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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 March 31, 1997
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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 March 31, 1997 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>
<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 10
</TABLE>
<PAGE> 3
Part I. Financial Information
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($000's Omitted)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities -- at amortized cost
(market: 1997, $2,493; 1996, $2,531) $ 2,506 $ 2,506
Held for sale -- at market
(cost: 1997, $90,345; 1996, $89,497) 90,189 89,399
Mortgage loans on real estate:
Unaffiliated 67 68
Policy loans 207 197
Short-term investments 217 174
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TOTAL INVESTMENTS 93,186 92,344
Cash and cash equivalents 575 1,036
Accrued investment income 2,547 861
Deferred policy acquisition costs 3,308 3,100
Property and equipment 290 296
Intangible assets 8,353 8,410
Agent advances 53 24
Other assets 541 507
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TOTAL ASSETS $108,853 $106,578
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 64,248 $ 62,319
Other policy benefits 433 391
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TOTAL POLICY LIABILITIES AND ACCRUALS 64,681 62,710
Accrued expenses and other liabilities 595 747
Federal income tax payable - current 664 1,460
Federal income tax payable - deferred 1,191 1,108
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TOTAL LIABILITIES 67,131 66,025
COMMITMENTS AND CONTINGENCIES (See Note 3)
STOCKHOLDERS' EQUITY
No par value; authorized 20,000,000
shares; issued and outstanding
14,426,096 shares in 1997 and 1996 31,738 31,738
Additional paid in capital 540
Treasury stock (337) (337)
Retained earnings (deficit) 9,781 9,152
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TOTAL STOCKHOLDERS' EQUITY 41,722 40,553
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TOTAL LIABILITIES AND EQUITY $108,853 $106,578
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31 March 31
1997 1996
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<S> <C> <C>
REVENUE:
Insurance revenue:
Traditional life and accident
and health insurance premiums $ 3,224 $ 2,132
Universal life and investment
product policy charges 251 308
Net investment income 1,341 1,223
Net realized and unrealized investment
gains (losses) 1,095 142
Other (net) 137 191
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$ 6,048 $ 3,996
BENEFITS, CLAIMS, AND EXPENSES
Policy benefits and claims:
Traditional life and accident
and health insurance $ 957 $ 811
Universal life and investment
products 318 527
Change in life and A&H insurance
reserves for future benefits 2,287 1,026
Amortization of deferred policy
acquisition costs 519 285
Commissions 41 99
Operating costs and expenses 1,191 1,137
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$ 5,313 $ 3,885
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NET INCOME BEFORE TAX $ 735 $ 111
Federal income tax expense (benefit) 107 (60)
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$ 628 $ 171
NET INCOME ======= =======
NET INCOME PER COMMON SHARE $ 0.04 $ 0.01
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,426 14,426
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<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>
Three Months
Ended
March 31 March 31
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ 628 $ 171
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in Life and A&H reserves 2,287 1,026
Revenues from policy fund charges (252) (308)
Depreciation 27 31
Amortization 57 57
Net change in book value of securities 273 80
Net realized (gains) losses on
investments (1,095) (142)
Purchase of trading securities (5,328,094) (4,552,823)
Sales of trading securities 5,328,128 4,553,034
Amortization of policy acquisition
costs 519 285
Change in unearned premiums 43 8
Change in agent advances (29) 13
(Increase) decrease in accrued
investment income (1,687) (1,344)
Increase (decrease) in accrued
policy benefits and claims 1 6
Increase (decrease) in federal income
taxes payable (713) (95)
Change in other assets and other
liabilities (196) 119
Capitalization of deferred policy
acquisition costs (727) (352)
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NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES $ (830) $ (234)
INVESTMENT ACTIVITIES
Purchases of investments and loans $ (145) $ 237
Sales of investments 100 22
Maturities of investments - 12
Receipts from repayment of loans - 18
(Purchases) sales of property and
equipment (20) (26)
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NET CASH USED BY INVESTING $ (65) $ 263
</TABLE>
See accompanying notes to consolidated financial statements.
<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>
Three Months
Ended
March 31 March 31
1997 1996
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<S> <C> <C>
FINANCING ACTIVITIES
Additional paid in capital $ 540 $ -
Receipts from universal life
policies credited to policyholder
account balances 558 590
Return of policyholder account
balances on universal life policies (664) (586)
------ ------
NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 434 $ 4
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INCREASE (DECREASE) IN CASH (461) 33
Cash and cash equivalents at
beginning of period 1,036 1,107
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 575 $1,140
====== ======
</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.
