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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT under Section 13 or 15(d) of the Securities and Exchange
Act of 1934 (fee required)
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT under Section 13 or 15(d) of the Securities and
Exchange Act of 1934 (no fee required)
For the transition period from _______________ to _______________ .
Commission file number 0-18748
FRANKLIN AMERICAN CORPORATION
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C>
Tennessee 62-1365451
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
</TABLE>
377 Riverside Drive, Fourth Floor
Franklin, Tennessee 37064
(Address of Principal Executive Offices) (Zip Code)
(615) 790-0464
(Issuer's telephone number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common stock,
no par value
(Title of Class)
Check whether the issuer: (1) 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. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.|X|
The Registrant's revenues for its most recent fiscal year were $26,906,370.
As of December 31, 1996, 14,263,746 shares of the Registrant's common stock,
excluding 162,350 shares held in treasury, were issued and outstanding, and the
aggregate market value of such shares held by nonaffiliates of the Registrant
on such date, based on the average of the high and low sales prices for the
fourth quarter of 1996 of $1.37 per share was $19,541,332.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III, items 9, 10, 11 and 12 of Form 10-KSB is
incorporated by reference from the Registrant's definitive proxy statement to
be filed in connection with the Annual Meeting of Shareholders to be held on or
about May 22, 1997.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Franklin American Corporation, a Tennessee corporation (the "Company"), formed
in September 1988, owns 100% of the outstanding capital stock of Franklin
American Life Insurance Company, a Tennessee life insurance company ("Franklin
American"), Family Guaranty Life Insurance Company, a Mississippi life
insurance company ("Family Guaranty"), Protective United Assets Incorporated
("PUA") domiciled in Mississippi, which owns 100% of the outstanding stock of
Franklin Protective Life Insurance Company f/k/a Protective Service Life
Insurance Company ("Protective") and Southern Heritage Life Insurance Company
(inactive), both Mississippi life insurance companies (collectively referred to
as the "Subsidiaries") and Franklin American Agency, Inc., a Tennessee
corporation ("Agency"). The Company conducts its business primarily through the
Subsidiaries, except for certain investment activities. During 1993 three
additional subsidiaries were added: AmCASH Mortgage, Inc. and its subsidiary,
AmCASH Equities, Inc., and Merchants Home Mortgage Corporation (now Franklin
American Mortgage Company). All three of these corporations were sold in 1994
(see section discussing Disposition of Assets). During 1994 the Company added
three additional life insurance subsidiaries: Farmers and Ranchers Life
Insurance Company, ("Farmers") an Oklahoma corporation, International Financial
Services Life Insurance Company ("IFSLIC"), a Missouri Corporation, and Family
Guaranty Life Insurance Company, a Mississippi life insurance company ("Family
Guaranty"). Two of the life insurance subsidiaries were sold later in 1994 (see
section discussing Disposition of Assets).
Franklin American is licensed to conduct life and health insurance business in
the states of Alabama, Arkansas, Florida, Georgia, Illinois, Kentucky,
Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee,
Virginia and West Virginia.
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Family Guaranty is licensed to sell life insurance in the state of Mississippi.
Protective is licensed to sell life insurance in the states of Alabama,
Arizona, Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas.
Franklin American has an A.M. Best rating of C+ (indicating a fair rating for
its financial size category), Family Guaranty has an A.M. Best rating of C
(indicating marginal rating for its financial size category), and Protective
has an A.M. Best rating of FPR-3 (indicating below average for its financial
size category).
INSURANCE PRODUCTS AND ANNUITIES
The Subsidiaries market products solely in the states in which they are
licensed with the current concentration in Tennessee, Alabama and Mississippi.
The portfolio primarily consists of individually written interest-sensitive
whole life, universal life, traditional whole life, excess interest whole life,
participating whole life, and annuities. The primary emphasis is on policies
with face amounts under $10,000 on a limited pay or single premium basis which
are often used to fund the funeral arrangements of the insured. Additionally, a
traditional "paid-up at age 95" policy is offered up to a face amount of
$20,000, at certain ages, in which premiums are paid until the earlier of death
of the insured or the insured reaching age 95. Interest-sensitive whole life is
a form of life insurance in which separately identified interest credits, other
than in connection with dividend accumulations, premium deposit funds or other
supplementary accounts and mortality and expense charges are made to a fund
accumulated in the policy. Participating whole life is a form of life insurance
in which at the discretion of the Company an annual dividend may be declared on
such policies. The policyholder has the option of receiving this dividend in
cash, applying it to future premium payments or purchasing additional
insurance. Universal life is the popular designation of that form of life
insurance in which both premiums and benefits may be changed at the option of
the policy owner. It operates by the creation of a fund to which premiums and
interest are added, and from which benefits and expenses are subtracted.
Universal life differs from traditional participating insurance in that the
amounts credited or charged are processed as nearly as possible at the time the
event occurs instead of at the end of the policy year and each such charge or
credit is separately identified. Excess interest policies are policies in which
separately identified interest credits are made in a manner comparable to the
dividends of participating policies but the credits are applied to purchase
paid-up additional insurance. Traditional life insurance is any form of life
insurance other than interest-sensitive, excess interest or universal life.
Term insurance is that form of life insurance which is issued to be in effect
for a specific number of years, after which it expires without value.
Because the Subsidiaries' primary products are marketed through funeral homes
as a method of prefunding funeral arrangements, a large number of these
policyholders are older persons with a higher than average mortality rate.
These products are priced based on this excess mortality and
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require a premium payment of 100% over the standard premium rate. The premium
charged has been actuarially determined on this basis so that the risk of
excess mortality is diminished. The limited underwriting involved in the
issuance of such policies has also been taken into account in the pricing of
these products.
However, the risks involved in writing life insurance for older persons can
include a higher rate of mortality beyond that which was assumed in pricing the
products. If the mortality experience exceeds the assumed rate, an insurer
faces additional risk of loss of investment income and attendant
non-recoverability of issuance expenses. This risk is inherent in all life
insurance.
Franklin American offers interest-sensitive universal life policies and term
life policies over a $10,000 face amount. These policies are more extensively
underwritten than the smaller face amount policies and are priced accordingly.
Only a small number of these policies were written during 1994, 1995 and 1996.
In 1996 less than one percent of all policies issued were for face amounts
greater than $10,000.
Franklin American and Protective also offer single premium and flexible premium
deferred annuities in amounts under $10,000. The majority of these annuities
are written on persons that for reasons of age or health cannot qualify for a
life insurance product. Both the single premium and flexible premium annuities
earn a current rate of interest set by Franklin American and Protective.
Payments are made upon the death of the insured and the proceeds are generally
utilized to fund funeral expenses. The "single premium annuity" product
requires payment of the full premium in a lump sum when the annuity is placed
in force. The payment dates and premium amounts for "flexible premium
annuities" can be made at any time for any amount during the period that the
annuity is in force. Other than with respect to premium payments, both types of
annuities are treated similarly as to interest credited, and both products are
subject to a surrender charge if there is a withdrawal of amounts. All of the
Company's annuities carry a minimum guaranteed interest rate of five percent of
the fund value. Those annuities placed in force after February 1993 by Franklin
American Life Insurance Company carry a minimum guaranteed interest rate of
three and one-half percent of the premiums. Upon the death of the insured,
Franklin American pays the greater of the premiums paid plus accrued interest
or the current fund value. All of the annuity policies are subject to
withdrawal by the holder prior to death. Upon withdrawal the holder receives
the current fund value minus a surrender charge equal to the excess interest
credited to the fund value above the guaranteed rate over the twelve months
immediately preceding withdrawal. The total surrender charges incurred by
Franklin American and Protective for 1996, 1995, and 1994 were $25,362, $7,472,
and $14,155, respectively.
The total of life insurance liabilities attributed to Franklin American
includes the fund value of each individual life insurance policy. The fund
value for each policy contains the actuarially computed mortality amount,
future policy expenses, future surrender charges and interest accumulated since
the policy was issued. Also included is the unamortized single premium life
loading amount. The
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loading amount is the difference between gross single premium collected and the
portion of premium going into the policy fund value. The amount of incurred but
unpaid claims on life insurance policies at the end of the year is included in
the life insurance liabilities. The interest rate credited to the fund values
on life policies in 1996 was between five and six percent depending on the type
of policy.
The annuity liabilities attributed to Franklin American and Protective include
the gross cash value (before surrender charges), and unamortized single premium
annuity loading. The interest rate credited in 1996 was five percent.
The majority of Franklin American and Protective life policies mature at age 95
or have no maturity date and either terminate upon the death of the insured (at
which time the benefit is paid) or when they are surrendered by the policy
owner. The annuity products have no maturity date.
Upon surrender of a life insurance policy (other than a term life insurance
policy), the policy owner is entitled to receive an amount equal to the cash
surrender value as stated in the policy minus any applicable surrender charges
and policy loans outstanding. Cash surrender values vary from policy to policy,
and are based on the non-forfeiture values calculations prescribed by the
National Association of Insurance Commissioners. For the annuity products, the
surrender amount is equal to the fund value less the surrender charge. The
annuity surrender charge is excess interest credited to the fund value over the
guaranteed interest rate stated in the policy for the previous twelve months.
Because the average age of the Subsidiaries' policy owner is high, and the
purpose of purchasing these policies is generally to fund funeral expenses,
policyholders are not likely to surrender their policies. Aggregate payments
for surrenders of life and annuity policies (net of reinsurance) for the years
1996, 1995, and 1994 were $1,018,882, $1,383,117, and $42,443, respectively.
The large increase in 1996 and 1995 over 1994 was due to the surrenders by
Protective which was acquired in 1995.
Individual health insurance liabilities include unearned premiums, benefit
reserves, and incurred but unpaid claims.
New individual accident and health policies are no longer being offered by the
Subsidiaries. As a result of consistent losses on these products, management
terminated sales of individual accident and health products in May 1991. By the
end of 1996 there were only 63 of these policies remaining in force with
reserves totalling $29,945.
Family Guaranty's license in the state of Mississippi permits the writing of
policies with initial benefits up to five thousand dollars. This type of
license is referred to as an industrial life insurance license. Family Guaranty
issues both participating and non-participating policies.
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Industrial life insurance is a term used for small whole life policies
originally designed to have premiums collected by an agent in a designated area
referred to as a debit. Frequency of collection is usually weekly or monthly.
Premiums on these policies are priced to reflect the higher cost of collection.
Although there are policies still being collected by the debit agent, much of
the premium is being collected at the funeral homes or via the mail.
The Subsidiaries' net increase (decrease) in the face amount of policies in
force per period, which reflects sales of new insurance policies less deaths,
policy lapses and other terminations, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Universal Life $(2,421,793) $(2,504,683) $(1,636,038)
Whole Life (286,632) 2,481,274 1,631,633
Term Life (1,173,000) (244,898) 18,405
Industrial* 7,652,000 5,518 (546,000)
Annuities 494,615 (28,520) (548,158)
----------- ----------- -----------
Total 4,265,190 $ (291,309) $(1,080,158)
=========== =========== ===========
</TABLE>
* Acquired with Family Guaranty in 1994 and Protective in 1995.
The new business written by the Subsidiaries in 1996, 1995, and 1994 was
$18,330,000, $14,555,000, and $10,983,000, respectively. The increasing amounts
reflect the increased acceptance of the Subsidiaries' products in the
marketplace and the successful marketing plan which has been put in place. The
1995 and the 1994 amounts were affected by the acquisitions of Family Guaranty
in 1994 and Protective in 1995.
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Below is a summary of certain individual life policy data covering the years
1996, 1995, and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Number of life policies in force 69,817 69,181 31,085
Average size of life policies in force $ 2,282 $ 2,262(1) $ 2,528(1)
Number of claims on life policies 1,122 1,416 1,740
Amount on life policy claims $ 3,678,068 $ 3,115,000 $ 2,635,000
incurred
Persistency rate of life policies 93.4 91.0 93.9
Penalty charges for withdrawals $ 25,362 $ 7,472 $ 14,155
Numbers of surrenders, lapses, and 3,255 4,352 1,748
other reductions
Amount of surrenders, lapses, and $13,926,000 $27,317,000 $ 5,957,000
other reductions (in force)
Amount of policy loans outstanding $ 196,893 $ 245,714 $ 88,940
at December 31
</TABLE>
(1) Restated to correct amount.
The National Association of Insurance Commissioners ("NAIC") has developed the
Insurance Regulatory Information System (IRIS) of financial ratios to assist
state insurance departments in overseeing the financial condition of insurance
companies. The NAIC furnishes state insurance regulatory authorities the
financial ratio results annually. State insurance regulatory authorities
monitor these financial ratio results in reviewing the financial condition of
insurance companies. Deviation from the usual ranges generally leads to an
increased level of regulatory oversight. Ratio #1 is a general measurement of
the improvement or deterioration in a company's financial condition during the
year but excludes capital or surplus paid in during the year. Ratio #1A is the
same measurement calculation as Ratio #1 except that it does include capital or
surplus paid in during the year. Ratio #2 is a measurement of a company's
profitability including realized capital gains and losses. Ratio #3 has been
discontinued. Ratio #4 indicates if a company has adequate income to meet the
interest requirements of its reserves which is a key element in a company's
profitability. Ratio #5 measures the degree to which a company has acquired
nonadmitted assets, nonproductive assets or risky investments. Ratio #6
reflects the percentage of capital and surplus invested in real estate which
may be a source of financial difficulty since it may be non-income producing.
Ratio #7 reflects the percentage of a company's capital and surplus invested in
affiliates. Ratio #8 measures the percentage of commission and expenses
received on reinsurance ceded to other insurers less commissions and expenses
paid to other reinsurers on reinsurance assumed to capital and surplus. Ratio
#9 measures the percentage change in premiums from the prior year to current
year. Ratio #10 measures the average change in the percentage of total premium
from each line of business. Ratio #11 measures the average change in the
percentage of total cash and invested assets. Ratio #12 represents the change
in the reserving ratio for current and prior years with the reserving ratio
being the percentage of increase in reserves to renewal and single premiums.
