SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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)
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)
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
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 6, 2002, based on the closing sales price in the Nasdaq
National Market ($13.90 per share), was $110,550,495.
The number of shares outstanding of Registrant's common stock on March 6, 2002
was 9,519,751.
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. [ ]
Forward-Looking Statements
Except for historical factual information set forth in this Form 10-K, the
statements, analyses, and other information contained in this report relating to
trends in the Company's operations and financial results, the markets for the
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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PART I
Item 1. Business
General
Financial Industries Corporation ("FIC", the "Company" or the "Registrant") is a
holding company primarily engaged in the life insurance business through its
ownership of Family Life Insurance Company, ("Family Life") Investors Life
Insurance Company of North America ("Investors Life"), and prior to February 19,
2002, Investors Life Insurance Company of Indiana.
FIC was organized as an Ohio corporation in 1968 and was reincorporated in Texas
in 1980. Its executive offices are located at 6500 River Place Boulevard,
Building One, Austin, Texas 78730. Through 1984, FIC's principal business was
the sale and underwriting of life and health insurance, mainly in the midwestern
and southwestern United States. During the period from 1985 to 1987, FIC
acquired a 48.3% equity interest in InterContinental Life Corporation ("ILCO").
ILCO is a Texas corporation which, prior to May 18, 2001, was publicly traded
and was engaged in the sale and underwriting of life insurance and annuities,
through its subsidiaries, Investors Life and Investors Life Insurance Company of
Indiana ("Investors-IN"). On May 18, 2001, FIC acquired the remaining shares of
ILCO through a merger of a subsidiary of FIC with and into ILCO, whereby ILCO
shareholders were issued 1.1 shares of FIC stock for each share of ILCO stock
outstanding. See, "Acquisitions and Consolidations - Acquisition of ILCO." In
June 1991, FIC purchased Family Life, a Washington based life insurance
corporation, from Merrill Lynch Insurance Group, Inc.
FIC and its insurance subsidiaries have substantially identical managements.
Officers allocate their time among FIC and its subsidiaries in accordance with
their comparative requirements. The Roy F. and Joann Cole Mitte Foundation (the
"Foundation"), a charitable entity exempt from federal income tax under section
501(a) of the Internal Revenue Code (the "Code") as an organization described in
section 501(c)(3) of the Code, owns 16.31% of the outstanding shares of FIC's
common stock. The sole members of the Foundation are Roy F. Mitte, Chairman,
President and Chief Executive Officer of FIC, and their insurance subsidiaries
and his wife, Joann Cole Mitte.
Acquisitions and Consolidations
Strategy. FIC's business strategy has been and continues to be to grow
internally and through acquisitions, while maintaining an emphasis on cost
controls. Management believes that, under appropriate circumstances, it is more
advantageous to acquire companies with books of in-force life insurance than to
produce new business, because initial underwriting costs have already been
incurred and mature business is generally less likely to terminate, making
possible more predictable profit analysis. It is also management's belief that
the continuing consolidation in the life insurance industry presents attractive
opportunities for the Company to acquire life insurance companies that
complement or fit within the Company's existing marketing structure and product
lines. The Company's objective is to improve the profitability of acquired
businesses by consolidating and streamlining the administrative functions of
these businesses, eliminating unprofitable products and distribution channels,
applying its marketing expertise to the acquired company's markets and agents
and benefitting from economies of scale. FIC's ability to make future
acquisitions will be dependent on obtaining the necessary financing.
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Acquisition of Family Life. FIC acquired Family Life, a Washington based
life insurance corporation, from Merrill Lynch Insurance Group, Inc. on June 12,
1991. Family Life's primary business is the underwriting and sale of mortgage
protection life insurance to customers who are mortgage borrowers from financial
institutions where Family Life has marketing relationships. Family Life
distributes its insurance products primarily through a national career agency
sales force. See "Business of Insurance Subsidiaries -- Family Life".
Acquisition of ILCO. In January 1985, FIC acquired 26.53% of ILCO's common
stock. During the period from 1985 to 1987, FIC acquired additional ILCO common
stock resulting in an approximate 48% equity interest in ILCO. On May 18, 2001,
pursuant to an 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.
ILCO's Acquisitions. Prior to May 18, 2001, ILCO made the following
acquisitions:
Standard Life Insurance Company. In November 1986, ILCO acquired
Standard Life Insurance Company ("Standard Life"), headquartered in
Jackson, Mississippi, for a gross purchase price of $54.5 million.
Investors Life and Investors Life Insurance Company of California. In
December 1988, ILCO, through Standard Life, purchased Investors Life
Insurance Company of California ("Investors-CA") and Investors Life from
CIGNA Corporation for a purchase price of $140 million.
Meridian Life Insurance Company. In February 1995, ILCO, through
Investors Life, purchased from Meridian Mutual Insurance Company the stock
of Meridian Life Insurance Company, an Indianapolis-based life insurer, for
a cash purchase price of $17.1 million. After the acquisition, Meridian
Life changed its name to Investors Life Insurance Company of Indiana
("Investors-Indiana").
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State Auto Life Insurance Company. In July 1997, ILCO and
Investors-Indiana acquired State Auto Life Insurance Company, an Ohio
domiciled life insurer, from State Automobile Mutual Insurance Company, for
an adjusted cash purchase price of $11.8 million. Under the terms of the
transaction, State Auto Life was merged into Investors-Indiana.
Grinnell Life Insurance Company. On June 30, 1998, ILCO, through a
subsidiary, acquired Grinnell Life Insurance Company ("Grinnell Life") for
an adjusted purchase price of $16.6 million. A portion of the purchase
price ($12.37 million) was paid by way of a dividend to the seller
immediately prior to the closing of the transaction; the balance of the
purchase price was paid by ILCO's subsidiary. As part of the transaction,
Grinnell Life was immediately merged with and into that subsidiary, with
that subsidiary being the surviving entity. Consolidation of Acquired
Companies.
Merger of ILIC and Investors-Indiana. In December 1997,
InterContinental Life Insurance Company ("ILIC"), a subsidiary of ILCO,
transferred its domicile from New Jersey to Indiana. Following completion
of the redomestication, ILIC and Investors-Indiana merged, with ILIC as the
surviving entity in the merger process. Immediately after the merger, ILIC
changed its name to Investors Life Insurance Company of Indiana. As used
hereinafter, the phrase "Investors-IN" shall be used to refer to the merged
entities.
Mergers with Investors Life. Investors Life redomesticated from
Pennsylvania to Washington in December of 1992. Investors-CA merged into
Investors Life on December 31, 1992. Standard Life merged into Investors
Life on June 29, 1993. On February 19, 2002, Investors-IN merged into
Investors Life.
FIC's management believes that the acquisitions and consolidations of its life
insurance subsidiaries have achieved cost savings, such as reduced auditing
expenses involved in auditing combined companies; the savings of expenses and
time resulting from the combined company being examined by one state insurance
department (Washington), rather than four (California, Pennsylvania, Mississippi
and Indiana); the reduction in the number of tax returns and other annual
filings with state insurance departments; and smaller annual fees to do business
and reduced retaliatory premium taxes in most states.
Business of Insurance Subsidiaries
In addition to FIC's strategy of growth through acquisitions, FIC's
insurance subsidiaries market and sell certain life insurance and annuity
products through agents of Investors Life and Family Life.
Family Life. Family Life, which was organized in the State of Washington in
1949, specializes in providing mortgage protection life and accidental death
insurance and annuity products to mortgage borrowers of financial institutions.
Family Life has policies in force with customers of approximately 190 financial
institutions, of which approximately 40 actively provide Family Life with
regular updating of their lists of borrowers.
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Family Life's mortgage protection business consists of term and universal life
insurance sold to borrowers of mortgage debt, designed to repay or reduce the
mortgages of policyholders in the event of their death. This business is sold to
customers of independent financial institutions, usually through a list of
borrowers provided by the financial institution. These policies often list the
lending financial institution as the primary beneficiary of the life insurance
policy. An important feature of the Family Life product is the ability to bill
and collect premiums through the policyholder's monthly mortgage payments.
Family Life has annuity products and a variety of life insurance products,
including decreasing term life insurance, universal life insurance, ten-year
level term products and a whole life insurance product. In 2001, direct
statutory premiums received on Family Life's insurance products totaled $39.6
million.
Family Life is licensed to sell mortgage life insurance products in 48 states
and the District of Columbia (not licensed in New York or New Hampshire). In
2001, premium income from these products was derived from all states in which
Family Life is licensed, with over half of the amount derived from Texas (27%)
and California (25%).
At December 31, 2001, Family Life's primary distribution channel is its agency
force of approximately 300 career agents, who are organized into 10 regions. The
career agents sell mortgage life insurance products exclusively for Family Life.
The mortgage life insurance business is very fragmented. Family Life believes
that it is among the larger writers of agent sold mortgage life insurance in the
United States and the only nation-wide agent-sold life insurance company
operating through leads from financial institutions. Many of Family Life's
competitors are life insurance companies with more resources than Family Life
and whose mortgage life insurance business represents only a small portion of
their total business.
In addition to Family Life's primary distribution channel, Family Life has been
expanding its distribution system to (i) provide a broader range of products;
(ii) generate direct mail leads; and (iii) target higher income customers than
Family Life's traditional market targets. This distribution system involves the
ability of Family Life's agents to sell products of third-party life insurance
companies which have entered into marketing relationships with a subsidiary of
FIC. In 2001, Family Life received $0.7 million of revenues through this system.
At December 31, 2001, Family Life had relationships with 279 agents actively
engaged in this marketing effort.
Investors Life. Investors Life is engaged primarily in administering
existing portfolios of individual life insurance and accident and health
insurance policies and annuity products. Approximately 76.6% of the total
collected premiums for 2001 were derived from renewal premiums on insurance
policies and annuity products sold by FIC's insurance subsidiaries prior to
their acquisition by the Company.
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Investors Life is also engaged in marketing and underwriting individual life
insurance and annuity products in 49 states (not licensed in New York), the
District of Columbia and the U.S. Virgin Islands. These products are marketed
through independent, non-exclusive general agents.
The products currently being distributed by Investors Life include several
versions of universal life flexible premium insurance, which provide permanent
life insurance which credit company-declared current interest rates. Under the
flexible premium policies, policyholders may vary the amounts of their coverage
(subject to minimum and maximum limits) as well as the date of payment and
frequency of payments.
Direct statutory premiums received from all types of universal life products
sold by Investors Life and Investors-IN were $33.3 million in 2001, as compared
to $34.2 million in 2000 and $35.6 million in 1999. Investors Life received
reinsurance premiums from Family Life of $4.7 million in 2001, pursuant to the
reinsurance agreement for universal life products written by Family Life. In
2001, premium income from all life insurance products was derived from all
states in which Investors Life is licensed, with significant amounts derived
from Pennsylvania (14%), California (8%) and Ohio (8%).
Investors Life also receives premium income from health insurance policies. In
2001, premium income from all health insurance policies was $0.6 million, as
compared to $0.7 million in 2000 and $0.8 million in 1999. Since 1997,
substantially all of Investors Life's health insurance business has been
reinsured with a third party reinsurer.
Investors Life also sponsors a variable annuity separate account, which offers
single premium and flexible premium policies. The policies provide for the
contract owner to allocate premium payments among four different portfolios of
Putnam Variable Trust (the "Putnam Fund"), a series fund which is managed by
Putnam Investment Management, Inc. As of December 31, 2001, the assets held in
the separate account were $36.3 million. During 2001, the premium income
realized in connection with these variable annuity policies was $104,028, which
was received from existing contract owners.
Investors Life also maintains a closed variable annuity separate account, with
approximately $15.1 million of assets as of December 31, 2001. The separate
account was closed to new purchases in 1981 as a result of an IRS ruling which
adversely affected the status of variable annuity separate accounts which invest
in publicly-available mutual funds. The ruling did not adversely affect the
status of in-force contracts.
For the past several years, Investors Life has expanded its marketing efforts in
the fixed annuity market. Direct deposits from the sale of fixed annuity
products were $12.3 million in 2001, as compared to $10.6 million in 2000 and
$7.6 million in 1999. Investors Life also received reinsurance premiums from
Family Life of $2.0 million in 2001, pursuant to a reinsurance agreement for
annuity products between Investors Life and Family Life.
For the past few years, Investors Life has been marketing a group deposit
administration product, designed for use in connection with the funding of
deferred compensation plans maintained by government employers under section 457
of the Internal Revenue Code. The company has established a marketing
relationship with a third-party administrator based in San Antonio, Texas, which
has established relationships with school districts in Texas. Annuity premiums
under this program for the year 1999 totaled $0.9 million, premiums in 2000
totaled $1.5 million and premiums in 2001 totaled $0.24 million. At December 31,
2001, 12 school districts held plans with Investors Life. One school district in
Louisiana surrendered its $1.5 million policy with Investors Life during 2001.
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Investors Life, along with Family Life, participates in the distribution system
involving third-party life insurance companies. The marketing arrangement makes
available, to appointed agents of Investors Life, life insurance and annuity
products not currently being offered by Investors Life. The underwriting risk on
the products sold under this arrangement is assumed by the third-party insurer.
The Company's appointed agents receive commissions on the sales of these
products and the Company's marketing subsidiary receives an override commission.
During 2001, Investors Life received revenues of $0.2 million through this
distribution system. At December 31, 2001, Investors Life had relationships with
159 agents actively engaged in this marketing effort.
Employees of the Company
At December 31, 2001, the number of employees within FIC and its subsidiaries
was approximately 313 and the number of Regional Vice Presidents employed by the
life insurance subsidiaries of FIC was 26.
Agency Operations
The products of FIC's insurance subsidiaries are marketed and sold through two
divisions:
A. Investors Life Distribution System
Investors Life contracts with independent non-exclusive agents, general agents
and brokers nation-wide to sell its products. Such agents and brokers also sell
insurance products for companies in competition with Investors Life. In order to
attract agents and enhance the sale of its products, Investors Life pays
competitive commission rates and provides other sales inducements. Investors
Life is presently concentrating its efforts on the promotion and sale of
universal life and fixed annuity products.
Marketing and sales for Investors Life is directed by the Executive Vice
President of Marketing and Sales. The distribution system is organized into 14
regions, each of which has a Regional Vice President ("RVP") who is responsible
for the recruitment and maintenance of the general agents and managing general
agents for individual insurance sales within such region. During 1999, Investors
Life implemented a plan to restructure the compensation arrangements for RVPs,
so as to emphasize the role of personal production by the RVPs. The effect of
this plan during the year 2000 and 2001 was to lower fixed costs for
distribution of Investors Life's products.
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B. Family Life Distribution System
Family Life utilizes a nationwide exclusive agent force to sell its products.
This agent force sells mortgage protection life insurance and annuity products.
The products are sold primarily to middle-income customers of client financial
institutions, usually through a list of borrowers provided by the financial
institution. Family Life works closely with the financial institutions to
maintain and insure that Family Life lead systems, which had been built from the
loan portfolios of each active financial institution, operate effectively.
Family Life agents make courtesy calls to borrowers of the financial
institutions which are active on the Family Life lead system to offer the
borrower the opportunity to purchase mortgage protection insurance (term or
universal life insurance products).
In advance of the passage of the Financial Services Modernization Act (the
"Act") in 1999 (for a discussion of the provisions of this law, refer to the
section entitled "Regulation"), Family Life established a task force to develop
new lead sources for its agents. Although Family Life continues to focus on its
traditional sales approach, it has established a supplemental leads program,
whereby leads are obtained from public records (e.g. county loan records).
Family Life has also developed a strategy to work with lenders as "setup only",
whereby the mortgage institution does not furnish leads, but will collect and
remit premiums. Finally, Family Life is developing new sales methods, including
direct mailings and direct telephone leads.
Sales and Marketing for Family Life is directed by the Executive Vice President
of Marketing and Sales. Sales and marketing focuses on the development and
maintenance of contractual agreements with the financial institutions which
provide referrals to, and collect monthly premiums from, their borrowers for
Family Life insurance plans. As of March 6, 2002, the Family Life distribution
system consisted of 10 regions, each directed by a Regional Vice President.
Investment of Assets
FIC has established and staffed an investment department, which manages
portfolio investments and investment accounting functions for its life insurance
subsidiaries. At December 31, 2001, invested assets totaled $756 million.
The general investment objective of the Company emphasizes the selection of
short to medium term high quality fixed income securities, rated Baa-3
(investment grade) or better by Moody's Investors Service, Inc. 66% of FIC's
invested assets are in fixed maturity securities, available for sale. Our fixed
maturity securities portfolio is predominately comprised of low risk, investment
grade, available for sale publicly traded corporate securities, mortgage-backed
securities, and United States Government bonds. All of FIC's invested assets are
invested in the United States. The assets held by Family Life and Investors 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 determines the allocation of our assets primarily on the basis of cash
flow and return requirements of our products and secondarily by the level of
investment risk.
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The Company's investment objectives include the making of selected investments
in collateralized mortgage obligations. The Company does not invest in
non-agency mortgage-backed securities, which have a greater credit risk than
that of agency mortgage-backed securities.
The other asset categories which comprise at least 5% of FIC's invested assets
include investments in real estate, short-term investments, and policy loans.
For a further discussion of FIC's invested assets see "Item 7 - Management
Discussion and Analysis - Investments."
Data Processing
Since December 1994, the data processing needs of FIC's insurance subsidiaries
have been provided to FIC's Austin, Texas and Seattle, Washington facilities by
FIC Computer Services, Inc., a subsidiary of FIC. See "Item 13 - Certain
Relationships and Related Transactions with Management."
As the provider of data processing for the Company and its subsidiaries, FIC
Computer Services, Inc. utilizes a centralized computer system to process
policyholder records and financial information. In addition, the Company uses
non-centralized computer terminals in connection with its operations.
Competition
There are many life and health insurance companies in the United States. Agents
placing insurance business with Family Life and Investors Life are compensated
on a commission basis. However, some companies pay higher commissions and charge
lower premium rates and many companies have more resources than FIC's insurance
subsidiaries. In addition, consolidations of insurance and banking institutions,
which is permitted under recently-enacted federal legislation, may adversely
affect the ability of Family Life to expand its customer referral relationships
with mortgage lending and servicing institutions.
The principal cost and competitive factors that affect the ability of FIC's
insurance subsidiaries to sell their insurance products on a profitable basis
are: (1) the general level of premium rates for comparable products; (2) the
extent of individual policyholders services required to service each product
category; (3) general interest rate levels; (4) competitive commission rates and
related marketing costs; (5) legislative and regulatory requirements and
restrictions; (6) the impact of competing insurance and other financial
products; and (7) the condition of the regional and national economies.
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Reinsurance and Reserves
In accordance with general practices in the insurance industry, FIC's insurance
subsidiaries limit the maximum net losses that may arise from large risks by
reinsuring with other carriers. Such reinsurance provides for a portion of the
mortality risk to be retained by FIC's insurance subsidiaries with the excess
being ceded to a reinsurer at a premium set forth in a schedule based upon the
age and risk classification of the insured. The reinsurance treaties provide for
allowances that help Family Life and Investors Life offset the expense of
writing new business. Investors Life generally retains the first $100,000 to
$250,000 of risk on the life of any individual. On its in-force block of
business, Family Life generally retains the first $200,000 of risk on the life
of any one individual. On certain new products being written by Family Life
(which amount to approximately one-third of Family Life's new business), the
entire amount of risk is reinsured on a percentage basis with Family Life
retaining 10% of the risk. Although Family Life only retains 10% of the risk,
Family Life retains an allowance from the reinsurer of their portion of the
premiums, which allows Family Life to cede substantially less than 90% of the
incoming premiums. This "first dollar" arrangement allows Family Life to price
products more competitively and take certain underwriting risks which it could
not take if it were retaining 100% of the risk. Family Life still reinsures all
of its new business over $200,000.
Family Life maintains a bulk reinsurance treaty, under which it reinsured all of
its risks under accidental death benefit policies. The treaty was most recently
renegotiated with the current reinsurer in January 1997.
As discussed above (see "Business of Insurance Subsidiaries"), in December 1997,
FIC's life insurance subsidiaries entered into a reinsurance treaty under which
all of the contractual obligations and risks under accident and health and
disability income policies were assumed by a third party reinsurer.
In 1995, Family Life (as the ceding company) entered into a reinsurance
agreement with Investors Life (as the reinsuring company) 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 (as the ceding company) entered into a reinsurance agreement with
Investors Life (as the reinsuring company), pertaining to annuity contracts
written by Family Life. The agreement applies to contracts written on or after
January 1, 1996. These reinsurance arrangements reflect management's plan to
develop universal life and annuity business at Investors Life, with Family Life
concentrating on the writing of term life insurance products.
Although reinsurance does not eliminate the exposure of FIC's insurance
subsidiaries to losses from risks insured, the net liability of such
subsidiaries will be limited to the portion of the risk retained, provided that
the reinsurers meet their contractual obligations.
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FIC's insurance subsidiaries carry reserves on their books to meet future
obligations under their outstanding insurance policies. Such reserves are
believed to be sufficient to meet policy obligations as they mature and are
calculated using assumptions for interest, mortality, expenses and withdrawals
in effect at the time the policies were issued.
Senior Subordinated Loans
In 1989, as part of the purchase of Family Life from Merrill Lynch Insurance
Group, Inc. ("Merrill Lynch"), FIC organized two downstream holding companies:
Family Life Insurance Investment Corporation ("FLIIC") and Family Life
Corporation ("FLC"). FLIIC was organized as a wholly-owned subsidiary of FIC
and, in turn, was issued all of the outstanding shares of FLC. FLC purchased all
of the outstanding shares of Family Life from Merrill Lynch. A portion of the
consideration for the purchase consisted of a $30 million senior subordinated
note (the "Merrill Lynch Loan"). Following the purchase of the Family Life
shares by FLC, Family Life issued 250,000 previously unissued shares of its
common stock to FLC for a $2.5 million cash payment and immediately thereafter
redeemed from FLC 250,000 shares of its common stock that had been purchased by
FLC from Merrill Lynch. The consideration paid to FLC by Family Life for said
redeemed shares consisted of $2.5 million cash, a newly issued surplus debenture
(an instrument having certain restrictions on payment for the protection of
policyholders) in the principal amount of $97.5 million (the "Family Life
Surplus Debenture") and $14 million principal value of newly issued preferred
shares.
Investors Life Notes. Another part of the financing arrangement to purchase
Family Life included FLC borrowing $25 million from Investors Life (the
"Investors Life Loans"). This 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). In addition to
the interest provided under the Investors Life Loans, Investors Life was granted
non-transferable options to purchase FIC common stock, up to a total of 9.9 % of
shares of FIC common stock (currently 500,411 shares) at a price of $2.10 per
share (as adjusted to reflect the five-for-one stock split in November 1996),
equivalent to the then current market price, subject to adjustment to prevent
dilution. The initial terms of the option provided for their expiration on June
12, 1998, if not previously exercised. In connection with the 1996 amendments to
the Investors Life Loans, the expiration date of the options was extended to
September 12, 2006.
On June 12, 1996, the Investors Life Loans were amended to provide for twenty
quarterly principal payments, commencing on December 12, 1996. Additionally,
prior to such date, accrued interest on the $2.5 million subordinated note
issued by FIC to Investors-CA was paid by delivery of additional notes of FIC
having terms identical to the original note, including the payment of interest.
The Investors Life Loans were paid in full as of September 12, 2001; however,
because of the 1993 Subordinated Loans, described in "Family Life Refinancing"
below, the options of Investors Life to purchase FIC common stock did not expire
with the repayment of the Investors Life Loans.
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Family Life Refinancing. In 1993, Investors Life loaned an additional $34.5
million to FLC and FLIIC in the form of subordinated notes so that FLC and FLIIC
could prepay the Merrill Lynch Loan (the "1993 Subordinated Loans"). The 1993
Subordinated Loans consisted of a $30 million loan to FLC and a $4.5 million
loan to FLIIC. The debt restructuring reduced the total indebtedness of FLC and
FLIIC by approximately $15 million. Upon the retirement of the Merrill Lynch
Loan, certain of its provisions were automatically incorporated into the 1993
Subordinated Loans. Those provisions include specified events of default,
including, but not limited to, failure to pay principal, interest, commitment
fees or other amounts payable when due, failure to maintain certain financial
covenants, violation of covenants (including covenants with respect to the
maintenance of a minimum net worth), material misrepresentations, defaults under
other indebtedness, the loss of any license of an insurance subsidiary of FLC
which would have a material adverse effect on FLC, defaults under the FIC
guaranty agreement, a fine in an amount in excess of $100,000 imposed upon any
insurance subsidiary of FLC by any state insurance regulatory agency, changes in
ownership or control of FIC by its controlling person, Roy F. Mitte, or in ILCO
by FIC, and the occurrence of certain events of bankruptcy. In addition, the
security interests furnished to the lenders under the Merrill Lynch Loan were
transferred to Investors Life. The security interests include all of the issued
and outstanding shares of preferred stock and common stock of FLC and Family
Life. Prior to June 30, 2001, the security also included the Family Life Surplus
Debenture; however, the Family Life Surplus Debenture was paid in full as of
June 30, 2001.
On June 12, 1996, the 1993 Subordinated Loans were also amended 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 remained 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 remained at 9%.
In December 1998, FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder, FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
As of December 31, 2001, the outstanding principal balance of the 1993
Subordinated Loans was $29.2 million. Since May 18, 2001, ILCO has been a
wholly-owned subsidiary of FIC, and thus the 1993 Subordinated Loans are not an
asset or liability on FIC's balance sheets, but still affect FIC's cash flow due
to its debt servicing obligations.
-13-
<page>
Regulation
General. The Company and its insurance subsidiaries are subject to
regulation and supervision at both the state and federal level, including
regulation under federal and state securities laws and regulation by the states
in which they are licensed to do business. The state insurance regulation is
designed primarily to protect policy owners. Although the extent of regulation
varies by state, the respective state insurance departments have broad
administrative powers relating to the granting and revocation of licenses to
transact business, licensing of agents, the regulation of trade practices and
premium rates, the approval of form and content of financial statements and the
type and character of investments.
These laws and regulations require the Company's insurance subsidiaries to
maintain certain minimum surplus levels and to file detailed periodic reports
with the supervisory agencies in each of the states in which they do business
and their business and accounts are subject to examination by such agencies at
any time. The insurance laws and regulations of the domiciliary state of the
Company's insurance subsidiaries require that such subsidiaries be examined at
specified intervals. Both Investors Life and Family Life are domiciled in the
state of Washington. Prior to the merger of Investors Life and Investors-IN in
February 2002, Investors-IN was domiciled in the state of Indiana.
