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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, 1999
[ ] 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, $.20 par value
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 15, 2000, based on the closing sales price in The Nasdaq
Small-Cap Market ($9.50 per share), was $31,230,348.
The number of shares outstanding of Registrant's common stock on March 15, 2000
was 5,054,661.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
A. Reports on Form 10-K of InterContinental Life Corporation for the
fiscal years ended December 31, 1999, 1998 and 1997 are hereby
incorporated by reference.
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PART I
Item 1. Business
General
Financial Industries Corporation ("FIC", the "Company" or the "Registrant") is a
holding company primarily engaged in the life insurance business through its
ownership of 100% of Family Life Insurance Company ("Family Life") and its
approximately 44.5% interest in InterContinental Life Corporation ("ILCO").
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. 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, is the owner, directly and beneficially, of
approximately 30.71% 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 books of in- force life insurance than to
produce new business, because initial underwriting costs have already been
incurred and mature business is generally less likely to terminate, making
possible more predictable profit analysis. However, Family Life does continue to
market those products that are profitable, as well as develop new products and
streamline distribution channels. See "Agency Operations". It is also
management's belief that the continuing consolidation in the life insurance
industry presents attractive opportunities for the Company to acquire life
insurance companies that complement or fit within the Company's existing
marketing structure and product lines. The Company's objective is to improve the
profitability of acquired businesses by consolidating and streamlining the
administrative functions of these businesses, eliminating unprofitable products
and distribution channels, applying its marketing expertise to the acquired
company's markets and agents and benefitting from economies of scale. FIC's
ability to make future acquisitions will be dependent on its being able to
obtain the necessary financing. In addition, since ILCO has the same acquisition
strategy as FIC, a conflict of interest could arise in the future between FIC
and ILCO with respect to acquisition opportunities.
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Acquisition of ILCO. In January, 1985, FIC acquired 26.53% of ILCO's common
stock. FIC and Family Life subsequently acquired additional shares of ILCO's
common stock and as of March 15, 2000, FIC owned, directly and indirectly
through Family Life, approximately 44.5% of the outstanding shares of ILCO's
common stock. Prior to September 30, 1998, FIC held options to acquire up to
1,702,155 additional shares of ILCO's common stock. The consideration for the
options, which were granted in 1986, was FIC's granting to ILCO a loan in the
principal amount of $1.2 million, FIC's agreement to guarantee future loan
obligations of ILCO and FIC's agreement to guarantee ILCO's lease obligation on
its headquarters building upon demand. As described under the heading "The ILCO
Senior Loan", the Senior Loan of ILCO was fully repaid on September 30, 1998.
Accordingly, FIC's rights under the 1986 option agreement expired on September
30, 1998.
Acquisition of Family Life. FIC acquired Family Life from Merrill Lynch
Insurance Group, Inc. on June 12, 1991. The consideration for the purchase was
$114 million consisting of a cash payment of $70 million and $44 million of
subordinated promissory notes issued by subsidiaries of FIC to the seller and
its affiliates. Family Life's primary business is the underwriting and sale of
mortgage protection life insurance to customers who are mortgage borrowers from
financial institutions where Family Life has marketing relationships. Family
Life distributes its insurance products primarily through a national career
agency sales force. See "Business of Family Life Insurance Company".
ILCO's Acquisitions
a. Standard Life. In November, 1986, ILCO acquired Standard Life Insurance
Company ("Standard Life"), headquartered in Jackson, Mississippi, for a gross
purchase price of $54.5 million.
b. Investors-NA and Investors-CA. In December, 1988, ILCO, through Standard
Life, purchased Investors Life Insurance Company of California ("Investors-CA")
and Investors Life Insurance Company of North America ("Investors-NA") from
CIGNA Corporation for a purchase price of $140 million.
c. Investors-Indiana. In February, 1995, ILCO, through Investors-NA, purchased
from Meridian Mutual Insurance Company the stock of Meridian Life Insurance
Company, an Indianapolis-based life insurer, for a cash purchase price of $17.1
million. After the acquisition, Meridian Life changed its name to Investors Life
Insurance Company of Indiana ("Investors- Indiana").
d. State Auto Life. In July, 1997, ILCO and Investors-Indiana acquired State
Auto Life Insurance Company, an Ohio domiciled life insurer, from State
Automobile Mutual Insurance Company, for an adjusted cash purchase price of
$11.8 million. Under the terms of the transaction, State Auto Life was merged
into Investors-Indiana.
e. Investors-IN. In December, 1997, InterContinental Life Insurance Company
("ILIC") , a subsidiary of ILCO, transferred its domicile from New Jersey to
Indiana. Following completion of the redomestication, ILIC merged with
Investors-Indiana, with ILIC as the surviving entity in the merger process.
Immediately after the merger, ILIC changed its name to Investors Life Insurance
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Company of Indiana. As used hereinafter, the phrase "Investors-IN" shall be used
to refer to the merged entities.
f. Grinnell Life. On June 30, 1998, ILCO, through a subsidiary, acquired
Grinnell Life Insurance Company ("Grinnell Life") for an adjusted purchase price
of $16.6 million. A portion of the purchase price ($12.37 million) was paid by
way of a dividend to the seller immediately prior to the closing of the
transaction; the balance of the purchase price was paid by ILCO's subsidiary. As
part of the transaction, Grinnell Life was immediately merged with and into that
subsidiary, with that subsidiary being the surviving entity.
Business of Family Life Insurance Company
Family Life, which was organized in the State of Washington in 1949, specializes
in providing mortgage protection life and accidental death insurance and annuity
products to mortgage borrowers of financial institutions. Family Life has
policies in force with customers of approximately 227 financial institutions, of
which approximately 54 actively provide Family Life with regular updating of
their lists of borrowers.
Family Life's mortgage protection business consists of term and universal life
insurance sold to borrowers of mortgage debt, designed to repay the mortgages of
policyholders in the event of their death. This business is sold to customers of
client financial institutions, usually through a list of borrowers provided by
the financial institution. These policies often list the lending financial
institution as the primary beneficiary of the life insurance policy. An
important feature of the Family Life product is the ability to bill and collect
premiums through the policyholder's monthly mortgage payments.
Family Life has annuity products and a variety of life insurance products,
including decreasing term life insurance, universal life insurance, ten-year
level term products, and a whole life insurance product.
Family Life is licensed to sell mortgage life insurance products in 49 states
and the District of Columbia. In 1999, premium income from these products was
derived from all states in which Family Life is licensed, with significant
amounts derived from Texas (25.4%), California (24.8%) and Florida (4.9%).
Family Life's primary distribution channel is its agency force of approximately
607 career agents (at December 31, 1999), who are organized into 22 regions.
Most of the career agents sell mortgage life insurance products exclusively for
Family Life. The mortgage life insurance business is very fragmented. Family
Life believes that it is among the larger writers of agent sold mortgage life
insurance in the United States and the only nation-wide agent-sold life
insurance company operating through leads from financial institutions. Many of
Family Life's competitors are life insurance companies with more resources than
Family Life and whose mortgage life insurance business represents only a small
portion of their total business.
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During 1999, Family Life continued the expansion of its distribution system, to
recruit agents whose product portfolio includes a broader range of life and
annuity products, in addition to the traditional mortgage protection life
insurance products offered by Family Life. While Family Life's traditional sales
force consists of agents who are contracted exclusively with the company, agents
who participate in the expanded distribution system may have selling
relationships with other insurers in addition to Family Life. During 1999,
Family Life recruited 438 agents for this marketing effort.
At December 31, 1999, the number of employees within FIC and its subsidiaries,
together with the employees of ILCO's insurance subsidiaries, was approximately
312.
Business of InterContinental Life Corporation
ILCO was incorporated in 1969 under the laws of New Jersey. In June, 1997, ILCO
transferred its domicile to the State of Texas. Its executive office is located
at 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.
During 1999, the general insurance expenses of ILCO's insurance subsidiaries
were $15,910,308, as compared to $15,172,682 in 1998 and $15,574,265 in 1997.
The level of expenses at the ILCO life companies for the year 1999 was affected
by the expenses incurred in connection with Year 2000 compliance. For the year
1998, the level of expenses at the ILCO life companies was also affected by
expenses incurred in connection with Year 2000 compliance, as well as the
expenses incurred in connection with ILCO's acquisition of Grinnell Life
Insurance Company. Expenses for the year 1997 were affected primarily from costs
incurred in connection with ILCO's acquisition of State Auto Life in July, 1997
and as well as expenses related to the modification of data processing systems
for Year 2000 compliance. 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 life insurance and accident and
health insurance policies and annuity products. Approximately 79% of the total
collected premiums for 1999 were derived from renewal premiums on insurance
policies and annuity products sold by ILCO's insurance subsidiaries prior to
their acquisition by ILCO.
ILCO's insurance subsidiaries are also engaged in marketing and underwriting
individual life insurance and annuity products in 49 states and the District of
Columbia. These products are marketed through independent, non-exclusive general
agents.
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The products currently being distributed by ILCO's life subsidiaries include
several versions of universal life insurance, which provide permanent life
insurance which credit company-declared current interest rates. The universal
life insurance portfolio of ILCO's insurance subsidiaries consists of flexible
premium universal life insurance policies. Under the flexible premium policies,
policyholders may vary the amounts of their coverage (subject to minimum and
maximum limits) as well as the date of payment and frequency of payments.
Direct statutory premiums received from all types of universal life products
were $34.3 million in 1999, as compared to $38.9 million in 1998 and $40.6
million in 1997. Investors-NA received reinsurance premiums from Family Life of
$3.2 million in 1999, pursuant to the reinsurance agreement for universal life
products written by Family Life. In 1999, premium income from all life insurance
products was derived from all states in which ILCO's insurance subsidiaries are
licensed, with significant amounts derived from Pennsylvania (14%), California
(8%), Ohio (9%) and New Jersey (8%).
ILCO's insurance subsidiaries receive premium income from health insurance
policies. In 1999, premium income from all health insurance policies was $0.8
million, as compared to $1.0 million in 1998 and $0.9 million in 1997. As
described below, the health insurance business of ILCO's subsidiaries is 100%
reinsured with a third party reinsurer.
In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which most of the contractual obligations and risks under accident
and health and disability income insurance policies were assumed by a third
party reinsurer. The transfer was effective as of July 1, 1997. The decision to
dispose of this book of business was based on ILCO's analysis that the business
was not generating targeted profit objectives and that the products were not
part of the core business of ILCO's subsidiaries. The sale permits the companies
to focus on its primary business - life insurance and annuity sales. In
connection with the transaction, the total amount of net reserves transferred by
the ILCO subsidiaries was $6,327,504. In addition to the transfer of reserves,
ILCO's life companies paid the reinsurer $1,037,150 in connection with the
transaction, which amount was accounted for as an expense for the year ended
December 31, 1997. In 1997, the transferred business generated approximately
$791,000 in annualized premiums for ILCO's life subsidiaries.
Investors-NA sponsors a variable annuity separate account, which offers single
premium and flexible premium policies. The policies provide for the contract
owner to allocate premium payments among four different portfolios of Putnam
Variable Trust (the "Putnam Fund"), a series fund which is managed by Putnam
Investment Management, Inc. As of December 31, 1999, the assets held in the
separate account were $48.4 million. During 1999, the premium income realized in
connection with these variable annuity policies was $117,666, which was received
from existing contract owners.
Investors-NA also maintains a closed variable annuity separate account, with
approximately $19.8 million of assets as of December 31, 1999. The separate
account was closed to new purchases in 1981 as a result of an IRS ruling which
adversely affected the status of variable annuity separate accounts which invest
in publicly-available mutual funds. The ruling did not adversely affect the
status of in-force contracts.
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Beginning in 1997, ILCO's life company subsidiaries expanded their marketing
efforts in the fixed annuity market. Direct deposits from the sale of fixed
annuity products were $7.6 million in 1999, as compared to $6.1 million in 1998
and $3.5 million in 1997. Investors-NA also received reinsurance premiums from
Family Life of $1.8 million in 1999, pursuant to a reinsurance agreement for
annuity products between Investors-NA and Family Life Insurance Company.
Merger of Insurance Subsidiaries. Investors-NA redomesticated from Pennsylvania
to Washington in December of 1992. Investors-CA merged into Investors-NA on
December 31, 1992. Standard Life merged into Investors-NA on June 29, 1993. The
mergers have achieved cost savings, such as reduced auditing expenses involved
in auditing one combined company; the savings of expenses and time resulting
from the combined company being examined by one state insurance department
(Washington), rather than three (California, Pennsylvania and Mississippi); the
reduction in the number of tax returns and other annual filings with state
insurance departments; and smaller annual fees to do business and reduced
retaliatory premium taxes in most states.
In December, 1997, ILIC transferred its domicile from New Jersey to Indiana.
Following completion of the redomestication, ILIC merged with Investors-Indiana,
with ILIC as the surviving entity in the merger process. Immediately after the
merger, ILIC changed its name to Investors Life Insurance Company of Indiana. As
used hereinafter, the phrase "Investors-IN" shall be used to refer to the merged
entities. As a result of the merger, Investors-IN is licensed in 47 states and
the District of Columbia. As of December 31, 1999, it had assets of $ 176.4
million and capital and surplus of $23 million.
ILCO's management believes that these acquisitions and consolidations have
caused a reduction in expense and have further strengthened the financial
condition of the combined companies.
Investment of Assets
The assets held by Family Life and ILCO's life insurance subsidiaries must
comply with applicable state insurance laws and regulations pertaining to life
insurance companies. The investment portfolios of Family Life and ILCO's life
insurance subsidiaries are tailored by their managements to reflect the nature
of the insurance obligations, business needs, regulatory requirements and tax
considerations relating to the underlying insurance business with respect to
such assets. This is particularly the case with respect to interest-sensitive
life insurance products, where the investment emphasis is to obtain a targeted
margin of profit over the rate of interest credited to policyholders, while
endeavoring to minimize the portfolio's exposure to changing interest rates. To
reduce the exposure to such rate changes, portfolio investments are selected so
that diversity, maturity and liquidity factors approximate the duration of
associated policyholder liabilities.
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, 1999, only 2.2% of ILCO's total assets were
invested in mortgage loans or real estate. Non-affiliated corporate debt
securities that were non-investment grade represented 0.1% of ILCO's total
assets at December 31, 1999. ILCO had
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investments in debt securities of affiliated companies aggregating approximately
$41.5 million as of December 31, 1999. Family Life does not have investments in
mortgage loans, real estate, non- investment grade debt securities or
affiliates' debt securities.
The investments of Family Life and ILCO's insurance subsidiaries in
mortgage-backed securities included collateralized mortgage obligations ("CMOs")
of $22.1 million and $178.9 million, respectively, and mortgage-backed
pass-through securities of $5.4 million and $29.1 million, respectively, at
December 31, 1999. Mortgage-backed pass-through securities, sequential CMO's and
support bonds, which comprised approximately 43.9% of the book value of FIC's
mortgage- backed securities and 52.0% of the book value of ILCO's
mortgage-backed securities at December 31, 1999, 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,
1999, PAC and TAC instruments and accretion directed and scheduled bonds
represented approximately 56.1% of the book value of FIC's mortgage-backed
securities and approximately 48.0% of the book value of ILCO's mortgage-backed
securities. Sequential and support classes represented approximately 24.1% of
the book value of FIC's mortgage-backed securities and approximately 38.0% of
the book value of ILCO's mortgage-backed securities at December 31, 1999. In
addition, FIC and ILCO limit the risk of prepayment of CMOs by not paying a
premium for any CMOs. ILCO and FIC do not invest in mortgage-backed securities
with increased prepayment risk, such as interest-only stripped pass-through
securities and inverse floater bonds. Neither FIC nor ILCO had any z-accrual
bonds as of December 31, 1999. 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. Neither FIC nor ILCO made additional
investments in CMOs during 1999. For the year 2000, the investment objectives of
FIC and ILCO include the making of selected investments in CMOs.
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, 1999, none of the mortgage loans
held by ILCO had defaulted as to principal or interest for more than 90 days,
and none of the ILCO's mortgage loans were in foreclosure. During 1999, ILCO
wrote off the value of approximately $81,000 of principal and interest on
mortgage loans which had defaulted as to principal and interest payment for more
than 90 days.
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
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private placements, partnerships and bank participations. These categories
accounted for approximately 0.3% of ILCO's invested assets and none of FIC's
invested assets at December 31, 1999.
A subsidiary of ILCO, Investors-NA, was the owner and developer of Bridgepoint
Square Offices. Following the completion of the construction, the project
consisted of four office buildings, with a total rentable space of approximately
364,000 square feet, and two parking garages. Investors-NA purchased the 20 acre
tract of land for this complex in January, 1995. At that time, the tract
included one completed and fully leased office building, an adjacent parking
garage, and sites for three more office buildings and another parking garage.
Investors-NA completed construction of the three remaining office buildings and
parking garage in 1997. See Item 2. Properties.
In May, 1996, Family Life purchased a 7.1 acre tract adjacent to the original
Bridgepoint Square tract. This second tract contained one building site and one
garage site. In January, 1997, Family Life began construction on a four-story
office building, with rentable space of approximately 76,793 square feet, and
the parking garage, with 350 parking spaces. In May, 1997, the entire rentable
space in the building was leased to a major tenant in the technology business.
Construction of the parking garage and the building shell was completed in
October, 1997.
In November, 1997, Investors-NA and Family Life entered into a sale agreement
with an independent third party for the sale of their respective interests in
Bridgepoint Square Offices. The transaction, which closed on December 5,1997,
was for an aggregate price of $78 million. The sale resulted in a net pre-tax
profit to Investors-NA of approximately $14.0 million, and a net pre-tax profit
to Family Life of approximately $4.5 million. See Item 2. Properties.
In October, 1998, Investors-NA purchased 47.995 acres of land in Austin, Texas
for the development of its River Place Pointe project. The purchase price for
the land was $8.1 million. Prior to the closing of the transaction, Investors-NA
obtained a Site Development Permit for the tracts from the City of Austin. The
Site Development Permit allows for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. Development of the initial phase of the project commenced during
the first quarter of 1999. When completed, the first phase will consist of two
office buildings, a parking garage and the infrastructure for the entire
project. FIC and ILCO plan to move their corporate offices to approximately
70,182 square feet of office space in one of the two buildings currently under
construction. The move is planned to take place during the third quarter of
2000. Investors-NA plans to commence development of the additional stages of the
project following completion and leasing of the first phase.
FIC and ILCO have established and staffed an investment department, which
manages portfolio investments and investment accounting functions for their life
insurance subsidiaries.
