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, 1997
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)
The Austin Centre, 701 Brazos, 12th Floor
Austin, Texas 78701
(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: 5,427,965
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item I - Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996.................. 3
Consolidated Statements of Income
For the three and nine month periods ended
September 30, 1997 and 1996............................... 5
Consolidated Statements of Cash Flows
For the three and nine month periods ended
September 30, 1997 and 1996............................... 7
Notes to Consolidated Financial Statements.................... 11
Item 2 - Management's Discussion and Analysis of
Financial Conditions and Results of Operations....... 13
Part II
Other Information............................................. 22
Signature Page................................................ 23
Item 1. Financial Statements
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept.30, Dec. 31,
1997 1996
(Unaudited)
ASSETS
Investments:
Fixed maturities available for sale,
at market value (amortized cost of
$79,925 and $82,969, respectively) $ 82,075 $ 83,833
Equity securities, at market (cost
approximately $11) 4 4
Policy loans 2,576 2,286
Invested Real Estate 7,134 1,374
Short-term investments 24,229 25,615
Total investments 116,018 113,112
Cash 839 308
Investment in affiliate 59,637 52,925
Accrued investment income 915 1,233
Agent advances and other receivables 6,579 7,825
Reinsurance receivables 9,150 6,159
Due and deferred premiums 10,870 10,651
Property and equipment, net 7,425 7,425
Deferred policy acquisition costs 44,101 41,333
Present value of future profits of
acquired business 36,015 40,604
Other assets 5,181 5,706
Separate account assets 509 449
Total assets $ 297,239 $ 287,730
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept.30, Dec. 31,
1997 1996
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits payable $ 60,204 $ 59,340
Contractholder deposit funds 43,444 41,434
Unearned premiums 104 129
Other policy claims & benefits
payable 5,177 5,164
108,929 106,067
Subordinated notes payable to affiliate 55,329 59,940
Deferred federal income taxes 19,931 17,952
Other liabilities 9,904 11,248
Separate account liabilities 509 449
Total liabilities 194,602 195,656
Commitments and contingencies
Shareholders' equity:
Common stock, $.20 par value,
10,000,000 shares authorized;
5,845,300 shares issued, 5,427,965
shares outstanding in 1997 and 1996 1,169 1,169
Additional paid-in capital 7,225 7,225
Net unrealized gain on investments in
fixed maturities available for sale 4,726 1,220
Net unrealized gain on equity securities 30 25
Retained earnings 89,909 82,857
103,059 92,496
Common treasury stock, at cost, 417,335
shares in 1997 and 1996 (422) (422)
Total shareholders' equity 102,637 92,074
Total liabilities and shareholders'
equity $297,239 $287,730
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIOD
ENDED September 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars, except per share data)
3 Months Ended
Sept. 30,
1997 1996
Revenues:
Net premiums $ 10,003 $ 11,025
Net investment income 2,080 1,815
Earned insurance charges 1,325 1,311
Other 762 827
Total revenues 14,170 14,978
Benefits and expenses:
Benefits and other expenses 4,263 5,974
Interest on insurance policies 674 664
Amortization of present value of
future profits of acquired business 1,515 1,429
Amortization of deferred policy
acquisition costs 1,234 862
Operating expenses 3,263 3,054
Interest expense 884 923
Total benefits and expenses 11,833 12,906
Income before federal income taxes
and equity in net earnings of
affiliate 2,337 2,072
Provision for federal income taxes 231 481
Income before equity in net earnings
of affiliate 2,106 1,591
Equity in net earnings of affiliate, net
of tax 497 574
Net income $ 2,603 $ 2,165
Per Share Data:
Common stock and common stock equivalents 5,590 5,565
Net income per share available to common
shareholders $ .47 $ .39
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIOD
ENDED September 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars, except per share data)
9 Months Ended
Sept. 30,
1997 1996
Revenues:
Net premiums $ 30,284 $ 32,636
Net investment income 6,583 5,438
Earned insurance charges 3,655 4,260
Other 2,091 2,731
Total revenues 42,613 45,065
Benefits and expenses:
Benefits and other expenses 13,469 16,768
Interest on insurance policies 1,944 1,679
Amortization of present value of
future profits of acquired business 4,589 3,902
