================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 ~~~~~~ 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 - 1,733,715 as of August 6, 2001. The date of this Report is August 8, 2001. ================================================================================ Part I - Financial Information; Item 1 - Financial Statements Citizens Financial Corporation and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) Six Months Ended June 30 2001 2000 ------------------------------------------------------------------------ -------------------- -------------------- Revenues: Premiums and other considerations $ 14,499,491 $ 11,768,194 Premiums ceded (571,395) (485,350) ------------------------------------------------------------------------ -------------------- -------------------- Net premiums earned 13,928,096 11,282,844 Net investment income 3,341,497 2,965,696 Net realized investment gains (losses), net of expenses (3,298,100) 6,324,889 Other income 119,270 111,437 ------------------------------------------------------------------------ -------------------- -------------------- Total Revenues 14,090,763 20,684,866 Policy Benefits and Expenses: Policyholder benefits 9,211,451 7,991,184 Policyholder benefits ceded (551,088) (422,577) ------------------------------------------------------------------------ -------------------- -------------------- Net benefits 8,660,363 7,568,607 Increase in net benefit reserves 2,773,707 1,048,683 Interest credited on policyholder deposits 413,409 406,104 Commissions 3,413,978 2,383,575 General expenses 3,331,683 3,180,856 Interest expense 314,701 379,307 Policy acquisition costs deferred (2,030,361) (787,671) Amortization of deferred policy acquisition costs, value of insurance acquired, and goodwill 914,001 627,495 ------------------------------------------------------------------------ -------------------- -------------------- Total Policy Benefits and Expenses 17,791,481 14,806,956 ------------------------------------------------------------------------ -------------------- -------------------- Income (Loss) before Income Tax Expense (3,700,718) 5,877,910 Income Tax Expense (Benefit) (857,000) 2,140,000 ------------------------------------------------------------------------ -------------------- -------------------- Income (Loss) before cumulative effect of a (2,843,718) 3,737,910 change in accounting principle Cumulative effect from prior years (since January 1, 1999) of accounting for embedded options (311,211) --- ------------------------------------------------------------------------ -------------------- -------------------- Net Income (Loss) $ (3,154,929) $ 3,737,910 ------------------------------------------------------------------------ -------------------- -------------------- Per Share Amounts: Income (Loss) before cumulative effect of a change in accounting principle $(1.62) $2.12 Cumulative effect from prior years (since January 1, 1999) of accounting for embedded options (0.18) ------------------------------------------------------------------------ -------------------- -------------------- Net Income (Loss) $(1.80) $2.12 ------------------------------------------------------------------------ -------------------- --------------------See Notes to Condensed Consolidated Financial Statements. Part I, Item 1 (continued) Citizens Financial Corporation and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended June 30 2001 2000 ------------------------------------------------------------------------ -------------------- -------------------- Revenues: Premiums and other considerations $7,469,404 $5,850,075 Premiums ceded (259,863) (289,583) ------------------------------------------------------------------------ -------------------- -------------------- Net premiums earned 7,209,541 5,560,492 Net investment income 1,656,564 1,541,113 Net realized investment gains (losses), net of expenses (3,469,996) 1,530,931 Other income 69,325 66,555 ------------------------------------------------------------------------ -------------------- -------------------- Total Revenues 5,465,434 8,699,091 Policy Benefits and Expenses: Policyholder benefits 4,510,476 3,758,649 Policyholder benefits ceded (267,248) (158,476) ------------------------------------------------------------------------ -------------------- -------------------- Net benefits 4,243,228 3,600,173 Increase in net benefit reserves 1,943,644 813,390 Interest credited on policyholder deposits 217,863 204,658 Commissions 1,655,635 1,200,652 General expenses 1,707,876 1,554,836 Interest expense 143,050 194,085 Policy acquisition costs deferred (971,548) (427,734) Amortization of deferred policy acquisition costs, value of insurance