SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly Period Ended June 30, 2001
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 74-2126975
(State of Incorporation) (I.R.S. Employer Identification Number)
6500 River Place Blvd., Building One
Austin, Texas 78730
(Address of principal executive office (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of common shares outstanding ($.20 par value) at end of period:
9,446,099.
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<page>
Forward-Looking Statements
Except for historical factual information set forth in this Form 10-Q, the
statements, analyses, and other information contained in this report relating to
trends in the Company's operations and financial results, the markets for the
Companys products, the future development of the Company's business, and the
contingencies and uncertainties to which the Company may be subject, as well as
other statements including words such as "anticipate," "believe," "path,"
"estimate," "expect," "intend" and other similar expressions constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such statements are made based upon management's current expectations and
beliefs concerning the financial results, economic conditions and are subject to
known and unknown risks, uncertainties and other factors contemplated by the
forward-looking statements. Such factors include, among other things: (1)
general economic conditions and other factors, including prevailing interest
rate levels and stock market performance, which may affect the ability of FIC to
sell its products, the market value of FIC's investments and the lapse rate and
profitability of policies; (2) FIC's ability to achieve anticipated levels of
operational efficiencies and cost-saving initiatives; (3) customer response to
new products, distribution channels and marketing initiatives; (4) mortality,
morbidity and other factors which may affect the profitability of FIC's
insurance products; (5) changes in the Federal income tax laws and regulations
which may affect the relative tax advantages of some of FIC's products; (6)
increasing competition in the sale of insurance and annuities; (7) regulatory
changes or actions, including those relating to regulation of insurance products
and insurance companies; (8) ratings assigned to FIC's insurance subsidiaries by
independent rating organizations such as A.M. Best Company, which FIC believes
are particularly important to the sale of annuity and other accumulation
products; and (9) unanticipated litigation. There can be no assurance that other
factors not currently anticipated by management will not also materially and
adversely affect FIC.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000................................ 4
Consolidated Statements of Income
For the three and six month periods ended
June 30, 2001 and June 30, 2000.................................... 6
Consolidated Statements of Cash Flows
For the three and six month periods ended
June 30, 2001 and June 30, 2000................................... 10
Notes to Consolidated Financial Statements..................................14
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations.....................17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ..............................................26
Part II
Other Information..........................................................27
Signature Page.............................................................31
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<table>
<s> <c> <c>
June 30, December 31,
2001 2000
(unaudited)
ASSETS
Investments other than investments in affiliate:
Fixed maturities available for sale at
market value (amortized cost of $476,471 and
$78,249 at June 30, 2001 and
December 31, 2000, respectively) $ 483,773 $ 79,786
Fixed maturities at amortized cost (market
approximates $1,023 at June 30, 2001) 1,016 0
Equity securities at market (cost approximates
$45 at June 30 at June 30, 2001 and $11
at December 31, 2000) 51 4
Policy loans 51,761 3,699
Mortgage loans and other investments 4,790 0
Invested real estate and other invested assets 45,252 0
Short-term investments 163,606 15,624
Total investments 750,249 99,113
Cash 12,079 2,733
Investment in affiliate 0 79,105
Accrued investment income 9,488 1,172
Agency advances and other receivables 25,787 7,604
Reinsurance receivables 34,919 17,466
Due and deferred premiums 22,201 12,537
Real estate occupied by the Company 20,143 0
Property and equipment, net 3,762 1,318
Deferred policy acquisition costs 77,628 56,161
Present value of future profits of
acquired businesses 34,333 19,440
Other assets 16,160 4,117
Separate account assets 421,142 0
Total Assets $ 1,427,891 $ 300,766
</table>
The accompanying notes are an integral part of these consolidated
financial statements
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<table>
<s> <c> <c>
June 30, December31,
2001 2000
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contract holder deposit funds:
Future policy benefits $ 192,310 $ 62,462
Contract holder deposit funds 567,899 43,301
Other policy claims and benefits payable 13,933 2,931
774,142 108,694
Subordinated notes payable to affiliate 0 35,349
Deferred federal income taxes 33,931 24,437
Excess of net assets acquired over cost 13,955 0
Other liabilities 13,272 3,734
Separate account liabilities 413,970 0
Total Liabilities 1,249,270 172,214
Commitments and Contingencies
Shareholders' equity:
Common stock, $.20 par value, 25,000,000 shares authorized at
June 30, 2001 and 10,000,000 shares authorized at December
31, 2000; 11,689,546 and 5,845,300 shares issued, 9,446,099 and 2,338 1,169
5,054,661 shares outstanding in 2001 and 2000, respectively
Additional paid-in capital 67,761 7,225
Accumulated other comprehensive income 4,751 2,107
Retained earnings 126,293 125,426
201,143 135,927
Common treasury stock, at cost, 2,243,447 at 2001 and
790,639 at 2000. (22,523) (7,375)
Total Shareholders' Equity 178,620 128,552
Total Liabilities and Shareholders' Equity $ 1,427,891 $ 300,766
The accompanying notes are an integral part of these consolidated financial statements.
