<PAGE> 1
U. S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from..........to........
Commission File Number 1-8069
Investors Insurance Group, Inc.
(Exact name of small business issuer
as specified in its charter)
Florida 13-2574130
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No)
7200 W. Camino Real
Boca Raton, Florida 33433
(Address of principal executive office) (Zip Code)
(407) 391-5043
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] No [X]
As of November 10, 1996, 2,836,082 shares of the issuer's common stock were
outstanding.
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Investors Insurance Group, Inc
FORM 10-QSB
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1: Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 3
Item 1: Consolidated Statements of Operations - nine months
ended September 30, 1996 and 1995 5
Item 1: Consolidated Statements of Operations - three months
ended September 30, 1996 and 1995 6
Item 1: Consolidated Statements of Cash Flow - three months
ended September 30, 1996 and 1995 7
Item 1: Notes to Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis 14
Part II. OTHER INFORMATION
Item 1: Legal Proceedings 17
Item 2: Changes in Securities 17
Item 3: Default Upon Senior Securities 17
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 AND DECEMBER 31, 1995
(Dollars in thousands)
ASSETS 1996 1995
-------- --------
(unaudited)
Investments:
Fixed maturities held to maturity, at
amortized cost (market $9,773 in 1996
and $10,556 in 1995) $ 9,501 $ 9,504
Securities available for sale:
Fixed maturities, at market (amortized
cost $63,886 in 1996 and $141,474 in 1995) 63,054 149,231
Equity securities, at market (cost $11 in
1996 and $339 in 1995) 17 366
Short-term investments 325 356
Mortgage loans on real estate 375 564
Policy loans 569 598
------- -------
Total 73,841 160,619
Cash and cash equivalents 5,441 11,372
Investment in common stock of affiliate,
at market (cost $992 in 1996 and 1995) 815 803
Accrued investment income 597 1,090
Deferred acquisition costs 47,360 42,468
Investment contract benefits recoverable 467,275 351,489
Reinsurance benefits recoverable 3,748 2,438
Cost in excess of net assets of businesses
acquired (less accumulated amortization
of $1,228 in 1996 and $1,014 in 1995) 3,458 3,666
Income tax recoverable 1,504 -
Other assets 372 541
------- -------
Total Assets $ 604,361 $ 574,486
======= =======
See accompanying notes to consolidated financial statements
<PAGE> 4
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 1996 AND DECEMBER 31, 1995
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
-------- --------
(unaudited)
Liabilities:
Future policy benefits and claims:
Investment contracts $ 540,269 $ 511,315
Life insurance reserves 8,566 7,189
Accident & health claim reserves 5 5
Unearned ceding commission (including
deferred gross profits of $8,532 in
1996 and $7,031 in 1995) 49,326 38,062
Note payable 8,000 8,000
Amounts due to coinsurer 270 5,998
Accrued expenses 798 250
Other liabilities 3,069 2,239
------- -------
Total Liabilities 610,303 573,058
------- -------
Commitments & Contingencies
Shareholders' Equity:
Preferred Stock, no par,
authorized 20,000,000 shares, none issued - -
Common Stock, $.50 par value; authorized
30,000,000 shares; issued 2,840,082 in
1996 and 2,766,982 in 1995; outstanding
2,836,082 in 1996 and 2,762,982 in 1995 1,420 1,384
Additional paid-in capital 3,656 3,651
Net unrealized investment gains (losses) (1,020) 7,083
Accumulated deficit (9,990) (10,682)
Treasury stock, at cost (4,000 shares in
1996 and 1995) (8) (8)
------- -------
(5,942) 1,428
------- -------
Total Liabilities and Shareholders' Equity $ 604,361 $ 574,486
======= =======
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE NINE MONTHS ENDED September 30, 1996 AND 1995
(Dollars in thousands, except per share data)
1996 1995
-------- --------
Revenue:
Net investment income $ 5,073 $ 8,633
Realized investment gains (losses) 4,017 548
Premium and policy fees 906 1,305
Commission and other income 1,466 663
------- -------
Total revenue 11,462 11,149
------- -------
Benefits and Expenses:
Current and future insurance benefits 360 680
Interest on investment contracts 4,090 7,331
Underwriting, acquisition and insurance expenses 5,897 3,360
Other expenses 693 691
------- -------
Total benefits and expenses 11,040 12,062
------- -------
Income (loss) before income tax benefit 422 (913)
Income tax benefit (270) (20)
------- -------
Net income (loss) $ 692 $ (893)
======= =======
Net Income (loss) per share of common stock $ 0.24 $ (0.32)
======= =======
Weighted average number of shares outstanding 2,836,548 2,764,402
========= =========
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS ENDED September 30, 1996 AND 1995
(Dollars in thousands, except per share data)
1996 1995
-------- --------
Revenue:
Net investment income $ 1,422 $ 2,920
Realized investment gains (losses) (12) (7)
