meeting was held.
At the meeting, the following individuals were elected to the Board of
Directors:

Harold E. Riley Dr. Richard C. Scott
Mark A. Oliver Walden P. Little
Rick D. Riley Dr. E. Dean Gage
Steven F. Shelton Ralph M. Smith
Timothy T. Timmerman

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS:

99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350

REPORTS ON FORM 8-K:

None.

24

SIGNATURES

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

CITIZENS, INC.

By: /s/ MARK A. OLIVER
--------------------------------------
Mark A. Oliver, FLMI
President

By: /s/ JEFFREY J. WOOD
--------------------------------------
Jeffrey J. Wood, CPA
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer

Date: August 13, 2002

25

EXHIBIT INDEX