United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 14 or 15(d) of
the Securities Exchange Act of 1934 for the Period Ended
September 30, 1997
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
corporation or organization) Identification Number)
2285 Executive Drive, Suite 308
Lexington, Kentucky 40505
(Address of principal executive offices) (Zip Code)
(606) 299-7656
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Applicable Only to Corporate Insurers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, No Par Value - 5,579,840 shares as of November 1, 1997.
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities, at fair
value (amortized cost, $8,775,809 and
$10,095,461 in 1997 and 1996, respectively) $8,732,812 $9,946,130
Preferred Stock 1,000,000 -
Investments in unconsolidated affiliates 49,906 97,184
Other investments 425,152 221,096
Total investments 10,207,870 10,264,410
Cash and cash equivalents 1,356,745 908,276
Investments in related parties 125,000 125,000
Receivables from related parties 58,961 46,279
Accrued investment income 126,251 171,416
Deferred policy acquisition costs 1,110,377 749,610
Prepaid expenses 43,734 46,625
Office furniture and equipment, less accumulated
depreciation of $51,765 and $ 38,790 in 1997
and 1996, respectively 38,538 47,722
Premiums due 89,700 42,522
Other assets 123,083 129,212
Total assets $13,280,259 $12,531,072
Liabilities and Shareholders' Equity
Policy liabilities and accruals 2,103,558 1,487,628
Deferred tax liabilities 156,071 38,418
Federal income taxes payable 14,702 2,154
Other liabilities 161,541 28,436
Total liabilities 2,435,872 1,556,636
Commitments and contingencies (Note H)
Shareholders' equity:
Common stock, no par value, 8,000,000 shares
authorized; 5,579,840 shares issued and
outstanding at September 30, 1997 and
December 31, 1996 557,984 557,984
Additional paid in capital 11,981,820 11,981,803
Unrealized investment losses net of
deferred federal income tax benefit
of $14,619 in 1997 and $50,773 in 1996 (28,377) (98,558)
Retained earnings-deficit (1,667,040) (1,466,793)
Total shareholders' equity 10,844,387 10,974,436
Total liabilities and shareholders' equity $13,280,259 $12,531,072
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)(Unaudited)(Unaudited)
<S> <C> <C>
Revenues
Net premium income $266,101 $203,470 $912,296 $623,932
Net investment income 153,096 153,935 437,647 459,677
Earnings of unconsolidated
affiliates and other income (26,232) 5,768 (63,090) 11,597
Total revenue 392,965 363,173 1,286,853 1,095,206
Benefits and expenses
Salaries, wages and
employee benefits 81,972 136,098 270,557 344,926
Increase in policy reserves 86,428 90,761 268,120 265,818
Amortization of deferred policy
acquisition costs 58,912 31,737 251,305 139,755
Other insurance benefits and
expenses 90,094 50,860 199,254 133,506
Professional and other fees 15,732 28,258 157,960 91,480
Other taxes 8,626 43,204 13,611 60,679
Other expenses 68,293 42,581 219,894 134,406
Total benefits and expenses 410,057 423,499 1,380,701 1,170,570
Loss from operations (17,092) (60,326) (93,848) (75,364)
Income tax expense 27,200 14,600 106,400 53,400
Net loss $(44,292) $(74,926) $(200,248) $(128,764)
Net loss per common share $(0.008) $ (0.013) $(0.036) $(0.023)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine months ended
September 30, September 30,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash used in operating activities $(307,191) $(318,960)
Investing activities:
Purchase of available-for-sale
fixed maturities (750,000) (9,001,346)
Maturity of available-for-sale
fixed maturities 2,039,680 1,000,000
Short-term investments sold - 2,611,979
Purchase of Preferred Stock (1,000,000) -
Purchase of other investments (20,000) -
Purchase of furniture and equipment (3,791) (8,987)
Net cash used in investing activities 265,889 (5,398,354)
Financing activities:
Deposits on annuity contracts 489,754 388,517
Cost of stock offering 17 (37,994)
Net cash provided by financing activities 489,771 350,523
Increase(Decrease) in cash and cash
equivalents 448,469 (5,366,791)
Cash and cash equivalents beginning
of period $908,276 $6,087,294
Cash and cash equivalents at end of
period $1,356,745 $720,503
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
Part I
FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(A) Basis of Presentation
The accompanying condensed consolidated financial statements of First Alliance
Corporation and its Subsidiaries ( the "Company") for the nine month periods
ended September 30, 1997 and 1996 are unaudited. However, in the opinion of
the Company, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been reflected therein.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes, has been
omitted. The accompanying condensed consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K for the fiscal year ended December 31, 1996.
