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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, 1995
[ ] 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)
701 Brazos, Suite 1400, Austin, Texas 78701
(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, $1 par value
(Title of Class)
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 19, 1996, based on the
closing sales price in The Nasdaq Small-Cap Market ($42.00 per
share), was $28,244,412.
The number of shares outstanding of Registrant's common stock on
March 19, 1996 was 1,085,593.
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,
1995, 1994 and 1993 are hereby incorporated by
reference.
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 ownership of 100% of Family Life
Insurance Company ("Family Life") and its 47% interest in
InterContinental Life Corporation ("ILCO"). FIC also holds
options to acquire additional shares, which, if exercised, would
result in FIC owning approximately 62% of ILCO's outstanding
shares.
The Registrant was organized as an Ohio corporation in 1968 and
was reincorporated in Texas in 1980. Its executive offices are
located at 701 Brazos, Suite 1400, Austin, Texas 78701. Through
1984, FIC's principal business was the sale and underwriting of
life and health insurance, mainly in the midwestern and
southwestern United States. In 1985, FIC acquired control of
ILCO.
FIC, ILCO and their insurance subsidiaries have substantially
identical managements, and a majority of the directors of FIC are
also directors of ILCO and FIC's and ILCO's insurance
subsidiaries. No non-management director of FIC or ILCO is a
director of the other company. Officers allocate their time
between FIC and ILCO in accordance with the comparative
requirements of both companies and their subsidiaries. Roy F.
Mitte, Chairman, President and Chief Executive Officer of FIC,
ILCO and their insurance subsidiaries, owns 34% of the
outstanding shares of FIC's common stock.
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 large 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.
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 20,
1996, FIC owned, directly and indirectly through Family Life,
47.03% of the outstanding shares of ILCO's Common Stock. FIC
holds options to acquire up to 1,702,155 additional shares of
ILCO's Common Stock. Giving effect to the exercise of those
options, FIC would own, directly and indirectly through Family
Life, 62.35% of the outstanding shares of ILCO's Common Stock.
The exercise price of the options is equal to the average quoted
market price of ILCO's common stock over the six month period
immediately prior to exercise. In addition, in the event that
any other party should seek to acquire, without the prior
approval of ILCO's Board of Directors, securities aggregating
five percent or more of the outstanding shares of ILCO, FIC would
then have the right to acquire, under the same price formula,
that number of shares of common stock which together with the
shares then owned by FIC, would amount to 51% of the outstanding
shares of ILCO. The consideration for the options was FIC's
granting to ILCO a loan in the principal amount of $1,200,000,
FIC's agreement to guarantee additional ILCO obligations totaling
$4,000,000 and FIC's agreement to guarantee ILCO's lease
obligation on its headquarters building upon demand. In
addition, FIC guaranteed a $15,000,000 term loan of ILCO.
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 underwrites and sells 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
"Acquisition of Family Life".
ILCO's Acquisitions
In November 1986, ILCO acquired Standard Life Insurance Company
("Standard Life"), headquartered in Jackson, Mississippi, for a
gross purchase price of $54,500,000. A portion of the funds used
by the new life insurance company formed by ILCO to make the
acquisition ("New Standard") was the proceeds of a loan extended
to the Company by a national bank in the principal amount of
$15,000,000 (the "Standard Term Loan"). This sum was, in turn,
loaned by ILCO to New Standard, and the loan was evidenced by a
surplus debenture. New Standard was merged into Standard Life in
June 1988.
In December 1988, ILCO, through Standard Life, purchased
Investors Life Insurance Company of California ("Investors-CA")
and Investors Life Insurance Company of North America
("Investors-NA") from CIGNA Corporation for an adjusted purchase
price of $136,000,000. ILCO obtained the funds used for the
acquisition from: (a) a senior loan in the amount of
$125,000,000 provided by six financial institutions, (b) a
$10,000,000 subordinated loan provided by two insurance and
financial service organizations and (c) the sale of $5,000,000 of
Class A Preferred Stock to CIGNA and $15,000,000 of Class B
Preferred Stock to the subordinated lenders. Approximately
$15,000,000 of these funds were used to discharge the Standard
Term Loan. The balance of these funds were loaned by ILCO to
Standard Life. To evidence this indebtedness, Standard Life
issued a $140,000,000 surplus debenture to ILCO. In connection
with the subordinated debt and preferred stock financing, ILCO
issued detachable warrants entitling the holders to purchase
1,107,480 shares of ILCO's Common Stock at $3.33 per share. In
May 1990, the holders of the Class A and Class B Preferred Stock
exchanged that stock for subordinated loans of a like amount.
ILCO prepaid the subordinated debt and purchased the warrants in
early 1993. See "The ILCO Refinancing."
On February 14, 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-IN").
Investors-IN is licensed in ten states and markets a variety of
individual life and annuity products through independent agents.
Business of Family Life Insurance Company
Family Life, which was organized in the State of Washington in
1949, specializes in providing mortgage protection life,
disability and accidental death insurance and annuity products to
mortgage borrowers of financial institutions. Family Life has
policies in force with customers of approximately 400 financial
institutions, of which approximately 75 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 and disability insurance sold to
borrowers of mortgage debt, designed to repay the mortgages of
policyholders in the event of their death or disability. 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.
During 1995, 1994 and 1993, Family Life received premium income
from sales of its annuity products and various lines of insurance
as follows: $3.8 million, $1.5 million and $394,915,
respectively, from annuity products, $51.5 million, $52.4
million and $60.1 million, respectively, from individual life,
$1.2 million, $1.4 million and $1.6 million, respectively, from
individual accident and health, $483,373, $609,132 and $757,563,
respectively, from direct mail (group) life and $289,749,
$424,429 and $562,845, respectively, from direct mail (group)
accident and health.
Family Life is licensed to sell mortgage protection products in
49 states and the District of Columbia. In 1995, premium income
from these products was derived from all states in which Family
Life is licensed, with significant amounts derived from
California (23%), Texas (23%) and Illinois (5%).
Family Life's primary distribution channel is its agency force of
approximately 500 career agents (at December 31, 1995), who are
organized into ten regions. Most of the career agents sell
mortgage protection products exclusively for Family Life. Family
Life's other distribution channel had been direct mail marketing.
However, in 1992, Family Life discontinued solicitations of new
direct mail business in order to concentrate more cost
effectively on proven agent sold operations.
The mortgage protection insurance business is very fragmented.
Family Life believes that it is among the largest writers of
agent sold mortgage protection 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 protection business represents
only a small portion of their total business.
Consolidation and Administration
Family Life had approximately 270 employees at June 12, 1991.
Following FIC's acquisition of Family Life, various personnel
changes arising from a cost reduction program at Family Life
resulted in a decline in the number of employees to approximately
140 as of December 31, 1991.
Following the acquisition of Family Life by FIC, management
integrated the sales, marketing, underwriting, accounting,
contract and licensing, investments, personnel, data processing,
home office support and other departments of Family Life and the
life insurance subsidiaries of ILCO. Management believes this
integration has resulted in cost savings for Family Life and
ILCO's insurance subsidiaries. During 1992, ILCO's and FIC's
insurance operations were centralized at their headquarters in
Austin, Texas, with the exception of certain services performed
in Seattle, Washington (some of the premium accounting services
were moved to Seattle in the first quarter of 1993). Management
believes that relocating administrative functions to Austin has
reduced costs and improved the efficiency of the insurance
companies' operations.
At December 31, 1995, the number of employees within FIC and its
subsidiaries, together with the employees of ILCO's insurance
subsidiaries, was approximately 330.
Business of InterContinental Life Corporation
ILCO was incorporated in 1969 under the laws of New Jersey. Its
executive office is located at 701 Brazos, Suite 1400, Austin,
Texas 78701.
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.
ILCO's centralized management techniques resulted in significant
employee reductions and expense savings in the three life
insurance companies acquired by ILCO in 1986 and 1988. During
1995, the general insurance expenses of ILCO's insurance
subsidiaries were $13,737,883, which represented an increase from
1994 primarily as the result of increased marketing expenses
incurred by Investors-NA in 1995 and ILCO's acquisition of
Investors-IN in early 1995. The general insurance expenses were
$12,865,000 in 1994, $14,170,000 in 1993 and $18,182,000
(including nonrecurring expenses of $2,423,200 incurred in
connection with the relocation from Philadelphia to Austin) in
1992. The attainment of this level of cost reduction has
contributed significantly to the achievement of the current level
of profitability. Management is committed to maintaining the
general insurance expenses of ILCO's insurance subsidiaries at a
level which will generate an acceptable level of profitability
while maintaining the competitive pricing of their insurance
products.
Principal Products. ILCO's insurance subsidiaries are engaged
primarily in administering existing portfolios of individual and
group life insurance and accident and health insurance policies
and annuity products. Approximately 73.9% of the total collected
premiums for 1995 were derived primarily 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. In 1992,
Standard Life discontinued its group insurance marketing and
transferred its in-force group insurance to an unrelated
insurance company.
The products currently being distributed include several versions
of universal life insurance and interest-sensitive whole life
insurance. Under a whole life insurance policy, the policyholder
pays a level premium over his or her expected lifetime. The
policy combines life insurance protection with a savings plan
that gradually increases in amount over a period of several
years. The universal and interest-sensitive whole life insurance
policies of ILCO's insurance subsidiaries provide permanent life
insurance with adjustable rates of return based on current
interest rates and mortality assumptions. The universal life
insurance portfolio of ILCO's insurance subsidiaries consists
primarily 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.
Direct premiums received from all types of universal life
products were $42.3 million in 1995, as compared to $42.1 million
in 1994 and $46.8 million in 1993. In 1995, 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 (9%) and New
Jersey (8%).
Until they discontinued sales of credit life and disability
insurance in the fourth quarter of 1994, two of ILCO's insurance
subsidiaries generally sold that insurance to consumers through
lending and credit organizations. Such insurance was generally
written on an individual or group basis to (i) persons financing
the purchase of new automobiles in the State of New Jersey and
(ii) persons obtaining loans from banks and finance companies in
southeastern states. Most policies of this type were issued for
a term of 48 months or less. Direct premiums received from
credit life and accident insurance, prior to reinsurance, were
$4.2 million in 1994 and $6.5 million in 1993.
Two of ILCO's insurance subsidiaries receive premium income from
health insurance policies. In 1995, premium income from all
health insurance policies was $1.1 million, as compared to $1.4
million in 1994 and $1.9 million in 1993. Premium income from
health insurance in 1995 was derived from all of the states in
which those two insurance subsidiaries are licensed, with
significant amounts derived from Pennsylvania (21%), New Jersey
(21%), and California (9%).
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 Capital
Manager Trust ("PCM Fund"), a series fund which is managed by
Putnam Investment Management, Inc. Prior to April, 1995, the
underlying investment vehicle for the variable annuity contracts
was the CIGNA Annuity Funds Group. A substitution of the PCM
Fund for the CIGNA Funds was completed in April, 1995. The plan
of substitution was approved by the Securities and Exchange
Commission. Following such approval, the plan was submitted to
policyholders for approval, which approval was obtained. During
1995, the premium income realized in connection with these
variable annuity policies was $376,000, which was received from
existing contract owners.
Direct deposits from the sale of fixed annuity products were
$1,359,000 in 1995, as compared to $1,296,000 in 1994 and
$1,695,000 in 1993.
The following table sets forth, for the three years ended
December 31, 1995, the combined premium income and other
considerations received by ILCO's insurance subsidiaries from
sales of their various lines of insurance.
Year Ended December 31,
Type of Insurance 1995 1994 1993
(in thousands)
Individual:
Life $16,426 $15,721 $16,196
Accident & Health 1,218 1,435 1,504
Total Individual Lines 17,644 17,156 17,700
Group:
Life 2,594 2,226 3,195
Accident & Health 6 105 275
Total Group Lines 2,600 2,331 3,470
Credit:
Life (222) 3,282 4,354
Accident & Health 240 2,296 2,468
Total Credit Lines 18 5,578 6,822
Total Premiums 20,262 25,065 27,992
Reinsurance Premiums ceded (8,568) (10,748) (11,878)
Total Net Premium 11,694 14,317 16,114
Amount Received on
Investment
Type Contracts 44,130 43,372 47,733
Total Premiums and
Deposits Received $55,824 $57,689 $63,847
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 45 states;
and smaller annual fees to do business and reduced retaliatory
premium taxes in most states. Management believes that these
reductions in expenses have further strengthened the financial
condition of the combined company.
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.
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, 1995, only 5.1% of ILCO's total assets were invested in
mortgage loans or real estate. Non-affiliated corporate debt
securities that were non-investment grade represented 1.1% of
ILCO's total assets at December 31, 1995. ILCO had investments
in debt securities of affiliated corporations aggregating
approximately $61.2 million as of December 31, 1995. 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 $33,420,000 and $280,286,000,
respectively, and mortgage-backed pass-through securities of
$8,228,000 and $65,810,000, respectively, at December 31, 1995.
Mortgage-backed pass-through securities, sequential CMO's,
support bonds and z-accrual bonds, which comprised approximately
60% of the book value of FIC's mortgage-backed securities and
57.1% of the book value of ILCO's mortgage-backed securities at
December 31, 1995, 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, 1995, PAC and
TAC instruments and accretion directed and scheduled bonds
represented approximately 40% of the book value of FIC's
mortgage-backed securities and approximately 42.9% of the book
value of ILCO's mortgage-backed securities. Sequential and
support classes represented approximately 40.2% of the book value
of FIC's mortgage-backed securities and approximately 34.4% of
the book value of ILCO's mortgage-backed securities at December
31, 1995. 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. FIC does not have any z-
accrual bonds, and those bonds constituted only 3.6% of the book
value of ILCO's mortgage-backed securities at December 31, 1995.
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. 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, 1995, 1.7% of the total book value of mortgage loans
held by ILCO had defaulted as to principal or interest for more
than 90 days, and none of ILCO's mortgage loans were in
foreclosure. During 1995, none of ILCO's mortgage loans were
converted to foreclosed real estate or were restructured while
ILCO owned them. Family Life does not have any mortgage loans.
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
2.2% of ILCO's invested assets and none of FIC's invested assets
at December 31, 1995.
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
Investors Life Distribution System sells a wide range of life
insurance products through an independent, non-exclusive general
agent sales distribution system. The products sold are issued by
subsidiary companies of ILCO.
All marketing and sales for the Company are directed by the
Executive Vice President of Marketing and Sales. The Vice
President for Investors Sales directs Regional Vice Presidents
who are responsible for the recruitment of general agents and
managing general agents for individual insurance sales in the
Investors Life Distribution System.
B. Family Life Distribution System
This nationwide system sells Family Life's products through an
exclusive agent force. This agent force sells mortgage
protection 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. Approximately 410 mortgages bankers,
including more than 76 of the nation's 100 largest, are
contracted with Family Life for the sale of insurance. 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, universal or whole life insurance products).
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
nine Regional Vice Presidents. The Family Life distribution
system consists of 95 District Sales Managers, and 275 active
career agents.
Data Processing
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided at a central location until November
30, 1994. Effective December 1, 1994, all of those data
processing needs have been provided to ILCO's and FIC's Austin,
Texas and Seattle, Washington facilities by FIC Computer
Services, Inc., a new subsidiary of FIC. See Item 13. Certain
Relationships and Related Transactions with Management.
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.
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. ILIC generally retains the first $70,000 of
risk on the life of any individual. On group life insurance, the
retention level is $50,000 per individual life. Investors-NA
generally retains the first $100,000 of risk on the life of any
individual. Investors-IN generally retains the first $50,000 of
risk on the life of any individual.
In 1988, Investors-NA entered into a bulk reinsurance treaty
under which it reinsured all of its risks under accidental death
benefit policies. ILIC had previously obtained similar bulk
reinsurance for accidental death benefit policies. The treaty
was renegotiated with another reinsurer, with a new effective
date of January 1, 1996.
In 1993 ILCO's life insurance subsidiaries entered into a quota
share reinsurance treaty under which all credit life and health
business issued March 1, 1993 and later is 50% reinsured.
In 1995, Investors-NA entered into a reinsurance agreement with
Family Life 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. The arrangement
reflects management's plan to develop universal life 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 reinsures 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
On June 12, 1991 FIC consummated the purchase of all of the
outstanding shares of common stock of Family Life, a State of
Washington based life insurance corporation, from Merrill Lynch
Insurance Group, Inc. ("Merrill Lynch") pursuant to the terms of
a definitive Stock Purchase Agreement entered into in March of
1991. 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.
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 "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 options
will expire on June 12, 1998 if not previously exercised.
Of the total of $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 totalling $34.5 million that were obtained
from Investors-NA. See "The Family Life Refinancing."
Family Life Senior and Subordinated Loans
Senior Loan. The Senior Loan is a secured and guaranteed five
year term loan in the aggregate principal amount of $50 million.
The Senior Loan consists of separate notes (one for each member
of the lending syndicate), with interest payable quarterly and a
final maturity date of June 12, 1996. The interest rate of the
Senior Loan is subject to periodic change based upon stipulated
percentages above a quoted bank base lending rate or Eurodollar
rate as such are in effect from time to time.
