SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File
Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 74-2126975
State of Incorporation (I.R.S. Employer
Identification number)
701 Brazos, Suite 1400, Austin, Texas 78701
(Address of Principal Executive Offices) (Zip Code)
(512) 404-5050
(Registrant's Telephone Number)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. YES X NO
The aggregate market value of the voting stock held by non-
affiliates of the Registrant on March 25, 1997, based on the
closing sales price in The Nasdaq Small-Cap Market ($12.25
per share), was $41,001,608.
The number of shares outstanding of Registrant's common stock on
March 25, 1997 was 5,427,965.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
A. Reports on Form 10-K of InterContinental Life
Corporation for the fiscal years ended December 31,
1996, 1995 and 1994 are hereby incorporated by
reference.
PART I
Item 1. Business
General
Financial Industries Corporation ("FIC", the "Company" or the
"Registrant") is a holding company primarily engaged in the life
insurance business through its ownership of 100% of Family Life
Insurance Company ("Family Life") and its approximately 46%
interest in InterContinental Life Corporation ("ILCO"). FIC also
holds options to acquire additional shares, which, if exercised,
would result in FIC owning approximately 61.5% of ILCO's
outstanding shares.
The Registrant was organized as an Ohio corporation in 1968 and
was reincorporated in Texas in 1980. Its executive offices are
located at 701 Brazos, Suite 1400, Austin, Texas 78701. Through
1984, FIC's principal business was the sale and underwriting of
life and health insurance, mainly in the midwestern and
southwestern United States. In 1985, FIC acquired control of
ILCO.
FIC, ILCO and their insurance subsidiaries have substantially
identical managements, and a majority of the directors of FIC are
also directors of ILCO and FIC's and ILCO's insurance
subsidiaries. Officers allocate their time between FIC and
ILCO in accordance with the comparative requirements of both
companies and their subsidiaries. Roy F. Mitte, Chairman,
President and Chief Executive Officer of FIC, ILCO and their
insurance subsidiaries, owns 34% of the outstanding shares of
FIC's common stock.
Acquisitions
Strategy. The Company's strategy has been and continues to be to
grow internally and through acquisitions, while maintaining an
emphasis on cost controls. Management believes that, under
appropriate circumstances, it is more advantageous to acquire
companies with large books of in-force life insurance than to
produce new business, because initial underwriting costs have
already been incurred and mature business is generally less
likely to terminate, making possible more predictable profit
analysis. However, Family Life does continue to market those
products that are profitable, as well as develop new products and
streamline distribution channels. See "Agency Operations". It is
also management's belief that the continuing consolidation in the
life insurance industry presents attractive opportunities for the
Company to acquire life insurance companies that complement or
fit within the Company's existing marketing structure and product
lines. The Company's objective is to improve the profitability
of acquired businesses by consolidating and streamlining the
administrative functions of these businesses, eliminating
unprofitable products and distribution channels, applying its
marketing expertise to the acquired company's markets and agents,
and benefitting from economies of scale. FIC's ability to make
future acquisitions will be dependent on its being able to obtain
the necessary financing. In addition, since ILCO has the same
acquisition strategy as FIC, a conflict of interest could arise
in the future between FIC and ILCO with respect to acquisition
opportunities.
Acquisition of ILCO. In January 1985, FIC acquired 26.53% of
ILCO's Common Stock. FIC and Family Life subsequently acquired
additional shares of ILCO's Common Stock and as of March 17,
1997, FIC owned, directly and indirectly through Family Life,
approximately 46% of the outstanding shares of ILCO's Common
Stock. FIC holds options to acquire up to 1,702,155 additional
shares of ILCO's Common Stock. Giving effect to the exercise of
those options, FIC would own, directly and indirectly through
Family Life, approximately 61.54% of the outstanding shares of
ILCO's Common Stock. The exercise price of the options is equal
to the average quoted market price of ILCO's common stock over
the six-month period immediately prior to exercise. In addition,
in the event that any other party should seek to acquire, without
the prior approval of ILCO's Board of Directors, securities
aggregating five percent or more of the outstanding shares of
ILCO, FIC would then have the right to acquire, under the same
price formula, that number of shares of common stock which
together with the shares then owned by FIC, would amount to 51%
of the outstanding shares of ILCO. The consideration for the
options was FIC's granting to ILCO a loan in the principal amount
of $1.2 million, FIC's agreement to guarantee additional ILCO
obligations totaling $4.0 million and FIC's agreement to
guarantee ILCO's lease obligation on its headquarters building
upon demand. In addition, FIC guaranteed a $15.0 million term
loan of ILCO.
Acquisition of Family Life. FIC acquired Family Life from
Merrill Lynch Insurance Group, Inc. on June 12, 1991. The
consideration for the purchase was $114 million consisting of a
cash payment of $70 million and $44 million of subordinated
promissory notes issued by subsidiaries of FIC to the seller and
its affiliates. Family Life underwrites and sells mortgage
protection life insurance to customers who are mortgage borrowers
from financial institutions where Family Life has marketing
relationships. Family Life distributes its insurance products
primarily through a national career agency sales force. See
"Acquisition of Family Life".
ILCO's Acquisitions
In November 1986, ILCO acquired Standard Life Insurance Company
("Standard Life"), headquartered in Jackson, Mississippi, for a
gross purchase price of $54.5 million. A portion of the funds
used by the new life insurance company formed by ILCO to make the
acquisition ("New Standard") was the proceeds of a loan extended
to the Company by a national bank in the principal amount of
$15.0 million (the "Standard Term Loan"). This sum was, in turn,
loaned by ILCO to New Standard, and the loan was evidenced by a
surplus debenture. New Standard was merged into Standard Life in
June 1988.
In December 1988, ILCO, through Standard Life, purchased
Investors Life Insurance Company of California ("Investors-CA")
and Investors Life Insurance Company of North America
("Investors-NA") from CIGNA Corporation for a purchase price of
$140 million. ILCO obtained the funds used for the acquisition
from: (a) a senior loan in the amount of $125.0 million provided
by six financial institutions, (b) a $10.0 million subordinated
loan provided by two insurance and financial service
organizations and (c) the sale of $5.0 million of Class A
Preferred Stock to CIGNA and $15.0 million of Class B Preferred
Stock to the subordinated lenders. Approximately $15.0 million
of these funds were used to discharge the Standard Term Loan.
The balance of these funds were loaned by ILCO to Standard Life.
To evidence this indebtedness, Standard Life issued a $140.0
million surplus debenture to ILCO. In connection with the
subordinated debt and preferred stock financing, ILCO issued
detachable warrants entitling the holders to purchase 1,107,480
shares of ILCO's Common Stock at $3.33 per share.
In May 1990, ILCO effected an exchange agreement with the holders
of its Class A Preferred Stock and its Class B Preferred Stock.
Under the provisions of the exchange agreement, the holders of
the Class A Preferred Stock received $5 million principal amount
of a 13.25% 1998 Series Subordinate Notes, due November 1, 1998,
together with a make whole amount equal to 13.25% of the then
outstanding balance of the Note. The holders of the Class B
Preferred Stock received $15 million principal amount of a 13.25%
1999 Series Subordinated Notes, due November 1, 1999.
ILCO prepaid the subordinated debt and purchased the warrants in
early 1993. See "The ILCO Senior Loan".
In February, 1995, ILCO, through Investors-NA, purchased from
Meridian Mutual Insurance Company the stock of Meridian Life
Insurance Company, an Indianapolis-based life insurer, for a cash
purchase price of $17.1 million. After the acquisition, Meridian
Life changed its name to Investors Life Insurance Company of
Indiana ("Investors-IN"). Investors-IN is licensed in ten states
and markets a variety of individual life and annuity products
through independent agents.
On March 25, 1997, ILCO and Investors-IN entered into an
agreement to acquire State Auto Life Insurance Company, an Ohio
domiciled life insurer, from State Automobile Mutual Insurance
Company, for a cash purchase price of $11.8 million, subject to
certain post-closing adjustments. In connection with this
transaction, the bank group participating in the Senior Loan have
agreed to defer payment of $4.5 million otherwise payable on
April 1, 1997 under the terms of the Senior Loan, and to reduce
the amount of the payment otherwise due on July 1, 1997 by $2.5
million. This deferral would result in extending the maturity
date of the Senior Loan to October 1, 1998. Under the terms of
the transaction, State Auto Life would be merged into Investors-
IN. The closing of the transaction, which is expected to occur
during the second quarter of 1997, is subject to regulatory
approvals.
Business of Family Life Insurance Company
Family Life, which was organized in the State of Washington in
1949, specializes in providing mortgage protection life,
disability and accidental death insurance and annuity products to
mortgage borrowers of financial institutions. Family Life has
policies in force with customers of approximately 335 financial
institutions, of which approximately 35 actively provide Family
Life with regular updating of their lists of borrowers.
Family Life's mortgage protection business consists of term and
universal life insurance and disability insurance sold to
borrowers of mortgage debt, designed to repay the mortgages of
policyholders in the event of their death or disability. This
business is sold to customers of client financial institutions,
usually through a list of borrowers provided by the financial
institution. These policies often list the lending financial
institution as the primary beneficiary of the life insurance
policy. An important feature of the Family Life product is the
ability to bill and collect premiums through the policyholder's
monthly mortgage payments.
Family Life has annuity products and a variety of life insurance
products, including decreasing term life insurance, universal
life insurance, ten-year level term products, and a whole life
insurance product.
During 1996, 1995 and 1994, Family Life received premium income
from sales of its annuity products and various lines of insurance
as follows: $0.2 million, $3.8 million and $1.5, respectively,
from annuity products; $48.3 million, $51.5 million and $52.4
million, respectively, from individual life; $1.0 million, $1.2
million and $1.4 million, respectively, from individual accident
and health; $469,327, $483,373 and $609,132, respectively, from
direct mail (group) life and $238,128, $289,749 and $424,429,
respectively, from direct mail (group) accident and health.
Family Life is licensed to sell mortgage life insurance products
in 49 states and the District of Columbia. In 1996, premium
income from these products was derived from all states in which
Family Life is licensed, with significant amounts derived from
Texas (24%), California (23%), and Illinois (5%).
Family Life's primary distribution channel is its agency force of
approximately 514 career agents (at December 31, 1996), who are
organized into ten regions. Most of the career agents sell
mortgage life insurance products exclusively for Family Life.
Family Life's other distribution channel had been direct mail
marketing. However, in 1992, Family Life discontinued
solicitations of new direct mail business in order to concentrate
more cost effectively on proven agent sold operations.
The mortgage life insurance business is very fragmented. Family
Life believes that it is among the larger writers of agent sold
mortgage life insurance in the United States and the only nation-
wide agent-sold life insurance company operating through leads
from financial institutions. Many of Family Life's competitors
are life insurance companies with more resources than Family Life
and whose mortgage life insurance business represents only a
small portion of their total business.
Consolidation and Administration
Following the 1991 acquisition of Family Life by FIC, management
integrated the sales, marketing, underwriting, accounting,
contract and licensing, investments, personnel, data processing,
home office support and other departments of Family Life and the
life insurance subsidiaries of ILCO. Management believes this
integration has resulted in cost savings for Family Life and
ILCO's insurance subsidiaries. During 1992, ILCO's and FIC's
insurance operations were centralized at their headquarters in
Austin, Texas, with the exception of certain services performed
in Seattle, Washington. Management believes that relocating
administrative functions to Austin has reduced costs and improved
the efficiency of the insurance companies' operations.
At December 31, 1996, the number of employees within FIC and its
subsidiaries, together with the employees of ILCO's insurance
subsidiaries, was approximately 332.
Business of InterContinental Life Corporation
ILCO was incorporated in 1969 under the laws of New Jersey. Its
executive office is located at 701 Brazos, Suite 1400, Austin,
Texas 78701.
Operations. ILCO has developed management techniques to reduce
operating expenses by centralizing, standardizing and more
efficiently performing many functions common to most life
insurance companies, such as underwriting and policy
administration, accounting and financial reporting, marketing,
regulatory compliance, actuarial services and asset management.
ILCO has selectively recruited personnel in sales, marketing and
various administrative departments.
ILCO's centralized management techniques resulted in significant
employee reductions and expense savings in the three life
insurance companies acquired by ILCO in 1986 and 1988. During
1996, the general insurance expenses of ILCO's insurance
subsidiaries were $12,008,160, as compared to $13,737,883 in 1995
and $12,865,000 in 1994. The attainment of this level of cost
reduction has contributed significantly to the achievement of the
current level of profitability. Management is committed to
maintaining the general insurance expenses of ILCO's insurance
subsidiaries at a level which will generate an acceptable level
of profitability while maintaining the competitive pricing of
their insurance products.
Principal Products. ILCO's insurance subsidiaries are engaged
primarily in administering existing portfolios of individual and
group life insurance and accident and health insurance policies
and annuity products. Approximately 74.5% of the total collected
premiums for 1996 were derived primarily from renewal premiums on
insurance policies and annuity products sold by ILCO's insurance
subsidiaries prior to their acquisition by ILCO.
ILCO's insurance subsidiaries are also engaged in marketing and
underwriting individual life insurance and annuity products in 49
states and the District of Columbia. These products are marketed
through independent, non-exclusive general agents.
The products currently being distributed include several versions
of universal life insurance and interest-sensitive whole life
insurance. Under a whole life insurance policy, the policyholder
pays a level premium over his or her expected lifetime. The
policy combines life insurance protection with a savings plan
that gradually increases in amount over a period of several
years. The universal and interest-sensitive whole life insurance
policies of ILCO's insurance subsidiaries provide permanent life
insurance which credit company-declared current interest rates.
The universal life insurance portfolio of ILCO's insurance
subsidiaries consists primarily of flexible premium universal
life insurance policies. Under the flexible premium policies,
policyholders may vary the amounts of their coverage (subject to
minimum and maximum limits) as well as the date of payment and
frequency of payments.
Direct premiums received from all types of universal life
products were $40.6 million in 1996, as compared to $42.3 million
in 1995 and $42.1 million in 1994. Investors-NA received
reinsurance premiums from Family Life of $1.6 million in 1996,
pursuant to the reinsurance agreement for universal life products
written by Family Life. In 1996, premium income from all life
insurance products was derived from all states in which ILCO's
insurance subsidiaries are licensed, with significant amounts
derived from Pennsylvania (14%), California (9.0%) New Jersey
(9.0%).
Until they discontinued sales of credit life and disability
insurance in the fourth quarter of 1994, two of ILCO's insurance
subsidiaries generally sold that insurance to consumers through
lending and credit organizations. Such insurance was generally
written on an individual or group basis to (i) persons financing
the purchase of new automobiles in the State of New Jersey and
(ii) persons obtaining loans from banks and finance companies in
southeastern states. Most policies of this type were issued for
a term of 48 months or less. Direct premiums received from
credit life and accident insurance, prior to reinsurance, were
$4.2 million in 1994 and $6.5 million in 1993.
Two of ILCO's insurance subsidiaries receive premium income from
health insurance policies. In 1996, premium income from all
health insurance policies was $0.9 million, as compared to $1.1
million in 1995 and $1.4 million in 1994. Premium income from
health insurance in 1996 was derived from all of the states in
which those two insurance subsidiaries are licensed, with
significant amounts derived from Pennsylvania (23%), New Jersey
(23%), and California (10%).
Investors-NA sponsors a variable annuity separate account, which
offers single premium and flexible premium policies. The
policies provide for the contract owner to allocate premium
payments among four different portfolios of Putnam Capital
Manager Trust ("PCM Fund"), a series fund which is managed by
Putnam Investment Management, Inc. As of January 1, 1997, the
PCM Fund changed its name to Putnam Variable Trust. Prior to
April, 1995, the underlying investment vehicle for the variable
annuity contracts was the CIGNA Annuity Funds Group. A
substitution of the PCM Fund for the CIGNA Funds was completed in
April, 1995. The plan of substitution was approved by the
Securities and Exchange Commission. Following such approval, the
plan was submitted to policyholders for approval, which approval
was obtained. During 1996, the premium income realized in
connection with these variable annuity policies was $256,294,
which was received from existing contract owners.
Direct deposits from the sale of fixed annuity products by ILCO's
subsidiaries were $948,000 in 1996, as compared to $1,359,000 in
1995 and $1,296,000 in 1994. Investors-NA received reinsurance
premiums from Family Life of $3.8 million in 1996, pursuant to
the reinsurance agreement for annuity products written by Family
Life.
The following table sets forth, for the three years ended
December 31, 1996, the combined premium income and other
considerations received by ILCO's insurance subsidiaries from
sales of their various lines of insurance.
Year Ended December 31,
Type of Insurance 1996 1995 1994
(in thousands)
Individual:
Life $15,031 $16,426 $15,721
Accident & Health 1,035 1,218 1,435
Total Individual Lines 16,066 17,644 17,156
Group:
Life 2,018 2,594 2,226
Accident & Health 6 105
Total Group Lines 2,018 2,600 2,331
Credit:
Life (85) (222) 3,282
Accident & Health (57) 240 2,296
Total Credit Lines (142) 18 5,578
Total Premiums 17,942 20,262 25,065
Reinsurance premiums ceded (7,962) (8,568) (10,748)
Total Net Premium 9,980 11,694 14,317
Amount Received on
Investment
Type Contracts 47,135 44,130 43,372
Total Premiums and
Deposits Received $57,115 $55,824 $57,689
Merger of Insurance Subsidiaries. Investors-NA redomesticated
from Pennsylvania to Washington in December of 1992. Investors-
CA merged into Investors-NA on December 31, 1992. Standard Life
merged into Investors-NA on June 29, 1993. The mergers have
achieved cost savings, such as reduced auditing expenses involved
in auditing one combined company; the savings of expenses and
time resulting from the combined company being examined by one
state insurance department (Washington), rather than three
(California, Pennsylvania and Mississippi); the reduction in the
number of tax returns and other annual filings with 45 states;
and smaller annual fees to do business and reduced retaliatory
premium taxes in most states. Management believes that these
reductions in expenses have further strengthened the financial
condition of the combined company.
Investment of Assets
The assets held by Family Life and ILCO's life insurance
subsidiaries must comply with applicable state insurance laws and
regulations pertaining to life insurance companies. The
investment portfolios of Family Life and ILCO's life insurance
subsidiaries are tailored by their managements to reflect the
nature of the insurance obligations, business needs, regulatory
requirements and tax considerations relating to the underlying
insurance business with respect to such assets. This is
particularly the case with respect to interest-sensitive life
insurance products, where the investment emphasis is to obtain a
targeted margin of profit over the rate of interest credited to
policyholders, while endeavoring to minimize the portfolio's
exposure to changing interest rates. To reduce the exposure to
such rate changes, portfolio investments are selected so that
diversity, maturity and liquidity factors approximate the
duration of associated policyholder liabilities.
The investment objective of Family Life and ILCO's insurance
subsidiaries emphasizes the selection of short to medium term,
high quality fixed income securities, rated Baa-3 (investment
grade) or better by Moody's Investors Service, Inc. At December
31, 1996, only 3.9% of ILCO's total assets were invested in
mortgage loans or real estate. Non-affiliated corporate debt
securities that were non-investment grade represented 1.1% of
ILCO's total assets at December 31, 1996. ILCO had investments
in debt securities of affiliated companies aggregating
approximately $59.9 million as of December 31, 1996. Family Life
does not have investments in mortgage loans, real estate, non-
investment grade debt securities or affiliates' debt securities.
The investments of Family Life and ILCO's insurance subsidiaries
in mortgage-backed securities included collateralized mortgage
obligations ("CMOs") of $40.4 million and $260.1 million,
respectively, and mortgage-backed pass-through securities of $7.3
million and $53.7 million, respectively, at December 31, 1996.
Mortgage-backed pass-through securities, sequential CMO's,
support bonds and z-accrual bonds, which comprised approximately
39.8% of the book value of FIC's mortgage-backed securities and
52.3% of the book value of ILCO's mortgage-backed securities at
December 31, 1996, are sensitive to prepayment and extension
risks. ILCO and FIC have reduced the risk of prepayment
associated with mortgage-backed securities by investing in
planned amortization class ("PAC"), target amortization class
("TAC") instruments, accretion directed bonds and scheduled
bonds. These investments are designed to amortize in a
predictable manner by shifting the risk of prepayment of the
underlying collateral to other investors in other tranches
("support classes") of the CMO. At December 31, 1996, PAC and
TAC instruments and accretion directed and scheduled bonds
represented approximately 60.8% of the book value of FIC's
mortgage-backed securities and approximately 47.7% of the book
value of ILCO's mortgage-backed securities. Sequential and
support classes represented approximately 21.1% of the book value
of FIC's mortgage-backed securities and approximately 35.2% of
the book value of ILCO's mortgage-backed securities at December
31, 1996. In addition, FIC and ILCO limit the risk of prepayment
of CMOs by not paying a premium for any CMOs. ILCO and FIC do
not invest in mortgage-backed securities with increased
prepayment risk, such as interest-only stripped pass-through
securities and inverse floater bonds. FIC does not have any z-
accrual bonds, and those bonds constituted only 3.4% of the book
value of ILCO's mortgage-backed securities at December 31, 1996.
The prepayment risk that certain mortgage-backed securities are
subject to is prevalent in periods of declining interest rates,
when mortgages may be repaid more rapidly than scheduled as
individuals refinance higher rate mortgages to take advantage of
the lower current rates. As a result, holders of mortgage-backed
securities may receive large prepayments on their investments
which cannot be reinvested at an interest rate comparable to the
rate on the prepaying mortgages. Neither FIC nor ILCO made
additional investments in CMOs during 1996, and the current
investment objectives of both FIC and ILCO do not contemplate
additions to the portfolio of CMO investments during 1997.
FIC and ILCO do not invest in non-agency mortgage-backed
securities, which have a greater credit risk than that of agency
mortgage-backed securities.
ILCO and FIC do not make new mortgage loans on commercial
properties. Substantially all of ILCO's mortgage loans were made
by its subsidiaries prior to their acquisition by ILCO. At
December 31, 1996, 0.6% of the total book value of mortgage loans
held by ILCO had defaulted as to principal or interest for more
than 90 days, and none of ILCO's mortgage loans were in
foreclosure. During 1996, none of ILCO's mortgage loans were
converted to foreclosed real estate or were restructured while
ILCO owned them. Family Life does not have any mortgage loans.
Another key element of FIC's and ILCO's investment strategy is to
avoid large exposure in other investment categories which
management believes carry higher credit or liquidity risks,
including private placements, partnerships and bank
participations. These categories accounted for approximately
1.2% of ILCO's invested assets and none of FIC's invested assets
at December 31, 1996.
A subsidiary of ILCO, Investors-NA, is the owner and developer of
an office complex known as Bridgepoint Square Offices. Once
completed, the project will consist of four office buildings,
with a total rentable space of 364,000 square feet, and two
parking garages. Investors-NA purchased the 20 acre tract of land
for this complex in January, 1995. At that time, the tract
included one completed and fully leased office building, an
adjacent parking garage, and sites for three more office
buildings and a second parking garage. Since the purchase,
Investors-NA has completed construction on the second parking
garage and two of the remaining building sites. Construction is
in progress on the fourth building, with a projected completion
date in July, 1997. Three of the four buildings are fully
occupied by tenants and the fourth is partially leased.
Negotiations are in progress with two potential tenants to lease
the remaining space in the fourth building. See Item 2.
Properties.
In May 1996, Family Life Insurance Company, an indirect, 100%
owned subsidiary of FIC, purchased a 7.1 acre tract adjacent to
the original Bridgepoint Square tract. This second tract
contained one building site and one garage site. In January,
1997, Family Life began construction on a four-story office
building, with rentable space of approximately 71,500 square
feet, and the parking garage, with 350 parking spaces. The
projected completion date is September, 1997. Once construction
on the building is completed, FIC, ILCO and their related
companies will move their headquarters from the current location
in the Austin Centre to the new office building. The companies
will occupy approximately 50,000 square feet of the building,
with the balance to be leased to a third party.
FIC and ILCO have established and staffed an investment
department, which manages portfolio investments and investment
accounting functions for their life insurance subsidiaries.
Agency Operations
The products of FIC's and ILCO's insurance subsidiaries are
marketed and sold through two divisions:
A. Investors Life Distribution System
Investors Life Distribution System sells a wide range of life
insurance and annuity products through an independent, non-
exclusive general agent sales distribution system. The products
sold are issued by subsidiary companies of ILCO.
All marketing and sales for the Company are directed by the
Executive Vice President of Marketing and Sales. The Vice
President for Investors Sales directs Regional Vice Presidents
who are responsible for the recruitment of general agents and
managing general agents for individual insurance sales in the
Investors Life Distribution System.
B. Family Life Distribution System
This nationwide system sells Family Life's products through an
exclusive agent force. This agent force sells mortgage
protection insurance and annuity products. The products are sold
primarily to middle-income customers of client financial
institutions, usually through a list of borrowers provided by the
financial institution. Family Life works closely with the
financial institutions to maintain and insure that Family Life
lead systems, which had been built from the loan portfolios of
each active financial institution, operate at a level that favors
both parties. Family Life agents make courtesy calls to
borrowers of the financial institutions which are active on the
Family Life lead system to offer the borrower the opportunity to
purchase mortgage protection insurance (term, universal or whole
life insurance products).
Sales and Marketing for Family Life is directed by the Executive
Vice President of Marketing and Sales. Reporting to the Executive
Vice President, the Senior Vice President of Marketing heads the
Family Life marketing organization which is focused on the
development and maintenance of contractual agreements with the
financial institutions which provide referrals to, and collect
monthly premiums from, their borrowers for Family Life insurance
plans. The Senior Vice President for Family Life Sales directs
nine Regional Vice Presidents. The Family Life distribution
system consists of 72 District Sales Managers, and 514 active
career agents.
Data Processing
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided at a central location until November
30, 1994. Effective December 1, 1994, all of those data
processing needs have been provided to ILCO's and FIC's Austin,
Texas and Seattle, Washington facilities by FIC Computer
Services, Inc., a new subsidiary of FIC. See Item 13. Certain
Relationships and Related Transactions with Management.
