SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (date of earliest event reported): May 18, 2001
FINANCIAL INDUSTRIES CORPORATION
(Exact name of Registrant as specified in charter)
Texas 0-4690 74-2126975
(State or other jurisdiction (Commission file number) (I.R.S. employer
of incorporation) identification no.)
6500 River Place Blvd., Building One
Austin, Texas 78730
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 404-5000
<page>
This Form 8-K/A of Financial Industries Corporation (the "Company" or "FIC") is
being submitted to provide the financial statements required in connection with
the acquisition by FIC of InterContinental Life Corporation ("ILCO") on May 18,
2001. This amendment is to our Current Report on Form 8-K dated May 30, 2001 and
provides the financial statements and unaudited pro forma financial information
set forth below which were omitted from the original filing pursuant to the
rules set forth Items 7(a)(4) and 7(b)(2) of Form 8-K.
Item 7. Financial Statements and Pro Forma Financial Information
(a) Financial Statements of the Company Acquired:
(i) The Audited Financial Statements of InterContinental Life Corporation
for the years ended December 31, 2000, December 31, 1999 and December
31, 1998, the accompanying notes and the accountant's report related
thereto, are filed as Exhibit 99.2.
(ii) The Unaudited Financial Statements of InterContinental Life
Corporation for the three months ended March 31, 2001, and the
accompanying notes, are filed as Exhibit 99.3.
(b) Pro Forma Financial Information. Unaudited Pro forma combined financial
statements of FIC and ILCO for the year ended December 31, 2000 and the
three months ended March 31, 2001 are filed as Exhibit 99.4.
(c) Exhibits:
Exhibit Description
Number
23.1 Consent of PricewaterhouseCoopers LLP
99.1* Press Release dated May 22, 2001.
99.2 Audited consolidated Financial Statements of
InterContinental Life Corporation for the years
ended December 31, 2000, December 31, 1999 and
December 31, 1998 contained in its Form 10-K as
filed with the Securities and Exchange Commission
on April 2, 2001. (Financial statement schedules
included in the Form 10-K have been omitted, in
accordance with the provisions of item 7(a)(2) of
Form 8- K).
<page>
99.3 Unaudited Financial Statements of InterContinental
Life Corporation for the three months ended March 31,
2001, and the accompanying notes, are filed as
Exhibit 99.3.
99.4 Unaudited Pro forma combined financial statements of
FIC and ILCO for the year ended December 31, 2000 and
the three months ended March 31, 2001
* Previously filed
<page>
SIGNATURES
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 hereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
Date: August 2, 2001 By: /s/ Roy F. Mitte
Roy F. Mitte
Chairman, President
and Chief Executive Officer
<page>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S- 8 (No. 333-63046) of Financial Industries Corporation of
our report dated April 2, 2001 relating to the financial statements of
InterContinental Life Corporation, which appears in this Form 8-K/A.
PricewaterhouseCoopers LLP
Dallas, Texas
August 2, 2001
<page>
Exhibit 99.2
AUDITED FINANCIAL STATEMENTS OF ILCO FOR THE YEARS ENDED DECEMBER 31, 2000,
DECEMBER 31, 1999 and DECEMBER 31, 1998.
Index to audited consolidated financial statements of InterContinental Life
Corporation and Subsidiaries:
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets,
December 31, 2000 and 1999.................................................F-3
Consolidated Statements of Income, for the
years ended December 31, 2000, 1999 and 1998...............................F-5
Consolidated Statements of Changes in Shareholders' Equity,
for the years ended December 31, 2000, 1999 and 1998.......................F-6
Consolidated Statements of Cash Flows, for the years
ended December 31, 2000, 1999 and 1998....................................F-9
Notes to Consolidated Financial Statements.................................F-12
F-1
<page>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
InterContinental Life Corporation
In our opinion, the accompanying consolidated financial statements listed in the
index on page F-1, present fairly, in all material respects, the financial
position of InterContinental Life Corporation and its subsidiaries (the
"Company") at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
April 2, 2001
F-2
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<table>
December 31,
2000 1999
ASSETS
Investments:
Fixed maturities held to maturity, at
amortized cost (market value
approximates $1,386 and $2,056) $ 1,386 $ 2,088
Fixed maturities available for sale,
at market value (amortized cost
$436,997 and $411,532) 440,749 404,217
Equity securities, at market value
(cost approximates $338 and $338) 1,764 1,943
Policy loans 48,449 50,882
Mortgage loans 4,858 6,844
Invested real estate and other invested assets 32,969 21,145
Short-term investments 129,807 191,695
Total investments 659,982 678,814
Cash and cash equivalents 9,066 3,358
Notes receivable from affiliates 35,349 41,497
Accrued investment income 8,304 7,529
Accounts receivable and other receivables 24,340 24,230
Reinsurance receivables 17,448 18,769
Real estate occupied by the Company 19,938 -0-
Property and equipment, net 5,005 4,416
Deferred policy acquisition costs 39,395 35,598
Present value of future profits of
acquired business 36,024 39,831
`
Other assets 7,866 9,304
Separate account assets 444,898 457,853
Total Assets $1,307,615 $1,321,199
</table>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands of dollars, except share data)
<table>
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
Liabilities:
Policy liabilities and contractholder deposit funds:
Future policy benefits $ 130,325 $ 130,092
Contractholder deposit funds 520,349 533,869
Unearned premiums 1,589 1,977
Other policy claims and benefits payable 10,801 9,893
663,064 675,831
Other policyholders' funds 3,015 3,012
Deferred federal income taxes 27,188 21,741
Other liabilities 10,045 14,635
Separate account liabilities 440,127 454,289
Total Liabilities 1,143,439 1,169,508
Commitments and Contingencies (Note 6, 8, 11, 13 and 16)
Redeemable preferred stock:
Class A Preferred, $1 par value, 5,000,000
shares authorized, issued 5,000 5,000
Class B Preferred, $1 par value, 15,000,000
shares authorized, issued 15,000 15,000
20,000 20,000
Redeemable preferred stock held in treasury (20,000) (20,000)
-0- -0-
Shareholders' Equity:
Common Stock, $.22 par value, 15,000,000 shares
authorized; 10,859,478 and 10,855,478 shares issued, and
8,129,385 and 8,827,941 shares outstanding in 2000 and
1999, respectively 2,389 2,388
Additional paid-in capital 4,561 4,526
Accumulated other comprehensive income (loss) 3,365 (3,712)
Retained earnings 163,998 151,932
174,313 155,134
Common treasury stock, at cost, 2,730,093 and 2,027,537
shares in 2000 and 1999, respectively (10,137) (3,443)
Total Shareholders' Equity 164,176 151,691
Total Liabilities and Shareholders' Equity $ 1,307,615 $ 1,321,199
</table>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except for per share data)
<table>
Year Ended December 31,
2000 1999 1998
Revenues:
Premium $ 10,873 $ 11,132 $ 10,890
Net investment income 50,893 49,913 54,619
Earned insurance charges 38,500 40,447 41,067
Gain on sale of real estate -0- 112 -0-
Other 3,490 2,601 2,886
103,756 104,205 109,462
Benefits and expenses:
Policyholder benefits and expenses 32,460 32,001 38,367
Interest expense on contract holders
deposit funds 28,794 30,229 29,966
Amortization of present value of future
profits of acquired businesses 3,807 3,835 5,903
Amortization of deferred policy
acquisition costs 2,505 2,372 2,128
Operating expenses 17,103 17,029 14,853
Interest expense -0- -0- 659
84,669 85,466 91,876
Income from operations 19,087 18,739 17,586
Provision for federal income taxes:
Current 5,385 5,955 6,899
Deferred 1,636 19 (432)
7,021 5,974 6,467
Net income $ 12,066 $ 12,765 $ 11,119
Net income per share (Note 14):
Basic:
Weighted average common stock
outstanding 8,333 8,796 8,750
Basic earnings per share $ 1.45 $ 1.45 $ 1.27
Diluted:
Common stock and common stock
equivalents 8,343 8,800 8,924
Diluted earnings per share $ 1.45 $ 1.45 $ 1.25
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<table>
<s> <c> <c> <c>
Additional
Common Stock Paid-in
Shares Amount Capital
Balance at December 31, 1997 5,344 $ 1,176 $ 4,253
Comprehensive Income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities
Change in net unrealized gain on investments
in fixed maturities available for sale
Total comprehensive income
Options exercised 42 9 132
Balance at December 31, 1998 5,386 1,185 4,385
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities
Change in net unrealized gain on investments
in fixed maturities available for sale
Total comprehensive income
Stock dividend paid 5,405 1,189
Treasury stock purchased and reissued
Options exercised 64 14 141
Balance at December 31, 1999 10,855 2,388 4,526
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities
Change in net unrealized gain on investments
in fixed maturities available for sale
Total comprehensive income
Treasury stock purchased and reissued
Options exercised 4 1 35
Balance at December 31, 2000 10,859 $ 2,389 $ 4,561
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
<table>
<s> <c> <c> <c>
Accumulated Other Comprehensive Income
Net Unrealized
Net Gain (Loss) on
Unrealized Investments Total
Appreciation In Fixed Accumulated
(Depreciation) Maturities Other
of Equity Available Comprehensive
Securities For Sale Income (Loss)
Balance at December 31, 1997 $ 2,946 $ 11,457 $ 14,403
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (1,137) (1,137)
Change in net unrealized gain on investments
in fixed maturities available for sale (1,695) (1,695)
Total comprehensive income (1,137) (1,695) (2,832)
Options exercised
Balance at December 31, 1998 1,809 9,762 11,571
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (766) (766)
Change in net unrealized gain on investments
in fixed maturities available for sale (14,517) (14,517)
Total comprehensive income (766) (14,517) (15,283)
Stock dividend paid
Treasury stock purchased
Options exercised
Balance at December 31, 1999 1,043 (4,755) (3,712)
Comprehensive income:
Net income
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (117) (117)
Change in net unrealized loss on investments in
fixed maturities available for sale 7,194 7,194
Total comprehensive income (117) 7,194 7,077
Treasury stock purchased and reissued
Options exercised
Balance at December 31, 2000 $ 926 $ 2,439 $ 3,365
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
<table>
<s> <c> <c> <c>
Common Total
Retained Treasury Shareholders'
Earnings Stock Equity
Balance at December 31, 1997 $ 129,237 $ (3,307) $ 145,762
Comprehensive income:
Net income 11,119 11,119
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (1,137)
Change in net unrealized gain on investments
in fixed maturities available for sale (1,695)
Total comprehensive income 11,119 8,287
Treasury stock purchased 45 45
Options exercised 141
Balance at December 31, 1998 140,356 (3,262) 154,235
Comprehensive income:
Net income 12,765 12,765
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (766)
