United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One) |
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| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| For the quarterly period ended June 30, 2006. |
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| Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to ..
Commission file number : 0-25679
FIRST AMERICAN CAPITAL CORPORATION
(Exact Name of small business issuer in its charter)
Kansas |
| 48-1187574 |
(State of incorporation) |
| (I.R.S. Employer Identification Number) |
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1303 S.W. First American Place Topeka, Kansas |
| 66604 |
(Address of principal executive offices) |
| (zip code) |
(785) 267-7077
Issuer’s telephone number
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
Common Stock, $.10 Par Value — 4,257,057 shares as of October 27, 2006
Transitional Small Business Disclosure Format (check one): Yes o No x
EXPLANATORY NOTE
This amendment on Form 10-QSB/A (Amendment No. 1) (the “Amendment”) is being filed to (i) file financial statements for the fiscal quarter ended June 30, 2006, that have been reviewed by an independent public accounting firm pursuant to Item 310(b) of Regulation S-B, which include certain nonmaterial modifications from the financial statements originally filed with the Form 10-QSB to which this Amendment relates; and (ii) to discuss the Company’s response to a finding by that independent public accounting firm that a “material weakness” in the Company’s financial review procedures existed with respect to the financial statements for the subject fiscal quarter.
Completion of Review of Financial Statements. When the Form 10-QSB to which this Amendment relates was filed with the Securities and Exchange Commission on October 6, 2006, the independent public accounting firm that was engaged to conduct the review of the financial statements contained therein had completed substantially all of its work in reviewing those financial statements but had not completed all of its requisite procedures to complete the review required by Item 310(b) of Regulation S-B. The procedures to complete that review have now been completed. A copy of this report is filed as Exhibit 23.1 to this Amendment.
The financial statements contained in Part I of this Amendment for the fiscal quarter and six month period ended June 30, 2006, have been reviewed by BKD LLP for the purposes of Item 310(b) of Regulation S-B. The financial statements contained herein restate and replace in their entirety the financial statements filed with the 10-QSB, but management does not consider the changes from those original financial statements to be material individually or when taken as a whole.
Remediation of Material Weakness. In connection with its review of the financial statements filed with this Amendment, the Company’s independent public accounting firm advised management that it had noted certain matters that it considered to be “material weaknesses,” which is a significant deficiency, or a combination of significant deficiencies, in the Company’s internal financial procedures or controls, that results in more than a remote likelihood that a material misstatement of the Company’s financial statements will not be prevented or detected. The auditors noted that due to the resignation of the Chief Financial Officer of the Company effective March 31, 2006, the Company did not then have adequate review procedures in place to ensure the development of timely, complete and accurate financial statements and related footnotes.
Since March 31, 2006, the Company has taken significant steps to remediate this material weakness, including enhancing the knowledge and skills of the existing staff, hiring outside consultants and independent contractors to assist the staff in handling financial statement matters, and engaging as a full-time consultant an individual who had previously served as the Company’s controller and who during that tenure was primarily responsible for preparing both the Company’s statutory and GAAP financial statements. Although the Company has been unable to hire a qualified Chief Financial Officer due to the uncertainty of its financial position prior to the announcement of the transaction with Brooke Corporation described in the Form 10-QSB, management believes that the material weakness that existed with respect to the preparation of the Company’s financial statements for the quarter ended March 31, 2006, remained at June 30, 2006, but were substantially remediated prior to the preparation of the financial statements for the quarter ended June 30, 2006.
With these remediation steps remaining in place and the addition of the functional financial support to be provided by Brooke Corporation pursuant to the Services Agreement described in the Form 10-QSB, management believes that these material weakness will continue to be remediated and that the Company’s internal control over financial reporting is effective at a reasonable assurance level as of the date of this Amendment and has been for a period of time prior hereto.
2
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO FORM 10-QSB
3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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| June 30, |
| December 31, |
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| 2006 |
| 2005 |
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| (Unaudited) |
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Assets |
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Investments: |
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Securities available-for-sale, at fair value: |
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Fixed maturities (amortized cost, $11,773,264 in 2006 and $13,960,005 in 2005) |
| $ | 11,166,226 |
| $ | 13,854,375 |
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Equity securities (cost of $258,400 in 2006 and $458,150 in 2005) |
| 238,631 |
| 456,760 |
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Investments in real estate |
| 274,564 |
| 274,564 |
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Policy loans |
| 141,930 |
| 103,493 |
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Mortgage loans on real estate |
| 1,538,953 |
| 1,566,382 |
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Other investments |
| 2,854,364 |
| 1,656,866 |
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Total investments |
| 16,214,668 |
| 17,912,440 |
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Cash and cash equivalents |
| 1,076,457 |
| 249,109 |
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Accrued investment income |
| 226,508 |
| 250,984 |
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Accounts receivable |
| 203,937 |
| 272,200 |
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Reinsurance receivables |
| 112,775 |
| 78,725 |
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Deferred policy acquisition costs (net of accumulated amortization of $4,078,112 in 2006 and $3,712,369 in 2005) |
| 5,204,752 |
| 5,133,244 |
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Property and equipment (net of accumulated depreciation of $886,533 in 2006 and $820,415 in 2005) |
| 2,697,663 |
| 2,756,025 |
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Other assets |
| 122,748 |
| 24,935 |
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Total assets |
| $ | 25,859,508 |
| $ | 26,677,662 |
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See notes to condensed consolidated financial statements.
