SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly Period Ended June 30, 1997
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 74-2126975
(State of Incorporation) (I.R.S. Employer Identification
Number)
The Austin Centre, 701 Brazos, 12th Floor
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of common shares outstanding ($.20 par value) at end of
period: 5,427,965
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996................... 3
Consolidated Statements of Income
For the three and six month periods ended
June 30, 1997 and 1996................................ 5
Consolidated Statements of Cash Flows
For the three and six month periods ended
June 30, 1997 and 1996................................ 7
Notes to Consolidated Financial Statements.................11
Management's Discussion and Analysis of
Financial Conditions and Results of Operations........13
Part II
Other Information..........................................19
Signature Page.............................................20
Item 1. Financial Statements
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
June 30, Dec. 31,
1997 1996
Unadited
ASSETS
Investments:
Fixed maturities available for sale,
at market value (amortized cost of
$82,929 and $82,969, respectively) $ 83,743 $ 83,833
Equity securities, at market (cost
approximately $11) 4 4
Policy loans 2,485 2,286
Short-term investments 23,472 25,615
Total investments 109,704 111,738
Cash 324 308
Investment in affiliate 55,402 52,925
Accrued investment income 1,219 1,233
Agent advances and other receivables 6,683 7,825
Reinsurance receivables 7,677 6,159
Due and deferred premiums 10,763 10,651
Property and equipment, net 11,769 8,799
Deferred policy acquisition costs 43,243 41,333
Present value of future profits of
acquired business 37,531 40,604
Other assets 4,644 5,706
Separate account assets 475 449
Total assets $ 289,434 $ 287,730
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
June 30, Dec. 31,
1997 1996
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits payable $ 58,695 $ 59,340
Contractholder deposit funds 43,444 41,434
Unearned premiums 104 129
Other policy claims & benefits
payable 4,799 5,164
107,042 106,067
Subordinated notes payable to affiliate 56,866 59,940
Deferred federal income taxes 18,684 17,952
Other liabilities 9,952 11,248
Separate account liabilities 475 449
Total liabilities 193,019 195,656
Commitments and contingencies
Shareholders' equity:
Common stock, $.20 par value,
10,000,000 shares authorized;
5,845,300 shares issued, 5,427,965
shares outstanding in 1997 and 1996 1,169 1,169
Additional paid-in capital 7,225 7,225
Net unrealized gain on investments in
fixed maturities available for sale 1,110 1,220
Net unrealized gain on equity securities 27 25
Retained earnings 87,306 82,857
96,837 92,496
Common treasury stock, at cost, 83,467
shares in 1997 and 1996 (422) (422)
Total shareholders' equity 96,415 92,074
Total liabilities and shareholders'
equity $289,434 $287,730
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIOD
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars, except per share data)
3 Months Ended
June 30,
1997 1996
Revenues:
Net premiums $ 10,268 $ 11,179
Net investment income 2,283 1,807
Earned insurance charges 1,084 1,152
Other 732 935
Total revenues 14,367 15,073
Benefits and expenses:
Benefits and other expenses 4,531 5,087
Interest on insurance policies 687 472
Amortization of present value of
future profits of acquired business 1,522 1,092
Amortization of deferred policy
acquisition costs 1,080 833
Operating expenses 3,333 3,477
Interest expense 856 1,089
Total benefits and expenses 12,009 12,050
Income before federal income taxes
and equity in net earnings of
affiliate 2,358 3,023
Provision for federal income taxes 680 803
Income before equity in net earnings
of affiliate 1,678 2,220
Equity in net earnings of affiliate, net
of tax 543 558
Net income $ 2,221 $ 2,778
Per Share Data:
Common stock and common stock equivalents 5,584 5,560
Net income per share available to common
shareholders $ .40 $ .50
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars, except per share data)
6 Months Ended
June 30,
1997 1996
Revenues:
Net premiums $ 20,281 $ 21,611
Net investment income 4,503 3,623
Earned insurance charges 2,330 2,949
Other 1,329 1,904
Total revenues 28,443 30,087
Benefits and expenses:
Benefits and other expenses 9,206 10,794
Interest on insurance policies 1,270 1,015
Amortization of present value of
future profits of acquired business 3,074 2,473
Amortization of deferred policy
acquisition costs 2,282 1,883
Operating expenses 6,142 7,050
