United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[] Quarterly Report Pursuant to Section 14 or 15(d) of
the Securities Exchange Act of 1934 For the Period
Ended September 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 (I.R.S. Employer
incorporation or organization) Identification 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
November 11, 1996
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in dollars)
<CAPTION>
September 30,December 31
1996 1995
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities, at fair value 10,078,527 2,496,695
(Amortized cost $10,354,219 and $2,482,680
in 1996 and 1995, respectively)
Common stocks 125,000 -
Short-term investments - 2,611,979
Total investments 10,203,527 5,108,674
Cash and cash equivalents 720,503 6,087,294
Accrued investment income 125,259 235,707
Deferred policy acquisition costs 542,256 51,212
Office furniture and equipment, less accumulated
depreciation of $32,644 and $17,957
in 1996 and 1995, respectively 49,252 51,074
Deferred tax asset 52,077 -
Notes receivable 186,215 -
Goodwill 18,561 -
Other assets 163,796 114,298
Total assets 12,061,446 11,648,259
Liabilities, Minority Interest, and Shareholders' Equity
Policy liabilities and accruals 881,371 185,225
Federal income taxes payable 9,137 32,247
Deferred tax liability 30,350 8,415
Other liabilities 122,691 80,840
Total liabilities 1,043,549 306,727
Shareholders' equity:
Preferred stock 6% non-cumulative convertible
callable, $5.00 par and liquidation value; 550,000
shares authorized 550,000 shares
outstanding at December 31, 1995 - 2,750,000
Common stock, no par value, 8,000,000 shares
authorized; 5,579,840 shares issued and outstanding
at September 30, 1996 and 3,380,000 shares
outstanding at December 31, 1995 at $.10 stated value 557,984 338,000
Additional paid in capital 11,979,226 9,411,216
Net unrealized investment gain/(loss) (223,615) 9,250
Retained earnings - deficit (1,295,698) (1,166,934)
Total shareholders' equity 11,017,897 11,341,532
Total liabilities and shareholders' equity 12,061,446 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 Nine months ended
September 30,September 30,September 30,September 3
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S>
Revenues <C> <C> <C> <C>
Premium income 203,470 - 623,932 -
Net investment income 153,935 125,287 459,677 284,326
Other income 5,768 - 11,597 -
Total revenue 363,173 125,287 1,095,206 284,326
Benefits and expenses
Salaries, wages and
employee benefits 344,926 339,329 344,926 339,329
Increase in policy reserves 90,761 - 265,818 -
Amortization of deferred
policy acquisition costs 139,755 - 139,755 -
Other insurance benefits
and expenses 133,506 - 133,506
Professional and other fees 28,258 - 91,480 -
Other taxes 43,204 - 60,679 -
Other expenses 42,581 61,696 134,406 137,884
Total benefits and expenses 822,991 401,025 1,170,570 477,213
Loss from operations (459,818) (275,738) (75,364) (192,887)
Federal income taxes 14,600 - 53,400 -
Net loss $ (474,418) $ (275,738) $ (128,764) $ (192,887)
Net loss per common share $ (.013) $ (.006) $ (.023) $ (.061)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in dollars)
<CAPTION>
Nine months ended
September 30,September 3
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash provided/(used) in operating activities (318,960) (408,851)
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 (1,190,158)
Purchase of furniture and equipment (8,987) (30,948)
Net cash used in investing activities (5,398,354) (1,221,106)
Financing activities:
Deposits on annuity contracts 388,517 -
Proceeds from stock offering - 7,767,800
Cost of stock offering (37,994) (908,268)
Net cash provided by financing activities 350,523 6,859,532
Increase/(decrease) in cash and cash equivalents (5,366,791) 5,229,575
Cash and cash equivalents beginning of period 6,087,294 762,189
Cash and cash equivalents at end of period 720,503 5,991,764
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
nine month periods ended September 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. Operating results for the
nine months ended September 30, 1996 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1996.
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 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 nine month period ending
September 30, 1995, reflects only results of the Company during its
initial public offering.
(C) Investments
Fixed maturity investments are classified as available-for-sale and
are recorded at fair value. Adjustments to fair value are recognized
as a separate component of shareholders' equity net of applicable
federal income tax effects. Common stock investments consist of
organizational investments in two start-up companies, Mid-American
Alliance Corporation of Jefferson City, Missouri and First American
Capital Corporation of Topeka, Kansas. Ownership interest in each
company will represent less than ten percent. These investments are
restricted under Rule 144 of the Securities and Exchange Act and may
not be tradable until 2001. Since these investments are restricted,
a fair value cannot be readily determined. Accordingly, Financial
Accounting Standards No. 115 requires these investments be carried
at cost.