acquired, and goodwill 417,849 289,839 ------------------------------------------------------------------------ -------------------- -------------------- Total Policy Benefits and Expenses 9,357,597 7,429,899 ------------------------------------------------------------------------ -------------------- -------------------- Income (Loss) before Income Tax Expense (3,892,163) 1,269,192 Income Tax Expense (Benefit) (945,000) 440,000 ------------------------------------------------------------------------ -------------------- -------------------- Net Income (Loss) $(2,947,163) $ 829,192 ------------------------------------------------------------------------ -------------------- -------------------- Net Income (Loss) Per Common Share $(1.68) $0.47 ------------------------------------------------------------------------ -------------------- --------------------See Notes to Condensed Consolidated Financial Statements. Part I; Item 1 (continued) Citizens Financial Corporation and Subsidiaries Condensed Consolidated Statements of Financial Condition June 30, December 31, 2001 2000 ------------------------------------------------------------------------ -------------------- -------------------- ASSETS (Unaudited) Investments: Securities available for sale, at fair value: Fixed maturities (amortized cost of $67,337,719 and $72,516,172 in 2001 and 2000 respectively) $ 67,690,504 $ 71,403,674 Equity securities (cost of $10,951,281 and $13,677,303 in 2001 and 2000, respectively) 11,830,773 12,577,874 Investment real estate 3,548,764 3,506,386 Mortgage loans on real estate 156,000 156,000 Policy loans 4,228,579 4,270,588 Short-term investments 610,379 610,379 ------------------------------------------------------------------------ -------------------- -------------------- Total Investments 88,064,999 92,524,901 Cash and cash equivalents 26,079,323 20,093,774 Accrued investment income 1,351,929 1,328,491 Reinsurance recoverable 2,511,546 2,686,747 Premiums receivable 287,204 212,089 Property and equipment 2,895,336 2,959,744 Deferred policy acquisition costs 8,068,023 6,511,948 Value of insurance acquired 4,525,492 4,884,680 Goodwill 800,788 851,795 Federal income tax receivable 740,758 1,364,502 Deferred federal income tax 1,142,677 1,711,661 Other assets 586,221 407,674 ------------------------------------------------------------------------ -------------------- -------------------- Total Assets $137,054,296 $135,538,006 ------------------------------------------------------------------------ -------------------- --------------------See Notes to Condensed Consolidated Financial Statements. Part I; Item 1 (continued) Citizens Financial Corporation and Subsidiaries Condensed Consolidated Statements of Financial Condition June 30, December 31, 2001 2000 ------------------------------------------------------------------------ -------------------- -------------------- LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) Liabilities: Policy Liabilities: Future policy benefits $ 86,547,617 $ 83,403,780 Policyholder deposits 16,320,623 16,381,247 Policy and contract claims 1,648,164 1,816,947 Unearned premiums 170,334 217,670 Other 269,357 203,600 ------------------------------------------------------------------------ -------------------- -------------------- Total Policy Liabilities 104,956,095 102,023,244 Notes payable 7,600,000 8,000,000 Accrued expenses and other liabilities 2,253,628 2,240,653 ------------------------------------------------------------------------ -------------------- -------------------- Total Liabilities 114,809,723 112,263,897 Commitments and Contingencies Shareholders' Equity: Common stock, 6,000,000 shares authorized; 1,733,715 and 1,758,215 shares issued and outstanding in 2001 and 2000, respectively 1,733,715 1,758,215 Additional paid-in capital 7,419,263 7,640,988 Accumulated other comprehensive income (loss) 798,324 (1,573,294) Retained earnings 12,293,271 15,448,200 ------------------------------------------------------------------------ -------------------- -------------------- Total Shareholders' Equity 22,244,573 23,274,109 ------------------------------------------------------------------------ -------------------- -------------------- Total Liabilities and Shareholders' Equity $137,054,296 $135,538,006 ------------------------------------------------------------------------ -------------------- --------------------See Notes to Condensed Consolidated Financial Statements. Part I; Item 1 (continued) Citizens Financial Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30 2001 2000 ------------------------------------------------------------------------ -------------------- -------------------- Cash Flows from Operations: Net income (loss) $(3,154,929) $3,737,910 Adjustments to reconcile net income to cash from operations: Increase in benefit reserves 3,115,649 975,511 Decrease in claim liabilities (168,783) (134,916) Decrease in reinsurance recoverable 175,201 187,139 Interest credited on policyholder deposits 413,409 406,104 Provision for amortization and depreciation, net of deferrals (937,238) (10,898) Amortization of premium and accretion of discount on Securities purchased, net (42,285) 26,435 Net realized investment (gains) losses 3,298,100 (6,324,889) Increase in accrued investment income (23,438) (48,122) Change in other assets and liabilities (124,023) (190,835) Decrease in deferred federal income tax liability (236,000) (967,000) Decrease in federal income taxes receivable 623,743 537,000 Cumulative effect of a change in accounting principle 311,211 --- ------------------------------------------------------------------------ -------------------- -------------------- Net Cash provided (used in) by Operations 3,250,617 (1,806,561) Cash Flows from Investment Activities: Cost of securities acquired (9,002,909) (52,508,753) Investments sold or matured 13,108,753 59,973,409 Investment management fees and margin interest (170,395) (677,848) Additions to property and equipment, net (157,092) (66,007) Other investing activities, net 76,833 9,533 ------------------------------------------------------------------------ -------------------- -------------------- Net Cash provided by Investment Activities 3,855,190 6,730,334 Cash Flows from Financing Activities: Policyholder deposits 511,638 425,556 Policyholder withdrawals (985,671) (1,358,602) Payments on notes payable - bank (400,000) (100,884) Brokerage account advances, net --- (250,000) Repurchase of common stock (246,225) (66,463) ------------------------------------------------------------------------ -------------------- -------------------- Net Cash used in Financing Activities (1,120,258) (1,350,393) ------------------------------------------------------------------------ -------------------- -------------------- Net Increase in Cash and Cash Equivalents 5,985,549 3,573,380 Cash and Cash Equivalents at Beginning of Period 20,093,774 18,696,401 ------------------------------------------------------------------------ -------------------- -------------------- Cash and Cash Equivalents at End of Period $26,079,323 $22,269,781 ------------------------------------------------------------------------ -------------------- --------------------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 which 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, 2000 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 and six months ended June 30, 2001 and 2000 are as follows: ------------------------------- ------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------- --------------- --------------- --------------- --------------- COMPREHENSIVE INCOME: 2001 2000 2001 2000 ------------------------------------------------- --------------- --------------- --------------- --------------- Net Income (Loss) $(2,947,163) $ 829,192 $(3,154,929) $3,737,910 Net unrealized gains (losses) on securities 2,308,564 (3,111,712) 2,371,618 (864,980) ------------------------------------------------- --------------- --------------- --------------- --------------- Comprehensive Income (Loss) $ (638,599) $(2,282,520) $ (783,311) $2,872,930 ------------------------------------------------- --------------- --------------- --------------- --------------- Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted Financial Accounting Standards Board Statement (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138. This statement requires that all derivatives be recognized as either assets or liabilities in the balance sheet at their fair value, and sets forth the manner in which gains or losses thereon are to be recorded. The treatment of such gains and losses is dependent upon the type of exposure, if any, for which the derivative is designed as a hedge. Currently, the Company has not designated any derivatives as hedges. In accordance with SFAS 133, as of January 1, 2001, the Company recorded a $311,211 transition adjustment loss. This adjustment represents the cumulative market value change (since January 1, 1999) of options embedded within convertible bonds, along with a recalculation of discount accretion for the related host bonds and corresponding income tax impacts. The net transition adjustment includes a $539,090 gross market value decline, $67,558 of discount accretion, and a $160,321 income tax benefit. Note 4 - NET REALIZED INVESTMENT GAINS, NET OF EXPENSES The Company recorded pretax reductions to the carrying value of