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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly Period Ended September 30, 2002
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 74-2126975
(State of Incorporation) (I.R.S. Employer Identification Number)
6500 River Place Blvd., Building One, Austin, Texas 78730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of common shares outstanding ($.20 par value) at end of period:
9,598,415.
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Forward-Looking Statements
Except for historical factual information set forth in this Form 10-Q, the
statements, analyses, and other information contained in this report relating to
trends in the Company's operations and financial results, the markets for the
Company's products, the future development of the Company's business, and the
contingencies and uncertainties to which the Company may be subject, as well as
other statements including words such as "anticipate," "believe," "path,"
"estimate," "expect," "intend" and other similar expressions constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such statements are made based upon management's current expectations and
beliefs concerning the financial results, economic conditions and are subject to
known and unknown risks, uncertainties and other factors contemplated by the
forward-looking statements. Such factors include, among other things: (1)
general economic conditions and other factors, including prevailing interest
rate levels and stock market performance, which may affect the ability of FIC to
sell its products, the market value of FIC's investments and the lapse rate and
profitability of policies; (2) FIC's ability to achieve anticipated levels of
operational efficiencies and cost-saving initiatives; (3) customer response to
new products, distribution channels and marketing initiatives; (4) mortality,
morbidity and other factors which may affect the profitability of FIC's
insurance products; (5) changes in the Federal income tax laws and regulations
which may affect the relative tax advantages of some of FIC's products; (6)
increasing competition in the sale of insurance and annuities; (7) regulatory
changes or actions, including those relating to regulation of insurance products
and insurance companies; (8) ratings assigned to FIC's insurance subsidiaries by
independent rating organizations such as A.M. Best Company, which FIC believes
are particularly important to the sale of annuity and other accumulation
products; and (9) unanticipated litigation. There can be no assurance that other
factors not currently anticipated by management will not also materially and
adversely affect FIC.
- 2 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001........................... 4
Consolidated Statements of Income
For the three and nine month periods ended
September 30, 2002 and September 30, 2001.......................... 6
Consolidated Statements of Cash Flows
For the three and nine month periods ended
September 30, 2002 and September 30, 2001..........................10
Notes to Consolidated Financial Statements..................................14
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations.....................17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ..............................................29
Item 4. Controls and Procedures ............................................30
Part II
Other Information..........................................................30
Signature Page.............................................................33
Certifications..............................................................34
- 3 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2002 2001
(unaudited)
ASSETS
Investments:
Fixed maturities held to maturity,
at amortized cost (market value approxi-
mates $1,028 and $1,028 at September 30,
2002 and December 31, 2001, respectively) $ 1,063 $ 1,029
Fixed maturities available for sale at
market value(amortized cost of $449,215
and $496,704 at September 30, 2002
and December 31, 2001, respectively) 463,315 501,395
Equity securities, at market value(cost
approximates $59 at September 30, 2002
and December 31, 2001) 35 56
Policy loans 47,610 49,794
Mortgage loans 73 4,715
Invested real estate 71,223 61,049
Short-term investments 172,661 138,291
Total investments 755,980 756,329
Cash and cash equivalents 8,044 7,094
Accrued investment income 9,941 8,483
Agency advances and other receivables 31,817 30,324
Reinsurance receivables 11,763 14,709
Due and deferred premiums 12,336 13,411
Real estate occupied by the Company 19,809 20,054
Property and equipment, net 3,604 3,546
Deferred policy acquisition costs 80,863 80,290
Present value of future profits of
acquired businesses 27,299 31,251
Other assets 17,214 14,074
Separate account assets 334,796 399,264
Total Assets $ 1,313,466 $ 1,378,829
The accompanying notes are an integral part of these
consolidated financial statements.
- 4 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December31,
2002 2001
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contract holder
deposit funds:
Contract holder deposit funds $ 556,138 $ 556,117
Future policy benefits 172,537 180,953
Other policy claims and benefits payable 14,008 13,985
742,684 751,055
Deferred federal income taxes 34,640 31,920
Excess of net assets acquired over cost -0- 15,847
Other liabilities 7,689 8,938
Separate account liabilities 327,067 391,593
Total Liabilities 1,112,080 1,199,353
Commitments and Contingencies
Shareholders' equity:
Common stock, $.20 par value, 25,000
shares authorized in 2002 and 2001,
11,857 and 11,736 shares issued in 2002
and 2001, 9,598 and 9,499 shares
outstanding in 2002 and 2001. 2,372 2,348
Additional paid-in capital 66,541 65,558
Accumulated other comprehensive income 7,842 2,297
Deferred compensation (263) (292)
Retained earnings 147,251 131,462
223,743 201,373
Common treasury stock, at cost, 2,258
and 2,237 shares in 2002 and 2001, respectively. (22,357) (21,897)
Total Shareholders' Equity 201,386 179,476
Total Liabilities and Shareholders' Equity $ 1,313,466 $ 1,378,829
The accompanying notes are an integral part of these
consolidated financial statements.
- 5 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended September 30,
2002 2001
Revenues:
Premiums $ 8,607 $ 10,225
Net investment income 11,649 12,694
Earned insurance charges 9,934 10,361
Other 329 685
30,519 33,965
Benefits and expenses:
Policyholder benefits and expenses 10,623 10,321
Interest expense on contract holders
deposit funds 7,423 7,439
Amortization of present value of future
profits of acquired businesses 1,094 875
Amortization of deferred policy
acquisition costs 2,766 1,745
Operating expenses 7,802 8,042
29,708 28,422
Income before federal income tax and
equity in net earnings of affiliates 811 5,543
Provision for federal income taxes (88) 1,737
Net Income $ 899 $3,806
The accompanying notes are an integral part of these
consolidated statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended September 30,
2002 2001
Net Income Per Share
Basic:
Average weighted shares outstanding 9,597 9,483
Basic earnings per share $ 0.09 $ 0.40
Diluted:
Common stock and common stock equivalents 9,647 9,536
Diluted earnings per share $ 0.09 $ 0.40
The accompanying notes are an integral part of these
consolidated financial statements.
- 7 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Nine Months Ended September 30,
2002 2001
Revenues:
Premiums $ 27,517 $ 27,324
Net investment income 32,789 21,466
Earned insurance charges 31,435 16,953
Other 1,019 939
92,760 66,682
Benefits and expenses:
Policyholder benefits and expenses 32,028 19,615
Interest expense on contract holders
deposit funds 22,517 12,135
Amortization of present value of future
profits of acquired businesses 3,424 2,651
Amortization of deferred policy acquisition
costs 6,913 4,678
Operating expenses 24,389 16,558
Interest expense -0- 616
Total 89,271 56,253
Income before federal income tax, equity
in net earnings of affiliates and cumulative
effect of change in accounting principle 3,489 10,429
Provision for federal income taxes 1,221 3,091
Income before equity in net earnings of
affiliates and cumulative effect of
change in accounting principle 2,268 7,338
Equity in net earnings of affiliate,
net of tax -0- 1,317
Net income before cumulative effect of
change in accounting principle 2,268 8,655
Cumulative effect of change in accounting
principle 15,727 -0-
Net Income $ 17,995 $ 8,655
====== ======
The accompanying notes are an integral part of
these consolidated statements.
- 8 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Nine Months Ended September 30,
2002 2001
Net Income Per Share
Basic:
Average weighted shares outstanding 9,543 7,261
Basic earnings per share
Income per share before cumulative
effect of change in accounting principle $ 0.24 $ 1.19
Cumulative effect of change in accounting
principle 1.65 0.00
Basic earnings per share $ 1.89 $ 1.19
Diluted:
Common stock and common stock equivalents 9,621 7,292
Diluted earnings per share
Income per share before cumulative effect
of change in accounting principle $ 0.24 $ 1.18
Cumulative effect of change in accounting
principle 1.63 0.00
Diluted earnings per share $ 1.87 $ 1.18
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended September 30,
2002 2001
(unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 899 $ 3,806
Adjustments to reconcile net income to
net cash (used in)provided by operating
activities:
Amortization of present value of future
profits of acquired business 1,094 875
Depreciation 645 625
Changes in assets and liabilities:
(Increase) decrease in accrued investment
income (1,634) 1
Decrease in agent advances and other
receivables 8,067 3,006
Decrease in due and deferred premiums 216 3,494
Net change in deferred policy acquisition
costs 53 (1,579)
(Increase) decrease in other assets (651) 184
Decrease in policy liabilities and accruals (5,100) (6,287)
Decrease in other liabilities (3,676) (937)
Increase in deferred federal income taxes 996 162
Other, net (1,484) 1,484
Net cash (used in) provided by operating
activities $ (575) $ 4,834
The accompanying notes are an integral part of these
consolidated financial statements.
- 10 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
Three Months Ended September 30,
2002 2001
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities purchased $ (35,038) $ (6,063)
Proceeds from sales and maturities of
fixed maturities 79,328 27,841
Real estate capitalized 456 (10,861)
Net change in policy loans 587 1,933
Increase in short-term investments, net (46,210) (16,234)
Purchases of property and equipment (1,957) (668)
Net cash used in investing activities (2,834) (4,052)
CASH FLOW FROM FINANCING
ACTIVITIES
Dividends paid -0- (2,051)
Contractholder fund deposits 14,648 14,616
Contractholder fund withdrawals (10,629) (12,832)
Issuance of common capital stock 18 271
Purchase of treasury stock -0- 57
Net cash provided by financing activities 4,037 61
Net increase in cash 628 843
Cash, beginning of period 7,416 12,079
Cash, end of period $ 8,044 $ 12,922
The accompanying notes are an integral part of these
consolidated financial statements.
- 11 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
2002 2001
(unaudited)
CASH FLOWS FROM OPERATION
ACTIVITIES
Net Income $ 17,995 $ 8,655
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Amortization of present value of future
profits of acquired business 3,424 2,931
Depreciation 1,926 899
Cumulative change in accounting principle (15,727) -0-
Equity in undistributed earnings of
affiliate -0- (2,137)
Changes in assets and liabilities:
Increase in accrued investment income (1,458) (103)
Decrease in agent advances and other
receivables 1,453 3,003
Decrease in due and deferred premiums 1,075 3,067
Net change in deferred policy acquisition
costs (889) (3,202)
(Increase) decrease in other assets (3,140) 229
Decrease in policy liabilities and accruals (14,545) (8,254)
Decrease in other liabilities (1,249) (800)
(Decrease) increase in deferred federal
income taxes (573) 12
Other, net (528) 2,212
Net cash (used in) provided by operating
activities $ (12,236) $ 6,512
- 12 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
Nine Months Ended September 30,
2002 2001
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities purchased $ (141,625) $ (37,253)
Proceeds from sales and maturities of
fixed maturities 194,641 70,406
Real estate capitalized (10,174) (13,656)
Net change in policy loans 2,184 1,825
Increase in short-term investments, net (34,370) (19,229)
Purchases of property and equipment (1,984) (952)
Net cash provided by investing activities 8,672 1,141
CASH FLOW FROM FINANCING
ACTIVITIES
Dividends Paid (2,207) (3,982)
Net cash from acquisition of insurance
holding company -0- 6,979
Contractholder fund deposits 40,276 23,114
Contractholder fund withdrawals (34,102) (20,068)
Issuance of common capital stock 1,007 271
Purchase of treasury stock (460) (2,241)
Repayment of subordinated notes payable -0- (1,537)
Net cash provided by financing activities 4,514 2,536
Net increase in cash 950 10,189
Cash, beginning of year 7,094 2,733
Cash, end of period $ 8,044 $ 12,922
The accompanying notes are an integral part of these
consolidated financial statements.
- 13 -
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been presented to conform to the
requirements of Form 10-Q. This presentation includes year end balance sheet
data that was derived from audited financial statements. The notes to the
financial statements do not necessarily include all disclosures required by
generally accepted accounting principles (GAAP). The reader should refer to Form
10-K for the year ended December 31, 2001 previously filed with the Securities
and Exchange Commission for financial statements prepared in accordance with
GAAP. Management believes the financial statements reflect all adjustments
necessary to present a fair statement of interim results. Certain prior year
amounts have been reclassified to conform with the current year presentation.
The consolidated financial statements include the accounts of Financial
Industries Corporation ("FIC") and its wholly-owned subsidiaries. All
significant intercompany items and transactions have been eliminated.
Accumulated Other Comprehensive Income
The following is a reconciliation of accumulated other comprehensive income from
December 31, 2001 to September 30, 2002 (in thousands):
Net unrealized Net Total
gain (loss) on appreciation accumulated
investments depreciation) other
in fixed maturities of equity comprehen-
available for sale securities Other sive income
Balance at
December 31, 2001 $ 2,527 $ (2) $ (228) $ 2,297
Current Period Change 5,559 (14) -0- 5,545
Balance at
September 30, 2002 $ 8,086 $ (16) $ (228) $ 7,842
Dividends Declared
In March, 2001, FIC announced that its board approved the payment of an annual
cash dividend in the amount of $0.41 per share. The dividend was paid on April
12, 2001, to shareholders of record as of the close of business on March 19,
2001.
In May 2001, FIC announced that its Board of Directors approved the payment of a
semi-annual cash dividend in the amount of $0.25 per common share. The dividend
was payable on July 2, 2001, to record holders as of the close of business on
June 18, 2001.
A dividend of $0.23 per share was declared in the second quarter of 2002. The
dividend was paid on June 21, 2002 to shareholders of record as of June 7, 2002.
- 14 -
Related Party Transactions
On January 8, 2001, the Company donated $375,000 to the Roy F. and Joann Cole
Mitte Foundation (the "Foundation"). The Foundation is a charitable entity
exempt from federal income tax under section 501(a) of the Code as an
organization described in section 501(c)(3) of the Code, and based upon the most
recent information provided to the Company by the Foundation owned 16.31% of the
outstanding shares of FIC's common stock. The sole members of the Foundation are
Roy F. Mitte, former Chairman, President and Chief Executive Officer of FIC,
ILCO and their insurance subsidiaries, and his wife, Joann Cole Mitte. On
January 2, 2002, FIC made a donation of $1,000,000 to the Foundation. For recent
events concerning Roy F. Mitte see "Item 2 - Management's Discussion and
Analysis of Financial Conditions and Results of Operation - Subsequent Events."