</table>
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<table>
<s> <c> <c>
Three Months Ended June 30,
2001 2000
(unaudited)
Revenues:
Premiums $ 9,061 $ 8,443
Net investment income 7,141 1,700
Earned insurance charges 5,658 1,225
Other 254 3
22,114 11,371
Benefits and expenses:
Policyholder benefits and expenses 6,703 3,870
Interest expense on contract holders
deposit funds 4,126 469
Amortization of present value of future
profits of acquired businesses 938 856
Amortization of deferred policy
acquisition costs 1,494 1,094
Operating expenses 5,376 2,991
Interest expense 189 484
18,826 9,764
Income before federal income tax and
equity in net earnings of affiliates 3,288 1,607
Provision for federal income taxes 994 319
Income before equity in net earnings of affiliates 2,294 1,288
Equity in net earnings of affiliate, net of tax 472 917
Net Income $ 2,766 $ 2,205
</table>
The accompanying notes are an integral part of these
consolidated statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<table>
<s> <c> <c>
Three Months Ended June 30,
2001 2000
(unaudited)
Net Income Per Share
Basic:
Average weighted shares outstanding 7,193 5,055
Basic earnings per share $ 0.38 $ 0.44
Diluted:
Common stock and common stock equivalents 7,250 5,168
Diluted earnings per share $ 0.38 $ 0.43
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<table>
<s> <c> <c>
Six Months Ended June 30,
2001 2000
(unaudited)
Revenues:
Premiums $ 17,099 $ 16,844
Net investment income 8,772 3,440
Earned insurance charges 6,592 2,372
Other 254 3
32,717 22,659
Benefits and expenses:
Policyholder benefits and expenses 9,294 7,221
Interest expense on contract holders
deposit funds 4,696 1,059
Amortization of present value of future
profits of acquired businesses 1,776 1,872
Amortization of deferred policy
acquisition costs 2,933 2,443
Operating expenses 8,516 5,938
Interest expense 616 1,012
Total 27,831 19,545
Income before federal income tax and
equity in net earnings of affiliates 4,886 3,114
Provision for federal income taxes 1,354 578
Income before equity in net earnings
of affiliates 3,533 2,536
Equity in net earnings of affiliate,
net of tax 1,317 1,883
Net Income $ 4,849 $ 4,419
</table>
The accompanying notes are an integral part of
these consolidated statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<table>
<s> <c> <c>
Six Months Ended June 30,
2001 2000
(unaudited)
Net Income Per Share
Basic:
Average weighted shares outstanding 6,130 5,055
Basic earnings per share $ 0.79 $ 0.87
Diluted:
Common stock and common stock equivalents 6,160 5,167
Diluted earnings per share $ 0.79 $ 0.86
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
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<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<table>
<s> <c> <c>
Three Months Ended June 30,
2001 2000
(unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 2,766 $ 2,205
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of present value of future
profits of acquired business 1,218 856
Amortization of deferred policy
acquisition costs 1,478 1,094
Equity in undistributed earnings of affiliate (776) (1,505)
Changes in assets and liabilities:
Increase in accrued investment income 72 (113)
(Increase) Decrease in agent advances and
other receivables 2,917 (1,252)
Increase in due and deferred premiums (101) (260)
Increase in deferred policy acquisition costs (2,567) (2,222)
Decrease in other assets (381) (133)
Decrease in policy liabilities and accruals (953) 129
Increase (Decrease) in other liabilities (1,620) 136
Increase (Decrease) in deferred federal income taxes 114 (77)
Other, net 1,089 445
Net cash provided by (used in) operating activities $ 4,018 $ (697)
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
<table>
<s> <c> <c>
Three Months Ended June 30,
2001 2000
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities purchased $ (28,785) $ (8,826)
Proceeds from sales and maturities of
fixed maturities 34,069 6,406
Increase in policy loans (61) (5)
Net change in short-term investments (3,757) 5,837
Purchase & retirement of property
and equipment (10) 37
Net cash provided by investing activities 1,456 3,449
CASH FLOW FROM FINANCING
ACTIVITIES
Dividends Paid (1,931) (907)
Net cash from purchase of insurance holding company 6,979 0
Purchase of treasury stock (2,298) 0
Repayment of subordinated notes payable 0 (1,537)
Net cash provided by (used in) financing activities 2,750 (2,444)
Net Increase (Decrease) in cash 8,224 308
Cash, beginning of period 3,855 873
Cash, end of period $ 12,079 $ 1,181
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<table>
<s> <c> <c>
Six Months Ended June 30,
2001 2000
(unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 4,849 $ 4,419
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of present value of future
profits of acquired business 2,056 1,872
Amortization of deferred policy
acquisition costs 2,917 2,443
Equity in undistributed earnings of affiliate (2,137) (3,031)
Changes in assets and liabilities:
Increase in accrued investment income (104) (64)
Increase in agent advances and
other receivables (3) (1,509)
Increase in due and deferred premiums (427) (123)
Increase in deferred policy acquisition costs (4,540) (4,193)
Decrease in other assets 45 (33)
Decrease in policy liabilities and accruals (705) (91)
Increase (Decrease) in other liabilities 137 (329)
Decrease in deferred federal
income taxes (150) (124)
Other, net 728 305
Net cash provided by (used in)
operating activities $ 2,666 $ (458)
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
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<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
<table>
<s> <c> <c>
Six Months Ended June 30,
2001 2000
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities purchased $ (33,985) $ (10,288)
Proceeds from sales and maturities of
fixed maturities 42,565 6,638
Increase in policy loans (108) (8)
Net change in short-term investments (2,995) 8,549
Purchase & retirement of property
and equipment (10) 37
Net cash provided by investing activities 5,467 4,928
CASH FLOW FROM FINANCING
ACTIVITIES
Dividends Paid (1,931) (907)
Net cash from acquisition of insurance
holding company 6,979 0
Purchase of treasury stock (2,298) 0
Repayment of subordinated notes payable (1,537) (3,074)
Net cash provided by (used in)
financing activities 1,213 (3,981)
Net Increase in cash 9,346 489
Cash, beginning of year 2,733 692
Cash, end of period $ 12,079 $ 1,181
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein reflect all adjustments which are, in
the opinion of management, necessary to present a fair statement of the interim
results. The statements have been prepared to conform to the requirements of
Form 10-Q and do not necessarily include all disclosures required by generally
accepted accounting principles (GAAP). The reader should refer to Form 10-K for
the year ended December 31, 2000, previously filed with the Commission for
financial statements prepared in accordance with GAAP. Certain prior year
amounts have been reclassified to conform with current year presentation.