Interest expense 1,739 1,973
Total benefits and expenses 23,713 25,188
Income before federal income taxes
and equity in net earnings of
affiliate 4,730 4,899
Provision for federal income taxes 1,266 1,210
Income before equity in net earnings
of affiliate 3,464 3,689
Equity in net earnings of affiliate, net
of tax 985 7,705
Net income $ 4,449 $ 11,394
Per Share Data:
Common stock and common stock equivalents 5,583 5,555
Net income per share available to common
shareholders $ 0.80 $ 2.05
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
3 Months Ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,221 $ 2,778
Adjustments to reconcile net income to net
cash used in operating activities:
Amortization of present value of future
profits 1,522 1,092
Amortization of deferred policy acquisition
costs 1,080 833
Financing costs amortized -0- 84
Equity in undistributed earnings of
affiliate (1,328) 55
Changes in assets and liabilities net of
effects from purchase of insurance
subsidiaries:
Decrease in accrued investment income (160) (318)
(Increase) decrease in agent advances and
other receivables (13) 988
Increase in due and deferred
premiums (100) (96)
Increase in deferred policy acquisition
costs (2,001) (2,379)
Decrease (increase) in other assets 1,325 (8)
Increase (decrease) in policy liabilities
and accruals 127 (733)
(Decrease)increase in other liabilities (831) 209
Increase in policy loans (120) (139)
Increase in deferred federal income taxes 800 824
Other, net (703) (44)
Net cash provided by operating
activities $ 1,819 $ 3,146
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
3 Months Ended
June 30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased $ 2 $ (2,016)
Proceeds from sale and maturities of
investments 272 (513)
Net change in short-term investments 1,847 5,066
Retirement of equipment (2,388) (1,321)
Net cash provided by investing activities (267) 1,216
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of subordinated notes payable
to affiliate -0- 253
Repayment of debt (1,537) (4,674)
Net cash used in financing activities (1,537) (4,421)
Net increase (decrease) increase in cash 15 (59)
Cash, beginning of period 309 1,263
Cash, end of period $ 324 $ 1,204
(See Notes to Consolidated Financial Statements)<PAGE>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
6 Months Ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,449 $ 11,394
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of present value of future
profits 3,074 2,473
Amortization of deferred policy acquisition
costs 2,282 1,883
Financing costs amortized -0- 168
Equity in undistributed earnings of
affiliate (2,558) (8,429)
Changes in assets and liabilities net of
effects from purchase of insurance
subsidiaries:
Decrease (increase) in accrued
investment income 14 (21)
(Increase) decrease in agent advances
and other receivables (376) 1,966
Increase in due and deferred
premiums (112) (198)
Increase in deferred policy acquisition
costs (4,192) (4,498)
Decrease in other assets 1,062 119
Increase (decrease) in policy liabilities
and accruals 975 (557)
(Decrease) increase in other liabilities (1,296) 1,566
Increase in policy loans (199) (212)
Increase in deferred federal
income taxes 732 994
Other, net (483) (48)
Net cash provided by operating
activities $ 3,372 $ 6,600
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
6 Months Ended
June 30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased $ (3,056) $ (2,759)
Proceeds from sale and maturities of
investments 3,601 1,111
Net change in short-term investments 2,143 2,665
Purchase of equipment, net (2,970) (1,315)
Net cash provided by (used in)
investing activities (282) (298)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of subordinated notes payable
to affiliate -0- 253
Repayment of debt (3,074) (6,765)
Net cash used in financing activities (3,074) (6,512)
Net increase (decrease) in cash 16 (210)
Cash, beginning of period 308 1,414
Cash, end of period $ 324 $ 1,204
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein reflect all adjustments
which are, in the opinion of management, necessary to present a
fair statement of the interim results. The statements have been
prepared to conform to the requirements of Form 10-Q and do not
necessarily include all disclosures required by generally
accepted accounting principles (GAAP). The reader should refer
to Form 10-K for the year ended December 31, 1996 previously
filed with the Commission for financial statements prepared in
accordance with GAAP. Certain prior year amounts have been
reclassified to conform with current year presentation.
