<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Period Ended September 30, 2000
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
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FIRST ALLIANCE CORPORATION
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(exact name of registrant as specified in its charter)
Kentucky 61-1242009
--------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) number)
2285 Executive Drive, Suite 308
Lexington, Kentucky 40505
--------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(859) 299-7656
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [ X ] No [ ]
Applicable Only to Corporate Insurers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
Common Stock, No Par Value - 5,541,510 shares as of October 31, 2000
Transitional Small Business Disclosure Format (Check one): Yes No X
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FIRST ALLIANCE CORPORATION
INDEX TO FORM 10-QSB
--------------------
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
---------------------------------- ---------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Operations
for the three months ended September 30, 2000 and 1999
for the nine months ended September 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis or Plan of Operation 11
Part II.
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Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
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</TABLE>
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FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
ASSETS Unaudited
<S> <C> <C>
Investments:
Available-for-sale fixed maturities, at fair value
(amortized cost, $8,735,307 and $8,897,097
in 2000 and 1999, respectively) $ 8,751,258 $ 8,774,608
Equity securities (cost of $3,903,534 and $382,588
in 2000 and 1999, respectively) 3,138,358 407,881
Policy loans 76,290 32,194
Notes receivable (net of $149,698 valuation
allowance in 2000 and 1999) 412,693 103,164
Investments in partnership 150,000 150,000
Investment in limited liability company 360,000 -
Short-term investments - 200,000
----------- -----------
Total investments 12,888,599 9,667,847
Cash and cash equivalents 2,487,022 5,540,571
Investments in related parties 237,500 125,000
Reinsurance recoverable 1,512 1,418
Receivables from related parties 41,207 14,203
Federal income tax recoverable - 7,985
Accrued investment income 176,776 135,482
Deferred policy acquisition costs 3,195,429 2,743,111
Value of insurance acquired 58,245 61,311
Goodwill 158,975 155,256
Premiums due 84,755 81,690
Office furniture and equipment, less accumulated depreciation of
$110,122 and $96,427 in 2000 and 1999, respectively 39,897 42,499
Other assets 119,028 117,815
----------- -----------
Total assets $19,488,945 $18,694,188
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
1
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FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Policy and contract liabilities:
Annuity contract liabilities $ 4,168,828 $ 3,004,186
Life policy reserves (net of reinsurance ceded
reserves of $312,951 and $203,776 in 2000 and
1999, respectively) 3,808,045 3,273,564
Policy and contract claims 754 42,099
Policyholder dividend deposits 42,550 43,188
Policyholder premium deposits 193,336 187,414
Deposits on pending policy applications 241,845 233,158
Unearned revenue 77,962 86,878
Reinsurance premiums payable 64,707 61,450
------------ ------------
Total policy and contract liabilities 8,598,027 6,931,937
Federal income taxes payable:
Current 8,310 -
Deferred 516,571 602,667
Other taxes payable 30,286 8,207
Commissions, salaries, wages and benefits payable 154,891 133,382
Accounts payable and accrued expenses 20,185 81,562
------------ ------------
Total liabilities 9,328,270 7,757,755
Shareholders' equity:
Common stock, no par value, 8,000,000 shares
authorized; 5,541,510 and 5,643,185 shares issued and
outstanding at September 30, 2000 and December 31, 1999 554,151 564,318
Additional paid in capital 12,628,572 12,466,943
Retained earnings - deficit (2,514,360) (2,030,679)
Accumulated other comprehensive income (507,688) (64,149)
------------ ------------
Total shareholders' equity 10,160,675 10,936,433
------------ ------------
Total liabilities and shareholders' equity $ 19,488,945 $ 18,694,188
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
2
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FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Premium income $ 854,758 $ 754,158 $ 2,537,130 $ 2,332,812
Net investment income 165,664 158,851 529,788 478,160
Realized gains (loss) on investments (100,832) - (128,784) 2,070
Ceding commission 95,706 2,646 346,767 5,621
Service fee revenue 52,623 14,413 130,702 43,837
Other income 2,285 17,936 9,543 41,602
----------- ----------- ----------- -----------
Total revenue 1,070,204 948,004 3,425,146 2,904,102
BENEFITS AND EXPENSES
Increase in policy reserves 171,805 181,501 534,481 622,141
