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, 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 November 1, 1998.
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost, $6,819,079
and $9,016,891 in 1998 and 1997,
respectively) $ 7,051,265 $ 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) 251,434 334,923
Total investments 8,322,699 10,393,617
Cash and cash equivalents 4,320,841 1,335,455
Investments in related parties 125,000 125,000
Receivables from related parties 22,880 21,286
Accrued investment income 122,266 151,813
Deferred policy acquisition costs (net of
amortization of $200,201 in 1998 and
$128,183 in 1997) 1,678,409 1,074,485
Prepaid expenses 50,674 20,662
Office furniture and equipment, less accumulated
depreciation of $65,208 and $53,533 in 1998
and 1997, respectively 46,815 32,026
Advances to agents 50,788 23,251
Premiums due 24,022 27,951
Other assets 24,134 92,818
Total Assets $ 14,788,528 $ 13,298,364
Liabilities and Shareholders' Equity
Policy liabilities and accruals 3,197,107 2,259,567
Federal income taxes payable 465,110 205,706
Accounts payable 83,778 31,134
Other liabilities 262,679 235,599
Total liabilities 4,008,674 2,732,006
Commitments and Contingencies (Note H)
Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,614,740 shares
issued and outstanding at September 30,
1998 and 5,579,840 shares issued and
outstanding at December 31, 1997 561,514 557,984
Additional paid in capital 12,148,658 12,141,546
Accumulated Comprehensive Income net of
deferred federal income tax expense of
$71,531 in 1998 and $7,413 in 1997 153,244 14,390
Retained Earnings (2,083,562) (2,147,562)
Total Shareholders' equity 10,779,854 10,566,358
Total liabilities and shareholders' equity $ 14,788,528 $ 13,298,364
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
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Premium Income $ 557,753 $ 266,101 $ 1,582,031 $ 912,296
Net Investment Income 148,447 153,096 437,407 437,647
Realized gains on
investments 6,664 - 6,664 -
Earnings of
unconsolidated
affiliates and other
income 25,143 (26,232) 62,654 (63,090)
Total revenue 738,007 392,965 2,088,756 1,286,853
Benefits and expenses
Salaries, wages and
employee benefits 190,669 165,553 583,685 502,962
Increase in policy
reserves 158,828 86,428 520,156 268,120
Commissions 246,296 99,978 644,255 321,522
Policy acquisition
costs deferred (275,675) (118,490) (821,118) (541,856)
Amortization of
deferred policy
acquisition costs 16,992 58,912 217,193 251,305
Other insurance
benefits and
expenses 47,223 107,563 136,699 199,254
Agency expenses 65,647 49,363 180,739 117,073
Professional fees 26,467 52,019 111,147 157,960
Other expenses 84,016 (86,284) 253,146 104,361
Total benefits and
expenses 560,463 415,042 1,825,902 1,380,701
Income/(loss) from
operations 177,544 (22,077) 262,854 (93,848)
Federal income taxes 85,932 27,200 198,855 106,400
Net Income/(loss) $ 91,612 $ (49,277) $ 63,999 $ (200,248)
Net Income/(loss) per
common share-basic
and diluted $ 0.02 $ (0.01) $ 0.01 $ (0.04)
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,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net cash provided/(used) in operating
activities $ 390,040 $ (307,191)
Investing activities:
Purchase of available-for-sale
fixed maturities (782,760) (750,000)
Maturity of available-for-sale
fixed maturities 2,965,829 2,039,680
Short-term investments sold/(acquired) - -
Notes Receivable 8,489 -
Purchase of Preferred Stock - (1,000,000)
Purchase of Common Stock - (20,000)
Purchase of furniture and equipment (26,464) (3,791)
Net cash used in investing activities 2,165,094 265,889
Financing activities:
Deposits on annuity contracts 371,792 489,754
Policyholder premiums 47,817 -
Sale of common stock 10,643 -
Cost of stock offering - 17
Net cash provided by financing activities 430,252 489,771
Increase(Decrease) in cash and cash equivalents 2,985,386 448,469
Cash and cash equivalents beginning of period $ 1,335,455 $ 908,276
Cash and cash equivalents at end of period $ 4,320,841 $ 1,356,745
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
STATEMENT OF COMPREHENSIVE INCOME
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $ 91,612 $ (49,277) $ 63,999 $ (200,248)
Other comprehensive
income, net of tax:
Unrealized gains on
securities 100,870 71,946 153,244 28,377
Comprehensive Income $ 192,482 $ 22,669 $ 217,243 $ (171,871)
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
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 period ended September 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 nine month period ending September 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) Comprehensive Income
The Company reports comprehensive income as required by FAS 130
"Reporting Comprehensive Income". According to FAS 130, all items that
are required to be recognize d under accounting standards as components
of comprehensive income, shall be displayed in the financial statements.
