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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 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 (I.R.S. Employer Identification
incorporation or organization) number)
2285 Executive Drive, Suite 308
Lexington, KY 40505 606-299-7656
(Address of principal executive offices) (Telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
NONE
Securities registered pursuant to section 12(g) of the Act:
Title of Each Class
Class A Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities 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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form [X]
Applicable only to Corporate Issuers
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 - 5,673,465 shares as of March 1, 2000
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Shareholders
scheduled to be held June 8, 2000 are incorporated by reference into
Part III.
Certain Exhibits to the Company's prior filing of Form 10-K for 1995 and
the Registration Statement on Form S-1, Amendment Number 4, File Number
33-67312, which was declared effective on March 4, 1994 are incorporated by
reference into Part IV.
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PART I
Item 1. Business
First Alliance Corporation (the "Company") was organized on February 16, 1993
for the purpose of forming, owning and managing life insurance companies.
The Company registered with the Securities and Exchange Commission and the
Kentucky Department of Financial Institutions a $12,500,000 public stock
offering.
On October 28, 1995, the Company completed the public stock offering. The
company raised total capital of $13,750,000 which includes a 10% over-sale
of $1,250,000 contemplated in the public filing. Six million dollars of
the proceeds of the stock sale were used to capitalize the life insurance
subsidiary, First Alliance Insurance Company ("FAIC"). Three million dollars
of the proceeds might be used to capitalize the venture capital company based
on a schedule as determined by the Company's Board of Directors. During 1997
and 1996, $316,000 and during 1999, $127,500 of the proceeds were used in the
capitalization of the Company's wholly-owned venture capital subsidiary,
First Kentucky Capital Corporation ("FKCC"). The remainder of the proceeds
will provide resources for additional capital for the life insurance
subsidiary or capital for the possible acquisition of life insurance or
insurance related company(s).
The Company is currently marketing Common Stock at $2.50 per share through a
$500,000 Indiana intra-state private placement. The offering relied on
exemptions from registration provided by Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D promulgated thereunder. The purpose of
this offering was to provide a base in Indiana for marketing of the products
of FAIC. As of March 1, 2000, the Company had raised total offering proceeds
of $451,888.
First Alliance Corporation
The primary revenue source for the Company is provided by its wholly owned
life insurance subsidiary, First Alliance Insurance Company ("FAIC"). FAIC
has contracted with the Company to provide administrative and data processing
services for insurance operations. The Company provides underwriting and
accounting services for First American Capital Corporation ("FACC") of Topeka,
Kansas and its subsidiaries. The Company owns approximately 9.6% of FACC's
outstanding common shares. Additionally, the Company provides accounting
services for Mid-American Alliance Corporation ("MAAC") of Jefferson City,
Missouri, of which it owns approximately 15.1%. Investment income provides
additional income to the Company.
First Alliance Insurance Company
On May 17, 1995, FAIC received a Certificate of Authority from the Kentucky
Department of Insurance ("KDI"). On November 1, 1995 insurance operations
commenced. Under generally accepted accounting principles, FAIC has over
$8,154,804 of capital and surplus and is wholly owned by the Company. FAIC
is also licensed to transact life and annuity business in Indiana, Ohio and
Kansas. Currently, FAIC only markets its products in Kentucky and Indiana.
FAIC has contracted with the Company to provide administrative and data
processing services. As discussed in the following paragraph, the only
expenses to be directly incurred by FAIC are direct agency expenses including
commissions.
Administration
Effective November 1, 1995, the Company entered into a service agreement with
FAIC to provide personnel, facilities, and services to FAIC. FAIC has no
employees. The services to be performed pursuant to the service agreement
are underwriting, claim processing, accounting, processing and servicing of
policies, and other services necessary to carry on 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 recorded by FAIC. The percentages are twenty-five percent
of first year premiums; twenty percent of second year premiums; fifteen
percent of third year premiums; ten percent of fourth year premiums and five
percent of premiums in years five and thereafter. FAIC will retain direct
agency expenses such as agent training and licensing, agency meeting expenses,
and other directly related expenditures. Pursuant to the terms of the
agreement, FAIC had incurred expenses totaling $821,562, $595,146 and $432,648
during 1999, 1998 and 1997, respectively.
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On behalf of FAIC, the Company has retained the services of Bruce and Bruce
Company, consulting actuaries of Lake Bluff, Illinois. Bruce and Bruce
assisted in developing the products that the Company is marketing.
Products of FAIC
The primary insurance product being marketed by FAIC is a modified payment
whole life insurance policy with a flexible premium deferred annuity rider.
A modified payment whole life insurance policy requires premium payments to
be made for a certain number of years after which the policyholder is
entitled to full policy benefits. Typical premium paying periods for modified
payment whole life insurance polices are ten, fifteen and twenty years.
FAIC's product, marketed as the "Alliance 2000", combines both a ten and
twenty payment period based on the issue age of the insured. Issue ages from
0 to 20 and 66 through 80 are ten pay polices and issue ages from age 21 to 65
are twenty pay policies. Premium payments are split between the life and
annuity based on percentages established in the product design. First year
premium payments are allocated 100% to life insurance and renewal payments
are split 50% to life and 50% to annuity. The product is being sold in
premium units with the ability to purchase either fractional or multiple
units. At the end of the required premium paying period, the policyholder
may continue to make full premium payments into the annuity rider to provide
for greater annuity accumulations.
The initial product was designed to provide predetermined life insurance
benefits based on the age of the insured. The base coverage decreases each
year until an ultimate benefit amount is attained. The annuity rider does
not contain any fees or load. Surrender charges in the annuity are based on
a regressive scale which starts at 10% in the first year and decreases by 1%
each year until after the tenth policy year there are no surrender charges.
This product is the result of a modification of FAIC's initial insurance
product which was introduced in November of 1995. The initial insurance
product was a twenty pay ordinary life policy with a flexible premium
deferred annuity rider. For issue ages 0 to 50, there was an annual income
protection benefit rider (decreasing term rider).
FAIC also offers credit life and disability insurance products (see "Credit
Life Agreement" below) as well as a ten year term life insurance policy and a
single premium deferred annuity product.
Product Marketing and Sales
FAIC uses the same face to face marketing techniques for its life insurance
products as the Company did for its public stock offering. The marketing
plan is designed in its entirety around the Company's stockholder base, which
provides an excellent referral system for product sales.
FAIC also markets credit life and disability insurance products to banks
throughout the state of Kentucky. Marketing of these products is accomplished
through an agreement with the Kentucky Bankers Association (the "KBA"). A
representative of the KBA promotes FAIC's credit insurance products through
banks who are members of the KBA. Marketing of these products commenced in
December of 1998.
FAIC is licensed to market its products in the states of Indiana, Kansas,
Ohio and Kentucky. Marketing in Indiana began in late 1998. Marketing in
Kansas and Ohio may not begin until a substantial policyholder base is
established in Kentucky and Indiana.
Credit Life Agreement
On November 1, 1998, FAIC entered into an credit life agreement with North
Central Life Insurance Company of St. Paul, Minnesota ("North Central").
Under the terms of the agreement, FAIC receives 2 1/2% (two and a half
percent) of all credit life insurance premiums written by banks in the state
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of Kentucky who offer FAIC's credit insurance products. Additionally, FAIC
entered into an administration agreement with North Central through which
North Central provides all policy administration. During 1999 and 1998, FAIC
received $230,129 and $295, respectively, of ceding commissions pursuant to
the agreement. All credit insurance products are also 100% reinsured through
North Central. FAIC remains primarily liable if North Central is unable to
meet its obligations under the terms of the reinsurance agreement. North
Central is rated A- Excellent by A.M. Best Company.
<TABLE>
The following table provides certain information about FAIC's life insurance
operations for the year ended December 31, 1999.
<CAPTION>
Ordinary Life Credit Life
Number Amount of Number of Amount of
of Polices Insurance Policies or Insurance
(thousands)
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Beginning of year 2,334 $ 119,576 83 $ 287
Issued during year 1,412 77,533 1,354 10,310
Revived during year 11 1,933 - -
Deaths (5) (212) (12) (14)
Lapse, surrender and
decreased (117) (26,640) (290) (4,205)
------------ ----------- ------------ ----------
In-force end of year 3,635 $ 172,190 1,135 $ 6,378
</TABLE>
Reinsurance
Consistent with the general practice of the life insurance industry, FAIC
reinsures a portion of the coverage provided by the life insurance products
they offer. The maximum amount of risk that FAIC retains on its ordinary
life products is $50,000 on any one insured. The remaining coverage is
reinsured with Business Men's Assurance Company of America of Kansas City,
Missouri. Additional reinsurance is provided for the 10-year term product
through Optimum RE of Dallas, Texas. The retention limit on the 10-year
term is $50,000. FAIC reinsures all of the credit life and disability it
writes through North Central Life Insurance Company of St. Paul, Minnesota.
At December 31, 1999, FAIC has reinsured $107,024,000 of life insurance
coverage, including $45,690,000 in accidental death benefits and $6,378,000
of credit life insurance.
Investments
Investment activities are an integral part of the operations of FAIC. The
Kentucky Insurance Code restricts the investments of insurance companies by
the type of investment, the amount that an insurance company may invest in
any one type of investment, and the amount that an insurance company may
invest in the securities of any one issuer. The restrictions of the Kentucky
Insurance Code are not expected to have a material effect on the investment
return of FAIC. The Company is not subject to the same investment restrictions
as FAIC. Credit risk is limited by emphasizing investment grade securities
and by diversifying the investment portfolio among government and corporate
bonds.
The Company has an agreement with Fifth Third Bank of Lexington, Kentucky, a
registered investment advisor, to assist FAIC in managing its investment
portfolio. Fifth Third Bank also provides investment services for the
Company. Fees are based on a percentage of invested assets.
The Company has taken a very conservative investment approach in which the
investments consist of government and high grade corporate issues. In doing
so, investment yields are lower than could be obtained with investments which
have a higher degree of risk.
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Competition
The life insurance industry is extremely competitive. There are a large
number of insurance companies which are substantially larger, have greater
financial resources, offer more diversified product lines and have larger
selling organizations than FAIC. Competition also is encountered from the
expanding number of banks and other financial intermediaries that offer
competing products. FAIC must also compete with other insurers to attract
and retain qualified agents to market FAIC's products.
Governmental Regulation
FAIC is subject to regulation and supervision by the KDI. The insurance laws
of Kentucky give the KDI broad regulatory authority, including powers to: (I)
grant and revoke licenses to transact business; (ii) regulate and supervise
trade practices and market conduct; (iii) establish guaranty associations;
(iv) license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and reports;
(ix) determine the reasonableness and adequacy of statutory capital and
surplus; and (x) regulate the type and amount of permitted investments.
Kentucky has enacted legislation which regulates insurance holding company
systems, including acquisitions, extraordinary dividends, the terms of
affiliate transactions, and other related matters. Currently, the Company
and FAIC have registered as a holding company system pursuant to the laws of
the state of Kentucky.
Benefit Capital Life Insurance Company
On December 30, 1999, FAIC acquired all of the outstanding capital stock of
Benefit Capital Life Insurance Company ("BCLIC") of New Orleans, Louisiana.
The purchase price for the shares was approximately $519,000 in cash and
25,000 shares of First Alliance Corporation common stock valued at $62,500.
Benefit Capital is licensed only in the state of Louisiana.
