SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly Period Ended June 30, 2002
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 74-2126975
(State of Incorporation) (I.R.S. Employer Identification Number)
6500 River Place Blvd., Building One, Austin, Texas 78730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of common shares outstanding ($.20 par value) at end of period:
9,593,605.
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EXPLANATORY NOTE
This Form 10-Q/A amends the Registrant's quarterly on Form 10-Q for the quarter
ended June 30, 2002 as filed on August 26, 2002 and is being filed to reflect
the restatement of the Registrant's interim consolidated financial statements.
The reasons for and effects of this restatement are presented in the Notes to
the consolidated financial statements. Except for Items 1 and 2 of Part I, no
other information included in the original report on Form 10-Q is amended by
this Form 10-Q/A. Other than with respect to the restated information, the
Registrant has not updated disclosures in this Form 10-Q/A to reflect any event
subsequent to the Registrant's initial filing of its quarterly report on Form
10-Q on August 26, 2002. For the most recent information concerning the
Registrant, please see the Registrant's quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
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Forward-Looking Statements
Except for historical factual information set forth in this Form 10-Q, the
statements, analyses, and other information contained in this report relating to
trends in the Company's operations and financial results, the markets for the
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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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 (as RESTATED) and December 31, 2001................... 5
Consolidated Statements of Income
For the three and six month periods ended
June 30, 2002 (as RESTATED) and June 30, 2001....................... 7
Consolidated Statements of Cash Flows
For the three and six month periods ended
June 30, 2002 (as RESTATED) and June 30, 2001...................... 11
Notes to Consolidated Financial Statements (as RESTATED).................... 15
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations..................... 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .............................................. 31
Item 4. Controls and Procedures ............................................ 32
Part II
Other Information.......................................................... 33
Signature Page............................................................. 37
Certifications.............................................................. 38
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
(unaudited)
ASSETS (RESTATED)
Investments:
Fixed maturities held to maturity, at
amortized cost (market value approximates
$1,042 and $1,028 at June 30, 2002
and December 31, 2001, respectively) $ 1,042 $ 1,029
Fixed maturities available for sale at
market value (amortized cost of $488,031
and $496,704 at June 30, 2002 and
December 31, 2001, respectively) 497,041 501,395
Equity securities, at market
(cost approximates $59 at June 30,
2002 and December 31, 2001) 35 56
Policy loans 48,197 49,794
Mortgage loans 3,722 4,715
Invested real estate 70,435 61,049
Short-term investments 126,451 138,291
Total investments 746,923 756,329
Cash 7,416 7,094
Accrued investment income 8,307 8,483
Agency advances and other receivables 36,251 30,324
Reinsurance receivables 15,396 14,709
Due and deferred premiums 12,552 13,411
Real estate occupied by the Company 19,913 20,054
Property and equipment, net 3,573 3,546
Deferred policy acquisition costs 81,232 80,290
Present value of future profits of
acquired businesses 28,735 31,251
Other assets 16,564 14,074
Separate account assets 364,060 399,264
Total Assets $ 1,340,922 $ 1,378,829
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
(unaudited)
(RESTATED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contract holder
deposit funds:
Contract holder deposit funds $ 554,025 $ 556,117
Future policy benefits 175,810 180,953
Other policy claims and benefits payable 13,932 13,985
743,767 751,055
Deferred federal income taxes 31,857 31,920
Excess of net assets acquired over cost -0- 15,847
Other liabilities 11,365 8,938
Separate account liabilities 356,261 391,593
Total Liabilities 1,143,250 1,199,353
Commitments and Contingencies
Shareholders' equity:
Common stock, $.20 par value, 25,000
shares authorized in 2002 and 2001,
11,855 and 11,736 shares issued in 2002
and 2001, 9,594 and 9,499 shares out-
standing in 2002 and 2001. 2,372 2,348
Additional paid-in capital 66,523 65,558
Accumulated other comprehensive income 5,044 2,297
Deferred compensation (263) (292)
Retained earnings 146,353 131,462
220,029 201,373
Common treasury stock, at cost, 2,261
and 2,237 shares in 2002 and 2001,
respectively. (22,357) (21,897)
Total Shareholders' Equity 197,672 179,476
Total Liabilities and Shareholders' Equity $ 1,340,922 $ 1,378,829
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended June 30,
2002 2001
(RESTATED)
Revenues:
Premiums $ 8,996 $ 9,061
Net investment income 10,092 7,141
Earned insurance charges 10,676 5,658
Other 238 254
30,002 22,114
Benefits and expenses:
Policyholder benefits and expenses 11,121 6,703
Interest expense on contract holders
deposit funds 7,109 4,126
Amortization of present value of future
profits of acquired businesses 1,260 938
Amortization of deferred policy acquisition
costs 2,224 1,494
Operating expenses 7,697 5,376
Interest expense -0- 189
29,411 18,826
Income before federal income tax and equity
in net earnings of affiliates 591 3,288
Provision for federal income taxes 376 994
Income before equity in net earnings of
affiliates 215 2,294
Equity in net earnings of affiliate,
net of tax -0- 472
Net Income $ 215 $ 2,766
The accompanying notes are an integral part of these
consolidated statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended June 30,
2002 2001
(RESTATED)
Net Income Per Share
Basic:
Average weighted shares outstanding 9,541 7,193
Basic earnings per share $ 0.02 $ 0.38
Diluted:
Common stock and common stock equivalents 9,619 7,250
Diluted earnings per share $ 0.02 $ 0.38
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Six Months Ended June 30,
2002 2001
(RESTATED)
Revenues:
Premiums $ 18,910 $ 17,099
Net investment income 21,140 8,772
Earned insurance charges 21,501 6,592
Other 690 254
62,241 32,717
Benefits and expenses:
Policyholder benefits and expenses 21,405 9,294
Interest expense on contract holders
deposit funds 15,094 4,696
Amortization of present value of future
profits of acquired businesses 2,330 1,776
Amortization of deferred policy acquisition costs 4,147 2,933
Operating expenses 16,585 8,516
Interest expense -0- 616
Total 59,561 27,831
Income before federal income tax, equity
in net earnings of affiliates and cumulative
effect of change in accounting principle 2,680 4,886
Provision for federal income taxes 1,309 1,354
Income before equity in net earnings of
affiliates and cumulative effect of change
in accounting principle 1,371 3,532
Equity in net earnings of affiliate,
net of tax -0- 1,317
Net income before cumulative effect of
change in accounting principle 1,371 4,849
Cumulative effect of change in accounting
principle 15,727 -0-
Net Income $ 17,098 $ 4,849
The accompanying notes are an integral part of these
consolidated statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Six Months Ended June 30,
2002 2001
Net Income Per Share
Basic: (RESTATED)
Average weighted shares outstanding $ 9,515 6,130
Basic earnings per share
Income per share before cumulative
effect of change in accounting principle $ 0.14 $ 0.79
Cumulative effect of change in accounting
principle 1.65 0.00
Basic earnings per share $ 1.80 $ 0.79
Diluted:
Common stock and common stock equivalents 9,594 6,160
Diluted earnings per share
Income per share before cumulative effect
of change in accounting principle $ 0.14 $ 0.79
Cumulative effect of change in accounting
principle 1.64 0.00
Diluted earnings per share $ 1.78 $ 0.79
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended June 30,
2002 2001
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES (RESTATED)
Net Income $ 215 $ 2,766
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of present value of future
profits of acquired business 1,260 938
Depreciation 641 249
Equity in undistributed earnings of
affiliate -0- (776)
Changes in assets and liabilities:
Decrease in accrued investment income 2,428 72
(Increase) decrease in agent advances
and other receivables (6,599) 2,917
Decrease (increase) in due and deferred
premiums 309 (101)
Net change in deferred policy acquisition
costs (41) (1,089)
Decrease in other assets 989 381
Decrease in policy liabilities and accruals (5,202) (2,263)
Increase (decrease) in other liabilities 2,082 (1,620)
(Decrease) increase in deferred federal
income taxes (145) 114
Other, net 499 1,369
Net cash (used in) provided by operating
activities $ (3,564) $ 2,957
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
Three Months Ended June 30,
2002 2001
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES (RESTATED)
Fixed maturities purchased $ (79,192) $ (28,785)
Real estate capitalized (7,010) -0-
Proceeds from sales and maturities of
fixed maturities 84,038 34,069
Net change in policy loans 729 (61)
Net change in short-term investments 1,820 (3,757)
Net change in property and equipment 3 (259)
Net cash provided by investing activities 388 1,207
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid (2,207) (1,931)
Net cash from acquisition of insurance
holding company -0- 6,979
Contractholder fund deposits 13,110 7,435
Contractholder fund withdrawals (10,925) (6,125)
Issuance of common capital stock 795 -0-
Purchase of treasury stock -0- (2,298)
Net cash provided by financing activities 773 4,060
Net (decrease) increase in cash (2,403) 8,224
Cash, beginning of period 9,819 3,855
Cash, end of period $ 7,416 $ 12,079
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30,
2002 2001
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES (RESTATED)
Net Income $ 17,098 $ 4,849
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization of present value of future
profits of acquired business 2,330 2,056
Depreciation 1,281 274
Cumulative change in accounting principle (15,727) -0-
Equity in undistributed earnings of
affiliate -0- (2,137)
Changes in assets and liabilities:
Decrease (increase) in accrued investment
income 176 (104)
Increase in agent advances and other
receivables (6,614) (3)
Decrease (increase) in due and deferred
premiums 859 (427)
Net change in deferred policy acquisition
costs (942) (1,623)
Increase) decrease in other assets (2,489) 45
Decrease in policy liabilities and accruals (9,445) (1,967)
Increase in other liabilities 2,427 137
Decrease in deferred federal income taxes (1,569) (150)
Other, net 954 728
Net cash (used in) provided by operating
activities $ (11,661) $ 1,678
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
Six Months Ended June 30,
2002 2001
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES (RESTATED)
Fixed maturities purchased $ (106,587) $ (33,985)
Real estate capitalized (10,630) -0-
Proceeds from sales and maturities of
fixed maturities 115,313 42,565
Net change in policy loans 1,597 (108)
Net change in short-term investments 11,840 (2,995)
Net change in property and equipment (27) (284)
Net cash provided by investing activities 11,506 5,193
CASH FLOW FROM FINANCING ACTIVITIES
Dividends Paid (2,207) (1,931)
Net cash from acquisition of insurance
holding company -0- 6,979
Contractholder fund deposits 25,628 8,498
Contractholder fund withdrawals (23,473) (7,236)
Issuance of common capital stock 989 -0-
Purchase of treasury stock (460) (2,298)
Repayment of subordinated notes payable -0- (1,537)
Net cash provided by financing activities 477 2,475
Net increase in cash 322 9,346
Cash, beginning of year 7,094 2,733
Cash, end of period $ 7,416 $ 12,079
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The financial statements included herein have been presented to conform to the
requirements of Form 10-Q. This presentation includes year end balance sheet
data that was derived from audited financial statements. The notes to the
financial statements do not necessarily include all disclosures required by
generally accepted accounting principles (GAAP). The reader should refer to Form
10-K for the year ended December 31, 2001 previously filed with the Securities
and Exchange Commission for financial statements prepared in accordance with
GAAP. Management believes the financial statements reflect all adjustments
necessary to present a fair statement of interim results. Certain prior year
amounts have been reclassified to conform with the current year presentation.