The consolidated financial statements include the accounts of
Financial Industries Corporation ("FIC") and its wholly-owned
subsidiaries. The investment of FIC in InterContinental Life
Corporation ("ILCO") is presented using the equity method. All
significant intercompany items and transactions have been
eliminated.
FIC's net income is affected by its equity interest in ILCO and
ILCO's insurance subsidiaries. Net income for the first six
months of 1996 includes $7.2 million resulting from the sale
during the first quarter of 1996 of the Austin Centre, a
hotel/office complex, located in Austin, Texas. The sale was
completed by Investors Life Insurance Company of North America
("Investors-NA"), a wholly-owned subsidiary of ILCO. The selling
price was $62.675 million, less $1 million paid to a capital
reserve account for the purchaser. The property was purchased in
1991 for $31.275 million. The book value of the property, $36.8
million, net of improvements and amortization, was retained and
reinvested by Investors-NA. The balance of the proceeds of the
sale, net of federal income tax, was used to reduce the ILCO's
senior loan obligations by $15 million. The sale closed on March
29, 1996.
New Accounting Pronouncements
In February 1997, the FASB issued FAS No. 128, "Earnings Per
Share," which revises the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings Per
Share." The Statement established two measures of earnings per
share: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were converted or
exercised. The Statement requires dual presentation of basic and
diluted earnings per share on the face of the income statement
for all entities with potential dilutive securities outstanding.
The Statement also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation. The Statement is effective for interim and annual
periods ending after December 15, 1997. Earlier application is
not permitted. However, an entity may disclose pro forma
earnings per share amounts that would have resulted if the entity
had applied the Statement in an earlier period. The Company
intends to adopt FAS 128 in its annual financial statements for
the year ended December 31, 1997.
The pro forma unaudited earnings per share amounts that would
have resulted assuming the Company had computed its earnings per
share in accordance with the provisions established by FAS 128
for the three and six months ended June 30, 1997 and 1996 are as
follows:
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
Basic earnings per share $0.41 $0.51
Diluted earnings per share $0.40 $0.50
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
Basic earnings per share $0.82 $2.10
Diluted earnings per share $0.80 $2.05
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operation:
For the six-month period ended June 30, 1997, FIC's net income
was $4,449,000 (or $.80 per common share), as compared to
$11,394,000 (or $2.05 per common share) in the first six months
of 1996. The net income per share for the 1996 quarter has been
restated to reflect the effect of the five-for-one stock split
which was effective November 12, 1996.
Net income from continuing operations (excluding the gain
resulting from ILCO's sale of the Austin Centre, as described
below) was $4,449,000 ($.80 per common share) for the six-month
period ended June 30, 1997, as compared to $4,724,000 ($.85 per
common share) for the first six months of 1996.
FIC's net income is affected by its equity interest in
InterContinental Life Corporation ("ILCO") and ILCO's insurance
subsidiaries. Net income for the six-month period ended June 30,
1996 includes $6.67 million ($1.20 per common share)
resulting from ILCO's sale of the Austin Centre, a hotel/office
complex, located in Austin, Texas. The sale was completed by
Investors Life Insurance Company of North America ("Investors-
NA"), a wholly-owned subsidiary of ILCO. The selling price was
$62.675 million, less $1 million paid to a capital reserve
account for the purchaser. The property was purchased in 1991
for $31.275 million. A portion of the sale proceeds, equal to
the book value of the property, net of improvements and
amortization ($36.8 million), was retained and reinvested by
Investors-NA. The balance of the proceeds of the sale, net of
federal income tax, was used to reduce ILCO's senior loan
obligations by $15 million. The sale closed on March 29, 1996.
