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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 March 31, 2004
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20148
CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1187135
(State of Incorporation) (I.R.S. Employer Identification No.)
12910 Shelbyville Road, Louisville, Kentucky 40243
(Address of principal executive offices)
(502) 244-2420
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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. Yes ~~X~~ No ~~~~~~
Indicate by check mark whether the registrant is an accelerated filer (as
determined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ~~~~~ No
~~X~~
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Class A Stock - 1,685,228 as of
May 14, 2004.
The date of this Report is May 14, 2004.
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Part I - Financial Information; Item 1 - Financial Statements
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31 2004 2003
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $ 7,394,618 $ 9,238,935
Premiums ceded (322,050) (261,295)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 7,072,568 8,977,640
Net investment income 1,623,681 1,373,989
Net realized investment gains (losses) 228,186 (276,163)
Other income 46,589 56,353
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 8,971,024 10,131,819
Policy Benefits and Expenses:
Policyholder benefits 5,551,979 5,257,211
Policyholder benefits ceded (267,432) (234,011)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 5,284,547 5,023,200
Increase in net benefit reserves 448,681 1,682,187
Interest credited on policyholder deposits 155,028 164,885
Commissions 1,323,574 1,693,668
General expenses 1,749,836 1,812,072
Interest expense 90,588 92,208
Policy acquisition costs deferred (348,768) (579,542)
Amortization of deferred policy acquisition costs
and value of insurance acquired 413,397 649,459
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 9,116,883 10,538,137
------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax (145,859) (406,318)
Income tax benefit (36,248) (73,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (109,611) $ (333,318)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss per Common Share, basic and diluted $ (0.07) $ (0.20)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
March 31, December 31,
2004 2003
------------------------------------------------------------------------ -------------------- --------------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $103,299,713
and $104,768,393 in 2004 and 2003 respectively) $ 108,833,578 $ 108,640,262
Equity securities (cost of $12,863,624 and
$8,061,783 in 2004 and 2003, respectively) 16,224,903 11,336,964
Investment real estate 3,094,543 3,162,223
Policy loans 4,427,440 4,409,301
Short-term investments 642,748 642,748
------------------------------------------------------------------------ -------------------- --------------------
Total Investments 133,223,212 128,191,498
Cash and cash equivalents 5,301,064 8,588,896
Accrued investment income 1,688,966 1,685,776
Reinsurance recoverable 2,715,397 2,834,222
Premiums receivable 242,526 256,140
Property and equipment 2,641,965 2,640,579
Deferred policy acquisition costs 10,318,570 10,325,660
Value of insurance acquired 3,011,735 3,119,609
Goodwill 755,782 755,782
Federal income tax receivable 448,382 421,676
Other assets 144,961 60,494
------------------------------------------------------------------------ -------------------- --------------------
Total Assets $ 160,492,560 $ 158,880,332
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
March 31, December 31,
2004 2003
------------------------------------------------------------------------ -------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities:
Policy Liabilities:
Future policy benefits $ 109,695,071 $ 109,383,695
Policyholder deposits 15,421,533 15,530,824
Policy and contract claims 1,647,900 1,663,249
Unearned premiums 261,796 249,572
Other 271,671 310,464
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Liabilities 127,297,971 127,137,804
Note payable - bank 3,804,169 4,133,335
Note payable - related party 3,000,000 3,000,000
Accrued expenses and other liabilities 1,623,349 1,805,934
Deferred federal income tax 2,666,847 1,969,850
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities 138,392,336 138,046,923
Commitments and Contingencies
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,685,228 and 1,685,228 shares issued and outstanding
in 2004 and 2003, respectively 1,685,228 1,685,228
Additional paid-in capital 7,170,321 7,170,321
Accumulated other comprehensive income 5,857,366 4,595,473
Retained earnings 7,387,309 7,382,387
------------------------------------------------------------------------ -------------------- --------------------