Amortization of deferred policy
acquisition costs 3,516 2,745
Operating expenses 9,405 10,104
Interest expense 2,623 2,896
Total benefits and expenses 35,546 38,094
Income before federal income taxes
and equity in net earnings of
affiliate 7,067 6,971
Provision for federal income taxes 1,497 1,691
Income before equity in net earnings
of affiliate 5,570 5,280
Equity in net earnings of affiliate, net
of tax 1,482 8,279
Net income $ 7,052 $ 13,559
Per Share Data:
Common stock and common stock equivalents 5,586 5,560
Net income per share available to common
shareholders $ 1.26 $ 2.44
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED September 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
3 Months Ended
Sept.30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,603 $ 2,165
Adjustments to reconcile net income to net
cash used in operating activities:
Amortization of present value of future
profits 1,515 1,429
Amortization of deferred policy acquisition
costs 1,234 862
Financing costs amortized -0- -0-
Equity in undistributed earnings of
affiliate (1,235) (2,815)
Changes in assets and liabilities net of
effects from purchase of insurance
subsidiaries:
Decrease in accrued investment income 304 197
Increase in agent advances and
other receivables (1,369) (2,126)
Increase in due and deferred
premiums (107) (352)
Increase in deferred policy acquisition
costs (2,092) (2,106)
(Increase) decrease in other assets (537) 513
Increase in policy liabilities
and accruals 1,887 3,630
Decrease in other liabilities (48) (542)
Increase in policy loans (91) (133)
Increase in deferred federal income taxes 595 693
Other, net 1,125 1,860
Net cash provided by operating
activities $ 3,784 $ 3,275
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
3 Months Ended
Sept.30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased $(3,919) $ (976)
Proceeds from sale and maturities of
investments 5,734 (156)
Net change in short-term investments (757) (1,451)
Retirement of equipment (2,790) -0-
Net cash provided by investing activities (1,732) (2,583)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of subordinated notes payable
to affiliate -0- -0-
Repayment of debt (1,537) -0-
Net cash used in financing activities (1,537) -0-
Net increase in cash 515 692
Cash, beginning of period 324 1,204
Cash, end of period $ 839 $ 1,896
(See Notes to Consolidated Financial Statements)<PAGE>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
9 Months Ended
Sept.30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,052 $ 13,559
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of present value of future
profits 4,589 3,902
Amortization of deferred policy acquisition
costs 3,516 2,745
Financing costs amortized -0- 168
Equity in undistributed earnings of
affiliate (3,793) (11,244)
Changes in assets and liabilities net of
effects from purchase of insurance
subsidiaries:
Decrease in accrued
investment income 318 176
Increase in agent advances
and other receivables (1,745) (160)
Increase in due and deferred
premiums (219) (550)
Increase in deferred policy acquisition
costs (6,284) (6,604)
Decrease in other assets 525 632
Increase in policy liabilities
and accruals 2,862 3,073
(Decrease) increase in other liabilities (1,344) 1,024
Increase in policy loans (290) (345)
Increase in deferred federal
income taxes 1,327 1,687
Other, net 642 1,812
Net cash provided by operating
activities $ 7,156 $ 9,875
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
9 Months Ended
Sept. 30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased $ (6,975) $ (3,735)
Proceeds from sale and maturities of
investments 9,335 955
Net change in short-term investments 1,386 1,214
Purchase of equipment, net (5,760) (1,315)
Net cash provided by (used in)
investing activities (2,014) (2,881)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of subordinated notes payable
to affiliate -0- 253
Repayment of debt (4,611) (6,765)
Net cash used in financing activities (4,611) (6,512)
Net increase (decrease) in cash 531 482
Cash, beginning of period 308 1,414
Cash, end of period $ 839 $ 1,896
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein reflect all adjustments
which are, in the opinion of management, necessary to present a
fair statement of the interim results. The statements have been
prepared to conform to the requirements of Form 10-Q and 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, 1996 previously
filed with the Commission for financial statements prepared in
accordance with GAAP. Certain prior year amounts have been
reclassified to conform with current year presentation.
