SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File
Number 0-7288
INTERCONTINENTAL LIFE CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-1890938
(State of Incorporation) (I.R.S. Employer identification number)
701 Brazos, Suite 1400, Austin, Texas 78701
(Address of Principal Executive Offices) (Zip Code)
(512) 404-5050
(Registrant's Telephone Number)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.22 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
The aggregate market value of the voting stock held by
non-affiliates of the Registrant on March 14, 1997, based on the
closing sales price in The Nasdaq Small-Cap Market ($14.50 per
share), was $31,302,753.
As of March 14, 1997, Registrant had 4,258,829 shares of its
Common Stock outstanding (excluding shares held in Treasury and
not entitled to vote).
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulations S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
PART I
Item 1. Business
General
InterContinental Life Corporation ("ILCO", the "Company" or the
"Registrant") was incorporated in 1969 under the laws of the
State of New Jersey. Its executive offices are located at 701
Brazos, Suite 1400, Austin, Texas 78701.
The Company is principally engaged, through its subsidiaries, in
administering existing portfolios of life insurance policies,
credit life and disability insurance policies and annuity
products. It also administers an in-force book of health
insurance business. The Company's insurance subsidiaries are also
engaged in the business of marketing and underwriting individual
life insurance and annuity products in 49 states and the District
of Columbia. Such products are marketed through independent,
non-exclusive general agents.
The Company is controlled by Financial Industries Corporation
("FIC"), a life insurance holding company, through FIC's
ownership of approximately 46% of the Company's outstanding
Common Stock. FIC also holds options to acquire additional
shares, which, if exercised, would result in FIC's owning
approximately 61.5% of the Company's outstanding shares. FIC,
ILCO and their insurance subsidiaries have substantially
identical managements, and a majority of the directors of ILCO
are also directors of FIC and ILCO's and FIC's insurance
subsidiaries. Officers allocate their time between ILCO and FIC
in accordance with the comparative requirements of both companies
and their subsidiaries. Roy F. Mitte, Chairman, President and
Chief Executive Officer of FIC, the Company and their insurance
subsidiaries, owns approximately 34% of the outstanding shares of
FIC's common stock. FIC owns Family Life Insurance Company, a
Washington domiciled underwriter of mortgage protection life
insurance.
The Company was organized in 1969 to be the publicly owned
holding company for InterContinental Life Insurance Company
("ILIC"). The Company acquired Standard Life Insurance Company
("Standard Life") in 1986, Investors Life Insurance Company of
California ("Investors-CA") and Investors Life Insurance Company
of North America ("Investors-NA") in 1988 and Meridian Life
Insurance Company, now Investors Life Insurance Company of
Indiana ("Investors-IN"), in February 1995.
Acquisitions
Strategy. The Company's strategy has been and continues to be to
grow internally and through acquisitions, while maintaining an
emphasis on cost controls. Management believes that, under
appropriate circumstances, it is more advantageous to acquire
companies with large books of in-force life insurance than to
produce new business, because initial underwriting costs have
already been incurred and mature business is generally less
likely to terminate, making possible more predictable profit
analysis. However, the Company's insurance subsidiaries do
continue to market those products that are profitable, as well as
develop new products and streamline distribution channels. See
"Agency Operations". It is also management's belief that the
continuing consolidation in the life insurance industry presents
attractive opportunities for the Company to acquire life
insurance companies that complement or fit within the Company's
existing marketing structure and product lines. The Company's
objective is to improve the profitability of acquired businesses
by consolidating and streamlining the administrative functions of
these businesses, eliminating unprofitable products and
distribution channels, applying its marketing expertise to the
acquired company's markets and agents, and benefitting from
economies of scale. The Company's ability to make future
acquisitions will be dependent on its being able to obtain the
necessary financing. In addition, since FIC has the same
acquisition strategy as ILCO, a conflict of interest could arise
in the future between ILCO and FIC with respect to acquisition
opportunities.
Acquisition of Standard Life. In November 1986, the Company
acquired Standard Life, headquartered in Jackson, Mississippi,
for a gross purchase price of $54,500,000. A portion of the funds
used by the new life insurance company formed by the Company to
make the acquisition ("New Standard") was the proceeds of a loan
extended to the Company by a national bank in the principal
amount of $15,000,000 (the "Standard Term Loan"). This sum was,
in turn, loaned by the Company to New Standard, and the loan was
evidenced by a surplus debenture. New Standard was merged into
Standard Life in June 1988.
Acquisition of Investors-NA and Investors-CA. In December 1988,
the Company, through Standard Life, purchased Investors-CA and
Investors-NA from CIGNA Corporation for a purchase price of $140
million. The Company obtained the funds used for the acquisition
from: (a) a senior loan in the amount of $125,000,000 (maturity
date December 31, 1996, payable in twenty -seven quarterly
installments of $4 million each, commencing on July 1, 1989,
followed by four quarterly installments of $4.25 million each)
provided by six financial institutions, (b) a $10,000,000
subordinated loan (a nine-year note, with an interest rate of
13.25%) provided by two insurance and financial service
organizations and (c) the sale of $5,000,000 of Class A Preferred
Stock (principal amount of $5 million; dividend rate of 13.25%)
to CIGNA and $15,000,000 of Class B Preferred Stock (principal
amount of $15 million; dividend rate of 13.25%) to the
subordinated lenders. Approximately $15,000,000 of these funds
were used to discharge the Standard Term Loan. The balance of
these funds were loaned by the Company to Standard Life. To
evidence this indebtedness, Standard Life issued a $140,000,000
surplus debenture to the Company. In connection with the
subordinated debt and preferred stock financing, the Company
issued detachable warrants entitling the holders to purchase
1,107,480 shares of the Company's Common Stock at $3.33 per
share.
In May 1990, the Company effected an exchange agreement with the
holders of its Class A Preferred Stock and its Class B Preferred
Stock . Under the provisions of the exchange agreement, the
holders of the Class A Preferred Stock received $5 million
principal amount of a 13.25% 1998 Series Subordinated Notes, due
November 1, 1998, together with a make whole amount equal to
13.25% of the then outstanding balance of the Note. The holders
of the Class B Preferred Stock received $15 million principal
amount of a 13.25% 1999 Series Subordinated Notes, due November
1, 1999.
The Company prepaid the subordinated debt and purchased the
warrants in early 1993. See "Senior Loan".
Acquisition of Investors-IN. On February 14, 1995, ILCO, through
Investors-NA, purchased from Meridian Mutual Insurance Company
the stock of Meridian Life Insurance Company, an
Indianapolis-based life insurer, for a cash purchase price of
$17.1 million. After the acquisition, Meridian Life changed its
name to Investors Life Insurance Company of Indiana
("Investors-IN").
Investors-IN is licensed in ten states and markets a variety of
individual life and annuity products through independent agents.
Pending Acquisition. On March 25, 1997, ILCO and Investors-IN
entered into an agreement to acquire State Auto Life Insurance
Company, an Ohio domiciled life insurer, from State Automobile
Mutual Insurance Company, for a cash purchase price of $11.8
million, subject to certain post-closing adjustments. In
connection with this transaction, the bank group participating in
the Senior Loan has agreed to defer payment of $4.5 million
otherwise payable on April 1, 1997 under the terms of the Senior
Loan, and to reduce the amount of the payment otherwise due on
July 1, 1997 by $2.5 million. This deferral would result in
extending the maturity date of the Senior Loan to October 1,
1998. Under the terms of the transaction, State Auto Life would
be merged into Investors-IN. The closing of the transaction,
which is expected to occur during the second quarter of 1997, is
subject to regulatory approvals.
Merger of Insurance Subsidiaries. Investors-NA redomesticated
from Pennsylvania to Washington in December of 1992. Investors-CA
merged into Investors-NA on December 31, 1992, and Standard Life
merged into Investors-NA on June 29, 1993. The mergers have
achieved cost savings, such as reduced auditing expenses involved
in auditing one combined company; the savings of expenses and
time resulting from the combined company being examined by one
state insurance department (Washington), rather than three
(California, Pennsylvania and Mississippi); the reduction in the
number of tax returns and other annual filings with 45 states;
and smaller annual fees to do business and reduced retaliatory
premium taxes in most states. Management believes that these
reductions in expenses have further strengthened the financial
condition of the combined company.
Operations
The Company has developed management techniques to reduce
operating expenses by centralizing, standardizing and more
efficiently performing many functions common to most life
insurance companies, such as underwriting and policy
administration, accounting and financial reporting, marketing,
regulatory compliance, actuarial services and asset management.
The Company has selectively recruited personnel in sales,
marketing and various administrative departments.
The Company's centralized management techniques resulted in
significant employee reductions and expense savings in the three
life insurance companies acquired by the Company in 1986 and
1988. During 1996, the general insurance expenses of the
Company's insurance subsidiaries were $12,008,160, as compared to
$13,737,883 in 1995 and $12,865,000 in 1994. The increase in
1995, as compared to 1994, resulted primarily from increased
marketing expenses incurred by Investors-NA in 1995 and ILCO's
acquisition of Investors-IN in early 1995. The attainment of
this level of cost reduction has contributed significantly to the
achievement of the current level of profitability. Management is
committed to maintaining the general insurance expenses of the
Company's insurance subsidiaries at a level which will generate
an acceptable level of profitability while maintaining the
competitive pricing of their insurance products.
In June 1991, FIC acquired Family Life Insurance Company.
Following the acquisition of Family Life by FIC, management
integrated the sales, marketing, underwriting, accounting,
contract and licensing, investments, personnel, data processing,
home office support and other departments of Family Life and the
life insurance subsidiaries of ILCO. Management believes this
integration has resulted in cost savings for ILCO's insurance
subsidiaries and Family Life. During 1992, the Company's
insurance operations were centralized at the Company's
headquarters in Austin, Texas, with the exception of certain
services performed in Seattle, Washington. Management believes
that relocating administrative functions to Austin has reduced
costs and improved the efficiency of the insurance companies'
operations. The number of employees within the Company and its
subsidiaries (including employees who also perform administrative
services for Family Life) was approximately 332 at December 31,
1996.
Principal Products
The Company's insurance subsidiaries are engaged primarily in
administering existing portfolios of life insurance and accident
and health insurance policies and annuity products. Approximately
74.5% of the total collected premiums for 1996 were derived
primarily from renewal premiums on insurance policies and annuity
products sold by the insurance subsidiaries prior to their
acquisition by the Company.
The Company's insurance subsidiaries are also engaged in
marketing and underwriting individual life insurance and annuity
products in 49 states and the District of Columbia. These
products are marketed through independent, non-exclusive general
agents.
The products currently being distributed include several versions
of universal life insurance and interest-sensitive whole life
insurance. Under a whole life insurance policy, the policyholder
pays a level premium over his or her expected lifetime. The
policy combines life insurance protection with a savings plan
that gradually increases in amount over a period of several
years. The universal and interest-sensitive whole life insurance
policies of the Company's insurance subsidiaries provide
permanent life insurance which credit company-declared current
interest rates. The universal life insurance portfolio of the
Company's insurance subsidiaries consists primarily of flexible
premium universal life insurance policies. Under the flexible
premium policies, policyholders may vary the amounts of their
coverage (subject to minimum and maximum limits) as well as the
date of payment and frequency of payments.
Direct premiums received from all types of universal life
products were $40.6 million in 1996, as compared to $42.3 million
in 1995 and $42.0 million in 1994. Investors-NA received
reinsurance premiums from Family Life of $1.6 million in 1996,
pursuant to the reinsurance agreement for universal life products
written by Family Life. In 1996, premium income from all life
insurance products was derived from all states in which the
Company's insurance subsidiaries are licensed, with significant
amounts derived from Pennsylvania (14%), California (9.0%) New
Jersey (9.0%).
Until they discontinued sales of credit life and disability
insurance in the fourth quarter of 1994, two of the Company's
insurance subsidiaries generally sold that insurance to consumers
through lending and credit organizations. Such insurance was
generally written on an individual or group basis to (i) persons
financing the purchase of new automobiles in the State of New
Jersey and (ii) persons obtaining loans from banks and finance
companies in southeastern states. Most policies of this type were
issued for a term of 48 months or less.
Direct premiums received from credit life and accident insurance,
prior to reinsurance, were $4.2 million in 1994 and $6.5 million
in 1993.
Two of the Company's insurance subsidiaries receive premium
income from health insurance policies. In 1996, premium income
from all health insurance policies was $0.9 million, as compared
to $1.1 million in 1995 and $1.4 million in 1994. Premium
income from health insurance in 1996 was derived from all of the
states in which those two insurance subsidiaries are licensed,
with significant amounts derived from Pennsylvania (23%), New
Jersey (23%), and California (10%).
Investors-NA sponsors a variable annuity separate account, which
offers single premium and flexible premium policies. The
policies provide for the contract owner to allocate premium
payments among four different portfolios of Putnam Capital
Manager Trust ("PCM Fund"), a series fund which is managed by
Putnam Investment Management, Inc. As of January 1, 1997, the
PCM Fund changed its name to Putnam Variable Trust. Prior to
April, 1995, the underlying investment vehicle for the variable
annuity contracts was the CIGNA Annuity Funds Group. A
substitution of the PCM Fund for the CIGNA Funds was completed in
April, 1995. The plan of substitution was approved by the
Securities and Exchange Commission. Following such approval, the
plan was submitted to policyholders for approval, which was
obtained. During 1996, the premium income realized in connection
with these variable annuity policies was $256,294, which was
received from existing contract owners.
Direct deposits from the sale of fixed annuity products were
$948,000 in 1996, as compared to $1,359,000 in 1995 and
$1,296,000 in 1994. Investors-NA received reinsurance premiums
from Family Life of $3.8 million in 1996, pursuant to the
reinsurance agreement for annuity products written by Family
Life.
The following table sets forth, for the three years ended
December 31, 1995, the combined premium income and other
considerations received by the Company's insurance subsidiaries
from sales of their various lines of insurance.
Item 6. Selected Financial Data (in thousands, except per share
data; certain restatements and adjustments are explained
following this table.)
Year Ended December 31,
Type of Insurance 1996 1995 1994
(in thousands)
Individual:
Life $15,031 $16,426 $15,721
Accident & Health 1,035 1,218 1,435
Total Individual Lines 16,066 17,644 17,156
Group:
Life 2,018 2,594 2,226
Accident & Health 6 105
Total Group Lines 2,018 2,600 2,331
Credit:
Life (85) (222) 3,282
Accident & Health (57) 240 2,296
Total Credit Lines (142) 18 5,578
Total Premiums 17,942 20,262 25,065
Reinsurance premiums ceded (7,962) (8,568) (10,748)
Total Net Premium 9,980 11,694 14,317
Amount Received on
Investment
Type Contracts 47,135 44,130 43,372
Total Premiums and
Deposits Received $57,115 $55,824 $57,689
Investment of Assets
The assets held by the Company's insurance subsidiaries must
comply with applicable state insurance laws and regulations
pertaining to life insurance companies. The investment portfolio
of the Company's insurance subsidiaries is tailored to reflect
the nature of the insurance obligations, business needs,
regulatory requirements and tax considerations relating to the
underlying insurance business with respect to such assets. This
is particularly the case with respect to interest-sensitive life
insurance and deferred annuity products, where the investment
emphasis is to obtain a targeted margin of profit over the rate
of interest credited to policyholders, while endeavoring to
minimize the portfolio's exposure to changing interest rates. To
reduce the exposure to such rate changes, portfolio investments
are selected so that diversity, maturity and liquidity factors
approximate the duration of associated policyholder liabilities.
The investment objective of the Company's insurance subsidiaries
emphasizes the selection of short to medium term high quality
fixed income securities, rated Baa-3 (investment grade) or better
by Moody's Investors Service, Inc. At December 31, 1996, only
3.9% of the Company's total assets were invested in mortgage
loans or real estate. Non-affiliated corporate debt securities
that were non-investment grade represented 1.1% of the Company's
total assets at December 31, 1996. The Company had investments in
debt securities of affiliated corporations aggregating
approximately $59.9 million as of December 31, 1996.
Investments in mortgage-backed securities included collateralized
mortgage obligations ("CMOs") of $260.1 million and
mortgage-backed pass-through securities of $53.7 million at
December 31, 1996. Mortgage-backed pass-through securities,
sequential CMOs, support bonds, and z-accrual bonds, which
comprised approximately 52.3% of the book value of the Company's
mortgage-backed securities at December 31, 1996, are sensitive to
prepayment and extension risks. The Company has reduced the risk
of prepayment associated with mortgage-backed securities by
investing in planned amortization class ("PAC"), target
amortization class ("TAC") instruments, accretion directed bonds
and scheduled bonds. These investments are designed to amortize
in a predictable manner by shifting the risk of prepayment of the
underlying collateral to other investors in other tranches
("support classes") of the CMO. PAC and TAC instruments and
accretion directed and scheduled bonds represented approximately
47.7% and sequential and support classes represented
approximately 35.2% of the book value of the Company's mortgage--
backed securities at December 31, 1996. In addition, the Company
limits the risk of prepayment of CMOs by not paying a premium for
any CMOs. The Company does not invest in mortgage-backed
securities with increased prepayment risk, such as interest-only
stripped pass-through securities and inverse floater bonds. The
Company does invest in z-accrual bonds, but they constituted only
3.4% of the book value of the Company's mortgage-backed
securities at December 31, 1996. The prepayment risk that certain
mortgage-backed securities are subject to is prevalent in periods
of declining interest rates, when mortgages may be repaid more
rapidly than scheduled as individuals refinance higher rate
mortgages to take advantage of the lower current rates. As a
result, holders of mortgage-backed securities may receive large
prepayments on their investments which cannot be reinvested at an
interest rate comparable to the rate on the prepaying mortgages.
The Company did not make additional investments in CMOs during
1996, and the current investment objectives of the Company do not
contemplate additions to the portfolio of CMO investments during
1997.
The Company does not invest in non-agency mortgage-backed
securities, which have a greater credit risk than that of agency
mortgage-backed securities.
The Company does not make new mortgage loans on commercial
properties. Substantially all of the Company's mortgage loans
were made by its subsidiaries prior to their acquisition by the
Company. At December 31, 1996, 0.6% of the total book value of
mortgage loans held by the Company had defaulted as to principal
or interest for more than 90 days, and none of the Company's
mortgage loans were in foreclosure. During 1996, none of the
Company's mortgage loans were converted to foreclosed real estate
or were restructured while the Company owned them.
Another key element of the Company's investment strategy is to
avoid large exposure in other investment categories which the
Company believes carry higher credit or liquidity risks,
including private placements, partnerships and bank
participation. These categories accounted for approximately 1.2%
of the Company's invested assets at December 31, 1996.
Investors-NA is the owner and developer of an office complex
known as Bridgepoint Square Offices. Once completed, the project
will consist of four office buildings, with a total rentable
space of 364,000 square feet, and two parking garages. Investors-
NA purchased the 20 acre tract of land for this complex in
January, 1995. At that time, the tract included one completed
and fully leased office building, an adjacent parking garage, and
sites for three more office buildings and a second parking
garage. Since the purchase, Investors-NA has completed
construction on the second parking garage and two of the
remaining building sites. Construction is in progress on the
fourth building, with a projected completion date in July, 1997.
Three of the four buildings are fully occupied by tenants and the
fourth is partially leased. Negotiations are in progress with two
potential tenants to lease the remaining space in the fourth
building. See Item 2. Properties.
In May 1996, Family Life Insurance Company ("FLIC"), an indirect,
100% owned subsidiary of FIC, purchased a 7.1 acre tract adjacent
to the original Bridgepoint Square tract. This second tract
contained one building site and one garage site. In January,
1997, FLIC began construction on a four-story office building,
with rentable space of approximately 71,500 square feet, and the
parking garage, with 350 parking spaces. The projected completion
date is September, 1997. Once construction on the building is
completed, ILCO and its related companies will move their
headquarters from the current location in the Austin Centre to
the new office building. The companies will occupy approximately
50,000 square feet of the building, with the balance to be leased
to a third party.
The Company has established and staffed an investment department,
which manages portfolio investments and investment accounting
functions for ILCO's life insurance subsidiaries.
Agency Operations
ILCO's insurance subsidiaries collectively market through the
"Investors" distribution system. Independent non-exclusive
agents, general agents and brokers are recruited nation-wide to
sell the products. Such agents and brokers also sell insurance
products for companies in competition with ILCO's insurance
subsidiaries. In order to attract agents and enhance the sale of
its products, the Company's insurance subsidiaries pay
competitive commission rates and provides other sales
inducements. The Investors Sales distribution system is presently
concentrating its efforts on the promotion and sale of universal
life, interest-sensitive life, term life and fixed annuity
products.
Marketing and sales for all of the Company's insurance
subsidiaries are directed by the Executive Vice President of
Marketing and Sales. The Vice President for Investors Sales
directs Regional Vice Presidents who are responsible for the
recruitment and maintenance of the general agents and managing
general agents for individual insurance sales.
Data Processing
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided at a central location until November
30, 1994. Since December, 1994, all of those data processing
needs have been provided to ILCO's and FIC's Austin, Texas and
Seattle, Washington facilities by FIC Computer Services, Inc., a
new subsidiary of FIC. See Item 13.- Certain Relationships and
Related Transactions with Management.
Competition
There are many life and health insurance companies in the United
States. A significant number of casualty companies also market
health insurance. Agents placing insurance business with ILCO's
life insurance subsidiaries are compensated on a commission
basis. However, some companies pay higher commissions and charge
lower premium rates and many companies have more substantial
resources.
The principal cost and competitive factors that affect the
Company's ability to sell its life and health insurance and
annuity products on a profitable basis are: (1) the general level
of premium rates for comparable products; (2) the extent of
individual policy holder services required to service each
product category; (3) general interest rate levels; (4)
competitive commission rates and related marketing costs; (5)
legislative and regulatory requirements and restrictions; (6) the
impact of competing insurance and other financial products; and
(7) the condition of the regional and national economies.
Reinsurance and Reserves
Reinsurance Ceded:
In accordance with general practices in the insurance industry,
the Company's insurance subsidiaries limit the maximum net losses
that may arise from large risks by reinsuring with other
carriers. Such reinsurance provides for a portion of the
mortality risk to be retained (the "Retention") with the excess
being ceded to a reinsurer at a premium set forth in a schedule
based upon the age and risk classification of the insured. The
reinsurance treaties provide for allowances that help the
Company's insurance subsidiaries offset the expense of writing
new business. ILIC generally retains the first $70,000 of risk on
the life of any individual. Investors-NA generally retains the
first $100,000 of risk on the life of any individual.
Investors-IN generally retains the first $50,000 of risk on the
life of any individual.
In 1988, Investors-NA entered into a bulk reinsurance treaty
under which it reinsured all of its risks under accidental death
benefit policies. ILIC had previously obtained similar bulk
reinsurance for accidental death benefit policies. The treaty was
renegotiated with another reinsurer, with a new effective date of
January 1, 1996. Effective as of January 1, 1997, the treaty was
renegotiated with a different reinsurer.
In 1993 ILCO's life subsidiaries entered into a quota share
reinsurance treaty under which all credit life and health
business issued March 1, 1993 and later is 50% reinsured.
Although reinsurance does not eliminate the exposure of the
Company's insurance subsidiaries to losses from risks insured,
the net liability of such subsidiaries will be limited to the
portion of the risk retained, provided that the reinsurers meet
their contractual obligations.
The Company's insurance subsidiaries carry reserves on their
books to meet future obligations under their outstanding
insurance policies. Such reserves are believed to be sufficient
to meet policy obligations as they mature and are calculated
using assumptions for interest, mortality, expenses and
withdrawals in effect at the time the policies were issued.
Reinsurance Assumed:
In 1995, Investors-NA entered into a reinsurance agreement with
Family Life pertaining to universal life insurance written by
Family Life. The reinsurance agreement is on a co-insurance
basis and applies to all covered business with effective dates on
and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than
$200,000; face amounts of $200,000 or more are reinsured by
Family Life with a third party reinsurer. In 1996, Investors-NA
entered into a reinsurance agreement with Family Life, pertaining
to annuity contracts written by Family Life. The agreement
applies to contracts written on or after January 1, 1996. These
reinsurance arrangements reflect management's plan to develop
universal life and annuity business at Investors-NA, with Family
Life concentrating on the writing of term life insurance
products.
FIC's Acquisition of Control of the Company
In January 1985, FIC acquired 26.53% of ILCO's common stock. FIC
and Family Life subsequently acquired additional shares of ILCO's
common stock and as of March 14, 1997, FIC owned, directly and
indirectly through Family Life, approximately 46% of the
outstanding shares of ILCO's common stock. FIC holds options to
acquire up to 1,702,155 additional shares of ILCO Common Stock.
Giving effect to the exercise of those options, FIC would own,
directly and indirectly through Family Life, approximately 61.5%
of the outstanding shares of ILCO Common Stock. The exercise
price of the options is equal to the average quoted market price
of ILCO's common stock over the six month period immediately
prior to exercise. In addition, in the event that any other party
were to seek to acquire, without the prior approval of ILCO's
Board of Directors, securities aggregating five percent or more
of ILCO's outstanding common stock, FIC would have the right to
acquire, under the same price formula, that number of shares of
ILCO's common stock which, when added to the number of shares
then owned by FIC, would amount to 51% of ILCO's outstanding
common stock.
The stock options were granted in 1986 to FIC by the Company
principally in consideration for a $1,200,000 unsecured loan from
FIC, FIC's agreement to guarantee up to $4,000,000 of
Registrant's financial obligations and FIC's agreement to
guarantee, upon demand, ILCO's performance under its lease on its
headquarters building. In addition, FIC guaranteed a $15,000,000
term loan of ILCO.
FIC's Acquisition of Family Life
After FIC acquired control of ILCO, FIC's primary involvement in
the insurance industry was its indirect investment, through ILCO,
in ILCO's insurance subsidiaries. In June 1991, FIC acquired
Family Life Insurance Company, ("Family Life"), based in Seattle,
Washington, from Merrill Lynch Insurance Group, Inc.
Family Life underwrites and sells mortgage protection life
insurance to customers who are mortgage borrowers from financial
institutions where Family Life has marketing relationships.
Family Life distributes its insurance products primarily through
a national career sales force in 49 states and the District of
Columbia.
The $114 million purchase price for Family Life and an additional
$5 million for transaction costs, working capital and other
related purposes were financed by: (a) a $50 million senior loan
provided by a group of banks, (b) $44 million subordinated notes
issued to the seller and its affiliates and (c) $25 million
senior subordinated notes issued to Investors-CA and
Investors-NA. In addition, FIC granted to Investors-CA and
Investors-NA nontransferable options to purchase up to a total of
9.9% of FIC's common stock at a price of $10.50 per share,
equivalent to the then current market price, subject to
adjustment to prevent dilution. As a result of the five-for-one
stock split implemented by FIC, effective in November, 1996, the
exercise price of the options was changed to $2.10 per share. The
initial terms of the option provided for their expiration on June
12, 1998, if not previously exercised. In connection with the
1996 amendments to the subordinated loans held by Investors-NA,
the expiration date of the options was extended to September 12,
2006. For a discussion of the 1996 amendments, see Item 13,
Certain Relationships and Related Transactions with Management,
above. In July 1993 the subordinated notes held by the seller
and its affiliates were prepaid. The primary source of the funds
used to prepay the subordinated debt was a new subordinated loan
of $34.5 million obtained from Investors-NA. See Item 13, above.
