[FIC LOGO]
Financial Industries Corporation
Austin Centre, 701 Brazos
Austin, Texas 78701
Dear Shareholder:
You are invited to attend the Annual Meeting of Shareholders of Financial
Industries Corporation, which will be held at the Austin Centre, 701 Brazos,
Austin, Texas 78701 on May 18, 1999, at 10:00 a.m. local time. For those of you
who cannot be present at this meeting, we urge that you participate by
indicating your choices on the enclosed proxy and completing and returning it to
us in the enclosed postage paid envelope at your earliest convenience. By
returning your proxy promptly, you will assist us in reducing the Company's
expenses relating to the meeting. You can revoke your signed proxy at any time
before it is used.
We appreciate your support and cooperation in returning the enclosed proxy.
Cordially,
Roy F. Mitte
Chairman, President and
Chief Executive Officer
<PAGE>
Financial Industries Corporation
Austin Centre, 701 Brazos
Austin, Texas 78701
NOTICE OF ANNUAL MEETING
TO BE HELD MAY 18, 1999
Notice is hereby given that the 1999 Annual Meeting of Shareholders of Financial
Industries Corporation is scheduled to be held at the Austin Centre, 701 Brazos,
Austin, Texas 78701 on May 18, 1999, 10:00 a.m., local time, for the following
purposes:
1. The election of eleven Directors for the ensuing year.
2. Such other business that may properly come before the meeting
or any adjournment thereof.
Only those Shareholders of record at the close of business on April 12 , 1999
(the "Record Date") will be entitled to notice of and vote at the meeting or any
adjournment thereof.
The Proxy Statement accompanies this notice.
April 16, 1999
By Order of the Board of Directors
Eugene E. Payne
Secretary
YOUR VOTE IS IMPORTANT
We hope that you will be able to attend the meeting in person. IF YOU DO NOT
EXPECT TO ATTEND IN PERSON, PLEASE SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT
PROMPTLY in the enclosed envelope for which no postage is necessary if mailed in
the United States. It will assist us in reducing the expenses of the Annual
Meeting if shareholders who do not attend in person return the signed proxy
promptly. You may revoke your proxy at any time before it is voted.
<PAGE>
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS OF
Financial Industries Corporation
Austin Centre o 701 Brazos o Austin, Texas 78701
This Proxy is furnished in connection with the solicitation of proxies by the
Board of Directors of Financial Industries Corporation (FIC or the Company) for
use at the Annual Meeting of Shareholders to be held May 18, 1999, at the Austin
Centre, 701 Brazos, Austin, Texas 78701. Solicitation of proxies may be made by
mail and telephone and the expenses will be borne by FIC. The Company intends to
reimburse broker-dealers and others for forwarding the proxy materials to
beneficial owners of FIC's Common Stock. The approximate date on which this
Proxy Statement and the enclosed Form of Proxy will be sent or given to
shareholders is April 16, 1999.
A copy of FIC's Annual Report of Shareholders for the year ended December 31,
1998, including financial statements, has either been previously forwarded to
Shareholders or is included with this Proxy Statement.
A copy of the Company's Annual Report to the Securities and Exchange Commission
on form 10-K, including Financial Statements and Financial Schedules, may be
obtained by Shareholders without charge upon the receipt of a written request
addressed to Robert S. Cox, Financial Industries Corporation, Austin Centre, 701
Brazos, Austin, Texas 78701.