The consolidated financial statements include the accounts of Financial
Industries Corporation ("FIC") and its wholly-owned subsidiaries. The investment
of FIC in InterContinental Life Corporation ("ILCO") is presented using the
equity method. All significant intercompany items and transactions have been
eliminated.
Other Comprehensive Income
The following is a reconciliation of accumulated other comprehensive income from
December 31, 2000 to June 30, 2001 (in thousands):
<table>
<s> <c> <c> <c>
Net Total
Net unrealized appreciation accumulated
gain on investments (depreciation) other
in fixed maturities of equity comprehensive
available for sale securities income
Balance at December 31, 2000 $ 2,107 $ 0 $ 2,107
Current Period Change 2,640 4 2,644
Balance at June 30, 2001 $ 4,747 $ 4 $ 4,751
</table>
Acquisition of InterContinental Life Corporation
On May 18, 2001, Financial Industries Corporation ("FIC") completed the merger
of a subsidiary of FIC with and into ILCO, with ILCO surviving the merger as a
wholly-owned subsidiary of FIC. In connection with the transaction, FIC issued
1.1 shares of its common stock for each share of ILCO common stock outstanding
at the time of the merger and not held directly by FIC or ILCO. In addition,
each option to purchase ILCO common stock was assumed by FIC and became an
option to purchase FIC common stock with the number of shares and the exercise
price adjusted for the exchange ratio in the merger. The consideration for the
transaction was $50.536 million represented by the issuance of 4.7 million
shares of FIC stock, at $10 per share, to ILCO shareholders. The $10 per share
price was calculated based on the average price of FIC common stock on the two
days immediately precedding and following the date of the merger agreement
between FIC and ILCO. Prior to the merger, FIC owned approximately 48.1% of
ILCO's common stock. The acquisition of ILCO was accounted for as a purchase;
accordingly, the results of ILCO's operations are included in income from the
date of the acquisition to June 30, 2001. The allocation of the purchase price
to the net assets acquired resulted in excess of net assets acquired which have
been estimated to be approximately $14.1 million. This estimate is based on an
analysis, as of May 18, 2001, of the acquired block of business, which estimate
is subject to adjustment based on actuarial analysis of the book of business.
For the period from January 1, 2001 to May 17, 2001, and for the first six
months of 2000, FIC's net income includes its equity interest in the net income
of ILCO, with such equity interest being based on FIC's percentage ownership of
ILCO.
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<page>
The pro forma unaudited results of operations for the six months ended June 30,
2001 and 2000, assuming the ILCO acquisition had been consummated as of the
beginning of the respective periods, are as follows:
Six Months Ended
June 30
(In thousands, except per share data)
2001 2000
Total Revenues $ 71,129 $ 72,318
Net Income $ 7,870 $ 8,950
Net Income per share:
Basic $ 0.82 $ 0.91
Diluted $ 0.81 $ 0.90
New Accounting Pronouncements
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS 133 is applicable to financial statements for all fiscal
quarters of fiscal years beginning after June 15, 2000, as amended by FAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FAS No.133." As the Company does not have significant
investments in derivative financial instruments, the adoption of FAS No. 133 is
not anticipated to have a material impact on the Company's results of
operations, liquidity or financial position.
During 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 141 (FAS 141), "Business Combinations," which
supersedes Accounting Principles Board Opinion No. 16 (APB 16), "Business
Combinations," and establishes guidelines to account for business combinations
under one method, the purchase method. The most significant changes made by FAS
141 are: (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
As of the earlier of the first day of the fiscal year beginning after December
15, 2001, or the date Financial Accounting Standards Statement No. 142 (FAS 142)
is initially applied in its entirety, the amount of any unamortized deferred
credit related to an excess of net assets acquired over cost arising from (a) a
business combination for which the acquisition date was before July 1, 2001, or
(b) an investment accounted for by the equity method acquired before July 1,
2001, shall be written off and recognized as the effect of a change in
accounting principle. The effect of the accounting change and related income tax
effects shall be presented in the income statement between the captions
extraordinary items and net income. The per-share information presented in the
income statement shall include the per-share effect of the accounting change.
Upon adoption fo FAS 141 in the first quarter of 2002, FIC will allocate the
unamortized balance of excess of net assets acquired over costs to net income.
This amount will be recorded in extraordinary items as a change in accounting
principle.
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<page>
During 2001, the FASB issued Financial Accounting Standards No. 142 (FAS 142),
"Goodwill and Other Intangible Assets," which supersedes Accounting Principles
Board Opinion No. 17 (APB 17), "Intangible Assets," and which addresses
financial accounting and reporting for acquired goodwill and other intangible
assets upon and subsequent to their acquisition. The provisions of FAS 142 will
be effective for fiscal years beginning after December 15, 2001. The most
significant changes made by FAS 142 are: (1) goodwill and indefinite lived
intangible assets will no longer be amortized, (2) goodwill will be tested for
impairment at least annually at the reporting unit level, (3) intangible assets
deemed to have an indefinite life will be tested for impairment at least
annually, and (4) the amortization period of intangible assets with finite lives
will no longer be limited to forty years. The adoption of FAS 142 is not
expected to materially affect FIC's financial position.
Dividends Declared
In March, 2001, FIC announced that its board approved the payment of an annual
cash dividend in the amount of $0.41 per share. The dividend was paid on April
12, 2001, to shareholders of record as of the close of business on March 19,
2001.
In May, 2001, FIC announced that its Board has approved a dividend policy. The
policy adopted by the Board anticipates that the Company will declare and pay,
on a semi-annual basis, a dividend on the common stock of the Company so as to
provide to shareholders with an annualized yield of approximately 3% on the
market value (based on the NASDAQ National Market quotation system). The
implementation of this policy and the future declarations of dividends are
subject to change depending on future circumstances.
Also, in May, 2001, FIC announced that its Board of Directors has approved the
payment of a semi- annual cash dividend in the amount of $.25 per common share.