Comprehensive income is defined as changes in the net equity of a
business from other than non owner sources. Comprehensive income is
reported as a separate item from net income in the Statement of
Comprehensive Income. Additionally, accumulated comprehensive income is
reported as a separate component in the equity section of the balance
sheet. Comprehensive income reported in these financial statements
consists of unrealized holding gains and losses net of the appropriate
taxes.
(D) Investments
The Company classifies all of its available-for-sale fixed maturities at
the current market value. Adjustments to market value are recognized as
comprehensive income and reported net of applicable federal income taxes
as a separate component of shareholders' equity and in the Statement of
Comprehensive Income. Amortized cost of investments at September 30, 1998
was $6,819,079 with gross unrealized gains of $233,684 and gross unrealized
investment losses of $1,498 resulting in a market value of $7,015,265 for
available-for-sale fixed maturity investments.
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. On November 10,1998, FACC had raised total capital of
$12,500,000 from the sale of private placement shares through a
$12,500,000 Kansas inrastate public stock offering which commenced on
March 11, 1997. A 10% over-sale of the offering was registered with
the Kansas Department of Securities which allows FACC to raise an
additional $1,250,000 of capital for a total of $13,750,000. The
proceeds of the public offering have been used to form a Kansas
<PAGE>
domiciled life insurance company, First Life America Corporation
("FLAC"). FLAC began test marketing its initial insurance product
in October of this year. When the public offering is completed, the
Company will own less than 10% of outstanding common stock.
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 November 10, 1998, MAAC had raised total
capital of $2,976,800 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 September 30, 1998 the Company's Board
of Directors voted to redeem the Preferred shares of the U.S. Star.
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 September 30, 1998 and
December 31, 1997, the fair values of notes receivable were $326,434
and $334,923, respectively.
(E) 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. Acquisition costs are initial expenses incurred by the Company
related to the sale of life insurance such as commissions and
administrative service fees. These acquisition costs are being
amortized over the premium paying period of the related policies.
(F) 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 Company had 35,300 option shares outstanding which are convertible
securities and impacts the dilutive earnings per share calculation.
The net income and loss per share amounts for all periods have been
presented to conform to the SFAS 128 requirements for basic earnings per
share.
<PAGE>
Diluted earnings per share are not presented since the minimal number of
outstanding dilutive securities does not change the basic earnings per
share amounts. Net income per common share is based upon the weighted
average number of common shares outstanding each year. For the nine
months ended September 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. Diluted
outstanding common shares totaled 5,650,070 in 1998.
(G) 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 three quarters of 1998, 35,300 of these options
were exercised.
(H) 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
nine months ended September 30, 1998 is calculated using an effective
rate derived from the previous year tax expense. For the nine months
ended September 30, 1998 and 1997 estimated Federal Income tax expense
was $198,855 and $79,200, respectively.
(I) 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
$19,933 and $2,947 from FACC and MAAC, respectively, at September 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.
(J) 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 September 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 following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes thereto.
<PAGE>
Results of Operations
Revenues for the nine months ending September 30, 1998 and September 30,
1997 totaled $2,088,756 and $1,286,853, respectively. For the three month
period ending September 30, 1998 and 1997, revenues totaled $738,007 and
$392,965, respectively. Total premium income increased $669,735 during
the nine months ended September 30, 1998 as compared to the same period in
1997. This increase is the result of intensified marketing efforts and the
increase in the sales agency. These factors also accounted for the $291,652
increase in premium revenue for the three months ended September 30, 1998 as
compared to the same period of 1997. First year premium income for the nine
months ending September 30, 1998 and 1997 totaled $931,745 and $480,191
respectively. 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
while 60% of premium income was allocated to life insurance through August
of 1997.