Change in net unrealized gain on investments in
fixed maturities available or sale (14,517)
Total comprehensive income 12,765 (2,518)
Stock dividend paid (1,189)
Treasury stock purchased and reissued (181) (181)
Options exercised 155
Balance at December 31, 1999 151,932 (3,443) 151,691
Comprehensive income:
Net income 12,066 12,066
Other comprehensive income:
Change in net unrealized appreciation of
equity securities (117)
Change in net unrealized loss on
investments in fixed maturities available for sale 7,194
Total comprehensive income 12,066 19,143
Treasury stock purchased and reissued (6,694) (6,694)
Options exercised 36
Balance at December 31, 2000 $ 163,998 $ (10,137) $ 164,176
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<table>
<s> <c> <c> <c>
Year Ended December 31,
CASH FLOWS FROM OPERATING 2000 1999 1998
ACTIVITIES
Net Income $ 12,066 $ 12,765 $ 11,119
Adjustments to reconcile net income to
net cash used in operating activities:
Amortization of present value of future
profits of acquired businesses 3,807 3,835 5,903
Amortization of deferred policy
acquisition costs 2,505 2,372 2,128
Depreciation 848 488 551
Net gain on sales of investments -0- (112) (988)
Financing costs amortized -0- -0- 111
Amortization of deferred gain on sale of
real estate (110) (110) (110)
Changes in assets and liabilities:
(Increase) decrease in accrued investment
income (775) 239 698
Decrease (increase) in agent advances and
other receivables 1,211 (3,399) (7,686)
Policy acquisition costs deferred (6,302) (6,017) (5,460)
Decrease in policy liabilities and
contractholder deposit funds (12,767) (18,520) (16,194)
Increase (decrease) in other policyholders'
funds 3 (44) (668)
Decrease in other liabilities (4,480) (5,382) (1,036)
Increase (decrease) in deferred federal
income taxes 5,447 (8,444) (2,355)
Decrease (increase) in other assets 1,438 1,339 (2,691)
Other, net (4,804) 100 (653)
Net cash used in operating activities (1,913) (20,890) (17,331)
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<table>
<s> <c> <c> <c>
Year Ended December 31,
CASH FLOWS FROM INVESTING 2000 1999 1998
ACTIVITIES
Purchase of insurance subsidiary -0- -0- (1,322)
Investments purchased (100,710) (79,308) (41,915)
Proceeds from sales and maturities of
investments 47,761 106,517 77,700
Net change in short-term investments 61,888 (19,855) (7,218)
Purchases and retirements of equipment, net (808) (1,434) (2,119)
Decrease in notes receivable from affiliates 6,148 6,148 6,148
Net cash provided by investing activities 14,279 12,068 31,274
CASH FLOWS FROM FINANCING
ACTIVITIES
(Purchase) re-issuance of treasury stock (6,694) (181) 45
Issuance of common stock 36 155 141
Repayment of debt -0- -0- (10,964)
Net cash used in financing activities (6,658) (26) (10,778)
Net increase (decrease) in cash and cash
equivalents 5,708 (8,848) 3,165
Cash and cash equivalents,
beginning of the year
3,358 12,206 9,041
Cash and cash equivalents, end of year $ 9,066 $ 3,358 $ 12,206
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<table>
<s> <c> <c> <c>
Supplemental Cash Flow Disclosures:
Year Ended December 31,
2000 1999 1998
Income taxes paid $ 4,700 $ 9,050 $ 11,700
Interest paid $ 272 $ 461 $ 871
</table>
Supplemental Schedule of Non-Cash Investing Activities:
The Company purchased the outstanding capital stock of a life insurer in the
second quarter of 1998 for cash purchase price of $16.6 million (including a
$12.4 million dividend paid by the acquired company to its former parent), net
of post closing adjustments. The consolidated statements of cash flows reflect
the impact of this acquisition. This purchase resulted in the Company receiving
tangible assets and assuming liabilities as follows:
1998
Assets $57,745
Liabilities $41,135
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
InterContinental Life Corporation (ILCO or the "Company") is principally
engaged, through its subsidiaries, in administering existing portfolios of
individual life insurance and annuity products. The Company's insurance
subsidiaries are also engaged in the business of marketing and underwriting
individual life insurance and annuity products in 49 states and the District of
Columbia. Such products are marketed through independent, non-exclusive general
agents.
Principles of Consolidation
The consolidated financial statements include the accounts of InterContinental
Life Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Basis of Presentation
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America which differ from
statutory accounting principles required by regulatory authorities for the
Company's insurance subsidiaries. Significant accounting policies followed by
the Company are:
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results will differ from those estimates.
Investments
The Company's general investment philosophy is to hold fixed maturity securities
until maturity. However, fixed maturities may be sold prior to the maturity
dates in response to changing market conditions, duration of liabilities,
liquidity factors, interest rate movements and other investment factors.
Accordingly, most fixed maturity investments are classified as available for
sale and are carried at market value. All other fixed maturities are carried at
the lower of amortized cost or net realizable value as management has the
positive intent and the Company has the ability to hold such investments to
maturity. Unrealized gains and losses on securities available for sale are not
recognized in earnings but are reported as a separate component of equity in
accumulated other comprehensive income, net of income tax effect.
F-12
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
While collateralized mortgage obligations (CMOs) are carried at market value,
premiums and discounts on CMOs are amortized over the stated maturity of the
CMOs, with consideration given to estimates of prepayments in the amortization
of those premiums and discounts. The Company endeavors to minimize the
portfolio's exposure to interest rate changes inherent in interest-sensitive
products by selecting and selling investments so that diversity, maturity and
liquidity factors approximate the duration of related policyholder liabilities.
Equity securities are carried at market value. Unrealized gains and losses on
equity securities, net of deferred income taxes, if applicable, are reflected
directly in shareholders' equity as a component of accumulated other
comprehensive income. Mortgage loans and policy loans are recorded at unpaid
balances. Short-term investments are carried at cost, which approximates market
value, and generally consist of those fixed maturities and other investments
that are intended to be held less than one year from the date of purchase.
Real estate is carried at cost less accumulated depreciation, which is generally
calculated using the straight-line method over 20 to 40 years. Accumulated
depreciation on investments in real estate is $2,554,962 and $2,126,231 at
December 31, 2000 and 1999, respectively.
Realized gains and losses on disposal of investments are included in net income.
The cost of investments sold is determined on the specific identification basis,
except for equity securities, for which the first-in, first-out method is
employed. When an impairment of the value of an investment is considered other
than temporary, the decrease in value is reported in net income as a realized
investment loss and a new cost basis is established.
Cash and Cash Equivalents
Short-term investments with maturities of three months or less at the time of
purchase are reported as cash equivalents.
Sale of Real Estate
Prior to December, 1999, Investors-NA owned an office building, located at 206
West Pearl Street, Jackson, Mississippi, which was the former headquarters of
Standard Life Insurance Company the ("Standard Life Building"). On December 29,
1999, Investors-NA donated the Standard Life Building to the Jackson
Redevelopment Authority ("JRA"). Contemporaneously with the donation of the
Standard Life Building, Investors-NA and Financial Industries Corporation
("FIC") sold all of the adjacent parcels they owned to the JRA for a total sale
price of $2,500,000.00, which has been allocated according to the respective
ownership interests of Investors-NA (approximately 59.28%) and FIC
(approximately 40.72%). The donation and sale was made pursuant to the terms of
the Donation, Purchase and Sale Agreement dated July 17, 1998. Investors-NA
claimed an income tax deduction on tax return filed in 2000 in an amount of
$864,231. The donation and sale transaction referenced above resulted in a net
gain (GAAP basis) of $0.992 million for ILCO and $0.409 million for FIC (or a
combined total of $1.401 million).
F-13
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using straight-line and accelerated methods over
estimated useful lives of 10 to 33 years for buildings and improvements and 10
years for furniture and equipment. Maintenance and repairs are charged to
expense when incurred. Accumulated depreciation for property and equipment and
home office real estate was $5,124,279 and $4,630,102 at December 31, 2000 and
1999, respectively.
Deferred Acquisition Costs
The cost of acquiring new and renewal business, principally first year
commissions and certain expenses of the policy issuance and underwriting
departments, which vary with and are primarily related to the production of new
and renewal business, have been deferred to the extent recoverable. Acquisition
costs related to universal life products are deferred and amortized to expense
using actuarial methods that include the same assumptions used to estimate
future policy benefits in proportion to the ratio of estimated annual gross
profits to total estimated gross profits over the expected lives of the
contracts. Acquisition costs related to traditional life insurance business are
deferred and amortized over the premium paying period of the related policies.
Present Value of Future Profits
The present value of future profits of acquired traditional life business is
amortized over the premium paying period of the related policies in proportion
to the ratio of the annual premium revenue to total anticipated premium revenue
applicable to such policies. Interest on the unamortized balance is accreted at
rates from 7.0% to 8.5%.
For interest-sensitive products, these costs are amortized in relation to the
present value, using the current credited interest rate, of expected gross
profits of the policies over the anticipated coverage period.
Retrospective adjustments of these amounts are made periodically upon the
revision of estimates of current or future gross profits on universal life-type
products to be realized from a group of policies. Recoverability of present
value of future profits is evaluated periodically by comparing the current
estimate of future profits to the unamortized asset balances.
Anticipated investment returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of present value of future profits acquired.
Deferred Financing Costs
Financing costs associated with the Company's Senior Loan were deferred and were
amortized over the borrowing periods using the interest method.