A number of states regulate the manner and extent to which insurance companies
may test for acquired immune deficiency syndrome (AIDS) antibodies in connection
with the underwriting of life insurance policies. To the extent permitted by
law, the Company's insurance subsidiaries consider AIDS information in
underwriting coverage and establishing premium rates. An evaluation of the
financial impact of future AIDS claims is extremely difficult, due in part to
insufficient and conflicting data regarding the incidence of the disease in the
general population and the prognosis for the probable future course of the
disease.
Risk Based Capital Requirements. The National Association of Insurance
Commissioners ("NAIC") has imposed Risk-Based Capital ("RBC") requirements to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance risks associated with; (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (iv) other business factors.
The RBC formula is intended to be used by insurance regulators as an early
warning tool to discover potential weakly capitalized companies for the purpose
of initiating regulatory action. The RBC requirements are not intended to be a
basis for ranking the relative financial strength of insurance companies. The
formula also defines a new minimum capital standard which will supplement the
prevailing system of low fixed minimum capital and surplus requirements on a
state-by-state basis.
The RBC requirements provide for four different levels of regulatory attention
in those states that adopt the NAIC regulations, depending on the ratio of the
company's Total Adjusted Capital (which generally consist of its statutory
capital, surplus and asset valuation reserve) to its Authorized Control Level
RBC. A "Company Action Level Event" is triggered if a company's Total Adjusted
Capital is less than 200% but greater than or equal to 150% of its Authorized
Control Level RBC, or if a negative trend has occurred (as defined by the
regulations) and Total Adjusted Capital is less than 250% but more than 200% of
its Authorized Control Level RBC. When a Company Action Level Event occurs, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. A
"Regulatory Action Level Event" is triggered if a company's Total Adjusted
Capital is less than 150% but greater than or equal to 100% of its Authorized
Control Level RBC. When a Regulatory Action Level Event occurs, the regulatory
authority will perform a special examination of the company and issue an order
specifying corrective actions that must be followed. An "Authorized Control
Level Event" is triggered if a company's Total Adjusted Capital is less than
100% but greater than or equal to 70% of its Authorized Control Level RBC, and
the regulatory authority may take any action it deems necessary, including
placing the company under regulatory control. A "Mandatory Control Level Event"
is triggered if a company's total adjusted capital is less than 70% of its
Authorized Control Level RBC, and the regulatory authority is mandated to place
the company under its control.
-14-
<page>
Calculations using the NAIC formula and the statutory financial statements of
the Company's insurance subsidiaries as of December 31, 2001 indicate that the
Total Adjusted Capital of each of the Company's insurance subsidiaries is above
450% of its respective Authorized Control Level RBC.
Solvency Laws Assessments. The solvency or guaranty laws of most states in
which an insurance company does business may require that company to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. Recent insolvencies of
insurance companies increase the possibility that such assessments may be
required. These assessments may be deferred or forgiven under most guaranty laws
if they would threaten an insurer's financial strength and, in certain
instances, may be offset against future premium taxes. The insurance companies
record the expense for guaranty fund assessments in the period assessed. For the
year ended December 31, 2001, Family Life received a credit on its guaranty fund
assessment return of $21,481, while Investors Life and Investors-IN had expenses
of $6,090 and $2,159, respectively. Those amounts are net of the amounts that
can be offset against future premium taxes and, in the case of Family Life, the
amount is also net of the amount that can be recovered from Merrill Lynch
pursuant to the Stock Purchase Agreement between FIC and Merrill Lynch. The
likelihood and amount of any other future assessments cannot be estimated and
are beyond the control of FIC.
Dividends. Prior to June 2001, payment from Family Life of surplus and
interest on the surplus debenture was the primary source of cash for Family Life
Corporation ("FLC"), a wholly-owned subsidiary of FIC, to make payments on the
1993 Subordinated Loans. Pursuant to the surplus debenture, Family Life paid
principal and interest to FLC in 1999, 2000 and 2001 totaling $10,754,978,
$8,982,244 and $4,111,046, respectively. Since the Family Life Surplus Debenture
was paid off in June 2001, one source of cash for FLC to make payments of
principal and interest on the 1993 Subordinated Loans is dividends paid to FLC
by Family Life. Under current Washington law, any proposed payment of an
"extraordinary dividend" requires a 30-day prior notice to the Washington
Insurance Commissioner, during which period the Commissioner can approve the
dividend, disapprove the dividend or fail to comment on the notice, in which
case the dividend is deemed approved at the end of the 30-day period. An
"extraordinary dividend" is a 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 31st or (ii) the
statutory net gain from operations for the preceding calendar year. Payment of a
regular dividend requires that the insurer's earned surplus after dividends or
distributions must be reasonable in relation to the insurer's outstanding
liabilities and adequate to its financial needs. Family Life did not have earned
surplus in 2000 as defined by the regulations adopted by the Washington
Insurance Commissioner and, therefore, was not permitted to pay cash dividends
during 2001. However, as of December 31, 2001, Family Life had earned surplus of
$0.3 million and a net gain from operations of $4.4 million. Investors Life had
earned surplus of $48.4 million and a net gain from operations of $8.3 million
at December 31, 2001.
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<page>
Valuation Reserves. Life insurance companies are required to establish an
Asset Valuation Reserve ("AVR") consisting of two components: (i) a "default
component," which provides for future credit-related losses on fixed maturity
investments, and (ii) an "equity component," which provides for losses on all
types of equity investments, including equity securities and real estate.
Insurers are also required to establish an Interest Maintenance Reserve ("IMR"),
designed to defer realized capital gains and losses due to interest rate changes
on fixed income investments and to amortize those gains and losses into future
income. The IMR is required to be amortized into statutory earnings on a basis
reflecting the remaining period to maturity of the fixed maturity securities
sold. These reserves are required by state insurance regulatory authorities to
be established as a liability on a life insurer's statutory financial
statements, but do not affect the financial statements prepared in accordance
with Generally Accepted Accounting Principles ("GAAP"). Since dividend payments
are based upon statutory earnings, management believes that the combination of
the AVR and IMR will affect statutory capital and surplus and therefore may
reduce the ability of Investors Life and Family Life to pay dividends to FIC.
Insurance Holding Company Regulation. Family Life and Investors Life are
subject to regulation under the insurance and insurance holding company statutes
of the state of Washington and prior to February 2002, Investors-IN was subject
to regulation under the insurance and insurance holding company statutes of the
state of Indiana. The insurance holding company laws and regulations vary from
jurisdiction to jurisdiction, but generally require insurance and reinsurance
subsidiaries of insurance holding companies to register with the applicable
state regulatory authorities and to file with those authorities certain reports
describing, among other information, their capital structure, ownership,
financial condition, certain intercompany transactions and general business
operations. The insurance holding company statutes also require prior regulatory
agency approval, or in certain circumstances, prior notice of certain material
intercompany transfers of assets as well as certain transactions between
insurance companies, their parent companies and affiliates.
Under the Washington Insurance Code, unless (i) certain filings are made with
the Washington Department of Insurance, (ii) certain requirements are met,
including a public hearing and (iii) approval or exemption is granted by the
insurance commissioner, no person may acquire any voting security or security
convertible into a voting security of an insurance holding company, such as the
Company, which controls a Washington insurance company, or merge with such a
holding company, if as a result of such transaction such person would "control"
the insurance holding company. "Control" is presumed to exist if a person
directly or indirectly owns or controls 10% or more or the voting securities of
another person.
-16-
<page>
The insurance holding company regulations generally apply only to insurers
domiciled in a particular state. However, the regulations in certain states also
provide that insurers that are "commercially domiciled" in that state are also
subject to the provisions applicable to domiciled insurers. The test for
determining whether an insurer is commercially domiciled is based on the
percentage of premiums written in the state as compared to the amount of
premiums written everywhere over a measuring period. The applicable percentage
for California is 33% , while for Texas it is 30%. Currently, the insurance
subsidiaries of FIC are not treated as commercially domiciled in any
jurisdiction.
Privacy Legislation. In July 2001, the Financial Services Modernization Act
(referred to in this paragraph as the "Act") of 1999 became applicable to
insurance companies. In general, the Act provides that financial institutions
have certain obligations with respect to the maintenance of the privacy of
customer information. In addition, the Act places new restrictions on disclosure
of nonpublic personal information to third party institutions seeking to utilize
such information in connection with the sale of products or services. A
financial institution may disseminate certain types of customer information to
nonaffiliated third parties if the institution provides clear and conspicuous
disclosure of the institution's privacy policy and the customer authorizes the
release of certain information to third parties. Where the customer permits the
release of the information, the Act restricts disclosure of information that is
non-public in nature but does not prohibit the release of information which can
be obtained from public sources. Although FIC's insurance subsidiaries have not
experienced any adverse effects to their business as a result of the Act to
date, it is too early to assess the Act's long-range effects.
Potential Federal Regulation. Although the federal government generally
does not directly regulate the insurance industry, federal initiatives often
have an impact on the business. Congress and certain federal agencies
periodically investigate the condition of the insurance industry (encompassing
both life and health and property and casualty insurance) in the United States
in order to decide whether some form of federal role in the regulation of
insurance companies would be appropriate. Further, since FIC is a publicly
traded entity, it is subject to regulation by the Securities and Exchange
Commission (SEC), as well as NASDAQ. Under SEC regulations, FIC is required to
file forms under the Securities Act of 1933 and the Securities and Exchange Act
of 1934 with respect to various aspects of its business.
Federal Income Taxation. The Revenue Reconciliation Act of 1990 amended the
Internal Revenue Code of 1986 to require a portion of the expenses incurred in
selling insurance products to be deducted over a period of years, as opposed to
an immediate deduction in the year incurred. Since this change only affects the
timing of the deductions, it does not affect tax expense as shown on the
Company's financial statements prepared in accordance with GAAP. For the years
ended December 31, 1999, 2000 and 2001, the decreases in Family Life's current
income tax provisions, utilizing the effective tax rates, due to this change
were $78,759, $177,038 and $157,180, respectively. For the years ended December
31, 1999, 2000 and 2001, the decreases in the current income tax provisions of
Investors Life and Investors- IN due to this change were $409,193, $8,368 and
$294,695, respectively. The change has a negative tax effect for statutory
accounting purposes when the premium income of the Company's insurance
subsidiaries increases, but has a positive tax effect when their premium income
decreases.
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<page>
FIC files a consolidated federal income tax return with its subsidiaries, except
for Investors Life and Investors-IN (which file a separate consolidated return)
and ILG Securities (which files its own federal income tax return). In
accordance with the tax allocation agreements maintained by those FIC companies
which file a consolidated return, federal income tax expense or benefit is
allocated to each entity in the consolidated group as if such entity were filing
a separate return.
Segment Information
The principal operations of the Company's insurance subsidiaries are the
underwriting of life insurance and annuities. Accordingly, no separate segment
information is required to be provided by the Registrant for the three-year
period ending December 31, 2001.
Item 2. Properties
FIC's home office is located at River Place Pointe, 6500 River Place Blvd.,
Building One, Austin, Texas. River Place Pointe was purchased by Investors Life
in October 1998. It consists of 47.995 acres of land in Austin, Texas. The
aggregate purchase price for these tracts was $8.1 million. The site development
permit allows for the construction of seven office buildings totaling 600,000
square feet, with associated parking, drives and related improvements.
Construction on the first section of the project, which consists of four office
buildings, an associated parking garage and related infrastructure was completed
during 2000 and 2001. The second section of construction, which includes three
more office buildings, an associated parking garage and related infrastructure,
is in progress and Investors Life expects completion of this phase by the end of
2002. FIC and its insurance subsidiaries occupy almost the entire Building One
of River Place Pointe, consisting of approximately 74,021 square feet of space.
-18-
<page>
Family Life and Investors Life lease their home offices at the Sedgwick James
Building, 2101 Fourth Avenue, in Seattle, Washington. The lease currently covers
approximately 7,776 rentable square feet of office space for a term expiring on
October 31, 2003. The base rental is approximately $16,362 per month, which
includes Family Life's proportionate share of the building's operating expenses,
including utilities, property taxes, insurance, maintenance and management.
Actual increases from those initial operating expenses during the lease term are
passed on to Family Life on a proportionate basis.
ILCO leases a building located at 40 Parker Road, Elizabeth, New Jersey. This
building, which was formerly ILCO's headquarters building, contains
approximately 41,000 square feet of office space. The lease, which was signed in
December 1985 and expires in December 2005, calls for a minimum base rental of
$737,940 per annum. The lease provides that all costs including, but not limited
to, those for maintenance, repairs, insurance and taxes be borne by ILCO. ILCO
subleases this space to third parties.
Prior to December 2001, ILCO and Investors-IN owned three residential buildings
adjacent to the 40 Parker Road building. In December 2001, ILCO and Investors-IN
sold these properties for a total purchase price of $380,000, which amount was
allocated between ILCO and Investors-IN in accordance with their respective
interests in the properties.
The Company believes that its properties and leased space are adequate to meet
its foreseeable requirements.
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<page>
Item 3. 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 on the
financial statements.
Universal Life Litigation. On January 22, 2002, the Travis County District
Court in Austin, Texas, denied certification to a proposed nationwide class of
plaintiffs who purchased certain universal life insurance policies from INA Life
Insurance Company (which was merged into Investors Life in 1992). The lawsuit,
which was filed in 1996 as a "vanishing premium" life insurance litigation,
initially alleged that the universal life insurance policies sold to plaintiffs
by INA Life Insurance Company utilized unfair sales practices. In April 2001,
the plaintiffs filed an amended complaint, so as to include various post-sale
allegations, including allegations related to the manner in which increases in
the cost of insurance were applied, the allocation of portfolio yields to the
universal life policies and changes in the spread between the earned rate and
the credited rate. Plaintiffs' Motion for Class Certification was denied in its
entirety.
Litigation Relating to the FIC/ ILCO Merger. On the day that FIC and ILCO
each publicly announced the formation of a special committee to evaluate a
potential merger, two class action lawsuits were filed against ILCO, FIC and the
officers and directors of ILCO. The actions allege that a cash consideration in
the proposed merger is unfair to the shareholders of ILCO, that it would prevent
the ILCO shareholders from realizing the true value of ILCO, and that FIC and
the named officers and directors had material conflicts of interest in approving
the transaction. In their initial pleadings, the plaintiffs sought certification
of the cases as class actions and the named plaintiffs as class representatives,
and among other relief, requested that the merger be enjoined (or, if
consummated, rescinded and set aside) and that the defendants account to the
class members for their damages. The defendants believe that the lawsuits are
without merit and intend to vigorously contest the lawsuits. Management is
unable to determine the impact, if any, that the lawsuits may have on the
results of operations of the Company.
Other Litigation. Additionally, FIC's insurance subsidiaries are regularly
involved in litigation, both as a defendant and as plaintiff. The litigation
naming the insurance subsidiaries as defendant ordinarily involves our
activities as a provider of insurance protection products. Management does not
believe that such litigation, either individually or in the aggregate, will have
a material adverse effect on the Company's business, financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 2001, to a vote of security holders.
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<page>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
A. Market Information
As of January 2001, FIC's common stock is traded on the Nasdaq National Market
(NASDAQ symbol: FNIN). Prior to January 2001, FIC's common stock was traded on
the Nasdaq Small-Cap Market. The following table sets forth the quarterly high
and low closing prices for FIC common stock for 2001 and 2000. Quotations are
furnished by the National Association of Securities Dealers Automated Quotation
System (NASDAQ).
Common Stock
Prices
High Low
2001
First Quarter $ 14.75 $ 9.125
Second Quarter 16.90 11.90
Third Quarter 16.00 12.44
Fourth Quarter 14.90 13.00
2000
First Quarter $ 10.50 $ 7.25
Second Quarter 10.50 8.00
Third Quarter 9.50 7.875
Fourth Quarter 10.00 8.500
B. Holders
As of March 6, 2002, there were approximately 15,749 record holders of FIC
common stock.
C. Dividends
In the year 2000, FIC paid a cash dividend in the amount of $.18 per share,
which was payable on April 12, 2000, to shareholders of record on April 5, 2000.
In the year 2001, FIC paid three cash dividends. In March 2001, FIC announced
that its board approved the payment of a cash dividend for the year in the
amount of $0.41 per share. The dividend was paid on April 12, 2001, to
shareholders of record as of the close of business on March 19, 2001.
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<page>
In May 2001, FIC announced that its Board approved a dividend policy. The policy
adopted by the Board anticipates that the Company will declare and pay, on a
semi-annual basis, a dividend on the common stock of the Company so as to
provide to shareholders with an annualized yield of approximately 3% of the
market value (based on the NASDAQ National Market quotation system). The
implementation of this policy and the future declarations of dividends are
subject to change depending on future circumstances.
Pursuant to the above-mentioned policy, in May 2001, FIC announced that its
Board of Directors approved the payment of a semi-annual cash dividend in the
amount of $.25 per common share. The dividend was payable on July 2, 2001, to
record holders as of the close of business on June 18, 2001. On November 27,
2001 a dividend in the amount of $.21 per common share was approved. This
dividend was payable on December 21, 2001 to record holders as of December 7,
2001.
The ability of an insurance holding company, such as FIC, to pay dividends to
its shareholders may be limited by the company's ability to obtain revenue, in
the form of dividends and other payments, from its subsidiaries. The right of
FIC's insurance subsidiaries to pay dividends is restricted by the insurance
laws of their domiciliary state. See Item 1. Business - Regulation - Dividends.
Further, FLC, which holds all of the stock of Family Life, is restricted from
paying dividends on its common stock by the provisions of the 1993 Subordinated
Loans. See Item 1. Business - Senior Subordinated Loans. FIC (as the successor
to the obligations of FLIIC) is also prohibited from paying dividends on its
stock by the provisions of the $4.5 million subordinated note held by Investors
Life. In order to provide for the payment of the three cash dividends paid in
2001, FIC received waivers from Investors Life on the above-described
restrictions of the loan agreements, thereby permitting FIC to make the dividend
payments to its shareholders.
Item 6. Selected Financial Data: (Registrant and its Consolidated Subsidiaries)
<table>
<s> <c> <c> <c> <c> <c>
(In thousands, except per share data)
2001 2000 1999 1998 1997
Operating Revenues $ 99,125 $ 44,418 $ 46,244 $ 52,293 $ 63,343
Income before federal
income tax, equity in net
earnings of affiliates 15,999 6,482 7,013 8,973 13,411
Income before equity in
net earnings of affiliates 10,698 5,198 5,839 6,605 9,870
Equity in net earnings of
affiliate, net of tax 1,316 3,581 3,310 2,613 6,458
Net Income 12,014 8,779 9,149 9,218 $ 16,328
Common Stock and
Common Stock
Equivalents 7,898 5,163 5,200 5,557 5,589
Net income per share
Basic $ 1.54 $ 1.74 $ 1.81 $ 1.71 $ 3.01
Diluted $ 1.52 $ 1.70 $ 1.76 $ 1.66 $ 2.92
Total Assets $1,378,829 $ 300,766 $ 294,054 $ 301,738 $ 304,324
Long Term Obligations $ 0 $ 35,349 $ 41,497 $ 47,645 $ 53,792
Cash dividends paid per $ 0.87 $ 0.18 $ 0 $ 0 $ 0
share
</table>
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<page>
The results for the year ended December 31, 2001 were affected by the merger of
ILCO with and into a subsidiary of FIC on May 18, 2001. For a description of the
merger transaction, see "Item 7 - Management Discussion & Analysis -
Transactions Affecting Comparability of Results of Operations."
The results for the year ended December 31, 1997 were affected by the sale of
property owned by Family Life at Bridgepoint Square ("Bridgepoint") in Austin,
Texas. In January 1995, Investors Life purchased a 20 acre tract of land at
Bridgepoint. Investors Life developed the project, which consisted of four
office buildings, with a total rentable space of approximately 364,000 square
feet, and two parking garages. In May 1996, Family Life purchased a 7.1 acre
tract adjacent to the original Bridgepoint tract. This second tract contained
one building site and one garage site. In January 1997, Family Life began
construction on a four-story office building, with rentable space of
approximately 76,793 square feet, and the parking garage, with 350 parking
spaces. In May 1997, the entire rentable space in the building was leased to a
major tenant in the technology business. Construction of the parking garage and
the building shell was completed in October 1997. In November 1997, Investors
Life and Family Life entered into a sale agreement with an independent third
party for the sale of their respective interests in Bridgepoint. The
transaction, which closed on December 5,1997, was for an aggregate price of $78
million. The sale resulted in a net pre-tax profit to Investors Life of
approximately $14.0 million, and a net pre-tax profit to Family Life of
approximately $4.5 million.
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<page>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
FIC's financial condition and results of operations. This discussion should be
read in conjunction with the financial statements beginning on page F-1.
Forward-Looking Statements
Except for historical factual information set forth in this Management's
Discussion and Analysis, the statements, analyses, and other information
contained in this report relating to trends in the Company's operations and
financial results, the markets for the 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 effect 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 subsidiaries'
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 life 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.
Overview
Financial Industries Corporation ("FIC" or the "Company") is a holding company
engaged through its subsidiaries in the business of marketing, underwriting and
distributing a broad range of life insurance and annuity products in 49 states,
the District of Columbia and the U.S. Virgin Islands.
The Company's revenues are derived principally from:
premiums on individual life insurance policies
product charges from universal life insurance products and annuities
net investment income and realized investment gains on assets
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<page>
In accordance with Generally Accepted Accounting Principles (GAAP), universal
life insurance premiums and annuity deposits received are reflected on FIC's
consolidated balance sheets as increases in liabilities for contract holder
deposit funds and not as revenues.
Expenses consist principally of insurance benefits provided to policyholders,
interest credited on policyholder account balances, other operating costs and
expenses, which include commissions and general business expenses, net of
expenses deferred, amortization of present value of future profits of acquired
businesses and amortization of deferred policy acquisition costs, and premium
and income taxes. Surrender benefits paid relating to universal life insurance
policies and annuities are reflected as decreases in liabilities for contract
holder deposit funds and not as expenses.
The Company's profitability depends in large part upon: (1) the adequacy of our
product pricing, which is primarily a function of competitive conditions, our
ability to assess and manage trends in mortality and morbidity experience, our
ability to generate investment earnings and our ability to maintain expenses in
accordance with pricing assumptions; (2) the amount of assets under management;
and (3) the maintenance of our target spreads between the rate of earnings on
our investments and credited rates on policyholders' account balances.
Transactions Affecting Comparability of Results of Operations
On May 18, 2001, pursuant to an Agreement and Plan of Merger, as amended (the
"Merger Agreement"), dated as of January 17, 2001, among FIC, InterContinental
Life Corporation ("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, FIC owned approximately 48.1% of ILCO's common
stock. Since ILCO was a wholly-owned subsidiary of FIC for the period from May
18, 2001 to December 31, 2001, the operations of ILCO are reported on a
consolidated basis with FIC in the year end 2001 financial statements. For the
period from January 1, 2001 to May 17, 2001, and for the years ended December
31, 2000 and December 31, 1999, FIC's net income includes its equity interest in
the net income of ILCO, with such equity interest being based on FIC's
percentage ownership of ILCO.
Prior to December 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building known as the Standard Life Building,
which building was owned by Investors Life. On December 29, 1999, Investors Life
donated the Standard Life Building to the Jackson Redevelopment Authority
("JRA"). Contemporaneously with the donation of the Standard Life Building,
Investors Life and FIC sold all of the adjacent parcels they owned to the JRA
for a total sale price of $2.5 million, which has been allocated according to
the respective ownership interests of Investors Life (approximately 59.28%) and
FIC (approximately 40.72%). The donation and sale was made pursuant to the terms
of the Donation, Purchase and Sale Agreement dated July 17, 1998. Investors Life
claimed an income tax deduction on its 2000 tax return for the donation of the
Standard Life Building of $864,231. The donation and sale transaction referenced
above resulted in a net of tax gain (GAAP basis) of $1.0 million for ILCO and
$0.4 million for FIC (or a combined total of $1.401 million) in 1999.
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Results of Operations - Three Years Ended December 31, 2001
For the year ended December 31, 2001, FIC's net income was $12,014,000 (basic
earnings of $1.54 per common share or diluted earnings of $1.52 per common
share) on revenues of $99,125,000 as compared to net income for the year ended
December 31, 2000, which was $8,779,000 (basic earnings of $1.74 per common
share or diluted earnings of $1.70 per common share) on revenues of $44,418,000
and net income for the year ended December 31, 1999, which was $9,149,000 (basic
earnings of $1.81 per common share or diluted earnings of $1.76 per common
share) on revenues of $46,244,000.
Earnings per share for the year ended December 31, 2001, were affected by the
increase in the number of FIC's common shares outstanding and the inclusion of
100% of the operating results of ILCO from the date of the Merger through
December 31, 2001. The increase in outstanding shares is attributable to the
shares issued to ILCO shareholders in connection with the Merger. As of December
31, 2001, the number of FIC's common shares outstanding was 9,498,847, as
compared to 5,054,661 as of December 31, 2000.
The increase in net income for the year 2001 was primarily attributable to the
Merger, which consolidated 100% of ILCO's net income subsequent to the May 18,
2001 Merger, with FIC's net income. Net income for the year 1999 was affected by
the inclusion of $409,000 of net gain from the sale of real estate located in
Jackson, Mississippi.
Revenues.
Premium revenues reported for traditional life insurance products are recognized
when due. Premium income, net of reinsurance ceded, for the year 2001, was $35.9
million, as compared to $33.1 million for the year 2000 and $34.0 million for
the year 1999. The consolidation of ILCO's operations following the Merger
contributed approximately $5 million and Family Life contributed approximately
$31 million to premium income for the year ended December 31, 2001. At Family
Life (which has been a subsidiary of FIC for all of the year-end periods covered
by this report), first year net collected premiums for traditional life
insurance products in 2001 were $3.4 million as compared to $2.2 million in
2000. The level of renewal premiums for traditional life insurance products at
Family Life for the year 2001 was $27.2 million, as compared to $31.4 million
for the year 2000 and $32.0 million for the year 1999. The decrease in renewal
premium is attributable to the decrease in the traditional life insurance book
of business.
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Income from universal life and annuity charges for the year ended December 31,
2001 was $27.7 million, as compared to $4.3 million for the year 2000 and $4.8
million in 1999. The consolidation of ILCO's operations following the Merger
contributed approximately $24 million to earned insurance charges for the year
ended December 31, 2001. At Family Life, earned insurance charges declined from
$4.3 million in the year 2000 to $3.4 million in the year 2001. The amount is
consistently decreasing because Family Life reinsures all of its new universal
life and annuity business with Investors Life and thus earned insurance charges
received are attributable to a closed, decreasing book of business. At Investors
Life and Investors-IN, earned insurance charges increased from $38.5 million in
the year 2000 to $39.5 million in the year 2001 (which includes the pre-Merger
and post-Merger charges). The face amount of in force universal life policies at
Family Life was $870.9 million at December 31, 2000 as compared to $721.1
million at December 31, 2001. The face amount of in force universal life
policies at Investors Life and Investors-IN was $4,692.7 million at December 31,
2000 as compared to $4,676.9 million at December 31, 2001.
