SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 74-2126975
(State of Incorporation) (I.R.S. Employer Identification
Number)
The Austin Centre, 701 Brazos, 12th Floor
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of common shares outstanding ($1.00 par value) at end of
period: 1,085,593
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995...................3
Consolidated Statements of Income
For the three and nine month periods ended
September 30, 1996 and 1995................................ 5
Consolidated Statements of Cash Flows
For the three and nine month periods ended
September 30, 1996 and 1995................................ 7
Notes to Consolidated Financial Statements...................11
Management's Discussion and Analysis of
Financial Conditions and Results of Operations..........12
Part II
Other Information............................................19
Signature Page...............................................20
Item 1. Financial Statements
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept 30, Dec. 31,
1996 1995
Unaudited
ASSETS
Investments:
Fixed maturities available for sale,
at market value (amortized cost of
$82,741 and $79,961, respectively) $ 82,619 $ 83,632
Equity securities, at market (cost
approximately $11) 4 4
Policy loans 2,119 1,774
Short-term investments 25,966 27,180
Total investments 110,708 112,590
Cash 1,896 1,414
Investment in affiliate 49,927 45,736
Accrued investment income 926 1,102
Agent advances and other receivables 7,552 10,368
Reinsurance receivables 5,359 2,383
Due and deferred premiums 10,276 9,726
Property and equipment, net 8,767 7,452
Deferred policy acquisition costs 40,396 36,537
Present value of future profits of
acquired business 41,513 45,415
Deferred financing costs -0- 168
Other assets 5,631 6,264
Separate account assets 8,681 8,523
Total assets $291,632 $287,678
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept 30, Dec. 31,
1996 1995
Unaudited
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits payable $ 58,088 $ 54,909
Contractholder deposit funds 41,434 41,456
Unearned premiums 129 132
Other policy claims & benefits payable 5,754 5,836
105,405 102,333
Senior loans -0- 6,765
Subordinated notes payable to affiliate 61,477 61,224
Deferred federal income taxes 16,470 14,783
Other liabilities 12,339 11,315
Separate account liabilities 8,681 8,523
Total liabilities 204,372 204,943
Commitments and contingencies
Shareholders' equity:
Common stock, $1.00 par value,
3,304,200 shares authorized;
1,169,060 shares issued, 1,085,593
shares outstanding in 1996 and 1995 1,169 1,169
Additional paid-in capital 7,225 7,225
Net unrealized (loss) gain on investments in
fixed maturities available for sale (990) 8,052
Net unrealized gain on equity securities 18 11
Retained earnings 80,260 66,700
87,682 83,157
Common treasury stock, at cost, 83,467
shares in 1996 and 1995 (422) (422)
Total shareholders' equity 87,260 82,735
Total liabilities and shareholders'
equity $291,632 $287,678
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars, except per share data)
3 Months Ended
Sept 30,
1996 1995
Revenues:
Net premiums $ 11,025 $ 11,625
Net investment income 1,815 1,929
Earned insurance charges 1,311 1,731
Other 827 803
Total revenues 14,978 16,088
Benefits and expenses:
Benefits and other expenses 5,974 5,420
Interest on insurance policies 664 510
Amortization of present value of
future profits of acquired business 1,429 1,510
Amortization of deferred policy
acquisition costs 862 958
Operating expenses 3,054 4,075
Interest expense 923 1,197
Total benefits and expenses 12,906 13,670
Income before federal income taxes
and equity in net earnings of
affiliate 2,072 2,418
Provision for federal income taxes 481 495
Income before equity in net earnings
of affiliate 1,591 1,923
Equity in net earnings of affiliate, net
of tax 574 435
Net income $ 2,165 $ 2,358
Per Share Data:
Common stock and common stock equivalents 1,113 1,109
Net income per share available to common
shareholders $ 1.94 $ 2.13
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars, except per share data)
9 Months Ended
Sept 30,
1996 1995
Revenues:
Net premiums $ 32,636 $ 33,016
Net investment income 5,438 5,682
Earned insurance charges 4,260 5,396
Other 2,731 2,429
Total revenues 45,065 46,523
Benefits and expenses:
Benefits and other expenses 16,768 15,264
Interest on insurance policies 1,679 1,433
Amortization of present value of
future profits of acquired business 3,902 4,112
Amortization of deferred policy
acquisition costs 2,745 2,710
Operating expenses 10,104 10,987
Interest expense 2,896 3,566
Total benefits and expenses 38,094 38,072
