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, 2004.
[ ] 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
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(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 - 4,687,078 shares as of May 1, 2004
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO FORM 10-QSB
Page Numbers
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003.............................................3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003...........................5
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2004 and 2003.................6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003...........................7
Notes to Condensed Consolidated Financial Statements.........................................................................9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................11
Item 3. Controls and Procedures.............................................................................................15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................................................16
SIGNATURES..................................................................................................................18
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
--------------- ---------------
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost, $5,666,787
in 2004 and $11,432,605 in 2003) $ 5,877,061 $ 12,032,106
Equity securities (cost of $41,800 in 2004 and 2003) 41,800 41,800
Investments in real estate 274,564 274,564
Policy loans 56,919 60,451
Notes receivable (net of valuation allowance
of $0 in 2004 and $0 in 2003) 3,421 13,741
Short-term investments 455,614 460,593
--------------- ---------------
Total investments 6,709,379 12,883,255
Cash and cash equivalents 928,792 397,789
Receivable for securities 6,620,731 --
Investments in related parties 54,597 65,200
Accrued investment income 112,082 181,069
Accounts receivable 244,177 296,366
Deferred policy acquisition costs (net of accumulated
amortization of $2,505,978 in 2004 and $2,312,021 in 2003) 4,160,474 4,010,959
Property and equipment (net of accumulated depreciation
of $410,971 in 2004 and $383,199 in 2003) 2,811,250 2,836,814
Other assets 10,938 7,648
--------------- ---------------
Total assets $ 21,652,420 $ 20,679,100
=============== ===============
See notes to condensed consolidated financial statements.
3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
Unaudited
March 31, December 31,
2004 2003
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy and contract liabilities:
Future annuity benefits $ 5,521,452 $ 4,899,770
Future policy benefits 3,497,508 3,128,491
Liability for policy claims 65,564 108,018
Policyholder premium deposits 205,994 217,976
Deposits on pending policy applications 7,095 32,491
Reinsurance premiums payable 29,241 31,713
------------- -------------
Total policy and contract liabilities 9,326,854 8,418,459
Commissions, salaries, wages and benefits payable 78,261 53,015
Other liabilities 225,332 174,277
Note payable 1,830,298 1,843,007
Deferred federal income taxes payable 679,073 760,881
------------- -------------
Total liabilities 12,139,818 11,249,639
Shareholders' equity:
Common stock, $.10 par value, 8,000,000 shares authorized; 5,449,578 shares
issued and 4,687,078 shares outstanding
in 2004 and 2003 544,958 544,958
Additional paid in capital 12,380,523 12,380,523
Accumulated deficit (2,195,363) (2,562,839)
Accumulated other comprehensive income 167,967 452,302
Less: Treasury stock held at cost (762,500 shares in 2004 and 2003) (1,385,483) (1,385,483)
------------- -------------
Total shareholders' equity 9,512,602 9,429,461
------------- -------------
Total liabilities and shareholders' equity $ 21,652,420 $ 20,679,100
============= =============
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,
2004 2003
------------ ------------
Revenues:
Gross premium income $ 1,084,394 $ 1,203,771
Reinsurance premiums assumed 1,182 738
Reinsurance premiums ceded (47,610) (45,013)
------------ ------------
Net premium income 1,037,966 1,159,496
Net investment income 122,403 143,873
Net realized investment gain 464,363 341
Rental income 45,498 53,857
------------ ------------
Total revenue 1,670,230 1,357,567
Benefits and expenses:
Increase in policy reserves 369,016 279,485
Policyholder surrender values 21,714 15,950
Interest credited on annuities and
premium deposits 76,448 62,114
Death claims 81,622 69,083
Commissions 293,254 408,668
Policy acquisition costs deferred (343,471) (471,471)
Amortization of deferred policy
acquisition costs 193,956 86,610
Salaries, wages, and employee benefits 269,448 395,217
Miscellaneous taxes 30,446 10,298
Other operating costs and expenses 287,812 414,759
------------ ------------
Total benefits and expenses 1,280,245 1,270,713
------------ ------------
Income before income tax expense 389,985 86,854
------------ ------------
Income tax expense 22,509 144,133
------------ ------------
Net income (loss) $ 367,476 $ (57,279)
============ ============
Net income (loss) per common
share - basic and diluted $ 0.08 $ (0.01)
============ ============
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,
2004 2003
------------ ------------
Net income (loss) $ 367,476 $ (57,279)
Unrealized (loss) gain on available-for-sale securities:
Unrealized holding gain during the period 75,712 17,754
Less: Reclassification for gains included in net income 464,363 341
Tax benefit (expense) 104,316 (6,096)
------------ ------------
Other comprehensive (loss) income (284,335) 11,317
------------ ------------
Comprehensive income (loss) $ 83,141 $ (45,962)
============ ============
Net income (loss) per common share-basic and diluted $ 0.02 $ (0.01)
============ ============
See notes to condensed consolidated financial statements.