The consolidated financial statements include the accounts of Financial
Industries Corporation ("FIC") and its wholly-owned subsidiaries. All
significant intercompany items and transactions have been eliminated.
Accumulated Other Comprehensive Income
The following is a reconciliation of accumulated other comprehensive income from
December 31, 2001 to June 30, 2002 (in thousands):
Net
unrealized
gain (loss) Total
on invest- Net accumu-
ments in appreciation lated
fixed (depreti- other
maturities ation) compre-
available of equity hensive
for sale security Other income
Balance at December 31,
2001 $ 2,527 $ (2) $(228) $ 2,297
Current Period Change 2,761 (14) 0 2,747
Balance at June 30, 2002 $ 5,288 $ (16) $(228) $ 5,044
Dividends Declared
In March, 2001, FIC announced that its board approved the payment of an annual
cash dividend in the amount of $0.41 per share. The dividend was paid on April
12, 2001, to shareholders of record as of the close of business on March 19,
2001.
In May 2001, FIC announced that its Board of Directors approved the payment of a
semi-annual cash dividend in the amount of $0.25 per common share. The dividend
was payable on July 2, 2001, to record holders as of the close of business on
June 18, 2001.
A dividend of $0.23 per share was declared in the second quarter of 2002. The
dividend was paid on June 21, 2002 to shareholders of record as of June 7, 2002.
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Related Party Transactions
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 as of March 6,
2002, owned 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. For recent events concerning Roy F. Mitte see "Item 2 - Management's
Discussion and Analysis of Financial Conditions and Results of Operation -
Subsequent Events."
New Accounting Pronouncements
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 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, is recognized and reported as
the effect of a change in accounting principle. The effect of the accounting
change and related income tax effects is presented in the income statement
between the captions "extraordinary items" and "net income". The per-share
information presented in the income statement includes the per-share effect of
the accounting change. During the first quarter of 2002, FIC recognized the
unamortized balance of $15,727,000 of negative goodwill. There was no
amortization of negative goodwill recorded during the first quarter of 2002 and
during the first quarter of 2001.
During 2001, the FASB issued Statement of 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 are 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 did not materially affect FIC's
results of operations, liquidity or financial position.
- 16 -
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.
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 did not materially affect FIC's results of operations, liquidity or
financial position.
In May 2002, the FASB issued Statement of Financial Accounting Standards No. 145
(FAS 145), "Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and
Technical Corrections as of April 2002." This Statement rescinds FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking- Fund Requirements. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. FAS 145 is
effective for financial statements issued for fiscal years beginning after May
15, 2002, and is not expected to affect FIC's results of operations, liquidity
or financial position.
The AICPA also recently issued Statement of Position No. 01-06 ("SOP 01-06")
"Accounting by Certain Entities (Including Entities with Trade Receivables) That
Lend to or Finance the Activities of Others." The guidance in SOP 01-06 relating
to financing and lending activities is explicitly applicable to insurance
companies. SOP 01-06 reconciles and conforms the accounting and financial
reporting guidance presently contained in other accounting guidance. SOP 01-06
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company's accounting practices for its lending activities
are already consistent with the guidance contained in SOP 01-06. The adoption of
SOP 01-06 did not have a significant effect on the Company's financial
statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("FAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." FAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, the adoption of which is
not expected to materially affect FIC's results of operations, liquidity or
financial position.
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Restatement
Subsequent to the issuance of the Registrant's financial statements included in
our Form 10-Q for the period ending June 30, 2002, the Company identified
approximately $1.4 million of certain death benefit expenses incurred during the
quarter ended June 30, 2002 that were not recorded until the quarter ended
September 30, 2002 due to an interface error between the Company's policy
administration system and its general ledger. As a result, the financial
statements for the three and six month periods ending June 30, 2002 have been
restated. A summary of the effects of the restatement of the Company's
Consolidated Balance Sheets, Statements of Income, and Cash Flow Statements, as
follows:
As Reported As Restated
Other Liabilities $10,467,000 $11,365,000
3 months ended June 30, 2002
Policyholder benefits and expenses $ 9,739,000 $11,121,000
Provision for federal income taxes $ 860,000 $ 376,000
Net income $ 1,113,000 $ 215,000
Basic earnings per share $ 0.12 $ 0.02
Diluted earnings per share $ 0.12 $ 0.02
6 months ended June 30, 2002
Policyholder benefits and expenses $20,023,000 $21,405,000
Provision for federal income taxes $ 1,793,000 $ 1,309,000
Net income before cumulative
effect of change in accounting
principle $ 2,269,000 $ 1,371,000
Basic earnings per share $ 0.24 $ 0.14
Diluted earnings per share $ 0.24 $ 0.14
Cumulative effect of change in
accounting principle $15,727,000 $15,727,000
Basic earnings per share $ 1.65 $ 1.65
Diluted earnings per share $ 1.64 $ 1.64
Net income $17,996,000 $17,098,000
Basic earnings per share $ 1.89 $ 1.80
Diluted earnings per share $ 1.88 $ 1.78
- 18 -
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
RESTATEMENT
In this Item 2, references to results for the quarter ended June 30, 2002 are to
restated results. See the Notes to the Consolidated Financial Statements.
Financial Industries Corporation has restated its consolidated financial
statements for the quarterly period ended June 30, 2002. The restatement relates
to approximately $1.4 million of certain death benefit expenses incurred during
the quarter ended June 30, 2002 that were not recorded until the quarter ended
September 30, 2002 due to an interface error between the Company's policy
administration system and its general ledger. As a result, the financial
statements for the three and six month periods ending June 30, 2002 have been
restated.
For purposes of this Form 10-Q/A and in accordance with rule 12b-15 under the
Securities Exchange Act of 1934, as amended, each item of the Form 10-Q for the
period ended June 30, 2002 as originally filed on August 26, 2002 that was
affected by the restatement has been amended to the extent affected and restated
in its entirety. NO ATTEMPT HAS BEEN MADE IN THIS FORM 10-Q/A TO MODIFY OR
UPDATE OTHER DISCLOSURES AS PRESENTED IN THE ORIGINAL FORM 10-Q EXCEPT AS
REQUIRED TO REFLECT THE EFFECTS OF THIS RESTATEMENT.
The following discussion addresses the financial condition of FIC as of June 30,
2002, compared with December 31, 2001, and its results of operations for the six
months ended June 30, 2002, compared with the same period last year. This
discussion should be read in conjunction with Management's Discussion and
Analysis included in FIC's 10-K dated April 1, 2002, to which the reader is
directed for additional information.
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 six month period
ending June 30, 2002, the operations of ILCO are reported on a consolidated
basis with FIC. For the period from January 1, 2001 through May 17, 2001, 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, and for the
period from May 18, 2001 through June 30, 2001, the operations of ILCO were
reported on a consolidated basis with FIC.
- 19 -
Results of Operations - Six Months Ended June 30, 2002 and 2001
For the six-month period ended June 30, 2002, Financial Industries Corporation's
("FIC") net income was $17,098,000 (basic earnings of $1.80 per common share, or
diluted earnings of $1.78 per common share) on revenues of $62,241,000 as
compared to net income of $4,849,000 (basic earnings of $0.79 per common share,
or diluted earnings of $0.79 per common share) on revenues of $32,717,000 in the
first six months of 2001. Net income in the six month period ended June 30,
2002, before the cumulative effect of a change in accounting principle, was
$1,371,000 (basic and diluted earnings of $0.14 per common share).
Earnings per share for the six months ended June 30, 2002 were affected by the
increase in the number of FIC's common shares outstanding due to the Merger. As
of June 30, 2002, the number of FIC's weighted average common shares outstanding
was 9,515,000, as compared to weighted average shares outstanding of 6,130,000
as of June 30, 2001. The June 30, 2001 average weighted shares outstanding takes
into account the fact that additional shares were issued on May 18, 2001 due to
the Merger and were outstanding only for the period from May 18, 2001 to June
30, 2001. Additionally, net income and earnings per share were affected by the
cumulative effect of a change in accounting principle of $15.7 million. This
amount represents the excess of fair value of net assets acquired over cost as
of the beginning of 2002 related to the Merger. The Company recorded this
cumulative effect in conjunction with adopting Statement of Financial Accounting
Standards No. 141 (FAS 141), "Business Combinations," in the first quarter of
2002, as required by FAS 141.
Revenues
Premium revenues reported for traditional life insurance products are recognized
when due. Premium income for the first six months of 2002, net of reinsurance
ceded, was $18.9 million, as compared to $17.1 million in the first six months
of 2001. This source of revenues is related to the traditional life insurance
book of business of FIC's insurance subsidiaries. The consolidation of ILCO's
operations contributed approximately $4.6 million to premium income for the six
month period ended June 30, 2002 and $1.1 million to premium income for the
period from May 18, 2001 to June 30, 2001. At Family Life Insurance Company
("Family Life", which has been a subsidiary of FIC for the six-month periods
ending June 30, 2002 and 2001), first year net collected premiums for
traditional life insurance products for the six month period ending June 30,
2002 were $1.3 million as compared to $1.9 million for the same period in 2001.
The level of renewal premiums for traditional life insurance products at Family
Life for the six month period ending June 30, 2002 was $12.2 million, as
compared to $13.6 million for the same period in 2001. The decrease in renewal
premium is attributable to the decrease in the traditional life insurance book
of business.
Income from universal life and annuity charges for the first six months of 2002
was $21.5 million, as compared to $6.6 million in the same period of 2001. The
consolidation of ILCO's operations contributed approximately $20.0 million to
earned insurance charges for the six month period ended June 30, 2002 and $4.5
million to earned insurance charges for the period from May 18, 2001 to June 30,
2001. At Family Life, earned insurance charges declined from $2.1 million in the
2001 period ending June 30th to $1.5 million in the 2002 period ending June
30th. This change is attributable to a decrease in Family Life's universal life
and annuity business. The face amount of Family Life's in force universal life
policies was $627 million at June 30, 2002 as compared to $817 million at June
30, 2001.