Competition
There are many life and health insurance companies in the United
States. Agents placing insurance business with Family Life and
ILCO's insurance subsidiaries are compensated on a commission
basis. However, some companies pay higher commissions and charge
lower premium rates and many companies have more substantial
resources than Family Life and ILCO's insurance subsidiaries.
The principal cost and competitive factors that affect the
ability of Family Life and ILCO's insurance subsidiaries to sell
their insurance products on a profitable basis are: (1) the
general level of premium rates for comparable products; (2) the
extent of individual policyholders services required to service
each product category; (3) general interest rate levels; (4)
competitive commission rates and related marketing costs; (5)
legislative and regulatory requirements and restrictions; (6) the
impact of competing insurance and other financial products; and
(7) the condition of the regional and national economies.
Reinsurance and Reserves
In accordance with general practices in the insurance industry,
Family Life and ILCO's insurance subsidiaries limit the maximum
net losses that may arise from large risks by reinsuring with
other carriers. Such reinsurance provides for a portion of the
mortality risk to be retained by Family Life and the ILCO
subsidiaries with the excess being ceded to a reinsurer at a
premium set forth in a schedule based upon the age and risk
classification of the insured. The reinsurance treaties provide
for allowances that help Family Life and ILCO's insurance
subsidiaries offset the expense of writing new business. Family
Life generally retains the first $200,000 of risk on the life of
any one individual. ILIC generally retains the first $70,000 of
risk on the life of any individual. On group life insurance, the
retention level is $50,000 per individual life. Investors-NA
generally retains the first $100,000 of risk on the life of any
individual. Investors-IN generally retains the first $50,000 of
risk on the life of any individual.
In 1988, Investors-NA entered into a bulk reinsurance treaty
under which it reinsured all of its risks under accidental death
benefit policies. ILIC had previously obtained similar bulk
reinsurance for accidental death benefit policies. The treaty
was renegotiated with another reinsurer, with a new effective
date of January 1, 1996. Effective as of January 1, 1997, the
treaty was renegotiated with a different reinsurer.
In 1993 ILCO's life insurance subsidiaries entered into a quota
share reinsurance treaty under which all credit life and health
business issued March 1, 1993 and later is 50% reinsured.
In 1995, Family Life (as the ceding company) entered into a
reinsurance agreement with Investors-NA (as the reinsuring
company) pertaining to universal life insurance written by Family
Life. The reinsurance agreement is on a co-insurance basis and
applies to all covered business with effective dates on and after
January 1, 1995. The agreement applies to only that portion of
the face amount of the policy which is less than $200,000; face
amounts of $200,000 or more are reinsured by Family Life with a
third party reinsurer. In 1996, Family Life (as the ceding
company) entered into a reinsurance agreement with Investors-NA
(as the reinsuring company), pertaining to annuity contracts
written by Family Life. The agreement applies to contracts
written on or after January 1, 1996. These reinsurance
arrangements reflect management's plan to develop universal life
and annuity business at Investors-NA, with Family Life
concentrating on the writing of term life insurance products.
Although reinsurance does not eliminate the exposure of FIC's and
ILCO's insurance subsidiaries to losses from risks insured, the
net liability of such subsidiaries will be limited to the portion
of the risk retained, provided that the reinsures meet their
contractual obligations.
ILCO's insurance subsidiaries and Family Life carry reserves on
their books to meet future obligations under their outstanding
insurance policies. Such reserves are believed to be sufficient
to meet policy obligations as they mature and are calculated
using assumptions for interest, mortality, expenses and
withdrawals in effect at the time the policies were issued.
Acquisition of Family Life
On June 12, 1991 FIC consummated the purchase of all of the
outstanding shares of common stock of Family Life, a State of
Washington based life insurance corporation, from Merrill Lynch
Insurance Group, Inc. ("Merrill Lynch") pursuant to the terms of
a definitive Stock Purchase Agreement entered into in March of
1991. The business of Family Life, as reconstituted for sale,
consists principally of the underwriting and sale of life
insurance to mortgage borrowers through lending institutions.
The consideration for the purchase was $114 million consisting of
a cash payment of $70 million and $44 million of subordinated
promissory notes issued by subsidiaries of FIC to the seller and
its affiliates.
To effectuate the transaction, FIC organized two downstream
holding companies: Family Life Corporation ("FLC"), and Family
Life Insurance Investment Corporation ("FLIIC"). FLIIC was
organized as a wholly-owned subsidiary of FIC and, in turn, was
issued all of the outstanding shares of FLC. FLC purchased
250,000 shares of common stock, being all of the outstanding
shares, of Family Life from Merrill Lynch for an $84 million cash
payment (including $14 million that had been borrowed by FLIIC
from an affiliate of Merrill Lynch) and a $30 million senior
subordinated note. Following the purchase of the Family Life
shares by FLC, Family Life issued 250,000 previously unissued
shares of its common stock to FLC for a $2.5 million cash payment
and immediately thereafter redeemed from FLC 250,000 shares of
its common stock that had been purchased by FLC from Merrill
Lynch. The consideration paid to FLC by Family Life for said
redeemed shares consisted of $2.5 million cash, a newly issued
surplus debenture (an instrument having certain restrictions on
payment for the protection of policyholders) in the principal
amount of $97.5 million and $14 million principal value of newly
issued preferred shares.
As part of the financing arrangement, FLC entered into a senior
loan agreement under which $50 million was provided by a group of
banks (the "Family Life Senior Loan"). The balance of the
financing consisted of a $30 million subordinated note issued by
FLC to Merrill Lynch and $14 million borrowed by FLIIC from an
affiliate of Merrill Lynch and evidenced by a subordinated note
in the principal amount of $12 million and a subordinated note in
the principal amount of $2 million (collectively, the "Merrill
Lynch Subordinated Loans") and $25 million lent by two insurance
company subsidiaries of ILCO (the "Investors Life Subordinated
Loans"). The latter amount was represented by a $22.5 million
loan from Investors-NA to FLC and a $2.5 million loan provided
directly to FIC by Investors-CA. In addition to the interest
provided under the Investors Life Subordinated Loans, Investors-
NA and Investors-CA were granted by FIC non-transferable options
to purchase, in amounts proportionate to their respective loans,
up to a total of 9.9 percent of shares of FIC common stock at a
price of $10.50 per share, equivalent to the then current market
price, subject to adjustment to prevent dilution. The initial
terms of the option provided for their expiration on June 12,
1998, if not previously exercised. In connection with the 1996
amendments to the $34.5 million subordinated loans obtained from
Investors-NA, the expiration date of the options was extended to
September 12, 2006. For a discussion of the 1996 amendments,
please refer to Item 13, Certain Relationships and Related
Transactions with Management, above.
Of the total of $119 million of cash borrowed and notes issued by
FIC and its subsidiaries for purposes of the transaction, $114
million constituted the purchase price for Family Life and $5
million was used to pay transaction costs, for working capital
and for other related purposes. In connection with the several
loans effected for purposes of the transaction, various creditors
priorities and normal borrower requirements and restrictions were
established and FIC issued its direct guaranty of the respective
loans, subject to certain priorities, to the various lending
banks, Merrill Lynch and its affiliates, and Investors-NA and
Investors-CA. The outstanding shares of common stock of Family
Life were also pledged as collateral to the bank lenders and,
upon repayment of the bank loan, to Merrill Lynch. The
transaction was structured to conform to the requirements of
Section 338(h)(10) of the Internal Revenue Code.
On July 30, 1993, the Merrill Lynch Subordinated Loans were
prepaid. $38 million plus accrued interest was paid to retire
the indebtedness, which had a principal balance of approximately
$50 million on July 30, 1993. The primary source of the funds
used to prepay the Merrill Lynch Subordinated Loans was new
subordinated loans totalling $34.5 million that were obtained
from Investors-NA. See "The Family Life Refinancing."
Family Life Senior and Subordinated Loans
Senior Loan. The Senior Loan obligations of FLC were completely
paid off on April 17, 1996. During the period that the Senior
Loan was in effect, it was a secured and guaranteed five year
term loan in the initial principal amount of $50 million. The
Senior Loan consisted of separate notes (one for each member of
the lending syndicate), with interest payable quarterly and a
final maturity date of June 12, 1996. The interest rate of the
Senior Loan was subject to periodic change based upon stipulated
percentages above a quoted bank base lending rate or Eurodollar
rate as such are in effect from time to time.
Upon the retirement of the Senior Loan, certain of the its
provisions were automatically incorporated into the Investors
Life Subordinated Loans which are described in the following
section. Those provisions include specified events of default,
including, but not limited to, failure to pay principal,
interest, commitment fees or other amounts payable when due,
failure to maintain certain financial covenants, violation of
covenants (including covenants with respect to the maintenance
of a minimum net worth), material misrepresentations, defaults
under other indebtedness, the loss of any license of an insurance
subsidiary of FLC which would have a material adverse effect on
FLC, defaults under the FIC guaranty agreement, a fine in an
amount in excess of $100,000 imposed upon any insurance
subsidiary of FLC by any state insurance regulatory agency,
changes in ownership or control of FIC by its controlling person,
Roy F. Mitte, or in ILCO by FIC and the occurrence of certain
events of bankruptcy. In addition, the security interests
furnished to the lenders under the Senior Loan were transferred
to Investors-NA. The security interests include all of the
issued and outstanding shares of common stock of FLIIC, all of
the issued and outstanding shares of preferred stock and common
stock of FLC and Family Life and the $97.5 million surplus
debenture of Family Life.
Investors Life Subordinated Loans. The $22.5 million
subordinated senior note issued by FLC to Investors-NA was
originally scheduled to mature on June 12, 1998, with principal
payments in four equal semi-annual principal installments of
$5,625,000 each on December 12, 1996, June 12, 1997, December 12,
1997 and June 12, 1998. Interest is payable semi-annually, at
the rate of 11% per annum. Effective as of June 12, 1996, the
note was amended to provide for twenty quarterly principal
payments, in the amount of $1,125,000 each, to commence on
December 12, 1996. The final quarterly principal payment is due
on September 12, 2001. The interest rate on the note remains at
11%.
The $2.5 million subordinated note issued by FIC to Investors-CA
initially provided for interest, payable semi-annually, at the
rate of 12% per annum, and its principal is due and payable in
full at maturity on June 12, 1998 (the "FIC Note"). As a result
of the merger of Investors-CA into Investors-NA, the FIC Note is
now owned by Investors-NA. Prior to June 12, 1996, accrued
interest on the FIC Note was paid by delivery of additional notes
of FIC having terms identical to such original note, including
the payment of interest (the "PIK Notes"). Interest payable on
and after June 12, 1996 on all of the FIC Note is to be paid in
cash. Effective as of June 12, 1996, the FIC Note was amended to
provide that the principal balance of the note is to be repaid in
twenty quarterly installments of $125,000 each, commencing
December 12, 1996 with the final payment due on September 12,
2001. With respect to the PIK Notes, the amendment provided that
the principal balance of the notes ($1,977,119) is to be paid in
twenty quarterly principal payments, in the amount of $98,855.95
each, commencing December 12, 1996 with the final payment due on
September 12, 2001. The interest rate on both the FIC Note and
the PIK Notes remained at 12%.
The obligors are allowed to prepay the Investors Life
Subordinated Loans, in whole or in part, without premium or
penalty. During the time that the Senior Loan was outstanding,
the Investors Life Subordinated Loans were subordinated to the
Senior Loan and constitute a second lien on the pledged
collateral subject to the first lien of the Senior Loan.
Repayment of FLC's $22.5 million note is also guaranteed by FIC.
The Investors Life Subordinated Loan documents specify events of
default, including, but not limited to, failure to pay principal,
interest or other amounts payable with respect to the Investors
Life Subordinated Loan documents when due, violation of covenants
in the Investors Life Subordinated Loan documents (including
covenants with respect to the maintenance of a minimum net
worth), material misrepresentations, defaults under other
indebtedness, and the occurrence of certain events of bankruptcy.
The Investors Life Subordinated Loan documents also contain
various specified negative, affirmative and financial covenants
to be performed or observed by FLC, FIC and their subsidiaries.
During the period the Senior Loan was outstanding, the covenants
in effect under the Investors Life Subordinated Loan documents
were less restrictive than the covenants under the Senior Loan
documents but become generally equivalent to the Senior Loan
restrictions upon the termination of the Senior Loan.
On July 30, 1993, Investors-NA loaned $34.5 million to FLC and
FLIIC in the form of subordinated notes in connection with the
prepayment of the Merrill Lynch Subordinated Loans. See "The
Family Life Refinancing."
As of December 31, 1996 the outstanding principal balance of the
Investors Life Subordinated Loans, including the loans made by
Investors-NA in 1993 was $59,940,193.
Options. In addition to the interest provided under the
Investors Life Subordinated Loans, Investors-NA and Investors-CA
were granted by FIC non-transferable options to purchase, in
amounts proportionate to their respective loans, up to a total of
9.9 percent of shares of FIC common stock at a price of $2.10 per
share (as adjusted to reflect the five-for-one stock split in
November, 1996), equivalent to the then current market price,
subject to adjustment to prevent dilution. The initial terms of
the option provided for their expiration on June 12, 1998, if not
previously exercised. In connection with the 1996 amendments to
the $34.5 million subordinated loans obtained from Investors-NA,
the expiration date of the options was extended to September 12,
2006.
The Family Life Refinancing. On July 30, 1993, the Merrill Lynch
Subordinated Loans were prepaid. $38 million plus accrued
interest was paid to retire the indebtedness, which had a
principal balance of approximately $50 million on July 30, 1993.
The primary source of the funds used to prepay the Merrill Lynch
Subordinated Loans was new subordinated loans totalling $34.5
million that were obtained from Investors-NA. Prior to the 1996
amendments described below, the principal amount of the new
subordinated debt was payable in four equal annual installments
in 2000, 2001, 2002 and 2003. The interest rate is 9%. The
other terms of the 1993 notes are substantially the same as those
of the $22.5 million subordinated loan that Investors-NA had
previously made to FLC and that continue to be outstanding.
The $34.5 million of new subordinated loans consist of a $30
million loan to FLC and a $4.5 million loan to FLIIC. The debt
restructuring reduced the total indebtedness of FLC and FLIIC by
approximately $15 million. The transaction resulted in a pre-tax
gain of approximately $12 million for the Company in the third
quarter of 1993, and the Company estimates that the restructuring
of this subordinated debt will result in aggregate interest
savings to FLC and FLIIC of approximately $40 million over the
next ten years. In recognition of this reduced interest
requirement, the interest rate on the surplus debenture of Family
Life held by FLC was reduced from 12.5% to 9%.
As of June 12, 1996, the provisions of the notes from Investors-
NA to FIC, FLC and FLIIC were modified as follows: (a) the $22.5
million note was amended to provide for twenty quarterly
principal payments, in the amount of $1,125,000 each, to commence
on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains
at 11%, (b) the $30 million note was amended to provide for forty
quarterly principal payments, in the amount of $163,540 each for
the period December 12, 1996 to September 12, 2001; beginning
with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final
quarterly principal payment is due on September 12, 2006; the
interest rate on the note remains at 9%, (c) the $4.5 million
note was amended to provide for forty quarterly principal
payments, in the amount of $24,531 each for the period December
12, 1996 to September 12, 2001; beginning with the principal
payment due on December 12, 2001, the amount of the principal
payment increases to $200,469; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the
note remains at 9%, (d) the $2.5 million note was amended to
provide that the principal balance of the note is to be repaid in
twenty quarterly installments of $125,000 each, commencing
December 12, 1996 with the final payment due on September 12,
2001; the rate of interest remains at 12%, (e) the Master PIK
note, which was issued to provide for the payment in kind of
interest due under the terms of the $2.5 million note prior to
June 12, 1996, was amended to provide that the principal balance
of the note ($1,977,119) is to be paid in twenty quarterly
principal payments, in the amount of $98,855.95 each, to commence
December 12, 1996 with the final payment due on September 12,
2001; the interest rate on the note remains at 12%.
ILCO's Senior and Subordination Loans and Warrants
FIC guaranteed ILCO's senior and subordinated loans that were the
source of funds used for the acquisition of Investors-NA and
Investors-CA. Those loans were as follows: (1) a credit
facility in the amount of $135,000,000 composed of the following:
(a) a senior loan in the amount of $125,000,000 (the "ILCO Senior
Loan") provided by a nationally chartered banking institution
(the "Senior Lender") as the lead bank in a lending syndicate
consisting of six banks and/or other financial institutions; and
(b) a $10,000,000 subordinated loan (the "Subordinated Loan")
provided by two insurance and financial service organizations
(the "Subordinated Lenders"); and (2) the sale of preferred stock
as follows: (a) $5,000,000 of Class A Preferred Stock issued at
par to Insurance Company of North America, a CIGNA subsidiary;
and (b) $15,000,000 of Class B Preferred Stock issued at par to
the Subordinated Lenders. Approximately $15,000,000 of these
funds were used to discharge an existing term loan. The balance
of these funds were loaned by ILCO to Standard to consummate the
purchase under the Acquisition Agreement. To evidence this
indebtedness, Standard issued a $140,000,000 surplus debenture to
ILCO. In January 1993, ILCO prepaid the Subordinated Loans and
amended the ILCO Senior Loan. See "The ILCO Refinancing."
In May 1, 1990, ILCO effected an exchange agreement with the
holders of its Class A Preferred Stock (principal amount of $5
million; dividend rate of 13.25%) and its Class B Preferred Stock
(principal amount of $15 million; dividend rate of 13.25%). Under
the provisions of the exchange agreement, the holders of the
Class A Preferred Stock received $5 million principal amount of a
13.25% 1998 Series Subordinated Notes, due November 1, 1998,
together with a make whole amount equal to 13.25% of the then
outstanding balance of the Note. The holders of the Class B
Preferred Stock received $15 million principal amount of a 13.25%
1999 Series Subordinated Notes, due November 1, 1999.
The ILCO Refinancing. In January, 1993, ILCO prepaid all of its
subordinated indebtedness and purchased and cancelled all of the
warrants held by certain of its subordinated noteholders. In
addition to paying the $30 million aggregate principal amount of
the subordinated notes due in 1997, 1998 and 1999 plus accrued
interest, ILCO paid approximately $7 million of prepayment
penalty, the after-tax effect of which will be a charge against
earnings in 1993, and approximately $8 million for the warrants,
which will be a charge directly against retained earnings. The
warrants had entitled the holders to purchase 1,107,480 shares of
ILCO's Common Stock (approximately 24% of the outstanding shares)
at an exercise price of $3.33 per share. The currently estimated
price that the warrant holders could have required ILCO to pay
for the warrants upon exercise of their put option was
approximately $29.9 million. The earliest that the put option
could have been exercised was December 1993, if such exercise
would not have resulted in a default under ILCO's Senior Loan at
that time. The purchase and cancellation of the warrants will
reduce the number of ILCO's outstanding shares of common stock
and common stock equivalents used in the computation of its
earnings per share from approximately 7,147,000 shares to
approximately 6,040,000 shares. This adjustment in common stock
equivalents will affect ILCO's earnings per share for periods
after January 29, 1993. However, it will not affect FIC's equity
in ILCO's net income.
The primary source of the funds used to prepay the subordinated
debt and to purchase the warrants was an increase in the
outstanding balance of ILCO's Senior Loan from $60 million to
$110 million pursuant to an amended and restated credit agreement
that the Company entered into on January 29, 1993 with certain
banks, including the same agent bank as in the Company's original
bank group in 1988. ILCO's prepayment of subordinated debt,
purchase of warrants and increase in senior bank indebtedness are
referred to herein as the "ILCO Refinancing". The terms of the
amended and restated credit facility are substantially the same
as the 1988 facility. The interest rate on the $30 million
subordinated debt that was replaced by the new ILCO Senior Loan
was 13.25%. The average interest rate paid by ILCO on ILCO's New
Senior Loan was approximately 7.04% during 1994, 8.63% during
1995 and 7.76% during 1996. The maturity date, which had been
December 31, 1996, was extended to July 1, 1998 for the new ILCO
Senior Loan. On February 14, 1995, ILCO borrowed an additional
$15 million under the ILCO Senior Loan to help finance the
acquisition of Investors-IN, and the maturity date of the ILCO
Senior Loan was further extended to July 1, 1999.
As of December 31, 1995, the outstanding principal balance of the
ILCO's senior loan obligations was $59.4 million. In January,
1996, the Company made a scheduled payment of $4.5 million under
its Senior Loan. In March, 1996, the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At
that same time, the Company made a payment of $941,000, an
additional payment under the terms of the loan applied to the
principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made, which resulted in
advancing the scheduled payoff date of the Senior Loan to April
1, 1998. In July, 1996, the Company made the principal payment
for October 1st ($4.5 million), plus an optional principal
payment of $0.5 million.
The ILCO Senior Loan is a secured and guaranteed six and one-half
year term loan. A required $26 million principal payment was
made on April 1, 1993. Thereafter, the principal is payable in
twenty-two quarterly installments of $4.5 million each,
commencing on April 1, 1994 and ending on July 1, 1999. ILCO is
required to make mandatory payments on the Senior Loan equal to
(a) 100% of the net proceeds from the issuance of ILCO's capital
stock or debt securities and (b) the applicable percentage of
ILCO's annual Excess Cash Flow: 100%, if the outstanding
principal balance of the ILCO Senior Loan exceeds $75 million;
75%, if the outstanding balance exceeds $50 million but is equal
to or less than $75 million; or 50%, if the outstanding balance
is equal to or less than $50 million. Excess Cash Flow is the
excess of (i) the sum of ILCO's cash and cash equivalents,
principal and interest received by ILCO from surplus debentures,
cash dividends received by ILCO and interest income on ILCO's
cash equivalents over (ii) the sum of principal and interest paid
on ILCO's indebtedness, operating expenses, taxes actually paid
and $5 million.
The ILCO Senior Loan bears interest, at the option of ILCO, at a
rate per annum equal to (i) the Alternate Base Rate (as defined
below) plus the Applicable Margin (as defined below), or (ii)
LIBOR (adjusted for reserves) for interest periods of 1, 2, 3 or
6 months plus the Applicable Margin. LIBOR is London Inter-Bank
Offered Rates. The Alternate Base Rate for any day is the higher
of (a) the agent bank's corporate base rate as announced from
time to time and (b) the federal funds rate as published by the
Federal Reserve Bank of New York plus 0.5%. The Applicable
Margin, depending on the outstanding principal balance of the
ILCO Senior Loan, ranges from 0.5% to 1.25% for loans that bear
interest based upon the Alternate Base Rate and from 1.75% to
2.5% for loans that bear interest based upon LIBOR. The initial
Applicable Margin for Alternate Base Rate loans is 1.25% and the
initial Applicable Margin for LIBOR loans is 2.5%.
The obligations of ILCO under the ILCO Senior Loan are secured
by: (1) all of the outstanding shares of stock of Investors-NA,
(2) a $15,000,000 surplus debenture of Investors-NA payable to
ILCO, which had an outstanding principal balance of $5,706,000
as of December 31, 1996 and (3) a $140,000,000 surplus debenture
of Investors-NA payable to ILCO, which had an outstanding
principal balance of $32,840,000 as of December 31, 1996. The
obligations of ILCO under the ILCO Senior Loan are guaranteed by
FIC.
The ILCO Senior Loan prohibits the payment by ILCO of cash
dividends on ILCO's Common Stock and contains covenants,
including restrictive covenants that impose limitations on ILCO's
and its subsidiaries' ability to, among other things: (i) make
investments; (ii) create or incur additional debt; (iii) engage
in businesses other than their present and related businesses;
(iv) create or incur additional liens; (v) incur contingent
obligations; (vi) dispose of assets; (vii) enter into
transactions with affiliated companies; and (viii) make capital
expenditures; and various financial covenants, including
covenants requiring the maintenance of a minimum cash flow
coverage ratio, minimum consolidated net worth and minimum
statutory surplus of subsidiaries, and a minimum ratio (360%) of
(i) the sum of the statutory capital and surplus, the asset
valuation reserve and one-half of the dividend liability
pertaining to participating policies of each insurance company
subsidiary to (ii) its respective Authorized Control Level RBC
(see "Regulation").
The ILCO Senior Loan specifies events of default, including, but
not limited to, failure to pay amounts under the ILCO Senior Loan
documents when due; defaults or violation of covenants under
other indebtedness; certain defaults or violation of certain
covenants under the Family Life Senior Loan (which provisions are
no longer applicable since the repayment of the Family Life
Senior Loan in April, 1996); default under the subordinated loans
made by Investors-NA to FLC and FLIIC; the loss of any license of
an insurance subsidiary of ILCO which would have a material
adverse effect on ILCO; defaults under the FIC guaranty
agreement; changes in ownership or control of FIC or ILCO by its
controlling person, Roy F. Mitte, or in ILCO by FIC; and the
occurrence of certain events of bankruptcy. If Mr. Mitte ceases
to control the management of ILCO solely by reason of (i) his
death or (ii) his permanent inability to perform his usual and
customary duties on a full-time basis on behalf of ILCO and FIC
as the result of physical or mental infirmity, a default will
occur, and the banks holding in the aggregate at least 66 2/3% of
the outstanding balance of the ILCO Senior Loan may, on or after
180 days after the date on which such default occurs, declare the
ILCO Senior Loan immediately due and payable. Mr. Mitte's
ability to communicate and his mobility are impaired as a result
of a stroke he suffered in May 1991. However, Mr. Mitte
continues to control the management of the Company, and Mr.
Mitte's impairments do not constitute a default under the ILCO
Senior Loan. See Item 10(b) "Executive Officers of the
Registrant".
The principal balance of the ILCO Senior Loan was $24.94 million
as of December 31, 1996.
Regulation
General. ILCO's insurance subsidiaries and Family Life are
subject to regulation and supervision by the states in which they
are licensed to do business. Such regulation is designed
primarily to protect policy owners. Although the extent of
regulation varies by state, the respective state insurance
departments have broad administrative powers relating to the
granting and revocation of licenses to transact business,
licensing of agents, the regulation of trade practices and
premium rates, the approval of form and content of financial
statements and the type and character of investments.
