UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 74-2126975
State of Incorporation (I.R.S. Employer Identification number)
6500 River Place Boulevard, Building One, Austin, Texas 78730
(Address of Principal Executive Offices) (Zip Code)
(512) 404-5050 (Registrant's Telephone Number, including area code)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
(Title of Class)
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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 and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on February 28, 2003, based on the closing sales price in the Nasdaq
National Market ($14.80), was $118,977,156.
The number of shares outstanding of Registrant's common stock on February 28,
2003 was 9,607,427.
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Forward-Looking Statements
Except for historical factual information set forth in this Annual Report on
Form 10-K, the statements, analyses, and other information contained in this
report relating to trends in Financial Industries Corporation(the "Company" or
"FIC")'s operations and financial results, the markets for the Company's
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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This Amendment No. 1 to the Annual Report on Form 10-K of Financial Industries
Corporation for the year ended December 31, 2002 (the "Annual Report") is being
filed for the purpose of including in the Annual Report certain information
which the Registrant had intended to incorporate by reference from its Proxy
Statement for the 2003 Annual Meeting of Shareholders ("the Proxy Statement").
Subsequent to the date of filing its Annual Report, the Registrant determined
that it would not file its definitive Proxy Statement by April 30, 2002.
Accordingly, the Registrant is filing this Amendment No. 1, so as to include in
its Annual Report the following information which it would otherwise have
incorporated by reference from the Proxy Statement:
Item 10(g): Beneficial Ownership Reporting Compliance:
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of beneficial ownership on Form 3 and changes in
beneficial ownership on Forms 4 and 5 with the Securities and Exchange
Commission. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from January 1, 2002 through December 31, 2002,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with.
Item 11: Summary Compensation Table
The following table sets forth information concerning the compensation of
the Company's Chief Executive Officers and each of the Company's four most
highly compensated executive officers other than the Chief Executive Officer who
were serving as executive officers at the end of 2002 and received cash
compensation exceeding $100,000 during 2002. Note: The Company does not have
four other executive officers who received compensation in excess of $100,000
other than those listed below:
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Annual Compensation
Long-Term Compensation
Stock
Apprec-
iation
Other Term All Other
Annual Rights(4) Long-Term
Name and Fiscal Compen- Compen- Compen-
Principal Position Year Salary(1) Bonus sation (2)(3) sation (5) sation (#)
Roy F. Mitte, Chairman, 2002 $690,116 $2,500,000 $12,360 -0- -0-
President and Chief 2001 514,904 2,500,000 18,500 -0- -0-
Executive Officer (7) 2000 503,500 2,500,000 -0- -0- -0-
Eugene E. Payne, Chairman, 2002 63,171 -0- -0- 30,000
President and Chief
Executive Officer
Jeffrey H. Demgen, Vice 2002 180,000 30,000 30,154 -0- 3,600
President 2001 163,862 -0- 18,000 -0- 3,303
2000 160,000 20,000 -0- -0- 2,021
Thomas C. Richmond, Vice 2002 180,000 20,000 18,520 -0- -0-
President 2001(6) 138,846 -0- 20,690 -0- 2,776
Theodore A. Fleron, Vice 2002(6) 141,827 20,000 31,518 -0- 2,819
President
__________________
(1) On May 18, 2001, pursuant to that certain Agreement and Plan of Merger,
as amended (the "Merger Agreement"), dated as of January 17, 2001, among FIC,
ILCO, and ILCO Acquisition Company, a Texas corporation and wholly-owned
subsidiary of FIC ("Merger Sub"), Merger Sub was merged with and into ILCO (the
"Merger"). ILCO was the surviving corporation of the Merger and became a
wholly-owned subsidiary of FIC. In accordance with the Merger Agreement, FIC
issued 1.1 shares of common stock, par value $0.20 per share ("FIC Common
Stock"), for each share of common stock, par value $0.22 per share, of ILCO
outstanding at the time of the Merger ("ILCO Common Stock"). In addition, each
share of ILCO Common Stock issuable pursuant to outstanding options was assumed
by FIC and became an option to acquire FIC Common Stock with the number of
shares and exercise price adjusted for the exchange ratio in the Merger. Prior
to the Merger, the salaries and bonuses set forth in the table were paid by
ILCO, except that FIC and/or Family Life authorized payment of a portion of Mr.