Death claims 23,641 13,382 66,114 88,351
Policyholder surrender values 40,800 9,132 135,050 30,570
Interest credited on annuities and
premium deposit fund 89,747 52,221 237,393 142,646
Payment of dividend accumulations 463 - 1,881 -
Commissions 334,461 312,978 1,152,651 928,872
Policy acquisition costs deferred (260,996) (399,583) (915,945) (1,181,969)
Amortization of deferred policy
acquisition cost 148,486 202,396 463,627 536,980
Amortization of cost of insurance 1,022 - 3,066 -
Salaries, wages and employee benefits 230,845 256,344 777,843 777,367
Agency expenses 108,068 113,340 408,705 265,384
Professional fees 48,103 19,796 158,945 111,476
Other expenses 122,172 146,622 359,141 392,586
----------- ----------- ----------- -----------
Total benefits and expenses 1,058,617 908,129 3,382,952 2,714,404
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 11,587 39,875 42,194 189,698
----------- ----------- ----------- -----------
Federal income taxes 23,974 39,865 170,895 164,302
----------- ----------- ----------- -----------
Net income (loss) $ (12,387) $ 10 $ (128,701) $ 25,396
=========== =========== =========== ===========
Net income (loss) per common share-
basic and diluted $ 0.00 $ 0.00 $ (0.02) $ 0.00
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30, September 30,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (128,701) $ 25,396
Adjustments to reconcile net loss to net cash
provided by operating activities:
Interest credited on annuities and premium deposits 228,931 139,365
Provision for depreciation 13,695 11,582
Amortization of premium and accretion of discount on
fixed maturity investments 15,676 18,854
Amortization of insurance acquired 3,066 -
Realized investment loss 128,785 -
Provision for deferred federal income taxes 142,395 152,194
Increase in policy loans (44,096) (3,571)
Increase in reinsurance recoverable (94) (19,631)
Increase in receivables from related parties (27,004) (13,014)
Decrease in federal income tax recoverable 7,985 -
Increase (decrease) in accrued investment income (41,294) 1,559
Increase in deferred policy acquisition costs, net (452,318) (644,989)
Increase in premiums due (3,065) (18,142)
Increase in other assets (1,213) (37,911)
Increase in policy reserves 534,481 622,141
Decrease in claims payable (41,345) -
Increase in deposits on pending policy applications 8,687 16,995
Decrease in unearned revenue (8,916) -
Increase in reinsurance premiums payable 3,257 31,856
Increase (decrease) in federal income taxes payable 8,310 (32,258)
Increase in commissions, salaries, wages and benefits payable 21,509 42,545
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (39,298) 5,012
----------- -----------
Net cash provided by operating activities 329,433 297,983
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities (2,639,847) (398,256)
Sale of available-for-sale fixed maturities 2,398,896 -
Maturity of available-for-sale fixed maturities 350,000 1,000,000
Purchase of common stock (5,136,341) (107,537)
Sale of common stock 1,503,674 -
Purchase price paid for Benefit Capital Life Insurance
Company in excess of cash acquired (3,719) -
Purchase of limited partnership interest - (22,500)
Purchase of limited liability company interest (360,000) -
Short term investments disposed 200,000 -
Purchase of investment in unconsolidated affiliate (112,500) -
Increase (decrease) in notes receivable (309,529) 96,173
Net increase in furniture and equipment (11,093) (3,723)
----------- -----------
Net cash provided (used in) investing activities (4,120,459) 564,157
</TABLE>
4
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FIRST ALLIANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Nine months ended
September 30, September 30,
2000 1999
------------- -------------
(Unaudited) (Unaudited)
FINANCING ACTIVITIES:
<S> <C> <C>
Deposits on annuity contracts, net 935,711 730,344
Policyholder premium deposits, net 5,922 11,693
Policyholder dividend deposits, net (638) -
Proceeds from sale of common stock 186,312 185,530
Cost of stock offering (1,050) -
Repurchase of common stock (388,780) (140,900)
----------- -----------
Net cash provided by financing activities 737,477 786,667
----------- -----------
Increase (decrease) in cash and cash equivalents (3,053,549) 1,648,807
Cash and cash equivalents at beginning of period 5,540,571 6,587,264
----------- -----------
Cash and cash equivalents at end of period $ 2,487,022 $ 8,236,071
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 8
FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of the results for the interim periods have been
included.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes, has
been omitted. The accompanying condensed consolidated financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the fiscal year ended
December 31, 1999. Certain reclassifications have been made in the prior
period financial statements to conform with the current year presentation.
