<PAGE>
<PAGE>1
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to .
Commission file number : 00-25679
FIRST AMERICAN CAPITAL CORPORATION
(exact name of registrant as specified in its charter)
Kansas 48-1187574
State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organiztion) number)
3360 S.W. Harrison Street, Suite 100
Topeka, Kansas 66611 (785) 267-7077
(Address of principal executive offices) (Telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $.10 Par Value
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 and Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $1,634,277
Applicable Only to Corporate Insurers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.10 Par Value - 5,468,860 shares as of March 7, 2000
<PAGE>
<PAGE>2
PART I
Item 1. Description of Business
First American Capital Corporation (the "Company") was incorporated on July
10, 1996 for the purpose of forming, owning and managing life insurance
companies. The Company sold 2,120,000 shares at $.10 per share to its
organizing shareholders in August of 1996 for total proceeds of $212,000.
Also, in September, 1996, the Company sold 600,000 shares of its common stock
for $1.00 per share in a separate private placement. The initial capital was
used to fund the Company's efforts to register a $12,500,000 intra-state
public offering with the Office of the Kansas Securities Commissioner.
Included in the registration was a 10% over-sale provision. On March 11, 1996
the Office of the Kansas Securities Commissioner declared the registration
statement effective.
On January 11, 1999, the Company completed the intra-state public stock
offering raising approximately $13,750,000 of capital which included a 10%
over-sale of $1,250,000. Three million dollars of the proceeds of the stock
sale were used to capitalize the life insurance subsidiary, First Life
America Corporation ("FLAC"). The venture capital subsidiary, First Capital
Venture, Inc., was formed in October of 1998 and may be capitalized with up
to three million dollars on a schedule as determined by the Company's Board
of Directors. The remainder of the proceeds will provide resources for one
of the following: provide additional capital for the life insurance subsidiary;
provide capital for the possible acquisition of life insurance or insurance
related company(s) or provide working capital.
First American Capital Corporation
The primary segment of the Company's operations is life insurance.
Accordingly, a significant portion of revenue will be generated by the
Company's wholly owned life insurance subsidiary, FLAC. The Company has
contracted with FLAC to provide services which are incident to the operations
of FLAC. Under the terms of the contract, FLAC pays the Company service fees
based on percentages of first year and renewal premium income delivered by
FLAC. Additional income is provided in the form of investment income. When
the venture capital subsidiary becomes operational, additional income may be
provided through a service fee arrangement with the Company.
The Company has contracted with First Alliance Corporation ("FAC") of
Lexington, Kentucky to provide underwriting and accounting services for FLAC.
Under the terms of the management agreement, the Company pays fees based on
a percentage of delivered premiums of FLAC. The percentages are 5.5% for
first year premiums; 4% of second year premiums; 3% of third year premiums;
2% of fourth year premiums; 1% of fifth year premiums, and 1% for years six
through ten for ten year policies and .5% in years six through twenty for
twenty year policies. Pursuant to the agreement, the Company incurred
$60,531 and $816 of management fees during 1999 and 1998, respectively.
FAC is also a shareholder of the Company (see Item 11 on Page 16).
First Life America Corporation
On October 15, 1997, FLAC received a certificate of authority from the Kansas
Insurance Department to transact life and annuity business in the state of
Kansas. On November 19, 1998, life insurance operations commenced. Under
the provisions of Generally Accepted Accounting Principals, "GAAP," FLAC has
$3,317, 386 of capital and surplus as of December 31, 1999, and is wholly
owned by the Company. FLAC has contracted with the Company for policy
administration and data processing services.
Administration
Effective December 31, 1998, FLAC entered into a service agreement with the
Company. Under the terms of the agreement, the Company provides personnel,
facilities, and services incident to the operations of FLAC. FLAC does not
have any employees. Services performed pursuant to the agreement are
underwriting, claim processing, accounting, policy processing and other
services necessary for FLAC to operate. The agreement is effective until
either party provides 90 days written notice of termination. Under the
agreement, FLAC pays fees based on a percentage of first year and renewal
premiums delivered by FLAC. Delivered premium is defined as premium received
<PAGE>
<PAGE>3
on new written business which has been underwritten by FLAC and the policy
accepted by the policy owner upon delivery by the agent. The percentages
under the contract are 25% of first year life premiums; 40% of second year
life premiums; 30% of third year life premiums; 20% of fourth year life
premiums and 10% of life premiums in years five and thereafter. If at any
time FLAC's annual premiums on new business were to exceed $5,000,000, the
provisions of the agreement will be tolled until the agreement has been
resubmitted to the Kansas Insurance Department for approval. FLAC will bear
the cost of all direct selling costs which include agent recruiting, training
and licensing; agent commissions; any benefits or awards directly for or to
agents or management including any life or health insurance to be provided;
and any taxes (federal, state or county) directly related to the business of
FLAC. Additionally, FLAC will be responsible for any reinsurance premiums;
legal expenses related to settlement of claims; state examination fees;
directors fees and directors liability insurance; interest on indebtedness;
costs related to mergers or acquisitions and costs related to fulfilling
obligations of the life insurance and annuity contracts written by the agents
of FLAC. Pursuant to the terms of the agreement, FLAC incurred $275,375 and
$4,081 of service fees during 1999 and 1998, respectively.
Actuarial Services
On behalf of FLAC, the Company has retained the services of Bruce and Bruce
Company, consulting actuaries of Lake Bluff, Illinois. Bruce and Bruce
developed the product that FLAC is marketing. Mr. Robert Bruce of Bruce and
Bruce has been appointed by the Board of Directors of FLAC to act as
valuation and illustration actuary.
Products of FLAC
The primary insurance product being marketed by FLAC is a modified payment
whole life insurance policy with a flexible premium deferred annuity rider.
A modified payment whole life insurance policy requires premium payments
to be made for a certain number of years after which the policyholder is
entitled to full policy benefits. Typical premium paying periods for
modified payment whole life insurance polices are ten, fifteen and twenty
years. FLAC's product, marketed as the "First America 2000," combines both a
ten and twenty payment period based on the issue age of the insured. Issue
ages from 0 to 20 and 66 through 80 are ten pay polices and issue ages from
age 21 to 65 are twenty pay policies. Premium payments are split between
life and annuity based on percentages established in the product design.
First year premiums payments are allocated 100% to life insurance and renewal
payments are split 50% to life and 50% to annuity. The product is being sold
in premium units with the ability to purchase either fractional or multiple
units. At the end of the required premium paying period, the policyholder
may continue to make full premium payments into the annuity rider to provide
for greater annuity accumulations.
The initial product was designed to provide predetermined life insurance
benefits based on the age of the insured. The base coverage decreases each
year until an ultimate benefit amount is attained. The annuity rider does
not contain any fees or load. Surrender charges in the annuity are based on
a regressive scale which starts at 10% in the first year and decreases by 1%
each year until after the tenth policy year there are no surrender charges.
Other products are also being considered to meet niche marketing needs.
These products include term life insurance and annuities.
Product Marketing and Sales
FLAC is using the same face-to-face marketing techniques for its life
insurance products as the Company did for its public stock offering. The
marketing plan is designed in its entirety around the Company's stockholder
base, which provides an excellent referral system for FLAC product sales.
After FLAC develops a substantial policyholder base in Kansas, marketing
efforts will expand into additional states. This expansion will depend
largely on many factors, one of which is being admitted to do business in
these additional states. Due to the uncertainties involved, management
cannot reasonably estimate the time frame of such expansion.
<PAGE>
<PAGE>4
FLAC's insurance operations commenced on November 19, 1998 on a limited basis
for test marketing of the initial insurance market. Full scale marketing
commenced on January 11, 1999. The agency force involved in selling the
public offering was licensed through FLAC to sell the life insurance products.
FLAC constantly recruits and trains new agents.
Product Sales Information
<TABLE>
The following table provides certain information about FLAC's life insurance
operations for the years ended December 31, 1999 and 1998. FLAC commenced
selling life insurance on November 19, 1998 and accordingly, the results for
December 31, 1998 provided are for approximately one full month of operations:
<CAPTION>
December 31, 1999
Policies Amount of
(number) Insurance(1)
-------------- --------------
<S> <C> <C>
Issued during the year 864 $ 39,378,500
In-force end of year 867 39,536,500
<FN>
<F1>
(1) excludes accidental death benefits of $17,100,000
</FN>
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Policies Amount of
(number) Insurance(1)
-------------- --------------
<S> <C> <C>
Issued during the year 5 $ 387,000
In-force end of year 5 387,000
<FN>
<F1>
(1) excludes accidental death benefits of $120,000
</FN>
</TABLE>
Reinsurance
In order to reduce the risk of financial exposure to adverse underwriting
results, insurance companies reinsure a portion of their risks with other
insurance companies. FLAC has entered into an agreement with Business Men's
Assurance Company of Kansas City, Missouri, to reinsure portions of the life
insurance risks it underwrites. FLAC retains a maximum of $50,000 on any one
insured. At December 31, 1999 and 1998, respectively, FLAC had ceded
$8,755,634 and $137,000 of ordinary business and $17,100,000 and $120,000 of
ADB risk of accidental death benefit risk to Business Men's Assurance Company
("BMA"). In the event BMA is unable to fulfill their obligations under the
reinsurance agreement, FLAC remains primarily liable. According to the
reinsurance agreement, there are no premiums due on first year business.
Investments
The Company and FLAC have contracted with Advantus Capital Management, Inc.
of St. Paul, MN for management of investments. Fees are based on a percentage
of invested assets.
The Kansas Insurance Code restricts the investments of insurance companies by
the type of investment, the amount that an insurance company may invest in
one type of investment, and the amount that an insurance company may invest
in the securities of any one issuer. The restrictions of the Kansas
Insurance Code are not expected to have a material effect on the investment
return of FLAC. The Company is not subject to the limitations which restrict
the investments made by FLAC. Currently, investments are held in both
short-term, highly liquid securities and long-term, higher yield securities.
<PAGE>
<PAGE>5
Competition
The life insurance industry is extremely competitive. There are a large
number of insurance companies which are substantially larger, have greater
financial resources, offer more diversified product lines and have larger
selling organizations than FLAC. Competition also is encountered from the
expanding number of banks and other financial intermediaries that offer
competing products. FLAC must also compete with other insurers to attract
and retain qualified agents to market FLAC's products.