These laws and regulations require Family Life and ILCO's
insurance subsidiaries to maintain certain minimum surplus levels
and to file detailed periodic reports with the supervisory
agencies in each of the states in which they do business, and
their business and accounts are subject to examination by such
agencies at any time. The insurance laws and regulations of the
domiciliary states of FIC's and ILCO's insurance subsidiaries
require that such subsidiaries be examined at specified
intervals. Family Life is domiciled in the State of Washington.
Investors-NA and ILIC are domiciled in the states of Washington
and New Jersey, respectively. In December 1992, Investors-NA
redomesticated from Pennsylvania to Washington, and Investors-CA
merged into Investors-NA. In June 1993 Standard Life merged into
Investors-NA. Investors-IN is domiciled in the State of Indiana.
A number of states regulate the manner and extent to which
insurance companies may test for Acquired Immune Deficiency
Syndrome (AIDS) antibodies in connection with the underwriting of
life insurance policies. To the extent permitted by law, Family
Life and ILCO's insurance subsidiaries consider AIDS information
in underwriting coverages and establishing premium rates. An
evaluation of the financial impact of future AIDS claims is
extremely difficult, due in part to insufficient and conflicting
data regarding the incidence of the disease in the general
population and the prognosis for the probable future course of
the disease.
Risk-Based Capital Requirements. Effective for the 1993 calendar
year, the National Association of Insurance Commissioners
("NAIC") has adopted Risk-Based Capital ("RBC") requirements to
evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks associated with: (i)
asset quality; (ii) mortality and morbidity; (iii) asset and
liability matching; and (iv) other business factors. The states
will use the RBC formula as an early warning tool to discover
potential weakly capitalized companies for the purpose of
initiating regulatory action. The RBC requirements are not
intended to be a basis for ranking the relative financial
strength of insurance companies. In addition, the formula
defines a new minimum capital standard which will supplement the
prevailing system of low fixed minimum capital and surplus
requirements on a state-by-state basis.
The RBC requirements provide for four different levels of
regulatory attention in those states that adopt the NAIC
regulations, depending on the ratio of the company's Total
Adjusted Capital (which generally consists of its statutory
capital, surplus and asset valuation reserve) to its Authorized
Control Level RBC. A "Company Action Level Event" is triggered if
a company's Total Adjusted Capital is less than 200% but greater
than or equal to 150% of its Authorized Control Level RBC, or if
a negative trend has occurred (as defined by the regulations) and
Total Adjusted Capital is less than 250% but more than 200% of
its Authorized Control Level RBC. When a Company Action Level
Event occurs, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions
to improve its capital position. A "Regulatory Action Level
Event" is triggered if a company's Total Adjusted Capital is less
than 150% but greater than or equal to 100% of its Authorized
Control Level RBC. When a Regulatory Action Level Event occurs,
the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that
must be followed. An "Authorized Control Level Event" is
triggered if a company's Total Adjusted Capital is less than 100%
but greater than or equal to 70% of its Authorized Control Level
RBC, and the regulatory authority may take any action it deems
necessary, including placing the company under regulatory
control. A "Mandatory Control Level Event" is triggered if a
company's Total Adjusted Capital is less than 70% of its
Authorized Control Level RBC, and the regulatory authority is
mandated to place the company under its control.
Calculations using the NAIC formula and the statutory financial
statements of Family Life and ILCO's insurance subsidiaries as of
December 31, 1996 indicate that the Total Adjusted Capital of
each of FIC's and ILCO's insurance subsidiaries is above 480% of
its respective Authorized Control Level RBC.
Solvency Laws Assessments. The solvency or guaranty laws of most
states in which an insurance company does business may require
that company to pay assessments (up to certain prescribed limits)
to fund policyholder losses or liabilities of insurance companies
that become insolvent. Recent insolvencies of insurance
companies increase the possibility that such assessments may be
required. These assessments may be deferred or forgiven under
most guaranty laws if they would threaten an insurer's financial
strength and, in certain instances, may be offset against future
premium taxes. The insurance companies record the expense for
guaranty fund assessments in the period assessed. The occurrence
and amount of such assessments have increased in recent years.
The net amounts of such assessments for Family Life and ILCO's
insurance subsidiaries were approximately $6,796 and $100,165,
respectively, in the year ended December 31, 1996. Those amounts
are net of the amounts that can be offset against future premium
taxes and, in the case of Family Life, the amount is also net of
the amount that can be recovered from Merrill Lynch pursuant to
the Stock Purchase Agreement between FIC and Merrill Lynch. See
"Acquisition of Family Life." The likelihood and amount of any
other future assessments cannot be estimated and are beyond the
control of FIC and ILCO.
Surplus Debentures and Dividends. The principal sources of cash
for FLC to make payments of principal and interest on the Family
Life Senior Loan are payments under the surplus debenture of
Family Life Insurance Company (a Washington-domiciled insurer)
and dividends paid by Family Life . Under current Washington
law, any proposed payment of a dividend or distribution which,
together with dividends or distributions paid during the
preceding twelve months, exceeds the greater of (i) 10% of
statutory surplus as of the preceding December 31 or (ii)
statutory net gain from operations for the preceding calendar
year is an "extraordinary dividend" and may not be paid until
either it has been approved, or a 60-day waiting period shall
have passed during which it has not been disapproved, by the
Washington Insurance Commissioner. Effective July 25, 1993,
Washington amended its insurance code to retain the "greater of"
standard for dividends but enacted requirements that prior
notification of a proposed dividend be given to the Washington
Insurance Commissioner and that cash dividends may be paid only
from earned surplus. Family Life does not presently have earned
surplus as defined by the regulations adopted by the Washington
Insurance Commissioner and, therefore, is not presently permitted
to pay cash dividends. However, since the new law applies only
to dividend payments, the ability of Family Life to make
principal and interest payments under the surplus debenture is
not affected.
Principal and interest payments on the surplus debenture have
provided sufficient funds to meet debt service obligations of
FLC. Under the provisions of the surplus debenture and current
law, Family Life can pay interest and principal on the surplus
debenture without having to obtain the prior approval of the
Washington Insurance Commissioner; provided that, after giving
effect to the payment of interest or principal on the surplus
debenture, the statutory capital and surplus of Family Life
exceeds 6% of its assets. Pursuant to the surplus debenture,
Family Life paid principal and interest in 1994, 1995 and 1996
totalling
$19,311,960, $16,052,400 and $13,526,338, respectively. Family
Life does give five-days prior notification to the Washington
Insurance Department of each proposed payment on the surplus
debenture in accordance with an agreement between Family Life and
the Department. The Company does not anticipate that Family Life
will have any difficulty in making principal and interest
payments on the surplus debenture in the amounts necessary to
enable FLC to service its indebtedness for the foreseeable
future.
Valuation Reserves. Commencing in 1992, the Mandatory Securities
Valuation Reserve ("MSVR") required by the NAIC for life
insurance companies was replaced by a mandatory Asset Valuation
Reserve ("AVR") which is expanded to cover mortgage loans, real
estate and other investments. A new mandatory Interest
Maintenance Reserve ("IMR"), designed to defer realized capital
gains and losses due to interest rate changes on fixed income
investments and to amortize those gains and losses into future
income, is also effective for 1992. Previously, realized capital
gains attributable to interest rate changes were credited to the
MSVR and had the effect of reducing Family Life's required MSVR
contributions. Effective in 1992, such realized capital gains
are credited to the IMR. As a result of these changes, Family
Life is required to accrue greater aggregate asset valuation
reserves. The combination of the AVR and IMR will affect
statutory capital and surplus and may reduce the ability of
Family Life to pay dividends and make payments on the surplus
debenture.
Insurance Holding Company Regulation. Family Life is subject to
regulation under the insurance and insurance holding company
statutes of Washington. The insurance holding company laws and
regulations vary from jurisdiction to jurisdiction, but generally
require insurance and reinsurance subsidiaries of insurance
holding companies to register with the applicable state
regulatory authorities and to file with those authorities certain
reports describing, among other information, their capital
structure, ownership, financial condition, certain intercompany
transactions and general business operations. The insurance
holding company statutes also require prior regulatory agency
approval or, in certain circumstances, prior notice of certain
material intercompany transfers of assets as well as certain
transactions between insurance companies, their parent companies
and affiliates.
Under the Washington Insurance Code, unless (i) certain filings
are made with the Washington Department of Insurance, (ii)
certain requirements are met, including a public hearing and
(iii) approval or exemption is granted by the insurance
commissioner, no person may acquire any voting security or
security convertible into a voting security of an insurance
holding company, such as the Company, which controls a Washington
insurance company, or merge with such a holding company, if as a
result of such transaction such person would "control" the
insurance holding company. "Control" is presumed to exist if a
person directly or indirectly owns or controls 10% or more or the
voting securities of another person.
Potential Federal Regulation. Although the federal government
generally does not directly regulate the insurance industry,
federal initiatives often have an impact on the business.
Congress and certain federal agencies are investigating the
current condition of the insurance industry (encompassing both
life and health and property and casualty insurance) in the
United States in order to decide whether some form of federal
role in the regulation of insurance companies would be
appropriate. Congress is currently conducting a variety of
hearings relating in general to the solvency of insurers. It is
not possible to predict the outcome of any such congressional
activity nor the potential effects thereof on Family Life.
Congressional initiatives directed at repeal of the McCarran-
Ferguson Act (which exempts the "business of insurance" from most
federal laws, including the antitrust laws, to the extent it is
subject to state regulation) and judicial decisions narrowing the
definition of "business of insurance" for McCarran-Ferguson Act
purposes may limit the ability of insurance companies in general
to share information with respect to rate-setting, underwriting
and claims management practices. Current and proposed federal
measures which may also significantly affect the insurance
industry include minimum solvency requirements and removal of
barriers preventing banks from engaging in the insurance
business.
Federal Income Taxation
The Revenue Reconciliation Act of 1990 amended the Internal
Revenue Code of 1986 to require a portion of the expenses
incurred in selling insurance products to be deducted over a
period of years, as opposed to an immediate deduction in the year
incurred. Since this change only affects the timing of the
deductions, it does not affect tax expense as shown on the
Company's financial statements prepared in accordance with GAAP.
However, the change will increase the tax for statutory
accounting purposes in the first few years, which will reduce
statutory surplus and, accordingly, may decrease the amount of
cash dividends that Family Life can pay. For the years ended
December 31, 1994, 1995 and 1996, the increases in Family Life's
current income tax provisions, utilizing the effective tax rates,
due to this change were $209,555, $77,498 and $183,358,
respectively. The change has a negative tax effect for statutory
accounting purposes when Family Life's premium income
increases, but has a positive tax effect when its premium
income decreases.
Item 2. Properties
The Registrant's headquarters are currently located at Austin
Centre, 701 Brazos, Suite 1400, Austin, Texas. Investors-NA
purchased Austin Centre, an office-hotel property in downtown
Austin in August 1991 for a purchase price of $31,275,000 from an
unrelated seller that had previously acquired the property
through foreclosure. Austin Centre covers a full city block and
is a sixteen story mixed use development consisting of 343,664
square feet of office/retail space (predominately office space),
a 314 room hotel and 61 luxury apartments, all united by a 200
foot high glass atrium. The project was completed in October
1986.
In September 1995, Investors-NA (a subsidiary of ILCO) entered
into a contract to sell Austin Centre to an Austin-based real
estate investment firm for a purchase price of $62.675 million,
less $1 million to be paid to a capital reserve account for the
purchaser. The sale was consummated on March 29, 1996. A
portion of the sale proceeds equal to the amount that Investors-
NA presently had invested in Austin Centre were retained and
reinvested by Investors-NA. The balance of the net proceeds of
the sale were used to reduce ILCO's bank indebtedness by
approximately $15 million.
On January 31, 1995, ILCO, through Investors-NA, purchased, as an
investment property, an office building project known as
Bridgepoint Office Square in Austin, Texas for a cash purchase
price of $9.75 million. The property consists of 20 acres of land
with four office building sites and two parking structure sites.
The first phase of development of the property was completed in
1986 and consists of a five-story office building with 83,474
square feet of rentable space and a 550-car parking garage. The
office space is fully rented.
In the fourth quarter of 1995, construction began on the second
office building, containing approximately 109,000 rentable square
feet, and the other parking garage containing approximately 871
spaces. That phase of the project was completed in September
1996, and is 100% leased to a major tenant in the technology
business.
In March 1996, construction commenced on the third office
building, with approximately 81,000 rentable square feet of
office space and was completed in December, 1996. Investors-NA
leased approximately 43,000 square feet of the third office
building to the same tenant which leased all of the space in the
second building. The remaining space was leased in October, 1996
to a major tenant, also in the technology business.
Construction began on the fourth building in July 1996, with a
projected completion date of July, 1997. The fourth building
contains approximately 92,459 rentable square feet. In September
of 1996, approximately 23,619 rentable square feet were leased to
an oil and gas company. Another 10,000 square feet was leased in
March, 1997, to a company involved in the technology field.
Investors-NA is currently negotiating with two other potential
tenants to lease the remainder of the rentable square feet in the
fourth building.
On May 3, 1996, Family Life, purchased a tract of land adjoining
the Bridgepoint Office Square tract for a cash purchase price of
$1.3 million. The property consists of 7.1 acres of land with one
office building site and one parking structure site. Family Life
began construction of the fifth building (known as "Bridgepoint
Five") on the new site in January 1997. The building, which will
have approximately 71,500 square feet of rentable space, is
currently projected to be completed in September, 1997. Following
completion of the building, ILCO and its related companies will
vacate their current headquarters in the Austin Centre and move
them to Bridgepoint Five. ILCO and its related companies will
occupy approximately 50,000 rentable square feet. Family Life is
currently seeking tenants to occupy the remainder of the rentable
square feet in the fifth building.
Family Life leases its home offices at the Fourth and Blanchard
Building, 2121 Fourth Avenue, in Seattle, Washington. The lease
currently covers approximately 7,776 rentable square feet of
office space for a term expiring in October 1998 with an option
to renew for an additional three-year period. The initial base
rental is approximately $11,200 per month, which includes Family
Life's proportionate share of the building's operating expenses,
including utilities, property taxes, insurance, maintenance and
management. Actual increases from those initial operating
expenses during the lease term are passed on to Family Life on a
proportionate basis.
ILCO leases a building located at 40 Parker Road, Elizabeth, New
Jersey. This building, which was formerly ILCO's headquarters
building, contains approximately 41,000 square feet of office
space. The remaining term of the lease is 11 years, and the
lease calls for a minimum base rental of $450,000 per annum. The
lease provides that all costs including, but not limited to,
those for maintenance, repairs, insurance and taxes be borne by
ILCO. ILCO and ILIC currently occupy a nominal portion of the
space in the 40 Parker Road property and have sub-leased the
remaining portion.
ILIC owns three buildings which are adjacent to the 40 Parker
Road building. One building, which is leased to third parties,
contains approximately 3,500 square feet of space. The second
building contains approximately 2,500 square feet of space and is
leased to persons who perform maintenance services for ILIC's and
ILCO's properties in Elizabeth, New Jersey. The third building,
purchased during 1985, contains approximately 3,500 square feet
of space, and is partially leased to third parties and the
remainder is used to provide accommodations for employees working
at the New Jersey office.
Investors-NA owns an office building located at 206 West Pearl
Street, Jackson, Mississippi. This building is 66 years old and
contains approximately 85,000 square feet of office space.
Investors-NA currently occupies a nominal portion of the space in
this property and leases space to various commercial tenants.
The Company believes that its properties and leased space are
adequate to meet its foreseeable requirements.
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal
actions related to the normal business operations of the Company.
Management believes that the resolution of such legal actions
will not have a material impact on the financial statements.
ILCO and Investors-NA are defendants in a lawsuit which was filed
in October, 1996, in Travis County, Texas. CIGNA Corporation, an
unrelated company, is also a named defendant in the lawsuit. The
named plaintiffs in the suit (a husband and wife), allege that
the universal life insurance policies sold to them by INA Life
Insurance Company (a company which was merged into Investors-NA
in 1992) utilized unfair sales practices. The named plaintiffs
seek reformation of the life insurance contracts and an
unspecified amount of damages. The named plaintiffs also seek a
class action as to similarly situated individuals. No
certification of a class has been granted as of the date hereof.
ILCO believes that the suit is without merit and intends to
vigorously defend this matter.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of the Shareholders of FIC was held on November
12, 1996, for the purpose of obtaining the vote of the
shareholders on a proposal to amend the Articles of Incorporation
to: (i) increase the number of authorized shares of common stock
from 3,304,200 shares to 10,000,000 shares and (ii) to reduce the
par value of the common stock from $1.00 to $.20. These
amendments to the Articles of Incorporation were related to the
implementation of the five-for-one stock split authorized by the
Board of Directors on September 27, 1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
A. Market Information
The following table sets forth the quarterly high and low sales
prices for FIC Common Stock in The Nasdaq Small-Cap Market for
1996 and 1995. The quotations set forth in the table have been
adjusted to give retroactive effect to the five-for-one stock
split which was effective November 12, 1996. FIC's NASDAQ
trading symbol is FNIN.
Common Stock
Prices
High Low
1996
First Quarter $11.00 $ 6.95
Second Quarter 11.90 7.80
Third Quarter 11.90 8.70
Fourth Quarter 15.00 11.00
1995
First Quarter $ 6.80 $ 5.60
Second Quarter 8.10 5.60
Third Quarter 8.50 7.30
Fourth Quarter 7.90 6.60
B. Stockholders
As of March 17, 1997 there were approximately 16,126 record
holders of FIC Common Stock.
C. Dividends
FIC has not paid a dividend since 1976 and does not expect to pay
a dividend during 1997.
The ability of an insurance holding company, such as FIC, to pay
dividends to its shareholders may be limited by the company's
ability to obtain revenue, in the form of dividends and other
payments, from its operating insurance subsidiary or
subsidiaries. The right of Family Life to pay dividends is
restricted by the insurance laws of its domiciliary state. See
Item 1. Business - Regulation - Surplus Debenture and Dividends.
However, FIC does not directly own Family Life's stock but,
instead, indirectly owns that stock through two downstream
holding companies, FLIIC and FLC. FLC, which holds all of the
stock of Family Life, is prohibited from paying dividends on its
common stock by the provisions of the note from Investors-NA ,
and FLIIC, the immediate parent of FLC and the directly-owned
subsidiary of FIC, is prohibited from paying dividends on its
stock by the $4.5 million subordinated note of FLIIC held by
Investors-NA, except FLIIC may pay dividends on its common stock
to enable FIC to make scheduled principal and interest payments
on its $2.5 million subordinated note to Investors-NA. The
ability of ILCO to pay dividends to FIC and the other
shareholders of ILCO is affected by the receipt of dividends and
other payments from its insurance subsidiaries. In addition, the
ILCO Senior Loan restricts ILCO from paying any dividends on its
stock during the term of that loan.
Item 6. Selected Financial Data
(Registrant and its Consolidated Subsidiaries)
(In thousands, except per share data)
1996 1995 1994 1993 1992
Operating
Revenues $59,928 $ 61,541 $ 68,524 $ 74,023 $ 83,531
Income (loss)
before federal
income tax,
equity in net
earnings of
affiliates,
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 9,791 10,394 10,610 11,560 12,179
Income before
equity in net
earnings of
affiliates,
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 7,145 7,966 8,264 8,587 8,831
Equity in net
earnings of
affiliate, net
of tax 9,012 2,051 1,690 3,038 4,761
Income before
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 16,157 10,017 9,954 11,625 13,592
Extraordinary
items -0- -0- -0- 5,555 -0-
Income before
cumulative
effect of
change in
accounting
principle of
affiliate 16,157 10,017 9,954 17,180 13,592
Cumulative
effect of
change in
accounting
principle of
affiliate, net -0- -0- -0- (1,159) -0-
of tax benefit
Net Income $16,157 $ 10,017 $ 9,954 $ 16,021 $ 13,592
Common Stock
and Common
Stock
Equivalents 5,568 5,540 5,530 5,555 5,565
Net income per
share before
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate $ 2.90 $ 1.81 $ 1.80 $ 2.09 $ 2.44
Extraordinary
items -0- -0- -0- 1.00 -0-
Net income per
share before
cumulative
effect of
change in
accounting
principle of
affiliate 2.90 1.81 1.80 3.09 2.44
Cumulative
effect of
change in
accounting
principle of
affiliate -0- -0- -0- ( 0.21) 0.00
Net Income per
share $ 2.90 $ 1.81 $ 1.80 $ 2.88 $ 2.44
Total Assets $287,730 $287,678 $253,100 $277,790 $311,497
Long Term
Obligations $59,940 $ 67,989 $ 77,819 $ 89,178 $113,015
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the year ended December 31, 1996, FIC's net income was
$16,157,000 (or $2.90 per common share), as compared to
$10,017,000 (or $1.81 per common share for the year ended
December 31, 1995 and $9,954,000 (or $1.80 per common share), for
the year ended December 31, 1994. The net income per share for
the years 1995 and 1994 has been restated to reflect the effect
of the five-for-one stock split which was effective November 12,
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 year ended December 31, 1996
includes $7.1 million 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 the 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
September, 1997, the Company and its affiliates will move its
headquarters to a new, 71,500 square foot office building know
as Bridgepoint Five. That project, which is currently under
construction on a 7.1 acre site owned by Family Life Insurance
Company, is located in Austin, Texas, adjacent to the 20-acre
office building site which is being developed by Investors-NA.
The Bridgepoint Five site was purchased by Family Life in May,
1996, for a cash purchase price of $1.3 million.
The statutory earnings of Family Life as required to be reported
to insurance regulatory authorities before interest expense,
capital gains and losses, and federal income taxes were
$12,734,000 at December 31, 1996, as compared to $14,354,000 at
December 31, 1995 and $18,944,000 at December 31, 1994. 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 1996, which was
related to general economic conditions, had a positive effect
upon the market value of the fixed maturities available for sale
segment of the Company's portfolio. As of December 31, 1996, the
market value of the fixed maturities available for sale segment
was $83.8 million as compared to an amortized value of $83.0
million, or an unrealized gain $.8 million. The net of tax
effect of this increase has been recorded as an increase in
shareholders' equity. There is no assurance that this unrealized
gain may be realized in the future.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
The consolidated balance sheets at December 31, 1996 include
Separate Account assets of Family Life in the amount of $0.45
million. The Separate Account is maintained by Family Life,
which was acquired by FIC on June 12, 1991. Under the provisions
of the purchase agreement between FIC and Merrill Lynch Insurance
Group, Inc., certain life insurance companies affiliated with
Merrill Lynch agreed to assume (on an assumption reinsurance
basis) the variable annuity contracts related to such Separate
Account assets. The transfer of these assets, in accordance with
the provisions of the reinsurance agreement, is subject to
certain regulatory approvals. During the year 1996, Merrill Lynch
received regulatory approvals in several additional
jurisdictions. As a result, Separate Account assets in the
amount of $8.1 million were transferred out of Family Life, in
accordance with the provisions of the 1991 agreements. The
Company has not obtained a definitive date from Merrill Lynch as
to when the remaining regulatory approvals will be obtained, so
as to enable Family Life to complete the transfer of Separate
Account assets.
Equity in Net Income of InterContinental Life Corporation
General:
Prior to the acquisition of Family Life in June of 1991, FIC's
primary involvement in the life insurance business was through
its equity interest in ILCO. The Company's equity in the net
earnings of ILCO, net of federal income tax, was $9,012,000, as
compared to $2,051,000 for the year 1995 and $1,690,000 for the
year 1994. The increase in 1996 is primarily 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 61.5% of the issued and outstanding shares of
ILCO's common stock.
The decline in long-term interest rates during 1996, which was
related to general economic conditions, had a positive effect
upon the market value of the fixed maturities available for sale
segment of ILCO's investment portfolio. As of December 31, 1996,
the market value of the fixed maturities available for sale
segment was $453.9 million as compared to an amortized cost of
$451.6 million, or an unrealized gain $ 2.3 million. There is no
assurance that this unrealized gain will be realized by ILCO in
the future. 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 $5.3
million.
ILCO's results for 1996, and for that portion of 1995 beginning
on february 14th, include the operations of Investors Life
Insurance Company of Indiana (formerly known as Meridian Life
Insurance Company). Investors Life Insurance Company of Indiana
("Investors-IN") was purchased by ILCO and Investors Life
Insurance Company of North America ("Investors-NA") for an
adjusted purchase price of $17.1 million; the transaction was
completed on February 14, 1995. The name change was completed in
May, 1995.
Liquidity and Capital Resources of ILCO:
ILCO is a holding company whose principal assets consist of the
common stock of Investors-NA and its subsidiaries,
InterContinental Life Insurance Company ("ILIC") and, since
February, 1995, Investors-IN. ILCO's primary source of funds
consists of payments under the surplus debentures from Investors-
NA.
The cash requirements of ILCO consist primarily of its service of
the indebtedness created in connection with the 1988 acquisition
of the Investors Life Companies and the 1995 acquisition of
Investors-IN. As of December 31, 1995, the unpaid principal of
ILCO's senior loan was $59.4 million. In January, 1996, ILCO
made a scheduled payment of $4.5 million under its Senior Loan.
In March, 1996, ILCO made the scheduled payments for April 1st
and July 1st, totaling $9 million. At that same time, ILCO made
a payment of $941,000, an additional payment under the terms of
the loan applied to the principal balance. On April 1, 1996, an
optional principal payment in the amount of $15 million was made.
