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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended            March 31, 2005 or o
    
    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: 1-13004 CITIZENS, INC. 
 Colorado
    
    84-0755371(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
 (512) 837-7100 
 N/A 
 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 o No Indicate by check mark whether the registrant is an accelerated filer as defined in Rule
12b-2 of the Exchange. x Yes o No As of May 1, 2005, the Registrant had 37,457,307 shares of Class A common stock, no par value,
outstanding and 936,181 shares of Class B common stock, no par value, outstanding.




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES INDEX PageNumberPart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Statements of Financial Position,
March 31, 2005 (Unaudited) and December 31, 2004
    
    
    3Consolidated Statements of Operations, Three Months
Ended March 31, 2005 and 2004 (Unaudited)
    
    
    6Consolidated Statements of Cash Flows, Three Months
Ended March 31, 2005 and 2004 (Unaudited)
    
    
    7Notes to Consolidated Financial Statements
    
    
    9Item 2.
    
    Managements Discussion and Analysis
of Financial Conditions and Results
of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative
Disclosures about Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    26Part II. Other Information
    
    
    29Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, 2005 and December 31, 2004 (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004AssetsInvestments:Fixed maturities held-to-maturity, at
amortized cost (fair value $8,741,232
in 2005 and $8,826,950 in 2004)
    
    $
    7,545,564
    
    
    $
    7,514,224Fixed maturities available-for-sale, at
fair value (cost $432,615,364 in
2005 and $441,528,337 in 2004)
    
    
    427,064,941
    
    
    
    440,052,698Equity securities, available-for-sale, at fair value
(cost $723,428 in 2005 and 2004)
    
    
    1,016,446
    
    
    
    1,063,917Mortgage loans on real estate (net of reserve
of $50,000 in 2005 and $250,000 in 2004)
    
    
    558,093
    
    
    
    349,611Policy loans
    
    
    24,515,206
    
    
    
    24,316,468Other long-term investments
    
    
    2,066,397
    
    
    
    2,505,025Total investments
    
    
    462,766,647
    
    
    
    475,801,943Cash and cash equivalents
    
    
    63,542,245
    
    
    
    31,720,787Accrued investment income
    
    
        4,444,612
    
    
    
    6,113,474Reinsurance recoverable
    
    
    18,857,405
    
    
    
    17,806,573Deferred policy acquisition costs
    
    
    59,385,346
    
    
    
    56,335,361Other intangible assets
    
    
    2,331,069
    
    
    
    2,331,069Deferred Federal income tax asset
    
    
        12,903
    
    
    
    Cost of customer relationships acquired
    
    
    43,754,655
    
    
    
    44,904,581Excess of cost over net assets acquired
    
    
    12,401,990
    
    
    
    12,401,990Property, plant and equipment
    
    
    8,451,833
    
    
    
    8,797,445Other assets
    
    
    4,776,854
    
    
    
    4,998,339Total assets
    
    $
        680,725,559
    
    
    $
    661,211,562
  See accompanying notes to consolidated financial statements.
    
    (Continued)
 3




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
March 31, 2005 and December 31, 2004 (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    419,736,461
    
    
    $
    413,106,928Annuities
    
    
    17,981,814
    
    
    
    16,913,432Accident and health
    
    
    12,297,514
    
    
    
    13,604,150Dividend accumulations
    
    
    4,931,648
    
    
    
    4,932,124Premium deposits
    
    
    8,473,390
    
    
    
    7,938,529Policy claims payable
    
    
    9,203,413
    
    
    
    8,282,508Other policyholders funds
    
    
    5,906,603
    
    
    
    5,689,378Total policy liabilities
    
    
    478,530,843
    
    
    
    470,467,049Commissions payable
    
    
    2,495,834
    
    
    
    2,325,503Federal income tax payable
    
    
    457,713
    
    
    
    1,307,249Payable for securities in the process of
settlement
    
    
    23,825,000
    
    
    
    7,052,398Notes payable
    
    
    30,000,000
    
    
    
    30,000,000Deferred Federal income tax
    
    
    0
    
    
    
    805,387Liabilities for options and warrants
    
    
    2,303,656
    
    
    
    2,738,062Other liabilities
    
    
    2,441,364
    
    
    
    5,483,564Total liabilities
    
    
        540,054,410
    
    
    
    520,179,212Cumulative convertible preferred stock  Series A-1
($500 stated value, 50,000 shares authorized,
25,000 shares issued and outstanding in 2005 and 2004)
    
    
    6,265,171
    
    
    
    5,901,271Stockholders Equity:Common stock:Class A, no par value, 100,000,000 shares
authorized, 40,387,868 shares issued in
2005 and 40,364,332 in 2004, including shares in treasury
of 2,930,596 in 2005 and 2004
    
    
    198,397,815
    
    
    
    198,266,955Class B, no par value, 2,000,000 shares
authorized, 936,181 shares issued and
outstanding in 2005 and 2004
    
    
    2,827,191
    
    
    
    2,827,191Retained deficit
    
    
        (53,456,561
    )
    
    
    (55,321,287
    )Accumulated other comprehensive income (loss):Unrealized
losses on securities,
net of tax
    
    
    (3,469,886
    )
    
    
    (749,199
    )144,298,559
    
    
    
    145,023,660
 (Continued) 4




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
March 31, 2005 and December 31, 2004 Treasury stock, at cost
    
    
    (9,892,581
    )
    
    
    (9,892,581
    )Total stockholders equity
    
    
    134,405,978
    
    
    
    135,131,079Total liabilities and stockholders equity
    
    $
    680,725,569
    
    
    $
    661,211,562
 See accompanying notes to consolidated financial statements. 5




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2005 and 2004 (Unaudited) Three months ended March 31,2005
    
    
    2004Revenues:Premiums
    
    $
    27,783,998
    
    
    $
    15,121,602Annuity and universal life considerations
    
    
    795,373
    
    
    
    917,237Net investment income
    
    
    6,106,012
    
    
    
    3,874,328Realized gains
    
    
    69,127
    
    
    
    39,212Decrease in
fair value of options and warrants
    
    
    434,406
    
    
    
    Other income
    
    
    207,761
    
    
    
    152,584Total revenues
    
    
    35,396,677
    
    
    
    20,104,963Benefits and expenses:Insurance benefits paid or provided:Increase in future policy
            benefit reserves
    
    
    5,598,497
    
    
    
    2,676,246Policyholders dividends
    
    
    870,168
    
    
    
    731,189Claims and surrenders
    
    
    12,254,356
    
    
    
    8,642,224Annuity expenses
    
    
    455,329
    
    
    
    3,122Total insurance benefits paid or provided
    
    
    19,178,350
    
    
    
    12,052,781Commissions
    
    
    7,046,446
    
    
    
    3,773,308Other underwriting, acquisition and insurance expenses
    
    
    7,719,718
    
    
    
    3,436,235Capitalization of deferred policy acquisition costs
    
    
    (5,021,085
    )
    
    
    (3,641,732
    )Amortization of deferred policy acquisition costs
    
    
        1,971,100
    
    
    
    2,648,555Amortization of cost of customer relationships acquired
and other intangibles
    
    
    1,149,926
    
    
    
    724,761Loss on coinsurance agreements
    
    
    
    
    
    
    634,461Total benefits and expenses
    
    
        32,044,455
    
    
    
    19,628,369Income before Federal income tax
    
    
        3,352,222
    
    
    
    476,594Federal income tax expense
    
    
    992,736
    
    
    
    104,851Net income
    
    $
        2,359,486
    
    
    $
    371,743Per Share Amounts:Basic and diluted income per share of
common stock
    
    $
    0.05
    
    
    $
    0.01Weighted average shares outstanding
    
    
    38,369,917
    
    
    
    38,317,079
 See accompanying notes to consolidated financial statements. 6




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2005 and 2004 (Unaudited) Three
          months ended March 31,2005
        