Premium and policy fees 237 371
Commission and other income 852 227
------- -------
Total revenue 2,499 3,511
------- -------
Benefits and Expenses:
Current and future insurance benefits 52 91
Interest on investment contracts 1,359 2,544
Underwriting, acquisition and insurance expenses 1,164 1,258
Other expenses 232 231
------- -------
Total benefits and expenses 2,807 4,124
------- -------
Loss before income tax benefit (308) (613)
Income tax benefit (11) (20)
------- -------
Net loss $ (297) $ (593)
======= =======
Net loss per share of common stock $ (0.10) $ (0.21)
======= =======
Weighted average number of shares outstanding 2,836,082 2,763,382
========= =========
See accompanying notes to consolidated financial statements
<PAGE> 7
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED September 30, 1996 AND 1995
(Dollars in thousands)
1996 1995
-------- --------
Cash flows from operating activities:
Net income (loss) $ 692 $ (893)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Net accretion of fixed maturities (240) (463)
Realized investment loss (gains) (3,995) (548)
Amortization of costs in excess of net assets
of businesses acquired 224 217
Amortization of deferred acquisition costs 2,819 1,193
Amortization of unearned ceding commissions (933) (216)
Deferral of unearned ceding commission 9,887 10,077
Deferral of acquisition costs (4,906) (8,814)
Change in assets and liabilities:
Increase in investment contract
benefits recoverable (102,151) (13,604)
Increase in insurance reserves and
interest on investment contracts 24,105 22,186
Increase in other assets, net (2,117) (1,220)
Increase (decrease) in other liabilities, net (4,353) (1,315)
------- -------
Net cash provided by (used in)
operating activities (80,968) 6,600
------- -------
Cash flows from investing activities:
Investment repayments:
Mortgage loans 189 64
Policy loans, net 29 (14)
Investments sold:
Fixed maturities, available for sale 88,656 59,426
Equity securities, available for sale 328 771
Investments in:
Fixed maturities, available for sale (6,828) (58,157)
Equity securities, available for sale - (343)
Short-term investments, net 31 (65)
------- -------
Net cash provided by investing activities 82,405 1,664
------- -------
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
FOR THE NINE MONTHS ENDED September 30, 1996 AND 1995
(Dollars in thousands)
1996 1995
-------- --------
Cash flows from financing activities:
Investment contract deposits $ 49,771 $ 87,098
Investment contract withdrawals (43,545) (34,039)
Reinsurance contract deposits (48,900) (80,250)
Withdrawals recovered from reinsurance 35,265 20,485
Treasury stock purchased - (8)
Common stock issued 41 1
------- -------
Net cash provided by (used in)
financing activities (7,368) (6,713)
------- -------
Net increase (decrease) in cash
and cash equivalents (5,931) 1,551
Cash and cash equivalents, beginning of year 11,372 3,530
------- -------
Cash and cash equivalents, end of year $ 5,441 $ 5,081
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest - 480
Income taxes 1,000 95
see accompanying notes to consolidated financial statements
<PAGE> 9
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Management Representation
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring items) necessary
to present fairly the consolidated financial position of Investors Insurance
Group, Inc. ("Company") and its subsidiaries, primarily Investors Insurance
Corporation ("Investors") and Investors Marketing Group, Inc. ("IMG"), as of
September 30, 1996, and the results of operations for the nine month and three
month periods ended September 30, 1996 and 1995, and the cash flow for the
nine month periods ended September 30, 1996 and 1995.
2. Reporting Standards
Prior to 1996, the Company filed its financial statements in compliance with
Regulation S-X of the Securities and Exchange Commission ("SEC"). Recognizing
that the requirements of Regulation S-X are unnecessarily burdensome for small
businesses, the SEC has provided alternative, and less expensive, financial
reporting standards under its Regulation S-B. Beginning in 1996, the Company
has elected to report under the SEC's Regulation S-B.
3. Regulatory Issues
In early 1996, Investors agreed to arrange a capital infusion that would raise
its statutory capital and surplus to $11 million in order to continue to write
new business in California. Investors has not been successful in attracting
this capital and, as a result, it is suspending writing new business in
California on November 15, 1996. Through September 30, 1996, 37% of Investors'
new business was written in California. In order to protect the value of its
California agent network, IMG has agreed to act as a third-party administrator
for Republic-Vanguard Life Insurance Company. Under this arrangement, IMG
will receive override commissions and servicing fees for the business it
generates through its agent network.