(2) SUBSIDIARY OPERATIONS
The Company's wholly owned subsidiaries', First Alliance Insurance Company
("FAIC") and First Kentucky Capital Corporation ("FKCC"), are included in
the condensed consolidated financial information. Benefit Capital Life
Insurance Company ("BCLIC") is included from the date of acquisition of
December 30, 1999.
(3) COMPREHENSIVE INCOME
The components of comprehensive income along with the related tax effects
are presented for the quarters ended September 30, 2000 and 1999 as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Unrealized gain on available-for-sale securities
Unrealized holding gains/(losses) during
the period $(224,370) $ (17,104) $(672,030) $(178,863)
Tax benefit/(expense) 76,286 5,817 228,491 60,814
------------------------------------------------------
Other comprehensive income $(148,084) $ (11,287) $(443,539) $(118,049)
======================================================
Net income/(loss) $ (12,387) $ 10 $(128,701) $ 25,396
Other comprehensive income/(loss) net of
tax effect:
Unrealized investment gains/(loss) (148,084) (11,287) (443,539) (118,049)
------------------------------------------------------
Comprehensive income/(loss) $(160,471) $ (11,277) $(572,240) $ (92,653)
======================================================
Net income/(loss) per common share - basic
and diluted $ (0.00) $ 0.00 $ (0.02) $ 0.00
======================================================
</TABLE>
6
<PAGE> 9
FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4) INVESTMENTS
During the first nine months of 2000 the Company entered into
collateralized loan agreements with eight of its agents. The total amount
loaned was $271,989. Collateral for these loans is common stock of the
Company and/or future renewal commissions and renewal management overwrite
commissions. Also the Company advanced Ken Belsky and Associates $100,000
under an outstanding credit agreement during the first nine months of
2000.
On February 17, 2000 the Company executed an agreement with Ken Belsky to
purchase a 10% interest in Ken Belsky & Associates, LLC, for $300,000
cash. The Company also received an option to purchase up to an additional
5% interest for an amount equal to $30,000 for each 1% of the additional
interest purchased. The option expires February 17, 2001. During April
2000 the Company purchased an additional 2% interest in Ken Belsky
&Associates for $60,000 cash. Ken Belsky & Associates, LLC is a general
insurance agency specializing in the marketing of substandard life
insurance policies.
(5) INVESTMENT IN RELATED PARTY
On August 8, 1996, the Company purchased 725,000 shares of the common
stock of Mid-American Alliance Corporation ("MAAC") of Jefferson City,
Missouri, for $72,500. At September 30, 2000, MAAC had raised total
capital of $10,832,840 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. These
shares are not registered under the Securities Act of 1933, they are
subject to restrictions on transferability and resale and may not be
transferred or resold except as permitted under the act and applicable
state securities laws, pursuant to registration or exemption therefrom.
Thomas Evans, Company Secretary and Treasurer is Assistant Secretary and
Treasurer of MAAC.
The Company entered into a service agreement with MACLIC effective April
14, 2000. Pursuant to the terms of the agreements, the Company provides
data processing, accounting, reporting services, policy underwriting and
issue services, policy owner services and claims processing in return for
fees based on the number of policies in force
On June 12, 2000, the Company purchased, thru a private placement, 585,000
shares of no par value Class A common stock of Integrity Capital
Corporation ("ICC") of Indianapolis, IN for $58,500. At September 30, 2000
ICC had raised $601,000 from the sale of private placement shares. After
ICC's private placement and public offerings are complete, the Company
will own approximately 9.75% of the common stock. These shares are not
registered under the Securities Act of 1933, they are subject to
restrictions on transferability and resale and may not be transferred or
resold except as permitted under the act and applicable state securities
laws, pursuant to registration or exemption therefrom. Michael Fink,
Company President is Chairman of the Board of ICC and Thomas Evans,
Company Secretary and Treasurer is Secretary and Treasurer of ICC.