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Set forth in the table below are Franklin American's ratios for the years 1996,
1995, and 1994 compared to the unusual value standards:
NAIC RATIOS FOR FRANKLIN AMERICAN
<TABLE>
<CAPTION>
Unusual Values
Equal to or
1996 1995 1994
---- ---- ----
Ratio Over Under Results Results Results
- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 10 37 -10*
1A. Gross change in capital and surplus 50 -10 10 37 -10*
2. Net gain to total income -- 0 8 NR 1
3. DISCONTINUED
4. Adequacy of investment income 900 125 205 N/A 182
5. Non-adm to admitted assets 10 -- 0 0 0
6. Total real estate and mortgage
loans to cash and invested assets 30 -- 0 0 --
7. Investments in affiliates to capital
and surplus 100 -- 1 0 0
8. Surplus relief
(over $5 million capital and
surplus) 30 -99 0 14 -10
($5 million or less capital and
surplus) 10 -10 -- -- --
9. Change in premium 50 -10 999* -99* 549*
10. Change in product mix 5 -- NA NR 9.9*
11. Change in asset mix 5 -- 0.1 6.7* 6.5*
12. Change in reserving ratio 20 -20 59* -81* -99*
===================================================================================================================
</TABLE>
* Indicates unusual values.
N/A Indicates not applicable.
NR Indicates no ratio.
In 1996, the unusual ratio #9 occurred due to the ceding back of the
approximately $20,000,000 block of annuity reserves as mentioned in
the 1995 unusual ratios for #9 in the paragraph below. Ratio #12
unusual ratio is due to the increase in first year premiums.
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In 1995, the unusual ratios #9, #10 and #12 are due to ceding back the
approximately $20,000,000 block of annuity reserves assumed in 1994. The
decrease in reserves for this block is also reflected as ceded premiums on the
statutory basis of accounting. Ratio #11 reflects as an unusual ratio since the
funds for the annuity block held in United States Treasury Bills as short-term
securities decreased when transferred back to the original insurer in 1995.
In 1994 the unusual ratios #1 and #1A are due to reserves required as a result
of actuarial asset to liability analysis resulting from the coinsurance of a
$20,000,000 block of annuity reserves during 1994; ratios #9 and #10 are also
due to the coinsurance of the $20,000,000 annuity block since assets received
are treated as premiums on the statutory basis of accounting; ratio #11 is a
result of the assets received in the coinsurance transaction being invested in
short-term securities, thereby affecting this calculation as called for in the
formula and ratio #12 was affected by greater deaths in 1994 than 1993 which
resulted in a larger reserve decrease; also the ceded premiums under
reinsurance contracts decreased which affected the calculations as required by
the formula.
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Set forth in the table below are Family Guaranty's ratios for the years 1996,
1995 and 1994 compared to the unusual value standards (Family Guaranty was
acquired in 1994):
NAIC RATIOS FOR FAMILY GUARANTY
Unusual Values
Equal to or
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Ratio Over Under Results Results Results
- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 11 15 -43*
1A. Gross change in capital and surplus 50 -10 52* 15 9
2. Net gain to total income -- 0 2 4 -10*
3. DISCONTINUED
4. Adequacy of investment income 900 125 168 N/A 171
5. Non-adm to admitted assets 10 -- 0 0 0
6. Total real estate and mortgage loans
to cash and invested assets 30 -- 0 0 2
7. Investments in affiliates to capital
and surplus 100 -- 0 5 0
8. Surplus relief
(over $5 million capital and
surplus) 30 -99 -- -- --
($5 million or less capital and
surplus) 10 -10 0 0 0
9. Change in premium 50 -10 20 9 41
10. Change in product mix 5 -- 0 0 0
11. Change in asset mix 5 -- .5 .9 5.4*
12. Change in reserving ratio 20 -20 -4 -12 50*
==========================================================================================================
</TABLE>
* Indicates unusual values.
N/A Indicates not applicable
For 1994 the unusual ratios #1 and #2 resulted from the increased
production of new business in 1994. Specifically, the increase in
first year commissions and increase in reserves were responsible for
the 1994 statutory loss reflected in ratios #1 and #2; ratio #11
reflects the move of cash to bond investments when comparing
investments of 1994
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with those of 1993; ratio #12 was due to the increase in reserves
caused by the first year premiums which are not used in the formula
for this ratio.
For 1995 there were no unusual ratios.
For 1996 ratio #1A reflected as unusual because of the $500,000
contributed to paid in surplus.
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Set forth in the table below are Protective's ratios for the years 1996 and
1995 compared to the unusual value standards (Protective was acquired in 1995):
NAIC RATIOS FOR PROTECTIVE
Unusual Values
Equal to or
<TABLE>
<CAPTION>
1996 1995
---- ----
Ratio Over Under Results Results
- ----- ---- ----- ------- -------
<S> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 12 -99*
1A. Gross change in capital and surplus 50 -10 29 78*
2. Net gain to total income -- 0 12 -39*
3. DISCONTINUED
4. Adequacy of investment income 900 125 185 N/A
5. Non-adm to admitted assets 10 -- 0 2
6. Total real estate and mortgage
loans to cash and invested assets 30 -- 7
7. Investments in affiliates to capital
and surplus 100 -- 0 1
8. Surplus relief
(over $5 million capital and
surplus) 30 -99 -- --
($5 million or less capital and
surplus) 10 -10 0 1
9. Change in premium 50 -10 12 -24*
10. Change in product mix 5 -- NR 4.3
11. Change in asset mix 5 -- 1.9 5.5*
12. Change in reserving ratio 20 -20 4 16
=====================================================================================================
</TABLE>
* Indicates unusual values.
N/A Indicates not applicable.
N/R Indicates no ratio.
For 1996 there were no unusual ratios.
For 1995, unusual ratios #1 and #1A are due to the additional capital and paid
in surplus contributed during 1995. Ratio #2 is reflected as unusual since
Protective recorded a loss from operations on
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statutory accounting basis. Ratio #9 is due to a decrease in premiums as a
result of policy terminations during 1995 such as cash surrenders and the
decrease in new policies issued from 1994 to 1995. Ratio # 11 is due to a shift
in 1994 of cash, common stocks, and preferred stocks to U.S.
Government bonds.
MARKETING
The Company markets life insurance policies through its subsidiaries, Franklin
American, Family Guaranty, and Protective. Franklin American is approved to
write policies in all of the states in which it is licensed with the exception
of South Carolina where its license was suspended in 1991. Franklin American
was approved for readmission in Mississippi effective August 1, 1995. Family
Guaranty writes policies in Mississippi which is the only state in which it
holds a license. Protective is licensed in eight states, but primarily is
issuing new business in Mississippi.
The majority of the Subsidiaries' independent agents are either funeral home
owners, managers or their employees. Presently there are approximately ninety
funeral home agents under contract, primarily in Tennessee and Alabama. The
Subsidiaries presently have two Regional Sales Directors and a Vice President
of Marketing responsible for the recruiting, training and servicing of its
agents to sell its products through funeral homes.
Franklin American had contracted with another of the Company's subsidiaries,
the Agency, to develop a force of independent agents to market its traditional
life "paid-up at 95" final expense policy. Due to the early high lapse rate on
policies written through the Agency and the difficulty in recruiting quality
agents, Franklin American decided in mid-1994 to concentrate its efforts on the
funeral homes.
The Subsidiaries are not obligated to accept any business submitted by their
agents which does not meet their underwriting criteria. In those cases where an
applicant's health prohibits the issuance of a full benefit policy, a modified
benefit policy is offered on a guaranteed issue basis. In all cases, new and
reinstated policy applications are subject to approval and acceptance by the
Subsidiaries. The Subsidiaries are not dependent on one agent or a few agents,
the loss of whom would have a material adverse impact on the Company. Over 90%
of the Subsidiaries' new premiums are derived from sales through funeral homes.
Family Guaranty markets a participating industrial whole life and an industrial
excess interest whole life policy through an exclusive agreement with a general
insurance agency (the "General Agent") that has exclusive rights to market
insurance through approximately twenty-four funeral homes in Mississippi. The
General Agent is responsible for the recruitment, training and management of
its agents working out of these funeral homes. Although Family Guaranty's
entire production is derived through this relationship, this exclusive
agreement was signed in early 1994 for a period of five years and requires the
General Agent to place all of its insurance with Family Guaranty.
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PUA serves as the Trustee for several funeral homes in Mississippi who are
grantors of the trust. As monies are received into the trust, PUA as Trustee
generally purchases annuities from Protective; however, monies received may be
invested in certain securities if requested by the Trust Grantor. When claims
occur on an annuity, Protective pays the funeral homes who are beneficiaries of
the Trust.
REINSURANCE
In accordance with the practice of the life insurance industry, the
Subsidiaries cede insurance to other insurers ("reinsurers") from time to time
in varying amounts. Insurance is "ceded" when the reinsurer assumes liability
for a portion of the risk on a policy and receives a share of the premiums. The
largest risk retained by the Subsidiaries on any one life in 1996 and 1995 was
$25,000. Policies which exceed the retention level of $25,000 on any one life
are automatically reinsured under negotiated reinsurance agreements. In
addition, certain other policies are reinsured on what is known as a
facultative basis in conjunction with the underwriting process. One plan issued
by Franklin American is coinsured on a 50-50 basis whereby one half of all the
transactions involving these policies are shared with the reinsurer. Only a
small number of policies are subject to this reinsurance agreement.
Ceding insurance generally provides greater diversification of business risk
and reduces the maximum net loss arising from large claims. Although the ceding
of insurance does not discharge an insurer from its primary legal liability to
a policyholder, the reinsurer assumes a related liability and, accordingly, it
is the practice of the industry (subject to certain limitations imposed by
state insurance statutes) to treat properly reinsured risks as if they were not
risks for which the primary insurer is liable. The Subsidiaries believe that
its reinsurers are in a financial condition to satisfy their obligations under
its reinsurance arrangements.
Franklin American entered into a coinsurance/modified coinsurance agreement
with Cologne Life Reinsurance Company, Stamford, Connecticut as of September
30, 1990. This agreement resulted in an additional statutory surplus of
$1,800,000. No statutory surplus has been available under this agreement since
September 30, 1995 because the agreement was terminated and Franklin American
recaptured all of the business as of September 30, 1995.
Family Guaranty does not have any reinsurance agreements in force.
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RESERVES
The insurance laws and regulations under which the Subsidiaries operate require
them to carry on their books, as a liability, actuarially determined reserves
to meet their obligations on their outstanding life insurance and annuity
contracts. Statutory reserves for life insurance and annuity contracts are
based on mortality and morbidity tables in general use in the United States and
are amounts, that, when added to interest thereon at certain assumed rates and
premiums to be received on outstanding policies, are calculated to be
sufficient to meet the Subsidiaries' obligations. The calculation of statutory
reserves is based on estimates of future policy liabilities and premium and
interest income.
Future liabilities of all life insurance companies are dependent on future
mortality rates which may increase or decrease based upon factors such as the
effect of high risk diseases such as AIDS or changes in medical care.
Therefore, the Subsidiaries may adjust reserves and the claim liabilities from
time to time on existing policies. Reserves established under generally
accepted accounting principles differ in certain respects from reserves
established in accordance with statutory requirements. The reserve amounts
included in the financial statements included in this report were determined in
accordance with generally accepted accounting principles.
UNDERWRITING
With the exception of the single premium guaranteed issue policy and the
annuity policy, management individually underwrites all policies issued by the
Subsidiaries. After initial processing, each file is reviewed to determine the
additional information, if any, required to make an underwriting decision,
which depends in part on the amount of insurance applied for and the
applicant's age and medical history. Additional information may include medical
examinations, statements from doctors who have treated the applicant in the
past, and special medical tests such as an HIV antibody test or an
electrocardiogram, all as may be regulated by state laws and regulations. The
Subsidiaries also utilize investigative services where deemed necessary to
supplement and substantiate other information. After reviewing the information
collected, the Subsidiaries either issue the policy as applied for, issue the
policy with an extra premium charge because of unfavorable factors, or reject
the application.
Family Guaranty does very little underwriting as most of the policies are
issued on a guaranteed issue basis.
INVESTMENTS
The Company's and Subsidiaries' investment activities are performed by the
officers of the respective companies. The investments of the Company and the
Subsidiaries are primarily U.S. government bonds, money market accounts and
certificates of deposit. Management's investment objectives are
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to obtain the highest yields possible with liquid investments and to improve
operating profits in order to improve statutory surplus of the Subsidiaries.
These same objectives are also intended to improve the earnings on the
consolidated financial statements of the Company prepared in accordance with
generally accepted accounting principles. As of December 31, 1996, the Company
did not own any common or preferred stocks. All bonds owned on December 31,
1996 were United States Government securities except for one utility bond for
$18,492, one state bond for $100,000 and one industrial bond for $51,103. As of
December 31, 1995 the Company owned two common stocks and no preferred stocks.
All bonds owned on December 31, 1995 were United States Government securities
except for six utility bonds totalling $92,665, one state bond for $100,000 and
one industrial bond for $52,000. Investments of the Subsidiaries are subject to
certain restrictions imposed by state insurance laws and regulations.
In 1996, 1995, and 1994, net investment income represented approximately 30%,
31%, and 39%, respectively, of the Company's total revenues less realized gains
and losses. Investment results of the Company for the three years ended
December 31, 1996 before applicable income taxes, are as follows:
<TABLE>
<CAPTION>
REALIZED
NET INVESTMENT UNREALIZED
INVESTMENT INVESTMENT GAINS GAINS (LOSSES)
INVESTMENTS CASH TOTAL INCOME YIELD(1) (LOSSES)(2) ON SECURITIES(3)
----------- ------ ------- ---------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT YIELD AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
December 31,
1996 $92,344 $1,036 $93,380 $5,582 6.63% $8,579 $ 11
1995 $77,955 $1,107 $79,062 $5,657 7.45% $3,818 $(16)
1994 $76,515 $ 593 $77,108 $4,466 7.64% $ 90 $ 76
</TABLE>
(1) Investment yield reflects net investment income on the sum of average
invested assets, including cash and cash equivalents, plus average
investment income accrued. This yield does not include realized and
unrealized gains or losses.
