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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File
Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 74-2126975
State of Incorporation (I.R.S. Employer Identification number)
6500 River Place Boulevard, Building One, Austin, Texas 78730
(Address of Principal Executive Offices) (Zip Code)
(512) 404-5050 (Registrant's Telephone Number)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
(Title of Class)
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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 and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 6, 2001, based on the closing sales price in The Nasdaq
Small-Cap Market ($9.75 per share), was 44,406,968.
The number of shares outstanding of Registrant's common stock on March 6, 2001
was 5,054,661.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
A. Reports on Form 10-K of InterContinental Life Corporation for the fiscal
years ended December 31, 2000, 1999 and 1998 are hereby incorporated by
reference.
Forward-Looking Statements
Except for historical factual information set forth in this Form 10-K, the
statements, analyses, and other information contained in this report relating to
trends in the Company's operations and financial results, the markets for the
Company's products, the future development of the Company's business, and the
contingencies and uncertainties to which the Company may be subject, as well as
other statements including words such as "anticipate," "believe," "path,"
"estimate," "expect," "intend" and other similar expressions constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such statements are made based upon management's current expectations and
beliefs concerning the financial results, economic conditions and are subject to
known and unknown risks, uncertainties and other factors contemplated by the
forward-looking statements. Such factors include, among other things: (1)
general economic conditions and other factors, including prevailing interest
rate levels and stock market performance, which may effect the ability of FIC to
sell its products, the market value of FIC's investments and the lapse rate and
profitability of policies; (2) FIC's ability to achieve anticipated levels of
operational efficiencies and cost-saving initiatives; (3) customer response to
new products, distribution channels and marketing initiatives; (4) mortality,
morbidity and other factors which may affect the profitability of FIC's
insurance products; (5) changes in the Federal income tax laws and regulations
which may affect the relative tax advantages of some of FIC's products; (6)
increasing competition in the sale of insurance and annuities; (7) regulatory
changes or actions, including those relating to regulation of insurance products
and insurance companies; (8) ratings assigned to FIC's insurance subsidiaries by
independent rating organizations such as A.M. Best Company, which FIC believes
are particularly important to the sale of annuity and other accumulation
products; and (9) unanticipated litigation. There can be no assurance that other
factors not currently anticipated by management will not also materially and
adversely affect FIC.
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PART I
Item 1. Business
General
Financial Industries Corporation ("FIC", the "Company" or the "Registrant") is a
holding company primarily engaged in the life insurance business through its
indirect ownership of 100% of Family Life Insurance Company ("Family Life") and
its approximately 48.3% interest in InterContinental Life Corporation ("ILCO"),
also a holding company primarily engaged in the life insurance business.
The Registrant was organized as an Ohio corporation in 1968 and was
reincorporated in Texas in 1980. Its executive offices are located at 6500 River
Place Boulevard, Building One, Austin, Texas 78730. Through 1984, FIC's
principal business was the sale and underwriting of life and health insurance,
mainly in the midwestern and southwestern United States. During the period from
1985 to 1987, FIC acquired its equity interest in ILCO, which is currently
approximately 48.3%.
FIC, ILCO and their insurance subsidiaries have substantially identical
managements. Officers allocate their time between FIC and ILCO in accordance
with the comparative requirements of both companies and their subsidiaries. The
Roy F. and Joann Cole Mitte Foundation (the "Foundation"), a charitable entity
exempt from federal income tax under section 501(a) of the Internal Revenue Code
(the "Code") as an organization described in section 501(c)(3) of the Code, owns
30.71% of the outstanding shares of FIC's common stock. The sole members of the
Foundation are Roy F. Mitte, Chairman, President and Chief Executive Officer of
FIC, the Company and their insurance subsidiaries, and his wife, Joann Cole
Mitte. FIC owns Family Life Insurance Company, a Washington domiciled
underwriter of mortgage protection life insurance.
Acquisitions Strategy. The Company's strategy has been and continues to be to
grow internally and through acquisitions, while maintaining an emphasis on cost
controls. Management believes that, under appropriate circumstances, it is more
advantageous to acquire companies with books of in-force life insurance than to
produce new business, because initial underwriting costs have already been
incurred and mature business is generally less likely to terminate, making
possible more predictable profit analysis. However, Family Life does continue to
market those products that are profitable, as well as develop new products and
streamline distribution channels. See "Agency Operations". It is also
management's belief that the continuing consolidation in the life insurance
industry presents attractive opportunities for the Company to acquire life
insurance companies that complement or fit within the Company's existing
marketing structure and product lines. The Company's objective is to improve the
profitability of acquired businesses by consolidating and streamlining the
administrative functions of these businesses, eliminating unprofitable products
and distribution channels, applying its marketing expertise to the acquired
company's markets and agents and benefitting from economies of scale. FIC's
ability to make future acquisitions will be dependent on its being able to
obtain the necessary financing. In addition, since ILCO has the same acquisition
strategy as FIC, a conflict of interest could arise in the future between FIC
and ILCO with respect to acquisition opportunities.
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Acquisition of ILCO. In January, 1985, FIC acquired 26.53% of ILCO's common
stock. FIC and Family Life subsequently acquired additional shares of ILCO's
common stock and as of March 6, 2001, FIC owned, directly and indirectly through
Family Life, approximately 48.3% of the outstanding shares of ILCO's common
stock. Prior to September 30, 1998, FIC held options to acquire up to 1,702,155
additional shares of ILCO's common stock. The consideration for the options,
which were granted in 1986, was FIC's granting to ILCO a loan in the principal
amount of $1.2 million, FIC's agreement to guarantee future loan obligations of
ILCO and FIC's agreement to guarantee ILCO's lease obligation on its
headquarters building upon demand. As described under the heading "The ILCO
Senior Loan", the Senior Loan of ILCO was fully repaid on September 30, 1998.
Accordingly, FIC's rights under the 1986 option agreement expired on September
30, 1998.
Acquisition of Family Life. FIC acquired Family Life from Merrill Lynch
Insurance Group, Inc. on June 12, 1991. The consideration for the purchase was
$114 million consisting of a cash payment of $70 million and $44 million of
subordinated promissory notes issued by subsidiaries of FIC to the seller and
its affiliates. Family Life's primary business is the underwriting and sale of
mortgage protection life insurance to customers who are mortgage borrowers from
financial institutions where Family Life has marketing relationships. Family
Life distributes its insurance products primarily through a national career
agency sales force. See "Business of Family Life Insurance Company".
ILCO's Acquisitions
a. Standard Life. In November, 1986, ILCO acquired Standard Life Insurance
Company ("Standard Life"), headquartered in Jackson, Mississippi, for a gross
purchase price of $54.5 million.
b. Investors-NA and Investors-CA. In December, 1988, ILCO, through Standard
Life, purchased Investors Life Insurance Company of California ("Investors-CA")
and Investors-NA from CIGNA Corporation for a purchase price of $140 million.
c. Investors-Indiana. In February, 1995, ILCO, through Investors-NA, purchased
from Meridian Mutual Insurance Company the stock of Meridian Life Insurance
Company, an Indianapolis-based life insurer, for a cash purchase price of $17.1
million. After the acquisition, Meridian Life changed its name to Investors Life
Insurance Company of Indiana ("Investors-Indiana").
d. State Auto Life. In July, 1997, ILCO and Investors-Indiana acquired State
Auto Life Insurance Company, an Ohio domiciled life insurer, from State
Automobile Mutual Insurance Company, for an adjusted cash purchase price of
$11.8 million. Under the terms of the transaction, State Auto Life was merged
into Investors-Indiana.
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e. Grinnell Life. On June 30, 1998, ILCO, through a subsidiary, acquired
Grinnell Life Insurance Company ("Grinnell Life") for an adjusted purchase price
of $16.6 million. A portion of the purchase price ($12.37 million) was paid by
way of a dividend to the seller immediately prior to the closing of the
transaction; the balance of the purchase price was paid by ILCO's subsidiary. As
part of the transaction, Grinnell Life was immediately merged with and into that
subsidiary, with that subsidiary being the surviving entity.
Merger of ILIC and Investors-Indiana. In December, 1997, InterContinental Life
Insurance Company ("ILIC"), a subsidiary of ILCO, transferred its domicile from
New Jersey to Indiana. Following completion of the redomestication, ILIC merged
with Investors-Indiana, with ILIC as the surviving entity in the merger process.
Immediately after the merger, ILIC changed its name to Investors Life Insurance
Company of Indiana. As used hereinafter, the phrase "Investors-IN" shall be used
to refer to the merged entities.
Business of Family Life Insurance Company
Family Life, which was organized in the State of Washington in 1949, specializes
in providing mortgage protection life and accidental death insurance and annuity
products to mortgage borrowers of financial institutions. Family Life has
policies in force with customers of approximately 82 financial institutions, of
which approximately 49 actively provide Family Life with regular updating of
their lists of borrowers.
Family Life's mortgage protection business consists of term and universal life
insurance sold to borrowers of mortgage debt, designed to repay the mortgages of
policyholders in the event of their death. This business is sold to customers of
client financial institutions, usually through a list of borrowers provided by
the financial institution. These policies often list the lending financial
institution as the primary beneficiary of the life insurance policy. An
important feature of the Family Life product is the ability to bill and collect
premiums through the policyholder's monthly mortgage payments.
Family Life has annuity products and a variety of life insurance products,
including decreasing term life insurance, universal life insurance, ten-year
level term products and a whole life insurance product.
Family Life is licensed to sell mortgage life insurance products in 49 states
and the District of Columbia. In 2000, premium income from these products was
derived from all states in which Family Life is licensed, with significant
amounts derived from Texas ( 26%), California ( 25%) and Florida ( 5%). Family
Life's primary distribution channel is its agency force of approximately 340
career agents (at December 31, 2000), who are organized into 28 regions. Most of
the career agents sell mortgage life insurance products exclusively for Family
Life. The mortgage life insurance business is very fragmented. Family Life
believes that it is among the larger writers of agent sold mortgage life
insurance in the United States and the only nation-wide agent-sold life
insurance company operating through leads from financial institutions. Many of
Family Life's competitors are life insurance companies with more resources than
Family Life and whose mortgage life insurance business represents only a small
portion of their total business.
-5-
During 2000, Family Life continued the expansion of its distribution system, to
recruit agents whose product portfolio includes a broader range of life and
annuity products, in addition to the traditional mortgage protection life
insurance products offered by Family Life. While Family Life's traditional sales
force consists of agents who are contracted exclusively with the company, agents
who participate in the expanded distribution system may have selling
relationships with other insurers in addition to Family Life. During 2000,
Family Life recruited 410 agents for this marketing effort.
At December 31, 2000, the number of employees within FIC and its subsidiaries,
together with the employees of ILCO's insurance subsidiaries, was approximately
286 and the number of regional vice presidents employed by the life insurance
subsidiaries of the Company and ILCO was 40.
Business of InterContinental Life Corporation
ILCO was incorporated in 1969 under the laws of New Jersey. In June, 1997, ILCO
transferred its domicile to the State of Texas. Its executive office is located
at 6500 River Place Boulevard, Building One, Austin, Texas 78730.
Operations. ILCO has developed management techniques to reduce operating
expenses by centralizing, standardizing and more efficiently performing many
functions common to most life insurance companies, such as underwriting and
policy administration, accounting and financial reporting, marketing, regulatory
compliance, actuarial services and asset management. ILCO has selectively
recruited personnel in sales, marketing and various administrative departments.
Principal Products. ILCO's insurance subsidiaries are engaged primarily in
administering existing portfolios of individual life insurance and accident and
health insurance policies and annuity products. Approximately 79 % of the total
collected premiums for 2000 were derived from renewal premiums on insurance
policies and annuity products sold by ILCO's insurance subsidiaries prior to
their acquisition by ILCO.
ILCO's insurance subsidiaries are also engaged in marketing and underwriting
individual life insurance and annuity products in 49 states and the District of
Columbia. These products are marketed through independent, non-exclusive general
agents.
The products currently being distributed by ILCO's life subsidiaries include
several versions of universal life insurance, which provide permanent life
insurance which credit company-declared current interest rates. The universal
life insurance portfolio of ILCO's insurance subsidiaries consists of flexible
premium universal life insurance policies. Under the flexible premium policies,
policyholders may vary the amounts of their coverage (subject to minimum and
maximum limits) as well as the date of payment and frequency of payments.
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Direct statutory premiums received from all types of universal life products
were $36.3 million in 2000, as compared to $ 35.6 million in 1999 and $38.9
million in 1998. Investors-NA received reinsurance premiums from Family Life of
$3.5 million in 2000, pursuant to the reinsurance agreement for universal life
products written by Family Life. In 2000, premium income from all life insurance
products was derived from all states in which ILCO's insurance subsidiaries are
licensed, with significant amounts derived from Pennsylvania (14%), California
(8%), Ohio (8%) and New Jersey (7%).
ILCO's insurance subsidiaries receive premium income from health insurance
policies. In 2000, premium income from all health insurance policies was $0.7
million, as compared to $0.8 million in 1999 and $1.0 million in 1998. The
health insurance business of ILCO's subsidiaries is 100% reinsured with a third
party reinsurer. In December, 1997, ILCO's life insurance subsidiaries entered
into a reinsurance treaty under which most of the contractual obligations and
risks under accident and health and disability income insurance policies were
assumed by a third party reinsurer. The transfer was effective as of July 1,
1997. The decision to dispose of this book of business was based on ILCO's
analysis that the business was not generating targeted profit objectives and
that the products were not part of the core business of ILCO's subsidiaries. The
sale permits the companies to focus on its primary business - life insurance and
annuity sales. In connection with the transaction, the total amount of net
reserves transferred by the ILCO subsidiaries was $6,327,504.
Investors-NA sponsors a variable annuity separate account, which offers single
premium and flexible premium policies. The policies provide for the contract
owner to allocate premium payments among four different portfolios of Putnam
Variable Trust (the "Putnam Fund"), a series fund which is managed by Putnam
Investment Management, Inc. As of December 31, 2000, the assets held in the
separate account were $42.3 million. During 2000, the premium income realized in
connection with these variable annuity policies was $85,402, which was received
from existing contract owners.
Investors-NA also maintains a closed variable annuity separate account, with
approximately $16.6 million of assets as of December 31, 2000. The separate
account was closed to new purchases in 1981 as a result of an IRS ruling which
adversely affected the status of variable annuity separate accounts which invest
in publicly-available mutual funds. The ruling did not adversely affect the
status of in-force contracts.
For the past several years, ILCO's life company subsidiaries expanded their
marketing efforts in the fixed annuity market. Direct deposits from the sale of
fixed annuity products were $10.6 million in 2000, as compared to $7.6 million
in 1999 and $6.1 million in 1998. Investors-NA also received reinsurance
premiums from Family Life of $1.2 million in 2000, pursuant to a reinsurance
agreement for annuity products between Investors-NA and Family Life Insurance
Company.
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During the fourth quarter of 1998, Investors-NA developed a group deposit
administration product, designed for use in connection with the funding of
deferred compensation plans maintained by government employers under section 457
of the Internal Revenue Code. The company has established a marketing
relationship with a third-party administrator based in San Antonio, Texas, which
has established relationships with school districts in Texas and Louisiana.
Enrollments under the program commenced during 1999, which contributed $0.9
million of the annuity premiums for that year. Annuity premiums for the year
2000 totaled $1.5 million.
During 1999, a marketing subsidiary of the Company entered into a marketing
agreement with a third- party life insurance company. The marketing agreement
makes available, to appointed agents of the Company's life insurance
subsidiaries, a portfolio of term life insurance products not currently being
offered by the subsidiaries. The underwriting risk on the products sold under
this arrangement is assumed by the third-party insurer. The Company's appointed
agents receive commissions on the sales of these products and the Company's
marketing subsidiary receives an override commission. This initiative was
expanded during the year 2000 to include a substantially similar arrangement
with another third-party life insurance company.
Merger of Insurance Subsidiaries. Investors-NA redomesticated from Pennsylvania
to Washington in December of 1992. Investors-CA merged into Investors-NA on
December 31, 1992. Standard Life merged into Investors-NA on June 29, 1993. The
mergers have achieved cost savings, such as reduced auditing expenses involved
in auditing one combined company; the savings of expenses and time resulting
from the combined company being examined by one state insurance department
(Washington), rather than three (California, Pennsylvania and Mississippi); the
reduction in the number of tax returns and other annual filings with state
insurance departments; and smaller annual fees to do business and reduced
retaliatory premium taxes in most states.
In December, 1997, ILIC transferred its domicile from New Jersey to Indiana.
Following completion of the redomestication, ILIC merged with Investors-Indiana,
with ILIC as the surviving entity in the merger process. Immediately after the
merger, ILIC changed its name to Investors Life Insurance Company of Indiana. As
used hereinafter, the phrase "Investors-IN" shall be used to refer to the merged
entities. As a result of the merger, Investors-IN is licensed in 47 states and
the District of Columbia. As of December 31, 2000, it had assets of $170.0
million and capital and surplus of $26.3 million.
ILCO's management believes that these acquisitions and consolidations have
caused a reduction in expense and have further strengthened the financial
condition of the combined companies.
Investment of Assets
The assets held by Family Life and ILCO's life insurance subsidiaries must
comply with applicable state insurance laws and regulations pertaining to life
insurance companies. The investment portfolios of Family Life and ILCO's life
insurance subsidiaries are tailored by their managements to reflect the nature
of the insurance obligations, business needs, regulatory requirements and tax
considerations relating to the underlying insurance business with respect to
such assets. This is particularly the case with respect to interest-sensitive
life insurance products, where the investment emphasis is to obtain a targeted
margin of profit over the rate of interest credited to policyholders, while
endeavoring to minimize the portfolio's exposure to changing interest rates. To
reduce the exposure to such rate changes, portfolio investments are selected so
that diversity, maturity and liquidity factors approximate the duration of
associated policyholder liabilities.
-8-
The investment objective of Family Life and ILCO's insurance subsidiaries
emphasizes the selection of short to medium term, high quality fixed income
securities, rated Baa-3 (investment grade) or better by Moody's Investors
Service, Inc. At December 31, 2000, only 4.4% of ILCO's total assets were
invested in mortgage loans or real estate. Non-affiliated corporate debt
securities that were non-investment grade represented 0.3% of ILCO's total
assets at December 31, 2000. ILCO had investments in debt securities of
affiliated companies aggregating approximately $35.3 million as of December 31,
2000. Family Life does not have investments in mortgage loans, real estate,
non-investment grade debt securities or affiliates' debt securities.
The investments of Family Life and ILCO's insurance subsidiaries in
mortgage-backed securities included collateralized mortgage obligations ("CMOs")
of $22.4 million and $175.7 million, respectively, and mortgage-backed
pass-through securities of $8.6 million and $42.9 million, respectively, at
December 31, 2000. Mortgage-backed pass-through securities, sequential CMO's and
support bonds, which comprised approximately 43.25% of the book value of FIC's
mortgage-backed securities and 45.7% of the book value of ILCO's mortgage-backed
securities at December 31, 2000, are sensitive to prepayment and extension
risks. ILCO and FIC have reduced the risk of prepayment associated with
mortgage-backed securities by investing in planned amortization class ("PAC"),
target amortization class ("TAC") instruments, accretion directed bonds and
scheduled bonds. These investments are designed to amortize in a predictable
manner by shifting the risk of prepayment of the underlying collateral to other
investors in other tranches ("support classes") of the CMO. At December 31,
2000, PAC and TAC instruments and accretion directed and scheduled bonds
represented approximately 56.75% of the book value of FIC's mortgage-backed
securities and approximately 45.7% of the book value of ILCO's mortgage-backed
securities. Sequential and support classes represented approximately 15.4% of
the book value of FIC's mortgage-backed securities and approximately 34.7% of
the book value of ILCO's mortgage-backed securities at December 31, 2000. In
addition, FIC and ILCO limit the risk of prepayment of CMOs by not paying a
premium for any CMOs. ILCO and FIC do not invest in mortgage-backed securities
with increased prepayment risk, such as interest-only stripped pass-through
securities and inverse floater bonds. Neither FIC nor ILCO had any z-accrual
bonds as of December 31, 2000. The prepayment risk that certain mortgage-backed
securities are subject to is prevalent in periods of declining interest rates,
when mortgages may be repaid more rapidly than scheduled as individuals
refinance higher rate mortgages to take advantage of the lower current rates. As
a result, holders of mortgage-backed securities may receive large prepayments on
their investments which cannot be reinvested at an interest rate comparable to
the rate on the prepaying mortgages.
-9-
FIC and ILCO do not invest in non-agency mortgage-backed securities, which have
a greater credit risk than that of agency mortgage-backed securities.
ILCO and FIC do not make new mortgage loans on commercial properties.
Substantially all of ILCO's mortgage loans were made by its subsidiaries prior
to their acquisition by ILCO. At December 31, 2000, none of the mortgage loans
held by ILCO had defaulted as to principal or interest for more than 90 days,
and none of the ILCO's mortgage loans were in foreclosure.
Another key element of FIC's and ILCO's investment strategy is to avoid large
exposure in other investment categories which management believes carry higher
credit or liquidity risks, including private placements, partnerships and bank
participations. These categories accounted for approximately 0.2% of ILCO's
invested assets and none of FIC's invested assets at December 31, 2000.
ILCO's subsidiaries also make investments in real property, subject to
regulatory limitations. In October, 1998, Investors-NA purchased River Place
Pointe, two adjoining tracts of land located in Austin, Texas totaling 47.995
acres. The aggregate purchase price for these tracts was $8.1 million.
Investors-NA has obtained approval of a site plan development proposal for these
tracts. Prior to the closing of the transaction, Investors-NA obtained a Site
Development Permit for the tracts from the City of Austin. The Site Development
Permit allows for the construction of seven office buildings totaling 600,000
square feet, with associated parking, drives and related improvements.
Construction on the first phase of the Project, which consists of two office
buildings, an associated parking garage, and related infrastructure was
completed during 2000. The second phase of construction, which includes two more
office buildings, is in progress and Investors-NA expects completion of this
phase by the end of the second quarter of 2001.
FIC and ILCO have established and staffed an investment department, which
manages portfolio investments and investment accounting functions for their life
insurance subsidiaries.
Agency Operations
The products of FIC's and ILCO's insurance subsidiaries are marketed and sold
through two divisions:
A. Investors Life Distribution System
ILCO's insurance subsidiaries collectively market through the "Investors"
distribution system. Independent non-exclusive agents, general agents and
brokers are recruited nation-wide to sell the products. Such agents and brokers
also sell insurance products for companies in competition with ILCO's insurance
subsidiaries. In order to attract agents and enhance the sale of its products,
the Company's insurance subsidiaries pay competitive commission rates and
provide other sales inducements. The Investors sales distribution system is
presently concentrating its efforts on the promotion and sale of universal life,
term life and fixed annuity products.