Governmental Regulation
FLAC is subject to regulation and supervision by the Kansas Insurance
Department ("KID"). The insurance laws of Kansas give the KID broad regulatory
authority, including powers to: (i) grant and revoke licenses to transact
business; (ii) regulate and supervise trade practices and market conduct;
(iii) establish guaranty associations; (iv) license agents; (v) approve
policy forms; (vi) approve premium rates for some lines of business; (vii)
establish reserve requirements; (viii) prescribe the form and content of
required financial statements and reports; (ix) determine the reasonableness
and adequacy of statutory capital and surplus; and (x) regulate the type and
amount of permitted investments.
Kansas has enacted legislation which regulates insurance holding company
systems, including acquisitions, extraordinary dividends, the terms of
affiliate transactions, and other related matters. Currently, the Company
and FLAC have registered as a holding company system pursuant to the laws of
the state of Kansas.
Year 2000 Concerns
The year 2000 concern was the ability of computer systems to accurately
process date calculations in the year 2000 and beyond. The problem arises
from the initial design of date values which only recognize a two digit year
value. As a result, a computer may interpret a date entered for the year
2000 as the year 1900. Any computer system that performs date comparisons
and calculations is exposed to such a problem. These systems are typically
referred to as information technology systems ("ITS") or computer based
systems. Another concern is microchips which may also be encoded with
a two digit date value. These microchips are typically found in such office
equipment as facsimile machines and telephone systems. These systems are
referred to as non-information technology systems ("NITS"). The Company did
not experience any year 2000 related failures. Additionally, there has been
no impact on the Company's operations from external sources.
The Company's primary exposure to any business interruption would be the
result of an ITS failure. The life insurance industry relies heavily on date
sensitive calculations in daily operations. The inability to process
transactions could be detrimental to the Company's ability to continue
operations. The Company out-sources its primary computer processing system
through Navisys, Inc. of Saint Louis, Missouri. Navisys has assured the
Company that its hardware and software systems have been modified to
eliminate any potential year 2000 problems.
The costs to address year 2000 issues have been and will continue to be
relatively insignificant for the Company. All of the major costs related to
the insurance processing system have been borne by Navisys. Internally,
continuing year 2000 issues are not expected to cause any significant
financial impact.
<PAGE>
<PAGE>6
Financial Information Relating to Industry Segments
<TABLE>
Financial information related to specific segments of the Company's business
are presented below. All sales of life insurance by FLAC are to unaffiliated
customers.
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Premiums earned, net
of reinsurance:
Life and annuity insurance
operations $ 1,090,287 $ 16,325 $ -
========== ========== ==========
Revenues:
Life and annuity insurance
operations $ 1,243,323 $ 91,848 $ 31,618
Corporate operations 390,954 273,068 43,544
---------- ---------- ----------
Total $ 1,634,277 $ 364,916 $ 75,162
========== ========== ==========
Income (loss) before income
taxes:
Life and annuity insurance
operations $ 418,084 $ 66,680 $ 6,618
Corporate operations (404,036) (397,593) (633,198)
---------- ---------- ----------
Total $ 14,048 $ (330,913) $ (626,580)
========== ========== ==========
Assets:
Life and annuity insurance
operations $ 4,255,380 $ 3,113,186 $ 1,231,618
Corporate operations 8,125,955 8,395,825 1,914,878
---------- ---------- ----------
Total $12,381,335 $11,509,011 $ 3,146,496
========== ========== ==========
</TABLE>
Employees
As of December 31, 1999, the Company had seven full time and three part time
employees.
Item 2. Description of Property
During 1999, the Company acquired approximately seven acres of land, located
in Topeka, Kansas, at a total purchase price of $325,169. Management has
tentative plans to construct a building on approximately one-third of this
land, to be used as a home office. A definitive construction contract has
yet to be executed. It is anticipated that the remaining portion of the land
will be sold. Financing for the construction of the building has yet to be
determined. The Company has made an offer of $80,081 to purchase additional
land measuring approximately 500 feet by 90 feet adjacent to the land already
purchased. A deposit of $5,000 has been made with Columbian Title Insurance
Company and preliminary tests and surveys have been completed. Closing will
occur no later than May 12, 2000.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any pending
legal proceedings including any proceedings which involve property owned by
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
<PAGE>
<PAGE>7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a.) Market Information
The Company's common stock became tradeable on October 11, 1999. The common
stock is not listed on any stock exchange. Management is not aware of any
trades that have occurred since the stock became tradeable. Accordingly,
no market for the Company's common stock currently exists.
(b.) Holders
As of March 7, 2000, there are approximately 4,500 shareholders of the
Company's outstanding common stock.
(c.) Dividends
The Company has not paid any cash dividends since inception (July 10, 1996).
Additionally, dividends are not anticipated in the foreseeable future.
Item 6. Management's Discussion and Analysis
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under
the Private Securities Litigation Reform Act of 1995 when they are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
The statements contained in this report, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements. Any projections of financial performances or
statements concerning expectations as to future developments should not be
construed in any manner as a guarantee that such results or developments will,
in fact, occur. There can be no assurance that any forward-looking statement
will be realized or that actual results will not be significantly different
from that set forth in such forward-looking statement. In addition to the
risks and uncertainties of ordinary business operations, the forward-looking
statements of the Company referred to above are also subject to risks and
uncertainties.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto, beginning on page F-1.
Results of Operations
The Company completed a Kansas intra-state offering on January 11, 1999
raising total capital of approximately $13,750,000. The offering, which
commenced on March 11, 1997, provided capital to form a wholly owned life
insurance subsidiary, First Life America Corporation ("FLAC"); form a venture
capital subsidiary, First Capital Venture, Inc. ("FCVI") and provide working
and acquisition capital. FLAC commenced insurance operations on a limited
basis in November of 1998. In January of 1999, FLAC began full insurance
operations. Until the marketing of life insurance began, the Company was in
the development stage. Comparisons of operations between the years ended
December 31, 1999, 1998, and 1997 are not comparable since insurance
operations did not begin until November of 1998 and the public stock offering
did not begin until March 11, 1997.
Revenues for the year ended December 31, 1999 totaled $1,634,277 as compared
to $364,916 and $75,162 for the same periods of 1998 and 1997, respectively.
Revenues include life insurance premiums, net of reinsurance, and net
investment income. Gross premium income for the years ended December 31, 1999
and 1998 totaled $1,102,785 and $16,325, respectively. There was no premium
income for 1997. It is typical in the insurance industry to reinsure a
portion of the risk associated with life policies. The Company pays premiums
to another company who assumes the risk. These premiums are a direct
reduction of gross premium income. Reinsurance premium totaled $12,498 in
1999. There were no reinsurance premiums incurred in 1998 or 1997.
<PAGE>
<PAGE>8
Net premium income in 1999 increased compared to 1998 due to insurance
operations for only one month during 1998. Net investment income increased
from $75,162 for the year ended December 31, 1997 to $348,591 for the year
ended December 31, 1998 and then again to $543,990 for the same period during
1999. Cash provided by the on-going public offerring allowed the Company
to achieve higher investment income during 1998 than it could in 1997.
The completion of the public offering in January of 1999, along with
the cash provided by insurance operations, has provided a larger invested
asset base in 1999. Additionally, in 1999, management hired an investment
manager to increase investment yields.
Benefits and expenses totaled $1,620,229 for the year ended December 31, 1999,
whereas the total of such expenses for the years ended December 31, 1998 and
1997, respectively, was $695,829 and $701,742. The decrease in total expenses
from 1997 to 1998 is due to $7,267 of survey fees and expenses and $17,500
of organizational expenses incurred during 1997. No such expenses were
incurred during 1998. Expenses related to insurance operations were incurred
for a full year during 1999 and only one month in 1998. These expenses
include reserves, commissions, interest on policyholder premiums and
annuities, agency expenses, and premium taxes. For the year ended December
31, 1999, the increase in life insurance reserves totaled $368,804, as
compared to an increase in reserves of $5,494 for the year ended December 31,
1998. These reserves are actuarially determined based on such factors as
insured age, life expectancy, mortality and interest assumptions. As more
life insurance is written, these reserves will continue to increase.
Commission expense totaled $631,929 and $9,267 for the years ended December
31, 1999 and 1998, respectively. The commission expense is based on a
percentage of premium and is determined in the product design. Acquisition
costs which are related to the sale of insurance are capitalized and
amortized over the premium paying period of the associated policies. These
costs include commissions and management fees incurred in the first policy
year. During 1999 and 1998, $901,613 and $13,348, respectively, of these
costs had been capitalized as deferred policy acquisition costs. The related
amortization for the same periods totaled $234,522 and $299, respectively.
Included in miscellaneous taxes is premium taxes. These taxes, which totaled
$22,129 for the year ended December 31, 1999, are incurred as a percentage of
premium collected and payable to the Kansas Insurance Department. Agency
expenses are costs associated with the recruiting, training, development and
incentives of the sales agents as well as marketing costs. These costs,
which increased along with the increase in sales, totaled $117,825 for the
year ended December 31, 1999 and $17,470 for the year ended December 31, 1998.
Salaries, wages and employee benefits increased from $401,939 to $672,289 for
the years ended December 31, 1998 and 1999, respectively. This increase is
due to additional personnel hired for the administration of life insurance
operations. During 1998, expenses related to salaries, wages, and employee
benefits were down from the amount incurred during 1997 of $448,134 due to
salaries of sales managers which ceased in 1998. Professional fees increased
to $74,281 from $43,293 for years ended December 31, 1999 and 1998,
respectively. Such fees of $34,289 were incurred during 1997. These
increases are related to accounting, legal, actuarial and transfer agent fees.
Administrative fees-related party are paid to First Alliance Corporation
("FAC"), a shareholder of the Company, for underwriting and accounting
services. During 1999, these fees totaled $60,531 and were calculated
strictly as a percentage of FLAC's premium income. In 1998, FAC charged a
flat fee of $2,000 per month plus a percentage of FLAC's premium income
earned in December of 1998, for a total of $24,816. In 1997, FAC charged a
fee of $1,000 for the first three months of the year and $2,000 for the
remainder of the year. Rent expense was $33,517, $33,066, and $40,136 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The Company pays Advisory Board fees to Advisory Board Members throughout
Kansas. Each Advisory Board Member will periodically receive stock in the
Company based on first year premiums written in his/her county. These costs
totaled $43,283 and $653 during 1999 and 1998, respectively. There were no
such fees incurred during 1997 since there was no premium income. Directors
fees increased from $7,800 in 1997 to $15,850 in 1998 and then again to
$27,775 in 1999. As FLAC was entering the operational stage towards the end
1998, more director's meetings were held, and with FLAC being fully
operational during 1999, still more directors meetings were held. Other
operating costs and expenses increased to $213,959 in 1999 from $145,553 in
1998 due to and again from $119,168 in 1997 due to increased operations of
the Company.