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Agency Operations
The products of FIC's and ILCO's insurance subsidiaries are marketed and sold
through two divisions:
A. Investors Life Distribution System
The Investors Life Distribution System sells a wide range of life insurance and
annuity 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 Senior 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 life insurance and annuity
products. The products are sold primarily to middle-income customers of client
financial institutions, usually through a list of borrowers provided by the
financial institution. Family Life works closely with the financial institutions
to maintain and insure that Family Life lead systems, which had been built from
the loan portfolios of each active financial institution, operate at a level
that favors both parties. Family Life agents make courtesy calls to borrowers of
the financial institutions which are active on the Family Life lead system to
offer the borrower the opportunity to purchase mortgage protection insurance
(term or universal life insurance products).
In advance of the passage of the Financial Services Modernization Act (the
"Act") in 1999 (for a discussion of the provisions of this new law, refer to the
section entitled "Regulation"), Family Life established a task force to develop
new lead sources for its agents. Since Family Life uses leads from financial
institutions, restrictions under the Act on the type of information which a
financial institution may provide to Family Life may have an adverse impact on
its traditional sales methods. Although Family Life continues to focus on its
traditional sales approach, it has established a supplemental leads program,
whereby third parties supply leads obtained from public records (e.g. county
loan records). Family Life has also developed a strategy to work with lenders as
"setup only", whereby the mortgage institution does not furnish leads, but will
collect and remit premiums. Finally, Family Life is developing new sales
methods, including direct mailings and direct telephone leads. The Act provides
that various Federal agencies are to adopt regulations implementing the purposes
of the Act. Since such regulations have not been finalized, Family Life is not
in a position to determine whether the final regulations will have an impact on
the ability of financial institutions to supply Family Life with lead
information.
Beginning in 1998, Family Life expanded its distribution system, to recruit
agents whose product portfolio includes a broader range of life and annuity
products, in addition to the traditional mortgage protection life insurance
products offered by Family Life. While Family Life's exclusive sales force
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consists of agents who are contracted exclusively with the company, agents who
participate in the expanded distribution system may have selling relationships
with other insurers in addition to Family Life. During 1999, Family Life
recruited 438 agents for this marketing effort.
In October, 1999, a marketing subsidiary of Investors Life entered into a
marketing agreement with a third- party life insurance company. The marketing
agreement makes available to appointed agents of the Investors Life and Family
Life a portfolio of term life insurance products not currently being offer by
those companies. The underwriting risk on the products sold under this
arrangement is assumed by the third-party insurer. The Company's appointed
agents receives commissions on the sale of these products and the marketing
subsidiary receives an override commission.
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 22 Regional Vice Presidents. Currently, the Family
Life distribution system consists of 110 District Sales Managers and 497 active
career agents.
Data Processing
The data processing needs of FIC's and ILCO's insurance subsidiaries are
provided to ILCO's and FIC's Austin, Texas and Seattle, Washington facilities by
FIC Computer Services, Inc., a subsidiary of FIC. See Item 13.- Certain
Relationships and Related Transactions with Management.
As the provider of data processing for the Company and its subsidiaries and
affiliates, FIC Computer Services, Inc. utilizes a centralized computer system
to process policyholder records and financial information. In addition, the
Company uses non-centralized computer terminals in connection with its
operations. In advance of the millennium date change, the Company recognized
that the software programs used in connection with these systems could be
affected by what has been referred to as the "Y2K date problem". This refers to
the limitations of the programming code in certain existing software programs to
recognize date sensitive information on and after January 1, 2000.
Beginning in 1997, the Company began an evaluation of its centralized computer
systems and developed a plan to reach Y2K compliance (the "Y2K Plan"). A central
feature of the Y2K Plan was to convert certain of the centralized systems to a
common system which was already in compliance with Y2K requirements. The Company
completed this system conversion during 1999. The converted systems were
extensively tested during the fourth quarter of 1999. The Company did not
experience any material disruptions in its data processing as a result of either
the January 1, 2000 date change or the occurrence of a leap year date in
February, 2000.
The Y2K Plan called for an upgrade of the Family Life's administrative systems
by changing individual lines of computer code in order to modify current
operating software such that it became Y2K compliant. This process included
approximately 29 sub-systems which provide data input to
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the main systems. The administrative systems which were not modified were
converted onto the Company's CK/4 System, a system designed to be Y2K compliant
according to the representations of the vendor.
The systems which administer a substantial number of Family Life policies were
modified rather than converted. The modification of the PMS system
(administering approximately 100,880 policies for Family Life) was completed in
March, 1998. The conversion of the Cypros AP system (administering approximately
22,210 active policies for Family Life) was completed in October of 1999. A
small number of Family Life policies are administered by systems which also
administer policies for ILCO and its subsidiaries. With regard to ILCO and its
subsidiaries, the ALIS system (administering approximately 42,000 active
policies for Investors-NA at the time of conversion) was converted to CK/4 in
January of 1998. The conversion of the Life 70 system (administering
approximately 15,300 active policies for Investors-IN) was completed in May of
1999. The modification of the Lifecomm-B system which is responsible for the
administration of approximately 16,900 active policies assumed after ILCO's
acquisition of State Auto Life was also completed. The conversion of the
Lifecomm-A system, which administers approximately 57,140 active policies for
Investors-NA and 2,000 active policies for Family Life, was completed in
November, 1999.
The cost of implementing and completing the Y2K Plan resulted in an after-tax
expense of approximately $825,000 for the three-year (1997 - 1999) conversion
period.
The Company also faced the risk that one or more of its external suppliers of
goods or services ("third party providers") would not be in a position to
properly interact with the Company due to the inability of such third party
provider to resolve its own Y2K issues. The Company completed an inventory of
its third party provider relationships. In order to assess the Y2K readiness of
such third party providers, the Company developed and forwarded a detailed
questionnaire to such providers. The Company received responses and assurances
of Y2K readiness from all of its mission critical external suppliers, as well as
many of its non-mission critical suppliers.
With respect to non-centralized systems (i.e., desktop computers), the Company
obtained updated software releases and new hardware designed to be Y2K compliant
according to the representations of the vendors. The Company's effort needed to
correct for Y2K problems on such systems was less time intensive than the effort
needed to achieve compliance for its centralized systems. The installation of
such new PC hardware and software was commenced in early 1999 and was completed
in mid-November, 1999.
As part of its Y2K Plan the Company developed a contingency plan in the event
that a major administrative system failed to operate properly due to a Y2K
problem. Under the contingency plan, FIC Computer Services assigned certain
personnel to be members of an emergency response team to resolve Y2K operations
problems. Additionally, the plan provided for insurance policies to be
administered manually if the necessary systems conversions were not completed
prior to January 1, 2000, or subsequent Y2K operations problems should persist.
Since the implementation of the Y2K Plan was successful, the Company did not
need to invoke these contingency plans.
-13-
Competition
There are many life and health insurance companies in the United States. Agents
placing insurance business with Family Life and ILCO's insurance subsidiaries
are compensated on a commission basis. However, some companies pay higher
commissions and charge lower premium rates and many companies have more
substantial resources than Family Life and ILCO's insurance subsidiaries. In
addition, consolidations of insurance and banking institutions, which is
permitted under recently-enacted federal legislation, may adversely affect the
ability of Family Life to expand its customer referral relationships with
mortgage lending and servicing institutions. The principal cost and competitive
factors that affect the ability of Family Life and ILCO's insurance subsidiaries
to sell their insurance products on a profitable basis are: (1) the general
level of premium rates for comparable products; (2) the extent of individual
policyholders services required to service each product category; (3) general
interest rate levels; (4) competitive commission rates and related marketing
costs; (5) legislative and regulatory requirements and restrictions; (6) the
impact of competing insurance and other financial products; and (7) the
condition of the regional and national economies.
Reinsurance and Reserves
In accordance with general practices in the insurance industry, Family Life and
ILCO's insurance subsidiaries limit the maximum net losses that may arise from
large risks by reinsuring with other carriers. Such reinsurance provides for a
portion of the mortality risk to be retained by Family Life and the ILCO
subsidiaries with the excess being ceded to a reinsurer at a premium set forth
in a schedule based upon the age and risk classification of the insured. The
reinsurance treaties provide for allowances that help Family Life and ILCO's
insurance subsidiaries offset the expense of writing new business. Family Life
generally retains the first $200,000 of risk on the life of any one individual.
Investors-IN generally retains the first $60,000 to $100,000 of risk on the life
of any individual, depending on the type of coverage being written. Investors-NA
generally retains the first $250,000 of risk on the life of any individual.
Family Life maintains a bulk reinsurance treaty, under which it reinsured all of
its risks under accidental death benefit policies. The treaty was most recently
renegotiated with the current reinsurer in January, 1997.
As discussed above (see "Principal Products"), in December, 1997, FLIC and
ILCO's life insurance subsidiaries entered into a reinsurance treaty under which
all of the contractual obligations and risks under accident and health and
disability income policies were assumed by a third party reinsurer. In
connection with the transaction, the total amount of net reserves transferred by
the FLIC was $852,688. In addition to the transfer of reserves, FLIC paid the
reinsurer $100,000 in connection with the transaction, which amount was
accounted for as an expense for the year ended December 31, 1997.
In 1995, Family Life (as the ceding company) entered into a reinsurance
agreement with Investors- NA (as the reinsuring company) pertaining to universal
life insurance written by Family Life. The
-14-
reinsurance agreement is on a co-insurance basis and applies to all covered
business with effective dates on and after January 1, 1995. The agreement
applies to only that portion of the face amount of the policy which is less than
$200,000; face amounts of $200,000 or more are reinsured by Family Life with a
third party reinsurer. In 1996, Family Life (as the ceding company) entered into
a reinsurance agreement with Investors-NA (as the reinsuring company),
pertaining to annuity contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996. These reinsurance arrangements
reflect management's plan to develop universal life and annuity business at
Investors-NA, with Family Life concentrating on the writing of term life
insurance products.
Although reinsurance does not eliminate the exposure of FIC's and ILCO's
insurance subsidiaries to losses from risks insured, the net liability of such
subsidiaries will be limited to the portion of the risk retained, provided that
the reinsurers meet their contractual obligations.
ILCO's insurance subsidiaries and Family Life carry reserves on their books to
meet future obligations under their outstanding insurance policies. Such
reserves are believed to be sufficient to meet policy obligations as they mature
and are calculated using assumptions for interest, mortality, expenses and
withdrawals in effect at the time the policies were issued.
Acquisition of Family Life
In June, 1991, FIC purchased Family Life, a Washington based life insurance
corporation, from Merrill Lynch Insurance Group, Inc. ("Merrill Lynch"). The
business of Family Life, as reconstituted for sale, consists principally of the
underwriting and sale of life insurance to mortgage borrowers through lending
institutions.
The consideration for the purchase was $114 million consisting of a cash payment
of $70 million and $44 million of subordinated promissory notes issued by
subsidiaries of FIC to the seller and its affiliates.
To effectuate the transaction, FIC organized two downstream holding companies:
Family Life Corporation ("FLC"), and Family Life Insurance Investment
Corporation ("FLIIC"). FLIIC was organized as a wholly-owned subsidiary of FIC
and, in turn, was issued all of the outstanding shares of FLC. FLC purchased
250,000 shares of common stock, being all of the outstanding shares, of Family
Life from Merrill Lynch for an $84 million cash payment (including $14 million
that had been borrowed by FLIIC from an affiliate of Merrill Lynch) and a $30
million senior subordinated note. Following the purchase of the Family Life
shares by FLC, Family Life issued 250,000 previously unissued shares of its
common stock to FLC for a $2.5 million cash payment and immediately thereafter
redeemed from FLC 250,000 shares of its common stock that had been purchased by
FLC from Merrill Lynch. The consideration paid to FLC by Family Life for said
redeemed shares consisted of $2.5 million cash, a newly issued surplus debenture
(an instrument having certain restrictions on payment for the protection of
policyholders) in the principal amount of $97.5 million and $14 million
principal value of newly issued preferred shares.
-15-
As part of the financing arrangement, FLC entered into a Senior Loan agreement
under which $50 million was provided by a group of banks (the "Family Life
Senior Loan"). The balance of the financing consisted of a $30 million
subordinated note issued by FLC to Merrill Lynch and $14 million borrowed by
FLIIC from an affiliate of Merrill Lynch and evidenced by a subordinated note in
the principal amount of $12 million and a subordinated note in the principal
amount of $2 million (collectively, the "Merrill Lynch Subordinated Loans") and
$25 million lent by two insurance company subsidiaries of ILCO (the "Investors
Life Subordinated Loans"). The latter amount was represented by a $22.5 million
loan from Investors-NA to FLC and a $2.5 million loan provided directly to FIC
by Investors-CA. In addition to the interest provided under the Investors Life
Subordinated Loans, Investors-NA and Investors-CA were granted by FIC
non-transferable options to purchase, in amounts proportionate to their
respective loans, up to a total of 9.9 percent of shares of FIC common stock at
a price of $10.50 per share, equivalent to the then current market price,
subject to adjustment to prevent dilution. The initial terms of the option
provided for their expiration on June 12, 1998, if not previously exercised. In
connection with the 1996 amendments to the $34.5 million subordinated loans
obtained from Investors-NA, the expiration date of the options was extended to
September 12, 2006.
Of the total $119 million of cash borrowed and notes issued by FIC and its
subsidiaries for purposes of the transaction, $114 million constituted the
purchase price for Family Life and $5 million was used to pay transaction costs,
for working capital and for other related purposes. In connection with the
several loans effected for purposes of the transaction, various creditors
priorities and normal borrower requirements and restrictions were established
and FIC issued its direct guaranty of the respective loans, subject to certain
priorities, to the various lending banks, Merrill Lynch and its affiliates, and
Investors-NA and Investors-CA. The outstanding shares of common stock of Family
Life were also pledged as collateral to the bank lenders and, upon repayment of
the bank loan, to Merrill Lynch. The transaction was structured to conform to
the requirements of Section 338(h)(10) of the Internal Revenue Code.
On July 30, 1993, the Merrill Lynch Subordinated Loans were prepaid. $38 million
plus accrued interest was paid to retire the indebtedness, which had a principal
balance of approximately $50 million on July 30, 1993. The primary source of the
funds used to prepay the Merrill Lynch Subordinated Loans was new subordinated
loans totaling $34.5 million that were obtained from Investors-NA. See "The
Family Life Refinancing."
Family Life Senior and Subordinated Loans
Senior Loan. The Senior Loan obligations of FLC were completely paid off on
April 17, 1996. During the period that the Senior Loan was in effect, it was a
secured and guaranteed five year term loan in the initial principal amount of
$50 million.
Upon the retirement of the Senior Loan, certain of its provisions were
automatically incorporated into the Investors Life Subordinated Loans which are
described in the following section. Those
-16-
provisions include specified events of default, including, but not limited to,
failure to pay principal, interest, commitment fees or other amounts payable
when due, failure to maintain certain financial covenants, violation of
covenants (including covenants with respect to the maintenance of a minimum net
worth), material misrepresentations, defaults under other indebtedness, the loss
of any license of an insurance subsidiary of FLC which would have a material
adverse effect on FLC, defaults under the FIC guaranty agreement, a fine in an
amount in excess of $100,000 imposed upon any insurance subsidiary of FLC by any
state insurance regulatory agency, changes in ownership or control of FIC by its
controlling person, Roy F. Mitte, or in ILCO by FIC and the occurrence of
certain events of bankruptcy. In addition, the security interests furnished to
the lenders under the Senior Loan were transferred to Investors-NA. The security
interests include all of the issued and outstanding shares of preferred stock
and common stock of FLC and Family Life and the $97.5 million surplus debenture
of Family Life.
Investors Life Subordinated Loans. The $22.5 million subordinated senior note
issued by FLC to Investors-NA was originally scheduled to mature on June 12,
1998, with principal payments in four equal semi-annual principal installments
of $5,625,000 each on December 12, 1996, June 12, 1997, December 12, 1997 and
June 12, 1998. Interest is payable semi-annually, at the rate of 11% per annum.
Effective as of June 12, 1996, the note was amended to provide for twenty
quarterly principal payments, in the amount of $1,125,000 each, to commence on
December 12, 1996. The final quarterly principal payment is due on September 12,
2001. The interest rate on the note remains at 11%.
The $2.5 million subordinated note issued by FIC to Investors-CA initially
provided for interest, payable semi-annually, at the rate of 12% per annum, and
its principal was due and payable in full at maturity on June 12, 1998 (the "FIC
Note"). As a result of the merger of Investors-CA into Investors-NA, the FIC
Note is now owned by Investors-NA. Prior to June 12, 1996, accrued interest on
the FIC Note was paid by delivery of additional notes of FIC having terms
identical to such original note, including the payment of interest (the "PIK
Notes"). Interest payable on and after June 12, 1996 on all of the FIC Note is
to be paid in cash. Effective as of June 12, 1996, the FIC Note was amended to
provide that the principal balance of the note is to be repaid in twenty
quarterly installments of $125,000 each, commencing December 12, 1996 with the
final payment due on September 12, 2001. With respect to the PIK Notes, the
amendment provided that the principal balance of the notes ($1,977,119) is to be
paid in twenty quarterly principal payments, in the amount of $98,855.95 each,
commencing December 12, 1996 with the final payment due on September 12, 2001.
The interest rate on both the FIC Note and the PIK Notes remained at 12%.
The obligors are allowed to prepay the Investors Life Subordinated Loans, in
whole or in part, without premium or penalty. During the time that the Senior
Loan was outstanding, the Investors Life Subordinated Loans were subordinated to
the Senior Loan and constitute a second lien on the pledged collateral subject
to the first lien of the Senior Loan. Repayment of FLC's $22.5 million note is
also guaranteed by FIC.
The Investors Life Subordinated Loan documents specify events of default,
including, but not limited to, failure to pay principal, interest or other
amounts payable with respect to the Investors Life
-17-
Subordinated Loan documents when due, violation of covenants in the Investors
Life Subordinated Loan documents (including covenants with respect to the
maintenance of a minimum net worth), material misrepresentations, defaults under
other indebtedness, and the occurrence of certain events of bankruptcy.
The Investors Life Subordinated Loan documents also contain various specified
negative, affirmative and financial covenants to be performed or observed by
FLC, FIC and their subsidiaries. During the period the Senior Loan was
outstanding, the covenants in effect under the Investors Life Subordinated Loan
documents were less restrictive than the covenants under the Senior Loan
documents but become generally equivalent to the Senior Loan restrictions upon
the termination of the Senior Loan.
On July 30, 1993, Investors-NA loaned $34.5 million to FLC and FLIIC in the form
of subordinated notes in connection with the prepayment of the Merrill Lynch
Subordinated Loans. See "The Family Life Refinancing."
