<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 0-6896
FORTUNE NATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
State of Incorporation: IRS Employer Id.:
Pennsylvania 25-1229620
Address of Principal Executive Office:
10555 Richmond Avenue
Houston, Texas 77042
Issuer's telephone number: (713) 974-2242
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[x] Yes [ ] No.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 10, 1995
----- ------------------------------
Common Stock, Par Value $1.00 2,616,984
This Form 10-QSB contains a total of 14 pages, including any exhibits.
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet - June 30, 1995 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Six Months Ended
June 30, 1995 and 1994 (Unaudited) 5
Condensed Consolidated Statements of
Operations - Three Months Ended
June 30, 1995 and 1994 (Unaudited) 6
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1995 and 1994 (Unaudited) 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Part II. Other Information:
Item 6. Exhibit 27-Financial Data Schedule 14
</TABLE>
2
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PART I. ITEM 1. FINANCIAL INFORMATION
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
INVESTMENTS:
Fixed maturities available for sale $28,768,144
Equity securities (at market) 176,885
Mortgage loans 792,278
Real estate 1,957,150
Policy loans 6,827,197
Short-term investments 1,696,355
-----------
Total investments 40,218,009
Accrued investment income 533,228
Reinsurance receivable 33,817,485
Accounts receivable (less allowance
for uncollectible accounts of
$82,824) 188,583
Deferred policy acquisition costs 1,838,116
Property and equipment
(less accumulated depreciation of
$523,170) 85,477
Costs in excess of net assets of
acquired business (less accumulated
amortization of $1,545,852) 3,238,075
Other assets 969,805
-----------
$80,888,778
===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
LIABILITIES:
Policy liabilities:
Future policy benefits $64,993,362
Contract claims 607,869
-----------
65,601,231
Other policyholders' funds 1,764,021
Federal income tax payable
Current 460,004
Deferred 895,953
Deferred gain on reinsurance 2,174,474
Note payable 1,437,500
Other liabilities 748,695
-----------
Total liabilities 73,081,878
-----------
Minority interest 1,840,498
-----------
Preferred stock of subsidiary 1,850,000
-----------
STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share,
authorized 4,000,000 shares,
issued 2,804,445 shares 2,804,445
Additional paid-in capital 5,136,435
Accumulated deficit (4,246,363)
Treasury stock, at cost, 187,461 shares (147,465)
Net unrealized investment gains, net
of taxes of $465,053 569,350
-----------
Total stockholders' equity 4,116,402
-----------
$80,888,778
===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
REVENUES:
Premiums and other considerations $ 990,745 332,078
Net investment income 739,909 573,850
Net realized investment gains 5,859 31,699
Reinsurance expense allowance 971,272 811,547
Amortization of deferred gain (loss)
on reinsurance 183,244 (53,242)
Other income 57,993 33,693
----------- ---------
Total revenues 2,949,022 1,729,625
----------- ---------
BENEFITS AND EXPENSES:
Death benefits 208,138 43,312
Other benefits 912,693 437,255
Commissions and general expenses 1,402,557 958,273
Interest expense 101,423 --
Amortization of deferred policy
acquisition costs 56,739 19,203
Amortization of costs in excess of net
acquired business 106,774 84,194
----------- ---------
Total benefits and expenses 2,788,324 1,542,237
----------- ---------
Income before federal income tax
expense and minority interest in
losses (earnings) of subsidiary 160,698 187,388
Federal income tax expense (benefit)
Current 1,018,864 49,526
Deferred (1,038,019) 226,776
----------- ---------
Income (loss) before minority interest
in losses (earnings) of subsidiary 179,853 (88,914)
Preferred dividends of subsidiary 63,312 47,117
Minority interest in losses (earnings)
of subsidiary (85,219) 12,420
----------- ---------
Net income (loss) $ 31,322 (123,611)
=========== =========
Net income (loss) per common share: $ .01 (.05)
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
REVENUES:
Premiums and other considerations $ 544,251 189,230
Net investment income 343,518 267,569
Net realized investment gains (losses) (388) 31,699
Reinsurance expense allowance 497,119 429,362
Amortization of deferred gain (loss)
on reinsurance 105,924 (26,933)
Other income 43,744 19,419
---------- -------
Total revenues 1,534,168 910,346
---------- -------
BENEFITS AND EXPENSES:
Death benefits 66,426 4,458
Other benefits 572,525 229,194
Commissions and general expenses 644,708 545,728
Interest expense 36,788 --
Amortization of deferred policy
acquisition costs 28,998 6,483
Amortization of costs in excess of net
acquired business 53,387 42,098
---------- -------
Total benefits and expenses 1,402,832 827,961
---------- -------
Income before federal income tax
expense and minority interest in losses
of subsidiary 131,336 82,385
Federal income tax expense
Current 8,288 24,763
Deferred 177,782 98,381
