<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 June 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 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 - 5,714,365 shares as of July 30, 1999.
<PAGE>
FIRST ALLIANCE CORPORATION
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998
and for the six months ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Changes in Shareholders'
Equity for the six months ended June 30, 1999 and 1998
and for the year ended December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Assets Unaudited
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost,
$5,210,636 and $5,973,453 in 1999
and 1998, respectively) $ 5,196,555 $ 6,121,129
Common stock at cost 20,000 20,000
Limited partnership 22,500 -
Notes receivable (net of $149,698
valuation allowance in 1999 and 1998) 130,384 221,636
Policy loans 825 -
------------ -------------
Total investments 5,370,264 6,362,765
Cash and cash equivalents 8,291,292 6,587,264
Investments in related parties 125,000 125,000
Receivables from related parties 33,416 20,496
Accrued investment income 91,054 107,416
Deferred policy acquisition costs 2,296,221 1,848,419
Prepaid expenses 50,321 23,427
Office furniture and equipment, less
accumulated depreciation of $73,336
and $60,965 in 1999 and 1998,
respectively 35,166 43,684
Advances to agents 56,795 57,676
Premiums due 57,866 47,130
Other assets 13,875 9,748
------------ -------------
Total assets $ 16,421,270 $ 15,233,025
============ =============
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Liabilities and Shareholders' Equity (Unaudited)
Policy and contract liabilities:
Annuity contract liabilities $ 2,352,816 $ 1,763,029
Life policy reserves (net of reinsurance
ceded reserves of $103,314 and $88,534
in 1999 and 1998, respectively) 1,934,406 1,493,766
Deposits on pending policy applications 245,111 216,565
Unearned revenue 97,247 102,993
Policyholder premium deposits 203,968 177,528
Reinsurance premiums payable 82,493 65,183
------------ -------------
Total policy and contract liabilities 4,916,041 3,819,064
Federal income taxes payable:
Current 9,739 32,258
Deferred 506,893 458,932
Other taxes payable 9,500 -
Commissions, salaries, wages and
benefits payable 90,910 64,740
Accounts payable and accrued expenses 11,052 31,305
------------ -------------
Total liabilities 5,544,135 4,406,299
Claims and contingencies (Note 12)
Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,686,190 and
5,620,690 shares issued and outstanding
at June 30, 1999 and December 31, 1998 568,619 562,069
Additional paid in capital 12,322,788 12,180,353
Retained Earnings - deficit (2,004,979) (2,013,165)
Accumulated other comprehensive income (9,293) 97,469
------------ -------------
Total shareholders' equity 10,877,135 10,826,726
------------ -------------
Total liabilities and
shareholders' equity $ 16,421,270 $ 15,233,025
============ =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Premium Income $ 785,590 $ 528,861 $ 1,578,654 $ 1,024,278
Net Investment Income 166,627 149,321 319,309 288,960
Other income 38,108 24,353 58,135 37,511
---------- ---------- ----------- -----------
Total revenue 990,325 702,535 1,956,098 1,350,749
Benefits and expenses
Increase in policy
reserves 186,043 200,620 440,640 361,328
Death claims 6,219 - 74,969 -
Policyholder surrender
values 10,187 - 21,438 -
Interest credited on
annuities and premium
deposit Premium
deposit fund 50,278 25,644 90,425 48,012
Commissions 314,634 229,730 615,894 397,959
Policy acquisition
costs deferred (399,412) (323,409) (782,386) (545,443)
Amortization of
deferred policy
acquisition costs 176,360 119,262 334,584 200,201
Selling, administrative
and general insurance
expenses 71,873 92,424 152,044 159,632
Salaries, wages and
employee benefits 273,811 193,018 521,023 393,016
Professional fees 48,194 42,817 91,680 84,680
Miscellaneous taxes 4,835 - 10,179 -
Advisory board and
directors fees 20,537 17,518 46,732 34,055
Rent expense 22,294 19,609 42,798 38,415
Depreciation expense 3,513 3,919 7,655 7,432
Other expenses 51,231 44,203 138,600 86,152
---------- ---------- ----------- -----------
Total benefits and
expenses 840,597 665,355 1,806,275 1,265,439
---------- ---------- ----------- -----------
Income from operations 149,728 37,180 149,823 85,310
---------- ---------- ----------- -----------
Federal income taxes 74,941 64,807 124,437 112,923
---------- ---------- ----------- -----------
Net income/(loss) $ 74,787 $ (27,627) $ 25,386 $ (27,613)
========== ========== =========== ===========
Net income/(loss) per
common share-basic and
diluted $ 0.01 $ 0.00 $ 0.00 $ 0.00
========== ========== =========== ===========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Six months ended Year ended
June 30, December 31,
1999 1998 1998
