United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]Quarterly Report Pursuant to Section 14 or 15(d) of the Securities
Exchange Act of 1934 for the Period Ended June 30, 1996.
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 : 33-67312
FIRST ALLIANCE CORPORATION
(exact name of registrant as specified in its charter)
Kentucky 61-1242009
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) number)
2285 Executive Drive, Suite 308
Lexington, Kentucky 40505
(Address of principal executive offices) (Zip Code)
(606) 299-7656
(Registrant's telephone number, including area code)
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 [ ]
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, No Par Value - 5,579,840 shares as of August 7, 1996
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in dollars)
<CAPTION>
June 30, December 31
1996 1995
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities, at fair value (amortize$ 10,053,490 $ 2,496,695
$10,360,198 and $2,482,680 in 1996 and 1995, respectively
Short-term investments - 2,611,979
Total investments 10,053,490 5,108,674
Cash and cash equivalents 901,367 6,087,294
Accrued investment income 178,807 235,707
Deferred policy acquisition costs 366,313 51,212
Office furniture and equipment, less accumulated depreciation
of $23,244 and $17,957 in 1996 and 1995, respectively 53,144 51,074
Deferred tax asset 55,589 -
Notes Receivable 67,388 -
Goodwill 9,992 -
Other assets 122,022 114,298
Total assets $ 11,808,112 $11,648,259
Liabilities, Minority Interest, and Shareholders' Equity
Policy liabilities and accruals $ 691,936 $ 185,225
Federal income taxes payable 24,887 40,662
Other liabilities 46,973 80,840
Total liabilities 763,796 306,727
Minority interest (17,436) -
Shareholders' equity:
Preferred stock 6% non-cumulative convertible callable, $5.00 p - 2,750,000
and liquidation value; 550,000 shares authorized 550,000 shares
outstanding at December 31, 1995
Common stock, no par value, 8,000,000 shares authorized; 5,579,840 557,984 338,000
shares issued and outstanding at June 30, 1996 and 3,380,000
shares outstanding at December 31, 1995 at $.10 stated value
Additional paid in capital 11,975,657 9,411,216
Net unrealized investment gain/(loss) (251,118) 9,250
Retained earnings - deficit (1,220,771) (1,166,934)
Total shareholders' equity 11,061,752 11,341,532
Total liabilities and shareholders' equity $ 11,808,112 $11,648,259
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in dollars)
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Premium income $ 191,924 $ - $ 420,462 $ -
Net investment income 154,138 92,236 305,742 159,039
Other income 2,261 - 5,829 -
Total revenue 348,323 92,236 732,033 159,039
Benefits and expenses
Salaries, wages and employee benefits 80,696 127,817 208,828 253,815
Increase in policy reserves 79,281 - 175,057 -
Amortization of deferred policy acqui 76,689 - 108,018 -
Other insurance benefits and expenses 46,306 - 82,646 -
Professional and other fees 35,106 - 63,222 -
Other taxes 17,475 - 17,475 -
Other expenses 67,077 42,660 91,825 76,188
Total benefits and expenses 402,630 170,477 747,071 330,003
Income/(loss) from operations (54,307) (78,241) (15,038) (170,964)
Federal income taxes (12,200) - 38,800 -
Net loss $ (42,107) $ (78,241) $ (53,838) $ (170,964)
Net loss per common share $ (.008) $ (.025) $ (.010) $ (.055)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in dollars)
<CAPTION>
Six months ended
June 30, June 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash provided/(used) in operating activities $ (16,770) $ (295,087)
Investing activities:
Purchase of available-for-sale fixed maturities (9,001,346) -
Maturity of available-for-sale fixed maturities 1,000,000 -
Short-term investments sold/(acquired) 2,611,979 (3,224,725)
Purchase of furniture and equipment (9,330) (16,815)
Net cash used in investing activities (5,380,037) (3,241,540)
Financing activities:
Deposits on annuity contracts 263,965 -
Proceeds from stock offering - 4,550,925
Cost of stock offering (34,425) (539,101)
Net cash provided by financing activities 229,540 4,011,824
Decrease in cash and cash equivalents (5,185,927) 475,197
Cash and cash equivalents beginning of period $ 6,087,294 $ 762,189
Cash and cash equivalents at end of period $ 901,367 $ 1,237,386
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
Part I.
FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(A) Basis of Presentation
The accompanying condensed consolidated financial statements of First Alliance
Corporation and its Subsidiaries ( the "Company") for the six month period
ended June 30, 1996 and 1995 are unaudited. However, in the opinion of the
Company, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been reflected therein.
