United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB / A AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2003.
[ ] 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
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FIRST AMERICAN CAPITAL CORPORATION
----------------------------------
(Exact Name of small business issuer in its charter)
Kansas 48-1187574
----------------------- -------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
1303 S.W. First American Place Topeka, Kansas 66604
---------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (785) 267-7077
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, $.10 Par Value - 4,687,078 shares as of November 1, 2003
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X ]
1
FIRST AMERICAN CAPITAL CORPORATION
INDEX TO FORM 10-QSB
Part I. FINANCIAL INFORMATION Page Numbers
--------------------------------- ------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002..................................................3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2003 and 2002 and for
the nine months ended September 30, 2003 and 2002......................5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002..........................6
Notes to Condensed Consolidated Financial Statements............................8
Item 2. Management's Discussion and Analysis or Plan
of Operation...........................................................11
Item 3. Controls and Procedures................................................14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................15
Item 5. Other Information.......................................................15
Item 6. Exhibits and Reports on Form 8-K........................................16
Signatures......................................................................17
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
----------- -----------
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost, $10,757,409
in 2003 and $10,096,482 in 2002) $11,461,723 $10,760,529
Investments in real estate 274,564 274,564
Policy loans 103,729 65,011
Notes receivable (net of valuation allowance
of $0 in 2003 and $2,368 in 2002) 20,868 28,204
Short-term investments 349,466 416,801
----------- -----------
Total investments 12,210,350 11,545,109
Cash and cash equivalents 509,448 400,062
Investments in related parties 107,131 131,549
Accrued investment income 205,204 177,598
Accounts receivable 394,806 322,421
Deferred policy acquisition costs (net of accumulated
amortization of $2,082,421 in 2003 and $1,682,954 in 2002) 3,927,125 3,186,587
Property and equipment (net of accumulated depreciation
of $352,974 in 2003 and $264,976 in 2002) 2,867,787 2,952,046
Other assets 17,897 31,144
----------- -----------
Total assets $20,239,748 $18,746,516
=========== ===========
See notes to condensed consolidated financial statements.
3
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
------------ ------------
Policy and contract liabilities:
Annuity contract liabilities $ 4,344,656 $ 2,888,962
Life policy reserves 2,906,855 2,308,859
Liability for policy claims 96,548 78,671
Policyholder premium deposits 219,038 219,629
Deposits on pending policy applications 9,969 197,013
Reinsurance premiums payable 34,767 39,886
------------ ------------
Total policy and contract liabilities 7,611,833 5,733,020
Commissions, salaries, wages and benefits payable 48,416 55,230
Other liabilities 216,158 108,075
Note payable 1,855,529 1,888,844
Federal income taxes payable:
Deferred 638,805 1,066,390
------------ ------------
Total liabilities 10,370,741 8,851,559
Shareholders' equity:
Common stock, $.10 par value, 8,000,000 shares authorized; 5,449,578 shares
issued and 4,687,078 shares outstanding
in 2003 and 2002 544,958 544,958
Additional paid in capital 12,380,523 12,380,523
Accumulated deficit (2,234,438) (2,076,839)
Accumulated other comprehensive income 563,447 431,798
Less: Treasury stock held at cost (762,500 shares in 2003 and 2002) (1,385,483) (1,385,483)
------------ ------------
Total shareholders' equity 9,869,007 9,894,957
------------ ------------
Total liabilities and shareholders' equity $ 20,239,748 $ 18,746,516
============ ============
See notes to condensed consolidated financial statements.