Only shareholders of record on the books of FIC at the close of business on
April 12, 1999, will be entitled to vote at the Annual Meeting. At the close of
business on such date, there were outstanding and entitled to vote 5,054,661
shares of Common Stock. Each shareholder of FIC Common Stock is entitled to one
vote for each share standing in his or her name on the books of the Company, as
of the Record Date, on all business to come before the meeting. However, in
voting for Directors, each shareholder may cumulate votes for the election of
Directors for those candidates whose names have been placed in nomination; that
is, each Shareholder may cast as many votes as there are Directors to be elected
multiplied by the number of shares then registered in his or her name and to
cast all such votes for one candidate or distribute such votes among the
nominees for Director in accordance with the Shareholder's choice. Each share
will be entitled to eleven (11) votes on a cumulative basis in voting for
Directors. The right to vote cumulatively may be exercised only in the event
that a Shareholder gives written notice of his decision to vote cumulatively to
the Secretary of FIC on or before the day preceding the Annual Meeting. If any
Shareholder complies with that written notice requirement, all Shareholders may
cumulate their votes. FIC's management does not intend to request cumulative
voting of their shares and is not aware of an intention by any Shareholder to do
so. However, should any Shareholder elect to vote cumulatively, the person
authorized to vote shares represented by executed proxies, if authority to vote
for the election of Directors is not withheld, will have full discretion and
authority to vote cumulatively and to allocate votes among any or all of the
Board of Directors' nominees as they may determine or, if authority to vote for
a specific candidates has been withheld, among those nominees for whom authority
to vote has not been withheld.
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The proxy solicited by this Proxy Statement is revokable at any time prior to
the exercise thereof at the meeting by written notice submitted to Eugene E.
Payne, Secretary, Financial Industries Corporation, Austin Centre, 701 Brazos,
Austin, Texas 78701 or by delivery of a subsequent proxy. All shares represented
by executed and unrevoked proxies will be voted in accordance with instructions
contained therein. Proxies submitted without specification will be voted to
elect the nominees for Directors named herein.
ELECTION OF DIRECTORS
The following eleven nominees are proposed for election as Directors to serve
until the next Annual Meeting of Shareholders or until their successors are
elected and qualified. All nominees are now Directors of the Company. Proxies
solicited by the Board of Directors will be voted in favor of the election of
these nominees unless authorization to do so is withheld in the proxy. If any
nominee for election as Director is unable or unwilling to serve, which the
Board of Directors does not anticipate, the persons acting under the proxy will
vote for such other person as management may recommend. An affirmative vote by a
majority of those shares constituting at least a quorum at the Annual Meeting of
Shareholders is required for the election of Directors. The Board of Directors
recommends a vote "FOR" each of the nominees.
The names and ages of the nominees, their principal occupations or employment
during the past five years and other data regarding them are set forth on the
following pages. The data supplied below is based on information provided by the
nominees, except to the extent that such data is known to the Company.
Name Age Director Director and Other Information
Since
John D. 55 1991 Vice President-Investments, Investment
Barnett Professionals, Inc. Since August 1996.
Vice President-Investments of Prudential
Securities from April 1983 to July 1996.
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<PAGE>
Name Age Director Director and Other Information
Joseph F. 60 1992 1992 to Vice President of FIC from
Crowe February 29, 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 from May 1991 to October 1997.
Executive Vice President of Investors
Life Insurance Company of North America,
Family Life Insurance Company and
InterContinental Life Insurance Company
from June 1991 to January 1997. Director
of Investors Life Insurance Company of
North America, Family Life Insurance
Company and InterContinental Life
Insurance Company from June 1991 to
January 1997. Executive Vice President
of Investors Life Insurance Company of
Indiana from February 1995 to January
1997. Director of Investors Life
Insurance Company of Indiana from
February 1995 to January 1997. From
December 1986 to March 1991, Executive
Vice President of Personal Financial
Security Division of Aetna Life &
Casualty Company.
Jeffrey H. 46 1995 Director of FIC since May 1995. Vice
Demgen 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 Investors-IN (formerly
known as InterContinental Life Insurance
Company) since August 1996. Executive
Vice President and Director of Investors
Life Insurance Company of Indiana from
August 1996 to December 1997. Senior
Vice President of United Insurance
Company of America from September 1984
to July 1992.
