<PAGE>
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, 1999
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 - 5,614,165 shares as of October 31,
1999.
FIRST ALLIANCE CORPORATION
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations
for the three months ended September 30, 1999 and 1998
and for the nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Statement of changes in Shareholder
Equity for the periods ended September 30, 1999 and
December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
Unaudited
Assets
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost,
$5,352,856 and $5,973,453 in 1999 and
1998, respectively) $ 5,332,844 $ 6,121,129
Common stock 116,363 20,000
Limited partnership 22,500 -
Notes receivable (net of $149,698 valuation
allowance in 1999 and 1998) 125,463 221,636
Policy loans 3,571 -
------------ ------------
Total investments 5,600,741 6,362,765
Cash and cash equivalents 8,236,071 6,587,264
Investments in related parties 125,000 125,000
Receivables from related parties 33,510 20,496
Accrued investment income 105,857 107,416
Federal income tax recoverable 19,631 -
Deferred policy acquisition costs 2,493,408 1,848,419
Prepaid expenses 59,438 23,427
Office furniture and equipment,
less accumulated depreciation of $77,263
and $60,965 in 1999 and 1998, respectively 35,825 43,684
Advances to agents 51,938 57,676
Premiums due 65,272 47,130
Other assets 17,386 9,748
------------ ------------
Total assets $ 16,844,077 $ 15,233,025
============ ============
See notes to condensed consolidated financial statements
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
September 30, December 31,
1999 1998
(Unaudited)
Liabilities and Shareholders' Equity
Policy and contract liabilities:
Annuity contract liabilities $ 2,637,049 $ 1,763,029
Life policy reserves (net of reinsurance
ceded reserves of $114,073 and $88,534
in 1999 and 1998, respectively) 2,115,907 1,493,766
Deposits on pending policy applications 233,561 216,565
Unearned revenue 88,424 102,993
Policyholder premium deposits 199,479 177,528
Reinsurance premiums payable 97,039 65,183
------------ ------------
Total policy and contract liabilities 5,371,459 3,819,064
Federal income taxes payable:
Current - 32,258
Deferred 550,312 458,932
Other taxes payable 6,163 -
Commissions, salaries, wages and
benefits payable 107,285 64,740
Accounts payable and accrued expenses 30,157 31,305
------------ ------------
Total liabilities 6,065,376 4,406,299
Claims and contingencies (Note 12)
Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,614,165 and 5,620,690
shares issued and outstanding at September
30, 1999 and December 31, 1998 561,417 562,069
Additional paid in capital 12,346,735 12,180,353
Retained Earnings - deficit (2,108,869) (2,013,165)
Accumulated other comprehensive income (20,582) 97,469
------------ ------------
Total shareholders' equity 10,778,701 10,826,726
------------ ------------
Total liabilities and shareholders' equity $ 16,844,077 $ 15,233,025
============ ============
See notes to condensed consolidated financial statements.