The consolidated financial statements include the accounts of
Financial Industries Corporation ("FIC") and its wholly-owned
subsidiaries. The investment of FIC in InterContinental Life
Corporation ("ILCO") is presented using the equity method. All
significant intercompany items and transactions have been
eliminated.
FIC's net income is affected by its equity interest in ILCO and
ILCO's insurance subsidiaries. Net income for the first nine
months of 1996 includes $7.2 million resulting from the sale
during the first quarter of 1996 of the Austin Centre, a
hotel/office complex, located in Austin, Texas. The sale was
completed by Investors Life Insurance Company of North America
("Investors-NA"), a wholly-owned subsidiary of ILCO. The selling
price was $62.675 million, less $1 million paid to a capital
reserve account for the purchaser. The property was purchased in
1991 for $31.275 million. The book value of the property, $36.8
million, net of improvements and amortization, was retained and
reinvested by Investors-NA. The balance of the proceeds of the
sale, net of federal income tax, was used to reduce ILCO's senior
loan obligations by $15 million. The sale closed on March 29,
1996.
New Accounting Pronouncements
In February 1997, the FASB issued FAS No. 128, "Earnings Per
Share," which revises the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings Per
Share." The Statement established two measures of earnings per
share: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were converted or
exercised. The Statement requires dual presentation of basic and
diluted earnings per share on the face of the income statement
for all entities with potential dilutive securities outstanding.
The Statement also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation. The Statement is effective for interim and annual
periods ending after December 15, 1997. Earlier application is
not permitted. However, an entity may disclose pro forma
earnings per share amounts that would have resulted if the entity
had applied the Statement in an earlier period. The Company
intends to adopt FAS 128 in its annual financial statements for
the year ended December 31, 1997.
The pro forma unaudited earnings per share amounts that would
have resulted assuming the Company had computed its earnings per
share in accordance with the provisions established by FAS 128
for the three and nine months ended September 30, 1997 and 1996
are as follows:
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
Basic earnings per share $0.48 $0.40
Diluted earnings per share $0.47 $0.39
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Basic earnings per share $1.30 $2.50
Diluted earnings per share $1.26 $2.44
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operation:
For the nine-month period ended September 30, 1997, FIC's net
income was $7,052,000 (or $1.26 per common share), as compared
to $13,559,000 (or $2.44 per common share) in the first nine
months of 1996. The net income per share for the 1996 period has
been restated to reflect the effect of the five-for-one stock
split which was effective November 12, 1996.
Net income from continuing operations (excluding the gain
resulting from ILCO's sale of the Austin Centre, as described
below) was $7,052,000 ($1.26 per common share) for the nine-
month period ended September 30, 1997, as compared to $6,889,000
($1.24 per common share) for the first nine months of 1996.
FIC's net income is affected by its equity interest in
InterContinental Life Corporation ("ILCO") and ILCO's insurance
subsidiaries. Net income for the nine-month period ended
September 30, 1996 includes $6.67 million ($1.20 per common
share) resulting from ILCO's sale of the Austin Centre, a
hotel/office complex, located in Austin, Texas. The sale was
completed by Investors Life Insurance Company of North America
("Investors-NA"), a wholly-owned subsidiary of ILCO. The selling
price was $62.675 million, less $1 million paid to a capital
reserve account for the purchaser. The property was purchased in
1991 for $31.275 million. A portion of the sale proceeds, equal
to the book value of the property, net of improvements and
amortization ($36.8 million), was retained and reinvested by
Investors-NA. The balance of the proceeds of the sale, net of
federal income tax, was used to reduce ILCO's senior loan
obligations by $15 million. The sale closed on March 29, 1996.
The Company and its affiliates will continue to occupy space on
three floors of the office tower as its headquarters, under a
lease which runs through September 30, 1997. In May 1997, the
Investors-NA renewed the lease, for a 5-year period, with options
to renew for additional 5-year periods.