- 20 -
Net investment income for the first six months of 2002 was $21.1 million as
compared to $8.8 million in the same period of 2001. The consolidation of ILCO's
operations contributed approximately $18.2 million to net investment income for
the six month period ended June 30, 2002 and $5.6 million for the period from
May 18, 2001 to June 30, 2001. FIC and its subsidiaries' investment portfolio
were 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. Net investment income was further
affected by the sale of short-term investments and the reinvestment of the
proceeds from such sales in real estate, and the write down of two mortgage
loans totaling $1.0 million in the second quarter of 2002. For a further
discussion of the mortgage loans, refer to the discussion under the caption
'Investments'.
Real estate income is primarily earned from the leases on the buildings at River
Place Pointe, an office complex in Austin, Texas which is owned and being
developed by Investors Life Insurance Company of North America ('Investors
Life'). Net real estate income, included in net investment income, was $3.2
million for the six month period ended June 30, 2002, as compared to $0.7
million for the same period in 2001. ILCO's real estate income was only included
in FIC's income statements from May 18, 2001 through June 30, 2001 for the
second quarter of 2001 and for the entire six month period in 2002.
Benefits and Expenses
Policyholder benefits and expenses were $21.4 million in the first six months of
2002, as compared to $9.3 million in the first six months of 2001. The
consolidation of ILCO's operations for the six month period ending June 30, 2002
contributed approximately $16.0 million to policyholder benefits and expenses
and contributed $3.3 million for the period from May 18, 2001 to June 30, 2001.
At Investors Life, the level of policyholder benefits and expenses was $14.6
million for the first six months of 2001 compared to $16.0 million in the first
six months of 2002. At Family Life, the level of policyholder benefits and
expenses was $6.0 million for the first six months of 2001 compared to $5.5
million for the same period in 2002. The increase in policyholder benefits and
expenses at ILCO, was primarily attributable to an increase in death benefits
paid out of $1.6 million.
Interest expense on contract holders deposit funds was $15.1 million in the
first six months of 2002, as compared to $4.7 million in the same period of the
year 2001. This increase is attributable to $14.1 million of interest expense on
contract holders deposit funds resulting from the consolidation of ILCO's
operations for the period ended June 30, 2002, compared to $3.4 million of
ILCO's interest expense for the period from May 18, 2001 to June 30, 2001.
The expense related to the amortization of deferred policy acquisition costs
increased by $1.2 million to $4.1 million in the first six months of 2002, from
$2.9 million in the first six months of 2001. A portion of the increase in
amortization is attributable to the Merger . In the first quarter of 2002,
expenses related to acquiring new business were $3.0 million, of which $2.2
million has been capitalized as deferred policy acquisition costs. In the second
quarter of 2002, expenses related to acquiring new business were $3.9 million,
of which $2.7 million has been capitalized as deferred policy acquisition costs.
The amounts not capitalized in each quarter were recorded as expenses in the
relevant quarter. See "Critical Accounting Policies, Deferred Policy Acquisition
Costs and Present Value of Future Profits of Acquired Business" herein for a
further discussion of capitalization of expenses related to acquiring new
business.
- 21 -
In the first six months of 2002, the amortization of present value of future
profits of acquired business was $2.3 million as compared to $1.8 million in the
first six months of 2001. The consolidation of ILCO's amortization expense with
FIC's contributed approximately $0.7 million in the period ended June 30, 2002
and $0.2 million for the period from May 18, 2001 to June 30, 2001.
The operating expenses for the first six months of 2002 were $16.6 million, as
compared to $8.5 million in the first six months of 2001. The consolidation of
ILCO's operations contributed approximately $9.9 million to operating expenses
for the six month period ended June 30, 2002 as compared to $2.2 million for the
period from May 18, 2001 to June 30, 2001. The level of operating expenses for
the six month period ending June 30, 2002 included: (i) expenses related to
acquiring new business; (ii) $318,156 related to the repurchase of James M.
Grace's employment contract; and (iii) a donation of $1 million to the Roy F.
and Joann Cole Mitte Foundation which was made in the first quarter of 2002, as
compared to a $375,000 donation in the first quarter of 2001. For a further
discussion of the repurchase of Mr. Grace's employment contract and the donation
to the Foundation, see FIC's 10-K for the year ended December 31, 2001, dated
April 1, 2002.
Interest expense for the first six months of 2002 was $0, as compared to $0.6
million in the first six months of 2001. This interest expense is related to
indebtedness owed to Investors Life by Family Life Corporation (a wholly owned
subsidiary of FIC) and FIC. The consolidation of ILCO's operations with those of
FIC for the entire six month period ending June 30, 2002 results in the
elimination of this interest expense in the income statements of FIC.
The provision for federal income taxes was $1.3 million in the first six months
of 2002 as compared to $1.4 million in the first six months of 2001. The
inclusion of ILCO's results contributed approximately $1.3 million to the level
of federal income taxes for the six months ended June 30, 2002. 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 decrease in federal income taxes from the small
company deduction utilized in the six months ended June 30, 2001 was $134,495.
Additionally, due to the Merger, the Company will incur approximately $175,000
in federal income taxes in the second quarter of 2002 related to non-deductible
compensation.
- 22 -
Equity in Net Income of InterContinental Life Corporation
For the period from January 1, 2001 to May 17, 2001, FIC's equity in the net
earnings of ILCO, net of federal income tax, was $1.3 million. Following the
merger of ILCO with FIC on May 18, 2001, the results of ILCO were consolidated
with those of FIC. Accordingly, there is no equity in net earnings of affiliate
results for the period ended June 30, 2002.
Prior to the merger with ILCO, FIC owned 3,591,534 shares of ILCO's common
stock. In addition, Family Life owned 342,400 shares of ILCO common stock. As a
result, FIC owned, directly and indirectly through Family Life, 3,933,934 shares
(approximately 48.1%) of ILCO's common stock. Upon completion of the merger,
ILCO became a wholly-owned subsidiary of FIC.
Results of Operations - Three Months Ended June 30, 2002
as compared to the Three Months Ended June 30, 2001
For the three-month period ended June 30, 2002, FIC's net income was $0.2
million (basic and diluted earnings of $0.02 per common share) on revenues of
$30.0 million as compared to net income of $2.8 million (basic and diluted
earnings of $0.38 per common share) on total revenues of $22.1 million in the
same three month period of 2001. The increase in total revenues from 2001 to
2002 is primarily attributable to the consolidation of ILCO's operations into
FIC's Statements of Income for the entire second quarter of 2002. The decrease
in net income from June 30, 2001 to June 30, 2002 was primarily attributable to
$1.2 million of increased expenses due to the acquisition of new business that
was not capitalized as deferred policy acquisition costs , $1.0 million of
capital losses relating to the write-down of two mortgage loans, and increases
in policyholder benefits and expenses. For a further discussion of the mortgage
loans, see "Investments" herein.
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.
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.
- 23 -
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.
Neither Investors Life nor Family Life paid any dividends during the first six
months of 2002. For the six month period ended June 30, 2002, Investors Life had
earned surplus of $51.4 million and a net gain from operations of $3.4 million,
and Family Life had earned surplus of $3.6 million and a net gain from
operations of $1.9 million.
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.
Investors-IN did not make any dividend payments in 2002.
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 June 30, 2002 was $7.4 million as compared to
$7.1 million at December 31, 2001. Cash and cash equivalents at June 30, 2001
was $12.1 million.
FIC's net cash flow used in operating activities was ($11.7) million for the six
month period ending June 30, 2002, as compared to $1.7 million provided by
operating activities for the same period in the year 2001. The increase in cash
used in operating activities of $13.3 million from the first six months of 2001
to the same period in 2002 was primarily attributable to a $6.6 million increase
in agent advances and other receivables due to an increase in federal income
taxes recoverable and an increase in amounts due from on a reinsurance treaty,
and a decrease in policy liabilities and accruals of $7.5 million.
- 24 -
Net cash flow provided by investing activities was $11.5 million in the six
month period ending June 30, 2002, as compared to $5.2 million in the same
period of 2001. The cash provided by investing activities was positively
affected by an $14.8 million increase in cash from a net change in short-term
investments and a $1.7 million decrease in policy loans. These amounts were
offset by a ($10.6) million capitalization of real estate.
Net cash flow provided by financing activities was $0.5 million in the first six
months of 2002, as compared to $2.5 million in the first six months of 2001. The
decrease in cash provided by financing activities is due to $7.0 million in net
cash FIC received in the period ended June 30, 2001 due to the acquisition of
ILCO.
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 June 30, 2002, the
investment portfolio of Investors Life included $26.1 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.
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%.
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.
Additionally, in 2002 and 2001, FIC has used cash to pay dividends to
shareholders. In May, 2001, the Board of Directors approved a policy pertaining
to the payment of dividends to the shareholders of the Company whereby the
Company will endeavor to declare and pay, on a semi-annual basis, a dividend on
the common stock of the Company so as to provide to the shareholders of the
Company an annualized yield of approximately 3% on the market value of the
common stock of the Company at the time of the declaration of such dividend.
Based on this policy, a dividend of $0.23 per share was paid on June 21, 2002 to
shareholders of record on June 7, 2002. The total amount of cash that FIC paid
to shareholders for the June 21, 2002 dividend was $2,207,000.
- 25 -
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 commitments or capital asset
requirements that are expected to have an adverse effect on the liquidity of
FIC.
Investments
As of June 30, 2002, FIC's invested assets, excluding separate accounts, totaled
$746.9 million, a decrease of $9.4 million from $756.3 million at December 31,
2001. The decrease is primarily attributable to a decrease of $4.4 million in
fixed maturities available for sale (due to a decrease of $8.7 million in the
book value of bonds matured, offset by a $4.3 million increase in the market
value of the fixed maturities portfolio), and a decrease of $11.8 million in
short-term investments. These decreases in invested assets were partially offset
with $9.4 million reinvested in real estate. There are no significant
differences between the portfolio composition as of June 30, 2002 as compared to
December 31, 2001.
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". FIC 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.
A 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 $32,256 of invested assets
as of June 30, 2002 and $45,479 of invested assets at December 31, 2001.
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 June 30,
2002, the market value of the fixed maturities available for sale segment was
$497.0 million as compared to an amortized cost of $488.0 million or an
unrealized gain of $9.0 million. The increase reflects unrealized gains on such
investments related to changes in interest rates subsequent to the purchase of
such investments. At 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.
