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
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-7288
INTERCONTINENTAL LIFE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 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) 404-5000
(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
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 15, 2000, based on the closing sales price in The Nasdaq
Small-Cap Market ($9.50 per share), was $44,152,333.
As of March 15, 2000, Registrant had 8,821,191 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. [ ]
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PART I
Item 1. Business
General
InterContinental Life Corporation ("ILCO", the "Company" or the "Registrant")
was originally incorporated in 1969 under the laws of the State of New Jersey.
During 1997, ILCO transferred its domicile from New Jersey to the State of
Texas. This change was approved by vote of the shareholders at the annual
meeting of shareholders held on June 19, 1997. 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 and annuity products. Prior to
the end of 1997, the life insurance subsidiaries also administered an in-force
book of accident and health insurance business. In December, 1997, the life
insurance subsidiaries entered into an agreement, effective as of June 30, 1997,
with a third party insurer whereby the obligations under the accident and health
insurance and the disability income business of the companies were assumed by
the reinsurer. The arrangement provides for an initial period of reinsurance on
a coinsurance basis, pending applicable approvals of the assumption arrangement.
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 44.5% of the
Company's outstanding common stock. FIC, ILCO and their insurance subsidiaries
have substantially identical management, 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, is the beneficial owner of approximately 30.71% 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, Meridian Life Insurance Company, renamed
Investors Life Insurance Company of Indiana ("Investors-Indiana"), in February,
1995, State Auto Life Insurance Company (via merger of that company into
Investors- Indiana in 1997) and Grinnell Life Insurance Company (via merger of
that company into Investors- Indiana in 1998).
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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 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 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.
Completed Acquisitions.
a. Standard Life. In November 1986, the Company acquired Standard Life,
headquartered in Jackson, Mississippi, for a gross purchase price of
$54,500,000.
b. 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.
c. Investors-Indiana. 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-Indiana").
d. State Auto Life. On July 9, 1997, ILCO and Investors-Indiana acquired State
Auto Life Insurance Company, an Ohio domiciled life insurer, from State
Automobile Mutual Insurance Company, for an adjusted cash purchase price of
$11.8 million. Under the terms of the transaction, State Auto Life was merged
into Investors-Indiana.
e. Grinnell Life. On June 30, 1998, ILCO, through a subsidiary, acquired
Grinnell Life Insurance Company ("Grinnell Life") for an adjusted purchase price
of $16.6 million. A portion of the purchase price ($12.37 million) was paid by
way of a dividend to the seller immediately prior to the closing of the
transaction; the balance of the purchase price was paid by ILCO's subsidiary.
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As part of the transaction, Grinnell Life was immediately merged with and into
that subsidiary, with that subsidiary being the surviving entity.
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.
In December, 1997, InterContinental Life Insurance Company ("ILIC"), an ILCO
subsidiary, transferred its domicile from New Jersey to Indiana. Following
completion of the redomestication, ILIC merged with Investors-Indiana, with ILIC
as the surviving entity in the merger process. Immediately after the merger,
ILIC changed its name to Investors Life Insurance Company of Indiana. As used
hereinafter, the phrase "Investors-IN" shall be used to refer to the merged
entities. As a result of the merger, Investors-IN is licensed in 47 states and
the District of Columbia. As of December 31, 1999, it had assets of $176.4
million and capital and surplus of $23 million.
Management believes that these acquisitions and consolidations have caused a
reduction in expenses and have further strengthened the financial condition of
the combined companies.
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 life insurance companies acquired by the
Company. During 1999, the general insurance expenses of the Company's insurance
subsidiaries on a statutory basis were $15,910,308, as compared to $15,172,682
in 1998 and $15,574,265 in 1997. The level of expenses for the years 1999, 1998
and 1997 was affected by expenses incurred in connection with Year 2000
compliance (see the discussion under the caption "Data Processing"). For the
year 1998, the level of expenses was also affected by expenses incurred in
connection with the acquisition of Grinnell Life Insurance Company. Expenses for
the year 1997 were also affected by the acquisition in July of that year of
State Auto Life. 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.
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The number of employees within the Company and its subsidiaries (including
employees who also perform administrative services for Family Life) was
approximately 312 at December 31, 1999.
Principal Products
The Company's insurance subsidiaries are engaged primarily in administering
existing portfolios of life insurance policies and annuity products.
Approximately 79% of the total collected premiums for 1999 were derived 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, which provide permanent life insurance protection while
crediting company-declared current interest rates to the cash value of the
policy. 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 statutory premiums received from all types of universal life products
were $34.3 million in 1999, as compared to $38.9 million in 1998 and $40.6
million in 1997. Investors-NA received reinsurance premiums from Family Life of
$3.2 million in 1999, pursuant to the reinsurance agreement for universal life
products written by Family Life. In 1999, 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%), Ohio (9%), California (8%) and New Jersey (8%).
The Company's insurance subsidiaries received premium income from health
insurance policies. In 1999, premium income from all health insurance policies
was $0.8 million, as compared to $1.0 million in 1998 and $0.9 million in 1997.
As described below, the health insurance business of the Company's subsidiaries
is 100% reinsured with a third party reinsurer.
In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which most of the contractual obligations and risks under accident
and health insurance policies were assumed by a third party reinsurer. The
transfer was effective as of July 1, 1997. These risks and contractual
obligations were sold pursuant to, first, a coinsurance reinsurance agreement.
Following applicable regulatory approvals, the reinsurer will assume the direct
obligations of the companies, on an assumption reinsurance basis. The decision
to dispose of this book of business was based on management's analysis that the
business was not generating targeted profit objectives and that the products
were not part of the core business of the subsidiaries. The sale permits the
companies to
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focus on its primary business - life insurance and annuity sales. In connection
with the transaction, the total amount of net reserves transferred by the
subsidiaries was $6,327,504. In addition to the transfer of reserves, the life
companies paid the reinsurer $1,037,150 in connection with the transaction,
which amount was accounted for as an expense for the year ended December 31,
1997. In 1997, the transferred business generated approximately $791,000 in
annualized premiums.
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
Variable Trust (the "Putnam Fund"), a series fund which is managed by Putnam
Investment Management, Inc. As of December 31, 1999, the assets held in the
separate account were $48.4 million. During 1999, the premium income realized in
connection with these variable annuity policies was $117,666, which was received
from existing contract owners.
Investors-NA also maintains a closed variable annuity separate account, with
approximately $19.8 million of assets as of December 31, 1999. The separate
account was closed to new purchases in 1981, as a result of an IRS ruling which
adversely affected the status of variable annuity separate accounts which invest
in publicly-available mutual funds. The ruling did not adversely affect the
status of in-force contracts.
For the past several years, ILCO's life companies expanded their marketing
efforts in the fixed annuity market. Direct deposits from the sale of fixed
annuity products were $7.6 million in 1999, as compared to $6.1 million in 1998,
and $3.5 million in 1997. Investors-NA also received reinsurance premiums from
Family Life of $1.8 million in 1999, pursuant to a reinsurance agreement for
annuity products between Investors-NA and Family Life Insurance Company.
During the fourth quarter of 1998, Investors-NA developed a group deposit
administration product, designed for use in connection with the funding of
deferred compensation plans maintained by government employers under section 457
of the Internal Revenue Code. The company has established a marketing
relationship with a third-party administrator based in San Antonio, Texas, which
has established relationships with school districts in Texas. Enrollments under
the program commenced during 1999, which contributed $0.9 million of the annuity
premiums for that year.
In October, 1999, a marketing subsidiary of the Company entered into a marketing
agreement with a third- party life insurance company. The marketing agreement
makes available, to appointed agents of the Company's life insurance
subsidiaries, a portfolio of term life insurance products not currently being
offered by the subsidiaries. The underwriting risk on the products sold under
this arrangement is assumed by the third-party insurer. The Company's appointed
agents receive commissions on the sales of these products and the Company's
marketing subsidiary receives an override commission.
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The following table sets forth, for the three years ended December 31, 1999, the
combined premium income and other considerations received by the Company's
insurance subsidiaries from sales of their various lines of insurance.
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
Type of Insurance Premium 1999 1998 1997
(In thousands)
Individual:
Life $10,647 $10,528 $10,163
Accident & Health 808 994 792
Total Individual Lines 11,455 11,522 10,955
Group:
Life 3,164 2,323 2,639
Accident & Health 0 11 40
Total Group Lines 3,164 2,334 2,679
Credit:
Life (14) (21) (27)
Accident & Health (1) (3) 14
Total Credit Lines (15) (24) (13)
Total Premium 14,604 13,832 13,621
Reinsurance Premiums Ceded (3,472) (2,942) (2,590)
Total Net Premium 11,132 10,890 11,031
Amount Received on
Investment Type Contracts 45,536 48,739 47,862
Total Premiums and
Deposits Received $56,668 $59,629 $58,893
</TABLE>
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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. As of
December 31, 1999, only 2.1% 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 0.1% of the Company's total assets at
December 31, 1999. The Company had investments in debt securities of affiliated
corporations aggregating $41.5 million as of December 31, 1999.
Investments in mortgage-backed securities included collateralized mortgage
obligations ("CMOs") of $178.9 million and mortgage-backed pass-through
securities of $29.1 million at December 31, 1999. Mortgage-backed pass-through
securities, sequential CMOs and support bonds, which comprised approximately
52.0% of the book value of the Company's mortgage-backed securities at December
31, 1999, 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 48.0% and sequential and
support classes represented approximately 38% of the book value of the Company's
mortgage-backed securities at December 31, 1999. 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 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 1999. For the year 2000, the Company's investment objectives include the
making of selected investments in CMOs.
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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, 1999, none of the
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 1999, the Company wrote off the value of approximately $81,000 of
principal and interest on mortgage loans which had defaulted as to principal and
interest payment for more than 90 days.
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
participations. These categories accounted for approximately 0.3% of the
Company's invested assets at December 31, 1999.
Investors-NA was the owner and developer of Bridgepoint Square Offices.
Following the completion of the construction, the project consisted of four
office buildings, with a total rentable space of approximately 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 another parking garage. Investors-NA
completed construction of the three remaining office buildings and parking
garage in 1997.
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 76,793 square feet, and the
parking garage, with 350 parking spaces. In May, 1997, the entire rentable space
was leased to a major tenant in the technology business. Construction of the
parking garage and the building shell was completed in October, 1997.
In November, 1997, Investors-NA and Family Life entered into a sale agreement
with an independent third party for the sale of their respective interests in
Bridgepoint Square Offices. The transaction, which closed on December 5, 1997,
was for an aggregate price of $78 million. The sale resulted in a net pre-tax
profit to Investors-NA of approximately $14.6 million, and a net pre-tax profit
to Family Life of approximately $4.5 million. See Item 2. Properties.
In October, 1998, Investors-NA purchased two adjoining tracts of land located in
Austin, Texas totaling 47.995 acres. The aggregate purchase price for these
tracts was $8.1 million. Investors-NA has obtained approval of a site plan
development proposal for these tracts. The development permit provides for the
construction of seven office buildings totaling 600,000 square feet, with
associated parking, drives and related improvements. The initial phase of the
project ("Phase One") will consist of two office buildings, associated parking
and the infrastructure for the entire project. Construction on Phase One began
during the first quarter of 1999 and is expected to be completed during the
third quarter of 2000.
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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
provide other sales inducements. The Investors sales distribution system is
presently concentrating its efforts on the promotion and sale of universal 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 Senior 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. During 1999, the Company
implemented a plan to restructure the compensation arrangements for Regional
Vice Presidents, so as to emphasize the role of personal production by the RVPs.
Data Processing
Since December, 1994, the data processing needs of ILCO's and FIC's insurance
subsidiaries have been provided to ILCO's and FIC's Austin, Texas and Seattle,
Washington facilities by FIC Computer Services, Inc., a subsidiary of FIC. See
Item 13 - Certain Relationships and Related Transactions with Management.
As the provider of data processing for the Company and its subsidiaries and
affiliates, FIC Computer Services, Inc. utilizes a centralized computer system
to process policyholder records and financial information. In addition, the
Company uses non-centralized computer terminals in connection with its
operations.
In response to the potential operations and policy administration problems
caused by the computer calendar change on January 1, 2000, the management of the
Company instructed FIC Computer Services, Inc. to analyze its system
capabilities and the operational requirements of the Company and its respective
subsidiaries and affiliates with respect to the Y2K problem. In 1996, FIC
Computer Services, Inc. conducted the analysis of all of the Company's systems.
After reviewing that analysis, the Company determined that a plan should be
devised to prevent the data processing errors that would be encountered due to
the Y2K problem. In November, 1996, a three-year plan outlining a proposed
solution (the "Year 2000 Plan") was established and approved by the Company to
ensure that all of the data processing systems would be Y2K compliant or
converted onto Y2K compliant systems. The Company began the major work under the
Year 2000 Plan in 1997 and the work, including extensive testing of the
converted systems, was completed during the fourth quarter of 1999. The Company
did not experience any material disruptions in the processing of its business as
a result of the Year 2000 date change.
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The Company established the Year 2000 Plan because FIC Computer Services, Inc.'s
analysis revealed that those systems that are not converted or modified into Y2K
compliant systems, may produce policy administration errors as a result of the
calendar change, requiring that the life insurance subsidiaries manually
administer those policies. This would have resulted in a material increase in
administrative costs incurred by the life insurance subsidiaries of both ILCO
and FIC.
The Company's analysis also indicated that, in addition to potential policy
administration errors in the life insurance subsidiaries, any machine which
contains a microchip is subject to error due to the Y2K problem. Such an
occurrence could not only create errors in the Company's internal systems, but
those of the Company's suppliers and service providers. In order to prepare for
this contingency, the Year 2000 Plan called for the acquisition of new mainframe
hardware and software, and the modification and conversion of the Company's
telephones, voice mail and desk-top personal computers.
The Year 2000 Plan included the conversion of certain systems onto the Company's
CK/4 System, a system which is designed to be Y2K compliant according to the
representations of the vendor. Those systems which are not converted were
upgraded by changing individual lines of computer code in order to modify
current operating software such that it became Y2K compliant.
In order to continuously evaluate the effectiveness of the modifications and
conversions made to the various systems, FIC Computer Services, Inc. acquired
testing software to simulate dates on or after January 1, 2000. Additionally,
FIC Computer Services, Inc. ran the systems through model office cycles and also
conducted visual inspections of screen displays to determine whether the systems
functioned in a Y2K compliant manner.
The various software applications described above are licensed to the Company
under agreements which permit the Company's subsidiaries to process business on
its computer systems utilizing such software.
Under the Year 2000 Plan, FIC Computer Services, Inc. utilized its own
personnel, acquired Y2K compliant operating software, and engaged the assistance
of outside consultants to facilitate the systems conversions and modifications.
For the twelve month period ended December 31, 1999, the Company incurred an
after tax cost of approximately $195,000 in connection with the Year 2000 Plan,
as compared to an after tax expense of approximately $158,000 for the year ended
December 31, 1998 and $140,000 for the year ended December 31, 1997.
With respect to non-centralized systems (i.e., desktop computers), the Company
obtained updated software releases and new hardware designed to be Y2K compliant
according to the representations of the vendors. The effort needed to correct
for Y2K problems on such systems was less time intensive than the effort needed
to achieve compliance for its centralized systems. The installation of such new
PC hardware and software was commenced in early 1999 and was completed during
the fourth quarter of 1999.