6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
March 31, March 31,
2004 2003
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 367,476 $ (57,279)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Interest credited on annuities and premium deposits 76,448 69,322
Net realized investment gain (464,363) (341)
Provision for depreciation 27,772 31,378
Equity loss in investment in affiliate 10,603 11,444
Amortization of premium and accretion of discount on
fixed maturity and short-term investments 41,344 13,104
Provision for deferred federal income taxes 22,509 144,133
Decrease (increase) in accrued investment income 68,987 (21,122)
Decrease (increase) in accounts receivable 52,189 (38,479)
Increase in deferred policy acquisition costs, net (149,515) (384,861)
Decrease (increase) in policy loans 3,532 (7,361)
Increase in other assets (3,290) (25,064)
Increase in future policy benefits 369,017 279,485
Decrease in liability for policy claims (42,454) (4,003)
Decrease in deposits on pending policy applications (25,396) (42,581)
Decrease in reinsurance premiums payable (2,472) (1,901)
Increase in commissions, salaries, wages and
benefits payable 25,246 15,736
Increase in other liabilities 51,055 81,769
------------- -------------
Net cash provided by operating activities $ 428,688 $ 63,379
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,
2004 2003
------------ ------------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $ (431,052) $ (617,925)
Sale or maturity of available-for-sale fixed maturities 4,713 300,000
Additions to property and equipment (2,210) (12,440)
Purchase of investments in affiliates -- (10,000)
Payments on notes receivable 10,320 2,404
Purchases of short-term investments -- 200,000
------------ ------------
Net cash used in investing activities (418,229) (137,961)
FINANCING ACTIVITIES:
Payments on note payable (12,709) (20,956)
Deposits on annuity contracts 615,398 517,209
Surrenders on annuity contracts (67,860) (25,005)
Policyholder premium deposits 3,721 18,057
Withdrawals on policyholder premium deposits (18,006) (16,128)
------------ ------------
Net cash provided by financing activities 520,544 473,177
------------ ------------
Increase in cash and cash equivalents 531,003 398,595
Cash and cash equivalents, beginning of period 397,789 400,062
------------ ------------
Cash and cash equivalents, end of period $ 928,792 $ 798,657
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES:
Interest paid $ 27,893 $ 33,044
============ ============
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, 2004 and 2003 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, 2003. 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. INVESTMENTS IN RELATED PARTIES
The Company owns a 50% interest in First Computer Services, LLC ("FCS"). FCS
owns the computer hardware and software that operates the Company's policy
administration, underwriting, claim processing, and accounting system. The
company uses the equity method to account for this investment, which is owned
jointly by the Company and First Alliance Corporation ("FAC") of Lexington,
Kentucky. As of March 31, 2004 and December 31, 2003, the carrying value of the
FCS investment was $54,597 and $65,200, respectively. The current year amount
represents an investment of $146,500 reduced by cumulative net operating losses
totaling $91,903. Selected financial data for FCS for the period ended March 31,
2004 is listed below.
Total Assets: $ 109,193
Total Liabilities: 0
Total Liabilities and Equity: 109,193
Loss from Operations: (21,206)
3. 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 number of common shares outstanding was 4,687,078
for the three months ended March 31, 2004 and March 31, 2003, 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 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.
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, the Company's
former President, arising, in part, out of Mr. Meyer's employment with the
Company. Among other things, the Company is seeking to recover expense
reimbursements previously paid to Mr. Meyer and Company funds allegedly
misappropriated by Mr. Meyer. In this regard, the petition alleges that
9
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Mr. Meyer abused Company policies related to claiming business- related expense
reimbursements by submitting expense reports for goods and services purchased
for personal use. The petition further alleges that Mr. Meyer misappropriated
funds from the Company by fraudulently altering a check made payable to the
Company. The Company is also seeking to have Mr. 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 Mr. 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 as required by the agreements.
