-----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, AzNqrhBuhJg9n8MajgpiNfxyfX/lz9s30T1+g9lqcWc9a7b3O45aJ4U+dK4bLuBe kmz0CUVO8MIyKxufCDEBgA== 0000035733-96-000007.txt : 19960517 0000035733-96-000007.hdr.sgml : 19960517 ACCESSION NUMBER: 0000035733-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96565017 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 March 31, 1996 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 March 31, 1996 and December 31, 1995..................... Consolidated Statements of Income For the three month periods ended March 31, 1996 and 1995.................................. Consolidated Statements of Cash Flows For the three month periods ended March 31, 1996 and 1995.................................. 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) Mar. 31, Dec. 31, 1996 1995 (Unaudited) ASSETS Investments: Fixed maturities available for sale, at market value (amortized cost of $80,544 and $79,961, respectively) $ 81,095 $ 83,632 Equity securities, at market (cost approximately $11) 4 4 Policy loans 1,847 1,774 Short-term investments 29,581 27,180 Total investments 112,527 112,590 Cash 1,263 1,414 Investment in affiliate 48,821 45,736 Accrued investment income 805 1,102 Agent advances and other receivables 8,863 10,368 Reinsurance receivables 2,910 2,383 Due and deferred premiums 9,828 9,726 Property and equipment, net 7,446 7,452 Deferred policy acquisition costs 37,606 36,537 Present value of future profits of acquired business 44,034 45,415 Deferred financing costs 84 168 Other assets 6,137 6,264 Separate account assets 8,472 8,523 Total assets $288,796 $287,678 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Mar. 31, Dec. 31, 1996 1995 (Unaudited) LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds: Future policy benefits payable $ 55,143 $ 54,909 Contractholder deposit funds 41,434 41,456 Unearned premiums 129 132 Other policy claims & benefits payable 5,803 5,836 102,509 102,333 Senior loans 4,674 6,765 Subordinated notes payable to affiliate 61,224 61,224 Deferred federal income taxes 14,953 14,783 Other liabilities 12,672 11,315 Separate account liabilities 8,472 8,523 Total liabilities 204,504 204,943 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 1996 and 1995 1,169 1,169 Additional paid-in capital 7,225 7,225 Net unrealized gain on investments in fixed maturities available for sale 993 8,052 Net unrealized loss on equity securities 11 11 Retained earnings 75,316 66,700 84,714 83,157 Common treasury stock, at cost, 83,467 shares in 1996 and 1995 (422) (422) Total shareholders' equity 84,292 82,735 Total liabilities and shareholders' equity $288,796 $287,678 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND 1995 (Unaudited) (in thousands of dollars, except per share data) 3 Months Ended March 31, 1996 1995 Revenues: Premiums $10,432 $11,133 Net investment income 1,816 1,878 Earned insurance charges 1,797 2,228 Other 968 811 Total revenues 15,014 16,050 Benefits and expenses: Benefits and other expenses 5,707 5,665 Interest on insurance policies 543 531 Amortization of present value of future profits of acquired business 1,381 1,419 Amortization of deferred policy acquisition costs 1,050 790 Operating expenses 3,572 3,656 Interest expense 884 1,185 Total benefits and expenses 13,138 13,246 Income before federal income taxes and equity in net earnings of affiliate 1,876 2,804 Provision for federal income taxes 407 614 Income before equity in net earnings of affiliate 1,469 2,190 Equity in net earnings of affiliate, net of tax 7,147 471 Net income $ 8,616 $ 2,661 Per Share Data: Common stock and common stock equivalents 1,111 1,105 Net income per share available to common shareholders $ 7.76 $ 2.41 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995 (Unaudited) (in thousands of dollars) 3 Months Ended March 31, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,616 $ 2,661 Adjustments to reconcile net income to net cash used in operating activities: Amortization of present value of future profits 1,381 1,419 Amortization of deferred policy acquisition costs 1,050 790 Financing costs amortized 84 141 Equity in undistributed earnings of affiliate (8,484) (1,221) Changes in assets and liabilities net of effects from purchase of insurance subsidiaries: Decrease in accrued investment income 297 293 Decrease in agent advances and other receivables 978 111 (Increase) decrease in due and deferred premiums (102) 65 Increase in deferred policy acquisition costs (2,119) (2,778) Decrease (increase) in other assets 127 (667) Increase in policy liabilities and accruals 176 282 Increase in other liabilities 1,357 1,781 Increase in policy loans (73) (108) Increase (decrease) in deferred federal income taxes 170 (120) Other, net (4) (1,269) Net cash provided by operating activities 3,454 1,380 CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased (743) -0- Proceeds from sale and maturities of investments 1,624 2,644 Net change in short-term investments (2,401) (1,250) Retirement of equipment 6 -0- Net cash (used in) provided by investing activities (1,514) 1,394 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (2,091) (1,963) Net cash used in financing activities (2,091) (1,963) Net increase (decrease) in cash (151) 811 Cash, beginning of period 1,414 933 Cash, end of period $ 1,263 $ 1,744 (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, 1995 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. FIC's net income is effected by its equity interest in InterContinental Life Corporation (ILCO) and ILCO's insurance subsidiaries. Net income for the first quarter of 1996 includes $7.2 million resulting from the sale of the Austin Centre, a