-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OdU5ykAJU4COyp8kQpU1gMm1ezhKWxvCCpMALcYEn8qYGW9iLDUvVCL6F9pkL91H ceg6cOKhzXm8sbn/ZM5oWg== 0000050982-97-000011.txt : 19970520 0000050982-97-000011.hdr.sgml : 19970520 ACCESSION NUMBER: 0000050982-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCONTINENTAL LIFE CORP CENTRAL INDEX KEY: 0000050982 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 221890938 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07288 FILM NUMBER: 97608686 BUSINESS ADDRESS: STREET 1: THE AUSTIN CENTRE STREET 2: 701 BRAZOS 12TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124045050 MAIL ADDRESS: STREET 1: 701 BRAZOS STE 1400 STREET 2: ATTN KELLYE S SEEKATZ CITY: AUSTIN STATE: TX ZIP: 78701 FORMER COMPANY: FORMER CONFORMED NAME: INTERCONTINENTAL FINANCIAL CORP DATE OF NAME CHANGE: 19781019 FORMER COMPANY: FORMER CONFORMED NAME: INTERCONTINENTAL LIFE CO DATE OF NAME CHANGE: 19600201 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1997 Commission File Number 2-39310 INTERCONTINENTAL LIFE CORPORATION New Jersey 22-1890938 (State of Incorporation) (I.R.S. Employer Identification Number) The Austin Centre,701 Brazos, 12th Floor Austin, Texas 78701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (512)404-5000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Number of common shares outstanding ($.22 Par Value) at end of period: 4,266,829. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information Consolidated Balance Sheets March 31, 1997 and December 31, 1996............... 3 Consolidated Statements of Income For the three month periods ended March 31, 1997 and 1996............................ 5 Consolidated Statements of Cash Flows For the three month periods ended March 31, 1997 and 1996 ........................... 6 Notes to Consolidated Financial Statements.............. 8 Management's Discussion and Analysis of Financial Conditions and Results of Operations..... 9 Part II Computations of Earnings Per Share..................... 16 Part III Other Information.......................................17 Signature Page..........................................18 Item 1. Financial Statements INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) March 31, December 31, 1997 1996 (Unaudited) ASSETS Investments: Fixed maturities, at amortized cost (market value approximates $6,501 and $8,374) $ 6,607 $ 8,165 Fixed maturities available for sale at market value (amortized cost of $450,542 and $451,550) 442,159 453,896 Equity securities at market (cost approximates $369 and $373) 2,670 2,304 Policy loans 52,721 53,030 Mortgage loans 12,168 13,494 Invested real estate and other invested assets 45,041 38,696 Short-term investments 88,752 91,556 Total investments 650,118 661,141 Cash and cash equivalents 4,313 3,313 Notes receivable from affiliates 58,403 59,940 Accrued investment income 8,299 7,807 Agent advances and other receivables 17,239 21,725 Reinsurance receivables 12,917 12,123 Property and equipment, net 1,782 1,785 Deferred policy acquisition costs 27,584 26,938 Present value of future profits of acquired businesses 43,849 45,240 Deferred financing costs 488 636 Other assets 9,555 8,965 Separate account assets 408,610 414,329 Total Assets $1,243,156 $1,263,942 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) March 31, December 31, 1997 1996 (Unaudited) LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds Future policy benefits $ 128,862 $ 119,744 Contractholder deposit funds 525,083 538,505 Unearned premiums 9,304 9,069 Other policy claims & benefits payable 6,988 5,988 Other policyholders' funds 2,518 2,720 Senior loans 20,364 24,944 Deferred federal income taxes 20,921 23,692 Other liabilities 13,192 13,835 Separate account liabilities 406,364 412,084 Total liabilities 1,133,595 1,150,581 Commitments and contingencies Redeemable preferred stock: Class A Preferred, $1 par value, 5,000,000 shares authorized and issued 5,000 5,000 Class B Preferred, $1 par value, 15,000,000 shares authorized and issued 15,000 15,000 20,000 20,000 Redeemable Preferred Treasury Stock at cost, 20,000,000 shares (20,000) (20,000) Shareholders' equity: -0- -0- Class C Preferred stock, $1 par value, 10,000,000 authorized, none issued Common stock, $.22 par value, 10,000,000 shares authorized; 5,257,739 shares issued, 4,266,829 shares outstanding 1,157 1,150 Additional paid-in capital 3,977 3,752 Net unrealized appreciation of equity securities 1,496 1,255 Net unrealized gain (loss) on investments in fixed maturities available for sale (5,449) 1,525 Retained earnings 111,397 108,697 Common Treasury stock, at cost, 990,910 shares (3,018) (3,018) Total Shareholders' equity 109,561 113,361 Total Liabilities and Shareholders' Equity $1,243,156 $1,263,942 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED March 31, 1997 AND 1996 (Unaudited) (in thousands of dollars, except per share data) 3 Months Ended March 31, 1997 1996 Revenues: Premiums $ 1,954 $ 2,934 Earned insurance charges 10,217 10,703 Net investment income 14,621 15,793 Gain on sale of real estate -0- 23,520 Other 609 631 Total 27,401 53,581 Benefits and expenses: Policyholder benefits and expenses 9,394 10,072 Interest on insurance policies 8,016 7,922 Amortization of present value of future profits of acquired business 1,391 1,468 Amortization of dac 522 711 Other expenses 3,489 