Total Shareholders' Equity 22,100,224 20,833,409
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities and Shareholders' Equity $ 160,492,560 $ 158,880,332
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31 2004 2003
------------------------------------------------------------------------ -------------------- --------------------
Cash Flows from Operations:
Net loss $ (109,611) $ (333,318)
Adjustments to reconcile net loss to cash from operations:
Increase in benefit reserves 448,681 1,567,918
Decrease in claim liabilities (15,349) (262,102)
Decrease in reinsurance recoverable 118,825 293,177
Interest credited on policyholder deposits 155,887 164,885
Provision for amortization and depreciation, net of deferrals 136,998 141,604
Amortization of premium and accretion of discount on
securities purchased, net 8,604 9,227
Net realized investment (gains) losses (228,186) 276,163
Increase in accrued investment income (3,190) (56,784)
Change in other assets and liabilities 22,250 (9,385)
Decrease in deferred federal income tax liability (372,997) (98,000)
Increase in federal income taxes receivable (26,706) (35,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by Operations 135,206 1,658,385
Cash Flows from Investment Activities:
Cost of securities acquired (15,022,183) (17,128,419)
Investments sold or matured 12,497,966 15,170,175
Investment management fees (355,009) (2,298)
Additions to real estate -- (17,669)
Additions to property and equipment, net -- (5,071)
Other investing activities, net 50,532 (15,645)
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Investment Activities (2,828,694) (1,998,927)
Cash Flows from Financing Activities:
Policyholder deposits 196,907 151,298
Policyholder withdrawals (462,085) (416,291)
Payments on notes payable - bank (329,166) (658,333)
Repurchase of common stock -- (7,759)
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Financing Activities (594,344) (931,085)
------------------------------------------------------------------------ -------------------- --------------------
Net Decrease in Cash and Cash Equivalents (3,287,832) (1,271,627)
Cash and Cash Equivalents at Beginning of Period 8,588,896 6,699,171
------------------------------------------------------------------------ -------------------- --------------------
------------------------------------------------------------------------ -------------------- --------------------
Cash and Cash Equivalents at End of Period $ 5,301,064 $ 5,427,544
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q in conformity with
accounting principles generally accepted in the United States. The accompanying
unaudited condensed financial statements reflect all adjustments that are, in
the opinion of management, necessary to a fair presentation of the results for
the interim periods. All such adjustments are of a normal recurring nature. For
further information, refer to the December 31, 2003 consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K.
Note 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three months
ended March 31, 2004 and 2003 are as follows:
----------------------------------
Three Months Ended March 31,
----------------- ----------------
COMPREHENSIVE INCOME: 2004 2003
------------------------------------------- ----------------- ----------------
Net Loss $ (109,611) $ (333,318)
Net unrealized gain on securities 1,371,504 418,234
------------------------------------------- ----------------- ----------------
Comprehensive Income $ 1,261,893 $ 84,916
------------------------------------------- ----------------- ----------------
Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's derivatives outstanding at March 31, 2004 include approximately
$192,000 of embedded options on convertible bonds and $(15,000) of other open
option positions. Hedge accounting is not used for these securities and changes
in market value are reported currently as realized gains or losses.
Note 4 - NET REALIZED INVESTMENT GAINS (LOSSES), NET OF EXPENSES
The Company recorded pretax reductions to the carrying value of available for
sale securities totaling $101,061 and $68,329 for the three months ended March
31, 2004 and 2003, respectively, relating to declines in value which were
considered by management to be other than temporary. These amounts are included
along with other net realized gains (losses). The Company also nets certain
direct, incremental investment management fees against net realized investment
gains and losses presented in the Condensed Consolidated Statements of
Operations. Such costs are based directly on or, are primarily associated with
capital gains. Costs netted against realized investment gains and losses total
$45,900 and $21,030 for the three months ended March 31, 2004 and 2003,
respectively.
