United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 14 or 15(d) of the Securities
Exchange Act of 1934 for the Period Ended March 31, 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
incorporation or organization) (I.R.S. Employer 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 - 5,680,890 shares as of April 30, 1999
<PAGE>
FIRST ALLIANCE CORPORATION
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Part II.
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in dollars)
<CAPTION>
March 31, December 31,
1999 1998
Assets (Unaudited)
<S> <C> <C>
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost, $5,216,450
and $5,973,453 in 1999 and 1998, respectively) $ 5,283,812 $ 6,121,129
Common stock at cost 20,000 20,000
Notes receivable (net of $149,698 valuation
allowance in 1999 and 1998) 160,884 221,636
--------- ---------
Total investments 5,464,696 6,362,765
Cash and cash equivalents 7,910,365 6,587,264
Investments in related parties 125,000 125,000
Receivables from related parties 26,981 20,496
Accrued investment income 92,356 107,416
Deferred policy acquisition costs 2,073,168 1,848,419
Prepaid expenses 53,002 23,427
Office furniture and equipment, less accumulated
depreciation of $69,823 and $69,808 in 1999
and 1998, respectively 33,579 43,684
Advances to agents 50,185 57,676
Premiums due 61,191 47,130
Other assets 19,416 9,748
----------- -----------
Total assets $ 15,909,939 $ 15,233,025
=========== ===========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(amounts in dollars)
<CAPTION>
March 31, December 31,
1999 1998
Liabilities and Shareholders' Equity (Unaudited)
<S> <C> <C>
Policy and contract liabilities:
Annuity contract liabilities $ 2,037,915 $ 1,763,029
Life policy reserves (net of reinsurance
ceded reserves of $91,388 and $88,534
in 1999 and 1998, respectively) 1,748,363 1,493,766
Deposits on pending policy applications 265,342 216,565
Unearned revenue 100,772 102,993
Claims Payable 68,750 -
Policyholder premium deposits 198,912 177,528
Reinsurance premiums payable 63,495 65,183
---------- ----------
Total policy and contract liabilities 4,483,549 3,819,064
Federal income taxes payable:
Current - 32,258
Deferred 481,882 458,932
Commissions, salaries, wages and benefits
payable 74,249 64,740
Accounts payable and accrued expenses 46,506 31,305
---------- ----------
Total liabilities 5,086,186 4,406,299
Claims and contingencies (Note 12)
Shareholders' equity:
Common stock, no par value, 8,000,000 shares
authorized; 5,667,690 and 5,620,690 shares
issued and outstanding at March 31, 1999 and
December 31, 1998 566,769 562,069
Additional paid in capital 12,275,091 12,180,353
Retained Earnings - deficit (2,062,566) (2,013,165)
Accumulated other comprehensive income 44,459 97,469
---------- ----------
Total shareholders' equity 10,823,753 10,826,726
---------- ----------
Total liabilities and shareholders' equity $ 15,909,939 $ 15,233,025
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in dollars)
<CAPTION>
Three months ended
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
Revenues
<S> <C> <C>
Premium Income (net of reinsurance of
$53,965 in 1999 and $20,158 in 1998) $ 793,064 $ 495,417
Net Investment Income 152,681 139,639
Other income 20,028 13,158
---------- ----------
Total revenue 965,773 648,214
Benefits and expenses
Increase in policy reserves 254,597 160,708
Death claims (net of reinsurance of $162,000) 68,750 -
Policyholder surrender values 11,251 -
Interest credited on annuities and premium
deposit funds 40,147 22,368
Commissions 301,260 168,229
Policy acquisition costs deferred (382,973) (222,034)
Amortization of deferred policy acquisition
costs 158,225 80,939
Salaries, wages and employee benefits 247,212 199,998
Agency expenses 57,242 55,589
Professional fees 43,486 41,863
Other expenses 166,481 92,424
---------- ---------
Total benefits and expenses 965,678 600,084
---------- ---------
Income from operations 95 48,130
---------- ---------
Federal income taxes 49,496 48,116
---------- ---------
Net income/(loss) $ (49,401) $ 14
========== =========
Net income/(loss) per common share-basic
and diluted $ (0.01) $ 0.00
========== =========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(amounts in dollars)
<CAPTION>
Three months ended Year ended
March 31, 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 (47,000 shares) 4,700 - -
------------ ----------- -----------
Balance, end of year 566,769 561,474 562,069
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) - 379 38,807
Sale of shares in private
placement (47,000 shares) 112,800 - -
Cost of private placement (18,062) - -
------------ ----------- -----------
Balance, end of year 12,275,091 12,141,925 12,180,353
Retained earnings-deficit:
Balance, beginning of year (2,013,165) (2,147,562) (2,147,562)
Net income (loss) (49,401) 14 134,397
------------ ----------- -----------
Balance, end of year (2,062,566) (2,147,549) (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) (53,010) 26,059 83,079
------------ ----------- -----------
Balance, end of year 44,459 40,449 97,469
------------ ----------- -----------
Total shareholders' equity $ 10,823,753 $ 10,596,299 $ 10,826,726
============ =========== ===========
Disclosure of reclassification
amount:
Unrealized holding gains (loss)
arising during period $ (53,010) $ 26,059 $ 87,586
Less: reclassification
adjustment for (gains) loss
included in net income - - (4,507)
------------ ----------- -----------
Net unrealized gains (loss)
on securities $ (53,010) $ 26,059 $ 83,079
============ =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in dollars)