4,505 Interest expense 435 1,101 Total 23,247 25,779 Income from operations 4,154 27,802 Provision for federal income taxes Current 623 8,808 Deferred 831 952 Net income $ 2,700 $ 18,042 Per Share Data: Common stock and common stock equivalents 5,302 5,425 Net income per share available to common share holders $ .54 $ 3.35 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED March 31, 1997 AND 1996 (Unaudited) (in thousands of dollars) 3 Months Ended March 31, CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 Net income $ 2,700 $ 18,042 Adjustments to reconcile net income to net cash provided (used in) by operating activities: Amortization of present value of future profits of acquired businesses 1,391 1,468 Amortization of deferred policy acquisition costs 522 711 Depreciation 515 281 Net gain on sales of investments -0- (23,607) Financing costs amortized 148 217 Changes in assets and liabilities: Increase in accrued investment income (492) (664) Increase in agent advances and other receivables 3,695 (3,311) Policy acquisition costs deferred (1,168) (1,103) Decrease in policy liabilities and contract holder deposit funds (3,070) (7,031) Decrease in other policyholders' funds (202) 47 Decrease in other liabilities (643) (1,543) Decrease in deferred federal income taxes (2,771) (5,160) Increase in other assets (590) (528) Other, net 4,332 7,808 Net cash provided by (used in) operating activities $ 3,337 $ (14,373) (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED March 31, 1997 AND 1996 (Unaudited) (In thousands of dollars) 3 Months Ended March 31, CASH FLOWS FROM INVESTING ACTIVITIES 1997 1996 Investments purchased $ (9,852) $ (13,703) Proceeds from sale and maturities of investments 9,571 74,676 Net change in short-term investments 2,804 (36,552) Purchase & retirement of equipment, net (512) (272) Net cash provided by investing activities 2,011 24,149 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 232 81 Repayment of debt (4,580) (14,441) Net cash used in financing activities (4,348) (14,360) Net increase (decrease) in cash and cash equivalents 1,000 (4,584) Cash and cash equivalents, beginning of period 3,313 6,537 Cash and cash equivalents, end of period $ 4,313 $ 1,953 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) The financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the interim results. The statements have been prepared to conform to the requirements of Form 10-Q and do not necessarily include all disclosures required by generally accepted accounting principles (GAAP). The reader should refer to Form 10-K for the year ended December 31, 1996 previously filed with the Securities and Exchange Commission for financial statements prepared in accordance with GAAP. Certain prior year amounts have been reclassified to conform with current year presentation. Sale of Home Office Building Net income for the first quarter of 1996 includes $15.3 million resulting from the sale of the Austin Centre, a hotel/office complex, located in Austin, Texas. The selling price was $62.675 million, less $1 million paid to a capital reserve account for the purchaser. The property was purchased in 1991 for $31.275 million. The book value of the property, $36.8 million, net of improvements and amortization, were retained and reinvested by Investors Life Insurance Company of North America. The balance of the proceeds of the sale, net of Federal Income Tax, were used to reduce the Company's senior loan obligations by $15 million. The sale closed on March 29, 1996. The Company continues to rent space on three floors under the terms of an operating lease which expires in September, 1997. New Accounting Pronouncements In February 1997, the FASB issued FAS No. 128, "Earnings Per Share," which revises the standards for computing earnings per share previously prescribed by APB 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, an entity may disclose pro forma earnings per share amounts that would have resulted if the entity had applied the Statement in an earlier period. The Company intends to adopt FAS 128 in its annual financial statements for the year ended December 31, 1997. The pro forma unaudited earnings per share amounts that would have resulted assuming the Company had computed its earnings per share in accordance with the provisions established by FAS 128 for the quarters ended March 31, 1997 and 1996 are as follows: Quarter Ended Quarter Ended March 31, 1997 March 31, 1996 Basic earnings per share $ 0.64 $ 4.31 Diluted earnings per share $ 0.61 $ 3.89 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operation: For the three-month period ended March 31, 1997, ILCO's net income was $2,700,000 ($.54 per common share) as compared to $18,042,000 ($3.35 per common share) in the first three months of 1996. Net income from continuing operations (excluding the gain resulting from the Austin Centre, as described below) was $2,700,000 ($.54 per common share) for the three-month period ended March 31, 1997, as compared to $2,755,000 ($.53 per common share) for the first three months of 1996. For the three-month period ended March 31, 1996, net income included $15.3 million ($2.82 per common share) resulting from the sale of the Austin Centre, a hotel/office complex, located in Austin, Texas. The selling price was $62.675 million, less $1 million paid to a capital reserve