In September, 1995, Investors-NA 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.
In the fourth quarter of 1995, construction began on the second office building, containing approximately 109,000 rentable square feet, and the other parking garage containing approximately 871 spaces. That phase of the project was completed in September, 1996. In March, 1996, construction commenced on the third office building, with approximately 79,000 rentable square feet of office space and was completed in December, 1996. Construction began on the fourth building in July, 1996 and was completed in July, 1997. The fourth building contains approximately 92,459 rentable square feet.
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. In May, 1997, the entire rentable space (approximately 76,793 rentable square feet) contained in the building was leased to a major tenant in the technology business. Construction of the parking garage and the building shell was completed in October, 1997.
Selected Financial Data: (Registrant and its Consolidated Subsidiaries) (In thousands, except per share data)
For the year ended December 31, 1999, FIC's net income was $9,149,000 (basic earnings of $1.81 per common share or diluted earnings of $1.76 per common share) as compared to $9,218,000 (basic earnings of $1.71 per common share or diluted earnings of $1.66 per common share) for the year ended December 31, 1998 and $16,328,000 (basic earnings of $3.01 per common share or diluted earnings of $2.92 per common share) for the year ended December 31, 1997. 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.
Net income from continuing operations (excluding the gain resulting from Family Life's sale of its interest in Bridgepoint Square Offices in 1997, and ILCO's sale of its interest in Bridgepoint Square Offices in 1997, as described below) was $9,149,000 (basic earnings of $1.81 per common share or diluted earnings of $1.76 per common share) in 1999, as compared to $9,218,000 (basic earnings of $1.71 per common share or diluted earnings of $1.66 per common share) for the year ended December 31, 1998 and $9,300,000 (basic earnings of $1.71 per common share or diluted earnings of $1.66 per common share) for the year ended December 31, 1997.
Net income for the year ended December 31, 1997 includes $3.2 million ($0.57 per common share) resulting from Family Life's sale of its interest in Bridgepoint Square Offices. Family Life purchased undeveloped land at the Bridgepoint site in May, 1996, 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 building (known as "Bridgepoint Five") in January, 1997. In May, 1997, the entire rentable space (approximately 76,793 rentable square feet) contained in the building was leased to a major tenant in the technology business. Construction of the parking garage and the building shell was completed in October, 1997. In November, 1997, Family Life entered into a contract to sell its interest in the Bridgepoint Square Office complex. The sale also included the adjacent properties developed by ILCO's subsidiary, Investors-NA. The aggregate purchase price for the project was $78 million. The transaction closed on December 5, 1997. The purchase price was allocated approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale resulted in a net profit to Family Life of approximately $4.5 million ($3.2 million after tax) that is included in FIC's earnings for the year 1997.
The increase in long-term interest rates during 1999, which was related to general economic conditions, had a negative effect upon the market value of the fixed maturities available for sale segment of the Company's portfolio. As of December 31, 1999, the market value of the fixed maturities available for sale segment was $77.5 million as compared to an amortized value of $78.3 million, or an unrealized loss $0.8 million. The net of tax effect of this decease has been recorded as a decrease in shareholders' equity.
Premiums for the year 1999, net of reinsurance ceded, were $33.96 million, as compared to $38.4 million for the year 1998 and $40.2 million in 1997. Policyholder benefits and expenses were $13.9 million in 1999, as compared to $16.3 million in 1998 and $19.9 million in 1997.
The increase in long-term interest rates during 1999, which was related to general economic conditions, had a negative effect upon the market value of the fixed maturities available for sale segment of ILCO's investment portfolio. As of December 31, 1999, the market value of the fixed maturities available for sale segment was $404.2 million as compared to an amortized cost of $411.5 million, or an unrealized loss of $7.3 million. Since FIC owns approximately 44.5% of the common stock of ILCO, such unrealized losses, net of tax, are reflected in FIC's equity interest in ILCO, and had the effect of decreasing the reported value of such equity interest by approximately $2.0 million.
Investors-IN is domiciled in the State of Indiana. The transfer of domicile from New Jersey to Indiana was effective December 15, 1997. 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.
payments of $1.8 million to Family Life Corporation under the Surplus Debenture. As of December 31, 1999, the principal balance of the Surplus Debenture was $13.9 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 $2.6 million for the year 1999, as compared to $6.0 million in 1998 and $4.2 million in 1997. Net cash flow used in financing activities was $6.15 million in 1999, as compared to $13.10 million in 1998 and $6.15 million in 1997.
The assets held by Family 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".
The fixed maturities portfolio of Family Life, as of December 31, 1999, 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).
The Year 2000 Plan called for an upgrade of the Family Life's administrative systems by changing individual lines of computer code in order to modify current operating software such that it would become Y2K compliant. This process included approximately 29 sub-systems which provide data input to the main systems. The administrative systems which were not modified were converted onto the Company's CK/4 System, a system designed to be Y2K compliant according to the representations of the vendor.
With respect to non-centralized systems (i.e., desktop computers), the Company obtained updated software releases and new hardware designed to be Y2K compliant according to the representations of the vendors. The installation of such new PC hardware and software was commenced in early 1999 and was completed during the fourth quarter of 1999.
The Company also faced the risk that one or more of its external suppliers of goods or services ("third party providers") would not be in a position to properly interact with the Company due to the inability of such third party provider to resolve its own Y2K issues. During 1999, the Company completed an inventory of its third party provider relationships. In order to assess the Y2K readiness of such third party providers, the Company developed and forwarded a detailed questionnaire to such providers. As the responses to the questionnaires were received, the Company evaluated the overall Y2K readiness of its third party provider relationships. The Company did not experience any material problems with its third-party vendors which were related to the Year 2000 date change.
Except for historical factual information set forth in this Management's Discussion and Analysis, certain statements made in this report are forward looking and contain information about financial results, economic conditions and other risks and known uncertainties. The Company cautions the reader that actual results could differ materially from those anticipated by the Company, depending upon the eventual outcome of certain factors, including: (1) heightened competition for new business, (2) significant changes in interest rates and (3) adverse regulatory changes affecting the business of insurance.
In February, 1997, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," which revises the standards for computing earnings per share previously prescribed by Accounting Principles Board Opinion No. 15, "Earnings Per Share." The Statement 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 reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. The Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with potential dilutive securities outstanding. The Statement also requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The Statement is effective for interim and annual periods ending after December 15, 1997. Earlier application is not permitted. However, a company may disclose pro forma earnings per share amounts that would have resulted if it had applied the Statement in an earlier period. The Company adopted FAS 128 in its annual financial statements for the year ended December 31, 1997.
In February, 1998, the FASB issued FAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits", which revises current disclosure requirements for employers' pension and other retiree benefits. FAS No. 132 does not change the measurement or recognition of pension or other postretirement benefit plans. The Company adopted FAS No. 132 effective January 1, 1998, with the effect of such adoption to be reflected in year-end financial statements. The adoption of FAS No. 132 did not have a material impact on the Company's results of operations, liquidity or financial position.
In December, 1997, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", which provides guidance on accounting for insurance-related assessments. The Company adopted SOP 97-3, effective January 1, 1999. Previously issued financial statements were required to be restated. The adoption of SOP 97-3 did not have a material impact on the Company's results of operations, liquidity or financial position.
2. Consolidated Balance Sheets, as of December 31, 1999 and December 31, 1998.