(2) These amounts exclude any realized gains or losses on real estate, if any.
(3) These amounts represent unrealized gains or losses on common stocks, bonds
and other fixed maturity investments, if any.
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The following table sets out the types and amounts of investments of the
Company and the percentage thereof as compared to total invested assets for
1996, 1995, and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 1,036 1.1% $ 1,107 1.4% $ 593 .8%
Short-term
investments 175 .2 597 .8 328 .4
Fixed maturities 91,904 98.4 75,694 95.7 75,601 98.1
Common stocks -- -- 1 -- 147 .2
Preferred stocks -- -- -- -- 14 --
Policy loans 197 .2 246 .3 89 .1
Mortgage Loans 68 .1 1,417 1.8 336 .4
------- ------ ------- ------ ------- ----
TOTAL $93,380 100.0% $79,062 100.0% $77,108 100.0%
======= ====== ======= ====== ======= =====
</TABLE>
The total bond portfolio, which currently consists primarily of U.S. Government
securities, contained $92,002,593 at cost and $91,930,250 at market value at
December 31, 1996. The following table sets forth the scheduled maturities of
the bond portfolio:
<TABLE>
<CAPTION>
Less Than 1-5 6-10 11-20 Over 20
Bonds 1 year Years Years Years Years Total
----- ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government $1,042,431 $1,061,373 $ 0 $ 0 $89,631,583 $91,735,387
States and
Territories 0 0 0 100,000 0 100,000
Public Utilities 0 0 18,492 0 0 18,492
Industrial &
Miscellaneous 0 51,103 0 0 0 $ 51,103
---------- ---------- ------- -------- ----------- -----------
TOTALS $1,042,431 $1,112,476 $18,492 $100,000 $89,631,583 $91,904,982
========== ========== ======= ======== =========== ===========
</TABLE>
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GOVERNMENT REGULATION
The laws of Tennessee and the other states in which the Subsidiaries do
business and intend to do business in the future have established insurance
regulatory agencies that to various degrees exercise broad administrative
powers with respect to licensing insurance companies to transact business,
overseeing trade practices, licensing agents, approving policy forms,
establishing reserve requirements, prescribing dividend limitations,
prescribing the form and content of required financial statements, regulating
the type and amounts of investments and other matters. The Subsidiaries file
detailed annual reports with each state in which they are licensed. The
Subsidiaries' operations and accounts are subject to examination by state
insurance regulatory agencies at regular intervals.
State laws regulating insurance holding companies such as the Company may
significantly limit the ability of the Subsidiaries, or the Company's ability
to cause the Subsidiaries, to pay or make dividends, loans or advances to the
Company. All states in which the Subsidiaries are licensed to do business
regulate insurers and their affiliates under insurance holding company laws.
Under such laws, transactions between the Subsidiaries and its affiliates may
be subject to prior notice or approval depending on the nature of the
transaction or the size of the transaction in relation to the affiliates'
financial positions.
Under state insurance guaranty fund laws, insurers doing business in such
states can be assessed up to certain prescribed limits for policyholder losses
incurred by insolvent companies. The amounts of any future assessments against
the Subsidiaries cannot be reasonably estimated.
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on such business
in a variety of ways. Federal measures which could significantly affect the
insurance business include employee benefit regulation, securities regulation
of certain insurance products, tax law changes affecting the taxation of
insurance companies, the tax treatment of insurance products and antitrust
laws.
COMPETITION
The life insurance and pre-need funeral funding business is highly competitive
because of the large number of stock and mutual life insurance companies
marketing insurance products. The Subsidiaries compete with other national,
regional and local life insurance companies, many of which are considerably
larger and have substantially greater financial resources than the
Subsidiaries. In addition, national banks are now permitted to sell annuities
on a nationwide basis. Many companies have broader and more diverse product
lines together with active agency forces, and therefore, the Subsidiaries'
policyholders may be induced to replace the existing polices with those
provided by the Subsidiaries' competition.
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FRANKLIN AMERICAN AGENCY
The Agency was incorporated under the laws of Tennessee in January 1990 as a
general insurance agency. The Company owns 100% of the capital stock of the
Agency. The Agency contracted as a managing general agent with other insurance
companies to sell products through Franklin American's agent force. The Agency
was inactive between October 1991 and November 1993.
In November 1993 the Agency contracted with Franklin American as the managing
general agent to sell its newly developed final expense product. The Agency
also began contracting with other insurance companies to sell products directed
toward the "seniors market" which were not offered by Franklin American. In
mid-1994 this distribution method was discontinued and the Agency has had very
few transactions since that time.
ACQUISITION AND DISPOSITION OF ASSETS
ACQUISITIONS:
National American Life Insurance Company of Pennsylvania
On January 19, 1994 the Company coinsured at a cost of $442,807 approximately
$9,300,000 of annuity policy fund values of National American Life Insurance
Company of Pennsylvania ("NALICO") through a coinsurance treaty containing a
provision to coinsure and eventually assume policies totalling $21,000,000 of
fund values or $20,000,000 of statutory reserves (the "NALICO agreement"). On
March 3, 1994, the Company assumed an approximate additional $7,500,000 in
annuity policy fund values at a cost of $360,494. On July 18, 1994, the Company
assumed approximately the final $5,000,000 in annuity policy fund values at a
cost of $221,180. On January 31, 1995, the Pennsylvania Insurance Department
placed NALICO under formal rehabilitation. Pursuant to the Rehabilitation
Order, the Department denied FALIC's request to complete the assumption of the
annuities. As a result of the insolvency and subsequent rehabilitation of
NALICO, the parties entered into a Stipulation and Settlement Agreement,
effective September 1, 1995, pursuant to which FALIC returned to NALICO the
balance of the re-insurance trust account of $19,302,089.59, less $1,250,000,
as a cash settlement retained by FALIC, for a net transfer of $18,052,080.59.
As a result of the recision of the Co-Insurance agreements, NALICO recaptured
all liability for policies and claims arising after September 1, 1995.
Family Guaranty Life Insurance Company
In February 1994, effective January 1, 1994, the Company acquired Family
Guaranty which had approximately $10,000,000 in assets for $2,900,000 in cash.
Family Guaranty is licensed in the State of Mississippi as an industrial life
company. Industrial companies issue small insurance
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policies and the premiums are collected by agents, more commonly called debit
collections. Family Guaranty commenced business in 1973. Policies sold are
small burial type policies with most of the policies being assigned to funeral
homes. Family Guaranty contributed $865,000 or eight cents ($.08) income per
common share to the Company on the 1994 consolidated statement of operations.
Farmers and Ranchers Life Insurance Company
On March 31, 1994, Franklin American purchased Farmers and Ranchers Life
Insurance Company ("Farmers"), an Oklahoma corporation, which had approximately
$12,000,000 in assets, for a purchase price of approximately $4,100,000.
Farmers is only licensed to do business in Oklahoma. Activities of Farmers were
conducted entirely in the individual life and annuity markets. Operations were
conducted on the general agency plan in Oklahoma by a field force of 188
general and soliciting agents.
International Financial Services Life Insurance Company
On August 12, 1994, the Company purchased International Financial Services Life
Insurance Company, ("IFSLIC") a Missouri insurance company, owned by Frontier
Insurance Company with no volume of business in force. The purpose of the
acquisition was to acquire the rights to licenses in 42 states. The Company
paid approximately $4,600,000 which included licenses in 42 states and assets
of approximately $3,500,000. The Company also received cash or cash equivalents
(representing capital and surplus) for which it paid fair market value.
Protective United Assets
On March 17, 1995, effective January 1, 1995, the Company acquired Protective
United Assets Incorporated ("PUA"), an insurance holding company with assets of
approximately $15,500,000 excluding goodwill and deferred acquisition cost. PUA
assets consist primarily of Franklin Protective Life Insurance Company. The
purchase price was $4,178,000. Primarily the type of policies sold by
Protective are small burial type policies sold through funeral homes and
independent agents. PUA contributed a loss of $329,273 or two cents ($.02) loss
per common share to the Company on the 1995 consolidated statement of
operations. PUA also owns Southern Heritage Life Insurance Company (an inactive
company).
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DISPOSITION OF ASSETS
Mortgage Companies
The Company entered into a Stock Purchase Agreement with FAMC Corporation
("FAMC") dated September 30, 1994 in which it agreed to sell to FAMC all of its
common stock in Franklin American Mortgage Company, Franklin American Equity
Corporation, and AmCASH Mortgage, Inc. (collectively, the "Mortgage
Companies"). The consideration paid for the common stock consisted of $250,000
in cash and a promissory note for $113,500 with interest payable at eight
percent per annum. An independent third party valued the Mortgage Companies at
$35,000. The purchase price was reached as a result of negotiations with the
buyer. John Hackney, President of the Company continues to provide advice and
consultation to FAMC on an ongoing basis regarding the management of these
companies. Mr. Hackney does not receive compensation for such services. The
Company realized a capital gain of $27,059 as a result of the sale.
Farmers and Ranchers Life Insurance Company
On October 31, 1994 the Company sold all of its stock in Farmers to
International Financial Corporation ("International"). International is a
holding company wholly owned by the Thunor Trust which owns approximately 83%
of the Company's common stock. The purchase price was $4,332,654 which is
$212,161 more than originally paid by Franklin American when it purchased
Farmers from Appalachian Life Insurance Company on March 31, 1994. John
Hackney, President of the Company provides advice and consultation to
International concerning the management of Farmers and he is compensated by
International for any such services actually rendered. The result of this
transaction was a net profit of $212,161 or two cents ($.02) profit per common
share to the Company on the 1994 consolidated statement of operations.
International Financial Services Life Insurance Company
The Company sold all of its stock in International Financial Services Life
Insurance Company ("IFSLIC") to International pursuant to a Stock Purchase
Agreement executed by the parties on October 11, 1994. The sale was effective
November 30, 1994. The Company originally paid $4,679,101 for IFSLIC and sold
it for $7,100,000. The result of this transaction was a net profit of $284,592
or three cents ($.03) profit per common share to the Company on the 1994
consolidated statement of operations. Mr. Hackney will remain available to
render management advice to IFSLIC and will be compensated by International for
any such services actually rendered.
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EMPLOYEES
As of December 31, 1996, the Company had 45 employees, all of whom were
full-time. None of these employees are covered by a collective bargaining
agreement. Agents marketing the Subsidiaries' insurance products are not
considered employees of the Company.
SUBSEQUENT EVENTS
The Company received $540,000 from the Company's majority shareholder as
additional paid in capital in January 1997.
ITEM 2. DESCRIPTION OF PROPERTY
The Company entered into a lease for space in the former home office building
on July 15, 1994 with an effective date of August 1, 1994. The lease covers
12,387 square feet for a term of five (5) years. The space is occupied by the
Company and Franklin American. The lease requires a monthly payment based on an
annual twelve dollars ($12.00) per square foot for the first year; thirteen
dollars ($13.00) per square foot for the next twenty-four months; and fourteen
dollars ($14.00) per square foot for the remaining two years. The Company
anticipates this leased space is adequate for the Company's current operations
and for its operations for the remaining period of the current lease.
Nevertheless, the Company is currently reviewing its options if the need for
additional space is required before the end of the current lease. If this need
occurs, the Company believes the square foot charge would approximate the scale
of the current lease.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Subsidiaries are parties to lawsuits in the ordinary course
of business. Neither the Company nor the Subsidiaries is a party to any pending
lawsuit other than those filed in the ordinary course of business related to
insurance policy claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the Company's fiscal year ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company has been traded only in a limited
over-the-counter market in Nashville, Tennessee, not reported by NASDAQ, and
such trading may not be indicative of a reliable market value.
The following table shows the high and low sales prices of the common stock for
each quarter during 1996 and 1995 as provided by a local securities dealer in
Nashville, Tennessee.
<TABLE>
<CAPTION>
1996 1995
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 1.375 .875 1.75 1.125
Second Quarter 1.375 .750 1.75 1.125
Third Quarter 1.375 1.125 1.75 1.125
Fourth Quarter 1.625 1.125 1.375 1.000
</TABLE>
As of December 31, 1996 there were 1,476 holders of common stock of record.
The Company's Board of Directors has not declared any cash dividends on the
common stock for the last three fiscal years. The present policy of the
Company's Board of Directors is to retain funds for the operation and expansion
of the Company's business. The Board of Directors of the Company has no
immediate plans for the payment of dividends but, from time to time, will
review this policy in light of the Company's earnings, financial condition and
other relevant factors. The Company currently intends to retain the major
portion of any future earnings to finance the development and expansion of its
business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
OVERVIEW
This section discusses and analyzes the Company's results of operations,
financial condition and changes in financial condition. Also included is
information regarding the Company's operations that may not be evident in the
financial statements. This analysis should be read in conjunction with the
Company's consolidated financial statements and related notes included
elsewhere in this report.
RESULTS OF OPERATIONS
For the year ended December 31, 1996 the Company had a net income of
$8,006,411, compared to net income of $2,024,420 in 1995. A significant
transaction occurring in 1996 was the accruing of $541,000 representing
$500,000 of a nonrefundable option plus interest of $41,000 which was paid in
January 1997. The refund of the nonrefundable option was required by the
Missouri Insurance Department, the domiciled state of the option purchaser and
who is also owned by the principle stockholder of the Company. In a related
transaction the principal stockholder of the Company contributed $540,000 in
January 1997 as additional paid in capital. The origination of this transaction
is described in the next three sentences of this paragraph. Significant
transactions during 1995 included return of the approximately $21,000,000
annuity fund value to the ceding insurer as the result of the Stipulation and
Settlement agreement with the Pennsylvania Insurance Department which resulted
in a gain of $591,000 and is reflected in other income in the consolidated
statement of operations. In a separate transaction in 1994, the Company
received a $500,000 nonrefundable option to assume the Company's position in
this block. The $500,000 was reflected as a liability on the 1994 financial
statement and recognized as other income in the consolidated statement of
operations for 1995. Other major transactions in 1995 include the acquisition
of Protective United Assets Incorporated whose principal asset is Franklin
Protective Life Insurance Company which increased traditional life premiums
approximately $1,900,000 and issued additional shares of common stock of the
Company for $3,000,000.
