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 March 31, 1997
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 74-2126975
(State of Incorporation) (I.R.S. Employer Identification Number)
The Austin Centre, 701 Brazos, 12th Floor
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
Number of common shares outstanding ($.20 par value) at end of
period: 5,427,965
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996................... 3
Consolidated Statements of Income
For the three month periods ended
March 31, 1997 and 1996................................ 5
Consolidated Statements of Cash Flows
For the three month periods ended
March 31, 1997 and 1996................................ 6
Notes to Consolidated Financial Statements...................8
Management's Discussion and Analysis of
Financial Conditions and Results of Operations..........9
Part II
Other Information..........................................16
Signature Page.............................................17
Item 1.Financial Statements
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Mar. 31, Dec. 31,
1997 1996
(Unaudited)
ASSETS
Investments:
Fixed maturities available for sale,
at market value (amortized cost of
$83,279 and $82,969) $ 82,498 $ 83,833
Equity securities, at market (cost
approximately $11) 4 4
Policy loans 2,365 2,286
Short-term investments 25,319 25,615
Total investments 110,186 111,738
Cash 309 308
Investment in affiliate 50,933 52,925
Accrued investment income 1,059 1,233
Agent advances and other receivables 6,670 7,825
Reinsurance receivables 7,677 6,159
Due and deferred premiums 10,663 10,651
Property and equipment, net 9,381 8,799
Deferred policy acquisition costs 42,322 41,333
Present value of future profits of
acquired business 39,053 40,604
Other assets 5,968 5,706
Separate account assets 449 449
Total assets $284,670 $287,730
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Mar. 31, Dec. 31,
1997 1996
(Unaudited)
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits payable $58,805 $59,340
Contractholder deposit funds 43,444 41,434
Unearned premiums 104 129
Other policy claims & benefits payable 4,562 5,164
106,915 106,067
Subordinated notes payable to affiliate 58,403 59,940
Deferred federal income taxes 17,884 17,952
Other liabilities 10,783 11,248
Separate account liabilities 449 449
Total liabilities 194,434 195,656
Commitments and contingencies
Shareholders' equity:
Common stock, $.20 par value,
10,000,000 shares authorized;
5,845,300 shares issued, 5,427,965
shares outstanding in 1997 and 1996 1,169 1,169
Additional paid-in capital 7,225 7,225
Net unrealized (loss) gain on investments in
fixed maturities available for sale (2,843) 1,220
Net unrealized gain on equity securities 22 25
Retained earnings 85,085 82,857
90,658 92,496
Common treasury stock, at cost, 417,335
shares in 1997 and 1996 (422) (422)
Total shareholders' equity 90,236 92,074
Total liabilities and shareholders'
equity $284,670 $287,730
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIOD
ENDED March 31, 1997 AND 1996
(Unaudited)
(in thousands of dollars, except per share data)
3 Months Ended
Mar. 31,
1997 1996
Revenues:
Net premiums $10,013 $10,432
Net investment income 2,220 1,816
Earned insurance charges 1,246 1,797
Other 597 968
Total revenues 14,076 15,013
Benefits and expenses:
Benefits and other expenses 4,675 5,707
Interest on insurance policies 583 543
Amortization of present value of
future profits of acquired business 1,552 1,381
Amortization of deferred policy
acquisition costs 1,202 1,050
Operating expenses 2,809 3,572
Interest expense 883 884
Total benefits and expenses 11,704 13,137
Income before federal income taxes
and equity in net earnings of
affiliate 2,372 1,876
Provision for federal income taxes
Current (148) (860)
Deferred 734 1,267
586 407
Income before equity in net earnings
of affiliate 1,786 1,469
Equity in net earnings of affiliate, net
of tax 442 7,147
Net income $2,228 $8,616
Per Share Data:
Common stock and common stock equivalents 5,581 5,555
Net income per share available to common
shareholders $ .40 $1.55
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED March 31, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
3 Months Ended
Mar. 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,228 $8,616
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of present value of future
profits 1,552 1,381
Amortization of deferred policy acquisition
costs 1,202 1,050
Financing costs amortized -0- 84
Equity in undistributed earnings of
affiliate (1,230) (8,484)
