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EX-23.2 - EX-23.2 - First Trinity Financial CORP | d73107exv23w2.htm |
EX-99.10 - EX-99.10 - First Trinity Financial CORP | d73107exv99w10.htm |
Table of Contents
Registration No. 333-163901
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST TRINITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma | 6311 | 34-10011436 | ||
(State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
incorporation or organization) | Classification Code Number) | Identification Number.) |
7633 E. 63rd Place
Suite 230
Tulsa, OK 74133
(918) 249-2438
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
Suite 230
Tulsa, OK 74133
(918) 249-2438
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
Mr. Gregg Zahn
Chief Executive Officer
First Trinity Financial Corporation
7633 E. 63rd Place
Suite 230
Tulsa, OK 74133
(918) 249-2438
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Chief Executive Officer
First Trinity Financial Corporation
7633 E. 63rd Place
Suite 230
Tulsa, OK 74133
(918) 249-2438
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
P. David Newsome, Jr.
Cooper & Newsome PLLP
401 South Boston Avenue
Suite 3300, Mid-Continent Tower
Tulsa, Oklahoma 74103
(918) 592-3300
Cooper & Newsome PLLP
401 South Boston Avenue
Suite 3300, Mid-Continent Tower
Tulsa, Oklahoma 74103
(918) 592-3300
Approximate date of commencement of proposed sale to the public: As soon as practicable beginning
after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. þ
If this form is filed to register additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
CALCULATION OF REGISTRATION FEE
Proposed | ||||||||||||||
maximum | ||||||||||||||
Title of each Class | aggregate | Amount of | ||||||||||||
of securities to be | Amount to be | Offering price | offering | registration | ||||||||||
registered | registered(1) | per share(2) | price(3) | fee(4) | ||||||||||
Common Stock, par value
$.01 per share |
1,466,668 | $7.50 | $11,000,010 | $784.30 | ||||||||||
(1) | Includes 133,334 shares of common stock to cover over-subscriptions, if any, in excess of the proposed maximum number of shares being offered. | |
(2) | The common stock is not traded on any national exchange. The offering price was arbitrarily determined by the registrant and bears no relationship to assets, earnings or any other valuation criteria. | |
(3) | Estimated in accordance with Rule 457 of the Securities Act. | |
(4) | Previously paid. | |
The registrant hereby amends this registration statement on such date or dates as may be necessary
to delay its effective date until the registrant shall file a further amendment which specifically
states that this registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
Table of Contents
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY
NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT
TO COMPLETION, DATED MAY 17, 2010
PROSPECTUS
FIRST TRINITY FINANCIAL CORPORATION
1,333,334 SHARES OF COMMON STOCK
This prospectus relates to a public offering of 1,333,334 shares of common stock, $.01 par
value per share, of First Trinity Financial Corporation for $7.50 per share. First Trinity
Financial Corporation is referred to as FTFC or the Company and the securities are referred to
as shares of Common Stock. The Company will receive $8,500,000 after offering expenses and sales
commissions if all of the securities are sold.
Per Share | Total | |||||||
Public offering price |
$ | 7.50 | $ | 10,000,000 | ||||
Less: Estimated offering expenses (excluding selling agent fees and expenses) |
$ | 0.38 | $ | 500,000 | ||||
Less: Estimated selling agent fees and expenses |
$ | 0.75 | $ | 1,000,000 | ||||
Estimated net proceeds |
$ | 6.37 | $ | 8,500,000 | ||||
The shares of Common Stock will be offered and sold by our registered securities agents in
the State of Oklahoma. The shares will be offered and sold on a best efforts basis. By best
efforts we mean that we are not required to sell any specific number or dollar amount of shares.
For a description of the plan of distribution of these shares, please see page 16 of this
prospectus. Our securities are not listed on a national securities exchange or quoted on the
Over-the-Counter Bulletin Board (OTCBB). There is no assurance that a market may be established
in the future. In addition to the 1,333,334 shares mentioned above, we have registered an
additional 133,334 shares of Common Stock to cover over-subscriptions if any occur.
We will not accept subscriptions from any potential investor who does not meet one of the
following standards: (1) a minimum annual gross income of $70,000 and a minimum net worth of
$70,000 excluding vehicles, home and home furnishings; or (2) a minimum net worth of $150,000
excluding vehicles, home, and home furnishings. In addition, we will not accept subscriptions from
any potential investor who is investing more than 10% of their net worth, excluding vehicles, home
and home furnishings.
This offering will end on ___, 2011, unless all of the Shares are sold before
then. The proceeds from the sale of Shares will be immediately available to us and will not be held
in escrow.
Our business and an investment in our Common Stock involve significant risks. You should
refer to the factors described in the section called Risk Factors beginning on page 5 of this
prospectus. Among the Risk Factors is a disclosure about our operating losses and accumulated
deficit. You should not invest unless you can afford to lose your entire investment.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is ___, 2010.
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You should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information that is different. You should assume that
information appearing in this prospectus as well as the information we filed previously with the
Securities and Exchange Commission, or SEC, and incorporated herein by reference is accurate only
as of the date of the document containing the information.
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PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to you. You should
read this entire prospectus before making an investment decision.
You should pay special attention to the Risk Factors section beginning on page 5 of
this prospectus in determining whether an investment in our Common Stock is appropriate for you.
In this prospectus, references to the Company, we, us, our, First Trinity and
registrant refer to First Trinity Financial Corporation. Our life insurance subsidiary, Trinity
Life Insurance Company, is referred to as TLIC. Our premium finance subsidiary, First Trinity
Capital Corporation, is referred to as FTCC.
First Trinity Financial Corporation
First Trinity Financial Corporation is an Oklahoma corporation with offices at 7633 E.
63rd Place, Suite 230, Tulsa, Oklahoma 74133. The Companys telephone number
is (918) 249-2438. The Company was incorporated on April 19, 2004 for the purpose of forming and/or
acquiring a life insurance company or insurance related companies and the formation of other
financial service businesses. We received our Certificate of Authority for TLIC, our life insurance
subsidiary (Old TLIC), from the Oklahoma Department of Insurance on June 22, 2006. We incorporated our premium
finance subsidiary, FTCC, in February of 2006. We have been selling life insurance since March of
2007, and making premium finance loans since January of 2007. On December 23, 2008, we purchased
First Life America Corporation (FLAC) from Brooke Capital Corporation to increase our insurance
business. On August 31, 2009, we merged old TLIC into FLAC with FLAC being the surviving company and we then changed the name of FLAC to
TLIC.
We are a holding company for an insurance company and a premium finance company. We
operate our insurance company in eight states and develop and market individual life insurance and
annuity products. We serve middle-income consumers with a focus on seniors. We believe this is an
attractive, underserved, high growth market. We sell our products through independent producers
(some of whom sell one or more of our product lines exclusively). We operate our premium finance
company in three states and finance casualty insurance premiums through general insurance agencies.
State insurance holding company statutes applicable to us generally provide that no
person may acquire control of us, and thus indirect control of our insurance subsidiary, without
prior approval of the relevant state insurance commissioners. Generally, any person who acquires
beneficial ownership of 10% or more of our outstanding voting securities would be presumed to have
acquired such control unless the relevant state insurance commissioners upon application determine
otherwise. Beneficial ownership includes the acquisition, directly or indirectly (by revocable
proxy or otherwise), of our voting shares. If any person acquires 10% or more of the outstanding
shares of common stock in violation of such provisions, our insurance subsidiary or the state
insurance commissioner is entitled to injunctive relief, including enjoining any proposed
acquisition, or seizing shares of common stock owned by such person, and such shares of common
stock would not be entitled to be voted.
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The Offering
Securities Offered
|
1,333,334 shares of Common Stock. The Company has registered an additional 133,334 shares for over-subscriptions. | |
Common Stock Outstanding Before Offering |
5,805,000 shares. | |
Common Stock Outstanding After Offering (if maximum sold) |
7,138,334 shares. The Company has registered an additional 133,334 shares of Common Stock for over-subscriptions, if any. | |
Minimum Offering
|
The offering will not be completed if proceeds of $1 million (from the sale of not fewer than 133,334 shares of Common Stock) are not received by the Company. Proceeds from the sale of shares of Common Stock will be held in an escrow account until 133,334 shares are sold. Officers, directors and their affiliates (as defined by regulations under the Securities Act) may purchase shares on the same terms as unaffiliated public investors to complete the minimum offering of 133,334 shares and terminate and release of the escrow requirements. | |
Minimum Subscription
|
Subscriptions will be subject to a minimum purchase of 200 shares of Common Stock ($1,500) and a maximum purchase of 10,000 shares ($75,000), unless management of the Company in its sole discretion permits the purchase of a larger number of shares. | |
Plan of Distribution
|
Shares will be sold on a best efforts basis through agents of the Company registered in Oklahoma who will receive a direct commission based upon such sales not to exceed 10%. See Plan of Distribution below for additional information. | |
Use of Proceeds
|
We estimate that our net proceeds from the sale of shares in this offering, after deducting commissions and offering expenses, will be approximately $8,500,000 if the maximum number of shares of Common Stock are sold. We estimate that our net proceeds will be $786,671 if the minimum of 133,334 shares are sold. We intend to use the net proceeds for general corporate purposes, including working capital, to increase the capital and/or surplus of our insurance subsidiary as needed to maintain adequate capital and for potential acquisitions of insurance companies or life insurance business. | |
Term of Offering
|
The offering will continue for one year from the date of this prospectus unless all of the shares are sold before then. We may extend the offering for one additional year by a future amendment to our registration statement. | |
Risk Factors
|
See Risk Factors beginning on page 5 of this prospectus for a discussion of the risk factors you should carefully consider before deciding to invest in our common stock. |
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Suitability
|
We will not accept subscriptions from any potential investor who does not meet one of the following standards: (1) a minimum annual gross income of $70,000 and a minimum net worth of $70,000 excluding vehicles, home and home furnishings; or (2) a minimum net worth of $150,000 excluding vehicles, home, and home furnishings. In addition, we will not accept subscriptions from any potential investor who is investing more than 10% of their net worth, excluding vehicles, home and home furnishings. |
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated herein by reference contain statements
which constitute forward looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and other federal securities laws. Also, whenever we use words such as
believe, expect, anticipate, intend, plan, estimate or similar expressions, we are
making forward looking statements. For example, when we discuss in this prospectus or any of the
documents incorporated by reference future trends in the life insurance or premium finance
industries and our expectations based on such trends, we are using forward looking statements.
These forward looking statements are based upon our present intent, beliefs or expectations, but
forward looking statements are not guaranteed to occur and may not occur. Actual results may differ
materially from those contained in or implied by our forward looking statements as a result of
various factors.
Important factors that could cause actual results to differ materially from those in our
forward looking statements include, among others, general market conditions, including the recent
downturn in the economy and the growth in consumer debt, regulatory developments and other
conditions which are not within our control. Other risks may adversely impact us, as described more
fully in the section called Risk Factors. You should not place undue reliance upon forward
looking statements. Except as required by law, we undertake no obligation to update or revise any
forward looking statements as a result of new information, future events or otherwise.
RISK FACTORS
Your investment in our Common Stock involves risk. You should carefully consider the
risks described below, as well as other information included or incorporated by reference in this
prospectus, before making a decision to buy our Common Stock. If any of the following risks
actually occurs, our business could be materially harmed. In that case, the value of our Common
Stock could decline, and you may lose all or part of your investment. You also should refer to the
other information in this prospectus, including our financial statements and the related notes.
Risks Related To Our Business
We have suffered operating losses for the years prior to this offering and have an accumulated
deficit of approximately $3,481,000 at December 31, 2009.
We have experienced net losses since inception in 2004. TLIC sustained losses for its
first two years of operation although in 2009 it had pre-tax income of $219,889. Our premium
finance subsidiary increased its revenues in 2009 over 2008, but it experienced a pre-tax loss of
$619,613 compared to a gain of $913 for 2008 due to a loss on fraudulent loans and an increase in
loan loss reserves as explained below. We cannot be certain that we will achieve or sustain
profitability on a quarterly or annual basis in the future.
In addition, although we are under no obligation to do so, we may elect to contribute
additional capital to strengthen the surplus of our insurance subsidiary for regulatory purposes or
to provide the capital
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necessary for growth. Any election regarding the contribution of additional capital to our
insurance subsidiary could affect the ability of our insurance subsidiary to pay dividends.
We are a holding company and our liquidity and ability to meet our obligations may be constrained
by the ability of our insurance subsidiary to distribute cash to us.
We are a holding company with no business operations of our own. We depend on our initial
capital and operating subsidiaries for cash to pay administrative expenses. We receive interest
payments on surplus debentures from our insurance subsidiary, as well as cash from our
non-insurance subsidiary consisting of principal and interest payments. A deterioration in the
financial condition, earnings or cash flow of our subsidiaries for any reason could hinder the
ability of our subsidiaries to make disbursements to us. In addition, we may elect to contribute
additional capital to our insurance subsidiary to strengthen its surplus for regulatory purposes or
to provide the capital necessary for growth, in which case it is less likely that our insurance
subsidiary would pay dividends to us. Accordingly, this could limit our ability to satisfy holding
company financial obligations.
Payments from our non-insurance subsidiary do not require approval by any regulatory
authority or other third party. However, the payment of dividends or surplus debenture interest by
our insurance subsidiary is subject to state insurance department regulations and may be prohibited
by insurance regulators if they determine that such dividends or other payments could be adverse to
our policyholders or contract holders. Oklahoma Insurance Department regulations permit dividends
to be paid from statutory earned surplus of the insurance company without regulatory approval for
any 12-month period in amounts equal to the greater of statutory net gain from operations,
excluding realized capital gains, or 10% of insurers surplus as regards policyholders as of the
end of the preceding year. This type of dividend is referred to as ordinary dividends. Any
dividends in excess of these levels require the approval of the Oklahoma Insurance Commissioner.
This type of dividend is referred to as extraordinary dividends. Accordingly, any dividend
payments from our insurance subsidiary will require the prior approval of the Oklahoma Insurance
Commissioner.
Furthermore, risk-based capital requirements and other capital requirements can also
limit, in certain circumstances, the ability of our insurance subsidiary to pay dividends. For
example, certain states have established minimum capital requirements for insurance companies
licensed to do business in their state.
In addition, although we are under no obligation to do so, we may elect to contribute
additional capital to strengthen the surplus of our insurance subsidiary for regulatory purposes or
to provide the capital necessary for growth.
There are risks to our business associated with the current economic environment.
Over the past two years, the U.S. economy has experienced unprecedented credit and
liquidity issues and entered into a recession. Following several years of rapid credit expansion, a
sharp contraction in mortgage lending coupled with dramatic declines in home prices, rising
mortgage defaults and increasing home foreclosures, resulted in significant write-downs of asset
values by financial institutions, including government-sponsored entities and major commercial and
investment banks. These write-downs, initially of mortgage-backed securities but spreading to most
sectors of the credit markets, and to credit default swaps and other derivative securities, have
caused many financial institutions to seek additional capital, to merge with larger and stronger
institutions, to be subsidized by the U.S. government and, in some cases, to fail. Reflecting
concern about the stability of the financial markets, generally, and the strength of
counterparties, many lenders and institutional investors have reduced and, in some cases, ceased to
provide funding to borrowers, including other financial institutions. These factors, combined with
declining business and consumer confidence and increased unemployment, have precipitated an
economic slowdown and fears of a prolonged recession.
Even under more favorable market conditions, general factors such as the availability of
credit, consumer spending, business investment, capital market conditions and inflation affect our
business. For example, in an economic downturn, higher unemployment, lower family income, lower
corporate earnings,
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lower business investment and lower consumer spending may depress the demand for life insurance and
annuity products. In addition, this type of economic environment may result in higher lapses or
surrenders of policies. Accordingly, the risks we face related to general economic and business
conditions are more pronounced given the severity and magnitude of the recent adverse economic and
market conditions experienced.
More specifically, our business is exposed to the performance of the debt and equity
markets, which have been materially and adversely affected by recent economic developments. Adverse
conditions, including but not limited to, a lack of buyers in the marketplace, volatility, credit
spread changes, and benchmark interest rate changes, have affected and will continue to impact the
liquidity and value of our investments. We experienced realized losses during 2009 due to bond
defaults; however the recovery in the debt and equity market performance was beneficial to us
during 2009 due to having purchased the bonds and equity securities of FLAC in a depressed market.
Changes in interest rates that have adversely affected, and will continue to adversely
affect, our business, financial condition, growth and profitability include, but are not limited
to, the following:
A widening of credit spreads, such as the market experienced in 2008 could increase the
net unrealized loss position of our investment portfolio and may ultimately result in increased
realized losses. The value of our investment portfolio can also be affected by illiquidity and by
changes in assumptions or inputs we use in estimating fair value. Although the value of our
investments increased on an aggregate basis in 2009, there can be no assurance that higher realized
and/or unrealized losses will not occur in the future. Continued adverse capital market conditions
could result in further realized and/or unrealized losses.
Changes in interest rates also have other effects related to our investment portfolio. In
periods of increasing interest rates, life insurance policy loans, surrenders and withdrawals could
increase as policyholders seek investments with higher returns. This could require us to sell
invested assets at a time when their prices are depressed by the increase in interest rates, which
could cause us to realize investment losses. Conversely, during periods of declining interest
rates, we could experience increased premium payments on products with flexible premium features,
repayment of policy loans and increased percentages of policies remaining in-force. We would obtain
lower returns on investments made with these cash flows. In addition, borrowers may prepay or
redeem bonds in our investment portfolio so that we might have to reinvest those proceeds in lower
yielding investments. As a consequence of these factors, we could experience a decrease in the
spread between the returns on our investment portfolio and amounts credited to policyholders and
contract owners, which could adversely affect our profitability.
Increasing consumer concerns about the returns and features of our products or our
financial strength may cause existing customers to surrender policies or withdraw assets, and
diminish our ability to sell policies and attract assets from new and existing customers, which
would result in lower sales and revenues.
It is difficult to predict how long the current economic and market conditions will
continue, whether the financial markets will continue to deteriorate and which aspects of our
products and/or business will be adversely affected. However, the lack of credit, lack of
confidence in the financial sector, increased volatility in the financial markets and reduced
business activity are likely to continue to materially and adversely affect our business, financial
condition and results of operations.
The determination of the amount of realized investment losses recorded as impairments of our
investments is highly subjective and could have a material adverse effect on our operating results
and financial condition.
The determination of the amount of realized investment losses recorded as impairments
vary by investment type and is based upon our periodic evaluation and assessment of known and
inherent risks associated with the respective asset class. Such evaluations and assessments are
revised as conditions change and new information becomes available. We update our evaluations
regularly and reflect changes in realized investment gains and losses from impairments in operating
results as such evaluations are revised.
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Our assessment of whether unrealized losses are other-than-temporary impairments requires
significant judgment and future events may occur, or additional information may become available,
which may necessitate future impairments of securities in our portfolio. Historical trends may not
be indicative of future other-than-temporary impairments. For example, the cost of our fixed
maturity and equity securities is adjusted for impairments in value deemed to be other than
temporary in the period in which the determination is made. The assessment of whether impairments
have occurred is based on our case-by-case evaluation of the underlying reasons for the decline in
fair value.
The determination of the fair value of our fixed maturity securities results in unrealized net
investment gains and losses and is highly subjective and could materially impact our operating
results and financial condition.
In determining fair value, we generally utilize market transaction data for the same or
similar instruments. The degree of management judgment involved in determining fair values is
inversely related to the availability of market observable information. The fair value of financial
assets and financial liabilities may differ from the amount actually received to sell an asset or
the amount paid to transfer a liability in an orderly transaction between market participants at
the measurement date. Moreover, the use of different valuation assumptions may have a material
effect on the fair values of the financial assets and financial liabilities. As of December 31,
2009, our total unrealized net investment gains before deferred income taxes were $2,744,135.
If we fail to raise a significant portion of the offering our plans to seek acquisitions and expand
the premium finance company will be effected.
If we do not raise a significant portion of this offering, we will be limited to the size
and financing options available for any acquisitions of life insurance companies or life insurance
business. Additionally, we may have to use our bank line of credit to provide financing to expand
our premium finance business. Our target is to increase the loans financed to $7 million. This may
negatively impact our plan for growth of the Company.
Our business is subject to extensive regulation.
Our insurance business is subject to extensive regulation and supervision in the
jurisdictions in which we operate. Our insurance subsidiary is subject to state insurance laws that
establish supervisory agencies. Such agencies have broad administrative powers including the power
to grant and revoke business licenses, regulate and supervise sales practices and market conduct,
establish guaranty associations, license agents, approve policy forms, establish reserve
requirements, prescribe the form and content of required financial statements and reports,
determine the reasonableness and adequacy of statutory capital and surplus, perform financial,
market conduct and other examinations, define acceptable accounting principles; and regulate the
types and amounts of permitted investments.
The regulations issued by state insurance agencies can be complex and subject to
differing interpretations. If a state insurance regulatory agency determines that our insurance
subsidiary is not in compliance with applicable regulations, the subsidiary is subject to various
potential administrative remedies including, without limitation, monetary penalties, restrictions
on the subsidiarys ability to do business in that state and a return of a portion of policyholder
premiums. In addition, regulatory action or investigations could cause us to suffer significant
reputational harm, which could have an adverse effect on our business, financial condition and
results of operations.
Our insurance subsidiary is also subject to risk-based capital requirements. These
requirements were designed to evaluate the adequacy of statutory capital and surplus in relation to
investment and insurance risks associated with asset quality, mortality and morbidity, asset and
liability matching and other business factors. The requirements are used by states as an early
warning tool to discover companies that may be weakly-capitalized for the purpose of initiating
regulatory action. Generally, if an insurers risk-based capital falls below specified levels, the
insurer is subject to different degrees of regulatory action depending upon the magnitude of the
deficiency. The 2009 statutory annual statements filed with the state insurance
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regulators reflected total adjusted capital in excess of the levels subjecting the subsidiary to
any regulatory action.
Regulatory developments relating to the recent financial crisis may also significantly affect
our operations and prospects in ways that we cannot predict. New regulations will likely affect
critical matters, including capital requirements. If we fail to manage the impact of these
developments effectively, our prospects, results and financial condition could be materially
adversely affected.
Our reserves for future insurance policy benefits and claims may prove to be inadequate, requiring
us to increase liabilities which results in reduced net income and shareholders equity.
Liabilities for insurance products are calculated using managements best judgments,
based on our past experience and standard actuarial tables of mortality, morbidity, lapse rates,
investment experience and expense levels. We establish reserves based on assumptions and estimates
of factors either established at the date of acquisition for business acquired or considered when
we set premium rates for business written.
Many factors can affect these reserves and liabilities, such as economic and social
conditions, changes in life expectancy and regulatory actions. Therefore, the reserves and
liabilities we establish are necessarily based on estimates, assumptions, industry data and prior
years statistics. It is possible that actual claims will materially exceed our reserves and have a
material adverse effect on our results of operations and financial condition.
We may be required to accelerate the amortization of the cost of policies produced or the value of
policies acquired.
Costs of policies produced represent the costs that vary with, and are primarily related
to, producing new insurance business. The value of policies acquired represents the value assigned
to the right to receive future cash flows from contracts in-force in FLAC at the date FLAC was
acquired. The balances of these accounts are amortized over the expected lives of the underlying
insurance contracts. On an ongoing basis, we test these accounts recorded on our balance sheet to
determine if these amounts are recoverable under current assumptions. In addition, we regularly
review the estimates and assumptions underlying these accounts for those products for which we
amortize the cost of policies produced or the value of business acquired in proportion to gross
profits or gross margins. If facts and circumstances change, these tests and reviews could lead to
reduction in the balance of those accounts that could have an adverse effect on the results of our
operations and our financial condition.