Certain reclassifications have been made in the prior period financial
statements to conform with the current year presentation.
(B) Subsidiary Operations
The Company's wholly owned subsidiaries', First Alliance Insurance Company
("FAIC") and First Kentucky Capital Corporation ("FKCC"), results of operations
are included in the condensed consolidated financial information for the nine
month period ending September 30, 1997.
(C) Investments
The Company classifies all of its available-for-sale fixed maturities at the
current market value. Adjustments to market value are recognized as a separate
component of shareholders' equity net of applicable federal income tax effects.
The following table details the investment values at September 30, 1997:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government Bonds $5,754,856 $ - $(66,940) $5,687,916
Municipal Bonds 1,246,843 22,847 (4,728) 1,264,962
Corporate Bonds 1,774,110 10,354 (4,530) 1,779,934
Total $8,775,809 $ 33,201 $(76,198) $8,732,812
On March 31, 1997, the Company purchased 400,000 shares of the $2.00 par value
Secured Non-Cumulative Redeemable Convertible Preferred Stock of U.S. Star
Financial Corporation ("U.S. Star") of Oakbrook Terrace, Illinois
for $800,000. The Preferred Stock has no dividend provisions and is
collateralized with securities that equal the purchase price. All interest
earned on the collateral is retained by U.S. Star. On that same date, FAIC
purchased 100,000 shares of the same Preferred Stock for $200,000.
The Preferred shares are convertible into common shares at a rate of one share
of preferred for one share of common and are secured with bond funds, which
are in possession of the Company, equal to the total investment. U.S. Star
can require the conversion if it meets conditions set forth in the security
<PAGE>
agreement. If the preferred shares are not converted within eighteen months
of the date of purchase, the preferred shares can be redeemed at the original
purchase price. These shares have been recorded in the financial statements
at cost.
(D) Deferred Policy Acquisition Costs
Certain costs related to the acquisition of life insurance have been deferred
to the extent recoverable from future policy revenues and gross profits.
These acquisition costs are being amortized over the premium paying period of
the related policies. Deferred policy acquisition costs are summarized below:
Nine months ended
September 30, 1997
Balance beginning of year $749,610
Policy acquisition costs, deferred 612,072
Amortization (251,305)
Balance at end of quarter $1,110,377
(E) Net Loss Per Common Share
Net loss per common share is based upon the weighted average number of common
shares outstanding for each period. For the period ended September 30, 1996,
all shares are assumed to be converted and outstanding (see discussion in
following note). Accordingly, the weighted average outstanding common shares
is 5,579,840 for the periods ended September 30, 1997 and 1996.
(F) Conversion of Preferred Stock
Pursuant to the terms of the Subscription Agreements, a subscriber could elect,
at the time of the sale, to convert their shares of preferred stock to shares
of common stock upon issuance of stock certificates. The subscriber was
allowed to revoke this conversion during a six month period starting on the
date the offering was completed. The offering was completed on October 28,
1995 and conversions were allowed until April 28, 1996. Each share of
preferred stock could be converted into four shares of common stock. On
April 28, 1996, substantially all of the preferred shareholders converted
their preferred shares to common shares.
(G) Federal Income Taxes
The Company does not file a consolidated federal income tax return with FAIC.
