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, 1998
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, 1998 and December 31, 1997................... 3
Consolidated Statements of Income
For the three and six month periods ended
June 30, 1998 and 1997................................ 5
Consolidated Statements of Cash Flows
For the three and six month periods ended
June 30, 1998 and 1997................................ 7
Notes to Consolidated Financial Statements...................11
Management's Discussion and Analysis of
Financial Conditions and Results of Operations.........13
PART II
Other Information..........................................23
Signature Page.............................................25
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
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June 30, Dec. 31,
ASSETS 1998 1997
(unaudited)
Investments:
Fixed maturities available for sale, at
market value (amortized cost of
$81,932 and $79,054 at 1998 and 1997,
respectively) $ 84,844 $ 81,854
Equity securities, at market value
(cost approximates $11) 4 4
Policy loans 2,961 2,748
Short-term investments 30,965 34,475
Total Investments 118,774 119,081
Cash and cash equivalents 1,210 508
Investment in affiliate 69,251 66,752
Accrued investment income 1,252 1,184
Agent advances and other receivables 6,520 6,474
Reinsurance receivables 12,306 11,086
Property and equipment, net 1,758 1,724
Deferred policy acquisition costs 46,926 45,122
Present value of future profits of
acquired businesses 31,168 34,437
Due and deferred premiums 11,380 11,134
Other assets 5,338 6,346
Separate account assets 520 476
Total Assets $306,403 $304,324
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
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LIABILITIES AND SHAREHOLDERS' EQUITY June 30, Dec. 31,
1998 1997
Liabilities: (unaudited)
Policy liabilities and contract holder
deposit funds:
Future policy benefits $ 60,776 $ 59,987
Contract holder deposit funds 44,693 44,304
Unearned premiums 90 90
Other policy claims and
benefits payable 4,258 5,315
109,817 109,696
Subordinated notes payable to affiliate 50,719 53,792
Deferred federal income taxes 22,889 21,631
Other liabilities 3,686 4,880
Separate account liabilities 520 476
Total Liabilities 187,631 190,475
Shareholders' Equity:
Common stock, $.20 par value,10,000,000
shares authorized; 5,845,300 issued and
5,427,965 shares outstanding in 1998 and
1997 1,169 1,169
Additional paid-in capital 7,225 7,225
Accumulated other comprehensive income 6,790 6,692
Retained earnings 104,010 99,185
119,194 114,271
Common treasury stock, at cost, 417,335
shares in 1998 and 1997 (422) (422)
Total Shareholders' Equity 118,772 113,849
Total Liabilities and Shareholders' Equity $ 306,403 $ 304,324
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIOD ENDED
JUNE 30, 1998 AND 1997
(in thousands of dollars, except for per share data)
(unaudited)
3 Months Ended
June 30,
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Revenues: 1998 1997
Net premiums $ 9,957 $ 10,268
Net investment income 1,983 2,283
Earned insurance charges 1,738 1,084
Other 350 732
Total 14,028 14,367
Benefits & expenses:
Policyholder benefits and expenses 3,796 4,531
Interest expense on contractholder
deposit funds 566 687
Amortization of present value of future
profits of acquired businesses 1,756 1,522
Amortization of deferred policy
acquisition costs 1,070 1,080
Operating expenses 3,500 3,333
Interest expense 682 856
Total 11,370 12,009
Income before federal income taxes and
equity in net earnings of affiliate 2,658 2,358
Provision for federal income taxes 733 680
Income before equity in net earnings of
affiliate 1,925 1,678
Equity in net earnings of affiliate 568 543
Net Income $ 2,493 $ 2,221
Net income per share:
Basic:
Weighted average common stock outstanding 5,428 5,428
Basic earnings per share $ 0.46 $ 0.41
Diluted:
Common stock and common stock equivalents 5,603 5,568
Diluted earnings per share $ 0.44 $ 0.40
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1998 AND 1997
(in thousands of dollars, except for per share data)
(unaudited)
6 Months Ended
June 30,
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Revenues: 1998 1997
Net premiums $ 19,721 $ 20,281
Net investment income 3,921 4,503
Earned insurance charges 3,165 2,330
Other 697 1,329
Total 27,504 28,443
Benefits & expenses:
Policyholder benefits and expenses 7,904 9,206
Interest expense on contractholder
deposit funds 1,206 1,270
Amortization of present value of future
profits of acquired businesses 3,269 3,074
Amortization of deferred policy
acquisition costs 2,266 2,282
Operating expenses 6,599 6,142
Interest expense 1,401 1,739
Total 22,645 23,713
Income before federal income taxes and
equity in net earnings of affiliate 4,859 4,730
Provision for federal income taxes 1,133 1,266
Income before equity in net earnings of
affiliate 3,726 3,464