As of December 31, 1999 the outstanding principal balance of the Investors Life
Subordinated Loans, including the loans made by Investors-NA in 1993 was $41.50
million.
Options. In addition to the interest provided under the Investors Life
Subordinated Loans, Investors-NA and Investors-CA were granted by FIC
non-transferable options to purchase, in amounts proportionate to their
respective loans, up to a total of 9.9 percent of shares of FIC common stock at
a price of $2.10 per share (as adjusted to reflect the five-for-one stock split
in November, 1996), equivalent to the then current market price, subject to
adjustment to prevent dilution. The initial terms of the option provided for
their expiration on June 12, 1998, if not previously exercised. In connection
with the 1996 amendments to the $34.5 million subordinated loans obtained from
Investors-NA, the expiration date of the options was extended to September 12,
2006.
The Family Life Refinancing. In July, 1993, the Merrill Lynch Subordinated Loans
were prepaid. $38 million plus accrued interest was paid to retire the
indebtedness, which had a principal balance of approximately $50 million on July
30, 1993.
The primary source of the funds used to prepay the Merrill Lynch Subordinated
Loans was new subordinated loans totaling $34.5 million that were obtained from
Investors-NA. Prior to the 1996 amendments described below, the principal amount
of the new subordinated debt was payable in four equal annual installments in
2000, 2001, 2002 and 2003. The interest rate is 9%. The other terms of the 1993
notes are substantially the same as those of the $22.5 million subordinated loan
that Investors-NA had previously made to FLC and that continue to be
outstanding.
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%.
-18-
As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC
and FLIIC were modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the note remains at
9%, (c) the $4.5 million note was amended to provide for forty quarterly
principal payments, in the amount of $24,531 each for the period December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the final
quarterly principal payment is due on September 12, 2006; the interest rate on
the note remains at 9%, (d) the $2.5 million note was amended to provide that
the principal balance of the note is to be repaid in twenty quarterly
installments of $125,000 each, commencing December 12, 1996 with the final
payment due on September 12, 2001; the rate of interest remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in kind of interest
due under the terms of the $2.5 million note prior to June 12, 1996, was amended
to provide that the principal balance of the note, in the amount of $1,977,119,
is to be paid in twenty quarterly principal payments, in the amount of
$98,855.95 each, to commence December 12, 1996 with the final payment due on
September 12, 2001; the interest rate on the note remains at 12%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
ILCO's Senior Loan
ILCO's Senior Loan was fully repaid as of September 30, 1998. During the period
that the ILCO Senior Loan was outstanding, FIC guaranteed obligations under the
loan documents. The Senior Loan of ILCO was originally arranged in connection
with the 1988 acquisition of Investors-NA and Investors-CA. In January, 1993,
ILCO refinanced its Senior Loan. That transaction was done in connection with
the prepayment of the subordinated indebtedness and the purchase of warrants
which had been issued as part of the financing of the 1988 acquisitions. The
terms of the amended and restated credit facility were substantially the same as
the terms and provisions of the 1988 Senior Loan. The maturity date, which had
been December 31, 1996, was extended to July 1, 1998 for the Senior Loan. The
average interest rate paid by ILCO on its Senior Loan was approximately 7.68%
during 1997 and 7.63% during 1998.
-19-
In February, 1995, ILCO borrowed an additional $15 million under the Senior Loan
to help finance the acquisition of Meridian Life Insurance Company, and the
maturity date of the Senior Loan was further extended to July 1, 1999. As of
December 31, 1995, the outstanding principal balance of ILCO's Senior Loan
obligations was $59.4 million. In January, 1996, ILCO made a scheduled payment
of $4.5 million under its Senior Loan. In March, 1996, ILCO made the scheduled
payments for April 1st and July 1st, totaling $9 million. At that same time,
ILCO made a payment of $941,000, an additional payment under the terms of the
loan applied to the principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made, which resulted in advancing the
scheduled payoff date of the Senior Loan to April 1, 1998. In July, 1996, ILCO
made the principal payment for October 1st ($4.5 million), plus an optional
principal payment of $0.5 million. In connection with ILCO's acquisition of
State Auto Life Insurance Company in July, 1997, ILCO's Senior Loan agreement
was modified to extend the maturity date to October 1, 1998.
As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
Regulation
General. 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 Investors-IN are domiciled in the states of Washington and
Indiana, respectively. In December, 1992, Investors-NA redomesticated from
Pennsylvania to Washington, and Investors-CA merged into Investors-NA. In June,
1993, Standard Life merged into Investors-NA. Prior to December, 1997,
Investors-IN was domiciled in the State of New Jersey. In December, 1997,
Investors-IN transferred its domicile to the State of Indiana.
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.
-20-
Privacy Legislation. In November 12, 1999, the Financial Services Modernization
Act (the "Act") was signed into law, to take effect on March 12, 2000. In
general, the Act provides that financial institutions have certain obligations
with respect to the maintenance of the privacy of customer information, so as to
insure the security and confidentiality of customer records and information, to
protect against any anticipated threats or hazards to the security or integrity
of such records and to protect against unauthorized access to or use of such
records or information which could result in substantial harm or inconvenience
to any customer. In addition, the Act introduces new restrictions on disclosure
of nonpublic personal information to third party institutions seeking to utilize
such information in connection with the sale of products or services. The
restrictions include a notice requirement, an opt out provision and limitations
on the permissible recipients of nonpublic information and account numbers of
customers. The notice requirements call for financial institutions to maintain
the confidentiality all nonpublic personal customer information. However, a
financial institution may disseminate certain types of information pertaining to
a customer to nonaffiliated third parties if the institution provides clear and
conspicuous disclosure of the institution's privacy policy and the customer
authorizes the release of certain information to third parties. Where the
customer permits the release of information, the Act restricts the disclosure of
information that is non-public in nature. The Act does not preclude the release
of information which can be obtained from public sources, such as the internet.
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.
-21-
Calculations using the NAIC formula and the statutory financial statements of
Family Life and ILCO's insurance subsidiaries as of December 31, 1999 indicate
that the Total Adjusted Capital of each of FIC's and ILCO's insurance
subsidiaries is above 630% 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. For the year ended
December 31, 1999, Family Life and ILCO's insurance subsidiaries received
credits on their guaranty fund assessment returns, in the amount of $45,603 and
$13,478, respectively. Those amounts are net of the amounts that can be offset
against future premium taxes and, in the case of Family Life, the amount is also
net of the amount that can be recovered from Merrill Lynch pursuant to the Stock
Purchase Agreement between FIC and Merrill Lynch. See "Acquisition of Family
Life." The likelihood and amount of any other future assessments cannot be
estimated and are beyond the control of FIC and ILCO.
Surplus Debentures and Dividends. The principal sources of cash for FLC to make
payments of principal and interest on the Family Life Senior Loan are payments
under the surplus debenture of Family Life Insurance Company (a
Washington-domiciled insurer) and dividends paid by Family Life. Under current
Washington law, any proposed payment of a dividend or distribution which,
together with dividends or distributions paid during the preceding twelve
months, exceeds the greater of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) statutory net gain from operations for the preceding
calendar year is an "extraordinary dividend" and may not be paid until either it
has been approved, or a 60-day waiting period shall have passed during which it
has not been disapproved, by the Washington Insurance Commissioner. In 1993,
Washington amended its insurance code to retain the above-described "greater of"
standard for dividends, but enacted requirements that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner and that
cash dividends may be paid only from earned surplus. Family Life does not
presently have earned surplus as defined by the regulations adopted by the
Washington Insurance Commissioner and, therefore, is not presently permitted to
pay cash dividends. However, since this law applies only to dividend payments,
the ability of Family Life to make principal and interest payments under the
surplus debenture is not affected.
-22-
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 1997, 1998 and
1999 totaling $11,903,287, $11,564,978 and $10,754,978, 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. During 1997, a change in the
NAIC's AVR procedures resulted in a one-time reduction in the amount of the
reserves held by Family Life, with a corresponding one-time increase in the
amount of surplus, in the amount of $320,000. 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. Beginning in the year 1992, such realized capital gains are
credited to the IMR. 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.
-23-
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, 1997, 1998 and 1999,
the decreases in Family Life's current income tax provisions, utilizing the
effective tax rates, due to this change were $136,000, $89,034 and $78,759,
respectively. The change has a negative tax effect for statutory accounting
purposes when Family Life's premium income increases, but has a positive tax
effect when its premium income decreases.
The Company and Family Life are eligible to file a consolidated federal income
tax return. The Company is considering the tax advantages to be obtained by the
filing of a consolidated return and is currently considering the filing of such
consolidated return for the year 1999.
-24-
Item 2. Properties
The Registrant's headquarters are currently located at Austin Centre, 701
Brazos, Suite 1400, Austin, Texas. A subsidiary of ILCO, 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.
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 sale was consummated on March 29, 1996. A portion of the sale
proceeds equal to the amount that Investors-NA presently had invested in Austin
Centre were retained and reinvested by Investors-NA. The balance of the net
proceeds of the sale were used to reduce ILCO's bank indebtedness by
approximately $15 million.
Following the sale of the Austin Centre, the Company and its affiliates
continued to occupy three floors of the office space, under a lease arrangement.
The current lease, which was entered into in May, 1997, is for a five (5) year
term ending in October, 2002, with options to renew for three successive five
(5) year terms thereafter.
Investors-NA is currently in the process of developing an office complex at a
site in Austin, Texas. The site consists of 47.995 acres. The Site Development
Permit obtained by Investors-NA allows for the construction of seven office
buildings totaling 600,000 square feet, with associated parking, drives and
related improvements. The initial phase of the project ("Phase One") consists of
two office buildings, associated parking and the infrastructure for the entire
project, which is known as River Place Pointe. Construction on Phase One
commenced during the first quarter of 1999. Upon completion of Phase One, the
Company plans to move its corporate headquarters to space in one of the
buildings. The move is currently scheduled for July, 2000. In connection with
the move, Investors-NA (the tenant under the lease of the Austin Centre space)
intends to sub-lease said space.
In January, 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 containing approximately 871 spaces. That phase of the project was
completed in September, 1996. In March, 1996, construction commenced on the
third office building, with approximately 79,000 rentable square feet of office
space and was completed in December, 1996. Construction began on the fourth
building in July, 1996 and was completed in July, 1997. The fourth building
contains approximately 92,459 rentable square feet.
-25-
On May 3, 1996, Family Life purchased a tract of land adjoining the Bridgepoint
Office Square tract for a cash purchase price of $1.3 million. The property
consists of 7.1 acres of land with one office building site and one parking
structure site. Family Life began construction of the fifth building (known as
"Bridgepoint Five") on the new site in January, 1997. In May, 1997, the entire
rentable space (approximately 76,793 rentable square feet) contained in the
building was leased to a major tenant in the technology business. Construction
of the parking garage and the building shell was completed in October, 1997.
On November 24, 1997, Investors-NA and Family Life entered into a contract with
Health and Retirement Properties Trust, a Maryland real estate investment trust
(the "Purchaser") to sell their respective interests in the Bridgepoint Square
Office complex. The aggregate purchase price for the project was $78,000,000.
The transaction closed on December 5, 1997. The purchase price was allocated
approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale of
Bridgepoint Office Square resulted in a net profit to Investors-NA of
approximately $14.0 million ($9.1 million after tax) that is included in ILCO's
fourth quarter earnings for the year 1997. For Family Life, the sale resulted in
a net profit of approximately $4.5 million ($3.2 million after tax) that is
included in FIC's fourth quarter earnings for the year 1997.
Prior to December, 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building which formerly served as the
headquarters of Standard Life Insurance Company (the "Standard Life Building").
The Standard Life Building was owned by Investors-NA. This building is 68 years
old and contains approximately 85,000 square feet (65,000 net rentable square
feet) of office space. On December 29, 1999, Investors-NA donated the Standard
Life Building to the Jackson Redevelopment Authority ("JRA"). Contemporaneously
with the donation of the Standard Life Building, Investors-NA and FIC sold all
of the adjacent parcels they owned to the JRA for a total sale price of
$2,500,000.00, which has been allocated according to the respective ownership
interests of Investors-NA (approximately 59.28%) and FIC (approximately 40.72%).
The donation and sale was made pursuant to the terms of the Donation, Purchase
and Sale Agreement dated July 17, 1998. Investors-NA intends to claim an income
tax deduction on its upcoming tax return for the donation of the Standard Life
Building, which has an appraised value at December 15, 1999 of approximately
$3,050,000.00. The donation and sale transaction referenced above resulted in a
net gain (GAAP basis) of $0.992 million for ILCO and $0.409 million for FIC (or
a combined total of $1.401 million).
Family Life leases its home offices at the Sedgwick James Building, 2101 Fourth
Avenue, in Seattle, Washington. The lease currently covers approximately 7,776
rentable square feet of office space for a term expiring in October, 2001. The
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.
-26-
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 are defendants in certain legal actions related
to the normal business operations of the Company. Management believes that the
resolution of such legal actions will not have a material impact on the
financial statements.
ILCO and Investors-NA are defendants in a lawsuit which was filed in October,
1996, in Travis County, Texas. CIGNA Corporation, an unrelated company, is also
a named defendant in the lawsuit. The named plaintiffs in the suit (a husband
and wife), allege that the universal life insurance policies sold to them by INA
Life Insurance Company (a company which was merged into Investors-NA in 1992)
utilized unfair sales practices. The named plaintiffs seek reformation of the
life insurance contracts and an unspecified amount of damages. The named
plaintiffs also seek a class action as to similarly situated individuals. No
certification of a class has been granted as of the date hereof. ILCO believes
that the suit is without merit and intends to vigorously defend this matter.
In August, 1997, another individual filed a similar action in Travis County,
Texas against the corporate entities identified above. The lawsuit involves the
same type of policy and includes allegations which are substantially identical
to the allegations in the first action. The named plaintiff also seeks class
certification. ILCO believes that the court would consider class certification
with respect to only one of these actions. ILCO also believes that this action
is without merit and intends to vigorously defend this matter.
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, 1999 to a vote of security holders.
-27-
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 1999 and 1998. The quotations
set forth in the table have been adjusted to give retroactive effect to the
five-for-one stock split which was effective November 12, 1996. FIC's NASDAQ
trading symbol is FNIN.
Common Stock
Prices
High Low
1999
First Quarter $ 17.375 $ 12.00
Second Quarter 14.00 7.625
Third Quarter 15.50 8.00
Fourth Quarter 10.750 9.250
1998
First Quarter $ 21.25 $ 16.375
Second Quarter 20.50 17.75
Third Quarter 20.25 12.50
Fourth Quarter 19.50 13.625
B. Holders
As of March 15, 2000 there were approximately 14,998 record holders of FIC
common stock.
C. Dividends
FIC did not pay a dividend during the years 1976 to 1999. On January 18, 2000,
FIC announced that it will pay a cash dividend in the amount of $.18 per share,
payable on April 12, 2000, to shareholders of record on April 5, 2000.
The ability of an insurance holding company, such as FIC, to pay dividends to
its shareholders may be limited by the company's ability to obtain revenue, in
the form of dividends and other payments, from its operating insurance
subsidiary or subsidiaries. The right of Family Life to pay dividends is
restricted by the insurance laws of its domiciliary state. See Item 1. Business
- - Regulation - Surplus Debenture and Dividends. However, FIC does not directly
own Family Life's stock but, instead, indirectly owns that stock through a
downstream holding company, Family Life Corporation ("FLC"). FLC, which holds
all of the stock of Family Life, is restricted from paying dividends on its
common stock by the provisions of the notes from Investors-NA. FIC (as the
successor to the obligations of FLIIC under the provisions of the $4.5 million
subordinated note held by Investors-NA) the immediate parent of FLC and the
directly-owned subsidiary of FIC, is prohibited from paying dividends on its
stock by the provisions of the $4.5 million subordinated note. In order to
provide for the payment of the $.18 per share annual dividend payable on April
12, 2000, FIC requested a waiver from Investors-NA of the above-described
restrictions of the loan agreements. Investors-NA granted the requested waiver,
thereby permitting FIC to make the dividend payment to its shareholders.
The ability of ILCO to pay dividends to FIC and the other shareholders of ILCO
is affected by the receipt of dividends and other payments from its insurance
subsidiaries.
-28-
Item 6. Selected Financial Data: (Registrant and its Consolidated Subsidiaries)
(In thousands, except per share data)
1999 1998 1997 1996 1995
Operating Revenues $ 47,313 $ 53,607 $ 63,343 $ 59,928 $ 61,541
Income before federal
income tax, equity in net
earnings of affiliates 7,013 8,973 13,411 9,791 10,394
Income before equity in net
earnings of affiliates 5,839 6,605 9,870 7,145 7,966
Equity in net earnings of
affiliate, net of tax 3,310 2,613 6,458 9,012 2,051
Net Income $ 9,149 $ 9,218 $ 16,328 $ 16,157 $ 10,017
Common Stock and
Common Stock Equivalents 5,200 5,557 5,589 5,568 5,540
Net income per share
Basic $ 1.81 $ 1.71 $ 3.01 $ 2.98 $ 1.85
Diluted $ 1.76 $ 1.66 $ 2.92 $ 2.90 $ 1.81
Total Assets $294,054 $301,738 $304,324 $287,730 $ 287,678
Long Term Obligations $ 41,497 $ 47,645 $ 53,792 $ 59,940 $ 67,989
-29-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the year ended December 31, 1999, FIC's net income was $9,149,000 (basic
earnings of $1.81 per common share or diluted earnings of $1.76 per common
share) as compared to $9,218,000 (basic earnings of $1.71 per common share or
diluted earnings of $1.66 per common share) for the year ended December 31, 1998
and $16,328,000 (basic earnings of $3.01 per common share or diluted earnings of
$2.92 per common share) for the year ended December 31, 1997. Earnings per share
are stated in accordance with the requirements of Financial Accounting Standard
(FAS) No. 128, which establishes two measures of earnings per share: basic
earnings per share and diluted earnings per share. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share reflect the potential dilution that would occur if securities or other
contracts to issue common stock were converted or exercised.
Results of Operations
Net income from continuing operations (excluding the gain resulting from Family
Life's sale of its interest in Bridgepoint Square Offices in 1997, and ILCO's
sale of its interest in Bridgepoint Square Offices in 1997, as described below)
was $9,149,000 (basic earnings of $1.81 per common share or diluted earnings of
$1.76 per common share) in 1999, as compared to $9,218,000 (basic earnings of
$1.71 per common share or diluted earnings of $1.66 per common share) for the
year ended December 31, 1998 and $9,300,000 (basic earnings of $1.71 per common
share or diluted earnings of $1.66 per common share) for the year ended December
31, 1997.