The Company and its affiliates will continue to occupy space on
three floors of the office tower as its headquarters, under a
lease which runs through September 30, 1997. In May, 1997, the
Investors-NA renewed the lease, for a 5-year period, with options
to renew for additional 5-year periods.
The statutory earnings of Family Life as required to be reported
to insurance regulatory authorities before interest expense,
capital gains and losses, and federal income taxes were
$6,660,489 at June 30, 1997, as compared to $5,711,652 at June
30, 1996. These statutory earnings are the source to provide for
the repayment of the indebtedness incurred in connection with the
acquisition of Family Life.
The decline in long-term interest rates during the first six
months of 1997, which was related to general economic conditions,
had a positive effect upon the market value of the fixed
maturities available for sale segment of the Company's portfolio.
As of June 30, 1997, the market value of the fixed maturities
available for sale segment was $83.7 million as compared to an
amortized value of $82.9 million, or an unrealized gain of $.8
million. Such increase reflects unrealized gains on such
investments. There is no assurance that this gain will be
realized in the future. The net of tax effect of this increase
has been recorded as an increase in shareholders' equity.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
The consolidated balance sheets at June 30, 1997 include Separate
Account assets of Family Life in the amount of $0.48 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. For the six-month period ended June
30, 1997, the Company's equity in the net earnings of ILCO, net
of federal income tax, was $985,000, as compared to $7,705,000
for the first six months of 1996. For the 1996 period, the
equity in net earnings of affiliate includes $6,670,000
attributable to ILCO's net income resulting from the sale of the
Austin Centre property.
FIC currently owns 1,795,146 shares of ILCO's common stock, and
holds options to acquire an additional 1,702,155 shares. The
options were granted under an Option Agreement between FIC and
ILCO which was entered into in March, 1986. In addition, Family
Life currently owns 171,200 shares of ILCO common stock. As a
result, FIC currently owns, directly and indirectly through
Family Life, 1,966,346 shares (approximately 46%) of ILCO's
common stock and holds options to acquire 1,702,155 shares. If
all of FIC's rights under the Option Agreement were to be
presently exercised, FIC's ownership would amount to
approximately 60.1% of the issued and outstanding shares of
ILCO's common stock.
The decline in long-term interest rates during the first six
months of 1997, which was related to general economic conditions,
had a positive effect upon the market value of the fixed
maturities available for sale segment of ILCO's investment
portfolio. As of June 30, 1997, the market value of the fixed
maturities available for sale segment was $443.6 million as
compared to an amortized cost of $441.5 million, or an unrealized
gain of $2.1 million. Such increase reflects unrealized gains on
such investments. Since FIC owns approximately 46% of the common
stock of ILCO, such unrealized gains net of tax, are reflected
in FIC's equity interest in ILCO, and had the effect of
increasing the reported value of such equity interest by
approximately $0.67 million.
Liquidity and Capital Resources of ILCO:
ILCO is a holding company whose principal assets consist of the
common stock of Investors-NA and its subsidiaries,
InterContinental Life Insurance Company ("ILIC") and, since
February, 1995, Investors-IN. ILCO's primary source of funds
consists of payments under the surplus debentures from Investors-
NA.
The cash requirements of ILCO consist primarily of its service of
the indebtedness created in connection with the 1988 acquisition
of the Investors Life Companies and the 1995 acquisition of
Investors-IN. As of December 31, 1995, the outstanding principal
balance of the ILCO's senior loan obligations was $59.4 million.