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30 September 30, September 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Premium Income $ 754,158 $ 557,753 $ 2,332,812 $ 1,582,031
Net Investment
Income 158,851 148,447 478,160 437,407
Realized gains on
investments - 6,664 - 6,664
Other income 34,995 25,143 93,130 62,654
----------- ----------- ----------- -----------
Total revenue 948,004 738,007 2,904,102 2,088,756
Benefits and
expenses
Increase in policy
reserves 181,501 158,828 622,141 520,156
Death claims 13,382 - 88,351 -
Policyholder
surrender values 9,132 - 30,570 -
Interest credited
on annuities and
Premium deposit
fund 52,221 28,511 142,646 76,523
Commissions 312,978 246,296 928,872 644,255
Policy acquisition
costs deferred (399,583) (275,675) (1,181,969) (821,118)
Amortization of
deferred policy
acquisition costs 202,396 16,992 536,980 217,193
Selling,
administrative
and general
insurance expenses 113,340 86,174 265,384 245,806
Salaries, wages and
employee benefits 256,344 190,669 777,367 583,685
Professional fees 19,796 26,467 111,476 111,147
Miscellaneous taxes 23,028 - 33,207 -
Advisory board and
directors fees 18,065 14,516 64,797 48,571
Rent expense 22,294 19,609 65,092 58,024
Depreciation expense 3,927 4,243 11,582 11,675
State insurance
department exam fees 42,951 - 42,951 -
Other expenses 36,357 43,833 174,957 129,985
----------- ----------- ----------- -----------
Total benefits
and expenses 908,129 560,463 2,714,404 1,825,902
----------- ----------- ----------- -----------
Income from
operations 39,875 177,544 189,698 262,854
----------- ----------- ----------- -----------
Federal income taxes 39,865 85,932 164,302 198,855
----------- ----------- ----------- -----------
Net income/(loss) $ 10 $ 91,612 $ 25,396 $ 63,999
=========== =========== =========== ===========
Net income/(loss)
per common share
- basic and
diluted $ 0.00 $ 0.02 $ 0.00 $ 0.01
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended Year ended
September 30, December 31,
1999 1998 1998
(Unaudited)
Common stock:
Balance, beginning of year $ 562,069 $ 557,984 $ 557,984
Exercise of stock options
(35,300 and 40,850 shares) - 3,530 4,085
Sale of shares in private
placement (95,475 shares) 9,548 - -
Company stock acquired
(102,000 shares) (10,200) - -
----------- ----------- -----------
Balance, end of year 561,417 561,514 562,069
Additional paid-in capital:
Balance, beginning of year 12,180,353 12,141,546 12,141,546
Exercise of stock options
(35,300 and 40,850 shares) - 7,112 38,807
Sale of shares in private
placement (95,475 shares) 229,140 - -
Cost of private placement (53,158) - -
Company stock acquired
(14,000 shares) (9,600) - -
----------- ----------- -----------
Balance, end of year 12,346,735 12,148,658 12,180,353
Retained earnings-deficit:
Balance, beginning of year (2,013,165) (2,147,562) (2,147,562)
Net income (loss) 25,396 63,999 134,397
Company stock acquired (121,100) - -
----------- ----------- -----------
Balance, end of year (2,108,869) (2,083,563) (2,013,165)
Accumulated other comprehensive
income:
Balance, beginning of year 97,469 14,390 14,390
Net unrealized gain (loss)
on available-for-sale
securities net of
reclassification
adjustment (see below) (118,051) 138,854 83,079
----------- ----------- -----------
Balance, end of year (20,582) 153,244 97,469
----------- ----------- -----------
Total shareholders' equity $10,778,701 $10,779,853 $10,826,726
=========== =========== ===========
Disclosure of reclassification
amount:
Unrealized holding gains
(loss) arising during period $ (118,051) $ 138,854 $ 87,586
Less: reclassification
adjustment for (gains) loss
included in net income - - (4,507)
----------- ----------- -----------
Net unrealized gains (loss)
on securities $ (118,051) $ 138,854 $ 83,079
=========== =========== ===========
See notes to consolidated financial statements.
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
Cash Flows from Operations:
Net cash provided by operating activities $ 297,983 $ 390,040
Investing activities:
Purchase of available-for-sale fixed
maturities (398,256) (782,760)
Maturity of available-for-sale fixed
maturities 1,000,000 2,965,829
Purchase of common stock (107,537) -
Purchase of limited partnership interest (22,500) -
Decrease in notes receivable 96,173 8,489
Net (increase)/decrease in furniture and
equipment (3,723) (26,464)
----------- -----------
Net cash provided by investing activities 564,157 2,165,094
Financing activities:
Deposits on annuity contracts, net 730,344 371,792
Policyholder premium deposits, net 11,693 47,817
Purchase of company stock (140,900) -
Proceeds from sale of common stock 185,530 10,643
----------- -----------
Net cash provided by financing activities 786,667 430,252
----------- -----------
Increase in cash and cash equivalents 1,648,807 2,985,386
Cash and cash equivalents beginning of period $ 6,587,264 $ 1,335,455
----------- -----------
Cash and cash equivalents at end of period $ 8,236,071 $ 4,320,841
=========== ===========
See notes to condensed consolidated financial statements.
FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) 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, 1999 and 1998 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, 1998. Certain reclassifications have been made in the prior
period financial statements to conform with the current year presentation.
