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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 0-6869
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 MAY 10, 1996
----- ---------------------------
Common Stock, Par Value $1.00 2,616,984
This Form 10-QSB contains a total of 13 pages including any exhibits.<PAGE>
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance 3
Sheet - March 31, 1996 (Unaudited)
Condensed Consolidated Statements of 5
Operations - Three Months Ended
March 31, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of 6
Cash Flows - Three Months Ended
March 31, 1996 and 1995 (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 13
<PAGE>
<TABLE>
PART I. ITEM 1. FINANCIAL INFORMATION
-------------------------------------
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<CAPTION>
ASSETS
------
1996
----
<S> <C>
Investments:
Fixed maturities available for sale $29,699,832
Equity securities (at market) 11,409
Mortgage loans 1,087,513
Real estate 1,494,819
Policy loans 6,364,445
Short-term investments 1,077,761
-----------
Total investments 39,735,779
Accrued investment income 458,466
Reinsurance receivables 33,253,764
Accounts receivable (less allowance
for uncollectible accounts of $82,918) 212,707
Deferred acquisition costs 1,752,002
Property and equipment
(less accumulated depreciation of $553,306) 113,286
Costs in excess of net assets of
acquired business (less accumulated
amortization of $1,706,008) 3,077,920
Other assets 1,240,454
-----------
$79,844,378
===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
1996
----
<S> <C>
LIABILITIES:
Policy liabilities:
Future policy benefits $64,175,844
Contract claims 801,243
-----------
Total policy liabilities 64,977,087
Other policyholders' funds 1,722,029
Deferred tax liability 2,112,319
Deferred gain on reinsurance 868,676
Note payable 1,250,000
Other liabilities 1,388,772
-----------
Total liabilities 72,318,883
-----------
Minority interest 1,768,295
-----------
Preferred stock of subsidiary 1,850,000
-----------
STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share,
authorized 4,000,000 shares,
issued 2,859,768 shares 2,859,768
Additional paid-in capital 5,098,262
Accumulated deficit (4,359,970)
Treasury stock, at cost, 242,784 shares (158,385)
Net unrealized investment gains,
net of taxes of $117,757 467,525
------------
Total stockholders' equity 3,907,200
------------
$79,844,378
============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Premiums and other considerations $ 345,889 446,494
Net investment income 307,467 368,266
Net realized investment gains 514 6,247
Reinsurance expense allowance 454,789 474,153
Amortization of deferred gain on reinsurance 17,682 77,320
Other income 14,073 14,249
---------- ----------
Total revenues 1,140,414 1,386,729
---------- ----------
BENEFITS AND EXPENSES:
Death benefits 128,619 141,712
Other benefits 282,492 340,168
Commissions and general expenses 565,282 729,724
Interest expense 28,905 64,635
Amortization of deferred acquisition costs 27,053 27,741
Amortization of costs in excess of net
acquired business 53,384 53,387
---------- ----------
Total benefits and expenses 1,085,735 1,357,367
---------- ----------
Income before federal income tax expense and
minority interest in earnings of subsidiary 54,679 29,362
Federal income tax expense (benefit)
Current 10,000 1,010,576
Deferred (54,555)(1,215,801)
--------- ----------
Income before minority interest earnings of
subsidiary 99,234 234,587
Preferred dividends of subsidiary 31,657 30,919
Minority interest in earnings of subsidiary (53,042) (95,162)
----------- ----------
Net income $ 14,535 108,506
=========== ==========
Net income per common share: $ .01 .04
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH (UNAUDITED)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,535 108,506
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 78,619 16,793
Realized gains on investments (514) (6,247)
Deferred federal income tax benefit (54,555) (1,215,801)
Decrease in reinsurance receivable 221,532 224,396
Decrease in accrued investment income 94,495 118,451
Increase in accounts receivable (93,154) (8,780)
Decrease (increase) in other assets (925,472) 8,744
Increase (decrease) in future policy
benefit liability 113,443 (52,596)
Increase in contract claim liability 22,863 79,510
Increase (decrease) in other
policyholders' funds liability (11,456) 18,311
Increase in other liabilities 711,262 853,820
Increase in minority interest 28,750 77,521
---------- ----------
Net cash provided by operating activities 200,348 222,628
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments and
principal repayments on mortgage loans 581,586 892,682
Purchases of investments available for sale (1,347,148) (3,116,259)
Net decrease in policy loans 270,001 37,885
Net decrease in short-term investments 632,986 10,540,492
Purchase of property and equipment (60,903) (2,715)
Purchase of subsidiary, net of cash acquired -- (1,952,300)
----------- -----------
Net cash provided by investing activities 76,522 6,399,785
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable -- 1,500,000
Principal payments on notes payable (62,500) (8,300,000)
Deposits on policy contracts 298,561 337,359
Withdrawals from policy contracts (638,802) (545,058)
----------- -----------
Net cash used in financing activities (402,741) (7,007,699)
----------- -----------
Net decrease in cash (125,871) (385,286)
Cash at beginning of year 125,871 385,286
----------- -----------
Cash at end of period $ -- --
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
6
<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 March 31, 1996 and the
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 1996 and 1995, 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, 1996
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 on Form 10-KSB. The results of operations for the
three month periods ended March 31, 1996 and 1995 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 by the weighted
average number of shares of common stock outstanding (2,616,984 at March 31,
1996 and March 31, 1995).
