United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 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
(Name of small business issuer in its charter)
Kansas 48-1187574
(State of incorporation) (I.R.S. Employer Identification Number)
1303 SW First American Place, Topeka, KS 66604
(Address of principal executive offices)
Issuer's telephone number (785) 267-7077
Securities registered under 12(b) of the Act:
Title of Each Class
NONE
Securities registered under Section 12(g) of the Act:
Title of Each Class
Common Stock, $.10 Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
periods that 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $4,697,476
State the aggregate market value of the voting equity held by non-affiliates:
Of the 5,449,578 shares of common stock of the registrant issued and 4,237,578
outstanding shares of common stock of the registrant as of March 11, 2005,
3,867,378 shares are held by non-affiliates. Because of the absence of an
established trading market for the common stock, the registrant is unable to
calculate the aggregate market value of the voting stock held by non-affiliates
as of a specified date within the past 60 days.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, $.10 Par Value - 4,237,578 shares as of March 11, 2005.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
FORM 10-KSB
For the Fiscal Year Ended December 31, 2004
TABLE OF CONTENTS
Page
----
Part I.
Item 1. Description of Business ....................................... 3
Item 2. Description of Property ....................................... 9
Item 3. Legal Proceedings ............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ........... 9
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters ...... 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 10
Item 7. Financial Statements .......................................... 17
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ................................... 17
Item 8a. Controls and Procedures ....................................... 18
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act .......... 18
Item 10. Executive Compensation ........................................ 22
Item 11. Security Ownership of Certain Beneficial Owners
and Management ............................................. 24
Item 12. Certain Relationships and Related Transactions ................ 25
Item 13. Exhibits and Reports on Form 8-K .............................. 26
Item 14. Principal Accountant Fees and Services ........................ 27
Signatures .............................................................. 28
2
PART I
Item 1. Description of Business
First American Capital Corporation (the "Company") was incorporated on July 10,
1996 for the purpose of forming, owning and managing life insurance companies.
The Company sold 2,120,000 shares at $.10 per share to its organizing
shareholders in August of 1996 for total proceeds of $212,000. Also, in
September, 1996, the Company sold 600,000 shares of its common stock for $1.00
per share in a separate private placement. The initial capital was used to fund
the Company's efforts to register a $12,500,000 intra-state public offering with
the Office of the Kansas Securities Commissioner.
On January 11, 1999, the Company completed the intra-state public stock offering
raising approximately $13,750,000 of capital by selling 2,750,000 shares of
common stock at $5.00 per share. These funds were used to capitalize the life
insurance company, purchase and develop real estate assets and fund operations.
First American Capital Corporation
The primary segment of the Company's operations is life insurance and annuities.
Accordingly, a significant portion of revenue will be generated by the Company's
wholly owned life insurance subsidiary, First Life America Corporation ("FLAC").
Additional income is provided in the form of investment and rental income. The
Company has contracted with FLAC to provide services, which are incident to the
operations of FLAC, as discussed below. The Service Agreement between the
Company and FLAC ("Service Agreement") was amended and restated effective
January 1, 2002.
First Life America Corporation
On October 15, 1997, FLAC received a certificate of authority from the Kansas
Insurance Department ("KID") to transact its life insurance and annuity business
in the state of Kansas. On November 19, 1998, life insurance operations
commenced. Under the provisions of accounting principles generally accepted in
the United States of America, FLAC had $6,251,955 of shareholders' equity as of
December 31, 2004, and is wholly owned by the Company.
Administration
Under the terms of the Service Agreement, the Company provides personnel,
facilities, and services incident to the operations of FLAC. FLAC does not have
any employees. Services performed pursuant to the Service Agreement are
underwriting, claim processing, accounting, policy administration and data
processing and other services necessary for FLAC to operate. The Service
Agreement is effective until either party provides 90 days written notice of
termination. FLAC pays fees equal to the Company's cost of providing such
services, including an appropriate allocation of the Company's overhead
expenses, in accordance with accounting principles generally accepted in the
United States of America. FLAC bears all of its direct selling costs, which
include agent recruiting, training and licensing; agent commissions; any
benefits or awards directly for or to agents or management including any life or
health insurance to be provided; and any taxes (federal, state or county)
directly related to the business of FLAC. Additionally, FLAC is responsible for,
among other things, any reinsurance premiums; legal expenses related to
settlement of claims; state examination fees; interest on indebtedness; costs
related to mergers or acquisitions and costs related to fulfilling obligations
of the life insurance and annuity contracts written by the agents of FLAC.
Actuarial Services
On behalf of FLAC, the Company has retained the services of Miller & Newberg
Inc., consulting actuaries located in Olathe, Kansas. Mr. Eric Newberg of Miller
& Newberg Inc. has been appointed by the Board of Directors of FLAC to act as
its valuation and illustration actuary.
3
Products of FLAC
The three primary insurance products marketed by FLAC in fiscal years 2002
through 2004 were as follows:
First American 2000 is a modified payment whole life insurance policy with a
flexible premium deferred annuity rider. The policy requires premium payments to
be made for a certain number of years after which time the policyholder is
entitled to policy benefits without making future payments. The product combines
both a ten and twenty payment period based on the issue age of the insured.
Issue ages from age 0 (30 days) to 20 and 66 to 80 are ten pay policies and
issue ages from 21 to 65 are twenty pay policies. Premium payments are split
between life and annuity based on percentages established in the product design.
First year premium payments are allocated 100% to life insurance and renewal
payments are split 50% to life and 50% to annuity. The product is sold in
premium units with the ability to purchase either fractional or multiple units.
At the end of the required premium paying period, the policyholder may continue
to make full premium payments into the annuity rider to provide for greater
annuity accumulations.
Golden Eagle Whole Life (Final Expense) is available on a simplified issue or
graded death benefit basis. The simplified issue product is issued from age 50
to 85 with death benefit coverage ranging from a minimum of $2,500 to a maximum
of $25,000. The graded death benefit product is issued from age 50 to 80 with
death benefit coverage ranging from a minimum of $2,000 to a maximum of $10,000.
The policy includes a living benefit rider that pays the actuarial present value
of death benefit upon terminal illness or nursing home confinement. Premiums are
level for life and vary by risk class, sex and issue age.
First Step is a juvenile term product issued from age 0 (30 days) to age 15.
Coverage is sold in units. One unit, consisting of a single premium payment of
$100 purchases $5,000 of death benefit coverage, while two units, consisting of
a single premium payment of $200 purchases $10,000 of coverage. The product
contains a conversion provision allowing it to be converted to a whole life
policy prior to age 21.
The following new products are either scheduled for release in the near future
or have been released thus far during 2005:
First Whole Life is a permanent whole life insurance product with guaranteed
level premiums and death benefits. Issue ages are 0 to 80. Rate classes include
preferred non-tobacco, non-tobacco and tobacco. The product is
non-participating. Available riders include accidental death, accelerated living
benefit, waiver of premium, terminal illness and long-term care.
First Term is a level term life insurance product for issue ages 18 to 60. Term
periods are 10, 15, 20 and 30 years. Both fully guaranteed and partially
guaranteed premium options are available. For the partially guaranteed option,
premiums are level for 5 years on the 10 year term, 10 years on the 15 year
term, 13 years on the 20 year term and 17 years on the 30 year term, increasing
annually thereafter. Rate classes include non-tobacco, preferred tobacco and
tobacco. Available riders include return of premium, accidental death,
accelerated living benefit and waiver of premium.
Value Builder is a modified payment whole life insurance policy with a flexible
premium deferred annuity rider. The policy requires premium payments to be made
for a certain number of years after which time the policyholder is entitled to
policy benefits without making future payments. The product combines both a ten
and twenty payment period based on the issue age of the insured. Issue ages from
age 0 (30 days) to 20 and 66 to 80 are ten pay policies and issue ages from 21
to 65 are twenty pay policies. Premium payments are split between life and
annuity based on percentages established in the product design. First year
premium payments are allocated 100% to life insurance and renewal payments are
split 50% to life and 50% to annuity. The product is being sold in premium units
with the ability to purchase either fractional or multiple units. At the end of
the required premium paying period, the policyholder may continue to make full
premium payments into the annuity rider to provide for greater annuity
accumulations.
First FLEX I is a flexible premium deferred annuity for ages 0 to 90. The
initial interest rate is guaranteed for one contract year with a minimum
guaranteed interest rate of 3%. The surrender charge period is seven years and
up to 15% of the account value can be withdrawn each year without incurring a
surrender charge. If the annuitant becomes confined to a nursing home, the
surrender charge may be waived up to a certain limit. The minimum deposit is
$100.
4
First MAX I is a single premium deferred annuity for ages 0 to 90. The initial
interest rate is guaranteed for one contract year with a minimum guaranteed
interest rate of 3%. The surrender charge period is five years and up to 15% of
the account value can be withdrawn each year without incurring a surrender
charge. If the annuitant becomes confined to a nursing home, the surrender
charge may be waived up to a certain limit. The minimum deposit is $500.
First MAX III is a single premium deferred annuity for ages 0 to 90. The initial
interest rate is guaranteed for three contract years with a minimum guaranteed
interest rate of 3%. The surrender charge period is three years. If the
annuitant becomes confined to a nursing home, the surrender charge may be waived
up to a certain limit. The minimum deposit is $500.
Easy Pack contains short form applications for simplified underwriting and quick
issue. Products included in the Easy Pack are First Whole Life, First Term,
First Step, Golden Eagle Final Expense and First Flex I, First Max I and First
Max III. The Easy Pack is designed for the agent and consumer to receive quick
underwriting decisions on the small face policies.
Product Marketing and Sales
The Company's marketing strategy is to work with FLAC to provide life insurance
and annuity products that are beneficial to the consumer and profitable for the
Company and its shareholders. As such, FLAC is continually seeking new markets
for its products. FLAC sells its products through independent agents. The
independent agents receive commissions from FLAC based on premiums collected on
the products sold by the independent agents. FLAC contracts the independent
agents directly or through independent marketing organizations, referred to as
IMOs. IMOs generally are organizations that align multiple independent agents
with specific insurers and products. The IMOs receive a portion of the overall
commissions paid by FLAC on products sold by the agents. The IMOs recruit,
train, contract and provide other support functions to the independent agents.
FLAC is currently licensed to transact life and annuity business in the states
of Kansas, Texas, Ohio, Illinois, Oklahoma, North Dakota, Kentucky and Nebraska.
Due to the varied processes of obtaining admission to write business in new
states, management cannot reasonably estimate the time frame of expanding its
marketing presence.
Insurance Inforce
The following table provides certain information about FLAC's volume of life
insurance coverage inforce for each of the last three years:
(shown in thousands)
------------------------------
2004 2003 2002
-------- -------- --------
Amounts of Insurance (1)
Beginning of year $163,424 $154,577 $112,302
Issued during year 16,854 32,877 54,827
Reinsurance assumed 3,169 6,360 5,821
Revived during year 694 427 1,512
Lapse, surrender and decreased (24,018) (30,817) (19,885)
-------- -------- --------
In-force end of year $160,123 $163,424 $154,577
======== ======== ========
(1) Excludes accidental death benefits (shown in thousands) of $35,695,
$36,920, and $36,508 in 2004, 2003, and 2002, respectively.
5
The following table provides certain information about FLAC's policy count for
each of the last three years:
(Number of Policies)
---------------------
2004 2003 2002
----- ----- -----
Beginning of year 6,582 4,927 2,933
Issued during year 1,676 2,239 2,210
Reinsurance assumed 726 -- --
Revived during year 50 27 25
Lapse, surrender and decreased (716) (611) (241)
----- ----- -----
In-force end of year 8,318 6,582 4,927
===== ===== =====
As is evidenced by the tables above, the average face amount per policy issued
has decreased from approximately $25,000 in 2002 to approximately $15,000 and
$10,000 in 2003 and 2004, respectively. The decrease in average face amount
issued is directly related to increased focus being placed on production of the
Company's Final Expense product over the past three years. The Final Expense
product has a maximum face amount of $25,000, a level significantly less than
the other products historically marketed by the Company.
Reinsurance
In order to reduce the financial exposure to adverse underwriting results,
insurance companies generally reinsure a portion of their risks with other
insurance companies. FLAC has entered into agreements with Generali USA Life
Reassurance Company ("Generali") of Kansas City, Missouri, as well as Optimum Re
Insurance Company ("Optimum Re") of Dallas, Texas, to reinsure portions of the
life insurance risks it underwrites. Pursuant to the terms of the reinsurance
agreements, FLAC retains a maximum coverage exposure of $50,000 on any one
insured. In the event that the reinsurance companies are unable to fulfill their
obligations under the reinsurance agreements, FLAC remains primarily liable for
the entire amount at risk. According to the reinsurance agreements, there are
generally no premiums due on first year business.
FLAC is party to an Automatic Retrocession Pool Agreement (the "Reinsurance
Pool") with Optimum Re, Catholic Order of Foresters, American Home Life
Insurance Company and Woodmen of the World. The agreement provides for automatic
retrocession of coverage in excess of Optimum Re's retention on business ceded
to Optimum Re by the other parties to the Reinsurance Pool. FLAC's maximum
exposure on any one insured under the Reinsurance Pool is $50,000.
