-----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, FF74vuN5uIjNpFPVOfowM9kZ4OwpLx8/Hz7KQ4krZ073qCQKa/8ZnFzoT5v9wLhZ PedB8UMrQFViEha+oo9lLw== 0000035733-97-000012.txt : 19971117 0000035733-97-000012.hdr.sgml : 19971117 ACCESSION NUMBER: 0000035733-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-04690 FILM NUMBER: 97719990 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, 1997 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 ($.20 par value) at end of period: 5,427,965 FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information Item I - Financial Statements: Consolidated Balance Sheets September 30, 1997 and December 31, 1996.................. 3 Consolidated Statements of Income For the three and nine month periods ended September 30, 1997 and 1996............................... 5 Consolidated Statements of Cash Flows For the three and nine month periods ended September 30, 1997 and 1996............................... 7 Notes to Consolidated Financial Statements.................... 11 Item 2 - Management's Discussion and Analysis of Financial Conditions and Results of Operations....... 13 Part II Other Information............................................. 22 Signature Page................................................ 23 Item 1. Financial Statements FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept.30, Dec. 31, 1997 1996 (Unaudited) ASSETS Investments: Fixed maturities available for sale, at market value (amortized cost of $79,925 and $82,969, respectively) $ 82,075 $ 83,833 Equity securities, at market (cost approximately $11) 4 4 Policy loans 2,576 2,286 Invested Real Estate 7,134 1,374 Short-term investments 24,229 25,615 Total investments 116,018 113,112 Cash 839 308 Investment in affiliate 59,637 52,925 Accrued investment income 915 1,233 Agent advances and other receivables 6,579 7,825 Reinsurance receivables 9,150 6,159 Due and deferred premiums 10,870 10,651 Property and equipment, net 7,425 7,425 Deferred policy acquisition costs 44,101 41,333 Present value of future profits of acquired business 36,015 40,604 Other assets 5,181 5,706 Separate account assets 509 449 Total assets $ 297,239 $ 287,730 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept.30, Dec. 31, 1997 1996 (Unaudited) LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds: Future policy benefits payable $ 60,204 $ 59,340 Contractholder deposit funds 43,444 41,434 Unearned premiums 104 129 Other policy claims & benefits payable 5,177 5,164 108,929 106,067 Subordinated notes payable to affiliate 55,329 59,940 Deferred federal income taxes 19,931 17,952 Other liabilities 9,904 11,248 Separate account liabilities 509 449 Total liabilities 194,602 195,656 Commitments and contingencies Shareholders' equity: Common stock, $.20 par value, 10,000,000 shares authorized; 5,845,300 shares issued, 5,427,965 shares outstanding in 1997 and 1996 1,169 1,169 Additional paid-in capital 7,225 7,225 Net unrealized gain on investments in fixed maturities available for sale 4,726 1,220 Net unrealized gain on equity securities 30 25 Retained earnings 89,909 82,857 103,059 92,496 Common treasury stock, at cost, 417,335 shares in 1997 and 1996 (422) (422) Total shareholders' equity 102,637 92,074 Total liabilities and shareholders' equity $297,239 $287,730 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIOD ENDED September 30, 1997 AND 1996 (Unaudited) (in thousands of dollars, except per share data) 3 Months Ended Sept. 30, 1997 1996 Revenues: Net premiums $ 10,003 $ 11,025 Net investment income 2,080 1,815 Earned insurance charges 1,325 1,311 Other 762 827 Total revenues 14,170 14,978 Benefits and expenses: Benefits and other expenses 4,263 5,974 Interest on insurance policies 674 664 Amortization of present value of future profits of acquired business 1,515 1,429 Amortization of deferred policy acquisition costs 1,234 862 Operating expenses 3,263 3,054 Interest expense 884 923 Total benefits and expenses 11,833 12,906 Income before federal income taxes and equity in net earnings of affiliate 2,337 2,072 Provision for federal income taxes 231 481 Income before equity in net earnings of affiliate 2,106 1,591 Equity in net earnings of affiliate, net of tax 497 574 Net income $ 2,603 $ 2,165 Per Share Data: Common stock and common stock equivalents 5,590 5,565 Net income per share available to common shareholders $ .47 $ .39 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIOD ENDED September 30, 1997 AND 1996 (Unaudited) (in thousands of dollars, except per share data) 9 Months Ended Sept. 30, 1997 1996 Revenues: Net premiums $ 30,284 $ 32,636 Net investment income 6,583 5,438 Earned insurance charges 3,655 4,260 Other 2,091 2,731 Total revenues 42,613 45,065 Benefits and expenses: Benefits and other expenses 13,469 16,768 Interest on insurance policies 1,944 1,679 Amortization of present value of future profits of acquired business 4,589 3,902 Amortization of deferred