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 September 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 November 1, 2004
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO FORM 10-QSB
Page Numbers
------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003............................................................................... 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2004 and 2003 and for
the nine months ended September 30, 2004 and 2003................................................... 5
Condensed Consolidated Statements of Comprehensive Income for the three months
ended September 30, 2004 and 2003 and for
the nine months ended September 30, 2004 and 2003................................................... 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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)
September 30, December 31,
2004 2003
------------- -----------
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost, $12,986,761
in 2004 and $11,432,605 in 2003) $ 13,176,335 $ 12,032,106
Equity securities (cost of $44,150 in 2004
and $41,800 in 2003) 45,650 41,800
Investments in real estate 274,564 274,564
Policy loans 72,321 60,451
Notes receivable (net of valuation allowance
of $0 in 2004 and 2003) - 13,741
Short-term investments 199,034 460,593
Other investments 129,026 -
------------- ------------
Total investments 13,896,930 12,883,255
Cash and cash equivalents 819,533 397,789
Investments in related parties - 65,200
Accrued investment income 197,349 181,069
Accounts receivable 223,080 296,366
Deferred policy acquisition costs (net of accumulated
amortization of $2,906,393 in 2004 and $2,312,021 in 2003) 4,359,203 4,010,959
Property and equipment (net of accumulated depreciation
of $624,669 in 2004 and $383,199 in 2003) 2,817,614 2,836,814
Other assets 31,051 7,648
------------- ------------
Total assets $ 22,344,760 $ 20,679,100
============= ============
See notes to condensed consolidated financial statements.
3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
Unaudited
September 30, December 31,
2004 2003
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy and contract liabilities:
Future annuity benefits $ 6,334,099 $ 4,899,770
Future policy benefits 3,826,843 3,128,491
Liability for policy claims 90,541 108,018
Policyholder premium deposits 192,989 217,976
Deposits on pending policy applications 5,406 32,491
Reinsurance premiums payable 24,696 31,713
------------- ------------
Total policy and contract liabilities 10,474,574 8,418,459
Commissions, salaries, wages and benefits payable 93,755 53,015
Other liabilities 342,985 174,277
Note payable 1,804,900 1,843,007
Deferred federal income taxes payable 626,774 760,881
------------- ------------
Total liabilities 13,342,988 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 (2,691,808) (2,562,839)
Accumulated other comprehensive income 153,582 452,302
Less: Treasury stock held at cost (762,500 shares in 2004 and 2003) (1,385,483) (1,385,483)
------------- ------------
Total shareholders' equity 9,001,772 9,429,461
------------- ------------
Total liabilities and shareholders' equity $ 22,344,760 $ 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 Nine months ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Gross premium income $ 827,664 $ 808,266 $ 2,709,160 $ 2,916,678
Reinsurance premiums assumed 3,198 1,756 8,578 4,826
Reinsurance premiums ceded (22,449) (27,553) (95,530) (102,414)
------------- ------------- ------------- -------------
Net premium income 808,413 782,469 2,622,208 2,819,090
Net investment income 136,380 138,342 348,358 425,496
Net realized investment gain - 4,479 464,361 4,820
Rental income 45,779 54,046 136,774 161,758
Other income - - 38 -
------------- ------------- ------------- -------------
Total revenue 990,572 979,336 3,571,739 3,411,164
Benefits and expenses:
Increase in policy reserves 159,912 120,105 698,352 597,996
Policyholder surrender values 59,035 22,837 111,338 52,237
Interest credited on annuities and
premium deposits 89,054 80,378 249,093 214,701
Death claims 82,341 81,058 218,850 214,528
Commissions 248,221 246,138 783,210 975,879
Policy acquisition costs deferred (303,230) (281,729) (942,616) (1,140,006)
Amortization of deferred policy
acquisition costs 208,909 178,051 594,372 399,468
Salaries, wages, and employee benefits 266,617 240,748 821,240 921,621
Miscellaneous taxes 33,329 32,338 140,515 102,222
Other operating costs and expenses 450,030 417,536 1,051,861 1,566,058
------------- ------------- ------------- -------------
Total benefits and expenses 1,294,218 1,137,460 3,726,215 3,904,704
------------- ------------- ------------- -------------
Loss before income tax expense (303,646) (158,124) (154,476) (493,540)
------------- ------------- ------------- -------------
Income tax expense (benefit) (28,716) 20,594 (25,507) (335,941)
------------- ------------- ------------- -------------
Net loss $ (274,930) $ (178,718) $ (128,969) $ (157,599)
============= ============= ============= =============
Net loss per common
share - basic and diluted $ (0.06) $ (0.04) $ (0.03) $ (0.03)
============= ============= ============= =============
See notes to condensed consolidated financial statements.
