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, 2005.
[ ] 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
--------------
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 [X] No [ ]
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-- 4,237,578 shares as of May 1, 2005
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
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, 2005
and December 31, 2004 .............................................................. 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2005 and 2004....................... .................. 5
Condensed Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2005 and 2004.......................................... 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004.......................................... 7
Notes to Condensed Consolidated Financial Statements...................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 12
Item 3. Controls and Procedures.......................................................... 19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................. 20
SIGNATURES................................................................................ 22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2005 2004
------------------- ------------------
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost, $13,228,128
in 2005 and $13,206,486 in 2004) $ 13,264,284 $ 13,479,388
Equity securities (cost of $235,400 in 2005
and $235,400 in 2004) 217,078 236,342
Investments in real estate 274,564 274,564
Policy loans 97,346 86,946
Mortgage loans on real estate 647,151 349,542
Other investments 423,173 206,306
------------------- ------------------
Total investments 14,923,596 14,633,088
Cash and cash equivalents 877,082 527,028
Accrued investment income 207,985 214,140
Accounts receivable 326,503 258,194
Deferred policy acquisition costs (net of accumulated
amortization of $3,277,764 in 2005 and $3,081,632 in 2004) 4,643,065 4,516,994
Property and equipment (net of accumulated depreciation
of $710,168 in 2005 and $668,821 in 2004) 2,735,047 2,775,187
Other assets 12,877 30,365
------------------- ------------------
Total assets $ 23,726,155 $ 22,954,996
=================== ==================
See notes to condensed consolidated financial statements.
3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004
------------------ -------------------
Policy and contract liabilities:
Future annuity benefits $ 7,738,041 $ 6,806,430
Future policy benefits 4,561,051 4,149,304
Liability for policy claims 114,606 112,906
Policyholder premium deposits 187,290 186,971
Deposits on pending policy applications 12,536 9,668
Reinsurance premiums payable 21,072 23,120
------------------ -------------------
Total policy and contract liabilities 12,634,596 11,288,399
Commissions, salaries, wages and benefits payable 114,740 103,944
Other liabilities 270,722 200,870
Notes payable 2,342,901 1,791,607
Deferred federal income taxes payable 567,429 603,489
------------------ -------------------
Total liabilities 15,930,388 13,988,309
Shareholders' equity:
Common stock, $.10 par value, 8,000,000 shares authorized;
5,449,578 shares issued and 4,237,578 shares outstanding
in 2005; and 5,449,578 issued and 4,688,078 shares
outstanding in 2004 544,958 544,958
Additional paid in capital 12,416,181 12,380,716
Accumulated deficit (3,027,096) (2,795,775)
Accumulated other comprehensive income 15,745 220,454
Less: Treasury stock held at cost (1,212,000 shares in 2005
and 761,500 in 2004) (2,154,021) (1,383,666)
------------------ -------------------
Total shareholders' equity 7,795,767 8,966,687
------------------ -------------------
Total liabilities and shareholders' equity $ 23,726,155 $ 22,954,996
================== ===================
See notes to condensed consolidated financial statements.
4
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31, March 31,
2005 2004
------------------- ------------------
Revenues:
Gross premium income $ 1,156,197 $ 1,084,394
Reinsurance premiums assumed 2,035 1,182
Reinsurance premiums ceded (45,776) (47,610)
------------------- ------------------
Net premium income 1,112,456 1,037,966
Net investment income 189,933 122,403
Net realized investment gain (loss) (1,669) 464,363
Rental income 45,780 45,498
------------------- ------------------
Total revenue 1,346,500 1,670,230
Benefits and expenses:
Increase in policy reserves 411,748 369,016
Policyholder surrender values 49,609 21,714
Interest credited on annuities and
premium deposits 85,826 76,448
Death claims 72,556 81,622
Commissions 300,960 293,254
Policy acquisition costs deferred (322,203) (343,471)
Amortization of deferred policy
acquisition costs 196,132 193,956
Salaries, wages, and employee benefits 315,040 269,448
Miscellaneous taxes 31,979 30,446
Other operating costs and expenses 420,933 287,812
------------------- ------------------
Total benefits and expenses 1,562,580 1,280,245
------------------- ------------------
Income (loss) before income tax expense (216,080) 389,985
------------------- ------------------
Income tax expense 15,241 22,509
------------------- ------------------
Net income (loss) $ (231,321) $ 367,476
=================== ==================
Net income (loss) per common
share - basic and diluted $ (0.05) $ 0.08
=================== ==================
See notes to condensed consolidated financial statements.