-10-
Marketing and sales for all of the Company's insurance subsidiaries are directed
by the Executive Vice President of Marketing and Sales. The Senior Vice
President for Investors Sales directs Regional Vice Presidents who are
responsible for the recruitment and maintenance of the general agents and
managing general agents for individual insurance sales. During 1999, the Company
implemented a plan to restructure the compensation arrangements for Regional
Vice Presidents, so as to emphasize the role of personal production by the RVPs.
The effect of this plan during the year 2000 was to lower fixed costs for
distribution of the Company's products.
B. Family Life Distribution System
This nationwide system sells Family Life's products through an exclusive agent
force. This agent force sells mortgage protection life insurance and annuity
products. The products are sold primarily to middle-income customers of client
financial institutions, usually through a list of borrowers provided by the
financial institution. Family Life works closely with the financial institutions
to maintain and insure that Family Life lead systems, which had been built from
the loan portfolios of each active financial institution, operate at a level
that favors both parties. Family Life agents make courtesy calls to borrowers of
the financial institutions which are active on the Family Life lead system to
offer the borrower the opportunity to purchase mortgage protection insurance
(term or universal life insurance products).
In advance of the passage of the Financial Services Modernization Act (the
"Act") in 1999 (for a discussion of the provisions of this new law, refer to the
section entitled "Regulation"), Family Life established a task force to develop
new lead sources for its agents. Since Family Life uses leads from financial
institutions, restrictions under the Act on the type of information which a
financial institution may provide to Family Life may have an adverse impact on
its traditional sales methods. Although Family Life continues to focus on its
traditional sales approach, it has established a supplemental leads program,
whereby third parties supply leads obtained from public records (e.g. county
loan records). Family Life has also developed a strategy to work with lenders as
"setup only", whereby the mortgage institution does not furnish leads, but will
collect and remit premiums. Finally, Family Life is developing new sales
methods, including direct mailings and direct telephone leads. The Act provides
that various Federal agencies are to adopt regulations implementing the purposes
of the Act. The adopted regulations are not going to take effect on the
insurance industry until July 1, 2001.
Beginning in 1998, Family Life expanded its distribution system, to recruit
agents whose product portfolio includes a broader range of life and annuity
products, in addition to the traditional mortgage protection life insurance
products offered by Family Life. While Family Life's exclusive sales force
consists of agents who are contracted exclusively with the company, agents who
participate in the expanded distribution system may have selling relationships
with other insurers in addition to Family Life. During 2000, Family Life
recruited 438 agents for this marketing effort.
In October, 1999, a marketing subsidiary of Investors Life entered into a
marketing agreement with a third- party life insurance company. The marketing
agreement makes available to appointed agents of the Investors Life and Family
Life a portfolio of term life insurance products not currently being offered by
those companies. The underwriting risk on the products sold under this
arrangement is assumed by the third-party insurer. The Company's appointed
agents receives commissions on the sale of these products and the marketing
subsidiary receives an override commission.
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Sales and Marketing for Family Life is directed by the Executive Vice President
of Marketing and Sales. Reporting to the Executive Vice President, the Senior
Vice President of Marketing heads the Family Life marketing organization which
is focused on the development and maintenance of contractual agreements with the
financial institutions which provide referrals to, and collect monthly premiums
from, their borrowers for Family Life insurance plans. The Senior Vice President
for Family Life Sales directs 28 Regional Vice Presidents. Currently, the Family
Life distribution system consists of 159 District Sales Managers and 179 active
career agents.
Data Processing
Since December, 1994, the data processing needs of ILCO's and FIC's insurance
subsidiaries have been provided to ILCO's and FIC's Austin, Texas and Seattle,
Washington facilities by FIC Computer Services, Inc., a subsidiary of FIC. See
Item 13 - Certain Relationships and Related Transactions with Management.
As the provider of data processing for the Company and its subsidiaries and
affiliates, FIC Computer Services, Inc. utilizes a centralized computer system
to process policyholder records and financial information. In addition, the
Company uses non-centralized computer terminals in connection with its
operations.
In response to the potential operations and policy administration
problems caused by the computer calendar change on January 1, 2000, the
management of the Company instructed FIC Computer Services, Inc. to analyze its
system capabilities and the operational requirements of the Company and its
respective subsidiaries and affiliates with respect to the Y2K problem. The
Company developed a Year 2000 Plan and began the major work under the Plan in
1997. The work, including extensive testing of the converted systems, was
completed during the fourth quarter of 1999. The Company did not experience any
material disruptions in the processing of its business as a result of the Year
2000 date change.
Under the Year 2000 Plan, FIC Computer Services, Inc. utilized its own
personnel, acquired Y2K compliant operating software, and engaged the assistance
of outside consultants to facilitate the systems conversions and modifications.
For the twelve month period ended December 31, 1999, the Company incurred an
after tax cost of approximately $195,000 in connection with the Year 2000 Plan,
as compared to an after tax expense of approximately $158,000 for the year ended
December 31, 1998. In the year December 31, 2000, the Company incurred $90,000
in expenses related to the Year 2000 Plan, in connection with bonus payments
made to management employees for Year 2000 Plan-related work.
-12-
Competition
There are many life and health insurance companies in the United States. Agents
placing insurance business with Family Life and ILCO's insurance subsidiaries
are compensated on a commission basis. However, some companies pay higher
commissions and charge lower premium rates and many companies have more
substantial resources than Family Life and ILCO's insurance subsidiaries. In
addition, consolidations of insurance and banking institutions, which is
permitted under recently-enacted federal legislation, may adversely affect the
ability of Family Life to expand its customer referral relationships with
mortgage lending and servicing institutions.
The principal cost and competitive factors that affect the ability of Family
Life and ILCO's insurance subsidiaries to sell their insurance products on a
profitable basis are: (1) the general level of premium rates for comparable
products; (2) the extent of individual policyholders services required to
service each product category; (3) general interest rate levels; (4) competitive
commission rates and related marketing costs; (5) legislative and regulatory
requirements and restrictions; (6) the impact of competing insurance and other
financial products; and (7) the condition of the regional and national
economies.
Reinsurance and Reserves
In accordance with general practices in the insurance industry, Family Life and
ILCO's insurance subsidiaries limit the maximum net losses that may arise from
large risks by reinsuring with other carriers. Such reinsurance provides for a
portion of the mortality risk to be retained by Family Life and the ILCO
subsidiaries with the excess being ceded to a reinsurer at a premium set forth
in a schedule based upon the age and risk classification of the insured. The
reinsurance treaties provide for allowances that help Family Life and ILCO's
insurance subsidiaries offset the expense of writing new business. Family Life
generally retains the first $200,000 of risk on the life of any one individual.
Investors-IN generally retains the first $100,000 of risk on the life of any
individual, depending on the type of coverage being written. Investors-NA
generally retains the first $100,000 to $250,000 of risk on the life of any
individual.
Family Life maintains a bulk reinsurance treaty, under which it reinsured all of
its risks under accidental death benefit policies. The treaty was most recently
renegotiated with the current reinsurer in January, 1997.
-13-
As discussed above (see "Principal Products"), in December, 1997, FLIC and
ILCO's life insurance subsidiaries entered into a reinsurance treaty under which
all of the contractual obligations and risks under accident and health and
disability income policies were assumed by a third party reinsurer.
In 1995, Family Life (as the ceding company) entered into a reinsurance
agreement with Investors-NA (as the reinsuring company) pertaining to universal
life insurance written by Family Life. The reinsurance agreement is on a
co-insurance basis and applies to all covered business with effective dates on
and after January 1, 1995. The agreement applies to only that portion of the
face amount of the policy which is less than $200,000; face amounts of $200,000
or more are reinsured by Family Life with a third party reinsurer. In 1996,
Family Life (as the ceding company) entered into a reinsurance agreement with
Investors-NA (as the reinsuring company), pertaining to annuity contracts
written by Family Life. The agreement applies to contracts written on or after
January 1, 1996. These reinsurance arrangements reflect management's plan to
develop universal life and annuity business at Investors-NA, with Family Life
concentrating on the writing of term life insurance products.
Although reinsurance does not eliminate the exposure of FIC's and ILCO's
insurance subsidiaries to losses from risks insured, the net liability of such
subsidiaries will be limited to the portion of the risk retained, provided that
the reinsurers meet their contractual obligations.
ILCO's insurance subsidiaries and Family Life carry reserves on their books to
meet future obligations under their outstanding insurance policies. Such
reserves are believed to be sufficient to meet policy obligations as they mature
and are calculated using assumptions for interest, mortality, expenses and
withdrawals in effect at the time the policies were issued.
Acquisition of Family Life
In June, 1991, FIC purchased Family Life, a Washington based life insurance
corporation, from Merrill Lynch Insurance Group, Inc. ("Merrill Lynch"). The
business of Family Life, as reconstituted for sale, consists principally of the
underwriting and sale of life insurance to mortgage borrowers through lending
institutions.
The consideration for the purchase was $114 million consisting of a cash payment
of $70 million and $44 million of subordinated promissory notes issued by
subsidiaries of FIC to the seller and its affiliates.
To effectuate the transaction, FIC organized two downstream holding companies:
Family Life Corporation ("FLC"), and Family Life Insurance Investment
Corporation ("FLIIC"). FLIIC was organized as a wholly- owned subsidiary of FIC
and, in turn, was issued all of the outstanding shares of FLC. FLC purchased
250,000 shares of common stock, being all of the outstanding shares, of Family
Life from Merrill Lynch for an $84 million cash payment (including $14 million
that had been borrowed by FLIIC from an affiliate of Merrill Lynch) and a $30
million senior subordinated note. Following the purchase of the Family Life
shares by FLC, Family Life issued 250,000 previously unissued shares of its
common stock to FLC for a $2.5 million cash payment and immediately thereafter
redeemed from FLC 250,000 shares of its common stock that had been purchased by
FLC from Merrill Lynch. The consideration paid to FLC by Family Life for said
redeemed shares consisted of $2.5 million cash, a newly issued surplus debenture
(an instrument having certain restrictions on payment for the protection of
policyholders) in the principal amount of $97.5 million and $14 million
principal value of newly issued preferred shares.
-14-
As part of the financing arrangement, FLC entered into a Senior Loan agreement
under which $50 million was provided by a group of banks (the "Family Life
Senior Loan"). The balance of the financing consisted of a $30 million
subordinated note issued by FLC to Merrill Lynch and $14 million borrowed by
FLIIC from an affiliate of Merrill Lynch and evidenced by a subordinated note in
the principal amount of $12 million and a subordinated note in the principal
amount of $2 million (collectively, the "Merrill Lynch Subordinated Loans") and
$25 million lent by two insurance company subsidiaries of ILCO (the "Investors
Life Subordinated Loans"). The latter amount was represented by a $22.5 million
loan from Investors-NA to FLC and a $2.5 million loan provided directly to FIC
by Investors-CA. In addition to the interest provided under the Investors Life
Subordinated Loans, Investors-NA and Investors-CA were granted by FIC
non-transferable options to purchase, in amounts proportionate to their
respective loans, up to a total of 9.9 percent of shares of FIC common stock at
a price of $10.50 per share, equivalent to the then current market price,
subject to adjustment to prevent dilution. The initial terms of the option
provided for their expiration on June 12, 1998, if not previously exercised. In
connection with the 1996 amendments to the $34.5 million subordinated loans
obtained from Investors-NA, the expiration date of the options was extended to
September 12, 2006.
Of the total $119 million of cash borrowed and notes issued by FIC and its
subsidiaries for purposes of the transaction, $114 million constituted the
purchase price for Family Life and $5 million was used to pay transaction costs,
for working capital and for other related purposes. In connection with the
several loans effected for purposes of the transaction, various creditors
priorities and normal borrower requirements and restrictions were established
and FIC issued its direct guaranty of the respective loans, subject to certain
priorities, to the various lending banks, Merrill Lynch and its affiliates, and
Investors-NA and Investors-CA. The outstanding shares of common stock of Family
Life were also pledged as collateral to the bank lenders and, upon repayment of
the bank loan, to Merrill Lynch. The transaction was structured to conform to
the requirements of Section 338(h)(10) of the Internal Revenue Code.
On July 30, 1993, the Merrill Lynch Subordinated Loans were prepaid. $38 million
plus accrued interest was paid to retire the indebtedness, which had a principal
balance of approximately $50 million on July 30, 1993. The primary source of the
funds used to prepay the Merrill Lynch Subordinated Loans was new subordinated
loans totaling $34.5 million that were obtained from Investors-NA. See "The
Family Life Refinancing."
-15-
Family Life Senior and ILCO Subordinated Loans
Senior Loan. The Senior Loan obligations of FLC were completely paid off on
April 17, 1996. During the period that the Senior Loan was in effect, it was a
secured and guaranteed five year term loan in the initial principal amount of
$50 million.
Upon the retirement of the Senior Loan, certain of its provisions were
automatically incorporated into the Investors Life Subordinated Loans which are
described in the following section. Those provisions include specified events of
default, including, but not limited to, failure to pay principal, interest,
commitment fees or other amounts payable when due, failure to maintain certain
financial covenants, violation of covenants (including covenants with respect to
the maintenance of a minimum net worth), material misrepresentations, defaults
under other indebtedness, the loss of any license of an insurance subsidiary of
FLC which would have a material adverse effect on FLC, defaults under the FIC
guaranty agreement, a fine in an amount in excess of $100,000 imposed upon any
insurance subsidiary of FLC by any state insurance regulatory agency, changes in
ownership or control of FIC by its controlling person, Roy F. Mitte, or in ILCO
by FIC and the occurrence of certain events of bankruptcy. In addition, the
security interests furnished to the lenders under the Senior Loan were
transferred to Investors-NA. The security interests include all of the issued
and outstanding shares of preferred stock and common stock of FLC and Family
Life and the $97.5 million surplus debenture of Family Life.
Investors Life Subordinated Loans. The $22.5 million subordinated senior note
issued by FLC to Investors-NA was originally scheduled to mature on June 12,
1998, with principal payments in four equal semi-annual principal installments
of $5,625,000 each on December 12, 1996, June 12, 1997, December 12, 1997 and
June 12, 1998. Interest is payable semi-annually, at the rate of 11% per annum.
Effective as of June 12, 1996, the note was amended to provide for twenty
quarterly principal payments, in the amount of $1,125,000 each, to commence on
December 12, 1996. The final quarterly principal payment is due on September 12,
2001. The interest rate on the note remained at 11%.
The $2.5 million subordinated note issued by FIC to Investors-CA initially
provided for interest, payable semi-annually, at the rate of 12% per annum, and
its principal was due and payable in full at maturity on June 12, 1998 (the "FIC
Note"). As a result of the merger of Investors-CA into Investors-NA, the FIC
Note is now owned by Investors-NA. Prior to June 12, 1996, accrued interest on
the FIC Note was paid by delivery of additional notes of FIC having terms
identical to such original note, including the payment of interest (the "PIK
Notes"). Interest payable on and after June 12, 1996 on all of the FIC Note is
to be paid in cash. Effective as of June 12, 1996, the FIC Note was amended to
provide that the principal balance of the note is to be repaid in twenty
quarterly installments of $125,000 each, commencing December 12, 1996 with the
final payment due on September 12, 2001. With respect to the PIK Notes, the
amendment provided that the principal balance of the notes ($1,977,119) is to be
paid in twenty quarterly principal payments, in the amount of $98,855.95 each,
commencing December 12, 1996 with the final payment due on September 12, 2001.
The interest rate on both the FIC Note and the PIK Notes remained at 12%.
-16-
The obligors are allowed to prepay the Investors Life Subordinated Loans, in
whole or in part, without premium or penalty. During the time that the Senior
Loan was outstanding, the Investors Life Subordinated Loans were subordinated to
the Senior Loan and constitute a second lien on the pledged collateral subject
to the first lien of the Senior Loan. Repayment of FLC's $22.5 million note is
also guaranteed by FIC.
The Investors Life Subordinated Loan documents specify events of default,
including, but not limited to, failure to pay principal, interest or other
amounts payable with respect to the Investors Life Subordinated Loan documents
when due, violation of covenants in the Investors Life Subordinated Loan
documents (including covenants with respect to the maintenance of a minimum net
worth), material misrepresentations, defaults under other indebtedness, and the
occurrence of certain events of bankruptcy.
The Investors Life Subordinated Loan documents also contain various specified
negative, affirmative and financial covenants to be performed or observed by
FLC, FIC and their subsidiaries. During the period the Senior Loan was
outstanding, the covenants in effect under the Investors Life Subordinated Loan
documents were less restrictive than the covenants under the Senior Loan
documents but become generally equivalent to the Senior Loan restrictions upon
the termination of the Senior Loan.
On July 30, 1993, Investors-NA loaned $34.5 million to FLC and FLIIC in the form
of subordinated notes in connection with the prepayment of the Merrill Lynch
Subordinated Loans. See "The Family Life Refinancing."
As of December 31, 2000, the outstanding principal balance of the Investors Life
Subordinated Loans, including the loans made by Investors-NA in 1993 was $35.3
million.
Options. In addition to the interest provided under the Investors Life
Subordinated Loans, Investors-NA and Investors-CA were granted by FIC
non-transferable options to purchase, in amounts proportionate to their
respective loans, up to a total of 9.9 percent of shares of FIC common stock at
a price of $2.10 per share (as adjusted to reflect the five-for-one stock split
in November, 1996), equivalent to the then current market price, subject to
adjustment to prevent dilution. The initial terms of the option provided for
their expiration on June 12, 1998, if not previously exercised. In connection
with the 1996 amendments to the $34.5 million subordinated loans obtained from
Investors-NA, the expiration date of the options was extended to September 12,
2006.
The Family Life Refinancing. In July, 1993, the Merrill Lynch Subordinated Loans
were prepaid. $38 million plus accrued interest was paid to retire the
indebtedness, which had a principal balance of approximately $50 million on July
30, 1993.
The primary source of the funds used to prepay the Merrill Lynch Subordinated
Loans was new subordinated loans totaling $34.5 million that were obtained from
Investors-NA. Prior to the 1996 amendments described below, the principal amount
of the new subordinated debt was payable in four equal annual installments in
2000, 2001, 2002 and 2003. The interest rate is 9%. The other terms of the 1993
notes are substantially the same as those of the $22.5 million subordinated loan
that Investors-NA had previously made to FLC and that continue to be
outstanding.
-17-
The $34.5 million of new subordinated loans consist of a $30 million loan to FLC
and a $4.5 million loan to FLIIC. The debt restructuring reduced the total
indebtedness of FLC and FLIIC by approximately $15 million. The transaction
resulted in a pre-tax gain of approximately $12 million for the Company in the
third quarter of 1993, and the Company estimates that the restructuring of this
subordinated debt will result in aggregate interest savings to FLC and FLIIC of
approximately $40 million over the next ten years. In recognition of this
reduced interest requirement, the interest rate on the surplus debenture of
Family Life held by FLC was reduced from 12.5% to 9%.
As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC
and FLIIC were modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the note remains at
9%, (c) the $4.5 million note was amended to provide for forty quarterly
principal payments, in the amount of $24,531 each for the period December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the final
quarterly principal payment is due on September 12, 2006; the interest rate on
the note remains at 9%, (d) the $2.5 million note was amended to provide that
the principal balance of the note is to be repaid in twenty quarterly
installments of $125,000 each, commencing December 12, 1996 with the final
payment due on September 12, 2001; the rate of interest remains at 12% and (e)
the Master PIK note, which was issued to provide for the payment in kind of
interest due under the terms of the $2.5 million note prior to June 12, 1996,
was amended to provide that the principal balance of the note, in the amount of
$1,977,119, is to be paid in twenty quarterly principal payments, in the amount
of $98,855.95 each, to commence December 12, 1996 with the final payment due on
September 12, 2001; the interest rate on the note remains at 12%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
-18-
ILCO's Senior Loan
ILCO's Senior Loan was fully repaid as of September 30, 1998. The Senior Loan of
ILCO was originally arranged in connection with the 1988 acquisition of
Investors-NA and Investors-CA. In January, 1993, ILCO refinanced its Senior
Loan. That transaction was done in connection with the prepayment of the
subordinated indebtedness and the purchase of warrants which had been issued as
part of the financing of the 1988 acquisitions. The terms of the amended and
restated credit facility were substantially the same as the terms and provisions
of the 1988 Senior Loan. The maturity date, which had been December 31, 1996,
was extended to July 1, 1998 for the Senior Loan. The average interest rate paid
by ILCO on its Senior Loan was approximately 7.63% during 1998.
In February, 1995, ILCO borrowed an additional $15 million under the Senior Loan
to help finance the acquisition of Meridian Life Insurance Company, and the
maturity date of the Senior Loan was further extended to July 1, 1999. In
connection with ILCO's acquisition of State Auto Life Insurance Company in July,
1997, ILCO's Senior Loan agreement was modified to extend the maturity date to
October 1, 1998.
As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
Regulation
General. The Company and its insurance subsidiaries are subject to regulation
and supervision at both the state and Federal level, including regulation under
federal and state securities laws and regulation by the states in which they are
licensed to do business. The state insurance regulation is designed primarily to
protect policy owners. Although the extent of regulation varies by state, the
respective state insurance departments have broad administrative powers relating
to the granting and revocation of licenses to transact business, licensing of
agents, the regulation of trade practices and premium rates, the approval of
form and content of financial statements and the type and character of
investments.
These laws and regulations require the Company's insurance subsidiaries to
maintain certain minimum surplus levels and to file detailed periodic reports
with the supervisory agencies in each of the states in which they do business
and their business and accounts are subject to examination by such agencies at
any time. The insurance laws and regulations of the domiciliary states of the
Company's insurance subsidiaries require that such subsidiaries be examined at
specified intervals.
Investors-NA and Investors-IN are domiciled in the states of Washington and
Indiana, respectively. In December, 1992, Investors-NA redomesticated from
Pennsylvania to Washington, and Investors-CA merged into Investors-NA. In June,
1993, Standard Life merged into Investors-NA. Prior to December, 1997,
Investors-IN was domiciled in the State of New Jersey. In December, 1997,
Investors-IN transferred its domicile to the State of Indiana.
-19-
A number of states regulate the manner and extent to which insurance companies
may test for acquired immune deficiency syndrome (AIDS) antibodies in connection
with the underwriting of life insurance policies. To the extent permitted by
law, the Company's insurance subsidiaries consider AIDS information in
underwriting coverage and establishing premium rates. An evaluation of the
financial impact of future AIDS claims is extremely difficult, due in part to
insufficient and conflicting data regarding the incidence of the disease in the
general population and the prognosis for the probable future course of the
disease.
Risk Based Capital Requirements. The National Association of Insurance
Commissioners ("NAIC") has imposed Risk-Based Capital ("RBC") requirements to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance risks associated with; (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (iv) other business factors.
