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, 1998
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, 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 - 5,614,740 shares as of August 1, 1998.
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amouonts in dollars)
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost, $7,300,081
and $9,016,891 in 1998 and 1997, respectively) $ 7,379,435 $ 9,038,694
Preferred stock at cost 1,000,000 1,000,000
Common stock at cost 20,000 20,000
Notes receivable (net of $149,698 valuation
allowance in 1998 and 1997) 274,484 334,923
Total investments 8,673,919 10,393,617
Cash and cash equivalents 3,616,696 1,335,455
Investments in related parties 125,000 125,000
Receivables from related parties 18,006 21,286
Accrued investment income 120,955 151,813
Deferred policy acquisition costs (net of
amortization of $200,201 in 1998 and $128,183
in 1997) 1,420,730 1,074,485
Prepaid expenses 39,822 20,662
Office furniture and equipment, less accumulated
depreciation of $60,965 and $53,533 in 1998
and 1997, respectively 48,152 32,026
Advances to agents 44,097 23,251
Premiums due 41,940 27,951
Other assets 20,926 92,818
Total Assets $ 14,170,243 $ 13,298,364
Liabilities and Shareholders' Equity
Policy liabilities and accruals 2,869,956 2,259,567
Federal income taxes payable 338,091 205,706
Accounts payable 83,361 31,134
Other liabilities 291,883 235,599
Total liabilities 3,583,291 2,732,006
Commitments and Contingencies (Note I)
Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,614,740 shares
issued and outstanding at June 30, 1998
and 5,579,840 shares issued and outstanding
at December 31, 1997 561,474 557,984
Additional paid in capital 12,148,278 12,141,546
Unrealized investment gains (losses) net of
deferred federal income tax expense of
$17,975 in 1998 and $7,413 in 1997 52,374 14,390
Retained Earnings (2,175,174) (2,147,562)
Total Shareholders' equity 10,586,952 10,566,358
Total liabilities and shareholders' equity $ 14,170,243 $ 13,298,364
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,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Premium Income $ 528,861 $ 248,946 $ 1,024,278 $ 646,195
Net Investment Income 149,321 132,194 288,960 284,551
Earnings of unconsolidated
affiliates and other
income 24,353 8,052 37,511 (36,858)
Total revenue 702,535 389,192 1,350,749 893,888
Benefits and expenses
Salaries, wages and
employee benefits 193,018 162,239 393,016 337,409
Increase in policy
reserves 200,620 80,125 361,328 181,692
Commissions 229,730 97,412 397,959 221,544
Policy acquisition costs
deferred (323,409) (189,060) (545,443) (423,366)
Amortization of deferred
policy acquisition costs 119,262 64,210 200,201 192,393
Other insurance benefits
and expenses 50,384 46,334 89,476 91,691
Agency expenses 59,503 26,901 115,092 67,710
Professional fees 42,817 71,784 84,680 105,941
Other expenses 93,430 126,394 169,130 190,645
Total benefits and expenses 665,355 486,339 1,265,439 965,659
Income/(loss) from operations 37,180 (97,147) 85,310 (71,771)
Federal income taxes 64,807 36,700 112,923 79,200
Net loss $ (27,627) $ (133,847) $ (27,613) $ (150,971)
Net loss per common share
-basic and diluted $ (0.005) $ (0.024) $ (0.005) $ (0.027)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in dollars)
<CAPTION> Six months ended
June 30, June 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash provided/(used) in operating
activities $ 237,212 $ (106,518)
Investing activities:
Purchase of available-for-sale
fixed maturities (250,000) (501,452)
Maturity of available-for-sale
fixed maturities 1,949,863 1,539,680
Short-term investments sold/(acquired) - -
Notes Receivable 60,440 (164,428)
Purchase of Preferred Stock - (1,000,000)
Purchase of Common Stock - (20,000)
Purchase of furniture and equipment (23,559) (3,144)
Net cash used in investing activities 1,736,744 (149,344)
Financing activities:
Deposits on annuity contracts 297,442 336,304
Additional paid in capital 6,353 -
Sale of common stock 3,490 -
Cost of stock offering - -
Net cash provided by financing activities 307,285 336,304
Increase(Decrease) in cash and cash
equivalents 2,281,241 80,442
Cash and cash equivalents beginning
of period $ 1,335,455 $ 908,276
Cash and cash equivalents at end
of period $ 3,616,696 $ 988,718
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, 1998 and 1997 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, 1997. 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, 1998.
During 1997, the venture capital investments of FKCC were written-off.
The Board of Directors of FKCC elected to place a moratorium on any new
investments until certain criteria can be established for these
investments.
