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 March 31, 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
incorporation or organization) (I.R.S. Employer Identification
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 May 12, 1998
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in dollars)
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost, $7,058,411
and $9,016,891 in 1998 and 1997, respectively) $7,107,440 $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) 319,397 334,923
Total investments 8,446,837 10,393,617
Cash and cash equivalents 3,595,567 1,335,455
Investments in related parties 125,000 125,000
Receivables from related parties 38,808 21,286
Accrued investment income 112,214 151,813
Deferred policy acquisition costs (net of
amortization of $80,939 in 1998 and $128,183
in 1997) 1,215,589 1,074,485
Prepaid expenses 49,858 20,662
Office furniture and equipment, less accumulated
depreciation of $57,046 and $ 53,533 in 1998
and 1997, respectively 50,690 32,026
Advances to agents 32,824 23,251
Premiums due 26,219 27,951
Other assets 18,244 92,818
Total Assets $13,711,850 $13,298,364
Liabilities and Shareholders' Equity
Policy liabilities and accruals 2,529,064 2,259,567
Federal income taxes payable 254,886 205,706
Accounts payable 85,757 31,134
Other liabilities 245,844 235,599
Total liabilities 3,115,551 2,732,006
Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,614,740 shares
issued and outstanding at March 31,
1998 and 5,579,840 shares issued and
outstanding at December 31, 1997 561,474 557,984
Additional paid in capital 12,141,925 12,141,546
Unrealized investment gains (losses)
(net of deferred federal income tax benefit
(expense) of $1,170 in 1998 and ($7,413)
in 1997 40,449 14,390
Retained Earnings (2,147,549) (2,147,562)
Total Shareholders' equity 10,596,299 10,566,358
Total liabilities and shareholders' equity $13,711,850 $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
March 31, March 31,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues
Premium Income (net of reinsurance of
$20,158 in 1998 and $20,849 in 1997) $ 495,417 $ 397,249
Net Investment Income 139,639 152,357
Earnings of unconsolidated affiliates
and other income 13,158 (44,910)
Total revenue 648,214 504,696
Benefits and expenses
Salaries, wages and employee benefits 199,998 175,170
Increase in policy reserves 160,708 101,567
Commissions 168,229 124,132
Policy acquisition costs deferred (222,034) (234,305)
Amortization of deferred policy
acquisition costs 80,939 128,183
Other insurance benefits and expenses 39,092 45,357
Agency expenses 55,589 40,809
Professional fees 41,863 34,157
Other expenses 75,700 69,235
Total benefits and expenses 600,084 484,305
Income/(loss) from operations 48,130 20,391
Federal income taxes 48,116 42,500
Net income/(loss) $ 14 $ (22,109)
Net income/(loss) per common share-basic
and diluted $ 0.000 $ (0.004)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in dollars)
<CAPTION>
Three months ended
March 31, March 31,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash provided/(used) in operating
activities $ 153,154 $ (41,114)
Investing activities:
Purchase of available-for-sale fixed
maturities - (251,452)
Maturity of available-for-sale fixed
maturities 1,949,863 1,240,781
Notes Receivable - (186,108)
Purchase of Preferred Stock - (1,000,000)
Purchase of Common Stock - (20,000)
Purchase of furniture and equipment (22,177) (2,863)
Net cash used in investing activities 1,927,686 (219,642)
Financing activities:
Deposits on annuity contracts 175,402 202,444
Exercise of common stock options 3,870 -
Net cash provided by financing activities 179,272 202,444
Increase/decrease in cash and cash equivalents 2,260,112 (58,312)
Cash and cash equivalents beginning of period $1,335,455 $ 908,276
Cash and cash equivalents at end of period $3,595,567 $ 849,964
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
Part I
FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(A) Basis of Presentation
The accompanying condensed consolidated financial statements of First
Alliance Corporation and its Subsidiaries ( the "Company") for the three
month period ended March 31, 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 three month period ending March 31, 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 March 31, 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Loss Fair Value
<S> <C> <C> <C> <C>
U.S. Government Bonds $4,049,983 $ 5,066 $ (12,771) $ 4,042,278
Municipal Bonds 1,238,208 37,286 (631) 1,274,863
Corporate Bonds 1,770,220 21,260 (1,181) 1,790,299
Totals $7,058,411 $ 63,612 $ (14,583) $ 7,107,440
</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 March 31, 1998, FACC had raised total capital of
$5,410,725 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 March 31, 1998, MAAC had raised total capital
of $952,600 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 March 31, 1998 and December
31, 1997, the fair values of notes receivable were $319,396 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 Income/(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 income/(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 income/(loss) per common share is based upon the weighted average
number of common shares outstanding each year. For the three months
ended March 31, 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.
<PAGE>
(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 the first quarter of 1998, 34,900 of these options were
exercised.