The RBC formula is intended to be used by insurance regulators as an early
warning tool to discover potential weakly capitalized companies for the purpose
of initiating regulatory action. The RBC requirements are not intended to be a
basis for ranking the relative financial strength of insurance companies. The
formula also defines a new minimum capital standard which will supplement the
prevailing system of low fixed minimum capital and surplus requirements on a
state-by-state basis.
The RBC requirements provide for four different levels of regulatory attention
in those states that adopt the NAIC regulations, depending on the ratio of the
company's Total Adjusted Capital (which generally consist of its statutory
capital, surplus and asset valuation reserve) to its Authorized Control Level
RBC. A "Company Action Level Event" is triggered if a company's Total Adjusted
Capital is less than 200% but greater than or equal to 150% of its Authorized
Control Level RBC, or if a negative trend has occurred (as defined by the
regulations) and Total Adjusted Capital is less than 250% but more than 200% of
its Authorized Control Level RBC. When a Company Action Level Event occurs, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. A
"Regulatory Action Level Event" is triggered if a company's Total Adjusted
Capital is less than 150% but greater than or equal to 100% of its Authorized
Control Level RBC. When a Regulatory Action Level Event occurs, the regulatory
authority will perform a special examination of the company and issue an order
specifying corrective actions that must be followed. An "Authorized Control
Level Event" is triggered if a company's Total Adjusted Capital is less than
100% but greater than or equal to 70% of its Authorized Control Level RBC, and
the regulatory authority may take any action it deems necessary, including
placing the company under regulatory control. A "Mandatory Control Level Event"
is triggered if a company's total adjusted capital is less than 70% of its
Authorized Control Level RBC, and the regulatory authority is mandated to place
the company under its control.
Calculations using the NAIC formula and the statutory financial statements of
the Company's insurance subsidiaries as of December 31, 2000 indicate that the
Total Adjusted Capital of each of the Company's insurance subsidiaries is above
560% of its respective Authorized Control Level RBC.
-20-
Solvency Laws Assessments. The solvency or guaranty laws of most states in which
an insurance company does business may require that company to pay assessments
(up to certain prescribed limits) to fund policyholder losses or liabilities of
insurance companies that become insolvent. Recent insolvencies of insurance
companies increase the possibility that such assessments may be required. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain instances, may be
offset against future premium taxes. The insurance companies record the expense
for guaranty fund assessments in the period assessed. For the year ended
December 31, 2000, Family Life and ILCO's insurance subsidiaries received
credits on their guaranty fund assessment returns, in the amount of $54,344 and
$24,136, respectively. Those amounts are net of the amounts that can be offset
against future premium taxes and, in the case of Family Life, the amount is also
net of the amount that can be recovered from Merrill Lynch pursuant to the Stock
Purchase Agreement between FIC and Merrill Lynch. See "Acquisition of Family
Life." The likelihood and amount of any other future assessments cannot be
estimated and are beyond the control of FIC and ILCO.
Surplus Debentures and Dividends. The principal sources of cash for FLC to make
payments of principal and interest on the Family Life Senior Loan are payments
under the surplus debenture of Family Life Insurance Company (a
Washington-domiciled insurer) and dividends paid by Family Life. Under current
Washington law, any proposed payment of a dividend or distribution which,
together with dividends or distributions paid during the preceding twelve
months, exceeds the greater of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) statutory net gain from operations for the preceding
calendar year is an "extraordinary dividend" and may not be paid until either it
has been approved, or a 60-day waiting period shall have passed during which it
has not been disapproved, by the Washington Insurance Commissioner. In 1993,
Washington amended its insurance code to retain the above-described "greater of"
standard for dividends, but enacted requirements that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner and that
cash dividends may be paid only from earned surplus. Family Life does not
presently have earned surplus as defined by the regulations adopted by the
Washington Insurance Commissioner and, therefore, is not presently permitted to
pay cash dividends. However, since this law applies only to dividend payments,
the ability of Family Life to make principal and interest payments under the
surplus debenture is not affected.
Principal and interest payments on the surplus debenture have provided
sufficient funds to meet debt service obligations of FLC. Under the provisions
of the surplus debenture and current law, Family Life can pay interest and
principal on the surplus debenture without having to obtain the prior approval
of the Washington Insurance Commissioner; provided that, after giving effect to
the payment of interest or principal on the surplus debenture, the statutory
capital and surplus of Family Life exceeds 6% of its assets. Pursuant to the
surplus debenture, Family Life paid principal and interest in 1998, 1999 and
2000 totaling $11,564,978, $10,754,978 and $8,982,244 respectively. Family Life
does give five-days prior notification to the Washington Insurance Department of
each proposed payment on the surplus debenture in accordance with an agreement
between Family Life and the Department. The Company does not anticipate that,
for the foreseeable future, Family Life will have any difficulty in making
payments to Family Life Corporation in amounts sufficient to enable Family Life
Corporation to service its indebtedness, either by payments of principal and
interest by Family Life on the Surplus Debenture or partial redemptions by
Family Life of its redeemable preferred stock.
-21-
Valuation Reserves. Life insurance companies are required to establish an Asset
Valuation Reserve ("AVR") consisting of two components: (i) a "default
component," which provides for future credit-related losses on fixed maturity
investments, and (ii) an "equity component," which provides for losses on all
types of equity investments, including equity securities and real estate.
Insurers are also required to establish an Interest Maintenance Reserve ("IMR"),
designed to defer realized capital gains and losses due to interest rate changes
on fixed income investments and to amortize those gains and losses into future
income. The IMR is required to be amortized into statutory earnings on a basis
reflecting the remaining period to maturity of the fixed maturity securities
sold. These reserves are required by state insurance regulatory authorities to
be established as a liability on a life insurer's statutory financial
statements, but do not affect the financial statements prepared in accordance
with GAAP. Management believes that the combination of the AVR and IMR will
affect statutory capital and surplus and may reduce the ability of the Company's
insurance subsidiaries to pay dividends to ILCO.
Insurance Holding Company Regulation. Family Life is subject to regulation under
the insurance and insurance holding company statutes of Washington. The
insurance holding company laws and regulations vary from jurisdiction to
jurisdiction, but generally require insurance and reinsurance subsidiaries of
insurance holding companies to register with the applicable state regulatory
authorities and to file with those authorities certain reports describing, among
other information, their capital structure, ownership, financial condition,
certain intercompany transactions and general business operations. The insurance
holding company statutes also require prior regulatory agency approval or, in
certain circumstances, prior notice of certain material intercompany transfers
of assets as well as certain transactions between insurance companies, their
parent companies and affiliates.
Under the Washington Insurance Code, unless (i) certain filings are made with
the Washington Department of Insurance, (ii) certain requirements are met,
including a public hearing and (iii) approval or exemption is granted by the
insurance commissioner, no person may acquire any voting security or security
convertible into a voting security of an insurance holding company, such as the
Company, which controls a Washington insurance company, or merge with such a
holding company, if as a result of such transaction such person would "control"
the insurance holding company. "Control" is presumed to exist if a person
directly or indirectly owns or controls 10% or more or the voting securities of
another person.
-22-
Privacy Legislation. On November 12, 1999, President Clinton signed into law the
Financial Services Modernization Act (referred to in this paragraph as the
"Act") of 1999, implementing fundamental changes in the regulation of the
financial services industry in the United States. In general, the Act provides
that financial institutions have certain obligations with respect to the
maintenance of the privacy of customer information, so as to insure the security
and confidentiality of customer records and information, to protect against any
anticipated threats or hazards to the security or integrity of these records and
to protect against unauthorized access or use of these records or information
which could result in substantial harm or inconvenience to any customer. In
addition, the Act places new restrictions on disclosure of nonpublic personal
information to third party institutions seeking to utilize such information in
connection with the sale of products or services. A financial institution may
disseminate certain types of customer information to nonaffiliated third parties
if the institution provides clear and conspicuous disclosure of the
institution's privacy policy and the customer authorizes the release of certain
information to third parties. Where the customer permits the release of the
information, the Act restricts disclosure of information that is non-public in
nature but does not prohibit the release of information which can be obtained
from public sources. The passage of the Act and regulations pertaining thereto
may adversely affect FIC's insurance subsidiaries from utilizing certain sales
methods; however, at this time, FIC is unable to determine to what extent the
final regulations will impact the sales practices of FIC's insurance
subsidiaries.
Potential Federal Regulation. Although the federal government generally does not
directly regulate the insurance industry, federal initiatives often have an
impact on the business. Congress and certain federal agencies are investigating
the current condition of the insurance industry (encompassing both life and
health and property and casualty insurance) in the United States in order to
decide whether some form of federal role in the regulation of insurance
companies would be appropriate. Congress is currently conducting a variety of
hearings relating in general to the solvency of insurers. It is not possible to
predict the outcome of any such congressional activity nor the potential effects
thereof on Family Life.
Federal Income Taxation. The Revenue Reconciliation Act of 1990 amended the
Internal Revenue Code of 1986 to require a portion of the expenses incurred in
selling insurance products to be deducted over a period of years, as opposed to
an immediate deduction in the year incurred. Since this change only affects the
timing of the deductions, it does not affect tax expense as shown on the
Company's financial statements prepared in accordance with GAAP. However, the
change will increase the tax for statutory accounting purposes in the first few
years, which will reduce statutory surplus and, accordingly, may decrease the
amount of cash dividends that Family Life can pay. For the years ended December
31, 1998, 1999 and 2000, the decreases in Family Life's current income tax
provisions, utilizing the effective tax rates, due to this change were $89,034 ,
$78,759 and $177,038 respectively. The change has a negative tax effect for
statutory accounting purposes when Family Life's premium income increases, but
has a positive tax effect when its premium income decreases.
The Company and Family Life filed a consolidated federal income tax returns for
the years 2000 and 1999.
Segment Information
The principal operations of the Company's insurance subsidiaries are the
underwriting of life insurance and annuities. Accordingly, no separate segment
information is required to be provided by the Registrant for the three-year
period ending December 31, 2000.
-23-
Item 2. Properties
ILCO's home office is located at River Place Pointe, 6500 River Place Blvd.,
Building One, Austin, Texas. River Place Pointe was purchased by Investors-NA on
October 29, 1998. It consists of two adjoining tracts of land located in Austin,
Texas totaling 47.995 acres. The aggregate purchase price for these tracts was
$8.1 million. Prior to the closing of the transaction, Investors-NA obtained a
Site Development Permit for the tracts from the City of Austin. The Site
Development Permit allows for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. Construction on the first phase of the Project, which consists of
two office buildings, an associated parking garage, and related infrastructure
was completed during 2000. The second phase of construction, which includes two
more office buildings, is in progress and Investors-NA expects completion of
this phase by the end of the second quarter of 2001. ILCO, FIC and their
insurance subsidiaries occupy almost the entire Building One of River Place
Pointe, consisting of approximately 74,021 square feet of space.
Family Life leases its home offices at the Sedgwick James Building, 2101 Fourth
Avenue, in Seattle, Washington. The lease currently covers approximately 7,776
rentable square feet of office space for a term expiring on October 31, 2001.
Family Life is in the process of renewing this lease for a two year period
commencing on November 1, 2001 and expiring on October 31, 2003. The base rental
for the renewal paid will be approximately $16,362 per month, which includes
Family Life's proportionate share of the building's operating expenses,
including utilities, property taxes, insurance, maintenance and management.
Actual increases from those initial operating expenses during the lease term are
passed on to Family Life on a proportionate basis.
The Company believes that its properties and leased space are adequate to meet
its foreseeable requirements.
-24-
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal actions related
to the normal business operations of the Company. Management believes that the
resolution of such legal actions will not have a material impact on the
financial statements.
ILCO and Investors-NA are defendants in a lawsuit which was filed in October,
1996, in Travis County, Texas. CIGNA Corporation, an unrelated company, is also
a named defendant in the lawsuit. The named plaintiffs in the suit (a husband
and wife), allege that the universal life insurance policies sold to them by INA
Life Insurance Company (a company which was merged into Investors-NA in 1992)
utilized unfair sales practices. The named plaintiffs seek reformation of the
life insurance contracts and an unspecified amount of damages. The named
plaintiffs also seek a class action as to similarly situated individuals. No
certification of a class has been granted as of the date hereof. ILCO believes
that the suit is without merit and intends to vigorously defend this matter.
Additionally, ILCO's insurance subsidiaries are regularly involved in
litigation, both as a defendant and as plaintiff. The litigation naming the
insurance subsidiaries as defendant ordinarily involves our activities as a
provider of insurance protection products. We do not believe that such
litigation, either individually or in the aggregate, will have a material
adverse effect on the Company's business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 2000, to a vote of security holders.
-25-
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
A. Market Information
FIC's common stock is traded in the Nasdaq Small-Cap Market (NASDAQ symbol:
FNIN). The following table sets forth the quarterly high and low sales prices
for FIC common stock for 2000 and 1999. Quotations are furnished by the National
Association of Securities Dealers Automated Quotation System (NASDAQ).
Common Stock
Prices
High Low
2000
First Quarter $10.50 $7.25
Second Quarter 10.50 8.00
Third Quarter 9.50 7.875
Fourth Quarter 10.00 8.500
1999
First Quarter $17.375 $12.00
Second Quarter 14.00 7.625
Third Quarter 15.50 8.00
Fourth Quarter 10.75 9.25
B. Holders
As of March 6, 2001 there were approximately 14,736 record holders of FIC common
stock.
-26-
C. Dividends
In the year 2000, FIC paid a cash dividend in the amount of $.18 per share,
which was payable on April 12, 2000, to shareholders of record on April 5, 2000.
The ability of an insurance holding company, such as FIC, to pay dividends to
its shareholders may be limited by the company's ability to obtain revenue, in
the form of dividends and other payments, from its operating insurance
subsidiary or subsidiaries. The right of Family Life to pay dividends is
restricted by the insurance laws of its domiciliary state. See Item 1. Business
- - Regulation - Surplus Debentures and Dividends. However, FIC does not directly
own Family Life's stock but, instead, indirectly owns that stock through a
downstream holding company, Family Life Corporation ("FLC"). FLC, which holds
all of the stock of Family Life, is restricted from paying dividends on its
common stock by the provisions of the notes from Investors-NA. FIC (as the
successor to the obligations of FLIIC under the provisions of the $4.5 million
subordinated note held by Investors-NA), is prohibited from paying dividends on
its stock by the provisions of the $4.5 million subordinated note. In order to
provide for the payment of the $.18 per share annual dividend payable on April
12, 2000, FIC requested a waiver from Investors-NA of the above-described
restrictions of the loan agreements. Investors-NA granted the requested waiver,
thereby permitting FIC to make the dividend payment to its shareholders.
The ability of ILCO to pay dividends to FIC and the other shareholders of ILCO
is affected by the receipt of dividends and other payments from its insurance
subsidiaries.
Item 6. Selected Financial Data: (Registrant and its Consolidated Subsidiaries)
(In thousands, except per share data)
2000 1999 1998 1997 1996
Operating Revenues $ 44,418 $ 46,244 $ 52,293 $ 63,343 $ 59,928
Income before federal
income tax, equity in net
earnings of affiliates 6,482 7,013 8,973 13,411 9,791
Income before equity in
net earnings of affiliates 5,198 5,839 6,605 9,870 7,145
Equity in net earnings of
affiliate, net of tax 3,581 3,310 2,613 6,458 9,012
Net Income $ 8,779 $ 9,149 $ 9,218 $ 16,328 $ 16,157
Common Stock and
Common Stock 5,163 5,200 5,557 5,589 5,568
Equivalents
Net income per share
Basic $ 1.74 $ 1.81 $ 1.71 $ 3.01 $ 2.98
Diluted $ 1.70 $ 1.76 $ 1.66 $ 2.92 $ 2.90
Total Assets $300,766 $294,054 $301,738 $304,324 $287,730
Long Term Obligations $ 35,349 $ 41,497 $ 47,645 $ 53,792 $ 59,940
-27-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
FIC's financial condition and results of operations.
Forward-Looking Statements
Except for historical factual information set forth in this Management's
Discussion and Analysis, the statements, analyses, and other information
contained in this report relating to trends in the Company's operations and
financial results, the markets for the Company's products, the future
development of the Company's business, and the contingencies and uncertainties
to which the Company may be subject, as well as other statements including words
such as "anticipate," "believe," "path," "estimate," "expect," "intend" and
other similar expressions constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. Such statements are made based
upon management's current expectations and beliefs concerning the financial
results, economic conditions and are subject to known and unknown risks,
uncertainties and other factors contemplated by the forward-looking statements.
Such factors include, among other things: (1) general economic conditions and
other factors, including prevailing interest rate levels and stock market
performance, which may effect the ability of FIC to sell its products, the
market value of FIC's investments and the lapse rate and profitability of
policies; (2) FIC's ability to achieve anticipated levels of operational
efficiencies and cost-saving initiatives; (3) customer response to new products,
distribution channels and marketing initiatives; (4) mortality, morbidity and
other factors which may affect the profitability of FIC's insurance products;
(5) changes in the Federal income tax laws and regulations which may affect the
relative tax advantages of some of FIC's products; (6) increasing competition in
the sale of insurance and annuities; (7) regulatory changes or actions,
including those relating to regulation of insurance products and insurance
companies; (8) ratings assigned to FIC's insurance subsidiaries by independent
rating organizations such as A.M. Best Company, which FIC believes are
particularly important to the sale of annuity and other accumulation products;
and (9) unanticipated litigation. There can be no assurance that other factors
not currently anticipated by management will not also materially and adversely
affect FIC.
-28-
Results of Operations - Three Years Ended December 31, 2000, 1999 and 1998
For the year ended December 31, 2000, FIC's net income was $8,779,000 (basic
earnings of $1.74 per common share or diluted earnings of $1.70 per common
share) which was a decrease as compared to $9,149,000 (basic earnings of $1.81
per common share or diluted earnings of $1.76 per common share) for the year
ended December 31, 1999 and $9,218,000 (basic earnings of $1.71 per common share
or diluted earnings of $1.66 per common share) for the year ended December 31,
1998. Earnings per share are stated in accordance with the requirements of
Financial Accounting Standard (FAS) No. 128, which establishes two measures of
earnings per share: basic earnings per share and diluted earnings per share.
Basic earnings per share are computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect the potential dilution that would
occur if securities or other contracts to issue common stock were converted or
exercised. Net income for the year 1999 was affected by the inclusion of
$629,000 of gain from the sale of real estate located in Jackson, Mississippi.
Premiums for the year 2000, net of reinsurance ceded, were $33.1 million, as
compared to $33.96 million for the year 1999 and $38.4 million for the year
1998. This source of revenue is related to Family Life's traditional life
insurance book of business, especially Family Life's decreasing term products.
The first year premiums for 2000 were relatively level with 1999. The decrease
in first year premiums from 1998 to 1999 of $0.7 million was related to higher
level of new sales in 1998. The level of, renewal premiums for the year 2000 was
$0.6 million lower than for the year 1999, and the level for the year 1999 was
$3.7 million lower that for the year 1998. The decrease in renewal premium is
attributable to the decrease in the traditional life insurance book of business.
The net investment income was approximately level from 1999 to 2000 mainly due
to the long term portfolio remaining level while short term investments were
decreasing and the short term rates were increasing. The net investment income
for 1999 was $6.9 million as compared to $7.8 million in 1998. There was a
decrease of approximately $0.9 million from 1998 to 1999.
-29-
Earned insurance charges for 2000 were $4.3 million, as compared to $4.8 million
in 1999 and $6.0 million in 1998. This source of revenue is related to the
universal life insurance and annuity book of business of Family Life. The amount
is consistently decreasing because Family Life Insurance Company reinsures all
of its universal life and annuity business with Investors-NA. As a result,
earned insurance charges are affected by a decreasing block of business.
Policyholder benefits and expenses were $13.5 million in 2000, as compared to $
12.9 million in 1999 and $14.9 million in 1998. The $600,000 increase in
policyholder benefits and expenses from 1999 to 2000 is due to an increase in
policyholder expenses. The $2.0 million decrease in policyholder benefits and
expenses from 1998 to 1999 is due to a decrease in the reserves of $2.8
million., which is related to a lower level of premiums, and an increase in
death claims of $1.1 million.
Interest expense on contract holders deposit funds was $2.2 million in each of
the years 2000 and 1999, as compared to $2.4 million in 1998. This expense is
related to the universal life book of business, which was a relatively level
amount during the three-year period.
In 2000, the amortization of present value of future profits of acquired
business was $3.7 million as compared to $5.2 million in 1999 and $6.1 million
in 1998. The amortization of present value of future profits decreased by $1.5
million in 1999 to 2000 and $958,000 from 1998 to 1999. These decreases in
amortization were expected and should continue to decrease as the underlying
asset, present value of future profits decreases.
-30-
The amortization of deferred policy acquisition costs was $5.3 million in 2000,
as compared to $5.2 million in 1999 and $5.2 million in 1998. The increase in
amortization of $171,000 from 1999 to 2000 can be attributed to the
capitalization of expenses incurred in connection with the writing of new
business.
The operating expenses for 2000 were $11.4 million, as compared to
$11.7 million on 1999 and $11.8 million in 1998. The decrease in operating
expenses of $365,000 from 1999 to 2000 is due to a reduction of overall
operating expenses in 2000 and the reduction of Y2K conversion expenses incurred
in 2000 as compared to 1999's expenses. The experience of level expenses from
1998 to 1999 was due to a reduction of overall operating expenses in 1999 offset
by the additional costs relating to the Y2K conversion.
Interest expense for 2000 was $1.9 million, as compared to $2.4 million in 1999
and $2.9 million in 1998. The continued decrease of interest expenses from 1999
to 2000 is consistent with the scheduled pay down of FIC's debt to Investors-NA.
The provision for federal income taxes was $1.28 million in 2000 as compared to
$1.17million in 1999 and $2.37 million in 1998. The provision for federal income
taxes for the years 2000 and 1999 is substantially lower that for 1998, due to
the utilization in 1999 and 2000 of the small company deduction by Family Life
Insurance Company. That deduction was not available to Family Life in the year
1998 under the applicable federal income tax rules. The availability of the
deduction reduced federal income taxes by $600,000 in 1999 and $400,000 in 2000.
Results of Operations - Three Months Ended December 31, 2000
as compared to the Three Months Ended December 31, 1999
For the three-month period ended December 31, 2000, FIC's net income was $2.193
million (basic and diluted earnings of $0.85 per common share) on revenues of
$10.649 million as compared to the net income of $2.604 million (basic earnings
and diluted earnings of $1.02 per common share) on total revenues of $11.169
million in the last three months of 1999. Earnings per share are stated in
accordance with the requirements of Financial Accounting Standard (FAS) No. 128,
which establishes two measures of earnings per share: basic earnings per share
and diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflect the
potential dilution that would occur if securities or other contracts to issue
common stock were converted or exercised.
