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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 14 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 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 Identification
incorporation or organization) number)
2285 Executive Drive, Suite 308
Lexington, KY 40505 606-299-7656
(Address of principal executive offices) (Telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title and Class
NONE
Securities registered pursuant to section 12(g) of the Act:
Title and Class
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities 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-K 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-K or any amendment to this form [ ]
Applicable only to Corporate Issuers
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 March 1, 1997
Documents Incorporated by Reference
PART IV Certain Exhibits to the Company's prior filing of Form 10-K for
1995 and the Registration Statement on Form S-1, Amendment Number 4, File
Number 33-67312, which was declared effective on March 4, 1994.
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PART I
Item 1. Business
First Alliance Corporation (the "Company") was organized on February 16, 1993
for the purpose of forming, owning and managing life insurance companies. The
Company registered with the Securities and Exchange Commission and the Kentucky
Department of Financial Institutions a $12,500,000 public stock offering.
In June of 1993, the Company sold 2,230,000 shares of its common stock to its
organizing shareholders at $.10 per share for total proceeds of $223,000. Also,
in July 1993, the Company sold an additional 600,000 shares of its common stock
at $.50 per share in a separate private placement. The initial capital of
$523,000 was primarily used to fund the Company's efforts to register the public
offering. On March 4, 1994, the registration statement for First Alliance
Corporation was declared effective.
The offering was sold in Units consisting of one share of 6% non-cumulative
convertible, redeemable, $5.00 par value preferred stock and one share of no par
value common stock for a total Unit cost of $25.00. All shares of the Company's
common stock have equal voting rights, with one vote per share, on all matters
submitted to the shareholders for their consideration. The shares of common
stock do not have cumulative voting rights except in the election of directors.
Subject to the prior rights of the holders of the preferred stock, holders of
common stock are entitled to receive dividends when and if declared by the Board
of Directors, out of Company funds legally available therefor. Each share of
preferred stock could be converted, at the holder's option, into four (4) shares
of common stock until six (6) months after the completion of the offering. The
Company could, at its option, call all or, from time to time, any portion of the
shares of preferred stock by paying the holder $25.00 per share, plus any
declared but unpaid dividends.
On October 28, 1995, the Company completed the public stock offering. The
company raised total capital of $13,750,000 which includes a 10% oversale of
$1,250,000 contemplated in the public filing. The net proceeds of the offering
were used to capitalize a life insurance subsidiary; form a venture capital
company and provide capital for the acquisition of additional life insurance or
insurance related companies. Six million dollars of the proceeds of the stock
sale were used to capitalize the life insurance subsidiary. Three million
dollars of the proceeds will be used to capitalize the venture capital company
based on a schedule as determined by the Company's Board of Directors. During
1996, $224,000 of the proceeds were used in the initial capitalization of the
Company's wholly-owned venture capital subsidiary, First Kentucky Capital
Corporation ("FKCC"). The remainder of the proceeds will provide resources for
one or more 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 additional working capital. At April
28, 1996, six months after completion of the offering, substantially all of the
preferred shares were converted to common shares.
First Alliance Corporation
The primary revenue source for the Company is provided by its wholly owned life
insurance subsidiary, First Alliance Insurance Company ("FAIC"). FAIC has
contracted with the Company to provide administrative and data processing
services for the insurance operations. Investment income provides additional
income to the Company.
First Alliance Insurance Company
On May 17, 1995, FAIC received a Certificate of Authority from the Kentucky
Department of Insurance ("KDI"). On November 1, 1995 insurance operations
commenced. FAIC has $6,000,000 of capital and surplus and is wholly owned by
the Company. FAIC has contracted with the Company to provide administrative
and data processing services. As discussed in the following paragraph, the
only expenses to be directly incurred by FAIC are direct agency expenses
including commissions.
Administration
Effective November 1, 1995, the Company entered into a service agreement with
FAIC to provide personnel, facilities, and services to FAIC. FAIC has no
employees. The services to be performed pursuant to the service agreement
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are underwriting, claim processing, accounting, processing and servicing of
policies, and other services necessary to carry on FAIC's business. The
agreement is in effect until either party provides ninety days written notice
of dermination. Under the agreement, FAIC pays monthly fees based on life and
annuity premiums recorded by FAIC. The percentages are twenty-five percent of
first year premiums; twenty percent of second year premiums; ten percent of
third year premiums; and five percent of premiums in years four and thereafter.
FAIC will retain direct agency expenses such as agent training and licensing,
agency meeting expenses, and other directly related expenditures. Pursuant to
the terms of the agreement, FAIC had incurred expenses totaling $359,662 and
$26,111 during 1996 and 1995, respectively.
On behalf of FAIC, the Company has retained the services of Bruce and Bruce
Company, consulting actuaries of Lake Bluff, Illinois. Bruce and Bruce
assisted in developing the product that the Company is marketing.
Products of FAIC
The initial insurance product being marketed is a twenty pay ordinary life
policy with an annuity rider. For issue ages 0 to 50, there is also an
annual income protection benefit rider (decreasing term rider). The income
protection rider is not available for issue ages greater than age 50.
Issue ages from 0 to 65 will use standard underwriting procedures and ages
66 through 80 will use simplified underwriting.
The product is being sold in premium units with the ability to purchase
either fractional or multiple units. If a greater accumulated annuity value
is desired, the policyholder may continue to make the premium payments, after
the completion of the twenty pay period, with the entire payment funding the
annuity.
Other products will be introduced during 1997. These products include a
single premium deferred annuity and a ten year renewable term product.
Marketing of these products will be used to meet niche market needs.
Product Marketing and Sales
FAIC's insurance operations commenced on November 1, 1995 following the
completion of the Company's public stock offering. FAIC 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. The
Company's shareholder base provides an excellent referral system for FAIC
product sales.
Once FAIC develops a substantial policyholder base in Kentucky, 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.
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<TABLE>
The following table provides certain information about FAIC's life insurance
operations for the years ended December 31, 1996 and 1995. FAIC commenced
selling life insurance on November 1, 1995 and therefore the results
provided for 1995 are for two months ended December 31, 1995:
<CAPTION>
Number of Amount of
Policies Insurance
(in thousands)
<S> <C> <C>
Issued during 1995 64 $ 5,422
Issued during 1996 907 81,940
Death claims paid during 1996 1 14
Lapses and surrenders 22 930
incurred during 1996 ---- -------
In-force December 31, 1996 948 $ 86,418
==== =======
</TABLE>
Reinsurance
Consistent with the general practice of the life insurance industry, FAIC
reinsures a portion of the coverage provided by the life insurance products
it offers. The maximum amount of risk that FAIC retains is $50,000 on any
one insured. The remaining coverage is reinsured with Business Men's
Assurance Company of Kansas City, Missouri. At December 31, 1996, FAIC has
reinsured $38,597,541 of life insurance coverage including $14,220,000 in a
ccidental death benefits.
Investments
The Company has entered into an agreement with Alpha Advisors, Inc. of
Chicago, Illinois, a registered investment advisor, to assist FAIC in
managing its investment portfolio. Alpha Advisors is an investment firm that
caters to the unique needs of life insurance companies. Alpha Advisors also
provides investment services for the Company. Fees are based on a percentage
of invested assets.
Investment activities are an integral part of the operations of FAIC. The
Kentucky Insurance Code restricts the investments of insurance companies by
the type of investment, the amount that an insurance company may invest in
any one type of investment, and the amount that an insurance company may
invest in the securities of any one issuer. The restrictions of the Kentucky
Insurance Code are not expected to have a material effect on the investment
return of FAIC. The Company is not subject to the same investment restrictions
as FAIC. Credit risk is limited by emphasizing investment grade securities and
by diversifying the investment portfolio among government and corporate bonds.
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 FAIC. Competition also is encountered from the expanding
number of banks and other financial intermediaries that offer competing
products. FAIC must also compete with other insurers to attract and retain
qualified agents to market FAIC's products.
Governmental Regulation
FAIC is subject to regulation and supervision by the KDI. The insurance laws
of Kentucky give the KDI broad regulatory authority , including powers to :
(i) grant and revoke licenses to transact business; (ii) regulate and supervise
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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.
Kentucky 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
FAIC have registered as a holding company system pursuant to the laws of the
state of Kentucky.
First Kentucky Capital Corporation
During 1996, the Company funded its wholly owned venture capital subsidiary,
First Kentucky Capital Corporation ("FKCC"), with the purchase of 224 shares
of FKCC common stock for $224,000. FKCC provides capital for Kentucky based
business for both start-up companies and for expansion of existing business.
Investments may take the form of loans, guarantees, commitments, equity, or
joint venture agreements, or any combination thereof. During 1996, FKCC
purchased the common stock of three Kentucky based businesses, Medical
Acceptance Corporation ("MAC") of Lexington, Kentucky; LGP, Inc. of Louisville,
Kentucky; and Cybertyme, Inc. of Glasgow, Kentucky.