Certain financial information which is normally included in financial statements
prepared in accordance with generally accepted accounting principles, but which
is not required for interim reporting purposes, has been omitted. The
accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended December 31, 1995. Certain
reclassifications have been made in the prior period financial statements
to conform with the current year presentation.
(B) Subsidiary Operations
The Company's wholly owned life insurance subsidiary, First Alliance Insurance
Company ("FAIC"), was formed on December 29, 1994. Operations did not commence
until November of 1995. Additionally, the Company's wholly owned venture
capital subsidiary, First Kentucky Capital Corporation ("FKCC"), did not
commence operations until April of 1996. Accordingly, the condensed
consolidated financial information for the six month period ending June 30,
1995, reflects only results of the Company during its initial public offering.
(C) Investments
The Company classifies all of its available-for-sale fixed maturities at the
current market value. Adjustments to market value are recognized as a separate
component of shareholders' equity net of applicable federal income tax effects.
The following table details the investment values at June 30, 1996:
Gross
Amortized Unrealized Fair
Cost Loss Value
U.S. Government Obligations $ 7,574,367 ($ 248,666) $ 7,325,701
Taxable Municipals 1,002,523 ( 16,834) 985,689
Corporate Obligations 1,783,308 ( 41,208) 1,742,100
$10,360,198 ($ 306,708) $10,053,490
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(D) Deferred Policy Acquisition Costs
Certain costs related to the acquisition of life insurance have been deferred
to the extent recoverable from future policy revenues and gross profits. These
acquisition cost are being amortized over the premium paying period of the
related policies. Deferred policy acquisition costs are summarized below:
June 30, 1996
Balance beginning of year $ 51,212
Policy acquisition costs, deferred 423,119
Amortization (108,018)
Balance at end of quarter $366,313
(E) Earnings Per Common Share
Earnings per share for the six months ending June 30, 1996 and 1995 are based on
the weighted average number of shares outstanding during the respective periods.
During the Company's public stock offering, shares sold were assumed outstanding
for 1/2 a month in the month they were sold. Shares issued prior to January 1,
1995 are assumed to be outstanding for the entire year. During January,
February and March of 1995, the Company sold 33,184, 23,594, and 23,328 Units
respectively. During April, May and June the Company sold 31,943, 24,372, and
35,696 Units respectively. At October 31, 1995, the public stock offering
had been completed and all Units sold are considered outstanding. On April
28, 1996, substantially all of the 550,000 preferred shares were converted to
common stock (see Note F). Accordingly, the weighted average common
shares outstanding are 5,579,840 and 3,101,140 at June 30, 1996 and 1995,
respectively.
(F) Conversion of Preferred Stock
Pursuant to the terms of the Subscription Agreements, a subscriber could elect,
at the time of the sale, to convert their preferred stock shares to shares of
common stock. 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 October 28, 1995 and conversions were allowed until
April 28, 1996. Each share of preferred stock could be converted into four
shares of common stock. On April 28, 1996, substantially all of the preferred
shareholders converted their preferred shares to common shares. Accordingly,
the total number of common shares outstanding increased to 5,579,840 on
April 28, 1996.
(G) Federal Income Taxes
Federal income tax expense is calculated based on the income of FAIC. During
interim periods, federal income tax expense is estimated based on annualized
earnings. Federal income tax expense at June 30, 1996 was estimated at $38,800
of which $24,400 is currently payable.
(H) Capitalization of FKCC and Acquisition of Medical Acceptance Corporation
On April 12, 1996, the Company capitalized FKCC by purchasing fifty shares of
FKCC's Common Stock for $50,000. Additional capitalization will be provided as
determined by the Company's Management.
On April 12, 1996, FKCC purchased 51% of Medical Acceptance Corporation, ("MAC")
of Lexington, Kentucky. Accordingly, the acquisition will be accounted for as a
purchase. The purchase price for MAC's common stock was $50,000. Goodwill,
which totaled $10,500, is amortized over a period of sixty months.
MAC purchases receivables from medical providers at a discount. The receivables
are in the form of contracts in which the patient makes monthly payments of
principal and interest directly to MAC. MAC retains all of the principal and
interest paid. The contracts are for terms of six to thiry-six months and have
an annual percentage rate of nineteen percent. In the event of default, MAC
has total recourse against the medical provider for the amount of the
patient's unpaid principal balance. FKCC will provide MAC a $200,000 line of
credit for the purchase of receivables.