        
        2004Cash flows from
            operating activities:Net income
        
        $
        2,359,486
        
        
        $
        371,743Adjustments to reconcile
            net income to net cash provided by operating activities:Realized gains on
            sale of investments and other assets
        
        
        (69,127
        )
        
        
        (39,212
        )Loss on coinsurance
            agreements
        
        
        0
        
        
        
        634,461Net deferred policy
            acquisition costs
        
        
        (3,049,985
        )
        
        
        (993,177
        )Decrease in fair
            value of options and warrants
        
        
        (434,406
        )
        
        
        0Amortization of cost
            of customer relationships acquired and other intangibles
        
        
        1,149,926
        
        
        
        724,761Depreciation
        
        
        363,032
        
        
        
        176,703Deferred Federal
            income tax
        
        
        583,276
        
        
        
        31,586Change in:Accrued investment
            income
        
        
        1,668,862
        
        
        
        999,043Reinsurance recoverable
        
        
        (1,050,832
        )
        
        
        (114,562
        )Future policy benefit
            reserves
        
        
        6,391,279
        
        
        
        2,276,819Other policy liabilities
        
        
        1,672,515
        
        
        
        (276,858
        )Federal income tax
        
        
        (849,536
        )
        
        
        (207,702
        )Commissions payable
            and other liabilities
        
        
        (2,871,869
        )
        
        
        (960,615
        )Other, net
        
        
        52,389
        
        
        
        (140,895
        )Net cash provided
            by operating activities
        
        
        5,915,010
        
        
        
        2,482,095Cash flows from
            investing activities:Sale of fixed maturities,
            available-for-sale
        
        
        9,723,906
        
        
        
        1,317,657Sale of equity securities,
            available-for-sale
        
        
        0
        
        
        
        37,532Maturity of fixed
            maturities, available-for-sale
        
        
        56,413,997
        
        
        
        32,133,446Purchase of fixed
            maturities, available-for-sale
        
        
        (39,806,815
        )
        
        
        (18,549,687
        )Principal payments
            on mortgage loans
        
        
        6,359
        
        
        
        17,845Sale of other long-term
            investments and property, plant and equipment
        
        
        0
        
        
        
        67,473Mortgage loans funded
        
        
        (214,841
        )
        
        
        0Decrease (increase) in
            policy loans, net
        
        
        (198,738
        )
        
        
        320,974
  See accompanying notes to consolidated financial statements.
    
    (Continued)
 7




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Three Months Ended March 31, 2005 and 2004 (Unaudited) Three months ended March 31,2005
    
    
    2004Purchase of property, plant and equipment
    
    $
    (17,420
    )
    
    $
    (192,389
    )Net cash provided by
investing activities
    
    
    25,906,448
    
    
    
    15,152,851Net increase in cash and cash equivalents
    
    
    31,821,458
    
    
    
    17,634,946Cash and cash equivalents at beginning of period
    
    
    31,720,787
    
    
    
    15,016,254Cash and cash equivalents at end of period
    
    $
    63,542,245
    
    
    $
    32,651,200Supplemental:Cash paid during the period for income taxes
    
    $
    1,258,996
    
    
    $
    280,967
 Supplemental Disclosure of Non-Cash Investing and Financing Activities: On March 9, 2004, the Company entered into coinsurance agreements, effective January 1, 2004,
ceding the majority of its accident and health premiums and corresponding benefits and claims. Due
to this cession, the Company ceded its January 1, 2004, deferred policy acquisition costs and cost
of customer relationships acquired and increased reinsurance recoverable and funds withheld under
coinsurance agreements by $2,197,434, $2,886,060, $14,960,408 and $10,439,830, respectively,
resulting in a loss of $634,461 and a deferred gain of $71,545. The deferred gain was fully
amortized to earnings in 2004. On July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1 Senior
Convertible Preferred Stock to four unaffiliated institutional investors. The Company initially
recognized deferred issuance costs of $1,485,846, discounts on beneficial conversion 8




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features of $3,073,204 and
discounts on fair value of options and warrants of $2,718,959,
respectively. The Company has recognized accretion of those deferrals and discounts
amounting to $679,280 in 2004 and $363,900 in the first quarter of
2005. These discounts and deferrals have decreased the carrying amount of the
Convertible Preferred Stock in the statement of financial position. See accompanying notes to consolidated financial statements. 
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (Unaudited)  (1)
    Financial StatementsThe 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), Citizens USA Life Insurance Company (CUSA), Citizens National Life Insurance
Company (CNLIC), First Alliance Insurance Company (FAIC), KYWIDE Insurance Management,
Inc. (KYWIDE), Mid-American Alliance Corporation (Mid-American), Mid American Century
Life Insurance Company (MACLIC), Security Alliance Insurance Company (SAIC), Security
Plan Life Insurance Company (Security Plan), Security Plan Fire Insurance Company
(SPFIC), Mid-American Associates Agency, Inc. (MAAAI), Mid-American Alliance Insurance
Agency, Inc. (MAAIA) and Industrial Benefits, Inc. (IBI). Citizens and its consolidated
subsidiaries are collectively referred to as the Company.During 2004, Citizens acquired Security Plan and its subsidiary, SPFIC. In addition,
First Alliance Corporation and Alliance Insurance Management, a dormant subsidiary, were
dissolved, and Combined Underwriters Life Insurance Company was renamed CNLIC. On March
1, 2005, FAIC was merged into CICA, and on April 1, 2005, MAAIA
was sold for an immaterial amount.The statement of financial position as of March 31, 2005, the statements of operations for
the three-month periods ended March 31, 2005 and 2004, and the statements of cash flows
for the three-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 March 31, 2005, 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 9




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included in the Companys December 31, 2004, Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the period ended March
31, 2005, are not necessarily indicative of the operating results for the full year.(2)
    Coinsurance AgreementsOn March 9, 2004, the Company entered into coinsurance agreements, effective January 1,
2004, and ceded approximately $15 million of its annual accident and health premium and
corresponding benefits and claims. In consideration for these cessions, the Company had
a liability for funds held under reinsurance agreements of $10,496,549 as of March 31,
2004 and made a closing settlement payment of this amount to the reinsurer in May 2004.
Due to this cession, the Company also ceded its January 1, 2004 deferred policy
acquisition costs, cost of customer relationships acquired and policy benefit reserve by
$2,197,434, $2,886,060 and $14,960,408, respectively, and recorded an initial amount
payable to the reinsurer of $10,439,830, resulting in a loss of $634,461 and a deferred
gain of $71,545. The deferred gain was fully amortized to earnings in 2004. The
coinsurance agreement provides that this ceded business will revert to the reinsurer when
a parallel assumption reinsurance agreement is approved by the various state insurance
departments holding jurisdiction. No approvals had been obtained as of March 31, 2005. The
Company also participates in future profits on the accident and health business subject
to the coinsurance agreements over a 10-year period.(3)
    Revolving Line of CreditOn March 22, 2004, the Company entered into a revolving loan agreement with a Regions
Bank establishing a commitment for a line of credit of $30,000,000 that matured on March
22, 2005. It was extended at maturity until June 30, 2005. The line of credit has a
maximum of $5,000,000 for general corporate purposes not related to acquisition of
insurance companies and any borrowings up to the maximum for general corporate purposes
are unsecured. The line of credit bears interest at the lesser of the thirty-day LIBOR
(London InterBank Offered Rate) plus 180 basis points or the highest lawful rate. The
Company paid a loan origination fee equal to 37.5 basis points of the line of credit.
The loan is secured by 100% of the common stock of any company acquired by the Company or
any of its subsidiaries if the line of credit is used for any part of an acquisition.On October 1, 2004, the Company entered into a Second Amendment to the Loan Agreement
that converted into a term loan a $30 million advance against the line of credit made for
the purpose of acquiring Security Plan. Under the term loan, the Company is required to
repay the principal portion of the loan in ten semi-annual installments of $3,000,000
beginning on May 1, 2005, with the final installment of principal and any accrued and
unpaid interest on November 1, 2009. Interest on the unpaid principal balance of the
loan was required to be paid on the fifth day of each month following the end of the
fiscal quarter of the Company. The interest rate is equal to a 30-day LIBOR plus 1.8%
per year. In connection with the acquisition of Security Plan, the Companys borrowed
funds on its term loan were loaned to CICA.   10