Mitte's salary in each year.
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The executive officers of FIC have also been executive officers of Family Life
and Investors Life, the insurance subsidiaries of FIC. Prior to May 18, 2001,
FIC and/or Family Life reimbursed ILCO (or, in the case of Mr. Mitte, authorized
payment of) the following amounts as FIC's or Family Life's share of the
executive officers' cash compensation and bonus 2000 (i) Mr. Mitte: $1,111,821;
and (ii) Mr. Demgen: $81,000. In the years 2001 and 2002 executive officer
payments have been apportioned based on a cost allocation agreement among the
life insurance subsidiaries and FIC.
(2) Does not include the value of perquisites and other personal benefits
because the aggregate amount of any such compensation does not exceed the lesser
of $50,000 or 10% of the total amount of annual salary and bonus for any named
individual.
(3) Includes the value realized by each executive officer in connection
with the exercise of stock options granted under the 1999 ILCO Non-Qualified
Stock Option Plan (the "Stock Option Plan"). See "Aggregated Option/SAR
exercises and Value Unexercised in 2002" below. In 2002, Mr. Mitte and Mr.
Richmond exercised options to purchase 2,200 shares of FIC common stock and Mr.
Demgen and Mr. Fleron exercised options to purchase 4,400 shares of FIC common
stock under the Stock Option Plan.
(4) The data in this column represents the number of FIC stock appreciation
rights granted to Eugene E. Payne in 2002. The stock appreciation rights were
granted under the terms and provisions of the Financial Industries Corporation
Equity Incentive Plan adopted by FIC in 2002, a copy of which was filed with the
Securities and Exchange Commission on November 14, 2002 as an Exhibit to FIC's
Quarterly Report on Form 10-Q for the period ended September 30, 2002.
(5) The executive officers of the Company participate in the
InterContinental Life Corporation Employees Savings and Investment Plan ("401K
Plan"). For the year 2000, ILCO contributed the following amounts and for the
years 2001 and 2002 FIC contributed the following amount to the named
participant's 401K Plan account: (a) Mr. Demgen: $ 2,021, $3,303, and $3,600
respectively, (b) Mr. Richmond: $2,776 in the year 2001 and $0 in the year 2002;
and (d) Mr. Fleron: $2,819 for the year 2002 only.
(6) Thomas C. Richmond was appointed as an executive officer in the year
2001, thus only his compensation for the years 2001 and 2002 are included.
Theodore A. Fleron was appointed as an executive officer in the year 2002 and
thus only his compensation for the year 2002 is included.
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(7) Mr. Mitte was Chairman, President and Chief Executive Officer of FIC
from January 1, 2002 through October 31, 2002. Eugene Payne has been Chairman
President and Chief Executive Officer since November 4, 2002 and was Interim
Chairman of the Board of Directors of FIC from August 19, 2002 through November
4, 2002.
Item 11: Options Vesting Upon a Change of Control in 2002
In 1999, certain officers of FIC and its life insurance subsidiaries were
each granted options to purchase 10,000 shares of ILCO common stock, pursuant to
the InterContinental Life Corporation 1999 Stock Option Plan ("Stock Option
Plan"). On May 18, 2001, each share of ILCO Common Stock issuable pursuant to
outstanding options was assumed by FIC and became an option to acquire FIC
Common Stock with the number of shares and exercise price adjusted for the
exchange ratio in the Merger. Prior to the Merger, 78,000 shares of ILCO Common
Stock had been issued pursuant to the Stock Option Plan. On May 18, 2001, the
outstanding options were converted to options to purchase 389,400 shares of FIC
Common Stock.
During 2002, options to purchase 115,650 shares of FIC common stock were
exercised pursuant to the Stock Option Plan. Options to exercise 33,000 shares
of FIC common stock were granted in 2002 and options to exercise 55,550 shares
terminated or lapsed during 2002. As of February 28, 2003, options to purchase
202,250 shares of FIC Common Stock remain to be exercised pursuant to the terms
of the Stock Option Plan.