FLC is obligated to make quarterly principal payments on the
Senior Loan consisting of a $1.5 million payment on October 1,
1991, a $2 million payment on January 1, 1992 and each subsequent
quarterly payment date in 1992, a $2.25 million payment on
January 1, 1993 and each subsequent quarterly payment date
through April 1, 1996 and a final payment due on June 12, 1996
equal to the unpaid principal balance of the Senior Loan. The
Senior Loan documents also require FLC to make additional
mandatory principal payments on the Senior Loan, which, in
general, reduce the quarterly principal payments in the inverse
order of their due dates. Those additional payments are required
in specified situations in which the amount of Family Life's
statutory capital and surplus exceeds a certain formula, FLC has
Excess Cash Flow (as defined), or FLC or Family Life receives
proceeds from reinsurance of life insurance policies in force in
one transaction or a series of related transactions or from sales
of assets or issuances of stock or debt securities. The Senior
Loan may be prepaid, in whole or in part, without penalty or
premium. The obligations of FLC under the Senior Loan documents
are secured by all of the issued and outstanding shares of common
stock of FLIIC, 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. The obligations
of FLC under the Senior Loan documents are guaranteed by FIC.
The Senior Loan documents specify events of default, including,
but not limited to, failure to pay principal, interest,
commitment fees or other amounts payable with respect to the
Senior Loan documents when due, violation of covenants in the
Senior Loan documents (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.
The Senior Loan documents also contain various specified
negative, affirmative and financial covenants to be performed or
observed by FLC and its subsidiaries.
As of December 31, 1995, the outstanding principal balance of the
Senior Loan was $6,765,000.
Investors Life Subordinated Loans. The $22.5 million
subordinated senior note issued by FLC to Investors-NA matures on
June 12, 1998, is payable 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 and bears interest
payable semi-annually, at the rate of 11% per annum. The $2.5
million subordinated note issued by FIC to Investors-CA bears
interest, payable semi-annually, at the rate of 12% per annum,
and its principal is due and payable in full at maturity on June
12, 1998. As a result of the merger of Investors-CA into
Investors-NA, the $2.5 million note is now owned by Investors-NA.
Prior to June 12, 1996, accrued interest on the FIC note must be
paid by delivery of additional notes of FIC having terms
identical to such original note, including the payment of
interest by delivery of additional notes through June 12, 1996.
Interest payable on and after June 12, 1996 on all of the FIC
notes must be paid in cash.
The obligors are allowed to prepay the Investors Life
Subordinated Loans, in whole or in part, without premium or
penalty. The Investors Life Subordinated Loans are 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 is outstanding, the covenants
in effect under the Investors Life Subordinated Loan documents
are 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, 1995 the outstanding principal balance of the
Investors Life Subordinated Loans and the subordinated loans made
by Investors-NA in 1993 was $61,223,698.
Merrill Lynch Subordinated Loans. The $30 million subordinated
note issued by FLC to Merrill Lynch had a maturity date of June
12, 2001, was payable in three equal annual principal
installments of $10 million each on June 12, 1999, 2000, and 2001
and bore interest, payable semi-annually, at the rate of 12 % per
annum through June 12, 1995 and thereafter at 14 % per annum.
The $12 million subordinated note and the $2 million subordinated
note issued by FLIIC to an affiliate of Merrill Lynch had a
maturity date of June 12, 2006 and were payable in three equal
annual principal installments each in the amount of one-third of
the original principal amount of the respective note. The
principal installments were due on June 12, 2004, 2005 and 2006,
and both notes of FLIIC bore interest, payable quarterly, at the
rate of 15 % per annum. Prior to June 12, 1994, accrued interest
on each note of FLIIC was required to be paid by delivery of
additional notes of FLIIC having terms identical to such original
note, including the payment of interest by delivery of additional
notes through June 12, 1994. Interest payable on and after June
12, 1994 on all of the FLIIC notes was required to be paid in
cash.
The obligors were allowed to prepay the Merrill Lynch
Subordinated Loans, in whole or in part, without premium or
penalty. The Merrill Lynch Subordinated Loans were subordinated
to the Senior Loan described above and constituted a second lien
on the pledged collateral subject to the first lien of the Senior
Loan. Repayment of the Merrill Lynch Subordinated Loans was also
guaranteed by FIC.
The Merrill Lynch Subordinated Loan documents specified events of
default, including, but not limited to, failure to pay principal,
interest or other amounts payable with respect to the Merrill
Lynch Subordinated Loan documents when due, violation of
covenants in the Merrill Lynch Subordinated Loan Documents
(including covenants with respect to the maintenance of a minimum
net worth), material misrepresentations, defaults under other
indebtedness, 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.
The Merrill Lynch Subordinated Loan documents also contained
various specified negative, affirmative and financial covenants
which were less restrictive than the covenants under the Senior
Loan documents but would have become generally equivalent to the
Senior Loan restrictions upon the termination of the Senior Loan.
Ranking, Payment and Lien Priorities Between Investors Life
Subordinated Loans and Merrill Lynch Subordinated Loans. The $30
million subordinated note issued by FLC to Merrill Lynch was
subordinated to the $22.5 million subordinated senior note issued
by FLC to Investors-NA, but, upon payment in full of the Senior
Loan, both of those notes would have been of equal ranking with
each other. Assuming they had been paid in accordance with their
terms, the Investors Life Subordinated Loans would have been paid
in full before the first principal payment was due on any of the
Merrill Lynch Subordinated Loans. The holders of the notes
constituting the Investors Life Subordinated Loans and the
Merrill Lynch Subordinated Loans had agreed that, among
themselves, any distributions of proceeds of the pledged
collateral would have been made to Investors-NA, Investors-CA,
Merrill Lynch and the affiliate of Merrill Lynch pro rata on the
basis of the amount of indebtedness then outstanding under the
Investors Life Subordinated Loans, on the one hand, and the
Merrill Lynch Subordinated Loans, on the other hand.
On July 30, 1993, the Merrill Lynch Subordinated Loans were
prepaid. See "The Family Life Refinancing."
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 $10.50
per share, equivalent to the then current market price, subject
to adjustment to prevent dilution. The options will expire on
June 12, 1998 if not previously exercised.
The Family Life Refinancing. 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 totalling $34.5
million that were 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 loan that Investors-NA had previously made to FLC
and that continues to be outstanding.
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%.
ILCO's Senior and Subordination Loans and Warrants
FIC guaranteed ILCO's senior and subordinated loans that were the
source of funds used for the acquisition of Investors-NA and
Investors-CA. Those loans were as follows: (1) a credit
facility in the amount of $135,000,000 composed of the following:
(a) a senior loan in the amount of $125,000,000 (the "ILCO Senior
Loan") provided by a nationally chartered banking institution
(the "Senior Lender") as the lead bank in a lending syndicate
consisting of six banks and/or other financial institutions; and
(b) a $10,000,000 subordinated loan (the "Subordinated Loan")
provided by two insurance and financial service organizations
(the "Subordinated Lenders"); and (2) the sale of preferred stock
as follows: (a) $5,000,000 of Class A Preferred Stock issued at
par to Insurance Company of North America, a CIGNA subsidiary;
and (b) $15,000,000 of Class B Preferred Stock issued at par to
the Subordinated Lenders. Approximately $15,000,000 of these
funds were used to discharge an existing term loan. The balance
of these funds were loaned by ILCO to Standard to consummate the
purchase under the Acquisition Agreement. To evidence this
indebtedness, Standard issued a $140,000,000 surplus debenture to
ILCO. In January 1993, ILCO prepaid the Subordinated Loans and
amended the ILCO Senior Loan. See "The ILCO Refinancing."
Effective as of May 1, 1990, ILCO effected an exchange agreement
with the holders of its Class A Preferred Stock (principal amount
of $5 million; dividend rate of 13.25%) and its Class B Preferred
Stock (principal amount of $15 million; dividend rate of 13.25%).
Under the provisions of the exchange agreement, the holders of
the Class A Preferred Stock received $5 million principal amount
of a 13.25% 1998 Series Subordinated Notes, due November 1, 1998,
together with a make whole amount equal to 13.25% of the then
outstanding balance of the Note. The holders of the Class B
Preferred Stock received $15 million principal amount of a 13.25%
1999 Series Subordinated Notes, due November 1, 1999. Each of
the new Series of Subordinated Notes were included, by amendment,
within the Subordinated Loan documents.
Pursuant to the terms of the Subordinated Loan documents and the
Class B Preferred Stock Purchase Agreement, ILCO issued on
December 28, 1988, to the Subordinated Lenders and the purchasers
of the Class B Preferred Stock, detachable warrants entitling the
holders thereof to purchase a total of 19.95% of ILCO's Common
Stock, on a fully diluted basis, exercisable for a Warrant
Exercise Price of $10.00 per share. As a result of the three-
for-one split of ILCO's common stock effective February 15, 1990,
the exercise price was adjusted to $3.33 per share. The warrants
provided for a put and call option under which the holder was
entitled to put said warrants to ILCO at a price based on a
specified formula during the period commencing at the beginning
of the sixth year from the date of issuance and continuing for
1,095 days thereafter, except that to the extent that the Senior
Loan would have prevented the exercise of such put, then for such
additional period as would give the warrant holders 1,095 days of
exercise rights. ILCO had the right to call said warrants for a
like period commencing at the beginning of the seventh year from
the date of issuance. If the warrants had been exercised,
approximately 1,107,000 shares of ILCO common stock would have
been issued. FIC's ownership would have been reduced from 47.83%
to 37.7% and if FIC had exercised its options, its ownership
would have been 53%. The warrants were purchased and cancelled
by ILCO in January 1993. See "The ILCO Refinancing."
The ILCO Refinancing. On January 29, 1993, ILCO prepaid all of
its subordinated indebtedness and purchased and cancelled all of
the warrants held by certain of its subordinated noteholders. In
addition to paying the $30 million aggregate principal amount of
the subordinated notes due in 1997, 1998 and 1999 plus accrued
interest, ILCO paid approximately $7 million of prepayment
penalty, the after-tax effect of which will be a charge against
earnings in 1993, and approximately $8 million for the warrants,
which will be a charge directly against retained earnings. The
warrants had entitled the holders to purchase 1,107,480 shares of
ILCO's Common Stock (approximately 24% of the outstanding shares)
at an exercise price of $3.33 per share. The currently estimated
price that the warrant holders could have required ILCO to pay
for the warrants upon exercise of their put option was
approximately $29.9 million. The earliest that the put option
could have been exercised was December 1993, if such exercise
would not have resulted in a default under ILCO's Senior Loan at
that time. The purchase and cancellation of the warrants will
reduce the number of ILCO's outstanding shares of common stock
and common stock equivalents used in the computation of its
earnings per share from approximately 7,147,000 shares to
approximately 6,040,000 shares. This adjustment in common stock
equivalents will affect ILCO's earnings per share for periods
after January 29, 1993. However, it will not affect FIC's equity
in ILCO's net income.
The primary source of the funds used to prepay the subordinated
debt and to purchase the warrants was an increase in the
outstanding balance of ILCO's Senior Loan from $60 million to
$110 million pursuant to an amended and restated credit agreement
that the Company entered into on January 29, 1993 with certain
banks, including the same agent bank as in the Company's original
bank group in 1988. ILCO's prepayment of subordinated debt,
purchase of warrants and increase in senior bank indebtedness are
referred to herein as the "Refinancing". The terms of the
amended and restated credit facility ("New ILCO Senior Loan") are
substantially the same as the 1988 facility. The interest rate
on the $30 million subordinated debt that was replaced by the New
ILCO Senior Loan was 13.25%. The average interest rate paid by
ILCO on ILCO's New Senior Loan was approximately 6. 37% during
1993, 7.04% during 1994 and 8. 63% during 1995. The maturity
date, which had been December 31, 1996, was extended to July 1,
1998 for the New ILCO Senior Loan. On February 14, 1995, ILCO
borrowed an additional $15 million under the New ILCO Senior Loan
to help finance the acquisition of Investors-IN, and the maturity
date of the New ILCO Senior Loan was further extended to July 1,
1999.
The New ILCO Senior Loan is a secured and guaranteed six and one-
half year term loan. A required $26 million principal payment
was made on April 1, 1993. Thereafter, the principal is payable
in twenty-two quarterly installments of $4.5 million each,
commencing on April 1, 1994 and ending on July 1, 1999. ILCO is
required to make mandatory payments on the Senior Loan equal to
(a) 100% of the net proceeds from the issuance of ILCO's capital
stock or debt securities and (b) the applicable percentage of
ILCO's annual Excess Cash Flow: 100%, if the outstanding
principal balance of the New ILCO Senior Loan exceeds $75
million; 75%, if the outstanding balance exceeds $50 million but
is equal to or less than $75 million; or 50%, if the outstanding
balance is equal to or less than $50 million. Excess Cash Flow
is the excess of (i) the sum of ILCO's cash and cash equivalents,
principal and interest received by ILCO from surplus debentures,
cash dividends received by ILCO and interest income on ILCO's
cash equivalents over (ii) the sum of principal and interest paid
on ILCO's indebtedness, operating expenses, taxes actually paid
and $5 million.
The New ILCO Senior Loan bears interest, at the option of ILCO,
at a rate per annum equal to (i) the Alternate Base Rate (as
defined below) plus the Applicable Margin (as defined below), or
(ii) LIBOR (adjusted for reserves) for interest periods of 1, 2,
3 or 6 months plus the Applicable Margin. LIBOR is London Inter-
Bank Offered Rates. The Alternate Base Rate for any day is the
higher of (a) the agent bank's corporate base rate as announced
from time to time and (b) the federal funds rate as published by
the Federal Reserve Bank of New York plus 0.5%. The Applicable
Margin, depending on the outstanding principal balance of the New
ILCO Senior Loan, ranges from 0.5% to 1.25% for loans that bear
interest based upon the Alternate Base Rate and from 1.75% to
2.5% for loans that bear interest based upon LIBOR. The initial
Applicable Margin for Alternate Base Rate loans is 1.25% and the
initial Applicable Margin for LIBOR loans is 2.5%.
The obligations of ILCO under the New ILCO Senior Loan are
secured by: (1) all of the outstanding shares of stock of
Investors-NA, (2) a $15,000,000 surplus debenture of Investors-NA
payable to ILCO, which had an outstanding principal balance of
$6,956,224 as of December 31, 1995 and (3) a $140,000,000 surplus
debenture of Investors-NA payable to ILCO, which had an
outstanding principal balance of $62,340,000 as of December 31,
1995. The obligations of ILCO under the New ILCO Senior Loan are
guaranteed by FIC.
The New ILCO Senior Loan prohibits the payment by ILCO of cash
dividends on ILCO's Common Stock and contains covenants,
including restrictive covenants that impose limitations on ILCO's
and its subsidiaries' ability to, among other things: (i) make
investments; (ii) create or incur additional debt; (iii) engage
in businesses other than their present and related businesses;
(iv) create or incur additional liens; (v) incur contingent
obligations; (vi) dispose of assets; (vii) enter into
transactions with affiliated companies; and (viii) make capital
expenditures; and various financial covenants, including
covenants requiring the maintenance of a minimum cash flow
coverage ratio, minimum consolidated net worth and minimum
statutory surplus of subsidiaries, and a minimum ratio (330%) of
the sum of statutory capital and surplus, asset valuation reserve
and interest maintenance reserve of each insurance company
subsidiary of ILCO to its respective Authorized Control Level RBC
(see "Regulation").
The New ILCO Senior Loan specifies events of default, including,
but not limited to, failure to pay amounts under the New ILCO
Senior Loan documents when due; defaults or violation of
covenants under other indebtedness; certain defaults or violation
of certain covenants under the Family Life Senior Loan; default
under the subordinated loans made by Investors-NA to FLC and
FLIIC in 1993; the loss of any license of an insurance subsidiary
of ILCO which would have a material adverse effect on ILCO;
defaults under the FIC guaranty agreement; changes in ownership
or control of FIC or ILCO by its controlling person, Roy F.
Mitte, or in ILCO by FIC; and the occurrence of certain events of
bankruptcy. If Mr. Mitte ceases to control the management of
ILCO solely by reason of (i) his death or (ii) his permanent
inability to perform his usual and customary duties on a full-
time basis on behalf of ILCO and FIC as the result of physical or
mental infirmity, a default will occur, and the banks holding in
the aggregate at least 66 2/3% of the outstanding balance of the
New ILCO Senior Loan may, on or after 180 days after the date on
which such default occurs, declare the New ILCO Senior Loan
immediately due and payable. Mr. Mitte's ability to communicate
and his mobility are impaired as a result of a stroke he suffered
in May 1991. However, Mr. Mitte continues to control the
management of the Company, and Mr. Mitte's impairments did not
constitute a default under the ILCO Senior Loan, nor do they
constitute a default under the New ILCO Senior Loan. See Item
10(b) "Executive Officers of the Registrant".
The principal balance of the New ILCO Senior Loan was $59.4
million as of December 31, 1995.
Regulation
General. ILCO's insurance subsidiaries and Family Life are
subject to regulation and supervision by the states in which they
are licensed to do business. Such 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 Family Life and ILCO'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 FIC's and ILCO's insurance subsidiaries
require that such subsidiaries be examined at specified
intervals. Family Life is domiciled in the State of Washington.