4
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
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| June 30, |
| December 31, |
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| 2006 |
| 2005 |
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| (Unaudited) |
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Liabilities and Shareholders’ Equity |
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Policy and contract liabilities: |
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Future annuity benefits |
| $ | 12,163,420 |
| $ | 10,301,546 |
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Future policy benefits |
| 5,703,130 |
| 5,267,805 |
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Liability for policy claims |
| 177,071 |
| 190,050 |
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Policyholder premium deposits |
| 132,245 |
| 146,354 |
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Deposits on pending policy applications |
| 16,481 |
| 9,361 |
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Reinsurance premiums payable |
| 66,197 |
| 107,334 |
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Amounts held under reinsurance |
| 95,429 |
| 219,079 |
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Total policy and contract liabilities |
| 18,353,973 |
| 16,241,529 |
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Commissions, salaries, wages and benefits payable |
| 61,629 |
| 131,873 |
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Other liabilities |
| 236,609 |
| 180,086 |
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Notes payable |
| — |
| 2,272,986 |
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Deferred federal income taxes payable |
| 424,744 |
| 527,941 |
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Total liabilities |
| 19,076,955 |
| 19,354,415 |
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Shareholders’ equity: |
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Common stock, $.10 par value, 8,000,000 shares authorized; 5,449,578 shares issued and 4,257,057 shares outstanding in 2006; and 5,449,578 issued and 4,257,057 shares outstanding in 2005 |
| 544,958 |
| 544,958 |
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Additional paid in capital |
| 12,478,903 |
| 12,478,903 |
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Accumulated deficit |
| (3,620,508 | ) | (3,496,404 | ) | ||
Accumulated other comprehensive income (loss) |
| (501,452 | ) | (84,862 | ) | ||
Less: Treasury stock held at cost (1,192,521 shares in 2006 and 1,192,521 in 2005) |
| (2,119,348 | ) | (2,119,348 | ) | ||
Total shareholders’ equity |
| 6,782,553 |
| 7,323,247 |
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Total liabilities and shareholders’ equity |
| $ | 25,859,508 |
| $ | 26,677,662 |
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See notes to condensed consolidated financial statements.
5
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| (Unaudited) |
| (Unaudited) |
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| Three months ended |
| Six months ended |
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| June 30, |
| June 30, |
| June 30, |
| June 30, |
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Revenues: |
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Gross premium income |
| $ | 972,407 |
| $ | 945,015 |
| $ | 2,236,373 |
| $ | 2,101,212 |
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Reinsurance premiums assumed |
| 6,471 |
| 3,845 |
| 8,637 |
| 5,880 |
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Reinsurance premiums ceded |
| (150,520 | ) | (22,421 | ) | (312,873 | ) | (68,197 | ) | ||||
Net premium income |
| 828,358 |
| 926,439 |
| 1,932,137 |
| 2,038,895 |
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Net investment income |
| 267,710 |
| 210,935 |
| 533,676 |
| 400,868 |
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Net realized investment gain (loss) |
| (68,293 | ) | 3,211 |
| (70,017 | ) | 1,542 |
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Rental income |
| 59,057 |
| 45,779 |
| 118,114 |
| 91,558 |
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Other income |
| 1,054 |
| 50 |
| 1,305 |
| 50 |
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Total revenue |
| 1,087,886 |
| 1,186,414 |
| 2,515,215 |
| 2,532,913 |
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Benefits and expenses: |
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Increase in policy reserves |
| 185,348 |
| 266,684 |
| 435,325 |
| 678,432 |
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Policyholder surrender values |
| 76,556 |
| 60,538 |
| 147,921 |
| 110,147 |
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Interest credited on annuities and premium deposits |
| 142,943 |
| 98,768 |
| 269,247 |
| 184,594 |
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Death claims |
| 162,467 |
| 133,444 |
| 295,031 |
| 206,000 |
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Commissions |
| 175,299 |
| 393,422 |
| 425,620 |
| 694,382 |
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Policy acquisition costs deferred |
| (162,257 | ) | (457,127 | ) | (437,251 | ) | (779,330 | ) | ||||
Amortization of deferred policy acquisition costs |
| 209,827 |
| 144,812 |
| 365,743 |
| 340,944 |
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Salaries, wages, and employee benefits |
| 218,176 |
| 318,329 |
| 489,009 |
| 633,369 |
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Miscellaneous taxes |
| 32,223 |
| 45,990 |
| 59,351 |
| 77,969 |
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Other operating costs and expenses |
| 230,231 |
| 372,937 |
| 589,323 |
| 793,869 |
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Total benefits and expenses |
| 1,270,813 |
| 1,377,797 |
| 2,639,319 |
| 2,940,376 |
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Income (Loss) before income tax expense |
| (182,927 | ) | (191,383 | ) | (124,104 | ) | (407,463 | ) | ||||
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Income tax expense (benefit) |
| — |
| (290 | ) | — |
| 14,951 |
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Net Income (Loss) |
| $ | (182,927 | ) | $ | (191,093 | ) | $ | (124,104 | ) | $ | (422,414 | ) |
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Net Income (Loss) per common share—basic and diluted |
| $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.03 | ) | $ | (0.10 | ) |
See notes to condensed consolidated financial statements.
6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| (Unaudited) |
| (Unaudited) |
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| Three months ended |
| Six months ended |
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| June 30, |
| June 30, |
| June 30, |
| June 30, |
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Net income (loss) |
| $ | (182,927 | ) | $ | (191,093 | ) | $ | (124,104 | ) | $ | (422,414 | ) |
Unrealized gain (loss) on available-for-sale securities: |
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Unrealized holding gain (loss) during the period |
| (285,437 | ) | 333,262 |
| (589,804 | ) | 75,582 |
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Less: Reclassification for gains (loss) included in net income |
| (68,293 | ) | 3,211 |
| (70,017 | ) | 1,542 |
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Tax benefit (expense) |
| 40,334 |
| (66,361 | ) | 103,197 |
| (15,059 | ) | ||||
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Other comprehensive income (loss) |
| (176,810 | ) | 263,690 |
| (416,590 | ) | 58,981 |
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Comprehensive loss |
| $ | (359,737 | ) | $ | 72,597 |
| $ | (540,694 | ) | $ | (363,433 | ) |
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Comprehensive loss per common share-basic and diluted |
| $ | (0.08 | ) | $ | 0.02 |
| $ | (0.13 | ) | $ | (0.08 | ) |
See notes to condensed consolidated financial statements.