Consolidated Financial Condition
As discussed above, FLAC's insurance operations during 1998 were limited
since the marketing of its life insurance product did not begin until
November of 1998. Accordingly, the Company's consolidated balance sheets, or
statements of consolidated financial condition, are not comparable from 1998
to 1999. Significant changes in the consolidated balance sheets from 1998 to
1999 are highlighted below.
Total assets increased from $11,509,011 at December 31, 1998 to $12,381,335
at December 31, 1999. Several of the short-term investments held by the
Company in 1998 were replaced with investments in available-for-sale fixed
maturity investments, with higher yields, during late 1999. The timing of
interest payments increased accrued investment income from $53,444 in 1998 to
$111,352 in 1999. The Company made an investment in real estate of $325,169
to be used for building a home office facility. Estimated tax deposits
exceeded the tax liability for 1999, resulting in federal income tax
recoverable of $16,854.
<PAGE>
<PAGE>9
Deferred policy acquisition costs, net of amortization, increased from
$13,119 at December 31, 1998 to $680,211 at December 31, 1999 resulting from
the capitalization of acquisition expenses related to the increasing sales of
life insurance. Advances to agents include monies advanced to agents for
living expenses.
The Company has placed $5,000 in escrow with Columbian Title Insurance
Company to purchase an additional tract of land adjacent to the land
previously acquired for $325,169 (discussed above). Preliminary tests and
surveys have been completed, and closing will occur no later than May 12,
2000 if the Company's offer of $81,181 is accepted. If closing occurs, the
Company will pay cash for the property, which will be used in conjunction
with the existing investment in real estate.
Liabilities increased to $962,171 at December 31, 1999 from $68,173 at
December 31, 1998. Life insurance related policy liabilities are the primary
reason for this increase. Policy reserves established due to the sale of
life insurance totaled $374,298 at December 31, 1999. Policy reserves at
December 31, 1998 totaled $5,494 due to limited insurance marketing during
1998. For the same reason, the liability for deposits on pending policy
applications increased from $9,554 at December 31, 1998 to $221,413 at
December 31, 1999. At December 31, 1999, the Company has an annuity
contract liability for $11,282 and a liability of $66,321 for policyholder
premium deposits. No annuity contract liability existed at December 31, 1998
because all premiums collected were for life insurance.
Federal income taxes payable are primarily due to deferred taxes established
based on timing differences between income recognized for financial statements
and taxable income for the Internal Revenue Service. These deferred taxes
are based on the operations of FLAC. At December 31, 1999, premium taxes of
$21,639 were due.
Liquidity
FLAC's insurance operations generally receive adequate cash flow from premium
collections and investment income to meet their obligations. Insurance
policy liabilities are primarily long-term and generally are paid from future
cash flows. A significant portion of the Company's invested assets are
readily marketable and highly liquid.
Year 2000 Concerns
The year 2000 concern was the ability of computer systems to accurately
process date calculations in the year 2000 and beyond. The problem arises
from the initial design of date values which only recognize a two digit year
value. As a result, a computer may interpret a date entered for the year
2000 as the year 1900. Any computer system that performs date comparisons
and calculations is exposed to such a problem. These systems are typically
referred to as information technology systems ("ITS") or computer based
systems. Another concern is microchips which may also be encoded with a two
digit date value. These microchips are typically found in such office
equipment as facsimile machines and telephone systems. These systems are
referred to as non-information technology systems ("NITS"). The Company did
not experience any year 2000 related failures. Additionally, there has been
no impact on the Company's operations from external sources.
The Company's primary exposure to any business interruption would be the
result of an ITS failure. The life insurance industry relies heavily on date
sensitive calculations in daily operations. The inability to process
transactions could be detrimental to the Company's ability to continue
operations. The Company out-sources its primary computer processing system
through Navisys, Inc. of Saint Louis, Missouri. Navisys has assured the
Company that its hardware and software systems have been modified to
eliminate any potential year 2000 problems.
The costs to address year 2000 issues have been and will continue to be
relatively insignificant for the Company. All of the major costs related to
the insurance processing system have been borne by Navisys. Internally,
continuing year 2000 issues are not expected to cause any significant
financial impact.
<PAGE>
<PAGE>10
Item 7. Financial Statements
The financial statements and related notes are included in this report
beginning on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
<PAGE>
<PAGE>11
PART III
Item 9. Directors and Executive Officers
<TABLE>
The current Executive Officers and Directors of the Company are as follows:
<CAPTION>
Name Age Position Term
- ----- --- -------- ----
<S> <C> <C> <C>
Michael N. Fink 44 Chairman of the Board One Year
Rick D. Meyer 48 President and Director One Year
*Chris J. Haas 54 Secretary/Treasurer and Director One Year
Danny N. Biggs 63 Director One Year
Paul Burke 66 Director One Year
Ed C. Carter 57 Director One Year
Kenneth Frahm 53 Director One Year
John Hadl 60 Director One Year
Steve Irsik Jr. 53 Director One Year
John G. Montgomery 60 Director One Year
Harland E. Priddle 69 Director One Year
Gary E. Yager 45 Director One Year
<FN>
<F1>
*Mr. Haas resigned from the Company and its subsidiaries as Secretary/
Treasurer and Director, for personal reasons, effective March 10, 2000.
</FN>
</TABLE>
The Directors serve until their successors are elected and qualified.
Directors will be elected annually by the stockholders. The Executive
Officers serve at the discretion of the Board of Directors. The President,
Secretary and Treasurer are elected at the annual meeting of the Board,
while the other officers are elected by the Board from time to time as the
Board deems advisable. The Executive Officers and Directors also hold the
same positions for the Company's subsidiaries. The following is a brief
description of the previous business background of the Executive Officers
and Directors:
Michael N. Fink: Mr. Fink has nineteen years of experience in the insurance
industry, primarily in sales management. From 1981 to 1984, Mr. Fink was an
agent, District Director, and Regional Director with Liberty American
Assurance Company in Lincoln, Nebraska. In 1984, Mr. Fink transferred to an
affiliated company, Future Security Life, in Austin, Texas, where he served
as Regional Director and Agency Director until 1988. In March 1988, Mr. Fink
became affiliated with United Income, Inc. and United Security Assurance
Company as Agency Director and Assistant to the President. In June 1993,
Mr. Fink left the United Companies and became President of First Alliance
Corporation and its life insurance and venture capital companies.
Rick D. Meyer: Mr. Meyer has eighteen years of experience in the insurance
industry, primarily in sales management. From May 1982 to October 1984, Mr.
Meyer was a life insurance agent, District Director and Executive Sales
Director with Liberty American Assurance Company in Lincoln, Nebraska. In
October 1984, Mr. Meyer transferred to an affiliated company to become Agency
Director. In 1985, Mr. Meyer left Liberty American to become an organizer
and Zone Sales Director for United Trust, Inc. in Springfield, Illinois. In
January 1988, Mr. Meyer transferred to Columbus, Ohio to assist in the
organization of United Income, Inc. and served as Zone Sales Manager. While
with United Income, he was promoted to Training Director in 1991 and to
Agency Director in 1993. Mr. Meyer left the United Companies in January 1996
to form the Company.
<PAGE>
<PAGE>12
*Chris J. Haas: Mr. Haas has twenty-one years of experience in the insurance
industry primarily in the areas of financial and operations administration.
He served as Chief Financial Officer of Life of Indiana Corp. from June 1979
to June 1987. He then served as Chairman of the Board and President of ROI
Corporation from June 1987 to June 1989. Mr. Haas became associated with
United Trust, Inc., an Illinois insurance holding company, in March of 1990
as that company's Chief Financial Officer. He also served as Executive
Vice-President of the Ohio-based United Income, Inc. and Chief Financial
Officer of United Security Assurance Company from March 1990 to March of 1993.
Mr. Haas left the United Companies in April 1993 to become the Chairman and
Secretary/Treasurer of First Alliance Corporation and its life insurance and
venture capital subsidiaries. Mr. Haas is a Certified Public Accountant
(Inactive) and a Fellow of Life Management Institute (FLMI). He served as an
audit Manager at Arthur Young & Company in Indianapolis, Indiana, from October
1976 to June 1979. Mr. Haas holds a B.S. in accounting from Ball State
University.
Danny N. Biggs: Mr. Biggs is Vice-President, Partner, General Superintendent
and Director of Pickrell Drilling Company, Inc., Mobile Drilling Company,
Inc.; Central Dirt Service, Inc., and Pickrell Acquisitions, Inc. and also a
Partner in Kelly Petroleum. Mr. Biggs is a past President of the Kansas
Independent Oil & Gas Association ("KIOGA") and is currently a member and
director of KIOGA, director and president of Kansas Oil & Gas Hall of Fame &
Museum Foundation and director of Barton County Historical Foundation. He is
a member of the Great Bend Chamber of Commerce, American Petroleum Institute,
Interstate Oil & Gas Compact Commission Crude Oil Policy Committee,
Association of Energy Service Companies and the Independent Petroleum
Association of America. He served as Chairman of the Mid-America Oil & Gas
Technology Exposition, Vision 2000 Area Relations/Image Committee, KIOGA
Membership Committee and general Chairman of the 1992 KIOGA Convention. Mr.
Biggs is actively involved in numerous other business, civic and religious
organizations including prior service as an Elder in the Presbyterian Church.
Paul "Bud" Burke: Mr. Burke is the President of Issues Management Group,
Inc., a public relations and governmental affairs consulting company. Mr.
Burke served as a member of the Kansas State Senate from 1975 to January 1997
and served as the President of the Senate from 1989 until his retirement in
1997. During his tenure in the Kansas Senate, Mr. Burke served as Chairman
of the Organization, Calendar and Rules, Legislative Coordinating Council and
Interstate Cooperation Committees. Mr. Burke was a majority leader of the
Senate from 1985 to 1988. Mr. Burke has served in numerous national, state
and local leadership positions including past positions as a member of the
President's Advisory Commission on Intergovernmental Relations. He is also
the former owner of WEBBCO, Inc., an industrial engineering and equipment
company. Mr. Burke received his Bachelor of Science degree in business from
the University of Kansas in 1956.
