United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 14 or 15(d)
of the Securities Exchange Act of 1934 for the Period Ended
June 30, 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
incorporation or organization) Identification Number)
2285 Executive Drive, Suite 308
Lexington, Kentucky 40505
(Address of principal executive offices) (Zip Code)
(606) 299-7656
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Applicable Only to Corporate Insurers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, No Par Value - 5,579,840 shares as of August 1, 1997.
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in dollars)
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities, at fair value
(amortized cost, $9,032,181 and $10,095,461 in
1997 and 1996, respectively) $8,880,174 $9,946,130
Preferred Stock 1,000,000 -
Investments in unconsolidated affiliates 56,744 -
Other investments 405,523 318,280
Total investments 10,342,441 10,264,410
Cash and cash equivalents 988,718 908,276
Investments in related parties 125,000 125,000
Receivables from related parties 20,145 46,279
Accrued investment income 163,886 171,416
Deferred policy acquisition costs 980,582 749,610
Prepaid expenses 57,293 46,625
Office furniture and equipment, less accumulated
depreciation of $47,342 and $ 38,790 in 1997
and 1996, respectively 42,314 47,722
Premiums due 94,229 42,522
Other assets 154,544 129,212
Total Assets $12,969,152 $12,531,072
Liabilities and Shareholders' Equity
Policy liabilities and accruals 1,730,584 1,365,099
Federal income taxes payable 14,702 40,572
Other liabilities 407,134 150,965
Total liabilities 2,152,420 1,556,636
Commitments and Contingencies (Note H)
Shareholders' equity:
Preferred stock 6% non-cumulative convertible
callable, $5.00 par and liquidation value;
550,000 shares authorized and outstanding at
June 30, 1997 and December 31, 1996 - -
Common stock, no par value, 8,000,000 shares
authorized; 5,579,840 shares issued and outstanding
at June 30, 1997 and December 31, 1996 557,984 557,984
Additional paid in capital 11,981,820 11,981,803
Unrealized investment gains (losses) net of
deferred federal income tax benefit (expense)
of $51,682 in 1997 and $50,773 in 1996 (100,323) (98,558)
Retained Earnings (1,622,749) (1,466,793)
Total Shareholders' equity 10,816,732 10,974,436
Total liabilities and shareholders' equity $12,969,152 $12,531,072
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in dollars)
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C>
Revenues
Premium Income $248,946 $191,924 $646,195 $420,462
Net Investment Income 132,194 154,138 284,551 305,742
Earnings of unconsolidated affiliates
and other income 8,052 2,261 (36,858) 5,829
Total revenue 389,192 348,323 893,888 732,033
Benefits and expenses
Salaries, wages and employee benefits 97,113 80,696 188,585 208,828
Increase in policy reserves 80,125 79,281 181,692 175,057
Amortization of deferred policy
acquisition costs 64,210 76,689 192,393 108,018
Other insurance benefits and expenses 63,446 46,306 109,160 82,646
Professional and other fees 71,784 35,106 142,228 63,222
Other taxes - 17,475 4,985 17,475
Other expenses 109,661 67,077 151,601 91,825
Total benefits and expenses 486,339 402,630 970,644 747,071
Income/(loss) from operations (97,147) (54,307) (76,756) (15,038)
Federal income taxes 36,700 (12,200) 79,200 38,800
Net loss $(133,847) $(42,107) $(155,956) $(53,838)
Net loss per common share $(0.024) $(0.008) $(0.028) $(0.010)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amount in dollars)
<CAPTION>
Six months ended
June 30, June 30,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash provided/(used) in operating activities $(106,518) $(16,770)
Investing activities:
Purchase of available-for-sale fixed maturities (501,452) (9,001,346)
Maturity of available-for-sale fixed maturities 1,539,680 1,000,000
Short-term investments sold/(acquired) - 2,611,979
Notes Receivable (164,428) -
Purchase of Preferred Stock (1,000,000) -
Purchase of Common Stock (20,000) -
Purchase of furniture and equipment (3,144) (9,330)
Net cash used in investing activities (149,344) (5,398,697)
Financing activities:
Deposits on annuity contracts 336,304 263,965
Cost of stock offering - (34,425)
Net cash provided by financing activities 336,304 229,540
Increase(Decrease) in cash and cash equivalents 80,442 (5,185,927)
Cash and cash equivalents beginning of period $908,276 $6,087,294
Cash and cash equivalents at end of period $988,718 $901,367
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
Part I
FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(A) Basis of Presentation
The accompanying condensed consolidated financial statements of First Alliance
Corporation and its Subsidiaries ( the "Company") for the six month period
ended June 30, 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 six
month period ending June 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 June 30, 1997:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
U.S. Government Bonds $6,007,356 $ - $(133,695) $5,873,661
Municipal Bonds 1,248,825 12,254 (9,297) 1,251,782
Corporate Bonds 1,776,000 - (21,269) 1,754,731
Total $9,032,181 $12,254 $(164,261) $8,880,174
On March 31, 1997, the Company purchased 400,000 shares of the Preferred Stock
of U.S. Star Financial Corporation ("U.S.Star") of Oakbrook Terrace, Illinois
for $800,000. On that same date, FAIC purchased 100,000 shares of the same
Preferred Stock for $200,000. The Preferred shares are convertible into common
shares at a rate of one share of preferred for one share of common 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 agreement. If the preferred shares are
not converted within eighteen months of the date of purchase, the preferred
shares can be redeemed at the original purchase price. These shares have
been recorded in the financial statements at cost.