- 26 -
The investments of FIC's insurance subsidiaries in mortgage-backed securities
included collateralized mortgage obligations ("CMOs") of $138.2 million as of
June 30, 2002 as compared to $201.8 million at December 31, 2001, and
mortgage-backed pass-through securities of $24.1 million as of June 30, 2002 and
$31.2 million at December 31, 2001. Mortgage-backed pass-through securities,
sequential CMO's and support bonds, which comprised approximately 45.6% of the
book value of FIC's mortgage-backed securities at June 30, 2002, are sensitive
to prepayment and extension risks. FIC's insurance subsidiaries have reduced the
risk of prepayment associated with mortgage-backed securities by investing in
planned amortization class ("PAC"), target amortization class ("TAC")
instruments and scheduled bonds. These investments are designed to amortize in a
predictable manner by shifting the risk of prepayment of the underlying
collateral to other investors in other tranches ("support classes") of the CMO.
At June 30, 2002, PAC and TAC instruments and scheduled bonds represented
approximately 54.4% of the book value of FIC's mortgage-backed securities.
Sequential and support classes represented approximately 30.8% of the book value
of FIC's mortgage-backed securities at June 30, 2002. In addition, FIC's
insurance subsidiaries limit the risk of prepayment of CMOs by not paying a
premium for any CMOs. FIC's insurance subsidiaries do not invest in
mortgage-backed securities with increased prepayment risk, such as interest-only
stripped pass-through securities and inverse floater bonds. FIC's insurance
subsidiaries did not have any z-accrual bonds as of June 30, 2002. 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 June 30, 2002, the majority of our bonds are investment grade
(Category 1 and 2). The Company's fixed maturities portfolio (including
short-term investments), included only a non-material amount 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.
FIC's short-term investments consist primarily of U.S. Government bonds. The
level of short-term investments at June 30, 2002 was $126.5 million, as compared
to $138.3 million as of December 31, 2001. The $11.8 million decrease in
short-term investments was offset by a $9.4 million increase in invested real
estate.
- 27 -
Invested real estate at June 30, 2002 was $70.4 million as compared to $61.0
million at December 31, 2001. The real estate investment is primarily related to
the development of the River Place Pointe project ("River Place Pointe") by
Investors Life. In October 1998, Investors Life purchased River Place Pointe,
which consisted of 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 first six months of 2002, including work on
buildings five, six and seven. Building five was completed during the second
quarter of 2002 and completion of the remainder of the project is expected by
the end of 2002.
As of June 30, 2002, Investors Life had invested $91.7 million in the
construction of River Place Pointe, of which $19.9 million is recorded on FIC's
balance sheet as real estate occupied by the Company. Investors Life paid $10.6
million during the first six months of 2002 on construction of the project and
expects to pay an additional $5.4 million to complete the project. As of June
30, 2002, 302,589 rentable square feet of office space was leased and 152,858
rentable square feet was available for lease. Upon the completion of the
remainder of the project, which includes two more office buildings, there will
be 128,824 additional rentable square feet available for lease. According to the
Federal Deposit Insurance Corporation's ("FDIC") National Edition of Regional
Outlook, Second Quarter, 2002, the Austin office market posted the nation's
greatest increase in office vacancy rate (15.2 percentage points) from first-
quarter 2001 to first-quarter 2002, and, at 23.3 percent, ranks second in the
country. Additionally, the FDIC report states that sublease space in Austin is
nearly 3.5 million square feet, or 44 percent of the metro area's total vacant
space, and will remain an obstacle to on the recovery of Austin's office market.
As of June 30, 2002, $3.7 million was invested in mortgage loans, as compared to
$4.7 million at December 31, 2001. 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 June 30,
2002, 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. The Company participates with a third party in two
mortgage loans in New York state, Champlain Centre Mall and Salmon Run Mall,
with a total balance due of $4.6 million at June 30, 2002. On June 18, 2002, the
Company agreed to a proposed payoff of these loans at a discount. The borrower
paid off the loans in August, 2002, with a payment of $3.6 million. The Company
reduced the carrying value of the two loans by $1.0 million as of June 30, 2002
as an impairment of an invested asset.
Policy loans totaled $48.2 million at June 30, 2002, as compared to $49.8
million at December 31, 2001.
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.
- 28 -
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 and
deferred acquisition costs and present value of future profits. For the six
month period ended June 30, 2002, the Company's critical accounting policies
also included the cumulative effect of accounting changes regarding the goodwill
acquired from the merger with ILCO.
Cumulative Effect of Accounting Changes. During the first quarter of 2002, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations." SFAS No. 141 eliminates the practice of amortizing and
deferring excess of fair value of net assets acquired over cost and requires
unallocated negative goodwill to be recognized immediately. In accordance with
the standard, FIC ceased negative goodwill amortization on January 1, 2002 and
recognized the unamortized balance of $15.7 million of negative goodwill
acquired in the Merger.
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. Generally
accepted accounting principles require that investments be written down to fair
value when declines in value are considered other than temporary. When such
impairments occur, the decrease in value is reported in net income as a realized
investment loss and a new cost basis is established. During the second quarter
of 2002 an impairment write-down was recorded resulting in a realized loss of
$1.0 million in two mortgage loans.
Deferred Policy Acquisition Costs and Present Value of Future Profits of
Acquired Business. The costs of acquiring new business, including certain costs
of issuing policies and certain other variable selling expenses (principally
commissions), are deferred policy acquisition costs ("DAC"). DAC is capitalized
and then amortized to reflect an expense in relation to the projected stream of
profits (for universal life and annuity products) or to the premium revenue (for
traditional life products). Such projections require use of certain assumptions,
including interest margins, product loads, mortality rates, persistency rates,
and maintenance expense levels. Effective with respect to new business issued on
and after January 1, 2002, the Company has capitalized DAC based on an updated
analysis of its cost structure and assumptions as to product performance. For
business written previously, DAC is amortized using previously established
methods and practices. Management periodically reviews the assumptions
associated with the amortization models prospectively.
- 29 -
Present value of future profits of acquired business ("PVFP") are the costs
associated with acquiring blocks of insurance from other companies or through
the acquisition of other companies. PVFP is capitalized and amortized in a
manner that matches these costs against the associated revenues.
From the period of January 1, 2001 through May 18, 2001, 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, refer to the discussion under
the caption New Accounting Pronouncements herein.
Subsequent Events
Separate Accounts
As of August 1, 2002, the separate account assets of the Company were adjusted
to reflect the results of a review of policyholder liability accounts. A
subsidiary of the Company (Investors Life Insurance Company of North America)
sponsors two variable annuity separate accounts, representing twelve separate
divisions. The assets of each division are invested in shares of a designated
unaffiliated mutual fund. The sponsor increased the assets of five divisions in
an aggregate amount of $279,981, with a corresponding increase in the
contractholder interests in the separate accounts. With respect to the six
divisions for which the net assets attributable to contractholders were less
than the amount of assets held in the underlying fund, the sponsor decreased the
assets in an aggregate amount of $490,322.
In addition, Investors Life administers a variable annuity separate account for
a third party insurer. That separate account consists of fourteen divisions. The
assets of each division are invested in shares of a designated mutual fund. As a
result of the referenced review, Investors Life funded an increase in the assets
of five divisions in an aggregate amount of $357,585, with a corresponding
increase in the contractholder interests in the separate account. Investors Life
is considering the contractual indemnification rights, if any, it may have as to
the sponsor of the separate account.
Administrative Leave of President, Chief Executive Officer and Chairman of the
Board
Effective August 19, 2002, the Board of Directors of the Company placed Roy F.
Mitte, the President, Chief Executive Officer and Chairman of the Board of the
Registrant, on administrative leave pending the satisfactory completion of a
review by the Audit Committee of the Board of Directors into certain expenses
that were paid by the Company during the reporting period and prior reporting
periods that may have been personal, rather than business-related expenses, of
Mr. Mitte. On August 15, 2002, the Audit Committee retained independent counsel
to conduct such review. The Board of Directors elected Dr. Eugene Payne as a
Director of the Registrant and appointed him as interim Chairman of the Board,
and appointed Thomas C. Richmond, a Director and Vice President, as Chief
Operating Officer. On August 24, 2002, the Board of Directors appointed Mr.
Richmond to the additional position of interim Chief Executive Officer.
- 30 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General. FIC's principal assets are financial instruments, which are
subject to market risks. Market risk is the risk of loss arising from adverse
changes in market rates, principally interest rates on fixed rate investments.
For a discussion of the Company's investment portfolio and the management of
that portfolio to reflect the nature of the underlying insurance obligations of
the Company's insurance subsidiaries, please refer to the information set forth
in "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 that 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 that 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 $25.7 million at June 30, 2002 and
$24.6 million at December 31, 2001. For purposes of the foregoing estimate,
fixed maturities and short- term investments were taken into account. The market
value of such assets was $624.5 million at June 30, 2002 and $640.7 million at
December 31, 2001.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $173.2 million at June 30,
2002 and $209.9 million at December 31, 2001. 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 $3.9 million
at June 30, 2002 and $6.7 million at December 31, 2001.
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 manage our exposure
to fluctuations in interest rates.
- 31 -
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 4. Controls and Procedures
(a) The chief executive officer and chief financial officer of the Company have
evaluated the effectiveness of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of a date
within 90 days prior to the filing date of this report. Based on that
evaluation, such officers have concluded that the Company's disclosure controls
and procedures, as modified following implementation of the procedure described
in paragraph (b), below, are effective to ensure that material information
relating to the Company and its subsidiaries is made known to such officers in a
timely manner for inclusion in the Company's periodic filings with the SEC.
(b) In connection with the preparation of its financial statements for the
quarter ended September 30, 2002, the Company identified certain transactions
that occurred in the quarter ended June 30, 2002, but were not recorded in the
financial results for that period. These accounting errors relate to death
benefits for a relatively new annuity product line. The errors were inadvertent,
unintentional and were due to a failure in the mechanical interface between the
Company's policy administration system and the general ledger system used to
record consolidated transaction for GAAP reporting purposes. The effect on the
financial statements for the quarter ended June 30, 2002 resulting from the
correction of these errors is described in the notes to the financial statements
included in this Report.
As a result of the identification of these accounting errors, the Company
initiated and completed a review of all product lines, to assure that benefit
payments were properly recorded for the current period. The Company intends that
this manual review will be continued on at least a quarterly basis until a
resolution of the mechanical interface system is implemented and tested. This
modification, when implemented, would eliminate the need for a manual review
procedure to assure the proper recording of benefit payments.