First Kentucky Capital Corporation
The Company funded its wholly owned venture capital subsidiary with $316,000
during 1996 and 1997. During 1999, FAC provided additional capital of
$127,500. FKCC provides capital for Kentucky based business for both start-up
companies and expansion of existing business. During 1996 and 1997, FKCC
made three venture capital investments and one investment was made during
1999.
On April 12, 1996, FKCC purchased a 51% interest in Medical Acceptance
Corporation ("MAC") for $50,000. MAC purchases receivables from medical
providers at a discount. On December 31, 1997, FKCC entered into an
agreement to sell its interest in MAC for $8,000 in cash and notes receivable
totaling $147,049. The notes receivable included draws of $105,049 on a
$250,000 line of credit FKCC provided to MAC as well as capital provided for
operations since its purchase in 1996. Due to the uncertainty of
collectibility of the notes, FKCC established a $74,698 valuation allowance
during 1997. During 1999 and 1998 MAC paid $27,394 and $38,341, respectively
of the principal balance of the notes receivable. FKCC included $55,241 and
$6,182 of operating losses of MAC in its operations during 1997 and 1996,
respectively.
Other investments made during 1996 in LGP, Inc. and Cybertyme, Inc were
written-off during 1997 due to unfavorable operating results. These write-offs
totaled $97,184 at December 31, 1997 and will not affect future operating
results. In addition, during 1997 a $31,000 line of credit agreement from
LGP, Inc. was determined to be uncollectible and was written off.
On June 16, 1999, FKCC executed a commitment to purchase three units of the
Prosperitas Investment Partners, LP ("Prosperitas") for $450,000.
Prosperitas is a venture capital fund based in Louisville, Kentucky. An
initial payment of $22,500, which represents 5% 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, an additional $127,500 was invested.
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The investment at December 31, 1999 was $150,000 with the remaining amount of
the commitment due in equal installments on the second and fourth
anniversaries of the investment.
Financial Information Relating to Industry Segments
<TABLE>
Financial information related to specific segments of the Company's business
are presented below. All sales of life insurance by FAIC are to unaffiliated
customers.
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Premiums earned, net
of reinsurance:
Life and annuity
insurance operations $ 3,329,812 $ 2,294,440 $ 1,221,400
========== ========== ==========
Revenues:
Life and annuity
insurance operations $ 4,103,369 $ 2,814,106 $ 1,652,201
Venture capital
operations 30,923 4,101 (152,919)
Corporate operations 199,834 167,002 155,769
---------- ---------- ----------
Total $ 4,334,126 $ 2,985,209 $ 1,655,051
========== ========== ==========
Income (loss) before
income taxes:
Life and annuity
insurance operations $ 1,045,750 $ 935,549 $ 455,550
Venture capital
operations 30,923 4,085 (154,015)
Corporate operations (681,655) (540,135) (858,309)
---------- ---------- ----------
Total $ 395,018 $ 399,499 $ (556,774)
========== ========== ==========
Assets:
Life and annuity
insurance operations $ 16,359,833 $ 11,850,273 $ 9,259,930
Venture capital
operations 208,766 50,343 46,258
Corporate operations 2,125,589 3,332,409 3,992,176
---------- ---------- ----------
Total $ 18,694,188 $ 15,233,025 $ 13,298,364
========== ========== ==========
</TABLE>
Employees
As of December 31, 1999, the Company had thirteen full time employees.
Item 2. Properties
The Company leases approximately 6,100 square feet located at 2285 Executive
Drive, Lexington, Kentucky. At December 31, 1999, the Company leased
approximately 5,400 square feet pursuant to a lease agreement which would
expire on March 31, 1999. In February of 1999, the Company extended the
5,400 square foot lease agreement until January 31, 2001. Additionally, in
February of 1999 the Company entered into a lease agreement for an additional
700 square feet at the same location. The lease on this additional space
expires on January 31, 2001. Annual rent expense for the year ended December
31, 1999 totaled $87,386.
Item 3. Legal Proceedings
The Company received a civil summons on October 6, 1997 related to an
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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 and Angela Novak, as the Plaintiffs. 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 lawsuit was settled within the policy limits.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a.) Market Information
Trading of the Company's common stock is limited and sporadic and an
established public market does not exist.
(b.) Holders
As of March 1, 2000, there are approximately 5,300 shareholders of the
Company's outstanding common stock.
(c.) Dividends
The Company has not paid any cash dividends since inception (February 16,
1993). Additionally, dividends are not anticipated in the foreseeable future.
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Item 6. Selected Financial Data
<TABLE>
The following table provides selected consolidated operating results for the
Company for the years ended December 31, 1999, 1998 and 1997 and selected
balance sheet information at December 31, 1999, 1998 and 1997.
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Operating Data:
Premium income, net $ 3,329,812 $ 2,294,440 $ 1,221,400
Net investment income 659,309 595,612 504,831
Benefits and expenses 3,939,108 2,585,710 2,211,825
Federal income taxes 254,540 265,102 123,995
Net income/(loss) 140,478 134,397 (680,769)
Net income/(loss) per
common share-basic and
diluted 0.02 0.02 (0.12)
<CAPTION>
Balance Sheet Data:
<S> <C> <C> <C>
Total assets 18,694,188 15,233,025 13,298,364
Life policy reserves 3,273,564 1,493,766 761,808
Annuity contract liabilities 3,004,186 1,763,029 1,112,551
Total liabilities 7,757,755 4,406,299 2,732,006
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Conditions 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 Litigation 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 statement. 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 Company operates in a highly competitive business environment, and its
operations could be negatively affected by matters discussed under the
caption, "Competition," on page 5 of this Form 10-K.
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The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto beginning on page F-1.
Results of Operations
Comparisons between periods related to the results of operations are for the
years ended December 31 of the year specified. Net income during 1999
increased $6,081 over 1998 results based on the following income and expense
transactions.
The primary source of revenue for the Company is life insurance premium
income. First Alliance Insurance Company ("FAIC") began writing life
insurance and annuities in November of 1995. Typical with most life
insurance policies, a premium payment is required each year in order for the
policyholder to receive the benefits set forth in the policy. Premium
payments are classified as first year and renewal. Renewal premiums are any
premium payment that is made after the first year the policy is in force.
During 1999, premium income totaled $3,798,814. In 1998, premium income
totaled $2,383,680. This increase of $1,415,134 can be attributed to the
growth in the renewal premium base plus an increase in first year premium
sales. Of the $3,798,814 of premium income in 1999, $1,886,288 represents
first year premium, $1,543,799 represents renewal premiums and $368,727
represents single premiums on credit insurance. Premium income in 1998 was
comprised of $1,375,270 of first year premium and $1,008,410. Total premium
income for 1998 increased $1,104,001 over 1997 primarily due to a larger
renewal premium base and first year premium sales.
Life insurance companies typically reinsure a portion of the death benefit on
individual lives. Reinsurance is a method of transferring risk to another
life insurance company to guard against an adverse effect on capital. In
return for assuming this risk, a premium is charged by the reinsurance
company. FAIC has a reinsurance agreement for its primary product with
Businessmen's Assurance Company of Kansas City, Missouri. Under the terms
of the agreement, FAIC is not required to make first year premium payments.
However, Generally Accepted Accounting Principles require the amount of
premium not paid in the first year to be recorded as a liability and
amortized over the duration of the associated policies. Reinsurance premiums
totaled $469,002, $89,240 and $58,279 for 1999, 1998 and 1997, respectively.
These reinsurance premiums are a direct reduction of premium income. Credit
insurance is 100% reinsured. The reinsurance premiums related to credit
insurance were $368,727 in 1999.
During 1999, net investment income increased $63,697 over 1998 results. This
increase is primarily due to a larger investment base from FAIC's operations.
Net investment income in 1998 and 1997 was $595,612 and $504,831, respectively.
Realized investment gains during 1999 totaled $205. During 1998, realized
investment gains totaled $6,529 from investment gains on the sale of bonds.
During 1997, realized investment losses included a write-off of a $31,000
credit line balance of LGP, Inc., a valuation allowance of $75,000 on notes
receivable offset by a $8,000 gain on the sale of Medical Acceptance
Corporation.
Other income totaled $114,671 in 1999 which represents a $26,043 increase
over 1998 results of $88,628. The Company provides accounting support to
Mid-American Alliance Corporation and its subsidiary Mid American Century Life
Insurance company and First American Capital Corporation and its subsidiary
First Life America Corporation. Fees related to these accounting services
were $95,531, $48,816 and $35,000 in 1999, 1998, and 1997 respectively.
The increase in life insurance policy reserves was $870,582 in 1999 and
$731,958 in 1998. Life insurance reserves are established to provide for the
payment of policyholder benefits. Factors such as premiums, interest,
mortality and life expectancy are considered in the calculation of reserve
factors developed by an actuary. Typically, these factors increase as a
policy reaches another anniversary creating a larger reserve. During 1999,
reserves were recorded on new insurance sales and reserves on existing
policies increased. This accounted for the increase of $138,624 in 1999 as
compared to 1998. During 1997, life insurance policy reserves increased
$381,888.
Commissions paid to life insurance agents totaled $1,524,961, $933,100 and
$473,231 1999, 1998 and 1997, respectively. Commissions are paid to agents
on both first year and renewal premium payments. First year commission
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<PAGE>10
percentages are significantly greater than renewal commission percentages.
When new premiums written increase from year to year and existing policies
renew, commission expense increases. In December 1998 FAIC began the selling
credit insurance. During 1999, commission on the sale of credit insurance
was $220,838. During 1999 first year premium sales increased which, combined
with the sale of credit insurance, accounts for the $591,861 increase in
commission expense in 1999 over 1998.
During 1999 and 1997, death claims, net of reinsurance ceded, were $122,135
and $24,848 respectively. FAIC did not incur any death claims in 1998.
Annuity premiums received are recorded as liabilities rather than income
pursuant to Statement of Financial Accounting Standard 97 "Accounting and
Reporting by Insurance enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of Investments". Interest is
paid on these annuity premium accumulations. As policies renew, the annuity
fund balance increases which also increases the base on which interest is
earned by the policyholder. Interest is credited to the fund balance. The
growth in the annuity fund balance accounts for the increase in interest
expense between years. Interest expense was $200,107, $111,171 and $58,642
for 1999, 1998 and 1997, respectively.
Certain costs related to the acquisition of life insurance policies are
capitalized and amortized over the premium paying period of the policies.
These costs, which are referred to as deferred policy acquisition costs,
include first year commissions and first year management fees based on new
premiums written. During 1999, $1,655,160 of these expenses were capitalized
and will be amortized over the life of the associated policies. In 1998 and
1997, $1,200,412 and $708,185 of these costs were capitalized. Amortization
of deferred policy acquisition costs totaled $760,468, $426,476 and $339,562
for 1999, 1998 and 1997, respectively.
Selling, administrative and general insurance expenses increased $29,416 in a
comparison of 1999 to 1998. These expenses relate to the administration and
issuance of life insurance policies. This increase can be attributed to a
larger sales volume and increased processing costs. Selling , administrative
and general insurance expenses totaled $363,166, $333,750, and $225,511 in
1999, 1998 and 1997, respectively. Salaries, wages and employee benefits
totaled $1,102,195 in 1999 and increased $300,863 over 1998 results. This
increase is due to additional personnel, increased costs of employee benefits
and incentive payments to officers.
During 1997, the Company granted stock options. Compensation expense was
recorded based on the difference between the exercise price of the options
and the fair market value of the stock on the date of grant. This
compensation expense totaled $159,743 in 1997. There were no options granted
during 1999 and 1998 and accordingly, no compensation cost related to stock
options is recorded.
