-----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, T/01hkf4med5KvKHQ4fx3Yj3w3IOVxJKuYb7CehBTPezXxIbSSCdunHiamctdFcM /E+fxoHsMHdw3EsVeRzrrg== /in/edgar/work/20000814/0000035733-00-000008/0000035733-00-000008.txt : 20000921 0000035733-00-000008.hdr.sgml : 20000921 ACCESSION NUMBER: 0000035733-00-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINANCIAL INDUSTRIES CORP CENTRAL INDEX KEY: 0000035733 STANDARD INDUSTRIAL CLASSIFICATION: [6311 ] IRS NUMBER: 742126975 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04690 FILM NUMBER: 698991 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 0001.txt 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 June 30, 2000 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) 6500 River Place Boulevard, Building I Austin, Texas 78730 (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 ($.20 par value) at end of period:5,054,661. - 1 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets June 30, 2000 and December 31, 1999....................................3 Consolidated Statements of Income For the three and six month periods ended June 30, 2000 and June 30, 1999.......................................5 Consolidated Statements of Cash Flows For the three and six month periods ended June 30, 2000 and June 30, 1999.......................................9 Notes to Consolidated Financial Statements....................................13 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations.......................15 Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... .......................................20 Part II Other Information............................................................23 Signature Page...............................................................24 - 2 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, December 31, 2000 1999 ----------- --------- (unaudited) ASSETS Investments other than investments in affiliate: Fixed maturities available for sale at market value (amortized cost of $81,571 and $78,252 at June 30, 2000 and December 31, 1999, respectively) $ 80,851 $ 77,515 Equity securities at market (cost approximates $11 at June 30, 2000 and December 31, 1999) 4 4 Policy loans 3,603 3,595 Short-term investments 16,290 24,839 ----------------- ---------------- Total investments 100,748 105,953 Cash 1,181 692 Investment in affiliate 73,503 70,013 Accrued investment income 1,244 1,180 Agency advances and other receivables 6,873 6,885 Reinsurance receivables 16,369 14,848 Due and deferred premiums 12,515 12,392 Property and equipment, net 1,318 1,355 Deferred policy acquisition costs 54,240 52,490 Present value of future profits of acquired businesses 21,237 23,109 Other assets 4,791 4,758 Separate account assets 0 379 -------------------- ------------------ Total Assets $ 294,019 $ 294,054 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements - 3 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, December31, 2000 1999 ------------ ---------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contract holder deposit funds: Future policy benefits $ 61,394 $ 59,783 Contract holder deposit funds 43,527 44,681 Unearned premiums 14 14 Other policy claims and benefits payable 3,734 4,282 ------------------ ----------------- 108,669 108,760 Subordinated notes payable to affiliate 38,423 41,497 Deferred federal income taxes 23,098 23,222 Other liabilities 3,750 4,079 Separate account liabilities 0 379 ------------------- ------------------ Total Liabilities 173,940 177,937 -------------- --------------- Commitments and Contingencies Shareholders' equity: Common stock, $.20 par value, 10,000,000 shares authorized; 5,845,300 shares issued, 5,054,661 outstanding in 2000 and 1999 1,169 1,169 Additional paid-in capital 7,225 7,225 Accumulated other comprehensive income (2,006) (2,454) Retained earnings 121,066 117,552 --------------- --------------- 127,454 123,492 Common treasury stock, at cost, 790,639 at 2000 and 1999. (7,375) (7,375) ----------------- ---------------- Total Shareholders' Equity 120,079 116,117 --------------- -------------- Total Liabilities and Shareholders' Equity $ 294,019 $ 294,054 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. - 4 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share data)
Three Months Ended June 30, 2000 1999 ------------ -------- (unaudited) Revenues: Premiums $ 8,443 $ 9,101 Net investment income 1,700 1,701 Earned insurance charges 1,225 1,209 Other 3 297 ----------------- ----------------- 11,371 12,308 Benefits and expenses: Policyholder benefits and expenses 3,870 4,192 Interest expense on contract holders deposit funds 469 467 Amortization of present value of future profits of acquired businesses 856 1,402 Amortization of deferred policy acquisition costs 1,094 1,180 Operating expenses 2,991 2,806 Interest expense 484 552 ----------------- ------------------ 9,764 10,599 ---------------- ---------------- Income before federal income tax and equity in net earnings of affiliates 1,607 1,709 Provision for federal income taxes 319 434 ---------------- -------------- Income before equity in net earnings of affiliates 1,288 1,275 Equity in net earnings of affiliate, net of tax 917 526 --------------- ------------------ Net Income $ 2,205 $ 1,801 ============= ================
