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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 September 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 September 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> <S> <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>
September 30 December 31
1996 1995
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities -- at amortized cost
(market: 1996, $2,813; 1995, $2,289) $ 2,508 $ 2,203
Held for sale -- at market
(cost: 1996, $79,646; 1995, $73,601) 79,556 73,491
Common stock 1 1
Mortgage loans on real estate:
Unaffiliated 1,298 1,417
Policy loans 276 246
Short-term investments 197 597
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TOTAL INVESTMENTS 83,836 77,955
Cash and cash equivalents 1,397 1,107
Accrued investment income 2,226 671
Deferred policy acquisition costs 1,098 1,901
Property and equipment 318 319
Intangible assets 8,467 8,636
Agent advances 163 233
Other assets 649 447
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TOTAL ASSETS $98,154 $91,269
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $59,906 $56,486
Other policy benefits 527 577
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TOTAL POLICY LIABILITIES AND ACCRUALS 60,433 57,063
Accrued expenses and other liabilities 305 487
Federal income tax payable - current 705 353
Federal income tax payable - deferred 1,748 819
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TOTAL LIABILITIES 63,191 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) 3,562 1,146
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TOTAL STOCKHOLDERS' EQUITY 34,963 32,547
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TOTAL LIABILITIES AND EQUITY $98,154 $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 Nine Months
Ended Ended
September 30 September 30 September 30 September 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 $ 2,689 $ 2,407 $ 7,312 $ 6,113
Universal life and investment
product policy charges 364 300 1,626 886
Net investment income 1,454 1,444 4,106 4,428
Net realized and unrealized investment (losses) 838 (106) 3,649 825
Other income 43 1,144 198 1,550
------- ------- ------- -------
$ 5,388 $ 5,189 $16,891 $13,802
BENEFITS, CLAIMS, AND EXPENSES
Policy benefits and claims:
Traditional life and accident
and health insurance $ 712 $ 839 $ 2,279 $ 1,920
Universal life and investment
products 119 58 795 640
Change in life and A&H insurance
reserves for future benefits 1,517 1,213 4,476 4,299
Amortization of deferred policy
acquisition costs 734 (115) 2,373 733
Commissions 99 203 366 481
Operating costs and expenses 865 1,001 2,816 3,207
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$ 4,046 $ 3,199 $13,105 $11,280
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NET INCOME BEFORE TAX $ 1,342 $ 1,990 $ 3,786 $ 2,522
Federal Income Tax Expense (562) (33) (1,370) (118)
NET INCOME $ 780 $ 1,957 $ 2,416 $ 2,404
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NET INCOME PER COMMON SHARE $ 0.05 $ 0.15 $ 0.17 $ 0.19
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,426 12,926 14,426 12,926
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's Omitted)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30 September 30
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ 2,416 $ 2,404
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in Life and A&H reserves 4,476 4,298
Revenues from policy fund charges (1,626) (715)
Depreciation 89 150
Amortization 170 408
Net change in book value of securities 106 1
Net realized (gains) losses on
investments (3,649) (825)
Purchase of trading securities (10,833,697) (10,891,326)
Sales of trading securities 10,831,028 10,879,909
Amortization of policy acquisition
costs 2,373 733
Change in unearned premiums 26 (39)
Change in agent advances 69 (149)
(Increase) decrease in accrued
investment income (1,555) (257)
Increase (decrease) in accrued
policy benefits and claims (76) (609)
Increase (decrease) in federal income
taxes payable 1,281 148
Change in other assets and other
liabilities (415) (3,628)
Capitalization of deferred policy
acquisition costs (1,570) (1,154)
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NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES $ (554) (10,651)
INVESTMENT ACTIVITIES
Purchases of investments and loans $ (483) (41,872)
Sales of investments 592 1,835
Maturities of investments 137 58,049
Receipts from repayment of loans 115 313
(Purchases) sales of property and
equipment (88) (154)
Proceeds from sale of property and equipment 0 41
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NET CASH USED BY INVESTING $ 273 18,212
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's Omitted)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30 September 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 2,207 5,941
Return of policyholder account
balances on universal life policies (1,636) (23,418)
Traditional reserves received from acquired
company 0 10,906
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NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 571 $(6,759)
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INCREASE (DECREASE) IN CASH 290 802
Cash and cash equivalents at
beginning of period 1,107 593
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,397 $ 1,395
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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
SEPTEMBER 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
<PAGE> 8
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 nine month period ending September 30, 1996 was $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 the nine month period ending September 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 nine months of 1994 ending September 30, 1994, the Company
reinsured three blocks of annuity business through three separate, but similar
coinsurance agreements which added approximately $18,700,000 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 nine months of 1996 for these blocks of business.
The total invested assets increased approximately $5,900,000 in the first nine
months of 1996 due to the realized capital gains and the collection of bond
accrued investment income during May. Total assets increased approximately
$7,000,000 during the first nine months of 1996 as a result of the capital gains
and the bond interest collected less approximately $803,000 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 which is used in determining the amount of amortization for
these products.
Policy reserves increased approximately $3,400,000 for the nine months ended
September 30, 1996. The increase is due mostly to the increase in the
traditional life production.
Stockholders' equity is $34,963,000 at September 30, 1996 which is an increase
of $2,416,000 since December 31, 1995, resulting from the gain from operations
for the nine month period ending September 30, 1996.
Revenues for the nine month period ended September 30, 1996, were $16,891,000
compared to revenues of $13,802,000 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 $322,000, or 7% for the nine month period ended
September 30, 1996 as compared to the nine month period ended September 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 $359,000 in the nine month
period ended September 30, 1996 over the same period ended September 30, 1995.
The increase is due to the greater number of traditional policies inforce. The
larger 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 twenty-four months. Universal life and investment product claims
increased $155,000 between the periods ending September 30, 1996 and September
30, 1995. Paid claims were lower by $502,000 for the 1996 period over the 1995
period and the release of policy account balances were smaller by $657,000
resulting in the increase.
Change in life and accident and health insurance reserves for future benefits
increased $177,000 for the nine month period ended September 30, 1996 as
compared to the like period ended September 30, 1995. Most of this increase is
due to the increase in traditional policies produced over the past twelve month
period.
Amortization of deferred policy acquisition costs increased $1,640,000 for the
nine month period ended September 30, 1996 compared to the same period ended
September 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 $115,000 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 increase in deferred policy
acquisition cost on new policies would also have some effect on this decrease.
Operating costs and expenses decreased $391,000 in the nine month period ending
September 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.
9
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Included in other income for the second quarter 1996 is $72,000 due to final
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.
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 nine month period and three month
period ending September 30, 1996 and September 30, 1995 except as otherwise
discussed.
10
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 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 11/1/96 /s/ John A. Hackney
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John A. Hackney
President
Date 11/1/96 /s/ Gary L. Atnip
------------------- ----------------------------------
Gary L. Atnip
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 79,556
<DEBT-CARRYING-VALUE> 2,508
<DEBT-MARKET-VALUE> 2,813
<EQUITIES> 1
<MORTGAGE> 1,298
<REAL-ESTATE> 0
<TOTAL-INVEST> 83,836
<CASH> 1,397
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,098
<TOTAL-ASSETS> 98,154
<POLICY-LOSSES> 59,906
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 527
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 98,154
8,938
<INVESTMENT-INCOME> 4,106
<INVESTMENT-GAINS> 3,649
<OTHER-INCOME> 198
<BENEFITS> 3,074
<UNDERWRITING-AMORTIZATION> 2,373
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 3,786
<INCOME-TAX> 1,370
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,416
<EPS-PRIMARY> 0.17
<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>