Medical Acceptance Corporation
On April 12, 1996, FKCC purchased, from MAC, common stock of the company
representing a 51% interest for $50,000. 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 also provides MAC with a $250,000 line of credit of which MAC has drawn
$35,000 through December 31, 1996.
LGP, Inc.
On October 18, 1996, FKCC purchased from LGP, Inc., common stock of the company
representing a 49% interest for $49,000. LGP is a dating service using
interactive-video matchmaking and combining a television dating show and an
on-line profile library on the Internet. LGP commenced production of videos
during December and the shows aired in January of 1997. FKCC will also provide
LGP with a line of credit of $31,000.
Cybertyme
On November 12, 1996, FKCC purchased, from Cybertyme, Inc., 200 common shares
of the company for $80,000, which represents a 40% ownership interest.
Cybertyme provides individuals who do not have access to a personal computer
the ability to access the Internet for a hourly fee. In addition, Cybertyme
will provide educational classes regarding Internet use and other personal
computer applications.
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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 FAIC are to unaffiliated
customers. Years ended December 31,
<CAPTION>
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Premiums earned, net of reinsurance:
Life and annuity insurance operations $ 901,584 $ 63,524 $ 0
Revenues:
Life and annuity insurance operations 1,287,769 374,614 0
Venture capital operations (21,790) 0 0
Corporate operations 228,153 129,325 37,839
---------- --------- ----------
Total $1,494,132 $ 503,939 $ 37,839
========== ========= ==========
Income (loss) before income taxes:
Life and annuity insurance operations $ 446,563 $ 235,425 $ 0
Venture capital operations (115,728) 0 0
Corporate operations (519,041) (642,582) (466,775)
---------- --------- ----------
Total $ (188,206) $ (407,157) $ (466,775)
========== ========= ==========
Assets:
Life and annuity insurance operations $7,736,441 $ 6,491,729 $ 0
Venture capital operations 109,455 0 0
Corporate operations 4,685,176 5,156,533 3,490,205
----------- ---------- ---------
Total $12,531,072 $11,648,259 $3,490,205
=========== ========== =========
</TABLE>
Employees
As of December 31, 1996, the Company had nine full time employees.
Item 2. Properties
The Company currently leases approximately 5,400 square feet of office space
in Lexington, Kentucky. On August 31, 1995, the Company entered into a
sublease agreement with Bizwill, Inc. for additional space on the same floor
as the Company's current lease. The sublease agreement is for a period from
October 1, 1995 to March 31, 1998. The current lease, which expired in May
of 1996, was extended until March 31, 1998. Combined annual rental payments
totaled $72,868 and $41,490 for 1996 and 1995, respectively.
Item 3. Legal Proceedings
The Company has received notice of a claim and potential litigation related
to an automobile accident in October 1996 which involved an officer of the
Company, who was driving the automobile. The claim alleges that the officer
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was acting in the course and scope of employment with the Company at the time
of the accident. The outcome of this matter is not predictable with assurance.
Although any actual liability is not determinable as of December 31, 1996, the
Company believes that any liability resulting from this matter, after taking
into consideration insurance coverages, should not have a material adverse
effect on the Company's financial position.
The Company, nor any of its subsidiaries, are presently engaged in any other
material pending litigation which might have an adverse effect on its net
assets.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a.) Market Information
<TABLE>
The Company's common stock is traded through the investment services of
J.C. Bradford and Company of Louisville, Kentucky. The Company's common
stock began trading on July 28, 1996 pursuant to the terms and conditions
of the Company's public stock offering. The following summarizes quarterly
high and low bid transactions subsequent to the commencement of trading:
<CAPTION>
Quarter Ended High Bid Low Bid
<S> <C> <C>
September 30, 1996 6 5
December 31, 1996 6 5
</TABLE>
(b.) Holders
As of March 1, 1997, there are approximately 5,500 shareholders of the
Company's outstanding common stock.
(c.) Dividends
The Company has not paid any cash dividends since inception (February 16, 1993).
Additionally, dividends are not anticipated in the foreseeable future.
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Item 6 Selected Financial Data
<TABLE>
The following table provides selected consolidated operating results for the
Company for the years ended December 31, 1996, 1995 and 1994 and selected
balance sheet information at December 31, 1996, 1995 and 1994.
<CAPTION>
Operating Data: 1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Premium income $ 901,584 $ 63,524 $ -
Net investment income 585,244 440,415 37,389
Benefits and expenses 1,682,338 911,096 504,164
Federal income taxes 111,653 35,897 -
Net loss (299,859) (443,054) (466,775)
Net loss per common share (0.054) (0.139) (0.162)
Cash dividend per common share - - -
<CAPTION>
Balance Sheet Data: 1996 1995 1994
<S> <C> <C> <C>
Total assets $ 12,531,072 $ 11,648,259 $ 3,490,205
Life policy reserves 379,920 25,272 0
Annuity contract liabilities 504,323 32,835 0
Total liabilities 1,556,636 306,727 18,978
</TABLE>
Item 7 Management's Discussion and Analysis of Financial Conditions 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 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 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 statement. In addition to the risks and uncertainties of
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ordinary business operations, the forward-looking statements of the Company
referred to above are also subject to risks and uncertainties.
The Company operates in a highly competitive business environment, and its
operations could be negatively affected by matters discussed under the
caption, "Competition," on page 4 of this Form 10-K.
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto beginning on page F-1.
Results of Operations
Revenues totaled $1,494,132 in 1996, $503,939 in 1995 and $37,389 in 1994.
Since the Company commenced insurance operations in November of 1995, and
1996 was the first full year of operation for FAIC, the primary source of
revenue is life insurance premium income. Premium income for 1996 increased
by $838,060 in comparison to 1995 results. There were no premium revenues
during 1994 since the Company was in its public stock offering. 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 totaled $563,314 during 1996 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 December
31, 1996, $32,272 of reinsurance premiums were recorded as a liability.
Investment income is an integral component of total revenues for life
insurance companies. Combined net investment income for FAIC and the
Company totaled $585,244 for the year ended December 31, 1996 and $440,415
for the same period in 1995. Net investment income in 1994 totaled $37,389
since the Company was in its public stock offering and the invested asset base
was smaller. Net investment income increased over the last two years due to
the growth of FAIC's insurance operations.
For the year ended December 31, 1996, expenses totaled $1,682,338 representing
a $771,242 increase over the same period of 1995. This increase was primarily
due to the growth in FAIC's insurance operations. There were no life insurance
related expenses during 1994 since FAIC commenced operations in November of
1995. Life policy reserve expense totaled $354,648 in 1996 as compared to
$25,272 in 1995. Policy reserves are established with the sale of life
insurance. Policy reserve expense for 1996 represents sales for the entire
year while 1995 amounts represent two months of sales. 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 $859,561 and $64,164 during 1996 and 1995,
respectively, were reclassified as deferred policy acquisition costs.
Amortization of these costs totaled $161,163 during 1996 and $12,952 during
1995. Death claims incurred during 1996 totaled $68,574 which are net of
$40,000 of death benefits reinsured. Expenses directly related to FAIC's
agency totaled $143,984 for the year ended December 31, 1996. 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$31,085 during 1995.
Salaries and benefit expenses totaled $454,755 in 1996 and $545,327 in 1995.
This decrease of $90,572 is the primary result of a reduction of bonuses to
the executive officers and the allocation of salaries when the financial
statements are consolidated. Professional fees totaled $119,472 for 1996
and $68,490 for 1995. Audit fees of $19,250 related to the 1995 audit were
expensed during 1996. During 1996, the Company issued the common shares sold
during the public stock offering. Fees related to the issuance of these shares
and the ongoing maintenance of accounts totaled $15,391.
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During 1996, FKCC commenced operations and incurred operating losses totaling
$115,728. These losses are the primary result of the inclusion of operating
losses of Medical Acceptance Corporation ("MAC") in the operating results of
the Company. FKCC purchased 51% of MAC on April 12, 1996. MAC has incurred
operating losses since inception and therefore the Company recognizes 100% of
MAC's operating results. The losses of MAC totaled $55,241 since the date of
acquisition. Intangible assets related to the acquisition of MAC totaling
$26,623 were written off during 1996 due to MAC's continuing operating losses.
LGP, Inc. has incurred operating losses since inception totaling $31,816.
Accordingly, the Company recognized 100% of these losses in operations as a
component of net investment income.
Income tax expense, which is calculated based on the earnings of FAIC, totaled
$111,653 during 1996 and $35,897 during 1995. Current tax expense is based
on taxable income as calculated based on federal Internal Revenue Service code
requirements. These requirements include adjustments for such items as reserves
and deferred policy acquisition costs. Deferred taxes are based on temporary
differences which are the result of different accounting practices for financial
reporting and tax reporting.
Consolidated Financial Condition
Changes in the consolidated balance sheet of 1996 compared to 1995 reflect the
operations of the Company and the capital transactions discussed below.
