For purposes of this Form 10-K and in accordance with rule 12b-15 under the Securities and Exchange Act of 1934, as amended, each item of this form 10-K for the years ended December 31, 2002, 2001, 2000 and 1999 as originally filed 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-K TO MODIFY OR UPDATE OTHER DISCLOSURES AS PRESENTED IN THE ORIGINAL FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, 2000 or 1999 EXCEPT AS REQUIRED TO REFLECT THE EFFECTS OF THE RESTATEMENT HEREIN.THE COMPANY’S PREVIOUSLY ISSUED FINANICAL STATEMENTS FOR THESE YEARS, AND FOR THE QUARTERLY PERIODS WITHIN SUCH YEARS SHOULD NO LONGER BE RELIED UPON.
Financial Industries Corporation (“FIC” or the “Company”) is a holding company engaged through its subsidiaries in the business of marketing, underwriting and servicing life insurance and annuity products in 49 states, the District of Columbia and the U.S. Virgin Islands. Like other financial intermediaries, FIC earns income principally based on the “spread” between what it pays its customers (death benefits, interest on funds on deposit) and what it earns on the money (premiums, policy and annuity deposits) its customers place in its care. Its long-term viability, profitability, and growth turn on FIC’s ability to manage both sides of this spread (investment of assets and pricing of liabilities), to keep its operating expenses reasonable, and to attract a sufficient volume of new deposits (by selling new insurance policies and annuities) to more than replace the inevitable withdrawal (through deaths, policy cancellations, and annuity contract surrenders) of funds currently in its keeping.
FIC’s internal review was complemented by an investigation by outside counsel for the Audit Committee of the Board of Directors. PricewaterhouseCoopers LLP, FIC’s independent registered public accounting firm, was consulted on the scope of the internal review for certain matters and reviewed the results of the internal review.
$10.9 million reduction from change in net unrealized losses on investments in fixed maturities available for sale
The most significant development in liabilities during 2003 was the Company’s borrowing of $15 million in May 2003 through the issuance of trust preferred notes (the “2003 Notes”). FIC used the proceeds of this borrowing to pay for its acquisition of the New Era Companies and to repay advances that it had received from one of its insurance company subsidiaries for operating expenses. The 2003 Notes bear interest at the three-month LIBOR rate plus 4.2% (approximately 7.53% at June 30, 2005), not to exceed 12.5% prior to May 2008. The 2003 Notes require the payment only of interest through May 22, 2033, when the entire $15 million must be repaid, and may be repaid without any prepayment penalty after May 2008.
The Company’s revenues and net (loss) income for years 2003, 2002, and 2001 are shown in the following table.
The financial statements that are a part of this report contain a summary of FIC’s significant accounting policies, including a discussion of recently issued accounting pronouncements. Certain of these policies are particularly important to the portrayal of FIC’s financial condition because they require management to make difficult, complex, and/or subjective judgments, some of which may relate to matters that are inherently uncertain. These policies include methods of accounting for certain policy-related receipts, valuing investments, capitalizing, deferring, and amortizing policy acquisition costs and costs associated with the acquisition of existing blocks of business (the present value of future profits), and reserving for future liabilities to insurance policy and annuity contractholders. For the year 2002, the Company's critical accounting policies also included the cumulative effect of accounting changes regarding the goodwill acquired in the merger with ILCO.
A number of states regulate the manner and extent to which insurance companies may test for Acquired Immune Deficiency Syndrome (“AIDS”) antibodies in connection with the underwriting of life insurance policies. To the extent permitted by law, our insurance subsidiaries consider AIDS information in underwriting coverages and establishing premium rates. An evaluation of the financial impact of future AIDS claims is extremely difficult, due in part to insufficient and conflicting data regarding the incidence of the disease in the general population and the prognosis for the probable future course of the disease.
Currently, under the Internal Revenue Code, holders of many life insurance and annuity products, including both traditional and variable products, are entitled to tax-favorable treatment on these products. For example, income tax payable by policyholders on investment earnings under life insurance and annuity products which are owned by natural persons is deferred during the product’s accumulation period and is payable, if at all, only when the insurance or annuity benefits are actually paid or to be paid.
The profitability of our spread-based business depends in large part upon our ability to manage interest rate spreads, and the credit and other risks inherent in our investment portfolio. We cannot guarantee, however, that we will manage successfully our interest rate spreads or the potential negative impact of those risks.
materially increase the number of policy or contract surrenders for all or a portion of their net cash values and withdrawals by policyholders of cash values from their policies;