4
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Gross premium income $ 808,266 $ 871,974 $ 2,916,678 $ 2,560,640
Reinsurance premiums assumed 1,756 - 4,826 -
Reinsurance premiums ceded (27,553) (26,557) (102,414) (94,536)
----------- ----------- ----------- -----------
Net premium income 782,469 845,417 2,819,090 2,466,104
Net investment income 138,342 168,261 425,496 447,846
Net realized gain on disposal of assets 4,479 39,153 4,820 22,848
Rental income 54,046 53,856 161,758 160,819
Other income - 254 - 1,244
----------- ----------- ----------- -----------
Total revenue 979,336 1,106,941 3,411,164 3,098,861
Benefits and expenses:
Increase in policy reserves 120,105 154,396 597,996 585,790
Policyholder surrender values 22,837 13,992 52,237 51,641
Interest credited on annuities and
premium deposits 80,378 46,993 214,701 117,718
Death claims 81,058 3,013 214,528 4,087
Commissions 246,138 391,461 975,879 956,143
Policy acquisition costs deferred (281,729) (456,257) (1,140,006) (1,219,183)
Amortization of deferred policy
acquisition costs 178,051 182,638 399,468 399,708
Salaries, wages, and employee benefits 240,748 344,821 921,621 1,030,796
Miscellaneous taxes 32,338 7,462 102,222 26,589
Administrative fees - related party - 222,794 - 288,936
Other operating costs and expenses 417,536 331,532 1,566,058 1,056,289
----------- ----------- ----------- -----------
Total benefits and expenses 1,137,460 1,242,845 3,904,704 3,298,514
----------- ----------- ----------- -----------
Loss before income tax expense (158,124) (135,904) (493,540) (199,653)
----------- ----------- ----------- -----------
Income tax (benefit) expense 20,594 106,392 (335,941) 263,877
----------- ----------- ----------- -----------
Net loss $ (178,718) $ (242,296) $ (157,599) $ (463,530)
=========== =========== =========== ===========
Net loss per common
share - basic and diluted $ (0.04) $ (0.05) $ (0.03) $ (0.09)
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
5
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Unaudited)
September 30, September 30,
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net loss $(157,599) $(463,530)
Adjustments to reconcile net loss to net cash
used in operating activities:
Interest credited on annuities and premium deposits 214,701 117,718
Net realized investment gain (4,820) (22,848)
Provision for depreciation and amortization 93,599 99,673
Equity loss in investment in affiliate 34,418 21,612
Amortization of premium and accretion of discount on
fixed maturity and short-term investments 55,091 40,348
Interest credited to certificates of deposit balances - (7,020)
Provision for deferred federal income taxes (335,941) 263,689
Increase in accrued investment income (27,606) (26,019)
Increase in accounts receivable (72,385) (150,200)
Decrease in accounts receivable from affiliate - 124,881
Increase in deferred policy acquisition costs, net (740,538) (819,475)
Increase in policy loans (38,718) (25,776)
Decrease (increase) in other assets 13,247 (31,375)
Increase in policy reserves 597,996 585,790
Increase in liability for policy claims 17,877 3,014
Decrease in deposits on pending policy applications (187,044) (94,290)
(Decrease) increase in reinsurance premiums payable (5,119) 7,162
(Decrease) increase in commissions, salaries, wages and
benefits payable (6,814) 75,744
Decrease in accounts payable to affiliate - (18,022)
Increase in other liabilities 108,083 48,087
--------- ---------
Net cash used in operating activities $(441,572) $(270,837)
6
FIRST AMERICAN CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (Unaudited)
September 30, September 30,
2003 2002
----------- -----------
INVESTING ACTIVITIES:
Purchase of available-for-sale fixed maturities $(1,862,911) $(3,966,200)
Sale or maturity of available-for-sale fixed maturities 1,154,000 2,983,351
Additions to property and equipment, net (9,340) (23,855)
Purchase of investments in affiliates (10,000) (9,805)
Changes in notes receivable, net 7,336 (30,555)
Short-term investments disposed, net 64,786 1,392,343
----------- -----------
Net cash (used in) provided by investing activities (656,129) 345,279
FINANCING ACTIVITIES:
Payments on note payable (33,315) (58,248)
Purchase of treasury stock - (1,141,225)
Deposits on annuity contracts, net 1,251,534 957,750
Policyholder premium deposits, net (11,132) 75,914
----------- -----------
Net cash provided by (used in) financing activities 1,207,087 (165,809)
----------- -----------
Increase (decrease) in cash and cash equivalents 109,386 (91,367)
Cash and cash equivalents, beginning of period 400,062 463,363
----------- -----------
Cash and cash equivalents, end of period $ 509,448 $ 371,996
=========== ===========
See notes to condensed consolidated financial statements.
7
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of First American
Capital Corporation and its Subsidiaries (the "Company") for the three month and
nine month periods ended September 30, 2003 and 2002 are unaudited. However, in
the opinion of the Company, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been reflected
therein.
