Investors-IN owns three buildings which are adjacent to the 40 Parker Road building. One building, which is leased to third parties, contains approximately 3,500 square feet of space. The second building contains approximately 2,500 square feet of space and is leased to persons who perform maintenance services for Investors-IN's and ILCO's properties in Elizabeth, New Jersey. The third building, purchased during 1985, contains approximately 3,500 square feet of space, and is partially leased to third parties .
2. Net income per share for the years 1995 and 1996 has been restated to reflect the effect of FAS 128.
Net income from continuing operations (excluding the gain resulting from the sale of Bridgepoint Square Offices in 1997, as described below) was $12,765,000 (basic earnings of $1.45 per common share, or diluted earnings of $1.45 per common share) for the year ended December 31, 1999, as compared to $11,119,000 (basic earnings of $1.27 per common share, or diluted earnings of $1.25 per common share) for the year ended December 31, 1998 and $11,443,000 (basic earnings of $1.32 per common share, or diluted earnings of $1.31 per common share) for the year ended December 31, 1997.
The results for 1998 include, for the period beginning on June 30, 1998, the operations of Grinnell Life Insurance Company. Grinnell Life was acquired on June 30, 1998, through a subsidiary of ILCO, for an adjusted purchase price of $16.6 million. A portion of the purchase price ($12.37 million) was paid by way of a dividend to the seller immediately prior to the closing of the transaction; the balance of the purchase price was paid by ILCO's subsidiary. As part of the transaction, Grinnell Life was immediately merged with and into that subsidiary, with that subsidiary being the surviving entity.
Premium income, net of reinsurance, for the year 1999 was $11.13 million, as compared to $10.89 million for the year 1998 and $11.03 million in 1997. Reinsurance premiums ceded were $3.47 million in 1999, as compared to $2.94 million in 1998 and $2.59 million in 1997. For the year 1997, ceded reinsurance includes the results of the sale of the accident and health and disability income insurance business of the Company's life insurance subsidiaries. In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance treaty under which all of the contractual obligations and risks under accident and health and disability income insurance policies were assumed by a third party reinsurer. These risks and contractual obligations were sold pursuant to, first, a coinsurance reinsurance agreement. Following applicable regulatory approvals, the reinsurer will assume the direct obligations of the companies, on an assumption reinsurance basis. The decision to dispose of this book of business was based on management's analysis that the business was not generating targeted profit objectives and that the products were not part of the core business of the subsidiaries. The sale permits the companies to focus on its primary business - life insurance and annuity sales. In connection with the transaction, the total amount of net reserves transferred by the subsidiaries was $6.33 million. In addition to the transfer of reserves, the life companies paid the reinsurer $1.04 million in connection with the transaction, which amount was accounted for as an expense for the year ended December 31, 1997. In 1997, the transferred business generated approximately $791,000 in annualized premiums.
During 1999, the lapse rate with respect to universal life insurance policies decreased slightly from the lapse rate experienced in 1998. The rate in 1999 was 6.30%, as compared to 7.25% in 1998. The lapse rate with respect to traditional (non-universal) life insurance policies increased from the levels experienced in 1998. The rate in 1999 was 8.15% as compared to 7.09% in 1998. The lapse rates experienced during the 1999 period were within the ranges anticipated by management.
ILCO is a holding company whose principal assets consist of the common stock of Investors-NA and its subsidiary, Investors-IN. ILCO's primary source of funds consists of payments under two Surplus Debentures from Investors-NA.
Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN had earned surplus of $18.1 million at December 31, 1999. During 1999, Investors-IN made a dividend payment in the amount of $3 million to Investors-NA. The payment was made on June 29, 1999 after the advance notice required by the Indiana insurance code had been provided to the Indiana Department of Insurance.
ILCO's net cash flow provided by (used in) operating activities was $(20.89) million for the year ended December 31, 1999, as compared to $(17.33) million for the year ended December 31, 1998 and $3.96 million for the year ended December 31, 1997. The change between the 1997 and 1998 periods is primarily due to the payments made in connection with the reinsurance of the health insurance business and the payment in 1998 of income taxes relating to the gain on the sale of Bridgepoint Square Offices.
The consolidated balance sheets of the Company as of December 31, 1999 include $41.5 million of "Notes receivable from affiliates", represented by (i) a loan of $22.5 million from Investors-NA to Family Life Corporation and a $2.5 million loan from Investors-CA to Financial Industries Corporation (which is now owned by Investors-NA as a result of the merger of Investors-CA into Investors-NA) and $2.0 million of additions to the $2.5 million note made in accordance with the terms of such note; these loans were granted in connection with the 1991 acquisition of Family Life Insurance Company by a wholly-owned subsidiary of FIC (ii) a loan of $30 million by Investors-NA to Family Life Corporation made in July, 1993, in connection with the prepayment by the FIC subsidiaries of indebtedness which had been previously issued to Merrill Lynch as part of the 1991 acquisition and (iii) a loan of $4.5 million by Investors-NA to Family Life Insurance Investment Company made in July, 1993, in connection with the same transaction described above.
As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC and FLIIC were modified as follows: (a) the $22.5 million note was amended to provide for twenty quarterly principal payments, in the amount of $1,125,000 each, to commence on December 12, 1996; the final quarterly principal payment is due on September 12, 2001; the interest rate on the note remains at 11%, (b) the $30 million note was amended to provide for forty quarterly principal payments, in the amount of $163,540 each for the period December 12, 1996 to September 12, 2001; beginning with the principal payment due on December 12, 2001, the amount of the principal payment increases to $1,336,458; the final quarterly principal payment is due on September 12, 2006; the interest rate on the note remains at 9%, (c) the $4.5 million note was amended to provide for forty quarterly principal payments, in the amount of $24,531 each for the period December 12, 1996 to September 12, 2001; beginning with the principal payment due on December 12, 2001, the amount of the principal payment increases to $200,469; the final quarterly principal payment is due on September 12, 2006; the interest rate on the note remains at 9%, (d) the $2.5 million note was amended to provide that the principal balance of the note is to be repaid in twenty quarterly installments of $125,000 each, commencing December 12, 1996 with the final payment due on September 12, 2001; the rate of interest remains at 12% and (e) the Master PIK note, which was issued to provide for the payment in kind of interest due under the terms of the $2.5 million note prior to June 12, 1996, was amended to provide that the principal balance of the note, in the amount of $1,977,119, is to be paid in twenty quarterly principal payments, in the amount of $98,855.95 each, to commence December 12, 1996 with the final payment due on September 12, 2001; the interest rate on the note remains at 12%.
The Company completed this systems conversion and testing prior to January 1, 2000. For the year ended December 31, 1999, the Company incurred an after-tax expense of approximately $195,000 in connection with the Year 2000 Plan, as compared to an after-tax expense of approximately $158,000 for the year 1998 and $140,000 for the year 1997.
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. FAS 133 is applicable to financial statements for all fiscal quarters of fiscal years beginning after June 15, 2000 as amended by FAS No. 137, "Accounting for the Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statements No. 133". The operations of the Company are not affected by the provisions of FAS No. 133.
3. Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.
5. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.