Total revenues increased 24 percent in 1996 compared to 1995 and increased 87
percent in 1995 compared to 1994. The increase in 1996 over 1995 and 1995 over
1994 are both due to the increase in realized and unrealized investment gains
and traditional premiums. The 1995 increase in traditional premiums resulted
from the acquisition of PUA and the 1996 traditional premium increase was due
to increased sales. The 1995 other income includes the gain of $591,000 on the
return of the annuity fund value and recognition of the nonrefundable option of
$500,000 as income on these fund values.
Net investment income decreased 1% in 1996 over 1995, and increased 27% in 1995
over 1994. The slight decrease in net investment in 1996 was the result of the
decrease in the yield on invested
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PAGE 25
assets. The decrease in the yield on bonds provided the opportunity for
realized capital gains, particularly in the latter part of the year 1996. The
increase in 1995 is due to the acquisition of PUA and the maintaining of the
assets for eight months in 1995 representing the approximately $21,000,000 of
annuity fund values before returning to the original insurer. Management is
very active in trading United States Government securities, taking advantage of
capital gains created by changing interest rates. Net yields for the past three
years are as follows: 6.63% in 1996, 7.45% in 1995, and 7.64% in 1994. The
changes in the yield rates for the past three years reflect the general
marketplace increase on new investments. The Company's investment strategy
which began in the fourth quarter 1991 involved the liquidation of most of the
invested assets and reinvesting in Government securities, money market accounts
or certificates of deposit. As interest rates change, the U.S. Government
securities are sold and repurchased periodically resulting in net capital
gains. The realized and unrealized net gains for all three years of 1996, 1995
and 1994 are the result of the decreasing interest rates on United States
Government bonds occurring throughout the year, but particularly in the fourth
quarter of 1996 and 1995. The net capital gains for 1994 were $166,301 and were
due to the sale of two of the Company's life insurance subsidiaries of
$489,047. Otherwise it would have reflected a loss of $322,746.
Policy benefits for traditional life, accident and health insurance increased
4% in 1996, increased 236% in 1995 and increased 1247% in 1994. Most of the
increase in 1996 occurred in Franklin American due to the increase in writing
traditional policies. The increase in 1995 was due mostly to the acquisition of
Protective whose policy inforce was principally traditional policies and a
slight increase occurred in Family Guaranty due to the increase in the writing
of new business over the past two years. The increase in 1994 results from the
purchase of Family Guaranty whose inforce consists 100% of traditional
policies. Also there was a slight increase in traditional benefits in Franklin
American. The accident and health premium deficiency liability of $650,000 was
established at December 31, 1990 due to the excessive claims in relationship to
the premiums. Marketing for new accident and health ceased in 1991 and
improvement in the operating results started in 1991. The $650,000 was an
estimated amount of future losses which in all probability would have occurred
if Franklin American continued the accident and health line of business. When
Franklin American ceased accepting new business, the agents writing this type
of policy placed most of these policies with another company. This reduced the
probability for claims since these were field issued policies with little or no
underwriting. Due to the improvement in accident and health claims, the premium
deficiency liability of $650,000 recorded in 1990 was reduced to $450,000 in
1991, to $250,000 in 1992, $50,000 in 1993, and further reduced to $-0- in
1994. This added $50,000 to income in 1994. The result on a per share basis was
less than one cent per share in 1994, based on weighted average of outstanding
shares. Policy benefits for universal life and annuity products increased 17%
in 1996 over 1995, increased less than 1% in 1995 over 1994, and 2% in 1994
over 1993. Policy benefits represent benefits paid less fund values released.
In 1996, benefits paid decreased 15% and fund values released decreased 24%
which net to the increase for the year. In 1995 the benefits paid decreased 18%
and fund values released decreased 22%, the net of which reflected a slight
increase in benefits to the policyholders. In 1994 the benefits paid increased
35%
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PAGE 26
and fund values released increased 44%, the net of which also reflected an
increase. A portion of the 1995 activity comes from companies acquired during
1995 as well as from the block of annuities coinsured held for 8 months in
1995.
The change in life and accident and health insurance reserves is primarily due
to the interest added to the universal life insurance and annuity policies fund
values and the increase in reserves on traditional policies for the three years
of 1996, 1995, and 1994. In 1995 the increase is also due to the acquisition of
Protective as well as the increase in the Subsidiaries' traditional reserves
due to the interest rate decrease in 1995 over 1994 as required by the
actuarial guidelines. The total future policy liabilities at December 31, 1996,
1995, and 1994 were $62,318,987, $56,485,831, and $59,441,634 respectively.
Assets generated by the policy fund receipts are invested in interest bearing
instruments and the interest earned is used to fund the policy fund value
interest requirement. The increase in the future policy liabilities for 1996 is
due mostly to the increase in the traditional policies. The decrease in future
policy liability for 1995 is attributable primarily to the difference of
disposition of the block of reinsured annuity business per the agreement with
the Pennsylvania Insurance Department and the acquisition of Protective which
sells primarily traditional type policies. The increase in 1994 is due to the
acquisition of Family Guaranty who sells only traditional policies. In
addition, Franklin American continues to increase its selling of traditional
products.
Amortization of deferred policy acquisition costs decreased 80% in 1996,
increased 398% in 1995, and increased 80% in 1994. In 1996 the amortization was
not as much as 1995 because there was not as much deferred acquisition cost
asset available to be amortized as there was in 1995. The actuarial guideline
for universal life and annuity products provides for the amortization to be
determined by the amount of profit generated by this line of business including
capital gains. The profit for the line of business is allocated to each issue
year; therefore, the amortization is recorded by issue year until fully
amortized. Once fully amortized, no further amortization can be recorded for
that issue year. For traditional products in 1995, smaller future earnings are
assumed as the result of the lower assumed interest rate required a greater
amortization of the deferred acquisition cost. The increase in 1994 is due to
the Company's acquisition transactions.
Commissions decreased 11% in 1996, increased 18% in 1995, and increased 244% in
1994. Commissions are reported after deducting for the amount being capitalized
in the deferred acquisition cost asset. These amounts will ultimately be
written off as amortization of deferred policy acquisition expense. The
decrease in 1996 is due to the increase in the deferred amount. The 1995
increase is mostly due to the acquisition of Protective. The substantial
increase in 1994 is due to the increase in new traditional life premiums being
produced as a result of acquiring Family Guaranty who only sells traditional
type policies. Franklin American also increased its issuing of traditional
products beginning in 1994.
Operating costs and expenses increased 12% in 1996, 42% in 1995, and 6% in
1994. Operating costs associated with the production of new business are
capitalized in the deferred acquisition cost asset;
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PAGE 27
therefore, the operating costs reported in the consolidated statement of
operations is net of the capitalized amounts. These amounts will ultimately be
written off as amortization of deferred policy acquisition expense. The
increase in 1996 is due to the $541,000 included in operating costs and
expenses in 1996. This amount represents $500,000 nonrefundable options plus
interest of $41,000. This refund was required by the Missouri Insurance
Department, the domiciled state of the option purchaser. This transaction is
more fully described in the first paragraph of this section of Item 6. See also
footnotes to the financial statements. The 1995 increase in operating expense
is due primarily to the acquisition of Protective. A portion of the increase
occurred in Franklin American. The 1994 amounts would have been greater except
the Mortgage Companies were sold effective September 30, 1994 and the nine
month period operating costs are included in the discontinued operations line
on the consolidated statement of operations. The decrease in operating expenses
due to the sale of the Mortgage Companies is offset by the operating cost of
the newly acquired companies.
The Company and the some of the Subsidiaries are required to file separate
federal income tax returns. The Company, Franklin American, and the Agency are
allowed to file a consolidated federal income tax return. At December 31, 1996,
there are no net operating loss carryforwards remaining.
Family Guaranty files its federal income tax return separately. At December 31,
1996, Family Guaranty did not have any net operating losses available to offset
future earnings.
PUA and Protective are allowed to file their federal income tax returns on a
consolidated basis with Southern Heritage Life Insurance Company. There were
approximately $343,000 of net operating losses available to offset future
earnings as of December 31, 1996.
For the year ended December 31, 1996, the consolidated GAAP income tax expense
was $1,404,409. Of that amount, $1,148,538 has been recorded as currently due
and payable while the remaining $255,871 has been recorded as a deferred
expense due to timing differences in the recognition of revenues and expenses
between GAAP and current income tax regulations.
Policy loans to policyholders decreased $196,894 in 1996 from $245,714 in 1995.
The decrease was due to adjustments on Protective which was purchased in 1995.
The Company expects as the fund value increases policy loans will also
increase. Since the total amount of policy loans outstanding are relatively
small in comparison with the fund value liability there is no significant
effect on operations or the financial condition of the Company.
The balance sheet shows advance commissions of $24,194 and $232,771 at December
31, 1996 and 1995, respectively. Allowances for uncollectible accounts were
$759,941 and $794,124 at December 31, 1996 and 1995, respectively.
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PAGE 28
Since 1991, management has concentrated on a strategy involving both asset and
earnings growth through internal expansion and acquisition of new businesses.
At the same time the Subsidiaries are expanding the agency force and developing
policies in order to compete with the competition. This strategy has had a
positive effect as assets have increased approximately $75,109,000 between
December 31, 1991 and December 31, 1996 which includes the $18,800,000 issuance
of additional common stock. Also stockholders' equity has increased
approximately $36,006,411 during the same period.
Production of new business in the last half of 1991 was nonexistent.
Subsequently, new business began increasing each year which is part of the
strategy for improving the Company's cash flow and improving its financial
position.
Inflation has had no significant effect on reported revenue, and the results of
operations are not expected to be significantly affected by inflation in the
near future.
LIQUIDITY AND CAPITAL RESOURCES
Franklin American initially was capitalized through a private placement of
Common Stock at $1 per share, followed by two intrastate Common Stock offerings
at $5 per share. A total of 2,383,870 shares were issued and $9,054,774, net of
commissions and other costs of raising capital of $1,364,376, were raised
through these offerings. Of the foregoing, a total of 1,828,894 shares were
issued through a related company to which commissions of $1,227,665 were paid
based on commission rates ranging from 4% to 14% of total capital received from
the issuance of these shares, which totaled $9,144,470.
In 1991, the offering price on the 1,674 shares issued during the offering to
current stockholders in 1990 was changed from $5.00 to $3.50 per share.
Shareholders were given the option to receive additional shares or a refund. As
a result, 576 additional shares were issued and $292.50 refunded. Also, in
October 1991, the Company received $3,757,500.60 for 2,683,959 shares of common
stock from a private placement sale in a single transaction. In September 1993,
the Company issued an additional 4,500,000 shares of Common Stock at $2.00 per
share for a gross total of $9,000,000. $4,200,000 of these proceeds was
contributed to Franklin American and the remainder was invested in U.S.
Government securities held by the Company. The balance of the shares
outstanding were issued through warrants, dividends, or sold by officers with
no payment of commissions.
In August 1994, the Company issued an additional 3,238,095 shares of Common
Stock at $2.10 per share for a gross total of $6,800,000. The Company used a
portion of the funds to acquire IFSLIC for $4,615,408.
28
<PAGE> 29
PAGE 29
In December 1995, the Company issued an additional 1,500,000 shares in a
private placement of common stock at $2.00 per share for a total of $3,000,000.
The funds obtained through these equity offerings were used in supporting
operating cost and acquiring new insurance policies. The excess funds were
invested primarily in fixed and equity securities. As a result of the invested
capital and investment of premiums received from policyholders, invested assets
and cash equivalents at December 31, 1996 and 1995 totalled $93,380,149 and
$79,062,329, respectively. The stockholders' equity at December 31, 1996 was
$40,553,734 compared to $32,547,323 at December 31, 1995.
Various states in which the subsidiaries do business require that a security
deposit be maintained in such states to be held in trust for the protection of
policyholders. Such security deposits are in the form of investment securities
and are held in trust by that particular state's insurance commissioner.
Although the investment security remains in the possession of the particular
state's insurance commissioner, the Company receives interest earned on such
securities. Total carrying amount of such security deposits as of December 31,
1996 is $2,765,505. While the Company receives the interest generated by such
securities, principal is not available for general corporate use except that
the security may be replaced with another security with sufficient value. The
Company is required to maintain such security deposits in the states so long as
it has insureds residing in such states whose aggregate future policy benefits
are in excess of the amount required by statute to be kept on deposit.
Franklin American's statutory capital and surplus was $12,507,724 at December
31, 1996. Tennessee insurance law requires Franklin American to maintain a
minimum capital and surplus of $2,000,000. Franklin American reported a
statutory profit of $753,104 at December 31, 1996.
Family Guaranty's statutory capital and surplus was $1,843,136 at December 31,
1996. Mississippi insurance law requires $1,000,000 minimum capital and
surplus. Family Guaranty reported a statutory gain of $124,737 at December 31,
1996.
Protective's statutory capital and surplus was $2,961,723 at December 31, 1996.
Mississippi insurance law requires $1,000,000 minimum capital and surplus.
Protective reported a statutory gain of $442,566 at December 31, 1996.