Changes in assets and liabilities net of
effects from purchase of insurance
subsidiaries:
Decrease in accrued investment income 174 297
(Increase) decrease in agent advances and
other receivables (363) 978
Increase in due and deferred
premiums (12) (102)
Increase in deferred policy acquisition
costs (2,191) (2,119)
(Increase) decrease in other assets (263) 127
Increase in policy liabilities
and accruals 848 176
(Decrease) Increase in other liabilities (465) 1,357
Increase in policy loans (79) (73)
Increase (decrease) in deferred federal
income taxes (68) 170
Other, net 220 (4)
Net cash provided by operating
activities $1,553 $3,454
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD
ENDED March 31, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
3 Months Ended
Mar. 31,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased $(3,058) $(743)
Proceeds from sale and maturities of
investments 3,329 1,624
Net change in short-term investments 296 (2,401)
Retirement of equipment (582) 6
Net cash (used in) provided by
investing activities (15) (1,514)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (1,537) (2,091)
Net cash used in financing activities (1,537) (2,091)
Net increase (decrease) in cash 1 (151)
Cash, beginning of period 308 1,414
Cash, end of period $309 $1,263
(See Notes to Consolidated Financial Statements)
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein reflect all adjustments
which are, in the opinion of management, necessary to present a
fair statement of the interim results. The statements have been
prepared to conform to the requirements of Form 10-Q and do not
necessarily include all disclosures required by generally accepted
accounting principles (GAAP). The reader should refer to Form 10-K
for the year ended December 31, 1996 previously filed with the
Commission for financial statements prepared in accordance with
GAAP. Certain prior year amounts have been reclassified to conform
with current year presentation.
The consolidated financial statements include the accounts of
Financial Industries Corporation ("FIC") and its wholly-owned
subsidiaries. The investment of FIC in InterContinental Life
Corporation ("ILCO") is presented using the equity method. All
significant intercompany items and transactions have been
eliminated.
FIC's net income is affected by its equity interest in ILCO and
ILCO's insurance subsidiaries. Net income for the first three
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 February 1997, the FASB issued FAS No. 128, "Earnings Per
Share," which revises the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings Per Share."
The Statement established two measures of earnings per share:
Basic earnings per share and diluted earnings per share. Basic
earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were converted or exercised. The
Statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all entities with
potential dilutive securities outstanding.
The Statement also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation. The Statement is effective for interim and annual
periods ending after December 15, 1997. Earlier application is not
permitted. However, an entity may disclose pro forma earnings per
share amounts that would have resulted if the entity had applied
the Statement in an earlier period. The Company intends to adopt
FAS 128 in its annual financial statements for the year ended
December 31, 1997.
The pro forma unaudited earnings per share amounts that would have
resulted assuming the Company had computed its earnings per share
in accordance with the provisions established by FAS 128 for the
quarters ended March 31, 1997 and 1996 are as follows:
Quarter Ended Quarter Ended
March 31, 1997 March 31, 1996
Basic earnings per share $ 0.41 $ 1.59
Diluted earnings per share $ 0.40 $ 1.55
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operation:
For the three-month period ended March 31, 1997, FIC's net income
was $2,228,000 (or $.40 per common share), as compared to
$8,616,000 (or $1.55 per common share) in the first three months of
1996. The net income per share for the 1996 quarter has been
restated to reflect the effect of the five-for-one stock split
which was effective November 12, 1996.
Net income from continuing operations (excluding the gain resulting
from ILCO's sale of the Austin Centre, as described below) was
$2,228,000 ($.40 per common share) for the three-month period ended
March 31, 1997, as compared to $1,946,000 ($.35 per common share)
for the first three months of 1996.