5
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended
March 31, March 31,
2005 2004
------------------ ------------------
Net income (loss) $ (231,321) $ 367,476
Unrealized gain (loss) on available-for-sale securities:
Unrealized holding gain (loss) during the period (257,680) 75,712
Less: Reclassification for gains (loss) included in net income (1,669) 464,363
Tax expense 51,302 104,316
------------------ ------------------
Other comprehensive loss (204,709) (284,335)
------------------ ------------------
Comprehensive income (loss) $ (436,030) $ 83,141
================== ==================
Comprehensive income (loss) per common share-basic and diluted $ (0.10) $ 0.02
================== ==================
See notes to condensed consolidated financial statements.
6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
March 31, March 31,
2005 2004
----------------- -----------------
OPERATING ACTIVITIES:
Net income (loss) $ (231,321) $ 367,476
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Interest credited on annuities and premium deposits 85,826 76,448
Net realized investment (gain) loss 1,669 (464,363)
Provision for depreciation 41,347 27,772
Equity loss in investment in affiliate - 10,603
Settlement loss 35,465 -
Amortization of premium and accretion of discount on
fixed maturity and short-term investments 20,869 41,344
Provision for deferred federal income taxes 15,241 22,509
Decrease in accrued investment income 6,155 68,987
(Increase) decrease in accounts receivable (68,309) 52,189
Acquisition costs capitalized (322,203) (343,471)
Amortization of deferred acquisition costs 196,132 193,956
(Increase) decrease in policy loans (10,400) 3,532
Decrease (increase) in other assets 17,488 (3,290)
Increase in future policy benefits 411,748 369,017
Increase (decrease) in liability for policy claims 1,700 (42,454)
Increase (decrease) in deposits on pending policy applications 2,868 (25,396)
Decrease in reinsurance premiums payable (2,048) (2,472)
Increase in commissions, salaries, wages and
benefits payable 10,796 25,246
Increase in other liabilities 69,852 51,055
----------------- -----------------
Net cash provided by operating activities $ 282,875 $ 428,688
See notes to condensed consolidated financial statements.
7
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (Unaudited)
March 31, March 31,
2005 2004
----------------- ------------------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $ (749,582) $ (431,052)
Sale of available-for-sale fixed maturities 198,750 -
Maturity of available-for-sale fixed maturities 500,000 4,713
Additions to property and equipment (1,207) (2,210)
Purchase of other investments (218,550) -
Maturity of other investments 8,333 -
Purchase of mortgage loans (299,000) -
Payments received on mortgage loans 1,391 -
Payments on notes receivable - 10,320
----------------- ------------------
Net cash used in investing activities (559,865) (418,229)
FINANCING ACTIVITIES:
Proceeds from note payable 570,355 -
Payments on notes payable (19,061) (12,709)
Deposits on annuity contracts 1,009,784 615,398
Surrenders on annuity contracts (162,174) (67,860)
Policyholder premium deposits 16,842 3,721
Withdrawals on policyholder premium deposits (18,347) (18,006)
Purchase of treasury stock (770,355) -
----------------- ------------------
Net cash provided by financing activities 627,044 520,544
----------------- ------------------
Increase in cash and cash equivalents 350,054 531,003
Cash and cash equivalents, beginning of period 527,028 397,789
----------------- ------------------
Cash and cash equivalents, end of period $ 877,082 $ 928,792
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES:
Interest paid $ 28,437 $ 27,893
================= ==================
Income taxes paid $ - $ -
================= ==================
SCHEDULE OF NON-CASH INVESTING TRANSACTIONS:
Receivable on sale of securities $ - $ 6,620,731
================= ==================
See notes to condensed consolidated financial statements.
