-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BITEzYB9j9dyWi5Km2GdT/VrSSj4SK2lR8koBvMvqnytt+OXVKq3xz0IcbM1NrhG nltr8x/xbPR5Mm5cBsj11g== 0000035733-95-000009.txt : 19951119 0000035733-95-000009.hdr.sgml : 19951119 ACCESSION NUMBER: 0000035733-95-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINANCIAL INDUSTRIES CORP CENTRAL INDEX KEY: 0000035733 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 742126975 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04690 FILM NUMBER: 95591927 BUSINESS ADDRESS: STREET 1: THE AUSTIN CENTER STREET 2: 701 BRAZOS 12TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124045050 MAIL ADDRESS: STREET 1: 701 BRAZOS 12TH FL CITY: AUSTIN STATE: TX ZIP: 78701 FORMER COMPANY: FORMER CONFORMED NAME: GOLDEN UNITED INVESTMENT CO STOCK PLAN DATE OF NAME CHANGE: 19731128 FORMER COMPANY: FORMER CONFORMED NAME: ILEX CORP DATE OF NAME CHANGE: 19730801 FORMER COMPANY: FORMER CONFORMED NAME: GOLDEN UNITED INVESTMENT CO DATE OF NAME CHANGE: 19730801 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the Quarterly Period Ended September 30, 1995 Commission File Number 0-4690 FINANCIAL INDUSTRIES CORPORATION (Exact Name of Registrant as specified in its charter) Texas 74-2126975 (State of Incorporation) (I.R.S. Employer Identification Number) The Austin Centre, 701 Brazos, 12th Floor Austin, Texas 78701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (512) 404-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Number of common shares outstanding ($1.00 par value) at end of period: 1,085,593 FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information Consolidated Balance Sheets September 30, 1995 and December 31, 1994............... Consolidated Statements of Income For the three and nine month periods ended September 30, 1995 and 1994............................ Consolidated Statements of Cash Flows For the three and nine month periods ended September 30, 1995 and 1994............................ Notes to Consolidated Financial Statements.................. Management's Discussion and Analysis of Financial Conditions and Results of Operations......... Part II Other Information........................................... Signature Page.............................................. Item 1. Financial Statements FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept.30, Dec. 31, 1995 1994 Unaudited ASSETS Investments: Fixed maturities available for sale, at market value (amortized cost of $79,210 and $83,397, respectively) $ 80,699 $ 77,468 Equity securities, at market (cost approximately $11) 4 4 Policy loans 1,606 1,231 Short-term investments 28,368 28,365 Total investments 110,677 107,068 Cash 1,828 933 Investment in affiliate 39,921 24,912 Accrued investment income 780 1,166 Agent advances and other receivables 7,490 6,979 Reinsurance receivables 1,758 2,186 Due and deferred premiums 9,469 9,714 Property and equipment, net 7,453 4,057 Deferred policy acquisition costs 36,002 29,975 Present value of future profits of acquired business 46,600 50,712 Deferred financing costs 194 389 Other assets 7,372 6,286 Separate account assets 8,372 8,723 Total assets $277,916 $253,100 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept.30, Dec. 31, 1995 1994 Unaudited LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds: Future policy benefits payable $ 56,313 $ 60,411 Contractholder deposit funds 38,442 30,759 Unearned premiums 136 196 Other policy claims & benefits payable 5,008 6,579 99,899 97,945 Senior loans 8,856 17,060 Subordinated notes payable to affiliate 60,985 60,759 Deferred federal income taxes 8,329 7,010 Other liabilities 16,308 9,807 Separate account liabilities 8,372 8,723 Total liabilities 202,749 201,304 Commitments and contingencies Shareholders' equity: Common stock, $1.00 par value, 3,304,200 shares authorized; 1,169,060 shares issued, 1,085,593 shares outstanding in 1995 and 1994 1,169 1,169 Additional paid-in capital 7,225 7,225 Net unrealized gain (loss) on investments in fixed maturities available for sale 2,729 (12,858) Net unrealized loss on equity securities (1) (1) Retained earnings 64,467 56,683 75,589 52,218 Common treasury stock, at cost, 83,467 shares in 1995 and 1994 (422) (422) Total shareholders' equity 75,167 51,796 Total liabilities and shareholders' equity $277,916 $253,100 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (in thousands of dollars, except per share data) 3 Months Ended September 30, 1995 1994 Revenues: Premiums $11,853 $12,104 Premiums ceded (228) (282) Net premiums 11,625 11,822 Net investment income 1,929 1,758 Earned insurance charges 1,731 1,786 Other 803 802 Total revenues 16,088 16,168 Benefits and expenses: Benefits and other expenses 5,420 4,437 Interest on insurance policies 510 442 Amortization of present value of future