---------- -------
Loss before minority interest in losses
of subsidiary (54,734) (40,759)
Preferred dividends of subsidiary 32,393 23,559
Minority interest in losses of
subsidiary 9,943 4,867
---------- -------
Net loss $ (77,184) (59,451)
========== =======
Net loss per common share: $ (.03) (.02)
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
INCREASE (DECREASE) IN CASH (UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from operations $ 31,322 (123,611)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization (2,511) 188,607
Realized gains on sale of investments (5,859) (31,699)
Deferred federal income tax expense
(benefit) (1,038,018) 226,776
Decrease in reinsurance receivable 917,326 524,889
Decrease in accrued investment income 56,221 5,775
Increase in accounts receivable (160,994) (2,403)
Decrease (increase) in other assets 3,221 (15,680)
Decrease in future policy benefits (63,057) (36,076)
Decrease in contract claims (73,718) (126,610)
Increase (decrease) in other
policyholders' funds 24,526 (9,519)
Increase (decrease) in other liabilities 307,106 (17,093)
Increase (decrease) in minority interest 49,097 (39,303)
----------- ----------
Net cash provided by operating activities 44,662 544,053
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments and
principal repayments on mortgage loans 1,074,964 1,921,868
Purchases of investments (3,725,420) (1,896,020)
Net decrease in policy loans 125,416 79,353
Net decrease (increase) in short-term
investments 11,436,715 (67,401)
Purchase of property and equipment (24,746) (3,671)
Purchase of subsidiary, net of cash
acquired (1,952,300) (169,555)
----------- ----------
Net cash provided (used) by investing
activities 6,934,629 (135,426)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable 1,500,000 --
Principal payments on notes payable (8,362,500) --
Deposits on policy contracts 641,340 497,198
Withdrawals from policy contracts (1,143,417) (922,794)
----------- ----------
Net cash used in financing activities (7,364,577) (425,596)
----------- ----------
Net decrease in cash (385,286) (16,969)
Cash at beginning of period 385,286 62,564
----------- ----------
Cash at end of period $ -- 45,595
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1995 and the condensed
consolidated statements of operations and cash flows for the six month periods
ended June 30, 1995 and 1994, have been prepared by Fortune National Corporation
(the "Company"), without audit. In the opinion of management, all adjustments
(which, except as may be noted below, include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
changes in cash flows at June 30, 1995 and for all periods presented have been
made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1995 Annual
Report to Stockholders. The results of operations for the six month periods
ended June 30, 1995 and 1994 are not necessarily indicative of the operating
results for the full year.
2. EARNINGS PER SHARE
Earnings per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding (2,616,984 at
June 30, 1995 and June 30, 1994).
3. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1995, stockholders' equity changed for the
following items: Increase in net unrealized investment gains of $1,089,377 and
net income of $31,322.
4. ACQUISITIONS
On February 2, 1995, the Company acquired 100% of the common stock of
Oakley-Metcalf Insurance Company ("Oakley-Metcalf"), a Texas-domiciled life
insurance company. The consideration paid for the stock of Oakley-Metcalf was
cash in the amount of $2,559,516. Concurrent with the acquisition of
Oakley-Metcalf, the Company fully reinsured all of Oakley-Metcalf's policies
(approximately 3,000 policies) with an unaffiliated life insurance company. The
obligations of this reinsurer under the related reinsurance agreement are
secured by a trust containing a $450,000 letter of credit. In connection with
the reinsurance agreement, Oakley-Metcalf transferred assets of $560,683 and
liabilities of $653,006 and recognized a deferred gain on reinsurance of
$92,323.
8
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. NOTE PAYABLE
On January 31, 1995, as a source of funds to repay the $5 million surplus
debenture issued in connection with the acquisition of Family Life Insurance
Company ("Family"), the Company's subsidiary, Acap Corporation ("Acap") borrowed
$1.5 million from Central National Bank of Waco, Texas. The note matures April
30, 1996 and renews April 30 of each year thereafter. The note bears interest
at a rate equal to the base rate of a bank plus 1%. Principal payments on the
note of $62,500 are due quarterly beginning April 30, 1995. The note is secured
by the Company's pledge of all the outstanding shares of Acap's subsidiary,
American Capitol Insurance Company ("American Capitol"). The loan agreement
contains certain restrictions and financial covenants. Without the written
consent of the bank, Acap may not incur any debt, pay common stock dividends or
sell any substantial amounts of assets. Also, American Capitol is subject to
minimum statutory earnings and capital and surplus requirements during the loan
term.