The Arizona Department of Insurance ("Arizona") has raised questions about
Investors' continuing ability to write new business at, or above, its 1995
level based on its current ratio of policy liabilities to statutory capital
and surplus. Through September 30, 1996, 18% of Investors' new business was
written in Arizona. Arizona has indicated it will not consider this issue
further until the end of 1996.
4. Reinsurance
As a result of the continued concern of the Delaware Department of Insurance
(" Delaware") about Investors' ratio of statutory policy liabilities to
capital and surplus, in early 1996, Investors entered into an agreement to
cede a block of annuity policies with statutory policy reserves of $76,306,929
to New Era Life Insurance Company ("New Era"). This reinsurance agreement
provides for an initial coinsurance period (up to five years) followed by full
assumption of the specified policies. Investors will continue to service
these policies through December 31, 2000. Investors will pay New Era
coinsurance allowances of 1% of the average statutory policy liability for
<PAGE> 10
the first 5 years. Thereafter, New Era will pay Investors 2% of the average
statutory policy for the following five years. The profit related to these
allowances will be deferred until its realization is assured.
Since, under its terms, this agreement became effective on December 31, 1995
and, based on Delaware's approval, this transaction was reflected in
Investors' 1995 statutory statement and, as a result, Investors' ratio of
statutory policy liabilities to capital and surplus was reduced below
Delaware's target. This transaction was closed on March 1, 1996 and,
therefore, it is reflected as of that date in the accompanying financial
statements. The amounts of the policy liabilities and the related settlement
values have been adjusted to reflect the balances as they existed as of the
closing.
Under the terms of the New Era reinsurance agreement, Investors elected to
transfer cash rather than securities to New Era. Therefore, in January and
February of 1996 Investors sold the securities supporting this block of
business and realized an investment gain of approximately $3,697,000. Under
generally accepted accounting principles, this gain accelerates the
amortization of the deferred acquisition costs related to this block of
business by approximately $2,254,000, leaving approximately $1,443,000 as a
contribution to profits for the first quarter of 1996.
In addition to Delaware's approval, Investors had to obtain approval for the
New Era reinsurance agreement from the California Department of Insurance
("California"). California approved the coinsurance portion on the New Era
agreement, but wanted additional time to review the assumption portion of the
agreement.
5. Preferred Stock
In the second quarter of 1996, the Company announced an agreement to sell
preferred stock valued at $7 million to AAM Capital Partners (AAM). However,
since AAM was unable to arrange the necessary financing, the previously
announced agreement has been canceled. The Company is continuing its search
for additional capital.
6. Stock Options
During the nine month period ended September 30, 1996, the Company issued
45,600 share options under its Agent Plan at market ($0.94 to $1.00 per
share). Since the Company's agents are not employees, under SFAS #123 which
became effective on January 1, 1996, the Company has recorded the fair value
of these share options ($13,329) as an expense. If SFAS #123 had been
effective in 1995, the fair value of the 74,400 share options issued through
September 30, 1995 ($35,499) would have been recorded as an expense.
If unexercised, these options expire after two years.
7. Note Payable
In connection with its acquisition of IIC Inc. ("IIC"), which owns all the
outstanding shares of Investors, the Company issued an $8,000,000 secured
subordinated note payable due March 31, 1997, with interest at 8% payable
<PAGE> 11
quarterly (IIG Note). The IIG Note is secured by the stock of IIC. This
security interest is subordinate to any senior indebtedness.
As a result of material misrepresentations by the seller, the Company has
several significant claims which, if sustained, should reduce the principal
amount of the IIG Note and result in a refund of previously paid interest.
However, these issues have not been settled since ownership of the IIG Note
has been in dispute. The seller, Corporate Life Insurance Company ("Corporate
Life"), allegedly transferred the note to a Delaware insurer, National
Heritage Life Insurance Company ("National Heritage"). Subsequently, both
companies came under orders of rehabilitation from the insurance departments
of their respective states. Now, in their roles as liquidators, both states
have claimed ownership of the IIG Note.
To avoid being subject to double liability, the Company filed a Complaint in
Equity for Interpleader with the Pennsylvania Commonwealth Court in late 1995.
On August 27, 1996, a settlement conference was held in Harrisburg,
Pennsylvania in order to settle the ownership issue regarding the IIG Note.
Although it appeared from that conference that Corporate Life and National
Heritage settled their differences regarding the IIG Note, the Company
believes there is no agreement.