On December 12, 2003, Mr. Meyer filed an Answer and Counterclaim against FACC
asserting claims for defamation and breach of employment agreement. Mr. Meyer
seeks damages in excess of $75,000 plus interest and costs on his defamation
claims. Mr. 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.
FACC denies Mr. Meyer's allegations and will defend against them as well as
pursue its lawsuit against Mr. Meyer.
6. 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,
2004 and 2003 and as of March 31, 2004 and December 31, 2003 is as follows:
Three months ended
March 31, March 31,
2004 2003
------------- -------------
Revenues:
Life and annuity insurance operations $ 1,416,710 $ 1,271,184
Corporate operations 253,520 86,383
------------- -------------
Total $ 1,670,230 $ 1,357,567
============= =============
Income (loss) before income taxes:
Life and annuity insurance operations $ 388,381 $ 325,819
Corporate operations 1,604 (238,965)
------------- -------------
Total $ 389,985 $ 86,854
============= =============
Depreciation and amortization expense:
Life and annuity insurance operations $ 193,956 $ 86,610
Corporate operations 27,772 31,378
------------- -------------
Total $ 221,728 $ 117,988
============= =============
March 31, December 31,
2004 2003
------------- -------------
Assets:
Life and annuity insurance operations $ 16,170,650 $ 15,053,265
Corporate operations 5,481,770 5,625,835
------------- -------------
Total $ 21,652,420 $ 20,679,100
============= =============
10
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" 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 Condition
Significant changes in the condensed consolidated balance sheets from December
31, 2003 to March 31, 2004 are highlighted below.
Total assets increased from $20,679,100 at December 31, 2003 to $21,652,420 at
March 31, 2004. The Company's available-for-sale fixed maturity securities had a
fair value of $5,877,061 and $12,032,106 at March 31, 2004 and December 31,
2003, 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 in
available-for-sale fixed maturity securities is attributable to the sale of a
significant portion of the Company's bond portfolio during the quarter ended
March 31, 2004. The bonds were sold in an attempt to realize market gains and to
reinvest the resulting assets using a new investment approach. The new approach
is focused primarily on matching investment 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. Given the timing of the sales, the
resulting assets could not be reinvested into the various securities markets
prior to the end of the quarter, thus resulting in the $6,620,731 receivable for
securities at March 31, 2004.
Notes receivable decreased $10,320 or 75% from $13,741 at December 31, 2003 to
$3,421 at March 31, 2004. The note was to be payable in 36 equal monthly
installments and bear interest at 8% per annum. During 2003, the note was called
as a result of the employee failing to pay one of the monthly installments when
due. Subsequent to the note being called, demand payments have been recovered
from both the employee and the guarantor of the note.
Cash and cash equivalents increased $531,003 from $397,789 at December 31, 2003
to $928,792 at March 31, 2004. Refer to the statement of cash flows for sources
and uses of cash.
Investments in related parties decreased from $65,200 at December 31, 2003 to
$54,597 at March 31, 2004. The decrease is due to the Company's 50%, or $10,603,
share of FCS' net loss from operations during the year.
Accrued investment income decreased $68,987 or 38% from $181,069 at December 31,
2003 to $112,082 at March 31, 2004. The decrease in accrued investment income is
attributable to the sale of a significant portion of the bond portfolio prior to
the end of the quarter.
Accounts receivable decreased 18% from $296,366 at December 31, 2003 to $244,177
at March 31, 2004. The decrease is primarily due to a $17,940 decrease in
amounts due from agents, a $13,265 decrease in due premiums, and a $21,089
decrease in income tax recoverable. These amounts are expected to be fully
recoverable.
11
Deferred policy acquisition costs, net of amortization, increased 4% from
$4,010,959 at December 31, 2003 to $4,160,474 at March 31,2004 resulting from
the capitalization of acquisition expenses related to the increasing 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.
Property and equipment net of accumulated depreciation decreased by 1% from
$2,836,814 at December 31, 2003 to $2,811,250 at March 31, 2004. The decrease is
attributable to depreciation expense of $27,772 and capitalization of assets of
$2,210.