<CAPTION>
Three months ended
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operations:
Net cash provided by operating activities $ 153,045 $ 153,154
Investing activities:
Maturity of available-for-sale fixed maturities 750,000 1,949,863
Decrease in notes receivable 60,752 -
Net (increase)/decrease in furniture
and equipment 5,963 (22,177)
----------- -----------
Net cash provided by investing activities 816,715 1,927,686
Financing activities:
Deposits on annuity contracts, net 236,860 175,402
Policyholder premium deposits, net 17,042 -
Proceeds from sale of common stock 99,438 3,870
----------- -----------
Net cash provided by financing activities 353,340 179,272
----------- -----------
Increase in cash and cash equivalents 1,323,100 2,260,112
Cash and cash equivalents beginning of period $ 6,587,264 $ 1,335,455
----------- -----------
Cash and cash equivalents at end of period $ 7,910,364 $ 3,595,567
=========== ===========
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 three month period ended March 31, 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 three month periods ending
March 31, 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 March 31, 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
<S> <C> <C> <C> <C>
U.S. Government Bonds $1,795,698 $ 23,517 $ - $1,819,215
Municipal Bonds 1,129,563 15,237 - 1,144,800
Corporate Bonds 2,291,189 30,210 (1,602) 2,319,797
--------- -------- ------- ---------
$5,216,450 $ 68,964 $ (1,602) $5,283,812
========= ======== ======= =========
</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.
On August 8, 1996, the Company purchased 725,000 shares of the
common stock of Mid-American Alliance Corporation ("MAAC") of
Jefferson City, Missouri, for $72,500. At March 31, 1999, MAAC
had raised total capital of $3,859,850 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
<PAGE>
(3) Investments (continued)
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.
The carrying values of notes receivable and investments in
unconsolidated affiliates approximate their fair values. At March 31,
1999 and December 31, 1998, the fair values of notes receivable were
$160,884 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 March 31, 1999 and 1998, all shares are assumed
to be outstanding for the entire period. The weighted average
outstanding common shares were 5,667,690 in 1999 and 5,614,740 in
1998.
(6) Stock Options
The Company has adopted a stock option plan for 200,000 common
stock shares. On December 31, 1997, the Stock Option Committee
granted 54,650 options, all of which were exercisable and outstanding
at December 31, 1997. During 1998, 40,850 of these options were
exercised and 13,800 forfeited.
(7) 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
<PAGE>
(7) Federal Income Taxes (continued)
of existence. At March 31, 1999 and 1998 estimated Federal Income
tax expense was $49,496 and $48,116, respectively.
(8) 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 $186,429 and
$95,797 for the quarters ended March 31, 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 $6,851 and $8,000, respectively, during the quarter ending
March 31, 1999 and $6,000 and $6,000, respectively, during the
quarter ending March 31, 1998. Further, the Company has accounts
receivable of $14,431 and $12,551 from FACC and MAAC,
respectively, at March 31, 1999 and $13,318 and $6,362 from FACC
and MAAC, respectively, at December 31, 1998.
(9). 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
March 31, 1999, the Company had sold 47,000 shares raising total
proceeds of $117,500.
(10). Comprehensive income
The components of comprehensive income along with the related tax
effects are presented for the quarters ended March 31,
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 $ (80,317) $ 27,229
Tax benefit/(expense) 27,307 (1,170)
---------- ---------
Other comprehensive income (53,010) 26,059
========== =========
Net income/(loss) $ (49,401) $ 14
Other comprehensive income/(loss)
net of tax effect:
Unrealized investment gains/(loss) (53,010) 26,059
---------- ---------
Comprehensive income/(loss) $ (102,411) $ 26,072
========== =========
Net income/(loss) per common share - basic
and diluted $ (0.01) $ (0.00)
========== =========
</TABLE>
(11) 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 March 31, 1999 and December
31, 1998 and for the quarters ended March 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues:
Life and annuity insurance operations $ 917,019 $ 601,739
Venture capital operations 471 726
Corporate operations 48,283 45,749
---------- ----------
Total $ 965,773 $ 648,214
========== ==========
Income (loss) before income taxes:
Life and annuity insurance operations $ 217,341 $ 186,347
Venture capital operations 471 710
Corporate operations (215,291) (138,928)
---------- ----------
Total $ 2,521 $ 48,129
========== ==========
Assets:
Life and annuity insurance operations $ 12,690,046 $ 9,918,761
Venture capital operations 50,814 49,968
Corporate operations 3,169,079 3,743,122
---------- ----------
Total $ 15,909,939 $ 13,711,851
========== ==========
Depreciation and amortization expense:
Life and annuity insurance operations $ 158,224 $ 80,930
Venture capital operations - -
Corporate operations 4,142 3,513
---------- ----------
Total $ 162,366 $ 84,443
========== ==========
</TABLE>
<PAGE>
(12) 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 alleges that the officer was acting in the course and
scope of employment with the Company at the time of the accident.