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<PAGE>
Name Age Director Director and Other Information
Theodore A. 59 1996 Vice President and Director of FIC since
Fleron 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 Investors-IN, formerly
known as InterContinental Life Insurance
Company since July 1992. Vice President,
General Counsel, Assistant Secretary and
Director of Investors Life Insurance
Company of North America and Investors-
IN, formerly known as 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 from June 1995 to
December 1997. Senior Vice President,
General Counsel, Director and Assistant
Secretary of Family Life Insurance
Company since August 1996.
James M. 55 1976 Vice President, Treasurer and Director
Grace of FIC. Vice President and Treasurer of
ILCO since January 1985. Executive Vice
President, Treasurer and Director of
Investors-IN, formerly known as
InterContinental Life Insurance Company
since 1989. Director, 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 from February 1995 to
December 1997.
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<PAGE>
Name Age Director Director and Other Information
Dale E. Mitte 64 1994 Director of FIC since January 1994.
Senior Vice President and Chief
Underwriter from January 1993 to March
5, 1999 (when he retired from active
service) of Investors Life Insurance
Company of North America and Investors
Life Insurance Company of Indiana,
formerly known as InterContinental Life
Insurance Company. Director of Investors
Life Insurance Company of North America
and Investors Life Insurance Company of
Indiana since December, 1988. Vice
President, Chief Underwriter from
December 1988 to January 1993 of
Investors Life Insurance Company of
North America and Investors Life
Insurance Company of Indiana. Senior
Vice President and Chief Underwriter
from June 1991 to March 5, 1999 of
Family Life Insurance Company. Director
since June, 1991 of Family Life
Insurance Company.
Roy F. Mitte 67 1976 Chairman of the Board, President and
Chief Executive Officer of FIC.
Chairman of the Board, President and
Chief Executive Officer of ILCO and
Investors-IN, formerly known as
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 from
February 1995 to December 1997.
Chairman, ILG Securities Corporation
since December 1988.
Frank Parker 70 1994 President, Gateway Tugs, Inc., which is
located in Brownsville, Texas and is
engaged in operating and chartering
harbor and intracoastal tug boats, for
more than the last five years
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<PAGE>
Name Age Director Director and Other Information
Eugene E. 56 1992 Vice President, Secretary and Director
Payne of FIC. Vice President of ILCO since
December 1988 and Secretary 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
Investors-IN, formerly known as
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 from February 1995 to December
1997.
Thomas C. 56 1996 Director of FIC since August 1996.
Richmond 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 Investors-IN, formerly
known as 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 from
June 1995 to December 1997.
Jerome H. 62 1998 Director of FIC since 1998. President
Supple and Professor of Chemistry, Southwest
Texas State University, San Marcos,
Texas since 1989. Director, Frost Bank.
Dr. Supple is also active in a number of
professional and educational
organizations including: American
Association of State Colleges and
Universities, Board of Directors;
American Council of Education/Commission
on Governmental Relations; Commission
on Colleges - Class 1993/Southern
Association of Colleges and Schools;
National Collegiate Athletic
Association President's Commission;
Association of Texas Colleges and
Universities, Board of Directors;
American Association for the Advancement
of Science; and American Association of
Higher Education.
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<PAGE>
EXECUTIVE OFFICERS
The following table sets forth the names and ages of the persons who currently
serve as the Company's executive officers together with all positions and
offices held by them with the Company. 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 67 Chairman of the Board,
President and Chief Executive Officer
James M. Grace 55 Vice President and Treasurer
Eugene E. Payne 56 Vice President and Secretary
Jeffrey H. Demgen 46 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.
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 Forms 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 reviews of the copies of such forms furnished to the Company, or
written representatives that no Forms 5 were required, the Company believes that
during the period from January 1, 1998 through December 31, 1998, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were compiled with.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 1,493,216 29.54%
Family Life Insurance Company
701 Brazos Street
Suite 1400
Austin, Texas 78701 272,000 5.38%
InterContinental Life
Corporation
701 Brazos
Suite 1400,
Austin, Texas 78701 690,161 (1) 13.65% (2)
Investors Life Insurance
Company of North America
701 Brazos
Suite 1400
Austin, Texas 78701 690,161 (1) 13.65% (2)
Heartland Advisors, Inc.