National Heritage has notified the Company of its intent to foreclose on the
IIG Note. The Company has filed an injunction to stay the foreclosure pending
its receipt of a written agreement between Corporate Life and National
Heritage. While management believes the Company has valid defenses and
counterclaims to any foreclosure action instituted by either Corporate Life
and National Heritage, the ultimate outcome of this case cannot be determined
at this time.
Ultimately, settlement of this dispute will not result in any additional
liability to the Company, but should make it possible to settle the Company's
claims against the IIG Note. In the meantime, the Company has continued to
recognized interest expense based on the terms of the IIG Note. In recognition
of its claims against the IIG Note, the Company has withheld payment of
interest since 1995.
8. Condensed Financial Information of the Parent Company
The Parent company's principal source of funds is the override commission it
receives from Investors' new business. Through September 30, 1996, Investors'
new annuity business has declined to $49 million from $87 million for the
comparable period in 1995. Further, since new business in California will be
handled through IMG, the Parent company will no longer receive any funds
from these sales. Together, these changes have intensified the Parent
company's liquidity problem. At the present time, aside from the IIG Note
(Due March 31, 1997) and potential related interest discussed above, the Parent
company has sufficient funds to pay its debts as they become due. However, at
the expected level of cash expenditures, there can be no assurance the Parent
company will continue to maintain this liquidity beyond the end of 1996 without
additional capital. The Parent company's current financial results are
summarized below:
<PAGE> 12
CONDENSED BALANCE SHEETS
PARENT COMPANY
As of September 30, 1996
(in thousands)
ASSETS
Cash and cash equivalents $ 151
Equity securities, at market 17
Investments in affiliate and wholly-owned subsidiary 2,661
Other assets 4
------
Total assets $2,833
======
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
Liabilities:
Note payable $ 8,000
Accrued interest on note payable 640
Due to affiliates 30
Other liabilities 105
------
Total liabilities 8,775
------
Shareholders' Equity (Capital Deficit):
Common stock 1,420
Additional paid-in capital 3,656
Net unrealized investment gains (losses) (1,020)
Accumulated deficit (9,990)
Treasury stock (8)
------
Total Shareholders' Equity (Capital Deficit) (5,942)
------
Total Liabilities and Shareholders' Equity (Capital Deficit) $ 2,833
======
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CONDENSED STATEMENTS OF OPERATIONS
PARENT COMPANY
For the year to Date Period Ending September 30, 1996
(in thousands)
Revenue $ 445
------
Expenses:
General and administrative expenses 591
Interest expense 480
------
Total expenses 1,071
------
Loss before equity in net income
of subsidiaries and income taxes (626)
Equity in net income of subsidiaries 1,297
------
Loss before income taxes 671
Income tax expense -
------
Net Income $ 671
======
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY
For the year to Date Period Ending September 30, 1996
(in thousands)
Cash flows from operating activities:
Net income $ 671
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss of subsidiaries (1,297)
Change in accrued interest 480
Change in other assets and
other liabilities, net (15)
-------
Net cash used in operating activities (161)
-------
Cash flows from financing activities:
Common stock issued 40
-------
Net increase (decrease) in cash and cash equivalents (121)
Cash and cash equivalents, beginning of year 272
-------
Cash and cash equivalents as of September 30, 1996 $ 151
=======
<PAGE> 14
Item 2: Management Discussion and Analysis
General
The following discussion and analysis for Investors Insurance Group, Inc.
("Company") and its wholly-owned subsidiaries, primarily Investors Insurance
Corporation ("Investors"), updates the discussion and analysis contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995
and should be read in conjunction with that report and the Notes to the
September 30, 1996 financial statements presented under Item 1.
Results of Operations
As described in Note 4 to the accompanying financial statements, on March 1,
1996, Investors closed a large reinsurance agreement with New Era Life
Insurance Company ("New Era"). This transaction substantially accounts for
the significant changes in the Company's balance sheet. Specifically,
Investors transferred approximately $78,688,000 in cash (which has previously
been invested in Fixed maturities, available for sale) and added $82,974,000
to Investment contracts recoverable and $4,286,000 to Unearned ceding
commission.
This transactions also significantly effected the Company's statement of
operations. The increase in Realized investment gains is substantially due to
the disposal of the investments supporting the policies ceded to New Era Life
Insurance Company ("New Era"). The realization of investment gains and losses
changes the pattern of expected future profits which forms the basis for the
amortization of deferred acquisition costs. As a result of this gain, the
amortization of deferred acquisition costs increased by approximately
$2,254,000 and this increase substantially accounts for the change in
Underwriting, acquisition and insurance expenses between 1995 and 1996.