available for sale securities totaling $2,715,000 and $2,762,000 for the six months ended June 30, 2001 and 2000, respectively, relating to declines in value which were considered by management to be other than temporary. These amounts are reported as reductions of net realized investment gains. Changes in the fair value of derivative instruments are also reported as realized gains (losses). The Company also nets certain direct, incremental investment management fees against net realized investment gains presented in the Condensed Consolidated Statements of Income. Such costs are based directly on or, are primarily associated with, realized capital gains. Costs netted against realized investment gains total $23,000 and $283,000 for the six months ended June 30, 2001 and 2000, respectively. Part I; Item 1 (continued) 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. 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 June 30, 2001 and 2000, and for the periods then ended is as follows: ------------------------------- ------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------- --------------- --------------- --------------- --------------- REVENUE: 2001 2000 2001 2000 ------------------------------------------------- --------------- --------------- --------------- --------------- Home Service Life $ 2,344,220 $ 2,178,382 $ 4,682,981 $ 4,544,798 Broker Life 1,602,379 1,470,882 3,091,439 2,965,840 Preneed Life 2,530,092 1,228,505 4,667,413 2,280,474 Dental 2,073,328 1,950,207 4,172,980 3,835,510 Other Health 385,411 340,184 774,050 733,355 ------------------------------------------------- --------------- --------------- --------------- --------------- Segment Totals 8,935,430 7,168,160 17,388,863 14,359,977 Net realized investment gains (losses) (3,469,996) 1,530,931 (3,298,100) 6,324,889 ------------------------------------------------- --------------- --------------- --------------- --------------- Total Revenue $ 5,465,434 $ 8,699,091 $14,090,763 $20,684,866 ------------------------------------------------- --------------- --------------- --------------- ---------------Below are the net investment income amounts which are included in the revenue totals above. ------------------------------- ------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------- --------------- --------------- --------------- --------------- NET INVESTMENT INCOME: 2001 2000 2001 2000 ------------------------------------------------- --------------- --------------- --------------- --------------- Home Service Life $ 549,316 $ 537,315 $1,112,364 $1,029,043 Broker Life 685,730 640,963 1,398,252 1,236,698 Preneed Life 387,505 329,844 762,276 637,621 Dental 9,822 10,056 19,787 18,701 Other Health 24,191 22,935 48,818 43,633 ------------------------------------------------- --------------- --------------- --------------- --------------- Segment Totals $1,656,564 $1,541,113 $3,341,497 $2,965,696 ------------------------------------------------- --------------- --------------- --------------- --------------- 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 and interest expense are excluded. The majority of the Company's realized investment gains and losses are generated from investments in equity securities. The equities portfolio averaged (on a cost basis) approximately $12,838,000 and $19,721,000 during the six months ended June 30, 2001 and 2000, respectively. If these funds had been invested in fixed-maturities yielding 7%, realized investment gains (losses) would have changed and the six month segment profit totals below would have increased by approximately $300,000 and $454,000 in 2001 and 2000, respectively. ------------------------------- ------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------- --------------- --------------- --------------- --------------- SEGMENT PROFIT (LOSS): 2001 2000 2001 2000 ------------------------------------------------- --------------- --------------- --------------- --------------- Home Service Life $ 3,820 $ 52,708 $ 173,488 $ 94,948 Broker Life (202,945) 61,042 11,502 196,013 Preneed Life (75,283) (228,571) (387,219) (555,223) Dental (10,800) 100,984 84,698 222,495 Other Health 6,091 (53,817) 29,614 (25,905) ------------------------------------------------- --------------- --------------- --------------- --------------- Segment Totals (279,117) (67,654) (87,917) (67,672) Net realized investment gains (losses) (3,469,996) 1,530,931 (3,298,100) 6,324,889 Interest expense 143,050 194,085 314,701 379,307 ------------------------------------------------- --------------- --------------- --------------- --------------- Income (Loss) before Federal Income Tax $(3,892,163) $1,269,192 $(3,700,718) $5,877,910 ------------------------------------------------- --------------- --------------- --------------- --------------- Depreciation and amortization amounts below consist of amortization of the value of insurance acquired, deferred policy acquisition costs and goodwill, along with depreciation expense. ------------------------------- ------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------- --------------- --------------- --------------- --------------- DEPRECIATION AND AMORTIZATION: 2001 2000 2001 2000 ------------------------------------------------- --------------- --------------- --------------- --------------- Home Service Life $115,131 $ 155,196 $ 292,766 $ 304,565 Broker Life 171,747 113,002 330,427 276,107 Preneed Life 186,721 74,167 401,511 152,807 Dental 18,006 12,664 36,006 26,262 Other Health 15,818 9,448 32,412 17,030 ------------------------------------------------- --------------- --------------- --------------- --------------- Segment Totals $507,423 $ 364,477 $1,093,122 $ 776,771 ------------------------------------------------- --------------- --------------- --------------- ---------------Segment asset totals are determined based on policy liabilities outstanding in each segment. ----------------- ---------------- ----------------------------------------------- June 30, December 31, ASSETS: 2001 2000 ----------------------------------------------- ----------------- ---------------- Home Service Life $45,441,758 $ 45,577,255 Broker Life 56,253,560 57,721,008 Preneed Life 32,661,505 29,421,677 Dental 736,665 799,496 Other Health 1,960,808 2,018,570 ----------------------------------------------- ----------------- ---------------- Segment Totals $137,054,296 $135,538,006 ----------------------------------------------- ----------------- ---------------- Part I; Item 1 (continued) Note 7 - LITIGATION United Liberty Life Insurance Company ("United"), 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 issued over a period of years ending around 1971. It alleges that United'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 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 residing in Ohio whose policies were still in force in 1993. United has denied the material allegations of the Complaint and is defending the action vigorously. Pre-trial discovery is continuing and will be followed by motions to dismiss or narrow the plaintiffs' claims. At this early 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. Note 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $90,000 ($0.05 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. Part I; Item 2 - Management's Discussion and Analysis FINANCIAL POSITION. Shareholders' equity totaled approximately $22,245,000 and $30,843,000 at June 30, 2001 and 2000, respectively. These balances reflect an approximate 4% decrease and a 10% increase for the respective six month periods then ended. As described above, comprehensive income (loss) totaled approximately $(783,000) and $2,873,000 for the six months ended June 30, 2001 and 2000, respectively. A significant portion of comprehensive income (loss) is attributable to changes in the value of the Company's equity portfolios. Equity securities comprised approximately 9% and 17% of the Company's total assets as of June 30, 2001 and 2000, respectively. Accordingly, as also described below, the Company's financial position can be significantly affected by movements in the equities markets. Equity portfolio positions decreased $2,726,000 on a cost basis and $747,000 on a market value basis, during the first six months of 2001. The majority of this cost basis decline is attributable to recording second quarter impairments (realized losses) which management believes are appropriate due to the continued uncertainty in the equity markets. Fixed maturity portfolio positions decreased $5,178,000 on an amortized cost basis and decreased $3,713,000 on a market value basis during the same period. However, as described in Note 3 above, $497,000 of the change between cost and market values during 2001 is attributable to the SFAS 133 transition adjustment recorded at January 1, 2001. Cash and cash equivalent positions also increased approximately $5,986,000 during the six months ended June 30, 2001. OPERATIONS. Net premiums and other considerations increased approximately $2,645,000, or 23% during the first six months of 2001 compared to the first six months of 2000. Preneed Life, Dental, and Home Service Life premium increases were approximately $2,259,000, $336,000, and $54,000, respectively, while Broker Life experienced a modest decrease. The Preneed Life segment growth is attributable primarily to competitive marketing agreements signed with certain