In accordance with the terms of the plan, which defined a "change in
control" as the termination, by resignation or otherwise, of Roy F. Mitte as
Chairman of the Board and Chief Executive Officer, all person holding
outstanding options under the Stock Option Plan became fully vested in such
options as of October 31, 2002.
Item 11: Stock Appreciation Rights Granted in 2002
On November 4, 2002, FIC adopted an Equity Incentive Plan (the "Plan"). The
purpose of the Plan is to provide motivation to key employees of the Company and
its subsidiaries to put forth maximum efforts toward the continued growth,
profitability, and success of the Company and its subsidiaries by providing
incentives to such key employees through performance-related incentives,
including, but not limited to the performance of the Common Stock of the
Company. Toward this objective, stock appreciation rights or performance units
may be granted to key employees of the Company and its subsidiaries on the terms
and subject to the conditions set forth in the Plan. On November 4, 2002, Eugene
Payne was granted stock appreciation rights (SARs) with respect to 30,000 shares
of the Common Stock of the Company, pursuant to terms and provisions of the
Plan. The exercise price of each unit is $14.11, which was 100% of the Fair
Market Value of the Common Stock of the Company on the date of such grant.
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Item 11: Option/SAR Grants in Last Fiscal Year
Potential realizable
value at assumed rates
of stock price appre-
ciation for option
Individual Grants term
- ----------------------------------------------------------------------------- -----------------------
Name Number of Percent
Securities of total
underlying options/ Exercise
Options/ SARs granted or base Expira-
SARs to employees price tion
granted(#) in fiscal year ($/shr) Date 5%($) 10%($)
Roy F. Mitte(1) - - - - - -
Eugene E. Payne(1) 30,000 48% $14.11 November 1, 2009 $172,200 $401,700
Jeffrey H. Demgen - - - - - -
Thomas C. Richmond - - - - - -
Theodore A. Fleron - - - - - -
_________________________
(1) Mr. Mitte was Chairman, President and Chief Executive Officer of FIC
from January 1, 2002 through October 31, 2002. Eugene Payne has been Chairman
President and Chief Executive Officer since November 4, 2002 and was Interim
Chairman of the Board of Directors of FIC from August 19, 2002 through November
4, 2002.
Item 11: Aggregated Option/SAR Exercises and Value Unexercised in 2002
The following table sets forth information concerning each exercise of
stock options during 2002 by each of the individuals who were executive officers
of the Company as of December 31, 2002, as well as the value, as of December 31,
2002, of unexercised options of such executive officers. The value of
unexercised in-the-money stock options at December 31, 2002 shown below are
presented in accordance with SEC rules. The actual amount, if any, realized upon
exercise of stock options will depend upon the market price of the Common Stock
of the Company relative to the exercise price per share of the stock option at
the time the stock option is exercised. There is no assurance that the values of
unexercised in-the-money stock options reflected in the following table will be
realized.
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Aggregated Option/SAR Exercises in 2002
and 2002 Option /SAR Values
Number of
Unexercised
Options/
SARs Held at
December
Shares 31, 2002 Value of Unexercised In-
Acquired Exercisable/ the-Money Options/SARs
on Exer- Value Unexer- at December 31, 2002
Name cise(#)(1) Realized($) cisable(2) Exercisable/Unexercisable (3)
- ---------------------------------------------------------------------------------------------
Jeffrey H. Demgen 4,400 30,154 4400/0 $26,656 $ 0
Theodore A. Fleron 4,400 31,158 4400/0 $26,656 $ 0
Thomas C. Richmond 2,200 18,520 4400/0 $26,656 $ 0
Eugene E. Payne (4) 0 0 0/30,000 $ 0 $3,900
_______________________
(1) Each exercise of shares listed in the above table were exercises of FIC
Common Stock granted under the ILCO Stock Option Plan.
(2) All options granted under the ILCO stock Option Plan were exercisable
as of October 31, 2002 pursuant to the change of control provisions set forth in
the Plan.