Certain financial information which is normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, but which is not required for interim reporting
purposes, has been omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-KSB for the fiscal year ended December
31, 2002. Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation.
2. INVESTMENTS IN RELATED PARTIES
The Company owns a 50% interest in First Computer Services, LLC ("FCS"). FCS
owns the computer hardware and software that operates 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 ("FAC") of Lexington,
Kentucky. At September 30, 2003, the carrying value of the FCS investment was
$65,331. This amount represents total capital contributions of $135,000 reduced
by the Company's $69,669 share of the cumulative net operating losses to date.
Selected financial data for FCS at September 30, 2003 and for the period ended
September 30, 2003 is listed below.
Total Assets: $ 130,662
Total Liabilities: 0
Total Liabilities and Equity: 130,662
Loss from Operations: (68,836)
3. NET EARNINGS PER COMMON SHARE
Net income per common share for basic and diluted earnings per share is based
upon the weighted average number of common shares outstanding during each
period. The weighted average number of common shares outstanding was 4,687,078
for the three and nine months ended September 30, 2003. The weighted average
number of common shares outstanding was 5,262,952 and 5,270,267 for the three
and nine months ended September 30, 2002, respectively.
4. FEDERAL INCOME TAXES
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Effective June 30, 2003, the Company commenced calculating deferred taxes based
on a consolidated income tax return approach. In conjunction therewith, the
Company reduced the tax rate used to calculate deferred taxes from 35% to 20%.
The impact of this change in accounting estimate is reflected in the nine months
ended September 30, 2003 summary of operations. Income tax expense was reduced
by $532,546, or $.11 per share, for the nine months ended September 30, 2003,
resulting in an income tax benefit of $335,941 for the nine months ended
September 30, 2003.
8
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. NOTE PAYABLE
On April 22, 2003, the Company refinanced the note to Columbian Bank and Trust
Company with a note from Western National Bank. The note is secured by the home
office building. The note will mature on April 22, 2013. The note is payable in
120 monthly payments of $13,534 each with a final payment of the unpaid
principal balance and interest on April 22, 2013. Interest will be accrued at 6%
until April 22, 2008 at which time the rate may change. The interest rate change
will be the Wall Street Journal Prime Rate of Interest, subject to a floor of 6%
and a ceiling of 9.5%.
Required future principal payments are as follows:
Principal
Year Payment
---------- ----------
2003 $ 12,522
2004 51,400
2005 54,936
2006 58,373
2007 62,024
Thereafter 1,616,274
----------
Total $1,855,529
==========
6. COMPREHENSIVE INCOME
The components of comprehensive income along with the related tax effects for
the three months and nine months ended September 30, 2003 and 2002 are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Unrealized (loss) gain on available-for-sale securities:
Unrealized holding (loss) gain during the period $(130,670) $ 201,504 $ 40,004 $ 325,574
Tax benefit (expense) 26,134 (70,526) 91,645 (113,952)
--------- --------- --------- ---------
Other comprehensive (loss) income $(104,536) $ 130,978 $ 131,649 $ 211,622
========= ========= ========= =========
Net loss $(178,718) $(242,296) $(157,599) $(463,530)
Other comprehensive (loss) income net of
tax effect:
Unrealized investment (loss) gain (104,536) 130,978 131,649 211,622
--------- --------- --------- ---------
Comprehensive loss $(283,254) $(111,318) $ (25,950) $(251,908)
========= ========= ========= =========
Net loss per common share-basic and diluted $ (0.06) $ (0.02) $ (0.01) $ (0.05)
========= ========= ========= =========
9
FIRST AMERICAN CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION
The operations of the Company and its subsidiaries have been classified into two
operating segments as follows: life and annuity insurance operations and
corporate operations. Segment information for the three months and nine months
ended September 30, 2003 and 2002 and as of September 30, 2003 and December 31,
2002 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Life and annuity insurance operations $ 897,723 $ 949,254 $ 3,158,876 $ 2,743,663
Corporate operations 81,613 157,687 252,288 355,198
----------- ----------- ----------- -----------
Total $ 979,336 $ 1,106,941 $ 3,411,164 $ 3,098,861
=========== =========== =========== ===========
Income (loss) before income taxes:
Life and annuity insurance operations $ 120,464 $ 43,099 $ 442,851 $ 250,010
Corporate operations (278,588) (179,003) (936,391) (449,663)
----------- ----------- ----------- -----------
Total $ (158,124) $ (135,904) $ (493,540) $ (199,653)
=========== =========== =========== ===========
Depreciation and amortization expense:
Life and annuity insurance operations $ 178,051 $ 182,638 $ 399,468 $ 399,708
Corporate operations 30,631 33,778 93,599 99,673
----------- ----------- ----------- -----------
Total $ 208,682 $ 216,416 $ 493,067 $ 499,381
=========== =========== =========== ===========
Segment asset information as of September 30, 2003 and December 31, 2002
:
September 30, December 31,
2003 2002
----------- -----------
Assets:
Life and annuity insurance operations $14,409,718 $12,090,507
Corporate operations 5,830,030 6,656,009
----------- -----------
Total $20,239,748 $18,746,516
=========== ===========
10
ITEM 2. 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.