8
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
periods ended March 31, 2005 and 2004 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, 2004. Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation. The results of
operations for the period are not necessarily indicative of the results to be
expected for the full year.
2. TREASURY STOCK TRANSACTION
On March 2, 2005 the Company acquired 450,500 shares of its common stock from a
single, corporate shareholder, Brooke Corporation ("Brooke"). The Company
negotiated a purchase price of $770,355 ($1.71 per share) to include $200,000
cash at closing, with Brooke Credit Corporation, the finance subsidiary of
Brooke, financing the remainder at a fixed interest rate of 8% over a ten year
period. The agreement also grants Brooke three separate warrants to purchase
common stock for 50,000 shares each at prices of $1.71, $3.35 and $5.00. The
warrants are exercisable in 2012 or immediately prior to any earlier change of
control involving the Company and expire no later than 2015. The agreement also
contained covenants whereby Brooke agreed, among other things, not to purchase
additional shares of the Company's common stock or participate in any proxy
contest or other effort to take control of the Company for a period of five
years. The Company incurred a loss on the transaction in the amount of $35,465.
The loss is included in other operating costs and expenses for the current
quarter. The fair value of the warrants has been included in additional paid in
capital.
3. NOTES PAYABLE
The Company maintained a $1,777,817 note from Western National Bank as of March
31, 2005. The note is secured by the home office building. The note will mature
on April 22, 2013. The note is payable in 120 monthly payments of $13,534 each
with a final payment of the unpaid principal balance and interest on April 22,
2013. Interest will be accrued at 6% until April 22, 2008 at which time the rate
may change. The interest rate change will be the Wall Street Journal Prime Rate
of Interest, subject to a floor of 6% and a ceiling of 9.5%.
On March 2, 2005 the Company borrowed $570,355 from Brooke Credit Corporation at
a fixed interest rate of 8% over a ten year period (See Note 2). The note is
payable in 120 monthly payments of $6,897. The balance of the note at March 31,
2005 was $565,084.
4. NET EARNINGS PER COMMON SHARE
Net income (loss) per common share for basic and diluted earnings per share is
based upon the weighted average number of common shares outstanding during 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
4,541,917 and 4,687,078 for the three months ended March 31, 2005 and March 31,
2004, respectively.
9
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. 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 subsidiary, First Life
America Corporation ("FLAC") commencing with the year ended December 31, 2003.
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.
6. 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 is seeking to recover expense
reimbursements previously paid to Meyer and Company funds allegedly
misappropriated by Meyer. The petition alleges that Meyer misappropriated funds
from the Company by fraudulently altering a check made payable to the Company.
The Company is also seeking to have Meyer reimburse it for the amount it paid
another insurance company in settlement of a claim. 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. The petition
asserts that Meyer entered into the marketing agreements despite knowing that
the Company could not perform on the financial requirements of the agreements
and without the knowledge, approval or authorization of the Company's Board of
Directors.
On December 12, 2003, Meyer filed an Answer and Counterclaim against the Company
asserting claims for defamation and breach of employment agreement. Meyer seeks
damages in excess of $75,000 plus interest and costs on his defamation claims.
Meyer seeks damages in the amount of $250,000 for an alleged breach of a
provision in his employment contract regarding severance pay; he seeks
additional damages in excess of $75,000 for an alleged breach of a provision in
the employment contract relating to payment of residual commissions.
The Company denies Meyer's allegations and will vigorously defend against them
as well as pursue its claims against Meyer. The trial is currently in the
discovery stage. No trial date has been set. No accrual of any loss or gain that
may result from the resolution of these matters has been reflected in the
financial statements. The amount of the ultimate loss or gain could differ
materially from the amounts noted above.