5
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss $ (274,930) $ (178,718) $ (128,969) $ (157,599)
Unrealized gain (loss) on available-for-sale securities:
Unrealized holding gain (loss) during the period 112,712 (126,191) 57,042 44,824
Less: Reclassification for gains included in net income - 4,479 464,361 4,820
Tax benefit (expense) (22,640) 26,134 108,599 91,645
------------- ------------- ------------- -------------
Other comprehensive income (loss) 90,072 (104,536) (298,720) 131,649
------------- ------------- ------------- -------------
Comprehensive loss $ (184,858) $ (283,254) $ (427,689) $ (25,950)
============= ============= ============= =============
Comprehensive loss per common share-basic and diluted $ (0.04) $ (0.06) $ (0.09) $ (0.01)
============= ============= ============= =============
See notes to condensed consolidated financial statements.
6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
September 30, September 30,
2004 2003
------------- -------------
OPERATING ACTIVITIES:
Net loss $ (128,969) $ (157,599)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Interest credited on annuities and premium deposits 249,093 214,701
Net realized investment gain (464,361) (4,820)
Provision for depreciation 88,750 93,599
Equity loss in investment in affiliate 28,516 34,418
Amortization of premium and accretion of discount on
fixed maturity and short-term investments 105,870 55,091
Realized net loss on disposal of assets - 1,850
Provision for deferred federal income taxes (25,507) (335,941)
Increase in accrued investment income (16,280) (27,606)
Decrease (increase) in accounts receivable 73,286 (72,385)
Increase in deferred policy acquisition costs, net (348,244) (740,538)
Increase in policy loans (11,870) (38,718)
(Increase) decrease in other assets (23,403) 13,247
Increase in future policy benefits 698,352 597,996
(Decrease) increase in liability for policy claims (17,477) 17,877
Decrease in deposits on pending policy applications (27,085) (187,044)
Decrease in reinsurance premiums payable (7,017) (5,119)
Increase (decrease) in commissions, salaries, wages and
benefits payable 40,740 (6,814)
Increase in other liabilities 168,708 108,083
------------- -------------
Net cash provided by (used in) operating activities $ 383,102 $ (439,722)
See notes to condensed consolidated financial statements.
7
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (Unaudited)
September 30, September 30,
2004 2003
------------- -------------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $ (9,059,880) $ (1,862,911)
Sale or maturity of available-for-sale fixed maturities 7,875,444 1,154,000
Purchase of available-for-sale equity securities (2,350) -
Additions to property and equipment (69,550) (12,440)
Dispositions of property plant and equipment - 1,250
Purchase of other investments (128,860) -
Purchase of investments in affiliate (11,500) (10,000)
Dispositions of investments in affiliates 48,184 -
Payments on notes receivable 13,741 7,336
Purchases of short-term investments (3,925,512) (260,214)
Sale or maturity of short-term investments 4,176,782 325,000
------------- -------------
Net cash used in investing activities (1,083,501) (657,979)
FINANCING ACTIVITIES:
Payments on note payable (38,107) (33,315)
Deposits on annuity contracts 1,404,897 1,335,036
Surrenders on annuity contracts (213,455) (83,502)
Policyholder premium deposits 22,472 39,754
Withdrawals on policyholder premium deposits (53,664) (50,886)
------------- -------------
Net cash provided by financing activities 1,122,143 1,207,087
------------- -------------
Increase in cash and cash equivalents 421,744 109,386
Cash and cash equivalents, beginning of period 397,789 400,062
------------- -------------
Cash and cash equivalents, end of period $ 819,533 $ 509,448
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES:
Interest paid $ 83,697 $ 95,370
============= =============
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
nine month periods ended September 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 that 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
Effective August 26, 2004, the Company purchased the remaining 50% joint venture
interest in First Computer Services, LLC ("FCS") from First Alliance Corporation
("FAC") of Lexington, Kentucky (a copy of the Amendment of the Operating
Agreement is attached at Exhibit 10.3). FCS owned the accounting hardware and
software that operates the Company's policy administration, underwriting, claim
processing, and accounting system. The aggregate purchase price for the
remaining interest was $80,547, consisting of a single cash payment to FAC of
$57,547 and the assumption of a $23,000 liability of FAC to FCS. The fair value
of the remaining interest acquired was $48,184 consisting of 50% interests in
computer hardware and software and an operating cash balance. The resulting loss
of $32,363, representing the difference between the aggregate purchase price and
the fair value of the remaining interest acquired, is included in other
operating costs and expenses for the current quarter. Following the purchase of
the remaining interest, FCS was dissolved with all assets being transferred to
the Company.