The two primary sources of cash are premiums and investment income. During 1995
the private placement of $3,000,000 of the Company's common stock was an
additional source of cash. The primary uses of cash are the payment of policy
benefits and operating expenses. The Company reflects a cash decrease of
$71,708 in 1996 and shows a cash increase of $514,596 in 1995 including the
$3,000,000 for additional shares of stock. A portion of the funds were used as
contributed surplus to Protective and the remaining invested in United States
Government securities to be used later to purchase additional business. In 1994
the Company showed a cash decrease of $90,010
29
<PAGE> 30
PAGE 30
including the $6,800,000 for additional shares of stock. The funds were used
principally in the acquisition of additional life insurance companies and/or
blocks of business. In each of the years presented, interest and realized
capital gains on bonds are generally reinvested in bonds which may cause the
Company to reflect a negative cash flow.
Prior approval of the Tennessee Insurance Department is required for the
payment by an insurance company of dividends, loans, or other advances which
exceed certain statutory limitations. Therefore, as of December 31, 1996 no
dividends could be paid without prior approval of the Tennessee Insurance
Department.
The risk-based capital standard for life companies was developed by the NAIC
which consists of four major risk tests. The tests are: asset risk, insurance
risk, interest risk, and business risk. These tests are intended to measure the
adequacy of a company's actual statutory capital as measured by its risk-based
capital ratio. The minimum capital level is 100%. The Subsidiaries' risk based
capital calculations show that the Subsidiaries' total adjusted capital exceeds
the Subsidiaries' Action Level Risk Based Capital which indicates that
regulatory action or attention is not needed. Therefore, the calculation
indicating the level of regulatory attention is not required.
This capital standard should not have an impact on the Company's liquidity or
results of operations, nor will it have any effect on the Company's business
strategy. The Company and Subsidiaries primarily invested in U.S. Government
bonds in 1996 which creates a low risk factor.
ITEM 7. FINANCIAL STATEMENTS
See index to consolidated financial statements and financial statement
schedules on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
Reference is hereby made to the Company's Proxy Statement to be filed in
connection with its 1997 Annual Meeting of Shareholders, which is herein
incorporated by reference.
30
<PAGE> 31
PAGE 31
ITEM 10. EXECUTIVE COMPENSATION
Reference is hereby made to the Company's Proxy Statement to be filed in
connection with its 1997 Annual Meeting of Shareholders, which is herein
incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Reference is hereby made to the Company's Proxy Statement to be filed in
connection with its 1997 Annual Meeting of Shareholders, which is herein
incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the Company's Proxy Statement to be filed in
connection with its 1997 Annual Meeting of Shareholders, which is herein
incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to Consolidated Financial Statements and
Financial Statement Schedules on page F-1 for a list
of all financial statements filed as part of this
report.
2. Financial Statement Schedules
See Index to Consolidated Financial Statements and
Financial Statement Schedules on page F-1 for a list
of all financial statement schedules filed as part
of this report.
All other schedules for which provision is made in
Regulation S-X of the Securities and Exchange
Commission are not required under the related
instructions or are inapplicable and therefore have
been omitted.
3. Exhibits
The Index to Exhibits appears on the following page.
(b) Reports on Form 8-K filed during the fourth quarter. None.
31
<PAGE> 32
PAGE 32
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Report on Form 10-KSB for the fiscal year ended December 31, 1996
<TABLE>
<CAPTION>
Page
Number in
Manually
Exhibit Signed
Number Description Original
------ ----------- --------
<S> <C>
3.1 Charter of the Company (filed as Exhibit 1.1 of the
Company's Registration Statement on Form S-1,
No. 33-26453, effective August 10, 1990, and
incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 of the
Company's Form 10-KSB filing for fiscal year ended
December 31, 1993 and incorporated by reference herein).
3.3 Form of Share Exchange Agreement (filed as Exhibit of
the Company's Registration Statement on Form S-1,
File No. 33-26453, effective August 10, 1990, and
incorporated herein by reference).
4.1 Form of Stock Certificate (filed as Exhibit 4.1 of the
Company's Registration Statement on Form S-1,
File No. 33-26453, effective August 10, 1990, and
incorporated herein by reference).
10.1 Reinsurance Agreement between Franklin American
and Optimum ReInsurance Company (purchased agreement
from AGC Life Insurance Company ) (filed as Exhibit 10.1
of the Registrant's Registration Statement on Form S-1,
File No. 33-26453 effective August 10, 1990 and
incorporated herein by reference).
10.2 Agency Agreement between Franklin American and
Guy S. Kirkpatrick (filed as Exhibit 10.2 of the Registrant's
</TABLE>
32
<PAGE> 33
PAGE 33
<TABLE>
<CAPTION>
Registration Statement on Form S-1, File No. 33-26453
effective August 10, 1990 and incorporated herein by
reference).
<S> <C>
10.3 Agreement between Franklin American and Tennessee
Funeral Security, Inc. (filed as Exhibit 10.5 of the
Registrant's Registration Statement on Form S-1,
File No. 33-26453 effective August 10, 1990 and
incorporated by reference herein).
10.4 Reinsurance Agreement between Cologne Life Reinsurance
Company and Franklin American dated December 17, 1990. (filed
as Exhibit 10.15 of the Registrant's Form 10-K filing for
fiscal year ended December 31, 1990 and incorporated by
reference herein).
10.5 Franklin American Corporation 1988 Stock Incentive
Plan (filed as Exhibit 10.4 of the Registrant's
Registration Statement on Form S-1, File No.
33-26453 effective August 10, 1990 and incorporated
by reference herein).
22.1 List of Subsidiaries
27 Financial Data Schedule (for SEC use only)
</TABLE>
33
<PAGE> 34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
FRANKLIN AMERICAN CORPORATION
DATE: MARCH 27, 1997 BY: /s/ John A. Hackney
-------------------------------------
John A. Hackney, Chairman,
President and Chief Executive Officer
<PAGE> 35
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman, President and
Chief Executive Officer
/s/ John A. Hackney (Principal Executive Officer) March 27, 1997
- ---------------------------------
John A. Hackney
Chief Financial
/s/ Gary L. Atnip Officer and Director March 27, 1997
- ---------------------------------
Gary L. Atnip
/s/ John T. Bible Director March 27, 1997
- ---------------------------------
John T. Bible
Treasurer and
/s/ Judith C. Lowrey Director March 27, 1997
- ---------------------------------
Judith C. Lowrey
/s/ William T. Patterson Director March 27, 1997
- ---------------------------------
William T. Patterson
/s/ Jerry D. Poindexter Director March 27, 1997
- ---------------------------------
Jerry D. Poindexter
/s/ Wade A. Willis Director March 27, 1997
- ---------------------------------
Wade A. Willis
</TABLE>
<PAGE> 36
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Franklin American
Corporation and subsidiaries are incorporated by reference into Item 7:
Report of Independent Auditors .......................................F-2
Consolidated Balance Sheets--December 31, 1996 and 1995 ..............F-3
Consolidated Statements of Operations-Years Ended
December 31, 1996, 1995 and 1994 .....................................F-4
Consolidated Statements of Stockholders' Equity-Years
Ended December 31, 1996, 1995 and 1994 ...............................F-5
Consolidated Statements of Cash Flows-Years Ended
December 31, 1996, 1995 and 1994 .....................................F-6
Notes to Financial Statements ........................................F-7
The following consolidated financial statement schedules of Franklin American
Corporation and subsidiaries are incorporated by reference into Item 7:
Schedule I--Summary of Investments--Other than Investments in
Related Parties.
Schedule II--Condensed Financial Information of Registrant.
Schedule III--Supplementary Insurance Information.
Schedule IV--Reinsurance.
F-1
<PAGE> 37
[LETTER HEAD]
INDEPENDENT AUDITOR'S REPORT
- ----------------------------
March 21, 1997
To the Board of Directors and Shareholders of
FRANKLIN AMERICAN CORPORATION
We have audited the consolidated balance sheets of FRANKLIN AMERICAN
CORPORATION AND SUBSIDIARIES as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES as of December 31, 1996, and
1995 and the consolidated results of operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Leuty and Heath, PLLC
LEUTY AND HEATH, PLLC
Certified Public Accountants
<PAGE> 38
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
Notes 1996 1995
----- ---- ----
<S> <C> <C> <C>
ASSETS
Investments: 1,3,10
Fixed maturities -- at amortized
cost (market: 1996, $2,530,773;
1995, $2,289,450) 3,10 $ 2,505,506 $ 2,202,893
Held for sale - at market
(cost: 1996, $89,497,087; 1995
$73,601,598) 3,10 89,399,477 73,491,300
Common stock - 803
Mortgage loans on real estate:
Unaffiliated 67,999 1,417,106
Policy loans 196,894 245,714
Short-term investments 10 174,674 597,206
------------ -----------
TOTAL INVESTMENTS 92,344,550 77,955,022
Cash and cash equivalents 1,035,599 1,107,307
Accrued investment income 860,916 671,246
Deferred policy acquisition costs 1,2 3,100,110 1,900,508
Property and equipment--at cost,
less accumulated depreciation (1996,
$1,179,150; 1995, $1,077,154) 1 296,422 319,259
Intangible assets 1,4 8,409,668 8,636,207
Agent advances (net of allowance for
uncollectible accounts of $759,941
in 1996 and $794,124 in 1995) 5 24,194 232,771
Other assets 4 506,719 446,749
------------ -----------
TOTAL ASSETS $106,578,178 $91,269,069
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits 1,2 $ 62,318,987 $56,485,831
Other policy liabilities 1 390,754 576,875
------------ -----------
TOTAL POLICY LIABILITIES 62,709,741 57,062,706
ACCRUALS
Accrued expenses and other liabilities 747,073 486,530
Income tax payable - current 7 1,459,386 353,572
Income tax payable - deferred 7 1,108,244 818,938
------------ -----------
TOTAL LIABILITIES 66,024,444 58,721,746
COMMITMENTS AND CONTINGENCIES 8,9
STOCKHOLDERS' EQUITY 1
Common stock, no par value; authorized
20,000,000 shares; issued and
outstanding 14,426,096 shares in 1996
and 1995 31,738,304 31,738,304
Treasury Stock: 162,350 shares in 1996 and 1995 (336,670) (336,670)
Retained earnings 9,152,100 1,145,689
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 40,553,734 32,547,323
------------ -----------
TOTAL LIABILITIES AND EQUITY $106,578,178 $91,269,069
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 39
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For Years Ended December 31
Notes 1996 1995 1994
----- ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUE:
Insurance revenue: 1
Traditional life and accident and
health insurance premiums $10,177,779 $ 8,206,778 $ 5,368,374
Universal life and investment
product policy charges 2,071,532 2,508,301 1,700,248
Net investment income 1,3 5,582,250 5,657,309 4,466,549
Net realized and unrealized investment gains 1,3,9 8,590,285 3,801,492 166,301
Other (net) 12 484,524 1,606,498 45,754
Cumulative effect of change in accounting principles - - (118,859)
----------- ----------- -----------
26,906,370 21,780,378 11,628,367
BENEFITS, CLAIMS, AND EXPENSES:
Policy benefits and claims: 1
Traditional life and accident and
health insurance 3,361,776 3,239,186 965,288
Universal life and investment products 936,366 798,696 796,639
Change in premium deficiency 13 - - (50,000)
Change in life and A&H insurance
reserves for future benefits 7,265,046 5,772,084 2,747,568
Amortization of deferred policy
acquisition costs 1 1,060,587 5,303,168 1,065,686
Commissions 449,345 506,108 427,538
Operating costs and expenses 2,12 4,422,430 3,963,958 2,799,530
----------- ----------- -----------
17,495,550 19,583,200 8,752,249
----------- ----------- -----------
NET INCOME BEFORE TAX 9,410,820 2,197,178 2,876,118
Income tax expense 7 (1,404,409) (172,758) (934,339)
----------- ----------- -----------
NET INCOME FROM CONTINUING OPERATIONS 8,006,411 2,024,420 1,941,779
LOSS FROM DISCONTINUED MORTGAGE OPERATIONS 9 - - (403,381)
----------- ----------- -----------
NET INCOME $ 8,006,411 $ 2,024,420 $ 1,538,398
=========== =========== ===========
INCOME/(LOSS) PER COMMON SHARE: 1
Continuing Operations $ 0.55 $ 0.16 $ 0.18
Discontinued Operations 2 - - (.04)
----------- ----------- -----------
NET INCOME PER COMMON SHARE 0.55 0.16 0.14
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,426,096 13,028,835 10,710,400
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 40
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized Retained Total
Common Treasury Gain/(Loss) Earnings Stockholders'
Stock Stock on Investments (Deficit) Equity
----------- -------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $21,938,304 -- (118,859) (2,417,129) 19,402,316
Issuance of common stock 6,800,000 -- -- -- 6,800,000
Purchase of treasury stock -- (149,000) -- -- (149,000)
Cumulative effect of change
in accounting principles -- -- 118,859 -- 118,859
Net income -- -- -- 1,538,398 1,538,398
----------- -------- -------- ---------- -----------
BALANCE, DECEMBER 31, 1994 28,738,304 (149,000) -- (878,731) 27,710,573
Issuance of common stock 3,000,000 -- -- -- 3,000,000
Purchase of treasury stock -- (187,670) -- -- (187,670)
Net income -- -- -- 2,024,420 2,024,420
----------- -------- -------- ---------- -----------
BALANCE, DECEMBER 31, 1995 31,738,304 (336,670) -- 1,145,689 32,547,323
Net income -- -- -- 8,006,411 8,006,411
----------- -------- -------- ---------- -----------
BALANCE, DECEMBER 31, 1996 $31,738,304 (336,670) -- 9,152,100 40,553,734
=========== ======== ======== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 41
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For Years Ended December 31
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,006,411 $ 2,024,420 $ 1,538,398
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Change in life and A&H reserves 7,265,046 5,772,084 2,747,568
Revenues from policy fund charges (2,071,532) (2,508,301) (1,700,248)
Depreciation 128,469 196,027 169,664
Amortization 226,539 464,946 597,259
Net change in book value of securities 109,200 1,981 25,283
Net realized investment (gains) losses (8,590,285) (3,801,492) (193,360)
Purchase of trading securities (12,820,141,182) (14,857,545,723) (8,385,896,576)
Sales of trading securities 12,813,241,793 14,841,615,091 8,378,693,105
Amortization of policy acquisition
costs 1,060,587 5,303,168 1,065,686
Change in unearned premiums (59,619) 29,241 227,484
Change in agent advances 208,577 (213,250) 89,214
<Increase> decrease in accrued
investment income (189,670) (48,225) (227,993)
Increase <decrease> in accrued
policy benefits and claims (126,502) (586,357) 665,045
Increase <decrease> in federal income tax payable 1,395,120 274,483 758,027
Change in other assets and other
liabilities 249,394 (3,769,278) (4,874,326)
Capitalization of deferred policy
acquisitions costs (2,260,189) (1,545,539) (3,701,115)
Change in premium deficiency (50,000)
---------------- ---------------- ----------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES $ (1,547,843) $ (14,336,724) $ (10,066,885)
---------------- ---------------- ----------------
</TABLE>
<PAGE> 42
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For Years Ended December 31
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of investments and loans $ (916,729) (42,064,540) (113,061,627)
Sales of investments 879,847 1,840,628 149,250
Maturities of investments 137,500 58,136,976 86,625,853
Proceeds from repayment of loans 841,507 493,575 14,410
Purchases of property and equipment (105,632) (188,618) (77,425)
Proceeds from sale of property and equipment -- 40,555 --
----------- ----------- ------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 836,493 18,258,576 (26,349,539)
----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 3,000,000 6,800,000
Purchase of treasury stock -- (187,670) (98,700)
Receipts from universal life policies
credited to policyholder account
balances 2,890,678 6,564,572 24,595,459
Return of policyholder account balances
on universal life policies (2,251,036) (23,690,093) (3,767,260)
Traditional reserves received from acquisitions -- 10,905,935 8,796,915
----------- ----------- ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 639,642 (3,407,256) 36,326,414
----------- ----------- ------------
INCREASE (DECREASE) IN CASH (71,708) 514,596 (90,010)
Cash and cash equivalents at beginning of year 1,107,307 592,711 682,721
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 1,035,599 1,107,307 592,711
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest credited to policyholders
accounts $ 1,524,206 1,932,373 2,279,385
=========== =========== ============
Income taxes paid $ 42,724 -- 191,000
=========== =========== ============
</TABLE>
NONCASH TRANSACTIONS:
In 1994, the mortgage company's subsidiaries were sold and the Company received
a $113,500, 8% interest bearing note as part of the selling price.