7
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| (Unaudited) |
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|
| Six months ended |
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| June 30, |
| June 30, |
| ||
|
| 2006 |
| 2005 |
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Operating activities : |
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Net income (loss) |
| $ | (124,104 | ) | $ | (422,414 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Interest credited on annuities and premium deposits |
| 269,247 |
| 184,594 |
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Net realized investment (gain) loss |
| 70,017 |
| (1,542 | ) | ||
Provision for depreciation |
| 66,117 |
| 82,870 |
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Settlement loss |
| — |
| 35,465 |
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Amortization of premium and accretion of discount on fixed maturity and |
| (42,505 | ) | 29,164 |
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Provision for deferred federal income taxes |
| — |
| 14,951 |
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Increase (decrease) in accrued investment income |
| 24,476 |
| (10,332 | ) | ||
(Increase) decrease in accounts receivable |
| 68,263 |
| (171,649 | ) | ||
Decrease in reinsurance receivables |
| (34,050 | ) | — |
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Acquisition costs capitalized |
| (437,251 | ) | (779,330 | ) | ||
Amortization of deferred acquisition costs |
| 365,743 |
| 340,944 |
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Increase in policy loans |
| (38,437 | ) | (18,168 | ) | ||
Decrease in other assets |
| (97,813 | ) | (3,092 | ) | ||
Increase in future policy benefits |
| 435,325 |
| 678,432 |
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Increase (decrease) in liability for policy claims |
| (12,979 | ) | 12,797 |
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Increase in deposits on pending policy applications |
| 7,120 |
| 25,407 |
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Decrease in reinsurance premiums payable |
| (41,137 | ) | (3,061 | ) | ||
Decrease in amounts held under reinsurance |
| (123,650 | ) | — |
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Increase (decrease) in commissions, salaries, wages and benefits payable |
| (70,244 | ) | 19,744 |
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Increase in other liabilities |
| 56,523 |
| 45,264 |
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Net cash provided by operating activities |
| $ | 340,661 |
| $ | 60,044 |
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See notes to condensed consolidated financial statements.
8
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
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| (Unaudited) |
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| June 30, |
| June 30, |
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Investing activities: |
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Purchase of available-for-sale fixed maturities |
| $ | (664,852 | ) | $ | (1,179,218 | ) |
Sale of available-for-sale fixed maturities |
| 2,258,015 |
| 198,750 |
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Maturity of available-for-sale fixed maturities |
| 471,000 |
| 1,031,623 |
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Purchase of available-for-sale equities |
| — |
| (247,750 | ) | ||
Sale of available-for-sale equities |
| 222,699 |
| 25,000 |
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Additions to property and equipment |
| (7,755 | ) | (4,630 | ) | ||
Purchase of other investments |
| (1,329,068 | ) | (606,850 | ) | ||
Maturity of other investments |
| 203,687 |
| 58,333 |
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Purchase of mortgage loans |
| — |
| (717,000 | ) | ||
Payments received on mortgage loans |
| 27,429 |
| 7,979 |
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Net cash provided by (used in) investing activities |
| 1,181,155 |
| (1,433,763 | ) | ||
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Financing activities: |
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Proceeds from note payable |
| — |
| 570,355 |
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Payments on notes payable |
| (2,272,986 | ) | (41,828 | ) | ||
Deposits on annuity contracts |
| 1,592,627 |
| 1,780,647 |
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Surrenders on annuity contracts |
| — |
| (368,077 | ) | ||
Policyholder premium deposits |
| — |
| 23,938 |
| ||
Withdrawals on policyholder premium deposits |
| (14,109 | ) | (33,220 | ) | ||
Purchase of treasury stock |
| — |
| (770,355 | ) | ||
Net cash provided by (used in) financing activities |
| (694,468 | ) | 1,161,460 |
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(Decrease) Increase in cash and cash equivalents |
| 827,348 |
| (212,259 | ) | ||
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Cash and cash equivalents, beginning of period |
| 249,109 |
| 527,028 |
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Cash and cash equivalents, end of period |
| $ | 1,076,457 |
| $ | 314,769 |
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Supplemental disclosure of cash activities: |
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Interest paid |
| $ | 62,295 |
| $ | 65,335 |
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Income taxes paid |
| $ | — |
| $ | — |
|
See notes to condensed consolidated financial statements.
9
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements of First American Capital Corporation and its Subsidiaries (the “Company”) for the three month and six month periods ended June 30, 2006 and 2005 are unaudited. However, in the opinion of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been reflected therein.
Certain financial information which is normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, 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-KSB for the fiscal year ended December 31, 2005. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.
2. Intercompany Sale of Building and Payoff of Related Mortgage Notes Payable
On May 1, 2006, the Company sold its home office building to First Life America Corporation (“FLAC”) for $2,800,000. No gain was recognized on this intercompany sale. The Company paid $1,722,053 to Vision Bank to repay the mortgage note from the proceeds resulting from the sale of the home office building. Also, the Company paid $522,822 to Brooke Credit Corporation (“Brooke”) to repay the second mortgage from the proceeds from the sale of the home office building.
3. Net Earnings Per Common Share
Net loss per common share for basic and diluted earnings per share is based upon the weighted average number of common shares outstanding during each period. On March 2, 2005 the Company acquired 450,500 shares of its common stock from Brooke. The weighted average number of common shares outstanding was 4,257,057 and 4,388,404 for the six months ended June 30, 2006 and June 30, 2005, respectively. The weighted average number of common shares outstanding was 4,257,057 and 4,237,578 for the three months ended June 30, 2006 and June 30, 2005, respectively.
4. Federal Income Taxes
Current taxes are provided based on estimates of the projected effective annual tax rate. Deferred taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has elected to file a consolidated federal income tax return with its subsidiaries, First Life America Corporation (“FLAC”) and First Life Brokerage, Inc. (FLBI). FLAC is taxed as a life insurance company under the provisions of the Internal Revenue Code and had to file a separate tax return for its initial five years of existence, which covers the period from November 1998 through December 31, 2002.
5. Commitments and Contingencies
On November 12, 2003, the Company filed a petition in the District Court of Shawnee County, Kansas asserting claims against Rickie D. Meyer (“Meyer”), the Company’s former President, arising, in part, out of Meyer’s employment with the Company. Among other things, the Company sought to recover expense reimbursements previously paid to Meyer and Company funds allegedly misappropriated by Meyer. On August 8, 2003, the Company settled a claim that it had breached various marketing agreements with AF&L, a long-term care insurance company, and certain of its affiliates, through the payment to AF&L of $150,000 plus $15,000 in attorney fees.
On December 12, 2003, Meyer filed an Answer and Counterclaim against the Company asserting claims for defamation and breach of employment agreement.
10
5. Commitments and Contingencies (Continued)
On August 1, 2005, the District Court of Shawnee County, Kansas entered an order, by agreement, submitting the claims to binding arbitration. Following the conclusion of the arbitration, the parties entered into a settlement agreement in November of 2005, pursuant to which the Company agreed to pay Meyer $38,500 with Meyer and the Company agreeing to settle all claims. The Company paid the amount to Meyer in February of 2006. This claim was accrued as of December 31, 2005.
