United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001.
[ ] 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)
1303 S.W. First American Place Topeka, Kansas 66604
- -----------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (785) 267-7077
---------------------------
3360 S.W. Harrison Street, Suite 100 Topeka, Kansas 66611
- -------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 - 5,418,860 shares as of May 10, 2001
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X ]
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO FORM 10-QSB
Part I. FINANCIAL INFORMATION Page Numbers
- ------------------------------------ -------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 8
Management's Discussion and Analysis or Plan of Operation 14
Part II.
- ---------
Item 6. Exhibits and Reports on Form 8-K
Signatures
- ----------
Page 2
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
------------ -------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost, $7,111,579
in 2001 and $6,023,296 in 2000) $ 7,349,327 $ 6,241,820
Policy loans 16,432 5,990
Notes receivable (net of valuation allowance
of $14,524 in 2001 and $18,414 in 2000) 26,868 30,262
Short-term investments 3,808,903 4,437,280
------------ -------------
Total investments 11,201,530 10,715,352
------------ -------------
Cash and cash equivalents 807,747 832,485
Investments in related parties 16,800 16,800
Prepaid administrative fees - related party 88,808 -
Accrued investment income 182,583 148,487
Accounts receivable 111,338 93,167
Deferred policy acquisition costs (net of accumulated amort-
ization of $856,382 in 2001 and $800,619 in 2000) 1,403,588 1,272,554
Property and equipment, net of accumulated depreciation 2,023,190 1,283,522
Other assets 11,701 18,387
------------ -------------
Total assets $ 15,847,285 $ 14,380,754
============ =============
Page 3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
March 31, December 31,
2001 2000
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Policy and contract liabilities:
Annuity contract liabilities $ 793,512 $ 486,533
Life policy reserves 1,048,674 919,635
Liability for policy claims 38,941 22,306
Policyholder premium deposits 95,050 74,469
Deposits on pending policy applications 176,153 76,379
Reinsurance premiums payable 26,693 28,561
------------ --------------
Total policy and contract liabilities 2,179,023 1,607,883
Commissions, salaries, wages and benefits payable 139,473 114,018
Other liabilities 55,715 28,811
Note payable 1,393,873 698,018
Accounts payable to affiliate - 18,047
Federal income taxes payable:
Deferred 424,349 361,403
------------ --------------
Total liabilities 4,192,433 2,828,180
Shareholders' equity:
Common stock, $.10 par value, 8,000,000 shares
authorized; 5,418,860 shares issued and 5,303,860 shares
outstanding in 2001 and 2000 541,886 541,886
Additional paid in capital 12,230,005 12,230,005
Retained earnings - deficit (1,084,818) (1,176,785)
Accumulated other comprehensive income 154,537 144,226
Less: treasury shares held at cost (115,000 shares
in 2001 and 2000) (186,758) (186,758)
------------ --------------
Total shareholders' equity 11,654,852 11,552,574
------------ --------------
Total liabilities and shareholders' equity $15,847,285 $ 14,380,754
============ ==============
See notes to consolidated financial statements.
Page 4
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
March 31, March 31,
2001 2000
REVENUES (Unaudited) (Unaudited)
------------ ------------
Gross premium income $ 593,177 $ 541,702
Reinsurance premiums ceded (24,795) (15,311)
------------ ------------
Net premium income 568,382 526,391
Net investment income 215,501 160,612
Other income 3,080 -
------------ ------------
Total revenue 786,963 687,003
BENEFITS AND EXPENSES
Increase in policy reserves 129,039 160,461
Policyholder surrender values 7,630 37
Interest credited on annuities and premium deposits 12,747 2,305
Death claims 38,142 -
Commissions 148,407 205,767
Policy acquisition costs deferred (186,796) (290,089)
Amortization of deferred policy acquisition costs 55,762 99,272
Salaries, wages and employee benefits 192,426 169,978
Miscellaneous taxes 4,370 10,537
Administrative fees - related party 35,729 32,167
Other operating costs and expenses 200,660 161,698
------------ ------------
Total benefits and expenses 638,116 552,133
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 148,847 134,870
------------ ------------
Income tax expense 56,880 99,826
------------ ------------
NET INCOME $ 91,967 $ 35,044
============ ============
NET INCOME PER COMMON SHARE-
BASIC AND DILUTED $ 0.02 $ 0.01
============ ============
See notes to consolidated financial statements.