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The Company also faced the risk that one or more of its external suppliers of
goods or services ("third party providers") would not be in a position to
properly interact with the Company due to the inability of such third party
provider to resolve its own Y2K issues. Pursuant to the Year 2000 Plan, the
Company completed an inventory of its third party provider relationships. In
order to assess the Y2K readiness of such third party providers, the Company
developed and forwarded a detailed questionnaire to such providers. As the
responses to the questionnaires were received, the Company evaluated the overall
Y2K readiness of its third party provider relationships. The Company did not
experience any material problems with its third-party vendors which were related
to the Year 2000 date change.
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 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. Investors-IN generally retains the
first $60,000 to $100,000 of risk on the life of any individual, depending upon
the type of coverage being written. Investors-NA generally retains the first
$100,000 to $250,000 of risk on the life of any individual, depending on the
type of coverage being issued. Investors-NA maintains a bulk reinsurance treaty,
under which it reinsured all of its risks under accidental death benefit
policies. The treaty was most recently renegotiated with the current reinsurer
in January, 1997.
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As discussed above (see "Principal Products"), in December, 1997, ILCO's life
insurance subsidiaries entered into a reinsurance treaty under which all of the
contractual obligations and risks under individual accident and health insurance
policies were assumed by a third party reinsurer. In connection with the
transaction, the total amount of net reserves transferred by the subsidiaries
was $6,327,504. In addition to the transfer of reserves, the life companies paid
the reinsurer $1,037,150 in connection with the transaction, which amount was
accounted for as an expense for the year ended December 31, 1997.
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 15, 2000, FIC owned, directly and indirectly through Family Life,
approximately 44.5% of the outstanding shares of ILCO's common stock.
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.
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Family Life specializes in underwriting and selling 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" . 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.
Senior Loan
The Senior Loan of ILCO was originally arranged in connection with the 1988
acquisition of Investors-NA and Investors-CA. In January, 1993, the Company
refinanced its Senior Loan. That transaction was done in connection with the
prepayment of the subordinated indebtedness and the purchase of warrants which
had been issued as part of the financing of the 1988 acquisitions. The terms of
the amended and restated credit facility are substantially the same as the terms
and provisions of the 1988 senior loan. The maturity date, which had been
December 31, 1996, was extended to July 1, 1998 for the Senior Loan. The average
interest rate paid by the Company on its Senior Loan was approximately 7.68%
during 1997 and 7.63% during 1998.
In February, 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 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,
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1996, the Company made the principal payment for October 1st ($4.5 million),
plus an optional principal payment of $0.5 million. In connection with the
acquisition of State Auto Life Insurance Company in July, 1997, the Senior Loan
agreement was modified to extend the maturity date to October 1, 1998.
As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
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 Investors-IN are domiciled in the states of Washington and
Indiana, 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. Prior to December, 1997,
Investors-IN was domiciled in the State of New Jersey. In December, 1997,
Investors-IN transferred its domicile to 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.
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Risk-Based Capital Requirements. The National Association of Insurance
Commissioners ("NAIC") has imposed 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. The formula also 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, 1999 indicate that the
Total Adjusted Capital of each of the Company's insurance subsidiaries is above
750% 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. For the year ended December 31 1999, the Company's insurance
subsidiaries received a net credit on its guaranty fund assessment returns in
the amount of $13,478. The likelihood and amount of any other future assessments
cannot be estimated and are beyond the control of the Company.
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Surplus Debentures and Dividends. The Company receives payments from
Investors-NA under the terms of two surplus debentures. 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, 1999, the statutory surplus of
Investors-NA was $72.6 million. 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.
Pursuant to the surplus debentures, Investors-NA paid to the Company principal
and interest on the surplus debentures of $14,093,711 in 1997, $13,382,361 in
1998 and $10,859,115 in 1999. As of December 31, 1999, the outstanding principal
balance of the surplus debentures was $0.956 million and $4.94 million,
respectively. The terms of the latter debenture provided for final payment of
the remaining principal on September 30, 1999. In September, 1999, Investors-NA
and ILCO amended the payment schedule to provide for payment of the remaining
balance in four installments, with the final installment being due July 1, 2000.
In addition to the payments under the terms of the Surplus Debentures, ILCO has
received dividends from its insurance subsidiaries. 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. Under the "greater of" standard, an insurer may pay a dividend
in an amount equal to the greater of (i) 10% of policyholder surplus or (ii) the
insurer's net gain from operations for the previous year. As of December 31,
1999, Investors-NA had earned surplus of $51.6 million. Since the law applies
only to dividend payments, the ability of Investors-NA to make principal and
interest payments under the Surplus Debentures is not affected. ILCO does not
anticipate that Investors-NA will have any difficulty in making principal and
interest payments on the Surplus Debentures .
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 $18.1 million at December 31, 1999.
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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. During 1997, a change in the
NAIC's AVR procedures resulted in a one-time reduction in the amount of the
reserves held by ILCO's life insurance subsidiaries, with a corresponding one-
time increase in the amount of surplus. For Investors-NA, the amount of the
increase in surplus was $2,395,000; for Investors-IN, the amount of the increase
in surplus was $590,000. 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 and Investors-IN are
subject to regulation under the insurance and insurance holding company statutes
of Washington 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 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
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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-NA can pay to the Company. For the years ended December 31, 1997,
1998 and 1999, the decreases in the current income tax provisions of the
Company's insurance subsidiaries due to this change were $269,633, $253,411 and
$409,193, 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, 1999.
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. 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
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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. Following the sale of the Austin Centre, the Company
and its affiliates continued to occupy three floors of the office space under a
lease arrangement. The current lease, which was entered into in May, 1997, is
for a five (5) year term ending in October, 2002, with options to renew for
three successive five (5) year terms thereafter.
In January, 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.
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. In March, 1996, construction commenced on the
third office building, with approximately 79,000 rentable square feet of office
space and was completed in December, 1996. Construction began on the fourth
building in July, 1996 and was completed in July, 1997. The fourth building
contains approximately 92,459 rentable square feet.
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.
Family Life began construction of the fifth building (known as "Bridgepoint
Five") on the new site in January, 1997. Construction of the parking garage and
the building shell was completed in October, 1997.
On November 24, 1997, Investors-NA and Family Life entered into a contract with
Health and Retirement Properties Trust, a Maryland real estate investment trust
(the "Purchaser") to sell their respective interests in the Bridgepoint Square
Office complex. The aggregate purchase price for the project was $78,000,000.
The transaction closed on December 5, 1997. The purchase price was allocated
approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale of
Bridgepoint Office Square resulted in a net profit to Investors-NA of
approximately $14.0 million ($9.1 million after tax) that was included in ILCO's
fourth quarter earnings for the period ended December 31, 1997. For Family Life,
the sale resulted in a net profit of approximately $4.5 million ($3.2 million
after tax) that was included in FIC's fourth quarter earnings for the period
ended December 31, 1997.
On October 29, 1998, Investors-NA purchased two adjoining tracts of land located
in Austin, Texas totaling 47.995 acres. The aggregate purchase price for these
tracts was $8.1 million. Prior to the closing, Investors-NA obtained approval of
Site Development Permit from the City of Austin for the
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tracts. The Site Development Permit allows for the construction of seven office
buildings totaling 600,000 square feet, with associated parking, drives and
related improvements. The initial phase of the project ("Phase One") will
consist of two office buildings, associated parking and the infrastructure for
the entire project, which is known as River Place Pointe. Construction on Phase
One commenced during the first quarter of 1999 and is expected to be completed
during the third quarter of 2000. The Company plans to relocate its corporate
headquarters to space in one of the buildings during the third quarter of 2000.
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 6 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 Company has
sub-leased the space in the property to third parties.
Investors-IN owns three buildings which are adjacent to the 40 Parker Road
building. One building, which is 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 Investors-IN'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 .
Prior to December, 1999, Investors-NA owned an office building, located at 206
West Pearl Street, Jackson, Mississippi, which was the former headquarters of
Standard Life Insurance Company (the "Standard Life Building"). This building is
68 years old and contains approximately 85,000 square feet (65,000 net rentable
square feet) of office space. On December 29, 1999, Investors-NA donated the
Standard Life Building to the Jackson Redevelopment Authority ("JRA").
Contemporaneously with the donation of the Standard Life Building, Investors-NA
and Financial Industries Corporation ("FIC") sold all of the adjacent parcels
they owned to the JRA for a total sale price of $2,500,000.00, which has been
allocated according to the respective ownership interests of Investors-NA
(approximately 59.28%) and FIC (approximately 40.72%). The donation and sale was
made pursuant to the terms of the Donation, Purchase and Sale Agreement dated
July 17, 1998. Investors-NA intends to claim an income tax deduction on its
upcoming tax return for the donation of the Standard Life Building, which has an
appraised value at December 15, 1999 of approximately $3,050,000.00. The
donation and sale transaction referenced above resulted in a net gain (GAAP
basis) of $0.992 million for ILCO and $0.409 million for FIC (or a combined
total of $1.401 million).
The Company believes that its properties and leased space are adequate to meet
its foreseeable requirements.
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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.
In August, 1997, another individual filed a similar action in Travis County,
Texas against the corporate entities identified above. The lawsuit involves the
same type of policy and includes allegations which are substantially identical
to the allegations in the first action. The named plaintiff also seeks class
certification. The Company believes that the court would consider class
certification with respect to only one of these actions. The Company also
believes that this action 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, 1999 to a vote of security holders.
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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 1999 and 1998. The
quotations set forth below have been adjusted to give retroactive effective to
the stock dividend (one share for each issued and outstanding share) which was
paid on March 17, 1999.
Prices
High Low
1999:
1st Quarter. . . . . . . $ 10.00 $ 8.250
2nd Quarter. . . . . . . 9.875 7.00
3rd Quarter. . . . . . . 11.50 9.250
4th Quarter. . . . . . . 10.50 9.188
1998:
1st Quarter. . . . . . . $ 11.50 $ 9.375
2nd Quarter. . . . . . . 13.906 11.00
3rd Quarter. . . . . . . 13.50 9.75
4th Quarter. . . . . . . 10.50 8.625
The common stock of the Company is traded in The Nasdaq Small-Cap Market (NASDAQ
Symbol: ILCO). 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 15, 2000 was 1,382.
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C. Dividends
In 1999, the Company paid a stock dividend in the amount of one share of common
stock for each share of common stock issued and outstanding. The dividend was
paid on March 17, 1999, to holders of record on March 8, 1999.
No dividend was declared or paid by the Company during 1997 or 1998. Under the
terms of its Senior Loan the Company was not permitted to declare or pay any
dividends on its Common Stock during the term of the loan. As discussed above,
under the caption "Senior Loan", the Senior Loan of the Company was fully repaid
on September 30, 1998.
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.)
<TABLE>
Years Ended December 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Revenues $ 104,205 $ 109,462 $ 127,683 $ 138,244 $ 122,390
Benefits & Expenses 85,466 91,876 96,081 96,801 105,907
Income from operations 18,739 17,586 31,602 41,443 16,483
Provisions for federal
income taxes 5,974 6,467 11,062 14,505 5,769
Net Income $ 12,765 $ 11,119 $ 20,540 $ 26,938 $ 10,714
Common Stock and
Common Stock
Equivalents 1 8,800 8,934 8,738 8,882 8,864
Net income per share 1, 2
Basic $ 1.45 $ 1.27 $ 2.38 $ 3.18 $ 1.29
Diluted $ 1.45 $ 1.25 $ 2.35 $ 3.04 $ 1.24
Cash Dividend -0- -0- -0- -0- -0-
Long Term Debt -0- -0- $ 10,964 $ 24,944 $ 59,385
Total Assets $1,321,199 $1,350,248 $1,321,653 $1,263,942 $1,315,293
</TABLE>
1. Data for the years 1995 to 1998 has been restated to reflect the effect of
the stock dividend which was paid on March 17, 1999.
2. Net income per share for the years 1995 and 1996 has been restated to
reflect the effect of FAS 128.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the year ended December 31, 1999, ILCO's net income was $12,765,000 (basic
earnings of $1.45 per common share, or diluted earnings of $1.45 per common
share) as compared to $11,119,000 (basic earnings of $1.27 per common share, or
diluted earnings of $1.25 per common share) for the year 1998 and $20,540,000
(basic earnings of $2.38 per common share, or diluted earnings of $2.35 per
common share) in 1997. Earnings per share are stated in accordance with the
requirements of Financial Accounting Standard (FAS) No. 128, which establishes
two measures of earnings per share: basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect the potential
dilution that would occur if securities or other contracts to issue common stock
were converted or exercised. For the year 1998 and 1997, earnings per share have
been restated to reflect the effect of the stock dividend which was paid on
March 17, 1999.
Results of Operations
Net income from continuing operations (excluding the gain resulting from the
sale of Bridgepoint Square Offices in 1997, as described below) was $12,765,000
(basic earnings of $1.45 per common share, or diluted earnings of $1.45 per
common share) for the year ended December 31, 1999, as compared to $11,119,000
(basic earnings of $1.27 per common share, or diluted earnings of $1.25 per
common share) for the year ended December 31, 1998 and $11,443,000 (basic
earnings of $1.32 per common share, or diluted earnings of $1.31 per common
share) for the year ended December 31, 1997.
Net income for 1997 includes $9.1 million resulting from the sale of the
Bridgepoint Square Offices, an office complex located in Austin, Texas. The
selling price was $78 million, which was allocated approximately 78.5% to
Investors-NA ($61.3 million). The sale closed on December 5, 1997. As part of
the decision to sell the Bridgepoint properties, the Company canceled its plans
to move its headquarters to one of the Bridgepoint buildings and entered into a
new lease at the Austin Centre. Under the provisions of the lease, Investors-NA
received a payment from the owner of the Austin Centre in the amount of $1.7
million. That amount is included in net income for the year ended December 31,
1997.
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<PAGE>
The results for 1998 include, for the period beginning on June 30, 1998, the
operations of Grinnell Life Insurance Company. Grinnell Life was acquired on
June 30, 1998, through a subsidiary of ILCO, for an adjusted purchase price of
$16.6 million. A portion of the purchase price ($12.37 million) was paid by way
of a dividend to the seller immediately prior to the closing of the transaction;
the balance of the purchase price was paid by ILCO's subsidiary. As part of the
transaction, Grinnell Life was immediately merged with and into that subsidiary,
with that subsidiary being the surviving entity.
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 $18,344,000 at December
31, 1999, as compared to $17,079,000 at December 31, 1998 and $20,192,000 at
December 31, 1997. 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 1999 was $11.13 million, as
compared to $10.89 million for the year 1998 and $11.03 million in 1997.
Reinsurance premiums ceded were $3.47 million in 1999, as compared to $2.94
million in 1998 and $2.59 million in 1997. For the year 1997, ceded reinsurance
includes the results of the sale of the accident and health and disability
income insurance business of the Company's life insurance subsidiaries. In
December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which all of the contractual obligations and risks under accident
and health and disability income insurance policies were assumed by a third
party reinsurer. These risks and contractual obligations were sold pursuant to,
first, a coinsurance reinsurance agreement. Following applicable regulatory
approvals, the reinsurer will assume the direct obligations of the companies, on
an assumption reinsurance basis. The decision to dispose of this book of
business was based on management's analysis that the business was not generating
targeted profit objectives and that the products were not part of the core
business of the subsidiaries. The sale permits the companies to focus on its
primary business - life insurance and annuity sales. In connection with the
transaction, the total amount of net reserves transferred by the subsidiaries
was $6.33 million. In addition to the transfer of reserves, the life companies
paid the reinsurer $1.04 million in connection with the transaction, which
amount was accounted for as an expense for the year ended December 31, 1997. In
1997, the transferred business generated approximately $791,000 in annualized
premiums.