Total investments increased $5,280,736 principally because of : (i) the
conversion of cash and cash equivalents to higher yielding and longer term
investments; (ii) cash provided from the insurance operations of FAIC;
(iii) lending agreements with two individuals which resulted in the
establishment of notes receivable of $221,096; (iv) two related party common
stock investments in start-up companies in Topeka, Kansas and Jefferson
City, Missouri (see Note 4 to the audited financial statements); and
(v) other invested assets of $97,000 of the Company's venture capital
subsidiary, FKCC. These increases were partially offset by the unrealized loss
adjustment to fixed maturity investments recognized as an adjustment to
shareholders' equity in accordance with SFAS No. 115.
Deferred policy acquisition costs increased $698,398 net of $161,163 of
amortization as the result of new business written by FAIC.
Policy and contract liabilities increased $1,179,874 principally because
of (i) life policy reserves increased $354,648 due to premiums written for
an entire year and policies issued during 1995 entering a second duration;
(ii) an increase in the unearned revenue liability of $109,862 related to
the recognition of the first year load on annuity premiums as a liability
and amortized into income over the premium paying period of the related
policies; (iii) annuity premiums received recognized as annuity contract
deposits and recorded as a liability which increased $471,488; (iv) the
accrual of a death claim payable of $93,794 at December 31, 1996; and
(v) policyholder premium deposits totaling $114,015 which accumulate interest
and will result in the payment of premiums over the premium paying period of
the policy.
Changes in other liabilities include an increase of $30,003 in deferred
federal income taxes related to the operations of FAIC and an increase in
amounts payable to the Company's Advisory Board Members of $32,122.
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.
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Item 8. Financial Statements and Supplementary Data
The financial statements listed in Item 14(a) (1) and (2) are included in
this report beginning on page 15.
Item 9. Changes in Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
PART III
Item 10. Directors and Executive Officers
<TABLE>
<CAPTION>
Name Age Position Term
<S> <C> <C> <C>
Scott J. Engebritson 38 Chairman of the Board/Director 1 Year
Chris J. Haas 51 Vice Chairman/Secretary 1 Year
Treasurer/Director
Michael N. Fink 41 President/Director 1 Year
Steven B. Bing 49 Director 1 Year
Daniel D. Briscoe 53 Director 1 Year
Ballard W. Cassady, Jr. 45 Director 1 Year
Jimmy Dan Conner 43 Director 1 Year
Denzel E. ("Denny") Crum 59 Director 1 Year
James M. Everett 51 Director 1 Year
Charles Hamilton 70 Director 1 Year
Ronda S. Paul 53 Director 1 Year
The executive officers serve at the direction of the Board of Directors and
are appointed at the annual meeting of the Board. Directors will be elected
annually by the shareholders. The following is a brief description of the
previous business background of each of the executive officers and directors.
SCOTT J. ENGEBRITSON: Mr. Engebritson serves as Chairman of the Board of
Directors. Mr. Engebritson has nineteen years of experience in the insurance
industry. From 1978 to 1984, he was associated with Liberty American
Corporation and Liberty American Assurance Corporation as Regional Director of
Sales and Director of Customer Services. In December of 1984, Mr. Engebritson
became affiliated with United Trust, Inc., an Illinois insurance holding
company, where he served as Regional Director of Sales, Agency Director and
Assistant to the President. In December of 1987, Mr. Engebritson assisted in
the organization of United Income, Inc., an Ohio insurance holding company,
where he served as President and a Director of United Income, Inc. and United
Security Assurance Company, United Income's insurance subsidiary, through
February of 1993. He has been listed in Who's Who in Life Insurance since
1988.
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<PAGE> 12
CHRIS J. HAAS: Mr. Haas serves as Vice-Chairman of the Board of Directors,
Secretary and Treasurer. Mr. Haas has eighteen 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 the company's Chief Financial Officer. He also served as
Executive Vice-President of Ohio-based United Income, Inc. and Chief Financial
Officer of United Security Assurance Company from March 1990 to March of 1993.
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. B.S. in
accounting from Ball State University.
MICHAEL N. FINK: Mr. Fink serves as President of the Company and a Director.
Mr. Fink has sixteen 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 of 1988, Mr. Fink became affiliated
with United Income, Inc. and United Security Assurance Company as Agency
Director and Assistant to the President. He ended his affiliation with these
companies in June of 1993.
STEVEN B. BING: Director. Mr. Bing is associated with R. Gene Smith, Inc.
From 1984-1992, Mr. Bing was Senior Vice President, Assistant to the Chairman,
and President of ICH Corporation. From 1972 through 1984, Mr. Bing was
associated with the University of Louisville as Assistant to the President,
Vice President for University Relations and Vice President of the University
of Louisville Foundation and currently serves on the University of Louisville
Board of Trustees. In 1970-1972, Mr. Bing served as Senior Policy Analyst for
Kentucky Governor Wendell Ford. Mr. Bing serves on the Board of Directors of
Caretenders Healthcare Corp.; The Healing Place and several other companies.
BA with honors from University of Kentucky. JD with honors from the University
of Louisville.
DANIEL D. BRISCOE: Director. Political consultant and attorney. Former
Kentucky Commissioner of Insurance (1981-1984). Past Chairman of the Kentucky
State Democratic Party. Since 1989, has served on the Kentucky State Fair
Board. Six-year member of the University of Louisville Board of Directors
(1981-1987). BA in History and Political Science from Centre College. JD from
the University of Louisville.
BALLARD W. CASSADY, JR.: Director. Executive Vice President of the Kentucky
Bankers' Association since 1986. President and partner in TRI-B Coal Company in
Pikeville. Partner in CA-JA Enterprises. Director of Sandy Valley Explosives
Company. Commissioner of the Kentucky Department of Financial Institutions
from 1984-1986. Serves on the Board of Directors of Prochnow Graduate School of
Banking at the University of Wisconsin and LSU School of Banking in Louisiana.
B.S. from Transylvania University and MBA from Vanderbilt University.
JIMMY DAN CONNER: Director. President of Old Colony Insurance Service, Inc.,
an independent insurance agency. Involved in Crusade for Children and Boy Scouts
of America. Sales Manager of Allied Foods, Atlanta, Georgia 1982-1983 and
Torbitt & Castleman Co. in Buckner, Kentucky 1977-1982. Professional basketball
player with the Kentucky Colonels of the American Basketball Association
1976-1977. Captain of the University of Kentucky basketball team,
All American Honorable Mention and Academic All American in 1975. Kentucky
Mr. Basketball 1971. Business Administration major at the University of
Kentucky.
DENZEL E. ("DENNY") CRUM: Director. Head basketball coach at the University
of Louisville since 1971. On the Board of Directors of the National Association
of Basketball Coaches (NABC). The Sporting News 1986 "Coach of the Year." The
Lexington Herald Leader's 1990 "Sportsman of the Decade." 1994 Naismith
Basketball Hall of Fame Inductee. Numerous other Kentucky and national coaching
awards. BA in Physical Education from UCLA where he played basketball for John
Wooden.
JAMES M. EVERETT: Director. Director, Kentucky Council Area Development
Districts. Member of Governor's Earthquake Hazards and Safety Technical
Advisory Panel (GEHSTAP) since 1983. On the Board of Directors of Kentuckians
for Better Transportation (KBT). Member of the Governor's Local Issues
Conference Planning Committee. Fulton County Judge-Executive 1982-1992. B.S.
in Vocational Agriculture and M.S. in Horticulture from Murray State University.
<PAGE>
<PAGE> 13
CHARLES HAMILTON: Director. Owns and operates numerous interests in real
estate, agri-business and agriculture. Director of Bullitt County Farm Bureau
for last 24 years. Vice President and Director of Bullitt County Bank. Former
Kentucky Commissioner of Agriculture and past Chairman of the Governor's Task
Force on Agriculture. Past member of the Kentucky State Fair Board. Recipient
of the 1992 Distinguished Services Award from the Kentucky Association
of Conservation Districts. 1980 and 1991 recipient of the Kentucky Pork
Producers Association Outstanding Service Award. B.S. in Agriculture from the
University of Kentucky.
RONDA S. PAUL: Ms. Paul serves as General Counsel and Director for the Company.
Attorney. Director of the Kentucky Division of Securities from 1982 through
1991. Attorney for the Kentucky Department of Banking and Securities 1980-1981.
On the faculty of the College of Business and Economics at the University of
Kentucky 1971-1978. PhD in finance and accounting from Purdue University and
JD from the University of Kentucky.
Item 11. Executive Compensation
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth amounts earned by executive officers as
compensation over the past three years:
Annual Compensation
Incentive Other Annual
Year Salary Compensation Compensation
------ --------- ------------ ------------
<S> <C> <C> <C> <F1> <C> <F2>
Scott J. Engebritson 1996 $ 75,563 $ 33,652 $ 7,200
Chairman/Director 1995 54,170 55,541 6,200
1994 50,000 38,000 6,000
Chris J. Haas 1996 75,563 33,652 7,200
Vice Chairman/ 1995 54,170 55,541 6,200
Secretary/Treasuer 1994 50,000 38,000 6,000
Director
Michael N. Fink 1996 75,563 41,580 7,200
President/Director 1995 54,170 56,176 6,200
1994 50,000 38,000 6,000
<FN>
<F1>
Includes incentive compensation pursuant to the Executive Employment
Agreement totaling $2,541 in 1995. The 1995 amount also includes bonus
payments as recommended by the Compensation Committee of the Board based
upon superior performance in achieving corporate goals.