Equity in net earnings of affiliate 1,100 985
Net Income $ 4,826 $ 4,449
Net income per share:
Basic:
Weighted average common stock outstanding 5,428 5,428
Basic earnings per share $ 0.89 $ 0.82
Diluted:
Common stock and common stock equivalents 5,603 5,568
Diluted earnings per share $ 0.86 $ 0.80
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED
JUNE 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
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3 Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,493 $ 2,221
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization of present value of future
profits of acquired businesses 1,756 1,522
Amortization of deferred policy
acquisition costs 1,070 1,080
Equity in undistributed earnings of
affiliate (1,253) (1,328)
Changes in assets and liabilities:
Increase in accrued investment income (262) (160)
Increase in agent advances and other
receivables (524) (13)
Policy acquisition costs deferred (2,134) (2,001)
Increase in policy liabilities
and contractholder deposit funds 424 127
Increase in due and deferred premiums (178) (100)
Increase (decrease) in other liabilities 592 (831)
Increase in policy loans (139) (120)
Increase in deferred federal income taxes 930 800
(Increase) decrease in other assets (172) 1,325
Other, net (207) (703)
Net cash provided by operating activities $ 2,396 $ 1,819
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED
June 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
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3 Months Ended
June 30,
1998 1997
CASH FLOWS FROM INVESTING ACTIVITIES
Investments purchased $ -0- $ 2
Proceeds from sales and maturities of
Investments 1,711 272
Net change in short-term investments (2,164) 1,847
Purchases & retirements of equipment, net (34) (2,388)
Net cash used in investing activities (487) (267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (1,537) (1,537)
Net cash used in financing
activities (1,537) (1,537)
Net increase in cash and cash
equivalents 372 15
Cash and cash equivalents, beginning of
period 838 309
Cash and cash equivalents, end of period $ 1,210 $ 324
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
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6 Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,826 $ 4,449
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization of present value of future
profits of acquired businesses 3,269 3,074
Amortization of deferred policy
acquisition costs 2,266 2,282
Equity in undistributed earnings of
affiliate (2,473) (2,558)
Changes in assets and liabilities:
(Increase) decrease in accrued investment
income (68) 14
Increase in agent advances and other
receivables (1,266) (376)
Policy acquisition costs deferred (4,070) (4,192)
Increase in policy liabilities
and contractholder deposit funds 121 975
Increase in due and deferred premiums (246) (112)
Decrease in other liabilities (1,194) (1,296)
Increase in policy loans (213) (199)
Increase in deferred federal income taxes 1,258 732
Decrease in other assets 1,008 1,062
Other, net (209) (483)
Net cash provided by operating activities $ 3,009 $ 3,372
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED
June 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
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6 Months Ended
June 30,
1998 1997
CASH FLOWS FROM INVESTING ACTIVITIES
Investments purchased $ (9,082) $ (3,056)
Proceeds from sales and maturities of
Investments 6,372 3,601
Net change in short-term investments 3,510 2,143
Purchases & retirements of equipment, net (34) (2,970)
Net cash provided by (used in)
investing activities 766 (282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (3,073) (3,074)
Net cash used in financing
activities (3,073) (3,074)
Net increase in cash and cash
equivalents 702 16
Cash and cash equivalents, beginning of
period 508 308
Cash and cash equivalents, end of period $ 1,210 $ 324
</TABLE>
The accompanying notes are an integral part of the
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, 1997
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.
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130 (SFAS), " Reporting Comprehensive Income."
The new standard, which is effective for financial statements
issued for periods ending after December 15, 1997,
established standards for reporting, in addition to net income,
comprehensive income and its components including, as applicable,
foreign currency income, minimum pension liability adjustments
and unrealized gains and losses on certain investments
in debt and equity services. Upon adoption, the Company is
also required to reclassify financial statements for
earlier periods provided for comparative purposes. The Company
adopted this standard in the first quarter of 1998. Total
comprehensive income for the six months ended June 30, 1998 and
June 30,1997 is $4.9 million and $4.3 million, respectively.