In addition to making the scheduled principal payments under its
senior loan, the Company made optional payments of $941,000 in
March, 1996, $15.0 million in April, 1996 and $0.5 million in
July, 1996. As of June 30, 1997, the principal balance of the
senior loan was $20.4 million.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest to it by Investors-NA, pursuant
to the terms of the two surplus debentures. The surplus
debentures were originally issued by Standard Life Insurance
Company and its terms were previously approved by the Mississippi
Insurance Commissioner. Upon the merger of Standard Life into
Investors-NA, the obligations of the surplus debentures were
assumed by Investors-NA. As of June 30, 1997, the outstanding
principal balance of the surplus debentures was $5.2 million and
$28.8 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
June 30, 1997, the statutory capital and surplus of Investors-NA
was $56.7 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
June 30, 1997, Investors-NA had earned surplus of $12.1 million.
Since the law applies only to dividend payments, the ability of
Investors-NA to make principal and interest payments under the
Surplus Debentures is not affected. ILCO does not anticipate that
Investors-NA will have any difficulty in making principal and
interest payments on the Surplus Debentures in the amounts
necessary to enable ILCO to service the Senior Loan for the
foreseeable future.
ILIC is domiciled in the State of New Jersey. Under the New
Jersey insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Any
dividend must be paid from earned surplus. A proposed payment of
a dividend or distribution which, together with dividends or
distributions paid during the preceding twelve months, exceeds
the greater of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) statutory net gain from operations for the
preceding calendar year is treated as an "extraordinary dividend"
and may not be paid until either it has been approved, or a
waiting period shall have passed during which it has not been
disapproved, by the insurance commissioner. ILIC had earned
surplus of $5.2 million at June 30, 1997.
Investors-IN is domiciled in the State of Indiana. Under the
Indiana insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Under
Indiana law the dividend must be paid from earned surplus.
Extraordinary dividend approval would be required where a
dividend exceeds the greater of 10% of surplus or the net gain
from operations for the prior fiscal year. Investors-IN had
earned surplus of $12.4 million at June 30, 1997. As a result of
the purchase of State Auto Life Insurance Company on July 9,
1997, the surplus of Investors-IN declined by $6 million, to $6.4
million.
The Form 10-Qs of ILCO for the six-month periods years ended June
30, 1997 and June 30, 1996, set forth the business operations and
financial results of ILCO and its life insurance subsidiaries.
Such 10-Q reports of ILCO, including the discussion by ILCO's
management under the caption "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" are
incorporated herein by reference.
Results of Operations
For the six-month period ended June 30, 1997, FIC's income from
operations, before federal income tax and equity in net earnings
of affiliate, was $4,730,000 (on revenues of $28,443,000), as
compared to $4,899,000 (on revenues of $30,087,000) in the first
six months of 1996.
Premiums for the first six months of 1997, net of reinsurance
ceded, were $20.3 million, as compared to $21.6 million in the
first six months of 1996. Policyholder benefits and expenses
were $9.2 million in the 1997 period, as compared to $10.8
million in the first six months of 1996.
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the
common stock of Family Life and its equity ownership in ILCO.
FIC's primary sources of capital consists of cash flow from
operations of its subsidiaries 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 June 30,
1997, the outstanding balance of such indebtedness was $56.9
million on the Subordinated Notes granted by Investors-NA. On
April 17, 1996, the Senior Loan granted by a group of banks was
completely paid off.
The principal source of liquidity for FIC's subsidiaries consists
of the periodic payment of principal and interest by Family Life
pursuant to the terms of a Surplus Debenture. The terms of the
Surplus Debenture were previously approved by the Washington
Insurance Commissioner. Under the provisions of the Surplus
Debenture and current law, no prior approval of the Washington
Insurance Department is required for Family Life to pay interest
or principal on the Surplus Debenture; provided that, after
giving effect to such payments, the statutory surplus of Family
Life is in excess of 6% of assets (the "surplus floor").
