-----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, NHJ9gTZDd2wE7H/oL3jW7binYe7CD+SuHqfAReiATvSIJy2hshBEty0av9demjcM 8ES7TWZJlGJej2V+WDRifQ== 0000035733-96-000016.txt : 19961118 0000035733-96-000016.hdr.sgml : 19961118 ACCESSION NUMBER: 0000035733-96-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96665535 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, 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 September 30, 1996 and December 31, 1995...................3 Consolidated Statements of Income For the three and nine month periods ended September 30, 1996 and 1995................................ 5 Consolidated Statements of Cash Flows For the three and nine month periods ended September 30, 1996 and 1995................................ 7 Notes to Consolidated Financial Statements...................11 Management's Discussion and Analysis of Financial Conditions and Results of Operations..........12 Part II Other Information............................................19 Signature Page...............................................20 Item 1. Financial Statements FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept 30, Dec. 31, 1996 1995 Unaudited ASSETS Investments: Fixed maturities available for sale, at market value (amortized cost of $82,741 and $79,961, respectively) $ 82,619 $ 83,632 Equity securities, at market (cost approximately $11) 4 4 Policy loans 2,119 1,774 Short-term investments 25,966 27,180 Total investments 110,708 112,590 Cash 1,896 1,414 Investment in affiliate 49,927 45,736 Accrued investment income 926 1,102 Agent advances and other receivables 7,552 10,368 Reinsurance receivables 5,359 2,383 Due and deferred premiums 10,276 9,726 Property and equipment, net 8,767 7,452 Deferred policy acquisition costs 40,396 36,537 Present value of future profits of acquired business 41,513 45,415 Deferred financing costs -0- 168 Other assets 5,631 6,264 Separate account assets 8,681 8,523 Total assets $291,632 $287,678 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept 30, Dec. 31, 1996 1995 Unaudited LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds: Future policy benefits payable $ 58,088 $ 54,909 Contractholder deposit funds 41,434 41,456 Unearned premiums 129 132 Other policy claims & benefits payable 5,754 5,836 105,405 102,333 Senior loans -0- 6,765 Subordinated notes payable to affiliate 61,477 61,224 Deferred federal income taxes 16,470 14,783 Other liabilities 12,339 11,315 Separate account liabilities 8,681 8,523 Total liabilities 204,372 204,943 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 (loss) gain on investments in fixed maturities available for sale (990) 8,052 Net unrealized gain on equity securities 18 11 Retained earnings 80,260 66,700 87,682 83,157 Common treasury stock, at cost, 83,467 shares in 1996 and 1995 (422) (422) Total shareholders' equity 87,260 82,735 Total liabilities and shareholders' equity $291,632 $287,678 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars, except per share data) 3 Months Ended Sept 30, 1996 1995 Revenues: Net premiums $ 11,025 $ 11,625 Net investment income 1,815 1,929 Earned insurance charges 1,311 1,731 Other 827 803 Total revenues 14,978 16,088 Benefits and expenses: Benefits and other expenses 5,974 5,420 Interest on insurance policies 664 510 Amortization of present value of future profits of acquired business 1,429 1,510 Amortization of deferred policy acquisition costs 862 958 Operating expenses 3,054 4,075 Interest expense 923 1,197 Total benefits and expenses 12,906 13,670 Income before federal income taxes and equity in net earnings of affiliate 2,072 2,418 Provision for federal income taxes 481 495 Income before equity in net earnings of affiliate 1,591 1,923 Equity in net earnings of affiliate, net of tax 574 435 Net income $ 2,165 $ 2,358 Per Share Data: Common stock and common stock equivalents 1,113 1,109 Net income per share available to common shareholders $ 1.94 $ 2.13 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars, except per share data) 9 Months Ended Sept 30, 1996 1995 Revenues: Net premiums $ 32,636 $ 33,016 Net investment income 5,438 5,682 Earned insurance charges 4,260 5,396 Other 2,731 2,429 Total revenues 45,065 46,523 Benefits and expenses: Benefits and other expenses 16,768 15,264 Interest on insurance policies 1,679 1,433 Amortization of present value of future profits of acquired business 3,902 4,112 Amortization of deferred policy acquisition costs 2,745 2,710 Operating expenses 10,104 10,987 Interest expense 2,896 3,566 Total benefits and expenses 38,094 38,072 Income before federal income taxes and equity in net earnings of affiliate 6,971 8,451 Provision for federal income taxes 1,691 2,061 Income before equity in net earnings of affiliate 5,280 6,390 Equity in net earnings of affiliate, net of tax 8,279 1,394 