In July, 1996, ILCO made the principal payment for October 1st
($4.5 million), plus an optional principal payment of $0.5
million, thereby reducing the total amount of the outstanding
Senior Loan to $24.94 million.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest to it by Investors-NA, pursuant
to the terms of the two surplus debentures. The surplus
debentures were originally issued by Standard Life Insurance
Company and its terms were previously approved by the Mississippi
Insurance Commissioner. One of the surplus debentures, in the
original amount of $15 million, was issued in connection with the
1986 acquisition of Standard Life by ILCO; the other, in the
original amount of $140 million was issued in connection with the
1988 acquisition by ILCO of the Investors Life Companies. Upon
the merger of Standard Life into Investors-NA, the obligations of
the surplus debentures were assumed by Investors-NA. As of
December 31, 1996, the outstanding principal balance of the
surplus debentures was $5.7 million and $32.8 million,
respectively. Since Investors-NA is domiciled in the State of
Washington, the Washington insurance law applies to the
administration of the terms of the surplus debentures. Under the
provisions of the surplus debentures and current law, no prior
approval of the Washington Insurance Commissioner is required for
Investors-NA to pay interest or principal on the surplus
debentures; provided that, after giving effect to such payments,
the statutory surplus of Investors-NA is in excess of $10 million
(the "surplus floor"). However, Investors-NA has voluntarily
agreed with the Washington Insurance Commissioner that it will
provide at least five days advance notice of payments which it
will make under the surplus debenture. As of December 31, 1996,
the statutory capital and surplus of Investors-NA was $53.8
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
December 31, 1996, Investors-NA had earned surplus of $5,205,100.
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 $7,026,282 at December 31, 1996.
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 $12,510,153 at December 31, 1996.
The Form 10-Ks of ILCO for the years ended December 31, 1996,
1995 and 1994, set forth the business operations and financial
results of ILCO and its life insurance subsidiaries. Such 10-K
reports of ILCO, including the discussion by ILCO's management
under the caption "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" are incorporated
herein by reference.
Results of Operations
For the year ended December 31, 1996, FIC's income from
operations, before federal income tax and equity in net earnings
of affiliate, was $9,791,000 (on revenues of $59,928,000), as
compared to $10,394,000 (on revenues of $61,541,000) in the year
1995 and $10,610,000 (on revenues of $68,524,000) for the year
1994.
Premiums for the year 1996, net of reinsurance ceded, were $43.3
million, as compared to $43.9 million in 1995 and $48.9 million
in 1994. Policyholder benefits and expenses were $22.1 million
in 1996, as compared to $21.0 million in 1995 and $21.8 million
in 1994.
In 1995, Family Life entered into a reinsurance agreement with
Investors-NA pertaining to universal life insurance written by
Family Life. The reinsurance agreement is on a co-insurance
basis and applies to all covered business with effective dates on
and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than
$200,000; face amounts of $200,000 or more are reinsured by
Family Life with a third party reinsurer. In 1996, Family Life
entered into a reinsurance agreement with Investors-NA,
pertaining to annuity contracts written by Family Life. The
agreement applies to contracts written on or after January 1,
1996. These reinsurance arrangements reflect management's plan to
develop universal life and annuity business at Investors-NA, with
Family Life concentrating on the writing of term life insurance
products.
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the
common stock of Family Life and its equity ownership in ILCO.
FIC's primary sources of capital consists of cash flow from
operations of its subsidiaries and the proceeds from bank and
institutional borrowings.
The cash requirements of FIC and its subsidiaries consist
primarily of its service of the indebtedness created in
connection with its ownership of Family Life. As of September
30, 1996 the outstanding balance of such indebtedness was $61.5
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 balance as of March 31, 1996 had been
$4.67 million.
The principal source of liquidity for FIC's subsidiaries consists
of the periodic payment of principal and interest by Family Life
pursuant to the terms of a Surplus Debenture. The terms of the
Surplus Debenture were previously approved by the Washington
Insurance Commissioner. Under the provisions of the Surplus
Debenture and current law, no prior approval of the Washington
Insurance Department is required for Family Life to pay interest
or principal on the Surplus Debenture; provided that, after
giving effect to such payments, the statutory surplus of Family
Life is in excess of 6% of assets (the "surplus floor").
However, Family Life has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days
advance notice of payments which it will make under the surplus
debenture. As of December 31, 1996, the statutory capital and
surplus of Family Life was $24.9 million, an amount
substantially in excess of the surplus floor. During 1996,
Family Life made principal payments of $9.4 million and interest
payments of $4.1 million to Family Life Corporation under the
Surplus Debenture. As of December 31, 1996, the principal
balance of the Surplus Debenture was $40.5 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 $9.7
million in 1996, as compared to $9.1 million in 1995 and $5.3
million in 1994. Net cash flow used in financing activities was
$8.05 million in 1996, as compared to $9.8 million in 1995 and
$11.4 million in 1994.
In connection with the purchase of the Investors Life Companies
by ILCO and the purchase of Family Life by a wholly- owned
subsidiary of FIC, FIC guaranteed the payment of the indebtedness
created in connection with such acquisitions. After giving
effect to the refinancing of the ILCO Senior Loan and the
repayment of the ILCO Subordinated Loans, the guaranty
commitments of FIC with respect to the debt obligations of ILCO
relate to the ILCO Senior Loan, with an outstanding balance at
December 31, 1996 of $24.9 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 $22.50 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 December 31, 1996, the Company's investment assets totaled
$111.7 million, as compared to $112.6 million as of December 31,
1995 and $107.1 million as of December 31, 1994.
The level of short-term investments at the end of 1996 was $25.6
million, as compared to $27.2 million as of December 31, 1995.
The fixed maturities available for sale portion represents $83.8
million of investment assets as of December 31, 1996, as compared
to $83.6 million at the end of 1995. The amortized cost of fixed
maturities available for sale as of December 31, 1996 was $83.0
million representing a net unrealized gain of $.8 million. This
unrealized gain principally reflects changes in interest rates
from the date the respective investments were purchased. To
reduce the exposure to interest rate changes, portfolio
investments are selected so that diversity, maturity and
liquidity factors approximate the duration of associated
policyholder liabilities.
The assets held by Family Life must comply with applicable state
insurance laws and regulations. In selecting investments for the
portfolios of its life insurance subsidiaries, the Company's
emphasis is to obtain targeted profit margins, while minimizing
the exposure to changing interest rates. This objective is
implemented by selecting primarily short- to medium-term,
investment grade fixed income securities. In making such
portfolio selections, the Company generally does not select new
investments which are commonly referred to as "high yield" or
"non-investment grade".
The fixed maturities portfolio of Family Life, as of December 31,
1996, 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.
Accounting Developments
In March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of." This statement required that
long lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In addition, the statement
requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cash to sell.
SFAS No. 121 is effective for fiscal years beginning after 1995.
The Company plans to adopt SFAS No. 121 effective January 1,
1996. Management does not anticipate that adoption or this
standard will have a material impact on the Company's financial
statements.
During 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation," which encourages
companies to adopt the fair value based method of accounting for
stock-based compensation. This method requires the recognition
of compensation expense equal to the fair value of such equity
securities at the date of the grant. This statement also allows
companies to continue to account for stock-based compensation
under the intrinsic value based method, as prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees," with footnote disclosure of the pro forma
effects of the fair value based method. SFAS No. 123 is
effective for transactions entered into in years that begin after
December 15, 1995.
The Company plans to adopt SFAS No. 123 during 1996 by continuing
to account for stock-based compensation under the intrinsic value
method and disclosing the pro forma effects of the fair value
method in the footnotes to the financial statements.
Item 8. Financial Statements and Supplementary Data
The following Financial Statements of the Registrant have been
filed as part of this report:
1. Report of Price Waterhouse LLP, Independent
Accountants, dated March 27, 1996.
2. Consolidated Balance Sheets, as of December 31, 1996
and December 31, 1995.
3. Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.
4. Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1995 and
1994.
5. Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994.
6. Notes to Consolidated Financial Statements.
7. Consolidated Financial Statement Schedules.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
No independent accountant who audited the Registrant's financial
statements has resigned or been dismissed during the two most
recent fiscal years.
Part III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
The names and ages of the current directors of the Registrant,
their principal occupations or employment during the past five
years and other data regarding them are set forth below. All of
the directors were elected at the 1995 annual shareholders
meeting. The data supplied below is based on information
provided by the directors, except to the extent that such data is
known to the Registrant.
Director Principal Occupation
Name Age Since and Other Information
Roy F. Mitte 65 1976 Chairman of the Board,
President and Chief Executive
Officer of FIC. Chairman of
the Board, President and Chief
Executive Officer of ILCO and
InterContinental Life
Insurance Company since
January 1985. President of
ILCO since April 1985.
Chairman of the Board,
President and Chief Executive
Officer of Investors Life
Insurance Company of North
America since December 1988.
Chairman of the Board,
President and Chief Executive
Officer of Family Life
Insurance Company since June
1991. Chairman of the Board,
President and Chief Executive
Officer of Investors Life
Insurance Company of Indiana
since February 1995.
Chairman, ILG Securities
Corporation since December
1988.
James M. Grace 53 1976 Vice President, Secretary,
Treasurer and Director of FIC.
Vice President and Treasurer
of ILCO since January 1985.
Executive Vice President,
Treasurer and Director of
InterContinental Life
Insurance Company since 1989.
Executive Vice President and
Treasurer of Investors Life
Insurance Company of North
America since 1989. Executive
Vice President, Treasurer and
Director of Family Life
Insurance Company since June
1991. Director, Executive
Vice President and Treasurer
of Investors Life Insurance
Company of Indiana since
February 1995.
John D. Barnett 54 1991 Vice President-Investments,
Investment Professionals, Inc.
since August 1996. Vice
President-Investments of
Prudential Securities from
April 1983 to July 1996.
Eugene E. Payne 54 1992 Vice President and Director of
FIC since February 29, 1992.
Vice President of ILCO since
December 1988 and Director of
ILCO since May 1989.
Executive Vice President,
Secretary and Director of
Investors Life Insurance
Company of North America since
December 1988. Executive Vice
President since December 1988
and Director since May 1989 of
InterContinental Life
Insurance Company. Executive
Vice President, Secretary and
Director of Family Life
Insurance Company since June
1991. Director, Executive
Vice President and Secretary
of Investors Life Insurance
Company of Indiana since
February 1995.
Joseph F. Crowe 58 1992 Vice President of FIC from
February 29, 1992 to January
3, 1997, when he retired from
active service with the
Company. Director of FIC since
February 29, 1992. Vice
President of ILCO from May
1991 to January 1997.
Director of ILCO since May
1991. Executive Vice
President of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company from
June 1991 to January 1997.
Director of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company since
June 1991. Executive Vice
President of Family Life
Insurance Company from June
1991 to January 1997.
Director of Family Life
Insurance Company since June
1991. Executive Vice
President of Investors Life
Insurance Company of Indiana
from February 1995 to January
1997. Director of Investors
Life Insurance Company of
Indiana since February 1995.
From December 1986 to March
1991, Executive Vice President
of Personal Financial Security
Division of Aetna Life &
Casualty Company.
Theodore A. Fleron 57 1996 Vice President and Director of
FIC since August 1996. Vice
President and Director of ILCO
since May 1991. Assistant
Secretary of ILCO since June
1990. Senior Vice President,
General Counsel, Assistant
Secretary and Director of
Investors Life Insurance
Company of North America and
InterContinental Life
Insurance Company since July
1992. General Counsel,
Assistant Secretary and
Director of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company from
January 1989 to July 1992.
Senior Vice President, General
Counsel, Director and
Assistant Secretary of
Investors Life Insurance
Company of Indiana since June
1995. Senior Vice President,
General Counsel, Director and
Assistant Secretary of Family
Life Insurance Company since
August 1996.
Dale E. Mitte 62 1994 Senior Vice President since
January 1993 and Vice
President, Chief Underwriter
and Director since December
1988 of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company.
Director from June 1991 to
April 1992 and Vice President
and Chief Underwriter since
June 1991 of Family Life
Insurance Company. Director,
Senior Vice President and
Chief Underwriter of Investors
Life Insurance Company of
Indiana since June 1995.
Leonard A. Nadler 54 1994 Senior Managing Director of
Julien J. Studley, Inc. since
1995. President, Leonard
Nadler Associates, Inc., a
commercial real estate
brokerage company located in
Los Angeles, California, for
more than five years prior to
1995.
Frank Parker 67 1994 President, Gateway Tugs, Inc.
and Par-Tex Marine, Inc., both
of which are located in
Brownsville, Texas and are
engaged in operating and
chartering harbor and
intracoastal tug boats, for
more than the last five years.
Jeffrey H. Demgen 44 1995 Director of FIC since May
1995. Vice President of FIC
since August 1996. Vice
President and Director of ILCO
since August 1996. Director
of Family Life Insurance
Company since October 1992.
Executive Vice President of
Family Life Insurance Company
since August 1996. Senior
Vice President of Family Life
Insurance Company from October
1992 to August 1996.
Executive Vice President and
Director of Investors Life
Insurance Company of North
America since August 1996.
Senior Vice President and
Director of Investors Life
Insurance Company of North
America from October 1992 to
June 1995. Executive Vice
President of InterContinental
Life Insurance Company since
August 1996. Senior Vice
President of InterContinental
Life Insurance Company from
October 1992 to June 1995.
Executive Vice President and
Director of Investors Life
Insurance Company of Indiana
since August 1996. Senior
Vice President of United
Insurance Company of America
from September 1984 to July
1992.
Thomas C. Richmond 55 1996 Director of FIC since August
1996. Director of ILCO from
March 1994 to August 1996.
Director from March 1989 to
February 1990, Senior Vice
President since January 1993
and Vice President from March
1989 to January 1993 of
Investors Life Insurance
Company of North America and
InterContinental Life
Insurance Company. Senior
Vice President of Family Life
Insurance Company since June
1991. Senior Vice President
of Investors Life Insurance
Company of Indiana since June
1995.
Mr. Nadler and his wife were general partners of a single-asset
partnership that owned The Palmilla Apartments, a 26 unit
apartment complex in Hollywood, California. In March 1992, a
receiver for that property was appointed by stipulation of the
parties in connection with the conveyance of that property to the
mortgagee. The receiver was discharged by stipulation of the
parties in September 1992.
The incumbent directors have been nominated for submission to
vote of the shareholders for reelection at the 1997 annual
shareholders' meeting.
(b) Executive Officers of the Registrant
The following table sets forth the names and ages of the persons
who served as the Registrant's Executive Officers during 1996
together with all positions and offices held by them with the
Registrant. Officers are elected to serve at the will of the
Board of Directors or until their successors have been elected
and qualified.
Name Age Positions and Offices
Roy F. Mitte 65 Chairman of the Board,
President and Chief
Executive Officer
James M. Grace 53 Vice President, Secretary,
and Treasurer
Eugene E. Payne 54 Vice President
Joseph F. Crowe1 58 Vice President
Roger H. Hamm2 52 Vice President
Jeffrey H. Demgen3 44 Vice President
In May 1991, Roy F. Mitte suffered a stroke, resulting in partial
paralysis affecting his speech and mobility. Mr. Mitte continues
to make the requisite decisions in his capacity as Chief
Executive Officer, although his ability to communicate and his
mobility are impaired.
1. Mr. Crowe retired from active service with the Company as of
January 3, 1997. He will continue to service on the Board
of Directors.
2. Mr. Hamm resigned as Director of the Company as of August
26, 1996. His appointment as a Vice President of the
Company was terminated on that date.
3. Mr. Demgen was appointed a Vice President of the Company on
August 26, 1996.
(c) Identification of certain significant employees
Not applicable.
(d) Family relationships
Dale E. Mitte is Roy F. Mitte's brother.
(e) Business experience
All of the executive officers of the Company are members of the
Board of Directors, and their business experience has been
outlined in Item 10 (a).
(f) Compliance with Section 16(a) of the Securities Exchange Act
of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than
ten percent of a registered class of the Company's equity
securities, to file reports of beneficial ownership on Form 3 and
changes in beneficial ownership on Form 4 and 5 with the
Securities and Exchange Commission. Officers, directors and
greater than ten-percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on review of the copies of such forms furnished to
the Company, or written representations that no Form 5's were
required, the Company believes that during the period from
January 1, 1996 through December 31, 1996, all Section 16(a) filing
requirements applicable to its officers, directors and greater
than ten-percent beneficial owners were complied with, except as
follows: (i) Frank Parker filed a Form 5 in February, 1997, to
report the purchase in June, 1996 of 2,000 shares (10,000 shares as
adjusted to reflect the five-for-one stock split effective
November 12, 1996) of FIC common stock; and (ii) Eugene E. Payne
filed a Form 5 in February, 1997, to report the purchase in August,
1996, of 347 shares (1,735 shares as adjusted to reflect the five-
for-one stock split effective November 12, 1996) of FIC common
stock.
Thomas C. Richmond and Theodore A. Fleron each filed a Form 5 in
February, 1997, to report his appointment as a Director of the
Company as of August 26, 1996 and to report no beneficial
ownership of FIC common stock.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the
compensation of the Company's Chief Executive Officer and each of
the four other persons who were serving as executive officers of
the Company at the end of 1995 and received cash compensation
exceeding $100,000 during 1996
Annual Compensation
Name and All Other
Principal Salary(1) Bonus(1) Other(2) Compensation
Position Year ($) ($) ($) ($)
Roy F. Mitte,
Chairman of
Board,
President and
Chief 1996 503,500 -0- -0- 2,446,397 3
Executive 1995 503,500 -0- -0- 1,120,513 4
Officer 1994 503,500 1,076,159 5 -0- 1,376,663 6
James M.
Grace,
Vice
President, 1996 15,000 -0- -0-
Secretary and 1995 195,000 10,000 -0- -0-
Treasurer 1994 195,000 2,500 -0- -0-
195,000
Eugene E.
Payne, 1996 15,000 -0- -0-
Vice 1995 195,000 10,000 -0- -0-
President 1994 195,000 5,000 -0- -0-
Joseph F. 195,000
Crowe, 1996 15,000 -0- -0-
Vice 1995 10,000 -0- -0-
President 1994 196,500 5,500 -0- -0-
195,000
Jeffrey 195,000
H. Demgen,
Vice Presi-
dent 7 1996 7,500 -0- -0-
102,500
(1) The salaries and bonuses set forth in the table were
paid by ILCO, except that $216,857 of Mr. Mitte's
salary in 1996, $216,857 of Mr. Mitte's salary in 1995
and $251,700 of Mr. Mitte's salary and $538,080 of his
bonus in 1994 were paid by Family Life. The executive
officers of FIC have also been executive officers of
Family Life, the insurance subsidiary of FIC, and ILCO
and its insurance subsidiaries. Family Life reimbursed
ILCO (or, in the case of Mr. Mitte, paid Mr. Mitte
directly) the following amounts as Family Life's share
of the executive officers' cash compensation for 1994,
1995 and 1996: $789,780, $216,857 and $216,857,
respectively, for Mr. Mitte; $70,590, $88,293 and
$83,987, respectively, for Mr. Grace; $126,750, $79,875
and $83,987, respectively, for Dr. Payne; $68,250,
$88,293 and $84,633, respectively, for Mr. Crowe; and
$46,125 (1996 only) for Mr. Demgen.
Mr. Mitte and FIC are parties to an employment
agreement, providing for the employment of Mr. Mitte as
Chairman, President and Chief Executive Officer of the
Company. The agreement, which was initially effective
February 25, 1982, provides for five-year terms and for
automatic renewals for successive five-year periods,
unless otherwise terminated in accordance with the
terms of the agreement. The agreement provides that the
level of compensation will be fixed each year by
agreement, but not less than $120,000 per year. In
addition, the agreement provides that Mr. Mitte is
entitled to reimbursement for reasonable business
expenses and to participate in all fringe benefit plans
and arrangements available generally to employees of
the Company.
(2) Does not include the value of perquisites and other
personal benefits because the aggregate amount of any
such compensation does not exceed the lesser of $50,000
or 10 percent of the total amount of annual salary and
bonus for any named individual.
(3) During 1996, ILCO paid Mr. Mitte: (i) $1,862,000 for
the cancellation in 1996 of options to purchase 121,500
shares of the Company's common stock, plus interest at
the rate of 8% per year on such amount for a one year
period (for a total of $2,011,737); (ii) $120,700 for
the federal income tax reimbursement relating to the
cancellation in 1995 of options to purchase 50,000
shares of the Company's common stock; and (iii)
$313,960 for the federal income tax reimbursement
relating to the 1996 options cancellation described
above in this footnote. Each of these payments was
made pursuant to the contract referred to in footnote
4.
(4) In 1989, ILCO's Board of Directors granted Mr. Mitte
options to purchase 600,000 shares of ILCO's Common
Stock. In October 1992, Mr. Mitte surrendered to ILCO
for cancellation options to purchase 120,000 shares.
ILCO and Mr. Mitte entered into a contract in 1993
providing for the cancellation of 240,000 options for
an aggregate amount of $3,237,120 in 1993 and the
cancellation in subsequent years of the remaining
options for an aggregate amount of $3,610,240. In
addition, the Company agreed to pay Mr. Mitte the
amount necessary to ensure that Mr. Mitte will receive
the same amount, after federal income tax, that he
would have received if the options had been cancelled
in 1992. During 1995, Mr. Mitte was paid $836,582 for
the cancellation in 1995 of options to purchase 50,000
shares of ILCO's Common Stock, $156,323 for the federal
income tax reimbursement relating to the cancellation
in 1994 of options to purchase 68,500 shares and
$127,608 as the final payment relating to the
cancellation in 1993 of options to purchase 240,000
shares. These option cancellation payments were made
pursuant to the contract referred to above. FIC's
Compensation Committee made a recommendation to FIC's
Board of Directors, which it adopted, that, in lieu of
paying Mr. Mitte a bonus as it has in the past, FIC pay
$407,000 of these option cancellation payments to Mr.
Mitte, with the balance of $713,513 being paid by ILCO.
(5) ILCO's Compensation Committee made a recommendation to
ILCO's Board of Directors, which the Board adopted,
that a bonus be paid to Mr. Mitte to enable him to pay
off the $650,000 loan that ILCO had made to Mr. Mitte
in 1989 and to reimburse him for the amount of federal
income tax payable on the bonus. Since ILCO and FIC
have usually each paid one-half of Mr. Mitte's cash
compensation, FIC's Board of Directors, acting on the
recommendation of its Compensation Committee,
subsequently authorized FIC to pay $500,000 of that
bonus to Mr. Mitte. Therefore, FIC paid $500,000, and
ILCO paid $576,159, of the bonus.
(6) During 1994, ILCO paid Mr. Mitte $997,520 for the
cancellation in 1994 of options to purchase 68,500
shares of ILCO's Common Stock and $379,143 for the
federal income tax reimbursement relating to the
cancellation in 1993 of options to purchase 240,000
shares. Both of these payments were made pursuant to
the contract referred to in footnote (4).
(7) Mr. Demgen became an executive officer of FIC and ILCO
in August 1996.
Compensation of Directors
Directors who are not officers or employees of the Company are
paid a $5,000 annual fee, and are compensated $1,000 for each
regular or special meeting of the Board of Directors which they
attend in person.
Members of Compensation Committee
The Compensation Committee makes recommendations to the Board of
Directors with respect to the Chief Executive Officer's
compensation. The members of the Compensation Committee are John
D. Barnett, Leonard A. Nadler and Frank Parker.
Compensation Committee Interlocks and Insider Participation
Roy F. Mitte determines the compensation of all executive
officers of FIC, other than the Chief Executive Officer. Mr.
Mitte is the Chairman of the Board, President and Chief Executive
Officer of FIC and ILCO. He also determines the compensation of
all executive officers of ILCO, other than the Chief Executive
Officer.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table presents information as of March 14, 1997 as
to all persons who, to the knowledge of the Registrant, were the
beneficial owners of five percent (5%) or more of the Common
Stock of the Registrant.
Amount and Nature
Name and Address of of Beneficial Percent
Beneficial Owner Ownership of Class
Roy F. Mitte,
Chairman of the Board,
President and Chief
Executive Officer,
701 Brazos
Suite 1400,
Austin, Texas 78701 1,866,520 1 34.39% 1
InterContinental Life
Corporation
701 Brazos
Suite 1400,
Austin, Texas 78701 727,115 2,4 12.19% 3
Investors Life Insurance
Company of North America
701 Brazos
Suite 1400
Austin, Texas 78701 727,115 2,4 12.19% 3
(1) These shares are held jointly by Mr. Mitte with his wife
Joann C. Mitte.
(2) Of such shares, 145,500 shares are owned by Investors-NA,
44,250 shares are owned by ILIC, and 537,365 shares are
issuable upon exercise of an option held by Investors-NA.
Investors-NA is a direct subsidiary of ILCO. ILIC is a
direct subsidiary of Investors-NA.
(3) Assumes that outstanding stock options or warrants held by
other persons have not been exercised.
(4) See Item 1. Business-Acquisition of Family Life for a
description of the options granted to Investors-NA.
The following table contains information as of March 14, 1997 as
to the Common Stock of the Registrant beneficially owned by each
director, nominee and executive officer and by all executive
officers and directors of the Registrant as a group. Messrs.
Barnett, Crowe, Demgen, Hamm, Parker, Payne and Spears did not
beneficially own any shares of FIC as of March 14, 1997. The
information contained in the table has been obtained by the
Registrant from each director and executive officer, except for
the information known to the Registrant. Except as indicated in
the notes to the table, each beneficial owner has sole voting
power and sole investment power as to the shares listed opposite
his name.
Amount and Nature of Percent of
Name Beneficial Ownership Class
John Barnett -0-
Joseph F. Crowe -0- 2
Jeffrey H. Demgen -0- 2
Theodore A. Fleron -0-
James M. Grace 5,600 2 *
Dale E. Mitte 2,000 *
Roy F. Mitte 1,866,520 1,2 34.39%
Leonard A. Nadler 1,665 *
Frank Parker 10,000 *
Eugene E. Payne 5,360 2 *
Thomas C. Richmond -0-
All Executive Officers,
Nominees and Directors as
a group (11 persons) 1,891,145 1,2 34.84%
(1) These shares are held by Mr. Mitte jointly with his wife
Joann C. Mitte.
(2) No executive officer or director holds any options to
acquire FIC Common Stock. Messrs. Roy Mitte, Grace, Payne,
Crowe and Demgen are executive officers and/or directors of
ILCO and beneficially owned approximately 63.9% of the
outstanding shares of ILCO common stock as of March 14,
1997. Since FIC beneficially owns 61.5% of ILCO Common
Stock, Mr. Roy Mitte's personal holdings are combined with
FIC's holdings in determining the percentage of ILCO Common
Stock beneficially owned by Mr. Mitte. ILCO beneficially
owned 727,115 shares of FIC Common Stock (12.19% of the
outstanding shares) as of March 14, 1997.