The dividend was payable on July 2, 2001, to record holders as of the close of
business on June 18, 2001.
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<page>
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operation
Results of Operations - Six Months Ended June 30, 2001 and 2000
For the six-month period ended June 30, 2001, Financial Industries Corporation'
("FIC") net income was $4,849,000 (basic earnings of $0.79 per common share, or
diluted earnings of $0.79 per common share) as compared to $4,419,000 (basic
earnings of $0.87 per common share, or diluted earnings of $0.86 per common
share) in the first six months of 2000. Earnings per share are stated in
accordance with the requirements of FAS No. 128, which establishes two measures
of earnings per share: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect the potential dilution that would
occur if securities or other contracts to issue common stock were converted or
exercised.
Earnings per share for the six months ended June 30, 2001, were affected by the
increase in the number of FIC's common shares outstanding. The increase is
attributable to the shares issued to InterContinental Life Corporation ("ILCO")
shareholders in connection with the merger described in the following paragraph.
As of June 30, 2001, the number of FIC's common shares outstanding was
9,446,099, as compared to 5,054,661 as of June 30, 2000.
On May 18, 2001, FIC completed the merger of a subsidiary of FIC with and into
InterContinental Life Corporation ("ILCO"). In connection with the merger, FIC
issued 1.1 shares of its common stock for each share of ILCO common stock
outstanding at the time of the merger and not held directly by FIC or ILCO. As a
result of the merger, ILCO became a wholly-owned subsidiary of FIC. Prior to the
merger, FIC owned approximately 48.1% of ILCO's common stock. Since ILCO was a
wholly- owned subsidiary of FIC for the period from May 18, 2001 to June 30,
2001, the operations of ILCO are reported on a consolidated basis with FIC. For
the period from January 1, 2001 to May 17, 2001, and for the first six months of
2000, FIC's net income includes its equity interest in the net income of ILCO,
with such equity interest being based on FIC's percentage ownership of ILCO.
FIC's income from operations - as determined before federal income tax and
equity in net earnings of its affiliate, InterContinental Life Corporation - for
the six-month period ended June 30, 2001, was $4,886,000 (on revenues of $
32,717,000), as compared to $3,114,000 (on revenues of $22,659,000), in the
first six months of 2000. The consolidation of ILCO's operations for the period
from May 18, 2001 to June 30, 2001 contributed approximately $1,674,000 to
income from operations and approximately $11,540,000 to revenues for the
six-month period ended June 30, 2001.
Revenues.
Premium income for the first six months of 2001, net of reinsurance ceded, was
$17.1 million, as compared to $16.8 million in the first six months of 2000.
This source of revenues is related to the traditional life insurance book of
business of FIC's insurance subsidiaries. The consolidation of ILCO's operations
following the May 18th merger contributed approximately $1.1 million to premium
income for the six-month period ended June 30, 2001.
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<page>
Net investment income for the first six months of 2001 was $8.8 million as
compared to $3.4 million in the same period of 2000. The consolidation of ILCO's
operations for the period from May 18, 2001 to June 30, 2001 contributed
approximately $5.65 million to net investment income for the six-month period
ended June 30, 2001. The level of investment income contributed by the
investment portfolio of Family Life Insurance Company (which has been a
subsidiary of FIC for both of the six-month periods covered by this report)
during the current period was adversely affected by the decline in the level of
interest income received from fixed income and short-term investments. This
decline is attributable to lower interest rates during the period.
Earned insurance charges for the first six months of 2001 were $6.6 million, as
compared to $2.4 million in the same period of 2000. This source of revenue is
related to the universal life insurance and annuity book of business of FIC's
insurance subsidiaries. The consolidation of ILCO's operations following the May
18th merger contributed approximately $4.5 million to earned insurance charges
for the six-month period ended June 30, 2001. At Family Life, earned insurance
charges declined from $2.4 million in the 2000 period to $2.1 million in the
2001 period. This change is attributable to a decrease in Family Life's
universal life and annuity business. The face amount of in force universal life
policies was $902.9 million at June 30, 2000 as compared to $816.7 million at
June 30, 2001.
Benefits and Expenses.
Policyholder benefits and expenses were $9.29 million in the first six months of
2001, as compared to $7.22 million in the first six months of 2000. The
consolidation of ILCO's operations for the period from May 18, 2001 to June 30,
2001 contributed approximately $3.31 million to policyholder benefits and
expenses for the six-month period ended June 30, 2001. At Family Life, the level
of policyholder benefits and expenses decreased from $7.22 million for the first
six months of 2000 to $5.98 million for the same period in 2001, which decrease
is attributable to a decrease in death benefit claims.
Interest expense on contract holders deposit funds was $4.70 million in the
first six months of 2001, as compared to $1.06 million in the same period of the
year 2000. This increase is primarily attributable to $3.38 million of interest
expense on contract holders deposit funds resulting from the consolidation of
ILCO's operations following the May 18th merger transaction.
In the first six months of 2001, the amortization of present value of future
profits of acquired business was $1.78 million as compared to $1.87 million in
the first six months of 2000. The decreases in amortization was expected and
should continue to decrease as the underlying asset, present value of future
profits, decreases.
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The amortization of deferred policy acquisition costs was $2.93 million in the
first six months of 2001, as compared to $2.44 million in the first six months
of 2000. The increase in amortization is attributable to the capitalization of
expenses incurred in connection with the writing of new business. The
amortization of deferred policy acquisition costs for the current period
includes costs associated with Investors-NA and Investors-IN only for the period
from May 18, 2001 to June 30, 2001, in the amount of $0.28 million.
The operating expenses for the first six months of 2001 were $8.52 million, as
compared to $5.94 million in the first six months of 2000. The consolidation of
ILCO's operations for the period from May 18, 2001 to June 30, 2001 contributed
approximately $2.19 million to operating expenses for the six- month period
ended June 30, 2001.