hotel/office complex, located in Austin, Texas. The sale was completed by Investors Life Insurance Company of North America (Investors-NA), a wholly-owned subsidiary of ILCO. The selling price was $62.675 million, less $1 million paid to a capital reserve account for the purchaser. The property was purchased in 1991 for $31.275 million. The book value of the property, $36.8 million, net of improvements and amortization, were retained and reinvested by Investors-NA. The balance of the proceeds of the sale, net of Federal Income Tax, were used to reduce the ILCO's senior loan obligations by $15 million. The sale closed on March 29, 1996. The Company will continue to rent space on three floors of the office tower as its headquarters, under a lease which runs through September 31, 1997, with renewal options thereafter. New Accounting Pronouncements In March 1995, the FASB issued FAS No. 121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, the Statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cash to sell. FAS No. 121 is effective for fiscal years beginning after 1995. The Company adopted FAS No. 121 effective January 1, 1996. The adoption of this Statement did not have a material impact on the Company's financial statements. During 1995, the FASB issued FAS No. 123, "Accounting for Stock- Based Compensation," which encourages companies to adopt the fair value based method of accounting for stock-based compensation. This method requires the recognition of compensation expense equal to the fair value of such equity securities at the date of the grant. This Statement also allows companies to continue to account for stock-based compensation under the intrinsic value based method, as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," with footnote disclosure of the pro forma effects of the fair value based method. FAS No. 123 is effective for transactions entered into in years that begin after December 15, 1995. The Company plans to adopt FAS No. 123 during 1996 by continuing to account for stock-based compensation under the intrinsic value method and disclosing the pro forma effects of the fair value method in the footnotes to the financial statements. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operation: For the three-month period ended March 31, 1996, FIC's net income was $8,616,000 ($7.76 per common share), as compared to $2,661,000 ($2.41 per common share) for the three-month period ended March 31, 1995. FIC's net income is effected by its equity interest in InterContinental Life Corporation ("ILCO") and ILCO's insurance subsidiaries. Net income for the first quarter of 1996 includes $7.1 million resulting from ILCO's sale of the Austin Centre, a hotel/office complex, located in Austin, Texas. The sale was completed by Investors Life Insurance Company of North America ("Investors-NA"), a wholly-owned subsidiary of ILCO. The selling price was $62.675 million, less $1 million paid to a capital reserve account for the purchaser. The property was purchased in 1991 for $31.275 million. A portion of the sale proceeds, equal to the book value of the property, net of improvements and amortization ($36.8 million), was retained and reinvested by Investors-NA. The balance of the proceeds of the sale, net of federal income tax, was used to reduce the ILCO's senior loan obligations by $15 million. The sale closed on March 29, 1996. The Company and its affiliates will continue to occupy space on three floors of the office tower as its headquarters, under a lease which runs through September 30, 1997, with renewal options thereafter. The Company has not determined if it will exercise its renewal options. The statutory earnings of the Company's life insurance subsidiary, Family Life Insurance Company, ("Family Life") as required to be reported to insurance regulatory authorities before interest expense, capital gains and losses, and federal income taxes were $2,502,000 at March 31, 1996, as compared to $3,654,000 at March 31, 1995. These statutory earnings are the source to provide for the repayment of the indebtedness incurred in connection with the acquisition of Family Life. 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 March 31, 1996 include Separate Account assets of Family Life in the amount of $8.5 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 ILCO. The Company's equity in the net earnings, net of federal income tax, of ILCO, was $7,147,000 for the three-month period ended March 31, 1996, as compared to $471,000 for the similar period in 1995. This increase is primarily attributable to the increase in ILCO's net income resulting from ILCO's sale of the Austin Centre property. 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 47%) 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 62% of the issued and outstanding shares of ILCO's common stock. The fixed maturities available for sale portion of ILCO's investment assets at March 31, 1996 was $461.6 million. The amortized cost of the fixed maturities available for sale segment as of March 31, 1996 was $459.4 million, representing a net unrealized gain of approximately $2.2 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 by ILCO in the future. Since FIC owns approximately 47% 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 $0.7 million. ILCO's net income for the three month period ended March 31, 1996, as compared to the same period in 1995, was affected by a decrease in interest expense. Interest expense was $1.1 million for the first three months of 1996, as compared to $1.5 million for the same period in 1995. The decrease is attributable to a reduction in the average principal balance of the senior loan from $69.7 million for the three month period ending March 31, 1995 to $44.94 million for the three month period ending March 31, 1996, as well as a decrease in the average rate of interest paid on the senior loan - 7.91% for the first quarter of 1996 as compared to 8.80% for the same 1995 period. ILCO's results for the first three months of 1996 include the operations of Investors Life Insurance Company of Indiana (formerly Meridian Life Insurance Company). Investors Life Insurance Company of Indiana ("Investors-IN") was purchased by ILCO and Investors-NA for an adjusted purchase price of $17.1 million; the transaction was completed on February 14, 1995. ILCO's results for this period also include the operations of Investors-NA and InterContinental Life Insurance Company ("ILIC"). 