See accompanying notes to consolidated financial statements.
<PAGE> 7
Item 1. Financial Information (continued)
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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, 1996.
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. This will have
an effect on the Company's earnings in the second quarter of 1996 of
approximately one and a half cent to two cents 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 cent per share outstanding. The
gain is due to the release of certain liabilities which were recorded in excess
of this final settlement.
7
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
The total invested assets reflects an increase in the first quarter of 1997 of
$842,000 due to realized and unrealized gains and additional paid in capital of
$540,000. Total assets increased approximately $2,275,000 during the first
quarter of 1997 due to the increase in invested assets and the increase in
accured investment income.
Policy reserves increased approximately $2,000,000 for the quarter ended March
31, 1997 as the result of increase in premium revenue.
Stockholders' equity is $41,722,000 at March 31, 1997 which is an increase of
$1,169,000 since December 31, 1996, resulting from the gain from operations for
the first quarter of 1997 of $628,000 and the additional paid in capital of
$540,000 contributed by the major stockholder of the Company. This contribution
was in connection with the refund of the nonrefundable option of $541,000
required by the Missouri Insurance Department, the domiciled state of the
option purchaser. The $541,000 was reflected as an expense liability at
December 31, 1996 and paid in January 1997.
Revenues for the three months ended March 31, 1997, were $6,048,000 compared
with revenues of $3,996,000 for the same period in 1996. The increase is due
to the increase in traditional premiums and investment gains. The investment
gains increased due to the market interest rate changes during the period on
United States Government Bonds.
Net investment income increased $118,000, or 10% for the three month period
ended March 31, 1997 as compared to the three month period ended March 31,
1996. This increase is primarily the result of the growth of the invested
assets over the past twelve months.
Traditional policy benefits and claims increased $146,000 in the three month
period ended March 31, 1997 over the same period ended March 31, 1996. The
increase is due primarily to the increase in the writing of new traditional
policies over the past twenty four months. Universal life and investment
product claims decreased $209,000 between the periods ending March 31, 1997 and
March 31, 1996. Paid claims were lower by $229,000 for the 1997 period over
the 1996 period and the release of policy account balances were smaller by
$20,000 resulting in the increase.
Change in life and accident and health insurance reserves for future benefits
increased $1,261,000 for the three months ended March 31, 1997 as compared to
the like period ended March 31, 1996. Most of the increase is due to the
increase in traditional premiums written.
8
<PAGE> 10
Amortization of deferred policy acquisition costs increased $234,000 for the
three months ended March 31, 1997 compared to the same period ended March 31,
1996. The increase in deferred expenses due to increase in new policy
production for traditional policies over the past twenty four months has caused
an increase in the amortization in the deferred expenses.
Commissions decreased $58,000 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 increased $54,000 in the three month period ending
March 31, 1997 over the same period in 1996. The increase in operating cost is
generally due to the increase in administration, taxes and selling expense
associated with the increase in the production of new policies.
The estimated federal income tax liabilities as reflected on the balance sheet
represents amounts calculated on the consolidated financial statement amounts.
The current federal income tax payable represents amounts appearing on the life
companies financials and the deferred income tax payable is due to the timing
differences between financial and tax basis.
9
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27 Financial Data Schedule (SEC use only)
10
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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
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(Registrant)
Date 5/8/97
---------------------- /s/ John A. Hackney
------------------------------
John A. Hackney
President
Date 5/8/97 /s/ Gary L. Atnip
---------------------- ------------------------------
Gary L. Atnip
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 90,189
<DEBT-CARRYING-VALUE> 2,506
<DEBT-MARKET-VALUE> 2,531
<EQUITIES> 0
<MORTGAGE> 67
<REAL-ESTATE> 0
<TOTAL-INVEST> 93,186
<CASH> 575
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,308
<TOTAL-ASSETS> 108,853
<POLICY-LOSSES> 64,248
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 433
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 108,853
3,475
<INVESTMENT-INCOME> 1,341
<INVESTMENT-GAINS> 1,095
<OTHER-INCOME> 137
<BENEFITS> 1,275
<UNDERWRITING-AMORTIZATION> 519
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 735
<INCOME-TAX> 107
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 628
<EPS-PRIMARY> 0.04
<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>