Senior Loan . In January, 1993, the Company prepaid all of its
subordinated indebtedness and purchased and cancelled all of the
warrants held by certain of its subordinated noteholders. In
addition to paying the $30 million aggregate principal amount of
the subordinated notes due in 1997, 1998 and 1999 plus accrued
interest, the Company paid approximately $7 million of prepayment
penalty, the after-tax effect of which was a charge against
earnings in 1993, and approximately $8 million for the warrants,
which was a charge directly against retained earnings. The
warrants had entitled the holders to purchase 1,107,480 shares of
the Company's Common Stock (approximately 24% of the outstanding
shares) at an exercise price of $3.33 per share. The currently
estimated price that the warrant holders could have required the
Company to pay for the warrants upon exercise of their put option
was approximately $29.9 million. The earliest that the put option
could have been exercised was December 1993, if such exercise
would not have resulted in a default under the Senior Loan at
that time. The purchase and cancellation of the warrants reduced
the number of the Company's outstanding shares of common stock
and common stock equivalents used in the computation of its
earnings per share from approximately 7,147,000 shares to
approximately 6,040,000 shares. This adjustment in common stock
equivalents affected earnings per share for periods after January
29, 1993.
The primary source of the funds used to prepay the subordinated
debt and to purchase the warrants was an increase in the
outstanding balance of the Company's existing senior loan
obligation from $60 million to $110 million pursuant to an
amended and restated credit agreement that the Company entered
into on January 29, 1993 with certain banks, including the same
agent bank as in the bank group which provided the senior loan
used in connection with the 1988 acquisition of Investors-NA and
Investors-CA (the "Senior Loan"). The Company's prepayment of
subordinated debt, purchase of warrants and increase in senior
bank indebtedness are referred to herein as the "Refinancing".
The terms of the amended and restated credit facility ("Senior
Loan") are substantially the same as the terms and provisions of
the original senior loan which was provided to the Company in
1988. The interest rate on the $30 million subordinated debt that
was replaced by the New Senior Loan was 13.25%. The average
interest rate paid by the Company on its Senior Loan was
approximately 7.04% during 1994, 8.63% during 1995 and 7.76%
during 1996. The maturity date, which had been December 31, 1996,
was extended to July 1, 1998 for the Senior Loan. On February 14,
1995, the Company borrowed an additional $15 million under the
Senior Loan to help finance the acquisition of Investors-IN, and
the maturity date of the Senior Loan was further extended to July
1, 1999.
As of December 31, 1995, the outstanding principal balance of the
ILCO's senior loan obligations was $59.4 million. In January,
1996, the Company made a scheduled payment of $4.5 million under
its Senior Loan. In March, 1996, the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At
that same time, the Company made a payment of $941,000, an
additional payment under the terms of the loan applied to the
principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made, which resulted in
advancing the scheduled payoff date of the Senior Loan to April
1, 1998. In July, 1996, the Company made the principal payment
for October 1st ($4.5 million), plus an optional principal
payment of $0.5 million.
The Senior Loan is a secured and guaranteed six and one-half year
term loan. A required $26 million principal payment was made on
April 1, 1993. Thereafter, the principal is payable in twenty two
quarterly installments of $4.5 million each, commencing on April
1, 1994 and ending on July 1, 1999. The Company is required to
make mandatory payments on the Senior Loan equal to (a) 100% of
the net proceeds from the issuance of the Company's capital stock
or debt securities and (b) the applicable percentage of the
Company's annual Excess Cash Flow: 100%, if the outstanding
principal balance of the New Senior Loan exceeds $75 million;
75%, if the outstanding balance exceeds $50 million but is equal
to or less than $75 million; or 50%, if the outstanding balance
is equal to or less than $50 million. Excess Cash Flow is the
excess of (i) the sum of the Company's cash and cash equivalents,
principal and interest received by the Company from surplus
debentures, cash dividends received by the Company and interest
income on the Company's cash equivalents over (ii) the sum of
principal and interest paid on the Company's indebtedness,
operating expenses, taxes actually paid and $5 million.
The Senior Loan bears interest, at the option of the Company, at
a rate per annum equal to (i) the Alternate Base Rate (as defined
below) plus the Applicable Margin (as defined below), or (ii)
LIBOR (adjusted for reserves) for interest periods of 1, 2, 3 or
6 months plus the Applicable Margin. LIBOR is London Inter-Bank
Offered Rates. The Alternate Base Rate for any day is the higher
of (a) the agent bank's corporate base rate as announced from
time to time and (b) the federal funds rate as published by the
Federal Reserve Bank of New York plus 0.5%. The Applicable
Margin, depending on the outstanding principal balance of the
Senior Loan, ranges from 0.5% to 1.25% for loans that bear
interest based upon the Alternate Base Rate and from 1.75% to
2.5% for loans that bear interest based upon LIBOR. The initial
Applicable Margin for Alternate Base Rate loans is 1.25% and the
initial Applicable Margin for LIBOR loans is 2.5%.
The obligations of the Company under the Senior Loan are secured
by: (1) all of the outstanding shares of stock of Investors-NA,
(2) a $15,000,000 surplus debenture of Investors-NA payable to
the Company, which had an outstanding principal balance of
$5,706,000 as of December 31, 1996 and (3) a $140,000,000
surplus debenture of Investors-NA payable to the Company, which
had an outstanding principal balance of $32,840,000 as of
December 31, 1996. The obligations of the Company under the
Senior Loan are guaranteed by FIC.
The Senior Loan prohibits the payment by the Company of cash
dividends on the Common Stock and contains covenants, including
restrictive covenants that impose limitations on the Company's
and its subsidiaries' ability to, among other things: (i) make
investments; (ii) create or incur additional debt; (iii) engage
in businesses other than their present and related businesses;
(iv) create or incur additional liens; (v) incur contingent
obligations; (vi) dispose of assets, (vii) enter into
transactions with affiliated companies; and (viii) make capital
expenditures; and various financial covenants, including
covenants requiring the maintenance of a minimum cash flow
coverage ratio, minimum consolidated net worth and minimum
statutory surplus of subsidiaries, and a minimum ratio (360%) of
(i) the sum of the statutory capital and surplus, the asset
valuation reserve and one-half of the dividend liability
pertaining to participating policies of each insurance company
subsidiary to (ii) its respective Authorized Control Level RBC
(see "Regulation").
The Senior Loan specifies events of default, including, but not
limited to, failure to pay amounts under the Senior Loan
documents when due; defaults or violation of covenants under
other indebtedness; defaults under the loans made by Investors-NA
to subsidiaries of FIC; the loss of any license of an insurance
subsidiary of the Company which would have a material adverse
effect on the Company; defaults under the FIC guaranty agreement;
changes in ownership or control of FIC or the Company by its
controlling person, Roy F. Mitte, or in the Company by FIC; and
the occurrence of certain events of bankruptcy. If Mr. Mitte
ceases to control the management of the Company solely by reason
of (i) his death or (ii) his permanent inability to perform his
usual and customary duties on a full-time basis on behalf of the
Company and FIC as the result of physical or mental infirmity, a
default will occur, and the banks holding in the aggregate at
least 66 2/3% of the outstanding balance of the Senior Loan may,
on or after 180 days after the date on which such default occurs,
declare the Senior Loan immediately due and payable. Mr. Mitte's
ability to communicate and his mobility are impaired as a result
of a stroke he suffered in May 1991. However, Mr. Mitte continues
to control the management of the Company, and Mr. Mitte's
impairments did not constitute a default under the Senior Loan.
See Item 10(b)-Executive Officers of the Registrant.
The outstanding principal balance of the Senior Loan was $24.94
million as of December 31, 1996.
Regulation
General. The Company's insurance subsidiaries are subject to
regulation and supervision by the states in which they are
licensed to do business. Such regulation is designed primarily to
protect policy owners. Although the extent of regulation varies
by state, the respective state insurance departments have broad
administrative powers relating to the granting and revocation of
licenses to transact business, licensing of agents, the
regulation of trade practices and premium rates, the approval of
form and content of financial statements and the type and
character of investments.
These laws and regulations require the Company's insurance
subsidiaries to maintain certain minimum surplus levels and to
file detailed periodic reports with the supervisory agencies in
each of the states in which they do business and their business
and accounts are subject to examination by such agencies at any
time. The insurance laws and regulations of the domiciliary
states of the Company's insurance subsidiaries require that such
subsidiaries be examined at specified intervals.
Investors-NA and ILIC are domiciled in the states of Washington
and New Jersey, respectively. In December 1992, Investors-NA
redomesticated from Pennsylvania to Washington, and Investors-CA
merged into Investors-NA. In June, 1993 Standard Life merged into
Investors-NA. Investors-IN is domiciled in the State of Indiana.
A number of states regulate the manner and extent to which
insurance companies may test for acquired immune deficiency
syndrome (AIDS) antibodies in connection with the underwriting of
life insurance policies. To the extent permitted by law, the
Company's insurance subsidiaries consider AIDS information in
underwriting coverage and establishing premium rates. An
evaluation of the financial impact of future AIDS claims is
extremely difficult, due in part to insufficient and conflicting
data regarding the incidence of the disease in the general
population and the prognosis for the probable future course of
the disease.
Risk-Based Capital Requirements. Effective for the 1993 calendar
year, the National Association of Insurance Commissioners
("NAIC") has adopted Risk-Based Capital ("RBC") requirements to
evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks associated with; (i)
asset quality; (ii) mortality and morbidity; (iii) asset and
liability matching; and (iv) other business factors. The states
will use the RBC formula as an early warning tool to discover
potential weakly capitalized companies for the purpose of
initiating regulatory action. The RBC requirements are not
intended to be a basis for ranking the relative financial
strength of insurance companies. In addition, the formula defines
a new minimum capital standard which will supplement the
prevailing system of low fixed minimum capital and surplus
requirements on a state-by-state basis.
The RBC requirements provide for four different levels of
regulatory attention in those states that adopt the NAIC
regulations, depending on the ratio of the company's Total
Adjusted Capital (which generally consist of its statutory
capital, surplus and asset valuation reserve) to its Authorized
Control Level RBC. A "Company Action Level Event" is triggered
if a company's Total Adjusted Capital is less than 200% but
greater than or equal to 150% of its Authorized Control Level
RBC, or if a negative trend has occurred (as defined by the
regulations) and Total Adjusted Capital is less than 250% but
more than 200% of its Authorized Control Level RBC. When a
Company Action Level Event occurs, the company must submit a
comprehensive plan to the regulatory authority which discusses
proposed corrective actions to improve its capital position. A
"Regulatory Action Level Event" is triggered if a company's Total
Adjusted Capital is less than 150% but greater than or equal to
100% of its Authorized Control Level RBC. When a Regulatory
Action Level Event occurs, the regulatory authority will perform
a special examination of the company and issue an order
specifying corrective actions that must be followed. An
"Authorized Control Level Event" is triggered if a company's
Total Adjusted Capital is less than 100% but greater than or
equal to 70% of its Authorized Control Level RBC, and the
regulatory authority may take any action it deems necessary,
including placing the company under regulatory control. A
"Mandatory Control Level Event" is triggered if a company's total
adjusted capital is less than 70% of its Authorized Control Level
RBC, and the regulatory authority is mandated to place the
company under its control.
Calculations using the NAIC formula and the statutory financial
statements of the Company's insurance subsidiaries as of December
31, 1996 indicate that the Total Adjusted Capital of each of the
Company's insurance subsidiaries is above 480% of its respective
Authorized Control Level RBC.
Solvency Laws Assessments. The solvency or guaranty laws of most
states in which the Company's insurance subsidiaries do business
may require the Company's insurance subsidiaries to pay
assessments (up to certain prescribed limits) to fund
policyholder losses or liabilities of insurance companies that
become insolvent. Recent insolvencies of insurance companies
increase the possibility that such assessments may be required.
These assessments may be deferred or forgiven under most guaranty
laws if they would threaten an insurer's financial strength and,
in certain instances, may be offset against future premium taxes.
The insurance companies record the expense for guaranty fund
assessments in the period assessed. The occurrence and amount of
such assessments have increased in recent years. The net amount
of such assessment for the Company's insurance subsidiaries was
approximately $100,165 in the year ended December 31, 1996 That
amount is net of the amounts that can be offset against future
premium taxes. The likelihood and amount of any other future
assessments cannot be estimated and are beyond the control of the
Company.
Surplus Debentures and Dividends. The principal sources of cash
for the Company to make payments of principal and interest on the
Senior Loan are payments under the surplus debentures of
Investors-NA (a Washington-domiciled corporation).
The surplus debentures were originally issued by Standard Life.
Upon the merger of Standard Life into Investors-NA, the
obligations of the surplus debentures were assumed by
Investors-NA. Since Investors-NA is domiciled in the State of
Washington, the provisions of Washington insurance law apply to
the surplus debentures. Under the provisions of the surplus
debentures and current law, Investors-NA can pay interest and
principal on the surplus debentures without having to obtain the
prior approval of the Washington Insurance Commissioner; provided
that, after giving effect to such payments, the statutory surplus
of Investors-NA is in excess of $10 million. As of December 31,
1996, the statutory surplus of Investors-NA was $53,773,628.
Investors-NA does give five-days prior notification to the
Washington Insurance Department of each proposed payment on the
surplus debentures in accordance with an agreement between
Investors-NA and the Department. 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.
Pursuant to the surplus debentures Investors-NA paid to the
Company principal and interest on the surplus debentures of
$26,224,640 in 1994, $22,749,576 in 1995 and $36,288,469 in 1996.
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 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. As of
December 31, 1996, Investors-NA had earned surplus of $5,205,100.
Since the law applies only to dividend payments, the ability of
Investors-NA to make principal and interest payments under the
Surplus Debentures is not affected. ILCO does not anticipate
that Investors-NA will have any difficulty in making principal
and interest payments on the Surplus Debentures in the amounts
necessary to enable ILCO to service the Senior Loan for the
foreseeable future.
ILIC is domiciled in the State of New Jersey. Under the New
Jersey insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Any
dividend must be paid from earned surplus. A proposed payment of
a dividend or distribution which, together with dividends or
distributions paid during the preceding twelve months, exceeds
the greater of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) statutory net gain from operations for the
preceding calendar year is treated as an "extraordinary dividend"
and may not be paid until either it has been approved, or a
waiting period shall have passed during which it has not been
disapproved, by the insurance commissioner. ILIC had earned
surplus of $4,566,338 at December 31, 1996.
Investors-IN is domiciled in the State of Indiana. Under the
Indiana insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Under
Indiana law the dividend must be paid from earned surplus.
Extraordinary dividend approval would be required where a
dividend exceeds the greater of 10% of surplus or the net gain
from operations for the prior fiscal year. Investors-IN had
earned surplus of $11,525,153 at December 31, 1996.
Valuation Reserves. Commencing in 1992, the Mandatory Securities
Valuation Reserve ("MSVR") required by the NAIC for life
insurance companies was replaced by a mandatory Asset Valuation
Reserve ("AVR") which is expanded to cover mortgage loans, real
estate and other investments. A new mandatory Interest
Maintenance Reserve ("IMR"), designed to defer realized capital
gains and losses due to interest rate changes on fixed income
investments and to amortize those gains and losses into future
income, is also effective for 1992. Previously, realized capital
gains attributable to interest rate changes were credited to the
MSVR and had the effect of reducing the required MSVR
contributions of ILCO's insurance subsidiaries. Effective in
1992, such realized capital gains are credited to the IMR. As a
result of these changes, management believes that the Company's
insurance subsidiaries are required to accrue greater aggregate
asset valuation reserves. The combination of the AVR and IMR will
affect statutory capital and surplus and may reduce the ability
of the Company's insurance subsidiaries to pay dividends and make
payments on the surplus debentures.
Insurance Holding Company Regulation. Investors-NA, ILIC and
Investors-IN are subject to regulation under the insurance and
insurance holding company statutes of Washington, New Jersey and
Indiana. The insurance holding company laws and regulations vary
from jurisdiction to jurisdiction, but generally require
insurance and reinsurance subsidiaries of insurance holding
companies to register with the applicable state regulatory
authorities and to file with those authorities certain reports
describing, among other information, their capital structure,
ownership, financial condition, certain intercompany transactions
and general business operations. The insurance holding company
statutes also require prior regulatory agency approval or, in
certain circumstances, prior notice of certain material
intercompany transfers of assets as well as certain transactions
between insurance companies, their parent companies and
affiliates.
Under the Washington, New Jersey and Indiana insurance holding
company laws, unless (i) certain filings are made with the
respective department of insurance, (ii) certain requirements are
met, including a public hearing and (iii) approval or exemption
is granted by the respective insurance commissioner, no person
may acquire any voting security or security convertible into a
voting security of an insurance holding company, such as the
Company, which controls an insurance company domiciled in that
state, or merge with such a holding company, if as a result of
such transaction such person would "control" the insurance
holding company. "Control" is presumed to exist if a person
directly or indirectly owns or controls 10% or more or the voting
securities of another person.
Potential Federal Regulation. Although the federal government
generally does not directly regulate the insurance industry,
federal initiatives often have an impact on the business.
Congress and certain federal agencies are investigating the
current condition of the insurance industry (encompassing both
life and health and property and casualty insurance) in the
United States in order to decide whether some form of federal
role in the regulation of insurance companies would be
appropriate. Congress is currently conducting a variety of
hearings relating in general to the solvency of insurers. It is
not possible to predict the outcome of any such congressional
activity nor the potential effects thereof on the Company's
insurance subsidiaries.
Congressional initiatives directed at repeal of the McCarran-
Ferguson Act (which exempts the "business of insurance" from most
federal laws, including the antitrust laws, to the extent it is
subject to state regulation) and judicial decisions narrowing the
definition of "business of insurance" for McCarran-Ferguson Act
purposes may limit the ability of insurance companies in general
to share information with respect to rate-setting, underwriting
and claims management practices. Current and proposed federal
measures which may also significantly affect the insurance
industry include minimum solvency requirements and removal of
barriers preventing banks from engaging in the insurance
business.
Federal Income Taxation
The Revenue Reconciliation Act of 1990 amended the Internal
Revenue Code of 1986 to require a portion of the expenses
incurred in selling insurance products to be deducted over a
period of years, as opposed to an immediate deduction in the year
incurred. Since this change only affects the timing of the
deductions, it does not affect tax expense as shown on the
Company's financial statements prepared in accordance with GAAP.
However, the change will increase the tax for statutory
accounting purposes in the first few years, which will reduce
statutory surplus and, accordingly, may decrease the amount of
cash dividends that Investors Life-NA can pay to the Company. For
the years ended December 31, 1994, 1995 and 1996, the increases
(decreases) in the current income tax provisions of the Company's
insurance subsidiaries due to this change were $88,505,
($118,480) and ($90,413), respectively. The change has a negative
tax effect for statutory accounting purposes when the premium
income of the Company's insurance subsidiaries increases, but has
a positive tax effect when their premium income decreases.
Segment Information
The principal operations of the Company's insurance subsidiaries
are the underwriting of life insurance and annuities.
Accordingly, no separate segment information is required to be
provided by the Registrant for the three-year period ending
December 31, 1996.
Item 2. Properties
The Registrant's headquarters are currently located at Austin
Centre, 701 Brazos, Suite 1400, Austin, Texas. Investors-NA
purchased Austin Centre, an office-hotel property in downtown
Austin in August 1991 for a purchase price of $31,275,000 from an
unrelated seller that had previously acquired the property
through foreclosure. Austin Centre covers a full city block and
is a sixteen story mixed use development consisting of 343,664
square feet of office/retail space (predominately office space),
a 314 room hotel and 61 luxury apartments, all united by a 200
foot high glass atrium. The project was completed in October
1986.
In September 1995, Investors-NA entered into a contract to sell
Austin Centre to an Austin-based real estate investment firm for
a purchase price of $62.675 million, less $1 million to be paid
to a capital reserve account for the purchaser. The sale was
consummated on March 29, 1996. A portion of the sale proceeds
equal to the amount that Investors-NA presently had invested in
Austin Centre were retained and reinvested by Investors-NA. The
balance of the net proceeds of the sale were used to reduce
ILCO's bank indebtedness by approximately $15 million.
On January 31, 1995, ILCO, through Investors-NA, purchased, as an
investment property, an office building project known as
Bridgepoint Office Square in Austin, Texas for a cash purchase
price of $9.75 million. The property consists of 20 acres of land
with four office building sites and two parking structure sites.
The first phase of development of the property was completed in
1986 and consists of a five-story office building with 83,474
square feet of rentable space and a 550-car parking garage. The
office space is fully rented.
In the fourth quarter of 1995, construction began on the second
office building, containing approximately 109,000 rentable square
feet, and the other parking garage containing approximately 871
spaces. That phase of the project was completed in September
1996, and is 100% leased to a major tenant in the technology
business.
In March 1996, construction commenced on the third office
building, with approximately 81,000 rentable square feet of
office space and was completed in December, 1996. Investors-NA
leased approximately 43,000 square feet of the third office
building to the same tenant which leased all of the space in the
second building. The remaining space was leased in October, 1996
to a major tenant also in the technology business.
Construction began on the fourth building in July 1996, with a
projected completion date of July, 1997. The fourth building
contains approximately 92,459 rentable square feet. In September
of 1996, approximately 23,619 rentable square feet were leased to
an oil and gas company. Another 10,000 square feet was leased in
March, 1997, to a company involved in the technology field.
Investors-NA is currently negotiating with two other potential
tenants to lease the remainder of the rentable square feet in the
fourth building.
On May 3, 1996, Family Life Insurance Company, an indirect, 100%
owned subsidiary of FIC, purchased a tract of land adjoining the
Bridgepoint Office Square tract for a cash purchase price of $1.3
million. The property consists of 7.1 acres of land with one
office building site and one parking structure site. FLIC began
construction of the fifth building (known as "Bridgepoint Five")
on the new site in January 1997. The building, which will have
approximately 71,500 square feet of rentable space, is currently
projected to be completed in September, 1997. Following
completion of the building, ILCO and its related companies will
vacate their current headquarters in the Austin Centre and move
them to Bridgepoint Five. ILCO and its related companies will
occupy approximately 50,000 rentable square feet. FLIC is
currently seeking tenants to occupy the remainder of the rentable
square feet in the fifth building.
ILCO leases a building located at 40 Parker Road, Elizabeth, New
Jersey. This building, which was formerly the Company's
headquarters building, contains approximately 41,000 square feet
of office space. The remaining term of the lease is 11 years, and
the lease calls for a minimum base rental of $450,000 per annum.
The lease provides that all costs including, but not limited to,
those for maintenance, repairs, insurance and taxes be borne by
ILCO. The Registrant and ILIC currently occupy a nominal portion
of the space in the 40 Parker Road property and have sub-leased
the remaining portion.
ILIC owns three buildings which are adjacent to the 40 Parker
Road building. One building, which leased to third parties,
contains approximately 3,500 square feet of space. The second
building contains approximately 2,500 square feet of space and is
leased to persons who perform maintenance services for ILIC's and
ILCO's properties in Elizabeth, New Jersey. The third building,
purchased during 1985, contains approximately 3,500 square feet
of space, and is partially leased to third parties and the
remainder is used to provide accommodations for employees working
at the New Jersey office.
Investors-NA owns an office building, located at 206 West Pearl
Street, Jackson, Mississippi. This building is 67 years old and
contains approximately 85,000 square feet of office space.
Investors-NA currently occupies a nominal portion of the space in
this property and leases space to various commercial tenants.
The Company believes that its properties and leased space are
adequate to meet its foreseeable requirements.
Item 3. Legal Proceedings
The Company and Investors-NA are defendants in a lawsuit which
was filed in October, 1996, in Travis County, Texas. CIGNA
Corporation, an unrelated company, is also a named defendant in
the lawsuit. The named plaintiffs in the suit (a husband and
wife), allege that the universal life insurance policies sold to
them by INA Life Insurance Company (a company which was merged
into Investors-NA in 1992) utilized unfair sales practices. The
named plaintiffs seek reformation of the life insurance contracts
and an unspecified amount of damages. The named plaintiffs also
seek a class action as to similarly situated individuals. No
certification of a class has been granted as of the date hereof.
The Company believes that the suit is without merit and intends
to vigorously defend this matter.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal
year ended December 31, 1996 to a vote of security holders.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
A. Market Information
The following table sets forth the quarterly high and low sales
prices for the Company's Common Stock in The Nasdaq Small-Cap
Market for 1996 and 1995.
Prices
High Low
1996:
1st Quarter. . . . . . . $15.50 $12.50
2nd Quarter. . . . . . . 16.25 13.375
3rd Quarter. . . . . . . 15.25 11.50
4th Quarter. . . . . . . 14.25 12.00
1995:
1st Quarter. . . . . . . $13.50 $10.00
2nd Quarter. . . . . . . 13.00 10.75
3rd Quarter. . . . . . . 12.00 10.25
4th Quarter. . . . . . . 13.25 10.25
The Common Stock of the Company is traded in The Nasdaq Small-Cap
Market (NASDAQ Symbol: ILC0). Quotations are furnished by the
National Association of Securities Dealers Automated Quotation
System (NASDAQ).
B. Holders
The approximate number of record holders of the Common Stock of
the Registrant as of March 14, 1997 was 1,537.
C. Dividends
No dividend was declared or paid by the Company during 1994, 1995
or 1996. Under the terms of its Senior Loan the Company is not
permitted to declare or pay any dividends on its Common Stock
during the loan term. A more detailed discussion of the Senior
Loan is set forth in Item 1 hereof.
The ability of an insurance holding company, such as ILCO, to pay
dividends to its shareholders may be limited by the company's
ability to obtain revenue, in the form of dividends and other
payments, from its operating insurance subsidiaries. The right of
such subsidiaries to pay dividends is generally restricted by the
insurance laws of their domiciliary states. See Item 1. Business
Regulation - Surplus Debentures and Dividends.
Item 6. Selected Financial Data (in thousands, except per share
data; certain restatements and adjustments are explained
following this table.)