On July 6, 2000, the Company purchased, thru a private placement, 540,000
shares of no par value Class A common stock of Mid-Atlantic Capital
Corporation ("MCC") of Charleston, WV for $54,000. At September 30, 2000
ICC had raised $362,000 from the sale of private placement shares. After
NCC's private placement and public offerings are complete, the Company
will own approximately 9.75% of the common stock. These shares are not
registered under the Securities Act of 1933, they are subject to
restrictions on transferability and resale and may not be transferred or
resold except as permitted under the act and applicable state securities
7
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FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
laws, pursuant to registration or exemption therefrom. Michael Fink,
Company President is Co-Chairman of the Board of MCC.
(6) SEGMENT INFORMATION
The operations of the Company and its subsidiaries have been classified
into three operating segments as follows: life and annuity insurance
operations, venture capital operations, and corporate operations. Segment
information as of September 30, 2000 and September 30, 1999 and for the
quarters ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Life and annuity insurance
operations $ 1,019,855 $ 921,878 $ 3,241,669 $ 1,838,897
Venture capital operations - 452 - 923
Corporate operations 50,349 67,995 183,477 116,278
----------- ----------- ----------- -----------
Total $ 1,070,204 $ 990,325 $ 3,425,146 $ 1,956,098
=========== =========== =========== ===========
Income (loss)before income taxes:
Life and annuity insurance
operations $ (3,150) $ 308,074 $ 403,036 $ 525,415
Venture capital operations - 452 - 923
Corporate operations (156,158) (161,224) (531,737) (376,515)
----------- ----------- ----------- -----------
Total $ (159,308) $ 147,302 $ (128,701) $ 149,823
=========== =========== =========== ===========
Depreciation and amortization expense:
Life and annuity insurance
operations $ 150,367 $ 176,360 $ 469,270 $ 334,584
Venture capital operations - - - -
Corporate operations 3,433 3,513 11,117 7,655
----------- ----------- ----------- -----------
Total $ 153,800 $ 179,873 $ 480,387 $ 342,239
=========== =========== =========== ===========
</TABLE>
Segment asset information as of September
30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30,2000 December 31, 1999
------------------- ---------------------
Unaudited
<S> <C> <C>
Assets:
Life and annuity insurance operations $ 17,451,234 $ 16,359,833
Venture capital operations 208,766 208,766
Corporate operations 1,828,945 2,125,589
------------------- ---------------------
Total $ 19,488,945 $ 18,694,188
=================== =====================
</TABLE>
8
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FIRST ALLIANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(7) 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. The weighted average outstanding common
shares for the three months ending September 30, 2000 and 1999 was
5,541,510 and 5,614,165, respectively and for the nine months ending
September 30, 2000 and 1999 was 5,621,384 and 5,614,165, respectively.
(8) PRIVATE PLACEMENT OFFERING
In February 1999 the Company commenced an offering of 200,000 shares of
class A common stock no par value for $2.50 per share. The securities are
exempted from registration in reliance on Rule 506 of Regulation D of the
Securities Act of 1933 and related exemptions at the state level.
Additionally, these securities are restricted from transfer for thirty
months from the date of purchase. The shares of common stock were offered
directly to potential subscribers on a direct participation basis by
agents of the Company. At June 30, 2000, the Company had completed the
sale of 200,000 shares that raised total proceeds of $500,000 and incurred
offering cost, including commissions, of $55,608.