Our operating results will suffer if policyholder surrender levels differ significantly from our
assumptions.
Surrenders of our annuities and life insurance products can result in losses and
decreased revenues if surrender levels differ significantly from assumed levels. The surrender
charges that are imposed on our fixed rate annuities typically decline during a penalty period,
which ranges from three to ten years after the date the policy is issued. Surrender charges are
eliminated after the penalty period. Surrenders and redemptions could require us to dispose of
assets earlier than we had planned, possibly at a loss. Moreover, surrenders and redemptions
require faster amortization of either the acquisition costs or the commissions associated with the
original sale of a product, thus reducing our net income. We believe policyholders are generally
more likely to surrender their policies if they believe the issuer is having financial
difficulties, or if they are able to reinvest the policys value at a higher rate of return in an
alternative insurance or investment product.
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The amount of statutory capital that we have and the amount of statutory capital that we must hold
to maintain our financial strength and credit ratings and meet other requirements can vary
significantly from time to time and is sensitive to a number of factors outside of our control,
including equity market, credit market, interest rate, changes in policyholder behavior and changes
in rating agency models.
We conduct the majority of our business through our life insurance company subsidiary.
Accounting standards and statutory capital and reserve requirements for these entities are
prescribed by the applicable insurance regulators and the National Association of Insurance
Commissioners (NAIC). Insurance regulators have established regulations that provide minimum
capitalization requirements based on risk-based capital formulas for life companies. The
risk-based capital formula for life companies establishes capital requirements relating to
insurance, business, asset and interests rate risks, including equity, interest rate and expense
recovery risks associated with variable annuities that contain death benefits or certain living
benefits.
In any particular year, statutory surplus amounts and risk-based capital ratios may increase
or decrease depending on a variety of factors the amount of statutory income or losses generated
by our insurance subsidiary (which itself is sensitive to equity market and credit market
conditions), the amount of additional capital our insurance subsidiary must hold to support
business growth, changes in equity market levels, the value of certain fixed-income and equity
securities in our investment portfolio, the value of certain derivative instruments, changes in
interest rates, as well as changes to the NAIC risk-based capital formulas. Most of these factors
are outside of the Companys control. The Companys financial strength is significantly influenced
by the statutory surplus amounts and risk-based capital ratios of our insurance company subsidiary.
Due to a variety of factors, projecting statutory capital and the related risk-based capital
ratios is complex.
Changing interest rates may adversely affect our results of operations.
Our profitability is affected by fluctuating interest rates. While we monitor the
interest rate environment and our financial results could be adversely affected by changes in
interest rates. Our annuity business is subject to several inherent risks arising from movements in
interest rates, especially if we fail to anticipate or respond to such movements. First, interest
rate changes can cause compression of our net spread between interest earned on investments and
interest credited to customer deposits. Our ability to adjust for such a compression is limited by
the guaranteed minimum rates that we must credit to policyholders on certain products, as well as
the terms on most of our other products that limit reductions in the crediting rates to
pre-established intervals. Second, if interest rate changes produce an unanticipated increase in
surrenders of our annuity products, we may be forced to sell invested assets at a loss in order to
fund such surrenders. Third, the profits from other insurance products can be adversely affected
when interest rates decline because we may be unable to reinvest the cash from premiums received at
the interest rates anticipated when we sold the policies. Finally, changes in interest rates can
have significant effects on the market value and performance of our investments in general.
Concentration of our investment portfolios in any particular sector of the economy or type of asset
may have an adverse effect on our financial position or results of operations.
The concentration of our investment portfolios in any particular industry, group of
related industries, asset classes (such as residential mortgage-backed securities and other
asset-backed securities), or geographic area could have an adverse effect on its value and
performance and, consequently, on our results of operations and financial position. While we seek
to mitigate this risk by having a broadly diversified portfolio, events or developments that have a
negative impact on any particular industry, group of related industries or geographic area may have
an adverse effect on the investment portfolios to the extent that the portfolios are concentrated.
General market conditions affect investments and investment income.
The performance of our investment portfolio depends in part upon the level of and changes
in interest rates, risk spreads, market volatility, the performance of the economy in general, the
performance of the
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specific obligors included in our portfolio and other factors that are beyond our control. Changes
in these factors can affect our net investment income in any period, and such changes can be
substantial.
Financial market conditions can also affect our realized and unrealized investment gains
(losses). During periods of rising interest rates, the fair values of our investments will
typically decline. Conversely, during periods of falling interest rates, the fair values of our
investments will typically rise.
Competition from companies that have greater market share, higher ratings, greater financial
resources and stronger brand recognition, may impair our ability to retain existing customers and
sales representatives, attract new customers and sales representatives and maintain or improve our
financial results.
We sell life insurance and fixed annuities and have a relatively small market share. Many
of our competitors are larger companies that have higher financial strength ratings, greater
capital, technological and marketing resources. Recent industry consolidation, including business
combinations among insurance and other financial services companies, has resulted in larger
competitors with even greater financial resources. Furthermore, changes in federal law have
narrowed the historical separation between banks and insurance companies, enabling traditional
banking institutions to enter the insurance and annuity markets and further increase competition.
This increased competition may harm our ability to improve our profitability.
In addition, because the actual cost of products is unknown when they are sold, we are
subject to competitors who may sell a product at a price that does not cover its actual cost.
Accordingly, if we do not also lower our prices for similar products, we may lose market share to
these competitors. If we lower our prices to maintain market share, our profitability will decline.
We must attract and retain sales representatives to sell our insurance and annuity
products. Strong competition exists among insurance and financial services companies for sales
representatives. We compete for sales representatives primarily on the basis of our financial
position, financial strength ratings, support services, compensation, products and product
features. Our competitiveness for such agents also depends upon the relationships we develop with
these agents. If we are unable to attract and retain sufficient numbers of sales representatives to
sell our products, our ability to compete and our revenues and profitability would suffer.
Tax law changes could adversely affect our insurance product sales and profitability.
We sell deferred annuities and some forms of life insurance that are attractive, in part,
because policyholders generally are not subject to U.S. federal income tax on increases in policy
values until some form of distribution is made. Congress has enacted legislation to lower marginal
tax rates, to reduce the U.S. federal estate tax gradually over a ten-year period (with total
elimination of the U.S. federal estate tax in 2010) and to increase contributions that may be made
to individual retirement accounts and 401(k) accounts. While these tax law changes are scheduled to
expire at the beginning of 2011 absent future congressional action, they could, in the interim,
diminish the appeal of our annuity and life insurance products because the benefit of tax deferral
is lessened when tax rates are lower and because fewer people may purchase these products when they
can contribute more to individual retirement accounts and 401(k) accounts. Additionally, Congress
has considered, from time to time, other possible changes to U.S. tax laws, including elimination
of the tax deferral on the accretion of value within certain annuities and life insurance products.
Such a change would make these products less attractive to prospective purchasers and therefore
would likely cause our sales of these products to decline.
We face risk with respect to our reinsurance agreements.
We transfer exposure to certain risks to others through reinsurance arrangements. Under
these arrangements, other insurers assume a portion of our losses and expenses associated with
reported and unreported claims in exchange for a portion of policy premiums. The availability,
amount and cost of reinsurance depend on general market conditions and may vary significantly. As
of December 31, 2009,
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our reinsurance receivables totaled $870,000. Our ceded life insurance in-force totaled
$47.3 million. When we obtain reinsurance, we are still liable for those transferred risks if the
reinsurer cannot meet its obligations. Therefore, the inability of our reinsurers to meet their
financial obligations may require us to increase liabilities, thereby reducing our net income and
shareholders equity.
Our insurance subsidiary may be required to pay assessments to fund other companies policyholder
losses or liabilities and this may negatively impact our financial results.
The solvency or guaranty laws of most states in which an insurance company does business
may require that company to pay assessments up to certain prescribed limits to fund policyholder
losses or liabilities of other insurance companies that become insolvent. Insolvencies of insurance
companies increase the possibility that these assessments may be required. These assessments may be
deferred or forgiven under most guaranty laws if they would threaten an insurers financial
strength and, in certain instances, may be offset against future premium taxes. We cannot estimate
the likelihood and amount of future assessments. Although past assessments have not been material,
if there were a number of large insolvencies, future assessments could be material and could have a
material adverse effect on our operating results and financial position.
We may not be able to obtain a favorable insurance rating.
Insurance ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Ratings reflect the rating agencies opinion of an
insurance companys financial strength, operating performance and ability to meet its obligations
to policyholders. There can be no assurance that our insurance company will be rated by a rating
agency or that a rating, if and when received, will be favorable to the insurance subsidiary.
Our premium finance business will be subject to risk.
Our premium finance business is subject to the risk that we will not be able to
successfully market our products, the possibility of interest rate changes which could affect the
profitability of the business, the possibility of regulatory changes including limits on the amount
of interest which could be charged, the insolvency of an insurance company or agency whose premiums
have been financed and the competition from other premium finance companies that have greater
capitalization and have existing business in the states in which we operate.
Risks Related To The Offering and Ownership of Our Common Stock
No market exists or is expected to develop for the Common Stock.
There is currently no existing public or other market for our Common Stock. The development of
a public trading market, if any, will depend upon the Companys ability to meet the listing
requirements on an exchange or trading system. There is no assurance that we will be able to meet
those standards or that we will attempt to do so.
We have no plans to pay dividends on our Common Stock, and you may not receive funds without
selling your Common stock.
We have not declared or paid cash dividends on our Common Stock and do not anticipate
paying such dividends in the foreseeable future. We currently intend to retain available funds to
finance our operations and growth. Future dividend policy will be at the discretion of our board of
directors and will depend on our earnings, capital requirements, financial condition and other
relevant factors. See Description of Securities below for additional information.
Accordingly, you may have to sell some or all of your common stock in order to generate
cash from your investment. Because there is no public market for the stock, you may not receive a
gain when you sell our common stock and you may lose the entire investment.
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Since this offering is being made on a best efforts basis with the requirement that at least $1
million must be raised before the offering will be closed, we cannot assure you that the offering
will be successful.
We are making this offering on a best efforts basis through our registered securities
agents. These agents will be able to offer and sell securities in Oklahoma only. If we expand the
offering to other states we will have to engage the services of a FINRA-member broker-dealer to
assist us in those states. We cannot assure you that we will be successful in engaging a
broker-dealer to assist us. While some of our agents have prior securities experience from our
previous offerings, we will recruit and train new agents who will not be experienced securities
salespersons. This lack of experience may have a negative impact on our ability to complete this
offering. There can be no assurance that all of the offering will be sold. If more than 133,334
shares are sold so that the offering can be closed but less than all of the shares of Common Stock
offered by this prospectus are sold prior to the termination of this offering, we will have lesser
funds available for our business purposes, and our prospects may be materially and adversely
affected. See Use of Proceeds, and Plan of Distribution, below for additional information.
You will suffer an immediate and substantial dilution in the net tangible book value of the Shares
you purchase.
There will be an immediate and substantial dilution in the book value of each purchasers
investment. The dilution would be a minimum of $4.45 per share or 59% of the $7.50 offering price
if all the shares offered are sold and could be substantially higher depending upon the number of
shares sold. This dilution, which is influenced by our net losses from operations, is due in large
part to the fact that prior investors in the Company paid an average price of $2.67 per share when
they purchased their shares of Common Stock, which is substantially less than the offering price of
$7.50 per share in this offering. Dilution will also affect your investment if the minimum number
of shares are sold in this offering. See Dilution below for additional information.
Our management will have broad discretion in using the net proceeds of this offering.
Although we intend to reserve a substantial portion of the offering for the acquisition
of other life insurance companies or blocks of life insurance business, we intend to utilize a
portion of the net proceeds of the offering to expand the business of our premium finance company
and for working capital. While such acquisitions require approval of the insurance commissioner in
the appropriate state, management will have absolute and broad discretion regarding the selection
of any acquisition. Investors will be dependent upon the judgment and ability of management to
select an acquisition that meets to financial and operational objectives of the Company. Investors
will also be dependent upon managements judgment regarding timing of an acquisition. In addition,
prospective investors who invest in the Company will be entirely dependent on the judgment of our
management in connection with the allocation of the funds raised herein for working capital. There
can be no assurance that determinations ultimately made by such persons relating to the specific
allocation of those proceeds will permit us to achieve our business objectives. See Use of
Proceeds below for additional information.
This offering has not been independently reviewed.
We are offering the shares of Common Stock directly through issuer agents. While we have
reserved the right to place the shares through the services of a stock broker, the shares in all
likelihood will be sold without the use of an investment banker. Consequently, no independent
review of the offering has been, or will likely be, made by any investment banker.
The offering price of the shares has been fixed exclusively by our management.
While our management has reviewed and considered our assets, operations, and the
acquisition of FLAC in relationship to our initial offerings, the offering price is arbitrarily
determined by the Company and bears no relationship to assets, earnings, recent arms-length
private sales or any other valuation criteria. No
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assurance can be given that the shares offered hereby will have a market value or that they may be
sold at this, or at any price. See Determination of Offering Price below for additional
information.
We and our agents in this offering must comply with federal broker and dealer laws, and a
failure to comply with these laws would materially and adversely affect our financial condition.
We do not plan to use the services of a broker/dealer to place the shares. Instead, we
will offer the shares through certain of our agents and employees that have been registered as our
agents in Oklahoma. See Plan of Distribution below for additional information. Neither we nor any
of our agents have registered with FINRA as a broker or a dealer but have relied on a statutory
exemption for a broker or dealer whose business is exclusively within a single state and who does
not make use of any facility of a national securities exchange. Should a determination be made that
any of the individual agents recruited to sell the shares was acting in violation of the statutory
exemption, we could be subject to the voidability of contract provisions of the securities laws for
any transactions made in violation of the securities acts.
We are highly dependent upon our key personnel, and the loss of any of our key personnel could
materially and adversely affect our business.
Our ability to operate successfully will be dependent primarily upon the efforts of Gregg
Zahn, our President and CEO. We have an employment agreement with Mr. Zahn and a $1 million key
man life insurance policy on his life but the loss of his services could have a materially adverse
effect on our ability to operate successfully.
Our officers and directors will own 14.14% of our Common Stock and will continue to have
substantial control over us following this offering.
As of the date of this prospectus, our officers and directors own approximately 17.39% of
the outstanding shares of our Common Stock. In the event that all of the shares are sold pursuant
to this prospectus, our officers and directors will own approximately 14.14% of the outstanding
shares of our Common Stock. See Security Ownership of Certain Beneficial Owners and Management
below for additional information. As a result, the officers and directors will be able to continue
to influence decisions requiring shareholder approval, including election of the directors and all
corporate actions and changes. This could limit the ability of purchasers in this offering to
influence the outcome of key transactions.
State insurance laws may delay, deter or prevent a takeover attempt that may be in the best
interests of stockholders.
State insurance laws include provisions that may delay, deter or prevent a takeover
attempt that may be in the best interests of stockholders. For example, under applicable state
insurance holding company laws and regulations, no person may acquire control of us, and thus
indirect control of our insurance subsidiary, unless the person has provided required information
to, and the acquisition is approved or not disapproved by, the appropriate insurance regulatory
authorities. Under applicable laws and regulations, any person acquiring, directly by stock
ownership or indirectly (by revocable proxy or otherwise) 10% or more of the voting power of our
capital stock would be presumed to have acquired control of us, and a person who beneficially
acquires 10% or more of our shares of Common Stock without obtaining the approval of the
appropriate state insurance commissioners would be in violation of state insurance holding company
statutes and would be subject to injunctive action requiring disposition or seizure of the shares
and prohibiting the voting of such shares, as well as other action determined by the state
insurance commissioners, unless the appropriate insurance regulatory authorities, upon advance
application, determine otherwise. Even in the absence of a takeover attempt, the existence of these
provisions may adversely affect the prevailing market price of our common stock.
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USE OF PROCEEDS
The Company intends to use the proceeds to finance future acquisition of life insurance
companies or blocks of life insurance business, provide up to $2 million of capital and/or surplus
for TLIC as needed to
maintain adequate capital and increase working capital. We intend to use the proceeds to fund the
acquisition of life insurance companies or blocks of life insurance business and for working
capital We will not use the proceeds from the offering until we have received proceeds of $1
million from the sale of 133,334 Shares. If we do not raise $1 million in this offering, we will
return the proceeds to purchasers and terminate this offering. We will use up to 10% of the
proceeds to pay sales commissions to our agents and an additional 5% of the proceeds to pay
additional offering costs.
The following table summarizes the anticipated use of the gross proceeds from the sale of
shares, assuming all shares offered are sold and if only the minimum number of shares are sold. It
should be noted, however, that certain of these figures are only estimates and are subject to
change, particularly if less than all of the shares offered are sold. There can be no assurance
that actual experience will approach this anticipated use of proceeds:
Minimum Offering of | Maximum Offering | |||||||||
133,334 Shares | of 1,333,334 Shares | |||||||||
Expenses of the offering (1) |
||||||||||
Sales commissions (2) |
$ | 100,000 | $ | 1,000,000 | ||||||
Legal, accounting , printing and office expense |
25,000 | 160,000 | ||||||||
Agent recruitment and training |
25,000 | 340,000 | ||||||||
Capital and/or surplus for TLIC (3) |
2,000,000 | |||||||||
Available for acquisitions (3) |
700,005 | 5,000,000 | ||||||||
Working Capital (3) |
150,000 | 1,500,000 | ||||||||
Total |
$ | 1,000,005 | $ | 10,000,000 | ||||||
(1) | Includes fees and expenses for legal, accounting, registration and our transfer agent and printing and mailing costs in connection with the offering. Also includes agent recruiting, training, and registration expenses, as well as amounts paid for prizes and bonuses to sales personnel in connection with their sales efforts. In no event will sales commissions and other offering expenses exceed 15% of the gross proceeds. | |
(2) | The Companys sales agents will be paid commissions ranging from 7% to 10% of the shares sold by them. The table assumes that all commissions will be 10%. | |
(3) | The Company will use the net proceeds in the following order of priority; (1) acquisition of life insurance companies or blocks of life insurance business, (2) working capital, and (3) Capital and/or surplus for TLIC. The Company may alter the priorities if funds are needed for the expansion of the premium finance business prior to the proceeds being used for other purposes. | |
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DETERMINATION OF OFFERING PRICE AND MARKET DATA
There is no public market for the Common Stock and, therefore, the shares have no readily
ascertainable market value. Our management has determined the price of the shares being offered by
this prospectus arbitrarily, and without the input of any third party. The offering price bears no
relationship to assets, earnings, recent arms-length private sales or any other valuation
criteria. No assurance can be given that the Common Stock offered hereby will have a market value
or that they may be sold at this, or at any price. The shares are offered only as a long-term
investment for those who can afford the risk of loss of their entire investment and who can foresee
no need to liquidate their investment in the near future. Management considered the price at which
its previous offerings had been made, the increase in assets since the last offering, the dilution
to existing shareholders, the increase in business in both the life insurance and premium finance
business since the last offering and the acquisition of FLAC.
DILUTION
As of December 31, 2009, we had an aggregate of 5,805,000 shares of Common Stock
outstanding and a net book value, as reflected on our balance sheet, of $13,250,690 or
approximately $2.28 per share. Net book value per share represents our total assets less
liabilities, divided by the number of shares of Common Stock outstanding.
After the offering, if $10 million is raised from the sale of 1,333,334 shares, we will
have an aggregate of 7,138,334 shares outstanding and a net book value of $21,750,690 (assuming net
proceeds from the shares being sold of $8,500,000) or approximately $3.05 per share. New shares
will experience an immediate dilution in net book value per share of $4.45 from the $7.50 per share
purchase price, while the present shareholders will receive an immediate increase in the net book
value of $.77 per share. If the minimum number of shares are sold in the offering, we will have an
aggregate of 5,938,334 shares outstanding and a net book value of $2.37 (assuming net proceeds from
the shares being sold of $820,000). New shares will then experience an immediate dilution in net
book value per share of $5.13 from the $7.50 per share purchase price, while the present
shareholder will receive an immediate increase in net book value of $.09 per share. Such dilution
represents the difference between the offering price per share and the net book value per share
immediately after completion of the offering assuming there is no change in net book value other
than from the sale of shares. The increase in book value per share held by the current shareholders
would be solely attributable to the cash paid by new shareholders for their shares.
PLAN OF DISTRIBUTION
We are offering up to 1,333,334 shares of our Common Stock on a best efforts basis only
through a network of agents recruited, trained, and registered as our agents. We will not accept
subscriptions from any potential investor who does not meet one of the following standards: (1) a
minimum annual gross income of $70,000 and a minimum net worth of $70,000 excluding vehicles, home
and home furnishings; or (2) a minimum net worth of $150,000 excluding vehicles, home, and home
furnishings. In addition, we will not accept subscriptions from any potential investor who is
investing more than 10% of his or her net worth, excluding vehicles, home and home furnishings.
Commissions to be paid to agents on each sale will range from 7% 10% of the amount of
the shares sold. In addition, the agents may receive prizes and other incentives for their sales
efforts. All agents must employ the suitability standards for subscribers as set forth in the
Subscription Agreement.
Our agents will be registered as issuer-agents with the Oklahoma Department of
Securities. These agents will be limited to making offers and sales to Oklahoma residents. In the
event we elect to offer the shares in other states we will use the services of a broker-dealer
licensed in that state. At that time we will enter into an underwriting agreement that will provide
for the terms and conditions for the offering in that jurisdiction. Neither we nor any of our
agents have registered with the SEC as a broker or a dealer in reliance on a statutory
exemption for a broker or dealer whose business is exclusively intrastate and who does not make use
of any facility of a national securities exchange. Should a determination be made that any of the
individual agents recruited to sell the shares were acting in violation of statutory exemption, we
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could be subject to the voidability of contracts provisions of Section 29(b) of the Exchange Act
for any transactions made in violation of that act. See, Risk Factors We and our agents in this
offering must comply with federal broker and dealer laws, and a failure to comply with these
laws would materially and adversely affect our financial condition.
The purchase price shall be payable in cash at the time of subscription. Subscriptions
are made by executing a Subscription Agreement and by payment of the purchase price by a check made
payable to First Trinity Financial Corporation. Each subscriber will be required to represent to
the Company that they meet the income and net worth requirements for this offering.
We will not sell any shares in the offering until we receive and accept subscriptions for
133,334 shares. The proceeds will be deposited in an interest bearing escrow account until then.
If 133,334 shares are not sold, the proceeds in the escrow account will be refunded by the escrow
agent with a pro rata portion of the interest earned on the proceeds. The offering will continue
until all of the 1,333,334 shares being offered are sold or until one year from the date of this
prospectus, whichever occurs first. We may, in our sole discretion, extend the offering for one
additional year. We also may increase the numbers of shares in this offering by 133,334 shares if
the offering is over-subscribed. Subscriptions from our officers, directors and affiliates (as
defined by regulations under the Securities Act) may purchase shares on the same terms as
unaffiliated public investors to complete the minimum offering and terminate and release the
escrowed funds.
DESCRIPTION OF SECURITIES
Capital Stock
The authorized capital stock of the Company consists of 20 million shares of Common
Stock, par value $.01 per share, of which there are 5,805,000 shares issued and outstanding and
550,000 shares of Preferred Stock, par value $.01 per share, none of which have been designated or
issued. The following summarizes the important provisions of the Companys capital stock.
