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, 2001.
[ ] 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
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(Address of principal executive offices)
Issuers telephone number (785) 267-7077
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Securities registered under 12(b) of the Act:
Title of Each Class
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NONE
Securities registered under Section 12(g) of the Act:
Title of Each Class
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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 is not contained 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: $3,219,148
State the aggregate market value of the voting equity held by non-affiliates: Of
the 5,438,985 shares of common stock of the registrant issued as of March 13,
2002, 4,393,985 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 - 5,273,985 shares as of March 13, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X ]
1
FORM 10-KSB
For the Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
Part I Page
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Item 1. Description of Business 3
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II.
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Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Management s Discussion and Analysis or Plan of Operation 10
Item 7. Financial Statements 15
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 15
Part III.
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Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With Section
16(a) of the Exchange Act 15
Item 10. Executive Compensation 19
Item 11. Security Ownership of Certain Beneficial
Owners and Management 20
Item 12. Certain Relationships and Related Transactions 21
Item 13. Exhibits and Reports on Form 8-K 22
Signatures 23
Index to exhibits 26
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. Included in the registration
was a 10% over-sale provision. On March 11, 1996 the Office of the Kansas
Securities Commissioner declared the registration statement effective.
On January 11, 1999, the Company completed the intra-state public stock offering
raising approximately $13,750,000 of capital which included a 10% over-sale of
$1,250,000. $3,250,000 of the proceeds of the stock sale were used to
capitalize the life insurance subsidiary, First Life America Corporation ( FLAC
). The venture capital subsidiary, First Capital Venture, Inc., was formed in
October of 1998; however, it has not yet been capitalized. The remainder of the
proceeds will provide additional capital for the life insurance subsidiary or
for the possible acquisition of life insurance or insurance related company(s)
or provide working capital.
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, 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. Under the
terms of the contract, FLAC pays the Company service fees based on percentages
of first year and renewal premium income delivered by FLAC.
The Company has contracted with First Alliance Corporation ( FAC ) of Lexington,
Kentucky to provide accounting services for FLAC. Under the terms of the
service agreement, the Company pays fees based on a percentage of delivered
premiums of FLAC. The percentages are 5.5% for 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 pay policies
and .5% in years six through twenty for twenty pay policies. Pursuant to the
agreement, the Company incurred $142,785, $117,246, and $60,531 of fees during
2001, 2000 and 1999, respectively. FAC is also a shareholder of the Company
(see Item 11 on Page 20).
First Life America Corporation
On October 15, 1997, FLAC received a certificate of authority from the Kansas
Insurance Department to transact life and annuity business in the state of
Kansas. On November 19, 1998, life insurance operations commenced. Under the
provisions of Generally Accepted Accounting Principals ( GAAP ), FLAC has
$4,922,152 of capital and surplus as of December 31, 2001, and is wholly owned
by the Company. FLAC has contracted with the Company for policy administration
and data processing services as discussed below.
Administration
Effective December 31, 1998, FLAC entered into a service agreement with the
Company. Under the terms of the 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 agreement are underwriting,
claim processing, accounting, policy processing and other services necessary for
FLAC to operate. The agreement is effective until either party provides 90 days
written notice of termination. Under the agreement, FLAC pays fees based on a
percentage of first year and renewal premiums delivered by FLAC. Delivered
premium is defined as premium received on new written business which has been
underwritten by FLAC and the policy accepted by the policy
3
owner upon delivery by the agent. The percentages under the contract are 25% of
first year life premiums; 40% of second year life premiums; 30% of third year
life premiums; 20%of fourth year life premiums and 10% of life premiums in years
five and thereafter. If at any time FLAC s annual premiums on new business were
to exceed $5,000,000, the provisions of the agreement will be tolled until the
agreement has been resubmitted to the Kansas Insurance Department for approval.
FLAC bears the cost of all 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 any reinsurance
premiums; legal expenses related to settlement of claims; state examination
fees; directors fees and directors liability insurance; 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. Pursuant to the terms of the agreement, FLAC incurred
$704,151, $562,686 and $275,375 of service fees during 2001, 2000 and 1999,
respectively.
Effective January 1, 2002, FLAC entered into a new service agreement with the
Company. Under the terms of the 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 agreement are underwriting,
claim processing, accounting, policy processing and other services necessary for
FLAC to operate. The 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 generally accepted accounting principles.
FLAC still bears the cost of all 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 any reinsurance
premiums; legal expenses related to settlement of claims; state examination
fees; directors fees and directors liability insurance; 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 of Olathe, Kansas. Mr. Eric Newberg of Miller &
Newberg Inc. has been appointed by the Board of Directors of FLAC to act as
valuation and illustration actuary. In recent years, the Company has also
retained actuarial services of Bruce and Bruce Company of Lake Bluff, Illinois
and Lewis and Ellis of Overland Park, Kansas in connection with the development
of the various insurance products being marketed by FLAC.
Products of FLAC
The various insurance products currently being marketed by FLAC are as follows:
First American 2000 is a modified payment whole life insurance policy with a
flexible premium deferred annuity rider. A modified payment whole life
insurance policy requires premium payments to be made for a certain number of
years after which 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.
4
Golden Eagle Whole Life 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.
FLAT 10 (First Life Affordable Term) is a ten year term product issued from age
20 to 70. It has a re-entry provision allowing the current insured to
re-qualify prior to each ten year period. The re-qualification is essentially
re-underwriting including medical exams and inspections to determine if the risk
has changed or remained the same. The policy expires automatically at age 95.
First Guard 10 is a ten year term product renewable to age 70 and convertible to
age 60. Renewable means the policy is kept inforce as long as the premiums are
paid, but the rates do change each 10 year period. Convertible means that prior
to age 60 the policy can be converted to a permanent plan of insurance, whole
life or universal life, but not term. The product is issued from age 18 to 60.
The policy includes an accelerated death benefit rider. This rider provides
that in the event that certain ailments or medical conditions strike, a 25% or
50% of the base policy coverage could be paid. The maximum benefit under this
rider is $250,000. Payment of an accelerated benefit does reduce the future
death benefit.
Product Marketing and Sales
FLAC is using the same face-to-face marketing techniques for its life insurance
products as the Company did for its public stock offering. The marketing plan
is designed in its entirety around the Company's stockholder base, which
provides an excellent referral system for FLAC product sales.
After FLAC develops a substantial policyholder base in Kansas, marketing
efforts are expected to expand into additional states. This expansion will
depend largely on many factors, one of which is being admitted to do business in
these states. As of March 15, 2002, approval has been granted to FLAC in the
states of Illinois, Kansas, Nebraska, North Dakota, Ohio, Oklahoma, and Texas.
Management intends to file for certificates of authority in the states of
Florida, Kentucky, and Missouri in the near future. Due to the uncertainties
involved, management cannot reasonably estimate the time frame of marketing
expansion to any of these states.
FLAC's insurance operations commenced on November 19, 1998 on a limited basis
for test marketing of the initial insurance product. Full scale marketing
commenced on January 11, 1999. The agency force involved in selling the public
offering was licensed through FLAC to sell the life insurance products. FLAC
continually recruits and trains new agents.
5
Insurance Inforce
The following table provides certain information about FLAC s volume of life
insurance coverage inforce for each of the last three years:
Amounts of Insurance(1)
(shown in thousands)
2001 2000 1999
------ ----- ------
Beginning of year $ 83,277 $ 39,536 $ 337
Issued during year 46,962 53,953 39,378
Revived during year 167 280 -
Lapse, surrender and decreased (18,104) (10,492) (179)
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In-force end of year $112,302 $ 83,277 $39,536
======== ======== =========
(1) Excludes accidental death benefits of $31,027, $26,520, and $17,100 in
2001, 2000, and 1999, respectively.
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 Business Men's
Assurance Company of America ( BMA ) of Kansas City, Missouri, as well as
Optimum Re Insurance Company of Dallas, Texas, to reinsure portions of the life
insurance risks it underwrites. Pursuant to the terms of the agreements, FLAC
retains a maximum of $50,000 on any one insured. Currently, insurance ceded to
Optimum Re Insurance Company is limited to the 10-year term policies. At
December 31, 2001, 2000 and 1999, respectively, FLAC had ceded amounts totaling
$31,878,000, $24,259,688 and $8,755,634 of ordinary business and $31,027,000,
$26,520,000 and $17,100,000 of accidental death benefit risk. 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.
Underwriting
The life insurance subsidiary 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.
Evaluating the impact of future Acquired Immune Deficiency Syndrome ("AIDS")
claims under life insurance policies issued is extremely difficult, in part due
to the insufficiency and conflicting data regarding the number of persons now
infected with the AIDS virus, uncertainty as to the speed at which the AIDS
virus has and may spread through the general population, advancements in medical
treatment options. The life insurance subsidiary has implemented, where legally
permitted, underwriting procedures designed to assist in the detection of the
AIDS virus in applicants.
6
Investments
During portions of 2000 and 1999, the Company and FLAC was under contract with
Advantus Capital Management, Inc. of St. Paul, MN for management of investments.
Fees were based on the market value of invested assets. In 2000, management
determined that the contact with Advantus Capital Management, Inc. would be
terminated and that the Company and FLAC would manage its investment portfolio
internally.