Interest expense for the first six months of 2001 was $0.62 million, as compared
to $1.01 million in the first six months of 2000. The decrease in the amount of
interest expenses from the first six months of 2000 to the first six months of
2001 is attributable to the scheduled reduction in the amount of outstanding
indebtedness. This interest expense is related to the indebtedness owed to
Investors-NA by Family Life Corporation and FIC and includes the amount of
interest for the period from January 1, 2001 to May 18, 2001. The consolidation
of ILCO's operations with those of FIC for periods following the May 18th merger
results in the elimination of this interest expense in the income statements of
FIC.
The provision for federal income taxes was $1.35 million in the first six months
of 2001 as compared to $0.58 million in the first six months of 2000. The
inclusion of ILCO's results for the period from May 18, 2001 to June 30, 2001
contributed approximately $767,000 to the level of federal income taxes.
Equity in Net Income of InterContinental Life Corporation
For the period from January 1, 2001 to May 17, 2001, FIC's equity in the net
earnings of InterContinental Life Corporation ('ILCO"), net of federal income
tax, was $1.32 million, as compared to $1.88 million for the first six months of
2000. Following the merger of ILCO with FIC on May 18, 2001, the results of ILCO
were consolidated with those of FIC. Accordingly, the equity in net earnings of
affiliate results for the 2001 period are not fully comparable with the 2000
period.
Prior to the merger with ILCO, FIC owned 3,591,534 shares of ILCO's common
stock. In addition, Family Life owned 342,400 shares of ILCO common stock. As a
result, FIC owned, directly and indirectly through Family Life, 3,933,934 shares
(approximately 48.1%) of ILCO's common stock. Upon completion of the merger,
ILCO became a wholly-owned subsidiary of FIC.
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Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows
to meet the cash requirements of business operations. FIC is a holding company
whose principal assets currently consists of the common stock of its insurance
subsidiaries - Investors Life Insurance Company of North America
("Investors-NA"), Investors Life Insurance Company of Indiana ("Investors-IN")
and Family Life Insurance Company ("Family Life"). Prior to the merger of FIC
and ILCO on May 18, 2001, the principal assets of FIC consisted of the common
stock of its insurance subsidiary, Family Life - and its equity ownership in
ILCO. FIC's primary sources of capital consist of dividends from its
subsidiaries and the proceeds from bank and institutional borrowings.
The cash requirements of FIC, and its subsidiary, Family Life Corporation
("FLC"), consist primarily of its service of the indebtedness created in
connection with FIC's ownership of Family Life. As of June 30, 2001, the
outstanding balance of such indebtedness was $32.28 million on the Subordinated
Notes granted by Investors-NA. FIC believes that the resources available to it
within the holding company group are sufficient to provide for FLC's service of
its indebtedness to Investors-NA.
Prior to the May 18th merger of ILCO with FIC, the principal source of liquidity
for FIC's subsidiaries consisted of the periodic payment of principal and
interest by Family Life pursuant to the terms of a Surplus Debenture. In June,
2001, the outstanding principal balance of the Surplus Debenture was completely
paid off. For future periods, FIC's available source of liquidity will be
dividends paid to it from its subsidiaries. Applicable state insurance laws
generally restrict the ability of insurance companies to pay cash dividends in
excess of prescribed limitations without prior approval. The ability of
Investors-NA to pay shareholder dividends is and will continue to be subject to
restrictions set forth in the insurance laws and regulations of Washington, its
domiciliary state. The Washington insurance law limits how and when Investors-NA
can pay shareholder dividends by including the "greater of" standard for payment
of dividends to shareholders, and requiring that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner and that
cash dividends may be paid only from earned surplus. Under the "greater of"
standard, an insurer may pay a dividend in an amount equal to the greater of (i)
10% of the policyholder surplus or (ii) the insurer's net gain from operations
for the previous year. As of June 30, 2001, Investors-NA had earned surplus of
$77.17 million.
Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance
code, a domestic insurer may make dividend distributions upon proper notice to
the Department of Insurance, as long as the distribution is reasonable in
relation to adequate levels of policyholder surplus and quality of earnings.
Under Indiana law the dividend must be paid from earned surplus. Extraordinary
dividend approval would be required where a dividend exceeds the greater of 10%
of surplus or the net gain from operations for the prior fiscal year.
Investors-IN had earned surplus of $24.2 million at June 30, 2001.
Family Life is domiciled in the State of Washington and its ability to pay
dividends to FIC is subject to the insurance regulatory requirements described
above. Family Life does not presently have earned surplus as defined by the
regulations adopted by the Washington Insurance Commissioner and, therefore, is
not permitted to pay cash dividends.
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The sources of funds for the insurance subsidiaries of FIC consist of premium
payments from policyholders, earned insurance charges, investment income and the
proceeds from the sale and redemption of portfolio investments. These funds are
applied primarily to provide for the payment of claims under insurance and
annuity policies, operating expenses, taxes, investments in portfolio securities
and shareholder dividends.
FIC's net cash flow (used in) provided by operating activities was $2.7 million
in the first six months of 2001, as compared to $(0.46) million in the first six
months of 2000. Net cash flow provided by (used in) financing activities was
$1.2 million in the first six months of 2001, as compared to $(3.98) million in
the first six months of 2000. Net cash flow provided by investing activities was
$5.47 million for the six months ended June 30, 2001, as compared to $4.93
million for the same period in 2000.
The guaranty commitments of FIC under the loans incurred in connection with the
acquisition of Family Life (after taking into account the repayments and new
loans which occurred in July, 1993) relate to: (i) the $22.5 million note issued
by Family Life Corporation to Investors Life Insurance Company of North America
and (ii) the $34.5 million loaned by Investors-NA to a subsidiary of FIC.
Management believes that its cash, cash equivalents and short term investments
are sufficient to meet the needs of its business and to satisfy debt service.