Income before federal income taxes
and equity in net earnings of
affiliate 6,971 8,451
Provision for federal income taxes 1,691 2,061
Income before equity in net earnings
of affiliate 5,280 6,390
Equity in net earnings of affiliate, net
of tax 8,279 1,394
Net income $ 13,559 $ 7,784
Per Share Data:
Common stock and common stock equivalents 1,112 1,108
Net income per share available to common
shareholders $ 12.19 $ 7.03
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars)
3 Months Ended
Sept 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,165 $ 2,358
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of present value of future
profits 1,429 1,510
Amortization of deferred policy acquisition
costs 862 958
Financing costs amortized -0- (141)
Loss on sale of equipment -0- -0-
Equity in undistributed earnings of
affiliate (2,815) (1,183)
Changes in assets and liabilities net of
effects from purchase of insurance
subsidiaries:
Decrease in accrued investment income 197 314
(Increase) decrease in agent advances and
other receivables (2,126) 212
Increase in due and deferred
premiums (352) (686)
Increase in deferred policy acquisition
costs (2,106) (2,418)
(Increase) decrease in other assets 513 (723)
Increase in policy liabilities
and accruals 3,630 1,298
(Decrease) Increase in other liabilities (542) 2,743
Increase in policy loans (133) (181)
Increase (decrease) in deferred federal
income taxes 693 (2,672)
Other, net 1,860 (4)
Net cash provided by operating
activities $ 3,275 $ 1,385
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars)
3 Months Ended
Sept 30,
1996 1995
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased $ (976) $ -0-
Proceeds from sale and maturities of
investments (156) 399
Net change in short-term investments (1,451) (207)
Retirement of equipment -0- 1
Net cash (used in) provided by
investing activities (2,583) 193
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of subordinated notes payable
to affiliate -0- -0-
Repayment of debt -0- (2,091)
Net cash used in financing activities -0- (2,091)
Net increase (decrease) in cash 692 (513)
Cash, beginning of period 1,204 2,341
Cash, end of period $ 1,896 $ 1,828
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLDIATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars)
9 Months Ended
Sept 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,559 $ 7,784
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of present value of future
profits 3,902 4,112
Amortization of deferred policy acquisition
costs 2,745 2,710
Financing costs amortized 168 195
Loss on sale of equipment -0- -0-
Equity in undistributed earnings of
affiliate (11,244) (3,642)
Changes in assets and liabilities net of
effects from purchase of insurance
subsidiaries:
Decrease in accrued investment income 176 386
Decrease in agent advances and
other receivables (160) (83)
(Increase) decrease in due and deferred
premiums (550) 245
Increase in deferred policy acquisition
costs (6,604) (8,737)
Decrease (increase) in other assets 632 (1,086)
Increase in policy liabilities
and accruals 3,073 1,954
Increase in other liabilities 1,024 6,501
Increase in policy loans (345) (375)
Increase in deferred federal
income taxes 1,687 1,319
Other, net 1,812 (12)
Net cash provided by operating
activities $ 9,875 $ 11,271
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLDIATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars)
9 Months Ended
Sept 30,
1996 1995
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased $ (3,735) $ -0-
Proceeds from sale and maturities of
investments 955 1,001
Net change in short-term investments 1,214 (3)
Purchase of equipment, net (1,315) (3,396)
Net cash used in investing activities (2,881) (2,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of subordinated notes payable
to affiliate 253 226
Repayment of debt (6,765) (8,204)
Net cash used in financing activities (6,512) (7,978)
Net increase in cash 482 895
Cash, beginning of period 1,414 933
Cash, end of period $ 1,896 $ 1,828
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein reflect all adjustments
which are, in the opinion of management, necessary to present a
fair statement of the interim results. The statements have been
prepared to conform to the requirements of Form 10-Q and do not
necessarily include all disclosures required by generally
accepted accounting principles (GAAP). The reader should refer
to Form 10-K for the year ended December 31, 1995 previously
filed with the Commission for financial statements prepared in
accordance with GAAP. Certain prior year amounts have been
reclassified to conform with current year presentation.
