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 June 30, 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
------------------------------------------------------
(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 August 1, 2004
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 June 30, 2004
and December 31, 2003..................................................... 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2004 and 2003 and for
the six months ended June 30, 2004 and 2003 .............................. 5
Condensed Consolidated Statements of Comprehensive Income for the three months
ended June 30, 2004 and 2003 and for
the six months ended June 30, 2004 and 2003............................... 6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 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 ............................................... 16
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................... 17
Item 6. Exhibits and Reports on Form 8-K ....................................... 17
Signatures ..................................................................... 19
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 2004 2003
----------- ------------
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost, $6,788,398
in 2004 and $11,432,605 in 2003) $ 6,860,745 $12,032,106
Equity securities (cost of $44,150 in 2004
and $41,800 in 2003) 45,550 41,800
Investments in real estate 274,564 274,564
Policy loans 69,617 60,451
Notes receivable (net of valuation allowance
of $0 in 2004 and 2003) -- 13,741
Short-term investments 3,082,423 460,593
----------- -----------
Total investments 10,332,899 12,883,255
Cash and cash equivalents 4,020,180 397,789
Investments in related parties 43,853 65,200
Accrued investment income 102,256 181,069
Accounts receivable 246,423 296,366
Deferred policy acquisition costs (net of accumulated
amortization of $2,697,484 in 2004 and $2,312,021 in 2003) 4,264,882 4,010,959
Property and equipment (net of accumulated depreciation
of $438,918 in 2004 and $383,199 in 2003) 2,785,517 2,836,814
Other assets 31,302 7,648
----------- -----------
Total assets $21,827,312 $20,679,100
=========== ===========
See notes to condensed consolidated financial statements.
3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
Unaudited
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
------------ ------------
Policy and contract liabilities:
Future annuity benefits $ 5,946,317 $ 4,899,770
Future policy benefits 3,666,931 3,128,491
Liability for policy claims 62,898 108,018
Policyholder premium deposits 198,796 217,976
Deposits on pending policy applications 4,832 32,491
Reinsurance premiums payable 27,315 31,713
------------ ------------
Total policy and contract liabilities 9,907,089 8,418,459
Commissions, salaries, wages and benefits payable 70,165 53,015
Other liabilities 212,879 174,277
Note payable 1,817,698 1,843,007
Deferred federal income taxes payable 632,851 760,881
------------ ------------
Total liabilities 12,640,682 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 (2,416,878) (2,562,839)
Accumulated other comprehensive income 63,510 452,302
Less: Treasury stock held at cost (762,500 shares in 2004 and 2003) (1,385,483) (1,385,483)
------------ ------------
Total shareholders' equity 9,186,630 9,429,461
------------ ------------
Total liabilities and shareholders' equity $ 21,827,312 $ 20,679,100
============ ============
See notes to condensed consolidated financial statements.