The following is a reconciliation of accumulated other
comprehensive income from December 31, 1997 to June 30, 1998 (in
thousands):
Net Total
Net unrealized appreciation accumulated
gain on investments (depreciation) other
in fixed maturities of equity comprehensive
available for sale securities income
Balance at December 31, 1997 $ 6,660 $ 32 $ 6,692
Current Period Change 133 (35) 98
Balance at June 30, 1998 $ 6,793 $ ( 3) $ 6,790
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
New Accounting Pronouncements, continued
In June 1997, the FASB issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which
establishes standards for reporting information about
operating segments. Generally, FAS 131 requires that
financial information be reported on the basis that is used
internally for evaluating performance. The Company adopted FAS
131 effective January 1, 1998, and comparative information
for earlier years will be restated. This statement does not need
to be applied to interim financial statements in the initial year
of application. The adoption of FAS No. 131 did not have a
material impact on the Company's results of operations, liquidity
or financial position.
In February 1998, the FASB issued FAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits,"
which revises current disclosure requirements for
employers' pension and other retiree benefits. FAS 132 does not
change the measurement or recognition of pension or other
postretirement benefit plans. The Company adopted FAS 132
effective January 1, 1998, with restatement of disclosures for
earlier years required. The adoption of FAS No. 132 is not
expected to have a material impact on the Company's results of
operations, liquidity or financial position.
In December 1997, the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting for
insurance-related assessments. The Company is required to
adopt SOP 97-3 effective January 1, 1999. Previously issued
financial statements should not be restated unless the SOP is
adopted prior to the effective date and during an interim period.
In June 1998, the FASB issued FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for
hedging activities. FAS 133 is applicable to financial
statements for all fiscal quarters of fiscal years beginning
after June 15, 1999. The operations of the Company are not
affected by the provisions of FAS No. 133.
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operation:
For the six-month period ended June 30, 1998, Financial Industries
Corporation's ("FIC") net income was $4,826,000 (basic earnings of
$0.89 per common share, or diluted earnings of $0.86 per common
share) as compared to $4,449,000 (basic earnings of $0.82 per
common share, or diluted earnings of $0.80 per common share) in the
first six months of 1997. Earnings per share are stated in
accordance with the requirements of FAS No. 128, which establishes
two measures of earnings per share: basic earnings per share and
diluted earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share reflect the potential dilution that
would occur if securities or other contracts to issue common stock
were converted or exercised. For the six month period ended June
30, 1997, earnings per share have been restated to reflect the
effect of FAS No. 128.
Results of Operations
FIC's income from operations - as determined before federal income
tax and equity in net earnings of its affiliate, InterContinental
Life Corporation - for the six-month period ended June 30, 1998,
was $4,859,000 (on revenues of $27,504,000), as compared to
$4,730,000 (on revenues of $28,443,000) in the first six months of
1997.
Premiums for the first six months of 1998, net of reinsurance
ceded, were $19.7 million, as compared to $20.3 million in the
first six months of 1997. Policyholder benefits and expenses were
$7.9 million in the 1998 period, as compared to $9.2 million in the
first six months of 1997.
As of June 30, 1998, the market value of the fixed maturities
available for sale segment was $84.8 million as compared to an
amortized value of $81.9 million, or an unrealized gain of $2.9
million. The increase reflects unrealized gains on such investments
related to changes in interest rates subsequent to the purchase of
such investments. There is no assurance that this gain will be
realized in the future. The net of tax effect of this increase
($1.9 million at June 30, 1998) has been recorded as an increase in
shareholders' equity. As required under the provisions of FAS No.
130, the determination of "Accumulated other comprehensive income"
includes separate identification of the change in values which
occurred during the current period.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
Equity in Net Income of InterContinental Life Corporation
General:
Prior to the acquisition of Family Life Insurance Company ("Family
Life") in June of 1991, FIC's primary involvement in the life
insurance business was through its equity interest in
InterContinental Life Corporation ("ILCO"). For the six-month
period ended June 30, 1998, the Company's equity in the net
earnings of ILCO, net of federal income tax, was $1,100,000, as
compared to $985,000 for the first six months of 1997.
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 ("Option Agreement"). 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 45%) 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% of the
issued and outstanding shares of ILCO's common stock. The Option
Agreement provides that it continues in effect as long as FIC
guarantees indebtedness of ILCO. The current Senior Loan of ILCO is
scheduled to be fully repaid on October 1, 1998. Accordingly,
unless ILCO's Senior Loan is extended, or ILCO otherwise incurs
indebtedness which is guaranteed by FIC, FIC's rights under the
Option Agreement would expire on October 1, 1998.