F-14
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Separate Accounts
Separate account assets, carried at market value, and liabilities represent
policyholder funds maintained in accounts having specific investment objectives.
The net investment income, gains and losses of these accounts, less applicable
contract charges, generally accrue directly to the policyholders and are not
included in the Company's statement of income, with the exception for the gains
and losses in the Company's seed money in the separate accounts.
Solvency Laws Assessments
The solvency or guaranty laws of most states in which the Company's insurance
subsidiaries do business may require the Company's insurance subsidiaries to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These assessments may
be deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength and, in certain instances, may be offset against
future premium taxes. The Company's insurance subsidiaries' expense for guaranty
fund assessment from states which do not allow premium tax offsets is not
material.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits related to traditional life products are
accrued as premium revenue is recognized. The liabilities are computed using the
net level premium method, or an equivalent actuarial method, based upon industry
and Company experience of investment yields, mortality and withdrawals,
including provisions for possible adverse deviation. The liability for future
policy benefits for traditional life policies is graded to reserves stipulated
by regulatory authorities over a 30-year period or the end of the premium paying
period, if less.
Contractholder deposit funds are liabilities for universal life and annuity
products. These liabilities consist of deposits received from customers and
accumulated net investment income on their fund balances, less administrative
charges. Universal life fund balances are also assessed mortality charges. The
cash value benefit for these products is based on actual crediting rates, which
are lower than assumed investment yields.
Liabilities for future policy benefits related to non-cancelable and guaranteed
renewable accident and health contracts are computed based on industry and
Company experience and estimated future investment yields ranging from 4 1/2% to
6%. Unearned premium reserves for credit life and accident and health contracts
are computed on either the sum-of-the-year's digits or pro rata methods
depending upon the type of coverage. In December, 1997, ILCO's life insurance
subsidiaries entered into a reinsurance treaty under which all of the
contractual obligations and risks under accident and health insurance policies
were assumed by a third party reinsurer. (See Note 8.)
F-15
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable represents
management's estimate of unpaid losses on claims and other miscellaneous
liabilities to policyholders. Estimated unpaid losses on claims are comprised of
losses on claims that have been reported but not yet paid, including estimates
of additional development of initial claims estimates, and claims that have been
incurred but not yet reported (IBNR) to the Company.
The liability for other policy claims and benefits payable is subject to the
impact of changes in claim severity, frequency and other factors. Although there
is considerable variability inherent in such estimates, management believes that
the liability recorded is adequate.
Revenue Recognition
Premiums on traditional life and health products are recognized as revenue when
due. Credit life and credit health insurance premiums are recognized over the
contract period on a pro rata basis, or the sum of years digits basis. Benefits
and expenses are associated with earned premiums, so as to result in recognition
of profits over the lives of the contracts.
Proceeds from investment-related products and universal life products are
recorded as liabilities when received. Revenues for investment-related and
universal life products consist of net investment income, mortality,
administration charges and surrender charges.
Net Income Per Share
Net income per share is calculated based on two methods, 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. Both methods are
presented on the face of the income statement.
Federal Income Taxes
In February, 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
The Company adopted FAS 109 on a prospective basis effective January 1, 1993.
FAS 109 mandates the asset and liability method for computing deferred income
taxes. Under this method, balance sheet amounts for deferred income taxes are
computed based on the tax effect of the differences between the financial
reporting and federal income tax basis of assets and liabilities using the tax
rates which are expected be in effect when these differences are anticipated to
reverse.
F-16
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments. Generally, FAS 131 requires that financial
information be reported on the basis that is used internally for evaluating
performance. The Company adopted SFAS 131 for the year ended December 31, 1998.
As described in Note 1, the Company is principally engaged, through its
subsidiaries, in administering existing portfolios of individual life insurance
and annuity products. The Company's insurance subsidiaries are also engaged in
the business of marketing and underwriting individual life insurance and annuity
products in 49 states and the District of Columbia. Such products are marketed
through independent, non-exclusive general agents. Management considers the
Company's insurance operations to constitute one reportable segment. Premium
revenues for traditional insurance products and earned insurance charges on
universal life and annuity products are presented in the accompanying
consolidated statements of income. No single customer accounts for 10 percent or
more of the Company's revenue. The Company has no foreign operations.
In February 1998, the FASB issued FAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS 132 does not
change the measurement or recognition of pension or other postretirement benefit
plans. The Company adopted FAS 132 for the year ended December 31, 1998.
In December 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which provides guidance on accounting for
insurance-related assessments. The Company adopted SOP 97-3 January 1, 1999. The
adoption of this SOP did not have a material impact on the Company's financial
statements.
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, as amended by FAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An Amendment of
FASB Statement 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 133 did not
have a material impact on the Company's results of operations, liquidity or
financial position.
Reclassification
Certain prior years' amounts have been reclassified to conform with the 2000
presentation.
F-17
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Investments
Fixed Maturities
The amortized cost, gross unrealized gains and losses and market values of fixed
maturities available for sale and fixed maturities held to maturity at December
31, 2000 and 1999, respectively were as follows (in thousands):
<table>
<s> <c> <c> <c> <c>
Amortized Gross Unreal- Gross Unreal- Market
Cost ized Gains ized Losses Value
Fixed Maturities Available
for Sale as of December 31, 2000:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 25,785 $ 2,040 $ -0- $ 27,825
Obligations of states and political
subdivisions 4,527 278 -0- 4,805
Corporate securities 188,056 2,025 5,570 184,511
Mortgage-backed securities 218,629 5,327 348 223,608
Total Fixed Maturities Available
For Sale
Fixed Maturities Held to Maturity: 436,997 9,670 5,918 440,749
Private placements-corporate 1,386 10 10 1,386
Total Fixed Maturities $ 438,383 $ 9,680 $ 5,928 $ 442,135
Fixed Maturities Available For Sale
as of December 31, 1999:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 26,191 $ 745 $ 30 $ 26,906
Obligations of states and political
subdivisions 4,680 91 -0- 4,771
Corporate securities 172,686 334 8,306 164,714
Mortgage-backed securities 207,975 3,273 3,422 207,826
Total Fixed Maturities Available
For Sale 411,532 4,443 11,758 404,217
Fixed Maturities Held to Maturity:
Private placements-corporate 2,088 11 43 2,056
Total Fixed Maturities $ 413,620 $ 4,454 $ 11,801 $ 406,273
</table>
F-18
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts of unrealized gains and losses on fixed maturities available for
sale included in accumulated other comprehensive income reflected in the balance
sheet have been reduced by estimated deferred taxes in the amount of $1,313,000
and $(2,560,000) in 2000 and 1999, respectively.
The amortized cost and market value of fixed maturities available for sale and
fixed maturities held to maturity at December 31, 2000 is shown below by
contractual maturity. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Fixed Maturities Available for Sale
Amortized Market
Cost Value
(in thousands)
Due in one year or less $ 39,841 $ 39,939
Due after one through five years 50,751 51,653
Due after five through ten years 34,789 35,231
Due after ten years 92,987 90,318
Mortgage backed securities 218,629 223,608
Total Fixed Maturities Available
for Sale $436,997 $440,749
Fixed Maturities Held to Maturity
Amortized Market
Cost Value
Due in one year or less $ 879 $ 878
Due after one through five years 440 432
Due after five through ten years -0- -0-
Due after ten years 67 76
Mortgage backed securities -0- -0-
Total Fixed Maturities Held to Maturity $1,386 $1,386
Proceeds from sales and maturities of investments in fixed maturities during
2000, 1999 and 1998 were approximately $47,761,000, $106,517,000 and
$77,700,000. Gross gains of approximately $6,000, $443,000 and $178,000 and
gross losses of approximately $11,000, $61,000 and $16,000 were realized on
those sales and maturities in 2000, 1999 and 1998, respectively.
F-19
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities
The change in net unrealized appreciation for equity securities was $(117,000)
and $(766,000) for the years ended December 31, 2000 and 1999, respectively.
Amounts as of December 31 were as follows (in thousands):
2000 1999
Unrealized appreciation $ 1,437 $ 1,617
Unrealized depreciation (12) (12)
Net unrealized appreciation
before tax 1,425 1,605
Less: Federal income tax (499) (562)
Net unrealized appreciation $ 926 $ 1,043
Equity securities included a $1,719,704 investment, ($318,390 at cost), in
189,750 shares of common stock of Financial Industries Corporation (FIC) (See
note 9). This represents 3.8% of FIC's outstanding common stock at December 31,
2000.
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 2000,
1999 and 1998. The following is a summary of the change in unrealized investment
gains (losses) net of related deferred income taxes which are reflected in
accumulated other comprehensive income for the periods presented:
<table>
<s> <c> <c> <c>
Change in Unrealized Gains (Losses) on Investments 2000 1999 1998
(in thousands)
Fixed maturities $ 11,067 $ (22,334) $ (2,607)
Equity securities (180) (1,178) (1,749)
10,887 (23,512) (4,356)
Deferred federal income taxes (3,810) 8,229 1,524
Net change in unrealized gains (losses)
on investments $ 7,077 $ (15,283) $ (2,832)
</table>
F-20
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the reclassification adjustments required for the
years ended December 31, 2000, 1999 and 1998:
<table>
<s> <c> <c> <c>
Reclassification Adjustments 2000 1999 1998
(in thousands)
Unrealized holding gains (losses) on investments
arising during the period $ 7,080 $ (15,034) $ (2,621)
Reclassification adjustments for gains included in
net income (3) 249 211
Unrealized gains (losses) on investments, net of
reclassification adjustment $ 7,077 $ (15,283) $ (2,832)
</table>
Net Investment Income
The components of net investment income are summarized as follows (in
thousands):
<table>
Year Ended December 31,
<s> <c> <c> <c>
2000 1999 1998
Fixed maturities $ 43,797 $ 43,755 $ 47,322
Other, including policy loans, real estate,
mortgage loans and equity securities 8,153 6,881 8,282
51,950 50,636 55,604
Investment expenses (1,057) (723) (985)
Net Investment Income $ 50,893 $ 49,913 $ 54,619
</table>
Realized Gains and Losses
Net realized (losses) gains included in net investment income are summarized
below (in thousands):
<table>
<s> <c> <c> <c>
Year Ended December 31,
2000 1999 1998
Fixed maturities available for sale $ (5) $ 382 $ 162
Equity securities -0- 1 164
Other investments -0- 74 662
(5) 457 988
Income taxes (2) 160 346
Net realized gains $ (3) $ 297 $ 642
</table>
F-21
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans and invested real estate
The Company's mortgage loans and invested real estate are diversified by
property type, location and issuer. Mortgage loans are collateralized by the
related properties and such loans generally range from 15% to 80% of the
property's value at the time the loan is made. No new mortgage loans were made
during the three year period ended December 31, 2000.