4
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three months ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Gross premium income $ 797,102 $ 904,641 $ 1,881,496 $ 2,108,412
Reinsurance premiums assumed 4,198 2,332 5,380 3,070
Reinsurance premiums ceded (25,471) (29,848) (73,081) (74,861)
----------- ----------- ----------- -----------
Net premium income 775,829 877,125 1,813,795 2,036,621
Net investment income 89,575 143,281 211,978 287,154
Net realized investment gain (loss) (2) -- 464,361 341
Rental income 45,498 53,856 90,995 107,712
Other income 38 -- 38 --
----------- ----------- ----------- -----------
Total revenue 910,938 1,074,262 2,581,167 2,431,828
Benefits and expenses:
Increase in policy reserves 169,424 198,406 538,440 477,891
Policyholder surrender values 30,589 13,450 52,303 29,400
Interest credited on annuities and
premium deposits 83,591 72,209 160,039 134,323
Death claims 54,887 64,387 136,509 133,470
Commissions 241,735 321,073 534,989 729,741
Policy acquisition costs deferred (295,915) (386,806) (639,386) (858,277)
Amortization of deferred policy
acquisition costs 191,507 134,807 385,463 221,417
Salaries, wages, and employee benefits 285,175 285,656 554,623 680,873
Miscellaneous taxes 76,740 59,586 107,186 69,884
Other operating costs and expenses 314,019 733,764 601,831 1,148,522
----------- ----------- ----------- -----------
Total benefits and expenses 1,151,752 1,496,532 2,431,997 2,767,244
----------- ----------- ----------- -----------
Income (loss) before income tax expense (240,814) (422,270) 149,170 (335,416)
----------- ----------- ----------- -----------
Income tax expense (benefit) (19,300) (500,668) 3,209 (356,535)
----------- ----------- ----------- -----------
Net income (loss) $ (221,514) $ 78,398 $ 145,961 $ 21,119
=========== =========== =========== ===========
Net income (loss) per common
share - basic and diluted $ (0.05) $ 0.02 $ 0.03 $ 0.00
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
5
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (Unaudited)
Three months ended Six months ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net income (loss) $(221,514) $ 78,398 $ 145,961 $ 21,119
Unrealized gain (loss) on available-for-sale securities:
Unrealized holding gain (loss) during the period (131,382) 153,261 (55,670) 171,015
Less: Reclassification for gains (losses) included in net income (2) -- 464,361 341
Tax benefit 26,923 71,607 131,239 65,511
--------- --------- --------- ---------
Other comprehensive income (loss) (104,457) 224,868 (388,792) 236,185
--------- --------- --------- ---------
Comprehensive income (loss) $(325,971) $ 303,266 $(242,831) $ 257,304
========= ========= ========= =========
Comprehensive income (loss) per common share-basic and diluted $ (0.07) $ 0.06 $ (0.05) $ 0.05
========= ========= ========= =========
See notes to condensed consolidated financial statements.
6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
June 30, June 30,
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net income $ 145,961 $ 21,119
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Interest credited on annuities and premium deposits 160,039 72,977
Net realized investment gain (464,361) (341)
Provision for depreciation 55,720 62,968
Equity loss in investment in affiliate 21,347 23,036
Amortization of premium and accretion of discount on
fixed maturity and short-term investments 70,839 31,997
Provision for deferred federal income taxes 3,209 (356,535)
Decrease (increase) in accrued investment income 78,813 (5,279)
Decrease (increase) in accounts receivable 49,943 (70,021)
Increase in deferred policy acquisition costs, net (253,923) (636,860)
Increase in policy loans (9,166) (11,495)
Increase in other assets (23,654) (9,539)
Increase in future policy benefits 538,440 477,891
Decrease in liability for policy claims (45,120) (42,905)
Decrease in deposits on pending policy applications (27,659) (174,599)
Decrease in reinsurance premiums payable (4,398) (2,418)
Increase (decrease) in commissions, salaries, wages and
benefits payable 17,150 (32,536)
Increase in other liabilities 38,602 295,596
--------- ---------
Net cash provided by (used in) operating activities $ 351,782 $(356,944)
See notes to condensed consolidated financial statements.
7
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (Unaudited)
June 30, June 30,
2004 2003
----------- -----------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $(3,277,041) $(1,411,182)
Sale or maturity of available-for-sale fixed maturities 8,325,444 725,000
Purchase of available-for-sale equity securities (2,350) --
Additions to property and equipment (4,423) (12,441)
Purchase of investments in affiliate -- (10,000)
Payments on notes receivable 13,741 4,845
Purchases of short-term investments (2,826,782) --
Sale or maturity of short-term investments 200,000 325,000
----------- -----------
Net cash provided by (used in) investing activities 2,428,589 (378,778)
FINANCING ACTIVITIES:
Payments on note payable (25,309) (21,286)
Deposits on annuity contracts 1,002,409 971,263
Surrenders on annuity contracts (111,574) (51,300)
Policyholder premium deposits 3,721 37,410
Withdrawals on policyholder premium deposits (27,227) (24,352)
----------- -----------
Net cash provided by financing activities 842,020 911,735
----------- -----------
Increase in cash and cash equivalents 3,622,391 176,013
Cash and cash equivalents, beginning of period 397,789 400,062
----------- -----------
Cash and cash equivalents, end of period $ 4,020,180 $ 576,075
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES:
Interest paid $ 55,893 $ 66,798
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
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 and
six month periods ended June 30, 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 June 30, 2004 and December 31, 2003, the carrying value of the
FCS investment was $43,853 and $65,200, respectively. The current year amount
represents an investment of $146,500 reduced by cumulative net operating losses
totaling $102,647. Selected financial data for FCS for the period ended June 30,
2004 is listed below.