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After funding the term loan, the Companys line of credit had been drawn down to zero.
Under the Amended Loan Agreement, upon any prepayment or repayment of the term loan
described above, the line of credit will be reinstated to an aggregate amount equal to
the difference between (a) $30 million minus (b) the aggregate outstanding principal
amount under the term loan.Because CICA is an insurance company formed under the laws of Colorado, under the
subordinated debenture, any principal and accrued interest is not a legal liability of
CICA until repayment of interest or principal has received the prior written approval of
the Commissioner of Insurance for the State of Colorado. CICA pledged 100% the stock of
Security Plan to the bank as collateral.In April 2005, the term loan was paid off and the line of credit restored to the
$30,000,000 level.(4)
    Segment InformationHistorically, the Company has had three reportable segments: International Life Business,
Domestic Health Business and Domestic Life Business. During 2004, following the
acquisition of Security Plan, a new segment, Home Service Business, was established.International Life Business, consisting of ordinary whole-life business, is sold
primarily throughout Central and South America. 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 Health Business, consisting of
accident and health specified disease, hospital indemnity and accidental death policies,
is sold throughout the southern U.S. Domestic Life Business, consisting of traditional
life, burial insurance and pre-need 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 net income before federal income taxes for its three
reportable segments.The acquisition of SPLIC and SPFIC created a new segment for
the Company. SPLIC has focused on writing ordinary whole life
insurance utilizing the home service marketing distribution method,
whereby employee/agents working routes make regular
collections of premiums from clients. SPFIC also uses the home service
method to write small fire policies on Louisiana residents. This
marketing method dates back to the creation of the life insurance
industry in the United States and SPLIC utilizes approximately 390
agents (307 of whom also represent SPFIC) to write and collect
premiums.Geographic Areas- The following summary represents financial data of the Companys
continuing operations based on their location. Three months ended March 31,2005
    
    
    2004Revenues:U.S.
    
    $
    18,114,539
    
    
    $
    4,513,850Non-U.S.
    
    
    17,282,138
    
    
    
    15,591,113Total Revenues
    
    $
    35,396,677
    
    
    $
    20,104,963
 11




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The following summary, representing revenues, amortization expense and pre-tax income
from continuing operations and identifiable assets for the Companys reportable segments
for the periods indicated is as follows: Three months ended March 31,2005
    
    
    2004Revenue, excluding net investment income and
realized gains:Domestic Life
    
    $
    4,366,091
    
    
    $
    3,423,348Domestic Health
    
    
        180,695
    
    
    
    211,857International Life
    
    
        14,884,731
    
    
    
    12,556,218Home Service Business
    
    
    9,790,021
    
    
    
    0Total consolidated revenue, excluding net
investment income and realized gain on
investments
    
    $
    29,221,538
    
    
    $
    16,191,423Net investment income:Domestic Life
    
    $
        728,968
    
    
    $
    869,842Domestic Health
    
    
    0
    
    
    
    0International Life
    
    
        2,386,407
    
    
    
    3,004,486Home Service Business
    
    
    2,990,637
    
    
    
    0Total consolidated net investment income
    
    $
    6,106,012
    
    
    $
    3,874,328Amortization expense:Domestic Life
    
    $
        844,109
    
    
    $
    1,049,172Domestic Health
    
    
    0
    
    
    
    7,774International Life
    
    
        1,464,091
    
    
    
    2,316,370Home Service Business
    
    
        812,826
    
    
    
    0Total consolidated amortization expense
    
    $
        3,121,026
    
    
    $
    3,373,316Realized gain on sale of investments and
other assets:Domestic Life
    
    $
        3, 360
    
    
    $
    8,804Domestic Health
    
    
    0
    
    
    
    0International Life
    
    
        11,000
    
    
    
    30,408Home Service Business
    
    
    54,767
    
    
    
    0Total consolidated realized gain on sale of
investments and other assets
    
    $
    69,127
    
    
    $
    39,212Income (loss) before Federal income tax:Domestic Life
    
    $
        (268,826
    )
    
    $
    (139,319
    )Domestic Health
    
    
        32,141
    
    
    
    (605,915
    )International Life
    
    
        2,676,958
    
    
    
    1,221,828Home Service Business
    
    
        911,948
    
    
    
    0Total consolidated income before
Federal income tax
    
    $
        3,352,222
    
    
    $
    476,594
 12




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March 31, 2005
    
    
    December 31, 2004Assets:Domestic Life
    
    $
    132,727,725
    
    
    $
    123,160,286Domestic Health
    
    
    15,405,896
    
    
    
    14,295,390Home Service Business
    
    
    301,644,203
    
    
    
    298,396,206International Life
    
    
    230,947,735
    
    
    
    225,359,680Total
    
    $
    680,725,559
    
    
    $
    661,211,562
  Major categories of premiums and annuity and universal life considerations are summarized
as follows: Three months ended
    
    
    Three months endedMarch 31, 2005
    
    
    March 31, 2004Premiums and universal
life considerations:Ordinary life
    
    $
    17,654,192
    
    
    $
    14,793,838Annuity and
universal life
    
    
    795,373
    
    
    
    917,237Group life
    
    
    159,090
    
    
    
    115,907Accident and health
    
    
    180,695
    
    
    
    211,857Home service business
    
    
    9,790,021
    
    
    
    0Total premiums
    
    $
    28,579,371
    
    
    $
    16,038,839
  (5)
    Accumulated Other Comprehensive Income (Loss)For the three months ended March 31, 2005, the other comprehensive income amounts
included in total comprehensive income consisted of unrealized losses on investments in
fixed maturities and equity securities available-for-sale of
$2,720,687 net of tax and
for the same period in 2004 unrealized gains of $1,497,702. Total comprehensive loss
for the three months ended March 31, 2005 was $361,201 and for the same period in 2004
total comprehensive income of $1,869,445.(6)
    Earnings Per ShareBasic 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 months ended March 31, 2005, were 38,369,917. The
weighted average shares outstanding for the three months ended March 31, 2004, were
38,317,079. The per share amounts have been adjusted retroactively for all periods
presented to reflect the change in capital structure resulting from a 7% stock dividend
paid in 2004. The 2004 stock dividend resulted in the issuance of 2,690,039 Class A shares (including 191,722 shares in treasury) and 61,246 Class B shares.On March 4, 2004 at a special meeting of the Companys shareholders the Companys
Articles of Incorporation were amended to increase the number of authorized shares   13




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##### Table of Contents



of its Class A and Class B common stock from 50,000,0000 to 100,000,000 and from
1,000,000 to 2,000,000, respectively. In addition, a class of 25,000,000 shares of
preferred stock was authorized to be available for future issuance in series with terms
and preferences designated by the Companys Board of Directors. On March 4, 2004, at a
special meeting of the Companys shareholders, the Companys Articles of Incorporation
were amended to increase the number of authorized shares of its Class A and Class B
common stock from 50,000,000 to 100,000,000 and from 1,000,000 to 2,000,000,
respectively. In addition, a class of 25,000,000 shares of preferred stock was
authorized to be available for future issuance in series with terms and preferences
designated by the Companys Board of Directors. The Company completed a private
placement of $12.5 million of Series A-1 Convertible Preferred Stock in July 2004. In
addition, on September 30, 2004, the Company declared its initial 4% dividend to the
Series A-1 Convertible Preferred Stock shareholders. On December 31, 2004, the Company
paid the second quarterly dividend, consisting of 20,948 shares of its Class A common
stock valued at $133,439. The Company paid the initial dividend in early October 2004
by issuing 19,396 shares of its Class A common stock valued at $115,794. On March 31,
2005, the Company paid the third quarterly dividend, consisting of 23,536 shares of its
Class A common stock valued at $130,860.The following table sets forth the computation of basic and dilutive earnings per
share: Three months endedMarch 31,2005
    