The accompanying notes are an integral part of these consolidated statements. - 5 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share data)
Three Months Ended June 30, 2000 1999 ---------- --------- (unaudited) Net Income Per Share Basic: Average weighted shares outstanding 5,055 5,055 =================== ================== Basic earnings per share $ 0.44 $ 0.36 =================== ================== Diluted: Common stock and common stock equivalents 5,168 5,194 =================== ================== Diluted earnings per share $ 0.43 $ 0.35 =================== ==================
The accompanying notes are an integral part of these consolidated financial statements. - 6 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share data)
Six Months Ended June 30, 2000 1999 ------------ -------- (unaudited) Revenues: Premiums $ 16,844 $ 17,682 Net investment income 3,440 3,454 Earned insurance charges 2,372 2,585 Other 3 702 ---------------------- -------------------- 22,659 24,423 Benefits and expenses: Policyholder benefits and expenses 7,221 7,933 Interest expense on contract holders deposit funds 1,059 972 Amortization of present value of future profits of acquired businesses 1,872 2,612 Amortization of deferred policy acquisition costs 2,443 2,383 Operating expenses 5,938 5,722 Interest expense 1,012 1,250 ----------------- ------------------ Total 19,545 20,872 ---------------- ----------------- Income before federal income tax and equity in net earnings of affiliates 3,114 3,551 Provision for federal income taxes 578 773 ------------------ ------------------- Income before equity in net earnings of affiliates 2,536 2,778 Equity in net earnings of affiliate, net of tax 1,883 1,291 ------------------ ------------------ Net Income $ 4,419 $ 4,069 ================= =================
The accompanying notes are an integral part of these consolidated statements. - 7 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share data)
Six Months Ended June 30, 2000 1999 ------------ --------- (unaudited) Net Income Per Share Basic: Average weighted shares outstanding 5,055 5,055 ================== ================= Basic earnings per share $ 0.87 $ 0.81 ================== ================= Diluted: Common stock and common stock equivalents 5,167 5,201 ================== ================= Diluted earnings per share $ 0.86 $ 0.78 ================== =================
The accompanying notes are an integral part of these consolidated financial statements. - 8 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Three Months Ended June 30, 2000 1999 ------------- --------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income 2,205 $ 1,801 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of present value of future profits of acquired business 856 1,402 Amortization of deferred policy acquisition costs 1,094 1,180 Equity in undistributed earnings of affiliate (1,505) (1,164) Changes in assets and liabilities: Increase in accrued investment income (113) (186) (Increase) Decrease in agent advances and other receivables (1 ,252) 142 Increase in due and deferred premiums (260) (458) Increase in deferred policy acquisition costs (2,222) (2,451) (Increase)Decrease in other assets (133) 180 (Increase)Decrease in policy liabilities and accruals 129 (927) Increase (Decrease) in other liabilities 136 (761) (Decrease) in deferred federal income taxes (77) (298) Other, net 445 (2) ---------------- --------------------- Net cash used in operating activities $ (697) $ (1,542) --------------- ----------------
The accompanying notes are an integral part of these consolidated financial statements. - 9 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (in thousands)
Three Months Ended June 30, 2000 1999 ------------ -------- (unaudited) CASH FLOWS FROM INVESTING ACTIVITIES Fixed maturities purchased $ (8,826) $ (2,996) Proceeds from sales and maturities of fixed maturities 6,406 3,486 Increase in policy loans (5) (44) Net change in short-term investments 5,837 1,877 Purchase & retirement of property and equipment 37 0 ---------------- ---------------- Net cash provided by investing activities 3,449 2,323 -------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES Dividends Paid (907) 0 Repayment of subordinated notes payable (1,537) (1,537) -------------- -------------- Net cash used in financing activities (2,444) (1,537) -------------- -------------- Net Increase (Decrease) in cash 308 (756) Cash, beginning of period 873 1,758 ------------- -------------- Cash, end of period $ 1,181 $ 1,002 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. - 10 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Six Months Ended June 30, 2000 1999 (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 4,419 $ 4,069 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of present value of future profits of acquired business 1,872 2,612 Amortization of deferred policy acquisition costs 2,443 2,383 Equity in undistributed earnings of affiliate (3,031) (2,478) Changes in assets and liabilities: (Increase) Decrease in accrued investment income (64) 42 Increase in agent advances and other receivables (1,509) (827) Increase in due and deferred premiums (123) (261) Increase in deferred policy acquisition costs (4,193) (4,508) (Increase)Decrease in other assets (33) 521 Decrease in policy liabilities and accruals (91) (845) (Decrease) in other liabilities (329) (1,413) (Decrease) in deferred federal income taxes (124) (160) Other, net 305 (71) ---------------- -------------------- Net cash used in operating activities $ (458) $ (936) -------------- -----------------