-31-
Equity in Net Income of InterContinental Life Corporation
General
Prior to the acquisition of Family Life in June of 1991, FIC's primary
involvement in the life insurance business was through its equity interest in
ILCO. For the year 2000, the Company's equity in the net earnings of ILCO, net
of federal income tax, was $3,581,000 ,which was an increase as compared to
$3,310,000 for the year 1999 and $2,613,000 for the year 1998. The increase in
equity income from ILCO of $271,000 from 1999 to 2000 is due to an increase in
the percentage ownership FIC has in ILCO and is partially offset by a decrease
in ILCO's net income. The equity income from ILCO of $697,000 from 1998 to 1999
can be attributed to an increase in ILCO's net income of $1.6 million from 1998
to 1999.
FIC currently owns 3,590,592 shares of ILCO's common stock. In addition, Family
Life currently owns 343,400 shares of ILCO common stock. As a result, FIC
currently owns, directly and indirectly through Family Life, 3,932,692 shares
(approximately 48.3%) of ILCO's common stock.
FIC carries its investment in ILCO on the equity method of accounting. At
December 31, 2000, FIC's investment in affiliate was valued at $79.1 million.
The book value of ILCO's common stock at December 31, 2000 was $19.70 per share,
which is substantially above the market value ($9.50) of ILCO's common stock on
that same date. The applicable accounting standards permit FIC to carry its
investment in ILCO on the equity method of accounting, without any adjustment to
reflect the difference between book value and market value. Under certain
circumstances, Accounting Principles Board Opinion 18 ("APB 18") and Staff
Accounting Bulletin Topic 5.M ("SAB 5.M") require an adjustment to earnings
where the value of an investment is deemed to have decreased on an other than a
temporary basis. Application of the "other than temporary" provisions of APB 18
and SAB 5.M to FIC's investment in ILCO would potentially result in a charge to
earnings in some future period. The amount of such charge would be based
primarily upon the market price of ILCO's common stock, which ranged from $9.313
per share to $14.56 per share during the first quarter of 2001. Based on that
range of market prices, the range of possible impairment charges which might
result would be from $20.22 million to $39.36 million, net of tax.
However, management believes that an adjustment to earnings is neither required
nor appropriate under the provisions of APB 18 and SAB 5.M. In addition,
management notes that FIC and ILCO are currently parties to an Agreement and
Plan of Merger whereby ILCO would become a wholly- owned subsidiary of FIC. FIC
believes that it is probable that the merger will be consummated. After the
merger, FIC will include ILCO in its consolidated financial statements. FIC
expects to recover the cost of its investment in ILCO from the realization of
ILCO's net assets through consolidation.
Further, in the event that the merger transaction were not completed, ILCO has
the ability to resume its stock repurchase plan. If ILCO were to make additional
purchases under that plan, the additional purchases would reduce the number of
ILCO's outstanding shares, thereby increasing the percentage of FIC's ownership
interest in ILCO. Alternatively, FIC could purchase shares of FIC in the open
market or in negotiated transactions to increase the percentage of its ownership
in ILCO. In the event that the ownership percentage were to be increased to more
than 50%, FIC would include ILCO in its consolidated financial statements, which
would produce the results described in the preceding paragraph.
-32-
In the event that none of the above-described events were to occur and FIC was
required to recognize an earnings charge for an "other than temporary"
impairment, the ability of FIC to record on an equity basis its interest in the
net earnings of ILCO may be limited by the future market value of ILCO's common
stock. Since the amount of any such adjustments would be dependent upon the
future market value of ILCO's common stock, FIC's management is not able to
estimate the potential range of charges which might occur in future periods.
The decrease in long-term interest rates during the last part of the year 2000,
which was related to general economic conditions, had a positive effect upon the
market value of the fixed maturities available for sale segment of ILCO's
investment portfolio. As of December 31, 2000, the market value of the fixed
maturities available for sale segment was $440.7 million as compared to an
amortized cost of $437.0 million, or an unrealized gain of $3.7 million. Since
FIC owns approximately 48.3% of the common stock of ILCO, such unrealized gains,
net of tax, are reflected in FIC's investment in affiliate and accumulated other
comprehensive income, and had the effect of increasing the reported value of
such equity interest by approximately $1.2 million.
ILCO's results for 1998 include, for the period beginning on June 30, 1998, the
operations of Grinnell Life Insurance Company. Grinnell Life was acquired on
June 30, 1998, through a subsidiary of ILCO, for an adjusted purchase price of
$16.6 million. A portion of the purchase price ($12.37 million) was paid by way
of a dividend to the seller immediately prior to the closing of the transaction;
the balance of the purchase price was paid by ILCO's subsidiary. As part of the
transaction, Grinnell Life was immediately merged with and into that subsidiary,
with that subsidiary being the surviving entity.
Liquidity and Capital Resources of ILCO
Liquidity describes the ability of a company to generate sufficient cash flows
to meet the cash requirements of business operations. Historically, our
principal cash flow sources have been from periodic payment of principal and
interest by Investors-NA, pursuant to the terms of the Surplus Debentures. In
addition to the need for cash flow to meet operating expenses, our liquidity
requirements relate principally to the liabilities associated with our various
life insurance and annuity products. Our product liabilities include the payment
of benefits under life insurance and annuity products, as well as the payment of
policy surrenders, withdrawals and policy loans.
-33-
ILCO is an insurance holding company. The principal assets of ILCO consist of
the outstanding capital stock of Investors-NA and its subsidiary, Investors-IN.
Prior to June 30, 2000, ILCO's principal source of liquidity consisted of the
periodic payment of principal and interest by Investors-NA, pursuant to the
terms of the Surplus Debentures. The Surplus Debentures were originally issued
by Standard Life Insurance Company and their terms were previously approved by
the Mississippi Insurance Commissioner. In connection with the 1993 merger of
Standard Life into Investors-NA, the obligations of the Surplus Debentures were
assumed by Investors-NA. As of June 30, 2000, the outstanding principal balance
of the Surplus Debentures was completely paid off. For periods subsequent to
June 30, 2000, ILCO's available source of liquidity is dividends paid to it from
its subsidiaries. Applicable state insurance laws generally restrict the ability
of insurance companies to pay cash dividends in excess of prescribed limitations
without prior approval. The ability of Investors-NA to pay shareholder dividends
is and will continue to be subject to restrictions set forth in the insurance
laws and regulations of Washington, its domiciliary state. The Washington
insurance law limits how and when Investors-NA can pay shareholder dividends by
including the "greater of" standard for payment of dividends to shareholders,
and requiring that prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and that cash dividends may be paid only from
earned surplus. Under the "greater of" standard, an insurer may pay a dividend
in an amount equal to the greater of (i) 10% of the policyholder surplus or (ii)
the insurer's net gain from operations for the previous year. As of December 31,
2000, Investors-NA had earned surplus of $69.1 million.
Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance
code, a domestic insurer may make dividend distributions upon proper notice to
the Department of Insurance, as long as the distribution is reasonable in
relation to adequate levels of policyholder surplus and quality of earnings.
Under Indiana law the dividend must be paid from earned surplus. Extraordinary
dividend approval would be required where a dividend exceeds the greater of 10%
of surplus or the net gain from operations for the prior fiscal year.
Investors-IN had earned surplus of $ 23.8 million at December 31, 2000.
The Form 10-Ks of ILCO for the years ended December 31, 2000, 1999 and 1998, set
forth the business operations and financial results of ILCO and its life
insurance subsidiaries. Such 10-K reports of ILCO, including the discussion by
ILCO's management under the caption "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" are incorporated herein by
reference.
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the common stock of
Family Life and its equity ownership in ILCO. FIC's primary sources of capital
consists of cash flow from operations of its subsidiaries and the proceeds from
bank and institutional borrowings.
-34-
The principal source of liquidity for FIC's subsidiaries consists of the
periodic payment of principal and interest by Family Life pursuant to the terms
of a Surplus Debenture. The terms of the Surplus Debenture were previously
approved by the Washington Insurance Commissioner. Under the provisions of the
Surplus Debenture and current law, no prior approval of the Washington Insurance
Department is required for Family Life to pay interest or principal on the
Surplus Debenture; provided that, after giving effect to such payments, the
statutory surplus of Family Life is in excess of 6% of assets (the "surplus
floor"). However, Family Life has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days advance notice of
payments which it will make under the surplus debenture. As of December 31,
2000, the statutory capital and surplus of Family Life was $23.8 million, an
amount substantially in excess of the surplus floor. During 2000, Family Life
made principal payments of $8.0 million and interest payments of $1.0 million to
Family Life Corporation under the Surplus Debenture. As of December 31, 2000,
the principal balance of the Surplus Debenture was $5.9 million. The funds
required by Family Life to meet its obligations under the terms of the Surplus
Debenture are generated primarily from premium payments from policyholders,
investment income and the proceeds from the sale
and redemption of portfolio investments.
Washington's insurance code includes the "greater of" standard for dividends but
has requirements that prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and that cash dividends may be paid only from
earned surplus. Family Life does not presently have earned surplus as defined by
the regulations adopted by the Washington Insurance Commissioner and, therefore,
is not permitted to pay cash dividends. However, since the new law applies only
to dividend payments, the ability of Family Life to make principal and interest
payments under the Surplus Debenture is not affected. The Company does not
anticipate that, for the foreseeable future, Family Life will have any
difficulty in making payments to Family Life Corporation in amounts sufficient
to enable Family Life Corporation to service its indebtedness, either by
payments of principal and interest by Family Life on the Surplus Debenture or
partial redemptions by Family Life of its redeemable preferred stock.
The sources of funds for Family Life consist of premium payments from
policyholders, investment income and the proceeds from the sale and redemption
of portfolio investments. These funds are applied primarily to provide for the
payment of claims under insurance and annuity policies, operating expenses,
taxes, investments in portfolio securities, shareholder dividends and payments
under the provisions of the Surplus Debenture.
FIC's net cash flow provided by operating activities was $7,000 for the year
2000, as compared to $2.6 million for the year 1999 and $6.0 million in 1998.
The decrease from 1999 to 2000 can be attributed to an increase in receivables
of $3.3 million in 2000 as compared to a $1.5 million increase in 1999. This
change is attributable to the reinsurance receivable from the universal life and
annuity business reinsured by Family Life with Investors-NA. In addition, the
change in cash flow provided by operating activities for the year 2000 was
adversely affected by a decrease in the amortization of the present value of
future profits and the amortization of deferred policy acquisition costs.
-35-
Net cash flow used in financing activities was ($7.05) million in 2000, as
compared to ($6.15) million in 1999 and ($13.10) million in 1998. The increase
for the year 2000 in cash used in financing activities is due to the cash
dividend paid to the FIC stockholders.
The guaranty commitments of FIC under the loans incurred in connection with the
acquisition of Family Life (after taking into account the repayments and new
loans which occurred in July, 1993) relate to: (i) the $22.5 million note issued
by Family Life Corporation to Investors Life Insurance Company of North America
and (ii) the $34.5 million loaned by Investors-NA to two subsidiaries of FIC.
Management believes that its cash, cash equivalents and short term investments
of FIC and its subsidiaries are sufficient to meet the needs of its business and
to satisfy debt service.
Investments
As of December 31, 2000, the Company's investment assets totaled $99.1 million,
as compared to $105.95 million in 1999.
The level of short-term investments at the end of 2000 was $15.6 million, as
compared to $24.8 million as of December 31, 1999. The fixed maturities
available for sale portion represents $79.8 million of investment assets as of
December 31, 2000, as compared to $77.5 million at the end of 1999. The
amortized cost of fixed maturities available for sale as of December 31, 2000
was $78.2 million representing a net unrealized gain of $1.6 million. This
unrealized gain principally reflects changes in interest rates from the date of
purchase of the related investments.
The decrease in long-term interest rates during the last part of the year 2000,
which was related to general economic conditions, had a positive effect upon the
market value of the fixed maturities available for sale segment of the Company's
portfolio. As of December 31, 2000, the market value of the fixed maturities
available for sale segment was $79.8 million as compared to an amortized value
of $78.2 million, or a realized gain of $1.6 million.
The assets held by Family Life must comply with applicable state insurance laws
and regulations. In selecting investments for the portfolios of its life
insurance subsidiaries, the Company's emphasis is to obtain targeted profit
margins, while minimizing the exposure to changing interest rates. This
objective is implemented by selecting primarily short- to medium-term,
investment grade fixed income securities. In making such portfolio selections,
the Company generally does not select new investments which are commonly
referred to as "high yield" or "non-investment grade".
The fixed maturities portfolio of Family Life, as of December 31, 2000,
consisted solely of fixed maturities investments which, in the annual statements
of the companies, as filed with state insurance departments, were designated
under the National Association of Insurance Commissioners ("NAIC") rating system
as a "1" (highest quality).
-36-
Prior to December, 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building known as the Standard Life Building,
which building was owned by Investors-NA. On December 29, 1999, Investors-NA
donated the Standard Life Building to the Jackson Redevelopment Authority
("JRA"). Contemporaneously with the donation of the Standard Life Building,
Investors-NA and FIC sold all of the adjacent parcels they owned to the JRA for
a total sale price of $2,500,000.00, which has been allocated according to the
respective ownership interests of Investors-NA (approximately 59.28%) and FIC
(approximately 40.72%). The donation and sale was made pursuant to the terms of
the Donation, Purchase and Sale Agreement dated July 17, 1998. Investors-NA
claimed an income tax deduction on its 2000 tax return for the donation of the
Standard Life Building of $864,231, The donation and sale transaction referenced
above resulted in a net of tax gain (GAAP basis) of $0.992 million for ILCO and
$0.409 million for FIC (or a combined total of $1.401 million) in 1999.
Management believes that the absence of "high-yield" or "non-investment grade"
investments (as defined above) in the portfolios of its life insurance
subsidiary enhances the ability of the Company to service its debt, provide
security to its policyholders and to credit relatively consistent rates of
return to its policyholders.
New Accounting Pronouncements
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133, as amended by FAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An Amendment of
FASB Statement No. 133", is applicable to financial statements for all fiscal
quarters of fiscal years beginning after June 15, 2000, as amended by FAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FAS No. 133". As the Company does not have significant
investments in derivative financial instruments, the adoption of FAS 133 did not
have a material impact on the Company's results of operations, liquidity or
financial position.
-37-
Subsequent Events
Agreement and Plan of Merger.
On January 17, 2001, FIC entered into an Agreement and Plan of Merger (the
"Agreement") with ILCO and ILCO Acquisition Company ("ILCO Acquisition"), a
Texas corporation and wholly-owned subsidiary of FIC. In general, the Agreement
provides that, following the approval of the Agreement by the shareholders of
ILCO and the approval of the issuance of shares of FIC common stock and
amendment to FIC's articles of incorporation by the shareholders of FIC and the
satisfaction or waiver of the other conditions to the merger: (1) ILCO
Acquisition will merge with and into ILCO; and (2) ILCO Acquisition will cease
to exist and ILCO will continue as the surviving corporation and as a
wholly-owned subsidiary of FIC following the merger.
Upon the consummation of the merger: (1) each share of ILCO common stock issued
and outstanding immediately prior to the merger, other than shares of ILCO
common stock held as treasury shares by ILCO (but excluding shares of ILCO
common stock held by any of ILCO's subsidiaries, whether or not treated as
treasury shares of ILCO on a consolidated basis under generally accepted
accounting principles) or shares of ILCO common stock held by FIC, will be
converted into the right to receive 1.1 shares of FIC common stock. However, in
the event of any change in FIC common stock and/or ILCO common stock prior to
the merger, such as a stock split, stock dividend, subdivision,
reclassification, recapitalization, combination, exchange of shares or the like,
the number and class of shares of FIC common stock to be issued and delivered in
the merger in exchange for each outstanding share of ILCO common stock will be
adjusted so as to maintain the relative proportionate interests of the holders
of ILCO common stock and FIC common stock; (2) each share of ILCO common stock,
series A preferred stock and series B preferred stock of ILCO, in each case
which is held as treasury shares by ILCO prior to the merger (excluding shares
of ILCO common stock held by any of ILCO's subsidiaries, whether or not treated
as treasury shares of ILCO on a consolidated basis under generally accepted
accounting principles), and each share of ILCO common stock which is held by FIC
(excluding any shares of ILCO common stock owned by any of FIC's subsidiaries)
prior to the merger, will be cancelled and retired; (3) each share of common
stock of ILCO Acquisition issued and outstanding immediately prior to the merger
will be converted into one share of common stock of ILCO and such shares will
represent all of the issued and outstanding capital stock of ILCO following the
merger; and (4) shares of FIC common stock outstanding immediately prior to the
merger (including shares of FIC common stock held by any subsidiary of FIC or
ILCO) will remain outstanding and will be unaffected by the merger. No
fractional shares of FIC common stock will be issued in the merger. A holder of
ILCO common stock who would otherwise be entitled to receive fractional shares
of FIC common stock as a result of the merger will receive, in lieu of
fractional shares, cash in an amount equal to the average closing price per
share of FIC common stock for the 30 trading days immediately prior to the
merger multiplied by the fraction to which the holder would otherwise be
entitled. FIC will make available to First Union National Bank, as exchange
agent, from time to time sufficient cash amounts to satisfy payment for
fractional shares and First Union will distribute such proceeds, without
interest, to the holders of the fractional interests.
The consummation of the merger remains subject to regulatory approval, as well
as to the various conditions precedent set forth in the Agreement, including the
approval of certain matters by the shareholders of FIC and ILCO. For a more
detailed description of the Agreement, see the complete copy of the Agreement,
attached as an annex to the S-4 filed by FIC with the Securities and Exchange
Commission on February 1, 2001, as amended by the S-4/A filed on March 13, 2001.
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Litigation Relating to the Merger
On the day that ILCO publicly announced the formation of a special committee to
evaluate a potential merger with FIC, two class action lawsuits were filed
against ILCO, FIC and the officers and directors of ILCO. The actions allege
that a cash consideration in the proposed merger is unfair to the shareholders
of ILCO, that it would prevent the ILCO shareholders from realizing the true
value of ILCO, and that FIC and the named officers and directors had material
conflicts of interest in approving the transaction.
In their initial pleadings, the plaintiffs sought certification of the cases as
class actions and the named plaintiffs as class representatives, and among other
relief, requested that the merger be enjoined (or, if consummated, rescinded and
set aside) and that the defendants account to the class members for their
damages.
As of March 16, 2001, the plaintiffs have not taken any further action with
respect to the litigation. The defendants believe that the lawsuits are without
merit and intend to vigorously contest the lawsuits. Management is unable to
determine the impact, if any, that the lawsuits will have on the results of
operations of ILCO.
NASDAQ Application
On January 24, 2001, FIC submitted an application to have its common stock
traded on the NASDAQ National Market under the symbol FNIN. FIC has provided
Nasdaq Listing Qualifications with appropriate documentation to support its
application and management expects the application process to be completed at
the beginning of April, 2001.
Unsolicited Verbal Inquiries Concerning Possible Purchase of Post-Merger Company
On March 8, 2001, FIC announced that it has received unsolicited verbal
indications of interest from a few companies that may be interested in acquiring
FIC after completion of the merger with ILCO. The press release did not state
any price ranges or other material terms. In conjunction with such indications
of interest, FIC has retained Philo Smith Capital Corporation as its financial
advisor to explore the possibility of a post-merger sale of FIC with these
companies and to further solicit indications of interest from other companies
that may have similar interests. No formal indications of interest have been
received by FIC to date and FIC has not determined to sell the post-merger
company.
-39-
Dividend
In March, 2001, FIC announced that its board of directors approved the payment
of an annual cash dividend in the amount of $0.41 per share. The dividend is
payable on April 12, 2001, to record holders as of the close of business on
March 19, 2001.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
General. FIC's principal assets are financial instruments, which are subject to
market risks. Market risk is the risk of loss arising from adverse changes in
market rates, principally interest rates on fixed rate investments. For a
discussion of the Company's investment portfolio and the management of that
portfolio to reflect the nature of the underlying insurance obligations of the
Company's insurance subsidiaries, please refer to the sections entitled
"Acquisition of ILCO" and "Investment of Assets" in Item 1 of this report and
the information set forth in Item 7, "Management's Discussion and Analysis of
Financial Condition and Operations - Investments".
The following is a discussion of the Company's primary market risk sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business operations of the Company, such
as the reinsurance recoveries on reinsurance treaties with third party insurers.
The primary market risk to the Company's investment portfolio is interest rate
risk. Since the Company own approximately 48.3% of the common stock of ILCO, the
interest rate risk of ILCO's fixed income portfolio has an effect on the value
of FIC's "investment in affiliate". The Company does not use derivative
financial instruments.
Interest Rate Risk
a. FIC's Fixed Income Investments:
The Company manages the interest rate risk inherent in our assets
relative to the interest rate risk inherent in our liabilities.
Generally, we manage interest rate risk based on the application
of a commonly used model. The model projects the impact of
interest rate changes on a range of factors, including duration
and potential prepayment. For example, assuming an immediate
increase of 100 basis points in interest rates, the net
hypothetical loss in fair market value related to the financial
instruments segment of the Company's balance sheet is estimated
to be $3.1 million at December 31, 2000 and $9.7 million at
December 31, 1999. For purposes of the foregoing estimate, the
following categories of the Company's fixed income investments
were taken into account: (i) fixed maturities, including fixed
maturities available for sale, (ii) short-term investments and
(iii) notes receivable from affiliates. The market value of such
assets was $95.4 million at December 31, 2000 and $102.4 million
at December 31, 1999.
-40-
The fixed income investments of the Company include certain
mortgage-backed securities. The market value of such securities
was $31.6 million at December 31, 2000 and $27.3 million at
December 31, 1999. Assuming an immediate increase of 100 basis
points in interest rates, the net hypothetical loss in the fair
market value related to such mortgage-backed securities is
estimated to be $1.4 million at December 31, 2000 and $1.9
million at December 31, 1999.
Separate account assets have not been included, since gains and
losses on those assets generally accrue to the policyholders.
The Company does not use derivative financial instruments to
manager our exposure to fluctuations in interest rates.
b. FIC's Investment in Affiliate:
The value of FIC's investment in affiliate is affected by the
amount of unrealized gains and losses, net of tax, in the
investment portfolio of its affiliate, ILCO. Assuming an
immediate increase of 100 basis points in interest rates, the net
hypothetical loss in value, net of tax, related to the Company's
investment in affiliate is estimated to be $ 6.2 million at
December 31, 2000 and $6.3 million at December 31, 1999.
The hypothetical effect of the interest rate risk on fair values was estimated
by applying a commonly used model. The model projects the impact of interest
rate changes on a range of factors, including duration and potential prepayment.
Item 8. Financial Statements and Supplementary Data
The following Financial Statements of the Registrant have been filed as part of
this report:
1. Report of PricewaterhouseCoopers LLP, Independent Accountants, dated April 2,
2001.