    
    2004Basic and diluted income per share:Numerator:Net income
    
    $
    2,359,486
    
    
    $
    371,743Less: Preferred stock dividend
    
    
    (130,860
    )
    
    
    Accretion of deferred issuance
costs and discounts on preferred
stock
    
    
    (363,900
    )
    
    
    Net income to common stockholders
    
    $
    1,864,726
    
    
    $
    371,743Denominator:Weighted average shares outstanding
    
    
    38,369,917
    
    
    
    38,317,079Basic and diluted income per share
    
    $
    0.05
    
    
    $
    0.01
  The effects of Series A-1 Convertible Preferred Stock and warrants are
antidilutive; therefore, diluted
loss per share is reported the same as basic loss per share. The Series A-1 Convertible Preferred Stock is antidilutive
because the amount of the dividend and accretion of deferred issuance costs and discounts for the three months ended
March 31, 2005 per common stock obtainable on conversion exceeds basic income per share. The warrants are antidilutive
because the exercise price is in excess of the average Class A
common stock market price for the three months ended March 31, 2005.(7)
    Accounting PronouncementsIn 2004, the FASB issued a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and its related implementation guidance and establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for
goods or services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the entitys
equity instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. It does not change the
accounting guidance for share-based payment transactions with parties other than
employees provided in Statement 123 as originally issued and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, nor does it address the
accounting for employee share ownership plans, which are subject to AICPA Statement of
Position 93-6, Employers Accounting for Employee Stock Ownership Plans. SFAS 123 as
amended is effective for interim reporting periods beginning after
June 30, 2005. However, in 2005, the SEC has issued a rule that
will allow the Company to adopt the provisions of SFAS 123, as
amended, at the beginning of the first annual period starting after
June 15, 2005. The
Company does not anticipate the revision of SFAS No. 123 will have a material effect on
the financial position, results of operations or liquidity of the Company.   14




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##### Table of Contents



(8)
    Legal ProceedingsOn April 24, 2003, the Court of Appeals for the Third District of Texas affirmed in part
and modified in part, a July 31, 2002, class action certification granted by a Travis
County, Texas district court judge to the plaintiffs in a lawsuit filed in 1999 styled
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 offered or sold to certain
non-U.S. residents by CICA are actually securities that were offered or sold in Texas
by unregistered dealers 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 purchased insurance policies or made premium payments since August 1996
and assigned policy dividends to an overseas trust for the purchase of the Companys
Class A common stock. The remedy sought is rescission of the insurance premium
payments. The Supreme Court of Texas granted the Companys Petition for Review and
heard oral arguments on the case on October 21, 2004. The Company believes the
Plaintiffs claim under the Texas Securities Act is not valid and the class defined is
not appropriate for class certification and does not meet the legal requirements for
class action treatment under Texas law.Recent decisions from the Texas Supreme Court indicate a more defense-oriented approach
to class certification cases, especially in class action cases encompassing claimants
from more than one state or jurisdiction. Although a decision is not expected until
sometime in the third quarter of 2005, the Company expects the Supreme Court of Texas
will ultimately rule in the Companys favor, decertify the class and remand the matter
to district court for further action. During the time of the Companys appeal to the
Texas Supreme Court, there are no further district court proceedings in the case. The
Company is unable to determine the potential magnitude of the claims in the event of a
final class certification and the plaintiffs prevailing on the substantive action,
although the Company would expect a significant adverse financial impact from any final
class action judgment.The Company is a party to various legal proceedings incidental to its business. The
Company has been named as a defendant in various legal actions seeking payments for
claims denied by the Company and other monetary damages. In the opinion of management,
the ultimate liability, if any, resulting from any contingent liabilities that might
arise from litigation are not considered material in relation to the financial position
or results of operations of the Company. Reserves for claims payable are based on the
expected claim amount to be paid after a case-by-case review of the facts and
circumstances relating to each claim. A contingency exists with regard to these
reserves until the claims are adjudicated and paid. 15




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##### Table of Contents



ITEM 2 MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Three months ended March 31, 2005 and 2004 Overview In 2004, the Company achieved several milestones. Production of new ordinary life
premium increased to record levels during the year. Additionally, the acquisition of
Security Plan in October added a substantial amount of U.S.
revenues as well as creating a new marketing division, home service life, from which to
further expand the Companys U.S. presence. The Companys book of accident and health business, which had been a source of
significant overhead and attention was ceded of through a reinsurance arrangement
that was signed in March 2004 under which the majority of the in force accident and health
business was ceded to another reinsurer effective January 1, 2004. This cession lowered
overhead and removed the inherent volatility of the accident and health business. In 2005, management expects to focus on the conversion of Security Plan to the data
processing system used by the Company.
Additionally, implementation of the Sarbanes-Oxley Section 404 evaluation was deferred for Security Plan until 2005.
The Company will begin the documentation and testing required in June 2005. Additionally, the Company is moving to
consolidate insignificant or dormant subsidiaries in order to take advantage of economics of scale and achieve expense
reductions. Management continues to seek acquisitions that can add value to the Company. Because of
the growth in the Companys asset base and level of capital, management is exploring
opportunities for larger acquisition transactions (those in the $50 million to $100
million purchase price range). A $30 million line of credit was negotiated with Regions
Bank during the first quarter of 2004 in order to permit the Company to pursue larger
transactions. Results of Operations The Companys operations have historically focused on three areas: international life
insurance; USA life insurance; and acquisition of other USA life insurance companies.
Beginning in 2002 with the acquisition of Citizens National (formerly Combined), a new
area was added, that of USA supplemental accident and health business. The Company has
effectively exited the accident and health segment through the cession of virtually all
of that business effective January 1, 2004. International Operations The acceptance of applications for U.S. dollar-denominated ordinary whole life insurance
from high net worth foreign nationals has been the core business for the Company for the
past 30 years. Our niche allows the Company to participate in a marketplace where the
policies are typically large face amounts, the premiums are paid annually, the
persistency is high compared to U.S. policies, the mortality is as 16




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##### Table of Contents



good as or better than that experienced in the United States, the caliber of the
marketers from whom applications are received for consideration is higher and more
professional than that typically seen in the U.S., and there is no advancing of
commissions to producers. Overall, we expect our international operations to continue
to expand. The number of independent marketers contracted has grown over the past few
years. Historically, the majority of such business was focused on Central and South
America; however CICA has established relationships with a number of marketing
organizations in the Pacific Rim and during 2004 received approximately $2 million in
submitted premiums from that region Our foreign life insurance operations are performed
by our primary insurance subsidiary, Citizens Insurance Company of America (CICA). Total premium income from the international
market amounted to $14,825,000 during the first three months of 2005 compared to
$12,556,000 for the same period of 2004. (See Note 4 of the Notes to Consolidated
Financial Statements for an analysis of the International Life segment.) U.S. Operations The Companys focus historically has been on the international market because of the key
advantages described above. However, throughout the Companys history, it has always
written U.S. business, and through the acquisition of other U.S. life insurers,
accumulated more than $11.3 million of annual U.S. life premium. In 2000, management perceived an opportunity for the Company to serve middle-income
American families through the sale of an ordinary whole life insurance product
containing a no-load annuity benefit. This product was introduced in Texas in 2000.
Since that time, the Company has sought the marketing management necessary to build a
U.S. sales organization from scratch and to begin to write the product in volume. After
several attempts to bring in such expertise, in early 2004, senior executives in the
Companys home office staff assumed this new management responsibility. We have begun
emphasizing the development of a sales force comprised primarily of second career sales
associates. Recent acquisitions, such as our acquisition of Mid-American Alliance
Corporation in Missouri, have created opportunities to increase production. Mid
American Century Life Insurance 17