- 11 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (in thousands)
Six Months Ended June 30, 2000 1999 -------------- -------- (unaudited) CASH FLOWS FROM INVESTING ACTIVITIES Fixed maturities purchased $ (10,288) $ (9,996) Proceeds from sales and maturities of fixed maturities 6,638 13,255 Increase in policy loans (8) (122) Net change in short-term investments 8,549 (726) Purchase & retirement of property and equipment 37 0 ---------------- ---------------- Net cash provided by investing activities 4,928 2,411 -------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES Dividends Paid (907) 0 Repayment of subordinated notes payable (3,074) (3,074) --------------- ------------- Net cash used in financing activities (3,981) (3,074) ------------- ------------- Net Increase (Decrease) in cash 489 (1,599) Cash, beginning of year 692 2,601 -------------- -------------- Cash, end of period $ 1,181 $ 1,002 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. - 12 - FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1999, 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. Other Comprehensive Income (Loss) The following is a reconciliation of accumulated other comprehensive income (loss)from December 31, 1999 to June 30, 2000 (in thousands):
Net Total Net unrealized appreciation accumulated gain on investments (depreciation) other in fixed maturities of equity comprehensive available for sale securities income (loss) ------------------ ----------- ------ Balance at December 31, 1999 $ (2,454) $ (0) $ (2,454) Current Period Change 451 (3) 448 ----------- ---------- ----------- Balance at June 30, 2000 $ (2,003) $ (3) $ (2,006) ========= ========= =========
- 13 - New Accounting Pronouncements In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. FAS 133 is applicable to financial statements for all fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS No.133." As the Company does not have significant investments in derivative financial instruments, the adoption of FAS No. 133 is not anticipated to have a material impact on the Company's results of operations, liquidity or financial position. Dividends Declared On January 17, 2000, FIC's Board of Directors approved an annual cash dividend in the amount of $.18 per common share. The dividend was paid on April 12, 2000 to shareholders of record on April 5, 2000. - 14 - Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operation ----------------------------------------------------------------------- The following discussion addresses the results of operations of Financial Industries Corporation ("FIC") for the six months ended June 30, 2000 compared with the same six-month period last year, and the financial condition as of June 30, 2000, compared with December 31, 1999. For the six-month period ended June 30, 2000, FIC's net income was $4,419,000 (basic earnings of $0.87 per common share, or diluted earnings of $0.86 per common share) as compared to $4,069,000 (basic earnings of $0.81 per common share, or diluted earnings of $0.78 per common share) in the first six months of 1999. Earnings per share are stated in accordance with the requirements of FAS No. 128, which establishes two measures of earnings per share: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common stock were converted or exercised. On January 17, 2000, FIC's Board of Directors approved an annual cash dividend in the amount of $.18 per common share. The dividend was paid on April 12, 2000, to record holders as of the close of business on April 5, 2000. The dividend was paid with respect to each share of common stock which is issued on the record date, except for shares owned directly by FIC. Results of Operations FIC's income from operations - as determined before federal income tax and equity in net earnings of its affiliate, InterContinental Life Corporation - for the six-month period ended June 30, 2000, was $3,114,000 (on revenues of $22,659,000), as compared to $3,551,000 (on revenues of $24,423,000) in the first six months of 1999. Premiums for the first six months of 2000, net of reinsurance ceded, were $16.8 million, as compared to $17.7 million in the first six months of 1999. Policyholder benefits and expenses were $7.2 million in the second quarter of 2000, as compared to $7.9 million in the first six months of 1999. As of June 30, 2000, the market value of the fixed maturities available for sale segment was $80.9 million as compared to an amortized cost of $81.6 million, or an unrealized loss of $0.7 million. The decrease reflects unrealized losses on such investments related to changes in interest rates subsequent to the purchase of such investments. The net of tax effect of this decrease ($0.46 million at June 30, 2000) has been recorded as an decrease in shareholders' equity. As required under the provisions of FAS No. 130, the determination of "Accumulated other comprehensive loss" includes separate identification of the change in values which occurred during the current period. 