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.
Competition
The life insurance industry is extremely competitive. There are a large number
of insurance companies which are substantially larger, have greater financial
resources, offer more diversified product lines and have larger selling
organizations than FLAC. Competition also is encountered from the expanding
number of banks and other financial intermediaries that offer competing
products. FLAC must also 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 Kansas Insurance Department
( KID ). The insurance laws of Kansas give the 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.
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
The Life Insurance Subsidiary 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 to ten
year period of certain policy acquisition costs incurred in connection with the
sale of certain insurance products. These provisions apply to life, health, 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
Financial Information Relating to Industry Segments
Financial information related to specific segments of the Company s business are
presented below. All sales of life insurance by FLAC are to unaffiliated
customers.
Years ended December 31,
--------------------------------
2001 2000 1999
--------- ----------- ----------
Revenues
Life and annuity insurance operations $ 2,704,352 $ 2,181,628 $ 1,243,323
Corporate operations 514,796 482,187 390,954
----------- ----------- ------------
Total $ 3,219,148 $ 2,663,815 $ 1,634,277
Income/(loss) before income taxes:
Life and annuity insurance operations $ 532,626 $ 537,649 $ 418,084
Corporate operations (734,059) (245,768) (404,036)
------------ ------------ ------------
Total $ (201,433) $ 291,881 $ 14,048
Depreciation and amortization expense:
Life and annuity insurance operations $ 459,124 $ 565,869 $ 234,522
Corporate operations 87,698 15,666 14,916
----------- ----------- ------------
Total $ 546,822 $ 581,535 $ 249,438
Assets:
Life and annuity insurance operations $ 8,795,709 $ 6,024,504 $ 4,255,380
Corporate operations 8,444,254 8,356,250 8,125,955
----------- ----------- ------------
Total $17,239,963 $14,380,754 $ 12,381,335
Employees
As of December 31, 2001, the Company had 16 full time and no part time
employees.
Item 2. Description of Property
During 1999, the Company acquired approximately six and one-half acres of land,
located in Topeka, KS. A 20,000 square foot building has been constructed on
approximately one-half of this land. On May 1, 2001, the Company relocated its
home office to the newly constructed building. Effective July 1, 2001, the
remaining 12,500 square feet of office space has been leased. The Company
intends to sell the remaining land at an undetermined time in the future.
Item 3. Legal Proceedings
There are no legal proceedings pending against the Company or its subsidiaries
or of which any of their property is the subject. There are no proceedings in
which any director, officer, affiliate or shareholder of the Company, or any of
their associates, is a party adverse to the Company or any of its subsidiaries
or has a material interest adverse to the Company or any of its subsidiaries.
8
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the forth 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.
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 is limited and sporadic and an established public market does not exist.
(b.) Holders
As of March 13, 2002, there are approximately 4,950 shareholders of the Company
s outstanding common stock.
(c.) Dividends
The Company has not paid any cash dividends since inception (July 10, 1996).
Additionally, dividends are not anticipated in the foreseeable future.
9
Item 6. Management s Discussion and Analysis or Plan of Operation
The Company makes forward-looking statements from time to time and desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements.
The statements contained in this report, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements. Any projections of financial performances or statements concerning
expectations as to future developments should not be construed in any manner as
a guarantee that such results or developments will, in fact, occur. There can
be no assurance that any forward-looking statement will be realized or that
actual results will not be significantly different from that set forth in such
forward-looking statement. In addition to the risks and uncertainties of
ordinary business operations, the forward-looking statements of the Company
referred to above are also subject to risks and uncertainties.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto, beginning on page F-1.
Financial Position
Significant changes in the consolidated balance sheets from 2000 to 2001 are
highlighted below.
Total assets increased from $14,380,754 at December 31, 2000 to $17,239,963 at
December 31, 2001. The Company's available-for-sale fixed maturities had a
fair value of $8,605,901 and amortized cost of $8,313,448 at December 31, 2001.
This investment portfolio is reported at market value with unrealized gains and
losses, net of applicable deferred taxes, reflected as a separate component in
shareholders' equity. Several of the short-term investments held by the Company
in 2000 were either sold or matured and the proceeds were used to purchase
investments in available-for-sale fixed maturity investments with higher yields
during 2001. This change caused a $2.2 million decrease (48%) in short-term
investments and an increase of $2.4 million (38%) in the Company's fixed
maturities portfolio from 2000 to 2001.
The Company limits credit risk by emphasizing investment grade securities and by
diversifying its investment portfolio among U.S. Government agency and corporate
bonds. Credit risk is further minimized by investing in certificates of
deposit. As a result, management believes that significant concentrations of
credit risk do not exist.
In conjunction with the construction of a new office building, the Company has
classified the unused portion of the land and the related costs to real estate
held for investment. At December 31, 2001, the balance of this account was
$274,564.
Cash and cash equivalents decreased from $832,485 at December 31, 2000 to
$463,363 at December 31, 2001. Refer to the statement of cash flows for uses
and sources of cash during 2001.
Investments in related parties increased $133,776 from $16,800 at December 31,
2000 to $150,576 at December 31, 2001. This increase is due to the purchase of
investments in Arkansas Security Capital Corporation and First Computer
Services, LLC. During 2001, the Company purchased, through a private
placement, 250,000 shares of common stock of Arkansas Security Capital
Corporation ("ASCC") of Springdale, Arkansas for $25,000. ASCC intends to
register an Arkansas intrastate public offering of $12,500,000. After ASCC's
private placement and public offerings are complete, the Company will own 3.05%
of the outstanding common stock. These shares are not registered under the
Securities Act of 1933, and are subject to restrictions on transferability and
resales and may not be transferred or resold except as permitted under the Act
and applicable state securities laws, pursuant to registration or exemption
therefrom. The Company also purchased a 50% interest in First Computer
Services, LLC ("FCS"). FCS owns the computer hardware and software that runs
the Company's policy administration,
10
underwriting, claim processing, and accounting functions. First Alliance
Corporation ("FAC", another related party) owns the remaining 50% interest in
FCS. During 2001, the Company contributed capital of $115,195. The total
investment in FCS is offset by the Company's share of the FCS loss, $6,420.
Accounts receivable from affiliate increased $124,881 from $0 at December 31,
2000 to $124,881 at December 31, 2001. The receivable, which is due from FAC,
is primarily attributable to the Company funding FAC's investment in FCS.
Deferred policy acquisition costs, net of amortization, increased 52% from
$1,272,554 at December 31, 2000 to $1,928,820 at December 31, 2001 resulting
from the capitalization of acquisition expenses related to the increasing sales
of life insurance. These acquisition expenses include commissions and
management fees incurred in the first policy year.
Property and equipment increased to $3,060,247 at December 31, 2001 from
$1,283,522 at December 31, 2000.
The increase is primarily due to the construction of the Company's new office
building. Costs associated with the building have increased $1.7 million since
December 31, 2000. The remaining increase in property and equipment is a result
of the purchase of new office equipment, furniture, and software.
Liabilities increased to $5,950,041 at December 31, 2001 from $2,828,180 at
December 31, 2000. A significant portion of this increase is due to life
insurance related policy liabilities. Policy reserves established due to the
sale of life insurance increased approximately $603,159 (66%) between 2000 and
2001. These reserves are actuarially determined based on such factors as
insured age, life expectancy, mortality and interest assumptions.
There was an increase in the amount of $937,584 (193%) for annuity contract
liabilities from 2000 to 2001. According to the design of FLAC's primary life
insurance product, first year premiums payments are allocated 100% to life
insurance and renewal payments are split 50% to life and 50% to annuity. In
2001, annuity contract liabilities increased as additional policies reached the
second policy year and the renewal policy base grew larger.
Deposits on pending policy applications increased to $172,616 at December 31,
2001 from $76,379 at December 31, 2000. Deposits on pending policy applications
represent money submitted with policy applications that have not yet been
approved. Any increases or decreases in this liability from year to year are
due to the timing of approval and delivery of the new business.
Policyholder premium deposits increased $91,713 (123%) from $76,379 at December
31, 2000 to $166,182 at December 31, 2000. Premium deposits have grown as the
amount of insurance inforce has grown.
In accordance with existing reinsurance agreements, 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 balance sheet and
as "reinsurance premiums ceded" in the income statement. The change in
reinsurance premiums payable between 2000 and 2001 was minimal.
On July 20, 2001, the Company entered into a $2 million promissory note with
Columbian Bank and Trust Company. The note matures on July 15, 2016 with a
stated interest rate of the 5-year T-Bill (currently 4.400%) plus a margin of
2.600 percentage points. The note was made to finance the new office building,
which serves as collateral for the note. The company has incurred interest of
$93,634 related to this note during 2001.
Federal income taxes payable increased to $533,793 at December 31, 2001 from
$361,403 at December 31, 2000. Federal income taxes payable are primarily due
to deferred taxes established based on timing differences between income
recognized for financial statements and taxable income for the Internal Revenue
Service. These deferred taxes are based on the operations of FLAC and on
unrealized gains of fixed maturities.