Net income for the year ended December 31, 1997 includes $3.2 million ($0.57 per
common share) resulting from Family Life's sale of its interest in Bridgepoint
Square Offices. Family Life purchased undeveloped land at the Bridgepoint site
in May, 1996, for a cash purchase price of $1.3 million. The property consists
of 7.1 acres of land with one office building site and one parking structure
site. Family Life began construction of the building (known as "Bridgepoint
Five") in January, 1997. In May, 1997, the entire rentable space (approximately
76,793 rentable square feet) contained in the building was leased to a major
tenant in the technology business. Construction of the parking garage and the
building shell was completed in October, 1997. In November, 1997, Family Life
entered into a contract to sell its interest in the Bridgepoint Square Office
complex. The sale also included the adjacent properties developed by ILCO's
subsidiary, Investors-NA. The aggregate purchase price for the project was $78
million. The transaction closed on December 5, 1997. The purchase price was
allocated approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale
resulted in a net profit to Family Life of approximately $4.5 million ($3.2
million after tax) that is included in FIC's earnings for the year 1997.
FIC's net income is affected by its equity interest in InterContinental Life
Corporation ("ILCO") and ILCO's insurance subsidiaries. Net income for the year
ended December 31, 1997 includes $3.8 million ($0.68 per common share on a
diluted basis) resulting from ILCO's sale of its interest in Bridgepoint Square
Offices.
-30-
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 $8,829,000 at December 31, 1999, as compared to
$12,930,000 at December 31, 1998 and $13,625,000 at December 31, 1997. These
statutory earnings are the source to provide for the repayment of the
indebtedness incurred in connection with the acquisition of Family Life.
The increase in long-term interest rates during 1999, which was related to
general economic conditions, had a negative effect upon the market value of the
fixed maturities available for sale segment of the Company's portfolio. As of
December 31, 1999, the market value of the fixed maturities available for sale
segment was $77.5 million as compared to an amortized value of $78.3 million, or
an unrealized loss $0.8 million. The net of tax effect of this decease has been
recorded as a decrease in shareholders' equity.
For the year ended December 31, 1999, FIC's income from operations, before
federal income tax and equity in net earnings of affiliate, was $7,013,000 (on
revenues of $47,313,000) as compared to $8,973,000 (on revenues of $53,607,000)
for the year 1998 and $13,411,000 (on revenues of $63,343,000) in the year 1997.
Premiums for the year 1999, net of reinsurance ceded, were $33.96 million, as
compared to $38.4 million for the year 1998 and $40.2 million in 1997.
Policyholder benefits and expenses were $13.9 million in 1999, as compared to
$16.3 million in 1998 and $19.9 million in 1997.
Equity in Net Income of InterContinental Life Corporation
General
Prior to the acquisition of Family Life in June of 1991, FIC's primary
involvement in the life insurance business was through its equity interest in
ILCO. For the year 1999, the Company's equity in the net earnings of ILCO, net
of federal income tax, was $3,310,000, as compared to $2,613,000 for the year
1998 and $6,458,000 for the year 1997.
FIC currently owns 3,590,292 shares of ILCO's common stock. In addition, Family
Life currently owns 342,400 shares of ILCO common stock. As a result, FIC
currently owns, directly and indirectly through Family Life, 3,932,692 shares
(approximately 44.5%) of ILCO's common stock.
The increase in long-term interest rates during 1999, which was related to
general economic conditions, had a negative effect upon the market value of the
fixed maturities available for sale segment of ILCO's investment portfolio. As
of December 31, 1999, the market value of the fixed maturities available for
sale segment was $404.2 million as compared to an amortized cost of $411.5
million, or an unrealized loss of $7.3 million. Since FIC owns approximately
44.5% of the common stock of ILCO, such unrealized losses, net of tax, are
reflected in FIC's equity interest in ILCO, and had the effect of decreasing the
reported value of such equity interest by approximately $2.0 million.
-31-
ILCO's results for 1998 include, for the period beginning on June 30, 1998, the
operations of Grinnell Life Insurance Company. Grinnell Life was acquired on
June 30, 1998, through a subsidiary of ILCO, for an adjusted purchase price of
$16.6 million. A portion of the purchase price ($12.37 million) was paid by way
of a dividend to the seller immediately prior to the closing of the transaction;
the balance of the purchase price was paid by ILCO's subsidiary. As part of the
transaction, Grinnell Life was immediately merged with and into that subsidiary,
with that subsidiary being the surviving entity.
Liquidity and Capital Resources of ILCO
ILCO is a holding company whose principal assets consist of the common stock of
Investors-NA and its subsidiary, Investors-IN. ILCO's primary source of funds
consists of payments under the surplus debentures from Investors-NA.
As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
ILCO receives periodic payments of principal and interest from Investors-NA,
pursuant to the terms of the Surplus Debentures. The Surplus Debentures were
originally issued by Standard Life Insurance Company and their terms were
previously approved by the Mississippi Insurance Commissioner. Upon the merger
of Standard Life into Investors-NA, the obligations of the Surplus Debentures
were assumed by Investors-NA. As of December 31, 1999, the outstanding principal
balance of the Surplus Debentures was $0.956 million and $4.94 million,
respectively. The terms of the latter debenture provided for final payment of
the remaining principal on September 30, 1999. In September, 1999, Investors-NA
and ILCO amended the payment schedule to provide for payment of the remaining
balance in four installments, with the final installment being due July 1, 2000.
Since Investors-NA is domiciled in the State of Washington, the provisions of
Washington insurance law apply to 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,
1999, the statutory surplus of Investors-NA was $72.6 million, an amount
substantially in excess of the surplus floor. The funds required by Investors-NA
to meet its obligations to the Company under the terms of the Surplus Debentures
are derived from operating income generated from insurance and investment
operations.
-32-
In addition to the payments under the terms of the Surplus Debentures, ILCO has
received dividends from its life insurance subsidiaries. Washington's insurance
code includes the "greater of" standard for payment of dividends to
shareholders, but has a requirement 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. As of December 31, 1999,
Investors-NA had earned surplus of $51.6 million. Since the 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 for the foreseeable future.
Investors-IN is domiciled in the State of Indiana. The transfer of domicile from
New Jersey to Indiana was effective December 15, 1997. Under the Indiana
insurance code, a domestic insurer may make dividend distributions upon proper
notice to the Department of Insurance, as long as the distribution is reasonable
in relation to adequate levels of policyholder surplus and quality of earnings.
Under Indiana law the dividend must be paid from earned surplus. Extraordinary
dividend approval would be required where a dividend exceeds the greater of 10%
of surplus or the net gain from operations for the prior fiscal year.
Investors-IN had earned surplus of $18.1 million at December 31, 1999.
The Form 10-Ks of ILCO for the years ended December 31, 1999, 1998 and 1997, set
forth the business operations and financial results of ILCO and its life
insurance subsidiaries. Such 10-K reports of ILCO, including the discussion by
ILCO's management under the caption "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" are incorporated herein by
reference.
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the common stock of
Family Life and its equity ownership in ILCO. FIC's primary sources of capital
consists of cash flow from operations of its subsidiaries and the proceeds from
bank and institutional borrowings.
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,
1999, the statutory capital and surplus of Family Life was $26.9 million, an
amount substantially in excess of the surplus floor. During 1999, Family Life
made principal payments of $9.0 million and interest
-33-
payments of $1.8 million to Family Life Corporation under the Surplus Debenture.
As of December 31, 1999, the principal balance of the Surplus Debenture was
$13.9 million. The funds required by Family Life to meet its obligations under
the terms of the Surplus Debenture are generated primarily from premium payments
from policyholders, investment income and the proceeds from the sale and
redemption of portfolio investments.
Washington's insurance code includes the "greater of" standard for dividends but
has requirements that prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and that cash dividends may be paid only from
earned surplus. Family Life does not presently have earned surplus as defined by
the regulations adopted by the Washington Insurance Commissioner and, therefore,
is not permitted to pay cash dividends. However, since the new law applies only
to dividend payments, the ability of Family Life to make principal and interest
payments under the Surplus Debenture is not affected. The Company does not
anticipate that 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.
The sources of funds for Family Life consist of premium payments from
policyholders, investment income and the proceeds from the sale and redemption
of portfolio investments. These funds are applied primarily to provide for the
payment of claims under insurance and annuity policies, operating expenses,
taxes, investments in portfolio securities, shareholder dividends and payments
under the provisions of the Surplus Debenture.
FIC's net cash flow provided by operating activities was $2.6 million for the
year 1999, as compared to $6.0 million in 1998 and $4.2 million in 1997. Net
cash flow used in financing activities was $6.15 million in 1999, as compared to
$13.10 million in 1998 and $6.15 million in 1997.
The guaranty commitments of FIC under the loans incurred in connection with the
acquisition of Family Life (after taking into account the repayments and new
loans which occurred in July, 1993) relate to: (i) the $22.5 million note issued
by Family Life Corporation to Investors Life Insurance Company of North America
and (ii) the $34.5 million loaned by Investors-NA to two subsidiaries of FIC.
Management believes that its cash, cash equivalents and short term investments
are sufficient to meet the needs of its business and to satisfy debt service.
Investments
As of December 31, 1999, the Company's investment assets totaled $105.95
million, as compared to $110.15 million as of December 31, 1998.
The level of short-term investments at the end of 1999 was $24.8 million, as
compared to $27.6 million as of December 31, 1998. The fixed maturities
available for sale portion represents $77.5 million of investment assets as of
December 31, 1999, as compared to $79.4 million at the end of 1998.
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The amortized cost of fixed maturities available for sale as of December 31,
1999 was $78.3 million representing a net unrealized loss of $0.8 million. This
unrealized loss 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, 1999,
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).
Prior to December, 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building known as the Standard Life Building,
which building was owned by Investors- NA. This building is 68 years old and
contains approximately 85,000 square feet (65,000 net rentable square feet) of
office space. On December 29, 1999, Investors-NA donated the Standard Life
Building to the Jackson Redevelopment Authority ("JRA"). Contemporaneously with
the donation of the Standard Life Building, Investors-NA and FIC sold all of the
adjacent parcels they owned to the JRA for a total sale price of $2,500,000.00,
which has been allocated according to the respective ownership interests of
Investors-NA (approximately 59.28%) and FIC (approximately 40.72%). The donation
and sale was made pursuant to the terms of the Donation, Purchase and Sale
Agreement dated July 17, 1998. Investors-NA intends to claim an income tax
deduction on its upcoming tax return for the donation of the Standard Life
Building, which has an appraised value at December 15, 1999 of approximately
$3,050,000.00. The donation and sale transaction referenced above resulted in a
net gain (GAAP basis) of $0.992 million for ILCO and $0.409 million for FIC (or
a combined total of $1.401 million).
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.
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Year 2000 Compliance
The Company and its subsidiaries utilize a centralized computer system to
process policyholder records and financial information. In addition, the Company
uses non-centralized computer terminals in connection with its operations. In
response to the potential operations and policy administration problems caused
by the calendar change on January 1, 2000, the Company evaluated its centralized
computer systems and developed a plan to reach Y2K compliance (the "Year 2000
Plan"). A central feature of the plan was to convert certain of the centralized
systems to a common system which is already in compliance with Y2K requirements.
The Year 2000 Plan called for an upgrade of the Family Life's administrative
systems by changing individual lines of computer code in order to modify current
operating software such that it would become Y2K compliant. This process
included approximately 29 sub-systems which provide data input to the main
systems. The administrative systems which were not modified were converted onto
the Company's CK/4 System, a system designed to be Y2K compliant according to
the representations of the vendor.
The Company completed this systems conversion and testing prior to January 1,
2000. For the year ended December 31, 1999, the Company incurred an after-tax
expense of approximately $283,000 in connection with the Year 2000 Plan, as
compared to an after-tax expense of approximately $289,000 for the year 1998 and
$253,000 for the year 1997.
With respect to non-centralized systems (i.e., desktop computers), the Company
obtained updated software releases and new hardware designed to be Y2K compliant
according to the representations of the vendors. The installation of such new PC
hardware and software was commenced in early 1999 and was completed during the
fourth quarter of 1999.
The Company also faced the risk that one or more of its external suppliers of
goods or services ("third party providers") would not be in a position to
properly interact with the Company due to the inability of such third party
provider to resolve its own Y2K issues. During 1999, the Company completed an
inventory of its third party provider relationships. In order to assess the Y2K
readiness of such third party providers, the Company developed and forwarded a
detailed questionnaire to such providers. As the responses to the questionnaires
were received, the Company evaluated the overall Y2K readiness of its third
party provider relationships. The Company did not experience any material
problems with its third-party vendors which were related to the Year 2000 date
change.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Except for historical factual information set forth in this Management's
Discussion and Analysis, certain statements made in this report are forward
looking and contain information about financial results, economic conditions and
other risks and known uncertainties. The Company cautions the reader that actual
results could differ materially from those anticipated by the Company, depending
upon the eventual outcome of certain factors, including: (1) heightened
competition for new business, (2) significant changes in interest rates and (3)
adverse regulatory changes affecting the business of insurance.
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Accounting Developments
In February, 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," which revises
the standards for computing earnings per share previously prescribed by
Accounting Principles Board Opinion No. 15, "Earnings Per Share." The Statement
establishes two measures of earnings per share: basic earnings per share and
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were converted or exercised. The Statement requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with potential dilutive securities outstanding. The
Statement also requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. The Statement is effective for interim
and annual periods ending after December 15, 1997. Earlier application is not
permitted. However, a company may disclose pro forma earnings per share amounts
that would have resulted if it had applied the Statement in an earlier period.
The Company adopted FAS 128 in its annual financial statements for the year
ended December 31, 1997.
In June, 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a financial statement with the same prominence as other
financial statements. Comprehensive income is defined as net income adjusted for
changes in stockholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. The Company adopted FAS
130 effective January 1, 1998, with reclassification of financial statements for
earlier years.
In June, 1997, the FASB issued FAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments. Generally, FAS No. 131 requires that
financial information be reported on the basis that it is used internally for
evaluating performance. The Company adopted FAS No. 131 effective January 1,
1998 and comparative information for earlier years has been restated. This
statement does not need to be applied to interim financial statements in the
initial year of application. The adoption of FAS No. 131 did not impact upon the
Company's reporting of financial information.
In February, 1998, the FASB issued FAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits", which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS No. 132 does
not change the measurement or recognition of pension or other postretirement
benefit plans. The Company adopted FAS No. 132 effective January 1, 1998, with
the effect of such adoption to be reflected in year-end financial statements.
The adoption of FAS No. 132 did not have a material impact on the Company's
results of operations, liquidity or financial position.
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In December, 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments", which provides guidance on accounting for
insurance-related assessments. The Company adopted SOP 97-3, effective January
1, 1999. Previously issued financial statements were required to be restated.
The adoption of SOP 97-3 did not have a material impact on the Company's results
of operations, liquidity or financial position.
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133 is applicable to financial statements for all
fiscal quarters of fiscal years beginning after June 15, 1999. As the Company
does not have significant investments in derivative financial instruments, the
adoption of FAS 133 is not expected to have a material impact on the Company's
results of operations, liquidity or financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
General
FIC's principal assets are financial instruments, which are subject to market
risks. Market risk is the risk of loss arising from adverse changes in market
rates, principally interest rates on fixed rate investments. For a discussion of
the Company's investment portfolio and the management of that portfolio to
reflect the nature of the underlying insurance obligations of the Company's
insurance subsidiaries, please refer to the sections entitled "Acquisition of
ILCO" and "Investment of Assets" in Item 1 of this report and the information
set forth in Item 7, "Management's Discussion and Analysis of Financial
Condition and Operations - Investments".
The following is a discussion of the Company's primary market risk sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business operations of the Company, such
as the reinsurance recoveries on reinsurance treaties with third party insurers.
The primary market risk to the Company's investment portfolio is interest rate
risk. Since the Company own approximately 44.5% of the common stock of ILCO, the
interest rate risk of ILCO's fixed income portfolio has an effect on the value
of FIC's "investment in affiliate". The Company does not use derivative
financial instruments.
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Interest Rate Risk
a. FIC's Fixed Income Investments
Assuming an immediate increase of 100 basis points in interest rates, the
net hypothetical loss in fair market value related to the financial
instruments segment of the Company's balance sheet is estimated to be $9.7
million at December 31, 1999 and $2.5 million at December 31, 1998. For
purposes of the foregoing estimate, the following categories of the
Company's fixed income investments were taken into account: (i) fixed
maturities, including fixed maturities available for sale and (ii)
short-term investments. The market value of such assets was $102.4 million
at December 31, 1999 and $107.0 million at December 31, 1998.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $27.3 million at
December 31, 1999 and $33.9 million at December 31, 1998. Assuming an
immediate increase of 100 basis points in interest rates, the net
hypothetical loss in the fair market value related to such mortgage- backed
securities is estimated to be $1.9 million at December 31, 1999 and $1.2
million at December 31, 1998.
b. FIC's Investment in Affiliate
The value of FIC's investment in affiliate is affected by the amount of
unrealized gains and losses, net of tax, in the investment portfolio of its
affiliate, ILCO. Assuming an immediate increase of 100 basis points in
interest rates, the net hypothetical loss in value, net of tax, related to
the Company's investment in affiliate is estimated to be $6.3 million at
December 31, 1999 and $4.6 million at December 31, 1998.
The hypothetical effect of the interest rate risk on fair values was estimated
by applying a commonly used model. The model projects the impact of interest
rate changes on a range of factors, including duration and potential prepayment.
-39-
Item 8. Financial Statements and Supplementary Data
The following Financial Statements of the Registrant have been filed as part of
this report:
1. Report of PricewaterhouseCoopers LLP, Independent Accountants, dated March
27, 2000.
2. Consolidated Balance Sheets, as of December 31, 1999 and December 31, 1998.
3. Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997.
4. Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997.
5. Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
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.
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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. Chacosky, were
elected at the 1999 annual shareholders meeting. Mr.Chacosky was appointed as a
director in January, 2000, to fill a vacancy created by an increase in the
number of directors which was approved by the Board of Directors in January,
2000. The data supplied below is based on information provided by the directors,
except to the extent that such data is known to the Registrant.
Name Age Since Director and Other Information
John D. 57 1991 Director of FIC since 1991. Vice President,
Barnett Investment Professionals, Inc. from 1996 to
present. Vice President, Investments of
Prudential Securities from 1983 to 1996.
Charles K. 42 2000 Director and Vice President of FIC and ILCO
Chacosky since January, 2000. Executive Vice
President of FLIC since January, 2000.
Executive Vice President of Investors-NA
and Investors-IN since January, 2000.
Senior Manager of PricewaterhouseCoopers,
LLP from February, 1997 to December, 1999.