Non-income producing investments
The Company has no non-income producing investments as of December 31, 2000.
3. Disclosures about Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments at December 31,
2000 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $442,135 $442,135
Policy loans 48,449 48,449
Mortgage loans 4,858 4,858
Short-term investments 129,807 129,807
Cash and cash equivalents 9,066 9,066
Notes receivable from affiliates 35,349 35,349
Financial liabilities:
Deferred annuities 114,271 112,648
Supplemental Contracts 13,659 13,263
The following methods and assumptions were used to estimate the fair value of
each class of financial investments:
Fixed maturities
Fair values are based on quoted market prices or dealer quotes.
Policy loans
Policy loans are, generally, issued with coupon rates below market rates and are
considered early payment of the life benefit. As such, the carrying amount of
these financial instruments is a reasonable estimate of their fair value.
F-22
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans
The fair value of mortgage loans is estimated using a discounted cash flow
analysis using rates for BBB- rated bonds with similar coupon rates and
maturities.
Cash and cash equivalents and short-term investments
The carrying amount of these instruments approximates market value.
Notes receivable from affiliates
The fair value is based on redemption value.
Deferred annuities and supplemental contracts
The fair value of deferred annuities is estimated using cash surrender values.
Fair values for supplemental contracts is estimated using a discounted cash flow
analysis, based on interest rates currently offered on similar products.
4. Present Value of Future Profits of Acquired Business
An analysis of the present value of future profits of acquired businesses is as
follows:
2000 1999
(in thousands)
Beginning balance $ 39,831 $ 43,666
Accretion of interest 3,121 3,382
Amortization (6,928) (7,217)
Ending Balance $ 36,024 $ 39,831
Amortization of the present value of future profits included in the consolidated
statements of income is presented net of the accretion of interest.
The estimated amount of present value of future profits to be amortized net of
interest accretion during each of the next five years is as follows:
(in thousands)
2001 $ 3,431
2002 $ 3,083
2003 $ 2,875
2004 $ 2,576
2005 $ 2,456
F-23
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Acquisition of Business
On June 30, 1998, ILCO, through a subsidiary, Investors-Indiana, acquired
Grinnell Life Insurance Company ("Grinnell Life") an Iowa-domiciled life
insurer, from Grinnell Mutual Life Insurance Company for an adjusted purchase
price of $16.6 million. As part of the transaction, Grinnell Life was
immediately merged with and into Investors-Indiana, with Investors-Indiana being
the surviving entity.
6. Senior Loans
The Senior Loan of ILCO was originally arranged in connection with the 1988
acquisition of Investors-NA and Investors-CA. In January, 1993, the Company
refinanced its Senior Loan. That transaction was done in connection with the
prepayment of the subordinated indebtedness and the purchase of warrants which
had been issued as part of the financing of the 1988 acquisitions. The terms of
the amended and restated credit facility are substantially the same as the terms
and provisions of the 1988 senior loan. The maturity date, which had been
December 31, 1996, was extended to July 1, 1998 for the Senior Loan. The average
interest rate paid by the Company on its Senior Loan was approximately 7.63%
during 1998.
In February, 1995, the Company borrowed an additional $15 million under the
Senior Loan to help finance the acquisition of Investors-IN, and the maturity
date of the Senior Loan was further extended to July 1, 1999. In connection with
the acquisition of State Auto Life Insurance Company in July, 1997, the Senior
Loan agreement was modified to extend the maturity date to October 1, 1998.
As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
7. Income Taxes
The Company files consolidated federal income tax returns with its non-life
subsidiaries. The Company's life insurance subsidiaries file a separate life
consolidated federal income tax return. In accordance with the Company's tax
allocation agreement, federal income tax expense or benefit is allocated to each
member of the consolidated group as if each member were filing a separate
return.
The U.S. federal income tax provision (benefit) charged to continuing operations
for the years ended December 31, was as follows:
2000 1999 1998
(in thousands)
Current tax provision $ 5,385 $ 5,955 $ 6,899
Deferred tax provision 1,636 19 (432)
Total provision for income
taxes $ 7,021 $ 5,974 $ 6,467
F-24
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provision has not been made for state income tax expense since expense is
minimal. Premium taxes are paid to various states where premium revenues are
earned. Premium taxes are included in the statement of income as operating
expenses.
The provision for income taxes differs from the amount of income tax determined
by applying the U.S. statutory federal income tax rate of 35% to pre-tax income
from continuing operations as a result of the following differences:
<table>
<s> <c> <c> <c>
2000 1999 1998
(in thousands)
Income taxes at the U.S. statutory rate $ 6,680 $ 6,559 $ 6,155
Charitable contribution -0- (920) -0-
Increase (decrease) in taxes resulting from:
Non-deductible compensation 335 335 312
Other 6 -0- -0-
Total provision for income taxes $ 7,021 $ 5,974 $ 6,467
</table>
Deferred taxes are recorded for temporary differences between the financial
reporting bases and the federal income tax bases of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
<table>
<s> <c> <c>
December 31,
2000 1999
Deferred Tax Liability: (in thousands)
Deferred policy acquisition costs $ 10,025 $ 8,340
Present value of future profits 10,571 11,597
Net unrealized (depreciation) appreciation on 1,813 (1,998)
marketable securities
Acquisition discounts on mortgages/policy loans 969 1,210
Reinsurance recoverable 5,000 5,571
Other taxable temporary differences 2,910 2,965
Total deferred tax liability 31,288 27,685
Deferred Tax Asset:
Policy reserves 1,284 2,771
Invested assets 1,708 1,655
Net operating loss carry forward 764 1,195
Minimum tax credit 344 323
Total deferred tax asset 4,100 5,944
Net deferred tax liability $ 27,188 $ 21,741
F-25
</table>
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred federal income tax (expense) benefit of $(3,810,000) and $8,229,000 for
2000 and 1999, respectively, have been provided on the unrealized appreciation
(depreciation) of marketable securities and included in the balance of the
deferred tax liability account. This increase or decrease in deferred tax
liability has been recorded as a reduction or increase to the equity adjustment
due to the net change in unrealized appreciation or depreciation and has not
been reflected in the deferred income tax expense included in net income from
operations.
Under the provisions of pre-1984 life insurance company income tax regulations,
a portion of "gain from operations" of Investors-IN and Investors-NA was not
subject to current taxation but was accumulated, for tax purposes, in special
tax memorandum accounts designated as "policyholders' surplus accounts". Subject
to certain limitations,"policyholders' surplus" is not taxed until distributed
or the insurance company no longer qualifies to be taxed as a life insurance
company. The accumulation in these accounts for Investors-NA and Investors-IN at
December 31, 2000 was $8,225,000 and $4,357,000, respectively. Federal income
tax of $2,879,000 and $1,525,000 would be due if the entire balance is
distributed at a tax rate of 35%.
The Company does not anticipate any transactions that would cause any part of
the policyholders' surplus accounts to become taxable and, accordingly, deferred
taxes have not been provided on such amounts. At December 31, 2000, Investors-NA
and Investors-IN have approximately $146,000,000 and $17,500,000, respectively,
in the aggregate in their shareholders' surplus accounts from which
distributions could be made without incurring any federal tax liability.
At December 31, 2000, the Company and its non-life wholly-owned subsidiaries
have net operating loss carry forwards of approximately $2.1 million.
8. Reinsurance
The Company reinsures portions of certain policies thereby providing greater
diversification of risk and minimizing exposure on larger policies. The
Company's retention on any one individual ranges from $100,000 to $250,000
depending on the risk. The Company remains liable to the extent the reinsurance
companies are unable to meet their obligations under the reinsurance agreements.
The amounts reported in the consolidated financial statements for reinsurance
ceded are as follows:
December 31,
2000 1999
(in thousands)
Future policy benefits $ 9,017 $ 10,010
Unearned premiums 1,456 1,605
Other policy claims and benefits payable 3,812 4,103
Amounts recoverable on paid claims 3,163 3,051
Reinsurance receivables $ 17,448 $ 18,769
F-26
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31,
2000 1999 1998
(in thousands)
Premiums $ 1,641 $ 3,472 $ 2,942
Policyholder benefits
and expenses $ 2,300 $ 3,780 $ 4,492
9. Shareholders' Equity
Financial Industries Corporation ("FIC"), a life insurance holding company,
retains ownership of approximately 48.3% of the Company's outstanding common
stock. FIC held options to purchase up to an additional 1,702,155 shares, (which
number does not reflect the stock dividend paid by ILCO on March 7, 1999) of the
Company's authorized but unissued common stock at a price equal to the average
market value during the six months preceding the exercise date. These options
expired on September 30, 1998.
The Company's ability to pay dividends to its shareholders is affected, in part,
by the receipt of dividends from Investors-NA, which is organized under the laws
of the state of Washington. Under current Washington law, any 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 called an "extraordinary
dividend" and may not be paid until either it has been approved, or a waiting
period shall have passed during which it has not been disapproved, by the
insurance commissioner.
In addition, Washington laws require that prior notification of a proposed
dividend be given to the Washington Insurance Commissioner and that dividends
may be paid only from earned surplus.