As of June 30, 1998, the market value of ILCO's fixed maturities
available for sale segment was $488.2 million as compared to an
amortized cost of $470.2 million, or an unrealized gain of $18
million. The increase reflects unrealized gains on such investments
related to changes in interest rates subsequent to the purchase of
such investments. Since FIC owns approximately 45% of the common
stock of ILCO, the net of tax effect of this increase ($5.3 million
at June 30, 1998) is included in "Accumulated other comprehensive
income" on the Consolidated Balance Sheets and has been recorded as
an increase in shareholders' equity.
Liquidity and Capital Resources of ILCO:
ILCO is a holding company whose principal assets consist of the
common stock of Investors Life Insurance Company of North America
("Investors-NA") and its subsidiary, Investors Life Insurance
Company of Indiana (formerly InterContinental Life Insurance
Company). ILCO's primary source of funds consists of payments
under the surplus debentures from Investors-NA.
On June 30, 1998, ILCO, through a subsidiary, acquired Grinnell
Life Insurance Company ("Grinnell Life") for a base purchase price
of $16.4 million, subject to certain post-closing adjustments. As
part of the transaction, Grinnell Life was immediately merged with
and into that subsidiary, with that subsidiary being the surviving
entity. The operations of ILCO for the six-month period ending
June 30, 1998 do not reflect the operations of Grinnell Life.
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 Meridian
Life Insurance Company (which company was subsequently merged into
another life insurance subsidiary of ILCO). As of December 31,
1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by
ILCO of the payment originally scheduled for January 1, 1998. A
regular payment, in the amount of $3.7 million was made on April 1,
1998 and a prepayment of the July 1st installment, in the amount of
$3.7 million, was made on June 30, 1998. As a result, the
outstanding principal balance of ILCO's senior loan obligations was
$3.6 million at June 30, 1998. The final installment on the ILCO
senior loan obligation is due on October 1, 1998.
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 their
terms were previously approved by the Mississippi Insurance
Commissioner. In connection with the 1993 merger of Standard Life
into Investors-NA, the obligations of the surplus debentures were
assumed by Investors-NA. As of June 30, 1998, the outstanding
principal balances of the surplus debentures were $4.7 million and
$14.9 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, 1998, the
statutory capital and surplus of Investors-NA was $69.1 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. Under the "greater
of" standard, an insurer may pay a dividend in an amount equal to
the greater of (i) 10% of policyholder surplus or (ii) the
insurer's net gain from operations for the previous year. As of
June 30, 1998, Investors-NA had earned surplus of $35.6 million.
Since the law applies only to dividend payments, the ability of
Investors-NA to make principal and interest payments under the
Surplus Debentures is not affected. ILCO does not anticipate that
Investors-NA will have any difficulty in making principal and
interest payments on the Surplus Debentures in the amounts
necessary to enable ILCO to service the Senior Loan for the
foreseeable future.
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 $17.9 million at June 30, 1998.
The Form 10-Qs of ILCO for the six-month periods ended June 30,
1998 and June 30, 1997, 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.
Liquidity and Capital Resources:
FIC is a holding company whose principal assets consist of the
common stock of Family Life and its equity ownership in ILCO.
FIC's primary sources of capital consists of cash flow from
operations of its subsidiaries.
The cash requirements of FIC and its subsidiaries consist primarily
of its service of the indebtedness created in connection with its
ownership of Family Life. As of June 30, 1998, the outstanding
balance of such indebtedness was $50.7 million on the Notes granted
by Investors-NA.
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,
1998, the statutory capital and surplus of Family Life was $31.5
million, an amount substantially in excess of the surplus floor.
As of June 30, 1998, the principal balance of the Surplus Debenture
was $27.4 million. The funds required by Family Life to meet its
obligations under the terms of the Surplus Debenture are generated
primarily from premium payments from policyholders, investment
income and the proceeds from the sale and redemption of portfolio
investments.
Washington's insurance code includes the "greater of" standard for
dividends but has requirements that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner
and that cash dividends may be paid only from earned surplus.