(3) The value of unexercised in-the-money options equals the difference
between the option exercise price and the closing price of the Company's Common
Stock on Nasdaq (Symbol: FNIN) on December 31, 2002 ($14.24), multiplied by the
number of shares underlying the options.
(4) The data in this column represents the number of FIC stock appreciation
rights granted to Eugene Payne in 2002. The stock appreciation rights were
granted under the terms and provisions of the Financial Industries Corporation
Equity Incentive Plan adopted by FIC in 2002, a copy of which was filed with the
Securities and Exchange Commission on November 14, 2002 as an Exhibit to FIC's
Quarterly Report on Form 10-Q for the period ended September 30, 2002.
Item 11: Defined Benefit Plan
The following Pension Plan table sets forth estimated annual pension
benefits payable upon retirement at age of 65 under the Company's
noncontributory defined benefit plan ("Pension Plan") to an employee in the
final pay and years of service classifications indicated, assuming a straight
life annuity form of benefit. The amounts shown in the table do not reflect the
reduction related to Social Security benefits referred to below.
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Years of Service
Remuneration 15 20 25 30 or more
$125,000 $29,437 $39,250 $49,062 $58,875
150,000 35,325 47,100 58,875 70,650
160,000 37,680 50,240 62,800 75,360
175,000 41,212 54,950 68,687 82,425
200,000 47,100 62,800 78,500 94,200
The normal retirement benefit provided under the Pension Plan is equal to
1.57% of final average eligible earnings less 0.65% of the participant's Social
Security covered compensation multiplied by the number of years of credited
service (up to 30 years). The compensation used in determining benefits under
the Pension Plan is the highest average earnings received in any five
consecutive full-calendar years during the last ten full-calendar years before
the participant's retirement date. The maximum amount of annual salary and bonus
that can be used in determining benefits under the Pension Plan is $200,000 for
any year prior to 1994 and is $150,000 for 1994, 1995 and 1996 and is $160,000
for 1997 and each subsequent year.
The annual eligible earnings, for 2002 only, covered by the Pension Plan
(salary up to $160,000) with respect to the individuals reported in the Summary
Compensation Table were as follows, with their respective years of credited
service under the Pension Plan at December 31, 2002 being shown in parentheses:
Mr. Mitte, $160,000 (15 years); Mr. Demgen, $160,000 (10 years); Mr. Richmond,
$160,000 (14 years); and Mr. Fleron, $141,827 (15 years).
Item 11: Employment Agreements and Change In Control Arrangements
Roy F. Mitte. Prior to October 31, 2002, Mr. Mitte and FIC were parties to
an employment agreement, providing for the employment of Mr. Mitte as Chairman,
President and Chief Executive Officer of the Company. The agreement, which was
initially effective February 25, 1982, provided for five-year terms and for
automatic renewals for successive five-year periods, unless otherwise terminated
in accordance with the terms of the agreement. On October 31, 2002, the
agreement was terminated according to its terms. Mr. Mitte remains a
non-managerial employee of FIC and is paid a salary equivalent to the salary of
a non-employee director of the Company.
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Eugene E. Payne. On November 4, 2002, the Company and Dr. Payne entered
into an employment agreement, providing for the employment of Dr. Payne as
Chairman, President and Chief Executive Officer of the Company. The agreement
provides for a three-year term; however, on the first anniversary of the
agreement date and thereafter, the employment period shall be automatically
extended each day by one day to create a new two year term until, at any time
after the first anniversary of the agreement date, the Company delivers written
notice (an "Expiration Notice") to Dr. Payne or Dr. Payne delivers an Expiration
Notice to the Company, in either case, to the effect that the agreement shall
expire on a date specified in the Expiration Notice (the "Expiration Date") that
is not less than two years after the date the Expiration Notice is delivered to
the Company or to Dr. Payne, respectively. Dr. Payne's initial base salary under
the agreement is $360,000 per year. During the employment period, the base
salary shall be reviewed periodically and may be increased from time to time as
shall be determined by the Board of the Company. Additionally, Dr. Payne shall
be eligible for an annual bonus based upon target performance goals, as
determined by the Board on an annual basis, in accordance with normal Company
administrative practices for senior management, which provides for a payment
opportunity of at least the highest target level generally available to senior
management under any Company annual bonus plan upon the achievement of the
target annual goals. As of the agreement date, the Company also awarded Dr.