(2) 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 periods ending September 30, 1999 and 1998.
(3) Investments
The Company classifies all of its available-for-sale fixed maturities at
the current market value. Adjustments to market value are recognized as a
separate component of shareholders' equity net of applicable federal income
tax effects. The following table details the investment values at
September 30, 1999:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Loss Fair Value
U.S. Government Bonds $ 1,791,940 $ 2,231 $ (16,596) $ 1,777,574
Municipal Bonds 879,627 5,312 (7,209) 877,730
Corporate Bonds 2,681,289 9,154 (12,903) 2,677,540
----------- -------- ----------- -----------
$ 5,352,856 $ 16,697 $ (36,708) $ 5,332,844
=========== ======== =========== ===========
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. FACC completed its Kansas intrastate public stock offering
on January 11, 1999, raising total capital of $13,750,000. The proceeds
of the public offering have been used to form a Kansas domiciled life
insurance company, First Life America Corporation. The Company own's
9.9% of the outstanding common stock of FACC.
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 September 30, 1999, MAAC had raised total
capital of $7,277,947 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.
(3) Investments (continued)
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 were convertible into common shares at a rate of one
share of preferred for one share of common. U.S. Star could have required
the conversion if it met conditions set forth in the security agreement.
If the Preferred shares were not converted within eighteen months of the
date of purchase, the Preferred shares could have been redeemed at the
original purchase price. On September 30, 1998, the Preferred shares were
redeemed for approximately the original purchase price. The preferred
shares contained a provision under which the Company received dividends in
the form of common stock. During 1998, the Company received 45,000 shares
of U.S. Star common stock. The common stock received is restricted from
sale or transfer under rule 144 of the Act. Accordingly, the value of the
common stock dividend could not be determined and therefore the Company
did not recognize any dividend income or record the common stock at any
value.
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. At
September 30, 1999 and December 31, 1998, the unpaid principal balance on
this note was $69,636.
On June 16, 1999, First Kentucky Capital Corporation executed a commitment
to purchase three units of the Prosperitas Partners, LP ("Prosperitas")
for $450,000. Prosperitas is a venture capital fund based in Louisville,
Kentucky. An initial payment of $22,500, which represents five percent of
the total investment, was paid upon the execution of the subscription
agreement. Upon receipt of the Small Business Investment Company ("SBIC")
license from the U.S. Small Business Association by Prosperitas,
twenty-eight percent of the capital commitment is due. The remaining
amount of the commitment is due in equal installments on the second and
fourth anniversaries of the initial capital contribution.
The carrying values of notes receivable and investments in unconsolidated
affiliates approximate their fair values. At September 30, 1999 and
December 31, 1998, the fair values of notes receivable were $130,384 and
$221,636, respectively.
(4) Deferred Policy Acquisition Costs
Commissions and other cost of acquiring life insurance, which vary with,
and are primarily related to, the production of new insurance contracts
have been deferred to the extent recoverable from future policy revenues
and gross profits. The acquisition costs are amortized over the premium
paying period of the related policies using assumptions consistent with
those used in computing policy reserves.
(5) Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". All earnings and losses per share amounts for all periods have
been presented to conform with the requirements of SFAS No. 128.
Net income (loss) per common share is based upon the weighted average
number of common shares outstanding each year. For the three months ended
September 30, 1999 and September 30, 1998 and for the nine months ended
September 30, 1999 and 1998, all shares are assumed to be outstanding for
the entire period. The weighted average outstanding common shares were
5,614,165 in 1999 and 5,615,140 in 1998.
(6) 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. At September 30, 1999 and 1998 estimated
Federal Income tax expense was $164,302 and $198,855, respectively.