6. Reinsurance
Effective September 29, 2005, the Company and Wilton Reassurance Company (“Wilton Re”), of Wilton, CT, executed a binding letter of intent whereby both parties agreed that the Company would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis. The letter of intent was executed on a retroactive basis to cover all applicable business issued by the Company subsequent to January 1, 2005. Wilton Re agreed to provide various commission and expense allowances to the Company in exchange for the Company ceding 50% of the applicable premiums to Wilton Re as they are collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement, for new business issued after the termination date.
7. Liquidity and Capital Resources
During the quarters ended June 30, 2006, and 2005, the Company maintained liquid assets sufficient to meet operating demands, while continuing to utilize excess liquidity to purchase various investments. Net cash provided by operating activities during the six months ended June 30, 2006 and 2005 totaled $340,661 and $60,044, respectively.
As of June 30, 2006, the Company and its subsidiaries had consolidated cash reserves and liquid investments of approximately $12,464,514, as compared with $14,209,951 as of June 30, 2005. Of these amounts, cash reserves and liquid investments at FLAC as of these dates were approximately $11,905,907 and $13,358,036, respectively. FLAC generally receives adequate cash flow from premium collections and investment income to meet the obligations of its insurance operations. Insurance policy liabilities are primarily long-term and generally are paid from future cash flows. Cash collected from deposits on annuity contracts and policyholder premium deposits are recorded as cash flows from financing activities. Due to insurance regulatory restrictions, as noted above, cash generated by FLAC cannot necessarily be used to fund the cash needs of the parent company on a stand-alone basis.
As of June 30, 2006, cash reserves at the parent company level were approximately $553,674 as compared with $828,790 as of June 30, 2005. Cash reserves for FLBI were $4,933 at June 30, 2006 and there $23,125 as of June 30, 2005. Based on the decreasing level of cash reserves at the parent company level over the past few years, in 2005, management began to pursue all reasonable alternatives for increasing cash reserves at the parent company level. As an initial step in this process, the Board of Directors of each of the parent company and FLAC approved a transaction pursuant to which FLAC agreed to purchase the Company’s home office building and the real property on which it is located from the parent company at its value of $2,800,000, which was determined based on an independent appraisal.
On March 28, 2006, the Kansas Insurance Department (KID) approved this transaction pursuant to a Form D (Prior Notice of a Transaction) filed by the Company. Proceeds from the sale were used by the parent company to pay off the two creditors that held mortgages on the building, which resulting in interest savings of approximately $890,000 over the life of the loans. In addition, the transaction provided the parent company with approximately $478,000 in cash. This cash will be used to fund operations at the parent company.
11
7. Liquidity and Capital Resources (Continued)
Based on currently forecasted cash flow levels, management anticipates that the $478,000 in cash provided to the parent company as a result of the aforementioned transaction plus the parent company’s existing cash reserves will fund operations at the parent company level into mid 2007. Therefore, in the interim, management will continue to explore all reasonable opportunities to provide additional capital to the parent company through the sale of new equity securities or debt securities, or through borrowed funds. Successful efforts in this arena will not only help to remedy the parent company’s current cash situation, but also allow management to fully implement its business development plan of expanding the Company’s product lines and marketing efforts through the infusion of additional capital into FLAC’s insurance operations and FLBI’s brokerage operations. If these efforts are not successful, however, then the Company will have no choice but to cease operations as a public company and liquidate its assets, which primarily are the insurance operations of its subsidiary FLAC. There is no assurance of what if any value could be realized by the parent company in this event.
Pursuant to these efforts, on October 6, 2006, the Company executed a Stock Purchase and Sale Agreement (the “Agreement”) with Brooke Corporation (“Brooke”) pursuant to which, subject to the conditions stated in the Agreement, Brooke has agreed to acquire newly issued shares of the common stock of FACC in a two step transaction that will result in Brooke owning 55% of the then issued and outstanding shares of common stock. In consideration therefor, Brooke will (i) pay to FACC $3,000,000 in cash and (ii) enter into a Brokerage Agreement pursuant to which, among other things, CJD & Associates, L.L.C., a Brooke subsidiary, will cause all of its new managing general agent loan brokerage business to be transacted through First Life Brokerage, Inc. (“FLB”), a FACC subsidiary. In the Agreement, the pretax profits of FLB over a three year period shall be not less than $6,000,000 in pretax profits or Brooke shall be obligated to contribute funds to FACC as additional consideration for the issuance of the shares of FACC common stock acquired pursuant to the Agreement to the extent the pretax profit goal is not made under such schedule. The closing of the transactions contemplated under the Agreement are subject to a number of conditions, including the approval of the Kansas Department of Insurance. Although there is no assurance that these conditions will be met and that the closing of these transactions will occur, management currently anticipates that the closing will occur in the fourth quarter of 2006.
8. Other Regulatory Matters
FLAC is licensed to transact life and annuity business in the states of Kansas, Texas, Illinois, Oklahoma, North Dakota, Kentucky and Nebraska. Due to the varied processes of obtaining admission to write business in new states, management cannot reasonably estimate the time frame of expanding its marketing presence.
FLAC was previously licensed to transact business in the state of Ohio. FLAC’s license in Ohio was suspended during the fourth quarter of 2005. The suspension resulted from FLAC’s statutory basis capital and surplus as of September 30, 2005 of $2,495,616 being less than the minimum required level in Ohio of $2,500,000. As of June 30, 2006, FLAC’s statutory basis capital and surplus was $2,931,926, which is in excess of the aforementioned minimum requirement. FLAC appealed the suspension and had its license reinstated on July 27, 2006.