FAIC is taxed as a life insurance company under the provisions of the
Internal Revenue Code and must file a separate tax return for its initial six
years of existence. Federal income tax expense for the quarter ended
September 30, 1997 is calculated using an effective rate derived from the
previous year tax expense. At September 30, 1997, the estimated Federal
Income tax expense was $106,400.
<PAGE>
(H) Commitments and Contingencies
The Company is party to litigation 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 September 30, 1997, the Company believes that any liability resulting from
this matter, after taking into consideration insurance coverage, should not
have a material adverse effect on the Company's financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under
the Private Securities Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
The statements contained in the following "Management's Discussion and
Analysis of Financial Condition and Results of Operations," statements
contained in future filings with the Securities and Exchange Commission and
publicly disseminated press releases, and statements which may be made from
time to time in the future by management of the Company in presentations to
shareholders, prospective investors, and others interested in the business and
financial affairs of the Company, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements. Any projections of financial performances or
statements concerning expectations as to future developments should not be
construed in any manner as a guarantee that such results or developments will,
in fact, occur. There can be no assurance that any forward-looking statement
will be realized or that actual results will not be significantly different
from that set forth in such forward-looking statements. In addition to the
risks and uncertainties of ordinary business operations, the forward-looking
statements of the Company referred to above are also subject to risks and
uncertainties.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes thereto.
Results of Operations
Revenues for the nine months ended September 30 totaled $1,286,853 in 1997 and
$1,095,206 in 1996. The primary source of revenue for the Company is life
insurance premium income. Premium income for the first nine months of 1997
increased $288,364 in comparison to 1996 as the result of new business written
along with policies entering a second duration. Earnings of unconsolidated
affiliates and other income includes operating losses of $17,184 for LGP, Inc.
and $30,094 for Cybertyme for the nine months ended September 30, 1997.
Premium income consists of life insurance premium sales of the Company's
initial product referred to as the "Alliance 2000." An annuity rider is also
included with the Alliance 2000; however, according to Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from Sales of Investments," annuity premium income is not recognized
as revenue. Annuity premium receipts for the nine months ended September 30,
1997 totaled $528,228 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 September 30, 1997, $13,297 of reinsurance
premiums were recorded as a liability.
<PAGE>
Combined net investment income for FAIC and the Company totaled $437,647 for
the three quarters ended September 30, 1997 and $459,677 for the same period
in 1996. Net investment income decreased over the last two quarters due to
the sale of investments which were not reinvested and the loss of interest on
funds used to purchase the U.S. Star investment.
For the nine months ended September 30, 1997, expenses totaled $1,380,701
representing an increase of $210,131 over the same period of 1996. This
increase was primarily due to the growth in FAIC's insurance operations.
Life policy reserve expense totaled $268,120 for the three quarters ended
September 30, 1997 as compared to $265,818 for the same period in 1996.
Policy reserves are established with the sale of life insurance. Expenses
related to the acquisition of life insurance are deferred and amortized over
the premium paying period of the related policy. These expenses, which
include commissions and administrative costs, totaled $612,072 for the nine
month period ended September 30, 1997 and $630,799 for the same period in 1996,
were reclassified as deferred policy acquisition costs. Amortization of these
costs totaled $251,305 for the three quarters ended September 30, 1997 and
$109,323 for the same period in 1996. Death claims incurred during the first
nine months of 1997 totaled $25,469. There were no death claims for the same
period in 1996. Expenses directly related to FAIC's agency totaled $117,073
for the first nine months of 1997. These expenses include agent's health
insurance, agency meetings, recruiting, and other expenses directly related to
the sale of insurance and annuities. Direct agency expenses totaled $101,870
for the same period in 1996.
Salaries and benefit expenses totaled $270,557 for the nine months ended
September 30, 1997 and $344,926 for the same period of 1996. The decrease of
$74,369 from 1996 to 1997 is mainly attributable to the increase in deferable
policy acquisition costs. Professional fees totaled $116,058 for the first
nine months of 1997 and $46,821 in 1996. The increase of $69,237 from last
year is attributable to the development of new products and the accrual of
fiscal year 1997 estimated audit fees.