Ed C. Carter: Mr. Carter is an entrepreneur and real estate developer. Mr.
Carter is a retired senior executive (1963-1992) with the Kansas Southwestern
Bell Telephone Company. He served in numerous senior executive positions
including Division Manager Regulatory Relations, Regional Vice President
Southwestern Bell Telecom, a start up company serving a four state area, and
Kansas Director of Marketing and District Manager Residence Service Centers.
Mr. Carter served as City Commissioner and Mayor of Lawrence, Kansas from
1977 to 1981. He was a director and President of Lawrence, Kansas Rotary
Club, past Executive Board Member of the Kansas State Chamber of Commerce,
past Chairman of the Douglas County United Fund and Director and President
of Junior Achievement. He is a Co-Recipient of the Outstanding Kansan Award
for Civic Service. Mr. Carter was a member and All Conference guard on
the Pittsburgh State University National Championship Football Team. He
received his B.A. in Business Administration from Pittsburgh State University
in 1963.
Kenneth Frahm: Mr. Frahm is President of the Kansas Development and Finance
Authority. He has been a self-employed farmer since 1975. He currently owns
1,200 acres of irrigated corn and dryland wheat production land and manages
an additional 4,500 acres, producing over 400,000 bushes of grain per year.
Mr. Frahm's operating entities include Allied Family Farm and Grain
Management, Inc. He is past Chairman and current member of the Board of
Directors of 21st Century Alliance, a closed co-op looking for value-added
investments, a former member of the Board of Directors of Bank IV Community
Bank in Colby. In addition, Mr. Frahm is a member of the Agricultural Use
Value Committee of the Kansas Department of Revenue, a member of the Board of
Directors of the Kansas Area United Methodist Foundation and Chairman of its
Investment Committee, Past President and Paul Harris Fellow of the Rotary,
a member of the Kansas Farm Bureau, Kansas Livestock Association, Kansas
Corn Growers Association, Kansas Association of Wheat Growers and Vice
<PAGE>
<PAGE>13
President of the Kansas Water Resources Association. Mr. Frahm is married
to Sheila Frahm, a former Kansas United States Senator and has three
daughters. Mr. Frahm received his B.A. in Economics in 1968 from Fort Hays
Kansas State College and his M.B.A. in Finance in 1969 from the University of
Texas at Austin.
John Hadl: Mr. Hadl is an Associate Athletics Director at the University of
Kansas in Lawrence, Kansas, and he also heads the Williams Educational Fund,
which provides scholarship assistance to more than 400 male and female Kansas
University student-athletes. With a membership of over 3,500 donors, the
Williams Fund raised in excess of $3 million last year to pay the scholarship
expenses of student-athletes. Prior to becoming the Associate Athletics
Director, Mr. Hadl served as an Assistant Athletic Director and member of the
KU football coaching staff. Mr. Hadl was a three year letterman at KU,
earning All-American honors at two different positions-as a halfback in 1960
and as a quarterback in 1961. He was All-Conference three times. After his
college career, Mr. Hadl, went on to play professional football for 18
seasons in the AFL, NFL with San Diego, Los Angeles, Green Bay and Houston.
He was NFL Man of the Year in 1971 and the NFL's Most Valuable Player in 1973.
He played in four AFL All-Star games, three title games and led the league in
passing in 1968 and in 1971. In December of 1994, Mr. Hadl was inducted into
the College Football Hall of Fame.
Steve Irsik: Jr. Mr. Irsik owns and operates a multi-county agri-business
centered in western Kansas. The business deals with both irrigated and dry
land wheat, grain sorghum and corn, a yearling steer operation utilizing
native grass and wheat pasture. Mr. Irsik also owns a ranch operation which
maintains a spring and fall cow herd, employing "Embryo Transfer" for the
development of registered Angus bulls. Mr. Irsik is one of the owners of
Irsik and Doll Company, a grain storage, merchandising and full feeding
cattle operation with facilities across the State of Kansas. Mr. Irsik is
actively involved in public service and has been elected to serve a third
term on the Gray County Commission. He currently serves as a Board member of
Dodge City Federal Land Bank, and 21st Century Alliance. He is Chairman of
the Kansas Ogallala Task Force, which focuses on highlighting the importance
of the Ogallala region and its water supply to agriculture, the State of
Kansas & the nation. Mr. Irsik has served as a past Board member of the
Southwest Kansas Irrigation Association, Upper Ark Basin Advisory committee
and the Ground Water Management District #3. He received his undergraduate
degree from Kansas State University in 1969.
John G. Montgomery: Mr. Montgomery is the President of Montgomery
Communications, Inc. of Junction City, Kansas. He is a newspaper publisher
and TV station owner. He is also Vice President of Travel Centre in Junction
City. His current business affiliations include Directorship's with the
Associated Press, New York City; First National Bank, Junction City;
Automobile Club of Kansas and Sprint/UTS Midwest. He is also President of
the Junction City Housing and Development Corporation. From 1964 to 1973 he
was the Assistant to the President at the San Francisco Newspaper Printing
Company. Mr. Montgomery is a member of the InterAmerican Press Association,
Inland Daily Press Association & the Kansas Press Association. He was
Civilian Aid to the Secretary of the Army of Kansas from 1979-1981 and has
again served in that role since 1995. He has extensive state government
service including Past Chairman of the Kansas Board of Regents, Past member
of the Washburn University Board of Regents, Kansas, Inc. - Science and
Technology Council, and 1986 Democratic nominee for Lieutenant Governor. His
considerable civic involvement, in part, includes being past President of
the Junction City Chamber of Commerce, Director and past President of the
United Way, past Board member of the Boy Scouts of America, Coronado
Council, past Director of the YMCA, Trustee of the William Allen White
Foundation, Co-chair of Economic Lifelines, Board member of Kansas Wildscape
and the Kansas 4-H and a member of the Rotary Club. Mr. Montgomery has
received the 1975 Jaycees Outstanding Young Man of Kansas Award, 1975
Junction City Jaycees Distinguished Service Award and the Department of the
Army, Patriotic Civilian Service Award. He graduated from the Philips
Academy, Andover, Massachusetts, in 1958, Yale University in 1962, receiving
a Bachelor of Arts Degree, and from Stanford University in 1964, where he
received his MBA Degree.
Harland E. Priddle: Mr. Priddle is retired. He is the former Chairman and
Chief Executive Officer of Network Trade Associates and President and Chief
Executive Officer of Mid-American International Trade Services, L.C. Mr.
Priddle is the former Kansas Secretary of Agriculture and served as the first
Kansas Secretary of Commerce. As the first Secretary of Commerce, he was
directly involved in the creation of such programs as Kansas, Inc., Kansas
Technology Enterprise Corporation, Kansas Development Finance Authority and
the Kansas Venture Capital Corp. He was candidate for Lt. Governor of Kansas
in 1990. He was the Deputy Director of the White House Communications Agency
<PAGE>
<PAGE>14
for the President for a period of four years where he provided support and
accompanied the President on approximately 200 Presidential trips. Mr.
Priddle specializes in international trade relations. Mr. Priddle was the
Vice President for Marketing and Customer Services for the Hutchinson
National Bank from 1978 to 1981. He retired from the United States Air Force
after 22 years with the rank of Colonel. While in the Air Force, he received
17 military decorations including the Bronze Star and two Legions of Merit.
He received a B.S. in Agriculture from Kansas State University in 1952.
Gary Yager: Mr. Yager recently became Executive Vice President and Chief
Executive Officer and Senior Lender of the Columbian Bank of Topeka, Kansas.
From October 1986 to December 1995, Mr. Yager served as either the Vice
President and Branch Manager or the Vice President of Commercial Loans for
the Commerce Bank and Trust of Topeka, Kansas. From 1976 to 1986, he served
in various management positions with Bank IV of Topeka including Assistant
Vice-President of Correspondent Banking and Branch Manager. Mr. Yager is
currently a member of the Board of Directors of the Young Bank Officers of
Kansas, Topeka-Shawnee County Certified Development Corporation, Contemporary
Housing Alternatives of Topeka, and Quail Unlimited. He is a member of the
Topeka Chamber of Commerce, former member of the Board of Directors of the
Topeka Family Service and Guidance Center, and former advisor of Junior
Achievement. He is a past member of the Topeka Active 20-30 Club, where he
served in numerous leadership roles including President and Treasurer. Mr.
Yager received his BA degree in Business Administration from Washburn
University of Topeka in 1976.
Item 10. Executive Compensation
<TABLE>
The following table sets forth amounts earned by executive officers as
compensation over the past three years:
<CAPTION>
Annual Compensation
Name and
Principal Other Annual Incentive
Position Year Salary ($) Bonus ($) Compensation($)(1) Compensation($)(2)
<S> <C> <C> <C> <C> <C>
Rick D. Meyer
President and
Director 1999 90,485 70,000 8,400 4,255
1998 77,500 50,000 7,200 -
1997 75,000 25,000 7,200 -
Michael N.Fink
Chairman and
Director 1999 72,388 - 4,800 43,405
1998 63,000 36,000 4,800 -
1997 60,000 18,000 4,800 -
Chris J.
Haas (3)
Secretary/
Treasurer and
Director 1999 36,194 - 2,400 21,703
1998 31,000 18,000 2,400 -
1997 30,000 9,000 2,400 -
<FN>
<F1>
(1) Amounts paid for auto allowance.
<F2>
(2) Includes incentive compensation pursuant to the Executive Employment
Agreement, based on premiums.
<F3>
(3) Mr. Haas resigned from the Company and its subsidiaries as
Secretary/Treasurer and Director, for personal reasons, effective
March 10, 2000.
</FN>
</TABLE>
Compensation of Directors
Each Director is paid $750 per regular meeting attended for the Company and
its subsidiaries and $75 per telephonic board meeting. During 1999, there
were 4 regular Board of Directors meetings and 2 telephonic meetings of the
Company.