6. REINSURANCE
On January 4, 1995, Family increased the amount of reinsurance on each of its
life policies in force from 20% to 100%. The Company recorded a deferred gain
on reinsurance of $2,518,234 and an increase in the reinsurance receivable of
$2,809,418 on the transaction.
7. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments of $558,924 and $49,526 for federal income taxes were made for the
six months ended June 30, 1995 and 1994.
Cash payments of $348,262 for interest expense were made during the six months
ended June 30, 1995.
The following reflects assets acquired and liabilities assumed relative to the
acquisition of Oakley-Metcalf by the Company, the consideration given for such
acquisition and the net cash flow relative to such acquisition on
February 2, 1995.
<TABLE>
<CAPTION>
<S> <C>
Assets of acquired subsidiary $ 4,393,403
Liabilities of acquired subsidiary (1,833,887)
-----------
Cost of acquisition $ 2,559,516
===========
Cash paid for acquisition $ 2,559,516
===========
Net cash from acquisition:
Cash paid for acquisition $ 2,559,516
Cash of acquired company (607,216)
-----------
Net cash required by acquisition $ 1,952,300
===========
</TABLE>
The reinsurance agreements entered into by the Company with an unaffiliated
reinsurer covering 100% of each of Oakley-Metcalf's policies and the increase in
the Family life policies from 20% to 100% were non cash transactions. The
Company transferred assets of $2,023,654 and liabilities of $4,634,211 and
recognized a deferred gain on the reinsurance of $2,610,557 to be amortized over
the life of the policies.
9
<PAGE>
FORTUNE NATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT TRANSACTIONS
As noted in the 1994 Annual Report to Stockholders, the Company acquired three
life insurance companies during 1994. One of the acquisitions, which was
completed on August 31, 1994, was a material transaction.
On January 4, 1995, the Company increased the reinsurance on each of the life
policies in force in the life insurance subsidiary acquired August 31, 1994 from
20% to 100%. The Company recorded a deferred gain on reinsurance of $2,518,234
and an increase in the reinsurance receivable of $2,809,418 on the transaction.
On February 2, 1995, the Company, through one of its life insurance
subsidiaries, acquired a small life insurance company, Oakley-Metcalf Insurance
Company, for cash of approximately $2.6 million.
RESULTS OF OPERATIONS
Premiums and other considerations were 198% higher in the first half of 1995 in
comparison to the first half of 1994. Premiums and other considerations were
188% higher in the second quarter of 1995 in comparison to the second quarter of
1994. The increase in premiums is primarily attributable to the life insurance
premiums, net of reinsurance, from the acquisitions noted above. In addition,
during 1995 the Company received approximately $500,000 in single premiums
related to the conversion of three trust-funded prepaid funeral service plans to
insurance-funded plans.
Net investment income increased 29% in the first half of 1995 in comparison to
the first half of 1994 and increased 28% in the second quarter of 1995 in
comparison to the second quarter of 1994. The increase in the invested asset
base resulting from the acquisitions noted above resulted in the higher level of
net investment income.
The amortization of the deferred gain on reinsurance increased by $236,486 in
the first half of 1995 in comparison to the first half of 1994 and by $132,857
in the second quarter of 1995 in comparison to the second quarter of 1994. Of
the four acquisitions noted above, the Company fully reinsured the acquired life
policies of three of the acquired companies with a reinsurance company. The
reinsurance transactions resulted in total deferred gains in excess of $3
million. The amortization of these gains resulted in the increased amortization
income in 1995.
The Company retains the administration of the reinsured policies, for which it
receives an expense allowance from the reinsurance company. The reinsurance
transactions noted above resulted in a
10
<PAGE>
20% increase in the reinsurance expense allowance in the first half of 1995
compared to the first half of 1994 and a 16% increase in the reinsurance expense
allowance in the second quarter of 1995 compared to the second quarter of 1994.
Total policy benefits (i.e., death benefits and other benefits) were 38% of
total revenue for the first half of 1995 compared to 28% of total revenue for
the first half of 1994. Total policy benefits were 42% of total revenue for the
second quarter of 1995 compared to 26% of total revenue for the second quarter
of 1994. The higher ratio of total policy benefits to total revenue in 1995 is
attributable in part to increased mortality experience. Another significant
factor in the higher ratio is the composition of the acquired business. One of
the acquired companies is in the insurance-funded prepaid funeral services
business. Higher reserve requirements due to higher average attained ages in
this type of business result in a higher benefit to revenue ratio.
