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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1995
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to
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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.
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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 MAY 12, 1995
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Common Stock, Par Value $1.00 2,616,984
This Form 10-QSB contains a total of 12 pages including any exhibits.
1
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FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
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<CAPTION>
Page No.
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance 3
Sheet - March 31, 1995 (Unaudited)
Condensed Consolidated Statements of 5
Operations - Three Months Ended
March 31, 1995 and 1994 (Unaudited)
Condensed Consolidated Statements of 6
Cash Flows - Three Months Ended
March 31, 1995 and 1994 (Unaudited)
Notes to Condensed Consolidated 7
Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of
Operations
Part II. Other Information:
Item 6. Exhibit 27 - Financial Data Schedule 12
</TABLE>
2
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PART I. ITEM 1. FINANCIAL INFORMATION
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1995
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<S> <C>
INVESTMENTS:
Fixed maturities available for sale $26,932,056
Equity securities (at market) 164,665
Mortgage loans 829,907
Real estate 1,960,313
Policy loans 6,914,728
Short-term investments 2,592,577
-----------
Total investments 39,394,246
Accrued investment income 470,998
Reinsurance receivable 34,510,415
Accounts receivable (less allowance
for uncollectible accounts of $82,852) 36,369
Deferred policy acquisition costs 1,867,114
Property and equipment
(less accumulated depreciation of $511,308) 82,478
Costs in excess of net assets of
acquired business (less accumulated
amortization of $1,351,120) 3,291,462
Other assets 963,859
-----------
$80,616,941
===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995
------------------------------------ -----------
<S> <C>
Liabilities:
Policy liabilities:
Future policy benefits $65,298,201
Contract claims 761,097
-----------
66,059,298
Other policyholders' funds 1,757,806
Current federal income tax payable 933,405
Deferred federal income tax payable 293,011
Deferred gain on reinsurance 2,258,979
Note payable 1,500,000
Other liabilities 839,984
-----------
Total liabilities 73,642,483
-----------
Minority interest 1,528,144
-----------
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 (4,169,179)
Treasury stock, at cost, 187,461 shares (147,465)
Net unrealized investment losses,
net of taxes of ($210,596) (27,922)
-----------
Total stockholders' equity 3,596,314
-----------
$80,616,941
===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
REVENUES:
Premiums and other considerations $ 446,494 142,848
Net investment income 396,391 306,281
Net realized investment gains 6,247 --
Reinsurance expense allowance 474,153 382,185
Amortization of deferred gain on
reinsurance 77,320 (26,309)
Other income 14,249 14,274
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Total revenues 1,414,854 819,279
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BENEFITS AND EXPENSES:
Death benefits 141,712 38,854
Other benefits 340,168 208,061
Commissions and general expenses 757,849 412,542
Interest expense 64,635 --
Amortization of deferred policy
acquisition costs 27,741 12,720
Amortization of costs in excess of net
acquired business 53,387 42,099
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Total benefits and expenses 1,385,492 714,276
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Income before federal income tax
expense and minority interest in
losses (earnings) of subsidiary 29,362 105,003
Federal income tax expense (benefit)
Current 1,010,576 24,763
Deferred (1,215,801) 128,395
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Income (loss) before minority interest
in losses (earnings) of subsidiary 234,587 (48,155)
Preferred dividends of subsidiary 30,919 23,558
Minority interest in losses (earnings)
of subsidiary (95,162) 7,553
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Net income (loss) $ 108,506 (64,160)
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Net income (loss) per common share: $ .04 (.02)
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</TABLE>
See accompanying notes to consolidated financial statements.
5
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FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
INCREASE (DECREASE) IN CASH (UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from operations $ 108,506 (64,160)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 16,793 99,251
Realized gains on sale of investments (6,247) --
Deferred federal income tax expense
(benefits) (1,215,801) 128,395
Decrease (increase) in reinsurance
receivable 224,396 574,336
Decrease in accrued investment income 118,451 19,357
Increase in accounts receivable (8,780) (3,582)
Decrease (increase) in other assets 8,744 (17,712)
Decrease in future policy benefits (52,596) (47,705)
Increase (decrease) in contract claims 79,510 (299,457)
Increase (decrease) in other
policyholders' funds 18,311 (12,602)
Increase (decrease) in other liabilities 853,820 (104,158)
Increase (decrease) in minority interest 77,521 (20,995)
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Net cash provided by operating activities 222,628 250,968
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments and
principal repayments on mortgage loans 892,682 405,038
Purchases of investments (3,116,259) --
Net decrease in policy loans 37,885 42,019
Net decrease in short-term investments 10,540,492 (361,144)
Purchase of property and equipment (2,715) (1,204)
Purchase of subsidiary, net of cash
acquired (1,952,300) (169,555)
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Net cash provided (used) by investing
activities 6,399,785 (84,846)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable 1,500,000 --
Principal payments on notes payable (8,300,000) --
Deposits on policy contracts 337,359 247,939
Withdrawals from policy contracts (545,058) (457,685)
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Net cash used in financing activities (7,007,699) (209,746)
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Net decrease in cash (385,286) (43,624)
Cash at beginning of period 385,286 62,564
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Cash at end of period $ -- 18,940
=========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 1995 and the
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 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 March 31, 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,
1994 Annual Report to Stockholders. The results of operations for the three
month periods ended March 31, 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
March 31, 1995 and March 31, 1994).