(Unaudited)
<S> <C> <C> <C>
Common stock:
Balance, beginning of year $ 562,069 $ 557,984 $ 557,984
Exercise of stock options
(34,900 and 40,850 shares) - 3,490 4,085
Sale of shares in private
placement (79,500 shares) 7,950 - -
Company stock acquired
(14,000 shares) (1,400) - -
----------- ---------- ----------
Balance, end of year 568,619 561,474 562,069
Additional paid-in capital:
Balance, beginning of year 12,180,353 12,141,546 12,141,546
Exercise of stock options
(34,900 and 40,850 shares) - 6,732 38,807
Sale of shares in private
placement (79,500 shares) 190,800 - -
Cost of private placement (42,765) - -
Company stock acquired
(14,000 shares) (5,600) - -
----------- ---------- ----------
Balance, end of year 12,322,788 12,148,278 12,180,353
Retained earnings-deficit:
Balance, beginning of year (2,013,165) (2,147,562) (2,147,562)
Net income (loss) 25,386 (27,612) 134,397
Company stock acquired (17,200) - -
----------- ---------- ----------
Balance, end of year (2,004,979) (2,175,174) (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) (106,762) 37,984 83,079
----------- ---------- ----------
Balance, end of year (9,293) 52,374 97,469
----------- ---------- ----------
Total shareholders' equity $10,877,135 $10,586,952 $10,826,726
========== ========== ==========
Disclosure of reclassification
amount:
Unrealized holding gains
(loss) arising during period $ (106,762) $ 37,984 $ 87,586
Less: reclassification
adjustment for (gains) loss
included in net income - - (4,507)
----------- ---------- ----------
Net unrealized gains (loss)
on securities $ (106,762) $ 37,984 $ 83,079
=========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six months ended
June 30, June 30,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operations:
Net cash provided by operating
activities $ 229,523 $ 237,212
Investing activities:
Purchase of available-for-sale
fixed maturities - (250,000)
Maturity of available-for-sale
fixed maturities 750,000 1,949,863
Purchase of limited partnership
interest (22,500) -
Decrease in notes receivable 91,252 60,440
Net (increase)/decrease in
furniture and equipment 863 (23,559)
----------- -----------
Net cash provided by investing
activities 819,615 1,736,744
Financing activities:
Deposits on annuity contracts, net 503,930 297,442
Policyholder premium deposits, net 19,175 -
Purchase of company stock (24,200) -
Additional paid in capital - 6,353
Proceeds from sale of common stock 155,985 3,490
----------- -----------
Net cash provided by financing
activities 654,890 307,285
----------- -----------
Increase in cash and cash equivalents 1,704,028 2,281,241
Cash and cash equivalents
beginning of period $ 6,587,264 $ 1,335,455
----------- -----------
Cash and cash equivalents at
end of period $ 8,291,292 $ 3,616,696
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
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 six
month period ended June 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 six month periods ending June 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 June 30,
1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
<S> <C> <C> <C> <C>
U.S. Government Bonds $ 1,793,361 $ 3,077 $ (11,591) $ 1,784,847
Municipal Bonds 1,129,578 6,482 (8,368) 1,127,692
Corporate Bonds 2,287,697 8,005 (11,686) 2,284,016
----------- ---------- ---------- -----------
$ 5,210,636 $ 17,564 $ (31,645) $ 5,196,555
=========== ========== ========== ===========
</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. 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 June 30, 1999, MAAC had raised total capital
of $4,989,425 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.
<PAGE>
(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 March 31, 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 June 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 June 30, 1999 and 1998 and for the six months ended
June 30, 1999 and 1998, all shares are assumed to be outstanding for the
entire period. The weighted average outstanding common shares were
5,686,190 in 1999 and 5,614,740 in 1998.
<PAGE>
(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 June 30, 1999 and 1998 estimated
Federal Income tax expense was $124,437 and $112,923, 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 $396,304 and $281,267 for the six months
ended June 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
$29,424 and $17,000, respectively, during the six months ending June 30,
1999 and $12,000 and $12,000, respectively, during the six months ending
June 30, 1998. Further, the Company has accounts receivable of $26,024
and $7,392 from FACC and MAAC, respectively, at June 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 June 30, 1999, the
Company had sold 79,500 shares raising total proceeds of $198,750.