Financial Condition
Significant changes in the condensed consolidated balance sheets from December
31, 2002 to September 30, 2003 are highlighted below.
Total assets increased from $18,746,516 at December 31, 2002 to $20,239,748 at
September 30, 2003. The Company's available-for-sale fixed maturities had a fair
value of $11,461,723 and $10,760,529 at September 30, 2003 and December 31,
2002, respectively. 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.
Policy loans increased $38,718 or 60% from $65,011 at December 31, 2002 to
$103,729 at September 30, 2003. The increase in policy loans was due to
policyholders using policy cash values to pay premiums.
Short-term investments decreased from $416,801 at December 31, 2002 to $349,466
at September 30, 2003. The reduction of short-term investments held by the
Company is attributable to bonds maturing during the nine months ended September
30, 2003, and the proceeds being used to purchase available-for-sale securities
and short-term investments. This resulted in a $67,335 or 16% decrease in
short-term investments.
Cash and cash equivalents increased $109,386 from $400,062 at December 31, 2002
to $509,448 at September 30, 2003. Refer to the statement of cash flows for
sources and uses of cash.
Investments in related parties decreased from $131,549 at December 31, 2002 to
$107,131 at September 30, 2003. The decrease was due to the Company's $34,418
loss in share of FCS, which is offset by a capital contribution of $10,000.
Accounts receivable increased 22% from $322,421 at December 31, 2002 to $394,806
at September 30, 2003. The increase is due to a $23,125 increase in amounts due
from agents, a $67,956 increase in due premiums, and an $18,696 decrease in
other receivables. These amounts are expected to be fully recoverable.
Deferred policy acquisition costs, net of amortization, increased 23% from
$3,186,587 at December 31, 2002 to $3,927,125 at September 30, 2003 resulting
from the capitalization of acquisition expenses related to the increasing sales
of life insurance. These acquisition expenses include commissions and other fees
incurred in the first policy year.
Property and equipment net of accumulated depreciation decreased by $84,259 at
September 30, 2003 as compared to December 31, 2002. The decrease is
attributable to depreciation expense of $93,599, capitalization of assets of
$12,440 and the disposition of assets with a book value of $3,100.
11
Liabilities increased to $10,370,741 at September 30, 2003 from $8,851,559 at
December 31, 2002. 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 $597,996 or 26% from December 31, 2002 to
September 30, 2003. These reserves are actuarially determined based on such
factors as insured age, life expectancy, mortality and interest assumptions.
Liabilities for policy claims increased $17,877 at September 30, 2003 compared
to December 31, 2002.
There was a 50% increase in the amount of $1,455,694 for annuity contract
liabilities from December 31, 2002 to September 30, 2003. According to the
design of FLAC's primary life insurance product, first year premium payments are
allocated 100% to life insurance and renewal payments are split 50% to life and
50% to annuity. In the first nine months of 2003, annuity contract liabilities
increased as additional policies reached the second policy year.
Deposits on pending policy applications decreased from $197,013 at December 31,
2002 to $9,969 at September 30, 2003 because of the timing issues associated
with receipt and application of premium payments.
Other liabilities increased $108,083 from $108,075 at December 31, 2002 to
$216,158 at September 30, 2003. There was an increase of $83,866 in accounts
payable due to the timing of the receipt of significant invoices for legal and
actuarial services.