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<PAGE>
Earned insurance charges for the year ended December 31, 1999 were $40.4
million, as compared to $41.1 million for the year 1998 and $40.9 million for
1997. This source of revenues is related to the universal life insurance and
annuity book of business of Investors-NA.
The increase in long-term interest rates during 1999, which was related to
general economic conditions, had a negative effect upon the market value of the
fixed maturities available for sale segment of the portfolio. As of December 31,
1999, the market value of the fixed maturities available for sale segment was
$404.2 million, as compared to an amortized cost of $411.5 million, or an
unrealized loss of $7.3 million. The net of tax effect of this decrease has been
recorded as a decrease in shareholders' equity.
During 1999, the lapse rate with respect to universal life insurance policies
decreased slightly from the lapse rate experienced in 1998. The rate in 1999 was
6.30%, as compared to 7.25% in 1998. The lapse rate with respect to traditional
(non-universal) life insurance policies increased from the levels experienced in
1998. The rate in 1999 was 8.15% as compared to 7.09% in 1998. The lapse rates
experienced during the 1999 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-NA and its subsidiary, Investors-IN. ILCO's primary source of funds
consists of payments under two Surplus Debentures from Investors-NA.
As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
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<PAGE>
ILCO receives periodic payments of principal and interest from 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, 1999, the outstanding principal
balance of the Surplus Debentures was $0.956 million and $4.94 million,
respectively. The terms of the latter debenture provided for final payment of
the remaining principal on September 30, 1999. In September, 1999, Investors-NA
and ILCO amended the payment schedule to provide for payment of the remaining
balance in four installments, with the final installment being due July 1, 2000.
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 Debentures. At December 31, 1999,
the statutory surplus of Investors-NA was $72.6 million, 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 its life insurance subsidiaries. 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, 1999,
Investors-NA had earned surplus of $51.6 million. Since the law applies only to
dividend payments, the ability of Investors-NA to make principal and interest
payments under the Surplus Debentures is not affected. ILCO does not anticipate
that Investors-NA will have any difficulty in making principal and interest
payments on the Surplus Debentures for the foreseeable future.
-29-
<PAGE>
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 $18.1 million at December 31, 1999. During
1999, Investors-IN made a dividend payment in the amount of $3 million to
Investors-NA. The payment was made on June 29, 1999 after the advance notice
required by the Indiana insurance code had been provided to the Indiana
Department of Insurance.
ILCO's net cash flow provided by (used in) operating activities was $(20.89)
million for the year ended December 31, 1999, as compared to $(17.33) million
for the year ended December 31, 1998 and $3.96 million for the year ended
December 31, 1997. The change between the 1997 and 1998 periods is primarily due
to the payments made in connection with the reinsurance of the health insurance
business and the payment in 1998 of income taxes relating to the gain on the
sale of Bridgepoint Square Offices.
Management believes that its cash, cash equivalents and short term investments
are sufficient to meet the needs of its business.
Investments
As of December 31, 1999, the book value of the Company's investment assets
totaled $678.8 million as compared to $702.1 million as of December 31, 1998.
Total assets as of December 31, 1999 ($1.32 billion) decreased slightly from the
level as of December 31, 1998 ($1.35 billion).
The level of short-term investments at the end of 1999 was $191.7 million, as
compared to $171.8 million at the end of 1998.
Invested real estate and other invested assets increased from $10.03 million at
December 31, 1998 to $21.15 million as of December 31, 1999. This increase is
related to the purchase by Investors-NA of the 47.995 acres of land in Austin,
Texas for the development of the River Place Pointe project. The land was
purchased in October, 1998 by Investors-NA, for an aggregate purchase price of
$8.1 million. Prior to the closing of the transaction, Investors-NA obtained a
Site Development Permit for the tracts from the City of Austin. The Site
Development Permit allows for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. Construction on Phase One commenced during the first quarter of
1999. Upon completion of Phase One, the Company plans to move its corporate
headquarters to space in one of the buildings. The move is currently scheduled
for the third quarter of 2000. In connection with the move, Investors-NA (the
tenant under the lease of its current Austin Centre space) intends to sub- lease
said space. Investors-NA plans to commence development of the additional stages
of the River Place Pointe project following completion and leasing of Phase One.
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<PAGE>
Prior to December, 1999, Investors-NA owned an office building, located at 206
West Pearl Street, Jackson, Mississippi, which was the former headquarters of
Standard Life Insurance Company (the "Standard Life Building"). This building is
68 years old and contains approximately 85,000 square feet (65,000 net rentable
square feet) of office space. On December 29, 1999, Investors-NA donated the
Standard Life Building to the Jackson Redevelopment Authority ("JRA").
Contemporaneously with the donation of the Standard Life Building, Investors-NA
and Financial Industries Corporation ("FIC") sold all of the adjacent parcels
they owned to the JRA for a total sale price of $2,500,000.00, which has been
allocated according to the respective ownership interests of Investors-NA
(approximately 59.28%) and FIC (approximately 40.72%). The donation and sale was
made pursuant to the terms of the Donation, Purchase and Sale Agreement dated
July 17, 1998. Investors-NA intends to claim an income tax deduction on its
upcoming tax return for the donation of the Standard Life Building, which has an
appraised value at December 15, 1999 of approximately $3,050,000.00. The
donation and sale transaction referenced above resulted in a net gain (GAAP
basis) of $0.992 million for ILCO and $0.409 million for FIC (or a combined
total of $1.401 million).
The fixed maturities available for sale portion of invested assets at December
31, 1999 was $404.2 million. The amortized cost of the fixed maturities
available for sale segment as of December 31, 1999 was $411.5 million,
representing a net unrealized loss of $7.3 million. This unrealized loss
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 objective is implemented by selecting primarily short- to
medium-term, investment grade fixed income securities. In making such portfolio
selections, the Company generally does not select new investments which are
commonly referred to as "high yield" or "non- investment grade."
The Company's fixed maturities portfolio (including short-term investments), as
of December 31, 1999, included a non-material amount (0.1% 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,
1998, the comparable percentage was 0.6%.
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<PAGE>
The consolidated balance sheets of the Company as of December 31, 1999 include
$41.5 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
$2.0 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 (iii) 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% and (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, in the amount of
$1,977,119, is to be paid in twenty quarterly principal payments, in the amount
of $98,855.95 each, to commence December 12, 1996 with the final payment due on
September 12, 2001; the interest rate on the note remains at 12%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
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.
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<PAGE>
Year 2000 Compliance
The Company and its subsidiaries utilize a centralized computer system to
process policyholder records and financial information. In addition, the Company
uses non-centralized computer terminals in connection with its operations. In
response to the potential operations and policy administration problems caused
by the calendar change on January 1, 2000, the Company evaluated its centralized
computer systems and developed a plan to reach Y2K compliance (the "Year 2000
Plan"). A central feature of the plan was to convert certain of the centralized
systems to a common system which is already in compliance with Y2K requirements.
The Year 2000 Plan called for a conversion of certain systems onto the Company's
CK/4 System; a system which is designed to be Y2K compliant according to the
representations of the vendor. Those systems which are not converted will be
upgraded by changing individual lines of computer code in order to modify
current operating software such that it will become Y2K compliant.
In order to continuously evaluate the effectiveness of the modifications and
conversions made to the various systems, FIC Computer Services acquired testing
software to simulate dates on or after January 1, 2000. Additionally, FIC
Computer Services ran the systems through model office cycles and also conducted
visual inspections of screen displays to determine whether the systems are
functioning in a Y2K compliant manner.
The various software applications described above are licensed to the Company
under agreements which permit the Company's subsidiaries to process business on
its computer systems utilizing such software.
The Company completed this systems conversion and testing prior to January 1,
2000. For the year ended December 31, 1999, the Company incurred an after-tax
expense of approximately $195,000 in connection with the Year 2000 Plan, as
compared to an after-tax expense of approximately $158,000 for the year 1998 and
$140,000 for the year 1997.
With respect to non-centralized systems (i.e., desktop computers), the Company
obtained updated software releases and new hardware designed to be Y2K compliant
according to the representations of the vendors. The installation of such new PC
hardware and software was commenced in early 1999 and is expected to be
completed during the fourth quarter of 1999.
The Company also faced the risk that one or more of its external suppliers of
goods or services ("third party providers") would not be in a position to
properly interact with the Company due to the inability of such third party
provider to resolve its own Y2K issues. During 1999, the Company completed an
inventory of its third party provider relationships. In order to assess the Y2K
readiness of such third party providers, the Company developed and forwarded a
detailed questionnaire to such providers. As the responses to the questionnaires
were received, the Company evaluated the overall Y2K readiness of its third
party provider relationships. The Company did not experience any material
problems with its third-party vendors which were related to the Year 2000 date
change.
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<PAGE>
Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
Except for historical factual information set forth in this Management's
Discussion and Analysis, certain statements made in this report are forward
looking and contain information about financial results, economic conditions and
other risks and known uncertainties. The Company cautions the reader that actual
results could differ materially from those anticipated by the Company, depending
upon the eventual outcome of certain factors, including: (1) heightened
competition for new business, (2) significant changes in interest rates and (3)
adverse regulatory changes affecting the business of insurance.
Accounting Developments
In February, 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," which revises
the standards for computing earnings per share previously prescribed by APB
Opinion No. 15, "Earnings Per Share." The Statement establishes two measures of
earnings per share: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
converted or exercised. The Statement requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with potential dilutive securities outstanding. The Statement also requires a
reconciliation of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation. The Statement is effective for interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. However, a
company may disclose pro forma earnings per share amounts that would have
resulted if it had applied the Statement in an earlier period. The Company
adopted FAS 128 in its annual financial statements for the year ended December
31, 1997.
In June, 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a financial statement with the same prominence as other
financial statements. Comprehensive income is defined as net income adjusted for
changes in stockholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. The Company adopted FAS
130 effective January 1, 1998, with reclassification of financial statements for
earlier years.
In June, 1997, the FASB issued FAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments. Generally, FAS No. 131 requires that
financial information be reported on the basis that it is used internally for
evaluating performance. The Company adopted FAS No. 131 effective January 1,
1998 and comparative information for earlier years has been restated. This
statement does not need to be applied to interim financial statements in the
initial year of application. The adoption of FAS No. 131 did not impact upon the
Company's reporting of financial information.
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<PAGE>
In February, 1998, the FASB issued FAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits", which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS No. 132 does
not change the measurement or recognition of pension or other postretirement
benefit plans. The Company adopted FAS No. 132 effective January 1, 1998, with
the effect of such adoption to be reflected in year-end financial statements.
The adoption of FAS No. 132 did not have a material impact on the Company's
results of operations, liquidity or financial position.
In December, 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments", which provides guidance on accounting for
insurance-related assessments. The Company adopted SOP 97-3, effective January
1, 1999. Previously issued financial statements were required to be restated.
The adoption of SOP 97-3 did not have a material impact on the Company's results
of operations, liquidity or financial position.
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS 133 is applicable to financial statements for all fiscal
quarters of fiscal years beginning after June 15, 2000 as amended by FAS No.
137, "Accounting for the Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statements No. 133". The operations of
the Company are not affected by the provisions of FAS No. 133.
Subsequent Event
On March 28, 2000, the Company purchased 546,000 shares of its common stock in a
single transaction at a price of $9.25 per share. The purchase price was
approximately $0.25 per share below the prevailing market price at the time of
the purchase. The shares repurchased will be treated as treasury shares.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
General. ILCO's principal assets are financial instruments, which are subject to
market risks. Market risk is the risk of loss arising from adverse changes in
market rates and prices, principally interest rates on fixed rate investments.
For a discussion of the Company's investment portfolio and the management of
that portfolio to reflect the nature of the underlying insurance obligations of
the Company's insurance subsidiaries, please refer to the section entitled
"Investment of Assets" in Item 1 of this report and the information set forth in
Item 7, "Management's Discussion and Analysis of Financial Condition and
Operations - Investments".
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<PAGE>
The following is a discussion of the Company's primary market risk sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business operations of the Company, such
as the reinsurance recoveries on reinsurance treaties with third party insurers.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company does not use derivative financial instruments.
Interest Rate Risk . Assuming an immediate increase of 100 basis points in
interest rates, the net hypothetical loss in fair market value related to the
financial instruments segment of the Company's balance sheet is estimated to be
$23.3 million at December 31, 1999 and $17.1 million at December 31, 1998. For
purposes of the foregoing estimate, the following categories of the Company's
fixed income investments were taken into account: (i) fixed maturities,
including fixed maturities available for sale, (ii) short-term investments and
(iii) notes receivable from affiliates. The market value of such assets was
$639.5 million at December 31, 1999 and $672.6 million at December 31, 1998.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $208 million at December 31,
1999 and $250.8 million at December 31, 1998. Assuming an immediate increase of
100 basis points in interest rates, the net hypothetical loss in the fair market
value related to such mortgage-backed securities is estimated to be $12.0
million at December 31, 1999 and $7.1 million at December 31, 1998.
Separate account assets have not been included, since gains and losses on those
assets generally accrue to the policyholders. The hypothetical effect of the
interest rate risk on fair values was estimated by applying a commonly used
model. The model projects the impact of interest rate changes on a range of
factors, including duration and potential prepayment.
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 PricewaterhouseCoopers LLP, Independent Accountants, dated March
27, 2000.
2. Consolidated Balance Sheets, as of December 31, 1999 and December 31, 1998.
3. Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997.
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<PAGE>
4. Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997.
5. Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
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.
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<PAGE>
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 other than Mr. Chacosky, were
elected at the 1999 annual shareholders meeting. Mr. Chacosky was appointed as a
director in January, 2000, to fill a vacancy created by an increase in the
number of directors which was approved by the Board of Directors in January,
2000. The data supplied below is based on information provided by the directors,
except to the extent that such data is known to the Registrant.
Director Principal Occupation
Name Age Since and Other Information
Robert A. Bender 46 1997 Director of ILCO since October,
1997. Vice President of Family
Life Insurance Company since
January, 1997. Vice President of
Investors Life Insurance Company
of North America since January,
1997. Vice President of
Investors-IN, formerly known as
InterContinental Life Insurance
Company since January, 1997.
Assistant Vice President of
Investors Life Insurance Company
of North America from February,
1994 to January, 1997. Assistant
Vice President of Investors-
Indiana from February, 1994 to
January, 1997. Assistant Vice
President of Investors-IN,
formerly known as InterContinental
Life Insurance Company from
February, 1994 to January, 1997.
Assistant Vice President of Family
Life Insurance Company from
February, 1994 to January, 1997.
Retired from 22 years of service
in the U.S. Army in February,
1994.
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<PAGE>
Charles K. 42 2000 Vice President and Director of FIC
Chacosky since January, 2000. Vice
President and Director of ILCO
since January, 2000. Executive
Vice President and Chief Actuary
of Family Life Insurance Company,
Investors Life Insurance Company
of North America and Investors
Life Insurance Company of Indiana
since January, 2000. Senior
Manager, Pricewaterhouse - Coopers
from February, 1997 to December,
1999. Vice President, Germantown
Life Insurance Company, February,
1995 to January, 1997.
Jeffrey H. Demgen 47 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 FIC since May,
1995. Executive Vice President
and Director of Family Life
Insurance Company since August,
1996. Senior Vice President and
Director of Family Life Insurance
Company from October, 1992 to
August, 1996. Executive Vice
President and Director of
Investors Life Insurance Company
of North America since August,
1996. Senior Vice President and
Director of Investors Life
Insurance Company of North America
from October, 1992 to June, 1995.
Executive Vice President of
Investors-IN, formerly known as
InterContinental Life Insurance
Company since August, 1996.