10
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. 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 operations. Segment information for the three months ended March 31,
2005 and 2004 and as of March 31, 2005 and December 31, 2004 is as follows:
Three months ended
March 31, March 31,
2005 2004
----------------- -----------------
Revenues:
Life and annuity insurance operations $ 1,291,279 $ 1,416,710
Corporate operations 55,221 253,520
----------------- -----------------
Total $ 1,346,500 $ 1,670,230
================= =================
Income (loss) before income taxes:
Life and annuity insurance operations $ 83,692 $ 388,381
Corporate operations (299,772) 1,604
----------------- -----------------
Total $ (216,080) $ 389,985
================= =================
Depreciation and amortization expense:
Life and annuity insurance operations $ 196,132 $ 193,956
Corporate operations 41,347 27,772
----------------- -----------------
Total $ 237,479 $ 221,728
================= =================
March 31, December 31,
2005 2004
----------------- -----------------
Assets:
Life and annuity insurance operations $ 19,749,821 $ 16,170,650
Corporate operations 3,976,334 5,481,770
----------------- -----------------
Total $ 23,726,155 $ 21,652,420
================= =================
11
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.
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.
12
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.
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, 2004 to March 31, 2005 are highlighted below.
Total assets increased from $22,954,996 at December 31, 2004 to $23,726,155 at
March 31, 2005. The increase in total assets is primarily attributable to the
investment of premiums received during the year. Given the long-term nature of
the policy and contract liabilities associated with these premiums, management
is able to invest these premiums for a period of time until a payout of policy
benefits is required.
The Company's available-for-sale fixed maturity securities had a fair value of
$13,264,284 and $13,479,388 at March 31, 2005 and December 31, 2004,
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.
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.
13
Mortgage loans on real estate increased from $349,542 at December 31, 2004 to
$647,151 at March 31, 2005. The increase is attributable to the purchase of an
additional mortgage loan on commercial property. The Company currently owns two
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 $206,306 at December 31, 2004 to $423,173 at
March 31, 2005. The increase is attributable to the purchase of additional
investments in lottery prize cash flows during the three months ended March 31,
2005. These other investments involve purchasing assignments of the future
payment rights from the lottery winners at a discounted price sufficient to meet
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 $877,082 at March 31, 2005 from $527,028
at December 31, 2004. Refer to the statement of cash flows for sources and uses
of cash.
Accounts receivable increased 26% from $258,194 at December 31, 2004 to $326,503
at March 31, 2005. The increase is primarily due to an increase of $66,165 in
amounts due from agents. An allowance for uncollectible items is not deemed
necessary with respect to these receivables.
Deferred policy acquisition costs, net of amortization, increased 3% from
$4,516,994 at December 31, 2004 to $4,643,065 at March 31, 2005 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 increased to $15,390,388 at March 31, 2005 from $13,988,309 at
December 31, 2004. A significant portion of this increase is attributable to
future policy and annuity benefits related to sales of the Company's various
life insurance products. Reserves for future policy benefits established due to
the sale of life insurance increased $411,747 or 10% from December 31, 2004 to
March 31, 2005. These reserves are actuarially determined based on such factors
as insured age, life expectancy, mortality and interest assumptions. Reserves
for future annuity benefits increased $931,611 or 14% from December 31, 2004 to
March 31, 2005. In 2005, 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. According to the design
of the Company's FA2000 product, first year premium payments are allocated 100%
to life insurance and renewal payments are split 50% to life and 50% to annuity.
Other liabilities increased $69,852 from $200,870 at December 31, 2004 to
$270,722 at March 31, 2005. The increase is attributable to timing factors
associated with the payment of significant invoices for professional services
and property taxes.