Page 5
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31, March 31,
2001 2000
------------ ------------
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net income $ 91,967 $ 35,044
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited on annuities and premium deposits 12,747 2,305
Provision for depreciation and amortization 3,977 3,243
Amortization of premium and accretion of discount on
fixed maturity and short-term investments (7,491) (1,263)
Interest credited to certificates of deposit balances (18,230) -
Realized net loss on disposal of assets 1,034 -
Provision for deferred federal income taxes 54,033 97,326
Increase in prepaid administrative fees - related party (88,808) -
Increase in accrued investment income (34,096) (28,688)
Increase in accounts receivable (18,171) (23,726)
Increase in deferred policy acquisition costs, net (131,034) (190,817)
Increase in policy loans (10,442) -
Decrease (increase) in other assets 6,686 (5,217)
Increase in policy reserves 129,039 160,461
Increase in liability for policy claims 16,635 -
Increase in deposits on pending policy applications 99,774 141,049
Decrease in reinsurance premiums payable (1,868) (1,854)
Increase in commissions, salaries, wages and benefits payable 25,455 17,239
Increase (decrease) in accounts payable to affiliate (18,047) 35,518
Increase (decrease) in other liabilities 26,904 (19,093)
------------ ------------
Net cash provided by operating activities $ 140,064 $ 221,527
Page 6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three months ended
March 31 March 31
2001 2000
------------ ------------
(Unaudited) (Unaudited)
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $(1,731,814) $(1,041,193)
Sale of available-for-sale fixed maturities 651,000 -
Additions to property and equipment, net (744,679) (2,552)
Changes in notes receivable, net 3,394 -
Short-term investments (acquired) disposed, net
646,629 795,765
------------ ------------
Net cash used in investing activities (1,175,470) (247,980)
FINANCING ACTIVITIES:
Proceeds from note payable 695,855 -
Deposits on annuity contracts, net 295,573 139,093
Policyholder premium deposits, net 19,240 (8,306)
------------ ------------
Net cash provided by financing activities 1,010,668 130,787
------------ ------------
Increase (decrease) in cash and cash equivalents (24,738) 104,334
Cash and cash equivalents, beginning of period 832,485 793,885
------------ ------------
Cash and cash equivalents, end of period $ 807,747 $ 898,219
============ ============
See notes to consolidated financial statements.
Page 7
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
period ended March 31, 2001 and 2000 are unaudited. However, in the opinion of
the Company, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been reflected therein.
Certain financial information which is normally included in financial statements
prepared in accordance with generally accepted accounting principles, but which
is not required for interim reporting purposes, has been omitted. The
accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the fiscal year ended December 31, 2000. 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 subsidiary, First Life America Corporation ("FLAC"),
results of operations are included in the condensed consolidated financial
information for the three month periods ending March 31, 2001 and 2000. The
Company's venture capital subsidiary, First Capital Venture Inc. ("FCVI"), has
not been capitalized or commenced operations.
3. INVESTMENTS
The Company classifies all of its available-for-sale fixed maturities at the
current market value. Adjustments to market value are recognized as a separate
component of shareholders' equity net of applicable federal income tax effects.
The following table details the investment values at March 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ----------
Special Revenue Bonds $3,346,772 $ 85,369 $ 1,296 $3,430,845
Corporate Bonds 3,404,807 154,659 984 3,558,482
Certificates of Deposit 360,000 - - 360,000
---------- ----------- ----------- ----------
$7,111,579 $ 240,028 $ 2,280 $7,349,327
The fair values for investments in fixed maturities are based on quoted market
prices.