Common Stock
In the event of liquidation, holders of the shares of Common Stock are entitled to
participate equally per Share in all of our assets, if any, remaining after the payment of all
liabilities and any liquidation preference on our preferred stock if any is outstanding with a
liquidation preference. Holders of the shares of our Common Stock are entitled to such dividends as
the Board of Directors, in its discretion, may declare out of funds available therefore, subject to
any preference in favor of outstanding shares of preferred stock, if any. The holders of shares are
entitled to one vote for each share held of record in each matter submitted to a vote of
shareholders. A majority of the outstanding shares of stock entitled to vote constitutes a quorum
at any shareholder meeting. There are no preemptive or other subscription rights, conversion
rights, cumulative voting, and registration or redemption provisions with respect to any shares of
Common Stock. The rights, preferences, and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the owners of any series of Preferred Stock that we
may designate and issue in the future.
Preferred Stock
The Board of Directors is authorized to issue up to 550,000 shares of Preferred Stock in
one or more series. The Board of Directors of the Company, without further action by the
shareholders, may issue shares of Preferred Stock and may fix or alter the voting rights,
redemption provisions (including sinking fund provisions), dividend rights, dividend rates,
liquidation preferences, conversion rights, and the designation of a number of shares constituting
any wholly unissued series of preferred stock. The Company does not anticipate the issuance of any
Preferred Shares at this time. In the event that Preferred Shares are to be issued, promoters will
be allowed to purchase such shares only on the same terms as existing or new shareholders. In
addition, the issuance of preferred shares will only occur upon the approval of a majority of our
independent directors.
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The actual effect of the authorization of the Preferred Stock upon the rights of the
holders of Common Stock is unknown until the Board of Directors of the Company determines the
specific rights of owners of any series of Preferred Stock. Depending upon the rights granted to
any series of Preferred Stock, the voting power, liquidation preference, or other rights of common
stock could be adversely affected.
Oklahoma Law and Certain Charter Provisions
Under the Oklahoma General Corporation Act (the Oklahoma Act), mergers, consolidations
and sales of substantially all of the assets of an Oklahoma Corporation must generally be approved
by a vote of the holders of a majority of the outstanding shares of stock entitled to vote thereon.
Section 1090.3 of the Oklahoma Act, however, restricts certain transactions between an Oklahoma
corporation (or its majority owned subsidiaries), and a holder of 15% or more of the corporations
outstanding voting stock, together with affiliates or associates thereof (an interested
shareholder). For a period of three years following the date that a shareholder becomes an
interested shareholder, Section 1090.3 prohibits the following types of transactions between the
corporation and the interested shareholder (unless certain conditions, described below, are met):
(i) mergers or consolidations; (ii) sales, leases, exchanges or other transfers of 10% or more of
the aggregate assets of the corporation; (iii) the issuances or transfers by the corporation of any
stock of the corporation that would have the effect of increasing the interested shareholders
proportionate share of the stock of any class or series of the corporation; (iv) receipt by the
interested shareholder of the benefit, except proportionately as a shareholder of the corporation,
of any loans, advances, guarantees, pledges or other financial benefits provided by the
corporation; (v) any other transaction which has the effect of increasing the proportionate share
of the stock of any class or series of the corporation that is owned by the interested shareholder;
and (vi) any share acquisition by the interested shareholder from the corporation pursuant to
Section 1090.1 of the Oklahoma Act. These restrictions do not apply if: (1) before such person
becomes an interested shareholder, the board of directors approved the transaction in which the
interested shareholder becomes an interested shareholder or approved the business combination; or
(2) upon consummation of the transaction which resulted in the shareholder becoming an interested
shareholder, the interested shareholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of determining the number
of shares outstanding, those shares owned by (a) persons who are directors and also officers, and
(b) employee stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in any tender or exchange
offer; or (3) at or subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of shareholders, and not by written
consent by the affirmative vote of at least two-thirds of the outstanding voting stock which is not
owned by the interested shareholder. The provisions of Section 1090.3 are not currently applicable
to the Company, but will become so in the event that the Common Stock (or another class of our
voting stock) is subsequently listed on a national securities exchange, authorized for quotation on
the NASDAQ Stock Market, or held of record by 1,000 or more shareholders.
The Oklahoma Act also contains provisions regulating a control share acquisition, which
effectively deny voting rights to shares in an Oklahoma corporation acquired in control share
acquisitions unless a resolution granting such voting rights is approved at a meeting of
shareholders by an affirmative majority of all voting power, excluding all interested shares. A
control share acquisition is one by which a purchasing shareholder acquires more than 1/5th,
1/3rd or a majority, under various circumstances, of the voting power of the stock of an issuing
public corporation. An issuing public corporation is an Oklahoma corporation that has (i) any
class of securities registered pursuant to Section 12 or subject to Section 15(d) of the Securities
Exchange Act of 1934; (ii) 1,000 or more shareholders; and (iii) either (a) more than 10% of its
shareholders resident in Oklahoma; (b) more than 10% of its shares owned by Oklahoma residents; or
(c) 10,000 shareholders resident in Oklahoma.
Our Certificate of Incorporation limits, to the fullest extent permitted by Oklahoma law,
the liability of a director to the Company or our shareholders for monetary damages for a breach of
such directors fiduciary duty as a director. Oklahoma law presently permits such limitations of a
directors liability except where a director breaches his or her duty of loyalty to the Company or
our shareholders, fails to act in good faith or
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engages in intentional misconduct or a knowing violation of law, authorizes payment of an unlawful
dividend or stock repurchase, or obtains an improper personal benefit. This provision is intended
to afford directors additional protection, and limit their potential liability, from suits alleging
a breach of the duty of care by a director. We believe this provision will assist the Company in
maintaining and securing the services of directors who are not employees of the Company.
Our Bylaws provide that directors and officers shall be indemnified against liabilities
arising from their services as directors and/or officers to the fullest extent permitted by law,
which generally requires that the individual act in good faith and in a manner he or she reasonably
believes to be in or not opposed to the Companys best interests. We have obtained directors and
officers liability insurance to limit our exposure under these provisions.
Transfer Agent
Computershare Trust Company, 350 Indiana Street, Suite 800, Golden, Colorado 80401, is
the transfer agent for our Common Stock. Our transfer agents phone number is 303-262-0600.
BUSINESS
Business Development
We were incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a
life insurance subsidiary. The Company raised $1,450,000 from two private placement stock
offerings during 2004. On June 22, 2005, we filed an intrastate public stock offering with the
Oklahoma Department of Securities for a $12,750,000 plus a 10% over-sale provision (additional
sales of $1,275,000). The offering was completed February 23, 2007, and we raised $14,025,000.
On August 31, 2009, two of the Companys subsidiaries, Trinity Life Insurance Company (Old
TLIC) and First Life America Corporation (FLAC) were merged, with FLAC being the surviving
company. Immediately following the merger FLAC changed its name to Trinity Life Insurance Company
(TLIC). After the merger, the Company has two wholly owned subsidiaries, First Trinity Capital
Corporation (FTCC) and TLIC. FTCC was incorporated in 2006, and began operations in January 2007
providing financing for casualty insurance premiums. FLAC was purchased December 23, 2008 and had
statutory capital and surplus of $2,700,455 at December 31, 2008.
TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad
range of individual life and annuity insurance products to individuals in eight states primarily in
the Midwest. TLICs current product portfolio consists of a modified premium whole life insurance
policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental
death and dismemberment and annuity products. The term products are both renewable and convertible
and are issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for
the entire term period or with a limited premium guarantee. The final expense is issued as either a
simplified issue or as a graded benefit, determined by underwriting. The products are sold through
independent agents in Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.
Our operations, prior to the acquisition of FLAC involved the sale of a modified premium whole
life insurance policy with a flexible premium deferred annuity rider through Old TLIC in the state
of Oklahoma. FTCC provides financing for casualty insurance premiums for individuals and companies
and is licensed to conduct premium financing business in the states of Alabama, Arkansas,
Louisiana, Mississippi and Oklahoma. FTCC is the sole member of Southern Insurance Services, LLC,
(SIS), a limited liability company that operates a property and casualty insurance agency.
The Company was a development stage company until commencing operations in 2007. Significant
net losses have been incurred since inception. At December 31, 2009, the Company had an
accumulated deficit of $3,480,907. The losses have resulted primarily from costs incurred while
raising capital and establishing the subsidiary companies as well as losses resulting from writing
new life insurance business.
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Acquisition of Other Companies
On December 23, 2008, we acquired 100% of the outstanding common stock of First Life America
Corporation from an unaffiliated company (the FLAC acquisition). The FLAC acquisition was
accounted for as a purchase. The aggregate purchase price was approximately $2,695,000 (including
direct cost associated with the acquisition of approximately $195,000). The FLAC acquisition was
financed with our working capital. On December 31, 2008, we made FLAC a 15 year loan in the form
of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, subject to
approval of the Oklahoma Insurance Department.
Financial Information about Segments
Our business is comprised of three primary operating business segments: Life and Annuity Insurance
Operations, Premium Finance Operations and Corporate Operations. Note 12 of the Notes to
Consolidated Financial Statements contains operating results of these segments for the years ended
December 31, 2009 and 2008.
Life and Annuity Insurance Operations
Our Life and Annuity Insurance Operations consist of issuing ordinary whole life insurance,
modified premium whole life with an annuity rider, term, final expense, accidental death and
dismemberment and annuity products. They can be issued with premiums fully guaranteed for the
entire term period or with a limited premium guarantee. The final expense is issued as either a
simplified issue or as a Graded Benefit, determined by underwriting.
Old TLIC entered into an administrative services agreement with Investors Heritage Life
Insurance Company (IHLIC). Under the terms of the agreement, IHLIC provided services that include
underwriting, actuarial, policy issue, accounting, claims processing and other services incident to
the operations of Old TLIC. The agreement was effective for a period of five years. The agreement
was terminated after the FLAC acquisition and replaced with a new administrative services agreement
that provides the same services as the agreement with Old TLIC. The new agreement terminates on
January 31, 2012 and may be terminated at any time with a 180 day prior notice.
We seek to serve middle income households in the states of Illinois, Kansas, Kentucky,
Nebraska, North Dakota, Ohio, Oklahoma and Texas. The majority of our in-force business resulted
from the FLAC acquisition. We market our products through independent agents.
The following table sets forth our direct collected premiums by state for each state in
which we are licensed for the years ended December 31, 2009 and 2008, in accordance with statutory
accounting practices prescribed by the states of domicile of our insurance company subsidiaries
which were TLIC in 2009 and Old TLIC in 2008.
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2009 | ||||||||||||||||
State | Life | Annuity | ||||||||||||||
Illinois |
$ | 419,054 | 7 | % | $ | 39,349 | 1 | % | ||||||||
Kansas |
1,795,227 | 29 | % | 1,880,059 | 51 | % | ||||||||||
Kentucky |
109,560 | 2 | % | | | |||||||||||
Nebraska |
80,998 | 1 | % | 12,275 | | |||||||||||
North Dakota |
90,808 | 2 | % | 539,828 | 15 | % | ||||||||||
Ohio |
567,676 | 9 | % | 1,250 | | |||||||||||
Oklahoma |
1,996,268 | 32 | % | 681,292 | 18 | % | ||||||||||
Texas |
1,011,839 | 17 | % | 471,525 | 13 | % | ||||||||||
All other |
84,905 | 1 | % | 69,702 | 2 | % | ||||||||||
$ | 6,156,335 | 100 | % | $ | 3,695,280 | 100 | % | |||||||||
2008 | ||||||||||||||||
State | Life | Annuity | ||||||||||||||
Oklahoma |
$ | 1,535,533 | 100 | % | $ | 315,948 | 99 | % | ||||||||
All other |
4,244 | | 2,282 | 1 | % | |||||||||||
$ | 1,539,777 | 100 | % | $ | 318,230 | 100 | % | |||||||||
Reinsurance
TLIC participates in reinsurance in order to provide risk diversification, additional capacity
for future growth and to limit the maximum net loss potential arising from large risk. TLIC
reinsures all amounts of risk on any one life in excess of $55,000 for individual life insurance
with IHLIC, Munich American Reassurance Company, Optimum Re and Wilton RE.
TLIC is a party to an Automatic Retrocession Pool Agreement (the Reinsurance Pool) with
Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the
World. The agreement provides for automatic retrocession of coverage in excess of Optimum Res
retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. TLICs
maximum exposure on any one insured under the Reinsurance Pool is $50,000. As of January 1, 2008,
the Reinsurance Pool stopped accepting new cessions.
Effective September 29, 2005, FLAC and Wilton Re executed a binding letter of intent whereby
both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole
Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis.
The letter of intent was executed on a retroactive basis to cover all applicable business issued by
FLAC subsequent to January 1, 2005. Wilton Re agreed to provide various commission and expense
allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Re as they
are collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement for new business
issued after the termination date.
To the extent that the reinsurance companies are unable to meet their obligations under the
reinsurance agreements, TLIC remains primarily liable for the entire amount at risk.
Competition
The U.S. life insurance industry is a mature industry that, in recent years, has experienced
little to no growth. Competition is intense because the life insurance industry is consolidating,
with larger, more efficient and more effective organizations emerging from consolidation.
Additionally, legislation became effective in the United States that permits commercial banks,
insurance companies and investment banks to combine. These factors have increased competitive
pressures in general.
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Many domestic life insurance companies have significantly greater financial, marketing forces
and other resources, longer business histories and more diversified lines of insurance products
than we do. We also face competition from companies marketing in person as well as with direct mail
and Internet sales campaigns. Although we may be at a competitive disadvantage to these entities,
we believe that our premium rates and policy features are generally competitive with those of other
life insurance companies selling similar types of products.
Governmental Regulation
TLIC is subject to regulation and supervision by the Oklahoma Insurance Department (OID).
The insurance laws of Oklahoma give the OID 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.
TLIC can be required, under the solvency or guaranty laws of most states in which it does
business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities
of other insurance companies that become insolvent. These assessments may be deferred or foregone
under most guaranty laws if they would threaten an insurers financial strength and, in certain
instances, may be offset against future premium taxes.
Oklahoma has enacted legislation which regulates insurance holding company systems, including
acquisitions, extraordinary dividends, terms of affiliate transactions, and other related matters.
Under the Oklahoma statutes, TLIC may not during any year pay dividends on common stock to the
parent company in excess of the lesser of the net gain from operations for the preceding year or
10% of capital and surplus at the end of the preceding year, without the consent of the Oklahoma
Commissioner of Insurance. For 2009, TLIC could not pay a dividend without the Commissioners
approval.
There are certain factors particular to the life insurance business which may have an adverse
effect on the statutory operating results of TLIC. One such factor is that the cost of putting a
new policy in force is usually greater than the first years policy premium, and, accordingly, in
the early years of a new life insurance company, these initial costs and the required provisions
for reserves often have an adverse effect on statutory operating results.
Premium Finance Operation
The premium finance subsidiary, FTCC, provides premium financing to individuals and
businesses. Many casualty insurance carriers require their premiums to be paid on an annual or
lump sum basis. A premium finance company finances these casualty premiums. A typical premium
finance contract requires the insured to pay 25% of the premium up front and the balance is paid
over a nine month period. Premium financing is unique in that the unpaid balance due the company is
lower than the unearned premium, which has in effect been assigned to the company in the event of
non-payment, thus, the element of risk is minimized.
FTCC was capitalized with $4 million.. The company engages in the premium finance business,
independent of its life insurance business. FTCC is licensed to conduct premium finance business
in Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has contracted with over 200
insurance agencies to finance their insurance premiums and financed premiums for approximately 30
agencies. There is no guarantee that these agencies will write contracts with FTCC. The company
experienced losses from fraud at one of these agencies in 2009. The financial impact is described
under Results of Operations at page 29. We are not dependent on a single customer or a few major
customers. SIS, our property and casualty insurance agency, writes commercial and personal lines
of insurance, primarily in the state of Mississippi.
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Premium finance companies are regulated by the states with no uniformity among state
regulations. Commercial insurance premium finance transactions are not regulated directly in
Oklahoma. Consumer insurance premium finance transactions are considered a consumer credit sale and
are subject to the Oklahoma Uniform Consumer Credit Code. Therefore the regulation of the
transaction is by the Department of Consumer Credit under the consumer credit laws. We are
regulated by the Department of Banking in Mississippi.
Finance companies are subject to interest rate fluctuations. An increase in the cost of funds
or a decrease in interest rates that FTCC can charge could affect the net return.
Competition
The premium financing business is highly competitive in every channel in which FTCC competes.
FTCC competes with large financial institutions most of which may have greater financial and other
resources. FTCC has targeted the niche market of small business and individual consumer casualty
insurance financing and faces competition with many specialty financing businesses. Some
competitors are affiliated with property and casualty writing agencies and may have advantageous
marketing relationships with their affiliates.
Employees
As of March 1, 2010, the Company had sixteen full time employees and three part time
employees.
DESCRIPTION OF PROPERTY
We lease approximately 2,517 square feet of office space under a three-year lease that began
July 1, 2008, leased approximately 200 square feet on a month to month basis during 2009 and leases
950 square feet of office space effective December 15, 2009 through December 31, 2010. Under the
leases, the monthly rent expense for the 2,517 square feet space is $3,041 through June 30, 2009,
$3,146 from July 1, 2009 through June 30, 2010 and $3,251 from July 1, 2010 through June 30, 2011.
The month to month lease is $300 per month and the 950 square feet space rents for $1,225 per
month. We incurred rent expense of $43,809 and $31,562 for the years 2009 and 2008, respectively.
Future minimum lease payments are $53,084 and $19,507 for 2010 and 2011, respectively.
TLIC occupied approximately 7,500 square feet of its building in Topeka, Kansas until December
2009. Effective December 24, 2009, TLIC entered into a five year lease with a tenant for this space
with an option to renew for five additional years. The monthly lease payments are $8,888 for 2010,
$9,130 for 2011-12 and $9,371for 2013-14. TLIC has leased 10,000 square feet under a lease that
was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by
the lessee. The lease calls for minimum monthly base lease payments of $15,757.
Effective August 29, 2005, TLIC executed a lease agreement with a tenant for 2,500 square
feet. The base lease period commenced on September 1, 2005 and will end on August 31, 2010. The
lease will automatically renew, if not terminated on or after August 15, 2010, for another five
years with a 90 day notice to terminate the lease by the lessee. The lease calls for minimum
monthly base lease payments of $4,332 through August 31, 2010. The rent will decrease to $3,100 per
month for the period September 1, 2010 through August 31, 2015.
The future minimum lease payments to be received under non-cancelable lease agreements are
$142,170, $109,563, $109,563, $112,461 and $112,461for 2010 through 2014, respectively.
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LEGAL PROCEEDINGS
There are no material 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.
MARKET OF AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
RELATED STOCKHOLDER MATTERS
Market Information
Trading of our Common Stock is limited and an established public market does not exist.
Holders
There were approximately 3,750 shareholders of Common Stock at March 31, 2010.
Dividends
We have not declared or paid dividends on our Common Stock and do not anticipate paying
dividends in the foreseeable future. Any payment of cash dividends will be dependent upon the
amount of funds legally available, our earnings, if any, our financial condition, our anticipated
capital requirements and other factors our Board of Directors may think are relevant. Our ability
to pay dividends also is restricted by loan covenants on our senior secured loan agreement. TLIC
may not pay dividends to us without the approval of the Oklahoma Insurance Commissioner unless the
dividends are less than TLICs net gain from operations or 10% of its capital and surplus whichever
is less. We have received no dividends from TLIC to date.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table provides summary historical consolidated financial data for the
periods and as of the dates indicated. You should read this information in conjunction with our
audited consolidated financial statements, including the related notes, and Managements
Discussion and Analysis of Financial Condition and Results of Operations which are included in
this prospectus. The results indicated below are not necessarily indicative of our future
performance.
2009 | 2008 | |||||||
Statement of Operations Data |
||||||||
Premiums |
$ | 5,860,351 | $ | 1,572,599 | ||||
Income from premium financing |
582,816 | 503,885 | ||||||
Net investment income |
2,222,525 | 164,924 | ||||||
Net realized investment losses |
(186,410 | ) | | |||||
Total revenue |
8,542,792 | 2,241,408 | ||||||
Total benefits, losses and expenses |
9,384,044 | 2,747,092 | ||||||
Loss before income tax expense |
(841,252 | ) | (505,864 | ) | ||||
Income taxes |
49,139 | (832 | ) | |||||
Net loss |
(890,391 | ) | (504,852 | ) | ||||
Net loss per common share, basic and diluted |
$ | (0.15 | ) | $ | (0.09 | ) | ||
Balance Sheet Data |
||||||||
Total assets |
$ | 49,816,843 | $ | 43,580,917 | ||||
Total liabilities |
36,566,153 | 32,304,147 | ||||||
Total Shareholders equity |
$ | 13,250,690 | $ | 11,276,770 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
We conduct operations as an insurance holding company emphasizing ordinary life insurance
products in niche markets and a premium finance company, financing casualty insurance premiums.
As an insurance provider, we collect premiums in the current period to pay future benefits to
our policy and contract holders. Our core operations include issuing modified premium whole life
insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and
annuity products to predominately middle income households in the states of Illinois, Kansas,
Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents.
We also realize revenues from our investment portfolio, which is a key component of our
operations. The revenues we collect as premiums from policyholders are invested to ensure future
benefit payments under the policy contracts. Life insurance companies earn profits on the
investment spread, which reflects the investment income earned on the premiums paid to the insurer
between the time of receipt and the time benefits are paid out under policies. Changes in interest
rates, changes in economic conditions and volatility in the capital markets can all impact the
amount of earnings that we realize from our investment portfolio.
We provide financing for casualty insurance premiums through independent property and casualty
insurance agents. We are licensed in the states of Alabama, Arkansas, Louisiana, Mississippi and
Oklahoma.
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Recent Acquisitions
We expect to facilitate growth through acquisitions of other life insurance companies and/or
blocks of life insurance business. In the fourth quarter of 2008, FTFC completed its acquisition of
100% of the outstanding stock of First Life America Corporation, included in the life insurance
segment, for $2,500,000 and had additional acquisition related expenses of $195,000. Results of
operations for the year 2008 are not included in the consolidated financial statements.
Our profitability in the life insurance segment is a function of its ability to accurately
price the policies that it writes, adequately value life insurance business acquired and administer
life insurance company acquisitions at an expense level that validates the acquisition cost.
Profitability in the premium financing segment is dependent on FTFCs ability to compete in that
sector, maintain low administrative costs and minimize losses.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on
our consolidated financial statements that have been prepared in accordance with accounting
principles generally accepted in the United States. Preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. We continually evaluate our estimates and assumptions, including
those related to investments, loans from premium financing, deferred acquisition costs, value of
insurance business acquired, policy liabilities and income taxes. We base our estimates on
historical experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. We believe the following
accounting policies, judgments and estimates are the most critical to the preparation of our
consolidated financial statements.
Investments. Fixed maturities are comprised of bonds that are classified as
available-for-sale and are carried at fair value with unrealized gains and losses, net of
applicable deferred taxes, reported in accumulated other comprehensive income. The amortized cost
of fixed maturities is adjusted for amortization of premium and accretion of discount to maturity.
Interest income, as well as the related amortization of premium and accretion of discount is
included in net investment income under the effective yield method. The amortized cost of fixed
maturities is written down to fair value when a decline in value is considered to be
other-than-temporary.
Equity securities are comprised of common stock and are carried at fair value. The associated
unrealized gains and losses, net of applicable deferred taxes, are included in accumulated other
comprehensive income) The cost of equity securities is written down to fair value when a decline
in value is considered to be other-than-temporary. Dividends from these investments are recognized
in net investment income when declared.
Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts.
Interest income and the amortization of premiums or discounts are included in net investment
income.
Investment real estate is carried at amortized cost. Depreciation on the office building is
calculated over its estimated useful life of 39 years.
Policy loans are carried at unpaid principal balances. Interest income on policy loans is
recognized in net investment income at the contract interest rate when earned.
Other long term investments are comprised of lottery prize receivables and are carried at
amortized cost, net of unamortized premium or discounts. Interest income and the amortization of
premium or discount are included in net investment income.
Cash and cash equivalents include cash on hand, amounts due from banks and money market
instruments.
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Certificates of deposit are carried at cost. We limit our investment in certificates of
deposit to accounts that are federally insured.
Realized gains and losses on sales of investments are recognized in operations on the specific
identification basis. Interest and dividends earned on investments are included in net investment
income.
Deferred Policy Acquisition Costs. Commissions and other acquisition costs which vary with
and are primarily related to the production of new business are deferred and amortized over the
life of the related policies. Refer to Revenues and Expenses discussed later regarding amortization
methods. Recoverability of deferred acquisition costs is evaluated periodically by comparing the
current estimate of the present value of expected pretax future profits to the unamortized asset
balance. If this current estimate is less than the existing balance, the difference is charged to
expense.
Deferred acquisition costs related to annuities are deferred to the extent deemed recoverable
and amortized in relation to the present value of actual and expected gross profits on the
policies. To the extent that realized gains and losses on fixed income securities result in
adjustments to deferred acquisition costs related to annuities, such adjustments are reflected as a
component of the amortization of deferred acquisition costs.
Deferred acquisition costs related to annuities are also adjusted, net of tax, for the change
in amortization that would have been recorded if the unrealized gains and (losses) from securities
had actually been realized. This adjustment is included in the change in net unrealized
appreciation (depreciation) on available-for-sale securities, a component of Accumulated Other
Comprehensive Income in the shareholders equity section of the balance sheet.
Loans from Premium Financing. Loans from premium financing are carried at their outstanding
unpaid principal balances, net of unearned interest, charge-offs and an allowance for loan losses.
Interest on loans is earned based on the interest method for computing unearned interest. The rule
of 78s is used to calculate the amount of the interest charge to be forgiven in the event that a
loan is repaid prior to the agreed upon number of monthly payments. When serious doubt concerning
collectability arises, loans are placed on a nonaccrual basis, generally if no payment is received
after one hundred twenty days all accrued and uncollected interest income is reversed against
current period operations. Interest income on nonaccrual loans is recognized only when the loan is
paid in full. Loan origination fees and costs are charged to expense as incurred.
Allowance for Loan Losses from Premium Financing. The allowance for possible loan losses from
financing casualty insurance premiums is a reserve established through a provision for possible
loan losses charged to expense which represents, in managements judgment, the known and inherent
credit losses existing in the loan portfolio. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses inherent in the loan portfolio.
While management utilizes its best judgment and information available, the ultimate adequacy
of the allowance is dependent upon a variety of factors beyond FTFCs control, including the
performance of the Companys loan portfolio, the economy and changes in interest rates. Our
allowance for possible loan losses consists of specific valuation allowances established for
probable losses on specific loans and a portfolio reserve for probable incurred but not
specifically identified loans.
A loan is considered impaired when, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrowers prior payment
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record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis.
Value of Insurance Business Acquired. As a result of FTFCs purchase of FLAC, an asset was
recorded in the application of purchase accounting to recognize the value of acquired insurance in
force. The value of acquired insurance in force is an intangible asset with a definite life and is
amortized under Financial Accounting Standards Board (FASB) guidance. The value of acquired
insurance in force will be amortized over 34 years, which is the expected remaining life of the
insurance in force. For the amortization of the value of acquired insurance in force, we will
periodically review our estimates of gross profits. The most significant assumptions involved in
the estimation of gross profits include interest rate spreads, future financial market performance,
business surrender/lapse rates, expenses and the impact of realized investment gains and losses. In
the event actual experience differs significantly from assumptions or assumptions are significantly
revised, we are required to record a charge or credit to amortization expense for the period in
which an adjustment is made. At December 31, 2009 and 2008 were $333,493 and $0 accumulated
amortization due to the purchase of FLAC occurring at the end of 2008. We expect to amortize the
value of insurance business acquired by the following amounts over the next five years: $309,254,
$290,542, $265,065, $237,704 and $220,155.
Policyholders Account Balances . FTFCs liability for policyholders account balances
represents the contract value that has accrued to the benefit of the policyholder as of the balance
sheet date. This liability is generally equal to the accumulated account deposits plus interest
credited less policyholders withdrawals and other charges assessed against the account balance.
Interest crediting rates for individual annuities range from 3.75% to 6.75%. Interest crediting
rates for premium deposit funds range from 3.5% to 4%.
Future Policy Benefits. Our liability for future policy benefits is primarily comprised of
the present value of estimated future payments to or on behalf of policyholders, where the timing
and amount of payment depends on policyholder mortality or morbidity, less the present value of
future net premiums. For life insurance and annuity products, expected mortality and morbidity is
generally based on FTFCs historical experience or standard industry tables including a provision
for the risk of adverse deviation. Interest rate assumptions are based on factors such as market
conditions and expected investment returns. Although mortality and morbidity and interest rate
assumptions are locked-in upon the issuance of new insurance with fixed and guaranteed terms,
significant changes in experience or assumptions may require us to provide for expected future
losses on a product by establishing premium deficiency reserves.
Federal Income Taxes. We use 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 GAAP and balances determined using tax bases. A valuation allowance
is established for the amount of the deferred tax asset that exceeds the amount of the estimated
future taxable income needed to utilize the future tax benefits.
Recent Accounting Pronouncements. In April 2009, the FASB issued new guidance regarding the
recognition and presentation of other-than-temporary impairments. The new guidance requires
entities to separate an other-than-temporary impairment of a fixed maturity security into two
components when there are credit related losses associated with the impaired fixed maturity
security for which management asserts that it does not have the intent to sell the security, and it
is not more likely than not that it will be required to sell the security before recovery of its
cost basis. The amount of the other-than-temporary impairment related to a credit loss is
recognized in earnings, and the amount of the other-than-temporary impairment related to other
factors is recorded in other comprehensive income (loss). The new guidance also expands prior
guidance in annual reporting for investment disclosures to interim periods and further enhances
certain disclosures contained therein. This guidance was effective for periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this
guidance effective for the second quarter 2009. The adoption of this guidance did not have a
material effect on our consolidated financial statements.
In April 2009, the FASB issued new guidance to clarify fair valuation in inactive markets and
includes all assets and liabilities subject to fair value measurements. Under this guidance, if an
entity determines that there
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has been a significant decrease in the volume and level of activity for the asset or the
liability in relation to the normal market activity for the asset or liability (or similar assets
and liabilities), then transactions or quoted prices may not accurately reflect fair value. In
addition, if there is evidence that the transaction for the asset or liability is not orderly; the
entity shall place little, if any weight on that transaction price as an indicator of fair value.
This guidance was effective for periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. The Company adopted this guidance effective for the
second quarter 2009, with no material impact to the consolidated financial statements.
In April 2009, the FASB issued new guidance to expand the fair value disclosures required for
financial instruments for interim periods. The guidance also requires entities to disclose the
methods and significant assumptions used to estimate the fair value of financial instruments in
financial statements on an interim and annual basis and to highlight any changes from prior
periods. This guidance was effective for periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. We adopted this guidance effective for the
second quarter of 2009, with no material impact to the consolidated financial statements.
In May 2009, the FASB issued new guidance that established general accounting standards and
disclosure for events occurring subsequent to the balance sheet date but before the financial
statements are issued. This guidance became effective for interim and annual accounting periods
ending after June 15, 2009. FTFC adopted this guidance upon issuance, with no material impact to
the consolidated financial statements.
In June 2009, the FASB issued new guidance to reorganize existing U.S. accounting and
reporting standards issued by the FASB and other private sector standard setters into a single
source of authoritative accounting principles arranged by topic (the Codification). The
Codification replaced previous guidance related to the same issue and became effective for interim
and annual reporting periods ending after September 15, 2009. We adopted this guidance upon
issuance, with no material impact to the consolidated financial statements.
In February 2010, the FASB modified its guidance related to subsequent events. This guidance
continues to require entities that file or furnish financial statements with the SEC to evaluate
subsequent events through the date the financial statements are issued; however, this guidance
removed the requirement for these entities to disclose the date through which events have been
evaluated. This guidance became effective upon issue. We adopted this guidance upon issue, with
no material impact to the consolidated financial statements.
Business Segments
FASB guidance requires a management approach in the presentation of business segments based
on how management internally evaluates the operating performance of business units. The discussion
of segment operating results that follows is being provided based on segment data prepared in
accordance with this methodology. Our business segments are as follows:
| Life and annuity insurance operations, consisting of the operations of TLIC; | ||
| Premium finance operations, consisting of the operations of FTCC; and | ||
| Corporate operations, which includes the results of the parent company after the elimination of intercompany amounts. | ||
Please see Note 12 to the Consolidated Financial Statements for additional information regarding
segment data.
Results of Operations
We acquired FLAC as of December 31, 2008 and Old TLIC was merged into FLAC with the name of
FLAC being changed to TLIC during 2009. The consolidated results of operations show signigicant
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changes in all items of revenue and expenses for the year ended December 31, 2009 compared to
the year ended December 31, 2008.
The primary sources of revenue for FTFC are life insurance premium income and income from
premium financing. Premium payments are classified as first-year, renewal and single. Renewal
premiums are any premium payments made after the first year the policy is in force.
On August 6, 2009, we were made aware of potentially fraudulent loans and financial
transactions made by an independent agency that did business with our wholly owned subsidiary,
FTCC. The fraudulent loans and financial transactions totaled $1,293,450. The independent agency
and its owner have assigned assets having an estimated fair value of $622,377 to cover loan losses.
Additionally, the independent agency endorsed and deposited $326,479 of checks issued by FTCC
in the agencys bank account that were payable to other third parties for insurance premiums. FTCC
recovered these funds from the banks due to improper endorsement.
FTCC recorded losses related to loans originated by this agency net of assets received of
$344,594 that has been recognized in the December 31, 2009 financial statements. FTCC and FTFC
continue to investigate the facts and circumstances relating to any fraudulent loans and financial
transactions and will continue to seek restitution for any losses.
Revenues
Insurance revenues are primarily generated from premium revenues and investment income. In
addition, realized gains and losses on investment holdings can significantly impact revenues from
year to year.
Our total consolidated revenues increased 281% to $8,542,792 for the year ended December 31,
2009, an increase of $6,301,384 from $2,241,408 for the year ended December 31, 2008. The increase
is primarily attributable to the increase in premium and investment income from the acquisition of
FLAC and witing new insurance policies.
Life and Annuity Insurance Operations
Revenues from life and annuity insurance operations increased 388% to $7,898,665 for the year
ended December 31, 2009, an increase of $6,279,645 from $1,619,020 for the year ended December 31,
2008. Our pre-tax income increased $352,492 compared to the prior year. The increase is primarily
attributable to the increase in premium income from the acquisition of FLAC and premiums from new
insurance policies.
Premium Finance Operations
Revenues from premium financing operations increased 27% to $642,729 for the year ended
December 31, 2009, an increase of $137,186 from $505,543 for the year ended December 31, 2008.
Pre-tax income decreased to a loss of $619,613 compared to a pre-tax gain of $913 for the prior
year. The loss is primarily attributable to fraudulent loans of $344,594, described above under
Results of Operations, and an increase in allowance for loan losses of $297,521.
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Corporate Operations
Revenues from corporate operations decreased $115,447. This decrease is primiarily due to a
decrease in investment income. Net loss increased 18% to $(441,528) for the year ended December
31, 2009 from a net loss of $(373,994) for the year ended December 31, 2008. The increase in the
loss is primarily attributable to an increase in general operating expenses.
Net Investment Income
Net investment income increased 1248% to $2,222,525 for the year ended December 31, 2009, an
increase of $2,057,601from $164,924 for the year ended December 31, 2008. The increase is
primarily due to the increase in investment income from the acquisition of FLAC.
Net Realized Investment Losses
Net realized investment losses were $(186,410) for the year ended December 31, 2009. There
were no realized investment losses for the year ended December 31, 2008.
The investment markets were very volatile at the end of 2008 and throughout 2009 due to the
credit crisis and economic downturn. We recorded two other-than-temporary impairments during 2009.
During the second quarter of 2009, the Company impaired its $200,000 par value General Motors
(GM) bond as a result of a bankruptcy filing by GM. This impairment was considered
fully credit-related, resulting in a charge to the income statement before tax of $8,659 as of June
30, 2009. This charge represents the difference between the amortized cost basis of the security
and its fair value. During the third quarter 2009, we recorded an other-than-temporary impairment
relative to CIT bonds with a total par value of $710,000. These bonds were written down to their
fair value at September 30, 2009. We determined that the entire loss was credit related and
recognized a realized loss of $146,705 in the statement of operations. These bonds defaulted on
October 30, 2009. We recognized $31,046 of net realized loss on other investment transactions.
Benefits, Losses and Expenses
Benefits and claims increased $3,509,445 to $4,234,016 for the year ended December 31, 2009
from $724,571 at December 31, 2008. The increase in 2009 is primarily attributable to the increase
due to the acquisition of FLAC.
Certain costs related to the acquisition of life insurance policies are capitalized and
amortized over the premium-paying period of the policies. These costs, which are referred to as
deferred policy acquisition costs, include commissions and other costs of acquiring life insurance,
which vary with, and are primarily related to, the production of new insurance contracts. The
capitalized cost will be amortized over the life of the associated policies. In 2009 and 2008,
capitalized cost was $1,478,104 and $553,292, respectively. Amortization of deferred policy
acquisition costs for the years ended December 31, 2009 and 2008 was $452,960 and $114,673,
respectively.
The cost of acquiring insurance business is amortized over the remaining life of the business.
Amortization of value of insurance business acquired was $333,493 in 2009 and $0 in 2008. The
increase is due to the acquisition of FLAC.
Commissions were $1,450,437 for the year ended December 31, 2009, an increase of $824,945,
compared to the year ended December 31, 2008. The increase is due to the acquisition of FLAC.
Loan fees and losses were $684,300 for the year ended December 31, 2009, an increase of
$559,442, compared to the year ended December 31, 2008. The increase is due primarily to writing
off fradulent loans in excess of assets recovered and additional loan losses.
Salaries and wages were $1,347,897 for the year ended December 31, 2009, an increase of
$665,342, compared to the year ended December 31, 2008. The increase is due primarily to the
acquisition of FLAC.
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Third party administration fees were $247,211 for the year ended December 31, 2009, an
increase of $77,870 compared to the year ended December 31, 2008. The increase was due to an
escalation clause in the fees in the administration service agreement and for providing additional
services and the acquisition of FLAC.
Other underwriting, insurance and acquisition expenses were $2,111,834 for the year ended
December 31, 2009, an increase of $1,252,940, compared to the year ended December 31, 2008. The
increase is primarily due to the acquisition of FLAC. The insurance processing for FLAC has been
outsourced to IHLIC and the former home office building utilized by FLAC has been leased.
Federal income taxes are calculated based on the earnings of TLIC. Certain items included in
income reported for financial statements are not included in taxable income for the current year,
resulting in deferred income taxes. Deferred income taxes totaled $49,139 and taxes currently
payable were $0. In 2008, deferred income tax benefit was $832.
During 2009 net loss increased $385,539 compared to 2008 and loss per share increased $.06 per
share to a $.15 loss per share, while equity per share increased approximately 18% to $2.28
compared to $1.94 per share at December 31, 2008. The increase in the net loss was primarily
attributable to the write off of loans in the premium finance operations.
Consolidated Financial Condition
Significant changes in the consolidated balance sheet of 2009 compared to 2008 reflect the
operations of FTFC, the acquisition of FLAC and capital transactions discussed below.
At December 31, 2009, our available-for-sale fixed maturities had a fair value of $22,510,660
and amortized cost of $19,772,497 compared to a fair value of $18,207,905 and an amortized cost of
$18,203,764 at December 31, 2008. This portfolio is reported at fair value with unrealized gains
and losses, net of applicable deferred taxes, reflected as a separate component in shareholders
equity within Accumulated Other Comprehensive Income. The fixed maturities portfolio is invested
in a variety of companies and U. S. Government sponsored agency securities.
At December 31, 2009, our available-for-sale equity securities had a fair value of $448,484
compared to a fair value of $213,752 at December 31, 2008. This portfolio is reported at fair
value with unrealized gains and losses, net of applicable deferred taxes, reflected as a separate
component in shareholders equity. The equity securities portfolio is invested in a variety of
companies.
At December 31, 2009 and 2008, we held loans from premium financing of $2,749,830 and
$4,702,590, respectively. The loan balances at December 31, 2009 and 2008, respectively, are net of
unearned interest of $72,144 and $124,950 and allowance for loan losses of $318,826 and $21,305.
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Shown below is a progression of our loans from premium financing for the years ended December
31, 2009 and 2008, respectively.
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Balance, beginning of year |
$ | 4,848,845 | $ | 2,366,165 | ||||
Loans financed |
9,313,585 | 9,279,014 | ||||||
Unearned interest added to loans |
493,647 | 493,989 | ||||||
Capitalized fees and interest reversed |
(53,176 | ) | | |||||
Payment of loans and unearned interest |
(11,462,101 | ) | (7,290,323 | ) | ||||
Ending loan balance including unearned interest |
3,140,800 | 4,848,845 | ||||||
Unearned interest included in ending loan balances |
(72,144 | ) | (124,950 | ) | ||||
Loan balance net of unearned interest |
3,068,656 | 4,723,895 | ||||||
Less: |
||||||||
Allowance for loan loss |
(318,826 | ) | (21,305 | ) | ||||
Loan balance net of unearned interest and
allowance for loan losses at the end of the year |
$ | 2,749,830 | $ | 4,702,590 | ||||
Total investments were $32,782,251 and $24,826,430 at December 31, 2009 and 2008,
respectively.
Deferred policy acquisition costs were $1,918,994 and $898,134 at December 31, 2009 and 2008,
respectively, net of amortization of $452,960 and $114,673 during 2009 and 2008, respectively.
Policy acquisition expenses related to new insurance sales were capitalized in the amount of
$1,478,104 and $553,292 during 2009 and 2008, respectively.
Total policy liabilities as of December 31, 2009 and 2008 were $36,157,127 and $31,256,906,
respectively. Approximately 98% of the 2009 total consists of policyholders account balances and
future policy benefit reserves.
Statutory Insurance Information
For insurance regulatory and rating purposes, Old TLIC and TLIC, formerly FLAC, prior to the
merger of Old TLIC into FLAC and the name change of FLAC to Trinity Life Insurance Company, report
on the basis of statutory accounting principles (SAP). To provide a more detailed understanding
of FTFC insurance operations, the following are SAP basis assets, statutory capital and surplus,
and net income for TLIC for the year ended December 31, 2009 and Old TLIC and FLAC for year ended
December 31, 2008:
TLIC | FLAC | |||||||||||||||||||||||
Statutory | Statutory | |||||||||||||||||||||||
Year ended | Capital and | Net | Capital and | Net | ||||||||||||||||||||
December 31 | Assets | Surplus | Loss | Assets | Surplus | Income (Loss) | ||||||||||||||||||
2009 |
$ | 39,727,482 | $ | 4,327,428 | $ | (882,176 | ) | $ | | $ | | $ | | |||||||||||
2008 |
$ | 3,844,909 | $ | 2,242,226 | $ | (238,936 | ) | $ | 32,499,603 | $ | 2,700,455 | $ | (1,057,821 | ) |
The amounts shown for the year 2009 reflect the merger of TLIC and FLAC. Statutory capital
and surplus, specifically the component called surplus, is used to fund the expansion of an
insurance companys first-year individual life and accident and health sales. The first-year
commission and underwriting expenses on such sales will normally consume a very high percentage of,
if not exceed, first-year premiums. Accordingly, a statutory loss may occur on these sales the
first year of the policy.
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Liquidity and Capital Resources
Since inception, our operations have been financed primarily through the private placement of
equity securities and an intrastate public stock offering. Through December 31, 2009, we received
$15,475,000 from the sale of our shares. Our operations have not been profitable and have generated
significant operating losses since we were incorporated in 2004.
At December 31, 2009, we had cash and cash equivalents totaling $7,080,692. The majority of
our excess funds have been invested in money market mutual funds. At December 31, 2009, cash and
cash equivalents of $5,903,147 of the total $7,080,692 are held by TLIC and may not be available
for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department of any
dividend or intercompany transaction to transfer funds to FTFC.
Cash balances at our primary depositories were significantly in excess of Federal Deposit
Insurance Corporation coverage at December 31, 2009 and December 31, 2008. Management monitors the
solvency of all financial institutions in which we have funds to minimize the exposure for loss.
Management does not believe we are at significant risk for such a loss.
During 2009, we used $324,405 of cash in operations compared to $109,083 of cash provided by
operations in 2008. The increase in cash used in operations can be attributed primarily to the
increase in the net loss and the decrease in other liabilities. Cash used in investing activities
was $425,022 compared to $3,836,635 in 2008. Net cash provided by financing activities was
$2,160,324 compared to $375,936 in 2008. The increase resulted from a net increase in policy
deposits.
Shareholders equity at December 31, 2009 was $13,250,690 compared to $11,276,770 at December
31, 2008. The increase is due to an increase in fair value of fixed maturities and equity security
investments.
The liquidity requirements of our life insurance company are met primarily by funds provided
from operations. Premium deposits and revenues, investment income and investment maturities are the
primary sources of funds, while investment purchases, policy benefits, and operating expenses are
the primary uses of funds. There were no liquidity issues in 2009. Our investments consist
primarily of marketable debt securities that could be readily converted to cash for liquidity
needs.
We are subject to various market risks. The quality of our investment portfolio and the
current level of shareholder equity continue to provide a sound financial base as we strive to
expand our marketing to offer competitive products. Our investment portfolio recovered from the
disruptions in the capital markets and had net unrealized gains of $2,867,044 at December 31, 2009.
A primary liquidity concern is the risk of an extraordinary level of early policyholder
withdrawals. We include provisions within our insurance policies, such as surrender charges, that
help limit and discourage early withdrawals. Individual life insurance policies are less
susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may
incur surrender charges and undergo a new underwriting process in order to obtain a new insurance
policy. Cash flow projections and cash flow tests under various market interest rate scenarios are
also performed annually to assist in evaluating liquidity needs and adequacy. We currently
anticipate that available liquidity sources and future cash flows will be adequate to meet our
needs for funds.
One of the significant risks relates to the fluctuations in interest rates. Regarding
interest rates, the value of our fixed-maturity investment portfolio will increase or decrease in
an inverse relationship with fluctuations in interest rates, while net investment income earned on
newly acquired fixed maturities increases or decreases in direct relationship with interest rate
changes. From an income perspective, we are exposed to rising interest rates which could be a
significant risk, as TLICs annuity business is subject to variable interest rates. The life
insurance companys life insurance policy liabilities bear fixed rates. From a liquidity
perspective, our fixed rate policy liabilities are relatively insensitive to interest rate
fluctuations. Accordingly, we believe gradual increases in interest rates do not present a
significant liquidity exposure
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for the life insurance policies. We maintain conservative durations in its fixed maturity
portfolio. At December 31, 2009 cash and fixed-maturity investments with maturities of less than
one year equaled twenty percent of total policy liabilities. If interest rates rise significantly
in a short time frame, there can be no assurance that the life insurance industry, including our
company, would not experience increased levels of surrenders and reduced sales, and thereby be
materially adversely affected.