The consolidated financial statements include the accounts of
Financial Industries Corporation ("FIC") and its wholly-owned
subsidiaries. The investment of FIC in InterContinental Life
Corporation ("ILCO") is presented using the equity method. All
significant intercompany items and transactions have been
eliminated.
FIC's net income is effected by its equity interest in ILCO and
ILCO's insurance subsidiaries. Net income for the first nine
months of 1996 includes $7.2 million resulting from the sale
during the first quarter of 1996 of the Austin Centre, a
hotel/office complex, located in Austin, Texas. The sale was
completed by Investors Life Insurance Company of North America
("Investors-NA"), a wholly-owned subsidiary of ILCO. The selling
price was $62.675 million, less $1 million paid to a capital
reserve account for the purchaser. The property was purchased in
1991 for $31.275 million. The book value of the property, $36.8
million, net of improvements and amortization, was retained and
reinvested by Investors-NA. The balance of the proceeds of the
sale, net of federal income tax, was used to reduce the ILCO's
senior loan obligations by $15 million. The sale closed on March
29, 1996.
New Accounting Pronouncements
In March 1995, the FASB issued FAS No. 121, "Accounting For the
Impairment of Long-Lived Assets and For Long-Lived Assets to be
Disposed of." This Statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In addition, the Statement requires that
long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair
value less cost to sell.
FAS No. 121 is effective for fiscal years beginning after 1995.
The Company adopted FAS No. 121 effective January 1, 1996. The
adoption of this Statement did not have a material impact on the
Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations:
For the nine-month period ended September 30, 1996, FIC's net
income was $13,559,000 ($12.19 per common share), as compared to
$7,784,000 ($7.03 per common share) for the nine-month period
ended September 30, 1995.
FIC's net income is affected by its equity interest in
InterContinental Life Corporation ("ILCO") and ILCO's insurance
subsidiaries. Net income for the first nine months of 1996
includes $7.1 million resulting from ILCO's sale of the Austin
Centre, a hotel/office complex, located in Austin, Texas. The
sale was completed by Investors Life Insurance Company of North
America ("Investors-NA"), a wholly-owned subsidiary of ILCO. The
selling price was $62.675 million, less $1 million paid to a
capital reserve account for the purchaser. The property was
purchased in 1991 for $31.275 million. A portion of the sale
proceeds, equal to the book value of the property, net of
improvements and amortization ($36.8 million), was retained and
reinvested by Investors-NA. The balance of the proceeds of the
sale, net of federal income tax, was used to reduce the ILCO's
senior loan obligations by $15 million. The sale closed on March
29, 1996.