Total Assets: $ 87,705
Total Liabilities: 0
Total Liabilities and Equity: 87,705
Loss from Operations: (42,694)
3. 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. The weighted average number of common shares outstanding was 4,687,078
for the three months and six months ended June 30, 2004 and 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
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and six months
ended June 30, 2004 and 2003 and as of June 30, 2004 and December 31, 2003 is as
follows:
Three months ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Life and annuity insurance operations $ 867,026 $ 989,969 $ 2,283,736 $ 2,261,153
Corporate operations 43,912 84,293 297,431 170,675
----------- ----------- ----------- -----------
Total $ 910,938 $ 1,074,262 $ 2,581,167 $ 2,431,828
=========== =========== =========== ===========
Income (loss) before income taxes:
Life and annuity insurance operations $ 6,738 $ (3,432) $ 395,118 $ 322,387
Corporate operations (247,552) (418,838) (245,948) (657,803)
----------- ----------- ----------- -----------
Total $ (240,814) $ (422,270) $ 149,170 $ (335,416)
=========== =========== =========== ===========
Depreciation and amortization expense:
Life and annuity insurance operations $ 191,507 $ 134,807 $ 385,463 $ 221,417
Corporate operations 27,948 31,590 55,720 62,968
----------- ----------- ----------- -----------
Total $ 219,455 $ 166,397 $ 441,183 $ 284,385
=========== =========== =========== ===========
June 30, December 31,
2004 2003
----------- ------------
Assets:
Life and annuity insurance operations $16,611,849 $15,053,265
Corporate operations 5,215,463 5,625,835
----------- -----------
Total $21,827,312 $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 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.
Financial Condition
-------------------
Significant changes in the condensed consolidated balance sheets from December
31, 2003 to June 30, 2004 are highlighted below.
Total assets increased from $20,679,100 at December 31, 2003 to $21,827,312 at
June 30, 2004. The Company's available-for-sale fixed maturity securities had a
fair value of $6,860,745 and $12,032,106 at June 30, 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 first of quarter
of 2004. The bonds were sold in an attempt to realize market gains and to
reinvest the resulting assets using a new investment strategy. The new strategy
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.
Short-term investments increased $2,621,830 from $460,593 at December 31, 2003
to $3,082,423 at June 30, 2004. The increase is due to the sale of a significant
portion of the Company's bond portfolio during the first quarter of 2004.
Proceeds resulting from the bond sales were temporarily reinvested in short-term
securities with maturities ranging from 30 to 120 days. As these short term
securities mature, the resulting proceeds will be reinvested in conjunction with
the new investment strategy.
Cash and cash equivalents increased to $4,020,180 at June 30, 2004 from $397,789
at December 31, 2003. Refer to the statement of cash flows for sources and uses
of cash.
Accrued investment income decreased $78,813 or 44% from $181,069 at December 31,
2003 to $102,256 at June 30, 2004. The decrease in accrued investment income is
attributable to the sale of a significant portion of the bond portfolio during
the first quarter of 2004.
Accounts receivable decreased 17% from $296,366 at December 31, 2003 to $246,423
at June 30, 2004. The decrease is
11
primarily due to a $5,900 decrease in amounts due from agents, a $23,059
decrease in due premiums, and a $21,089 decrease in income tax recoverable.
These amounts are expected to be fully recoverable.
Deferred policy acquisition costs, net of amortization, increased 6% from
$4,010,959 at December 31, 2003 to $4,264,882 at June 30, 2004 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.