Note 5 - INCOME TAXES
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Income before federal
income taxes differs from taxable income principally due to the small life
insurance company tax deduction and dividends-received tax deductions.
Part I; Item 1 (continued)
Note 6 - SEGMENT INFORMATION
The Company's operations are managed along five principal insurance product
lines: Home Service Life, Broker Life, Preneed Life, Dental, and Other Health.
Products in all five lines are sold through independent agency operations. Home
Service Life consists primarily of traditional life insurance coverage sold in
amounts of $10,000 and under to middle and lower income individuals. This
distribution channel is characterized by a significant amount of agent contact
with customers throughout the year. Broker Life product sales consist primarily
of simplified issue and graded-benefit policies in amounts of $10,000 and under.
Other products in this segment, which are not aggressively marketed, include:
group life, universal life, annuities and participating life coverages. Preneed
Life products are sold to individuals in connection with prearrangement of their
funeral and include single premium and multi-pay policies with coverages
generally in amounts of $10,000 and less. These policies are generally sold to
older individuals at increased premium rates. Dental products are term coverages
generally sold to small and intermediate size employer groups. Other Health
products include various accident and health coverages sold to individuals and
employer groups. Segment information as of March 31, 2004 and 2003, and for the
periods then ended is as follows:
----------------------------------
Three Months Ended March 31,
----------------- ----------------
REVENUE: 2004 2003
-------------------------------------------- ----------------- ----------------
Home Service Life $ 2,241,596 $ 2,287,941
Broker Life 1,628,578 1,464,206
Preneed Life 2,357,982 4,141,607
Dental 2,188,638 2,147,260
Other Health 326,044 366,968
-------------------------------------------- ----------------- ----------------
Segment Totals 8,742,838 10,407,982
Realized investment gains (losses) 228,186 (276,163)
-------------------------------------------- ----------------- ----------------
Total Revenue $8,971,024 $10,131,819
-------------------------------------------- ----------------- ----------------
Below are the net investment income amounts that are included in the revenue
totals above.
----------------------------------
Three Months Ended March 31,
----------------- ----------------
INVESTMENT INCOME: 2004 2003
------------------------------------------ ----------------- ----------------
Home Service Life $ 427,509 $ 396,342
Broker Life 563,873 541,107
Preneed Life 604,179 409,834
Dental 8,344 6,637
Other Health 19,776 20,069
------------------------------------------ ----------------- ----------------
Segment Totals $ 1,623,681 $ 1,373,989
------------------------------------------ ----------------- ----------------
Part I; Item 1 (continued)
The Company evaluates performance based on several factors, of which the primary
financial measure is segment profit. Segment profit represents pretax earnings,
except net realized investment gains (losses) and interest expense are excluded.
A significant portion of the Company's realized investment gains (losses) are
generated from investments in equity securities. The equities portfolio averaged
(on a cost basis) approximately $10,463,000 and $7,866,000 during the three
months ended March 31, 2004 and 2003, respectively.
----------------------------------
Three Months Ended March 31,
----------------- ----------------
SEGMENT PROFIT (LOSS): 2004 2003
-------------------------------------------- ----------------- ----------------
Home Service Life $ (117,112) $ 121,867
Broker Life (145,583) 65,209
Preneed Life (77,140) (121,412)
Dental 73,956 141,912
Other Health (17,578) (245,523)
-------------------------------------------- ----------------- ----------------
Segment Totals (283,457) (37,947)
Realized investment gains (losses) 228,186 (276,163)
Interest expense 90,588 92,208
-------------------------------------------- ----------------- ----------------
Income (Loss) before Federal Income Tax $ (145,859) $ (406,318)
-------------------------------------------- ----------------- ----------------
Depreciation and amortization amounts below consist of depreciation expense
along with amortization of the value of insurance acquired and deferred policy
acquisition costs.