Professional fees increased $20,778 during 1999 compared to 1998.
Professional fees include accounting fees, actuarial fees, consulting fees
and legal fees. Professional fees totaled $107,708, $86,930 and $235,749 for
1999, 1998 and 1997, respectively.
Income tax expense for 1999 totaled $254,540. Federal income taxes are
calculated based on the earnings of FAIC. Certain items included in income
reported for financial statements are not included in taxable income for the
current year and recorded as deferred income taxes. Of the $254,540 deferred
income taxes totaled $230,783 and taxes currently payable totaled $23,757.
In 1998 total income tax expense was $265,102 of which $210,430 was deferred.
In 1997 total income tax expense was $123,995 of which $109,102 was deferred.
Consolidated Financial Condition
Changes in the consolidated balance sheet of 1999 compared to 1998 reflect
the operations of the Company and capital transactions discussed below.
Total assets in 1999 increased $3,461,163 from $15,233,025 in 1998 to
$18,694,188. At December 31, 1999 and 1998, invested assets totaled
$9,667,847 and $6,362,765, respectively. This increase of $3,305,082 is
primarily the result of investing cash in available-for-sale securities and
$905,098 of invested assets acquired in the purchase of BCLIC. Cash and cash
<PAGE>
<PAGE>11
equivalents totaled $5,540,571 at December 31, 1999 which consisted of cash
and money market mutual funds.
Deferred policy acquisition costs increased $894,692 net of amortization of
$760,468 during 1999. Policy acquisition expenses related to new insurance
sales totaled $1,655,160 and were capitalized during 1999. Goodwill and
value of insurance acquired increased $216,567 due to the acquisition of
BCLIC. Advances to agents decreased $14,678 during 1999 due to repayments of
prior advances on new business submitted.
Liabilities increased $3,351,456 during 1999 to $7,757,755. Annuity premiums
received by insurance companies are classified as liabilities. At December
31, 1999 these annuity premiums, along with interest credited to policyholder
balances, totaled $3,004,186. Renewal annuity premiums plus interest less
surrenders accounted for the $1,241,157 increase over 1998. Life policy
reserves increased $1,779,798 during 1999 to $3,273,564. Life policy
reserves were established on new business and additional reserves were
recorded on existing policies which renewed. Deposits on pending policy
applications increased from $216,565 in 1998 to $233,158 in 1999. These
deposits are monies submitted with life insurance applications which are in
the process of being underwritten. In the event these policies are issued,
this money becomes premium income, otherwise it is refunded to the
policyholder. The increase of $16,593 in 1999 represents increased sales
volume. Policyholder dividend deposits in the amount of $43, 188 for 1999,
are funds placed on deposit with the Company to accumulate interest and they
are related to BCLIC policies that were acquired on December 30, 1999.
Policyholder premium deposits are funds placed on deposit with the Company to
accumulate interest to pay future policy premiums. Interest credited to the
fund along with additional deposits and withdrawals accounted for the $9,886
increase during 1999.
Deferred federal income taxes are based on timing differences between FAIC's
financial statement taxable income and taxable income computed based on
Internal Revenue Service requirements. Due to increased earnings of FAIC,
the deferred federal income taxes liability increased $143,735 to $602,667
for 1999.
Liquidity
FAIC's insurance operations generally receive adequate cash flows from
premium collections and investment income to meet their obligations.
Insurance policy liabilities are primarily long term and generally are paid
from future cash flows. Most of the Company's invested assets are in bonds
which are readily marketable. Although there is no present need or intent to
dispose of such investments, the Company could liquidate portions of their
investments if such a need arose.
Item 8. Financial Statements and Supplementary Data
The financial statements listed in Item 14(a) (1) and (2) are included in
this report beginning on page 19.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
<PAGE>
<PAGE>12
PART III
Item 10. Directors and Executive Officers
<TABLE>
<CAPTION>
Name Age Position Term
- ---- --- -------- ----
<S> <C> <C> <C>
Scott J. Engebritson 42 Vice Chairman of the Board 1 Year
Director
Michael N. Fink 44 President/Director 1 Year
Jimmy Dan Conner 46 Director 1 Year
Denzel E. ("Denny") Crum 62 Director 1 Year
James M. Everett 54 Director 1 Year
Charles Hamilton 73 Director 1 Year
Ronda S. Paul 56 Director 1 Year
</TABLE>
The executive officers serve at the direction of the Board of Directors and
are appointed at the annual meeting of the Board. Directors are elected
annually by the shareholders. On October 15, 1999, Daniel D. Briscoe
resigned from the Company and its subsidiaries' Boards of Directors. He
resigned for personal reasons. On March 28, 2000, Chris J. Haas was removed
as a director and oficer of the Company due to management differences. The
following is a brief description of the previous business background of each
of the executive officers and directors.
SCOTT J. ENGEBRITSON: Mr. Engebritson serves as Vice-Chairman of the Board of
Directors. Mr. Engebritson is also Chairman of Mid-American Alliance
Corporation and Mid American Century Life Insurance Company, both of
Jefferson City, Missouri. Mr. Engebritson has twenty two years of experience
in the insurance industry. From 1978 to 1984, he was associated with Liberty
American Corporation and Liberty American Assurance Corporation as Regional
Director of Sales and Director of Customer Services. In December of 1984,
Mr. Engebritson became affiliated with United Trust, Inc., an Illinois
insurance holding company, where he served as Regional Director of Sales,
Agency Director and Assistant to the President. In December of 1987, Mr.
Engebritson assisted in the organization of United Income, Inc., an Ohio
insurance holding company, where he served as President and a Director of
United Income, Inc. and United Security Assurance Company, United Income's
insurance subsidiary, through February of 1993. He has been listed in Who's
Who in Life Insurance since 1988.
MICHAEL N. FINK: Mr. Fink serves as President of the Company and a Director.
Mr. Fink also serves as Chairman of First American Capital Corporation and
First Life America Corporation, both of Topeka, Kansas. Mr. Fink has
nineteen years of experience in the insurance industry, primarily in sales
management. From 1981 to 1984, Mr. Fink was an agent, District Director,
and Regional Director with Liberty American Assurance Company in Lincoln,
Nebraska. In 1984, Mr. Fink transferred to an affiliated company, Future
Security Life, in Austin, Texas, where he served as Regional Director and
Agency Director until 1988. In March of 1988, Mr. Fink became affiliated
with United Income, Inc. and United Security Assurance Company as Agency
Director and Assistant to the President. He ended his affiliation with these
companies in June of 1993.
JIMMY DAN CONNER: Director. President of Old Colony Insurance Service, Inc.,
an independent insurance agency. Involved in Crusade for Children and Boy
Scouts of America. Sales Manager of Allied Foods, Atlanta, Georgia
1982-1983 and Torbitt & Castleman Co. in Buckner, Kentucky 1977-1982.
Professional basketball player with the Kentucky Colonels of the American
Basketball Association 1976-1977. Captain of the University of Kentucky
basketball team, All American Honorable Mention and Academic All American in
1975. Kentucky Mr. Basketball 1971. Business Administration major at the
University of Kentucky.
<PAGE>
<PAGE>13
DENZEL E. ("DENNY") CRUM: Director. Head basketball coach at the University
of Louisville since 1971. On the board of Directors of the National
Association of Basketball Coaches (NABC). The Sporting News 1986 "Coach of
the Year." The Lexington Herald Leader's 1990 "Sportsman of the Decade."
1994 Naismith Basketball Hall of Fame Inductee. Numerous other Kentucky and
national coaching awards. BA in Physical Education from UCLA where he played
basketball for John Wooden.
JAMES M. EVERETT: Director. Director, Kentucky Council Area Development
Districts. Member of Governor's Earthquake Hazards and Safety Technical
Advisory Panel (GEHSTAP) since 1983. On the Board of Directors of Kentuckians
for Better Transportation (KBT). Member of the Governor's Local Issues
Conference Planning Committee. Fulton County Judge-Executive 1982-1992.
B.S. in Vocational Agriculture and M.S. in Horticulture from Murray State
University.
CHARLES HAMILTON: Director. Owns and operates numerous interests in real
estate, agri-business and agriculture. Director of Bullitt County Farm
Bureau for last 25 years. Vice President and Director of Bullitt County
Bank. Former Kentucky Commissioner of Agriculture and past Chairman of the
Governor's Task Force on Agriculture. Past member of the Kentucky State Fair
Board. Recipient of the 1992 Distinguished Services Award from the Kentucky
Association of Conservation Districts. 1980 and 1991 recipient of the
Kentucky Pork Producers Association Outstanding Service Award. B.S. in
Agriculture from the University of Kentucky.
RONDA S. PAUL: Ms. Paul serves as General Counsel and Director for the
Company. Attorney. Director of the Kentucky Division of Securities from
1982 through 1991. Attorney for the Kentucky Department of Banking and
Securities 1980-1981. On the faculty of the College of Business and
Economics at the University of Kentucky 1971-1978. PhD in finance and
accounting from Purdue University and JD from the University of Kentucky.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
Company's proxy statement for the annual meeting of shareholders to be filed
with the Securities and Exchange Commission by the Company within 120 days
after the end of its 1999 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the
Company's proxy statement for the annual meeting of shareholders to be filed
with the Securities and Exchange Commission by the Company within 120 days
after the end of its 1999 fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
Company's proxy statement for the annual meeting of shareholders to be filed
with the Securities and Exchange Commission by the Company within 120 days
after the end of its 1999 fiscal year.
<PAGE>
<PAGE>14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 and 2 Financial Statements and Schedules
The consolidated financial statements and financial statement
schedules of First Alliance Corporation presented in this report
are listed in the index on Page F-1.
3 Exhibits
3(I) Articles of Incorporation, as amended (1)
3(ii) By-laws, as amended (1)
4 Instruments defining the rights of security holders,
including indentures (1)
10 Material Contracts
(a) Lease (1)
(b) Sub-lease (2)
(c) Advisory Board Contract (1)
(d) Service agreement between First Alliance Insurance
Company and First Alliance Corporation. (2)
(e) Management Employment Agreements (2)
(f) Lease agreement dated February 26, 1999 (3)
(g) Management agreement between First Alliance Corporation
and First American Capital Corporation (3)
11 Statement re computation of per share earnings (4)
21 Subsidiaries
27 Financial Data Schedule
(b) Reports on Form 8-K
No filing on form 8-K was made in 1999.
(1) Filed as an Exhibit to the Registrant's Registration Statement
on Form S-1, Amendment Number 4, File Number 33-67312, which was
declared effective on March 4, 1994, and incorporated herein by
reference.
(2) Filed as an Exhibit to the Registrant's 1995 Form 10-K, File Number
33-67312, and incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant's 1998 Form 10-K, File Number
33-67312, and incorporated herein by reference.