Underwriting
FLAC follows underwriting procedures designed to assess and quantify insurance
risks before issuing life insurance policies. Such procedures require medical
examinations (including blood tests, where permitted) of applicants for policies
of life insurance in excess of certain policy limits. These requirements are
graduated according to the applicant's age and vary by policy type. The life
insurance subsidiary also relies upon medical records and upon each applicant's
written application for insurance, which is generally prepared under the
supervision of a trained agent.
6
Investments
The Kansas Insurance Code restricts the investments of insurance companies by
the type of investment, the amount that an insurance company may invest in one
type of investment, and the amount that an insurance company may invest in the
securities of any one issuer. The restrictions of the Kansas Insurance Code are
not expected to have a material effect on the investment return of FLAC. The
Company is not subject to the limitations, which restrict the investments made
by FLAC. Currently, investments are held in both short-term, highly liquid
securities and long-term, higher yield securities. The Company implemented a new
investment strategy in 2004. 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.
Competition
The life insurance industry is extremely competitive. There are a large number
of insurance companies that are substantially larger, have greater financial
resources, offer more diversified product lines and have larger selling
organizations and customer bases than FLAC. Competition also is encountered from
the expanding number of banks and other financial intermediaries that offer
competing products. FLAC must compete with other insurers to attract and retain
qualified agents to market FLAC's products.
Governmental Regulation
FLAC is subject to regulation and supervision by the KID. The insurance laws of
Kansas give KID broad regulatory authority, including powers to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for some
lines of business; (vii) establish reserve requirements; (viii) prescribe the
form and content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; and (x)
regulate the type and amount of permitted investments. Without limiting the
foregoing, the effect of the regulatory powers of the KID over FLAC may restrict
the ability of FLAC to dividend or otherwise transfer funds from FLAC to the
Company even if FLAC's operations are profitable and creating positive cash
flow, restrict the ability of FLAC to raise capital other than by contributions
from the Company, and require that the Company contribute additional capital to
FLAC.
Kansas has enacted legislation which regulates insurance holding company
systems, including acquisitions, extraordinary dividends, the terms of affiliate
transactions, and other related matters. Currently, the Company and FLAC have
registered as a holding company system pursuant to the laws of the state of
Kansas.
Federal Income Taxation
FLAC is taxed under the life insurance company provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). Under the Code, a life insurance
company's taxable income incorporates all income, including life and health
premiums, investment income, and certain decreases in reserves. The Code
currently establishes a maximum corporate tax rate of 35%. The Code currently
requires capitalization and amortization over a five year period of certain
policy acquisition costs incurred in connection with the sale of certain
insurance products. These provisions apply to life and annuity business. Certain
proposals to make additional changes in the federal income tax laws, including
increasing marginal tax rates, and regulations affecting insurance companies or
insurance products, continue to be considered at various times in the United
States Congress and by the Internal Revenue Service. The Company currently
cannot predict whether any additional changes will be adopted in the foreseeable
future or, if adopted, whether such measures will have a material effect on its
operations.
7
Commencing with the 2003 tax year, FLAC filed a consolidated income tax return
with the Company. In certain consolidated return years, the separate tax
liability of either FLAC or the Company may be reduced through the utilization
of net operating losses of the other company comprising the consolidated group.
In addition, the taxes payable by the consolidated group as a whole may be
reduced by tax credits generated or earned by one company of the consolidated
group, which are in effect used to reduce the separate tax liability of the
other company. The tax savings attributable to the use of such tax attributes
will inure generally to the benefit of the company of the consolidated group
that earned or generated the tax attribute in question. Members of the
consolidated group will reimburse one another for the value of the consolidated
tax attributes utilized in each consolidated return year.
Financial Information Relating to Industry Segments
The Company's operations are categorized in two segments: Life and annuity
insurance operations (conducted by FLAC and by the Company pursuant to the
Services Agreement) and Corporate Operations (managing and leasing the Company's
office building). Financial information related to these two segments of the
Company's business is presented below. All sales of life insurance by FLAC are
to unaffiliated customers.
2004 2003 2002
----------- ----------- -----------
Revenues:
Life and annuity insurance operations $ 4,293,633 $ 3,988,400 $ 3,712,523
Corporate operations 403,843 325,569 446,625
----------- ----------- -----------
Total $ 4,697,476 $ 4,313,969 $ 4,159,148
=========== =========== ===========
Income (loss) before income taxes:
Life and annuity insurance operations $ 464,114 $ 368,682 $ 480,628
Corporate operations (761,430) (1,095,168) (625,386)
----------- ----------- -----------
Total $ (297,316) $ (726,486) $ (144,758)
=========== =========== ===========
Depreciation and amortization expense:
Life and annuity insurance operations $ 769,611 $ 629,068 $ 423,210
Corporate operations 132,902 124,093 134,999
----------- ----------- -----------
Total $ 902,513 $ 753,161 $ 558,209
=========== =========== ===========
Assets:
Life and annuity insurance operations $18,305,111 $15,053,265 $12,090,507
Corporate operations 4,649,885 5,625,835 6,656,009
----------- ----------- -----------
Total $22,954,996 $20,679,100 $18,746,516
=========== =========== ===========
Employees
As of December 31, 2004, the Company had 15 full time and no part time
employees.
8
Item 2. Description of Property
The Company owns approximately six and one-half acres of land located in Topeka,
Kansas. A 20,000 square foot office building has been constructed on
approximately one-half of this land. The remaining land, including improvement
costs, is classified as real estate held for investment. The Company does not
intend to make any improvements, develop or renovate the property or building.
The Company occupies approximately 7,500 square feet of the building. The
remaining 12,500 square feet is leased. Approximately 10,000 square feet is
leased to the United States Department of Agriculture ("USDA") under a 10 year
inclusive non cancelable lease that commenced on July 1, 2001 and will end on
June 30, 2011. The USDA may terminate this lease after 5 years, on or after June
30, 2006 upon 90 days notification in writing to the Company. The average annual
rental of this lease is $18.31 per square foot or $183,116 per year. The
remaining 2,500 square feet is currently available for lease. The occupancy rate
based on the total square feet available for lease in 2004 was 88%. Management
believes that insurance coverage on the building is adequate. The building is
depreciated over 39 years using the straight-line method for book and tax
purposes. The annual taxes on the building are $71,737 or an assessed rate of
25%. The annual taxes on the land are $7,707 or an assessed rate of 12%.
The Company has granted security interests in its commercial real estate and
office building to secure a loan from Western National Bank of Lenexa, Kansas,
in the amount of approximately $1,800,000 on a first priority basis and a loan
from Brooke Credit Corp. in the amount of approximately $570,000 on a second
priority basis. See Item 12 Certain Relationships and Related Party
Transactions.
Item 3. Legal Proceedings
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. The petition 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 Meyer entered into the marketing
agreements despite knowing that the Company could not perform on the financial
requirements of the agreements and without the knowledge, approval or
authorization of the Company's Board of Directors.
On December 12, 2003, Meyer filed an Answer and Counterclaim against the Company
asserting claims for defamation and breach of employment agreement. Meyer seeks
damages in excess of $75,000 plus interest and costs on his defamation claims.
Meyer seeks damages in the amount of $250,000 for an alleged breach of a
provision in his employment contract regarding severance pay; he seeks
additional damages in excess of $75,000 for an alleged breach of a provision in
the employment contract relating to payment of residual commissions.
The Company denies Meyer's allegations and will vigorously defend against them
as well as pursue its claims against Meyer. The trial is currently in the
discovery stage. No trial date has been set.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year covered by
this Form 10-KSB to a vote of the Company's security holders, through the
solicitation of proxies or otherwise.
9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a.) Market Information
The Company's common stock became tradeable on October 11, 1999. The common
stock is not listed on any stock exchange. Trading of the Company's common stock
in the over-the-counter market is limited and sporadic and an established public
market does not exist.
(b.) Holders
As of March 11, 2005, there are approximately 4,948 shareholders of record of
the Company's outstanding common stock.
(c.) Dividends
The Company has not paid any cash dividends since inception (July 10, 1996).
Management anticipates that for the foreseeable future any and all earnings will
be retained to fund the growth of FLAC's business and for other working capital
purposes and that as a result no dividends will be paid on the Company's stock.
As noted above, the regulatory requirements of the KID may practically restrict
the ability of the Company to transfer any operating profits produced by FLAC's
insurance operations to the Company for use in paying dividends on the Company's
stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" that is afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements.
The statements contained in this report, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements. Any projections of financial performances or statements concerning
expectations as to future developments should not be construed in any manner as
a guarantee that such results or developments will, in fact, occur. There can be
no assurance that any forward-looking statement will be realized or that actual
results will not be significantly different from that set forth in such
forward-looking statement. In addition to the risks and uncertainties of
ordinary business operations, the forward-looking statements of the Company
referred to above are also subject to the following risks and uncertainties,
among others: (i) the strength of the United States economy in general and the
strength of the local economies in which the Company does business; (ii)
inflation, interest rates, market and monetary fluctuations and volatility;
(iii) the timely development of and acceptance of new products and services and
perceived overall value of these products and services by existing and potential
customers; (iv) the persistency of existing and future insurance policies sold
by the Company; (v) the effect of changes in laws and regulations with which the
Company must comply; and (vi) the cost and effects of litigation and of
unexpected or adverse outcomes in litigation.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto, beginning on page F-1 in this report.
10
Critical Accounting Policies and Estimates
The accounting policies below have been identified as critical to the
understanding of the results of operations and financial position. The
application of these critical accounting policies in preparing the financial
statements requires management to use significant judgments and estimates
concerning future results or other developments, including the likelihood,
timing or amount of one or more future transactions. Actual results may differ
from these estimates under different assumptions or conditions. On an ongoing
basis, estimates, assumptions and judgments are evaluated based on historical
experience and various other information believed to be reasonable under the
circumstances. For a detailed discussion of other significant accounting
policies, see Note 2 - Significant Accounting Policies in the Notes to
Consolidated Financial Statements.
Investments
The Company's principal investments are in fixed maturity securities.
Investments are exposed to three primary sources of investment risk: credit,
interest rate and liquidity. The fixed maturity securities, which are all
classified as available for sale, are carried at their fair value in the
Company's balance sheet. The investment portfolio is monitored regularly to
ensure that investments which may be other than temporarily impaired are
identified in a timely fashion and properly valued, and that impairments are
charged against earnings as realized investment losses. The valuation of the
investment portfolio involves a variety of assumptions and estimates, especially
for investments that are not actively traded. Fair values are obtained from
broker statements.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs, principally agent commissions and other
selling, selection and issue costs, which vary with and are directly related to
the production of new business, are capitalized as incurred. These deferred
costs are then amortized in proportion to future premium revenues or the
expected future profits of the business, depending upon the type of product.
Profit expectations are based upon assumptions of future interest spreads,
mortality margins, expense margins and policy and premium persistency
experience. These assumptions involve judgment and are compared to actual
experience on an ongoing basis.
Future Policy Benefits
The Company establishes liabilities for amounts payable under insurance
policies. Generally, benefits are payable over an extended period of time and
the reserves established for future policy benefits are dependent on the
assumptions used in the pricing of the products. Principal assumptions used in
pricing policies and in the establishment of reserves for future policy benefits
are mortality, morbidity, expenses, persistency, investment returns and
inflation. Differences between actual experience and assumptions used in the
pricing of these policies and in the establishment of liabilities may result in
variability of net income in amounts which may be material.
Future Annuity Benefits
Future annuity benefits relate to deferred annuity contracts. The account
balances for deferred annuity contracts are equal to the cumulative deposits
less any applicable contract charges plus interest credited. The profitability
of these products is also dependent on principal assumptions similar to
traditional insurance products, and differences between actual experience and
pricing assumptions may result in variability of net income in amounts which may
be material.
Premiums
Premiums for traditional life insurance products are reported as revenue when
due. Traditional insurance products include whole life and term life. Deposits
relate to deferred annuity products. The cash flows from deposits are credited
to policyholder account balances. Deposits are not recorded as revenue.
Income Taxes
Deferred income taxes are recorded on the differences between the tax bases of
assets and liabilities and the amounts at which they are reported in the
consolidated financial statements. Recorded amounts are adjusted to reflect
changes in income tax rates and other tax law provisions as they become enacted.
11
Reinsurance
Reinsurance is one of the tools that the Company uses to accomplish its business
objectives. A variety of reinsurance vehicles are currently in use. Reinsurance
supports a multitude of corporate objectives including managing statutory
capital, reducing volatility and reducing surplus strain. At the customer level
it increases the Company's capacity, provides access to additional underwriting
expertise, and generally makes it possible for the Company to offer products at
competitive levels that the Company could not otherwise bring to market without
reinsurance support.
Financial Condition
Significant changes in the consolidated balance sheets from December 31, 2003 to
December 31, 2004 are highlighted below.
Total assets increased from $20,679,100 at December 31, 2003 to $22,954,996 at
December 31, 2004. The increase in total assets is primarily attributable to the
investment of premiums received during the year. Given the long-term nature of
the policy and contract liabilities associated with these premiums, management
is able to invest these premiums for a period of time until a payout of policy
benefits is required.
The Company's available-for-sale fixed maturity securities had a fair value of
$13,479,388 and $12,032,106 at December 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.
Credit risk is limited by emphasizing investment grade securities and by
diversifying the investment portfolio among various investment instruments.
Credit risk is further minimized by investing in certificates of deposit.