account for the purchaser. The property was purchased in 1991 for $31.275 million. A portion of the sale proceeds, equal to the book value of the property, net of improvements and amortization ($36.8 million), was retained and reinvested by Investors Life Insurance Company of North America ("Investors-NA"). The balance of the proceeds, net of federal income tax, of the sale was used to reduce the Company's senior loan obligations by $15 million. The sale closed on March 29, 1996. The Company and its affiliates will continue to occupy space on three floors of the office tower as its headquarters, under a lease which runs through September 30, 1997. In September, 1997, the Company and its affiliates will move its headquarters to a building in an office complex known as Bridgepoint Square Offices, a 20-acre office building site which is being developed by Investors-NA. The statutory earnings of the Company's insurance subsidiaries, as required to be reported to insurance regulatory authorities, before interest expense, capital gains and losses, and federal income taxes were $4,147,680 for the three-month period ended March 31, 1997 as compared to $5,277,991 for the comparable period in 1996. These statutory earnings are the source to provide for the repayment of ILCO's indebtedness. The operating strategy of the Company's management emphasizes several key objectives: expense management; marketing of competitively priced insurance products which are designed to generate an acceptable level of profitability; maintenance of a high quality portfolio of investment grade securities; and the provision of quality customer service. Premium income, net of reinsurance, for the first three months of 1997 was $1.95 million, as compared to $2.9 million for the first three months of 1996. Reinsurance premiums ceded were $1.4 million for the first quarter of 1997, as compared to $1.1 million in the first quarter of 1996. Earned insurance charges for the three-month period ended March 31, 1997 were $10.2 million, as compared to $10.7 million for the same period in 1996. This source of revenues is related to the universal life insurance and annuity book of business of Investors-NA. Interest expense was $0.44 million for the first three months of 1997, as compared to $1.10 million for the first three months of 1996. The decrease is attributable to a reduction in the average principal balance of the senior loan from $54.8 million for the first quarter of 1996 to $20.5 million for the first quarter of 1997, as well as a decrease in the average rate of interest paid on the senior loan - 7.67% for the first quarter of 1997, as compared to 7.91% for the first quarter year 1996. The increase in long-term interest rates during the first quarter of 1997, 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 portfolio. As of March 31, 1997, the market value of the fixed maturities available for sale segment was $442.2 million as compared to an amortized cost of $450.5 million, or an unrealized loss $8.3 million. Such decrease reflects unrealized losses on such investments. The net of tax effect of this decrease has been recorded as a reduction in shareholders' equity. A subsidiary of the Company, Investors Life Insurance Company of North America ("Investors-NA") is the owner and developer of the office complex known as Bridgepoint Square Offices. Once completed, the project will consist of four office buildings, with a total rentable space of 364,000 square feet, and two parking garages. Investors-NA purchased the 20 acre tract of land for this complex in January, 1995, for a cash purchase price of $9.75 million. At that time, the tract included one completed and fully leased office building, an adjacent parking garage, and sites for three more office buildings and a second parking garage. Since the purchase, Investors-NA has completed construction on the second parking garage and two of the remaining building sites. Construction is in progress on the fourth building, with a projected completion date in July, 1997. Three of the four buildings are fully leased to tenants and the fourth is partially leased. Beginning in September, 1997, the Company and its affiliates will occupy space in the existing buildings which will be vacated by a current tenant. Negotiations are in progress with a potential tenant to lease the remaining space in the fourth building. Upon completion of the project, the investment of Investors-NA will be approximately $46 million. On March 25, 1997, ILCO and Investors Life Insurance Company of Indiana ("Investors-IN"), an indirect, wholly-owned subsidiary of ILCO, entered into an agreement to acquire State Auto Life Insurance Company, an Ohio domiciled life insurer, from State Automobile Mutual Insurance Company, for a cash purchase price of $11.8 million, subject to certain post-closing adjustments. In connection with this transaction, the bank group participating in the Senior Loan have agreed to defer payment of $4.5 million otherwise payable on April 1, 1997 under the terms of the Senior Loan, and to reduce the amount of the payment otherwise due on July 1, 1997 by $2.5 million. This deferral would result in extending the maturity date of the Senior Loan to October 1, 1998. Under the terms of the transaction, State Auto Life would be merged into Investors-IN. The closing of the transaction, which