New Accounting Pronouncements
During 2001, the FASB issued Statement of Financial Accounting Standards No. 141
(FAS 141), "Business Combinations," which supersedes Accounting Principles Board
Opinion No. 16 (APB 16), "Business Combinations," and establishes guidelines to
account for all acquisitions of a controlling interest, regardless of the form
of consideration. The most significant changes made by FAS 141 are that it: (1)
requires the purchase method of accounting, rather than the pooling method, be
used for all business combinations initiated after June 30, 2001; (2)
establishes specific criteria for the recognition of intangible assets
separately from goodwill; and (3) requires unallocated negative goodwill (which
is an excess of net assets acquired over cost) to be recognized immediately as
an extraordinary gain (instead of being deferred and amortized).
As of the first quarter of 2002, the amount of any unamortized deferred credit
related to negative goodwill arising from (a) a business combination for which
the acquisition date was before July 1, 2001, or (b) an investment accounted for
by the equity method acquired before July 1, 2001, is recognized and reported as
the effect of a change in accounting principle. The effect of the accounting
change and related income tax effects is presented in the income statement
between the captions "extraordinary items" and "net income". The per-share
information presented in the income statement includes the per-share effect of
the accounting change. During the first quarter of 2002, FIC recognized the
unamortized balance of $15,727,000 of negative goodwill. There was no
amortization of negative goodwill recorded during the first quarter of 2002.
During 2001, the FASB issued Statement of Financial Accounting Standards No. 142
(FAS 142), "Goodwill and Other Intangible Assets," which supersedes Accounting
Principles Board Opinion No. 17 (APB 17), "Intangible Assets," and which
addresses financial accounting and reporting for acquired goodwill and other
intangible assets upon and subsequent to their acquisition. The provisions of
FAS 142 are effective for FIC's fiscal year beginning January 1, 2002. The most
significant changes made by FAS 142 are: (1) goodwill and indefinite lived
intangible assets will no longer be amortized, but instead will be tested for
impairment at least annually at the reporting unit level, and (2) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years. The adoption of FAS 142 did not materially affect FIC's
results of operations, liquidity or financial position.
- 15 -
During 2001, the FASB issued Statement of Financial Accounting Standards No. 143
(FAS 143), "Accounting for Asset Retirement Obligations", which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002, the adoption of which is not expected to
materially affect FIC's results of operations, liquidity or financial position.
During 2001, the FASB issued Statement of Financial Accounting Standard No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144
supersedes Statement of Financial Accounting Standard No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FAS 121) and amends Accounting Principles Bulletin Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (APB 30) and Accounting Research Bulletin No. 51 (ARB 51)
"Consolidated Financial Statements". FAS 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of FAS 144 did not materially
affect FIC's results of operations, liquidity or financial position.
In May 2002, the FASB issued Statement of Financial Accounting Standards No. 145
(FAS 145), "Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and
Technical Corrections as of April 2002." This Statement rescinds FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. FAS 145 is
effective for financial statements issued for fiscal years beginning after May
15, 2002, and is not expected to affect FIC's results of operations, liquidity
or financial position.
The AICPA also recently issued Statement of Position No. 01-06 ("SOP 01-06")
"Accounting by Certain Entities (Including Entities with Trade Receivables) That
Lend to or Finance the Activities of Others." The guidance in SOP 01-06 relating
to financing and lending activities is explicitly applicable to insurance
companies. SOP 01-06 reconciles and conforms the accounting and financial
reporting guidance presently contained in other accounting guidance. SOP 01-06
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company's accounting practices for its lending activities
are already consistent with the guidance contained in SOP 01-06. The adoption of
SOP 01-06 did not have a significant effect on the Company's financial
statements.
- 16 -
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("FAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." FAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, the adoption of which is
not expected to materially affect FIC's results of operations, liquidity or
financial position.
Restatement of Form 10Q for period ending June 30, 2002
During the quarter ended September 30, 2002, the Company identified certain
death benefit expenses incurred during the quarter ended June 30, 2002 that were
not recorded until the quarter ended September 30, 2002 due to an interface
error between the Company's policy administration system and its general ledger
as well as certain surrender benefits expenses incurred during the quarter ended
June 30, 2002 that were not recorded until the quarter ended September 30, 2002.
The June 30, 2002 financial statements included in the previously filed Form
10-Q for the three and six months ended June 30, 2002 will be restated as shown
in the table below to correct the above errors and reflect the related effect of
income taxes. The Company will file an amended Form 10-Q for the three and six
months ended June 30, 2002 to reflect these restatements.
As Reported As Restated
Other liabilities $10,467,000 $11,365,000
3 month ended June 30, 2002
Policyholder benefits and expenses $ 9,739,000 $11,121,000
Provision for federal income taxes $ 860,000 $ 376,000
Net income $ 1,113,000 $ 215,000
Basic earnings per share $ 0.12 $ 0.02
Diluted earnings per share $ 0.12 $ 0.02
6 month ended June 30, 2002
Policyholder benefits and expenses $20,023,000 $21,405,000
Provision for federal income taxes $ 1,793,000 $ 1,309,000
Net income before cumulative
effect of change in accounting
principle $ 2,269,000 $ 1,371,000
Basic earnings per share $ 0.24 $ 0.14
Diluted earnings per share $ 0.24 $ 0.14
Cumulative effect of change in
accounting principle $15,727,000 $15,727,000
Basic earnings per share $ 1.65 $ 1.65
Diluted earnings per share $ 1.64 $ 1.64
Net income $17,996,000 $17,098,000
Basic earnings per share $ 1.89 $ 1.80
Diluted earnings per share $ 1.88 $ 1.78
- 17 -
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
The following discussion addresses the financial condition of FIC as of
September 30, 2002, compared with December 31, 2001, and its results of
operations for the three and nine months ended September 30, 2002, compared with
the same period last year. This discussion should be read in conjunction with
Management's Discussion and Analysis included in FIC's 10-K dated April 1, 2002,
to which the reader is directed for additional information.
Transactions Affecting Comparability of Results of Operations
On May 18, 2001, pursuant to an Agreement and Plan of Merger, as amended (the
"Merger Agreement"), dated as of January 17, 2001, among FIC, InterContinental
Life Corporation ("ILCO"), and ILCO Acquisition Company, a Texas corporation and
wholly-owned subsidiary of FIC ("Merger Sub"), Merger Sub was merged with and
into ILCO (the "Merger"). ILCO was the surviving corporation of the Merger and
became a wholly-owned subsidiary of FIC. In accordance with the Merger
Agreement, FIC issued 1.1 shares of common stock, par value $0.20 per share
("FIC Common Stock"), for each share of common stock, par value $0.22 per share,
of ILCO outstanding at the time of the Merger ("ILCO Common Stock"). In
addition, each share of ILCO Common Stock issuable pursuant to outstanding
options was assumed by FIC and became an option to acquire FIC Common Stock with
the number of shares and exercise price adjusted for the exchange ratio in the
Merger. Prior to the merger, FIC owned approximately 48.1% of ILCO's common
stock. Since ILCO was a wholly-owned subsidiary of FIC for the nine month period
ending September 30, 2002, the operations of ILCO are reported on a consolidated
basis with FIC. For the period from January 1, 2001 through May 17, 2001, FIC's
net income includes its equity interest in the net income of ILCO, with such
equity interest being based on FIC's percentage ownership of ILCO, and for the
period from May 18, 2001 through September 30, 2001, the operations of ILCO were
reported on a consolidated basis with FIC.
Results of Operations - Nine Months Ended September 30, 2002 and 2001
For the nine-month period ended September 30, 2002, Financial Industries
Corporation's ("FIC") net income was $17,995,000 (basic earnings of $1.89 per
common share, or diluted earnings of $1.87 per common share) on revenues of
$92,760,000 as compared to net income of $8,655,000 (basic earnings of $1.19 per
common share, or diluted earnings of $1.18 per common share) on revenues of
$66,682,000 in the first nine months of 2001. Net income in the nine month
period ended September 30, 2002, before the cumulative effect of a change in
accounting principle, was $2,268,000 (basic earnings of $0.24 per common share,
or diluted earnings of $0.24 per common share).
Earnings per share for the nine months ended September 30, 2002 were affected by
the increase in the number of FIC's common shares outstanding due to the Merger.
As of September 30, 2002, the number of FIC's weighted average common shares
outstanding was 9,543,000, as compared to weighted average shares outstanding of
7,261,000 as of September 30, 2001. The September 30, 2001 weighted average
hares outstanding takes into account the fact that additional shares were
issued on May 18, 2001 due to the Merger and were outstanding only for the
period from May 18, 2001 to September 30, 2001. Additionally, net income and
earnings per share were affected by the cumulative effect of a change in
accounting principle of $15.7 million. This amount represents the excess of fair
value of net assets acquired over cost as of the beginning of 2002 related to
the Merger. The Company recorded this cumulative effect in conjunction with
adopting Statement of Financial Accounting Standards No. 141 (FAS 141),
"Business Combinations," in the first quarter of 2002, as required by FAS 141.
- 18 -
Revenues
Premium revenues reported for traditional life insurance products are recognized
when due. Premium income for the first nine months of 2002, net of reinsurance
ceded, was $27.5 million, as compared to $27.3 million in the first nine months
of 2001. This source of revenues is related to the traditional life insurance
book of business of FIC's insurance subsidiaries. The consolidation of ILCO's
operations contributed approximately $6.9 million to premium income for the nine
month period ended September 30, 2002 and $3.4 million to premium income for the
period from May 18, 2001 to September 30, 2001. At Family Life Insurance Company
("Family Life", which has been a subsidiary of FIC for the nine-month periods
ending September 30, 2002 and 2001), first year net collected premiums for
traditional life insurance products for the nine month period ending September
30, 2002 were $2.0 million as compared to $2.7 million for the same period in
2001. The level of renewal premiums for traditional life insurance products at
Family Life for the nine month period ending September 30, 2002 was $17.9
million, as compared to $19.8 million for the same period in 2001. The decrease
in renewal premium is attributable to the decrease in the traditional life
insurance book of business.
Income from universal life and annuity charges for the first nine months of 2002
was $31.4 million, as compared to $17.0 million in the same period of 2001. The
consolidation of ILCO's operations contributed approximately $29.3 million to
earned insurance charges for the nine month period ended September 30, 2002 and
$14.1 million to earned insurance charges for the period from May 18, 2001 to
September 30, 2001. At Family Life, earned insurance charges declined from $2.6
million in the 2001 nine month period ending September 30th to $2.2 million in
the 2002 nine month period ending September 30th. This change is attributable to
(i) a decrease in Family Life's universal life and annuity business; and (ii)
reinsuring all of Family Life's new interest sensitive products with Investors
Life. The face amount of Family Life's in force universal life policies was
$626.6 million at September 30, 2002 as compared to $737.6 million at September
30, 2001.
Net investment income for the first nine months of 2002 was $32.8 million as
compared to $21.5 million in the same period of 2001. The consolidation of
ILCO's operations contributed approximately $28.5 million to net investment
income for the nine month period ended September 30, 2002 and $17.4 million for
the period from May 18, 2001 to September 30, 2001. FIC and its subsidiaries'
investment portfolios were adversely affected by the decrease in yields on
short-term investments, calls in long-term investments that were subsequently
reinvested in short-term assets at lower yields, and reinvestment of assets in
real estate.
- 19 -
Real estate income is primarily earned from the leases on the buildings at River
Place Pointe, an office complex in Austin, Texas which is owned and being
developed by Investors Life Insurance Company of North America ("Investors
Life"), a subsidiary of ILCO. Net real estate income, included in net investment
income, was $4.9 million for the nine month period ended September 30, 2002, as
compared to $2.4 million for the same period in 2001. ILCO's real estate income
was only included in FIC's income statements from May 18, 2001 through September
30, 2001 for the first nine months of 2001 and for the entire nine month period
in 2002.
Benefits and Expenses
Policyholder benefits and expenses were $32.0 million in the first nine months
of 2002, as compared to $19.6 million in the first nine months of 2001. The
consolidation of ILCO's operations for the nine month period ending September
30, 2002 contributed approximately $24.7 million to policyholder benefits and
expenses and contributed $10.6 million for the period from May 18, 2001 to
September 30, 2001. At Family Life, the level of policyholder benefits and
expenses was $8.8 million for the first nine months of 2001 compared to $7.0
million for the same period in 2002.
Interest expense on contract holders deposit funds was $22.5 million in the
first nine months of 2002, as compared to $12.1 million in the same period of
the year 2001. This increase is attributable to $21.0 million of interest
expense on contract holders deposit funds resulting from the consolidation of
ILCO's operations for the nine month period ended September 30, 2002, compared
to $10.2 million of ILCO's interest expense for the period from May 18, 2001 to
September 30, 2001.
The expense related to the amortization of deferred policy acquisition costs
increased by $2.2 million to $6.9 million in the first nine months of 2002, from
$4.7 million in the first nine months of 2001. A portion of the increase in
amortization is attributable to the Merger . In the first quarter of 2002,
expenses related to acquiring new business were $3.6 million, of which $2.3
million has been capitalized as deferred policy acquisition costs. In the second
quarter of 2002, expenses related to acquiring new business were $3.9 million,
of which $2.7 million has been capitalized as deferred policy acquisition costs.
In the third quarter of 2002, expenses related to acquiring new business were
$4.0 million, of which $2.8 million has been capitalized as deferred policy
acquisition costs. The amounts not capitalized in each quarter were recorded as
expenses in the relevant quarter. See "Critical Accounting Policies, Deferred
Policy Acquisition Costs and Present Value of Future Profits of Acquired
Business" herein for a further discussion of capitalization of expenses related
to acquiring new business.
- 20 -
In the first nine months of 2002, the amortization of present value of future
profits of acquired business was $3.4 million as compared to $2.7 million in the
first nine months of 2001. The consolidation of ILCO's amortization expense with
FIC's contributed approximately $1.1 million in the period ended September 30,
2002 and $62 thousand for the period from May 18, 2001 to September 30, 2001.
Operating expenses for the first nine months of 2002 were $24.4 million, as
compared to $16.6 million in the first nine months of 2001. The consolidation of
ILCO's operations contributed approximately $14.1 million to operating expenses
for the nine month period ended September 30, 2002 as compared to $7.5 million
for the period from May 18, 2001 to September 30, 2001. The level of operating
expenses for the nine month period ending September 30, 2002 included: (i)
expenses related to acquiring new business; (ii) $477,234 related to the
repurchase of James M. Grace's employment contract; (iii) a donation of $1
million to the Roy F. and Joann Cole Mitte Foundation which was made in the
first quarter of 2002, as compared to a $375,000 donation in the first quarter
of 2001; and (iv) $200,000 of costs incurred due to the investigation of the
matters described in the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 15, 2002. For a further discussion
of the repurchase of Mr. Grace's employment contract and the donation to the
Foundation, see FIC's 10-K for the year ended December 31, 2001, dated April 1,
2002.