Certain certificates of deposit and cash balances exceed the maximum insurance
protection of $100,000 provided by the Federal Deposit Insurance Corporation
("FDIC"). However, both certificates of deposit balances and cash balances
exceeding this maximum are protected through additional insurance. As a result,
management believes that significant concentrations of credit risk do not exist.
Investments in equity securities increased from $41,800 at December 31, 2003 to
$236,342 at December 31, 2004 due primarily to the purchases of equity
securities of $193,600 in 2004.
Short-term investments decreased $460,593 from $460,593 at December 31, 2003 to
$0 at December 31, 2004. The decrease is attributable to bonds maturing during
the year ended December 31, 2004, and the proceeds being used to purchase
available-for-sale fixed maturity securities and other investments.
Mortgage loans on real estate increased from $0 at December 31, 2003 to $349,542
at December 31, 2004. The increase is attributable to the purchase of a mortgage
loan on commercial property. The Company may purchase more of these types of
investments in the future in limited quantities in an effort to enhance the
Company's investment portfolio yield.
Other investments increased from $0 at December 31, 2003 to $206,306 at December
31, 2004. The increase is attributable to the purchase of investments in lottery
prize cash flows during the year ended December 31, 2004. These other
investments involve purchasing assignments of the future payment rights from the
lottery winners at a discounted price sufficient to meet the Company's yield
requirements. Payments on these other investments will be made by state run
lotteries and as such are backed by the general credit of the respective state.
The Company may purchase more of these types of investments in the future in
limited quantities in an effort to enhance the Company's investment portfolio
yield.
Cash and cash equivalents increased to $527,028 at December 31, 2004 from
$397,789 at December 31, 2003. Refer to the statement of cash flows for sources
and uses of cash.
12
Investments in related parties decreased from $65,200 at December 31, 2003 to $0
at December 31, 2004. 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. 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 year.
Following the purchase of the remaining interest, FCS was dissolved with all
assets being transferred to the Company.
Accounts receivable decreased 13% from $296,366 at December 31, 2003 to $258,194
at December 31, 2004. The decrease is primarily due to a $27,469 decrease in due
premiums and a $21,089 decrease in income tax recoverable offset by an increase
of $10,281 in amounts due from agents. An allowance for uncollectible items is
not deemed necessary with respect to these receivables.
Deferred policy acquisition costs, net of amortization, increased 13% from
$4,010,959 at December 31, 2003 to $4,516,994 at December 31, 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.
Based on the results of the aforementioned procedures performed by management
and the results of a formal recoverability study completed by the Company's
external consulting actuary, no impairments have been recorded against the
balance of deferred acquisition costs.
Property and equipment net of accumulated depreciation decreased 2% from
$2,836,814 at December 31, 2003 to $2,775,187 at December 31, 2004. The decrease
is attributable to the capitalization of assets of $71,275 offset by
depreciation expense of $132,902.
Liabilities increased to $13,988,309 at December 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 $1,020,813 or 33% from December 31, 2003 to
December 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 $1,906,660 or 39% from December
31, 2003 to December 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.
Commission, salaries, wages and benefit payables increased $50,929 from $53,015
at December 31, 2003 to $103,944 at December 31, 2004. The increase is primarily
attributable to timing factors associated with the payment of incentive
compensation and payroll.
Deferred federal income taxes payable decreased to $603,489 at December 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 available-for-sale 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 December
31, 2004.
13
Results of Operations
Significant components of revenues include life insurance premiums, net of
reinsurance, and net investment income. The following table provides information
concerning net premium income for the years ended December 31, 2004, 2003, and
2002:
2004 2003 2002
---------- ---------- ----------
Whole life insurance:
First year $ 899,629 $1,381,964 $1,815,415
Renewal 2,701,813 2,247,022 1,595,159
Term insurance:
First year 1,099 1,352 4,524
Renewal 20,296 17,724 15,729
Single premium 17,720 9,800 10,580
---------- ---------- ----------
Gross premium income 3,640,557 3,657,862 3,441,407
Reinsurance premiums assumed 10,816 5,943 1,077
Reinsurance premiums ceded (117,761) (126,531) (111,624)
---------- ---------- ----------
Net premium income $3,533,612 $3,537,274 $3,330,860
========== ========== ==========
Net premium income was essentially the same in 2004 as 2003 and increased
$206,414 or 6% from 2002 to 2003. Total first year whole life premium decreased
$482,335 or 35% from 2003 to 2004 and $433,451 or 24% from 2002 to 2003. The
significant negative trend in first year whole life premium began in 2003 as a
result of the disruptive effect that the Company's 2003 proxy contest had on its
customers, shareholders and its marketing agents used to market the Company's
FA2000 product. The downward trend continued in 2004 as a result of the
Company's shift in marketing emphasis away from its FA2000 product. The FA2000
product was designed primarily for the Company's shareholders. Now that all
shareholders have been contacted, emphasis is shifting to other products. In
addition, the interest rate credited on the FA2000 annuity rider determines
whether it remains competitive in the market. In the lower interest rate
environment of the last few years, the product was competitive because the
Company paid an above average interest rate on the annuity rider.
Management spent a significant amount of time during 2004 developing new
products in an effort to enhance production going forward. Management has and
will continue to release several new annuity, term and whole life products
during the early portion of 2005. The Company's goal in introducing these new
products is to diversify the Company's product mix and to manage its first year
production to both the needs and capacity of the Company.
Total renewal year whole life premiums increased $454,791 or 20% from 2003 to
2004 and $651,863 or 41% from 2002 to 2003. Renewal premiums reflect the premium
collected in the current year for those policies that have surpassed their first
anniversary. Renewal premiums will continue to increase unless premiums lost
from surrenders, lapses, settlement options or application of the non-forfeiture
options, exceed prior year's first year premium, other than single premium.
Net investment income decreased $40,932 or 7% from 2003 to 2004 and $31,012 or
5% from 2002 to 2003. During the first quarter of 2004 the Company sold a
significant portion of its bond portfolio in order to realize market gains and
reinvest the resulting proceeds using a new investment strategy. The new
strategy is focused primarily on matching maturities to the anticipated cash
needs of the Company, but also attempts to match the investment mix to others
within the Company's industry peer group. The proceeds from the sale were used
to purchase short-term securities with maturities ranging from 30 to 120 days.
As these short term securities matured, the proceeds were reinvested in
conjunction with the new investment strategy. 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 year ended
December 31, 2003.
Net realized investment gain increased $458,967 from 2003 to 2004. The increase
is attributable to the sale of a significant portion of the Company's bond
portfolio during 2004.
14
Rental income decreased from $213,457 in 2003 to $182,553 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 $4,994,792, $5,040,455 and $4,303,906 for the
years ended December 31, 2004, 2003 and 2002, respectively. Included in total
benefits and expenses were policy reserve increases of $1,020,812, $819,632 and
$786,064 for the years ended December 31, 2004, 2003 and 2002, 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.
Interest credited on annuities and premium deposits totaled $344,918, $304,283
and $171,866 for the years ended December 31, 2004, 2003 and 2002, respectively.
The increases during 2004 and 2003 of $40,635 and $132,417, respectively are
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 (8,318, 6,582 and 4,927 in 2004, 2003
and 2002, respectively). The average interest credit rate on annuities and
premium deposits has decreased from 7.3% and 7.4% during 2002 and 2003,
respectively, to 5.7% during 2004. The decrease is attributable to management's
attempt to more effectively manage the interest spread between the rate the
Company earns on its investment portfolio and the rate being credited to
policyholder accounts.
Death claims increased $37,352 from 2003 to 2004 and $165,622 from 2002 to 2003.
The increase is attributable to the increase in the number of policies inforce
and the continued maturation of those policies. Mortality experienced by the
Company to date is within management's expectations.
Commission expense totaled $1,059,798, $1,235,074 and $1,336,805 for the years
ended December 31, 2004, 2003 and 2002, 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 during each respective period.
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 years ended December 31, 2004, 2003 and 2002, $1,275,646,
$1,453,440 and $1,680,977, respectively, of these costs had been capitalized as
deferred policy acquisition costs. The related amortization for the same periods
totaled $769,611, $629,068 and $423,210, respectively.
Salaries, wages and employee benefits decreased from $1,352,175 in 2002 to
$1,150,230 in 2003 and $1,119,185 in 2004. The decrease during 2004 and 2003 is
primarily attributable to the decrease in employee headcount during the years in
comparison to the same period in 2002. The decreases included a $29,222 and
$118,688 decrease in incentive compensation for 2004 and 2003, respectively,
resulting from the Company opting not to renew the employment contracts of prior
executive management.
Administrative fees - related party were paid to FAC for underwriting,
accounting and other policy services during 2002. There were no administrative
fees - related party in 2003 and 2004. During 2002 these fees totaled $288,936
and were calculated based on a percentage of FLAC's premium income collected.
15
Other operating costs and expenses totaled $1,359,969, $1,845,155 and $1,394,120
for the years ended December 31, 2004, 2003 and 2002, respectively. The decrease
of $485,186 during 2004 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 $510,318 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 $135,609 of professional service
fees incurred in 2004 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 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. On March 2, 2005, the Company repurchased 450,500
shares of the Company's common stock from this stockholder. See Item 12 Certain
Relationships and Related Transactions.
As a result of the items noted above net loss decreased $253,064 or 52% to
$232,936 from $486,000 for the years ended December 31, 2004 and 2003,
respectively and decreased $61,226 or 11% to $486,000 from $547,226 for the
years ended December 31, 2003 and 2002, respectively.
Liquidity and Capital Resources
During the years ended December 31, 2004, 2003, and 2002, the Company maintained
liquid assets sufficient to meet operating demands, while continuing to utilize
excess liquidity to purchase various investments. Net cash provided by (used in)
operating activities during the years ended December 31, 2004, 2003 and 2002
totaled $404,894, ($179,098) and ($280,699), respectively. The increase in net
cash provided by operations in 2004 as compared to both 2003 and 2002 is
primarily a result of the reductions in operating expenses, salaries and wages,
and administrative fees during the applicable years, as noted above.
FLAC generally receives adequate cash flow from premium collections and
investment income to meet the obligations of its insurance operations. Insurance
policy liabilities are primarily long-term and generally are paid from future
cash flows. Cash collected from deposits on annuity contracts and policyholder
premium deposits are recorded as cash flows from financing activities. A
significant portion of the Company's invested assets are readily marketable and
highly liquid.
As of December 31, 2004, the Company had consolidated cash reserves and liquid
investments of approximately $14,200,958, as compared with $12,890,488 at the
end of 2003 and $11,577,392 at the end of 2002. Of these amounts, cash reserves
and liquid investments at FLAC as of these dates were approximately $12,812,107,
$10,541,139, and $8,394,494, respectively. However, due to insurance regulatory
restrictions, as noted above, these amounts cannot necessarily be used to fund
the cash needs of the parent company on a stand-alone basis. As of these dates,
cash reserves and liquid investments at the parent company level were
approximately $1,388,851, $2,349,349 and $3,182,898 respectively.
16
Management believes that these funds provide sufficient liquidity to fund the
basic operating needs at both the parent company and the FLAC levels for the
foreseeable future. However, if extraordinary legal or other expenses (such as
those incurred in 2003 and 2004 with respect to the proxy contest, Meyer
litigation, and special committee activities described above) are unexpectedly
incurred at the parent company level or if operating losses continue unabated at
2002 through 2004 levels, then the sufficiency of the parent company's operating
cash position could be jeopardized. In addition, although there can be no
assurance that extraordinary corporate activities will not continue, management
believes that steps recently taken by the Company reduce the likelihood that it
will continue to incur extraordinary expenses such as those incurred in 2003 and
2004. See Item 12 Certain Relationships and Related Party Transactions.
In 2004, management adopted a five-year business development plan intended to
expand the Company's product lines and marketing efforts. However, the Company's
efforts to implement its new business plan and grow its business and policy base
through the implementation of the new product lines and marketing efforts would
be significantly enhanced if additional capital could be infused into FLAC's
insurance operations. Further, the parent company's capital position would be
strengthened against the risks noted in the preceding paragraph if more capital
were available at the parent company level. Therefore, management of the Company
intends to explore opportunities to provide this additional capital through the
sale of new equity securities or debt securities or through borrowed funds,
although there is no assurance that these efforts will be successful.
The Company's former President and Chief Executive Officer has made a demand on
the Company for the payment of $250,000 in severance benefits under his
employment agreement. The Company denies any such obligation. See Item 3 Legal
Proceedings 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.
Item 7. Financial Statements
The consolidated financial statements and related notes are included in this
report beginning on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On April 15, 2004, the Company discharged Kerber, Eck & Braeckel LLP ("KE&B") as
its independent accountants. The Company's Audit Committee participated in and
approved the decision to change independent accountants.
The reports of KE&B on the financial statements for the past two fiscal years
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle.
In connection with its audits for the two most recent fiscal years and through
April 15, 2004, there were no disagreements with KE&B on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
KE&B would have caused them to make reference thereto in their report on the
financial statements for such years.
During the two most recent fiscal years and through April 15, 2004, there were
no reportable events (as defined in Regulation S-B Item 304(a)(1)(iv)(B)).
The Company requested that KE&B furnish it with a letter addressed to the SEC
stating whether or not it agrees with the above statements. A copy of such
letter, dated April 19, 2004, was filed as Exhibit 99.1 to the Company's Form
8-K filed April 21, 2004.