(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, 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Loss Fair Value
<S> <C> <C> <C> <C>
U.S. Government Bonds $ 4,047,910 $ 16,985 $ (4,154) $ 4,060,741
Municipal Bonds 1,483,913 41,659 (269) 1,525,303
Corporate Bonds 1,768,258 25,607 (474) 1,793,391
Totals $ 7,300,081 $ 84,251 $ (4,897) $ 7,379,435
</TABLE>
On August 8, 1996, the Company purchased 525,000 shares of the common
stock of First American Capital Corporation ("FACC") of Topeka, Kansas,
for $52,500. At June 30, 1998, FACC had raised total capital of
$7,856,750 from the sale of private placement shares and through a
$12,500,000 Kansas intrastate public stock offering which commenced on
March 11, 1997. The proceeds of the public offering have been used to
form a Kansas domiciled life insurance company, First Life America
Corporation. When the public offering is completed, the Company will
own less than 10% of outstanding common stock.
<PAGE>
On August 8, 1996, the Company purchased 725,000 shares of the common
stock of Mid-American Alliance Corporation ("MAAC") of Jefferson City,
Missouri, for $72,500. At June 30, 1998, MAAC had raised total capital
of $1,801,600 from the sale of shares through a $16,000,000 Missouri
intrastate public stock offering. On December 31, 1997, MAAC acquired
Mid American Century Life Insurance Company ("MACLIC"), a Missouri
domiciled life insurance company. The proceeds of the public offering
will be used to further capitalize MACLIC. When the public offering is
completed, the Company will own less than 10% of MAAC's outstanding
common stock.
On March 31, 1997, the Company purchased 500,000 shares of the $2.00 par
value Secured Non-Cumulative Redeemable Convertible Preferred Stock of
U.S. Star Financial Corporation ("U.S. Star") for $1,000,000. The
Preferred shares are collateralized with securities, which are in the
possession of the Company, that equal the total investment. All
interest earned on the collateral is retained by U.S. Star. The
Preferred shares are convertible into common shares at a rate of one
share of preferred for one share of common. U.S. Star can require the
conversion if it meets conditions set forth in the security agreement.
If the Preferred shares are not converted within eighteen months of the
date of purchase, the Preferred shares can be redeemed at the original
purchase price. As a result, these shares have been recorded in the
financial statements at cost.
On March 31, 1997, the Company purchased 200,000 shares of Paradise Plus
USA, Inc. and 200,000 shares of Paradise Plus Holding Company, Inc. for
a total investment of $20,000 or $.05 per share. Each company is
offering a total of 700,000 shares of its no par value common stock
through a private placement stock offering. As these shares represent
organizer shares and are restricted under Rule 144 of the Act, the
common stock investments have been recorded at cost. In addition, the
Company executed a $100,000 promissory note bearing interest at an
annual rate of 8.5% with Paradise Plus Holding Company, Inc. on March 5,
1997.
The carrying values of notes receivable and investments in unconsolidated
affiliates approximate their fair values. At June 30, 1998 and December
31, 1997, the fair values of notes receivable were $274,484 and $334,923,
respectively.
(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.
(E) Net Loss Per Common Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share". SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of convertible securities. Diluted earnings
per share is very similar to fully diluted earnings per share. The net
loss per share amounts for all periods have been presented to conform to
the SFAS 128 requirements for basic earnings per share. The diluted
earnings per share amounts are not presented as the effect of inclusion of
the stock options granted at December 31, 1997 as common stock equivalents
would be antidilutive.
Net loss per common share is based upon the weighted average number of
common shares outstanding each year. For the six months ended June 30,
1998 and 1997, all shares are assumed to be outstanding for the entire
year. The weighted average outstanding common shares were 5,614,740 in
1998 and 5,579,840 in 1997.
(F) Stock Options
The Company has adopted a stock option plan for 200,000 common stock
shares. On December 31, 1997, the Stock Option Committee granted 54,650
options, all of which were exercisable and outstanding at December 31,
1997. During 1998, 34,900 of these options were exercised.
<PAGE>
(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 six
months ended June 30, 1998 is calculated using an effective rate derived
from the previous year tax expense. For the six months ended June 30,
1998 and 1997 estimated Federal Income tax expense was $112,923 and
$79,200, respectively.
(H) Related Party Transactions
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.
Upon commencement of their public stock offerings (April 1, 1997 for FACC
and November 1, 1997 for MAAC), these fees increased to $2,000 per month.
Under the terms of the agreements, FACC and MAAC each incurred expenses
of $12,000 during 1998. Further, the Company has accounts receivable of
$8,961 and $9,045 from FACC and MAAC, respectively, at June 30, 1998 and
$6,914 and $14,372 from FACC and MAAC, respectively, at December 31, 1997.
Various officers and directors of the Company hold similar positions with
FACC and MAAC.
(I) Commitments and Contingencies
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 June 30, 1998, 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.
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.