790 North Milwaukee St.
Milwaukee, WI 53202 438,500 8.68% (3)
(1) Of such shares, 145,500 shares are owned by Investors-NA, 44,250 shares are
owned by Investors- IN, and 500,411 shares are issuable upon exercise of an
option held by Investors-NA. Investors-NA is a direct subsidiary of ILCO.
Investors-IN is a direct subsidiary of Investors-NA.
(2) Assumes that outstanding stock options or warrants held by other persons
have not been exercised.
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<PAGE>
(3) As reported to the Company on a Schedule 13(G) filed by Heartland Advisors,
Inc. ("Heartland"). According to the Schedule 13(G), the shares are held
for various investment advisory accounts and the interest of one such
account (Heartland Value Fund, a registered investment company) is more
than 5% of the common stock of FIC. A Schedule 13(G) was filed on January
27, 1998, reporting beneficial ownership of 320,400 shares. A Schedule
13(G)/A was filed on January 21, 1999, reporting beneficial ownership of an
additional 118,100 shares.
The following table contains information as of March 15, 1999 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. 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 2,000 *
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 1,493,216 (1,2) 29.54%
Frank Parker 10,000 *
Eugene E. Payne -0- *
Thomas C. Richmond 1,100 *
Jerome H. Supple 200 *
All Executive Officers,
and Directors as
a group (11 persons) 1,514,116 (1,2) 29.95 %
(1) As of March 15, 1999, Mr. Mitte, jointly with his wife Joann, owns
1,493,216 common shares of Financial Industries Corporation ("FIC"). The
holdings of Mr. Mitte of FIC's common stock constitutes 29.54% of the
outstanding common stock of the Company. In addition, Mr. Mitte holds the
position of Chairman, President and Chief Executive Officer of ILCO.
(2) No executive officer or director holds any options to acquire FIC Common
Stock. Messrs. Roy Mitte, Grace, Payne and Demgen are executive officers
and/or directors of ILCO and beneficially
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<PAGE>
owned approximately 47.12 % of the outstanding shares of ILCO common stock
as of March 15, 1999. Since FIC beneficially owns 44.74 % of ILCO's 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 690,161 shares of FIC Common Stock
(13.65% of the outstanding shares) as of March 15, 1999.
* Less than 1%.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Summary Compensation Table
The following table sets forth information concerning the compensation of the
Company's Chief Executive Officer and each of the three other persons who were
serving as executive officers of the Company at the end of 1998 and received
cash compensation exceeding $100,000 during 1998:
Annual Compensation
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Long Term Compens-
Name and ation Awards All Other
Principal Stock Options Compensa-
Position Year Salary(1) Bonus(4) Other(2) (Shares) tion
Roy F. Mitte,
Chairman,
President and 1998 $ 503,500 $2,500,000 -0- -0- -0-
Chief Executive 1997 $ 503,500 $1,500,000 -0- -0- -0-
Officer 1996 $ 503,500 -0- -0- -0- $2,446,397(3)
James M.
Grace, Vice 1998 195,000 25,000 -0- -0- -0-
President and 1997 195,000 40,000 -0- -0- -0-
Treasurer 1996 195,000 15,000 -0- -0- -0-
Eugene E.