Years Ended December 31,
1996 1995 1994 1993 1992
Revenues $ 138,244 $ 122,390 $ 114,842 $ 117,843 $ 139,009
Benefits &
Expenses 96,801 105,907 99,142 100,525 117,568
Income from
operations 41,443 16,483 15,700 17,318 21,441
Provision for
federal income
taxes 14,505 5,769 5,783 5,118 7,540
Net Income
before extra-
ordinary item
and cumulative
effect of
change in
accounting
principle 26,938 10,714 9,917 12,200 13,901
Extraordinary
Item -0- -0- -0- (6 253) -0-
Net Income
before
cumulative
effect of
change in
accounting
principle 26,938 10,714 9,917 5,947 13,901
Cumulative
effect of
change in
accounting
principle -0- -0- -0- (2,600) -0-
Net Income $ 26,938 $ 10,714 $ 9,917 $ 3,347 $ 13,901
Common
Stock and
Common Stock
Equivalents 5,380 5,389 5,378 5,858 7,052
Net Income per
share before
extraordinary
item and
cumulative
effect of
change in
accounting
principle $ 5.12 $ 2.11 $ 1.93 $ 2.20 $ 2.06
Extraordinary
Item -0- -0- -0- (1.07) -0-
Net income per
share before
cumulative
effect of
change in
accounting
principle 5.12 2.11 1.93 1.13 2.06
Cumulative
effect of
change in
accounting
principle -0- -0- -0- (.44) -0-
Net income per
share $ 5.12 $ 2.11 $ 1.93 $ .69 $ 2.06
Cash Dividend -0- -0- -0- -0- -0-
Long Term Debt $ 24,944 $ 59,385 $ 66,585 $ 84,000 $ 90,325
Total Assets $1,263,942 $1,315,293 $1,148,994 $1,266.941 $1,286,733
1 Net income per share for the years ended December 31,
1996, 1995, 1994, 1993 and 1992 included the dilutive effect
resulting from the increase in the market price of the
Company's common stock. Such increase requires that
outstanding common share equivalents be taken into account
in determining net income per share. See "Notes to
Consolidated Financial Statements" for a description of the
manner of calculation of common share equivalents.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the year ended December 31, 1996, ILCO's net income from
operations was $26,938,000 ($5.12 per common share) as compared
to $10,714,000 ($2.11 per common share) in 1995 and $9,917,000
($1.93 per common share) in 1994.
Net income for 1996 includes $15.3 million resulting from the
sale of the Austin Centre, a hotel/office complex, located in
Austin, Texas. The selling price was $62.675 million, less $1
million paid to a capital reserve account for the purchaser. The
property was purchased in 1991 for $31.275 million. A portion of
the sale proceeds, equal to the book value of the property, net
of improvements and amortization ($36.8 million), was retained
and reinvested by Investors Life Insurance Company of North
America ("Investors-NA"). The balance of the proceeds, net of
federal income tax, of the sale was used to reduce the Company's
senior loan obligations by $15 million. The sale closed on March
29, 1996.
The results for 1996, and for that portion of 1995 beginning on
February 14th, include the operations of Investors Life Insurance
Company of Indiana (formerly known as Meridian Life Insurance
Company). Investors Life Insurance Company of Indiana
("Investors-IN") was purchased by ILCO and Investors Life
Insurance Company of North America ("Investors-NA") for an
adjusted purchase price of $17.1 million; the transaction was
completed on February 14, 1995. The name change was completed in
May, 1995.
The statutory earnings of the Company's insurance subsidiaries,
as required to be reported to insurance regulatory authorities,
before interest expense, capital gains and losses, and federal
income taxes were $21,624,112 at December 31, 1996, as compared
to $24,511,342 at December 31, 1995 and $21,119,689 at December
31, 1994. These statutory earnings are the source to provide for
the repayment of ILCO's indebtedness.
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.
Premium income, net of reinsurance, for the year 1996 $9.98
million, as compared to $11.69 million in 1995 and $14.31 million
in 1994. Reinsurance premiums ceded were $8.0 million, as
compared to $8.5 million in 1995 and $10.9 million in 1994.
Earned insurance charges for the year ended December 31, 1996
were $42.24 million, as compared to $42.32 million for 1995 and
$39.37 million for 1994. This source of revenues is related to
the universal life insurance and annuity book of business of
Investors-NA.
In 1995, Investors-NA entered into a reinsurance agreement with
Family Life Insurance Company (an insurance company subsidiary of
Financial Industries Corporation and an affiliated company of
Investors-NA), pertaining to universal life insurance written by
Family Life. The reinsurance agreement is on a co-insurance
basis and applies to all covered business with effective dates on
and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than
$200,000; face amounts of $200,000 or more are reinsured by
Family Life with a third party reinsurer. In 1996, Investors-NA
entered into a reinsurance agreement with Family Life, pertaining
to annuity contracts written by Family Life. The agreement
applies to contracts written on or after January 1, 1996. These
reinsurance arrangements reflect management's plan to develop
universal life and annuity business at Investors-NA, with Family
Life concentrating on the writing of term life insurance
products.
Interest expense was $2.8 million for the year 1996, as compared
to $5.7 million for the year 1995 and $5.2 million in 1994. The
decrease is attributable to a reduction in the average principal
balance of the senior loan from $64.4 million for the year ending
December 31, 1995 to $33.7 million for the year ending December
31, 1996, as well as a decrease in the average rate of interest
paid on the senior loan - 7.76% for the year 1996, as compared to
8.63% for the year 1995.
The decline in long-term interest rates during 1996, which was
related to general economic conditions, had a positive effect
upon the market value of the fixed maturities available for sale
segment of the portfolio. As of December 31, 1996, the market
value of the fixed maturities available for sale segment was
$453.9 million as compared to an amortized cost of $451.6
million, or an unrealized gain $2.3 million. The net of tax
effect of this increase has been recorded as an increase in
shareholders' equity. There is no assurance that this unrealized
gain will be realized in the future.
Investors-NA is the owner and developer of an office complex
known as Bridgepoint Square Offices. Once completed, the project
will consist of four office buildings, with a total rentable
space of 364,000 square feet, and two parking garages. Investors-
NA purchased the 20 acre tract of land for this complex in
January, 1995, for a cash purchase price of $9.75 million. At
that time, the tract included one completed and fully leased
office building, an adjacent parking garage, and sites for three
more office buildings and a second parking garage. Since the
purchase, Investors-NA has completed construction on the second
parking garage and two of the remaining building sites.
Construction is in progress on the fourth building, with a
projected completion date in July, 1997. Three of the four
buildings are fully occupied by tenants and the fourth is
partially leased. Negotiations are in progress with two potential
tenants to lease the remaining space in the fourth building. Upon
completion of the project, the investment of Investors-NA will be
approximately $46 million.
Results of Operations
For the year ended December 31, 1996, the Company's income from
operations before Federal income taxes was $41,443,000 on
revenues of $138,244,000, as compared to $16,483,000 on revenues
of $122,390,000 for the year 1995 and $15,700,000 on revenues of
$114,842,000 in 1994.
During 1996, the lapse rate with respect to universal life
insurance policies increased slightly from the lapse rate
experienced in 1995. The rate in 1996 was 9.0%, as compared to
8.8% in 1995. The lapse rate with respect to traditional (non-
universal) life insurance policies decreased from the levels
experienced in 1995. The rate in 1996 was 8.0%. as compared to
8.8% in 1995. The lapse rates experienced during the 1996 period
were within the ranges anticipated by management.
Liquidity and Capital Resources:
ILCO is a holding company whose principal assets consist of the
common stock of Investors Life Insurance Company of North America
and its subsidiaries - Investors Life Insurance Company of
Indiana (formerly known as Meridian Life Insurance Company) and
InterContinental Life Insurance Company ("ILIC"). ILCO's primary
source of funds consists of payments under two Surplus Debentures
from Investors-NA.
As of December 31, 1995, the outstanding principal balance of the
ILCO's senior loan obligations was $59.4 million. In January,
1996, the Company made a scheduled payment of $4.5 million under
its Senior Loan. In March, 1996, the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At
that same time, the Company made a payment of $941,000, an
additional payment under the terms of the loan applied to the
principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made. In July, 1996,
the Company made the principal payment for October 1st ($4.5
million), plus an optional principal payment of $0.5 million,
thereby reducing the total amount of the outstanding Senior Loan
to $24.94 million.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest by Investors-NA, pursuant to
the terms of the Surplus Debentures. The Surplus Debentures were
originally issued by Standard Life Insurance Company and their
terms were previously approved by the Mississippi Insurance
Commissioner. Upon the merger of Standard Life into Investors-
NA, the obligations of the Surplus Debentures were assumed by
Investors-NA. As of December 31, 1996, the outstanding principal
balance of the Surplus Debentures was $5.7 million and $32.8
million, respectively. Since Investors-NA is domiciled in the
State of Washington, the provisions of Washington insurance law
apply to the Surplus Debentures. Under the provisions of the
Surplus Debentures and current law, no prior approval of the
Washington Insurance Commissioner is required for Investors-NA to
pay interest or principal on the Surplus Debentures; provided
that, after giving effect to such payments, the statutory surplus
of Investors-NA is in excess of $10 million (the "surplus
floor"). However, Investors-NA has voluntarily agreed with the
Washington Insurance Commissioner that it will provide at least
five days advance notice of payments which it will make under the
surplus debenture. As of December 31, 1996, the statutory
surplus of Investors-NA was $53,773,628, an amount substantially
in excess of the surplus floor. The funds required by Investors-
NA to meet its obligations to the Company under the terms of the
Surplus Debentures are generated from operating income generated
from insurance and investment operations.
In addition to the payments under the terms of the Surplus
Debentures, ILCO has received dividends from Standard Life (now,
from Investors-NA). Washington's insurance code includes the
"greater of" standard for payment of dividends to shareholders,
but has a requirement that prior notification of a proposed
dividend be given to the Washington Insurance Commissioner and
that cash dividends may be paid only from earned surplus. As of
December 31, 1996, Investors-NA had earned surplus of $5,205,148.
Since the law applies only to dividend payments, the ability of
Investors-NA to make principal and interest payments under the
Surplus Debentures is not affected. ILCO does not anticipate
that Investors-NA will have any difficulty in making principal
and interest payments on the Surplus Debentures in the amounts
necessary to enable ILCO to service the Senior Loan for the
foreseeable future.
ILIC is domiciled in the State of New Jersey. Under the New
Jersey insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Any
dividend must be paid from earned surplus. A proposed payment of
a dividend or distribution which, together with dividends or
distributions paid during the preceding twelve months, exceeds
the greater of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) statutory net gain from operations for the
preceding calendar year is treated as an "extraordinary dividend"
and may not be paid until either it has been approved, or a
waiting period shall have passed during which it has not been
disapproved, by the insurance commissioner. ILIC had earned
surplus of $4,566,338 at December 31, 1996.
Investors-IN is domiciled in the State of Indiana. Under the
Indiana insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Under
Indiana law the dividend must be paid from earned surplus.
Extraordinary dividend approval would be required where a
dividend exceeds the greater of 10% of surplus or the net gain
from operations for the prior fiscal year. Investors-IN had
earned surplus of $11,525,153 at December 31, 1996.
ILCO's net cash flow provided by (used in) operating activities
was ($23.46) million, as compared to $10.3 million for the year
ended December 31, 1995 and ($15.3) million for the same period
in 1994. This change is primarily due to fluctuations in the
amount of deferred federal income tax related to the market value
of investment assets that are fixed maturities available for sale
and the net gain realized in connection with the sale of the
Austin Centre.
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.
Investments
As of December 31, 1996, the book value of the Company's
investment assets totaled $661.1 million, as compared to $669.5
million as of December 31, 1995. Total assets as of December 31,
1996 ($1.26 billion) decreased from the level as of December 31,
1995 ($1.32 billion).
The level of short-term investments at the end of 1996 was $91.6
million, as compared to $86.0 million at the end of 1995.
The fixed maturities available for sale portion of invested
assets at December 31, 1996 was $453.9 million. The amortized
cost of the fixed maturities available for sale segment as of
December 31, 1996 was $451.6 million, representing a net
unrealized gain of $2.3 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 ILCO's life insurance subsidiaries 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 objectiveis implemented by selectingprimarily 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 Company's fixed maturities portfolio (including short-term
investments), as of December 31, 1996, included a non-material
amount (1.1% of total fixed maturities and short-term
investments) of debt securities 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 "3" (medium quality) or
below. For the year ended December 31, 1995, the comparable
percentage was 1.1%. The majority of these non-investment grade
investments are concentrated in the medium quality (or "3")
category, with only 0.7% receiving an NAIC rating of "4" (low
quality) or below as of December 31, 1996, as compared to 1.5% as
of December 31, 1995.
The consolidated balance sheets of the Company as of December 31,
1996 include $59.9 million of "Notes receivable from affiliates",
represented by (i) a loan of $22.5 million from Investors-NA to
Family Life Corporation and a $2.5 million loan from Investors-CA
to Financial Industries Corporation (which is now owned by
Investors-NA as a result of the merger of Investors-CA into
Investors-NA) and $1.9 million of additions to the $2.5 million
note made in accordance with the terms of such note; these loans
were granted in connection with the 1991 acquisition of Family
Life Insurance Company by a wholly-owned subsidiary of FIC (ii) a
loan of $30 million by Investors-NA to Family Life Corporation
made in July, 1993, in connection with the prepayment by the FIC
subsidiaries of indebtedness which had been previously issued to
Merrill Lynch as part of the 1991 acquisition and (iv) a loan of
$4.5 million by Investors-NA to Family Life Insurance Investment
Company made in July, 1993, in connection with the same
transaction described above. As of June 12, 1996, the provisions
of the notes from Investors-NA to FIC, FLC and FLIIC were
modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of
$1,125,000 each, to commence on December 12, 1996; the final
quarterly principal payment is due on September 12, 2001; the
interest rate on the note remains at 11%, (b) the $30 million
note was amended to provide for forty quarterly principal
payments, in the amount of $163,540 each for the period December
12, 1996 to September 12, 2001; beginning with the principal
payment due on December 12, 2001, the amount of the principal
payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the
note remains at 9%, (c) the $4.5 million note was amended to
provide for forty quarterly principal payments, in the amount of
$24,531 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12,
2001, the amount of the principal payment increases to $200,469;
the final quarterly principal payment is due on September 12,
2006; the interest rate on the note remains at 9%, (d) the $2.5
million note was amended to provide that the principal balance of
the note is to be repaid in twenty quarterly installments of
$125,000 each, commencing December 12, 1996 with the final
payment due on September 12, 2001; the rate of interest remains
at 12%, (e) the Master PIK note, which was issued to provide for
the payment in kind of interest due under the terms of the $2.5
million note prior to June 12, 1996, was amended to provide that
the principal balance of the note ($1,977,119) is to be paid in
twenty quarterly principal payments, in the amount of $98,855.95
each, to commence December 12, 1996 with the final payment due on
September 12, 2001; the interest rate on the note remains at 12%.
The NAIC continued its rating of "3" to the "Notes receivable
from affiliates", as amended. These loans have not been included
in the preceding description of NAIC rating percentages.
Management believes that the absence of any material amounts of
"high-yield" or "non-investment grade" investments (as defined
above) in the portfolios of its life insurance subsidiaries
enhances the ability of the Company to service its debt, provide
security to its policyholders and to credit relatively consistent
rates of return to its policyholders.
Accounting Developments
Stock-Based Compensation:
In October, 1995, the Financial Accounting standards Board issued
Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation." This Statement encourages
companies to adopt a fair value based method of accounting for
employee stock options and other equity instruments awarded as
compensation. Under this method, compensation expense equal to
the fair value of the security at the award grant date is
recognized as compensation expense over the vesting period of the
awarded security. However, the Statement also allows companies
to continue to account for stock-based compensation under the
intrinsic value based method, as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value based method, the
compensation cost is computed as the excess, if any, of the
quoted market price of the equity security at the measurement
date over the amount an employee must pay to acquire the
security. If a company continues to account for stock-based
compensation under the intrinsic value based method, it must make
certain pro-forma disclosures in the footnotes to the financial
statements for the difference in the fair value based method and
the intrinsic value based method. This Statement is effective
for stock-based compensation transactions entered into in fiscal
years that begin after December 15, 1995.
The Company adopted FAS No. 123 during 1996, and will continue to
account for stock-based compensation under the intrinsic value
based method and disclose the impact of the fair value method in
the notes to its financial statements.
Subsequent Event
On March 25, 1997, ILCO and Investors-IN entered into an
agreement to acquire State Auto Life Insurance Company, an Ohio
domiciled life insurer, from State Automobile Mutual Insurance
Company, for a cash purchase price of $11.8 million, subject to
certain post-closing adjustments. In connection with this
transaction, the bank group participating in the Senior Loan have
agreed to defer payment of $4.5 million otherwise payable on
April 1, 1997 under the terms of the Senior Loan, and to reduce
the amount of the payment otherwise due on July 1, 1997 by $2.5
million. This deferral would result in extending the maturity
date of the Senior Loan to October 1, 1998. Under the terms of
the transaction, State Auto Life would be merged into Investors-
IN. The closing of the transaction, which is expected to occur
during the second quarter of 1997, is subject to regulatory
approvals.
Item 8. Financial Statements and Supplementary Data
The following Financial Statements of ILCO and its consolidated
subsidiaries have been filed as part of this report:
1. Report of Price Waterhouse LLP, Independent
Accountants, dated March 25, 1997. .
2. Consolidated Balance Sheets, as of December 31, 1996
and December 31, 1995.
3. Consolidated Statements of Income for the years ended
December 31 1996, 1995 and 1994.
4. Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1995 and
1994.
5. Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994.
6. Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
No independent accountant who audited the Registrant's financial
statements has resigned or been dismissed during the two most
recent fiscal years.
PART III
Item 10. Directors and Executive Officers of Registrant
(a) Directors of the Registrant
The names and ages of the current directors of the Registrant,
their principal occupations or employment during the past five
years and other data regarding them are set forth below. All of
the directors, except Mr. Pruner and Mr. Demgen, were elected at
the 1996 annual shareholders meeting. Mr. Pruner and Mr. Demgen
were appointed as directors by the Board of Directors on August
26, 1996. The data supplied below is based on information
provided by the directors, except to the extent that such data is
known to the Registrant.
Name Age Director Principal Occupation
Since and Other Information
W. Lewis Gilcrease 65 1988 Dentist practicing in San
Marcos, Texas. Director of
ILCO since 1988. Director of
FIC from 1979 to July 6, 1991.
James M. Grace 53 1984 Vice President and Treasurer
of the Company since January,
1985. Executive Vice
President, Treasurer and
Director of InterContinental
Life Insurance Company since
1989. Vice President,
Treasurer and Director of
Financial Industries
Corporation since July, 1976.
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 (a
subsidiary of Financial
Industries Corporation) since
June 1991. Director,
Executive Vice President and
Treasurer of Investors Life
Insurance Company of Indiana
since February 1995.
Richard A. Kosson 64 1981 Certified Public Accountant
and a partner in the firm of
Manheim, Kosson & Novick in
Millburn, New Jersey.
Roy F. Mitte 65 1984 Chairman of the Board and
Chief Executive Officer of the
Company and InterContinental
Life Insurance Company since
January, 1985. President of
the Company since April, 1985.
Chairman of the Board,
President and Chief Executive
Officer of Financial
Industries Corporation since
1976. Chairman of the Board,
President and Chief Executive
Officer of Investors Life
Insurance Company of North
America since December, 1988.
Chairman of the Board,
President and Chief Executive
Officer of Family Life
Insurance Company since June
1991. Chairman of the Board,
President and Chief Executive
Officer of Investors Life
Insurance Company of Indiana
since February 1995.
Chairman, ILG Securities
Corporation since December
1988.
Donald Shuman 72 1980 Real estate specialist,
engaged in sales and
management of real estate for
his own company, Don Shuman
Associates, a real estate
brokerage and management firm.
Eugene E. Payne 54 1989 Vice President of ILCO since
December 1988 and Director
since May 1989. Vice
President and Director of
Financial Industries
Corporation since February
1992. Executive Vice
President, Secretary and
Director of Investors Life
Insurance Company of North
America since December 1988.
Executive Vice President since
December 1988 and Director
since May 1989 of
InterContinental Life
Insurance Company. Executive
Vice President, Secretary and
Director of Family Life
Insurance Company since June
1991. Director, Executive
Vice President and Secretary
of Investors Life Insurance
Company of Indiana since
February 1995.
Theodore A. Fleron 57 1991 Vice President and Director of
ILCO since May 1991.
Assistant Secretary since June
1990. Vice President and
Director of FIC since August
1996. Senior Vice President,
General Counsel, Assistant
Secretary and Director of
Investors Life Insurance
Company of North America and
InterContinental Life
Insurance Company since July
1992. General Counsel,
Assistant Secretary and
Director of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company from
January 1989 to July 1992.
Senior Vice President, General
Counsel, Director and
Assistant Secretary of
Investors Life Insurance
Company of Indiana since June
1995. Senior Vice President,
General Counsel, Director and
Assistant Secretary of Family
Life Insurance Company since
August 1996.
Joseph F. Crowe 58 1991 Vice President of ILCO from
May 1991 to January 1997, when
he retired from active service
with the Company. Director of
ILCO since May 1991. Vice
President of FIC from February
29, 1992 to January 3, 1997.
Director of FIC since February
29, 1992. Executive Vice
President of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company from
June 1991 to January 1997.
Director of Investors Life
Insurance Company of North
America and InterContinental
Life Insurance Company since
June 1991. Executive Vice
President of Family Life
Insurance Company from June
1991 to January 1997.
Director of Family Life
Insurance Company since June
1991. Executive Vice
President of Investors Life
Insurance Company of Indiana
from February 1995 to January
1997. Director of Investors
Life Insurance Company of
Indiana since February 1995.
From December 1986 to March
1991, Executive Vice President
of Personal Financial Security
Division of Aetna Life &
Casualty Company.
Steven P. Schmitt 50 1994 Senior Vice President since
April 1992 and Director, Vice
President and Assistant
Secretary since August 1989 of
Investors Life Insurance
Company of North America and
InterContinental Life
Insurance Company. Senior
Vice President since April
1992 and Director and Vice
President since June 1991 of
Family Life Insurance Company.
Director, Senior Vice
President and Assistant
Secretary of Investors Life
Insurance Company of Indiana
since June 1995.
H. Gene Pruner 69 1995 Director of ILCO since August
1996. Director of Investors-
IN since February, 1995.
President of Market Share,
Inc. since April 1985.
Jeffrey H. Demgen 44 1995 Director of FIC since May
1995. Vice President of FIC
since August 1996. Vice
President and Director of ILCO
since August 1996. Director
of Family Life Insurance
Company since October 1992.
Executive Vice President of
Family Life Insurance Company
since August 1996. Senior
Vice President of Family Life
Insurance Company from October
1992 to August 1996.
Executive Vice President and
Director of Investors Life
Insurance Company of North
America since August 1996.
Senior Vice President and
Director of Investors Life
Insurance Company of North
America from October 1992 to
June 1995. Executive Vice
President of InterContinental
Life Insurance Company since
August 1996. Senior Vice
President of InterContinental
Life Insurance Company from
October 1992 to June 1995.
Executive Vice President and
Director of Investors Life
Insurance Company of Indiana
since August 1996. Senior
Vice President of United
Insurance Company of America
from September 1984 to July
1992.
Mr. Shuman was the general partner of Shuman-Carlisle Mall
Associates, a partnership that owned a 400,000 square foot
shopping mall located in Carlisle, Pennsylvania. In January
1993, the partnership filed a petition pursuant to Chapter 11 of
the Federal Bankruptcy Code, and that bankruptcy proceeding was
concluded in early 1995.
The incumbent directors have been nominated for submission to
vote of the shareholders for reelection at the 1997 annual
shareholders' meeting.
(b) Executive Officers of the Registrant
The following table sets forth the names and ages of the persons
who have served as Registrant's Executive Officers during 1996
together with all positions and offices held by them with the
Registrant. Officers are elected to serve at the will of the
Board of Directors or until their successors have been elected
and qualified.
Name Age Positions and Offices
Roy F. Mitte 65 Chairman of the Board,
President and Chief
Executive Officer
James M. Grace 53 Vice President and Treasurer
Eugene E. Payne 54 Vice President and Secretary
Joseph F. Crowe1 58 Vice President
Roger H. Hamm2 52 Vice President
Jeffrey H. Demgen3 44 Vice President
In May 1991, Roy F. Mitte suffered a stroke, resulting in partial
paralysis affecting his speech and mobility. Mr. Mitte continues
to make the requisite decisions in his capacity as Chief
Executive Officer, although his ability to communicate and his
mobility are impaired.
1. Mr. Crowe retired from active service with the Company as of
January 3, 1997. He will continue to service on the Board
of Directors.
2. Mr. Hamm resigned as Director of the Company as of August
26, 1996. His appointment as a Vice President of the
Company was terminated on that date.
3. Mr. Demgen was appointed a Vice President of the Company on
August 26, 1996.
(c) Identification of certain significant employees
Not Applicable.
(d) Family relationships
Not Applicable.
(e) Business experience
All of the executive officers of the Company are members of the
Board of Directors and their business experience has been
outlined in Item 10(a).
(f) Compliance with Section 16(a) of the Securities
Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than
ten percent of a registered class of the Company's equity
securities, to file reports of beneficial ownership on Form 3 and
changes in beneficial ownership on 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 review of the copies of
such forms furnished to the Company, or written representations
that no Forms 5 were required, the Company believes that for the
period from January 1, 1996 through December 31, 1996 all Section
16(a) filing requirements applicable to its officers, directors
and greater than ten-percent beneficial owners were complied
with, except as follows: (i) Jeffrey H. Demgen filed a Form 5 in
February, 1997, to report his appointment as a Director of the
Company as of August 26,1996, and to report beneficial ownership
of (a) 198.5076 shares of ILCO common stock through the Employee
Stock Purchase Plan made available to employees of the Company
and 2,803 shares of ILCO common stock through the Employee Stock
Ownership Plan, a non-contributory, tax-qualified plan made
available to employees of the Company; (ii) W. Lewis Gilcrease
filed a Form 5 in February, 1997, to report the disposition in
December, 1996 of 4,420 shares of ILCO common stock to
participants in a tax-qualified retirement plan for which he
served as trustee; (iii) Eugene E. Payne filed a Form 5 in
February, 1997, to report the purchase in August, 1990, of 1,200
shares of ILCO common stock which had not been included in prior
Form 4 filings; and (iv) Roy F. Mitte filed a Form 5 in February,
1997, to report the surrender, in December, 1996, of options to
acquire 120,000 shares of ILCO common stock and the receipt of
final payment from the Company of amounts payable in connection
with such cancellation.
H. Gene Pruner filed a Form 5 in February, 1997, to report his
appointment as a Director of the Company as of August 26, 1996
and to report no beneficial ownership of ILCO common stock.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the
compensation of the Company's Chief Executive Officer and each of
the four other persons who were serving as executive officers of
the Company at the end of 1996 and received cash compensation
exceeding $100,000 during 1996.
Annual Compensation
Long Term
Compensa-
tion
Awards
Name and Stock
Principal Options All Other
Position Year Salary1 Bonus1 Other2 (Shares) Compensation
Roy F.
Mitte,
Chairman,
President
and Chief 1996 $286,643 -0- -0- -0- $2,446,3973
Executive 1995 $286,643 -0- -0- -0- 713,5134
Officer 1994 $251,750 $576,1595 -0- -0- 1,376,6636
James M.
Grace,
Vice
President 1996 195,000 15,000 -0-7 -0- -0-
and 1995 195,000 10,000 -0- -0- -0-
Treasurer 1994 195,000 2,000 -0- -0- -0-
Eugene E.
Payne,
Vice
President 1996 195,000 15,000 -0-8 -0- -0-
and 1995 195,000 10,000 -0- -0- -0-
Secretary 1994 195,000 5,000 -0- -0- -0-
Joseph F.