(4) Note 2 in Notes to Consolidated Financial Statements included in
this Report beginning on Page F-13
<PAGE>
<PAGE>15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/Michael N. Fink Date 3/28/2000
Michael N. Fink, President/Director
By /s/Thomas I. Evans Date 3/28/2000
Thomas I. Evans, Vice-President/
Assistant Secretary
<PAGE>
<PAGE>16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/Scott J. Engebritson Date 3/28/2000
Scott J. Engebritson, Vice-Chairman/Director
By /s/Michael N. Fink Date 3/28/2000
Michael N. Fink, President/Director
By /s/Jimmy Dan Conner Date 3/28/2000
Jimmy Dan Conner, Director
By /s/Denzel E. Crum Date 3/28/2000
Denzel E. Crum, Director
By /s/James M. Everett Date 3/28/2000
James M. Everett, Director
By /s/Charles Hamilton Date 3/28/2000
Charles Hamilton, Director
By /s/Ronda S. Paul Date 3/28/2000
Ronda S. Paul, Director
<PAGE>
<PAGE>F-1
FIRST ALLIANCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Consolidated Financial Statements Numbers
Report of Independent Auditors. . . . . . . . . . . . . . . F-2
Report of Independent Auditors. . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 . . . . F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . F-6
Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-10
Consolidated Financial Statement Schedules
Schedule I Summary of Investments . . . . . . . . . . . . . . F-26
Schedule II Condensed Financial Information of Registrant . . . F-27
Schedule III Supplementary Insurance Information . . . . . . . . F-30
Schedule IV Reinsurance . . . . . . . . . . . . . . . . . . . . F-32
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefor, have been omitted.
<PAGE>
<PAGE>F-2
Independent Auditors' Report
Board of Directors and Shareholders
First Alliance Corporation
We have audited the accompanying consolidated balance sheets of First
Alliance Corporation (a Kentucky corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First
Alliance Corporation and subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for the years then ended in conformity with generally accepted accounting
principles.
We have also audited Schedules I, II, III and IV as of December 31, 1999 and
1998, of First Alliance Corporation and subsidiaries and Schedules II, III
and IV for the years then ended. In our opinion, these schedules present
fairly, in all material respects, the information required to be set forth
therein.
/s/KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 10, 2000
<PAGE>
<PAGE>F-3
Report of Independent Auditors
The Shareholders and Board of Directors
First Alliance Corporation
We have audited the accompanying consolidated statements of operations,
changes in shareholders' equity and cash flows of First Alliance Corporation
and subsidiaries for the year ended December 31, 1997. Our audit also
included the financial statement schedules as of and for the year ended
December 31, 1997. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of First Alliance Corporation and subsidiaries for
the year ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the
1997 financial statement schedules referred to above, when considered
in relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
March 24, 1998
<PAGE>
<PAGE>F-4
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
1999 1998
<S> -------------- --------------
Assets <C> <C>
Investments:
Securities available for sale,
at fair value:
Fixed maturities (amortized cost,
$8,897,097 and $5,973,453 in 1999
and 1998, respectively) $ 8,774,608 $ 6,121,129
Equity securities (cost of
$382,588 and $20,000 in 1999
and 1998, respectively) 407,881 20,000
Policy loans 32,194 -
Notes receivable (net of $149,698
valuation allowance in 1999 and 1998) 103,164 221,636
Other invested assets 150,000 -
Short-term investments 200,000 -
-------------- --------------
Total investments 9,667,847 6,362,765
Cash and cash equivalents 5,540,571 6,587,264
Investments in related parties 125,000 125,000
Reinsurance recoverable 1,418 -
Receivables from related parties 14,203 20,496
Federal income tax recoverable 7,985 -
Accrued investment income 135,482 107,416
Deferred policy acquisition costs 2,743,111 1,848,419
Value of insurance acquired 61,311 -
Goodwill 155,256 -
Prepaid expenses 48,473 23,427
Office furniture and equipment 42,499 43,684
Advances to agents 42,998 57,676
Premiums due 81,690 47,130
Other assets 26,344 9,748
-------------- --------------
Total assets $ 18,694,188 $ 15,233,025
============== ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-5
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<CAPTION>
December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Policy and contract liabilities:
Annuity contract liabilities $ 3,004,186 $ 1,763,029
Life policy reserves (net of
reinsurance ceded reserves of
$203,776 and $88,534 in 1999 and
1998, respectively) 3,273,564 1,493,766
Policy and contract claims 42,099 -
Policyholder dividend deposits 43,188 -
Policyholder premium deposits 187,414 177,528
Deposits on pending policy applications 233,158 216,565
Unearned revenue 86,878 102,993
Reinsurance premiums payable 61,450 65,183
-------------- --------------
Total policy and contract liabilities 6,931,937 3,819,064
Federal income taxes payable:
Current - 32,258
Deferred 602,667 458,932
Other taxes payable 8,207 -
Commissions, salaries, wages and
benefits payable 133,382 64,740
Accounts payable and accrued expenses 81,562 31,305
-------------- --------------
Total liabilities 7,757,755 4,406,299
Claims and contingencies (Note 16)
Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,643,185 and
5,620,690 shares issued and
outstanding at December 31, 1999
and 1998 564,318 562,069
Additional paid in capital 12,466,943 12,180,353
Retained earnings - deficit (2,030,679) (2,013,165)
Accumulated other comprehensive income (64,149) 97,469
-------------- --------------
Total shareholders' equity 10,936,433 10,826,726
-------------- --------------
Total liabilities and shareholders'
equity $ 18,694,188 $ 15,233,025
============== ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-6
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Gross premium income $ 3,798,814 $ 2,383,680 $ 1,279,679
Reinsurance premiums ceded (469,002) (89,240) (58,279)
------------ ------------ ------------
Net premium income 3,329,812 2,294,440 1,221,400
Investment activity:
Net investment income 659,309 595,612 504,831
Net realized investment
gain (loss) 205 6,529 (110,935)
Commissions and expense
allowances received
on reinsurance ceded 230,129 - -
Other income 114,671 88,628 39,755
------------ ------------ ------------
Total revenue 4,334,126 2,985,209 1,655,051
Benefits and expenses
Increase in policy reserves 870,582 731,958 381,888
Death claims (net of
reinsurance of $208,135
in 1999) 122,135 - 24,848
Policyholder surrender values 49,408 27,374 -
Interest credited on annuities
and premium deposits 200,107 111,171 58,642
Commissions 1,524,961 933,100 473,231
Policy acquisition costs
deferred (1,655,160) (1,200,412) (708,185)
Amortization of deferred policy
acquisition costs 760,468 426,476 339,562
Selling, administrative and
general insurance expenses 363,166 333,750 225,511
Salaries, wages and employee
benefits 1,102,195 801,332 680,193
Compensation expense related
to stock options - - 159,743
Professional fees 107,708 86,930 235,749
Miscellaneous taxes 42,837 23,689 38,168
Advisory board and directors
fees 87,430 65,986 48,361
Rent expense 87,386 77,633 75,226
Depreciation expense 15,708 16,436 16,292
Other operating costs and
expenses 260,177 150,287 162,596
------------ ------------ ------------
Total benefits and expenses 3,939,108 2,585,710 2,211,825
------------ ------------ ------------
Income (loss) before income
tax expense 395,018 399,499 (556,774)
------------ ------------ ------------
Income tax expense 254,540 265,102 123,995
------------ ------------ ------------
Net income (loss) $ 140,478 $ 134,397 $ (680,769)
============ ============ ============
Net income (loss) per common
share-basic and diluted $ 0.02 $ 0.02 $ (0.12)
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-7
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Common stock:
Balance, beginning of year $ 562,069 $ 557,984 $ 557,984
Sale of shares in private
placement (150,475 shares) 15,047 - -
Exercise of stock options
(40,850 shares) - 4,085 -
Company stock acquired
(127,980 shares) (12,798) - -
------------ ------------ ------------
Balance, end of year 564,318 562,069 557,984
Additional paid-in capital:
Balance, beginning of year 12,180,353 12,141,546 11,981,803
Stock options granted - - 159,743
Exercise of stock options
(40,850 shares) - 38,807 -
Sale of shares in private
placement (150,475 shares) 361,140 - -
Cost of public offering (54,558) - -
Company stock acquired
(127,980 shares) (19,992) - -
------------ ------------ ------------
Balance, end of year 12,466,943 12,180,353 12,141,546
Retained earnings-deficit:
Balance, beginning of year (2,013,165) (2,147,562) (1,466,793)
Net income (loss) 140,478 134,397 (680,769)
Company stock acquired
(127,980 shares) (157,992) - -
------------ ------------ ------------
Balance, end of year (2,030,679) (2,013,165) (2,147,562)
Accumulated other comprehensive
income:
Balance, beginning of year 97,469 14,390 (98,558)
Net unrealized gain (loss)
on available-for-sale
securities net of
reclassification adjustment
(see below) (161,618) 83,079 112,948
------------ ------------ ------------
Balance, end of year (64,149) 97,469 14,390
------------ ------------ ------------
Total shareholders' equity $10,936,433 $10,826,726 $10,566,358
============ ============ ============
Disclosure of reclassification
amount:
Unrealized holding gains (loss)
arising during period $ (161,823) $ 87,586 $ 104,411
Less: reclassification
adjustment for (gains) loss
in net income 205 (4,507) 8,537
------------ ------------ ------------
Net unrealized gains (loss)
on securities $ (161,618) $ 83,079 $ 112,948
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-8
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 140,478 $ 134,397 $ (680,769)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Interest credited on annuities
and premium deposits 183,734 111,171 58,642
Provision for depreciation 15,708 16,436 16,292
Compensation expense related
to stock options - - 159,743
Amortization of premium and
accretion of discount on
fixed maturity investments 23,883 20,899 25,955
Realized investment (loss)gain (205) (6,529) 87,935
Provision for deferred federal
income taxes 230,786 210,429 109,102
Loss on investments in
unconsolidated affiliates - - 97,184
Increase in policy loans (5,587) - -
Increase (decrease) in accrued
investment income (21,207) 44,397 19,603
Decrease in receivables from
related parties 6,293 790 24,993
Increase (decrease) in
reinsurance recoverable (1,418) - 40,000
Increase in federal income
tax recoverable (7,985) - -
Increase in deferred policy
acquisition costs, net (894,692) (773,935) (324,875)
Decrease in unearned revenue (17,221) (33,306) -
Decrease (increase) in premiums
due (31,915) (19,179) 14,571
Decrease (increase) in other
assets (24,780) 45,883 (2,534)
Increase in policy reserves 870,582 731,958 381,888
Increase (decrease) in deposits
on pending policy applications 16,593 124,350 (30,514)
Increase (decrease) in claims
payable 22,000 - (93,794)
Increase (decrease) in reinsurance
premiums payable (3,733) 25,626 7,285
Decrease (increase) in federal
income taxes payable (32,258) 32,258 (2,154)
Increase (decrease) in
commissions, salaries, wages
and benefits 68,641 (56,017) 71,046
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities 57,607 (114,671) 46,362
------------ ------------ ------------
Net cash provided by operating
activities 595,304 494,957 25,961
Investing activities:
Purchase of available-for-sale
fixed maturities (4,031,911) (782,760) (1,250,000)
Sale of available-for-sale
fixed maturities 1,789,689 3,112,129 1,539,680
Maturity of available-for-sale
fixed maturities - 700,000 750,000
Purchase of preferred stock - - (1,000,000)
Sale of preferred stock - 999,700 -
Purchase of common stock (362,588) - (20,000)
Purchase of other invested
assets (150,000) - -
Purchase price paid for
Benefit Capital Life Insurance
Company in excess of cash
acquired (200,092) - -
Decrease (increase) in notes
receivable 118,472 113,287 (188,827)
Purchase of furniture and
equipment (net) (3,723) (28,094) (594)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (2,840,153) 4,114,262 (169,741)
<PAGE>
<PAGE>F-9
Financing activities:
Deposits on annuity contracts,
net 1,057,423 549,013 574,717
Policyholder premium deposits,
net 9,886 50,685 (3,758)
Proceeds from exercise of stock
options - 42,892 -
Proceeds from sale of company
stock 376,187 - -
Cost of stock offering (54,558) - -
Purchase of company stock (190,782) - -
------------ ------------ ------------
Net cash provided by financing
activities 1,198,156 642,590 570,959
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents (1,046,693) 5,251,809 427,179
Cash and cash equivalents,
beginning of year 6,587,264 1,335,455 908,276
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 5,540,571 $ 6,587,264 $ 1,335,455
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>F-10
1. Nature of Operations
First Alliance Corporation (the "Company") was incorporated on February 16,
1993 for the primary purpose of forming, owning and managing life insurance
companies. On March 4, 1994, the Company's registration statement filed with
the Securities and Exchange Commission and the Kentucky Department of
Financial Institutions for a $12,500,000 public stock offering, which
included a 10% "over-sale" provision (additional sales of $1,250,000), was
declared effective. The Company completed its public stock offering on
October 28, 1995, raising total capital of $13,750,000.