11
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, 2001, 2000, and
1999:
2001 2000 1999
------ ------ ------
Modified payment whole life insurance:
First year $1,365,755 $1,419,335 $1,086,234
Renewal 1,034,091 560,747 16,551
Single Premium 30,386
Term insurance:
First year 11,814 8,993 -
Renewal 8,871 - -
Reinsurance premiums assumed 15 - -
---------- ---------- ----------
Gross premium income 2,450,932 1,989,075 1,102,785
Reinsurance premiums ceded (78,203) (54,162) (12,498)
=========== =========== ===========
Net premium income $2,372,729 $1,934,913 $1,090,287
Net premium income increased $437,816 (23%) from 2000 to 2001 and $844,626 (77%)
from 1999 to 2000. The increases in net premium income are primarily driven by
significant increases in total renewal year premiums during both 2001 and 2000.
Total renewal year whole life premiums increased $473,344 from 2000 to 2001 and
$544,196 from 1999 to 2000. The increases in renewal year premiums are
consistent with the growing nature of the Company. Other significant increases
in the components comprising net premium income include a $30,386 increase in
single premiums from 2000 to 2001 and increases in reinsurance premiums ceded of
$24,041 (44%) from 2000 to 2001 and $41,664 (333%) from 1999 to 2000. The
increase in single premiums is attributable to the rollout of the First Step
product. First Step is currently the only single premium product being marketed
by the Company. Reinsurance premiums ceded reflect premiums paid to other
companies to reinsure a portion of the risk associated with life policies. The
increase in reinsurance premiums ceded each year is consistent with the increase
in gross premiums.
Net investment income increased $1,658 (1%) from 2000 to 2001 and $155,255
(29%) from 1999 to 2000. During 1999 and 2000, short-term investments were
converted to investments in available-for-sale fixed maturity investments, with
higher yields. The invested asset mix, combined with a growing invested asset
base each year, resulted in increased income from investments for the years
ended December 31, 2001 and 2000.
Rental income increased from $0 in 2000 and 1999 to $106,963 in 2001. Rental
income is earned by leasing approximately 12,500 square feet of office space in
the home office building. The Company has executed a five year lease (expiring
on July 1, 2006) on 10,000 square feet of the office space. The remaining 2,500
square feet is leased on a month-to-month basis.
Benefits and expenses totaled $3,240,581, $2,371,934 and $1,620,229 for the
years ended December 31, 2001, 2000 and 1999, respectively. Included in total
benefits and expenses were policy reserve increases of $603,159, $545,337 and
$368,804 during 2001, 2000, and 1999, respectively. Life insurance reserves are
actuarially determined based on such factors as insured age, life expectancy,
mortality and interest assumptions. As more life insurance is written and
existing policies reach additional durations, it is reasonable for policy
reserves to continue to increase.
12
Interest credited on annuity balances totaled $78,989, $21,683 and $3,236 for
the years ended December 31, 2001, 2000 and 1999, respectively. The increases
during 2001 and 2000 ($57,306 and $18,447, respectively) are primarily a result
of the increase in annuity fund balances. Both interest credited on annuities
and annuity fund balances have increased as a result of the increase in the
number of policies inforce (2,933, 1,797 and 867 in 2001, 2000 and 1999,
respectively).
Commission expense was $849,576, $863,159 and $631,929 for the years ended
December 31, 2001, 2000, and 1999, 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 increases and/or decreases in commission expenses are directly
related to the increases and/or decreases in first year premium income during
each respective period.
Acquisition costs which are related to the sale of insurance are capitalized and
amortized over the premium paying period of the associated policies. These
costs include commissions and management fees incurred in the first policy year.
During 2001, 2000 and 1999, $1,115,390, $1,158,212 and $901,613, respectively,
of these costs had been capitalized as deferred policy acquisition costs. The
related amortization for the same periods totaled $459,124, $565,869, and
$234,522, respectively.
Salaries, wages and employee benefits increased from $682,458 in 2000 to
$1,020,655 in 2001. This increase is due primarily to a 45% increase in the
number of persons employed by the Company.
Administrative fees -related party are paid to First Alliance Corporation
("FAC"), a shareholder of the Company, for accounting services. During 2001,
2000 and 1999, respectively, these fees totaled $142,785, $117,246 and $60,531
and were calculated based on a percentage of FLAC's premium income collected.
The increase in administrative fees during 2001 ($25,539 or 22%) and 2000
($56,715 or 94%) correlates with the increase in premium income during the same
time periods.
Other operating costs and expenses totaled $1,235,769, $690,841 and $525,556 for
the years ended December 31, 2001, 2000, and 1999, respectively. The increases
in both years are consistent with the growing nature of the Company.
Significant components of the $544,928 increase from 2000 to 2001 include the
following: interest expense ($95K), travel related expense ($85K), electronic
data processing expense ($80K), depreciation ($70K), advertising ($70K),
building operations expense ($40K), product development ($30K), recruiting
($20K) and insurance ($10K). The increases in interest, depreciation, building
operations and insurance expenses are a result of the new home office building
in Topeka, KS.
Liquidity and Capital Resources
During the years ended December 31, 2001, 2000, and 1999, the Company maintained
liquid assets sufficient to meet operating demands, while continuing to utilize
excess liquidity for fixed maturity investments. Net cash provided (used) by
operating activities during the years ended December 31, 2001, 2000 and 1999
totaled $(226,170), $98,435 and $(109,199) respectively.
FLAC generally receives adequate cash flow from premium collections and
investment income to meet the obligations of its insurance operations.
Insurance policy liabilities are primarily long-term and generally are paid from
future cash flows. A significant portion of the Company's invested assets are
readily marketable and highly liquid.
13
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.
The Company has been constructing a building to be used as the Company's home
office. The Company occupied the new building on May 1, 2001. The Company
entered into a note payable with Columbian Bank for $2,000,000 to finance the
project. To obtain this financing, the building and property were pledged as
collateral on the note. Cash flows used on the real estate project for the
years ended December 31, 2001 and 2000 totaled approximately $1.6 million and
$900,000, respectively.
14
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
NONE
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 Term
================= ===== ======================== =========
Michael N. Fink 46 Chairman of the Board One Year
Rickie D. Meyer 50 President and Director One Year
Phillip M. Donnelly 50 Secretary/Treasurer
/Vice President and Director One Year
Danny N. Biggs 65 Director One Year
Paul E. Burke, Jr. 68 Director One Year
Edward C. Carter 59 Director One Year
Kenneth L. Frahm 55 Director One Year
John W. Hadl 62 Director One Year
Stephen J. Irsik Jr. 55 Director One Year
John G. Montgomery 62 Director One Year
Harland E. Priddle 71 Director One Year
Gary E. Yager 47 Director One Year
The Directors serve until their successors are elected and qualified. Directors
will be 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:
15
Michael N. Fink: Mr. Fink has twenty-one years of experience in the insurance
industry, primarily in sales management. From 1981 to 1984, Mr. Fink was an
agent, District Director, and Regional Director with Liberty American Assurance
Company in Lincoln, Nebraska. In 1984, Mr. Fink transferred to an affiliated
company, Future Security Life, in Austin, Texas, where he served as Regional
Director and Agency Director until 1988. In March 1988, Mr. Fink became
affiliated with United Income, Inc. and United Security Assurance Company as
Agency Director and Assistant to the President. In June 1993, Mr. Fink left the
United Companies and became President of First Alliance Corporation and its life
insurance and venture capital companies.
Rickie D. Meyer: Mr. Meyer has twenty years of experience in the insurance
industry, primarily in sales management. From May 1982 to October 1984, Mr.
Meyer was a life insurance agent, District Director and Executive Sales Director
with Liberty American Assurance Company in Lincoln, Nebraska. In October 1984,
Mr. Meyer transferred to an affiliated company to become Agency Director. In
1985, Mr. Meyer left Liberty American to become an organizer and Zone Sales
Director for United Trust, Inc. in Springfield, Illinois. In January 1988, Mr.
Meyer transferred to Columbus, Ohio to assist in the organization of United
Income, Inc. and served as Zone Sales Manager. While with United Income, he was
promoted to Training Director in 1991 and to Agency Director in 1993. Mr. Meyer
left the United Companies in January 1996 to form the Company.
Phillip M. Donnelly: Mr. Donnelly has twenty-two years of experience in the
insurance industry, primarily in the areas of financial and operations
administration. He served as Treasurer and Chief Financial Officer of the
Cimarron Life Insurance Company from 1974 to 1986. In 1986, Mr. Donnelly
returned to college and received his M.B.A. in Accounting from Fort Hays State
University in 1988. In 1989, Mr. Donnelly became affiliated with The Franklin
Life Insurance Company of Springfield, Illinois, where he served as Assistant
Vice President in charge of purchasing, budgeting, forecasting and strategic
planning until his departure in 1997. He then returned to Kansas and worked as
a Financial Manager for Cargill Corporation until 1999. In 1999, Mr. Donnelly
joined First American Capital Corporation and became Vice President/
Secretary/Treasurer and Director in 2000.