Liabilities increased to $12,139,818 at March 31, 2004 from $11,249,639 at
December 31, 2003. 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 $369,017 or 12% from December 31, 2003 to
March 31, 2004. These reserves are actuarially determined based on such factors
as insured age, life expectancy, mortality and interest assumptions. Reserves
for future annuity benefits increased $621,682 or 13% from December 31, 2003 to
March 31, 2004. 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. In 2004, annuity contract liabilities
increased as additional policies reached the second policy year and the renewal
policy base grew larger.
Liabilities for policy claims decreased $42,454 at March 31, 2004 compared to
December 31, 2003. The decrease is due to a decrease in the number of unpaid
claims at March 31, 2004.
Deposits on pending policy applications decreased to $7,095 at March 31, 2004
from $32,491 at December 31, 2003. 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 year to year are
attributable to the timing of the approval and delivery of any new business
which has been submitted to the Company.
Commissions, salaries, wages and benefits payable increased $25,246 or 48% from
$53,015 at December 31, 2003 to $78,261 at March 31, 2004. The increase is
attributable to an increase in the number of employees at March 31, 2004
compared to December 31, 2003 and the timing issues associated with payroll
dates.
Other liabilities increased $51,055 from $174,277 at December 31, 2003 to
$225,332 at March 31, 2004. There was an increase of $52,049 in accounts payable
due to the timing of the receipt of significant invoices for legal, auditing
services, actuarial services and property taxes.
Deferred federal income taxes payable decreased to $679,073 at March 31, 2004
from $760,881 at December 31, 2003. Federal income taxes payable are due to
deferred taxes 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 fixed maturity securities. The decrease in
deferred taxes payable is primarily attributable to the sale of a significant
portion of the Company's bond portfolio during the quarter, thus reducing the
amount of unrealized gains present in such portfolio at March 31, 2004.
12
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, 2004 and 2003:
Three months ended
March 31, March 31,
2004 2003
----------- -----------
Whole life insurance:
First year $ 286,983 $ 554,841
Renewal 793,692 643,460
Term insurance:
First year 630 --
Renewal 1,470 2,070
Single premium 1,620 3,400
----------- -----------
Gross premium income 1,084,394 1,203,771
Reinsurance premiums assumed 1,182 738
Reinsurance premiums ceded (47,610) (45,013)
----------- -----------
Net premium income $ 1,037,966 $ 1,159,496
=========== ===========
Net premium income decreased $121,530 or 10% from the three months ended March
31, 2003 to the same period during 2004. Total first year whole life premium
decreased $267,858 or 48% from 2003 to 2004. Total renewal year whole life
premiums increased $150,232 or 23% from 2003 to 2004. First year whole life
premiums collected on the Company's FA2000 product have decreased as a result of
the disruptive affect of the Company's 2003 proxy contest on its customers,
shareholders and its marketing agents used to market the Company's FA2000
product. The Company anticipates the reduction in FA2000 production will
continue through the remainder of 2004. The decrease in FA2000 production has
been partially offset by an increase in production of the Company's Final
Expense product. Management is presently reviewing its product portfolio in an
effort to manage production to both the needs and capacity of the Company.
Net investment income decreased $21,470 or 15% from the three months ended March
31, 2003 to the same period during 2004. During 2003 excess cash was used to
purchase available-for-sale fixed maturity investments, with lower yields as
compared to bonds that have been purchased in prior years. The decrease in
yields resulted in the decrease in net investment income for the three months
ended March 31, 2004.
Net realized investment gain increased $464,022 from the three months ended
March 31, 2003 to the same period during 2004. The increase 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. The proceeds from the sale will be reinvested using a
new investment approach focused primarily on matching investment maturities to
the anticipated cash needs of the Company.
Rental income decreased from $53,857 during the three months ended March 31,
2003 to $45,498 during the same period in 2004. Rental income is earned by
leasing approximately 12,500 square feet of office space in the home office
building. The Company has executed a 10 year inclusive non cancelable lease on
10,000 square feet of the office space. The decrease in rental income resulted
from a month to month lease for the remaining 2,500 square feet of available
office space being cancelled in December of 2003. The space is currently on the
market for lease.
Benefits and expenses totaled $1,280,245 and $1,270,713 during the three months
ended March 31, 2004 and 2003, respectively. Included in total benefits and
expenses were policy reserve increases of $369,016 and $279,485 during three
months ended March 31, 2004 and 2003, 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.