Senior Vice President of
Investors-IN, formerly known as
InterContinental Life Insurance
Company from October, 1992 to
June, 1995. Executive Vice
President and Director of
Investors-Indiana from August,
1996 to December, 1997. Senior
Vice President of United Insurance
Company of America from September,
1984 to July, 1992.
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<PAGE>
Theodore A. 60 1991 Vice President and Director of
Fleron 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
Investors-IN, formerly known as
InterContinental Life Insurance
Company since July, 1992. General
Counsel, Assistant Secretary and
Director of Investors Life
Insurance Company of North America
and Investors- IN, formerly known
as InterContinental Life Insurance
Company from January, 1989 to
July, 1992. Senior Vice
President, General Counsel,
Director and Assistant Secretary
of Investors-Indiana from
June, 1995 to December, 1997.
Senior Vice President, General
Counsel, Director and Assistant
Secretary of Family Life Insurance
Company since August, 1996.
W. Lewis 68 1988 Dentist practicing in San Marcos,
Gilcrease Texas. Director of ILCO since
1988. Director of FIC from 1979
to July, 1991.
James M. Grace 56 1984 Vice President and Treasurer of
the Company since January, 1985.
Executive Vice President,
Treasurer and Director of
Investors-IN, formerly known as
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-Indiana from February,
1995 to December, 1997.
Richard A. 68 1981 Certified Public Accountant and a
Kosson partner in the firm of Manheim,
Kosson & Novick in Millburn, New
Jersey. Director of ILCO since
1981.
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<PAGE>
Roy F. Mitte 68 1984 Chairman of the Board and Chief
Executive Officer of the Company
and Investors-IN formerly known as
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-
Indiana from February 1995 to
December, 1997. Chairman, ILG
Securities Corporation since
December 1988.
Elizabeth T. Nash 50 1998 Member of the Board of Regents,
Texas State University System
since 1993, Chairman from 1997 to
1998, Vice-Chairman from 1996 to
1997. Trustee of the Development
Foundation of Southwest Texas
State University since 1987,
Chairman from 1992 to 1997, Vice-
Chairman from 1989 to 1992.
Director of ILCO since 1998.
Eugene E. Payne 57 1989 Vice President of ILCO since
December, 1988 and Director and
Secretary 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
Investors- IN, formerly known as
InterContinental Life Insurance
Company. Executive Vice President,
Secretary and Director of Family
Life Insurance Company since June,
1991. Director, Executive Vice
President and Secretary of
Investors-Indiana from February,
1995 to December, 1997.
H. Gene Pruner 71 1995 Director of ILCO since August,
1996. Director of Investors-IN
since February, 1995. President
of Market Share, Inc. since April,
1985.
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<PAGE>
Steven P. Schmitt 53 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 Investors-IN, formerly known
as 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-Indiana from June, 1995
to December, 1997.
The incumbent directors, other than Mr. Pruner, have been nominated for
submission to vote of the shareholders for reelection at the 2000 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 1999 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 68 Chairman of the Board, President
and Chief Executive Officer
James M. Grace 56 Vice President and Treasurer
Eugene E. Payne 57 Vice President and Secretary
Jeffrey H. Demgen 47 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.
(c) Identification of certain significant employees
Not Applicable.
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<PAGE>
(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) Involvement in certain legal proceedings
Not Applicable
(g) 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, 1999 through December 31, 1999 all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with.
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<PAGE>
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 three other persons who were
serving as executive officers of the Company at the end of 1999 and received
cash compensation exceeding $100,000 during 1999.
<TABLE>
Annual Compensation
<S> <C> <C> <C> <C> <C> <C>
Name and Awards All Other
Principal Other Annual Long Term
Position Year Salary(1) Bonus(5) Compensation Stock Compensation(7)
Options
(2, 3, 4) (Shares)(6)
Roy F. Mitte,
Chairman, 1999 $ 356,679 $ 1,535,000 $ -0- 10,000 $ -0-
President and 1998 356,679 1,535,000 -0- -0- -0-
Chief Executive 1997 252,253 751,500 -0- -0- -0-
Officer
James M. Grace, 1999 195,000 20,000 191,215 10,000 1,600
Vice President 1998 195,000 25,000 227,040 -0- 1,350
and Treasurer 1997 195,000 40,000 437,340 -0- 16,165
Eugene E. 1999 195,000 20,000 95,520 10,000 1,600
Payne, Vice 1998 195,000 20,000 100,020 -0- 4,390
President and 1997 195,000 40,000 278,920 -0- 20,025
Secretary
Jeffrey H. 1999 150,000 20,000 -0- 10,000 1,600
Demgen, Vice 1998 145,384 15,000 -0- -0- 1,615
President 1997 117,884 30,000 -0- -0- 1,400
</TABLE>
(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. FIC and/or Family Life reimbursed the Company (or, in the case of
Mr. Mitte, authorized payment of) the following amounts as FIC's or Family
Life's share of these executive officers' cash compensation and bonus for 1997,
1998 and 1999: (i) Mr. Mitte: $999,746, $1,111,821 and $1,111,821 respectively,
which amounts are not included in the above table; (ii) Mr. Grace: $68,150,
$64,152 and $62,694, respectively, which amounts are included in the above
table; (iii) Dr. Payne: $68,150, $61,447 and $61,447, respectively, which
amounts are included in the above table; and (iv) Mr. Demgen $66,548, $72,173
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<PAGE>
and $76,500, respectively, which amounts are included in the above table. Dr.
Payne elected to defer a portion ($13,000) of his 1998 compensation under the
provisions of the Company's Non-Qualified Deferred Compensation Plan. See also,
Note 5.
(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) Includes the value realized by Mr. Grace in connection with the exercise of
stock options. In 1999, Mr. Grace exercised options to purchase 24,000 shares of
the Company's common stock under the Non-Qualified Option Plan. See "Aggregated
Option Exercises in 1999" below.
(4) Includes the value realized by Dr. Payne in connection with the exercise of
stock options. In 1999, Dr. Payne exercised options to purchase 6,000 (which
number does not reflect the stock dividend paid on April 17, 1999, since Dr.
Payne exercised the options prior to the date of the dividend) shares of the
Company's common stock under the Non-Qualified Stock Option Plan . See
"Aggregated Option Exercises in 1999" below.
(5) The data in this column represents the amount of annual bonus awarded. The
bonuses for Mr. Grace, Dr. Payne and Mr. Demgen for the year 1997 represent
amounts paid in 1997, but include the bonuses awarded with respect to the years
1996 and 1997. Dr. Payne elected to defer the amounts shown for 1997, 1998 and
1999 into the Company's Non-Qualified Deferred Compensation Plan. The Plan was
established in 1997 to permit Mr. Grace and Dr. Payne to defer a portion of
their compensation. Under the provisions of the Plan, contributions are invested
on a money purchase basis and plan benefits are based on the value of the
account at retirement or other distribution. In accordance with applicable tax
law requirements, amounts allocated to the Plan are subject to the claims of
general creditors of the Company. See also, Note 7.
(6) The data in this column represents the number of shares available for
exercise under options granted in 1999 under the 1999 ILCO Non-Qualified Stock
Option Plan. See also, "Option Grants in 1999", below.
(7) All Other Compensation includes:
(i) Company contributions to the InterContinental Life Corporation Employees
Savings and Investment Plan. The amount of each such contribution for the
years 1997, 1998 and 1999, respectively, was as follows: (a) Mr. Grace:
$1,350, $1,350 and $1,600, respectively, (b) Dr. Payne: $2,100, $2,100 and
$1,600, respectively and (c) Mr. Demgen: $1,400, $1,615 and $ 1,600,
respectively.
(ii) amounts paid by the Company to Mr. Grace and Dr. Payne to supplement the
benefits under the Company's Pension Plan. The Pension Plan supplement
relates to each of the past service years for Mr. Grace and Dr. Payne which
were affected by the limitation on compensation which the Pension Plan may
take into account for benefit accrual purposes. Under federal pension
rules, an employee's benefits under a qualified pension plan, such as the
ILCO Pension Plan, are limited to certain maximum amounts. The amount of
the
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<PAGE>
payments made in 1997 was determined by comparing the accrued benefit for the
listed individuals under the ILCO Pension Plan through December 31, 1996 to the
accrued benefit which the individual would have had under the Plan's benefit
formula without application of the limitations applicable to tax qualified
retirement plans. The value of the difference, representing an amount payable
for life commencing at normal retirement age, was then commuted to its present
value, which amount is included in this column. In 1998, the Company made
similar payments, with respect to benefit accruals for the preceding year. Mr.
Grace and Dr. Payne elected to defer their respective amounts into the Company's
Non- Qualified Deferred Compensation Plan. In 1999, the actuarial consulting
firm which provides the Company with the calculations of the amounts of the
supplements advised the Company that certain errors had been made with respect
to prior years. As a result, the Company adjusted the amount of the supplements
for each of Dr. Payne and Mr. Grace. The adjustments resulted in a credit to the
Company in the amount of $74.96 for Dr. Payne and $6,574.43 with respect to Mr.
Grace. These amount were deducted from the Non-Qualified Deferred Compensation
Plan maintained by the Company for each individual The Company intends to make a
similar payment with respect to benefit accruals for subsequent years; however,
there is no obligation for it to do so. See also, Note 5.
Option Grants in 1999
The following table sets forth certain information regarding stock options
granted during calendar year 1999 to the persons named in the Summary
Compensation Table, above. The options were granted under the InterContinental
Life Corporation 1999 Stock Option Plan. The plan was approved at the Annual
Meeting of Stockholders held on May 18, 1999. During 1999, options to purchase
10,000 shares of the common stock of the Company were granted to each of 46
employees of the Company, its subsidiaries and affiliates, for a total of
460,000 options. As of December 31 1999, options to purchase a total of 20,000
shares had terminated as a result of employee turnover.
The potential realizable values on date of grant of stock options granted in
1999 shown below are presented pursuant to SEC rule and are calculated using
assumed annual rates of stock price appreciation for the option term. The
theoretical values of options do not necessarily bear a relationship to the
compensation cost to the Company or potential gain realized by an executive. The
actual amount, if any, realized upon exercise of stock options will depend upon
the market price of the common stock of the Company relative to the exercise
price of the stock option at the time the stock option is exercised. There is no
assurance that the theoretical values of stock options reflected in this table
actually will be realized.
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
% of Total
Options Potential Realizable
Granted to Value at Assumed
Employees Annual Rates of Stock
Options During Exercise Expiration Price Appreciation for
Name Granted (1) 1999 Price Date Option Term (2)
5% 10%
Roy F. Mitte 10,000 2.27% $9.00 5/18/05 $14,434 $30,880
James M. 10,000 2.27% 9.00 5/18/05 14,434 30,880
Grace
Eugene E. 10,000 2.27% 9.00 5/18/05 14,434 30,880
Payne
Jeffrey H. 10,000 2.27% 9.00 5/18/05 14,434 30,880
Demgen
</TABLE>
(1) The options shown in the preceding table were each granted on May 18, 1999.
Options vest in 20% increments with the first 20% vesting on the first
anniversary of the date of grant and an additional 20% vesting on each
subsequent anniversary. The option period for each sequentially vested
portion of an option is one year from the respective Anniversary Date on
which said portion of the option becomes partially exercisable.
(2) The potential realizable values on date of grant are calculated assuming
that the market price of the underlying security appreciates in value from
the date of the grant to the last date on which the options may be
exercised at an assumed annualized rate of 5% and, alternatively, 10%. The
calculations assume that each vested option is exercised as of the initial
date on which such vested percentage may be exercised.
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<PAGE>
Aggregated Option Exercises in 1999
The following table sets forth information concerning each exercise of stock
options during 1999 by each of the individuals who were executive officers of
the Company as of December 31, 1999.
Shares
Acquired Value
Name On Exercise (#) Realized ($)
James M. Grace 24,000 (1) $191,215
Eugene E. Payne 6,000 (2) 95,520
(1) The number of shares acquired upon exercise of options reflects the stock
dividend which was paid on March 17, 1999.
(2) The number of shares acquired upon exercise does not reflect the stock
dividend which was paid on March 17, 1999, since the options were exercised
prior to that date.
Aggregated Stock Option Values
The following table sets forth information with respect to the unexercised
options held by the executive officers of the Company. The value of unexercised
in-the-money stock options at December 31, 1999 shown below are presented in
accordance with SEC rules. The actual amount, if any, realized upon exercise of
stock options will depend upon the market price of the common stock of the
Company relative to the exercise price per share of the stock option at the time
the stock option is exercised. There is no assurance that the values of
unexercised in-the-money stock options reflected in the following table will be
realized.
<TABLE>
Number of Unexercised Value of Unexercised
Options Held at In-the-Money Options at
December 31, 1999 December 31, 19991
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Roy F. Mitte -0- 10,000 $ -0- $2,500
Jeffrey H. Demgen -0- 10,000 -0- 2,500
James M. Grace -0- 10,000 -0- 2,500
Eugene E. Payne -0- 10,000 -0- 2,500
</TABLE>
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<PAGE>
(1)Based on the closing price of the Company's common stock on NASDAQ on
December 31, 1999 ($9.250).
Members of Compensation Committee
W. Lewis Gilcrease, Richard A. Kosson and Elizabeth T. Nash 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 $29,437 $39,250 $49,062 $58,875
150,000 35,325 47,100 58,875 70,650
160,000 37,680 50,240 62,800 75,360
175,000 41,212 54,950 68,687 82,425
200,000 47,100 62,800 78,500 94,200
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, 1995 and 1996 and is $160,000
for 1997 and each subsequent year.
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<PAGE>
The annual eligible earnings, for 1999 only, covered by the Pension Plan (salary
up to $160,000) 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, 1999 being shown in parentheses:
Mr. Mitte, $160,000 (12 years), Mr. Grace, $160,000 (12 years), Dr. Payne,
$160,000 (11 years), and Mr. Demgen, $150,000 (7 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 and
Payne 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
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<PAGE>
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 15, 2000 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
Name and Address of Beneficial Ownership Percent of Class
Financial Industries Corp.
701 Brazos, Suite 1400
Austin, TX 78701 3,932,692 44.48 % (5)
Roy F. Mitte
701 Brazos, Suite 1400
Austin, TX 78701 3,996,890 (1,2) 45.20 % (5)
Investors Life Insurance
Company of North America
701 Brazos, Suite 1400
Austin, TX 78701 669,920 (3) 7.58 % (5)
Investors Life Insurance
Company of Indiana
701 Brazos, Suite 1400
Austin, TX 78701 563,120 (4) 6.37 % (5)
Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109 878,100 (6) 9.93 % (5)
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, WI 53202 550,600 (7) 6.23 % (5)
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<PAGE>
1. As of March 15, 2000, Mr. Mitte, jointly with his wife Joann, owned
1,552,206 common shares of Financial Industries Corporation ("FIC"). The
holdings of Mr. Mitte of FIC's common stock constitutes 30.71 % of the
outstanding common stock of that company. In addition, Mr. Mitte holds the
position of Chairman, President and Chief Executive Officer of FIC. Since
FIC holds a controlling interest in ILCO, 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.
2. Includes 31,998 shares allocated to Mr. Mitte's account under the Employees
Stock Ownership Plan and 32,200 shares owned directly by Mr. Mitte.
3. Represents 563,120 shares owned by Investors-IN and 106,800 shares owned
directly by Investors-NA. Investors-IN is a life insurance company
subsidiary of Investors-NA.
4. All are directly owned by Investors-IN.
5. Assumes that outstanding stock options available to other persons have not
been exercised.