Interest expense for the first nine months of 2002 was $0, as compared to $0.6
million in the first nine months of 2001. This interest expense is related to
indebtedness owed to Investors Life by Family Life Corporation (a wholly owned
subsidiary of FIC) and FIC. The consolidation of ILCO's operations with those of
FIC for the entire nine month period ending September 30, 2002 results in the
elimination of this interest expense in the income statements of FIC.
The provision for federal income taxes was $1.2 million in the first nine months
of 2002 as compared to $3.1 million in the first nine months of 2001. The
decrease was due to the $6.9 million decrease in income (before federal income
tax, equity in net earnings of affiliates and cumulative effect of change in
accounting principle) for the nine month period ended September 30, 2002
compared to the nine month period ended September 30, 2001. Additionally, the
Company was able to credit $350,000 in the third quarter provision for federal
income taxes related to the compensation of its former president and chief
executive officer, Roy F. Mitte. In the first two quarters of 2002, the Company
expected to incur federal income taxes related to non-deductible compensation.
However, since Mr. Mitte is not expected to be an executive with the company on
December 31, 2002, which is the relevant date for measuring deductibility of
compensation under Section 162(m) of the Code, his entire compensation for 2002
is deductible and thus the Company will not incur the $350,000 in federal income
taxes which had been reflected in the provision for federal income taxes in the
first and second quarter of 2002.
Equity in Net Income of InterContinental Life Corporation
For the period from January 1, 2001 to May 17, 2001, FIC's equity in the net
earnings of ILCO, net of federal income tax, was $1.3 million. Following the
merger of ILCO with FIC on May 18, 2001, the results of ILCO were consolidated
with those of FIC. Accordingly, there is no equity in net earnings of affiliate
results for the period ended September 30, 2002.
- 21 -
Prior to the merger with ILCO, FIC owned 3,591,534 shares of ILCO's common
stock. In addition, Family Life owned 342,400 shares of ILCO common stock. As a
result, FIC owned, directly and indirectly through Family Life, 3,933,934 shares
(approximately 48.1%) of ILCO's common stock. Upon completion of the merger,
ILCO became a wholly-owned subsidiary of FIC.
Results of Operations - Three Months Ended September 30, 2002
as compared to the Three Months Ended September 30, 2001
For the three-month period ended September 30, 2002, FIC's net income was $0.9
million (basic earnings of $0.09 per common share and diluted earnings of $0.09
per common share) on revenues of $30.5 million as compared to net income of $3.5
million (basic earnings of $0.40 per common share and diluted earnings of $0.40
per common share) on total revenues of $34.0 million in the same three month
period of 2001. The decrease in net income from September 30, 2001 to September
30, 2002 was primarily attributable to $1.2 million of increased expenses due to
the acquisition of new business that was not capitalized as deferred policy
acquisition costs as well as a decrease in investment income of $1.0 million.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows
to meet the cash requirements of business operations. FIC is an insurance
holding company whose principal assets consist of the outstanding capital stock
of its insurance subsidiaries - Family Life Insurance Company ("Family Life"),
Investors Life Insurance Company of North America ("Investors Life"), and prior
to February 19, 2002, Investors Life Insurance Company of Indiana
("Investors-IN"). Prior to the merger of FIC and ILCO on May 18, 2001, the
principal assets of FIC consisted of the common stock of its insurance
subsidiary, Family Life - and its equity ownership in ILCO. As a holding
company, FIC's ability to meet its cash requirements, pay interest on any debt,
pay expenses related to its affairs and pay dividends on its common stock
substantially depends upon dividends from its subsidiaries.
Prior to June 2001, the principal source of liquidity for FIC and its
wholly-owned subsidiary, Family Life Corporation, consisted of the periodic
payment of principal and interest by Family Life pursuant to the terms of the
surplus debenture issued in connection with the Family Life acquisition from
Merrill Lynch. For periods subsequent to June 30, 2001, FIC's available source
of liquidity will be dividends paid to it from its subsidiaries. Applicable
state insurance laws generally restrict the ability of insurance companies to
pay cash dividends in excess of prescribed limitations without prior approval.
The ability of Family Life and Investors Life to pay shareholder dividends is
and will continue to be subject to restrictions set forth in the insurance laws
and regulations of Washington, their domiciliary state. Washington limits how
and when Family Life and Investors Life can pay shareholder dividends by (a)
including the "greater of" standard for payment of dividends to shareholders,
(b) requiring that prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and (c) requiring that cash dividends be paid
only from earned surplus. Under the "greater of" standard, an insurer may pay a
dividend in an amount equal to the greater of : (i) 10% of the policyholder
surplus or (ii) the insurer's net gain from operations for the previous year.
Neither Investors Life nor Family Life paid any dividends during the first nine
months of 2002. For the nine month period ended September 30, 2002, Investors
Life had earned surplus of $48.9 million and a net gain from operations of $2.9
million, and Family Life had earned surplus of $3.4 million and a net gain from
operations of $3.1 million.
- 22 -
Prior to the merger of Investors Life and Investors-IN in February 2002,
Investors-IN was domiciled in the State of Indiana. Under the Indiana insurance
code, a domestic insurer may make dividend distributions upon proper notice to
the Department of Insurance, as long as the distribution is reasonable in
relation to adequate levels of policyholder surplus and quality of earnings.
Investors-IN did not make any dividend payments in 2002.
Sources of cash for FIC's insurance subsidiaries consist of premium payments
from policyholders and annuity holders, charges on policies and contracts,
investment income, and proceeds from the sale of investment assets. These funds
are applied primarily to provide for the payment of claims under insurance and
annuity policies, payment of policy withdrawals, surrenders and loans, operating
expenses, taxes, investments in portfolio securities, and shareholder dividends.
FIC's cash and cash equivalents at September 30, 2002 was $8.0 million as
compared to $7.1 million at December 31, 2001. Cash and cash equivalents at
September 30, 2001 was $12.9 million.
FIC's net cash used in operating activities was ($12.2) million for the nine
month period ending September 30, 2002, as compared to $6.5 million provided by
operating activities for the same period in the year 2001. The decrease in cash
provided by operating activities of $18.7 million from the first nine months of
2001 to the same period in 2002 was attributable to a decrease in net income of
$4.3 million, a decrease of $6.3 million in poilcy liabilities and accruals,
$2.0 million less cash from due and deferred premiums, $1.6 million less of a
decrease in agent advances and other receivables, and a $3.4 million increase in
other assets.
Net cash flow provided by investing activities was $8.7 million in the nine
month period ending September 30, 2002, as compared to $1.1 million in the same
period of 2001. The cash used in investing activities was positively affected by
an increase in proceeds from sales and maturities of fixed maturities. This
amount was offset by reinvestment of the sale proceeds into short-term
investments and purchase of other fixed maturities.
Net cash flow provided by financing activities was $4.5 million in the first
nine months of 2002, as compared to $2.5 million in the first nine months of
2001. The $2.0 million increase in cash provided by financing activities is
primarily due to less cash dividends paid to stockholders in the first nine
months of 2002 as compared to the first nine months of 2001.
- 23 -
The cash requirements of FIC, and its holding company subsidiary, Family Life
Corporation, consist primarily of its service of the indebtedness created in
connection with FIC's ownership of Family Life. As of September 30, 2002, the
investment portfolio of Investors Life included $24.6 million of notes
receivable from affiliates, represented by (i) a loan of $30 million by
Investors Life to Family Life Corporation made in July 1993, in connection with
the prepayment of indebtedness which had been previously issued to Merrill Lynch
as part of the 1991 acquisition of Family Life Insurance Company by a
wholly-owned subsidiary of FIC, and (ii) a loan of $4.5 million by Investors
Life to Family Life Insurance Investment Company made in July 1993, in
connection with the same transaction described above.
The provisions of the notes owned by Investors Life include the following
provisions: (a) the $30 million note provides for 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%, and (b) the $4.5 million note provides for 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%.
Due to the Merger, this indebtedness is not included as a liability on the
consolidated financial statements of FIC. FIC's other liquidity requirements
relate principally to the need for cash flow to meet operating expenses, as well
as the liabilities associated with its insurance subsidiaries' various life
insurance and annuity products.
Additionally, in 2002 and 2001, FIC has used cash to pay dividends to
shareholders. In May, 2001, the Board of Directors approved a policy pertaining
to the payment of dividends to the shareholders of the Company whereby the
Company will endeavor to declare and pay, on a semi-annual basis, a dividend on
the common stock of the Company so as to provide to the shareholders of the
Company an annualized yield of approximately 3% on the market value of the
common stock of the Company at the time of the declaration of such dividend.
Based on this policy, a dividend of $0.23 per share was paid on June 21, 2002 to
shareholders of record on June 7, 2002. The total amount of cash that FIC paid
to shareholders for the June 21, 2002 dividend was $2,207,000. There is no
guarantee that FIC will continue to pay a cash dividend to shareholders.
Given the historical cash flow of our subsidiaries and the current financial
results, management believes that the cash, cash equivalents and short term
investments of FIC and its subsidiaries are sufficient to meet the needs of its
business and to satisfy debt service. There are no commitments or capital asset
requirements that are expected to have an adverse effect on the liquidity of
FIC.
- 24 -
Investments
As of September 30, 2002, FIC's invested assets, excluding separate accounts,
totaled $756.0 million, compared to $756.3 million at December 31, 2001. During
the nine-month period from December 31, 2001 to September 30, 2002, short-term
investments increased by $34.4 million and invested real estate increased by
$10.2 million. These increases were offset by a $38.0 million decrease in fixed
maturities.
The assets held by Family Life and Investors 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". FIC determines
the allocation of our assets primarily on the basis of cash flow and return
requirements of our products and secondarily by the level of investment risk.
A key element of the Company's investment strategy is to avoid large exposure in
other investment categories which the Company believes carry higher credit or
liquidity risks, including private placements, partnerships and bank
participations. These categories accounted for only $31,051 of invested assets
as of September 30, 2002 and $45,479 of invested assets at December 31, 2001.
Our fixed maturity securities portfolio is predominately comprised of low risk,
investment grade, available for sale publicly traded corporate securities,
mortgage-backed securities and United States Government bonds. As of September
30, 2002, the market value of the fixed maturities available for sale segment
was $463.3 million as compared to an amortized cost of $449.2 million or an
unrealized gain of $14.1 million. The increase reflects unrealized gains on such
investments related to changes in interest rates subsequent to the purchase of
such investments. At December 31, 2001, the market value of the fixed maturities
available for sale segment was $501.4 million as compared to an amortized cost
of $496.7 million. The $38.1 million decline in the market value of the fixed
maturities available for sale from December 31, 2001 to September 30, 2002 is
attributable to calls on long-term fixed maturities that were subsequently
reinvested in short-term assets.
- 25 -
The investments of FIC's insurance subsidiaries in mortgage-backed securities
included collateralized mortgage obligations ("CMOs") of $153.3 million as of
September 30, 2002 as compared to $210.0 million at December 31, 2001, and
mortgage-backed pass-through securities of $22.4 million as of September 30,
2002 and $32.7 million at December 31, 2001. Mortgage-backed pass-through
securities, sequential CMO's and support bonds, which comprised approximately
31.3% of the market value of FIC's mortgage-backed securities at September 30,
2002, are sensitive to prepayment and extension risks. FIC's insurance
subsidiaries have reduced the risk of prepayment associated with
mortgage-backedsecurities by investing in planned amortization class ("PAC"),
target amortization class ("TAC") instruments 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 September 30, 2002, PAC and TAC
instruments and scheduled bonds represented approximately 43.2% of the market
value of FIC's mortgage-backed securities. Sequential and support classes
represented approximately 16.7% of the market value of FIC's mortgage-backed
securities at September 30, 2002. In addition, FIC's insurance subsidiaries
limit the risk of prepayment of CMOs by not paying a premium for any CMOs. FIC's
insurance subsidiaries do not invest in mortgage-backed securities with
increased prepayment risk, such as interest-only stripped pass-through
securities and inverse floater bonds. FIC's insurance subsidiaries did not have
any z-accrual bonds as of September 30, 2002. 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. For the year 2002, the
investment objectives of FIC's insurance subsidiaries include the making of
selected investments in CMOs.
The securities valuation office (SVO) of the National Association of Insurance
Commissioners evaluates all public and private bonds purchased as investments by
insurance companies. The SVO assigns one of six investment categories to each
security it reviews. Category 1 is the highest quality rating, and Category 6 is
the lowest. As of September 30, 2002, the majority of our bonds are investment
grade (Category 1 and 2). The Company's fixed maturities portfolio (including
short-term investments), included only a non- material amount of debt securities
which, in the annual statements of the companies as filed with state insurance
departments, were designated by the SVO as "3" (medium quality) or below.
FIC's short-term investments consist primarily of U.S. Government bonds. The
level of short-term investments at September 30, 2002 was $172.7 million, as
compared to $138.3 million as of December 31, 2001. The $34.4 million increase
in short-term investments was due to the maturity of medium and long-term bonds
which were reinvested in short-term assets.
- 26 -
Invested real estate at September 30, 2002 was $71.2 million as compared to
$61.0 million at December 31, 2001. The real estate investment is primarily
related to the development of the River Place Pointe project ("River Place
Pointe") by Investors Life. In October 1998, Investors Life purchased River
Place Pointe, which consisted of two adjoining tracts of land located in Austin,
Texas, totaling 47.995 acres. The aggregate purchase price for these tracts was
$8.1 million. Investors Life obtained a Site Development Permit for the tracts
from the City of Austin allowing for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. Construction on the first section of the Project, which consists
of four office buildings, an associated parking garage, and related
infrastructure was completed during 2000 and 2001. Construction on the second
section continued during the first nine months of 2002, including work on
buildings five, six and seven. Building five was completed during the second
quarter of 2002, building six was completed during the third quarter of 2002,
and completion of the remainder of the project is expected by the end of 2002.
As of September 30, 2002, Investors Life had invested $92.4 million in the
construction of River Place Pointe, of which $19.8 million is recorded on FIC's
balance sheet as real estate occupied by the Company. Investors Life paid $11.4
million during the first nine months of 2002 on construction of the project and
expects to pay an additional $1.8 million to complete the project. As of
September 30, 2002, 302,589 rentable square feet of office space was leased and
214,731 rentable square feet was available for lease. Upon the completion of the
remainder of the project, which includes one more office building, there will be
66,951 additional rentable square feet available for lease. According to the
Federal Deposit Insurance Corporation's ("FDIC") National Edition of Regional
Outlook, Second Quarter, 2002, the Austin office market posted the nation's
greatest increase in office vacancy rate (15.2 percentage points) from first-
quarter 2001 to first-quarter 2002, and, at 23.3 percent, ranks second in the
country. Additionally, the FDIC report states that sublease space in Austin is
nearly 3.5 million square feet, or 44 percent of the metro area's total vacant
space, and will remain an obstacle to on the recovery of Austin's office market.