(7) Related Party Transactions
Effective November 1, 1995, the Company entered into a service agreement
with FAIC to provide personnel, facilities, and services to FAIC. The
services to be performed pursuant to the service agreement are
underwriting, claim, processing, accounting, processing and servicing
policies, and other services necessary to facilitate FAIC's business. The
agreement is in effect until either party provides ninety days written
notice of termination. Under the agreement, FAIC pays monthly fees based
on life and annuity premiums delivered by FAIC. The percentages are 25%
of first year premiums; 20% of second year premiums; 10% of third year
premiums; and 5% of premiums in years four and thereafter. FAIC will
retain general insurance expenses related to its sales agency, such as
agent training and licensing, agency meeting expense and agent's health
insurance. Pursuant to the terms of the agreement, FAIC had incurred
expenses of $587,394 and $429,709 for the nine months ended September 30,
1999 and 1998, respectively.
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
and the MAAC fees increased to $3,000 per month on February 1, 1999.
In December 1998, the Company contracted with FACC to provide underwriting
and accounting services for FLAC and FACC. The agreement dated September
1, 1996 between the Company and FACC was terminated with the execution of
the new agreement. Under the terms of the management agreement, FACC
pays fees based on a percentage of delivered premiums of FLAC. The
percentages are five and one half percent (5.5%) for first year premiums;
four percent (4%) of second year premiums; three percent (3%) of third
year premiums; two percent (2%) of fourth year premiums and one percent
(1%) of fifth year premiums and one percent (1%) for years six through
ten for ten year policies and one-half percent (.5%) in years six through
twenty for twenty year policies.
Under the terms of the agreements, FACC and MAAC incurred expenses of
$43,837 and $26,000, respectively, during the nine months ending September
30, 1999 and $18,000 and $18,000, respectively, during the nine months
ending September 30, 1998. Further, the Company has accounts receivable
of $27,315 and $6,196 from FACC and MAAC, respectively, at September 30,
1999 and $14,134 and $6,362 from FACC and MAAC, respectively, at December
31, 1998.
(8) Private Placement Offering
The Company is currently offering 200,000 shares of no par value common
stock for $2.50 per share. The securities are exempted from registration
in reliance on Rule 506 of Regulation D of the Securities Act of 1933 and
related exemptions at the state level. Additionally, these securities are
restricted from transfer for one year after the close of the offering
under Rule 144 of the Securities Act of 1933. At September 30, 1999, the
Company had sold 95,475 shares raising total proceeds of $238,688.
(9) Comprehensive income
The components of comprehensive income along with the related tax effects
are presented for the quarters ended September 30, 1999 and 1998 as
follows:
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
Unrealized gain
on available-for
-sale securities
Unrealized holding
gains/(losses)
during the period $ (17,104) $ 152,834 $ (178,863) $ 202,972
Tax benefit/(expense) 5,817 51,964 60,814 (64,118)
---------------------------------------------------------
Other comprehensive
income $ (11,287) $ 204,798 $ (118,049) $ 138,854
=========================================================
Net income/(loss) $ 91,612 $ (49,277) $ 25,396 $ 63,999
Other comprehensive
income/(loss) net
of tax effect:
Unrealized
investment gains
/(loss) (11,287) 204,798 (118,049) 138,854
---------------------------------------------------------
Comprehensive
income/(loss) $ 80,325 $ 155,521 $ (92,653) $ 202,852
=========================================================
Net income/(loss)
per common share
-basic and diluted $ 0.01 $ 0.03 $ (0.02) $ 0.04
=========================================================
(10) Segment Information
The operations of the Company and its subsidiaries have been classified
into three operating segments as follows: life and annuity insurance
operations, venture capital operations, and corporate operations.