FIC's net income is affected by its equity interest in
InterContinental Life Corporation ("ILCO") and ILCO's insurance
subsidiaries. Net income for the three-month period ended March
31, 1996 includes $6,670,000 ($1.20 per common share) resulting
from ILCO's sale of the Austin Centre, a hotel/office complex,
located in Austin, Texas. The sale was completed by Investors Life
Insurance Company of North America ("Investors-NA"), a wholly-owned
subsidiary of ILCO. The selling price was $62.675 million, less $1
million paid to a capital reserve account for the purchaser. The
property was purchased in 1991 for $31.275 million. A portion of
the sale proceeds, equal to the book value of the property, net of
improvements and amortization ($36.8 million), was retained and
reinvested by Investors-NA. The balance of the proceeds of the
sale, net of federal income tax, was used to reduce ILCO's senior
loan obligations by $15 million. The sale closed on March 29,
1996. The Company and its affiliates will continue to occupy space
on three floors of the office tower as its headquarters, under a
lease which runs through September 30, 1997. In September, 1997,
the Company and its affiliates will move its headquarters to a
building in an office complex known as Bridgepoint Square Offices,
a 20-acre office building site which is being developed by
Investors-NA.
The statutory earnings of Family Life as required to be reported to
insurance regulatory authorities before interest expense, capital
gains and losses, and federal income taxes were $2,305,966 at March
31, 1997, as compared to $1,388,631 at March 31, 1996. These
statutory earnings are the source to provide for the repayment of
the indebtedness incurred in connection with the acquisition of
Family Life.
The increase in long-term interest rates during the first quarter
of 1997, which was related to general economic conditions, had a
negative effect upon the market value of the fixed maturities
available for sale segment of the Company's portfolio. As of March
31, 1997, the market value of the fixed maturities available for
sale segment was $82.5 million as compared to an amortized value of
$83.3 million, or an unrealized loss of $.8 million. Such decrease
reflects unrealized losses on such investments. The net of tax
effect of this decrease has been recorded as a reduction in
shareholders' equity.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
The consolidated balance sheets at March 31, 1997 include Separate
Account assets of Family Life in the amount of $0.45 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.
During the year 1996, Merrill Lynch received regulatory approvals
in several additional jurisdictions. As a result, Separate Account
assets in the amount of $8.1 million were transferred out of Family
Life, in accordance with the provisions of the 1991 agreements.
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 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. For the three-month period ended March
31, 1997, the Company's equity in the net earnings of ILCO, net of
federal income tax, was $442,000, as compared to $7,147,000 for the
first three months of 1996. For the 1996 period, the equity in net
earnings of affiliate includes $6,670,000 attributable to ILCO's
net income resulting from the sale of the Austin Centre property.
FIC currently owns 1,795,146 shares of ILCO's common stock, and
holds options to acquire an additional 1,702,155 shares. The
options were granted under an Option Agreement between FIC and ILCO
which was entered into in March, 1986. In addition, Family Life
currently owns 171,200 shares of ILCO common stock. As a result,
FIC currently owns, directly and indirectly through Family Life,
1,966,346 shares (approximately 46%) of ILCO's common stock and
holds options to acquire 1,702,155 shares. If all of FIC's rights
under the Option Agreement were to be presently exercised, FIC's
ownership would amount to approximately 61.5% of the issued and
outstanding shares of ILCO's common stock.
The increase in long-term interest rates during 1996, which was
related to general economic conditions, had a negative effect upon
the market value of the fixed maturities available for sale segment
of ILCO's investment portfolio. As of March 31, 1997, the market
value of the fixed maturities available for sale segment was $442.2
million as compared to an amortized cost of $450.5 million, or an
unrealized loss of $8.3 million. Such decrease reflects unrealized
losses on such investments. Since FIC owns approximately 46% of
the common stock of ILCO, such unrealized losses, net of tax, are
reflected in FIC's equity interest in ILCO, and had the effect of
decreasing the reported value of such equity interest by
approximately $3.2 million.