9. Segment Information
The operations of the Company and its subsidiaries have been classified into two operating segments as follows: life and annuity insurance operations and corporate and brokerage operations. Segment information for the three and six months ended June 30, 2006 and 2005 and as of June 30, 2006 and December 31, 2005 is as follows:
12
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| Three months ended |
| Six months ended |
| ||||||||
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| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Revenues : |
|
|
|
|
|
|
|
|
| ||||
Life and annuity insurance operations |
| $ | 1,067,962 |
| $ | 1,131,169 |
| $ | 2,433,356 |
| $ | 2,422,448 |
|
Corporate and brokerage operations |
| $ | 19,924 |
| 55,245 |
| 81,859 |
| 110,465 |
| |||
Total |
| $ | 1,087,886 |
| 1,186,414 |
| $ | 2,515,215 |
| $ | 2,532,913 |
| |
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| ||||
Income (los s) before income taxes : |
|
|
|
|
|
|
|
|
| ||||
Life and annuity insurance operations |
| $ | (67,691 | ) | $ | 4 |
| $ | 176,776 |
| $ | 83,696 |
|
Corporate and brokerage operations |
| (115,236 | ) | (191,387 | ) | (300,880 | ) | (491,159 | ) | ||||
Total |
| $ | (182,927 | ) | $ | (191,383 | ) | $ | (124,104 | ) | $ | (407,463 | ) |
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Depreciation and amortization expense: |
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|
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|
|
|
|
| ||||
Life and annuity insurance operations |
| $ | 221,793 |
| $ | 144,812 |
| $ | 377,709 |
| $ | 340,944 |
|
Corporate and brokerage operations |
| 18,726 |
| 41,523 |
| 54,151 |
| 82,870 |
| ||||
Total |
| $ | 240,519 |
| $ | 186,335 |
| $ | 431,860 |
| $ | 423,814 |
|
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| June 30, |
| December 31, |
| ||
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|
| 2006 |
| 2005 |
| ||
Assets: |
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| ||
Life and annuity insurance operations |
|
|
|
|
| $ | 25,091,285 |
| $ | 23,337,149 |
|
Corporate and brokerage operations |
|
|
|
|
| 768,223 |
| 3,340,513 |
| ||
Total |
|
|
|
|
| $ | 25,859,508 |
| $ | 26,677,662 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company makes forward-looking statements from time to time and desires to take advantage of the “safe harbor” that 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 this report, 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 the following risks and uncertainties, among others: (i) the strength of the United States economy in general and the strength of the local economies in which the Company does business; (ii) inflation, interest rates, market and monetary fluctuations and volatility; (iii) the timely development of and acceptance of new products and services and perceived overall value of these products and services by existing and potential customers; (iv) the persistency of existing and future insurance policies sold by the Company; (v) the effect of changes in laws and regulations with which the Company must comply; and (vi) the cost and effects of litigation and of unexpected or adverse outcomes in litigation.
When the Form 10-QSB to which this Amendment relates was filed with the Securities and Exchange Commission on October 6, 2006, the independent public accounting firm that was engaged to conduct the review of the financial statements contained therein had completed substantially all of its work in reviewing those financial statements but had not completed all of its requisite procedures to complete the review required by Item 310(b) of Regulation S-B. The procedures to complete that review have now been completed. A copy of this report is filed as Exhibit 23.1 to this Amendment.
13
The financial statements contained in Part I of this Amendment for the fiscal quarter and six month period ended June 30, 2006, have been reviewed by BKD LLP for the purposes of Item 310(b) of Regulation S-B. The financial statements contained herein restate and replace in their entirety the financial statements filed with the 10-QSB, but management does not consider the changes from those original financial statements to be material individually or when taken as a whole.
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
Critical Accounting Policies and Estimates
The accounting policies below have been identified as critical to the understanding of the results of operations and financial position. The application of these critical accounting policies in preparing the financial statements requires management to use significant judgments and estimates concerning future results or other developments, including the likelihood, timing or amount of one or more future transactions. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, estimates, assumptions and judgments are evaluated based on historical experience and various other information believed to be reasonable under the circumstances.
Investments
The Company’s principal investments are in fixed maturity securities. Investments are exposed to three primary sources of investment risk: credit, interest rate and liquidity. The fixed maturity securities, which are all classified as available for sale, are carried at their fair value in the Company’s balance sheet. The investment portfolio is monitored regularly to ensure that investments which may be other than temporarily impaired are identified in a timely fashion and properly valued, and that impairments are charged against earnings as realized investment losses. The valuation of the investment portfolio involves a variety of assumptions and estimates, especially for investments that are not actively traded. Fair values are obtained from broker statements.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs, principally agent commissions and other selling, selection and issue costs, which vary with and are directly related to the production of new business, are capitalized as incurred. These deferred costs are then amortized in proportion to future premium revenues or the expected future profits of the business, depending upon the type of product. Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins and policy and premium persistency experience. These assumptions involve judgment and are compared to actual experience on an ongoing basis.
Future Policy Benefits
The Company establishes liabilities for amounts payable under insurance policies. Generally, benefits are payable over an extended period of time and the reserves established for future policy benefits are dependent on the assumptions used in the pricing of the products. Principal assumptions used in pricing policies and in the establishment of reserves for future policy benefits are mortality, morbidity, expenses, persistency, investment returns and inflation. Differences between actual experience and assumptions used in the pricing of these policies and in the establishment of liabilities may result in variability of net income in amounts which may be material.
Future Annuity Benefits
Future annuity benefits relate to deferred annuity contracts. The account balances for deferred annuity contracts are equal to the cumulative deposits less any applicable contract charges plus interest credited. The profitability of these products is also dependent on principal assumptions similar to traditional insurance products, and differences between actual experience and pricing assumptions may result in variability of net income in amounts which may be material.
14
Premiums
Premiums for traditional life insurance products are reported as revenue when due. Traditional insurance products include whole life and term life. Deposits relate to deferred annuity products. The cash flows from deposits are credited to policyholder account balances. Deposits are not recorded as revenue.
Income Taxes
Deferred income taxes are recorded on the differences between the tax bases of assets and liabilities and the amounts at which they are reported in the consolidated financial statements. Recorded amounts are adjusted to reflect changes in income tax rates and other tax law provisions as they become enacted.
Reinsurance
Reinsurance is one of the tools that the Company uses to accomplish its business objectives. A variety of reinsurance vehicles are currently in use. Reinsurance supports a multitude of corporate objectives including managing statutory capital, reducing volatility and reducing surplus strain. At the customer level it increases the Company’s capacity, provides access to additional underwriting expertise, and generally makes it possible for the Company to offer products at competitive levels that the Company could not otherwise bring to market without reinsurance support.
Financial Condition
Significant changes in the condensed consolidated balance sheets from December 31, 2005 to June 30, 2006 are highlighted below.
Total assets decreased from $26,677,662 at December 31, 2005 to $25,859,508 at June 30, 2006. The decrease in total assets is primarily attributable to the sale of FLAC available-for sale fixed maturity securities to facilitate the purchase of the home office building from the Company.