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##### Table of Contents



Company, a Missouri-domiciled life insurer acquired in the acquisition of Mid-American
Alliance Corporation, is writing approximately $1 million of annual life premium.
Through this and other acquisitions, marketing operations are being conducted in several
states. Total U.S. life premium income and annuity and universal life considerations for the
first quarter of 2005 amounted to $3,516,000 compared to $4,366,000 in the first quarter
of 2004. Management intends to broaden the portfolio of ordinary whole life products
available in the United States to include products similar to those available to
overseas clients as well. Home Service Operations The acquisition of Security Plan created a new segment for the Company.
Security Plan has focused on writing ordinary whole life insurance utilizing the home service marketing
distribution method, whereby employee/agents working routes make regular collections
of premiums from clients. This marketing method dates back to the creation of the life
insurance industry in the United States and Security Plan utilizes approximately 390
agents to write and collect premiums. Because Security Plan was acquired on October 1,
2004, its activities are not included in first quarter 2004 results from operations. Under the management of its previous owner, Security Plan had focused on limiting the
amount of new business sold in order to maximize profits under regulatory accounting.
As such, its book of premium revenues has decreased each year for the past five years.
Management is optimistic that a new emphasis on sales can halt the shrinkage in the
premium income and serve as a base from which to expand the home service or debit
business. Security Plan is made up of books of business from more than 100 small life
insurance carriers that it had acquired during its history. For the first quarter of
2005, Home Service premium revenues amounted to $9.8 million Consolidated Results The following table sets forth the Companys net income for periods
indicated: Three Months
    
    
    
    
    
    
    
    Net IncomeEnded
    
    
    
    
    
    
    
    Per Class A and B
    
    
    
    Change fromMarch 31
    
    
    Net Income
    
    
    
    Shares
    
    
    
    Previous Period2005
    
    
    $
    2,360,000
    
    
    
    $
    0.05
    
    
    
    
    543.4
    %2004
    
    
    $
    372,000
    
    
    
    $
    0.01
    
    
    
    
    209.7
    %
  As further discussed below, increases in life premiums and net investment income
contributed to the increased earnings in first quarter 2005 compared to first quarter
2004. 18




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##### Table of Contents



The Company entered into coinsurance agreements, effective January 1, 2004, and ceded
approximately $15 million of its annual accident and health premium and corresponding
benefits and claims. In consideration for these cessions, the Company made a closing
settlement payment of $10,497,000 to the reinsurer in May 2004. Due to this cession,
the Company also ceded its January 1, 2004 deferred policy acquisition costs, cost of
customer relationships acquired and policy benefit reserves by $2,197,000, $2,886,000
and $14,960,000, respectively, and recorded an initial amount payable to the reinsurer
of $10,440,000, resulting in a first quarter 2004 charge of $634,000 and a deferred gain
of $72,000 that was amortized to earnings during 2004. The coinsurance agreements
provide that this ceded business will revert to the reinsurer when parallel assumption
reinsurance agreements are approved by the various state insurance departments holding
jurisdiction. Such approval is expected during 2005. The Company also participates in
future profits on the accident and health business subject to the coinsurance agreements
over a 10-year period. During 2004, the Companys share of profits amounted to
approximately $800,000. Total revenues for the first three months of 2005 were $35,397,000 compared to
$20,105,000 in 2004, an increase of 76.1%. The inclusion of Security Plan in the first
quarter of 2005 contributed $12.8 million of revenue. Premiums and annuity and universal life considerations for first quarter increased to
$28,579,000 in 2005 from $16,039,000 in 2004. The 2005 increase is attributable to the
inclusion of Security Plan, which had $9,790,000 of premium income during the quarter,
as well as the growth in premium income for CICA, who benefited from the large increase
in new premiums written in 2004, as well as an increase in new business during 2005.
First year issued and paid annualized life premium for CICA increased 33.2% from
$4,045,000 in the first quarter of 2004 to $5,388,000 in 2005. Net investment income increased 57.6% during first quarter 2005 to $6,106,000 from
$3,874,000 during first quarter 2004. Security Plans inclusion added $2,991,000 to the
2005 results. Available yields remained low during the first part of 2005, with
Treasury returns falling to two year lows. The Company continues to invest in bonds
issued by public agencies that carry the implied full faith and credit of the Federal
government, such as FNMA and FHLMC. These bonds typically have stated maturities of 15
years, but will carry a call feature (at par) that varies between three months and two
years. All bonds purchased are at par or at a discount, so that the yield to call will
be equal to or greater than the yield to maturity. By choosing to invest in these
securities, the Company is exposed to reinvestment risk in the event that interest rates
fall for an extended period because the securities will typically be called and the
likelihood of increases in market value above par is unlikely because the expectation is
that the bond will be called. Such events may require reinvestment of the proceeds at
levels lower than the yields of the called bonds. Management believes the Companys
cash flow is strong enough to take advantage of opportunities for higher return, should
those present themselves in the coming months.Currently, the Company has been able to
earn returns in the 6% range on newly invested money, which are greater than its
obligations on reserves and any annuity obligations, and substantially higher than
available through the treasury market. The change in future policy benefit reserves increased from $2,676,000 in first quarter
2004 to $5,598,000 in first quarter 2005. CICAs life reserves increased $4.8 million 19




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##### Table of Contents



in first quarter 2005 compared to an increase of $2.4 million in first quarter 2004
predominantly due to an increase in persistency on the Companys international business.
Security Plans operations added $512,000 to the 2005 increase. Policyholder
dividends increased 19% during first quarter 2005 to $870,000 from 2004
dividends of $731,000. Virtually all of CICAs overseas policies are participating, and
the improvement in persistency on the Companys international business has contributed
to the growth in dividends. As noted in the table below, claims and surrenders increased 41.8% from $8,642,000 in
first quarter 2004 to $12,254,000 in first quarter 2005. The 2005 increase primarily
relates to the acquisition of Security Plan in October, 2004, as discussed above. Three months ended March 31,2005
    
    
    2004Death claims
    
    $
    6,305,000
    
    
    $
    1,918,000Surrender expenses
    
    
    3,710,000
    
    
    
    4,955,000Accident and health benefits
    
    
    121,000
    
    
    
    108,000Endowments
    
    
    1,909,000
    
    
    
    1,534,000Other policy benefits
    
    
    209,000
    
    
    
    127,000Total claims and surrenders
    
    $
    12,254,000
    
    
    $
    8,642,000
 Death
benefits increased 228.7% from $1,918,000 in first quarter 2004 to $6,305,000 in
first quarter 2005. Security Plans death claims totaled $4,326,000. Claims on the
Companys remaining books of business remained static or down slightly during early
2005. Because of the nature of Security Plans business, its incurred claims
historically are higher than those incurred on the Companys international business.
CICA has historically adhered to an underwriting policy which requires thorough medical
examinations on all applicants who are foreign residents, except children, regardless of
age or face amount of the policy applied for, including x-rays and electrocardiograms.
On all policies of $150,000 or more, inspection reports are required which detail the
background, resources and lifestyle of the applicant. We have developed numerous
contacts with whom our underwriters can validate information contained in applications,
medical or inspection reports. CICA also retains only the first $100,000 of risk and
cedes to other reinsurers the excess. Accident and health benefits are nominal since the cession of the majority of the
Companys accident and health business in force according to coinsurance agreements
effective January 1, 2004. Endowment benefits increased 24.4% from $1,534,000 in first quarter 2004 to $1,909,000
in first quarter 2005. CICA has a series of international policies that carry an
immediate endowment benefit of an amount elected by the policyowner. This endowment is
factored into the premium of the policy and is paid annually. Like policy dividends,
endowments are factored into the premium and as such the increase should have no adverse
impact on profitability. 20