<F2>
Amounts paid for auto allowance.
</FN>
</TABLE>
<PAGE>
<PAGE> 14
Compensation of Directors
Each Director of the Company, excluding Messrs. Engebritson, Haas and Fink,
receives a $1,000 annual retainer. Additionally, each Director is paid $250
per meeting attended for the Company and its subsidiaries. During 1996,
there were three regular Board of Directors meetings for the Company and each
of its subsidiaries.
Executive Employment Agreements
On October 23, 1995, the Company entered into Executive Employment Agreements
with Messrs. Engebritson, Haas and Fink. The employment agreements are for a
term of four years beginning November 1, 1995. Annual compensation under the
agreement for each Executive is $75,000 adjusted annually for the increase in
the Consumer Price Index Labor Component. Incentive compensation is based on
percentages of first year life and renewal insurance premium of the FAIC
"Alliance 2000" product. Also included in the agreement is an annual auto
allowance of $7,200. Additionally, the Company provides term life insurance
coverage in the amount of $500,000 and disability coverage for each Executive.
Item 12. Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
The following table sets forth information as of March 1, 1997, regarding
ownership of Common Stock of the Company by management and the only persons
known by the Company to own beneficially more than 5% thereof:
Name and Address of Amount and Nature Percent of
Title and Class Beneficial Owner of Beneficial Ownership Class
- --------------- ---------------------- ----------------------- ----------
<S> <C> <C> <C>
Common Stock Scott J. Engebritson 427,500 <F1> 7.66
3945 Rosalie Lane
Lexington, KY 40510
Common Stock Chris J. Haas 400,000 <F2> <F3> 7.17
1188 Sheffield Court
Lexington, KY 40509
Common Stock Michael N. Fink 500,000 <F3> 8.96
1121 Chetford Drive
Lexington, KY 40509
<FN>
<F1>
These shares are held in trust for two children and a nephew of Mr. Engebritson,
who is the trustee.
<F2>
Mr. Haas has two adult children who each own 50,000 shares. Mr. Haas
disclaims any beneficial ownership of such shares.
<F3>
These shares are owned jointly with spouse.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions
NONE
<PAGE>
<PAGE> 15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 and 2 Financial Statements and Schedules
The consolidated financial statements and financial statement schedules
of First Alliance Corporation presented in this report are listed in the
index on Page F-1.
3 Exhibits
3(i) Articles of Incorporation, as amended(1)
3(ii) By-laws, as amended (1)
4 Instruments defining the rights of security holders, including
indentures (1)
10 Material Contracts
(a) Lease (1)
(b) Sub-lease (2)
(c) Advisory Board Contract (1)
(d) Service agreement between First Alliance Insurance Company and
First Alliance Corporation. (2)
(e) Management Employment Agreements (2)
11 Statement re computation of per share earnings (3)
(b) Reports on Form 8-K
NONE
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1,
Amendment Number 4, File Number 33-67312, which was declared effective on
March 4, 1994, and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's 1995 Form 10-K, File Number
33-67312, and incorporated herein by reference.
(3) Note 2 in Notes to Consolidated Financial Statements included in this
Report on Page F-8
<PAGE>
<PAGE> 16
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/Scott J. Engebritson Date 3/24/97
Scott J. Engebritson, Chairman/Director
By /s/Chris J. Haas Date 3/24/97
Chris J. Haas, Vice-Chairman/Secretary
Treasurer/ Director
By /s/Thomas I. Evans Date 3/24/97
Thomas I. Evans, Vice-President Accounting/
Assistant Secretary
<PAGE>
<PAGE> 17
SIGNATURES
Pursuant to the requires 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/Scott J. Engebritson Date 3/24/97
Scott J. Engebritson, Chairman/Director
By /s/Chris J. Haas Date 3/24/97
Chris J. Haas, Vice-Chairman/Secretary/
Treasurer/Director
By /s/Michael N. Fink Date 3/24/97
Michael N. Fink, President/Director
By Date
Steven B. Bing, Director
By /s/Daniel D. Briscoe Date 3/24/97
Daniel D. Briscoe, Director
By /s/Ballard W. Cassady Date 3/24/97
Ballard W. Cassady, Jr., Director
By /s/Jimmy Dan Conner Date 3/24/97
Jimmy Dan Conner, Director
By /s/Denzel E. Crum Date 3/24/97
Denzel E. Crum, Director
By /s/James M. Everett Date 3/24/97
James M. Everett, Director
By /s/Charles Hamilton Date 3/24/97
Charles Hamilton, Director
By /s/Ronda S. Paul Date 3/24/97
Ronda S. Paul, Director
<PAGE>
<PAGE> F-1
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Consolidated Financial Statements Numbers
<S> <C>
Report of Independent Auditors. . . . .. . . . . .. . . . . . F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . F-3
Consolidated Statements of Operations for the years ending
December 31, 1996, 1995 and 1994 . .. . . . . .. . . . . F-5
Consolidated Statement of Changes in Shareholders' Equity
for the years ending December 31, 1996, 1995 and 1994. . . . F-6
Consolidated Statements of Cash Flows for the years ending
December 31, 1996, 1995 and 1994 . .. . . . . .. . . . . . F-7
Notes to Consolidated Financial Statements. . . . .. . . . . . F-8
Consolidated Financial Statement Schedules
Schedule I Summary of Investments . . . . .. . . . . . F-19
Schedule II Condensed Financial Information of Registrant . F-20
Schedule III Supplementary Insurance Information . .. . . . F-23
Schedule IV Reinsurance . . . .. . . . . . . . .. . . . F-24
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefor, have been omitted.
<PAGE>
<PAGE> F-2
Report of Independent Auditors
The Shareholders and Board of Directors
First Alliance Corporation
We have audited the consolidated financial statements of First Alliance
Corporation and subsidiaries listed in the accompanying index to the
consolidated financial statements. Our audit also included the financial
statement schedules listed in the index. These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 audits provide a reasonable
basis for our opinion. In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of First Alliance Corporation and subsidiaries at
December 31, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles. Also,
in our opinion, the financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Ernst & Young LLP
Louisville, Kentucky
January 27, 1997, except for Note 13,
as to which the date is March 14, 1997
<PAGE>
<PAGE> F-3
</TABLE>
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
------------ -----------
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities, at fair value
(amortized cost, $10,095,461 and $2,482,680
in 1996 and 1995, respectively) $ 9,946,130 $ 2,496,695
Notes receivable 221,096 -
Investments in unconsolidated affiliates 97,184 -
Short-term investments - 2,611,979
------------ ------------
Total investments 10,264,410 5,108,674
Cash and cash equivalents 908,276 6,087,294
Investments in related parties 125,000 -
Receivables from related parties 46,279 -
Accrued investment income 171,416 235,707
Amounts recoverable from reinsurer 40,000 -
Deferred policy acquisition costs 749,610 51,212
Prepaid expenses 46,625 53,599
Office furniture and equipment, less accumulated
depreciation of $38,790 and $17,957 in 1996
and 1995, respectively 47,722 51,074
Advances to agents 45,845 48,241
Premiums due 42,522 -
Other assets 43,367 12,458
------------ ------------
Total assets $ 12,531,072 $ 11,648,259
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE> F-4
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
1996 1995
------------- ----------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Policy and contract liabilities:
Annuity contract liabilities $ 504,323 $ 32,835
Life policy reserves (net of reinsurance ceded
reserves of $49,162 and $602 in 1996 and
1995, respectively) 379,920 25,272
Deposits on pending policy applications 122,729 118,934
Unearned revenue 118,046 8,184
Policyholder premium deposits 114,015 -
Claims payable 93,794 -
Reinsurance premiums payable 32,272 -
----------- -----------
Total policy and contract liabilities 1,365,099 185,225
Federal income taxes payable:
Current 2,154 32,247
Deferred 38,418 8,415
Other taxes payable 26,640 10,202
Commissions, salaries, wages and benefits payable 49,711 19,421
Accounts payable and accrued expenses 74,614 51,217
----------- -----------
Total liabilities 1,556,636 306,727
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, 6% non-cumulative convertible
callable, $5.00 par and liquidation value;
550,000 shares authorized and 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 December 31, 1996 and
2,830,000 shares issued and 3,380,000
outstanding at December 31, 1995 at $.10
stated value (Note 2) 557,984 338,000
Additional paid in capital 11,981,803 9,411,216
Unrealized investment gains (losses) (net of deferred
federal income tax benefit (expense) of $50,773
in 1996 and ($4,765) in 1995 (98,558) 9,250
Retained earnings - deficit (1,466,793) (1,166,934)
------------ ------------
Total shareholders' equity 10,974,436 11,341,532
------------ ------------
Total liabilities and shareholders' equity $ 12,531,072 $ 11,648,259
============= =============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE> F-5
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Revenues
Gross premium income $ 944,011 $ 63,524 $ -
Reinsurance premiums ceded (42,427) - -
--------- -------- ---------
Net premium income 901,584 63,524 -
Investment activity:
Net investment income 585,244 440,415 37,389
Net realized investment loss (4,368) - -
Other income 11,672 - -
--------- -------- ---------
Total revenue 1,494,132 503,939 37,389
Benefits and expenses
Increase in policy reserves 354,648 25,272 -
Death claims (net of reinsurance
of $40,000) 68,574 - -
Interest credited on annuities
and premium deposits 17,520 98 -
Amortization of deferred policy
acquisition costs 161,163 12,952 -
Selling, administrative and
general insurance expenses 172,142 90,664 -
Salaries, wages and employee
benefits 454,755 545,327 389,643
Professional fees 119,472 68,490 31,029
Miscellaneous taxes 80,844 17,002 -
Advisory board and directors fees 53,122 6,180 -
Rent expense 38,854 41,490 31,851
Depreciation expense 21,342 13,520 3,810
Amortization of goodwill and
other intangible assets 26,623 - -
Other operating costs and
expenses 113,279 90,101 47,831
--------- -------- ---------
Total benefits and expenses 1,682,338 911,096 504,164
--------- -------- ---------
Loss before income tax expense (188,206) (407,157) (466,775)
--------- -------- ---------
Income tax expense 111,653 35,897 -
--------- -------- ---------
Net loss $(299,859) $(443,054) $(466,775)
========= ======== =========
Net loss per common share $ (0.054) $ (0.139) $ (0.162)
========= ======== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE> F-6
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Preferred stock:
Balance, beginning of year $ 2,750,000 $ 848,630 $ -
Sale of shares in public offering
(380,274 shares in 1995 and 169,726
shares in 1994) - 1,901,370 848,630
Conversion of preferred to common
(549,960 preferred shares to
2,199,840 common shares) (2,749,800) - -
Other changes (200) - -
----------- ---------- ----------
Balance, end of year - 2,750,000 848,630
Common stock:
Balance, beginning of year 338,000 299,973 283,000
Sale of shares in public offering
(380,274 shares in 1995 and 169,726
shares in 1994) - 38,027 16,973
Conversion of preferred to common
(549,960 preferred shares to
2,199,840 common shares) 219,984 - -
----------- ---------- ----------
Balance, end of year 557,984 338,000 299,973
Additional paid-in capital:
Balance, beginning of year 9,411,216 3,046,504 202,035
Sale of shares in public offering - 7,567,453 3,377,547
Cost of public offering 40,571 (1,202,741) (533,078)
Conversion of preferred to common 2,530,016 - -
----------- ---------- ----------
Balance, end of year 11,981,803 9,411,216 3,046,504
Unrealized appreciation (depreciation)
of securities:
Balance, beginning of year 9,250 - -
Change in unrealized appreciation
(depreciation) (107,808) 9,250 -
----------- ---------- ----------
Balance, end of year (98,558) 9,250 -
Retained earnings:
Balance, beginning of year (1,166,934) (723,880) (257,105)
Net loss (299,859) (443,054) (466,775)
----------- ---------- ----------
Balance, end of year (1,466,793) (1,166,934) (723,880)
Total shareholders' equity $ 10,974,436 $ 11,341,532 $ 3,471,227
=========== =========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE> F-7
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (299,859) $ (443,054) $ (466,775)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Interest credited on annuities
and premium deposits 17,422 98 -
Provision for depreciation 21,342 13,520 3,810
Amortization of goodwill and
other intangible assets 26,623 - -
Amortization of premium on fixed
maturity investments 21,074 383 -
Realized investment loss 4,368 - -
Provision for deferred federal
income taxes 85,541 3,650 -
Loss on investments in
unconsolidated affiliates 31,816 - -
Decrease/(increase) in accrued
investment income 65,262 (220,399) (15,308)
Receivables from related parties (46,279) - -
Reinsurance recoverable (40,000) - -
Increase in deferred policy
acquisition costs, net (698,398) (51,212) -
Increase in premiums due (42,522) - -
Increase in other assets (21,539) (32,832) (54,148)
Increase in policy reserves 354,648 25,272 -
Increase in deposits on pending
policy applications 3,795 118,934 -
Increase in claims payable 93,794 - -
Increase in reinsurance premiums
payable 32,272 - -
Change in current federal income
taxes (30,093) 32,247 -
Increase in commissions, salaries,
wages and benefits payable 28,790 19,421 -
Increase in accounts payable,
accrued expenses and other
liabilities 10,725 42,441 7,066
----------- ---------- ----------
Net cash used in operating
activities (381,218) (491,531) (525,355)
Investing activities:
Purchase of available-for-sale
fixed maturities (8,886,387) (2,483,063) (2,621,513)
Maturity of available-for-sale
fixed maturities 1,248,164 2,621,513 -
Short-term investments (acquired)
disposed, net 2,611,979 (2,611,979) -
Increase in notes receivable (221,096) - -
Purchase of investments in
unconsolidated affiliates (129,000) - -
Purchase of investments in
related parties (125,000) - -
Purchase of furniture and equipment (14,974) (54,865) (7,898)
----------- ---------- ----------
Net cash used in investing
activities (5,516,314) (2,528,394) (2,629,411)
Financing activities:
Deposits on annuity contracts 566,016 40,921 -
Policyholder premium deposits 111,927 - -
Proceeds from stock offering - 9,506,850 4,243,150
Cost of stock offering 40,571 (1,202,741) (533,078)
----------- ---------- ---------
Net cash provided by financing
activities 718,514 8,345,030 3,710,072
----------- ---------- ---------
Increase in cash and cash
equivalents (5,179,018) 5,325,105 555,306
Cash and cash equivalents,
beginning of year $ 6,087,294 $ 762,189 $ 206,883
----------- ---------- ---------
Cash and cash equivalents,
end of year $ 908,276 $6,087,294 $ 762,189
=========== ========== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE> F-8
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Nature of Operations
First Alliance Corporation (the "Company") was incorporated on February 16, 1993
for the primary purpose of forming, owning and managing life insurance
companies. On March 4, 1994, the Company's registration statement filed with
the Securities and Exchange Commission and the Kentucky Department of Financial
Institutions for a $12,500,000 public stock offering, which included a 10%
"oversale" provision (additional sales of $1,250,000), was declared effective.
The Company completed its public stock offering on October 28, 1995, raising
total capital of $13,750,000.
The Company has a wholly-owned insurance subsidiary, First Alliance Insurance
Company ("FAIC"), which is domiciled in Kentucky. FAIC was incorporated on
December 29, 1994 and initially capitalized with $3,000,000 on January 10, 1995.
The Company made an additional $3,000,000 capital contribution on May 15, 1995
and the Kentucky Department of Insurance ("KDI") granted FAIC a Certificate of
Authority on May 17, 1995. Insurance operations commenced on November 1, 1995.
FAIC's initial product is a twenty pay ordinary life insurance policy with a
flexible premium deferred annuity rider. For issue ages 0 to 50, a decreasing
term rider is included. Other products currently being developed are a single
premium deferred annuity and a ten year term policy. The Company is licensed
and sells its product in the state of Kentucky. Once a substantial policyholder
base is established in Kentucky, marketing efforts may be expanded into
additional states.
The Company also has a wholly-owned venture capital subsidiary, First Kentucky
Capital Corporation ("FKCC"), which was capitalized with $224,000 during 1996
and commenced operations on April 12, 1996. FKCC provides capital for Kentucky
based businesses for both start-up companies and for expansion of existing
businesses. Investments may take the form of loans, guarantees, commitments,
equity, or joint venture agreements, or any combination thereof. FKCC invested
in three Kentucky businesses during 1996.
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
FAIC, differ from statutory accounting practices prescribed or permitted by
the KDI.
During the course of the public stock offering, the Company was in the
development stage. Insurance operations commenced on November 1, 1995 and
therefore, the Company is no longer in the development stage. As a result,
operating results in the accompanying consolidated financial statements are
presented for each of the periods ended December 31, 1996, 1995 and 1994.
Certain amounts from prior years have been reclassified to conform with the
current year's presentation. These reclassifications had no significant
effect on previously reported net income or shareholders' equity.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company, FAIC, FKCC and Medical Acceptance Corporation
(" MAC"). All intercompany accounts and transactions are eliminated in
consolidation.
Management's Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could
change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
Investments
The Company classifies all of its fixed maturities as available-for-sale.
Available-for-sale fixed maturities are carried at fair value with
unrealized gains and losses, net of applicable taxes, reported as a separate
component of shareholders' equity.
Investments with original maturities between three months and one year are
classified as short-term investments and are carried at cost which
approximates fair value. 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.
Realized gains and losses on sales of investments are recognized in operations
on the specific identification basis. Interest earned on investments is
included in net investment income.