The statutory earnings of the Company's life insurance
subsidiary, Family Life Insurance Company, ("Family Life") as
required to be reported to insurance regulatory authorities
before interest expense, capital gains and losses, and federal
income taxes were $8,578,339 at September 30, 1996, as compared
to $10,841,027 at September 30, 1995. These statutory earnings
are the source to provide for the repayment of the indebtedness
incurred in connection with the acquisition of Family Life.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
The consolidated balance sheets at September 30, 1996 include
Separate Account assets of Family Life in the amount of $8.68
million. The Separate Account is maintained by Family Life,
which was acquired by FIC on June 12, 1991. Under the provisions
of the purchase agreement between FIC and Merrill Lynch Insurance
Group, Inc., certain life insurance companies affiliated with
Merrill Lynch agreed to assume (on an assumption reinsurance
basis) the variable annuity contracts related to such Separate
Account assets. The transfer of these assets, in accordance with
the provisions of the reinsurance agreement, is subject to
certain regulatory approvals. Such regulatory approvals have
been obtained in a number of jurisdictions, and the assumption of
the business has been completed in those states. However, the
Company has not obtained a definitive date from Merrill Lynch as
to when the remaining regulatory approvals will be obtained, so
as to enable Family Life to complete the transfer of the balance
of the Separate Account assets.
Equity in Net Income of InterContinental Life Corporation
General
Prior to the acquisition of Family Life in June of 1991, FIC's
primary involvement in the life insurance business was through
its equity interest in ILCO. The Company's equity in the net
earnings, net of federal income tax, of ILCO, was $8,279,000 for
the nine-month period ended September 30, 1996, as compared to
$1,394,000 for the similar period in 1995. This increase is
primarily attributable to the increase in ILCO's net income
resulting from ILCO's sale of the Austin Centre property.
FIC currently owns 1,795,146 shares of ILCO's common stock, and
holds options to acquire an additional 1,702,155 shares. The
options were granted under an Option Agreement between FIC and
ILCO which was entered into in March, 1986. In addition, Family
Life, a subsidiary of FIC, currently owns 171,200 shares of ILCO
common stock. As a result, FIC currently owns, directly and
indirectly through Family Life, 1,966,346 shares (approximately
47%) of ILCO's common stock. If all of FIC's rights under the
Option Agreement were to be presently exercised, FIC's ownership
would amount to approximately 62% of the issued and outstanding
shares of ILCO's common stock.
The fixed maturities available for sale portion of ILCO's
investment assets at September 30, 1996 was $461.6 million. The
amortized cost of the fixed maturities available for sale segment
as of September 30, 1996 was $466.2 million, representing a net
unrealized loss of $4.6 million over amortized cost. Such
decrease reflects unrealized losses on such investments. Since
FIC owns approximately 47% of the common stock of ILCO, such
unrealized loss, net of tax, is reflected in FIC's equity
interest in ILCO, and had the effect of decreasing the reported
value of such equity interest by approximately $7.2 million.
ILCO's net income for the nine-month period ended September 30,
1996, as compared to the same period in 1995, was affected by a
decrease in interest expense. Interest expense was $2.27 million
for the first nine months of 1996, as compared to $4.55 million
for the same period in 1995. The decrease is attributable to a
reduction in the average principal balance of the senior loan
from $65.96 million for the nine-month period ending September
30, 1995 to $36.58 million for the nine-month period ending
September 30, 1996, as well as a decrease in the average rate of
interest paid on the senior loan - 7.78% for the first nine
months of 1996 as compared to 8.72% for the same period in 1995.
ILCO's results for the first nine months of 1996 include the
operations of Investors Life Insurance Company of Indiana
(formerly Meridian Life Insurance Company). Investors Life
Insurance Company of Indiana ("Investors-IN") was purchased by
ILCO and Investors-NA for an adjusted purchase price of $17.1
million; the transaction was completed on February 14, 1995.
ILCO's results for this period also include the operations of
Investors-NA and InterContinental Life Insurance Company
("ILIC").
Liquidity and Capital Resources of ILCO
ILCO is a holding company whose principal assets consist of the
common stock of Investors-NA and its subsidiaries - ILIC and,
since February, 1995, Investors-IN. ILCO's primary source of
funds consists of payments under the Surplus Debentures from
Investors-NA.