Federal income taxes payable have decreased 40% from $1,066,390 at December 31,
2002 to $638,805 at September 30, 2003. Federal income taxes payable represent
deferred taxes established based on timing differences between income recognized
for financial statement purposes and taxable income for the Internal Revenue
Service. These deferred taxes are based on the operations of the Company and on
unrealized gains of fixed maturities. The decrease in deferred income taxes
payable is primarily attributable to the reduction in the tax rate used to
calculate deferred taxes under a consolidated tax return approach from 35% to
20%.
Results of Operations
Revenues for the nine months ended September 30, 2003 totaled $3,411,164 as
compared to $3,098,861 for the same period of 2002. The increase is primarily
due to a 14% increase in net premium income of $352,986 resulting from the
growth in the policyholder base. The increase in net premium income has been
driven by increased sales of the Company's Final Expense product and renewal
year premiums collected on the Company's FA2000 product. First year premiums
collected on the FA2000 product have decreased from prior year as a result of
the disruptive affect of the Company's 2003 proxy contest on its customers,
shareholders and its marketing agents used to market the Company's FA2000
product.
Revenues for the three months ended September 30, 2003 totaled $979,336 as
compared to $1,106,941 for the same period of 2002. The decrease is primarily
due to a 7% decrease in net premium income of $62,948 resulting from the
disruptive affect of the Company's 2003 proxy contest on its customers,
shareholders and its marketing agents used to market the Company's FA2000
product.
Benefits and expenses totaled $3,904,704 and $3,298,514 for the nine months
ended September 30, 2003 and 2002, respectively. In total, benefits and expenses
increased $606,190, or 18%. Other operating costs accounted for $509,769 of the
total increase resulting from significant increases in legal fees of $367,542,
annual meeting expense of $143,549, audit fees of $26,813 and board fees of
$26,403. The increases in legal fees, annual meeting expense and board fees are
directly related to the Company's 2003 proxy contest and the litigation
surrounding such contest. The increase in audit fees is a result of additional
work being required due to the growth of the Company and the audit now being
performed on a stand-alone basis. The increase in other operating costs is also
attributable to $165,000 in legal settlement fees paid to AF&L. See "Other
Information". These increases were offset by decreases in agency related
expenses of $107,679 and travel, meals and entertainment expenses of $54,174.
The decreases in agency related expenses and travel, meals and entertainment
expenses are the result of management implementing tighter control of these
expense areas during 2003. As a result of the growth in the policyholder base,
the increase in policy reserves was $12,206 greater than the same period in
2002. Salaries and wages decreased $109,175 as a result of a decrease in the
number of employees. Commissions increased $19,736 due to the increase in
premium income and increased sales of the Final Expense product.
12
Commission rates paid on first year premiums received on the Final Expense
product are typically higher than those paid on the other products being
marketed by FLAC. Administration fees decreased $288,936 when compared to the
same period in 2002 due to the termination of the management agreement with
First Alliance Corporation. Death claims for the nine months ended September 30,
2003 totaled $214,528 as compared to $4,087 at September 30, 2002. The increase
is due to the maturation of policies. Interest credited on annuities and premium
deposits increased $96,983 for the nine months ended September 30, 2003 compared
to September 30, 2002. The increase is due to the design of FLAC's primary life
insurance product whereby first year premium payments are allocated 100% to life
insurance and renewal payments are split 50% to life and 50% to annuity. In the
first nine months of 2003, interest credited on annuities increased as
additional policies reached the second policy year.
Benefits and expenses totaled $1,137,460 and $1,242,845 for the three months
ended September 30, 2003 and 2002, respectively. In total, benefits and expenses
decreased $105,385, or 8%. Other operating costs increased $86,004 for the three
months ended September 30, 2003 and 2002. The increase was due to a significant
increase in legal fees of $173,269. The increase in legal fees is directly
related to the Company's 2003 proxy contest and litigation surrounding such
contest. These increases were offset by decreases in agency related expenses of
$20,803, travel, meals and entertainment expenses of $24,104, and office
expenses of $30,306. The decreases in agency related expenses, travel, meals and
entertainment expenses and office expenses are the result of management
implementing tighter control of these expense areas during 2003. The increase in
policy reserves was $34,291 less than the same period in 2002. Salaries and
wages decreased $104,073 as a result of a decrease in the number of employees.