2. Consolidated Balance Sheets, as of December 31, 2000 and December 31, 1999.
3. Consolidated Statements of Income for the years ended December 31, 2000, 1999
and 1998.
4. Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2000, 1999 and 1998.
5. Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998.
6. Notes to Consolidated Financial Statements.
7. Consolidated Financial Statement Schedules.
-41-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No independent accountant who audited the Registrant's financial statements has
resigned or been dismissed during the two most recent fiscal years.
Part III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
The names and ages of the current directors of the Registrant, their principal
occupations or employment during the past five years and other data regarding
them are set forth below. All of the directors, other than Messrs. M. Scott
Mitte and Steven P. Schmitt, were elected at the 2000 annual shareholders
meeting. Messrs. Mitte and Schmitt appointed as a directors in October, 2000, to
fill a vacancies created by resignations of two directors. The data supplied
below is based on information provided by the directors, except to the extent
that such data is known to the Registrant.
-42-
Name Age Since Director and Other Information
John D. 58 1991 Director of FIC since 1991. Vice President, Investment
Barnett Professionals, Inc. from 1996 to present. Vice President,
Investments of Prudential Securities from 1983 to 1996.
Joseph F. 62 1992 Director of FIC since February 29, 1992. Vice President
Crowe of FIC from February 29, 1992 to January 3, 1997. Vice
President of ILCO from May 1991 to January, 1997.
Director of ILCO from May, 1991 until September, 1997.
Director and Executive Vice President of Investors-NA
and Investors-IN from June, 1991 to January, 1997.
Director and Executive Vice President of FLIC from June,
1991 to January, 1997.
Jeffrey H. 48 1995 Director of FIC since May, 1995. Vice President of FIC
Demgen since August, 1996. Vice President and Director of ILCO
since August, 1996. Director of FLIC since October,
1992. Executive Vice President of FLIC since August,
1996. Senior Vice President of FLIC from October,
1992 to August, 1996. Executive Vice President and
Director of Investors - NA since August, 1996. Senior
Vice President and Director of Investors - NA from
October, 1992 to June, 1995. Executive Vice President
and Director of Investors-IN since August, 1996. Senior
Vice President of Investors-IN from October, 1992 to
June, 1995.
-43-
Name Age Since Director and Other Information
Theodore A. 61 1996 Vice President and Director of FIC since August, 1996.
Fleron Vice President and Director of ILCO since May, 1991.
Assistant Secretary of ILCO since June, 1990. Senior
Vice President, General Counsel, Assistant Secretary and
Director of Investors - NA and Investors-IN since July,
1992. Senior Vice President, General Counsel, Director
and Assistant Secretary of FLIC since August, 1996.
James M. 57 1976 Vice President, Treasurer and Director of FIC since
Grace 1976. Vice President and Treasurer of ILCO since
January, 1985. Executive Vice President, Treasurer and
Director of Investors-IN since 1989. Executive Vice
President and Treasurer of Investors-NA since 1989.
Director, Executive Vice President and Treasurer of FLIC
since 1991.
M. Scott Mitte 44 2000 Director of FIC since October, 2000. Director of ILCO
since October, 2000. Executive Director and Vice-
President of the Roy F. and Joann Cole Mitte Foundation
since 1999.
Roy F. Mitte 68 1976 Chairman of the Board, President and Chief Executive
Office of FIC since 1976. Chairman of the Board,
President and Chief Executive Officer of ILCO and
Investors-IN since 1985. Chairman of the Board,
President and Chief Executive Officer of Investors-NA
since December, 1988. Chairman of ILG Securities
Corporation since December 1988. Chairman of the
Board, President and Chief Executive Officer of FLIC
since June, 1991.
Frank Parker 71 1994 Private investor. Prior to June, 1997, President of
Gateway Tugs, Inc. and Par-Tex Marine, Inc., both of
which are located in Brownsville, Texas and were engaged
in operating and chartering harbor and intracoastal tug
boats. Director of FIC since May, 1994.
Thomas C. 59 1996 Director of FIC since August, 1996. Director of ILCO
Richmond from March, 1994 to August, 1996. Senior Vice
President since January 1993 of Investors -NA and
Investors-IN.
-44-
Name Age Since Director and Other Information
Steven P. 54 2000 Director of FIC since October, 2000. Director of ILCO
Schmitt since 1994. Vice President of FIC and ILCO since
October, 2000. Executive Vice President of Family Life
Insurance Company since October, 2000. Executive Vice
President of Investors-NA and Investors-IN since
October, 2000. Senior Vice President of Investors-NA
and Investors-IN from April, 1992 through October, 2000
and Director and Assistant Secretary of Investors-NA and
Investors-IN since August, 1989. Senior Vice President
of Family Life Insurance Company from April, 1992
through October, 2000 and Director of FLIC since June,
1999.
Jerome H. 64 1998 President and Professor of Chemistry, Southwest Texas
Supple State University since April, 1989. Director of FIC since
1998.
(b) Executive Officers of the Registrant
The following table sets forth the names and ages of the persons who served as
the Registrant's Executive Officers during 2000 together with all positions and
offices held by them with the Registrant. Officers are elected to serve at the
will of the Board of Directors or until their successors have been elected and
qualified.
Name Age Positions and Offices
Roy F. Mitte 69 Chairman of the Board,
President and Chief
Executive Officer
James M. Grace 57 Vice President and Treasurer
Steven P. Schmitt 54 Vice President and Secretary
Jeffrey H. Demgen 48 Vice President
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In May, 1991, Roy F. Mitte suffered a stroke, resulting in partial paralysis
affecting his speech and mobility. Mr. Mitte continues to make the requisite
decisions in his capacity as Chief Executive Officer, although his ability to
communicate and his mobility are impaired.
Steven P. Schmitt was appointed Vice President and Secretary of the Company in
October, 2000.
(c) Identification of certain significant employees
Not applicable.
(d) Family relationships
M. Scott Mitte is Roy F. Mitte's son.
(e) Business experience
All of the executive officers of the Company are members of the Board of
Directors, and their business experience has been outlined in Item 10 (a).
(f) Involvement in Certain Legal Proceedings
None.
(g) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4
and 5 with the Securities and Exchange Commission. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Form 5s were required, the Company believes that
during the period from January 1, 2000 through December 31, 2000, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with, other than with respect to (i)
Mr. Michael Scott Mitte, who filed a Form 5 in February, 2001, to report his
election as a director on October 13, 2000; and (ii) Steven P. Schmitt, who
filed a Form 5 in February, 2001, to report his election as a director on
October 13, 2000.
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Item 11. Executive Compensation
Composition of Board and Committees
The business of FIC is managed under the direction of its board of directors.
The board of directors currently consists of eleven directors, four of whom are
independent directors.
Compensation Committee
The compensation committee of FIC is chosen by the Board of Directors. The
Compensation Committee makes recommendations to the Board of Directors with
respect to the Chief Executive Officer's compensation. The members of the
Compensation Committee are John D. Barnett, Frank Parker and Jerome H. Supple.
The Compensation Committee met once in 2000.
Compensation Committee Interlocks and Insider Participation
Roy F. Mitte determines the compensation of all executive officers of the
Company, other than the Chief Executive Officer. Mr. Mitte is the Chairman of
the Board, President and Chief Executive Officer of FIC. He also determines the
compensation of all executive officers of FIC, other than the Chief Executive
Officer.
Summary Compensation Table
The following table sets forth information concerning the compensation of the
Company's Chief Executive Officer and each of the four other persons who were
serving as executive officers of the Company at the end of 2000 and received
cash compensation exceeding $100,000 during 2000:
Annual Compensation
Long Term
Compens-
Name and ation Awards/ All Other
Principal Stock Options Compensa-
Position Year Salary(1) Bonus(3) Other(2) (Shares) tion
Roy F. Mitte,
Chairman, 2000 $ 503,500 $2,500,000 -0- -0- -0-
President and 1999 503,500 2,500,000 -0- -0- -0-
Chief Executive 1998 503,500 2,500,000 -0- -0- -0-
Officer
James M. 2000 195,000 25,000 -0- -0- -0-
Grace, Vice 1999 195,000 20,000 -0- -0- -0-
President and 1998 195,000 25,000 -0- -0- -0-
Treasurer
Steven P. 2000(4) 108,846 16,000 -0- -0- -0-
Schmitt, Vice
President and
Secretary
Jeffrey H. 2000 160,000 20,000 -0- -0- -0-
Demgen, Vice 1999 150,000 20,000 -0- -0- -0-
President 1998 145,384 15,000 -0- -0- -0-
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(1) The salaries and bonuses set forth in the table were paid by ILCO, except
that FIC and/or Family Life authorized payment of a portion of Mr. Mitte's
salary in each of 1998, 1999 and 2000. The executive officers of FIC have also
been executive officers of Family Life, the insurance subsidiary of FIC, and
ILCO and its insurance subsidiaries. FIC and/or Family Life reimbursed ILCO (or,
in the case of Mr. Mitte, authorized payment of) the following amounts as FIC's
or Family Life's share of the executive officers' cash compensation and bonus
for 1998,1999 and 2000 (i) Mr. Mitte: $1,111,821, $1,111,821 and $1,111,821,
respectively; (ii) Mr. Grace: $64,152, $62,694 and $64,152, respectively; (iii)
Mr. Schmitt: $39,888, respectively; and (iv) Mr. Demgen: $72,173, $76,500 and
$81,000, respectively.
Mr. Mitte and FIC are parties to an employment agreement, providing for the
employment of Mr. Mitte as Chairman, President and Chief Executive Officer of
the Company. The agreement, which was initially effective February 25, 1982,
provides for five-year terms and for automatic renewals for successive five-
year periods, unless otherwise terminated in accordance with the terms of the
agreement. The agreement provides that the level of compensation will be fixed
each year by agreement, but not less than $120,000 per year. In addition, the
agreement provides that Mr. Mitte is entitled to reimbursement for reasonable
business expenses and to participate in all fringe benefit plans and
arrangements available generally to employees of the Company. In March, 2001,
the Company approved an amendment to the employment agreement, effective as of
the date of the closing of the proposed merger between the Company and FIC.
Under the provisions of the amendment, the minimum level of compensation was
increased to $503,500. In addition, the amendment provides that Mr. Mitte will
be entitled to receive an annual bonus in an amount to be determined by the
Compensation Committee of the Board of Directors. Upon the occurrence of a
change in control (as defined in the amendment), the amendment provides that the
amount of the bonus is to be fixed at the rate of $2.5 million per year. The
amendment further provides that, in the event of the death of Mr. Mitte, the
rate of compensation which was being paid to him at that time will continue to
be paid for a period of twelve months following the date of death.
(2) Does not include the value of perquisites and other personal benefits
because the aggregate amount of any such compensation does not exceed the lesser
of $50,000 or 10 percent of the total amount of annual salary and bonus for any
named individual.
(3) The data in this column represents the amount of annual bonus awarded.
(4) Steven P. Schmitt was appointed as an executive officer in the year 2000,
thus only his compensation for the year 2000 is disclosed.
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Compensation of Directors
Directors who are not officers or employees of the Company are paid a $5,000
annual fee, and are compensated $1,000 for each regular or special meeting of
the Board of Directors which they attend in person. In the case of telephonic
meetings of the Board, non-employee directors who participate in such telephonic
meetings are compensated $500 for such meeting. Directors who participate via
telephone in a regular or special meeting which is held by other than conference
telephone are not entitled to a fee for such a meeting.
Non-employee directors serving on committees of the Board are compensated in the
amount of $500 for each committee meeting they attend whether such participation
is in person or by telephone, provided that the committee meeting is held on a
day other than that on which the Board meets.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table presents information as of March 6, 2001 as to all persons
who, to the knowledge of the Registrant, were the beneficial owners of five
percent (5%) or more of the common stock of the Registrant.
Amount and Nature
Name and Address of of Beneficial Percent
Beneficial Owner Ownership of Class
Roy F. and Joann Cole Mitte
Foundation
6500 River Place Blvd.
Austin, Texas 78730 1,552,206 (1) 30.71 %
Roy F. Mitte
6500 River Place Blvd.
Austin, Texas 78730 1,552,206 (1) 30.71 %
Family Life Insurance Company
6500 River Place Blvd.
Austin, Texas 78730 272,000 5.1 %
InterContinental Life
Corporation
6500 Rive Place Blvd.
Austin, Texas 78730 690,161(2) 12.01 %(3)
Investors Life Insurance
Company of North America
6500 River Place Blvd.
Austin, Texas 78730 690,161(2) 12.01 %(3)
Heartland Advisors, Inc.
790 North Milwaukee St.
Milwaukee, WI 53202 471,400 9.33 %(4)
Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109 340,000 6.73 %(5)
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(1) The Roy F. and Joann Cole Mitte Foundation is a non-profit
corporation/membership organization and its two members are Roy F. Mitte
and Joann Cole Mitte. The Internal Revenue Service has determined that the
Foundation is exempt from federal income tax under section 501(a) of the
Internal Revenue Code (the "Code') as an organization described in section
501(c)(3) of the Code. Roy F. Mitte is also Chairman, President and Chief
Executive Officer of both FIC and ILCO. For purposes of this table, Mr.
Mitte is deemed to have beneficial ownership of the shares owned by the
Foundation.
(2) Of such shares, 145,500 shares are owned by Investors-NA, 44,250 shares are
owned by Investors-IN, and 500,411 shares are issuable upon exercise of an
option held by Investors-NA. Investors-NA is a direct subsidiary of ILCO.
Investors-IN is a direct subsidiary of Investors-NA.
(3) Assumes that outstanding stock options or warrants held by non-affiliated
persons have not been exercised and that outstanding stock options held by
Investors-NA have been exercised.
(4) As reported to the Company on a amended Schedule 13(G) filed on January 8,
2001 by Heartland Advisors, Inc. ("Heartland"). According to the Schedule
13(G), the shares are held for various investment advisory accounts and the
interest of one such account (Heartland Value Fund, a registered investment
company) is more than 5% of the common stock of FIC.
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(5) As reported to the Company on a Schedule 13(G) filed on February 14, 2000,
by FMR Corporation, the parent company of Fidelity Management & Research
Company ("Fidelity") and Fidelity Management Trust Company. The Company
also notes that Fidelity filed a Schedule 13G/A on February 13, 2001,
reporting that its beneficial ownership had increased to 340,000 shares.
According to the Schedule 13(G) filings, as amended, Fidelity acts as
investment advisor to the Fidelity Low-Priced Stock Fund, a registered
investment company, and the Fund is the beneficial owner of 340,000 shares
of FIC common stock.
The following table contains information as of March 6, 2001 as to the common
stock of FIC beneficially owned by each director and executive officer and by
all executive officers and directors of FIC as a group. The information
contained in the table has been obtained by FIC from each director and executive
officer, except for the information known to FIC. Except as indicated in the
notes to the table, each beneficial owner has sole voting power and sole
investment power as to the shares listed opposite his name.
Amount and Nature of Percent of
Name Beneficial Ownership(2) Class
John Barnett 2,000 *
Joseph F. Crowe 1,500 *
Jeffrey H. Demgen -0-
Theodore A. Fleron -0-
James M. Grace 7,600 *
Roy F. Mitte 1,552,206(1) 30.71%
Michael Scott Mitte -0-
Frank Parker 12,000 *
Thomas C. Richmond -0-
Steven P. Schmitt -0-
Jerome H. Supple 200 *
All Executive Officers,
and Directors as
a group (11 persons) 1,575,506 31.16%
* Less than 1%.
(1) The Roy F. and Joann Cole Mitte Foundation is a non-profit
corporation/membership organization and its two members are Roy F. Mitte
and Joann Cole Mitte. The Internal Revenue Service has determined that the
Foundation is exempt from federal income tax under section 501(a) of the
Internal Revenue Code (the 'Code") as an organization described in section
501(c)(3) of the Code. Roy F. Mitte is also Chairman, President and Chief
Executive Officer of both FIC and ILCO. For purposes of this table, Mr.
Mitte is assumed to have beneficial ownership of the shares owned by the
Foundation.
(2) No executive officer or director holds any options to acquire FIC common
stock. Messrs. Roy Mitte, Grace, Demgen and Schmitt are executive officers
and/or directors of ILCO.
-51-
Item 13. Certain Relationships and Related Transactions
For the period January 1, 2000 to December 31, 2000, the Registrant reports the
following information in accordance with the provisions of section 229.404 of
the Regulations of the U.S. Securities and exchange Commission. Management
believes that the transactions described herein were in the ordinary course of
business and on terms as favorable to the Registrant and its subsidiaries as if
the transactions had involved unaffiliated persons or organizations.
(a) Roy F. Mitte serves as Chairman, President and Chief Executive Officer of
both FIC and ILCO. James M. Grace serves as Vice President, Treasurer and
Director of both companies; Mr. Schmitt serves as Vice President, Secretary
and Director of both companies; Messrs. Demgen and Fleron serve as Vice
Presidents and Directors of both companies. Mr. Roy Mitte holds beneficial
ownership of 30.71% of the outstanding shares of the Company (see "Security
Ownership of Certain Beneficial Owners").
(b) As part of the financing arrangement for the acquisition of Family Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC,
entered into a Senior Loan agreement under which $50 million was provided
by a group of banks. The balance of the financing consisted of a $30
million subordinated note issued by FLC to Merrill Lynch Insurance Group,
Ins. ("Merrill Lynch") and $14 million borrowed by another subsidiary of
FIC from an affiliate of Merrill Lynch and evidenced by a senior
subordinated note in the principal amount of $12 million and a junior
subordinated note in the principal amount of $2 million and $25 million
lent by two insurance company subsidiaries of ILCO. The latter amount was
represented by a $22.5 million loan from Investors-NA to FLC and a $2.5
million loan provided directly to FIC by Investors-CA. In addition to the
interest provided under those loans, Investors-NA and Investors-CA were
granted by FIC non-transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9 percent of
shares of FIC's common stock at a price of $10.50 per share ($2.10 per
share as adjusted for the five-for-one stock split in November, 1996),
equivalent to the then current market price, subject to adjustment to
prevent dilution. The original provisions of the options provided for their
expiration on June 12, 1998 if not previously exercised. In connection with
the 1996 amendments to the subordinated notes, as described below, the
expiration date of the options were extended to September 12, 2006.
-52-
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and
its affiliate was prepaid. The Company paid $38 million plus accrued
interest to retire the indebtedness, which had a principal balance of
approximately $50 million on July 30, 1993. The primary source of the funds
used to prepay the subordinated debt was new subordinated loans totaling
$34.5 million that FLC and another subsidiary of FIC obtained from
Investors-NA. The principal amount of the new subordinated debt is payable
in four equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of the new debt are
substantially the same as those of the $22.5 million subordinated loans
that Investors-NA had previously made to FLC and that continue to be
outstanding.
In June, 1996, the provisions of the notes from Investors-NA to FIC, Family
Life Corporation ('FLC") and Family Life Insurance Investment Company
('FLIIC") were modified as follows: (a) the $22.5 million note was amended
to provide for twenty quarterly principal payments, in the amount of
$1,125,000 each, to commence on December 12, 1996; the final quarterly
principal payment is due on September 12, 2001; the interest rate on the
note remains at 11%, (b) the $30 million note was amended to provide for
forty quarterly principal payments, in the amount of $163,540 each for the
period December 12, 1996 to September 12, 2001; beginning with the
principal payment due on December 12, 2001, the amount of the principal
payment increases to $1,336,458; the final quarterly principal payment is
due on September 12, 2006; the interest rate on the note remains at 9%, (c)
the $4.5 million note was amended to provide for forty quarterly principal
payments, in the amount of $24,531 each for the period December 12, 1996 to
September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the
final quarterly principal payment is due on September 12, 2006; the
interest rate on the note remains at 9%, (d) the $2.5 million note was
amended to provide that the principal balance of the note is to be repaid
in twenty quarterly installments of $125,000 each, commencing December 12,
1996 with the final payment due on September 12, 2001; the rate of interest
remains at 12% and (e) the Master PIK note, which was issued to provide for
the payment in kind of interest due under the terms of the $2.5 million
note prior to June 12, 1996, was amended to provide that the principal
balance of the note ($1,977,119) is to be paid in twenty quarterly
principal payments, in the amount of $98,855.95 each, to commence December
12, 1996 with the final payment due on September 12, 2001; the interest
rate on the note remains at 12%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution,
all of the assets and liabilities of FLIIC became the obligations of
FLIIC's sole shareholder (FIC). Accordingly, the obligations under the
provisions of the $4.5 million note described above are now the obligations
of FIC.
-53-
(c) The data processing needs of ILCO's and FIC's insurance subsidiaries are
provided to ILCO's and FIC's insurance subsidiaries by FIC Computer
Services, Inc. ("FIC Computer"), a subsidiary of FIC. Under the provisions
of the data processing agreement FIC Computer provides data processing
services to each subsidiary for fees equal to such subsidiary's
proportionate share of FIC Computer's actual costs of providing those
services to all of the subsidiaries. Family Life paid $1,758,000 and ILCO's
insurance subsidiaries paid $2,427,000 to FIC Computer for data processing
services provided during 2000.
(d) In 1995, Family Life entered into a reinsurance agreement with Investors-NA
pertaining to universal life insurance written by Family Life. The
reinsurance agreement is on a co-insurance basis and applies to all covered
business with effective dates on and after January 1, 1995. The agreement
applies to only that portion of the face amount of the policy which is less
than $200,000; face amounts of $200,000 or more are reinsured by Family
Life with a third party reinsurer.
(e) In 1996, Family Life entered into a reinsurance agreement with
Investors-NA, pertaining to annuity contracts written by Family Life. The
agreement applies to contracts written on or after January 1, 1996.
(f) On January 8, 2001, the Compensation Committee of the Company recommended
that the Company make a donation of $375,000 to the Roy F. and Joann Cole
Mitte Foundation (the "Foundation"). At the Company's board meeting held on
January 17, 2001, the Board of Directors approved the donation to the
Foundation. The Foundation is a charitable entity exempt from federal
income tax under section 501(a) of the Code as an organization described in
section 501(c)(3) of the Code, and owns 30.71% of the outstanding shares of
FIC's common stock. The sole members of the Foundation are Roy F. Mitte,
Chairman, President and Chief Executive Officer of FIC, ILCO and their
insurance subsidiaries, and his wife, Joann Cole Mitte.
-54-
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents have been filed as part of this report:
1. Financial Statements (See Item 8)
ILCO Form 10-K as of December 31, 1998, 1999 and 2000 and the
Financial Statements contained therein are hereby incorporated by
reference.