Family Life does not presently have earned surplus as defined by
the regulations adopted by the Washington Insurance Commissioner
and, therefore, is not permitted to pay cash dividends. However,
since the new law applies only to dividend payments, the ability of
Family Life to make principal and interest payments under the
Surplus Debenture is not affected. The Company does not anticipate
that Family Life will have any difficulty in making principal and
interest payments on the Surplus Debenture in the amounts necessary
to enable Family Life Corporation to service its indebtedness for
the foreseeable future.
The sources of funds for Family Life consist of premium payments
from policyholders, investment income and the proceeds from the
sale and redemption of portfolio investments. These funds are
applied primarily to provide for the payment of claims under
insurance and annuity policies, operating expenses, taxes,
investments in portfolio securities, shareholder dividends and
payments under the provisions of the Surplus Debenture.
FIC's net cash flow provided by operating activities was $3.0 in
the first six months of 1998, as compared to $3.4 million in the
first six months of 1997. Net cash flow used in financing
activities was $(3.1) million in the 1998 period, as compared to
$(3.1) million in the first six months of 1997.
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 principal balance at June 30, 1998 of $3.6 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, 1998, the Company's investment assets totaled $118.8
million, as compared to $119.1 million as of December 31, 1997.
The level of short-term investments at June 30, 1998 was $31.0
million, as compared to $34.5 million as of December 31, 1997. The
fixed maturities available for sale portion represents $84.8
million of investment assets as of June 30, 1998, as compared to
$81.9 million at December 31, 1997. The amortized cost of fixed
maturities available for sale as of June 30, 1998 was $81.9 million
representing a net unrealized gain of $2.9 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, 1998,
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.
Year 2000 Compliance
The Company and its subsidiaries utilize a centralized computer
system to process policyholder records and financial information.
In addition, the Company uses non-centralized computer terminals
in connection with its operations. The software programs used in
connection with these systems will be affected by what is referred
to as the "Year 2000 problem" or "Y2K problem". This refers to the
limitations of the programming code in certain existing software
programs to recognize date sensitive information as the year 2000
approaches. Unless modified prior to the year 2000, such systems
may not properly recognize such information and could generate
erroneous data or cause a system to fail to operate properly.
The Company has evaluated its centralized computer systems and has
developed a plan to reach Y2K compliance. A central feature of
the plan is to convert most of the centralized systems to a common
system which is already in compliance with Y2K requirements. The
Company is in the process of this systems conversion and
anticipates that the project will be completed in advance of the
year 2000. Based on its initial analysis, the Company expects that
the cost of implementing and completing the Plan will result in a
after-tax expense of approximately $760,000 for the three-year
(1997 - 1999) conversion period.
The Plan calls for an upgrade of the Family Life's administrative
systems by changing individual lines of computer code in order to
modify current operating software such that it will become Y2K
compliant. This process includes approximately 29 sub-systems which
provide data input to the main systems. The administrative systems
which are not modified will be converted onto the Company's CK/4
System, a system designed to be Y2K compliant according to the
representations of the vendor.
The systems which administer a substantial number of Family Life
policies will be modified rather than converted. The modification
of the PMS system (administering approximately 122,000 policies for
Family Life) was completed in March, 1998. The conversion of the
Cypros AP system (administering approximately 21,400 policies for
Family Life) is scheduled for completion at the end of September,
1999.
A small number of Family Life policies are administered by systems
which also administer policies for ILCO and its subsidiaries. With
regard to ILCO and its subsidiaries, the ALIS system (administering
approximately 49,280 policies for Investors-NA) was converted to
CK/4 in January of 1998. The conversion of the Life 70 system
(administering approximately 17,285 policies for Investors-IN) is
scheduled for completion in April, 1999. The modification of the
Lifecomm-B system which is responsible for the 19,205 policies
assumed after ILCO's acquisition of State Auto Life is also
scheduled for completion in April, 1999. The conversion of the
Lifecomm-A system (administering approximately 65,266 policies for
Investors-NA) is now scheduled for completion in September of 1999.
In 1997, FIC Computer Services - a subsidiary of FIC which provides
data processing services for the Company and its affiliates -
purchased new mainframe hardware and accompanying operating
software, which the vendor has represented to be Y2K compliant.
This hardware and software will be tested in 1998. The telephone
system has been tested by the maintenance provider for that system
and the Company has received assurances that the telephone system
is Y2K compliant.
With respect to non-centralized systems (i.e. desktop computers),
the Company anticipates that updated software releases will be
commercially available well in advance of the year 2000.