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##### Table of Contents



Policy surrenders decreased 25.1% in 2005 to $3,710,000 from $4,955,000 in the first
quarter of 2004. The relative policy size of Security Plans business coupled with the
nature of the policies is such that surrenders on that book of business are relatively
low. However, the inclusion of Security Plan in 2005 added $411,000 in surrender
benefits to the 2005 results. Lower surrenders on the First Alliance book of business
as well as improved persistency on the Companys international business contributed to
the decrease in surrenders. Other policy benefits amounted to $209,000 for the first quarter of 2005, compared to
$127,000 for the first quarter of 2004. These benefits are comprised of supplemental
contract benefits, interest on policy funds and assorted other miscellaneous policy
benefits. During 2005, commissions increased 86.7% to $7,046,000 from $3,773,000 in 2004 primarily
due to Security Plans inclusion. Commissions paid by Security plan during the first
quarter of 2005 totaled $2,480,000. Additionally, CICAs commissions were higher in
2005 as a result of the increase in issued new business described above. Underwriting, acquisition and insurance expenses increased 124.7% to
$7,719,000 in first
quarter 2005 compared to $3,436,000 in first quarter 2004. The increase is largely
attributable to Security Plan, whose expenses were approximately $3,220,000 in the first
three months of 2005, coupled with the expenses incurred in the conversion process and
approximately $330,000 of interest expense on the Companys term loan. Capitalized deferred policy acquisition costs increased 37.9% from $3,642,000 in first
quarter 2004 to $5,021,000 in first quarter 2005 primarily related to the increase in
new life production discussed above. Security Plans capitalized expenses were
$533,000. Amortization of these costs was $1,971,000 and $2,649,000, respectively, in
the first quarters of 2005 and 2004. The improvement in persistency contributed to the
slowdown in amortization during 2005. Amortization of cost of customer relationships acquired and other intangibles increased
from $725,000 in the first quarter of 2004 to $1,150,000 in the first quarter of 2005.
Amortization of these items related to the Security Plan acquisition was $777,000 in
2005. Liquidity and Capital Resources Stockholders equity at March 31, 2005
was $134,406,000 compared to $135,131,000 at
December 31, 2004. Unrealized losses on the Companys bond portfolio, net of tax,
offset the income earned during the period. Invested assets decreased to $462,767,000 at March 31, 2005 from $475,802,000 at
year-end 2004. The decrease related to call activity in the first quarter of 2005 that
management chose to accumulate for the purpose of retiring the outstanding term loan.
Fixed maturities are categorized into two classifications: fixed maturities held- 21




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##### Table of Contents



to-maturity, which are valued at amortized cost, and fixed maturities available-for-sale
which are valued at fair value. Fixed maturities available-for-sale and fixed
maturities held-to-maturity were 92.3% and 1.6%, respectively, of invested assets at
March 31, 2004. Fixed maturities held to maturity, amounting to $7,546,000 at March 31,
2005, consist of U.S. Treasury and U.S. government agency securities. Management has
the intent and believes we have the ability to hold the securities to maturity. Policy loans comprised 5.3% of invested assets at March 31, 2005 compared to 5.1% at
December 31, 2004. 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 we maintain adequate
liquidity despite the uncertain maturities of these loans. Our cash balances at our primary depositories were significantly in excess of Federal
Deposit Insurance Corporation coverage at March 31, 2005 and December 31, 2004.
Management monitors the solvency of all financial institutions in which we have funds to
minimize the exposure for loss. Management does not believe we are at significant risk
for such a loss. During 2005, we intend to continue to utilize high grade commercial
paper as cash management tools to minimize excess cash balances and enhance returns. In the wake of bankruptcy filings by large corporations
in 2000-2001, concern was raised
regarding the use of certain off-balance sheet special purpose entities such as
partnerships to hedge or conceal losses related to investment activity. We do not
utilize special purpose entities as investment vehicles, nor are there any such
entities in which we have an investment that engage in speculative activities of any
description, and we do not use such investments to hedge our investment positions. 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 an insurance
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 affected company would begin. At March 31, 2005
and December 31, 2004, all of the Companys insurance subsidiaries were above required
minimum levels. 22




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##### Table of Contents



During the first quarter of 2005, we continued to engage in discussions with the
investment banking community regarding raising additional equity capital. Should we
decide to pursue equity capital, the purpose would be to utilize the proceeds to pursue
acquisitions. Management believes the Company has sufficient capital for its long-term
operating needs; however, management may pursue additional equity capital to finance
larger acquisitions. The Company signed a revolving line of credit agreement from Regions Bank for a $30
million credit facility for use in acquisitions in March 2004. On October 1, 2004, the
Company entered into a Second Amendment to the Loan Agreement that converted into a term
loan its $30 million advance against the line of credit made in connection with the
acquisition of Security Plan. The loan was repaid in April of 2005. The Sarbanes-Oxley Act of 2002 (the Act) established significant new guidelines for
corporate governance. Subsequently, the New York Stock Exchange adopted new 23




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##### Table of Contents



rules relating to such matters as the composition of listed companies Boards of
Directors and various committees thereof, the need to adopt specific policies and the
establishment of a Code of Ethics. The Companys Board of Directors, Compensation
Committee and Audit Committee were already configured in such a way as to comply with
the Act. Citizens has operated under a Principles, Purposes, Philosophy and Beliefs
for numerous years that sets forth the manner in which the Company and its officers,
directors and employees are expected to function. However, the Board of Directors has
implemented a formal Code of Ethics applicable to all officers, directors and employees. Additionally, the Act imposes a duty upon public companies to document and test all
internal controls and have such controls audited by independent auditors. The Company has committed to the following contractual obligations as of March 31, 2005
with the payments due by the period indicated below: Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOperating leases
    
    $
    1,048,000
    
    
    $
    500,000
    
    
    $
    512,000
    
    
    $
    36,000
    
    
    $
    Other
    
    
    525,000
    
    
    
    300,000
    
    
    
    225,000
    
    
    
    
    
    
    
    Total operating leases and other
    
    $
    1,573,000
    
    
    $
    800,000
    
    
    $
    737,000
    
    
    $
    36,000
    
    
    $
    Future policy benefit reserves:Life insurance
    
    $
    419,736,000
    
    
    $
    156,000
    
    
    $
    876,000
    
    
    $
    8,219,000
    
    
    $
    410,485,000Annuities
    
    
    17,982,000
    
    
    
    4,445,000
    
    
    
    2,711,000
    
    
    
    4,944,000
    
    
    
    5,882,000Accident and health
    
    
    12,298,000
    
    
    
    12,298,000
    
    
    
    
    
    
    
    
    
    
    
    Total future policy benefit reserves
    
    $
    450,016,000
    
    
    $
    16,899,000
    
    
    $
    3,587,000
    
    
    $
    13,163,000
    
    
    $
    416,367,000Policy claims payable:Life insurance
    
    $
    7,087,000
    
    
    $
    7,087,000
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    2,116,000
    
    
    
    2,116,000
    
    
    
    
    
    
    
    
    
    
    
    Total policy claims payable
    
    $
    9,203,000
    
    
    $
    9,203,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Note payable
    
    $
    30,000,000
    
    
    $
    6,000,000
    
    
    $
    12,000,000
    
    
    $
    12,000,000
    
    
    $
    Convertible preferred stock
    
    $
    6,265,000
    
    
    $
    
    
    
    $
    
    
    
    $
    6,265,000
    
    
    $
    Total contractual obligations
    
    $
    497,057,000
    
    
    $
    32,902,000
    
    
    $
    16,324,000
    
    
    $
    31,464,000
    
    
    $
    416,367,000


The payments
related to the future policy benefits and policy claims payable reflected
in the table above have been projected utilizing assumptions based
upon the Companys historical experience and anticipated future
experience.