Segment information as of September 30, 1999 and 1998 and for the periods
then ended is as follows:
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Life and annuity
insurance
operations $ 893,207 $ 696,315 $ 2,732,104 $ 1,957,653
Venture capital
operations - 1,040 923 2,898
Corporate
operations 54,797 40,652 171,075 128,205
----------- ----------- ----------- -----------
Total revenue $ 948,004 $ 738,007 $ 2,904,102 $ 2,088,756
=========== =========== =========== ===========
Investment Income:
Life and annuity
insurance
operations $ 127,467 $ 126,459 $ 378,993 $ 351,707
Venture capital
operations - - - -
Corporate
operations 31,384 21,988 99,167 85,700
----------- ----------- ----------- -----------
Total revenue $ 158,851 $ 148,447 $ 478,160 $ 437,407
=========== =========== =========== ===========
Income (loss)before
income taxes:
Life and annuity
insurance
operations $ 187,376 $ 307,275 $ 712,791 $ 710,197
Venture capital
operations - 1,040 923 2,882
Corporate
operations (147,501) (130,771) (524,016) (450,225)
----------- ----------- ----------- -----------
Total revenue $ 39,875 $ 177,544 $ 189,698 $ 262,854
=========== =========== =========== ===========
Depreciation and
amortization
expense:
Life and annuity
insurance
operations $ 202,396 $ 16,992 $ 536,980 $ 217,193
Venture capital
operations - - - -
Corporate
operations 3,927 4,243 11,582 11,675
----------- ----------- ----------- -----------
Total revenue $ 206,323 $ 21,235 $ 548,562 $ 228,868
=========== =========== =========== ===========
Segment asset information as of September 30, 1999 and December 31, 1998.
Assets:
Life and annuity insurance operations $ 13,915,265 $ 11,850,273
Venture capital operations 51,266 50,343
Corporate operations 2,877,546 3,332,409
------------- -------------
Total $ 16,844,077 $ 15,233,025
============= =============
(11) Claims 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 alleged
that the officer was acting in the course and scope of employment with the
Company at the time of the accident. The lawsuit was settled within the
insurance policy limits.
(12) Subsequent Events
On November 10, 1999 First Alliance Insurance Company entered into a stock
purchase agreement with Summit Life Corporation to acquire all of the
outstanding common capital stock of Benefit Capital Life Insurance Company,
("Benefit"), a Lousiana Corporation for 25,000 shares of First Alliance
Corporation common stock and $517,500 in cash. The cash portion of the
purchase price will be increased or decreased based on an amount equal to
the difference between $463,000 and the capital and surplus of Benefit as
of the end of the month preceding closing. The agreement is subject to
regulatory approval by the Louisiana Department of Insurance. The
transaction will not have a material impact on the financial statements
of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under
the Private Securities Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
The statements contained in the following "Management's Discussion and
Analysis of Financial Condition and Results of Operations," statements
contained in future filings with the Securities and Exchange Commission and
publicly disseminated press releases, and statements which may be made from
time to time in the future by management of the Company in presentations to
shareholders, prospective investors, and others interested in the business
and financial affairs of the Company, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements. Any projections of financial performances or
statements concerning expectations as to future developments should not be
construed in any manner as a guarantee that such results or developments
will, in fact, occur. There can be no assurance that any forward-looking
statement will be realized or that actual results will not be significantly
different from that set forth in such forward-looking statements. In
addition to the risks and uncertainties of ordinary business operations, the
forward-looking statements of the Company referred to above are also subject
to risks and uncertainties.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes thereto.
Results of Operations
Revenues for the nine months ended September 30, 1999 and 1998 totaled
$2,904,102 and $2,088,756, respectively. Revenues for the three months ended
September 30 1999 and 1998 totaled $948,004 and $738,007 respectively. The
primary source of revenue for the Company is life insurance premium income.
Premium income for the first nine months of 1999 increased $750,781 in
comparison to 1998 results. This increase is due to life insurance premium
renewals and new sales. An annuity rider is also included with most of the
life insurance products; 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 nine months of 1999 and
1998 totaled $806,238 and $287,980, 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 reinsurance premiums due. However, SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts",
requires this unpaid premium to be recognized as an expense and amortized
over the term of the contracts reinsured. At September 30, 1999 amortization
of reinsurance premiums payable totaled $2,463. There was no amortization
for the nine months ended September 30, 1998.
Combined net investment income for FAIC and the Company totaled $478,160 for
the nine months ended September 30, 1999 and $437,407 for the same period in
1998. Cash of $1,000,000 made available from the redemption of the U.S.
Star preferred stock investment earned interest during 1999. There was no
investment income from the U.S. Star investment during 1998.