The cash requirements of ILCO consist primarily of its service of
the indebtedness created in connection with the 1988 acquisition
of the Investors Life Companies. In connection with the
acquisition of Investors-IN in February, 1995, ILCO borrowed an
additional $15 million under its Senior Loan to help finance the
purchase. As of December 31, 1995, the unpaid principal of
ILCO's Senior Loan was $59.4 million. In January, 1996, ILCO
made a scheduled payment of $4.5 million under its Senior Loan.
In March, 1996, ILCO made the scheduled payments for April 1st
and July 1st, totaling $9 million. At that same time, it made a
payment of $941,000, an additional payment under the terms of the
loan applied to the principal balance. On April 1, 1996, an
optional principal payment in the amount of $15 million was made.
In July, 1996, ILCO made the principal payment for October 1st
($4.5 million), plus an optional principal payment of $0.5
million, thereby reducing the total amount of its outstanding
Senior Loan to $24.94 million.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest to it by Investors-NA, pursuant
to the terms of the two surplus debentures. The surplus
debentures were originally issued by Standard Life Insurance
Company and its terms were previously approved by the Mississippi
Insurance Commissioner. One of the surplus debentures, in the
original amount of $15 million, was issued in connection with the
1986 acquisition of Standard Life by ILCO; the other, in the
original amount of $140 million was issued in connection with the
1988 acquisition by ILCO of the Investors Life Companies. Upon
the merger of Standard Life into Investors-NA, the obligations of
the surplus debentures were assumed by Investors-NA. As of
September 30, 1996, the outstanding principal balance of the
surplus debentures was $6.4 million and $35.5 million,
respectively. Since Investors-NA is domiciled in the State of
Washington, the Washington insurance laws apply to the
administration of the terms of the surplus debentures. Under the
provisions of the surplus debentures and current law, no prior
approval of the Washington Insurance Commissioner is required for
Investors-NA to pay interest or principal on the surplus
debentures; provided that, after giving effect to such payments,
the statutory surplus of Investors-NA is in excess of $10 million
(the "surplus floor"). However, Investors-NA has voluntarily
agreed with the Washington Insurance Commissioner that it will
provide at least five days advance notice of payments which it
will make under the surplus debentures. As of September 30,
1996, the statutory capital and surplus of Investors-NA was $54.3
million, an amount substantially in excess of the surplus floor.
The funds required by Investors-NA to meet its obligations to
ILCO under the terms of the surplus debentures are generated from
operating income generated from insurance and investment
operations.
ILCO's ability to pay dividends to its shareholders is affected,
in part, by receipt of dividends from its insurance subsidiaries.
Under current Washington law, any proposed payment of a dividend
or distribution by the Company's insurance subsidiaries which,
together with dividends or distributions paid during the
preceding twelve months, exceeds the greater of (i) 10% of
statutory surplus as of the preceding December 31 or (ii)
statutory net gain from operations for the preceding calendar
year is called an "extraordinary dividend" and may not be paid
until either it has been approved, or a waiting period shall have
passed during which it has not been disapproved, by the insurance
commissioner. Since the law applies only to dividend payments,
the ability of Investors-NA to make principal and interest
payments under the surplus debentures is not affected. ILCO does
not anticipate that Investors-NA will have any difficulty in
making principal and interest payments on the surplus debentures
in the amounts necessary to enable ILCO to service its Senior
Loan for the foreseeable future.
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 policy holder 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
currently has earned surplus.
The Form 10-Q of ILCO for each of the nine-month periods ended
September 30, 1996 and September 30, 1995, sets forth the
business operations and financial results of ILCO and its life
insurance subsidiaries. Such 10-Q reports of ILCO, including the
discussion by ILCO's management under the caption "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations" are incorporated herein by reference.
Results of Operations of Financial Industries Corporation
For the three-month period ended September 30, 1996, FIC's income
from operations before Federal income taxes and before equity in
net earnings of affiliate, was $2,072,000 on revenues of
$14,978,000, as compared to $2,418,000, on revenues of
$16,088,000 for the same period in 1995.