Financial Accounting Standards

See Note 7 of our Consolidated Financial Statements for a discussion of recently promulgated
accounting standards and interpretations, which we have adopted, and our estimates of their impact
upon us.

24



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##### Table of Contents



ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Our exposure to interest rate changes results from our significant holdings of fixed maturity
investments, mortgage loans on real estate and policy loans, all of which comprised almost 99% of
our investment portfolio as of December 31, 2004 and March 31, 2005. These investments are mainly exposed to changes in
treasury rates. Our fixed maturities investments include U.S. government bonds, securities issued
by government agencies, and corporate bonds. Approximately 94.6% of the fixed maturities we
owned at December 31, 2004 and March 31, 2005 are instruments of the United States government or are backed by U.S.
government agencies or private corporations carrying the implied full faith and credit backing of
the U.S. government . To manage interest rate risk, we perform periodic projections of asset and liability cash
flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest
rate sensitivity with respect to our available-for-sale fixed maturities investments using
hypothetical test scenarios that assume either upward or downward 100 basis point shifts in the
prevailing interest rates. The following tables set forth the potential amount of unrealized gains
(losses) that could be caused by 100 basis point upward and downward shifts on our
available-for-sale fixed maturities investments as of the dates indicated: March 31, 2005 Decreases in Interest Rates
    
    
    Increases in Interest Rates300 Basis
    
    200 Basis
    
    
    100 Basis
    
    
    100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points$  70,051,000
    
    $
    47,049,000
    
    
    $
    27,462,000
    
    
    $
    (17,847,000
    )
    
    $
    (42,095,000
    )
    
    $
    (65,104,000
    )
 December 31, 2004 Decreases in Interest Rates
    
    
    Increases in Interest Rates300 Basis
    
    200 Basis
    
    
    100 Basis
    
    
    100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points$  69,321,000
    
    $
    47,412,000
    
    
    $
    28,368,000
    
    
    $
    (20,298,000
    )
    
    $
    (48,702,000
    )
    
    $
    (74,613,000
    )
 While the test scenario is for illustrative purposes only and does not reflect our
expectations regarding future interest rates or the performance of fixed-income markets, it is a
near-term change that illustrates the potential impact of such events. Due to the composition of
our book of insurance business, we believe it is unlikely that we would encounter large surrender
activity due an interest rate increase that would force us to dispose of our fixed maturities at a
loss. There are no fixed maturities or other investments that we classify as trading instruments. At
March 31, 2005 and December 31, 2004, there were no investments in derivative instruments. Market Risk Related to Equity Prices Changes in the level or volatility of equity prices affect the value equity securities we hold as
investments. However, our equity investments portfolio was less than 1% of our total investments
at March 31, 2005 and December 31, 2004. Thus, we believe that significant decreases in the equity
markets would have an immaterial impact on our total investment portfolio. See also. Managements
Discussion and Analysis of Financial Condition and Results of Operations. 25




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##### Table of Contents



ITEM 4 CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures We have established disclosure controls and procedures to ensure, among other things, that
material information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify our financial reports and to the other members of
senior management and the Board of Directors. Our Chief Executive Officer (CEO) and our President and Chief Financial Officer (CFO) are
responsible for establishing and maintaining disclosure controls and procedures for the
Company (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (Exchange Act)). Based upon our evaluation at the end of the period, the
Chief Executive Officer and the President and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were not effective as of the end of the period
covered by this annual report because of the material weakness discussed below. A material weakness in internal control over financial reporting is defined by the Public
Company Accounting Oversight Boards (PCAOB) Auditing Standard No. 2 as a significant
deficiency, or combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will
not be prevented or detected. The material weakness relates to the inadequate and ineffective management oversight and
review of the Companys financial reporting process. Specifically, the Company did not
revise its management oversight and review protocols to address changes in the
qualifications of personnel performing financial reporting functions, and did not provide
for effective cross-training of personnel performing financial reporting functions. As a
result, numerous material errors were identified in the
Companys annual financial statement
footnotes. These errors were corrected prior to issuance of the Companys 2004 consolidated
financial statements. 26




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##### Table of Contents



The aforementioned material weakness in internal control over financial reporting resulted
in more than a remote likelihood that the Companys financial statements could have been
materially misstated. The conditions identified at December 31,
2004 remained at March 31, 2005. (b) Change in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the quarter
ended March 31, 2005 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. The conditions identified
at December 31, 2004 remained at March 31, 2005. However, we are in the process of completing remediation efforts relating to the material
weakness, which are set forth in detail below, which primarily include hiring additional
personnel who will be competent to address U.S. GAAP relating to our operations, additional
training for our accounting staff, particularly relating to U.S. GAAP, and enhanced
management review procedures. In order to address the findings of our internal control assessment, we are implementing the
following improvements to our internal controls and procedures in the financial accounting
area which we believe will improve our internal control over financial reporting in future
periods:  
    Hiring a new Vice President, Financial Reporting and Tax, with significant
experience in U.S. GAAP and SEC reporting who will be responsible for the
preparation and supervision of the Companys financial statements. This individual
will report directly to the Chief Financial Officer. In addition, we plan on
assuring that at least one other person is fully trained and experienced to step in
and perform the duties of the Vice President, Financial Reporting and Tax if he
should, for any reason, be unable to do so.
    Hiring new personnel to work with the Vice President, Financial Reporting and
Tax to develop additional expertise in U.S. GAAP and SEC reporting and to insure
that adequate depth is developed in the Companys financial reporting area. 27




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##### Table of Contents




    Strengthening the process of work paper review by senior members of management
to ensure the completeness and accuracy of supporting work papers and schedules,
including formalized sign-off processes.
    Additional training of accounting department personnel in U.S. GAAP and SEC
reporting.
    Adopt procedures to seek a more thorough and timely review process by senior
management of the financial statement process. We believe these efforts will address the material weakness identified by management during
its assessment of internal control over financial reporting. Additionally, during 2005, management must evaluate, test and report on the internal
controls over financial reporting at Security Plan. Management expects to begin this
process during the second quarter of 2005, as well as the continuation of reviewing and
updating of the findings of the 2004 evaluation. Effective
January 1, 2005, the Companys book of accident and health
business is being administered by the reinsurer. Should the assuming
reinsurer of the accident and health business not complete the assumption process during
2005, the Company must evaluate the internal controls of the assuming company during the
course of 2005. 28




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##### Table of Contents



PART II. OTHER INFORMATION Item 1.
    
    Legal ProceedingsOn April 24, 2003, the Court of Appeals for the Third District of Texas affirmed in part
and modified in part, a July 31, 2002, class action certification granted by a Travis
County, Texas district court judge to the plaintiffs in a lawsuit filed in 1999 styled
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 offered or sold to certain
non-U.S. residents by CICA are actually securities that were offered or sold in Texas
by unregistered dealers 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 purchased insurance policies or made premium payments since August 1996
and assigned policy dividends to an overseas trust for the purchase of the Companys
Class A common stock. The remedy sought is rescission of the insurance premium
payments. The Supreme Court of Texas granted the Companys Petition for Review and
heard oral arguments on the case on October 21, 2004. The Company believes the
Plaintiffs claim under the Texas Securities Act is not valid and the class defined is
not appropriate for class certification and does not meet the legal requirements for
class action treatment under Texas law.Recent decisions from the Texas Supreme Court indicate a more defense-oriented approach
to class certification cases, especially in class action cases encompassing claimants
from more than one state or jurisdiction. Although a decision is not expected until
sometime in 2005, the Company expects the Supreme Court of Texas will ultimately rule in
the Companys favor, decertify the class and remand the matter to district court for
further action. During the time of the Companys appeal to the Texas Supreme Court,
there are no further district court proceedings in the case. The Company is unable to
determine the potential magnitude of the claims in the event of a final class
certification and the plaintiffs prevailing on the substantive action, although the
Company would expect a significant adverse financial impact from any final class action
judgment.The Company is a party to various legal proceedings incidental to its business. The
Company has been named as a defendant in various legal actions seeking payments for
claims denied by the Company and other monetary damages. In the opinion of management,
the ultimate liability, if any, resulting from any contingent liabilities that might
arise from litigation are not considered material in relation to the financial position
or results of operations of the Company. Reserves for claims payable are based on the
expected claim amount to be paid after a case-by-case review of the facts and
circumstances relating to each claim. A contingency exists with regard to these
reserves until the claims are adjudicated and paid.
 29




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##### Table of Contents



Item 2.
    