Investors-NA and ILIC are domiciled in the states of Washington
and New Jersey, 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. Investors-IN is domiciled in the State of Indiana.
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, Family
Life and ILCO's insurance subsidiaries consider AIDS information
in underwriting coverages 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. Effective for the 1993 calendar
year, the National Association of Insurance Commissioners
("NAIC") has adopted 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 states
will use the RBC formula 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. In addition, the formula
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 consists 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 Family Life and ILCO's insurance subsidiaries as of
December 31, 1995 indicate that the Total Adjusted Capital of
each of FIC's and ILCO's insurance subsidiaries is above 500% of
its respective Authorized Control Level RBC.
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. The occurrence
and amount of such assessments have increased in recent years.
The net amounts of such assessments for Family Life and ILCO's
insurance subsidiaries were approximately $189,929 and $241,692,
respectively, in the year ended December 31, 1995. 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 Senior
Loan are payments under the surplus debenture of Family Life and
dividends paid by Family Life (a Washington-domiciled
corporation). 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. Effective
July 25, 1993, Washington amended its insurance code to retain
the "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 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.
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 1993, 1994 and 1995
totalling $20,672,000, $19,311,960 and $16,052,400, 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
Family Life will have any difficulty in making principal and
interest payments on the surplus debenture in the amounts
necessary to enable FLC to service its indebtedness for the
foreseeable future.
Valuation Reserves. Commencing in 1992, the Mandatory Securities
Valuation Reserve ("MSVR") required by the NAIC for life
insurance companies was replaced by a mandatory Asset Valuation
Reserve ("AVR") which is expanded to cover mortgage loans, real
estate and other investments. A new mandatory 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, is also effective for 1992. Previously, realized capital
gains attributable to interest rate changes were credited to the
MSVR and had the effect of reducing Family Life's required MSVR
contributions. Effective in 1992, such realized capital gains
are credited to the IMR. As a result of these changes, Family
Life is required to accrue greater aggregate asset valuation
reserves. The combination of the AVR and IMR will affect
statutory capital and surplus and may reduce the ability of
Family Life to pay dividends and make payments on the surplus
debenture.
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.
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.
Congressional initiatives directed at repeal of the McCarran-
Ferguson Act (which exempts the "business of insurance" from most
federal laws, including the antitrust laws, to the extent it is
subject to state regulation) and judicial decisions narrowing the
definition of "business of insurance" for McCarran-Ferguson Act
purposes may limit the ability of insurance companies in general
to share information with respect to rate-setting, underwriting
and claims management practices. Current and proposed federal
measures which may also significantly affect the insurance
industry include minimum solvency requirements and removal of
barriers preventing banks from engaging in the insurance
business.
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, 1993, 1994 and 1995, the increases in Family Life's
current income tax provisions, utilizing the effective tax rates,
due to this change were $1,063,718, $209,555 and $77,498,
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.
Item 2. Properties
The Registrant's headquarters are located at Austin Centre, 701
Brazos, Suite 1400, Austin, Texas. Investors-NA purchased Austin
Centre, an office-hotel property in downtown Austin in August
1991 for a purchase price of $31,275,000 from an unrelated seller
that had previously acquired the property through foreclosure.
Austin Centre covers a full city block and is a sixteen story
mixed use development consisting of 343,664 square feet of
office/retail space (predominately office space), a 314 room
hotel and 61 luxury apartments, all united by a 200 foot high
glass atrium. The project was completed in October 1986. At
December 31, 1995, the office tower was approximately 85%
occupied, and during 1995 the hotel averaged about 80% occupancy.
In September 1995, Investors-NA entered into a contract to sell
Austin Centre to an Austin-based real estate investment firm for
a purchase price of $62.675 million, less $1 million to be paid
to a capital reserve account for the purchaser. The contract
provides that the sale will be consummated by March 29, 1996.
ILCO anticipates that the sale proceeds equal to the amount that
Investors-NA presently has invested in Austin Centre will be
retained and reinvested by Investors-NA and that most of the
balance of the net proceeds of the sale will be used to reduce
ILCO's bank indebtedness by approximately $15 million.
On January 31, 1995, ILCO, through Investors-NA, purchased, as an
investment property, an office building project known as
Bridgepoint Office Square in Austin, Texas for a cash purchase
price of $9.75 million. The property consists of 20 acres of
land with four office building sites and two parking structure
sites. The first phase of development of the property was
completed in 1986 and consists of a five-story office building
with 83,474 square feet of rentable space and a 550-car parking
garage. In the fourth quarter of 1995, construction began on the
second office building, containing approximately 109,000 rentable
square feet, and the other parking garage. This second phase of
the project is projected to be completed in the summer of 1996.
In March 1996, Investors-NA agreed to lease approximately 152,000
square feet at Bridgepoint Office Square to Motorola, Inc. for
use by the Power PC Alliance, composed of engineers from
Motorola, IBM Corp. and Apple Computer Inc. The Alliance will
occupy 100% of the second office building and approximately
43,000 square feet of the third office building, which Investors-
NA began constructing in March 1996. The third building will
contain approximately 81,000 rentable square feet and is
projected to be finished in late 1996.
Family Life leases its home offices at the Fourth and Blanchard
Building, 2121 Fourth Avenue, in Seattle, Washington. The lease
currently covers approximately 2,700 rentable square feet of
office space for a term expiring in October 1998 with an option
to renew for an additional three-year period. The initial base
rental is approximately $11,200 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.
ILCO leases a building located at 40 Parker Road, Elizabeth, New
Jersey. This building, which was formerly ILCO's headquarters
building, contains approximately 41,000 square feet of office
space. The remaining term of the lease is 11 years, and the
lease calls for a minimum base rental of $450,000 per annum. The
lease provides that all costs including, but not limited to,
those for maintenance, repairs, insurance and taxes be borne by
ILCO. ILCO and ILIC currently occupy a nominal portion of the
space in the 40 Parker Road property and have sub-leased the
remaining portion.
ILIC owns three buildings which are adjacent to the 40 Parker
Road building. One building, which is leased to third parties,
contains approximately 3,500 square feet of space. The second
building contains approximately 2,500 square feet of space and is
leased to persons who perform maintenance services for ILIC's and
ILCO's properties in Elizabeth, New Jersey. The third building,
purchased during 1985, contains approximately 3,500 square feet
of space, and is partially leased to third parties and the
remainder is used to provide accommodations for employees working
at the New Jersey office.
Investors-NA owns an office building located at 206 West Pearl
Street, Jackson, Mississippi. This building is 66 years old and
contains approximately 85,000 square feet of office space.
Investors-NA currently occupies a nominal portion of the space in
this property and leases space to various commercial tenants.
The Company believes that its properties and leased space are
adequate to meet its foreseeable requirements.
Item 3. Legal Proceedings
The Company and its subsidiaries and affiliates 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.
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, 1995 to a vote of security holders.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
A. Market Information
The following table sets forth the quarterly high and low sales
prices for FIC Common Stock in The Nasdaq Small-Cap Market for
1995 and 1994. FIC's NASDAQ trading symbol is FNIN.
Common Stock
Prices
High Low
1995
First Quarter $34.00 $28.00
Second Quarter 40.50 28.00
Third Quarter 42.50 36.50
Fourth Quarter 39.50 33.00
1994
First Quarter $39.00 $34.00
Second Quarter 36.50 34.00
Third Quarter 37.50 33.50
Fourth Quarter 36.00 28.00
B. Stockholders
As of March 19, 1996 there were approximately 16,900 record
holders of FIC Common Stock.
C. Dividends
FIC has not paid a dividend since 1976 and does not expect to pay
a dividend during 1995.
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 Debenture and Dividends.
However, FIC does not directly own Family Life's stock but,
instead, indirectly owns that stock through two downstream
holding companies, FLIIC and FLC. FLC, which holds all of the
stock of Family Life, is prohibited from paying dividends on its
common stock by the Senior Loan documents, and FLIIC, the
immediate parent of FLC and the directly-owned subsidiary of FIC,
is prohibited from paying dividends on its stock by the $4.5
million subordinated note of FLIIC held by Investors-NA, except
FLIIC may pay dividends on its common stock to enable FIC to make
scheduled principal and interest payments on its $2.5 million
subordinated note to Investors-NA. 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. In addition, the New ILCO Senior Loan restricts
ILCO from paying any dividends on its stock during the term of
that loan.
Item 6. Selected Financial Data
(Registrant and its Consolidated Subsidiaries)
(In thousands, except per share data)
1995 1994 1993 1992 1991
Operating
Revenues $63,407 $ 68,524 $ 74,023 $ 83,531 $ 49,417
Income (loss)
before federal
income tax,
equity in net
earnings of
affiliates,
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 10,394 10,610 11,560 12,179 7,981
Income before
equity in net
earnings of
affiliates,
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 7,803 8,264 8,587 8,831 5,852
Equity in net
earnings of
affiliate, net
of tax 2,213 1,690 3,038 4,761 4,454
Income before
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 10,016 9,954 11,625 13,592 10,306
Extraordinary
items -0- -0- 5,555 -0- -0-
Income before
cumulative
effect of
change in
accounting
principle of
affiliate 10,016 9,954 17,180 13,592 10,306
Cumulative
effect of
change in
accounting
principle of
affiliate, net
of tax benefit -0- -0- (1,159) -0- -0-
Net Income $10,016 $ 9,954 $ 16,021 $ 13,592 $ 10,306
Common Stock
and Common
Stock
Equivalents 1,108 1,106 1,111 1,113 1,080
Net income per
share before
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate $ 9.04 $ 9.00 $ 10.46 $ 12.21 $ 9.54
Extraordinary
items -0- -0- 5.00 -0- -0-
Net income per
share before
cumulative
effect of
change in
accounting
principle of
affiliate 9.04 9.00 15.46 12.21 9.54
Cumulative
effect of
change in
accounting
principle of
affiliate -0- -0- ( 1.04) 0.00 0.00
Net Income per
share $ 9.04 $ 9.00 $ 14.42 $ 12.21 $ 9.54
Total Assets $ 287,678 $253,100 $277,790 $311,497 $300,587
Long Term
Obligations $ 67,989 $ 77,819 $ 89,178 $113,015 $118,184
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the year ended December 31, 1995, FIC's net income was
$10,017,000 (or $9.04 per common share, as compared to $9,954,000
(or $9.00 per common share), for the year ended December 31, 1994
and $11,625,000 (or $10.46 per common share), before
extraordinary items and cumulative effect of change in accounting
principle of affiliate, for the year ended December 31, 1993.
Net income for the years 1995 and 1994 was not affected by any
extraordinary items. After giving effect to: (i) the
extraordinary items and change in accounting method related to
FIC's equity in the net income of its affiliate, InterContinental
Life Corporation ("ILCO") and (ii) the one-time gain, in the
amount of $8,344,000, net of tax, resulting from early
extinguishment of the indebtedness to Merrill Lynch incurred in
connection with the 1991 acquisition of Family Life Insurance
Company ("Family Life"), net income for the year ended December
31, 1993 was $16,021,000, or $14.42 per common share. The net
income of FIC for the 1993 period was affected by extraordinary
items and change in accounting principle of its affiliate, ILCO,
related to (i) the costs associated with the prepayment in
January of 1993 by ILCO of its Subordinated Loans; the prepayment
premium resulted in a one time charge to FIC's earnings, net of
tax benefit, in the amount of $2,789,000 and (ii) the one time
charge to FIC's earnings, net of tax benefit, in the amount of
$1,159,000, which was incurred in connection with the initial
adoption by ILCO of Financial Accounting Standard No. 109
("Accounting for Income Taxes"). The effect of each of these
items was within the range previously disclosed by management in
the Company's Form 10-K for the year ended December 31, 1992.
The statutory earnings of Family Life as required to be
reported to insurance regulatory authorities before interest
expense, capital gains and losses, and federal income taxes were
$14,354,000 at December 31, 1995, as compared to $18,944,000 at
December 31, 1994 and $21,757,000 at December 31, 1993 These
statutory earnings are the source to provide for the repayment of
the indebtedness incurred in connection with the acquisition of
Family Life.
The decline in long-term interest rates during 1995, 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, 1995, the
market value of the fixed maturities available for sale segment
was $83.6 million as compared to a carrying value of $80
million, or an unrealized gain $3.6 million. There is no
assurance that this unrealized gain may be realized in the
future.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
For the year ended December 31, 1995, the combined general
insurance expenses of Family Life were $13,126,000, as compared
to $11,944,000 for the year 1994 and $11,510,000 for the year
1993.
The consolidated balance sheets at December 31, 1995 include
Separate Account assets of Family Life in the amount of $8.5
million. The Separate Account is maintained by Family Life,
which was acquired by FIC on June 12, 1991. Under the provisions
of the purchase agreement between FIC and Merrill Lynch Insurance
Group, Inc., certain life insurance companies affiliated with
Merrill Lynch agreed to assume (on an assumption reinsurance
basis) the variable annuity contracts related to such Separate
Account assets. The transfer of these assets, in accordance with
the provisions of the reinsurance agreement, is subject to
certain regulatory approvals. The Company has not obtained a
definitive date from Merrill Lynch as to when such regulatory
approvals will be obtained, so as to enable Family Life to
complete the transfer of Separate Account assets.
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. The Company's equity in the net
earnings of ILCO, net of federal income tax, was $2,051,000 for
the year 1995, as compared to $1,690,000 for the year 1994 and
$3,038,000 in 1993. The increase in 1995, as compared to 1994,
is primarily related to the increase in ILCO's net income,
partially offset by the increase in the elimination from FIC's
equity in ILCO's earnings of approximately 47% of the interest
received by ILCO on the notes issued to subsidiaries of FIC. The
Company's equity in the net income from operations of ILCO for
the 1993 period was affected by the extraordinary item and change
in accounting principle previously discussed. The Company's
equity in ILCO's net earnings for the 1995 and 1994 periods was
not affected by extraordinary items.
FIC currently owns 1,795,146 shares of ILCO's common stock, and
holds options to acquire an additional 1,702,155 shares. The
options were granted under an Option Agreement between FIC and
ILCO which was entered into in March, 1986. In addition, Family
Life currently owns 171,200 shares of ILCO common stock. As a
result, FIC currently owns, directly and indirectly through
Family Life, 1,966,346 shares (approximately 47%) of ILCO's
common stock and holds options to acquire 1,702,155 shares. If
all of FIC's rights under the Option Agreement were to be
presently exercised, FIC's ownership would amount to
approximately 62% of the issued and outstanding shares of ILCO's
common stock.
The decline in long-term interest rates during 1995, 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, 1995,
the market value of the fixed maturities available for sale
segment was $483.6 million as compared to a carrying value of
$463.7 million, or an unrealized gain $19.9 million. There is no
assurance that this unrealized gain will be realized by ILCO in
the future. Since FIC owns approximately 47% of the common stock
of ILCO, such unrealized gains, net of tax, are reflected in
FIC's equity interest in ILCO, and had the effect of increasing
the reported value of such equity interest by approximately $15.8
million.
ILCO's results for 1995 include the operations of Investors Life
Insurance Company of Indiana (formerly known as Meridian Life
Insurance Company) for the period from February 14, 1995 to
December 31, 1995. Investors Life Insurance Company of Indiana
("Investors-IN") was purchased by ILCO and Investors Life
Insurance Company of North America ("Investors-NA") for an
adjusted purchase price of $17.1 million; the transaction was
completed on February 14, 1995. The name change was completed in
May, 1995.
Liquidity and Capital Resources of ILCO:
ILCO is a holding company whose principal assets consist of the
common stock of Investors-NA and its subsidiaries,
InterContinental Life Insurance Company ("ILIC") and, since
February, 1995, Investors-IN. ILCO's primary source of funds
consists of payments under the surplus debentures from Investors-
NA.
The cash requirements of ILCO consist primarily of its service of
the indebtedness created in connection with the 1988 acquisition
of the Investors Life Companies and the 1995 acquisition of
Investors-IN. As of December 31, 1994, the unpaid principal of
ILCO's senior loan was $66.6 million. In connection with the
acquisition of Investors-IN in February, 1995, ILCO borrowed an
additional $15 million under its senior loan to help finance the
purchase. On April 3, 1995, a principal payment in the amount of
$13.2 million was made, which paid the senior loan until October
1, 1995. The senior loan had a principal balance at December 31,
1995 of $59.4 million.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest to it by Investors-NA, pursuant
to the terms of the two surplus debentures. The surplus
debentures were originally issued by Standard Life Insurance
Company and its terms were previously approved by the Mississippi
Insurance Commissioner. One of the surplus debentures, in the
original amount of $15 million, was issued in connection with the
1986 acquisition of Standard Life by ILCO; the other, in the
original amount of $140 million was issued in connection with the
1988 acquisition by ILCO of the Investors Life Companies. Upon
the merger of Standard Life into Investors-NA, the obligations of
the surplus debentures were assumed by Investors-NA. As of
December 31, 1995, the outstanding principal balance of the
surplus debentures was $7.0 million and $62.3 million,
respectively. Since Investors-NA is domiciled in the State of
Washington, the Washington insurance law applies to the
administration of the terms of the surplus debentures. Under the
provisions of the surplus debentures and current law, no prior
approval of the Washington Insurance Commissioner is required for
Investors-NA to pay interest or principal on the surplus
debentures; provided that, after giving effect to such payments,
the statutory surplus of Investors-NA is in excess of $10 million
(the "surplus floor"). However, Investors-NA 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, 1995,
the statutory capital and surplus of Investors-NA was $61.9
million, an amount substantially in excess of the surplus floor.