policy acquisition costs 3,516 2,745 Operating expenses 9,405 10,104 Interest expense 2,623 2,896 Total benefits and expenses 35,546 38,094 Income before federal income taxes and equity in net earnings of affiliate 7,067 6,971 Provision for federal income taxes 1,497 1,691 Income before equity in net earnings of affiliate 5,570 5,280 Equity in net earnings of affiliate, net of tax 1,482 8,279 Net income $ 7,052 $ 13,559 Per Share Data: Common stock and common stock equivalents 5,586 5,560 Net income per share available to common shareholders $ 1.26 $ 2.44 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED September 30, 1997 AND 1996 (Unaudited) (in thousands of dollars) 3 Months Ended Sept.30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,603 $ 2,165 Adjustments to reconcile net income to net cash used in operating activities: Amortization of present value of future profits 1,515 1,429 Amortization of deferred policy acquisition costs 1,234 862 Financing costs amortized -0- -0- Equity in undistributed earnings of affiliate (1,235) (2,815) Changes in assets and liabilities net of effects from purchase of insurance subsidiaries: Decrease in accrued investment income 304 197 Increase in agent advances and other receivables (1,369) (2,126) Increase in due and deferred premiums (107) (352) Increase in deferred policy acquisition costs (2,092) (2,106) (Increase) decrease in other assets (537) 513 Increase in policy liabilities and accruals 1,887 3,630 Decrease in other liabilities (48) (542) Increase in policy loans (91) (133) Increase in deferred federal income taxes 595 693 Other, net 1,125 1,860 Net cash provided by operating activities $ 3,784 $ 3,275 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (in thousands of dollars) 3 Months Ended Sept.30, 1997 1996 CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased $(3,919) $ (976) Proceeds from sale and maturities of investments 5,734 (156) Net change in short-term investments (757) (1,451) Retirement of equipment (2,790) -0- Net cash provided by investing activities (1,732) (2,583) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of subordinated notes payable to affiliate -0- -0- Repayment of debt (1,537) -0- Net cash used in financing activities (1,537) -0- Net increase in cash 515 692 Cash, beginning of period 324 1,204 Cash, end of period $ 839 $ 1,896 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (in thousands of dollars) 9 Months Ended Sept.30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,052 $ 13,559 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of present value of future profits 4,589 3,902 Amortization of deferred policy acquisition costs 3,516 2,745 Financing costs amortized -0- 168 Equity in undistributed earnings of affiliate (3,793) (11,244) Changes in assets and liabilities net of effects from purchase of insurance subsidiaries: Decrease in accrued investment income 318 176 Increase in agent advances and other receivables (1,745) (160) Increase in due and deferred premiums (219) (550) Increase in deferred policy acquisition costs (6,284) (6,604) Decrease in other assets 525 632 Increase in policy liabilities and accruals 2,862 3,073 (Decrease) increase in other liabilities (1,344) 1,024 Increase in policy loans (290) (345) Increase in deferred federal income taxes 1,327 1,687 Other, net 642 1,812 Net cash provided by operating activities $ 7,156 $ 9,875 (See Notes to Consolidated Financial Statements) FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (in thousands of dollars) 9 Months Ended Sept. 30, 1997 1996 CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased $ (6,975) $ (3,735) Proceeds from sale and maturities of investments 9,335 955 Net change in short-term investments 1,386 1,214 Purchase of equipment, net (5,760) (1,315) Net cash provided by (used in) investing activities (2,014) (2,881) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of subordinated notes payable to affiliate -0- 253 Repayment of debt (4,611) (6,765) Net cash used in financing activities (4,611) (6,512) Net increase (decrease) in cash 531 482 Cash, beginning of period 308 1,414 Cash, end of period $ 839 $ 1,896 (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, 1996 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 affected 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 ILCO's senior loan obligations by $15 million. The sale closed on March 29, 1996. New Accounting Pronouncements In February 1997, the FASB issued FAS No. 128, "Earnings Per Share," which revises the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share." The Statement established two measures of earnings per share: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. The Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with potential dilutive securities outstanding. The Statement also requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The Statement is effective for interim and annual periods