The outcome of this matter is not predictable with assurance.
Although any actual liability is not determinable as of March 31, 1999,
the Company believes that any liability resulting from this matter, after
taking into consideration insurance coverages, should not have a
material adverse effect on the Company's financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company makes forward-looking statements from time to time and
desires to take advantage of the "safe harbor" which is afforded such
statements under the Private Securities Reform Act of 1995 when they are
accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those in the
forward-looking statements.
The statements contained in the following "Management's Discussion and
Analysis of Financial Condition and Results of Operations," statements
contained in future filings with the Securities and Exchange Commission
and publicly disseminated press releases, and statements which may be
made from time to time in the future by management of the Company in
presentations to shareholders, prospective investors, and others interested in
the business and financial affairs of the Company, which are not historical
facts, are forward-looking statements that involve risks and uncertainties
that could cause actual results to differ materially from those set forth in the
forward-looking statements. Any projections of financial performances or
statements concerning expectations as to future developments should not be
construed in any manner as a guarantee that such results or developments
will, in fact, occur. There can be no assurance that any forward-looking
statement will be realized or that actual results will not be significantly
different from that set forth in such forward-looking statements. In addition
to the risks and uncertainties of ordinary business operations, the
forward-looking statements of the Company referred to above are also subject to
risks and uncertainties.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes thereto.
Results of Operations
Revenues for the three months ended March 31 totaled $965,773 in 1999
and $648,214 in 1998. The primary source of revenue for the Company is
life insurance premium income. Premium income for the first three months
of 1999 increased $297,647 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 quarter of 1999 and 1998 totaled
$259,499 and $176,686, 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 March 31, 1999 amortization of
reinsurance premiums payable totaled $822. There was no amortization for
the three months ended March 31, 1999.
Combined net investment income for FAIC and the Company totaled
$152,682 for the quarter ended March 31, 1999 and $139,639 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.
<PAGE>
For the quarter period ended March 31, 1999, expenses totaled $965,678
representing an increase of $365,594 over the same period of 1998. Life
policy reserve expense increased from $160,708 for the three months ended
March 31, 1998 to $254,597 for the three months ended March 31, 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 $382,973 for the quarter ended March 31, 1999 and $222,034
for the same period in 1998. Amortization of these costs totaled $158,225
for the quarter ended March 31, 1999 and $80,939 for the same period in
1998. Death claims incurred during the first quarter of 1999 totaled
$68,750, net of reinsurance of $162,000. There were no death claims for
the same period in 1998. Expenses directly related to FAIC's agency
totaled $57,242 for the first quarter of 1999 and $55,589 for the same
period in 1998. These expenses include agent's health insurance, agency
meetings, recruiting, and other expenses directly related to the sale of
insurance and annuities.
Salaries and benefit expenses totaled $247,212 for the first quarter of 1999
and $199,998 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 $49,496 during the first quarter of 1999 and $48,116 for the same
period of 1998.
Consolidated Financial Condition
Changes in the consolidated balance sheet of March 31, 1999 compared to
December 31, 1998 reflect the operations of the Company and the capital
transactions listed below.
Total assets increased by $676,914 from December 31, 1998 to March 31,
1999. Deferred policy acquisition costs increased $224,749 net of
$158,225 of amortization as the result of new business written by FAIC.
Policy and contract liabilities increased $664,485 principally because of (i)
life policy reserves increased $254,597 due to policies written in 1999 and
existing policies entering an additional duration; (ii) annuity contract
liabilities increased $274,866 as the result of annuity premiums received
which are recorded as a liability; (iii) claims payable increased $68,750 due
to pending death claims; (iv) deposits on pending policy applications
increased $48,777; and (v) policyholder premium deposit funds increased
$21,384.
Changes in other liabilities include (i) a decrease of $9,308 in the federal
income tax liability; (ii) an increase of $9,509 in commissions, salaries and
other benefits; and (iii) an increase in accounts payable and accrued
expenses of $15,201.
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.
<PAGE>
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 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 three months ended March 31, 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 May 14, 1999
Michael N. Fink, President
/s/ Thomas I. Evans Date May 14, 1999
Thomas I. Evans, Vice President/Asst. Secretary
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