independent agency groups during late 2000. Dental premium growth is also primarily attributable to a key additional independent marketing arrangement signed during 2000. The Other Health segment represents less that 6% of total premium. Pretax earnings (loss) [before the cumulative effect of a new accounting principle] totaled approximately $(3,701,000) for the six months ended June 30, 2001, compared to $5,878,000 for the six months ended June 30, 2000. The majority of this change resulted from realized investment losses. Pretax Segment (Loss) (excluding realized investment gains and losses and interest expense) for the first six months of 2001 was approximately $(88,000), compared to $(68,000) for the first six months of 2000. This change resulted primarily from improved Preneed Life sales and mortality and improved Home Service Life sales and persistency, offset by higher Broker Life and Dental claims. The Company's lower effective income tax (benefit) rate for the six months ended June 30, 2001 is due to the effect of the small life insurance company deduction on taxes paid in prior years, for which loss carrybacks are available. CASH FLOW AND LIQUIDITY. Cash flow from operations totaled $3,251,000 for the six months ended June 30, 2001 compared to $(1,807,000) for the same period in the prior year. This increase is primarily attributable to growth in the Preneed Life business. The $3,855,000 of cash provided by investing activities for the six months ended March 31, 2001 resulted primarily from retaining the net proceeds from equity investment sales as cash. The $1,120,000 of cash used in financing activities during the first six months of 2001 is primarily attributable to annuity and Universal Life account withdrawals and bank loan principal repayments. Part I; Item 2 - Management's Discussion and Analysis (continued) 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 which 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 There have been no material changes in quantitative or qualitative market risks during the six months ended June 30, 2001. Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders. The 2001 annual meeting of shareholders of the Company was held on May 24, 2001. At the meeting, eight incumbent directors were re-elected to serve until the 2002 annual meeting of shareholders. The names of the incumbent directors and shares of the Company's Class A Stock voted for each were as follows: Candidate Votes ------------------------------------ ----------------- John H. Harralson, Jr. 1,370,143 Lane A. Hersman 1,281,719 Frank T. Kiley 1,370,143 Charles A. Mays 1,338,068 Earle V. Powell 1,370,043 Thomas G. Ward 1,370,143 Darrell R. Wells 1,313,556 Margaret A. Wells 1,313,556 Item 6. Exhibits and Reports on Form 8-K. a). Exhibit 11. Statement re: computation of per share earnings. b). none 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 /s/ Darrell R. Wells BY: -------------------------------------------- Darrell R. Wells President and Chief Executive Officer /s/ Brent L. Nemec BY: -------------------------------------------- Brent L. Nemec Treasurer and Principal Accounting Officer Date: August 8, 2001 EXHIBIT INDEX --------------------- ---------------------------------------------------------- Exhibit No. Description --------------------- ---------------------------------------------------------- 11 Statement re: computation of per share earnings EXHIBIT 11 Citizens Financial Corporation and Subsidiaries Computation of Per Share Earnings (Unaudited) Six Months Ended June 30 2001 2000 --------------------------------------------------------------------------- ----------------- ---------------- Numerator(s): Income (Loss) before cumulative effect of a change in accounting principle $(2,843,718) $3,737,910 Cumulative effect of a change in accounting principle (311,211) --- --------------------------------------------------------------------------- ----------------- ---------------- Net Income (Loss) $ (3,154,929) $3,737,910 Denominator: Weighted average common shares 1,753,884 1,762,943 Earnings Per Share: Income (Loss) before cumulative effect of a change in accounting principle $ (1.62) $ 2.12 Cumulative effect of a change in accounting principle (0.18) --- --------------------------------------------------------------------------- ----------------- ---------------- Net Income (Loss) $ (1.80) $ 2.12 Three Months Ended June 31 2001 2000 --------------------------------------------------------------------------- ----------------- ---------------- Numerator(s): Net Income (Loss) $(2,947,163) $829,192 Denominator: Weighted average common shares 1,749,600 1,761,672 Earnings Per Share: Net Income (Loss) $ (1.68) $ 0.47