Notes payable increased $551,294 from $1,791,607 at December 31, 2004 to
$2,342,901 at March 31, 2005. The increase is attributable to the Company
acquiring 450,500 shares of its common stock from Brooke. The Company negotiated
a purchase price of $770,355 ($1.71 per share) to include $200,000 cash at
closing, with Brooke Credit Corporation, the finance subsidiary of Brooke,
financing the remaining $570,355 at a fixed interest rate of 8%over a ten year
period.
14
Deferred federal income taxes payable decreased to $567,429 at March 31, 2005
from $603,489 at December 31, 2004. 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 gains of available-for-sale securities. The decrease in deferred
taxes payable is primarily attributable to the decrease in unrealized gains in
the investment portfolio at March 31, 2005 compared to December 31, 2004.
15
Results of Operations
Significant components of revenues include life insurance premiums (net of
reinsurance), net investment income, and net realized investment gain. The
following table provides information concerning net premium income for the three
months ended March 31, 2005 and 2004:
Three months ended
March 31, March 31,
2005 2004
---------------- ----------------
Whole life insurance:
First year $ 221,134 $ 286,983
Renewal 927,580 793,692
Term insurance:
First year 40 630
Renewal 1,723 1,470
Single premium 5,720 1,620
---------------- ----------------
Gross premium income 1,156,197 1,084,395
Reinsurance premiums assumed 2,035 1,181
Reinsurance premiums ceded (45,776) (47,610)
---------------- ----------------
Net premium income 1,112,456 1,037,966
================ ================
Net premium income increased $74,489 or 7% from the three months ended March 31,
2004 to the same period during 2005. Total first year whole life premium
decreased $65,850 or 23% from 2004 to 2005. The significant negative trend in
first year whole life premium began in 2003 as a result of the disruptive effect
that the Company's 2003 proxy contest had on its customers, shareholders and its
marketing agents used to market the Company's FA2000 product. The downward trend
continued in 2004 and 2005 as a result of the Company's shift in marketing
emphasis away from its FA2000 product. The FA2000 product was designed primarily
for the Company's shareholders. Now that all shareholders have been contacted,
emphasis is shifting to other products. In addition, the interest rate credited
on the FA2000 annuity rider determines whether it remains competitive in the
market. In the lower interest rate environment of the last few years, the
product was competitive because the Company paid an above average interest rate
on the annuity rider.
Management spent a significant amount of time during 2004 developing new
products in an effort to enhance production going forward. Management has
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 $133,888 or 17% from the three
months ended March 31, 2004 to the same period during 2005. 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.
Net investment income increased $67,530 or 55% from the three months ended March
31, 2004 to the same period during 2005. During the first quarter of 2004 the
Company sold a significant portion of its bond portfolio in order to realize
market gains and reinvest the resulting proceeds using a new investment
strategy. The new 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. The proceeds from the
sale were used to purchase short-term securities with maturities ranging from 30
to 120 days. As these short term securities matured, the proceeds were
reinvested in conjunction with the new investment strategy.
16
Net realized investment gain (loss) decreased $466,032 from the three months
ended March 31, 2004 to the same period during 2005. The decrease is
attributable to the sale of a significant portion of the Company's bond
portfolio during the three months ended March 31, 2004. Gains totaling $464,363
were realized upon the sale of these bonds.
Benefits and expenses totaled $1,562,580 and $1,280,245 during the three months
ended March 31, 2005 and 2004, respectively. Included in total benefits and
expenses were policy reserve increases of $411,748 and $369,016 during three
months ended March 31, 2005 and 2004, 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 $27,895 from $21,714 during the three
months ended March 31, 2004 to $49,609 during the same period in 2005. This
increase is attributable to the maturation of policies.
Interest credited on annuities and premium deposits totaled $85,826 and $76,448
for the three months ended March 31, 2005 and 2004, respectively. The increase
during 2005 of $9,378 or 12% 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 decreased
from 5.6% to 4.6% during the three months ended March 31, 2004 and 2005,
respectively. The decrease is attributable to management's attempt to more
effectively manage the interest spread between the rate the Company earns on its
investment portfolio and the rate being credited to policyholder accounts
combined with the introduction of several new annuity products during 2005 which
are deemed to be shorter in duration and thus credit interest at a lesser rate
than other annuities which have historically been offered by the Company.