Net investment income for the year ended December 31, 2001 was $30.7 million as
compared to $6.9 million for the year ended December 31, 2000 and $6.9 million
for the year ended December 31, 1999. Approximately $24 million of the increase
in net investment income for the year ended December 31, 2001 was attributable
to the consolidation of ILCO's operations for the period from May 18, 2001 to
December 31, 2001. At Investors Life and Investors-IN net investment income
decreased from $50.9 million in 2000 to $47.9 million in 2001. The decrease was
primarily attributable to lower interest rates on short-term investments as well
as the sale of investments to pay for the continued construction at River Place
Pointe. See "Investments - Real Estate" for a description of the River Place
Pointe investment. The level of net investment income contributed by the
investment portfolio of Family Life for the year ended December 31, 2001 was
$6.3 million. Net investment income at Family Life was adversely affected by the
decline in the level of interest income received from fixed income and
short-term investments. This decline is attributable to lower interest rates
during the period. The net investment income was approximately level from the
year ended 1999 and 2000 mainly due to the long term portfolio remaining level
while short term investments were decreasing and the short term rates were
increasing.
Net real estate income was $1.9 million for the year ended December 31, 2001, as
compared to $0 in 2000 and 1999. Real estate income is attributable to the
inclusion of ILCO's investment income with FIC's from the period from May 18,
2001 to December 31, 2001. Real estate income is earned from the leases on the
buildings at River Place Pointe, which is owned by Investors Life. Rental income
was received during the entire year 2001, while the buildings only produced
rental income for the second half of the year 2000.
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Benefits and Expenses.
Policyholder benefits and expenses were $27.7 million in 2001, as compared to
$13.5 million in 2000 and $12.6 million in 1999. The consolidation of ILCO's
operations for the period from May 18, 2001 to December 31, 2001 contributed
approximately $19 million to policyholder benefits and expenses for the year
ended December 31, 2001. At ILCO's insurance subsidiaries, the level of
policyholder benefits and expenses decreased from $32.5 million for the year
2000 to $30.0 million for the year 2001 (which includes the pre-Merger and
post-Merger expenses), which decrease is attributable to a decrease in death
benefit claims. At Family Life, the level of policyholder benefits and expenses
decreased from $13.5 million for the year 2000 to $10.1 million for the year
2001, which decrease is attributable to a decrease in death benefit claims as
well as a decrease in reserves due to a higher than expected lapse rates in
Family Life's traditional life business.
Interest expense on contract holders deposit funds was $19.9 million for the
year 2001, as compared to $2.2 million in each of the years 2000 and 1999. This
increase is primarily attributable to $17.5 million of interest expense on
contract holders deposit funds resulting from the consolidation of ILCO's
operations following the Merger. This expense is related to payment of interest
to policyholders for cash values accumulated in their accounts.
The expense related to the amortization of present value of future profits of
acquired businesses was $4.7 million for the year ended December 31, 2001, as
compared to $3.7 million at December 31, 2000 and $5.2 million at December 31,
1999. The consolidation of ILCO's amortization expense with FIC's contributed
approximately $1 million. The amortization of present value of future profits
decreased by $1.5 million from 1999 to 2000, which is in line with the expected
amortization of the remaining book of business. The amortization of present
value of future profits was relatively level from 2000 to 2001 due to higher
than expected lapses at Family Life, which created a higher rate of
amortization.
The costs related to acquiring new business, including certain costs of issuing
policies and certain other variable selling expenses (principally commissions),
are deferred policy acquisition costs. The expense related to the amortization
of deferred policy acquisition costs was $6.8 million for the year ended
December 31, 2001, $5.3 million for the year ended December 31, 2000, and $5.2
million for the year ended December 31, 1999. The amortization of deferred
policy acquisition costs for the current period includes costs associated with
Investors Life and Investors-IN only for the period from May 18, 2001 to
December 31, 2001, in the amount of approximately $0.5 million.
Operating expenses for 2001 were $23.0 million, as compared to $11.4 million on
2000 and $11.7 million in 1999. The consolidation of ILCO's operations for the
period from May 18, 2001 to December 31, 2001 contributed approximately $11
million to operating expenses for the year 2001. The level of operating expenses
for the year 2001 included certain non-recurring expenses related to the
favorable resolution of the vanishing premium litigation and the implementation
of the correction procedure set forth by the Internal Revenue Service in Rev.
Proc. 2001-42 for Modified Endowment Contracts. At Family Life, $4.7 million in
operating expenses was attributable to commissions paid. The decrease in
operating expenses of $365,000 from 1999 to 2000 is due to a reduction of
overall operating expenses in 2000 and the reduction of Y2K conversion expenses
incurred in 2000 as compared to 1999's expenses.
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Interest expense for 2001 was $0.9 million, as compared to $1.9 million in 2000
and $2.4 million in 1999. The decrease in the amount of interest expenses from
2000 to 2001 is attributable to the scheduled reduction in the amount of
outstanding indebtedness. This interest expense is related to the indebtedness
owed to Investors Life by Family Life Corporation and FIC and includes the
amount of interest for the period from January 1, 2001 to May 18, 2001. The
consolidation of ILCO's operations with those of FIC for periods following the
May 18th Merger results in the elimination of this interest expense in the
consolidated income statements of FIC and thus the post-Merger interest expense
is $0. The decrease of interest expenses from 1999 to 2000 was consistent with
the scheduled pay down of the above-mentioned debt to Investors Life.
The provision for federal income taxes was $5.3 million in 2001, as compared to
$1.3 million in 2000 and $1.2 million in 1999. The inclusion of ILCO's results
for the period from May 18, 2001 to December 31, 2001 contributed approximately
$2.6 million to the level of federal income taxes. Because of the Merger and
subsequent consolidation of FIC and ILCO's provision for federal income taxes,
FIC was not able to utilize the small company tax deduction, which provided
lower tax rates. The increase in federal income taxes due to the loss of this
deduction was $343,227. Further, for the year ended December 31, 2000 and 1999,
FIC and ILCO each paid, and were each able to deduct $1 million of excess
compensation each. Due to the Merger, the Company will incur approximately
$100,000 in additional federal income taxes in 2001 related to excess
compensation since ILCO will only be able to deduct approximately $750,000 of
Mr. Mitte's compensation for 2001.
Results of Operations - Three Months Ended December 31, 2001
as compared to the Three Months Ended December 31, 2000
For the three-month period ended December 31, 2001, FIC's net income was $3.4
million (basic and diluted earnings of $0.35 per common share) on revenues of
$32.4 million as compared to the net income of $2.2 million (basic earnings of
$0.43 and diluted earnings of $0.42 per common share) on total revenues of $10.6
million in the last three months of 2000. The increase in net income and total
revenues from the three-month period ended December 31, 2000 to the same period
in 2001 is primarily attributable to the consolidation of ILCO's operations into
FIC's Statements of Income for the fourth quarter of 2001.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows
to meet the cash requirements of business operations. FIC is an insurance
holding company whose principal assets consist of the outstanding capital stock
of its insurance subsidiaries - Family Life Insurance Company ("Family Life"),
Investors Life Insurance Company of North America ("Investors Life"), and prior
to February 19, 2002, Investors Life Insurance Company of Indiana
("Investors-IN"). Prior to the merger of FIC and ILCO on May 18, 2001, the
principal assets of FIC consisted of the common stock of its insurance
subsidiary, Family Life - and its equity ownership in ILCO. As a holding
company, FIC's ability to meet its cash requirements, pay interest on any debt,
pay expenses related to its affairs and pay dividends on its common stock
substantially depends upon dividends from its subsidiaries.
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Prior to June 2001, the principal source of liquidity for FIC and its
wholly-owned subsidiary, Family Life Corporation, consisted of the periodic
payment of principal and interest by Family Life pursuant to the terms of the
surplus debenture issued in connection with the Family Life acquisition from
Merrill Lynch. During 2001, Family Life made principal payments of $5.9 million
and interest payments of $0.2 million to Family Life Corporation pursuant to the
terms of the surplus debenture. The surplus debenture was completely paid off as
of June 30, 2001. For periods subsequent to June 30, 2001, FIC's available
source of liquidity will be dividends paid to it from its subsidiaries.
Applicable state insurance laws generally restrict the ability of insurance
companies to pay cash dividends in excess of prescribed limitations without
prior approval.
The ability of Family Life and Investors Life to pay shareholder dividends is
and will continue to be subject to restrictions set forth in the insurance laws
and regulations of Washington, their domiciliary state. Washington limits how
and when Family Life and Investors Life can pay shareholder dividends by (a)
including the "greater of" standard for payment of dividends to shareholders,
(b) requiring that prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and (c) requiring that cash dividends be paid
only from earned surplus. Under the "greater of" standard, an insurer may pay a
dividend in an amount equal to the greater of : (i) 10% of the policyholder
surplus or (ii) the insurer's net gain from operations for the previous year. In
2001, Investors Life paid a dividend to its parent corporation, ILCO, of
$11,082,586 (based upon earned surplus of $54.7 million and net gain from
operations of $11.1 million in the year 2000). ILCO, a holding company, does not
have any restrictions on payments of dividends and paid a dividend of
$11,082,586 to FIC in December 2001. Family Life did not have earned surplus in
2000 as defined by the regulations adopted by the Washington Insurance
Commissioner and, therefore, was not permitted to pay cash dividends during
2001. The $5.9 million in payments required by Family Life under the surplus
debenture (which was paid off in June 2001) contributed to Family Life's absence
of earned surplus in 2000. As of December 31, 2001, Investors Life had earned
surplus of $48.4 million and a net gain from operations of $8.3 million, and
Family Life had earned surplus of $0.3 million and a net gain from operations of
$4.4 million. Family Life's earned surplus in 2001 was negatively affected by a
$4.7 million increase in its reserves for flexible premium universal life
insurance. This increase was the result of an implementation of Washington's
interpretation with respect to reserve methodology for flexible premium
universal life insurance policies, which interpretation differs from that of the
NAIC.
Prior to the merger of Investors Life and Investors-IN in February 2002,
Investors-IN was 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. Investors-IN
had earned surplus of $26.5 million at December 31, 2001 and earned surplus of
$21.3 million at December 31, 2000. Investors-IN did not make any dividend
payments during 2001.
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Sources of cash for FIC's insurance subsidiaries consist of premium payments
from policyholders and annuity holders, charges on policies and contracts,
investment income, and proceeds from the sale of investment assets. These funds
are applied primarily to provide for the payment of claims under insurance and
annuity policies, payment of policy withdrawals, surrenders and loans, operating
expenses, taxes, investments in portfolio securities, and shareholder dividends.
FIC's cash and cash equivalents at December 31, 2001 was $7.1 million as
compared to $2.7 million at December 31, 2000 and $0.7 million at December 31,
1999. The $4.4 million increase in cash and cash equivalents at December 31,
2001 from 2000 was due primarily to a the Merger and the cash acquired in the
purchase. The increase in cash and cash equivalents from 1999 to 2000 was
primarily attributable to an increase in cash flow from investing activities due
to a decrease in short-term invested assets.
FIC's net cash flow used in operating activities was ($6.5) million for the year
2001, as compared to ($2.2) million for the year 2000 and ($0.5) million for the
year 1999. The decrease in cash used in operating activities of ($4.3) million
from 2000 to 2001 was attributable to a higher than expected level of surrenders
of insurance and annuity policies which contributed to a larger decrease in
policy liabilities. The decrease in cash used in operating activities from 1999
to 2000 can be attributed to an increase in deferred federal income taxes of
$2.0 million.
Net cash flow provided by investing activities was $12.0 million in 2001, as
compared to $9.1 million in 2000 and $1.7 million in 1999. The increase in cash
provided by investing activities from 2000 to 2001 was due to the purchase of
ILCO, which provided $9.1 million, and a $14.8 million increase in proceeds from
short-term investments. These amounts were offset by a ($18.1) million
capitalization of real estate. The increase in cash provided by investing from
1999 to 2000 was primarily attributable to proceeds from a net decrease in short
term investments.
Net cash flow used in financing activities was ($1.1) million in 2001, as
compared to ($4.8) million in 2000 and ($3.1) million in 1999. Payment of cash
dividends to stockholders attributed to $6.0 million of cash used in financing
for 2001, as compared to only $0.9 million in 2000 and $0 in 1999; however,
repayment of subordinated notes payable decreased from ($6.1) million in 2000 to
($1.5) million in 2001 due to the Merger. Contractholder deposits provided $35.9
million to cash from financing activities in 2001 and contractholder withdrawals
used ($27.7) million which was an increase from 2000 and 1999 due to the
inclusion of ILCO's cash flows for the period following the Merger.
A primary liquidity consideration with respect to life insurance and annuity
products is the risk of early policyholder and contractholder withdrawal.
Deposit fund liabilities for universal life and annuity products as of December
31, 2001 were $556.1 million. Individual life insurance policies are less
susceptible to withdrawal than are annuity contracts because policyholders may
incur surrender charges and undergo a new underwriting process in order to
obtain a new insurance policy. At December 31, 2001, the bulk of the liabilities
for contractholder deposit funds on FIC's balance sheet, $416.1 million, were
related to insurance products, as compared to only $140.0 million of annuity
product liabilities.
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The cash requirements of FIC, and its holding company subsidiary, Family Life
Corporation, consist primarily of its service of the indebtedness created in
connection with FIC's ownership of Family Life. As of December 31, 2001, the
investment portfolio of Investors Life included $29.2 million of notes
receivable from affiliates, represented by (i) a loan of $30 million by
Investors Life to Family Life Corporation made in July 1993, in connection with
the prepayment of indebtedness which had been previously issued to Merrill Lynch
as part of the 1991 acquisition of Family Life Insurance Company by a
wholly-owned subsidiary of FIC, and (ii) a loan of $4.5 million by Investors
Life to Family Life Insurance Investment Company made in July 1993, in
connection with the same transaction described above. Prior to September 12,
2001, the investment portfolio of Investors Life also included a $22.5 million
loan from Investors Life to Family Life Corporation and a $2.5 million loan from
Investors-CA (which was subsequently merged into Investors Life) to FIC and $2.0
million of additions to the $2.5 million note made in accordance with the terms
of such note, which loans were fully paid on September 12, 2001.
The provisions of the notes owned by Investors Life include the following
provisions: (a) the $30 million note provides for 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 provides for 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%.
As of December 31, 2001, the outstanding balance of such indebtedness was $29.2
million on the 1993 Subordinated Loan granted by Investors Life. Due to the
Merger, this indebtedness is not included as a liability on the consolidated
financial statements of FIC. FIC's other liquidity requirements relate
principally to the need for cash flow to meet operating expenses, as well as the
liabilities associated with its insurance subsidiaries' various life insurance
and annuity products.
Given the historical cash flow of our subsidiaries and the current financial
results, management believes that the cash, cash equivalents and short term
investments of FIC and its subsidiaries 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.
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Investments
Overall Composition of Investments.
Invested assets, excluding separate accounts, totaled $756.3 million and $99.1
million as of December 31, 2001 and December 31, 2000, respectively. The
increase is primarily attributable to the inclusion of ILCO's invested assets on
FIC's Consolidated Balance Sheets after the May 18th Merger. 66% of FIC's
invested assets are in fixed maturity securities, available for sale. All of
FIC's invested assets are invested in the United States. The most significant
differences between the portfolio composition as of December 31, 2001 as
compared to December 31, 2000 are investments in real estate, mortgage loans,
and fixed maturities held to maturity, as well as an increase in investments in
policy loans. Prior to the May 18, 2001 Merger, FIC did not have any invested
real estate, mortgage loans, or fixed maturities held to maturity.
The assets held by Family Life and Investors 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". We determine the
allocation of our assets primarily on the basis of cash flow and return
requirements of our products and secondarily by the level of investment risk.
Another key element of the Company's investment strategy is to avoid large
exposure in other investment categories which the Company believes carry higher
credit or liquidity risks, including private placements, partnerships and bank
participations. These categories accounted for only $45,479 of invested assets
at December 31, 2001 as compared to $0. The private placements are holdings of
Investors Life and thus were not on the consolidated balance sheet of FIC for
the year 2000.
Fixed Maturity Securities.
Our fixed maturity securities portfolio is predominately comprised of low risk,
investment grade, available for sale publicly traded corporate securities,
mortgage-backed securities and United States Government bonds. As of December
31, 2001, the market value of the fixed maturities available for sale segment
was $501.4 million as compared to an amortized cost of $496.7 million or an
unrealized gain of $4.7 million. The increase reflects unrealized gains on such
investments related to changes in interest rates subsequent to the purchase of
such investments. A portion ($0.8 million) of the unrealized gain has been
recorded as a decrease in deferred policy acquisition costs and present value of
future profits of acquired businesses on the consolidated balance sheet. The net
of tax effect of the remainder of this increase ($2.5 million) has been recorded
as accumulated other comprehensive income as an increase in shareholders'
equity.
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The investments of FIC's insurance subsidiaries in mortgage-backed securities
included collateralized mortgage obligations ("CMOs") of $170.7 million, and
mortgage-backed pass-through securities of $31.2 million, at December 31, 2001.
Mortgage-backed pass-through securities, sequential CMO's and support bonds,
which comprised approximately 46.8% of the book value of FIC's mortgage-backed
securities at December 31, 2001, are sensitive to prepayment and extension
risks. FIC's insurance subsidiaries have reduced the risk of prepayment
associated with mortgage-backed securities by investing in planned amortization
class ("PAC"), target amortization class ("TAC") instruments and scheduled
bonds. These investments are designed to amortize in a predictable manner by
shifting the risk of prepayment of the underlying collateral to other investors
in other tranches ("support classes") of the CMO. At December 31, 2001, PAC and
TAC instruments and scheduled bonds represented approximately 53.2% of the book
value of FIC's mortgage-backed securities. Sequential and support classes
represented approximately 31.3% of the book value of FIC's mortgage-backed
securities at December 31, 2001. In addition, FIC's insurance subsidiaries limit
the risk of prepayment of CMOs by not paying a premium for any CMOs. FIC's
insurance subsidiaries do not invest in mortgage-backed securities with
increased prepayment risk, such as interest-only stripped pass-through
securities and inverse floater bonds. FIC's insurance subsidiaries did not have
any z-accrual bonds as of December 31, 2001. The prepayment risk that certain
mortgage-backed securities are subject to is prevalent in periods of declining
interest rates, when mortgages may be repaid more rapidly than scheduled as
individuals refinance higher rate mortgages to take advantage of the lower
current rates. As a result, holders of mortgage-backed securities may receive
large prepayments on their investments which cannot be reinvested at an interest
rate comparable to the rate on the prepaying mortgages. For the year 2002, the
investment objectives of FIC's insurance subsidiaries include the making of
selected investments in CMOs.
The securities valuation office (SVO) of the National Association of Insurance
Commissioners evaluates all public and private bonds purchased as investments by
insurance companies. The SVO assigns one of six investment categories to each
security it reviews. Category 1 is the highest quality rating, and Category 6 is
the lowest. As of December 31, 2001, the majority of our bonds, 99.8%, are
investment grade (Category 1 and 2). The Company's fixed maturities portfolio
(including short-term investments), included only a non-material amount (0.2% of
total fixed maturities and short-term investments) of debt securities which, in
the annual statements of the companies as filed with state insurance
departments, were designated by the SVO as "3" (medium quality) or below. This
number is attributable to mortgage bonds which Investors Life owns in a
California utility, which has been downgraded to a "6" (lowest quality) rating
by the NAIC. As of December 31, 2001, Investors Life owned bonds in Southern
California Edison which were purchased for $0.98 million and had a market value
as of December 31, 2001 of $0.94 million. Prior to December 31, 2001, Investors
Life also owned mortgage bonds in Pacific Gas & Electric which were sold during
2001 at a loss of $170,263 and Southern California Edison which were sold during
2001 at a loss of $187,305, and Investors-IN also owned bonds in Southern
California Edison which were sold at a loss of $26,906 during 2001.
FIC's short-term investments consist primarily of U.S. Government bonds. The
level of short-term investments at December 31, 2001 was $138.3 million, as
compared to $15.6 million as of December 31, 2000. This increase is also
primarily attributable to the inclusion of the assets of ILCO in the
consolidated financial statements of FIC.
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<page>
Real Estate.
Invested real estate at December 31, 2001 was $61.0 million. At December 31,
2000, FIC did not have any assets invested in real estate. The change is
attributable to the consolidation of ILCO's financial results with FIC following
the May 18th Merger. The real estate investment is primarily related to the
development of the River Place Pointe project ("River Place Pointe") by
Investors Life, a subsidiary of ILCO. In October 1998, Investors Life purchased
River Place Pointe, two adjoining tracts of land located in Austin, Texas
totaling 47.995 acres. The aggregate purchase price for these tracts was $8.1
million. Investors Life obtained a Site Development Permit for the tracts from
the City of Austin allowing for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. Construction on the first section of the Project, which consists
of four office buildings, an associated parking garage, and related
infrastructure was completed during 2000 and 2001. Construction on the second
section continued during the third and fourth quarter of 2001, including work on
buildings six and seven. Completion of the entire project is expected by the end
of 2002.
As of December 31, 2001, Investors Life had expended $84.5 million in the
construction of River Place Pointe. Investors Life expects to pay $13.1 million
during 2002 to finish construction on the project. FIC and its insurance
subsidiaries occupy almost the entire Building One of River Place Pointe,
consisting of approximately 74,021 square feet of space. As of December 31,
2001, 289,873 rentable square feet of office space was leased and 98,623
rentable square feet was available for lease. Upon the completion of the second
section of the project, which includes three more office buildings, there will
be 294,398 additional rentable square feet available for lease. At December 31,
2001, the office vacancy rate in Austin, Texas, was 19.9% according to a study
released by the Federal Deposit Insurance Corporation. The study also found that
Austin had the highest percent of new office real estate space under
construction in relation to existing space at December 31, 2001.
Mortgage Loans.
As of December 31, 2001, only $4.7 million was invested in mortgage loans as
compared to $0 at December 31, 2000. The increase is due to the inclusion of
Investors Life's assets on FIC's consolidated balance sheet for the year 2001.
At December 31, 2000, ILCO's Balance Sheets included a $4.9 million investment
in mortgage loans. The Company does not make new mortgage loans on commercial
properties. Substantially all of the Company's mortgage loans were made by its
subsidiaries prior to their acquisition by the Company. At December 31, 2001,
none of the mortgage loans held by the Company had defaulted as to principal or
interest for more than 90 days, and none of the Company's mortgage loans were in
foreclosure.
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<page>
Policy Loans.
Policy loans totaled $49.8 million at December 31, 2001, as compared to $3.7
million at December 31, 2000. The increase was attributable to the inclusion of
ILCO's assets on the Consolidated Balance Sheets following the Merger. ILCO's
Balance Sheets at December 31, 2000 included $48.4 million in policy loans.
Management believes that the absence of "high-yield" or "non-investment grade"
investments (as defined above) in the portfolios of FIC's life insurance
subsidiaries 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.
Critical Accounting Policies
The financial statements contain a summary of FIC's critical accounting
policies, including a discussion of recently-issued accounting pronouncements.
Certain of these policies are considered to be important to the portrayal of
FIC's financial condition, since they require management to make difficult,
complex or subjective judgments, some of which may relate to matters that are
inherently uncertain. These policies include valuation of : investments,
deferred acquisition costs and present value of future profits, and future
policy benefits. For the year 2001, the Company's critical accounting policies
also included the purchase accounting for ILCO.
Investments.
The Company's investments primarily consist of fixed maturity securities, which
include bonds, notes and redeemable preferred stocks. Fair values of investments
in fixed securities are based on quoted market prices or dealer quotes. Fixed
maturities are classified as "available for sale" and are reported at fair
value, with unrealized investment gains and losses, net of income taxes,
credited or charged directly to shareholder's equity. When an impairment of the
value of an investment is considered other than temporary, the decrease in value
is reported in net income as a realized investment loss and a new cost basis is
established.
Deferred Acquisition Costs and Present Value of Future Profits.
Costs of acquiring individual life insurance and annuities, principally
commissions and certain expenses related to policy issuance, underwriting and
marketing, all of which vary with and are primarily related to the production of
new business, are deferred. Acquisition costs relating to traditional life
insurance, including term insurance, are amortized in relation to anticipated
premiums. Universal life costs are amortized in relation to estimated gross
profits, and annuity contracts employ a level yield method. For life insurance,
a 15 to 20-year amortization period is used, and a 7 to 20-year period is
employed for annuities.
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<page>
Future Policy Benefits.
Future policy benefits comprise 15% of FIC's total liabilities at December 31,
2001. These liabilities are estimated using actuarial methods based on
assumptions about premiums, interest yields, investment returns, expenses,
mortality, morbidity, and persistency. These assumptions consider Company
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration.
Purchase Accounting for ILCO.
The acquisition of ILCO was accounted for as a purchase; accordingly, the
results of ILCO's operations since the May 18, 2001 Merger are included in FIC's
consolidated results of operations at December 31, 2001. The fair values of the
assets acquired and liabilities assumed at the date of acquisition were
estimated based on an analysis, as of May 18, 2001, of the acquired book of
business. The allocation of the purchase price to the net assets acquired
resulted in excess of net assets acquired over cost, or negative goodwill.
Upon adoption of Statement of Financial Accounting Standards No. 141 (FAS 141),
"Business Combinations," during the first quarter of 2002, the amount of any
unamortized deferred credit related to the negative goodwill arising from the
Merger shall be recognized and reported as the effect of a change in accounting
principle. The effect of the accounting change and related income tax effects
shall be presented in the income statement between the captions "extraordinary
items" and "net income".
For the period from January 1, 2001 to May 17, 2001, and for the years 2000 and
1999, FIC's net income includes its equity interest in the net income of ILCO,
with such equity interest being based on FIC's percentage ownership of ILCO.
For a further discussion of accounting standards, see Note 1 to our audited
consolidated financial statements, beginning on page F-13.
Events of September 11, 2001
Family Life incurred and paid $155,000 of death benefits as a result of the
September 11, 2001 events. The Company is not aware of any unreported losses or
claims resulting of such events.
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<page>
Subsequent Events
Merger of Investors Life and Investors-IN.
On February 19, 2002, Investors-IN was merged with and into Investors Life,
whereby Investors Life was the surviving corporation. The merger was approved by
the Washington Department of Insurance in January 2002 and by the Indiana
Department of Insurance in February 2002. Investors Life will assume all of the
assets and liabilities of Investors-IN
.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
General. FIC's principal assets are financial instruments, which are
subject to market risks. Market risk is the risk of loss arising from adverse
changes in market rates, principally interest rates on fixed rate investments.