Total expenses (i.e., total benefits and expenses less total policy benefits)
were 57% of total revenue for the first half of 1995 compared to 61% of total
revenue for the first half of 1994. Total expenses were 50% of total revenue
for the second quarter of 1995 compared to 65% of total revenue for the second
quarter of 1994. The improved expense ratio is the result of economies of scale
from the acquisition activity noted above.
As a result of the higher revenues resulting from the acquired business and
economies of scale, pre-tax operating income was 59% higher during the second
quarter of 1995 in comparison to the same period in 1994. During the first
quarter of 1995, the Company had experienced a high level of death claims and
some significant non-recurring expenses. Consequently, pre-tax operating income
for the first half of 1995 was 14% lower than that of the first half of 1994.
As a result of the 1995 reinsurance transaction that increased the reinsurance
on each of the life policies in force in the life insurance subsidiary acquired
August 31, 1994 from 20% to 100%, the Company incurred current federal income
taxes of approximately $920,000.
Offsetting the increase in the current federal income tax expense, the
reinsurance transaction noted above resulted in a deferred federal income tax
benefit. The benefit related to the reinsurance transaction was the majority of
the total deferred federal income tax benefit recorded in 1995.
LIQUIDITY AND CAPITAL RESOURCES
On January 31, 1995, the Company repaid a $5 million surplus debenture issued to
the seller of the life insurance company acquired by the Company on August 31,
1995. At the time it was acquired, the life insurance company had a $3.3
million note
11
<PAGE>
payable outstanding. This note was also repaid on January 31, 1995.
The Company borrowed $1.5 million from a bank on January 31, 1995 as a source of
funds to repay the $5 million surplus debenture noted above. The note matures
April 30, 1996 and renews April 30 of each year thereafter. The note bears
interest at a rate equal to the base rate of a bank plus 1%. Principal payments
on the note of $62,500 are due quarterly, with the first payment made April 30,
1995. The note is secured by a pledge of all of the outstanding shares of
American Capitol Insurance Company ("American Capitol") owned by Acap
Corporation ("Acap"). The loan agreement contains certain restrictions and
financial covenants. Without the written consent of the bank, Acap may not
incur any debt, pay common stock dividends or sell any substantial amounts of
assets. Also, American Capitol is subject to minimum statutory earnings and
capital and surplus requirements during the loan term.
The operating activity of the Company takes place within Acap and the insurance
subsidiaries. Fortune, at the parent level, has no independent source of funds
to meet its cash needs. Acap is covering certain expenses of Fortune that are
incurred prior to the year 1996. Fortune is exploring alternatives for meeting
its cash needs, which are typically quite small in any one year, arising in 1996
and beyond.
During the first half of 1995, there was an improvement in net unrealized
investment losses of $1,089,377. The improvement in invested asset values was
primarily the result of a decline in market interest rates during the quarter.
While the Company reported net unrealized investment gains of $569,350 at June
30, 1995, it is not anticipated that the Company will liquidate investments
prior to their projected maturities in order to meet cash flow requirements.
The Company had positive cash flows from operating activities during the first
half of 1995.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report of Form 10-QSB for the quarter
ended June 30, 1995 to be signed on its behalf by the undersigned thereunto duly
authorized.
FORTUNE NATIONAL CORPORATION
Date: August 10, 1995
By:/s/ William F. Guest
--------------------------------
William F. Guest, President
By:/s/ John D. Cornett
--------------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 28,768,144
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 176,885
<MORTGAGE> 792,278
<REAL-ESTATE> 1,957,150
<TOTAL-INVEST> 40,218,009
<CASH> 0
<RECOVER-REINSURE> 33,817,485
<DEFERRED-ACQUISITION> 1,838,116
<TOTAL-ASSETS> 80,888,778
<POLICY-LOSSES> 65,601,231
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,764,021
<NOTES-PAYABLE> 1,437,500
<COMMON> 2,804,445
0
0
<OTHER-SE> 1,311,957
<TOTAL-LIABILITY-AND-EQUITY> 80,888,778
990,745
<INVESTMENT-INCOME> 739,909
<INVESTMENT-GAINS> 5,859
<OTHER-INCOME> 57,993
<BENEFITS> 1,120,831
<UNDERWRITING-AMORTIZATION> 56,739
<UNDERWRITING-OTHER> 1,402,557
<INCOME-PRETAX> 160,698
<INCOME-TAX> (19,155)
<INCOME-CONTINUING> 31,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,322
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
<RESERVE-OPEN> 103,940
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 208,138
<PAYMENTS-PRIOR> 43,312
<RESERVE-CLOSE> 206,119
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