Net income (before surplus debenture interest expense) and capital and surplus
of Investors-NA as reported to insurance regulators and as determined in
accordance with statutory accounting practices are as follows:
Year Ended December 31,
2000 1999 1998
Net Income $ 11,201 $ 12,549 $ 14,246
Capital and Surplus $ 71,661 $ 75,169 $ 70,627
The insurance regulations of the state of Washington limit the amount an insurer
may invest in the obligations of any one corporation to four percent of the
insurer's statutory admitted assets. Investors-NA held $35,349,000 and
$41,497,000 in subordinated notes issued by FIC and Family Life Corporation, a
wholly-owned subsidiary of FIC, at December 31, 2000 and 1999, respectively.
Prior to the acquisition of these notes, Investors-NA received written approval
from the Washington State Insurance Department for the inclusion of the full
amount of these notes in its statutory admitted assets. At December 31, 2000,
this permitted practice did not increase statutory surplus over what it would
have been under prescribed statutory accounting practices.
F-27
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon implementation. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, e.g. deferred income taxes are recorded. While management has not
yet determined the impact of Codification, it is possible that certain changes
in statutory accounting principles arising from Codification would be material
to the Company's insurance subsidiaries.
In 1988, the Company authorized the issuance of 10 million shares of Class C
Preferred Stock, $1.00 par value. The Company was not permitted, under the
provisions of the Senior Loan Agreements (See Note 6), to issue any preferred
stock except Class A and Class B issued in connection with the acquisition of
the Investors Life Companies. The Company has reacquired the Class A and Class B
Preferred Stock and holds the shares in treasury.
10. Retirement Plans and Employee Stock Plans
Retirement Plan
The Company maintains a retirement plan, ("ILCO Pension Plan"), covering
substantially all employees of the Company. The plan is a non-contributory,
defined benefit pension plan, which covers each eligible employee who has
attained 21 years of age and has completed one year or more of service. Each
participating subsidiary company contributes an amount necessary (as actuarially
determined) to fund the benefits provided for its participating employees.
The Plan's basic retirement income benefit at normal retirement age is 1.57% of
the participant's average annual earnings less 0.65% of the participant's final
average earnings up to covered compensation multiplied by the number of his/her
years of credited service. For participants who previously participated in the
plan maintained by the Company for the benefit of former employees of the IIP
Division of CIGNA Corporation (the IIP Plan), the benefit formula described
above applies to service subsequent to May 31, 1996. With respect to service
prior to that date, the benefit formula provided by the IIP Plan is applicable,
with certain exceptions applicable to former IIP employees who are classified as
highly compensated employees.
Former eligible IIP employees commenced participation automatically. The Plan
also provides for early retirement, postponed retirement and disability benefits
to eligible employees. Participant benefits become fully vested upon completion
of five years of service, as defined, or attainment of normal retirement age, if
earlier.
The pension benefit (costs) for the plan includes the following components:
F-28
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<table>
<s> <c> <c> <c>
2000 1999 1998
(in thousands)
Service cost for benefits earned during the period
$ 434 $ 446 $ 460
Interest cost on projected benefit obligation 987 905 793
Expected return on plan assets (1,174) (1,277) (1,235)
Amortization of unrecognized prior service cost (229) (229) (229)
Pension benefit (costs) $ 18 $ (155) $ (211)
</table>
The following summarizes the funded status of the plan at December 31:
<table>
<s> <c> <c>
2000 1999
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 13,868 $ 12,726
Service cost 434 446
Interest cost 987 905
Benefits paid (505) (483)
(Gain)/Loss due to change in assumptions -0- -0-
(Gain)/Loss due to experience (1,232) 274
Benefit Obligation at end of year $ 13,552 $ 13,868
</table>
F-29
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<table>
Change in plan assets: 2000 1999
Fair value of plan assets at beginning of year $ 16,325 $ 16,238
Actual return on plan assets 1,015 570
Benefits paid (505) (483)
Fair value of plan assets at end of year $ 16,835 $ 16,325
Funded Status:
Funded status at end of year $ 3,282 $ 2,457
Unrecognized prior service cost (11) (240)
Unrecognized actuarial net loss 1,592 2,665
Prepaid pension expense at end of year $ 4,863 $ 4,882
</table>
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.25% in 2000, 1999 and
1998. The assumed long-term rate of compensation increases was 5.0% for 2000,
1999 and 1998. The assumed long-term rate of return on plan assets was 8.0% for
2000, 1999 and 1998. Assumed expenses as a percentage of plan assets were 0% for
2000, 1999 and 1998.
Savings and Investment Plan
The Company maintains a Savings and Investment (401(k)) Plan that allows
eligible employees who have met a one-year service requirement to make
contributions to the Plan on a tax-deferred basis. A Plan participant may elect
to contribute up to 16% of eligible earnings on a tax deferred basis, subject to
certain limitations applicable to "highly compensated employees" as defined in
the Internal Revenue Code. Plan participants may allocate contributions, and
earnings thereon, between investment options selected by participants. The
Account Balance of each Participant attributable to employee contributions is
100% vested at all times.
During 1995, the Plan was amended to allow for the addition of Family Life
Insurance Company (FLIC), a wholly-owned subsidiary of FIC, as a participating
employer, thus allowing FLIC employees to participate in the Plan. The amendment
did not affect the Plan's tax-qualified status.
F-30
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1997, the Plan was amended to provide for a matching contribution by the
Company. The match, which is in the form of shares of ILCO common stock, is
equal to 100% of an eligible participant's elective deferral contributions, as
defined in the Plan, not to exceed a maximum percentage of the participant's
plan compensation. Initially, the maximum percentage was 1%. Effective January
1, 2000, the plan was amended to increase the maximum percentage to 2%.
Allocations are made on a quarterly basis to the account of participants who
have at least 250 hours of service in that quarter.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan and a related trust for the
benefit of its employees and FLIC employees. The Plan generally covers employees
who have attained the age of 21 and have completed one year of service. Vesting
of benefits to employees is based on number of years of service. No
contributions were made to the Plan in 2000, 1999 or 1998. At December 31, 2000,
the Plan had a total of 530,562 shares which are allocated to participants.
Effective May 1, 1998, the 401(k) Plan was amended to provide for the merger of
the ESOP into the 401(k) Plan. In connection with the merger, certain features
under the ESOP were preserved for the benefit of employees previously
participating in the ESOP with regard to all benefits accrued under the ESOP
through the date of merger.
Stock Option Plans
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock option plans, which are described below accordingly. No
compensation cost has been recognized by the Company in the accompanying income
statement for its stock option plans.
In 1999, the Company paid a stock dividend in the amount of one share of common
stock for each share of common stock issued and outstanding. The dividend was
paid on March 17, 1999 to holders of record on March 8, 1999. The data in this
note has been restated to reflect the effect of the stock dividend.
Under the Non-Qualified Stock Option Plan for certain officers, directors,
agents and others, the Board of Directors is authorized to issue options to
purchase up to 1,200,000 shares of the Company's common stock at 100% of the
fair market value on the date of grant but in no case less than $1.67 per share.
In 1988, options to purchase 660,000 shares were granted at a price of $1.67 per
share. In 1990, options to purchase 60,000 shares expired. In 1991, options to
purchase 100,000 shares were granted at prices ranging from $4.38 to $4.63. In
1992 options to purchase 120,000 shares expired. In 1995, options to purchase
120,000 shares were granted at a price of $5.56 per share. These same options,
along with 40,000 other options, were terminated in 1996. In 1997 84,000 options
were canceled. There were no options granted in 1998, 1997 and 1996. The number
of options exercised in 2000, 1999 and 1998 were 0, 84,000, and 84,000,
respectively.
F-31
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Company's 1999 Non-Qualified Stock Option Plan options to purchase
shares of the Company's common stock at 100% of the fair market value on the
date of grant but in no case less than $7.50 per share, were granted to certain
employees of the Company, its subsidiaries and affiliates. In 1999 options to
purchase 460,000 shares were granted at prices ranging from $9.00 to $9.75.
During 1999, 20,000 options were canceled and no options were exercised. During
2000, 70,000 shares were granted at prices ranging from $9.00 to $9.75. During
2000, 68,000 options were canceled and 4,000 options were exercised.
The following table summarized activity under all Plans for each of the three
years ended December 31, 2000:
<table>
1998 Weighted
Shares Average
(000's) Exercise Price
Outstanding at the beginning of the year 168 $ 1.67
Granted 0 0.00
Exercised (84) 1.67
Canceled -0- 0.00
Outstanding at the end of the year 84 $ 1.67
Options exercisable at year end -0- $ -0-
Weighted average fair value of options granted during the
year $ -0-
1999 Weighted
Shares Average
(000's) Exercise Price
Outstanding at the beginning of the year 84 $ 1.67
Granted 460 9.03
Exercised (84) 1.67
Canceled (20) 9.00
Outstanding at the end of the year 440 $ 9.03
Options exercisable at year end 0 $ -0-
Weighted average fair value of options granted during the
year $ -0-
2000 Weighted
Shares Average
(000's) Exercise Price
Outstanding at the beginning of the year 440 $ 9.03
Granted 70 9.30
Exercised (4) 9.00
Canceled (68) 9.00
Outstanding at the end of the year 438 $ 9.08
Options exercisable at year end 76
</table>
F-32
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted average fair value of options granted during the
year
As of December 31, 2000:
Options Outstanding weighted-
Number Outstanding average remaining
Range of exercise prices December 31, 2000 Contractual Life (years)
$9.00 to $9.75 438,000 2.45
Weighted Average
Range of exercise prices Exercise prices
$9.00 to $9.75 $9.08
Number exercisable Weighted average
Range of Exercise prices December 31, 2000 exercise price
$9.00 to $9.75 76,000 $9.03
11. Leases
The Company and its subsidiaries occupy office facilities under lease agreements
which expire at various dates through 2005. Certain office space leases may be
renewed at the option of the Company.