-----------------------------------
Three Months Ended March 31,
----------------- -----------------
DEPRECIATION AND AMORTIZATION: 2004 2003
-------------------------------------------- ----------------- -----------------
Home Service Life $ 133,960 $ 175,984
Broker Life 83,205 199,537
Preneed Life 229,405 318,675
Dental 16,153 14,294
Other Health 22,960 12,656
-------------------------------------------- ----------------- -----------------
Segment Totals $ 485,683 $ 721,146
-------------------------------------------- ----------------- -----------------
Segment asset totals are determined based on policy liabilities outstanding in
each segment.
----------------- ----------------
March 31, December 31,
ASSETS: 2004 2003
--------------------------------------------- ----------------- ----------------
Home Service Life $ 41,969,753 $41,312,914
Broker Life 55,262,113 54,585,019
Preneed Life 60,665,385 60,100,723
Dental 694,430 930,279
Other Health 1,900,879 1,951,397
--------------------------------------------- ----------------- ----------------
Segment Totals $160,492,560 $158,880,332
--------------------------------------------- ----------------- ----------------
Part I; Item 1 (continued)
Note 7 - LITIGATION
United Liberty, which the Company acquired in 1998, is defending an action in an
Ohio state court brought by two policyholders. The Complaint refers to a
particular class of life insurance policies that United Liberty issued over a
period of years ending around 1971. It alleges that United Liberty's dividend
payments on these policies from 1993 through 1999 were less than the required
amount. It does not specify the amount of the alleged underpayment but implies a
maximum of about $850,000. The plaintiffs also allege that United Liberty is
liable to pay punitive damages, also in an unspecified amount, for breach of an
implied covenant of good faith and fair dealing to the plaintiffs in relation to
the dividends. The action has been certified as a class action on behalf of all
policyholders who were Ohio residents and whose policies were still in force in
1993. United Liberty has denied the material allegations of the Complaint and is
defending the action vigorously. Pre-trial discovery is continuing. United
Liberty has filed a motion for summary judgment, which has been fully briefed
and argued and awaits decision by the Court. At United Liberty's request, an
initial mediation session has been completed and negotiations are continuing. As
a pre-requisite for the mediation, United Liberty offered to settle the matter
for payments over time, which would include attorneys' fees, and which would be
contingent upon an exchange or reformation of the insurance policies currently
owned by the members of the class. There has been no significant developments
during the current quarter regarding this litigation. At this stage of the
litigation, the Company is unable to determine whether an unfavorable outcome of
the action is likely to occur or, alternatively, whether the chance of such an
outcome is remote. Therefore, at this time, management has no basis for
estimating potential losses, if any.
Citizens Security is defending an action in an Alabama state court brought by an
alleged policyholder in which a former independent agent is also a defendant.
The action has been pending since November, 2001. In broad summary, the original
Complaint referred to the Company's alleged failure to pay a $30,000 death
benefit under a life insurance policy but also alleged that the plaintiff
incurred mental anguish as a consequence and sought damages in an unspecified
amount. In March, 2004, the plaintiff filed an Amended Complaint that alleges,
in broad summary, that the independent agent collected premium payments for the
policy from the policyholder but failed to remit them to the Company and that
these acts, in relation to the Company's failure to pay the death benefit and
other circumstances, amounted to fraudulent conduct for which not only the
independent agent but also the Company are liable. The Company has denied the
material allegations of the Complaint and the Amended Complaint and will defend
the action vigorously. Despite having been pending for some time, the case is in
an early stage, with very little pre-trial discovery having been conducted to
date, and none in relation to new issues raised by the Amended Complaint. At
this stage of the litigation, the Company is unable to determine whether an
unfavorable outcome of the action is likely to occur or, alternatively, whether
the chance of such an outcome is remote. Therefore, at this time, management has
no basis for estimating potential losses, if any. The Company has recently
become aware of other actions brought against the same independent agent and two
other insurance companies in the same court by other plaintiffs in relation to
insurance policies issued by the other companies and alleging similar misconduct
by the independent agent. In at least one such other action, the jury returned
very large verdict against the independent agent and the other insurer although
the Company understands that the action was later settled for an undisclosed
amount that though substantial is much less than the verdict amount.
