In September 1995, Investors-NA (a subsidiary of ILCO) entered into a contract to sell Austin Centre to an Austin-based real estate investment firm for a purchase price of $62.675 million, less $1 million to be paid to a capital reserve account for the purchaser. The sale was consummated on March 29, 1996. A portion of the sale proceeds equal to the amount that Investors- NA presently had invested in Austin Centre were retained and reinvested by Investors-NA. The balance of the net proceeds of the sale were used to reduce ILCO's bank indebtedness by approximately $15 million.
On May 3, 1996, Family Life, purchased a tract of land adjoining the Bridgepoint Office Square tract for a cash purchase price of $1.3 million. The property consists of 7.1 acres of land with one office building site and one parking structure site. Family Life began construction of the fifth building (known as "Bridgepoint Five") on the new site in January 1997. The building, which will have approximately 71,500 square feet of rentable space, is currently projected to be completed in September, 1997. Following completion of the building, ILCO and its related companies will vacate their current headquarters in the Austin Centre and move them to Bridgepoint Five. ILCO and its related companies will occupy approximately 50,000 rentable square feet. Family Life is currently seeking tenants to occupy the remainder of the rentable square feet in the fifth building.
Family Life leases its home offices at the Fourth and Blanchard Building, 2121 Fourth Avenue, in Seattle, Washington. The lease currently covers approximately 7,776 rentable square feet of office space for a term expiring in October 1998 with an option to renew for an additional three-year period. The initial base rental is approximately $11,200 per month, which includes Family Life's proportionate share of the building's operating expenses, including utilities, property taxes, insurance, maintenance and management. Actual increases from those initial operating expenses during the lease term are passed on to Family Life on a proportionate basis.
ILCO leases a building located at 40 Parker Road, Elizabeth, New Jersey. This building, which was formerly ILCO's headquarters building, contains approximately 41,000 square feet of office space. The remaining term of the lease is 11 years, and the lease calls for a minimum base rental of $450,000 per annum. The lease provides that all costs including, but not limited to, those for maintenance, repairs, insurance and taxes be borne by ILCO. ILCO and ILIC currently occupy a nominal portion of the space in the 40 Parker Road property and have sub-leased the remaining portion.
Income (loss) before federal income tax, equity in net earnings of affiliates, extraordinary items and cumulative effect of change in accounting principle of affiliate 9,791 10,394 10,610 11,560 12,179
Equity in net earnings of affiliate, net of tax 9,012 2,051 1,690 3,038 4,761
Cumulative effect of change in accounting principle of affiliate, net -0- -0- -0- (1,159) -0- of tax benefit
Common Stock and Common Stock Equivalents 5,568 5,540 5,530 5,555 5,565
Net income per share before extraordinary items and cumulative effect of change in accounting principle of affiliate $ 2.90 $ 1.81 $ 1.80 $ 2.09 $ 2.44
Net income per share before cumulative effect of change in accounting principle of affiliate 2.90 1.81 1.80 3.09 2.44
Cumulative effect of change in accounting principle of affiliate -0- -0- -0- ( 0.21) 0.00
The statutory earnings of Family Life as required to be reported to insurance regulatory authorities before interest expense, capital gains and losses, and federal income taxes were $12,734,000 at December 31, 1996, as compared to $14,354,000 at December 31, 1995 and $18,944,000 at December 31, 1994. These statutory earnings are the source to provide for the repayment of the indebtedness incurred in connection with the acquisition of Family Life.
The consolidated balance sheets at December 31, 1996 include Separate Account assets of Family Life in the amount of $0.45 million. The Separate Account is maintained by Family Life, which was acquired by FIC on June 12, 1991. Under the provisions of the purchase agreement between FIC and Merrill Lynch Insurance Group, Inc., certain life insurance companies affiliated with Merrill Lynch agreed to assume (on an assumption reinsurance basis) the variable annuity contracts related to such Separate Account assets. The transfer of these assets, in accordance with the provisions of the reinsurance agreement, is subject to certain regulatory approvals. During the year 1996, Merrill Lynch received regulatory approvals in several additional jurisdictions. As a result, Separate Account assets in the amount of $8.1 million were transferred out of Family Life, in accordance with the provisions of the 1991 agreements. The Company has not obtained a definitive date from Merrill Lynch as to when the remaining regulatory approvals will be obtained, so as to enable Family Life to complete the transfer of Separate Account assets.
Prior to the acquisition of Family Life in June of 1991, FIC's primary involvement in the life insurance business was through its equity interest in ILCO. The Company's equity in the net earnings of ILCO, net of federal income tax, was $9,012,000, as compared to $2,051,000 for the year 1995 and $1,690,000 for the year 1994. The increase in 1996 is primarily attributable to ILCO's net income resulting from the sale of the Austin Centre property.
FIC currently owns 1,795,146 shares of ILCO's common stock, and holds options to acquire an additional 1,702,155 shares. The options were granted under an Option Agreement between FIC and ILCO which was entered into in March, 1986. In addition, Family Life currently owns 171,200 shares of ILCO common stock. As a result, FIC currently owns, directly and indirectly through Family Life, 1,966,346 shares (approximately 46%) of ILCO's common stock and holds options to acquire 1,702,155 shares. If all of FIC's rights under the Option Agreement were to be presently exercised, FIC's ownership would amount to approximately 61.5% of the issued and outstanding shares of ILCO's common stock.