The funds required by Investors-NA to meet its obligations to
ILCO under the terms of the surplus debentures are generated from
operating income generated from insurance and investment
operations.
ILCO's ability to pay dividends to its shareholders is affected,
in part, by receipt of dividends from its insurance subsidiaries.
Under current Washington law, any proposed payment of a dividend
or distribution by the Company's insurance subsidiaries 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 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.
In July, 1993, Washington amended its insurance code to retain
the "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. Investors-NA 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 Investors-NA to
make principal and interest payments under the surplus debentures
is not affected. ILCO does not anticipate that Investors-NA will
have any difficulty in making principal and interest payments on
the surplus debentures in the amounts necessary to enable ILCO to
service its Senior Loan for the foreseeable future.
The Form 10-Ks of ILCO for the years ended December 31, 1995,
1994 and 1993, 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.
Results of Operations
For the year ended December 31, 1995, FIC's income from
operations, before federal income tax and equity in net earnings
of affiliate, was $10,394,000 (on revenues of $63,408,000), as
compared to $10,610,000 (on revenues of $68,524,000) for the year
1994. For the year 1993, income from operations, before federal
income tax, equity in net earnings of affiliate and extraordinary
items of affiliate was $11,560,000 on revenues of $74,023,000.
Premiums for the year 1995, net of reinsurance ceded, were $43.9
million, as compared to $48.9 million in 1994 and $54.2 million
in 1993. The decline is primarily attributable to the combined
effect of the lapse of group business (a product line which
Family Life had previously discontinued), a shift in consumer
purchases from traditional, whole life insurance policies to
other forms of life insurance products and the lapse rates
experienced with respect to term life insurance products.
Policyholder benefits and expenses were $21.0 million in 1995, as
compared to $21.8 million in 1994 and $20.9 million in 1993.
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. The arrangement
reflects management's plan to concentrate on the writing of term
life insurance, with Investors-NA to develop universal life
business.
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.
The cash requirements of FIC and its subsidiaries consist
primarily of its service of the indebtedness created in
connection with its ownership of Family Life . As of December
31, 1995, the outstanding balance of such indebtedness was: (i)
$6.8 million on the Senior Loan granted by a group of banks and
(ii) $61.2 million on the Subordinated Notes granted by
Investors-NA.
The lower amount of the Senior Loan reflects regular quarterly
payments made during 1995, as well as a "sweep" payment in April,
1995, in the amount of $1.9 million (the latter payment being
calculated in accordance with the provisions of the Senior Loan
agreement).
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, 1995, the statutory capital and
surplus of Family Life was $25.8 million, an amount substantially
in excess of the surplus floor. During 1995, Family Life made
principal payments of $10.97 million and interest payments of
$5.1 million to Family Life Corporation under the Surplus
Debenture. As of December 31, 1995, the principal balance of the
Surplus Debenture was $49.9 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.
The sources of funds for Family Life consist of premium payments
from policy holders, 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.
Effective July 25, 1993, Washington amended its insurance code to
retain the "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 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
Family Life will have any difficulty in making principal and
interest payments on the Surplus Debenture in the amounts
necessary to enable Family Life Corporation to service its
indebtedness for the foreseeable future.
FIC's net cash flow provided by operating activities was $9.1
million in 1995, as compared to $5.3 million in 1994 and $16.9
million in 1993. Net cash flow used in financing activities was
$9.8 million in 1995, as compared to $11.4 million in 1994 and
$18.3 million in 1993.
In connection with the purchase of the Investors Life Companies
by ILCO and the purchase of Family Life by a wholly- owned
subsidiary of FIC, FIC guaranteed the payment of the indebtedness
created in connection with such acquisitions. After giving
effect to the refinancing of the ILCO Senior Loan and the
repayment of the ILCO Subordinated Loans, the guaranty
commitments of FIC with respect to the debt obligations of ILCO
relate to the ILCO Senior Loan, with an outstanding balance at
December 31, 1995 of $59.4 million.
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 Senior Loan of Family Life Corporation
to a bank group, with a balance of $6.8 million at December 31,
1995, (ii) the $22.5 million note issued by Family Life
Corporation to Investors Life Insurance Company of North America,
and (iii) the $34.5 million loaned by Investors-NA to two
subsidiaries of FIC.
Management believes that its cash, cash equivalents and short
term investments are sufficient to meet the needs of its business
and to satisfy debt service.
There are no trends, commitments or capital asset requirements
that are expected to have an adverse effect on the liquidity of
FIC.
Investments
As of December 31, 1995, the Company's investment assets totaled
$112.6 million, as compared to $107.1 million as of December 31,
1994. The increase is primarily attributable to unrealized
capital gains in the fixed maturities for sale segment of the
Company's total investments.
The level of short-term investments at the end of 1995 was $27.2
million, as compared to $28.4 million as of December 31, 1994.
The fixed maturities available for sale portion represents $83.6
million of investment assets as of December 31, 1995, as compared
to $77.5 million at the end of 1994. The amortized cost of fixed
maturities available for sale as of December 31, 1995 was $80
million representing a net unrealized gain of $3.6 million. This
unrealized gain principally reflects changes in interest rates
from the date the respective investments were purchased. To
reduce the exposure to interest rate changes, portfolio
investments are selected so that diversity, maturity and
liquidity factors approximate the duration of associated
policyholder liabilities.
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,
1995, 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). As of December 31, 1994, approximately
96.3% of the fixed maturities portfolio consisted of investments
with an NAIC rating of "1" and the remaining portion were
designated with an NAIC rating of "2" (high quality).
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.
Accounting Developments
In March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of." This statement required that
long lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In addition, the statement
requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cash to sell.
SFAS No. 121 is effective for fiscal years beginning after 1995.
The Company plans to adopt SFAS No. 121 effective January 1,
1996. Management does not anticipate that adoption or this
standard will have a material impact on the Company's financial
statements.
During 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation," which encourages
companies to adopt the fair value based method of accounting for
stock-based compensation. This method requires the recognition
of compensation expense equal to the fair value of such equity
securities at the date of the grant. This statement also allows
companies to continue to account for stock-based compensation
under the intrinsic value based method, as prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees," with footnote disclosure of the pro forma
effects of the fair value based method. SFAS No. 123 is
effective for transactions entered into in years that begin after
December 15, 1995.
The Company plans to adopt SFAS No. 123 during 1996 by continuing
to account for stock-based compensation under the intrinsic value
method and disclosing the pro forma effects of the fair value
method in the footnotes to the financial statements.
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 Price Waterhouse LLP, Independent
Accountants, dated March 27, 1996.
2. Consolidated Balance Sheets, as of December 31, 1995
and December 31, 1994.
3. Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993.
4. Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1995, 1994 and
1993.
5. Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993.
6. Notes to Consolidated Financial Statements.
7. Consolidated Financial Statement Schedules.
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 Mr. Hamm, were elected at the 1995
annual shareholders meeting. Mr. Hamm was appointed a director
by the Board of Directors on September 22, 1995. The data
supplied below is based on information provided by the directors,
except to the extent that such data is known to the Registrant.
Director Principal Occupation
Name Age Since and Other Information
Roy F. Mitte 64 1976 Chairman of the Board,
President and Chief Executive
Officer of FIC. Chairman of
the Board, President and Chief
Executive Officer of ILCO and
InterContinental Life
Insurance Company since
January 1985. President of
ILCO since April 1985.
Chairman of the Board,
President and Chief Executive
Officer of Investors Life
Insurance Company of North
America since December 1988.
Chairman of the Board,
President and Chief Executive
Officer of Family Life
Insurance Company since June
1991. Chairman of the Board,
President and Chief Executive
Officer of Investors Life
Insurance Company of Indiana
since February 1995.
Chairman, ILG Securities
Corporation since December
1988.
James M. Grace 52 1976 Vice President, Secretary,
Treasurer and Director of FIC.
Vice President and Treasurer
of ILCO since January 1985.
Executive Vice President,
Treasurer and Director of
InterContinental Life
Insurance Company since 1989.
Executive Vice President and
Treasurer of Investors Life
Insurance Company of North
America since 1989. Executive
Vice President, Treasurer and
Director of Family Life
Insurance Company since June
1991. Director, Executive
Vice President and Treasurer
of Investors Life Insurance
Company of Indiana since
February 1995.
John D. Barnett 53 1991 Vice President, Investments of
Prudential Securities since
1983.
Eugene E. Payne 53 1992 Vice President and Director of
FIC since February 29, 1992.
Vice President of ILCO since
December 1988 and Director of
ILCO since May 1989.
Executive Vice President,
Secretary and Director of
Investors Life Insurance
Company of North America since
December 1988. Executive Vice
President since December 1988
and Director since May 1989 of
InterContinental Life
Insurance Company. Executive
Vice President, Secretary and
Director of Family Life
Insurance Company since June
1991. Director, Executive
Vice President and Secretary
of Investors Life Insurance
Company of Indiana since
February 1995.
Joseph F. Crowe 57 1992 Vice President and Director of
FIC since February 29, 1992.
Vice President and Director of
ILCO since May 1991.
Executive Vice President and
Director of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company since
June 1991. Executive Vice
President and Director of
Family Life Insurance Company
since June 1991. Executive
Vice President and Director of
Investors Life Insurance
Company of Indiana since
February 1995. From December
1986 to March 1991, Executive
Vice President of Personal
Financial Security Division of
Aetna Life & Casualty Company.
Robert F. Spears 52 1992 General Counsel and Vice
President of FIC and Director
of Family Life Insurance
Company since June 1991;
partner of the law firm of
Locke Purnell Rain Harrell,
Dallas, Texas, for more than
five years prior to June 1991.
Dale E. Mitte 61 1994 Senior Vice President since
January 1993 and Vice
President, Chief Underwriter
and Director since December
1988 of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company.
Director from June 1991 to
April 1992 and Vice President
and Chief Underwriter since
June 1991 of Family Life
Insurance Company. Director,
Senior Vice President and
Chief Underwriter of Investors
Life Insurance Company of
Indiana since June 1995.
Leonard A. Nadler 53 1994 President, Leonard Nadler
Associates, Inc., a commercial
real estate brokerage company
located in Los Angeles,
California, for more than the
last five years.
Frank Parker 66 1994 President, Gateway Tugs, Inc.
and Par-Tex Marine, Inc., both
of which are located in
Brownsville, Texas and are
engaged in operating and
chartering harbor and
intracoastal tug boats, for
more than the last five years.
Jeffrey H. Demgen 43 1995 Senior Vice President and
Director of Family Life
Insurance Company since
October 1992. Director and
Senior Vice President of
Investors Life Insurance
Company of North America from
October 1992 to June 1995.
Senior Vice President of
InterContinental Life
Insurance Company from October
1992 to June 1995. Senior
Vice President of United
Insurance Company of America
from September 1984 to July
1992.
Roger H. Hamm 51 1995 Executive Vice President and
Director of Investors Life
Insurance Company of Indiana,
Investors Life Insurance
Company of North America and
Family Life Insurance Company
since August 1995. Vice
President and Director of FIC
and ILCO since September 1995.
Executive Vice President of
InterContinental Life
Insurance Company since August
1995. Vice President of Aetna
Life & Casualty Company from
1972 to 1995.
Mr. Nadler and his wife were general partners of a single-asset
partnership that owned The Palmilla Apartments, a 26 unit
apartment complex in Hollywood, California. In March 1992, a
receiver for that property was appointed by stipulation of the
parties in connection with the conveyance of that property to the
mortgagee. The receiver was discharged by stipulation of the
parties in September 1992.
The incumbent directors have been nominated for submission to
vote of the shareholders for reelection at the 1996 annual
shareholders' meeting.
(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 1995
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 64 Chairman of the Board,
President and Chief
Executive Officer
James M. Grace 52 Vice President, Secretary,
and Treasurer
Eugene E. Payne 53 Vice President
Joseph F. Crowe 57 Vice President
Roger H. Hamm 51 Vice President
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.
(c) Identification of certain significant employees
Not applicable.
(d) Family relationships
Dale E. Mitte is Roy F. Mitte's brother.
(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) Compliance with Section 16(a) of the Securities Exchange Act
of 1934
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 Form 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 5's were
required, the Company believes that during the period from
January 1, 1995 through December 31, 1995, all Section 16(a)
filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with.
Item 11. Executive Compensation
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 1995 and received cash compensation
exceeding $100,000 during 1995.
Annual Compensation
Name and All Other
Principal Salary(1) Bonus(1) Other(2) Compensation
Position Year ($) ($) ($) ($)
------------------------------------------------------------------
Roy F. Mitte,
Chairman of
Board,
President and
Chief 1995 503,500 -0- -0- 1,120,513(4)
Executive 1994 503,500 1,076,159(3) -0- 1,376,663(5)
Officer 1993 503,500 -0- -0- 3,237,120(6)
James M.
Grace,
Vice
President, 1995 195,000 10,000 -0- -0-
Secretary and 1994 195,000 2,500 -0- -0-
Treasurer 1993 195,000 5,000 -0- -0-
Eugene E.
Payne, 1995 195,000 10,000 -0- -0-
Vice 1994 195,000 5,000 -0- -0-
President 1993 195,000 -0- -0- -0-
Joseph F.
Crowe, 1995 195,000 10,000 -0- -0-
Vice 1994 195,000 5,500 -0- -0-
President 1993 195,000 3,000 -0- -0-
Roger H.
Hamm,
Vice
President(7) 1995 67,308 -0- 175,371(8) -0-
(1) The salaries and bonuses set forth in the table were
paid by ILCO, except that $216,857 of Mr. Mitte's
salary in 1995, $251,700 of Mr. Mitte's salary and
$538,080 of his bonus in 1994 and $251,750 of Mr.
Mitte's salary in 1993 were paid directly to him by
Family Life. The executive officers of FIC have also
been executive officers of Family Life, the insurance
subsidiary of FIC, and ILCO and its insurance
subsidiaries. Family Life reimbursed ILCO (or, in the
case of Mr. Mitte, paid Mr. Mitte directly) the
following amounts as Family Life's share of the
executive officers' cash compensation for 1993, 1994
and 1995: $251,750, $789,830 and $216,857,
respectively, for Mr. Mitte; $55,750, $70,590 and
$88,293, respectively, for Mr. Grace; $91,650, $126,750
and $79,875, respectively, for Dr. Payne; $55,350,
$68,250 and $88,293, respectively, for Mr. Crowe; and
$109,205 (1995 only) for Mr. Hamm.
(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) ILCO's Compensation Committee made a recommendation to
ILCO's Board of Directors, which the Board adopted,
that a bonus be paid to Mr. Mitte to enable him to pay
off the $650,000 loan that ILCO had made to Mr. Mitte
in 1989 and to reimburse him for the amount of federal
income tax payable on the bonus. Since ILCO and FIC
have usually each paid one-half of Mr. Mitte's cash
compensation, FIC's Board of Directors, acting on the
recommendation of its Compensation Committee,
subsequently authorized FIC to pay $500,000 of that
bonus to Mr. Mitte. Therefore, FIC paid $500,000, and
ILCO paid $576,159, of the bonus.
(4) In 1989, ILCO's Board of Directors granted Mr. Mitte
options to purchase 600,000 shares of ILCO's Common
Stock. In October 1992, Mr. Mitte surrendered to ILCO
for cancellation options to purchase 120,000 shares.
ILCO and Mr. Mitte entered into a contract in 1993
providing for the cancellation of 240,000 options for
an aggregate amount of $3,237,120 in 1993 and the
cancellation in subsequent years of the remaining
options for an aggregate amount of $3,610,240. In
addition, the Company agreed to pay Mr. Mitte the
amount necessary to ensure that Mr. Mitte will receive
the same amount, after federal income tax, that he
would have received if the options had been cancelled
in 1992. During 1995, Mr. Mitte was paid $836,582 for
the cancellation in 1995 of options to purchase 50,000
shares of ILCO's Common Stock, $156,323 for the federal
income tax reimbursement relating to the cancellation
in 1994 of options to purchase 68,500 shares and
$127,608 as the final payment relating to the
cancellation in 1993 of options to purchase 240,000
shares. These option cancellation payments were made
pursuant to the contract referred to above. FIC's
Compensation Committee made a recommendation to FIC's
Board of Directors, which it adopted, that, in lieu of
paying Mr. Mitte a bonus as it has in the past, FIC pay
$407,000 of these option cancellation payments to Mr.
Mitte, with the balance of $713,513 being paid by ILCO.
(5) During 1994, ILCO paid Mr. Mitte $997,520 for the
cancellation in 1994 of options to purchase 68,500
shares of ILCO's Common Stock and $379,143 for the
federal income tax reimbursement relating to the
cancellation in 1993 of options to purchase 240,000
shares. Both of these payments were made pursuant to
the contract referred to in footnote (4).
(6) ILCO paid this amount in 1993 to Mr. Mitte for the
cancellation of options to purchase 240,000 shares of
ILCO's Common Stock pursuant to the contract referred
to in footnote (4).