Payne, Vice 1998 195,000 20,000 -0- -0- -0-
President and 1997 195,000 40,000 -0- -0- -0-
Secretary 1996 195,000 15,000 -0- -0- -0-
Jeffrey H. 1998 $ 145,384 $ 15,000 -0- -0- -0-
Demgen, Vice 1997 $ 117,884 $ 30,000 -0- -0- -0-
President7 1996 $ 102,500 $ 7,500 -0- -0- -0-
</TABLE>
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<PAGE>
(1) The salaries and bonuses set forth in the table were paid by ILCO, except
that FIC and/or Family Life authorized payment of a portion of Mr. Mitte's
salary in each of 1996, 1997 and 1998. The executive officers of FIC have
also been executive officers of Family Life, the insurance subsidiary of
FIC, and ILCO and its insurance subsidiaries. FIC and/or Family Life
reimbursed ILCO (or, in the case of Mr. Mitte, authorized payment of) the
following amounts as FIC's or Family Life's share of the executive
officers' cash compensation and bonus for 1996, 1997 and 1998: (i) Mr.
Mitte: $216,857, $999,746 and $1,111,821, respectively;(ii) Mr. Grace:
$83,987, $68,150 and $64,152, respectively; (iii) Dr. Payne: $83,987,
$68,150 and $61,447, respectively; and (iv) Mr. Demgen: $46,125 and $66,548
and $72,173 , respectively.
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 ILCO'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 ILCO's common stock; and (iii) $313,960 for the federal
income tax reimbursement relating to the 1996 options cancellation
described above in this footnote.
(4) The data in this column represents the amount of annual bonus awarded. The
bonuses for Mr. Grace, Dr. Payne and Mr. Demgen for the year 1997 represent
amounts paid in 1997, but include the bonuses awarded with respect to the
years 1996 and 1997. Dr. Payne elected to defer the amounts shown for 1997
and 1998 into the Company's Non-Qualified Deferred Compensation Plan. The
Plan was established in 1997 to permit Mr. Grace and Dr. Payne to defer a
portion of their compensation. Under the provisions of the Plan,
contributions are invested on a money purchase basis and plan benefits are
based on the value of the account at retirement or other distribution. In
accordance with applicable tax law requirements, amounts allocated to the
Plan are subject to the claims of general creditors of the Company.
Directors' Compensation
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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, Frank Parker and Jerome Supple.
Compensation Committee Interlocks and Insider Participation
Roy F. Mitte determines the compensation of all executive officers of the
Company, other than the Chief Executive Officer. Mr. Mitte is the Chairman of
the Board, President and Chief Executive Officer of the Company and ILCO. He
also determines the compensation of all executive officers of ILCO, other than
the Chief Executive Officer.
Reports on Executive Compensation
The following reports and the performance graph following those reports shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Proxy Statement into any filing under the Securities Act of
1933 or under the Securities Exchange Act of 1934, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
Chief Executive Officer's Report
The following report is made by Chief Executive Officer with respect to
compensation policies applicable to the Company's executive officers, other than
the Chief Executive Officer.
The goal of the Company's compensation policies is to ensure that an appropriate
relationship exists between executive pay and the creation of shareholder value,
while at the same time motivating and retaining senior managers. Executive
compensation is based on several factors, including corporate performance. While
sales, earnings, return on equity and other performance measurers are considered
in making annual executive compensation decisions, no formulas, pre-established
target levels or minimum performance thresholds are used. Each executive
officer's individual initiatives and achievements and the performance of the
operations directed by the executive are integral factors utilized in
determining that officer's compensation.
Since the executive officers of the Company are also executive officers of ILCO,
they receive cash compensation from the Company and ILCO. In addition, since a
significant portion of the Company's net income is derived from its equity in
ILCO's net income, the executive officers of both companies are provided
long-term equity-based compensation in the form of ILCO stock options granted
under the ILCO
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<PAGE>
1988 Stock Option Plan and ILCO's Savings and Investment (401K) Plan. They also
participate in medical and pension plans that are generally available to
employees of the Company and ILCO. The objectives of the stock option plan and
the 401K Plan are to create a strong link between executive compensation and
shareholders return and enable senior managers to develop and retain a
significant and long-term equity investment.