Danny N. Biggs: Mr. Biggs is Vice-President, Partner, General Superintendent
and Director of Pickrell Drilling Company, Inc., Mobile Drilling Company, Inc.,
Central Dirt Service, Inc., and Pickrell Acquisitions, Inc. and also a Partner
in Kelly Petroleum. Mr. Biggs is a past President of the Kansas Independent Oil
& Gas Association ("KIOGA") and is currently a member and director of KIOGA and
director and president of Kansas Oil & Gas Hall of Fame & Museum Foundation. He
is a member of the Great Bend Chamber of Commerce, American Petroleum Institute,
Interstate Oil & Gas Compact Commission Crude Oil Policy Committee, Association
of Energy Service Companies and the Independent Petroleum Association of
America. He served as Chairman of the Mid-America Oil & Gas Technology
Exposition, Vision 2000 Area Relations/Image Committee, KIOGA Membership
Committee and general Chairman of the 1992 KIOGA Convention. Mr. Biggs was
recently inducted into the Kansas Oil & Gas Hall of Fame. Mr. Biggs is
actively involved in numerous other business, civic and religious organizations
including prior service as an Elder in the Presbyterian Church.
Paul E. Burke, Jr.: Mr. Burke 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.
16
Edward C. Carter: Mr. Carter 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 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.
Kenneth L. Frahm: Mr. Frahm 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, 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 the Kansas Water Resources
Association. 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
John W. Hadl: Mr. Hadl is an Associate Athletics Director at the University of
Kansas in Lawrence, Kansas, and he also heads the Williams Educational Fund,
which provides scholarship assistance to more than 400 male and female Kansas
University student-athletes. With a membership of over 3,500 donors, the
Williams Fund raised in excess of $3 million last year to pay the scholarship
expenses of student-athletes. Prior to becoming the Associate Athletics
Director, Mr. Hadl served as an Assistant Athletic Director and member of the KU
football coaching staff. Mr. Hadl was a three year letterman at KU, earning
All-American honors at two different positions-as a halfback in 1960 and as a
quarterback in 1961. He was All-Conference three times. After his college
career, Mr. Hadl, went on to play professional football for 18 seasons in the
AFL, NFL with San Diego, Los Angeles, Green Bay and Houston. He was NFL Man of
the Year in 1971 and the NFL's Most Valuable Player in 1973. He played in four
AFL All-Star games, three title games and led the league in passing in 1968 and
in 1971. In December of 1994, Mr. Hadl was inducted into the College Football
Hall of Fame.
Stephen J. Irsik Jr.: Stephen J. Irsik, Jr.: Mr. Irsik 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, Ks. 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.
17
John G. Montgomery: Mr. Montgomery is the President of Montgomery
Communications, Inc. of Junction City, Kansas. He is a newspaper publisher and
TV station owner. His current business affiliations include Directorship's
with First National Bank, Junction City. 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, Kansas, Inc. - Science and Technology Council, 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 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.
Harland E. Priddle: 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 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
received a BS in Agriculture from Kansas State University in 1952
Gary E. Yager: Mr. Yager recently became 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 Board of Directors of the Young Bank Officers of
Kansas, Topeka-Shawnee County Certified Development Corporation, Contemporary
Housing Alternatives of Topeka, and Quail Unlimited. He is a member of the
Topeka Chamber of Commerce, 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.
18
Item 10. Executive Compensation
The following table sets forth amounts earned by executive officers as
compensation over the past three years:
Annual Compensation
---------------------------------------------------
Other Annual All Other
Salary Bonus Compensation Compensation
Name and Principal Position Year ($) ($)(1) ($)(2)
=========================== ===== ======= ======== ============== ============
Rickie D. Meyer 2001 96,271 79,080 5,983 -
President and Director 2000 93,000 80,309 - -
1999 90,485 124,255 - -
Michael N. Fink 2001 77,017 63,264 2,792 -
Chairman and Director 2000 74,330 64,247 - -
1999 72,388 43,405 - -
Phillip M. Donnelly 2001 72,838 19,783 - -
Treasurer / Secretary 2000 67,408 - 400 -
and Director 1999 30,639 601 - -
(1) Includes incentive compensation pursuant to the Executive Employment
Agreement, based on premiums
(2) Other Annual Compensation consists of automobile allowances and
personal disability and life insurance premiums. The aggregate
cost to the Company of such personal benefits did not exceed the
lesser of $50,000 or 10% of the annual salaries received by the above
individuals.
Compensation of Directors
As an annual retainer fee for directors who are not officers of the Company, an
attendance fee pool was established. This pool consists of 1% of the premiums
delivered in each calendar year and is paid to each board member on a pro-rata
basis determined by his attendance of board meetings. This fee was payable in
cash for 2000 and 2001.In addition, each Director is paid $750 per regular
meeting attended for the Company and its subsidiaries, $75 per telephonic board
meeting, and $250 per committee meeting. During 2001, there were four regular
and two telephonic Board of Directors meetings. In addition, there were four
audit committee, investment committee and compensation committee meetings.
Executive Employment Agreements
The Company has entered into Executive Employment Agreements with Messrs. Fink,
Meyer and Donnelly. The employment agreements for Messrs. Fink and Meyer are
for a term of four years beginning November 1, 1998. The employment agreement
for Mr. Donnelly is for a term of two years beginning November 1, 2000. Annual
compensation under the agreements is $72,000, $90,000 and $70,000 for Messrs.
Fink, Meyer and Donnelly, respectively. Included in these agreements is a
clause that requires the salaries to be adjusted annually to reflect current
cost of living. Incentive compensation is earned based on percentages of first
year life and renewal premiums of FLAC's First America 2000 product. Messrs.
Fink, Meyer and Donnelly devote 25%, 100% and 100% of their time, respectively,
to the operations of the Company.
19
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 13, 2002, 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 directors
individually; and (iii) all officers and directors as a group.
Class Amount and Percent
Name and Address of of Nature of of
Beneficial Owner Stock Beneficial Ownership Class
========================== ======= ===================== ========
Michael N. Fink
2581 Walnut Grove Lane
Lexington, KY 40509 Common 125,000 2.4%
Rickie D. Meyer
3513 SW Alameda Dr.
Topeka, KS 66614 Common 526,000 9.9%
Danny N. Biggs
2601 Canterbury
Great Bend, KS 67530 Common 50,000 *
Paul E. Burke, Jr.
2009 Camelback Drive
Lawrence, KS 66047 Common 50,000 *
Edward C. Carter
4100 Wimbledon Drive
Lawrence, KS 66047 Common 60,000 (1) 1.1%
Kenneth L. Frahm
Box 849
Colby, KS 67701 Common 40,000 *
Stephen J. Irsik, Jr.
05405 Six Road
Ingalls, KS 67853 Common 69,000 1.3%
John G. Montgomery
510 Redbud Lane
Junction City, KS 66441 Common 45,000 *
Harland E. Priddle
8214 South Haven Rd.
Burrton, KS 67020 Common 40,000 *
Gary E. Yager
3521 SW Lincolnshire
Topeka, KS 66614 Common 40,000 *
20
Class Amount and Percent
Name and Address of of Nature of of
Beneficial Owner Stock Beneficial Ownership Class
=================== ========== ==================== ========
First Alliance Corporation
2285 Executive Drive
Suite 308
Lexington, KY 40505 Common 525,000 (2) 9.9%
---------- ------
All Directors and Officers as a Group 1,045,000 19.8%
*Indicates less than 1% ownership.
(1) Excludes 20,000 shares held by Becky Carter, Mr. Carter's wife, as to
which Mr. Carter disclaims beneficial ownership.
(2) FAC is a financial services holding company based in Lexington,
Kentucky, which wholly owns life insurance and venture capital
subsidiaries. Messrs. Fink is an officer and director of FAC.
Item 12. Certain Relationships and Related Transactions
Messrs. Michael Fink and Rick Meyer and First Alliance Corporation are promoters
of the Company. Collectively, they hold 1,176,000 shares of Common Stock in the
Company for which they paid aggregate consideration of $117,600 or $.10 per
share.
A portion of the Company s short-term investments consisting of certificates of
deposit are purchased through Columbian Bank. Mr. Gary Yager, a Director of the
Company, is the Chief Executive Officer of this bank.
A note payable, secured by the main office building was obtained through
Columbian Bank. As noted above, Mr. Gary Yager, a Director of the Company, is
the Chief Executive Officer of this bank.
The Company has contracted with First Alliance Corporation ( FAC ) of Lexington,
Kentucky to provide accounting services for FLAC and the Company. Under the
terms of the management agreement, the Company pays fees based on a percentage
of delivered premiums of FLAC. The percentages are 5.5% for first year
premiums; 4% of second year premiums; 3% of third year premiums; 2% of fourth
year premiums; 1% of fifth year premiums; 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 $142,785, $117,246, and $60,531
of fees during 2001, 2000, and 1999, respectively. FAC owns approximately 9.9%
of the Company s outstanding common stock as of December 31, 2001.
21
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-KSB:
(1)Financial Statements are attached and included
herein on pages F-1 through f-26
(2) The exhibits listed in the Index to
Exhibits appearing on Page 26.
(b) Reports on Form 8-K.