As of September 30, 2002, only $73,000 was invested in mortgage loans, as
compared to $4.7 million at December 31, 2001. The Company does not make new
mortgage loans on commercial properties. All of the Company's mortgage loans
were made by its subsidiaries prior to their acquisition by the Company. At
September 30, 2002, none of the mortgage loans held by the Company had defaulted
as to principal or interest for more than 90 days, and none of the Company's
mortgage loans were in foreclosure. The decrease in mortgage loans was due to
the pay off of two mortgage loans during the third quarter of 2002. The Company
participated with a third party in two mortgage loans in New York state,
Champlain Centre Mall and Salmon Run Mall, with a total balance due of $4.6
million at June 30, 2002. On June 18, 2002, the Company agreed to a proposed
payoff of these loans at a discount. The borrower paid off the loans in August,
2002, with a payment of $3.6 million. The Company reduced the carrying value of
the two loans by $1.0 million as of June 30, 2002 as an impairment of an
invested asset.
Policy loans totaled $47.6 million at September 30, 2002, as compared to $49.8
million at December 31, 2001.
Management believes that the absence of "high-yield" or "non-investment grade"
investments (as defined above) in the portfolios of FIC's life insurance
subsidiaries 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.
- 27 -
Critical Accounting Policies
The financial statements contain a summary of FIC's critical accounting
policies, including a discussion of recently-issued accounting pronouncements.
Certain of these policies are considered to be important to the portrayal of
FIC's financial condition, since they require management to make difficult,
complex or subjective judgments, some of which may relate to matters that are
inherently uncertain. These policies include valuation of : investments and
deferred acquisition costs and present value of future profits. For the nine
month period ended September 30, 2002, the Company's critical accounting
policies also included the cumulative effect of accounting changes regarding the
goodwill acquired from the merger with ILCO.
Cumulative Effect of Accounting Changes. During the first quarter of 2002, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations." SFAS No. 141 eliminates the practice of amortizing and
deferring excess of fair value of net assets acquired over cost and requires
unallocated negative goodwill to be recognized immediately. In accordance with
the standard, FIC ceased negative goodwill amortization on January 1, 2002 and
recognized the unamortized balance of $15.7 million of negative goodwill
acquired in the Merger.
Investments. The Company's investments primarily consist of fixed maturity
securities, which include bonds, notes and redeemable preferred stocks. Fair
values of investments in fixed securities are based on quoted market prices or
dealer quotes. Fixed maturities are classified as "available for sale" and are
reported at fair value, with unrealized investment gains and losses, net of
income taxes, credited or charged directly to shareholder's equity. Generally
accepted accounting principles require that investments be written down to fair
value when declines in value are considered other than temporary. When such
impairments occur, the decrease in value is reported in net income as a realized
investment loss and a new cost basis is established.
Deferred Policy Acquisition Costs and Present Value of Future Profits of
Acquired Business. The costs of acquiring new business, including certain costs
of issuing policies and certain other variable selling expenses (principally
commissions), are deferred policy acquisition costs ("DAC"). DAC is capitalized
and then amortized to reflect an expense in relation to the projected stream of
profits (for universal life and annuity products) or to the premium revenue (for
traditional life products). Such projections require use of certain assumptions,
including interest margins, product loads, mortality rates, persistency rates,
and maintenance expense levels. Effective with respect to new business issued on
and after January 1, 2002, the Company has capitalized DAC based on an updated
analysis of its cost structure and assumptions as to product performance. For
business written previously, DAC is amortized using previously established
methods and practices. Management periodically reviews the assumptions
associated with the amortization models prospectively.
- 28 -
Present value of future profits of acquired business ("PVFP") are the costs
associated with acquiring blocks of insurance from other companies or through
the acquisition of other companies. PVFP is capitalized and amortized in a
manner that matches these costs against the associated revenues.
From the period of January 1, 2001 through May 18, 2001, FIC's net income
includes its equity interest in the net income of ILCO, with such equity
interest being based on FIC's percentage ownership of ILCO.
For a further discussion of accounting standards, refer to the discussion under
the caption New Accounting Pronouncements herein.
Subsequent Events
Appointment of President, Chief Executive Officer and Chairman of the Board
On November 4, 2002, FIC's Board of Directors elected Eugene E. Payne as the
Company's new President, Chief Executive Officer, and Chairman of the Board. The
appointment was effective immediately. Payne had been acting as Interim Chairman
of the Board since August 27, 2002. He took over the CEO responsibilities from
Interim CEO, Thomas C. Richmond. Mr. Richmond continues in his role as Vice
President-Operations and Secretary of the Company.
Termination of Roy F. Mitte's Employment Contract
Effective as of October 31, 2002, FIC's Board of Directors terminated the
employment agreement between the Company and Roy F. Mitte, the former Chairman,
President, Chief Executive Officer of the Company. The Company has designated
Mr. Mitte as Chairman Emeritus. Mr. Mitte will continue as an employee of the
Registrant in the newly created position of Chairman Emeritus. His salary is set
at the same annual rate which non-employee directors of the Registrant receive
for service on the Board, and he shall be entitled to certain employee medical
and life insurance benefits.
Item 3. 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 information set forth
in "Management's Discussion and Analysis of Financial Condition and Operations -
Investments".
- 29 -
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 that 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 that 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. The Company does not use derivative financial instruments.
Interest Rate Risk The Company manages the interest rate risk inherent in
our assets relative to the interest rate risk inherent in our liabilities.
Generally, we manage interest rate risk based on the application of a commonly
used model. The model projects the impact of interest rate changes on a range of
factors, including duration and potential prepayment. For example, assuming an
immediate increase of 100 basis points in interest rates, the net hypothetical
loss in fair market value related to the financial instruments segment of the
Company's balance sheet is estimated to be $20.0 million at September 30, 2002
and $24.6 million at December 31, 2001. For purposes of the foregoing estimate,
fixed maturities and short-term investments were taken into account. The market
value of such assets was $637.0 million at September 30, 2002 and $640.7 million
at December 31, 2001.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $153.3 million at September
30, 2002 and $209.9 million at December 31, 2001. Assuming an immediate increase
of 100 basis points in interest rates, the net hypothetical loss in the fair
market value related to such mortgage-backed securities is estimated to be $1.4
million at September 30, 2002 and $6.7 million at December 31, 2001.
Separate account assets have not been included, since gains and losses on those
assets generally accrue to the policyholders.
The Company does not use derivative financial instruments to manage our exposure
to fluctuations in interest rates.
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.
- 30 -
Item 4. Controls and Procedures
(a) The chief executive officer and chief financial officer of the Company have
evaluated the effectiveness of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of a date
within 90 days prior to the filing date of this report. Based on that
evaluation, such officers have concluded that the Company's disclosure controls
and procedures, as modified following implementation of the procedure described
in paragraph (b), below, are effective to ensure that material information
relating to the Company and its subsidiaries is made known to such officers in a
timely manner for inclusion in the Company's periodic filings with the SEC.
(b) In connection with the preparation of its financial statements for the
quarter ended September 30, 2002, the Company identified certain transactions
that occurred in the quarter ended June 30, 2002, but were not recorded in the
financial results for that period. These accounting errors relate to death
benefits for a relatively new annuity product line. The errors were inadvertent,
unintentional and were due to a failure in the mechanical interface between the
Company's policy administration system and the general ledger system used to
record consolidated transactions for GAAP reporting purposes. The effect on the
financial statements for the quarter ended June 30, 2002 resulting from the
correction of these errors is described in the notes to the financial statements
included in this Report.
As a result of the identification of these accounting errors, the Company
initiated and completed a review of all product lines, to assure that benefit
payments were properly recorded for the current period. The Company intends that
this manual review will be continued on at least a quarterly basis until a
resolution of the mechanical interface system is implemented and tested. This
modification, when implemented, would eliminate the need for a manual review
procedure to assure the proper recording of benefit payments.
Except as described above, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation by the Company's
chief executive officer and chief financial officer.
Part II. Other Information
Item 1. 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.
- 31 -
Litigation Relating to the FIC/ ILCO Merger. On the day that FIC and ILCO each
publicly announced the formation of a special committee to evaluate a potential
merger, two class action lawsuits were filed against ILCO, FIC and the officers
and directors of ILCO. The actions allege that a cash consideration in the
proposed merger is unfair to the shareholders of ILCO, that it would prevent the
ILCO shareholders from realizing the true value of ILCO, and that FIC and the
named officers and directors had material conflicts of interest in approving the
transaction. In their initial pleadings, the plaintiffs sought certification of
the cases as class actions and the named plaintiffs as class representatives,
and among other relief, requested that the merger be enjoined (or, if
consummated, rescinded and set aside) and that the defendants account to the
class members for their damages. The defendants believe that the lawsuits are
without merit and intend to vigorously contest the lawsuits. Management is
unable to determine the impact, if any, that the lawsuits may have on the
results of operations of the Company.
Other Litigation. Additionally, FIC's insurance subsidiaries are regularly
involved in litigation, both as a defendant and as plaintiff. The litigation
naming the insurance subsidiaries as defendant ordinarily involves our
activities as a provider of insurance protection products. Management does not
believe that such litigation, either individually or in the aggregate, will have
a material adverse effect on the Company's business, financial condition or
results of operations.
- 32 -
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
- 33 -
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Form 10-K Annual Report of Registrant for the year ended December
31, 2001 heretofore filed by Registrant with the Securities and
Exchange Commission, which is hereby incorporated by reference.
Material Contracts - Relating to Management Compensation Plans or
Arrangements
10.31 Employment Agreement between Registrant and Dr. Eugene E.
Payne dated as of November 4, 2002 and ratified by the Board of
Directors on November 4, 2002.
10.32 Financial Industries Corporation Equity Incentive Plan,
dated November 4, 2002.
(b) Reports on Form 8-K:
(i) On August 28, 2002, the Registrant filed a Current Report on
Form 8-K. The current report pertained to the filing, on August
26, 2002, of FIC's Form 10-Q for the period ended June 30, 2002
(the "Form 10-Q"), which had been due on August 14, 2002. FIC
reported that as a result of the late filing, the Company had
received a Nasdaq Staff Determination on August 20, 2002
indicating that since Nasdaq had not received the Company's Form
10-Q for the period ended June 30, 2002 as required by
Marketplace Rule 4310(c)(14), the Company's securities would be
delisted from the Nasdaq Stock Market at the opening of business
on August 28, 2002 unless the Company requested a hearing in
accordance with the Marketplace Rules. As a result of the late
filing, the trading symbol for the Company's securities were
changed from FNIN to FNINE at the opening of business on August
23, 2002.
The Form 8-K further reported that on August 27, 2002, FIC
received a letter from Nasdaq stating that based on the filing of
the Form 10-Q, FIC is in compliance with Marketplace Rule
4310(c)(14) and the delisting matter has been closed. As a result
of FIC's compliance with the aforementioned Rule, the Company's
trading symbol was changed from FNINE back to FNIN at the opening
of business on August 29, 2002.
- 34 -
(ii) On November 6, 2002, the Registrant filed a Current Report
on Form 8-K. The current report pertained to the appointment of
Dr. Eugene Payne as the Registrant's new President, Chief
Executive Officer, and Chairman of the Board. The 8-K reported
that Dr. Payne had been acting as Interim Chairman of the Board
since August 27, 2002. He takes over the CEO responsibilities
from Interim CEO, Thomas C. Richmond. Mr. Richmond will continue
in his role as Vice President-Operations and Secretary.
The Form 8-K further reported that the employment agreement
between the Registrant and Roy F. Mitte, the former Chairman,
President, Chief Executive Officer, was terminated effective
October 31, 2002. While the employment agreement has been
terminated, the employment of Mr. Mitte has not been terminated.
He will continue as an employee of the Registrant in the newly
created position of Chairman Emeritus. His salary is set at the
same annual rate which non-employee directors of the Registrant
receive for service on the Board, and he shall be entitled to
certain employee medical and life insurance benefits.
- 35 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
________________________________ ________________________________
Eugene E. Payne Jeffrey Demgen
Chief Executive Officer Vice-President &
Chief Financial Officer
Date: November 14, 2002
- 36 -
CERTIFICATION
I, Eugene E. Payne, Chief Executive Officer of Financial Industries Corporation
("FIC"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
- 37 -
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By:/s/ Eugene E. Payne
Eugene E. Payne
Chief Executive Officer
- 38 -
CERTIFICATION
I, Jeffrey H. Demgen, Chief Executive Officer of Financial Industries
Corporation ("FIC"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
- 39 -
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By:/s/ Jeffrey H. Demgen
Jeffrey H. Demgen
Chief Financial Officer
- 40 -
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") dated as of November 4, 2002
("Agreement Date") by and between Financial Industries Corporation, a Texas
company ("Company"), and Eugene E. Payne ("Executive"), a resident of Texas.
Executive is currently serving as Interim Chairman of the Board of Directors of
the Company. The parties desire to enter into this Agreement, which is intended
to more fully embody the agreement among the parties as to Executive's
employment. In consideration of the mutual agreements contained herein, the
Company and Executive agree as follows:
ARTICLE I.
DEFINITIONS
The terms set forth below have the following meanings (such meanings to be
applicable to both the singular and plural forms, except where otherwise
expressly indicated):
1.1 "Accrued Annual Bonus" means the amount of any Annual Bonus earned but
not yet paid with respect to any Fiscal Year ended prior to the Date of
Termination.
1.2 "Accrued Base Salary" means the amount of Executive's Base Salary which
is accrued but not yet paid as of the Date of Termination.
1.3 "Affiliate" means any Person that directly or indirectly controls, is
controlled by, is under common control with, a Company. For the purposes of
this definition, the term "control" when used with respect to any Person
means (a) the power to direct or cause the direction of management or
policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise, or (b) for
purposes of Section 1.11 and Article VII, the power substantially to
influence the direction of strategic management policies of such Person,
and provided a Company has a direct or indirect commercial relationship
with such Person, all as determined by the Compensation Committee of the
Board or its successor.
1.4 "Agreement" -- as defined in the introductory paragraph of this
Agreement.
- 41 -
1.5 "Agreement Date" -- as defined in the introductory paragraph of this
Agreement.