6. As reported to the Company on a Schedule 13(G), as amended, filed by FMR
Corporation, the parent company of Fidelity Management & Research Company
("Fidelity"). According to the Schedule 13(G) filings, Fidelity acts as
investment advisor to the Fidelity Low-Priced Stock Fund, a registered
investment company, and the Fund is the owner of 878,100 shares of ILCO
common stock, including 10,300 shares which were purchased subsequent to
the Schedule 13(G)/A filed on February 1, 1999. The most recent Schedule
13(G)/A was filed on February 14, 2000.
7. As reported to the Company on a Schedule 13(G) initially filed by Heartland
Advisors, Inc. ("Heartland") on January 21, 1999 and most recently amended
on a Schedule 13(G) filed on January 20, 2000. According to its Schedule
13(G) filings, Heartland acts as investment advisor with respect to certain
investment advisory accounts, with respect to which various persons have
the right to receive or the power to direct the receipt of dividends from,
or the proceeds from the sale of securities. The Schedule 13(G) identifies
that the interests of one such account, the Heartland Value Fund, a series
of Heartland Group, Inc., a registered investment company, relates to more
than 5% of the common stock of ILCO.
The following table contains information as of March 15, 2000 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 number of shares owned by each individual has been adjusted to reflect the
stock dividend which was paid on March 17, 1999. 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.
-52-
<PAGE>
Amount and Nature of Percent of
Name Beneficial Ownership (2)(3) Class
Robert A. Bender 2,438 *
Charles K. Chacosky -0-
Jeffrey H. Demgen 8,450 *
Theodore A. Fleron 18,931 *
W. Lewis Gilcrease -0-
James M. Grace 112,026 1.27 %
Richard A. Kosson 200 *
Roy F. Mitte (1) 3,996,800 45.20 %
Elizabeth T. Nash 200 *
Eugene E. Payne 21,184 *
H. Gene Pruner -0-
Steven P. Schmitt 13,348 *
All Executive
Officers and
Directors as a
group, all of
whom are listed
above 4,173,377 47.19 %
* Less than 1%
(1) As an executive officer and director of FIC, which as of March 15, 2000
beneficially owned 3,932,692 shares of the Company's common stock.
(2) Includes shares beneficially acquired through participation in the
Company's Employees Stock Ownership Plan, 401K Plan and/or the Employee
Stock Purchase Plan, which are group plans for eligible employees.
-53-
<PAGE>
(3) Does not include shares issuable upon exercise of options granted under the
1999 Non- Qualified Stock Option Plan to executive officers and directors
who are also employees of the Company or its subsidiaries, which options
are not currently exercisable.
Item 13. Certain Relationships and Related Transactions with Management
a. As part of the financing arrangement for the acquisition of Family Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC,
entered into a Senior Loan agreement under which $50 million was provided
by a group of banks. The balance of the financing consisted of a $30
million subordinated note issued by FLC to Merrill Lynch Insurance Group,
Ins. ("Merrill Lynch") and $14 million borrowed by another subsidiary of
FIC from an affiliate of Merrill Lynch and evidenced by a senior
subordinated note in the principal amount of $12 million and a junior
subordinated note in the principal amount of $2 million and $25 million
lent by two insurance company subsidiaries of ILCO. The latter amount was
represented by a $22.5 million loan from Investors-NA to FLC and a $2.5
million loan provided directly to FIC by Investors-CA. In addition to the
interest provided under those loans, Investors-NA and Investors-CA were
granted by FIC non-transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9 percent of
shares of FIC's common stock at a price of $10.50 per share ($2.10 per
share as adjusted for the five-for-one stock split in November, 1996),
equivalent to the then current market price, subject to adjustment to
prevent dilution. The original provisions of the options provided for their
expiration on June 12, 1998 if not previously exercised. In connection with
the 1996 amendments to the subordinated notes, as described below, the
expiration date of the options were extended to September 12, 2006.
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and
its affiliate was prepaid. The Company paid $38 million plus accrued
interest to retire the indebtedness, which had a principal balance of
approximately $50 million on July 30, 1993. The primary source of the funds
used to prepay the subordinated debt was new subordinated loans totaling
$34.5 million that FLC and another subsidiary of FIC obtained from
Investors-NA. The principal amount of the new subordinated debt is payable
in four equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of the new debt are
substantially the same as those of the $22.5 million subordinated loans
that Investors-NA had previously made to FLC and that continue to be
outstanding.
In June, 1996, the provisions of the notes from Investors-NA to FIC, Family
Life Corporation ("FLC") and Family Life Insurance Investment Company
("FLIIC") were modified as follows: (a) the $22.5 million note was amended
to provide for twenty quarterly principal payments, in the amount of
$1,125,000 each, to commence on December 12, 1996; the final quarterly
principal payment is due on September 12, 2001; the interest rate on the
note remains at 11%, (b) the $30 million note was amended to provide for
forty quarterly principal payments, in the amount of $163,540 each for the
period December 12, 1996 to September 12, 2001; beginning with the
principal payment due on December 12, 2001, the amount of the principal
payment increases to $1,336,458; the final quarterly principal payment is
due on September 12, 2006; the interest rate on the note remains at 9%, (c)
the $4.5 million note
-54-
<PAGE>
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% and
(e) the Master PIK note, which was issued to provide for the payment in
kind of interest due under the terms of the $2.5 million note prior to June
12, 1996, was amended to provide that the principal balance of the note
$1,977,119 is to be paid in twenty quarterly principal payments, in the
amount of $98,855.95 each, to commence December 12, 1996 with the final
payment due on September 12, 2001; the interest rate on the note remains at
12%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution,
all of the assets and liabilities of FLIIC became the obligations of
FLIIC's sole shareholder (FIC). Accordingly, the obligations under the
provisions of the $4.5 million note described above are now the obligations
of FIC.
b. The data processing needs of ILCO's and FIC's insurance subsidiaries are
provided by FIC Computer Services, Inc. ("FIC Computer"), a subsidiary of
FIC. Under the provisions of the data processing agreement, FIC Computer
provides data processing services to each subsidiary for fees equal to such
subsidiary's proportionate share of FIC Computer's actual costs of
providing those services to all of the subsidiaries. The Company's
insurance subsidiaries paid $2.7 million and Family Life paid $1.9 million
to FIC Computer for data processing services provided during the year ended
December 31, 1999.
c. 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.
d. 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.
e. 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, Secretary and Director of both companies. Messrs. Demgen and
Fleron serve as Vice Presidents and Directors of both companies. Mr. Roy
Mitte holds beneficial ownership of 30.71% of the outstanding shares of FIC
(see "Security Ownership of Certain Beneficial Owners and Management").
-55-
<PAGE>
f. Mr. Joseph F. Crowe retired from active service with the Company in
January, 1997 and served on the ILCO Board until October, 1997; he
continues to serve on the Board of Directors of FIC. Following Mr. Crowe's
retirement, the Company entered into a consulting agreement with him. Under
the terms of the agreement, Mr. Crowe is to be available for periodic
consultation on actuarial matters related to the operations of the life
insurance companies. The agreement provides for a payment of $25,000 per
year for a period of five- years.
g. The Company and Investors-NA are parties to two surplus debentures. The
surplus debentures were originally issued by Standard Life Insurance
Company. Upon the merger of Standard Life into Investors-NA, the
obligations of the surplus debentures were assumed by Investors-NA. Under
the terms of the surplus debentures, Investors-NA paid to the Company
principal and interest on the surplus debentures of $10.8 million in 1999.
As of December 31, 1999, the outstanding principal balance of the surplus
debentures was $0.956 million and $4.94 million, respectively. The terms of
the latter debenture provided for final payment of the remaining principal
on September 30, 1999. In September, 1999, Investors-NA and ILCO amended
the payment schedule to provide for payment of the remaining balance in
four installments, with the final installment being due July 1, 2000.
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 -Condensed Financial Statements of Registrant.
c. Schedule IV-Reinsurance.
3. Exhibits filed with this report or incorporated herein by reference
are as listed in the Index to Exhibits on page EX-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, 1999.
-56-
<PAGE>
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 29, 2000.
/s/ Roy F. Mitte /s/ James M. Grace
Roy F. Mitte, Director James M. Grace, Director
/s/ Eugene E. Payne /s/ Jeffrey H. Demgen
Eugene E. Payne, Director Jeffrey H. Demgen, Director
/s/ Robert A. Bender /s/ Theodore A. Fleron
Robert A. Bender, Director Theodore A. Fleron, Director
/s/ W. Lewis Gilcrease /s/ Richard A. Kosson
W. Lewis Gilcrease, Director Richard A. Kosson, Director
/s/ Elizabeth T. Nash /s/ H. Gene Pruner
Elizabeth T. Nash, Director H. Gene Pruner, Director
/s/ Steven P. Schmitt /s/ Charles K. Chacosky
Steven P. Schmitt, Director Charles K. Chacosky, Director
-57-
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
FORM 10-K--ITEM 14 (a)(1) and (2)
LIST OF FINANCIAL STATEMENTS
TABLE OF CONTENTS
(1) 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, 1999 and 1998..............................................F-3
Consolidated Statements of Income, for the
years ended December 31, 1999, 1998 and 1997............................F-5
Consolidated Statements of Changes in Shareholders' Equity,
for the years ended December 31, 1999, 1998 and 1997....................F-6
Consolidated Statements of Cash Flows, for the years
ended December 31, 1999, 1998 and 1997..................................F-9
Notes to Consolidated Financial Statements.............................F-12
(2) 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-44
Schedule II - Condensed Financial Statements of
Registrant.............................................................F-45
Schedule IV - Reinsurance..............................................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.
F-1
<PAGE>
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 14 (a)
(1) on page F-1 present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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.
PricewaterhouseCoopers LLP
Dallas, Texas
March 27, 2000
F-2
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
December 31,
<S> <C> <C>
1999 1998
ASSETS
Investments:
Fixed maturities, at
amortized cost (market value
approximates $2,056 and $3,059) $ 2,088 $ 3,005
Fixed maturities available for sale,
at market value (amortized cost
$411,532 and $435,130) 404,217 450,149
Equity securities, at market value
(cost approximates $338 and $338) 1,943 3,121
Policy loans 50,882 53,614
Mortgage loans 6,844 10,332
Invested real estate and other invested
assets 21,145 10,025
Short-term investments 191,695 171,840
Total investments 678,814 702,086
Cash and cash equivalents 3,358 12,206
Notes receivable from affiliates 41,497 47,645
Accrued investment income 7,529 7,768
Agent advances and other receivables 24,230 20,753
Reinsurance receivables 18,769 18,847
Property and equipment, net 4,416 3,470
Deferred policy acquisition costs 35,598 31,953
Present value of future profits of
acquired businesses 39,831 43,666
Other assets 9,304 10,643
Separate account assets 457,853 451,211
Total Assets $ 1,321,199 $ 1,350,248
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands of dollars)
<TABLE>
<S> <C> <C>
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits $ 130,092 $ 135,463
Contractholder deposit funds 533,869 545,908
Unearned premiums 1,977 2,124
Other policy claims and benefits payable 9,893 10,856
675,831 694,351
Other policyholders' funds 3,012 3,056
Deferred federal income taxes 21,741 30,185
Other liabilities 14,635 20,127
Separate account liabilities 454,289 448,294
Total Liabilities 1,169,508 1,196,013
Commitments and Contingencies
(Notes 6, 8, 11 and 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
20,000 20,000
Redeemable preferred stock held in treasury (20,000) (20,000)
-0- -0-
Shareholders' Equity:
Common Stock, $.22 par value,
15,000,000 shares authorized;
10,875,478 and 5,385,739 shares
issued, and 8,827,941 and
4,376,706 shares outstanding
in 1999 and 1998, respectively 2,392 1,185
Additional paid-in capital 4,522 4,385
Accumulated other comprehensive
income (loss) (3,712) 11,571
Retained earnings 151,932 140,356
155,134 157,497
Common treasury stock, at cost,
2,027,537 and 1,009,033 shares
in 1999 and 1998, respectively (3,443) (3,262)
Total Shareholders' Equity 151,691 154,235
Total Liabilities and Shareholders'
Equity $ 1,321,199 $ 1,350,248
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except for per share data)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
1999 1998 1997
Revenues:
Premium $ 11,132 $ 10,890 $ 11,031
Net investment income 49,913 54,619 57,740
Earned insurance charges 40,447 41,067 40,853
Gain on sale of real estate 112 -0- 14,630
Other 2,601 2,886 3,429
104,205 109,462 127,683
Benefits and expenses:
Policyholder benefits and expenses 32,001 38,367 37,962
Interest expense on contract holders
deposit funds 30,229 29,966 30,533
Amortization of present value of future
profits of acquired businesses 3,835 5,903 6,311
Amortization of deferred policy
acquisition costs 2,372 2,128 2,818
Operating expenses 17,029 14,853 16,798
Interest expense -0- 659 1,659
85,466 91,876 96,081
Income from operations 18,739 17,586 31,602
Provision for federal income taxes:
Current 5,955 6,899 9,005
Deferred 19 (432) 2,057
5,974 6,467 11,062
Net income $ 12,765 $ 11,119 $ 20,540
Net income per share (Note 14):
Basic:
Weighted average common stock
outstanding 8,796 8,750 8,656
Basic earnings per share $ 1.45 $ 1.27 $ 2.37
Diluted:
Common stock and common stock
equivalents 8,800 8,924 8,738
Diluted earnings per share $ 1.45 $ 1.25 $ 2.35
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
Additional
Common Stock Paid-in
Shares Amount Capital
<S> <C> <C> <C>
Balance at December 31, 1996 5,224 $ 1,150 $ 3,752
Comprehensive Income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities
Change in net unrealized gain on investments
in fixed maturities available for sale
Total comprehensive income
Options exercised 120 26 501
Balance at December 31, 1997 5,344 1,176 4,253
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities
Change in net unrealized gain on investments
in fixed maturities available for sale
Total comprehensive income
Treasury stock purchased
Options exercised 42 9 132
Balance at December 31, 1998 5,386 1,185 4,385
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities
Change in net unrealized loss on investments
in fixed maturities available for sale
Total comprehensive income
Stock dividend paid 5,405 1,189
Treasury stock reissued
Options exercised 84 18 137
Balance at December 31, 1999 10,875 $ 2,392 $ 4,522
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
<TABLE>
Accumulated Other Comprehensive Income
Net Unrealized
Net Gain (Loss)on
Unrealized Investments Total
Appreciation In Fixed Accumulated
(Depreciation) Maturities Other
of Equity Available Comprehensive
Securities For Sale Income (Loss)
<S> <C> <C> <C>
Balance at December 31, 1996 $ 1,255 $ 1,525 $ 2,780
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities 1,691 1,691
Change in net unrealized gain on investments
in fixed maturities available for sale 9,932 9,932
Total comprehensive income 1,691 9,932 11,623
Options exercised
Balance at December 31, 1997 2,946 11,457 14,403
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (1,137) (1,137)
Change in net unrealized gain on investments
in fixed maturities available for sale (1,695) (1,695)
Total comprehensive income (1,137) (1,695) (2,832)
Treasury stock purchased
Options exercised
Balance at December 31, 1998 1,809 9,762 11,571
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized apppreciation of
equity securities (766) (766)
Change in net unrealized loss on investments in
fixed maturities available for sale (14,517) (14,517)
Total comprehensive income (766) (14,517) (15,283)
Stock dividend paid
Treasury stock reissued
Options exercised
Balance at December 31, 1999 $ 1,043 $ (4,755) $ (3,712)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
<TABLE>
Common Total
Retained Treasury Shareholders'
Earnings Stock Equity
<S> <C> <C> <C>
Balance at December 31, 1996 $ 108,697 $ (3,018) $ 113,361
Comprehensive income:
Net income 20,540 20,540
Other comprehensive income:
Change in net unrealized appreciation of
equity securities 1,691
Change in net unrealized gain on investments
in fixed maturities available for sale 9,932
Total comprehensive income 20,540 32,163
Treasury stock purchased (289) (289)
Options exercised 527
Balance at December 31, 1997 129,237 (3,307) 145,762
Comprehensive income:
Net income 11,119 11,119
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (1,137)
Change in net unrealized gain on investments
in fixed maturities available for sale (1,695)
Total comprehensive income 11,119 8,287
Treasury stock reissued 45 45
Options exercised 141
Balance at December 31, 1998 140,356 (3,262) 154,235
Comprehensive income:
Net income 12,765 12,765
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (766)
Change in net unrealized loss on investments
in fixed maturities available for sale (14,517)
Total comprehensive income 12,765 (2,518)
Stock dividend paid (1,189) -0-
Treasury stock purchased and reissued (181) (181)
Options exercised 155
Balance at December 31, 1999 $ 151,932 $ (3,443) $ 151,691
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING 1999 1998 1997
ACTIVITIES
Net Income $ 12,765 $ 11,119 $ 20,540
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Amortization of present value of future
profits of acquired businesses 3,835 5,903 6,311
Amortization of deferred policy
acquisition costs 2,372 2,128 2,819
Depreciation 488 551 2,398
Net gain on sales of investments (112) (988) (14,805)
Financing costs amortized -0- 111 525
Amortization of deferred gain on sale of
real estate (110) (110) (110)
Changes in assets and liabilities:
Decrease in accrued investment income 239 698 362
(Increase) decrease in agent advances and
other receivables (3,399) (7,686) 4,170
Policy acquisition costs deferred (6,017) (5,460) (4,502)
Decrease in policy liabilities and
contractholder deposit funds (18,520) (16,194) (17,585)
(Decrease) in other policyholders'
funds (44) (668) (258)
(Decrease) increase in other liabilities (5,382) (1,036) 5,172
(Decrease) increase in deferred federal
income taxes (8,444) (2,355) 5,302
(Decrease) increase in other assets 1,339 (2,691) 1,036
Other, net 100 (653) (7,416)
Net cash (used in) provided by operating
activities (20,890) (17,331) 3,959
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING 1999 1998 1997
ACTIVITIES
Purchase of insurance subsidiary -0- (1,322) (11,688)
Investments purchased (79,308) (41,915) (24,276)
Proceeds from sales and maturities of
investments 106,517 77,700 117,025
Net change in short-term investments (19,855) (7,218) (71,415)
Purchases and retirements of equipment, (1,434) (2,119) (283)
net
Decrease in notes receivable from
affiliates 6,148 6,148 6,148
Net cash provided by investing
activities 12,068 31,274 15,511
CASH FLOWS FROM FINANCING
ACTIVITIES
Reissuance (purchase) of treasury stock (181) 45 (289)
Issuance of common stock 155 141 527
Repayment of debt -0- (10,964) (13,980)
Net cash used in financing activities (26) (10,778) (13,742)
Net increase (decrease) in cash and cash
equivalents (8,848) 3,165 5,728
Cash and cash equivalents, beginning of
year 12,206 9,041 3,313
Cash and cash equivalents, end of year $ 3,358 $ 12,206 $ 9,041
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Supplemental Cash Flow Disclosures:
Year Ended December 31,
1999 1998 1997
Income taxes paid $9,050 $11,700 $2,200
Interest paid $ 461 $ 871 $1,925
Supplemental Schedule of Non-Cash Investing Activities:
The Company purchased the outstanding capital stock of two life insurers in the
second quarter of 1998 and the third quarter of 1997 for cash purchase prices of
$16.6 million (including a $12.4 million dividend paid by the acquired company
to its former parent) and $11.8 million, respectively, net of post closing
adjustments. The consolidated statements of cash flows reflect the impact of
these acquisitions. These purchases resulted in the Company receiving tangible
assets and assuming liabilities as follows:
1998 1997
Assets $57,745 $32,420
Liabilities $41,135 $20,653
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
<PAGE>
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 life insurance and annuity products. 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.