Since the assets related to the reinsurance agreement were transferred to New
Era on March 1,1996, both the related income (Net investment income) and
expense (Interest on investment contracts) have declined from the levels
reflected in 1995.
As more fully described in the Company's 1995 Form 10K, the calculation of
income tax expense results in a deferred tax asset that is fully reserved. As
a result, the income tax expense reflected in the Company's financial
statements is its estimate of the amount it expects to pay in the current
period. Netted against the current tax expense is the income tax benefit
resulting from the difference between the prior estimate of the refund
resulting from the carryback and carryforward of the loss from 1995 and the
actual amount calculated in the preparation of the Company's 1995 tax return.
In addition to the reinsurance transaction, the value of the Company's
investments changed significantly due to changes in the market interest rates.
The excess of the carrying value of investments carried at market over the
related cost of these investments declined from $7,595,000 at December 31, 1995
to ($1,003,000) at September 30, 1996. This change caused an
increase of $4,855,000 in Deferred acquisitions costs and $4,360,000 in
Unearned ceding commissions and a decrease of $8,103,000 in the Net unrealized
investment gains and (losses) component of shareholders equity.
<PAGE> 15
Commission and other income is comprised primarily of service fees related to
reinsured business and recognition of ceding commission previously deferred as
a portion of the Unearned ceding commission. The increase in this revenue
line is the result of the growth in the amount of reinsured business from
both the New Era reinsurance transaction discussed above and Investors'
continuing policy of reinsuring 100% of new business written.
Premium and policy fees is comprised primarily of surrender fees from
surrenders and withdrawals within the surrender charge period and premium from
conversion of deferred annuities to life contingent products. The decline in
this line reflects the decline in the unreinsured portion of Investors'
inforce business.
Liquidity and Capital Resources
In connection with its acquisition of IIC Inc. ("IIC"), which owns all the
outstanding shares of Investors, the Company issued an $8,000,000 secured
subordinated note payable due March 31, 1997, with interest at 8% payable
quarterly (IIG Note). The IIG Note is secured by the stock of IIC. This
security interest is subordinate to any senior indebtedness.
As a result of material misrepresentations by the seller, the Company has
several significant claims which, if sustained, should reduce the principal
amount of the IIG Note and result in a refund of previously paid interest.
However, these issues have not been settled since ownership of the IIG Note
has been in dispute. The seller, Corporate Life Insurance Company ("Corporate
Life"), allegedly transferred the note to a Delaware insurer, National
Heritage Life Insurance Company ("National Heritage"). Subsequently, both
companies came under orders of rehabilitation from the insurance departments
of their respective states. Now, in their roles as liquidators, both states
have claimed ownership of the IIG Note.
To avoid being subject to double liability, the Company filed a Complaint in
Equity for Interpleader with the Pennsylvania Commonwealth Court in late 1995.
On August 27, 1996, a settlement conference was held in Harrisburg,
Pennsylvania in order to settle the ownership issue regarding the IIG Note.
Although it appeared from that conference that Corporate Life and National
Heritage settled their differences regarding the IIG Note, the Company
believes there is no agreement.
National Heritage has notified the Company of its intent to foreclose on the
IIG Note. The Company has filed an injunction to stay the foreclosure pending
its receipt of a written agreement between Corporate Life and National
Heritage. While management believes the Company has valid defenses and
counterclaims to any foreclosure action instituted by either Corporate Life
and National Heritage, the ultimate outcome of this case cannot be determined
at this time.
Ultimately, settlement of this dispute will not result in any additional
liability to the Company, but should make it possible to settle the Company's
claims against the IIG Note. In the meantime, the Company has continued to
recognized interest expense based on the terms of the IIG Note. In recognition
of its claims against the IIG Note, the Company has withheld payment of
interest since 1995.
<PAGE> 16
The Parent company's principal source of funds is the override commission it
receives from Investors' new business. Through September 30, 1996, Investors'
new annuity business has declined to $49 million from $87 million for the
comparable period in 1995. Further, since new business in California will be
handled through IMG, the Parent company will no longer receive any funds
from these sales. Together, these changes have intensified the Parent
company's liquidity problem. At the present time, aside from the IIG Note and
potential related interest discussed above, the Parent company has sufficient
funds to pay its debts as they become due. However, at the expected level of
cash expenditures, there can be no assurance the Parent company will
continue to maintain this liquidity beyond the end of 1996 without additional
capital.