<PAGE>
The following table details the available-for-sale fixed maturity
investment values at September 30, 1996:
Gross
Amortized Unrealized Fair
Cost Loss Value
U.S. Government Obligations $ 7,571,041 ($ 226,971) $ 7,344,070
Taxable Municipals 1,001,665 ( 11,581) 990,084
Corporate Obligations 1,781,513 ( 37,140) 1,744,373
$10,354,219 ($ 275,692) $10,078,527
(D) Deferred Policy Acquisition Costs
Certain costs related to the acquisition of life insurance and annuities
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:
Balance beginning of year $ 51,212
Policy acquisition costs, deferred 630,799
Amortization (139,755)
Balance at September 30, 1996 $542,256
(E) Earnings Per Common Share
Earnings per share for the nine months ending September 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 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. During July,
August and September, the Company sold 39,168, 42,769 and 46,538
Units, respectively. On October 28, 1995, the public stock offering
was 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
3,159,375 at September 30, 1996 and 1995, respectively.
<PAGE>
(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 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 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 effective tax rates. Federal income tax
expense at September 30, 1996 was estimated at $53,400 of
which $27,600 is current expense.
(H) Medical Acceptance Corporation
On April 12, 1996, FKCC purchased common stock in treasury of
Medical Acceptance Corporation ("MAC") of Lexington, Kentucky
for $50,000 which resulted in a 51% ownership interest. The
purchase, which was accounted for as a purchase, resulted in
goodwill of $20,622 which is being amortized over five years.
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 thirty-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
provides MAC a $200,000 line of credit for the purchase of
receivables. At September 30, 1996, MAC had used $16,000 of the
line of credit.
MAC has had operating losses since inception and these losses
are expected to continue through December 31, 1996. As such,
the Company has included 100% of MAC's year-to-date operating
losses of $34,842 in the condensed consolidated financial statements.
(I) Subsequent Event
On October 18, 1996, FKCC purchased 49% of LGP, Inc. of Kentucky
for $49,000. LPG, Inc. is developing a dating service and
interactive-video matchmaking service by combining a television
dating show and an on-line profile library on the Internet.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets increased by $413,187 from December 31, 1995 to
September 30, 1996. This increase is primarily related to
insurance operations of FAIC. During 1996, deferred policy
acquisition costs increased $491,044 net of amortization. A
deferred tax asset of $52,077 was established as the result of
unrealized losses on available-for-sale fixed maturity investments
of FAIC. These increases were partially offset by a decrease in
accrued investment income of $110,448. Fixed maturity investments
were adjusted to fair value in accordance with Statement of
Financial Accounting Standards No. 115. These adjustments,
which totaled $275,692 at September 30, 1996, have no earnings
effect. Investments in common stocks totaled $125,000.
Liabilities increased by $736,822 during the period from December
31, 1995 to September 30, 1996. The increase in liabilities is
primarily related to the insurance operations of FAIC. At
September 30, 1996, insurance related liabilities totaled $881,371
which includes $291,090 of life policy reserves and $352,691 of
annuity contract liabilities.
Liquidity
Other than normal operating expenditures, the Company does not
anticipate any significant capital expenditures. 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 nine
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 nine months ended September 30, 1996,
revenues totaled $1,095,206 of which $623,932 was related to
FAIC's insurance sales. During the third quarter of 1996,
revenues increased $363,173 which includes $203,470 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 nine months ending September 30, 1996, policy reserve
expense totaled $ 265,818. 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, $630,799 of these
expenses were recorded as assets. Amortization of deferred
policy acquisition costs totaled $139,755 during 1996 of which
$31,737 was in the third quarter. Costs related to the
administration of insurance policies and direct agency expenses
totaled $133,506 for the nine months ended September 30, 1996
and are classified as other insurance benefits and expenses.
This represents and increase of $50,860 during the third quarter.
Included in these expenses are agent's health insurance, agency
meetings and recruiting and training. Also included are costs
related to the agency incentives. There were no insurance related
expenses for the same periods in 1995. Professional and other
fees totaled $91,480 as the result of additional audit expenses
of $19,250 that were not accrued at December 31, 1995 and fees
of $24,309 payable to the Company's Advisory Board Members. Other
taxes includes intangibles tax on capital of $60,662 payable to
the state of Kentucky.
Operating results of MAC from the date of acquisition
(April 12, 1996) have been included in the condensed consolidated
statement of operations. MAC's revenues and expenses from April
12, 1996 through September 30, 1996 totaled $3,730 and $38,572,
respectively (see Note H).
<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 nine months ended
September 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 November 14, 1996
Michael N. Fink, President
/s/ Chris J. Haas Date November 14, 1996
Chris J. Haas, Secretary/Treasurer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 10,078,527
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,078,527
<CASH> 720,503
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 542,256
<TOTAL-ASSETS> 12,061,446
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 881,371
<NOTES-PAYABLE> 0
0
0
<COMMON> 557,984
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,061,446
623,932
<INVESTMENT-INCOME> 459,677
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 11,597
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 139,755
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (75,364)
<INCOME-TAX> 53,400
<INCOME-CONTINUING> (128,764)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (128,764)
<EPS-PRIMARY> (.023)
<EPS-DILUTED> (.023)
<RESERVE-OPEN> 25,272
<PROVISION-CURRENT> 265,818
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 291,089
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