ending after December 15, 1997. Earlier application is not permitted. However, an entity may disclose pro forma earnings per share amounts that would have resulted if the entity had applied the Statement in an earlier period. The Company intends to adopt FAS 128 in its annual financial statements for the year ended December 31, 1997. The pro forma unaudited earnings per share amounts that would have resulted assuming the Company had computed its earnings per share in accordance with the provisions established by FAS 128 for the three and nine months ended September 30, 1997 and 1996 are as follows: Three Months Ended Three Months Ended September 30, 1997 September 30, 1996 Basic earnings per share $0.48 $0.40 Diluted earnings per share $0.47 $0.39 Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 Basic earnings per share $1.30 $2.50 Diluted earnings per share $1.26 $2.44 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operation: For the nine-month period ended September 30, 1997, FIC's net income was $7,052,000 (or $1.26 per common share), as compared to $13,559,000 (or $2.44 per common share) in the first nine months of 1996. The net income per share for the 1996 period has been restated to reflect the effect of the five-for-one stock split which was effective November 12, 1996. Net income from continuing operations (excluding the gain resulting from ILCO's sale of the Austin Centre, as described below) was $7,052,000 ($1.26 per common share) for the nine- month period ended September 30, 1997, as compared to $6,889,000 ($1.24 per common share) for the first nine months of 1996. FIC's net income is affected by its equity interest in InterContinental Life Corporation ("ILCO") and ILCO's insurance subsidiaries. Net income for the nine-month period ended September 30, 1996 includes $6.67 million ($1.20 per common share) 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 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. In May 1997, the Investors-NA renewed the lease, for a 5-year period, with options to renew for additional 5-year periods. The statutory earnings of Family Life Insurance Company ("Family Life"), the Company's life insurance subsidiary, as required to be reported to insurance regulatory authorities before interest expense, capital gains and losses, and federal income taxes were $10.7 million at September 30, 1997, as compared to $8.6 million at September 30, 1996. These statutory earnings are the source to provide for the repayment of the indebtedness incurred in connection with the acquisition of Family Life. The decline in long-term interest rates during the first nine months of 1997, which was related to general economic conditions, had a positive effect upon the market value of the fixed maturities available for sale segment of the Company's portfolio. As of September 30, 1997, the market value of the fixed maturities available for sale segment was $82.08 million as compared to an amortized value of $79.93 million, or an unrealized gain of $2.15 million. Such increase reflects unrealized gains on such investments. There is no assurance that this gain will be realized in the future. The net of tax effect of this increase has been recorded as an increase in shareholders' equity. 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. 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. For the nine-month period ended September 30, 1997, the Company's equity in the net earnings of ILCO, net of federal income tax, was $1,482,000, as compared to $8,279,000 for the first nine months of 1996. For the 1996 period, the equity in net earnings of affiliate includes $6,670,000 attributable to ILCO's net income resulting from the 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 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 46%) of ILCO's common stock and holds options to acquire 1,702,155 shares. If all of FIC's rights under the Option Agreement were to be presently exercised, FIC's ownership would amount to approximately 60.1% of the issued and outstanding shares of ILCO's common stock. The decline in long-term interest rates during the first nine months of 1997, which was related to general economic conditions, had a positive effect upon the market value of the fixed maturities available for sale segment of ILCO's investment portfolio. As of September 30, 1997, the market value of the fixed maturities available for sale segment was $460.6 million as compared to an amortized cost of $448.5 million, or an unrealized gain of $12.1 million. Such increase reflects unrealized gains on such investments. Since FIC owns approximately 46% 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 $3.6 million. Liquidity and Capital Resources of ILCO: ILCO is a holding company whose principal assets consist of the common stock of Investors-NA and its subsidiaries, InterContinental Life Insurance Company ("ILIC") and, since February, 1995, Investors-IN. ILCO's primary source of funds consists of payments under the surplus debentures from Investors- NA. The cash requirements of ILCO consist primarily of its service of the indebtedness created in connection with the 1988 acquisition of the Investors Life Companies and the 1995 acquisition of Investors-IN. As of December 31, 1996, the outstanding principal balance of the ILCO's senior loan obligations was $24.9 million. ILCO made scheduled principal payments under its senior loan on January 1, 1997 and July 1, 1997, reducing the principal balance to $18.4 million at September 30, 1997. 