The Company has two wholly-owned insurance subsidiaries, First Alliance
Insurance Company ("FAIC"), domiciled in Kentucky and Benefit Capital Life
Insurance Company ("BCLIC"domiciled in Louisiana. FAIC was incorporated
on December 29, 1994 and initially capitalized with $3,000,000 on January 10,
1995. The Company made an additional $3,000,000 capital contribution on May
15, 1995 and the Kentucky Department of Insurance ("KDI") granted FAIC a
Certificate of Authority on May 17, 1995. Insurance operations commenced on
November 1, 1995. BCLIC was purchased December 30, 1999 and has capital and
surplus of $480,501. Operating results of BCLIC are not included in these
financial statements.
FAIC's initial product was a twenty pay ordinary life insurance policy with a
flexible premium deferred annuity rider and a decreasing term rider for issue
ages 0 to 50. During 1997, the Company modified the insurance product being
marketed. The revised product offers a life insurance policy with an annuity
rider similar to the initial product, however the annual income protection
benefit rider was eliminated and death benefits on the base policy modified.
Additionally, the split between life and annuity premiums and the premium
paying period were changed. In the first year, the full premium is allocated
to life insurance with all renewal premium payments being split half to life
and half to annuity. Depending on the issue age, the premium paying period is
either ten or twenty years.
The product is being sold in premium units with the ability to purchase
either fractional or multiple units. If a greater accumulated annuity value
is desired, the policyholder may continue to make the premium payments,
after the completion of the premium paying period, with the entire payment
funding the annuity. Other products currently being marketed by FAIC are a
single premium deferred annuity, a ten year term policy and credit life and
credit accident and health. FAIC is licensed and sells its product in the
states of Kentucky, Indiana, Ohio and Kansas. Currently, the products are
only marketed in Kentucky and Indiana.
The Company also has a wholly-owned venture capital subsidiary, First Kentucky
Capital Corporation ("FKCC"), which was capitalized with $224,000 during 1996
and commenced operations on April 12, 1996. Additional capital contributions
of $127,500 and $92,000 were made during 1999 and 1997, respectively. FKCC
provides capital for Kentucky based businesses for both start-up companies
and for expansion of existing businesses. Investments may take the form of
loans, guarantees, commitments, equity, or joint venture agreements, or any
combination thereof. FKCC invested in three Kentucky businesses during 1996.
As of December 31, 1997, all of these investments had been written-off.
During 1999 FKCC 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 5% 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, an additional $127,500 was invested. The investment at
December 31, 1999 was $150,000 with the remaining amount of the commitment
due in equal installments on the second and fourth anniversaries of the
investment.
<PAGE>
<PAGE>F-11
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") which
differ from statutory accounting practices prescribed or permitted by the
KDI and the Louisiana Department of Insurance ("LDI").
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company, FAIC, FKCC, BCLIC and Medical Acceptance
Corporation ("MAC", prior to its disposition on December 31, 1997). All
intercompany accounts and transactions are eliminated in consolidation.
Management's Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Investments
The Company classifies all of its fixed maturity and equity securities,
except equity securities of related parties as available-for-sale.
Available-for-sale securities are carried at fair value with unrealized gains
and losses, net of applicable deferred taxes, reported in other comprehensive
income. Policy loans are carried at unpaid balances. Cash equivalents
consist of highly liquid investments with maturities of three months or less
at the date of purchase and are carried at cost which approximates fair value.
Notes receivable are reported at unpaid principal balance, net of allowance
for uncollectible amounts. Other invested assets are reported at cost.
Short term investments are carried at cost which approximates fair value.
Realized gains and losses on sales of investments are recognized in
operations on the specific identification basis. Interest and dividends
earned on investments are included in net investment income.
Common stock is reported at cost as these shares represent organizer shares
purchased in the initial private placement and are restricted from sale or
transfer under Rule 144 of the Act (see Note 4).
Investments in related parties are reported at cost (see Note 6).
Investments in unconsolidated affiliates consist of common stock investments
and are recorded using the equity method of accounting, with gains and losses
reported in net investment income.
Office Furniture and Equipment
Office furniture and equipment is recorded at cost less accumulated
depreciation using principally the 200% declining balance method over the
estimated useful life of the respective assets. Accumulated depreciation was
$96,427 and $69,808 at December 31, 1999 and 1998, respectively.
Office Lease
The Company leases approximately 6,100 square feet located at 2285 Executive
Drive, Lexington, Kentucky. At December 31, 1998, the Company leased
approximately 5,400 square feet pursuant to a lease agreement which would
expire on March 31, 1999. In February of 1999, the Company extended the
5,400 square foot lease agreement until January 31, 2001. Additionally, in
February of 1999 the Company entered into a lease agreement for an additional
700
<PAGE>
<PAGE>F-12
2. Significant Accounting Policies (continued)
square feet at the same location. The lease on this additional space expires
on January 31, 2001. Annual rent expense for the years ended December 31,
1999, 1998 and 1997 totaled $87,386, $77,633 and $75,226, respectively.
Deferred Policy Acquisition Costs
Commissions and other costs 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 life of the related
policies using assumptions consistent with those used in computing policy
reserves.
Goodwill and Value of Insurance Acquired
Goodwill represents the excess of the purchase price of purchased subsidiaries,
over amounts assigned (based on estimated fair values at the date of
acquisition) to the identifiable net assets acquired. Goodwill is amortized
over 20 years. At December 31, 1999 no amortization had been recorded.
Value of insurance acquired is recorded for the estimated value assigned to
the insurance in force of the purchased subsidiary at the date of acquisition.
The assigned value is amortized over the expected remaining life of the
insurance in force using methods consistent with that used for amortization
of policy acquisition costs. The acquisition of BCLIC occurred at December
31, 1999 and accordingly, no amortization has been recorded.
Life Policy Reserves
The liabilities for future policy benefits on the Company's life insurance
products are computed using the net level premium method and assumptions as
to investment yields, mortality, withdrawals and other assumptions, modified
as necessary to reflect anticipated trends and to include provisions for
possible unfavorable deviations. The assumptions utilized were 7.25% for
investment yields, 1975-1980 select and ultimate tables for mortality, and
Linton BA tables for withdrawal rates.
Annuity Contract Liabilities
Annuity contract liabilities are computed using the retrospective deposit
method and consist of policy account balances, before deducting surrender
charges, which accrue to the benefit of policyholders. Premiums received on
annuity contracts are recognized as an increase in a liability rather than
premium income. Interest credited on annuity contracts is recognized as an
expense.
Liability for Policy Claims
Policy claim liabilities are based on known liabilities plus estimated
future liabilities developed from trends of historical data applied to
current exposures.
Policyholder Deposits
Policyholder deposits consist primarily of premium and dividend deposits.
Policyholder premium deposits represent premiums received for the payment of
future premiums on existing policyholder contracts. Interest is credited on
these deposits at the rate of 6%. The premium deposits are recognized as an
increase in a liability rather than premium income. Policyholder dividend
deposits represent dividends paid to policyholders of BCLIC that have been
left with the company to earn interest. Interest is credited on these
deposits at the rate of 4%. Interest credited on premium and dividend
deposits is recognized as an expense.
<PAGE>
<PAGE>F-13
2. Significant Accounting Policies (continued)
Premiums
Life insurance premiums for limited payment contract are recorded according
to Statement of Financial Accounting Standard ("SFAS") No. 97. "Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and for Realized Gains and Losses from the Sale of Investments". Any gross
premium in excess of net premium is deferred and recognized in income in a
constant relationship with insurance in force.
Federal Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred income taxes are provided for cumulative temporary differences
between balances of assets and liabilities determined under generally accepted
accounting principles and balances determined for tax reporting purposes.
Reinsurance
Estimated reinsurance receivables are reported as assets and are recognized
in a manner consistent with the liabilities related to the underlying
reinsured contracts, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts".
Common Stock
Common stock has no par value and a stated value of $.10 per share and is
fully-paid and non-assessable.
Earnings Per Share
Net income (loss) per common share for basic and diluted earnings per share
is based upon the weighted average number of common shares outstanding during
the year. During 1998, option shares exercised are assumed to be outstanding
based on the day exercised. The weighted average outstanding common shares
was 5,645,035 in 1999 and 5,583,016 in 1998 and 5,579,840 in 1997.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on
the Company's net income or total shareholder's equity. SFAS No. 130
requires unrealized gains and losses on the Company's available-for-sale
securities to be included in other comprehensive income.
3. Acquisition of Benefit Capital Life Insurance Company
On December 30, 1999, FAIC, a subsidiary of the Company, acquired 100% of
the common stock of Benefit Capital Life Insurance Company from an
unaffiliated insurance holding company (the "BCLIC Acquisition"). The BCLIC
acquisition was accounted for as a purchase. There were no results of
operations to be included in the consolidated statements since the date of
acquisition.
The aggregate purchase price for the BCLIC acquisition was approximately
$636,000 (including net cost associated with the acquisition of approximately
$54,000). The BCLIC acquisition was financed with the working capital of
FAIC and 25,000 shares of Company stock valued at $62,500.
<PAGE>
<PAGE>F-14
4. Investments
<TABLE>
The amortized cost and fair value of investments in fixed maturities and
equity securities at December 31, 1999 and 1998 are summarized as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1999:
Fixed maturities
U.S. government bonds $ 5,290,951 $ 1,119 $ 70,633 $ 5,221,437
Municipal bonds 779,662 1,365 16,345 764,682
Corporate bonds 2,826,484 277 38,272 2,788,489
----------- ---------- ---------- -----------
Total $ 8,897,097 $ 2,761 $ 125,250 $ 8,774,608
----------- ---------- ---------- -----------
Equity securities $ 382,588 $ 46,899 $ 21,606 $ 407,881
----------- ---------- ---------- -----------
<CAPTION>
December 31, 1998:
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government bonds $ 2,549,148 $ 64,175 $ - $ 2,613,323
Municipal bonds 1,129,553 34,378 - 1,163,931
Corporate bonds 2,294,752 49,648 525 2,343,8750
----------- ---------- ---------- -----------
Total $ 5,973,453 $ 148,201 $ 525 $ 6,121,129
----------- ---------- ---------- -----------
</TABLE>
<TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1999,
by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers may have the right to call
or prepay obligations.
<CAPTION>
Amortized Fair
Cost Value
------------- ------------
<S> <C> <C>
Due in one year or less $ 880,443 $ 876,302
Due after one year through five years 3,910,151 3,854,077
Due after five years through ten years 3,693,217 3,630,943
Due after ten years 413,286 413,286
------------- ------------
$ 8,897,097 $ 8,774,608
</TABLE>
The fair values for investments in fixed maturities are based on quoted
market prices.
Included in investments are securities which have a fair value of $4,390,848
and $187,312 at December 31, 1999, which are on deposit with the KDI and the
LDI.