Property and equipment net of accumulated depreciation decreased by 2% from
$2,836,814 at December 31, 2003 to $2,785,517 at June 30, 2004. The decrease is
attributable to depreciation expense of $55,720 and capitalization of assets of
$4,423.
Liabilities increased to $12,640,682 at June 30, 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 $538,440 or 17% from December 31, 2003 to
June 30, 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 $1,046,547 or 21% from December 31, 2003
to June 30, 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.
Deferred federal income taxes payable decreased to $632,851 at June 30, 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 first quarter of 2004, thus
reducing the amount of unrealized gains present in such portfolio at June 30,
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 and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Whole life insurance:
First year $ 196,123 $ 368,580 $ 483,105 $ 923,421
Renewal 587,691 524,809 1,381,383 1,168,269
Term insurance:
First year 310 465 940 465
Renewal 12,278 8,587 13,748 10,657
Single premium 700 2,200 2,320 5,600
----------- ----------- ----------- -----------
Gross premium income 797,102 904,641 1,881,496 2,108,412
Reinsurance premiums assumed 4,198 2,332 5,380 3,070
Reinsurance premiums ceded (25,471) (29,848) (73,081) (74,861)
----------- ----------- ----------- -----------
Net premium income $ 775,829 $ 877,125 $ 1,813,795 $ 2,036,621
=========== =========== =========== ===========
Net premium income decreased $222,826 or 11% from the six months ended June 30,
2003 to the same period during 2004. Total first year whole life premium
decreased $440,316 or 48% from 2003 to 2004. Total renewal year whole life
premium increased $213,114 or 18% 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 premium income decreased $101,296 or 12% from the three months ended June
30, 2003 to the same period during 2004. Total first year whole life premium
decreased $172,457 or 47% from 2003 to 2004. Total renewal year whole life
premiums increased $62,882 or 12% from 2003 to 2004.
Net investment income decreased $75,176 or 26% from the six months ended June
30, 2003 to the same period during 2004 and decreased $53,706 or 37% from the
three months ended June 30, 2003 to the same period during 2004. 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 proceeds from the sale were used to
purchase short-term securities with maturities ranging from 30 to 120 days. As
these short term securities mature, the proceeds will be reinvested in
conjunction with the new investment strategy. 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 from the purchases of short term securities in 2004 and the purchases of
lower yielding bonds in 2003 resulted in the decrease in net investment income
for the six month and three month periods ended June 30, 2004.
Net realized investment gain increased $464,020 from the six months ended June
30, 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 2004. Gains
totaling $464,363 were realized upon the sale of these bonds.
Rental income decreased from $107,712 during the six months ended June 30, 2003
to $90,995 during the same period in 2004 and decreased from $53,856 during the
three months ended June 30, 2003 to $45,498 during the same period in
13
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 $2,431,997 and $2,767,244 during the six months
ended June 30, 2004 and 2003, respectively. Included in total benefits and
expenses were policy reserve increases of $538,440 and $477,891 during the six
months ended June 30, 2004 and 2003, respectively. Benefits and expenses totaled
$1,151,752 and $1,496,532 during the three months ended June 30, 2004 and 2003,
respectively. Included in total benefits and expenses were policy reserve
increases of $169,424 and $198,406 during the three months ended June 30, 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, policy reserves will continue to increase.
Commission expense totaled $534,989 and $729,741 for the six months ended June
30, 2004 and 2003, respectively and $241,735 and $321,073 for the three months
ended June 30, 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 six months ended June 30, 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 six months ended June 30, 2004 and 2003, $639,386 and
$858,277, respectively, of these costs had been capitalized as deferred policy
acquisition costs. The related amortization for the same periods totaled
$385,463, and $221,417, respectively. During the three months ended June 30,
2004 and 2003, $295,915 and $386,806, respectively, of these costs had been
capitalized as deferred policy acquisition costs. The related amortization for
the same periods totaled $191,507, and $134,807, respectively.