Rent expense in 2000, 1999, and 1998 was $2,436,159, $2,320,185, and $2,283,198,
respectively, under these lease agreements. Minimum annual future rentals are as
follows:
(in thousands)
2001 $ 2,281
2002 2,155
2003 2,133
2004 2,099
2005 2,041
Thereafter 6,347
$17,057
F-33
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Related Party Transactions
The obligations of the Company under the Senior Loan were guaranteed by FIC. FIC
presently owns 3,932,692 shares of the company's Common Stock, constituting
48.3% of such shares outstanding. FIC held options to acquire an additional
1,702,155 shares, (which does not reflect the stock dividend paid by ILCO on
March 7, 1999) at the average bid price of such shares during the six-month
period preceding the date of any such purchase as long as ILCO's debt guaranteed
by FIC (the Senor Loans) remained outstanding. As described in Note 6, the
current Senior Loan of ILCO was fully repaid on September 30, 1998. Accordingly,
FIC's rights under the 1986 option agreement expired on September 30, 1998.
As part of the financing arrangement for the acquisition of Family Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC, entered
into a senior loan agreement under which $50 million was provided by a group of
banks. The balance of the financing consisted of a $30 million subordinated note
issued by FLC to Merrill Lynch Insurance Group, Inc. ("Merrill Lynch") and $14
million borrowed by another subsidiary of FIC from an affiliate of Merrill Lynch
and evidenced by a senior subordinated note in the principal amount of $12
million and a junior subordinated note in the principal amount of $2 million and
$25 million lent by two insurance company subsidiaries of ILCO. The latter
amount was represented by a $22.5 million loan from Investors-NA to FLC and a
$2.5 million loan provided directly to FIC by Investors-CA. In addition to the
interest provided under those loans, Investors-NA and Investors-CA were granted
by FIC non-transferable options to purchase, in the amounts proportionate to
their respective loans, up to a total of 9.9 percent of shares of FIC's common
stock at a price of $10.50 per share ($2.10 per share as adjusted for the
five-for-one stock split in November, 1996), equivalent to the then current
market price, subject to adjustment to prevent dilution. The original provisions
of the options provided for their expiration on June 12, 1998 if not previously
exercised. In connection with the 1996 amendments to the subordinated notes, as
described below, the expiration date of the options was extended to September
12, 2006.
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and its
affiliate was prepaid. The Company paid $38 million plus accrued interest to
retire the indebtedness, which had a principal balance of approximately $50
million on July 30, 1993. The primary source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
Family Life Insurance Investment Company ("FLIIC"), another subsidiary of FIC,
obtained from Investors-NA. The principal amount of the new subordinated debt
was payable in four equal annual installments in 2000, 2001, 2002 and 2003 and
bears interest at an annual rate of 9%. The other terms of the new debt are
substantially the same as those of the $22.5 million subordinated loans that
Investors-NA had previously made to FLC and that continue to be outstanding.
F-34
<page>
In June, 1996, the provisions of the notes from Investors-NA to FIC, FLC and
FLIIC were modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the note remains at
9%, (c) the $4.5 million note was amended to provide for forty quarterly
principal payments, in the amount of $24,531 each for the period December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the final
quarterly principal payment is due on September 12, 2006; the interest rate on
the note remains at 9%, (d) the $2.5 million note was amended to provide that
the principal balance of the note is to be repaid in twenty quarterly
installments of $125,000 each, commencing December 12, 1996 with the final
payment due on September 12, 2001; the rate of interest remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in kind of interest
due under the terms of the $2.5 million note prior to June 12, 1996, was amended
to provide that the $1,977,119 principal balance of the note is to be paid in
twenty quarterly principal payments, in the amount of $98,855.95 each, to
commence December 12, 1996 with the final payment due on September 12, 2001; the
interest rate on the note remains at 12%.
In December, 1998 FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder, FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
Data processing services for ILCO's and FIC's insurance subsidiaries are
provided by FIC Computer Service, Inc. ("FIC Computer"), a subsidiary of FIC.
Each of FIC's and ILCO's insurance subsidiaries has entered into a data
processing agreement with FIC Computer whereby FIC Computer provides data
processing services to each subsidiary for fees equal to such subsidiary's
proportionate share of FIC Computer's actual costs of providing those services
to all of the subsidiaries. The Company's insurance subsidiaries paid
$2,426,793, $2,730,189 and $2,818,095 and Family Life paid $1,757,904,
$1,916,350 and $1,610,397 to FIC Computer for data processing services provided
during the years ended December 31, 2000, 1999 and 1998, respectively.
In 1995, Investors-NA entered into a reinsurance agreement with Family Life
Insurance Company ("Family Life") pertaining to universal life insurance written
by Family Life. The reinsurance agreement is on a co-insurance basis and applies
to all covered business with effective dates on and after January 1, 1995. The
agreement applies to only that portion of the face amount of the policy which is
less than $200,000; face amounts of $200,000 or more are reinsured by Family
Life with a third party reinsurer.
In 1996, Investors-NA entered into a reinsurance agreement with Family Life,
pertaining to annuity contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996.
ILCO received $12 million, $13 million, and $11 million from Family Life for
direct costs incurred by ILCO on behalf of Family Life's operations in 2000,
1999 and 1998, respectively. Under an agreement between ILCO and Family Life all
direct costs incurred on behalf of the other are to be reimbursed.
13. Commitments and Contingencies
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 matters will not have a material impact on the financial
statements.
14. Net Income Per Share
The following table reflects the calculation of basic and diluted earnings per
share:
F-35
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<table>
Year Ended December 31,
2000 1999 1998
(in thousands except per share amounts)
Basic:
Net income available to common shareholders $ 12,066 $ 12,765 $ 11,119
Weighted average common stock outstanding 8,333 8,796 8,750
Basic earnings per share $ 1.45 $ 1.45 $ 1.27
Diluted:
Net income available to common shareholders $ 12,066 $ 12,765 $ 11,119
Weighted average common stock outstanding 8,333 8,796 8,750
Common stock options 423 273 2,638
Repurchase of treasury stock (413) (269) (2,464)
Common stock and common stock equivalents 8,343 8,800 8,924
Diluted earnings per share $ 1.45 $ 1.45 $ 1.25
</table>
15. Quarterly Financial Data (unaudited) ( in thousands, except per share
amounts)
<table>
Three Months Three Months
Ended Ended
March 31, June 30,
2000 1999 2000 1999
Net Operating Revenue $ 25,399 $ 26,270 $ 25,270 $ 26,693
Net Income $ 3,231 $ 2,961 $ 3,123 $ 2,627
Basic earnings per share $ 0.37 $ 0.34 $ 0.38 $ 0.30
Diluted earnings per share $ 0.37 $ 0.34 $ 0.38 $ 0.30
Three Months Three Months
Ended Ended
September 30, December 31,
2000 1999 2000 1999
Net Operating Revenue $ 27,631 $ 25,299 $ 25,456 $ 25,943
Net Income $ 3,238 $ 3,135 $ 2,474 $ 4,042
Basic earnings per share $ 0.40 $ 0.36 $ 0.30 $ 0.46
Diluted earnings per share $ 0.40 $ 0.36 $ 0.30 $ 0.46
</table>
F-36
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Subsequent Events
Agreement and Plan of Merger.
On January 17, 2001, ILCO entered into an Agreement and Plan of Merger (the
"Agreement") with FIC and ILCO Acquisition Company ("ILCO Acquisition"), a Texas
corporation and wholly-owned subsidiary of FIC. In general, the Agreement
provides that, following the approval of the Agreement by the shareholders of
ILCO and the approval of the issuance of shares of FIC common stock and
amendment to FIC's articles of incorporation by the shareholders of FIC and the
satisfaction or waiver of the other conditions to the merger: (1) ILCO
Acquisition will merge with and into ILCO; and (2) ILCO Acquisition will cease
to exist and ILCO will continue as the surviving corporation and as a
wholly-owned subsidiary of FIC following the merger.
Upon the consummation of the merger: (1) each share of ILCO common stock issued
and outstanding immediately prior to the merger, other than shares of ILCO
common stock held as treasury shares by ILCO (but excluding shares of ILCO
common stock held by any of ILCO's subsidiaries, whether or not treated as
treasury shares of ILCO on a consolidated basis under generally accepted
accounting principles) or shares of ILCO common stock held by FIC, will be
converted into the right to receive 1.1 shares of FIC common stock. However, in
the event of any change in FIC common stock and/or ILCO common stock prior to
the merger, such as a stock split, stock dividend, subdivision,
reclassification, recapitalization, combination, exchange of shares or the like,
the number and class of shares of FIC common stock to be issued and delivered in
the merger in exchange for each outstanding share of ILCO common stock will be
adjusted so as to maintain the relative proportionate interests of the holders
of ILCO common stock and FIC common stock; (2) each share of ILCO common stock,
series A preferred stock and series B preferred stock of ILCO, in each case
which is held as treasury shares by ILCO prior to the merger (excluding shares
of ILCO common stock held by any of ILCO's subsidiaries, whether or not treated
as treasury shares of ILCO on a consolidated basis under generally accepted
accounting principles), and each share of ILCO common stock which is held by FIC
(excluding any shares of ILCO common stock owned by any of FIC's subsidiaries)
prior to the merger, will be cancelled and retired; (3) each share of common
stock of ILCO Acquisition issued and outstanding immediately prior to the merger
will be converted into one share of common stock of ILCO and such shares will
represent all of the issued and outstanding capital stock of ILCO following the
merger; and (4) shares of FIC common stock outstanding immediately prior to the
merger (including shares of FIC common stock held by any subsidiary of FIC or
ILCO) will remain outstanding and will be unaffected by the merger. No
fractional shares of FIC common stock will be issued in the merger. A holder of
ILCO common stock who would otherwise be entitled to receive fractional shares
of FIC common stock as a result of the merger will receive, in lieu of
fractional shares, cash in an amount equal to the average closing price per
share of FIC common stock for the 30 trading days immediately prior to the
merger multiplied by the fraction to which the holder would otherwise be
entitled. FIC will make available to First Union National Bank, as exchange
agent, from time to time sufficient cash amounts to satisfy payment for
fractional shares and First Union will distribute such proceeds, without
interest, to the holders of the fractional interests.
The consummation of the merger remains subject to regulatory approval, as well
as to the various conditions precedent set forth in the Agreement, including the
approval of certain matters by the shareholders of FIC and ILCO. For a more
detailed description of the Agreement, see the complete copy of the Agreement,
attached as an annex to the S-4 filed by FIC with the Securities and Exchange
Commission on February 1, 2001, as amended by the S-4/A filed on March 13, 2001.
