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 and Exchange Act of 1934 For the Period Ended
March 31, 1997.
or
[] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transistion 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 as of May 12, 1997
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in dollars)
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities, at fair value
(amortized cost, $9,087,799 and $10,095,461 in
1997 and 1996, respectively) $8,810,204 $9,946,130
Preferred Stock 1,000,000 -
Investments in unconsolidated affiliates 63,582 -
Other investments 427,204 318,280
Total investments 10,300,990 10,264,410
Cash and cash equivalents 849,964 908,276
Investments in related parties 125,000 125,000
Receivables from related parties 15,059 46,279
Accrued investment income 131,638 171,416
Deferred policy acquisition costs 855,731 749,610
Prepaid expenses 56,963 46,625
Office furniture and equipment, less accumulated
depreciation of $43,014 and $ 38,790 in 1997
and 1996, respectively 46,361 47,722
Premiums due 115,318 42,522
Other assets 147,984 129,212
Total Assets $12,645,008 $12,531,072
Liabilities and Shareholders' Equity
Policy liabilities and accruals 1,435,282 1,365,099
Federal income taxes payable 14,702 40,572
Other liabilities 327,333 150,965
Total liabilities 1,777,317 1,556,636
Commitments and Contingencies (Note H)
Shareholders' equity:
Preferred stock 6% non-cumulative convertible
callable, $5.00 par and liquidation value;
550,000 shares authorized and outstanding at
March 31, 1997 and December 31,1996 - -
Common stock, no par value, 8,000,000 shares
authorized; 5,579,840 shares issued and outstanding
at March 31, 1997 and December 31, 1996 557,984 557,984
Additional paid in capital 11,981,820 11,981,803
Unrealized investment gains (losses) (net of
deferred federal income tax benefit (expense)
of $94,384 (183,211) (98,558)
Retained Earnings (1,488,902) (1,466,793)
Total Shareholders' equity 10,867,691 10,974,436
Total liabilities and shareholders' equity $12,645,008 $12,531,072
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
March 31, March 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues
Premium Income 397,249 228,538
Net Investment Income 152,357 151,604
Earnings of unconsolidated affiliates and
other income (44,910) 3,568
Total revenue 504,696 383,710
Benefits and expenses
Salaries, wages and employee benefits 91,472 128,132
Increase in policy reserves 101,567 95,776
Amortization of deferred policy acquisition costs 128,183 31,329
Other insurance benefits and expenses 82,001 36,340
Other expenses 81,082 52,864
Total benefits and expenses 484,305 344,441
Income/(loss) from operations 20,391 39,269
Federal income taxes 42,500 51,000
Net loss $ (22,109) $ (11,731)
Net loss per common share $ (0.004) $ ( 0.002)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amount in dollars)
<CAPTION>
Three months ended
March 31, March 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash provided/(used) in operating activities (41,114) 95,275
Investing activities:
Purchase of available-for-sale fixed maturities (251,452) (8,122,356)
Maturity of available-for-sale fixed maturities 1,240,781 1,000,000
Short-term investments sold/(acquired) - 2,611,979
Notes Receivable (186,108) -
Purchase of Preferred Stock (1,000,000) -
Purchase of Common Stock (20,000) -
Purchase of furniture and equipment (2,863) (2,725)
Net cash used in investing activities (219,642) (4,513,102)
Financing activities:
Deposits on annuity contracts 202,444 142,271
Net cash provided by financing activities 202,444 142,271
Decrease in cash and cash equivalents (58,312) (4,275,556)
Cash and cash equivalents beginning of period 908,276 6,087,294
Cash and cash equivalents at end of period 849,964 1,811,738
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 three month period
ended March 31, 1997 and 1996 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, 1996. 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 subsidiaries', First Alliance Insurance Company
("FAIC") and First Kentucky Capital Corporation ("FKCC"), results of operations
are included in the condensed consolidated financial information for the three
month period ending March 31, 1997.