The Company’s available-for-sale fixed maturity securities had a fair value of $11,166,226 and $13,854,375 at June 30, 2006 and December 31, 2005, respectively. This investment portfolio is reported at market value with unrealized gains and losses, net of applicable deferred taxes, reflected as a separate component of accumulated other comprehensive income. The decrease is attributable to the sale of FLAC owned investments to facilitate the purchase of the building from the Company. Credit risk is limited by emphasizing investment grade securities and by diversifying the investment portfolio among various investment instruments. Certain cash balances exceed the maximum insurance protection of $100,000 provided by the Federal Deposit Insurance Corporation. However, cash balances exceeding this maximum are protected through additional insurance. As a result, management believes that significant concentrations of credit risk do not exist.
The Company’s available-for-sale equity securities had a fair value of $238,631 and $456,760 at June 30, 2006 and December 31, 2005, respectively. This investment portfolio is reported at market value with unrealized gains and losses, net of applicable deferred taxes, reflected as a separate component of accumulated other comprehensive income. The decrease is attributable to a FLAC owned investment was sold to facilitate the purchase of the home office building from the Company.
Mortgage loans on real estate decreased from $1,566,382 at December 31, 2005 to $1,538,953 at June 30, 2006. The slight decrease is attributable to the payments received during the quarter on mortgage loans held during the quarter. No additional mortgage loans have been purchased during the period. The Company currently owns six mortgage loans. The Company may purchase more of these types of investments in the future in limited quantities in an effort to enhance the Company’s investment portfolio yield.
Other investments increased from $1,656,866 at December 31, 2005 to $2,854,364 at June 30, 2006. The increase is attributable to the purchase of additional investments in lottery prize cash flows during the year. These other investments involve purchasing assignments of the future payment rights from lottery winners at a discounted price sufficient to meet
15
the Company’s yield requirements. Payments on these other investments will be made by state run lotteries and as such are backed by the general credit of the respective state. The Company may purchase more of these types of investments in the future in limited quantities in an effort to enhance the Company’s investment portfolio yield.
Cash and cash equivalents increased to $1,076,457 at June 30, 2006 from $249,109 at December 31, 2005. Refer to the statement of cash flows for sources and uses of cash.
Accounts receivable decreased 25% from $272,200 at December 31, 2005 to $203,937 at June 30, 2006. The decrease is primarily due to a decrease of $121,190 in amounts due from agents and an increase in income tax recoverable of $57,706. An allowance for uncollectible items is not deemed necessary with respect to these receivables.
Deferred policy acquisition costs, net of amortization, increased from $5,133,244 at December 31, 2005 to $5,204,752 at June 30, 2006 resulting from the capitalization of acquisition expenses related to the sales of life insurance. These acquisition expenses include commissions on first year business, medical exam and inspection report fees, and salaries of employees directly involved in the marketing, underwriting and policy issuance functions. Management of the Company reviews the recoverability of deferred acquisition costs on a quarterly basis based on current trends as to persistency, mortality and interest. These trends are compared to the assumptions used in the establishment of the original asset in order to assess the need for impairment. Based on the results of the aforementioned procedures performed by management, no impairments have been recorded against the balance of deferred acquisition costs.
Liabilities decreased to $19,076,955 at June 30, 2006 from $19,354,415 at December 31, 2005. Reserves for future policy benefits, established from the sale of life insurance increased $435,325, or 8% from December 31, 2005 to June 30, 2006. These reserves are actuarially determined based on such factors as insured age, life expectancy, mortality and interest assumptions. Reserves for future annuity benefits increased $1,861,874 or 18% from December 31, 2005 to June 30, 2006. In 2005 and 2006, annuity contract liabilities increased due to the introduction of three new annuity products to the marketing force and continued considerations received on the Company’s FA2000 product.
Other liabilities increased $56,523 from $180,086 at December 31, 2005 to $236,609 at June 30, 2006. The increase is attributable to timing factors associated with the payment of significant invoices for professional services and property taxes.
Notes payable stood at $0 at June 30, 2006, a decrease from $2,272,986 at December 31, 2005. The decrease is due to the Company paying off Vision Bank and Brooke Credit Corporation notes from proceeds of the sale of the home office building to FLAC.
Deferred federal income taxes payable decreased to $424,744 at June 30, 2006 from $527,941 at December 31, 2005. Deferred federal income taxes payable are established based on timing differences between income recognized for financial statement purposes and taxable income for the Internal Revenue Service. These deferred taxes are based on the operations of the Company and FLAC and on unrealized losses on available-for-sale securities. The decrease in deferred taxes payable is primarily attributable to the increase in unrealized losses in the investment portfolio at June 30, 2006 compared to December 31, 2005.
Results of Operations
Significant components of revenues include life insurance premiums (net of reinsurance) and net investment income. The following table provides information concerning net premium income for the three and six months ended June 30, 2006 and 2005:
16
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| Six months ended |
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| June 30, |
| June 30, |
| June 30, |
| June 30, |
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| 2006 |
| 2005 |
| 2006 |
| 2005 |
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Whole life insurance: |
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First year |
| $ | 179,297 |
| $ | 278,879 |
| $ | 414,819 |
| $ | 500,014 |
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Renewal |
| 778,122 |
| 650,435 |
| 1,796,163 |
| 1,578,015 |
| ||||
Term insurance: |
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|
|
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First year |
| 868 |
| 937 |
| 2,311 |
| 977 |
| ||||
Renewal |
| 11,320 |
| 11,264 |
| 13,280 |
| 12,986 |
| ||||
Single premium |
| 2,800 |
| 3,500 |
| 9,800 |
| 9,220 |
| ||||
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Gross premium income |
| 972,407 |
| 945,015 |
| 2,236,373 |
| 2,101,212 |
| ||||
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Reinsurance premiums assumed |
| 6,471 |
| 3,845 |
| 8,637 |
| 5,880 |
| ||||
Reinsurance premiums ceded |
| (150,520 | ) | (22,421 | ) | (312,873 | ) | (68,197 | ) | ||||
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Net premium income |
| $ | 828,358 |
| $ 926,439 |
| $ | 1,932,137 |
| $ | 2,038,895 |
| |
Net premium income decreased $106,758 or 5% from the six months ended June 30, 2006 to the same period during 2005. Total first year whole life premium decreased $85,195 or 17% from 2005 to 2006. The decrease is attributable to a decrease in the production of the Company’s Golden Eagle Whole Life (Final Expense) product and the coinsurance allowance paid to Wilton Re for business written in the prior year.
Management released several new annuity, term and whole life products during 2005. The Company’s goal in introducing these new products is to diversify the Company’s product mix and to manage its first year production to both the needs and capacity of the Company.