However, Family Life has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days
advance notice of payments which it will make under the surplus
debenture. As of June 30, 1997, the statutory capital and
surplus of Family Life was $25.1 million, an amount substantially
in excess of the surplus floor. As of June 30, 1997, the
principal balance of the Surplus Debenture was $35.9 million.
The funds required by Family Life to meet its obligations under
the terms of the Surplus Debenture are generated primarily from
premium payments from policyholders, investment income and the
proceeds from the sale and redemption of portfolio investments.
Washington's insurance code includes the "greater of" standard
for dividends but has requirements that prior notification of a
proposed dividend be given to the Washington Insurance
Commissioner and that cash dividends may be paid only from earned
surplus. Family Life does not presently have earned surplus as
defined by the regulations adopted by the Washington Insurance
Commissioner and, therefore, is not permitted to pay cash
dividends. However, since the new law applies only to dividend
payments, the ability of Family Life to make principal and
interest payments under the Surplus Debenture is not affected.
The Company does not anticipate that Family Life will have any
difficulty in making principal and interest payments on the
Surplus Debenture in the amounts necessary to enable Family Life
Corporation to service its indebtedness for the foreseeable
future.
The sources of funds for Family Life consist of premium payments
from policy holders, investment income and the proceeds from the
sale and redemption of portfolio investments. These funds are
applied primarily to provide for the payment of claims under
insurance and annuity policies, operating expenses, taxes,
investments in portfolio securities, shareholder dividends and
payments under the provisions of the Surplus Debenture.
FIC's net cash flow provided by operating activities was $3.4
million in the first six months of 1997, as compared to $6.6
million in the first six months of 1996. Net cash flow used in
financing activities was $3.1 million in the 1997 period, as
compared to $6.5 million in the first six months of 1996.
In connection with the purchase of the Investors Life Companies
by ILCO and the purchase of Family Life by a wholly- owned
subsidiary of FIC, FIC guaranteed the payment of the indebtedness
created in connection with such acquisitions. After giving
effect to the refinancing of the ILCO Senior Loan and the
repayment of the ILCO Subordinated Loans, the guaranty
commitments of FIC with respect to the debt obligations of ILCO
relate to the ILCO Senior Loan, with an outstanding balance at
June 30, 1997 of $20.4 million.
The guaranty commitments of FIC under the loans incurred in
connection with the acquisition of Family Life (after taking into
account the repayments and new loans which occurred in July,
1993) relate to: (i) the $22.5 million note issued by Family Life
Corporation to Investors Life Insurance Company of North America,
and (ii) the $34.5 million loaned by Investors-NA to two
subsidiaries of FIC.
Management believes that its cash, cash equivalents and short
term investments are sufficient to meet the needs of its business
and to satisfy debt service.
There are no trends, commitments or capital asset requirements
that are expected to have an adverse effect on the liquidity of
FIC.
Investments
As of June 30, 1997, the Company's investment assets totaled
$109.7 million, as compared to $111.7 million as of December 31,
1996.
The level of short-term investments at June 30, 1997 was $23.5
million, as compared to $25.6 million as of December 31, 1996.
The fixed maturities available for sale portion represents $83.7
million of investment assets as of June 30, 1997, as compared to
$83.8 million at December 31, 1996. The amortized cost of fixed
maturities available for sale as of June 30, 1997 was $82.9
million representing a net unrealized gain of $0.8 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 June 30,
1997, consisted solely of fixed maturities investments which, in
the annual statements of the companies, as filed with state
insurance departments, were designated under the National
Association of Insurance Commissioners ("NAIC") rating system as
a "1" (highest quality).
Management believes that the absence of "high-yield" or "non-
investment grade" investments (as defined above) in the
portfolios of its life insurance subsidiary enhances the ability
of the Company to service its debt, provide security to its
policyholders and to credit relatively consistent rates of return
to its policyholders.