Earnings of unconsolidated affiliates and other income increased $125,744
during the first nine months of 1998 as compared to the first nine months of
1997. By December 31, 1997 all of the venture capital investments had been
written off. For the nine months ended September 30, 1997 losses from
unconsolidated affiliates totaled $47,278. In 1998 operating results are not
impacted by any losses of venture capital investments. The primary component
of other income for the nine month period ended September 30, 1998 is
revenues from service fees from First American Capital Corporation and
Mid-American Alliance Corporation which totaled $36,000 for the nine months
ending September 30, 1998. These fees totaled $24,000 for the same period of
1997.
For the nine month period ended September 30, 1998, benefits and expenses
totaled $1,825,902. For the same period in 1997, benefits and expenses
totaled $1,380,701. This increase of $445,201 is the result of increased
volume of insurance operations. Salaries, wages and employee benefits
increased $80,723 due to additional employees hired, an increase in employee
wages and higher incentive compensation earnings based on premium revenues.
During the first nine months of 1998, policy reserves increased $252,036 due
to new business written and existing policies reaching another duration.
Agency expenses increased $63,666 to $180,739 for the nine months ended
September 30, 1998 compared to the same period in 1997. Additional agents
hired along with more extensive recruiting and agency contests accounted for
the increase. Professional fees decreased from $157,960 for the nine month
period ended September 30, 1997 to $111,147 for the same period in 1998.
During 1997, the company incurred actuarial charges for the re-design of
the revised product being marketed. These costs did not reoccur in 1998.
Income from operations for the nine months ended September 30, 1998 totaled
$262,854. For the same period in 1997, the loss from operations totaled
$93,848.
Income tax expense totaled $198,855 for the nine months ended September 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 $106,400. Of the total tax expense of $198,855, $187,873
represent deferred taxes which are based on timing differences between
taxable income and income reported under generally accepted accounting
principles.
Consolidated Financial Condition
Changes in the consolidated balance sheet of September 30, 1998 compared to
December 31, 1997 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $1,490,164 from December 31, 1997 to September 30,
1998. Available-for-sale fixed maturity investments decreased $1,987,429
as the result of maturities and sale of investments. Cash and cash
equivalents increased $2,985,386 due to cash provided by insurance
operations and investment maturities and sales held in interest bearing
accounts. Deferred acquisition costs increased $603,924 net of amortization
of $217,193. This increase is the result of commissions and service fees
being deferred related to new business written. Prepaid expenses increased
$30,012 due to the timing of payroll checks and health insurance payments.
<PAGE>
Advances related to newly submitted premiums and agents expenses accounted
for a $27,537 increase in advances to agents. Other assets decreased $68,684
due to the repayment of employee advances owed to the company.
Liabilities increased $1,276,668 as the result of increased insurance
operations. Policy liabilities and accruals increased $937,540. Policy
liabilities and accruals primarily consist of life insurance reserves and
annuity contract deposits which increase due to new business written and
policies reaching additional durations. Federal income taxes payable
increased $259,404 due to deferred federal income taxes based on the
insurance operations. Accounts payable increased $52,644 due to the accrual
of audit fees for the 1998 fiscal year audit. Other liabilities increased
$27,080 due to deposits by policyholders 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
nine months ended September 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 November 13, 1998
Thomas I. Evans, Vice President/Asst. Secretary Date November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 7,051,265
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,051,265
<CASH> 4,320,841
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,678,409
<TOTAL-ASSETS> 14,788,528
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3,197,107
<NOTES-PAYABLE> 0
0
0
<COMMON> 561,514
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,788,528
1,582,031
<INVESTMENT-INCOME> 437,407
<INVESTMENT-GAINS> 6,664
<OTHER-INCOME> (62,654)
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 136,699
<INCOME-PRETAX> 262,854
<INCOME-TAX> 198,855
<INCOME-CONTINUING> 63,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,999
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<RESERVE-OPEN> 761,808
<PROVISION-CURRENT> 496,156
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,257,964
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