Except as described above, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation by the Company's
chief executive officer and chief financial officer.
- 32 -
Part II. Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal actions related
to the normal business operations of the Company. Management believes that the
resolution of such legal actions will not have a material impact on the
financial statements.
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 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders was held on June 4, 2002. The
only matter submitted at the meeting to a vote of the Shareholders was
the election of directors. All of the nominees had previously served
as directors of the Company, and all were reelected as directors.
- 33 -
The voting tabulation as to each nominee was as follows:
Name In Favor Withheld
Hans Annarino 6,560,526 564,664
John D. Barnett 6,579,707 545,483
David G. Caldwell 6,560,476 564,714
S. Tim Casey 6,559,692 565,498
Jeffrey H. Demgen 6,559,322 565,868
Theodore A. Fleron 6,559,307 565,883
W. Lewis Gilcrease 6,561,613 563,577
Roy F. Mitte 6,553,349 571,841
M. Scott Mitte 6,551,744 573,446
Elizabeth T. Nash 6,561,012 564,178
Frank Parker 6,580,989 544,201
Thomas C. Richmond 6,558,632 566,558
Item 5. Other Information
Receipt of Delisting Notification from Nasdaq
On August 20, 2002, the Company received a notification from Nasdaq stating that
Nasdaq had not received the Company's 10-Q for the period ended June 30, 2002 as
required by Marketplace Rule 4310(c)(14) and thus the Company's securities would
be delisted from the Nasdaq Stock Market at the opening of business on August
28, 2002 unless the Company requests a hearing in accordance with the
Marketplace Rules. As a result, the trading symbol for the Company's securities
were changed from FNIN to FNINE at the opening of business on August 23, 2002.
The Company intends to make a timely request for a hearing before the Nasdaq
Listing Qualification Panel to review the determination and shall make a public
announcement on or before August 27, 2002, through the news media that discloses
the receipt of the above-referenced notification, as required by the Marketplace
Rules.
- 34 -
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Form 10-K Annual Report of Registrant for the year ended December
31, 2001 heretofore filed by Registrant with the Securities and
Exchange Commission, which is hereby incorporated by reference.
Material Contracts - Relating to Management Compensation Plans or
Arrangements
10.27 Employment Agreement between Registrant and Jeffrey H.
Demgen dated as of May 1, 2002 and ratified by the Board of
Directors on August 17, 2002, as amended on August 19, 2002.
10.28 Employment Agreement between Registrant and Thomas C.
Richmond dated as of May 1, 2002 and ratified by the Board of
Directors on August 17, 2002.
10.29 Employment Agreement between Registrant and Hans Annarino
dated as of May 1, 2002 and ratified by the Board of Directors on
August 17, 2002.
10.30 Employment Agreement between Registrant and Theodore A.
Fleron dated as of March 22, 2002 and ratified by the Board of
Directors on August 17, 2002.
(b) Reports on Form 8-K:
(i) On August 15, 2002, the Registrant filed a Current Report on
Form 8-K. The current report pertained to the filing of a Form
12b-25, Notification of Late Filing, indicating that the
quarterly report would not be timely filed for the quarter ended
June 30, 2002. The Company indicated in the Form 8-K filing that
it had been working diligently to prepare its consolidated
financial statements for the quarter and six-month periods ended
June 30, 2002 and such consolidated financial statements had been
substantially completed. However, in connection with the
preparation of such reports, management discovered that certain
expenses which were paid by the Company during the reporting
period and prior reporting periods may have been personal, rather
than business-related expenses, of the President and Chief
Executive Officer of the Company. On August 15, 2002, the Audit
Committee of the Board of Directors retained independent counsel
to conduct a review for the current and prior periods.
- 35 -
(ii) On August 20, 2002, the Registrant filed a Current Report on
Form 8-K. The current report pertained to the administrative
leave of Roy F. Mitte, the President, Chief Executive Officer and
Chairman of the Board of the Registrant, pending the completion
of the review by the Audit Committee of the matters described in
the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 15, 2002.
The Form 8-K further indicated that (a) Dr. Eugene Payne was
elected a Director of the Registrant and has been appointed
interim Chairman of the Board; (b) Thomas C. Richmond, who has
been Registrant's Vice President in charge of Operations and the
Executive Vice President of Operations for Registrant's two life
insurance company subsidiaries, has been given the formal title
of Chief Operations Officer; and (c) the Company formed a Special
Committee of the Board of Directors to review and consider the
structure and functions of the offices of the President and the
Chief Executive Officer during the administrative leave.
- 36 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
_____________________________________ ________________________________
Eugene E. Payne George M. Wise, III
Chief Executive Officer Chief Financial Officer
Date: November 18, 2002
- 37 -
CERTIFICATION
I, Eugene E. Payne, Chief Executive Officer of Financial Industries Corporation
("FIC"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
- 38 -
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 18, 2002 By:/s/ Eugene E. Payne
Eugene E. Payne
Chief Executive Officer
- 39 -
CERTIFICATION
I, George M. Wise, III, Chief Executive Officer of Financial Industries
Corporation ("FIC"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
- 40 -
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 18, 2002 By:/s/ George M. Wise, III
George M. Wise, III
Chief Financial Officer
- 41 -
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Financial Industries Corporation
("FIC") on Form 10-Q for the quarter ended June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we Thomas
C. Richmond, Interim Chief Executive Officer, and Jeffrey H. Demgen, Chief
Financial Officer, certify pursuant to 18 U.S.C. SECTION 1350, as adopted
pursuant to SECTION 906 of the Sarbanes- Oxley Act of 2002, that to our
knowledge and belief:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of FIC.
/s/ Eugene E. Payne /s/ George M. Wise, III
__________________________________ ________________________________
Eugene E. Payne George M. Wise, III
Chief Executive Officer Chief Financial Officer
Date: November 18, 2002
- 42 -
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of May 1,
2002, between Financial Industries Corporation, a Texas corporation with its
principal place of business located at 6500 River Place Blvd., Building One,
Austin, Texas 78730 (the "Company"), and Jeffrey H. Demgen, of 6500 River Place
Blvd., Building One, Austin, Texas 78730 (the "Employee").
RECITALS
The Company is primarily engaged in the business of insurance and financial
services.
The Company desires to employ the Employee, and the Employee desires to be
so employed by the Company, on the terms and subject to the conditions set forth
in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth in this Agreement, the Company and the Employee hereby agree as
follows:
1. Employment.
(a) Subject to the terms and conditions contained herein, the Company
hereby agrees to employ the Employee, and the Employee accepts such
employment, from the date hereof through December 31, 2005. During the
Employee's employment under this Agreement, the Employee shall perform
such duties for the Company as are customarily performed by an
employee in a similar position or as may from time to time be assigned
to the Employee by the board of directors of the Company (the "Board")
or by the President of the Company. The Employee shall have the title
of Vice President or such other title or titles, if any, as from time
to time may be assigned to the Employee by the Board.
- 43 -
(b) The Employee agrees to perform faithfully, industriously, and to
the best of the Employee's ability, experience, and talents, all of
the duties as assigned to him as needed from time to time. So long as
the Employee is employed by the Company, the Employee shall not,
without the written consent of the Company:
(i) engage in any other activity for compensation, profit or
other pecuniary advantage, during the term of this Agreement;
(ii) render or perform services of a business, professional, or
commercial nature, either alone or as an employee, consultant,
director, officer, or partner of another business entity, whether
or not for compensation, which services are competitive with or
adverse to the business of the Company or its affiliates or
subsidiaries; or
(iii) invest in or become a shareholder of another corporation or
other entity (other than an affiliate of the Company) which
business is competitive with or adverse to the business of the
Company or its affiliates or subsidiaries, if such investment
requires active involvement of the Employee in the operation of
said corporation or other entity.
2. Location of Employment. The Employee's principal place of employment
shall be at the principal executive offices of the Company located at 6500
River Place Blvd., Building One, Austin, Texas 78730, or the Austin area.
Employee shall not be required to perform services for the Company or its
affiliates outside of the Central Texas area.
3. Compensation.
(a) In exchange for full performance of the Employee's obligations and
duties under this Agreement, the Company shall pay the Employee
$180,000 per year. Such payments shall be payable in installments in
accordance with the Company's regular payroll schedule.
(b) The base salary described in subsection (a) hereof is a gross
amount, and the Company shall be required to withhold from such amount
deductions with respect to Federal, state and local taxes, FICA,
unemployment compensation taxes and similar taxes, assessments or
withholding requirements.
- 44 -
(c) During the Employee's employment under this Agreement, the
Employee shall also be reimbursed by the Company for reasonable
business expenses actually incurred or paid by the Employee,
consistent with the policies established by the Board, in rendering to
the Company or its affiliates the services provided for in this
Agreement, upon presentation of expense statements or such other
supporting information as is consistent with the policies of the
Company.
(d) The Employee shall be entitled to participate in all benefit plans
(including but not limited to, deferred compensation plans, medical,
dental, or life insurance plans) which shall be available from time to
time to the management employees of the Company (including the
management employees of an affiliate of the Company) generally. If,
for any reason, the Company is unable to make available to Employee
coverage under the life insurance or the group medical insurance plans
generally available to employees of the Company, the Company shall
obtain substantially similar individual life insurance, and medical
insurance benefits for Employee and his family. The dollar amount of
the Employee's contribution to the premiums for such individual life
insurance and medical insurance benefits shall not exceed the dollar
amount of the contribution which would otherwise have been made by
Employee under the group life and medical plans generally available to
employees of the Company.
4. Term.
(a) This Agreement shall be effective as of the date first written
above, and shall terminate on December 31, 2005. The Agreement may not
be terminated by the Company prior to such date, other than as set
forth herein. If Employee is terminated in a manner other than as
provided herein, the Company shall pay the Employee the remaining
salary through the end of the term of this Agreement.
(b) The employment of the Employee under this Agreement shall
terminate on the date of the Employee's death.
(c) The employment of the Employee under this Agreement may be
terminated by the Company upon written notice from the Board that, in
the opinion of the Board, the Employee has (i) demonstrated willful
misconduct in the execution of the Employee's duties which have been
appropriately assigned in accordance with the terms and provisions of
this Agreement, (ii) been convicted of or pleaded nolo contendere to a
felony or other serious crime involving the theft or misappropriation
of money, or (iii) misappropriated assets of the Company.
- 45 -
(d) The employment of the Employee under this Agreement shall
terminate upon receipt by the Board of a written notice of resignation
signed by the Employee or, if no notice is given, on the date on which
the Employee voluntarily terminates his employment relationship with
the Company. In such event, Employee shall not be entitled to any
further compensation or benefits hereunder.