The Company engaged BKD, LLP ("BKD") as its new independent accountants as of
April 15, 2004. During the two most recent fiscal years and through April 15,
2004, the Company did not consult with BKD regarding either (i) the application
of accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on the Company's financial
statements and either written or oral advice was provided that BKD concluded was
an important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv)(A) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a reportable event, as that term is defined in Item
304(a)(1)(iv)(B) of Regulation S-B.
17
Item 8a. Controls and Procedures
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. This information is accumulated and
communicated to Company management to allow timely decisions regarding
disclosure. The Company's Chief Executive Officer and Chief Financial Officer
conducted an evaluation of the Company's disclosure controls and procedures as
of the end of the period covered by this report. Based upon their evaluation of
those controls and procedures, the Chief Executive Officer and Chief Financial
Officer of the Company concluded that the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information required to be disclosed in the Company's periodic filings.
The Company made no significant changes in its internal controls over financial
reporting or in other factors that could significantly affect these controls
subsequent to the date of the evaluation of those controls by the Chief
Executive Officer and Chief Financial Officer.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16 (a) of the Exchange Act
The current Executive Officers and Directors of the Company are as follows:
Name Age Position
---- --- --------
Harland E. Priddle 74 Chairman of the Board, Secretary and Director
John F. Van Engelen 52 President, CEO and Director
Patrick A. Tilghman 31 Treasurer and CFO
Thomas C. Kimery 36 Vice President
Paul E. Burke Jr. 71 Director
Edward C. Carter 62 Director
Thomas M. Fogt 59 Director
Kenneth L. Frahm 58 Director
Stephen J. Irsik Jr. 58 Director
John G. Montgomery 65 Director
Gary E. Yager 50 Director
The Directors serve until their successors are elected and qualified. Directors
are elected annually by the stockholders. The Executive Officers serve at the
discretion of the Board of Directors. The President, Secretary and Treasurer are
elected at the annual meeting of the Board, while the other officers are elected
by the Board from time to time as the Board deems advisable. The Executive
Officers and Directors also hold the same positions for the Company's
subsidiaries. The following is a brief description of the previous business
background of the Executive Officers and Directors:
18
Harland E. Priddle: Mr. Priddle has been a Director of the Company since its
inception and has been the Chairman of the Board since November 15, 2002. Mr.
Priddle is President of Priddle & Associates, a business consulting firm
specializing in business and economic development consulting. Mr. Priddle is the
former Kansas Secretary of Agriculture (1982-1986) and served as the first
Kansas Secretary of Commerce (1987-1991). As the first Secretary of Commerce, he
was directly involved in the creation of such programs as Kansas, Inc., Kansas
Technology Enterprise Corporation, Kansas Development Finance Authority and the
Kansas Venture Capital Corp. He was candidate for Lt. Governor of Kansas in 1986
and 1990. He was the Deputy Director of the White House Communications Agency
for the President for a period of four years (1970-1974) where he provided
support and accompanied the President on approximately 200 Presidential trips.
Mr. Priddle was the Vice President for Marketing and Customer Services for the
Hutchinson National Bank from 1978 to 1981. He also has served as Assistant
Manager of the Kansas State Fair (1974-1978) and Executive Director of the
Kansas Wildscape Foundation (1999-2002), a not for profit foundation dedicated
to creating outdoor opportunities in Kansas. He retired from the United States
Air Force in 1974, after 22 years, with the rank of Colonel. While in the Air
Force, he received 17 military decorations including the Bronze Star and two
Legions of Merit. He is a veteran of both Korea and Vietnam Campaigns. He
received a BS in Agriculture from Kansas State University in 1952.
John F. Van Engelen: Mr. Van Engelen was named President and CEO of the Company
on February 16, 2004. Mr. Van Engelen previously was the President of Western
United Life. Mr. Van Engelen joined Western United Life in 1984 as its
underwriting manager, and shortly thereafter he was appointed Vice
President--Underwriting. From 1987 to 1994, he was Vice President--Sales and a
Regional Sales Manager. During 1994, he was appointed President of Western
United Life. Prior to joining Western United Life, Mr. Van Engelen had worked in
the insurance industry and in corporate and public accounting. He holds the
following certifications: CPA, CFP, CLU, ChFC, and FLMI. He is also a member of
the American Institute of Certified Public Accountants, Society of Financial
Service Professionals, and a board member of the New Mexico Life and Health
Guaranty Fund. Mr. Van Engelen holds a Bachelor of Business Administration in
Accounting from Boise State University.
Patrick A. Tilghman: Mr. Tilghman joined the Company in July, 2001 as
Controller. He was appointed as Treasurer and Chief Financial Officer effective
July 6, 2004. He is responsible for the oversight of the accounting function
with specific emphasis being placed in the areas of financial reporting,
internal financial analysis, forecasting and cash management. Prior to joining
the Company, Mr. Tilghman worked for PricewaterhouseCoopers LLP in their audit
division servicing clients primarily in the insurance, health care and
entertainment industries. Mr. Tilghman received his Bachelor of Business
Administration and Accounting with Honors from the University of Kansas. He
holds the designation of CPA and is a member of the American Institute of
Certified Public Accountants.
Thomas C. Kimery: Mr. Kimery joined the Company in June, 2000, in his present
role and was appointed as a corporate officer effective July 6, 2004. He is
responsible for new business and underwriting, policyowner service, claims,
product creation and extensive administration duties. Prior to joining the
Company, Mr. Kimery worked for Transamerica Life Companies in Kansas City,
Missouri from 1994 to 2000, with roles in underwriting and claims. Mr. Kimery
has an undergraduate degree in History from the University of Kansas and a
M.B.A. from Baker University. He also holds the FLMI, ACS and ARA designations.
Paul E. Burke, Jr.: Mr. Burke, who has been a Director of the Company since its
inception, is the President of Issues Management Group, Inc., a public relations
and governmental affairs consulting company. Mr. Burke served as a member of the
Kansas State Senate from 1975 to January 1997 and served as the President of the
Senate from 1989 until his retirement in 1997. During his tenure in the Kansas
Senate, Mr. Burke served as Chairman of the Organization, Calendar and Rules,
Legislative Coordinating Council and Interstate Cooperation Committees. Mr.
Burke was a majority leader of the Senate from 1985 to 1988. Mr. Burke has
served in numerous national, state and local leadership positions including past
positions as a member of the President's Advisory Commission on
Intergovernmental Relations. He is also the former owner of WEBBCO, Inc., an
industrial engineering and equipment company. Mr. Burke received his Bachelor of
Science degree in business from the University of Kansas in 1956.
19
Edward C. Carter: Mr. Carter, who has been a Director of the Company since its
inception, is an entrepreneur and real estate developer. Mr. Carter is a retired
senior executive (1963-1992) with the Kansas Southwestern Bell Telephone
Company. He served in numerous senior executive positions including Division
Manager Regulatory Relations, Regional Vice President Southwestern Bell Telecom,
a start up company serving a four state area, and Kansas Director of Marketing
and District Manager Residence Service Centers. Mr. Carter served as City
Commissioner and Mayor of Lawrence, Kansas from 1977 to 1981. He was a director
and President of the Lawrence, Kansas Rotary Club, past Executive Board Member
of the Kansas State Chamber of Commerce, past Chairman of the Douglas County
United Fund and Director and President of Junior Achievement. He is a
Co-Recipient of the Outstanding Kansan Award for Civic Service and received the
Lifetime Meritorious Achievement Award from Pittsburgh State University in 2001.
Mr. Carter was a member and All Conference guard on the Pittsburgh State
University National Championship Football Team. He received his B.A. in Business
Administration from Pittsburgh State University in 1963.
Thomas M. Fogt: Mr. Fogt has been a director of the Company since March 31,
2003. Mr. Fogt has over twenty-five years of experience in insurance, financial
management, accounting, corporate development and business planning. He has a
master's degree from Xavier University in business and is a member of the
American Institute of Certified Public Accountants. Mr. Fogt has served as
Executive Vice President for AmerUs Annuity Group Co., a subsidiary of AmerUs
Group, since 1994 with responsibilities for finance and accounting, as well as
mergers and acquisitions. Prior to joining AmerUs, Mr. Fogt was a partner with
the accounting firm of Deloitte & Touche.
Kenneth L. Frahm: Mr. Frahm, who has been a Director of the Company since its
inception, has been a self-employed farmer since 1975. He currently owns 1,200
acres of irrigated corn and dryland wheat production land and is a member of a
family partnership, which produces over 500,000 bushels of corn and wheat
annually on 6,500 acres of western Kansas farm land. Mr. Frahm's operating
entities include Allied Family Farm and Grain Management, Inc. He is past
President of the Kansas Development Finance Authority. He is past Chairman of
21st Century Grain Processing Cooperative, and a former member of the Board of
Directors of Bank IV Community Bank in Colby. In addition, Mr. Frahm is a member
of the Kansas Farm Service Agency State Committee appointed by US Agriculture
Secretary Ann Veneman. He is a member of the Agricultural Use Value Committee of
the Kansas Department of Revenue, an Executive Committee member of the Fort Hays
State University Endowment Association, a past member of the Board of Directors
of the Kansas Area United Methodist Foundation and Chairman of its Investment
Committee, Past President and Paul Harris Fellow of Rotary, a member of the
Kansas Farm Bureau, Kansas Livestock Association, Kansas Corn Growers
Association, Kansas Association of Wheat Growers and serves on the Boards of
Directors of the Ogallala Aquifer Institute and the Kansas Water Congress. Mr.
Frahm is married to Sheila Frahm, a former Kansas United States Senator and has
three daughters. Mr. Frahm received his B.A. in Economics in 1968 from Fort Hays
Kansas State College and his M.B.A. in Finance in 1969 from the University of
Texas at Austin.
Stephen J. Irsik Jr.: Mr. Irsik, who has been a Director of the Company since
its inception, is one of the owners of a multi faceted agri-business centered in
western Kansas. The business deals with identity preserved grain production,
angus beef and the dairy industry. Mr. Irsik is one of the owners of Irsik &
Doll Company, a grain storage, merchandising and full feeding cattle operation
with facilities across the State of Kansas. Mr. Irsik is serving his 16th year
on the Gray County Commission. He currently serves on the 21 Century Alliance
Board, 21Century Grain Processing board and Home National Bank Board of Garden
City, Kansas. Mr. Irsik has served as a past Board member of the Southwest
Kansas Irrigation Association, Upper Ark Basin Advisory committee and Ground
Water Management District #3. He is a graduate of Kansas State University and a
veteran of the United States Air Force.
20
John G. Montgomery: Mr. Montgomery, who has been a Director of the Company since
its inception, is the President of Montgomery Communications, Inc. of Junction
City, Kansas. He is a newspaper publisher and TV station owner. He is also
President of the Junction City Housing and Development Corporation. From 1964 to
1973 he was the Assistant to the President at the San Francisco Newspaper
Printing Company. Mr. Montgomery is a member of the InterAmerican Press
Association, Inland Daily Press Association and the Kansas Press Association. He
was Civilian Aid to the Secretary of the Army of Kansas from 1979-1981 and has
again served in that role since 1995. He has extensive state government service
including Past Chairman of the Kansas Board of Regents, Past member of the
Washburn University Board of Regents, and 1986 Democratic nominee for Lieutenant
Governor. His considerable civic involvement, in part, includes being past
President of the Junction City Chamber of Commerce, Director and past President
of the United Way, past Board member of the Boy Scouts of America, Coronado
Council, past Director of the armed service YMCA, Trustee of the William Allen
White Foundation, Co-chair of Economic Lifelines, Board member of Kansas
Wildscape and the Kansas 4-H and a member of the Rotary Club. Mr. Montgomery has
received the 1975 Jaycees Outstanding Young Man of Kansas Award, 1975 Junction
City Jaycees Distinguished Service Award and the Department of the Army,
Patriotic Civilian Service Award. He graduated from the Philips Academy,
Andover, Massachusetts, in 1958, Yale University in 1962, receiving a Bachelor
of Arts Degree, and from Stanford University in 1964, where he received his MBA
Degree.
Gary E. Yager: Mr. Yager, who has been a Director of the Company since its
inception, became the Vice Chairman of Western National Bank in September of
2002. From December 1995 to September of 2002 Mr. Yager was the Executive Vice
President and Chief Executive Officer and Senior Lender of the Columbian Bank of
Topeka, Kansas. From October 1986 to December 1995, Mr. Yager served as either
the Vice President and Branch Manager or the Vice President of Commercial Loans
for the Commerce Bank and Trust of Topeka, Kansas. From 1976 to 1986, he served
in various management positions with Bank IV of Topeka including Assistant
Vice-President of Correspondent Banking and Branch Manager. Mr. Yager is
currently a member of the Topeka Housing Authority, Topeka Chamber of Commerce,
Art Council of Topeka, the Washburn University Ichabod Club and the Washburn
University Moore Bowl Renovation Committee. Additionally, he currently serves as
President of Downtown Topeka, Inc. and as Chairman of the Business Improvement
District of Topeka. He is a former member of the Board of Directors of the
Topeka Family Service and Guidance Center and former advisor of Junior
Achievement. He is a past member of the Topeka Active 20-30 Club, where he
served in numerous leadership roles including President and Treasurer. Mr. Yager
received his BA degree in Business Administration from Washburn University of
Topeka in 1976.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file initial reports of
ownership and reports of change in ownership with the SEC. Such persons are
required by SEC regulations to furnish the Company with copies of all forms
under Section 16(a). To the Company's knowledge, all filings were made on a
timely basis during 2004.