Net income $ 13,559 $ 7,784 Per Share Data: Common stock and common stock equivalents 1,112 1,108 Net income per share available to common shareholders $ 12.19 $ 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, 1996 AND 1995 (Unaudited) (in thousands of dollars) 3 Months Ended Sept 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,165 $ 2,358 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of present value of future profits 1,429 1,510 Amortization of deferred policy acquisition costs 862 958 Financing costs amortized -0- (141) Loss on sale of equipment -0- -0- Equity in undistributed earnings of affiliate (2,815) (1,183) Changes in assets and liabilities net of effects from purchase of insurance subsidiaries: Decrease in accrued investment income 197 314 (Increase) decrease in agent advances and other receivables (2,126) 212 Increase in due and deferred premiums (352) (686) Increase in deferred policy acquisition costs (2,106) (2,418) (Increase) decrease in other assets 513 (723) Increase in policy liabilities and accruals 3,630 1,298 (Decrease) Increase in other liabilities (542) 2,743 Increase in policy loans (133) (181) Increase (decrease) in deferred federal income taxes 693 (2,672) Other, net 1,860 (4) Net cash provided by operating activities $ 3,275 $ 1,385 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars) 3 Months Ended Sept 30, 1996 1995 CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased $ (976) $ -0- Proceeds from sale and maturities of investments (156) 399 Net change in short-term investments (1,451) (207) Retirement of equipment -0- 1 Net cash (used in) provided by investing activities (2,583) 193 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of subordinated notes payable to affiliate -0- -0- Repayment of debt -0- (2,091) Net cash used in financing activities -0- (2,091) Net increase (decrease) in cash 692 (513) Cash, beginning of period 1,204 2,341 Cash, end of period $ 1,896 $ 1,828 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLDIATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars) 9 Months Ended Sept 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,559 $ 7,784 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of present value of future profits 3,902 4,112 Amortization of deferred policy acquisition costs 2,745 2,710 Financing costs amortized 168 195 Loss on sale of equipment -0- -0- Equity in undistributed earnings of affiliate (11,244) (3,642) Changes in assets and liabilities net of effects from purchase of insurance subsidiaries: Decrease in accrued investment income 176 386 Decrease in agent advances and other receivables (160) (83) (Increase) decrease in due and deferred premiums (550) 245 Increase in deferred policy acquisition costs (6,604) (8,737) Decrease (increase) in other assets 632 (1,086) Increase in policy liabilities and accruals 3,073 1,954 Increase in other liabilities 1,024 6,501 Increase in policy loans (345) (375) Increase in deferred federal income taxes 1,687 1,319 Other, net 1,812 (12) Net cash provided by operating activities $ 9,875 $ 11,271 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLDIATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars) 9 Months Ended Sept 30, 1996 1995 CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased $ (3,735) $ -0- Proceeds from sale and maturities of investments 955 1,001 Net change in short-term investments 1,214 (3) Purchase of equipment, net (1,315) (3,396) Net cash used in investing activities (2,881) (2,398) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of subordinated notes payable to affiliate 253 226 Repayment of debt (6,765) (8,204) Net cash used in financing activities (6,512) (7,978) Net increase in cash 482 895 Cash, beginning of period 1,414 933 Cash, end of period $ 1,896 $ 1,828 (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 ILCO and ILCO's insurance subsidiaries. Net income for the first nine months of 1996 includes $7.2 million resulting from the sale during the first quarter of 1996 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, 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. 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 cost 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. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations: For the nine-month period ended September 30, 1996, FIC's net income was $13,559,000 ($12.19 per common share), as compared to $7,784,000 ($7.03 per common share) for the nine-month period ended September 30, 1995. FIC's net income is affected by its equity interest in InterContinental Life Corporation ("ILCO") and ILCO's insurance subsidiaries. Net income for the first nine months 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 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 $8,578,339 at September 30, 1996, as compared to $10,841,027 at September 30, 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 September 30, 1996 include Separate Account assets of Family Life in the amount of $8.68 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 $8,279,000 for the nine-month period ended September 30, 1996, as compared to $1,394,000 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 September 30, 1996 was $461.6 million. The amortized cost of the fixed maturities available for sale segment as of September 30, 1996 was $466.2 million, representing a net unrealized loss of $4.6 million over amortized cost. Such decrease reflects unrealized losses on such investments. Since FIC owns approximately 47% of the common stock of ILCO, such unrealized loss, net of tax, is reflected in FIC's equity interest in ILCO, and had the effect of decreasing the reported value of such equity interest by approximately $7.2 million. ILCO's net income for the nine-month period ended September 30, 1996, as compared to the same period in 1995, was affected by a decrease in interest expense. Interest expense was $2.27 million for the first nine months of 1996, as compared to $4.55 million for the same period in 1995. The decrease is attributable to a reduction in the average principal balance of the senior loan from $65.96 million for the nine-month period ending September 30, 1995 to $36.58 million for the nine-month period ending September 30, 1996, as well as a decrease in the average rate of interest paid on the senior loan - 7.78% for the first nine months of 1996 as compared to 8.72% for the same period in 1995. ILCO's results for the first nine 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, ILCO made a scheduled payment of $4.5 million under its Senior Loan. In March, 1996, ILCO made the scheduled payments for April 1st and July 1st, totaling $9 million. At that same time, it made a payment of $941,000, an additional payment under the terms of the loan applied to the principal balance. On April 1, 1996, an optional principal payment in the amount of $15 million was made. In July, 1996, ILCO made the principal payment for October 1st ($4.5 million), plus an optional principal payment of $0.5 million, thereby reducing the total amount of its outstanding Senior Loan to $24.94 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, 1996, the outstanding principal balance of the surplus debentures was $6.4 million and $35.5 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 September 30, 1996, the statutory capital and surplus of Investors-NA was $54.3 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. Since the law applies only to dividend payments, the ability of Investors-NA to make principal and interest payments under the surplus debentures is not affected. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the surplus debentures in the amounts necessary to enable ILCO to service 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 nine-month periods ended September 30, 1996 and September 30, 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 September 30, 1996, FIC's income from operations before Federal income taxes and before equity in net earnings of affiliate, was $2,072,000 on revenues of $14,978,000, as compared to $2,418,000, on revenues of $16,088,000 for the same period in 1995. Premium income, net of reinsurance ceded, for the third quarter of 1996 was $11.03 million, as compared to $11.63 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 consist 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 September 30, 1996 the outstanding balance of such indebtedness was $61.5 million on the Subordinated Notes granted by Investors-NA. On April 17, 1996, the Senior Loan granted by a group of banks was completely paid off; the balance as of March 31, 1996 had been $4.67 million. 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, 1996, the statutory capital and surplus of Family Life was $24.2 million, an amount substantially in excess of the surplus floor. As of September 30, 1996, the principal balance of the Surplus Debenture was $42.8 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 $9.9 million in the nine-month period ended September 30, 1996, as compared to $11.3 million for the corresponding period of 1995. Net cash flow used in financing activities was $6.5 million for the nine-month period ended September 30, 1996, as compared to $8.0 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 September 30, 1996 of $24.9 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 $22.5 million note issued by Family Life Corporation to Investors-NA, and (ii) 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, 1996, the Company's investment assets were $110.7, as compared to $112.6 million as of December 31, 1995. The level of short-term investments decreased to $25.9 million for the period ended September 30, 1996, from the $27.2 million level which existed as of December 31, 1995. The fixed maturities available for sale portion represents $82.6 million of invested assets at September 30, 1996, as compared to $83.6 million at December 31, 1995. The amortized cost of fixed maturities available for sale as of September 30, 1996 was $82.7 million, representing an unrealized loss of approximately $0.1 million. This unrealized loss principally reflects changes in interest rates from the date the respective investments were purchased. The net of tax effect of this decrease has been recorded as a reduction in shareholders' equity. 