The decline in long-term interest rates during 1996, which was related to general economic conditions, had a positive effect upon the market value of the fixed maturities available for sale segment of ILCO's investment portfolio. As of December 31, 1996, the market value of the fixed maturities available for sale segment was $453.9 million as compared to an amortized cost of $451.6 million, or an unrealized gain $ 2.3 million. There is no assurance that this unrealized gain will be realized by ILCO in the future. Since FIC owns approximately 46% of the common stock of ILCO, such unrealized gains, net of tax, are reflected in FIC's equity interest in ILCO, and had the effect of increasing the reported value of such equity interest by approximately $5.3 million.
ILCO's results for 1996, and for that portion of 1995 beginning on february 14th, include the operations of Investors Life Insurance Company of Indiana (formerly known as Meridian Life Insurance Company). Investors Life Insurance Company of Indiana ("Investors-IN") was purchased by ILCO and Investors Life Insurance Company of North America ("Investors-NA") for an adjusted purchase price of $17.1 million; the transaction was completed on February 14, 1995. The name change was completed in May, 1995.
The cash requirements of ILCO consist primarily of its service of the indebtedness created in connection with the 1988 acquisition of the Investors Life Companies and the 1995 acquisition of Investors-IN. As of December 31, 1995, the unpaid principal of ILCO's senior loan was $59.4 million. In January, 1996, ILCO made a scheduled payment of $4.5 million under its Senior Loan. In March, 1996, ILCO made the scheduled payments for April 1st and July 1st, totaling $9 million. At that same time, ILCO made a payment of $941,000, an additional payment under the terms of the loan applied to the principal balance. On April 1, 1996, an optional principal payment in the amount of $15 million was made. In July, 1996, ILCO made the principal payment for October 1st ($4.5 million), plus an optional principal payment of $0.5 million, thereby reducing the total amount of the outstanding Senior Loan to $24.94 million.
ILCO's principal source of liquidity consists of the periodic payment of principal and interest to it by Investors-NA, pursuant to the terms of the two surplus debentures. The surplus debentures were originally issued by Standard Life Insurance Company and its terms were previously approved by the Mississippi Insurance Commissioner. One of the surplus debentures, in the original amount of $15 million, was issued in connection with the 1986 acquisition of Standard Life by ILCO; the other, in the original amount of $140 million was issued in connection with the 1988 acquisition by ILCO of the Investors Life Companies. Upon the merger of Standard Life into Investors-NA, the obligations of the surplus debentures were assumed by Investors-NA. As of December 31, 1996, the outstanding principal balance of the surplus debentures was $5.7 million and $32.8 million, respectively. Since Investors-NA is domiciled in the State of Washington, the Washington insurance law applies to the administration of the terms of the surplus debentures. Under the provisions of the surplus debentures and current law, no prior approval of the Washington Insurance Commissioner is required for Investors-NA to pay interest or principal on the surplus debentures; provided that, after giving effect to such payments, the statutory surplus of Investors-NA is in excess of $10 million (the "surplus floor"). However, Investors-NA has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debenture. As of December 31, 1996, the statutory capital and surplus of Investors-NA was $53.8 million, an amount substantially in excess of the surplus floor. The funds required by Investors-NA to meet its obligations to ILCO under the terms of the surplus debentures are generated from operating income generated from insurance and investment operations.
For the year ended December 31, 1996, FIC's income from operations, before federal income tax and equity in net earnings of affiliate, was $9,791,000 (on revenues of $59,928,000), as compared to $10,394,000 (on revenues of $61,541,000) in the year 1995 and $10,610,000 (on revenues of $68,524,000) for the year 1994.
The principal source of liquidity for FIC's subsidiaries consists of the periodic payment of principal and interest by Family Life pursuant to the terms of a Surplus Debenture. The terms of the Surplus Debenture were previously approved by the Washington Insurance Commissioner. Under the provisions of the Surplus Debenture and current law, no prior approval of the Washington Insurance Department is required for Family Life to pay interest or principal on the Surplus Debenture; provided that, after giving effect to such payments, the statutory surplus of Family Life is in excess of 6% of assets (the "surplus floor"). However, Family Life has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debenture. As of December 31, 1996, the statutory capital and surplus of Family Life was $24.9 million, an amount substantially in excess of the surplus floor. During 1996, Family Life made principal payments of $9.4 million and interest payments of $4.1 million to Family Life Corporation under the Surplus Debenture. As of December 31, 1996, the principal balance of the Surplus Debenture was $40.5 million. The funds required by Family Life to meet its obligations under the terms of the Surplus Debenture are generated primarily from premium payments from policyholders, investment income and the proceeds from the sale and redemption of portfolio investments.
FIC's net cash flow provided by operating activities was $9.7 million in 1996, as compared to $9.1 million in 1995 and $5.3 million in 1994. Net cash flow used in financing activities was $8.05 million in 1996, as compared to $9.8 million in 1995 and $11.4 million in 1994.
The guaranty commitments of FIC under the loans incurred in connection with the acquisition of Family Life (after taking into account the repayments and new loans which occurred in July, 1993) relate to: (i) the $22.50 million note issued by Family Life Corporation to Investors Life Insurance Company of North America, and (ii) the 34.5 million loaned by Investors-NA to two subsidiaries of FIC.
The fixed maturities portfolio of Family Life, as of December 31, 1996, consisted solely of fixed maturities investments which, in the annual statements of the companies, as filed with state insurance departments, were designated under the National Association of Insurance Commissioners ("NAIC") rating system as a "1" (highest quality).
SFAS No. 121 is effective for fiscal years beginning after 1995. The Company plans to adopt SFAS No. 121 effective January 1, 1996. Management does not anticipate that adoption or this standard will have a material impact on the Company's financial statements.
3. Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994.
4. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994.