For a discussion of the Company's investment portfolio and the management of
that portfolio to reflect the nature of the underlying insurance obligations of
the Company's insurance subsidiaries, please refer to the sections entitled
"Acquisition of ILCO" and "Investment of Assets" in Item 1 of this report and
the information set forth in Item 7, "Management's Discussion and Analysis of
Financial Condition and Operations - Investments".
The following is a discussion of the Company's primary market risk sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business operations of the Company, such
as the reinsurance recoveries on reinsurance treaties with third party insurers.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company does not use derivative financial instruments.
Interest Rate Risk The Company manages the interest rate risk inherent in
our assets relative to the interest rate risk inherent in our liabilities.
Generally, we manage interest rate risk based on the application of a commonly
used model. The model projects the impact of interest rate changes on a range of
factors, including duration and potential prepayment. For example, assuming an
immediate increase of 100 basis points in interest rates, the net hypothetical
loss in fair market value related to the financial instruments segment of the
Company's balance sheet is estimated to be $24.6 million at December 31, 2001
and $3.1 million at December 31, 2000. For purposes of the foregoing estimate,
fixed maturities, including fixed maturities available for sale, and short-term
investments were taken into account. The market value of such assets was $640.7
million at December 31, 2001 and $95.4 million at December 31, 2000.
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<page>
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $209.9 million at December
31, 2001 and $31.6 million at December 31, 2000. Assuming an immediate increase
of 100 basis points in interest rates, the net hypothetical loss in the fair
market value related to such mortgage-backed securities is estimated to be $6.7
million at December 31, 2001 and $1.4 million at December 31, 2000.
Separate account assets have not been included, since gains and losses on those
assets generally accrue to the policyholders.
The Company does not use derivative financial instruments to manager our
exposure to fluctuations in interest rates.
The hypothetical effect of the interest rate risk on fair values was estimated
by applying a commonly used model. The model projects the impact of interest
rate changes on a range of factors, including duration and potential prepayment.
Item 8. Financial Statements and Supplementary Data
The following Financial Statements of the Registrant have been filed as part of
this report:
1. Report of PricewaterhouseCoopers LLP, Independent Accountants, dated March
29, 2002.
2. Consolidated Balance Sheets, as of December 31, 2001 and December 31, 2000.
3. Consolidated Statements of Income for the years ended December 31, 2001,
2000 and 1999.
4. Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2001, 2000 and 1999.
5. Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999.
6. Notes to Consolidated Financial Statements.
7. Consolidated Financial Statement Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No independent accountant who audited the Registrant's financial statements has
resigned or been dismissed during the two most recent fiscal years.
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<page>
Part III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
The names and ages of the current directors of the Registrant, their principal
occupations or employment during the past five years and other data regarding
them are set forth below. All of the directors, other than Hans Annarino and
David Caldwell, were elected at the 2001 annual shareholders meeting held in
August 2001. Hans Annarino was appointed as a director in December 2001 and
David Caldwell was appointed as a director in January 2002, to fill vacancies
created by resignations of two directors. The data supplied below is based on
information provided by the directors, except to the extent that such data is
known to the Registrant.
<table>
<s> <c> <c> <c>
Name Age Since Director and Other Information
Hans Annarino 59 2001 Director and Vice President of FIC since December 2001;
Regional Vice President of Family Life Insurance
Company from 1991 through December 2001.
John D. 59 1991 Director of FIC since 1991. Vice President, Investment
Barnett Professionals, Inc. from 1996 to present. Vice President,
Investments of Prudential Securities from 1983 to 1996.
David G. 50 2002 Director of FIC since January 2002. Private legal practice
Caldwell since 1997.
S. Tim Casey 59 2001 Director of FIC since June 2001; Director and Senior
Vice President of FIC Realty Services, Inc., and FIC
Property Management for the past five years.
Jeffrey H. 49 1995 Director of FIC since May 1995. Vice President of FIC
Demgen since August 1996. Vice President and Director of ILCO
since August 1996. Director of Family Life since October
1992. Executive Vice President of Family Life since
August 1996. Senior Vice President of Family Life from
October 1992 to August 1996. Executive Vice President
and Director of Investors Life since August 1996. Senior
Vice President and Director of Investors Life from
October 1992 to June 1995. Executive Vice President
and Director of Investors-IN since August 1996. Senior
Vice President of Investors-IN from October 1992 to
June 1995.
</table>
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<page>
<table>
<s> <c> <c> <c>
Name Age Since Director and Other Information
Theodore A. 62 1996 Vice President and Director of FIC since August 1996.
Fleron Vice President and Director of ILCO since May 1991.
Senior Vice President, General Counsel, Assistant
Secretary and Director of Investors Life and Investors-IN
since July 1992 and Secretary since September 2001.
Senior Vice President, General Counsel, Director and
Assistant Secretary of Family Life since August 1996 and
Secretary since September 2001.
W. Lewis 70 2001 Director of FIC since June 2001 and from 1979 to July
Gilcrease 1991. Director of ILCO from 1988 to May 2001.
Dentist practicing in San Marcos, Texas.
M. Scott Mitte 45 2000 Director of FIC since October 2000. Executive Director
and Vice-President of the Roy F. and Joann Cole Mitte
Foundation since 1999.
Roy F. Mitte 70 1976 Chairman of the Board, President and Chief Executive
Office of FIC since 1976. Chairman of the Board,
President and Chief Executive Officer of ILCO and
Investors-IN since 1985. Chairman of the Board,
President and Chief Executive Officer of Investors Life
since December 1988. Chairman of ILG Securities
Corporation since December 1988. Chairman of the
Board, President and Chief Executive Officer of Family
Life since June 1991.
Elizabeth T. 52 2001 Director of FIC since June 2001. Director of ILCO from
Nash 1998 to May 2001. Member of the Board of Regents,
Texas State University System from 1993 through 1999,
Chairman from 1997 to 1998, Vice-Chairman from 1996
to 1997. Board member of the Development Foundation
of Southwest Texas State University since 1987, Chairman
from 1992 to 1997, Vice-Chairman from 1989 to 1992.
Frank Parker 72 1994 Director of FIC since May 1994. Private investor. Prior
to June 1997, President of Gateway Tugs, Inc. and Par-
Tex Marine, Inc., both of which are located in Brownsville,
Texas and were engaged in operating and chartering
harbor and intracoastal tug boats.
Thomas C. 60 1996 Director of FIC since August 1996. Vice President and
Richmond Secretary of FIC since September 2001. Director of
ILCO from March 1994 to August 1996 and from
December 2001 to present. Executive Vice President of
Investors Life, Family Life and Investors-IN since
September 2001. Senior Vice President from January
1993 to September 2001 of Investors Life and Investors-IN
</table>
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<page>
(b) Executive Officers of the Registrant
The following table sets forth the names and ages of the current Executive
Officers of Registrant, together with all positions and offices held by them
with the Registrant. Officers are elected to serve at the will of the Board of
Directors or until their successors have been elected and qualified. All
executive officers listed below served in such position during the entire year
2001 except Thomas C. Richmond was elected Vice President of the Company in
September 2001 and Hans Annarino was elected Vice President of the Company in
December 2001.
Name Age Positions and Offices
Roy F. Mitte 70 Chairman of the Board,
President and Chief
Executive Officer
Jeffrey H. Demgen 49 Vice President
Thomas C. Richmond 60 Vice President
Hans Annarino 59 Vice President
In May 1991, Roy F. Mitte suffered a stroke, resulting in partial paralysis
affecting his speech and mobility. Mr. Mitte continues to make the requisite
decisions in his capacity as Chief Executive Officer, although his ability to
communicate and his mobility are impaired.
(c) Identification of certain significant employees
Not applicable.
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<page>
(d) Family relationships
M. Scott Mitte is Roy F. Mitte's son.
(e) Business experience
All of the executive officers of the Company are members of the Board of
Directors, and their business experience has been outlined in Item 10 (a).
(f) Involvement in Certain Legal Proceedings
None.
(g) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 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 Form 5s were required, the Company believes that
during the period from January 1, 2001 through December 31, 2001, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with.
Item 11. Executive Compensation
Composition of Board
The business of FIC is managed under the direction of its board of directors.
The board of directors currently consists of twelve directors, five of whom are
independent directors.
Summary Compensation Table
The following table sets forth information concerning the compensation of the
Company's Chief Executive Officer and each of the Registrant's four most highly
compensated executive officers other than the CEO who were serving as executive
officers at the end of 2001 and received cash compensation exceeding $100,000
during 2001:
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<page>
<table>
<s> <c> <c> <c> <c> <c>
Annual Compensation Long Term Compensation
Name and Other Annual Stock Options All Other
Principal Position Year Salary(1) Bonus Compensation (Shares)(4) Long Term
(2) (3) Compensation(5)
Roy F. Mitte, 2001 $514,904 $2,500,000 $18,500 -0- -0-
Chairman, 2000 503,500 2,500,000 -0- -0- -0-
President and 1999 503,500 2,500,000 -0- 10,000 -0-
Chief Executive
Officer
James M. Grace, 2001 195,000 327,846 3,000 -0-
Vice President 2000 195,000 25,000 -0- -0- 6,337
and Treasurer(7) 1999 195,000 20,000 191,215 10,000 1,600
Steven P. 2001 145,192 3,519 2,500 -0-
Schmitt, Vice 2000(6) 108,846 16,000 -0- -0- 2,004
President and 1999 10,000
Secretary(7)
Jeffrey H. 2001 163,862 -0- 18,000 -0-
Demgen, Vice 2000 160,000 20,000 -0- -0- 2,021
President 1999 150,000 20,000 -0- 10,000 1,600
Thomas C. 2001(6) 138,846 -0- 20,690 -0-
Richmond, Vice 2000 -0-
President 1999 10,000
</table>
(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.
The executive officers of FIC have also been executive officers of Family Life,
Investors Life and Investors-IN, 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 for 1999 and 2000 (i) Mr.
Mitte: $1,111,821 and $1,111,821, respectively; (ii) Mr. Grace: $62,694 and
$64,152, respectively; (iii) Mr. Schmitt: $39,888 (for the year 2000 only); and
(iv) Mr. Demgen: $76,500 and $81,000 respectively. In the year 2001, executive
officer payments have been apportioned based on a cost allocation agreement
among the life insurance subsidiaries and FIC.
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<page>
(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 Exercises and Value
Unexercised in 2001" below. In 2001, Mr. Mitte, Mr. Grace Mr. Schmitt and Mr.
Demgen exercised options to purchase 2,000 shares of ILCO common stock under the
Stock Option Plan. Mr. Richmond exercised options to purchase 2,000 shares of
ILCO common stock and 2,200 shares of FIC stock under the Stock Option Plan.
Also includes the value realized by Mr. Grace in connection with the exercise of
stock options in 1999. Mr. Grace exercised options to purchase 24,000 shares of
ILCO's common stock under the former ILCO Non-Qualified Option Plan.
(4) The data in this column represents the number of ILCO share options granted
to each of the above- named executive officer in 1999. The shares were granted
pursuant to the Stock Option Plan. Subsequent to 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.
(5) All Other Compensation includes:
(i) The executive officers of the Company participate in the
InterContinental Life Corporation Employees Savings and Investment
Plan ("401K Plan"). For the years 1999 and 2000, ILCO contributed the
following amounts and for the year 2001 FIC contributed the following
amount to the named participant's 401K Plan account: (a) Mr. Grace:
$1,600, $2,021 and $3,400 respectively, (b) Mr. Demgen: $1,600, $
2,021 and $3,303 respectively, (c) Mr. Schmitt: $2,004 in the year
2000 and $2,903 in the year 2001; and (d) Mr. Richmond: $2,776 for the
year 2001 only.
(ii) amounts paid by ILCO to Mr. Grace to supplement his benefits under
ILCO's Pension Plan. The Pension Plan supplement relates to each of
the past service years for Mr. Grace which were affected by the
limitation on compensation which the Pension Plan may take into
account for benefit accrual purposes. Under federal pension rules, an
employee's benefit under a qualified pension plan, such as the ILCO
Pension Plan, is limited to certain maximum amounts.
-45-
<page>
(6) Steven P. Schmitt was appointed as an executive officer in the year 2000,
thus only his compensation for the years 2000 and 2001 are disclosed. Thomas C.
Richmond was appointed as an executive officer in the year 2001, thus only his
compensation for the year 2001 is included.
(7) James M. Grace and Steven P. Schmitt were both officers and directors of FIC
during 2001; however, both retired from active service at December 31, 2001.
Option Grants in 1999
In 1999, the persons named in the Summary Compensation Table, above, in addition
to 41 other employees of ILCO, its subsidiaries and affiliates, 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. As of March 6, 2002, options to purchase 64,750 shares of FIC
Common Stock had been exercised, options to purchase 312,000 shares of FIC
Common Stock remain to be exercised pursuant to the terms of the Stock Option
Plan, and options to exercise 34,650 shares of FIC Common Stock had terminated
since the date of the Merger. Additionally, subsequent to the Merger, 22,000
options to purchase shares of FIC Common Stock were granted pursuant to the
Stock Option Plan.
Aggregated Option Exercises and Value Unexercised in 2001
The following table sets forth information concerning each exercise of stock
options during 2001 by each of the individuals who were executive officers of
the Company as of December 31, 2001, as well as the value, as of December 31,
2001, of unexercised options of such executive officers. The value of
unexercised in-the-money stock options at December 31, 2001 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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<page>
<table>
<s> <c> <c> <c> <c>
Aggregated Option Exercises in 2001
and 2001 Option Values
Number of Value of
Unexercised Unexercised
Options Held at In-the-Money
December 31, 2001 Options at
Shares Acquired Exercisable/ December 31, 2001
Name on Exercise (#)(1) Value Realized ($) Unexercisable Exercisable / Unexercisable
(2)
Roy F. Mitte 2,000 $18,500 2200 / 6600 $ 11,810 $ 35,430
James M. Grace 2,000 3,000 2200 / 0 $ 11,810 $ 0
Steven P. Schmitt 2,000 2,500 2200 / 0 $ 11,810 $ 0
Jeffrey H. Demgen 2,000 18,000 2200 / 6600 $ 11,810 $ 35,430
Thomas C. Richmond 2,000
2,200 20,690 0 / 6600 $ 0 $ 35,430
</table>
(1) Each exercise of 2,000 shares listed in the above table were exercises of
ILCO Common Stock granted under the Stock Option Plan prior to May 18, 2001. Mr.
Richmond also exercised 2,200 shares of FIC Common Stock subsequent to May 18,
2001.
(2) Based on the closing price of the Company's common stock on NASDAQ (Symbol:
FNIN) on December 31, 2001 ($13.55).
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.
Years of Service
<table>
<s> <c> <c> <c> <c> <c>
30 or
Remuneration 15 20 25 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
</table>
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<page>
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 2001 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, 2001 being shown in parentheses:
Mr. Mitte, $160,000 (14 years); Mr. Grace, $160,000 (14 years); Mr. Demgen,
$160,000 (9 years); Mr. Schmitt, $145,192 (30 years); and Mr. Richmond, $138,846
(13 years).
Compensation of Directors
Directors who are not officers or employees of the Company are paid a $5,000
annual fee, and are compensated $1,000 for each regular or special meeting of
the Board of Directors which they attend in person. In the case of telephonic
meetings of the Board, non-employee directors who participate in such telephonic
meetings are compensated $500 for such meeting. Directors who participate via
telephone in a regular or special meeting which is held by other than conference
telephone are not entitled to a fee for such a meeting.
Non-employee directors serving on committees of the Board are compensated in the
amount of $500 for each committee meeting they attend whether such participation
is in person or by telephone, provided that the committee meeting is held on a
day other than that on which the Board meets.
Employment Agreements and Change In Control Arrangements
Roy F. Mitte. Mr. Mitte and FIC are 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, provides for five-year terms and for automatic renewals for
successive five-year periods, unless otherwise terminated in accordance with the
terms of the agreement. The original agreement provided that the level of
compensation was to be fixed each year by agreement, but not less than $120,000
per year, and further provided that Mr. Mitte is entitled to reimbursement for
reasonable business expenses, and to participate in all fringe benefit plans and
arrangements available generally to employees of the Company. In 2001, the
employment agreement was amended as follows: (i) the minimum level of
compensation was increased to $503,500; (ii) Mr. Mitte is entitled to receive an
annual bonus in an amount to be determined by the Compensation Committee of the
Board of Directors; (iii) upon the occurrence of a change in control (as defined
in the amendment), the amount of the bonus is to be fixed at the rate of $2.5
million per year; (iv) in the event of the death of Mr. Mitte, payments would
continue to his estate for the remainder of the term of his employment then in
effect, and that the amount of such payments shall be based on both that monthly
base salary then in effect and the bonus amount paid to him by FIC and ILCO for
the year 2001; and (v) if the employment of Mr. Mitte is terminated during the
term of the agreement, he is entitled to receive the payments otherwise due for
the remainder of the then current term.
-48-
<page>
James Grace. On January 8, 2001, Mr. Grace and ILCO entered into an
employment agreement which superceded a prior employment agreement. The
obligations under the agreement were assumed by FIC subsequent to the Merger.
The agreement provided for the employment of Mr. Grace through August 12, 2005
at a salary of $195,000 per year. Mr. Grace's obligations were to perform the
duties he performed at the time of the effective date of the agreement, or other
similar duties as may be assigned from time to time. The agreement allowed for
termination by the Company only in limited circumstances. It further provided
that in the event of a change of control of the Company, the remaining amounts
payable under this agreement shall become immediately due and payable in one
lump sum and the agreement shall terminate.
In January 2002, the Company and Mr. Grace entered into a modification of
the agreement, whereby the Company paid to Mr. Grace the present value of the
remaining installments under the agreement. The amount of the payment, prior to
withholdings, was $636,311.43. The Company also agreed to pay the full cost of
medical insurance coverage for Mr. Grace for the period from January 2002 to
August 2005. In connection with the modification of the agreement, Mr. Grace
submitted his resignation as an officer and director of the Company and its
subsidiaries. In addition, the Company purchased from Mr. Grace 27,424 shares of
FIC common stock at a price of $16.80 per share, which purchase was made in
accordance with the provisions of an agreement approved by FIC's board of
directors in May 2001.
Compensation Committee Interlocks and Insider 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 members of the
Compensation Committee are John D. Barnett and Frank Parker, both outside
directors. The Compensation Committee met once in 2001.
Roy F. Mitte determines the compensation of all executive officers of the
Company, other than the Chief Executive Officer. Mr. Mitte is the Chairman of
the Board, President and Chief Executive Officer of FIC. He also determines the
compensation of all executive officers of FIC, other than the Chief Executive
Officer.
-49-
<page>
Board Compensation Committee Report on Executive Compensation
The information under the caption "Board Compensation Committee Report on
Executive Compensation" is incorporated by reference from FIC's 2001 annual
proxy statement, to be filed by April 30, 2002.
Performance Graph
The information under the caption "Performance Graph" is incorporated by
reference from FIC's 2001 annual proxy statement, to be filed by April 30, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table presents information as of March 6, 2002 as to all persons
who, to the knowledge of the Registrant, were the beneficial owners of five
percent (5%) or more of the common stock of the Registrant.
<table>
<s> <c> <c> <c>
Amount and Nature
Name and Address of of Beneficial Percent
Beneficial Owner Ownership of Class
Roy F. and Joann Cole Mitte
Foundation
6500 River Place Blvd.
Austin, Texas 78730 1,552,206(1) 16.31%
Roy F. Mitte
6500 River Place Blvd.
Austin, Texas 78730 1,589,807(1,2) 16.70%
Family Life Insurance Company
6500 River Place Blvd.
Austin, Texas 78730 648,640 6.38%(3)
Investors Life Insurance
Company of North America
6500 River Place Blvd.
Austin, Texas 78730 1,427,073(4) 13.04%(5)
Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109 1,307,020(6) 13.428%
Wellington Management
Company, LLP
75 State Street
Boston, MA 02109 560,200(7) 5.88%
</table>
-50-
<page>
(1) The Roy F. and Joann Cole Mitte Foundation is a non-profit
corporation/membership organization and its two members are Roy F. Mitte
and Joann Cole Mitte. The Internal Revenue Service has determined that the
Foundation is exempt from federal income tax under section 501(a) of the
Internal Revenue Code (the "Code") as an organization described in section
501(c)(3) of the Code. Roy F. Mitte is also Chairman, President and Chief
Executive Officer of both FIC and ILCO. For purposes of this table, Mr.
Mitte is deemed to have beneficial ownership of the shares owned by the
Foundation.
(2) Includes 35,401 shares allocated to Mr. Mitte's account under the 401K Plan
and 2,200 shares which may be acquired pursuant to options which are
exercisable within 60 days.
(3) Assumes that outstanding stock options or warrants held by non-affiliated
persons have not been exercised and that outstanding stock options held by
Family Life have been exercised.
(4) Of such shares, 262,980 shares are owned by Investors Life, 663,682 shares
were owned by Investors-IN, prior to the merger of Investors-IN into
Investors Life and 500,411 shares are issuable upon exercise of an option
held by Investors Life. Investors Life is a direct subsidiary of ILCO.
Investors-IN is a direct subsidiary of Investors Life. All shares are held
as treasury shares.
(5) Assumes that outstanding stock options or warrants held by non-affiliated
persons have not been exercised and that outstanding stock options held by
Investors Life have been exercised.
(6) As reported to the Company on a Schedule 13(G) filed on June 11, 2001, by
FMR Corporation, the parent company of Fidelity Management & Research
Company ("Fidelity") and Fidelity Management Trust Company. The Company
also notes that Fidelity filed a Schedule 13G/A on February 13, 2001,
reporting that its beneficial ownership had increased to 340,000 shares.
According to the Schedule 13(G) filings, as amended, Fidelity acts as
investment advisor to the Fidelity Low-Priced Stock Fund, a registered
investment company, and the Fund is the beneficial owner of 340,000 shares
of FIC common stock.
-51-
<page>
(7) As reported on a Schedule 13(G) filed by Wellington Management Company, LLP
("WMC") on February 14, 2001. According to the Schedule 13(G) filing, WMC
acts as investment advisor to certain clients of WMC and such clients have
the right to receive, or the power to direct the receipt of, dividends
from, or the proceeds from the sale of, such securities. The filing further
states that no such client is known to have such right or power with
respect to more than five percent of the common stock of the Company.
The following table contains information as of March 6, 2002 as to the common
stock of FIC beneficially owned by each director and executive officer and by
all executive officers and directors of FIC as a group. The information
contained in the table has been obtained by FIC from each director and executive
officer, except for the information known to FIC. Except as indicated in the
notes to the table, each beneficial owner has sole voting power and sole
investment power as to the shares listed opposite his name.
Amount and Nature of Percent of
Name Beneficial Ownership Class
Hans Annarino 8,140 (2,4) *
John Barnett 2,000 *
David G. Caldwell 7 *
S. Tim Casey 13,078 (2,3) *
Jeffrey H. Demgen 9,759 (2) *
Theodore A. Fleron 23,557 (2,3) *
W. Lewis Gilcrease -0-
Roy F. Mitte 1,589,807 (1,2,3) 16.70 %
Michael Scott Mitte 45 *
Elizabeth T. Nash 220 *
Frank Parker 12,000 *
Thomas C. Richmond 16,436 (2) *
All Executive Officers,
and Directors as
a group (12 persons) 1,675,049 17.58 %
* Less than 1%.
(1) The shares are owned by the Roy F. and Joann Cole Mitte Foundation, a
non-profit corporation/membership organization with two members, Roy F.
Mitte and Joann Cole Mitte. The Internal Revenue Service has determined
that the Foundation is exempt from federal income tax under section 501(a)
of the Internal Revenue Code (the "Code") as an organization described in
section 501(c)(3) of the Code. Roy F. Mitte is also Chairman, President and
Chief Executive Officer of FIC. For purposes of this table, Mr. Mitte is
assumed to have beneficial ownership of the shares owned by the Foundation.
-52-
<page>
(2) Includes shares beneficially acquired through participation in the
Company's 401K Plan and/or the Employee Stock Purchase Plan, which are
group plans for eligible employees.
(3) Include shares issuable upon exercise of options granted under the Stock
Option Plan to executive officers and directors who are also employees of
the Company or its subsidiaries, to the extent that such options are
exercisable within 60 days of March 6, 2002.
(4) Includes 2,157 shares owned by Mr. Annarino's spouse.
Item 13. Certain Relationships and Related Transactions
For the period January 1, 2001 to December 31, 2001, the Registrant reports the
following information in accordance with the provisions of section 229.404 of
the Regulations of the U.S. Securities and exchange Commission. Management
believes that the transactions described herein were in the ordinary course of
business and on terms as favorable to the Registrant and its subsidiaries as if
the transactions had involved unaffiliated persons or organizations.
(a) 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 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. 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.
-53-
<page>
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 (c)
the $4.5 million note was amended to provide for forty quarterly principal
payments, in the amount of $24,531 each for the period December 12, 1996 to
September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the
final quarterly principal payment is due on September 12, 2006; the
interest rate on the note remains at 9%.
(b) 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 $1,591,341, Investors
Life paid $1,687,304, and Investors-IN paid $606,466 to FIC Computer for
data processing services provided during 2001.
(c) 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.
(d) 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.
(e) On January 8, 2001, the Company donated $375,000 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 16.31%
of the outstanding shares of FIC's common stock. The sole members of the
Foundation are Roy F. Mitte, Chairman, President and Chief Executive
Officer of FIC, ILCO and their insurance subsidiaries, and his wife, Joann
Cole Mitte.
-54-
<page>
(f) On January 2, 2002, FIC made a donation of $1,000,000 to the Foundation.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents have been filed as part of this report:
1. Financial Statements (See Item 8)
The following consolidated financial statements of Financial
Industries Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Income, for years ended December 31, 2001,
2000 and 1999
Consolidated Statements of Changes in
Shareholders' Equity, for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statement of Cash Flows, for the
years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedules of Financial
Industries Corporation and Subsidiaries are included:
Schedule I-Summary of Investments
Other Than Investments in Related Parties
Schedule II - Condensed Financial Statements
of Registrant
Schedule IV - Reinsurance
-55-
<page>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.
3. Exhibits filed with this report or incorporated herein by reference are
as listed in the Index to Exhibits on Page Ex-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2001.
-56-
<page>
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/ Roy F. Mitte By:/s/ Jeffrey H. Demgen
Roy F. Mitte, Chairman of Jeffrey H. Demgen, Treasurer,
the Board, President and Principal Accounting and
Chief Executive Officer and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 2002.