Vice President of Germantown Life Insurance
from February, 1995 to January, 1997.
Joseph F. 61 1992 Director of FIC since February 29, 1992.
Crowe Vice President of FIC from February 29,
1992 to January 3, 1997. Vice President of
ILCO from May 1991 to January, 1997.
Director of ILCO from May, 1991 until
September, 1997. Director and Executive
Vice President of Investors-NA and
Investors-IN from June, 1991 to January,
1997. Director and Executive Vice
President of FLIC from June, 1991 to
January, 1997.
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Name Age Since Director and Other Information
Jeffrey H. 47 1995 Director of FIC since May, 1995. Vice
Demgen President of FIC since August, 1996. Vice
President and Director of ILCO since
August, 1996. Director of FLIC since
October, 1992. Executive Vice President of
FLIC since August, 1996. Senior Vice
President of FLIC from October, 1992 to
August, 1996. Executive Vice President and
Director of Investors-NA since August,
1996. Senior Vice President and Director
of Investors-NA from October, 1992 to
June, 1995. Executive Vice President and
Director of Investors-IN since
August, 1996. Senior Vice President of
Investors-IN from October, 1992 to
June, 1995.
Theodore A. 60 1996 Vice President and Director of FIC since
Fleron August, 1996. Vice President and Director
of ILCO since May, 1991. Assistant
Secretary of ILCO since June, 1990. Senior
Vice President, General Counsel, Assistant
Secretary and Director of Investors - NA
and Investors-IN since July, 1992. Senior
Vice President, General Counsel, Director
and Assistant Secretary of FLIC since
August, 1996.
James M. 56 1976 Vice President, Secretary, Treasurer and
Grace Director of FIC since 1976. Vice President
and Treasurer of ILCO since January, 1985.
Executive Vice President, Treasurer and
Director of Investors-IN since 1989.
Executive Vice President and Treasurer of
Investors-NA since 1989. Director,
Executive Vice President and Treasurer of
FLIC since 1991.
Dale E. Mitte 65 1994 Director of FIC since 1994. Senior Vice
President, Chief Underwriter and Director
from January, 1993 to March 5, 1999 of
Investors-NA and Investors-IN. Vice
President and Chief Underwriter from
June, 1991 to March 5, 1999 of FLIC.
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Name Age Since Director and Other Information
Roy F. Mitte 68 1976 Chairman of the Board, President and Chief
Executive Office of FIC since 1976.
Chairman of the Board, President and Chief
Executive Officer of ILCO and Investors-IN
since 1985. Chairman of the Board,
President and Chief Executive Officer of
Investors-NA since December, 1988.
Chairman of ILG Securities Corporation
since December 1988. Chairman of the
Board, President and Chief Executive
Officer of FLIC since June, 1991.
Frank Parker 70 1994 Private investor. Prior to June, 1997,
President of Gateway Tugs, Inc. and Par-Tex
Marine, Inc., both of which are located in
Brownsville, Texas and were engaged in
operating and chartering harbor and
intracoastal tug boats. Director of FIC
since May, 1994.
Eugene E. 57 1992 Vice President and Director of FIC since
Payne 1992. Vice President of ILCO since
December, 1988 and Director since May,
1989. Executive Vice President, Secretary
and Director of Investors-NA since
December, 1988. Executive Vice President
since December, 1988 and Director since
May, 1989 of Investors-IN. Director,
Executive Vice President and Secretary of
FLIC since June, 1991.
Thomas C. 58 1996 Director of FIC since August, 1996.
Richmond Director of ILCO from March, 1994 to
August, 1996. Senior Vice President since
January 1993 of Investors -NA and
Investors-IN.
Jerome H. 63 1998 President and Professor of Chemistry,
Supple Southwest Texas State University since
April, 1989. Director of FIC since 1998.
The incumbent directors, other than Dr. Payne, have been nominated for
submission to vote of the shareholders for reelection at the 2000 annual
shareholders' meeting.
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(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 1999 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 68 Chairman of the Board,
President and Chief
Executive Officer
James M. Grace 56 Vice President and Treasurer
Eugene E. Payne 57 Vice President and Secretary
Jeffrey H. Demgen 47 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.
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(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) Involvement in Certain Legal Proceedings
None.
(g) 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 5s were required, the Company believes that
during the period from January 1, 1999 through December 31, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with, other than with respect to Mr.
Parker, who filed a Form 5 in February, 2000, to report the transfer to him in
February, 1998 of 2,000 shares of the Company's common stock upon the
dissolution of his employer (Par-Tex Marine).
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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 three other persons who were
serving as executive officers of the Company at the end of 1999 and received
cash compensation exceeding $100,000 during 1999:
Annual Compensation
Long Term
Name and Compensation Awards All Other
Principal Stock Options Compensa-
Position Year Salary(1) Bonus(3) Other(2) (Shares) tion
Roy F. Mitte,
Chairman, 1999 $ 503,500 $2,500,000 -0- -0- -0-
President and 1998 503,500 2,500,000 -0- -0- -0-
Chief Executive 1997 503,500 1,500,000 -0- -0- -0-
Officer
James M. 1999 195,000 20,000 -0- -0- -0-
Grace, Vice 1998 195,000 25,000 -0- -0- -0-
President and 1997 195,000 40,000 -0- -0- -0-
Treasurer
Eugene E. 1999 195,000 20,000 -0- -0- -0-
Payne, Vice 1998 195,000 20,000 -0- -0- -0-
President and 1997 195,000 40,000 -0- -0- -0-
Secretary
Jeffrey H. 1999 150,000 20,000 -0- -0- -0-
Demgen, Vice 1998 145,384 15,000 -0- -0- -0-
President 1997 117,884 30,000 -0- -0- -0-
(1) The salaries and bonuses set forth in the table were paid by ILCO, except
that FIC and/or Family Life authorized payment of a portion of Mr. Mitte's
salary in each of 1997, 1998 and 1999. The executive officers of FIC have also
been executive officers of Family Life, the insurance subsidiary of FIC, and
ILCO and its insurance subsidiaries. FIC and/or Family Life reimbursed ILCO (or,
in the case of Mr. Mitte, authorized payment of) the following amounts as FIC's
or Family Life's share of the executive officers' cash compensation and bonus
for 1997, 1998 and 1999 (i) Mr. Mitte: $999,746, $1,111,821 and $1,111,821,
respectively; (ii) Mr. Grace: $68,150, $64,152 and $62,694, respectively; (iii)
Dr. Payne: $68,150 , $61,447 and $61,447, respectively; and (iv) Mr. Demgen:
$66,548, $72,173 and $76,500, respectively.
Mr. Mitte and FIC are parties to an employment agreement, providing for the
employment of Mr. Mitte as Chairman, President and Chief Executive Officer of
the Company. The agreement, which was initially effective February 25, 1982,
provides for five-year terms and for automatic renewals for successive five-year
periods, unless otherwise terminated in accordance with the terms of the
agreement. The agreement provides that the level of compensation will be fixed
each year by agreement, but not less than $120,000 per year. In addition, the
agreement provides that Mr. Mitte is entitled to reimbursement for reasonable
business expenses and to participate in all fringe benefit plans and
arrangements available generally to employees of the Company.
(2) Does not include the value of perquisites and other personal benefits
because the aggregate amount of any such compensation does not exceed the lesser
of $50,000 or 10 percent of the total amount of annual salary and bonus for any
named individual.
(3) The data in this column represents the amount of annual bonus awarded. The
bonuses for Mr. Grace, Dr. Payne and Mr. Demgen for the year 1997 represent
amounts paid in 1997, but include the bonuses awarded with respect to the years
1996 and 1997. Dr. Payne elected to defer the amounts shown for 1997, 1998 and
1999 into the Company's Non-Qualified Deferred Compensation Plan. The Plan was
established in 1997 to permit Mr. Grace and Dr. Payne to defer a portion of
their compensation. Under the provisions of the Plan, contributions are invested
on a money purchase basis and plan benefits are based on the value of the
account at retirement or other distribution. In accordance with applicable tax
law requirements, amounts allocated to the Plan are subject to the claims of
general creditors of the Company.
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Compensation of Directors
Directors who are not officers or employees of the Company are paid a $5,000
annual fee, and are compensated $1,000 for each regular or special meeting of
the Board of Directors which they attend in person.
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, Frank Parker and Jerome H. Supple.
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 15, 2000 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 1,552,206 30.71 %
Family Life Insurance Company
701 Brazos Street
Suite 1400
Austin, Texas 78701 272,000 5.38 %
InterContinental Life
Corporation
701 Brazos
Suite 1400
Austin, Texas 78701 690,161 (1,3) 12.42 % (2)
Investors Life Insurance
Company of North America
701 Brazos
Suite 1400
Austin, Texas 78701 690,161 (1,3) 12.42 % (2)
Heartland Advisors, Inc.
790 North Milwaukee St.
Milwaukee, WI 53202 500,100 9.89 % (4)
-47-
Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109 272,700 5.39% (5)
(1) Of such shares, 145,500 shares are owned by Investors-NA, 44,250 shares are
owned by Investors-IN, and 500,411 shares are issuable upon exercise of an
option held by Investors- NA. Investors-NA is a direct subsidiary of ILCO.
Investors-IN is a direct subsidiary of Investors-NA.
(2) Assumes that outstanding stock options or warrants held by non-affiliated
persons have not been exercised and that outstanding stock options held by
Investors-NA have been exercised.
(3) See Item 1. Business-Acquisition of Family Life for a description of the
options granted to Investors-NA.
(4) As reported to the Company on a Schedule 13(G) filed by Heartland Advisors,
Inc. ("Heartland"). According to the Schedule 13(G), the shares are held
for various investment advisory accounts and the interest of one such
account (Heartland Value Fund, a registered investment company) is more
than 5% of the common stock of FIC. A Schedule 13(G) was filed on January
27, 1998, reporting beneficial ownership of 320,400 shares. A Schedule
13(G)/A was filed on January 21, 1999, reporting beneficial ownership of an
additional 118,100 shares and a Schedule 13(G)/A was filed on January 12,
2000, reporting beneficial ownership of an additional 61,600 shares.
(5) As reported to the Company on a Schedule 13(G) filed on February 14, 2000,
by FMR Corporation, the parent company of Fidelity Management & Research
Company ("Fidelity") and Fidelity Management Trust Company. According to
the Schedule 13(G) filing, Fidelity acts as investment advisor to the
Fidelity Low-Priced Stock Fund, a registered investment company, and the
Fund is the beneficial owner of 268,700 shares of FIC common stock. The
Schedule 13(G) also states that Fidelity Management Trust Company is the
beneficial owner of 4,000 shares of FIC common stock, as a result of its
serving as investment manager of certain institutional accounts.
The following table contains information as of March 15, 2000 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. 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.
-48-
Amount and Nature of Percent of
Name Beneficial Ownership Class
John Barnett 2,000 *
Joseph F. Crowe 1,500 (2) *
Charles K. Chacosky -0- (2)
Jeffrey H. Demgen -0- (2)
Theodore A. Fleron -0-
James M. Grace 7,600 (2) *
Dale E. Mitte 2,000 *
Roy F. Mitte 1,552,206 (1,2) 30.71%
Frank Parker 12,000 *
Eugene E. Payne -0-
Thomas C. Richmond -0-
Jerome H. Supple 200 *
All Executive Officers,
and Directors as
a group (11 persons) 1,577,506 (1,2) 31.21%
* Less than 1%.
(1) As of March 15, 2000, Mr. Mitte, jointly with his wife Joann, owns
1,552,206 common shares of Financial Industries Corporation ("FIC"). The
holdings of Mr. Mitte of FIC's common stock constitutes 30.71% of the
outstanding common stock of the Company. In addition, Mr. Mitte holds the
position of Chairman, President and Chief Executive Officer of ILCO.
(2) No executive officer or director holds any options to acquire FIC common
stock. Messrs. Roy Mitte, Grace, Payne, Demgen and Chacosky are executive
officers and/or directors of ILCO and beneficially owned approximately 46.9
% of the outstanding shares of ILCO common stock as of March 15, 2000.
Since FIC beneficially owns approximately 44.5% of ILCO's 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 690,161 shares of FIC common stock (12.42%
of outstanding shares, assuming the exercise of outstanding stock options
held by an ILCO subsidiary) as of March 15, 2000.
Item 13. Certain Relationships and Related Transactions
For the period January 1, 1999 to December 31, 1999, the Registrant reports the
following information in accordance with the provisions of section 229.404 of
the Regulations of the U.S. Securities and exchange Commission. Management
believes that the transactions described herein were in the ordinary course of
business and on terms as favorable to the Registrant and its subsidiaries as if
the transactions had involved unaffiliated persons or organizations.
-49-
(a) Roy F. Mitte serves as Chairman, President and Chief Executive Officer of
both FIC and ILCO. James M. Grace serves as Vice President, Treasurer and
Director of both companies; Dr. Payne serves as Vice President, Secretary
and Director of both companies; Messrs. Demgen and Fleron serve as Vice
Presidents and Directors of both companies. Mr. Roy Mitte holds beneficial
ownership of 30.71% of the outstanding shares of the Company (see "Security
Ownership of Certain Beneficial Owners").
(b) As part of the financing arrangement for the acquisition of Family Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC,
entered into a Senior Loan agreement under which $50 million was provided
by a group of banks. The balance of the financing consisted of a $30
million subordinated note issued by FLC to Merrill Lynch Insurance Group,
Ins. ("Merrill Lynch") and $14 million borrowed by another subsidiary of
FIC from an affiliate of Merrill Lynch and evidenced by a senior
subordinated note in the principal amount of $12 million and a junior
subordinated note in the principal amount of $2 million and $25 million
lent by two insurance company subsidiaries of ILCO. The latter amount was
represented by a $22.5 million loan from Investors-NA to FLC and a $2.5
million loan provided directly to FIC by Investors-CA. In addition to the
interest provided under those loans, Investors-NA and Investors-CA were
granted by FIC non-transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9% of shares of
FIC's common stock at a price of $10.50 per share ($2.10 per share as
adjusted for the five-for-one stock split in November, 1996), equivalent to
the then current market price, subject to adjustment to prevent dilution.
The original provisions of the options provided for their expiration on
June 12, 1998 if not previously exercised. In connection with the 1996
amendments to the subordinated notes, as described below, the expiration
date of the options were extended to September 12, 2006.
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and
its affiliate was prepaid. The Company paid $38 million plus accrued
interest to retire the indebtedness, which had a principal balance of
approximately $50 million on July 30, 1993. The primary source of the funds
used to prepay the subordinated debt was new subordinated loans totaling
$34.5 million that FLC and another subsidiary of FIC obtained from
Investors-NA. The principal amount of the new subordinated debt is payable
in four equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of the new debt are
substantially the same as those of the $22.5 million subordinated loans
that Investors-NA had previously made to FLC and that continue to be
outstanding.
In June, 1996, the provisions of the notes from Investors-NA to FIC, Family
Life Corporation ("FLC") and Family Life Insurance Investment Company
("FLIIC") were modified as follows: (a) the $22.5 million note was amended
to provide for twenty quarterly principal payments, in the amount of
$1,125,000 each, to commence on December 12, 1996; the final quarterly
principal payment is due on September 12, 2001; the interest rate on the
note remains at 11%, (b) the $30 million note was amended to provide for
forty quarterly principal payments, in the amount of $163,540 each for the
period December 12, 1996 to September 12, 2001; beginning with the
principal payment due on December 12, 2001, the amount of the principal
payment increases to $1,336,458; the final quarterly principal payment is
due
-50-
on September 12, 2006; the interest rate on the note remains at 9%, (c) the
$4.5 million note was amended to provide for forty quarterly principal
payments, in the amount of $24,531 each for the period December 12, 1996 to
September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the
final quarterly principal payment is due on September 12, 2006; the
interest rate on the note remains at 9%, (d) the $2.5 million note was
amended to provide that the principal balance of the note is to be repaid
in twenty quarterly installments of $125,000 each, commencing December 12,
1996 with the final payment due on September 12, 2001; the rate of interest
remains at 12% and (e) the Master PIK note, which was issued to provide for
the payment in kind of interest due under the terms of the $2.5 million
note prior to June 12, 1996, was amended to provide that the principal
balance of the note ($1,977,119) is to be paid in twenty quarterly
principal payments, in the amount of $98,855.95 each, to commence December
12, 1996 with the final payment due on September 12, 2001; the interest
rate on the note remains at 12%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution,
all of the assets and liabilities of FLIIC became the obligations of
FLIIC's sole shareholder (FIC). Accordingly, the obligations under the
provisions of the $4.5 million note described above are now the obligations
of FIC.
(c) The data processing needs of ILCO's and FIC's insurance subsidiaries are
provided to ILCO's and FIC's insurance subsidiaries by FIC Computer
Services, Inc. ("FIC Computer"), a subsidiary of FIC. Under the provisions
of the data processing agreement FIC Computer provides data processing
services to each subsidiary for fees equal to such subsidiary's
proportionate share of FIC Computer's actual costs of providing those
services to all of the subsidiaries. Family Life paid $1,916,350 and ILCO's
insurance subsidiaries paid $2,730,189 to FIC Computer for data processing
services provided during 1999.
(d) In 1995, Family Life entered into a reinsurance agreement with Investors-NA
pertaining to universal life insurance written by Family Life. The
reinsurance agreement is on a co- insurance basis and applies to all
covered business with effective dates on and after January 1, 1995. The
agreement applies to only that portion of the face amount of the policy
which is less than $200,000; face amounts of $200,000 or more are reinsured
by Family Life with a third party reinsurer.
(e) In 1996, Family Life entered into a reinsurance agreement with
Investors-NA, pertaining to annuity contracts written by Family Life. The
agreement applies to contracts written on or after January 1, 1996.
(f) Mr. Crowe retired from active service with the Company in January, 1997 and
served on the ILCO Board until October, 1997; he continues to serve on the
Board of Directors of FIC. Following Mr. Crowe's retirement, the Company
entered into a consulting agreement with him. Under the terms of the
agreement, Mr. Crowe is to be available for periodic consultation on
actuarial matters related to the operations of the life insurance
companies. The agreement provide of a payment of $25,000 per year for a
period of five-years.
-51-
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, 1997, 1998 and 1999 and the Financial
Statements contained therein are hereby incorporated by reference.
The following consolidated financial statements of Financial Industries
Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets, September 31, 1999 and 1998
Consolidated Statements of Income, for
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in
Shareholders' Equity, for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows, for the
years ended December 31, 1999, 1998 and 1997
-52-
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedules of Financial
Industries Corporation and Subsidiaries are included:
Schedule I-Summary of Investments
Other Than Investments in Related Parties
Schedule II - Condensed Financial Statements
of Registrant
Schedule IV - Reinsurance
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.