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:
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.
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 in
accumulated other comprehensive income, net of income tax effect.
F-12
<PAGE>
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.
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 as a component of accumulated other
comprehensive income. Mortgage loans and policy loans are recorded at unpaid
balances. 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.
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 $2,126,231 and $5,501,545 at
December 31, 1999 and 1998, respectively.
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.
Sale of Real Estate
Prior to December, 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building which formerly served as the
headquarters of Standard Life Insurance Company (the "Standard Life Building").
The Standard Life Building was owned by Investors Life Insurance Company of
North America ("Investors-NA"). This building is 68 years old and contains
approximately 85,000 square feet (65,000 net rentable square feet) of office
space. On December 29, 1999, Investors-NA donated the Standard Life Building to
the Jackson Redevelopment Authority ("JRA"). Contemporaneously with the donation
of the Standard Life Building, Investors-NA and Financial Industries Corporation
("FIC") sold all of the adjacent parcels they owned to the JRA for a total sale
price of $2,500,000, which has been allocated according to the respective
ownership interests of Investors-NA (approximately 59.28%) and FIC
(approximately 40.72%). The donation and sale was made pursuant to the terms of
the Donation, Purchase and Sale Agreement dated July 17, 1998. Investors-NA
intends to claim an income tax deduction of its upcoming tax return for the
donation of the Standard Life Building, which has an appraised value at December
15, 1999 of approximately $3,050,000. The donation and sale transaction
referenced above resulted in a net gain (GAAP basis) of $992,494 for ILCO and
$408,664 for FIC (combined total of $1,401,158).
F-13
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income for 1997 includes $14.6 million (before federal income tax) resulting
from the sale during the fourth quarter of 1997 of the Bridgepoint Square office
complex. The aggregate selling price was $78 million which was allocated
approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale closed on
December 5, 1997.
Property and Equipment
Property and equipment 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 $4,630,102 and $5,091,037 at December 31, 1999 and
1998, 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 7.0% to 8.5%.
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 policies. Recoverability of present
value of future profits is evaluated periodically by comparing the current
estimate of future profits to the unamortized asset balances.
F-14
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 were deferred and were
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, with the exception for the gains
and losses in the Company's seed money in the separate accounts.
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' expense for guaranty
fund assessment from states which do not allow premium tax offsets is not
material.
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 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.
F-15
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In December, 1997, ILCO's life insurance
subsidiaries entered into a reinsurance treaty under which all of the
contractual obligations and risks under accident and health insurance policies
were assumed by a third party reinsurer. (See Note 8.)
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable represents
management's estimate of unpaid losses on claims and other miscellaneous
liabilities to policyholders. 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 credit health insurance
premiums are recognized over the contract period on a pro rata basis, or the sum
of years digits basis. 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.
F-16
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income Per Share
Net income per share is calculated based on two methods, basic earnings per
share and diluted earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were converted or exercised. Both methods are
presented on the face of the income statement.
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 basis of assets and liabilities using the tax
rates which are expected be in effect when these differences are anticipated to
reverse.
New Accounting Pronouncements
In February 1997, the Financial Standards Board ("FASB") issued FAS No. 128,
"Earnings Per Share", which revises the standards for computing earnings per
share previously prescribed by APB Opinion No. 15, "Earnings Per Share". The
Statement establishes two measures of earnings per share. Basic earnings per
share is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were converted or exercised.
The Statement requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all entities with potentially dilutive
securities outstanding.
The Statement also requires a reconciliation of the numerator and denominator of
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. The Statement is effective for interim
and annual periods ending after December 15, 1997. The Company adopted SFAS No.
128 for the year ended December 31, 1997.
F-17
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined as net income
adjusted for changes in stockholders' equity resulting from events other than
net income or transactions related to an entity's capital instruments. The
Company has adopted FAS 130 for the year ended December 31, 1998 and has
restated the financial statement presentation for 1997 as required by this
pronouncement.
In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments. Generally, FAS 131 requires that financial
information be reported on the basis that is used internally for evaluating
performance. The Company adopted SFAS 131 for the year ended December 31, 1998.
As described in Note 1, the Company is principally engaged, through its
subsidiaries, in administering existing portfolios of individual life insurance
and annuity products. 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. Management considers the
Company's insurance operations to constitute one reportable segment. Premium
revenues for traditional insurance products and earned insurance charges on
universal life and annuity products are presented in the accompanying
consolidated statements of income. No single customer accounts for 10 percent or
more of the Company's revenue. The Company has no foreign operations.
In February 1998, the FASB issued FAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS 132 does not
change the measurement or recognition of pension or other postretirement benefit
plans. The Company adopted FAS 132 for the year ended December 31, 1998, and
restated disclosures for 1997 as required by this pronouncement.
In December 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which provides guidance on accounting for
insurance-related assessments. The Company adopted SOP 97-3 January 1, 1999. The
adoption of this SOP did not have a material impact on the Company's financial
statements.
F-18
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133 is applicable to financial statements for all
fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FAS No. 133". As the Company does not have
significant investments in derivative financial instruments, the adoption of FAS
133 is not anticipated to have a material impact on the Company's results of
operations, liquidity or financial position.
Reclassification Certain prior years' amounts have been reclassified to conform
with the 1999 presentation.
F-19
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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, 1999 and 1998, respectively were as follows (in
thousands):
<TABLE>
Amortized Gross Unreal- Gross Unreal- Market
Cost ized Gains ized Losses Value
<S> <C> <C> <C> <C>
Fixed Maturities Available
for Sale as of December 31, 1999:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 26,191 $ 745 $ 30 $ 26,906
Obligations of states and political
subdivisions 4,680 91 -0- 4,771
Corporate securities 172,686 334 8,306 164,714
Mortgage-backed securities 207,975 3,273 3,422 207,826
Total fixed Maturities Available
For Sale
Fixed Maturities Held to Maturity: 411,532 4,443 11,758 404,217
Private placements-corporate
2,088 11 43 2,056
Total Fixed Maturities $ 413,620 $ 4,454 $ 11,801 $ 406,273
Fixed Maturities Available For
Sale as of December 31, 1998
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 37,360 $ 3,293 $ 1 $ 40,652
Obligations of states and political
subdivisions 4,690 383 -0- 5,073
Corporate securities 148,989 4,755 110 153,634
Mortgage-backed securities 244,091 7,067 368 250,790
Total Fixed Maturities Available
For Sale 435,130 15,498 479 450,149
Fixed Maturities Held to
Maturity:
Private placements-corporate 3,005 54 -0- 3,059
Total Fixed Maturities $ 438,135 $ 15,552 $ 479 $ 453,208
</TABLE>
F-20
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts of unrealized gains and losses on fixed maturities available for
sale included in accumulated other comprehensive income reflected in the balance
sheet have been reduced by estimated deferred taxes in the amount of $2,560,000
and $5,257,000 in 1999 and 1998, respectively.
The amortized cost and market value of fixed maturities available for sale and
fixed maturities held to maturity at December 31, 1998 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 Value
(in thousands)
Due in one year or less $ 18,967 $ 19,008
Due after one through five years 59,154 58,742
Due after five through ten years 35,812 34,718
Due after ten years 89,624 83,923
Mortgage backed securities 207,975 207,826
Total Fixed Maturities Available
for Sale $ 411,532 $ 404,217
Fixed Maturities Held to Maturity
Amortized Market
Cost Value
(in thousands)
Due in one year or less $ 569 $ 566
Due after one through five years 903 891
Due after five through ten years 545 517
Due after ten years 71 82
Mortgage backed securities -0- -0-
Total Fixed Maturities Held to Maturity $ 2,088 $ 2,056
Proceeds from sales and maturities of investments in fixed maturities during
1999, 1998 and 1997 were approximately $106,517,000, $77,700,000 and
$117,025,000. Gross gains of approximately $443,000, $178,000 and $293,000 and
gross losses of approximately $61,000, $16,000 and $123,000 were realized on
those sales and maturities in 1999, 1998 and 1997, respectively.
F-21
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities
The change in net unrealized appreciation for equity securities was $(766,000)
and $(1,137,000) for the years ended December 31, 1999 and 1998, respectively.
Amounts as of December 31 were as follows (in thousands):
1999 1998
Unrealized appreciation $ 1,617 $ 2,796
Unrealized depreciation (12) (13)
Net unrealized appreciation before tax 1,605 2,783
Less: Federal income tax (562) (974)
Net unrealized appreciation $ 1,043 $ 1,809
Equity securities included a $1,897,500 investment, ($318,390 at cost), in
189,750 shares of common stock of Financial Industries Corporation (FIC) (See
note 9). This represents 3.8% of FIC's outstanding common stock at December 31,
1999.
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 1999,
1998 and 1997. The following is a summary of the change in unrealized investment
gains (losses) net of related deferred income taxes which are reflected in
accumulated other comprehensive income for the periods presented:
Change in Unrealized Gains (Losses)
on Investments 1999 1998 1997
(in thousands)
Fixed maturities $(22,334) $ (2,607) $ 15,280
Equity securities (1,178) (1,749) 2,602
(23,512) (4,356) 17,882
Deferred federal income taxes (8,229) (1,524) 6,259
Net change in unrealized gains
(losses) on investments $(15,283) $ (2,832) $ 11,623
F-22
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the reclassification adjustments required for the
years ended December 31, 1999, 1998 and 1997:
Reclassification Adjustments 1999 1998 1997
(in thousands)
Unrealized holding gains (losses)
on investments
arising during the period $ (15,034) $ (2,621) $ 11,733
Reclassification adjustments for
gains included in net income 249 211 110
Unrealized gains (losses) on
investments, net of
reclassification adjustment $ (15,283) $(2,832) $ 11,623
Net Investment Income
The components of net investment income are summarized as follows (in
thousands):
Year Ended December 31,
1999 1998 1997
Fixed maturities $ 43,755 $ 47,322 $ 46,570
Equity securities 1 7 10
Other, including policy loans,
real estate and mortgage loans 6,880 8,275 14,826
50,636 55,604 61,406
Investment expenses (723) (985) (3,666)
Net Investment Income $ 49,913 $ 54,619 $ 57,740
F-23
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realized Gains and Losses
Net realized gains (losses) included in net investment income are summarized
below (in thousands): Year Ended December 31,
1999 1998 1997
Fixed maturities available for sale $ 382 $ 162 $ 171
Equity securities 1 164 (2)
Other investments 74 662 6
457 988 175
Income taxes 160 346 61
Net realized gains $ 297 $ 642 $ 114
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, 1999.
Non-income producing investments
The carrying value of non-income producing investments were as follows as of
December 31:
1999 1998
(in thousands)
Fixed Maturities $ -0- $ -0-
Mortgage loans -0- 81
Total $ -0- $ 81
F-24
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Disclosures about Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments at December 31,
1999 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $406,305 $406,273
Policy loans 50,882 50,882
Mortgage loans 6,884 6,701
Short-term investments 191,695 191,695
Cash and cash equivalents 3,358 3,358
Notes receivable from affiliates 41,497 41,497
Financial liabilities:
Deferred annuities 113,923 112,714
Supplemental Contracts 13,745 13,309
The following methods and assumptions were used to estimate the fair value of
each class of financial investments:
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.
F-25
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 based on redemption value.
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.