Audit Committee
The Board of Directors has a standing Audit Committee established in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The
Audit Committee is responsible for the selection, review and oversight of the
Company's independent accountants, the approval of all audit, review and attest
services provided by the independent accountants, the integrity of the Company's
reporting practices and the evaluation of the Company's internal controls and
accounting procedures. It also periodically reviews audit reports with the
Company's independent auditors. The Audit Committee is currently comprised of
Gary Yager, John Montgomery and Thomas Fogt. Each of the members of the Audit
Committee are "independent" as that term is defined in Rule 4200(a)(14) of the
Nasdaq Marketplace Rules. The Board of Directors has adopted a written charter
for the Audit Committee. The Board of Directors has determined that Mr. Fogt is
an "audit committee financial expert" as defined under regulations of the SEC.
Code of Ethics
The Company has adopted a code of ethics that applies to all executive officers
and directors.
21
Item 10. Executive Compensation
The following table sets forth amounts earned over the past three fiscal years
by all persons who served as the Chief Executive Officer of the Company at any
time during fiscal 2004 and by each person employed by the Company as of the end
of fiscal 2004 whose total salary and bonus paid during that year exceeded
$100,000.
Annual Compensation
Other Annual All Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($)(1) Compensation
--------------------------- ---- ---------- --------- ------------------- ------------
John F. Van Engelen President and CEO (2) 2004 118,641 28,000 4,000 2,886 (4)
2003 -- -- -- --
2002 -- -- -- --
Vincent L. Rocereto 2004 71,277 962 -- --
Former Executive Vice President and
Former President / CEO (3) 2003 73,038 1,731 -- --
2002 -- -- -- --
(1) Other Annual Compensation consists of automobile allowances. The aggregate
cost to the Company of such personal benefits did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus received by the
applicable executive officers.
(2) Mr. Van Engelen became President and CEO of the Company on February 16,
2004.
(3) Mr. Rocereto became President and CEO of the Company on February 28, 2003.
Mr. Rocereto resigned as President and CEO on February 16, 2004. Mr.
Rocereto subsequently served as Vice President of Marketing until February
1, 2005, as of which date he became a consultant to the Company serving on
an at-will basis.
(4) All Other Compensation for Mr. Van Engelen includes nonqualified moving
expenses paid by the Company for the benefit of Mr. Van Engelen in
conjunction with his relocation from Spokane, WA to Topeka, KS.
Compensation of Directors
Each non-employee director is paid $750 per regular meeting attended for the
Company and its subsidiaries, $75 per telephonic meeting and $250 per committee
meeting.
22
Executive Employment Agreements
On February 16, 2004, the Company entered into an Employment Agreement with Mr.
John F. Van Engelen to serve as President and Chief Executive Officer of the
Company and its subsidiaries. The agreement was for an initial term of one year.
Subsequent to the expiration of the initial term, the agreement became an
at-will employment agreement. The agreement calls for a gross annual base salary
of $140,000. In addition, a performance bonus of not less than 20% of the gross
annual base salary will be paid no later than January 31 of the next year of
employment under the agreement if Mr. Van Engelen's performance is determined to
be satisfactory by the Company's Board of Directors. The performance bonus will
be paid either in cash or shares of the Company's common stock (with the number
of shares determined on the basis of the book value of the stock on the last day
of the calendar year). In 2005, the Board of Directors of the Company approved a
bonus of $28,000 payable with respect to the 2004 fiscal year. The agreement
also included an option to purchase 10,000 shares of the Company's common stock
at the current book value for a period of one year from the effective date of
the agreement. Mr. Van Engelen purchased 1,000 shares pursuant to the option,
the remainder of which has expired. In the event that there is a change in
control of the Company, whether during the initial term or during at-will
employment, Mr. Van Engelen may terminate his employment with the Company within
a period of 60 days after the change in control becomes effective. In such
event, Mr. Van Engelen will receive a lump sum cash payment in the amount of
$280,000 within 30 days of his last day of employment. In addition, if Mr. Van
Engelen elects, pursuant to applicable federal or state law, continuation
coverage under the Company's health, major medical or dental plans, the Company
will pay for the same portion or percentage of such coverage as it was paying
prior to his termination of employment, for the first 12 months of such period
of continuation coverage or such lesser period of time as he remains eligible
for and continues to purchase such continuation coverage.
23
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 11, 2005, regarding
ownership of Common Stock of the Company by (i) the only persons known by the
Company to own beneficially more than 5% thereof; (ii) the executive officers
and directors individually; and (iii) all officers and directors as a group.
Name and Address of Amount and Nature of
Beneficial Owner Class of Stock Beneficial Ownership Percent of Class
------------------- -------------- -------------------- ----------------
Paul E. Burke, Jr.
2009 Camelback Drive
Lawrence, KS 66047 Common 50,000 1.18%
Edward C. Carter
4100 Wimbledon Drive
Lawrence, KS 66047 Common 85,000 2.01%
Thomas M. Fogt
8200 W 101st Terrace
Overland Park, KS 66212 Common 200 *
Kenneth L. Frahm
Box 849
Colby, KS 67701 Common 40,000 *
Stephen J. Irsik, Jr.
05405 Six Road
Ingalls, KS 67853 Common 69,000 1.63%
Thomas C. Kimery
5009 Brownridge
Shawnee, KS 66218 Common -- *
Rickie D. Meyer
3513 SW Alameda Drive
Topeka, KS 66614 Common 256,000 6.04%
John G. Montgomery
Box 129
Junction City, KS 66441 Common 45,000 1.06%
Harland E. Priddle
8214 South Haven Rd.
Burrton, KS 67020 Common 40,000 *
Patrick A. Tilghman
3208 SW 19th Street
Topeka, KS 66604 Common -- *
John F. Van Engelen
4624 NW Kendall Drive
Topeka, KS 66618 Common 1,000 *
Gary E. Yager
3521 SW Lincolnshire
Topeka, KS 66614 Common 40,000 *
All Directors and Officers as a Group
(11 persons) 370,200 8.74%
* Indicates less than 1% ownership.
24
Item 12. Certain Relationships and Related Transactions
In 2003, the Company borrowed $1,875,578 from Western National Bank of Lenexa,
Kansas, to refinance the mortgage on the commercial property and office building
that it owns in Topeka, Kansas. The loan that was refinanced was used for the
acquisition of the real estate and the development of the building. Gary Yager,
a Director of the Company, is the Vice Chairman of Western National Bank. As of
December 31, 2004, the remaining principal balance on the note was $1,791,607.
The note is payable in 120 monthly payments of $13,534 each with a final payment
of the unpaid principal balance and interest due on April 22, 2013. Interest
will be accrued at 6% per annum until April 22, 2008, at which time the interest
rate may change to the Wall Street Journal Prime Rate of Interest at such time,
subject to a floor of 6% per annum and a ceiling of 9.5% per annum. The note is
secured by a first priority security interest in the Company's commercial real
estate and office building. Management believes that the terms obtained from
Western National Bank were no less favorable to the Company than those available
from an independent lender.
On March 2, 2005, the Company entered into a Stock Repurchase Agreement with
Brooke Corporation, whereby the Company repurchased 450,500 shares of the
Company's common stock from Brooke Corporation. The privately-negotiated
transaction returns approximately 9.7% of the Company's total stock to the
corporate treasury, making it available for use for future planned
capitalization. The Company negotiated a purchase price of $770,355 ($1.71 per
share) to include $200,000 cash at closing, with Brooke Credit Corporation, the
finance subsidiary of Brooke Corporation, financing the remainder at a fixed
interest rate of 8% over a ten year period. The agreement also grants Brooke
warrants to purchase up to 150,000 shares of the Company's common stock at
prices ranging from $1.71 per share to $5.00 per share. The warrants are
exercisable in 2012 or immediately prior to any earlier change of control
involving FACC, are subject to certain covenants and conditions, and expire no
later than 2015.
Pursuant to the Stock Repurchase Agreement, Brooke Corporation agreed that
neither it nor its affiliates would take certain actions with respect to the
Company or its stock for a period of five years, including acquiring beneficial
ownership of the common stock, soliciting proxies or participating in any proxy
contest or other effort to take control of the Company or its affiliates.
The Company has granted a second priority security interest in its commercial
real property and office building to secure the loan from Brooke Credit Corp.
Mr. Van Engelen entered into an employment agreement with the Company effective
February 16, 2004 to serve as President and CEO of the Company. See Item 10
Executive Compensation above.
25
Item 13. Exhibits and Reports on Form 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Financial Statements are attached hereto and included herein on pages F-1
through F-24.
(b) 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 amended and restated effective January 1, 2002
between First American Capital Corporation and First Life America
Corporation (Incorporated by reference from Exhibit 10.3 to the
Registrant's Form 10-KSB filed March 31, 2003)
10.3 Operating Agreement of First Computer Services, LLC dated December
1, 2001, as amended (Incorporated by reference from Exhibit 10.3
to the Registrant's Form 10-QSB filed November 15, 2004)
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
(Incorporated by reference from Exhibit 10.5 to the Registrant's
Form 10-QSB filed November 15, 2004)
10.6 Intercompany Tax Sharing Agreement dated December 31, 2003 between
First American Capital Corporation and First Life America
Corporation (Incorporated by reference form Exhibit 10.6 to the
Registrant's Form 10-KSB filed March 29, 2004)
10.7 Stock Repurchase Agreement between First American Capital
Corporation and Brooke Corporation dated March 2, 2005 (*)
10.8 Warrant for 50,000 shares of First American Capital Corporation
common stock for $1.71 per share issued to Brooke Corporation
effective March 2, 2005 (*)
10.9 Warrant for 50,000 shares of First American Capital Corporation
common stock for $3.35 per share issued to Brooke Corporation
effective March 2, 2005 (*)
10.10 Warrant for 50,000 shares of First American Capital Corporation
common stock for $5.00 per share issued to Brooke Corporation
effective March 2, 2005 (*)
26
Item 13. Exhibits and Reports on Form 8-K (continued)
Exhibit No. Description
----------- -----------
14.1 First American Capital Corporation Code of Ethics for Executive
Management and Board of Directors (Incorporated by reference form
Exhibit 14.1 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-QSB filed
November 15, 2004)
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
(c) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fourth quarter of
2004.
Item 14. Principal Accountant Fees and Services
All audit related services were pre-approved by the Audit Committee, which
concluded that the provision of such services by BKD LLP was compatible with the
maintenance of this firm's independence in the conduct of its auditing
functions.
The following table represents fees for professional audit services rendered by
BKD LLP for the audit of the Company's annual financial statements and for the
review of the financial statements included in our quarterly reports.
Years Ended December 31,
------------------------
2004 2003
------- ----
Audit fees (1) $75,500 $--
------- ---
$75,500 $--
======= ===
(1) Audit fees - Consists of fees billed and anticipated fees for professional
services rendered for the audit of the Company's annual financial
statements and review of the interim financial statements included in
quarterly reports, and services that are normally provided by BKD LLP in
connection with statutory and regulatory filings or engagements.
27
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST AMERICAN CAPITAL CORPORATION
By /s/ John F. Van Engelen Date 3/30/05
------------------------------------------- --------------------------
John F. Van Engelen,
President & Chief Executive Officer
Director
28
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ John F. Van Engelen Date 3/30/05
------------------------------------------- --------------------------
John F. Van Engelen,
President & Chief Executive Officer
Director
By /s/ Harland E. Priddle Date 3/30/05
------------------------------------------- --------------------------
Harland E. Priddle,
Chairman & Secretary
Director
By /s/ Patrick A. Tilghman Date 3/30/05
------------------------------------------- --------------------------
Patrick A. Tilghman,
Treasurer & Chief Financial Officer
By /s/ Thomas M. Fogt Date 3/30/05
------------------------------------------- --------------------------
Thomas M. Fogt, Director
By /s/ John G. Montgomery Date 3/30/05
------------------------------------------- --------------------------
John G. Montgomery, Director
By /s/ Gary E. Yager Date 3/30/05
------------------------------------------- --------------------------
Gary E. Yager, Director
By /s/ Kenneth L. Frahm Date 3/30/05
------------------------------------------- --------------------------
Kenneth L. Frahm, Director
By /s/ Edward C. Carter Date 3/30/05
------------------------------------------- --------------------------
Edward C. Carter, Director
29
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements Numbers
--------------------------------- -------
Report of Independent Registered Public Accounting Firm
for the year ended December 31, 2004............................... F-2
Independent Auditor's Report for the years ended
December 31, 2003 and 2002......................................... F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003.......... F-4
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002................................... F-6
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2004, 2003 and 2002............................. F-7
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2004, 2003, and 2002...................... F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002.................................. F-9
Notes to Consolidated Financial Statements............................ F-11
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First American Capital Corporation
We have audited the accompanying consolidated balance sheet of First
American Capital Corporation (a Kansas corporation) as of December 31,
2004 and the related consolidated statements of operations, comprehensive
income, changes in shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our respon-sibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the 2004 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of First American Capital Corporation as of December 31, 2004
and the consolidated results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ BKD, LLP
Kansas City, Missouri
March 11, 2005
F-2
Independent Auditors' Report
Board of Directors and Shareholders
First American Capital Corporation
We have audited the accompanying consolidated balance sheets of First
American Capital Corporation (a Kansas corporation) and subsidiary as of
December 31, 2003, and the related consolidated statements of operations,
comprehensive income, changes in shareholders' equity, and cash flows for each
of the two years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First American
Capital Corporation and subsidiary as of December 31, 2003, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 18, 2004
F-3
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost, $13,206,486
in 2004 and $11,432,605 in 2003) $13,479,388 $12,032,106
Equity securities (cost of $235,400 in 2004
and $41,800 in 2003) 236,342 41,800
Investments in real estate 274,564 274,564
Policy loans 86,946 60,451
Notes receivable (net of valuation allowance
of $0 in 2004 and 2003) -- 13,741
Short-term investments -- 460,593
Mortgage loans on real estate 349,542 --
Other investments 206,306 --
----------- -----------
Total investments 14,633,088 12,883,255
Cash and cash equivalents 527,028 397,789
Investments in related parties -- 65,200
Accrued investment income 214,140 181,069
Accounts receivable 258,194 296,366
Deferred policy acquisition costs (net of accumulated
amortization of $3,081,632 in 2004 and $2,312,021 in 2003) 4,516,994 4,010,959
Property and equipment (net of accumulated depreciation
of $668,821 in 2004 and $383,199 in 2003) 2,775,187 2,836,814
Other assets 30,365 7,648
----------- -----------
Total assets $22,954,996 $20,679,100
=========== ===========
See notes to consolidated financial statements.