Salaries, wages and employee benefits decreased from $680,873 during the six
months ended June 30, 2003 to $554,623 during the same period in 2004. The
decrease during 2004 is primarily attributable to the decrease in employee
headcount during the six months ended June 30, 2004 in comparison to the same
period in 2003. Included in the decrease was a $37,427 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 $601,831, and $1,148,522 for the six
months ended June 30, 2004 and 2003, respectively. Significant components of the
$546,691 decrease from 2003 to 2004 include the following: decrease in office
expenses of $53,032; decrease in annual meeting expenses of $103,898; decrease
in settlement expenses of $165,000; decrease in director fees of $39,260;
decrease in travel, meals, lodging and entertainment expenses of $15,347;
decrease in ABM fees of $19,584; decrease in professional fees of $104,152;
decrease in agency expenses of $20,696. Other operating costs and expenses
totaled $314,019, and $733,764 for the three months ended June 30, 2004 and
2003, respectively. Significant components of the $419,745 decrease from 2003 to
2004 include the following: decrease in office expenses of $11,318; decrease in
annual meeting expenses of $103,898; decrease in settlement expenses of
$165,000; decrease in ABM fees of $7,353; decrease in professional fees of
$97,241; decrease in agency expenses of $5,951. The significant decrease in
other operating costs is due to the implementation of tighter controls over
expenses and the reduction of expenses associated with the 2004 annual meeting
as compared to the 2003 annual meeting, proxy contest and litigation surrounding
such contest.
14
Liquidity and Capital Resources
-------------------------------
During the quarters ended June 30, 2004 and 2003, the Company maintained liquid
assets sufficient to meet operating demands, while continuing to utilize excess
liquidity to purchase fixed maturity and short-term investments. Net cash
provided by (used in) operating activities during the six months ended June 30,
2004 and 2003 totaled $351,782 and $(356,944), 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.
15
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 as of the end of the period covered by this report, the
Chief Executive Officer and Chief Financial Officer of the Company concluded
that the Company's disclosure controls and procedures were effective.
During the period covered by this report, the Company made no significant
changes in its internal controls over financial reporting or in other factors
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
16
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company attempted to hold its regularly scheduled annual meeting of
shareholders on June 7, 2004 for the purpose of electing directors and ratifying
the appointment of independent auditors. However, shareholder attendance (in
person and by proxy) did not constitute quorum to transact business pursuant to
the Company's bylaws. Therefore, the meeting was adjourned to July 6, 2004.
Again, a quorum was not obtained at the July 6 continuation of the annual
meeting and no business was transacted. Accordingly, the following existing
directors remain in office: Thomas Fogt; Paul E. "Bud" Burke, Jr.; Harland E.
Priddle; Gary E. Yager; Edward C. Carter; Kenneth L. Frahm; John G. Montgomery;
and Stephen J. Irsik. In addition, those directors appointed John Van Engelen,
President/CEO of the Company, to the board of directors.
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)
17
ITEM 6. Exhibits and Reports on Form 8-K (CONTINUED)
Exhibit No. Description
----------- -----------
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 (*)
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 April 15,
2004 announcing the change in the Company's independent
accountants from Kerber, Eck and Braeckel LLP to BKD, LLP.
The Company filed a current report on Form 8-K dated June 10,
2004 announcing the mailing of a newsletter to its
shareholders regarding the status of its Annual Shareholders'
Meeting held on June 7, 2004.
Subsequent to the quarter ended June 30, 2004, the Company
filed a current report on Form 8-K dated July 9, 2004
announcing the issuance of a news release regarding the
appointment of the Company's directors and officers effective
July 6, 2004.
Subsequent to the quarter ended June 30, 2004, the Company
filed a current report on Form 8-K dated July 15, 2004
announcing the issuance of a newsletter to its shareholders
regarding the recent actions by Brooke Corporation.
18
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: 8/12/04 By: /s/ John F. Van Engelen
--------------------- -------------------------------------
John F. Van Engelen
President and Chief Executive Officer
Date: 8/12/04 By: /s/ Patrick A. Tilghman
--------------------- -------------------------------------
Patrick A. Tilghman
Treasurer and Chief Financial Officer
19