(7) Mr. Hamm became an executive officer of FIC and ILCO in
August 1995.
(8) This amount was paid as relocation assistance by the
Company to Mr. Hamm in connection with his relocation
from Connecticut to Austin, Texas.
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.
Members of Compensation Committee
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, Leonard A. Nadler and Frank Parker.
Compensation Committee Interlocks and Insider Participation
Roy F. Mitte determines the compensation of all executive
officers of FIC, other than the Chief Executive Officer. Mr.
Mitte is the Chairman of the Board, President and Chief Executive
Officer of FIC and ILCO. He also determines the compensation of
all executive officers of ILCO, other than the Chief Executive
Officer.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table presents information as of March 19, 1996 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. Mitte,
Chairman of the Board,
President and Chief
Executive Officer,
701 Brazos
Suite 1400,
Austin, Texas 78701 373,304 (1) 34.39% (1)
InterContinental Life
Corporation
701 Brazos
Suite 1400,
Austin, Texas 78701 145,423 (2)* 12.19% (3)
Investors Life Insurance
Company of North America
701 Brazos
Suite 1400
Austin, Texas 78701 145,423 (2)* 12.19% (3)
(1) These shares are held jointly by Mr. Mitte with his wife
Joann C. Mitte.
(2) Of such shares, 29,100 shares are owned by Investors-NA,
8,850 shares are owned by ILIC, and 107,473 shares are
issuable upon exercise of an option held by Investors-NA.
Investors-NA is a direct subsidiary of ILCO. ILIC is a
direct subsidiary of Investors-NA.
(3) Assumes that outstanding stock options or warrants held by
other persons have not been exercised.
* See Item 1. Business-Acquisition of Family Life for a
description of the options granted to Investors-NA.
The following table contains information as of March 19, 1996 as
to the Common Stock of the Registrant beneficially owned by each
director, nominee and executive officer and by all executive
officers and directors of the Registrant as a group. Messrs.
Barnett, Crowe, Demgen, Hamm, Parker, Payne and Spears did not
beneficially own any shares of FIC as of March 19, 1996. The
information contained in the table has been obtained by the
Registrant from each director and executive officer, except for
the information known to the Registrant. 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 Class
Roy F. Mitte 373,304 (1)(2) 34.39%
James M. Grace 1,120 (2) *
Dale E. Mitte 400 *
Leonard A. Nadler 333 *
All Executive Officers,
Nominees and Directors as
a group (11 persons) 375,157 (1)(2) 34.56
(1) These shares are held by Mr. Mitte jointly with his wife
Joann C. Mitte.
(2) No executive officer or director holds any options to
acquire FIC Common Stock. Messrs. Roy Mitte, Grace, Payne
and Crowe are executive officers and/or directors of ILCO
and beneficially owned approximately 67% of the outstanding
shares of ILCO common stock as of March 19, 1996. Since FIC
beneficially owns 62% of ILCO Common Stock, Mr. Roy Mitte's
personal holdings are combined with FIC's holdings in
determining the percentage of ILCO Common Stock beneficially
owned by Mr. Mitte. ILCO beneficially owned 145,423 shares
of FIC Common Stock (12.19% of the outstanding shares) as of
March 19, 1996.
* Less than 1%.
Item 13. Certain Relationships and Related Transactions
The obligations of ILCO under the New ILCO Senior Loan are
guaranteed by FIC. FIC presently owns 1,966,346 shares of ILCO
Common Stock, constituting 47.03% of such shares outstanding, and
holds options to acquire an additional 1,702,155 shares at the
average bid price of such shares during the six-month period
preceding the date of any such purchase. In the event that such
options were to be fully exercised, the total number of ILCO's
shares owned by FIC would constitute 62.35% of ILCO's outstanding
Common Stock.
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 and Secretary
of FIC, and Messrs. Payne and Crowe serve as Vice Presidents and
Directors of both companies. Mr. Roy Mitte holds beneficial
ownership of 34.39% of the outstanding shares of the Company (see
"Security Ownership of Certain Beneficial Owners"). Mr. Mitte
was granted an option to purchase 600,000 shares of the common
stock of ILCO (as adjusted to reflect a three-for-one split in
February 1990) on May 8, 1989 in equal annual installments of
150,000 shares each. Each installment was subject to the
approval of the Board of Directors, and would be exercisable for
a period of ten years from the date of grant at a price of $1.00
per share (as adjusted). The Board of Directors voted to award
installments of 150,000 shares in each of 1989, 1990, 1991 and
1992. In October 1992 Mr. Mitte surrendered to ILCO for
cancellation options to purchase 120,000 shares. ILCO and Mr.
Mitte entered into an agreement in 1993 providing for the
cancellation of the remaining options to purchase 480,000 shares.
See Item 11. Executive Compensation.
In May 1989, the Board of Directors of ILCO granted Roy F. Mitte
the right to borrow up to $650,000 from ILCO to be used solely
for the purchase of FIC common stock pursuant to Mr. Mitte's then
existing options. A principal purpose of said loan was to enable
Mr. Mitte to maintain his equity position in FIC, as required
under the terms of the lending agreements entered into in
connection with the purchase of the Investors Life Companies (see
"Acquisition of Investors Life Companies"). Said loan, which was
exercised on June 1, 1989, carried no interest and was payable in
five years. The loan was paid in full in 1994. See Item 11.
Executive Compensation.
When it acquired Austin Centre, Investors-NA leased the hotel to
FIC Realty Services, Inc. ("FIC Realty"), a subsidiary of FIC,
pursuant to which FIC Realty pays monthly rent to Investors-NA in
an amount equal to 95% of the net operating profits of the hotel
for the preceding month (excess of all hotel revenues over all
hotel expenses, including insurance, utilities and property
taxes). Any net operating loss for a month is carried forward and
deducted from the net operating profit for the next month that
has such a profit. During 1995, FIC Realty paid $1,991,356 of
rent to Investors-NA pursuant to this lease. FIC Realty has
delegated the management of the hotel to an unrelated third party
pursuant to a management agreement, but FIC Realty bears most of
the economic risks in operating the hotel. As an inducement to
FIC Realty's agreeing to bear those risks, Investors-NA has
agreed to provide funds to pay expenses in operating the hotel to
the extent that the cash flow from such operations is not
sufficient to do so.
Alcoholic beverages had been sold at the hotel by an unrelated
third party pursuant to a lease it had with FIC Realty until
September 30, 1994. Commencing October 1, 1994, all alcoholic
beverages sales have been conducted by Atrium Beverage
Corporation ("Atrium Beverage"), a new subsidiary of FIC Realty.
Atrium Beverage subleases from FIC Realty space in the hotel for
the storage, service and sale of alcoholic beverages pursuant to
which Atrium Beverage pays monthly rent to FIC Realty of $12,500.
The sublease provides that the rent paid during each calendar
year will be reduced to the extent necessary to insure that
Atrium Beverage's net operating profit from alcoholic beverage
sales is not less than 5% of its gross receipts from such sales.
Atrium Beverage and FIC Realty are also parties to a management
agreement whereby FIC Realty manages Atrium Beverage's alcoholic
beverage operations at the hotel for a monthly fee equal to 28%
of the gross receipts from alcoholic beverages sales. During
1995, Atrium Beverage paid FIC Realty rent and management fees
totalling $319,815. All of that amount was included in the hotel
revenues of FIC Realty for purposes of determining its net
operating profits under the hotel lease agreement with Investors-
NA.
Investors-NA entered into a management agreement in September
1991 with FIC Property Management, Inc. ("FIC Management"), a
subsidiary of FIC, whereby it appointed FIC Management to manage,
lease and operate the office tower, retail areas, underground
parking garage and common areas of Austin Centre. FIC Management
is paid fees in an amount equal to 5% of the net operating profit
that Investors-NA receives from the properties managed and leased
by FIC Management. During 1995, Investors-NA paid $130,760 of
fees to FIC Management under this agreement.
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-CA 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. The options will expire on June
12, 1998 if not previously exercised. See Item 1. Business -
Acquisition of Family Life.
On July 30, 1993, Investors-NA loaned $34.5 million to two
subsidiaries of FIC in connection with the prepayment of the
Merrill Lynch Subordinated Loans. See Item 1. Business-Family
Life Senior and Subordinated Loans - The Family Life Refinancing.
FIC was reimbursed by ILCO for rental expense and certain other
operating expenses incurred during 1995 on behalf of ILCO. The
amount of such reimbursement was approximately $830,000.
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided at a central location until November
30, 1994. Commencing December 1, 1994, all of those data
processing needs are provided to ILCO's and FIC's Austin, Texas
and Seattle, Washington facilities by FIC Computer Services, Inc.
("FIC Computer"), a new 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 $779,052 and ILCO's insurance subsidiaries paid
$1,655,486 to FIC Computer for data processing services provided
during 1995.
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.
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, 1993, 1994 and 1995
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 . . . . . . . . . . .F-2
Consolidated Balance Sheets,
December 31, 1995 and 1994. . . . . . . . . . . . . . .F-3
Consolidated Statements of Income, for
years ended December 31, 1995, 1994 and 1993. . . . . .F-5
Consolidated Statements of Changes in
Shareholders' Equity, for the years ended
December 31, 1995, 1994 and 1993. . . . . . . . . . . .F-8
Consolidated Statement of Cash Flows, for the
years ended December 31, 1995, 1994 and 1993. . . . . .F-9
Notes to Consolidated Financial Statements. . . . . . .F-11
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. . . . . . . . . . F-39
Schedule III - Condensed Financial Statements
of Registrant. . . . . . . . . . . F-40
Schedule IV - Indebtedness of and to
Related Parties. . . . . . . . . . F-43
Schedule VI - Reinsurance Ceded and Assumed. . . F-44
Schedule VII - Guarantees of Securities of
Other Issuers. . . . . . . . . . . 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.
2. 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, 1995.
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 27, 1996.
/s/ Roy F. Mitte
Roy F. Mitte, Director
/s/ James M. Grace
James M. Grace, Director
/s/ Eugene E. Payne
Eugene E. Payne, Director
/s/ Joseph F. Crowe
Joseph F. Crowe, Director
/s/ Jeffrey H. Demgen
Jeffrey H. Demgen, Director
/s/ Roger H. Hamm
Roger H. Hamm, Director
/s/ Robert F. Spears
Robert F. Spears, Director
/s/ Dale E. Mitte
Dale E. Mitte, Director
/s/ John D. Barnett
John D. Barnett, Director
/s/ Leonard A. Nadler
Leonard A. Nadler, Director
/s/s Frank Parker
Frank Parker, Director
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, 1995 and 1994..F-3
Consolidated Statements of Income, for the years ended
December 31, 1995, 1994 and 1993........................F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993....F-8
Consolidated Statements of Cash Flows, for the years ended
December 1995, 1994 and 1993...........................F-11
Notes to Consolidated Financial Statements..............F-13
(2) The following consolidated financial statements schedules of
Financial Industries Corporation and Subsidiaries are
included:
Schedule I - Summary of Investments Other Than Investments
in Related Parties......................................F-42
Schedule III - Condensed Financial Statements of
Registrant............................................. F-43
Schedule IV - Indebtedness of and to Related Parties....F-46
Schedule VI - Reinsurance Ceded and Assumed.............F-47
Schedule VII- Guarantees of Securities of Other Issuers.F-48
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Financial Industries Corporation
In our opinion, the 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, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are
the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards 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 the
opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Dallas, Texas
March 27, 1996
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
1995 1994
ASSETS
Investments other than investment in
affiliate:
Fixed maturities available for sale at
market value (amortized cost of $79,961
and $83,397 at December 31, 1995 and
1994) $ 83,632 $ 77,468
Equity securities at market (cost
approximates $11 at December 31, 1995
and 1994) 4 4
Policy loans 1,774 1,231
Short-term investments 27,180 28,365
Total investments 112,590 107,068
Cash 1,414 933
Investment in affiliate 45,736 24,912
Accrued investment income 1,102 1,166
Agency advances and other receivables 10,368 6,979
Reinsurance receivables 2,383 2,186
Due and deferred premiums 9,726 9,714
Property and equipment, net 7,452 4,057
Deferred policy acquisition costs 36,537 29,975
Present value of future profits of
acquired businesses 45,415 50,712
Deferred financing costs 168 389
Other assets 6,264 6,286
Separate account assets 8,523 8,723
TOTAL ASSETS $ 287,678 $ 253,100
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits $ 54,909 $ 60,411
Contractholder deposit funds 41,456 30,759
Unearned premiums 132 196
Other policy claims and benefits
payable 5,836 6,579
102,333 97,945
Senior loans 6,765 17,060
Subordinated notes payable to
affiliate 61,224 60,759
Deferred federal income taxes 14,783 7,010
Other liabilities 11,315 9,807
Separate account liabilities 8,523 8,723
TOTAL LIABILITIES 204,943 201,304
Commitments and Contingencies
(See Note 4, 8, 12, 14)
Shareholders' equity:
Common stock, $1.00 par value, 3,304,200
shares authorized; 1,169,060 shares
issued, 1,085,593 outstanding in 1995
and 1994 1,169 1,169
Additional paid-in capital 7,225 7,225
Net unrealized gain (loss) on
investments in fixed maturities
available for sale 8,052 (12,858)
Net unrealized appreciation of equity
securities 11 (1)
Retained earnings 66,700 56,683
83,157 52,218
Common treasury stock, at cost,
83,467 shares in 1995 and 1994 (422) (422)
Total shareholders' equity 82,735 51,796
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 287,678 $ 253,100
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1995 1994 1993
(in thousands)
Revenues:
Premiums $ 43,899 $ 48,872 $ 54,244
Net investment income 7,643 7,449 7,800
Net realized (loss) gain on
sale of investments -0- (23) 144
Earned insurance charges 7,059 8,911 8,027
Other 4,807 3,315 3,808
63,408 68,524 74,023
Benefits and expenses:
Policyholder benefits and expenses 21,011 21,837 20,889
Interest expense on contract-
holders deposit funds 2,143 2,124 1,903
Amortization of present value
future profits of acquired
businesses 5,297 11,447 12,264
Amortization of deferred policy
acquisition costs 3,755 2,955 1,783
Operating expenses 16,184 14,689 17,937
Interest expense 4,624 4,862 7,687
53,014 57,914 62,463
Income before federal income tax,
equity in net earnings of
affiliates, extraordinary items
and cumulative effect of change
in accounting principle of
affiliate 10,394 10,610 11,560
Provision for federal income taxes:
Current (717) (82) 335
Deferred 3,145 2,428 2,638
Income before equity in net earn-
ings of affiliates, extraordinary
items and cumulative effect of
change in accounting principle
of affiliate 7,966 8,264 8,587
Equity in net earnings of
affiliate, net of tax 2,051 1,690 3,038
Income before extraordinary items
and cumulative effect of change in
accounting principle of affiliate 10,017 9,954 11,625
The accompanying notes are an integral part of these
consolidated statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1995 1994 1993
(in thousands)
Extraordinary items:
Cost of early extinguishment
of debt of affiliate, net of
tax benefit -0- -0- (2,789)
Gain from early extinguishment of
debt, net of tax -0- -0- 8,344
Income before cumulative effect
of change in accounting
principle of affiliate 10,017 9,954 17,180
Cumulative effect of change in
accounting principle of
affiliate, net of tax benefit -0- -0- (1,159)
Net income $ 10,017 $ 9,954 $ 16,021
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
Years Ended December 31,
1995 1994 1993
(in thousands)
Common stock and common stock
equivalents 1,108 1,106 1,111
Net income per share before
extraordinary items and
cumulative effect of change in
accounting principle of
affiliate $ 9.04 $ 9.00 $ 10.46
Extraordinary items:
Cost of early extinguishment of
debt of affiliate, net of
tax benefit 0.00 0.00 (2.51)
Gain from early extinguishment
of debt, net of tax 0.00 0.00 7.51
Net income per share before
cumulative effect of change
in accounting principle
of affiliate 9.04 9.00 15.46
Cumulative effect of change in
accounting principle of
affiliate, net of tax benefit 0.00 0.00 (1.04)
Net income per share of common
stock $ 9.04 $ 9.00 $ 14.42
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Paid-in
Shares Amount Capital
Balance at December 31,
1992 1,169 $ 1,169 $ 7,225
Net income
Change in net unrealized
loss on investments in
fixed maturities
available for sale
Change in net unrealized
appreciation
(depreciation) of equity
securities
Cost of purchase options
by affiliate
Balance at December 31,
1993 1,169 1,169 7,225
Net Income
Change in net unrealized
loss on investments in
fixed maturities
available for sale
Change in net unrealized
appreciation
(depreciation) of equity
securities
Cost of purchase options
by affiliate
Balance at December 31,
1994 1,169 1,169 7,225
Net Income
Change in net unrealized
gain on investments in
fixed maturities
available for sale
Change in net unrealized
appreciation
(depreciation) of equity
securities
Balance at December 31,
1995 $ 1,169 $ 1,169 $ 7,225
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Net Unrealized
Net (Loss) Gain on
Unrealized Investments in
Appreciation Fixed Maturities
of Equity Available For
Securities Sale
Balance at December 31,
1992 $ (7) $ 6,940
Net income
Change in net unrealized
loss on investments in
fixed maturities
available for sale (2,084)
Change in net unrealized
appreciation
(depreciation) of equity
securities 74
Cost of purchase options
by affiliate
Balance at December 31,
1993 67 4,856
Net Income
Change in net unrealized
loss on investments in
fixed maturities
available for sale (17,714)
Change in net unrealized
appreciation
(depreciation) of equity
securities (68)
Cost of purchase options
by affiliate
Balance at December 31,
1994 (1) (12,858)
Net Income
Change in net unrealized
gain on investments in
fixed maturities
available for sale 20,910
Change in net unrealized
appreciation
(depreciation) of equity
securities 12
Balance at December 31,
1995 $ 11 $ 8,052
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Total
Retained Treasury Shareholders'
Earnings Stock Equity
Balance at December 31,
1992 $34,543 $ (422) $49,448
Net income 16,021 16,021
Change in net unrealized
loss on investments in
fixed maturities
available for sale (2,084)
Change in net unrealized
appreciation
(depreciation) of equity
securities 74
Cost of purchase options
by affiliate (3,835) (3,835)
Balance at December 31,
1993 46,729 (422) 59,624
Net Income 9,954 9,954
Change in net unrealized
loss on investments in
fixed maturities
available for sale (17,714)
Change in net unrealized
appreciation
(depreciation) of equity
securities
Cost of purchase options (68)
by affiliate
Balance at December 31,
1994 56,683 (422) 51,796
Net Income 10,017 10,017
Change in net unrealized
gain on investments in
fixed maturities
available for sale 20,910
Change in net unrealized
appreciation
(depreciation) of equity
securities 12
Balance at December 31,
1995 $66,700 $ (422) $82,735
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
(in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 10,017 $ 9,954 $ 16,021
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Net gain from early extinguishment
of debt, net of tax -0- -0- (5,555)
Amortization of present value of
future profits 5,297 11,447 12,264
Amortization of deferred policy
acquisition costs 3,755 2,955 1,783
Financing costs amortized 221 654 249
Depreciation on property and
equipment -0- 120 287
Equity in undistributed earnings
of affiliate (5,043) (4,673) (1,076)
Changes in assets and liabilities:
Decrease (Increase) in accrued
investment income 64 (71) 224
Increase in agent advances and
other receivables (3,586) (1,924) (731)
Increase in due premiums (12) (1,847) (1,861)
Increase in deferred policy
acquisition costs (10,318) (9,610) (10,311)
Decrease (Increase) in other assets 22 (1,704) 1,552
(Decrease) Increase in policy
liabilities and accruals 4,388 233 (183)
Increase (Decrease) in other
liabilities 1,508 (2,655) 1,161
Increase in policy loans (543) (361) (218)
(Decrease) Increase in deferred
federal income taxes 7,773 (1,261) 3,827
Other, net (4,475) 4,081 (519)
Net cash provided by (used in)
operating activities $ 9,068 $ 5,338 $ 16,914
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year Ended December 31,
1995 1994 1993
(in thousands)
CASH FLOWS FROM INVESTING
ACTIVITIES
Fixed maturities purchased $ (1,051) $(11,206) $(41,941)
Proceeds from sales and maturities
of fixed maturities 4,504 3,679 37,756
Net decrease in short-term
investments 1,185 11,963 6,920
Purchase & retirement of property
and equipment (3,395) -0- (205)
Net cash provided by (used in)
investing activities 1,243 4,436 2,530
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of subordinated notes
payable 465 413 34,847
Repayment of senior loan and
subordinated notes (10,295) (11,772) (58,684)
Net gain from early extinguishment
of debt, net of tax -0- -0- 5,555
Net cash used in financing
activities (9,830) (11,359) (18,282)
Net increase (decrease) in cash 481 (1,585) 1,162
Cash, beginning of year 933 2,518 1,356
Cash, end of year $ 1,414 $ 933 $ 2,518
Supplemental Cash Flow Disclosures:
Income taxes paid $ 150 $ 1,725 $ 4,730
Interest paid $ 4,107 $ 4,645 $ 6,160
The accompanying notes are an integral part of these
consolidated financial statements.