Page 8
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS IN RELATED PARTIES
On June 20, 2000, the Company purchased, through a private placement, 168,000
shares of the common stock of Mid-Atlantic Capital Corporation ("MCC") of
Charleston, West Virginia for $16,800. At March 31, 2001, MCC had raised
$850,000 from the sale of private placement shares. MCC intends to register a
West Virginia intrastate public offering of $12,000,000. After MCC's private
placement and public offerings are complete, the Company will own 3.05% of the
outstanding common stock. These shares are not registered under the Securities
Act of 1933, and are subject to restrictions on transferability and resales 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 N. Fink, who is the Company's Chairman of the Board, will
also serve as a Co-Chairman of the Board for MCC.
5. PROPERTY AND EQUIPMENT
During 1999, the Company acquired approximately six and one-half acres of land,
located in Topeka, Kansas for $325,169. A 20,000 square foot building to be
used as a home office has been constructed on approximately one-third of this
land. Approximately 10,000 square feet will be occupied by the Company with the
remaining office space to be leased to unaffiliated parties. Costs incurred to
date at March 31, 2001 totaled $1,980,251, of which $625,989 was related to land
cost and preparation and $1,323,354 was related to building construction. Also
included in total property of $1,980,251, is $30,908 of capitalized interest
costs incurred on the construction loan.
In May, the Company will relocate its home office to the newly constructed
building. The 10,000 square feet of office space to be leased is expected to be
completed by June of 2001. Once the entire project is completed, the remaining
portion of the land will be sold.
The components of property and equipment as of March 31, 2001 are as follows:
2001
-----------
Property (home office building) $1,980,251
Less: Accumulated depreciation -
-----------
Net property 1,980,251
-----------
Equipment 89,194
Less: Accumulated depreciation (46,255)
-----------
Net equipment 42,939
-----------
Property and equipment, net $2,023,190
===========
Page 9
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring life insurance, which vary with, and
are primarily related to, the production of new insurance contracts have been
deferred to the extent recoverable from future policy revenues and gross
profits. The acquisition costs are amortized over the premium paying period of
the related policies using assumptions consistent with those used in computing
policy reserves.
7. NET EARNINGS PER COMMON SHARE
Net income per common share for basic and diluted earnings per share is based
upon the weighted average number of common shares outstanding during each
period. The weighted average outstanding common shares was 5,303,860 and
5,448,860 for the three months ended March 31, 2001 and 2000, respectively.
8. FEDERAL INCOME TAXES
The company does not file a consolidated federal income tax return with FLAC.
FLAC is taxed as a life insurance company under the provisions of the Internal
Revenue Code and must file a separate tax return for its initial six years of
existence. At March 31, 2001 and 2000 estimated Federal Income Tax expense was
$56,880 and $99,826, respectively. The Federal Income Tax expense at March 31,
2001 included $2,847 of current tax expense and $54,033 of deferred tax
expense, and March 31, 2000 included $2,500 of current tax expense and $97,326
of deferred tax expense. Deferred federal income taxes reflect the impact of
"temporary differences" between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations.
9. RELATED PARTY TRANSACTIONS
Effective December 31, 1998, the Company entered into a service agreement with
FLAC to provide personnel, facilities, and services to FLAC. The services to be
performed pursuant to the service agreement are underwriting, claim processing,
accounting, processing and servicing of policies, and other services necessary
to facilitate FLAC's business. The agreement is in effect until either party
provides ninety days written notice of termination. Under the agreement, FLAC
pays monthly fees based on life premiums delivered by FLAC. The percentages are
25% of first year life premiums; 40% of second year life premiums; 30% of third
year life premiums 20% of fourth year life premiums and 10% of life premiums in
years five and thereafter. FLAC will retain general insurance expenses related
to its sales agency, such as agent training and licensing, agency meeting
expenses, and agent's health insurance. Pursuant to the terms of the agreement,
FLAC had incurred expenses of $181,055 for the three months ended March 31, 2001
and $155,463 for the three months ended March 31, 2000.