Crowe,
Vice 1996 196,500 15,000 -0-9 -0- -0-
Presi- 1995 195,000 10,000 -0- -0- -0-
dent 1994 195,000 5,500 -0- -0- -0-
Jeffrey
H. Demgen
Vice
Presi-
dent10 1996 102,500 7,500 -0- -0- -0-
(1) The executive officers of the Company have also been
executive officers of the Company's insurance subsidiaries and
FIC and FIC's insurance subsidiary, Family Life. The only
executive officer who has been paid compensation by Family Life
is Mr. Mitte, who received $216,857 in salary in 1996, $216,857
in salary in 1995, and $251,750 in salary and $538,080 in bonus
in 1994 from Family Life, which amounts are not included in the
table above. Family Life reimbursed the Company (or, in the case
of Mr. Mitte paid Mr. Mitte directly) the following amounts as
Family Life's share of these executive officers' cash
compensation for 1994, 1995 and 1996: $789,830, $216,857 and
$216,857, respectively, for Mr. Mitte; $70,590, $88,293 and
$83,987, respectively, for Mr. Grace; $126,750, $79,875 and
$83,987, respectively, for Dr. Payne; $68,250, 88,293 and
$84,633, respectively, for Mr. Crowe; and $46,125 (1996 only) for
Mr. Demgen.
(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, the Company paid Mr. Mitte: (i) $1,862,000 for
the cancellation in 1996 of options to purchase 121,500 shares of
the Company's common stock, plus interest at the rate of 8% per
year on such amount for a one year period (for a total of
$2,011,737); (ii) $120,700 for the federal income tax
reimbursement relating to the cancellation in 1995 of options to
purchase 50,000 shares of the Company's common stock; and (iii)
$313,960 for the federal income tax reimbursement relating to the
1996 options cancellation described above in this footnote. Each
of these payments was made pursuant to the contract referred to
in footnote 4.
(4) In 1989, the Board of Directors granted Mr. Mitte options
to purchase 600,000 shares (as adjusted for the three-for-one
stock split effective February 15, 1990) of the Common Stock of
the Company in equal annual installments of 150,000 shares each.
Each installment was subject to the approval of the Board of
Directors and is exercisable for a period of ten years from the
date the options become exercisable at a price of $1.00 per share
(as adjusted). The Board of Directors voted to award
installments of 150,000 shares in each of 1989, 1990, 1991 and
1992. In October 1992, Mr. Mitte surrendered to the Company for
cancellation options to purchase 120,000 shares. The Company and
Mr. Mitte entered into a contract in 1993 providing for the
cancellation in 1993 of 240,000 options for an aggregate amount
of $3,237,120 and the cancellation in subsequent years of the
remaining options for an aggregate amount of $3,610,240. In
addition, the Company agreed to pay Mr. Mitte the amount
necessary to ensure that Mr. Mitte will receive the same amount,
after federal income tax, that he would have received if the
options had been cancelled in 1992. During 1995, Mr. Mitte was
paid $836,582 for the cancellation in 1995 of options to purchase
50,000 shares of ILCO's Common Stock, $156,323 for the federal
income tax reimbursement relating to the cancellation in 1994 of
options to purchase 68,500 shares and $127,608 as the final
payment relating to the cancellation in 1993 of options to
purchase 240,000 shares. These option cancellation payments were
made pursuant to the contract referred to above. FIC's
Compensation Committee made a recommendation to FIC's Board of
Directors, which it adopted, that, in lieu of paying Mr. Mitte a
bonus as it has in the past, FIC paid $407,000 of these option
cancellation payments to Mr. Mitte, with the balance of $713,513
being paid by ILCO.
(5) The Company's Compensation Committee made a recommendation
to the Board of Directors, which the Board adopted, that a bonus
be paid to Mr. Mitte to enable him to pay off the $650,000 loan
that the Company had made to Mr. Mitte in 1989 and to reimburse
him for the amount of federal income tax payable on the bonus.
Since the Company and FIC have usually each paid one-half of Mr.
Mitte's cash compensation, FIC's Board of Directors, acting on
the recommendation of its Compensation Committee, subsequently
authorized FIC to pay $500,000 of that bonus to Mr. Mitte.
Therefore, the Company paid $576,159, and FIC paid $500,000, of
the bonus.
(6) During 1994, the Company paid Mr. Mitte $997,520 for the
cancellation in 1994 of options to purchase 68,500 shares of the
Company's Common Stock and $379,143 for the federal income tax
reimbursement relating to the cancellation in 1993 of options to
purchase 240,000 shares. Both of these payments were made
pursuant to the contract referred to in footnote (4).
(7) Mr. Grace exercised stock options in 1996 to purchase 12,000
shares of the Company's Common Stock. See "Aggregated Option
Exercises in 1996" below.
(8) Dr. Payne exercised stock options in 1996 to purchase 6,000
shares of the Company's Common Stock. See "Aggregated Option
Exercises in 1996" below.
(9) Mr. Crowe exercised stock options in 1996 to purchase 8,000
shares of the Company's Common Stock. See "Aggregated Option
Exercises in 1996" below.
(10) Mr. Demgen became an executive officer of the Company in
August, 1996.
Option Grants in 1996
No options were granted to any executive officers of the Company
during the year 1996.
Aggregated Option Exercises in 1996
The following table sets forth information concerning each
exercise of stock options during 1996 by each of the executive
officers of the Company.
Shares
Acquired Value
Name On Exercise (#) Realized ($)
Joseph F. Crowe 8,000 $ 44,000
James M. Grace 12,000 119,040
Eugene E. Payne 6,000 58,020
Aggregated Stock Option Values
The following table sets forth information with respect to the
unexercised options held by the executive officers of the
Company.
Value of
Number of Unexercised
Unexercised Options In-the-Money
Held at Options at
December 31, 1996 December 31, 1996
Name Exercisable Unexercisable Exercisable Unexercisable
James M.
Grace 42,000 24,000 $ 420,840 $ 244,080
Eugene E.
Payne 26,000 12,000 264,420 122,040
Joseph F.
Crowe 22,000 -0- 104,500 -0-
(1) Based on the closing price of the Company's Common Stock on
NASDAQ on December 31, 1996 ($13.50).
Members of Compensation Committee
W. Lewis Gilcrease, Donald Shuman and Richard A. Kosson are the
members of the Company's Compensation Committee, which makes
recommendations to the Board of Directors with respect to the
Chief Executive Officer's compensation.
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 FIC. He also determines the
compensation of all executive officers of FIC, other than the
Chief Executive Officer.
Pension Plan Table
The following table sets forth estimated annual pension benefits
payable upon retirement at age of 65 under the Company's
noncontributory defined benefit plan ("Pension Plan") to an
employee in the final pay and years of service classifications
indicated, assuming a straight life annuity form of benefit. The
amounts shown in the table do not reflect the reduction related
to Social Security benefits referred to below.
Years of Service
30 or
Remuneration 15 20 25 more
$125,000 $31,250 $41,667 $52,083 $62,500
150,000 37,500 50,000 62,498 75,000
175,000 43,750 58,333 72,914 87,500
200,000 50,000 66,667 83,330 100,000
The normal retirement benefit provided under the Pension Plan is
equal to 1.57% of final average eligible earnings less 0.65%
of the participant's Social Security covered compensation
multiplied by the number of years of credited service (up to 30
years). The compensation used in determining benefits under the
Pension Plan is the highest average earnings received in any five
consecutive full-calendar years during the last ten full-calendar
years before the participant's retirement date. The maximum
amount of annual salary and bonus that can be used in determining
benefits under the Pension Plan is $200,000 for any year prior to
1994 and is $150,000 for 1994 and each subsequent year.
The annual eligible earnings, for 1996 only, covered by the
Pension Plan (salary and bonus up to $150,000) with respect to
the individuals reported in the Summary Compensation Table were
as follows, with their respective years of credited service under
the Pension Plan at December 31, 1996 being shown in parentheses:
Mr. Mitte, $150,000 (9 years), Mr. Grace, $150,000 (9 years), Dr.
Payne, $150,000 (8 years), Mr. Crowe, $150,000 (5 years) and Mr.
Demgen (4 years).
Compensation of Directors
Directors who are not officers or employees of the Company are
paid a $5,000 annual fee, and are compensated $1,000 for each
regular or special meeting of the Board of Directors which they
attend in person. In the case of telephonic meetings of the
Board, non-employee directors who participate in such telephonic
meetings are compensated $500 for such meeting. Directors who
participate via telephone in a regular or special meeting which
is held by other than conference telephone are not entitled to a
fee for such a meeting.
Non-employee directors serving on committees of the Board are
compensated in the amount of $500 for each committee meeting they
attend whether such participation is in person or by telephone,
provided that the committee meeting is held on a day other than
that on which the Board meets.
Employment Agreements and Change In Control Arrangements
The terms and conditions of employment agreements that the
Company would enter into upon the occurrence of certain events
that result in the agreements taking effect were approved by the
Board of Directors with respect to Messrs. Grace, Payne and Crowe
in 1991 Each agreement would include two independent provisions
with respect to the effective date and the term of each
agreement. First, the term of the agreement would begin on the
earlier of (i) the date of retirement (early, normal or deferred)
of Roy F. Mitte from his position as Chairman, President and
Chief Executive Officer of the Company or (ii) the date of death
or disability of Mr. Mitte, and would terminate on the last day
of the twelfth month next following the commencement date of the
term of the agreement, unless extended upon mutually acceptable
terms.
Independently, the term of the agreement would commence upon the
date that any person who is not currently a control person with
respect to the Company acquires, or enters into an agreement to
acquire, control of the Company, directly or indirectly, and
would end on the last day of the twelfth month next following the
date on which the employee receives notice of the termination of
his employment with the Company or the life insurance
subsidiaries of the Company.
During the term of the agreement, the employee would be entitled
to perform all of the duties of the position or positions held by
the employee with the Company and all subsidiaries of the Company
on the date immediately preceding the commencement date of the
agreement.
During the term of the agreement, the employee would be entitled
to an annual rate of compensation which is not less than the
annual rate of compensation in effect as of the date immediately
preceding the commencement date of the agreement. During the
term of the agreement, the employee would be entitled to
participate in and benefit from all employee benefit plans and
other fringe benefits on the same basis as such plans and
benefits are made available to other executive personnel of the
Company.
The agreement may be terminated by the Company only in the event
that the employee is guilty of theft of property of the Company
or commits a wrongful act which has a material adverse effect
upon the business of the Company and with respect to which the
employee would not be entitled to indemnification under the
provisions of the Bylaws of the Company in effect as of the
commencement date of the agreement. The employee may terminate
the agreement upon thirty days advance written notice to the
Company.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table presents information as of March 14, 1997 as
to all persons who, to the knowledge of the Company, were
beneficial owners of five (5%) percent or more of the Common
Stock of the Company.
Amount and
Nature of Percent of
Name and Address Beneficial Ownership Class
Financial Industries Corp.
701 Brazos, Suite 1400
Austin, TX 78701............. 3,668,501 1 61.54% 6
Roy F. Mitte
701 Brazos, Suite 1400
Austin, TX 78701.............. 3,723,392 2,3 62.46% 6
Investors Life Insurance Company
of North America
701 Brazos, Suite 1400
Austin, TX 78701................ 334,960 4 7.86% 6
InterContinental Life Insurance
Company
701 Brazos, Suite 1400
Austin, TX 78701................. 281,560 5 6.61% 6
Fidelity Management & Research
Company
82 Devonshire Street
Boston, MA 02109................... 418,300 7 9.82% 6
1 Includes 1,966,346 shares of the Company's stock presently
owned and an option to purchase up to 1,702,155 shares of
the Company's authorized but unissued Common Stock which is
the balance of the option granted to Financial Industries
Corporation ("FIC") by the Company in December, 1985. This
option may be exercised by FIC at any time at an exercise
price equal to the average bid prices of the Company's
Common Stock over the six-month period immediately preceding
such exercise.
2 As of March 14, 1997, Mr. Mitte owned directly 25,000 shares
of the Company's stock. Mr. Mitte, jointly with his wife
Joann, also owns 1,866,520 common shares of Financial
Industries Corporation ("FIC") which constitutes 34.39
percent of the outstanding common stock of that company, and
holds the position of Chairman, President and Chief
Executive Officer of FIC.
Since FIC holds a controlling interest in the Company, Mr.
Mitte's personal holdings in the Company have been combined
with the holdings of FIC in determining the amount and
percentage of Mr. Mitte's beneficial ownership of the
Company.
3 Includes 14,611 shares allocated to Mr. Mitte's account
under the Employee Stock Ownership Plan.
4 Represents 281,560 shares owned by ILIC and 53,400 shares
owned directly by Investors-NA. ILIC is a life insurance
company subsidiary of Investors-NA. All of these shares are
treated as treasury shares.
5 All are directly owned by ILIC and are treated as treasury
shares.
6 Assumes that outstanding stock options or warrants available
to other persons have not been exercised.
7. As reported to the Company on a Schedule 13(G) filed by FMR
Corporation, the parent company of Fidelity Management &
Research Company ("Fidelity"). According to the Schedule
13(G), Fidelity acts as investment advisor to the Fidelity
Low-Priced Stock Fund, a registered investment company, and
the Fund is the owner of 418,300 shares of ILCO common
stock.
The following table contains information as of March 14, 1997 as
to the Common Stock of the Company beneficially owned by each
director, nominee and executive officer and by all executive
officers and directors of the Company as a group. The
information contained in the table has been obtained by the
Company from each director and executive officer except for
information known to the Company. 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
Joseph F. Crowe 1 38,744 3,4 *
Jeffrey H. Demgen 3,001 4 *
Theodore A. Fleron 14,366 4,5 *
W. Lewis Gilcrease -0-
James M. Grace 1 80,137 2,3,4 1.86%
Richard A. Kosson 200 *
Roy F. Mitte 1 3,723,292 2,4 62.46%
Eugene E. Payne 1 54,199 3,4 1.26%
H. Gene Pruner -0-
Donald Shuman 450 *
Steven P. Schmitt 13,041 4,5 *
All Executive
Officers and
Directors as a
group, all of
whom are listed
above 3,912,250 1,2,3,4,5 64 %
* Less than 1%
(1) Is an executive officer and/or director of FIC which as of
March 14, 1997 beneficially owned 3,668,501 shares of the
Company's Common Stock (including option rights to purchase
1,702,155 shares of the Company). In addition to the
shareholdings of Mr. Mitte in FIC (see Note 2, above), Mr.
Grace owns 5,600 shares of FIC Common Stock.
(2) 379,738 shares of the Company's Common Stock are held by the
Trustees of the Company's Employee Stock Ownership Plan
("ESOP") of which 15,180 shares are unallocated to any
participant's account. Messrs. Grace and Mitte are the
trustees of the ESOP and are entitled to vote such un-
allocated shares. The ESOP participants have the right to
direct the voting of shares allocated to their respective
accounts. Beneficial ownership of these unallocated shares
is disclaimed by Messrs. Grace and Mitte. The same 15,180
shares are included in the above table for each of Messrs.
Grace and Mitte as required for technical compliance with
the definition of beneficial ownership promulgated by the
Securities and Exchange Commission, and are counted once for
purposes of executive officers and directors as a group.
(3) Includes 30,000 shares issuable upon exercise of options
granted under the Incentive Stock Option Plan during 1987 to
Mr. Grace at a price of $3.54 (as adjusted) per share and
12,000 shares issuable upon exercise of options granted
under the Non-Qualified Stock Option Plan during 1988 to Mr.
Grace at a price of $3.33 (as adjusted) per share, all of
which are currently available for exercise. Includes 20,000
shares issuable upon exercise of options granted under the
Incentive Stock Option Plan and 6,000 shares issuable upon
exercise of options granted under the Non-Qualified Stock
Option Plan during 1988 to Dr. Payne at a price of $3.33 (as
adjusted) per share, all of which are currently available
for exercise. Includes 8,000 shares issuable upon exercise
of options granted under the Incentive Stock Option Plan to
Mr. Crowe during 1991 at a price of $8.75 per share, which
are currently available for exercise.
(4) Includes shares beneficially acquired through participation
in the Company's ESOP and/or the Employee Stock Purchase
Plan, which are group plans for eligible employees.
(5) Includes 6,000 shares issuable upon exercise of options
granted under the Non-Qualified Stock Option Plan during
1988 to each of Messrs. Fleron and Schmitt at a price of
$3.33 (as adjusted) per share, which are currently
exercisable.
Item 13. Certain Relationships and Related Transactions
with Management
The obligations of the Company under the Senior Loan are
guaranteed by FIC. FIC presently owns 1,966,346 shares of the
company's Common Stock, constituting 46.17% of such shares
outstanding, and holds options to acquire an additional 1,702,155
shares at the average bid price of such shares during the six-
month period preceding the date of any such purchase. In the
event that such options were to be fully exercised, the total
number of the Company's shares owned by FIC would constitute
61.54% of the outstanding shares of the Company's Common Stock.
In May 1989, the Board of Directors of ILCO granted Roy F. Mitte
the right to borrow up to $650,000 from ILCO to be used solely
for the purchase of FIC common stock pursuant to Mr. Mitte's then
existing options. A principal purpose of said loan was to enable
Mr. Mitte to maintain his equity position in FIC, as required
under the terms of the lending agreements entered into in
connection with the purchase of the Investors Life Companies (see
"Acquisition of Investors Life Companies"). Said loan, which was
exercised on June 1, 1989, carried no interest and was payable in
five years. The loan was paid in full in 1994. See Item 11.
Executive Compensation.
When it acquired Austin Centre, Investors-NA leased the hotel to
FIC Realty Services, Inc. ("FIC Realty"), a subsidiary of FIC,
pursuant to which FIC Realty pays monthly rent to Investors-NA in
an amount equal to 95% of the net operating profits of the hotel
for the preceding month (excess of all hotel revenues over all
hotel expenses, including insurance, utilities and property
taxes). Any net operating loss for a month is carried forward and
deducted from the net operating profit for the next month that
has such a profit. During 1996 FIC Realty paid $658,509 of rent
to Investors-NA pursuant to this lease. FIC Realty has delegated
the management of the hotel to an unrelated third party pursuant
to a management agreement, but FIC Realty bears most of the
economic risks in operating the hotel. As an inducement to FIC
Realty's agreeing to bear those risks, Investors-NA has agreed to
provide funds to pay expenses in operating the hotel to the
extent that the cash flow from such operations is not sufficient
to do so. This arrangement was terminated upon the sale of the
Austin Centre in March, 1996. See Item 2. Properties.
FIC Realty conducts the leasing activities for the Bridgepoint
Square properties owned by Investors-NA. In payment for such
services, FIC Realty receives a commission of 4% of the gross
rent under each lease which is negotiated by it. During 1996,
Investors-NA paid commissions in the amount of $108,811 to FIC
Realty.
Alcoholic beverages had been sold at the hotel by an unrelated
third party pursuant to a lease it had with FIC Realty until
September 30, 1994. Commencing October 1, 1994, all alcoholic
beverages sales have been conducted by Atrium Beverage
Corporation ("Atrium Beverage"), a new subsidiary of FIC Realty.
Atrium Beverage subleases from FIC Realty space in the hotel for
the storage, service and sale of alcoholic beverages pursuant to
which Atrium Beverage pays monthly rent to FIC Realty of $12,500.
The sublease provides that the rent paid during each calendar
year will be reduced to the extent necessary to insure that
Atrium Beverage's net operating profit from alcoholic beverage
sales is not less than 5% of its gross receipts from such sales.
Atrium Beverage and FIC Realty are also parties to a management
agreement whereby FIC Realty manages Atrium Beverage's alcoholic
beverage operations at the hotel for a monthly fee equal to 28%
of the gross receipts from alcoholic beverages sales. During
1996, Atrium Beverage paid FIC Realty rent and management fees
totalling $117,998. All of that amount was included in the hotel
revenues of FIC Realty for purposes of determining its net
operating profits under the hotel lease agreement with Investors-
NA.
Investors-NA entered into a management agreement in September
1991 with FIC Property Management, Inc. ("FIC Management"), a
subsidiary of FIC, whereby it appointed FIC Management to manage,
lease and operate the office tower, retail areas, underground
parking garage and common areas of Austin Centre. FIC Management
is paid fees in an amount equal to 5% of the net operating profit
that Investors-NA receives from the properties managed and leased
by FIC Management.
During 1996, Investors-NA paid $33,027 of fees to FIC Management
under this agreement. This arrangement was terminated upon the
sale of the Austin Centre in March, 1996. See Item 2.
Properties.
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 shares 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 totalling $34.5 million that FLC
and another subsidiary of FIC obtained from Investors-NA. The
principal amount of the new subordinated debt is payable in four
equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of the new
debt are substantially the same as those of the $22.5 million
subordinated loans that Investors-NA had previously made to FLC
and that continue to be outstanding.
As of June 12, 1996, the provisions of the notes from Investors-
NA to FIC, FLC and FLIIC were modified as follows: (a) the $22.5
million note was amended to provide for twenty quarterly
principal payments, in the amount of $1,125,000 each, to commence
on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains
at 11%, (b) the $30 million note was amended to provide for forty
quarterly principal payments, in the amount of $163,540 each for
the period December 12, 1996 to September 12, 2001; beginning
with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final
quarterly principal payment is due on September 12, 2006; the
interest rate on the note remains at 9%, (c) the $4.5 million
note was amended to provide for forty quarterly principal
payments, in the amount of $24,531 each for the period December
12, 1996 to September 12, 2001; beginning with the principal
payment due on December 12, 2001, the amount of the principal
payment increases to $200,469; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the
note remains at 9%, (d) the $2.5 million note was amended to
provide that the principal balance of the note is to be repaid in
twenty quarterly installments of $125,000 each, commencing
December 12, 1996 with the final payment due on September 12,
2001; the rate of interest remains at 12%, (e) the Master PIK
note, which was issued to provide for the payment in kind of
interest due under the terms of the $2.5 million note prior to
June 12, 1996, was amended to provide that the principal balance
of the note ($1,977,119) is to be paid in twenty quarterly
principal payments, in the amount of $98,855.95 each, to commence
December 12, 1996 with the final payment due on September 12,
2001; the interest rate on the note remains at 12%.
The Company believes that this restructuring of subordinated debt
should enhance the value of the loans that Investors-NA has made
to FIC's subsidiaries and the options it holds to purchase FIC's
stock.
The Company reimbursed FIC for rental expenses and certain other
operating expenses incurred during 1996 on behalf of the Company.
The amount of such reimbursement was approximately $305,000.
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided at a central location until November
30, 1994. Commencing December 1, 1994, all of those data
processing needs are provided to ILCO's and FIC's Austin, Texas
and Seattle, Washington facilities by FIC Computer Services, Inc.
("FIC Computer"), a new subsidiary of FIC. Each of FIC's and
ILCO's insurance subsidiaries has entered into a data processing
agreement with FIC Computer whereby FIC Computer provides data
processing services to each subsidiary for fees equal to such
subsidiary's proportionate share of FIC Computer's actual costs
of providing those services to all of the subsidiaries. The
Company's insurance subsidiaries paid $2,243,234 and Family Life
paid $1,055,639 to FIC Computer for data processing services
provided during December 1996.
In 1995, Investors-NA entered into a reinsurance agreement with
Family Life pertaining to universal life insurance written by
Family Life. The reinsurance agreement is on a co-insurance
basis and applies to all covered business with effective dates on
and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than
$200,000; face amounts of $200,000 or more are reinsured by
Family Life with a third party reinsurer.
In 1996, Investors-NA entered into a reinsurance agreement with
Family Life, pertaining to annuity contracts written by Family
Life. The agreement applies to contracts written on or after
January 1, 1996.
Roy F. Mitte serves as Chairman, President and Chief Executive
Officer of both FIC and ILCO. James M. Grace serves as Vice
President, Treasurer and Director of both companies and Secretary
of FIC; Dr. Payne serves as Vice President and Director of both
companies and Secretary of ILCO; Messrs. Demgen and Fleron serve
as Vice Presidents and Directors of both companies; and Mr. Crowe
serves as a Director of both companies and, until his retirement
in January, 1997, served as a Vice President of both companies.
Mr. Roy Mitte holds beneficial ownership of 34.39% of the
outstanding shares of FIC (see "Security Ownership of Certain
Beneficial Owners and Management").
Part IV
Item 14. Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K
(a) The following documents have been filed as part of this
Report.
1. Financial Statements as identified in Item 8 above.
2. Financial Statement Schedules Required to be filed by
Item 8.
a. Schedule I-Summary of Investments other than
Investments in Related Parties.
b. Schedule II-Amounts Receivable from Related
Parties, Underwriters, Promoters and
Employees other than Related Parties.
c. Schedule III-Condensed Financial Statements
of Registrant.
d. Schedule VI-Reinsurance Ceded and Assumed.
3. Exhibits filed with this report or incorporated herein
by reference are as listed in the Index to Exhibits on
page E-1.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
last quarter of the fiscal year ended
December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
InterContinental Life Corporation
(Registrant)
By: /s/ Roy F. Mitte By:/s/ James M. Grace
Roy F. Mitte, Chairman of James M. Grace, Treasurer,
the Board, President and Principal Accounting
Chief Executive Officer and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
March 27, 1997.