F-4
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy and contract liabilities:
Future annuity benefits $ 6,806,430 $ 4,899,770
Future policy benefits 4,149,304 3,128,491
Liability for policy claims 112,906 108,018
Policyholder premium deposits 186,971 217,976
Deposits on pending policy applications 9,668 32,491
Reinsurance premiums payable 23,120 31,713
----------- -----------
Total policy and contract liabilities 11,288,399 8,418,459
Commissions, salaries, wages and benefits payable 103,944 53,015
Other liabilities 200,870 174,277
Note payable 1,791,607 1,843,007
Deferred federal income taxes payable 603,489 760,881
----------- -----------
Total liabilities 13,988,309 11,249,639
Shareholders' equity:
Common stock, $.10 par value, 8,000,000 shares authorized; 5,449,578 shares
issued and 4,688,078 shares outstanding in 2004; and 5,449,578 issued and
4,687,078 shares outstanding in 2003 544,958 544,958
Additional paid in capital 12,380,716 12,380,523
Accumulated deficit (2,795,775) (2,562,839)
Accumulated other comprehensive income 220,454 452,302
Less: Treasury stock held at cost (761,500 shares in 2004
and 762,500 in 2003) (1,383,666) (1,385,483)
----------- -----------
Total shareholders' equity 8,966,687 9,429,461
----------- -----------
Total liabilities and shareholders' equity $22,954,996 $20,679,100
=========== ===========
See notes to consolidated financial statements.
F-5
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
Revenues:
Gross premium income $ 3,640,557 $ 3,657,862 $ 3,441,407
Reinsurance premiums assumed 10,816 5,943 1,077
Reinsurance premiums ceded (117,761) (126,531) (111,624)
----------- ----------- -----------
Net premium income 3,533,612 3,537,274 3,330,860
Net investment income 517,486 558,418 589,430
Net realized investment gain 463,787 4,820 22,848
Rental income 182,553 213,457 214,676
Other income 38 -- 1,334
----------- ----------- -----------
Total revenue 4,697,476 4,313,969 4,159,148
Benefits and expenses:
Increase in policy reserves 1,020,812 819,632 786,064
Policyholder surrender values 135,518 127,142 67,162
Interest credited on annuities and
premium deposits 344,918 304,283 171,866
Death claims 288,741 251,389 85,767
Commissions 1,059,798 1,235,074 1,336,805
Policy acquisition costs deferred (1,275,646) (1,453,440) (1,680,977)
Amortization of deferred policy
acquisition costs 769,611 629,068 423,210
Salaries, wages, and employee benefits 1,119,185 1,150,230 1,352,175
Miscellaneous taxes 171,886 131,922 78,778
Administrative fees - related party -- -- 288,936
Other operating costs and expenses 1,359,969 1,845,155 1,394,120
----------- ----------- -----------
Total benefits and expenses 4,994,792 5,040,455 4,303,906
----------- ----------- -----------
Loss before income tax expense (297,316) (726,486) (144,758)
----------- ----------- -----------
Income tax expense (benefit) (64,380) (240,486) 402,468
----------- ----------- -----------
Net loss $ (232,936) $ (486,000) $ (547,226)
=========== =========== ===========
Net loss per common
share - basic and diluted $ (0.05) $ (0.10) $ (0.11)
=========== =========== ===========
See notes to consolidated financial statements.
F-6
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
--------- --------- ---------
Net loss $(232,936) $(486,000) $(547,226)
Unrealized gain (loss) on available-for-sale securities:
Unrealized holding gain (loss) during the period 138,928 (60,789) 392,883
Less: Reclassification for gains included in net income 463,787 4,820 22,848
Tax benefit (expense) 93,011 86,113 (129,514)
--------- --------- ---------
Other comprehensive income (loss) (231,848) 20,504 240,521
--------- --------- ---------
Comprehensive loss $(464,784) $(465,496) $(306,705)
========= ========= =========
Comprehensive loss per common share-basic and diluted $ (0.10) $ (0.10) $ (0.06)
========= ========= =========
See notes to consolidated financial statements.
F-7
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
COMMON STOCK:
Balance, beginning of year $ 544,958 $ 544,958 $ 543,899
Common shares issued -- -- 1,059
----------- ----------- -----------
Balance, end of year 544,958 544,958 544,958
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of year 12,380,523 12,380,523 12,328,617
Additional paid in capital on sale of treasury stock 193 -- --
Common shares issued -- -- 51,906
----------- ----------- -----------
Balance, end of year 12,380,716 12,380,523 12,380,523
ACCUMULATED DEFICIT:
Balance, beginning of year (2,562,839) (2,076,839) (1,529,613)
Net loss (232,936) (486,000) (547,226)
----------- ----------- -----------
Balance, end of year (2,795,775) (2,562,839) (2,076,839)
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year 452,302 431,798 191,277
Other comprehensive income (231,848) 20,504 240,521
----------- ----------- -----------
Balance, end of year 220,454 452,302 431,798
TREASURY STOCK:
Balance, beginning of year (1,385,483) (1,385,483) (244,258)
Sale of 1,000 shares at cost of $1.82 per share 1,817 -- --
Purchase of 597,500 common shares at $1.91 per share -- -- (1,141,225)
----------- ----------- -----------
Balance, end of year (1,383,666) (1,385,483) (1,385,483)
----------- ----------- -----------
Total shareholders' equity $ 8,966,687 $ 9,429,461 $ 9,894,957
=========== =========== ===========
See notes to consolidated financial statements.
F-8
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
OPERATING ACTIVITIES:
Net loss $ (232,936) $ (486,000) $ (547,226)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Interest credited on annuities and premium deposits 344,918 304,283 77,189
Net realized investment gain (463,787) (4,820) (22,848)
Provision for depreciation 132,902 124,093 134,999
Equity loss in investment in affiliate 28,516 46,049 28,832
Amortization of premium and accretion of discount on
fixed maturity and short-term investments 138,001 87,980 53,849
Interest creditied in certificates of deposit balances -- -- (7,018)
Realized net loss on disposal of assets -- 2,179 --
(Benefit) provision for deferred federal income taxes (64,380) (219,401) 403,089
(Increase) decrease in accrued investment income (33,071) (3,471) 4,121
Decrease (increase) in accounts receivable 38,172 26,055 (217,974)
Decrease in accounts receivable from affiliate -- -- 124,881
Acquisition costs capitalized (1,275,646) (1,453,440) (1,680,977)
Amortization of deferred acquisition costs 769,611 629,068 423,210
(Increase) decrease in policy loans (26,495) 4,560 (31,833)
(Increase) decrease in other assets (22,717) 23,496 (5,072)
Increase in future policy benefits 1,020,812 819,632 786,065
Increase in liability for policy claims 4,888 29,347 78,671
(Decrease) increase in deposits on pending policy applications (22,823) (164,522) 24,397
(Decrease) increase in reinsurance premiums payable (8,593) (8,173) 7,744
Increase (decrease) in commissions, salaries, wages and
benefits payable 50,929 (2,215) 87,131
Decrease in accounts payable to affiliate -- -- (18,022)
Increase in other liabilities 26,593 66,202 16,093
----------- ----------- -----------
Net cash provided by (used in) operating activities $ 404,894 $ (179,098) $ (280,699)
See notes to consolidated financial statements.
F-9
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ----------- -----------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $(10,022,949) $(2,816,821) $(5,152,880)
Sale of available-for-sale fixed maturities 6,732,704 -- 1,478,352
Maturity of available-for-sale fixed maturities 1,850,000 1,404,000 1,895,000
Purchase of available-for-sale equity securities (193,600) -- --
Additions to property and equipment (71,275) (12,440) (26,698)
Dispositions of property and equipment -- 1,400 --
Purchase of other investments (202,760) -- --
Purchase of mortgage loans (350,000) -- --
Payments received on mortgage loans 458 -- --
Purchase of investments in affiliate (11,500) (21,500) (9,805)
Dispositions of investments in affiliates 48,184 -- --
Additions to notes receivable -- -- (31,000)
Payments on notes receivable 13,741 14,463 2,796
Purchase of short-term investments (3,925,512) (466,312) (697,403)
Maturity of short-term investments 4,375,507 415,000 2,537,643
------------ ----------- -----------
Net cash used in investing activities (1,757,002) (1,482,210) (3,995)
FINANCING ACTIVITIES:
Payments on note payable (51,400) (45,837) (78,484)
Deposits on annuity contracts 1,839,573 1,840,681 1,477,447
Surrenders on annuity contracts (269,794) (120,606) (78,540)
Policyholder premium deposits 22,472 46,858 109,519
Withdrawals on policyholder premium deposits (61,514) (62,061) (67,324)
Purchase of treasury stock -- -- (1,141,225)
Proceeds from sale of treasury stock 2,010 -- --
------------ ----------- -----------
Net cash provided by financing activities 1,481,347 1,659,035 221,393
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents 129,239 (2,273) (63,301)
Cash and cash equivalents, beginning of period 397,789 400,062 463,363
------------ ----------- -----------
Cash and cash equivalents, end of period $ 527,028 $ 397,789 $ 400,062
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES:
Interest paid $ 111,004 $ 123,449 $ 143,227
============ =========== ===========
Income taxes paid $ -- $ -- $ 10,500
============ =========== ===========
SCHEDULE OF NON-CASH INVESTING TRANSACTIONS:
Common stock issued to Advisory Board Members $ -- $ -- $ 52,965
============ =========== ===========
See notes to consolidated financial statements.
F-10
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First American Capital Corporation (the "Company") is a holding company whose
subsidiary, First Life America Corporation ("FLAC") is primarily engaged in the
business of marketing, underwriting and distributing a broad range of individual
life and annuity insurance products to individuals in eight states.
Approximately 64% of the Company's total policyholders are located in the State
of Kansas.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"), which for FLAC, differ from statutory accounting practices
prescribed or permitted by the Kansas Insurance Department ("KID").
Certain amounts from prior years have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on previously
reported net income or shareholders' equity.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its subsidiary, FLAC. All intercompany accounts
and transactions are eliminated in consolidation.
Management's Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. As more information becomes known, actual
results could differ from those estimates.
Investments
The Company classifies all of its fixed maturity and equity investments as
available-for-sale. Available-for-sale fixed maturities are carried at fair
value with unrealized gains and losses, net of applicable taxes, reported in
other comprehensive income. Equity securities are carried at fair value with
unrealized gains and losses, net of applicable taxes, reported in other
comprehensive income. Mortgage loans on real estate are carried at cost less
principal payments. Other receivable investments are carried at amortized cost.
Discounts originating at the time of purchase, net of capitalized acquisition
costs, are amortized using the level yield method on an individual basis over
the remaining contractual term of the receivable. Policy loans are carried at
unpaid balances. Cash equivalents consist of highly liquid investments with
maturities of three months or less at the date of purchase and are carried at
cost, which approximates fair value. Notes receivable are reported at unpaid
principal balance, net of allowance for uncollectible amounts. Short-term
investments consist of investments with original maturities of three months to
one year and are carried at cost, which approximates fair value. Realized gains
and losses on sales of investments are recognized in operations on the specific
identification basis. Interest earned on investments is included in net
investment income. Investments in related parties are reported using the equity
method (see Note 5).
F-11
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Policy Acquisition Costs
Commissions and other costs of acquiring life insurance, which vary with, and
are primarily related to, the production of new business have been deferred to
the extent recoverable from future policy revenues and gross profits. The
acquisition costs are being amortized over the premium paying period of the
related policies using assumptions consistent with those used in computing
policy reserves.
Property and Equipment
Property and equipment, including the home office building (see Note 6), are
carried at cost less accumulated depreciation. Accumulated depreciation on the
office building and land improvements is calculated using the straight-line
method over the estimated useful lives of the respective assets. Accumulated
depreciation on furniture, fixtures and equipment is calculated using the 200%
declining balance method over the estimated useful lives of the respective
assets. The estimated useful lives are generally as follows:
Building and capitalized interest 39 years
Land improvements 15 years
Furniture, fixtures and equipment 3 to 7 years
Future Annuity Benefits
Annuity contract liabilities are computed using the retrospective deposit method
and consist of policy account balances before deduction of surrender charges,
which accrue to the benefit of policyholders. Premiums received on annuity
contracts are recognized as an increase in a liability rather than premium
income. Interest credited on annuity contracts is recognized as an expense. The
range of interest crediting rates for annuity products was 4.75 to 6.00 percent
in 2004 and 4.75 to 7.88 percent in 2003.