Page 10
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has contracted with First Alliance Corporation ("FAC") of Lexington,
Kentucky to provide underwriting and accounting services for FLAC and the
Company. Under the terms of the management agreement, the Company pays fees
based on a percentage of delivered premiums of FLAC. The percentages are 5.5%
for first year premiums; 4% of second year premiums; 3% of third year premiums;
2% of fourth year premiums, 1% of fifth year premiums and 1% for years six
through ten for ten year policies and .5% in years six through twenty for twenty
year policies. Pursuant to the agreement, the Company incurred $35,729 and
$32,167 of management fees during the three months ended March 31, 2001 and
2000, respectively. FAC also owns approximately 9.7% of the Company's
outstanding common shares.
In March of 2001, the Company prepaid $100,000 of administrative fees to FAC.
The prepayment represents discounted estimated fees for the remainder of 2001.
At March 31, 2001, such fees totaled $11,192 and reduced the prepaid balance to
$88,808.
10. CONCENTRATIONS OF CREDIT RISK
Credit risk is limited by emphasizing investment grade securities and by
diversifying the investment portfolio among U.S. Government Agency and
Corporate bonds. Credit risk is further minimized by investing in certificates
of deposit. Certain certificates of deposit and cash balances exceed the
maximum insurance protection of $100,000 provided by the Federal Deposit
Insurance Corporation ("FDIC"). However, both certificates of deposit balances
and cash balances exceeding this maximum are protected through additional
insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Page 11
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. COMPREHENSIVE INCOME
In 1998, the Financial Accounting and Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS 130 requires the detail of comprehensive income for the reporting
period be disclosed in the financial statements. Comprehensive income consists
of net income or loss for the current period adjusted for income, expenses gains
and losses that are reported as a separate component of shareholders' equity
rather than in the statement of operations. The financial statements have been
prepared in accordance with SFAS 130.
The components of comprehensive income (loss) along with the related tax effects
are presented below for the quarters ended March 31, 2001 and 2000.
Three months ended
March 31, March 31,
2001 2000
----------- -----------
Unrealized gain/(loss) on available-for-sale securities:
Unrealized holding gains/(losses) during the
period $ 237,748 $ (43,140)
Tax benefit/(expense) (83,211) 14,667
----------- -----------
Other comprehensive income/(loss) $ 154,537 $ (28,473)
=========== ===========
Net income $ 91,967 $ 35,044
Other comprehensive income/(loss) net of tax
effect:
Unrealized investment gain/(loss) 154,537 (28,473)
----------- -----------
Comprehensive income $ 246,504 $ 6,571
=========== ===========
Net income per common share-basic and diluted $ 0.05 $ -
=========== ===========
Page 12
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," become effective for 1998 and superseded SFAS No. 14. SFAS No.
131 requires a "management approach" (how management internally evaluates the
operating performance of its business units) in the presentation of business
segments. The segment data that follows has been prepared in accordance with
SFAS No. 131. The operations of the Company and its subsidiaries have been
classified into two operating segments as follows: life and annuity insurance
operations and corporate operations. Segment information as of March 31, 2001
and December 31, 2000 and for the three months ended March 31, 2001 and 2000 is
as follows:
2001 2000
------------ ------------
Revenues:
Life and annuity insurance operations $ 668,557 $ 577,177
Corporate operations 118,406 109,826
------------ ------------
Total $ 786,963 $ 687,003
============ ============
Income (loss) before income taxes:
Life and annuity insurance operations $ 187,078 $ 182,055
Corporate operations (38,231) (47,185)
------------ ------------
Total $ 148,847 $ 134,870
============ ============
Assets:
Life and annuity insurance operations $ 6,833,481 $ 6,024,504
Corporate operations 9,013,804 8,356,250
------------ ------------
Total $15,847,285 $14,380,754
============ ============
Depreciation and amortization expense:
Life and annuity insurance operations $ 55,762 $ 99,272
Corporate operations 3,977 3,243
------------ ------------
Total $ 59,739 $ 102,515
============ ============
13. MATERIAL COMMITMENTS
The Company is currently constructing a building to be used as the Company's
home office (see note 5). Based on quoted costs and other management
estimates, total estimated land and building construction costs will total
$3,100,000 upon completion of the project. Of these estimated total costs,
$1,980,251 has been incurred at March 31, 2001, leaving estimated remaining
costs of $1,119,749.