There are no trends, commitments or capital asset requirements that are expected
to have an adverse effect on the liquidity of FIC.
Investments
As of June 30, 2001, FIC's investment assets totaled $750.25 million, as
compared to $99.11 million as of December 31, 2000. The increase is primarily
attributable to the inclusion of the assets of ILCO in the consolidated
financial statements of FIC.
As of June 30, 2001, the market value of the fixed maturities available for sale
segment was $483.77 million as compared to an amortized cost of $476.47 million
or an unrealized gain of $7.30 million. The increase reflects unrealized gains
on such investments related to changes in interest rates subsequent to the
purchase of such investments. The net of tax effect of this increase ($4.75
million at June 30, 2001) has been recorded as an increase in shareholders'
equity.
The level of short-term investments at June 30, 2001 was $163.61 million, as
compared to $15.62 million as of December 31, 2000. This increase is also
primarily attributable to the inclusion of the assets of ILCO in the
consolidated financial statements of FIC.
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Invested real estate and other invested assets at June 30, 2001 were $45.25
million. At December 31, 2000, FIC did not have any assets invested in real
estate. The change is attributable to the consolidation of ILCO's financial
results with FIC following the May 18th merger of the two companies. The real
estate investments are related to the development of the River Place Pointe
project ("River Place Pointe") by Investors-NA. In October, 1998, Investors-NA
purchased River Place Pointe, two adjoining tracts of land located in Austin,
Texas totaling 47.995 acres. The aggregate purchase price for these tracts was
$8.1 million. Prior to the closing of the transaction, Investors-NA obtained a
Site Development Permit for the tracts from the City of Austin. The Site
Development Permit allows for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. Construction on the first section of the Project, which consists
of four office buildings, an associated parking garage, and related
infrastructure was entirely completed by the second quarter of 2001. A single
tenant moved into the entire third building and another tenant moved into half
of the fourth building during the second quarter. Construction on the second
section began during the second quarter of 2001, including building five, the
second parking garage and related infrastructure.
The assets held by the life insurance subsidiaries of FIC must comply with
applicable state insurance laws and regulations. In selecting investments for
the portfolios of its life insurance subsidiaries, the Company's emphasis is to
obtain targeted profit margins, while minimizing the exposure to changing
interest rates. This objective is implemented by selecting primarily short- to
medium-term, investment grade fixed income securities. In making such portfolio
selections, the Company generally does not select new investments which are
commonly referred to as "high yield" or "non-investment grade".
The Company's fixed maturities portfolio (including short-term investments), as
of June 30, 2001, included a non-material amount (0.3 % of total fixed
maturities and short-term investments) of debt securities which, in the annual
statements of the companies as filed with state insurance departments, were
designated under the National Association of Insurance Commissioners ("NAIC")
rating system as "3" (medium quality) or below. This number is primarily
attributable to mortgage bonds which one of the Company's insurance subsidiaries
owns in California utilities, which have been downgraded to a "6" (lowest
quality) rating by the NAIC. As of June 30, 2001, Investors-NA owned mortgage
bonds in Pacific Gas & Electric which were purchased for $515,000 and had a
market value as of June 30, 2001 of $410,000 and Investors-NA and Investors-IN
owned bonds in Southern California Edison which were purchased for $1.47 million
and had a market value as of June 30, 2001 of $1.23 million.
The investment objective of the Company's insurance subsidiaries emphasizes the
selection of short to medium term high quality fixed income securities, rated
Baa-3 (investment grade) or better by Moody's Investors Service, Inc. As of June
30, 2001, only 4.6% of the Company's total assets were invested in mortgage
loans or real estate. Non-affiliated corporate debt securities that were
non-investment grade represented only 0.2% of the Company's total assets at June
30, 2001.
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<page>
The investments of FIC's insurance subsidiaries in mortgage-backed securities
included collateralized mortgage obligations ("CMOs") of $187 million, and
mortgage-backed pass-through securities of $40.7 million, at June 30, 2001.
Mortgage-backed pass-through securities, sequential CMO's and support bonds,
which comprised approximately 53.2% of the book value of FIC's mortgage-backed
securities at June 30, 2001, are sensitive to prepayment and extension risks.
FIC's insurance subsidiaries have reduced the risk of prepayment associated with
mortgage-backed securities by investing in planned amortization class ("PAC"),
target amortization class ("TAC") instruments and scheduled bonds. These
investments are designed to amortize in a predictable manner by shifting the
risk of prepayment of the underlying collateral to other investors in other
tranches ("support classes") of the CMO. At June 30, 2001, PAC and TAC
instruments and scheduled bonds represented approximately 46.8% of the book
value of FIC's mortgage-backed securities. Sequential and support classes
represented approximately 35.4% of the book value of FIC's mortgage-backed
securities at June 30, 2001. In addition, FIC's insurance subsidiaries limit the
risk of prepayment of CMOs by not paying a premium for any CMOs. FIC's insurance
subsidiaries do not invest in mortgage-backed securities with increased
prepayment risk, such as interest-only stripped pass-through securities and
inverse floater bonds. FIC's insurance subsidiaries did not have any z-accrual
bonds as of June 30, 2001. The prepayment risk that certain mortgage-backed
securities are subject to is prevalent in periods of declining interest rates,
when mortgages may be repaid more rapidly than scheduled as individuals
refinance higher rate mortgages to take advantage of the lower current rates. As
a result, holders of mortgage-backed securities may receive large prepayments on
their investments which cannot be reinvested at an interest rate comparable to
the rate on the prepaying mortgages. For the year 2001, the investment
objectives of FIC's insurance subsidiaries include the making of selected
investments in CMOs.