/s/ Roy F. Mitte
Roy F. Mitte, Director
/s/ James M. Grace
James M. Grace, Director
/s/ Eugene E. Payne
Eugene E. Payne, Director
/s/ Joseph F. Crowe
Joseph F. Crowe, Director
/s/ Theodore A. Fleron
Theodore A. Fleron, Director
/s/ H. Gene Pruner
H. Gene Pruner, Director
/s/ Jeffrey H. Demgen __
Jeffrey H. Demgen, Director
/s/ Steven P. Schmitt
Steven P. Schmitt, Director
/s/ W. Lewis Gilcrease
W. Lewis Gilcrease, Director
/s/ Richard A. Kosson
Richard A. Kosson, Director
/s/ Donald Shuman
Donald Shuman, Director
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
FORM 10-K--ITEM 14 (a)(1) and (2)
LIST OF FINANCIAL STATEMENTS
TABLE OF CONTENTS
The following consolidated financial statements of
InterContinental Life Corporation and Subsidiaries are included
in Item 8:
Report of Independent Accountants.............................F-2
Consolidated Balance Sheets, December 31, 1996 and 1995.......F-3
Consolidated Statements of Income, for the years ended
December 31, 1996, 1995 and 1994.............................F-5
Consolidated Statements of Changes in Shareholders' Equity,
for the years ended December 31, 1996, 1995 and 1994.........F-6
Consolidated Statements of Cash Flows, for the years ended
December 31, 1996, 1995 and 1994.............................F-9
Notes to Consolidated Financial
Statements...................................................F-12
The following consolidated financial statement schedules of
InterContinental Life Corporation and Subsidiaries are included:
Schedule I - Summary of Investments Other Than Investments in
Related Parties.............................................F-
42
Schedule II - Amounts Receivable From Related Parties and
Underwriters, Promoters, and Employees Other Than Related
Parties......................................................F-43
Schedule III - Condensed Financial Statements of
Registrant...................................................F-45
Schedule VI - Reinsurance Ceded and
Assumed..................F-49
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are not
applicable, and therefore have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
InterContinental Life Corporation
In our opinion, the consolidated financial statements listed in
the index appearing under Item 14(a)(1) and (2) on page F-1
present fairly, in all material respects, the financial position
of InterContinental Life Corporation and its subsidiaries (the
Company) at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are
the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Dallas, Texas
March 25, 1997
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31,
ASSETS 1996 1995
Investments:
Fixed maturities, at
amortized cost (market value
approximates $8,374 and $14,277) $ 8,165 $ 14,420
Fixed maturities available for sale,
at market value (amortized cost
$451,550 and $463,701) 453,896 483,606
Equity securities, at market value
(cost approximates $373 and $368) 2,304 1,559
Policy loans 53,030 53,656
Mortgage loans 13,494 14,836
Invested real estate and other invested
assets 38,696 15,467
Short-term investments 91,556 85,994
Total investments 661,141 669,538
Cash and cash equivalents 3,313 6,537
Notes receivable from affiliates 59,940 61,224
Accrued investment income 7,807 8,190
Agent advances and other receivables 21,725 16,591
Reinsurance receivables 12,123 14,474
Property and equipment, net 1,785 4,460
Real estate occupied by the Company, net -0- 36,169
Deferred policy acquisition costs 26,938 24,926
Present value of future profits of
acquired businesses 45,240 48,606
Deferred financing costs 636 1,597
Other assets 8,965 6,859
Separate account assets 414,329 416,122
Total Assets $1,263,942 $1,315,293
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands of dollars)
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits $ 119,744 $ 128,265
Contractholder deposit funds 538,505 544,621
Unearned premiums 9,069 10,669
Other policy claims and benefits payable 5,988 6,125
673,306 689,680
Other policyholders' funds 2,720 2,700
Senior loans 24,944 59,385
Deferred federal income taxes 23,692 25,462
Other liabilities 13,835 27,105
Separate account liabilities 412,084 413,876
Total Liabilities 1,150,581 1,218,208
Commitments and Contingencies
(Note 13)
Redeemable preferred stock:
Class A Preferred, $1 par value,
5,000,000 shares authorized, issued 5,000 5,000
Class B Preferred, $1 par value,
15,000,000 shares authorized, issued 15,000 15,000
Redeemable Preferred Stock held 20,000 20,000
in treasury (20,000) (20,000)
-0- -0-
Shareholders' Equity:
Common stock, $.22 par value,
10,000,000 shares authorized;
5,223,739 and 5,166,239 shares issued,
4,232,829 and 4,175,329 shares out-
standing in 1996 and 1995, respectively 1,150 1,137
Additional paid-in capital 3,752 3,521
Net unrealized appreciation of
equity securities 1,255 748
Net unrealized gain on investments
in fixed maturities available for sale 1,525 12,938
Retained earnings 108,697 81,759
Common treasury stock, at cost, 116,379 100,103
990,910 shares (3,018) (3,018)
Total shareholders' equity 113,361 97,085
Total Liabilities and Shareholders'
Equity $1,263,942 $1,315,293
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars)
(except for per share data)
Year Ended December 31,
1996 1995 1994
Revenues:
Premiums $ 9,980 $ 11,694 $ 14,317
Net investment income 59,836 64,781 57,553
Earned insurance charges 42,238 42,324 39,370
Gain on sale of real estate 23,520 -0- -0-
Other 2,670 3,591 3,602
138,244 122,390 114,842
Benefits and expenses:
Policyholder benefits and expenses 40,091 42,639 41,243
Interest expense on contractholder
deposit funds 32,068 32,375 29,592
Amortization of present value of
future profits of acquired
businesses 3,366 6,211 5,393
Amortization of deferred policy
acquisition costs 2,574 3,929 4,116
Operating expenses 15,884 15,016 13,574
Interest expense 2,820 5,737 5,224
96,801 105,907 99,142
Income from operations 41,443 16,483 15,700
Provision for federal income taxes:
Current 10,227 945 (465)
Deferred 4,278 4,824 6,248
14,505 5,769 5,783
Net Income $ 26,938 $ 10,714 $ 9,917
Net income per share (Note 14):
Common stock and common stock
equivalents 5,380 5,389 5,378
Net income per share available to
common shareholders $ 5.12 $ 2.11 $ 1.93
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
Additional
Common Stock Paid-in
Shares Amount Capital
Balance at December 31,
1993 5,102 $1,123 $2,786
Net income
Change in net unrealized
appreciation of equity
securities
Change in net unrealized
loss on investments
in fixed maturities
available for sale
Options exercised 5 1 68
Balance at December 31,
1994 5,107 1,124 2,854
Net Income
Change in net unrealized
appreciation of equity
securities
Change in net unrealized
loss on investments
in fixed maturities
available for sale
Options exercised 59 13 667
Balance at December 31,
1995 5,166 1,137 3,521
Net Income
Change in net unrealized
appreciation of equity
securities
Change in net unrealized
gain on investments
in fixed maturities
available for sale
Options exercised 58 13 231
Balance at December 31,
1996 5,224 $1,150 $3,752
The accompanying notes are an integral part of these
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
Net
Unrealized
Gain (Loss)
on Invest-
Net ments in
Unrealized Fixed
Appreciation Maturities
of Equity Available Retained
Balance at December 31, Securities For Sale Earnings
1993 $ 945 $ 6,323 $ 61,128
Net income 9,917
Change in net unrealized
appreciation of equity
securities (377)
Change in net unrealized
loss on investments
in fixed maturities
available for sale (26,589)
Options exercised
Balance at December 31,
1994 568 (20,266) 71,045
Net Income 10,714
Change in net unrealized
appreciation of equity
securities 180
Change in net unrealized
loss on investments
in fixed maturities
available for sale 33,204
Options exercised
Balance at December 31,
1995 748 12,938 81,759
Net Income 26,938
Change in net unrealized
appreciation of equity
securities 507
Change in net unrealized
gain on investments
in fixed maturities
available for sale (11,413)
Options exercised
Balance at December 31,
1996 $ 1,255 $ 1,525 $108,697
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
Common Total
Treasury Shareholders
Stock 'Equity
Balance at December 31,
1993 $ (3,018) $ 69,287
Net income 9,917
Change in net unrealized
appreciation of equity
securities (377)
Change in net unrealized
loss on investments
in fixed maturities
available for sale (26,589)
Options exercised 69
Balance at December 31,
1994 (3,018) 52,307
Net Income 10,714
Change in net unrealized
appreciation of equity
securities 180
Change in net unrealized
loss on investments
in fixed maturities
available for sale 33,204
Options exercised 680
Balance at December 31,
1995 (3,018) 97,085
Net Income 26,938
Change in net unrealized
appreciation of equity
securities 507
Change in net unrealized
gain on investments
in fixed maturities
available for sale (11,413)
Options exercised 244
Balance at December 31,
1996 $ (3,018) $113,361
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Year Ended December 31,
CASH FLOWS FROM OPERATING 1996 1995 1994
ACTIVITIES
Net Income $ 26,938 $ 10,714 $ 9,917
Adjustments to reconcile net
income to net cash (used in)
provided by operating activities:
Amortization of present value of
future profits of acquired
businesses 3,366 6,211 5,393
Amortization of deferred policy
acquisition costs 2,572 3,929 4,116
Depreciation 1,356 2,610 268
Net gain on sales of investments (23,394) (418) (695)
Financing costs amortized 961 865 1,411
Amortization of deferred gain on
sale of real estate (110) (110) (151)
Changes in assets and liabilities:
Decrease (increase) in accrued
investment income 383 1,759 (698)
(Increase) decrease in agent
advances and other receivables (2,783) 4,656 (2,467)
Policy acquisition costs deferred (4,584) (3,573) (3,597)
Decrease in policy liabilities
and contractholder deposit funds (16,374) (27,753) (17,685)
Increase (decrease) in other policy
holders' funds 20 (349) 78
(Decrease) increase in other
liabilities (13,270) 911 (707)
(Decrease) increase in deferred
federal income taxes (1,770) 4,696 (8,124)
(Increase) decrease in other assets (2,106) 7,527 (1,037)
Other, net 5,331 (1,388) (1,371)
Net cash (used in) provided by
operating activities (23,464) 10,287 (15,349)
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Year Ended December 31,
CASH FLOWS FROM INVESTING 1996 1995 1994
ACTIVITIES
Purchase of insurance subsidiary -0- (17,492) -0-
Investments purchased (55,395) (38,781) (130,710)
Proceeds from sales and maturities
of investments 112,791 50,181 97,019
Net change in short-term
investments (5,562) 8,847 68,505
Purchases & retirements of
equipment 1,319 (4,403) (655)
Notes receivable from affiliates 1,284 (465) (413)
Net cash provided by (used in)
investing activities 54,437 (2,113) 33,746
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of common stock 244 -0- -0-
Issuance of senior loan -0- 15,000 -0-
Repayment of debt (34,441) (22,200) (17,415)
Net cash used in financing
activities (34,197) (7,200) (17,415)
Net (decrease) increase in cash
and cash equivalents (3,224) 974 982
Cash and cash equivalents,
beginning of year 6,537 5,563 4,581
Cash and cash equivalents,
end of year $ 3,313 $ 6,537 $ 5,563
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Supplemental Cash Flow Disclosures:
Year Ended December 31,
1996 1995 1994
Income taxes paid $ 13,567 $ 560 2,675
Interest paid $ 3,377 $5,905 $ 4,733
Supplemental Schedule of Non-Cash Investing Activities:
The Company purchased the outstanding capital stock of a life
insurer in the first quarter of 1995 for a cash purchase price of
$17.1 million net of post closing adjustments. This purchase
resulted in the Company receiving tangible assets and assuming
liabilities as follows:
Assets $99,642,000
Liabilities $90,816,000
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
InterContinental Life Corporation (ILCO or the "Company") is
principally engaged, through its subsidiaries, in administering
existing portfolios of individual and group life insurance,
credit life and disability insurance policies and annuity
products. The Company's insurance subsidiaries are also engaged
in the business of marketing and underwriting individual life
insurance, credit life and disability insurance and annuity
products in 49 states and the District of Columbia. Such
products are marketed through independent, non-exclusive general
agents. The Company also administers an in-force book of health
insurance business.
Principles of Consolidation
The consolidated financial statements include the accounts of
InterContinental Life Corporation and its subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
Basis of Presentation
The financial statements have been prepared in conformity with
generally accepted accounting principles which differ from
statutory accounting principles required by regulatory
authorities for the Company's insurance subsidiaries.
Significant accounting policies followed by the Company are:
Investments
The Company's general investment philosophy is to hold fixed
maturity securities until maturity. However, fixed maturities
may be sold prior to the maturity dates in response to changing
market conditions, duration of liabilities, liquidity factors,
interest rate movements and other investment factors.
Accordingly, most fixed maturity investments are classified as
available for sale and are carried at market value. All other
fixed maturities are carried at the lower of amortized cost or
net realizable value as management has the positive intent and
the Company has the ability to hold such investments to maturity.
Unrealized gains and losses on securities available for sale are
not recognized in earnings but are reported as a separate
component of equity, net of the income tax effect.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Premiums and discounts on collateralized mortgage obligations
(CMOs) are amortized over the estimated redemption period as
opposed to the stated maturities. An adjustment to the
investment and investment income is booked on a retrospective
basis to reflect the amounts that would have existed had the new
effective yield been applied since the acquisition of the CMOs.
Equity securities are carried at market value. Unrealized gains
and losses on equity securities, net of deferred income taxes, if
applicable, are reflected directly in shareholders' equity.
Mortgage loans and policy loans are recorded at unpaid balances.
Real estate is carried at cost less accumulated depreciation,
which is generally calculated using the straight-line method over
20 to 40 years. Accumulated depreciation on investments in real
estate is $5,788,424 and $5,021,082 at December 31, 1996 and
1995, respectively. Short-term investments are carried at cost,
which approximates market value, and generally consist of those
fixed maturities and other investments that are intended to be
held less than one year from the date of purchase.
Investments in real estate are carried at cost less accumulated
depreciation. Interest is capitalized on funds expended for
construction of facilities for the Company's own use and for
facilities intended for sale or lease. Interest cost capitalized
and included as a component of the historical cost of the assets
was approximately $620,000 in 1996. No interest cost was
capitalized in 1995 and 1994.
Realized gains and losses on disposal of investments are included
in net income. The cost of investments sold is determined on the
specific identification basis, except for equity securities, for
which the first-in, first-out method is employed. When an
impairment of the value of an investment is considered other than
temporary, the decrease in value is reported in net income as a
realized investment loss and a new cost basis is established.
Cash and Cash Equivalents
Short-term investments with maturities of three months or less at
the time of purchase are reported as cash equivalents.
Property and Equipment and Home Office Real Estate
Net income for 1996 includes $23.5 million (before federal income
tax) resulting from the sale during the first quarter of 1996 of
the Austin Centre, a hotel/office complex, located in Austin,
Texas, which serves as the Company's home office building. The
selling price was $62.672 million, less $1 million paid to a
capital reserve account for the purchaser. The property was
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchased in 1991 for $31.275 million. The book value of the
property, $36.8 million, net of improvements and amortization,
was retained and reinvested by the Company. The balance of the
proceeds of the sale, net of federal income tax, was used to
reduce the Company's senior loan obligations by $15 million. The
sale closed on March 29, 1996. The Company continues to occupy
space in the building under the terms of an operating lease which
expires in September 1997.
Property and equipment and home office real estate is stated at
cost less accumulated depreciation. Depreciation is calculated
using straight-line and accelerated methods over estimated useful
lives of 10 to 33 years for buildings and improvements and 10
years for furniture and equipment. Maintenance and repairs are
charged to expense when incurred. Accumulated depreciation for
property and equipment and home office real estate was $4,364,064
and $8,984,287 at December 31, 1996 and 1995, respectively.
Deferred Acquisition Costs
The cost of acquiring new and renewal business, principally first
year commissions and certain expenses of the policy issuance and
underwriting departments, which vary with and are primarily
related to the production of new and renewal business, have been
deferred to the extent recoverable. Acquisition costs related to
universal life products are deferred and amortized in proportion
to the ratio of estimated annual gross profits to total estimated
gross profits over the expected lives of the contracts.
Acquisition costs related to traditional life insurance business
are deferred and amortized over the premium paying period of the
related policies.
Present Value of Future Profits
The present value of future profits of acquired traditional life
business is amortized over the premium paying period of the
related policies in proportion to the ratio of the annual premium
revenue to total anticipated premium revenue applicable to such
policies. Interest on the unamortized balance is accreted at
rates from 8.5% to 9%.
For interest-sensitive products, these costs are amortized in
relation to the present value, using the current credited
interest rate, of expected gross profits of the policies over the
anticipated coverage period.
Retrospective adjustments of these amounts are made periodically
upon the revision of estimates of current or future gross profits
on universal life-type products to be realized from a group of
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
policies. Recoverability of present value of future profits is
evaluated periodically by comparing the current estimate of
future profits to the unamortized asset balances.
Anticipated investment returns, including realized gains and
losses, from the investment of policyholder balances are
considered in determining the amortization of present value of
future profits acquired.
Deferred Financing Costs
Financing costs associated with the Company's Senior Loan have
been deferred and are being amortized over the borrowing periods
using the interest method.
Separate Accounts
Separate account assets, carried at market value, and liabilities
represent policyholder funds maintained in accounts having
specific investment objectives. The net investment income, gains
and losses of these accounts, less applicable contract charges,
generally accrue directly to the policyholders and are not
included in the Company's statement of income.
Solvency Laws Assessments
The solvency or guaranty laws of most states in which the
Company's insurance subsidiaries do business may require the
Company's insurance subsidiaries to pay assessments (up to
certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These
assessments may be deferred or forgiven under most guaranty laws
if they would threaten an insurer's financial strength and, in
certain instances, may be offset against future premium taxes.
The Company's insurance subsidiaries record the expense for
guaranty fund assessment from states which do not allow premium
tax offsets in the period assessed. The Company's insurance
subsidiaries recorded expenses of $100,165, $241,692 and $192,371
in the years ended December 31, 1996, 1995 and 1994,
respectively, as a result of such assessments.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits related to traditional
life products are computed using the net level premium method or
an equivalent actuarial method. Assumptions for future
investment yields are incorporated in these liabilities
(principally 8% for guaranteed premium products). Assumptions
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for mortality and withdrawal, based on industry and Company
experience for all products, include provisions for possible
unfavorable deviations. The liability for future policy benefits
for traditional life policies is graded to reserves stipulated by
regulatory authorities over a 30-year period or the end of the
premium paying period, if less.
Contractholder deposit funds are liabilities for universal life
and annuity products. These liabilities consist of deposits
received from customers and accumulated net investment income on
their fund balances, less administrative charges. Universal life
fund balances are also assessed mortality charges. The cash
value benefit for these products is based on actual crediting
rates, which are lower than assumed investment yields.
Liabilities for future policy benefits related to non-cancelable
and guaranteed renewable accident and health contracts are
computed based on industry and Company experience and estimated
future investment yields ranging from 4 1/2% to 6%. Unearned
premium reserves for credit life and accident and health
contracts are computed on either the sum-of-the-year's digits or
pro rata methods depending upon the type of coverage.
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable
represents management's estimate unpaid losses on claims and
other miscellaneous liabilities to policyholders reduced by
amounts anticipated to be recovered from reinsurance. Estimated
unpaid losses on claims are comprised of losses on claims that
have been reported but not yet paid, including estimates of
additional development of initial claims estimates, and claims
that have been incurred but not yet reported (IBNR) to the
Company.
The liability for other policy claims and benefits payable is
subject to the impact of changes in claim severity, frequency and
other factors. Although there is considerable variability
inherent in such estimates, management believes that the
liability recorded is adequate.
Revenue Recognition
Premiums on traditional life and health products are recognized
as revenue over the premium paying period when due. Credit life
and health insurance premiums are recognized over the contract
period on a pro rata basis, or the sum of years digits basis.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Benefits and expenses are associated with earned premiums, so as
to result in recognition of profits over the lives of the
contracts.
Proceeds from investment-related products and universal life
products are recorded as liabilities when received. Revenues for
investment-related products consist of contract charges assessed
against the deposit fund values and net investment income.
Related benefit expenses primarily consist of interest credited
to the fund values after deductions for investment and policy
charges. Revenues for universal life products consist of net
investment income, mortality and administration charges against
deposits and fund values and surrender charges assessed against
the fund values. Related benefit expenses include universal life
benefit claims in excess of fund values and interest credited to
universal life fund values.
Net Income Per Share
Net income per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding
during each year and net income increased by the reduction in
interest expense caused by the assumed conversion of common stock
equivalents. There are no significant differences between
primary and fully diluted income per share amounts.
Federal Income Taxes
In February, 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (FAS 109). The Company adopted FAS
109 on a prospective basis effective January 1, 1993. FAS 109
mandates the asset and liability method for computing deferred
income taxes. Under this method, balance sheet amounts for
deferred income taxes are computed based on the tax effect of the
differences between the financial reporting and federal income
tax bases of assets and liabilities using the tax rates which are
expected be in effect when these differences are anticipated to
reverse.
Under FAS 109, assets acquired and liabilities assumed in
purchase business combinations are assigned their fair values
assuming equal tax basis and deferred taxes are provided for
lower or higher tax basis. Under Accounting Principles Board
(APB) Opinion No. 22 (the previous accounting standard used by
the Company to account for income taxes), values assigned to
assets acquired and liabilities assumed were net-of-tax. In
adopting FAS 109, the Company adjusted the carrying amounts of
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investors-NA which was acquired in 1988. Pre-tax income from
operations for the calendar year ended December 31, 1993 was not
impacted.
Under FAS 109, as under APB 11, the Company will disclose in its
financial statements a reconciliation between the effective tax
rate and the amount derived by multiplying pre-tax accounting
income by the currently enacted federal income tax rate.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results will differ from those estimates.
New Accounting Pronouncements:
During 1995, the FASB issued FAS No. 123 "Accounting for Stock-
Based Compensation," which encourages companies to adopt the fair
value based method of accounting for stock-based compensation.
This method requires the recognition of compensation expense
equal to the fair value of such equity securities at the date of
the grant. This statement also allows companies to continue to
account for stock-based compensation under the intrinsic value
based method, as prescribed by APB Opinion No. 25 "Accounting for
Stock Issued to Employees," with footnote disclosure of the pro
forma effects of the fair value based method. FAS No. 123 is
effective for transactions entered into in years that begin after
December 15, 1995.
The Company adopted FAS No. 123 during 1996 and will continue to
account for stock-based compensation under the intrinsic value
method and disclose the impact of the fair value method in the
footnotes to the financial statements.
2. Investments
Fixed Maturities
The amortized cost, gross unrealized gains and losses and market
values of fixed maturities available for sale and fixed
maturities held to maturity at December 31, 1996 and 1995,
respectively were as follows (in thousands):
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Gross
Amort- Unreal- Unreal-
ized ized ized Market
Cost Gains Losses Value
Fixed Maturities Available
For Sale as of December 31,
1996:
U.S. Treasury securities and
obligations of U.S.
government agencies and
corporations $ 13,817 $ 902 $ 18 $ 14,701
Obligation of states and 4,727 163 -0- 4,890
political subdivisions
Foreign government debt
securities 5 -0- -0- 5
Corporate securities 120,263 2,582 3,625 119,220
Mortgage-backed securities 312,738 7,473 5,131 315,080
Total Fixed Maturities
Available For Sale 451,550 11,120 8,774 453,896
Fixed maturities held to
Maturity:
Private Placements-Corporate 8,165 320 111 8,374
Total Fixed Maturities $459,715 $ 11,440 $ 8,885 $462,270
Fixed Maturities Available
For Sale as of December 31,
1995:
U.S. Treasury securities and
obligations of U.S.
government agencies and
corporations $ 15,826 $ 1,494 $ 5 $ 17,315
Obligations of states and
political subdivisions 4,686 266 -0- 4,952
Foreign government debt
securities 15 -0- 1 14
Corporate securities 98,822 5,092 1,048 102,866
Mortgage-backed securities 344,352 14,600 493 358,459
Total Fixed Maturities
Available For Sale 463,701 21,452 1,547 483,606
Fixed Maturities held to
Maturity:
Private Placements-Corporate 14,420 370 513 14,277
Total Fixed Maturities $478,121 $ 21,822 $ 2,060 $497,883
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and market value of fixed maturities carried
at amortized cost at December 31, 1996 is shown below by
contractual maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Fixed Maturities Available for Sale
Amortized Market
Cost (in thousands) Value
Due in one year or less......$ 4,465 $ 4,502
Due after one through
five years................. 16,473 17,030
Due after five through ten
years...................... 18,637 19,246
Due after ten years.......... 99,237 98,038
Mortgage backed securities... 312,738 315,080
Total Fixed Maturities
Available for Sale $ 451,550 $ 453,896
Fixed Maturities Held to Maturity
Amortized Market
Cost (in thousands) Value
Due in one year or less.....$ 2,500 $ 2,547
Due after one through
five years................ 3,534 3,716
Due after five through ten
years..................... 1,463 1,415
Due after ten years.........
Mortgage backed securities.. 668 696
Total Fixed Maturities
Held to Maturity $ 8,165 $ 8,374
Proceeds from sales and maturities of investments in fixed
maturities during 1996, 1995 and 1994 were approximately
$53,888,000, $47,316,000, and $59,247,000. Gross gains of
approximately $322,000, $578,000, and $824,000 and gross losses
of approximately $100,000, $22,000, and $193,000 were realized on
those sales and maturities in 1996, 1995 and 1994, respectively.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities
The change in net unrealized appreciation for equity securities
was $780,000 and $277,000 for the years ended December 31, 1996
and 1995, respectively. Amounts as of December 31 were as
follows:
1996 1995
(in thousands)
Unrealized appreciation $ 1,946 $ 1,172
Unrealized depreciation (15) (21)
Net unrealized appreciation $ 1,931 $ 1,151
Net Investment Income
The components of net investment income are summarized as
follows:
Year Ended December 31,
(in thousands)
1996 1995 1994
Fixed maturities $47,448 $49,329 $40,938
Equity securities 12 65 12
Other, including policy loans,
real estate and mortgage loans 15,708 19,392 19,650
63,168 68,786 60,600
Investment expenses (3,332) (4,005) (3,047)
Net investment income $59,836 $64,781 $57,553
Realized Gains and Losses
Net realized gains (losses) included in net investment income are
summarized below:
Year Ended December 31,
(in thousands)
1996 1995 1994
Fixed maturities available for sale $ 222 $ 556 $ 78
Equity securities 1 (26) 324
Other investments (256) (97) 293
(33) 433 695
Income taxes (12) 152 243
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net realized (losses) gains $ (21) $ 281 $ 452
Non-income producing investments
The carrying value of non-income producing investments were as
follows as of December 31:
1996 1995
(in thousands)
Fixed maturities $ 100 $ 48
Mortgage loans 81 400
Total $ 181 $ 448
Mortgage loans and invested real estate
The Company's mortgage loans and invested real estate are
diversified by property type, location and issuer. Mortgage
loans are collateralized by the related properties and such loans
generally range from 15% to 80% of the property's value at the
time the loan is made. No new mortgage loans were made during
the three year period ended December 31, 1996.
Financial Industries Corporation
Equity securities includes a $2,158,407 investment, ($318,390 at
cost), in 189,750 shares of common stock of Financial Industries
Corporation (FIC) (See Note 9). This represents 3.5% of FIC's
outstanding common stock at December 31, 1996.
3. Disclosures about Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments
at December 31, 1996 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $462,061 $462,270
Policy loans 53,030 53,030
Mortgage loans 13,494 14,066
Short-term investments 91,556 91,556
Cash and cash equivalents 3,313 3,313
Notes receivable from affiliates 59,940 59,940
Carrying Fair
Amount Value
(in thousands)
Financial liabilities:
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred annuities $115,039 $114,445
Supplemental contracts 11,452 11,008
Senior loans 24,944 24,944
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument:
Fixed maturities
Fair values are based on quoted market prices or dealer quotes.
Policy loans
Policy loans are, generally, issued with coupon rates below
market rates and are considered early payment of the life
benefit. As such, the carrying amount of these financial
instruments is a reasonable estimate of their fair value.
Mortgage loans
The fair value of mortgage loans is estimated using a discounted
cash flow analysis using rates for BBB- rated bonds with similar
coupon rates and maturities.
Cash and cash equivalents and short-term investments
The carrying amount of these instruments approximates market
value.
Notes receivable from affiliates
The fair value is estimated based on a discounted cash flow
analysis using current rates offered to the Company for debt of
the same remaining maturities.
Senior loans
The fair value has been set at the price to call the debt.
Deferred annuities and supplemental contracts
The fair value of deferred annuities is estimated using cash
surrender values. Fair values for supplemental contracts is
estimated using a discounted cash flow analysis, based on
interest rates currently offered on similar products.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Present value of future profits of acquired business
An analysis of the present value of future profits of acquired
businesses is as follows:
1996 1995
Beginning balance $ 48,606 $ 46,153
Acquisition of insurance subsidiary -0- 8,664
Accretion of interest 4,401 4,437
Amortization (7,767) (10,648)
Ending balance $ 45,240 $ 48,606
Amortization of the present value of future profits included in
the consolidated statements of income is presented net of the
accretion of interest.
The estimated amount of present value of future profits to be
amortized net of interest accretion during each of the next five
years is as follows:
1997 $ 5,354
1998 $ 4,876
1999 $ 2,969
2000 $ 2,639
2001 $ 2,324
5. Acquisition of Business
On February 14, 1995, the Company and Investors-NA completed the
purchase of Meridian Life Insurance Company (MLIC), a life
insurer domiciled in Indiana, from Meridian Mutual Insurance
Company. Under the terms of the agreement, the Company acquired
approximately 82% of the outstanding common stock of MLIC for $14
million. Investors-NA acquired the remaining 18% for $3 million.