Under ILCO's 1988 Non-Qualified Stock Option Plan, options to buy ILCO's common
stock at 100% of the fair market value on the date of grant but in no event less
than $3.33 per share can be granted to officers, directors, agents and others.
The information set forth in this paragraph pertaining to the number of shares
for which options have been granted under the 1988 Plan has not been adjusted to
reflect the effect of the stock dividend paid by ILCO to its shareholders on
March 17, 1999. The 1988 Plan, which was adopted by ILCO in December, 1988,
authorizes the ILCO Board of Directors to grant options to purchase up to a
maximum of 600,000 shares of ILCO's common stock. Under its provisions, the 1988
Plan remains in effect for a period of eleven years from the date of the Plan's
adoption. At December 31, 1998, options to purchase 42,000 shares were
outstanding, of which options to buy 18,000 shares were held by executive
officers of FIC and ILCO. ILCO's Board of Directors administers the plan. In
1988, options to purchase 330,000 shares of ILCO's common stock were granted at
a price of $3.33 per share. In 1990, options to purchase 30,000 shares expired.
In 1991, options to purchase 50,000 shares were granted at prices ranging from
$8.75 to $9.25 per share. In 1992, options to purchase 60,000 shares expired. In
1995, options to purchase 60,000 shares were granted at a price of $11.12 per
share. The options granted in 1995, together with 20,000 other options, were
terminated in 1996. In 1997, 42,000 options were canceled. There were no options
granted in 1998, 1997 or 1996. FIC has been advised that ILCO's Board of
Directors has no current plans to grant any additional options under the 1988
Plan.
ILCO's 401K Plan allows eligible employees to make voluntary contributions on a
tax deferred basis. During 1997, the Plan was changed to provide for a matching
contribution by participating companies. The match, which is in the form of
shares of ILCO common stock, is equal to 100% of an eligible participant's
elective deferral contributions, as defined in the Plan, not to exceed 1% of the
participant's plan compensation. Allocations are made on a quarterly basis to
the account of participants who have at least 250 hours of service in that
quarter.
ILCO's 401K Plan also includes participant accounts which were transferred from
the ILCO Employee Stock Ownership Plan ("ESOP"). The ILCO ESOP was merged into
the ILCO 401K Plan in May, 1998. The ESOP was a noncontributory employee benefit
plan available to all employees who have completed one year of service.
Allocations of ILCO's contributions were made to participants in accordance with
their compensation. Vesting of participants in their accounts occurs in annual
installments over a period of approximately ten years. As of December 31, 1998,
that portion of the assets of the 401K Plan which represent participant accounts
transferred from the ESOP consisted of 638,976 shares of ILCO's Common Stock (as
adjusted to reflect the stock dividend paid on March 17, 1999 ) of which 90,684
shares were allocated to executive officers of the Company and the balance of
the shares were allocated to the other participants.
The Company and ILCO provide medical and pension benefits to their executive
officers that are generally
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available to employees.
The foregoing report has been furnished by Roy F. Mitte.
Compensation Committee's Report
The Compensation Committee of the Board of Directors makes a recommendation to
the Board of Directors each year with respect to the Chief Executive Officer's
compensation for that year. For the year 1998, the Committee recommended that
the Chief Executive Officer's compensation continue at the same level in effect
for the year 1997. In addition, the Committee recommended that the Chief
Executive Officer receive a cash bonus in the amount of $965,000.
The compensation policies and practices of the Compensation Committee are
subjective and are not based upon specific criteria. The Committee did consider
the Company's overall financial performance and its continuing progress in
expense management, maintenance of a high quality investment portfolio and
marketing of insurance products designed to generate an acceptable level of
profitability. The Committee recognized the Chief Executive Officer's leadership
role in the Company's performance and his ability to select, recruit and
motivate qualified people to implement the Company's policies that have
contributed to that performance.