    Changes in SecuritiesNone.Item 3.
    
    Defaults upon Senior SecuritiesNone.Item 4.
    
    Submission of Matters to a Vote of Security HoldersNo matters were submitted to our shareholders during the first calendar quarter of 2005.Item 5.
    
    Other InformationNone.
 30




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##### Table of Contents



Item 6.
    
    Exhibits(A) Exhibits3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Bylaws (b)3.3
    
    Amendment to State Series A-1
and A-2 Senior Convertible Preferred Stock. (j)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company
of America and Riunione Adriatica di Sicurta, S.p.A.(c)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General
Life Insurance Company and Citizens Insurance Company of America, as amended (d)10.3
    
    Plan and Agreement of Exchange between Citizens, Inc. and Combined Underwriters
Life Insurance Company (e)10.4
    
    Plan and Agreement of Exchange between Citizens, Inc. and Lifeline Underwriters
Life Insurance Company (f)10.5
    
    Plan and Agreement of Merger among Citizens, Inc., Citizens Acquisition, Inc.
and First Alliance Corporation (g)10.6
    
    Plan and Agreement of Merger between Citizens, Inc., Citizens Acquisition, Inc.
and Mid-American Alliance Corporation (h)10.12(a)
    
    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. (j)10.12(b)
    
    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. (j)10.12(c)
    
    Unit Warrant dated July 12,
2004, to Mainfield Enterprises, Inc. (j)10.12(d)
    
    Unit Warrant dated July 12,
2004, to Steelhead Investments Ltd. (j)10.12(e)
    
    Unit Warrant dated July 12,
2004, to Portside Growth and Opportunity Fund (j)10.12(f)
    
    Unit Warrant dated July 12,
2004, to Smithfield Fiduciary LLC (j)10.12(g)
    
    Warrant to Purchase Class A
Common Stock to Mainfield Enterprises, Inc. (j)10.12(h)
    
    Warrant to Purchase Class A
Common Stock to Steelhead Investments Ltd. (j)10.12(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and
Opportunity Fund (j)10.12(j)
    
    Warrant to Purchase Class A
Common Stock to Smithfield Fiduciary LLC (j)10.12(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens,
Inc. dated July 12, 2004 (j)10.12(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc.
and The Shemano Group, Inc. (j)11.0
    
    Statement re: Computation of per share earnings (i)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act*99.1
    
    Press Release of July 12, 2004 relating to the announcement by Citizens,
Inc. of its completion of a private placement of its Series A-1 and A-2
Senior Convertible Preferred Stock with four independent institutional
investors (j)
   *
    
    Filed herewith.  (a)
    Filed with the Registrants Annual Report on Form 10-K for the year ended December 31,
2003.(b)
    Filed with the Registrants Registration Statement on Form S-4, Registration No. 33-
59039, filed with the Commission on May 2, 1995.(c)
    Filed as exhibit 10.8 with the Registration Statement on Form S-4., SEC File No. 333-
16163, filed on or about November 14, 1996.(d)
    Filed as exhibit 10.9 with the Registrants Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.(e)
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002 and incorporated herein by reference.(f)
    Filed as Appendix B with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002, and incorporated herein by reference.(g)
    Filed as Appendix A of the Registration Statement on Form S-4, Registration No.
333-102016 dated December 19, 2002, and incorporated herein by reference.(h)
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-106128 dated June 13, 2003, and incorporated herein by reference.(i)
    See Note 6 to the Notes to Consolidated Financial Statements included in Item 1 of Part
1 of this Form 10-Q(j)
    Filed with the Registrants Periodic Report on Form 8-K on July 15, 2004 and incorporated herein by reference. 31




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##### Table of Contents



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/ Rick D. RileyRick D. RileyChief Executive OfficerBy:
    /s/ Mark A. OliverMark A. OliverPresident and Treasurer(Principle Accounting Officer) Date: May 13, 2005 32




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##### Table of Contents



EXHIBIT INDEX Exhibits3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Bylaws (b)3.3
    
    Amendment to State Series A-1
and A-2 Senior Convertible Preferred Stock. (j)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company
of America and Riunione Adriatica di Sicurta, S.p.A.(c)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General
Life Insurance Company and Citizens Insurance Company of America, as amended (d)10.3
    
    Plan and Agreement of Exchange between Citizens, Inc. and Combined Underwriters
Life Insurance Company (e)10.4
    
    Plan and Agreement of Exchange between Citizens, Inc. and Lifeline Underwriters
Life Insurance Company (f)10.5
    
    Plan and Agreement of Merger among Citizens, Inc., Citizens Acquisition, Inc.
and First Alliance Corporation (g)10.6
    
    Plan and Agreement of Merger between Citizens, Inc., Citizens Acquisition, Inc.
and Mid-American Alliance Corporation (h)10.12(a)
    
    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. (j)10.12(b)
    
    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. (j)10.12(c)
    
    Unit Warrant dated July 12,
2004, to Mainfield Enterprises, Inc. (j)10.12(d)
    
    Unit Warrant dated July 12,
2004, to Steelhead Investments Ltd. (j)10.12(e)
    
    Unit Warrant dated July 12,
2004, to Portside Growth and Opportunity Fund (j)10.12(f)
    
    Unit Warrant dated July 12,
2004, to Smithfield Fiduciary LLC (j)10.12(g)
    
    Warrant to Purchase Class A
Common Stock to Mainfield Enterprises, Inc. (j)10.12(h)
    
    Warrant to Purchase Class A
Common Stock to Steelhead Investments Ltd. (j)10.12(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and
Opportunity Fund (j)10.12(j)
    
    Warrant to Purchase Class A
Common Stock to Smithfield Fiduciary LLC (j)10.12(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens,
Inc. dated July 12, 2004 (j)10.12(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc.
and The Shemano Group, Inc. (j)11.0
    
    Statement re: Computation of per share earnings (i)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act*99.1
    
    Press Release of July 12, 2004 relating to the announcement by Citizens,
Inc. of its completion of a private placement of its Series A-1 and A-2
Senior Convertible Preferred Stock with four independent institutional
investors (j)
   *
    
    Filed herewith.  (a)
    Filed with the Registrants Annual Report on Form 10-K for the year ended December 31,
2003.(b)
    Filed with the Registrants Registration Statement on Form S-4, Registration No. 33-
    59039, filed with the Commission on May 2, 1995.(c)
    Filed as exhibit 10.8 with the Registration Statement on Form S-4., SEC File No. 333-16163, filed on or about November 14, 1996.(d)
    Filed as exhibit 10.9 with the Registrants Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.(e)
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002 and incorporated herein by reference.(f)
    Filed as Appendix B with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002, and incorporated herein by reference.(g)
    Filed as Appendix A of the Registration Statement on Form S-4, Registration No.
333-102016 dated December 19, 2002, and incorporated herein by reference.(h)
    Filed as Appendix A with the Registrants Registration Statement of Form S-4,
Registration No.333-106128 dated June 13, 2003, and incorporated herein by reference.(i)
    See Note 6 to the Notes to Consolidated Financial Statements included in Item 1 of Part
1 of this Form 10-Q(j)
    Filed with the Registrants Periodic Report on Form 8-K on July 15, 2004 and incorporated herein by reference. 33