ILCO's home office is located at River Place Pointe, 6500 River Place Blvd., Building One, Austin, Texas. River Place Pointe was purchased by Investors-NA on October 29, 1998. It consists 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. Prior to the closing of the purchase transaction, Investors-NA obtained a Site Development Permit for the tracts from the City of Austin. The Site Development Permit allows for the construction of seven office buildings totaling 600,000 square feet, with associated parking, drives and related improvements. Construction on the first phase of the Project, which consists of two office buildings, an associated parking garage, and related infrastructure, was completed during 2000. The second phase of construction, which includes two more office buildings, is in progress and Investors-NA expects completion of this phase by the end of the second quarter of 2001. ILCO, FIC and their insurance subsidiaries occupy almost the entire Building One of River Place Pointe, consisting of approximately 76,000 square feet of space.
ILCO leases a building located at 40 Parker Road, Elizabeth, New Jersey. This building, which was formerly the Company's headquarters building, contains approximately 41,000 square feet of office space. The lease was signed in December, 1985 and expires in December, 2005, and 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. The Company sub-leases the space in the property to third parties.
Investors-IN owns three residential buildings which are adjacent to the 40 Parker Road building. One residence, which is leased to a third party, contains approximately 3,000 square feet of space. The second building contains approximately 2,000 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 contains approximately 3,000 square feet of space, and is partially leased to third parties.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of ILCO's financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page.
Except for historical factual information set forth in this Management's Discussion and Analysis, the statements, analyses, and other information contained herein relating to trends in the Company's operations and financial results, the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "path," "estimate," "expect," "intend" and other similar expressions constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning the financial results, economic conditions and are subject to known and unknown risks, uncertainties and other factors contemplated by the forward-looking statements. Such factors include, among other things: (1) general economic conditions and other factors, including prevailing interest rate levels and stock market performance, which may effect the ability of ILCO to sell its products, the market value of ILCO's investments and the lapse rate and profitability of policies; (2) ILCO'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 ILCO's insurance products; (5) changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of ILCO'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 ILCO's insurance subsidiaries by independent rating organizations such as A.M. Best Company, which ILCO 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 ILCO.
Net investment income for the year ended December 31, 2000 was $50.89 million as compared to $49.91 million for the year ended December 31, 1999 and $54.62 million for the year ended December 31, 1998. The increase from 1999 to 2000 was primarily attributable to the investment income earned from the leases on the buildings at River Place Pointe during the second half of the year 2000. The decrease of $4.7 million from 1998 to 1999 was attributable to the allocation of a portion of the investment portfolio to the development of the River Place Pointe project. The project did not produce rental income during the year 1999.
Income from earned insurance charges for the year ended December 31, 2000 was $38.50 million, as compared to $40.45 million for the year 1999 and $41.07 million for the year 1998. This source of revenues is related to the universal life insurance and annuity book of business of Investors-NA. The decrease in income from earned insurance charges over the three year period is consistent with thedecrease in the universal life insurance book of business, as well as the decreased income from surrender charges on universal life policies that have been in force for a number of years.
Interest expense on contract holders deposit funds was $28.79 million for the year ended December 31, 2000, as compared to $30.23 million for the year ended December 31, 1999 and $29.97 million for the year ended December 31, 1998. This expense reflects increases or decreases in the universal life book of business. The increase in 1999 from 1998 is due to the acquisition of the universal life book of business from Grinnell Life. The decrease in 2000 is consistent with the decrease in the total amount of universal life policies in force.
The Company did not incur any interest expense in either the year ended December 31, 2000 or 1999. For the year ended December 31, 1998, the Company incurred $659,000 in interest expense related to the final portion of outside debt, which was completely paid off by the Company in 1998.
For the three-month period ended December 31, 2000, ILCO's net income was $2,474,000 (basic and diluted earnings of $0.30 per common share) on revenues of $25,456,000 as compared to $4,042,000 (basic earnings and diluted earnings of $0.46 per common share) on revenues of $25,943,000 in the last three months of 1999. The decrease in net income was primarily attributable to a $1.6 million increase in death benefits in the fourth quarter of 2000 from the fourth quarter of 1999. Additionally, the Standard Life Building was donated during the fourth quarter of 1999 and the corresponding tax deduction increased the net income for that quarter. Earnings per share are stated in accordance with the requirements of Financial Accounting Standard (FAS) No. 128, which establishes two measures of earnings per share: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common stock were converted or exercised.
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 $23.8 million at December 31, 2000.
The net cash used in financing activities was $(6.66) million for the year ended December 31, 2000, as compared to $(.026) million for the year ended December 31, 1999 and $(10.78) million for the year ended December 31, 1998. The cash used in financing activities for the year 2000 was attributable to ILCO's stock repurchase plan. In 1999, the Board of Directors of ILCO adopted a stock repurchase plan, under which ILCO is authorized to repurchase up to 5% of its outstanding common stock at times deemed appropriate by management. On June 29, 1999, the Company issued a press release describing the plan, and a Form 8-K was been filed with the SEC on June 30, 1999. The plan was subsequently amended to allow ILCO to repurchase up to 10% of its outstanding common stock. In authorizing the repurchases, the Board of Directors intended that the plan will enhance the value of ILCO's common stock and to manage its capital. Cash used in financing activities for the year 1998 was attributable to the final payment on the Senior Loan.