Since the Chief Executive Officer's 1998 compensation is not based on any
particular measures of the Company's performance, such as sales, earning or
return on equity, there is no specific discussion in this report of the
relationship of the Company's performance to the Chief Executive Officer's
compensation for 1998. Nevertheless, the Committee does believe that it is
noteworthy that (i) the Company's net income for 1998 was $9,218,000 ($1.71
basic and $1.66 diluted per share) compared to net income of $16,328,000 ($3.01
basic and $2.92 diluted per share) for 1997, (ii) net income for the year 1997
includes $3.2 million from the sale of Family Life's interest in the Bridgepoint
Square Offices and (iii) $6.4 million from FIC's equity interest in ILCO's net
income (including $3.8 million related to ILCO's gain from the sale of its
interest in the Bridgepoint Square Offices. FIC has approximately a 45% equity
interest in the net income of ILCO.
The foregoing report is submitted by the members of the Compensation Committee.
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<PAGE>
Performance Graph
The graph and table below compare the cumulative total shareholder return on the
Company's Common Stock for the last five calendar years with the cumulative
total return on The Nasdaq Stock Market (US) and an index of stocks of life
insurance companies traded on Nasdaq over the same period (assuming the
investment on December 31, 1993 of $100 in the Company's Common Stock, The
Nasdaq Stock Market (U.S.) and an index of stocks of life insurance companies
traded on Nasdaq and the reinvestment of all dividends).
[PERFORMANCE GRAPH OMITTED]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
12/31/93 12/30/94 12/29/95 12/29/96 12/31/97 12/31/98
The Company (1) $100.00 $ 79.48 $ 94.87 $145.83 $258.00 $208.33
The Nasdaq Stock Market (US) $100.00 $ 97.80 $138.30 $170.00 $208.30 $293.50
Index of Nasdaq Life Ins. Stocks (2) $100.00 $ 86.00 $129.30 $166.80 $220.30 $221.30
</TABLE>
(1) The dollar amounts for the Company's Common Stock are based on the closing
bid prices on Nasdaq on the dates indicated.
(2) The Index of Nasdaq Life Insurance Stocks is comprised of life insurance
companies whose stocks were traded on Nasdaq during the last five calendar
years (36 issues listed during that period, of which 21 issues were traded
on December 31, 1998). These peer companies were selected by the Company on
a line-of- business basis.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Prior to the repayment of the ILCO Senior Loan on September 30, 1998, the
obligations of ILCO under the Senior Loan were guaranteed by FIC. FIC
presently owns 1,966,346 shares of ILCO's Common Stock, constituting 44.74%
of such shares outstanding.
(b) 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; Dr. Payne serves as Vice President, Secretary
and Director of both companies; Messrs. Demgen and Fleron serve as Vice
Presidents and Directors of both companies. Mr. Roy Mitte holds beneficial
ownership of 29.54% of the outstanding shares of the Company (see "Security
Ownership of Certain Beneficial Owners").
(c) As part of the financing arrangement for the acquisition of Family Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC,
entered into a Senior Loan agreement under which $50 million was provided
by a group of banks. The balance of the financing consisted of a $30
million subordinated note issued by FLC to Merrill Lynch Insurance Group,
Ins. ("Merrill Lynch") and $14 million borrowed by another subsidiary of
FIC from an affiliate of Merrill Lynch and evidenced by a senior
subordinated note in the principal amount of $12 million and a junior
subordinated note in the principal amount of $2 million and $25 million
lent by two insurance company subsidiaries of ILCO. 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 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 ($2.10 per
share as adjusted for the five-for-one stock split in November, 1996),
equivalent to the then current market price, subject to adjustment to
prevent dilution. The original provisions of the options provided for their
expiration 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 totaling
$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.
-16-
<PAGE>
In June, 1996, the provisions of the notes from Investors-NA to FIC, Family
Life Corporation ("FLC") and Family Life Insurance Investment Company
("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%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution,
all of the assets and liabilities of FLIIC became the obligations of
FLIIC's sole shareholder (FIC). Accordingly, the obligations under the
provisions of the $4.5 million note described above are now the obligations
of FIC.