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. Upon the merger of Standard Life into Investors-NA, the obligations of the surplus debentures were assumed by Investors-NA. As of September 30, 1997, the outstanding principal balance of the surplus debentures was $5.0 million and $26.5 million, respectively. Since Investors-NA is domiciled in the State of Washington, the Washington insurance law applies to the administration of the terms of the surplus debentures. Under the provisions of the surplus debentures and current law, no prior approval of the Washington Insurance Commissioner is required for Investors-NA to pay interest or principal on the surplus debentures; provided that, after giving effect to such payments, the statutory surplus of Investors-NA is in excess of $10 million (the "surplus floor"). However, Investors-NA has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debenture. As of September 30, 1997, 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. In addition to the payments under the terms of the Surplus Debentures, ILCO has received dividends from Standard Life (now, from Investors-NA). Washington's insurance code includes the "greater of" standard for payment of dividends to shareholders, but has a requirement that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. As of September 30, 1997, Investors-NA had earned surplus of $9.4 million. Since the law applies only to dividend payments, the ability of Investors-NA to make principal and interest payments under the Surplus Debentures is not affected. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the Surplus Debentures in the amounts necessary to enable ILCO to service the Senior Loan for the foreseeable future. ILIC is domiciled in the State of New Jersey. Under the New Jersey insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Any dividend must be paid from earned surplus. A proposed payment of a dividend or distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory net gain from operations for the preceding calendar year, is treated as 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. ILIC had earned surplus of $5.0 million at September 30, 1997. Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN had earned surplus of $7.4 million at September 30, 1997. The Form 10-Qs of ILCO for the nine-month periods years ended September 30, 1997 and September 30, 1996, 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. Results of Operations For the nine-month period ended September 30, 1997, FIC's income from operations, before federal income tax and equity in net earnings of affiliate, was $7,067,000 (on revenues of $42,613,000), as compared to $6,971,000 (on revenues of $45,065,000) in the first nine months of 1996. Premiums for the first nine months of 1997, net of reinsurance ceded, were $30.3 million, as compared to $32.6 million in the first nine months of 1996. Policyholder benefits and expenses were $13.5 million in the 1997 period, as compared to $16.8 million in the first nine months of 1996. 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 September 30, 1997, the outstanding balance of such indebtedness was $55.3 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 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, 1997, the statutory capital and surplus of Family Life was $26.7 million, an amount substantially in excess of the surplus floor. As of September 30, 1997, the principal balance of the Surplus Debenture was $33.9 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 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 $7.2 million in the first nine months of 1997, as compared to $9.9 million in the first nine months of 1996. Net cash flow used in financing activities was $4.6 million in the 1997 period, as compared to $6.5 million in the first nine months of 1996. In connection with the purchase of the Investors Life Companies by ILCO 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 and the repayment of the ILCO Subordinated Loans, the guaranty commitments of FIC with respect to the debt obligations of ILCO relate to the ILCO Senior Loan, with an outstanding balance at September 30, 1997 of $18.4 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 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 September 30, 1997, the Company's investment assets totaled $108.9 million, as compared to $111.7 million as of December 31, 1996. The level of short-term investments at September 30, 1997 was $24.2 million, as compared to $25.6 million as of December 31, 1996. The fixed maturities available for sale portion represents $82.08 million of investment assets as of September 30, 1997, as compared to $83.83 million at December 31, 1996. The amortized cost of fixed maturities available for sale as of September 30, 1997 was $79.93 million representing a net unrealized gain of $2.15 million. This unrealized gain principally reflects changes in interest rates from the date the respective investments were purchased. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities. The assets held by 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 September 30, 1997, 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). 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. Family Life Insurance Company, an indirect, wholly-owned subsidiary of FIC, is the owner and developer of a 7.1 acre tract in Austin, Texas, adjacent to the 20-acre Bridgepoint Square Offices site being developed by a subsidiary of ILCO. The site was purchased by Family Life in May 1996, for $1.3 million. In January, 1997, Family Life began construction on a four-story office building, with rentable space of approximately 76,793 square feet, and a parking garage with 350 parking spaces. The projected completion date is November, 1997. Upon completion of the project, the investment of Family Life will be approximately $11.7 million, including the cost of the land. The building is fully leased to a third party. Year 2000 Compliance The Company and its subsidiaries utilize a centralized computer system to process policyholder records and financial information. In addition, the Company uses non-centralized computer terminals in connection with its operations. The software programs used in connection with these systems will be affected by what is referred to as the "year 2000 date problem". This refers to the limitations of the programming code in certain existing software programs to recognize date sensitive information as the year 2000 approaches. Unless modified prior to the year 2000, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. The Company has evaluated its centralized computer systems and has developed a plan to reach year 2000 compliance. A central feature of the plan is to convert most of the centralized systems to a common system which is already in compliance with year 2000 requirements. The Company is in the process of this systems conversion and anticipates that the project will be completed in advance of the year 2000. With respect to non-centralized systems (i.e. desktop computers), the Company anticipates that updated software releases will be commercially available well in advance of the year 2000. Accordingly, to the extent that such systems rely on date sensitive information, the Company expects that the effort needed to correct for year 2000 problems will be less time intensive than the effort needed to achieve compliance for its centralized systems. Accounting Developments In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 128, "Earnings Per Share," which revises the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share." The Statement established two measures of earnings per share: Basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. The Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with potential dilutive securities outstanding. The statement also requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The statement is effective for interim and annual periods ending after December 15, 1997. Earlier application is not permitted. However, a company may disclose pro forma earnings per share amounts that would have resulted if it had applied the statement in an earlier period. The Company intends to adopt FAS 128 in its annual financial statements for the year ended December 31, 1997. The pro forma unaudited earnings per share amounts that would have resulted assuming the Company had computed its earnings per share in accordance with the provisions established by FAS 128 as of the quarters ended September, 30, 1997 and 1996 are as follows: Nine Months Ended Nine Months Ended September, 30, 1997 September 30, 1996 Basic earnings per share $1.30 $2.50 Diluted earnings per share $1.26 $2.44 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, 1996 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 Grace James M. Grace Treasurer Date: November 14, 1997 EX-27 2
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000035733 FINANCIAL INDUSTRIES CORPORATION 1,000 9-MOS DEC-31-1997 SEP-30-1997 82,075 0 0 4 0 7,1340 116,018 839 9,150 44,101 297,239 60,204 104 43,444 5,177 55,329 0 0 1,169 101,468 297,239 30,284 6,583 0 2,091 13,469 3,516 9,405 8,549 1,497 7,052 0 0 0 7,052 1.26 1.26 0 0 0 0 0 0 0
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