Premium income, net of reinsurance ceded, for the third quarter
of 1996 was $11.03 million, as compared to $11.63 million in the
same period in 1995.
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the
common stock of Family Life Insurance Company and its equity
ownership in InterContinental Life Corporation ("ILCO"). FIC's
primary sources of capital consist of cash flow from operations
of its subsidiaries and the proceeds from bank and institutional
borrowings.
The cash requirements of FIC and its subsidiaries consist
primarily of its service of the indebtedness created in
connection with its ownership of Family Life. As of September
30, 1996 the outstanding balance of such indebtedness was $61.5
million on the Subordinated Notes granted by Investors-NA. On
April 17, 1996, the Senior Loan granted by a group of banks was
completely paid off; the balance as of March 31, 1996 had been
$4.67 million.
The principal source of liquidity for FIC's subsidiaries consists
of the periodic payment of principal and interest by Family Life,
pursuant to the terms of a Surplus Debenture. The terms of the
Surplus Debenture were previously approved by the Washington
Insurance Commissioner. Under the provisions of the Surplus
Debenture and current law, no prior approval of the Washington
Insurance Department is required for Family Life to pay interest
or principal on the Surplus Debenture; provided that, after
giving effect to such payments, the statutory surplus of Family
Life is in excess of 6% of assets (the "surplus floor").
However, Family Life has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days
advance notice of payments which it will make under the surplus
debenture. As of September 30, 1996, the statutory capital and
surplus of Family Life was $24.2 million, an amount
substantially in excess of the surplus floor. As of September
30, 1996, the principal balance of the Surplus Debenture was
$42.8 million. The funds required by Family Life to meet its
obligations under the terms of the Surplus Debenture are
generated primarily from premium payments from policy holders,
investment income and the proceeds from the sale and redemption
of portfolio investments.
Washington's insurance code includes the "greater of" standard
for dividends but has requirements that prior notification of a
proposed dividend be given to the Washington Insurance
Commissioner and that cash dividends may be paid only from earned
surplus. Family Life does not presently have earned surplus as
defined by the regulations adopted by the Washington Insurance
Commissioner and, therefore, is not permitted to pay cash
dividends. However, since the new law applies only to dividend
payments, the ability of Family Life to make principal and
interest payments under the Surplus Debenture is not affected.
The Company does not anticipate that Family Life will have any
difficulty in making principal and interest payments on the
Surplus Debenture in the amounts necessary to enable Family Life
Corporation to service its indebtedness for the foreseeable
future.
The sources of funds for Family Life consist of premium payments
from policy holders, investment income and the proceeds from the
sale and redemption of portfolio investments. These funds are
applied primarily to provide for the payment of claims under
insurance and annuity policies, operating expenses, taxes,
investments in portfolio securities, shareholder dividends and
payments under the provisions of the Surplus Debenture.
FIC's net cash flow provided by operating activities was $9.9
million in the nine-month period ended September 30, 1996, as
compared to $11.3 million for the corresponding period of 1995.
Net cash flow used in financing activities was $6.5 million for
the nine-month period ended September 30, 1996, as compared to
$8.0 million for the corresponding period of 1995.
In connection with the purchase of the Investors Life Companies
by ILCO, the purchase of Investors-IN by ILCO and Investors-NA
and the purchase of Family Life by a wholly-owned subsidiary of
FIC, FIC guaranteed the payment of the indebtedness created in
connection with such acquisitions. After giving effect to the
refinancing of the ILCO Senior Loan, the repayment of the ILCO
Subordinated Loans and the indebtedness created in connection
with the acquisition of Investors-IN, the guaranty commitments of
FIC with respect to the debt obligations of ILCO relate to ILCO's
Senior Loan, with an outstanding balance at September 30, 1996 of
$24.9 million.