Immediately after finalizing the transaction, ILCO contributed
its acquired shares to unassigned surplus of Investors-NA,
resulting in MLIC being a wholly owned subsidiary of Investors-
NA. ILCO's senior loan was increased by $15 million (through an
amendment to the loan agreement) to fund its portion of the
purchase price. Subsequent to the purchase, MLIC's name was
officially changed to Investors' Life Insurance Company of
Indiana (INVIND). The transaction was accounted for as a
purchase business combination. Accordingly, the results of
INVIND's operations are included in income from the date of the
acquisition. The purchase price has been allocated to the fair
values of the assets and liabilities acquired, including the
present value of future profits disclosed in Note 4.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma unaudited results of operations for the years ended
December 31, 1995 and 1994, assuming the acquisition of MLIC had
been consummated as of the beginning of 1994, are as follows:
Unaudited
1995 1994
(in thousands, except
per share data)
Total revenues $123,905 $134,431
Net income $ 10,391 $ 9,889
Net income per share
available to common shareholders $ 2.05 $ 1.92
6. Senior Loans
The Company's outstanding debt at December 31, 1996 and 1995
consists of a series of separate notes, each of which is payable
to a member bank of a lending syndicate with principal payments
beginning April 1, 1993 and a final payment on or before July 1,
1999. The balance of the notes was $24,944,000 and $59,385,000
at December 31, 1996 and 1995, respectively. Interest is payable
at the Company's option based on (1) the managing bank's
corporate base rate plus 1.25% declining to .5% as principal
declines, or (2) LIBOR plus 2.5% declining to 1.75%. The rate in
effect at December 31, 1996 and 1995 was 7.56% and 8.18%,
respectively.
The obligations of the Company under the Senior Loans are secured
by: (1) all of the outstanding shares of stock of Investors-NA,
(2) a $15,000,000 surplus debenture of Investors-NA payable to
the Company, which had an outstanding principal balance of
$5,706,224 as of December 31, 1996 and (3) a $140,000,000 surplus
debenture of Investors-NA payable to the Company, which had an
outstanding principal balance of $32,840,000 as of December 31,
1996. The obligations of the Company under the Senior Loans are
guaranteed by FIC.
The Senior Loans documents also require the Company to make
additional mandatory principal payments which reduce the
quarterly principal payments in the inverse order of their due
dates. The payments are equal to (a) 100% of the net proceeds
from the issuance of the Company's capital stock or debt
securities and (b) the applicable percentage of the Company's
annual Excess Cash Flow (as defined). Additional mandatory
principal payments during 1996, 1995 and 1994 were $941,000,
$4,200,000 and $3,915,000, respectively. The Senior Loan may be
prepaid, in whole or in part, without penalty or premium.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepayments during 1996, 1995 and 1994 were $15,500,000, $-0- and
$-0-, respectively.
In connection with the acquisition of Meridian Life Insurance
Company in February, 1995 (See Note 5), the Company borrowed an
additional $15 million under the Senior Loans to help finance the
purchase. In addition, the maturity schedule was extended one
year to July 1, 1999. Maturities of the Senior Loans over the
next three years are as follows:
(in thousands)
1997 $ 18,080
1998 6,864
1999 -0-
$ 24,944
7. Federal Income Taxes
The Company files consolidated federal income tax returns with
its non-life subsidiaries. The Company's life insurance
subsidiaries file consolidated federal income tax returns. In
accordance with the Company's tax allocation agreement, federal
income tax expense or benefit is allocated to each member of the
consolidated group as if each member were filing a separate
return.
The U.S. federal income tax provision (benefit) charged to
continuing operations for the years ended December 31, was as
follows:
1996 1995 1994
(amounts in thousands)
Current tax provision $ 10,227 $ 945 $ (465)
Deferred tax provision 4,278 4,824 6,248
Total provision for income taxes $ 14,505 $ 5,769 $5,783
Provision has not been made for state and foreign income tax
expense since expense is minimal.
The provision for income taxes differs from the amount of income
tax determined by applying the U.S. statutory federal income tax
rate of 35% to pre-tax income from continuing operations before
extraordinary item as a result of the following differences:
1996 1995 1994
Income taxes at the statutory rate $14,505 $ 5,769 $ 5,495
Increase (decrease) in taxes resulting
from:
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred compensation arrangement -0- -0- 375
Other items, net -0- -0- (87)
Total provision for income taxes $14,505 $ 5,769 $ 5,783
Deferred taxes are recorded for temporary differences between the
financial reporting bases and the federal income tax bases of the
Company's assets and liabilities. The sources of these
differences and the estimated tax effect of each are as follows:
Dec. 31, Dec. 31,
1996 1995
Deferred Tax Liability:
Deferred policy acquisition
costs $ 4,989 $ 4,058
Present value of future profits 11,715 10,201
Invested assets 769 998
Net unrealized appreciation on
marketable securities 1,497 7,369
Acquisition discounts on
mortgages/policy loans 1,984 2,404
Reinsurance recoverable 3,268 3,953
Other taxable temporary
differences 2,876 3,135
Total deferred tax liability $27,098 $32,118
Dec. 31, Dec. 31,
1996 1995
Deferred Tax Asset:
Policy Reserves $ 1,594 $ 4,757
Other deferred tax asset -0- 527
Net operating loss carry forward 1,512 828
Minimum tax credit 300 281
Deferred Compensation -0- 263
Total deferred tax asset 3,406 6,656
Net deferred tax liability $23,692 $25,462
Deferred federal income tax (benefit) expense of $(5,872,000) and
$17,976,000 for 1996 and 1995, respectively, have been provided
on the unrealized (depreciation) appreciation of marketable
securities and included in the deferred tax liability. This
decrease in deferred tax liability has been recorded as a
reduction to the equity adjustment due to the net change in
unrealized appreciation or depreciation and has not been
reflected in the deferred income tax expense.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the provisions of pre-1984 life insurance company income
tax regulations, a portion of "gain from operations" of ILIC and
Investors-NA was not subject to current taxation but was
accumulated, for tax purposes, in special tax memorandum accounts
designated as "policyholders' surplus accounts". Subject to
certain limitations,"policyholders' surplus" is not taxed until
distributed or the insurance company no longer qualifies to be
taxed as a life insurance company. The accumulation in these
accounts for Investors-NA and ILIC at December 31, 1996 and 1995
was $8,225,000 and $4,357,000, respectively. Federal income tax
of $2,879,000 and $1,525,000 would be due if the entire balance
is distributed at a tax rate of 35%.
The Company does not anticipate any transactions that would cause
any part of the policyholders' surplus accounts to become taxable
and, accordingly, deferred taxes have not been provided on such
amounts. At December 31, 1996 and 1995, Investors-NA and ILIC
have approximately $106,000,000 and $5,800,000, respectively, in
the aggregate in their shareholders' surplus accounts from which
distributions could be made without incurring any federal tax
liability.
At December 31, 1996, the Company and its non-life wholly-owned
subsidiaries have net operating loss carryforwards of
approximately $4.3 million.
At December 31, 1996, there were no IRS examinations in progress
for the Company or its subsidiaries.
8. Reinsurance
The Company reinsures portions of certain policies thereby
providing greater diversification of risk and minimizing exposure
on larger policies. The Company's retention on any one
individual ranges from $60,000 to $250,000 depending on the risk.
The Company remains liable to the extent the reinsurance
companies are unable to meet their obligations under the
reinsurance agreements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts reported in the consolidated financial statements for
reinsurance ceded are as follows:
December 31,
1996 1995
(in thousands)
Future policy benefits $ 7,314 $ 7,964
Unearned premiums 1,946 2,634
Other policy claims and benefits
payable 76 155
Amounts recoverable on paid claims 2,787 3,721
Reinsurance receivables $ 12,123 $ 14,474
Years ended December 31,
1996 1995 1994
(in thousands)
Premiums $ 7,962 $ 8,568 $ 10,907
Policyholder benefits and
expenses $ 14,712 $ 14,404 $ 14,176
9. Shareholders' Equity
The Company is controlled by FIC, a life insurance holding
company, through FIC's ownership of approximately 46% of the
Company's outstanding common stock. FIC also holds options to
purchase up to an additional 1,702,155 shares of the Company's
authorized but unissued common stock at a price equal to the
average market value during the six months preceding the exercise
date. If all of these options were exercised at December 31,
1996, FIC would own approximately 61.81% of the issued and
outstanding shares of the Company's common stock, assuming no
other options or warrants held by other parties were exercised.
In the event that any other party seeks to acquire the Company's
outstanding shares, FIC has the right to acquire, without prior
approval and under the same pricing formula, the number of shares
of common stock which when added to the number of shares then
owned by FIC, amount to 51% of the outstanding shares of the
Company. These options will remain in effect as long as any
indebtedness guaranteed by FIC remains outstanding (See Note 6).
The Company's ability to pay dividends to its shareholders is
affected, in part, by the receipt of dividends from Investors-NA,
which is organized under the laws of the state of Washington.
Under current Washington law, any proposed payment of a dividend
or distribution which, together with dividends or distributions
paid during the preceding twelve months, exceeds the greater of
(i) 10% of statutory surplus as of the preceding December 31 or
(ii) statutory net gain from operations for the preceding
calendar year is called an "extraordinary dividend" and may not
be paid until either it has been approved, or a waiting period
shall have passed during which it has not been disapproved, by
the insurance commissioner.
In addition, Washington Laws require that prior notification of a
proposed dividend be given to the Washington Insurance
Commissioner and that dividends may be paid only from earned
surplus.
The New Senior Loan described in Note 6 restricts the Company
from paying any dividends on its common stock during its term.
Net income (before surplus debenture interest expense) and
capital and surplus of Investors-NA as reported to insurance
regulators and as determined in accordance with statutory
accounting practices are as follows:
Year Ended December 31
(in thousands)
1996 1995 1994
Net Income $ 33,068 $ 23,810 $ 21,706
Capital and Surplus $ 56,174 $ 61,896 $ 53,841
The insurance regulations of the state of Washington limit the
amount an insurer may invest in the obligations of any one
corporation to four percent of the insurer's statutory admitted
assets. Investors-NA held $51,211,460 and $52,500,000 in
subordinated notes issued by Family Life Corporation, a wholly-
owned subsidiary of FIC, at December 31, 1996 and 1995,
respectively. This investment exceeds the limit on investments
prescribed by the state of Washington by $8,787,303 and
$9,282,287 at December 31, 1996 and 1995, respectively. Prior to
the acquisition of these notes, Investors-NA received written
approval from the Washington State Insurance Department for the
inclusion of the full amount of these notes in its statutory
admitted assets. At December 31, 1996 and 1995, this permitted
practice increased statutory surplus by $8,787,303 and $9,282,287
over what it would have been under prescribed statutory
accounting practices.
In 1988, the Company authorized the issuance of 10 million shares
of Class C Preferred Stock, $1.00 par value. The Company is not
permitted, under the provisions of the Senior Loan Agreement (See
Note 6), to issue any preferred stock except Class A and Class B
issued in connection with the acquisition of the Investors Life
Companies. The Company has reacquired the Class A and Class B
Preferred Stock and holds the shares in treasury.
10. Retirement Plans and Employee Stock Plans
Retirement Plan
The Company maintains a retirement plan, ("ILCO Pension Plan"),
covering substantially all employees of the Company. The plan
is a non-contributory, defined benefit pension plan, which covers
each eligible employee who has attained 21 years of age and has
completed one year or more of service. Each participating
company contributes an amount necessary (as actuarially
determined) to fund the benefits provided for its participating
employees.
The Plan's basic retirement income benefit at normal retirement
age is 1.57% of the participant's average annual earnings less
0.65% of the participant's final average earnings up to covered
compensation multiplied by the number of his/her years of
credited service. For participants who previously participated
in the plan maintained by the Company for the benefit of former
employees of the IIP Division of CIGNA Corporation (the IIP
Plan), the benefit formula described above applies to service
subsequent to May 31, 1996. With respect to service prior to
that date, the benefit formula provided by the IIP Plan is
applicable, with certain exceptions applicable to former IIP
employees who are classified as highly compensated employees.
Former eligible IIP employees commenced participation
automatically. The Plan also provides for early retirement,
postponed retirement and disability benefits to eligible
employees. Participant benefits become fully vested upon
completion of five years of service, as defined, or attainment of
normal retirement age, if earlier.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pension costs for all plans include the following components:
1996 1995
(in thousands)
Service cost-benefits earned
during the period $ 502 $ 313
Interest cost on projected
benefit obligation 686 571
Return on plan assets (1,128) (1,081)
Amortization (229) (269)
Pension benefit $ (169) $ (466)
The following summarizes the funded status of the plans at
December 31:
1996 1995
(in thousands)
Actuarial present value of:
Vested benefit obligation $ (7,726) $ (7,495)
Accumulated benefit obligation $ (7,914) $ (7,870)
Projected benefit obligation $ (8,936) $ (9,155)
Plan assets at market value 15,322 14,316
Plan assets in excess of projected
benefit obligations $ 6,386 $ 5,161
Unrecognized prior service cost $ (926) $ (1,888)
Unrecognized net (gain) loss $ (1,317) $ 700
Prepaid pension expense $ 4,143 $ 3,973
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.75% and
7.0% in 1996 and 1995, respectively. The assumed long-term rate
of compensation increases was 6.0% and 6.5% for 1996 and 1995,
respectively. The long-term rate of return on plan assets was
8.0% for 1996 and 1995. Assumed expenses as a percentage of plan
assets were 0.5.% and 0% for 1996 and 1995, respectively.
Savings and Investment Plan
The Company adopted a Savings and Investment (401(k)) Plan that
allows eligible employees who have met a one-year service
requirement to make contributions to the Plan on a tax-deferred
basis. A Plan participant may elect to contribute up to 16% of
eligible earnings on a tax deferred basis, subject to certain
limitations applicable to "highly compensated employees" as
defined in the Internal Revenue Code. Plan participants may
allocate contributions, and earnings thereon, between investment
options selected by participants. The Account Balance of each
Participant is 100% vested at all times. Prior to January 1,
1990, the Company made matching contributions of up to 50% of the
first 6% of eligible compensation contributed by the plan
participants. Vesting of such company contributions is based on
number of years of service. The employer contributions were
discontinued effective January 1, 1990.
During 1995, the Plan was amended to allow for the addition of
Family Life Insurance Company (FLIC), a wholly-owned subsidiary
of FIC, as a participating employer, thus allowing FLIC employees
to participate in the Plan. The amendment did not affect the
Plan's tax-qualified status.
Employee Stock Ownership Plan
During 1979, the Company established an Employee Stock Ownership
Plan and a related trust for the benefit of its employees. The
Plan generally covers employees who have attained the age of 21
and have completed one year of service. Vesting of benefits to
employees is based on number of years of service. No
contributions were made to the Plan in 1996, 1995 or 1994. At
December 31, 1996, the Plan had a total of 349,625 shares which
are allocated to participants and 15,180 which remain
unallocated.
During 1995, the Plan was amended to allow for the addition of
FLIC as a participating employer, thus allowing FLIC employees to
participate in the Plan. The amendment did not affect the Plan's
tax-qualified status.
Stock Option Plans
The Company applies APB Opinion No. 25 and related
Interpretations in Accounting for its stock option plans, which
are described below accordingly. No compensation cost has been
recognized for its stock option plans. Had compensation cost for
the Company's stock option plans been determined based on the
fair market value at the grant dates for awards under those plans
consistent with the method provided by FAS No. 123, the impact to
the Company's net income would have been immaterial.
Under the Company's Incentive Stock Option Plan, options to
purchase shares of the Company's common stock, at 100% of fair
market value on the date of grant, have been granted to key
employees. A total of 315,000 shares of the Company's common
stock are currently reserved for issuance under this plan. As
of December 31, 1996, options to purchase 327,850 shares have
been granted since the plan's inception. As of December 31, 1996,
161,750 options have been exercised and 86,100 options have been
terminated.
At December 31, 1996 72,000 options to purchase shares of the
Company's common stock at prices ranging from $3.33 to $8.75
remain outstanding. The number of options exercised in 1996, 1995
and 1994 were 9,500, 11,000 and 5,500, respectively.
Under the Non-Qualified Stock Option Plan for certain officers,
directors, agents and others, the Board of Directors is
authorized to issue options to purchase up to 600,000 shares of
the Company's common stock at 100% of the fair market value on
the date of grant but in no case less than $3.33 per share. In
1988, options to purchase 330,000 shares were granted at a price
of $3.33 per share. In 1991, options to purchase 50,000 shares
were granted at prices ranging from $8.75 to $9.25. In 1992 and
1990 options to purchase
60,000 and 30,000 shares respectively, expired. In 1995, options
to purchase 60,000 shares were granted at a price of $11.12 per
share. These same options, along with 20,000 other options, were
terminated in 1996. There were no options granted in 1996. The
number of options exercised in 1996, 1995 and 1994 were 48,000,
48,000 and -0-, respectively.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity under all Plans for each
of the three years ended December 31, 1996:
1994 Weighted
Average
Shares Exercise
(000's) Price
Outstanding at the
beginning of the year 388 $ 4.61
Granted 0 0.00
Exercised (5) 9.25
Canceled 0 0.00
Outstanding at the end of the year 383 $ 4.58
Options exercisable at year end 132 $ 4.79
Weighted average fair value of
options granted during the year $ 0.00
1995 Weighted
Average
Shares Exercise
(000's) Price
Outstanding at the
beginning of the year 383 $ 4.58
Granted 60 11.12
Exercised (59) 3.67
Canceled 0 0.00
Outstanding at the end of the year 384 $ 5.75
Options exercisable at year end 130 $ 4.70
Weighted average fair value of
options granted during the year 60 $11.12
1996 Weighted
Average
Shares Exercise
(000's) Price
Outstanding at the
beginning of the year 384 $ 5.75
Granted 0 0.00
Exercised (58) 4.24
Canceled (80) 10.65
Outstanding at the end of the year 246 $ 4.50
Options exercisable at year end 120 $ 4.38
Weighted average fair value of
options granted during the year $ 0.00
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options
outstanding
weighted-average
Number remaining
Range of outstanding contractual
exercise prices December 31, 1996 life (years)
$3.33 - 3.54 194,000 1.85
$8.75 52,000 4.42
$3.33 - 8.75 246,000 2.39
Range of Weighted average
exercise prices exercise price
$3.33 - 3.54 $3.36
$8.75 $8.75
$3.33 - 8.75 $4.50
Range of Number exercisable Weighted average
exercise prices December 31, 1996 exercise price
$3.33 - 3.54 98,000 $3.39
$8.75 22,000 $8.75
$3.33 - 8.75 120,000 $4.38
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1989 options to purchase 600,000 shares of the Company's
common stock at $1.00 per share were granted by the Board of
Directors to the Company's Chairman of the Board. These options
became exercisable upon approval of the Board of Directors in
annual installments of 150,000 shares each. The last installment
was granted in 1992. In 1992, the chairman surrendered for
cancellation 120,000 of these options. In October of 1993, the
Company entered into an agreement with the Chairman, whereby the
Chairman agreed to surrender all of his remaining common stock
options between 1993 and 1996. Pursuant to this agreement, all
remaining options were surrendered through December 31, 1996,
(see Note 12).
11. Leases
The Company and its subsidiaries occupy office facilities under
lease agreements which expire at various dates through 2005.
Certain office space leases may be renewed at the option of the
Company.
Rent expense in 1996, 1995, and 1994 was $2,466,679, $2,531,085,
and $1,424,946, respectively, under these lease agreements.
Minimum annual future rentals are as follows:
(in thousands)
1997 1,115
1998 637
1999 637
2000 637
2001 637
Thereafter 2,546
$ 6,209
12. Related Party Transactions
On June 12, 1991, FIC (which owns approximately 46% of the
outstanding common stock of the Registrant) completed the
purchase of all the outstanding shares of Family Life Insurance
Company, a Washington domiciled life insurance company, from
Merrill Lynch Insurance Group, Inc. The transaction was
financed, in part, by a senior subordinated loan of $22.5 million
by Investors - NA to Family Life Corporation (FLC), an indirect,
wholly-owned subsidiary of FIC, and a senior loan of $2.5 million
by Investors - NA to FIC. In addition to the interest provided
under the terms of said loans, Investors - NA was granted non-
transferrable options to purchase up to a total of 9.9 percent of
the common shares of FIC. The option price is $10.50 per share,
equivalent to the then current market price, subject to
adjustment to prevent the effect of dilution. As a result of the
five-for-one stock split implemented by FIC, effective in
November 1996, the exercise price of the options was changed to
$2.10 per share. The initial terms of the option provided for
their expiration on June 12, 1998, if not previously exercised.
In connection with the 1996 amendments to the subordinated loans
held by Investors-NA, the expiration date of the options was
extended to September 12, 2006.
On July 30, 1993, FLC prepaid its Merrill Lynch subordinated
loans. The transaction was financed, in part, by a subordinated
loan of $30 million by Investors - NA to FLC and by a
subordinated loan of $4.5 million by Investors - NA to Family
Life Insurance Investment Company, (FLIIC), a wholly-owned
subsidiary of FIC and parent of FLC.
Notes receivable from affiliates of $59,940,193 include
$51,211,460 of senior subordinated loans by Investors - NA to
FLC, a subordinated loan of $4,475,469 to FLIIC, and a senior
loan of $4,253,264 to FIC. Interest earned by ILCO on the
aforementioned loans totaled $6,095,877, $6,044,322 and
$5,993,512 in 1996, 1995 and 1994, respectively. At December 31,
1996 and December 31, 1995 accrued interest was $297,486 and
$1,459,408, respectively.
Rent and certain other operating expenses aggregating
approximately $305,000, $830,000, and $585,000, were incurred by
FIC in 1996, 1995 and 1994, respectively, on behalf of the
Company. The Company reimbursed FIC for these costs.
ILCO received $14 million, $15 million, and $13 million from
Family Life Insurance Company for direct costs incurred by ILCO
on behalf of Family Life Insurance Company's operations in 1996,
1995 and 1994, respectively. Under an agreement between ILCO and
Family Life all direct costs incurred on behalf of the other are
to be reimbursed.
In 1995, Investors-NA entered into a reinsurance agreement with
Family Life pertaining to universal life insurance written by
Family Life. The reinsurance agreement is on a co-insurance
basis and applies to all covered business with effective dates on
and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than
$200,000; face amounts of $200,000 or more are reinsured by
Family Life with a third party reinsurer. In 1996, Investors-NA
entered into a reinsurance agreement with Family Life, pertaining
to annuity contracts written by Family Life. The agreement
applies to contracts written on or after January 1, 1996. These
reinsurance arrangements reflect management's plan, to develop
universal life and annuity business at Investors-NA, with Family
Life concentrating on the writing of term life insurance
products.
In October of 1993, the Company entered into an agreement with
the Chairman, whereby the Chairman agreed to surrender all of his
remaining common stock options for consideration of $6,847,000
(See Note 11). Prior to entering into this agreement, the
Company had accrued compensation expense related to these options
of $4,225,000. Upon entering into the agreement, additional
compensation was recorded totaling $2,622,000 for the year ended
December 31, 1993 to increase total compensation to the surrender
price. Accordingly, a liability was recorded for the unpaid
portion of the agreement. Pursuant to this agreement, during
1993 the Chairman was paid $3,237,120 for cancellation of 240,000
of these options and during 1994 he was paid $997,520 for
cancellation of 68,500 options and $379,143 for federal income
tax reimbursement relating to the cancellation of options in
1993. During 1995, the Chairman was paid $836,582 for the
cancellation in 1995 of options to purchase 50,000 shares of
ILCO's Common Stock, $156,323 for the federal income tax
reimbursement relating to the cancellation in 1994 of options to
purchase 68,500 shares and $127,608 as the final payment relating
to the cancellation in 1993 of options to purchase 240,000
shares. The federal income tax reimbursements are expensed in
the period when they are incurred. During 1996, the Company paid
the Chairman: (i) $1,862,000 for the cancellation in 1996 of
options to purchase 121,500 shares of the Company's common stock,
plus interest at the rate of 8% per year on such amount for a one
year period (for a total of $2,011,737); (ii) $120,700 for the
federal income tax reimbursement relating to the cancellation in
1995 of options to purchase 50,000 shares of the Company's common
stock; and (iii) $313,960 for the federal income tax
reimbursement relating to the 1996 options cancellation.
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided by an offsite third party until
November 30, 1994. Commencing December 1, 1994, all of those
data processing needs are provided to ILCO's and FIC's Austin,
Texas and Seattle, Washington facilities by FIC Computer
Services, Inc. ("FIC Computer"), a subsidiary of FIC. Each of
FIC's and ILCO's insurance subsidiaries has entered into a data
processing agreement with FIC Computer whereby FIC Computer
provides data processing services to each subsidiary for fees
equal to such subsidiary's proportionate share of FIC Computer's
actual costs of providing those services to all of the
subsidiaries. Family Life paid $1,055,639, $779,052, and
$151,977 and Investors-NA, Investors-IN and ILIC paid $2,243,234,
$1,655,486, and $181,971 to FIC Computer for data processing
services provided during 1996, 1995 and 1994, respectively.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Commitments and Contingencies
The Company and its subsidiaries are defendants in certain legal
actions related to the normal business operations of the Company.
Management believes that the resolution of such matters will not
have a material impact on the financial statements.
14. Net Income Per Share
Net income per share was determined by dividing net income
available to common shareholders by the weighted average number
of shares of common stock and common stock equivalents
outstanding during each year.