The Company limits credit risk by emphasizing investment grade securities and
by diversifying its investment portfolio among government, states, municipals,
political subdivisions and corporate bonds. As a result, management believes
that significant concentrations of credit risk do not exist.
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 collateralized with securities, which were in the possession of the
Company, that equal the total investment. All interest earned on the
collateral was retained by U.S. Star. 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 be redeemed at the original purchase price. On September 30,
1998,
<PAGE>
<PAGE>F-15
4. Investments (continued)
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 December 31, 1999 and 1998, the unpaid principal
balance on this note was $144,334.
During 1996, the Company entered into a $175,000 line of credit agreement,
bearing interest at an annual rate of 10.25%, with Mr. Rick Meyer, President
of First American Capital Corporation (see Note 6). During 1997, the line of
credit agreement was converted to a thirty-six month promissory note bearing
interest at an annual rate of 10.25%. The Company had a perfected security
interest in amounts due Mr. Meyer from United Security Assurance Company
which would provide for payment of the note. The note was retired during
1999. At December 31, 1998 the unpaid balance of the note was $64,068.
During 1996, the Company entered into a $100,000 line of credit agreement,
which bears interest at an annual rate of 20%, with Mr. James Hayslip of
Successful Solutions, Inc. During 1997, the line of credit agreement was
extended from July 31, 1997 to July 31, 1998. The unpaid balance at December
31, 1997 was $22,042. During 1998, Mr. Hayslip paid the outstanding balance
of the note.
During 1999 and 1998, the Company had gross realized investment gains of $205
and $6,988, respectively. There were no realized investment gains during 1997.
Realized investment losses totaled $459 and $12,935 in 1998 and 1997,
respectively. There were no realized investment losses during 1999. These
realized gains and losses during 1999, 1998 and 1997 were the result of the
sale of available for sale fixed maturity investments. In addition, during
1997 the Company incurred a net realized gain of $8,000 related to its
disposition of MAC (see Note 7) and a gross realized loss of $31,000 related
to its line of credit agreement with LGP, Inc. ("LGP", see Note 7).
As of December 31, 1999 and 1998, the Company had recorded an allowance for
uncollectible accounts on notes receivable of $149,698 (including the
allowance recorded in connection with the sale of MAC - see Note 6).
<TABLE>
The following are the components of net investment income:
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturities $ 339,448 $ 439,310 $ 560,866
Equity securities 286 - -
Notes receivable 18,801 28,149 37,447
Short-term and other investments 319,624 147,996 26,421
Investments in unconsolidated
affiliates - - (97,184)
------------ ------------ ------------
Gross investment income 678,159 615,455 527,550
Investment expenses (18,850) (19,843) (22,719)
------------ ------------ ------------
Net investment income $ 659,309 $ 595,612 $ 504,831
============ ============ ============
</TABLE>
<PAGE>
<PAGE>F-16
5. Concentrations of Credit Risk
Credit risk is limited by emphasizing investment grade securities and by
diversifying the investment portfolio among government, special revenue and
corporate bonds. The Company has not experienced any significant losses in
such investments and believes it is not exposed to any significant credit
risk. The Company and its subsidiaries maintain cash balances at several
financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. Uninsured balances
aggregate $570,000 at December 31, 1999. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
6. Investments in and Receivables from Related Parties
The Company has investments in related parties of $125,000 at December 31,
1999 and 1998, which are reported at cost as these investments represent
organizer shares purchased in the initial private placement of the related
entities (discussed below) and are restricted from sale or transfer under
Rule 144 of the Act. The Company also had receivables from these entities
of $14,203 and $20,496 at December 31, 1999 and 1998, respectively.
First American Capital Corporation
On August 8, 1996, the Company purchased 525,000 shares of the common stock
of First American Capital Corporation ("FACC") of Topeka, Kansas, for $52,500.
At December 31, 1998, FACC had raised total capital of $14,349,649 from the
sale of private placement shares and through a $12,500,000 Kansas intrastate
public stock offering which commenced on March 11, 1997. On January 15, 1999,
FACC completed its public stock offering raising total public offering
proceeds of $13,750,000 which includes a $1,250,000 over-sale. The proceeds
of the public offering were used to form a Kansas domiciled life insurance
company, First Life America Corporation. The Company owns 9.6% of the
outstanding common stock of FACC at December 31, 1999. At December 31, 1999
and 1998, the Company had accounts receivable from FACC of $9,160 and
$14,134, respectively.
Mid-American Alliance Corporation
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 December 31, 1999, MAAC had raised total capital of
$9,906,015 from the sale of private placement shares and 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. The public offering will
end on April 14, 1999 and the Company will own approximately 12% of the
outstanding common stock. At December 31, 1999 and 1998, the Company had
accounts receivable from MAAC of $4,529 and $6,362, respectively.
7. Venture Capital Subsidiary Investments
FKCC purchased newly issued common stock of MAC, Lexington, Kentucky,
representing a 51% interest, for $50,000 on April 12, 1996. MAC purchases
receivables from medical providers at a discount. The acquisition was
accounted for as a purchase and resulted in intangible assets of $26,623
($20,623 goodwill and $6,000 non-compete agreement) at the date of acquisition.
MAC has incurred operating losses since inception. As such, the Company has
included 100% of MAC's operating losses of $6,182 and $55,241 for the years
ended December 31, 1997 and 1996, respectively, in the consolidated financial
statements. Further, at December 31, 1996, the Company recorded a valuation
allowance of $26,623 relating to the intangible assets recorded in conjunction
with the acquisition. During 1996, FKCC entered into a $250,000 line of
credit agreement with MAC. The unpaid balance on this agreement was $6,616
and $66,708 at December 31, 1999 and 1998, respectively.
<PAGE>
<PAGE>F-17
7. Venture Capital Subsidiary Investments (continued)
On December 31, 1997, FKCC entered into an agreement to sell its interest in
MAC for $8,000 in cash and notes receivable of $147,049, which includes the
unpaid balance on the line of credit agreement of $105,049 at December 31,
1997. Included in the notes receivable balance is a $72,351 contract funding
note, which bears interest at an annual rate of 7%, which will be repaid
based on the underlying patient contract payments, with the remaining balance
due June 30, 1998. Due to the uncertainty of collectibility of the notes,
the Company recorded a valuation allowance of $74,698. At the date of sale,
the investment in MAC had no carrying value. The net realized gain on this
disposition was $8,000.
FKCC also purchased a 49% interest in LGP, for $49,000 on October 18, 1996,
which is accounted for on the equity method of accounting. LGP is a dating
service using interactive-video matchmaking, which combines a television
dating show and an on-line profile library on the Internet. During 1996,
FKCC entered into a $31,000 line of credit agreement with LGP of which the
entire balance was drawn upon during 1997. At December 31, 1997, the $31,000
line of credit agreement was determined to be uncollectible and was written-
off. Due to operating losses of $17,184 in 1996 and $31,816 in 1997, the
investment in LGP has no carrying value at December 31, 1999 or 1998.
Lastly, FKCC purchased a 40% interest in Cybertyme, Inc. ("Cybertyme"),
Glasgow, Kentucky, for $80,000 on November 12, 1996, which is also accounted
for on the equity method of accounting. Cybertyme provides individuals who
do not have access to a personal computer the ability to access the Internet
for an hourly fee. In addition, Cybertyme will provide educational classes
regarding Internet use and other personal computer applications. During 1997,
operating losses of $29,678 were recorded relative to this investment.
Management believes that Cybertyme will continue to incur operating losses
and has elected to record a valuation allowance of $50,322 which approximates
the remaining investment balance at December 31, 1999 and 1998.
On June 16, 1999, First Kentucky Capital Corporation executed a commitment to
purchase three units of the Prosperitas Investment 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. On November 29, 1999 a payment of $127,500 was made and the
remaining amount of the commitment is due in equal installments on the second
and fourth anniversaries of the initial capital contribution.
8. Federal Income Taxes
<TABLE>
The Company files a consolidated federal income tax return with FACC but does
not file a consolidated return with FAIC. FAIC is taxed as a life insurance
company under the provisions of the Internal Revenue Code and must file a
separate tax return for its initial six years of existence. Federal income
tax expense for the years ended December 31, 1999, 1998 and 1997 consisted
of the following:
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current $ 23,757 $ 54,671 $ 14,893
Deferred 230,783 210,431 109,102
------------ ------------ ------------
Federal income tax expense $ 254,540 $ 265,102 $ 123,995
============ ============ ============
</TABLE>
<PAGE>
<PAGE>F-18
8. Federal Income Taxes (continued)
<TABLE>
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate of 34% as follows:
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax expense
(benefit) at statutory rate $ 134,306 $ 135,829 $ (189,303)
Small life insurance company
deduction (60,672) (74,692) (27,470)
Increase in valuation allowance 180,759 176,967 341,714
Surtax exemptions (10,802) (9,427) (9,847)
Other 10,949 36,425 8,901
------------ ------------ ------------
Federal income tax expense $ 254,540 $ 265,102 $ 123,995
============ ============ ============
</TABLE>
<TABLE>
Deferred federal income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations.
Significant components of the Company's net deferred tax liability are as
follows:
<CAPTION>
December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Deferred tax liability:
Deferred policy acquisition $ 734,002 $ 527,078
Due and deferred premiums 26,875 14,324
Net unrealized investment gains - 50,210
-------------- -------------
Total deferred tax liability 760,877 591,612
Deferred tax asset:
Policy reserves and contract
liabilities 73,805 76,548
Unearned revenue 29,162 35,018
Reinsurance premiums 18,402 21,114
Net unrealized investment
losses 36,841 -
Net operating loss carry
forward 1,337,796 1,157,037
Alternative minimum tax credit
carry forward 44,846 44,846
-------------- -------------
Total deferred tax asset 1,540,852 1,334,563
Valuation allowance (1,382,642) (1,201,883)
-------------- -------------
Net deferred tax asset 158,210 132,680
-------------- -------------
Net deferred tax liability $ 602,667 $ 458,932
============== =============
</TABLE>
The Company has net operating loss carry forwards of approximately $3,934,694,
expiring in 2009 through 2019. These net operating loss carry forwards are
not available to offset FAIC income. FAIC has alternative minimum tax credit
carry forwards of $44,846, which have no expiration date. Federal income
taxes paid during 1999, 1998 and 1997 were $26,000, $15,000 and $22,000
respectively.
<PAGE>
<PAGE>F-19
9. Shareholders' Equity and Statutory Accounting Practices
The insurance subsidiaries are domiciled in Kentucky and Louisiana and
prepare their statutory-basis financial statements in accordance with
statutory accounting practices ("SAP") prescribed or permitted by the
Kentucky and Louisiana Department of Insurance. Currently, "prescribed"
statutory accounting practices include state insurance laws, regulations, and
general administrative rules, as well as the National Association of Insurance
Commissioners ("NAIC") Accounting Practices and Procedures Manual and a
variety of other NAIC publications. "Permitted" statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to company
within a state, and may change in the future. During 1998, the NAIC adopted
codified statutory accounting principles ("Codification"). Codification
will change, to some extent, prescribed statutory accounting principals that
the insurance subsidiaries use to prepare their statutory-basis financial
statements. At this time it is anticipated that Codification will replace
the NAIC Accounting Practices and Procedures Manual and will be effective
January 1, 2001. However, management believes that the impact of Codification
will not be material to the insurance subsidiaries' statutory-basis financial
statements.