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 administering
existing portfolios of individual and group life insurance,
disability insurance policies 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 independent, non-
exclusive general agents.
Principles of Consolidation
The consolidated financial statements include the accounts of FIC
and its wholly-owned subsidiaries at December 31, 1995. The more
significant subsidiaries are Family Life Insurance Investment
Company (FLIIC), Family Life Corporation (FLC), Family Life
Insurance Company (Family Life) and Financial Industries
Corporation Realty Services. The Company's approximate 47%
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 generally accepted accounting
principles 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
generally accepted accounting principles 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 could 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, consistent with the requirements of Financial
Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115") which is effective
for fiscal years beginning after December 15, 1993, most fixed
maturity investments are classified as available for sale and are
carried at market value. All other fixed maturities are carried
at the lower of amortized cost or net realizable value, as
management has the positive intent and the Company has the
ability to hold such investments to maturity. Unrealized gains
and losses on securities available for sale are not recognized in
earnings but are reported as a separate component of equity, net
of related income taxes. Premiums and discounts on
collateralized mortgage obligations (CMOs) are amortized over the
estimated redemption period as opposed to the stated maturity.
An adjustment to the investment and investment income is recorded
on a retrospective basis to reflect the amounts that would have
existed had the new effective yield been applied since the
acquisition of the CMO's. 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 values. Unrealized gains
and losses on equity securities, net of deferred income taxes, if
applicable, are reflected directly in shareholders' equity.
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 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
noninterest bearing accounts. Short term investments with
maturities of three months or less at the time of purchase are
reported as cash equivalents.
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 10 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
life business are deferred and amortized over the premium paying
period of the related policies. 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.
Intangibles
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.
The negative goodwill is being amortized over seven years using
the straight line method of amortization.
Deferred Financing Costs
Financing costs associated with the Company's Senior Loan have
been deferred and are being amortized over the borrowing period
using the interest method.
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 is pending
regulatory approval.
Guaranty Fund Assesment
The solvency or guaranty laws of most states in which the
Company's insurance subsidiaries do business may require the
Company's insurance subsidiaries 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 subsidiaries record the expense for
guaranty fund assessment from states which do not allow premium
tax offsets in the period assessed. The Company's insurance
subsidiaries expensed approximately $189,929, $148,301 and
$119,087 in the years ended December 31, 1995, 1994 and 1993,
respectively, as a result of such assessments.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits for mortgage life
insurance products are computed using the net level premium
method or an actuarial equivalent method. The assumption for
future investment yield is 8 1/2%. Assumptions for mortality and
withdrawal are based on company experience with some provision
for possible adverse deviation.
Contractholder deposit funds are liabilities for universal life
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
reduced by amounts anticipated to be recovered from reinsurance.
Estimated unpaid losses on claims are comprised of losses on
claims that have been reported but not yet paid, including
estimates of additional development of initial claims estimates,
and claims that have been incurred.
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
In February, 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). The Company adopted
SFAS 109 on a prospective basis effective January 1, 1991. SFAS
109 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 bases of assets and liabilities using the tax rates
which are expected be in effect when these differences are
anticipated to reverse.
In accordance with SFAS 109, total tax expense is the amount of
income taxes expected to be payable for the current year plus (or
minus) the deferred income tax expense (or benefit) represented
by the change in the deferred income tax accounts at the
beginning and end of the year. The effect of changes in tax
rates and federal income tax laws are reflected in income from
continuing operations in the period such changes are enacted.
The tax effect of future taxable temporary differences
(liabilities) and future deductible temporary differences
(assets) are separately calculated and recorded when such
differences arise. A valuation allowance, reducing any
recognized deferred tax asset, must be recorded if it is
determined that it is more likely than not that such deferred tax
asset will not be realized.
In accordance with the SFAS 109, tax benefits associated with the
utilization of net operating losses are recognized as a reduction
of the current tax provision and are not recognized as
extraordinary items in the accompanying statement of operations.
Under the previous accounting method (APB 11), the utilization of
net operating losses in computing the federal income tax
provision was recorded as an extraordinary item.
There was no cumulative effect of the change in accounting method
related to income taxes as January 1, 1991 was the date of
adoption of SFAS 109.
Revenue Recognition
Premiums on mortgage life and health products are recognized as
revenue over the premium paying period. Benefits and expenses
are associated with earned premiums, so as to result in
recognition of profits over the life of the contracts.
Revenues for investment-related products consist of contract
charges (earned insurance charges) assessed against the fund
values and net investment income. Related benefit expenses
primarily consist of net investment income credited to the fund
values after deductions for investment and risk charges.
Revenues for universal life products consist of net investment
income and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses
include universal life benefit claims in excess of fund values
and net investment income credited to universal life fund values.
Net Income Per Share
Net income per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding
during each year (See Note 15).
New Accounting Pronouncements
In March 1995, the FASB issued FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In addition, the statement requires that
long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair
value less cost to sell.
FAS No. 121 is effective for fiscal years beginning after 1995.
The Company plans to adopt FAS No. 121 effective January 1, 1996.
Management does not anticipate that adoption of this standard
will have a material impact on the Company's financial
statements.
During 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation," which encourages
companies to adopt the fair value based method of accounting for
stock-based compensation. This method requires the recognition
of compensation expense equal to the fair value of such equity
securities at the date of the grant. This statement also allows
companies to continue to account for stock-based compensation
under the intrinsic value based method, as prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees," with footnote disclosure of the pro forma
effects of the fair value based method. SFAS No. 123 is
effective for transactions entered into in years that begin after
December 15, 1995.
The Company plans to adopt SFAS No. 123 during 1996 by continuing
to account for stock-based compensation under the intrinsic value
method and disclosing the pro forma effects of the fair value
method in the footnotes to the financial statements.
Reclassification
Certain prior years' amounts have been reclassified to conform
with the 1995 presentation.
2. INVESTMENTS
Fixed Maturities
Investments in fixed maturities by category at December 31, 1995
and 1994, respectively, were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury
securities and
obligations of U.S.
government agencies
and corporations . . $18,124 $ 1,569 $ -0- $19,693
States,
municipalities and
political
subdivisions . . . . 4,945 58 2 5,001
Corporate securities. 10,243 431 12 10,662
Mortgage-backed
securities . . . . . 46,649 1,737 110 48,276
Total Fixed Maturities
available for sale. $79,961 $ 3,795 $ 124 $83,632
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury
securities and
obligations of U.S.
government agencies
and corporations . . $21,623 $ 302 $ 371 $21,554
States,
municipalities and
political
subdivisions . . . . 4,943 489 4,454
Corporate securities. 14,190 13 1,423 12,780
Mortgage-backed
securities . . . . . 42,641 3,961 38,680
Total Fixed
Maturities
available for sale. $83,397 $ 315 $ 6,244 $77,468
The amortized value and market value of fixed maturities at
December 31, 1995 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............................. $ -0- $ -0-
Due after one year through five years....... 17,685 18,482
Due after five years through ten years...... 1,549 1,597
Due after ten years......................... 14,078 15,278
Mortgage-backed securities.................. 46,649 48,275
Total Fixed Maturities available
for sale............................. $79,961 $83,632
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.
The Company did not have any repurchase agreements at December
31, 1995 and 1994. Proceeds from sales of investments in fixed
maturities during 1995 and 1994 were $4,504,000 and $3,679,000,
respectively. There were no gains or losses in 1995. Gross
losses of $23,000 were realized in 1994.
Net Investment Income
The components of net investment income are summarized as
follows:
Year Ended December 31,
1995 1994 1993
(in thousands)
Fixed maturities $ 5,742 $ 5,684 $ 5,494
Other, including short-term
investments and policy loans 1,989 1,836 2,618
Investment expenses (89) (71) (312)
Net investment income $ 7,642 $ 7,449 $ 7,800
There were no impairments in the value of investments in 1995,
1994 or 1993, which were other than temporary.
3. Disclosure about Fair Value of Financial Instruments
The following estimated fair value disclosures are limited to the
reasonable estimates of the fair value of only the Company's
financial instruments. The disclosures do not address the value
of the Company's recognized nonfinancial assets and liabilities
or the value of anticipated future business. The Company does
not plan to sell most of its assets or settle most of its
liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation
sale. Selling expenses and potential taxes are not included.
The estimated fair value amounts were determined using available
market information, current pricing information and various
valuation methodologies. If quoted market prices were not
readily available for a financial instrument, management
determined an estimated fair value. Accordingly, the estimates
may not be indicative of the amounts the financial instruments
could be exchanged for in a current future market transaction.
The estimated fair values of the Company's financial instruments
at December 31, 1995 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $ 83,632 $ 83,632
Policy loans $ 1,774 $ 1,774
Short-term investments $ 27,180 $ 27,180
Cash and cash equivalents $ 1,414 $ 1,414
Financial liabilities:
Senior loans $ 6,765 $ 6,765
Subordinated notes payable to affiliate $ 61,224 $ 61,224
Note payable $ 5,144 $ 5,144
Other $ 172 $ 172
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.
Senior Loans
The fair value is estimated based on the quoted market prices for
the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
Subordinated Notes Payable to Affiliate
The fair value is based on the Company's estimate of current
market conditions.
4. Investment in
InterContinental Life Corporation
The Company carries its investment in ILCO on the equity method
of accounting. At December 31, 1995, excess of cost over net
assets acquired of $1,686,000, net in accumulated amortization of
$1,244,000,is included in investment in affiliate. At December
31, 1994, these amounts were $1,686,000 and $1,144,000,
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. Summarized
financial information for ILCO is set forth below:
Balance sheet information: 1995 1994
(in thousands)
Investments $ 669,537 $ 547,675
Deferred policy acquisition costs and
present value of future profits 73,532 71,435
Other assets 572,224 529,884
Total Assets $ 1,315,293 $1,148,994
Policy liabilities and contractholder
deposit funds $ 689,680 $ 628,817
Other liabilities 528,528 467,870
Total liabilities 1,218,208 1,096,687
Common stock, additional paid-in
capital and retained earnings 83,399 72,005
Net unrealized gain (loss) 13,686 (19,698)
Shareholders' equity 97,085 52,307
Total liabilities and
shareholders' equity $ 1,315,293 $1,148,994
4. Investment in
InterContinental Life Corporation
Results of operations: 1995 1994 1993
(in thousands)
Premium income $ 11,694 $ 14,317 $ 16,114
Net investment income $ 64,781 $ 57,553 $ 57,548
Earned insurance charges $ 42,324 $ 39,370 $ 38,554
Benefits and expenses $106,297 $ 99,142 $100,525
Net income $ 10,714 $ 9,917 $ 3,347
Net income per share available
to common shareholders $ 2.11 $ 1.93 $ .69
For 1993, ILCO's net income per share available to common
shareholders includes an extraordinary item of $(1.16) per share
related to the cost of early extinguishment of debt, net of tax
and a cumulative effect of change in accounting principle of
$(.48) per share related to the adoption of SFAS 109.
Total market value basis of the Company's investment in ILCO
approximated $25,562,498 and $20,646,633 at December 31, 1995 and
1994, respectively. FIC directly or indirectly owns 1,966,346
shares (approximately 47%, 48%, and 48%) of ILCO's outstanding
common stock at December 31, 1995, 1994 and 1993, respectively.
The Company holds options to purchase up to 1,702,155 additional
shares of ILCO's authorized but unissued common stock at a price
equal to the average market value during the six months preceding
the exercise date. If exercised, the total number of shares
subject to the Agreement, together with the 1,966,346 shares
already owned, would constitute 63.05% of the then issued and
outstanding shares of ILCO's common stock, assuming no other
options or warrants held by other parties were exercised. In
the event that any other party seeks to acquire ILCO's
outstanding shares without prior approval of FIC's Board of
Directors, the Company has the right to acquire, under the same
pricing formula, the number of shares of common stock which, when
added to the number of shares then owned by the Company, will
amount to 51% of the outstanding shares of ILCO. The
consideration for the options was FIC's granting to ILCO a loan
in the principal amount of $1,200,000, FIC's agreement to
guarantee additional ILCO obligations totaling $4,000,000 and
FIC's agreement to guarantee ILCO's lease obligation on its
headquarters building upon demand. In addition, FIC guaranteed a
$15,000,000 term loan of ILCO.
On January 29, 1993, ILCO prepaid all of the Subordinated Notes
Payable and purchased and canceled all of the detachable warrants
associated with the preferred stock. The primary source of funds
for this debt prepayment and warrant cancellation was an increase
in the outstanding balance of the Senior Loan from $60 million to
$110 million pursuant to an amended and restated credit agreement
that was entered into on January 29, 1993 (the "New Senior
Loan"). The terms of the New Senior Loan, which matures on July
1, 1999, are substantially the same as the Senior Loan. Interest
is payable at the Company's option based on (1) the managing
bank's corporate base rate plus 1.25% declining to 0.5% as
principal declines, or (2) LIBOR plus 2.5% declining to 1.75%.
The Company has guaranteed the New Senior Loan.