In the second quarter of 1996, the Company announced an agreement to sell
preferred stock valued at $7 million to AAM Capital Partners (AAM). However,
since AAM was unable to arrange the necessary financing, the previously
announced agreement has been canceled.
The Company is continuing its search for additional capital.
Caution on Forward-Looking Statements
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, any forward-looking statement contained herein or in
any other oral or written statement by the Company or any of its officers,
director or employees is qualified by the fact that actual results of the
Company may differ materially from such statement due to the following
important factors, among other risks and uncertainties inherent in the
Company's business:
1. Prevailing interest rate levels, including any continuation of the
current relatively flat yield curve for short-term investments,
which may affect the ability of the Company to sell its products,
the market value of the Company's investments or the lapse rate of
the Company's policies, notwithstanding product design features
intentioned to enhance persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantage of the Company's products.
3. Changes in the regulation of financial services, including bank
sales of insurance products, which may affect the competitive
environment for the Company's products.
4. Regulatory requirements from any of the states in which Investors is
authorized to sell insurance.
5. The parent company's access to sufficient funds to pay its
obligations as they become due.
<PAGE> 17
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
There exists a dispute between the Pennsylvania Department of Insurance, as
statutory liquidator of Corporate Life Insurance Company ("Corporate Life"),
and the Delaware Department of Insurance, as liquidator of National Heritage
Life Insurance Company ("National Heritage"), as to the ownership of the
Secured Subordinated Debenture ("IIG Note") issued in 1989 by Gemco National,
Inc. (predecessor of the Company) to Corporate Life Insurance Company in
connection with the purchase by Gemco of all of the outstanding shares of
stock of IIC, Inc., Investors Insurance Corporation and Westchester
Reinsurance, Ltd. To avoid being subject to double liability, the Company
filed a Complaint in Equity for Interpleader with the Pennsylvania
Commonwealth Court captioned Investors Insurance Group, Inc. v. Insurance
Commissioner of Pennsylvania Department of Insurance and Insurance
Commissioner of Delaware Department of Insurance, (518 MD 1995, PA Cmwlth Ct.
1995).
On August 27, 1996, a settlement conference was held in Harrisburg,
Pennsylvania in order to settle the ownership issue regarding the IIG Note.
Although it appeared from that conference that Corporate Life and National
Heritage settled their differences regarding the IIG Note, the Company
believes there is no agreement. National Heritage has notified the Company of
its intent to foreclose on the IIG Note. The Company has filed an injunction
to stay the foreclosure pending its receipt of a written agreement between
Corporate Life and National Heritage. While management believes the Company
has valid defenses and counterclaims to any foreclosure action instituted by
either Corporate Life and National Heritage, the ultimate outcome of this case
cannot be determined at this time.
Item 2: Changes in Securities
No changes to report
Item 3: Defaults on Senior Securities
See discussion under Item 1 above
Item 4: Submissions of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
<PAGE> 18
Item 6: Exhibits and Reports on Form 8-K
a). Exhibits
Third Party Administration Agreement dated October 18, 1996 between
Registrant's subsidiary, Investors Marketing Group, Inc., and
Republic Vanguard Life Insurance Company.
b). Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1996.
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Investors Insurance Group, Inc.
(Registrant)
Date: November 15, 1996 /s/ Melvin C. Parker
______________________________
Melvin C. Parker
President, Chief Executive
Officer and Chief Financial
Officer
<PAGE> 1
_________________________________________________________________
ADMINISTRATIVE SERVICE AGREEMENT
Between: Investors Marketing Group, Inc.*
Jacksonville, Florida
known as IMG
and: Republic-Vanguard Life Insurance Company
Dallas, Texas
known as RVL
Effective: September 24, 1996
* In California - dba IMG of Florida Insurances Services
In Utah - dba Investors Marketing Group Insurance Agency
__________________________________________________________________
<PAGE> 2
Administrative Service Agreement
Page 2 of 6
_____________________________________________________________________________
THIS AGREEMENT is effective 9/24/96, and is by and between IMG and RVL.
WHEREAS, IMG is in the business of marketing and administering Annuity
Insurance.
WHEREAS, RVL intends to issue Annuity Policies with IMG serving as
Administrator.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement and upon the terms and conditions contained in this Agreement, RVL
and IMG agree as follows:
1. RVL hereby appoints IMG as exclusive Administrator to perform the duties
described in this agreement and IMG hereby accepts such appointment. Such
appointment shall extend to Annuity policies. This appointment will
hereinafter be referred to as the Program.