(e) If the Employee's employment is terminated pursuant to this
Section 4(c) or 4(d), the Employee shall not be entitled to any
compensation or benefits from the Company, under Section 3 of this
Agreement or otherwise, except for the following:
(i) base salary accrued, and reasonable business expenses
incurred, under Section 3 of this Agreement through the date of
such termination; and
(ii) such benefits, if any, as may be required to be provided by
the Company under the Comprehensive Omnibus Budget Reconciliation
Act (COBRA), or any successor or similar legislation.
(f) In the event of a Change in Control of the Company, the remaining
amounts payable under this Agreement shall become immediately due and
payable in one lump sum. Following such payment, this Agreement shall
terminate.
5. Employee's Representations.
(a) The Employee represents that he has full authority to enter into
this Agreement and that he is free to enter into this Agreement and
not under any contractual restraint which would prohibit the Employee
from satisfactorily performing his duties to the Company under this
Agreement.
(b) The Employee acknowledges that he is free to seek advice from
independent counsel with respect to this Agreement. The Employee has
either obtained such advice or, after carefully reviewing this
Agreement, has decided to forego such advice. The Employee is not
relying on any representation or advice from the Company or any of its
officers, directors, attorneys or other representatives regarding this
Agreement, its content or effect.
6. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas.
- 46 -
7. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of the Employee by the
Company and in reference to any of the matters or things herein provided
for or hereinabove discussed or mentioned in reference to such employment;
all prior agreements, promises, representations and understandings relative
thereto being herein merged.
8. Assignability.
(a) In the event the Company shall merge or consolidate with any other
corporation, partnership or business entity, or all or substantially
all of the Company's business or assets shall be transferred in any
manner to any other corporation, partnership or business entity, then
such successor to the Company shall thereupon succeed to, and be
subject to, all rights, interests, duties and obligations of, and
shall thereafter be deemed for all purposes hereof to be, the
"Company" under this Agreement.
(b) This Agreement is personal in nature and the Employee shall not,
without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing expressed or
implied in this Agreement is intended or shall be construed to confer
upon or give to any person, other than the parties to this Agreement,
any right, remedy or claim under or by reason of this Agreement or of
any term, covenant or condition of this Agreement.
9. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants of
this Agreement may be waived only by a written instrument executed by the
parties to this Agreement or, in the case of a waiver, by the party waiving
compliance. Any such written instrument must be approved by the Board to be
effective as against the Company. The failure of any party at any time or
times to require performance of any provision of this Agreement shall in no
manner affect the right at a later time to enforce the same. No waiver by
any party of the breach of any term or provision contained in this
Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of
any such breach, or a waiver of the breach of any other term or covenant
contained in this Agreement.
- 47 -
10. Notice. All notices, requests or consents required or permitted under
this Agreement shall be made in writing and shall be given to the other
party by personal delivery, overnight air courier (with receipt signature)
or facsimile transmission (with "answerback" confirmation of transmission),
if to the Company, sent as follows: Financial Industries Corporation,
Attention: Legal Department, 6500 River Place Blvd., Building One, Austin,
Texas 78730, and
if to the Employee: Jeffrey H. Demgen, 6500 River Place Blvd., Building
One, Austin, Texas 78730, or such other addresses or telecopy numbers of
which the parties have given notice pursuant to this Section
10. Each such notice, request or consent shall be deemed effective upon the
date of mailing of such notice, provided the mailing party retains a
receipt signature or confirmation of transmission, as applicable.
11. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment
Agreement as of the date first above written.
Financial Industries Corporation
a Texas corporation
By: __________________________
Roy F. Mitte
Chairman, President and Chief Executive Officer
Employee: _____________________________
Jeffrey H. Demgen
Witnessed By: _____________________________
Sheryl Kinlaw
Counsel
- 48 -
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment"), dated as
of August 19, 2002 Financial Industries Corporation, a Texas corporation
("FIC"), and Jeffrey H. Demgen ("Demgen").
WHEREAS, the parties have entered into an employment agreement, dated as of
May 1, 2002 and ratified by the Board of Directors of FIC on August 17, 2002
(the "Employment Agreement"); and
WHEREAS, FIC and Demgen desire to amend the terms of the Employment
Agreement pursuant to the terms hereof.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, FIC and Demgen hereby agree as follows:
1. Amendment:
Paragraph 4(d) of the Employment Agreement is hereby amended in its
entirety to read as follows:
(d) The employment of the Employee under this Agreement shall not terminate
upon the voluntary resignation of the Employee of his resignation as Vice
President and Chief Financial Officer of the Company or, if no notice is
given, on the date on which the Employee voluntarily terminates his
employment relationship with the Company. In such event, Employee shall
continue to be entitled to the compensation and benefits provided
hereunder.
2. Confirmation. Except as amended by this Amendment, the Employment
Agreement shall remain in full force and effect.
- 49 -
3. Instruments to be Read Together. This Amendment shall form a part of the
Employment Agreement for all purposes and the Employment Agreement and this
Amendment shall henceforth be read together.
4. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
5. Governing Law. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, the parties have executed this First Amendment to
Employment Agreement on the date and year first above written. FINANCIAL
INDUSTRIES CORPORATION
By: _________________________________
Name:
Title:
_________________________________
Jeffrey H. Demgen
- 50 -
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of May 1, 2002,
between Financial Industries Corporation, a Texas corporation with its principal
place of business located at 6500 River Place Blvd., Building One, Austin, Texas
78730 (the "Company"), and Thomas C. Richmond, of 1004 Antelope Ridge, Cedar
Park, Texas 78613 (the "Employee").
RECITALS
The Company is primarily engaged in the business of insurance and financial
services.
The Company desires to employ the Employee, and the Employee desires to be so
employed by the Company, on the terms and subject to the conditions set forth in
this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth in this Agreement, the Company and the Employee hereby agree as
follows:
1. Employment.
(a) Subject to the terms and conditions contained herein, the Company
hereby agrees to employ the Employee, and the Employee accepts such
employment, from the date hereof through December 31, 2005. During the
Employee's employment under this Agreement, the Employee shall perform such
duties for the Company as are customarily performed by an employee in a
similar position or as may from time to time be assigned to the Employee by
the board of directors of the Company (the "Board") or by the President of
the Company. The Employee shall have the title of Vice President or such
other title or titles, if any, as from time to time may be assigned to the
Employee by the Board.
(b) The Employee agrees to perform faithfully, industriously, and to the
best of the Employee's ability, experience, and talents, all of the duties
as assigned to him as needed from time to time. So long as the Employee is
employed by the Company, the Employee shall not, without the written
consent of the Company:
(i) engage in any other activity for compensation, profit or other
pecuniary advantage, during the term of this Agreement;
- 51 -
(ii) render or perform services of a business, professional, or
commercial nature, either alone or as an employee, consultant,
director, officer, or partner of another business entity, whether or
not for compensation, which services are competitive with or adverse
to the business of the Company or its affiliates or subsidiaries; or
(iii) invest in or become a shareholder of another corporation or
other entity (other than an affiliate of the Company) which business
is competitive with or adverse to the business of the Company or its
affiliates or subsidiaries, if such investment requires active
involvement of the Employee in the operation of said corporation or
other entity.
2. Location of Employment. The Employee's principal place of employment
shall be at the principal executive offices of the Company located at 6500
River Place Blvd., Building One, Austin, Texas 78730, or the Austin area.
Employee shall not be required to perform services for the Company or its
affiliates outside of the Central Texas area.
3. Compensation.
(a) In exchange for full performance of the Employee's obligations and
duties under this Agreement, the Company shall pay the Employee $180,000
per year. Such payments shall be payable in installments in accordance with
the Company's regular payroll schedule.
(b) The base salary described in subsection (a) hereof is a gross amount,
and the Company shall be required to withhold from such amount deductions
with respect to Federal, state and local taxes, FICA, unemployment
compensation taxes and similar taxes, assessments or withholding
requirements.
(c) During the Employee's employment under this Agreement, the Employee
shall also be reimbursed by the Company for reasonable business expenses
actually incurred or paid by the Employee, consistent with the policies
established by the Board, in rendering to the Company or its affiliates the
services provided for in this Agreement, upon presentation of expense
statements or such other supporting information as is consistent with the
policies of the Company.
- 52 -
(d) The Employee shall be entitled to participate in all benefit plans
(including but not limited to, deferred compensation plans, medical,
dental, or life insurance plans) which shall be available from time to time
to the management employees of the Company (including the management
employees of an affiliate of the Company) generally. If, for any reason,
the Company is unable to make available to Employee coverage under the life
insurance or the group medical insurance plans generally available to
employees of the Company, the Company shall obtain substantially similar
individual life insurance, and medical insurance benefits for Employee and
his family. The dollar amount of the Employee's contribution to the
premiums for such individual life insurance and medical insurance benefits
shall not exceed the dollar amount of the contribution which would
otherwise have been made by Employee under the group life and medical plans
generally available to employees of the Company.
4. Term.
(a) This Agreement shall be effective as of the date first written above,
and shall terminate on December 31, 2005. The Agreement may not be
terminated by the Company prior to such date, other than as set forth
herein. If Employee is terminated in a manner other than as provided
herein, the Company shall pay the Employee the remaining salary through the
end of the term of this Agreement.
(b) The employment of the Employee under this Agreement shall terminate on
the date of the Employee's death.
(c) The employment of the Employee under this Agreement may be terminated
by the Company upon written notice from the Board that, in the opinion of
the Board, the Employee has (i) demonstrated willful misconduct in the
execution of the Employee's duties which have been appropriately assigned
in accordance with the terms and provisions of this Agreement, (ii) been
convicted of or pleaded nolo contendere to a felony or other serious crime
involving the theft or misappropriation of money, or (iii) misappropriated
assets of the Company.
(d) The employment of the Employee under this Agreement shall terminate
upon receipt by the Board of a written notice of resignation signed by the
Employee or, if no notice is given, on the date on which the Employee
voluntarily terminates his employment relationship with the Company. In
such event, Employee shall not be entitled to any further compensation or
benefits hereunder.
(e) If the Employee's employment is terminated pursuant to this Section
4(c) or 4(d), the Employee shall not be entitled to any compensation or
benefits from the Company, under Section 3 of this Agreement or otherwise,
except for the following:
(i) base salary accrued, and reasonable business expenses incurred,
under Section 3 of this Agreement through the date of such
termination; and
(ii) such benefits, if any, as may be required to be provided by the
Company under the Comprehensive Omnibus Budget Reconciliation Act
(COBRA), or any successor or similar legislation.