(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 March 31, 1997:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
U.S. Government Bonds $6,060,281 $ - $(217,627) $5,842,654
Municipal Bonds 1,249,808 2,992 (15,156) 1,237,644
Corporate Bonds 1,777,713 - (47,804) 1,729,909
Total $9,087,802 $2,992 $(280,587) $8,810,207
On March 31, 1997, the Company purchased 400,000 shares of the Preferred Stock
of U.S. Star Financial Corporation ("U.S.Star") of Oakbrook Terrace, Illinois
for $800,000. On that same date, FAIC purchased 100,000 shares of the same
Preferred Stock for $200,000. The Preferred shares are convertible into
common shares at a rate of one share of preferred for one share of common.
U.S.Star can require the conversion if it meets conditions set forth in the
security agreement. If the preferred shares are not converted within eighteen
months of the date of purchase, the preferred shares can be redeemed at the
original purchase price. These shares have been recorded in the financial
statements at cost.
<PAGE>
(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 costs are being amortized over the premium paying period of the
related policies. Deferred policy acquisition costs are summarized below:
March 31, 1997
Balance beginning of year $ 749,610
Policy acquisition costs, deferred 234,305
Amortization (128,183)
Balance at end of quarter $ 855,732
(E) Net Loss Per Common Share
Net loss per common share is based upon the weighted average number of common
shares outstanding each year. For the quarters ended March 31, 1997 and
March 31, 1996, all shares are assumed to be outstanding. Accordingly, the
weighted average outstanding common shares is 5,579,840.
(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.
(G) Federal Income Taxes
The company does not file a consolidated federal income tax return with FAIC.
FAIC 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 six years of
existence. Federal income tax expense for the quarter ended March 31, 1997 is
calculated using an effective rate derived from the previous year tax expense.
At March 31, 1997 the estimated Federal Income tax expense was $42,500.
<PAGE>
(H) Commitments and Contingencies
The Company is party to a claim related to an automobile accident involving
an officer of the Company. The outcome of this matter is not predictable with
assurance. Although any actual liability is not determinable as March 31,
1997, the Company believes that any liability resulting from this matter,
after taking into consideration insurance coverage, should not have a material
adverse effect on the Company's financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 the following "Management's Discussion and Analysis
of Financial Condition and Results of Operations," statements contained in
future filings with the Securities and Exchange Commission and publicly
disseminated press releases, and statements which may be made from time to time
in the future by management of the Company in presentations to shareholders,
prospective investors, and others interested in the business and financial
affairs of the Company, 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 statements. 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 the notes thereto.
Results of Operations
Revenues for the three months ended March 31 totaled $504,696 in 1997 and
$383,710 in 1996. The primary source of revenue for the Company is life
insurance premium income. Premium income for the first three months of 1997
increased $168,711 in comparison to 1996 results. Premium income consists of
life insurance premium sales of the Company's initial product referred to as
the "Alliance 2000." An annuity rider is also included with the Alliance 2000;
however, according to Statement of Financial Accounting Standards ("SFAS")
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from Sales of
Investments", annuity premium income is not recognized as revenue. Annuity
premium receipts for the first quarter totaled $202,444 and are recognized as
annuity contract liabilities net of a twenty percent first year load. Pursuant
to the terms of the reinsurance agreement between FAIC and Business Men's
Assurance Company, there are no first year premiums due. However, SFAS
No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts", requires this unpaid premium to be recognized as an
expense and amortized over the term of the contracts reinsured. At March 31,
1997, $3,089 of reinsurance premiums were recorded as a liability.
Combined net investment income for FAIC and the Company totaled $154,498 for
the quarter ended March 31,1997 and $151,604 for the same period in 1996. Net
investment income increased over the last two years due to the growth of FAIC's
insurance operations, which provided a larger invested asset base.