Payne stock appreciation rights (SARs) with respect to 30,000 shares of the
Common Stock of the Company, pursuant to terms and provisions of the Financial
Industries Corporation Equity Incentive Plan. A copy of this agreement is
attached as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2002 as filed with the SEC.
Jeffrey H. Demgen. On May 1, 2002, the Company and Mr. Demgen entered into
an employment agreement, which agreement was amended on August 17, 2002. The
Agreement provides for employment through December 31, 2005, at the rate of
$180,000 per year. The amendment provides that the employment agreement shall
not terminate upon the voluntary resignation of Mr. Demgen. A copy of this
agreement was filed with the SEC in the Company's Quarterly Report on Form 10-Q
for the period ending June 30, 2002.
Thomas A. Richmond. On December 13, 2002, the Company and Mr. Richmond
entered into an employment agreement, providing for the employment of Mr.
Richmond as Chief Operating Officer and Vice President of the Company. The
agreement provides for a three-year term; however, at the end of the term the
agreement is automatically renewed for successive one-year periods unless either
the Company or Mr. Richmond gives notice at least 90 days before the end of any
term that they choose not to renew the agreement. The agreement provides for a
base salary of $190,000, which base salary shall be reviewed periodically and
may be increased from time to time as shall be determined by the Chief Executive
Officer and subsequently ratified by the Board. Mr. Richmond is also eligible
for an annual bonus based upon target performance goals, as determined by the
Chief Executive Officer on an annual basis, in accordance with normal Company
administrative practices for senior management, as described above. A copy of
this agreement is attached as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002 as filed with the SEC.
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Theodore A. Fleron. On December 13, 2002, the Company and Mr. Fleron
entered into an employment agreement, providing for the employment of Mr. Fleron
as General Counsel and Vice President of the Company. The agreement provides for
a three-year term; however, at the end of the term the agreement is
automatically renewed for successive one-year periods unless either the Company
or Mr. Fleron gives notice at least 90 days before the end of any term that they
choose not to renew the agreement. The agreement provides for a base salary of
$190,000, which base salary shall be reviewed periodically and may be increased
from time to time as shall be determined by the Chief Executive Officer and
subsequently ratified by the Board. Mr. Fleron is also eligible for an annual
bonus based upon target performance goals, as determined by the Chief Executive
Officer on an annual basis, in accordance with normal Company administrative
practices for senior management, as described above. A copy of this agreement is
attached as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 as filed with the Securities and Exchange
Commission.
George M. Wise, III. On December 13, 2002, the Company and Mr. Wise entered
into an employment agreement, providing for the employment of Mr. Wise as Chief
Financial Officer and Vice President of the Company. The agreement provides for
a three-year term; however, at the end of the term the agreement is
automatically renewed for successive one-year periods unless either the Company
or Mr. Wise gives notice at least 90 days before the end of any term that they
choose not to renew the agreement. The agreement provides for a base salary of
$190,000, which base salary shall be reviewed periodically and may be increased
from time to time as shall be determined by the Chief Executive Officer and
subsequently ratified by the Board. Mr. Wise is also eligible for an annual
bonus based upon target performance goals, as determined by the Chief Executive
Officer on an annual basis, in accordance with normal Company administrative
practices for senior management, as described above. A copy of this agreement is
attached as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 as filed with the SEC.
Item 11: Compensation of Directors
Directors who were not officers or employees of the Company in 2002 were
paid a $5,000 annual fee, and were compensated $1,000 for each regular or
special meeting of the Board of Directors which they attended in person. In the
case of telephonic meetings of the Board, non-employee directors who
participated in such telephonic meetings were compensated $500 for each such
meeting. Directors who participated via telephone in a regular or special
meeting which were held by other than conference telephone were not entitled to
a fee for such meeting.