Salaries, wages and employee benefits increased from $269,448 during the three
months ended March 31, 2004 to $315,040 during the same period in 2005. The
increase during 2005 is primarily attributable to an increase in employee
headcount combined with increased employee benefit expenses.
Other operating costs and expenses totaled $420,933 and $287,812 for the three
months ended March 31, 2005 and 2004, respectively. Significant components of
the $133,121 increase from 2004 to 2005 include the following. Professional fees
increased $49,323 primarily due to legal costs incurred in support of the stock
repurchase from Brooke. Office expenses increased $39,471 primarily due to
increased printing costs incurred in conjunction with the development of various
new products released during the first quarter of 2005. The Company incurred a
loss of $35,465 on the transaction with Brooke (See Note 2 to the Condensed
Consolidated Financial Statements).
As a result of the items noted above the Company incurred a net loss of $231,321
for the three months ended March 31, 2005 and net income of $367,476 for the
three months ended March 31, 2004.
17
Liquidity and Capital Resources
During the quarter ended March 31, 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 three months ended March 31, 2005 totaled $282,875 as
compared with $428,688 for the three months ended March 31, 2004.
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. A
significant portion of the Company's invested assets are readily marketable and
highly liquid.
As of March 31, 2005, the Company had consolidated cash reserves and liquid
investments of approximately $14,316,644, as compared with $14,200,958 at
December 31, 2004. Of these amounts, cash reserves and liquid investments at
FLAC as of these dates were approximately $13,282,629 and $12,812,107,
respectively. However, due to insurance regulatory restrictions, these amounts
cannot necessarily be used to fund the cash needs of the parent company on a
stand-alone basis. As of these dates, cash reserves and liquid investments at
the parent company level were approximately $1,034,015 and $1,388,851,
respectively.
Management believes that these funds provide sufficient liquidity to fund the
basic operating needs at both the parent company and the FLAC levels for the
foreseeable future. However, if extraordinary legal or other expenses (such as
those incurred in 2003 and 2004 with respect to the proxy contest, Meyer
litigation, and special committee activities) are unexpectedly incurred at the
parent company level or if operating losses continue unabated at 2002 through
2004 levels, then the sufficiency of the parent company's operating cash
position could be jeopardized. In addition, although there can be no assurance
that extraordinary corporate activities will not continue, management believes
that steps recently taken by the Company reduce the likelihood that it will
continue to incur extraordinary expenses such as those incurred in 2003 and
2004.
In 2004, management adopted a five-year business development plan intended to
expand the Company's product lines and marketing efforts. However, the Company's
efforts to implement its new business plan and grow its business and policy base
through the implementation of the new product lines and marketing efforts would
be significantly enhanced if additional capital could be infused into FLAC's
insurance operations. Further, the parent company's capital position would be
strengthened against the risks noted in the preceding paragraph if more capital
were available at the parent company level. Therefore, management of the Company
intends to explore opportunities to provide this additional capital through the
sale of new equity securities or debt securities or through borrowed funds,
although there is no assurance that these efforts will be successful.
The Company's former President and Chief Executive Officer has made a demand on
the Company for the payment of $250,000 in severance benefits under his
employment agreement. The Company denies any such obligation. If these claims
are found to be meritorious, the Company's liquidity could be adversely
affected.
18
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 Company management to allow timely decisions regarding
disclosure. The Company's Chief Executive Officer and Chief Financial Officer
conducted an evaluation of the Company's disclosure controls and procedures as
of the end of the period covered by this report. Based upon their evaluation of
those controls and procedures, the Chief Executive Officer and Chief Financial
Officer of the Company concluded that the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information required to be disclosed in the Company's periodic filings.