<PAGE>
<PAGE>15
Executive Employment Agreements
On October 30, 1998, the Company entered into Executive Employment Agreements
with Messrs. Fink, Meyer and Haas. The employment agreements are for a term
of four years beginning November 1, 1998. Annual compensation under the
agreement is $90,000, $72,000 and $36,000 for Messrs. Meyer, Fink and Haas,
respectively. Included in these agreements is a clause that requires the
salaries to be adjusted annually to reflect current costs of living.
Incentive compensation is earned based on percentages of first year life and
renewal premiums of FLAC's First America 2000 product. Also included in the
agreement is an annual auto allowance of $8,400, $4,800 and $2,400 for
Messrs. Meyer, Fink and Haas, respectively. Mr. Haas devoted 20% of his time
to the operations of the Company (see note 3 above). Mr. Fink and Mr. Meyer
devote 40% and 100%, respectively of their time to the operations of the
Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management
<TABLE>
The following table sets forth information as of March 1, 2000, regarding
ownership of Common Stock of the Company by (i) the only persons known by the
Company to own beneficially more than 5% thereof; (ii) the directors
individually; and (iii) all officers and directors as a group.
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Class of Stock Beneficial Ownership Class
<S> <C> <C> <C>
Michael N. Fink
1121 Chetford Drive
Lexington, KY 40509 Common 125,000 2%
Rick D. Meyer
3500 SW 29th Street
Topeka, KS 66611 Common 526,000 10%
Chris J. Haas
1183 Sheffield Place
Lexington, KY 40509 Common 75,000 (1) 1%
Danny N. Biggs
2601 Canterbury
Great Bend, KS 66045 Common 50,000 (2) *
Paul Burke
26391 Cedar Niles
Circle
Olathe, KS 66061 Common 50,000 *
Ed C. Carter
4100 Wimbledon Drive
Lawrence, KS 66047 Common 65,000(3) 1%
Kenneth Frahm
6005 SW 39th Street
Topeka, KS 66610 Common 40,000 *
John Hadl
1185 N 1700 Road
Lawrence, KS 66045 Common 40,000 *
<PAGE>
<PAGE>16
Name and Address of Amount and Nature of Percent of
Beneficial Owner Class of Stock Beneficial Ownership Class
<S> <C> <C> <C>
Steve Irsik, Jr.
05405 Six Road
Ingalls, KS 67853 Common 60,000 1%
John G. Montgomery
510 Redbud Lane
Junction City, KS 66441 Common 45,000 *
Harland E. Priddle
102 North Bunker Hill
Drive
Junction City, KS 66441 Common 40,000 *
Gary E. Yager
3521 SW Lincolnshire
Topeka, KS 66614 Common 40,000 *
First Alliance
Corporation
2285 Executive Drive
Suite 308
Lexington, KY 40505 Common 525,000(4) 9.6%
All Directors and
Officers as a Group 1,146,000 22%
<FN>
<F1>
* Indicates less than 1% ownership.
<F2>
(1) Mr. Haas resigned from the Company and its subsidiaries as Secretary/
Treasurer and Director, for personal reasons, effective March 10, 2000.
<F3>
(2) Excludes 5,000 shares held by his son as to which Mr. Biggs disclaims
beneficial ownership.
<F4>
(3) Excludes 20,000 shares held by Becky Carter, Mr. Carter's wife, as to
which Mr. Carter disclaims beneficial ownership.
<F5>
(4) FAC is a financial services holding company based in Lexington, Kentucky,
which wholly owns a life insurance and venture capital subsidiaries.
Messrs. Fink and Haas are officers and directors of FAC.
</FN>
</TABLE>
Item 12. Certain Relationships and Related Transactions
Messrs. Michael Fink, Rick Meyer and Chris Haas and First Alliance Corporation
should be considered promoters of the Company. Collectively, they hold
1,251,000 shares of Common Stock in the Company for which they paid aggregate
consideration of $125,100 or $.10 per share.
A portion of the Company's short-term investments consisting of certificates
of deposit are purchased through Columbian Bank. Mr. Gary Yager, a Director
of the Company, is the Chief Executive Officer of this bank.
The Company has contracted with First Alliance Corporation ("FAC") of
Lexington, Kentucky to provide underwriting and accounting services for FLAC
and the Company. Under the terms of the management agreement, the Company
pays fees based on a percentage of delivered premiums of FLAC. The
percentages are 5.5% for first year premiums; 4% of second year premiums; 3%
of third year premiums; 2% of fourth year premiums; 1% of fifth year
premiums; 1% for years six through ten for ten year policies and .5% in
years six through twenty for twenty year policies. Pursuant to the agreement,
<PAGE>
<PAGE>17
the Company incurred $60,531 and $816 of management fees during 1999 and 1998,
respectively. FAC owns approximately 9.6% of the Company's outstanding
common stock as of December 31, 1999.
Item 13. Exhibits and Reports on Form 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Exhibits.
The exhibits listed in the Index to Exhibits appearing on Page 20.
(b) Reports on Form 8-K.
NONE
<PAGE>
<PAGE>18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Rickie D. Meyer Date 3/16/2000
Rickie D. Meyer, President/Director
By /s/ Michael N. Fink Date 3/16/2000
Michael N. Fink, Chairman/Director
By /s/ Daniel N. Biggs Date 3/16/2000
Daniel N. Biggs, Director
By /s/ Kenneth L. Frahm Date 3/16/2000
Kenneth L. Frahm, Director
By /s/ Harland E. Priddle Date 3/16/2000
Harland E. Priddle, Director
By /s/ Paul E. Burke Jr. Date 3/16/2000
Paul E. Burke Jr, Director
By /s/ Stephen J. Irsik Jr. Date 3/16/2000
Stephen J. Irsik Jr, Director
<PAGE>
<PAGE>19
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
By /s/ Rickie D. Meyer Date 3/16/2000
Rickie D. Meyer, President/Director
By /s/ Mike Donnelly Date 3/16/2000
Mike Donnelly, Secretary/Treasurer
<PAGE>
<PAGE>20
INDEX TO EXHIBITS
(Item 13(b))
The documents listed in the following table are filed as Exhibits in
response to Item 13(b). Exhibits listed that are not filed herewith are
incorporated by reference.
Exhibit No. Description
3(i) Articles of Incorporation (1)
3(ii) By-laws (1)
11 Statement re computation of per share
earnings (2)
21 Subsidiaries
27 Financial Data Schedule
(1) Filed as an Exhibit to the Registrant's amended Form 10-SB, filed on
August 13, 1999, and incorporated herein by reference.
(2) Note 2 in Notes to Consolidated Financial Statements included in this
Report on Page F-12.
<PAGE>
<PAGE>F-1
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements Numbers
Report of Independent Auditors. . . . . . . . . . . . . . . . . . F-2
Report of Independent Auditors. . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 . . F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997. . . . . . . . . . . . . . . F-6
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998, and 1997. . . . . F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997. . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements. . . . . . . . . . . . F-9
<PAGE>
<PAGE>F-2
Independent Auditors' Report
Board of Directors and Shareholders
First American Capital Corporation
We have audited the accompanying consolidated balance sheets of First
American Capital Corporation (a Kansas corporation) and subsidiary as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First
American Capital Corporation and subsidiary as of December 31, 1999 and 1998,
and the consolidated results of their operations and their consolidated cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 10, 2000
<PAGE>
<PAGE>F-3
Report of Independent Auditors
To Shareholders and Board of Directors
First American Capital Corporation
We have audited the accompanying consolidated statements of operations,
changes in shareholders' equity and cash flows of First American Capital
Corporation and subsidiary for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of First American Capital Corporation and
subsidiary for the year ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
February 27, 1998
<PAGE>
<PAGE>F-4
<TABLE>
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost,
$2,667,167) $ 2,631,102 $ -
Investment in real estate 325,169 -
Short-term investments 7,649,382 10,718,261
------------ ------------
Total investments 10,605,653 10,718,261
Cash and cash equivalents 793,885 624,919
Accrued investment income 111,352 53,444
Federal income tax recoverable 16,854 -
Deferred policy acquisition costs
(net of accumulated amort-
amortization of $234,751 and
$229 in 1999 and 1998, respectively) 680,211 13,119
Prepaid expenses 13,633 7,921
Office furniture and equipment, (less
accumulated depreciation of $31,259
and $17,005 in 1999 and 1998,
respectively) 32,198 30,843
Leasehold improvements (net of
accumulated amortization of $3,400 and
$2,738 at December 31, 1999 and 1998,
respectively) - 662
Advances to agents 107,951 54,585
Premiums due 8,565 -
Other assets 11,033 5,257
------------ ------------
Total assets $ 12,381,335 $ 11,509,011
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-5
<TABLE>
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Policy and contract liabilities:
Annuity contract liabilities $ 11,282 $ -
Life policy reserves 374,298 5,494
Deposits on pending policy
applications 221,413 9,554
Policyholder premium deposits 66,321 -
Reinsurance premiums payable 11,845 -
------------ ------------
Total policy and contract liabilities 685,159 15,048
Federal income taxes payable:
Current - 4,444
Deferred 147,865 4,277
Other taxes payable 21,639 -
Commissions, salaries, wages and
benefits payable 67,806 2,832
Accounts payable and accrued expenses 30,542 26,443
Accounts payable to affiliate 9,160 15,129
------------ ------------
Total liabilities 962,171 68,173
Shareholders' equity:
Preferred stock, 6% non-cumulative
convertible callable, $5.00 par and
liquidation value; 550,000 shares
authorized; 541,506 outstanding at
December 31, 1998 - 2,707,530
Common stock, no par value, 8,000,000
shares authorized; 5,468,860 shares
issued and outstanding at December 31,
1999 and 2,720,000 shares issued and
3,261,500 outstanding at December 31,
1998 546,886 326,150
Additional paid in capital 12,230,005 9,600,478
Retained earnings - deficit (1,331,924) (1,191,320)
Accumulated other comprehensive income
(loss) (23,803) -
Less: 20,000 treasury shares held at cost (2,000) (2,000)
------------ ------------
Total shareholders' equity 11,419,164 11,440,838
------------ ------------
Total liabilities and shareholders'
equity $ 12,381,335 $ 11,509,011
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-6
<TABLE>
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Revenues
Gross premium income $ 1,102,785 $ 16,325 $ -
Reinsurance premiums ceded (12,498) - -
------------ ----------- ------------
Net Premium income 1,090,287 16,325 -
Net investment income 543,990 348,591 75,162
------------ ----------- ------------
Total revenue 1,634,277 364,916 75,162
Benefits and expenses
Increase in policy reserves 368,804 5,494 -
Policyholder surrender values 54 - -
Interest credited on
annuities and premium
deposits 3,236 - -
Commissions 631,929 9,267 -
Policy acquisition costs
deferred (901,613) (13,348) -
Amortization of deferred
policy acquisition costs 234,522 229 -
Selling, administrative and
general insurance expenses 117,825 17,470 -