<PAGE>
For the period ended March 31, 1997, expenses totaled $484,305 representing an
increase of $139,864 over the same period of 1996. This increase was primarily
due to the growth in FAIC's insurance operations. Life policy reserve expense
totaled $101,567 for the quarter ended March 31, 1997 as compared to $95,776
for the same period in 1996. Policy reserves are established with the sale of
life insurance. Expenses related to the acquisition of life insurance are
deferred and amortized over the premium paying period of the related policy.
These expenses, which include commissions and administrative costs, totaled
$308,288 for the quarter and $236,743 for the same period in 1996, were
reclassified as deferred policy acquisition costs. Amortization of these costs
totaled $128,183 for the quarter ended March 31, 1997 and $31,329 for the same
period in 1996. Death claims incurred during the first quarter of 1997 totaled
$17,069. There were no death claims for the same period in 1996. Expenses
directly related to FAIC's agency totaled $40,809 for the first quarter of
1997. These expenses include agent's health insurance , agency meetings,
recruiting , and other expenses directly related to the sale of insurance and
annuities. Direct agency expenses totaled $35,034 for the same period in 1996.
Salaries and benefit expenses totaled $82,873 for the first quarter of 1997 and
$128,132 for the same period of 1996. The decrease of $45,259 from 1996 to
1997 is mainly attributable to the allocation of salaries when the financial
statements are consolidated. Professional fees totaled $34,157 for the first
quarter of 1997 and $10,762 in 1996. The increase of $23,395 from last year is
attributable to the development of new products and the accrual of fiscal year
1997 estimated audit fees.
During the first quarter of 1997, FKCC incurred operating losses totaling
$39,119. These losses are the result of the inclusion of operating losses from
Medical Acceptance Corporation ("MAC") in the operating results of the Company
and the equity in the losses of LGP, Inc. and Cybertyme, Inc.
Income tax expense, which is calculated based on the earnings of FAIC, totaled
$42,500 during the first quarter of 1997 and $7,627 for the same period of
1996. Current tax expense is estimated based on the effective tax rate for
fiscal year 1996.
Consolidated Financial Condition
Changes in the consolidated balance sheet of March 31, 1997 compared to
December 31, 1996 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $113,937 from December 31, 1996 to March 31, 1997.
Deferred policy acquisition costs increased $106,122 net of $128,183 of
amortization as the result of new business written by FAIC and the costs
related to existing policies entering a second duration being deferred.
Policy and contract liabilities increased $232,913 principally because of
(i) life policy reserves increased $101,567 due to policies written in 1997
and existing policies entering a second duration and (ii) annuity contract
liabilities increased $175,302 as the result of annuity premiums received which
are recorded as a liability. These increases were partially offset by a
decrease of $53,794 of death claim liabilities.
Changes in other liabilities include (i) an increase of $12,076 in accrued
payroll due to employee incentives; (ii) a decrease of $27,537 related to
commitments for Advisory Board Members; (iii) a decrease of $16,010 in
deferred tax liability; and (iv) an increase of $12,548 in federal tax payable
due to first quarter operations of FAIC.
<PAGE>
Liquidity
FAIC'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. Most of the Company's invested assets are in bonds which are readily
marketable. Although there is no present need or intent to dispose of such
investments, the Company could liquidate portions of their investments if such
a need arose.
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 three
months ended March 31, 1997
<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 May 12, 1997
Michael N. Fink, President
/s/ Thomas I. Evans Date May 12, 1997
Thomas I. Evans, Vice President/Asst. Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 8,810,204
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,810,204
<CASH> 849,964
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 855,731
<TOTAL-ASSETS> 12,645,008
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,435,282
<NOTES-PAYABLE> 0
0
0
<COMMON> 557,984
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,645,008
397,249
<INVESTMENT-INCOME> 152,357
<INVESTMENT-GAINS> 0
<OTHER-INCOME> (44,910)
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 128,183
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 20,391
<INCOME-TAX> 42,500
<INCOME-CONTINUING> (22,109)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,109)
<EPS-PRIMARY> (.004)
<EPS-DILUTED> (.004)
<RESERVE-OPEN> 379,920
<PROVISION-CURRENT> 101,567
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 481,487
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