Prior to the dissolution of FCS, the Company recorded its 50% investor share of
joint venture losses using the equity method of accounting. The Company's share
of joint venture losses totaled $7,169 and $28,516 for the three months and nine
months ended September 30, 2004, respectively. These amounts are included in net
investment income.
3. NET EARNINGS PER COMMON SHARE
Net loss per common share for basic and diluted earnings per share is based upon
the weighted average number of common shares outstanding during each period. The
weighted average number of common shares outstanding was 4,687,078 for the three
months and nine months ended September 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 filed a
consolidated federal income tax return with its subsidiary, First Life America
Corporation ("FLAC") for 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
9
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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. 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.
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 nine months
ended September 30, 2004 and 2003 and as of September 30, 2004 and December 31,
2003 is as follows:
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Life and annuity insurance operations $ 942,989 $ 897,723 $ 3,226,725 $ 3,158,876
Corporate operations 47,583 81,613 345,014 252,288
------------- ------------- ------------- -------------
Total $ 990,572 $ 979,336 $ 3,571,739 $ 3,411,164
============= ============= ============= =============
Income (loss) before income taxes:
Life and annuity insurance operations $ 36,973 $ 120,464 $ 432,091 $ 442,851
Corporate operations (340,619) (278,588) (586,567) (936,391)
------------- ------------- ------------- -------------
Total $ (303,646) $ (158,124) $ (154,476) $ (493,540)
============= ============= ============= =============
Depreciation and amortization expense:
Life and annuity insurance operations $ 208,909 $ 178,051 $ 594,372 $ 399,468
Corporate operations 33,030 30,631 88,750 93,599
------------- ------------- ------------- -------------
Total $ 241,939 $ 208,682 $ 683,122 $ 493,067
============= ============= ============= =============
September 30, December 31,
2004 2003
------------ ------------
Assets:
Life and annuity insurance operations $ 17,352,409 $ 15,053,265
Corporate operations 4,992,351 5,625,835
------------- -------------
Total $ 22,344,760 $ 20,679,100
============= =============
10
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2004 are highlighted below.
Total assets increased from $20,679,100 at December 31, 2003 to $22,344,760 at
September 30, 2004. The Company's available-for-sale fixed maturity securities
had a fair value of $13,176,335 and $12,032,106 at September 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.
Short-term investments decreased $261,559 from $460,593 at December 31, 2003 to
$199,034 at September 30, 2004. The decrease is attributable to bonds maturing
during the nine months ended September 30, 2004, and the proceeds being used to
purchase available-for-sale fixed maturity securities and other investments.
Other investments increased from $0 at December 31, 2003 to $129,026 at
September 30, 2004. The increase is attributable to the purchase of an
investment in lottery prize cash flows during the quarter ended September 30,
2004. This type of investment involves purchasing an assignment of the future
payment rights from the winners of the lottery at a discounted price sufficient
to meet the Company's yield requirements. Payments on this particular lottery
prize will be made by a state run lottery 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 $819,533 at September 30, 2004 from
$397,789 at December 31, 2003. Refer to the statement of cash flows for sources
and uses of cash.