The guaranty commitments of FIC under the loans incurred in
connection with the acquisition of Family Life (after taking into
account the repayments and new loans which occurred in July,
1993) relate to: (i) the $22.5 million note issued by Family
Life Corporation to Investors-NA, and (ii) the $34.5 million
loaned by Investors-NA to two subsidiaries of FIC.
Management believes that its cash, cash equivalents and short
term investments are sufficient to meet the needs of its business
and to satisfy debt service.
There are no trends, commitments or capital asset requirements
that are expected to have an adverse effect on the liquidity of
FIC.
Investments
As of September 30, 1996, the Company's investment assets were
$110.7, as compared to $112.6 million as of December 31, 1995.
The level of short-term investments decreased to $25.9 million
for the period ended September 30, 1996, from the $27.2 million
level which existed as of December 31, 1995. The fixed
maturities available for sale portion represents $82.6 million of
invested assets at September 30, 1996, as compared to $83.6
million at December 31, 1995. The amortized cost of fixed
maturities available for sale as of September 30, 1996 was $82.7
million, representing an unrealized loss of approximately $0.1
million. This unrealized loss principally reflects changes in
interest rates from the date the respective investments were
purchased. The net of tax effect of this decrease has been
recorded as a reduction in shareholders' equity.
The assets held by Family Life must comply with applicable state
insurance laws and regulations. In selecting investments for the
portfolios of its life insurance subsidiaries, the Company's
emphasis is to obtain targeted profit margins, while minimizing
the exposure to changing interest rates. This objective is
implemented by selecting primarily short-to medium-term,
investment grade fixed income securities. In making such
portfolio selections, the Company generally does not select new
investments which are commonly referred to as "high-yield" or
"non-investment grade."
The Company's fixed maturities portfolio, as of September 30,
1996, consisted solely of fixed maturities investments which, in
the annual statements of the companies as filed with state
insurance departments, were designated under the National
Association of Insurance Commissioners ("NAIC") rating system as
a "1" (highest quality). As of September 30, 1996, 100% of the
fixed maturities portfolio consisted of investments with an NAIC
rating of "1" (high quality).
Management believes that the absence of "high-yield" or "non-
investment grade" investments (as defined above) in the
portfolios of its life insurance subsidiary enhances the ability
of the Company to service its debt, provide security to its
policy holders and to credit relatively consistent rates of
return to its policy holders.
Subsequent Event
At a Special Meeting of Shareholders held on November 12, 1996,
the shareholders of the Company approved an amendment to the
Articles of Incorporation, increasing the number of authorized
shares of common stock from 3,304,200 to 10,000,000 and changing
the par value from $1.00 per share to $0.20 per share. This
action allowed the Company to implement the five-for-one stock
split which was authorized by the board of directors at a meeting
held on September 27, 1996. The record date for the stock split
is November 12, 1996 and the distribution date for the new
certificates is November 19, 1996. Shareholders will not be
required to surrender their original share certificates. Under
the provisions of the amendment to the Articles of Incorporation,
such certificates are automatically converted to shares with a
par value of $0.20. The Company will issue to each shareholder
as of the record date a certificate representing an additional
four shares of common stock for each share held.
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal
actions related to the normal business operations of the Company.
Management believes that the resolution of such legal actions
will not have a material impact upon the financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
At a Special Meeting of Shareholders held on November 12, 1996,
shareholder of the Company approved an amendment to the Articles
of Incorporation, authorizing an increase in common stock from
3,304,200 shares to 10,000,000 shares and changing the par value
from $1.00 to $0.20. The approval of the amendment permitted the
Company to proceed with the five-for-one split of the common
stock, as previously approved by the board of directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Amendment to the Articles of Incorporation of the
Registrant, filed November 12, 1996.
(ii) Form 10-K Annual Report of Registrant for the year
ended December 31, 1995 heretofore filed by Registrant
with the Securities and Exchange Commission, which is
hereby incorporated by reference.
(b) Reports on Form 8-K:
None
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
/s/ James M. Grace
James M. Grace
Treasurer
Date: November 14, 1996