The Company entered into a twelve month construction loan with Columbian Bank
for $2,000,000 as partial financing of the project. As of March 31, 2001,
$1,393,873 of the $2,000,000 construction loan had been borrowed, leaving
available funds in the amount of $606,127 to complete the project. The
remaining estimated costs of $513,622 will be financed with internal funds.
Page 13
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 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 risks and uncertainties.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Financial Position
- -------------------
Significant changes in the consolidated balance sheets from December 31, 2000 to
March 31, 2001 are highlighted below.
Total assets increased from $14,380,754 at December 31, 2000 to $15,847,285 at
March 31, 2001. The Company's available-for-sale fixed maturities had a fair
value of $7,349,327 and amortized cost of $7,111,579 at March 31, 2001. This
investment portfolio is reported at market value with unrealized gains and
losses, net of applicable deferred taxes, reflected as a separate component in
Shareholders' Equity. Several of the short-term investments held by the Company
in 2000 were either sold or matured and the proceeds were used to purchase
investments in available-for-sale fixed maturity investments with higher yields
during the first quarter of 2001. This change caused a 14% decrease in
short-term investments and an 18% increase (on an amortized cost basis) in the
Company's fixed maturities portfolio from 2000 to 2001.
The Company limits credit risk by emphasizing investment grade securities and by
diversifying its investment portfolio among U.S. Government Agency and Corporate
bonds. Credit risk is further minimized by investing in certificates of
deposit. As a result, management believes that significant concentrations of
credit risk do not exist.
In March of 2001, $100,000 of administrative fees were prepaid to First Alliance
Corporation, a related party which provides accounting and other administrative
services for the Company. The prepayment represents discounted estimated fees
for the remainder of 2001. The Company will earn nine and one-half percent on
the balance of the prepayment and will be calculated monthly after fees for each
month are incurred. Management anticipates that the prepaid balance will be
reduced to zero by December of 2001. At March 31, 2001, fees in the amount of
$11,192 were incurred, reducing the prepaid balance to $88,808.
Deferred policy acquisition costs, net of amortization, increased from
$1,272,554 at December 31, 2000 to $1,403,588 at March 31, 2001 resulting from
the capitalization of acquisition expenses related to the increasing sales of
life insurance. These acquisition expenses include commissions and management
fees incurred in the first policy year.
Included in property and equipment at March 31, 2001 and December 31, 2000,
respectively, is $1,980,251 and $1,247,740 in costs related to constructing a
20,000 square foot office building to be used for the Company's new
Page 14
home office facility. The Company acquired approximately six and one-half acres
of land for $325,169 in 1999, and the building is currently being
constructed on approximately one-third of this land. Approximately 10,000
square feet will be occupied by the Company with the remaining office
space to be leased to unaffiliated parties. As of March 31, 2001, $300,820
was incurred for land preparation. Additionally, building construction
costs, including $30,908 in capitalized interest costs, totaled $1,354,262.
Liabilities increased to $4,192,433 at March 31, 2001 from $2,828,180 at
December 31, 2000. A significant portion of this increase is due to life
insurance related policy liabilities. Policy reserves established due to the
sale of life insurance increased approximately 14% from 2000 to 2001. These
reserves are actuarially determined based on such factors as insured age, life
expectancy, mortality and interest assumptions. Liabilities for policy claims
are recorded based on reported death.
There was an increase in the amount of $306,979 for annuity contract liabilities
from December 31, 2000 to March 31, 2001. According to the design of FLAC's
primary life insurance product, first year premiums payments are allocated 100%
to life insurance and renewal payments are split 50% to life and 50% to annuity.