FIC's insurance subsidiaries do not make new mortgage loans on commercial
properties. Substantially all of the Company's mortgage loans were made by its
subsidiaries prior to their acquisition by the Company. At June 30, 2001, none
of the mortgage loans held by the subsidiaries had defaulted as to principal or
interest for more than 90 days, and none of the Company's mortgage loans were in
foreclosure.
Another key element of the Company's investment strategy is to avoid large
exposure in other investment categories which the Company believes carry higher
credit or liquidity risks, including private placements, partnerships and bank
participations. These categories accounted for approximately 0.2% of the
Company's invested assets at June 30, 2001.
The investment portfolio of Investors-NA includes $32.3 million of notes ,
represented by (i) a loan of $22.5 million from Investors-NA to Family Life
Corporation and a $2.5 million loan from Investors-CA to Financial Industries
Corporation (which is now owned by Investors-NA as a result of the merger of
Investors-CA into Investors-NA) and $2.0 million of additions to the $2.5
million note made in accordance with the terms of such note; these loans were
granted in connection with the 1991 acquisition of Family Life Insurance Company
by a wholly-owned subsidiary of FIC (ii) a loan of $30 million by Investors-NA
to Family Life Corporation made in July, 1993, in connection with the prepayment
by the FIC subsidiaries of indebtedness which had been previously issued to
Merrill Lynch as part of the 1991 acquisition and (iii) a loan of $4.5 million
by Investors-NA to Family Life Insurance Investment Company made in July, 1993,
in connection with the same transaction described above.
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<page>
As of June 12, 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% and (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 principal balance of the note, in the amount of
$1,977,119, 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.
The NAIC continued its rating of "3" to the "Notes receivable from affiliates",
as amended. These loans have not been included in the preceding description of
NAIC rating percentages.
Management believes that the absence of "high-yield" or "non-investment grade"
investments (as defined above) in the portfolios of its life insurance
subsidiary enhances the ability of the Company to service its debt, to provide
security to its policyholders and to credit relatively consistent rates of
return to its policyholders.
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<page>
Accounting Developments
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133, 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.
During 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 141 (FAS 141), "Business Combinations," which
supersedes Accounting Principles Board Opinion No. 16 (APB 16), "Business
Combinations," and establishes guidelines to account for business combinations
under one method, the purchase method. The most significant changes made by FAS
141 are: (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
As of the earlier of the first day of the fiscal year beginning after December
15, 2001, or the date Financial Accounting Standards Statement No. 142 (FAS 142)
is initially applied in its entirety, the amount of any unamortized deferred
credit related to an excess of net assets acquired over cost arising from (a) a
business combination for which the acquisition date was before July 1, 2001, or
(b) an investment accounted for by the equity method acquired before July 1,
2001, shall be written off and recognized as the effect of a change in
accounting principle. The effect of the accounting change and related income tax
effects shall be presented in the income statement between the captions
extraordinary items and net income. The per-share information presented in the
income statement shall include the per-share effect of the accounting change.
Upon adoption fo FAS 141 in the first quarter of 2002, FIC will allocate the
unamortized balance of excess of net assets acquired over costs to net income.
This amount will be recorded in extraordinary items as a change in accounting
principle.
During 2001, the FASB issued Financial Accounting Standards No. 142 (FAS 142),
"Goodwill and Other Intangible Assets," which supersedes Accounting Principles
Board Opinion No. 17 (APB 17), "Intangible Assets," and which addresses
financial accounting and reporting for acquired goodwill and other intangible
assets upon and subsequent to their acquisition. The provisions of FAS 142 will
be effective for fiscal years beginning after December 15, 2001. The most
significant changes made by FAS 142 are: (1) goodwill and indefinite lived
intangible assets will no longer be amortized, (2) goodwill will be tested for
impairment at least annually at the reporting unit level, (3) intangible assets
deemed to have an indefinite life will be tested for impairment at least
annually, and (4) the amortization period of intangible assets with finite lives
will no longer be limited to forty years. The adoption of FAS 142 is not
expected to materially affect FIC's financial position.
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Other Developments
NASDAQ Listing
On January 24, 2001, FIC submitted an application to have its common stock
traded on the NASDAQ National Market under the symbol FNIN. Previously, the
common stock of FIC was traded on the NASDAQ Small-Cap Market. The application
was approved and the common stock of FIC commenced trading on the NASDAQ
National Market on April 9, 2001.
Dividends Declared
In March, 2001, FIC announced that its board approved the payment of an annual
cash dividend in the amount of $0.41 per share. The dividend was paid on April
12, 2001, to shareholders of record as of the close of business on March 19,
2001.
In May, 2001, FIC announced that its Board has approved a dividend policy. The
policy adopted by the Board anticipates that the Company will declare and pay,
on a semi-annual basis, a dividend on the common stock of the Company so as to
provide to shareholders with an annualized yield of approximately 3% on the
market value (based on the NASDAQ National Market quotation system). The
implementation of this policy and the future declarations of dividends are
subject to change depending on future circumstances.
Also, in May, 2001, FIC announced that its Board of Directors has approved the
payment of a semi- annual cash dividend in the amount of $.25 per common share.
The dividend was payable on July 2, 2001, to record holders as of the close of
business on June 18, 2001. The dividend has been accrued in other liabilities on
the consolidated balance sheet at June 30, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General.
FIC's principal assets are financial instruments, which are subject to market
risks. Market risk is the risk of loss arising from adverse changes in market
rates, principally interest rates on fixed rate investments. For a discussion of
the Company's investment portfolio and the management of that portfolio to
reflect the nature of the underlying insurance obligations of the Company's
insurance subsidiaries, please refer to the information set forth in Item 2
"Management's Discussion and Analysis of Financial Conditions and Results of
Operation - Investments" of this report.
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<page>
The following is a discussion of the Company's primary market risk sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business operations of the Company, such
as the reinsurance recoveries on reinsurance treaties with third party insurers.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company does not use derivative financial instruments.