1.6 "Anniversary Date" means any annual anniversary of the Agreement Date.
1.7 "Annual Bonus" -- as described in Section 4.2.
1.8 "Base Salary" -- as described in Section 4.1.
1.9 "Beneficiary" -- as defined in Section 8.36.
1.10 "Board" means the Board of Directors of Company unless the context
indicates otherwise.
1.11 "Cause" means any of the following:
(a) Executive's conviction of, plea of guilty to, or plea of nolo
contendere to a felony or misdemeanor (other than a traffic-related
felony or misdemeanor) that involves fraud, dishonesty or moral
turpitude,
(b) any willful action by Executive resulting in criminal, civil or
internal Company conviction, sanction or judgment under Federal or
State workplace harassment or discrimination laws or internal Company
workplace harassment, discrimination or other workplace policy under
which such action could be and could reasonably be expected to be
grounds for immediate termination of a member of Senior Management
(other than mere failure to meet performance goals, objectives, or
measures),
(c) Executive's willful and intentional material breach of this
Agreement,
(d) Executive's habitual neglect of duties, (other than resulting from
Executive's incapacity due to physical or mental illness) which
results in substantial financial detriment to the Company or any
Affiliate,
- 42 -
(e) Executive's personally engaging in such conduct as results or is
likely to result in (i) substantial damage to the reputation of the
Company or any Affiliate, as a respectable business, and (ii)
substantial financial detriment (whether immediately or over time) to
the Company or any Affiliate,
(f) Executive's willful and intentional material misconduct in the
performance or gross negligence of his duties under this Agreement
that results in substantial financial detriment to the Company or any
Affiliate,
(g) Executive's intentional failure (including a failure caused by
gross negligence) to cause the Company or any Affiliate to comply with
applicable law and regulations material to the business of the Company
which results in substantial financial detriment to the Company or any
Affiliate, or
(h) Executive's willful or intentional failure to comply in all
material respects with a specific written direction of the Board that
is consistent with normal business practice and not inconsistent with
this Agreement and Executive's responsibilities hereunder.
For purposes of clauses (c), (d), (e), (f) and (g) of the preceding sentence,
Cause shall not mean the mere existence or occurrence of any one or more of the
following, and for purposes of clause (h) of the preceding sentence, Cause shall
not mean the mere existence or occurrence of item (iv) below:
(i) bad judgment,
(ii) negligence, other than Executive's habitual neglect of duties or
gross negligence;
(iii) any act or omission that Executive believed in good faith to
have been in the interest of the Company (without intent of Executive
to gain therefrom, directly or indirectly, a profit to which he was
not legally entitled), or
(iv) failure to meet performance goals, objectives or measures;
provided, that for purposes of clauses (c), (d), (e), (f), (g) and
(h), any act or omission that is curable shall not constitute Cause
unless the Company gives Executive written notice of such act or
omission that specifically refers to this Section and, within 10 days
after such notice is received by Executive, Executive fails to cure
such act or omission.
- 43 -
1.12 "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
1.13 "Company" as defined in the introductory paragraph to this
Agreement.
1.14 "Common Stock" means the common stock of the Company, par value
$0.20 per share;
1.15 "Competitive Business" means as of any date any corporation or
other Person (and any branch, office or operation thereof) that
engages in, or proposes to engage in:
(a) the underwriting, reinsurance, marketing or sale of (i) any
form of insurance of any kind that any of the Companies as of
such date does, or has under active consideration a proposal to,
underwrite, reinsure, market or sell (any such form of insurance,
a "Company Insurance Product") or (ii) any other form of
insurance that is marketed or sold in competition with any
Company Insurance Product, or
(b) any other business that as of such date is a direct and
material competitor of a Company and its Affiliates to the extent
that prior to the Date of Termination any of the Companies or its
Affiliates engaged at any time within 12 months in or had under
active consideration a proposal to engage in such competitive
business; and that is located anywhere in the United States where
such Company or its Affiliates is then engaged in, or has under
active consideration a proposal to engage in, any of such
activities.
1.16 "Date of Termination" means the date of the receipt of the Notice of
Termination by Executive (if such Notice is given by or on behalf of
Company) or by Company (if such Notice is given by Executive), or any later
date, not more than 15 days after the giving of such Notice, specified in
such notice, as of which Executive's employment with the Companies shall be
terminated; provided, however, that:
- 44 -
(i) if Executive's employment is terminated by reason of death, the
Date of Termination shall be the date of Executive's death; and
(ii) if Executive's employment is terminated by reason of Disability,
the Date of Termination shall be the 30th day after Executive's
receipt of the physician's certification of Disability, unless, before
such date, Executive shall have resumed the full-time performance of
Executive's duties; and (iii) if Executive terminates his employment
without Good Reason, the Date of Termination shall be the 30th day
after the giving of such Notice; and
(iv) if no Notice of Termination is given, the Date of Termination
shall be the last date on which Executive is employed by the Company
1.17 "Disability" means a mental or physical condition which renders
Executive unable or incompetent to carry out the material job
responsibilities which such Executive held or the material duties to which
Executive was assigned at the time the disability was incurred, which has
existed for at least six months. 1.18 "Employment Period" -- as defined in
Section 3.1.
1.19 "Executive" -- as defined in the introductory paragraph of this
Agreement.
1.20 "Fair Market Value" means, on any date, the price of the last trade,
regular way, in the Common Stock on such date on the Nasdaq National Market
or, if at the relevant time, the Common Stock is not listed to trade on
Nasdaq, on such other recognized quotation system on which the trading
prices of the Common Stock are then quoted (the "applicable exchange"). In
the event that there are no Common Stock transactions on the applicable
exchange on any relevant date, Fair Market Value for such date shall mean
the closing price on the immediately preceding date on which Common Stock
transactions were so reported.
1.21 "Fiscal Year" means the calendar year, which is the period used in
connection with the preparation of the consolidated financial statements of
Company.
- 45 -
1.22 "Good Reason" means the occurrence of any one of the following events
unless Executive specifically agrees in writing that such event shall not
be Good Reason:
(a) any material breach of the Agreement by the Company, including any
of the following, each of which shall be deemed material:
(i) any adverse change in the title, status, responsibilities,
authorities or perquisites of Executive;
(ii) any failure of Executive to be nominated, appointed or
elected and to continue to be nominated, re-elected, or
re-appointed as Chairman, President and Chief Executive Officer
of the Company;
(iii) any failure of Executive to be nominated, appointed or
elected and to continue to be nominated, re-elected, or
re-appointed as Chairman, President and Chief Executive Officer
of each of the Life Company Subsidiaries;
(iv) any failure of Executive to be nominated, appointed or
elected and to continue to be nominated, re-elected, or
re-appointed as a member of the Board of Directors of the
Company;
(v) any failure of Executive to be nominated, appointed or
elected and to continue to be nominated, re-elected, or
re-appointed as a member of the Board of Directors of each of the
Life Company Subsidiaries;
(vi) causing or requiring Executive to report to anyone other
than the Board of the Company;
(vii) assignment to Executive of duties materially inconsistent
with his position and duties described in this Agreement,
including status, offices, or responsibilities as contemplated
under Section 2.1or any other action by the Company or any of the
Life Company Subsidiaries which results in an adverse change in
such position, status, offices, titles or responsibilities;
- 46 -
(viii) any reduction or failure to pay Executive's Base Salary in
violation of Section 4.1 or his Annual Bonus in violation of
Section 4.2;
(ix) any failure to grant the SAR described in Section 4.3 or to
make any of the payments required to be made under the provisions
of the SAR described in Section 4.3; or
(x) any reduction in bonus or incentive opportunity; provided
that no such reduction shall be deemed to occur merely because
the Company revises or modifies the structure of or performance
factors taken into account (or the degree to which any such
performance factors are taken into account) under any bonus or
incentive plan or arrangement; provided further that the
Executive shall not be treated less favorably than the other
members of Senior Management;
provided that the creation, existence or appointment of a Chief Executive
Officer other than Executive of any subsidiary of the Company other than
the Life Company Subsidiaries shall not be deemed to be Good Reason if such
other Chief Executive Officer reports, directly or indirectly, to
Executive; and provided, further, that no act or omission described in
clauses (i) through (x) of this Section shall constitute Good Reason unless
Executive gives Company written notice of such act or omission and the
Company fails to cure such act or omission within 30-days after delivery of
such notice (except that Executive shall not be required to provide such
notice in case of intentional acts or omissions by a Company or more than
once in cases of repeated acts or omissions); or
(b) relocation of the Company's executive offices or Executive's own office
location to a location that is outside the Austin, Texas metropolitan area;
- 47 -
In the event of an occurrence or omission constituting Good Reason,
Executive shall not be entitled to terminate his employment for Good Reason
unless within 3 months after Executive first obtains actual knowledge of
such an event constituting Good Reason, he notifies Company of the events
constituting such Good Reason and of his intention to terminate employment
for Good Reason by a Notice of Termination.
1.23 "including" means including without limitation.
1.24 "Life Company Subsidiaries" means Investors Life Insurance Company of
North America and Family Life Insurance Company, which companies are
indirect, wholly owned subsidiaries of the Company as of the date of this
Agreement. The term also includes any life insurance company which becomes
an Affiliate of the Company on or after the date of this Agreement.
1.25 "Notice of Termination" means a written notice of termination of
Executive's employment given in accordance with Section 6.1 by Company on
behalf of the Companies, or by Executive, as the case may be, which sets
forth (a) the specific termination provision in this Agreement relied upon
by the party giving such notice, (b) in reasonable detail the specific
facts and circumstances claimed to provide a basis for such Termination of
Employment, and (c) if the Date of Termination is other than the date of
receipt of such Notice of Termination, the Date of Termination.
1.26 "Person" means any individual, sole proprietorship, partnership, joint
venture, limited liability company, trust, unincorporated organization,
corporation, institution, public benefit corporation, entity or government
instrumentality, division, agency, body or department.
1.27 "Prorata Annual Bonus" means the product of (i) the Target Annual
Bonus (provided that no effect shall be given to any reduction in such
Target Annual Bonus that would qualify as Good Reason if Executive were to
terminate his employment on account thereof) multiplied by (ii) a fraction
of which the numerator is the number of days which have elapsed in such
Fiscal Year through the Date of Termination and the denominator of which is
365.
1.28 "Retirement" means any Termination of Employment after Executive
reaches age 65, other than for Cause and other than for Good Reason.
- 48 -
1.29 "SAR" means a stock appreciation right granted under the terms and
provisions of the Financial Industries Corporation Equity Incentive Plan
1.30 "Senior Management" means Vice Presidents or higher level officers of
the Company.
1.31 "Target Annual Bonus" -- as described in 4.2.
1.32 "Target Annual Goals" - as described in Section 4.2.
1.33 "Taxes" means the incremental federal, state, and local income taxes
payable by Executive with respect to any applicable item of income.
1.34 "Termination For Good Reason" means a Termination of Employment by
Executive for a Good Reason.
1.35 "Termination of Employment" means a termination by the Company or
Executive of Executive's employment with the Company and its Affiliates.
1.36 "Termination Without Cause" means a Termination of Employment by the
Company for any reason other than Cause or Executive's death or Disability.
- 49 -
ARTICLE II.
DUTIES
2.1 Duties. Company shall employ Executive during the Employment Period as
its Chairman, President and Chief Executive Officer, and Executive shall
have the authority, duties, and responsibilities as are commensurate and
consistent with such position and title, and as provided in, Company's
by-laws. Executive shall also serve as Chairman, President and Chief
Executive Officer of the Life Company Subsidiaries. It is contemplated
that, in connection with each annual meeting or action by written consent
in lieu thereof of the stockholders of the Company and of the Life Company
Subsidiaries during the Employment Period, the stockholders of the Company
and of the Life Company Subsidiaries, respectively will elect Executive to
their respective Boards and Executive agrees to serve on such Boards if
elected. Executive shall report directly and solely to the Board of the
Company. During the Employment Period, Executive shall be the most senior
executive of the Company and shall have broad discretion and authority to
manage and direct the day-to-day affairs and operations of the Companies in
compliance with applicable law, including the sole authority to direct the
strategic direction of the Company and the Life Company Subsidiaries,
except to the extent required in connection with the exercise by the Board
of its corporate governance duties and responsibilities under Company's
by-laws and other applicable law. During the Employment Period, Executive
shall follow the directives of the Board and shall meet with the Board on a
periodic basis sufficient to enable the Board to fulfill its corporate
governance responsibilities. All operating, staff, other executives, and
divisions of the Company and the Life Company Subsidiaries, excluding the
internal audit department which may at the Board's discretion report to the
Board or its delegate, shall report solely to Executive, either directly or
indirectly through subordinates of Executive who report to Executive.
During the Employment Period, Executive shall perform the duties assigned
to him hereunder, and shall devote his full business time, attention and
effort, excluding any periods of disability, vacation, or sick leave to
which Executive is entitled, to the affairs of the Company and shall use
his best efforts to promote the interests of the Company. The Executive
acknowledges that his business time is not limited to a fixed number of
hours per week.
ARTICLE III.
EMPLOYMENT PERIOD
3.1 Employment Period. Subject to the termination provisions hereinafter
provided, the term of Executive's employment under this Agreement (the
"Employment Period") shall begin on the Agreement Date and end on the
Anniversary Date which is three years after such date or, if later, such
later date to which the Employment Period is extended pursuant to the
following sentence. On the first anniversary of the Agreement Date and
thereafter, the Employment Period shall be automatically extended each day
by one day to create a new two year term until, at any time after the first
anniversary of the Agreement Date, Company delivers written notice (an
"Expiration Notice") to Executive or Executive delivers an Expiration
Notice to Company, in either case, to the effect that the Agreement shall
expire on a date specified in the Expiration Notice (the "Expiration Date")
that is not less than two years after the date the Expiration Notice is
delivered to Company or the Executive, respectively. The employment of
Executive by Company shall not be terminated other than in accordance with
Article VI.
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ARTICLE IV.
COMPENSATION
4.1 Salary. Executive shall be paid in accordance with normal payroll
practices (but not less frequently than monthly) an annual salary at a rate
of $360,000 per year ("Base Salary"). During the Employment Period, the
Base Salary shall be reviewed periodically and may be increased from time
to time as shall be determined by the Board. After any such increase, the
term "Base Salary" shall thereafter refer to the increased amount. Any
increase in Base Salary shall not limit or reduce any other obligation of
the Company to Executive under this Agreement. Base Salary shall not be
reduced at any time without the express written consent of Executive.