<TABLE>
Net income for 1999, 1998 and 1997 and capital and surplus at December 31,
1999, 1998 and 1997 for the Company's insurance operations as reported in
these financial statements prepared in accordance with GAAP as compared to
amounts reported in accordance with SAP prescribed or permitted by the KDI
and LDI are as follows:
<CAPTION>
GAAP SAP
----------------------- ----------------------
Net Capital and Net Capital and
Income Surplus Income Surplus
<S> <C> <C> <C> <C>
1999 $ 791,210 $ 8,154,804 $ 100,989 $ 6,460,894
1998 670,447 7,458,286 107,579 6,306,783
1997 331,555 6,708,844 194,977 6,227,997
</TABLE>
FAIC carries its investment in BCLIC at cost after deduction for amortization
of goodwill and other intangibles, and adjustments for subsequent operating
results. The admitted value of FAIC's investment in BCLIC equals BCLIC's
statutory capital and surplus of $413,365 plus goodwill of $222,392 at
December 31, 1999.
Principal differences between GAAP and SAP include: a) costs of acquiring
new policies are deferred and amortized for GAAP; b) value of insurance
inforce acquired is established as an asset for GAAP; c) benefit reserves
are calculated using more current investments, mortality and withdrawals
assumptions for GAAP; d) deferred income taxes are provided for GAAP; e)
assets and liabilities of acquired companies are adjusted to their fair
values at acquisition, with the amount of the purchase price in excess of the
fair value recorded as goodwill under GAAP; f) statutory asset valuation
reserves and interest maintenance reserves are not required for GAAP; and g)
available-for-sale fixed maturity investments are reported at fair value with
unrealized gains and losses reported as a separate component of shareholders'
equity for GAAP.
Statutory restrictions limit the amount of dividends which may be paid by
FAIC to the Company. Generally, dividends during any year may not be paid
without prior regulatory approval, in excess of the lesser of (a) 10% of
statutory shareholder's surplus as of the preceding December 31, or (b)
statutory net operating income for the preceding year. In addition, FAIC must
maintain the minimum statutory capital and surplus, $1,250,000, required for
life insurance companies domiciled in Kentucky and BCLIC must maintain
minimum capital and surplus of $450,000.
The KDI and LDI imposes minimum risk-based capital ("RBC") requirements on
insurance enterprises that were developed by the NAIC. The formulas for
determining the amount of RBC specify various weighing factors that are
<PAGE>
<PAGE>F-20
9. Shareholders' Equity and Statutory Accounting Practices (continued)
applied to financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by ratio
(the "Ratio") of the enterprises regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level RBC, as defined by the
NAIC. Enterprises below specific trigger points or ratios are classified
within certain levels, each of which requires specified corrective action.
FAIC and BCLIC have a Ratio that is in excess of the minimum RBC requirements;
accordingly, FAIC and BCLIC meet the RBC requirements.
10. Reinsurance
To minimize the risk of claim exposure, FAIC reinsures all amounts of risk on
any one life in excess of $50,000 for individual life insurance. Credit life
and accident and health benefits and accidental death benefits are 100%
reinsured. All amounts of risk in excess of FAIC's retention on individual
life insurance, except for term insurance is ceded to Business Men's
Assurance Company ("BMA"). At December 31, 1999 and 1998, FAIC ceded
$61,333,753 and $66,850,411 of insurance in-force and received reserve
credits of $203,776 and $97,417 respectively. Pursuant to the terms of the
agreement with BMA, FAIC pays no reinsurance premiums on first year
individual business. However, SFAS No. 113 requires the unpaid premium to be
recognized as a first year expense and amortized over the estimated life of
the reinsured policies. FAIC records this unpaid premium as "Reinsurance
premiums payable" in the accompanying balance sheet and recognized as
"Reinsurance premiums ceded" in the accompanying income statement. At
December 31, 1999, and 1998, the unpaid reinsurance premiums net of
amortization totaled $61,450 and $65,183, respectively. During 1999, 1998
and 1997, FAIC paid $472,735, $79,375 and $50,994 of reinsurance premiums,
respectively.
BCLIC reinsures 50% of the risk to $10,000 and 100% of the risk over $10,000
on any one life. At December 31, 1999 BCLIC ceded $8,612,671 of reinsurance
in force and received reserve credits of $13,158. To the extent that the
reinsurance companies are unable to meet their obligations under the
reinsurance agreements, the Company remains primarily liable for the entire
amount at risk.
11. 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 of 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
expenses, and agent's health insurance. Pursuant to the terms of the
agreement, FAIC had incurred expenses of $821,562, $595,146 and $432,648 for
the years ended December 31, 1999, 1998 and 1997, 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.
In December of 1998, the Company contracted with FACC to provide underwriting
and accounting services for FAC. 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, the 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%) for year five 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.
<PAGE>
<PAGE>F-21
11. Related Party Transactions (continued)
Under the terms of the agreements, FACC incurred expenses of $60,531, $24,816
and $21,000 during 1999, 1998 and 1997, respectively and MAAC incurred expenses
of $35,000, $24,000 and $14,000 during 1999, 1998 and 1997, respectively.
Further, the Company has accounts receivable of $9,160 and $4,529 from FACC
and MAAC, respectively, at December 31, 1999 and $13,318 and $6,362 from FACC
and MAAC, respectively, at December 31, 1998 (see Note 4). Various officers
and directors of the Company hold similar positions with FACC and MAAC.
12. Fair Values of Financial Instruments
The fair values of financial instruments, and the methods and assumptions
used in estimating their fair values, are as follows:
Fixed Maturities
Fixed maturities are carried at fair value in the accompanying consolidated
balance sheets. The fair value of fixed maturities are based on quoted market
prices. At December 31, 1999 and 1998, the fair value of fixed maturities
was $8,774,608 and $6,121,129, respectively.
Equity Securities
The fair values of equity securities are based on market prices where
available. Equity securities are carried at fair value in the accompanying
financial statements. At December 31, 1999 the fair value of equity
securities was $407,881 and $20,000, respectively.
Investments in Related Parties
The Company holds investments in related parties of $125,000 at December 31,
1999 and 1998. These investments represent organizer shares purchased in the
initial private placement of the respective entities and are restricted under
Rule 144 of the Act. Accordingly, there are no quoted market prices for
these investments.. These investments are carried at cost in the accompanying
consolidated balance sheets.
Short-Term Investments
The carrying value of short-term investments approximates their fair value.
At December 31, 1999 the fair value of short-term investments was $200,000.
No short-term investments were held at December 31, 1998.
Cash and Cash Equivalents
The carrying values of cash and cash equivalents approximate their fair
values. At December 31, 1999 and 1998, the fair value of cash and cash
equivalents was $5,540,571 and $6,587,264, respectively.
Policy Loans
The carrying value of policy loans approximates their fair value. At
December 31, 1999 the fair value of policy loans was $32,194. No policy
loans were held at December 31, 1998.
Other Invested Assets
The carrying value of other invested assets approximates fair value. At
December 31, 1999 the fair value of other invested assets was $150,000. No
other invested assets were held in 1998.
<PAGE>
<PAGE>F-22
12. Fair Values of Financial Instruments (continued)
Notes Receivable and Investments in Unconsolidated Affiliates
The carrying values of notes receivable and investments in unconsolidated
affiliates approximate their fair values. At December 31, 1999 and 1998, the
fair values of notes receivable was $103,164 and $221,636 respectively.
Investments in unconsolidated affiliates did not have any carrying value at
December 31, 1999 and 1998.
Investment Contracts
The carrying value of investment-type fixed annuity contracts approximates
their fair value. At December 31, 1999 and 1998, the fair value of
investment-type fixed annuity contracts were $3,004,186 and $1,763,029,
respectively.
13. Stock Options
The Company has adopted a stock option plan for 200,000 common stock shares.
The option exercise price pursuant to the plan is $1.05. Grantees have not
more than one year in which to exercise their options. The stock acquired
pursuant to exercise of options granted is non-transferable for a period of
two years from the date of acquisition. The Company's three founding
officers are not eligible to participate in the plan. The stock options
became available for granting on March 4, 1997.
Stock options are accounted for in accordance with Accounting Principals
Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has recognized compensation expense equal to the difference between
the option exercise price of $1.05 and the estimated fair value of the stock
at the date of grant. Compensation cost reflected in these financial
statements as the result of these 54,650 options being granted is $159,743,
representing the difference between the estimated fair value of the
underlying stock at grant date (approximately $4.00 per share) and the
option exercise price.
<TABLE>
A summary of the Company's stock option activity and related information for
the years ended December 31, 1999 and 1998 follows.
<CAPTION>
1999 1998
Options Price Options Price
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of
year - $ - 54,650 $ 1.05
Granted - - - -
Exercised - - (40,850) 1.05
Forfeited - - 13,800 -
----------- -------- --------- --------
Outstanding, end of
year - -
=========== =========
Fair value of options
granted during year $ - $218,600
============ =========
</TABLE>
<PAGE>
<PAGE>F-23
14. Comprehensive income
In 1999, the Financial Accounting and Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS 130 requires the detail of comprehensive income for the
reporting period be disclosed in the financial statements. Comprehensive
income consists of net income or loss for the current period adjusted for
income, expenses gains and losses that are reported as a separate component
of shareholders' equity rather than in the statement of operations. The
financial statements have been prepared in accordance with SFAS 130.
<TABLE>
The components of comprehensive income along with the related tax effects
are presented for 1999, 1998 and 1997 as follows:
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Unrealized gain on
available-for-sale securities:
Unrealized holding gains/
(losses) during the period $ (244,669) $ 132,706 $ 158,199
Tax benefit/(expense) 83,186 (45,120) (53,788)
------------ ------------ ------------
(161,483) 87,586 104,411
Less:
Adjustment for gains realized
in net income 205 6,829 -
Tax benefit/(expense) (70) (2,322) -
------------ ------------ ------------
135 4,507 -
Plus:
Adjustment for losses realized
in net income - - 12,935
Tax benefit/(expense) - - 4,398
------------ ------------ ------------
- - 8,537
------------ ------------ ------------
Other comprehensive income $ (161,618) $ 83,079 $ 112,948
============ ============ ============
Net income/(loss) $ 140,478 $ 134,397 $ (680,769)
Other comprehensive income
/(loss) net of tax effect:
Unrealized investment gains
(losses) (161,618) 83,079 112,948
------------ ------------ ------------
Comprehensive income/(loss) $ (21,140) $ 217,476 $ (567,821)
============ ============ ============
Net income/(loss) per common
share - basic and diluted $ 0.02 $ 0.02 $ (0.12)
============ ============ ============
</TABLE>
<PAGE>
<PAGE>F-24
15. Segment Information
Prior to 1998 segment data was required to be presented on an "industry
approach" in accordance with SFAS No. 14. SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", became effective for 1998
and superseded SFAS No. 14. SFAS No. 131 requires a "management approach"
(how management internally evaluates the operating performance of its
business units) in the presentation of business segments. The segment data
that follows has been prepared in accordance with SFAS No. 131 which is
consistent with prior year presentation. 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 December 31, 1999, 1998
and 1997 and for the years then ended is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Life and annuity insurance
operations $ 4,103,369 $ 2,814,106 $ 1,652,201
Venture capital operations 30,923 4,101 (152,919)
Corporate operations 199,834 167,002 155,769
------------ ------------ ------------
Total $ 4,334,126 $ 2,985,209 $ 1,655,051
============ ============ ============
Income (loss) before income
taxes:
Life and annuity insurance
operations $ 1,045,750 $ 935,549 $ 455,550
Venture capital operations 30,923 4,085 (154,015)
Corporate operations (681,655) (540,135) (858,309)
------------ ------------ ------------
Total $ 395,018 $ 399,499 $ (556,774)
============ ============ ============
Assets:
Life and annuity insurance
operations $ 16,359,833 $ 11,850,273 $ 9,259,930
Venture capital operations 208,766 50,343 46,258
Corporate operations 2,125,589 3,332,409 3,992,176
------------ ------------ ------------
Total $ 18,694,188 $ 15,233,025 $ 13,298,364
============ ============ ============
Depreciation and amortization
expense:
Life and annuity insurance
operations $ 760,468 $ 426,476 $ 339,562
Venture capital operations - - -
Corporate operations 15,708 16,436 16,292
------------ ------------ ------------
Total $ 776,176 $ 442,912 $ 355,854
============ ============ ============
</TABLE>
16. 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.