Liquidity and Capital Resources of ILCO:
ILCO is a holding company whose principal assets consist of the
common stock of Investors-NA and its subsidiaries,
InterContinental Life Insurance Company ("ILIC") and, since
February, 1995, Investors-IN. ILCO's primary source of funds
consists of payments under the surplus debentures from Investors-
NA.
The cash requirements of ILCO consist primarily of its service of
the indebtedness created in connection with the 1988 acquisition of
the Investors Life Companies and the 1995 acquisition of Investors-
IN. As of December 31, 1995, the outstanding principal balance of
ILCO's senior loan obligations was $59.4 million. In addition to
making the scheduled principal payments under its senior loan, the
Company made optional payments of $941,000 in March, 1996, $15.0
million in April, 1996 and $0.5 million in July, 1996. As of March
31, 1997, the principal balance of the senior loan was $20.4
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. Upon the merger of Standard Life into Investors-NA,
the obligations of the surplus debentures were assumed by
Investors-NA. As of March 31, 1997, the outstanding principal
balance of the surplus debentures was $5.2 million and $28.8
million, respectively. Since Investors-NA is domiciled in the
State of Washington, the Washington insurance law applies to the
administration of the terms of the surplus debentures. Under the
provisions of the surplus debentures and current law, no prior
approval of the Washington Insurance Commissioner is required for
Investors-NA to pay interest or principal on the surplus
debentures; provided that, after giving effect to such payments,
the statutory surplus of Investors-NA is in excess of $10 million
(the "surplus floor"). However, Investors-NA has voluntarily
agreed with the Washington Insurance Commissioner that it will
provide at least five days advance notice of payments which it will
make under the surplus debenture. As of March 31, 1997, the
statutory capital and surplus of Investors-NA was $52.96 million,
an amount substantially in excess of the surplus floor. The funds
required by Investors-NA to meet its obligations to ILCO under the
terms of the surplus debentures are generated from operating income
generated from insurance and investment operations.
In addition to the payments under the terms of the Surplus
Debentures, ILCO has received dividends from Standard Life (now,
from Investors-NA). Washington's insurance code includes the
"greater of" standard for payment of dividends to shareholders, but
has a requirement that prior notification of a proposed dividend be
given to the Washington Insurance Commissioner and that cash
dividends may be paid only from earned surplus. As of March 31,
1997, Investors-NA had earned surplus of $9.0 million. Since the
law applies only to dividend payments, the ability of Investors-NA
to make principal and interest payments under the Surplus
Debentures is not affected. ILCO does not anticipate that
Investors-NA will have any difficulty in making principal and
interest payments on the Surplus Debentures in the amounts
necessary to enable ILCO to service the Senior Loan for the
foreseeable future.
ILIC is domiciled in the State of New Jersey. Under the New Jersey
insurance code, a domestic insurer may make dividend distributions
upon proper notice to the Department of Insurance, as long as the
distribution is reasonable in relation to adequate levels of
policyholder surplus and quality of earnings. Any dividend must be
paid from earned surplus. A proposed payment of a dividend or
distribution which, together with dividends or distributions paid
during the preceding twelve months, exceeds the greater of (i) 10%
of statutory surplus as of the preceding December 31 or (ii)
statutory net gain from operations for the preceding calendar year
is treated as an "extraordinary dividend" and may not be paid until
either it has been approved, or a waiting period shall have passed
during which it has not been disapproved, by the insurance
commissioner. ILIC had earned surplus of $4.7 million at March 31,
1997.
Investors-IN is domiciled in the State of Indiana. Under the
Indiana insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance, as
long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Under
Indiana law the dividend must be paid from earned surplus.