4.2 Annual Bonus.
(a) Executive shall be paid an annual bonus ("Annual Bonus") in
accordance with the terms hereof for each Fiscal Year which begins or
ends during the Employment Period. Executive shall be eligible for an
Annual Bonus based upon target performance goals (the "Target Annual
Goals"), as determined by the Board on an annual basis, after
consultation with Executive and in accordance with normal Company
administrative practices for Senior Management, which provides for a
payment opportunity of at least the highest target level generally
available to Senior Management under any Company annual bonus plan
("Target Annual Bonus") upon the Executive's achievement of the Target
Annual Goals. Each such Annual Bonus is intended to comply with the
provisions of section 162(m) of the Code.
(b) The entire Annual Bonus that is payable to Executive with respect
to the Fiscal Year shall be paid in cash as soon as practicable after
the Board has determined whether and the degree to which Target Annual
Goals have been achieved following the close of such Fiscal Year.
4.3 Stock Appreciation Rights (SARs).
(a) As of the Agreement Date, Company shall award to Executive stock
appreciation rights (SARs) with respect to 30,000 shares of the Common
Stock of the Company, pursuant to terms and provisions of the
Financial Industries Corporation Equity Incentive Plan (the "Plan").
Such award shall constitute an "Award", within the meaning of section
2.1 of the Plan. The terms and provisions of this Section 4.3 shall
constitute the Award Notice for purposes of the Plan;
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(b) The exercise price of each unit is $14.11, which was 100% of the
Fair Market Value of the Common Stock of the Company on the Agreement
Date;
(c) Executive may exercise the SARs granted hereunder in accordance
with the following vesting schedule:
Date Percentage of Units Exercisable
November 1, 2004 20%
November 1, 2005 40%
November 1, 2006 60%
November 1, 2007 80%
November 1, 2008 100%
(d) In the event of a Change of Control (as defined in Section 2.4 of
the Plan) each SAR then outstanding shall be fully exercisable
regardless of the exercise schedule set forth in Section 4.3(c)
hereof.
(d) Executive may exercise the vested percentage of his Award at any
time on or before November 1, 2009. Executive may defer payment of any
exercised portion of his SARs in accordance with the deferral
provisions of section 12 of the Plan.
4.4 Savings and Retirement Plans. Executive shall be eligible to
participate during the Employment Period in any Company's savings and
retirement plans, practices, policies and programs, in accordance with the
terms thereof, at the highest available level, if any, applicable from time
to time to members of Senior Management, including any supplemental
executive retirement plan.
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ARTICLE V.
OTHER BENEFITS
5.1 Welfare Benefits. During the Employment Period, Executive and his
family shall be eligible to participate in at the highest level, and shall
receive all benefits under, any Company's welfare benefit plans, practices,
policies and programs provided or made generally available by the Company
to Senior Management (including medical, dental, disability, salary
continuance, employee life, group life, dependent life, accidental death
and travel accident insurance plans and programs), in accordance with their
terms as in effect from time to time.
5.2 Fringe Benefits. During the Employment Period, Executive shall be
entitled to fringe benefits generally applicable to Senior Management in
accordance with their terms as in effect from time
to time.
5.3 Vacation. During the Employment Period, Executive shall be entitled to
paid vacation time under the plans, practices, policies, and programs
generally applicable to members of Senior Management in accordance with
their terms as in effect from time to time.
5.4 Expenses. Executive shall be promptly reimbursed for all actual and
reasonable employment-related business expenses he incurs during the
Employment Period in accordance with any Company's practices, policies, and
procedures generally applicable to members of Senior Management in
accordance with their terms as in effect from time to time, including the
timely submission of required receipts and accountings. In addition,
Executive shall be entitled to first-class air travel for business.
Notwithstanding the foregoing, no expense shall be reimbursed more than
once.
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ARTICLE VI.
TERMINATION BENEFITS
6.1 Termination for Cause or Other than for Good Reason, etc.
(a) If Company terminates Executive's employment with the Companies
for Cause or Executive terminates his employment other than for Good
Reason, death or Disability, the Executive shall be entitled to
receive immediately after the Date of Termination a lump sum amount
equal to the sum of Executive's Accrued Base Salary and Accrued Annual
Bonus, and Executive shall not be entitled to receive any severance or
other payment, other than compensation and benefits which relate to or
derive from Executive's employment with the Company on or prior to the
Date of Termination and which are otherwise payable in case of
termination for Cause or other than for Good Reason, death or
Disability, as applicable.
(b) Executive's employment may be terminated for Cause only if (i)
Company provides Executive (before the Date of Termination) with
written notice of the Board meeting referred to in clause (ii) of this
Section 6.1(b) at least twenty days prior to such meeting and
specifies in detail in writing the basis of a claim of Cause and
provides Executive, with or without counsel, at Executive's election,
an opportunity to be heard and present arguments and evidence on
Executive's behalf at such meeting, (ii) the Company Board, by
affirmative vote of not less than 2/3 of the entire membership of the
Board (excluding the Executive's vote from any such determination)
determines that the acts or omissions constitute Cause which Executive
failed to cure after being given an opportunity to cure if required by
Section 1.11, and to the effect that Executive's employment should be
terminated for Cause and (iii) Company thereafter provides Executive a
Notice of Termination which specifies in detail the basis of such
Termination of Employment for Cause. Nothing in this Section 6.1 (b)
shall preclude the Board, by majority vote, from suspending Executive
from his duties, with pay at any time.
6.2 Termination for Retirement, Death or Disability. If, before the end of
the Employment Period, Executive's employment terminates due to his
Retirement, death or Disability, Executive or his Beneficiaries, as the
case may be, shall be entitled to receive immediately after the Date of
Termination, a lump sum amount which is equal to the sum of Executive's
Accrued Base Salary, Accrued Annual Bonus, and Prorata Annual Bonus.
Executive's SARs shall be paid according to the terms of the SAR.
6.3 Termination Without Cause or for Good Reason. In the event of a
Termination Without Cause or a Termination for Good Reason (in either case
occurring during the Employment Period), Executive shall be entitled to
receive the following:
(a) promptly after the Date of Termination, (but in no event later
than ten business days after the Date of Termination) a lump sum
amount equal to the sum of Executive's Accrued Base Salary, Accrued
Annual Bonus and Prorata Annual Bonus;
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(b) promptly after the Date of Termination, (but in no event later
than ten business days after the Date of Termination), a lump sum
amount equal to the product of (i) the sum of Base Salary plus Target
Annual Bonus for the Fiscal Year during which the Date of Termination
occurs (provided that no effect shall be given to any reduction in
Target Annual Bonus that would qualify as Good Reason if Executive
were to terminate his employment on account thereof), and multiplied
by (ii) two;
(c) promptly after the Date of Termination, (but in no event later
than ten business days after the Date of Termination), a lump sum
amount equal to the product of (i) the number of shares of Common
Stock with respect to which SARs granted to Executive pursuant to the
provisions of Section 4.3 that have not vested as of the Date of
Termination multiplied by (ii) the excess, if any, of the Fair Market
Value of a share of Common Stock on the Date of Termination;
(d) the benefits specified in Section 5.1 and Section 5.2 to which
Executive is entitled as of the Date of Termination, for two years
following his Date of Termination, subject to the terms of applicable
plans, programs or policies; provided that the Executive shall pay the
same amount for such benefits as covered members of Senior Management
who are actively employed would pay; provided further that any
coverage required to be offered by the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, shall begin after such
benefits otherwise cease hereunder;
Notwithstanding anything herein to the contrary, the benefits provided in
Section 6.3 shall be provided only upon Executive's execution of a release
and waiver as described in Section 6.5.
6.4 Other Rights. This Agreement shall not prevent or limit Executive's
continuing or future participation in any benefit, bonus, incentive or
other plan, program or policy provided by the Company and for which
Executive may qualify, and shall not impair the Company's rights to amend
or terminate any benefit, bonus, incentive or other plan program or policy;
provided however that no such amendment or termination shall treat
Executive less favorably than other Senior Management and Executive's
benefits, bonus and incentives in the aggregate shall not be reduced.
Amounts which are vested benefits or which Executive is otherwise entitled
to receive under any plan, program or policy and any other payment or
benefit required by law at or after the Date of Termination shall be
payable in accordance with such plan, program or policy or applicable law
except as expressly modified by this Agreement.
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6.5 Waiver and Release. Notwithstanding anything herein to the contrary,
upon any Termination of Employment (other than due to death)
(a) the Executive shall execute a release and waiver in form mutually
agreed by Executive and the Board of Company (which agreement neither
party shall unreasonably withhold) which releases, waives, and forever
discharges the Company, its Affiliates, and their respective
subsidiaries, affiliates, employees, officers, shareholders, members,
partners, directors, agents, attorneys, predecessors, successors and
assigns, from and against any and all claims, liabilities, demands,
causes of action, costs, expenses, attorneys' fees, damages and
obligations of every kind and nature in law, equity, or otherwise,
known and unknown, suspected and unsuspected, disclosed and
undisclosed, including but not limited to any and all such claims and
demands directly or indirectly arising out of or in any way connected
with the Executive's employment with and services as a director of the
Company and its Affiliates; claims or demands related to compensation
or other amounts under any compensatory arrangement, stock, stock
options, or any other ownership interests in the Company or any
Affiliate, vacation pay, fringe benefits, expense reimbursements,
severance benefits, or any other form of compensation or equity;
claims pursuant to any federal, state, local law, statute of cause of
action including, but not limited to, the federal Civil Rights Act of
1964, as amended; the federal Age Discrimination in Employment Act of
1967, as amended; the federal Americans with Disabilities Act of 1990;
tort law, contract law; wrongful discharge, discrimination;
defamation; harassment; or emotional distress; provided that
Executive's waiver and release shall not relieve the Companies from
any of the following obligations, to the extent they are to be
performed after the date of the release and waiver: (i) payment of
amounts due under Sections 6.1, 6.2 or 6.3, as applicable, (ii) any
obligations under the. second sentence of Section 6.4, and (iii)
payment of any gross-up amount due under Article VIII; and provided
further that (x) neither party shall release the other from his or its
obligations under Article IX of this agreement, to the extent such
obligations are to be performed after the Date of Termination, and (y)
Executive shall not be precluded from defending against Cause Claims
(as defined in Section 6.5(b)); and
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(b) the Company shall execute a release and waiver in form mutually
agreed by Executive and the Board of Company (which agreement neither
party shall unreasonably withhold) which releases, waives, and forever
discharges the Executive and his executors, administrators, successors
and assigns, from and against any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages
and obligations of every kind and nature in law, equity, or otherwise,
known and unknown, suspected and unsuspected, disclosed and
undisclosed, including but not limited to any and all such claims and
demands directly or indirectly arising out of or in any way connected
with the Executive's employment with or service as a director of the
Company and its Affiliates, but excluding any such claims liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages
or obligations arising out of or in any way connected with events,
acts or conduct giving rise to or in any way connected with
Executive's Termination of Employment for Cause ("Cause Claims"),
provided, however, that (i) neither party shall release the other from
his or its obligations under Article IX of this agreement, to the
extent such obligations are to be performed after the Date of
Termination, and (ii) Executive shall not be precluded from defending
against Cause Claims.
(c) Executive hereby agrees that the execution of this Agreement is
adequate consideration for the execution of such a release, and hereby
acknowledges that the Company would not have executed this Agreement
had Executive not agreed to execute such a release.
ARTICLE VII.
RESTRICTIVE COVENANTS
7.1 Non-Competition. Executive shall not at any time during the period
beginning on the Agreement Date and ending on the second anniversary of the
Date of Termination (whether or not during the Term), directly or
indirectly, in any capacity:
(a) engage or participate in, become employed by, serve as a director
of, or render advisory or consulting or other services in connection
with, any Competitive Business; provided, however, that after the Date
of Termination this Section 7.1(a) shall not preclude Executive from
being an employee of, or consultant to, any business unit of a
Competitive Business if (i) such business unit does not qualify as a
Competitive Business in its own right and (ii) Executive does not have
any direct or indirect involvement in, or responsibility for, any
operations of such Competitive Business that cause it to qualify as a
Competitive Business; or
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(b) make or retain any financial investment, whether in the form of
equity or debt, or own any interest, in any Competitive Business;
provided, however, that nothing in this subsection shall restrict
Executive from making an investment in any Competitive Business if
such investment (i) represents no more than 1% of the aggregate market
value of the outstanding capital stock or debt (as applicable) of such
Competitive Business, (ii) does not give Executive any right or
ability, directly or indirectly, to control or influence the policy
decisions or management of such Competitive Business, and (iii) does
not create a conflict of interest between Executive's duties under
this Agreement and his interest in such investment.
7.2 Non-Solicitation. Executive shall not at any time during the period
beginning on the Agreement Date and ending on the second anniversary of the
Date of Termination (whether or not during the Term), directly or
indirectly:
(a) other than in connection with the good-faith performance of his
duties as an officer of any of the Companies, encourage any employee
or agent of the Company or any Affiliate to terminate his relationship
with the Company or any Affiliate;
(b) solicit the employment of or the engagement as a consultant or
advisor of, any employee or agent of the Company or any Affiliate
(other than by the Company or an Affiliate), or cause or encourage any
Person to do any of the foregoing;
(c) establish (or take preliminary steps to establish) a business
with, or encourage others to establish (or take preliminary steps to
establish) a business with, any employee or agent of the Company or
any Affiliate; or
(d) interfere with the relationship of any of the Companies with, or
endeavor to entice away from any of the Companies, any Person who or
which at any time during the period commencing one year prior to the
Agreement Date was or is a material client or material supplier of, or
maintained a material business relationship with, the Company or an
Affiliate.
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7.3 Confidentiality. The Executive acknowledges that in the course of
performing services for the Companies and Affiliates, he may create,
develop, learn of, receive or contribute non-public information, ideas,
processes, methods, designs, devices, inventions, data, models and other
information relating to the Companies and their Affiliates or their
products, services, businesses, operations, employees or customers, whether
in tangible or intangible form, and that the Company or its Affiliates
desire to protect and keep secret and confidential, including trade secrets
and information from third parties that the Companies or their Affiliates
are obligated to keep confidential ("Confidential Information").