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. - 15 - Equity in Net Income of InterContinental Life Corporation General For the six-month period ended June 30, 2000, the Company's equity in the net earnings of InterContinental Life Corporation ("ILCO"), net of federal income tax, was $1,883,000, as compared to $1,291,000 for the first six months of 1999. As of June 30, 2000, FIC owned 3,590,292 shares of ILCO's common stock. In addition, FIC's wholly- owned life insurance subsidiary, Family Life Insurance Company ("Family Life"), owned 342,400 shares of ILCO common stock. As a result, as of June 30, 2000, FIC owned, directly and indirectly through Family Life, 3,932,692 shares (approximately 47.9 %) of ILCO's common stock. As of June 30, 2000, the market value of ILCO's fixed maturities available for sale segment was $443.4 million as compared to an amortized cost of $451.7 million, or an unrealized loss of $8.3 million. The decrease reflects unrealized losses on such investments related to changes in interest rates subsequent to the purchase of such investments. Since FIC owns approximately 47.9 % of the common stock of ILCO, the net of tax effect of this decrease ($2.6 million at June 30, 2000) is included in "Accumulated other comprehensive loss" on the Consolidated Balance Sheets and has been recorded as a decrease in shareholders' equity. Liquidity and Capital Resources of ILCO ILCO is a holding company whose principal assets consist of the common stock of Investors Life Insurance Company of North America ("Investors-NA") and its subsidiary, Investors Life Insurance Company of Indiana ("Investors-IN"). Prior to June 30, 2000, ILCO's primary source of funds consisted of payments under the surplus debentures from Investors-NA. Prior to June 30, 2000, ILCO's principal source of liquidity consisted of the periodic payment of principal and interest to it by Investors-NA, pursuant to the terms of two surplus debentures (the "Surplus Debentures"). The Surplus Debentures were originally issued by Standard Life Insurance Company and their terms were previously approved by the Mississippi Insurance Commissioner. In connection with the 1993 merger of Standard Life into Investors-NA, the obligations of the Surplus Debentures were assumed by Investors-NA. As of June 30, 2000, the outstanding principal balance of the Surplus Debentures was completely paid off. For periods subsequent to June 30, 2000, ILCO's available source of liquidity would be from dividends paid to it from its subsidiaries, Investors-NA and Investors-IN. Applicable state insurance laws may limit the ability of such subsidiaries to pay dividends to ILCO. Investors-NA is domiciled in the State of Washington. The Washington insurance law includes the "greater of" standard for payment of dividends to shareholders, but has a requirement that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Under the "greater of" standard, an insurer may pay a dividend in an amount equal to the greater of (i) 10% of the policyholder surplus or (ii) the insurer's net gain from operations for the previous year. As of June 30, - 16 - 2000, Investors-NA had earned surplus of $ 55.3 million. Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance law, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN had earned surplus of $19.0 million at June 30, 2000. In June, 1999, Investors-IN paid a dividend in the amount of $3 million to its sole shareholder, Investors-NA. The amount of the dividend was less than the net gain from operations for the prior fiscal year; accordingly, no prior approval was required for the payment of the dividend. Advance notice of the payment was provided to the Indiana Department of Insurance, in accordance with the provisions of the Indiana Insurance Code. The Form 10-Qs of ILCO for the six-month periods ended June 30, 2000 and June 30,1999, set 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. Liquidity and Capital Resources FIC is a holding company whose principal assets consist of the common stock of Family Life and its equity ownership in ILCO. FIC's primary sources of capital consists of cash flow from operations of its subsidiaries. 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 June 30, 2000, the outstanding balance of such indebtedness was $38.4 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 June 30, 2000, the statutory capital and surplus of Family Life was $24.2 million, an amount substantially in excess of the surplus floor. As of June 30, 2000, the principal balance of the Surplus Debenture was $9.88 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 policyholders, 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 - 17 - 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 policyholders, 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 $(0.5) million in the first six months of 2000, as compared to $(0.9) million in the first six months of 1999. Net cash flow used in financing activities was $(4.0) million in the first six months of 2000, as compared to $(3.1) million in the first six months of 1999. 