2. IMG will handle all functions relating to issuance and servicing of RVL's
Annuity policies, including, but not limited to, marketing and agency
support, licensing and contracting of agents, policy issue and
policyowner service, claims and disbursements, and processing of
pertinent accounting and actuarial data. Officers of IMG (as designated
by RVL) shall have authority to execute such Annuity policies on behalf
of RVL. Operating procedures will be mutually agreed upon by IMG and
RVL.
3. IMG shall maintain adequate records sufficient to enable RVL to determine
plans and other pertinent data for insurance in effect.
4. IMG will forward to RVL monthly settlement reports with appropriate net
check by the tenth (10th) of the month for the preceding month showing
premiums collected, disbursements made, fees due IMG, and any other
information agreed upon beween RVL and IMG.
5. IMG shall allow RVL to monitor IMG operations through mail audits, and
on-site inspections by RVL. IMG shall cooperate with RVL with respect to
any such inspections and audits. RVL shall assume all financial
responsibilities for such inspections and audits except IMG agrees to be
responsible for all cost and expenses associated with the use of IMG
employees for such in-house inspections and audits.
6. IMG shall conform to the reasonable rules of RVL in its method of
conducting business which are communicated in writing. IMG shall comply
with all state insurance department regulations
<PAGE> 3
Administrative Service Agreement
Page 3 of 6
- -----------------------------------------------------------------------------
and laws pertaining to the Program and maintain the necessary licenses as
may be required.
7. All documents, books, and records pertaining to the Program shall be the
sole property of RVL, and they will be maintained at the IMG principal
office for the duration of this Agreement and for a period of six (6)
months following the termination of the Agreement. IMG and RVL agree
that RVL shall at all times have access to all records that are the
property of RVL and which are the subject matter of this Agreement. They
shall be open for inspection by RVL and any Insurance Regulators
authorized by law at all reasonable times during the continuation of the
Annuity Agreement and, in the event of termination of this Agreement,
they shall be available for inspection until all matters related to the
administration of the Annuity policies are resolved to the satisfaction
of RVL and IMG. RVL may make copies of the files on the policyholders as
to whom any problems or questions have arisen regarding coverage,
premiums or any other matter pertaining to the coverage of a particular
policyholder.
8. IMG shall submit for RVL's prior written approval or rejection, all
printed materials which relate to or could affect RVL obligations under
Annuity policies issued by RVL. Reference in this Agreement to "prior
written approval" of RVL shall be deemed to mean approval by an officer
of RVL.
9. Each party hereby agrees to indemnify and hold the other party harmless
from and against all losses, costs, damages and expenses (including
attorney's fees and extra-contractual damages, subject to the provision
below) which the other party may incur by reason of any demand or action
by any person arising out of the indemnifying party's negligence in the
performance of its duties hereunder. IMG shall indemnify and hold RVL
harmless from any liabilities, fines or causes of action made or brought
against RVL as a result of IMG's failure to comply with applicable state
laws or maintain necessary licenses as may be required.
10. Notwithstanding anything to the contrary, any contract or agreement made
by IMG with parties other than RVL shall not be binding upon nor involve
RVL unless RVL specifically agrees to it in writing.
11. IMG, with prior written approval from RVL, may contract with any third
party(ies) for performance of administrative functions required of IMG
under this Agreement provided that:
a. No such contract shall constitute an assignment or transfer of this
Agreement in its entirety; and
<PAGE> 4
Administrative Service Agreement
Page 4 of 6
- -----------------------------------------------------------------------------
b. No such contract shall relieve IMG of primary responsibility for
compliance with all terms and conditions of the Agreement.
12. As consideration for IMG's performance of the duties set forth in this
Agreement, IMG shall be entitled to the administrative allowances/fees
shown in the attached Exhibit A. These allowances are subject to review
and negotiation as mutually agreed upon.
13. Effective dates of this Agreement are from 9/24/96, through 12/31/96.
This Agreement shall automatically renew for subsequent terms of one year
beginning 1/1/97 unless terminated as follows:
a. RVL shall have the right to terminate this Agreement upon the
bankruptcy, reorganization or receivership of IMG; or
b. IMG shall have the right to terminate this Agreement upon the
bankruptcy, reorganization or receivership of any insurance company
which constitutes RVL; or
c. Either party shall give to the other party one hundred eighty (180)
days notice prior to the end of the initial or any subsequent term.
14. Upon termination in accordance with paragraph 16 of this Agreement,
IMG shall cooperate with RVL in transferring to RVL copies of all
documents, books and records pertaining to the Annuity policies if such
are determined by RVL to be necessar y. RVL agrees to bear the
reasonable cost of any such transfer of information.