None
22
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/Rickie D. Meyer___ __________________________________ Date 3/26/2002
Rickie D. Meyer, President/Director
23
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/ Rickie D. Meyer____________________________________ Date 3/26/2002
Rickie D. Meyer, President/Director
By___/S/Phillip M. Donnelly_________________________________ Date 3/26/2002
Phillip M. Donnelly, Secretary/Treasurer/Vice President/Director
By___/S/Michael N. Fink______________________ _________ Date 3/26/2002
Michael N. Fink, Chairman/Director
By_ /S/Daniel N. Biggs______________________________________ Date 3/26/2002
Daniel N. Biggs, Director
By__/S/Harland E. Priddle___________________________________ Date 3/26/2002
Harland E. Priddle, Director
By_ /S/Paul E. Burke Jr_____________________________________ Date 3/26/2002
Paul E. Burke Jr, Director
By_ /S/Stephen J. Irsik Jr_________________________________ Date 3/26/2002
Stephen J. Irsik Jr, Director
24
By__/S/John G. Montgomery___________________________________ Date 3/26/2002
John G. Montgomery, Director
By__/S/Gary E. Yager________________________________________ Date 3/26/2002
Gary E. Yager, Director
25
INDEX TO EXHIBITS
(Item 13(a))
The documents listed in the following table are filed as Exhibits in response to
Item 13(a). Exhibits listed that are not filed herewith are incorporated by
reference.
Exhibit No. Description
---------- ---------------------------
3.1 Articles of Incorporation (1)
3.2 By-laws (2)
4 Instruments defining the rights of security holders,
including indentures (1)
10 Material Contracts (1)
(a) Lease
(b) Advisory Board Contract
(c) Service agreement between First Life America
Corporation and First American Capital Corporation
(d) Service agreement between First American Capital
Corporation and First Alliance Corporation
(e) Management employment agreements
(f) Reinsurance agreement with BMA
11 Statement re computation of per share earnings (3)
21 Subsidiaries
(1) Filed as an Exhibit to the Registrant s amended Form 10-SB, filed on
August 13, 1999, and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrants Form 10-kSB, filed on
March 26, 2001, and incorporated herein by reference.
(3) Note 2 in Notes to Consolidated Financial Statements included in this
Report on Page F-10.
26
EXHIBIT 21
SUBSIDIARIES OF FIRST AMERICAN CAPITAL CORPORATION
Name Jurisdiction of Incorporation
--------------------------- -------------------------------
First Life America Corporation Kansas
First Capital Venture, Inc. Kansas
27
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements Numbers
----------------------------------- -------
Independent Auditors Report F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Changes in Shareholders Equity
for the years ended December 31, 2001, 2000, and 1999 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999. F-8
Notes to Consolidated Financial Statements F-10
F-1
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,
2001 and 2000, and the related consolidated statements of operations, changes in
shareholders equity, and cash flows for each of the three years in the period
ended December 31, 2001. 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 audit provides 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, 2001 and 2000, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 20, 2002
F-2
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 2001 2000
------ ----------- -------------
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost, $8,313,448
in 2001 and $6,023,296 in 2000) $ 8,605,901 $ 6,241,820
Policy loans 33,178 5,990
Notes receivable (net of valuation allowance
of $4,406 in 2001 and $18,414 in 2000) - 30,262
Real estate held for investment 274,564 -
Short-term investments 2,286,095 4,437,280
Total investments 11,199,738 10,715,352
Cash and cash equivalents 463,363 832,485
Investments in related parties 150,576 16,800
Accrued investment income 181,719 148,487
Accounts receivable 104,447 93,167
Accounts receivable from affiliate 124,881 -
Deferred policy acquisition costs (net of accumulated
amortization of $1,259,744 in 2001 and $800,619 in 2000) 1,928,820 1,272,554
Property and equipment (net of accumulated depreciation
of $129,977 in 2001 and $42,860 in 2000) 3,060,347 1,283,522
Other assets 26,072 18,387
------------- --------------
Total assets $ 17,239,963 $ 14,380,754
============= ==============
F-3
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
December 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------- --------------
Policy and contract liabilities:
Annuity contract liabilities $ 1,424,118 $ 486,533
Life policy reserves 1,522,794 919,635
Liability for policy claims - 22,306
Policyholder premium deposits 166,182 74,469
Deposits on pending policy applications 172,616 76,379
Reinsurance premiums payable 32,142 28,561
Total policy and contract liabilities 3,317,852 1,607,883
Commissions, salaries, wages and benefits payable 84,038 114,018
Other liabilities 28,395 28,811
Note payable 1,967,328 698,018
Accounts payable to affiliate 18,022 18,047
Federal income taxes payable:
Current 613 -
Deferred 533,793 361,403
------------ --------------
Total liabilities 5,950,041 2,828,180
Shareholders' equity:
Common stock, $.10 par value, 8,000,000 shares authorized; 543,899 541,886
5,438,985 shares issued and 5,273,985 shares outstanding
in 2001; and 5,418,860 shares issued and 5,303,860 shares
outstanding in 2000;
Additional paid in capital 12,328,617 12,230,005
Retained earnings - deficit (1,529,613) (1,176,785)
Accumulated other comprehensive income 191,277 144,226
Less: treasury shares held at cost (165,000 shares in 2001; and
115,000 shares in 2000) (244,258) (186,758)
-------------- --------------
Total shareholders' equity 11,289,922 11,552,574
------------- --------------
Total liabilities and shareholders' equity $ 17,239,963 $ 14,380,754
============= ==============
See notes to consolidated financial statements.
F-4
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues
Gross premium income $ 2,450,932 $ 1,989,075 $1,102,785
Reinsurance premiums ceded (78,203) (54,162) (12,498)
Net premium income 2,372,729 1,934,913 1,090,287
Net investment income 700,903 699,245 543,990
Net realized gain on disposal of assets 24,584 (908) -
Rental income 106,963 30,565 -
Other income 13,969 - -
----------- ---------- -----------
Total revenue 3,219,148 2,663,815 1,634,277
Benefits and expenses
Increase in policy reserves 603,159 545,337 368,804
Policyholder surrender values 46,754 14,887 54
Interest credited on annuities and
premium deposits 78,989 21,683 3,236
Death claims 47,250 22,306 -
Commissions 849,576 863,159 631,929
Policy acquisition costs deferred (1,115,390) (1,158,212) (901,613)
Amortization of deferred policy acquisition costs 459,124 565,869 234,522
Salaries, wages, and employee benefits 1,020,655 682,458 672,289
Miscellaneous taxes 51,910 6,360 24,921
Administrative fees - related party 142,785 117,246 60,531
Other operating costs and expenses 1,235,769 690,841 525,556
---------- --------- -----------
Total benefits and expenses 3,420,581 2,371,934 1,620,229
---------- ---------- -----------
Income (loss) before income tax expense (201,433) 291,881 14,048
Income tax expense 151,395 136,742 154,652
------------ ---------- -----------
Net income (loss) $ (352,828) $ 155,139 $ (140,604)
Net income (loss) per common
share - basic and diluted $ (0.07) $ 0.03 $ (0.03)
See notes to consolidated financial statements.