The following consolidated financial statements of Financial
Industries Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets, September 31, 2000 and 1999
Consolidated Statements of Income, for years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity,
for the years ended December 31, 2000, 1999 and 1998
Consolidated Statement of Cash Flows, for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedules of Financial
Industries Corporation and Subsidiaries are included:
Schedule I-Summary of Investments Other Than Investments in Related
Parties
Schedule II - Condensed Financial Statements of Registrant
Schedule IV - Reinsurance
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.
3. Exhibits filed with this report or incorporated herein by reference are
as listed in the Index to Exhibits on Page Ex-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended December 31, 2000.
-55-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Financial Industries Corporation
(Registrant)
By:/s/ Roy F. Mitte By:/s/ James M. Grace
Roy F. Mitte, Chairman of James M. Grace, Treasurer,
the Board, President and Principal Accounting and
Chief Executive Officer and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 2001.
/s/ Roy F. Mitte /s/ James M. Grace
Roy F. Mitte, Director James M. Grace, Director
/s/ Jeffrey H. Demgen, Director /s/ Steven P. Schmitt
Jeffrey H. Demgen, Director Steven P. Schmitt, Directo
/s/ Joseph F. Crowe /s/ Thomas C. Richmond
Joseph F. Crowe, Director Thomas C. Richmond, Director
/s/ Theodore A. Fleron /s/ M. Scott Mitte
Theodore A. Fleron, Director M. Scott Mitte, Director
/s/ John D. Barnett
John D. Barnett, Director
/s/ Jerome H. Supple
Jerome H. Supple, Director
/s/ Frank Parker
Frank Parker, Director
-56-
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
FORM 10-K--ITEM 14 (a) (1) and (2)
LIST OF FINANCIAL STATEMENTS
TABLE OF CONTENTS
(1) The following consolidated financial statements of Financial Industries
Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants...............................F-2
Consolidated Balance Sheets,
December 31, 2000 and 1999...................................F-3
Consolidated Statements of Income, for the
years ended December 31, 2000, 1999 and 1998.................F-5
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998.............................F-7
Consolidated Statements of Cash Flows, for
the years ended December 2000, 1999 and 1998.................F-10
Notes to Consolidated Financial Statements......................F-12
(2) The following consolidated financial statements of Financial Industries
Corporation and Subsidiaries are included:
Schedule I - Summary of Investments Other
Than Investments in Related Parties..........................F-41
Schedule II - Condensed Financial Statements of
Registrant ....................................................F-42
Schedule IV - Reinsurance.......................................F-45
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Financial Industries Corporation:
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a) (1) and (2) on page F-1 present fairly, in all
material respects, the financial position of Financial Industries Corporation
and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the index appearing under Item 14
(a) (1) on page F-1 present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
April 2, 2001
F-2
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2000 1999
(in thousands)
ASSETS
Investments other than
investments in affiliate:
Fixed maturities available for sale at
market value (amortized cost of $78,249
and $78,252 at December 31, 2000 and 1999) $ 79,786 $ 77,515
Equity securities at market (cost
approximates $11 at December 31, 2000
and 1999) 4 4
Policy loans 3,699 3,595
Short-term investments 15,624 24,839
Total investments 99,113 105,953
Cash and cash equivalents 2,733 692
Investment in affiliate 79,105 70,013
Accrued investment income 1,172 1,180
Agency advances and other
receivables 7,604 6,885
Reinsurance receivables 17,466 14,848
Due and deferred premiums 12,537 12,392
Property and equipment, net 1,318 1,355
Deferred policy acquisition costs 56,161 52,490
Present value of future profits of
acquired businesses 19,440 23,109
Other assets 4,117 4,758
Separate account assets -0- 379
Total Assets $300,766 $294,054
The accompanying notes are an integral part of these
consolidated financial statements
F-3
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2000 1999
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contract
holder deposit funds:
Future policy benefits $ 62,462 $ 59,783
Contract holder deposit funds 43,301 44,681
Unearned premiums -0- 14
Other policy claims and benefits
payable 2,931 4,282
108,694 108,760
Subordinated notes payable to
affiliate 35,349 41,497
Deferred federal income taxes 24,437 23,222
Other liabilities 3,734 4,079
Separate account liabilities -0- 379
Total Liabilities 172,214 177,937
Commitments and Contingencies
(See Notes 6, 8, 12, 14 and 18)
Shareholders' equity:
Common stock, $.20 par value, 10,000,000
shares authorized; 5,845,300 shares
issued, 5,054,661 outstanding in
2000 and 1999 1,169 1,169
Additional paid-in capital 7,225 7,225
Accumulated other comprehensive
income (loss) 2,107 (2,454)
Retained earnings 125,426 117,552
135,927 123,492
Common treasury stock, at cost,
790,639 shares at 2000 and 1999 (7,375) (7,375)
Total Shareholders' Equity 128,552 116,117
Total Liabilities and Shareholders' Equity $ 300,766 $294,054
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2000 1999 1998
(in thousands)
Revenues:
Premiums $ 33,149 $ 33,958 $ 38,358
Net investment income 6,940 6,928 7,808
Net realized gain on
sale of real estate -0- 629 -0-
Earned insurance charges 4,323 4,752 5,971
Other 6 (23) 156
44,418 46,244 52,293
Benefits and expenses:
Policyholder benefits
and expenses 13,453 12,585 14,944
Interest expense on contract
holders deposit funds 2,211 2,189 2,374
Amortization of present
value of future profits
of acquired businesses 3,669 5,185 6,143
Amortization of deferred
policy acquisition costs 5,329 5,158 5,174
Operating expenses 11,375 11,740 11,822
Interest expense 1,899 2,374 2,863
37,936 39,231 43,320
Income before federal income
tax and equity in net
earnings of affiliates 6,482 7,013 8,973
Provision for federal income taxes:
Current 1,521 335 119
Deferred (237) 839 2,249
Income before equity in net
earning of affiliates 5,198 5,839 6,605
Equity in net earnings of
affiliate, net of tax 3,581 3,310 2,613
Net Income $ 8,779 $ 9,149 $ 9,218
The accompanying notes are an integral part of these
consolidated statements.
F-5
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
Years Ended December 31,
2000 1999 1998
(in thousands)
Net Income Per Share (Note 15)
Basic:
Average weighted shares outstanding 5,055 5,055 5,383
Basic earnings per share $ 1.74 $ 1.81 $ 1.71
Diluted:
Common stock and common stock
equivalents 5,163 5,200 5,557
Diluted earnings per share $ 1.70 $ 1.76 $ 1.66
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Additional
Paid-in
Shares Amount Capital
Balance at December 31, 1997 5,845 $ 1,169 $ 7,225
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities
available for sale, net of tax
Change in net unrealized appreciation
of equity securities, net of tax
Total Comprehensive Income
Balance at December 31, 1998 5,845 1,169 7,225
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities
available for sale, net of tax
Change in net unrealized depreciation
of equity securities, net of tax
Total Comprehensive Income
Balance at December 31, 1999 5,845 1,169 7,225
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized loss on
investments in fixed maturities
available for sale, net of tax
Change in net unrealized appreciation
of equity securities, net of tax
Total Comprehensive Income
Cash Dividends to Stockholders
($0.18 per share)
Balance at December 31, 2000 5,845 $ 1,169 $ 7,225
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Accumulated Other Comprehensive Income (Loss)
Net Unrealized
Gain (Loss) on
Net Unrealized Investments in Total
Appreciation Fixed Maturities Accumulated
(Depreciation) Available for Other
of Equity Sale Comprehensive
Securities Income (Loss)
Balance at December 31, 1997 $ 32 $ 6,660 $ 6,692
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized
gain on investments in
fixed maturities available
for sale, net of tax (760) (760)
Change in net unrealized
appreciation of equity
securities, net of tax (34) (34)
Total Comprehensive Income (34) (760) (794)
Balance at December 31, 1998 (2) 5,900 5,898
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized
gain on investments in
fixed maturities available
for sale, net of tax (8,354) (8,354)
Change in net unrealized
depreciation of equity
securities, net of tax 2 2
Total Comprehensive Income 2 (8,354) (8,352)
Balance at December 31, 1999 0 (2,454) (2,454)
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized loss on
investments in fixed maturities
available for sale, net of tax 4,561 4,561
Change in net unrealized
appreciation of equity securities,
net of tax 0 0
Total Comprehensive Income 0 4,561 4,561
Cash Dividends to Stockholders ($0.18
per share)
Balance at December 31, 2000 $ 0 $ 2,107 $ 2,107
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Total
Retained Treasury Shareholders'
Earnings Stock Equity
Balance at December 31, 1997 $ 99,185 $ (422) $ 113,849
Comprehensive Income:
Net Income 9,218 9,218
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities
available for sale, net of tax (760)
Change in net unrealized appreciation
of equity securities, net of tax (34)
Total Comprehensive Income 9,218 -0- 8,424
Purchase of treasury stock (6,953) (6,953)
Balance at December 31, 1998 108,403 (7,375) 115,320
Comprehensive Income:
Net Income 9,149 9,149
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities
available for sale, net of tax (8,354)
Change in net unrealized depreciation
of equity securities, net of tax 2
Total Comprehensive Income 9,149 -0- 797
Balance at December 31, 1999 117,552 (7,375) 116,117
Comprehensive Income:
Net Income 8,779 8,779
Other Comprehensive Income:
Change in net unrealized loss on
investments in fixed maturities
available for sale, net of tax 4,561
Change in net unrealized appreciation
of equity securities, net of tax 0
Total Comprehensive Income 8,779 -0- 13,340
Cash Dividends to Stockholders ($0.18 per share) (905) (905)
Balance at December 31, 2000 $ 125,426 $ (7,375) $ 128,552
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2000 1999 1998
(in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 8,779 $ 9,149 $ 9,218
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of present value of
future profits of acquired business 3,669 5,185 6,143
Amortization of deferred policy
acquisition costs 5,329 5,158 5,174
Equity in undistributed earnings
of affiliate
(5,760) (5,654) (4,965)
Changes in assets and liabilities:
Decrease (increase) in accrued
investment income 8 29 (25)
Increase in agency advances and
other receivables (3,337) (1,548) (2,577)
Increase in due premiums (145) (211) (1,095)
Increase in deferred policy
acquisition costs (9,000) (9,138) (8,562)
Decrease in other assets 641 634 954
(Decrease) increase in policy
liabilities and (66) (1,047) 111
Decrease in other liabilities (345) (395) (406)
Increase (decrease) in deferred
federal income taxes 1,215 (762) 2,353
Other, net (981) 1,172 (373)
Net cash provided by
operating activities $ 7 $ 2,572 $ 5,950
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year Ended December 31,
2000 1999 1998
(in thousands)
CASH FLOWS FROM INVESTING
ACTIVITIES
Fixed maturities purchased (11,725) (19,557) (14,082)
Proceeds from sales and
maturities of fixed maturities 11,664 18,511 16,880
Net decrease in short-term
investments 9,215 2,750 6,886
Net increase in policy loans (104) (440) (407)
Purchase and retirement of
property and equipment 37 403 (34)
Net cash provided by investing
activities 9,087 1,667 9,243
CASH FLOW FROM FINANCING
ACTIVITIES
Repayment of subordinated notes
payable (6,148) (6,148) (6,147)
Cash dividends to stockholders (905) -0- -0-
Purchase of treasury stock. -0- -0- (6,953)
Net cash used in financing
activities (7,053) (6,148) (13,100)
Net increase (decrease) in cash 2,041 (1,909) 2,093
Cash and cash equivalents,
beginning of year 692 2,601 508
Cash and cash equivalents,
end of year $ 2,733 $ 692 $ 2,601
Supplemental Cash Flow Disclosures:
Income taxes paid $ 1,200 $ 485 $ 1,184
Interest paid $ 2,073 $ 2,621 $ 2,935
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Financial Industries Corporation (FIC or the "Company") is principally engaged,
through its subsidiaries, in acquiring and administering existing portfolios of
individual and annuity products. The Company's insurance subsidiary is also
engaged in the business of marketing and underwriting individual life insurance,
disability insurance and annuity products in 49 states and the District of
Columbia. Such products are marketed through an exclusive career agency system.
Principles of Consolidation
The consolidated financial statements include the accounts of FIC and its
wholly-owned subsidiaries at December 31, 2000. The more significant
subsidiaries are: Family Life Corporation (FLC), Family Life Insurance Company
(Family Life), FIC Realty Services, Inc. (FIC Realty) and FIC Property
Management, Inc. (FIC-Property). The Company's approximate 48% investment in
InterContinental Life Corporation (ILCO) is presented using the equity method of
accounting.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which differ from statutory accounting principles required by regulatory
authorities for the Company's insurance subsidiary. All material intercompany
balances and transactions have been eliminated. The following accounting
policies describe the accounting principles used in the preparation of the
consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results will differ from those estimates.
Investments
The Company's general investment philosophy is to hold fixed maturity securities
until maturity. However, fixed maturities may be sold prior to their maturity
dates in response to changing market conditions, duration of liabilities,
liquidity factors, interest rate movements and other investment factors.
Accordingly, fixed maturity investments are classified as available for sale and
are carried at market value. Unrealized gains and losses on securities available
for sale are not recognized in earnings but are reported as a separate component
of equity in other accumulated comprehensive income, net of related income
taxes.
F-12
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
While collateralized mortgage obligations (CMOs) are carried at market value,
premiums and discounts on CMOs are amortized over stated maturity of the CMOs,
with consideration given to estimates of prepayments in the amortization of
those premiums and discounts. The Company endeavors to minimize the portfolio's
exposure to interest rate changes inherent in interest-sensitive products by
selecting and selling investments so that diversity, maturity and liquidity
factors approximate the duration of related policyholder liabilities.
Equity securities are carried at market value. Unrealized gains and losses on
equity securities, net of deferred income taxes, if applicable, are reflected
directly in shareholders' equity as a component of other comprehensive income.
Policy loans represent unpaid balances and do not exceed the cash surrender
value of the related policies.
Short-term investments are carried at cost, which approximates market value, and
generally consist of those fixed maturities and other investments with
maturities less than one year from the date of purchase. Securities pledged as
collateral for repurchase agreements are held by the Company's investment
custodian until maturity of the repurchase agreement. Provisions of the
agreement and procedures adopted by the Company ensure that the market value of
the collateral, including accrued interest thereon, is sufficient in the event
of default by the counterparty.
The cost of investments sold is determined on the specific identification basis,
except for stocks, for which the first-in, first-out method is employed. When an
impairment of the value of an investment is considered other than temporary, the
decrease in value is reported in net income as a realized investment loss and a
new cost basis is established.
Cash and Cash Equivalents
Generally, cash includes cash on hand and on deposit in non-interest bearing
accounts. Short term investments with maturities of three months or less at the
time of purchase are reported as cash equivalents.
Sale of Real Estate
Prior to December, 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building which formerly served as the
headquarters of Standard Life Insurance Company (the "Standard Life Building").
The Standard Life Building was owned by Investors-NA. This building is 68 years
old and contains approximately 85,000 square feet (65,000 net rentable square
feet) of office space. On December 29, 1999, Investors-NA donated the Standard
Life Building to the Jackson Redevelopment Authority ("JRA"). Contemporaneously
with the donation of the Standard Life Building, Investors-NA and Financial
Industries Corporation ("FIC") sold all of the adjacent parcels they owned to
the JRA for a total sale price of $2,500,000, which has been allocated according
to the respective ownership interests of Investors-NA (approximately 59.28%) and
FIC (approximately 40.72%). The donation and sale was made pursuant to the terms
of the Donation, Purchase and Sale Agreement dated July 17, 1998. During 2000,
Investors-NA claimed an income tax deduction for the donation of the Standard
Life Building, which has an appraised value at December 15, 1999 of
approximately $3,050,000. The donation and sale transaction referenced above
resulted in a net gain (GAAP basis) of $992,494 for ILCO and $408,664 for FIC
(or a combined total of $1,401,158).
F-13
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over
estimated useful lives of 5 to 33 years. Maintenance and repairs are charged to
expense when incurred.
Deferred Policy Acquisition Costs
The cost of acquiring new business, principally first year commissions and
certain expenses of the policy issuance and underwriting departments, which vary
with and are primarily related to the production of new business, have been
deferred to the extent recoverable. Acquisition costs related to mortgage term
life insurance business are deferred and amortized to expense using actuarial
methods that include the same assumptions used to estimate future policy
benefits. Acquisition costs related to universal life products are deferred and
amortized in proportion to the ratio of estimated annual gross profits to total
estimated gross profits over the expected lives of the contracts.
Present Value of Future Profits on Acquired Businesses
The present value of future profits of acquired businesses (See Note 5) is
amortized over the premium paying period of the related policies in proportion
to the ratio of the annual premium revenue to total anticipated premium revenue
applicable to such policies. Interest on the unamortized present value of future
profits is accreted at approximately 8.5% per annum. The fair value of the net
assets acquired exceeded the purchase price and negative goodwill associated
with the purchase has been netted against the calculated amount of present value
of future profits.
Separate Accounts
Separate account assets, carried at market value, and liabilities represent
policyholder funds maintained in accounts having specific investment objectives.
The net investment income, gains and losses of these accounts, less applicable
contract charges, accrue directly to the policyholders. The separate account
business was fully reinsured to Merrill Lynch at the date of sale through an
assumption reinsurance agreement which was pending regulatory approval. As of
December 31, 2000 the remaining states have approved the assumption reinsurance
agreement.
F-14
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Solvency Laws Assessments
The solvency or guaranty laws of most states in which the Company's insurance
subsidiary do business may require the Company's insurance subsidiary to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These assessments may
be deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength, and in certain instances, may be offset against
future premium taxes. The Company's insurance subsidiary expense for guaranty
fund assessment, from states, which do not allow premium tax offsets, was not
material.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits related to traditional life products are
accrued as premium revenue is recognized. The liabilities are computed using the
net level premium method, or an equivalent actuarial method, based upon industry
and Company experience of investment yields, mortality and withdrawals,
including provisions for possible adverse deviation. The liability for future
policy benefits for traditional life policies is graded to reserves stipulated
by regulatory authorities over a 30-year period or the end of the premium paying
period, if less.
Contract holder deposit funds are liabilities for universal life and annuity
products. These liabilities consist of deposits received from customers and
accumulated at actual credited interest rates on their fund balances less
charges for expenses and mortality.
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable represents
management's estimate of ultimate unpaid losses on claims and other
miscellaneous liabilities to policyholders. Estimated unpaid losses on claims
are comprised of losses on claims that have been reported but not yet paid and
claims that have been incurred but not reported.
The liability for other policy claims and benefits payable is subject to the
impact of changes in claim severity, frequency and other factors. Although there
is considerable variability inherent in such estimates, management believes that
the liability recorded is adequate.
Federal Income Taxes
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), which
mandates the asset and liability method for computing deferred income taxes.
Under this method, balance sheet amounts for deferred income taxes are computed
based on the tax effect of the differences between the financial reporting and
federal income tax basis of assets and liabilities using the tax rates which are
expected be in effect when these differences are anticipated to reverse.
F-15
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Revenue Recognition
Premiums on mortgage life products are recognized as revenue when due. Proceeds
from universal life and annuity products are recorded as liabilities when
received. Revenues consist of net investment income and contract charges, such
as mortality, administration and surrender charges assessed against the fund
values.
Net Income Per Share
Net income per share is calculated based on two methods, basic earnings per
share and diluted earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were converted or exercised. Both methods are
presented on the face of the income statement.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined as net income
adjusted for changes in stockholders' equity resulting from events other than
net income or transactions related to an entity's capital instruments. The
Company has adopted SFAS 130 for the year ended December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments. Generally, SFAS 131 requires that
financial information be reported on the basis that is used internally for
evaluating performance. The Company adopted SFAS 131 for the year ended December
31, 1998. As described in Note 1, the Company is principally engaged, through
its subsidiaries, in administering existing portfolios of individual life
insurance and annuity products. The Company's insurance subsidiaries are also
engaged in the business of marketing and underwriting individual life insurance
and annuity products in 49 states and the District of Columbia. Such products
are marketed through an exclusive career agency system. Management considers the
Company's insurance operations to constitute one reportable segment. Premium
revenues for traditional insurance products and earned insurance charges on
universal life and annuity products are presented in the accompanying
consolidated statements of income. No single customer accounts for 10 percent or
more of the Company's revenue. The Company has no foreign operations.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which revises current disclosure
requirements for employers' pension and other retiree benefits. SFAS 132 does
not change the measurement or recognition of pension or other postretirement
benefit plans. The Company adopted SFAS 132 for the year ended December 31,
1998.
F-16
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In December 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which provides guidance on accounting for
insurance-related assessments. The Company adopted SOP 97-3 effective January 1,
1999. Previously issued financial statements should not be restated unless the
SOP is adopted prior to the effective date and during an interim period. The
adoption of this SOP did not have a material impact on the Company's financial
statements.
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133, as amended by FAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An Amendment of
FASB Statement No. 133", is applicable to financial statements for all fiscal
quarters of fiscal years beginning after June 15, 2000 as amended by FAS No 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FAS No 133". As the Company does not have significant
investments in derivative financial instruments, the adoption of FAS 133 did not
have a material impact on the Company's results of operations, liquidity or
financial position.
Reclassification
Certain prior years' amounts have been reclassified to conform with the 2000
presentation.
F-17
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Investments
Fixed Maturities
Investments in fixed maturities by category at December 31, 2000 and 1999,
respectively, were as follows (in thousands):
Gross Gross
December 31, 2000 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 6,378 $ 576 $ 21 $ 6,933
States, municipalities and
political subdivisions 4,928 122 0 5,050
Corporate securities 35,905 491 189 36,207
Mortgage-backed securities 31,038 584 26 31,596
Total fixed maturities available for
sale $ 78,249 $ 1,773 $ 236 $ 79,786
Gross Gross
December 31, 1999 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 8,938 $ 326 $ 0 $ 9,264
States, municipalities and political
subdivisions 4,972 109 0 5,081
Corporate securities 36,795 25 944 35,876
Mortgage-backed securities 27,547 137 390 27,294
Total fixed maturities available
for sale $ 78,252 $ 597 $ 1,334 $ 77,515
F-18
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The amounts of unrealized gains and losses reflected in the balance sheet in
accumulated other comprehensive income have been reduced by estimated deferred
tax expense (benefit) in the amount of $538,000 and $(258,000)in 2000 and 1999,
respectively. The adjustment is made to recognize deferred taxes on the net
unrealized gain (loss). Additional deferred tax expense (benefit) of $84,000 and
$(149,000) in 2000 and 1999, respectively, have been provided with respect to
the Company's portion of ILCO's unrealized appreciation or depreciation in
marketable securities.