/s/ Roy F. Mitte /s/ Hans Annarino
Roy F. Mitte, Director Hans Annarino, Director
/s/ Jeffrey H. Demgen /s/ David G. Caldwell
Jeffrey H. Demgen, Director David G. Caldwell, Director
/s/ S. Tim Casey /s/ Thomas C. Richmond
S. Tim Casey, Director Thomas C. Richmond, Director
/s/ Theodore A. Fleron /s/ M. Scott Mitte
Theodore A. Fleron, Director M. Scott Mitte, Director
/s/ John D. Barnett /s/ Elizabeth T. Nash
John D. Barnett, Director Elizabeth T. Nash, Director
/s/ Lewis W. Gilcrease
Lewis W. Gilcrease, Director
/s/ Frank Parker
Frank Parker, Director
-57-
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
FORM 10-K--ITEM 14 (a) (1) and (2)
LIST OF FINANCIAL STATEMENTS
TABLE OF CONTENTS
(1) The following consolidated financial statements of Financial Industries
Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants..................................F-2
Consolidated Balance Sheets,
December 31, 2001 and 2000......................................F-3
Consolidated Statements of Income, for the
years ended December 31, 2001, 2000 and 1999....................F-5
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999................................F-7
Consolidated Statements of Cash Flows, for
the years ended December 2001, 2000 and 1999....................F-10
Notes to Consolidated Financial Statements......................F-13
(2) The following consolidated financial statement schedules of Financial
Industries Corporation and Subsidiaries are included:
Schedule I - Summary of Investments - Other
Than Investments in Related Parties.............................F-49
Schedule II - Condensed Financial Information of Registrant........F-50
Schedule III - Supplementary Insurance Information.................F-53
Schedule IV - Reinsurance..........................................F-54
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.
F-1
<page>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Financial Industries Corporation:
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page F-1 present fairly, in all
material respects, the financial position of Financial Industries Corporation
and its subsidiaries (the "Company") at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the index appearing under Item
14(a)(1) and (2) on page F-1 present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 29, 2002
F-2
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<table>
<s> <c> <c>
December 31,
2001 2000
ASSETS (in thousands)
Investments other than investments in affiliate:
Fixed maturities held to maturity, at amortized cost (market $ 1,029 $ -0-
value approximates $1,028 at December 31, 2001)
Fixed maturities available for sale, at market value (amortized
cost of $496,704 and $78,249 at December 31, 2001 and 2000) 501,395 79,786
Equity securities, at market value (cost approximates $59 at
December 31, 2001 and $11 at December 31, 2000) 56 4
Policy loans 49,794 3,699
Mortgage loans 4,715 -0-
Invested real estate 61,049 -0-
Short-term investments 138,291 15,624
Total investments 756,329 99,113
Cash and cash equivalents 7,094 2,733
Investment in affiliate -0- 79,105
Accrued investment income 8,483 1,172
Agency advances and other receivables 30,324 7,604
Reinsurance receivables 14,709 17,466
Due and deferred premiums 13,411 12,537
Real estate occupied by Company 20,054 -0-
Property and equipment, net 3,546 1,318
Deferred policy acquisition costs 80,290 56,161
Present value of future profits of acquired businesses 31,251 19,440
Other assets 14,074 4,117
Separate account assets 399,264 -0-
Total Assets $ 1,378,829 $ 300,766
The accompanying notes are an integral part of these
consolidated financial statements
</table>
F-3
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
<table>
<s> <c> <c>
December 31,
2001 2000
LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands)
Liabilities:
Policy liabilities and contract holder deposit funds:
Contract holder deposit funds $ 556,117 $ 43,301
Future policy benefits 180,953 62,462
Other policy claims and benefits payable 13,985 2,931
751,055 108,694
Subordinated notes payable to affiliate -0- 35,349
Deferred federal income taxes 31,920 24,437
Excess of net assets acquired over cost 15,847 -0-
Other liabilities 8,938 3,734
Separate account liabilities 391,593 -0-
Total Liabilities 1,199,353 172,214
Commitments and Contingencies (Notes 6, 8 and 13)
Shareholders' equity:
Common stock, $.20 par value, 25,000,000 and 10,000,000
shares authorized in 2001 and 2000, 11,736,546 and 5,845,300
shares issued in 2001 and 2000, 9,498,847 and 5,054,661
outstanding in 2001 and 2000 2,348 1,169
Additional paid-in capital 65,558 7,225
Accumulated other comprehensive income 2,297 2,107
Deferred compensation (292) -0-
Retained earnings 131,462 125,426
201,373 135,927
Common treasury stock, at cost, 2,237,699 and 790,639
shares at 2001 and 2000 (21,897) (7,375)
Total Shareholders' Equity 179,476 128,552
Total Liabilities and Shareholders' Equity $ 1,378,829 $ 300,766
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<table>
<s> <c> <c> <c>
Years Ended December 31,
2001 2000 1999
(in thousands)
Revenues:
Premiums, net $ 35,886 $ 33,149 $ 33,958
Earned insurance charges 27,710 4,323 4,752
Net investment income 30,719 6,933 6,923
Real estate income, net 1,937 -0- -0-
Net realized gain on sale of fixed maturities 65 7 5
Other 2,808 6 606
99,125 44,418 46,244
Benefits and expenses:
Policyholder benefits and expenses 27,702 13,453 12,585
Interest expense on contract holders
deposit funds 19,936 2,211 2,189
Amortization of present value of future
profits of acquired businesses 4,715 3,669 5,185
Amortization of deferred policy
acquisition costs 6,800 5,329 5,158
Operating expenses 23,046 11,375 11,740
Interest expense 927 1,899 2,374
83,126 37,936 39,231
Income before federal income tax and
equity in net earnings of affiliates 15,999 6,482 7,013
Provision for federal income taxes:
Current 3,937 1,521 335
Deferred 1,364 (237) 839
Income before equity in net earnings
of affiliates 10,698 5,198 5,839
Equity in net earnings of affiliate,
net of tax 1,316 3,581 3,310
Net Income $ 12,014 $ 8,779 $ 9,149
</table>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, Continued
(in thousands except per share data)
<table>
<s> <c> <c> <c>
Years Ended December 31,
2001 2000 1999
(in thousands)
Net Income Per Share (Note 14)
Basic:
Average weighted shares outstanding 7,824 5,055 5,055
Basic earnings per share $ 1.54 $ 1.74 $ 1.81
Diluted:
Common stock and common stock
equivalents 7,898 5,163 5,200
Diluted earnings per share $ 1.52 $ 1.70 $ 1.76
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<table>
<s> <c> <c> <c>
Common Stock Additional
Paid-in
Shares Amount Capital
Balance at December 31, 1998 5,845 $ 1,169 $ 7,225
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on investments
in fixed maturities available for sale, net of tax
Change in net unrealized appreciation of equity
securities, net of tax
Total Comprehensive Income
Balance at December 31, 1999 5,845 1,169 7,225
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on investments in
fixed maturities available for sale, net of tax
Change in net unrealized depreciation of equity
securities, net of tax
Total Comprehensive Income
Cash Dividends to Stockholders ($0.18 per share)
Balance at December 31, 2000 5,845 1,169 7,225
Comprehensive Income
Net Income
Other Comprehensive Income:
Change in net unrealized loss on investments in
fixed maturities available for sale, net of tax
Change in net unrealized appreciation of equity
securities, net of tax
Total Comprehensive Income
Stock options exercised 47 10 374
Issuance of shares in exchange for acquired
company 5,844 1,169 57,959
Cash Dividends to Stockholders ($0.87 per share)
Balance at December 31, 2001 11,736 $ 2,348 $ 65,558
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, Continued
(in thousands)
<table>
<s> <c> <c> <c> <c>
Net Unrealized Net Unrealized Total
Appreciation Gain (Loss) on Accumulated
(Depreciation) Investments in Other
of Equity Fixed Maturities Comprehensive
Securities Available for Sale Other Income (Loss)
Balance at December 31, 1998 $ (2) $ 5,900 $ -0- $ 5,898
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on
investments investments in fixed (8,354) (8,354)
maturities available for sale, net of tax
Change in net unrealized appreciation of 2 2
equity securities, net of tax 2 (8,354) -0- (8,352)
Total Comprehensive Income
Balance at December 31, 1999 0 (2,454) (2,454)
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized gain on
investments in fixed maturities available
for sale, net of tax
Change in net unrealized depreciation of 4,561 4,561
equity securities, net of tax
Total Comprehensive Income 0 0
Cash dividends to Stockholders ($0.18 0 4,561 -0- 4,561
per share)
Balance at December 31, 2000 0 2,107 2,107
Comprehensive Income:
Net Income
Other Comprehensive Income:
Change in net unrealized loss on
investments in fixed maturities
available for sale, net of tax 420 420
Change in net unrealized appreciation
of equity securities, net of tax (2) (2)
Minimum pension liability, net of tax (228) (228)
Total Comprehensive Income (2) 420 (228) 190
Stock options exercised
Issuance of shares in exchange for
acquired company
Cash Dividends to Stockholders
($0.87 per share)
Balance at December 31, 2001 $ (2) $ 2,527 $ (228) $ 2,297
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, Continued
(in thousands)
<table>
<s> <c> <c> <c> <c>
Total
Deferred Retained Treasury Shareholders'
Compensation Earnings Stock Equity
Balance at December 31, 1998 $ -0- $ 108,403 $ (7,375) $ 115,320
Comprehensive Income:
Net Income 9,149 9,149
Other Comprehensive Income:
Change in net unrealized gain on investments
in fixed maturities available for sale, net of tax (8,354)
Change in net unrealized appreciation
of equity securities, net of tax 2
Total Comprehensive Income 9,149 -0- 797
Balance at December 31, 1999 -0- 117,552 (7,375) 116,117
Comprehensive Income:
Net Income 8,779 8,779
Other Comprehensive Income:
Change in net unrealized gain on investments
in fixed maturities available for sale, net of tax 4,561
Change in net unrealized depreciation of equity
securities, net of tax 0
Total Comprehensive Income 8,779 -0- 13,340
Cash Dividends to Stockholders ($0.18 per
share) (905) -0- (905)
Balance at December 31, 2000 -0- 125,426 (7,375) 128,552
Comprehensive Income:
Net Income 12,014 12,014
Other Comprehensive Income:
Change in net unrealized loss on investments
in fixed maturities available for sale, net of tax 420
Change in net unrealized appreciation of equity
securities, net of tax (2)
Mininum pension liability, net of tax (228)
Total Comprehensive Income 12,014 -0- 12,204
Stock options exercised 384
Treasury stock purchased (2,248) (2,248)
Issuance of shares in exchange for acquired
company (12,274) 46,854
Stock based compensation (292) (292)
Cash Dividends to Stockholders ($0.87 per
share) (5,978) (5,978)
Balance at December 31, 2001 $ (292) $ 131,462 $ (21,897) $ 179,476
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
<s> <c> <c> <c>
Years Ended December 31,
2001 2000 1999
(in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 12,014 $ 8,779 $ 9,149
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of present value of future
profits of acquired business 4,715 3,669 5,185
Amortization of deferred policy
acquisition costs 6,800 5,329 5,158
Equity in undistributed earnings of affiliate (2,791) (5,760) (5,654)
Changes in assets and liabilities:
Decrease in accrued investment income 1,047 8 29
Decrease (increase) in agency
advances and other receivables 25,543 (3,337) (1,548)
Increase in due premiums (874) (145) (211)
Increase in deferred policy acquisition
costs (10,422) (9,000) (9,138)
Decrease in other assets (1,236) 641 634
Decrease in policy liabilities and accruals (31,334) (2,318) (4,101)
Decrease in other liabilities (7,245) (345) (395)
Increase (decrease) in deferred federal
income taxes (447) 1,215 (762)
Other, net (2,238) (981) 1,172
Net cash used in operating activities $ (6,468) $ (2,245) $ (482)
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<table>
<s> <c> <c> <c>
Year Ended December 31,
2001 2000 1999
CASH FLOWS FROM INVESTING ACTIVITIES (in thousands)
Fixed maturities purchased (121,342) (11,725) (19,557)
Real estate capitalized (18,059) -0- -0-
Proceeds from sales and maturities of
fixed maturities 116,181 11,664 18,511
Net decrease in short-term investments 23,976 9,215 2,750
Net decrease (increase) in policy loans 1,946 (104) (440)
Cash acquired in purchase of insurance holding
company 9,080 -0- -0-
Purchase and retirement of property
and equipment 195 37 403
Net cash provided by investing activities 11,977 9,087 1,667
CASH FLOW FROM FINANCING
ACTIVITIES
Repayment of subordinated notes payable (1,537) (6,148) (6,148)
Cash dividends to stockholders (5,978) (905) -0-
Issuance of capital stock 384 -0- -0-
Contractholder fund deposits 35,896 4,978 5,501
Contractholder fund withdrawals (27,665) (2,726) (2,447)
Purchase of treasury stock. (2,248) -0- -0-
Net cash used in financing activities (1,148) (4,801) (3,094)
Net increase (decrease) in cash 4,361 2,041 (1,909)
Cash and cash equivalents, beginning of year 2,733 692 2,601
Cash and cash equivalents, end of year $ 7,094 $ 2,733 $ 692
Supplemental Cash Flow Disclosures:
Income taxes paid $ 7,104 $ 1,200 $ 485
Interest paid $ 725 $ 2,073 $ 2,621
</table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Supplemental Schedule of Non-Cash Investing Activities:
The Company purchased the outstanding capital stock of a life insurance holding
company in the second quarter of 2001 for purchase price of approximately $49.1
million. The consolidated statements of cash flows reflect the impact of this
acquisition. This purchase resulted in the Company receiving assets and assuming
liabilities as follows (in thousands):
2001
Assets $ 708,586
Liabilities $ 597,537
F-12
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Organization and Summary of Significant Accounting Policies
Organization
Financial Industries Corporation ("FIC" or the "Company") is principally
engaged, through its subsidiaries, in acquiring and administering existing
portfolios of individual life insurance and annuity products. The Company's
insurance subsidiaries are also engaged in the business of marketing and
underwriting individual life insurance, disability insurance and annuity
products in 49 states, the District of Columbia and the U.S. Virgin Islands.
Such products are marketed through both captive and independent agency systems.
Principles of Consolidation
The consolidated financial statements include the accounts of FIC and its
wholly-owned subsidiaries. All material intercompany balances and transactions
have been eliminated. The more significant subsidiaries are: Family Life
Corporation (FLC), Family Life Insurance Company (Family Life), FIC Realty
Services, Inc. (FIC Realty) and FIC Property Management, Inc. (FIC-Property),
and effective with the acquisition of InterContinental Life Corporation (ILCO).
Effective on May 18, 2001, the consolidated financial statements also include
the accounts of ILCO, Investors Life Insurance Company of North America
(Investors Life), Investors Life Insurance Company of Indiana (Investors-IN) and
ILG Sales Corp, all which were accounted for under the equity method of
accounting prior to the acquisition of the remaining outstanding shares.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which differ from statutory accounting principles required by regulatory
authorities for the Company's insurance subsidiaries. The following accounting
policies describe the accounting principles used in the preparation of the
consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results will differ from those estimates.
Investments
The Company's general investment philosophy is to hold fixed maturity securities
until maturity. However, fixed maturities may be sold prior to their maturity
dates in response to changing market conditions, duration of liabilities,
liquidity factors, interest rate movements and other investment factors.
Accordingly, substantially all the Companies fixed maturity investments are
classified as available for sale and are carried at market value. Unrealized
gains and losses on securities available for sale are not recognized in earnings
but are reported as a separate component of equity in accumulated other
comprehensive income, net of effect on other balance sheet accounts and related
income taxes.
F-13
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
While collateralized mortgage obligations (CMOs) are carried at market value,
premiums and discounts on CMOs are amortized over stated maturity of the CMOs,
with consideration given to estimates of prepayments in the amortization of
those premiums and discounts. The Company endeavors to minimize the portfolio's
exposure to interest rate changes inherent in interest-sensitive products by
selecting and selling investments so that diversity, maturity and liquidity
factors approximate the duration of related policyholder liabilities.
Equity securities are classified as available for sale and are carried at market
value. Unrealized gains and losses on equity securities, net of deferred income
taxes, if applicable, are reflected directly in shareholders' equity as a
component of accumulated other comprehensive income. Mortgage loans and policy
loans are recorded at unpaid balances.
Short-term investments are carried at cost, which approximates market value, and
generally consist of those fixed maturities and other investments with
maturities of less than one year from the date of purchase. Securities pledged
as collateral for repurchase agreements are held by the Company's investment
custodian until maturity of the repurchase agreement. Provisions of the
agreement and procedures adopted by the Company ensure that the market value of
the collateral, including accrued interest thereon, is sufficient in the event
of default by the counterparty.
Realized gains and losses on disposal of investments are included in net income.
The cost of investments sold is determined on the specific identification basis,
except for stocks, for which the first-in, first-out method is employed. When an
impairment of the value of an investment is considered other than temporary, the
decrease in value is reported in net income as a realized investment loss and a
new cost basis is established.
Invested Real Estate
Invested real estate is stated at cost less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over
estimated useful lives of 5 to 40 years. Real estate income is reported net of
expenses incurred to operate the properties and depreciation expenses.
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When an asset is determined to be impaired, an impairment loss
is recognized.
Cash and Cash Equivalents
Generally, cash includes cash on hand and on deposit in non-interest bearing
accounts. Short term investments with maturities of three months or less at the
time of purchase are reported as cash equivalents.
F-14
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over
estimated useful lives of 3 to 8 years. Maintenance and repairs are charged to
expense when incurred.
Deferred Policy Acquisition Costs
The cost of acquiring new business, principally first year commissions and
certain expenses of the policy issuance and underwriting departments, which vary
with and are primarily related to the production of new business, have been
deferred to the extent recoverable. Acquisition costs related to traditional
life insurance products are deferred and amortized to expense using actuarial
methods that include the same assumptions used to estimate future policy
benefits. Acquisition costs related to interest sensitive products are deferred
and amortized in proportion to the ratio of estimated annual gross profits to
total estimated gross profits over the expected lives of the contracts.
Present Value of Future Profits on Acquired Businesses
The present value of future profits of acquired traditional life business is
amortized over the premium paying period of the related policies in proportion
to the ratio of the annual premium revenue to total anticipated premium revenue
applicable to such policies. Interest on the unamortized balance is accreted at
rates from 7.0% to 8.5%.
For interest-sensitive products, these costs are amortized in relation to the
present value, using the current credited interest rate, of expected gross
profits of the policies over the anticipated coverage period. Retrospective
adjustments of these amounts for interest sensitive products are made
periodically upon the revision of estimates of current or future gross profits
to be realized from a group of policies.
Recoverability of present value of future profits is evaluated periodically by
comparing the current estimate of future profits to the unamortized asset
balances.
Anticipated investment returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of present value of future profits acquired.
Real Estate Occupied by Company
Real estate occupied by the Company is carried at cost less accumulated
depreciation. Depreciation is provided using straight-line and accelerated
methods over estimated useful lives of 40 years. Accumulated depreciation on
real estate occupied by Company is $639,736 as of December 31, 2001.
F-15
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Separate Accounts
Separate account assets and liabilities, carried at market value, represent
policyholder funds maintained in accounts having specific investment objectives.
The net investment income, gains and losses of these accounts, less applicable
contract charges, generally accrue directly to the policyholders and are not
included in the Company's statement of income, with the exception of the gains
and losses in the Company's seed money in the separate accounts.
Solvency Laws Assessments
The solvency or guaranty laws of most states in which the Company's insurance
subsidiaries do business may require the Company's insurance subsidiaries to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These assessments may
be deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength, and in certain instances, may be offset against
future premium taxes. The Company's insurance subsidiaries expense for guaranty
fund assessment, from states, which do not allow premium tax offsets, was not
material.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits related to traditional life products are
accrued as premium revenue is recognized. The liabilities are computed using the
net level premium method, or an equivalent actuarial method, based upon industry
and Company experience of investment yields, mortality and withdrawals,
including provisions for possible adverse deviation.
Contract holder deposit funds represent liabilities for universal life and
annuity products. These liabilities consist of deposits received from customers
and are accumulated at actual credited interest rates on their fund balances
less charges for expenses and mortality.
Liabilities for future policy benefits related to non-cancelable and guaranteed
renewable accident and health contracts are computed based on industry and
Company experience and estimated future investment yields ranging from 4 1/2% to
6%. Unearned premium reserves for credit life and accident and health contracts
are computed on either the sum-of-the-year's digits or pro rata methods
depending upon the type of coverage. In December, 1997, ILCO's life insurance
subsidiaries entered into a reinsurance treaty under which all of the
contractual obligations and risks under accident and health insurance policies
were assumed by a third party reinsurer. (See Note 8.)
Excess of Net Assets Acquired Over Cost
The excess of net assets acquired over cost, or negative goodwill, is presented
net of accumulated amortization. The excess of net assets acquired over cost is
amortized generally in accordance with expected revenues of the related
policies.
F-16
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable represents
management's estimate of ultimate unpaid losses on claims and other
miscellaneous liabilities to policyholders. Estimated unpaid losses on claims
are comprised of losses on claims that have been reported but not yet paid and
claims that have been incurred but not reported.
The liability for other policy claims and benefits payable is subject to the
impact of changes in claim severity, frequency and other factors. Although there
is considerable variability inherent in such estimates, management believes that
the liability recorded is adequate.
Federal Income Taxes
The Company computes deferred income taxes utilizing the asset and liability
method. Under this method, balance sheet amounts for deferred income taxes are
computed based on the tax effect of the differences between the financial
reporting and federal income tax bases of assets and liabilities using the tax
rates which are expected be in effect when these differences are anticipated to
reverse.
Revenue Recognition
Premiums on traditional life and health products are recognized as revenue when
due. Credit life and credit health insurance premiums are recognized over the
contract period on a pro rata basis, or the sum of years digits basis. Benefits
and expenses are associated with earned premiums, so as to result in recognition
of profits over the lives of the contracts.
Proceeds from investment-related products and universal life products are
recorded as liabilities when received. Revenues for investment-related and
universal life products consist of net investment income, mortality,
administration charges and surrender charges.
Net Income Per Share
Net income per share is calculated based on two methods, basic earnings per
share and diluted earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were converted or exercised. Both methods are
presented on the face of the accompanying consolidated statements of income.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS 133 is applicable to financial statements for all fiscal
quarters of fiscal years beginning after June 15, 2000, as amended by FAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FAS 133." As the Company does not have significant investments
in derivative financial instruments and does not engage in hedging activities,
the adoption of FAS 133 did not have a material impact on the Company's results
of operations, liquidity or financial position.
F-17
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
During 2001, the FASB issued Statement of Financial Accounting Standards No. 141
(FAS 141), "Business Combinations," which supersedes Accounting Principles Board
Opinion No. 16 (APB 16), "Business Combinations," and establishes guidelines to
account for all acquisitions of a controlling interest, regardless of the form
of consideration. The most significant changes made by FAS 141 are that it: (1)
requires the purchase method of accounting, rather than the pooling method, be
used for all business combinations initiated after June 30, 2001; (2)
establishes specific criteria for the recognition of intangible assets
separately from goodwill; and (3) requires unallocated negative goodwill (which
is an excess of net assets acquired over cost) to be recognized immediately as
an extraordinary gain (instead of being deferred and amortized).
As of the the first quarter of 2002, the amount of any unamortized deferred
credit related to negative goodwill arising from (a) a business combination for
which the acquisition date was before July 1, 2001, or (b) an investment
accounted for by the equity method acquired before July 1, 2001, shall be
recognized and reported as the effect of a change in accounting principle. The
effect of the accounting change and related income tax effects shall be
presented in the income statement between the captions "extraordinary items" and
"net income". The per-share information presented in the income statement shall
include the per-share effect of the accounting change. During the first quarter
in 2002, FIC plans to recognize the unamortized balance of $15,847,000 of
negative goodwill. This amount will be recorded as a change in accounting
principle.
During 2001, the FASB issued Financial Accounting Standards No. 142 (FAS 142),
"Goodwill and Other Intangible Assets," which supersedes Accounting Principles
Board Opinion No. 17 (APB 17), "Intangible Assets," and which addresses
financial accounting and reporting for acquired goodwill and other intangible
assets upon and subsequent to their acquisition. The provisions of FAS 142 will
be effective for FIC's fiscal year beginning January 1, 2002. The most
significant changes made by FAS 142 are: (1) goodwill and indefinite lived
intangible assets will no longer be amortized, but instead will be tested for
impairment at least annually at the reporting unit level, and (2) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years. The adoption of FAS 142 is not expected to materially
affect FIC's results of operations, liquidity or financial position.
During 2001, the FASB issued Statement of Financial Accounting Standards No. 143
(FAS 143), "Accounting for Asset Retirement Obligations", which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002, the adoption of which is not expected to
materially affect FIC's results of operations, liquidity or financial position.
F-18
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
During 2001, the FASB issued Statement of Financial Accounting Standard No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144
supersedes Statement of Financial Accounting Standard No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FAS 121) and amends Accounting Principles Bulletin Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (APB 30) and Accounting Research Bulletin No. 51 (ARB 51)
"Consolidated Financial Statements". FAS 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of FAS 144 is not expected to
materially affect FIC's results of operations, liquidity or financial position.
Reclassification
Certain prior years' amounts have been reclassified to conform with the 2001
presentation.
F-19
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Investments
Fixed Maturities
Investments in fixed maturities by category at December 31, 2001 and 2000,
respectively, were as follows (in thousands):
<table>
<s> <c> <c> <c> <c>
Gross Gross
December 31, 2001 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Fixed maturities available for sale as
of December 31, 2001:
U.S. treasury securities and
obligations of U.S. government
agencies and corporations $ 22,992 $ 2,307 $ 14 $ 25,285
States, municipalities and political
subdivisions 8,072 292 -0- 8,364
Corporate securities 261,812 718 4,674 257,856
Mortgage-backed securities 203,828 6,123 61 209,890
Total fixed maturities available for
sale 496,704 9,440 4,749 501,395
Fixed maturities held to maturity:
Corporate securities 1,029 -0- 1 1,028
Total fixed maturities $ 497,733 $ 9,440 $ 4,750 $ 502,423
</table>
F-20
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<table>
<s> <c> <c> <c> <c>
Gross Gross
December 31, 2000 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 6,378 $ 576 $ 21 $ 6,933
States, municipalities and political
subdivisions 4,928 122 -0- 5,050
Corporate securities 35,905 491 189 36,207
Mortgage-backed securities 31,038 584 26 31,596
Total fixed maturities available for
sale $ 78,249 $ 1,773 $ 236 $ 79,786
</table>
The amortized values and market values of fixed maturities at December 31, 2001
are shown below by contractual maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<table>
<s> <c> <c>
Fixed Maturities Available for Sale
Amortized Market
Value Value
(in thousands)
Due in one year or less $ 17,195 $ 17,344
Due after one year through five years 36,755 38,090
Due after five years through ten years 56,756 57,901
Due after ten years 181,523 178,170
Mortgage-backed securities 204,475 209,890
Total fixed maturities available for sale $ 496,704 $ 501,395
</table>
To reduce the exposure to market rate changes, portfolio investments are
selected so that diversity, maturity, and liquidity factors approximate the
duration of associated policyholder liabilities.