In addition, the Company is party to other lawsuits in the normal course of
business. Management believes that recorded claims liabilities are adequate to
ensure that these other suits will be resolved without material financial impact
to the Company.
Note 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effecive January 1, 2004, the Company adopted Statement of Position 03-1,
"Accountng and Reporting by Insurance Enterprises for certain Nontraditional
Long-Duration Contracts and for Separate Accounts (SOP 03-1)." The provisions of
SOP 03-1 did not have a material impact on the Company's financial statements.
Part I; Item 2 - Management's Discussion and Analysis
EXECUTIVE SUMMARY
The Company's management continuously monitors the performance and outlook of
the Company by analyzing several indicators that they judge to be critical.
Some, but not necessarily all, of the indicators of particular interest to
management are:
o The general economic environment
o Trend of premium volume
o Lapse rates
o Mortality and morbidity rates
o Trend of general expense levels
o Asset and Capital and Surplus growth
o General interest rate movements
o Investment yields
o Diversity (e.g. by industry) and mix (e.g. between fixed income
securities and equity securities) of our portfolios
o Segment performance and trends
FINANCIAL POSITION. Shareholders' equity totaled approximately $22,100,000 and
$20,833,000 at March 31, 2004 and December 31, 2003, respectively. These
balances reflect an approximate 6.1% increase for the three months ended March
31, 2004. As described above, the comprehensive income totaled approximately
$1,262,000 and $85,000 for the three months ended March 31, 2004 and 2003,
respectively. A significant portion of the comprehensive income is attributable
to changes in the value of the Company's fixed maturity and equity portfolios.
Equity securities comprised approximately 10.1% and 7.1% of the Company's total
assets as of March 31, 2004 and December 31, 2003, respectively. Accordingly, as
also described below, the Company's financial position can be significantly
affected by movements in the equities markets. Equity portfolio positions
increased $4,802,000 on a cost basis and $4,888,000 on a market value basis,
during the first three months of 2004. Fixed maturity portfolio positions
decreased $1,467,000 on an amortized cost basis and increased $193,000 on a
market value basis during the same period. This difference resulted primarily
from some fixed maturity securities being called by the issuers and a slight
increase in bond prices during the quarter. Cash and cash equivalent positions
decreased approximately $3,288,000 during the quarter ended March 31, 2004.
Equity markets continue to be highly volatile and were slightly favorable in the
first quarter of 2004, along with some continuing improvements in the first half
of the second quarter. Interest yields on fixed maturity investments held in our
portfolio are continuing to slowly increase. The significant decline in
short-term rates has and, continues to adversely impact the Company's investment
portfolio yield and operating earnings. The 2004 environment described continues
to generate a relatively high level of qualitative investment risk. However,
measures of quantitative risk per unit of investment are not believed to have
changed significantly from those previously disclosed in the Company's 2003 Form
10-K.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not participate in any off-balance sheet arrangements.
OPERATIONS. Net premiums and other considerations decreased approximately
$1,905,000, or 21.2% during the first quarter of 2004 compared to the first
quarter of 2003. Preneed Life premiums declined $1,914,000 or 51% as the result
of the Company lowering crediting rates related to face amount growth, lowering
commission rates and changing the focus of our marketing efforts in the second
half of 2003. All other segments experienced only modest changes in premium from
the first quarter of 2003. The Company is in the process of redirecting the
focus of our marketing efforts to the Home Service, Broker and Dental segments
in an effort to improve profitability in those segments.