F-37
<page>
Unsolicited Verbal Inquiries Concerning Possible Purchase of Post-Merger Company
On March 8, 2001, FIC announced that it has received unsolicited verbal
indications of interest from a few companies that may be interested in acquiring
FIC after completion of the merger with ILCO. The press release did not state
any price ranges or other material terms. In conjunction with such indications
of interest, FIC has retained Philo Smith Capital Corporation as its financial
advisor to explore the possibility of a post-merger sale of FIC with these
companies and to further solicit indications of interest from other companies
that may have similar interests. No formal indications of interest have been
received by FIC to date and FIC has not determined to sell the post-merger
company.
Litigation Relating to the Merger
On the day that ILCO publicly announced the formation of a special committee to
evaluate a potential merger with FIC, two class action lawsuits were filed
against ILCO, FIC and the officers and directors of ILCO. The actions allege
that a cash consideration in the proposed merger is unfair to the shareholders
of ILCO, that it would prevent the ILCO shareholders from realizing the true
value of ILCO, and that FIC and the named officers and directors had material
conflicts of interest in approving the transaction.
In their initial pleadings, the plaintiffs sought certification of the cases as
class actions and the named plaintiffs as class representatives, and among other
relief, requested that the merger be enjoined (or, if consummated, rescinded and
set aside) and that the defendants account to the class members for their
damages.
As of March 16, 2001, the plaintiffs have not taken any further action with
respect to the litigation. The defendants believe that the lawsuits are without
merit and intend to vigorously contest the lawsuits. Management is unable to
determine the impact, if any, that the lawsuits will have on the results of
operations of ILCO.
Dividend
In March, 2001, the Company announced that its board of directors approved the
payment of an annual cash dividend in the amount of $0.41 per share. The
dividend is payable on April 12, 2001 to record holders as of the close of
business on March 20, 2001.
F-38
<page>
Exhibit 99.3
UNAUDITED FINANCIAL STATEMENTS OF ILCO FOR THE THREE MONTHS
ENDED MARCH 31, 2001:
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
March 31,
<table>
2001
ASSETS (Unaudited)
Investments:
Fixed maturities, at amortized cost (market value
approximates $1,014 and $1,386 at March 31,
2001 and December 31, 2000) $ 1,002
Fixed maturities available for sale, at market value
(amortized cost of $418,020 and $436,997 at
March 31, 2001 and December 31, 2000) 427,360
Equity securities, at market value (cost approximates
$338 at March 31, 2001 and December 31, 2000) 2,510
Policy loans 48,139
Mortgage loans 4,824
Invested real estate and other invested
assets 40,401
Short-term investments 143,530
Total investments 667,766
Cash and cash equivalents 10,203
Notes receivable from affiliates 33,812
Accrued investment income 8,552
Accounts receivable and other receivables 26,130
Reinsurance receivables 16,606
Real estate occupied by the Company 20,086
Property and equipment, net 5,032
Deferred policy acquisition costs 40,323
Present value of future profits of
acquired businesses 35,446
Other assets 7,731
Separate account assets 427,659
Total Assets $ 1,299,346
</table>
The accompanying notes are an integral part of the
consolidated financial statements.
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands of dollars)
<table>
March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001
(Unaudited)
Liabilities:
Policy liabilities and contractholder deposit funds:
Future policy benefits $ 128,371
Contractholder deposit funds 520,797
Unearned premiums 1,589
Other policy claims and benefits payable 10,581
661,338
Other policyholders' funds 2,584
Deferred federal income taxes 29,384
Other liabilities 15,741
Separate account liabilities 422,618
Total Liabilities 1,131,665
Commitments and Contingencies
Redeemable preferred stock:
Class A Preferred, $1 par value, 5,000
5,000,000 shares authorized, issued
Class B Preferred, $1 par value,
15,000,000 shares authorized, issued 15,000
20,000
Redeemable preferred stock held in treasury (20,000)
-0-
Shareholders' Equity:
Common Stock, $.22 par value, 15,000,000 shares
authorized; 10,883,478 and 10,859,478 shares
issued, 8,180,407 and 8,129,385 shares outstanding in
2001 and 2000, respectively 2,398
Additional paid-in capital 4,745
Accumulated other comprehensive income 7,482
Retained earnings 163,169
177,794
Common treasury stock, at cost, 2,703,071 and
2,730,093 in 2001 and 2000, respectively (10,113)
Total Shareholders' Equity 167,681
Total Liabilities and Shareholders' Equity $ 1,299,346
</table>
The accompanying notes are an integral part of the
consolidated financial statements.
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
(in thousands of dollars, except for per share data)
(unaudited)
<table>
Three Months Ended
March 31,
2001
Revenues:
Premium $ 2,063
Net investment income 12,337
Earned insurance charges 9,894
Other 643
24,937
Benefits and expenses:
Policyholder benefits and expenses 6,911
Interest expense on contract holders
deposit funds 7,391
Amortization of present value of future
profits of acquired businesses 577
Amortization of deferred policy
acquisition costs 747
Operating expenses 4,825
20,451
Income from operations 4,486
Provision for federal income taxes 1,654
Net income $ 2,832
Net income per share
Basic:
Weighted average common stock
outstanding 8,160
Basic earnings per share $ 0.35
Diluted:
Common stock and common stock equivalents 8,241
Diluted earnings per share $ 0.34
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<table>
Three Months Ended
March 31,
CASH FLOWS FROM OPERATING 2001
ACTIVITIES
Net Income $ 2,832
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Amortization of present value of future 577
profits of acquired businesses
Amortization of deferred policy
acquisition costs 747
Depreciation 426
Changes in assets and liabilities:
Increase in accrued investment income (248)
Decrease (increase) in agent advances and
other receivables (948)
Policy acquisition costs deferred (1,675)
Decrease in policy liabilities and
contractholder deposit funds (1,726)
(Increase) decrease in other policyholders' funds (431)
Increase in other liabilities 5,696
Increase in deferred federal income taxes 2,196
Decrease (increase) in other assets 135
Deferred tax on change in comprehensive income (2,217)
Accrual for shareholder dividends (3,937)
Other, net (120)
Net cash provided by (used in) operating activities $ 1,307
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<table>
Three Months Ended
March 31,
CASH FLOWS FROM INVESTING
ACTIVITIES
Investments purchased $ (26,524)
Proceeds from calls and maturities of investments 38,776
Net change in short-term investments (13,723)
Purchases and sales of equipment (453)
Decrease in notes receivable from affiliates 1,537
Net cash (used in) provided by investing activities (387)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock -0-
Issuance of common stock 217
Net cash provided by (used in) financing activities 217
Net increase in cash and cash equivalents 1,137
Cash and cash equivalents, beginning of period 9,066
Cash and cash equivalents, end of period $ 10,203
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
<page>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein have been presented to conform to the
requirements of Form 10- Q. This presentation includes year end balance sheet
data which was derived from audited financial statements. The notes to the
financial statements 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, 2000 previously filed with the Securities
and Exchange Commission for financial statements prepared in accordance with
GAAP. Management believes the financial statements reflect all adjustments
necessary to present a fair statement of interim results. Certain prior year
amounts have been reclassified to conform with current year presentation.
Other Comprehensive Income
The following is a reconciliation of total accumulated other comprehensive
income from December 31, 2000 to March 31, 2001 (in thousands):
<table>
Net unrealized
gain on
investments Total
in fixed Net accumulated
maturities appreciation other
available for of equity comprehensive
sale securities income
Balance at December 31, 2000 $ 2,438 $ 927 $ 3,365
Current period change 3,633 484 4,117
Balance at March 31, 2001 $ 6,071 $ 1,411 $ 7,482
</table>
Dividends Declared
In March, 2001, ILCO announced that its board of directors approved the payment
of an annual cash dividend in the amount of $.41 per share. The dividend was
paid on April 12, 2001 to shareholders of record on March 19, 2001. The dividend
has been accrued in other liabilities on the consolidated balance sheet.
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 No. 133, as amended by FAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An Amendment of
FASB Statement 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 133 did not
have a material impact on the Company's results of operations, liquidity or
financial position.
<page>
Exhibit 99.4
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF FIC AND
ILCO FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE THREE MONTHS
ENDED MARCH 31, 2001:
FINANCIAL INDUSTRIES CORPORATION
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to the
merger and the pro forma adjustments described in the accompanying notes. The
unaudited pro forma combined financial information should be read in conjunction
with the audited historical consolidated financial statements and related notes
of FIC and ILCO, which are incorporated by reference into this joint proxy
statement/ prospectus.
The unaudited pro forma balance sheet gives effect to the merger as if it
had occurred on the balance sheet date. The unaudited pro forma consolidated
statements of income give effect to the merger as if it had occurred at the
beginning of the earliest period presented. The transaction is being accounted
for on a purchase basis.
The unaudited pro forma financial information is presented for illustrative
purposes only and does not purport to be indicative of the operating results or
financial position that would have actually occurred if the merger had been in
effect on the dates indicated, nor is it necessarily indicative of future
operating results or financial position of the merged companies. The pro forma
adjustments are based on the information and assumptions available as of the
date of this joint proxy statement/prospectus. The unaudited pro forma financial
statements do not give effect to any cost savings or synergies which may result
from the integration of FIC's and ILCO's operations.
