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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
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Commission File Number 0-18748
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Franklin American Corporation
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(Name of Small Business Issuer in Its Charter)
Tennessee 62-1365451
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
377 Riverside Drive, Franklin, Tennessee 37065
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(Address of Principal Executive Offices) (Zip Code)
(615) 790-0464
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 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.
Yes X No
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As of June 30, 1996 there were outstanding 14,426,096 shares of Issuer's common
stock, no par value per share including 162,350 shares of treasury stock.
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FRANKLIN AMERICAN CORPORATION
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. Other Information 11
</TABLE>
<PAGE> 3
Part I. Financial Information
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($000's Omitted)
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities -- at amortized cost
(market: 1996, $2,293; 1995, $2,289) $ 2,281 $ 2,203
Held for sale -- at market
(cost: 1996, $79,099; 1995, $73,601) 78,713 73,491
Common stock 1 1
Mortgage loans on real estate:
Unaffiliated 1,313 1,417
Policy loans 277 246
Short-term investments 309 597
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TOTAL INVESTMENTS 82,894 77,955
Cash and cash equivalents 1,041 1,107
Accrued investment income 780 671
Deferred policy acquisition costs 1,174 1,901
Property and equipment 296 319
Intangible assets 8,523 8,636
Agent advances 179 233
Other assets 429 447
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TOTAL ASSETS $95,316 $91,269
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $58,389 $56,486
Other policy benefits 568 577
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TOTAL POLICY LIABILITIES AND ACCRUALS 58,957 57,063
Accrued expenses and other liabilities 231 487
Federal income tax payable - current 680 353
Federal income tax payable - deferred 1,265 819
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TOTAL LIABILITIES 61,133 58,722
COMMITMENTS AND CONTINGENCIES (See Note 3)
STOCKHOLDERS' EQUITY
No par value; authorized 20,000,000
shares; issued and outstanding
14,426,096 shares in 1996 and 1995 31,738 31,738
Treasury stock (337) (337)
Retained earnings (deficit) 2,782 1,146
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TOTAL STOCKHOLDERS' EQUITY 34,183 32,547
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TOTAL LIABILITIES AND EQUITY $95,316 $91,269
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</TABLE>
See accompanying notes to consolidated financial statements.
2
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Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REVENUE:
Insurance revenue:
Traditional life and accident
and health insurance premiums $ 2,491 $ 2,088 $ 4,623 $ 3,706
Universal life and investment
product policy charges 954 296 1,262 586
Net investment income 1,429 1,522 2,652 2,984
Net realized and unrealized investment (losses) 2,669 460 2,811 931
Other income (36) 91 155 406
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$ 7,507 $ 4,457 $11,503 $ 8,613
BENEFITS, CLAIMS, AND EXPENSES
Policy benefits and claims:
Traditional life and accident
and health insurance $ 756 $ 671 $ 1,567 $ 1,081
Universal life and investment
products 149 215 676 582
Change in life and A&H insurance
reserves for future benefits 1,933 1,430 2,959 3,086
Amortization of deferred policy
acquisition costs 1,354 542 1,639 848
Commissions 168 162 267 278
Operating costs and expenses 814 1,112 1,951 2,206
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$ 5,174 $ 4,132 $ 9,059 $ 8,081
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NET INCOME BEFORE TAX $ 2,333 $ 325 $ 2,444 $ 532
Federal Income Tax Expense (868) (70) (808) (85)
NET INCOME $ 1,465 $ 255 $ 1,636 $ 447
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NET INCOME PER COMMON SHARE $ 0.10 $ 0.02 $ 0.11 $ 0.03
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,426 12,926 14,426 12,926
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
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Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's Omitted)
<TABLE>
<CAPTION>
Six Months
Ended
June 30 June 30
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ 1,636 $ 448
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in Life and A&H reserves 2,959 3,086
Revenues from policy fund charges (1,262) (586)
Depreciation 60 103
Amortization 113 319
Net change in book value of securities 66 (1)
Net realized (gains) losses on
investments (2,811) (931)
Purchase of trading securities (7,674,669) (6,866,097)
Sales of trading securities 7,672,037 6,860,434
Amortization of policy acquisition
costs 1,639 848
Change in unearned premiums (5) 45
Change in agent advances 53 (139)
(Increase) decrease in accrued
investment income (108) (1,310)
Increase (decrease) in accrued
policy benefits and claims (4) (602)
Increase (decrease) in federal income
taxes payable 773 90
Change in other assets and other
liabilities (269) (2,462)
Capitalization of deferred policy
acquisition costs (913) (4,154)
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NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES $ (705) $ (10,909)
INVESTMENT ACTIVITIES
Purchases of investments and loans $ (88) $ (42,509)
Sales of investments 440 277
Maturities of investments 13 38,834
Receipts from repayment of loans 104 176
(Purchases) sales of property and
equipment (36) (104)
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NET CASH USED BY INVESTING $ 433 $ (3,326)
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's Omitted)
<TABLE>
<CAPTION>
Six Months
Ended
June 30 June 30
1996 1995
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<S> <C> <C>
FINANCING ACTIVITIES
Purchase of treasury stock $ 0 $ (188)
Receipts from universal life
policies credited to policyholder
account balances 1,285 5,339
Return of policyholder account
balances on universal life policies (1,079) (1,165)
Traditional reserves received from acquired
company 0 10,817
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NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 206 $ 14,803
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INCREASE (DECREASE) IN CASH (66) 568
Cash and cash equivalents at
beginning of period 1,107 593
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,041 $ 1,161
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</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Disclosure of accounting policy:
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased as part of its daily cash management activities
to be cash equivalents.