In addition to the measures described above, TLIC must comply with the NAIC promulgated
Standard Valuation Law (SVL) which specifies minimum reserve levels and prescribes methods for
determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC
met during 2009, the SVL also requires us to perform annual cash flow testing for TLIC. This
testing is designed to ensure that statutory reserve levels will maintain adequate protection in a
variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy
of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy
of the reserves which is a required part of the annual statutory reporting process.
Our marketing plan could be modified to emphasize certain product types and reduce others.
New business levels could be varied in order to find the optimum level. Management believes that
the Companys current liquidity, current bond portfolio maturity distribution and cash position
give it substantial resources to administer its existing business and fund growth generated by
direct sales. We will service other expenses and commitments by: (1) using available cash, (2)
dividends from TLIC which are limited by law to the lesser of prior year net operating income or
10% of prior year-end capital and surplus unless specifically approved by the controlling insurance
department, (3) dividends from FTCC and (4) corporate borrowings, if necessary.
We have used the majority of our capital provided from the public offering to expand the
premium finance business and to acquire a life insurance company. The operations of TLIC may
require additional capital contributions to meet statutory capital and surplus requirements
mandated by state insurance departments. Life insurance contract liabilities are generally long
term in nature and are generally paid from future cash flows.
On March 12, 2009, we entered into a senior revolving loan with a bank to loan up to
$3,000,000 to provide working capital and funds for expansion. The loan was renewed on April 30,
2009 and modified to increase the revolving loan amount to $3,600,000. The loan agreement
terminates May 31, 2010. On July 21, 2009, FTCC borrowed $100,000 under the loan agreement and
repaid $99,999 on November 4, 2009, leaving a balance of $1. There have been no negotiations
relating to renewing the senior revolving loan that matures May 31, 2010.
We are not aware of any commitments or unusual events that could materially effect our capital
resources. We are not aware of any current recommendations by any regulatory authority which, if
implemented, would have a material adverse effect on our liquidity, capital resources or operations
We believe that our existing cash and cash equivalents at December 31, 2009 will be sufficient
to fund our anticipated operating expenses. Loans outstanding from premium financing declined
during 2009 and the growth of the premium finance subsidiary is uncertain and will require
additional capital if it grows. Funds will not be available to continue the expansion of the
Companys subsidiaries without borrowing funds or raising additional capital. We have based this
estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner
than we currently expect.
Forward Looking Information
We caution readers regarding certain forward-looking statements contained in this report and
in any other statements made by, or on behalf of, FTFC, whether or not in future filings with the
Securities and Exchange Commission. Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies, financial results or
other developments. Statements using verbs such as expect, anticipate, believe or words of
similar import generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which
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represent our beliefs concerning future levels of sales and redemptions of our products,
investment spreads and yields or the earnings and profitability of our activities.
Forward-looking statements are necessarily based on estimates and assumptions that are
inherently subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control and many of which are subject to change. These
uncertainties and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, FTFC. Whether or not actual
results differ materially from forward-looking statements may depend on numerous foreseeable and
unforeseeable factors and developments. Some of these may be national in scope, such as general
economic conditions, changes in tax laws and changes in interest rates. Some may be related to the
insurance industry generally, such as pricing competition, regulatory developments, industry
consolidation and the effects of competition in the insurance business from other insurance
companies and other financial institutions operating in our market area and elsewhere. Others may
relate to FTFC specifically, such as credit, volatility and other risks associated with our
investment portfolio. We caution that such factors are not exclusive. We disclaim any obligation
to update forward-looking information.
Off-Balance Sheet Arrangements
Our Company does not have any off-balance sheet arrangements.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
FINANCIAL DISCLOSURE
We have had no disagreements with our accountants on accounting or financial disclosure
issues.
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth information concerning each executive officer and director as of the
date of this prospectus. The Board of Directors is comprised of only one class. Our directors will
serve until the next annual meeting of shareholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal. The following also
includes a brief description of our executive officers and directors business experience.
Director | ||||||||||
Name of Nominee | Age | Position/Principal Occupation | Since | |||||||
Gregg E. Zahn
|
48 | Director; President and Chief Executive Officer of First Trinity | 2004 | |||||||
Scott J. Engebritson
|
52 | Director; Chairman of the Board | 2004 | |||||||
William S.Lay
|
70 | Director; Chief Financial Officer and Treasurer of First Trinity | 2007 | |||||||
John R. Perkins
|
58 | Director; Secretary First Trinity | 2004 | |||||||
H. Bryan Chrisman (2)
|
46 | Director; Insurance Marketing | 2004 | |||||||
Bill H. Hill (1) (2)
|
69 | Director; Former President of Eastern Oklahoma State College | 2004 | |||||||
Charles W. Owens (2)
|
55 | Director; Insurance and Marketing Services | 2004 | |||||||
George E. Peintner (3)
|
66 | Director; Marketing Company | 2004 | |||||||
G. Wayne Pettigrew
|
47 | Director; Insurance and Pension Benefits Consulting | 2004 | |||||||
Gary L. Sherrer (1) (3)
|
61 | Director; Assistant Vice President, Division of Agricultural Sciences and Natural Resources for Oklahoma State University | 2004 | |||||||
Shannon Young (3)
|
48 | Director; Insurance Marketing | 2008 |
(1) | Member Audit Committee | |
(2) | Member Compensation Committee | |
(3) | Member of Nominating and Corporation Governance Committee | |
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The following is a brief description of the previous business background of the executive
officers and directors.
Scott J. Engebritson has been Chairman of the Board of Directors since inception in 2004. He
was Chief Executive Officer from the inception of First Trinity in 2004 until October 2007. He was
President and a Director of TLIC and Chairman of the Board and Director of FTCC from their
inception in 2006 until October 2007 and Chairman of the Board of FLAC and director from December
2008 until August 31, 2009. TLIC, FTCC and FLAC are our subsidiaries. Mr. Engebritson currently
serves as Chairman of the Board and President of Great Plains Financial Corporation, a position he
has held since its inception in 2006. He currently serves as Chairman of the Board of Northern
Plains Capital Corporation a position he has held since its inception in 2008. Mr. Engebritson
served as Chairman of the Board for Mid-American Alliance Corporation and its subsidiary
Mid-American Century Life Insurance Company from their inception in 1995 until they were merged
with Citizens Inc. in 2003. Mr. Engebritson served as Chairman of the Board of Western States
Alliance from 2000 to 2006. He served as Co-Chairman of the Board of Arkansas Security Capital from
2001 to 2005. He served as Chairman of the Board of Midwest Holding Inc. from 2004 to 2006.
Gregg E. Zahn is President, Chief Executive Officer and a member of the Board of Directors of
FTFC. He has served as a Board Member since 2004 and in the other capacities since October 2007.
From 2004 until October 2007 he was Director of Training and Recruiting. He is President and Chief
Executive Officer and Director of TLIC and FTCC and has served in those positions since October
2007. He was Executive Vice President of FLAC from December 2008 until August 2009. Between 1997
and March 2004 Mr. Zahn served as Marketing Vice President of First Alliance Corporation of
Lexington, Kentucky and as Assistant to the President of First Alliance Corporation and Mid
American Alliance Corporation. He was President of Alliance Insurance Management from 2001 to 2003.
William S. Lay is Treasurer, Chief Financial Officer and a member of the Board of Directors
and has served in those positions since April of 2007. He also serves as an Officer and Director of
TLIC and FTCC. For the past five years, Mr. Lay has been a financial officer and business
consultant, specializing in corporate financial and consulting services for small sized
entrepreneurial companies, having spent the last five years providing consulting services to
businesses. Prior to that, Mr. Lay was an officer and director of numerous life insurance companies
and also has experience in business acquisitions, mergers and reorganizations.
H. Bryan Chrisman CLU, ChFC, has been a member of the Board of Directors since inception in
2004. He is a director of TLIC and FTCC. Mr. Chrisman is a principal with IMA, LLC, an insurance
marketing firm that he helped found in 2001.
Bill H. Hill has been a member of the Board of Directors since 2004. He also serves as a
Director of TLIC and FTCC. He was President of Eastern Oklahoma State College, in Wilburton,
Oklahoma from 1986-2000. He retired in 2000 and has been a rancher since that time.
Charles Wayne Owens has been a member of the Board of Directors since inception in 2004. He
is a Director of TLIC and FTCC. Mr. Owens has served as the President and Owner of Tinker Owens
Insurance and Marketing Services since its inception in 1988.
George E. Peintner has been a member of the Board of Directors since inception in 2004. He is
a Director of TLIC and FTCC. Mr. Peintner is the owner of Peintner Enterprises, a marketing company
established in 1980.
John R. Perkins has been a member of the Board of Directors since inception in 2004. He was
President from inception in 2004 until October 2007. He also is a Director of TLIC and FTCC. He
was President of FTCC and Co-Chairman of the Board of TLIC from their inception in 2006 until
October 2007. He currently serves as Chairman of the Board of First Wyoming Capital Corporation, a
position he has held since its inception in August 2009. He was President of Mid American Alliance
Corporation and Mid American Century Life Company from January 1, 2003 to December 31, 2003. He was
on the Board of Directors of Mid-American Alliance and Mid American Century from 1998 to 2003. He
is a member of the Board of Directors of Midwest Holding Inc. since its inception in 2004.
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G. Wayne Pettigrew has been a member of the Board of Directors since inception in 2004. He is
a Director of TLIC and FTCC. Mr. Pettigrew served in the Oklahoma House of Representatives from
1994 until 2004. He owns and operates Group Pension Planners, an insurance and pension benefits
consulting firm. He also serves on the Alumni Board at East Central University in Ada, Oklahoma.
Gary L. Sherrer has been a member of the Board of Directors since inception in 2004. He is a
Director of TLIC and FTCC. He is an Assistant Vice President for External Affairs for the Division
of Agricultural Sciences and Natural Resources for Oklahoma State University. Mr. Sherrer held the
position of Assistant CEO of KAMO Power from 2001-2004. Prior to his position as Assistant CEO,
Mr. Sherrer held the position of Chief Administrative Officer for seven years at KAMO Power.
Shannon B. Young was an advisory Director from April 2007 to December 2008, when he became a
Member of the Board of Directors. He is Marketing Director and Partner at Insurance Marketing
Alliance, LLC. He also is a member of the Oklahoma City Underwriters Association.
There are no family relationships between directors or officers.
Code of Conduct and Ethics
The Company has a Code of Conduct and Ethics (Code) applicable to all directors and
employees, including our Chairman of the Board, Chief Executive Officer and other senior
executives, to help ensure that our business is conducted in accordance with high standards of
ethical behavior. The Code is published on our website at www.firsttrinityfinancial.com
under Corporate Governance.
Audit Committee
The Audit Committee of the Board of Directors is currently composed of two directors, Gary
Sherrer (Chairman) and Bill Hill, each of whom is determined to be an independent director as the
term is defined by the NASDAQ listing standards. The Board of Directors has also determined that
Mr. Sherrer qualifies as an audit committee financial expert, as defined in applicable SEC rules.
The Audit Committee met one time during 2009. The Audit Committee was established by the Board
of Directors in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 to
oversee our financial reporting process, the system of internal financial controls and audits of
its financial statements. The Audit Committee (1) provides oversight of our accounting and
financial reporting processes and the audit of our financial statements, (2) assists the Board of
Directors in oversight of the integrity of our financial statements, our compliance with legal and
regulatory requirements, the independent public accounting firms qualifications, independence and
performance, and our internal accounting and financial controls, and (3) provides to the Board of
directors such information and materials as it may deem necessary to make the Board of Directors
aware of significant financial matters that require the attention of the Board of Directors. The
Audit Committee acts pursuant to a written charter adopted by the Board of Directors, which is
available in the Corporate Governance section of the Companys website at
www.firsttrinityfinancial.com.
Compensation Committee
The Compensation Committee currently consists of directors Bryan Chrisman (Chairman), Charles
Owens and Bill Hill, each of whom is determined to be an independent director as the term is
defined by the NASDAQ listing standards. Mr. Chrisman is chairman of the Compensation Committee.
The Compensation Committee met one time during 2009. The Compensation Committee reviews and
approves the compensation and benefits for our executive officers and performs such other duties as
may from time to time be determined by the Board of Directors. The Compensation Committee acts
pursuant to a written Charter adopted by the Board of Directors, which is available in the
Corporate Governance section of the Companys website at www.firsttrinityfinancial.com.
38
Table of Contents
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee meets on call and submits recommendations to
the Board of Directors for candidates to be submitted to the shareholders for election. The
Nominating and Corporate Governance Committee currently consists of directors George E. Peintner,
Gary Sherrer and Shannon Young, each of whom is deemed to be an independent director as the term is
defined by the NASDAQ listing standards, met one time in 2009. The Nominating and Corporate
Governance committee acts pursuant to a written Charter adopted by the Board of Directors, which is
available in the Corporate Governance section of our website at www.firsttrinityfinancial.com.
Director Compensation
Directors who are not employees of FTFC receive a $1,000 annual retainer and $500, plus
expenses, for each Board of Directors meeting they attend in person and $250 for each meeting in
which they participate held telephonically. The compensation of our directors is set forth in the
Director Compensation table below.
Director Compensation Table
Change in | ||||||||||||||||||||||||||||||
Pension Value | ||||||||||||||||||||||||||||||
Fees | and | |||||||||||||||||||||||||||||
Earned | Non-Equity | Nonqualified | ||||||||||||||||||||||||||||
or Paid | Stock | Option | Incentive Plan | Deferred | All Other | |||||||||||||||||||||||||
in Cash | Awards | Awards | Compensation | Compensation | Compensation | Total | ||||||||||||||||||||||||
Name | ($) | ($) | ($) | ($) | Earnings ($) | ($) | ($) | |||||||||||||||||||||||
H. Bryan Chrisman |
3,250 | 3,250 | ||||||||||||||||||||||||||||
Bill H. Hill |
4,000 | 4,000 | ||||||||||||||||||||||||||||
Charles W. Owens |
4,000 | 4,000 | ||||||||||||||||||||||||||||
Loren Everett Owens |
4,000 | 4,000 | ||||||||||||||||||||||||||||
George E. Peintner |
4,000 | 4,000 | ||||||||||||||||||||||||||||
G. Wayne Pettigrew |
3,250 | 3.250 | ||||||||||||||||||||||||||||
Gary L. Sherrer |
4,000 | 4,000 |
39
Table of Contents
EXECUTIVE COMPENSATION
The Compensation Committee assists the Board of Directors in overseeing the management of our
compensation and benefits program, Chief Executive Officer performance and executive development
and succession efforts. In addition the committee oversees the evaluation of management and
compensation of the officers of FTFC.
The primary objective of our compensation program is to offer executive officers competitive
compensation packages that will permit us to attract and retain individuals with superior abilities
and to motivate and reward such individuals in an appropriate manner in the long term interest of
FTFC and its shareholders.
Management provides recommendations to the Compensation Committee regarding most compensation
matters, including executive compensation; however, the Compensation Committee does not delegate
any of its functions to others in setting compensation. We do not engage any consultant related to
executive compensation matters.
The Companys compensation program for executive officers consists of base salary,
consideration for annual bonuses, 401(k) plan and health insurance coverage. These elements are
intended to provide an overall compensation package that is commensurate with the Companys
financial resources, that is appropriate to assure the retention of experienced management
personnel, and that aligns their financial interest with those of our shareholders.
Base Salary: Salary levels recommended by the Compensation Committee are intended to be
competitive with salary levels of similarly situated companies, commensurate with the executive
officers respective duties and responsibilities, and reflect the financial performance of FTFC.
Annual salary increases are considered based on the same criteria.
Cash Bonuses: Bonus amounts are based on individual performance and are intended to reward
superior performance. The Compensation Committee may also take into account additional
considerations that it deems appropriate. Bonuses are discretionary and there is no formal bonus
plan in place.
The following Summary Compensation Table sets forth the compensation of the most highly
compensated executive officers whose total compensation exceeded $100,000.
Summary Compensation Table
All Other | ||||||||||||||||||||
Salary | Bonus | Compensation | Total | |||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) (1) | ($) | |||||||||||||||
Gregg E. Zahn |
2009 | 180,000 | 40,000 | 9,000 | 229,000 | |||||||||||||||
President & Chief Executive Officer |
2008 | 180,000 | 20,000 | 9,000 | 209,000 | |||||||||||||||
William S. Lay |
2009 | 126,615 | 10,000 | 136,615 | ||||||||||||||||
Treasurer & Chief Financial Officer |
2008 | 60,000 | 10,000 | 70,000 |
(1) | Auto allowance | |
40
Table of Contents
Employment Agreements
Gregg E. Zahn entered into an employment agreement with FTFC, effective May 1, 2007. The
amended agreement is for a term through April 30, 2010, and is subject to earlier termination based
on disability, death, termination by FTFC, with or without cause. Mr. Zahns current base salary of
$180,000 per year does not have a provision for annual review. He also receives a $750 per month
auto allowance. He is entitled to participate in the Companys employment benefit plans available
to other executives. He is eligible for a bonus at the discretion of the Compensation Committee
and the Board of Directors based on his performance. Amounts payable, as of December 31, 2009, in
the event of Mr. Zahns termination of employment by the company for other than cause or for good
reason is $60,000.
William S. Lay entered into an employment agreement FTFC, effective January 1, 2009, and
amended April 23, 2010. The agreement is for a term through December 31, 2011 and is subject to
earlier termination based on disability, death, termination by FTFC, with or without cause. Mr.
Lays base salary is $125,000 per year for year one. Year two salary is $62,500 plus $90 per hour
for all hours worked in excess of 750 and year three is $31,250 plus $90 per hour for hours worked
in excess of 375. He is entitled to participate in our employment benefit plans available to other
executives. He is eligible for a bonus at the discretion of the Compensation Committee and the
Board of Directors, based on performance. Amounts payable, as of December 31, 2009, in the event
of Mr. Lays termination of employment by the company not for cause or for good reason by Mr. Lay
is $93,750.
SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of our Common Stock as of December 31,
2009, (i) by all persons known to FTFC, based on statements filed by such persons pursuant to
Section 13(d) or 13(g) of the Securities Exchange Act of 1934, to be the beneficial owners of more
than 5% of our Common Stock, (ii) by the executive officers named in the Summary Compensation Table
under Executive Compensation, (iii) by each director, and (iv) by all current directors and
executive officers as a group.
Percentage | ||||||||
Common Stock | Beneficially | |||||||
Name | Beneficially Owned | Owned | ||||||
Scott J. Engebritson |
188,500 | 3.25 | % | |||||
Gregg E. Zahn |
422,000 | 7.27 | % | |||||
William S. Lay |
20,000 | * | ||||||
John R. Perkins |
50,000 | * | ||||||
H. Bryan Chrisman |
100,000 | 1.72 | % | |||||
Bill H. Hill |
28,000 | * | ||||||
Charles Wayne Owens |
44,000 | (2) | * | |||||
George E. Peintner |
40,000 | * | ||||||
G. Wayne Pettigrew |
42,000 | * | ||||||
Gary L. Sherrer |
40,000 | * | ||||||
Shannon B. Young |
35,000 | * | ||||||
All directors and executive officers as a group (11 persons) |
1,009,500 | 17.39 | % |
* | represents less than 1% | |
(1) | At March 31, 2010, there are 5,805,000 shares outstanding and entitled to vote. | |
(2) | Includes 4,000 shares jointly owned by Mr. Owens and his children. | |
LEGAL MATTERS
The validity of the shares of Common Stock offered by this prospectus will be passed upon for
the Company by Cooper & Newsome PLLP, 401 South Boston Avenue, Suite 3300, Mid-Continent Tower,
Tulsa, Oklahoma 74103.
41
Table of Contents
EXPERTS
The consolidated financial statements as of December 31, 2009 and 2008 and for each of the two
years ended December 31, 2009, have been so included in reliance on the report of Kerber, Eck &
Braeckel LLP, an independent registered public accounting firm, given on the authority of said firm
as experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers and controlling persons of the Company pursuant to the foregoing provisions,
the Company has been advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
INCORPORATION BY REFERENCE
We have filed the following documents with the SEC, which are incorporated herein by
reference:
| Quarterly Report on Form 10-Q for the quarter ending March 31, 2010. | ||
We will provide without charge to each person, including any beneficial owner, to whom this
prospectus is delivered, upon written or oral request of such person, a copy of any or all of the
documents that have been or that may be incorporated by reference in this prospectus. Exhibits to
the filings will not be sent, however, unless those exhibits have been specifically incorporated by
reference in this prospectus.
Requests for such documents should be addressed in writing or by telephone to Gregg Zahn, our
President at First Trinity Financial Corporation, 7633 E. 63rd Place, Suite
230, Tulsa, OK 74133. Our telephone number is (918) 249-2438 and our corporate website is
www.firsttrinityfinancial.com. The information which appears on our website is not part of this
prospectus
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information reporting requirements of the Securities Exchange Act of
1934, as amended, or the Exchange Act, and accordingly file annual, quarterly and current reports,
proxy statements and other information with the SEC. Members of the public may read and copy any
materials we file with the SEC at the SECs Public Reference Room located at 100 F Street, N.E.,
Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
In addition, we are required to file electronic versions of these materials with the SEC
through the SECs Electronic Data Gathering, Analysis and Retrieval database system, or EDGAR.
Copies of the registration statement of which this prospectus is a part and its exhibits, as well
as of our annual reports, quarterly reports, proxy statements and other filings may be examined
without charge via the EDGAR database. The web address of the EDGAR database is
www.sec.gov. They are also available on our website, www.firsttrinityfinancial.com. Our
website is not a part of this prospectus.
42
Table of Contents
Table of Contents
TABLE OF CONTENTS
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
F -2
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of First Trinity Financial Corporation
We have audited the accompanying consolidated balance sheets of First Trinity Financial
Corporation and Subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in shareholders equity, and cash flows for the
years then ended. The Companys management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First Trinity Financial Corporation and Subsidiaries
as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States
of America.