On February 14, 1995, ILCO, through its subsidiary Investors Life
Insurance Company of North America (Investors-NA), purchased
Meridian Life Insurance Company (Meridian Life), a life insurer
domiciled in the State of Indiana, for $17.1 million. At
December 31, 1994, Meridian Life had total assets of
approximately $101 million and statutory capital and surplus of
approximately $11 million. The acquisition was partially
financed through a $15 million increase in indebtedness of ILCO's
Senior Loan. This additional indebtedness is guaranteed by FIC.
Maturities of the New Senior Loan over the next four years are as
follows:
(in thousands)
1996 $19,211
1997 18,000
1998 18,000
1999 4,174
$59,385
The Company has further agreed that, upon demand by ILCO, it will
guarantee performance under ILCO's lease of office facilities
located in Elizabeth, New Jersey. This agreement will remain in
effect for as long as any portion of the loan or any indebtedness
guaranteed by the Company remains outstanding. In connection
with ILCO's New Senior Loan, the net assets of ILCO which
aggregate $97,085,000 and $52,307,000 at December 31, 1995 and
1994, respectively, are restricted from paying dividends.
The amount of net realized gains included in net earnings of ILCO
is $344,000, $452,000 and $5,518,000, for the years ended
December 31, 1995, 1994 and 1993, respectively.
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:
1995 1994
(in thousands)
Balance at beginning of year $ 50,712 $ 62,159
Accretion of Interest 4,419 5,315
Amortization during the period (9,716) (16,762)
Present value of future profits at
December 31 $ 45,415 $ 50,712
Anticipated amortization of the present value of future profits
net of interest accretion for each of the next five years is as
follows:
Unaudited
(in thousands)
1996 $ 6,521
1997 $ 5,152
1998 $ 5,850
1999 $ 4,837
2000 $ 3,997
At purchase, the present value of future profits was calculated
using a discount rate of approximately 15%. Interest is accreted
on the unamortized portion at approximately 8.5%.
6. Senior Loan and Subordinated Notes Payable
Following is a summary of outstanding debt at December 31:
1995 1994
(in thousands)
Senior loan: A loan payable to a
syndicate of banks beginning with a $1.5
million payment on October 1, 1991, a $2
million payment on January 1, 1992 and each
subsequent quarter in 1992, a $2.25 million
payment on January 1, 1993 and each
subsequent quarter through April 1, 1996
with a final payment of the unpaid balance
on June 12, 1996. Interest is payable
at the Company's option based on (1) the
managing bank's corporate base rate plus 2%
or (2) LIBOR plus 3%. The rate in effect
at December 31, 1995 and 1994 was 8.81%
an 8.73%, respectively. $ 6,765 $ 17,060
Subordinated senior notes payable to
Investors-NA in four semi-annual principal
payments of $5,625,000 payable on December
12, 1996, June 12, 1997 December 12, 1997
and June 12, 1998. Interest is payable
on a semi-annual basis at 11%. 22,500 22,500
Subordinated note payable to Investors-NA
on June 12, 1998. Interest is payable
semi-annually at a rate of 12% per year and
is paid through the issuance of additional
notes through June 12, 1996 and in cash
thereafter. 4,224 3,759
Subordinated note payable to Investors-NA
in four equal annual principal payments of
$8,625,000 each on July 30, 2000, 2001, 2002,
and 2003. Interest is payable on a semi-
annual basis at 9%. 34,500 34,500
Total senior loans and subordinated
notes payable. $ 67,989 $ 77,819
The Senior Loan is secured by the following:
(1) All of the issued and outstanding shares of common stock of
FLIIC.
(2) All of the issued and outstanding shares of preferred stock
and common stock of FLC and Family Life.
(3) A $97.5 million surplus debenture of Family Life.
The Senior Loan is guaranteed by FIC for FLC.
The Senior Loan documents also require FLC to make additional
mandatory principal payments on the Senior Loan, which, in
general, reduce the quarterly principal payments in the inverse
order of their due dates. Those additional payments are required
in specified situations in which the amount of Family Life's
statutory capital and surplus exceed a certain formula. FLC has
Excess Cash Flow (as defined) or FLC or Family Life receives
proceeds from reinsurance of life insurance policies in force in
one transaction or a series of related transactions or sales of
assets or issuances of stock or debt securities. The Senior Loan
may be prepaid, in whole or in part, without penalty or premium.
The Senior Loan agreement specifies various negative, affirmative
and financial covenants made by the Company. The Subordinated
Notes Payable agreement also specifies various specified
negative, affirmative and financial covenants to be observed by
the Company. During the period the Senior Loan is outstanding,
the covenants in effect under the Subordinated Notes Payable are
substantially less restrictive than those under the Senior Loan
agreement but become generally equivalent to the Senior Loan
restrictions upon termination of the Senior Loan.
On July 30, 1993, the Merrill Lynch Subordinated Loans were
prepaid. Approximately $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 totalling $34.5 million that were
obtained from Investors-NA. The terms, other than maturity and
interest rate of the new debt, are substantially the same as
those of the $22.5 million subordinated loan that Investors-NA
had previously made to FLC and that continues to be outstanding.
The 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 obligors are allowed to prepay the Investors-NA Subordinated
Loans, in whole or in part, without premium or penalty. The
Investors-NA Subordinated Loans are 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 the
Investors-NA Subordinated Loans is also guaranteed by the
Company.
Aggregate maturities of the Senior Loan and the Subordinated
Notes Payable are as follows:
(in thousands)
1996 $12,390
1997 11,250
1998 9,849
1999 -0-
2000 8,625
Thereafter 25,875
$67,989
7. Federal Income Taxes
The Company files a consolidated federal income tax return with
its non-life subsidiaries. The Company's life insurance
subsidiary files a separate federal income tax return.
The Omnibus Budget Reconciliation Act of 1993 passed by Congress
in August 1993 ("the enactment date") increased the federal
corporate income tax rate to 35%, retroactive to January 1, 1993.
In accordance with SFAS No. 109, the effect of the rate change
was reflected in the third quarter 1993 financial statements.
The rate change had no material impact on the Company's
provisions for income taxes or results of operations.
The U.S. federal income tax provision (benefit) charged to
continuing operations was as follows:
1995 1994 1993
(in thousands)
Current $ (717) $ (82) $ 335
Deferred 3,145 2,428 2,638
Total provision for income taxes $2,428 $2,346 $2,973
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 before
extraordinary item as a result of the following differences:
1995 1994 1993
(in thousands)
Income taxes at the statutory rate $3,638 $3,714 $4,046
Increase (decrease) in taxes
resulting from:
Small life insurance company deduction (411) (581) (417)
Dividends received deduction (770) (775) (540)
Net operating loss carryforwards -0- -0- (328)
Tax rate differential (104) (106) (105)
Other items, net 75 94 317
Total provision for income taxes $2,428 $2,346 $2,973
Provision has not been made for state and foreign income tax
expense since this expense is minimal.
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:
1995 1994
Deferred Tax Liability: (in thousands)
Equity in net earnings of affiliate $ 2,509 $ 2,126
Excess pension Benefit 436 436
Deferred policy acquisition costs 8,514 6,386
Present value of future profits 4,210 2,733
Guaranty fund assessments 698 665
Deferred and uncollected premium 3,284 3,303
Unrealized appreciation on marketable
securities 1,712 -0-
Other taxable temporary differences 2,320 1,678
Total deferred tax liability 23,683 17,327
Deferred Tax Asset:
Policy reserves $ 8,567 $ 7,197
Unrealized depreciation on marketable
securities -0- 2,753
Alternative minimum tax credit 113 -0-
Accrued liabilities 220 367
Total deferred tax assets, net 8,900 10,317
Net deferred tax liability $14,783 $ 7,010
Deferred federal income tax expense (benefit) of $4,465,000 and
($3,823,000) for 1995 and 1994, respectively have been provided
on the unrealized appreciation (depreciation) of marketable
securities and included in the deferred tax liability. This
increase in deferred tax liability has been recorded as a
reduction 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.
In accordance with the Tax Reform Act of 1986, 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.
Provisions 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. The Company expects that additional deferred
taxes would be payable on the undistributed earnings of ILCO if
the Company should sell its investment.
At December 31, 1995, no IRS examinations were underway for the
Company or its subsidiaries.
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 contractholder 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 $1,939,799 and
$2,220,834 at December 31, 1995 and 1994, respectively. These
amounts are not reflected in the liability for future policy
benefits as they are ceded at 100% to Merrill Lynch pending the
approval of the assumption agreement.
The amounts in the consolidated financial statements for
reinsurance ceded are as follows:
December 31,
1995 1994 1993
(in thousands)
Future policy benefits $ 1,784 $ 1,548 $ 1,342
Unearned premiums $ 5 $ 6 $ 7
Other policy claims and
benefits payable $ 594 $ 631 $ 696
For the twelve months
ended
December 31,
1995 1994 1993
(in thousands)
Premiums $ 1,531 $ 918 $ 1,227
Policyholder benefits and expenses $ 372 $ 536 $ (226)
Estimated amounts recoverable from reinsurers on paid claims were
$10,866 and $42,923 in 1995 and 1994, respectively. These
amounts were included in other receivables in the consolidated
financial statements at December 31, 1995 and 1994.
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.
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. Investors-NA 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 two downstream holding companies, FLIIC and FLC, whose
ability to pay dividends to the Company is significantly limited
by the Senior Loan and some of the subordinated notes referred to
in Note 6 during the terms of those loans. Consolidated net
assets of FLIIC and FLC aggregated $48,422,556, and $52,330,299,
respectively at December 31, 1995 and $21,168,097 and
$33,329,860, respectively at December 31, 1994.
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. In addition, ILCO's senior loan restricts it from
paying any dividends on its common stock during the term of that
loan.
Capital and surplus of Family Life as reported to insurance
regulators and as determined in accordance with statutory
accounting practices aggregates approximately $25,794,540 and
$26,667,000 at December 31, 1995 and 1994, respectively.
Statutory net income aggregated approximately $9,245,000 and
$12,034,000 for the years ended December 31, 1995 and 1994,
respectively.
In December 1994, the AICPA approved Statement of Position 94-5,
"Disclosures of Certain Matters in the Financial Statements of
Insurance Enterprises." This statement requires insurance
enterprises to make disclosures in their financial statements
regarding the accounting methods used in their statutory
financial statements that are permitted by state insurance
departments rather than prescribed statutory accounting
practices. Prescribed statutory accounting practices include a
variety of publications of the NAIC as well as state laws,
regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices
not so prescribed. 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, 1995 or 1994.
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 $10.50 per share,
equivalent to the then current market price, subject to
adjustment to prevent the effect of dilution. The options expire
at the time of final repayment of each of the respective loans.
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.
(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.
Retirement Plan
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:
1995 1994
(in thousands)
Service cost-benefits earned
during the period $ 73 $ 84
Interest cost on projected
benefit obligation 563 483
Return on plan assets (705) (562)
Amortization -0- (125)
Pension (benefit) cost $ (69) $ (120)
The following summarizes the funded status of the plan at
December 31:
1995 1994
(in thousands)
Actuarial present value of:
Vested benefit obligation $ 6,554 $ 6,674
Accumulated benefit obligation $ 6,554 $ 6,674
Projected benefit obligation $ 6,990 $ 7,068
Plan assets at market value 8,673 8,853
Plan assets in excess of projected
benefit obligations 1,683 1,785
Unrecognized net (gain) loss (206) (377)
Prepaid pension asset $ 1,477 $ 1,408
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.0% and
8.0% for the years ended December 31, 1995 and December 31, 1994
respectively.
The assumed long-term rate of compensation increases was 6.0% for
the years ended December 31, 1995 and December 31, 1994.
The long-term rate of return on plan assets was 8.0% for the
years ended December 31, 1995 and 1994.
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.
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, 1995, no option 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 three to
five years. Certain office space leases may be renewed at the
option of the Company.
Rent expense in 1995, 1994 and 1993 was $896,688, $835,637 and
$801,920 respectively. Minimum annual rentals are as follows:
(in thousands)
1996 $ 420
1997 315
1998 0
1999 0
2000 0
Total $ 735
13. Related Party Transactions
FIC Realty, a management company and a subsidiary of the Company,
leases hotel space from Investors-NA which is part of its home
office building. Under this agreement, FIC Realty pays monthly
rent to Investors-NA in an amount equal to 95% of the net
operating profits of the hotel. The lease is for a period of 5
years. Total rent paid to Investors -NA under the terms of the
lease agreement was $1,991,356, $1,346,160 and $745,666 at
December 31, 1995, 1994, and 1993 respectively.
Alcoholic beverages had been sold at the hotel by an unrelated
third party pursuant to a lease it had with FIC Realty until
September 30, 1994. Commencing October 1, 1994, all alcoholic
beverages sales have been conducted by Atrium Beverage
Corporation ("Atrium Beverage"), a new subsidiary of FIC Realty.
Atrium Beverage subleases from FIC Realty space in the hotel for
the storage, service and sale of alcoholic beverages pursuant to
which Atrium Beverage pays monthly rent to FIC Realty of $12,500.
During 1995 and 1994, Atrium Beverage paid FIC Realty rent and
management fees totalling $319,815 and $81,233, respectively.
All of that amount was included in the hotel revenues of FIC
Realty for purposes of determining its net operating profits
under the hotel lease agreement with Investors-NA.
FIC Management is paid fees in an amount equal to 5% of the net
operating profit that Investors-NA receives from the properties
managed and leased by FIC Management. During 1995, 1994 and
1993, Investors-NA paid $130,760, $106,460, and $77,115 under
this agreement. Effective January 1, 1993, ILCO's insurance
subsidiaries and Family Life entered into an agreement with
Investors-NA to lease office space in the Austin Centre. The
annual rent is $1,119,705 and the lease is for a period of 5
years. Family Life's portion of the annual rent is 37.5%.
As part of the financing arrangement for the acquisition of
Family Life, a $22.5 million loan was made by Investors-NA to
Family Life Corporation, a subsidiary of FIC, and a $2.5 million
loan was made to FIC. Interest during 1995, 1994 and 1993 on the
loans aggregated $2,939,622, $2,891,269 and $2,802,394,
respectively. At December 31, 1995 and 1994 accrued interest was
$165,658 and $162,561, respectively. In addition to the interest
provided under those loans, Investors-NA was granted by FIC
107,473 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. The options will expire on June
12, 1998 if not previously exercised.
On July 30, 1993, Investors-NA loaned $34.5 million to two
subsidiaries of FIC in connection with the prepayment of the
subordinated loans owed to the seller. Interest during 1995 and
1994 on these notes was $3,105,000 and $3,096,375 and accrued
interest at December 31, 1995 and 1994 was $1,293,750 and
$1,293,750. (See Note 6)
FIC is reimbursed by ILCO for rental expense and certain other
operating expenses. The amount of such reimbursement was
approximately, $830,000, $585,000, and $860,000, in 1995, 1994
and 1993, respectively.
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 $15
million, $13 million, and $13 million in 1995, 1994 and 1993,
respectively.
At December 31, 1995 and 1994, 29,100 and 8,850 shares of the
Company's stock were owned by Investors-NA and InterContinental
Life Insurance Company, respectively.
The Company has guaranteed the obligations of its subsidiaries
under the senior loan and the subordinated loan referred to in
Note 6 and also guaranteed the debt refinanced in 1993. The
Company has also guaranteed certain financial obligations of
ILCO, as disclosed in Note 4.
On May 8, 1989, ILCO'S Board of Directors granted Mr. Mitte,
Chairman and CEO of FIC and ILCO, an option to purchase 600,000
shares (as adjusted for the three-for-one stock split effective
February 15, 1990) of the Common Stock of ILCO in equal annual
installments of 150,000 shares each. In 1992, the Chairman
surrendered for cancellation 120,000 of these options. In
October of 1993, the Company entered into an agreement with the
Chairman whereby the Chairman agreed to surrender all of his
remaining common stock options between 1993 and 1996. Pursuant
to this agreement, 358,500 options were surrendered through
December 31, 1995, with 121,500 options remaining to be
surrendered during 1996.
FIC Computer Services, Inc. (FIC Computer), a subsidiary of FIC,
provides data processing services to each subsidiary for
proportionate fees equal to FIC Computer's cost. Investors-NA,
Investors-IN and ILIC paid $1,655,486 and $181,971 to FIC
Computer for data processing services provided during December
1995 and 1994, respectively.
In December 1995, Family Life entered into a reinsurance
agreement with Investors-NA (an insurance company subsidiary of
ILCO and an affiliated company of Family Life), 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.
The arrangement reflects management's plan to concentrate on the
writing of term life insurance, with Investors-NA to develop
universal life business.
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)
Net income per share was determined by dividing net income
available to common shareholders by common stock and common stock
equivalents.
Changes in the market price of the Company's common stock also
impacts the number of common options and warrants which are
considered dilutive under the treasury stock method of
calculating the weighted average common stock and common stock
equivalents. For the years ended December 31, 1995, 1994 and
1993, weighted average common stock and common stock equivalents
are calculated as follows:
1995 1994 1993
Net income $10,017 $ 9,954 $16,021
Net income available to common
shareholders $10,017 $ 9,954 $16,021
Weighted average common shares
outstanding, less treasury stock 1,086 1,086 1,086
Dilutive common share equivalents:
Common stock options 107 107 107
Effect of ILCO ownership of
common stock options (51) (51) (51)
Less:
Assumed repurchase of shares
using the treasury stock method (32) (33) (24)
Effect of ownership of ILCO on
treasury shares 15 15 11
Effect of ILCO ownership of common
shares (18) (18) (18)
Common stock and common stock
equivalents 1,108 1,106 1,111
Net income per share available to
common shareholders $ 9.04 $ 9.00 $ 14.42
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 1995, premium income
from these products was derived from forty-nine states with
concentrations of approximately 23% and 23% in California and
Texas, respectively. In 1994, these amounts were 24% and 20%,
respectively.