3. STOCKHOLDERS' EQUITY
--------------------
During the three months ended March 31, 1996, stockholders' equity changed
for the following items: Reduction in net unrealized investment gains of
$393,467, net income of $14,535, issuance of common stock $55,323, offset by
a reduction in additional paid in capital of $38,173 and an increase in
treasury stock of $10,920.
4. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
---------------------------------------------
Cash payments of $10,000 and $0 were made for federal income taxes during
the three months ended March 31, 1996 and 1995, respectively.
Cash payments of $32,320 and $40,388 for interest expense were made during
the three months ended March 31, 1996 and 1995, respectively.
The following reflects assets acquired and liabilities assumed relative to
the acquisition of Oakley-Metcalf Insurance Company ("Oakley-Metcalf") by
the Company, the consideration given for such acquisition and the net cash
flow relative to such acquisition on February 2, 1995.
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 of acquired company $ 607,216
Cash paid for acquisition (2,559,516)
------------
Net cash used by acquisition $(1,952,300)
============
On January 4, 1995, Family Life Insurance Company of Texas ("Family"), a
wholly-owned subsidiary of the Company increased the amount of reinsurance
on each of its life policies in force from 20% to 100%. On February 2,
1995, Oakley-Metcalf entered into a reinsurance agreement whereby Oakley-
Metcalf ceded 100% of each life policy with an unaffiliated life insurance
company. These transactions were both non-cash transactions. The Company
transferred assets of $2,020,065 and liabilities of $3,259,418 and
recognized a deferred gain on the reinsurance of $1,239,353 to be amortized
over the life of the policies.
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
Premiums and other considerations were 23% lower during the first quarter of
1996 in comparison to the first quarter of 1995. Premiums for the first
quarter of 1995 include approximately $202,000 in single premiums related to
the conversion of a trust-funded prepaid funeral service plan to an
insurance-funded plan. Excluding the trust conversion, premiums and other
considerations were 42% higher during the first quarter of 1996 in
comparison to the first quarter of 1995. The increase in premiums is
attributable to an expansion of the Company's marketing of final expense
life insurance and insurance-funded prepaid funeral service contracts.
Net investment income decreased 17% in the first quarter of 1996 in
comparison to the first quarter of 1995. Net investment income for the
first quarter of 1995 included approximately $35,000 in investment income
related to assets used at January 31, 1995 to repay $8.3 million in notes
payable.
The amortization of the deferred gain on reinsurance decreased by $59,638 in
the first quarter of 1996 in comparison to the first quarter of 1995. The
deferred gain on reinsurance is being amortized based upon the amount of
insurance in force under the reinsurance treaties to which the deferred gain
relates. During the first quarter of 1995, the reinsured policies
experienced an unusually high level of terminations. This resulted in a
higher than normal amortization of the deferred gain during that quarter.
The Company receives an expense allowance for administering certain blocks
of reinsured policies. The expense allowance received during the first
quarter of 1996 was 4% less than the expense allowance received during the
first quarter of 1995 due to normal policy attrition of the reinsured
policies.
Total policy benefits (i.e., death benefits and other benefits) were 36% of
total revenue for the first quarter of 1996 compared to 35% of total revenue
for the first quarter of 1995.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 59% of total revenue for the first quarter of 1996 compared
to 63% of total revenue for the first quarter of 1995. 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 unusual expenses noted above in the first quarter of 1995,
operating income (i.e., income before preferred dividends, federal income
taxes and minority interest) was 86% higher in the first quarter of 1996
compared to the first quarter of 1995.