Proceeds from sales of investments in fixed maturities during 2001, 2000 and
1999 were $41,700,711, $1,050,000 and $1,250,000, respectively. On these sales,
there were gains of $217,459 and losses of $201,655 in 2001, gains of $1,575 and
losses of $0 in 2000 and gains of $3,820 and losses of $0 in 1999.
The net change in unrealized investment gains (losses) represents a component of
accumulated other comprehensive income for the years ended December 31, 2001,
2000 and 1999. The following is a summary of the change in unrealized investment
gains (losses) net of the effect on other balance sheet accounts and related
deferred income taxes, which are reflected in accumulated other comprehensive
income for the periods presented. The unrealized gains and losses include the
Company's portion of its percentage ownership of ILCO prior to May 18, 2001. The
amounts included in the total below are $4,743,000 and $(9,440,000) for 2000 and
1999, respectively.
F-21
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<table>
<s> <c> <c> <c>
Change in Unrealized Gains (Losses) on Investments 2001 2000 1999
(in thousands)
Fixed maturities $ 1,449 $ 7,017 $ (12,852)
Equity securities (3) -0- 2
Gross unrealized gains (losses) 1,446 7,017 (12,850)
Effect on other balance sheet accounts (817) -0- -0-
Deferred federal income taxes (211) (2,456) 4,498
Net change in unrealized gains (losses) on investments $ 418 $ 4,561 $ (8,352)
</table>
<table>
<s> <c> <c> <c>
The following table sets forth the reclassification adjustments required for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
Reclassification Adjustments (in thousands)
Unrealized holding gains (losses) on investments
arising during the period $ 460 $ 4,554 $ (8,357)
Reclassification adjustments for gains included in
net income 42 7 5
Unrealized gains (losses) on investments, net of
reclassification adjustment $ 418 $ 4,561 $ (8,352)
</table>
Equity Securities
The change in net unrealized losses on equity securities was $3,000 and $0 for
the years ended December 31, 2001 and 2000, respectively.
F-22
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Net Investment Income
The components of net investment income are summarized as follows:
<table>
<s> <c> <c> <c>
Year ended December 31,
2001 2000 1999
(in thousands)
Fixed maturities $ 23,878 $ 5,493 $ 5,221
Other, including short-term investments
and policy loans 7,268 1,483 1,751
31,146 6,976 6,972
Investment expenses (427) (43) (49)
Net investment income $ 30,719 $ 6,933 $ 6,923
</table>
There were no impairments in the value of investments in 2001, 2000 or 1999,
which were considered other than temporary.
Mortgage loans
The Company's mortgage loans are diversified by property type, location and
issuer. Mortgage loans are collateralized by the related properties and such
loans generally range from 15% to 80% of the property's value at the time the
loan is made. No new mortgage loans were made during the three year period ended
December 31, 2001.
Invested real estate
Investors Life purchased property known as River Place Pointe in October 1998.
It consists of 47.995 acres of land in Austin, Texas. The aggregate purchase
price for these tracts was $8.1 million. The site development permit allows for
the construction of seven office buildings totaling 600,000 square feet, with
associated parking, drives and related improvements. Construction on the first
section of the project, which consists of four office buildings, an associated
parking garage, and related infrastructure was completed during 2000 and 2001.
The second section of construction, which includes three more office buildings,
an associated parking garage, and related infrastructure, is in progress and
Investors Life expects completion of this phase by the end of 2002. FIC and its
insurance subsidiaries occupy almost the entire Building One of River Place
Pointe, consisting of approximately 74,021 square feet of space and lease out
approximately 222,596 sq. ft. of the remaining 320,691 sq. ft. from Buildings
Two, Three and Four. At December 31, 2001 invested real estate includes
approximately $60 million relating to the River Place Pointe property, not
including $20 million reported as real estate occupied by Company.
Real estate income as of December 31, 2001 was $1.94 million, net of real estate
expenses of $1.58 million.
F-23
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In addition, Investors Life owns numerous sites that are leased or subleased to
unrelated third parties. The lessee is responsible for the payment of property
taxes, insurance and maintenance costs related to the leased property.
Future minimum lease payment receivables under non-cancelable leasing
arrangements for the next five years are as follows (in thousands):
2002 $ 6,429
2003 $ 6,490
2004 $ 6,444
2005 $ 5,659
2006 $ 4,126
Accumulated depreciation on invested real estate as of December 31, 2001 is
$2,461,154.
Sale of Real Estate
Prior to December, 1999, FIC owned several parcels of real estate in Jackson,
Mississippi, adjacent to an office building which formerly served as the
headquarters of Standard Life Insurance Company (the "Standard Life Building").
The Standard Life Building was owned by Investors Life. On December 29, 1999,
Investors Life donated the Standard Life Building to the Jackson Redevelopment
Authority ("JRA"). Contemporaneously with the donation of the Standard Life
Building, Investors Life and FIC sold all of the adjacent parcels they owned to
the JRA for a total sale price of $2,500,000, which has been allocated according
to the respective ownership interests of Investors Life (approximately 59.28%)
and FIC (approximately 40.72%). The donation and sale was made pursuant to the
terms of the Donation, Purchase and Sale Agreement dated July 17, 1998. For the
tax year 1999, Investors Life filed a joint income tax return with its parent
(ILCO) and an income tax deduction for the donation of the Standard Life
Building, which has an appraised value at December 15, 1999 of approximately
$3,050,000. The donation and sale transaction resulted in a net gain (GAAP
basis) of $992,494 for ILCO and $408,664 for FIC (or a combined total of
$1,401,158).
Non-income producing investments
The Company has no non-income producing investments as of December 31, 2001.
F-24
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Disclosure about Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at December 31,
2001 are as follows:
<table>
<s> <c> <c>
Carrying Amount Fair Value
(in thousands)
Financial assets:
Fixed maturities $502,424 $502,423
Equity securities 56 56
Policy loans 49,794 49,794
Mortgage loans 4,715 4,663
Short-term investments 138,291 138,291
Separate account assets 399,264 399,264
Cash and cash equivalents 7,094 7,094
Financial liabilities:
Separate account liabilities 391,593 391,593
Deferred annuities 122,738 120,154
Supplemental contracts 14,209 13,877
</table>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Fixed Maturities
Fair values are based on quoted market prices or dealer quotes.
Policy Loans
Policy loans are, generally, issued with coupon rates below market rates and are
considered early payment of the life benefit. As such, the carrying amount of
these financial instruments is a reasonable estimate of their fair value.
Mortgage loans
The fair value of mortgage loans is estimated using a discounted cash flow
analysis using rates for BBB- rated bonds with similar coupon rates and
maturities.
F-25
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Separate account assets and liabilities
Separate account assets and liabilities represent the market value of
policyholder funds maintained in accounts having specific investment objectives.
Cash and Short-term Investments
The carrying amount of these instruments approximates market value.
Deferred annuities and supplemental contracts
The fair value of deferred annuities is estimated using cash surrender values.
Fair values for supplemental contracts is estimated using a discounted cash flow
analysis, based on interest rates currently offered on similar products.
4. Investment in InterContinental Life Corporation
Prior to the acquisition of ILCO on May 18, 2001, FIC carried its investment in
ILCO on the equity method of accounting. At December 31, 2000, FIC's investment
in affiliate was recorded at $79.1 million. For the period from January 1, 2001
to May 17, 2001, and for the years ended 2000 and 1999, FIC's net income
includes its equity interest in the net income of ILCO, with such equity
interest being based on FIC's percentage ownership of ILCO. ILCO is primarily
engaged in the sale and administration of life insurance products through its
insurance subsidiaries, Investors Life Insurance Company of North America
(Investors Life) and Investors Life Insurance Company of Indiana (Investors-IN).
Summarized financial information for ILCO as of December 31, 2000 and for the
period from January 1, 2001 to May 17, 2001 and the two years ended December 31,
2000 is set forth below:
F-26
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Balance sheet information: 2000
(in thousands)
Investments $ 659,982
Deferred policy acquisition costs and
present value of future profits 75,419
Other assets 572,214
Total Assets $ 1,307,615
Policy liabilities and contract holder
deposit funds $ 663,064
Other liabilities 480,375
Total liabilities 1,143,439
Common stock, additional paid-in capital
and retained earnings 160,811
Accumulated other comprehensive
income 3,365
Shareholders' equity 164,176
Total liabilities and shareholders' equity $ 1,307,615
<table>
<s> <c> <c> <c>
Jan. 1 to May 18,
Results of Operations: 2001 2000 1999
(in thousands)
Premium income $ 3,834 $ 10,873 $ 11,132
Net investment income 19,288 50,893 49,913
Gain on sale of real estate -0- -0- 112
Earned insurance charges 15,386 38,500 40,447
Benefits and expenses 32,296 84,669 85,466
Net income 4,493 12,066 12,765
Basic earnings per share $ 0.54 $ 1.45 $ 1.45
Diluted earnings per share $ 0.54 $ 1.45 $ 1.45
</table>
F-27
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The amount of net realized gains (losses) included in net earnings of ILCO is
$(3,000) and $297,000, for the years ended December 31, 2000 and 1999,
respectively.
On May 18, 2001, ILCO Acquisition Company ("ILCO Acquisition"), a Texas
corporation and wholly- owned subsidiary of FIC, merged with and into ILCO. As a
result of the merger, ILCO Acquisition subsequently ceased to exist, and ILCO
continued as the surviving corporation, as a wholly-owned subsidiary of FIC.
Each share of ILCO common stock issued and outstanding immediately prior to the
merger, other than shares of ILCO common stock held as treasury shares by ILCO
(but excluding shares of ILCO common stock held by any of ILCO's subsidiaries,
whether or not treated as treasury shares of ILCO on a consolidated basis under
generally accepted accounting principles) or shares of ILCO common stock held by
FIC, were converted into the right to receive 1.1 shares of FIC common stock. In
addition, each option to purchase ILCO common stock was assumed by FIC and
became an option to purchase FIC common stock with the number of shares and the
exercise price adjusted for the exchange ratio in the merger.
The consideration for the transaction was $49.1 million represented by the
issuance of 4.7 million shares of FIC stock, at $10 per share, to ILCO
shareholders and other direct costs of the merger. The $10 per share price was
calculated based on the average price of FIC common stock on the two days
immediately preceding and following the date of the merger agreement between FIC
and ILCO. Prior to the merger, FIC owned approximately 48.1% of ILCO's common
stock. The acquisition of ILCO was accounted for as a purchase; accordingly, the
results of ILCO's operations are included in the consolidated results of
operations from the date of the acquisition to December 31, 2001. The allocation
of the purchase price to the net assets acquired over costs resulted in excess
of net assets acquired of approximately $16.8 million. FIC amortized $966,000 of
excess of net assets acquired over cost in 2001, which amount is included in
other revenues in the consolidated statement of earnings. This allocation is
based on an analysis, as of May 18, 2001, of the acquired book of business.
The pro forma unaudited results of operations for the twelve months ended
December 31, 2001 and 2000, assuming the ILCO acquisition had been consummated
as of the beginning of the respective periods, are as follows:
Twelve Months Ended
December 31
(UNAUDITED)
(In thousands, except per share data)
2001 2000
Total Revenues $ 136,224 $ 144,520
Net Income $ 13,685 $ 18,900
Net Income per share:
Basic $ 1.43 $ 1.94
Diluted $ 1.41 $ 1.91
F-28
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
TION AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, Continued
5. Present Value of Future Profits of Acquired Businesses
An analysis of the present value of future profits follows:
<table>
<s> <c> <c>
2001 2000
(in thousands)
Balance at beginning of year $ 19,440 $ 23,109
Present value of acquired business from
consolidation of acquired company 16,816 -0-
Effect of unrealized gain on investments (290) -0-
Accretion of interest 2,305 1,820
Amortization during the period (7,020) (5,489)
Present value of future profits at
December 31 $ 31,251 $ 19,440
</table>
Anticipated amortization of the present value of future profits net of interest
accretion for each of the next five years is as follows (in thousands):
2002 $ 4,356
2003 $ 3,659
2004 $ 3,105
2005 $ 2,694
2006 $ 2,344
At purchase, the present value of future profits was calculated using a discount
rate of approximately 15%. Interest is accreted on the unamortized portion at
approximately 7.0% to 8.5%.
F-29
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Subordinated Notes Payable
<table>
<s> <c> <c>
Following is a summary of outstanding debt at December 31:
2001 2000
(in thousands)
Subordinated senior notes payable to Investors Life beginning with a
$1,125,000 payment on December 12, 1996 and each subsequent
quarter through September 12, 2001. Interest is payable on a
quarterly basis at 11% $ -0- $ 3,375
Subordinated notes payable to Investors Life beginning with a
$223,856 payment on December 12, 1996 and each subsequent
quarter through September 12, 2001. Interest is payable on a
quarterly basis at 12% -0- 672
Subordinated notes payable to Investors -NA beginning with a
$188,071 payment on December 12, 1996 and each subsequent
quarter through September 12, 2001, a payment of $1,536,927 on
December 12, 2001 and each subsequent quarter through June 12,
2006 with a final payment of $1,536,967 on September 12, 2006.
Interest is payable on a quarterly basis at 9%.
-0- 31,302
Total subordinated notes payable $ -0- $ 35,349
</table>
As a result of the merger of FIC and ILCO on May 18, 2001, the subordinated
notes payable are eliminated in consolidation, the balance of which was $29.2
million at December 31, 2001.
7. Income Taxes
The Company files a consolidated federal income tax return with its
subsidiaries, except for Investors Life, Investors-IN and ILG Securities, which
file separate returns. In accordance with the Company's tax allocation
agreement, federal income tax expense or benefit is allocated to each member of
the consolidated group as if each member were filing a separate return.
The U.S. federal income tax provision (benefit) charged to continuing operations
was as follows:
<table>
<s> <c> <c> <c>
2001 2000 1999
(in thousands)
Current $ 3,937 $ 1,521 $ 335
Deferred 1,364 (237) 839
Total provision for income tax $ 5,301 $ 1,284 $ 1,174
</table>
F-30
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The provision for income taxes is less than the amount of income tax determined
by applying the U.S. statutory income tax rate of 35% to pre-tax income from
continuing operations as a result of the following differences:
<table>
<s> <c> <c> <c>
2001 2000 1999
(in thousands)
Income taxes at the statutory rate $ 5,600 $ 2,269 $ 2,454
Increase (decrease) in taxes resulting from:
Small life insurance company deduction (104) (382) (608)
Dividends received deduction (313) (477) (526)
Tax rate differential -0- (65) (70)
Non-deductible compensation 443 16 17
Other items, net (325) (77) (93)
Total provision for income taxes $ 5,301 $ 1,284 $ 1,174
</table>
Provision has not been made for state and foreign income tax expense since this
expense is minimal. Premium taxes are paid to various states where premium
revenue is earned. Premium taxes are included in the statement of income as
operating expenses.
F-31
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Deferred taxes are recorded for temporary differences between the financial
reporting bases and the federal income tax bases of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
<table>
<s> <c> <c>
2001 2000
Deferred tax liability: (in thousands)
Equity in net earnings of affiliate $ -0- $ 5,225
Excess pension benefit 1,333 436
Deferred policy acquisition costs 21,389 15,941
Present value of future profits 9,303 6,576
Guaranty fund assessments -0- 77
Deferred and uncollected premium 6,955 4,263
Reinsurance recoverable 3,925 -0-
Unrealized (depreciation) appreciation on
marketable securities 1,642 622
Other taxable temporary differences 3,720 6,198
Total deferred tax liability 48,267 39,338
Deferred tax asset:
Policy reserves 11,716 13,017
Net operating loss carry forward 3,263 1,826
Alternative minimum tax credit 347 -0-
Accrued liabilities 1,021 58
Total deferred tax assets, net 16,347 14,901
Net deferred tax liability $ 31,920 $ 24,437
</table>
An additional deferred federal income charge of $159,000 and $1,028,000 for 2001
and 2000, respectively, has been provided on the unrealized appreciation
(depreciation) of marketable securities and is included in the balance of the
deferred tax liability. This increase or decrease in deferred tax liability has
been recorded as a reduction or increase to the equity adjustment due to the net
change in unrealized appreciation or depreciation and has not been reflected in
the deferred income tax expense, included in net income from operations.
F-32
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
A reconciliation of the Company's deferred tax liability account is as follows,
in thousands:
Deferred tax liability at December 31, 2000 $ 24,437
Deferred tax provision 1,364
Unrealized appreciation on marketable securities (128)
Undistributed equity of ILCO (5,423)
Deferred tax liability of ILCO at December 31, 2000 27,188
Change in bases of ILCO assets for financial
reporting purposes (15,518)
Deferred tax liability at December 31, 2001 $ 31,920
Provision for U.S. income taxes was not made on a portion of the undistributed
earnings of ILCO from the date of the Company's investment to the date of merger
of ILCO into FIC since the Company expects such earnings to be remitted in the
form of dividends. Deferred taxes of $5,423,000 were previously provided through
the merger date on a portion of ILCO's undistributed earnings which were
previously expected to be subject to tax upon distribution. Due to the merger,
ILCO's earnings may be distributed to FIC under various alternative methods and
tax planning strategies, without generating taxable dividends. As such, all
deferred taxes previously provided by FIC on ILCO's undistributed earnings was
released at the merger date as an adjustment to bases in assets acquired.
As a result of the acquisition of ILCO, the bases of ILCO's assets and
liabilities were adjusted as described more fully in Footnote 4 of these
financial statements. The adjustments to asset bases for financial reporting
purposes results in adjustments that reduce the taxable temporary differences
between financial reporting and tax purposes. As such, the Company's deferred
tax liability was reduced by approximately $15.4 million. This adjustment was
also reflected in the recorded financial reporting bases in assets acquired.
Under the provisions of pre-1984 life insurance company income tax regulations,
a portion of "gain from operations" of Investors-IN and Investors Life was not
subject to current taxation but was accumulated, for tax purposes, in special
tax memorandum accounts designated as "policyholders' surplus accounts". Subject
to certain limitations,"policyholders' surplus" is not taxed until distributed
or the insurance company no longer qualifies to be taxed as a life insurance
company. The accumulation in these accounts for Investors Life and Investors-IN
at December 31, 2001 was $8,225,000 and $4,357,000, respectively. Federal income
tax of $2,879,000 and $1,525,000 would be due if the entire balance is
distributed at a tax rate of 35%.
The Company does not anticipate any transactions that would cause any part of
the policyholders' surplus accounts to become taxable and, accordingly, deferred
taxes have not been provided on such amounts. At December 31, 2001, Investors
Life and Investors-IN have approximately $144,000,000 and $19,500,000,
respectively, in the aggregate in their shareholders' surplus accounts from
which distributions could be made without incurring any federal tax liability.
At December 31, 2001, the Company and its non-life wholly-owned subsidiaries
have net operating loss carry forwards of approximately $9.3 million.
F-33
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Family Life is eligible for a special deduction allowed to small life insurance
companies equal to 60 percent of tentative life insurance company taxable
income, subject to certain limitations, for years 1999 through 2001. Uunder
current law, FIC's insurance subsidiaries will no longer be eligible for this
special deduction subsequent to 2001.
8. Reinsurance
Family Life, Investors Life and Investors-IN reinsure portions of certain
policies they write, thereby providing greater diversification of risk and
minimizing exposure on larger policies. Generally, the reinsurer receives a
proportionate part of the premiums less commissions and is liable for a
corresponding part of benefit payments. The Company's retention on any one
individual ranges from $-0- to $200,000 depending on the risk.
Policy liabilities and contract holder deposit funds are reported in the
consolidated financial statements before considering the effect of reinsurance
ceded. The insurance subsidiaries remain liable to the extent the reinsurance
companies are unable to meet their obligation under the reinsurance agreements.
The components of reinsurance receivables as presented in the consolidated
financial statements are as follows:
December 31,
2001 2000
(in thousands)
Future policy benefits $ 8,263 $ 17,170
Unearned premiums 937 51
Other policy claims and benefits
payable 5,509 245
$ 14,709 $ 17,466
The amounts in the consolidated statements of income have been reduced by
reinsurance ceded as follows:
<table>
<s> <c> <c> <c>
For the years ended
2001 2000 1999
(in thousands)
Premiums $ 2,414 $ 839 $ 1,091
Policyholder benefits and expenses $ 3,389 $ 1,515 $ 1,306
</table>
Estimated amounts recoverable from reinsurers on paid claims are $2,486,455 and
$7,399 in 2001 and 2000, respectively. These amounts are included in other
receivables in the consolidated financial statements at December 31, 2001 and
2000.
F-34
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Shareholders' Equity
The Company's ability to pay dividends to its shareholders is affected, in part,
by receipt of dividends from Family Life and Investors Life. Family Life and
Investors Life are domiciled in the state of Washington. Under current
Washington law any proposed payment of dividends or distribution by the
insurance subsidiary 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, 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.
Effective July 25, 1993, Washington amended its insurance code to retain the
"greater of" standard but enacted requirements that prior notification of a
proposed dividend be given to the Washington Insurance Commissioner and that
dividends may be paid only from earned surplus. As of December 31 2001 Family
Life and Investors Life have earned surplus as defined by the regulations
adopted by the Washington Insurance Commissioner and, therefore, are presently
permitted to pay cash dividends. In December 2001, Investors Life paid a cash
dividend to ILCO of $11,082,586.
Capital and surplus of Family Life as reported to insurance regulators and as
determined in accordance with statutory accounting practices prescribed or
permitted by the state of Washington aggregates approximately $23,520,637 and
$23,788,279 at December 31, 2001 and 2000, respectively. Statutory net income
aggregated approximately $4,419,303, $5,024,926 and $6,703,705 for the years
ended December 31, 2001, 2000 and 1999, respectively.
Capital and surplus of Investors Life as reported to insurance regulators and as
determined in accordance with statutory accounting practices prescribed or
permitted by the state of Washington aggregates approximately $63,837,560 and
$71,661,478 at December 31, 2001 and 2000, respectively. Statutory net income
aggregated approximately $8,325,275, $11,082,693 and $11,750,274 for the years
ended December 31, 2001, 2000 and 1999, respectively.
The Company employed no permitted statutory accounting practices that
individually or in the aggregate materially affected statutory surplus or
risk-based capital of its insurance subsidiaries at December 31, 2001 or 2000.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which replaced the current Accounting Practices and Procedures manual
as the NAIC's primary guidance on statutory accounting. The Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas, e.g. deferred income taxes
are recorded. The Company implemented the changes from Codification in the first
quarter of 2001 for all its insurance subsidiaries. The main change from
Codification for each insurance subsidiary related to the recognition of
deferred taxes. The effect of the accounting change was $3,005,586, $870,069 and
$3,088,332 at January 1, 2001 for Investors Life, Investors-IN and Family Life,
respectively, as a result of Codification and resulted in a corresponding
increase in statutory surplus for each insurance subsidiary.
F-35
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Retirement Plans and Employee Stock Plans
Retirement Plans
A. Family Life
Family Life has a non-contributory defined benefit pension plan, ("Family Life
Pension Plan"), which covers employees who have completed one year or more of
service. Under the Family Life Pension Plan, benefits are payable upon
retirement based on earnings and years of credited service.
a. The Normal Retirement Date for all employees is the first day of the
month coinciding with or next following the later of attainment of age
65 or the completion of five years of service, but not later than age
70.
b. The Normal Retirement Benefit is the actuarial equivalent of a life
annuity, payable monthly, with the first payment commencing on the
Normal Retirement Date. The life annuity is equal to the sum of (1)
plus (2):
(1) Annual Past Service Benefit: 1.17% of the first $10,000 of
Average Final Earnings plus 1 1/2% of the excess of Average Final
Earnings over $10,000, all multiplied by the participant's
Credited Past Service. For these purposes, "credited past
service" is service prior to April 1, 1967, with respect to
employees who were plan participants on December 31, 1975.
(2) Annual Future Service Benefit: 1.5578% of the first $10,000 of
Average Final Earnings plus 2% of the excess of Average Final
Earnings over $10,000, all multiplied by the participant's
Credited Future Service.
c. Effective April 1, 1997, the Family Life Pension Plan was amended to
provide that the accrual rate for future service is 1.57% of Final
Average Earnings multiplied by Credited Service after March 31, 1997,
less .65% of Final Average Earnings up to Covered Compensation. With
respect to service prior to April 1, 1997, the accrual rate desribed
in paragraph (b), above, is applicable, with Average Final Earnings
taking into account a participant's earnings subsequent to April 1,
1997.
Average Final Earnings are the highest average Considered Earnings during any
five consecutive years while an active participant. Total Credited Past Service
plus Credited Future Service is limited to 40 years.
F-36
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The pension costs for the Family Life Pension Plan includes the following
components:
<table>
<s> <c> <c> <c>
2001 2000 1999
(in thousands)
Service cost for benefits earned during the year $ 66 $ 61 $ 52
Interest cost on projected benefit obligation 490 472 500
Expected return on plan assets (414) (401) (535)
Pension benefit $ 142 $ 132 $ 17
</table>
The following summarizes the funded status of the Family Life Pension Plan at
December 31:
<table>
<s> <c> <c>
2001 2000
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,841 $ 6,679
Service cost 66 61
Interest cost 490 472
Benefits paid (175) (341)
(Gain)/Loss due to change in assumptions 0 0
(Gain)/Loss due to experience 0 (30)
Benefit obligation at end of year $ 7,222 $ 6,841
</table>
F-37
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<table>
<s> <c> <c>
Change in benefit obligation:
Change in plan assets:
Fair value of plan assets at beginning of year $ 6,394 $ 6,352
Actual return on plan assets 344 383
Employer contributions 7 -0-
Benefits paid (175) (341)
Fair value of plan assets at end of year $ 6,570 $ 6,394
Funded Status:
Funded status at end of year $ 1,684 $ (447)
Unrecognized actuarial net (gain) loss (135) 2,131
Additional liability (1,901) -0-
(Accrued)/Prepaid pension expense at end of
year $ (352) $ 1,684
</table>
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.25% for the years
ended December 31, 2001, 2000 and 1999.
The assumed long-term rate of compensation increases was 5.0% for the years
ended December 31, 2001, 2000 and 1999.