Pretax loss decreased approximately $260,000 to $(146,000) for the three months
ended March 31, 2004, primarily due to an increase in realized investment gains
of $504,000 and an increase in net investment income of $250,000, offset by
unfavorable Home Service Life and Broker Life mortality. General expenses
decreased $62,000 for the quarter due to the implementation of various cost
saving measures, although the Company is continuing to incur costs associated
with outside consultants who were employed to review profitability of the
Company's life products in the current interest rate environment and perform
other actuarial calculations and analysis. Pretax Segment loss (excluding
realized investment gains (losses) and interest expense) for the first three
months of 2004 was approximately $283,000 compared to $38,000 for the first
three months of 2003. This is primarily attributable to the factors described
above relative to revenue changes. Below are the approximate, annualized pretax
investment income and total return yields for the three months ended March 31,
2004 and 2003.
----------------- -----------------
Three Months Ended March 31 2004 2003
-------------------------------------------- ----------------- -----------------
Investment Income $ 1,623,681 $ 1,373,989
Realized and Unrealized Gains (Losses) 1,599,688 380,874
-------------------------------------------- ----------------- -----------------
Total Return $ 3,223,369 $ 1,754,863
-------------------------------------------- ----------------- -----------------
Average Cash and Investments $137,652,385 $127,140,985
Investment Income Yield - Annualized 4.72% 4.32%
Total Return - Annualized 9.37% 5.52%
CASH FLOW AND LIQUIDITY. Cash flow from operations totaled $135,000 for the
quarter ended March 31, 2004 compared to $1,658,000 for the same period in the
prior year. The decrease in the positive cash flow is primarily attributable to
the decline in Preneed Life business which was growing during the first quarter
of 2003. The $2,829,000 of cash used by investing activities for the quarter
ended March 31, 2004 resulted primarily from investing a large portion of cash
held at the beginning of the quarter. The $594,000 of cash used in financing
activities during the first quarter of 2004 is primarily attributable to bank
loan principal repayments along with annuity and Universal Life account
withdrawals. Due to continued earnings pressure from low yields on investments
and cash equivalents and the declining Preneed premiums, the Company is
completing a strategic review of its products and operations. A key element of
this initiative is improving profitability of the Preneed, Home Service, and
Broker Life segments by increasing premiums in the Home Service and Broker
segments, strengthening underwriting practices, modifying commissions, and where
possible, lowering interest crediting or policy growth rates. Regarding the
currently scheduled debt repayments, the Company believes its available funds
will be adequate to service 2004 debt obligations and, with other available
assets, management believes it will be adequate to service debt obligations
through 2005. The Company sold its interest in an aircraft to SMC Advisors Inc.,
a related entity, in April 2004, generating $971,000 in additional cash. In
addition, the Company's Chairman has expressed potential willingness to loan the
Company an additional $2,000,000 if necessary, which could service debt
obligations through the majority of 2007.
FORWARD-LOOKING INFORMATION.
All statements, trend analyses and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate", "believe", "plan", "estimate", "expect", "intend", and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things:
|X| the market value of the Company's investments, including stock market
performance and prevailing interest rate levels;
|X| customer and agent response to new products, distribution channels
and marketing initiatives, including exposure to unrecoverable advanced
commissions;
|X| mortality, morbidity, lapse rates, and other factors which may affect
the profitability of the Company's insurance products;
|X| regulatory changes or actions, including those relating to regulation
of insurance products and insurance companies;
|X| ratings assigned to the Company and its subsidiaries by independent
rating organizations which the Company believes are important to the
sale of its products;
|X| general economic conditions and increasing competition which may affect
the Company's ability to sell its products;
|X| the Company's ability to achieve anticipated levels of operating
efficiencies and meet cash requirements based upon projected liquidity
sources;
|X| unanticipated adverse litigation outcomes; and
|X| changes in the Federal income tax laws and regulations that may affect
the relative tax advantages of some of the Company's products.
There can be no assurance that other factors not currently anticipated by
management will not also materially and adversely affect the Company's results
of operations.