3. STOCKHOLDERS' EQUITY
During the three months ended March 31, 1995, stockholders' equity changed
for the following items: Reduction in net unrealized investment losses of
$492,105 and net income of $108,506.
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 $564,272
and liabilities of $653,006 and recognized a deferred gain on reinsurance of
$88,734.
7
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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 $2,500,404 and an increase in the reinsurance
receivable of $2,795,030 on the transaction.
7. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
There were no cash payments made for federal income taxes during the three
months ended March 31, 1995 and 1994.
Cash payments of $40,388 for interest expense were made during the three
months ended March 31, 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)
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Cost of acquisition $ 2,559,516
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Cash paid for acquisition $ 2,559 516
===========
Net cash from acquisition:
Cash paid for acquisition $ 2,559,516
Cash of acquired company (607,216)
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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 $4,612,792 and
recognized a deferred gain on the reinsurance of $2,589,138 to be amortized
over the life of the policies.
8
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FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
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
$2,500,404 and an increase in the reinsurance receivable of $2,795,030 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 more than tripled in the first quarter of
1995 in comparison to the first quarter of 1994. The increase in premiums is
attributable to the life insurance premiums, net of reinsurance, from the
acquisitions noted above.
Net investment income increased 29% in the first quarter of 1995 in
comparison to the first 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 $103,629 in
the first quarter of 1995 in comparison to the first quarter of 1994. Of the
four acquisitions noted above, as of March 31, 1995, the Company had 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 the first quarter of 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 24% increase in the
reinsurance expense allowance in the first quarter of 1995 compared to the
first quarter of 1994.
Total policy benefits (i.e., death benefits and other benefits) were 34% of
total revenue for the first quarter of 1995 compared to 30% of total revenue
for the first quarter of 1994. The Company experienced higher than
anticipated death claims during the first quarter of 1995. Due to the
relatively small number of policies in force with the Company, there can be
9
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fairly wide swings in the volume of policy benefits incurred.
Total expenses (i.e., total benefits and expenses less total policy benefits)
were 64% of total revenue for the first quarter of 1995 compared to 57% of
total revenue for the first quarter of 1994. General expenses for the first
quarter of 1995 included approximately $72,000 in non-recurring actuarial
charges related to consultations on the Company's acquisition program and
approximately $35,000 in expense related to the settlement of a policy
dispute.
Due to the higher level of death claims and the unusual expenses noted above,
income before federal income taxes was $75,641 lower in the first quarter of
1995 compared to the first quarter of 1994.
As a result of the 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 the first
quarter of 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, 1994. At the time it was acquired, the life insurance company had a $3.3
million note 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 beginning 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 majority-owned subsidiary of the Company. 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.
During the first quarter of 1995, there was an improvement in net unrealized
investment losses of $492,105. 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 losses of
$27,922 at March 31, 1995, it is not anticipated that the Company will need
to liquidate investments prior to their projected maturities in order to meet
its cash flow requirements. The Company had positive cash flows from
operating activities during the first quarter of 1995.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1995 to be signed on its behalf by the undersigned
thereunto duly authorized.
FORTUNE NATIONAL CORPORATION
Date: May 12, 1995
/S/ William F. Guest
By:________________________________
William F. Guest, President
/S/ John D. Cornett
By:________________________________
John D. Cornett, Treasurer
(Principal Accounting Officer)
11
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from
March 31, 1995 Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 26,932,056
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 164,665
<MORTGAGE> 829,907
<REAL-ESTATE> 1,960,313
<TOTAL-INVEST> 39,394,246
<CASH> 0
<RECOVER-REINSURE> 34,510,415
<DEFERRED-ACQUISITION> 1,867,114
<TOTAL-ASSETS> 80,616,914
<POLICY-LOSSES> 66,059,298
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,757,806
<NOTES-PAYABLE> 1,500,000
<COMMON> 2,804,445
0
0
<OTHER-SE> 791,869
<TOTAL-LIABILITY-AND-EQUITY> 80,616,914
446,494
<INVESTMENT-INCOME> 396,391
<INVESTMENT-GAINS> 6,247
<OTHER-INCOME> 14,249
<BENEFITS> 481,880
<UNDERWRITING-AMORTIZATION> 64,635
<UNDERWRITING-OTHER> 757,849
<INCOME-PRETAX> 29,362
<INCOME-TAX> (205,225)
<INCOME-CONTINUING> 108,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,506
<EPS-PRIMARY> .04
<EPS-DILUTED> 0
<RESERVE-OPEN> 103,940
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 141,712
<PAYMENTS-PRIOR> 38,854
<RESERVE-CLOSE> 76,002
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