Total renewal year whole life premiums increased $218,148 or 14% from the six months ended June 30, 2005 to the same period during 2006. Renewal premiums reflect the premium collected in the current year for those policies that have surpassed their first anniversary. Renewal premiums will continue to increase unless premiums lost from surrenders, lapses, settlement options or application of the non-forfeiture options, exceed prior year’s first year premium, other than single premium.
Reinsurance premiums ceded increased $244,676 or 359% for the six months ended June 30, 2006, compared to the same period in 2005. The increase is primarily attributable to premiums paid to Wilton Re in conjunction with the reinsurance of the Company’s Golden Eagle Whole Life (Final Expense) product.
Net premium income decreased $98,081 or 11% from the three months ended June 30, 2006 to the same period during 2005. Total first year whole life premium decreased $99,582 or 36% from 2005 to 2006. The decrease is attributable to a decrease in the production of the Company’s Golden Eagle Whole Life (Final Expense) product.
Total renewal year whole life premiums increased $127,687 or 20% from the three months ended June 30, 2005 to the same period during 2006.
Reinsurance premiums ceded increased $128,099 or 571% for the three months ended June 30, 2006, compared to the same period in 2005. The increase is primarily attributable to premiums paid to Wilton Re in conjunction with the reinsurance of the Company’s Golden Eagle Whole Life (Final Expense) product.
Net investment income increased $132,808 or 33% for the six months ended June 30, 2006, compared to the same period for 2005. The increase is due to an increase of average yields on the Company’s portfolio. The Company’s investment strategy is focused primarily on matching maturities to the anticipated cash needs of the Company, but also attempts to match the investment mix to others within the Company’s industry peer group.
17
Net realized investment gain (loss) decreased $71,559 from the six months ended June 30, 2006 to the same period during 2005. The decrease is attributable to the sale of a significant portion of the Company’s investment portfolio during the six months ended June 30, 2006. Losses totaling $92,968 were realized upon the sale of these bonds and gains of $22,949 were realized on the sale of stock.
Benefits and expenses totaled $2,639,319 and $2,940,376 during the six months ended June 30, 2006 and 2005, respectively. Included in total benefits and expenses were policy reserve increases of $435,325 and $678,432 during three months ended June 30, 2006 and 2005, respectively. Benefits and expenses totaled $1,270,813 and $1,377,797 during the three months ended June 30, 2006 and 2005, respectively. Included in total benefits and expenses were policy reserve increases of $185,348 and $266,684 during three months ended June 30, 2006 and 2005, respectively. Life insurance reserves are actuarially determined based on such factors as insured age, life expectancy, mortality and interest assumptions. As more life insurance is written and existing policies reach additional durations, policy reserves will continue to increase.
Policyholder surrender values increased $37,774 from $110,147 during the six months ended June 30, 2005 to $147,921 during the same period in 2006. This increase is attributable to the maturation of policies.
Interest credited on annuities and premium deposits totaled $269,247 and $184,594 for the six months ended June 30, 2006 and 2005, respectively. The increase during 2006 of $84,653or 46% is primarily a result of the increase in annuity fund balances. Both interest credited on annuities and premium deposits have increased as a result of the increase in the number of policies inforce. The average interest credit rate on annuities and premium deposits has increased from 4.7% to 5.1% during the six months ended June 30, 2005 and 2006, respectively.
Death claims increased $89,031, or 43%, for the six months ended June 30, 2006, compared to the same period for 2005. The increase is attributable to the increase in the number of policies inforce and the continued maturation of those policies. Mortality experienced by the Company to date is within management’s expectations.
Commission expense totaled $425,620 and $694,382 for the six months ended June 30, 2006 and 2005, respectively. Commission expense is based on a percentage and is determined in the product design. Additionally, higher percentage commissions are paid for first year business rather than the renewal year. Commission expense decreased $268,762 primarily due to commission allowances received on reinsured business due from Wilton Re of $222,017 during the quarter being netted against the commission expense. Commission allowances received on reinsurance business essentially serve as a reimbursement to the Company for acquisition costs incurred to write business.
Salaries, wages and employee benefits decreased $144,360 from $633,369 for the six months ended June 30, 2005, to $489,009 for the same period in 2006. The decrease in 2006 is primarily attributable to a decrease in employee headcount along with decreased employee benefit expenses.
Other operating costs and expenses totaled $589,323 and $793,869 for the six months ended June 30, 2006 and 2005, respectively. The net decrease of $204,546, or 26%, was primarily due to a decrease in Wilton Re expense allowances of $72,877, and a loss on a Treasury Stock transaction of $35,465 recognized in March 31, 2005. The Company had no Treasury Stock transactions for the same period in 2006.
As a result of the items noted above the Company had a net loss before income tax expense of $124,104 and $407,463 for the six months ended June 30, 2006 and 2005, respectively.
Liquidity and Capital Resources
During the quarters ended June 30, 2006, and 2005, the Company maintained liquid assets sufficient to meet operating demands, while continuing to utilize excess liquidity to purchase various investments. Net cash provided by operating activities during the six months ended June 30, 2006 and 2005 totaled $340,661 and $60,044, respectively.
As of June 30, 2006, the Company and its subsidiaries had consolidated cash reserves and liquid investments of approximately $12,464,514, as compared with $14,209,951 as of June 30, 2005. Of these amounts, cash reserves and
18
liquid investments at FLAC as of these dates were approximately $11,905,907 and $13,358,036, respectively. FLAC generally receives adequate cash flow from premium collections and investment income to meet the obligations of its insurance operations. Insurance policy liabilities are primarily long-term and generally are paid from future cash flows. Cash collected from deposits on annuity contracts and policyholder premium deposits are recorded as cash flows from financing activities. Due to insurance regulatory restrictions, as noted above, cash generated by FLAC cannot necessarily be used to fund the cash needs of the parent company on a stand-alone basis.
As of June 30, 2006, cash reserves at the parent company level were approximately $553,674 as compared with $828,790 as of June 30, 2005. Cash reserves for FLBI were $4,933 at June 30, 2006 and there $23,125 as of June 30, 2005. Based on the decreasing level of cash reserves at the parent company level over the past few years, in 2005, management began to pursue all reasonable alternatives for increasing cash reserves at the parent company level. As an initial step in this process, the Board of Directors of each of the parent company and FLAC approved a transaction pursuant to which FLAC agreed to purchase the Company’s home office building and the real property on which it is located from the parent company at its value of $2,800,000, which was determined based on an independent appraisal.