13
Policyholder surrender values increased $5,764 from $15,950 during the three
months ended March 31, 2003 to $21,714 during the same period in 2004. This
increase is attributable to the maturation of policies.
Interest credited on annuities and premium deposits totaled $76,448 and $62,114
for the three months ended March 31, 2004 and 2003, respectively. The increase
during 2004 of $14,334 or 23% 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.
Death claims increased $12,539 from $69,083 during the three months ended March
31, 2003 to $81,622 during the same period in 2004. The increase is attributable
to the maturation of policies.
Commission expense totaled $293,254 and $408,668 for the three months ended
March 31, 2004 and 2003, respectively. Commission expense is based on a
percentage of premium and is determined in the product design. Additionally,
higher percentage commissions are paid for first year business than renewal
year. The decrease in commission expense is directly related to the decrease in
first year premium income during the three months ended March 31, 2004.
Acquisition costs related to the sale of insurance are capitalized and amortized
over the life of the associated policies. These costs include commissions on
first year business, medical exams and inspection report fees, and salaries of
employees directly involved in the marketing, underwriting and policy issuance
functions. During the three months ended March 31, 2004 and 2003, $343,471 and
$471,471, respectively, of these costs had been capitalized as deferred policy
acquisition costs. The related amortization for the same periods totaled
$193,956, and $86,610, respectively.
Salaries, wages and employee benefits decreased from $395,217 during the three
months ended March 31, 2003 to $269,448 during the same period in 2004. The
decrease during 2004 is primarily attributable to the decrease in employee
headcount during the three months ended March 31, 2004 in comparison to the same
period in 2003. Included in the decrease was a $25,405 decrease in incentive
compensation resulting from the Company opting not to renew the employment
contracts of prior executive management.
Other operating costs and expenses totaled $287,812, and $414,759 for the three
months ended March 31, 2004 and 2003, respectively. Significant components of
the $126,947 decrease from 2003 to 2004 include the following: decrease in
office expenses of $41,714; decrease in director fees of $38,085; decrease in
travel, meals, lodging and entertainment expenses of $19,520; decrease in ABM
fees of $12,230.
Liquidity and Capital Resources
During the quarters ended March 31, 2004 and 2003, 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 three months ended March 31, 2004 and 2003 totaled
$428,688 and $63,379, 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. A
significant portion of the Company's invested assets are readily marketable and
highly liquid.
Management of the Company has identified that there may be a need for additional
capital in the long term. Such capital could be used on a working capital basis
or to grow the business. In the event that additional capital is deemed
necessary, the Company may seek to sell additional equity securities, debt
securities or to borrow monies.
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. See Note 5 of the
Condensed Consolidated Financial Statements for other claims made by the former
President and CEO. If these claims are found to be meritorious, the Company's
liquidity could be adversely affected.
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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. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the Chief Executive Officer and Chief Financial Officer of the Company
concluded that the Company's disclosure controls and procedures were adequate.
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.
15
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 10-KSB filed March 31, 2003)
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 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 Operating Agreement of First Computer Services, LLC dated
December 1, 2001 (Incorporated by reference from Exhibit 10.10
to the Registrant's Form 10-KSB filed March 31, 2003)
10.4 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)
10.5 Employment Agreement effective February 16, 2004 between First
American Capital Corporation and John F. Van Engelen
(Incorporated by reference from Exhibit 10.5 to the
Registrant's Form 10-KSB filed March 29, 2004)
10.6 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)
21 Subsidiaries of First American Capital Corporation
(Incorporated by reference from Exhibit 21 to the Registrant's
Form 10-KSB filed March 31, 2003)
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 (*)
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
Exhibit No. Description
----------- -----------
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 January
29, 2004 announcing current developments. The Company filed a
current report on Form 8-K dated February 23, 2004 announcing
that John Van Engelen was named President and CEO of the
Company. The Company filed a current report on Form 8-K dated
March 16, 2004 announcing current developments. Subsequent to
the quarter ended March 31, 2004, the Company filed a current
report on Form 8-K dated April 15, 2004 announcing the change
in the Company's independent accountants.
17
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: 5/17/2004 By: /s/ John F. Van Engelen
---------------------------------- ---------------------------------
John F. Van Engelen
President and Chief Executive Officer
Date: 5/17/2004 By: /s/ Harland E. Priddle
---------------------------------- ---------------------------------
Harland E. Priddle
Secretary, Treasurer & Chief
Financial Officer
18