Salaries, wages and employee
benefits 672,289 401,939 448,134
Professional fees 74,281 43,293 34,289
Miscellaneous taxes 24,921 - -
Administrative fees - related
party 60,531 24,816 21,000
Advisory board and directors
fees 71,058 16,503 7,800
Rent expense 33,517 33,066 40,136
Depreciation and amortization
expense 14,916 11,547 6,448
Survey fees and expenses - - 7,267
Organizational expenses - - 17,500
Other operating costs and
expenses 213,959 145,553 119,168
------------ ----------- ------------
Total benefits and expenses 1,620,229 695,829 701,742
------------ ----------- ------------
Income (loss) before income
tax expense 14,048 (330,913) (626,580)
------------ ----------- ------------
Income tax expense 154,652 8,721 993
------------ ----------- ------------
Net loss $ (140,604) $ (339,634) $ (627,573)
============ =========== ============
Net loss per common
share-basic and diluted $ (0.03) $ (0.11) $ (0.23)
============ =========== ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-7
<TABLE>
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Preferred stock:
Balance, beginning of year $ 2,707,530 $ 704,690 $ -
Sale of shares in public
offering (8,394 shares
in 1999, 400,568 shares
in 1998, and 140,938 shares
in 1997) 41,970 2,002,840 704,690
Conversion of preferred to
common (549,740 preferred
shares to 2,198,960 common
shares) (2,748,700) - -
Call of preferred stock (800) - -
------------ ------------ ------------
Balance, end of year - 2,707,530 704,690
Common stock:
Balance, beginning of year 326,150 286,094 272,000
Sale of shares in public
offering (8,394 shares in
1999, 400,568 shares in
1998, and 140,938 shares
in 1997 840 40,056 14,094
Conversion of preferred to
common 219,896 - -
------------ ------------ ------------
Balance, end of year 546,886 326,150 286,094
Additional paid-in capital:
Balance, beginning of year 9,600,478 2,873,298 519,423
Sale of shares in public
offering (8,394 shares in
1999, 400,568 shares in
1998, and 140,938 shares
in 1997) 167,041 7,971,303 2,804,666
Conversion of preferred to
common 2,528,804 - -
Call of preferred stock (3,184) - -
Cost of public offering (63,134) (1,244,123) (450,791)
------------ ------------ ------------
Balance, end of year 12,230,005 9,600,478 2,873,298
Retained earnings-deficit:
Balance, beginning of year (1,191,320) (851,686) (224,113)
Net loss (140,604) (339,634) (627,573)
------------ ------------ ------------
Balance, end of year (1,331,924) (1,191,320) (851,686)
Accumulated other
comprehensive income:
Balance, beginning of year - - -
Net unrealized loss on
available-for-sale securities (23,803) - -
------------ ------------ ------------
Balance, end of year (23,803) - -
Treasury stock:
Balance, beginning of year (2,000) (2,000) -
Purchase of 20,000 common
shares at cost - - (2,000)
------------ ------------ ------------
Balance, end of year (2,000) (2,000) (2,000)
------------ ------------ ------------
Total shareholders' equity $ 11,419,164 $ 11,440,838 $ 3,010,396
============ ============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
<PAGE>F-8
<TABLE>
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (140,604) $ (339,634) $ (627,573)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Interest credited on
annuities and premium
deposits 3,236 - -
Provision for depreciation
and amortization 14,916 11,547 6,448
Amortization of premium
and accretion of discount
on fixed maturity
investments (131) - -
Provision for deferred
federal income taxes 155,850 4,277 -
Increase in accrued
investment income (57,908) (27,217) (26,227)
Increase in federal
income tax recoverable (16,854) - -
Increase in deferred policy
acquisition costs, net (667,092) (13,119) -
Decrease (increase) in
prepaid expenses (5,712) (566) 4,513
Increase in agent advances (53,366) (4,554) (45,481)
Increase in premiums due (8,565) - -
Increase in other assets (5,776) (1,664) (754)
Increase in policy reserves 368,804 5,494 -
Increase in deposits on
pending policy applications 211,859 9,554 -
Increase in reinsurance
premiums payable 11,845 - -
Increase (decrease) in
current federal income
taxes payable (4,444) 3,451 993
Increase (decrease) in
commissions, salaries,
wages and benefits payable 64,974 (108,553) 87,000
Increase (decrease) in accounts
payable to affiliate (5,969) 8,215 (5,566)
Increase in accounts payable,
accrued expenses and
other liabilities 25,738 9,635 9,362
------------ ------------ ------------
Net cash used in operating
activities (109,199) (443,134) (597,285)
Investing activities:
Purchase of available-for-
sale fixed maturities (2,667,036) - -
Investment in real estate (325,169) - -
Short-term investments
(acquired) disposed, net 3,068,879 (7,794,922) (2,923,339)
Sales (purchases) of
furniture and equipment,net (15,609) (27,759) (10,135)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 61,065 (7,822,681) (2,933,474)
Financing activities:
Proceeds from public stock
offering 209,851 10,014,199 3,523,450
Call of preferred stock (3,984) - -
Cost of stock offerings (63,134) (1,244,123) (450,791)
Purchase of treasury stock - - (2,000)
Deposits on annuity
contracts, net 11,227 - -
Policyholder premium
deposits, net 63,140 - -
------------ ------------ ------------
Net cash provided by financing
activities 217,100 8,770,076 3,070,659
------------ ------------ ------------
Increase(decrease) in cash
and cash equivalents 168,966 504,261 (460,100)
Cash and cash equivalents,
beginning of year 624,919 120,658 580,758
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 793,885 $ 624,919 $ 120,658
============ ============ ============
</TABLE>
<PAGE>
<PAGE>F-9
See notes to consolidated financial statements.
1. Nature of Operations
First American Capital Corporation (the "Company") was incorporated on July
10, 1996 for the primary purpose of forming, owning and managing life
insurance companies. On March 11, 1997, the Company's registration statement
filed with the Office of the Kansas Securities Commissioner for a $12,500,000
intra-state public stock offering, which included a 10% "over-sale" provision
(additional sales of $1,250,000), was declared effective. The Company
completed its public stock offering on January 11, 1999, raising total
capital of $13,750,000.
The Company has a wholly-owned insurance subsidiary, First Life America
Corporation ("FLAC"), which is domiciled in Kansas. FLAC was incorporated on
July 15, 1997 and capitalized with $1,200,000. On October 15, 1997, the
Kansas Insurance Department ("KID") granted FLAC a Certificate of Authority.
On December 10, 1998, the Company provided FLAC with an additional $1,800,000
of capital. Total capitalization of FLAC is $3,000,000. Insurance operations
commenced on November 19, 1998. Prior to the commencement of insurance
operations, the Company was in the developmental stage.
The primary insurance product being marketed by FLAC is a modified payment
whole life insurance policy with a flexible premium deferred annuity rider.
A modified payment whole life insurance policy requires premium payments to
be made for a certain number of years after which the policyholder is
entitled to full policy benefits. Typical premium paying periods for
modified payment whole life insurance polices are ten, fifteen and twenty
years. FLAC's product, marketed as the "First America 2000," combines both a
ten and twenty payment period based on the issue age of the insured. Issue
ages from 0 to 20 and 51 through 81 are ten pay polices and issue ages from
age 21 to 50 are twenty pay policies. Premium payments are split between the
life and annuity based on percentages established in the product design.
First year premiums payments are allocated 100% to life insurance and renewal
payments are split 50% to life and 50% to annuity. The product is being sold
in premium units with the ability to purchase either fractional or multiple
units. At the end of the required premium paying period, the policyholder
may continue to make full premium payments into the annuity rider to provide
for greater annuity accumulations.
The initial product was designed to provide predetermined life insurance
benefits based on the age of the insured. The base coverage decreases each
year until an ultimate benefit amount is attained. The annuity rider does
not contain any fees or load. Surrender charges in the annuity are based on
a regressive scale which starts at 10% in the first year and decreases by 1%
each year until after the tenth policy year there are no surrender charges.
The Company's venture capital subsidiary, First Capital Venture Inc. ("FCVI"),
has not been capitalized or commenced operations.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") which, for
FLAC, differ from statutory accounting practices prescribed or permitted by
the KID.
Certain amounts from prior years have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on
previously reported net income or shareholders' equity.
<PAGE>
<PAGE>F-10
2. Significant Accounting Policies (continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its subsidiary, FLAC. All intercompany
accounts and transactions are eliminated in consolidation.
Management's Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. As more information becomes known, actual results could differ from
those estimates.
Investments
The Company classifies all of its fixed maturity investments as available-for
- -sale. Available-for-sale fixed maturities are carried at fair value with
unrealized gains and losses, net of applicable taxes, reported in other
comprehensive income.
Investment in real estate is carried at cost.
Short-term investments consist of investments with original maturities of
three months to one year.
Cash equivalents consist of highly liquid investments with maturities of
three months or less at the date of purchase and are carried at cost which
approximates fair value.
Interest earned on investments is included in net investment income.
Office Furniture and Equipment
Office furniture and equipment is recorded at cost less accumulated
depreciation using the 200% declining balance method over the estimated
useful life of the respective assets.
Office Lease
The Company is currently located in approximately 2,700 square feet of leased
office space at 3360 S.W. Harrison Street, Topeka, Kansas 66611. This three
year lease commenced on July 11, 1996 and was renewed in July 1999 for a one
year period that expires on July 31, 2000. Annual rent expense for the years
ended December 31, 1999, 1998, and 1997 totaled $32,470, $31,671, and
$31,671, respectively.
Deferred Policy Acquisition Costs
Commissions and other costs of acquiring life insurance, which vary with, and
are primarily related to, the production of new business have been deferred
to the extent recoverable from future policy revenues and gross profits. The
acquisition costs are being amortized over the premium paying period of the
related policies using assumptions consistent with those used in computing
policy reserves.