For the nine month period ended September 30, 1999, benefits and expenses
totaled $2,714,404 representing an increase of $888,502 over the same period
of 1998. Life policy reserve expense increased from $520,156 for the nine
months ended September 30, 1998 to $622,141 for the nine months ended
September 30, 1999. 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 $1,181,969 for the nine months ended September
30, 1999 and $821,118 for the same period in 1998. Amortization of these
costs totaled $536,980 for the nine months ended September 30, 1999 and
$217,193 for the same period in 1998. Death claims incurred during the first
nine months of 1999 totaled $88,351, net of reinsurance of $193,712. There
were no death claims for the same period in 1998. Selling, administrative
and general expenses totaled $265,384 for the first nine months of 1999 and
$245,806 for the same period of 1998.
Salaries and benefit expenses totaled $777,367 for the first nine months of
1999 and $583,685 for the same period of 1998. The increase is due to the
hiring of additional employees and the adjustment of employee compensation.
Income tax expense, which is calculated based on the earnings of FAIC,
totaled $164,302 during the first nine months of 1999 and $198,855 for the
same period of 1998.
Consolidated Financial Condition
Changes in the consolidated balance sheet of September 30, 1999 compared to
December 31, 1998 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $1,611,052 from December 31, 1998 to September 30,
1999. Deferred policy acquisition costs increased $644,989 net of $536,980
of amortization as the result of new business written by FAIC.
Policy and contract liabilities increased $1,552,394 principally because of
(I) life policy reserves increased $622,141 due to policies written in 1999
and existing policies entering an additional duration; (ii) annuity contract
liabilities increased $874,020 as the result of annuity premiums received
which are recorded as a liability; (iii) deposits on pending policy
applications increased $16,995; and (iv) policyholder premium deposit funds
increased $21,951.
Changes in other liabilities include (I) an increase of $59,122 in the
federal income tax liability; (ii) an increase of $6,163 in other taxes
payable; (iii) an increase of $42,545 in commissions, salaries and other
benefits; and (iv) a decrease in accounts payable and accrued expenses of
$1,148.
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. The Company's bonds 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.
Year 2000 Considerations
A growing concern is the ability of computer systems to accurately process
date calculations in the year 2000 and beyond. The problem arises from the
initial design of date values which only recognize a two digit year value.
As a result, a computer may interpret a date entered for the year 2000 as the
year 1900. Any computer system that performs date comparisons and
calculations is exposed to such a problem. These systems are typically
referred to as information technology systems ("ITS") or computer based
systems. Another concern is microchips which may also be encoded with a two
digit date value. These microchips are typically found in such office
equipment as facsimile machines and telephone systems. These systems are
referred to as non-information technology systems ("NITS").
The Company's primary exposure to any business interruption would be the
result of an ITS failure. The life insurance industry relies heavily on date
sensitive calculations in daily operations. The inability to process
transactions could be detrimental to the Company's ability to continue
operations. The Company out-sources its primary computer processing system
through Navisys, Inc. of Saint Louis, Missouri. Navisys has assured the
Company that its hardware and software systems have been modified to
eliminate any potential year 2000 problems. Testing is scheduled to be
completed by mid year 1999. Evaluation of internal hardware and software is
being performed. However, management does not believe that a failure of
these internal systems would cause an interruption of business. Additionally,
a NITS failure would not substantially disrupt operations.
The costs to address year 2000 issues have been and will continue to be
relatively insignificant for the Company. All of the major costs related to
the insurance processing system have been borne by Navisys. Internally, year
2000 issues may require the replacement of such items as personal computers
and facsimile machines, however these are not expected to cause any
significant financial impact.
The ultimate risk of the year 2000 issue is the Company's inability to continue
as a going concern in the event of major computer system failure. The impact
could alter, not only the Company's ability to transact business, but also
global financial systems. Even though the Company is confident that these
issues will not cause significant internal problems, a danger exists
regarding the lack of preparedness of consumers and other institutions,
including federal and state government.
The Company is in the process of developing contingency plans to address any
system failure related to the year 2000. These plans are expected to be
completed during the fall of 1999.
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, 1999
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Alliance Corporation
(registrant)
/s/ Michael N. Fink Date November 12, 1999
Michael N. Fink, President
/s/ Thomas I. Evans Date November 12, 1999
Thomas I. Evans, Vice President/Asst. Secretary
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