The amortized value and market value of fixed maturities at December 31, 2000
are shown below by contractual maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Market
Value Value
(in thousands)
Due in one year $ 6,000 $ 5,977
Due after one year through five years 10,559 10,544
Due after five years through ten years 15,216 15,923
Due after ten years 15,436 15,746
Mortgage-backed securities 31,038 31,596
Total fixed maturities available for sale
$ 78,249 $ 79,786
To reduce the exposure to market rate changes, portfolio investments are
selected so that diversity, maturity, and liquidity factors approximate the
duration of associated policyholder liabilities.
Proceeds from maturities of investments in fixed maturities during 2000, 1999
and 1998 were $11,664,000, $18,511,000 and $16,880,000, respectively. There were
gains of $6,599 and losses of $0 in 2000 and gains of $4,739 and losses of $0 in
1999 and gains of $5,916 and losses of $16,437 in 1998.
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 2000,
1999 and 1998. The following is a summary of the change in unrealized investment
gains (losses) net of related deferred income taxes which are reflected in
accumulated other comprehensive income for the periods presented:
The unrealized gains and losses include the Company's portion of its percentage
ownership of ILCO. The amounts included in the total below are $4,743,000,
$(9,440,000) and $(1,044,000) for 2000, 1999 and 1998, respectively.
F-19
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Change in Unrealized Gains (Losses) on Investments 2000 1999 1998
(in thousands)
Fixed maturities $ 7,017 $ (12,852) $ (1,170)
Equity securities -0- 2 (52)
7,017 (12,850) (1,222)
Deferred federal income taxes 2,456 (4,498) (428)
Net change in unrealized gains
(losses) on investments $ 4,561 $ (8,352) $ (794)
The following table sets forth the reclassification adjustments required for the
years ended December 31, 2000, 1999 and 1998:
Reclassification Adjustments 2000 1999 1998
(in thousands)
Unrealized holding gains (losses)
on investments arising
during the period $ 4,554 $ (8,357) $ (790)
Reclassification adjustments for
gains included in net income 7 5 (4)
Unrealized gains (losses) on
investments, net of reclassification
adjustment $ 4,561 $ (8,352) $ (794)
Net Investment Income
The components of net investment income are summarized as follows:
Year ended December 31,
2000 1999 1998
(in thousands)
Fixed maturities $ 5,493 $ 5,221 $5,792
Other, including short-term
investments and policy loans 1,490 1,756 2,080
6,983 6,977 7,872
Investment expenses (43) (49) (64)
Net investment income $ 6,940 $ 6,928 $7,808
There were no impairments in the value of investments in 2000, 1999 or 1998,
which were considered other than temporary.
F-20
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Disclosure about Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at December 31,
2000 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $79,786 $79,786
Policy loans 3,699 3,699
Short-term investments 15,624 15,624
Cash and cash equivalents 2,733 2,733
Financial liabilities:
Subordinated notes payable to
affiliate 35,349 35,349
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Fixed Maturities
Fair values are based on quoted market prices or dealer quotes.
Policy Loans
Policy loans are, generally, issued with coupon rates below market rates and are
considered early payment of the life benefit. As such, the carrying amount of
these financial instruments is a reasonable estimate of their fair value.
Cash and Short-term Investments
The carrying amount of these instruments approximates market value.
Subordinated Notes Payable to Affiliate
The fair value is based on the Company's estimate of current market conditions.
F-21
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investment in InterContinental Life Corporation
FIC carries its investment in ILCO on the equity method of accounting. At
December 31, 2000, FIC's investment in affiliate was valued at $79.1 million.
The book value of ILCO's common stock at December 31, 2000 was $19.70 per share,
which is substantially above the market value ($9.50) of ILCO's common stock on
that same date. The applicable accounting standards permit FIC to carry its
investment in ILCO on the equity method of accounting, without any adjustment to
reflect the difference between book value and market value. Under certain
circumstances, Accounting Principles Board Opinion 18 ("APB 18") and Staff
Accounting Bulletin Topic 5.M ("SAB 5.M") require an adjustment to earnings
where the value of an investment is deemed to have decreased on an other than a
temporary basis. Application of the "other than temporary" provisions of APB 18
and SAB 5.M to FIC's investment in ILCO would potentially result in a charge to
earnings in some future period. The amount of such charge would be based
primarily upon the market price of ILCO's common stock, which ranged from $9.313
per share to $14.56 per share during the first quarter of 2001. Based on that
range of market prices, the range of possible impairment charges which might
result would be from $20.22 million to $39.36 million, net of tax. However, the
accounting standards set forth in APB 18 and SAB 5.M provide for several factors
as set forth below that indicate that an adjustment to earnings is neither
required nor appropriate:
(i) FIC has the ability to recover the carrying amount of its investment in
ILCO. Currently, FIC and ILCO are parties to an Agreement and Plan of
Merger whereby ILCO would become a wholly-owned subsidiary of FIC. FIC
believes that it is probable that the merger will be consummated. After the
merger, FIC will include ILCO in its consolidated financial statements. FIC
expects to recover the cost of its investment in ILCO from the realization
of ILCO's net assets through consolidation. FIC believes that there are no
impairment issues related to ILCO's assets and that its liabilities are
fairly stated
(ii) FIC has the ability and intent to continue to hold its investment in
ILCO, as evidenced by the length of time of its holding (approximately 18
years);
(iii) ILCO has a long, unbroken record of profitability and there is an
absence of factors which would indicate a change in that pattern,
(iv) FIC believes that the market has tended to undervalue ILCO's common
stock, due in part to the complex ownership structure of ILCO and the large
block of stock owned by FIC,
(vi) the average initial cost of FIC's investment in ILCO is $2.54 per
share, as compared to a market value of $9.50 per share as of December 31,
2000 and $12.00 per share as of March 30, 2001. During the period that FIC
has held its investment in ILCO, there has not been a significant decrease
in either the market value of ILCO's common stock or ILCO's earnings. The
carrying value of FIC's investment in ILCO has increased as FIC recorded
its equity interest in the earnings of ILCO; and
(vii) ILCO has not incurred either a technological change or the
discontinuance of a business segment which could impair the profitability
of its operations.
F-22
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
At December 31, 2000 excess of cost over net assets acquired of $1,686,000,
net of accumulated amortization of $1,686,000, is included in investment in
affiliate. At December 31, 1999, these amounts were $1,686,000 and
$1,644,000, respectively. Amortization of this excess is reflected in
equity in net earnings of affiliate. ILCO is primarily engaged in the sale
and administration of life insurance products through its insurance
subsidiaries, Investors Life Insurance Company of North America
(Investors-NA) and Investors Life Insurance Company of Indiana
(Investors-IN). Summarized financial information for ILCO is set forth
below:
Balance sheet information: 2000 1999
(in thousands)
Investments $ 659,982 $ 678,814
Deferred policy acquisition
costs and present value of
future profits 75,419 75,429
Other assets 572,214 566,956
Total Assets $ 1,307,615 $ 1,321,199
Policy liabilities and contract
holder deposit funds $ 663,064 $ 675,831
Other liabilities 480,375 493,677
Total liabilities 1,143,439 1,169,508
Common stock, additional paid-in
capital and retained earnings 160,811 155,403
Accumulated other comprehensive
income 3,365 (3,712)
Shareholders' equity 164,176 151,691
Total liabilities and shareholders'
equity $ 1,307,615 $ 1,321,199
F-23
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Results of Operations: 2000 1999 1998
(in thousands)
Premium income $ 10,873 $ 11,132 $ 10,890
Net investment income 50,893 49,913 54,619
Gain on sale of real estate -0- 112 -0-
Earned insurance charges 38,500 40,447 41,067
Benefits and expenses 84,669 85,466 91,876
Net income 12,066 12,765 11,119
Basic earnings per share $ 1.45 $ 1.45 $ 1.27
Diluted earnings per share $ 1.45 $ 1.45 $ 1.25
Total market value basis of the Company's investment in ILCO approximated
$37,360,574 and $36,377,401 at December 31, 2000 and 1999, respectively. FIC
directly or indirectly owns 3,932,692 shares of ILCO's outstanding common stock
at December 31, 2000, 1999 and 1998, (approximately 48% at December 31, 2000) .
In January 1985, FIC acquired 26.53% of ILCO's common stock. FIC and Family Life
subsequently acquired additional shares of ILCO's common stock and as of
December 31, 2000, FIC owned, directly and indirectly through Family Life,
approximately 48% of the outstanding shares of ILCO's common stock. Prior to
October 1, 1998, FIC held options to acquire up to 1,702,155 additional shares
of ILCO Common Stock. As a result of the final repayment on ILCO's Senior Loan
on September 30, 1998, FIC's options to acquire shares of ILCO's Common Stock
expired.
The amount of net realized gains (losses) included in net earnings of ILCO is
$(3,000), $297,000 and $642,000, for the years ended December 31, 2000, 1999 and
1998, respectively.
F-24
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Acquisition of Business
In 1991, the Company acquired Family Life, a Washington domiciled life insurance
company, from Merrill Lynch Insurance Group, Inc. Present value of future
profits of $87,726,000 was recorded as a result of the purchase.
An analysis of the present value of future profits follows:
2000 1999
(in thousands)
Balance at beginning of year $ 23,109 $ 28,294
Accretion of interest 1,820 2,154
Amortization during the period (5,489) (7,339)
Present value of future profits at
December 31 $ 19,440 $ 23,109
Anticipated amortization of the present value of future profits net of interest
accretion for each of the next five years is as follows:
(in thousands)
2001 $ 3,758
2002 $ 3,023
2003 $ 2,431
2004 $ 1,955
2005 $ 1,573
At purchase, the present value of future profits was calculated using a discount
rate of approximately 15%. Interest is accredited on the unamortized portion at
approximately 8.5%.
F-25
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Subordinated Notes Payable
Following is a summary of outstanding debt at December 31:
2000 1999
(in thousands)
Subordinated senior notes payable
to Investors-NA beginning with a
$1,125,000 payment on December 12,
1996 and each subsequentquarter
through September 12, 2001.
Interest is payable on a quarterly
basis at 11% $ 3,375 $ 7,875
Subordinated notes payable to
Investors-NA beginning with a $223,856
payment on December 12, 1996 and each
subsequent quarter through September
12, 2001. Interest is payable on a
quarterly basis at 12% 672 1,567
Subordinated notes payable to
Investors -NA beginning with a
$188,071 payment on December 12,
1996 and each subsequent quarter
through September 12, 2001, a
payment of $1,536,927 on December
12, 2001 and each subsequent
quarter through June 12,2006 with
a final payment of $1,536,967 on
September 12, 2006. Interest is
payable on a quarterly basis at 9%
31,302 32,055
Total subordinated notes payable $ 35,349 $ 41,497
The obligors are allowed to prepay the Investors-NA Subordinated Loans, in whole
or in part, without premium or penalty. The Investors-NA Subordinated Loans were
subordinated to the Senior Loan and now constitute a lien on the Pledged
Collateral. Repayment of the Investors-NA Subordinated Loans is also guaranteed
by the Company.
Aggregate maturities of the Subordinated Notes Payable are as follows:
(in thousands)
2001 $ 6,148
2002 6,148
2003 6,148
2004 6,148
2005 6,148
Thereafter 4,609
Total $ 35,349
F-26
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Income Taxes
The Company files a consolidated federal income tax return with its
subsidiaries. Beginning for the tax year ended December 31, 1999 the Company's
life insurance subsidiary joined in the federal consolidated return of the
Company.
The U.S. federal income tax provision (benefit) charged to continuing operations
was as follows:
2000 1999 1998
(in thousands)
Current $ 1,521 $ 335 $ 119
Deferred (237) 839 2,249
Total provision for income tax $ 1,284 $ 1,174 $ 2,368
The provision for income taxes is less than the amount of income tax determined
by applying the U.S. statutory income tax rate of 35% to pre-tax income from
continuing operations as a result of the following differences:
2000 1999 1998
(in thousands)
Income taxes at the statutory rate $ 2,269 $ 2,454 $ 3,141
Increase (decrease) in taxes resulting
from:
Small life insurance company
deduction (382) (608) (238)
Dividends received deduction (477) (526) (586)
Tax rate differential (65) (70) (90)
Non-deductible compensation 16 17 38
Other items, net (77) (93) 103
Total provision for income taxes $ 1,284 $ 1,174 $ 2,368
Provision has not been made for state and foreign income tax expense since this
expense is minimal. Premium taxes are paid to various states where premium
revenue is earned. Premium taxes are included in the statement of income as
operating expenses.
F-27
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Deferred taxes are recorded for temporary differences between the financial
reporting bases and the federal income tax bases of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
Deferred tax liability 2000 1999
(in thousands)
Equity in net earnings of affiliate $ 5,225 $ 4,815
Excess pension benefit 436 436
Deferred policy acquisition costs 15,941 14,582
Present value of future profits 6,576 7,798
Guaranty fund assessments 77 219
Deferred and uncollected premium 4,263 4,213
Unrealized (depreciation) appreciation
on marketable securities 622 (406)
Other taxable temporary differences 6,198 4,927
Total deferred tax liability 39,338 36,584
Deferred tax asset:
Policy reserves 13,017 11,397
Net operating loss carry forward 1,826 1,785
Alternative minimum tax credit -0- 122
Accrued liabilities 58 58
Total deferred tax assets, net 14,901 13,362
Net deferred tax liability $ 24,437 $ 23,222
An additional deferred federal income (asset) liability of $1,028,000 and
$(1,656,000) for 2000 and 1999, respectively, have been provided on the
unrealized appreciation (depreciation) of marketable securities and included in
the balance of the deferred tax liability. This increase or decrease in deferred
tax liability has been recorded as reduction or increase to the equity
adjustment due to the net change in unrealized appreciation or depreciation and
has not been reflected in the deferred income tax expense, included in net
income from operations.
F-28
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Family Life is eligible for a special deduction allowed to small life insurance
companies equal to 60 percent of tentative life insurance company taxable
income, subject to certain limitations.
Provision for U.S. income taxes has not been made on a portion of the
undistributed earnings of ILCO from the date of the Company's investment since
the Company expects such earnings to be remitted in the form of dividends. The
Company has provided for the tax on the undistributed earnings of ILCO net of
the dividends received deduction expected to be allowed when such dividends are
paid, including $423,000 of deferred tax expense in the current year. The
Company expects that additional deferred taxes would be payable on the
undistributed earnings of ILCO if the Company should sell its investment.
8. Reinsurance
Family Life reinsures portions of certain policies it writes, thereby providing
greater diversification of risk and minimizing exposure on larger policies. The
Company's retention on any one individual ranges from $-0- to $200,000 depending
on the risk.
Policy liabilities and contract holder deposit funds are reported in the
consolidated financial statements before considering the effect of reinsurance
ceded. The insurance subsidiary remains liable to the extent the reinsurance
companies are unable to meet their obligation under the reinsurance agreements.
Under the provisions of the purchase agreement between the Company and Merrill
Lynch, certain life insurance companies affiliated with Merrill Lynch agreed to
assume (on an assumption reinsurance basis) certain single premium whole life
and annuity products written by Merrill Lynch's insurance division on Family
Life's paper. The transfer of these reserves, in accordance with the reinsurance
agreement, is subject to certain regulatory approvals.
The amount remaining under this agreement that had not yet been approved for
transfer to Merrill Lynch was $214,875 and $116,070 at December 31, 2000 and
1999, respectively.
The amounts in the consolidated financial statements for reinsurance ceded are
as follows:
December 31,
2000 1999 1998
(in thousands)
Future policy benefits $ 17,170 $ 14,512 $ 11,950
Unearned premiums 51 46 28
Other policy claims and benefits
payable 245 290 448
$ 17,466 $ 14,848 $ 12,426
F-29
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
For the years ended
2000 1999 1998
(in thousands)
Premiums $ 839 $ 1,091 $ 1,419
Policyholder benefits
and expenses $ 1,515 $ 1,306 $ 1,503
Estimated amounts recoverable from reinsurers on paid claims were $7,399 and
$32,243 in 2000 and 1999, respectively. These amounts were included in other
receivables in the consolidated financial statements at December 31, 2000 and
1999.
9. Shareholders' Equity
The Company's ability to pay dividends to its shareholders is affected, in part,
by receipt of dividends from Family Life and ILCO.
Family Life is domiciled in the state of Washington. Under current Washington
law any proposed payment of dividends or distribution by the insurance
subsidiary which, together with dividends or distributions paid during the
preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as
of the preceding December 31 or (ii) statutory net gain from operations, is
called an "extraordinary dividend" and may not be paid until either it has been
approved, or a waiting period shall have passed during which it has not been
disapproved, by the insurance commissioner.
Effective July 25, 1993 Washington amended its insurance code to retain the
"greater of" standard but enacted requirements that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner and that
dividends may be paid only from earned surplus. Family Life does not presently
have earned surplus as defined by the regulations adopted by the Washington
Insurance Commissioner and, therefore, is not presently permitted to pay cash
dividends.
However, the Company does not directly own its life insurance subsidiary's
stock, but instead indirectly owns that stock through a downstream holding
company, FLC, whose ability to pay dividends to the Company is significantly
limited by some of the subordinated notes referred to in Note 6 during the terms
of those loans. Consolidated net assets of FLC aggregated approximately
$67,188,000 and $64,235,000 at December 31, 2000 and 1999, respectively.
The ability of ILCO to pay dividends to the Company and the other shareholders
of ILCO is affected by receipt of dividends from its insurance subsidiaries,
which are generally limited by law to the greater of their net income for the
prior year or 10% of capital and surplus.
Capital and surplus of Family Life as reported to insurance regulators and as
determined in accordance with statutory accounting practices prescribed or
permitted by the state of Washington aggregates approximately $23,788,279 and
$26,874,275 at December 31, 2000 and 1999, respectively.
F-30
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Statutory net income aggregated approximately $5,024,926, $6,703,705 and
$10,473,492 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company employed no permitted statutory accounting practices that
individually or in the aggregate materially affected statutory surplus or
risk-based capital at December 31, 2000 or 1999.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon implementation. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, e.g. deferred income taxes are recorded. While management has not
yet determined the impact of Codification, it is possible that certain changes
in statutory accounting principles arising from Codification would be material
to the Company's insurance subsidiary.
10. Options
In connection with the subordinated senior notes and subordinated notes payable
to Investors-NA, Investors-NA was granted non-transferrable options to purchase,
in amounts proportionate to their respective loans, up to a total of 9.9 percent
of the common shares of FIC. The option price is $2.10 per share (adjusted to
reflect the five-for-one stock split in 1996), equivalent to the then current
market price, subject to adjustment to prevent the effect of dilution. The
options expired at the time of final repayment of each of the respective loans
in 1998.
11. Retirement Plans and Employee Stock Plans
Retirement Plan
Family Life has a non-contributory defined benefit pension plan which covers
employees who have completed one year or more of service. Under the plan,
benefits are payable upon retirement based on earnings and years of credited
service.
a. The Normal Retirement Date for all employees is the first day of the
month coinciding with or next following the later of attainment of age 65
or the completion of five years of service, but not later than age 70.
b. The Normal Retirement Benefit is the actuarial equivalent of a life
annuity, payable monthly, with the first payment commencing on the Normal
Retirement Date. The life annuity is equal to the sum of (1) plus (2):
(1) Annual Past Service Benefit: 1.17% of the first $10,000 of Average
Final Earnings plus 1 1/2% of the excess of Average Final Earnings
over $10,000, all multiplied by the participant's Credited Past
Service. For these purposes, "credited past service" is service prior
to April 1, 1967, with respect to employees who were plan participants
on December 31, 1975.
F-31
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(2) Annual Future Service Benefit: 1.5578% of the first $10,000 of
Average Final Earnings plus 2% of the excess of Average Final Earnings
over $10,000, all multiplied by the participant's Credited Future
Service.
c. Effective April 1, 1997, the Family Life pension plan was amended to
provide that the accrual rate for future service is 1.57% of Final Average
Earnings multiplied by Credited Service after March 31, 1997, less .65% of
Final Average Earnings up to Covered Compensation. With respect to service
prior to April 1, 1997, the accrual rate described in paragraph (b), above,
is applicable, with Average Final Earnings taking into account a
participant's earnings subsequent to April 1, 1997. Average Final Earnings
are the highest average Considered Earnings during any five consecutive
years while an active participant. Total Credited Past Service plus
Credited Future Service is limited to 40 years.
The pension costs for the plan includes the following components:
2000 1999 1998
(in thousands)
Service cost for benefits
earned during the year $ 61 $ 52 $ 59
Interest cost on projected
benefit obligation 472 500 452
Expected return on plan assets (401) (535) (633)
Pension benefit $ 132 $ 17 $(122)
F-32
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The following summarizes the status of the plan at December 31:
2000 1999
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning
of year $ 6,679 $ 7,690
Service cost 61 52
Interest cost 472 500
Benefits paid (341) (1,581)
(Gain)/Loss due to change
in assumptions 0 0
(Gain)/Loss due to experience (30) 18
Benefit obligation at end of year $ 6,841 $ 6,679
Change in plan assets:
Fair value of plan assets at
beginning of year $ 6,352 $ 7,721
Actual return on plan assets 383 212
Benefits paid (341) (1,581)
Fair value of plan assets at
end of year $ 6,394 $ 6,352
Funded Status:
Funded status at end of year $ (447) $ (327)
Unrecognized actuarial net (gain) loss 2,131 2,143
Prepaid pension expense at end of year $ 1,684 $ 1,816
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.25% for the years
ended December 31, 2000, 1999 and 1998.
The assumed long-term rate of compensation increases was 5.0% for the years
ended December 31, 2000, 1999 and 1998.
The assumed long-term rate of return on plan assets was 8.0% for the years ended
December 31, 2000, 1999 and 1998.
F-33
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
During 1995, the ILCO Employee Stock Ownership Plan and the ILCO Savings and
Investment Plan were amended to allow for the addition of Family Life as a
participating employer, thus allowing Family Life employees to participate in
the plans.
In 1997, the ILCO Savings and Investment Plan was amended to provide for a
matching contribution by participating companies. The match, which is in the
form of shares of ILCO common stock, is equal to 100% of an eligible
participant's elective deferral contributions, as defined in the Plan, not to
exceed a maximum percentage of the participant's plan compensation. Initially,
the maximum percentage was 1%. Effective January 1, 2000, the plan was amended
to increase the maximum percentage to 2%. Allocations are made on a quarterly
basis to the account of participants who have at least 250 hours of service in
that quarter.
Effective May 1, 1998, the 401(k) Plan was amended to provide for the merger of
the ESOP into the 401(k) Plan. In connection with the merger, certain features
under the ESOP were preserved for the benefit of employees previously
participating in the ESOP with regard to all benefits accrued under the ESOP
through the date of merger.
Stock Option Plans
In 1984, the Company's shareholders adopted a qualified stock option plan for
officers and key employees. The aggregate amount of the common shares on which
options may be granted is limited to 200,000 shares. The option price will not
be less than 100% of the fair market price of the optioned shares on the date
the option is granted. As of December 31, 2000, no options had been granted
under this plan.