In 1994, the Company acquired three insurance companies and sold two of the
acquired companies before the end of 1994. (See footnotes #2 and #9 for further
discussion)
In 1994, the Company coinsured a block of annuities with fund values of
$21,912,000 accounted for on purchase accounting basis. In 1995, after the
ceding company was placed under formal rehabilitation, the Company was denied
the assumption of this block of annuities by the Pennsylvania Insurance
Department. As a result the co-insurance agreement was rescinded and the policy
fund values returned to the ceding company. (See footnote #2 for further
discussion of both the purchase in 1994 and the disposition in 1995)
See notes to consolidated financial statements.
F-6
<PAGE> 43
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's financial statements are prepared in conformity with
generally accepted accounting principles.
Consolidation Policy and Corporate Organization - The consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Franklin American Life Insurance Company,
Franklin American Agency, Family Guaranty Life Insurance Company and
Protective United Assets, Inc. All significant intercompany balances and
transactions have been eliminated.
Franklin American Life Insurance Company is licensed by the Tennessee
Department of Commerce and Insurance as a stock life insurance company.
Family Guaranty Life Insurance Company is licensed by the Mississippi
Insurance Department. Protective United Assets, Inc. is a Mississippi
domiciled holding company whose principal assets are Franklin Protective
Life Insurance Company, (name changed from Protective Service Life in
1996), and Southern Heritage Life Insurance Company (an inactive Company).
Franklin American Life has two primary lines of business; life insurance
(traditional and universal life) and annuities. Family Guaranty Life sells
industrial type insurance policies. Franklin Protective Life sells
primarily traditional life policies and annuities.
A significant portion of the Company's life insurance and annuity business
represents sales in the funeral market through funeral home directors or
their employees who are licensed agents of the Company. Frequently, the
funeral home is assigned benefits under the policies to provide funeral
arrangements for the insured. Protective United Assets, Inc. serves as
Trustee for life insurance trusts for the benefit of several funeral
homes. As Trustee, when monies are received into the trust, generally
annuity policies are purchased from Franklin Protective Life; however,
monies received may be invested in certain securities if requested by the
trust Grantor.
Investments - Fixed maturity investments that are held for investment
purposes are stated at amortized cost.
F-7
<PAGE> 44
Fixed maturities held for sale (bonds) are stated at market. At each
balance sheet date, fixed maturities are reviewed to determine if the
Company intends to and has the ability to hold each fixed maturity owned
to its maturity. If the Company concludes it will not hold a fixed
maturity investment to maturity, then the investment is reclassified to
"held for sale" and carried at market. Fixed maturities are generally sold
to take advantage of interest rate changes which increase assets and
income. Investments held for investment purposes are also reviewed on each
balance sheet date to determine if their value has been impaired. The
Company considers whether a decline in market value at the balance sheet
date is temporary; if not, the investment's carrying value is reduced to a
new cost basis which represents estimated net realizable value. The
decline in value is reported as an unrealized loss in the period of
decline.
Equity securities (common and preferred stocks) are stated at market value
and mortgage loans on real estate and policy loans are stated at their
unpaid principal balance. Short-term investments are stated at cost.
Gains and losses on the sale of investments and provisions for possible
losses on investments are included in net realized and unrealized
investment gains or losses in the statement of operations. Cost is
determined by specific identification in computing realized gains and
losses.
Revenue, Benefits, Claims and Expenses:
a. Traditional Life Insurance Products - Traditional life insurance
includes those products with fixed and guaranteed premiums and
benefits and consists principally of whole life insurance policies
and annually renewable term policies. Premiums for traditional life
insurance policies are recognized as revenue when due. The
liabilities for future policy benefits and expenses for traditional
life insurance policies are computed using a net-level method
including assumptions as to investment yields, withdrawals, mortality
and other assumptions based on the Company's experience modified as
necessary to reflect anticipated trends and to include provisions for
possible unfavorable deviation. The reserve yield assumption was a
range of 3% to 5 1/2% over the past three years. Benefit reserves for
traditional insurance policies include certain deferred profits on
limited-payment policies that are being recognized in income over the
policy term.
F-8
<PAGE> 45
b. Universal Life and Investment Products - Universal life products
include universal life insurance and other interest-sensitive life
insurance products. Investment products include deferred annuities
without life contingencies. Revenues related to universal life and
investment products consist of policy charges for the cost of
insurance, policy administration, and surrender charges that have
been assessed against policy account balances during the period.
Benefit reserves for universal life and investment products represent
policy account balances before applicable surrender charges and
deferred revenue charges. Policy benefits and claims that are charged
to expense include benefit claims incurred in the period in excess of
related policy account balances. Interest credited to policy account
balances is charged to expense under the caption "change in life
insurance reserves." Interest credit rates for universal life and
investment products ranged from approximately 5% to 6% for the three
year period ending December 31, 1996.
c. Accident and Health Insurance - Accident and health insurance
premiums are recognized as revenue over the terms of the policies.
The liability for policy benefits and claims includes unpaid claims
that have been reported to the Company and estimated claims incurred
but not yet reported, plus certain future policy benefits under
noncancelable policies. Policy claims are charged to expense in the
period that the claims are incurred.
d. Deferred Policy Acquisition Costs - These costs represent agent
commissions and other costs of acquiring traditional life insurance,
universal life and investment products that vary with and are
primarily related to the production of new and renewal business.
Traditional life insurance acquisition costs are amortized over the
premium-payment period of the related policies using assumptions
consistent with those used in computing policy benefit reserves.
Acquisition costs for universal life and annuities are amortized over
the lives of the policies in relation to either the present value of
estimated gross profits from surrender charges and investment,
mortality, and expense margins, or the balance of insurance in force.
The Company evaluates annually the actual versus expected experience
with respect to the elements of expected future gross profits, and
changes in amortization of acquisition costs as considered
appropriate based on the results obtained.
F-9
<PAGE> 46
e. Premium Deficiencies - On an annual basis, the Company reviews its
life and accident and health insurance products to determine whether
the policies contain sufficient premiums to provide for future
benefits and expenses.
The Company utilizes their actual experience with respect to
expenses, interest, mortality, morbidity and withdrawals to determine
whether accumulated reserves together with the present value of
future gross premiums will be sufficient to cover future benefits and
expenses and unamortized deferred policy acquisition costs. As a
result of this review, the Company provides for net premium
deficiencies through a charge to current year operations.
f. Claim Liabilities - Claim liabilities are estimated using actual
claim development patterns and represent an estimate of the ultimate
unpaid cost of claims incurred but unpaid at the balance sheet date.
Other Accounting Policies:
a. Reinsurance - Gross premiums ceded to other companies have been
reported as a reduction of premium income for traditional insurance
products. Amounts applicable to reinsurance ceded for reserves have
been reported as a reduction of reserves. Related commission and
expense allowances have been reported as a reduction of deferred
policy acquisition costs as appropriate.
b. Property and Equipment - Property and equipment is carried at cost
and depreciated over their estimated useful lives, ranging from 5 to
15 years primarily using the straight-line method.
c. Income (Loss) Per Common Share - Income (loss) per common share is
computed by dividing the net income (loss) by the weighted average
number of shares of common stock outstanding during the periods.
Stock options and warrants, considered common stock equivalents, have
not been included in the calculation due to their antidilutive
effect. Fully diluted earnings per share is not presented since it
approximates the gain or loss per common share.
F-10
<PAGE> 47
d. Intangible Assets - Intangible assets include organization costs
which is amortized on a straight-line basis over a five-year period;
goodwill from the acquisition of subsidiaries and state business
licenses, are amortized on a straight-line basis over a forty-year
period.
e. Income Taxes - The Company files a consolidated tax return with those
life and non-life insurance subsidiaries meeting the time
requirement. Those subsidiaries who do not meet the time requirement
file a separate tax return. The insurance holding company acquired
during 1995 files a consolidated return with its wholly owned life
insurance subsidiary. In February 1992, the Financial Accounting
Standards Board (FASB) issued Statement 109, "Accounting for Income
Taxes," which requires a change from the deferred method to the asset
and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of
existing assets and liabilities. Under this Statement, the effect on
deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. Under the deferred
method, deferred taxes were recognized using the tax rate applicable
to the year of the calculation and were not adjusted for subsequent
changes in tax rates.
f. Consolidated Statements of Cash Flows - For purposes of reporting
cash flows, cash and cash equivalents include cash and money market
accounts. Cash equivalents include only investments with original
maturities of three months or less.
g. Postretirement Benefits - In December 1990, the Financial Accounting
Standards Board issued statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which is to be effective
for fiscal years beginning after December 15, 1992. The impact of the
new standard is not material to the Company's consolidated financial
statements.
h. Reclassifications - The accompanying 1994 and 1995 financial
statements have been reclassified to conform with the 1996
presentation.
F-11
<PAGE> 48
2. ACQUISITIONS
Franklin American Life Insurance Company acquired $604,000 of
reserves (covering both life and annuity reserves) in 1993 through an
assumption reinsurance agreement. The deferred acquisition cost is
presented as an asset and other fund values are reflected in the
future policy benefits in the balance sheet. These items have been
adjusted to recognize the appropriate income and deferred acquisition
cost amortization.
AmCash Mortgage, Inc. and Merchants Home Mortgage, Inc. (name changed
to Franklin American Mortgage, Inc. in 1994), both wholly owned
subsidiaries of the Company, began business operations during 1993.
These subsidiaries were sold in 1994. The consolidated statement of
operations reflects the operating results for the period held in 1994
ending September 30, 1994. The net loss consists of a capital gain of
$27,058 and a loss from operations of $430,439 or a net of $403,381
loss reported as discontinued operations in the consolidated
statement of operations. This resulted in a four cent ($0.04) loss
per share.
At various times during 1994, the Company acquired a block of annuity
policies totalling $21,912,000 of fund values from North American
Life Insurance Company (NALICO). Effective September 1, 1995 the
Company and the Pennsylvania Insurance Commissioner agreed to rescind
the co-insurance agreement between the Company and NALICO. Fund
values totalling $21,459,048 were returned by the Company while
recognizing a gain on this transaction of $591,361 or five cents
($0.05) income per share.
Effective January 1, 1994 the Company acquired Family Guaranty Life
Insurance Company of Mississippi for $2,900,000. Total assets
acquired in this transaction were $12,069,000 including goodwill of
$2,641,858 and deferred policy acquisition costs of $1,159,354.
Effective March 31, 1994 the Company acquired Farmers and Ranchers
Life Insurance Company of Oklahoma for $4,120,000. Total assets
acquired were $12,262,000 including goodwill of $1,202,192 and
deferred policy acquisition costs of $900,000. (Farmers and Ranchers
was sold effective October 31, 1994 - See Related Party Note for
further discussion).
Effective August 12, 1994 the Company acquired International
Financial Services Life Insurance Company of Missouri for $4,615,000.
Total assets acquired were $4,634,000 including goodwill of $118,000.
International Financial Services had no business in
F-12
<PAGE> 49
force. The purpose of the acquisition was to acquire the licenses in
42 states with the cost of the licenses recorded as an intangible
asset of $1,155,000. (International Financial Services was sold
effective November 30, 1994 - See Related Party Note for further
discussion).
On March 17, 1995 effective January 1, 1995, the Company acquired
Protective United Assets, Inc. (PUA), an insurance holding company,
for a purchase price of $4,178,000. Total assets received were
$22,025,000 including goodwill of $5,603,000. The primary asset of
PUA is Franklin Protective Life Insurance Company.