The statutory earnings of Family Life Insurance Company ("Family
Life"), the Company's life insurance subsidiary, as required to
be reported to insurance regulatory authorities before interest
expense, capital gains and losses, and federal income taxes were
$10.7 million at September 30, 1997, as compared to $8.6 million
at September 30, 1996. These statutory earnings are the source
to provide for the repayment of the indebtedness incurred in
connection with the acquisition of Family Life.
The decline in long-term interest rates during the first nine
months of 1997, which was related to general economic conditions,
had a positive effect upon the market value of the fixed
maturities available for sale segment of the Company's portfolio.
As of September 30, 1997, the market value of the fixed
maturities available for sale segment was $82.08 million as
compared to an amortized value of $79.93 million, or an
unrealized gain of $2.15 million. Such increase reflects
unrealized gains on such investments. There is no assurance that
this gain will be realized in the future. The net of tax effect
of this increase has been recorded as an increase in
shareholders' equity.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
Equity in Net Income of InterContinental Life Corporation
General:
Prior to the acquisition of Family Life in June of 1991, FIC's
primary involvement in the life insurance business was through
its equity interest in ILCO. For the nine-month period ended
September 30, 1997, the Company's equity in the net earnings of
ILCO, net of federal income tax, was $1,482,000, as compared to
$8,279,000 for the first nine months of 1996. For the 1996
period, the equity in net earnings of affiliate includes
$6,670,000 attributable to ILCO's net income resulting from the
sale of the Austin Centre property.
FIC currently owns 1,795,146 shares of ILCO's common stock, and
holds options to acquire an additional 1,702,155 shares. The
options were granted under an Option Agreement between FIC and
ILCO which was entered into in March, 1986. In addition, Family
Life currently owns 171,200 shares of ILCO common stock. As a
result, FIC currently owns, directly and indirectly through
Family Life, 1,966,346 shares (approximately 46%) of ILCO's
common stock and holds options to acquire 1,702,155 shares. If
all of FIC's rights under the Option Agreement were to be
presently exercised, FIC's ownership would amount to
approximately 60.1% of the issued and outstanding shares of
ILCO's common stock.
The decline in long-term interest rates during the first nine
months of 1997, which was related to general economic conditions,
had a positive effect upon the market value of the fixed
maturities available for sale segment of ILCO's investment
portfolio. As of September 30, 1997, the market value of the
fixed maturities available for sale segment was $460.6 million as
compared to an amortized cost of $448.5 million, or an unrealized
gain of $12.1 million. Such increase reflects unrealized gains
on such investments. Since FIC owns approximately 46% of the
common stock of ILCO, such unrealized gains net of tax, are
reflected in FIC's equity interest in ILCO, and had the effect of
increasing the reported value of such equity interest by
approximately $3.6 million.
Liquidity and Capital Resources of ILCO:
ILCO is a holding company whose principal assets consist of the
common stock of Investors-NA and its subsidiaries,
InterContinental Life Insurance Company ("ILIC") and, since
February, 1995, Investors-IN. ILCO's primary source of funds
consists of payments under the surplus debentures from Investors-
NA.
The cash requirements of ILCO consist primarily of its service of
the indebtedness created in connection with the 1988 acquisition
of the Investors Life Companies and the 1995 acquisition of
Investors-IN. As of December 31, 1996, the outstanding principal
balance of the ILCO's senior loan obligations was $24.9 million.