(f) In the event of a Change in Control of the Company, the remaining
amounts payable under this Agreement shall become immediately due and
payable in one lump sum. Following such payment, this Agreement shall
terminate.
- 53 -
5. Employee's Representations.
(a) The Employee represents that he has full authority to enter into this
Agreement and that he is free to enter into this Agreement and not under
any contractual restraint which would prohibit the Employee from
satisfactorily performing his duties to the Company under this Agreement.
(b) The Employee acknowledges that he is free to seek advice from
independent counsel with respect to this Agreement. The Employee has either
obtained such advice or, after carefully reviewing this Agreement, has
decided to forego such advice. The Employee is not relying on any
representation or advice from the Company or any of its officers,
directors, attorneys or other representatives regarding this Agreement, its
content or effect.
6. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas.
7. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of the Employee by the
Company and in reference to any of the matters or things herein provided
for or hereinabove discussed or mentioned in reference to such employment;
all prior agreements, promises, representations and understandings relative
thereto being herein merged.
8. Assignability.
(a) In the event the Company shall merge or consolidate with any other
corporation, partnership or business entity, or all or substantially all of
the Company's business or assets shall be transferred in any manner to any
other corporation, partnership or business entity, then such successor to
the Company shall thereupon succeed to, and be subject to, all rights,
interests, duties and obligations of, and shall thereafter be deemed for
all purposes hereof to be, the "Company" under this Agreement.
(b) This Agreement is personal in nature and the Employee shall not,
without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing expressed or
implied in this Agreement is intended or shall be construed to confer upon
or give to any person, other than the parties to this Agreement, any right,
remedy or claim under or by reason of this Agreement or of any term,
covenant or condition of this Agreement.
- 54 -
9. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants of
this Agreement may be waived only by a written instrument executed by the
parties to this Agreement or, in the case of a waiver, by the party waiving
compliance. Any such written instrument must be approved by the Board to be
effective as against the Company. The failure of any party at any time or
times to require performance of any provision of this Agreement shall in no
manner affect the right at a later time to enforce the same. No waiver by
any party of the breach of any term or provision contained in this
Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of
any such breach, or a waiver of the breach of any other term or covenant
contained in this Agreement.
10. Notice. All notices, requests or consents required or permitted under
this Agreement shall be made in writing and shall be given to the other
party by personal delivery, overnight air courier (with receipt signature)
or facsimile transmission (with "answerback" confirmation of transmission),
if to the Company, sent as follows: Financial Industries Corporation,
Attention: Legal Department, 6500 River Place Blvd., Building One, Austin,
Texas 78730, and
if to the Employee: Thomas C. Richmond, 1004 Antelope Ridge, Cedar Park,
Texas 78613,
or such other addresses or telecopy numbers of which the parties have given
notice pursuant to this Section 10. Each such notice, request or consent
shall be deemed effective upon the date of mailing of such notice, provided
the mailing party retains a receipt signature or confirmation of
transmission, as applicable.
11. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
- 55 -
IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment
Agreement as of the date first above written.
Financial Industries Corporation
a Texas corporation
By: ______________________________________
Roy F. Mitte
Chairman, President and Chief Executive Officer
Employee: ________________________________
Thomas C. Richmond
Witnessed By: ____________________________
Sheryl Kinlaw
Counsel
- 56 -
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of May 1,
2002, between Financial Industries Corporation, a Texas corporation with its
principal place of business located at 6500 River Place Blvd., Building One,
Austin, Texas 78730 (the "Company"), and Hans Annarino, of 542 East Milam, La
Grange, Texas 78945 (the "Employee").
RECITALS
The Company is primarily engaged in the business of insurance and financial
services.
The Company desires to employ the Employee, and the Employee desires to be so
employed by the Company, on the terms and subject to the conditions set forth in
this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth in this Agreement, the Company and the Employee hereby agree as
follows:
1. Employment.
(a) Subject to the terms and conditions contained herein, the Company
hereby agrees to employ the Employee, and the Employee accepts such
employment, from the date hereof through December 31, 2005. During the
Employee's employment under this Agreement, the Employee shall perform such
duties for the Company as are customarily performed by an employee in a
similar position or as may from time to time be assigned to the Employee by
the board of directors of the Company (the "Board") or by the President of
the Company. The Employee shall have the title of Vice President or such
other title or titles, if any, as from time to time may be assigned to the
Employee by the Board.
(b) The Employee agrees to perform faithfully, industriously, and to the
best of the Employee's ability, experience, and talents, all of the duties
as assigned to him as needed from time to time. So long as the Employee is
employed by the Company, the Employee shall not, without the written
consent of the Company:
(i) engage in any other activity for compensation, profit or other
pecuniary advantage, during the term of this Agreement;
- 57 -
(ii) render or perform services of a business, professional, or
commercial nature, either alone or as an employee, consultant,
director, officer, or partner of another business entity, whether or
not for compensation, which services are competitive with or adverse
to the business of the Company or its affiliates or subsidiaries; or
(iii) invest in or become a shareholder of another corporation or
other entity (other than an affiliate of the Company) which business
is competitive with or adverse to the business of the Company or its
affiliates or subsidiaries, if such investment requires active
involvement of the Employee in the operation of said corporation or
other entity.
2. Location of Employment. The Employee's principal place of employment
shall be at the principal executive offices of the Company located at 6500 River
Place Blvd., Building One, Austin, Texas 78730, or the Austin area. Employee
shall not be required to perform services for the Company or its affiliates
outside of the Central Texas area.
3. Compensation.
(a) In exchange for full performance of the Employee's obligations and
duties under this Agreement, the Company shall pay the Employee $195,000
per year. Such payments shall be payable in installments in accordance with
the Company's regular payroll schedule.
(b) The base salary described in subsection (a) hereof is a gross amount,
and the Company shall be required to withhold from such amount deductions
with respect to Federal, state and local taxes, FICA, unemployment
compensation taxes and similar taxes, assessments or withholding
requirements.
(c) During the Employee's employment under this Agreement, the Employee
shall also be reimbursed by the Company for reasonable business expenses
actually incurred or paid by the Employee, consistent with the policies
established by the Board, in rendering to the Company or its affiliates the
services provided for in this Agreement, upon presentation of expense
statements or such other supporting information as is consistent with the
policies of the Company.
(d) The Employee shall be entitled to participate in all benefit plans
(including but not limited to, deferred compensation plans, medical,
dental, or life insurance plans) which shall be available from time to time
to the management employees of the Company (including the management
employees of an affiliate of the Company) generally. If, for any reason,
the Company is unable to make available to Employee coverage under the life
insurance or the group medical insurance plans generally available to
employees of the Company, the Company shall obtain substantially similar
individual life insurance, and medical insurance benefits for Employee and
his family. The dollar amount of the Employee's contribution to the
premiums for such individual life insurance and medical insurance benefits
shall not exceed the dollar amount of the contribution which would
otherwise have been made by Employee under the group life and medical plans
generally available to employees of the Company.
- 58 -
4. Term.
(a) This Agreement shall be effective as of the date first written above,
and shall terminate on December 31, 2005. The Agreement may not be
terminated by the Company prior to such date, other than as set forth
herein. If Employee is terminated in a manner other than as provided
herein, the Company shall pay the Employee the remaining salary through the
end of the term of this Agreement.
(b) The employment of the Employee under this Agreement shall terminate on
the date of the Employee's death.
(c) The employment of the Employee under this Agreement may be terminated
by the Company upon written notice from the Board that, in the opinion of
the Board, the Employee has (i) demonstrated willful misconduct in the
execution of the Employee's duties which have been appropriately assigned
in accordance with the terms and provisions of this Agreement, (ii) been
convicted of or pleaded nolo contendere to a felony or other serious crime
involving the theft or misappropriation of money, or (iii) misappropriated
assets of the Company.
(d) The employment of the Employee under this Agreement shall terminate
upon receipt by the Board of a written notice of resignation signed by the
Employee or, if no notice is given, on the date on which the Employee
voluntarily terminates his employment relationship with the Company. In
such event, Employee shall not be entitled to any further compensation or
benefits hereunder.
(e) If the Employee's employment is terminated pursuant to this Section
4(c) or 4(d), the Employee shall not be entitled to any compensation or
benefits from the Company, under Section 3 of this Agreement or otherwise,
except for the following:
(i) base salary accrued, and reasonable business expenses incurred,
under Section 3 of this Agreement through the date of such
termination; and
(ii) such benefits, if any, as may be required to be provided by the
Company under the Comprehensive Omnibus Budget Reconciliation Act
(COBRA), or any successor or similar legislation.
- 59 -
5. Employee's Representations.
(a) The Employee represents that he has full authority to enter into this
Agreement and that he is free to enter into this Agreement and not under
any contractual restraint which would prohibit the Employee from
satisfactorily performing his duties to the Company under this Agreement.
(b) The Employee acknowledges that he is free to seek advice from
independent counsel with respect to this Agreement. The Employee has either
obtained such advice or, after carefully reviewing this Agreement, has
decided to forego such advice. The Employee is not relying on any
representation or advice from the Company or any of its officers,
directors, attorneys or other representatives regarding this Agreement, its
content or effect.
6. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas.
7. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of the Employee by the Company and
in reference to any of the matters or things herein provided for or hereinabove
discussed or mentioned in reference to such employment; all prior agreements,
promises, representations and understandings relative thereto being herein
merged.
8. Assignability.
(a) In the event the Company shall merge or consolidate with any other
corporation, partnership or business entity, or all or substantially all of
the Company's business or assets shall be transferred in any manner to any
other corporation, partnership or business entity, then such successor to
the Company shall thereupon succeed to, and be subject to, all rights,
interests, duties and obligations of, and shall thereafter be deemed for
all purposes hereof to be, the "Company" under this Agreement.
(b) This Agreement is personal in nature and the Employee shall not,
without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing expressed or
implied in this Agreement is intended or shall be construed to confer upon
or give to any person, other than the parties to this Agreement, any right,
remedy or claim under or by reason of this Agreement or of any term,
covenant or condition of this Agreement.
- 60 -
9. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants of this
Agreement may be waived only by a written instrument executed by the parties to
this Agreement or, in the case of a waiver, by the party waiving compliance. Any
such written instrument must be approved by the Board to be effective as against
the Company. The failure of any party at any time or times to require
performance of any provision of this Agreement shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of the breach
of any term or provision contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such breach, or a waiver of the breach of
any other term or covenant contained in this Agreement.