(9) PURCHASE OF FAC STOCK AND SALE OF BENEFIT CAPITAL LIFE INSURANCE COMPANY
On June 27, 2000, the Company purchased 132,000 shares of FAC common stock
from Chris Haas ("HAAS"), former Chairman of the Board of the Company, for
$2.49 per share for an aggregate purchase price of $328,680 and entered
into an agreement with HAAS to exchange all the outstanding common capital
stock of BCLIC for 268,000 shares of FAC common stock. Under the terms of
the agreement, FAC will purchase BCLIC from FAIC for $670,000 cash and FAC
will exchange BCLIC for HAAS FAC shares. The agreement is subject to
regulatory approval by the Kentucky and Lousiana Departments of Insurance.
(10) 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, however the general partner has the right to accelerate or
delay capital calls.
On May 2, 2000 the Company entered into an agreement with Ken Belsky and
Associates, LLC to provide a credit facility of $600,000 at a 10% rate of
interest to Ken Belsky & Associates, LLC ("Borrower"). Advances under the
credit facility will be made as follows: (I) $300,000 as of the closing
date through March 31, 2001 and (ii) $300,000 as of the satisfaction of
the funding conditions through March 31, 2001, funding conditions were met
on March 10, 2000. Upon the Company's advance to Borrower of the first
$100,000, Borrower will issue a one percent (1%) membership interest in
Borrower to the Company and upon the Company's advance to borrow of any
amount in excess of $300,000, Borrower will issue an additional one
percent (1%) membership interest in Borrower to the Company. Principal and
interest under the credit facility shall be due and payable as follows:
monthly payments of
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<PAGE> 12
interest only on the outstanding balance of the loans through March 1,
2001 and then principal and interest will be payable in thirty (30) equal
monthly installments beginning April 1, 2001. $100,000 was advanced under
the credit agreement on May 2, 2000.
On June 21, 2000 the Company agreed to purchase 100,000 shares of its
common stock from Stephen T. Haas and Tracy M. Hoggard for $1.50 per share
for an aggregate purchase price of $150,000, over a period not to exceed
30 months, if certain conditions occur. All conditions have occurred and
the Company may be required to purchase the shares of stock.
10
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Reform Act of 1995 when they are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking statements.
The statements contained in the following "Management's Discussion and Analysis
or Plan of Operation", statements contained in future filings with the
Securities and Exchange Commission and publicly disseminated press releases, and
statements which may be made from time to time in the future by management of
the Company in presentations to shareholders, prospective investors, and others
interested in the business and financial affairs of the Company, which are not
historical facts, are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. Any projections of financial
performances or statements concerning expectations as to future developments
should not be construed in any manner as a guarantee that such results or
developments will, in fact, occur. There can be no assurance that any
forward-looking statement will be realized or that actual results will not be
significantly different from that set forth in such forward-looking statements.
In addition to the risks and uncertainties of ordinary business operations, the
forward-looking statements of the Company referred to above are also subject to
risks and uncertainties.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the notes thereto.
Results of Operations
---------------------
Revenues for the nine months ended September 30 totaled $3,425,146 in 2000 and
$2,904,102 in 1999. The primary source of revenue for the Company is life
insurance premium income. Premium income for the first nine months of 2000
increased $204,318 in comparison to 1999 results. This increase is due to life
insurance premium renewals and new sales. An annuity rider is also included with
most of the life insurance products; however, according to Statement of
Financial Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from Sales of Investments", annuity premium income is not recognized
as revenue. Annuity premium receipts for the first nine months of 2000 and 1999
totaled $1,104,307 and $806,238, respectively, and are recognized as annuity
contract liabilities. Pursuant to the terms of the reinsurance agreement between
FAIC and Business Men's Assurance Company, there are no first year reinsurance
premiums due. However, SFAS No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts", requires this unpaid premium to
be recognized as an expense and amortized over the term of the contracts
reinsured. At September 30, 2000 and 1999 amortization of reinsurance premiums
payable totaled $10,730 and $2,463, respectively.
Net investment income totaled $529,788 for the nine months ended September 30,
2000 and $478,160 for the same period in 1999. Approximately 60% of the increase
in net investment income is attributable to the BCLIC acquisition and the
remainder is attributable to an increase in investments in fixed maturities and
higher yields on fixed maturities.