11
<PAGE>
As a result of a transaction that increased the reinsurance from 20% to 100%
on each of the life policies in force in a life insurance subsidiary
acquired August 31, 1994, 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
--------------------------------
In connection with an acquisition, the Company's 63.7%-owned subsidiary,
Acap Corporation ("Acap") borrowed $1.5 million from a bank on January 31,
1995. The note had a principal balance of $1.25 million at March 31, 1996.
The note matured April 30, 1996. The bank granted a new note maturing April
30, 1997 under identical terms as the original note. 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. The note is secured by a
pledge of all of the outstanding shares of Acap's wholly-owned 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. Acap and American Capitol are in compliance with all
the restrictions and covenants of the loan.
During the first quarter of 1996, there was a decline in net unrealized
investment gains of $393,467. The decline in invested asset values was
primarily the result of an increase in market interest rates during the
quarter. 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 1996.
PLAN OF DISSOLUTION AND LIQUIDATION
-----------------------------------
As discussed in the Company's Annual Report on Form 10-KSB, the Company
expects to adopt a plan of dissolution and liquidation at its annual
stockholder meeting. The date of the annual stockholder meeting has not yet
been set.
Under the plan, the Company's stockholders are entitled, upon liquidation,
to receive, pro rata, the Company's sole asset, namely, 5,421 shares of
common stock of Acap. No fractional shares of Acap's common stock will be
issued. The Company's stockholders will have the option of selling their
"odd lot" shares of the Company's common stock to Acap or buying from Acap
enough of the Company's common stock to round up their holdings.
The Company has entered into an agreement with Acap to pay for the Company's
operating expenses through the expiration of the plan of dissolution and
liquidation. In exchange for its services, Acap received 55,323 shares of
the Company's common stock during the first quarter of 1996.
ACQUISITION PROSPECT
--------------------
On April 24, 1996, American Capitol signed a Letter of Intent to acquire,
through assumption reinsurance, the insurance in force of World Service Life
Insurance Company of America and its wholly-owned subsidiary, South Texas
Bankers Life Insurance Company. If the acquisition is consummated, the
Company plans on immediately reinsuring the acquired business on a 100%
coinsurance basis with an unrelated reinsurer. The Company plans on
retaining the administration of the policies in question, for which it will
receive an expense allowance from the reinsurer. An experience refund
formula in the coinsurance agreement returns to American Capitol 50% of the
profits generated by the reinsured policies once a threshold is exceeded.
Also, at American Capitol's option, the reinsured policies may be recaptured
at a price determined by the experience formula. The acquisition involves
approximately 24,000 policies, assets of approximately $24 million and a
purchase price of approximately $2.3 million (which is also approximately
the amount of the initial ceding allowance under the coinsurance agreement).
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, 1996 to be signed on its behalf by the undersigned
thereunto duly authorized.
FORTUNE NATIONAL CORPORATION
----------------------------
(Registrant)
Date: May 10, 1996 By:/s/ William F. Guest
---------------------------
William F. Guest, President
Date: May 10, 1996 By:/s/ John D. Cornett
---------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 29,699,832
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,409
<MORTGAGE> 1,087,513
<REAL-ESTATE> 1,494,819
<TOTAL-INVEST> 39,735,779
<CASH> 0
<RECOVER-REINSURE> 33,253,764
<DEFERRED-ACQUISITION> 1,752,002
<TOTAL-ASSETS> 79,844,378
<POLICY-LOSSES> 64,175,844
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 801,243
<POLICY-HOLDER-FUNDS> 1,722,029
<NOTES-PAYABLE> 1,250,000
0
1,850,000
<COMMON> 2,859,768
<OTHER-SE> 1,047,432
<TOTAL-LIABILITY-AND-EQUITY> 79,844,378
345,889
<INVESTMENT-INCOME> 307,467
<INVESTMENT-GAINS> 514
<OTHER-INCOME> 14,073
<BENEFITS> 128,619
<UNDERWRITING-AMORTIZATION> 27,053
<UNDERWRITING-OTHER> 565,282
<INCOME-PRETAX> 54,679
<INCOME-TAX> (44,555)
<INCOME-CONTINUING> 14,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,535
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
<RESERVE-OPEN> 778,380
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 128,619
<PAYMENTS-PRIOR> 141,712
<RESERVE-CLOSE> 801,243
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