3. INVESTMENTS
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $5,561,190 $4,738,458 $4,412,884
Equity securities 5 63,593 5,274
Mortgage loans on real estate 57,956 101,621 33,839
Policy loans 14,110 12,272 11,137
Short-term investments 65,423 833,871 92,090
---------- ---------- ----------
5,698,684 5,749,815 4,555,224
Investment expenses (116,434) (92,506) (88,675)
---------- ---------- ----------
Net investment income $5,582,250 $5,657,309 $4,466,549
========== ========== ==========
Net realized and unrealized investment
gains (losses):
Fixed maturities $9,085,902 $3,745,482 $(393,905)
Equity securities 917 118,165 (5,065)
Mortgage loans (507,600) (45,804) --
Sale of life companies subsidiaries -- -- 489,047
---------- ---------- ----------
Net realized investment gains (losses) 8,579,219 3,817,843 90,077
Net unrealized investment gains (losses) 11,066 (16,351) 76,224
---------- ---------- ----------
$8,590,285 $3,801,492 $ 166,301
========== ========== ==========
</TABLE>
During 1994, the Company adopted Statement of Financial Accounting
Standard No. 115 relating to certain marketable securities. This
standard requires that unrealized gains and losses on trading
securities be recognized in the statement of operations beginning in
1994. Adoption of this standard requires that the
F-13
<PAGE> 50
initial impact on equity be reported as the cumulative effect of an
accounting change in the statement of stockholders' equity.
The value of investments in fixed maturity securities was as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Gross Unrealized(1)
-------------------
Carrying Amortized
Value(1) Cost(1) Gains Losses
-------- ------- ----- ------
<S> <C> <C> <C> <C>
United States Government $89,399,477 $2,335,910 $14,175 $(101,710)
----------- ---------- ------- ---------
Corporate -- 169,596 15,193 --
$89,399,477 $2,505,506 $29,368 $(101,710)
=========== ========== ======= =========
</TABLE>
(1) Carrying value represents market value; therefore, the unrealized gains
and losses are calculated by the difference between cost of $89,497,087
and carrying value. For those bonds carried at amortized cost, the
unrealized gains and losses are calculated by the difference between
amortized cost and market of $2,530,773.
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Gross Unrealized(1)
-------------------
Carrying Amortized
Value(2) Cost(2) Gains Losses
-------- ------- ----- ------
<S> <C> <C> <C> <C>
United States Government $73,486,250 $1,963,228 $60,232 $(110,348)
Corporate 5,050 239,665 26,376 --
----------- ---------- ------- ---------
$73,491,300 $2,202,893 $86,608 $(110,348)
=========== ========== ======= =========
</TABLE>
(2) Carrying value represents market value; therefore, the unrealized gains
and losses are calculated by the difference between cost of $73,601,598
and carrying value. For those bonds carried at amortized cost, the
unrealized gains and losses are calculated by the difference between
amortized cost and market of $2,289,450.
F-14
<PAGE> 51
The carrying value of fixed maturity securities at December 31, 1996, by
contractual maturity, is shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Carrying Market
Value Value
----- -----
<S> <C> <C>
Due during next five years $ 2,154,907 $ 2,165,025
Due after five years through ten years 18,493 19,850
Due after ten years through fifteen years -- --
Due after fifteen years through twenty years 100,000 111,125
Due after twenty years 89,631,583 89,634,250
------------ ------------
Totals $91,904,983 $91,930,250
============ ============
</TABLE>
The market values of fixed maturity securities were based upon quoted
market prices for marketable bonds.
The following investments exceeded ten percent of
stockholders' equity as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------
1996 1995
---- ----
Carrying Estimated Carrying Estimated
Value Market Value Market
-----------------------------------------------------------
<S> <C> <C> <C>
Ten percent of stockholders' equity $ 4,055,373 $ 3,254,732
Bonds:
U.S. Treasury Bond Series 2021,
8% due November 2021 $88,610,857 $88,610,857 $70,810,000 $70,810,000
</TABLE>
F-15
<PAGE> 52
4. INTANGIBLE ASSETS AND OTHER ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Goodwill $ 8,244,554 $8,244,554
Less accumulated amortization (478,274) (272,160)
State business licenses 817,000 817,000
Less accumulated amortization (173,612) (153,187)
----------- ----------
Total $ 8,409,668 $8,636,207
=========== ==========
</TABLE>
Other assets include the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Notes receivable - other $ 72,672 100,000
Insurance Guaranty Fund 269,478 235,743
All others 164,569 111,006
----------- ----------
$ 506,719 $ 446,749
=========== ==========
</TABLE>
5. AGENT ADVANCES
In February 1989, the Company adopted a program whereby commission
advances were made to agents on certain new business. These advances were
to be repaid principally through the application of commissions earned on
premiums received in the future. At December 31, 1996 and 1995, the
balance sheet reflects agent advances of $24,194 and $232,771,
respectively. During 1990, the Company evaluated the recoverability of
these advances and concluded that due to the overall persistency within
the lines of business, an allowance for these advances was necessary in
order to state the advances at their net realizable value. The allowance
at December 31, 1996 and 1995 is $759,941 and $794,124, respectively. The
Company began phasing out its advance commission program in 1990 and
completed the phase out in 1991. The increase in agents advances in 1995
was due to the acquisition of Protective United Assets, Inc. effective
January 1, 1995.
F-16
<PAGE> 53
6. STOCKHOLDERS' EQUITY
The financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP), which differs in certain respects
from statutory accounting practices (SAP) prescribed or permitted by
regulatory authorities. The significant differences in SAP and GAAP
accounting practices result from:
a. Certain costs of acquiring and issuing new policies (principally
commissions and certain policy issue costs) which, under GAAP, are
capitalized as deferred policy acquisition costs and amortized over
the life of the related premium paying period, or the lives of the
policies in relation to either the present value of estimated gross
profits or the balance of insurance in force. SAP requires these
costs to be expensed as incurred.
b. Premium revenue on universal life and investment products for GAAP
reporting purposes, consists of policy charges for the cost of
insurance, policy administration, and surrender charges that have
been assessed against policy account balances during the period. Any
additional cash received is applied to the policy value. For SAP
purposes, premium revenue on universal life and investment products
are treated as revenue when received.
c. Premium revenue on single premium universal life and deferred annuity
policies for GAAP reporting purposes, is reduced by the amount of
certain front-end expense loads, which are deferred as unearned
revenue and amortized in proportion to the present value of expected
future profits on the related policies. Such unearned revenue is
included in future policy benefits on the balance sheet. For SAP
purposes, premiums on single premium universal life and annuity
policies are treated as revenue when received.
The statutory net income (loss) and capital and surplus for the Company's
life insurance subsidiaries as filed with the various state departments of
insurance were as follows:
<TABLE>
<CAPTION>
Net Income (Loss) Capital and Surplus
----------------------------------- ----------------------------
1996 1995 1994 1996 1995
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Franklin American Life Insurance Co. $753,104 1,857,792 347,662 12,507,723 11,339,850
Family Guaranty Life Insurance Co. 124,737 187,397 (452,464) 1,843,136 1,209,934
Franklin Protective Life Insurance Co.(1) 442,566 (1,308,516) - 2,961,723 2,293,397
</TABLE>
(1) acquired January 1, 1995
F-17
<PAGE> 54
Prior approval for the payment of dividends by the life insurance
subsidiaries to the parent must be obtained from, and prior notification
of loans or other advances by the life insurance subsidiaries to the
parent must be made to the Department of the domicile state for amounts in
excess of certain statutory limitations. At December 31, 1996 and 1995, no
such dividends could be paid without prior approval.
Under Tennessee law, the domicile state of Franklin American Life
Insurance Company, the minimum statutory capital and surplus is $2,000,000
at December 31, 1996. Under Mississippi law, the domicile state of Family
Guaranty Life and Franklin Protective Life, minimum capital and surplus is
$1,000,000 at December 31, 1996. The minimum requirements for statutory
capital and surplus vary for many of the 15 states in which the Company is
licensed with the highest minimum requirement being $3,000,000.
7. INCOME TAXES
The Company files a consolidated federal income tax return with Franklin
American Life and Franklin American Agency. Family Guaranty Life files its
federal income tax return separate from its affiliates. Protective United
Assets files a consolidated federal income tax return with Franklin
Protective Life and Southern Heritage Life. Protective United Assets has
$343,000 of net operating loss carryforwards available to offset future
earnings of its consolidated group as of December 31, 1996. None of the
other companies have net operating losses to offset future earnings.
Effective January 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method required
by FASB Statement 109, "Accounting for Income Taxes." As permitted under
those rules, prior year financial statements have not been restated. The
cumulative effect of adopting Statement 109 as of January 1, 1993 was not
significant.
The Company's federal income tax expense related to income before income
taxes is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ l,148,538 40,335 57,363
Deferred 255,871 132,423 876,976
------------- ------- -------
Total $ 1,404,409 172,758 934,339
============= ======= =======
</TABLE>
F-18
<PAGE> 55
Income taxes paid by the Company totaled $42,724, $0, and $191,000 in
1996, 1995, and 1994, respectively.
The Company's effective income tax rate on pre-tax income is lower than
the prevailing corporate federal income tax rate and is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Corporate federal income tax rate 34% 34% 34%
Utilization of net operating losses -7% -20% -2%
Small life insurance company deduction -12% -5% -
Other, net - -1% -
--- --- --
15% 8% 32%
=== === ==
</TABLE>
The Company's federal income tax liability is summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Current $1,459,386 353,572
Deferred 1,108,244 818,938
---------- ---------
Total $2,567,630 1,172,510
========== =========
</TABLE>
The significant components of the Company's net deferred tax
assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Policy reserves and policyholder funds $ 304,444 284,973
Other 41,503 54,627
---------- ---------
Total deferred assets 345,947 339,600
---------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs and intangibles 1,379,163 1,103,330
Other 75,028 55,208
---------- ---------
Total deferred liabilities 1,454,191 1,158,538
---------- ---------
Net deferred liability $1,108,244 818,938
========== =========
</TABLE>
8. LEASES
The Company (lessee) 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. Future rental expense payments are as follows:
1997 166,189
1998 173,412
1999 101,157
F-19
<PAGE> 56
The Company also has certain short-term (less than one year) operating
leases for various pieces of equipment. Total rental expenses under these
operating lease arrangements were $8,715, $9,782, and $13,987 in 1996,
1995, and 1994, respectively.
9. RELATED PARTY TRANSACTIONS
The Company sold subsidiaries during 1994 to companies owned by its
majority stockholder in three separate transactions. This stockholder owns
82.6% of the Company's outstanding shares of common stock.
The Company entered into a stock purchase agreement with FAMC Corporation
in September 1994 to sell to FAMC all of its common stock in Franklin
American Mortgage Company, Franklin American Equity Corporation, and
AmCASH Mortgage, Inc. (wholly-owned subsidiaries of the Company). The
common stock in these subsidiaries was sold for $250,000 cash and a
$113,500 promissory note with interest payable at an annual rate of eight
percent. This transaction resulted in a realized gain of $27,059. For
financial statement presentation purposes this gain has been netted with
the operating losses generated by the real estate subsidiaries of $430,440
for the nine month period ended September 30, 1994.
The Company entered into an agreement with International Financial
Corporation to sell all of its common stock in Farmers and Ranchers Life
Insurance Company (98%-owned subsidiary of the Company) pursuant to a
stock purchase agreement in October 1994. The common stock in the
subsidiary was sold for $4,332,654. This transaction resulted in a
$232,147 gain for the Company which is presented on the consolidated
statement of operations as net realized investment gains.
The Company entered into an agreement with International Financial
Corporation to sell all its common stock in International Financial
Services Life Insurance Company (wholly-owned subsidiary of the Company)
pursuant to a stock purchase agreement in November 1994. The common stock
in the subsidiary was sold for $7,100,000 cash. This transaction resulted
in a $256,900 gain for the Company which is presented on the consolidated
statement of operations as net realized investment gains.
During 1996, the Company purchased $1,229,000 of mortgage loans from
Franklin Protective Life (a subsidiary) at book value and then sold the
same loans to an unrelated third party for a loss of approximately
$500,000.
F-20
<PAGE> 57
The Company receives management fees from companies owned by the majority
shareholder of the Company. The amounts received in 1996, 1995 and 1994
are $382,000, $168,000 and $30,000 respectively.
10. RESTRICTED INVESTMENTS
Included in the balance sheet are certain investments which represent
security deposits held in trust for the protection of policyholders of the
Company as required under the laws of the various states in which the
subsidiaries of the Company are licensed. Total carrying value of these
investments at December 31, 1996 is $2,765,505. An amount of $60,000 is
included in the caption of "short-term investments" and $2,705,505 is
included under "fixed maturities" at amortized cost. While interest earned
on these investments is recorded by the Company, the principal is not
available for general corporate use.
11. REINSURANCE
Franklin American Life Insurance Company reinsures certain of its
insurance risks with other insurers under annually renewable term and
coinsurance/modified coinsurance agreements. The annually renewable term
agreement is accounted for by paying a stipulated premium to the reinsurer
in order for the reinsurer to share a certain portion of the risk. The
maximum amount of risk retained by the Subsidiary on any one life is
$25,000.
A coinsurance/modified coinsurance agreement was entered into in September
1990 and provided Franklin American Life, wholly-owned subsidiary of the
Company, with additional statutory surplus of $1,800,000 at December 31,
1990. This agreement was terminated as of June 30, 1995 as the policies
were recaptured as provided for in the agreement; therefore no statutory
surplus has been recorded since June 30, 1995. The coinsurance/modified
coinsurance agreement is accounted for by sharing the actual premiums
collected with the reinsurer. The reinsurer shares in the expenses,
claims, and reserve charges. The reserves and assets on the coinsurance
portion are maintained by the reinsurer, while Franklin American Life
retains the reserves and assets on the modified coinsurance portion of the
agreement. In accordance with generally accepted accounting principles
this agreement does not qualify as a transfer of risk and was not
reflected in the consolidated financial statements. The only amounts
recognized in the consolidated financial statements are the reinsurance
fees paid of $0, $18,107 and $31,857 for 1996, 1995 and 1994,
respectively.