Accordingly, to the extent that such systems rely on date sensitive
information, the Company expects that the effort needed to correct
for Y2K problems will be less time intensive than the effort
needed to achieve compliance for its centralized systems.
Accounting Developments
In February 1997, the Financial Accounting Standards Board (FASB)
issued Financial Accounting Standard (FAS) No. 128, "Earnings Per
Share," which revises the standards for computing earnings per
share previously prescribed by APB Opinion No. 15, "Earnings Per
Share." The Statement establishes two measures of earnings per
share: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were converted or exercised.
The Statement requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all
entities with potential dilutive securities outstanding. The
Statement also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation.
The Statement is effective for interim and annual periods ending
after December 15, 1997. The Company adopted FAS No. 128 in its annual
financial statements for the year ended December 31, 1997.
In June, 1997, the FASB issued FAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting
and display of comprehensive income and its components in a
financial statement with the same prominence as other financial
statements. Total comprehensive income is required to be reported
in condensed interim financial statements. Comprehensive income is
defined as net income adjusted for changes in stockholders' equity
resulting from events other than net income or transactions related
to an entity's capital instruments. The Company adopted FAS 130
effective January 1, 1998, with reclassification of financial
statements for earlier years.
In June, 1997, the FASB issued FAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which
establishes standards for reporting information about operating
segments. Generally, FAS No. 131 requires that financial
information be reported on the basis that it is used internally for
evaluating performance. The Company adopted FAS 131 effective
January 1, 1998 and comparative information for earlier years will
be restated. This statement does not need to be applied to interim
financial statements in the initial year of application. The
adoption of FAS No. 131 did not have a material impact on the
Company's results of operations, liquidity or financial position.
In February, 1998, the FASB issued FAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits",
which revises current disclosure requirements for employers'
pension and other retiree benefits. FAS No. 132 does not change
the measurement or recognition of pension or other postretirement
benefit plans. The Company adopted FAS No. 132 effective January
1, 1998, with the effect of such adoption to be reflected in year-
end financial statements. The adoption of FAS No. 132 is not
expected to have a material impact on the Company's results of
operations, liquidity or financial position.
In December, 1997, the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments", which
provides guidance on accounting for insurance-related assessments.
The Company is required to adopt SOP 97-3, effective January 1,
1999. Previously issued financial statements should not be
restated unless the SOP is adopted prior to the effective date and
during an interim period. The adoption of SOP 97-3 is not expected
to have a material impact on the Company's results of operations,
liquidity or financial position.
In June, 1998, the FASB issued FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133 is applicable to financial
statements for all fiscal quarters of fiscal years beginning after
June 15, 1999. The operations of the Company are not affected by
the provisions of FAS No. 133.
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.
ILCO and Investors-NA are defendants in two lawsuits which were
filed in Travis County, Texas in which the named plaintiffs in the
suit, 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 a class action as to similarly situated
individuals. A more detailed discussion of these two lawsuits is
contained in Part II, Item 1 Legal Proceedings of the Company's
Form 10-Q for the three-month period ended March 31, 1998 and the
Company's Form 10-K for the year ended December 31, 1997.
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 the Shareholders was held on May 19,
1998. The only matter submitted at the meeting to a vote of
the Shareholders was the election of directors. All of the
nominees were elected as directors. The nominees included one
individual, Dr. Jerome H. Supple, who had not previously
served as a director of the Company.
The voting tabulation as to each nominee was as follows:
Name In Favor Withheld
Barnett, John D. 3,496,166 17,919
Crowe, Joseph F. 3,494,921 19,164
Demgen, Jeffrey H. 3,494,176 19,909
Fleron, Theodore A. 3,494,751 19,324
Grace, James M. 3,494,801 19,254
Mitte, Dale E. 3,494,361 19,724
Mitte, Roy F. 3,490,111 23,074
Parker, Frank 3,494,261 19,824
Payne, Dr. Eugene E. 3,496,726 17,359
Richmond, Thomas C. 3,494,721 19,364
Supple, Dr. Jerome H. 3,494,581 19,504
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, 1997 heretofore filed by Registrant with the
Securities and Exchange Commission, which is hereby
incorporated by reference.
(b) Reports on Form 8-K:
None
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
/s/ James M. Grace
James M. Grace, Treasurer
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q FOR
THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE.
</LEGEND>
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<PERIOD-END> JUN-30-1998
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0
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