Notes receivable are reported at unpaid principal balance.
Investments in related parties are reported at cost (see Note 4).
Investments in unconsolidated affiliates consist of common stock investments
and are recorded using the equity method of accounting, with gains and losses
reported 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 leases approximately 5,400 square feet pursuant to a 2,700
square foot lease agreement and a 2,700 square foot sub-lease agreement.
Both lease agreements expire on March 31, 1998. Aggregate minimum lease
payments for 1997 and 1998 are approximately $75,000 and $19,000,
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.
<TABLE>
Deferred policy acquisition costs are summarized below:
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Balance, beginning of year $ 51,212 $ -
Policy acquisition costs, deferred 859,561 64,164
Amortization (161,163) (12,952)
--------- ---------
Balance, end of year $ 749,610 $ 51,212
========= =========
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.
<PAGE>
<PAGE> F-10
2. Significant Accounting Policies (continued)
Annuity Contract Liabilities
Annuity contract liabilities are computed using the retrospective deposit
method and represent policy account balances less the first year
non-refundable fee or "load" charged on first year annuity considerations
plus interest credited at approximately 6.5%. 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 are recognized as revenue when due.
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".
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 and has full voting
rights. The preferred stock has no voting rights, has a par and liquidation
value of $5.00 per share of which dividends, if and when declared, will be paid
at the rate of 6% of the par value, and was convertible into four shares
of common stock until April 28, 1996 (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 April 28, 1996. Accordingly, the stock sold in the public
offering was recorded as outstanding and not issued until April 28, 1996.
Additionally, the share certificates issued were not tradeable until
July 28, 1996.
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.
2. Significant Accounting Policies (continued)
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 year ended December 31, 1996,
all shares are assumed to be outstanding for the entire year. Shares issued
during 1995 are assumed to be outstanding for 1/2 month of the month in which
they are sold and shares issued prior to January 1, 1995 are assumed to be
outstanding for the entire year. The weighted average outstanding common shares
is 5,579,840, 3,196,125 and 2,886,938 at December 31, 1996, 1995 and 1994,
respectively.
3. Investments
</TABLE>
<TABLE>
The amortized cost and fair value of investments in fixed maturities at
December 31, 1996 and 1995 are summarized as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996: Cost Gains Losses Value
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. government bonds $ 7,315,121 $ - $(145,091) $ 7,170,030
Municipal bonds 1,000,695 16,253 (7,873) 1,009,075
Corporate bonds 1,779,645 4,715 (17,335) 1,767,025
----------- -------- -------- ----------
$10,095,461 $ 20,968 $(170,299) $9,946,130
=========== ====== ======== ==========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995: Cost Gains Losses Value
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. government bonds $ 1,482,395 $ 4,105 $ - $1,486,500
Corporate bonds 1,000,285 9,910 - 1,010,195
----------- ------- -------- ----------
$ 2,482,680 $14,015 $ - $2,496,695
=========== ====== ======== ==========
</TABLE>
<TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1996, 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 Fair
Cost Value
----------- ----------
<S> <C> <C>
Due after one year through five years $ 5,514,949 $5,469,833
Due after five years through ten years 4,580,512 4,476,297
----------- ----------
$10,095,461 $9,946,130
=========== ==========
</TABLE>
The fair values for investments in fixed maturities are based on quoted market
prices.
Included in investments are securities which have a fair value of $991,386 at
December 31, 1996, which are on deposit with the KDI.
The Company limits credit risk by emphasizing investment grade securities and by
diversifying its investment portfolio among government and corporate bonds. As
a result, management believes that significant concentrations of credit risk do
not exist.
<PAGE>
<PAGE> F-12
The Company has a $175,000 line of credit agreement with Mr. Rick Meyer,
President of First American Capital Corporation (see Note 4). The line of
credit bears interest at an annual rate of 10.25%. The term of the line of
credit agreement extends until March 1, 1997 at which time it converts to a
thirty-six month promissory note bearing interest at 10.25%. The Company has
a perfected security interest in amounts due Mr. Meyer from United Security
Assurance Company which will provide for payment of the note. At
December 31, 1996, $128,500 had been drawn on this line of credit.
The Company has entered into a line of credit agreement with Mr. James Hayslip
of Successful Solutions, Inc. in the amount of $100,000. The line of credit,
which bears interest at an annual rate of 20%, will terminate on July 31, 1997
unless extended by written agreement. The entire principal balance plus
accrued interest is due and payable on July 31, 1997. At December 31, 1996,
$57,000 had been drawn on this line of credit.
During 1996, gross realized investment loss on the sale of a fixed maturity
investment was $4,368. There were no realized investment gains during 1996.
There were no sales of fixed maturity investments during 1995 and 1994.
<TABLE>
The following are the components of net investment income:
<CAPTION>
Year ended December 31,
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Fixed maturities $581,568 $ 14,791 $15,308
Short-term investments 53,213 428,133 22,081
Notes receivable 8,654 - -
Investments in unconsolidated
affiliates (31,816) - -
-------- ------- -------
Gross investment income 611,619 442,924 37,389
Investment expenses (26,375) (2,509) -
-------- ------- -------
Net investment income $585,244 $440,415 $37,389
======== ======== =======
</TABLE>
4. Investments in Related Parties
The Company has investments in related parties of $125,000 at December 31, 1996,
which are reported at cost as these investments represent organizer shares
purchased in the initial private placement of the related entities (discussed
below) and are restricted under Rule 144 of the Act.
First American Capital Corporation
On August 8, 1996, the Company purchased common stock of First American Capital
Corporation ("FACC") of Topeka, Kansas, for $52,500. FACC has raised total
capital of $812,000 to fund a proposed $12,500,000 Kansas intrastate public
stock offering beginning in early 1997. The proceeds of the public offering
will be used to form a Kansas domiciled life insurance company. When the
public offering is completed, the Company will own less than 10% of
outstanding common stock. At December 31, 1996, the Company has accounts
receivable from FACC of $12,480 related to expenses incurred on behalf of
the initial start-up of FACC.
Mid-American Alliance Corporation
On August 8, 1996, the Company purchased common stock of Mid-American
Alliance Corporation ("MAAC") of Jefferson City, Missouri, for $72,500. MAAC
has raised total organizer capital of $315,000 and is in the process of
raising an additional
<PAGE>
<PAGE> F-13
4. Investments in Related Parties (continued)
$2,000,000 of capital to fund (i) the possible purchase of a life insurance
company and (ii) a $16,000,000 Missouri intrastate public stock offering.
The proceeds of the public offering will be used to further capitalize the
acquired life insurance company (if the purchase is consummated). When the
public offering is completed, the Company will own less than 10% of outstanding
common stock. At December 31, 1996, the Company has accounts receivable from
MAAC of $33,799 related to expenses incurred on behalf of the initial start-up
of MAAC.
5. Acquisitions
FKCC purchased newly issued common stock of MAC, Lexington, Kentucky,
representing a 51% interest, for $50,000 on April 12, 1996. MAC purchases
receivables from medical providers at a discount. The receivable 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 19%. In the event of default, MAC has total recourse against
the medical provider for the amount of the patient's unpaid principal balance.
The acquisition was accounted for as a purchase and resulted in intangible
assets of $26,623 ($20,623 goodwill and $6,000 non-compete agreement) at the
date of acquisition. MAC has incurred operating losses since inception and
these losses are expected to continue. As such, the Company has included 100%
of MAC's operating losses since acquisition of $55,241 in the consolidated
financial statements. Further, the Company has recorded a valuation allowance
of $26,623 relating to theintangible assets recorded in conjunction with the
acquisition.
FKCC has entered into a $250,000 line of credit agreement with MAC, of which
$35,500 has been drawn as of December 31, 1996.
FKCC also purchased a 49% interest in LGP, Inc. ("LGP"), Louisville, Kentucky,
for $49,000 on October 18, 1996. LGP is a dating service using
interactive-video matchmaking, which combines a television dating show and an
on-line profile library on the Internet. FKCC has also entered into a line of
credit agreement with LGP for $31,000. No amounts have been drawn upon this
line of credit as of December 31, 1996.
Lastly, FKCC purchased a 40% interest in Cybertyme, Inc. ("Cybertyme"), Glasgow,
Kentucky, for $80,000 on November 12, 1996. Cybertyme provides individuals who
do not have access to a personal computer the ability to access the Internet
for an hourly fee. In addition, Cybertyme will provide educational classes
regarding Internet use and other personal computer applications.
The investments in LGP and Cybertyme are being accounted for on the equity
method of accounting. Losses of $31,816 were recorded relative to these common
stock investments during 1996.