(G) Federal Income Taxes
The company does not file a consolidated federal income tax return with
FAIC. FAIC is taxed as a life insurance company under the provisions of
the Internal Revenue Code and must file a separate tax return for its
initial six years of existence. Federal income tax expense for the
quarter ended March 31, 1998 is calculated using an effective rate derived
from the previous year tax expense. At March 31, 1998 and 1997 estimated
Federal Income tax expense was $48,116 and $42,500, 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
$6,000 during 1998. Further, the Company has accounts receivable of
$6,425 and $32,383 from FACC and MAAC, respectively, at March 31, 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 March 31, 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
<PAGE>
- -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 three months ended March 31 totaled $648,214 in 1998 and
$504,696 in 1997. The primary source of revenue for the Company is life
insurance premium income. Premium income for the first three months of 1998
increased $98,168 in comparison to 1997 results. Premium income consists of
life insurance premium sales of the Company's initial product referred to as
the "Alliance 2000." An annuity rider is also included with the Alliance
2000; however, according to Statement of Financial Accounting Standards
("SFAS") No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from Sales
of Investments", annuity premium income is not recognized as revenue.
Annuity premium receipts for the first quarter of 1998 and 1997 totaled
$176,686 and $202,444, respectively, and are recognized as annuity contract
liabilities. Pursuant to the terms of the reinsurance agreement between FAIC
and Business Men's Assurance Company, there are no first year premiums due.
However, SFAS No. 113, "Accounting and Reporting for Reinsurance of Short
- -Duration and Long-Duration Contracts", requires this unpaid premium to be
recognized as an expense and amortized over the term of the contracts
reinsured. At March 31, 1998 and 1997, amortization of reinsurance premiums
payable totaled $18,550 and $3,089, respectively.
Combined net investment income for FAIC and the Company totaled $139,639 for
the quarter ended March 31, 1998 and $152,357 for the same period in 1997.
Net investment income decreased during 1998 in comparison to 1997 due
primarily to the loss of interest as a result of the U.S. Star preferred
stock investment.
For the period ended March 31, 1998, expenses totaled $600,084 representing
an increase of $115,779 over the same period of 1997. Life policy reserve
expense increased from $101,567 for the three months ended March 31, 1997
to $160,708 for the three months ended March 31, 1998. This increase is due
to new insurance sales and existing policies reaching another duration.
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
$222,034 for the quarter ended March 31, 1997 and $234,305 for the same
period in 1997. Amortization of these costs totaled $80,939 for the quarter
ended March 31, 1997 and $128,183 for the same period in 1997. Death claims
incurred during the first quarter of 1997 totaled $17,069. There were no
death claims for the same period in 1998. Expenses directly related to FAIC's
agency totaled $55,589 for the first quarter of 1998. 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 $40,809 for the same period in 1997.
Salaries and benefit expenses totaled $199,998 for the first quarter of 1998
and $175,170 for the same period of 1997. Professional fees totaled $41,863
for the first quarter of 1998 and $34,157 in 1997. The increase from last
year is attributable to additional audit fees related to the 1997 year end
audit.
During the first quarter of 1997, FKCC incurred operating losses totaling
$39,119. These losses are the result of the inclusion of operating losses
from Medical Acceptance Corporation ("MAC") in the operating results of the
Company and the equity in the losses of LGP, Inc. and Cybertyme, Inc. In
1997, FKCC sold its interest in MAC and wrote off the investments of LGP, Inc.
and Cybertyme, Inc., and accordingly, there is no resulting impact from
venture capital operations in 1998.
Income tax expense, which is calculated based on the earnings of FAIC, totaled
$48,116 during the first quarter of 1998 and $42,500 for the same period of
1997. Current tax expense is estimated based on the effective tax rate for
<PAGE>
fiscal year 1997.
Consolidated Financial Condition
Changes in the consolidated balance sheet of March 31, 1998 compared to
December 31, 1997 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $413,486 from December 31, 1997 to March 31, 1998.
Deferred policy acquisition costs increased $141,104 net of $80,939 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 $269,497 principally because of (i)
life policy reserves increased $160,708 due to policies written in 1998 and
existing policies entering an additional duration and (ii) annuity contract
liabilities increased $175,402 as the result of annuity premiums received
which are recorded as a liability.
Changes in other liabilities include (i) a decrease of $76,695 in accrued
payroll due to the payment employee incentives; (ii) an increase of $45,870
in the deferred tax liability and (iii) an increase in other liabilites of
$79,744 due to cash received on pending policy applications.
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.
<PAGE>
Part II.
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits - None
Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 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)
/s/ Michael N. Fink Date May 15, 1998
Michael N. Fink, President
/s/ Thomas I. Evans Date May 15, 1998
Thomas I. Evans, Vice President/Asst. Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 7,107,440
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,107,440
<CASH> 3,595,567
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,215,589
<TOTAL-ASSETS> 13,711,850
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,529,064
<NOTES-PAYABLE> 0
0
0
<COMMON> 561,474
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,711,850
495,417
<INVESTMENT-INCOME> 139,639
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 13,158
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 80,939
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 48,130
<INCOME-TAX> 48,116
<INCOME-CONTINUING> 14
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
<RESERVE-OPEN> 761,808
<PROVISION-CURRENT> 160,708
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 922,516
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