4. Present Value of Future Profits of Acquired Business
An analysis of the present value of future profits of acquired businesses is as
follows:
1999 1998
(in thousands)
Beginning balance $ 43,666 $ 47,286
Acquisition of insurance subsidiary -0- 1,981
Accretion of interest 3,382 3,559
Amortization (7,217) (9,160)
Ending Balance $ 39,831 $ 43,666
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:
(in thousands)
2000 $ 4,106
2001 $ 3,739
2002 $ 3,466
2003 $ 3,199
2004 $ 2,966
F-26
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Acquisition of Business
On June 30, 1998, ILCO, through a subsidiary, Investors-Indiana, acquired
Grinnell Life Insurance Company ("Grinnell Life") an Iowa-domiciled life
insurer, from Grinnell Mutual Life Insurance Company for an adjusted purchase
price of $16.6 million. As part of the transaction, Grinnell Life was
immediately merged with and into Investors-Indiana, with Investors-Indiana being
the surviving entity.
On July 9, 1997, ILCO and Investors-Indiana acquired State Auto Life Insurance
Company, an Ohio domiciled life insurer, from State Automobile Mutual Insurance
Company, for an adjusted cash purchase price of $11.8 million. The transaction
was accounted for as a purchase business combination. Accordingly, the results
of State Auto Life's operations are included in income from the date of the
acquisition. The purchase price was allocated to the fair values of the assets
and liabilities acquired including the present value of future profits disclosed
in Note 4. Under the terms of the transaction, State Auto Life was merged into
Investors-Indiana.
6. Senior Loans
The Senior Loan of ILCO was originally arranged in connection with the 1988
acquisition of Investors-NA and Investors-CA. In January, 1993, the Company
refinanced its Senior Loan. That transaction was done in connection with the
prepayment of the subordinated indebtedness and the purchase of warrants which
had been issued as part of the financing of the 1988 acquisitions. The terms of
the amended and restated credit facility were substantially the same as the
terms and provisions of the 1988 senior loan. The average interest rate paid by
the Company on its Senior Loan was approximately 7.68% during 1997 and 7.63%
during 1998. The maturity date, which had been December 31, 1996, was extended
to July 1, 1998 for the Senior Loan.
In February, 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 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. In connection with the acquisition
of State Auto Life Insurance Company in July, 1997, the Senior Loan agreement
was modified to extend the maturity date to October 1, 1998.
As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
F-27
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
The Company files consolidated federal income tax returns with its non-life
subsidiaries. The Company's life insurance subsidiaries file a separate life
consolidated federal income tax return. 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:
1999 1998 1997
(in thousands)
Current tax provision $ 5,955 $ 6,899 $ 9,005
Deferred tax provision 19 (432) 2,057
Total provision for income taxes $ 5,974 $ 6,467 $ 11,062
Provision has not been made for state income tax expense since expense is
minimal. Premium taxes are paid to various states where premium revenues are
earned. Premium taxes are included in the statement of income as operating
expenses.
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 as a result of the following differences:
1999 1998 1997
(in thousands)
Income taxes at the U.S.
statutory rate $ 6,559 $ 6,155 $ 11,062
Charitable contribution (920) -0- -0-
Increase (decrease) in taxes
resulting from:
Non-deductible compensation 335 312 -0-
Total provision for income taxes $ 5,974 $ 6,467 $ 11,062
F-28
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
December 31,
<S> <C> <C>
1999 1998
Deferred Tax Liability: (in thousands)
Deferred policy acquisition costs $ 8,340 $ 6,897
Present value of future profits 11,597 12,718
Net unrealized (depreciation)
appreciation on (1,998) 6,231
marketable securities
Acquisition discounts on mortgages/
policy loans 1,210 1,213
Reinsurance recoverable 5,571 5,607
Other taxable temporary differences 2,965 2,782
Total deferred tax liability 27,685 35,448
Deferred Tax Asset:
Policy reserves 2,771 1,896
Invested assets 1,655 1,759
Net operating loss carry forward 1,195 1,298
Minimum tax credit 323 310
Total deferred tax asset 5,944 5,263
Net deferred tax liability $ 21,741 $ 30,185
</TABLE>
Deferred federal income tax benefit of $8,229,000 and $1,524,000 for 1999 and
1998, respectively, have been provided on the unrealized appreciation
(depreciation) of marketable securities and included in the balance of the
deferred tax liability account. This increase or decrease in deferred tax
liability has been recorded as a reduction or increase 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 included in net income from
operations.
Under the provisions of pre-1984 life insurance company income tax regulations,
a portion of "gain from operations" of Investors-IN 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 Investors-IN at
December 31, 1999 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%.
F-29
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, Investors-NA
and Investors-IN have approximately $138,000,000 and $19,400,000, respectively,
in the aggregate in their shareholders' surplus accounts from which
distributions could be made without incurring any federal tax liability.
At December 31, 1999, the Company and its non-life wholly-owned subsidiaries
have net operating loss carry forwards of approximately $3.3 million.
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.
In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which most of the contractual obligations and risks under accident
and health insurance policies were assumed by a third party reinsurer. The
transfer is effective as of July 1, 1997. These risks and contractual
obligations were sold pursuant to, first, a coinsurance reinsurance agreement.
Following applicable regulatory approvals, the reinsurer will assume the direct
obligations of the companies, on an assumption reinsurance basis. The decision
to dispose of this block of business was based on management's analysis that the
business was not generating targeted profit objectives and that the products
were not part of the core business of the subsidiaries. The sale permits the
company to focus on its primary business: life insurance and annuity sales. In
connection with the transaction, the total amount of net reserves transferred by
the subsidiaries was $6,327,504. In addition to the transfer of reserves, the
life companies paid the reinsurer $1,037,150 in connection with the transaction,
which amount was accounted for as an expense for the year ended December 31,
1997. In 1997, the transferred business generated approximately $791,000 in
annualized premiums.
F-30
<PAGE>
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,
1999 1998
(in thousands)
Future policy benefits $ 10,010 $ 10,178
Unearned premiums 1,605 1,878
Other policy claims and benefits payable 4,103 4,225
Amounts recoverable on paid claims 3,051 2,566
Reinsurance receivables $ 18,769 $ 18,847
Year ended December 31,
1999 1998 1997
(in thousands)
Premiums $ 3,472 $ 2,942 $ 2,590
Policyholder benefits and expenses $ 14,568 $ 20,311 $ 15,286
9. Shareholders' Equity
Financial Industries Corporation ("FIC"), a life insurance holding company,
retains ownership of approximately 44.5% of the Company's outstanding common
stock. FIC held options to purchase up to an additional 1,702,155 shares, (which
number does not reflect the stock dividend paid by ILCO on March 7, 1999) 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. These options
expired on September 30, 1998.
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.
F-31
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1999 1998 1997
Net Income $12,549 $ 14,246 $ 25,925
Capital and Surplus $75,169 $ 70,627 $ 73,932
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 $41,497,000 and
$47,645,000 in subordinated notes issued by FIC and Family Life Corporation, a
wholly-owned subsidiary of FIC, at December 31, 1999 and 1998, 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, 1999,
this permitted practice did not increase statutory surplus over what it would
have been under prescribed statutory accounting practices.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon implementation. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, e.g. deferred income taxes are recorded. The Company has not
estimated the potential effect of the Codification guidance on statutory net
income and statutory capital and surplus. However, the actual effect of adoption
could differ as changes are made to the Codification guidance, prior to its
recommended effective date of January 1, 2001.
In 1988, the Company authorized the issuance of 10 million shares of Class C
Preferred Stock, $1.00 par value. The Company was not permitted, under the
provisions of the Senior Loan Agreements (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 subsidiary company contributes an amount necessary (as actuarially
determined) to fund the benefits provided for its participating employees.
F-32
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The pension costs for the plan includes the following components:
1999 1998 1997
(in thousands)
Service cost for benefits earned
during the period $ 446 $ 460 $ 390
Interest cost on projected benefit
obligation 905 793 693
Expected return on plan assets (1,277) (1,235) (1,226)
Amortization of unrecognized prior
service cost (229) (229) (229)
Pension benefit $ (155) $ (211) $ (372)
F-33
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the funded status of the plan at December 31:
1999 1998
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning
of period $ 12,726 $ 11,162
Service cost 446 460
Interest cost 905 793
Benefits paid (483) (443)
(Gain)/Loss due to change in
assumptions -0- 804
(Gain)/Loss due to experience 274 (50)
Benefit Obligation at end of year $ 13,868 $ 12,726
Change in plan assets: 1999 1998
Fair value of plan assets at
beginning of year $ 16,238 $ 15,681
Actual return on plan assets 570 1,000
Benefits paid (483) (443)
Fair value of plan assets at end of year $ 16,325 $ 16,238
Funded Status:
Funded status at end of year $ 2,457 $ 3,512
Unrecognized prior service cost (240) (469)
Unrecognized actuarial net loss 2,665 1,683
Prepaid pension expense at end of year $ 4,882 $ 4,726
F-34
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.25%, 7.25% and 7.75%
in 1999, 1998 and 1997. The assumed long-term rate of compensation increases was
5.0%, 5.0% and 6.0% for 1999, 1998 and 1997. The assumed long-term rate of
return on plan assets was 8.0% for 1999, 1998 and 1997. Assumed expenses as a
percentage of plan assets were 0% for 1999, 1998 and 1997.
Savings and Investment Plan
The Company maintains 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 attributable to employee contributions 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.
In 1997, the Plan was amended to provide for a matching contribution by the
Company. The match, which is in the form of shares of ILCO common stock, is
equal to 100% of an eligible participant's elective deferral contributions, as
defined in the Plan, not to exceed 1% of the participant's plan compensation.
Allocations are made on a quarterly basis to the account of participants who
have at least 250 hours of service in that quarter.
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 1999, 1998 or 1997. At
December 31, 1999, the Plan had a total of 579,314 shares which are allocated to
participants.
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.
F-35
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective May 1, 1998, the 401(k) Plan was amended to provide for the merger of
the ESOP into the 401(k) Plan. In connection with the merger, certain features
under the ESOP were preserved for the benefit of employees previously
participating in the ESOP with regard to all benefits accrued under the ESOP
through the date of merger.
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 by the Company in the accompanying income
statement for its stock option plans.
In 1999, the Company paid a stock dividend in the amount of one share of common
stock for each share of common stock issued and outstanding. The dividend was
paid on March 17, 1999 to holders of record on March 8, 1999. The data in this
note has been restated to reflect the effect of the stock dividend.
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 630,000 shares of the Company's
common stock are currently reserved for issuance under this plan. As of December
31, 1999, options to purchase 655,700 shares have been granted since the plan's
inception. As of December 31, 1999, 483,500 options have been exercised and
172,200 options have been terminated.
At December 31, 1999 there were no options remaining under the ISO Plan to
purchase shares of the Company's common stock. The number of options exercised
in 1999, 1998 and 1997 were -0-, -0- and 144,000, 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 1,200,000 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 $1.67 per share.
In 1988, options to purchase 660,000 shares were granted at a price of $1.67 per
share. In 1990, options to purchase 60,000 shares expired. In 1991, options to
purchase 100,000 shares were granted at prices ranging from $4.38 to $4.63. In
1992 options to purchase 120,000 shares expired. In 1995, options to purchase
120,000 shares were granted at a price of $5.56 per share. These same options,
along with 40,000 other options, were terminated in 1996. In 1997 84,000 options
were canceled. There were no options granted in 1998, 1997 and 1996. The number
of options exercised in 1999, 1998 and 1997 were 84,000, 84,000, and 96,000,
respectively.
Under the Company's 1999 Non-Qualified Stock Option Plan options to purchase
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 $9.00 per share, were granted to certain
employees of the Company, its subsidiaries and affiliates. In 1999 options to
purchase 460,000 shares were granted at prices ranging from $9.00 to $10.38.
During 1999, 20,000 options were canceled and no options were exercised.
F-36
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarized activity under all Plans for each of the three
years ended December 31, 1999:
1997 Weighted
Shares Average
(000's) Exercise Price
Outstanding at the beginning of the year 492 $ 2.25
Granted -0- 0.00
Exercised (240) 2.19
Canceled (84) 3.60
Outstanding at the end of the year 168 $ 1.67
Options exercisable at year end -0- $ -0-
Weighted average fair value of options
granted during the year $ -0-
1998 Weighted
Shares Average
(000's) Exercise Price
Outstanding at the beginning of the year 168 $ 1.67
Granted -0- 0.00
Exercised (84) 1.67
Canceled -0- 0.00
Outstanding at the end of the year 84 $ 1.67
Options exercisable at year end -0- $ -0-
Weighted average fair value of options
granted during the year $ -0-
1999 Weighted
Shares Average
(000's) Exercise Price
Outstanding at the beginning of the year 84 $ 1.67
Granted 460 9.06
Exercised (84) 1.67
Canceled (20) 9.00
Outstanding at the end of the year 440 $ 9.06
Options exercisable at year end -0-
Weighted average fair value of options
granted during the year $ 9.06
F-37
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999:
Options Outstanding
Number Outstanding weighted-average remaining
Range of exercise prices December 31, 1999 contractual Life (years)
$9.00 to $10.38 440,000 3.38
Weighted Average
Range of exercise prices Exercise prices
$9.00 to $10.38 $9.06
Number exercisable Weighted average
Range of Exercise prices December 31, 1999 exercise price
$9.00 to $10.38 -0- -0-
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 1999, 1998, and 1997 was $2,320,185, $2,283,198, and $3,147,037,
respectively, under these lease agreements. Minimum annual future rentals are as
follows:
(in thousands)
2000 1,868
2001 1,850
2002 1,475
2003 723
2004 689
Thereafter 689
$ 7,294
F-38
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Related Party Transactions
The obligations of the Company under the Senior Loan were guaranteed by FIC. FIC
presently owns 3,932,692 shares of the company's Common Stock, constituting
44.5% of such shares outstanding. FIC held options to acquire an additional
1,702,155 shares, (which does not reflect the stock dividend paid by ILCO on
March 7, 1999) at the average bid price of such shares during the six-month
period preceding the date of any such purchase as long as ILCO's debt guaranteed
by FIC (the Senor Loans) remained outstanding. As described in Note 6, the
current Senior Loan of ILCO was fully repaid on September 30, 1998. Accordingly,
FIC's rights under the 1986 option agreement expired on September 30, 1998.
FIC Property Management, Inc., ("FIC Property"), a subsidiary of FIC, conducted
the leasing activities for the Bridgepoint Square properties previously owned by
Investors-NA. As described in Note 1, these properties were sold in 1997.
In connection with the December, 1997 sale of Bridgepoint Square Offices by
Investors-NA and Family Life Insurance Company, FIC Realty Services, Inc., ("FIC
Realty"), a subsidiary of FIC, received a commission in the amount of $156,000,
of which $122,538 was paid by Investors-NA and $33,462 by Family Life. In
connection with the 1996 sale of Austin Centre by Investors-NA, FIC Realty
received a commission in the amount of $123,350 from Investors-NA.
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, Inc. ("Merrill Lynch") and $14
million borrowed by another subsidiary of FIC from an affiliate of Merrill Lynch
and evidenced by a senior subordinated note in the principal amount of $12
million and a junior subordinated note in the principal amount of $2 million and
$25 million lent by two insurance company subsidiaries of ILCO. The latter
amount was represented by a $22.5 million loan from Investors-NA to FLC and a
$2.5 million loan provided directly to FIC by Investors- CA. In addition to the
interest provided under those loans, Investors-NA and Investors-CA were granted
by FIC non-transferable options to purchase, in the amounts proportionate to
their respective loans, up to a total of 9.9 percent of shares of FIC's common
stock at a price of $10.50 per share ($2.10 per share as adjusted for the
five-for-one stock split in November, 1996), equivalent to the then current
market price, subject to adjustment to prevent dilution. The original provisions
of the options provided for their expiration on June 12, 1998 if not previously
exercised. In connection with the 1996 amendments to the subordinated notes, as
described below, the expiration date of the options was extended to September
12, 2006.