3. Exhibits filed with this report or incorporated herein by reference are as
listed in the Index to Exhibits on Page Ex-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended December 31, 1999.
-53-
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, 1999 and 1998..............................................F-3
Consolidated Statements of Income, for the
years ended December 31, 1999, 1998 and 1997............................F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1999, 1998 and 1997.............F-7
Consolidated Statements of Cash Flows, for
the years ended December 1999, 1998 and 1997...........................F-10
Notes to Consolidated Financial Statements.............................F-12
(2) The following consolidated financial statements of Financial Industries
Corporation and Subsidiaries are included:
Schedule I - Summary of Investments Other
Than Investments in Related Parties....................................F-40
Schedule II - Condensed Financial Statements of
Registrant.............................................................F-41
Schedule IV - Reinsurance..............................................F-44
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Financial Industries Corporation
In our opinion, the 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 14 (a)
(1) on page F-1 present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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.
PricewaterhouseCoopers LLP
Dallas, Texas
March 27, 2000
F-2
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
(in thousands)
ASSETS
Investments other than investments in affiliate:
Fixed maturities available for sale at
market value (amortized cost of $78,252 and $76,727
at December 31, 1999 and 1998) $ 77,515 $ 79,402
Equity securities at market (cost approximates $11
at December 31, 1999 and 1998) 4 4
Policy loans 3,595 3,155
Short-term investments 24,839 27,589
Total investments 105,953 110,150
Cash and cash equivalents 692 2,601
Investment in affiliate 70,013 70,950
Accrued investment income 1,180 1,209
Agency advances and other receivables 6,885 7,759
Reinsurance receivables 14,848 12,426
Due and deferred premiums 12,392 12,181
Property and equipment, net 1,355 1,758
Deferred policy acquisition costs 52,490 48,510
Present value of future profits of
acquired businesses 23,109 28,294
Other assets 4,758 5,392
Separate account assets 379 508
Total Assets $ 294,054 $ 301,738
The accompanying notes are an integral part of these
consolidated financial statements
F-3
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contract
holder deposit funds:
Future policy benefits $ 59,783 $ 60,069
Contract holder deposit funds 44,681 45,128
Unearned premiums 14 28
Other policy claims and benefits
payable 4,282 4,582
108,760 109,807
Subordinated notes payable to
affiliate 41,497 47,645
Deferred federal income taxes 23,222 23,984
Other liabilities 4,079 4,474
Separate account liabilities 379 508
Total Liabilities 177,937 186,418
Commitments and Contingencies
(See Notes 6, 8, 12, 14)
Shareholders' equity:
Common stock, $.20 par value,
10,000,000 shares authorized;
5,845,300 shares issued,
5,054,661 outstanding in 1999 and 1998 1,169 1,169
Additional paid-in capital 7,225 7,225
Accumulated other comprehensive
income (loss) (2,454) 5,898
Retained earnings 117,552 108,403
123,492 122,695
Common treasury stock, at cost,
790,639 shares in 1999 and 1998 (7,375) (7,375)
Total Shareholders' Equity 116,117 115,320
Total Liabilities and Shareholders' Equity $ 294,054 $ 301,738
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1999 1998 1997
(in thousands)
Revenues:
Premiums $ 33,958 $ 38,358 $ 40,249
Net investment income 6,928 7,808 8,106
Net realized gain on sale of real estate 629 -0- 4,548
Earned insurance charges 4,752 5,971 6,989
Other 1,046 1,470 3,451
47,313 53,607 63,343
Benefits and expenses:
Policyholder benefits and expenses 13,940 16,258 19,905
Interest expense on contract holders
deposit funds 1,903 2,374 2,596
Amortization of present value of future
profits of acquired businesses 5,185 6,143 6,167
Amortization of deferred policy
acquisition costs 5,158 5,174 4,826
Operating expenses 11,740 11,822 12,755
Interest expense 2,374 2,863 3,683
40,300 44,634 49,932
Income before federal income tax and
equity in net earnings of affiliates 7,013 8,973 13,411
Provision for federal income taxes:
Current 335 119 1,348
Deferred 839 2,249 2,193
Income before equity in net earnings
of affiliates 5,839 6,605 9,870
Equity in net earnings of affiliate,
net of tax 3,310 2,613 6,458
Net Income $ 9,149 $ 9,218 $ 16,328
The accompanying notes are an integral part of these
consolidated statements.
F-5
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
Years Ended December 31,
1999 1998 1997
(in thousands)
Net Income Per Share (Note 15)
Basic:
Average weighted shares outstanding 5,055 5,383 5,428
Basic earnings per share $ 1.81 $ 1.71 $ 3.01
Diluted:
Common stock and common stock
equivalents 5,200 5,557 5,589
Diluted earnings per share $ 1.76 $ 1.66 $ 2.92
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Additional
Paid-in
Shares Amount Capital
Balance at December 31, 1996 5,845 $ 1,169 $ 7,225
Comprehensive Income:
Net income
Other Comprehensive Income:
Change in net unrealized
gain on investments
in fixed maturities available
for sale, net of tax
Change in net unrealized appreciation
of equity securities, net of tax
Total Comprehensive Income
Balance at December 31, 1997 5,845 1,169 7,225
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized
gain on investments in
fixed maturities available
for sale, net of tax
Change in net unrealized
depreciation of equity
securities, net of tax
Total Comprehensive Income
Balance at December 31, 1998 5,845 1,169 7,225
Comprehensive Income
Net Income
Other Comprehensive Income:
Change in net unrealized loss on
investments in fixed maturities
available for sale, net of tax
Change in net unrealized appreciation
of equity securities, net of tax
Total Comprehensive Income
Balance at December 31, 1999 5,845 $ 1,169 $ 7,225
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Accumulated Other Comprehensive Income (Loss)
Net Unrealized
Gain (Loss) on
Net Unrealized Investments in Total
Appreciation Fixed Accumulated
(Depreciation) Maturities Other
of Equity Available for Comprehensive
Securities Sale Income (Loss)
Balance at December 31, 1996 $ 25 $ 1,220 $ 1,245
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities
available for sale, net of tax 5,440 5,440
Change in net unrealized
appreciation of equity securities,
net of tax 7 7
Total Comprehensive Income 7 5,440 5,447
Balance at December 31, 1997 32 6,660 6,692
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities
available for sale, net of tax (760) (760)
Change in net unrealized
depreciation of equity securities, net
of tax (34) (34)
Total Comprehensive Income (34) (760) (794)
Balance at December 31, 1998 (2) 5,900 5,898
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized loss on
investments in fixed maturities
available for sale, net of tax (8,354) (8,354)
Change in net unrealized
appreciation of equity securities,
net of tax 2 2
Total Comprehensive Income 2 (8,354) (8,352)
Balance at December 31, 1999 $ 0 $ (2,454) $ (2,454)
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Total
Retained Treasury Shareholders'
Earnings Stock Equity
Balance at December 31, 1996 $ 82,857 $ (422) $ 92,074
Comprehensive Income:
Net Income 16,328 16,328
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities
available for sale, net of tax 5,440
Change in net unrealized appreciation
of equity securities, net of tax 7
Total Comprehensive Income 16,328 -0- 21,775
Balance at December 31, 1997 99,185 (422) 113,849
Comprehensive Income:
Net Income 9,218 9,218
Other Comprehensive Income:
Change in net unrealized gain on investments in
fixed maturities available for sale, net of tax (760)
Change in net unrealized depreciation of equity
securities, net of tax (34)
Total Comprehensive Income 9,218 -0- 8,424
Purchase of treasury stock -0- (6,953) (6,953)
Balance at December 31, 1998 108,403 (7,375) 115,320
Comprehensive Income:
Net Income 9,149 9,149
Other Comprehensive Income:
Change in net unrealized loss
on investments in fixed
maturities available for
sale, net of tax (8,354)
Change in net
unrealized
appreciation of equity
securities, net of tax 2
Total Comprehensive Income 9,149 -0- 797
Balance at December 31, 1999 $ 117,552 $ (7,375) $ 116,117
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1999 1998 1997
(in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 9,149 $ 9,218 $ 16,328
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of present value of future
profits of acquired business 5,185 6,143 6,167
Amortization of deferred policy
acquisition costs 5,158 5,174 4,826
Equity in undistributed earnings of
affiliate (5,654) (4,965) (9,323)
Changes in assets and liabilities:
Decrease (Increase) in accrued
investment income 29 (25) 49
Increase in agency advances and
other receivables (1,548) (2,577) (3,624)
Increase in due premiums (211) (1,095) (435)
Increase in deferred policy acquisition
costs (9,138) (8,562) (8,615)
Decrease (increase) in other assets 634 954 (640)
(Decrease) increase in policy liabilities and
accruals (1,047) 111 3,629
Decrease in other liabilities (395) (406) (6,368)
(Decrease) increase in deferred federal
income taxes (762) 2,353 3,679
Other, net 1,172 (373) (1,482)
Net cash provided by operating activities $ 2,572 $ 5,950 $ 4,191
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year Ended December 31,
1999 1998 1997
(in thousands)
CASH FLOWS FROM INVESTING
ACTIVITIES
Fixed maturities purchased $ (19,557) $ (14,082) $ (4,056)
Proceeds from sales and maturities of
fixed maturities 18,071 16,473 7,998
Net decrease (increase) in short-term 2,750 6,886 (8,860)
investments
Purchase & retirement of property
and equipment 403 (34) 7,075
Net cash provided by investing activities 1,667 9,243 2,157
CASH FLOW FROM FINANCING
ACTIVITIES
Repayment of subordinated notes payable (6,148) (6,147) (6,148)
Purchase of treasury stock. -0- (6,953)
Net cash used in financing activities (6,148) (13,100) (6,148)
Net increase (decrease) in cash (1,909) 2,093 200
Cash and cash equivalents, beginning of 2,601 508 308
year
Cash and cash equivalents, end of year $ 692 $ 2,601 $ 508
Supplemental Cash Flow Disclosures:
Income taxes paid $ 485 $ 1,184 $ 150
Interest paid $ 2,621 $ 2,935 $ 3,677
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Financial Industries Corporation (FIC or the "Company") is principally engaged,
through its subsidiaries, in acquiring and administering existing portfolios of
individual and annuity products. The Company's insurance subsidiary is also
engaged in the business of marketing and underwriting individual life insurance,
disability insurance and annuity products in 49 states and the District of
Columbia. Such products are marketed through an exclusive career agency system.
Principles of Consolidation
The consolidated financial statements include the accounts of FIC and its
wholly-owned subsidiaries at December 31, 1999. The more significant
subsidiaries are: Family Life Corporation (FLC), Family Life Insurance Company
(Family Life), FIC Realty Services, Inc. (FIC Realty) and FIC Property
Management, Inc. (FIC-Property). The Company's approximate 45% 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 will differ from those estimates.
F-12
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
The Company's general investment philosophy is to hold fixed maturity securities
until maturity. However, fixed maturities may be sold prior to their maturity
dates in response to changing market conditions, duration of liabilities,
liquidity factors, interest rate movements and other investment factors.
Accordingly, fixed maturity investments are classified as available for sale and
are carried at market value. Unrealized gains and losses on securities available
for sale are not recognized in earnings but are reported as a separate component
of equity in other accumulated comprehensive income, net of related income
taxes.
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 CMOs. The Company
endeavors to minimize the portfolio's exposure to interest rate changes inherent
in interest-sensitive products by selecting and selling investments so that
diversity, maturity and liquidity factors approximate the duration of related
policyholder liabilities.
Equity securities are carried at market value. Unrealized gains and losses on
equity securities, net of deferred income taxes, if applicable, are reflected
directly in shareholders' equity as a component of other comprehensive income.
Policy loans represent unpaid balances and do not exceed the cash surrender
value of the related policies.
Short-term investments are carried at cost, which approximates market value, and
generally consist of those fixed maturities and other investments with
maturities less than one year from the date of purchase. Securities pledged as
collateral for repurchase agreements are held by the Company's investment
custodian until maturity of the repurchase agreement. Provisions of the
agreement and procedures adopted by the Company ensure that the market value of
the collateral, including accrued interest thereon, is sufficient in the event
of default by the counterparty.
The cost of investments sold is determined on the specific identification basis,
except for stocks, for which the first-in, first-out method is employed. When an
impairment of the value of an investment is considered other than temporary, the
decrease in value is reported in net income as a realized investment loss and a
new cost basis is established.
Cash and Cash Equivalents
Generally, cash includes cash on hand and on deposit in non-interest bearing
accounts. Short term investments with maturities of three months or less at the
time of purchase are reported as cash equivalents.
F-13
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Sale of Real Estate
Prior to December, 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building which formerly served as the
headquarters of Standard Life Insurance Company (the "Standard Life Building").
The Standard Life Building was owned by Investors-NA. This building is 68 years
old and contains approximately 85,000 square feet (65,000 net rentable square
feet) of office space. On December 29, 1999, Investors-NA donated the Standard
Life Building to the Jackson Redevelopment Authority ("JRA"). Contemporaneously
with the donation of the Standard Life Building, Investors-NA and Financial
Industries Corporation ("FIC") sold all of the adjacent parcels they owned to
the JRA for a total sale price of $2,500,000, which has been allocated according
to the respective ownership interests of Investors-NA (approximately 59.28%) and
FIC (approximately 40.72%). The donation and sale was made pursuant to the terms
of the Donation, Purchase and Sale Agreement dated July 17, 1998. Investors-NA
intends to claim an income tax deduction of its upcoming tax return for the
donation of the Standard Life Building, which has an appraised value at December
15, 1999 of approximately $3,050,000. The donation and sale transaction
referenced above resulted in a net gain (GAAP basis) of $992,494 for ILCO and
$408,664 for FIC (or a combined total of $1,401,158).
Net income for 1997 includes $4.5 million (before federal income tax) resulting
from the sale during the fourth quarter of 1997 of the Bridgepoint Square office
complex. The aggregate selling price was $78 million which was allocated
approximately 21.5% to Family Life and 78.5% to Investors Life Insurance Company
of North America (Investors-NA), a subsidiary of ILCO, in accordance with their
respective ownership interests in the Bridgepoint Square office complex. The
sale closed on December 5, 1997.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over
estimated useful lives of 5 to 33 years. Maintenance and repairs are charged to
expense when incurred.
Deferred Policy Acquisition Costs
The cost of acquiring new business, principally first year commissions and
certain expenses of the policy issuance and underwriting departments, which vary
with and are primarily related to the production of new business, have been
deferred to the extent recoverable. Acquisition costs related to mortgage term
life insurance business are deferred and amortized 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.
F-14
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Present Value of Future Profits on Acquired Businesses
The present value of future profits of acquired businesses (See Note 5) is
amortized over the premium paying period of the related policies in proportion
to the ratio of the annual premium revenue to total anticipated premium revenue
applicable to such policies. Interest on the unamortized present value of future
profits is accreted at approximately 8.5% per annum. The fair value of the net
assets acquired exceeded the purchase price and negative goodwill associated
with the purchase has been netted against the calculated amount of present value
of future profits.
Separate Accounts
Separate account assets, carried at market value, and liabilities represent
policyholder funds maintained in accounts having specific investment objectives.
The net investment income, gains and losses of these accounts, less applicable
contract charges, accrue directly to the policyholders. The separate account
business was fully reinsured to Merrill Lynch at the date of sale through an
assumption reinsurance agreement which is pending regulatory approval.
Solvency Laws Assessments
The solvency or guaranty laws of most states in which the Company's insurance
subsidiary do business may require the Company's insurance subsidiary to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These assessments may
be deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength, and in certain instances, may be offset against
future premium taxes. The Company's insurance subsidiary expense for guaranty
fund assessment, from states, which do not allow premium tax offsets, was not
material.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits for mortgage life and annuity insurance
products are computed using the net level premium method or an actuarially
equivalent method. The assumption for future investment yield is 8.5 %.
Assumptions for mortality and withdrawal are based on company experience with
provision for possible adverse deviation.
Contract holder deposit funds are liabilities for universal life and annuity
products. These liabilities consist of deposits received from customers and
accumulated at actual credited interest rates on their fund balances less
charges for expenses and mortality.
F-15
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable represents
management's estimate of ultimate unpaid losses on claims and other
miscellaneous liabilities to policyholders. Estimated unpaid losses on claims
are comprised of losses on claims that have been reported but not yet paid,
including estimates of additional development of initial claims estimates, and
claims that have been incurred but not reported.
The liability for other policy claims and benefits payable is subject to the
impact of changes in claim severity, frequency and other factors. Although there
is considerable variability inherent in such estimates, management believes that
the liability recorded is adequate.
Federal Income Taxes
In February, 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
The Company adopted FAS 109 on a prospective basis effective January 1, 1993.
FAS 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 basis of assets and liabilities using the tax
rates which are expected be in effect when these differences are anticipated to
reverse.
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 universal life and annuity 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 and annuity 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 and
annuity fund values.
Net Income Per Share
Net income per share is calculated based on two methods, basic earnings per
share and diluted earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period.
F-16
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were converted or exercised.
Both methods are presented on the face of the income statement.
New Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share," which revises the standards for computing
earnings per share previously prescribed by Accounting Principles Board ("APB")
Opinion No. 15, "Earnings Per Share." The Statement establishes two measures of
earnings per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were converted or exercised. The Statement requires dual presentation of basic
and diluted earnings per share on the face of the income statement for all
entities with potential dilutive securities outstanding.
The Statement also requires a reconciliation of the numerator and denominator of
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. The Statement is effective for interim
and annual periods ending after December 15, 1997. The Company adopted SFAS No.
128 for the year ended December 31, 1997.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined as net income
adjusted for changes in stockholders' equity resulting from events other than
net income or transactions related to an entity's capital instruments. The
Company has adopted SFAS 130 for the year ended December 31, 1998 and has
restated financial statement presentation for 1997 as required by this
pronouncement.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments. Generally, SFAS 131 requires that
financial information be reported on the basis that is used internally for
evaluating performance. The Company adopted SFAS 131 for the year ended December
31, 1998. As described in Note 1, the Company is principally engaged, through
its subsidiaries, in administering existing portfolios of individual life
insurance and annuity products. The Company's insurance subsidiaries are also
engaged in the business of marketing and underwriting individual life insurance
and annuity products in 49 states and the District of Columbia. Such products
are marketed through an exclusive career agency system. Management considers the
Company's insurance operations to constitute one reportable segment. Premium
revenues for traditional insurance products and earned insurance charges on
universal life and annuity products are presented in the accompanying
consolidated statements of income. No single customer accounts for 10% or more
of the Company's revenue. The Company has no foreign operations.