The Company made no significant changes in its internal controls over financial
reporting or in other factors that could significantly affect these controls
subsequent to the date of the evaluation of those controls by the Chief
Executive Officer and Chief Financial Officer.
19
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Index to Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of First American Capital
Corporation (Incorporated by reference from Exhibit 2.1 to the
Registrant's amended Form 10-SB filed August 13, 1999)
3.2 Bylaws of First American Capital Corporation, as amended
(Incorporated by reference from Exhibit 3.2 to the
Registrant's Form 8-K filed April 11, 2005)
4 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations, and Restrictions
Thereof of 6% Non-Cumulative, Convertible, Callable Preferred
Stock (Incorporated by reference from Exhibit 3 to the
Registrant's amended Form 10-SB filed August 13, 1999)
10.1 Form of Advisory Board Contract (Incorporated by reference
from Exhibit 6.2 to the Registrant's amended Form 10-SB filed
August 13, 1999)
10.2 Service Agreement amended and restated effective January 1,
2002 between First American Capital Corporation and First Life
America Corporation (Incorporated by reference from Exhibit
10.3 to the Registrant's Form 10-KSB filed March 31, 2003)
10.3 Automatic Umbrella and Bulk ADB Reinsurance Agreements
effective September 1, 1998 between First Life America
Corporation and Business Men's Assurance Company of America
(Incorporated by reference from Exhibit 6.8 to the
Registrant's Form 10-SB filed August 13, 1999)
10.4 Employment Agreement effective February 16, 2004 between First
American Capital Corporation and John F. Van Engelen, as
amended (Incorporated by reference from Exhibit 10.5 to the
Registrant's Form 10-QSB filed November 15, 2004)
10.5 Intercompany Tax Sharing Agreement dated December 31, 2003
between First American Capital Corporation and First Life
America Corporation (Incorporated by reference from Exhibit
10.6 to the Registrant's Form 10-KSB filed March 29, 2004)
10.6 Stock Repurchase Agreement between First American Capital
Corporation and Brooke Corporation dated March 2, 2005
(Incorporated by reference from Exhibit 10.7 to the
Registrant's Form 10-KSB filed March 31, 2005)
10.7 Warrant for 50,000 shares of First American Capital
Corporation common stock for $1.71 per share issued to Brooke
Corporation effective March 2, 2005 (Incorporated by reference
from Exhibit 10.8 to the Registrant's Form 10-KSB filed March
31, 2005)
10.8 Warrant for 50,000 shares of First American Capital
Corporation common stock for $3.35 per share issued to Brooke
Corporation effective March 2, 2005 (Incorporated by reference
from Exhibit 10.9 to the Registrant's Form 10-KSB filed March
31, 2005)
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
Exhibit No. Description
- ----------- -----------
10.9 Warrant for 50,000 shares of First American Capital
Corporation common stock for $5.00 per share issued to Brooke
Corporation effective March 2, 2005 (Incorporated by reference
from Exhibit 10.10 to the Registrant's Form 10-KSB filed March
31, 2005)
10.10 Employment Agreement effective February 7, 2005 between First
American Capital Corporation and Richard H. Katz (Incorporated
by reference from Exhibit 10.11 to the Registrant's Form 8-K
filed April 22, 2005)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (*)
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (*)
32.1 Certificate of Chief Executive Officer pursuant to Section 18
U.S.C. Section 1350 (*)
32.2 Certificate of Chief Financial Officer pursuant to Section 18
U.S.C. Section 1350 (*)
(*) Filed herewith
b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated March 2,
2005 announcing current developments.
21
SIGNATURES
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
Date: 5/16/2005 By: /s/ John F. Van Engelen
-------------------------------- ----------------------------------
John F. Van Engelen
President & Chief Executive Officer
Date: 5/16/2005 By: /s/ Patrick A. Tilghman
------------------------------- ----------------------------------
Patrick A. Tilghman
Treasurer & Chief Financial Officer
22