* Less than 1%.
Item 13. Certain Relationships and Related Transactions
The obligations of ILCO under the ILCO Senior Loan are guaranteed
by FIC. FIC presently owns 1,966,346 shares of ILCO Common
Stock, constituting 46.17% of such shares outstanding, and holds
options to acquire an additional 1,702,155 shares at the average
bid price of such shares during the six-month period preceding
the date of any such purchase. In the event that such options
were to be fully exercised, the total number of ILCO's shares
owned by FIC would constitute 61.54% of ILCO's outstanding Common
Stock.
Roy F. Mitte serves as Chairman, President and Chief Executive
Officer of both FIC and ILCO. James M. Grace serves as Vice
President, Treasurer and Director of both companies and Secretary
of FIC; Dr. Payne serves as Vice President and Director of both
companies and Secretary of ILCO; Messrs. Demgen and Fleron serve
as Vice Presidents and Directors of both companies; and Mr. Crowe
serves as a Director of both companies and, until his retirement
in January, 1997, served as a Vice President of both companies.
Mr. Roy Mitte holds beneficial ownership of 34.39% of the
outstanding shares of the Company (see "Security Ownership of
Certain Beneficial Owners"). Mr. Mitte was granted an option to
purchase 600,000 shares of the common stock of ILCO (as adjusted
to reflect a three-for-one split in February 1990) on May 8, 1989
in equal annual installments of 150,000 shares each. Each
installment was subject to the approval of the Board of
Directors, and would be exercisable for a period of ten years
from the date of grant at a price of $1.00 per share (as
adjusted). The Board of Directors voted to award installments of
150,000 shares in each of 1989, 1990, 1991 and 1992. In October
1992 Mr. Mitte surrendered to ILCO for cancellation options to
purchase 120,000 shares. ILCO and Mr. Mitte entered into an
agreement in 1993 providing for the cancellation of the remaining
optionstopurchase480,000shares. SeeItem11.Executive Compensation.
In May 1989, the Board of Directors of ILCO granted Roy F. Mitte
the right to borrow up to $650,000 from ILCO to be used solely
for the purchase of FIC common stock pursuant to Mr. Mitte's then
existing options. A principal purpose of said loan was to enable
Mr. Mitte to maintain his equity position in FIC, as required
under the terms of the lending agreements entered into in
connection with the purchase of the Investors Life Companies (see
"Acquisition of Investors Life Companies"). Said loan, which was
exercised on June 1, 1989, carried no interest and was payable in
five years. The loan was paid in full in 1994. See Item 11.
Executive Compensation.
When it acquired Austin Centre, Investors-NA leased the hotel to
FIC Realty Services, Inc. ("FIC Realty"), a subsidiary of FIC,
pursuant to which FIC Realty pays monthly rent to Investors-NA in
an amount equal to 95% of the net operating profits of the hotel
for the preceding month (excess of all hotel revenues over all
hotel expenses, including insurance, utilities and property
taxes). Any net operating loss for a month is carried forward and
deducted from the net operating profit for the next month that
has such a profit. During 1996, FIC Realty paid $658,509 of rent
to Investors-NA pursuant to this lease. FIC Realty has delegated
the management of the hotel to an unrelated third party pursuant
to a management agreement, but FIC Realty bears most of the
economic risks in operating the hotel. As an inducement to FIC
Realty's agreeing to bear those risks, Investors-NA has agreed to
provide funds to pay expenses in operating the hotel to the
extent that the cash flow from such operations is not sufficient
to do so. This arrangement was terminated upon the sale by
Investors-NA of the Austin Centre in March, 1996.
FIC Realty conducts the leasing activities for the Bridgepoint
Square properties owned by Investors-NA. In payment for such
services, FIC Realty receives a commission of 4% of the gross
rent under each lease which is negotiated by it. During 1996,
Investors-NA paid commissions in the amount of $100,811 to FIC
Realty.
Alcoholic beverages had been sold at the hotel by an unrelated
third party pursuant to a lease it had with FIC Realty until
September 30, 1994. Commencing October 1, 1994, all alcoholic
beverages sales have been conducted by Atrium Beverage
Corporation ("Atrium Beverage"), a new subsidiary of FIC Realty.
Atrium Beverage subleases from FIC Realty space in the hotel for
the storage, service and sale of alcoholic beverages pursuant to
which Atrium Beverage pays monthly rent to FIC Realty of $12,500.
The sublease provides that the rent paid during each calendar
year will be reduced to the extent necessary to insure that
Atrium Beverage's net operating profit from alcoholic beverage
sales is not less than 5% of its gross receipts from such sales.
Atrium Beverage and FIC Realty are also parties to a management
agreement whereby FIC Realty manages Atrium Beverage's alcoholic
beverage operations at the hotel for a monthly fee equal to 28%
of the gross receipts from alcoholic beverages sales. During
1996, Atrium Beverage paid FIC Realty rent and management fees
totalling $117,998. All of that amount was included in the hotel
revenues of FIC Realty for purposes of determining its net
operating profits under the hotel lease agreement with Investors-
NA.
Investors-NA entered into a management agreement in September
1991 with FIC Property Management, Inc. ("FIC Management"), a
subsidiary of FIC, whereby it appointed FIC Management to manage,
lease and operate the office tower, retail areas, underground
parking garage and common areas of Austin Centre. FIC Management
is paid fees in an amount equal to 5% of the net operating profit
that Investors-NA receives from the properties managed and leased
by FIC Management. During 1996, Investors-NA paid $33,027 of
fees to FIC Management under this agreement. This arrangement
was terminated upon the sale by Investors-NA of the Austin Centre
in March, 1996.
As part of the financing arrangement for the acquisition of
Family Life, a $22.5 million loan was made by Investors-NA to
FLC, a subsidiary of FIC, and a $2.5 million loan was made by
Investors-CA to FIC. In addition to the interest provided under
those loans, Investors-NA and Investors-CA were granted by FIC
non-transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9
percent of shares of FIC's common stock at a price of $10.50 per
share, equivalent to the then current market price, subject to
adjustment to prevent dilution. As a result of the FIC's five-
for-one stock split, which was effective November 12, 1996, the
option price is currently $2.10 per share. The options will
expire on June 12, 1998 if not previously exercised. In
connection with the 1996 amendments to the subordinated notes, as
described below, the expiration date of the options were extended
to September 12, 2006.
On July 30, 1993, the subordinated indebtedness owed to Merrill
Lynch and its affiliate was prepaid. The Company paid $38
million plus accrued interest to retire the indebtedness, which
had a principal balance of approximately $50 million on July 30,
1993.
The primary source of the funds used to prepay the subordinated
debt was new subordinated loans totalling $34.5 million that FLC
and another subsidiary of FIC obtained from Investors-NA. The
principal amount of the new subordinated debt is payable in four
equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of the new
debt are substantially the same as those of the $22.5 million
subordinated loans that Investors-NA had previously made to FLC
and that continue to be outstanding.
As of June 12, 1996, the provisions of the notes from Investors-
NA to FIC, FLC and FLIIC were modified as follows: (a) the $22.5
million note was amended to provide for twenty quarterly
principal payments, in the amount of $1,125,000 each, to commence
on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains
at 11%, (b) the $30 million note was amended to provide for forty
quarterly principal payments, in the amount of $163,540 each for
the period December 12, 1996 to September 12, 2001; beginning
with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final
quarterly principal payment is due on September 12, 2006; the
interest rate on the note remains at 9%, (c) the $4.5 million
note was amended to provide for forty quarterly principal
payments, in the amount of $24,531 each for the period December
12, 1996 to September 12, 2001; beginning with the principal
payment due on December 12, 2001, the amount of the principal
payment increases to $200,469; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the
note remains at 9%, (d) the $2.5 million note was amended to
provide that the principal balance of the note is to be repaid in
twenty quarterly installments of $125,000 each, commencing
December 12, 1996 with the final payment due on September 12,
2001; the rate of interest remains at 12%, (e) the Master PIK
note, which was issued to provide for the payment in kind of
interest due under the terms of the $2.5 million note prior to
June 12, 1996, was amended to provide that the principal balance
of the note ($1,977,119) is to be paid in twenty quarterly
principal payments, in the amount of $98,855.95 each, to commence
December 12, 1996 with the final payment due on September 12,
2001; the interest rate on the note remains at 12%.
FIC was reimbursed by ILCO for rental expense and certain other
operating expenses incurred during 1996 on behalf of ILCO. The
amount of such reimbursement was approximately $305,000.
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided at a central location until November
30, 1994. Commencing December 1, 1994, all of those data
processing needs are provided to ILCO's and FIC's Austin, Texas
and Seattle, Washington facilities by FIC Computer Services, Inc.
("FIC Computer"), a new subsidiary of FIC. Each of FIC's and
ILCO's insurance subsidiaries has entered into a data processing
agreement with FIC Computer whereby FIC Computer provides data
processing services to each subsidiary for fees equal to such
subsidiary's proportionate share of FIC Computer's actual costs
of providing those services to all of the subsidiaries.
Family Life paid $1,055,639 and ILCO's insurance subsidiaries
paid $2,243,234 to FIC Computer for data processing services
provided during 1996.
In 1995, Family Life entered into a reinsurance agreement with
Investors-NA pertaining to universal life insurance written by
Family Life. The reinsurance agreement is on a co-insurance
basis and applies to all covered business with effective dates on
and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than
$200,000; face amounts of $200,000 or more are reinsured by
Family Life with a third party reinsurer.
In 1996, Family Life entered into a reinsurance agreement with
Investors-NA, pertaining to annuity contracts written by Family
Life. The agreement applies to contracts written on or after
January 1, 1996.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents have been filed as part of this
report:
1. Financial Statements (See Item 8)
ILCO Form 10-K as of December 31, 1994, 1995 and 1996
and the Financial Statements contained therein are
hereby incorporated by reference.
The following consolidated financial statements of Financial
Industries Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants . . . . . . . . . . .F-2
Consolidated Balance Sheets,
December 31, 1996 and 1995. . . . . . . . . . . . . . .F-3
Consolidated Statements of Income, for
years ended December 31, 1996, 1995 and 1994. . . . . .F-5
Consolidated Statements of Changes in
Shareholders' Equity, for the years ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . .F-8
Consolidated Statement of Cash Flows, for the
years ended December 31, 1995, 1994 and 1993. . . . . .F-9
Notes to Consolidated Financial Statements. . . . . . .F-11
2. The following consolidated financial statement
schedules of Financial Industries Corporation and
Subsidiaries are included:
Schedule I - Summary of Investments
Other Than Investments in
Related Parties. . . . . . . . . . F-39
Schedule III - Condensed Financial Statements
of Registrant. . . . . . . . . . . F-40
Schedule IV - Indebtedness of and to
Related Parties. . . . . . . . . . F-43
Schedule VI - Reinsurance Ceded and Assumed. . . F-44
Schedule VII - Guarantees of Securities of
Other Issuers. . . . . . . . . . . F-45
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are not
applicable, and therefore, have been omitted.
2. Exhibits filed with this report or incorporated herein
by reference are as listed in the Index to Exhibits on
Page Ex-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the fiscal year ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Financial Industries Corporation
(Registrant)
By:/s/ Roy F. Mitte By:/s/ James M. Grace
Roy F. Mitte, Chairman of James M. Grace,
Treasurer,
the Board, President and Principal Accounting and
Chief Executive Officer and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
March 27, 1997.
/s/ Roy F. Mitte
Roy F. Mitte, Director
/s/ James M. Grace
James M. Grace, Director
/s/ Eugene E. Payne
Eugene E. Payne, Director
/s/ Joseph F. Crowe
Joseph F. Crowe, Director
/s/ Jeffrey H. Demgen
Jeffrey H. Demgen, Director
/s/ Roger H. Hamm
Roger H. Hamm, Director
/s/ Robert F. Spears
Robert F. Spears, Director
/s/ Dale E. Mitte
Dale E. Mitte, Director
/s/ John D. Barnett
John D. Barnett, Director
/s/ Leonard A. Nadler
Leonard A. Nadler, Director
/s/ Frank Parker
Frank Parker, Director
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
FORM 10-K--ITEM 14 (a) (1) and (2)
LIST OF FINANCIAL STATEMENTS
TABLE OF CONTENTS
(1) The following consolidated financial statements of Financial
Industries Corporation and Subsidiaries are included in Item
8:
Report of Independent Accountants........................F-2
Consolidated Balance Sheets, December 31, 1996 and 1995..F-3
Consolidated Statements of Income, for the years ended
December 31, 1996, 1995 and 1994........................F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994....F-7
Consolidated Statements of Cash Flows, for the years ended
December 1996, 1995 and 1994............................F-
10
Notes to Consolidated Financial Statements...............F-
12
(2) The following consolidated financial statements schedules of
Financial Industries Corporation and Subsidiaries are
included:
Schedule I - Summary of Investments Other Than Investments
i n R e l a t e d
Parties.........................................F-41
Schedule III - Condensed Financial Statements of
Registrant...............................................F-
42
Schedule IV - Indebtedness of and to Related Parties.....F-
45
Schedule VI - Reinsurance Ceded and Assumed..............F-
46
Schedule VII - Guarantees of Securities of Other Issuers.F-
47
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are not
applicable, and therefore, have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Financial Industries Corporation
In our opinion, the consolidated financial statements listed in
the index appearing under Item 14(a) (1) and (2) on page F-1
present fairly, in all material respects, the financial position
of Financial Industries Corporation and its subsidiaries (the
Company) at December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are
the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Dallas, Texas
March 25, 1997
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
1996 1995
ASSETS
Investments other than investment in
affiliate:
Fixed maturities available for sale at
market value (amortized cost of
$82,969 and $79,961 at December 31,
1996 and 1995) $ 83,833 $ 83,632
Equity securities at market (cost
approximates $11 at December 31, 1996
and 1995) 4 4
Policy loans 2,286 1,774
Short-term investments 25,615 27,180
Total investments 111,738 112,590
Cash 308 1,414
Investment in affiliate 52,925 45,736
Accrued investment income 1,233 1,102
Agency advances and other receivables 7,825 10,368
Reinsurance receivables 6,159 2,383
Due and deferred premiums 10,651 9,726
Property and equipment, net 8,799 7,452
Deferred policy acquisition costs 41,333 36,537
Present value of future profits of
acquired businesses 40,604 45,415
Deferred financing costs -0- 168
Other assets 5,706 6,264
Separate account assets 449 8,523
Total Assets $ 287,730 $ 287,678
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits $ 59,340 $ 54,909
Contractholder deposit funds 41,434 41,456
Unearned premiums 129 132
Other policy claims and benefits 5,164 5,836
payable 106,067 102,333
-0- 6,765
Senior loans
Subordinated notes payable to 59,940 61,224
affiliate 17,952 14,783
Deferred federal income taxes 11,248 11,315
Other liabilities 449 8,523
Separate account liabilities
195,656 204,943
Total Liabilities
Commitments and Contingencies
(See Note 4, 8, 12, 14)
Shareholders' equity:
Common stock, $.20 par value,
10,000,000
shares authorized; 5,845,300 shares 1,169 1,169
issued, 5,427,965 outstanding in 1996 7,225 7,225
and 1995
Additional paid-in capital
Net unrealized gain on 1,220 8,052
investments in fixed maturities
available for sale 25 11
Net unrealized appreciation of equity 82,857 66,700
securities 92,496 83,157
Retained earnings
(422) (422)
Common treasury stock, at cost, 417,335 92,074 82,735
shares in 1996 and 1995
Total Shareholders' Equity
$ 287,730 $ 287,678
Total Liabilities and Shareholders'
Equity
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1996 1995 1994
(in thousands)
Revenues:
Premiums $ 43,336 $ 43,899 $ 48,872
Net investment income 7,363 7,643 7,449
Net realized (loss) gain on
sale of investments -0- -0- (23)
Earned insurance charges 5,569 7,059 8,911
Other 3,660 2,940 3,315
59,928 61,541 68,524
Benefits and expenses:
Policyholder benefits and expenses 22,096 21,011 21,837
Interest expense on contract-
holders deposit funds 2,239 2,143 2,124
Amortization of present value of
future profits of acquired
businesses 4,811 5,297 11,447
Amortization of deferred policy
acquisition costs 4,185 3,755 2,955
Operating expenses 12,975 14,317 14,689
Interest expense 3,831 4,624 4,862
50,137 51,147 57,914
Income before federal income tax
and equity in net earnings of
affiliates 9,791 10,394 10,610
Provision for federal income taxes:
Current (1,165) (717) (82)
Deferred 3,811 3,145 2,428
Income before equity in net
earnings of affiliates 7,145 7,966 8,264
Equity in net earnings of
affiliate, net of tax 9,012 2,051 1,690
Net Income $ 16,157 $ 10,017 $ 9,954
The accompanying notes are an integral part of these
consolidated statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
Years Ended December 31,
1996 1995 1994
(in thousands)
Net Income Per Share (Note 15)
Common stock and common stock
equivalents 5,568 5,540 5,530
Net income per share of
common stock $ 2.90 $ 1.81 $ 1.80
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Paid-in
Shares Amount Capital
Balance at December 31,
1993 5,845 $ 1,169 $ 7,225
Net income
Change in net unrealized
loss on investments in
fixed maturities
available for sale
Change in net unrealized
appreciation
(depreciation) of equity
securities
Balance at December 31,
1994 5,845 1,169 7,225
Net Income
Change in net unrealized
loss on investments in
fixed maturities
available for sale
Change in net unrealized
appreciation
(depreciation) of equity
securities
Balance at December 31,
1995 5,845 1,169 7,225
Net Income
Change in net unrealized
gain on investments in
fixed maturities
available for sale
Change in net unrealized
appreciation
(depreciation) of equity
securities
Balance at December 31, 5,845 $ 1,169 $ 7,225
1996
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Net Unrealized
Net (Loss) Gain on
Unrealized Investments in
Appreciation F i x e d
Maturities
of Equity Available For
Securities Sale
Balance at December 31,
1993 $ 67 $ 4,856
Net income
Change in net unrealized
loss on investments in
fixed maturities
available for sale (17,714)
Change in net unrealized
appreciation
(depreciation) of equity
securities (68)
Balance at December 31,
1994 (1) (12,858)
Net Income
Change in net unrealized
loss on investments in
fixed maturities
available for sale 20,910
Change in net unrealized
appreciation
(depreciation) of equity
securities 12
Balance at December 31,
1995 11 8,052
Net Income
Change in net unrealized
gain on investments in
fixed maturities
available for sale (6,832)
Change in net unrealized
appreciation
(depreciation) of equity
securities 14
Balance at December 31,
1996 $ 25 $ 1,220
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Total
Retained T r e a s u r y
Shareholders'
Earnings Stock Equity
Balance at December 31,
1993 $46,729 $ (422) $59,624
Net income 9,954 9,954
Change in net unrealized
loss on investments in
fixed maturities
available for sale (17,714)
Change in net unrealized
appreciation
(depreciation) of equity
securities (68)
Balance at December 31,
1994 56,683 (422) 51,796
Net Income 10,017 10,017
Change in net unrealized
loss on investments in
fixed maturities
available for sale 20,910
Change in net unrealized
appreciation
(depreciation) of equity
securities 12
Balance at December 31,
1995 66,700 (422) 82,735
Net Income 16,157 16,157
Change in net unrealized
gain on investments in
fixed maturities
available for sale (6,832)
Change in net unrealized
appreciation
(depreciation) of equity
securities 14
Balance at December 31,
1996 $82,857 $ (422) $92,074
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
(in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 16,157 $ 10,017 $ 9,954
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization of present value of
future profits of acquired
businesses 4,811 5,297 11,447
Amortization of deferred policy
acquisition costs 4,185 3,755 2,955
Financing costs amortized 168 221 654
Depreciation on property and
equipment -0- -0- 120
Equity in undistributed earnings
of affiliate (12,558) (5,043) (4,673)
Changes in assets and liabilities:
Decrease (Increase) in accrued
investment income (131) 64 (71)
Increase in agent advances and
other receivables (1,233) (3,586) (1,924)
Increase in due premiums (925) (12) (1,847)
Increase in deferred policy
acquisition costs (8,981) (10,318) (9,610)
Decrease (Increase) in other assets 558 22 (1,704)
Increase in policy
liabilities and accruals 3,734 4,388 233
Increase (Decrease) in other
liabilities (67) 1,508 (2,655)
Increase in policy loans (512) (543) (361)
(Decrease) Increase in deferred
federal income taxes 3,169 7,773 (1,261)
Other, net 1,330 (4,475) 4,081
Net cash provided by operating
activities $ 9,705 $ 9,068 $ 5,338
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year Ended December 31,
1996 1995 1994
(in thousands)
CASH FLOWS FROM INVESTING
ACTIVITIES
Fixed maturities purchased $(4,245) $ (1,051) $(11,206)
Proceeds from sales and maturities
of fixed maturities 1,265 4,504 3,679
Net decrease in short-term
investments 1,565 1,185 11,963
Purchase & retirement of property
and equipment (1,347) (3,395) -0-
Net cash provided by (used in)
investing activities (2,762) 1,243 4,436
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of subordinated notes
payable 253 465 413
Repayment of senior loan and
subordinated notes (6,765) (10,295) (11,772)
Repayment of subordinated notes
payable (1,537) -0- -0-
Net cash used in financing
activities (8,049) (9,830) (11,359)
Net increase (decrease) in cash (1,106) 481 (1,585)
Cash, beginning of year 1,414 933 2,518
Cash, end of year 308 $ 1,414 $ 933
Supplemental Cash Flow Disclosures:
Income taxes paid $ 125 $ 150 $ 1,725
Interest paid $ 4,300 $ 4,107 $ 4,645
The accompanying notes are an integral part of these
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Financial Industries Corporation (FIC or the "Company") is
principally engaged, through its subsidiaries, in administering
existing portfolios of individual and group life insurance,
disability insurance policies and annuity products. The
Company's insurance subsidiary is also engaged in the business of
marketing and underwriting individual life insurance, disability
insurance and annuity products in 49 states and the District of
Columbia. Such products are marketed through independent, non-
exclusive general agents.
Principles of Consolidation
The consolidated financial statements include the accounts of FIC
and its wholly-owned subsidiaries at December 31, 1996. The more
significant subsidiaries are Family Life Insurance Investment
Company (FLIIC), Family Life Corporation (FLC), Family Life
Insurance Company (Family Life) and Financial Industries
Corporation Realty Services. The Company's approximate 46%
investment in InterContinental Life Corporation (ILCO) is
presented using the equity method of accounting.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles which differ from statutory accounting principles
required by regulatory authorities for the Company's insurance
subsidiary. All material intercompany balances and transactions
have been eliminated. The following accounting policies describe
the accounting principles used in the preparation of the
consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results will differ from those estimates.
Investments
The Company's general investment philosophy is to hold fixed
maturity securities until maturity. However, fixed maturities
may be sold prior to their maturity dates in response to changing
market conditions, duration of liabilities, liquidity factors,
interest rate movements and other investment factors.
Accordingly,
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fixed maturity investments are classified as available for sale
and are carried at market value. Unrealized gains and losses on
securities available for sale are not recognized in earnings but
are reported as a separate component of equity, net of related
income taxes.
Premiums and discounts on collateralized mortgage obligations
(CMOs) are amortized over the estimated redemption period as
opposed to the stated maturity. An adjustment to the investment
and investment income is recorded on a retrospective basis to
reflect the amounts that would have existed had the new effective
yield been applied since the acquisition of the CMO's. The
Company endeavors to minimize the portfolio's exposure to
interest rate changes inherent in interest-sensitive products by
selecting and selling investments so that diversity, maturity and
liquidity factors approximate the duration of related
policyholder liabilities.
Equity securities are carried at market values. Unrealized gains
and losses on equity securities, net of deferred income taxes, if
applicable, are reflected directly in shareholders' equity.
Policy loans represent unpaid balances and do not exceed the cash
surrender value of the related policies.
Short-term investments are carried at cost, which approximates
market value, and generally consist of those fixed maturities and
other investments with maturities less than one year from the
date of purchase. Securities pledged as collateral for
repurchase agreements are held by the Company's investment
custodian until maturity of the repurchase agreement. Provisions
of the agreement and procedures adopted by the Company ensure
that the market value of the collateral, including accrued
interest thereon, is sufficient in the event of default by the
counterparty.
The cost of investments sold is determined on the specific
identification basis, except for stocks, for which the first-in,
first-out method is employed. When impairment of the value of an
investment is considered other than temporary, the decrease in
value is reported in net income as a realized investment loss and
a new cost basis is established.
Cash and Cash Equivalents
Generally, cash includes cash on hand and on deposit in
noninterest bearing accounts. Short term investments with
maturities of three months or less at the time of purchase are
reported as cash equivalents.
Property and Equipment
Property and equipment is stated at cost less accumulated
depreciation. Depreciation is provided using straight-line and
accelerated methods over estimated useful lives of 10 to 33
years. Maintenance and repairs are charged to expense when
incurred.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Deferred Policy Acquisition Costs
The cost of acquiring new business, principally first year
commissions and certain expenses of the policy issuance and
underwriting departments, which vary with and are primarily
related to the production of new business, have been deferred to
the extent recoverable. Acquisition costs related to mortgage
life business are deferred and amortized over the premium paying
period of the related policies. Acquisition costs related to
universal life products are deferred and amortized in proportion
to the ratio of estimated annual gross profits to total estimated
gross profits over the expected lives of the contracts.
Present Value of Future Profits on Acquired Businesses
The present value of future profits of acquired businesses (See
Note 5) is amortized over the premium paying period of the
related policies in proportion to the ratio of the annual premium
revenue to total anticipated premium revenue applicable to such
policies. Interest on the unamortized present value of future
profits is accreted at approximately 8.5% per annum. The fair
value of the net assets acquired exceeded the purchase price and
negative goodwill associated with the purchase has been netted
against the calculated amount of present value of future profits.
The negative goodwill is being amortized over seven years using
the straight line method of amortization.
Deferred Financing Costs
Financing costs associated with the Company's Senior Loan was
deferred and was amortized over the borrowing period using the
interest method.