<PAGE>
Results of Operations
Revenues for the six months ended June 30, 1998 and June 30, 1997 totaled
$1,350,749 and $893,888, respectively. The increase in revenues $456,861 for
the six months ended June 30, 1998 compared to June 30, 1997 is the result of
an increase in premium revenues of $378,083. Premium income during 1998
consists of $584,701 of first year premiums and $475,830 of renewal premiums.
During 1997, first year premium income totaled $333,624 and renewal premium
income totaled $312,572. The primary product marketed by the company was
modified in August of 1997 which changed the allocation between life and
annuity premiums. All first year premiums in 1998 are allocated to life
insurance.
Current year net investment income was comparable with previous year results.
Investment income for the first six months of 1998 totaled $288,960 which was
$4,409 increase over the same period of 1997. While the invested asset base
of insurance operations continued to increase, the investment base of the
parent company decreased due to investment sales. These factors, along with
a decrease in the interest rates earned on investments accounted for lower
than anticipated investment income.
Earnings of unconsolidated affiliates and other income increased $74,369
during the first six months of 1998 as compared to the same period in 1997.
As of December 31,1997, all of the venture capital investments had been
written off. Accordingly, 1998 operating results are not impacted by any
losses of venture capital investments. The primary component of other income
for the six month period ended June 30, 1998 is service fee revenue from First
American Capital Corporation and Mid-American Alliance Corporation.
For the six month period ended June 30, 1998, benefits and expenses totaled
$1,265,439. For the same period in 1997, benefits and expenses totaled
$965,659. This increase of $299,780 is the result of increased insurance
administration expenses related to higher sales volume offset by a decline in
death benefits paid. For the first six months of 1998, no death claims had
been incurred as compared to $17,069 for the same period of 1997. Increased
employee wages and higher incentive compensation earnings related to higher
premium volume accounted for the $55,607 increase in salaries, wages and
employee benefits. Policy reserves increased $179,636 due to new business
written and existing business reaching another duration. Agency expenses
increased $47,392 to $115,092 for the six months ended June 30, 1998 compared
to the same period in 1997. Additional agents hired, more extensive
recruiting and agent incentive contest accruals accounted for this increase.
Professional fees decreased from $105,941 for the six month period ended
June 30, 1997 to $84,680 for the same period in 1998. During 1997, the
company incurred actuarial charges for the re-design of the revised product
being marketed which did not reoccur in 1998.
Income from operations for the six months ended June 30, 1998 totaled $85,310.
For the same period in 1997, the loss from operations totaled $71,771. This
change is reflective of the increase in premium income and the elimination of
losses from venture capital investments.
Income tax expense totaled $112,923 for the six months ended June 30, 1998.
Income tax expense is calculated based on the earnings of First Alliance
Insurance Company. Income tax expense for the same period in 1997 totaled
$79,200. Of the current year tax expense of $112,923, $106,811 represent
deferred taxes which are based on timing differences between taxable income
and income reported under generally accepted accounting principles.
The increase in operating revenues for the three months ended June 30, 1998
and 1997 reflect the increases in the volume of new and renewal life insurance
sales along with the elimination of the losses of the venture capital
investments in 1998. The increase in expenses is also attributed to the
increase in the volume of insurance operations.
Consolidated Financial Condition
Changes in the consolidated balance sheet of June 30, 1998 compared to
December 31, 1997 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $871,879 from December 31, 1997 to June 30, 1998.
Deferred policy acquisition costs increased $346,245 net of $72,018 of
amortization as the result of new business written by FAIC and the costs
related to existing policies entering an additional duration being deferred.
Policy and contract liabilities increased $610,389 principally because (i)
life policy reserves increased $361,329 due to policies written in 1998 and
existing policies entering an additional duration and (ii) annuity contract
liabilities increased $297,442 as the result of annuity premiums received
which are recorded as a liability.
Changes in other liabilities include (i) a decrease of $75,086 in accrued
payroll due to the payment of employee incentives; (ii) an increase of
$126,378 in deferred tax liability due to timing difference between taxable
income and generally accepted accounting principles income; and (iii) an
increase in other liabilities of $147,555 due to cash received on pending
policy applications.
<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, 1998
<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)
Michael N. Fink, President Date August 14, 1998
Thomas I. Evans, Vice President/Asst. Secretary Date August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 7,379,435
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,379,435
<CASH> 3,616,696
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,420,730
<TOTAL-ASSETS> 14,170,243
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,869,956
<NOTES-PAYABLE> 0
0
0
<COMMON> 561,474
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,170,243
1,024,278
<INVESTMENT-INCOME> 288,960
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 37,511
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 200,201
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 85,310
<INCOME-TAX> 112,923
<INCOME-CONTINUING> (27,613)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,613)
<EPS-PRIMARY> (0.005)
<EPS-DILUTED> (0.005)
<RESERVE-OPEN> 761,808
<PROVISION-CURRENT> 361,328
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,123,136
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