/s/ Kerber, Eck & Braeckel LLP
Springfield, Illinois
April 14, 2010
April 14, 2010
F -3
Table of Contents
FINANCIAL STATEMENTS
First Trinity Financial Corporation and Subsidiaries
First Trinity Financial Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Investments |
||||||||
Available-for-sale fixed maturities at fair value
(amortized cost: $19,772,497 and $18,203,764 at December 31, 2009 and
2008, respectively) |
$ | 22,510,660 | $ | 18,207,905 | ||||
Equity securities
(cost: $350,318 and $213,752 at December 31, 2009 and 2008,
respectively) |
448,484 | 213,752 | ||||||
Mortgage loans on real estate |
1,365,953 | 1,315,401 | ||||||
Investment real estate |
3,146,944 | 372,000 | ||||||
Policy loans |
335,022 | 253,092 | ||||||
Other long-term investments |
4,975,188 | 4,464,280 | ||||||
Total investments |
32,782,251 | 24,826,430 | ||||||
Cash and cash equivalents ($325,000 is restricted as to withdrawal at December 31, 2009 and 2008) |
7,080,692 | 5,669,795 | ||||||
Certificate of deposit (restricted) |
102,273 | 100,000 | ||||||
Accrued investment income |
340,384 | 345,069 | ||||||
Recoverable from reinsurers |
870,294 | 884,211 | ||||||
Accounts receivable |
273,843 | 179,699 | ||||||
Loans from premium financing |
2,749,830 | 4,702,590 | ||||||
Deferred policy acquisition costs |
1,918,994 | 898,134 | ||||||
Value of insurance business acquired |
2,778,723 | 2,509,950 | ||||||
Property and equipment |
82,349 | 2,747,822 | ||||||
Deferred federal income tax asset |
| 454,824 | ||||||
Other assets |
837,210 | 262,393 | ||||||
Total assets |
$ | 49,816,843 | $ | 43,580,917 | ||||
Liabilities and Shareholders Equity |
||||||||
Policy liabilities |
||||||||
Policyholders account balances |
$ | 24,417,483 | $ | 21,189,567 | ||||
Future policy benefits |
11,349,640 | 9,621,845 | ||||||
Policy claims |
289,273 | 343,469 | ||||||
Other policyholder funds |
100,731 | 102,025 | ||||||
Total policy liabilities |
36,157,127 | 31,256,906 | ||||||
Deferred federal income taxes |
159,315 | | ||||||
Other liabilities |
249,711 | 1,047,241 | ||||||
Total liabilities |
36,566,153 | 32,304,147 | ||||||
Shareholders Equity |
||||||||
Common stock, par value $.01 per share 8,000,000 shares authorized,
5,805,000 issued and outstanding |
58,050 | 58,050 | ||||||
Additional paid-in capital |
13,806,503 | 13,806,503 | ||||||
Accumulated other comprehensive income |
2,867,044 | 2,733 | ||||||
Accumulated deficit |
(3,480,907 | ) | (2,590,516 | ) | ||||
Total shareholders equity |
13,250,690 | 11,276,770 | ||||||
Total liabilities and shareholders equity |
$ | 49,816,843 | $ | 43,580,917 | ||||
See notes to consolidated financial statements.
F-4
Table of Contents
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
Year ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Revenues |
||||||||
Premiums |
$ | 5,860,351 | $ | 1,572,599 | ||||
Income from premium financing |
582,816 | 503,885 | ||||||
Net investment income |
2,222,525 | 164,924 | ||||||
Net realized investment losses: |
||||||||
Total-other-than-temporary impairment losses |
(155,364 | ) | | |||||
Other realized investment losses |
(31,046 | ) | | |||||
Total net realized investment losses |
(186,410 | ) | | |||||
Other income |
63,510 | | ||||||
Total revenues |
8,542,792 | 2,241,408 | ||||||
Benefits, losses and expenses |
||||||||
Benefits and claims |
4,234,016 | 724,571 | ||||||
Acquisition costs deferred |
(1,478,104 | ) | (553,292 | ) | ||||
Amortization of deferred acquisition costs |
452,960 | 114,673 | ||||||
Amortization of value of insurance business acquired |
333,493 | | ||||||
Commissions |
1,450,437 | 625,492 | ||||||
Loan fees and losses |
684,300 | 124,858 | ||||||
Salaries and wages |
1,347,897 | 682,555 | ||||||
Third party administration fees |
247,211 | 169,341 | ||||||
Other underwriting, insurance and acquisition expense |
2,111,834 | 858,894 | ||||||
Total benefits, losses and expenses |
9,384,044 | 2,747,092 | ||||||
Loss before income tax expense |
(841,252 | ) | (505,684 | ) | ||||
Provision for federal income taxes |
||||||||
Deferred |
49,139 | (832 | ) | |||||
Total federal income tax (benefit) |
49,139 | (832 | ) | |||||
Net loss |
$ | (890,391 | ) | $ | (504,852 | ) | ||
Net loss per common share basic and diluted |
$ | (0.15 | ) | $ | (0.09 | ) | ||
See notes to consolidated financial statements.
F-5
Table of Contents
First Trinity Financial Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders Equity
Accumulated | ||||||||||||||||||||
Common | Additional | Other | Total | |||||||||||||||||
Stock | Paid-in | Comprehensive | Accumulated | Shareholders | ||||||||||||||||
$.01 Par Value | Capital | Income | Deficit | Equity | ||||||||||||||||
Balance at January 1, 2008 |
$ | 58,050 | $ | 13,806,503 | $ | 926 | $ | (2,085,664 | ) | $ | 11,779,815 | |||||||||
Comprehensive loss |
||||||||||||||||||||
Net loss |
| | | (504,852 | ) | (504,852 | ) | |||||||||||||
Change in net unrealized
appreciation on
available-for-sale securities |
| | 1,807 | | 1,807 | |||||||||||||||
Total comprehensive loss |
| | | | (503,045 | ) | ||||||||||||||
Balance at December 31,
2008 |
58,050 | 13,806,503 | 2,733 | (2,590,516 | ) | 11,276,770 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||
Net loss |
| | | (890,391 | ) | (890,391 | ) | |||||||||||||
Change in net unrealized
appreciation on
available-for-sale securities |
| | 2,864,311 | | 2,864,311 | |||||||||||||||
Total comprehensive income |
| | | | 1,973,920 | |||||||||||||||
Balance at December 31,
2009 |
$ | 58,050 | $ | 13,806,503 | $ | 2,867,044 | $ | (3,480,907 | ) | $ | 13,250,690 | |||||||||
See notes to consolidated financial statements
F-6
Table of Contents
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Operating activities |
||||||||
Net loss |
$ | (890,391 | ) | $ | (504,852 | ) | ||
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities: |
||||||||
Provision for depreciation |
79,643 | 10,818 | ||||||
Accretion of discount on fixed maturity investments |
(564,296 | ) | 2,167 | |||||
Realized investment losses |
186,410 | | ||||||
Amortization of policy acquisition cost |
452,960 | 114,673 | ||||||
Policy acquisition cost deferred |
(1,478,104 | ) | (553,292 | ) | ||||
Amortization of value of business acquired |
333,493 | | ||||||
Provision for deferred federal income tax |
49,139 | (832 | ) | |||||
Interest credited on policyholder deposits |
1,067,592 | 10,484 | ||||||
Change in assets and liabilities |
||||||||
Accrued investment income |
4,685 | 7,378 | ||||||
Policy loans |
(81,930 | ) | | |||||
Allowance for loan losses |
297,521 | | ||||||
Recoverable from reinsurers |
13,917 | (14,900 | ) | |||||
Accounts receivable |
(94,144 | ) | (28,761 | ) | ||||
Other assets |
(574,817 | ) | (20,240 | ) | ||||
Future policy benefits |
1,727,795 | 693,347 | ||||||
Policy claims |
(54,196 | ) | 35,640 | |||||
Other policyholder funds |
(1,294 | ) | 30,201 | |||||
Other liabilities |
(798,388 | ) | 327,252 | |||||
Net cash provided by (used in) operating activities |
(324,405 | ) | 109,083 | |||||
Investing activities |
||||||||
Purchase of fixed maturities |
(4,054,880 | ) | (325,000 | ) | ||||
Sales and maturity of fixed maturities |
2,556,904 | 625,000 | ||||||
Purchase of equity securities |
(136,565 | ) | | |||||
Purchase of mortgage loan |
(110,000 | ) | | |||||
Reduction in mortgage loans |
86,742 | | ||||||
Purchase of real estate |
(141,483 | ) | | |||||
Purchase of other long term investments |
(1,206,500 | ) | | |||||
Payments on other long term investments |
975,424 | | ||||||
Purchase of certificate of deposit |
(2,273 | ) | | |||||
Loans made for premiums financed |
(9,860,038 | ) | (9,279,014 | ) | ||||
Loans repaid for premiums financed |
11,515,277 | 6,875,259 | ||||||
Purchase price for subsidiary in excess of cash received |
| (1,723,875 | ) | |||||
Purchases of furniture and equipment |
(47,630 | ) | (9,005 | ) | ||||
Net cash used in investing activities |
(425,022 | ) | (3,836,635 | ) | ||||
Financing activities |
||||||||
Policyholder account deposits |
3,699,270 | 375,936 | ||||||
Policyholder account withdrawals |
(1,538,946 | ) | | |||||
Net cash provided by financing activities |
2,160,324 | 375,936 | ||||||
Increase (decrease) in cash |
1,410,897 | (3,351,616 | ) | |||||
Cash and cash equivalents, beginning of period |
5,669,795 | 9,021,411 | ||||||
Cash and cash equivalents, end of period |
$ | 7,080,692 | $ | 5,669,795 | ||||
See notes to consolidated financial statements.
F-7
Table of Contents
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
First Trinity Financial Corporation is the holding company of Trinity Life Insurance Company
and First Trinity Capital Corporation.
First Trinity Financial Corporation, (the Company) was incorporated in Oklahoma on April 19,
2004, for the primary purpose of organizing a life insurance subsidiary. The Company raised
$1,450,000 from two private placement stock offerings during 2004. On June 22, 2005 the Companys
intrastate public stock offering filed with the Oklahoma Department of Securities for a $12,750,000
intrastate public stock offering, which included a 10% over-sale provision (additional sales of
$1,275,000), was declared effective. The offering was completed February 23, 2007. The Company
raised $14,025,000 from this offering.
On August 31, 2009, two of the Companys subsidiaries, Trinity Life Insurance Company (Old
TLIC) and First Life America Corporation (FLAC) were merged, with FLAC being the surviving
company. Immediately following the merger FLAC changed its name to Trinity Life Insurance Company
(TLIC). After the merger, the Company has two wholly owned subsidiaries, First Trinity Capital
Corporation (FTCC) and TLIC, domiciled in Oklahoma. FTCC was incorporated in 2006, and began
operations in January 2007 providing financing for casualty insurance premiums. FLAC was purchased
December 23, 2008 and had statutory capital and surplus of $2,700,455 at December 31, 2008.
TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad
range of individual life and annuity insurance products to individuals in eight states primarily in
the Midwest. TLICs current product portfolio consists of a modified premium whole life insurance
policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental
death and dismemberment and annuity products. The term products are both renewable and convertible
and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the
entire term period or with a limited premium guarantee. The final expense is issued as either a
simplified issue or as a graded benefit, determined by underwriting. The products are sold through
independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio,
Oklahoma and Texas.
The Companys operations, prior to the acquisition of FLAC involved the sale of a modified
premium whole life insurance policy with a flexible premium deferred annuity rider through its
subsidiary Old TLIC in the state of Oklahoma. FTCC provides financing for casualty insurance
premiums for individuals and companies and is licensed to conduct premium financing business in the
states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC is the sole member of
Southern Insurance Services, LLC, (SIS) a limited liability company that operates a property and
casualty insurance agency.
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).
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and
its subsidiaries, including FLAC from its date of acquisition, which is treated as December 31,
2008 for financial reporting purposes. No operating results of FLAC are included in the
consolidated financial statements for the year ended December 31, 2008. All intercompany accounts
and transactions are eliminated in consolidation.
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Reclassifications
Certain reclassifications have been made in the prior year financial statements to conform to
current year classifications. These reclassifications had no effect on previously reported net loss
or shareholders equity.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on managements knowledge of current events
and actions it may undertake in the future, they may ultimately differ from actual results.
Investments
Fixed maturities are comprised of bonds that are classified as available-for-sale and are
carried at fair value with unrealized gains and losses, net of applicable deferred taxes, reported
in accumulated other comprehensive income (loss). The amortized cost of fixed maturities is
adjusted for amortization of premium and accretion of discount to maturity. Interest income, as
well as the related amortization of premium and accretion of discount is included in net investment
income under the effective yield method. The amortized cost of fixed maturities is written down to
fair value when a decline in value is considered to be other-than-temporary.
Equity securities are comprised of common stock and are carried at fair value. The associated
unrealized gains and losses, net of applicable deferred taxes, are included in accumulated other
comprehensive income (loss) The cost of equity securities is written down to fair value when a
decline in value is considered to be other-than-temporary. Dividends from these investments are
recognized in net investment income when declared.
Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts.
Interest income and the amortization of premiums or discounts are included in net investment
income.
Investment real estate is carried at amortized cost. Depreciation on the office building is
calculated over its estimated useful life of 39 years.
Policy loans are carried at unpaid principal balances. Interest income on policy loans is
recognized in net investment income at the contract interest rate when earned.
Other long term investments are comprised of lottery prize receivables and are carried at
amortized cost, net of unamortized premium or discounts. Interest income and the amortization of
premium or discount are included in net investment income.
Cash and cash equivalents include cash on hand, amounts due from banks and money market
instruments.
Certificates of deposit are carried at cost. The Company limits its investment in certificates
of deposit to accounts that are federally insured.
Realized gains and losses on sales of investments are recognized in operations on the specific
identification basis. Interest and dividends earned on investments are included in net investment
income.
Deferred Policy Acquisition Costs
Commissions and other acquisition costs which vary with and are primarily related to the
production of new business are deferred and amortized over the life of the related policies. Refer
to Revenues and Expenses discussed later regarding amortization methods. Recoverability of deferred
acquisition costs is
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evaluated periodically by comparing the current estimate of the present value
of expected pretax future
profits to the unamortized asset balance. If this current estimate is less than the existing
balance, the difference is charged to expense.
Deferred acquisition costs related to annuities are deferred to the extent deemed recoverable
and amortized in relation to the present value of actual and expected gross profits on the
policies. To the extent that realized gains and losses on fixed income securities result in
adjustments to deferred acquisition costs related to annuities, such adjustments are reflected as a
component of the amortization of deferred acquisition costs.
Deferred acquisition costs related to annuities are also adjusted, net of tax, for the change
in amortization that would have been recorded if the unrealized gains and (losses) from securities
had actually been realized. This adjustment is included in the change in net unrealized
appreciation (depreciation) on available-for-sale securities, a component of Accumulated Other
Comprehensive Income (Loss) in the shareholders equity section of the balance sheet.
Loans from Premium Financing
Loans from premium financing are carried at their outstanding unpaid principal balances, net
of unearned interest, charge-offs and an allowance for loan losses. Interest on loans is earned
based on the interest method for computing unearned interest. The rule of 78s is used to calculate
the amount of the interest charge to be forgiven in the event that a loan is repaid prior to the
agreed upon number of monthly payments. When serious doubt concerning collectability arises, loans
are placed on a nonaccrual basis, generally if no payment is received after one hundred twenty days
all accrued and uncollected interest income is reversed against current period operations. Interest
income on nonaccrual loans is recognized only when the loan is paid in full. Loan origination fees
and costs are charged to expense as incurred.
Allowance for Loan Losses from Premium Financing
The allowance for possible loan losses from financing casualty insurance premiums is a reserve
established through a provision for possible loan losses charged to expense which represents, in
managements judgment, the known and inherent credit losses existing in the loan portfolio. The
allowance, in the judgment of management, is necessary to reserve for estimated loan losses
inherent in the loan portfolio.
While management utilizes its best judgment and information available, the ultimate adequacy
of the allowance is dependent upon a variety of factors beyond the Companys control, including the
performance of the Companys loan portfolio, the economy and changes in interest rates. The
Companys allowance for possible loan losses consists of specific valuation allowances established
for probable losses on specific loans and a portfolio reserve for probable incurred but not
specifically identified loans.
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan
basis.
Property and Equipment
The home office building that was acquired in the acquisition of FLAC and carried as property
and equipment on the balance sheet in 2008 was leased to third parties in December 2009 and has
been
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reclassified on the balance sheet to investment real estate. Property and equipment are
carried at amortized
cost. Depreciation on the office building occupied by SIS is calculated over its estimated
useful life of 39 years. Office furniture and equipment is recorded at cost or fair value at
acquisition less accumulated depreciation using the 200% declining balance method over the
estimated useful life of the respective assets of 3 to 7 years.
Reinsurance
The Company cedes reinsurance under various agreements allowing management to control exposure
to potential losses arising from large risks and providing additional capacity for growth.
Estimated reinsurance recoverables are reported as assets and are recognized in a manner consistent
with the liabilities related to the underlying reinsured contracts.
Value of Insurance Business Acquired
As a result of the Companys purchase of FLAC, an asset was recorded in the application of
purchase accounting to recognize the value of acquired insurance in force. The Companys value of
acquired insurance in force is an intangible asset with a definite life and is amortized under
Financial Accounting Standards Board (FASB) guidance. The value of acquired insurance in force
will be amortized over 34 years, which is the expected remaining life of the insurance in force.
For the amortization of the value of acquired insurance in force, the Company will periodically
review its estimates of gross profits. The most significant assumptions involved in the estimation
of gross profits include interest rate spreads, future financial market performance, business
surrender/lapse rates, expenses and the impact of realized investment gains and losses. In the
event actual experience differs significantly from assumptions or assumptions are significantly
revised, the Company is required to record a charge or credit to amortization expense for the
period in which an adjustment is made. During 2009, the Company evaluated its originally recorded
purchase price allocation of assets and liabilities of FLAC. As a result, value of business
acquired was increased $602,266 due to a change to the original assumptions made on the deferred
taxes of the investment portfolio of FLAC. This change in deferred taxes and value of business
acquired had the effect of increasing net loss by $159,175 ($.02 per share).
At December 31, 2009 and 2008 there was $333,493 and $0 accumulated amortization due to the
purchase of FLAC occurring at the end of 2008. The Company expects to amortize the value of
insurance business acquired by the following amounts over the next five years: $309,254, $290,542,
$265,065, $237,704 and $220,155.
Other Assets and Other Liabilities
Other assets consist primarily of prepaid expenses and federal and state income tax
recoverables. Other liabilities consist primarily of accrued expenses and payables.
Policyholders Account Balances
The Companys liability for policyholders account balances represents the contract value that
has accrued to the benefit of the policyholder as of the balance sheet date. This liability is
generally equal to the accumulated account deposits plus interest credited less policyholders
withdrawals and other charges assessed against the account balance. Interest crediting rates for
individual annuities range from 3.75% to 6.75%. Interest crediting rates for premium deposit funds
range from 3.5% to 4%.
Future Policy Benefits
The Companys liability for future policy benefits is primarily comprised of the present value
of estimated future payments to or on behalf of policyholders, where the timing and amount of
payment depends on policyholder mortality or morbidity, less the present value of future net
premiums. For life insurance and annuity products, expected mortality and morbidity is generally
based on the Companys historical experience or standard industry tables including a provision for
the risk of adverse deviation. Interest rate assumptions are based on factors such as market
conditions and expected investment returns.
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Although mortality and morbidity and interest rate
assumptions are locked-in upon the issuance of new
insurance with fixed and guaranteed terms, significant changes in experience or assumptions
may require the Company to provide for expected future losses on a product by establishing premium
deficiency reserves.
Policy Claims
Policy claim liabilities represent the estimated liabilities for claims reported plus
estimated incurred but not yet reported claims developed from trends of historical market data
applied to current exposure.
Common Stock
Common stock is fully paid, non-assessable and has a par value of $.01 per share.
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 GAAP and balances determined using tax bases. A valuation allowance is established
for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable
income needed to utilize the future tax benefits.
Revenues and Expenses
Revenues on traditional life insurance products consist of direct premiums reported as earned
when due. Liabilities for future policy benefits are provided and acquisition costs are amortized
by associating benefits and expenses with earned premiums to recognize related profits over the
life of the contracts. Acquisition costs are amortized over the premium paying period using the net
level premium method. Traditional life insurance products are treated as long duration contracts
since they are ordinary whole life insurance products, which generally remain in force for the
lifetime of the insured.
Income from premium financing includes cancellation and late fees.
Net Loss per Common Share
Net loss per common share is calculated using the weighted average number of common shares
outstanding during the year. The weighted average outstanding common shares for the years ended
December 31, 2009 and 2008 were 5,805,000.
Accumulated Other Comprehensive Income
FASB guidance requires the inclusion of unrealized gains or losses on available-for-sale
securities as a component of other comprehensive income. Unrealized gains and losses recognized in
accumulated other comprehensive income that are later recognized in net income through a
reclassification adjustment are identified on the specific identification method. There were no
reclassification amounts for the years ended December 31, 2009 and 2008.
Subsequent Events
Management has evaluated all events subsequent to December 31, 2009 through the date that
these financial statements have been issued.
Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued new guidance regarding
the recognition and presentation of other-than-temporary impairments. The new guidance requires
entities to
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separate an other-than-temporary impairment of a fixed maturity security into two
components when there
are credit related losses associated with the impaired fixed maturity security for which
management asserts that it does not have the intent to sell the security, and it is not more likely
than not that it will be required to sell the security before recovery of its cost basis. The
amount of the other-than-temporary impairment related to a credit loss is recognized in earnings,
and the amount of the other-than-temporary impairment related to other factors is recorded in other
comprehensive income (loss). The new guidance also expands prior guidance in annual reporting for
investment disclosures to interim periods and further enhances certain disclosures contained
therein. This guidance was effective for periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The Company adopted this guidance effective for
the second quarter 2009. The adoption of this guidance did not have a material effect on the
Companys consolidated financial statements.
In April 2009, the FASB issued new guidance to clarify fair valuation in inactive markets and
includes all assets and liabilities subject to fair value measurements. Under this guidance, if an
entity determines that there has been a significant decrease in the volume and level of activity
for the asset or the liability in relation to the normal market activity for the asset or liability
(or similar assets and liabilities), then transactions or quoted prices may not accurately reflect
fair value. In addition, if there is evidence that the transaction for the asset or liability is
not orderly; the entity shall place little, if any weight on that transaction price as an indicator
of fair value. This guidance was effective for periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance
effective for the second quarter 2009, with no material impact to the consolidated financial
statements.
In April 2009, the FASB issued new guidance to expand the fair value disclosures required for
financial instruments for interim periods. The guidance also requires entities to disclose the
methods and significant assumptions used to estimate the fair value of financial instruments in
financial statements on an interim and annual basis and to highlight any changes from prior
periods. This guidance was effective for periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The Company adopted this guidance effective for
the second quarter of 2009, with no material impact to the consolidated financial statements.
In May 2009, the FASB issued new guidance that established general accounting standards and
disclosure for events occurring subsequent to the balance sheet date but before the financial
statements are issued. This guidance became effective for interim and annual accounting periods
ending after June 15, 2009. The Company adopted this guidance upon issuance, with no material
impact to the consolidated financial statements.
In June 2009, the FASB issued new guidance to reorganize existing U.S. accounting and
reporting standards issued by the FASB and other private sector standard setters into a single
source of authoritative accounting principles arranged by topic (the Codification). The
Codification replaced previous guidance related to the same issue and became effective for interim
and annual reporting periods ending after September 15, 2009. The Company adopted this guidance
upon issuance, with no material impact to the consolidated financial statements.
In February 2010, the FASB modified its guidance related to subsequent events. This guidance
continues to require entities that file or furnish financial statements with the SEC to evaluate
subsequent events through the date the financial statements are issued; however, this guidance
removed the requirement for these entities to disclose the date through which events have been
evaluated. This guidance became effective upon issue. The Company adopted this guidance upon issue,
with no material impact to the consolidated financial statements.