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Non-employee directors serving on committees of the Board were compensated
in the amount of $500 for each committee meeting they attended whether such
participation was in person or by telephone, provided that the committee meeting
was held on a day other than that on which the Board meets.
Effective as of January 1, 2003, each Director who is not also an employee
of the Company shall receive, as a payment for his or her services as a
Director, an annual fee of $20,000, payable in January of each year, plus $1,000
for each meeting of the Board of Directors at which such Director is in
attendance. In the event that a Director attends a meeting of the Board of
Directors which has been designated as a regular meeting via telephone, rather
than in person, the fee payable to such Director for attendance at such regular
meeting shall be reduced to $500. Non-employee Directors who serve on committees
of the Board, other than the Audit Committee or the Executive Committee, receive
an annual fee of $2,000, plus $1,000 for each meeting at which the Director is
in attendance. Non-employee Directors who serve on the Audit Committee receive
an annual fee of $5,000, plus $1,000 for each meeting of the Audit Committee at
which the Director is in attendance. The Lead Director, who serves on the
Executive Committee, receives an annual fee of $10,000 for his services on such
committee.
Item 11: Compensation Committee Interlock and Inside Participation
The compensation committee of FIC is chosen by the Board of Directors. The
Compensation Committee makes recommendations to the Board of Directors with
respect to the Chief Executive Officer's compensation. The current members of
the Compensation Committee are John D. Barnett, Richard A. Kosson and Frank
Parker, all outside directors. The Compensation Committee did not meet in 2002.
The Chief Executive Officer determines the compensation of all executive
officers of the Company, other than the Chief Executive Officer.
Item 11: Compensation Committee Report on Executive Compensation
Chief Executive Officer's Report
The following report is made by Chief Executive Officer with respect to
compensation policies applicable to the Company's executive officers, other than
the Chief Executive Officer.
The goal of the Company's compensation policies is to ensure that an
appropriate relationship exists between executive pay and the creation of
shareholder value, while at the same time motivating and retaining senior
managers. Executive compensation is based on several factors, including
corporate performance. While sales, earnings, return on equity and other
performance measures are considered in making annual executive compensation
decisions, no formulas, pre-established target levels or minimum performance
thresholds are used. Each executive officer's individual initiatives and
achievements and the performance of the operations directed by the executive are
integral factors utilized in determining that officer's compensation.
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The executive officers are provided long-term equity-based compensation in
the form of (i) stock options granted under the ILCO 1999 Stock Option Plan
(which was adopted by FIC following the Merger) and (ii) matching shares issued
under ILCO's Savings and Investment (401K) Plan (which covers employees of FIC
and all of its subsidiaries). They also participate in medical and pension plans
that are generally available to employees of the Company. The objectives of the
ILCO 1999 Stock Option Plan and the 401K Plan are to create a strong link
between executive compensation and shareholders return and enable senior
managers to develop and retain a significant and long-term equity investment.
Under the Company's 1999 Stock Option Plan (the "Stock Option Plan"),
options to buy FIC's Common Stock at 100% of the fair market value on the date
of grant but in no event less than $6.8181 per share (as adjusted upon the
merger of ILCO with FIC on May 18, 2001) can be granted to officers of the
Company and its subsidiaries and affiliated companies. The Stock Option Plan,
which was adopted by ILCO in March 1999 and became effective upon its approval
by the shareholders of ILCO at the annual meeting on May 18, 1999, authorized
the ILCO Board of Directors to grant options to purchase up to a maximum of
800,000 shares of ILCO's common stock. In connection with the May 18, 2001
merger of ILCO with FIC, each outstanding option to purchase shares of ILCO
common stock under the Stock Option Plan was assumed by FIC and converted into
an option to purchase the number of shares of FIC common stock, rounded up to
the nearest 1/100 of a share, equal to the number of shares of ILCO common stock
subject to the original option multiplied by 1.1. The exercise price per share
of FIC Common Stock under the new option is equal to the former exercise price
per share of ILCO common stock under the option immediately prior to the merger
divided by 1.1, and rounded to the nearest penny. In accordance with the terms
of the ILCO stock option plan under which the options were issued, any
fractional shares resulting from the foregoing adjustments will be eliminated.