6. Income Taxes
<TABLE>
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 years ended December 31, 1996,
1995 and 1994 consisted of the following:
<CAPTION>
Year ended December 31,
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Current $ 26,112 $32,247 $ -
Deferred 85,541 3,650 -
------- ------- --------
Federal income tax expense $111,653 $35,897 $ -
======== ======= ========
</TABLE>
<PAGE>
<PAGE> F-15
6. Income Taxes (continued)
<TABLE>
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate of 34% as follows:
<CAPTION>
Year ended December 31,
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Federal income tax benefit at
statutory rate $(63,990) $(138,433) $(158,704)
Small life insurance company deduction (40,138) (45,837) -
Increase in valuation allowance 223,635 235,442 158,704
Surtax exemptions (11,750) (12,442) -
Goodwill and other intangible assets 9,052 - -
Other (5,156) (2,833) -
-------- -------- --------
Federal income tax expense $111,653 $ 35,897 $ -
======== ======== ========
</TABLE>
<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.
<CAPTION>
Significant components of the Company's net deferred tax liability are as
follows:
December 31,
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax liability:
Net unrealized investment gains $ - $ 4,735
Due and deferred premiums 14,457 -
Deferred policy acquisition costs 226,684 15,131
-------- --------
Total deferred tax liability 241,141 19,866
Deferred tax asset:
Net unrealized investment losses 50,773 -
Investment in unconsolidated affiliates 10,817 -
Policy reserves and contract liabilities 92,378 5,795
Unearned revenue 40,136 -
Reinsurance premiums 10,972 -
Net operating loss carryforward 661,716 460,389
Alternative minimum tax credit carryforward 24,544 13,439
Other 8,466 5,270
------- -------
Total deferred tax asset 899,802 484,893
Valuation allowance (697,079) (473,442)
-------- --------
Net deferred tax asset 202,723 11,451
-------- --------
Net deferred tax liability $ 38,418 $ 8,415
======== ========
</TABLE>
The Company has net operating loss carryforwards of approximately $1,946,224,
expiring in 2009, 2010 and 2011. These net operating loss carryforwards are
not available to offset FAIC income. FAIC has alternative minimum tax credit
carryforwards of $24,544, which have no expiration date. Federal income taxes
paid during 1996 were $56,404. No federal income taxes were paid during 1995
and 1994.
<PAGE>
<PAGE> F-15
7. Shareholders' Equity and Statutory Accounting Practices
FAIC prepares its statutory-basis financial statements in accordance with
statutory accounting practices ("SAP") prescribed or permitted by the KDI.
"Prescribed" statutory accounting practices include state laws, regulations,
and general administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners ("NAIC"). "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 currently is in
the process of codifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory accounting
practices, and may result in changes to the accounting practices that FAIC
used to prepare its statutory-basis financial statements.
<TABLE>
<CAPTION>
Net income for 1996 and 1995 and capital and surplus at December 31, 1996 and
1995 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 KDI are as follows:
GAAP SAP
1996 1995 1996 1995
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income $ 334,910 $ 199,528 $ 78,456 $ 175,302
Capital and surplus 6,286,334 6,207,623 6,002,781 6,134,490
</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
FAIC 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,
FAIC must maintain the minimum statutory capital and surplus, $3,000,000,
required for life insurance companies domiciled in Kentucky.
The KDI imposes minimum risk-based capital ("RBC") requirements on insurance
enterprises 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. FAIC has a Ratio that is in excess of the minimum
RBC requirements; accordingly, FAIC meets the RBC requirements.
8. Reinsurance
To minimize the risk of claim exposure to surplus, the Company retains a maximum
of $50,000 of risk on individual life insurance and all accidental death
policies; all amounts greater than $50,000 are ceded to the Company's reinsurer,
Business Men's Assurance Company ("BMA"). At December 31, 1996, the Company
ceded $38,597,541 of insurance in-force to BMA and received a reserve credit of
$49,162. Pursuant to the terms of the agreement, FAIC pays no premiums on first
year 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
reinsured policies. FAIC records this unpaid premium as "Reinsurance premiums
payable" in the accompanying balance sheet and recognized as "Reinsurance
premiums ceded" in the accompanying income statement. At December 31, 1996, the
unpaid reinsurance premiums totaled $32,272. To the extent that BMA is unable
to meet its obligations under the reinsurance agreement, the Company remains
primarily liable for the entire amount at risk. During 1996, FAIC paid $10,155
of reinsurance premiums.
<PAGE>
<PAGE> F-16
9. Related Party Transactions
Effective November 1, 1995, the Company entered into a service agreement with
FAIC to provide personnel, facilities, and services to FAIC. 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 FAIC's business. The agreement is in effect
until either party provides ninety days written notice of termination. Under
the agreement, FAIC pays monthly fees based on life and annuity premiums
delivered by FAIC. The percentages are 25% of first year premiums; 20% of
second year premiums; 10% of third year premiums; and 5% of premiums in years
four and thereafter. FAIC 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, FAIC had
incurred expenses of $359,662 and $26,111 at December 31, 1996 and 1995,
respectively.
The Company entered into service agreements with FACC and MAAC effective
September 1, 1996. Pursuant to the terms of the agreements, the Company
provides investment management, data processing, accounting and reporting
services in return for a $1,000 per month service fee from each company. Under
the terms of the agreement, FACC and MAAC each incurred expenses of $4,000.
Further, the Company has accounts receivable of $12,480 and $33,799 from FACC
and MAAC, respectively, at December 31, 1996 (see Note 4). Various officers
and directors of the Company hold similar positions with FACC and MAAC.
FKCC has entered into a line of credit agreement with MAC. Under the terms
of the agreement, MAC has available $250,000 for operations and financing
medical receivables. The agreement bears interest at an annual rate of 7%.
At December 31, 1996, MAC had drawn $35,500 of the line of credit.
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 sheet. The fair value of fixed maturities are based on quoted market
prices. At December 31, 1996 and 1995, the fair value of fixed maturities was
$9,946,130 and $2,496,695, respectively.
Notes Receivable and Investments in Unconsolidated Affiliates
The carrying values of notes receivable and investments in unconsolidated
affiliates approximate their fair values. At December 31, 1996, the fair
values of notes receivable and investments in unconsolidated affiliates were
$221,096 and $97,184, respectively. There were no investments in notes
receivable or unconsolidated affiliates at December 31, 1995.
Short-term Investments
The carrying value of short-term investments approximates their fair value.
There were no short-term investments at December 31, 1996. At December
31, 1995, the fair value of short-term investments was $2,611,979.
Cash and Cash Equivalents
The carrying values of cash and cash equivalents approximate their fair values.
At December 31, 1996 and 1995, the fair value of cash and cash equivalents was
$908,276 and $6,087,294, respectively.
Investment Contracts
The carrying value of investment-type fixed annuity contracts approximates their
fair value. At December 31, 1996 and 1995, the fair value of investment-type
fixed annuity contracts were $504,323 and $32,835.
<PAGE>
<PAGE> F-17
11. Stock Options
The Company has adopted a stock option plan for 200,000 common stock shares.
The option exercise price pursuant to the plan is $1.05. Grantees have five
years in which to exercise their options. Any options granted will be
exercisable in installments as follows: 25% at any time after the commencement
of the second year of the option term and an additional 25% at any time after
the commencement of years three, four and five, such installments to be
cumulative. The Company's three founding officers are not eligible to
participate in the plan. The stock options will not be available for granting
until March 4, 1997.
Stock options will be accounted for in accordance with Accounting Principals
Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
will recognize compensation expense for financial statement purposes when
options granted become vested. Such compensation expense will be the
difference between the option exercise price of $1.05 and the fair market value
at the date of grant.
12. Segment Information
<TABLE>
The operations of the Company and its subsidiaries have been classified into
three operating segments as follows: life and annuity insurance operations,
venture capital operations, and corporate operations. Segment information
as of December 31, 1996, 1995 and 1994 and for the years then ended is as
follows:
<CAPTION>
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Life and annuity insurance operations $ 1,287,769 $ 374,614 $ -
Venture capital operations (21,790) - -
Corporate operations 228,153 129,325 37,839
--------- -------- --------
Total $ 1,494,132 $ 503,939 $ 37,839
========== ========= ========
Income (loss) before income taxes:
Life and annuity insurance operations $ 446,563 $ 235,425 $ -
Venture capital operations (115,728) - -
Corporate operations (519,041) (642,582) (466,775)
--------- -------- --------
Total $ (188,206) $ (407,157) $ (466,775)
========== ========= ========
Assets:
Life and annuity insurance operations $ 7,736,441 $ 6,491,726 $ -
Venture capital operations 109,455 - -
Corporate operations 4,685,176 5,156,533 3,490,205
--------- --------- ---------
Total $12,531,072 $11,648,259 $3,490,205
========== ========== =========
Depreciation and amortization expense:
Life and annuity insurance operations $ 161,163 $ 12,952 $ -
Venture capital operations 27,667 - -
Corporate operations 20,298 13,520 3,810
-------- --------- ---------
Total $ 209,128 $ 26,472 $ 3,810
========= ========= =========
</TABLE>
<PAGE>
<PAGE> F-18
13. Claims 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 of
December 31, 1996, the Company believes that any liability resulting from this
matter, after taking into consideration insurance coverages, should not have a
material adverse effect on the Company's financial position.