Commissions decreased $145,323 due to the decrease in premium income on first
year sales of the FA2000 product. Administration fees decreased $222,794 when
compared to the same period in 2002 due to the termination of the management
agreement with First Alliance Corporation. Death claims for the three months
ended September 30, 2003 totaled $81,058 as compared to $3,013 at September 30,
2002. The increase is due to the maturation of policies. Interest credited on
annuities and premium deposits increased $33,385 for the three months ended
September 30, 2003 compared to September 30, 2002. The increase is due to the
design of FLAC's primary life insurance product whereby first year premium
payments are allocated 100% to life insurance and renewal payments are split 50%
to life and 50% to annuity.
Liquidity and Capital Resources
During the quarters ended September 30, 2003 and 2002, the Company maintained
liquid assets sufficient to meet operating demands, while continuing to utilize
excess liquidity for fixed maturity investments. Net cash used in operating
activities during the nine months ended September 30, 2003 and 2002 totaled
$441,572 and $270,837, respectively. The increase in net cash used in operating
activities during the nine months ended September 30, 2003 is directly related
to the Company's 2003 proxy contest and the litigation surrounding such contest.
FLAC's insurance operations generally receive adequate cash flows from premium
collections and investment income to meet their obligations. Insurance policy
liabilities are primarily long-term and generally are paid from future cash
flows. Cash collected from deposits on annuity contracts and policyholder
premium deposits are recorded as cash flows from financing activities. A
significant portion of the Company's invested assets are readily marketable and
highly liquid.
The Company's former president has made a demand on the Company for the payment
of $250,000 in severance benefits under his employment agreement. The Company
denies the allegation. If this claim is found to be meritorious, the Company's
liquidity could be adversely affected.
13
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the
design and effectiveness of our disclosure controls and procedures as of the end
of the period covered by this report (the "Evaluation Date"), have concluded
that as of the Evaluation Date, our disclosure controls and procedures were
adequately designed and operating effectively to ensure that material
information relating to us would be made known to them by others within the
Company, particularly during the period in which this Form 10-QSB Quarterly
Report was being prepared.
Changes in Internal Controls
There were no significant changes in our internal controls over financial
reporting that has materially affected or is reasonably likely to materially
affect internal control over financial reporting subsequent to the date of the
most recent evaluation, nor any significant deficiencies or material weaknesses
in such internal controls over financial reporting requiring corrective actions.
As a result, no corrective actions were taken.
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PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As previously reported, the Company recently settled litigation arising from the
proxy contest for the election of directors at the Company's 2003 annual
meeting.
On May 30, 2003, Rickie D. Meyer and Michael M. Fink, shareholders, directors
and former officers of the Company, initiated a lawsuit in the District Court of
Shawnee County, Kansas (the "District Court") seeking a declaratory judgment
determining that the Company was then engaging in conduct which violated and
interfered with the voting rights of the Company's shareholders in connection
with the Company's 2003 annual meeting. The action sought a temporary
restraining order, temporary injunction and a permanent injunction restraining
the Company from holding its June 2, 2003 annual meeting of shareholders pending
a final disposition of a regulatory application filed by Harold E. Riley, Mark
A. Oliver and Citizens, Inc. ("Citizens") with the Kansas Insurance Department
(the "Department") for permission to change the control of the Company.
Initiation of the lawsuit by Fink and Meyer followed a May 23, 2003
determination by the Department that voting of the proxy cards solicited by the
First American Committee for the Protection of Shareholder Value (the
"Committee"), a group formed by Meyer, Fink and others to nominate and elect an
alternate slate of directors, would violate the Kansas Insurance Holding
Companies Act.
On May 31, 2003, the District Court issued a temporary restraining order (the
"Restraining Order") permitting the Company to hold its annual meeting of
shareholders on June 2, 2003, as scheduled, but prohibiting the Company from
certifying any final results of the election of the board of directors at the
meeting or seating any new members of the board until further order of the
District Court. In the Restraining Order, the District Court directed Meyer and
Fink to deliver to the District Court (and not the annual meeting) any proxies
which they claimed should be eligible to be voted and counted at the annual
meeting, including the white proxy cards solicited by the Committee, to be held
by the District Court until their validity under Kansas insurance laws could be
determined.