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2. INVESTMENTS
Fixed Maturities and Equity Securities
The following tables provide additional information relating to fixed maturities and equity
securities as of December 31:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2009 | Cost | Gains | Losses | Value | ||||||||||||
Fixed maturity securities |
||||||||||||||||
U.S. Government Agency |
$ | 1,921,463 | $ | 7,955 | $ | 51,235 | $ | 1,878,183 | ||||||||
Residential mortgage-backed securities |
182,835 | 22,403 | | 205,238 | ||||||||||||
Corporate bonds |
17,668,199 | 2,796,431 | 37,391 | 20,427,239 | ||||||||||||
Total fixed maturity securities |
$ | 19,772,497 | $ | 2,826,789 | $ | 88,626 | $ | 22,510,660 | ||||||||
Equity securities |
350,318 | 98,166 | | 448,484 | ||||||||||||
Total |
$ | 20,122,815 | $ | 2,924,955 | $ | 88,626 | $ | 22,959,144 | ||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2008 | Cost | Gains | Losses | Value | ||||||||||||
Fixed maturity securities |
||||||||||||||||
U.S. Government Agency |
$ | 953,650 | $ | 4,141 | $ | | $ | 957,791 | ||||||||
Residential mortgage-backed securities |
221,951 | | | 221,951 | ||||||||||||
Corporate bonds |
17,028,163 | | | 17,028,163 | ||||||||||||
Total fixed maturity securities |
$ | 18,203,764 | $ | 4,141 | $ | | $ | 18,207,905 | ||||||||
Equity securities |
213,752 | | | 213,752 | ||||||||||||
Total |
$ | 18,417,516 | $ | 4,141 | $ | | $ | 18,421,657 | ||||||||
The following table summarizes, for all securities in an unrealized loss position as of
the balance sheet dates, the estimated fair value, pre-tax gross unrealized loss and number of
securities by length of time that those securities have been continuously in an unrealized loss
position.
Less than 12 months | ||||||||||||
Unrealized | Number of | |||||||||||
December 31, 2009 | Fair Value | Loss | Securities | |||||||||
Fixed maturity securities |
||||||||||||
U.S. Government agency |
$ | 1,676,246 | $ | 51,235 | 6 | |||||||
Corporate bonds |
742,087 | 37,391 | 5 | |||||||||
Total fixed maturity securities |
$ | 2,418,333 | $ | 88,626 | 11 | |||||||
There were no securities in an unrealized loss position greater than 12 months and there
were no equity securities in an unrealized loss position. There were no securities in an unrealized
loss position at December 31, 2008.
As of December 31, 2009, all of the above fixed maturity securities had a fair value to cost
ratio equal to or greater than 86% and all equity securities had a fair value to cost ratio equal
to or greater than 100%.
As of December 31, 2008, all of our fixed maturity and equity securities had a fair
value to cost ratio equal
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to or greater than 100%. At December 31, 2009 and 2008, fixed maturity
securities were 87% and 85% investment grade, respectively, as rated by Standard & Poors.
The Companys decision to record an impairment loss is primarily based on whether the
securitys fair value is likely to remain significantly below its book value in light of all the
factors considered. Factors that are considered include the length of time the securitys fair
value has been below its carrying amount, the severity of the decline in value, the credit
worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company
also assesses whether it intends to sell or whether it is more likely than not that it may be
required to sell the security prior to its recovery in value. For any fixed maturity securities
that are other-than-temporarily impaired, the Company determines the portion of the
other-than-temporary impairment that is credit-related and the portion that is related to other
factors. The credit-related portion is the difference between the expected future cash flows and
the amortized cost basis of the fixed maturity security, and that difference is charged to
earnings. The non-credit-related portion representing the remaining difference to fair value is
recognized in other comprehensive income (loss). Only in the case of a credit-related impairment
where management has the intent to sell the security, or it is more likely than not that it will be
required to sell the security before recovery of its cost basis, is a fixed maturity security
adjusted to fair value and the resulting losses recognized in realized gains/losses in the
consolidated statements of income. Any other-than-temporary impairments on equity securities are
recorded in the consolidated statements of income in the periods incurred as the difference between
fair value and cost.
The Company recorded two other-than-temporary impairments during 2009. During the second
quarter of 2009, the Company impaired its $200,000 par value General Motors (GM) bond as a result
of a bankruptcy filing by GM. This impairment was considered fully credit-related, resulting in a
charge to the income statement before tax of $8,659 as of June 30, 2009. This charge represents the
difference between the amortized cost basis of the security and its fair value. During the third
quarter 2009, the Company recorded an other-than-temporary impairment relative to CIT bonds with a
total par value of $710,000. These bonds were written down to their fair value at September 30,
2009. The Company determined that the entire loss was credit related and recognized a realized loss
of $146,705 in the statement of operations. These bonds defaulted on October 30, 2009. The Company
experienced no additional other-than temporary impairments during 2009. Management believes that
the Company will fully recover its cost basis in the securities held at December 31, 2009, and
management does not have the intent to sell nor is it more likely than not that the Company will be
required to sell such securities until they recover or mature. The remaining temporary impairments
shown herein are primarily the result of the current interest rate environment rather than credit
factors that would imply other-than-temporary impairment.
Net unrealized gains for investments classified as available-for-sale are presented below, net
of the effect of deferred income taxes and deferred acquisition costs assuming that the
appreciation had been realized.
December 31, | ||||||||
2009 | 2008 | |||||||
Gross unrealized appreciation on available-for-sale securities |
$ | 2,836,329 | $ | 4,141 | ||||
Adjustment to deferred acquisition costs |
(4,284 | ) | | |||||
Deferred income taxes |
34,999 | (1,408 | ) | |||||
Net unrealized appreciation on available-for-sale securities |
$ | 2,867,044 | $ | 2,733 | ||||
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The amortized cost and estimated fair value of fixed maturities, by contractual maturity,
at December 31, 2009 is shown below. Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties.
Available-for-Sale | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less |
$ | 43,500 | $ | 56,619 | ||||
Due in one year through five years |
5,826,977 | 6,734,979 | ||||||
Due after five years through ten years |
8,479,628 | 9,642,869 | ||||||
Due after ten years |
5,239,557 | 5,870,955 | ||||||
Due at multiple maturity dates |
182,835 | 205,238 | ||||||
$ | 19,772,497 | $ | 22,510,660 | |||||
Proceeds from the sale and maturity of fixed maturities during 2009 and 2008 were
$2,556,904 and $625,000, respectively. Gross gains of $5,323 and $0 and gross losses of $36,369 and
$0 were realized on the sales during 2009 and 2008, respectively. Certain other than temporary
losses were recognized on General Motors and CIT Corporation bonds totaling $155,364.
Presented below is investment information, including the accumulated and annual change in net
unrealized investment gains or losses. Additionally, the table shows the annual change in net
unrealized investment gains (losses) and the amount of realized investment gains (losses) on debt
and equity securities for the years ended December 31, 2009 and 2008.
2009 | 2008 | |||||||
Change in unrealized investment gains |
||||||||
Fixed maturities |
$ | 2,734,022 | $ | 2,738 | ||||
Equity securities |
98,166 | | ||||||
Realized investment losses |
||||||||
Fixed maturities |
$ | (186,410 | ) | $ | | |||
Equity securities |
| |
Mortgage Loans on Real Estate
The Companys mortgage loans by property type at December 31, 2009 and 2008 are as follows:
2009 | 2008 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Residential loans |
$ | 110,000 | 8.05 | % | $ | | 0.00 | % | ||||||||
Commercial loans |
||||||||||||||||
Retail stores |
$ | 851,607 | 62.35 | % | $ | 900,435 | 68.45 | % | ||||||||
Office buildings |
404,346 | 29.60 | % | 414,966 | 31.55 | % | ||||||||||
Total commercial loans |
1,255,953 | 91.95 | % | 1,315,401 | 100.00 | % | ||||||||||
Total mortgage loans |
$ | 1,365,953 | 100.00 | % | $ | 1,315,401 | 100.00 | % | ||||||||
The residential loan is located in Mississippi and commercial loans are geographically
concentrated in the states of Colorado (98%) and Arizona (2%) at December 31, 2009.
There were no loans more than 90 days past due at December 31, 2009. There were no mortgage
loans in default at December 31, 2008 and there was no allowance for losses at December 31, 2009
and 2008.
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Investment real estate
TLIC owns approximately six and one-half acres of land located in Topeka, Kansas. A 20,000
square foot office building has been constructed on approximately one-half of this land. TLIC
occupied approximately 7,500 square feet of the building until it was leased to a third party
effective December 24, 2009 and the remaining 12,500 square feet is leased. This building appeared
on the balance sheet as property and equipment at December 2008 and was reclassified as investment
real estate due to the change of usage in December 2009.
A summary of investment real estate at December 31, 2009 and 2008 is as follows:
2009 | 2008 | |||||||
Land and improvements |
$ | 3,210,050 | $ | 372,000 | ||||
Less accumulated depreciation |
(63,106 | ) | | |||||
Investment real estate, net of accumulated depreciation |
$ | 3,146,944 | $ | 372,000 | ||||
Other Long-Term Investments
The Companys investment in lottery prize cash flows was $4,975,188 and $4,464,280 at
December 31, 2009 and 2008, respectively. The lottery prize cash flows are assignment of the future
rights from lottery winners at a discounted price. Payments on these investments are made by state
run lotteries.
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity,
at December 31, 2009 are shown below:
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less |
$ | 1,096,582 | $ | 1,041,012 | ||||
Due in one year through five years |
2,639,259 | 2,741,285 | ||||||
Due in five years through ten years |
1,046,495 | 1,078,389 | ||||||
Due after ten years |
192,852 | 226,050 | ||||||
$ | 4,975,188 | $ | 5,086,736 | |||||
The outstanding balance of lottery prize cash flows, by state lottery at December 31, 2009 and
2008 are shown below:
2009 | 2008 | |||||||
Florida |
$ | 347,274 | $ | 376,252 | ||||
Illinois |
1,047,617 | 246,694 | ||||||
Indiana |
465,977 | 535,978 | ||||||
Kentucky |
170,103 | | ||||||
Massachusetts |
2,345,406 | 2,604,914 | ||||||
New York |
431,209 | 499,825 | ||||||
Pennsylvania |
| 31,058 | ||||||
Texas |
147,808 | 141,613 | ||||||
Washington |
19,794 | 27,946 | ||||||
$ | 4,975,188 | $ | 4,464,280 | |||||
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Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended December 31, 2009 and
2008:
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Fixed maturities |
$ | 1,803,860 | $ | 21,412 | ||||
Equity securities |
15,503 | | ||||||
Mortgage loans |
119,607 | | ||||||
Real estate |
244,703 | | ||||||
Short-term and other investments |
44,134 | 145,623 | ||||||
Gross investment income |
2,227,807 | 167,035 | ||||||
Investment expenses |
(5,282 | ) | (2,111 | ) | ||||
Net investment income |
$ | 2,222,525 | $ | 164,924 | ||||
3. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability (an exit price) in the measurement date. The Company also considers the impact on fair
value of a significant decrease in volume and level of activity for an asset or liability when
compared with normal activity.
The Company holds fixed maturities and equity securities that are measured and reported at
fair market value on the balance sheet. The Company determines the fair market values of its
financial instruments based on the fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value, as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1
asset and liabilities include debt and equity securities that are traded in an active exchange
market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded
in over-the-counter markets.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted
prices that are traded less frequently than exchange-traded instruments or assets and liabilities
whose value is determined using a pricing model with inputs that are observable in the market or
can be derived principally from or corroborated by observable market data. This category generally
includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.
Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation. This category generally includes
certain private equity investments and asset-backed securities where independent pricing
information was not able to be obtained for a significant portion of the underlying assets.
The Company has categorized its financial instruments, based on the priority of the inputs to
the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure
the financial instruments fall within different levels of the hierarchy, the categorization is
based on the lowest level input that is significant to the fair value measurement of the
instrument. A review of fair value hierarchy
F-18
Table of Contents
classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their
ability to be observed, may result in a reclassification for certain financial assets or
liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as
transfers in/out of the Level 3 category as of the beginning of the period in which the
reclassifications occur.
The following table presents the Companys fair value hierarchy for those financial
instruments measured at fair value on a recurring basis as of December 31, 2009 and 2008.
December 31, 2009 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed maturities, available for sale |
||||||||||||||||
U.S. government agency |
$ | | $ | 1,878,183 | $ | | $ | 1,878,183 | ||||||||
Corporate |
| 20,427,239 | | 20,427,239 | ||||||||||||
Residential MBS |
| 205,238 | | 205,238 | ||||||||||||
Total fixed maturities |
$ | | $ | 22,510,660 | $ | | $ | 22,510,660 | ||||||||
Equity securities |
||||||||||||||||
Mutual funds |
$ | 80,150 | $ | | $ | | $ | 80,150 | ||||||||
Corporate common stock |
333,334 | | 35,000 | 368,334 | ||||||||||||
Total equity securities |
$ | 413,484 | $ | | $ | 35,000 | $ | 448,484 | ||||||||
December 31, 2008 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed maturities, available for sale |
||||||||||||||||
U.S. government agency |
$ | | $ | 957,791 | $ | | $ | 957,791 | ||||||||
Corporate |
| 17,028,163 | | 17,028,163 | ||||||||||||
Residential MBS |
| 221,951 | | 221,951 | ||||||||||||
Total fixed maturities |
$ | | $ | 18,207,905 | $ | | $ | 18,207,905 | ||||||||
Equity securities |
||||||||||||||||
Mutual funds |
$ | 52,000 | $ | | $ | | $ | 52,000 | ||||||||
Corporate common stock |
161,752 | | | 161,752 | ||||||||||||
Total equity securities |
$ | 213,752 | $ | | $ | | $ | 213,752 | ||||||||
At December 31, 2009, Level 3 financial instruments consisted of one private placement
common stock that has no active trading. This stock represents an investment in a small development
stage insurance holding company. The fair value for this security was determined through the use of
unobservable assumptions about market participants. The Company has assumed a willing market
participant would purchase the securities for the same price as the Company paid until such time as
the development stage company commences operations.
The following table provides a summary of changes in fair value of our Level 3 financial
instruments for the year ended December 31, 2009 (none at December 31, 2008):
January 1, | Realized | Unrealized | December 31, | |||||||||||||||||||||
2009 | Gains | Gains | Purchases | Transfers | 2009 | |||||||||||||||||||
Balance | (Losses) | (Losses) | (Sales) | In (Out) | Balance | |||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||
Private placement common
stock |
$ | | $ | | $ | | $ | 35,000 | $ | | $ | 35,000 | ||||||||||||
Total equity securities |
$ | | $ | | $ | | $ | 35,000 | $ | | $ | 35,000 | ||||||||||||
F-19
Table of Contents
Fair Value of Financial Instruments
The following disclosure contains the estimated fair values of financial instruments, as of
December 31, 2009 and 2008. The estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However, considerable judgment was
required to interpret market data to develop these estimates. Accordingly, the estimates are not
necessarily indicative of the amounts which could be realized in a current market exchange. The use
of different market assumptions or estimation methodologies may have a material effect on the fair
value amounts.
2009 | 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Assets |
||||||||||||||||
Fixed maturities |
$ | 22,510,660 | $ | 22,510,660 | $ | 18,207,905 | $ | 18,207,905 | ||||||||
Equity securities |
448,484 | 448,484 | 213,752 | 213,752 | ||||||||||||
Mortgage loans on real estate |
||||||||||||||||
Residential |
110,000 | 110,000 | | | ||||||||||||
Commercial |
1,255,953 | 1,298,765 | 1,315,401 | 1,315,401 | ||||||||||||
Investment real estate |
3,146,944 | 3,146,944 | 372,000 | 372,000 | ||||||||||||
Policy loans |
335,022 | 335,022 | 253,092 | 253,092 | ||||||||||||
Other long-term investments |
4,975,188 | 5,086,736 | 4,464,280 | 4,464,280 | ||||||||||||
Cash and cash equivalents |
7,080,692 | 7,080,692 | 5,669,795 | 5,669,795 | ||||||||||||
Loans from premium financing |
2,749,830 | 2,749,830 | 4,702,590 | 4,702,590 | ||||||||||||
Liabilities |
||||||||||||||||
Policyholders account balances |
$ | 24,417,483 | 22,730,469 | 21,189,567 | 21,189,567 | |||||||||||
Policy claims |
289,273 | 289,273 | 343,469 | 343,469 |
Fixed Maturities and Equity Securities
The fair value of fixed maturities and equity securities are based on the principles
previously discussed.
Mortgage Loans on Real Estate
The fair value of commercial mortgage loans are based upon the present value of the expected
future cash flows discounted at the appropriate rate for similar quality loans.
Investment Real Estate
The fair value of investment real estate is based on cost, which approximates appraisal value.
Cash and Cash Equivalents and Policy loans
The carrying value of these financial instruments approximates their fair values.
Other Long-Term Investments
Other long-term investments are comprised of lottery prize receivables and fair value is
derived by using a discounted cash flow approach. Projected cash flows are discounted using
applicable rates.
F-20
Table of Contents
Loans from Premium Financing
The carrying value of loans from premium financing is net of unearned interest and any
estimated loan losses and approximates fair value. Estimated loan losses were $318,826 and $21,305
at December 31, 2009 and 2008, respectively.
Investment Contracts Policyholders Account Balances
The fair value for liabilities under investment-type insurance contracts (accumulation
annuities) is calculated using a discounted cash flow approach. Cash flows are projected using
actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for
credit risk and the nonperformance risk of the liabilities.
The fair values for insurance contracts other than investment-type contracts are not required
to be disclosed.
Policy Claims
The carrying amounts reported for these liabilities approximate their fair value.
4. CERTIFICATE OF DEPOSIT PLEDGED AND SPECIAL DEPOSITS
TLIC has a $100,000 line of credit from a bank. The line of credit expires on December 31,
2010 and interest is accrued on the outstanding principal balance at Bank of Americas Prime Rate.
The line of credit was obtained solely to secure the issuance of standby letters of credit. The
standby letters of credit are used to guarantee reserve credits taken by Optimum Re Insurance
Company (Optimum Re). At December 31, 2009 for TLIC and December 31, 2008 for FLAC there was a
$65,000 letter of credit secured by the line of credit agreement. The Company pledged certificate
of deposits with a market value of $65,000 as collateral for the letter of credit. There were no
amounts borrowed against this line of credit.
TLIC is required to hold assets on deposit for the benefit of policyholders in accordance with
statutory rules and regulations. At December 31, 2009 and 2008, these required deposits totaled
$2,393,687 and $2,422,622, respectively.
5. LOANS FROM PREMIUM FINANCING
The Company finances amounts up to 80% of the premium on casualty insurance policies after a
20% or greater down payment is made by the policy owner. The premiums financed are collateralized
by the amount of the unearned premium of the insurance policy. Policies that become delinquent are
submitted for cancellation and recovery of the unearned premium, up to the amount of the loan
balance, 25 days after a payment becomes delinquent. Loans from premium financing are carried net
of unearned interest and any estimated loan losses.
Unearned interest was $72,144 and $124,950 at December 31, 2009 and 2008, respectively.
Allowances for loan losses were $318,826 and $21,305 at December 31, 2009 and 2008, respectively.
The following table presents the companys credit losses related to loans from premium financing at
December 31, 2009 and 2008.
2009 | 2008 | |||||||
Allowance at beginning of period |
$ | 21,305 | $ | 3,500 | ||||
Additions charged to operations |
297,521 | 17,805 | ||||||
Allowance at end of period |
$ | 318,826 | $ | 21,305 | ||||
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Table of Contents
On August 6, 2009, the Company was made aware of potentially fraudulent loans and
financial transactions made by an independent agency that did business with the Companys wholly
owned subsidiary, FTCC. The fraudulent loans and financial transactions totaled $1,293,450. The
independent agency and its owner have assigned assets having an estimated fair value of $622,377 to
cover loan losses. Assets received were mortgage loan on real estate of $110,000, investment real
estate of $141,483, property and equipment including an office building of $24,017, furniture and
equipment of $2,000, accounts of property and casualty insurance agency of $150,000 and accounts
receivable of $194,877.
Additionally, the independent agency endorsed and deposited $326,479 of checks issued by FTCC
in the agencys bank account that were payable to other third parties for insurance premiums. FTCC
recovered these funds from the banks due to improper endorsement.
FTCC recorded losses related to loans originated by this agency net of assets received of
$344,594 that has been recognized in the December 31, 2009 financial statements. FTCC and the
Company continue to investigate the facts and circumstances relating to any fraudulent loans and
financial transactions and will continue to seek restitution for any losses.
6. DEFERRED POLICY ACQUISITION COST
The balances of and changes in deferred acquisition costs as of and for the years ended
December 31, are as follows:
2009 | 2008 | |||||||
Balance, beginning of year |
$ | 898,134 | $ | 459,515 | ||||
Capitalization of commissions, sales and issue expenses |
1,478,104 | 553,292 | ||||||
Amortization |
(452,960 | ) | (114,673 | ) | ||||
Deferred acquisition costs allocated to investment |
(4,284 | ) | | |||||
Balance, end of year |
$ | 1,918,994 | $ | 898,134 | ||||
7. FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with FTCC and does not file a
consolidated return with TLIC. TLIC is taxed as a life insurance company under the provisions of
the Internal Revenue Code and must file a separate tax return until they have been a member of the
filing group for five years.
There was no current federal income tax expense for the years 2009 and 2008.
Deferred taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Companys deferred tax liabilities and assets at
December 31, 2009 and 2008 are as follows:
December 31, | ||||||||
2009 | 2008 | |||||||
Deferred tax liabilities: |
||||||||
Net unrealized investment gains |
$ | | $ | 1,408 | ||||
Deferred policy acquisition costs |
147,097 | 71,555 | ||||||
Premiums receivable |
18,335 | 18,467 | ||||||
Reinsurance recoverable |
173,561 | 9,153 | ||||||
Investment real estate |
19,487 | 19,487 | ||||||
Other long term investments |
37,216 | 46,718 | ||||||
Value of business acquired |
555,745 | 501,990 | ||||||
Property and equipment |
11,920 | 9,268 | ||||||
Total deferred tax liabilities |
963,361 | 678,046 |
F-22
Table of Contents
December 31, | ||||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Net unrealized investment losses |
35,001 | 758,673 | ||||||
Policy reserves and contract liabilities |
277,276 | 205,536 | ||||||
Policy claims |
14,664 | 7,827 | ||||||
Other |
4,519 | 4,089 | ||||||
Net operating loss carryforward |
1,644,319 | 1,192,024 | ||||||
Net capital loss carryforward |
26,995 | | ||||||
Total deferred tax assets |
2,002,774 | 2,168,149 | ||||||
Valuation allowance |
(1,198,728 | ) | (1,035,279 | ) | ||||
Net deferred tax assets |
804,046 | 1,132,870 | ||||||
Net deferred tax liabilities (assets) |
$ | 159,315 | $ | (454,824 | ) | |||
FTFC has net operating loss carry forwards of approximately $3,525,000, expiring in 2019
through 2024, TLIC has net operating loss carry forwards of approximately $1,008,000, expiring in
2021 through 2024. Net operating loss carry forwards of $1,219,940, expiring in 2017 through 2023
and capital loss carry forwards of $63,727, expiring in 2011 and 2013 that may be available to
offset future taxable income were acquired in the acquisition of FLAC and the use of these losses
are restricted by the tax laws and some or all of the losses may not be available for use.
The Company has no known uncertain tax benefits within its provision for income taxes. In
addition, the Company does not believe it would be subject to any penalties or interest relative to
any open tax years and, therefore, have not accrued any such amounts. The Company files U.S.
federal income tax returns and income tax returns in various state jurisdictions. The 2006 through
2009 U.S. federal tax years are subject to income tax examination by tax authorities. The Company
classifies any interest and penalties (if applicable) as income tax expense in the financial
statements.
8. REINSURANCE
TLIC participates in reinsurance in order to provide risk diversification, additional capacity
for future growth and limit the maximum net loss potential arising from large risk. TLIC reinsures
all amounts of risk on any one life in excess of $55,000 for individual life insurance with
Investors Heritage Life Insurance Company, Munich American Reassurance Company, Optimum Re and
Wilton RE.