F-5
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31,
------------------------------------
2001 2000 1999
----------- ----------- ---------
PREFERRED STOCK:
Balance, beginning of year $ - $ - $ 2,707,530
Sale of shares in public offering (8,394 shares
in 1999) - - 41,970
Conversion of preferred to common shares (549,740
preferred shares to 2,198,960 common shares) - - (2,748,700)
Call of preferred stock - - (800)
----------- ----------- ------------
Balance, end of year - - 0
COMMON STOCK:
Balance, beginning of year 541,886 546,886 326,150
Sale of shares in public offering (8,394 shares
in 1999) - - 840
Conversion of preferred to common - - 219,896
Common shares retired - (5,000) -
Common shares issued (20,125 shares in 2001) 2,013 - -
-------- --------- ---------
Balance, end of year 543,899 541,886 546,886
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year 12,230,005 12,230,005 9,600,478
Sale of shares in public offering (8,394 shares
in 1999) - - 167,041
Conversion of preferred to common - - 2,528,804
Call of preferred stock - - (3,184)
Cost of public offering - - (63,134)
Common shares issued (20,125 shares in 2001) 98,612 - -
---------- --------- -----------
Balance, end of year 12,328,617 12,230,005 12,230,005
F-6
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY (continued)
Years ended December 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
RETAINED EARNINGS-DEFICIT:
Balance, beginning of year $(1,176,785) $(1,331,924) $(1,191,320)
Net income (loss) (352,828) 155,139 (140,604)
------------ ------------ ------------
Balance, end of year (1,529,613) (1,176,785) (1,331,924)
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year 144,226 (23,803) -
Net unrealized gain (loss)
on available-for-sale securities 47,051 168,029 (23,803)
------- ------- --------
Balance, end of year 191,277 144,226 (23,803)
TREASURY STOCK:
Balance, beginning of year (186,758) (2,000) (2,000)
Purchase of 95,000 common shares at $1.94 per share - (184,758) -
Purchase of 50,000 common shares at $1.15 per share (57,500) - -
--------- --------- -------
Balance, end of year (244,258) (186,758) (2,000)
------------ ------------ ------------
Total shareholder' equity $11,289,922 $11,552,574 $11,419,164
============ =========== ============
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains (loss) arising during period $ 64,463 $ 166,604 $ (23,803)
Less: reclassification adjustment for (gains) loss
in net income (17,412) 1,425 -
------------ ----------- ------------
Net unrealized gains (loss) on securities $ 47,051 $ 168,029 $ (23,803)
See notes to consolidated financial statements
F-7
FIRST AMERICAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------
2001 2000 1999
----------- ----------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ (352,828) $ 155,139 $ (140,604)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Interest credited on annuities and premium deposits 82,838 21,683 3,236
Net realized investment (gains) losses (25,618) 908 -
Provision for depreciation and amortization 87,698 15,666 14,916
Amortization of premium and accretion of discount on
fixed maturity and short-term investments (6,033) (12,159) (131)
Interest credited to certificates of deposit balances (47,909) (84,612) -
Realized net (gain) loss on disposal of assets 1,034 (2,236) -
Provision for deferred federal income taxes 143,692 126,978 155,850
Other - (5,000) -
Increase in accrued investment income (33,232) (37,135) (57,908)
(Increase) decrease in accounts receivable (11,280) 43,397 (81,979)
Increase in accounts receivable from affiliate (124,881) - -
Increase in deferred policy acquisition costs, net (656,266) (592,343) (667,092)
Increase in policy loans (27,188) (5,990) -
(Increase) decrease in other assets (7,685) 3,085 (8,294)
Increase in policy reserves 603,159 545,337 368,804
Increase (decrease) in liability for policy claims (22,306) 22,306 -
Increase (decrease) in deposits on pending
policy applications 96,237 (145,034) 211,859
Increase in reinsurance premiums payable 3,581 16,716 11,845
Increase (decrease) in commissions, salaries,
wages and benefits payable (29,980) 46,212 64,974
Increase (decrease) in accounts payable to affiliate (25) 8,887 (5,969)
Increase (decrease) in other liabilities 100,822 (23,370) 21,294
------------ ------------ ----------
Net cash provided by (used in) operating activities $ (226,170) $ 98,435 $ (109,199)
F-8
Years ended December 31,
----------------------------------------
2001 2000 1999
----------- ----------- ------------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $(4,537,224) $(3,543,284) $(2,667,036)
Sale of available-for-sale fixed maturities 2,014,503 198,000 -
Additions to property and equipment, net (1,865,557) (939,585) (340,778)
Purchase of real estate held for investment (274,564) - -
Purchase of investments in affiliates (133,776) (16,800) -
Changes in notes receivable, net 30,262 (30,262) -
Short-term investments disposed, net 2,465,136 3,297,120 3,068,879
----------- ----------- -----------
Net cash provided by (used in) investing activities (2,301,220) (1,034,811) 61,065
FINANCING ACTIVITIES:
Proceeds from public stock offering - - 209,851
Call of preferred stock - - (3,984)
Cost of stock offerings - - (63,134)
Proceeds from note payable 1,301,982 698,018 -
Payments on note payable (32,672) - -
Deposits on annuity contracts, net 862,297 457,424 11,227
Purchase of treasury stock (57,500) (184,758) -
Policyholder premium deposits, net 84,161 4,292 63,140
---------- -------- ---------
Net cash provided by financing activities 2,158,268 974,976 217,100
---------- -------- ---------
Increase (decrease) in cash and cash equivalents (369,122) 38,600 168,966
Cash and cash equivalents, beginning of period 832,485 793,885 624,919
---------- ------------ ------------
Cash and cash equivalents, end of period $ 463,363 $ 832,485 $ 793,885
=========== =========== ===========
See notes to consolidated financial statements
F-9
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First American Capital Corporation (the Company ) was incorporated on July 10,
1996 for the primary purpose of forming, owning and managing life insurance
companies. On March 11, 1997, the Company s registration statement filed with
the Office of the Kansas Securities Commissioner for a $12,500,000 intra-state
public stock offering, which included a 10% over-sale provision (additional
sales of $1,250,000), was declared effective. The Company completed its public
stock offering on January 11, 1999, raising total capital of $13,750,000.
The Company has a wholly-owned insurance subsidiary, First Life America
Corporation ( FLAC ), which is domiciled in Kansas. FLAC was incorporated on
July 15, 1997 and capitalized with $1,200,000. On October 15, 1997, the Kansas
Insurance Department ( KID ) granted FLAC a Certificate of Authority. On
December 10, 1998, the Company provided FLAC with an additional $1,800,000 of
capital. In 2000 and 2001, the Company contributed an additional $250,000 and
$450,000 of capital, respectively. This has resulted in total capitalization of
$3,700,000. Insurance operations commenced on November 19, 1998. Prior to the
commencement of insurance operations, the Company was in the developmental
stage.
The various insurance products currently being marketed by FLAC are as follows:
First American 2000 is a modified payment whole life insurance policy with a
flexible premium deferred annuity rider. A modified payment whole life
insurance policy requires premium payments to be made for a certain number of
years after which 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.
Golden Eagle Whole Life 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.
FLAT 10 (First Life Affordable Term) is a ten year term product issued from age
20 to 70. It has a re-entry provision allowing the current insured to
re-qualify prior to each ten year period. The re-qualification is essentially
re-underwriting including medical exams and inspections to determine if the risk
has changed or remained the same. The policy expires automatically at age 95.
F-10
1. NATURE OF OPERATIONS (CONTINUED)
First Guard 10 is a ten year term product renewable to age 70 and convertible to
age 60. Renewable means the policy is kept inforce as long as the premiums are
paid, but the rates do change each 10 year period. Convertible means that prior
to age 60 the policy can be converted to a permanent plan of insurance, whole
life or universal life, but not term. The product is issued from age 18 to 60.
The policy includes an accelerated death benefit rider. This rider provides
that in the event that certain ailments or medical conditions strike, a 25% or
50% of the base policy coverage could be paid. The maximum benefit under this
rider is $250,000. Payment of an accelerated benefit does reduce the future
death benefit.
The Company formed First Capital Venture Inc. ( FCVI ), a venture capital
subsidiary in October of 1998. FCVI has yet to be capitalized.
The Company helped form First Computer Services, LLC. ("FCS"), a Kansas
partnership in June of 2001. FCS owns the computer hardware and software that
runs the Company's policy administration, underwriting, claim processing, and
accounting functions. During December of 2001, FCS was capitalized with
$230,389, of which 50% was contributed by the Company.
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 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 generally accepted
accounting principles 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.
F-11
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
The Company classifies all of its fixed maturity 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. 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 at cost (see Note 5).
Property and Equipment
Property and equipment, including the home office building (see Note 6), are
carried at cost less accumulated depreciation. Accumulated depreciation on
equipment is calculated using the 200% declining balance method over the
estimated useful life of the respective assets. Accumulated depreciation on
equipment at December 31, 2001 and 2000, respectively, is $79,723 and $42,860.
Accumulated depreciation on the office building and land improvements is
calculated using the straight-line method. Accumulated depreciation of the
office building and land improvements at December 31, 2001 is $50,254.
Office Lease
The Company is currently located in the new office building at 1303 SW First
American Place, Topeka, Kansas 66604. During 2001, the Company terminated the
previous office lease. Rent expense incurred under this previous agreement for
the years ended December 31, 2001, 2000 and 1999 totaled $16,995, $37,788, and
$33,517, respectively.
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.
Life Policy Reserves
The liabilities for future policy benefits on the Company s life insurance
products are computed using the net level premium method and assumptions as to
investment yields, mortality, withdrawals and other assumptions, modified as
necessary to reflect anticipated trends and to include provisions for possible
unfavorable deviations. The assumptions utilized were 7.25% for investment
yields, 1975-1980 select and ultimate tables for mortality, and Linton BA tables
for withdrawal rates.
F-12
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Annuity Contract Liabilities
Annuity contract liabilities are computed using the retrospective deposit method
and consist of policy account balances before deduction 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.
Liability for Policy Claims
Policy claim liabilities are based on reported death claims.
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 6%. 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.
Premiums
Life insurance premiums for limited payment contracts are recorded according to
Statement of Financial Accounting Standard ( SFAS ) No. 97. Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments. Any gross premium in
excess of net premium is deferred and recognized in income in a constant
relationship with insurance in force.
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 generally accepted accounting
principles 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.
F-13
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Common Stock and Preferred Stock
The common stock is fully-paid and non-assessable with dividend rights subject
to the prior rights of the holders of preferred stock (prior to its conversion
to common stock) and has full voting rights. The preferred stock had no voting
rights, had a par and liquidation value of $5.00 per share of which dividends,
if and when declared, were to be paid at the rate of 6% of the par value, and
was convertible into four shares of common stock until July 11, 1999 (see
conversion of preferred stock and call of preferred stock).
Conversion of Preferred Stock
The public offering was sold in units consisting of one share of common and one
share of preferred stock. Each preferred share was convertible into four shares
of common stock. Pursuant to the terms of the Subscription Agreements, a
subscriber could elect, at the time of the sale, to convert their shares of
preferred stock to shares of common stock upon issuance of stock certificates.