17. Quarterly Financial Data (unaudited)
(in thousands, except per share data)
Three Months Three Months
Ended Ended
March 31, June 30,
1995 1994 1995 1994
Total revenues $16,050 $17,415 $17,536 $19,111
Net income $ 2,661 $ 2,822 $ 2,767 $ 2,688
Three Months Three Months
Ended Ended
September 30, December 31,
1995 1994 1995 1994
Total revenues $16,088 $16,759 $13,734 $15,239
Net income $ 2,358 $ 2,270 $ 2,231 $ 2,174
17. Quarterly Financial Data (unaudited), continued
(in thousands, except per share data)
Three Months Three Months
Ended Ended
March 31, June 30,
1995 1994 1995 1994
Net income per share $ 2.41 $ 2.55 $ 2.50 $ 2.43
Three Months Three Months
Ended Ended
September 30, December 31,
1995 1994 1995 1994
Net income per share $ 2.13 $ 2.05 $ 2.00 $ 1.97
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
(in thousands)
Column A Column B Column C Column D
Amount
Shown
on the
Balance
Type of Investment Cost Value Sheet
Fixed maturities:
Bonds:
United States Government and
government agencies and
authorities $ 18,124 $ 19,693 $ 19,693
States, municipalities and
political subdivisions 4,945 5,001 5,001
Corporate securities 10,243 10,662 10,662
Mortgage-backed securities 46,649 48,276 48,276
Total fixed maturities 79,961 83,632 83,632
Equity securities:
Common stocks:
Industrial and miscellaneous
other 11 4 4
Total equity securities 11 4 4
Policy loans 1,774 1,774 1,774
Short-term investments 27,180 27,180 27,180
Total investments $108,926 $112,590 $112,590
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS
DECEMBER 31
1995 1994
(in thousands)
ASSETS
Cash $ 71 $ 116
Long-Term bonds 16 16
Common Stock 4 4
Investments in subsidiaries* 84,012 56,074
Property, plant and equipment, net 6,202 2,807
Other assets 1,088 975
Accounts receivable 60 79
$91,453 $60,071
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Subordinated notes payable $ 4,221 $ 3,759
Other liabilities and intercompany
payables 4,499 4,516
8,720 8,275
Shareholders' equity:
Common stock, $1.00 par value,
3,304,200 shares authorized;
1,169,060 shares issued, 1,085,593
shares outstanding in 1995 and 1994 1,169 1,169
Additional paid-in capital 7,225 7,225
Net unrealized gain (loss) on investments
in fixed maturities available for sale 8,052 (12,858)
Net unrealized appreciation
(depreciation) of equity securities
held by insurance subsidiary 9 (1)
Retained earnings (including $61,680
and $51,196 of undistributed earnings
of subsidiaries at December 31, 1995
and 1994, respectively) 66,700 56,683
83,155 52,218
Common Treasury stock, at cost, 83,467
shares in 1995 and 1994 (422) (422)
Total shareholders' equity 82,733 51,796
Total liabilities and
shareholders' equity $91,453 $60,071
*Eliminated in consolidation
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
STATEMENTS OF INCOME
DECEMBER 31
1995 1994
(in thousands)
Income $ 885 $ 606
Operating expenses 456 293
Interest expense* 897 610
1,353 903
Income (loss) from operations (468) (297)
Equity in undistributed earnings
from subsidiaries 10,485 10,251
Net income $10,017 $ 9,954
*In consolidation, $179 is reported as a reduction in equity in
earnings of unconsolidated subsidiary.
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED STATEMENTS OF REGISTRANT,Continued
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31
1995 1994
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,017 $ 9,954
Adjustments to reconcile net income to net
cash used in operating activities:
Decrease in accounts receivables 19 19
Increase in investment in subsidiaries* (7,244) (10,251)
Increase in other assets 113 (924)
Increase (decrease) in other liabilities
and intercompany payables (17) 675
Decrease in property and equipment (3,395) 120
Net cash used in operating activities (507) (407)
CASH FLOWS FROM FINANCING ACTIVITIES
Subordinated notes payable issued to
Investors-NA 462 413
Net cash provided by financing
activities 462 413
Net (decrease) increase in cash (45) 6
Cash, beginning of year 116 110
Cash, end of year $ 71 $ 116
*Eliminated in consolidation
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE IV-INDEBTEDNESS OF AND TO RELATED PARTIES
NOT CURRENT
DECEMBER 31, 1995 AND 1994
(in thousands)
Column A
Balance
at Column C Column D Column E
Begin- Column B Amounts Amounts Balance
ning of Addi- Collect- Written End of
Name of Creditor Period tions ed Off Period
December 31, 1995
Investors Life
Insurance Company -
North America $22,500 -0- -0- -0- $22,500
Investors Life
Insurance Company -
North America $ 3,759 465 -0- -0- $ 4,224
Investors Life
Insurance Company -
North America $30,000 -0- -0- -0- $30,000
Investors Life
Insurance Company -
North America $ 4,500 -0- -0- -0- $ 4,500
December 31, 1994
Investors Life
Insurance Company -
North America $22,500 -0- -0- -0- $22,500
Investors Life
Insurance Company -
North America $ 3,346 413 -0- -0- $ 3,759
Investors Life
Insurance Company -
North America $30,000 -0- -0- -0- $30,000
Investors Life
Insurance Company -
North America $ 4,500 -0- -0- -0- $ 4,500
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE VI-REINSURANCE CEDED AND ASSUMED
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(in thousands)
Percent-
Ceded To Assumed age Of
Direct Other From Other Net Amount
Amount Companies Companies Amount Assumed
1995
Life Insurance
in-force $8,677,064 $ 314,826 $ 4,162 $8,366,400 0.05%
Premium:
Life insurance $ 57,269 $ 1,526 $ 56 $ 55,799 0.10%
Accident-health
insurance 1,471 5 0 1,466 0.00%
Total $ 58,740 $ 1,531 $ 56 $ 57,265 0.10%
1994
Life Insurance
in-force $8,192,823 $ 236,570 $ 1,700 $7,957,953 0.02%
Premium:
Life insurance $ 55,415 $ 897 $ 35 $ 54,553 0.06%
Accident-health
insurance 1,808 22 0 1,786 0.00%
Total $ 57,223 $ 919 $ 35 $ 56,339 0.06%
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS
DECEMBER 31, 1995
(in thousands)
Column A
Name of Issuer of
Securities Guaranteed
by Period For Which
Statement is Filed InterContinental Life Family Life
Corporation Corporation
Column B
Title of Issue of Each
Class of Securities
Guaranteed Credit Agreement Senior Loan Dated
Dated as of January as of June 12,
29, 1993 1991
Column C
Total Amount
Guaranteed and
Outstanding $59,385 $ 6,765
Column D
Amount Owned by Person
or Persons for Which
Statement is Filed -0- -0-
Column E
Amount in Treasury of
Issues of Securities
Guaranteed -0- -0-
Column F
Nature of Guarantee Guarantee of Guarantee of
Principal and Principal and
Interest Interest
Column G
Nature of Any Default
By Issuer of
Securities Guaranteed
in Principal Interest
Sinking Fund or
Redemption Provision
or Payment of
Dividends None None
EXHIBIT INDEX
Exhibit No. Page Nos. Description
3 The current Articles of Incorporation and
Bylaws of Registrant. Exhibit 3 to
Registrant's Report on Form 10-K filed for
the year 1985 is hereby incorporated by
reference.
10(ah) Guaranty Agreement dated as of December 28,
1988 from Registrant to a group of banks on
Senior Loan to ILCO, filed as an exhibit
with Registrant's Form 10-K for the year
ended December 31, 1989 and incorporated
herein by reference.
10(ai) Guaranty Agreement, dated as of December 1,
1988, on loan to ILCO on the Note Purchase
Agreement between ILCO and a Connecticut
based insurance/financial services company;
a guaranty agreement in substantially
identical form was provided by FIC to each
of the seven other entities participating
in said loan, filed as an exhibit with
Registrant's Form 10-K for the year ended
December 31, 1989 and incorporated herein
by reference.
10(aj) Guaranty Agreement, dated as of July 30,
1990, issued by the Registrant to a holder
of ILCO's 1999 Series Subordinated Notes;
a guaranty agreement in substantially
identical form was provided by the
Registrant to each of the holders of said
notes.
*10(ak) Stock Purchase Agreement by and among
Merrill Lynch Insurance Group, Inc.,
Family Life Insurance Company, Family
Life Corporation, Family Life Insurance
Investment Company and Financial
Industries Corporation dated as of March
19, 1991, as amended.
*10(al) Note dated June 12, 1991 in the amount of
$30 million made by a subsidiary of the
Registrant in favor of Merrill Lynch
Insurance Group, Inc.
*10(am) Note dated June 12, 1991 in the amount of
$12 million made by a subsidiary of the
Registrant to Merrill Lynch & Co., Inc.
*10(an) Note dated June 12, 1991 in the amount of
$2 million made by a subsidiary of the
Registrant in favor of the Seller under the
Stock Purchase Agreement dated as of March
19, 1991.
*10(ao) Performance and Payment Guaranty Agreement
dated June 12, 1991 by Registrant in favor
of the Seller under the Stock Purchase
Agreement dated as of March 19, 1991.
*10(ap) Payment Guaranty Agreement dated June 12,
1991 by Registrant in favor of the Seller
under the Stock Purchase Agreement dated as
of March 19, 1991.
*10(aq) InterCreditor Agreement dated June 12, 1991
among Investors Life Insurance Company of
North America, Investors Life Insurance
Company of California, Merrill Lynch
Insurance Group, Inc., and Merrill Lynch &
Co., Inc.
*10(ar) Credit Agreement dated as of June 12, 1991
among Family Life Corporation (a subsidiary
of the Registrant), the Lenders named
therein and the Agent.
*10(as) Guaranty Agreement by Registrant of the $50
million loan to Family Life Corporation in
favor of the bank lenders under the Credit
Agreement dated as of June 12, 1991.
*10(at) Guaranty Agreement by a subsidiary of the
Registrant on the $50 million loan to
Family Life Corporation in favor of the
bank lenders under the Credit Agreement
dated as of June 12, 1991.
*10(au) Pledge Agreement by Family Life Corporation
(a subsidiary of the Registrant) in favor
of the bank lenders under the Credit
Agreement dated as of June 12, 1991.
*10(aw) Pledge Agreement by Family Life Insurance
Investment Company (a subsidiary of the
Registrant) in favor of the bank lenders
under the Credit Agreement dated as of June
12, 1991.
*10(ax) Note dated June 12, 1991 in the amount of
$22.5 million made by a subsidiary of the
Registrant in favor of Investors Life
Insurance Company of North America.
*10(ay) Note dated June 12, 1991 in the amount of
$2.5 million made by the Registrant in
favor of Investors Life Insurance Company
of California.
*10(az) InterCreditor Agreement among Investors
Life Insurance Company of North America,
Investors Life Insurance Company of
California, and the Agent under the Credit
Agreement dated as of June 12, 1991.
*10(aaa) Option Agreement by the Registrant in favor
of Investors life Insurance Company of
North America and Investors Life
Insurance Company of California.
10(aab) Hotel Lease Agreement dated as of August
22, 1991 between Investors Life Insurance
Company of North America and FIC Realty
Services,Inc. filed as exhibit 10(aab)
by Registrant on Form 10-K for the year
ended December 31, 1991 is hereby
incorporated by reference.
10(aac) Management Agreement dated as of September
4, 1991 between Investors Life Insurance
Company of North America and FIC Property
Management, Inc. filed as exhibit 10(aac)
by Registrant on Form 10-K for the year
ended December 31, 1991 is hereby
incorporated by reference.
10(aad) Stock Option Agreement dated March 8, 1986
between ILCO and Registrant filed as
exhibit 10(aad) by Registrant on Form 10-K
for the year ended December 31, 1992 is
hereby incorporated by reference.
10(aae) Amended and Restated Guaranty of Registrant
dated January 29, 1993 filed as exhibit
10(aae) by Registrant on Form 10-K for the
year ended December 31, 1992 is hereby
incorporation by reference.
10(aaf) Surplus Debenture dated as of June 12, 1991
in the amount of $97.5 million made by
Family Life Insurance Company in favor of
Family Life Corporation filed as exhibit
10(aaf) by Registrant on Form 10-K for the
year ended December 31, 1993 is hereby
incorporated by reference.
10(aag) Note dated July 30, 1993 in the amount of
$30 million made by Family Life
Corporation in favor of Investors Life
Insurance Company of North America filed
as exhibit 10(aag) by Registrant on Form
10-K for the year ended December 31, 1993
is hereby incorporated by reference.
10(aah) Note dated July 30, 1993 in the amount of
$4.5 million made by Family Life Insurance
Investment Company in favor of Investors
Life Insurance Company of North America
filed as exhibit 10(aah) by Registrant on
Form 10-K for the year ended December 31,
1993 is hereby incorporated by reference.
10(aai) Amendment No. 1 dated July 30, 1993 between
Family Life Corporation and Investors Life
Insurance Company of North America amending
$22.5 million note filed as exhibit 10(aai)
by Registrant on Form 10-K for the year
ended December 31, 1993 is hereby
incorporated by reference.
10(aaj) Amendment No. 1 dated July 30, 1993
between Family Life Insurance Company and
Family Life Corporation amending $97.5
million Surplus Debenture filed as exhibit
10(aaj) by Registrant on Form 10-K for the
year ended December 31, 1993 is hereby
incorporated by reference.
10(aak) Guaranty Agreement dated July 30, 1993 by
Registrant of the $30 million loan to
Family Life Corporation in favor of
Investors Life Insurance Company of North
America filed as exhibit 10(aak) by
Registrant on Form 10-K for the year ended
December 31, 1993 is hereby incorporated
by reference.
10(aal) Guaranty Agreement dated July 30, 1993 by
Registrant of the $4.5 million loan to
Family Life Insurance Investment Company
in favor of Investors Life Insurance
Company of North America filed as exhibit
10(aal) by Registrant on Form 10-K for the
year ended December 31, 1993 is hereby
incorporated by reference.
10(aam) Letter agreement dated May 26, 1993 among
Family Life Corporation, Family Life
Insurance Investment Company, Merrill Lynch &
Co., Inc. and Merrill Lynch Group, Inc.
filed as exhibit 10(aam) by Registrant on
Form 10-K for the year ended December
31, 1993 is hereby incorporated by
reference.
10(aan) Waiver and Amendment Agreement dated as of
July 23, 1993 among Family Life Corporation,
the Lenders named therein and the Agent
filed as exhibit 10(aan) by Registrant on
Form 10-K for the year ended December
31, 1994 is hereby incorporate by
reference.
10(aao) Waiver and Amendment Agreement dated as of
December 14, 1993 among Family Life
Corporation, the Lenders named therein and
the Agent filed as exhibit 10(aao) by
Registrant on Form 10-K for the year ended
December 31, 1994 is hereby incorporated by
reference.
10(aap) Data Processing Agreement dated as of
November 30, 1994 between InterContinental
Life Insurance Company and FIC Computer
Services, Inc filed as exhibit 10(aap) by
Registrant on Form 10-K for the year ended
December 31, 1994 is hereby incorporated by
reference.
10(aaq) Data Processing Agreement dated as of
November 30, 1994 between Investors Life
Insurance Company of North America and FIC
Computer Services, Inc filed as exhibit
10(aaq) by Registrant on Form 10-K for the
year ended December 31, 1994 is hereby
incorporated by Reference.
10(aar) Data Processing Agreement dated as of
November 30, 1994 between Family Life
Insurance Company and FIC Computer
Services, Inc filed as exhibit 10(aar) by
Registrant on Form 10-K for the year ended
December 31, 1994 is hereby incorporated
by reference.
10(aas) Lease Agreement dated as of September 30,
1994 between FIC Realty Services, Inc. and
Atrium Beverage Corporation filed as
exhibit 10(aas) by Registrant on Form 10-K
for the year ended December 31, 1994 is
hereby incorporated by reference.
10(aat) Management Agreement dated as of September
30, 1994 between HCD Austin Corporation as
agent for FIC Realty Services, Inc. and
Atrium Beverage Corporation filed as
exhibit 10(aat) by Registrant on Form 10-K
for the year ended December 31, 1994 is
hereby incorporated by reference.
10(aau) Amendment Agreement dated as of July 31,
1995 among Family Life Corporation, the
Lenders named therein and the Agent.
21 Subsidiaries of Registrant.
28 Report on Form 10-K filed by ILCO for the
year ended December 31, 1995 is hereby
incorporated by reference in its entirety.
* Filed as an Exhibit with Registrant's Current Report on Form 8-K
dated June 25, 1991, and incorporated herein by reference.