profits of acquired business 1,510 3,167 Amortization of deferred policy acquisition costs 958 769 Operating expenses 4,075 3,466 Interest expense 1,197 1,223 Total benefits and expenses 13,670 13,504 Income before federal income taxes and equity in net earnings of affiliate 2,418 2,664 Provision for federal income taxes 495 712 Income before equity in net earnings of affiliate 1,923 1,952 Equity in net earnings of affiliate, net of tax 435 318 Net income $ 2,358 $ 2,270 Per Share Data: Common stock and common stock equivalents 1,109 1,107 Net income per share available to common shareholders $ 2.13 $ 2.05 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (in thousands of dollars, except per share data) 9 Months Ended September 30, 1995 1994 Revenues: Premiums $33,704 $38,831 Premiums ceded (688) (845) Net premiums 33,016 37,986 Net investment income 5,682 5,247 Earned insurance charges 5,396 5,555 Other 2,429 2,462 Total revenues 46,523 51,250 Benefits and expenses: Benefits and other expenses 15,264 14,708 Interest on insurance policies 1,433 1,256 Amortization of present value of future profits of acquired business 4,112 8,871 Amortization of deferred policy acquisition costs 2,710 2,119 Operating expenses 10,987 11,712 Interest expense 3,566 3,661 Total benefits and expenses 38,072 42,327 Income before federal income taxes and equity in net earnings of affiliate 8,451 8,923 Provision for federal income taxes 2,061 2,257 Income before equity in net earnings of affiliate 6,390 6,666 Equity in net earnings of affiliate, net of tax 1,394 1,114 Net income $ 7,784 $ 7,780 Per Share Data: Common stock and common stock equivalents 1,108 1,107 Net income per share available to common shareholders $ 7.03 $ 7.03 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (in thousands of dollars) 3 Months Ended September 30, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,358 $ 2,270 Adjustments to reconcile net income to net cash used in operating activities Amortization of present value of future profits 1,510 3,167 Amortization of deferred policy acquisition costs 958 769 Financing costs amortized (141) 199 Equity in undistributed earnings of affiliate (1,183) (966) Changes in assets and liabilities net of effects from purchase of insurance subsidiaries: Decrease in accrued investment income 314 507 Decrease (increase) in agent advances and other receivables 212 (1,909) (Increase) decrease in due and deferred premiums (686) 178 Increase in deferred policy acquisition costs (2,418) (2,339) (Increase) decrease in other assets (723) 649 Increase (decrease) in policy liabilities and accruals 1,298 (464) Increase (Decrease) in other liabilities 2,743 (78) Increase in policy loans (181) (125) Decrease in deferred federal income taxes (2,672) (1,138) Other, net (4) 783 Net cash provided by operating activities 1,385 1,503 Cash Flows From Investing Activities Investments purchased -0- (3,444) Proceeds from sale and maturities of investments 399 921 Net change in short-term investments (207) 2,579 Retirement of equipment 1 -0- Net cash provided by investing activities 193 56 Cash Flows From Financing Activities Repayment of debt (2,091) (1,963) Net cash used in financing activities (2,091) (1,963) Net decrease in cash (513) (404) Cash, beginning of period 2,341 1,708 Cash, end of period $ 1,828 $ 1,304 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLDIATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (in thousands of dollars) 9 Months Ended September 30, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,784 $ 7,780 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of present value of future profits 4,112 8,871 Amortization of deferred policy acquisition costs 2,710 2,119 Financing costs amortized 195 520 Loss on sale of equipment -0- 119 Equity in undistributed earnings of affiliate (3,642) (3,251) Changes in assets and liabilities net of effects from purchase of insurance subsidiaries: Decrease in accrued investment income 386 286 Increase in agent advances and (83) (1,504) other receivables Decrease (Increase) in due and deferred 245 (1,451) premiums Increase in deferred policy acquisition (8,737) (7,153) costs (1,086) (1,564) Increase in other assets 1,954 514 Increase in policy liabilities and accruals 6,501 (2,714) Increase (decrease) in other liabilities Increase in policy loans (375) (256) Increase (decrease) in deferred federal income taxes 1,319 (2,444) Other, net (12) 3,535 Net cash provided by operating activities 11,271 3,407 Cash Flows From Investing Activities Investments purchased -0- (10,313) Proceeds from sale and maturities of investments 1,001 3,546 Net change in short-term investments (3) 11,754 Purchase of equipment, net (3,396) -0- Net cash provided by investing activities (2,398) 4,987 Cash Flows From