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, 1996, 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 September 30, 1996, 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. Subsequent Event At a Special Meeting of Shareholders held on November 12, 1996, the shareholders of the Company approved an amendment to the Articles of Incorporation, increasing the number of authorized shares of common stock from 3,304,200 to 10,000,000 and changing the par value from $1.00 per share to $0.20 per share. This action allowed the Company to implement the five-for-one stock split which was authorized by the board of directors at a meeting held on September 27, 1996. The record date for the stock split is November 12, 1996 and the distribution date for the new certificates is November 19, 1996. Shareholders will not be required to surrender their original share certificates. Under the provisions of the amendment to the Articles of Incorporation, such certificates are automatically converted to shares with a par value of $0.20. The Company will issue to each shareholder as of the record date a certificate representing an additional four shares of common stock for each share held. 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 At a Special Meeting of Shareholders held on November 12, 1996, shareholder of the Company approved an amendment to the Articles of Incorporation, authorizing an increase in common stock from 3,304,200 shares to 10,000,000 shares and changing the par value from $1.00 to $0.20. The approval of the amendment permitted the Company to proceed with the five-for-one split of the common stock, as previously approved by the board of directors. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (i) Amendment to the Articles of Incorporation of the Registrant, filed November 12, 1996. (ii) 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: November 14, 1996 EX-27 2
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 SEP-30-1996 82,619 0 0 4 0 0 110,708 1,896 5,359 40,396 291,632 58,088 129 41,434 5,754 61,477 0 0 1,169 86,091 291,632 32,636 5,438 0 2,731 16,768 2,745 10,104 6,971 1,691 13,559 0 0 0 13,559 12.19 12.19 0 0 0 0 0 0 0
EX-3 3 ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF FINANCIAL INDUSTRIES CORPORATION The undersigned, Mr. Roy F. Mitte and Mr. James M. Grace, certify that: 1. They are the President and Secretary, respectively, of Financial Industries Corporation. 2. At a duly held annual meeting of the Board of Directors of Financial Industries Corporation, held on September 27, 1996, the Board adopted the following resolution approving the following amendment to the Articles of Incorporation: Paragraph 1 of Article IV is amended to read as follows: "The aggregate number of shares which the corporation shall have the authority to issue is ten million (10,000,000) shares of common stock of the par value of twenty cents ($0.20) each." 3. The decrease in par value accorded by this amendment will have no effect on the current stated capital since the Corporation will effect a five-for-one stock split immediately following the filing of this amendment. The original certificates will remain valid except that their par value will be converted from $1.00 to $0.20. 4. The shareholders of the corporation adopted and approved the same amendment by resolution at a special meeting held at Austin Centre, 701 Brazos, Austin, Texas, on November 12, 1996, by the required vote of shareholders as prescribed by Article VII of the Articles of Incorporation and Articles 4.02 and 2.28 of the Texas Business Corporations Act. 5. The number of shares outstanding is 1,085,593. The number of shares entitled to vote on or consent to the amendment is 1,085,593 shares. 6. The number of shares voted in favor of the amendment was 653,355, or 60.18%, which exceeded the required vote, which is a majority under Article VII of the Articles of Incorportion. The number of shares voted against was 6,401. 7. The undersigned have executed these Articles of Amendment and affixed the corporate seal on November 12, 1996. Roy F. Mitte, President James M. Grace, Secretary -----END PRIVACY-ENHANCED MESSAGE-----