In the first three months of 2001, annuity contract liabilities increased as
additional policies reached the second policy year. Deposits on pending policy
applications represent money submitted with policy applications that have not
yet been approved. Any increases or decreases in this liability from one period
to another are due to the timing of approval and delivery of the new business.
In accordance with existing reinsurance agreements, FLAC generally pays no
reinsurance premiums on first year individual business. However, SFAS No. 113
requires the unpaid premium to be recognized as a first year expense and
amortized over the estimated life of the reinsurance policies. FLAC records
this unpaid premium as "Reinsurance premiums payable" in the balance sheets and
as "Reinsurance premiums ceded" in the income statements. At March 31, 2001 and
December 31, 2000, respectively, the unpaid reinsurance premiums net of
amortization totaled $26,693 and $28,561.
During 2000, the Company entered into a twelve month construction loan with
Columbian Bank for $2,000,000 as partial financing of the construction project.
As of March 31, 2001 and December 31, 2000, respectively, the note balance
totaled $1,393,873 and $698,018. Upon final completion of the building
construction project, management will either obtain permanent, long-term,
financing or use internal funds to repay the construction loan.
Federal income taxes payable are due to deferred taxes established based on
timing differences between income recognized for financial statements and
taxable income for the Internal Revenue Service. These deferred taxes are based
on the operations of FLAC and on unrealized gains of fixed maturities.
Results of Operations
- -----------------------
The Company completed a Kansas intra-state offering on January 11, 1999 raising
total capital of approximately $13,750,000. The offering, which commenced on
March 11, 1997, provided capital to form a wholly owned life insurance
subsidiary, First Life America Corporation ("FLAC"); form a venture capital
subsidiary, First Capital Venture, Inc. ("FCVI") and provide working and
acquisition capital. FLAC commenced insurance operations on a limited basis in
November of 1998. In January of 1999, FLAC began full insurance operations.
Until the marketing of life insurance began, the Company was in the development
stage.
Page 15
Significant components of revenues include life insurance premiums, net of
reinsurance, and net investment income. The following table provides
information concerning premium income for the three months ended March 31, 2001
and 2000:
Modified payment whole life insurance: 2001 2000
--------- ---------
First year $232,306 $366,023
Renewal 357,061 175,679
Term insurance:
First year 3,810 -
--------- ---------
Gross premium income 593,177 541,702
Reinsurance premiums ceded (24,795) (15,311)
--------- ---------
Net premium income $568,382 $526,391
========= =========
The Company's income earned from first year premiums on the modified payment
whole life insurance policy decreased 36% from the three months ended March 31,
2000 to the three months ended March 31, 2001. This decrease is attributable
primarily to the loss of three of FLAC's most experienced agents, which occurred
after March 31, 2000. FLAC constantly recruits and trains new agents and
provides continuous training and incentives for existing agents. As a result,
management expects that other existing agents will soon be able to effectively
replace the valuable resources which were lost. As compared to the three months
ended March 31, 2000, greater renewal income was earned for the three months
ended March 31, 2001 due to the aging of policy contracts in force. During the
last twelve months, a significant portion of FLAC's policies reached their
second and third renewal years.
During 2001, FLAC received $3,810 in premium on its 10-year term product. FLAC
began offering this product during 2000 to meet niche marketing needs.
Management has not actively marketed and does not intend to actively market this
product. It is typical in the insurance industry to reinsure a portion of the
risk associated with life policies. The Company pays premiums to another
company who assumes the risk. These premiums are a direct reduction of gross
premium income. Reinsurance premiums totaled $24,795 and $15,311 for the
quarters ended March 31, 2001 and 2000, respectively.
Net investment income increased 34% from March 31, 2000 to March 31, 2001. In
1999, the Company hired an investment manager to increase investment yields.
During 2000 and 2001, short-term investments were converted to investments in
available-for-sale fixed maturity investments, with higher yields. The invested
asset mix, combined with a growing invested asset base, resulted in increased
gross income from investments for the quarter ended March 31, 2001.