11
Investments in related parties decreased from $65,200 at December 31, 2003 to $0
at September 30, 2004. The decrease is attributable to the dissolution of the
First Computer Services, LLC joint venture effective August 26, 2004.
Accounts receivable decreased 25% from $296,366 at December 31, 2003 to $223,080
at September 30, 2004. The decrease is primarily due to a $3,883 decrease in
amounts due from agents, a $48,419 decrease in due premiums, and a $21,089
decrease in income tax recoverable. An allowance for uncollectible items is not
deemed necessary with respect to these receivables.
Deferred policy acquisition costs, net of amortization, increased 9% from
$4,010,959 at December 31, 2003 to $4,359,203 at September 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.
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.
No impairments have been recorded against the balance of deferred acquisition
costs.
Property and equipment net of accumulated depreciation decreased less than 1%
from $2,836,814 at December 31, 2003 to $2,817,614 at September 30, 2004. The
decrease is attributable to the capitalization of assets of $69,550 offset by
depreciation expense of $88,750.
Liabilities increased to $13,342,988 at September 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 $698,352 or 22% from December 31, 2003 to
September 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 $1,434,329 or 29% from December
31, 2003 to September 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.
Other liabilities increased $168,708 from $174,277 at December 31, 2003 to
$342,985 at September 30, 2004. The increase is attributable to the timing of
the payment of significant invoices for professional services. Refer to the
discussion of other operating costs and expenses provided in the results of
operations section for further details regarding the nature of professional
services which have been obtained.
Deferred federal income taxes payable decreased to $626,774 at September 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 September
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 nine months ended September 30, 2004 and 2003:
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Whole life insurance:
First year $ 208,396 $ 233,311 $ 691,501 $ 1,156,732
Renewal 606,843 569,907 1,988,226 1,738,176
Term insurance:
First year 100 370 1,040 835
Renewal 2,025 2,578 15,773 13,235
Single premium 10,300 2,100 12,620 7,700
------------- ------------- ------------- -------------
Gross premium income 827,664 808,266 2,709,160 2,916,678
Reinsurance premiums assumed 3,198 1,756 8,578 4,826
Reinsurance premiums ceded (22,449) (27,553) (95,530) (102,414)
------------- ------------- ------------- -------------
Net premium income $ 808,413 $ 782,469 $ 2,622,208 $ 2,819,090
============= ============= ============= =============
Net premium income decreased $196,882 or 7% from the nine months ended September
30, 2003 to the same period during 2004. Total first year whole life premium
decreased $465,231 or 40% from 2003 to 2004. Total renewal year whole life
premium increased $250,050 or 14% 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. Management anticipates the reduction in FA2000 production will continue
through the remainder of 2004. As such, products are currently being developed
in an effort to enhance production going forward. Management anticipates
releasing several new annuity, term and whole life products during the early
portion of 2005. The introduction of these new products, combined with the
continued production of the Company's Final Expense product should enable the
Company to reverse the negative first year production trends which have been
experienced in recent months. While the reversal of these trends is a goal of
management, so to is managing first year production to both the needs and
capacity of the Company.
Net premium income increased $25,944 or 3% from the three months ended September
30, 2003 to the same period during 2004. Total first year whole life premium
decreased $24,915 or 11% from 2003 to 2004. Total renewal year whole life
premiums increased $36,936 or 6% from 2003 to 2004.
Net investment income decreased $77,138 or 18% from the nine months ended
September 30, 2003 to the same period during 2004 and decreased $1,962 or 1%
from the three months ended September 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 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 mature, the proceeds were 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 nine
month and three month periods ended September 30, 2004.
Net realized investment gain increased $459,541 from the nine months ended
September 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.