ILCO made scheduled principal payments under its senior loan on
January 1, 1997 and July 1, 1997, reducing the principal balance
to $18.4 million at September 30, 1997.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest to it by Investors-NA, pursuant
to the terms of the two surplus debentures. The surplus
debentures were originally issued by Standard Life Insurance
Company and its terms were previously approved by the Mississippi
Insurance Commissioner. Upon the merger of Standard Life into
Investors-NA, the obligations of the surplus debentures were
assumed by Investors-NA. As of September 30, 1997, the
outstanding principal balance of the surplus debentures was $5.0
million and $26.5 million, respectively. Since Investors-NA is
domiciled in the State of Washington, the Washington insurance
law applies to the administration of the terms of the surplus
debentures. Under the provisions of the surplus debentures and
current law, no prior approval of the Washington Insurance
Commissioner is required for Investors-NA to pay interest or
principal on the surplus debentures; provided that, after giving
effect to such payments, the statutory surplus of Investors-NA is
in excess of $10 million (the "surplus floor"). However,
Investors-NA has voluntarily agreed with the Washington Insurance
Commissioner that it will provide at least five days advance
notice of payments which it will make under the surplus
debenture. As of September 30, 1997, the statutory capital and
surplus of Investors-NA was $54.3 million, an amount
substantially in excess of the surplus floor. The funds required
by Investors-NA to meet its obligations to ILCO under the terms
of the surplus debentures are generated from operating income
generated from insurance and investment operations.
In addition to the payments under the terms of the Surplus
Debentures, ILCO has received dividends from Standard Life (now,
from Investors-NA). Washington's insurance code includes the
"greater of" standard for payment of dividends to shareholders,
but has a requirement that prior notification of a proposed
dividend be given to the Washington Insurance Commissioner and
that cash dividends may be paid only from earned surplus. As of
September 30, 1997, Investors-NA had earned surplus of $9.4
million. Since the law applies only to dividend payments, the
ability of Investors-NA to make principal and interest payments
under the Surplus Debentures is not affected. ILCO does not
anticipate that Investors-NA will have any difficulty in making
principal and interest payments on the Surplus Debentures in the
amounts necessary to enable ILCO to service the Senior Loan for
the foreseeable future.
ILIC is domiciled in the State of New Jersey. Under the New
Jersey 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. Any
dividend must be paid from earned surplus. A proposed payment of
a dividend or distribution which, together with dividends or
distributions paid during the preceding twelve months, exceeds
the greater of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) statutory net gain from operations for the
preceding calendar year, is treated as an "extraordinary
dividend" and may not be paid until either it has been approved,
or a waiting period shall have passed during which it has not
been disapproved, by the insurance commissioner. ILIC had earned
surplus of $5.0 million at September 30, 1997.
Investors-IN is domiciled in the State of Indiana. Under the
Indiana insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Under
Indiana law the dividend must be paid from earned surplus.
Extraordinary dividend approval would be required where a
dividend exceeds the greater of 10% of surplus or the net gain
from operations for the prior fiscal year. Investors-IN had
earned surplus of $7.4 million at September 30, 1997.
The Form 10-Qs of ILCO for the nine-month periods years ended
September 30, 1997 and September 30, 1996, set forth the business
operations and financial results of ILCO and its life insurance
subsidiaries. Such 10-Q reports of ILCO, including the
discussion by ILCO's management under the caption "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations" are incorporated herein by reference.
Results of Operations
For the nine-month period ended September 30, 1997, FIC's income
from operations, before federal income tax and equity in net
earnings of affiliate, was $7,067,000 (on revenues of
$42,613,000), as compared to $6,971,000 (on revenues of
$45,065,000) in the first nine months of 1996.
Premiums for the first nine months of 1997, net of reinsurance
ceded, were $30.3 million, as compared to $32.6 million in the
first nine months of 1996. Policyholder benefits and expenses
were $13.5 million in the 1997 period, as compared to $16.8
million in the first nine months of 1996.
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the
common stock of Family Life and its equity ownership in ILCO.
FIC's primary sources of capital consists of cash flow from
operations of its subsidiaries .
The cash requirements of FIC and its subsidiaries consist
primarily of its service of the indebtedness created in
connection with its ownership of Family Life. As of September
30, 1997, the outstanding balance of such indebtedness was $55.3
million on the Subordinated Notes granted by Investors-NA. On
April 17, 1996, the Senior Loan granted by a group of banks was
completely paid off.
The principal source of liquidity for FIC's subsidiaries consists
of the periodic payment of principal and interest by Family Life
pursuant to the terms of a Surplus Debenture. The terms of the
Surplus Debenture were previously approved by the Washington
Insurance Commissioner. Under the provisions of the Surplus
Debenture and current law, no prior approval of the Washington
Insurance Department is required for Family Life to pay interest
or principal on the Surplus Debenture; provided that, after
giving effect to such payments, the statutory surplus of Family
Life is in excess of 6% of assets (the "surplus floor").