Additionally, net investment income increased for the three months ended March
31, 2001 due to lower investment expenses. Currently, the Company manages its
investment portfolio internally; however, the Company was paying an outside
investment service to perform this function until September of 2000.
Benefits and expenses totaled $638,116 and $552,133 for the three months ended
March 31, 2001 and 2000, 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, it is reasonable for policy reserves to continue to
increase. Commission expense is based on a percentage of premium and is
determined in the product design. Commission expense decreased 28% from the
quarter ended March 31, 2000 to March 31, 2001. This decrease is related to the
decrease in first year premium income discussed above. Commissions as a
percentage of premiums are substantially less on renewals than on first year
premiums.
Acquisition costs which are related to the sale of insurance are capitalized and
amortized over the premium paying period of the associated policies. These
costs include commissions and management fees incurred in the first policy year.
During the first quarters of 2001 and 2000, $186,796, and $290,089,
respectively, of these costs were capitalized as deferred policy acquisition
costs. The amortization of deferred acquisition costs for the same periods
totaled $55,762 and $99,272, respectively. Salaries, wages and employee
benefits increased 13% for the quarter ended March 31, 2001 as compared to the
Page 16
same period in 2000. Additional personnel were hired during the last three
quarters of 2000 to facilitate growing life insurance operations. Included in
miscellaneous taxes for each period is premium taxes, which are incurred as a
percentage of premium collected and payable to the Kansas Insurance Department
("KID").
Administrative fees-related party are paid to First Alliance Corporation
("FAC"), a shareholder of the Company, for underwriting and accounting
services. During the three months ended March 31, 2001 and 2000, respectively,
these fees totaled $35,729 and $32,167 and were calculated based on a percentage
of FLAC's premium income and annuity deposits collected.
The increase in other operating costs and expenses are due to increased
operations of the Company.
Liquidity and Capital Resources
- ----------------------------------
During the quarters ended March 31, 2001 and 2000, the Company maintained liquid
assets sufficient to meet operating demands, while continuing to utilize excess
liquidity for fixed maturity investments. Net cash provided by operating
activities during the periods ended March 31, 2001 and 2000 totaled $140,064 and
$221,527, respectively. Cash provided by growing insurance operations during
these periods is the primary reason for the positive cash flows from operating
activities. Growing insurance operations also provided a larger invested asset
base in each period presented, which contributed to additional cash flows from
cash collected on interest income from investments.
FLAC's insurance operations generally receive adequate cash flows from premium
collections and investment income to meet their obligations. Insurance policy
liabilities are primarily long-term and generally are paid from future cash
flows. Cash collected from deposits on annuity contracts and policyholder
premium deposits are recorded as cash flows from financing activities. A
significant portion of the Company's invested assets are readily marketable and
highly liquid.
The Company is currently constructing a building to be used as the Company's
home office. Management expects the final completion of the project to occur
late this fall. The Company entered into a twelve month construction loan with
Columbian Bank for $2,000,000 as partial financing of the project. To obtain
this financing, $2,000,000 of short-term investments was pledged as collateral
on the note. Cash flows used on the real estate project for the quarter ended
March 31, 2001 totaled $732,511, of which $695,855 was financed with the
$2,000,000 construction loan and $36,656 was financed with internal funds.
Approximately $1,119,749 of costs will be incurred during the remainder of 2001
to complete the project. Over half of these costs will be financed with the
construction loan, and the remainder will be financed with internal funds.
Management does not foresee difficulty in meeting the future demands of this
commitment.
Page 17
Part II.
- ---------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.2 By-laws as amended
----------------------------------
(b) Form 8-K
---------
The Company did not file any reports on Form 8-K during the three months
ended March 31, 2001.
Page 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First American Capital Corporation
-------------------------------------
(registrant)
Date May 10, 2001 /s/ Rickie D. Meyer
------------------------------ ----------------------
Rickie D. Meyer, President
Date May 10, 2001 /s/ Phillip M. Donnelly
------------------------------ --------------------------
Phillip M. Donnelly, Secretary/Treasurer