Separate Accounts
Separate account assets, carried at market value, and liabilities
represent policyholder funds maintained in accounts having
specific investment objectives. The net investment income, gains
and losses of these accounts, less applicable contract charges,
accrue directly to the policyholders. The separate account
business was fully reinsured to Merrill Lynch at the date of sale
through an assumption reinsurance agreement which is pending
regulatory approval.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Guaranty Fund Assessment
The solvency or guaranty laws of most states in which the
Company's insurance subsidiaries do business may require the
Company's insurance subsidiaries to pay assessments (up to
certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These
assessments may be deferred or forgiven under most guaranty laws
if they would threaten an insurer's financial strength, and in
certain instances, may be offset against future premium taxes.
The Company's insurance subsidiary records the expense for
guaranty fund assessment from states which do not allow premium
tax offsets in the period assessed. The Company's insurance
subsidiary recorded expenses of $6,796, $189,929 and $148,301 in
the years ended December 31, 1996, 1995 and 1994, respectively,
as a result of such assessments.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits for mortgage life
insurance products are computed using the net level premium
method or an actuarial equivalent method. The assumption for
future investment yield is 8 1/2%. Assumptions for mortality and
withdrawal are based on company experience with some provision
for possible adverse deviation.
Contractholder deposit funds are liabilities for universal life
products. These liabilities consist of deposits received from
customers and accumulated at actual credited interest rates on
their fund balances less charges for expenses and mortality.
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable
represents management's estimate of ultimate unpaid losses on
claims and other miscellaneous liabilities to policyholders
reduced by amounts anticipated to be recovered from reinsurance.
Estimated unpaid losses on claims are comprised of losses on
claims that have been reported but not yet paid, including
estimates of additional development of initial claims estimates,
and claims that have been incurred.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The liability for other policy claims and benefits payable is
subject to the impact of changes in claim severity, frequency and
other factors. Although there is considerable variability
inherent in such estimates, management believes that the
liability recorded is adequate.
Federal Income Taxes
In February, 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). The Company adopted
SFAS 109 on a prospective basis effective January 1, 1991. SFAS
109 mandates the asset and liability method for computing
deferred income taxes. Under this method, balance sheet amounts
for deferred income taxes are computed based on the tax effect of
the differences between the financial reporting and federal
income tax bases of assets and liabilities using the tax rates
which are expected be in effect when these differences are
anticipated to reverse.
In accordance with SFAS 109, total tax expense is the amount of
income taxes expected to be payable for the current year plus (or
minus) the deferred income tax expense (or benefit) represented
by the change in the deferred income tax accounts at the
beginning and end of the year. The effect of changes in tax
rates and federal income tax laws are reflected in income from
continuing operations in the period such changes are enacted.
The tax effect of future taxable temporary differences
(liabilities) and future deductible temporary differences
(assets) are separately calculated and recorded when such
differences arise. A valuation allowance, reducing any
recognized deferred tax asset, must be recorded if it is
determined that it is more likely than not that such deferred tax
asset will not be realized.
In accordance with the SFAS 109, tax benefits associated with the
utilization of net operating losses are recognized as a reduction
of the current tax provision and are not recognized as
extraordinary items in the accompanying statement of operations.
Under the previous accounting method (APB 11), the utilization of
net operating losses in computing the federal income tax
provision was recorded as an extraordinary item.
There was no cumulative effect of the change in accounting method
related to income taxes as January 1, 1991 was the date of
adoption of SFAS 109.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Revenue Recognition
Premiums on mortgage life and health products are recognized as
revenue over the premium paying period. Benefits and expenses
are associated with earned premiums, so as to result in
recognition of profits over the life of the contracts.
Revenues for investment-related products consist of contract
charges (earned insurance charges) assessed against the fund
values and net investment income. Related benefit expenses
primarily consist of net investment income credited to the fund
values after deductions for investment and risk charges.
Revenues for universal life products consist of net investment
income and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses
include universal life benefit claims in excess of fund values
and net investment income credited to universal life fund values.
Net Income Per Share
Net income per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding
during each year (See Note 15).
New Accounting Pronouncements
During 1995, the FASB issued FAS No. 123 "Accounting for Stock-
Based Compensation," which encourages companies to adopt the fair
value based method of accounting for stock-based compensation.
This method requires the recognition of compensation expense
equal to the fair value of such equity securities at the date of
the grant. This statement also allows companies to continue to
account for stock-based compensation under the intrinsic value
based method, as prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees," with
footnote disclosure of the pro forma effects of the fair value
based method. FAS No. 123 is effective for transactions entered
into in years that begin after December 15, 1995.
The Company adopted FAS No. 123 during 1996 and will continue to
account for stock-based compensation under the intrinsic value
method and disclose the fair value method, if any, in the
footnotes to the financial statements.
Reclassification
Certain prior years' amounts have been reclassified to conform
with the 1996 presentation.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Investments
Fixed Maturities
Investments in fixed maturities by category at December 31, 1996
and 1995, respectively, were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
U.S. Treasury Cost Gains Losses Value
securities and
obligations of U.S.
government agencies
and corporations $18,125 $ 928 $ 10 $19,043
States,
municipalities and
political
subdivisions 2,955 67 -0- 3,022
Corporate securities 21,475 299 330 21,444
Mortgage-backed
securities 40,414 321 411 40,324
Total Fixed
Maturities
available for sale $82,969 $ 1,615 $ 751 $83,833
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury
securities and
obligations of U.S.
government agencies
and corporations $18,124 $ 1,569 $ -0- $19,693
States,
municipalities and
political
subdivisions 4,945 58 2 5,001
Corporate securities 10,243 431 12 10,662
Mortgage-backed
securities 46,649 1,737 110 48,276
Total Fixed
Maturities
available for sale $79,961 $ 3,795 $ 124 $83,632
The amortized value and market value of fixed maturities at
December 31, 1996 are shown below by contractual maturity.
Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Amortized Market
Value Value
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands)
Due in one year $ 5,500 $ 5,524
Due after one year through five years 12,222 12,593
Due after five years through ten years 8,088 7,983
Due after ten years 16,761 17,425
Mortgage-backed securities 40,398 40,308
Total Fixed Maturities available
for sale $82,969 $83,833
To reduce the exposure to market rate changes, portfolio
investments are selected so that diversity, maturity, and
liquidity factors approximate the duration of associated
policyholder liabilities.
Proceeds from maturities of investments in fixed maturities
during 1996 and 1995 were $1,265,000 and $4,504,000,
respectively. There were no gains or losses in 1996 and 1995.
Net Investment Income
The components of net investment income are summarized as
follows:
Year Ended December 31,
1996 1995 1994
(in thousands)
Fixed maturities $ 5,891 $ 5,742 $ 5,684
Other, including short-term
investments and policy loans 1,553 1,990 1,836
Investment expenses (81) (89) (71)
Net investment income $ 7,363 $ 7,643 $ 7,449
There were no impairments in the value of investments in 1996,
1995 or 1994, which were considered other than temporary.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Disclosure about Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments
at December 31, 1996 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $ 83,833 $ 83,833
Policy loans $ 2,286 $ 2,286
Short-term investments $ 25,615 $ 25,615
Cash and cash equivalents $ 308 $ 308
Financial liabilities:
Subordinated notes payable to affiliate $ 59,940 $ 59,940
Note payable $ 4,738 $ 4,738
Other $ 359 $ 359
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Fixed Maturities
Fair values are based on quoted market prices or dealer quotes.
Policy Loans
Policy loans are, generally, issued with coupon rates below
market rates and are considered early payment of the life
benefit. As such, the carrying amount of these financial
instruments is a reasonable estimate of their fair value.
Cash and Short-term Investments
The carrying amount of these instruments approximates market
value.
Subordinated Notes Payable to Affiliate
The fair value is based on the Company's estimate of current
market conditions.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investment in
InterContinental Life Corporation
The Company carries its investment in ILCO on the equity method
of accounting. At December 31, 1996, excess of cost over net
assets acquired of $1,686,000, net of accumulated amortization of
$1,344,000,is included in investment in affiliate. At December
31, 1995, these amounts were $1,686,000 and $1,244,000,
respectively. Amortization of this excess is reflected in equity
in net earnings of affiliate. ILCO is primarily engaged in the
sale and administration of life insurance products. Summarized
financial information for ILCO is set forth below:
Balance sheet information: 1996 1995
(in thousands)
Investments $ 661,141 $ 669,537
Deferred policy acquisition costs and
present value of future profits 72,178 73,532
Other assets 530,623 572,224
Total Assets $ 1,263,942 $1,315,293
Policy liabilities and contractholder
deposit funds $ 673,306 $ 689,680
Other liabilities 477,275 528,528
Total liabilities 1,150,581 1,218,208
Common stock, additional paid-in
capital and retained earnings 110,581 83,399
Net unrealized gain 2,780 13,686
Shareholders' equity 113,361 97,085
Total liabilities and
shareholders' equity $ 1,263,942 $1,315,293
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investment in
InterContinental Life Corporation, (continued)
Results of operations: 1996 1995 1994
(in thousands)
Premium income $ 9,980 $ 11,694 $ 14,317
Net investment income $ 59,836 $ 64,781 $ 57,553
Earned insurance charges $ 42,238 $ 42,324 $ 39,370
Benefits and expenses $ 96,801 $105,907 $ 99,142
Net income $ 26,938 $ 10,714 $ 9,917
Net income per share available
to common shareholders $ 5.12 $ 2.11 $ 1.93
Total market value basis of the Company's investment in ILCO
approximated $26,054,085 and $25,562,498 at December 31, 1996 and
1995, respectively. FIC directly or indirectly owns 1,966,346
shares (approximately 46%, 47%, and 48%) of ILCO's outstanding
common stock at December 31, 1996, 1995 and 1994, respectively.
The Company holds options to purchase up to 1,702,155 additional
shares of ILCO's authorized but unissued common stock at a price
equal to the average market value during the six months preceding
the exercise date. If exercised, the total number of shares
subject to the Agreement, together with the 1,966,346 shares
already owned, would constitute 61.81% of the then issued and
outstanding shares of ILCO's common stock, assuming no other
options or warrants held by other parties were exercised. In
the event that any other party seeks to acquire ILCO's
outstanding shares without prior approval of FIC's Board of
Directors, the Company has the right to acquire, under the same
pricing formula, the number of shares of common stock which, when
added to the number of shares then owned by the Company, will
amount to 51% of the outstanding shares of ILCO. The
consideration for the options was FIC's granting to ILCO a loan
in the principal amount of $1,200,000, FIC's agreement to
guarantee additional ILCO obligations totaling $4,000,000 and
FIC's agreement to guarantee ILCO's lease obligation on its
headquarters building upon demand. In addition, FIC guaranteed a
$15,000,000 term loan of ILCO.
On January 29, 1993, ILCO prepaid all of the Subordinated Notes
Payable and purchased and canceled all of the detachable warrants
associated with the preferred stock. The primary source of funds
for this debt prepayment and warrant cancellation was an increase
in the outstanding balance of the Senior Loan from $60 million to
$110 million pursuant to an amended and restated credit agreement
that was entered into on January 29, 1993 (the "New Senior
Loan"). The terms of the New Senior Loan, which matures on July
1, 1999, are substantially the same as the Senior Loan. Interest
is payable at the Company's option based on (1) the managing
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
bank's corporate base rate plus 1.25% declining to 0.5% as
principal declines, or (2) LIBOR plus 2.5% declining to 1.75%.
The Company has guaranteed the New Senior Loan.
On February 14, 1995, ILCO, through its subsidiary Investors Life
Insurance Company of North America (Investors-NA), purchased
Meridian Life Insurance Company (Meridian Life), a life insurer
domiciled in the State of Indiana, for $17.1 million. At
December 31, 1994, Meridian Life had total assets of
approximately $101 million and statutory capital and surplus of
approximately $11 million. The acquisition was partially
financed through a $15 million increase in indebtedness of ILCO's
Senior Loan. This additional indebtedness is guaranteed by FIC.
Maturities of the Senior Loans over the next three years are as
follows:
(in thousands)
1997 18,080
1998 6,864
1999 -0-
$24,944
The Company has further agreed that, upon demand by ILCO, it will
guarantee performance under ILCO's lease of office facilities
located in Elizabeth, New Jersey. This agreement will remain in
effect for as long as any portion of the loan or any indebtedness
guaranteed by the Company remains outstanding. In connection
with ILCO's Senior Loans, the net assets of ILCO which aggregate
$113,361,000 and $97,085,000 at December 31, 1996 and 1995,
respectively, are restricted from paying dividends.
The amount of net realized gains included in net earnings of ILCO
is $15,262,000, $281,000,and $452,000, for the years ended
December 31, 1996, 1995 and 1994, respectively.
5. Acquisition of Business
In 1991, the Company acquired Family Life, a Washington domiciled
life insurance company, from Merrill Lynch Insurance Group, Inc.
Present value of future profits of $87,726,000 was recorded as a
result of the purchase.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
An analysis of the present value of future profits follows:
1996 1995
(in thousands)
Balance at beginning of year $ 45,415 $ 50,712
Accretion of Interest 3,798 4,419
Amortization during the period (8,609) (9,716)
Present value of future profits at
December 31 $ 40,604 $ 45,415
Anticipated amortization of the present value of future profits
net of interest accretion for each of the next five years is as
follows (in thousands):
1997 $ 6,466
1998 $ 6,529
1999 $ 5,280
2000 $ 4,272
2001 $ 3,454
At purchase, the present value of future profits was calculated
using a discount rate of approximately 15%. Interest is accreted
on the unamortized portion at approximately 8.5%.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Senior Loan and Subordinated Notes Payable
Following is a summary of outstanding debt at December 31:
1996 1995
(in thousands)
Senior loan: A loan payable to a
syndicate of banks beginning with a $1.5
million payment on October 1, 1991, a $2
million payment on January 1, 1992 and each
subsequent quarter in 1992, a $2.25 million
payment on January 1, 1994 and each
subsequent quarter through April 1, 1996
with a final payment of the unpaid balance
on June 12, 1996. Interest is payable
at the Company's option based on (1) the
managing bank's corporate base rate plus 2%
or (2) LIBOR plus 3%. The rate in effect
at December 31, 1995 was 8.81%. $ -0- $ 6,765
Subordinated senior notes payable to
Investors-NA beginning with a $1,125,000
payment on December 12, 1996 and each
subsequent quarter through September
12, 2001. Interest is payable
on a quarterly basis at 11%. 21,375 22,500
Subordinated notes payable to Investors-NA
beginning with a $223,856 payment on December
12, 1996 and each subsequent quarter
through September 12, 2001. Interest
is payable on a quarterly basis at 12%. 4,253 4,224
Subordinated notes payable to Investors-NA
beginning with a $188,071 payment on December
12, 1996 and each subsequent quarter through
September 12, 2001, a payment of $1,536,927
on December 12, 2001 and each subsequent
quarter through June 12, 2006 with a final
payment of $1,536,967 on September 12,
2006. Interest is payable on a quarterly
basis at 9%. 34,312 34,500
Total senior loans and subordinated
notes payable. $ 59,940 $ 67,989
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Senior Loan was secured by the following:
(1) All of the issued and outstanding shares of common stock of
FLIIC.
(2) All of the issued and outstanding shares of preferred stock
and common stock of FLC and Family Life.
(3) A $97.5 million surplus debenture of Family Life.
The Senior Loan was guaranteed by FIC for FLC.
The Senior Loan documents also required FLC to make additional
mandatory principal payments on the Senior Loan, which, in
general, reduce the quarterly principal payments in the inverse
order of their due dates. Those additional payments were
required in specified situations in which the amount of Family
Life's statutory capital and surplus exceed a certain formula.
FLC has Excess Cash Flow (as defined) or FLC or Family Life
receives proceeds from reinsurance of life insurance policies in
force in one transaction or a series of related transactions or
sales of assets or issuances of stock or debt securities. The
Senior Loan may be prepaid, in whole or in part, without penalty
or premium.
The Senior Loan agreement specified various negative, affirmative
and financial covenants made by the Company. The Subordinated
Notes Payable agreement also specifies various specified
negative, affirmative and financial covenants to be observed by
the Company. During the period the Senior Loan was outstanding,
the covenants in effect under the Subordinated Notes Payable were
substantially less restrictive than those under the Senior Loan
agreement but became generally equivalent to the Senior Loan
restrictions upon termination of the Senior Loan.
On July 30, 1993, the Merrill Lynch Subordinated Loans were
prepaid. Approximately $38 million plus accrued interest was
paid to retire the indebtedness, which had a principal balance of
approximately $50 million on July 30, 1993. The primary source
of the funds used to prepay the Merrill Lynch Subordinated Loans
was new subordinated loans totalling $34.5 million that were
obtained from Investors-NA. The terms, other than maturity and
interest rate of the new debt, are substantially the same as
those of the $22.5 million subordinated loan that Investors-NA
had previously made to FLC and that continues to be outstanding.
The subordinated loans consist of a $30 million loan to FLC and a
$4.5 million loan to FLIIC. The debt restructuring reduced the
total indebtedness of FLC and FLIIC by approximately $15 million.
The obligors are allowed to prepay the Investors-NA Subordinated
Loans, in whole or in part, without premium or penalty. The
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Investors-NA Subordinated Loans were subordinated to the Senior
Loan and now constitute a lien on the Pledged Collateral.
Repayment of the Investors-NA Subordinated Loans is also
guaranteed by the Company.
Aggregate maturities of the Subordinated Notes Payable are as
follows:
(in thousands)
1997 $ 6,148
1998 6,148
1999 6,148
2000 6,148
2001 6,148
Thereafter 29,200
$59,940
7. Federal Income Taxes
The Company files a consolidated federal income tax return with
its non-life subsidiaries. The Company's life insurance
subsidiary files a separate federal income tax return.
The U.S. federal income tax provision (benefit) charged to
continuing operations was as follows:
1996 1995 1994
(in thousands)
Current $(1,165) $ (717) $ (82)
Deferred 3,811 3,145 2,428
Total provision for income taxes $ 2,646 $2,428 $2,346
The provision for income taxes is less than the amount of income
tax determined by applying the U.S. statutory income tax rate of
35% to pre-tax income from continuing operations before
extraordinary item as a result of the following differences:
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1996 1995 1994
(in thousands)
Income taxes at the statutory rate $3,427 $3,638 $3,714
Increase (decrease) in taxes
resulting from:
Small life insurance company deduction -0- (411) (581)
Dividends received deduction (771) (770) (775)
Net operating loss carryforwards -0- -0- -0-
Tax rate differential (98) (104) (106)
Other items, net 88 75 94
Total provision for income taxes $2,646 $2,428 $2,346
Provision has not been made for state and foreign income tax
expense since this expense is minimal.
Deferred taxes are recorded for temporary differences between the
financial reporting bases and the federal income tax bases of the
Company's assets and liabilities. The sources of these
differences and the estimated tax effect of each are as follows:
1996 1995
Deferred Tax Liability: (in thousands)
Equity in net earnings of affiliate $ 3,400 $ 2,509
Excess pension Benefit 436 436
Deferred policy acquisition costs 10,268 8,514
Present value of future profits 5,851 4,210
Guaranty fund assessments 589 698
Deferred and uncollected premium 3,602 3,284
Unrealized appreciation on marketable
securities 355 1,712
Other taxable temporary differences 3,838 2,320
Total deferred tax liability 28,339 23,683
Deferred Tax Asset:
Policy reserves 9,553 8,567
Net operating loss carry
forward 513 -0-
Alternative minimum tax credit 146 113
Accrued liabilities 175 220
Total deferred tax assets, net 10,387 8,900
Net deferred tax liability $17,952 $14,783
Deferred federal income tax expense (benefit) of $(1,357,000) and
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
$4,465,000 for 1996 and 1995, respectively have been provided on
the unrealized appreciation (depreciation) of marketable
securities and included in the deferred tax liability. This
decrease in deferred tax liability has been recorded as a
reduction to the equity adjustment due to the net change in
unrealized appreciation or depreciation and has not been
reflected in the deferred income tax expense.
In accordance with the Tax Reform Act of 1986, Family Life is
eligible for a special deduction allowed to small life insurance
companies equal to 60 percent of tentative life insurance company
taxable income, subject to certain limitations.
Provisions for U.S. income taxes has not been made on a portion
of the undistributed earnings of ILCO from the date of the
Company's investment since the Company expects such earnings to
be remitted in the form of dividends. The Company has provided
for the tax on the undistributed earnings of ILCO net of the
dividends received deduction expected to be allowed when such
dividends are paid. The Company expects that additional deferred
taxes would be payable on the undistributed earnings of ILCO if
the Company should sell its investment.
At December 31, 1996, no IRS examinations were underway for the
Company or its subsidiaries.
8. Reinsurance
Family Life reinsures portions of certain policies it writes,
thereby providing greater diversification of risk and minimizing
exposure on larger policies. The Company's retention on any one
individual ranges from $-0- to $200,000 depending on the risk.
Policy liabilities and contractholder deposit funds are reported
in the consolidated financial statements before considering the
effect of reinsurance ceded. The insurance subsidiary remains
liable to the extent the reinsurance companies are unable to meet
their obligation under the reinsurance agreements.
Under the provisions of the purchase agreement between the
Company and Merrill Lynch, certain life insurance companies
affiliated with Merrill Lynch agreed to assume (on an assumption
reinsurance basis) certain single premium whole life and annuity
products written by Merrill Lynch's insurance division on Family
Life's paper. The transfer of these reserves, in accordance with
the reinsurance agreement, is subject to certain regulatory
approvals.
The amount remaining under this agreement that had not yet been
approved for transfer to Merrill Lynch was $116,310 and
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
$1,939,799 at December 31, 1996 and 1995, respectively. These
amounts are not reflected in the liability for future policy
benefits as they are ceded at 100% to Merrill Lynch pending the
approval of the assumption agreement.
The amounts in the consolidated financial statements for
reinsurance ceded are as follows:
December 31,
1996 1995 1994
(in thousands)
Future policy benefits $ 5,729 $ 1,784 $ 1,548
Unearned premiums $ 4 $ 5 $ 6
Other policy claims and
benefits payable $ 426 $ 594 $ 631
For the twelve months
ended
December 31,
1996 1995 1994
(in thousands)
Premiums $ 6,259 $ 1,531 $ 918
Policyholder benefits and expenses $ 670 $ 372 $ 536
Estimated amounts recoverable from reinsurers on paid claims were
$43,857 and $10,866 in 1996 and 1995, respectively. These
amounts were included in other receivables in the consolidated
financial statements at December 31, 1996 and 1995.
9. Shareholders' Equity
The Company's ability to pay dividends to its shareholders is
affected, in part, by receipt of dividends from Family Life and
ILCO.
Under current Washington law any proposed payment of dividends or
distribution by the insurance subsidiary which, together with
dividends or distributions paid during the preceding twelve
months, exceeds the greater of (i) 10% of statutory surplus as of
the preceding December 31, or (ii) statutory net gain from
operations, is called an "extraordinary dividend" and may not be
paid until either it has been approved, or a waiting period shall
have passed during which it has not been disapproved, by the
insurance commissioner.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Effective July 25, 1993 Washington amended its insurance code to
retain the "greater of" standard but enacted requirements that
prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and that dividends may be paid
only from earned surplus. Family Life does not presently have
earned surplus as defined by the regulations adopted by the
Washington Insurance Commissioner and, therefore, is not
presently permitted to pay cash dividends.
However, the Company does not directly own its life insurance
subsidiary's stock, but instead, indirectly owns that stock
through two downstream holding companies, FLIIC and FLC, whose
ability to pay dividends to the Company is significantly limited
by some of the subordinated notes referred to in Note 6 during
the terms of those loans. Consolidated net assets of FLIIC and
FLC aggregated $44,704,000, and $56,490,000, respectively at
December 31, 1996 and $42,483,000 and $54,170,000, respectively
at December 31, 1995.
The ability of ILCO to pay dividends to the Company and the other
shareholders of ILCO is affected by receipt of dividends from its
insurance subsidiaries, which are generally limited by law to the
greater of their net income for the prior year or 10% of capital
and surplus. In addition, ILCO's senior loan restricts it from
paying any dividends on its common stock during the term of that
loan.
Capital and surplus of Family Life as reported to insurance
regulators and as determined in accordance with statutory 29
Accounting practices aggregates approximately $24,919,158 and
$25,794,540 at December 31, 1996 and 1995, respectively.
Statutory net income aggregated approximately $9,153,000 and
$9,245,000 for the years ended December 31, 1996 and 1995,
respectively.
The Company employed no permitted statutory accounting practices
that individually or in the aggregate materially affected
statutory surplus or risk-based capital at December 31, 1996 or
1995.
The Company's Articles of Incorporation were amended during 1996
to: (i) increase the number of authorized shares of common stock
from 3,304,200 shares to 10,000,000 shares and (ii) to reduce the
par value of the common stock from $1.00 to $.20. These
amendments to the Articles of Incorporation were related to the
implementation of the five-for-one stock split in 1996,
authorized by the Board of Directors.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Options
In connection with the subordinated senior notes and subordinated
notes payable to Investors-NA, Investors-NA was granted
non-transferrable options to purchase, in amounts proportionate
to their respective loans, up to a total of 9.9 percent of the
common shares of FIC. The option price is $2.10 per share
(adjusted to reflect the five-for-one stock split in 1996),
equivalent to the then current market price, subject to
adjustment to prevent the effect of dilution. The options expire
at the time of final repayment of each of the respective loans.
11. Retirement Plans and Employee Stock Plans
Retirement Plan
Family Life has a non-contributory defined benefit pension plan
which covers employees who have completed one year or more of
service. Under the plan, benefits are payable upon retirement
based on earnings and years of credited service.
a. The Normal Retirement Date for all employees is the
first day of the month coinciding with or next
following the later of attainment of age 65 or the
completion of five years of service, but not later than
age 70.
b. The Normal Retirement Benefit is the actuarial
equivalent of a life annuity, payable monthly, with the
first payment commencing on the Normal Retirement Date.