<PAGE>
(D) Deferred Policy Acquisition Costs
Certain costs related to the acquisition of life insurance have been deferred
to the extent recoverable from future policy revenues and gross profits.
These acquisition costs are being amortized over the premium paying period of
the related policies. Deferred policy acquisition costs are summarized below:
June 30, 1997
Balance beginning of year $749,610
Policy acquisition costs, deferred 423,365
Amortization (192,393)
Balance at end of quarter $980,582
(E) Net Loss Per Common Share
Net loss per common share is based upon the weighted average number of common
shares outstanding each year. For the quarters ended June 30, 1997 and
June 30, 1996, all shares are assumed to be outstanding. Accordingly, the
weighted average outstanding common shares is 5,579,840 at June 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 June 30, 1997 is
calculated using an effective rate derived from the previous year tax expense.
At June 30, 1997, the estimated Federal Income tax expense was $79,200.
<PAGE>
(H) Commitments and Contingencies
The Company is party to a claim related to an automobile accident involving
an officer of the Company. The outcome of this matter is not predictable with
assurance. Although any actual liability is not determinable as June 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 six months ended June 30 totaled $893,888 in 1997 and
$732,033 in 1996. The primary source of revenue for the Company is life
insurance premium income. Premium income for the first six months of 1997
increased $225,733 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 $23,256 for Cybertyme for the six months ended June 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 six months ended June 30, 1997 totaled
$372,272 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 June 30, 1997, $8,936 of reinsurance premiums were recorded
as a liability.
<PAGE>
Combined net investment income for FAIC and the Company totaled $284,551 for
the two quarters ended June 30, 1997 and $305,742 for the same period in 1996.
Net investment income increased over the last two years due to the growth of
FAIC's insurance operations, which provided a larger invested asset base.
For the six months ended June 30, 1997, expenses totaled $970,644 representing
an increase of $223,573 over the same period of 1996. This increase was
primarily due to the growth in FAIC's insurance operations. Life policy
reserve expense totaled $181,692 for the two quarters ended June 30, 1997 as
compared to $175,057 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 $423,365 for the six month period ended
June 30, 1997 and $423,119 for the same period in 1996, were reclassified as
deferred policy acquisition costs. Amortization of these costs totaled
$192,393 for the two quarters ended June 30, 1997 and $108,018 for the same
period in 1996. Death claims incurred during the first six months of 1997
totaled $17,069. There were no death claims for the same period in 1996.
Expenses directly related to FAIC's agency totaled $67,710 for the first six
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 $64,878 for the same
period in 1996.
Salaries and benefit expenses totaled $188,585 for the six months ended June
30, 1997 and $208,828 for the same period of 1996. The decrease of $20,243
from 1996 to 1997 is mainly attributable to the allocation of salaries when
the financial statements are consolidated. Professional fees totaled $105,941
for the first six months of 1997 and $30,610 in 1996. The increase of $75,331
from last year is attributable to the development of new products and the
accrual of fiscal year 1997 estimated audit fees.
During the first two quarters of 1997, FKCC incurred operating losses totaling
$76,579. 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
$79,200 during the first six months of 1997 and $38,800 for the same period
of 1996. Current tax expense is estimated based on the effective tax rate for
fiscal year 1996.
Consolidated Financial Condition
Changes in the consolidated balance sheet of June 30, 1997 compared to December
31, 1996 reflect the operations of the Company and the capital transactions
listed below.
Total assets increased by $438,080 from December 31, 1996 to June 30, 1997.
Deferred policy acquisition costs increased $230,972 net of $192,393 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 $488,214 principally because of
(i) life policy reserves increased $181,692 due to policies written in 1997
and existing policies entering a second duration and (ii) annuity contract
liabilities increased $336,304 as the result of annuity premiums received
which are recorded as a liability. These increases were partially offset by a
decrease of $53,794 of death claim liabilities.
Changes in other liabilities include (i) an increase of $19,141 in accrued
payroll due to employee incentives; (ii) a decrease of $21,725 related to
commitments for Advisory Board Members; (iii) an increase of $63,391 in
deferred tax liability; and (iv) an increase of $12,548 in federal tax payable
due to two quarters of operations of FAIC.
<PAGE>
Liquidity
FAIC's insurance operations generally receive adequate cash flow from premium
collections and investment income to meet their obligations. Insurance policy
liabilities are primarily long-term and generally are paid from future cash
flows. Most of the Company's invested assets are in bonds which are readily
marketable. Although there is no present need or intent to dispose of such
investments, the Company could liquidate portions of their investments if such
a need arose.
Part II.
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits - None
Form 8-K
The Company did not file any reports on Form 8-K during the six
months ended June 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 August 12, 1997
Michael N. Fink, President
/s/ Thomas I. Evans Date August 12, 1997
Thomas I. Evans, Vice President/Asst. Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 8,880,174
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,880,174
<CASH> 988,718
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 980,582
<TOTAL-ASSETS> 12,969,152
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,730,584
<NOTES-PAYABLE> 0
0
0
<COMMON> 557,984
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,969,152
646,195
<INVESTMENT-INCOME> 284,551
<INVESTMENT-GAINS> 0
<OTHER-INCOME> (36,858)
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 192,393
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (76,756)
<INCOME-TAX> 79,200
<INCOME-CONTINUING> (155,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155,956)
<EPS-PRIMARY> (.028)
<EPS-DILUTED> (.028)
<RESERVE-OPEN> 379,920
<PROVISION-CURRENT> 181,692
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 561,612
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