However, Family Life has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days
advance notice of payments which it will make under the surplus
debenture. As of September 30, 1997, the statutory capital and
surplus of Family Life was $26.7 million, an amount substantially
in excess of the surplus floor. As of September 30, 1997, the
principal balance of the Surplus Debenture was $33.9 million.
The funds required by Family Life to meet its obligations under
the terms of the Surplus Debenture are generated primarily from
premium payments from policyholders, investment income and the
proceeds from the sale and redemption of portfolio investments.
Washington's insurance code includes the "greater of" standard
for dividends but has requirements that prior notification of a
proposed dividend be given to the Washington Insurance
Commissioner and that cash dividends may be paid only from earned
surplus. Family Life does not presently have earned surplus as
defined by the regulations adopted by the Washington Insurance
Commissioner and, therefore, is not permitted to pay cash
dividends. However, since the new law applies only to dividend
payments, the ability of Family Life to make principal and
interest payments under the Surplus Debenture is not affected.
The Company does not anticipate that Family Life will have any
difficulty in making principal and interest payments on the
Surplus Debenture in the amounts necessary to enable Family Life
Corporation to service its indebtedness for the foreseeable
future.
The sources of funds for Family Life consist of premium payments
from policy holders, investment income and the proceeds from the
sale and redemption of portfolio investments. These funds are
applied primarily to provide for the payment of claims under
insurance and annuity policies, operating expenses, taxes,
investments in portfolio securities, shareholder dividends and
payments under the provisions of the Surplus Debenture.
FIC's net cash flow provided by operating activities was $7.2
million in the first nine months of 1997, as compared to $9.9
million in the first nine months of 1996. Net cash flow used in
financing activities was $4.6 million in the 1997 period, as
compared to $6.5 million in the first nine months of 1996.
In connection with the purchase of the Investors Life Companies
by ILCO and the purchase of Family Life by a wholly- owned
subsidiary of FIC, FIC guaranteed the payment of the indebtedness
created in connection with such acquisitions. After giving
effect to the refinancing of the ILCO Senior Loan and the
repayment of the ILCO Subordinated Loans, the guaranty
commitments of FIC with respect to the debt obligations of ILCO
relate to the ILCO Senior Loan, with an outstanding balance at
September 30, 1997 of $18.4 million.
The guaranty commitments of FIC under the loans incurred in
connection with the acquisition of Family Life (after taking into
account the repayments and new loans which occurred in July,
1993) relate to: (i) the $22.5 million note issued by Family Life
Corporation to Investors Life Insurance Company of North America,
and (ii) the $34.5 million loaned by Investors-NA to two
subsidiaries of FIC.
Management believes that its cash, cash equivalents and short
term investments are sufficient to meet the needs of its business
and to satisfy debt service.
There are no trends, commitments or capital asset requirements
that are expected to have an adverse effect on the liquidity of
FIC.
Investments
As of September 30, 1997, the Company's investment assets totaled
$108.9 million, as compared to $111.7 million as of December 31,
1996.
The level of short-term investments at September 30, 1997 was
$24.2 million, as compared to $25.6 million as of December 31,
1996. The fixed maturities available for sale portion represents
$82.08 million of investment assets as of September 30, 1997, as
compared to $83.83 million at December 31, 1996. The amortized
cost of fixed maturities available for sale as of September 30,
1997 was $79.93 million representing a net unrealized gain of
$2.15 million. This unrealized gain principally reflects changes
in interest rates from the date the respective investments were
purchased. To reduce the exposure to interest rate changes,
portfolio investments are selected so that diversity, maturity
and liquidity factors approximate the duration of associated
policyholder liabilities.