<page>
FINANCIAL INDUSTRIES CORPORATION AND
INTERCONTINENTAL LIFE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2001
(Unaudited) (In Thousands, Except Per Share Amounts)
<table>
Historical
Pro Forma Pro Forma
FIC ILCO Adjustments Combined
Revenues:
Premium...................................... $ 8,038 $ 2,063 $ 10,101
Net Investment Income........................ 1,631 12,337 (794)(a) 13,174
Earned Insurance Charges..................... 934 9,894 10,828
Other........................................ 643 643
Total Revenues..................... 10,603 24,937 (794) 34,746
Benefits and Expenses:
Policyholder Benefits........................ 2,591 6,911 9,502
Interest Expense on Contractholder
Deposit Funds............................... 570 7,391 7,961
Operating Expenses........................... 3,139 4,825 7,964
Interest Expense............................. 427 0 (427)(a) 0
Other Operating Expenses..................... 2,277 1,324 (1,058)(d) 2,543
Total Benefits and Expenses........ 9,004 20,451 (1,485) 27,970
Income before Federal Income Taxes and
Equity in Net Earnings of Affiliates......... 1,599 4,486 691 6,776
Provision for Federal Income Taxes........... 360 1,654 260 (d) 2,274
Income before Equity in Net Earnings of
Affiliates................................. 1,239 2,832 431 4,502
Equity in Net Earnings of Affiliates......... 845 0 (845)(a) 0
Net Income......................... $ 2,084 $ 2,832 $ (414) $ 4,502
Weighted Average Shares Outstanding:
Basic...................................... 5,055 8,160 4,616 9,538 (e)
Diluted.................................... 5,183 8,241 4,616 9,545 (e)
Net Income Per Share:
Basic...................................... $ 0.41 $ 0.35 $ 0.47
Diluted.................................... $ 0.40 $ 0.34 $ 0.47
</table>
<page>
FINANCIAL INDUSTRIES CORPORATION AND
INTERCONTINENTAL LIFE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 2000
(Unaudited) (In Thousands, Except Per Share Amounts)
<table>
Historical Pro Pro
Forma Forma
FIC ILCO Adjustments Combined
Revenues:
Premium......................................... $33,149 $ 10,873 $ 44,022
Net Investment Income........................... 6,940 50,893 (3,654)(a) 54,179
Earned Insurance Charges........................ 4,323 38,500 42,823
Other........................................... 6 3,490 3,496
Total Revenues......................... 44,418 103,756 (3,654) 144,520
Benefits and expenses:
Policyholder Benefits........................... 13,453 32,460 45,913
Interest Expense on Contractholder Deposit 2,211 28,794 31,005
Funds...........................................
Operating Expenses.............................. 11,375 17,103 28,478
Interest Expense................................ 1,899 -0- (1,899)(a) -0-
Other Operating Expenses........................ 8,998 6,312 (4,396)(d) 10,914
Total Benefits and Expenses............ 37,936 84,669 (6,295) 116,310
Income before Federal Income Taxes and
Equity in Net
Earnings of Affiliates........................ 6,482 19,087 2,641 28,210
Provision for Federal Income Taxes.............. 1,284 7,021 1,225 (d) 9,530
Income before Equity in Net Earnings of 5,198 12,066 1,416 18,680
Affiliates......................................
Equity in Net Earnings of Affiliates............ 3,581 -0- (3,581)(a) -0-
Net Income............................ $ 8,779 $ 12,066 $ (2,165) $ 18,680
Weighted Average Shares Outstanding:
Basic......................................... 5,055 8,333 4,616 9,481(e)
Diluted....................................... 5,163 8,343 4,616 9,488(e)
Net Income Per Share:
Basic......................................... $ 1.74 $ 1.45 $ 1.97
Diluted....................................... $ 1.70 $ 1.45 $ 1.97
</table>
<page>
FINANCIAL INDUSTRIES CORPORATION AND
INTERCONTINENTAL LIFE CORPORATION
PRO FORMA COMBINED CONDENSED BALANCED SHEET
March 31, 2001
(Unaudited) (in thousands)
<table>
Historical Pro Pro
Forma Forma
FIC ILCO Adjustments Combined
Assets
Total Invested Assets................. $ 95,952 $ 667,766 (1,708)(a) $ 762,003
(7)(c)
Investment in Affiliate............... 79,559 -0- (79,559)(a) -0-
Notes Receivable from Affiliates...... -0- 33,812 (33,812)(a) -0-
Intangible Assets..................... 75,297 75,769 (39,347)(c) 111,624
(95)(a)
Separate Account Assets............... -0- 427,659 0 427,659
Other Assets.......................... 51,827 94,340 (965)(c) 145,202
Total Assets................ $ 302,635 $1,299,346 $(155,493) $ 1,446,488
Liabilities and Shareholders' Equity
Policyholder Liabilities.............. $ 108,942 $ 661,338 3,136 (c) $ 773,416
Subordinated Notes Payable to 33,812 0 (33,812)(a) -0-
Affiliate.............................
Deferred Federal Income Taxes......... 24,473 29,384 (19,277)(c) 34,580
Other Liabilities..................... 5,491 18,325 0 23,816
Excess of Net Assets Acquired 0 0 15,960 (c) 15,960
Over Cost.............................
Separate Account Liabilities.......... 0 422,618 (3,054)(c) 419,564
Total Liabilities........... 172,718 1,131,665 (37,047) 1,267,336
Minority Interest..................... 0 0 89,739 (a) 0
(89,739)(a)
Shareholders' Equity:
Common Stock.......................... 1,169 2,398 (2,398)(a) 2,326
1,157 (b)
Additional Paid in Capital............ 7,225 4,745 (4,745)(a) 67,195
59,970 (b)
Accumulated Other Comprehensive 3,320 7,482 (7,482)(a) 4,270
Income................................ 950 (a)
Retained Earnings..................... 125,578 163,169 (163,169)(a) 125,578
Treasury Stock........................ (7,375) (10,113) 8,405 (a) (20,217)
(11,134)(b)
Total Shareholders' Equity.. 129,917 167,681 (118,446) 179,152
Total Liabilities and
Shareholders' Equity...... $302,635 $1,299,346 $(155,493) $1,446,488
</table>
<page>
FINANCIAL INDUSTRIES CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
On January 17, 2001, Financial Industries Corporation and InterContinental
Life Corporation entered into a merger agreement that will result in a
wholly-owned subsidiary of Financial Industries Corporation being merged with
and into InterContinental Life Corporation. The merger agreement provides that
InterContinental Life Corporation shareholders will receive 1.1 shares of
Financial Industries Corporation common stock for each share of InterContinental
Life Corporation common stock that they owned immediately before the merger.
The pro forma combined condensed balance sheet assumes that the merger took
place March 31, 2001 and combines Financial Industries Corporation's
consolidated balance sheet and InterContinental Life Corporation's consolidated
balance sheet as of March 31, 2001.
The pro forma combined condensed statement of operations assumes the merger
took place as of the beginning of the period presented and combines Financial
Industries Corporation's consolidated statement of operations for the year ended
December 31, 2000 and the three months ended March 31, 2001.
(a) Adjustment reflects the consolidation of Financial Industries
Corporation and InterContinental Life Corporation prior to the merger
resulting in the elimination of the following items (in thousands):
3/31/01 12/31/00
Summary of Operations:
Interest income from affiliates............. $ 794 $ 3,654
Interest expense to affiliate............... 427 1,899
Equity in net earnings of affiliate......... 845 3,581
Balance Sheet:
Investment in FIC common stock by
ILCO........................................ $ 1,708
Investment in ILCO by FIC................... 79,559
Notes receivable from affiliate............. 33,812
Intangible assets........................... 95
Notes payable to affiliate.................. 33,812
Common stock of ILCO........................ 2,398
Paid in capital of ILCO..................... 4,745
Accumulated other comprehensive income
of ILCO.................................... 6,532
Retained earnings of ILCO................... 163,169
Treasury stock of ILCO...................... (8,405)
For consolidation purposes minority interest of $89,739,000 was generated
in the consolidation entry and eliminated in the acquisition entry.
<page>
(b) Adjustment reflects the components of the consideration paid in the
form of 1.1 shares of FIC stock for each share of ILCO stock. FIC will
issue approximately 5,786,000 shares of which 4,673,000 are to outside
shareholders and 1,113,000 are to insurance subsidiaries of FIC and
ILCO and will be treated as treasury stock after the transaction. The
market price of FIC common stock used in the pro forma statements is
$10.00 a share which calculates a net purchase price of $49,993,000.
The components of the purchase price are as follows (in thousands):
Common stock........... $ 1,157
Additional paid
in capital............ 56,707
Estimated fair value of stock options
granted . . . . . 3,263
Treasury stock......... (11,134)
$ 49,993
(c) Adjustment reflects the allocation of the purchase price to 51.93% of
ILCO's assets and liabilities which represents those assets and
liabilities acquired and assumed, as follows (in thousands):
<table>
Allocation of Carrying
Purchase Price Value Adjustments
Invested Assets............................... $ 346,764 $ 346,771 $ (7)
Intangible Assets............................. -0- 39,347 (39,347)
Notes Receivable from Affiliates.............. 17,559 17,559 -
Separate Account Assets....................... 222,083 222,083 -
Other Assets.................................. 48,026 48,991 (965)
Policyholder Liabilities...................... 346,569 343,433 3,136
Deferred Income Taxes......................... (4,018) 15,259 (19,277)
Excess of Net Assets Acquired Over Cost....... 15,960 -0- 15,960
Other Liabilities............................. 9,516 9,516 -
Separate Account Liabilities.................. 216,412 219,466 (3,054)
$ 49,993
</table>
Note that the above table reflects the net effect of an entry to
offset negative goodwill calculated against the Present Value of
Future Profits calculated (net of tax). Also note that the remaining
48.07% of ILCO's net assets already owned by FIC will continue to be
carried at cost.
(d) Adjustment reflects reduction in amortization expense resulting from
the elimination of Deferred Acquisition Costs and Present Value of
Future Profits to the extent these assets were acquired and the
increase in income due to the amortization of the excess of net assets
acquired over cost as follows (in thousands):
3/31/01 12/31/00
Deferred Acquisition Costs.......... $ 385 $ 1,293
Present Value of Future Profits..... 298 1,965
Property, Plant & Equipment . . . 61 243
Excess of Net Assets Acquired
Over Cost........................... 314 895
$ 1,058 $ 4,396
Federal Income Tax.................. $ 260 $ 1,225
(e) Pro forma weighted average common shares outstanding for all periods
presented are based on FIC and ILCO's combined historical weighted
average shares, after adjustment of ILCO's historical number of shares
by the exchange ratio of 1.1.