Note:
Effective January 1, 1995, the Company acquired an insurance holding company
whose primary asset was a life insurance company. Total purchase price was
$4,178,000 with $3,461,000 of the life insurance company assets used as
consideration along with $717,000 cash. The Company purchased $6,000,000 of
newly issued common stock of the holding company. A portion of this cash was
used to purchase assets from the life insurance company subsidiary which was
used as consideration to the seller. The major portion of the remaining cash
was contributed by the holding company to it's life insurance subsidiary.
See accompanying notes to consolidated financial statements.
5
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Item 1. Financial Information (continued)
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Note 1.
The consolidated interim financial statements of Franklin American Corporation
and its subsidiaries ("the Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP"). Effective January 1, 1989
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from Sale of Investments". The
result of the operations for the period reported in this statement are in
conformity with the SFAS No. 97.
In the opinion of management, the attached unaudited financial statements
include all normal recurring adjustments necessary for a fair presentation of
the financial position, results of operations, and changes in financial
position of the Company. The results of operations for any interim period are
not indicative of results for the full year.
Note 2.
These consolidated interim financial statements should be read in conjunction
with the audited consolidated financial statements for December 31, 1995.
Note 3.
The Company leases space in the building formerly owned by the Company. The
lease is for a five year period effective August 1, 1994 and ending July 31,
1999. The Company also has certain short-term operating leases for various
pieces of equipment.
Note 4.
Effective January 1, 1995, the Company acquired an insurance holding company
whose primary asset was a life insurance company. Total purchase price was
$4,178,000 with $3,461,000 of the life insurance company assets used as
consideration along with $717,000 cash. The Company purchased $6,000,000 of
new issued common stock of the holding company. A portion of these funds was
used to purchase the assets from the life
6
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insurance company subsidiary which was used as consideration to the seller.
The major portion of the remaining cash was contributed by the holding company
to its life insurance subsidiary. The new company's transactions are reflected
in the consolidated financial statements of the Company. In April 1996, a
mutual final settlement of the consulting agreement and release of the
indemnification agreement was made with the majority stockholder of the
insurance holding company. The settlement involved a payment by the Company to
the majority shareholder of the purchased company of $250,000. The effect on
the Company's earnings for the six month period and the three month period both
ending June 30, 1996 was one and seven tenth cent ($0.017) per share
outstanding.
In April 1996, a final settlement was made with the shareholder of the life
insurance company acquired January 1, 1994. The Company paid the shareholder
$147,000. As a result of this transaction, the Company will recognize a gain
of approximately $72,000 or approximately one half ($0.005) cent per share
outstanding for both the six month period and three month period ending June
30, 1996. The gain is due to the release of certain liabilities which were
recorded in excess of the final settlement.
7
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Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
Effective January 1, 1995, the Company acquired an insurance holding company
whose principal asset was a life insurance company. This transaction increased
assets by a net amount of approximately $15,500,000 excluding goodwill and
deferred policy acquisition cost.
During the first six months of 1994 ending June 30, 1994, the Company reinsured
two blocks of annuity business through two separate, but similar coinsurance
agreements which added $14,415,000 to the assets of the Company. Subsequently,
in September 1995, the Pennsylvania Insurance Department rescinded the annuity
coinsurance agreements after placing the ceding company under formal
rehabilitation. Therefore, there are no comparative amounts in the first six
months of 1996 for these blocks of business.
The total invested assets reflects approximately $4,900,000 increase in the
first six months of 1996 due to the realized capital gains and the collection
of bond accrued investment income during May. Total assets increased
approximately $4,000,000 during the first six months of 1996 as a result of the
capital gains and the bond interest collected less approximately $727,000
decrease in deferred policy acquisition costs. Most of the decrease in
deferred policy acquisition costs was due to the large capital gains attributed
to the universal life and investment products line of business used in
determining the amount of amortization for this line of business.