On March 28, 2006, the Kansas Insurance Department (KID) approved this transaction pursuant to a Form D (Prior Notice of a Transaction) filed by the Company. Proceeds from the sale were used by the parent company to pay off the two creditors that held mortgages on the building, which resulting in interest savings of approximately $890,000 over the life of the loans. In addition, the transaction provided the parent company with approximately $478,000 in cash. This cash will be used to fund operations at the parent company.
Based on currently forecasted cash flow levels, management anticipates that the $478,000 in cash provided to the parent company as a result of the aforementioned transaction plus the parent company’s existing cash reserves will fund operations at the parent company level into mid 2007. Therefore, in the interim, management will continue to explore all reasonable opportunities to provide additional capital to the parent company through the sale of new equity securities or debt securities, or through borrowed funds. Successful efforts in this arena will not only help to remedy the parent company’s current cash situation, but also allow management to fully implement its business development plan of expanding the Company’s product lines and marketing efforts through the infusion of additional capital into FLAC’s insurance operations and FLBI’s brokerage operations. If these efforts are not successful, however, then the Company will have no choice but to cease operations as a public company and liquidate its assets, which primarily are the insurance operations of its subsidiary FLAC. There is no assurance of what if any value could be realized by the parent company in this event.
Liquidity and Capital Resources (Continued)
Pursuant to these efforts, on October 6, 2006, the Company executed a Stock Purchase and Sale Agreement (the “Agreement”) with Brooke Corporation (“Brooke”) pursuant to which, subject to the conditions stated in the Agreement, Brooke has agreed to acquire newly issued shares of the common stock of FACC in a two step transaction that will result in Brooke owning 55% of the then issued and outstanding shares of common stock. In consideration therefor, Brooke will (i) pay to FACC $3,000,000 in cash and (ii) enter into a Brokerage Agreement pursuant to which, among other things, CJD & Associates, L.L.C., a Brooke subsidiary, will cause all of its new managing general agent loan brokerage business to be transacted through First Life Brokerage, Inc. (“FLB”), a FACC subsidiary. In the Agreement, the pretax profits of FLB over a three year period shall be not less than $6,000,000 in pretax profits or Brooke shall be obligated to contribute funds to FACC as additional consideration for the issuance of the shares of FACC common stock acquired pursuant to the Agreement to the extent the pretax profit goal is not made under such schedule. The closing of the transactions contemplated under the Agreement are subject to a number of conditions, including the approval of the Kansas Department of Insurance. Although there is no assurance that these conditions will be met and that the closing of these transactions will occur, management currently anticipates that the closing will occur in the fourth quarter of 2006.
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ITEM 3. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. This information is accumulated and communicated to the Company’s management to allow timely decisions regarding disclosure. The Company’s Chief Executive Officer and President conducted an evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation of those controls and procedures, the Chief Executive Officer and President of the Company concluded that the Company’s disclosure controls and procedures are effective in alerting on a timely basis, material information required to be disclosed in the Company’s periodic filings except as set forth in the following paragraphs.
In connection with its review of the financial statements filed with this Amendment, the Company’s independent public accounting firm advised management that it had noted certain matters that it considered to be “material weaknesses,” which is a significant deficiency, or a combination of significant deficiencies, in the Company’s internal financial procedures or controls, that results in more than a remote likelihood that a material misstatement of the Company’s financial statements will not be prevented or detected. The auditors noted that due to the resignation of the Chief Financial Officer of the Company effective March 31, 2006, the Company did not then have adequate review procedures in place to ensure the development of timely, complete and accurate financial statements and related footnotes.
Since March 31, 2006, the Company has taken significant steps to remediate this material weakness, including enhancing the knowledge and skills of the existing staff, hiring outside consultants and independent contractors to assist the staff in handling financial statement matters, and engaging as a full-time consultant an individual who had previously served as the Company’s controller and who during that tenure was primarily responsible for preparing both the Company’s statutory and GAAP financial statements. Although the Company has been unable to hire a qualified Chief Financial Officer due to the uncertainty of its financial position prior to the announcement of the transaction with Brooke Corporation described in the Form 10-QSB, management believes that the material weakness that existed with respect to the preparation of the Company’s financial statements for the quarter ended March 31, 2006, remained at June 30, 2006, but were substantially remediated prior to the preparation of the financial statements for the quarter ended June 30, 2006.
With these remediation steps remaining in place and the addition of the functional financial support to be provided by Brooke Corporation pursuant to the Services Agreement described in the Form 10-QSB, management believes that these material weakness will continue to be remediated and that the Company’s internal control over financial reporting is effective at a reasonable assurance level as of the date of this Amendment and has been for a period of time prior hereto.
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OTHER INFORMATION
ITEM 4. |
| SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | |
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The Company attempted to hold its regularly scheduled annual meeting of shareholders on June 5, 2006 for the purpose of electing directors and ratifying the appointment of independent auditors. However, shareholder attendance (in person and by proxy) did not constitute quorum to transact business pursuant to the Company’s bylaws. Therefore, no business was transacted. Accordingly, the following existing directors remain in office: Thomas Fogt; Paul “Bud” Burke, Jr.; Harland Priddle; Gary Yager; Edward Carter; Kenneth Frahm; John Montgomery; and John Van Engelen. | |||
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ITEM 6. |
| EXHIBITS AND REPORTS ON FORM 8-K | |
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a) |
| Index to Exhibits | |
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Exhibit No. |
| Description | |
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23.1 |
| Report of Independent Registered Public Accounting Firm (*) | |
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31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act | |
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31.2 |
| Certification of Chairman & Secretary of the Board of Directors pursuant to Section 302 of the | |
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32.1 |
| Certificate of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350 (*) | |
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32.2 |
| Certificate of Chairman & Secretary of the Board of Directors pursuant to Section 18 U.S.C. | |
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| (*) Filed herewith | |
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b) |
| Reports on Form 8-K | |
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| The Company filed current reports on Forms 8-K dated February 16, 2006, March 13, 2006, and | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST AMERICAN CAPITAL CORPORATION |
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Date: | October 27, 2006 |
| By: | /s/ John F. Van Engelen |
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| John F. Van Engelen |
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| President & Chief Executive Officer |
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Date: | October 27, 2006 |
| By: | /s/ Harland E. Priddle |
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| Harland E. Priddle |
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| Chairman & Secretary of the Board of Directors |
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