The subscriber was allowed to revoke this conversion during a six month period
starting on the date the offering was completed. The offering was completed on
January 11, 1999 and conversions were allowed until July 11, 1999. On July 11,
1999, substantially all of the preferred shareholders converted their preferred
shares to common shares.
Call of Preferred Stock
Before July 11, 1999, subscribers owning a total of 160 shares of preferred
stock revoked the conversion election (discussed above). On December 10, 1999,
the Company called those 160 shares of preferred stock at $5.00 per preferred
share.
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 was 5,294,418, 5,387,767,
and 3,046,043 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Comprehensive Income
SFAS No. 130 requires unrealized gains and losses on the Company s
available-for-sale securities to be included in other comprehensive income.
F-14
3. INVESTMENTS
The amortized cost and fair value of investments in fixed maturities at December
31, 2001 and 2000 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
'December 31, 2001: Cost Gains Losses Value
------------------- ---------- ----------- ----------- ----------
U.S. Government Agency $3,879,669 $ 112,151 $ 3,171 $3,988,649
Corporate bonds 4,343,779 195,249 11,776 4,527,252
Certificates of Deposit 90,000 - - 90,000
---------- ----------- ----------- ----------
Total $8,313,448 $ 307,400 $ 14,947 $8,605,901
December 31, 2000:
U.S. Government Agency $2,898,553 $ 84,248 $ - $2,982,801
Corporate bonds 2,764,743 136,665 2,389 2,899,019
Certificates of Deposit 360,000 - - 360,000
---------- ----------- ----------- ----------
Total $6,023,296 $ 220,913 $ 2,389 $6,241,820
The amortized cost and fair value of fixed maturities at December 31, 2001, 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 $ - $ -
Due after one year through five years 3,860,963 4,129,653
Due after five years through ten years 4,452,485 4,476,248
--------------- -----------
$ 8,313,448 $ 8,605,901
The fair values for investments in fixed maturities are based on quoted market
prices.
Included in investments are securities which have a fair value of $2,291,249 and
$1,785,831 at December 31, 2001 and 2000, respectively, which are on deposit
with various state insurance departments.
F-15
3. INVESTMENTS (CONTINUED)
During 2001, the Company had gross realized investment gains of $26,746.
Investment gains were $1,251 and $0 during 2000 and 1999, respectively. Gross
realized investment losses totaled $2,162, $2,159 and $0 in 2001, 2000 and 1999,
respectively. These realized gains and losses during 2001 were the result of
the sale of available for sale fixed maturity investments.
During July of 2000, advances to agents in the amount of $60,053 were converted
to notes receivable to be collected over a three year period with a 9.5% annual
interest rate. These notes included $41,054 of balances due from agents
previously deemed to be uncollectible and expensed in prior years. A
corresponding allowance for bad debts of $41,054 was established. During 2001
and 2000, payments of $44,270 and $0, respectively were received on the notes.
Notes receivable, net of the valuation allowance of $4,406, is $0 at December
31, 2001.
The carrying value of short-term investments approximates their fair value. At
December 31, 2001 and 2000 the fair value of short-term investments was
$2,286,095 and $4,437,280, respectively.
Interest income consists of interest earned on notes receivable, policy loans,
available-for-sale securities and short-term investments, which include
certificates of deposit.
Following are the components of net investment income for the years ended
December 31, 2001, 2000 and 1999:
Years ended December 31,
-------------------------------
2001 2000 1999
-------- -------- ---------
Fixed maturities $482,201 $324,086 $ 18,079
Notes receivables 3,065 2,581 -
Short-term and other investments 218,936 388,667 530,723
Gross investment income 704,202 715,334 548,802
Investment expenses (3,299) (16,089) (4,812)
-------- -------- ---------
Net investment income $700,903 $699,245 $543,990
4. CONCENTRATIONS OF CREDIT RISK
Credit risk is limited by emphasizing investment grade securities and by
diversifying the investment portfolio among U.S. Government Agency and
Corporate bonds. 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
5. INVESTMENTS IN RELATED PARTIES
On June 20, 2000, the Company purchased, through a private placement, 168,000
shares of the common stock of Mid-Atlantic Capital Corporation ("MCC") of
Charleston, West Virginia for $16,800. At December 31, 2001, MCC had raised
$850,000 from the sale of private placement shares and $1,120,100 from public
offering shares. MCC has registered a West Virginia intrastate public offering
of $12,000,000. After MCC's private placement and public offerings are
complete, the Company will own 3.05% of the outstanding common stock. These
shares are not registered under the Securities Act of 1933, and are subject to
restrictions on transferability and resales and may not be transferred or resold
except as permitted under the Act and applicable state securities laws, pursuant
to registration or exemption therefrom. Michael N. Fink, who is the Company's
Chairman of the Board, will also serve as a Co-Chairman of the Board for MCC.
On August 16, 2001, the Company purchased, through a private placement, 250,000
shares of the common stock of Arkansas Security Capital Corporation ("ASCC") of
Springdale, Arkansas for $25,000. At December 31, 2001, ASCC had raised
$239,000 from the sale of private placement shares. ASCC will conduct another
private placement of $600,000 in March of 2002. ASCC then plans to register an
Arkansas intrastate public offering of $12,000,000. These shares are not
registered under the Securities Act of 1933, and are subject to restrictions on
transferability and resales and may not be transferred or resold except as
permitted under the Act and applicable state securities laws, pursuant to
registration or exemption therefrom. Rickie D. Meyer, who is the Company's
President, will also serve as a Co-Chairman of the Board for ASCC.
During 2001, the Company purchased a 50% interest in First Computer Services,
LLC ("FCS"). FCS owns the computer hardware and software that operates a
Company policy administration, underwriting, claim processing, and accounting
system. The company uses the equity method to account for this investment,
which is owned jointly by the Company and First Alliance Corporation. As of
December 31, 2001, the carrying value of the FCS investment was $108,776. This
amount represents an initial investment of $115,195 reduced by a net operating
loss of $6,419. Selected financial data for FCS is listed below.
Total Assets: $217,552
Total Liabilities: -
Total Liabilities and Equity: 217,552
---------
Loss from Operations: (12,838)
6. PROPERTY AND EQUIPMENT
During 1999, the Company acquired approximately six and one-half acres of land,
located in Topeka, Kansas for $325,169. A 20,000 square foot building has been
constructed on approximately one-half of this land. Costs incurred to date at
December 31, 2001 totaled $2,963,004, of which $357,675 was related to land cost
and preparation, and $2,605,329 was related to building construction. Also
included in total property of $2,963,004 is $37,810 of capitalized interest
costs incurred on the construction loan. An additional $274,564 related to
land cost and preparation has been reclassified to real estate held for
investment.
F-17
6. PROPERTY AND EQUIPMENT (CONTINUED)
On May 1, 2001, the Company relocated its home office to the newly constructed
building. Effective July 1, 2001 , 10,000 square feet of office space has been
leased for five years. The remaining 2,500 square feet that is available for
lease is being leased on a month-to-month basis.
The components of property and equipment as of December 31, 2001 and 2000 are as
follows:
2001 2000
----------- -----------
Property (home office building) $2,963,004 $1,247,740
Less: Accumulated depreciation (50,254) -
Net Property 2,912,750 1,247,740
Equipment 227,320 78,642
Less: Accumulated depreciation (79,723) (42,860)
Net equipment 147,597 35,782
----------- -----------
Property and equipment, net $3,060,347 $1,283,522
7. FEDERAL INCOME TAXES
The Company does not file a consolidated federal income tax return with FLAC.
FLAC is taxed as a life insurance company under the provisions of the Internal
Revenue Code and must file a separate tax return for its initial five years of
existence. Federal income tax expense for the years ended December 31, 2001,
2000, and 1999 consisted of the following:
Years ended December 31,
-----------------------------
2001 2000 1999
-------- -------- ---------
Current $ 7,703 $ 9,764 $ (1,198)
Deferred 143,692 126,978 155,850
-------- -------- ---------
Federal income tax expense $151,395 $136,742 $154,652
F-18
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate of 35% in 2001 and 34% in 2000 and 1999 as
follows:
Years ended December 31,
------------------------------
2001 2000 1999
--------- --------- --------
Federal income tax expense (benefit) at statutory rate $(70,502) $ 99,240 $ 4,776
Small life insurance company deduction (29,936) (30,118) -
Increase in valuation allowance 254,674 83,561 187,869
Surtax exemptions (9,650) (10,315) -
Other 6,809 (5,626) (37,993)
--------- --------- ---------
Federal income tax expense $151,395 $136,742 $154,652
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,
-----------------------
2001 2000
----------- ----------
Deferred tax liability:
Due and deferred premiums $ 19,488 $ 15,936
Deferred policy acquisition costs 554,006 362,525
Net unrealized investment gains 102,996 74,298
---------- ----------
Total deferred tax liability 676,490 452,759
Deferred tax asset:
Policy reserves 131,447 82,446
Reinsurance premiums 11,250 8,910
Net operating loss carry forward 889,591 634,917
Alternative minimum tax credit carry forward 1,198 1,198
Total deferred tax asset 1,033,486 727,471
Valuation allowance (890,789) (636,115)
----------- ----------
Net deferred tax asset 142,697 91,356
---------- ----------
Net deferred tax liability $ 533,793 $ 361,403
========== ==========
The Company has net operating loss carry forwards of approximately $2,541,589
expiring in 2011 through 2021. These net operating loss carry forwards are not
available to offset FLAC income. FLAC has alternative minimum tax credit carry
forwards of $1,198, which have no expiration date. Federal income taxes paid
were $20,000 in 1999. There were no taxes paid in 2001 and 2000.