Future Policy Benefits
Traditional life insurance policy benefit liabilities are computed on a net
level premium method using assumptions with respect to current yield, mortality,
withdrawal rates, and other assumptions deemed appropriate by the Company.
Reserve interest assumptions, including the impact of grading for possible
adverse deviations, ranged from 5.00 to 7.25 percent.
Liability for Policy Claims
Policy claim liabilities represent the estimated liabilities for claims reported
plus claims incurred but not yet reported. The liabilities are subject to the
impact of actual payments and future changes in claim factors.
Policyholder Premium Deposits
Policyholder premium deposits represent premiums received for the payment of
future premiums on existing policyholder contracts. Interest is credited on
these deposits at the rate of 4% in 2004 and 6% in 2003. The premium deposits
are recognized as an increase in a liability rather than premium income.
Interest credited on the premium deposits is recognized as an expense.
F-12
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums
For limited payment and other traditional life insurance policies, premium
income is reported as earned when due. Profits are recognized over the life of
these contracts by associating benefits and expenses with insurance in force for
limited payment policies and with earned premiums for other traditional life
policies. This association is accomplished by a provision for liability for
future policy benefits and the amortization of policy acquisition costs.
Federal Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred
income taxes are provided for cumulative temporary differences between balances
of assets and liabilities determined under accounting principles generally
accepted in the United States of America and balances determined for tax
reporting purposes.
Reinsurance
Estimated reinsurance receivables are reported as assets and are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts, in accordance with SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
Net Earnings (Loss) 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
year. The weighted average outstanding common shares were 4,687,086, 4,687,078,
and 5,120,804 for the years ended December 31, 2004, 2003 and 2002,
respectively.
Comprehensive Income
SFAS No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be recorded as a component of accumulated other
comprehensive income. Unrealized gains and losses recognized in accumulated
other comprehensive income that are later recognized in net income through a
reclassification adjustment are identified on the specific identification
method.
New Accounting Pronouncements
In March 2004, the Emerging Issues Task Force reached further consensus on Issue
No. 03-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance for determining
the meaning of "other-than-temporarily impaired" and its application to certain
debt and equity securities within the scope of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") and investments accounted for under the cost method.
The guidance requires that investments which have declined in value due to
credit concerns or solely due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Corporation can assert and
demonstrate its intention to hold the security for a period of time sufficient
to allow for a recovery of fair value up to or beyond the cost of the
investment, which might mean maturity. This issue also requires disclosures
assessing the ability and intent to hold investments in instances in which an
investor determines that an investment with a fair value less than cost is not
other-than-temporarily impaired.
F-13
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The guidance in EITF 03-1 was effective for other-than-temporary impairment
evaluations made in reporting periods beginning after June 15, 2004. However,
the guidance contained in paragraphs 10-20 of this Issue in EITF Abstracts has
been delayed by FASB Staff Position (FSP) EITF Issue 03-1-1, "The Effective Date
of Paragraphs 10-20 of EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,'" posted on September 30,
2004. At the November 2004 meeting, the FASB staff indicated that the Board is
expected to undertake a comprehensive reconsideration of the guidance in EITF
03-1 and that the measurement and recognition guidance in paragraphs 10-20 of
that Issue continue to be deferred by FSP EITF Issue 03-1-1. However, other
provisions of EITF 03-1, including its disclosure requirements, have not been
deferred. The disclosure requirements continue to be effective in annual
financial statements for fiscal years ending after December 15, 2003, for
investments accounted for under FASB Statements of Financial Accounting
Standards 115 and 124. For all other investments within the scope of this Issue,
the disclosures continue to be effective in annual financial statements for
fiscal years ending after June 15, 2004.
All other Standards and Interpretations of those Standards issued during 2004
did not relate to accounting policies and procedures pertinent to the Company at
this time.
3. INVESTMENTS
The amortized cost and fair value of investments at December 31, 2004 and 2003
are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
December 31, 2004:
U.S. Government Agency $ 1,848,071 $ 47,607 $ 1,930 $ 1,893,748
Corporate bonds
11,358,415 308,061 80,836 11,585,640
----------- -------- ------- -----------
Total $13,206,486 $355,668 $82,766 $13,479,388
=========== ======== ======= ===========
Equity securities $ 235,400 $ 5,992 $ 5,050 $ 236,342
=========== ======== ======= ===========
December 31, 2003:
U.S. Government Agency $ 3,428,817 $115,827 $ 4,882 $ 3,539,762
Corporate bonds
8,003,788 495,637 7,081 8,492,344
----------- -------- ------- -----------
Total $11,432,605 $611,464 $11,963 $12,032,106
=========== ======== ======= ===========
Equity securities $ 41,800 $ -- $ -- $ 41,800
=========== ======== ======= ===========
F-14
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 2004, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers may have the right to call or
prepay obligations.
Amortized Cost Fair Value
-------------- -----------
Due in one year or less $ 912,314 $ 907,825
Due after one year through five years 3,020,183 3,100,048
Due after five years through ten years 2,981,665 3,024,587
Due after ten years 6,292,324 6,446,929
----------- -----------
$13,206,486 $13,479,388
=========== ===========
The fair values for investments in fixed maturities are based on quoted market
prices.
Included in investments are securities, which have been pledged to various state
insurance departments. The fair values of these securities were $2,285,263 and
$2,172,541 at December 31, 2004 and 2003, respectively.
During 2004, the Company had gross realized investment gains of $464,363.
Investment gains were $4,820 and $39,454 during 2003 and 2002, respectively.
During 2004, the Company had gross realized investment losses of $576. Gross
realized investment losses totaled $0 and $16,606 in 2003 and 2002,
respectively.
During 2002, the Company issued a $31,000 note to an employee of the Company.
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. The remaining principal balance of the note was $0 and
$13,741 at December 31, 2004, and 2003, respectively. No valuation allowance was
assessed against the note at December 31, 2004 and 2003.
During 2004, the Company commenced purchasing investments in lottery prize cash
flows. These other investments involve purchasing assignments of the future
payment rights from the lottery winners at a discounted price sufficient to meet
the Company's yield requirements. Payments on these other investments will be
made by state run lotteries and as such are backed by the general credit of the
respective state. At December 31, 2004 and 2003 the carrying value of other
receivables was $206,306 and $0, respectively.
Interest income consists of dividends and interest earned on notes receivable,
policy loans, available-for-sale securities, mortgage loans, other investments
and short-term investments, which include certificates of deposit.
F-15
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Following are the components of net investment income for the years ended
December 31, 2004, 2003 and 2002:
Years ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
Fixed maturities $509,933 $549,369 $545,051
Equity securities 70 -- --
Notes receivables 238 1,697 2,051
Mortgage loans on real estate 2,275 -- --
Equity loss on investment in related parties (28,516) (46,049) (28,832)
Short-term and other investments 43,798 57,019 73,550
-------- -------- --------
Gross investment income 527,798 562,036 591,820
Investment expenses (10,312) (3,618) (2,390)
-------- -------- --------
Net investment income $517,486 $558,418 $589,430
======== ======== ========
The Company has a policy in place to identify securities that could potentially
have an impairment that is other than temporary. This policy involves monitoring
market events that could impact issuers' credit ratings, business climate,
management changes, litigation and government actions, downgrades by rating
agencies, financial statements and other similar factors.
The following table provides information regarding unrealized losses on
investments available for sale, as of December 31, 2004.
Less than 12 months 12 months or longer Total
----------------------- --------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------- ---------- -------- ---------- ---------- ----------
December 31, 2004:
U.S. Government Agency $ 401,058 $ 702 $447,332 $1,228 $ 848,390 $ 1,930
Corporate bonds 3,656,639 74,449 522,168 6,387 4,178,807 80,836
---------- ------- -------- ------ ---------- -------
Total $4,057,697 $75,151 $969,500 $7,615 $5,027,197 $82,766
========== ======= ======== ====== ========== =======
Equity securities $ 144,600 $ 5,050 $ -- $ -- $ 144,600 $ 5,050
========== ======= ======== ====== ========== =======
4. CONCENTRATIONS OF CREDIT RISK
Credit risk is limited by emphasizing investment grade securities and by
diversifying the investment portfolio among various investment instruments.
Credit risk is further minimized by investing in certificates of deposit.
Certain certificates of deposit and cash balances exceed the maximum insurance
protection of $100,000 provided by the Federal Deposit Insurance Corporation
("FDIC"). However, both certificates of deposit balances and cash balances
exceeding this maximum are protected through additional insurance. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
F-16
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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. 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 year. 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 $28,516, $46,049 and $28,832 for the years ended
December 31, 2004, 2003 and 2002, respectively. These amounts are included in
net investment income. As of December 31, 2004 and 2003, the carrying value of
the FCS investment was $0 and $65,200, respectively.
6. PROPERTY AND EQUIPMENT
The Company owns approximately six and one-half acres of land located in Topeka,
Kansas. A 20,000 square foot office building has been constructed on
approximately one-half of this land. The remaining land, including improvement
costs, is classified as real estate held for investment. The Company occupies
approximately 7,500 square feet of the building and the remaining 12,500 square
feet is leased (see Note 7).
2004 2003
---------- ----------
Land and improvements $ 357,675 $ 357,675
Building and capitalized interest 2,605,330 2,605,330
Furniture, fixtures and equipment 481,003 257,008
---------- ----------
Total property and equipment 3,444,008 3,220,013
Less - accumulated depreciation and amortization (668,821) (383,199)
---------- ----------
Net property and equipment $2,775,187 $2,836,814
========== ==========
7. LEASES
The Company owns a 20,000 square foot office building and occupies approximately
7,500 square feet. The Company has leased 10,000 square feet under a 10 year
inclusive non cancelable lease that commenced on July 1, 2001 and will end on
June 30, 2011. The lessee may terminate this lease after 5 years, on or after
June 30, 2006 upon 90 days notification in writing to the lessor. The Company
has leased approximately 2,500 square feet on a month to month basis. This lease
was cancelled in December 2003. The remaining 2,500 square feet is available for
lease. The future minimum lease payments to be received under non cancelable
lease agreements at December 31, 2004 are approximately as follows:
Year Ending
December 31, Amount
------------ --------
2005 183,116
2006 91,558
--------
Total $274,674
========
F-17
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FEDERAL INCOME TAXES
Effective June 30, 2003, the Company commenced calculating deferred taxes based
on a consolidated income tax return approach. The impact of this change in
accounting estimate is reflected in the year ended December 31, 2003 summary of
operations. Income tax expense was reduced by $347,412, or $.07 per share, for
the year ended December 31, 2003, resulting in an income tax benefit of $240,486
for the year ended December 31, 2003.
The Company has elected to file a consolidated federal income tax return with
FLAC for the years ended December 31, 2004 and 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. Federal
income tax expense for the years ended December 31, 2004, 2003, and 2002
consisted of the following:
Years ended December 31,
-------------------------------
2004 2003 2002
-------- --------- --------
Current $ -- $ (21,089) $ --
Deferred (64,380) (219,397) 402,468
-------- --------- --------
Federal income tax (benefit) expense $(64,380) $(240,486) $402,468
======== ========= ========
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate for 2004, 2003 and 2002 as follows:
Years ended December 31,
--------------------------------
2004 2003 2002
--------- --------- --------
Federal income tax expense (benefit) at
statutory rate $(101,088) $(247,005) $(50,665)
Small life insurance company deduction (64,975) (51,616) --
Increase in valuation allowance 100,202 234,152 480,683
Income tax recoverable from NOL carryback -- (21,089) --
Other 1,481 (154,928) (27,550)
--------- --------- --------
Federal income tax (benefit) expense $ (64,380) $(240,486) $402,468
========= ========= ========
F-18
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FEDERAL INCOME TAXES (CONTINUED)
Deferred federal income taxes reflect the impact of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Significant components
of the Company's net deferred tax liability are as follows:
December 31,
-------------------------
2004 2003
----------- -----------
Deferred tax liability:
Due premiums $ 10,659 $ 16,153
Deferred policy acquisition costs 761,870 675,324
Accrual of discount 4,253 11,387
Net unrealized investment gains 53,385 146,395
----------- -----------
Total deferred tax liability 830,167 849,259
Deferred tax asset:
Policy reserves 74,607 82,035
Reinsurance premiums 4,624 6,343
Net operating loss carryforward 1,852,075 1,602,890
Capital loss carryforward -- 1,536
----------- -----------
Total deferred tax asset 1,931,306 1,692,804
Valuation allowance (1,704,628) (1,604,426)
----------- -----------
Net deferred tax asset 226,678 88,378
----------- -----------
Net deferred tax liability $ 603,489 $ 760,881
=========== ===========
The Company has net operating loss carryforwards of approximately $5,750,845 on
a consolidated basis. Net operating loss carryforwards of $799,241 resulted from
non-life insurance operations and were generated prior to the base period for
tax consolidation purposes. These loss carryforwards expire in 2011 and 2012 and
can only be used to offset taxable income resulting from non-life insurance
operations. Net operating loss carryforwards of $4,214,374 resulted from
non-life insurance operations and were generated either during or subsequent to
the base period for tax consolidation purposes. These loss carryforwards expire
in 2018 through 2024 and can be used to offset either taxable income resulting
from non-life insurance operations or 35% of taxable income resulting from life
insurance operations. Net operating loss carryforwards of $737,230 resulted from
life insurance operations and were generated either during or subsequent to the
base period for tax consolidation purposes. These loss carryforwards expire in
2022 and 2023.