The Condensed Consolidated Statement of Operations reflects operating results of
MAC from the date of acquisition. The following pro forma Information presents
consolidated operating results as if MAC was purchased at the beginning of the
periods presented:
Six months ended
June 30,
1996 1995
Total Revenues $ 734,503 $ 160,304
Total Expenses 777,521 336,686
Operating Loss (43,018) (176,382)
Net Loss (81,818) (176,382)
Net Loss per Share (.015) (.057)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets increased by $159,853 from December 31, 1995 to June 30, 1996.
During 1996, deferred policy acquisition costs increased $315,101 net of
amortization. Fixed maturity investments were adjusted to fair market value in
accordance with Statement of Financial Accounting Standards No. 115. These
adjustments have no earnings effect. The valuation allowance reducing fixed
maturity investments totaled $306,708 at June 30, 1996.
Liabilities increased by $457,069 during the period from December 31, 1995 to
June 30, 1996. The increase in liabilities is primarily related to the insurance
operations of FAIC. At June 30, 1996, life insurance related liabilities
totaled $691,936 which includes $200,329 of reserves and $246,827 of annuity
contract liabilities.
The minority interest represents the 49% ownership by other shareholders of MAC
which was acquired in April of 1996 by FKCC.
Liquidity
Other than normal operating expenditures, the Company does not anticipate any
significant capital expenditures. The Company may make investments in two other
companies, however the total of both investments will not exceed $150,000.
These investments will be made sometime in the third quarter and the Company
will own less than 10% of both companies. Management believes that the funds
provided from operations and the working capital available from the public
stock offering will adequately meet the Company's cash flow needs.
Results of Operations
A comparison of the results of operations during the first six months of 1996
and 1995 is not meaningful since the Company was in the development stage until
October 28, 1995. During 1995, interest income was the only source of revenue.
During 1996, FAIC provided additional revenue from the sale of life insurance.
For the six months ended June 30, 1996, revenues totaled $732,033 of which
$420,462 was related to FAIC's insurance sales. Revenues increased by $348,323
over first quarter of 1996 results which includes $191,924 of FAIC's premium
income.
Associated with the sale of insurance policies, is the establishment of a
reserve in the event of policyholder deaths. The increases in policy reserves
are recognized as an expense. For the six months ending June 30, 1996, policy
reserve expense totaled $ 175,057. Certain expenses related to the acquisition
of life insurance, such as commissions and policy administration, are
capitalized and amortized over the premium paying period of the policies.
During 1996, $423,119 of these expenses were recorded as assets. Amortization
of deferred policy acquisition costs totaled $108,018 during 1996 of which
$76,689 was in the second quarter. Costs related to FAIC's sales
agency increased by $29,884 over the first quarter to $64,878 during 1996.
These costs include health insurance, agency meetings and other costs directly
related to the sales agency. Costs related to the administration and issuance
of life insurance policies totaled $82,646 for the six month period ended June
30, 1996, and are classified as other insurance benefits and expenses.
The insurance administration expenses increased by $46,306 over the first
quarter of 1996. There were no insurance related expenses for the same periods
in 1995. Professional and other fees totaled $63,222 as the result of
additional audit expenses of $19,250 that were not accrued at
December 31, 1995 and fees of $16,362 payable to the Company's Advisory Board
Members.
Also included in operating results is the Company's share of the losses of MAC
since the date of acquisition. The Company's portion of MAC's revenue and
expenses reflected in the condensed consolidated statement of income are
$348 and $8,504, respectively.
<PAGE>
Part II.
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6
Exhibits and Reports on Form 8-K
Exhibits - None
Form 8-K
The Company did not file any reports on Form 8-K during the six months
ended June 30, 1996.
<PAGE>
Signatures
Pursuant to the requirements 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.
First Alliance Corporation
(registrant)
/s/ Michael N. Fink Date August 8, 1996
Michael N. Fink, President
/s/ Chris J. Haas Date August 8, 1996
Chris J. Haas, Secretary/Treasurer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 10,053,490
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,053,490
<CASH> 901,367
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 366,313
<TOTAL-ASSETS> 11,808,112
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 691,936
<NOTES-PAYABLE> 0
0
0
<COMMON> 557,984
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,808,112
420,462
<INVESTMENT-INCOME> 305,742
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 5,829
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 190,664
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (15,038)
<INCOME-TAX> 38,800
<INCOME-CONTINUING> (53,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,838)
<EPS-PRIMARY> (.010)
<EPS-DILUTED> (.010)
<RESERVE-OPEN> 25,272
<PROVISION-CURRENT> 175,057
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 200,328
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