F-17
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In February, 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which revises current disclosure
requirements for employers' pension and other retiree benefits. SFAS 132 does
not change the measurement or recognition of pension or other postretirement
benefit plans. The Company adopted SFAS 132 for the year ended December 31,
1998, and restated disclosures for 1997 as required by this pronouncement.
In December, 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which provides guidance on accounting for
insurance-related assessments. The Company adopted SOP 97-3 effective January 1,
1999. Previously issued financial statements should not be restated unless the
SOP is adopted prior to the effective date and during an interim period. The
adoption of this SOP did not have a material impact on the Company's financial
statements.
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133 is applicable to financial statements for all
fiscal quarters of fiscal years beginning after June 15, 2000 as amended by FAS
No 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FAS No 133". As the Company does not have significant
investments in derivative financial instruments, the adoption of FAS 133 is not
anticipated to have a material impact on the Company's results of operations,
liquidity or financial position
Reclassification
Certain prior years' amounts have been reclassified to conform with the 1999
presentation.
F-18
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Investments
Fixed Maturities
Investments in fixed maturities by category at December 31, 1999 and 1998,
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 $ 8,938 $ 326 $ 0 $ 9,264
States, municipalities and
political subdivisions 4,972 109 0 5,081
Corporate securities 36,795 25 944 35,876
Mortgage-backed securities 27,547 137 390 27,294
Total fixed maturities available
for sale $ 78,252 $ 597 $ 1,334 $ 77,515
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 16,125 $ 1,014 $ 0 $ 17,139
States, municipalities and
political subdivisions 2,990 107 0 3,097
Corporate securities 24,499 783 4 25,278
Mortgage-backed securities 33,113 778 3 33,888
Total fixed maturities available
for sale $ 76,727 $ 2,682 $ 7 $ 79,402
The amounts of unrealized gains and losses reflected in the balance sheet in
accumulated other comprehensive income have been reduced by estimated deferred
tax expense (benefit) in the amount of $(258,000) and $937,000 in 1999 and 1998,
respectively. The adjustment is made to recognize deferred taxes on the net
unrealized gain (loss). Additional deferred tax expense (benefit) of $(149,000)
and $313,000 in 1999 and 1998, respectively, have been provided with respect to
the Company's portion of ILCO's unrealized appreciation or depreciation in
marketable securities.
The amortized value and market value of fixed maturities at December 31, 1999
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 $ 9,664 $ 9,655
Due after one year through five years 16,065 15,696
Due after five years through ten years 8,579 8,448
Due after ten years 16,397 16,422
Mortgage-backed securities 27,547 27,294
Total fixed maturities available for
sale $ 78,252 $ 77,515
To reduce the exposure to market rate changes, portfolio investments are
selected so that diversity, maturity, and liquidity factors approximate the
duration of associated policyholder liabilities.
Proceeds from maturities of investments in fixed maturities during 1999, 1998
and 1997 were $18,071,000, $16,473,000 and $7,998,000, respectively. There were
gains of $4,739 and losses of $0 in 1999 and gains of $5,916 and losses of
$16,437 in 1998 and gains of $23,000 and losses of $0 in 1997.
F-19
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 1999,
1998 and 1997. The following is a summary of the change in unrealized investment
gains (losses) net of related deferred income taxes which are reflected in
accumulated other comprehensive income for the periods presented:
The unrealized gains and losses include the Company's portion of its percentage
ownership of ILCO. The amounts included in the total below is $(9,440,000),
$(1,044,000) and $6,433,000 for 1999, 1998 and 1997, respectively.
Change in Unrealized Gains
(Losses) on Investments 1999 1998 1997
(in thousands)
Fixed maturities $ (12,852) $ (1,170) $ 8,369
Equity securities 2 (52) 11
(12,850) (1,222) 8,380
Deferred federal income taxes (4,498) (428) 2,933
Net change in unrealized gains
(losses) on investments $ (8,352) $ (794) $ 5,447
The following table sets forth the reclassification adjustments required for the
years ended December 31, 1999, 1998 and 1997:
Reclassification Adjustments 1999 1998 1997
(in thousands)
Unrealized holding gains (losses)
on investments arising
during the period $ (8,357) $ (790) $ 5,432
Reclassification adjustments
for gains included in
net income 5 (4) 15
Unrealized gains (losses) on
investments, net of
reclassification adjustment $ (8,352) $ (794) $ 5,447
F-20
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Net Investment Income
The components of net investment income are summarized as follows:
Year ended December 31,
1999 1998 1997
(in thousands)
Fixed maturities $ 5,221 $ 5,792 $ 5,853
Other, including short-term
investments and policy loans 1,756 2,080 2,336
6,977 7,872 8,189
Investment expenses (49) (64) (83)
Net investment income $ 6,928 $ 7,808 $ 8,106
There were no impairments in the value of investments in 1999, 1998 or 1997,
which were considered other than temporary.
3. Disclosure about Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at December 31,
1999 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $ 77,515 $ 77,515
Policy loans 3,595 3,595
Short-term investments 24,839 24,839
Cash and cash equivalents 692 692
Financial liabilities:
Subordinated notes payable to
affiliate 41,497 41,497
F-21
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Fixed Maturities
Fair values are based on quoted market prices or dealer quotes.
Policy Loans
Policy loans are, generally, issued with coupon rates below market rates and are
considered early payment of the life benefit. As such, the carrying amount of
these financial instruments is a reasonable estimate of their fair value.
Cash and Short-term Investments
The carrying amount of these instruments approximates market value.
Subordinated Notes Payable to Affiliate
The fair value is based on the Company's estimate of current market conditions.
F-22
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investment in InterContinental Life Corporation
The Company carries its investment in ILCO on the equity method of accounting.
At December 31, 1999 excess of cost over net assets acquired of $1,686,000, net
of accumulated amortization of $1,644,000, is included in investment in
affiliate. At December 31, 1998, these amounts were $1,686,000 and $1,544,000,
respectively. Amortization of this excess is reflected in equity in net earnings
of affiliate. ILCO is primarily engaged in the sale and administration of life
insurance products through its insurance subsidiaries, Investors Life Insurance
Company of North America (Investors-NA) and Investors Life Insurance Company of
Indiana (Investors-IN). Summarized financial information for ILCO is set forth
below:
Balance sheet information: 1999 1998
(in thousands)
Investments $ 678,814 $ 702,086
Deferred policy acquisition costs and
present value of future profits 75,429 75,619
Other assets 566,956 572,543
Total Assets $ 1,321,199 $ 1,350,248
Policy liabilities and contract holder
deposit funds $ 675,831 $ 694,351
Other liabilities 493,677 501,662
Total liabilities 1,169,508 1,196,013
Common stock, additional paid-in
capital and retained earnings 155,403 142,664
Accumulated other comprehensive
income (3,712) 11,571
Shareholders' equity 151,691 154,235
Total liabilities and shareholders' equity $ 1,321,199 $ 1,350,248
F-23
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Results of Operations: 1999 1998 1997
(in thousands)
Premium income $ 11,132 $ 10,890 $ 11,031
Net investment income 49,913 54,619 57,740
Gain on sale of real estate 112 -0- 14,630
Earned insurance charges 40,447 41,067 40,853
Benefits and expenses 85,466 91,876 96,081
Net income 12,765 11,119 20,540
Basic earnings per share $ 1.45 $ 1.27 $ 2.37
Diluted earnings per share $ 1.45 $ 1.25 $ 2.35
Total market value basis of the Company's investment in ILCO approximated
$36,377,401 and $39,326,920 at December 31, 1999 and 1998, respectively. FIC
directly or indirectly owns 3,932,692 shares (approximately 45%) of ILCO's
outstanding common stock at December 31, 1999, 1998 and 1997.
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
16, 1998, FIC owned, directly and indirectly through Family Life, approximately
45% of the outstanding shares of ILCO's common stock. Prior to October 1, 1998,
FIC held options to acquire up to 1,702,155 additional shares of ILCO Common
Stock. As a result of the final repayment on ILCO's Senior Loan on September 30,
1998, FIC's options to acquire shares of ILCO's Common Stock expired.
The amount of net realized gains included in net earnings of ILCO is $1,289,000,
$642,000 and $9,623,000, for the years ended December 31, 1999, 1998 and 1997,
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.
F-24
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
An analysis of the present value of future profits follows:
1999 1998
(in thousands)
Balance at beginning of year $ 28,294 $ 34,437
Accretion of interest 2,154 2,667
Amortization during the period (7,339) (8,810)
Present value of future profits at
December 31 $ 23,109 $ 28,294
Anticipated amortization of the present value of future profits net of interest
accretion for each of the next five years is as follows (in thousands):
2000 $ 5,784
2001 $ 4,426
2002 $ 3,158
2003 $ 2,459
2004 $ 1,915
At purchase, the present value of future profits was calculated using a discount
rate of approximately 15%. Interest is accredited on the unamortized portion at
approximately 8.5%.
F-25
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Subordinated Notes Payable
Following is a summary of outstanding debt at December 31:
1999 1998
(in thousands)
Subordinated senior notes payable to
Investors-NA beginning with a
$1,125,000 payment on December 12,
1996 and each subsequent quarter
through September 12, 2001.
Interest is payable on a quarterly
basis at 11% $ 7,875 $ 12,375
Subordinated notes payable to Investors-NA
beginning with a $223,856 payment on
December 12, 1996 and each subsequent
quarter through September 12, 2001.
Interest is payable on a quarterly basis
at 12% 1,567 2,463
Subordinated notes payable to Investors-NA
beginning with a $188,071 payment on
December 12, 1996 and each subsequent
quarter through September 12, 2001, a
payment of $1,536,927 on December 12,
2001 and each subsequent quarter through
June 12, 2006 with a final payment of
$1,536,967 on September 12, 2006. Interest
is payable on a quarterly basis at 9% 32,055 32,807
Total subordinated notes payable $ 41,497 $ 47,645
The obligors are allowed to prepay the Investors-NA Subordinated Loans, in whole
or in part, without premium or penalty. The Investors-NA Subordinated Loans were
subordinated to the Senior Loan and now constitute a lien on the Pledged
Collateral. Repayment of the Investors-NA Subordinated Loans is also guaranteed
by the Company.
Aggregate maturities of the Subordinated Notes Payable are as follows:
(in thousands)
2000 $6,148
2001 6,148
2002 6,148
2003 6,148
2004 6,148
Thereafter 10,757
$41,497
F-26
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Income Taxes
The Company files a consolidated federal income tax return with its non-life
subsidiaries. The Company's life insurance subsidiary files a separate federal
income tax return.
The U.S. federal income tax provision (benefit) charged to continuing operations
was as follows:
1999 1998 1997
(in thousands)
Current $ 335 $ 119 $ 1,348
Deferred 839 2,249 2,193
Total provision for
income tax $ 1,174 $ 2,368 $ 3,541
The provision for income taxes is less than the amount of income tax determined
by applying the U.S. statutory income tax rate of 35% to pre-tax income from
continuing operations as a result of the following differences: 1999 1998 1997
(in thousands)
Income taxes at the statutory rate $ 2,454 $ 3,141 $ 4,694
Increase (decrease) in taxes
resulting from:
Small life insurance company
deduction (608) (238) (499)
Dividends received deduction (526) (586) (649)
Tax rate differential (70) (90) (135)
Non-deductible compensation 17 38 -0-
Other items, net (93) 103 130
Total provision for income taxes $ 1,174 $ 2,368 $ 3,541
Provision has not been made for state and foreign income tax expense since this
expense is minimal. Premium taxes are paid to various states where premium
revenue is earned. Premium taxes are included in the statement of income as
operating expenses.
F-27
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Deferred taxes are recorded for temporary differences between the financial
reporting bases and the federal income tax bases of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
Deferred tax liability: 1999 1998
(in thousands)
Equity in net earnings of affiliate $ 4,815 $ 4,414
Excess pension benefit 436 436
Deferred policy acquisition costs 14,582 13,072
Present value of future profits 7,798 8,221
Guaranty fund assessments 219 388
Deferred and uncollected premium 4,213 4,141
Unrealized (depreciation) appreciation
on marketable securities (406) 1,250
Other taxable temporary differences 4,927 5,314
Total deferred tax liability 36,584 37,236
Deferred tax asset:
Policy reserves 11,397 12,123
Net operating loss carry forward 1,785 957
Alternative minimum tax credit 122 114
Accrued liabilities 58 58
Total deferred tax assets, net 13,362 13,252
Net deferred tax liability $ 23,222 $ 23,984
An additional deferred federal income (asset) liability of $(1,656,000) and
$(97,000) for 1999 and 1998, respectively, have been provided on the unrealized
appreciation (depreciation) of marketable securities and included in the balance
of the deferred tax liability. This increase or decrease in deferred tax
liability has been recorded as reduction or increase to the equity adjustment
due to the net change in unrealized appreciation or depreciation and has not
been reflected in the deferred income tax expense, included in net income from
operations.
F-28
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Family Life is eligible for a special deduction allowed to small life insurance
companies equal to 60 percent of tentative life insurance company taxable
income, subject to certain limitations.
Provision for U.S. income taxes has not been made on a portion of the
undistributed earnings of ILCO from the date of the Company's investment since
the Company expects such earnings to be remitted in the form of dividends. The
Company has provided for the tax on the undistributed earnings of ILCO net of
the dividends received deduction expected to be allowed when such dividends are
paid. The Company expects that additional deferred taxes would be payable on the
undistributed earnings of ILCO if the Company should sell its investment.
8. Reinsurance
Family Life reinsures portions of certain policies it writes, thereby providing
greater diversification of risk and minimizing exposure on larger policies. The
Company's retention on any one individual ranges from $-0- to $200,000 depending
on the risk.
Policy liabilities and contract holder deposit funds are reported in the
consolidated financial statements before considering the effect of reinsurance
ceded. The insurance subsidiary remains liable to the extent the reinsurance
companies are unable to meet their obligation under the reinsurance agreements.
Under the provisions of the purchase agreement between the Company and Merrill
Lynch, certain life insurance companies affiliated with Merrill Lynch agreed to
assume (on an assumption reinsurance basis) certain single premium whole life
and annuity products written by Merrill Lynch's insurance division on Family
Life's paper. The transfer of these reserves, in accordance with the reinsurance
agreement, is subject to certain regulatory approvals.
The amount remaining under this agreement that had not yet been approved for
transfer to Merrill Lynch was $116,070 and $115,524 at December 31, 1999 and
1998, respectively.
F-29
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The amounts in the consolidated financial statements for reinsurance ceded are
as follows:
December 31,
1999 1998 1997
(in thousands)
Future policy benefits $ 14,512 $ 11,950 $ 9,765
Unearned premiums 46 28 90
Other policy claims and benefits
payable 290 448 1,279
$ 14,848 $ 12,426 $ 11,134
For the years ended
1999 1998 1997
(in thousands)
Premiums $ 1,091 $ 1,419 $ 1,112
Policyholder benefits and expenses $ 2,260 $ 2,479 $ 1,697
Estimated amounts recoverable from reinsurers on paid claims were $32,243 and
$4,603 in 1999 and 1998, respectively. These amounts were included in other
receivables in the consolidated financial statements at December 31, 1999 and
1998.
9. Shareholders' Equity
The Company's ability to pay dividends to its shareholders is affected, in part,
by receipt of dividends from Family Life and ILCO.
Family Life is domiciled in the state of Washington. Under current Washington
law any proposed payment of dividends or distribution by the insurance
subsidiary which, together with dividends or distributions paid during the
preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as
of the preceding December 31 or (ii) statutory net gain from operations, is
called an "extraordinary dividend" and may not be paid until either it has been
approved, or a waiting period shall have passed during which it has not been
disapproved, by the insurance commissioner.
Effective July 25, 1993 Washington amended its insurance code to retain the
"greater of" standard but enacted requirements that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner and that
dividends may be paid only from earned surplus. Family Life does not presently
have earned surplus as defined by the regulations adopted by the
F-30
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Washington Insurance Commissioner and, therefore, is not presently permitted to
pay cash dividends.
However, the Company does not directly own its life insurance subsidiary's
stock, but instead indirectly owns that stock through a downstream holding
company, FLC, whose ability to pay dividends to the Company is significantly
limited by some of the subordinated notes referred to in Note 6 during the terms
of those loans. Consolidated net assets FLC aggregated approximately $64,235,000
and $54,514,000 at December 31, 1999 and 1998, respectively.
The ability of ILCO to pay dividends to the Company and the other shareholders
of ILCO is affected by receipt of dividends from its insurance subsidiaries,
which are generally limited by law to the greater of their net income for the
prior year or 10% of capital and surplus.
Capital and surplus of Family Life as reported to insurance regulators and as
determined in accordance with statutory accounting practices prescribed or
permitted by the state of Washington aggregates approximately $26,874,275 and
$30,294,446 at December 31, 1999 and 1998, respectively. Statutory net income
aggregated approximately $6,703,705, $10,473,492 and $13,302,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company employed no permitted statutory accounting practices that
individually or in the aggregate materially affected statutory surplus or
risk-based capital at December 31, 1999 or 1998.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon implementation. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, e.g. deferred income taxes are recorded. The Company has not
estimated the potential effect of the Codification guidance on statutory net
income and statutory capital and surplus. However, the actual effect of adoption
could differ as changes are made to the Codification guidance, prior to its
recommended effective date of January 1, 2001.
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% of the
common shares of FIC. The option price is $2.10 per share (adjusted to reflect
the five-for-one stock split in 1996), equivalent to the then current market
price, subject to adjustment to prevent the effect of dilution. The options
expire at the time of final repayment of each of the respective loans.
F-31
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
c. Effective April 1, 1997, the Family Life pension plan was amended to
provide that the accrual rate for future service is 1.57% of Final Average
Earnings multiplied by Credited Service after March 31, 1997, less .65% of
Final Average Earnings up to Covered Compensation. With respect to service
prior to April 1, 1997, the accrual rate described in paragraph (b), above,
is applicable, with Average Final Earnings taking into account a
participant's earnings subsequent to April 1, 1997.
Average Final Earnings are the highest average Considered Earnings during any
five consecutive years while an active participant. Total Credited Past Service
plus Credited Future Service is limited to 40 years.