Assuming an immediate increase of 100 basis points in interest rates, the net
hypothetical loss in fair market value related to the financial instruments
segment of the Company's balance sheet is estimated to be $22.4 million at June
30, 2001 and $22.0 million at December 31, 2000. For purposes of the foregoing
estimate, the following categories of the Company's fixed income investments
were taken into account: (i) fixed maturities, including fixed maturities
available for sale and (ii) short-term investments. The market value of such
assets was $648.4 million at June 30, 2001 and $702.7 million at December 31,
2000.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $236.3 million at June 30,
2001 and $251.0 million at December 31, 2000. Assuming an immediate increase of
100 basis points in interest rates, the net hypothetical loss in the fair market
value related to such mortgage-backed securities is estimated to be $8.2 million
at June 30, 2001 and $12.6 million at December 31, 2000.
The hypothetical effect of the interest rate risk on fair values was estimated
by applying a commonly used model. The model projects the impact of interest
rate changes on a range of factors, including duration and potential prepayment.
Part II. Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal actions related
to the normal business operations of the Company. Management believes that the
resolution of such legal actions will not have a material impact upon the
financial statements.
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Universal Life Litigation:
ILCO and Investors-NA are defendants in a lawsuit which was filed in October,
1996, in Travis County, Texas. CIGNA Corporation, an unrelated Company, is also
a named defendant in the lawsuit. The named plaintiffs in the suit (a husband
and wife), allege that the universal life insurance policies sold to them by INA
Life Insurance Company (a company which was merged into Investors-NA in 1992)
utilized unfair sales practices. The named plaintiffs seek reformation of the
life insurance contracts and an unspecified amount of damages. The named
plaintiffs also seek a class action as to similarly situated individuals. In
April, 2001, the named plaintiffs filed an amended complaint, so as to include
various post-sale allegations, including allegations related to the manner in
which increases in the cost of insurance were applied, the allocation of
portfolio yields to the universal life policies and changes in the spread
between the earned rate and the credited rate. The Company filed a motion to
strike the amended Complaint, which motion was denied by the Court. The
plaintiffs have filed a motion with the court for certification, which motion
will be heard by the court in October, 2001. The Company believes that the suit
is without merit and intends to vigorously defend this matter.
Litigation Relating to the FIC/ ILCO Merger:
On the day that FIC and ILCO each publicly announced the formation of a special
committee to evaluate a potential merger, 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.
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 may have on the results of operations of the Company.
Other Litigation:
Additionally, FIC and its subsidiaries are regularly involved in litigation,
both as a defendant and as plaintiff. The litigation naming the insurance
subsidiaries as defendant ordinarily involves our activities as a provider of
insurance protection products. We do not believe that such litigation, either
individually or in the aggregate, will have a material adverse effect on the
Company's business, financial condition or results of operations.
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<page>
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of the Shareholders was held on May 18, 2001. The
following matters were submitted at the meeting to a vote of the
Shareholders:
Proposal No. 1: To consider and vote on a proposal to approve the
issuance of shares of Financial Industries Corporation common
stock pursuant to the Agreement and Plan of Merger, dated as of
January 17, 2001 by and among Financial Industries Corporation,
InterContinental Life Corporation and a wholly-owned subsidiary
of Financial Industries Corporation;
Proposal No. 2: To consider and vote on a proposal to approve an
amendment to the articles of incorporation of Financial
Industries Corporation to increase its number of authorized
shares of common stock from 10,000,000 to 25,000,000.
The voting tabulation as to each proposal was as follows:
Proposal No. 1:
For: 3,336,185 shares
Against: 14,671 shares
Abstain: 43,304 shares
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<page>
Proposal No. 2:
For: 3,334,585 shares
Against: 35,549 shares
Abstain: 50,299 shares
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Form 10-K Annual Report of Registrant for the year ended
December 31, 2000 heretofore filed by Registrant with the
Securities and Exchange Commission, which is hereby
incorporated by reference.
(b) Reports on Form 8-K:
(i) On May 30, 2001, the Registrant filed a report on Form 8-K.
The report pertained to the announcement by the Registrant
that it had completed the purchase of the remaining common
shares (approximately 52%) of InterContinental Life
Corporation ("ILCO") which it did not previously own. The
terms and provisions of the transaction are set forth in an
Agreement and Plan of Merger dated as of January 17, 2001,
among the Registrant, ILCO and ILCO Acquisition Company (the
"Merger Agreement"). In accordance with the provisions of
the Merger Agreement, the Registrant issued 1.1 shares of
common stock, par value $0.20 per share for each share of
common stock, par value $0.22 per share, of ILCO outstanding
at the time of the Merger. The transaction was approved by
the shareholders of the Registrant at a special meeting of
shareholders held on May 18, 2001.
(ii) On June 8, 2001, the Registrant filed a report on Form 8-K.
The report pertained to an announcement by the Registrant
that, on May 22, 2001, its Board of Directors had approved a
dividend policy. As announced in the Form 8-K, the policy
adopted by the Board anticipates that the Company will
declare and pay, on a semi-annual basis, a dividend on the
common stock of the Company so as to provide to shareholders
with an annualized yield of approximately 3% on the market
value (based on the NASDAQ National Market quotation
system). The implementation of this policy and the future
declarations of dividends are subject to change depending on
future circumstances.
The press release which was included as an exhibit to the
Form 8-K report filed on June 8, 2001 also stated that, as
previously reported, in response to unsolicited verbal
communications from a few companies that were interested in
acquiring FIC, Philo Smith Capital Corporation was retained
by FIC to explore the possible sale of the company.
Subsequently, FIC received an indication of interest which
led to further discussions with a potential purchaser. The
Form 8-K filed on June 8, 2001 stated that FIC had
determined not to pursue further discussions with any party
that has submitted an indication of interest to acquire the
company.
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<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
/s/ James M. Grace
James M. Grace, Treasurer
Date: August 14, 2001
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