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 - 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. 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. As of December 31, 1995, the unpaid principal of ILCO's Senior Loan 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 schedule 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 further reduced the total amount of the outstanding Senior Loan to $29.94 million, as of that date. 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 March 31, 1996, the outstanding principal balance of the surplus debentures was $6.7 million and $53.6 million, respectively. Since Investors-NA is domiciled in the State of Washington, the Washington insurance laws apply 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 March 31, 1996, the statutory capital and surplus of Investors-NA was $71.8 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. Washington's insurance code includes the "greater of" standard for dividends 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. 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 policy holder 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 March 31, 1996 and March 31, 1995, 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 of Financial Industries Corporation For the three-month period ended March 31, 1996, FIC's income from operations before Federal income taxes and before equity in net earnings of affiliate, was $1,876,000 on revenues of $15,013,000, as compared to $2,804,000, on revenues of $16,050,000 for the same period in 1995. In part, this can be attributed to an increase in death claim payments by Family Life. For the three month period ended March 31, 1996, Family Life paid $5.6 million in death claims. For that same period in 1995, death benefit payments totaled $4.7 million. Premium income, net of reinsurance ceded, for the first quarter of 1996 was $10.4 million, as compared to $11.1 million in the same period in 1995. 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. As of March 31, 1996 the outstanding balance of such indebtedness was: (i) $4.67 million on the Senior Loan granted by a group of banks, which was completely paid off on April 17, 1996, and (ii) $61.2 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 March 31, 1996, the statutory capital and surplus of Family Life was $24.9 million, an amount substantially in excess of the surplus floor. As of March 31, 1996, the principal balance of the Surplus Debenture was $47.3 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. Washington's insurance code includes the "greater of" standard for dividends 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. 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 operating activities was $3.5 million in the three month period ended March 31, 1996, as compared to $1.38 million for the corresponding period of 1995. Net cash flow used in financing activities was $(2.09) million for the three-month period ended March 31, 1996, as compared to $(1.96) million for the corresponding period of 1995. 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 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 March 31, 1996 of $44.9 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 $4.67 million at March 31, 1996 (ii) the $22.5 million note issued by Family Life Corporation to Investors-NA, 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 March 31, 1996, the Company's invested assets were $112.5, as compared to $112.6 million as of December 31, 1995. The level of short-term investments at March 31, 1996 increased to $29.6 million from the $27.2 million level which existed as of December 31, 1995. The fixed maturities available for sale portion represents $81.1 million of invested assets at March 31, 1996, as compared to $83.6 million at December 31, 1995. The amortized cost of fixed maturities available for sale as of March 31, 1996 was $80.5 million representing a net unrealized gain of approximately $0.6 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 policy holder 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 December 31, 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, 1995, 100% of the fixed maturities portfolio consisted of investments with an NAIC rating of "1" (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 policy holders and to credit relatively consistent rates of return to its policy holders. FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES Part II. 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, 1995 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: May 14, 1996 EX-27 2
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 MAR-31-1996 81,095 0 0 4 0 0 112,527 1,263 2,910 37,606 288,796 55,143 129 41,434 5,803 65,898 0 0 1,169 83,123 288,796 10,432 1,816 0 968 5,707 1,050 3,572 1,876 407 8,616 0 0 0 8,616 7.76 7.76 0 0 0 0 0 0 0
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