For the quarter ended September 30, 2000, expenses totaled $3,382,952
representing an increase of $668,548 over the same period of 1999. Life policy
reserve expense decreased from $622,141 for the nine months ended September 30,
1999 to $534,481 for the nine months ended September 30, 2000. Expenses related
to the acquisition of life insurance are deferred and amortized over the premium
paying period of the related policy. These expenses, which include commissions
and administrative costs, totaled $915,945 for the nine months ended September
30, 2000 and $1,181,969 for the same period in 1999. Amortization of these costs
totaled $463,627 for the nine months ended September 30, 2000 and $536,980 for
the same period in 1999. Death claims incurred during the first nine months of
2000 totaled $66,114, net of reinsurance of $15,706. Death claims for the same
period in 1999 totaled $88,351, net of reinsurance of $193,712. Expenses
directly related to FAIC's agency totaled $408,705 for the first nine months of
2000 and $265,384 for the same period in 1999. These expenses include
11
<PAGE> 14
agent's health insurance, agency meetings, recruiting, and other expenses
directly related to the sale of insurance and annuities.
Salaries and benefit expenses totaled $777,843 for the first nine months of 2000
and $777,367 for the same period of 1999. Income tax expense, which is
calculated based on the earnings of FAIC, totaled $170,895 during the first nine
months of 2000 and $164,302 for the same period of 1999.
Financial Position
------------------
Shareholders' equity totaled $10,160,675 at September 30, 2000. This reflects a
net decrease of approximately 7% for the nine month period then ended.
Comprehensive income totaled $(572,240) for the nine months ended September 30,
2000. A significant portion of comprehensive income arose from depreciation of
the Company's equity securities portfolio. Equity securities comprised
approximately 16% of total assets at September 30, 2000. Accordingly the
Company's financial position can be significantly affected by movements in the
equities markets. Equity securities increased $3,520,946 on a cost basis and
$2,730,477 on a market value basis during the first nine months of 2000. Fixed
maturities decreased $161,790 based on amortized cost, during the first nine
months of 2000. Gross unrealized depreciation on available-for-sale fixed
maturities and equity securities was approximately $672,030 for the first nine
months of 2000. Notes receivable increased $309,529 for the first nine months of
2000. Investment in Ken Belsky & Associates, LLC increased $360,000 during the
nine months ended September 30, 2000. Short term investments decreased $200,000
during the nine months ended September 30, 2000. Cash and cash equivalents
decreased $3,053,549 during the nine months ended September 30, 2000
Cash Flow and Liquidity
-----------------------
The insurance operations generally provide adequate cash flow from premium
collections and investment income to meet their obligations. Insurance policy
liabilities are primarily long-term and generally are paid from future cash
flows. The Company's bonds and equity security investments are readily
marketable and could be liquidated if such a need arose. The Company has
commitments to (i) fund a credit facility of $500,000 in 2000 (ii) purchase
investments of $150,000 in 2001 and $150,000 in 2003 and (iii) purchase $150,000
of common stock of the Company not later than December 21, 2002.
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Part II. - Other information
Item 2. Changes in Securities
In February 1999 the Company commenced an offering of 200,000
shares of class A common stock no par value for $2.50 per
share. The securities are exempted from registration in
reliance on Rule 506 of Regulation D of the Securities Act of
1933 and related exemptions at the state level. Additionally,
these securities are restricted from transfer for thirty
months from the date of purchase. The shares of common stock
were offered directly to potential subscribers on a direct
participation basis by agents of the Company. At June 30,
2000, the Company had completed the sale of 200,000 shares
that raised total proceeds of $500,000 and incurred offering
cost, including commissions, of $55,608.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial data schedule
(b) The Company did not file any reports on Form 8-K during the
nine months ended September 30, 2000
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Alliance Corporation
--------------------------
(registrant)
/s/ Michael N. Fink Date November 10, 2000
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Michael N. Fink, President
/s/ Thomas I. Evans Date November 10, 2000
------------------------------------------- ---------------------
Thomas I. Evans, Vice President/Secretary
14