For the years ended December 31, 1996, 1995 and 1994, net income
available to common shareholders is calculated as follows:
1996 1995
1994
(in thousands)
Net income $26,938 $10,714 $ 9,917
Interest expense reduction,
net of income tax effect 643 671 472
Net income available to
common shareholders $27,581 $11,385 $10,389
Changes in the market price of the Company's common stock also
impacts the number of common stock options and warrants which are
considered dilutive under the treasury stock method of
calculating the weighted average common stock and common stock
equivalents. For the years ended December 31, 1996, 1995 and
1994, weighted average common stock and common stock equivalents
is calculated as follows:
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 1995 1994
(In thousands)
Weighted average common
shares outstanding 4,233 4,139 4,116
Common stock equivalents:
Common stock options 1,994 2,085 2,084
Less assumed repurchase of
shares using the treasury
stock method (847) (835) (822)
Common stock and common
stock equivalents 5,380 5,389 5,378
15. Quarterly Financial Data (unaudited)
(in thousands, except per share amounts)
Three Months Three Months
Ended Ended
March 31, June 30,
1996 1995 1996 1995
Net Operating Revenue $53,581 $29,105 $27,836 $31,017
Net Income $18,042 $ 2,589 $ 2,936 $ 2,601
Net income per share
available to common
shareholders $ 3.35 $ 0.51 $ 0.57 $ 0.52
Three Months Three Months
Ended Ended
September 30, December 31,
1996 1995 1996 1995
Net Operating Revenue $29,474 $30,453 $27,353 $31,815
Net Income $ 2,973 $ 2,498 $ 2,987 $ 3,026
Net income per share
available to common
shareholders $ 0.59 $ 0.50 $ 0.59 $ 0.58
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1996
(in thousands of dollars)
Column A Column B Column C Column D
Amount at
Which
Shown in
the
Balance
Type of Investment Costs Value Sheet
Fixed maturities available for
sale:
United States Government and
government agencies and
authorities $ 13,817 $ 14,701 $ 14,701
States, municipalities and
political subdivisions 4,727 4,890 4,890
Foreign governments 5 5 5
Corporate securities 120,263 119,220 119,220
Mortgage-backed securities 312,738 315,080 315,080
Total fixed maturities available
for sale 451,550 453,896 453,896
Fixed maturities held to maturity 8,165 8,374 8,165
Total fixed maturities 459,715 462,270 462,061
Equity securities:
Public utilities 2 3 3
Banks, trust and financial
institutions 31 85 85
Industrial, miscellaneous and all
other 22 30 30
Total equity securities 55 118 118
Policy loans 53,030 53,030 53,030
Mortgage loans 13,494 14,066 13,494
Real estate 38,696 38,696 38,696
Short term investments 91,556 91,556 91,556
Total investments $656,546 $659,736 $658,955
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
December 31, 1996, 1995 and 1994
Column A Column B Column C
Balance at
Beginning
Name of Debtor of Period Additions
December 31, 1996 $ -0- -0-
December 31, 1995
$ -0- -0-
December 31, 1994
Roy F. Mitte
Non-interest bearing loan
repayable in three years unless
forgiven by Board of Directors $650,000 -0-
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
December 31, 1996, 1995 and 1994, Continued
Column A Column D Column E
Amounts Balance
Amounts Written at End of
Name of Debtor Collected Off Period
December 31, 1996 -0- -0- $ -0-
December 31, 1995 -0- -0- $ -0-
December 31, 1994
Roy F. Mitte
Non-interest bearing loan
repayable in three years unless 650,000 -0- $ -0-
forgiven by Board of Directors
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS
December 31, 1996 and 1995
(in thousands of dollars)
ASSETS 1996 1995
Short-term investments $ 6,252 $ 7,022
Cash and cash equivalents 126 63
Subordinated debenture receivables
from Investors Life Insurance
Company of North America,
due September 30, 1999 38,546 72,835
Investments in and advances to
subsidiaries 91,601 76,730
Accounts receivable 6,117 6,117
Property, plant and equipment, net 277 279
Federal income tax receivable -0- -0-
Other assets 1,022 2,237
$ 143,941 $ 165,283
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANTS
BALANCE SHEETS, continued
December 31, 1996 and 1995
(in thousands of dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
Liabilities:
Accounts payable and accrued expenses $ 2,226 $ 5,293
Senior loans 24,944 59,385
Deferred gain on sale of real estate 956 1,066
28,126 65,744
Redeemable preferred stock:
Class A preferred stock, $1 par value,
shares authorized and issued 5,000 5,000
Class B preferred stock, $1 par value,
shares authorized, and issued 15,000 15,000
20,000 20,000
Redeemable preferred stock, repurchased and
held as treasury stock (20,000) (20,000)
-0- -0-
Shareholders' equity:
Common stock, $.22 par value, 10,000,000
shares authorized; 5,223,739 and 5,166,239
shares issued, 4,232,829 and 4,175,329
shares outstanding in 1996 and 1995,
respectively 1,150 1,137
Additional paid-in capital 3,752 3,521
Net unrealized appreciation of securities
held by insurance subsidiaries 1,255 748
Net unrealized gain (loss)
on investments in fixed
maturities available for sale held by
insurance subsidiaries 1,525 12,938
Retained earnings (including $105,628 and
$78,639 of undistributed earnings of
subsidiaries at December 31, 1996 and 1995,
respectively) 108,697 81,759
Common treasury stock, at cost, 665,950 116,379 100,103
shares in 1996 and 1995 (564) (564)
Total shareholders' equity 115,815 99,539
Total liabilities and shareholders' equity $143,941 $165,283
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
STATEMENTS OF INCOME, continued
Years Ended December 31, 1996, 1995 and 1994
(in thousands of dollars)
1996 1995 1994
Revenues charged to
subsidiaries:
Interest income $ 4,915 $ 8,236 $ 7,888
Other income 133 134 113
5,048 8,370 8,001
Operating expenses 2,513 1,779 1,386
Interest expense 2,613 5,469 4,914
5,126 7,248 6,300
Income (loss) from
operations (78) 1,122 1,701
Federal income tax
provision (27) 393 970
Net income (loss) before
equity in undistributed
earnings from subsidiaries
extraordinary item and
change in accounting
principle (51) 729 731
Equity in undistributed
earnings from subsidiaries 26,989 9,985 9,186
Net Income $ 26,938 $ 10,714 $ 9,917
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE III - CONDENSED STATEMENTS OF REGISTRANT
STATEMENT OF CASH FLOWS, continued
(in thousands of dollars)
Year ended December 31,
CASH FLOWS FROM OPERATING 1996 1995 1994
ACTIVITIES:
Net income $ 26,938 $ 10,714 $ 9,917
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization of deferred gain on
sale of real estate (110) (109) (109)
Unrealized appreciation
(depreciation) of equity
securities held by insurance
subsidiaries 507 180 (377)
Decrease in accounts receivable -0- 32 615
Increase in investment
in and advances to subsidiaries (26,284) (21,748) (3,742)
(Decrease) increase in accounts
payable and accrued expenses (3,067) 723 384
Decrease in deferred federal income
taxes, net -0- -0- 83
Decrease (increase) in other assets 1,215 640 1,028
Other 2 (87) 79
Net Cash (used in) provided by
operating activities (799) (9,655) 7,878
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investments (purchased) sold 770 (1,283) (302)
Net cash provided by (used in)
investing activities 770 (1,283) (302)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of debt (34,441) (7,200) (17,415)
Payment on subordinated debenture
payable -0- (200) (50)
Stock options exercised 244 680 -0-
Payment received on subordinated
debenture receivable 34,289 14,960 8,744
Net cash provided by (used in)
financing activities 92 8,240 (8,721)
Net increase in cash 63 (132) (1,145)
Cash, beginning of year 63 195 1,340
Cash, end of year $ 126 $ 63 $ 195
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SCHEDULE VI - REINSURANCE CEDED AND ASSUMED
For the years ended December 31, 1996, 1995 and 1994
(in thousands of dollars)
Ceded To Assumed
Direct Other From Other
1996 Amount Companies Companies
Life insurance in-force $7,009,993 $1,112,318 $ 18,481
Premium:
Life insurance $ 16,863 $ 8,164 $ 100
Accident-health insurance 948 (202) 31
Total $ 17,811 $ 7,962 $ 131
1995 ____
Life insurance in-force $7,693,274 $ 864,512 $ 8,124
Premium:
Life insurance $ 18,561 $ 8,773 $ 127
Accident-health insurance 2,260 (205) 38
Total $ 20,821 $ 8,568 $ 165
1994
Life insurance in-force $7,056,436 $ 427,611 $ 24,073
Premium:
Life insurance $ 20,712 $ 9,998 $ 676
Accident-health insurance 3,703 909 133
Total $ 24,415 $ 10,907 $ 809
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SCHEDULE VI - REINSURANCE CEDED AND ASSUMED
For the years ended December 31, 1996, 1995 and 1994
(in thousands of dollars)
Percentage
Net Of Amount
1996 Amount Assumed
Life insurance in-force 5,916,156 .31%
Premium:
Life insurance $ 8,799 1.15%
Accident-health insurance 1,181 2.71%
Total $ 9,980 1.33%
1995
Life insurance in-force $6,836,886 .12%
Premium:
Life insurance $ 9,915 1.24%
Accident-health insurance 1,179 3.22%
Total $ 11,694 6.84%
1994
Life insurance in-force $6,652,898 .36%
Premium:
Life insurance $ 11,390 5.94%
Accident-health insurance 2,927 4.54%
Total $ 14,317 5.65%
Exhibit Index
Exhibit Page Description
Number Number
4(a) Certificate of Incorporation of
Registrant filed May 22, 1969 and
Amendments thereto (2)
(i) Amendment filed July 16, 1973
(ii) Amendment filed August 4, 1977
(iii)Amendment filed February 10, 1983
(iv) Amendment filed December 14, 1988
(v) Amendment filed February 9, 1990
4(b) By-laws of Registrant. (3)
10(a) Registrant's Incentive Stock Option
Plan. (1)
10(m) Lease dated December 20, 1085 between
Registrant and Parker Road Associates
for the rental of 40 Parker Road,
Elizabeth, New Jersey. (4)
10(o) (i) Grid Note dated December 18, 1985
in the amount of $800,000 made by
the Registrant and payable to
Midlantic National Bank. (4)
(ii) Demand Note dated December 18, 1985
in the amount of $491,165.03 made
by Registrant and payable to
Midlantic National Bank. (4)
10(ah) Credit Agreement for $125,000,000 dated
as of December 28, 1988 among Registrant
and certain banks identified therein. (5)
10(ai) Note Purchase Agreement dated as of
December 31, 1988 between Registrant and
a Rhode Island based insurance/financial
services company. A Note Purchase
Agreement in substantially identical
form was executed with seven other
entities identified in these exhibit.
(5)
10(aj) Class A Preferred Stock Purchase
Agreement dated as of December 1, 1988
between Registrant and Insurance Company
of North America. (5)
10(ak) Class B Preferred Stock Purchase
Agreement dated as of December 1, 1988
between Registrant and a Rhode Island
based insurance/financial services
company. A Class B Preferred Stock
Purchase Agreement in substantially
identical form was executed with seven
other entities identified in this
exhibit. (5)
10(al) Pledge Agreement dated as of December
28, 1988 between Registrant and The
First National Bank of Chicago, as
Agent. (5)
10(am) Surplus Debenture dated as of December
28, 1988 in the amount of $140,000,000
made by Standard to Registrant. (5)
10(an) Warrant Agreement dated as of December
29, 1988 between Registrant and a
Connecticut based insurance/financial
services company. A Warrant Agreement
in substantially identical form was
executed with seven other entities. (5)
10(aq) Registrant's Defined Benefit Pension
Plan, effective as of January 1, 1988.
10(ar) Registrant's Employee Stock Purchase
Plan, effective as of August 25, 1989.
(6)
10(as) Registrant's Non-Qualified Stock Option
Plan. (6)
10(at) Exchange and Amendment Agreement dated
July 30, 1990 between Registrant and the
holders of its Class A Preferred Stock
and its Class B Preferred Stock. (7)
10(au) Amendment dated July 30, 1990 to Senior
Loan Agreement among the Registrant and
certain banks identified therein. (7)
10(av) InterCreditor Agreement dated June 12,
1991, among Investors Life Insurance
Company of North America, Investors Life
Insurance Company of California, Merrill
Lynch Insurance Group, Inc. and Merrill
Lynch & Co., Inc. (8)
10(aw) Note dated June 12, 1991 in the amount
of $22.5 million made by Family Life
Corporation in favor of Investors Life
Insurance Company of North America. (8)
10(ax) Note dated June 12, 1991 in the amount
of $2.5 million made by Financial
Industries Corporation in favor of
Investors Life Insurance Company of
California. (8)
10(ay) InterCreditor Agreement among Investors
Life Insurance Company of North America,
Investors Life Insurance Company of
California and the Agent under the
Credit Agreement dated as of June 12,
1991. (8)
10(az) Option Agreement by Financial Industries
Corporation in favor of Investors Life
Insurance Company of North America and
Investors Life Insurance Company of
California. (8)
10(aaa) Hotel Lease Agreement dated as of August
22, 1991 between Investors Life
Insurance Company of North America and
FIC Realty Services, Inc. (9)
10(aab) Management Agreement dated as of
September 4, 1991 between Investors Life
Insurance Company of North America and
FIC Property Management, Inc. (9)
10(aac) Amended and Restated Credit Agreement
dated January 29, 1993 among the
Registrant and certain banks identified
therein. (10)
10(aad) Amended and Restated Pledge Agreement
dated January 29, 1993 between the
Registrant and the agent bank named
therein. (10)
10(aae) Stock Option Agreement dated March 8,
1986 between Registrant and Financial
Industries Corporation. (10)
10(aaf) Surplus Debenture dated as of November
13, 1986 in the amount of $15,000,000
made by New Standard to Registrant.
(10)
10(aag) Terms and Conditions of Employment
Contracts of James M. Grace, Eugene E.
Payne and Joseph F. Crowe approved by
Registrant's Board of Directors on May
16, 1991, ((10)
10(aah) Letter agreement and addendum dated July
23, 1992 between Investors Life
Insurance Company of North America and
Mr. and Mrs. Theodore A. Fleron. (10)
10(aai) Letter agreement dated October 15, 1992
between Roy F. Mitte and Registrant
evidencing surrender and cancellation of
stock options. (10)
10(aaj) Note dated July 30, 1993 in the amount
of $30 million made by Family Life
Corporation in favor of Investors Life
Insurance Company of North America.
(11)
10(aak) Note dated July 30, 1993 in the amount
of $4.5 million made by Family Life
Insurance Investment Company in favor of
Investors Life Insurance Company of
North America. (11)
10(aal) Amendment No. 1 dated July 30, 1993
between Family Life Corporation and
Investors Life Insurance Company of
North America amending $22.5 million
note. (11)
10(aam) Cancellation of Stock Option Agreement
dated October 21, 1993 between
Registrant and Roy F. Mitte. (11)
10(aan) Waiver and Amendment Agreement dated as
of July 23, 1993 among the Registrant
and certain banks identified therein.
(12)
10(aao) Amendment Agreement dated as of December
20, 1993 among the Registrant and
certain banks identified therein. (12)
10(aap) Amendment Agreement dated as of March
12, 1994 among the Registrant and
certain banks identified therein. (12)
10(aaq) Amendment Agreement dated as of December
22, 1994 among the Registrant and
certain banks identified therein. (12)
10(aar) Amendment Agreement dated as of February
10, 1995 among the Registrant and
certain banks identified therein. (12)
10(aas) Data Processing Agreement dated as of
November 30, 1994 between
InterContinental Life Insurance Company
and FIC Computer Services, Inc. (12)
10(aat) Data Processing Agreement dated as of
November 30, 1994 between Investors Life
Insurance Company of North America and
FIC Computer Services, Inc. (12)
10(aau) Data Processing Agreement dated as of
November 30, 1994 between Family Life
Insurance Company and FIC Computer
Services, Inc. (12)
10(aav) Lease Agreement dated as of September
30, 1994 between FIC Realty Services,
Inc. and Atrium Beverage Corporation.
(12)
10(aaw) Management Agreement dated as of
September 30, 1994 between HCD Austin
Corporation as agent for FIC Realty
Services, Inc. and Atrium Beverage
Corporation. (12)
10(aax) Amendment Agreement dated as of August
8, 1995 among the Registrant and certain
banks identified therein. (13)
10(aay) Amendment Agreement dated as of December
15, 1995 among the Registrant and
certain banks identified therein. (13)
10(aaz) Agreement of Sale dated as of September
5, 1995 between Omni Congress Joint
venture as Buyer and Investors Life
Insurance Company of North America as
Seller, with exhibits, amendments and
assignment. (13)
10(aaaa) 121 Amendment No. 2 dated December 12, 1996,
effective June 12, 1996 to the note
dated June 12, 1991 in the amount of
$22.5 million made by Family Life
Corporation in favor of Investors Life
Insurance Company of North America.
10(aaab) 125 (i) Amendment No. 1 dated December 12,
1996, effective June 12, 1996 to
the note dated June 12, 1991 in the
amount of $2.5 million made by
Financial Industries Corporation in
favor of Investors Life Insurance
Company of California.
128 (ii) Amendment No. 1 dated December 12,
1996, effective June 12, 1996 to
the "payment in kind" provisions of
the note dated June 12, 1991 in the
amount of $2.5 million made by
Financial Industries Corporation in
favor of Investors Life Insurance
Company of North America.
10(aaac) 131 Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note
dated July 30, 1993 in the amount of $30
million made by Family Life Corporation
in favor of Investors Life Insurance
Company of North America.
10(aaad) 136 Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note
dated July 30, 1993 in the amount of
$4.5 million made by Family Life
Insurance Investment Company in favor of
Investors Life Insurance Company of
North America.
10(aaae) 140 Amendment Agreement dated as of April
24, 1996 between Registrant and certain
banks identified therein.
10(aaaf) 144 Waiver Agreement dated as of December
12, 1996 between Registrant and certain
banks identified therein.
10(aaag) 149 Amendment Agreement dated December 12,
1996 to the Option Agreement by
Financial Industries Corporation in
favor of Investors Life Insurance
Company of North America and Investors
Life Insurance Company of California
21 151 Subsidiaries of the Registrant.
23 152 Consent of Price Waterhouse, LLP.
(1) Filed with the Registrant's Annual Report of Form 10-K for
the fiscal year ended December 31, 1983, Commission File No.
0-7290, and incorporated herein by reference.
(2) Filed with the Registrant's Registration Statement on Form
S-8 (Registration No. 2085333) and incorporated herein by
reference; except Amendment filed December 14, 1988 (item
(iv)), which was filed with Registrant's Current Report of
Form 8-K dated January 12, 1989, and incorporated herein by
reference; and Amendment filed February 9, 1990, which was
filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, and incorporated herein
by reference.
(3) Filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1984 and incorporated
herein by reference.
(4) Filed with the Registrant's Annual Report of Form 10-K for
the fiscal year ended December 31, 1985 and incorporated
herein by reference.
(5) Filed with Registrant's Annual Report of Form 10_k for the
fiscal year ended December 31, 1988, and incorporated herein
by reference,
(6) Filed with Registrant;s Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, and incorporated herein
by reference.
(7) Filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, and incorporated herein
by reference.
(8) Filed with Financial Industries Corporation's Current Report
on Form 8-K dated June 25, 1991, and incorporated herein by
reference.
(9) Filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended
December 31, 1991, and incorporated herein by reference.
(10) Filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, and incorporated herein
by reference.
(11) Filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, and incorporated herein
by reference.
(12) Filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, and incorporated herein
by reference.
(13) Filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and incorporated herein
by reference.
Exhibit 10 (aaaa)
FAMILY LIFE CORPORATION
AMENDMENT NO. 2
TO
11% SUBORDINATED SENIOR NOTE DATED JUNE 12, 1991
This Waiver and Amendment Agreement (the "Agreement") is entered
into effective as of June 12, 1996, by and between Family Life
Corporation (the "Company") and Investors Life Insurance Company
of North America (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under
that certain 11% Subordinated Senior Note dated June 12, 1991,
due June 12, 1998, in the principal amount of $22,500,000 (the
"1991 Note"); and
WHEREAS the Company is also the obligor under that certain Senior
Subordinated Note dated July 30, 1993, due July 30, 2003, in the
principal amount of $30,000,000 (the "1993 Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the 1991 Note and the
1993 Note; and
WHEREAS, the Company has requested Payee to waive certain
provisions of the 1991 Note, as and to the extent hereinafter set
forth; and
WHEREAS, the Company and Payee desire to amend the 1991 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the 1991 Note, as previously
amended.
2. Waiver. Payee hereby waives any provision of the 1991 Note
and any Event of Default created thereby by reason of the
amendment of the 1993 Note as set forth in Exhibit A hereto.
3. Amendment to 1991 Note. The 1991 Note is hereby amended as
follows:
a. The description of the 1991 Note which appears on
the first page thereof is changed from
"Subordinated Senior Note due June 12, 1998" to
"Subordinated Senior Note due September 12, 2001".
b. The Payment Schedule attached to the 1991 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $22,500,000
12/12/96 $1,125,000 $21,375,000
03/12/97 $1,125,000 $20,250,000
06/12/97 $1,125,000 $19,125,000
09/12/97 $1,125,000 $18,000,000
12/12/97 $1,125,000 $16,875,000
03/12/98 $1,125,000 $15,750,000
06/12/98 $1,125,000 $14,624,000
09/12/98 $1,125,000 $13,500,000
12/12/98 $1,125,000 $12,375,000
03/12/99 $1,125,000 $11,250,000
06/12/99 $1,125,000 $10,125,000
09/12/99 $1,125,000 $ 9,000,000
12/12/99 $1,125,000 $ 7,875,000
03/12/00 $1,125,000 $ 6,750,000
06/12/00 $1,125,000 $ 5,625,000
09/12/00 $1,125,000 $ 4,500,000
12/12/00 $1,125,000 $ 3,375,000
03/12/01 $1,125,000 $ 2,250,000
06/12/01 $1,125,000 $ 1,125,000
09/12/01 $1,125,000 $ -0-
4. Representations and Warranty. The Company hereby represents
and warrants to Payee that after giving effect to the waiver
and amendment herein contained (i) all of the
representations and warranties contained in the 1991 Note
are true and correct as of the date hereof, (ii) no Event of
Default exists or is continuing and (iii) the Company has
performed all of the agreements on its part to be performed
prior to the date hereof as set forth in the 1991 Note.
5. Reference to and Effect on the 1991 Note.
a. On or after the date of this Agreement, each
reference in the 1991 Note, as amended by
Amendment No. 1 dated July 30, 1993, to "this
Note", "hereof", or words of like import and each
reference to the 1991 Note in other documents
shall mean and be a reference to the 1991 Note as
amended hereby.
b. Except as specifically amended and waived above,
all of the terms, conditions and covenants of the
1991 Note shall remain unaltered and in full force
and effect and shall continue to be binding upon
the Company in all respects and are hereby
ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right,
power or remedy of the Payee under the 1991 Note
or (ii) any Event of Default under the 1991 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December, 1996.
FAMILY LIFE CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Consent of Guarantor
Financial Industries Corporation, as guarantor under the Guaranty
Agreement dated June 12, 1991, in favor of Investors Life
Insurance Company of North America ("Investors-NA"), with respect
to a loan in the amount of $22,500,000 from Investors-NA to
Family Life Corporation, which loan is evidenced by a
Subordinated Senior Note dated June 12, 1991 (the 1991 Guaranty")
hereby consents to the Amendment Agreement dated as of June 12,
1996 and hereby confirms and agrees that the 1991 Guaranty is,
and shall continue to be, in full force and effect and is hereby
confirmed and ratified in all respects.
This Consent is executed and delivered as of December 12, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
Exhibit 10 (aaab)(i)
FINANCIAL INDUSTRIES CORPORATION
AMENDMENT NO. 1
TO
12% SUBORDINATED NOTE DATED JUNE 12, 1991
This Waiver and Amendment Agreement (the "Agreement") is entered
into effective as of June 12, 1996, by and between Financial
Industries Corporation (the "Company") and Investors Life
Insurance Company of North America, as successor to the interests
of Investors Life Insurance Company of California (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under
that certain 12% Subordinated Note dated June 12, 1991, due June
12, 1998, in the principal amount of $2,500,000 (the "1991
Note"); and
WHEREAS the Company is also the obligor under that certain Master
Subordinated PIK Note dated June 12, 1991, due June 12, 1998 (the
"PIK Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the 1991 Note and the
PIK Note; and
WHEREAS, the Company has requested Payee to waive certain
provisions of the 1991 Note, as and to the extent hereinafter set
forth; and
WHEREAS, the Company and Payee desire to amend the 1991 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the 1991 Note, as previously
amended.
2. Waiver. Payee hereby waives any provision of the 1991 Note
and any Event of Default created thereby by reason of the
amendment of the PIK Note as set forth in Exhibit A hereto.
3. Amendment to 1991 Note. The 1991 Note is hereby amended as
follows:
a. The description of the 1991 Note which appears on
the first page thereof is changed from
"Subordinated Note due June 12, 1998" to
"Subordinated Note due September 12, 2001".
b. The Payment Schedule attached to the 1991 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $ 2,500,000
12/12/96 $ 125,000 $ 2,375,000
03/12/97 $ 125,000 $ 2,250,000
06/12/97 $ 125,000 $ 2,125,000
09/12/97 $ 125,000 $ 2,000,000
12/12/97 $ 125,000 $ 1,875,000
03/12/98 $ 125,000 $ 1,750,000
06/12/98 $ 125,000 $ 1,625,000
09/12/98 $ 125,000 $ 1,500,000
12/12/98 $ 125,000 $ 1,375,000
03/12/99 $ 125,000 $ 1,250,000
06/12/99 $ 125,000 $ 1,125,000
09/12/99 $ 125,000 $ 1,000,000
12/12/99 $ 125,000 $ 875,000
03/12/00 $ 125,000 $ 750,000
06/12/00 $ 125,000 $ 625,000
09/12/00 $ 125,000 $ 500,000
12/12/00 $ 125,000 $ 375,000
03/12/01 $ 125,000 $ 250,000
06/12/01 $ 125,000 $ 125,000
09/12/01 $ 125,000 $ -0-
4. Representations and Warranty. The Company hereby represents
and warrants to Payee that after giving effect to the waiver
and amendment herein contained (i) all of the
representations and warranties contained in the 1991 Note
are true and correct as of the date hereof, (ii) no Event of
Default exists or is continuing and (iii) the Company has
performed all of the agreements on its part to be performed
prior to the date hereof as set forth in the 1991 Note.
5. Reference to and Effect on the 1991 Note.
a. On or after the date of this Agreement, each
reference in the 1991 Note to "this Note",
"hereof", or words of like import and each
reference to the 1991 Note in other documents
shall mean and be a reference to the 1991 Note as
amended hereby.
b. Except as specifically amended and waived above,
all of the terms, conditions and covenants of the
1991 Note shall remain unaltered and in full force
and effect and shall continue to be binding upon
the Company in all respects and are hereby
ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right,
power or remedy of the Payee under the 1991 Note
or (ii) any Event of Default under the 1991 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Exhibit 10 (aaab) (ii)
FINANCIAL INDUSTRIES CORPORATION
AMENDMENT NO. 1
TO
MASTER SUBORDINATED PIK NOTE DATED JUNE 12, 1991
This Waiver and Amendment Agreement (the "Agreement") is entered
into effective as of June 12, 1996, by and between Financial
Industries Corporation (the "Company") and Investors Life
Insurance Company of North America, as successor to the interests
of Investors Life Insurance Company of California (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under
that certain Master Subordinated PIK Note dated June 12, 1991,
due June 12, 1998 (the "PIK Note"); and
WHEREAS the Company is also the obligor under that certain 12%
Subordinated Note dated June 12, 1991, due June 12, 1998, in the
principal amount of $2,500,000 (the "1991 Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the PIK Note and the
1991 Note; and
WHEREAS, the Company has requested Payee to waive certain
provisions of the PIK Note, as and to the extent hereinafter set
forth; and
WHEREAS, the Company and Payee desire to amend the PIK Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the PIK Note, as previously
amended.
2. Waiver. Payee hereby waives any provision of the PIK Note
and any Event of Default created thereby by reason of the
amendment of the 1991 Note as set forth in Exhibit A hereto.