<PAGE>
<PAGE> F-19
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION AND SUBSIDIARY
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
Amount at
Which Shown in
the Balance
Type of Investment Cost<F1> Value<F2> Sheet <F3>
- -------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government
and government agencies
and authorities $ 7,315,121 $ 7,170,030 $ 7,170,030
States, municipalities
and political
subdivisions 1,000,695 1,009,075 1,009,075
All other corporate bonds 1,779,645 1,767,025 1,767,025
---------- ---------- ----------
Total fixed maturities 10,095,461 9,946,130 9,946,130
Notes receivable 221,096 221,096 221,096
Investments in
unconsolidated affiliates 129,000 97,184 97,184
---------- ---------- ----------
Total investments $10,445,557 $10,264,410 $10,264,410
=========== =========== ===========
<FN>
<F1>
Original cost of fixed maturities adjusted for amortization of premiums.
<F2>
Represents fair market value of fixed maturities at the balance sheet date
determined on the basis of year end market prices.
<F3>
Excludes investments in related parties of $125,000.
</FN>
</TABLE>
<PAGE>
<PAGE> F-20
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
December 31,
1996 1995
--------- -----------
<S> <C> <C>
Assets
Available-for-sale fixed maturities, at fair value
(amortized cost, $4,025,118 and $500,000
in 1996 and 1995, respectively) $ 3,986,092 $ 501,750
Investment in subsidiaries*<F1> 6,394,607 6,207,623
Cash and cash equivalents 118,293 4,506,430
Notes receivable 196,591 -
Investments in related parties 125,000 -
Receivables from related parties 46,279 -
Accrued investment income 80,722 23,354
Prepaid expenses 46,015 53,599
Office furniture and equipment, less accumulated
depreciation of $37,241 and $17,957 in 1996
and 1995, respectively 44,379 51,074
Advances to agents - 9,430
Receivable from subsidiary*<F1> 5,714 44,439
Deferred federal income taxes 13,268 -
Other assets 42,968 12,458
---------- ----------
Total assets $11,099,928 $11,410,157
========== ==========
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 75,343 $ 50,469
Salaries, wages, and benefits payable 48,986 15,999
Payable to subsidiary*<F1> 1,163 1,562
Deferred federal income taxes - 595
---------- ----------
Total liabilities 125,492 68,625
Shareholders' equity:
Preferred stock, 6% non-cumulative convertible
callable, $5.00 par and liquidation value;
550,000 shares authorized and
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 December 31, 1996 and
2,830,000 shares issued and 3,380,000
outstanding at December 31, 1995 at $.10
stated value 557,984 338,000
Additional paid-in capital 11,981,803 9,411,216
Unrealized investment gains (losses) (net of
deferred federal income tax benefit (expense)
of $50,773 in 1996 and ($4,765) in 1995) (98,558) 9,250
Retained earnings-deficit (1,466,793) (1,166,934)
---------- ----------
Total shareholders' equity 10,974,436 11,341,532
---------- ----------
Total liabilities and shareholders' equity $11,099,928 $11,410,157
========== ==========
<FN>
<F1>
* Eliminated in consolidation
</FN>
</TABLE>
<PAGE>
<PAGE> F-21
<TABLE>
<CAPTION>
<PAGE>
FIRST ALLIANCE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS - DEFICIT
Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Revenues
Service fee revenue*<F1> $ 359,662 $ 26,111 $ -
Net investment income 223,558 129,324 37,389
Realized investment losses (4,368) - -
Equity in earnings of subsidiaries*<F1> 219,182 199,528 -
Other income 8,963 - -
-------- ------- -------
Total revenue 806,997 354,963 37,389
Benefits and expenses
Salaries, wages and employee benefits 649,376 545,327 389,643
Professional fees 107,456 68,490 7,688
Legal fees - - 23,341
Insurance administration expenses*<F1> 71,667 26,111 -
Miscellaneous taxes 20,085 - -
Rent expense 72,868 41,490 31,851
Depreciation expense 20,298 13,520 3,810
Other operating costs and expenses 165,106 103,079 47,831
-------- ------- -------
Total benefits and expenses 1,106,856 798,017 504,164
Net loss (299,859) (443,054) (466,775)
Deficit, beginning of year (1,166,934) (723,880) (257,105)
---------- -------- --------
Deficit, end of year $(1,466,793) $(1,166,934) $(723,880)
========== ========== ========
<FN>
<F1>
* Eliminated in consolidation
</FN>
</TABLE>
<PAGE>
<PAGE> F-22
<TABLE>
<CAPTION>
<PAGE>
FIRST ALLIANCE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net cash used in operating activities $ (304,735) $ (626,516) $ (525,355)
Investing activities:
Purchase of available-for-sale fixed
maturities (4,288,438) (500,000) (2,621,513)
Maturity of available-for-sale fixed
maturities 748,164 2,621,513 -
Investment in subsidiaries (224,000) (6,000,000) -
Investment in related parties (125,000) - -
Increase in notes receivable (221,096) - -
Short-term investments acquired, net - - -
Purchase of furniture and equipment (13,603) (54,865) (7,898)
--------- --------- ---------
Net cash used in investing activities (4,123,973) (3,933,352) (2,629,411)
Financing activities:
Proceeds from stock offering - 9,506,850 4,243,150
Cost of stock offering 40,571 (1,202,741) (533,078)
--------- --------- ---------
Net cash provided by financing activities 40,571 8,304,109 3,710,072
Increase (decrease) in cash and cash
equivalents (4,388,137) 3,744,241 555,306
--------- --------- ---------
Cash and cash equivalents,
beginning of year $4,506,430 $ 762,189 $ 206,883
--------- --------- ---------
Cash and cash equivalents,
end of year $ 118,293 $4,506,430 $ 762,189
========= ========= =========
</TABLE>
<PAGE>
<PAGE> F-23
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
Future policy
benefits,
Deferred losses, Other policy
policy claims and claims and Net
acquision loss Unearned benefits Premium investment
costs expenses<F1> premiums payable<F2> revenue income
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Life insurance and annuity
operations $749,610 $884,243 $118,046 $207,809 $901,584 $393,502
Venture capital operations - - - - - (31,816)
Corporate operations - - - - - 223,558
------- ------- ------- ------- ------- -------
Total $749,610 $884,243 $118,046 $207,809 $901,584 $585,244
======= ======= ======= ======= ======= =======
December 31, 1995
Life insurance and annuity
operations $ 51,212 $ 58,107 $ 8,184 $ - $ 63,524 $311,090
Venture capital operations - - - - - -
Corporate operations - - - - - 129,325
------- ------- ------- ------- ------- -------
Total $ 51,212 $ 58,107 $ 8,184 $ - $ 63,524 $440,415
======= ======= ======= ======= ======= =======
<CAPTION>
Benefits, Amortization
claims, of deferred
losses and policy Other
settlement acquisition operating
expenses costs expenses
-------- ------- --------
<S> <C> <C> <C>
December 31, 1996
Life insurance and annuity
operations $ 440,741 $161,163 $ 239,302
Venture capital operations - - 93,937
Corporate operations - - 747,194
-------- ------- --------
Total $ 440,741 $161,163 $1,080,433
========= ======== ==========
December 31, 1995
Life insurance and annuity
operations $ 25,272 $ 12,952 $ 100,867
Venture capital operations - - -
Corporate operations - - 771,907
------- ------- ----------
Total $ 25,272 $ 12,952 $ 872,774
======== ======== ==========
<FN>
<F1>
Includes annuity contract liabilities.
<F2>
Includes policyholder premium deposits.
</FN>
</TABLE>
<PAGE>
<PAGE> F-24
<TABLE>
<CAPTION>
FIRST ALLIANCE CORPORATION
SCHEDULE IV - REINSURANCE
Percentage
of Amount
Ceded Assumed Assumed
Gross Other from other Net to Net
Amount Companies Companies Amount Amounts
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Life insurance in force (in thousands):
December 31, 1996 $ 86,418 $38,598 $ - $ 47,820 -
December 31, 1995 5,422 696 - 4,726 -
Premiums:
December 31, 1996 $944,011 $42,427 $ - $901,584 -
December 31, 1995 63,524 - - 63,524 -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 9,946,130
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,264,410
<CASH> 908,276
<RECOVER-REINSURE> 40,000
<DEFERRED-ACQUISITION> 749,610
<TOTAL-ASSETS> 12,531,072
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,365,099
<NOTES-PAYABLE> 0
0
0
<COMMON> 557,984
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,531,072
901,584
<INVESTMENT-INCOME> 585,244
<INVESTMENT-GAINS> (4,368)
<OTHER-INCOME> 11,672
<BENEFITS> 68,574
<UNDERWRITING-AMORTIZATION> 333,305
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (188,206)
<INCOME-TAX> 111,653
<INCOME-CONTINUING> (299,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (299,859)
<EPS-PRIMARY> (.054)
<EPS-DILUTED> (.054)
<RESERVE-OPEN> 25,272
<PROVISION-CURRENT> 354,648
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 379,920
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