<PAGE>
<PAGE>F-25
17. Commitments
On June 16, 1999, First Kentucky Capital Corporation executed a commitment to
purchase three units of the Prosperitas Investment 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. On November 29, 1999 a payment of $127,500 was made and the
remaining amount of the commitment is due in equal installments on the second
and fourth anniversaries of the initial capital contribution.
<PAGE>
<PAGE>F-26
<TABLE>
FIRST ALLIANCE CORPORATION AND SUBSIDIARY
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
<CAPTION>
Amount at
Which Shown in
the Balance
Type of Investment Cost(1) Value(2) Sheet (3)
------------- ----------- --------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government
and government agencies
and authorities $ 5,290,951 $ 5,221,437 $ 5,221,437
States, municipalities and
political subdivisions 779,662 764,682 764,682
All other corporate bonds 2,826,484 2,788,489 2,788,489
------------- ----------- --------------
Total fixed maturities 8,897,097 8,774,608 8,774,608
Equity securities 382,588 407,881 407,881
Policy loans 32,194 32,194 32,194
Notes receivable 103,164 103,164 103,164
Short-term investments 200,000 200,000 200,000
Other Invested Assets 150,000 150,000 150,000
------------- ----------- --------------
867,946 893,239 893,239
------------- ----------- --------------
Total investments $ 9,765,043 $ 9,667,847 $ 9,667,847
============= =========== ==============
<FN>
<F1>
(1) Original cost of fixed maturities adjusted for amortization of premiums
and discounts.
<F2>
(2) Represents fair market value of fixed maturities at the balance sheet
date determined on the basis of year end market prices.
<F3>
(3) Excludes investments in related parties of $125,000.
</FN>
</TABLE>
<PAGE>
<PAGE>F-27
<TABLE>
FIRST ALLIANCE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
<CAPTION>
December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Assets
Available-for-sale fixed maturities,
at fair value (amortized cost, $884,232
and $505,365 in 1999 and 1998,
respectively) $ 877,414 $ 505,848
Equity securities (cost of $156,925 and
$20,000 in 1999 and 1998, respectively) 157,522 20,000
Investment in subsidiaries* 8,363,570 7,508,630
Cash and cash equivalents 1,231,732 2,355,214
Notes receivable 93,925 218,688
Investments in related parties 125,000 125,000
Receivables from related parties 14,203 20,496
Accrued investment income 18,684 13,262
Prepaid expenses 48,473 23,427
Office furniture and equipment, less
accumulated depreciation of $81,390
and $69,808 in 1999 and 1998,
respectively 31,699 43,684
Receivable from subsidiary* 115,119 70,829
Deferred federal income taxes 2,115 -
Other assets 12,611 8,358
-------------- --------------
Total assets $ 11,092,067 $ 10,913,436
============== ==============
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 14,721 $ 64,270
Salaries, wages, and benefits payable 128,741 20,708
Payable to subsidiary* 5,172 1,569
Deferred federal income taxes - 164
Other taxes payable 7,000 -
-------------- --------------
Total liabilities 155,634 86,711
Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,643,185 and
5,620,690 shares issued and outstanding
at December 31, 1999 and 1998,
respectively; $.10 stated value 564,318 562,069
Additional paid-in capital 12,466,943 12,180,352
Retained earnings-deficit (2,030,679) (2,013,165)
Accumulated other comprehensive income (64,149) 97,469
-------------- --------------
Total shareholders' equity 10,936,433 10,826,725
-------------- --------------
Total liabilities and shareholders'
equity $ 11,092,067 $ 10,913,436
============== ==============
<FN>
<F1>
* Eliminated in consolidation
</FN>
</TABLE>
<PAGE>
<PAGE>F-28
<TABLE>
FIRST ALLIANCE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Service fee revenue from
subsidiary* $ 821,562 $ 595,962 $ 432,648
Net investment income 132,218 118,644 171,204
Realized investment gains
(losses) 14 (459) (50,435)
Equity in earnings of
subsidiaries* 822,133 674,533 177,540
Other income 97,602 48,000 35,000
------------ ------------ ------------
Total revenue 1,873,529 1,436,680 765,957
Benefits and expenses
Salaries, wages and employee
benefits 1,102,195 801,332 680,193
Compensation cost related to
stock options - - 159,743
Professional fees 107,708 86,930 235,749
Insurance administration
expenses 96,063 85,734 69,466
Rent expense 14,734 77,633 75,226
Depreciation expense 15,708 16,436 16,292
Other operating costs and
expenses 396,643 234,218 210,057
------------ ------------ ------------
Total benefits and expenses 1,733,051 1,302,283 1,446,726
------------ ------------ ------------
Net income/(loss) 140,478 134,397 (680,769)
Other comprehensive income (loss),
net of income tax:
Unrealized investment gain (loss) (161,618) 4,085 21,993
------------ ------------ ------------
Comprehensive income (loss) $ (21,140) $ 138,482 $ (658,776)
============ ============ ============
<FN>
<F1>
* Eliminated in consolidation
</FN>
</TABLE>
<PAGE>
<PAGE>F-29
<TABLE>
FIRST ALLIANCE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net cash used in operating
activities $ (663,978) $ (585,317) $ (634,713)
Investing activities:
Purchase of available-for-sale
fixed maturities (910,480) - -
Sale of available-for-sale
fixed maturities 526,014 1,249,863 1,539,680
Maturity of available-for-sale
fixed maturities - 700,000 -
Purchase of preferred stock - - (800,000)
Sale of preferred stock - 799,700 -
Purchase of common stock (136,925) - (20,000)
Investment in subsidiaries (190,000) - (92,000)
Decrease (Increase) in notes
receivable 124,763 68,848 -
Purchase of furniture and
equipment (3,723) (28,094) (3,939)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (590,351) 2,790,317 623,741
Financing activities:
Proceeds from stock options - 42,893 -
Proceeds from sale of stock 376,187 - -
Cost of stock offering (54,558) - -
Purchase of company stock (190,782) - -
------------ ------------ ------------
Net cash provided by financing
activities 130,847 42,893 -
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents (1,123,482) 2,247,893 (10,972)
Cash and cash equivalents,
beginning of year 2,355,214 107,321 118,293
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 1,231,732 $ 2,355,214 $ 107,321
============ ============ ============
</TABLE>
<PAGE>
<PAGE>F-30
<TABLE>
FIRST ALLIANCE CORPORATION
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
Future policy
benefits Other
Deferred losses policy Net
policy claims and claims & invest
acquisition loss Unearned benefits Premium & other
Segment costs expenses(a) premiums payable(b) revenue income
----------- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
December
31, 1999
Life
insurance
and annuity
operations $ 2,743,111 $ 6,319,849 $ 86,878 $ 230,602 $3,329,812 $526,168
Venture
capital
operations - - - - - -
Corporate
operations - - - - - 132,218
----------- ------------- --------- ---------- ---------- --------
Total $ 2,743,111 $ 6,319,849 $ 86,878 $ 230,602 $3,329,812 $658,386
=========== ============= ========= ========== ========== ========
December
31, 1998
Life
insurance
and annuity
operations $ 1,848,419 $ 3,256,795 $102,993 $ 177,528 $2,294,441 $476,968
Venture
capital
operations - - - - - -
Corporate
operations - - - - - 118,644
----------- ------------- --------- ---------- ---------- --------
Total $ 1,848,419 $ 3,256,795 $102,993 $ 177,528 $2,294,441 $595,612
=========== ============= ========= ========== ========== ========
December
31, 1997
Life
insurance
and annuity
operations $ 1,074,485 $ 1,874,359 $136,299 $ 117,137 $1,221,400 $430,811
Venture
capital
operations - - - - - (97,184)
Corporate
operations - - - - - 210,959
----------- ------------- --------- ---------- ---------- --------
Total $ 1,074,485 $ 1,874,359 $136,299 $ 117,137 $1,221,400 $544,586
=========== ============= ========= ========== ========== ========
</TABLE>
<PAGE>
<PAGE>F-31
<TABLE>
FIRST ALLIANCE CORPORATION
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (continued)
<CAPTION>
Benefits Amortization
claims, of deferred
losses and policy Other
settlement acquisition operating
Segment expenses(c) costs expenses
<S> <C> <C> <C>
December 31, 1999
Life insurance and annuity
operations $ 371,650 $ 760,468 $ 363,556
Venture capital operations - - -
Corporate operations - - 1,703,051
---------- ---------- -----------
Total $ 371,650 $ 760,468 $ 2,066,607
========== ========== ===========
December 31, 1998
Life insurance and annuity
operations $ 138,545 $ 426,476 $ 580,579
Venture capital operations - - -
Corporate operations - - 1,302,283
---------- ---------- -----------
Total $ 138,545 $ 426,476 $ 1,882,862
========== ========== ===========
December 31, 1997
Life insurance and annuity
operations $ 465,378 $ 339,562 $ 390,259
Venture capital operations - - 2,548
Corporate operations - - 1,014,078
---------- ---------- -----------
Total $ 465,378 $ 339,562 $ 1,406,885
========== ========== ===========
<FN>
<F1>
(a) Includes annuity contract liabilities.
<F2>
(b) Includes policyholder premium and dividend deposits.
<F3>
(c) Includes interest credited on annuity contract liabilities and
policyholder premium deposits.
</FN>
</TABLE>
<PAGE>
<PAGE>F-32
<TABLE>
FIRST ALLIANCE CORPORATION
SCHEDULE IV - REINSURANCE
<CAPTION>
Percentage
of Amount
Ceded to Assumed Assumed
Gross Other from Other to Net
Amount Companies Companies Net Amount Amounts
<S> <C> <C> <C> <C> <C>
Life insurance
in force
(in thousands):
December 31, 1999 $ 195,895 $ 69,947 $ - $ 125,948 -
December 31, 1998 119,576 36,310 - 83,266 -
December 31, 1997 98,685 47,248 - 51,437 -
Premiums:
December 31, 1999 $3,803,251 $ 473,439 $ - $3,329,812 -
December 31, 1998 2,383,680 89,240 - 2,294,440 -
December 31, 1997 1,279,679 58,279 - 1,221,400 -
</TABLE>
FIRST ALLIANCE CORPORATION
SUBSIDIARIES OF FIRST ALLIANCE CORPORATION
Subsidiaries of subsidiaries are indicated by indentations
Name Jurisdiction of Incorporation
- -----------------------------------------------------------------------------
First Alliance Insurance Company Kentucky
Benefit Capital Life Insurance Company Louisiana
First Kentucky Capital Corporation Kentucky
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 8,774,608
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 407,881
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,667,847
<CASH> 5,540,571
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,743,111
<TOTAL-ASSETS> 18,694,188
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
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