forward-looking statements of the Company referred to above are also subject to risks and uncertainties.
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 5 of this Form 10-K.
Other income includes income primarily related to service agreements with First American Capital Corporation and Mid-American Alliance Corporation. The combined revenue from these agreements was $35,000 for the year ended December 31, 1997 and $8,000 for the year ended December 31, 1996. These agreements did not exist in 1995.
Benefits and expenses totaled $2,211,825, $1,682,338 and $911,096 for the years ended December 31, 1997, 1996 and 1995, respectively. The increase in policy reserves of $381,888 for the year ended December 31, 1997 is the result of new business written and existing policies reaching an additional duration. The increase in policy reserves for 1996 and 1995 was $354,648 and $25,272, respectively. Interest credited on annuities and premium deposits increased by $41,122 as compared to 1996 results. Additional annuity deposits on renewing policies and new annuity premiums written, coupled with an increase in the interest rate from 6.5% to 7.25%, increased interest credited on annuities. Total interest credited was $58,642, $17,520 and $98 for 1997, 1996 and 1995, respectively.
Deferred costs decreased from 1996 to 1997 due to lower first year premium written during 1997. The increase from 1995 to 1996 is the result of the first full year of insurance operations in 1996. Amortization of deferred policy acquisition costs totaled $339,562, $161,163 and $12,952 for the years ended December 31, 1997, 1996 and 1995, respectively.
Salary, wages and employee benefits was $680,193 for the year ended December 31,1997 as compared to $699,736 for the same period in 1996. This $19,543 decrease was due to the elimination of salaries of MAC in 1997 which were consolidated with the operations of FKCC. For the year ended December 31, 1995, salary, wages and employee benefits totaled $546,592. The primary reason for the increase during 1996 was the payment of incentive compensation to the executive officers. In December of 1997, the Company granted stock options to agents in recognition of their performance. The Company accounts for these options according to APB Opinion No. 25, "Accounting for Stock Issued to Employees". Under these rules, the difference between the option exercise price and the estimated fair market value of the related stock on the date the options are granted is recorded as compensation expense for financial reporting purposes. The granting of these option shares resulted in the recognition of $159,743 of non-cash compensation expense.
Total assets increased $767,292 during 1997 to $13,298,364 at December 31, 1997. Insurance sales and policy renewals provided additional cash. Acquisition costs related to new business are reclassified as deferred policy acquisition costs and amortized over the premium paying period of the policy. As a result, deferred policy acquisition costs increased $324,875 net of amortization during 1997.
Liabilities increased $1,175,370 to $2,732,006 at December 31, 1997. Annuity contract liabilities increased from additional sales and renewal deposits into the annuity fund. Total annuity contract liabilities at December 31, 1997 and 1996 were $1,112,551 and $504,323, respectively. Policy reserves are established by law to provide for the protection of policyholders for the payment of death benefits. As policies reach additional durations, an additional reserve must be established along with those established for new business written. Life policy reserves totaled $761,808 at December 31, 1997 and $379,920 at December 31, 1996.
At December 31, 1997, all of the death claims incurred during 1997 had been paid. At December 31, 1996, one death claim totaling $93,794 remained unpaid until 1997.
Deferred federal income taxes are established based on the operating income of FAIC. Taxes are calculated on a different basis for financial reporting purposes as opposed to Internal Revenue Service requirements. The different basis generates timing differences for the recognition of income. Deferred federal income taxes payable increased $167,288 to $205,706 at December 31, 1997 due to increased earnings of FAIC on a financial reporting basis during 1997 compared to taxable income.
A growing concern among the life insurance industry is the ability of computer systems to adapt to the potential problems that may arise in the year 2000. Insurance processing systems rely on date processing as an integral part of many of the calculations performed on a daily basis. The problem arises from system programing which only recognizes the last two positions of year values. Systems programed in this manner will assume the last two digits of the year will represent the year 1900 rather than 2000. The impact of the required system enhancements could, in some cases, financially impair a company's ability to continue administering the business it produces. The Company has taken all steps necessary to ensure that the change to the year 2000 will not impair its ability to administer business. Notwithstanding the efforts or results of the Company, the ability to function unaffected to and through the
The financial statements listed in Item 14(a) (1) and (2) are included in this report beginning on page 16.