During the first three quarters of 1997, FKCC incurred operating losses
totaling $82,211. These losses are the result of the inclusion of operating
losses from Medical Acceptance Corporation ("MAC") in the operating results of
the Company and the equity in the losses of LGP, Inc. and Cybertyme, Inc.
Additionally, notes receivable from LGP, Inc. totaling $31,000 was written off
during the second quarter.
Income tax expense, which is calculated based on the earnings of FAIC, totaled
$106,400 during the first nine months of 1997 and $53,400 for the same period
of 1996. Income tax expense is estimated based on the effective tax rate for
fiscal year 1996.
During August of 1997, FAIC modified the initial product referred to as the
"Alliance 2000". The modifications include changes to the death benefits and
premium and commission structures. With the modifications, the entire premium
is allocated to life insurance in the first year. At September 30, 1997
approximately twenty policies had been delivered for the new product.
Consolidated Financial Condition
Changes in the consolidated balance sheet of September 30, 1997 compared to
December 31, 1996 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $749,187 from December 31, 1996 to September 30,
1997. Cash and cash equivalents increased $448,469 over the first nine months
of 1997 primarily due to the increase in cash received from new applications
and receipt of renewal premiums. Deferred policy acquisition costs increased
$360,767 net of $251,305 of amortization as the result of new business written
by FAIC and the costs related to existing policies entering a second duration
being deferred.
Policy and contract liabilities increased $615,930 principally because of (i)
life policy reserves increased $268,120 due to policies written in 1997 and
existing policies entering a second duration and (ii) annuity contract
liabilities increased $489,754 as the result of annuity premiums received which
are recorded as a liability. These increases were partially offset by a
decrease of $85,394 of death claim liabilities.
<PAGE>
Changes in other liabilities include (i) an increase of $28,179 in accrued
payroll due to employee incentives; (ii) a decrease of $16,110 related to
commitments for Advisory Board Members; (iii) an increase of $117,654 in
deferred tax liability; and (iv) an increase of $12,548 in federal tax payable
due to three quarters of operations of FAIC.
Liquidity
FAIC's insurance operations generally receive adequate cash flow from premium
collections and investment income to meet their obligations. Insurance policy
liabilities are primarily long-term and generally are paid from future cash
flows. Most of the Company's invested assets are in bonds which are readily
marketable. Although there is no present need or intent to dispose of such
investments, the Company could liquidate portions of their investments if such
a need arose.
Part II.
Item 1. Legal Proceedings
The Company received a civil summons on October 6, 1997 related to an
automobile accident in October 1996 which involved an officer of the Company,
who was driving the automobile. The summons was served by the Circuit Court
in Fayette County, Kentucky and lists Katherine Stockton, Individually and as
Administratrix of the Estate of Frank Novak, and as next friend of Bradley
Novak as the Plaintiff. The legal action alleges that the officer 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 September 30, 1997,
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.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits - None
Form 8-K
The Company did not file any reports on Form 8-K during the nine
months ended September 30, 1997
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Alliance Corporation
(registrant)
/s/ Michael N. Fink Date November 12, 1997
Michael N. Fink, President
/s/ Thomas I. Evans Date November 12, 1997
Thomas I. Evans, Vice President/Asst. Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 8,732,812
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,732,812
<CASH> 1,356,745
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,110,377
<TOTAL-ASSETS> 13,280,259
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,103,558
<NOTES-PAYABLE> 0
0
0
<COMMON> 557,984
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,280,259
912,296
<INVESTMENT-INCOME> 437,647
<INVESTMENT-GAINS> 0
<OTHER-INCOME> (63,090)
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 251,305
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (93,848)
<INCOME-TAX> 106,400
<INCOME-CONTINUING> (200,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (200,248)
<EPS-PRIMARY> (.036)
<EPS-DILUTED> (.036)
<RESERVE-OPEN> 379,920
<PROVISION-CURRENT> 268,120
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 648,040
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