Confidential Information shall not include: (i) information that is or
becomes generally known through no fault of Executive; (ii) information
received from a third party outside of the Company that was disclosed
without a breach of any confidentiality obligation; or (iii) information
approved for release by written authorization of the Company. The Executive
recognizes that all such Confidential Information is the sole and exclusive
property of the Company and its Affiliates, and that disclosure of
Confidential Information would cause damage to the Companies and their
Affiliates. The Executive agrees that, except as required by the duties of
his employment with any of the Companies or any of their and/or its
Affiliates and except in connection with enforcing the Executive's rights
under this Agreement or if compelled by a court or governmental agency, in
each case provided that prior written notice is given to Company, he will
not, without the consent of Company, willfully disseminate or otherwise
disclose, directly or indirectly, any Confidential Information obtained
during his employment with the Company or its Affiliates, and will take all
necessary precautions to prevent disclosure, to any unauthorized individual
or entity inside or outside the Company, and will not use the Confidential
Information or permit its use for the benefit of Executive or any other
person or entity other than the Company or the Affiliates. These
obligations shall continue during and after the termination of Executive's
employment (whether or not during the Employment Period).
7.4 Reasonableness of Restrictive Covenants.
(a) Executive acknowledges that the covenants contained in Sections
7.1, 7.2 and 7.3 are reasonable in the scope of the activities
restricted, the geographic area covered by the restrictions, and the
duration of the restrictions, and that such covenants are reasonably
necessary to protect the Company's relationships with its employees,
clients and suppliers. Executive further acknowledges such covenants
are essential elements of this Agreement and that, but for such
covenants, the Company would not have entered into this Agreement.
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(b) The Company and Executive have each consulted with their
respective legal counsel and have been advised concerning the
reasonableness and propriety of such covenants. Executive acknowledges
that his observance of the covenants contained in Sections 7.1, 7.2
and 7.3 will not deprive him of the ability to earn a livelihood or to
support his dependents.
7.5 Right to Injunction; Survival of Undertakings.
(a) In recognition of the necessity of the limited restrictions
imposed by Sections 7.1, 7.2 and 7.3, the parties agree that it would
be impossible to measure solely in money the damages that any of the
Companies would suffer if Executive were to breach any of his
obligations under such Sections. Executive acknowledges that any
breach of any provision of such Sections would irreparably injure the
Company. Accordingly, Executive agrees that the Company shall be
entitled, in addition to any other remedies to which Company may be
entitled under this Agreement or otherwise, to an injunction to be
issued by a court of competent jurisdiction, to restrain any actual
breach, or threatened breach, of such provisions, and Executive hereby
waives any right to assert any defense that any of the Company has to
adequate remedy at law for any such breach.
(b) If a court determines that any of the covenants included in this
Article VII are unenforceable in whole or in part because of such
covenant's duration or geographical or other scope, such court may
modify the duration or scope of such provision, as the case may be, so
as to cause such covenant as so modified to be enforceable.
(c) All of the provisions of this Article VII shall survive any
Termination of Employment without regard to (i) the reasons for such
termination or (ii) the expiration of the Employment Period.
(d) Company shall have any further obligation to pay or provide
severance or benefits under Section 6.3 if a court determines that the
Executive has breached any covenant in this Article VII.
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ARTICLE VIII.
MISCELLANEOUS
8.1 Approvals. The Company represents and warrants to Executive it has
taken all corporate action necessary to authorize this Agreement.
8.2 No Mitigation. In no event shall Executive be obligated to seek other
employment or take any other action to mitigate the amounts payable to
Executive under any of the provisions of this Agreement, nor shall the
amount of any payment hereunder be reduced by any compensation earned as a
result of Executive's employment by another employer, except that any
continued welfare benefits provided for by Section 6.3(d) shall not
duplicate any benefits that are provided to Executive and his family by
such other employer and shall be secondary to any coverage provided by such
other employer.
The Company's obligation to make the payments provided for in this
Agreement and otherwise perform the obligations hereunder shall not (unless
Executive is terminated for Cause) be affected by any circumstances,
including set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive.
8.3 Beneficiary. If Executive dies prior to receiving all of the amounts
payable to him in accordance with the terms and conditions of this
Agreement, such amounts shall be paid to the beneficiary ("Beneficiary")
designated by Executive in writing to the Company during his lifetime, or
if no such Beneficiary is designated, to Executive's estate. Such payments
shall be made in a lump sum to the extent so payable and, to the extent not
payable in a lump sum, in accordance with the terms of this Agreement. Such
payments shall not be less than the amount payable to Executive as if
Executive had lived to the date of payment and were the payee. Executive,
without the consent of any prior Beneficiary, may change his designation of
Beneficiary or Beneficiaries at any time or from time to time by submitting
to the Company a new designation in writing.
8.4 Assignment; Successors. This Agreement is personal to Executive and he
may not assign his duties or obligations under it. Company may not assign
its respective rights and obligations under this Agreement without the
prior written consent of Executive, except to a successor to the Company's
business which expressly assumes the Company's obligations hereunder in
writing. This Agreement shall be binding upon and inure to the benefit of
Executive, his estate and Beneficiaries, the Company and its successors and
permitted assigns. Company shall require any successor to all or
substantially all of the business and/or assets of such Company, whether
direct or indirect, by purchase, merger, consolidation, acquisition of
stock, or otherwise, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as such Company would
be required to perform if no such succession had taken place.
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8.5 Non-alienation. Except as is otherwise expressly provided herein,
benefits payable under this Agreement shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution or levy of any kind, either voluntary or
involuntary, prior to actually being received by Executive, and any such
attempt to dispose of any right to benefits payable hereunder shall be
void.
8.6 Severability. If all or any part of this Agreement is declared to be
unlawful or invalid, such unlawfulness or invalidity shall not serve to
invalidate any portion of this Agreement not declared to be unlawful or
invalid. Any provision so declared to be unlawful or invalid shall, if
possible, be construed in a manner which will give effect to the terms of
such provision to the fullest extent possible while remaining lawful and
valid.
8.6 Amendment; Waiver. This Agreement shall not be amended or modified
except by written instrument executed by Company and Executive. A waiver of
any term, covenant or condition contained in this Agreement shall not be
deemed a waiver of any other term, covenant or condition, and any waiver of
any default in any such term, covenant or condition shall not be deemed a
waiver of any later default thereof or of any other term, covenant or
condition.
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8.7 Arbitration, Any dispute, controversy or claim arising out of or in
connection with or relating to this Agreement or any breach or alleged
breach thereof shall be submitted to and settled by binding arbitration in
Austin, Texas, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association (or at any other place or under any other
form of arbitration mutually acceptable to the parties so involved). Any
dispute, controversy or claim submitted for resolution shall be submitted
to three (3) arbitrators, each of whom is a nationally recognized executive
compensation specialist. The Company shall select one arbitrator, the
Executive shall select one arbitrator and the third arbitrator shall be
selected by the first two arbitrators. Any award rendered shall be final
and conclusive upon the parties and a judgment thereon may be entered in
the highest court of a forum, state or federal, having jurisdiction. The
expenses of the arbitration shall be borne equally by the parties, except
that in the discretion of the arbitrators any award may include the fees
and costs of a party's attorneys if the arbitrator expressly determines
that the party against whom such award is entered has caused the dispute,
controversy or claim to be submitted to arbitration in bad faith or as a
dilatory tactic. No arbitration shall be commenced after the date when
institution of legal or equitable proceedings based upon such subject
matter would be barred by the applicable statute of limitations.
Notwithstanding anything to the contrary contained in this Section 8.7 or
elsewhere in this Agreement, either party may bring an action in the Travis
County, Texas District Court, in order to maintain the status quo ante of
the parties. The "status quo ante" is defined as the last peaceable,
uncontested status between the parties. However, neither the party bringing
the action nor the party defending the action thereby waives its right to
arbitration of any dispute, controversy or claim arising out of or in
connection or relating to this Agreement. Notwithstanding anything to the
contrary contained in this Section 8.7 or elsewhere in this Agreement,
either party may seek relief in the form of specific performance,
injunctive or other equitable relief in order to enforce the decision of
the arbitrator. The parties agree that in any arbitration commenced
pursuant to this Agreement, the parties shall be entitled to such discovery
(including depositions, requests for the production of documents and
interrogatories) as would be available in a federal district court pursuant
to Rules 26 through 37 of the Federal Rules of Civil Procedure. In the
event that either party fails to comply with its discovery obligations
hereunder, the arbitrator(s) shall have full power and authority to compel
disclosure or impose sanctions to the full extent of Rule 37, Federal Rules
of Civil Procedure.
8.8 Notices. All notices hereunder shall be in writing and delivered by
hand, by nationally-recognized delivery service that guarantees overnight
delivery, or by first-class, registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to Company, to: Financial Industries Corporation
6500 River Place Blvd., Building One
Austin, Texas 78730
Attention: Theodore A. Fleron,
Vice President and General Counsel
Facsimile No.: (512) 404-5041
If to Executive, to: At his most recent home address or facsimile
number on file with the Company)
Either party may from time to time designate a new address by notice given
in accordance with this Section. Notice shall be effective when actually
received by the addressee.
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8.9 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed to be an original, but all of which together
will constitute one and the same instrument.
8.10 Captions. The captions of this Agreement are not a part of the
provisions hereof and shall have no force or effect.
8.11 Entire Agreement. This Agreement forms the entire agreement between
the parties hereto with respect to the subject matter contained in the
Agreement and shall supersede all prior agreements, promises and
representations regarding employment, compensation, severance or other
payments contingent upon termination of employment, whether in writing or
otherwise.
8.12 Applicable Law, This Agreement shall be interpreted and construed in
accordance with the laws of the State of Texas, without regard to its
choice of law principles.
8.13 Survival of Executive's Rights. All of Executive's rights hereunder,
including his rights to compensation and benefits, and his obligations
under Article VIII hereof, shall survive the termination of Executive's
employment or the termination of this Agreement.
8.14 Joint and Several Liability. The obligations of the Company to
Executive under this Agreement shall be joint and several.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
Financial Industries Corporation
By: /s/ Thomas C. Richmond
Title: Secretary
/s/ Eugene E. Payne
Eugene E. Payne
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EXHIBIT 10.32
FINANCIAL INDUSTRIES CORPORATION
EQUITY INCENTIVE PLAN
1. Purpose:
The purpose of the Plan is to provide motivation to Key Employees of the
Company and its Subsidiaries to put forth maximum efforts toward the
continued growth, profitability, and success of the Company and its
Subsidiaries by providing incentives to such Key Employees through
performance-related incentives, including, but not limited to the
performance of the Common Stock of the Company. Toward this objective, the
Committee may grant stock appreciation rights or performance units to Key
Employees of the Company and its Subsidiaries on the terms and subject to
the conditions set forth in the Plan.
2. Definitions:
2.1 "Award" means any form of stock appreciation right ("SAR") or
performance unit granted under the Plan, whether individually or in
combination, to a Participant by the Committee pursuant to such terms,
conditions, restrictions, and/or limitations, if any, as the Committee may
establish by the Award Notice or otherwise.
2.2 "Award Notice" means a written notice from the Company to a Participant
that establishes the terms, conditions, restrictions, and/or limitations
applicable to an Award in addition to those established by this Plan and by
the Committee's exercise of its administrative powers.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Change of Control" means the occurrence of any one or more of the
following:
(i) any SEC Person becomes the Beneficial Owner of 50% or more of the
Common Stock or of Voting Securities representing 50% or more of the
combined voting power of all Voting Securities of the Company (such an
SEC Person, a "50% Owner"); or
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(ii) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or
(iii) approval by the stockholders of the Company of a plan or
agreement for the sale or other disposition of all or substantially
all of the consolidated assets of the Company or a plan of liquidation
of the Company; or
(iv) any other event or circumstance (or series of events or
circumstances) that the Board shall determine to constitute a Change
of Control.
2.5 "Change of Control Price" means the highest price per share of Common
Stock offered in conjunction with any transaction resulting in a Change of
Control (as determined in good faith by the Committee if any part of the
offered price is payable other than in cash) or, in the case of a Change of
Control occurring solely by reason of a change in the composition of the
Board, the highest Fair Market Value of the Common Stock on any of the 30
trading days immediately preceding the date on which a Change of Control
occurs.
2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.7 "Committee" means the Compensation Committee of the Board, or such
other committee designated by the Board, authorized to administer the Plan
under paragraph 3 hereof. The Committee shall consist of not less than two
members, each of whom shall be a "disinterested person" within the meaning
of Rule 16b-3 promulgated under Section 16 of the Exchange Act. The
Committee shall from time to time designate the Key Employees who shall be
eligible for Awards pursuant to this Plan.
2.8 "Common Stock" means common stock, par value $0.20 per share, of the
Company.
2.9 "Company" means Financial Industries Corporation.
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2.10 "Effective Date" means November 4, 2002.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.12 "Fair Market Value" means, on any date, the price of the last trade,
regular way, in the Common Stock on such date on the Nasdaq National Market
or, if at the relevant time, the Common Stock is not listed to trade on
Nasdaq, on such other recognized quotation system on which the trading
prices of the Common Stock are then quoted (the "applicable exchange"). In
the event that there are no Common Stock transactions on the applicable
exchange on any relevant date, Fair Market Value for such date shall mean
the closing price on the immediately preceding date on which Common Stock
transactions were so reported.
2.13 "Incumbent Directors" means the individuals who are serving as members
of the Board as of the Effective Date of the Plan. Individuals who are
nominated to serve as members of the Board by at least two-thirds of the
individuals who are serving as members of the Board as of the Effective
Date shall also be considered as Incumbent Directors for purposes of the
Plan.
2.14 "Key Employee" means officers of the Company or a Subsidiary and any
other employee of the Company or a Subsidiary so designated by the
Committee.
2.15 "Participant" means any individual to whom an Award has been granted
by the Committee under this Plan.
2.16 "Plan" means the Financial Industries Corporation Equity Incentive
Plan.
2.17 "SAR" means a stock appreciation right granted under Section 7 of the
Plan in respect of one or more shares of Common Stock that entitles the
holder thereof to receive, in cash, an amount per share of Common Stock
equal to the excess, if any, of the Fair Market Value on the date the SAR
is exercised over the Fair Market Value on the date the SAR is granted.
2.18 "SEC Person" means any person (as such term is defined in Section
3(a)(9) of the Exchange Act) or group (as such term is used in Rule 13d-5
under the Exchange Act), other than an affiliate or any employee benefit
plan (or any related trust) of the Company or any of its affiliates.
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2.19 "Subsidiary" means a corporation or other business entity in which the
Company directly or indirectly has an ownership interest of 50 percent or
more.
2.20 "Unit" means a bookkeeping entry used by the Company to record
and account for the grant of performance units until such time as the
Award is paid, cancelled, forfeited or terminated, as the case may be.