F-32
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The pension costs for the plan includes the following components:
1999 1998 1997
(in thousands)
Service cost for benefits earned
during the year $ 52 $ 59 $ 88
Interest cost on projected benefit
obligation 500 452 509
Expected return on plan assets (535) (633) (719)
Pension benefit $ 17 $ (122) $ (122)
The following summarizes the status of the plan at December 31:
1999 1998
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 7,690 $ 6,683
Service cost 52 59
Interest cost 500 452
Benefits paid (1,581) (897)
(Gain)/Loss due to change in assumptions 0 525
(Gain)/Loss due to experience 18 868
Benefit obligation at end of year $ 6,679 $ 7,690
Change in plan assets:
Fair value of plan assets at beginning of year $ 7,721 $ 8,361
Actual return on plan assets 212 495
Benefits paid (1,581) (898)
Fair value of plan assets at end of year $ 6,352 $ 7,958
Funded Status:
Funded status at end of year $ (327) $ 268
Unrecognized actuarial net (gain) loss 2,143 1,564
Prepaid pension expense at end of year $ 1,816 $ 1,832
F-33
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.25%, 7.25% and 7.75%
for the years ended December 31, 1999, 1998 and 1997, respectively.
The assumed long-term rate of compensation increases was 5.0%, 5.0% and 6.0% for
the years ended December 31, 1999, 1998 and 1997, respectively.
The assumed long-term rate of return on plan assets was 8.0% for the years ended
December 31, 1999, 1998 and 1997.
During 1995, the ILCO Employee Stock Ownership Plan and the ILCO Savings and
Investment Plan were amended to allow for the addition of Family Life as a
participating employer, thus allowing Family Life employees to participate in
the plans.
In 1997, the ILCO Savings and Investment Plan was amended to provide for a
matching contribution by participating companies. The match, which is in the
form of shares of ILCO common stock, is equal to 100% of an eligible
participant's elective deferral contributions, as defined in the Plan, not to
exceed 1% of the participant's plan compensation. Allocations are made on a
quarterly basis to the account of participants who have at least 250 hours of
service in that quarter.
Effective May 1, 1998, the 401(k) Plan was amended to provide for the merger of
the ESOP into the 401(k) Plan. In connection with the merger, certain features
under the ESOP were preserved for the benefit of employees previously
participating in the ESOP with regard to all benefits accrued under the ESOP
through the date of merger.
Stock Option Plans
In 1984, the Company's shareholders adopted a qualified stock option plan for
officers and key employees. The aggregate amount of the common shares on which
options may be granted is limited to 200,000 shares. The option price will not
be less than 100% of the fair market price of the optioned shares on the date
the option is granted. As of December 31, 1999, no options had been granted
under this plan.
12. Leases
Family Life occupies office facilities under lease agreements with unrelated
third parties which expire over the next year. Certain office space leases may
be renewed at the option of the Company.
F-34
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Rent expense in 1999, 1998 and 1997 was $591,947, $628,979 and $781,104
respectively. Minimum annual rentals are as follows:
(in thousands)
2000 $ 478
2001 471
2002 320
2003 19
2004 -0-
Thereafte - 0-
Total $ 1,288
13. Related Party Transactions
The obligations of ILCO under the ILCO Senior Loan were guaranteed by FIC. FIC
presently owns 3,932,692 shares of ILCO Common Stock, constituting 44.5% of such
shares outstanding. The current Senior Loan of ILCO was fully repaid on
September 30, 1998. Accordingly FIC's rights under the 1986 option agreement
expired on September 30, 1998.
FIC Property, a subsidiary of FIC, conducted the leasing activities for the
Bridgepoint Square properties previously owned by Investors-NA. In connection
with the December, 1997 sale of Bridgepoint Square Offices by Investors-NA and
Family Life Insurance Company, FIC Realty received a commission in the amount of
$156,000, of which $122,538 was paid by Investors-NA and $33,462 by Family Life.
As part of the financing arrangement for the acquisition of Family Life, a $22.5
million loan was made by Investors-NA to FLC, a subsidiary of FIC, and a $2.5
million loan was made by Investors Life Insurance Company of California
(Investors-CA), which was merged into Investors-NA in 1992, to FIC. In addition
to the interest provided under those loans, Investors- NA and Investors-CA were
granted by FIC non-transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9% of shares of
FIC's common stock at a price of $10.50 per share, equivalent to the then
current market price, subject to adjustment to prevent dilution. As a result of
the FIC's five-for-one stock split, which was effective November 12, 1996, the
option price is currently $2.10 per share. The options originally were to expire
on June 12, 1998 if not previously exercised. In connection with the 1996
amendments to the subordinated notes, as described below, the expiration date of
the options were extended to September 12, 2006.
F-35
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and its
affiliate was prepaid. The Company paid $38 million plus accrued interest to
retire the indebtedness, which had a principal balance of approximately $50
million on July 30, 1993. The primary source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
Family Life Insurance Investment Company ("FLIIC"), another subsidiary of FIC,
obtained from Investors-NA. The principal amount of the new subordinated debt is
payable in four equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of the new debt are
substantially the same as those of the $22.5 million subordinated loans that
Investors-NA had previously made to FLC and that continue to be outstanding.
As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC
and FLIIC were modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the note remains at
9%, (c) the $4.5 million note was amended to provide for forty quarterly
principal payments, in the amount of $24,531 each for the period December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the final
quarterly principal payment is due on September 12, 2006; the interest rate on
the note remains at 9%, (d) the $2.5 million note was amended to provide that
the principal balance of the note is to be repaid in twenty quarterly
installments of $125,000 each, commencing December 12, 1996 with the final
payment due on September 12, 2001; the rate of interest remains at 12% and (e)
the Master PIK note, which was issued to provide for the payment in kind of
interest due under the terms of the $2.5 million note prior to June 12, 1996,
was amended to provide that the principal balance of the note $1,977,119 is to
be paid in twenty quarterly principal payments, in the amount of $98,855.95
each, to commence December 12, 1996 with the final payment due on September 12,
2001; the interest rate on the note remains at 12%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder, FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
F-36
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
FIC was reimbursed by ILCO for rental expense and certain other miscellaneous
expenses incurred during 1997 on behalf of ILCO. The amount of such
reimbursement was approximately $822,000.
Data processing services are provided to ILCO's and FIC's Austin, Texas and
Seattle, Washington facilities by FIC Computer Services, Inc. ("FIC Computer"),
a subsidiary of FIC. Each of FIC's and ILCO's insurance subsidiaries has entered
into a data processing agreement with FIC Computer whereby FIC Computer provides
data processing services to each subsidiary for fees equal to such subsidiary's
proportionate share of FIC Computer's actual costs of providing those services
to all of the subsidiaries. Family Life paid $1,916,350, $1,610,397 and $824,425
and ILCO's insurance subsidiaries paid $2,730,189, $2,818,095 and $3,010,110 to
FIC Computer for data processing services provided during 1999, 1998 and 1997,
respectively.
In 1995, Family Life entered into a reinsurance agreement with Investors-NA
pertaining to universal life insurance written by Family Life. The reinsurance
agreement is on a co-insurance basis and applies to all covered business with
effective dates on and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than $200,000; face
amounts of $200,000 or more are reinsured by Family Life with a third party
reinsurer.
In 1996, Family Life entered into a reinsurance agreement with Investors-NA,
pertaining to annuity contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996.
Pursuant to a Service Agreement between Family Life and Investors NA, the
Company reimbursed Investors NA for certain operating expenses incurred on
behalf of FLIC totaling approximately $13 million, $11 million, and $14 million
in 1999, 1998 and 1997, respectively.
In November, 1998, FIC purchased 101,304 shares of FIC's common stock from the
Roy F. and Joann Cole Mitte Foundation (the "Foundation"), a Texas non-profit
corporation which is controlled by Mr. Mitte and his wife, at a price of $18.625
per share (or a total purchase price of $1,886,787). At the same time, Family
Life purchased 272,000 shares of FIC's common stock from the Foundation at a
price of $18.625 per share (or a total purchase price of $5,066,000). Mr. Mitte
and his wife had previously donated the shares to the Foundation. The shares are
included in common treasury stock in the Company's financial statements at cost.
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.
F-37
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Net Income Per Share
(in thousands except per share data)
The following table reflects the calculation of basic and diluted earnings per
share:
December 31,
1999 1998 1997
(Amounts in thousands, except per share amounts)
Basic:
Net income available to common
shareholders $ 9,149 $ 9,218 $ 16,328
Average weighted common stock
outstanding 5,055 5,383 5,428
Basic earnings per share $ 1.81 $ 1.71 $ 3.01
Diluted:
Net income available to common
shareholders $ 9,149 $ 9,218 $ 16,328
Average weighted common stock
outstanding 5,055 5,383 5,428
Common stock options 277 293 293
Effect of shares of ILCO owns of FIC (85) (85) (86)
Repurchase of treasury stock (47) (34) (46)
Common stock and common stock
equivalents 5,200 5,557 5,589
Diluted earnings per share $ 1.76 $ 1.66 $ 2.92
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 1999, premium
income from these products was derived from forty-nine states with
concentrations of approximately 25% and 25% in California and Texas,
respectively. In 1998, these amounts were 24% and 25%, respectively.
F-38
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Quarterly Financial Data (unaudited)(in thousands, except per share
data)
Three Months Three Months
Ended Ended
March 31, June 30,
1999 1998 1999 1998
Total revenues $ 12,115 $ 13,476 $ 12,308 $ 14,028
Net income $ 2,268 $ 2,333 $ 1,801 $ 2,493
Basic earnings per share $ 0.45 $ 0.43 $ 0.36 $ 0.46
Diluted earnings per share $ 0.44 $ 0.42 $ 0.35 $ 0.44
Three Months Three Months
Ended Ended
September 30, December 31,
1999 1998 1999 1998
Total revenues $ 11,721 $ 13,461 $ 11,169 $ 12,642
Net income $ 2,476 $ 2,153 $ 2,604 $ 2,240
Basic earnings per share $ 0.49 $ 0.40 $ 0.52 $ 0.43
Diluted earnings per share $ 0.48 $ 0.38 $ 0.50 $ 0.41
18. Subsequent Events
On January 18, 2000, FIC announced that it will pay a cash dividend in the
amount of $.18 per share, payable on April 12, 2000 to shareholders of record on
April 5, 2000.
F-39
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1999
(in thousands)
Column A Column B Column C Column D
Amount Shown on
Type of Investment Amortized Cost Fair Value the Balance Sheet
Fixed Maturities Available for Sale:
Bonds:
United States Government and
government agencies and authorities $ 8,938 $ 9,264 $ 9,264
States, municipalities and political
subdivisions 4,972 5,081 5,081
Corporate securities 36,795 35,876 35,876
Mortgage-backed securities 27,547 27,294 27,294
Total fixed maturities 78,252 77,515 77,515
Equity securities:
Common Stocks
Industrial and miscellaneous other 11 4 4
Total equity securities
Policy loans 3,595 3,595 3,595
Short -term investments 24,839 24,839 24,839
Total investments $106,697 $105,953 $105,953
F-40
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS
December 31,
1999 1998
ASSETS (in thousands)
Cash and cash equivalents $ 70 $ 55
Short-term investments 1,037 57
Long-term bonds 16 16
Investments in subsidiaries* 130,399 131,333
Property and equipment, net 105 509
Other assets 965 968
Accounts receivable 100 126
Total assets $ 132,692 $ 133,064
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Subordinated notes payable $ 5,748 $ 6,742
Other liabilities and intercompany payables 5,761 5,936
Total liabilities 11,509 12,678
Shareholders' equity
Common stock, $.20 par value,
10,000,000 shares authorized;
5,845,300 shares issued, 5,054,661
shares outstanding in 1999 and 1998
1,169 1,169
Additional paid-in capital 7,225 7,225
Accumulated other comprehensive income (2,454) 5,898
Retained earnings (including $115,363
and $106,037 of undistributed earnings
of subsidiaries at December 31, 1999
and 1998) 117,552 108,403
123,492 122,695
Common treasury stock, at cost, 518,639
shares in 1999 and
1998 respectively (2,309) (2,309)
Total shareholders' equity 121,183 120,386
Total liabilities and shareholders' equity $ 132,692 $ 133,064
* $62,144 and $60,383 are eliminated in consolidation in 1999 and 1998,
respectively.
F-41
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
STATEMENTS OF INCOME
FOR THE YEARS ENDED
December 31,
(in thousands)
1999 1998 1997
Income $ 629 $ 89 $ 1,375
Expenses:
Operating expenses 193 436 1,136
Interest expense* 613 769 869
806 1,205 2,005
Loss from operations (177) (1,116) (630)
Equity in undistributed
earnings from subsidiaries 9,326 10,334 16,958
Net income $ 9,149 $ 9,218 $ 16,328
*In consolidation, $282 is reported as a reduction in equity in earnings of
unconsolidated subsidiary.
F-42
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
December 31,
(in thousands)
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,149 $ 9,218 $ 16,328
Adjustments to reconcile net income to net
cash used in operating activities:
Decrease (increase) in accounts receivables 26 (49) (20)
Increase in investment in subsidiaries* (7,418) (14,837) (21,024)
Decrease in other assets 3 50 68
(Decrease) increase in other liabilities and
intercompany payables (175) 3,111 (980)
Other 404 (35) 5,702
Net cash provided by (used in) operating
activities 1,989 (2,542) 74
CASH FLOWS FROM FINANCING
ACTIVITIES
Net change in short-term investments (980) 1,046 823
Change in subordinated notes payable
to Investors-NA (994) 3,384 (895)
Purchase of treasury stock -0- (1,887) 0
Net cash provided by (used in) financing
activities (1,974) 2,543 (72)
Increase in cash 15 1 2
Cash and cash equivalents, beginning of year 55 54 52
Cash and cash equivalents, end of year $ 70 $ 55 $ 54
*Eliminated in consolidation
F-43
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE IV-REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
(in thousands)
Ceded to Assumed Percentage
Direct Other From Other Net of Amount
Amount Companies Companies Amount Assumed
1999
Life Insurance in-
force $ 7,406,486 $ 520,319 $ 5,787 $ 6,891,954 0.08%
Premium:
Life insurance $ 34,378 $ 573 $ 48 $ 33,853 0.14%
Accident-health
insurance 623 518 -0- 105 0.00%
Total $ 35,001 $ 1,091 $ 48 $ 33,958 0.14%
1998
Life Insurance in-
force $ 7,755,545 $ 440,270 $ 6,159 $ 7,321,434 0.08%
Premium:
Life insurance $ 38,908 $ 769 $ 60 $ 38,199 0.16%
Accident-health
insurance 809 650 -0- 159 0.00%
Total $ 39,717 $ 1,419 $ 60 $ 38,358 0.16%
1997
Life insurance in-
force $ 7,809,531 $ 403,600 $ 6,663 $ 7,412,594 0.09%
Premium:
Life insurance $ 40,333 $ 704 $ 94 $ 39,723 0.24%
Accident-health
insurance 934 408 -0- 526 0.00%
Total $ 41,267 $ 1,112 $ 94 $ 40,249 0.23%
F-44
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Financial Industries Corporation
(Registrant)
By:/s/ Roy F. Mitte By:/s/ James M. Grace
Roy F. Mitte, Chairman of James M. Grace, Treasurer,
the Board, President and Principal Accounting and
Chief Executive Officer and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 2000.
/s/ Roy F. Mitte /s/ James M. Grace
Roy F. Mitte, Director James M. Grace, Director
/s/ Eugene E. Payne /s/ Jeffrey H. Demgen
Eugene E. Payne, Director Jeffrey H. Demgen, Director
/s/ Joseph F. Crowe /s/ Thomas C. Richmond
Joseph F. Crowe, Director Thomas C. Richmond, Director
/s/ Theodore A. Fleron /s/ Charles K. Chacosky
Theodore A. Fleron, Director Charles K. Chacosky, Director
/s/ Dale E. Mitte
Dale E. Mitte, Director
/s/ John D. Barnett
John D. Barnett, Director
/s/ Jerome H. Supple
Jerome H. Supple, Director
/s/ Frank Parker
Frank Parker, Director
-54-
EXHIBIT INDEX
Exhibit Page Description
No. Nos.
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.
3(a) Certificate of Amendment to the Articles of
Incorporation of Registrant, dated November 12, 1996,
filed as an exhibit with Registrant's 10-Q for the
quarter ended September 30, 1996 and incorporated herein
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.
Ex-1
*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.
Ex-2
*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.
Ex-3
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.
Ex-4
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 filed as exhibit 10(aau) by Registrant on Form
Ex-5
10-K for the year ended December 31, 1995 is hereby
incorporated by reference.
10(aav) Amendment No. 2 dated December 12, 1996, effective
June 12, 1996 to the note dated June 12, 1991 in the
amount of $22.5 million made by Family Life Corporation
in favor of Investors Life Insurance Company of North
America filed as exhibit 10(aav) by Registrant on Form
10-K for the year ended December 31, 1996 is hereby
incorporated by reference.
10(aaw) (i) Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note dated June 12,
1991 in the amount of $2.5 million made by
Financial Industries Corporation in favor of
Investors Life Insurance Company of California
filed as exhibit 10(aaw)(i) by Registrant on Form
10-K for the year ended December 31, 1996 is
hereby incorporated by reference.
(ii) Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the "payment in kind"
provisions of the note dated June 12, 1991 in the
amount of $2.5 million made by Financial
Industries Corporation in favor of Investors Life
Insurance Company of North America filed as
exhibit 10(aaw)(ii) by Registrant on Form 10-K
for the year ended December 31, 1996 is hereby
incorporated by reference.
10(aax) Amendment No. 1 dated December 12, 1996, effective
June 12, 1996 to the 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(aax) by Registrant on Form
10-K for the year ended December 31, 1996 is hereby
incorporated by reference.
10(aay) Amendment No. 1 dated December 12, 1996, effective
June 12, 1996 to the 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(aay) by
Registrant on Form 10-K for the year ended December 31,
1996 is hereby incorporated by reference.
Ex-6
10(aaz) Amendment Agreement dated December 12, 1996
amending the Option Agreement by Financial Industries
Corporation in favor of Investors Life Insurance
Company of North America and Investors Life Insurance
Company of California filed as exhibit 10(aaz)
Registrant on Form 10-K for the year ended December 31,
1996 is hereby incorporated by reference.
10(aaaa) ** Assignment Agreement dated December 23, 1998, from
Family Life Insurance Investment Company to Financial
Industries Corporation, assigning the 9% Senior
Subordinated 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.
21 Ex-8 Subsidiaries of Registrant.
28 Report on Form 10-K filed by ILCO for the year ended
December 31, 1999 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.
** Filed as an Exhibit with Registrant's Current Report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
Ex-7
EXHIBIT 21
Subsidiaries of Registrant
Family Life Corporation
Family Life Insurance Company
Financial Industries Service Corporation
Financial Industries Securities Corporation
Financial Industries Service Corporation
of Mississippi, Inc.
Financial Industries Sales Corporation
of Southern California, Inc.
FIC Realty Services, Inc.
FIC Property Management, Inc.
FIC Computer Services, Inc.
Ex-8