12. Leases
Family Life occupies office facilities under lease agreements with unrelated
third parties which expire over the next year. Certain office space leases may
be renewed at the option of the Company.
Rent expense in 2000, 1999 and 1998 was $687,840, $591,947, and $628,979
respectively. Minimum annual rentals are as follows:
(in thousands)
2001 $ 750
2002 692
2003 681
2004 662
2005 662
Thereafter 2,980
Total $6,427
F-34
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Related Party Transactions
The obligations of ILCO under the ILCO Senior Loan were guaranteed by FIC. FIC
presently owns 3,932,692 shares of ILCO Common Stock, constituting 48% of such
shares outstanding. The current Senior Loan of ILCO was fully repaid on
September 30, 1998. Accordingly FIC's rights under the 1986 option agreement
expired on September 30, 1998.
As part of the financing arrangement for the acquisition of Family Life, a $22.5
million loan was made by Investors-NA to FLC, a subsidiary of FIC, and a $2.5
million loan was made by Investors Life Insurance Company of California
(Investors-CA), which was merged into Investors-NA in 1992, to FIC. In addition
to the interest provided under those loans, Investors-NA and Investors-CA were
granted by FIC non- transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9 percent of shares
of FIC's common stock at a price of $10.50 per share, equivalent to the then
current market price, subject to adjustment to prevent dilution. As a result of
the FIC's five-for-one stock split, which was effective November 12, 1996, the
option price is currently $2.10 per share. The options originally were to expire
on June 12, 1998 if not previously exercised. In connection with the 1996
amendments to the subordinated notes, as described below, the expiration date of
the options were extended to September 12, 2006.
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and its
affiliate was prepaid. The Company paid $38 million plus accrued interest to
retire the indebtedness, which had a principal balance of approximately $50
million on July 30, 1993. The primary source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
Family Life Insurance Investment Company ("FLIIC"), another subsidiary of FIC,
obtained from Investors-NA. The principal amount of the new subordinated debt is
payable in four equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of the new debt are
substantially the same as those of the $22.5 million subordinated loans that
Investors-NA had previously made to FLC and that continue to be outstanding.
As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC
and FLIIC were modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the note remains at
9%, (c) the $4.5 million note was amended to provide for forty quarterly
principal payments, in the amount of $24,531 each for the period December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the final
quarterly principal payment is due on September 12, 2006; the interest rate on
the note remains at 9%, (d) the $2.5 million note was amended to provide that
the principal balance of the note is to be repaid in twenty quarterly
installments of $125,000 each, commencing December 12, 1996 with the final
payment due on September 12, 2001; the rate of interest remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in kind of interest
due under the terms of the $2.5 million note prior to June 12, 1996, was amended
to provide that the principal balance of the note $1,977,119 is to be paid in
twenty quarterly principal payments, in the amount of $98,855.95 each, to
commence December 12, 1996 with the final payment due on September 12, 2001; the
interest rate on the note remains at 12%.
F-35
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In December, 1998 FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder, FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
Data processing services are provided to ILCO's and FIC's Austin, Texas and
Seattle, Washington facilities by FIC Computer Services, Inc. ("FIC Computer"),
a subsidiary of FIC. Each of FIC's and ILCO's insurance subsidiaries has entered
into a data processing agreement with FIC Computer whereby FIC Computer provides
data processing services to each subsidiary for fees equal to such subsidiary's
proportionate share of FIC Computer's actual costs of providing those services
to all of the subsidiaries. Family Life paid $1,757,904, $1,916,350 and
$1,610,397 and ILCO's insurance subsidiaries paid $2,426,793, $2,730,189 and
$2,818,095 to FIC Computer for data processing services provided during 2000,
1999 and 1998, respectively.
In 1995, Family Life entered into a reinsurance agreement with Investors-NA
pertaining to universal life insurance written by Family Life. The reinsurance
agreement is on a co-insurance basis and applies to all covered business with
effective dates on and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than $200,000; face
amounts of $200,000 or more are reinsured by Family Life with a third party
reinsurer.
In 1996, Family Life entered into a reinsurance agreement with Investors-NA,
pertaining to annuity contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996.
Pursuant to a Service Agreement between Family Life and Investors NA, the
Company reimbursed Investors NA for certain operating expenses incurred on
behalf of FLIC totaling approximately $12 million, $13 million, and $11 million
in 2000, 1999 and 1998, respectively.
In November, 1998, FIC purchased 101,304 shares of FIC's common stock from the
Roy F. and Joann Cole Mitte Foundation (the "Foundation"), a Texas non-profit
corporation which is controlled by Mr. Mitte and his wife, at a price of $18.625
per share (or a total purchase price of $1,886,787). At the same time, Family
Life purchased 272,000 shares of FIC's common stock from the Foundation at a
price of $18.625 per share (or a total purchase price of $5,066,000). Mr. Mitte
and his wife had previously donated the shares to the Foundation. The shares are
included in common treasury stock in the Company's financial statements at cost.
F-36
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Commitments and Contingencies
The Company and its subsidiaries are defendants in certain legal actions related
to the normal business operations of the Company. Management believes that the
resolution of such matters will not have a material impact on the financial
statements.
15. Net Income Per Share
(in thousands except per share data)
The following table reflects the calculation of basic and diluted earnings per
share:
December 31,
2000 1999 1998
(Amounts in thousands,
except per share amounts)
Basic:
Net income available to common
shareholders $ 8,779 $ 9,149 $ 9,218
Average weighted common stock
outstanding 5,055 5,055 5,383
Basic earnings per share $ 1.74 $ 1.81 $ 1.71
Diluted:
Net income available to common
shareholders $ 8,779 $ 9,149 $ 9,218
Average weighted common stock
outstanding 5,055 5,055 5,383
Common stock options 258 277 293
Effect of shares ILCO owns of FIC (91) (85) (85)
Repurchase of treasury stock (59) (47) (34)
Common stock and common stock
equivalents 5,163 5,200 5,557
Diluted earnings per share $ 1.70 $ 1.76 $ 1.66
F-37
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Business Concentration
The Company's insurance subsidiary, Family Life provides mortgage protection
life, disability and accidental death insurance to mortgage borrowers of
financial institutions. For marketing purposes a significant number of these
financial institutions provide Family Life with customer lists. In 2000, premium
income from these products was derived from forty-nine states with
concentrations of approximately 25% and 26% in California and Texas,
respectively. In 1999, these amounts were 25% and 25%, respectively.
17. Quarterly Financial Data (unaudited)
(in thousands, except per share data)
Three Months Three Months
Ended Ended
March 31, June 30,
2000 1999 2000 1999
Total revenues $ 11,288 $ 12,115 $ 11,371 $ 12,308
Net income $ 2,214 $ 2,268 $ 2,205 $ 1,801
Basic earnings per share $ 0.44 $ 0.45 $ 0.44 $ 0.36
Diluted earnings per share $ 0.43 $ 0.44 $ 0.43 $ 0.35
Three Months Three Months
Ended Ended
September 30, December 31,
2000 1999 2000 1999
Total revenues $ 11,110 $ 11,721 $ 10,649 $ 11,169
Net income $ 2,167 $ 2,476 $ 2,193 $ 2,604
Basic earnings per share $ 0.43 $ 0.49 $ 0.43 $ 0.52
Diluted earnings per share $ 0.42 $ 0.48 $ 0.42 $ 0.50
18. Subsequent Events
Agreement and Plan of Merger.
On January 17, 2001, FIC entered into an Agreement and Plan of Merger (the
"Agreement") with ILCO and ILCO Acquisition Company ("ILCO Acquisition"), a
Texas corporation and wholly-owned subsidiary of FIC. In general, the Agreement
provides that, following the approval of the Agreement by the shareholders of
ILCO and the approval of the issuance of shares of FIC common stock and
amendment to FIC's articles of incorporation by the shareholders of FIC and the
satisfaction or waiver of the other conditions to the merger: (1) ILCO
Acquisition will merge with and into ILCO; and (2) ILCO Acquisition will cease
to exist and ILCO will continue as the surviving corporation and as a
wholly-owned subsidiary of FIC following the merger.
F-38
Upon the consummation of the merger: (1) each share of ILCO common stock issued
and outstanding immediately prior to the merger, other than shares of ILCO
common stock held as treasury shares by ILCO (but excluding shares of ILCO
common stock held by any of ILCO's subsidiaries, whether or not treated as
treasury shares of ILCO on a consolidated basis under generally accepted
accounting principles) or shares of ILCO common stock held by FIC, will be
converted into the right to receive 1.1 shares of FIC common stock. However, in
the event of any change in FIC common stock and/or ILCO common stock prior to
the merger, such as a stock split, stock dividend, subdivision,
reclassification, recapitalization, combination, exchange of shares or the like,
the number and class of shares of FIC common stock to be issued and delivered in
the merger in exchange for each outstanding share of ILCO common stock will be
adjusted so as to maintain the relative proportionate interests of the holders
of ILCO common stock and FIC common stock; (2) each share of ILCO common stock,
series A preferred stock and series B preferred stock of ILCO, in each case
which is held as treasury shares by ILCO prior to the merger (excluding shares
of ILCO common stock held by any of ILCO's subsidiaries, whether or not treated
as treasury shares of ILCO on a consolidated basis under generally accepted
accounting principles), and each share of ILCO common stock which is held by FIC
(excluding any shares of ILCO common stock owned by any of FIC's subsidiaries)
prior to the merger, will be cancelled and retired; (3) each share of common
stock of ILCO Acquisition issued and outstanding immediately prior to the merger
will be converted into one share of common stock of ILCO and such shares will
represent all of the issued and outstanding capital stock of ILCO following the
merger; and (4) shares of FIC common stock outstanding immediately prior to the
merger (including shares of FIC common stock held by any subsidiary of FIC or
ILCO) will remain outstanding and will be unaffected by the merger. No
fractional shares of FIC common stock will be issued in the merger. A holder of
ILCO common stock who would otherwise be entitled to receive fractional shares
of FIC common stock as a result of the merger will receive, in lieu of
fractional shares, cash in an amount equal to the average closing price per
share of FIC common stock for the 30 trading days immediately prior to the
merger multiplied by the fraction to which the holder would otherwise be
entitled. FIC will make available to First Union National Bank, as exchange
agent, from time to time sufficient cash amounts to satisfy payment for
fractional shares and First Union will distribute such proceeds, without
interest, to the holders of the fractional interests.
The consummation of the merger remains subject to regulatory approval, as well
as to the various conditions precedent set forth in the Agreement, including the
approval of certain matters by the shareholders of FIC and ILCO. For a more
detailed description of the Agreement, see the complete copy of the Agreement,
attached as an annex to the S-4 filed by FIC with the Securities and Exchange
Commission on February 1, 2001, as amended by the S-4/A filed on March 13, 2001.
F-39
Litigation Relating to the Merger
On the day that ILCO publicly announced the formation of a special committee to
evaluate a potential merger with FIC, two class action lawsuits were filed
against ILCO, FIC and the officers and directors of ILCO. The actions allege
that a cash consideration in the proposed merger is unfair to the shareholders
of ILCO, that it would prevent the ILCO shareholders from realizing the true
value of ILCO, and that FIC and the named officers and directors had material
conflicts of interest in approving the transaction.
In their initial pleadings, the plaintiffs sought certification of the cases as
class actions and the named plaintiffs as class representatives, and among other
relief, requested that the merger be enjoined (or, if consummated, rescinded and
set aside) and that the defendants account to the class members for their
damages.
As of March 16, 2001, the plaintiffs have not taken any further action with
respect to the litigation. The defendants believe that the lawsuits are without
merit and intend to vigorously contest the lawsuits. Management is unable to
determine the impact, if any, that the lawsuits will have on the results of
operations of FIC.
NASDAQ Application
On January 24, 2001, FIC submitted an application to have its common stock
traded on the NASDAQ National Market under the symbol FNIN. FIC has provided
Nasdaq Listing Qualifications with appropriate documentation to support its
application and management expects the application process to be completed at
the beginning of April, 2001.
Unsolicited Verbal Inquiries Concerning Possible Purchase of Post-Merger Company
On March 8, 2001, FIC announced that it has received unsolicited verbal
indications of interest from a few companies that may be interested in acquiring
FIC after completion of the merger with ILCO. The press release did not state
any price ranges or other material terms. In conjunction with such indications
of interest, FIC has retained Philo Smith Capital Corporation as its financial
advisor to explore the possibility of a post-merger sale of FIC with these
companies and to further solicit indications of interest from other companies
that may have similar interests. No formal indications of interest have been
received by FIC to date and FIC has not determined to sell the post-merger
company.
Dividend
In March, 2001, the Company announced that its board of directors approved the
payment of an annual cash dividend in the amount of $0.41 per share. The
dividend is payable on April 12, 2001 to record holders as of the close of
business on March 20, 2001.
F-40
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 2000
(in thousands)
Column A Column B Column C Column D
Amount Shown
on the Balance
Type of Investment Amortized Cost Fair Value Sheet
Fixed Maturities Available for Sale:
Bonds:
United States Government and
government agencies and authorities $ 6,378 $ 6,933 $ 6,933
States, municipalities and political
subdivisions 4,928 5,050 5,050
Corporate securities 35,905 36,207 36,207
Mortgage-backed securities 31,038 31,596 31,596
Total fixed maturities 78,249 79,786 79,786
Equity securities:
Common Stocks
Industrial and miscellaneous other 11 4 4
Total equity securities
Policy loans 3,699 3,699 3,699
Short -term investments 15,624 15,624 15,624
Total investments $ 97,583 $ 99,113 $ 99,113
F-41
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS
December 31,
2000 1999
ASSETS (in thousands)
Cash and cash equivalents $ 223 $ 70
Short-term investments 150 1,037
Long-term bonds 16 16
Investments in subsidiaries* 143,011 130,399
Property, plant and equipment, net 69 105
Other assets 999 965
Accounts receivable 582 100
Total assets $ 145,050 $ 132,692
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Subordinated notes payable $ 4,755 $ 5,748
Other liabilities and intercompany payables 6,677 5,761
Total liabilities 11,432 11,509
Shareholders' equity
Common stock, $.20 par value, 10,000,000
shares authorized; 5,845,300 shares
issued, 5,054,661 shares outstanding
in 2000 and 1999
1,169 1,169
Additional paid-in capital 7,225 7,225
Accumulated other comprehensive income 2,107 (2,454)
Retained earnings (including $124,930 and
$115,363 of undistributed earnings of
subsidiaries at December 31, 2000 and 1999) 125,426 117,552
135,927 123,492
Common treasury stock, at cost, 518,639
shares in 2000 and 1999 respectively (2,309) (2,309)
Total shareholders' equity 133,618 121,183
Total liabilities and shareholders' equity $ 145,050 $ 132,692
* $72,309 and $65,354 are eliminated in consolidation in 2000 and 1999,
respectively.
F-42
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
STATEMENTS OF INCOME
FOR THE YEARS ENDED
December 31,
(in thousands)
2000 1999 1998
Income $ 26 $ 629 $ 89
Expenses:
Operating expenses 147 193 436
Interest expense* 515 613 769
662 806 1,205
Loss from operations (636) (177) (1,116)
Equity in undistributed
earnings from subsidiaries 9,415 9,326 10,334
Net income $ 8,779 $ 9,149 $ 9,218
*In consolidation, $250 is reported as a reduction in equity in earnings of
unconsolidated subsidiary.
F-43
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
December 31,
(in thousands)
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,779 $ 9,149 $ 9,218
Adjustments to reconcile net
income to net cash used in
operating activities:
Decrease (increase) in
accounts receivables (482) 26 (49)
Increase in investment in
subsidiaries* (12,612) (7,418) (14,837)
(Increase) decrease in
other assets (34) 3 50
Increase (decrease) in other
liabilities and intercompany
payables 916 (175) 3,111
Other 4,597 404 (35)
Net cash provided by (used in)
operating activities 1,164 1,989 (2,542)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net change in short-term
investments 887 (980) 1,046
Change in subordinated notes
payable to Investors-NA (993) (994) 3,384
Cash dividend to stockholders (905) -0- -0-
Purchase of treasury stock -0- -0- (1,887)
Net cash provided by (used in)
financing activities (1,011) (1,974) 2,543
Increase in cash 153 15 1
Cash and cash equivalents,
beginning of year 70 55 54
Cash and cash equivalents,
end of year $ 223 $ 70 $ 55
*Eliminated in consolidation
F-44
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE IV-REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
(in thousands)
Ceded to Assumed Percentage
Direct Other From Other Net Amount of Amount
Amount Companies Companies Assumed
2000
Life Insurance
in-force $ 7,006,301 $ 552,467 $ 5,067 $ 6,458,901 0.08%
Premium:
Life insurance $ 33,499 $ 448 $ 51 $ 33,102 0.15%
Accident-health
insurance 438 391 -0- 47 0.00%
Total $ 33,937 $ 839 $ 51 $ 33,149 0.15%
1999
Life Insurance in-
force $ 7,406,486 $ 520,319 $ 5,787 $ 6,891,954 0.08%
Premium:
Life insurance $ 34,378 $ 573 $ 48 $ 33,853 0.14%
Accident-health
insurance 623 518 -0- 105 0.00%
Total $ 35,001 $ 1,091 $ 48 $ 33,958 0.14%
1998
Life insurance in-
force $ 7,755,545 $ 440,270 $ 6,159 $ 7,321,434 0.08%
Premium:
Life insurance $ 38,908 $ 769 $ 60 $ 38,199 0.16%
Accident-health
insurance 809 650 -0- 159 0.00%
Total $ 39,717 $ 1,419 $ 60 $ 38,358 0.16%
F-45
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
2.1 Agreement and Plan of Merger dated as of January 17,
2001, by and among FIC, ILCO and Merger Sub.(1)
3.1 Articles of Incorporation of FIC.(2)
3.2 Certificate of Amendment to the Articles of
Incorporation of FIC, dated November 12, 1996.(3)
3.3 Bylaws of FIC.(2)
3.4 Amendment to Bylaws of FIC dated February 29, 1992.(10)
3.5 Amendment to Bylaws of FIC dated June 16, 1992.(10)
10.1 Stock Purchase Agreement, dated as of March 19, 1991,
as amended, by and among Merrill Lynch Insurance Group,
Inc., Family Life Insurance Company, Family Life
Corporation, Family Life Insurance Investment Company and
FIC.(4)
10.2 Note, dated June 12, 1991, in the original principal
amount of $2.5 million made by FIC in favor of Investors
Life Insurance Company of California (Investors-CA) and
transferred to Investors Life Insurance Company of North
America (Investors-NA) in connection with the merger as of
December 31, 1992 of Investors-CA into Investors-NA.(4)
10.3 Credit Agreement, dated as of June 12, 1991, among
Family Life Corporation, the Lenders named therein and the
Agent named therein.(4)
10.4 Note, dated June 12, 1991, in the original principal
amount of $22.5 million made by Family Life Corporation in
favor of Investors Life Insurance Company of North
America.(4)
10.5 Note, dated June 12, 1991, in the original principal
amount of $2.5 million made by FIC in favor of Investors
Life Insurance Company of California.(5)
10.6 Option Agreement, dated as of June 12, 1991, among FIC,
Investors Life Insurance Company of North America and
Investors Life Insurance Company of California.(4)
10.7 Surplus Debenture, dated as of June 12, 1991, in the
original principal amount of $97.5 million made by Family
Life Insurance Company in favor of Family Life
Corporation.(5)
Ex-1
10.8 Note, dated July 30, 1993, in the original principal
amount of $30 million made by Family Life Corporation in
favor of Investors Life Insurance Company of North
America.(5)
10.9 Note, dated July 30, 1993, in the original principal
amount of $4.5 million made by Family Life Insurance
Investment Company in favor of Investors Life Insurance
Company of North America.(5)
10.10 Amendment No. 1 to Note, dated July 30, 1993, between
Family Life Corporation and Investors Life Insurance
Company of North America.(5)
10.11 Amendment No. 1 to Note, dated July 30, 1993, between
Family Life Insurance Company and Family Life
Corporation.(5)
10.12 Guaranty Agreement, dated July 30, 1993, between FIC
and Investors Life Insurance Company of North America.(5)
10.13 Guaranty Agreement, dated July 30, 1993, between FIC
and Investors Life Insurance Company of North America.(5)
10.14 Data Processing Agreement, dated as of November 30,
1994, between ILCO and FIC Computer Services, Inc.(6)
10.15 Data Processing Agreement, dated as of November 30,
1994, between Investors Life Insurance Company of North
America and FIC Computer Services, Inc.(6)
10.16 Data Processing Agreement, dated as of November 30,
1994, between Family Life Insurance Company and FIC
Computer Services, Inc.(6)
10.17 Amendment No. 2, dated December 12, 1996, effective
June 12, 1996 to the note dated June 12, 1991 in the
original principal amount of $22.5 million made by Family
Life Corporation in favor of Investors Life Insurance
Company of North America.(7)
10.18 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996 to the note dated June 12, 1991 in the
original principal amount of $2.5 million made by FIC in
favor of Investors Life Insurance Company of California.(7)
Ex-2
10.19 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996 to the note dated June 12, 1991 in the
original principal amount of $2.5 million made by FIC in
favor of Investors Life Insurance Company of North
America.(7)
10.20 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996 to the note dated July 30, 1993 in the
original principal amount of $30 million made by FIC in
favor of Investors Life Insurance Company of North
America.(7)
10.21 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996 to the note dated July 30, 1993 in the
original principal amount of $4.5 million made by Family
Life Insurance Investment Company in favor of Investors
Life Insurance Company of North America.(7)
10.22 Company of North America and Investors Life Insurance
Company of California.(7)
10.23 Assignment Agreement, dated December 23, 1998, between
Family Life Insurance Investment Company and FIC.(8)
21.1 EX-5 Subsidiaries of Registrant.*
Ex-3
* Filed herewith.
(1) Incorporated be reference to the Exhibits filed with FIC's Current Report
on Form 8-k dated January 23, 2001.
(2) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1985.
(3) Incorporated by reference to the Exhibits filed with FIC's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(4) Incorporated by reference to the Exhibits filed with FIC's Current Report
on Form 8-k dated June 25, 1991.
(5) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1993.
(6) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1994.
(7) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1996.
(8) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1998.
(9) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1999.
(10) Incorporated by reference to the Exhibits filed with FIC's S-4 filed on
February 1, 2001.
Ex-4
EXHIBIT 21
Subsidiaries of Registrant
Family Life Corporation
Family Life Insurance Company
Financial Industries Service Corporation
Financial Industries Securities Corporation
Financial Industries Service Corporation
of Mississippi, Inc.
Financial Industries Sales Corporation
of Southern California, Inc.
FIC Realty Services, Inc.
FIC Property Management, Inc.
FIC Computer Services, Inc.
ILCO Acquisition Company
Ex-5