Part I; Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Risk. The primary changes in quantitative market
risks during the three months ended March 31, 2004 are discussed in Part I, Item
2 above.
Part I; Item 4 - Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within the past 90 days, the
Company conducted an evaluation of its disclosure controls and procedures, with
the supervision and participation of its Chief Executive Officer and Principal
Financial Officer. The Company does not expect that its disclosure controls and
procedures will prevent all error and fraud. Such a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must balance the constraint of prudent resource expenditure
with a judgmental evaluation of risks and benefits. Based on this evaluation of
disclosure controls and procedures, the Company's Chief Executive Officer and
Principal Financial Officer have concluded that such controls and procedures
provide reasonable assurance that material information required to be included
in the Company's periodic SEC reports is made known on a timely basis to the
Company's principal executive and financial officers.
CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Company's internal controls or changes in other factors that could significantly
affect these controls subsequent to their evaluation, nor has the Company
implemented any corrective actions regarding significant deficiencies or
material weaknesses in internal controls.
Part II - Other Information
Item 1. Litigation
The Company's subsidiary, Citizens Security Life Insurance Company, is defending
an action in the Circuit Court of Macon County, Alabama brought by an alleged
policyholder in which a former independent agent is also a defendant. The action
has been pending since November, 2001. In broad summary, the original Complaint
referred to the Company's alleged failure to pay a $30,000 death benefit under a
life insurance policy but also alleged that the plaintiff incurred mental
anguish as a consequence and sought damages in an unspecified amount. In March,
2004, the plaintiff filed an Amended Complaint that alleges, in broad summary,
that the independent agent collected premium payments for the policy from the
policyholder but failed to remit them to the Company and that these acts, in
relation to the Company's failure to pay the death benefit and other
circumstances, amounted to fraudulent conduct for which not only the independent
agent but also the Company are liable. The Company has denied the material
allegations of the Complaint and the Amended Complaint and will defend the
action vigorously. Despite having been pending for some time, the case is in an
early stage, with very little pre-trial discovery having been conducted to date,
and none in relation to new issues raised by the Amended Complaint. At this
stage of the litigation, the Company is unable to determine whether an
unfavorable outcome of the action is likely to occur or, alternatively, whether
the chance of such an outcome is remote. Therefore, at this time, management has
no basis for estimating potential losses, if any. The Company has recently
become aware of other actions brought against the same independent agent and two
other insurance companies in the same court by other plaintiffs in relation to
insurance policies issued by the other companies and alleging similar misconduct
by the independent agent. In at least one such other action, the jury returned
very large verdict against the independent agent and the other insurer although
the Company understands that the action was later settled for an undisclosed
amount that though substantial is much less than the verdict amount.
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibit 10.15: Severance Agreement and release dated as of April
15, 2004 between the Company and Lane A. Hersman
Exhibit 11: Statement re: computation of per share earnings.
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification --Principal
Executive Officer
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification --Principal
Financial Officer
Exhibit 32.1 Section 1350 Certification --Principal Executive
Officer
Exhibit 32.2 Section 1350 Certification --Principal Financial
Officer
b). Reports on Form 8-K: On January 9, 2004 the Company filed a Form 8-K
which noted that the Company completed the borrowing
of $1,000,000 from the Company's Chairman at the
greater of 6% annual interest or prime plus one
percent.
On March 29, 2004 the Company filed a Form 8-K to
furnish, pursuant to Item 12, a press release
disclosing the Company's earnings for the year ended
December 31, 2003.
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CITIZENS FINANCIAL CORPORATION
BY: /s/ Darrell R. Wells
------------------------------------------------
Darrell R. Wells
President and Chief Executive Officer
BY: /s/ Len E. Schweitzer
------------------------------------------------
Len E. Schweitzer
Treasurer and Principal Financial Officer
Date: May 14, 2004