Financing Activities Issuance of subordianted notes payable to affiliate 226 201 Repayment of debt (8,204) (9,809) Net cash used in financing activities (7,978) (9,608) Net increase (decrease) in cash 895 (1,214) Cash, beginning of period 933 2,518 Cash, end of period $ 1,828 $ 1,304 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the interim results. The statements have been prepared to conform to the requirements of Form 10-Q and do not necessarily include all disclosures required by generally accepted accounting principles (GAAP). The reader should refer to Form 10-K for the year ended December 31, 1994 previously filed with the Commission for financial statements prepared in accordance with GAAP. Certain prior year amounts have been reclassified to conform with current year presentation. The consolidated financial statements include the accounts of Financial Industries Corporation ("FIC") and its wholly-owned subsidiaries. The investment of FIC in InterContinental Life Corporation ("ILCO") is presented using the equity method. All significant intercompany items and transactions have been eliminated. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operation For the nine-month period ended September 30, 1995, FIC's net income was $7,784,000 ($7.03 per common share), as compared to $7,780,000 ($7.03 per common share) for the nine-month period ended September 30, 1994. The decline in long-term interest rates during the first nine months of 1995, which was related to general economic conditions, had a positive effect upon the market value of the fixed maturities available for sale segment of the portfolio. As of September 30, 1995, the market value of the fixed maturities available for sale segment was $80.7 million as compared to a carrying value of $79.2 million, or an unrealized gain $1.5 million. There is no assurance that this unrealized gain may be realized in the future. 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. The consolidated balance sheets at September 30, 1995 include Separate Account assets of Family Life Insurance Company ("Family Life") in the amount of $8.4 million. The Separate Account is maintained by Family Life, which was acquired by FIC on June 12, 1991. Under the provisions of the purchase agreement between FIC and Merrill Lynch Insurance Group, Inc., certain life insurance companies affiliated with Merrill Lynch agreed to assume (on an assumption reinsurance basis) the variable annuity contracts related to such Separate Account assets. The transfer of these assets, in accordance with the provisions of the reinsurance agreement, is subject to certain regulatory approvals. Such regulatory approvals have been obtained in a number of jurisdictions, and the assumption of the business has been completed in those states. However, the Company has not obtained a definitive date from Merrill Lynch as to when the remaining regulatory approvals will be obtained, so as to enable Family Life to complete the transfer of the balance of the Separate Account assets. Equity in Net Income of InterContinental Life Corporation General: Prior to the acquisition of Family Life in June of 1991, FIC's primary involvement in the life insurance business was through its equity interest in InterContinental Life Corporation ("ILCO"). The Company's equity in the net earnings, net of federal income tax, of ILCO, was $1,394,000 for the nine-month period ended September 30, 1995, as compared to $1,114,000 for the similar period in 1994. FIC currently owns 1,795,146 shares of ILCO's common stock, and holds options to acquire an additional 1,702,155 shares. The options were granted under an Option Agreement between FIC and ILCO which was entered into in March, 1986. In addition, Family Life, a subsidiary of FIC, currently owns 171,200 shares of ILCO common stock. As a result, FIC currently owns, directly and indirectly through Family Life, 1,966,346 shares (approximately 48%) of ILCO's common stock. If all of FIC's rights under the Option Agreement were to be presently exercised, FIC's ownership would amount to approximately 63% of the issued and outstanding shares of ILCO's common stock. The fixed maturities available for sale portion of ILCO's investment assets at September 30, 1995 was $469.4 million. The amortized cost of the fixed maturities available for sale segment as of September 30, 1995 was $463.3 million, representing a net unrealized gain of $6.1 million. This unrealized gains principally reflects changes in interest rates from the date the respective investments were purchased. Since FIC owns approximately 48% of the common stock of ILCO, such unrealized gains, net of tax, are reflected in FIC's equity interest in ILCO, and had the effect of increasing the reported value of such equity interest by approximately $2.9 million. ILCO's net income for the nine-month period ended September 30, 1995, as compared to the same period in 1994, was affected by an increase in interest expense. Interest expense was $4.6 million for the first nine months of 1995, as compared to $3.8 million for the same period in 1994. The increase is attributable to an increase in the average rate of interest paid on ILCO's senior loans - 8.72% for the 1995 period, as compared to 6.56% for the 1994 period. ILCO's results for the first nine months of 1995 include the operations of Investors Life Insurance Company of Indiana (formerly Meridian Life Insurance Company) for the period from February 14, 1995 to September 30, 1995. Investors Life Insurance Company of Indiana ("Investors-IN") was purchased by ILCO and Investors Life Insurance Company of North America ("Investors-NA") for an adjusted purchase price of $17.1 million; the transaction was completed on February 14, 1995. Liquidity and Capital Resources of ILCO: ILCO is a holding company whose principal assets consist of the common stock of Investors-NA and its subsidiaries - InterContinental Life Insurance Company ("ILIC") and, since February, 1995, Investors-IN. ILCO's primary source of funds consists of payments under the Surplus Debentures from Investors- NA. The cash requirements of ILCO consist primarily of its service of the indebtedness created in connection with the 1988 acquisition of the Investors Life Companies. As of December 31, 1994, the unpaid principal of ILCO's Senior Loan was $66.6 million. On January 2, 1995, ILCO made a scheduled payment of $4.5 million under its Senior Loan. In connection with the acquisition of Investors-IN in February, 1995, ILCO borrowed an additional $15 million under its Senior Loan to help finance the purchase. On April 3, 1995, a principal payment in the amount of $13.2 million was made, which prepaid the Senior Loan until October 1, 1995. As a result, the Senior Loan had a principal balance at September 30, 1995 of $63.9 million. ILCO's principal source of liquidity consists of the periodic payment of principal and interest to it by Investors-NA, pursuant to the terms of the two surplus debentures. The surplus debentures were originally issued by Standard Life Insurance Company and its terms were previously approved by the Mississippi Insurance Commissioner. One of the surplus debentures, in the original amount of $15 million, was issued in connection with the 1986 acquisition of Standard Life by ILCO; the other, in the original amount of $140 million was issued in connection with the 1988 acquisition by ILCO of the Investors Life Companies. Upon the merger of Standard Life into Investors-NA, the obligations of the surplus debentures were assumed by Investors-NA. As of September 30, 1995, the outstanding principal balance of the surplus debentures was $7.2 million and $64.3 million, respectively. Since Investors-NA is domiciled in the State of Washington, the Washington insurance law applies to the administration of the terms of the surplus debentures. Under the provisions of the surplus debentures and current law, no prior approval of the Washington Insurance Commissioner is required for Investors-NA to pay interest or principal on the surplus debentures; provided that, after giving effect to such payments, the statutory surplus of Investors-NA is in excess of $10 million (the "surplus floor"). However, Investors-NA has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debentures. As of September 30, 1995, the statutory capital and surplus of Investors-NA was $60.0 million, an amount substantially in excess of the surplus floor. The funds required by Investors-NA to meet its obligations to ILCO under the terms of the surplus debentures are generated from operating income generated from insurance and investment operations. ILCO's ability to pay dividends to its shareholders is affected, in part, by receipt of dividends from its insurance subsidiaries. Under current Washington law, any proposed payment of a dividend or distribution by the Company's insurance subsidiaries 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 July, 1993, Washington amended its insurance code to retain the "greater of" standard for dividends but enacted 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. Investors-NA does not presently have earned surplus as defined by the regulations adopted by the Washington Insurance Commissioner and, therefore, is not permitted to pay cash dividends. However, since the new law applies only to dividend payments, the ability of Investors-NA to make principal and interest payments under the surplus debentures is not affected. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the surplus debentures in the amounts necessary to enable ILCO to service its Senior Loan for the foreseeable future. Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN currently has earned surplus. The Form 10-Q of ILCO for each of the quarters ended September 30, 1995 and September 30, 1994, sets forth the business operations and financial results of ILCO and its life insurance subsidiaries. Such 10-Q reports of ILCO, including the discussion by ILCO's management under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" are incorporated herein by reference. Results of Operations For the three-month period ended September 30, 1995, the Company's income from operations before Federal income taxes and before equity in net earnings of affiliate, was $2,418,000 on revenues of $16,088,000, as compared to $2,664,000, on revenues of $16,168,000 for the same period in 1994. Premium income, net of reinsurance, for the third quarter of 1995 was $11.6 million, as compared to $11.8 million in the same period in 1994. Operating expenses were $4.1 million in the three-month period ended September 30, 1995, as compared to $3.5 million in the same period in 1994. Liquidity and Capital Resources FIC is a holding company whose principal assets consist of the common stock of Family Life Insurance Company and its equity ownership in InterContinental Life Corporation ("ILCO"). FIC's primary sources of capital consists of cash flow from operations of its subsidiaries and the proceeds from bank and institutional borrowings. The cash requirements of FIC and its subsidiaries consist primarily of its service of the indebtedness created in connection with its ownership of Family Life Insurance Company. As of September 30, 1995 the outstanding balance of such indebtedness was: (i) $8.9 million on the Senior Loan granted by a group of banks and (ii) $61.0 million on the Subordinated Notes granted by Investors-NA. The principal source of liquidity for FIC's subsidiaries consists of the periodic payment of principal and interest by Family Life pursuant to the terms of a Surplus Debenture. The terms of the Surplus Debenture were previously approved by the Washington Insurance Commissioner. Under the provisions of the Surplus Debenture and current law, no prior approval of the Washington Insurance Department is required for Family Life to pay interest or principal on the Surplus Debenture; provided that, after giving effect to such payments, the statutory surplus of Family Life is in excess of 6% of assets (the "surplus floor"). However, Family Life has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debenture. As of September 30, 1995, the statutory capital and surplus of Family Life was $ 25.6 million, an amount substantially in excess of the surplus floor. As of September 30, 1995, the principal balance of the Surplus Debenture was $52.4 million. The funds required by Family Life to meet its obligations under the terms of the Surplus Debenture are generated primarily from premium payments from policy holders, investment income and the proceeds from the sale and redemption of portfolio investments. Effective July 25, 1993, Washington amended its insurance code to retain the "greater of" standard for dividends but enacted requirements that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Family Life does not presently have earned surplus as defined by the regulations adopted by the Washington Insurance Commissioner and, therefore, is not permitted to pay cash dividends. However, since the new law applies only to dividend payments, the ability of Family Life to make principal and interest payments under the Surplus Debenture is not affected. The Company does not anticipate that Family Life will have any difficulty in making principal and interest payments on the Surplus Debenture in the amounts necessary to enable Family Life Corporation to service its indebtedness for the foreseeable future. The sources of funds for Family Life consist of premium payments from policy holders, investment income and the proceeds from the sale and redemption of portfolio investments. These funds are applied primarily to provide for the payment of claims under insurance and annuity policies, operating expenses, taxes, investments in portfolio securities, shareholder dividends and payments under the provisions of the Surplus Debenture. FIC's net cash flow provided by (used in) operating activities was $11.3 million in the nine-month period ended September 30, 1995, as compared to $3.4 million for the corresponding period of 1994. Net cash flow used in financing activities was $(8.0) million for the nine-month period ended September 30, 1995, as compared to $(9.6) million for the corresponding period of 1994. In connection with the purchase of the Investors Life Companies by ILCO, the purchase of Investors-IN by ILCO and Investors-NA and