All other terms of the options, including the vesting schedule, remain
unchanged.
The Company's 401K Plan allows eligible employees to make voluntary
contributions on a tax deferred basis. During 1997, the Plan was changed to
provide for a matching contribution by participating companies. The match, which
was in the form of shares of ILCO common stock prior to the merger of ILCO with
FIC and FIC shares subsequent to the merger, is equal to 100% of an eligible
participant's elective deferral contributions, as defined in the Plan, not to
exceed 1% of the participant's plan compensation. Effective January 1, 2000, the
Plan was amended to increase the match percentage from 1% 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. In 2001, the 401K Plan was amended and
restated to comply with the Economic Growth and Tax Relief Reconciliation Act of
2001.
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The Company provides medical and pension benefits to its executive officers
that are generally available to employees.
The foregoing report has been furnished by Eugene E. Payne.
Compensation Committee's Report
The Compensation Committee of the Board of Directors makes a recommendation
to the Board of Directors each year with respect to the Chief Executive
Officer's compensation for that year. However, on September 23, 2002, at a
meeting of the Board of Directors of FIC, a special committee of the Board of
Directors was created to for the purpose of making recommendations to the Board
with respect to the Report of the Audit Committee (the "Special Committee"). The
members of the Special Committee consisted of Tim Casey, Theodore Fleron, John
Barnett, David Caldwell, Lewis Gilcrease, Elizabeth Nash, and Frank Parker. On
October 23, 2002, the Special Committee met with an executive search consultant
for the purpose of discussing an executive search to fill the role of Chairman,
Chief Executive Officer and President of the Company. The consultant presented
to the Special Committee recommendations of salary, bonus and benefits for a
potential candidate based on packages given to the top executive at similar
sized life insurance companies. On the same day the Chairman of the Special
Committee, John Barnett, appointed a sub-committee consisting of Theodore
Fleron, Lewis Gilcrease and David Caldwell to interview Eugene Payne for the
position. On October 29, 2002 the Special Committee met and received a report
from the sub-committee regarding employment negotiations. Based on the
recommendations of the executive search consultant and the independent research
of the sub-committee, a recommendation was made to offer Eugene Payne a salary
of $360,000, and 30,000 stock appreciation rights, and a performance based
bonus. This recommendation was submitted to and approved by the Board of
Directors on November 4, 2002.
The compensation of the executive officers of the Company has been
established pursuant to the employment agreements described under the
"Employment Agreements and Change in Control Arrangements", which agreements
were approved by the Board of Directors. The amount of any bonus or equity-based
compensation is dependent upon corporate performance and attainment of
individual goals.
The foregoing report was furnished by the Special Committee.
Item 11: Performance Graph
The graph and table below compare the cumulative total shareholder return
on the Company's Common Stock for the last five calendar years with the
cumulative total return on The Nasdaq Stock Market (U.S.) and an index of stocks
of life insurance companies traded on Nasdaq over the same period (assuming the
investment on December 31, 1997 of $100 in the Company's Common Stock, The
Nasdaq Stock Market (U.S.) and an index of stocks of life insurance companies
traded on Nasdaq and the reinvestment of all dividends).
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[GRAPHIC OMITTED]
12/29/97 12/29/98 12/31/99 12/31/00 12/31/01 12/31/02
- -----------------------------------------------------------------------------------------------------------------
The Company (1) $100.00 $ 80.70 $ 49.70 $ 46.40 $ 73.10 $ 78.20
The Nasdaq Stock Market (US) 100.00 141.00 261.50 157.40 124.90 86.30
Index of Nasdaq Life Ins. Stocks (2) 100.00 100.80 87.10 96.30 119.70 111.80
(1) The dollar amounts for the Company's Common Stock are based on the
closing bid prices on Nasdaq on the dates indicated.