<PAGE>
(9) Comprehensive income
The components of comprehensive income along with the related tax effects
are presented for the quarters ended June 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Unrealized gain on available
-for-sale securities:
Unrealized holding gains/(losses)
during the period $ (161,759) $ 57,551
Tax benefit/(expense) 54,997 (19,567)
----------- ----------
Other comprehensive income (106,762) 37,984
=========== ==========
Net income/(loss) $ (58,519) $ (27,627)
Other comprehensive income/(loss)
net of tax effect:
Unrealized investment gains/(loss) (106,762) 37,984
----------- ----------
Comprehensive income/(loss) $ (165,281) $ 10,356
=========== ==========
Net income/(loss) per common share
- basic and diluted $ (0.01) $ (0.00)
=========== ==========
</TABLE>
<PAGE>
(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 June 30, 1999 and December 31, 1998 and for the quarters
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues:
Life and annuity insurance operations $ 1,838,897 $ 1,261,338
Venture capital operations 923 1,858
Corporate operations 116,278 87,553
------------- -------------
Total $ 1,956,098 $ 1,350,749
============= =============
Income (loss) before income taxes:
Life and annuity insurance operations $ 525,415 $ 402,922
Venture capital operations 923 1,842
Corporate operations (376,515) (319,454)
------------- -------------
Total $ 149,823 $ 85,310
============= =============
Assets:
Life and annuity insurance operations $ 13,355,046 $ 10,609,674
Venture capital operations 51,266 48,100
Corporate operations 3,014,958 3,512,469
------------- -------------
Total $ 16,421,270 $ 14,170,243
============= =============
Depreciation and amortization expense:
Life and annuity insurance operations $ 334,584 $ 200,201
Venture capital operations - -
Corporate operations 7,655 7,432
------------- -------------
Total $ 342,239 $ 207,633
============= =============
</TABLE>
(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. A settlement, which is within
the insurance policy limits, has been reached and agreed to in principle
by all parties and insurance carriers, subject to final court approval
and the negotiation and execution of definitive settlement documents.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under
the Private Securities Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
The statements contained in the following "Management's Discussion and
Analysis of Financial Condition and Results of Operations," statements
contained in future filings with the Securities and Exchange Commission and
publicly disseminated press releases, and statements which may be made from
time to time in the future by management of the Company in presentations to
shareholders, prospective investors, and others interested in the business
and financial affairs of the Company, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements. Any projections of financial performances or
statements concerning expectations as to future developments should not be
construed in any manner as a guarantee that such results or developments
will, in fact, occur. There can be no assurance that any forward-looking
statement will be realized or that actual results will not be significantly
different from that set forth in such forward-looking statements. In
addition to the risks and uncertainties of ordinary business operations,
the forward-looking statements of the Company referred to above are also
subject to risks and uncertainties.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes thereto.
Results of Operations
Revenues for the six months ended June 30, 1999 and 1998 totaled $1,956,098
and $1,350,749, respectively. Revenues for the three months ended June 30
1999 and 1998 totaled $990,325 and $702,535 respectively. The primary
source of revenue for the Company is life insurance premium income.
Premium income for the first six months of 1999 increased $554,376 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 six months of
1999 and 1998 totaled $542,701 and $288,023, 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 June 30, 1999 amortization of
reinsurance premiums payable totaled $1,642. There was no amortization for
the six months ended June 30, 1998.
Combined net investment income for FAIC and the Company totaled $319,309 for
the six months ended June 30, 1999 and $288,960 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 six month period ended June 30, 1999, benefits and expenses totaled
$1,806,275 representing an increase of $540,836 over the same period of 1998.
Life policy reserve expense increased from $361,328 for the six months ended
June 30, 1998 to $440,640 for the six months ended June 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
$782,386 for the six months ended June 30, 1999 and $545,443 for the same
<PAGE>
period in 1998. Amortization of these costs totaled $334,584 for the six
months ended June 30, 1999 and $200,201 for the same period in 1998. Death
claims incurred during the first six months of 1999 totaled $74,969, net of
reinsurance of $163,552. There were no death claims for the same period in
1998. Selling, administrative and general expenses totaled $152,044 for the
first six months of 1999 and $159,632 for the same period of 1998.
Salaries and benefit expenses totaled $521,023 for the first six months of
1999 and $393,016 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 $124,437 during the first six months of 1999 and $112,923 for the
same period of 1998.
Consolidated Financial Condition
Changes in the consolidated balance sheet of June 30, 1999 compared to
December 31, 1998 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $1,188,245 from December 31, 1998 to June 30,
1999. Deferred policy acquisition costs increased $447,802 net of $334,584
of amortization as the result of new business written by FAIC.
Policy and contract liabilities increased $1,096,977 principally because
of (I) life policy reserves increased $440,640 due to policies written in
1999 and existing policies entering an additional duration; (ii) annuity
contract liabilities increased $589,787 as the result of annuity premiums
received which are recorded as a liability; (iii) deposits on pending policy
applications increased $28,546; and (iv) policyholder premium deposit funds
increased $26,440.
Changes in other liabilities include (I) an increase of $25,442 in the
federal income tax liability; (ii) an increase of $9,500 in other taxes
payable; (iii) an increase of $26,170 in commissions, salaries and other
benefits; and (iv) a decrease in accounts payable and accrued expenses of
$20,253.
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.
<PAGE>
The ultimate risk of the year 2000 issue is the Company's inability 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.
<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 six
months ended June 30, 1999
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Alliance Corporation
(registrant)
/s/ Michael N. Fink Date August 13, 1999
Michael N. Fink, President
/s/ Thomas I. Evans Date August 13, 1999
Thomas I. Evans,
Vice President/Asst. Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 5,196,555
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,196,555
<CASH> 8,291,292
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,296,221
<TOTAL-ASSETS> 16,421,270
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,916,041
<NOTES-PAYABLE> 0
0
0
<COMMON> 568,619
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<TOTAL-LIABILITY-AND-EQUITY> 16,421,270
1,578,654
<INVESTMENT-INCOME> 319,309
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<INCOME-TAX> 124,437
<INCOME-CONTINUING> 25,386
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<NET-INCOME> 25,386
<EPS-BASIC> .000
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<RESERVE-OPEN> 1,493,766
<PROVISION-CURRENT> 440,640
<PROVISION-PRIOR> 0
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