F-39
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and its
affiliate was prepaid. The Company paid $38 million plus accrued interest to
retire the indebtedness, which had a principal balance of approximately $50
million on July 30, 1993. The primary source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
Family Life Insurance Investment Company ("FLIIC"), another subsidiary of FIC,
obtained from Investors-NA. The principal amount of the new subordinated debt
was 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.
In June, 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 $1,977,119 principal balance of the note is to be paid in
twenty quarterly principal payments, in the amount of $98,855.95 each, to
commence December 12, 1996 with the final payment due on September 12, 2001; the
interest rate on the note remains at 12%.
In December 1998 FLIIC was dissolved. In connection with the dissolution, all of
the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder, FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
The Company reimbursed FIC for rental expenses and certain other operating
expenses incurred during 1997 on behalf of the Company. The amount of such
reimbursement was approximately $822,000.
F-40
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Data processing services for ILCO's and FIC's insurance subsidiaries are
provided by FIC Computer Service, 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. The Company's insurance subsidiaries paid
$2,730,189, $2,818,095 and $3,010,110 and Family Life paid $1,916,350,
$1,610,397 and $824,425 to FIC Computer for data processing services provided
during the years ended December 31, 1999, 1998 and 1997, respectively.
In 1995, Investors-NA entered into a reinsurance agreement with Family Life
Insurance Company ("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.
ILCO received $13 million, $11 million, and $14 million from Family Life for
direct costs incurred by ILCO on behalf of Family Life's operations in 1999,
1998 and 1997, respectively. Under an agreement between ILCO and Family Life all
direct costs incurred on behalf of the other are to be reimbursed.
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.
F-41
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Net Income Per Share
The following table reflects the calculation of basic and diluted earnings per
share:
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
1999 1998 1997
(in thousands except per share amounts)
Basic:
Net income available to common shareholders $ 12,765 $ 11,119 $ 20,540
Weighted average common stock outstanding 8,796 8,750 8,656
Basic earnings per share $ 1.45 $ 1.27 $ 2.37
Diluted:
Net income available to common shareholders $ 12,765 $ 11,119 $ 20,540
Weighted average common stock outstanding 8,796 8,750 8,656
Common stock options 273 2,638 176
Repurchase of treasury stock (269) (2,464) (94)
Common stock and common stock equivalents 8,800 8,924 8,738
Diluted earnings per share $ 1.45 $ 1.25 $ 2.35
</TABLE>
The options held by FIC to purchase ILCO stock were excluded from the 1997
diluted EPS calculation as they were anti dilutive.
F-42
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Quarterly Financial Data (unaudited)( in thousands, except per
share amounts)
Three Months Three Months
Ended Ended
March 31, June 30,
1999 1998 1999 1998
Net Operating Revenue $ 26,270 $ 27,872 $ 26,693 $ 27,527
Net Income $ 2,961 $ 2,719 $ 2,627 $ 2,808
Basic earnings per share $ 0.34 $ 0.32 $ 0.30 $ 0.32
Diluted earnings per share $ 0.34 $ 0.31 $ 0.30 $ 0.31
Three Months Three Months
Ended Ended
September 30, December 31,
1999 1998 1999 1998
Net Operating Revenue $ 25,299 $ 27,269 $ 25,943 $ 26,793
Net Income $ 3,135 $ 2,829 $ 4,042 $ 2,763
Basic earnings per share $ 0.36 $ 0.33 $ 0.46 $ 0.32
Diluted earnings per share $ 0.36 $ 0.32 $ 0.46 $ 0.32
16. Subsequent Events
On March 28, 2000, the Company purchased 546,000 shares of its common stock in a
single transaction at a price of $9.25 per share. The purchase price was
approximately $.25 per share below the prevailing market price at the time of
the purchase. The shares repurchased will be treated as treasury shares.
F-43
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE I - SUMMARY OF INVESTMENT OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1999
(in thousands of dollars)
<TABLE>
Column A Column B Column C Column D
<S> <C> <C> <C>
Amount at which
Shown in the
Type of Investment Costs Value Balance Sheet
Fixed maturities available for sale:
United States Government and
government agencies and
authorities $ 26,191 $ 26,906 $ 26,906
States, municipalities and political
subdivisions 4,680 4,771 4,771
Corporate securities 172,686 164,714 164,714
Mortgage-backed securities 207,975 207,826 207,826
Total fixed maturities available for
sale 411,532 404,217 404,217
Fixed maturities held to maturity 2,088 2,056 2,088
Total fixed maturities $ 413,620 $ 406,273 $ 406,305
Equity securities:
Public utilities 2 2 2
Industrial, miscellaneous and all
other 18 43 43
Total equity securities 20 45 45
Policy loans 50,882 50,882 50,882
Mortgage loans 6,844 6,701 6,844
Real estate 21,145 21,145 21,145
Short term investments 191,695 191,695 191,695
Total investments $ 684,206 $ 676,741 $ 676,916
</TABLE>
F-44
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS
December 31, 1999 and 1998
(in thousands of dollars)
ASSETS 1999 1998
Short-term investments $ 15,505 $ 3,732
Cash and cash equivalents 48 157
Subordinated debenture receivables
from Investors Life Insurance
Company of North America 5,896 15,896
Investments in and advances to
subsidiaries 129,345 134,437
Accounts receivable 5,144 4,960
Property and equipment, net 260 265
Other assets 382 388
Total Assets $ 156,580 $ 159,835
F-45
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS, continued
December 31, 1999 and 1998
(in thousands of dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities: 1999 1998
Accounts payable and accrued
expenses $ 1,808 $ 2,409
Deferred gain on sale of
real estate 628 738
Total Liabilities 2,436 3,147
Redeemable preferred stock:
Class A preferred stock, $1 par value,
shares authorized and issued 5,000 5,000
Redeemable preferred stock:
Class B preferred stock, $1 par value, 15,000 15,000
shares authorized and issued 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,
15,000,000 shares authorized;
10,875,478 and 5,385,739 shares
issued, 8,827,941 and 4,376,706
shares outstanding in 1999 and
1998, respectively 2,392 1,185
Additional paid-in capital 4,522 4,385
Accumulated other comprehensive
income (3,712) 11,571
Retained earnings (including
$147,259 and $135,423 of
undistributed earnings of
subsidiaries at December 31,
1999 and 1998, respectively) 151,932 140,356
155,134 157,497
Common treasury stock, at cost,
1,378,017 and 684,273 shares in
1999 and 1998
(990) (809)
Total Shareholders' Equity 154,144 156,688
Total Liabilities and
Shareholders' Equity $ 156,580 $ 159,835
F-46
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Revenues charged to subsidiaries:
Interest income $ 1,418 $ 2,391 $ 3,345
Other income 134 138 131
1,552 2,529 3,476
Operating expenses 122 348 958
Interest expense -0- 415 1,417
122 763 2,375
Income from operations 1,430 1,766 1,101
Federal income tax provision 501 618 385
Net income before equity in
undistributed earnings from subsidiaries 929 1,148 716
Equity in undistributed earnings from
subsidiaries 11,836 9,971 19,824
Net income $ 12,765 $ 11,119 $ 20,540
</TABLE>
F-47
<PAGE>
<TABLE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
Year ended December 31,
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING 1999 1998 1997
ACTIVITIES:
Net income $ 12,765 $ 11,119 $ 20,540
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Amortization of deferred gain
on sale of real estate (110) (110) (109)
Decrease (increase) in accounts receivable (184) (20) 1,023
Decrease (increase) in investment in and
advances to subsidiaries (10,191) (8,957) (24,927)
(Decrease) increase in accounts
payable and accrued expenses (601) (161) 344
Decrease in other assets 6 105 529
Other 5 -0- 6
Net cash provided by (used in) operating
activities 1,690 1,976 (2,594)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Change in short term investments (11,773) (3,040) 5,560
Net cash (used in) provided by investing
activities (11,773) (3,040) 5,560
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of debt -0- (10,964) (13,980)
Stock options exercised 155 141 527
Purchase and reissuance of treasury stock (181) 45 (290)
Payment received on subordinated
debenture receivable 10,000 11,900 10,750
Net cash provided by (used in) financing
activities 9,974 1,122 (2,993)
Net increase (decrease) in cash
and cash equivalents (109) 58 (27)
Cash and cash equivalents,
beginning of year 157 99 126
Cash and cash equivalents,
end of year $ 48 $ 157 $ 99
</TABLE>
F-48
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(in thousands of dollars)
Ceded To Assumed
Direct Other From Other
1999 Amount Companies Companies
Life insurance in -force $ 6,612,022 $ 1,294,265 $ 438,833
Premium:
Life insurance 13,776 2,741 21
Accident-health insurance 808 731 (1)
Total $ 14,584 $ 3,472 $ 20
1998
Life insurance in-force $ 7,258,662 $ 1,531,981 $ 331,133
Premium:
Life insurance $ 12,782 $ 2,112 $ 48
Accident-health insurance 1,001 830 1
Total $ 13,783 $ 2,942 $ 49
1997
Life insurance in -force $ 7,788,147 $ 1,636,371 $ 174,777
Premium:
Life insurance $ 12,661 $ 2,186 $ 114
Accident-health insurance 809 404 37
Total $ 13,470 $ 2,590 $ 151
F-49
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE, continued
(in thousands of dollars)
Percentage
Net Of Amount
1999 Amount Assumed
Life insurance in-force $ 5,756,590 7.62%
Premium:
Life insurance 11,056 0.19%
Accident-health insurance 76 1.03%
Total $ 11,132 0.18%
1998
Life insurance in-force $ 6,057,814 5.47%
Premium:
Life insurance $ 10,718 0.45%
Accident-health insurance 172 0.58%
Total $ 10,890 0.45%
1997
Life insurance in-force $ 6,326,553 2.76%
Premium:
Life insurance $ 10,589 1.08%
Accident-health insurance 442 8.37%
Total $ 11,031 1.37%
F-50
<PAGE>
Exhibit Index
Exhibit Page Description
Number Number
3(a) Certificate of Incorporation of
InterContinental Life Corporation
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
3(b) By-laws of InterContinental Life
Corporation. (3)
3(c) Articles of Incorporation of
InterContinental Life Corporation of
Texas. (15)
3(d) Amendment to Articles of Incorporation of
InterContinental Life Corporation of
Texas. (15)
3(e) By-Laws of InterContinental Life
Corporation of Texas. (15)
3(f) Articles of Merger of InterContinental Life
Corporation and InterContinental Life
Corporation of Texas. (15)
3(g) Plan and Agreement of Merger Between
InterContinental Life Corporation and
InterContinental Life Corporation of
Texas. (15)
10(a) Registrant's Incentive Stock Option Plan.(1)
10(m) Lease dated December 20, 1985 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)
Ex - 1
<PAGE>
(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)
Ex - 2
<PAGE>
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)
Ex - 3
<PAGE>
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)
Ex - 4
<PAGE>
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) 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. (14)
Ex - 5
<PAGE>
10(aaab) (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.(14)
(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. (14)
10(aaac) 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.(14)
10(aaad) 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. (14)
10(aaae) Amendment Agreement dated as of April 24,
1996 between Registrant and certain banks
identified therein.(14)
10(aaaf) Waiver Agreement dated as of December 12,
1996 between Registrant and certain banks
identified therein.(14)
10(aaag) 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. (14)
10(aaah) Amendment and Waiver Agreement dated as
of March 31, 1997 among the Registrant
and certain banks identified
therein. (16).
10(aaai) Amendment and Waiver Agreement dated as
of December 9, 1997 among the Registrant
and certain banks identified
therein. (16).
10(aaaj) Assignment Agreement dated December 23,
1998, from Family Life Insurance
Investment Company to Financial
Industries Corporation, assigning the 9%
Senior Subordinated 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. (17)
Ex - 6
<PAGE>
10(aaak) InterContinental Life Corporation 1999
Stock Option Plan. Filed on April 20,
1999 with Registrant's Form DEF 14A,
and incorporated herein by reference.
10(aaal) Ex-9 Amendment to Surplus Debenture dated
September 28, 1999 between Investors
Life Insurance Company of North America
and the Registrant.
21 Ex-11 Subsidiaries of the Registrant.
23 Ex-12 Consent of PricewaterhouseCoopers 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 Registrants 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.
Ex - 7
<PAGE>
(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.
(14) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, and incorporated herein by reference.
(15) Filed with Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, and incorporated herein by reference.
(16) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, and incorporated herein by reference.
(17) Filed with Registrant's Annual Report on form 10-K for the fiscal year
ended December 31, 1998, and incorporated herein by reference.
Ex - 8
<PAGE>
Exhibit 10(aaal)
$140,000,000 SURPLUS DEBENTURE
AMENDMENT AGREEMENT
This Amendment Agreement is entered into as of September 28, 1999 by and between
InterContinental Life Corporation ("ILCO") and Investors Life Insurance Company
of North America ("Investors-NA") as successor-by-merger to Standard Life
Insurance Company ("Standard")
W I T N E S S E T H :
WHEREAS, ILCO and Standard were parties to that certain Surplus Debenture
in the amount of $140,000,000 (the "Surplus Debenture") issued in
connection with the acquisition of Investors-NA, INA Life Insurance Company
(now merged into Investors-NA) and INA Security Corporation (now known as
ILG Securities Corporation) in 1988.
WHEREAS, Investors-NA is the successor-by-merger to the interests of
Standard;
WHEREAS, under the terms of the Surplus Debenture, the remaining principal
balance of the Surplus Debenture is to be paid in full on September 30,
1999;
WHEREAS, the remaining principal balance of the Surplus Debenture at
September 28, 1999 is $6,940,000;
WHEREAS, the parties desire to amend the payment schedule of the Surplus
Debenture;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
(18) Defined Terms. Capitalized terms used herein and not otherwise defined
herein shall have the meanings attributed to such terms in the Surplus
Debenture.
(19) Schedule of Payments. The remaining principal balance of the Surplus
Debenture, plus interest accumulating thereon as calculated pursuant
to the interest rate formula contained in the Surplus Debenture, shall
be paid on the last day of each period in accordance with the
following schedule:
Payment Amount Period
$2,000,000, plus interest 7/1/1999 - 10/1/1999
$2,000,000, plus interest 10/1/1999 - 1/1/2000
$2,000,000, plus interest 1/1/2000 - 4/1/2000
$ 940,000, plus interest 4/1/2000 - 7/1/2000
Ex - 9
<PAGE>
(20) Effectiveness of Amendment. This Amendment Agreement shall become
effective as of the date first above written. Except as specifically
amended above, all of the terms, conditions and covenants of the
Surplus Debenture shall remain in full force and effect and shall
continue to be binding upon the parties hereto in all respects and are
hereby ratified and confirmed.
IN WITNESS WHEREOF, this Amendment Agreement is executed on this 28th day of
September, 1999 by duly authorized officers of ILCO and Investors-NA.
INTERCONTINENTAL LIFE CORPORATION
By: /s/ Roy F. Mitte
Name: Roy F. Mitte
Title: President
INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA (successor-by-merger
to STANDARD LIFE INSURANCE COMPANY)
By: /s/ James M. Grace
Name: James M.. Grace
Title: Executive Vice President
Ex - 10
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Investors Life Insurance Company of North America
Investors Life Insurance Company of Indiana
ILG Securities Corporation
ILG Sales Corporation
InterContinental Growth Plans, Inc.
InterContinental Life Agency, Inc. *
*Wholly-owned subsidiary of InterContinental Growth Plans, Inc.
Ex - 11
<PAGE>
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 27, 2000 appearing on page F-2 of this Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
March 27, 2000
Ex - 12
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
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0
0
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11,132
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