The Company currently leases approximately 5,400 square feet of office space in Lexington, Kentucky. On August 31, 1995, the Company entered into a sublease agreement with Bizwill, Inc. for additional space on the same floor as the Company's current lease. The sublease agreement is for a period from October 1, 1995 to March 31, 1998. The current lease, which expired in May of 1996, was extended until March 31, 1998. Combined annual rental payments totaled $72,868 and $41,490 for 1996 and 1995, respectively.
Management's Discussion and Analysis of Financial Conditions and Results of Operations
The Company operates in a highly competitive business environment, and its operations could be negatively affected by matters discussed under the caption, "Competition," on page 4 of this Form 10-K.
Revenues totaled $1,494,132 in 1996, $503,939 in 1995 and $37,389 in 1994. Since the Company commenced insurance operations in November of 1995, and 1996 was the first full year of operation for FAIC, the primary source of revenue is life insurance premium income. Premium income for 1996 increased by $838,060 in comparison to 1995 results. There were no premium revenues during 1994 since the Company was in its public stock offering. Premium income consists of life insurance premium sales of the Company's initial product referred to as the "Alliance 2000." An annuity rider is also included with the Alliance 2000; however, according to Statement of Financial Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from Sales of Investments", annuity premium income is not recognized as revenue. Annuity premium receipts totaled $563,314 during 1996 and are recognized as annuity contract liabilities net of a twenty percent first year load. Pursuant to the terms of the reinsurance agreement between FAIC and Business Men's Assurance Company, there are no first year premiums due. However, SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", requires this unpaid premium to be recognized as an expense and amortized over the term of the contracts reinsured. At December 31, 1996, $32,272 of reinsurance premiums were recorded as a liability.
Investment income is an integral component of total revenues for life insurance companies. Combined net investment income for FAIC and the Company totaled $585,244 for the year ended December 31, 1996 and $440,415 for the same period in 1995. Net investment income in 1994 totaled $37,389 since the Company was in its public stock offering and the invested asset base was smaller. Net investment income increased over the last two years due to the growth of FAIC's insurance operations.
During 1996, FKCC commenced operations and incurred operating losses totaling $115,728. These losses are the primary result of the inclusion of operating losses of Medical Acceptance Corporation ("MAC") in the operating results of the Company. FKCC purchased 51% of MAC on April 12, 1996. MAC has incurred operating losses since inception and therefore the Company recognizes 100% of MAC's operating results. The losses of MAC totaled $55,241 since the date of acquisition. Intangible assets related to the acquisition of MAC totaling $26,623 were written off during 1996 due to MAC's continuing operating losses. LGP, Inc. has incurred operating losses since inception totaling $31,816. Accordingly, the Company recognized 100% of these losses in operations as a component of net investment income.
Changes in the consolidated balance sheet of 1996 compared to 1995 reflect the operations of the Company and the capital transactions discussed below.
Total investments increased $5,280,736 principally because of : (i) the conversion of cash and cash equivalents to higher yielding and longer term investments; (ii) cash provided from the insurance operations of FAIC; (iii) lending agreements with two individuals which resulted in the establishment of notes receivable of $221,096; (iv) two related party common stock investments in start-up companies in Topeka, Kansas and Jefferson City, Missouri (see Note 4 to the audited financial statements); and (v) other invested assets of $97,000 of the Company's venture capital subsidiary, FKCC. These increases were partially offset by the unrealized loss adjustment to fixed maturity investments recognized as an adjustment to shareholders' equity in accordance with SFAS No. 115.
Deferred policy acquisition costs increased $698,398 net of $161,163 of amortization as the result of new business written by FAIC.
Policy and contract liabilities increased $1,179,874 principally because of (i) life policy reserves increased $354,648 due to premiums written for an entire year and policies issued during 1995 entering a second duration; (ii) an increase in the unearned revenue liability of $109,862 related to the recognition of the first year load on annuity premiums as a liability and amortized into income over the premium paying period of the related policies; (iii) annuity premiums received recognized as annuity contract deposits and recorded as a liability which increased $471,488; (iv) the accrual of a death claim payable of $93,794 at December 31, 1996; and (v) policyholder premium deposits totaling $114,015 which accumulate interest and will result in the payment of premiums over the premium paying period of the policy.
Changes in other liabilities include an increase of $30,003 in deferred federal income taxes related to the operations of FAIC and an increase in amounts payable to the Company's Advisory Board Members of $32,122.
The financial statements listed in Item 14(a) (1) and (2) are included in this report beginning on page 15.