The assumed long-term rate of return on plan assets was 8.0% for the years ended
December 31, 2001, 2000 and 1999.
B. ILCO
ILCO maintains a retirement plan, ("ILCO Pension Plan"), covering substantially
all employees of the Company and its subsidiaries. The ILCO Pension Plan is a
non-contributory, defined benefit pension plan, which covers each eligible
employee who has attained 21 years of age and has completed one year or more of
service. Each participating subsidiary company contributes an amount necessary
(as actuarially determined) to fund the benefits provided for its participating
employees.
The ILCO Pension Plan's basic retirement income benefit at normal retirement age
is 1.57% of the participant's average annual earnings less 0.65% of the
participant's final average earnings up to covered compensation multiplied by
the number of his/her years of credited service. For participants who previously
participated in the ILCO Pension Plan maintained by ILCO for the benefit of
former employees of the IIP Division of CIGNA Corporation (the IIP Plan), the
benefit formula described above applies to service subsequent to May 31, 1996.
With respect to service prior to that date, the benefit formula provided by the
IIP Plan is applicable, with certain exceptions applicable to former IIP
employees who are classified as highly compensated employees.
F-38
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Former eligible IIP employees commenced participation automatically. The ILCO
Pension Plan also provides for early retirement, postponed retirement and
disability benefits to eligible employees. Participant benefits become fully
vested upon completion of five years of service, as defined, or attainment of
normal retirement age, if earlier.
The pension benefit (costs) for the ILCO Pension Plan includes the following
components:
2001
(in thousands)
Service cost for benefits earned during the period $ 465
Interest cost on projected benefit obligation 965
Expected return on plan assets (1,327)
Amortization of unrecognized prior service cost (11)
Pension benefit (costs) $ 92
F-39
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The following summarizes the funded status of the ILCO Pension Plan at December
31:
2001
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 13,552
Service cost 465
Interest cost 965
Benefits paid (490)
(Gain)/Loss due to change in assumptions -0-
(Gain)/Loss due to experience -0-
Benefit Obligation at end of year $ 14,492
Change in plan assets:
Fair value of plan assets at beginning of year $ 16,835
Actual return on plan assets 948
Benefits paid (490)
Fair value of plan assets at end of year $ 17,293
Funded Status:
Funded status at end of year $ 4,863
Unrecognized prior service cost (92)
Unrecognized actuarial net loss -0-
Prepaid pension expense at end of year $ 4,771
The significant assumptions for the ILCO Pension Plan are as follows:
The discount rate for projected benefit obligations was 7.25% in 2001. The
assumed long-term rate of compensation increases was 5.0% for 2001. The assumed
long-term rate of return on plan assets was 8.0% for 2001. Assumed expenses as a
percentage of plan assets were 0% for 2001.
F-40
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Savings and Investment Plan
ILCO maintains a Savings and Investment ("401(k) Plan") that allows eligible
employees who have met a one-year service requirement to make contributions to
the 401(k) Plan on a tax-deferred basis. A 401(k) Plan participant may elect to
contribute up to 16% of eligible earnings on a tax deferred basis, subject to
certain limitations applicable to "highly compensated employees" as defined in
the Internal Revenue Code. 401(k) Plan participants may allocate contributions,
and earnings thereon, between investment options selected by participants. The
Account Balance of each Participant attributable to employee contributions is
100% vested at all times.
During 1995, the 401(k) Plan was amended to allow for the addition of Family
Life, as a participating employer, thus allowing Family Life employees to
participate in the 401(k) Plan.
In 1997, the 401(k) Plan was amended to provide for a matching contribution. The
match, which was in the form of shares of ILCO common stock, is equal to 100% of
an eligible participant's elective deferral contributions, as defined in the
401(k) Plan, not to exceed a maximum percentage of the participant's plan
compensation. Initially, the maximum percentage was 1%. Effective January 1,
2000, the 401(k) Plan was amended to increase the maximum percentage to 2%.
Allocations are made on a quarterly basis to the account of participants who
have at least 250 hours of service in that quarter. The total costs recognized
by the Company relating to the 401(k) Plan was $95,878 for 2001. In 2001, the
401(k) Plan was amended and restated to comply with the Economic Growth and Tax
Relief Reconciliation Act of 2001.
Employee Stock Ownership Plan
ILCO, maintained an Employee Stock Ownership Plan ("ESOP Plan") and a related
trust for the benefit of its employees and Family Life employees. The ESOP Plan
generally covered employees who had attained the age of 21 and had completed one
year of service. Vesting of benefits to employees was based on number of years
of service. No contributions were made to the ESOP Plan in 2001. At December 31,
2001, the ESOP Plan had a total of 548,686 shares of FIC stock, which are
allocated to participants.
ESOP shares are treated as issued and outstanding in calculating the Company's
earnings per share. Dividends to shareholders in the ESOP Plan are treated by
the Company as dividends to outside shareholders and are a direct charge to
retained earnings.
Effective May 1, 1998, the 401(k) Plan was amended to provide for the merger of
the ESOP Plan into the 401(k) Plan. In connection with the merger, certain
features under the ESOP Plan were preserved for the benefit of employees
previously participating in the ESOP Plan with regard to all benefits accrued
under the ESOP Plan through the date of merger.
F-41
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Stock Option Plans
A. ILCO Stock Option Plan
Under ILCO's 1999 Non-qualified Stock Option Plan (the "ILCO Stock Option Plan")
options to purchase shares of ILCO's common stock were granted to certain
employees of ILCO, its subsidiaries and affiliates. Subsequent to May 18, 2001,
each share of ILCO common stock issuable pursuant to outstanding options was
assumed by the Company and became an option to acquire FIC common stock. The
number of shares and the exercise price were adjusted for the exchange ratio in
the merger (see Note 4). The related charge is included in equity as deferred
compensation. The proforma and weighted average below are calculated from the
date of merger, May 18, 2001, to December 31, 2001.
The ILCO Stock Option Plan became effective on May 18, 1999 (the "Effective
Date"). The exercise price of the options is equal to 100% of the fair market
value on the date of grant, but in no case less than $7.50 per share ($6.818 per
share as adjusted for the exchange ratio in the merger). A portion of the
options become exercisable on the next anniversary of the Effective Date
following the date of grant. No options may be exercised after the sixth
anniversary of the Effective Date. All options must be exercised in one year
from the date the options become exercisable. The number of options that become
exercisable on each anniversary of the Effective Date, prior to the sixth
anniversary, is equal to 100% of the total options granted divided by the number
of years between the next anniversary of the Effective Date following the date
of grant and the sixth anniversary of the Effective Date.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock option plans, which are described below accordingly. No
compensation cost has been recognized by the Company in the accompanying income
statement for its stock option plans, with the exception of the amortization of
deferred compensation costs related to the merger.
After the merger, 22,000 options were granted at prices ranging from $13.00 to
$14.30. 26,400 options were cancelled and 47,150 options were exercised.
The Company follows the disclosure-only provisions of SFAS 123, "Accounting for
Stock-Based Compensation," but applies Accounting Principles Board Opinion 25
and related interpretations in accounting for its plans. The fair value
disclosure assumes that fair value of option grants were calculated at the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
2001
Expected dividend yield 3.0 %
Expected volatility 45 - 52
Risk-free interest rate 3.11 - 4.72
Expected holding period - years 2 - 4
F-42
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
For purpose of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. Pro forma loss
information is as follows (in thousands except for weighted average exercise
price) for the year ended December 31:
2001
Net income as reported $ 12,014
Pro forma compensation expense, Net of tax benefits 74
Pro forma net income $ 11,940
The following table summarized activity under ILCO's Stock Option Plan for the
year ended December 31, 2001:
<table>
<s> <c> <c>
2001 Weighted
Options Average
(000's) Exercise Price
Outstanding on May 18, 2001 389 $ 8.38
Granted 22 13.65
Exercised (47) 8.21
Cancelled (26) 8.18
Outstanding at the end of the year 338 $ 8.76
Options exercisable at year end 50 $ 8.54
Weighted average fair value of options
granted during the year $ 13.65
</table>
F-43
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
B. FIC Stock Option Plan
In 1984, the Company's shareholders adopted a qualified stock option plan for
officers and key employees. The aggregate amount of the common shares on which
options may be granted is limited to 200,000 shares. The option price will not
be less than 100% of the fair market price of the optioned shares on the date
the option is granted. As of December 31, 2001, no options had been granted
under the FIC Stock Option Plan.
11. Leases
The Company and its subsidiaries occupy office facilities under lease agreements
which expire at various dates through 2005. Certain office space leases may be
renewed at the option of the Company.
Rent expense in 2001, 2000 and 1999 was $1,695,425, $687,840 and $591,947
respectively. Minimum annual rentals are as follows:
(in thousands)
2002 $ 1,388
2003 1,212
2004 938
2005 840
2006 94
Thereafter 23
Total $ 4,495
12. Related Party Transactions
Prior to the merger, FIC owned 48.1% of ILCO's common stock. Prior to May 18,
2001, significant related party transactions are as follows:
In 1989, as part of the purchase of Family Life from Merrill Lynch Insurance
Group, Inc. ("Merrill Lynch"), FIC organized two downstream holding companies:
Family Life Insurance Investment Corporation ("FLIIC") and Family Life
Corporation ("FLC"). FLIIC was organized as a wholly-owned subsidiary of FIC
and, in turn, was issued all of the outstanding shares of FLC. FLC purchased all
of the outstanding shares of Family Life from Merrill Lynch. A portion of the
consideration for the purchase consisted of a $30 million senior subordinated
note (the "Merrill Lynch Loan"). Following the purchase of the Family Life
shares by FLC, Family Life issued 250,000 previously unissued shares of its
common stock to FLC for a $2.5 million cash payment and immediately thereafter
redeemed from FLC 250,000 shares of its common stock that had been purchased by
FLC from Merrill Lynch. The consideration paid to FLC by Family Life for said
redeemed shares consisted of $2.5 million cash, a newly issued surplus debenture
(an instrument having certain restrictions on payment for the protection of
policyholders) in the principal amount of $97.5 million (the "Family Life
Surplus Debenture") and $14 million principal value of newly issued preferred
shares.
Another part of the financing arrangement to purchase Family Life included FLC
borrowing $25 million from Investors Life (the "Investors Life Loans"). This
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). In addition to the interest provided
under the Investors Life Loans, Investors Life was granted non-transferable
options to purchase FIC common stock, up to a total of 9.9 % of shares of FIC
common stock (currently 500,411 shares) at a price of $2.10 per share (as
adjusted to reflect the five-for-one stock split in November 1996), equivalent
to the then current market price, subject to adjustment to prevent dilution. The
initial terms of the option provided for their expiration on June 12, 1998, if
not previously exercised. In connection with the 1996 amendments to the
Investors Life Loans, the expiration date of the options was extended to
September 12, 2006.
F-44
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
On June 12, 1996, the Investors Life Loans were amended to provide for twenty
quarterly principal payments, commencing on December 12, 1996. Additionally,
prior to such date, accrued interest on the $2.5 million subordinated note
issued by FIC to Investors-CA was paid by delivery of additional notes of FIC
having terms identical to the original note, including the payment of interest.
The Investors Life Loans were paid in full as of September 12, 2001; however,
because of the 1993 Subordinated Loans, described in "Family Life Refinancing"
below, the options of Investors Life to purchase FIC common stock did not expire
with the repayment of the Investors Life Loans.
In 1993, Investors Life loaned an additional $34.5 million to FLC and FLIIC in
the form of subordinated notes so that FLC and FLIIC could prepay the Merrill
Lynch Loan (the "1993 Subordinated Loans"). The 1993 Subordinated Loans
consisted of a $30 million loan to FLC and a $4.5 million loan to FLIIC. The
debt restructuring reduced the total indebtedness of FLC and FLIIC by
approximately $15 million. Upon the retirement of the Merrill Lynch Loan,
certain of its provisions were automatically incorporated into the 1993
Subordinated Loans. Those provisions include specified events of default,
including, but not limited to, failure to pay principal, interest, commitment
fees or other amounts payable when due, failure to maintain certain financial
covenants, violation of covenants (including covenants with respect to the
maintenance of a minimum net worth), material misrepresentations, defaults under
other indebtedness, the loss of any license of an insurance subsidiary of FLC
which would have a material adverse effect on FLC, defaults under the FIC
guaranty agreement, a fine in an amount in excess of $100,000 imposed upon any
insurance subsidiary of FLC by any state insurance regulatory agency, changes in
ownership or control of FIC by its controlling person, Roy F. Mitte, or in ILCO
by FIC, and the occurrence of certain events of bankruptcy. In addition, the
security interests furnished to the lenders under the Merrill Lynch Loan were
transferred to Investors Life. The security interests include all of the issued
and outstanding shares of preferred stock and common stock of FLC and Family
Life. Prior to June 30, 2001, the security also included the Family Life Surplus
Debenture, however, the Family Life Surplus Debenture was paid in full as of
June 30, 2001.
On June 12, 1996, the 1993 Subordinated Loans were also amended 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 remained 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 remained at 9%.
F-45
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In December 1998, FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder, FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
As of December 31, 2001, the outstanding principal balance of the 1993
Subordinated Loans was $29.2 million.
Data processing services are provided to ILCO's and FIC's Austin, Texas and
Seattle, Washington facilities by FIC Computer Services, Inc. ("FIC Computer"),
a subsidiary of FIC. Each of FIC's and ILCO's insurance subsidiaries has entered
into a data processing agreement with FIC Computer whereby FIC Computer provides
data processing services to each subsidiary for fees equal to such subsidiary's
proportionate share of FIC Computer's actual costs of providing those services
to all of the subsidiaries. Family Life paid $1,591,341, $1,757,904 and
$1,916,350 and ILCO's insurance subsidiaries paid $2,293,770, $2,426,793 and
$2,730,189 to FIC Computer for data processing services provided during 2001,
2000 and 1999, respectively.
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.
Pursuant to a Service Agreement between Family Life and Investors Life, the
Company reimbursed Investors Life for certain operating expenses incurred on
behalf of Family Life totaling approximately $12 million, $12 million, and $13
million in 2001, 2000 and 1999, respectively.
On January 8, 2001, the Company donated $375,000 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 16.31% of the
outstanding shares of FIC's common stock. The sole members of the Foundation are
Roy F. Mitte, Chairman, President and Chief Executive Officer of FIC, ILCO and
their insurance subsidiaries and his wife, Joann Cole Mitte. On January 2, 2002,
FIC made a donation of $1,000,000 to the Foundation.
13. Commitments and Contingencies
The Company and its subsidiaries are defendants in certain legal actions related
to the normal business operations of the Company. Management believes that the
resolution of such matters will not have a material impact on the financial
statements.
F-46
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Net Income Per Share
(in thousands except per share data)
The following table reflects the calculation of basic and diluted earnings per
share:
<table>
<s> <c> <c> <c>
December 31,
2001 2000 1999
(Amounts in thousands, except per share amounts)
Basic:
Net income available to common
shareholders $ 12,014 $ 8,779 $ 9,149
Average weighted common stock
outstanding 7,824 5,055 5,055
Basic earnings per share $ 1.54 $ 1.74 $ 1.81
Diluted:
Net income available to common
shareholders $ 12,014 $ 8,779 $ 9,149
Average weighted common stock
outstanding 7,824 5,055 5,055
Common stock options 224 258 277
Effect of shares ILCO owns of FIC 0 (91) (85)
Repurchase of treasury stock (150) (59) (47)
Common stock and common stock
equivalents 7,898 5,163 5,200
Diluted earnings per share $ 1.52 $ 1.70 $ 1.76
</table>
15. Business Concentration
The Company's insurance subsidiary, Family Life provides mortgage protection
life, disability and accidental death insurance to mortgage borrowers of
financial institutions. For marketing purposes, a significant number of these
financial institutions provide Family Life with customer lists. In 2001, premium
income from these products was derived from 48 states with concentrations of
approximately 25% and 27% in California and Texas, respectively. In 2000, these
amounts were 25% and 26%, respectively.
In 2001, premium income from Investors Life's life insurance products was
derived from all states in which Investors Life is licensed, with significant
amounts derived from Pennsylvania (14%), California (8%) and Ohio (8%).
F-47
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Quarterly Financial Data (unaudited)
(in thousands, except per share data)
<table>
<s> <c> <c> <c> <c>
Three Months Three Months
Ended Ended
March 31, June 30,
2001 2000 2001 2000
Total revenues $ 10,603 $ 11,288 $ 22,114 $ 11,371
Net income $ 2,083 $ 2,214 $ 2,766 $ 2,205
Basic earnings per share $ 0.41 $ 0.44 $ 0.38 $ 0.44
Diluted earnings per share $ 0.40 $ 0.43 $ 0.38 $ 0.43
Three Months Three Months
Ended Ended
September 30, December 31,
2001 2000 2001 2000
Total revenues $ 33,965 $ 11,110 $ 32,443 $ 10,649
Net income $ 3,806 $ 2,167 $ 3,359 $ 2,193
Basic earnings per share $ 0.40 $ 0.43 $ 0.35 $ 0.43
Diluted earnings per share $ 0.40 $ 0.42 $ 0.35 $ 0.42
</table>
17. Subsequent Events
Merger of Investors Life and Investors-IN.
On February 19, 2002, Investors-IN was merged with and into Investors Life,
whereby Investors Life was the surviving corporation. The merger was approved by
the Washington Department of Insurance in January 2002 and by the Indiana
Department of Insurance in February 2002. Investors Life will assume all of the
assets and liabilities of Investors-IN.
F-48
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
<table>
<s> <c> <c> <c>
December 31, 2001
(in thousands)
Column A Column B Column C Column D
Amount Shown
on the Balance
Type of Investment Amortized Cost Fair Value Sheet
Fixed Maturities Available for Sale:
Bonds:
United States Government and
government agencies and authorities $ 22,992 $ 25,285 $ 25,285
States, municipalities and political
subdivisions 8,072 8,364 8,364
Corporate securities 261,812 257,856 257,856
Mortgage-backed securities 203,828 209,890 209,890
Total fixed maturities available for sale 496,704 501,395 501,395
Fixed maturities held to maturity 1,029 1,028 1,029
Total fixed maturities 497,733 502,423 502,424
Equity securities:
Common Stocks:
Industrial and miscellaneous other 59 56 56
Total equity securities 59 56 56
Policy loans 49,794 49,794 49,794
Short-term investments 138,291 138,291 138,291
Total investments $ 685,877 $ 690,564 $ 690,565
</table>
F-49
<page>
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<table>
<s> <c> <c>
December 31,
2001 2000
ASSETS (in thousands)
Cash and cash equivalents $ 684 $ 223
Short-term investments 1,300 150
Long-term bonds 16 16
Investments in subsidiaries* 211,221 143,011
Property, plant and equipment, net 69 69
Other assets 965 999
Accounts receivable 95 582
Total assets $ 214,350 $ 145,050
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Subordinated notes payable $ 3,809 $ 4,755
Other liabilities and intercompany payables 12,935 6,677
Total liabilities 16,744 11,432
Shareholders' equity
Common stock, $.20 par value, 25,000,000 and
10,000,000 shares authorized; 11,736,546 and 5,845,300
shares issued in 2001 and 2000, 9,498,847 and
5,054,661 shares outstanding in 2001 and 2000 2,348 1,169
Additional paid-in capital 65,558 7,225
Accumulated other comprehensive income 2,284 2,107
Deferred compensation (292)
Retained earnings (including $138,067 and $124,930 of
undistributed earnings of subsidiaries at December 31,
2001 and 2000) 131,462 125,426
201,360 135,927
Common treasury stock, at cost, 608,025 and 518,639
shares in 2001 and 2000 respectively (3,754) (2,309)
Total shareholders' equity 197,606 133,618
Total liabilities and shareholders' equity $ 214,350 $ 145,050
* $211,221 and $72,309 are eliminated in consolidation in 2001 and 2000, respectively.
</table>
F-50
<page>
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT,
STATEMENTS OF INCOME
<table>
<s> <c> <c> <c>
FOR THE YEARS ENDED
December 31,
(in thousands)
2001 2000 1999
Income $ 67 $ 26 $ 629
Expenses:
Operating expenses 790 147 193
Interest expense 400 515 613
1,190 662 806
Loss from operations (1,123) (636) (177)
Equity in undistributed earnings from
subsidiaries 13,137 9,415 9,326
Net income $ 12,014 $ 8,779 $ 9,149
</table>
F-51
<page>
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<table>
<s> <c> <c> <c>
FOR THE YEARS ENDED
December 31,
(in thousands)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,014 $ 8,779 $ 9,149
Adjustments to reconcile net income to net
cash used in operating activities:
Decrease (increase) in accounts receivables 487 (482) 26
Increase in investment in subsidiaries* (68,210) (12,612) (7,418)
(Increase) decrease in other assets (258) (34) 3
Increase (decrease) in other liabilities and
intercompany payables 6,258 916 (175)
Other 59,689 4,597 405
Net cash provided by operating activities 9,980 1,164 1,990
CASH FLOWS FROM FINANCING
ACTIVITIES
Net change in short-term investments (1,150) 887 (980)
Change in subordinated notes payable
to Investors Life (946) (993) (994)
Cash dividend to stockholders (5,978) (905) -0-
Purchase of treasury stock (1,445) -0- -0-
Net cash used in financing activities (9,519) (1,011) (1,974)
Increase in cash 461 153 16
Cash and cash equivalents, beginning of year 223 70 54
Cash and cash equivalents, end of year $ 684 $ 223 $ 70
*Eliminated in consolidation
</table>
F-52
<page>
FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<table>
<s> <c> <c> <c> <c>
December 31, 2001, 2000 and 1999
(in thousands)
Future policy
benefits, losses, Net
Deferred policy claims and loss Premium investment
acquisition costs expenses (1) revenue income
2001 $ 80,290 $ 737,070 $ 35,886 $ 30,719
2000 $ 56,161 $ 105,763 $ 33,149 $ 6,933
1999 $ 52,490 $ 104,464 $ 33,958 $ 6,923
Benefits, claims,
losses and Amortization of Other
settlement deferred policy operating Premiums
expenses (2) acquisition costs expenses written
2001 $ 47,638 $ 6,800 $ 23,046 $ 35,886
2000 $ 15,664 $ 5,329 $ 11,375 $ 33,149
1999 $ 14,774 $ 5,158 $ 11,740 $ 33,958
</table>
(1) Includes contractholder funds
(2) Includes interest expense on contractholder funds
F-53
<page>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SCHEDULE IV-REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(in thousands)
<table>
<s> <c> <c> <c> <c> <c>
Percentage
Gross Ceded to Assumed of Amount
Direct Other From Other Assumed
Amount Companies Companies Net Amount To Net
2001
Life Insurance in-
force $ 12,107,319 $ 1,074,286 $ -0- $ 11,033,033 0.00%
Premium:
Life insurance $ 37,618 $ 1,821 $ 7 $ 35,804 0.02%
Accident-health
insurance 675 593 -0- 82 0.00%
Total Premium $ 38,293 $ 2,414 $ 7 $ 35,886 0.02%
2000
Life Insurance in-
force $ 7,006,301 $ 552,467 $ 5,067 $ 6,458,901 0.08%
Premium:
Life insurance $ 33,499 $ 448 $ 51 $ 33,102 0.15%
Accident-health
insurance 438 391 -0- 47 0.00%
Total Premium $ 33,937 $ 839 $ 51 $ 33,149 0.15%
1999
Life insurance in-
force $ 7,406,486 $ 520,319 $ 5,787 $ 6,891,954 0.08%
Premium:
Life insurance $ 34,378 $ 573 $ 48 $ 33,853 0.14%
Accident-health
insurance 623 518 -0- 105 0.00%
Total Premium $ 35,001 $ 1,091 $ 48 $ 33,958 0.14%
</table>
F-54
<page>
EXHIBIT INDEX
<table>
<s> <c> <c>
Exhibit Page
No. No. Description of Exhibit
2.1 Agreement and Plan of Merger dated as of January 18, 2001,
by and among FIC, ILCO and ILCO Acquisition Corp. (1)
3.1 Articles of Incorporation of FIC (2)
3.2 Certificate of Amendment to the Articles of Incorporation of
FIC, dated November 12, 1996 (3)
3.3 Bylaws of FIC (2)
3.4 Amendment to Bylaws of FIC dated February 29, 1992 (10)
3.5 Amendment to Bylaws of FIC dated June 16, 1992 (10)
3.6 EX-5 Amendment to Articles of Incorporation of FIC dated
May 18, 2001*
10.1 Stock Purchase Agreement, dated as of March 19, 1991,
as amended, by and among Merrill Lynch Insurance Group,
Inc., Family Life Insurance Company, Family Life
Corporation, Family Life Insurance Investment Company and
FIC (4)
10.2 Note, dated June 12, 1991, in the original principal amount
of $2.5 million made by FIC in favor of Investors Life
Insurance Company of California (Investors-CA) and
transferred to Investors Life Insurance Company of North
America (Investors Life) in connection with the merger as of
December 31, 1992 of Investors-CA into Investors Life (4)
10.3 Credit Agreement, dated as of June 12, 1991, among
Family Life Corporation, the Lenders named therein and the
Agent named therein (4)
10.4 Note, dated June 12, 1991, in the original principal amount
of $22.5 million made by Family Life Corporation in
favor of Investors Life (4)
10.5 Note, dated June 12, 1991, in the original principal amount
of $2.5 million made by FIC in favor of Investors Life
Insurance Company of California (4)
10.6 Option Agreement, dated as of June 12, 1991, among FIC,
Investors Life Insurance Company of North America and
Investors Life Insurance Company of California.(4)
</table>
Ex-1
<page>
<table>
<s> <c> <c>
Exhibit Page
No. No. Description of Exhibit
10.7 Surplus Debenture, dated as of June 12, 1991, in the original
principal amount of $97.5 million made by Family Life
Insurance Company in favor of Family Life Corporation (4)
10.8 Note, dated July 30, 1993, in the original principal amount
amount of $30 million made by Family Life Corporation in
favor of Investors Life Insurance Company of North
America (5)
10.9 Note, dated July 30, 1993, in the original principal amount
of $4.5 million made by Family Life Insurance Investment
Company in favor of Investors Life Insurance Company of
North America (5)
10.10 Amendment No. 1 to Note, dated July 30, 1993, between
Family Life Corporation and Investors Life Insurance
Company of North America (5)
10.11 Amendment No. 1 to Note, dated July 30, 1993, between
Family Life Insurance Company and Family Life
Corporation (5)
10.12 Guaranty Agreement, dated July 30, 1993, between FIC
and Investors Life Insurance Company of North America (5)
10.13 Guaranty Agreement, dated July 30, 1993, between FIC
and Investors Life Insurance Company of North America.(5)
10.14 Data Processing Agreement, dated as of November 30, 1994
between ILCO and FIC Computer Services, Inc.(6)
10.15 Data Processing Agreement, dated as of November 30, 1994
between Investors Life Insurance Company of North
America and FIC Computer Services, Inc (6)
10.16 Data Processing Agreement, dated as of November 30, 1994
Between Family Life Insurance Company and FIC
Computer Services, Inc.(6)
10.17 Amendment No. 2, dated December 12, 1996, effective
June 12, 1996, to the note dated June 12, 1991 in the
original principal amount of $22.5 million made by Family
Life Corporation in favor of Investors Life Insurance
Company of North America (7)
</table>
Ex-2
<page>
<table>
<s> <c> <c>
Exhibit Page
No. No. Description of Exhibit
10.18 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996, to the note dated June 12, 1991 in the
original principal amount of $2.5 million made by FIC in
favor of Investors Life Insurance Company of California (7)
10.19 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996, to the note dated June 12, 1991 in the
original principal amount of $2.5 million made by FIC in
favor of Investors Life Insurance Company of North
America (7)
10.20 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996, to the note dated July 30, 1993 in the
original principal amount of $30 million made by FIC in
favor of Investors Life Insurance Company of North
America (7)
10.21 Amendment No. 1, dated December 12, 1996, effective
June 12, 1996, to the note dated July 30, 1993 in the
original principal amount of $4.5 million made by Family
Life Insurance Investment Company in favor of Investors
Life Insurance Company of North America (7)
10.22 Amendment Agreement, dated December 12, 1996, amending
the Option Agreement among FIC, Investors Life Insurance
Company of North America and Investors Life Insurance
Company of California (7)
10.23 Assignment Agreement, dated December 23, 1998, between
Family Life Insurance Investment Company and FIC (8)
10.24 Amendment dated as of April 4, 2001 to Employment
Agreement between the Registrant and Roy F. Mitte (11)
10.25 EX-6 Amended and Restated Stock Option Grant Agreement*
10.26 Employment Agreement of James M. Grace dated January 8,
2001 (12)
21.1 EX-17 Subsidiaries of Registrant*
</table>
* Filed herewith.