TLIC is a party to an Automatic Retrocession Pool Agreement (the Reinsurance Pool) with
Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the
World. The agreement provides for automatic retrocession of coverage in excess of Optimum Res
retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. TLICs
maximum exposure on any one insured under the Reinsurance Pool is $50,000. As of January 1, 2008,
the Reinsurance Pool stopped accepting new cessions.
Effective September 29, 2005, FLAC and Wilton Re executed a binding letter of intent whereby
both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole
Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis.
The letter of intent was executed on a retroactive basis to cover all applicable business issued by
FLAC subsequent to January 1, 2005. Wilton Re agreed to provide various commission and expense
allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Re as they
are collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement for new business
issued after the termination date.
To the extent that the reinsurance companies are unable to meet their obligations under the
reinsurance agreements, TLIC remain primarily liable for the entire amount at risk.
F-23
Table of Contents
Reinsurance assumed and ceded amounts are as follows:
2009 | 2008 | |||||||||||||||
TLIC | Old TLIC | FLAC | Total | |||||||||||||
Premiums assumed |
$ | 31,943 | $ | | $ | | $ | | ||||||||
Benefits assumed |
10,599 | | | | ||||||||||||
Commissions and expense allowances |
113 | | | | ||||||||||||
Reserve credits assumed |
48,319 | | 47,979 | 47,979 | ||||||||||||
Inforce amount assumed |
25,916,794 | | 27,972,812 | 27,972,812 | ||||||||||||
Premiums ceded |
548,986 | 8,379 | | 8,379 | ||||||||||||
Commissions and expense allowances |
31,604 | | | | ||||||||||||
Benefits ceded |
222,425 | 15,761 | | 15,761 | ||||||||||||
Reserve credits ceded |
785,411 | 3,899 | 547,836 | 551,735 | ||||||||||||
Inforce amount ceded |
47,349,732 | 23,576,690 | 20,716,162 | 44,292,852 |
9. PROPERTY AND EQUIPMENT
TLICs home office property that appeared on the balance sheet in property and equipment at
December 31, 2008 was leased to a third party in December 2009 and was reclassified due to the
change of usage in December 2009 and now appears as investment real estate.
A summary of property and equipment at December 31, 2009 and 2008 is as follows:
2009 | 2008 | |||||||
Land and improvements |
$ | 27,064 | $ | 2,679,000 | ||||
Furniture and fixtures |
100,990 | 97,990 | ||||||
Total property and equipment |
128,054 | 2,776,990 | ||||||
Less accumulated depreciation |
(45,705 | ) | (29,168 | ) | ||||
Property and equipment net of accumulated depreciation |
$ | 82,349 | $ | 2,747,822 | ||||
10. LEASES
The Company leases approximately 2,517 square feet of office space pursuant to a three-year
lease that began July 1, 2008, leased approximately 200 square feet on a month to month basis
during 2009 and leased 950 square feet of office space effective December 15, 2009 that terminates
December 31, 2010. Under the terms of the leases, the monthly rent expense for the 2,517 square
feet is $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010 and $3,251
from July 1, 2010 through June 30, 2011 and the month to month lease is $300 per month and the 950
square feet is $1,225 per month. The Company incurred rent expense of $43,809 and $31,562 for the
years 2009 and 2008, respectively. Future minimum lease payments are $53,084 and $19,507 for the
years 2010 and 2011, respectively.
TLIC occupied approximately 7,500 square feet of its building in Topeka, Kansas until December
2009. Effective December 24, 2009, TLIC entered into a five year lease with a tenant for this space
with an option to renew for five additional years. The monthly lease payments are as follows: 2010
are $8,888, 2011 and 2012 are $9,130 and 2013 and 2014 are $9,371. TLIC has leased 10,000 square
feet under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice
to terminate the lease by the lessee. The lease agreement calls for minimum monthly base lease
payments of $15,757.
Effective August 29, 2005, TLIC executed a lease agreement with a tenant for 2,500 square
feet. The base lease period commenced on September 1, 2005 and will end on August 31, 2010. The
lease will automatically renew, if not terminated on or after August 15, 2010, for another five
years with a 90 day notice to terminate the lease by the lessee. The lease agreement calls for
minimum monthly base lease
F-24
Table of Contents
payments of $4,332 through August 31, 2010. The lease payments will decrease to $3,100 per
month for the period September 1, 2010 through August 31, 2015.
The future minimum lease payments to be received under non cancelable lease agreements are
approximately $142,170, $109,563, $109,563, $112,461 and $112,461 for the years 2010 through 2014,
respectively.
11. SHAREHOLDERS EQUITY AND STATUTORY ACCOUNTING PRACTICES
The insurance subsidiary is domiciled in Oklahoma and prepares its statutory financial
statements in accordance with statutory accounting practices prescribed or permitted by the
Oklahoma Department of Insurance. Prescribed statutory accounting practices include publications of
the NAIC, state laws, regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. Statutory accounting practices
primarily differ from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefit liabilities using different actuarial assumptions and valuing
investments, deferred taxes, and certain assets on a different basis.
The statutory net loss for TLIC amounted to $882,176 for the year ended December 31, 2009. The
statutory net loss for Old TLIC was $238,936 for the year ended December 31, 2008. The statutory
surplus of TLIC was $4,327,428 at December 31, 2009 and the statutory surplus of Old TLIC and FLAC
at December 31, 2008 was $2,242,226 and $2,700,455, respectively.
Old TLIC and TLIC are subject to Oklahoma laws and FLAC was subject to Kansas laws which limit
the amount of dividends that insurance companies can pay to stockholders without approval of the
respective Department of Insurance. The maximum dividend, which may be paid in any twelve-month
period without notification or approval, is limited to the lesser of 10% of statutory surplus as of
December 31 of the preceding year or the net gain from operations of the preceding calendar year.
Cash dividends may only be paid out of surplus derived from realized net profits. Based on these
limitations, there is no capacity to pay a dividend in 2010 without prior approval. There were no
dividends paid or a return of capital to the parent company in 2009 and 2008.
12. SEGMENT DATA
FASB guidance 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 this guidance.
F-25
Table of Contents
The Company operates in three segments as shown in the following table. The Company has a life
insurance segment, consisting of the operations of TLIC, and a premium financing segment,
consisting of the operations of FTCC and SIS. The asset segment for year 2008 information includes
values relating to FLAC allocated to the life and annuity insurance operations. Results for the
parent company, after elimination of intercompany amounts, are allocated to the corporate segment.
For the years ended December 31, | ||||||||
2009 | 2008 | |||||||
Revenues: |
||||||||
Life and annuity insurance operations |
$ | 7,898,665 | $ | 1,619,020 | ||||
Premium finance operations |
642,729 | 505,543 | ||||||
Corporate operations |
1,398 | 116,845 | ||||||
Total |
$ | 8,542,792 | $ | 2,241,408 | ||||
Income (loss) before income taxes: |
||||||||
Life and annuity insurance operations |
$ | 219,889 | $ | (132,603 | ) | |||
Premium finance operations |
(619,613 | ) | 913 | |||||
Corporate operations |
(441,528 | ) | (373,994 | ) | ||||
Total |
$ | (841,252 | ) | $ | (505,684 | ) | ||
Depreciation and amortization expense: |
||||||||
Life and annuity insurance operations |
$ | 858,035 | $ | 118,336 | ||||
Premium finance operations |
5,218 | 3,611 | ||||||
Corporate operations |
2,843 | 3,544 | ||||||
Total |
$ | 866,096 | $ | 125,491 | ||||
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Segment asset information as of: |
||||||||
Assets: |
||||||||
Life and annuity insurance operations |
$ | 45,153,138 | $ | 37,823,321 | ||||
Premium finance operations |
3,925,683 | 4,867,683 | ||||||
Corporate operations |
738,022 | 889,913 | ||||||
Total |
$ | 49,816,843 | $ | 43,580,917 | ||||
F-26
Table of Contents
13. ACQUISITION OF FIRST LIFE AMERICA CORPORATION
Pursuant to the terms of a stock purchase agreement, on December 23, 2008, the Company
acquired 100% of the outstanding common stock of First Life America Corporation from an
unaffiliated company (the FLAC Acquisition). The FLAC acquisition was accounted for as a
purchase. Results of operations are not included in the consolidated financial statements for the
year ended December 31, 2008. The Company acquired FLAC to expand its insurance operations in
additional states and FLAC had insurance policies in force similar to the product that TLIC is
currently selling.
The aggregate purchase price for the FLAC acquisition was approximately $2,695,000 (including
direct cost associated with the acquisition of approximately $195,000). The FLAC acquisition was
financed with the working capital of FTFC. On December 31, 2008, FTFC made FLAC a 15 year loan in
the form of a surplus note in the amount of $250,000 with an interest rate of 6%, with interest
payable monthly. In the event of liquidation, and in all other situations, the claims under the
surplus note are subordinated to policyholder, claimant and beneficiary claims as well as debts
owed to all other classes of creditors, other than surplus note holders, and that all repayment of
principal and payment of interest are not payable and shall not be paid until approved by the
Kansas Insurance Commissioner.
The acquisition of FLAC is summarized as follows:
Assets acquired: |
||||
Fixed maturities |
$ | 17,878,764 | ||
Equity securities |
213,752 | |||
Commercial mortgage loans |
1,315,401 | |||
Investment real estate |
372,000 | |||
Policy loans |
253,092 | |||
Other long term investments |
4,464,280 | |||
Cash and cash equivalents |
971,359 | |||
Certificate of deposit |
100,000 | |||
Accrued investment income |
344,671 | |||
Recoverable from reinsurers |
857,291 | |||
Value of insurance business acquired |
2,509,950 | |||
Property and equipment |
2,679,000 | |||
Deferred federal tax asset |
456,232 | |||
Other assets |
363,615 | |||
$ | 32,779,407 | |||
Liabilities acquired: |
||||
Policyholders account balances |
20,803,147 | |||
Future policy benefits |
8,395,450 | |||
Policy claims |
288,819 | |||
Other liabilities |
596,757 | |||
30,084,173 | ||||
Fair value of net assets acquired |
$ | 2,695,234 | ||
F-27
Table of Contents
The following unaudited pro forma information has been prepared to present the results of
operations of the Company assuming the acquisition of First Life America Corporation had occurred
at the beginning of the years ended December 31, 2008. This pro forma information is supplemental
and does not necessarily present the operations of the Company that would have occurred had the
acquisitions occurred on those dates and may not reflect the operations that will occur in the
future:
Historical | Historical | Pro Forma | ||||||||||||||
2008 (Unaudited) | FTFC | FLAC | Adjustments | Pro Forma | ||||||||||||
Revenue |
$ | 2,241,408 | $ | 4,968,271 | $ | 275,867 | $ | 7,485,546 | ||||||||
Income (loss) before extraordinary items |
$ | (504,852 | ) | $ | (933,867 | ) | $ | 743,258 | $ | (695,461 | ) | |||||
Net income (loss) |
$ | (504,852 | ) | $ | (933,867 | ) | $ | 743,258 | $ | (695,461 | ) | |||||
Net loss per share |
$ | (0.09 | ) | $ | (0.12 | ) |
14. CONCENTRATIONS OF CREDIT RISK
Credit risk is limited by diversifying the investments. The Company maintains cash and cash
equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures accounts up
to $250,000 at each banking institution. Other funds are invested in mutual funds that invest in
U.S. government securities. Uninsured balances aggregate $1,975,925 at December 31, 2009. The
Company has not experienced any losses in such accounts. The company has lottery prize receivables
due from the states of Massachusetts and Illinois in the amount of $2,345,406 and $1,047,617,
respectively.
15. REVOLVING LINE OF CREDIT
On April 30, 2009, FTCC renewed and modified its loan agreement with the First National Bank
of Muskogee, to increase the revolving loan amount to $3,600,000. The loan bears interest on the
outstanding principal amount for each interest period at a rate per annum equal to the sum of the
J.P. Morgan Chase Prime Rate at all times in effect plus the Prime Rate Margin of .25 of one
percent. The rate shall have a floor of no less than 5% at any time. FTFC is a guarantor on the
loan. The loan matures May 31, 2010. At December 31, 2009, the outstanding balance on the loan was
$1. The maximum amount that has been borrowed is $100,000.
16. CONTINGENT LIABILITIES
Guaranty fund assessments may be taken as a credit against premium taxes over a five-year
period. These assessments, brought about by the insolvency of life and health insurers, are levied
at the discretion of the various state guaranty fund associations to cover association obligations.
It is managements opinion that the effect of any future assessments would not be material to the
financial position or results of operations of the Company because of the use of premium tax
offsets.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Company in connection with the offering of the
securities being registered are as follows:
SEC filing fee |
$ | 784 | ||
Agent recruitment and training |
340,000 | |||
Legal fees and expenses |
40,000 | |||
Accounting fees and expenses |
40,000 | |||
Printing and mailing |
20,000 | |||
Transfer agent fees |
10,000 | |||
Miscellaneous |
49,216 | |||
Total |
$ | 500,000 | ||
Item 14. Indemnification of Directors and Officers.
Our Bylaws require indemnification to the extent permitted by law of any director,
officer, employee, and agent who is a party or is threatened to be made a party to any action,
suit, or proceeding if he or she acted in good faith and in a manner he or she reasonably believed
to be in, or not opposed to the best interests of, the Company. Insofar as indemnification for
liability arising under the Securities Act may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
Item 15. Recent Sales of Unregistered Securities.
The Company sold 2,000,000 common shares at $.10 per share to its organizing shareholders
in April of 2004 for total proceeds of $200,000, in reliance upon exemptions from registration
provided by Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated
thereunder. No underwriter was involved in connection with the issuance of our shares, and we paid
no finders fees in the April 2004 private placement. On May 21, 2004, we undertook a private
placement of 1,000,000 shares of common stock for gross proceeds of $1,250,000. This private
placement, which was concluded on August 31, 2004, was conducted in reliance upon exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder. No underwriter was involved in connection with the issuance of our shares,
and we paid no finders fees in the private placement. On June 22, 2005 the Company registered
2,550,000 shares to be sold at $5.00 per share in an intrastate public offering with the Oklahoma
Securities Commission for gross proceeds in the amount of $12,750,000 with a 10% oversale
provision. The offering was sold by issuer agents registered with the Oklahoma Securities
Commission. That offering was completed on February 23, 2007 with gross proceeds of $14,025,000
including the 10% oversale. The offering was sold pursuant to an exemption from registration
provided by Section 3(a)(11) of the Securities Act, and Rule 147 promulgated thereunder.
Item 16. Exhibits and Financial Schedules.
(a) Exhibits
See the Exhibit Index immediately following the signature page hereto, which is
incorporated by reference as if fully set forth herein.
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(b) Financial Statement Schedules
None.
Item 17. Undertakings.
The registrant undertakes:
(1) | To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement: | |
(i) | To include any prospectus required by Section 10(a)(3) of the Securities Act; | ||
(ii) | To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and | ||
(iii) | To include any additional or changed material information on the plan of distribution. | ||
(2) | That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. | |
(3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. | |
(4) | That, for the purpose of determining liability under the Securities Act to any purchaser: | |
Each prospectus filed by the registrant pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. | ||
The undersigned registrant hereby undertakes, for purposes of determining any liability under the Securities Act, each filing of the registrants annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plans annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. | ||
The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X and are not set forth in the prospectus, to deliver, or cause to be delivered to each such person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. | ||
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Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. | ||
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this
registration to be signed on its behalf by the undersigned, thereunto duly authorized in Tulsa,
Oklahoma on May 17, 2010
FIRST TRINITY FINANCIAL CORPORATION an Oklahoma corporation |
||||
May 17, 2010 | By: | /s/ Gregg Zahn | ||
Gregg Zahn, President and Chief | ||||
Executive Officer | ||||
May 17, 2010 | By: | /s/ William Lay | ||
William Lay, Treasurer, Chief | ||||
Financial Officer and Chief Accounting Officer | ||||
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints each of Gregg
Zahn and William Lay, or any of them, as his true and lawful attorney-in-fact and agent, each with
full power of substitution and resubstitution, for him and in his name, place and stead, in any and
all capacities, to sign this Registration Statement on Form S-1 and any and all amendments
including post-effective amendments thereto, and all other documents in connection therewith, with
the Securities and Exchange Commission, necessary or advisable to enable the registrant to comply
with the Securities Act, and any rules, regulations and requirements of the Securities and Exchange
Commission, in respect thereof, in connection with the registration of the securities described
herein which are the subject of such Registration Statement, as the case may be, which amendments
may make such changes in such Registration Statement, as the case may be, as such attorney may deem
appropriate, granting unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing necessary or advisable to be performed or done in connection
with any or all of the above-described matters, as fully as each of the undersigned could do in
person, hereby ratifying and approving all acts of any such attorney or substitute.
Pursuant to the requirements of the Securities Act, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||||
By
|
/s/Gregg Zahn |
President, Chief Executive Officer and Director | May 17, 2010 |
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Signature | Title | Date | ||||
*
|
Chairman of the Board and Director | May 17, 2010 | ||||
/s/ William S. Lay |
Treasurer, Chief Financial Officer, Chief Accounting Officer, Controller and Director | May 17, 2010 | ||||
* | Secretary and Director | May 17, 2010 | ||||
* | Director | May 17, 2010 | ||||
* | Director | May 17, 2010 | ||||
* | Director | May 17, 2010 | ||||
* | Director | May 17, 2010 | ||||
* | Director | May 17, 2010 | ||||
* | Director | May 17, 2010 | ||||
* | Director | May 17, 2010 | ||||
*By
|
/s/ Gregg Zahn |
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EXHIBIT INDEX
Exhibit No. | Description | |||
3.1 | Amended Certificate of Incorporation,
incorporated by reference to
Exhibit 3.1 to the Companys Current
Report on Form 8-K filed June 17, 2009. |
|||
3.2 | By-laws, as amended and restated,
incorporated by reference to
Exhibit 3.1 to the Companys Current
Report on Form 8-K filed May 1, 2009. |
|||
4.1 | Specimen Stock Certificate,
incorporated by reference to Exhibit 4
to the Companys Registration Statement
on Form 10SB12G filed April 30, 2007. |
|||
5.1 | ** | Opinion of Cooper & Newsome PLLP. |
||
10.1 | Administrative Service Agreement
between TLIC (formerly FLAC) and IHLIC,
incorporated by reference to
Exhibit 10.1 to the Companys Current
Report on Form 8-K filed June 17, 2009. |
|||
10.2 | Lease Agreement, incorporated by
reference to Exhibit 10.2 to the
Companys Registration Statement on
Form 10SB12G filed April 30, 2007. |
|||
10.3 | Reinsurance Agreement with Investors
Heritage Life Insurance Company is
incorporated by reference to
Exhibit 10.3 to the Companys
Registration Statement on
Form 10SB12G/A filed July 23, 2007 |
|||
10.4 | Reinsurance Agreement with Munich
American Reinsurance Company is
incorporated by reference to
Exhibit 10.4 to the Companys
registration statement on
Form 10SB12G/A filed July 23, 2007 |
|||
10.5 | Employment Agreement of Gregg Zahn,
President, dated October 30, 2007,
incorporated by reference to
Exhibit 10.5 to the Companys Quarterly
Report on Form 10-QSB filed November
14, 2007. |
|||
10.6 | Amendment to Employment Agreement of
Gregg Zahn, President dated March 13,
2008, incorporated by reference to
Exhibit 10.1 to the Companys Current
Report on form 8-K filed April 14,
2008. |
|||
10.7 | First Amendment to Lease Agreement
between First Trinity Financial
Corporation and Amejak Limited
Partnership dated July 1, 2008,
incorporated by reference to
Exhibit 10.6 to the Companys Annual
report on Form 10-K filed April 14,
2009. |
|||
10.8 | Lease Agreement dated July 10, 2006
between First Life America Corporation
and the United States of America,
incorporated by reference to
Exhibit 10.7 of the Companys Annual
Report on Form 10-K filed April 14,
2009. |
|||
10.9 | Lease Agreement dated August 2, 2006
between First Life America Corporation
and the United States of America,
incorporated by reference to
Exhibit 10.8 of the Companys Annual
Report on Form 10-K filed April 14,
2009. |
|||
10.10 | Employment Agreement of William S. Lay,
dated April 18, 2009, incorporated by
reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K
filed April 22, 2009. |
|||
10.11 | Loan agreement between First Trinity
Capital Corporation and First National
Bank of Muskogee dated March 12, 2009,
incorporated by reference to the
companys Quarterly Report on form 10-Q
filed May 15, 2009. |
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Table of Contents
Exhibit No. | Description | |||
10.12 | Loan guaranty agreement between First Trinity
Capital Corporation and First National Bank of
Muskogee dated March 12, 2009, incorporated by
reference to the companys Quarterly Report on form
10-Q filed May 15, 2009. |
|||
10.13 | Administrative Services Agreement between First
Life America Corporation and Investors Heritage
Life Insurance Company dated June 16, 2009,
incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed June 17,
2009. |
|||
10.14 | First Amendment to Administrative Services
Agreement between Trinity Life Insurance Company
and Investors Heritage Life Insurance Company
incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed June 17,
2009. |
|||
10.15 | Amendment to Employment Agreement of William S. Lay
dated April 23, 2010, incorporated by reference to
Exhibit 10.1 of the Companys Current Report of Form 8-K filed April 28, 2010. |
|||
21.1 | Subsidiaries of First Trinity Financial Corporation. |
|||
23.1 | ** | Consent of Cooper & Newsome PLLP (included as part
of its opinion filed as Exhibit 5.1 hereto). |
||
23.2 | * | Consent of Kerber, Eck and Braeckel, LLP. |
||
24.1 | Powers of Attorney (included in the signature pages
hereto, and incorporated herein by reference) |
|||
99.1 | Oklahoma Insurance Holding Company Disclaimer of
Control of Gregg Zahn, incorporated by reference to
Exhibit 99.1 to the Companys Registration
Statement on Form 10SB12G filed on April 20, 2007. |
|||
99.2 | Form of Promotional Shares Escrow Agreement (six
year restriction), is incorporated by reference to
Exhibit 99.2 to the Companys Registration
Statement on Form 10SB12G filed April 20, 2007. |
|||
99.3 | Form of Promotional Shares Escrow Agreement (four
year restriction), is incorporated by reference to
Exhibit 99.3 to the Companys Registration
Statement on Form 10SB12G filed on April 20, 2007. |
|||
99.4 | Termination of Oklahoma Insurance Holding Company
Disclaimer of Control between the Oklahoma
Department of Insurance and Gregg Earl Zahn dated
August 2, 2007 is incorporated by reference to
Exhibit 99.4 to the Companys Form 10-K filed on
March 31, 2008. |
|||
99.5 | First Life America Corporation unaudited financial
statements for the period ending September, 30,
2008, incorporated by reference to the Companys
Form 10-K filed on April 14, 2009. |
|||
99.6 | First Life America Corporation audited financial
statements for the years ended December 31, 2007
and 2006, incorporated by reference to the
Companys Form 10-K filed on April 14, 2009. |
|||
99.7 | Pro forma condensed financial information for the
acquisition of First Life America Corporation on
December 23, 2008, incorporated by reference to the
Companys Form 10-K filed on April 14, 2009. |
|||
99.8 | Form R Oklahoma Redomestication Application of
First Life America Corporation, incorporated by
reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K filed June 17, 2009. |
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Exhibit No. | Description | |||
99.9 | Completion of acquisition of First Life America
Corporation, , incorporated by reference to
Exhibit 99.1 to the Companys Current Report on
Form 8-K filed January 26, 2009. |
|||
99.10 | * | Subscription Agreement |
||
99.11 | ** | Impoundment Agreement |
* | filed herewith | |
** | To be filed by amendment |
vii