The assets held by Family Life must comply with applicable state
insurance laws and regulations. In selecting investments for the
portfolios of its life insurance subsidiaries, the Company's
emphasis is to obtain targeted profit margins, while minimizing
the exposure to changing interest rates. This objective is
implemented by selecting primarily short- to medium-term,
investment grade fixed income securities. In making such
portfolio selections, the Company generally does not select new
investments which are commonly referred to as "high yield" or
"non-investment grade".
The fixed maturities portfolio of Family Life, as of September
30, 1997, consisted solely of fixed maturities investments which,
in the annual statements of the companies, as filed with state
insurance departments, were designated under the National
Association of Insurance Commissioners ("NAIC") rating system as
a "1" (highest quality).
Management believes that the absence of "high-yield" or "non-
investment grade" investments (as defined above) in the
portfolios of its life insurance subsidiary enhances the ability
of the Company to service its debt, provide security to its
policyholders and to credit relatively consistent rates of return
to its policyholders.
Family Life Insurance Company, an indirect, wholly-owned
subsidiary of FIC, is the owner and developer of a 7.1 acre tract
in Austin, Texas, adjacent to the 20-acre Bridgepoint Square
Offices site being developed by a subsidiary of ILCO. The site
was purchased by Family Life in May 1996, for $1.3 million. In
January, 1997, Family Life began construction on a four-story
office building, with rentable space of approximately 76,793
square feet, and a parking garage with 350 parking spaces. The
projected completion date is November, 1997. Upon completion of
the project, the investment of Family Life will be approximately
$11.7 million, including the cost of the land. The building is
fully leased to a third party.
Year 2000 Compliance
The Company and its subsidiaries utilize a centralized computer
system to process policyholder records and financial information.
In addition, the Company uses non-centralized computer terminals
in connection with its operations. The software programs used in
connection with these systems will be affected by what is
referred to as the "year 2000 date problem". This refers to the
limitations of the programming code in certain existing software
programs to recognize date sensitive information as the year 2000
approaches. Unless modified prior to the year 2000, such
systems may not properly recognize such information and could
generate erroneous data or cause a system to fail to operate
properly.
The Company has evaluated its centralized computer systems and
has developed a plan to reach year 2000 compliance. A central
feature of the plan is to convert most of the centralized
systems to a common system which is already in compliance with
year 2000 requirements. The Company is in the process of this
systems conversion and anticipates that the project will be
completed in advance of the year 2000.
With respect to non-centralized systems (i.e. desktop computers),
the Company anticipates that updated software releases will be
commercially available well in advance of the year 2000.
Accordingly, to the extent that such systems rely on date
sensitive information, the Company expects that the effort needed
to correct for year 2000 problems will be less time intensive
than the effort needed to achieve compliance for its centralized
systems.
Accounting Developments
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No. 128,
"Earnings Per Share," which revises the standards for computing
earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share." The Statement established two measures of
earnings per share: Basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were converted or exercised. The Statement requires dual
presentation of basic and diluted earnings per share on the face
of the income statement for all entities with potential dilutive
securities outstanding. The statement also requires a
reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator
of the diluted earnings per share computation. The statement is
effective for interim and annual periods ending after December
15, 1997. Earlier application is not permitted. However, a
company may disclose pro forma earnings per share amounts that
would have resulted if it had applied the statement in an earlier
period. The Company intends to adopt FAS 128 in its annual
financial statements for the year ended December 31, 1997.
The pro forma unaudited earnings per share amounts that would
have resulted assuming the Company had computed its earnings per
share in accordance with the provisions established by FAS 128 as
of the quarters ended September, 30, 1997 and 1996 are as
follows:
Nine Months Ended Nine Months Ended
September, 30, 1997 September 30, 1996
Basic earnings per share $1.30 $2.50
Diluted earnings per share $1.26 $2.44
<PAGE>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
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 upon the financial statements.
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
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Form 10-K Annual Report of Registrant for the
year ended December 31, 1996 heretofore filed
by Registrant with the Securities and Exchange
Commission, which is hereby incorporated by
reference.
(b) Reports on Form 8-K:
None
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
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
/s/ James Grace
James M. Grace
Treasurer
Date: November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000035733
<NAME> FINANCIAL INDUSTRIES CORPORATION
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