9. NOTE PAYABLE
On July 20, 2001, the Company borrowed $2 million from Columbian Bank and Trust
Company secured by its home office building (See Note 6). The note was scheduled
to mature on July 15, 2016. The note was payable in 120 monthly payments of
$18,000 each and 59 monthly payments of $18,444 each and a final payment of the
balance due. The lender could, when an increase occurred in the interest rate,
increase the amount of the monthly payment or increase the number of payments
required. Interest was payable monthly based on the 5-year T-Bill rate (4.40% at
the date of the loan) plus a margin of 2.60 percentage points. The interest rate
would have been recomputed at the end of 5 years and 10 years based on the
current 5-year T-Bill rate at that time.
F-19
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTE PAYABLE (CONTINUED)
On April 22, 2003, the Company refinanced the note to Columbian Bank and Trust
Company with a note from Western National Bank (See Note 13). The note is
secured by the home office building. The note will mature on April 22, 2013. The
note is payable in 120 monthly payments of $13,534 each with a final payment of
the unpaid principal balance and interest on April 22, 2013. Interest will be
accrued at 6% until April 22, 2008 at which time the rate may change. The
interest rate change will be the Wall Street Journal Prime Rate of Interest,
subject to a floor of 6% and a ceiling of 9.5%.
Required future principle payments are as follows:
Principal
Year Payment
---- ---------
2005 54,936
2006 58,373
2007 62,024
2008 65,624
2009 70,010
Thereafter 1,480,640
---------
Total 1,791,607
=========
10. SHAREHOLDERS' EQUITY AND STATUTORY ACCOUNTING PRACTICES
FLAC prepares its statutory-basis financial statements in accordance with
statutory accounting practices ("SAP") prescribed or permitted by the KID.
Currently, "prescribed" statutory accounting practices include state insurance
laws, regulations, and general administrative rules, as well as the National
Association of Insurance Commissioners ("NAIC") Accounting Practices and
Procedures Manual and a variety of other NAIC publications. "Permitted"
statutory accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. During 1998,
the NAIC adopted codified statutory accounting principles ("Codification").
Codification replaced the NAIC Accounting Practices and Procedures Manual and
was effective January 1, 2001. The impact of Codification was not material to
FLAC's statutory-basis financial statements.
Net income for 2004, 2003, and 2002 and capital and surplus at December 31,
2004, 2003, and 2002 for the Company's insurance operations as reported in these
financial statements prepared in accordance with GAAP as compared to amounts
reported in accordance with SAP prescribed or permitted by the KID are as
follows:
GAAP SAP
------------------------ ------------------------
Net Income Capital and Net Income Capital and
(loss) Surplus (loss) Surplus
---------- ----------- ---------- -----------
2004 528,494 6,251,955 (54,205) 2,539,348
2003 609,166 5,796,464 (253,955) 2,615,342
2002 78,160 5,190,658 (671,551) 2,879,079
F-20
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHAREHOLDERS' EQUITY AND STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Principal differences between GAAP and SAP include: a) costs of acquiring new
policies are deferred and amortized for GAAP; b) benefit reserves are calculated
using more realistic investment, mortality and withdrawal assumptions for GAAP;
c) statutory asset valuation reserves are not required for GAAP; and d)
available-for-sale fixed maturity investments are reported at fair value with
unrealized gains and losses reported as a separate component of shareholders'
equity for GAAP.
Statutory restrictions limit the amount of dividends, which may be paid by FLAC
to the Company. Generally, dividends during any year may not be paid without
prior regulatory approval, in excess of the lesser of (a) 10% of statutory
shareholders' surplus as of the preceding December 31, or (b) statutory net
operating income for the preceding year. In addition, FLAC must maintain the
minimum statutory capital and surplus required for life insurance companies in
those states in which it is licensed to transact life insurance business.
The KID imposes on insurance enterprises minimum risk-based capital ("RBC")
requirements that were developed by the NAIC. The formulas for determining the
amount of RBC specify various weighing factors that are applied to financial
balances or various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by ratio (the "Ratio") of the enterprises
regulatory total adjusted capital, as defined by the NAIC, to its authorized
control level RBC, as defined by the NAIC. Enterprises below specific trigger
points or ratios are classified within certain levels, each of which requires
specified corrective action. FLAC has a ratio that is in excess of the minimum
RBC requirements; accordingly, FLAC meets the RBC requirements.
11. 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. The petition 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 Meyer entered into the marketing
agreements despite knowing that the Company could not perform on the financial
requirements of the agreements and without the knowledge, approval or
authorization of the Company's Board of Directors.
On December 12, 2003, Meyer filed an Answer and Counterclaim against the Company
asserting claims for defamation and breach of employment agreement. Meyer seeks
damages in excess of $75,000 plus interest and costs on his defamation claims.
Meyer seeks damages in the amount of $250,000 for an alleged breach of a
provision in his employment contract regarding severance pay; he seeks
additional damages in excess of $75,000 for an alleged breach of a provision in
the employment contract relating to payment of residual commissions.
The Company denies Meyer's allegations and will vigorously defend against them
as well as pursue its claims against Meyer. The trial is currently in the
discovery stage. No trial date has been set. No accrual of any loss or gain that
may result from the resolution of these matters has been reflected in the
financial statements. The amount of the ultimate loss or gain could differ
materially.
F-21
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REINSURANCE
In order to reduce the risk of financial exposure to adverse underwriting
results, insurance companies reinsure a portion of their risks with other
insurance companies. FLAC has entered into agreements with Generali USA Life
Reassurance Company ("Generali") of Kansas City, Missouri, as well as Optimum Re
Insurance Company ("Optimum Re") of Dallas, Texas, to reinsure portions of the
life insurance risks it underwrites. Pursuant to the terms of the agreements,
FLAC retains a maximum coverage exposure of $50,000 on any one insured.
Currently, insurance ceded to Optimum Re is limited to the 10-year term
policies. At December 31, 2004 and 2003, respectively, FLAC ceded inforce
amounts totaling $30,675,126 and $35,734,200 of ordinary business and
$35,695,000 and $36,920,000 of accidental death benefit risk.
Pursuant to the terms of the agreement with Generali, FLAC generally pays no
reinsurance premiums on first year individual business. However, SFAS No. 113
requires the unpaid premium to be recognized as a first year expense and
amortized over the estimated life of the reinsurance policies. FLAC records this
unpaid premium as "reinsurance premiums payable" in the accompanying balance
sheet and as "reinsurance premiums ceded" in the accompanying income statement.
At December 31, 2004 and 2003, respectively, the unpaid reinsurance premiums net
of amortization totaled $23,120 and $31,713. To the extent that the reinsurance
companies are unable to fulfill their obligations under the reinsurance
agreements, FLAC remains primarily liable for the entire amount at risk.
FLAC is party to an Automatic Retrocession Pool Agreement (the "Reinsurance
Pool") with Optimum Re, Catholic Order of Foresters, American Home Life
Insurance Company and Woodmen of the World. The agreement provides for automatic
retrocession of coverage in excess of Optimum Re's retention on business ceded
to Optimum Re by the other parties to the Reinsurance Pool. FLAC's maximum
exposure on any one insured under the Reinsurance Pool is $50,000. During 2004
and 2003, respectively, FLAC assumed inforce amounts totaling $16,629,840 and
$13,460,796.
13. RELATED PARTY TRANSACTIONS
The Company contracted with FAC to provide underwriting and accounting services
for FLAC and the Company. Under the terms of the management agreement, the
Company paid fees based on a percentage of delivered premiums of FLAC. The
percentages were 5.5% of first year premiums; 4% of second year premiums; 3% of
third year premiums; 2% of fourth year premiums, 1% of fifth year premiums, and
1% for years six through ten for ten year policies and .5% in years six through
twenty for twenty year policies. Pursuant to the agreement, the Company incurred
$288,936 of fees during 2002.
Effective September 30, 2002 the Company acquired 525,000 shares of its common
stock held by FAC for an aggregate purchase price of $1,002,750. In conjunction
with the agreement to repurchase the stock, the Company also acquired 72,500
shares of its common stock held by six individuals associated with FAC for an
aggregate purchase price of $138,475. In a related agreement, the Company and
FAC agreed to terminate the management agreement between the parties through
which the Company received administrative, reporting and underwriting services
from FAC. Termination of the agreement occurred by the Company making a lump-sum
payment of $212,000 to FAC on September 30, 2002. This amount represented the
then present value of fees anticipated to be earned by FAC under the agreement
which would otherwise have been payable over time. These agreements effectively
severed FAC's financial interest in the Company.
The Company's note payable (See Note 9) was obtained through Western National
Bank. A Director of the Company is the Vice Chairman of Western National Bank.
The terms of the note payable were determined by competitive bid.
F-22
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments, and the methods and assumptions used
in estimating their fair values, are as follows:
Fixed Maturities
Fixed maturities are carried at fair value in the accompanying consolidated
balance sheets. The fair value of fixed maturities are based on quoted market
prices. At December 31, 2004 and 2003, the fair value of fixed maturities was
$13,479,388 and $12,032,106, respectively.
Equity Securities
Equity securities are carried at fair value in the accompanying consolidated
balance sheets. The fair value of equity securities are based on quoted market
prices. At December 31, 2004 and 2003, the fair value of equity securities was
$236,342 and $41,800, respectively.
Policy Loans
The carrying value of policy loans approximates their fair value. At December
31, 2004 and 2003, the fair value of policy loans was $86,946 and $60,451,
respectively.
Notes Receivable
The carrying value of notes receivable approximates their fair value. At
December 31, 2004 and 2003, the fair value of notes receivable was $0 and
$13,741 respectively.
Short-term Investments
The carrying value of short-term investments approximates their fair value. At
December 31, 2004 and 2003, the fair value of short-term investments was $0 and
$460,593, respectively.
Mortgage Loans on Real Estate
The carrying value of mortgage loans on real estate approximates their fair
value. At December 31, 2004 and 2003, the fair value of mortgage loans on real
estate was $349,542 and $0, respectively.
Other Investments
The carrying value of other investments approximates their fair value. At
December 31, 2004 and 2003, the fair value of other investments was $206,306 and
$0, respectively.
Cash and Cash Equivalents
The carrying value of cash and cash equivalents approximates their fair value.
At December 31, 2004 and 2003, the fair value of cash and cash equivalents was
$527,028 and $397,789, respectively.
F-23
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Investments in Related Parties
The Company holds investments in related parties of $0 and $65,200 at December
31, 2004 and 2003, respectively. The balance represents the Company's investment
in First Computer Services, LLC ("FCS"). The company uses the equity method to
account for this investment. Refer to Note 5 for more information.
15. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," became effective for 1998 and superseded SFAS No. 14. SFAS No. 131
requires a "management approach" (how management internally evaluates the
operating performance of its business units) in the presentation of business
segments. The segment data that follows has been prepared in accordance with
SFAS No. 131. The operations of the Company and its subsidiaries have been
classified into two operating segments as follows: life and annuity insurance
operations and corporate operations. Segment information as of December 31,
2004, 2003 and 2002 and for the years then ended is as follows:
2004 2003 2002
----------- ----------- -----------
Revenues:
Life and annuity insurance operations $ 4,293,633 $ 3,988,400 $ 3,712,523
Corporate operations 403,843 325,569 446,625
----------- ----------- -----------
Total $ 4,697,476 $ 4,313,969 $ 4,159,148
=========== =========== ===========
Income (loss) before income taxes:
Life and annuity insurance operations $ 464,114 $ 368,682 $ 480,628
Corporate operations (761,430) (1,095,168) (625,386)
----------- ----------- -----------
Total $ (297,316) $ (726,486) $ (144,758)
=========== =========== ===========
Depreciation and amortization expense:
Life and annuity insurance operations $ 769,611 $ 629,068 $ 423,210
Corporate operations 132,902 124,093 134,999
----------- ----------- -----------
Total $ 902,513 $ 753,161 $ 558,209
=========== =========== ===========
Assets:
Life and annuity insurance operations $18,305,111 $15,053,265 $12,090,507
Corporate operations 4,649,885 5,625,835 6,656,009
----------- ----------- -----------
Total $22,954,996 $20,679,100 $18,746,516
=========== =========== ===========
16. SUBSEQUENT EVENTS
On March 2, 2005 the Company acquired 450,500 shares of its common stock from a
single, corporate shareholder, Brooke Corporation. The Company negotiated a
purchase price of $770,355 ($1.71 per share) to include $200,000 cash at
closing, with Brooke Credit Corporation, the finance subsidiary of Brooke
Corporation, financing the remainder at a fixed interest rate of 8 percent over
a ten year period. The agreement also grants Brooke warrants to purchase up to
150,000 shares of the Company's common stock at prices ranging from $1.71 per
share to $5.00 per share. The warrants are exercisable in 2012 or immediately
prior to any earlier change of control involving the Company, are subject to
certain covenants and conditions, and expire no later than 2015.
F-24