Family Life Insurance Company, an indirect, wholly-owned
subsidiary of FIC, is the owner and developer of a 7.1 acre tract
in Austin, Texas, adjacent to the 20-acre Bridgepoint Square
Offices site being developed by a subsidiary of ILCO. The site
was purchased by Family Life in May, 1996, for $1.3 million. In
January, 1997, Family Life began construction on a four-story
office building, with rentable space of approximately 76,793
square feet, and a parking garage with 350 parking spaces. The
projected completion date is September, 1997. Upon completion of
the project, the investment of Family Life will be approximately
$11.7 million, including the cost of the land. The building is
fully leased to a third party.
Accounting Developments
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No. 128,
"Earnings Per Share," which revises the standards for computing
earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share." The Statement established two measures of
earnings per share: Basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were converted or exercised. The Statement requires dual
presentation of basic and diluted earnings per share on the face
of the income statement for all entities with potential dilutive
securities outstanding. The statement also requires a
reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator
of the diluted earnings per share computation. The statement is
effective for interim and annual periods ending after December
15, 1997. Earlier application is not permitted. However, a
company may disclose pro forma earnings per share amounts that
would have resulted if it had applied the statement in an earlier
period. The Company intends to adopt FAS 128 in its annual
financial statements for the year ended December 31, 1997.
The pro forma unaudited earnings per share amounts that would
have resulted assuming the Company had computed its earnings per
share in accordance with the provisions established by FAS 128 as
of the quarters ended June 30, 1997 and 1996 are as follows:
Six Months
Ended Six Months Ended
June 30, 1997 June 30, 1996
Basic earnings per share $0.82 $2.10
Diluted earnings per share $0.80 $2.05
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal
actions related to the normal business operations of the Company.
Management believes that the resolution of such legal actions
will not have a material impact upon the financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 20, 1997. The
sole matter voted on at the meeting was the election of
directors. All of the nominees were reelected as directors.
Proxies for the meeting were solicited to Regulation 14 under the
'34 Act. The voting tabulation as to each nominee was as
follows:
Name In Favor Withheld
Barnett, John D. 3,276,992 2,675
Crowe, Joseph F. 3,277,442 2,225
Demgen, Jeffrey H. 3,277,192 2,475
Fleron, Theodore A. 3,277,567 2,100
Grace, James M. 3,279,292 375
Mitte, Dale E. 3,274,682 2,275
Mitte, Roy F. 3,277,632 2,035
Nadler, Leonard A. 3,278,917 750
Parker, Frank 3,274,267 0
Payne, Eugene E. 3,279,267 400
Richmond, Thomas C. 3,277,517 2,150
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Form 10-K Annual Report of Registrant for the
year ended December 31, 1996 heretofore filed
by Registrant with the Securities and Exchange
Commission, which is hereby incorporated by
reference.
(b) Reports on Form 8-K:
None
<PAGE>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
/s/ James M. Grace
James M. Grace
Treasurer
Date: August 14, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 83,743
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 109,704
<CASH> 324
<RECOVER-REINSURE> 7,677
<DEFERRED-ACQUISITION> 43,243
<TOTAL-ASSETS> 289,434
<POLICY-LOSSES> 58,695
<UNEARNED-PREMIUMS> 104
<POLICY-OTHER> 43,444
<POLICY-HOLDER-FUNDS> 4,799
<NOTES-PAYABLE> 56,866
0
0
<COMMON> 1,169
<OTHER-SE> 95,246
<TOTAL-LIABILITY-AND-EQUITY> 289,434
20,281
<INVESTMENT-INCOME> 4,503
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 1,329
<BENEFITS> 9,206
<UNDERWRITING-AMORTIZATION> 2,282
<UNDERWRITING-OTHER> 6,142
<INCOME-PRETAX> 5,715
<INCOME-TAX> 1,265
<INCOME-CONTINUING> 4,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,449
<EPS-PRIMARY> .80
<EPS-DILUTED> .80
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