Ex-3
<page>
(1) Incorporated be reference to the Exhibits filed with FIC's Current Report
on Form 8-K dated January 22, 2001.
(2) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1985.
(3) Incorporated by reference to the Exhibits filed with FIC's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(4) Incorporated by reference to the Exhibits filed with FIC's Current Report
on Form 8-K dated June 25, 1991.
(5) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1993.
(6) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1994.
(7) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1996.
(8) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1998.
(9) Incorporated by reference to the Exhibits filed with FIC's Annual Report on
Form 10-K for 1999.
(10) Incorporated by reference to the Exhibits filed with FIC's S-4 filed on
February 1, 2001.
(11) Incorporated by reference to the Exhibits filed with FIC's 10K/A filed on
April 5, 2001.
(12) Incorporated by reference to the Exhibits filed with ILCO's 10K/A filed on
April 3, 2001.
Ex-4
<page>
EXHIBIT 3.6
AMENDMENT TO ARTICLES OF INCORPORATION OF FIC
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
FINANCIAL INDUSTRIES CORPORATION
The undersigned, Roy F. Mitte and Steven P. Schmitt, certify that:
1. They are the President and Secretary, respectively, of Financial
Industries Corporation (the "Corporation").
2. At a duly held Special Meeting of the Board of Directors of the
Corporation, held on January 17, 2001, the Board of Directors
adopted the following resolution approving the following
amendment to the Articles of Incorporation of the Corporation:
Paragraph 1 of Article IV is amended to read as follows:
"The aggregate number of shares which the Corporation
shall have the authority to issue is twenty-five million
(25,000,000) shares of common stock, par value $0.20 per
share."
3. The shareholders of the Corporation adopted and approved the same
amendment by resolution at a special meeting held at the offices
of the Corporation in Austin, Texas, on May 18, 2001, by the
required vote of shareholders as prescribed by Article VII of the
Corporation's Articles of Incorporation and Articles 4.02 and
2.28 of the Texas Business Corporation Act.
4. The number of shares outstanding is 5,054,661. The number of
shares entitled to vote on or consent to the amendment is
5,054,661.
5. The number of shares voted in favor of the amendment was
3,334,585, or 65.97%, which exceeded the required vote, which is
a majority under Article VII of the Corporation's Articles of
Incorporation. The number of shares voted against was 35,549.
The undersigned have executed these Articles of Amendment and affixed
the corporate seal on May 18, 2001.
/s/ Roy F. Mitte /s/ Steven P. Schmitt
Roy F. Mitte, President Steven P. Schmitt, Secretary
Ex-5
<page>
EXHIBIT 10.25
AMENDED AND RESTATED STOCK OPTION GRANT AGREEMENT
THIS OPTION AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD, OFFERED FOR SALE OR
OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL IN REASONABLY ACCEPTABLE FORM AND SCOPE REASONABLY SATISFACTORY TO THE
COMPANY THAT REGISTRATION, QUALIFICATION OR OTHER SUCH ACTIONS ARE NOT REQUIRED
UNDER ANY SUCH LAWS. THE OFFERING OF THIS SECURITY HAS NOT BEEN REVIEWED OR
APPROVED BY ANY STATE'S SECURITIES ADMINISTRATOR.
AMENDED AND RESTATED STOCK OPTION GRANT AGREEMENT
GRANTED TO: Investors Life Insurance Company of North
America
DATE OF GRANT: March 21, 1991
NUMBER OF UNDERLYING SHARES: 500,411 shares
EXERCISE PRICE: $2.10 per share
VESTING SCHEDULE: As described in Paragraph 4 below
This Amended and Restated Stock Option Grant Agreement (this "Option")
is made and entered into as of May 18, 2001 and amends and restates in its
entirety the Option Agreement dated as of March 21, 1991 (the "Date of
Grant"), as amended on June 12, 1996, between Financial Industries
Corporation, a Texas corporation (the "Company"), and Investors Life
Insurance Company of North America (the "Holder"). Certain terms used in
this Option are defined in Paragraph 15.
1. Grant. The Holder is granted an option to purchase 500,411 shares (the
"Option Shares") of the common stock, par value $.20 per share
("Common Stock"), of the Company. The Option granted hereunder is in
consideration for the loans granted by the Holder, or subsidiaries
thereof, in the amounts of $22.5 million and $2.5 million in
connection with the acquisition by the Company of Family Life
Insurance Company in 1991.
2. Exercise Price. The Option's exercise price is $2.10 per share (the
"Exercise Price").
3. Term. The Option, unless sooner terminated or exercised in full, shall
expire at 5:00 p.m., Austin, Texas time, on June 12, 2006. No portion
of the Option may be exercised after such date.
Ex-6
<page>
4. Vesting and Exercisability. The Option Shares shall be fully vested
and exercisable on the Date of Grant.
5. [Intentionally Left Blank]
6. Method of Exercise.
(a) To exercise this Option in whole or in part, the Holder shall
deliver to the Company, at the Option Agency, (i) this Option, (ii) a
written notice, in substantially the form of the Subscription Notice
attached hereto as Annex A, of such Holder's election to exercise this
Option, which notice shall specify (A) the number of Option Shares to be
purchased, (B) the denominations of the share certificate or certificates
desired, and (C) the name or names in which such certificates are to the
registered, (iii) if the Common Stock to be received upon the exercise of
this Option has not been registered under the Securities Act, a written
certification in substantially the form of the Certification attached
hereto as Annex B, and (iv) payment of the Exercise Price with respect to
such Option Shares. Such payment may be made, at the option of the Holder,
by cash, money order, certified or bank cashier's check or wire transfer;
provided, however, that if this Option is exercised concurrently with or
after the occurrence of a Capital Reorganization in which cash is received
by the holders of Common Stock of the Company, then the Holder may elect to
offset the amount of cash due to the Holder from such Capital
Reorganization against the Exercise Price payable upon exercise of this
Option.
The Company shall, as promptly as practicable and in any event within
five Business Days thereafter, execute and deliver or cause to be executed
and delivered, in accordance with such notice, a certificate or
certificates representing the aggregate number of Option Shares specified
in said notice. The share certificate or certificates so delivered shall be
in such denominations as may be specified in such notice or, if such notice
shall not specify denominations, shall be in the amount of the number of
Option Shares for which the Option is being exercised, and shall be issued
in the name of the Holder or such other name or names as shall be
designated in such notice. Such certificate or certificates shall be deemed
to have been issued, and such Holder or any other Person so designated to
be named therein shall be deemed for all purposes to have become a Holder
of record of such shares, as of the date the aforementioned notice is
received by the Company. If this Option shall have been exercised only in
part, the Company shall, at the time of delivery of the certificate or
certificates, deliver to the Holder a new Option evidencing the right to
purchase the remaining Option Shares called for by this Option, which new
Option shall in all other respects be identical with this Option, or, at
the request of the Holder, appropriate notation may be made on this Option
which shall then be returned to the Holder. The Company shall pay all
expenses, taxes (if any) and other charges payable in connection with the
preparation, issuance and delivery of share certificates and a new Option,
except that, if share certificates or a new Option shall be registered in a
name or names other than the name of the Holder, funds sufficient to pay
all transfer taxes payable as a result of such transfer shall be paid by
the Holder at the time of delivering the aforementioned notice of exercise
or promptly upon receipt of a written request of the Company for payment.
(b) Shares To Be Fully Paid and Nonassessable. All shares of Common
Stock issued upon the exercise of this Option shall be validly issued,
fully paid and nonassessable and free from all preemptive rights of any
shareholder, and from all taxes.
(c) No Fractional Shares To Be Issued. The Company shall not be
required to issue fractions of shares of Common Stock upon exercise of this
Option. If any fraction of a share would, but for this Paragraph, be
issuable upon any exercise of this Option, in lieu of such fractional share
the Company shall pay to the Holder, in cash, an amount equal to such
fraction of the Fair Market Value per share of Common Stock of the Company
on the Business Day immediately prior to the date of such exercise.
Ex-7
<page>
(d) Restrictive Legend. If the Company, in its sole discretion, shall
determine that it is necessary, to comply with applicable securities laws,
the certificate or certificates representing the Option Shares purchased
pursuant to the exercise of this Option shall bear an appropriate legend,
in form and substance as determined by the Company, giving notice of
applicable restrictions on transfer under or with respect to such laws.
(e) Reservation; Authorization. The Company has reserved and will keep
available for issuance upon exercise of this Option the total number of
shares of Common Stock deliverable upon exercise of this Option from time
to time outstanding. The issuance of such shares has been duly and validly
authorized and, when issued and sold in accordance with this Option, such
shares will be duly and validly issued, fully paid and nonassessable.
7. Option Agency; Transfer; Exchange and Replacement of Option.
(a) Option Agency. At any time, the Company may appoint and thereafter
maintain, at its own expense, an agency, which agency may be the Company's
then existing transfer agent (the "Option Agency"), for certain purposes
specified herein, and shall give prompt notice of such appointment (and
appointment of any successor Option Agency) to the Holder. Until an
independent Option Agency is so appointed, the Company shall perform the
obligations of the Option Agency provided herein at its address as
specified on the signature page hereto or such other address as the Company
shall specify by notice to the Holder.
(b) Ownership of Option. The Company may deem and treat the Person in
whose name this Option is registered as the Holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any
Person other than the Option Agency) for all purposes and shall not be
affected by any notice to the contrary, until presentation of this Option
for registration of transfer as provided in this Paragraph 7.
(c) Transfer of Option. The Company agrees to maintain at the Option
Agency books for the registration of transfers of the Options, and transfer
of this Option and all rights hereunder shall be registered, in whole or in
part, on such books, upon surrender of this Option at the Option Agency,
together with a written assignment of this Option duly executed by the
Holder or his or its duly authorized agent or attorney, with (unless the
Holder is the original Holder or another institutional investor) signatures
guaranteed by a bank or trust company or a broker or dealer registered with
the NASD, and funds sufficient to pay any transfer taxes payable upon such
transfer. Upon surrender the Company shall execute and deliver a new Option
or Options in the name of the assignee or assignees and in the
denominations specified in the instrument of assignment, and this Option
shall promptly be canceled. The Option Agency shall not be required to
register any transfers if the Holder fails to furnish to the Company, after
a request therefor, an opinion of counsel (who may be an employee of such
Holder) reasonably satisfactory to the Company that such transfer is exempt
from the registration requirements of the Securities Act and applicable
blue sky laws.
(d) Division of Option. This Option may be divided upon surrender
hereof to the Option Agency, together with a written notice specifying the
names and denominations in which the new Options are to be issued, signed
by the Holder. Subject to compliance with Paragraph 7(c) as to any transfer
which may be involved in the division, the Company shall execute and
deliver new Options in exchange for the Option or Options to be divided in
accordance with such notice.
Ex-8
<page>
(e) Loss, Theft, Destruction or Mutilation of Options. Upon receipt
of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of this Option and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security reasonably satisfactory
to the Company, or, in the case of any such mutilation, upon surrender and
cancellation of such Option, the Company will make and deliver, in lieu of
such lost, stolen, destroyed or mutilated Option, a new Option of like
tenor and representing the right to purchase the same aggregate number of
shares of Common Stock as provided for in such lost, stolen, destroyed or
mutilated Option.
(f) Expenses of Delivery of Options. The Company shall pay all
expenses, taxes (other than transfer taxes) and other charges payable in
connection with the preparation, issuance and delivery of this Option and
the Common Stock issuable hereunder.
8. No Rights as a Shareholder. The Holder shall not have any of the rights
of a shareholder with respect to the Option Shares until the Option is exercised
and the Holder receives such shares in accordance with the terms hereof.
9. Anti-Dilution Provisions.
(a) Adjustments Generally. The Exercise Price and the number of Option
Shares (or other securities or property) issuable upon exercise of the
Option shall be subject to adjustment from time to time upon the occurrence
of certain events, as provided in this Paragraph 9.
(b) Common Stock Reorganization. If the Company shall after the date
of issuance of the Option subdivide its outstanding shares of Common Stock
into a greater number of shares or consolidate its outstanding shares of
Common Stock into a lesser number of shares, whether by way of a stock
dividend or stock split or otherwise (any such event being called a "Common
Stock Reorganization"), then (i) the Exercise Price shall be adjusted,
effective immediately after the record date at which the holders of shares
of Common Stock are determined for purposes of such Common Stock
Reorganization, to a price determined by multiplying the Exercise Price in
effect immediately prior to such record date by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding on such
record date before giving effect to such Common Stock Reorganization and
the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such Common Stock Reorganization, and
(ii) the number of shares of Common Stock subject to purchase upon exercise
of the Option shall be adjusted, effective at such time, to a number
determined by multiplying the number of shares of Common Stock subject to
purchase immediately before such Common Stock Reorganization by a fraction,
the numerator of which shall be the number of shares outstanding after
giving effect to such Common Stock Reorganization and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
before such Common Stock Reorganization.
(c) Capital Reorganization. If after the date of issuance of the
Option there shall be any consolidation or merger to which the Company is a
party (whether or not the Company is the surviving entity), other than a
consolidation or a merger in which the Company is a continuing corporation
and which does not result in any reclassification of, or change (other than
a Common Stock Reorganization or a change in par value), in, outstanding
shares of Common Stock, any sale, assignment, lease, exchange, conveyance
or other transfer (in one transaction or series of related transactions) of
the property of the Company as an entirety or substantially as an entirety
or all or substantially all of the outstanding equity securities of the
Company to any person or group of related persons for the purposes of
Section 13(d) of the Exchange Act, or any dividend or distribution of
assets (including securities of subsidiaries of the Company) other than
regular cash dividends (any such event, other than a Common Stock
Reorganization, being called a "Capital Reorganization"), then, effective
upon the effective date of such Capital Reorganization, the Holder shall
have the right to purchase or receive, upon exercise of the Option, the
kind and amount of shares of stock and other securities and property
(including cash) which the Holder would have owned or have been entitled to
receive after such Capital Reorganization if the Option had been exercised
immediately prior to such Capital Reorganization. If the Capital
Reorganization is a distribution of options or rights to purchase or
receive securities or assets of the Company and such options or rights
expire before this Option, the Holder shall be entitled to receive options
or rights with terms, as nearly as possible, identical to the terms of such
expired options or rights. As a condition to effecting any Capital
Reorganization, the Company or the successor or surviving corporation, as
the case may be, shall execute and deliver to the Holder an agreement as to
the Holder's rights in accordance with this Paragraph 9(c), providing for
subsequent adjustments as nearly equivalent as may be practicable to the
adjustments provided for in this Paragraph 9(c). The provisions of this
Paragraph 9(c) shall similarly apply to successive Capital Reorganizations.
Ex-9
<page>
(d) Certain Other Events. If any event occurs after the date of
issuance of the Option as to which the foregoing provisions of this
Paragraph 9 are not strictly applicable or, if strictly applicable, would
not, in the good faith judgment of the Board of Directors of the Company
(the "Board"), fairly protect the purchase rights of the Holder in
accordance with the essential intent and principles of such provisions,
then the Board shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, as
shall be reasonably necessary, in the good faith opinion of the Board, to
protect such purchase rights as aforesaid.
(e) Adjustment Rules.
(i) Any adjustments pursuant to this Paragraph 9 shall be made
successively whenever an event referred to herein shall occur.
(ii) If the Company shall set a record date to determine the holders
of shares of Common Stock for purposes of a Common Stock Reorganization or
Capital Reorganization, and shall legally abandon such action prior to
effecting such action, then no adjustment shall be made pursuant to this
Paragraph 9 in respect of such action.
(iii) No adjustment in the Exercise Price shall be made hereunder if
such adjustment would reduce the exercise price to an amount below par
value of the Common Stock, which par value shall initially be $.20 per
share of Common Stock.
(f) Notice of Adjustment. The Company shall give the Holder reasonable
notice of the record date or effective date, as the case may be, of any
action which requires or might require an adjustment or readjustment
pursuant to this Paragraph 9. Such notice shall describe such event in
reasonable detail and specify the record date or effective date, as the
case may be, and, if determinable, the required adjustment and the
computation thereof. If the required adjustment is not determinable at the
time of such notice, the Company shall give reasonable notice to the Holder
of such adjustment and computation promptly after such adjustment becomes
determinable.
Ex-10
<page>
10. Notices. All notices, requests, consents and other communications
provided for herein shall be in writing and shall be effective upon delivery in
person, faxed or telecopied, or mailed by certified or registered mail, return
receipt requested, postage pre-paid, to the addresses specified on the signature
pages hereto or, in any case, at such other address or addresses as shall have
been furnished in writing to the Company (in the case of a Holder) or to the
Holder (in the case of the Company) in accordance with the provisions of this
Paragraph.
11. Waivers; Amendments. No failure or delay of the Holder in exercising
any power or right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
and remedies of the Holder are cumulative and not exclusive of any rights or
remedies which it would otherwise have. The provisions of this Option may be
amended, modified or waived with (and only with) the written consent of the
Company and Holders who collectively hold Options to purchase a majority of the
Common Stock subject to purchase upon exercise of such Options at the time
outstanding.
Any such amendment, modification or waiver effected pursuant to this
Paragraph shall be binding upon the Holders, upon each future Holder thereof and
upon the Company. In the event of any such amendment, modification or waiver the
Company shall give prompt notice thereof to all Holders and, if appropriate,
notation thereof shall be made on all Options thereafter surrendered for
registration of transfer or exchange.
No notice or demand on the Company in any case shall entitle the Company to
any other or further notice or demand in similar or other circumstances.
12. Governing Law. This Option shall be construed in accordance with and
governed by the laws of the State of Texas.
13. Severability. In case any one or more of the provisions contained in
this Option shall be invalid, illegal or unenforceable in any respect, the
validity, legality or enforceability of the remaining provisions contained
herein and therein shall not in any way be affected or impaired thereby. The
parties shall endeavor in good faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions the economic effect of
which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
14. Paragraph Headings. The paragraph headings used herein are for
convenience of reference only, are not part of this Option and are not to affect
the construction of or be taken into consideration in interpreting this Option.
15. Certain Defined Terms. The following terms, as used in this Option,
have the following respective meanings:
(a) "Affiliate" means, with respect to any Person, any Person who,
directly or indirectly, controls, is controlled by or is under common
control with that Person.
(b) "Board" shall have the meaning set forth in Paragraph 9(d).
(c) "Business Day" means (i) if any class of common stock of the Company
is listed or admitted to trading on a national securities exchange or
approved for quotation on the Nasdaq Stock Market, a day on which the
principal national securities exchange or the Nasdaq Stock Market on
which such class of common stock is listed or admitted to trading is
open for business or (ii) if no class of common stock of the Company
is so listed or admitted to trading, a day on which the New York Stock
Exchange is open for business.
Ex-11
<page>
(d) "Capital Reorganization" shall have the meaning set forth in Paragraph
9(c).
(e) "Closing Price" with respect to any security on any day means (i) if
such security is listed or admitted for trading on a national
securities exchange, the reported last sales price regular way or, if
no such reported sale occurs on such day, the average of the closing
bid and asked prices regular way on such day, in each case as reported
in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities
exchange on which such class of security is listed or admitted to
trading, or (ii) if such security is not listed or admitted to trading
on any national securities exchange, the last quoted sales price, or,
if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market on such day as reported by the Nasdaq
Stock Market or any comparable system then in use or, if not so
reported, as reported by any New York Stock Exchange member firm
reasonably selected by the Company for such purpose.
(f) "Common Stock" shall have the meaning set forth in Paragraph 1.
(g) "Common Stock Reorganization" shall have the meaning set forth in
Paragraph 9(b).
(h) "Company" shall have the meaning set forth in the introductory
paragraph.
(i) "Date of Grant" shall have the meaning set forth in the introductory
paragraph.
(j) "Exercise Price" shall have the meaning set forth in Paragraph 2.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any similar or successor federal statute, and the rules
and regulations of the Securities and Exchange Commission (or its
successor) thereunder, all as the same shall be in effect at the time.
(l) "Fair Market Value," with respect to any security on any day, means
the average of the daily Closing Prices of a share or unit of such
security for the 20 consecutive Business Days ending on the most
recent Business Day for which a Closing Price is available; provided,
however, that in the event that, in the case of Common Stock, the Fair
Market Value is determined following the announcement by the Company
of any subdivision, combination or reclassification of Common Stock or
the record date for such subdivision, combination or reclassification,
then, and in each such case, the Fair Market Value shall be
appropriately adjusted to reflect the current market price per share
equivalent of Common Stock. If a Closing Price for any security is not
available, then "Fair Market Value" shall mean the fair market value
of such security as determined in good faith by the Board.
(m) "Holder" shall have the meaning set forth in the introductions
paragraph and shall also include registered assigns. The term Holders
shall refer to all Holders of Options.
(n) "NASD" means the National Association of Securities Dealers, Inc.
(o) "Option" shall have the meaning set forth in the introductory
paragraph. The term Options shall refer to the Options resulting from
any subdivision of this Option.
Ex-12
<page>
(p) "Option Agency" shall have the meaning set forth in Paragraph 7(a).
(q) "Option Shares" shall have the meaning set forth in Paragraph 1.
(r) "Person" or "person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or other agency or political subdivision
thereof.
(s) "Securities Act" means the Securities Act of 1933 and any similar or
successor federal statute, and the rules and regulations of the
Securities and Exchange Commission (or its successor) thereunder, all
as the same shall be in effect at the time.
16. Accredited Investor Status. The Holder hereby represents and warrants
to the Company that the Holder is an "Accredited Investor" (as defined in Rule
501(a) of Regulation D promulgated under the Securities Act).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
Ex-13
<page>
IN WITNESS WHEREOF, the undersigned have executed this Option as of the date
written below.
DATED: May 18, 2001 FINANCIAL INDUSTRIES
CORPORATION
By: /s/ Roy F. Mitte
Roy F. Mitte
Chairman, President
and Chief Executive
Officer
Address: 6500 River Place Blvd.
Building One
Austin, Texas 78730
ACCEPTED BY:
INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA
By: /s/ Steven P. Schmitt
Name: Steven P. Schmitt
Title: Secretary
Address: 6500 River Place Blvd.
Building One
Austin, Texas 78730
23-1632193
Holder Taxpayer Identification Number
Ex-14
<page>
ANNEX A
SUBSCRIPTION NOTICE
(To Be Executed upon Exercise of Option)
TO FINANCIAL INDUSTRIES CORPORATION:
The undersigned hereby irrevocably elects to exercise the attached
Option and to purchase thereunder ________ shares of Common Stock in
payment of an Exercise Price in an amount equal to $____ per share.
Please issue a certificate or certificates for such shares of Common
Stock in the following name or names and denominations:
If said number of shares shall not be all the shares issuable upon
exercise of the attached Option, a new Option is to be issued in the name
of the undersigned for the balance remaining of such shares less any
fraction of a share paid in cash.
Dated: ______________, _____
Note: The above signature should correspond exactly with the name on the face
of the attached Option or with the name of the assignee appearing in the
assignment form below.
Ex-15
<page>
ANNEX B
CERTIFICATION
The undersigned hereby certifies to Financial Industries Corporation
that he, she or it is:
a. an "accredited investor" as that term is defined in
Regulation D promulgated pursuant to the Securities Act or
any successor regulation, as such provisions may be in
effect on the date hereof, and is an "accredited investor"
pursuant to Rule 501(a) of such regulation; and
b. is knowledgeable, sophisticated and experienced in business
and financial matters and in securities similar to the
Common Stock; is aware of the limitation on the transfer of
the Common Stock imposed by applicable securities laws and
any limitations on transfer imposed by contracts with the
Company or others; and has had access to, or been furnished
with, all information about the Common Stock and the Company
deemed necessary to conclude that he, she or it has the
ability to bear the economic risk of the investment in the
Common Stock and to afford the complete loss of such
investment.
IN WITNESS WHEREOF, the undersigned has executed this CERTIFICATION
this _____ day of _________________, _____.
For Individuals: For Entities:
Signature Printed Name of Entity
By:
Printed Name Name:
Title:
Ex-16
<page>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Family Life Corporation
Family Life Insurance Company
Financial Industries Service Corporation
Financial Industries Securities Corporation
Financial Industries Service Corporation
of Mississippi, Inc.
Financial Industries Sales Corporation
of Southern California, Inc.
FIC Realty Services, Inc.
FIC Property Management, Inc.
FIC Computer Services, Inc.
ILCO Acquisition Company
InterContinental Life Corporation
Investors Life Insurance Company of North America
Investors Life Insurance Company of Indiana
ILG Sales Corporation
ILG Securities Corporation
InterContinental Growth Plans, Inc.
InterContinental Life Agency, Inc.
Ex-17