(2) The Index of Nasdaq Life Insurance Stocks is comprised of life
insurance companies whose stocks were traded on Nasdaq during the last five
calendar years (29 issuers listed during that period, of which 12 issuers were
traded on December 31, 2002). These peer companies were selected by the Company
on a line-of-business basis.
Item 13. Certain Relationships and Related Transactions
Management believes that the following transactions were in the ordinary
course of business and on terms as favorable to the Company and its subsidiaries
as if the transactions had involved unaffiliated persons or organizations.
Investors Life Loans
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, Ins. ("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 Life to FLC and a
$2.5 million loan provided directly to FIC by Investors-CA (which was
subsequently merged into Investors Life) (referred to as the "Investors Life
Loans"). In addition to the interest provided under the Investors Life Loans,
Investors Life and Investors-CA were granted by FIC non-transferable options to
purchase, in the amounts proportionate to their respective loans, up to a total
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of 9.9% 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. As part of the May 18, 2001 merger
of ILCO with FIC, the option agreement was amended to substitute the 9.9%
provision for a fixed number of shares. The fixed number of shares, 500,411, is
equivalent to the number of shares of FIC's common stock outstanding immediately
prior to the Merger. In connection with the 1996 amendments to the subordinated
notes, as described below, the expiration date of the options were extended to
September 12, 2006. These notes were paid off to Investors Life in June 2001.
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and
its affiliate was prepaid. The primary source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
another subsidiary of FIC obtained from Investors Life (the "1993 Subordinated
Loans"). The principal amount of the 1993 Subordinated Loans was to be paid 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 1993 Subordinated Loans are
substantially the same as those of the $22.5 million subordinated loans that
Investors Life had previously made to FLC.
In June 1996, the provisions of the Investors Life Loans and the 1993
Subordinated Loans were modified. The 1993 Subordinated Loans were modified as
follows: (a) 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%, and (b) 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%.
FIC Computer Services
The data processing needs of FIC's insurance subsidiaries are provided by
FIC Computer Services, Inc. ("FIC Computer"), a subsidiary of FIC. Under the
provisions of the data processing agreement 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. Family Life paid $1,654,826 and Investors Life paid
$2,282,423 to FIC Computer for data processing services provided during 2002.
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Reinsurance Arrangements
In 1995, Family Life entered into a reinsurance agreement with Investors
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, Family Life entered into a reinsurance agreement with Investors
Life, pertaining to annuity contracts written by Family Life. The agreement
applies to contracts written on or after January 1, 1996.
Donation to Mitte Foundation
On January 2, 2002, Roy F. Mitte caused the Company to transfer $1,000,000
to the Roy F. and Joann Cole Mitte Foundation (the "Foundation"). The Foundation
is a charitable entity exempt from federal income tax under section 501(a) of
the Code as an organization described in section 501(c)(3) of the Code, and owns
16.16% of the outstanding shares of FIC's Common Stock. The sole members of the
Foundation are Roy F. Mitte, former Chairman, President and Chief Executive
Officer of FIC, and his wife, Joann Cole Mitte. This transfer of funds was never
authorized by the Board of FIC and FIC has sued Mr. Mitte and the Foundation for
recovery of these funds.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
(Registrant)
By: /s/ Eugene E. Payne
Eugene E. Payne,
Chairman of the Board, President and Chief Executive Officer
By: /s/ George M. Wise, III
George M. Wise, III
Chief Financial Officer
By: /s/ Nigel S. Walker
Nigel S. Walker
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, a majority of the Board of
Directors of the Registrant, on behalf of the Registrant and in the capacities
indicated on April 17, 2003.
/s/ Eugene E. Payne /s/ John D. Barnett
Eugene E. Payne, Director John D. Barnett, Director
/s/ Jeffrey H. Demgen /s/ Theodore A. Fleron
Jeffrey H. Demgen, Director Theodore A. Fleron, Director
/s/ W. Lewis Gilcrease /s/ Richard A. Kosson
W. Lewis Gilcrease, Director Richard A. Kosson, Director
/s/ Elizabeth Nash /s/ Frank Parker
Elizabeth Nash, Director Frank Parker, Director
/s/ Thomas C. Richmond
Thomas C. Richmond, Director
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