15. Whenever this Agreement is terminated for any reason, RVL and IMG shall
be entitled to all fees and investments relative to the services provided
hereunder.
16. Should the parties to this Agreement engage in a dispute concerning the
terms of the Agreement, then the following arbitration rules will apply:
a. It is the intention of the parties that the customs and usages of
the business of insurance shall be given full effect in the
interpretation of this Agreement. The parties shall act in all
things with the highest good faith. A dispute or difference between
the parties with
<PAGE> 5
Administrative Service Agreement
Page 5 of 6
- -----------------------------------------------------------------------------
respect to the operation or interpretation of this Agreement on
which an amicable understanding cannot be reached shall be decided
by arbitration. The arbitrators are empowered to decide all
questions or issues and shall be free to reach their decisions from
the standpoint of equity and customary practices of the insurance
and reinsurance industry rather than from that of strict law. The
board of arbitration shall meet in Jacksonville, Florida.
b. To initiate arbitration, a party shall send by certified mail,
return receipt requested, to the other party's home office a notice
demanding arbitration. The notice shall include the issues for
decision and the remedies sought. The party receiving the notice
shall thereafter have thirty days within which to respond in
writing.
c. There shall be three arbitrators who shall be active or retired
officers of life insurance companies other than the contracting
companies or their affiliates. An arbitrator may not be a present
or former employee, officer, attorney, or consultant of either of
the contracting companies or their affiliates.
d. Each of the contracting companies shall appoint one of the
arbitrators and these two arbitrators shall select the third. In
the event that either contracting company should fail to choose an
arbitrator within thirty days after the response to the demand for
arbitration, the other contracting company may choose two
arbitrators, who shall in turn choose a third arbitrator before
entering arbitration. If the two arbitrators are unable to agree
upon the selection of a third arbitrator within thirty days
following their appointment, each arbitrator shall nominate three
candidates within ten days thereafter, two of whom the other shall
decline and the decision shall be made by drawing lots.
e. If more than one insurer/reinsurer is involved in the same dispute,
all such insurers/reinsurers shall constitute and act as one party
for purposes of the arbitration, and communication shall be made by
Investors Marketing Group, Inc. to each of the insurers/reinsurers
constituting the one party, provided that nothing therein shall
impair the rights of such insurers/reinsurers to assert several,
rather than joint, defenses or claims, nor be construed as changing
the liability of the insurers/ reinsurers under the terms of this
Agreement from several to joint.
<PAGE> 6
Administrative Service Agreement
Page 6 of 6
- -----------------------------------------------------------------------------
f. The arbitrators shall decide by a majority of votes and from their
written decision there can be no appeal. The cost of arbitration,
including the fees of the arbitrators, shall be borne by the losing
party unless the arbitrators dec ide otherwise.
17. This Agreement shall be governed by the laws of the State of Florida.
IN WITNESS WHEREOF, the parties have had their respective officers execute
this Agreement in duplicate below.
Investors Marketing Group, Inc. Republic-Vanguard Life Insurance Jacksonville,
Florida Company,
Dallas, Texas
9/26/96 9/26/96
______________________________ ________________________________
Date Date
/s/ Susan F. Powell /s/ John Brill
______________________________ _________________________________
By Susan F. Powell By John Brill
Executive Vice President Senior Vice President
______________________________ ________________________________
Title Title
/s/ Glenn Thigpen /s/ Gordon Jaron
______________________________ ________________________________
Witness Witness
<PAGE> 7
SCHEDULE A
- -----------------------------------------------------------------------------
TO BE DETERMINED
<TABLE> <S> <C>
<ARTICLE> 7
<PAGE>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 63,054
<DEBT-CARRYING-VALUE> 9,501
<DEBT-MARKET-VALUE> 9,773
<EQUITIES> 17
<MORTGAGE> 375
<REAL-ESTATE> 0
<TOTAL-INVEST> 73,841
<CASH> 5,441
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 47,360
<TOTAL-ASSETS> 604,361
<POLICY-LOSSES> 540,269
<UNEARNED-PREMIUMS> 5
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 8000
0
0
<COMMON> 1,420
<OTHER-SE> (7,362)
<TOTAL-LIABILITY-AND-EQUITY> 604,361
906
<INVESTMENT-INCOME> 5,073
<INVESTMENT-GAINS> 4,017
<OTHER-INCOME> 1,466
<BENEFITS> 360
<UNDERWRITING-AMORTIZATION> 2,774
<UNDERWRITING-OTHER> 3,123
<INCOME-PRETAX> 422
<INCOME-TAX> (270)
<INCOME-CONTINUING> 692
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 692
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