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 Life Insurance Company of North America 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 June 30, 2000, the Company's investment assets totaled $100.75 million, as compared to $105.95 million as of December 31, 1999. The level of short-term investments at June 30, 2000 was $16.3 million, as compared to $24.8 million as of December 31, 1999. The fixed maturities available for sale portion represents $80.9 million of investment assets as of June 30, 2000, as compared to $77.5 million at December 31, 1999. The amortized cost of fixed maturities available for sale as of June 30, 2000 was $81.6 million representing a net unrealized loss of $0.7 million. This unrealized loss principally reflects changes in interest rates from the date the respective investments were purchased. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities. - 18 - 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 fixed maturities portfolio of Family Life, as of June 30, 2000, 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). The investments of Family Life and ILCO's insurance subsidiaries in mortgage-backed securities included collateralized mortgage obligations ("CMOs") of $22.10 million and $179.1 million, respectively, and mortgage-backed pass-through securities of $9.3 million and $46.7 million, respectively, at June 30, 2000. Mortgage-backed pass-through securities, sequential CMO's and support bonds, which comprised approximately 50.8 % of the book value of FIC's mortgage-backed securities and 55.9 % of the book value of ILCO's mortgage-backed securities at June 30, 2000, are sensitive to prepayment and extension risks. ILCO and FIC have reduced the risk of prepayment associated with mortgage-backed securities by investing in planned amortization class ("PAC"), target amortization class ("TAC") instruments and scheduled bonds. These investments are designed to amortize in a predictable manner by shifting the risk of prepayment of the underlying collateral to other investors in other tranches ("support classes") of the CMO. At June 30, 2000, PAC and TAC instruments and scheduled bonds represented approximately 49.2 % of the book value of FIC's mortgage-backed securities and approximately 44.1 % of the book value of ILCO's mortgage-backed securities. Sequential and support classes represented approximately 21.2 % of the book value of FIC's mortgage-backed securities and approximately 35.2 % of the book value of ILCO's mortgage-backed securities at June 30, 2000. In addition, FIC and ILCO limit the risk of prepayment of CMOs by not paying a premium for any CMOs. ILCO and FIC do not invest in mortgage-backed securities with increased prepayment risk, such as interest-only stripped pass-through securities and inverse floater bonds. Neither FIC nor ILCO had any z-accrual bonds as of June 30, 2000. The prepayment risk that certain mortgage-backed securities are subject to is prevalent in periods of declining interest rates, when mortgages may be repaid more rapidly than scheduled as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage- backed securities may receive large prepayments on their investments which cannot be reinvested at an interest rate comparable to the rate on the prepaying mortgages. Neither FIC nor ILCO made additional investments in CMOs during 1999. For the year 2000, the investment objectives of FIC and ILCO include the making of selected investments in CMOs. 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. - 19 - Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Except for historical factual information set forth in this Management's Discussion and Analysis, certain statements made in this report are forward looking and contain information about financial results, economic conditions and other risks and known uncertainties. The Company cautions the reader that actual results could differ materially from those anticipated by the Company, depending upon the eventual outcome of certain factors, including: (1) heightened competition for new business, (2) significant changes in interest rates and (3) adverse regulatory changes affecting the business of insurance. Accounting Developments In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. FAS No. 133 is applicable to financial statements for all fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS No. 133". As the Company does not have significant investments in derivative financial instruments, the adoption of FAS No. 133 is not anticipated to have a material impact on the Company's results of operations, liquidity or financial position. Item 3. Quantitative and Qualitative Disclosures About Market Risk General FIC's principal assets are financial instruments, which are subject to market risks. Market risk is the risk of loss arising from adverse changes in market rates, principally interest rates on fixed rate investments. For a discussion of the Company's investment portfolio and the management of that portfolio to reflect the nature of the underlying insurance obligations of the Company's insurance subsidiaries, please refer to the information set forth in Item 2, "Management's Discussion and Analysis of Financial Conditions and Results of Operation - Investments" of this report. The following is a discussion of the Company's primary market risk sensitive instruments. It should be noted that this discussion has been developed using estimates and assumptions. Actual results may differ materially from those described below. Further, the following discussion does not take into account