(d) The data processing needs of ILCO's and FIC's insurance subsidiaries are
provided to ILCO's and FIC's insurance subsidiaries by FIC Computer
Services, Inc. ("FIC Computer"), a subsidiary of FIC. Under the provisions
of the data processing agreement 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 $1,610,397 and ILCO's
insurance subsidiaries paid $2,818,095 to FIC Computer for data processing
services provided during 1998.
(e) 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.
(f) In 1996, Family Life entered into a reinsurance agreement with
Investors-NA, pertaining to annuity
-17-
<PAGE>
contracts written by Family Life. The agreement applies to contracts
written on or after January 1, 1996.
(g) In November, 1998, FIC purchased 101,304 shares of FIC's common stock from
the Roy F. and Joann Cole Mitte Foundation (the "Foundation"), a Texas
non-profit corporation which is controlled by Mr. Mitte and his wife, at a
price of $18.625 per share (or a total purchase price of $1,886,787). At
the same time, Family Life purchased 272,000 shares of FIC's common stock
from the Foundation at a price of $18.625 per share (or a total purchase
price of $5,066,000). Mr. Mitte and his wife had previously donated the
shares to the Foundation. The Foundation obtained a private letter ruling
from the Internal Revenue Service, in which the IRS ruled that the sale of
the FIC common stock to the Company would not constitute a direct or
indirect act of self-dealing between the Foundation and the Company. The
transaction was reviewed by a Special Committee of the Board of Directors,
consisting of two outside directors. In addition, the Company obtained a
favorable fairness opinion from an independent investment banking firm.
(h) Mr. Crowe retired from active service with the Company in January, 1997 and
served on the ILCO Board until October, 1997; he continues to serve on the
Board of Directors of FIC. Following Mr. Crowe's retirement, the Company
entered into a consulting agreement with him. Under the terms of the
agreement, Mr. Crowe is to be available for periodic consultation on
actuarial matters related to the operations of the life insurance
companies. The agreement provide of a payment of $25,000 per year for a
period of five-years.
BOARD, COMMITTEES AND MEETINGS
FIC's Board of Directors met formally four times during 1998. All of the
incumbent Directors attended 100% of the required meetings, except Mr. Demgen,
who attended three of the four meetings (75%).
The Board has an Audit Committee which did not have any formal meetings during
1998. The Board does not have a Nominating Committee. The Directors serving on
the Audit Committee in 1998 were Messrs. Dale Mitte, Grace, Barnett and Crowe.
The duties of the Audit Committee are to review the financial statements and the
results of the Company's annual audit with FIC's independent auditors.
The members of the Compensation Committee during 1998 were: Messrs, Barnett,
Parker and Supple. The Compensation Committee held one meeting during 1998.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
FIC's accounting firm for the current year is PricewaterhouseCoopers LLP.
Representatives of PricewaterhouseCoopers LLP are expected to be available for
comment at the Shareholders Meeting and will be given an opportunity to respond
to appropriate questions.
-18-
<PAGE>
SHAREHOLDER PROPOSALS
It is contemplated by the management of FIC that the next Annual Meeting of the
Shareholders of FIC will be held on or about May 16, 2000. Proposals submitted
by any security holders and intended to be included in FIC's Proxy Statement and
Form of Proxy relating to the meeting must be received by the Company at its
principal executive offices no later than December 31, 1999 and must be in
compliance with applicable laws and Securities and Exchange Commission
regulations.
ADDITIONAL MATTERS
At the date hereof, there are no other matters which the Board of Directors
intends to present or has reason to believe others will present at the meeting.
However, if any other matter should be presented, the persons named in the
accompanying proxy will vote according to their best judgment in the interest of
FIC with respect to such matters.
Date: April 16, 1999
By Order of the Board of Directors
Financial Industries Corporation
Eugene E. Payne
Secretary
-19-