The life annuity is equal to the sum of (1) plus (2):
(1) Annual Past Service Benefit: 1.17% of the
first $10,000 of Average Final Earnings plus 1
1/2% of the excess of Average Final Earnings over
$10,000, all multiplied by the participant's
Credited Past Service. For these purposes,
"credited past service" is service prior to April
1, 1967, with respect to employees who were plan
participants on December 31, 1975.
(2) Annual Future Service Benefit: 1.5578% of the
first $10,000 of Average Final Earnings plus 2% of
the excess of Average Final Earnings over
$10,000, all multiplied by the participant's
Credited Future Service.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Retirement Plan
Average Final Earnings are the highest average Considered
Earnings during any five consecutive years while an active
participant. Total Credited Past Service plus Credited Future
Service is limited to 40 years.
The pension costs for the plan includes the following components:
1996 1995
(in thousands)
Service cost-benefits earned
during the period $ 81 $ 73
Interest cost on projected
benefit obligation 497 563
Return on plan assets (690) (705)
Amortization -0- -0-
Pension benefit $ (112) $ (69)
The following summarizes the funded status of the plan at
December 31:
1996 1995
(in thousands)
Actuarial present value of:
Vested benefit obligation 6,227 $ 6,554
Accumulated benefit obligation $ 6,227 $ 6,554
Projected benefit obligation $ 6,563 $ 6,990
Plan assets at market value 8,990 8,673
Plan assets in excess of projected
benefit obligations 2,427 1,683
Unrecognized net gain (838) (206)
Prepaid pension asset $ 1,589 $ 1,477
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.75% and
7.0% for the years ended December 31, 1996 and 1995,
respectively.
The assumed long-term rate of compensation increases was 6.0% for
the years ended December 31, 1996 and 1995, respectively.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The long-term rate of return on plan assets was 8.0% for the
years ended December 31, 1996 and 1995.
During 1995, the ILCO Employee Stock Ownership Plan and the ILCO
Savings and Investment Plan were amended to allow for the
addition of Family Life as a participating employer, thus
allowing Family Life employees to participate in the plans.
Stock Option Plans
In 1984, the Company's shareholders adopted a qualified stock
option plan for officers and key employees. The aggregate amount
of the common shares on which options may be granted is limited
to 200,000 shares. The option price will not be less than 100%
of the fair market price of the optioned shares on the date the
option is granted. As of December 31, 1996, no options had been
granted under this plan.
12. Leases
Family Life, occupies office facilities under lease agreements
with unrelated third parties which expire over the next year.
Certain office space leases may be renewed at the option of the
Company.
Rent expense in 1996, 1995 and 1994 was $886,189, $896,688, and
$835,637 respectively. Minimum annual rentals are as follows:
(in thousands)
1997 $ 315
1998 0
1999 0
2000 0
2001 0
Total $ 315
13. Related Party Transactions
FIC Management was paid fees in an amount equal to 5% of the net
operating profit that Investors-NA received from the properties
managed and leased by FIC Management. During 1996, 1995 and
1994, Investors-NA paid $141,838, $183,864, and $106,460 under
this agreement. Effective January 1, 1993, ILCO's insurance
subsidiaries and Family Life entered into an agreement with
Investors-NA to lease office space in the Austin Centre. The
annual rent is $1,119,705 and the lease is for a period of 5
years. Family Life's portion of the annual rent is 37.5%.
On March 29, 1996 Investors-NA sold the Austin Centre to an
Austin-based real estate investment firm for a purchase price of
$62.7 million, less $1 million paid to a capital reserve account
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
for the purchase.
As part of the financing arrangement for the acquisition of
Family Life, a $22.5 million loan was made by Investors-NA to
Family Life Corporation, a subsidiary of FIC, and a $2.5 million
loan was made to FIC. Interest during 1996, 1995 and 1994 on the
loans aggregated $2,997,049, $2,939,622 and $2,891,269,
respectively. At December 31, 1996 and 1995 accrued interest was
$143,083 and $165,658, respectively. In addition to the interest
provided under those loans, Investors-NA was granted by FIC
107,473 non-transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9
percent of shares of FIC's common stock. The option price is
$10.50 per share, equivalent to the then current market price,
subject to adjustment to prevent the effect of dilution. As a
result of the five-for-one stock split implemented by FIC,
effective in November 1996, the exercise price of the options was
changed to $2.10 per share. The initial terms of the option
provided for their expiration on June 12, 1998, if not previously
exercised. In connection with the 1996 amendments to the
subordinated loans held by Investors-NA, the expiration date of
the options was extended to September 12, 2006.
On July 30, 1993, Investors-NA loaned $34.5 million to two
subsidiaries of FIC in connection with the prepayment of the
subordinated loans owed to the seller. Interest during 1996 and
1995 on these notes was $4,260,750 and $3,105,000 and accrued
interest at December 31, 1996 and 1995 was $154,404 and
$1,293,750. (See Note 6)
FIC is reimbursed by ILCO for rental expense and certain other
operating expenses. The amount of such reimbursement was
approximately, $305,000, $830,000, and $585,000 in 1996, 1995 and
1994, respectively.
Pursuant to a Service Agreement between Family Life and Investors
NA, the Company reimbursed Investors NA for certain operating
expenses incurred on behalf of FLIC totaling approximately $14
million, $15 million, and $13 million in 1996, 1995 and 1994,
respectively.
At December 31, 1996 and 1995, 145,500 and 44,250 shares of the
Company's stock were owned by Investors-NA and InterContinental
Life Insurance Company, respectively.
The Company has guaranteed the obligations of its subsidiaries
under the senior loan and the subordinated loan referred to in
Note 6 and also guaranteed the debt refinanced in 1993. The
Company has also guaranteed certain financial obligations of
ILCO, as disclosed in Note 4.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
On May 8, 1989, ILCO'S Board of Directors granted Mr. Mitte,
Chairman and CEO of FIC and ILCO, an option to purchase 600,000
shares (as adjusted for the three-for-one stock split effective
February 15, 1990) of the Common Stock of ILCO in equal annual
installments of 150,000 shares each. In 1992, the Chairman
surrendered for cancellation 120,000 of these options. In
October of 1993, the Company entered into an agreement with the
Chairman whereby the Chairman agreed to surrender all of his
remaining common stock options between 1993 and 1996. Pursuant
to this agreement, all the remaining 121,500 options were
surrendered through December 31, 1996.
FIC Computer Services, Inc. (FIC Computer), a subsidiary of FIC,
provides data processing services to each subsidiary for
proportionate fees equal to FIC Computer's cost. Investors-NA,
Investors-IN and ILIC paid $2,243,234, $1,655,486 and $181,971 to
FIC Computer for data processing services provided during 1996,
1995 and 1994, respectively.
In December 1995, Family Life entered into a reinsurance
agreement with Investors-NA (an insurance company subsidiary of
ILCO and an affiliated company of Family Life), pertaining to
universal life insurance written by Family Life. The reinsurance
agreement is on a co-insurance basis and applies to all covered
business with effective dates on and after January 1, 1995. The
agreement applies to only that portion of the face amount of the
policy which is less than $200,000; face amounts of $200,000 or
more are reinsured by Family Life with a third party reinsurer.
The arrangement reflects management's plan to concentrate on the
writing of term life insurance, with Investors-NA to develop
universal life business. In 1996, Investors-NA entered into a
reinsurance agreement with Family Life, pertaining to annuity
contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996. These
reinsurance arrangements reflect management's plan to develop
universal life and annuity business at Investors-NA, with Family
Life concentrating on the writing of term life insurance
products.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Commitments and Contingencies
The Company and its subsidiaries are defendants in certain legal
actions related to the normal business operations of the Company.
Management believes that the resolution of such matters will not
have a material impact on the financial statements.
15. Net Income Per Share
(in thousands except per share data)
Net income per share was determined by dividing net income
available to common shareholders by common stock and common stock
equivalents.
Changes in the market price of the Company's common stock also
impacts the number of common options and warrants which are
considered dilutive under the treasury stock method of
calculating the weighted average common stock and common stock
equivalents. For the years ended December 31, 1996, 1995 and
1994, weighted average common stock and common stock equivalents
are calculated as follows:
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1996 1995 1994
Net income $16,157 $10,017 $ 9,954
Net income available to common
shareholders $16,157 $10,017 $ 9,954
Weighted average common shares
outstanding, less treasury stock 5,428 5,428 5,428
Dilutive common share equivalents:
Common stock options 537 537 537
Effect of ILCO ownership of
common stock options (249) (255) (255)
Less:
Assumed repurchase of shares using
the treasury stock method (112) (160) (165)
Effect of ownership of ILCO on
treasury shares 52 75 75
Effect of ILCO ownership of common
shares (88) (90) (90)
Common stock and common stock
equivalents 5,568 5,535 5,530
Net income per share available to
common shareholders $ 2.90 $ 1.81 $ 1.80
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Business Concentration
The Company's insurance subsidiary, Family Life provides mortgage
protection life, disability and accidental death insurance to
mortgage borrowers of financial institutions. For marketing
purposes a significant number of these financial institutions
provide Family Life with customer lists. In 1996, premium income
from these products was derived from forty-nine states with
concentrations of approximately 23% and 24% in California and
Texas, respectively. In 1995, these amounts were 23% and 23%,
respectively.
17. Quarterly Financial Data (unaudited)
(in thousands, except per share data)
Three Months Three Months
Ended Ended
March 31, June 30,
1996 1995 1996 1995
Total revenues $15,014 $15,370 $15,073 $16,744
Net income $ 8,616 $ 2,661 $ 2,778 $ 2,767
Three Months Three Months
Ended Ended
September 30, December 31,
1996 1995 1996 1995
Total revenues $14,978 $15,293 $14,863 $14,134
Net income $ 2,165 $ 2,358 $ 2,598 $ 2,231
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Quarterly Financial Data (unaudited), continued
(in thousands, except per share data)
Three Months Three Months
Ended Ended
March 31, June 30,
1996 1995 1996 1995
Net income per share $ 1.55 $ .48 $ .50 $ .50
Three Months Three Months
Ended Ended
September 30, December 31,
1996 1995 1996 1995
Net income per share $ .39 $ .43 $ .47 $ .40
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(in thousands)
Column A Column B Column C Column D
Amount
Shown
on the
Amortized Fair Balance
Type of Investment Cost Value Sheet
Fixed maturities:
Bonds:
United States Government and
government agencies and
authorities $ 18,125 $ 19,043 $ 19,043
States, municipalities and
political subdivisions 2,955 3,022 3,022
Corporate securities 21,475 21,444 21,444
Mortgage-backed securities 40,414 40,324 40,324
Total fixed maturities 82,969 83,833 83,833
Equity securities:
Common stocks:
Industrial and miscellaneous
other 11 4 4
Total equity securities 11 4 4
Policy loans 2,286 2,286 2,286
Short-term investments 25,615 25,615 25,615
Total investments $110,881 $111,738 $111,738
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS
DECEMBER 31,
1996 1995
(in thousands)
ASSETS
Cash $ 52 $ 71
Short-term Investments 1,926 -0-
Long-Term bonds 16 16
Common Stock 4 4
Investments in subsidiaries* 90,815 84,012
Property, plant and equipment, net 6,176 6,202
Other assets 1,086 1,088
Accounts receivable 57 60
$100,132 $91,453
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Subordinated notes payable $ 4,253 $ 4,221
Other liabilities and intercompany
payables 3,805 4,499
8,058 8,720
Shareholders' equity:
Common stock, $.20 par value,
10,000,000 shares authorized;
5,845,300 shares issued, 5,427,965
shares outstanding in 1996 and 1995 1,169 1,169
Additional paid-in capital 7,225 7,225
Net unrealized gain on investments
in fixed maturities available for sale 1,220 8,052
Net unrealized appreciation
of equity securities
held by insurance subsidiary 25 9
Retained earnings (including $78,745
and $61,680 of undistributed earnings
of subsidiaries at December 31, 1996
and 1995, respectively) 82,857 66,700
92,496 83,155
Common Treasury stock, at cost, 417,335
shares in 1996 and 1995 (422) (422)
Total shareholders' equity 92,074 82,733
Total liabilities and
shareholders' equity $100,132 $91,453
*Eliminated in consolidation
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
STATEMENTS OF INCOME
DECEMBER 31,
1996 1995
(in thousands)
Income $ 811 $ 885
Operating expenses 461 456
Interest expense* 977 897
1,438 1,353
Income (loss) from operations (627) (468)
Equity in undistributed earnings
from subsidiaries 16,784 10,485
Net income $16,157 $10,017
*In consolidation, $179 is reported as a reduction in equity in
earnings of unconsolidated subsidiary.
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED STATEMENTS OF REGISTRANT,Continued
STATEMENTS OF CASH FLOWS YEARS ENDED
DECEMBER 31,
1996 1995
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 16,157 $ 10,017
Adjustments to reconcile net income to net
cash used in operating activities:
Decrease in accounts receivables 3 19
Increase in investment in subsidiaries* (13,619) (7,244)
Decrease in other assets 2 113
Decrease in other liabilities
and intercompany payables (694) (17)
Decrease in property and equipment 26 (3,395)
Net cash used in operating activities 1,875 (507)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term investments (1,926) -0-
Subordinated notes payable issued to
Investors-NA 32 462
Net cash provided by financing
activities (1,894) 462
Decrease in cash (19) (45)
Cash, beginning of year 71 116
Cash, end of year $ 52 $ 71
*Eliminated in consolidation
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE IV-INDEBTEDNESS OF AND TO RELATED PARTIES
DECEMBER 31, 1996 AND 1995
(in thousands)
Column A
Balance
at Column C Column D Column E
Begin- Column B Amounts Amounts Balance
ning of Addi- Collect- Written End of
Name of Creditor Period tions ed Off Period
December 31, 1996
Investors Life
Insurance Company -
North America $22,500 -0- $1,125 -0- $21,375
Investors Life
Insurance Company -
North America $ 4,224 253 224 -0- $ 4,253
Investors Life
Insurance Company -
North America $30,000 -0- 164 -0- $29,836
Investors Life
Insurance Company -
North America $ 4,500 -0- 25 -0- $ 4,475
December 31, 1995
Investors Life
Insurance Company -
North America $22,500 -0- -0- -0- $22,500
Investors Life
Insurance Company -
North America $ 3,759 465 -0- -0- $ 4,224
Investors Life
Insurance Company -
North America $30,000 -0- -0- -0- $30,000
Investors Life
Insurance Company -
North America $ 4,500 -0- -0- -0- $ 4,500
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE VI-REINSURANCE CEDED AND ASSUMED
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(in thousands)
Percent-
Ceded To Assumed age Of
Direct Other From Other Net Amount
Amount Companies Companies Amount Assumed
1996
Life Insurance
in-force $8,324,406 $ 365,103 $ 5,772 $7,965,075 0.07%
Premium:
Life insurance $ 55,124 $ 6,257 $ 64 $ 48,931 0.13%
Accident-health
insurance 1,244 1 0 1,243 0.00%
Total $ 56,368 $ 6,258 $ 64 $ 50,174 0.13%
1995
Life Insurance
in-force $8,677,064 $ 314,826 $ 4,162 $8,366,400 0.05%
Premium:
Life insurance $ 57,269 $ 1,526 $ 56 $ 55,799 0.10%
Accident-health
insurance 1,471 5 0 1,466 0.00%
Total $ 58,740 $ 1,531 $ 56 $ 57,265 0.10%
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS
DECEMBER 31, 1996
(in thousands)
Column A
Name of Issuer of
Securities Guaranteed
by Period For Which
Statement is Filed InterContinental Life
Corporation
Column B
Title of Issue of Each
Class of Securities
Guaranteed Credit Agreement
Dated as of January
29, 1993
Column C
Total Amount
Guaranteed and
Outstanding $24,944
Column D
Amount Owned by Person
or Persons for Which
Statement is Filed -0-
Column E
Amount in Treasury of
Issues of Securities
Guaranteed -0-
Column F
Nature of Guarantee Guarantee of
Principal and
Interest
Column G
Nature of Any Default
By Issuer of
Securities Guaranteed
in Principal Interest
Sinking Fund or
Redemption Provision
or Payment of
Dividends None
EXHIBIT INDEX
Exhibit No. Page Nos. Description
3 The current Articles of Incorporation and
Bylaws of Registrant. Exhibit 3 to
Registrant's Report on Form 10-K filed for
the year 1985 is hereby incorporated by
reference.
3(a) Certificate of Amendment to the Articles of
Incorporation of Registrant, dated November
12, 1996, filed as an exhibit with
Registrant's 10-Q for the quarter ended
September 30, 1996 and incorporated herein by
reference.
10(ah) Guaranty Agreement dated as of December 28,
1988 from Registrant to a group of banks on
Senior Loan to ILCO, filed as an exhibit with
Registrant's Form 10-K for the year ended
December 31, 1989 and incorporated herein by
reference.
10(ai) Guaranty Agreement, dated as of December 1,
1988, on loan to ILCO on the Note Purchase
Agreement between ILCO and a Connecticut
based insurance/financial services company; a
guaranty agreement in substantially identical
form was provided by FIC to each of the seven
other entities participating in said loan,
filed as an exhibit with Registrant's Form
10-K for the year ended December 31, 1989 and
incorporated herein by reference.
10(aj) Guaranty Agreement, dated as of July 30,
1990, issued by the Registrant to a holder of
ILCO's 1999 Series Subordinated Notes; a
guaranty agreement in substantially identical
form was provided by the Registrant to each
of the holders of said notes.
*10(ak) Stock Purchase Agreement by and among Merrill
Lynch Insurance Group, Inc., Family Life
Insurance Company, Family Life Corporation,
Family Life Insurance Investment Company and
Financial Industries Corporation dated as of
March 19, 1991, as amended.
*10(al) Note dated June 12, 1991 in the amount of $30
million made by a subsidiary of the
Registrant in favor of Merrill Lynch
Insurance Group, Inc.
*10(am) Note dated June 12, 1991 in the amount of $12
million made by a subsidiary of the
Registrant to Merrill Lynch & Co., Inc.
*10(an) Note dated June 12, 1991 in the amount of $2
million made by a subsidiary of the
Registrant in favor of the Seller under the
Stock Purchase Agreement dated as of March
19, 1991.
*10(ao) Performance and Payment Guaranty Agreement
dated June 12, 1991 by Registrant in favor of
the Seller under the Stock Purchase Agreement
dated as of March 19, 1991.
*10(ap) Payment Guaranty Agreement dated June 12,
1991 by Registrant in favor of the Seller
under the Stock Purchase Agreement dated as
of March 19, 1991.
*10(aq) InterCreditor Agreement dated June 12, 1991
among Investors Life Insurance Company of
North America, Investors Life Insurance
Company of California, Merrill Lynch
Insurance Group, Inc., and Merrill Lynch &
Co., Inc.
*10(ar) Credit Agreement dated as of June 12, 1991
among Family Life Corporation (a subsidiary
of the Registrant), the Lenders named therein
and the Agent.
*10(as) Guaranty Agreement by Registrant of the $50
million loan to Family Life Corporation in
favor of the bank lenders under the Credit
Agreement dated as of June 12, 1991.
*10(at) Guaranty Agreement by a subsidiary of the
Registrant on the $50 million loan to Family
Life Corporation in favor of the bank lenders
under the Credit Agreement dated as of June
12, 1991.
*10(au) Pledge Agreement by Family Life Corporation
(a subsidiary of the Registrant) in favor of
the bank lenders under the Credit Agreement
dated as of June 12, 1991.
*10(aw) Pledge Agreement by Family Life Insurance
Investment Company (a subsidiary of the
Registrant) in favor of the bank lenders
under the Credit Agreement dated as of June
12, 1991.
*10(ax) Note dated June 12, 1991 in the amount of
$22.5 million made by a subsidiary of the
Registrant in favor of Investors Life
Life Insurance Company of North America.
*10(ay) Note dated June 12, 1991 in the amount of
$2.5 million made by the Registrant in
favor of Investors Life Insurance Company
of California.
*10(az) InterCreditor Agreement among Investors Life
Insurance Company of North America, Investors
Life Insurance Company of California, and
the Agent under the Credit Agreement dated
as of June 12, 1991.
*10(aaa) Option Agreement by the Registrant in favor
of Investors Life Insurance Company of North
America and Investors Life Insuance Company
of California.
10(aab) Hotel Lease Agreement dated as of August 22,
1991 between Investors Life Insuarnce Company
of North America and FIC Realty Services,
Inc. as exhibit 10(aab) by Registrant on Form
10-K for the year ended December 31, 1991 is
hereby incorporated by reference.
10(aac) Management Agreement dated as of September 4,
1991 between Investors Life Insurance Company
of North America and FIC Property Management
Inc. filed as exhibit 10(aac) by Registrant
on Form 10-K for the year ended December 31,
1991 is hereby incorporated by reference.
10(aad) Stock Option Agreement dated March 8, 1986
betweem ILCO and Registrant filed as exhibit
10(aad) by Registrant on Form 10-K for the
year ended December 31, 1992 is hereby
incorporated by reference.
10(aae) Amended and Restated Guaranty of Registrant
dated January 29, 1993 filed as exhibit 10
(aae) by Registrant on Form 10-K for the year
ended December 31, 1992 is hereby incorporated
by reference.
10(aaf) Surplus Debenture dated as of June 12, 1991
in the amount of $97.5 million made by
Family Life Insurance Company in favor of
Family Life Corporation filed as exhibit 10
(aaf) by Registrant on Form 10-K for the year
ended December 31, 1993 is hereby
incorporated by reference.
10(aag) Note dated July 30, 1993 in the amount of
$30 million made by Family Life Corporation
in favor of Investor Life Insurance Company
of North America filed as exhibit 10(aag)
by Registrant on Form 10-K for the year
ended December 31, 1993 is hereby
incorporated by reference.
Life Corporation filed as exhibit 10(aaf) by
10(aah) Note dated July 30, 1993 in the amount of
$4.5 million made by Family Life Insurance
Investment Company in favor of Investors Life
Insurance Company of North America filed as
exhibit 10(aah) by Registrant on Form 10-K
for the year ended December 31, 1993 is
hereby incorporated by reference.
10(aai) Amendment No. 1 dated July 30, 1993 between
Family Life Corporation and Investors Life
Insurance Company of North America amending
$22.5 million note filed as exhibit 10(aai)
by Registrant on Form 10-K for the year ended
December 31, 1993 is hereby incorporated by
reference.
10(aaj) Amendment No. 1 dated July 30, 1993 between
Family Life Insurance Company and Family Life
Corporation amending $97.5 million Surplus
Debenture filed as exhibit 10(aaj) by
Registrant on Form 10-K for the year ended
December 31, 1993 is hereby incorporated by
reference.
10(aak) Guaranty Agreement dated July 30, 1993 by
Registrant of the $30 million loan to Family
Life Corporation in favor of Investors Life
Insurance Company of North America filed as
exhibit 10(aak) by Registrant on Form 10-K
for the year ended December 31, 1993 is
hereby incorporated by reference.
10(aal) Guaranty Agreement dated July 30, 1993 by
Registrant of the $4.5 million loan to Family
Life Insurance Investment Company in favor of
Investors Life Insurance Company of North
America filed as exhibit 10(aal) by
Registrant on Form 10-K for the year ended
December 31, 1993 is hereby incorporated by
reference.
10(aam) Letter agreement dated May 26, 1993 among
Family Life Corporation, Family Life
Insurance Investment Company, Merrill Lynch &
Co., Inc. and Merrill Lynch Group, Inc. filed
as exhibit 10(aam) by Registrant on Form 10-K
for the year ended December 31, 1993 is
hereby incorporated by reference.
10(aan) Waiver and Amendment Agreement dated as of
July 23, 1993 among Family Life Corporation,
the Lenders named therein and the Agent filed
as exhibit 10(aan) by Registrant on Form 10-K
for the year ended December 31, 1994 is
hereby incorporate by reference.
10(aao) Waiver and Amendment Agreement dated as of
December 14, 1993 among Family Life
Corporation, the Lenders named therein and
the Agent filed as exhibit 10(aao) by
Registrant on Form 10-K for the year ended
December 31, 1994 is hereby incorporated by
reference.
10(aap) Data Processing Agreement dated as of
November 30, 1994 between InterContinental
Life Insurance Company and FIC Computer
Services, Inc filed as exhibit 10(aap) by
Registrant on Form 10-K for the year ended
December 31, 1994 is hereby incorporated by
reference.
10(aaq) Data Processing Agreement dated as of
November 30, 1994 between Investors Life
Insurance Company of North America and FIC
Computer Services, Inc filed as exhibit
10(aaq) by Registrant on Form 10-K for the
year ended December 31, 1994 is hereby
incorporated by Reference.
10(aar) Data Processing Agreement dated as of
November 30, 1994 between Family Life
Insurance Company and FIC Computer Services,
Inc filed as exhibit 10(aar) by Registrant on
Form 10-K for the year ended December 31,
1994 is hereby incorporated by reference.
10(aas) Lease Agreement dated as of September 30,
1994 between FIC Realty Services, Inc. and
Atrium Beverage Corporation filed as exhibit
10(aas) by Registrant on Form 10-K for the
year ended December 31, 1994 is hereby
incorporated by reference.
10(aat) Management Agreement dated as of September
30, 1994 between HCD Austin Corporation as
agent for FIC Realty Services, Inc. and
Atrium Beverage Corporation filed as exhibit
10(aat) by Registrant on Form 10-K for the
year ended December 31, 1994 is hereby
incorporated by reference.
10(aau) Amendment Agreement dated as of July 31, 1995
among Family Life Corporation, the Lenders
named therein and the Agent filed as exhibit
10(aau) by Registrant on Form 10-K for the
year ended December 31, 1995 is hereby
incorporated by reference.
10(aav) 122 Amendment No. 2 dated December 12, 1996,
effective June 12, 1996 to the note dated
June 12, 1991 in the amount of $22.5 million
made by Family Life Corporation in favor of
Investors Life Insurance Company of North
America.
10(aaw) 126 (i) Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note
dated June 12, 1991 in the amount of
$2.5 million made by Financial
Industries Corporation in favor of
Investors Life Insurance Company of
California.
129 (ii) Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the "payment
in kind" provisions of the note dated
June 12, 1991 in the amount of $2.5
million made by Financial Industries
Corporation in favor of Investors Life
Insurance Company of North America.