The Company subsequently responded by filing its answer in the action generally
denying Meyer's and Fink's allegations and asserting certain counterclaims
against these individuals.
The settlement of the litigation was part of a global settlement contained in a
settlement agreement dated August 8, 2003 (the "Agreement") among the Company,
the Committee, Citizens, Riley, Oliver, Fink and Meyer. Under the settlement,
Fink and Meyer agreed to dismiss the lawsuit and to dissolve the Restraining
Order. Citizens, Riley and Oliver agreed, as part of the settlement, to withdraw
the pending application seeking the Department's approval to a change of control
of the Company. Other material terms of the Agreement include: (i) the Company's
agreement to dismiss its counterclaims in the lawsuit; (ii) the Committee
members' agreement to dissolve the Committee; (iii) Citizens' agreement not to
acquire, directly or indirectly, any securities of the Company for a period of
two years; (iv) Riley's and Oliver's agreements to revoke the irrevocable
proxies granted to them by Fink, Meyer and others; and (v) the parties' release
of certain claims against the others. On August 8, 2003, the lawsuit was
dismissed and the Restraining Order was dissolved.
Item 5. OTHER INFORMATION
On August 8, 2003, the Company settled a claim that it had breached various
marketing agreements with AF&L, a long-term care insurance company, and certain
of its affiliates through the payment to AF&L of $150,000 plus $15,000 in
attorney fees. AF&L initially claimed that its damages were approximately
$560,000. The Company denies any liability in connection with the claim.
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Index to Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of First American Capital Corporation
(Incorporated by reference from Exhibit 2.1 to the Registrant's
amended Form 10-SB filed August 13, 1999)
3.2 Amendment II To Bylaws of First American Capital Corporation
(Incorporated by reference from Exhibit 3.2 to the Registrant's
Form 10-KSB filed March 31, 2003)
4 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations, and Restrictions Thereof
of 6% Non-Cumulative, Convertible, Callable Preferred Stock
(Incorporated by reference from Exhibit 3 to the Registrant's
amended Form 10-SB filed August 13, 1999)
10.1 Form of Advisory Board Contract (Incorporated by reference from
Exhibit 6.2 to the Registrant's amended Form 10-SB filed August
13, 1999)
10.2 Service Agreement effective January 1, 2002 between First
American Capital Corporation and First Life America Corporation
(Incorporated by reference from Exhibit 10.3 to the Registrant's
Form 10-KSB filed March 31, 2003)
10.3 Operating Agreement of First Computer Services, LLC dated
December 1, 2001 (Incorporated by reference from Exhibit 10.10 to
the Registrant's Form 10-KSB filed March 31, 2003)
10.4 Automatic Umbrella and Bulk ADB Reinsurance Agreements effective
September 1, 1998 between First Life America Corporation and
Business Men's Assurance Company of America (Incorporated by
reference from Exhibit 6.8 to the Registrant's Form 10-SB filed
August 13, 1999)
21 Subsidiaries of First American Capital Corporation (Incorporated
by reference from Exhibit 21 to the Registrant's Form 10-KSB
filed March 31, 2003)
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (*)
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (*)
32.1 Certificate of Chief Executive Officer pursuant to Section 18
U.S.C. Section 1350 (*)
32.2 Certificate of Chief Financial Officer pursuant to Section 18
U.S.C. Section 1350 (*)
(*) Filed herewith
b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated August 12,
2003 disclosing its issuance of a press release announcing the
results of the shareholder's election of directors and the
settlement of its proxy contest. Subsequent to the quarter
ended September 30, 2003, the Company filed a current report
on Form 8-K dated November 12, 2003 announcing the Company's
initiation of a lawsuit against its former President, Rickie
D. Meyer, seeking damages for, among other things, abuse of
the Company's expense reimbursement policy, misappropriation
of funds, indemnification, and breach of fiduciary duty.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST AMERICAN CAPITAL CORPORATION
Date: 11/14/03 By: /s/ Vincent L. Rocereto
-------------------- ---------------------------------------------
Vincent L. Rocereto
President and Chief Executive Officer
Date: 11/14/03 By: /s/ Harland E. Priddle
--------------------- ----------------------------------------------
Harland E. Priddle
Secretary, Treasurer & Chief
Financial Officer
17