As of December 31, 2000, the book value of the Company's investment assets totaled $660.0 million, as compared to $678.8 as of December 31, 1999. Total assets as of December 31, 2000, which were $1.31 billion decreased slightly from the level as of December 31, 1999, which was $1.32 billion. The decrease in investment assets was primarily attributable to a decrease in short-term investments. The level of short- term investments at the end of 2000 was $129.8 million, as compared to $191.7 million at the end of 1999. This decrease was primarily attributable to a reallocation of investments from short-term, fixed income bonds to long-term bonds and the Company's real estate investment in River Place Pointe.
The Company's fixed maturities portfolio (including short-term investments), as of December 31, 2000, included a non-material amount (0.7 % of total fixed maturities and short-term investments) of debt securities which, in the annual statements of the companies as filed with state insurance departments, were designated under the National Association of Insurance Commissioners ("NAIC") rating system as "3" (medium quality) or below. For the year ended December 31, 1999, the comparable percentage was 0.1%. The increase from 0.1% in 1999 to 0.7% in 2000 was attributable to mortgage bonds which the Company's insurance subsidiaries own in California utilities, which were downgraded to a "5" (lower quality) rating by the NAIC as of December, 2000. Inv-NA owns mortgage bonds in Pacific Gas & Electric which were purchased for $1.031 million and had a market value as of December 31, 2000 of $720,000, and owns bonds in Southern California Edison which were purchased for $1.96 million and had a market value as of December 31, 2000 of $1.48 million. Inv-IN also owns bonds in Southern California Edison which were purchased for $488,085 and had a market value as of December 31, 2000 of $370,000.
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 No. 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 Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No.133." As the Company does not have significant investments in derivative financial instruments, the adoption of FAS No. 133 is not anticipated to have a material impact on the Company's results of operations, liquidity or financial position.
On January 17, 2000, ILCO entered into an Agreement and Plan of Merger (the "Agreement") with FIC and ILCO Acquisition Company ("ILCO Acquisition"), a Texas corporation and wholly-owned subsidiary of FIC. In general, the Agreement provides that, following the approval of the Agreement by the shareholders of ILCO and the approval of the issuance of shares of FIC common stock and amendment to FIC's articles of incorporation by the shareholders of FIC and the satisfaction or waiver of the other conditions to the merger: (1) ILCO Acquisition will merge with and into ILCO; and (2) ILCO Acquisition will cease to exist and ILCO will continue as the surviving corporation and as a wholly-owned subsidiary of FIC following the merger.
Upon the consummation of the merger: (1) each share of ILCO common stock issued and outstanding immediately prior to the merger, other than shares of ILCO common stock held as treasury shares by ILCO (but excluding shares of ILCO common stock held by any of ILCO's subsidiaries, whether or not treated as treasury shares of ILCO on a consolidated basis under generally accepted accounting principles) or shares of ILCO common stock held by FIC, will be converted into the right to receive 1.1 shares of FIC common stock. However, in the event of any change in FIC common stock and/or ILCO common stock prior to the merger, such as a stock split, stock dividend, subdivision, reclassification, recapitalization, combination, exchange of shares or the like, the number and class of shares of FIC common stock to be issued and delivered in the merger in exchange for each outstanding share of ILCO common stock will be adjusted so as to maintain the relative proportionate interests of the holders of ILCO common stock and FIC common stock; (2) each share of ILCO common stock, series A preferred stock and series B preferred stock of ILCO, in each case which is held as treasury shares by ILCO prior to the merger (excluding shares of ILCO common stock held by any of ILCO's subsidiaries, whether or not treated as treasury shares of ILCO on a consolidated basis under generally accepted accounting principles), and each share of ILCO common stock which is held by FIC (excluding any shares of ILCO common stock owned by any of FIC's subsidiaries) prior to the merger, will be cancelled and retired; (3) each share of common stock of ILCO Acquisition issued and outstanding immediately prior to the merger will be converted into one share of common stock of ILCO and such shares will represent all of the issued and outstanding capital stock of ILCO following the merger; and (4) shares of FIC common stock outstanding immediately prior to the merger (including shares of FIC common stock held by any subsidiary of FIC or ILCO) will remain outstanding and will be unaffected by the merger. No fractional shares of FIC common stock will be issued in the merger. A holder of ILCO common stock who would otherwise be entitled to receive fractional shares
of FIC common stock as a result of the merger will receive, in lieu of fractional shares, cash in an amount equal to the average closing price per share of FIC common stock for the 30 trading days immediately prior to the merger multiplied by the fraction to which the holder would otherwise be entitled. FIC will make available to First Union National Bank, as exchange agent, from time to time sufficient cash amounts to satisfy payment for fractional shares and First Union will distribute such proceeds, without interest, to the holders of the fractional interests.
The following Financial Statements of ILCO and its consolidated subsidiaries have been filed as part of this report:
2. Consolidated Balance Sheets, as of December 31, 2000 and December 31, 1999.
4. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998.