Extraordinary dividend approval would be required where a dividend
exceeds the greater of 10% of surplus or the net gain from
operations for the prior fiscal year. Investors-IN had earned
surplus of $12.0 million at March 31, 1997.
The Form 10-Qs of ILCO for the three-month periods years ended
March 31, 1997 and March 31, 1996, set forth the business
operations and financial results of ILCO and its life insurance
subsidiaries. Such 10-Q reports of ILCO, including the discussion
by ILCO's management under the caption "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" are
incorporated herein by reference.
Results of Operations
For the three-month period ended March 31, 1997, FIC's income from
operations, before federal income tax and equity in net earnings of
affiliate, was $2,372,000 (on revenues of $14,076,000), as compared
to $1,876,000 (on revenues of $15,013,000) in the first quarter of
1996.
Premiums for the first quarter of 1997, net of reinsurance ceded,
were $10.0 million, as compared to $10.4 million in the first three
months of 1996. Policyholder benefits and expenses were $4.7
million in the 1997 period, as compared to $5.7 million in the
first quarter of 1996.
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the
common stock of Family Life and its equity ownership in ILCO.
FIC's primary sources of capital consists of cash flow from
operations of its subsidiaries 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 March 31, 1997, the outstanding
balance of such indebtedness was $58.4 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 March 31,
1997, the statutory capital and surplus of Family Life was $24.7
million, an amount substantially in excess of the surplus floor.
As of March 31, 1997, the principal balance of the Surplus
Debenture was $37.9 million. The funds required by Family Life to
meet its obligations under the terms of the Surplus Debenture are
generated primarily from premium payments from policyholders,
investment income and the proceeds from the sale and redemption of
portfolio investments.
Washington's insurance code includes the "greater of" standard for
dividends but has requirements that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner
and that cash dividends may be paid only from earned surplus.
Family Life does not presently have earned surplus as defined by
the regulations adopted by the Washington Insurance Commissioner
and, therefore, is not permitted to pay cash dividends. However,
since the new law applies only to dividend payments, the ability of
Family Life to make principal and interest payments under the
Surplus Debenture is not affected. The Company does not anticipate
that Family Life will have any difficulty in making principal and
interest payments on the Surplus Debenture in the amounts necessary
to enable Family Life Corporation to service its indebtedness for
the foreseeable future.
The sources of funds for Family Life consist of premium payments
from policy holders, investment income and the proceeds from the
sale and redemption of portfolio investments. These funds are
applied primarily to provide for the payment of claims under
insurance and annuity policies, operating expenses, taxes,
investments in portfolio securities, shareholder dividends and
payments under the provisions of the Surplus Debenture.
FIC's net cash flow provided by operating activities was $1.6
million in the first quarter of 1997, as compared to $3.5 million
in the first quarter of 1996. Net cash flow used in financing
activities was $1.5 million in the 1997 period, as compared to $2.1
million in the first quarter of 1996.
In connection with the purchase of the Investors Life Companies by
ILCO and the purchase of Family Life by a wholly- owned subsidiary
of FIC, FIC guaranteed the payment of the indebtedness created in
connection with such acquisitions. After giving effect to the
refinancing of the ILCO Senior Loan and the repayment of the ILCO
Subordinated Loans, the guaranty commitments of FIC with respect to
the debt obligations of ILCO relate to the ILCO Senior Loan, with
an outstanding balance at March 31, 1997 of $20.4 million.
The guaranty commitments of FIC under the loans incurred in
connection with the acquisition of Family Life (after taking into
account the repayments and new loans which occurred in July, 1993)
relate to: (i) the $22.5 million note issued by Family Life
Corporation to Investors Life Insurance Company of North America,
and (ii) the $34.5 million loaned by Investors-NA to two
subsidiaries of FIC.
Management believes that its cash, cash equivalents and short term
investments are sufficient to meet the needs of its business and to
satisfy debt service.
There are no trends, commitments or capital asset requirements that
are expected to have an adverse effect on the liquidity of FIC.