<PAGE>
<PAGE>F-11
2. Significant Accounting Policies (continued)
Future Policy Benefits
The liabilities for future policy benefits on the Company's life insurance
products are computed using the net level premium method and assumptions as
to investment yields, mortality, withdrawals and other assumptions, modified
as necessary to reflect anticipated trends and to include provisions for
possible unfavorable deviations. The assumptions utilized were 7.25% for
investment yields, 1975-1980 select and ultimate tables for mortality, and
Linton BA tables for withdrawal rates.
Annuity Contract Liabilities
Annuity Contract Liabilities are computed using the retrospective deposit
method and consist of policy account balances before deduction surrender
charges, which accrue to the benefit of policyholders. Premiums received on
annuity contracts are recognized as an increase in a liability rather than
premium income. Interest credited on annuity contracts is recognized as an
expense.
Policyholder Premium Deposits
Policyholder premium deposits represent premiums received for the payment of
future premiums on existing policyholder contracts. Interest is credited on
these deposits at the rate of 6%. The premium deposits are recognized as an
increase in a liability rather than premium income. Interest credited on the
premium deposits is recognized as an expense.
Premiums
Life insurance premiums for limited payment contracts are recorded according
to Statement of Financial Accounting Standard ("SFAS") No. 97. "Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and for Realized Gains and Losses from the Sale of Investments." Any gross
premium in excess of net premium is deferred and recognized in income in a
constant relationship with insurance in force.
Federal Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred income taxes are provided for cumulative temporary differences
between balances of assets and liabilities determined under generally
accepted accounting principles and balances determined for tax reporting
purposes.
Reinsurance
Estimated reinsurance receivables are reported as assets and are recognized
in a manner consistent with the liabilities related to the underlying
reinsured contracts, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts."
<PAGE>
<PAGE>F-12
2. Significant Accounting Policies (continued)
Common Stock and Preferred Stock
The common stock is fully-paid and non-assessable with dividend rights
subject to the prior rights of the holders of preferred stock (prior to its
conversion to common stock) and has full voting rights. The preferred stock
had no voting rights, had a par and liquidation value of $5.00 per share of
which dividends, if and when declared, were to be paid at the rate of 6% of
the par value, and was convertible into four shares of common stock until
July 11, 1999 (discussed below).
All shareholder rights conferred by the Company's Articles and By-Laws
vested in the subscribers immediately upon acceptance of the subscription by
the Company. These rights include, inter alia, voting rights, liquidation
and other preferences, etc. However, the actual issuance of ownership did
not occur until July 11, 1999. Accordingly, the stock sold in the public
offering was recorded as outstanding and not issued until July 11, 1999.
Additionally, the share certificates issued were not tradeable until October
11, 1999.
Conversion of Preferred Stock
The public offering was sold in units consisting of one share of common and
one share of preferred stock. Each preferred share was convertible into four
shares of common stock. Pursuant to the terms of the Subscription Agreements,
a subscriber could elect, at the time of the sale, to convert their shares of
preferred stock to shares of common stock upon issuance of stock certificates.
The subscriber was allowed to revoke this conversion during a six month period
starting on the date the offering was completed. The offering was completed
on January 11, 1999 and conversions were allowed until July 11, 1999. On
July 11, 1999, substantially all of the preferred shareholders converted
their preferred shares to common shares.
Call of Preferred Stock
Before July 11, 1999, subscribers owning a total of 160 shares of preferred
stock revoked the conversion election (discussed above). On December 10,
1999, the Company called those 160 shares of preferred stock at $5.00 per
preferred share.
Net Loss Per Common Share
Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." All earnings and losses per share amounts for all periods have been
presented to conform with the requirements of SFAS 128.
Net income (loss) per common share is based upon the weighted average number
of common shares outstanding each year. Shares issued during the public
stock offering are assumed to be outstanding for one half month of the month
in which they are sold. For the year ended December 31, 1999, all shares are
assumed to be outstanding for the entire period. Accordingly, the weighted
average outstanding common shares were 5,468,860, 3,046,043 and 2,772,770 for
the years ended December 31, 1999, 1998 and 1997, respectively.
<PAGE>
<PAGE>F-13
3. Investments
<TABLE>
The amortized cost and fair value of investments in fixed maturities at
December 31, 1999 are summarized as follows (there were no investments in
fixed maturities at December 31, 1998):
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1999:
U.S. Government Bonds $ 239,781 $ - $ 1,094 $ 238,687
Special Revenue Bonds 901,032 - 14,537 886,495
Corporate Bonds 1,166,354 - 20,434 1,145,920
Certificates of Deposit 360,000 - - 360,000
----------- ---------- ---------- -----------
$ 2,667,167 $ - $ 36,065 $ 2,631,102
=========== ========== ========== ===========
</TABLE>
<TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1999,
by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers may have the right to call
or prepay obligations.
<CAPTION>
Amortized Cost Fair Value
-------------- ------------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through
five years 986,384 978,861
Due after five years through
ten years 1,680,783 1,652,241
-------------- ------------
$ 2,667,167 $ 2,631,102
============== ============
</TABLE>
The fair values for investments in fixed maturities are based on quoted
market prices.
During 1999, the Company acquired approximately seven acres of land, located
in Topeka, Kansas, at a total purchase price of $325,169. Management has
tentative plans to construct a building on approximately one-third of this
land, to be used as a home office. A definitive construction contract has
yet to be executed. It is anticipated that the remaining portion of the
land will be sold. Financing for the construction of the building has yet
to be determined.
The carrying value of short-term investments approximates their fair value.
At December 31, 1999 and 1998 the fair value of short-term investments was
$7,649,382 and $10,718,261, respectively.
Included in short-term investments are securities which have a fair value of
$411,535 at December 31, 1999 which are on deposit with the KID.
Interest income consists of interest earned on available-for-sale securities
and short-term investments, which include certificates of deposit and U.S.
Treasury Bills.
<PAGE>
<PAGE>F-14
3. Investments (continued)
<TABLE>
The following table shows the components of net investment income for the
years ended December 31, 1999, 1998 and 1997:
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Investment income
Available-for-sale maturities $ 18,079 $ - $ -
Short-term investments 530,723 348,591 75,162
------------ ------------ ------------
Gross investment income 548,802 348,591 75,162
Investment expenses (4,812) - -
------------ ------------ ------------
Net investment income $ 543,990 $ 348,591 $ 75,162
============ ============ ============
</TABLE>
4. Concentrations of Credit Risk
Credit risk is limited by emphasizing investment grade securities and by
diversifying the investment portfolio among government, special revenue, and
corporate bonds. Credit risk is further minimized by investing in
certificates of deposit. Certain certificates of deposit and cash balances
exceed the maximum insurance protection of $100,000 provided by the Federal
Deposit Insurance Corporation ("FDIC"). The principal of the certificates of
deposit which exceed $100,000 is protected through additional insurance.
Uninsured cash balances total $487,399 at December 31, 1999. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash equivalents.
5. Other Assets
Included in "Other Assets" at December 31, 1999 is a $5,000 deposit the that
Company placed in escrow with Columbian Title Insurance Company to purchase
an additional tract of land, measuring approximately 500 X 90 feet, adjacent
to the approximate seven acres acquired by the Company in November of 1999
(see "Investments"). Preliminary tests and surveys have been completed, and
closing will occur no later than May 12, 2000 if the Company's offer of
$81,081 is accepted. If closing occurs, this land will be used in
conjunction with the existing seven acres (see "Investments").
<PAGE>
<PAGE>F-15
6. Federal Income Taxes
<TABLE>
The Company does not file a consolidated federal income tax return with FLAC.
FLAC is taxed as a life insurance company under the provisions of the
Internal Revenue Code and must file a separate tax return for its initial
five years of existence. Federal income tax expense for the years ended
December 31, 1999, 1998, and 1997 consisted of the following:
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current $ (1,198) $ 4,444 $ 993
Deferred 155,850 4,277 -
------------ ------------ ------------
Federal income tax expense $ 154,652 $ 8,721 $ 993
============ ============ ============
</TABLE>
<TABLE>
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate of 34% as follows:
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax benefit
at statutory rate $ 4,776 $ (112,510) $ (213,037)
Small life insurance company
deduction - (11,037) -
Increase in valuation allowance 187,869 135,182 215,287
Surtax exemptions - (2,914) (1,257)
Other (37,993) - -
------------ ------------ ------------
Federal income tax expense $ 154,652 $ 8,721 $ 993
============ ============ ============
</TABLE>
<PAGE>
<PAGE>F-16
6. Federal Income Taxes (continued)
<TABLE>
Deferred federal income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Significant
components of the Company's net deferred tax liability are as follows:
<CAPTION>
December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Deferred tax liability:
Policy reserves $ - $ 201
Due and deferred premiums 2,912 -
Deferred policy acquisition costs 203,867 4,076
-------------- --------------
Total deferred tax liability 206,779 4,277
Deferred tax asset:
Net unrealized investment losses 12,262 -
Policy reserves 44,079 -
Reinsurance premiums 2,573 -
Net operating loss carry forward 1,621,636 1,217,600
Alternative minimum tax credit
carry forward 1,198 1,198
-------------- --------------
Total deferred tax asset 1,681,748 1,218,798
Valuation allowance (1,622,834) (1,218,798)
-------------- --------------
Net deferred tax asset 58,914 -
-------------- --------------
Net deferred tax liability $ 147,865 $ 4,277
============== ==============
</TABLE>
The Company has net operating loss carry forwards of approximately $1,621,636
expiring in 2011 through 2019. These net operating loss carry forwards are
not available to offset FLAC income. FLAC has alternative minimum tax credit
carry forwards of $1,198, which have no expiration date. Federal income
taxes of $20,100 and $993 were paid during 1999 and 1998, respectively.
There were no Federal Income taxes paid during 1997.
7. Shareholders' Equity and Statutory Accounting Practices
FLAC prepares its statutory-basis financial statements in accordance with
statutory accounting practices ("SAP") prescribed or permitted by the KID.
Currently, "prescribed" statutory accounting practices include state
insurance laws, regulations, and general administrative rules, as well as
the National Association of Insurance Commissioners ("NAIC") Accounting
Practices and Procedures Manual and a variety of other NAIC publications.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future.