F-19
8. 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 will mature
on July 15, 2016. The note is 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 may, when an increase occurs in the interest rate, increase the
amount of the monthly payment or increase the number of payments required.
Interest is 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 will be
recomputed at the end of 5 years and 10 years based on the current 5-year T-Bill
rate at that time. The company has paid interest of $93,634 related to this
note during 2001.
Required future principle payments are as follows:
Principal
Year Payment
----------- ---------
2002 78,484
2003 84,257
2004 90,086
2005 97,081
2006 104,223
Thereafter 1,513,197
----------
Total 1,967,328
9. 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.
F-20
Net income for 2001, 2000, and 1999 and capital and surplus at December 31,
2001, 2000, and 1999 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
----------- ------------ ---------- ----------
2001 381,230 4,922,152 17,465 3,698,742
2000 400,907 4,046,552 68,787 3,252,279
1999 263,432 3,317,886 (100,572) 2,880,773
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, $1,200,000, required for life insurance
companies domiciled in Kansas.
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.
F-21
10. 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 Business Men's
Assurance Company of America ( BMA ) of Kansas City, Missouri, as well as
Optimum Re Insurance Company of Dallas, Texas, to reinsure portions of the life
insurance risks it underwrites. Pursuant to the terms of the agreements, FLAC
retains a maximum of $50,000 on any one insured. Currently, insurance ceded to
Optimum Re Insurance Company is limited to the 10-year term policies. At
December 31, 2001, 2000 and 1999, respectively, FLAC had ceded amounts totaling
$31,878,00, $24,259,688 and $8,755,634 of ordinary business and $31,027,000,
$26,520,000 and $17,100,000 of accidental death benefit risk
Pursuant to the terms of the agreement with BMA, 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 recognized as Reinsurance premiums ceded in the accompanying income
statement. At December 31, 2001 and 2000, respectively, the unpaid reinsurance
premiums net of amortization totaled $32,142 and $28,561. 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. During 2001, 2000 and 1999, respectively, FLAC paid $73,492, $37,446 and
$653 of reinsurance premiums.
11. RELATED PARTY TRANSACTIONS
Effective December 31, 1998, the Company entered into a service agreement with
FLAC to provide personnel, facilities, and services to FLAC. The services to be
performed pursuant to the service agreement are underwriting, claim processing,
accounting, processing and servicing of policies, and other services necessary
to facilitate FLAC s business. The agreement is in effect until either party
provides ninety days written notice of termination. Under the agreement, FLAC
pays monthly fees based on life premiums delivered by FLAC. The percentages are
25% of first year life premiums; 40% of second year life premiums; 30% of third
year life premiums, 20% of fourth year life premiums and 10% of life premiums in
years five and thereafter. FLAC retains general insurance expenses related to
its sales agency, such as agent training and licensing, agency meeting expenses,
and agent s health insurance. Pursuant to the terms of the agreement, FLAC had
incurred expenses of $704,151, $562,686 and $275,375 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Effective January 1, 2002, FLAC entered into a new service agreement with the
Company. Under the terms of the 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 agreement are underwriting,
claim processing, accounting, policy processing and other services necessary for
FLAC to operate. The agreement is effective until either party provides 90 days
written notice of termination. FLAC pays fees equal to the Company's cost pf
providing such services, including an appropriate allocation of the Company's
overhead expenses, in accordance with generally accepted accounting
principles FLAC still bears all direct selling costs which include agent
recruiting, training and licensing; agent commissions; any benefits or awards
directly for or to agents or management including the cost of any life or health
insurance; and any taxes (federal, state or county) directly related to the
business of FLAC. Additionally, FLAC is responsible for any reinsurance
premiums; legal expenses related to settlement of claims; state examination
fees; directors fees and directors liability insurance; interest on
indebtedness;
F-22
11. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
The Company has contracted with First Alliance Corporation ( FAC ) of Lexington,
Kentucky to provide underwriting and accounting services for FLAC and the
Company. Under the terms of the management agreement, the Company pays fees
based on a percentage of delivered premiums of FLAC. The percentages are 5.5%
for 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 $142,785,
$117,246, and $60,531 of fees during 2001, 2000, and 1999, respectively. FAC
is also a shareholder of the Company.
During 2001, the Company purchased a 50% interest in First Computer Services,
LLC ("FCS"). FCS owns the computer hardware and software that operates a
Company policy administration, underwriting, claim processing, and accounting
system. Rick Meyer and Mike Donnelly, officers of the Company, are also
officers of FCS. The Company's initial investment in FCS was $115,195. FAC owns
the remaining 50% of FCS. Refer to Note 5 for further information on the FCS
investment.
12. 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, 2001 and 2000, respectively, the fair value of fixed
maturities was $8,605,901 and $6,241,820, respectively.
Short-term Investments
The carrying value of short-term investments approximates their fair value. At
December 31, 2001 and 2000 the fair value of short-term investments was
$2,286,095 and $4,437,280, respectively.
Cash and Cash Equivalents
The carrying values of cash and cash equivalents approximate their fair values.
At December 31, 2001 and 2000, the fair value of cash and cash equivalents was
$463,363 and $832,485, respectively.
Policy Loans
The carrying value of policy loans approximates their fair value. At December
31, 2001 and 2000, the fair value of policy loans was $33,178 and $5,990,
respectively.
F-23
Investments in Related Parties
The Company holds investments in related parties of $150,576 and $16,800 at
December 31, 2001 and 2000, respectively. Of these amounts, $41,800 and
$16,800 represent organizer shares purchased in the initial private placement of
the respective entity at December 31, 2001 and 2000, respectively . These
investments are restricted under Rule 144 of the Act. There are no quoted
market prices for these investments. These investments are carried at cost in
the accompanying consolidated balance sheets.
The remaining $108,776 at December 31, 2001 represents the Company's investment
in First Computer Servcies, LLC ("FCS"). The company uses the equity method to
account for this investment. Refer to Note 5 for more information.
Notes Receivable
The carrying value of notes receivable approximates their fair value. At
December 31, 2001 and 2000, the fair value of notes receivable was $0 and
$30,262, respectively.
13. COMPREHENSIVE INCOME
In 1998, the Financial Accounting and Standards Board SFAS No. 130, Reporting
Comprehensive Income. SFAS 130 requires the detail of comprehensive income for
the reporting period be disclosed in the financial statements. Comprehensive
income consists of net income or loss for the current period adjusted for
income, expenses gains and losses that are reported as a separate component of
shareholders equity rather than in the statement of operations. The financial
statements have been prepared in accordance with SFAS 130.
The components of comprehensive income (loss) along with the related tax effects
are presented for 2001, 2000, and 1999.
2001 2000 1999
--------- --------- -----------
Unrealized gain on available-for-sale securities:
Unrealized holding gain (loss) during the period $ 75,751 $254,589 $ (36,065)
Tax benefit (expense) (28,700) (86,560) 12,262
---------- --------- ----------
Other comprehensive income $ 47,051 $168,029 $ (23,803)
Net income (loss) $(352,828) $155,139 $(140,604)
Other comprehensive income (loss) net of
tax effect:
Unrealized investment gain (loss) 47,051 168,029 (23,803)
---------- -------- -----------
Comprehensive income (loss) $(305,778) $323,168 $(164,407)
Net income (loss) per common share-basic and diluted $ (0.06) $ 0.06 $ (0.03)
F-24
14. SEGMENT INFORMATION
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, become 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,
2001, 2000 and 1999 and for the years then ended is as follows:
Years ended December 31,
----------------------------------------
2001 2000 1999
----------- ------------ -------------
Revenues
Life and annuity insurance operations $ 2,704,352 $ 2,181,628 $ 1,243,323
Corporate operations 514,796 482,187 390,954
----------- ----------- ------------
Total $ 3,219,148 $ 2,663,815 $ 1,634,277
Income/(loss) before income taxes:
Life and annuity insurance operations $ 532,626 $ 537,649 $ 418,084
Corporate operations (734,059) (245,768) (404,036)
------------ ------------ ------------
Total $ (201,433) $ 291,881 $ 14,048
Depreciation and amortization expense:
Life and annuity insurance operations $ 459,124 $ 565,869 $ 234,522
Corporate operations 87,698 15,666 14,916
----------- ----------- ------------
Total $ 546,822 $ 581,535 $ 249,438
Assets:
Life and annuity insurance operations $ 8,795,709 $ 6,024,504 $ 4,255,380
Corporate operations 8,444,254 8,356,250 8,125,955
---------- ----------- ------------
Total $17,239,963 $14,380,754 $12,381,335
=========== =========== ============
F-25