3. Administration:
The Plan shall be administered by the Committee. The President and
Chief Executive Officer, shall have the authority to make
recommendations to the Committee with respect to Awards to be granted
to Key Employees other than himself. Except as provided in the
preceding sentence, the Committee shall have the authority to (a)
interpret the Plan and make factual determinations; (b) establish or
amend such rules and regulations as it deems necessary for the proper
operation and administration of the Plan; (c) receive recommendations
from the President and Chief Executive Officer as to the Key Employees
to receive Awards under the Plan, except that the Committee shall
determine Awards with respect to the President and Chief Executive;
(d) determine the form of an Award, whether a stock appreciation right
or performance unit, the number of Units subject to the Award, all the
terms, conditions, restrictions and/or limitations, if any, of an
Award, including the time and conditions of exercise or vesting, and
the terms of any Award Notice, which may include the waiver or
amendment of prior terms and conditions or acceleration or early
vesting or payment of an Award under certain circumstances determined
by the Committee; (e) determine whether Awards will be granted
individually or in combination; (f) grant waivers of Plan terms,
conditions, restrictions, and limitations; (g) accelerate the vesting,
exercise, or payment of an Award or the performance period of an Award
when such action or actions would be in the best interest of the
Company; and (h) take any and all other action it deems necessary or
advisable for the proper operation or administration of the Plan. The
Committee shall also have the authority to grant Awards in replacement
of Awards previously granted under this Plan or any other executive
compensation plan of the Company or a Subsidiary. All determinations
of the Committee shall be made by a majority of its members, and its
determinations shall be final, binding and conclusive. All actions
required of the Committee under the Plan shall be made in the
Committee's sole discretion, not in a fiduciary capacity and need not
be uniformly applied to other persons, including similarly situated
persons.
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4. Eligibility:
Any Key Employee is eligible to become a Participant of the Plan.
5. Term:
The Plan shall become effective as of November 1, 2002.
Awards shall not be granted pursuant to the Plan after November 1,
2012.
6. Participation:
The Committee shall select, from time to time, Participants from those
Key Employees who, in the opinion of the Committee, can further the
Plan's purposes. Once a Participant is so selected, the Committee
shall determine the type or types of Awards to be made to the
Participant and shall establish in the related Award Notices the
terms, conditions, restrictions and/or limitations, if any, applicable
to the Awards in addition to those set forth in this Plan and the
administrative rules and regulations issued by the Committee.
7. Stock Appreciation Rights
(a) Grants. Awards may be granted in the form of stock appreciation
rights ("SARs"). SARs shall entitle the recipient to receive a
payment, in cash, equal to the appreciation in market value of a
stated number of shares of Common Stock from the Exercise Price to the
market value on the date of exercise. No SAR may be exercised for cash
by an officer or director of the Company who is subject to Section 16
of the Exchange Act, except in accordance with Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
(b) Terms and Conditions of SARS. SARs shall be exercisable in whole
or in such installments and at such times as may be determined by the
Committee and designated in the Award Notice. The exercise price of a
SAR shall be 100 percent of the fair market value of the Common Stock,
as determined by the Committee, on the date of the SAR's grant (the
"Exercise Price").
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(c) Additional Terms and Conditions. The Committee may, by way of the
Award Notice or otherwise, determine such other terms, conditions,
restrictions and/or limitations, if any, of any SAR Award, provided
they are not inconsistent with the Plan.
8. Performance Units
(a) Grants. Awards may be granted in the form of performance units.
Performance units, as that term is used in this Plan, shall refer to
Units valued by reference to designated criteria established by the
Committee, other than Common Stock.
(b) Performance Criteria. Performance units shall be contingent on the
attainment during a performance period of certain performance
objectives. The length of the performance period, the performance
objectives to be achieved during the performance period, and the
measure of whether and to what degree such objectives have been
attained shall be conclusively determined by the Committee in the
exercise of its absolute discretion. Subject to the requirements of
paragraph 9, if applicable, performance objectives may be revised by
the Committee, at such times as it deems appropriate during the
performance period, in order to take into consideration any unforeseen
events or changes in circumstances.
(c) Additional Terms and Conditions. The Committee may, by way of the
Award Notice or otherwise, determine such other terms, conditions,
restrictions, and/or limitations, if any, of any Award of performance
units, provided they are not inconsistent with the Plan.
9. Provisions Applicable to Section 162(m) Participants
(a) Designation of Participants and Goals. Within 90 days after the
start of each fiscal year (or by such other time as may be required or
permitted by Section 162(m) of the Code), the Committee shall, in
writing: (i) designate the Participants, if NY, for whom the grant of
performance units shall be subject to this paragraph 9; (ii) select
the performance goal or goals applicable to the fiscal year or years
included within any performance period; (iii) establish the number
performance units which may be earned for such year or such years
within a performance period by each such Participant; (iv) specify the
relationship between performance goals and the number of performance
units performance shares to be earned by each such Participant for
such year or period and (v)the method for computing the number of
performance units payable if the performance goals are attained.
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The Committee may specify that the number of performance units will be
earned if the applicable target is achieved for one goal or for any
one of a number of goals for a fiscal year or years within a
performance period. The Committee may also provide that the number of
performance units to be earned for a given fiscal year or years within
a performance period will vary based upon different levels of
achievement of the applicable performance targets.
(b) Performance Criteria. For purposes of this paragraph 9,
performance goals shall be limited to one or more of the following:
(i) future economic value per share of Common Stock, (ii) earnings per
shares, (iii) return on average common equity, (iv) pre-tax income,
(v) pre-tax operating income, (vi) net revenue, (vii) net income,
(viii) profits before taxes, (ix) book value per share, (x) stock
price and (xi) earnings available to common stockholders.
(c) Annual Payment. Following the completion of each fiscal year or
completion of a performance period, the Committee shall certify in
writing whether the applicable performance goals have been achieved
for such year or performance period and the number of performance
units, if any, payable to a Participant for such fiscal year or
performance period. The amounts due to a Participant to whom this
paragraph 9 applies will be paid following the end of the applicable
fiscal year or performance period after such certification by the
Committee. In determining the amount due to a Participant to whom this
paragraph applies for a given fiscal year or performance period, the
Committee shall have the right to reduce (but not to increase) the
amount payable at a given level of performance to take into account
additional factors that the Committee may deem relevant to the
assessment of individual or corporate performance for the year.
(d) Restrictions. Anything in this paragraph 9 to the contrary
notwithstanding, the maximum annual amount that may be paid to a
Participant under the Plan for (i) the fiscal year in which the Plan
is approved by the Stockholders of the Company shall equal no more
than $2,000,000 and (ii) each subsequent fiscal year shall equal 110%
of such maximum amount for the preceding fiscal year.
(e) Adjustment for Non-Recurring Items, Etc. Notwithstanding anything
herein to the contrary, if the Company's financial performance is
affected by any event that is of a non-recurring nature, the Committee
in its sole discretion may make such adjustments in the financial
criteria as it shall determine to be equitable and appropriate in
order to make the calculations of Awards, as nearly as may be
practicable, equivalent to the calculation that would have been made
without regard to such event. In the event of a significant change of
the business or assets of the Company under circumstances involving an
acquisition or a merger, consolidation or similar transaction, the
Committee shall, in good faith, recommend to the Board for approval
such revisions to the financial criteria and the other terms and
conditions used in calculating Awards for the then current Plan Year
as it reasonably deems appropriate in light of any such change.
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(f) Repeal of Section 162(m). Without further action by the Board, the
provisions of this paragraph 9 shall cease to apply on the effective
date of the repeal of Section 162(m) of the Code (and any successor
provision thereto).
(j) Change of Control
(a) Accelerated Vesting and Payment of SARs. In the event of a Change
of Control, each SAR then outstanding shall be fully exercisable
regardless of the exercise schedule otherwise applicable to such SAR
and, in connection with such a Change of Control, the Committee may,
in its discretion, provide that each SAR shall, upon the occurrence of
such Change of Control, be canceled in exchange for a payment per
share (the "Settlement Payment") in an amount equal to the excess, if
any, of the Change of Control Price over the base price of such SAR.
Such Settlement Payment shall be in the form of cash and shall be paid
within 30 days of the Change of Control.
(b) Payment of Performance Units. In the event of a Change of Control,
the performance period assigned to each performance unit with respect
to which an Award has been previously granted shall be deemed to have
been satisfied, notwithstanding the fact that such performance period
was originally scheduled to extend beyond the date of the Change of
Control. Prior to the effective date of the Change of Control, the
Committee, in the exercise of its absolute discretion, may revise the
performance objectives applicable to any such performance units and
shall determine the amount of payment to be made to each Participant
to whom an Award has been granted. Upon the occurrence of such Change
of Control, the Company shall make payment of the amount so determined
by the Committee in cash to each Participant.
11. Payment of Awards
Payment of Awards shall be made in cash, in a lump sum or
installments, as determined by the Committee; provided, however, that
if a payment is to be made in connection with a Change of Control,
such payment shall be made in a lump sum.
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12. Deferral of Awards
At the discretion of the Committee, payment of a performance unit, or
any portion thereof may be deferred by a Participant until such time
as the Committee may establish. All such deferrals shall be
accomplished by the delivery of a written, irrevocable election by the
Participant at least six months (and in the calendar year) prior to
such time payment would otherwise be made, on a form provided by the
Company. Further, all deferrals shall be made in accordance with
administrative guidelines established by the Committee to ensure that
such deferrals comply with all applicable requirements of the Code and
its regulations. Deferred payments shall be paid in a lump sum or
installments, as determined by the Committee. The Committee may also
credit interest, at such rates to be determined by the Committee, on
cash payments that are deferred and credit dividends or dividend
equivalents on deferred payments denominated in the form of Common
Stock.
13. Termination of Employment
If a Participant's employment with the Company or a Subsidiary
terminates for a reason other than death, disability, retirement, or
any approved reason, all unexercised, unearned, and/or unpaid Awards,
including, but not by way of limitation, Awards earned, but not yet
paid, all unpaid dividends and dividend equivalents, and all interest
accrued on the foregoing shall be cancelled or forfeited, as the case
may be, unless the Participant's Award Notice provides otherwise. The
Committee shall have the authority to promulgate rules and regulations
to (i) determine what events constitute disability, retirement, or
termination for an approved reason for purposes of the Plan, and (ii)
determine the treatment of a Participant under the Plan in the event
of his death, disability, retirement, or termination for an approved
reason.
14. Nonassignability
Unless the Committee determines otherwise, no SARs, performance shares
or other derivative securities (as defined in the rules and
regulations promulgated under Section 16 of the Exchange Act) awarded
under the Plan shall be subject in any manner to alienation,
anticipation, sale, transfer, assignment, pledge, or encumbrance,
except for transfers by will or the laws of descent and distribution;
provided, however, that the Committee may, subject to such terms and
conditions as the Committee shall specify, permit the transfer of an
Award to a Participant's family members or to one or more trusts
established in whole or in part for the benefit of one or more of such
family members. During the lifetime of the Participant, a SAR, or
similar-type other award shall be exercisable only by him or by the
family member or trust to whom such Option, SAR, or other Award has
been transferred in accordance with the previous sentence.
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15. Adjustment of Shares Available
If there is any change in the number of outstanding shares of Common
Stock through the declaration of stock dividends, stock splits or the
like, the number of shares available for Awards, the shares subject to
any Award and the exercise prices of Awards shall be automatically
adjusted. If there is any change in the number of outstanding shares
of Common Stock through any change in the capital account of the
Company, or through any other transaction referred to in Section
424(a) of the Code, the Committee shall make appropriate adjustments
and/or modifications to outstanding Awards as it deems appropriate. In
the event of any other change in the capital structure or in the
Common Stock of the Company, the Committee shall also be authorized to
make such appropriate adjustments in the maximum number of shares of
Common Stock available for issuance under the Plan and any adjustments
and/or modifications to outstanding Awards as it deems appropriate.
16. Withholding Taxes:
The Company shall be entitled to deduct from any payment under the
Plan, regardless of the form of such payment, the amount of all
applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment.
17. Noncompetition Provision
Unless the Award Notice specifies otherwise, a Participant shall
forfeit all unexercised, unearned, and/or unpaid Awards, including,
but not by way of limitation, Awards earned but not yet paid, if, (i)
in the opinion of the Committee, the Participant, without the written
consent of the Company, engages directly or indirectly in any manner
or capacity as principal, agent, partner, officer, director, employee,
or otherwise, in any business or activity competitive with the
business conducted by the Company or any Subsidiary; or (ii) the
Participant performs any act or engages in any activity which in the
opinion of the Chief Executive Officer of the Company is inimical to
the best interests of the Company. In addition, the Committee may, in
its discretion, condition the grant, exercise, payment or deferral of
any Award, dividend, or dividend equivalent made under the Plan on a
Participant's compliance with the terms of this paragraph 17 and any
other terms specified by the Committee in the Award Notice, and cause
such a Participant to forfeit any payment which is deferred or to
grant to the Company the right to obtain equitable relief if the
Participant fails to comply with the terms hereof.
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18. Amendments to Awards:
Subject to the requirements of paragraph 9, the Committee may at any
time unilaterally amend any unexercised, unearned, or unpaid Award,
including, but not by way of limitation, Awards earned but not yet
paid, to the extent it deems appropriate; provided, however, that any
such amendment which, in the opinion of the Committee, is adverse to
the Participant shall require the Participant's consent.
19. Compliance with Law:
With respect to persons subject to Section 16 of the Exchange Act, it
is the intent of the Company that the Plan and all transactions under
the Plan comply with all applicable provisions of Rule 16b-3, as the
Rule may be amended or replaced, under the Exchange Act.
20. No Right to Continued Employment or Grants:
Participation in the Plan shall not give any Key Employee any right to
remain in the employ of the Company or any Subsidiary. The Company or,
in the case of employment with a Subsidiary, the Subsidiary, reserves
the right
21. Amendment:
The Committee may suspend or terminate the Plan at any time. In
addition, the Committee may, from time to time, amend the Plan in any
manner, but may not without Board approval adopt any amendment which
would (a) materially increase the benefits accruing to Participants
under the Plan or (b) materially modify the requirements as to
eligibility for participation in the Plan; and provided further that
the Committee shall not amend the Plan without the approval of the
Board if such approval is required by Rule 16b-3 of the Exchange Act
or Section 162(m) of the Code, in each case as such provision may be
amended from time to time.
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22. Governing Law:
The Plan shall be governed by and construed in accordance with the
laws of the State of Texas, except as superseded by applicable Federal
Law.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly
authorized officers on this 4th day of November, 2002.
Financial Industries Corporation
By: /s/ Thomas C. Richmond
Title: Secretary
By: /s/ Theodore A. Fleron
Title: Vice President and Assistant Secretary
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