10(aax) 132 Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note dated
July 30, 1993 in the amount of $30 million
made by Family Life Corporation in favor of
Investors Life Insurance Company of North
America.
10(aay) 137 Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note dated
July 30, 1993 in the amount of $4.5 million
made by Family Life Insurance Investment
Company in favor of Investors Life Insurance
Company of North America.
10(aaz) 141 Amendment Agreement dated December 12, 1996
amending the Option Agreement by Financial
Industries Corporation in favor of Investors
Life Insurance Company of North America and
Investors Life Insurance Company of
California.
21 143 Subsidiaries of Registrant.
28 Report on Form 10-K filed by ILCO for the
year ended December 31, 1996 is hereby
incorporated by reference in its entirety.
* Filed as an Exhibit with Registrant's Current Report on Form 8-K
dated June 25, 1991, and incorporated herein by reference.
Exhibit 10 (aav)
FAMILY LIFE CORPORATION
AMENDMENT NO. 2
TO
11% SUBORDINATED SENIOR NOTE DATED JUNE 12, 1991
This Waiver and Amendment Agreement (the "Agreement") is entered into
effective as of June 12, 1996, by and between Family Life Corporation
(the "Company") and Investors Life Insurance Company of North America
(the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under that
certain 11% Subordinated Senior Note dated June 12, 1991, due June 12,
1998, in the principal amount of $22,500,000 (the "1991 Note"); and
WHEREAS the Company is also the obligor under that certain Senior
Subordinated Note dated July 30, 1993, due July 30, 2003, in the
principal amount of $30,000,000 (the "1993 Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the 1991 Note and the 1993
Note; and
WHEREAS, the Company has requested Payee to waive certain provisions
of the 1991 Note, as and to the extent hereinafter set forth; and
WHEREAS, the Company and Payee desire to amend the 1991 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined in this Agreement shall have the meanings attributed to
such terms in the 1991 Note, as previously amended.
2. Waiver. Payee hereby waives any provision of the 1991 Note and
any Event of Default created thereby by reason of the amendment
of the 1993 Note as set forth in Exhibit A hereto.
3. Amendment to 1991 Note. The 1991 Note is hereby amended as
follows:
a. The description of the 1991 Note which appears on the
first page thereof is changed from "Subordinated Senior
Note due June 12, 1998" to "Subordinated Senior Note
due September 12, 2001".
b. The Payment Schedule attached to the 1991 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $22,500,000
12/12/96 $1,125,000 $21,375,000
03/12/97 $1,125,000 $20,250,000
06/12/97 $1,125,000 $19,125,000
09/12/97 $1,125,000 $18,000,000
12/12/97 $1,125,000 $16,875,000
03/12/98 $1,125,000 $15,750,000
06/12/98 $1,125,000 $14,624,000
09/12/98 $1,125,000 $13,500,000
12/12/98 $1,125,000 $12,375,000
03/12/99 $1,125,000 $11,250,000
06/12/99 $1,125,000 $10,125,000
09/12/99 $1,125,000 $ 9,000,000
12/12/99 $1,125,000 $ 7,875,000
03/12/00 $1,125,000 $ 6,750,000
06/12/00 $1,125,000 $ 5,625,000
09/12/00 $1,125,000 $ 4,500,000
12/12/00 $1,125,000 $ 3,375,000
03/12/01 $1,125,000 $ 2,250,000
06/12/01 $1,125,000 $ 1,125,000
09/12/01 $1,125,000 $ -0-
4. Representations and Warranty. The Company hereby represents and
warrants to Payee that after giving effect to the waiver and
amendment herein contained (i) all of the representations and
warranties contained in the 1991 Note are true and correct as of
the date hereof, (ii) no Event of Default exists or is continuing
and (iii) the Company has performed all of the agreements on its
part to be performed prior to the date hereof as set forth in the
1991 Note.
5. Reference to and Effect on the 1991 Note.
a. On or after the date of this Agreement, each reference
in the 1991 Note, as amended by Amendment No. 1 dated
July 30, 1993, to "this Note", "hereof", or words of
like import and each reference to the 1991 Note in
other documents shall mean and be a reference to the
1991 Note as amended hereby.
b. Except as specifically amended and waived above, all of
the terms, conditions and covenants of the 1991 Note
shall remain unaltered and in full force and effect and
shall continue to be binding upon the Company in all
respects and are hereby ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right, power or
remedy of the Payee under the 1991 Note or (ii) any
Event of Default under the 1991 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December, 1996.
FAMILY LIFE CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Consent of Guarantor
Financial Industries Corporation, as guarantor under the Guaranty
Agreement dated June 12, 1991, in favor of Investors Life Insurance
Company of North America ("Investors-NA"), with respect to a loan in
the amount of $22,500,000 from Investors-NA to Family Life
Corporation, which loan is evidenced by a Subordinated Senior Note
dated June 12, 1991 (the 1991 Guaranty") hereby consents to the
Amendment Agreement dated as of June 12, 1996 and hereby confirms and
agrees that the 1991 Guaranty is, and shall continue to be, in full
force and effect and is hereby confirmed and ratified in all respects.
This Consent is executed and delivered as of December 12, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
Exhibit 10 (aaw)(i)
FINANCIAL INDUSTRIES CORPORATION
AMENDMENT NO. 1
TO
12% SUBORDINATED NOTE DATED JUNE 12, 1991
This Waiver and Amendment Agreement (the "Agreement") is entered into
effective as of June 12, 1996, by and between Financial Industries
Corporation (the "Company") and Investors Life Insurance Company of
North America, as successor to the interests of Investors Life
Insurance Company of California (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under that
certain 12% Subordinated Note dated June 12, 1991, due June 12, 1998,
in the principal amount of $2,500,000 (the "1991 Note"); and
WHEREAS the Company is also the obligor under that certain Master
Subordinated PIK Note dated June 12, 1991, due June 12, 1998 (the "PIK
Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the 1991 Note and the PIK
Note; and
WHEREAS, the Company has requested Payee to waive certain provisions
of the 1991 Note, as and to the extent hereinafter set forth; and
WHEREAS, the Company and Payee desire to amend the 1991 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined in this Agreement shall have the meanings attributed to
such terms in the 1991 Note, as previously amended.
2. Waiver. Payee hereby waives any provision of the 1991 Note and
any Event of Default created thereby by reason of the amendment
of the PIK Note as set forth in Exhibit A hereto.
3. Amendment to 1991 Note. The 1991 Note is hereby amended as
follows:
a. The description of the 1991 Note which appears on the
first page thereof is changed from "Subordinated Note
due June 12, 1998" to "Subordinated Note due September
12, 2001".
b. The Payment Schedule attached to the 1991 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $ 2,500,000
12/12/96 $ 125,000 $ 2,375,000
03/12/97 $ 125,000 $ 2,250,000
06/12/97 $ 125,000 $ 2,125,000
09/12/97 $ 125,000 $ 2,000,000
12/12/97 $ 125,000 $ 1,875,000
03/12/98 $ 125,000 $ 1,750,000
06/12/98 $ 125,000 $ 1,625,000
09/12/98 $ 125,000 $ 1,500,000
12/12/98 $ 125,000 $ 1,375,000
03/12/99 $ 125,000 $ 1,250,000
06/12/99 $ 125,000 $ 1,125,000
09/12/99 $ 125,000 $ 1,000,000
12/12/99 $ 125,000 $ 875,000
03/12/00 $ 125,000 $ 750,000
06/12/00 $ 125,000 $ 625,000
09/12/00 $ 125,000 $ 500,000
12/12/00 $ 125,000 $ 375,000
03/12/01 $ 125,000 $ 250,000
06/12/01 $ 125,000 $ 125,000
09/12/01 $ 125,000 $ -0-
4. Representations and Warranty. The Company hereby represents and
warrants to Payee that after giving effect to the waiver and
amendment herein contained (i) all of the representations and
warranties contained in the 1991 Note are true and correct as of
the date hereof, (ii) no Event of Default exists or is continuing
and (iii) the Company has performed all of the agreements on its
part to be performed prior to the date hereof as set forth in the
1991 Note.
5. Reference to and Effect on the 1991 Note.
a. On or after the date of this Agreement, each reference
in the 1991 Note to "this Note", "hereof", or words of
like import and each reference to the 1991 Note in
other documents shall mean and be a reference to the
1991 Note as amended hereby.
b. Except as specifically amended and waived above, all of
the terms, conditions and covenants of the 1991 Note
shall remain unaltered and in full force and effect and
shall continue to be binding upon the Company in all
respects and are hereby ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right, power or
remedy of the Payee under the 1991 Note or (ii) any
Event of Default under the 1991 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Exhibit 10 (aaw) (ii)
FINANCIAL INDUSTRIES CORPORATION
AMENDMENT NO. 1
TO
MASTER SUBORDINATED PIK NOTE DATED JUNE 12, 1991
This Waiver and Amendment Agreement (the "Agreement") is entered into
effective as of June 12, 1996, by and between Financial Industries
Corporation (the "Company") and Investors Life Insurance Company of
North America, as successor to the interests of Investors Life
Insurance Company of California (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under that
certain Master Subordinated PIK Note dated June 12, 1991, due June 12,
1998 (the "PIK Note"); and
WHEREAS the Company is also the obligor under that certain 12%
Subordinated Note dated June 12, 1991, due June 12, 1998, in the
principal amount of $2,500,000 (the "1991 Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the PIK Note and the 1991
Note; and
WHEREAS, the Company has requested Payee to waive certain provisions
of the PIK Note, as and to the extent hereinafter set forth; and
WHEREAS, the Company and Payee desire to amend the PIK Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined in this Agreement shall have the meanings attributed to
such terms in the PIK Note, as previously amended.
2. Waiver. Payee hereby waives any provision of the PIK Note and
any Event of Default created thereby by reason of the amendment
of the 1991 Note as set forth in Exhibit A hereto.
3. Amendment to PIK Note. The PIK Note is hereby amended as
follows:
a. The description of the PIK Note which appears on the
first page thereof is changed from "Master Subordinated
PIK Note due June 12, 1998" to "Master Subordinated PIK
Note due September 12, 2001".
b. The Payment Schedule attached to the PIK Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $ 1,977,119.00
12/12/96 $ 98,855.95 $ 1,878,263.05
03/12/97 $ 98,855.95 $ 1,779,407.10
06/12/97 $ 98,855.95 $ 1,680,551.15
09/12/97 $ 98,855.95 $ 1,581,695.20
12/12/97 $ 98,855.95 $ 1,482,839.25
03/12/98 $ 98,855.95 $ 1,383,983.30
06/12/98 $ 98,855.95 $ 1,285,127.35
09/12/98 $ 98,855.95 $ 1,186,271.40
12/12/98 $ 98,855.95 $ 1,087,415.45
03/12/99 $ 98,855.95 $ 988,559.50
06/12/99 $ 98,855.95 $ 889,703.55
09/12/99 $ 98,855.95 $ 790,847.60
12/12/99 $ 98,855.95 $ 691,991.65
03/12/00 $ 98,855.95 $ 593,135.70
06/12/00 $ 98,855.95 $ 494,279.75
09/12/00 $ 98,855.95 $ 395,423.80
12/12/00 $ 98,855.95 $ 296,567.85
03/12/01 $ 98,855.95 $ 197,711.90
06/12/01 $ 98,855.95 $ 98,855.95
09/12/01 $ 98,855.95 $ -0-
4. Representations and Warranty. The Company hereby represents and
warrants to Payee that after giving effect to the waiver and
amendment herein contained (i) all of the representations and
warranties contained in the PIK Note are true and correct as of
the date hereof, (ii) no Event of Default exists or is continuing
and (iii) the Company has performed all of the agreements on its
part to be performed prior to the date hereof as set forth in the
PIK Note.
5. Reference to and Effect on the PIK Note.
a. On or after the date of this Agreement, each reference
in the PIK Note to "this Note", "hereof", or words of
like import and each reference to the PIK Note in other
documents shall mean and be a reference to the PIK Note
as amended hereby.
b. Except as specifically amended and waived above, all of
the terms, conditions and covenants of the PIK Note
shall remain unaltered and in full force and effect and
shall continue to be binding upon the Company in all
respects and are hereby ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right, power or
remedy of the Payee under the PIK Note or (ii) any
Event of Default under the PIK Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Exhibit 10(aax)
FAMILY LIFE CORPORATION
AMENDMENT NO. 1
TO
9% SUBORDINATED SENIOR NOTE DATED JULY 30, 1993
This Waiver and Amendment Agreement (the "Agreement") is entered into
effective as of June 12, 1996, by and between Family Life Corporation
(the "Company") and Investors Life Insurance Company of North America
(the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under that
certain 9% Subordinated Senior Note dated July 30, 1993, due July 30,
2003, in the principal amount of $30,000,000 (the "1993 Note"); and
WHEREAS the Company is also the obligor under that certain 11% Senior
Subordinated Note dated June 12, 1991, due June 12, 1998, in the
principal amount of $22,500,000 (the "1991 Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the 1993 Note and the 1991
Note; and
WHEREAS, the Company has requested Payee to waive certain provisions
of the 1993 Note, as and to the extent hereinafter set forth; and
WHEREAS, the Company and Payee desire to amend the 1993 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined in this Agreement shall have the meanings attributed to
such terms in the 1993 Note, as previously amended.
2. Waiver. Payee hereby waives any provision of the 1993 Note and
any Event of Default created thereby by reason of the amendment
of the 1991 Note as set forth in Exhibit A hereto.
3. Amendment to 1993 Note. The 1993 Note is hereby amended as
follows:
a. The description of the 1993 Note which appears on the
first page thereof is changed from "Subordinated Senior
Note due July 30, 2003" to "Subordinated Senior Note
due September 12, 2006".
b. The Payment Schedule attached to the 1993 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $30,000,000
12/12/96 $ 163,540 $29,836,460
03/12/97 $ 163,540 $29,672,920
06/12/97 $ 163,540 $29,509,380
09/12/97 $ 163,540 $29,345,840
12/12/97 $ 163,540 $29,182,300
03/12/98 $ 163,540 $29,018,760
06/12/98 $ 163,540 $28,855,220
09/12/98 $ 163,540 $28,691,680
12/12/98 $ 163,540 $28,528,140
03/12/99 $ 163,540 $28,364,600
06/12/99 $ 163,540 $28,201,060
09/12/99 $ 163,540 $28,037,520
12/12/99 $ 163,540 $27,873,980
03/12/00 $ 163,540 $27,710,440
06/12/00 $ 163,540 $27,546,900
09/12/00 $ 163,540 $27,383,360
12/12/00 $ 163,540 $27,219,820
03/12/01 $ 163,540 $27,056,280
06/12/01 $ 163,540 $26,892,740
09/12/01 $ 163,540 $26,729,200
12/12/01 $1,336,458 $25,392,742
03/12/02 $1,336,458 $24,056,284
06/12/02 $1,336,458 $22,719,826
09/12/02 $1,336,458 $21,383,368
12/12/02 $1,336,458 $20,046,910
03/12/03 $1,336,458 $18,710,452
06/12/03 $1,336,458 $17,373,994
09/12/03 $1,336,458 $16,037,536
12/12/03 $1,336,458 $14,701,078
03/12/04 $1,336,458 $13,364,620
06/12/04 $1,336,458 $12,028,162
09/12/04 $1,336,458 $10,691,704
12/12/04 $1,336,458 $ 9,355,246
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
03/12/05 $1,336,458 $ 8,018,788
06/12/05 $1,336,458 $ 6,682,330
09/12/05 $1,336,458 $ 5,345,872
12/12/05 $1,336,458 $ 4,009,414
03/12/06 $1,336,458 $ 2,672,956
06/12/06 $1,336,458 $ 1,336,498
09/12/06 $1,336,498 $ -0-
4. Representations and Warranty. The Company hereby represents and
warrants to Payee that after giving effect to the waiver and
amendment herein contained (i) all of the representations and
warranties contained in the 1993 Note are true and correct as of
the date hereof, (ii) no Event of Default exists or is continuing
and (iii) the Company has performed all of the agreements on its
part to be performed prior to the date hereof as set forth in the
1993 Note.
5. Reference to and Effect on the 1993 Note.
a. On or after the date of this Agreement, each reference
in the 1993 Note to "this Note", "hereof", or words of
like import and each reference to the 1993 Note in
other documents shall mean and be a reference to the
1993 Note as amended hereby.
b. Except as specifically amended and waived above, all of
the terms, conditions and covenants of the 1993 Note
shall remain unaltered and in full force and effect and
shall continue to be binding upon the Company in all
respects and are hereby ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right, power or
remedy of the Payee under the 1993 Note or (ii) any
Event of Default under the 1993 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December 1996.
FAMILY LIFE CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Consent of Guarantor
Financial Industries Corporation, as guarantor under the Guaranty
Agreement dated July 30, 1993, in favor of Investors Life Insurance
Company of North America ("Investors-NA"), with respect to a loan in
the amount of $30,000,000 from Investors-NA to Family Life
Corporation, which loan is evidenced by a Subordinated Senior Note
dated July 30, 1993 (the 1993 Guaranty") hereby consents to the
Amendment Agreement dated as of June 12, 1996, and hereby confirms
and agrees that the 1993 Guaranty is, and shall continue to be, in
full force and effect and is hereby confirmed and ratified in all
respects.
This Consent is executed and delivered as of December 12, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
Exhibit 10 (aay)
FAMILY LIFE INSURANCE INVESTMENT COMPANY
AMENDMENT NO. 1
TO
9% SUBORDINATED SENIOR NOTE DATED JULY 30, 1993
This Amendment Agreement (the "Agreement") is entered into effective
as of June 12, 1996, by and between Family Life Insurance Investment
Company (the "Company") and Investors Life Insurance Company of North
America (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under that
certain 9% Subordinated Senior Note dated July 30, 1993, due July 30,
2003, in the principal amount of $4,500,000 (the "1993 Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under the 1993 Note; and
WHEREAS, the Company and Payee desire to amend the 1993 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined in this Agreement shall have the meanings attributed to
such terms in the 1993 Note, as previously amended.
2. Amendment to 1993 Note. The 1993 Note is hereby amended as
follows:
a. The description of the 1993 Note which appears on the
first page thereof is changed from "Subordinated Senior
Note due July 30, 2003" to "Subordinated Senior Note
due September 12, 2006".
b. The Payment Schedule attached to the 1993 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $ 4,500,000
12/12/96 $ 24,531 $ 4,475,469
03/12/97 $ 24,531 $ 4,450,938
06/12/97 $ 24,531 $ 4,426,407
09/12/97 $ 24,531 $ 4,401,876
12/12/97 $ 24,531 $ 4,377,345
03/12/98 $ 24,531 $ 4,352,814
06/12/98 $ 24,531 $ 4,328,283
09/12/98 $ 24,531 $ 4,303,752
12/12/98 $ 24,531 $ 4,279,221
03/12/99 $ 24,531 $ 4,254,690
06/12/99 $ 24,531 $ 4,230,159
09/12/99 $ 24,531 $ 4,205,628
12/12/99 $ 24,531 $ 4,181,097
03/12/00 $ 24,531 $ 4,156,566
06/12/00 $ 24,531 $ 4,132,035
09/12/00 $ 24,531 $ 4,107,504
12/12/00 $ 24,531 $ 4,082,973
03/12/01 $ 24,531 $ 4,058,442
06/12/01 $ 24,531 $ 4,033,911
09/12/01 $ 24,531 $ 4,009,380
12/12/01 $ 200,469 $ 3,808,911
03/12/02 $ 200,469 $ 3,608,442
06/12/02 $ 200,469 $ 3,407,973
09/12/02 $ 200,469 $ 3,207,504
12/12/02 $ 200,469 $ 3,007,035
03/12/03 $ 200,469 $ 2,806,566
06/12/03 $ 200,469 $ 2,606,097
09/12/03 $ 200,469 $ 2,405,628
12/12/03 $ 200,469 $ 2,205,159
03/12/04 $ 200,469 $ 2,004,690
06/12/04 $ 200,469 $ 1,804,221
09/12/04 $ 200,469 $ 1,603,752
12/12/04 $ 200,469 $ 1,403,283
03/12/05 $ 200,469 $ 1,202,814
06/12/05 $ 200,469 $ 1,002,345
09/12/05 $ 200,469 $ 801,876
12/12/05 $ 200,469 $ 601,407
03/12/06 $ 200,469 $ 400,938
06/12/06 $ 200,469 $ 200,469
09/12/06 $ 200,469 $ -0-
3. Representations and Warranty. The Company hereby represents and
warrants to Payee that after giving effect to the amendment
herein contained (i) all of the representations and warranties
contained in the 1993 Note are true and correct as of the date
hereof, (ii) no Event of Default exists or is continuing and
(iii) the Company has performed all of the agreements on its part
to be performed prior to the date hereof as set forth in the 1993
Note.
4. Reference to and Effect on the 1993 Note.
a. On or after the date of this Agreement, each reference
in the 1993 Note to "this Note", "hereof", or words of
like import and each reference to the 1993 Note in
other documents shall mean and be a reference to the
1993 Note as amended hereby.
b. Except as specifically amended and waived above, all of
the terms, conditions and covenants of the 1993 Note
shall remain unaltered and in full force and effect and
shall continue to be binding upon the Company in all
respects and are hereby ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right, power or
remedy of the Payee under the 1993 Note or (ii) any
Event of Default under the 1993 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December 1996.
FAMILY LIFE INSURANCE INVESTMENT COMPANY
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Consent of Guarantor
Financial Industries Corporation, as guarantor under the Guaranty
Agreement dated July 30, 1993, in favor of Investors Life Insurance
Company of North America ("Investors-NA"), with respect to a loan in
the amount of $4,500,000 from Investors-NA to Family Life Insurance
Investment Company, which loan is evidenced by a Subordinated Senior
Note dated July 30, 1993 (the 1993 Guaranty") hereby consents to the
Amendment Agreement dated as of June 12, 1996 and hereby confirms and
agrees that the 1993 Guaranty is, and shall continue to be, in full
force and effect and is hereby confirmed and ratified in all respects.
This Consent is executed and delivered as of December 12, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
Exhibit 10 (aaz)
FINANCIAL INDUSTRIES CORPORATION
AMENDMENT NUMBER 1
TO THE MARCH 21, 1991 OPTION AGREEMENT
This Amendment Agreement (hereinafter the "Amendment") is made by
Financial Industries Corporation ("FIC"), effective as of June 12,
1996, in favor of Investors Life Insurance Company of North America,
individually and as successor-in-interest to Investors Life Insurance
Company of California.
Reference is made to that certain option agreement dated March 21,
1991 by FIC in favor of Investors Life Insurance Company of North
America and Investors Life Insurance Company of California (the
"Option Agreement").
All capitalized terms not defined herein shall have the meanings
established in the Option Agreement.
WITNESSETH:
WHEREAS, Investors Life Insurance Company of North America and
Investors Life Insurance Company of California granted loans to FIC,
or subsidiaries thereof, in the amounts of $22.5 million and $2.5
million (the "Loans") in connection with the acquisition of Family
Life Insurance Company by FIC. As partial consideration for said
loans, FIC entered into the option agreement referenced herein,
providing for a grant to Investors Life Insurance Company of North
America and Investors Life Insurance Company of California of certain
options to purchase a total of 9.9% of the common stock of FIC at a
price of $10.50 per share; and
WHEREAS, Investors Life Insurance Company of California was merged
into Investors Life Insurance Company of North America, and Investors
Life Insurance Company of North America thereby became the surviving
organization and successor-in-interest to Investors Life Insurance
Company of California; and
WHEREAS, upon recommendation of the Board of Directors of FIC and the
approval of a majority of the shareholders of FIC, the common stock of
FIC was split on a five-for-one basis with a record date of November
12, 1996; and
WHEREAS, Investors Life Insurance Company of North America
(hereinafter "Investors-NA) and FIC agreed to amend the payment
schedules of the Loans; and
WHEREAS, Investors-NA and FIC wish to extend the period in which the
options may be exercised and provide a written recognition of the
effect of the five-for-one split on the per share price for the
exercise of those options under the original terms of the Option
Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, FIC agrees as follows:
1. The expiration date for the exercise of the options as provided
in paragraph two of the Option Agreement shall be changed to
June 12, 2006.
Furthermore, FIC acknowledges that the price per share under the
Option Agreement ($10.50) has been adjusted to account for the five-
for-one split of FIC common stock in accordance with the dilution
provisions in paragraph one of the Option Agreement. Therefore, the
resulting price per share is $2.10.
Except as otherwise noted herein, the terms and conditions of the
Option Agreement will remain in full force and effect.
Executed this 12th day of December, 1996 by:
FINANCIAL INDUSTRIES CORPORATION
By:
Roy F. Mitte
President
EXHIBIT 21
Subsidiaries of Registrant
Family Life Corporation
Family Life Insurance Investment Company
Family Life Insurance Company
Financial Industries Service Corporation
Financial Industries Securities Corporation
Financial Industries Service Corporation
of Mississippi, Inc.
Financial Industries Sales Corporation
of Southern California, Inc.
FIC Realty Services, Inc.
FIC Property Management, Inc.
FIC Computer Services, Inc.
Atrium Beverage Corporation
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 83,632
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 112,590
<CASH> 1,414
<RECOVER-REINSURE> 2,383
<DEFERRED-ACQUISITION> 36,537
<TOTAL-ASSETS> 287,678
<POLICY-LOSSES> 54,909
<UNEARNED-PREMIUMS> 132
<POLICY-OTHER> 41,456
<POLICY-HOLDER-FUNDS> 5,836
<NOTES-PAYABLE> 67,989
0
0
<COMMON> 1,169
<OTHER-SE> 81,566
<TOTAL-LIABILITY-AND-EQUITY> 287,678
43,889
<INVESTMENT-INCOME> 7,643
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 4,807
<BENEFITS> 21,011
<UNDERWRITING-AMORTIZATION> 3,755
<UNDERWRITING-OTHER> 16,184
<INCOME-PRETAX> 10,394
<INCOME-TAX> 2,428
<INCOME-CONTINUING> 10,017
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,017
<EPS-PRIMARY> 9.04
<EPS-DILUTED> 9.04
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