actions which could be taken by management in response to the assumed changes in market rates. In addition, the discussion does not take into account other types of risks which may be involved in the business operations of the Company, such as the reinsurance recoveries on reinsurance treaties with third party insurers. The primary market risk to the Company's investment portfolio is interest rate risk. Since the Company own approximately 47.9 % of the common stock of ILCO, the interest rate risk of ILCO's fixed income portfolio has an effect on the value of FIC's "investment in affiliate". The Company does not use derivative financial instruments. - 20 - Interest Rate Risk (a) FIC's Fixed Income Investments Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in fair market value related to the financial instruments segment of the Company's balance sheet is estimated to be $ 3.7 million at June 30, 2000 and $9.7 million at December 31, 1999. For purposes of the foregoing estimate, the following categories of the Company's fixed income investments were taken into account: (i) fixed maturities, including fixed maturities available for sale and (ii) short-term investments. The market value of such assets was $ 94.9 million at June 30, 2000 and $102.4 million at December 31, 1999. The fixed income investments of the Company include certain mortgage-backed securities. The market value of such securities was $ 31.0 million at June 30, 2000 and $ 27.3 million at December 31, 1999. Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in the fair market value related to such mortgage-backed securities is estimated to be $ 1.5 million at June 30, 2000 and $ 1.9 million at December 31, 1999. (b) FIC's Investment in Affiliate The value of FIC's investment in affiliate is affected by the amount of unrealized gains and losses, net of tax, in the investment portfolio of its affiliate, ILCO. Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in value, net of tax, related to the Company's investment in affiliate is estimated to be $7.0 million at June 30, 2000 and $6.3 million at December 31, 1999. The hypothetical effect of the interest rate risk on fair values was estimated by applying a commonly used model. The model projects the impact of interest rate changes on a range of factors, including duration and potential prepayment. 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. ILCO and Investors-NA are defendants in a lawsuit which was filed in October, 1996, in Travis County, Texas. CIGNA Corporation, an unrelated Company, is also a named defendant in the lawsuit. The named plaintiffs in the suit (a husband and wife), allege that the universal life insurance policies sold to them by INA Life Insurance Company (a company which was merged into Investors-NA in 1992) utilized unfair sales practices. The named plaintiffs seek reformation of the life insurance contracts and an unspecified amount of damages. The named plaintiffs also seek a class action as to similarly situated individuals. No - 21 - certification of a class has been granted as of the date hereof. The Company believes that the suit is without merit and intends to vigorously defend this matter. In August, 1997, another individual filed a similar action in Travis County, Texas against the corporate entities identified above. The lawsuit involves the same type of policy and includes allegations which are substantially identical to the allegations in the first action. The named plaintiff also seeks class certification. The Company believes that the court would consider class certification with respect to only one of these actions. The Company also believes that this action is without merit and intends to vigorously defend this matter. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The Annual Meeting of the Shareholders was held on May 23, 2000. The only matter submitted at the meeting to a vote of the Shareholders was the election of directors. All of the nominees were elected as directors. The nominees included one individual, Charles K. Chacosky, who had not previously served as a director of the Company. The voting tabulation as to each nominee was as follows: Name In Favor Withheld Barnett, John D. 2,863,282 473,054 Chacosky, Charles K. 2,862,832 473,504 Crowe, Joseph F. 2,863,682 472,654 Demgen, Jeffrey H. 2,863,622 472,714 Fleron, Theodore A. 2,863,582 472,754 Grace, James M. 2,861,672 474,664 Mitte, Dale E. 2,859,322 477,014 Mitte, Roy F. 2,857,387 478,949 Parker, Frank 2,860,152 476,184 Richmond, Thomas C. 2,862,872 473,464 Supple, Dr. Jerome H. 2,863,232 473,104 - 22 - 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, 1999 heretofore filed by Registrant with the Securities and Exchange Commission, which is hereby incorporated by reference. (b) Reports on Form 8-K None. - 23 - 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: August, 14, 2000 - 24 - EX-27 2 0002.txt FDS --
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q OF FINANCIAL INDUSTRIES CORPORATION FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JUN-30-2000 80,851 0 0 4 0 0 100,748 1,181 16,369 54,240 294,019 61,394 14 43,527 3,734 38,423 0 0 1,169 118,910 294,019 16,844 3,440 0 3 7,221 2,443 5,938 4,997 578 4,419 0 0 0 4,419 0.87 0.86 0 0 0 0 0 0 0
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