Policy reserves increased approximately $1,900,000 for the six months ended
June 30, 1996. The increase is due mostly to the increase in the traditional
life production.
Stockholders' equity is $34,183,000 at June 30, 1996 which is an increase of
$1,636,000 since December 31, 1995, resulting from the gain from operations for
the six month period ending June 30, 1996.
Revenues for the six month period ended June 30, 1996, were $11,503,000
compared with revenues of $8,613,000 for the same period in 1995. The largest
increases occurred in net realized gains from the sale of securities,
traditional premiums due to increased production and universal life and
investment product charges resulting from amortization of deferred items
required due to the net realized capital gains.
Net investment income decreased $332,000, or 11% for the six month period ended
June 30, 1996 as compared to the six month period ended June 30, 1995. This
decrease is primarily the result of rescinding the annuity coinsurance
agreement discussed above requiring the return of investment assets.
8
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Traditional policy benefits and claims increased $486,000 in the six month
period ended June 30, 1996 over the same period ended June 30, 1995. The
increase is due to the large amount of traditional policies inforce. The large
inforce amount resulted from the acquisitions of two companies during 1994 and
1995 as well as the increase of new traditional policy production over the past
eighteen months. Universal life and investment product claims increased
$94,000 between the periods ending June 30, 1996 and June 30, 1995. Paid
claims were lower by $242,000 for the 1996 period over the 1995 period and the
release of policy account balances were smaller by $336,000 resulting in the
increase.
Change in life and accident and health insurance reserves for future benefits
decreased $127,000 for the six month period ended June 30, 1996 as compared to
the like period ended June 30, 1995. Most of this decrease is due to
rescinding the coinsurance agreement covering the annuity block of business.
Amortization of deferred policy acquisition costs increased $791,000 for the
six month period ended June 30, 1996 compared to the same period ended June 30,
1995. The greater amortization amount in 1996 over 1995 is the required
increase due to the large capital gains attributed to the universal life and
investment products. These capital gains increased the profit for this line of
business, which is one of the factors in determining the amount of the
amortization of policy acquisition costs for the universal life and investment
business.
Commissions decreased $11,000 due to an increase in the amount of policies
being sold with smaller first year commission rates which would include
annuities and single premium life policies. The amount of deferred policy
acquisition cost on new policies would also have some effect on this decrease.
Operating costs and expenses decreased $255,000 in the six month period ending
June 30, 1996 over the same period in 1995. Operating costs decreased in all
three subsidiary life insurance companies with the largest decrease occurring
in the life company acquired effective January 1, 1995. Included in the
operating costs is $250,000 paid during the second quarter 1996 representing a
final settlement of a consulting agreement involved with the insurance holding
company acquired January 1, 1995. The effect on earnings equals one and seven
tenths cent ($0.017) per share outstanding.
Included in other income for the second quarter 1996 is $72,000 due to
settlement of the life insurance company acquired January 1, 1994. The gain is
due to the release of certain liabilities which were recorded in excess of the
final settlement. The effect on earnings equals one half cent ($0.005) per
share outstanding.
9
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The federal income tax is the result of separate tax estimates for the life
companies and the holding companies. On the balance sheet, the current federal
income tax payable is applicable to the life companies as calculated on
statutory basis and the deferred income tax payable to the timing differences
between financial and tax basis.
All comments made above are the same for the six month period and three month
period ending June 30, 1996 and June 30, 1995 except as otherwise discussed.
10
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
Ex-27 Financial Data Schedule (for SEC use only)
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN AMERICAN CORPORATION
-----------------------------
(Registrant)
Date 8/8/96 /s/ John A. Hackney
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John A. Hackney
President
Date 8/8/96 /s/ Gary L. Atnip
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Gary L. Atnip
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 78,713
<DEBT-CARRYING-VALUE> 2,281
<DEBT-MARKET-VALUE> 2,293
<EQUITIES> 1
<MORTGAGE> 1,313
<REAL-ESTATE> 0
<TOTAL-INVEST> 82,894
<CASH> 1,041
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,174
<TOTAL-ASSETS> 95,316
<POLICY-LOSSES> 58,389
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 568
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 95,316
5,885
<INVESTMENT-INCOME> 2,652
<INVESTMENT-GAINS> 2,811
<OTHER-INCOME> 155
<BENEFITS> 2,243
<UNDERWRITING-AMORTIZATION> 1,639
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 2,444
<INCOME-TAX> 808
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,636
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