13
Rental income decreased from $161,758 during the nine months ended September 30,
2003 to $136,774 during the same period in 2004 and decreased from $54,046
during the three months ended September 30, 2003 to $45,779 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 $3,726,215 and $3,904,704 during the nine months
ended September 30, 2004 and 2003, respectively. Included in total benefits and
expenses were policy reserve increases of $698,352 and $597,996 during the nine
months ended September 30, 2004 and 2003, respectively. Benefits and expenses
totaled $1,294,218 and $1,137,460 during the three months ended September 30,
2004 and 2003, respectively. Included in total benefits and expenses were policy
reserve increases of $159,912 and $120,105 during the three months ended
September 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 $783,210 and $975,879 for the nine months ended
September 30, 2004 and 2003, respectively and $248,221 and $246,138 for the
three months ended September 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 nine months ended September 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 nine months ended September 30, 2004 and 2003, $942,616
and $1,140,006, respectively, of these costs had been capitalized as deferred
policy acquisition costs. The related amortization for the same periods totaled
$594,372, and $399,468, respectively. During the three months ended September
30, 2004 and 2003, $303,230 and $281,729, respectively, of these costs had been
capitalized as deferred policy acquisition costs. The related amortization for
the same periods totaled $208,909, and $178,051, respectively.
Salaries, wages and employee benefits decreased from $921,621 during the nine
months ended September 30, 2003 to $821,240 during the same period in 2004. The
decrease during 2004 is primarily attributable to the decrease in employee
headcount during the nine months ended September 30, 2004 in comparison to the
same period in 2003. Included in the decrease was a $35,294 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 $1,051,861 and $1,566,058 for the
nine months ended September 30, 2004 and 2003, respectively. The decrease of
$514,197 results primarily from the nonrecurrance of the professional fees and
expenses incurred by the Company during the 2003 period in connection with its
annual meeting of stockholders for that year and a related proxy contest and
resulting litigation. These professional fees and expenses totaled $493,984 in
2003, as compared with professional fees and expenses of $98,726 incurred in
support of the 2004 annual meeting of stockholders. The decrease in other
operating costs and expenses in the 2004 period also is attributable to payment
in the 2003 period of $165,000 in settlement of a claim by AF&L, Inc. that the
Company had breached various marketing agreements. These decreases were
partially offset by payment of $117,695 of professional service fees incurred in
the 2004 period in support of the activities of a special committee of the Board
of Directors of the Company, described as follows. On July 12, 2004, a third
party filed an amendment to a Schedule 13D previously filed by such party,
stating that it may explore the acquisition of additional shares of the
Company's common stock through private negotiations or a tender offer for the
purpose, among other things, of possibly obtaining control of the Company and
replacing all or substantially all of the members of the Company's board of
directors and management. The Board of Directors of the Company, acting on
behalf of all shareholders in accordance with the legal obligations arising as a
result of the public statements made by the third party, charged a special
committee of independent directors with evaluating these actions and preparing
for an appropriate response in the event that the third party takes actions in
furtherance of its public
14
statements. The actions of the special committee included the retention of
independent outside legal counsel, financial advisors, and actuaries. The costs
of these extraordinary activities comprise the offset amounts described above.
Other operating costs and expenses totaled $450,030 and $417,536 for the three
months ended September 30, 2004 and 2003, respectively. The increase of $32,494
is largely attributable to the professional service fees incurred during the
2004 period in support of the activities of the aforementioned special
committee.
Liquidity and Capital Resources
During the quarters ended September 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 nine months ended
September 30, 2004 and 2003 totaled $383,102 and $(439,722), 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. 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. In addition, management may consider either the feasibility of selling
its home office building or leveraging the equity in its home office building in
an effort to release funds for use in other business endeavors.
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
Part II, Item 4 to the Registrant's Form 10-QSB filed August 12, 2004 is
incorporated by reference.
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, as
amended (*)
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, as amended (*)
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 (*)
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 (*)
17
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 July 9, 2004
announcing the issuance of a news release regarding the appointment of the
Company's directors and officers effective July 6, 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: 11/15/04 By: /s/ John F. Van Engelen
John F. Van Engelen
President and Chief Executive
Officer
Date: 11/15/04 By: /s/ Patrick A. Tilghman
Patrick A. Tilghman
Treasurer and Chief Financial
Officer
19