Investments
As of March 31, 1997, the Company's investment assets totaled
$110.2 million, as compared to $111.7 million as of December 31,
1996.
The level of short-term investments at March 31, 1997 was $25.3
million, as compared to $25.6 million as of December 31, 1996. The
fixed maturities available for sale portion represents $82.5
million of investment assets as of March 31, 1997, as compared to
$83.8 million at December 31, 1996. The amortized cost of fixed
maturities available for sale as of March 31, 1997 was $83.3
million representing a net unrealized loss of $.8 million. This
unrealized loss principally reflects changes in interest rates from
the date the respective investments were purchased. To reduce the
exposure to interest rate changes, portfolio investments are
selected so that diversity, maturity and liquidity factors
approximate the duration of associated policyholder liabilities.
The assets held by Family Life must comply with applicable state
insurance laws and regulations. In selecting investments for the
portfolios of its life insurance subsidiaries, the Company's
emphasis is to obtain targeted profit margins, while minimizing the
exposure to changing interest rates. This objective is implemented
by selecting primarily short- to medium-term, investment grade
fixed income securities. In making such portfolio selections, the
Company generally does not select new investments which are
commonly referred to as "high yield" or "non-investment grade".
The fixed maturities portfolio of Family Life, as of March 31,
1997, consisted solely of fixed maturities investments which, in
the annual statements of the companies, as filed with state
insurance departments, were designated under the National
Association of Insurance Commissioners ("NAIC") rating system as a
"1" (highest quality).
Management believes that the absence of "high-yield" or "non-
investment grade" investments (as defined above) in the portfolios
of its life insurance subsidiary enhances the ability of the
Company to service its debt, provide security to its policyholders
and to credit relatively consistent rates of return to its
policyholders.
Family Life Insurance Company, an indirect, wholly-owned subsidiary
of FIC, is the owner and developer of a 7.1 acre tract in Austin,
Texas, adjacent to the 20-acre Bridgepoint Square Offices site
being developed by a subsidiary of ILCO. The site was purchased by
Family Life in May, 1996, for $1.3 million. In January, 1997,
Family Life began construction on a four-story office building,
with rentable space of approximately 71,500 square feet, and a
parking garage with 350 parking spaces. The projected completion
date is September, 1997. Upon completion of the project, the
investment of Family Life will be approximately $9.6 million,
including the cost of the land. The building is fully leased to a
third party.
Accounting Developments
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No. 128,
"Earnings Per Share," which revises the standards for computing
earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share." The Statement established two measures of
earnings per share: Basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were converted
or exercised. The Statement requires dual presentation of basic
and diluted earnings per share on the face of the income statement
for all entities with potential dilutive securities outstanding.
The statement also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation. The statement is effective for interim and annual
periods ending after December 15, 1997. Earlier application is not
permitted. However, a company may disclose pro forma earnings per
share amounts that would have resulted if it had applied the
statement in an earlier period. The Company intends to adopt FAS
128 in its annual financial statements for the year ended December
31, 1997.
The pro forma unaudited earnings per share amounts that would have
resulted assuming the Company had computed its earnings per share
in accordance with the provisions established by FAS 128 for the
quarters ended March 31, 1997 and 1996 are as follows:
Quarter Ended Quarter Ended
March 31, 1997 March 31, 1996
Basic earnings per share $ 0.41 $ 1.59
Diluted earnings per share $ 0.40 $ 1.55
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in certain
legal actions related to the normal business operations of
the Company. Management believes that the resolution of
such legal actions will not have a material impact upon the
financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Form 10-K Annual Report of Registrant for the year ended
December 31, 1996 heretofore filed by Registrant with the
Securities and Exchange Commission, which is hereby
incorporated by reference.
(b) Reports on Form 8-K:
None
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
/s/ James M. Grace
James M. Grace
Treasurer
Date: May 15, 1997