the purchase of Family Life Insurance Company by a wholly- owned subsidiary of FIC, FIC guaranteed the payment of the indebtedness created in connection with such acquisitions. After giving effect to the refinancing of the ILCO Senior Loan, the repayment of the ILCO Subordinated Loans and the indebtedness created in connection with the acquisition of Investors-IN, the guaranty commitments of FIC with respect to the debt obligations of ILCO relate to ILCO's senior loan, with an outstanding balance at September 30, 1995 of $63.9 million. The guaranty commitments of FIC under the loans incurred in connection with the acquisition of Family Life (after taking into account the repayments and new loans which occurred in July, 1993) relate to: (i) the Senior Loan of Family Life Corporation to a bank group, with a balance of $8.9 million at September 30, 1995, (ii) the $22.5 million note issued by Family Life Corporation to Investors Life Insurance Company of North America, and (iii) the $34.5 million loaned by Investors-NA to two subsidiaries of FIC. Management believes that its cash, cash equivalents and short term investments are sufficient to meet the needs of its business and to satisfy debt service. There are no trends, commitments or capital asset requirements that are expected to have an adverse effect on the liquidity of FIC. Investments As of September 30, 1995, the Company's invested assets totaled $110.7 million, as compared to $107.1 million as of December 31, 1994. The level of short-term investments at September 30, 1995 remained unchanged at the $28.4 million level which existed as of December 31, 1994. The fixed maturities available for sale portion represents $80.7 million of invested assets at September 30, 1995, as compared to $77.5 million at December 31, 1994. The amortized cost of fixed maturities available for sale as of September 30, 1995 was $79.2 million representing a net unrealized gain of approximately $1.5 million. This unrealized gain principally reflects changes in interest rates from the date the respective investments were purchased. There is no assurance that this unrealized gain may be realized in the future. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities. The assets held by Family Life must comply with applicable state insurance laws and regulations. In selecting investments for the portfolios of its life insurance subsidiaries, the Company's emphasis is to obtain targeted profit margins, while minimizing the exposure to changing interest rates. This objective is implemented by selecting primarily short-to medium-term, investment grade fixed income securities. In making such portfolio selections, the Company generally does not select new investments which are commonly referred to as "high yield" or "non-investment grade." The Company's fixed maturities portfolio, as of September 30, 1995, consisted solely of fixed maturities investments which, in the annual statements of the companies as filed with state insurance departments, were designated under the National Association of Insurance Commissioners ("NAIC") rating system as a "1" (highest quality). As of December 31, 1994, approximately 96.3% of the fixed maturities portfolio consisted of investments with an NAIC rating of "1" and the remaining portion were designated with an NAIC rating of "2" (high quality). Management believes that the absence of "high-yield" or "non- investment grade" investments (as defined above) in the portfolios of its life insurance subsidiary enhances the ability of the Company to service its debt, provide security to its policyholders and to credit relatively consistent rates of return to its policyholders. FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES Part III. Other Information Item 1. Legal Proceedings The Company and its subsidiaries are defendants in certain legal actions related to the normal business operations of the Company. Management believes that the resolution of such legal actions will not have a material impact upon the financial statements. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Form 10-K Annual Report of Registrant for the year ended December 31, 1994 heretofore filed by Registrant with the Securities and Exchange Commission, which is hereby incorporated by reference. (b) Reports on Form 8-K: None FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FINANCIAL INDUSTRIES CORPORATION /s/ James M. Grace James M. Grace Treasurer Date: November 13, 1995 EX-27 2
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 SEP-30-1995 80,699 0 0 4 0 0 110,677 1,828 1,758 36,002 277,916 56,313 136 38,442 5,008 69,841 1,169 0 0 73,998 277,916 33,016 5,682 0 2,429 15,264 2,710 10,987 8,451 2,061 7,784 0 0 0 7,784 7.03 7.03 0 0 0 0 0 0 0
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