The NAIC has adopted Statements of Statutory Accounting Principles (SSAP's),
which represents the primary accounting guidance for life and health insurance
companies. SSAP will change, to some extent, prescribed SAP and may result
in changes to the accounting practices that FLAC uses to prepare its
statutory-basis financial statements. Codification, which has been approved
by the NAIC, will require adoption by the various states before it becomes
the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for FLAC, the KID must adopt Codification as the prescribed basis
of accounting on which domestic insurers must report their statutory-basis
results to the KID. At this time it is unclear whether the KID will adopt
Codification. However, based on current information available, management
believes that the impact of Codification will not be material to FLAC's
statutory-basis financial statements.
<PAGE>
<PAGE>F-17
7. Shareholders' Equity and Statutory Accounting Practices (continued)
<TABLE>
Net income for 1999, 1998, and 1997 and capital and surplus at December 31,
1999, 1998, and 1997 for the Company's insurance operations as reported in
these financial statements prepared in accordance with GAAP as compared to
amounts reported in accordance with SAP prescribed or permitted by the KID
are as follows:
<CAPTION>
GAAP SAP
Net Income Capital and Net Income Capital and
(loss) Surplus (loss) Surplus
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1999 $ 263,432 $ 3,317,386 $ (100,572) $ 2,880,773
1998 57,959 3,063,584 47,931 3,050,432
1997 5,625 1,205,625 6,221 1,206,221
</TABLE>
Principal differences between GAAP and SAP include: a) costs of acquiring new
policies are deferred and amortized for GAAP; b) benefit reserves are
calculated using more current assumptions relating to investments, mortality
and withdrawals for GAAP; c) deferred income taxes are provided for GAAP;
d) statutory asset valuation reserves are not required for GAAP; and
e) available-for-sale fixed maturity investments are reported at fair value
with unrealized gains and losses reported as a separate component of
shareholders' equity for GAAP.
Statutory restrictions limit the amount of dividends which may be paid by
FLAC to the Company. Generally, dividends during any year may not be paid
without prior regulatory approval, in excess of the lesser of (a) 10% of
statutory shareholder's surplus as of the preceding December 31, or (b)
statutory net operating income for the preceding year. In addition, FLAC
must maintain the minimum statutory capital and surplus, $1,200,000, required
for life insurance companies domiciled in Kansas.
The KID imposes on insurance enterprises minimum risk-based capital ("RBC")
requirements that were developed by the NAIC. The formulas for determining
the amount of RBC specify various weighing factors that are applied to
financial balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by ratio (the "Ratio")
of the enterprises regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level RBC, as defined by the NAIC. Enterprises
below specific trigger points or ratios are classified within certain levels,
each of which requires specified corrective action. FLAC has a Ratio that is
in excess of the minimum RBC requirements; accordingly, FLAC meets the RBC
requirements.
<PAGE>
<PAGE>F-18
8. Reinsurance
To minimize the risk of claim exposure to surplus, the Company reinsures all
amounts of risk on any one life in excess of $50,000 for individual life
insurance. Accidental death benefits are 100% reinsured. All amounts
greater than $50,000, as well as all accidental death policies, are ceded to
the Company's reinsurer, Business Men's Assurance Company ("BMA"). At
December 31, 1999 and 1998, the Company ceded $8,755,634 and $137,000,
respectively, of insurance in-force and received reserve credits of $16,475
in 1999. Pursuant to the terms of the agreement, FLAC pays no reinsurance
premiums on first year individual business. However, SFAS No. 113 requires
the unpaid premium to be recognized as a first year expense and amortized
over the estimated life of the reinsurance policies. FLAC records this
unpaid premium as "Reinsurance premiums payable" in the accompanying balance
sheet and recognized as "Reinsurance premiums ceded" in the accompanying
income statement. A December 31, 1999, the unpaid reinsurance premiums
totaled $11,845. To the extent that BMA is unable to fulfill its obligations
under the reinsurance agreement, FLAC remains primarily liable. During 1999,
FLAC paid $653 of reinsurance premiums.
9. Related Party Transactions
Effective December 31, 1998, the Company entered into a service agreement
with FLAC to provide personnel, facilities, and services to FLAC. The
services to be performed pursuant to the service agreement are underwriting,
claim processing, accounting, processing and servicing of policies, and other
services necessary to facilitate FLAC's business. The agreement is in effect
until either party provides ninety days written notice of termination. Under
the agreement, FLAC pays monthly fees based on life premiums delivered by
FLAC. The percentages are 25% of first year life premiums; 40% of second
year life premiums; 30% of third year life premiums, 20% of fourth year life
premiums and 10% of life premiums in years five and thereafter. FLAC will
retain general insurance expenses related to its sales agency, such as agent
training and licensing, agency meeting expenses, and agent's health insurance.
Pursuant to the terms of the agreement, FLAC had incurred expenses of
$275,375 and $4,081 for the years ended December 31, 1999 and 1998,
respectively.
The Company has contracted with First Alliance Corporation ("FAC") of
Lexington, Kentucky to provide underwriting and accounting services for FLAC
and the Company. Under the terms of the management agreement, the Company
pays fees based on a percentage of delivered premiums of FLAC. The
percentages are 5.5% for first year premiums; 4% of second year premiums; 3%
of third year premiums; 2% of fourth year premiums and 1% for years six
through ten for ten year policies and .5% in years six through twenty for
twenty year policies. Pursuant to the agreement, the Company incurred
$60,531 and $816 of management fees during 1999 and 1998, respectively.
FAC also owns approximately 9.6% of the Company's outstanding common shares.
10. Fair Values of Financial Instruments
The fair values of financial instruments, and the methods and assumptions
used in estimating their fair values, are as follows:
Fixed Maturities
Fixed maturities are carried at fair value in the accompanying consolidated
balance sheets. The fair value of fixed maturities are based on quoted
market prices. At December 31, 1999, the fair value of fixed maturities was
$2,631,102. There were no fixed maturities at December 31, 1998.
<PAGE>
<PAGE>F-19
10. Fair Values of Financial Instruments (continued)
Short-term Investments
The carrying value of short-term investments approximates their fair value.
At December 31, 1999 and 1998 the fair value of short-term investments was
$7,649,382 and $10,718,261, respectively.
Cash and Cash Equivalents
The carrying values of cash and cash equivalents approximate their fair
values. At December 31, 1999 and 1998 the fair value of cash and cash
equivalents was $793,885 and $624,919, respectively.
11. Comprehensive Income
In 1998, the Financial Accounting and Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS 130 requires the detail of comprehensive income for the
reporting period be disclosed in the financial statements. Comprehensive
income consists of net income or loss for the current period adjusted for
income, expenses gains and losses that are reported as a separate component
of shareholders' equity rather than in the statement of operations. The
financial statements have been prepared in accordance with SFAS 130.
<TABLE>
The components of comprehensive income (loss) along with the related tax
effects are presented for 1999, 1998, and 1997. There was no comprehensive
income (loss) reported during 1998 or 1997 because there were no investments
in fixed maturities until 1999.
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Unrealized gain/(loss) on
available-for-sale securities:
Unrealized holding gain/(loss)
during the period $ (36,065) $ - $ -
Tax benefit/(expense) 12,262 - -
------------ ------------ ------------
Other comprehensive income/(loss)$ (23,803) $ - $ -
============ ============ ============
Net income/(loss) $ (140,604) $ (339,634) $ (627,573)
Other comprehensive income/
(loss) net of tax effect:
Unrealized investment
gain/(loss) (23,803) - -
------------ ------------ ------------
Comprehensive income/(loss) $ (164,407) $ (339,634) $ (627,573)
============ ============ ============
Net income/(loss) per common
share - basic and diluted $ (.03) $ (.11) $ (.23)
============ ============ ============
</TABLE>
<PAGE>
<PAGE>F-20
12. Segment Information
<TABLE>
Prior to 1998 segment data has been presented on an "industry approach" in
accordance with SFAS No. 14. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," become effective for 1998 and superseded
SFAS No. 14. SFAS No. 131 requires a "management approach" (how management
internally evaluates the operating performance of its business units) in the
presentation of business segments. The segment data that follows has been
prepared in accordance with SFAS No. 131. The operations of the Company and
its subsidiaries have been classified into two operating segments as follows:
life and annuity insurance operations and corporate operations. Segment
information as of December 31, 1999, 1998 and 1997 and for the years then
ended is as follows:
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Life and annuity
insurance operations $ 1,243,323 $ 91,848 $ 31,618
Corporate operations 390,954 273,068 43,544
------------ ------------ ------------
Total $ 1,634,277 $ 364,916 $ 75,162
============ ============ ============
Income (loss) before
income taxes:
Life and annuity
insurance operations $ 418,084 $ 66,680 $ 6,618
Corporate operations (404,036) (397,593) (633,198)
------------ ------------ ------------
Total $ 14,048 $ (330,913) $ (626,580)
============ ============ ============
Assets:
Life and annuity
insurance operations $ 4,255,380 $ 3,113,186 $ 1,231,618
Corporate operations 8,125,955 8,395,825 1,914,878
------------ ------------ ------------
Total $ 12,381,335 $ 11,509,011 $ 3,146,496
============ ============ ============
Depreciation and
amortization expense:
Life and annuity
insurance operations $ 234,522 $ 229 $ -
Corporate operations 14,916 11,547 6,448
------------ ------------ ------------
Total $ 249,438 $ 11,776 $ 6,448
============ ============ ============
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF FIRST AMERICAN CAPITAL CORPORATION
Name Jurisdiction of Incorporation
- -----------------------------------------------------------------------------
First Life America Corporation Kansas
First Capital Venture, Inc. Kansas
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 10,280,484
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 325,169
<TOTAL-INVEST> 10,605,653
<CASH> 793,885
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 680,211
<TOTAL-ASSETS> 12,381,335
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 685,159
<NOTES-PAYABLE> 0
0
0
<COMMON> 546,886
<OTHER-SE> 10,872,278
<TOTAL-LIABILITY-AND-EQUITY> 12,381,335
1,090,287
<INVESTMENT-INCOME> 543,990
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 3,290
<UNDERWRITING-AMORTIZATION> 234,522
<UNDERWRITING-OTHER> 1,382,417
<INCOME-PRETAX> 14,048
<INCOME-TAX> 154,652
<INCOME-CONTINUING> (140,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (140,604)
<EPS-BASIC> (.030)
<EPS-DILUTED> (.030)
<RESERVE-OPEN> 5,494
<PROVISION-CURRENT> 368,804
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 374,298
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