is expected to occur during the second quarter of 1997, is subject to regulatory approvals. Results of Operations For the three-month period ended March 31, 1997, the Company's income before Federal income taxes was $4,154,000 on revenues of $27,401,000, as compared to income of $27,802,000, on revenues of $53,581,000 for the first quarter of 1996. Revenues for the first quarter of 1996 include $23,520,000 related to the gain resulting from the sale of the Austin Centre. For the three-month period ended March 31, 1997, the lapse rate with respect to universal life insurance policies decreased from the lapse rate experienced in the similar period in 1996. The rate for the 1997 period was 7.53%, as compared to 8.79% in the 1996 period. The lapse rate with respect to traditional (non- universal) life insurance policies increased slightly from the levels experienced in the first quarter of 1996. The rate for the three-month period ended March 31, 1997 was 8.15%, as compared to 8.02% in the similar period in 1996. The lapse rates experienced during these periods were within the ranges anticipated by management. Liquidity and Capital Resources: ILCO is a holding company whose principal assets consist of the common stock of Investors Life Insurance Company of North America and its subsidiaries - Investors Life Insurance Company of Indiana (formerly known as Meridian Life Insurance Company) and InterContinental Life Insurance Company ("ILIC"). ILCO's primary source of funds consists of payments under two Surplus Debentures from Investors-NA. As of December 31, 1995, the outstanding principal balance of the ILCO's senior loan obligations was $59.4 million. In addition to making the scheduled principal payments under its senior loan, the Company made optional payments of $941,000 in March, 1996, $15.0 million in April, 1996 and $0.5 million in July, 1996. As of March 31, 1997, the principal balance of the senior loan was $20.4 million. ILCO's principal source of liquidity consists of the periodic payment of principal and interest by Investors-NA, pursuant to the terms of the Surplus Debentures. The Surplus Debentures were originally issued by Standard Life Insurance Company and their terms were previously approved by the Mississippi Insurance Commissioner. Upon the merger of Standard Life into Investors- NA, the obligations of the Surplus Debentures were assumed by Investors-NA. As of March 31, 1997, the outstanding principal balance of the Surplus Debentures was $5.2 million and $28.8 million, respectively. Since Investors-NA is domiciled in the State of Washington, the provisions of Washington insurance law apply to 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 March 31, 1997, the statutory surplus of Investors-NA was $52.96 million, an amount substantially in excess of the surplus floor. The funds required by Investors-NA to meet its obligations to the Company under the terms of the Surplus Debentures are generated from operating income generated from insurance and investment operations. In addition to the payments under the terms of the Surplus Debentures, ILCO has received dividends from Standard Life (now, from Investors-NA). Washington's insurance code includes the "greater of" standard for payment of dividends to shareholders, but has a requirement that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. As of March 31, 1997, Investors-NA had earned surplus of $9.0 million. Since the law applies only to dividend payments, the ability of Investors-NA to make principal and interest payments under the Surplus Debentures is not affected. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the Surplus Debentures in the amounts necessary to enable ILCO to service the Senior Loan for the foreseeable future. InterContinental Life Insurance Company ("ILIC"), a subsidiary of Investors-NA is domiciled in the State of New Jersey. Under the New Jersey 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. Any dividend must be paid from earned surplus. A proposed payment of a dividend or distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory net gain from operations for the preceding calendar year is treated as an "extraordinary dividend" and may not be paid until either it has been approved, or a waiting period shall have passed during which it has not been disapproved, by the insurance commissioner. ILIC had earned surplus of $4.7 million at March 31, 1997. 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 $12.0 million at March 31, 1997. ILCO's net cash flow provided by (used in) operating activities was $3.3 million for the three month period ended March 31, 1997, as compared to $(14.4) million for the first quarter of 1996. This change is primarily due to fluctuations in the amount of deferred federal income tax related to the market value of investment assets that are fixed maturities available for sale and the net gain realized in connection with the sale of the Austin Centre. Management believes that its cash, cash equivalents and short term investments are sufficient to meet the needs of its business and to satisfy debt service. Investments As of March 31, 1997, the book value of the Company's investment assets totaled $650.1 million, as compared to $661.1 million as of December 31, 1996. Total assets as of March 31, 1997 ($1.24 billion) decreased from the level as of December 31, 1996 ($1.26 billion). The level of short-term investments at March 31, 1997 was $88.8 million, as compared to $91.6 million at the end of 1996. The fixed maturities available for sale portion of invested assets at March 31, 1997 was $442.2 million. The amortized cost of the fixed maturities available for sale segment as of March 31, 1997 was $450.5 million, representing a net unrealized loss of $8.3 million. This unrealized loss principally reflects changes in interest rates from the date the respective investments were purchased. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities. The assets held by ILCO's life insurance subsidiaries 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 Company's fixed maturities portfolio (including short-term investments), as of March 31, 1997, included a non-material amount (1.01% 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, 1996, the comparable percentage was 1.1%. Of these non-investment grade investments, 0.312% are concentrated in the medium quality (or "3") category, with 0.695% receiving an NAIC rating of "4" (low quality). None of the Company's fixed maturities portfolio included investments with NAIC ratings below "4". The consolidated balance sheets of the Company as of March 31, 1997 include $58.4 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 $1.9 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%, (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 ($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 NAIC continued its rating of "3" to the "Notes receivable from affiliates", as amended. These loans have not been included in the preceding description of NAIC rating percentages. Management believes that the absence of any material amounts of "high-yield" or "non-investment grade" investments (as defined above) in the portfolios of its life insurance subsidiaries enhances the ability of the Company to service its debt, provide security to its policyholders and to credit relatively consistent rates of return to its policyholders. Accounting Developments 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 APB 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 intends to adopt FAS 128 in its annual financial statements for the year ended December 31, 1997. The pro forma unaudited earnings per share amounts that would have resulted assuming the Company had computed its earnings per share in accordance with the provisions established by FAS 128 for the quarters ended March 31, 1997 and 1996 are as follows: Quarter Ended Quarter Ended March 31, 1997 March 31, 1996 Basic earnings per share $ 0.64 $ 4.31 Diluted earnings per share $ 0.61 $ 3.89 Subsequent Event On May 13, 1997, the Company mailed to stockholders its proxy statement for the Annual Meeting of Stockholders, which is scheduled for June 17, 1997. In addition to voting on nominations for the board of directors, stockholders are being asked to approve a proposal to redomesticate the Company from New Jersey to Texas. Under the proposal, the Company would merge into InterContinental Life Corporation of Texas ("ILCO-Texas"), a wholly-owned subsidiary of the Company. The surviving entity in the merger would be ILCO-Texas, which would then change its name to InterContinental Life Corporation. The board of directors of the Company would continue to serve as directors of the Texas company. INTERCONTINENTAL LIFE CORPORATION PART II ITEM 6(A) Net income per share is based on the weighted average common and common equivalent shares outstanding during each year. 3 Months Ended March 31, 1997 1996 (in thousands) Net income $ 2,700 $ 18,042 Interest expense reduc- tion net of income tax effect 152 129 Net income available to common shareholders 2,852 18,171 Divide by: Common shares out- standing, less treasury stock 3,414 3,345 Dilutive common share equivalents 1,888 2,080 Common stock and common stock equivalents 5,302 5,425 Net income per share available to common shareholders $ .54 $ 3.35 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES Part III. Other Information Item 1. Legal Proceedings The Company and Investors-NA are defendants in a lawsuit which was filed in October, 1996, in Travis County, Texas. CIGNA Corporation, an unrelated company, is also a named defendant in the lawsuit. The named plaintiffs in the suit (a husband and wife), allege that the universal life insurance policies sold to them by INA Life Insurance Company (a company which was merged into Investors-NA in 1992) utilized unfair sales practices. The named plaintiffs seek reformation of the life insurance contracts and an unspecified amount of damages. The named plaintiffs also seek a class action as to similarly situated individuals. No certification of a class has been granted as of the date hereof. The Company believes that the suit is without merit and intends to vigorously defend this matter. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Form 10-K Annual Report of Registrant for the year ended December 31, 1996 heretofore filed by Registrant with the Securities and Exchange Commission, which is hereby incorporated by reference. (b) Reports on Form 8-K: None INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERCONTINENTAL LIFE CORPORATION /s/ James M. Grace James M. Grace Treasurer Date: May 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----