3. Amendment to PIK Note. The PIK Note is hereby amended as
follows:
a. The description of the PIK Note which appears on
the first page thereof is changed from "Master
Subordinated PIK Note due June 12, 1998" to
"Master Subordinated PIK Note due September 12,
2001".
b. The Payment Schedule attached to the PIK Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $ 1,977,119.00
12/12/96 $ 98,855.95 $ 1,878,263.05
03/12/97 $ 98,855.95 $ 1,779,407.10
06/12/97 $ 98,855.95 $ 1,680,551.15
09/12/97 $ 98,855.95 $ 1,581,695.20
12/12/97 $ 98,855.95 $ 1,482,839.25
03/12/98 $ 98,855.95 $ 1,383,983.30
06/12/98 $ 98,855.95 $ 1,285,127.35
09/12/98 $ 98,855.95 $ 1,186,271.40
12/12/98 $ 98,855.95 $ 1,087,415.45
03/12/99 $ 98,855.95 $ 988,559.50
06/12/99 $ 98,855.95 $ 889,703.55
09/12/99 $ 98,855.95 $ 790,847.60
12/12/99 $ 98,855.95 $ 691,991.65
03/12/00 $ 98,855.95 $ 593,135.70
06/12/00 $ 98,855.95 $ 494,279.75
09/12/00 $ 98,855.95 $ 395,423.80
12/12/00 $ 98,855.95 $ 296,567.85
03/12/01 $ 98,855.95 $ 197,711.90
06/12/01 $ 98,855.95 $ 98,855.95
09/12/01 $ 98,855.95 $ -0-
4. Representations and Warranty. The Company hereby represents
and warrants to Payee that after giving effect to the waiver
and amendment herein contained (i) all of the
representations and warranties contained in the PIK Note are
true and correct as of the date hereof, (ii) no Event of
Default exists or is continuing and (iii) the Company has
performed all of the agreements on its part to be performed
prior to the date hereof as set forth in the PIK Note.
5. Reference to and Effect on the PIK Note.
a. On or after the date of this Agreement, each
reference in the PIK Note to "this Note",
"hereof", or words of like import and each
reference to the PIK Note in other documents shall
mean and be a reference to the PIK Note as amended
hereby.
b. Except as specifically amended and waived above,
all of the terms, conditions and covenants of the
PIK Note shall remain unaltered and in full force
and effect and shall continue to be binding upon
the Company in all respects and are hereby
ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right,
power or remedy of the Payee under the PIK Note or
(ii) any Event of Default under the PIK Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Exhibit 10(aaac)
FAMILY LIFE CORPORATION
AMENDMENT NO. 1
TO
9% SUBORDINATED SENIOR NOTE DATED JULY 30, 1993
This Waiver and Amendment Agreement (the "Agreement") is entered
into effective as of June 12, 1996, by and between Family Life
Corporation (the "Company") and Investors Life Insurance Company
of North America (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under
that certain 9% Subordinated Senior Note dated July 30, 1993, due
July 30, 2003, in the principal amount of $30,000,000 (the "1993
Note"); and
WHEREAS the Company is also the obligor under that certain 11%
Senior Subordinated Note dated June 12, 1991, due June 12, 1998,
in the principal amount of $22,500,000 (the "1991 Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under each of the 1993 Note and the
1991 Note; and
WHEREAS, the Company has requested Payee to waive certain
provisions of the 1993 Note, as and to the extent hereinafter set
forth; and
WHEREAS, the Company and Payee desire to amend the 1993 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the 1993 Note, as previously
amended.
2. Waiver. Payee hereby waives any provision of the 1993 Note
and any Event of Default created thereby by reason of the
amendment of the 1991 Note as set forth in Exhibit A hereto.
3. Amendment to 1993 Note. The 1993 Note is hereby amended as
follows:
a. The description of the 1993 Note which appears on
the first page thereof is changed from
"Subordinated Senior Note due July 30, 2003" to
"Subordinated Senior Note due September 12, 2006".
b. The Payment Schedule attached to the 1993 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $30,000,000
12/12/96 $ 163,540 $29,836,460
03/12/97 $ 163,540 $29,672,920
06/12/97 $ 163,540 $29,509,380
09/12/97 $ 163,540 $29,345,840
12/12/97 $ 163,540 $29,182,300
03/12/98 $ 163,540 $29,018,760
06/12/98 $ 163,540 $28,855,220
09/12/98 $ 163,540 $28,691,680
12/12/98 $ 163,540 $28,528,140
03/12/99 $ 163,540 $28,364,600
06/12/99 $ 163,540 $28,201,060
09/12/99 $ 163,540 $28,037,520
12/12/99 $ 163,540 $27,873,980
03/12/00 $ 163,540 $27,710,440
06/12/00 $ 163,540 $27,546,900
09/12/00 $ 163,540 $27,383,360
12/12/00 $ 163,540 $27,219,820
03/12/01 $ 163,540 $27,056,280
06/12/01 $ 163,540 $26,892,740
09/12/01 $ 163,540 $26,729,200
12/12/01 $1,336,458 $25,392,742
03/12/02 $1,336,458 $24,056,284
06/12/02 $1,336,458 $22,719,826
09/12/02 $1,336,458 $21,383,368
12/12/02 $1,336,458 $20,046,910
03/12/03 $1,336,458 $18,710,452
06/12/03 $1,336,458 $17,373,994
09/12/03 $1,336,458 $16,037,536
12/12/03 $1,336,458 $14,701,078
03/12/04 $1,336,458 $13,364,620
06/12/04 $1,336,458 $12,028,162
09/12/04 $1,336,458 $10,691,704
12/12/04 $1,336,458 $ 9,355,246
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
03/12/05 $1,336,458 $ 8,018,788
06/12/05 $1,336,458 $ 6,682,330
09/12/05 $1,336,458 $ 5,345,872
12/12/05 $1,336,458 $ 4,009,414
03/12/06 $1,336,458 $ 2,672,956
06/12/06 $1,336,458 $ 1,336,498
09/12/06 $1,336,498 $ -0-
4. Representations and Warranty. The Company hereby represents
and warrants to Payee that after giving effect to the waiver
and amendment herein contained (i) all of the
representations and warranties contained in the 1993 Note
are true and correct as of the date hereof, (ii) no Event of
Default exists or is continuing and (iii) the Company has
performed all of the agreements on its part to be performed
prior to the date hereof as set forth in the 1993 Note.
5. Reference to and Effect on the 1993 Note.
a. On or after the date of this Agreement, each
reference in the 1993 Note to "this Note",
"hereof", or words of like import and each
reference to the 1993 Note in other documents
shall mean and be a reference to the 1993 Note as
amended hereby.
b. Except as specifically amended and waived above,
all of the terms, conditions and covenants of the
1993 Note shall remain unaltered and in full force
and effect and shall continue to be binding upon
the Company in all respects and are hereby
ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right,
power or remedy of the Payee under the 1993 Note
or (ii) any Event of Default under the 1993 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December 1996.
FAMILY LIFE CORPORATION
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Consent of Guarantor
Financial Industries Corporation, as guarantor under the Guaranty
Agreement dated July 30, 1993, in favor of Investors Life
Insurance Company of North America ("Investors-NA"), with respect
to a loan in the amount of $30,000,000 from Investors-NA to
Family Life Corporation, which loan is evidenced by a
Subordinated Senior Note dated July 30, 1993 (the 1993 Guaranty")
hereby consents to the Amendment Agreement dated as of June 12,
1996, and hereby confirms and agrees that the 1993 Guaranty is,
and shall continue to be, in full force and effect and is hereby
confirmed and ratified in all respects.
This Consent is executed and delivered as of December 12, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
Exhibit 10 (aaad)
FAMILY LIFE INSURANCE INVESTMENT COMPANY
AMENDMENT NO. 1
TO
9% SUBORDINATED SENIOR NOTE DATED JULY 30, 1993
This Amendment Agreement (the "Agreement") is entered into
effective as of June 12, 1996, by and between Family Life
Insurance Investment Company (the "Company") and Investors Life
Insurance Company of North America (the "Payee").
WITNESSETH:
WHEREAS, the Company is the obligor and Payee is the payee under
that certain 9% Subordinated Senior Note dated July 30, 1993, due
July 30, 2003, in the principal amount of $4,500,000 (the "1993
Note"); and
WHEREAS, the Company has proposed a modification of the payment
schedule and the due dates under the 1993 Note; and
WHEREAS, the Company and Payee desire to amend the 1993 Note as
hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the 1993 Note, as previously
amended.
2. Amendment to 1993 Note. The 1993 Note is hereby amended as
follows:
a. The description of the 1993 Note which appears on
the first page thereof is changed from
"Subordinated Senior Note due July 30, 2003" to
"Subordinated Senior Note due September 12, 2006".
b. The Payment Schedule attached to the 1993 Note is
revised in its entirety to read as follows:
Unpaid
Principal
Principal Balance
Date of Payment Amount Paid Outstanding
06/12/96 $ 4,500,000
12/12/96 $ 24,531 $ 4,475,469
03/12/97 $ 24,531 $ 4,450,938
06/12/97 $ 24,531 $ 4,426,407
09/12/97 $ 24,531 $ 4,401,876
12/12/97 $ 24,531 $ 4,377,345
03/12/98 $ 24,531 $ 4,352,814
06/12/98 $ 24,531 $ 4,328,283
09/12/98 $ 24,531 $ 4,303,752
12/12/98 $ 24,531 $ 4,279,221
03/12/99 $ 24,531 $ 4,254,690
06/12/99 $ 24,531 $ 4,230,159
09/12/99 $ 24,531 $ 4,205,628
12/12/99 $ 24,531 $ 4,181,097
03/12/00 $ 24,531 $ 4,156,566
06/12/00 $ 24,531 $ 4,132,035
09/12/00 $ 24,531 $ 4,107,504
12/12/00 $ 24,531 $ 4,082,973
03/12/01 $ 24,531 $ 4,058,442
06/12/01 $ 24,531 $ 4,033,911
09/12/01 $ 24,531 $ 4,009,380
12/12/01 $ 200,469 $ 3,808,911
03/12/02 $ 200,469 $ 3,608,442
06/12/02 $ 200,469 $ 3,407,973
09/12/02 $ 200,469 $ 3,207,504
12/12/02 $ 200,469 $ 3,007,035
03/12/03 $ 200,469 $ 2,806,566
06/12/03 $ 200,469 $ 2,606,097
09/12/03 $ 200,469 $ 2,405,628
12/12/03 $ 200,469 $ 2,205,159
03/12/04 $ 200,469 $ 2,004,690
06/12/04 $ 200,469 $ 1,804,221
09/12/04 $ 200,469 $ 1,603,752
12/12/04 $ 200,469 $ 1,403,283
03/12/05 $ 200,469 $ 1,202,814
06/12/05 $ 200,469 $ 1,002,345
09/12/05 $ 200,469 $ 801,876
12/12/05 $ 200,469 $ 601,407
03/12/06 $ 200,469 $ 400,938
06/12/06 $ 200,469 $ 200,469
09/12/06 $ 200,469 $ -0-
3. Representations and Warranty. The Company hereby represents
and warrants to Payee that after giving effect to the
amendment herein contained (i) all of the representations
and warranties contained in the 1993 Note are true and
correct as of the date hereof, (ii) no Event of Default
exists or is continuing and (iii) the Company has performed
all of the agreements on its part to be performed prior to
the date hereof as set forth in the 1993 Note.
4. Reference to and Effect on the 1993 Note.
a. On or after the date of this Agreement, each
reference in the 1993 Note to "this Note",
"hereof", or words of like import and each
reference to the 1993 Note in other documents
shall mean and be a reference to the 1993 Note as
amended hereby.
b. Except as specifically amended and waived above,
all of the terms, conditions and covenants of the
1993 Note shall remain unaltered and in full force
and effect and shall continue to be binding upon
the Company in all respects and are hereby
ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right,
power or remedy of the Payee under the 1993 Note
or (ii) any Event of Default under the 1993 Note.
IN WITNESS WHEREOF, the Company and Payee have executed this
Agreement as of the 12th day of December 1996.
FAMILY LIFE INSURANCE INVESTMENT COMPANY
By:
Title:
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
By:
Title:
Consent of Guarantor
Financial Industries Corporation, as guarantor under the Guaranty
Agreement dated July 30, 1993, in favor of Investors Life
Insurance Company of North America ("Investors-NA"), with respect
to a loan in the amount of $4,500,000 from Investors-NA to Family
Life Insurance Investment Company, which loan is evidenced by a
Subordinated Senior Note dated July 30, 1993 (the 1993 Guaranty")
hereby consents to the Amendment Agreement dated as of June 12,
1996 and hereby confirms and agrees that the 1993 Guaranty is,
and shall continue to be, in full force and effect and is hereby
confirmed and ratified in all respects.
This Consent is executed and delivered as of December 12, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
Exhibit 10 (aaae)
INTERCONTINENTAL LIFE CORPORATION
AMENDMENT AGREEMENT
This Amendment Agreement (the "Agreement") is entered into
as of April 24, 1996 by and among InterContinental Life
Corporation (the "Company"), the undersigned lenders (the
"Lenders") and The First National Bank of Chicago, as agent for
the Lenders (the "Agent").
W I T N E S S E T H :
WHEREAS, the Company, the Lenders and the Agent are parties
to that certain Amended and Restated Credit Agreement dated as of
January 29, 1993 (as amended, the "Credit Agreement");
Whereas, the Company, the Lenders and the Agent desire to
amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meanings attributed to
such terms in the Credit Agreement.
2. Amendment to Credit Agreement. Section 6.16(b)(v) of the
Credit Agreement is hereby amended by deleting the reference to
"$24,000,000" contained in Section 6.16(b)(v) and inserting
"$46,000,000" in lieu thereof.
3. Conditions Precedent. Section 2 of this Agreement shall not
become effective unless and until the Company has furnished, or
caused to be furnished, to the Agent, with sufficient copies for
each Lender, the following:
(i) A consent from FIC, in the form of Exhibit A to
this Amendment.
(ii) Copies, certified by the Secretary or Assistant
Secretary of the Company, of its Board of Directors resolutions
authorizing the execution of this Agreement.
(iii) An incumbency certificate, executed by the
Secretary or Assistant Secretary of the Company, which shall
identify by name and title and bear the signature of the officers
of the Company authorized to sign this Agreement, upon which
certificate each Lender shall be entitled to rely until informed
of any change in writing by the Company.
4. Representation and Warranty. The Company hereby represents
and warrants to the Lenders that after giving effect to the
amendment herein contained (i) all of the representations and
warranties contained in the Credit Agreement are true and correct
as of the date hereof, (ii) no Default or Unmatured Default
exists or is continuing and (iii) the Company has performed all
the agreements on its part to be performed prior to the date
hereof as set forth in the Credit Agreement.
5. Effectiveness of Amendment. This Agreement shall become
effective as of the date first above written provided that all of
the conditions precedent set forth in Section 3 of this Agreement
are satisfied and upon receipt by the Agent of counterparts of
this Agreement duly executed by the Company and the Required
Lenders.
6. Reference to and Effect on the Credit Agreement.
a. Upon the effectiveness of Section 2 hereof, on or
after the date hereof each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import and each reference to
the Credit Agreement in the Notes and all other
documents (the "Loan Documents") delivered in
connection with the Credit Agreement shall mean and be
a reference to the Credit Agreement as amended hereby.
b. Except as specifically amended above, all of the
terms, conditions and covenants of the Credit Agreement
and all other Loan Documents shall remain unaltered and
in full force and effect and shall continue to be
binding upon the Company in all respects and are hereby
ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right, power or
remedy of the Lenders or the Agent under the Credit
Agreement or any of the Loan Documents, or (ii) any
Default or Unmatured Default under the Credit
Agreement.
7. Costs, Expenses and Taxes. The Company agrees to pay on
demand all costs and expenses of the Agent in connection with the
preparation, execution and delivery of this Agreement, including
the reasonable fees and out-of-pocket expenses of counsel for the
Agent with respect thereto.
8. CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS)
OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
9. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the Company, the undersigned Lenders and
the Agent have executed this Agreement as of the date first above
written.
INTERCONTINENTAL LIFE CORPORATION
By:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By:
Title:
BARCLAYS BANK, PLC
By:
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By:
Title:
FLEET NATIONAL BANK OF CONNECTICUT
By:
Title:
CORESTATES PHILADELPHIA NATIONAL
BANK N.A.
By:
Title:
EXHIBIT A
CONSENT OF GUARANTOR
Financial Industries Corporation, as guarantor under the
Amended and Restated Guaranty dated January 29, 1993 (the
"Guaranty") in favor of the Lenders party to the Amended and
Restated Credit Agreement dated as of January 29, 1993 (as
amended, the "Credit Agreement") hereby consents to the Amendment
Agreement dated as of April 24, 1996 and hereby confirms and
agrees that the Guaranty is, and shall continue to be, in full
force and effect and is hereby confirmed and ratified in all
respects.
This Consent is executed and delivered as of April 24, 1996.
FINANCIAL INDUSTRIES CORPORATION
By:
Title:
Exhibit 10 (aaaf)
INTERCONTINENTAL LIFE CORPORATION
WAIVER AGREEMENT
This Consent and Waiver Agreement (the "Agreement") is entered
into as of December 12, 1996 by and among InterContinental Life
Corporation (the "Company") the undersigned lenders (the
"Lenders") and The First National Bank of Chicago, as agent for
the Lenders (the "Agent").
W I T N E S S E T H :
WHEREAS, the Company, the Lenders and the Agent are parties
to that certain Amended and Restated Credit Agreement dated as of
January 29, 1993, (as amended, the "Credit Agreement"); and
WHEREAS, Family Life Corporation ("Family") and Investors -
North America have proposed to amend the $22,500,000 Subordinated
Senior Note dated June 12, 1991 and issued by Family to
Investors-North America (as amended, the ""$22.5 Million Note"),
the form of which amendment is attached hereto as Exhibit A (the
"$22.5 Million Note Amendment"); and
WHEREAS, Family and Investors-North America have proposed to
amend the $30,000,000 Subordinated Senior Note dated July 30,
1993 and issued by Family to Investors-North America (the "$30
Million Note"), the form of which amendment is attached hereto as
Exhibit B (the "$30 Million Note Amendment"); and
WHEREAS, Family Life Insurance Investment Company
("Holdings") and Investors-North America have proposed to amend
the $4,500,000 Subordinated Senior Note dated July 30, 1993 and
issued by Holdings to Investors-North America (the "4.5 Million
Note"), the form of which amendment is attached hereto as Exhibit
C (the "$4.5 Million Note Amendment"); and
WHEREAS, FIC and Investors-North America have proposed to
amend the $2,500,000 Subordinated Note dated June 12, 1991 and
issued by FIC to Investors Life Insurance Company of California
("Investors-CA"), and acquired by Investors-North America the
merger of Investors-CA with and into Investors-North America (the
"2.5 Million Note"), the form of which amendment is attached
hereto as Exhibit D (the "$2.5 Million Note Amendment"); and
WHEREAS, FIC and Investors-North America have proposed to
amend the Master Subordinated PIK Note dated June 12, 1991 and
issued by FIC to Investors-CA, and acquired by Investors-North
America upon the merger of Investors-CA with and into Investors-
North America (the "PIK Note"), the form of which amendment is
attached hereto as Exhibit E (the "PIK Note Amendment");and
WHEREAS, the Company has requested the Lenders to waive
certain provisions of the Credit Agreement in connection with the
above described amendments, as and to the extent hereinafter
described.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined in this Agreement shall have the meanings
attributed to such terms in the Credit Agreement.
2. Waiver. The Lenders hereby waive any violation of the Credit
Agreement and any Default created thereby attributable solely to
the Company's breach of the covenant set forth in Section 6.21 of
the Credit Agreement by reason of the execution by Investors-NA
of (a) the $22.5 Million Note Amendment, (b) the $30 Million Note
Amendment, (c) the $4.5 Million Note Amendment, (d) the $2.5
Million Note Amendment and (e) the PIK Note Amendment. This
waiver is only applicable and shall only be effective in this
specific instance and for the specific purpose for which made or
given.
3. Conditions Precedent. Section 2 of this Agreement shall not
become effective unless and until the Company has furnished, or
caused to be furnished, to the Agent, with sufficient copies for
each Lender, the following:
(i) A consent from FIC, in the form of Exhibit F to
this Agreement;
(ii) Copies, certified by the Secretary or Assistant
Secretary of the Company, of its Board of Directors
resolutions authorizing the execution of this
Agreement;
(iii) An incumbency certificate, executed by the
Secretary or Assistant Secretary of the Company, which
shall identify by name and title and bear the signature
of the officers of the Company authorized to sign this
Agreement, upon which certificate each Lender shall be
entitled to rely until informed of any change in
writing by the Company;
(iii) Evidence satisfactory to the Agent of the
execution and delivery by (1) Family of the $22.5
Million Note Amendment and the $30 Million Note
Amendment, together with FIC's consent as grantor of
the $22.5 Million Note and the $30 Million Note, (2)
Holdings of the $4.5 Million Note Amendment and (3) FIC
of the $2.5 Million Note Amendment and the PIK Note
Amendment.
4. Representation and Warranty. The Company hereby represents
and warrants to the Lenders that after giving effect to the
waiver herein contained (i) all of the representations and
warranties contained in the Credit Agreement are true and correct
as the date hereof, (ii) no Default or Unmatured Default exists
or is continuing and (iii) the Company has performed all the
agreements on its part to be performed prior to the date hereof
as set forth in the Credit Agreement.
5. Effectiveness of Waiver. This Agreement shall become
effective as of the date first above written provided that all
the conditions precedent set forth in Section 3 of this Agreement
are satisfied and upon receipt by the Agent of counterparts of
this Agreement duly executed by the Company and the Required
Lenders.
6. Reference to and Effect on the Credit Agreement.
a. Upon the effectiveness of Section 2 hereof, on or
after the date hereof each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import and each reference to
the Credit Agreement in the Notes and all other
documents (the "Loan Documents") delivered in
connection with the Credit Agreement shall mean and be
a reference to the Credit Agreement as affected hereby.
b. Except as specifically waived above, all of the
terms, conditions and covenants of the Credit Agreement
and all other Loan Documents shall remain unaltered and
in full force and effect and shall continue to be
binding upon the Company in all respects and are hereby
ratified and confirmed.
c. The execution, delivery and effectiveness of this
Agreement shall not, except as expressly provided
herein, operate as a waiver of (i) any right, power or
remedy of the Lenders or the Agent under the Credit
Agreement or any of the Loan Documents, or (ii) any
Default or Unmatured Default under the Credit
Agreement.
7. Costs, Expenses and Taxes. The Company agrees to pay on
demand all costs and expenses of the Agent in connection with the
preparation, execution and delivery of this Agreement, including
the reasonable fees and out-of-pocket expenses of counsel for the
Agent with respect thereto.
8. CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS)
OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
9. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the Company, the undersigned Lenders and
the Agent have executed this Agreement as of the date first above
written.
INTERCONTINENTAL LIFE CORPORATION
By:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By:
Title:
BARCLAYS BANK, PLC
By:
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By:
Title:
FLEET NATIONAL BANK OF CONNECTICUT
By:
Title:
CORESTATES PHILADELPHIA NATIONAL
BANK N.A.
By:
Title:
Exhibit 10 (aaag)
FINANCIAL INDUSTRIES CORPORATION
AMENDMENT NUMBER 1
TO THE MARCH 21, 1991 OPTION AGREEMENT
This Amendment Agreement (hereinafter the "Amendment") is made by
Financial Industries Corporation ("FIC"), effective as of June
12, 1996, in favor of Investors Life Insurance Company of North
America, individually and as successor-in-interest to Investors
Life Insurance Company of California.
Reference is made to that certain option agreement dated March
21, 1991 by FIC in favor of Investors Life Insurance Company of
North America and Investors Life Insurance Company of California
(the "Option Agreement").
All capitalized terms not defined herein shall have the meanings
established in the Option Agreement.
WITNESSETH:
WHEREAS, Investors Life Insurance Company of North America and
Investors Life Insurance Company of California granted loans to
FIC, or subsidiaries thereof, in the amounts of $22.5 million and
$2.5 million (the "Loans") in connection with the acquisition of
Family Life Insurance Company by FIC. As partial consideration
for said loans, FIC entered into the option agreement referenced
herein, providing for a grant to Investors Life Insurance Company
of North America and Investors Life Insurance Company of
California of certain options to purchase a total of 9.9% of the
common stock of FIC at a price of $10.50 per share; and
WHEREAS, Investors Life Insurance Company of California was
merged into Investors Life Insurance Company of North America,
and Investors Life Insurance Company of North America thereby
became the surviving organization and successor-in-interest to
Investors Life Insurance Company of California; and
WHEREAS, upon recommendation of the Board of Directors of FIC
and the approval of a majority of the shareholders of FIC, the
common stock of FIC was split on a five-for-one basis with a
record date of November 12, 1996; and
WHEREAS, Investors Life Insurance Company of North America
(hereinafter "Investors-NA) and FIC agreed to amend the payment
schedules of the Loans; and
WHEREAS, Investors-NA and FIC wish to extend the period in which
the options may be exercised and provide a written recognition of
the effect of the five-for-one split on the per share price for
the exercise of those options under the original terms of the
Option Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, FIC agrees as
follows:
1. The expiration date for the exercise of the options as
provided in paragraph two of the Option Agreement shall be
changed to June 12, 2006.
Furthermore, FIC acknowledges that the price per share under the
Option Agreement ($10.50) has been adjusted to account for the
five-for-one split of FIC common stock in accordance with the
dilution provisions in paragraph one of the Option Agreement.
Therefore, the resulting price per share is $2.10.
Except as otherwise noted herein, the terms and conditions of the
Option Agreement will remain in full force and effect.
Executed this 12th day of December, 1996 by:
FINANCIAL INDUSTRIES CORPORATION
By:
Roy F. Mitte
President
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Investors Life Insurance Company of North America
ILG Securities Corporation
InterContinental Life Insurance Company
ILG Sales Corporation
InterContinental Growth Plans, Inc.
InterContinental Life Agency, Inc. *
Investors Life Insurance Company of Indiana
*Wholly-owned subsidiary of InterContinental Growth Plans, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 33-71074) of
InterContinental Life Corporation of our report dated March 25,
1997 appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Dallas, Texas
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 453,896
<DEBT-CARRYING-VALUE> 8,165
<DEBT-MARKET-VALUE> 8,374
<EQUITIES> 2,304
<MORTGAGE> 13,494
<REAL-ESTATE> 38,696
<TOTAL-INVEST> 661,141
<CASH> 3,313
<RECOVER-REINSURE> 12,123
<DEFERRED-ACQUISITION> 26,938
<TOTAL-ASSETS> 1,263,942
<POLICY-LOSSES> 119,744
<UNEARNED-PREMIUMS> 9,069
<POLICY-OTHER> 538,505
<POLICY-HOLDER-FUNDS> 5,988
<NOTES-PAYABLE> 24,944
0
0
<COMMON> 1,150
<OTHER-SE> 112,211
<TOTAL-LIABILITY-AND-EQUITY> 1,263,942
9,980
<INVESTMENT-INCOME> 59,836
<INVESTMENT-GAINS> 23,520
<OTHER-INCOME> 2,670
<BENEFITS> 40,091
<UNDERWRITING-AMORTIZATION> 2,574
<UNDERWRITING-OTHER> 15,884
<INCOME-PRETAX> 41,443
<INCOME-TAX> 14,505
<INCOME-CONTINUING> 26,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,938
<EPS-PRIMARY> 5.12
<EPS-DILUTED> 5.12
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