F-21
<PAGE> 58
Additionally, the Company's life subsidiaries have reinsured approximately
$16,598,000, $7,279,000 and $9,210,000 in face amount of life insurance
risks with other insurers for 1996, 1995 and 1994, respectively,
representing $149,318, $88,808 and $49,799 of premiums for 1996, 1995 and
1994, respectively. Policy and claim reserves relating to insurance ceded
of $157,075 in 1996 and $162,228 in 1995 are provided for in the Company's
financial statements. Should any of the reinsurers be unable to meet its
obligation at the time of the claim, the obligation to pay such a claim
would remain with the subsidiary. There are no circumstances of this
nature at December 31, 1996.
12. OTHER INCOME
Included in other income on the consolidated statement of operations for
1995 are two significant transactions. One being the return of
approximately $21,000,000 of annuity fund value to the ceding insurer as
the result of the stipulation and settlement agreement with the
Pennsylvania Insurance Department which resluted in a gain of $591,000. In
a separate transaction in 1994, the Company received a $500,000
nonrefundable option to take the Company's position to assume this block.
The $500,000 was reflected as a liability on the 1994 financial statement
and recognized as other income on the 1995 consolidated statement of
operations.
Included in 1996 operating cost and expenses is $541,000 representing a
refund of the $500,000 nonrefundable option received in 1994 and
recognized as income in 1995. The $41,000 represents interest for the
period held by the company. The $541,000 was accrued in the 1996
consolidated statement of operations and was paid in January 1997. The
liability is included in accrued expenses and other liabilities on the
1996 consolidated balance sheet. The refund of the nonrefundable option
was required by the Missouri Insurance Department, the domiciled state of
the option purchase.
The majority stockholder of the Company contributed $540,000 of additional
paid-in capital in January, 1997.
The remaining amounts in other income consist primarily of management fees
from unconsolidated affiliated companies for all years presented.
F-22
<PAGE> 59
13. PREMIUM DEFICIENCY
In the fourth quarter of 1990 the Company determined that certain of its
products within its accident and health lines of business had a premium
deficiency. The anticipated deficiency of approximately $650,000 was
included in premium deficiency on the Company's consolidated statement of
operations for the 1990 fiscal year end. During 1994, the premium
deficiency was decreased $50,000 and for the year of 1993 it was decreased
$200,000. No new accident and health applications have been received since
May 1, 1991, and a rate increase was effective July 1, 1991 on the
policies in force on that date. The anticipated accident and health
premium deficiency was completely written off during 1994.
14. PENSION PLANS
The Company has a Simplified Employee Pension Plan under which it may, at
its discretion, contribute a portion of each eligible employee's salary to
an Individual Retirement Account. Employees who are at least 18 years old
and have been employed by the Company for at least six months are eligible
to participate, at their option. During 1996, 1995, and 1994 no
contributons were made.
Effective June 1, 1996, the Company adopted a 401K plan for all employees
except executive officers. The Company will contribute fifty percent of
the contributions made by the employees up to six percent of the
employee's salary. The company's contributions and earnings vest at an
increasing scale and after five years are fully vested. The Company's
contribution to the plan for 1996 was $5,263.
15. STOCK INCENTIVE PLAN
The Company has a Stock Incentive Plan, which provides for the granting of
options to key employees to purchase an aggregate of not more than 300,000
shares of common stock of the Company. As of December 31, 1995, options
for 734 shares were outstanding, all of which were exercisable, at a price
of $3.13 to $5.00 per share. No options had been exercised as of December
31, 1996 All outstanding options expired during 1996.
F-23
<PAGE> 60
[LETTER HEAD]
INDEPENDENT AUDITOR'S REPORT ON SCHEDULES
- -----------------------------------------
March 21, 1997
To the Board of Directors and Shareholders of
Franklin American Corporation
Our examination was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated financial
statement schedules included in the Form 10-KSB of Franklin American
Corporation and Subsidiaries as of December 31, 1996, 1995 and 1994 and for the
years then ended are presented for the purposes of additional analysis and are
not a required part of the basic consolidated financial statements. Such
information has been subjected to the auditing procedures applied in the
examination of the basic consolidated financial statements and, in our opinion,
is fairly stated in all material respects in relation to the basic consolidated
financial statements taken as a whole.
/s/ Leuty and Heath, PLLC
LEUTY AND HEATH, PLLC
Certified Public Accountants
<PAGE> 61
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
====================================================================================================
COL. A COL. B COL. C COL. D
====================================================================================================
Amount at Which
TYPE OF INVESTMENT Cost Value Shown in the
Balance Sheet
====================================================================================================
<S> <C> <C> <C>
December 31, 1996
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities $91,862,010 91,832,997 91,735,387
States, municipalities and political subdivisions 100,000 100,000 100,000
Public utilities 18,000 18,492 18,492
All other corporate bonds 52,000 51,103 51,104
Certificates of deposit -- -- --
-----------------------------------------
TOTAL FIXED MATURITIES 92,032,010 92,002,592 91,904,983
Equity securities:
Policy loans 196,894 XXX,XXX 196,894
Mortgage loans on real estate:
Unaffiliated 67,999 XXX,XXX 67,999
Short-term investments 174,674 XXX,XXX 174,674
-----------------------------------------
TOTAL INVESTMENTS $92,471,577 XX,XXX,XXX 92,344,550
=========================================
</TABLE>
<PAGE> 62
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------------
<S> <C> <C>
ASSETS
Fixed maturities $ 788,620 2,676,250
Investment in subsidiaries 39,309,632 29,662,684
Cash 160,266 43,395
Property and equipment -- at cost,
less accumulated depreciation
($121,429 in 1996 and $122,810 in 1995) 40,463 72,825
Other assets 265,296 166,278
------------ ----------
$ 40,564,277 32,621,432
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 10,543 74,109
------------ ----------
10,543 74,109
STOCKHOLDERS' EQUITY
Common Stock -- no par value; authorized
20,000,000 shares; issued and outstanding,
14,426,096 shares in 1996 and 1995 31,738,304 31,738,304
Treasury Stock: 162,350 shares in 1996
and 1995 (336,670) (336,670)
Retained earnings 9,152,100 1,145,689
------------ ----------
40,553,734 32,547,323
------------ ----------
$ 40,564,277 32,621,432
============ ==========
</TABLE>
<PAGE> 63
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---- ---- ----
Revenue:
<S> <C> <C> <C>
Rental income $ 113,424 109,172 87,191
Interest income 176,078 209,257 232,286
Realized and unrealized investment gains (losses) (261,902) 51,515 (91,074)
Other income 41 5,354 --
---------- ------- ---------
Total Revenue 27,641 375,298 228,403
---------- ------- ---------
Costs and Expenses:
Rent 162,941 167,529 121,853
Accounting and legal fees 119,461 124,278 399,192
Depreciation 25,091 30,986 34,427
Other operating costs and expenses 160,686 156,648 102,382
---------- ------- ---------
Total Costs and Expenses 468,179 479,441 657,854
---------- ------- ---------
LOSS BEFORE EQUITY IN
NET INCOME OF SUBSIDIARIES (440,538) (104,143) (429,451)
Equity in income of subsidiaries 8,446,949 2,128,563 1,967,849
---------- --------- ---------
NET INCOME $8,006,411 2,024,420 1,538,398
========== ========= =========
</TABLE>
<PAGE> 64
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,006,411 2,024,420 1,538,398
Equity in (income) loss of subsidiaries (8,446,949) (2,128,563) (1,967,849)
------------ --------- -----------
CASH USED BY OPERATING ACTIVITIES (440,538) (104,143) (429,451)
------------ --------- -----------
INVESTING ACTIVITIES
Sale of subsidiaries -- -- 243,858
Sale (purchase) of fixed maturities (net) 1,887,631 4,830,479 (2,698,261)
Sale (purchase) of property and equipment (net) 32,362 18,770 47,924
Purchase common stock in Subsidiary -- (4,315,843) (2,900,000)
Contributed paid-in surplus in subsidiary (1,200,000) (4,086,326) (500,000)
------------ --------- -----------
CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 719,993 (3,552,920) (5,806,479)
------------ --------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 3,000,000 6,800,000
Purchase treasury stock -- (187,670) (149,000)
(Increase) decrease in other assets (99,018) 689,605 (153,588)
Increase (decrease) in other liabilities (63,566) 61,750 (320,315)
------------ --------- -----------
CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (162,584) 3,563,685 6,177,097
------------ --------- -----------
INCREASE (DECREASE) IN CASH 116,871 (93,378) (58,833)
Cash at beginning of year 43,395 136,773 195,606
------------ --------- -----------
Cash at end of year $ 160,266 43,395 136,773
============ ========= ===========
</TABLE>
<PAGE> 65
SCHEDULE III-SUPPLEMENTARY INSURANCE INFORMATION
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
======================================================================================================================
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H
======================================================================================================================
DEFERRED FUTURE POLICY UNEARNED OTHER POLICY BENEFITS,
SEGMENT POLICY BENEFITS, PREMIUMS CLAIMS AND PREMIUM NET INVESTMENT CLAIMS, LOSSES
ACQUISITION LOSSES, CLAIMS BENEFITS REVENUE INCOME AND SETTLEMENT
COST AND LOSS PAYABLE EXPENSES
EXPENSES
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1994 $5,658,137 $59,441,634 $229,436 $904,555 $7,068,622 $4,466,549 $4,459,495
YEAR ENDED
DECEMBER 31, 1995 $1,900,508 $56,485,831 $258,677 $318,198 $10,715,079 $5,657,309 $9,809,966
YEAR ENDED
DECEMBER 31, 1996 $3,100,110 $62,318,987 $199,058 $191,696 $12,249,311 $5,582,250 $11,563,188
</TABLE>
<TABLE>
<CAPTION>
================================================
COL. I COL. J COL. K
================================================
AMORTIZATION OF
DEFERRED POLICY OTHER PREMIUMS
ACQUISITION OPERATING WRITTEN
COSTS EXPENSES
<C> <C> <C>
$1,065,686 $3,227,068 N/A
$5,303,168 $4,470,066 N/A
$1,060,587 $4,871,775 N/A
</TABLE>
<PAGE> 66
SCHEDULE IV -- REINSURANCE
FRANKLIN AMERICAN CORPORATION
<TABLE>
<CAPTION>
====================================================================================================================
COL. A COL. B COL. C COL. D COL. E COL. F
====================================================================================================================
Ceded Assumed Percentage of
Gross to Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
====================================================================================================================
<S> <C> <C> <C> <C> <C>
December 31, 1996
Life insurance in force $160,131,000 $16,598,000 $- $143,533,000 -%
------------ ----------- -- ------------ ---
Premiums:
Life insurance $ 12,354,775 $ 148,706 - $ 12,206,069 --
Accident and health insurance 43,853 611 - 43,242 --
Property and liability insurance -- -- - -- --
Title insurance -- -- - -- --
------------ ----------- -- ------------ ---
TOTAL PREMIUMS $ 12,398,628 $ 149,317 $- $ 12,249,311 -%
------------ ----------- -- ------------ ---
December 31, 1995
Life insurance in force $156,515,000 $15,903,000 $- $140,612,000 --%
------------ ----------- -- ------------ ---
Premiums:
Life insurance 10,741,238 $ 88,051 - 10,653,187 --
Accident and health insurance 62,649 757 - 61,892 --
Property and liability insurance -- -- - -- --
Title insurance -- -- - -- --
------------ ----------- -- ------------ ---
TOTAL PREMIUMS $ 10,803,887 $ 88,808 $- $ 10,715,079 -%
------------ ----------- -- ------------ ---
December 31, 1994
Life insurance in force $ 84,098,000 $32,743,000 $- $ 51,355,000 -%
------------ ----------- -- ------------ ---
Premiums:
Life insurance $ 7,121,607 $ 81,656 $- $ 7,039,951 --
Accident and health insurance 30,195 1,524 - 28,671 --
Property and liability insurance -- -- - -- --
Title insurance -- -- - -- --
------------ ----------- -- ------------ ---
TOTAL PREMIUMS $ 7,151,802 $ 83,180 $- $ 7,068,622 -%
============ =========== == ============ ===
</TABLE>
<PAGE> 1
EXHIBIT 22.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Franklin American Life Insurance Company Tennessee
Franklin American Agency, Inc. Tennessee
Family Guaranty Life Insurance Company Mississippi
Protective United Assets, Incorporated Mississippi
Franklin Protective Life Insurance Company Mississippi
Southern Heritage
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FRANKLIN AMERICAN CORP. FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 89,399
<DEBT-CARRYING-VALUE> 2,531
<DEBT-MARKET-VALUE> 91,930
<EQUITIES> 0
<MORTGAGE> 68
<REAL-ESTATE> 0
<TOTAL-INVEST> 92,345
<CASH> 1,036
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,100
<TOTAL-ASSETS> 106,578
<POLICY-LOSSES> 62,319
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 391
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 8,815
<TOTAL-LIABILITY-AND-EQUITY> 106,578
12,249
<INVESTMENT-INCOME> 5,582
<INVESTMENT-GAINS> 8,590
<OTHER-INCOME> 485
<BENEFITS> 4,298
<UNDERWRITING-AMORTIZATION> 1,061
<UNDERWRITING-OTHER> 4,872
<INCOME-PRETAX> 9,410
<INCOME-TAX> 1,404
<INCOME-CONTINUING> 8,006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,006
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<RESERVE-OPEN> 57,063
<PROVISION-CURRENT> 7,265
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1,618
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 62,710
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