10. Notice. All notices, requests or consents required or permitted under
this Agreement shall be made in writing and shall be given to the other party by
personal delivery, overnight air courier (with receipt signature) or facsimile
transmission (with "answerback" confirmation of transmission),
if to the Company, sent as follows: Financial Industries Corporation,
Attention: Legal Department, 6500 River Place Blvd., Building One, Austin,
Texas 78730, and
if to the Employee: Hans Annarino, 542 East Milam, La Grange, Texas 78945,
or such other addresses or telecopy numbers of which the parties have given
notice pursuant to this Section 10. Each such notice, request or consent
shall be deemed effective upon the date of mailing of such notice, provided
the mailing party retains a receipt signature or confirmation of
transmission, as applicable.
11. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment
Agreement as of the date first above written.
- 61 -
Financial Industries Corporation
a Texas corporation
By: _____________________________________
Roy F. Mitte
Chairman, President and Chief Executive Officer
Employee: ________________________________
Hans Annarino
Witnessed By: ____________________________
Sheryl Kinlaw
Counsel
- 62 -
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of March
22, 2002, between Financial Industries Corporation ("FIC") and Investors Life
Insurance Company of North American ("Investors Life") of 6500 River Place
Blvd., Building One, Austin, Texas 78730 (hereinafter referred to jointly as the
"Company"), and Theodore A. Fleron, of 1600 Easy Street, Austin, Texas 78746
(the "Employee").
RECITALS
The Company is primarily engaged in the business of insurance and financial
services.
The Company desires to employ the Employee, and the Employee desires to be so
employed by the Company, on the terms and subject to the conditions set forth in
this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth in this Agreement, the Company and the Employee hereby agree as
follows:
1. Employment.
(a) Employee acts as General Counsel to the Company and its subsidiaries.
Subject to the terms and conditions contained herein, the Company hereby agrees
to employ the Employee, and the Employee accepts such employment, from the date
hereof until March 20, 2005. During the Employee's employment under this
Agreement, the Employee shall perform such duties for the Company as are
customarily performed by an employee in a similar position or as may from time
to time be assigned to the Employee by the Board of Directors of FIC (the
"Board") or by the President of the Company; provided, however, the Employee
shall only be assigned duties which are the same or substantially similar to the
duties that Employee performed at the time that this Agreement was executed.
(b) The Employee agrees to perform faithfully, industriously, and to the
best of the Employee's ability, experience, and talents, all of the duties as
assigned to him as General Counsel. So long as the Employee is employed by the
Company, the Employee shall not, without the written consent of the Company:
- 63 -
(i) engage in any other activity for compensation, profit or other
pecuniary advantage, during the term of this Agreement;
(ii) render or perform services of a business, professional, or
commercial nature, either alone or as an employee, consultant,
director, officer, or partner of another business entity, whether or
not for compensation, which services are competitive with or adverse
to the business of the Company or its affiliates or subsidiaries; or
(iii) invest in or become a shareholder of another corporation or
other entity (other than an affiliate of the Company) which business
is competitive with or adverse to the business of the Company or its
affiliates or subsidiaries, if such investment requires active
involvement of the Employee in the operation of said corporation or
other entity.
2. Location of Employment. The Employee's principal place of employment
shall be at the principal executive offices of the Company located at 6500
River Place Blvd., Building One, Austin, Texas 78730, or the Austin area.
Employee shall not be required to perform services for the Company or its
affiliates outside of the Austin area.
3. Compensation.
(a) In exchange for full performance of the Employee's obligations and
duties under this Agreement, the Company shall pay the Employee as follows:
From To Amount
April 1, 2002 March 20, 2003 $ 145,000
March 21, 2003 March 20, 2004 $ 145,000
March 21, 2004 March 20, 2005 $ 145,000
Such payments shall be payable in installments in accordance with the Company's
regular payroll schedule.
(b) The base salary described in subsection (a) hereof is a gross amount,
and the Company shall be required to withhold from such amount deductions
with respect to Federal, state and local taxes, FICA, unemployment
compensation taxes and similar taxes, assessments or withholding
requirements.
- 64 -
(c) During the Employee's employment under this Agreement, the Employee
shall also be reimbursed by the Company for reasonable business expenses
actually incurred or paid by the Employee, consistent with the policies
established by the Board, in rendering to the Company or its affiliates the
services provided for in this Agreement, upon presentation of expense
statements or such other supporting information as is consistent with the
policies of the Company.
(d) The Employee shall be entitled to participate in all benefit plans
(including but not limited to, deferred compensation plans, medical,
dental, life insurance plans, or stock option plans) which shall be
available from time to time to the domestic management employees of the
Company (including the management employees of an affiliate of the Company)
generally. If, for any reason, the Company is unable to make available to
Employee coverage under the life insurance or the group medical insurance
plans generally available to employees of the Company, the Company shall
obtain substantially similar individual life insurance and medical
insurance benefits for Employee and his family. The dollar amount of the
Employee's contribution to the premiums for such individual life insurance
and medical insurance benefits shall not exceed the dollar amount of the
contribution which would otherwise have been made by Employee under the
group life and medical plans generally available to employees of the
Company.
4. Term.
(a) This Agreement shall be effective as of March 22, 2002, and shall
terminate on March 20, 2005. The Agreement may not be terminated by the
Company prior to such date, other than as set forth in Section 4. If
Employee is terminated in a manner other than as provided herein, the
Company shall pay the Employee the remaining salary through the end of the
term of this Agreement.
(b) The employment of the Employee under this Agreement shall terminate on
the date of the Employee's death.
(c) The employment of the Employee under this Agreement may be terminated
by the Company upon written notice from the Board that the Employee has
been convicted of or pleaded nolo contendere to a felony or other serious
crime involving the theft or misappropriation of assets of the Company.
(d) The employment of the Employee under this Agreement shall terminate
upon receipt by the Board of a written notice of resignation signed by the
Employee or, if no notice is given, on the date on which the Employee
voluntarily terminates his employment relationship with the Company. In
such event, Employee shall not be entitled to any further compensation
hereunder.
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(e) If the Employee's employment is terminated pursuant to this Section
4(c) or (d), the Employee shall not be entitled to any compensation or
benefits from the Company, under Section 3 of this Agreement or otherwise,
except for the following:
(i) base salary accrued, and reasonable business expenses incurred,
under Section 3 of this Agreement through the date of such
termination; and
(ii) such benefits, if any, as may be required to be provided by the
Company under the Comprehensive Omnibus Budget Reconciliation Act
(COBRA), or any successor or similar legislation.
(iii) such benefits as are provided under all benefits plans
(including pension plans, 401K plans and stock option plans) of the
Company in which the Employee participated.
(f) In the event of a Change in Control of the Company, the remaining
amounts payable under this Agreement shall become immediately due and
payable in one lump sum. Following such payment, this Agreement shall
terminate. For the purposes of this Agreement, a "Change in Control" shall
be deemed to have taken place upon the occurrence of any one or more of the
following: (i) Roy F. Mitte is no longer the Chairman, President and Chief
Executive Officer of the Company, (ii) a majority of the members of the
Board of Directors of the Company are not individuals who were selected to
serve as Directors by Roy F. Mitte.
(g) In no event shall the amount of the payment to be made to Employee
under the provisions of Section 4(f), above, exceed an amount which would
cause all amounts to be received by Employee which are treated as
"parachute payments" (within the meaning of section 280G(b)(2) of the
Internal Revenue Code) to exceed 2.99 times the "base amount" applicable to
Employee for purposes of section 280G(b)(3) of the Internal Revenue Code.
5. Employee's Representations.
(a) The Employee represents that he has full authority to enter into this
Agreement and that he is free to enter into this Agreement and not under
any contractual restraint which would prohibit the Employee from
satisfactorily performing his duties to the Company under this Agreement.
(b) The Employee acknowledges that he is free to seek advice from
independent counsel with respect to this Agreement. The Employee has either
obtained such advice or, after carefully reviewing this Agreement, has
decided to forego such advice. The Employee is not relying on any
representation or advice from the Company or any of its officers,
directors, attorneys or other representatives regarding this Agreement, its
content or effect.
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6. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas.
7. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of the Employee by the
Company and in reference to any of the matters or things herein provided
for or hereinabove discussed or mentioned in reference to such employment;
all prior agreements, promises, representations and understandings relative
thereto being herein merged.
8. Assignability.
(a) In the event the Company shall merge or consolidate with any other
corporation, partnership or business entity, or all or substantially all of
the Company's business or assets shall be transferred in any manner to any
other corporation, partnership or business entity, then such successor to
the Company shall thereupon succeed to, and be subject to, all rights,
interests, duties and obligations of, and shall thereafter be deemed for
all purposes hereof to be, the "Company" under this Agreement.
(b) This Agreement is personal in nature and the Employee shall not,
without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.
(c) Except as set forth in subsection (a) above, nothing expressed or
implied in this Agreement is intended or shall be construed to confer upon
or give to any person, other than the parties to this Agreement, any right,
remedy or claim under or by reason of this Agreement or of any term,
covenant or condition of this Agreement.
9. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants of
this Agreement may be waived only by a written instrument executed by the
parties to this Agreement or, in the case of a waiver, by the party waiving
compliance. Any such written instrument must be approved by the Board to be
effective as against the Company. The failure of any party at any time or
times to require performance of any provision of this Agreement shall in no
manner affect the right at a later time to enforce the same. No waiver by
any party of the breach of any term or provision contained in this
Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of
any such breach, or a waiver of the breach of any other term or covenant
contained in this Agreement.
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10. Notice. All notices, requests or consents required or permitted under
this Agreement shall be made in writing and shall be given to the other
party by personal delivery, overnight air courier (with receipt signature)
or facsimile transmission (with "answerback" confirmation of transmission),
if to the Company, sent as follows: Attention: Thomas C. Richmond, 6500
River Place Blvd., Building One, Austin, Texas 78730, and if to the
Employee: Theodore A. Fleron, 1600 Easy Street, Austin, Texas 78746, or
such other addresses or telecopy numbers of which the parties have given
notice pursuant to this Section 10. Each such notice, request or consent
shall be deemed effective upon the date of mailing of such notice, provided
the mailing party retains a receipt signature or confirmation of
transmission, as applicable.
11. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment
Agreement as of the date first above written.
Financial Industries Corporation
Investors Life Insurance Company of North America
By: ______________________________________
Roy F. Mitte
Chairman, President and Chief Executive Officer
6500 River Place Blvd.,
Building One
Austin, Texas 78730
Telephone: (512) 404-5000
Employee:
By: ______________________________________
Theodore A. Fleron
1600 Easy Street
Austin, Texas 78746
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