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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
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Commission File Number 0-18748
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Franklin American Corporation
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(Name of Small Business Issuer in Its Charter)
Tennessee 62-1365451
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
377 Riverside Drive, Franklin, Tennessee 37064
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(Address of Principal Executive Offices) (Zip Code)
(615) 790-0464
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, If
Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 1997 there were outstanding 14,426,096 shares of Issuer's common
stock, no par value per share including 162,350 shares of treasury stock.
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FRANKLIN AMERICAN CORPORATION
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. Other Information 10
</TABLE>
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Part I. Financial Information
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($000'S OMITTED)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities -- at amortized cost
(market: 1997, $1,776; 1996, $2,531) $ 1,765 $ 2,506
Held for sale -- at market
(cost: 1997, $95,138; 1996, $89,497) 95,059 89,399
Mortgage loans on real estate:
Unaffiliated 0 68
Policy loans 229 197
Short-term investments 478 174
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TOTAL INVESTMENTS 97,531 92,344
Cash and cash equivalents 1,616 1,036
Accrued investment income 908 861
Deferred policy acquisition costs 3,500 3,100
Property and equipment 335 296
Intangible assets 8,296 8,410
Agent advances 47 24
Other assets 601 507
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TOTAL ASSETS $ 112,834 $ 106,578
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 66,852 $ 62,319
Other policy benefits 516 391
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TOTAL POLICY LIABILITIES AND ACCRUALS 67,368 62,710
Accrued expenses and other liabilities 536 747
Federal income tax payable - current 421 1,460
Federal income tax payable - deferred 1,177 1,108
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TOTAL LIABILITIES 69,502 66,025
COMMITMENTS AND CONTINGENCIES (See Note 3)
STOCKHOLDERS' EQUITY
No par value; authorized 20,000,000
shares; issued and outstanding
14,426,096 shares in 1997 and 1996 31,738 31,738
Additional paid in capital 540
Treasury stock (337) (337)
Retained earnings (deficit) 11,391 9,152
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TOTAL STOCKHOLDERS' EQUITY 43,332 40,553
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TOTAL LIABILITIES AND EQUITY $ 112,834 $ 106,578
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</TABLE>
See accompanying notes to consolidated financial statements.
2
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Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30 June 30 June 30
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUE:
Insurance revenue:
Traditional life and accident
and health insurance premiums $ 4,101 2,491 7,325 4,623
Universal life and investment
product policy charges 254 954 505 1,262
Net investment income 1,657 1,429 2,998 2,652
Net realized and unrealized investment (losses) 1,580 2,669 2,675 2,811
Other income (net) (see note 5) 98 (36) 235 155
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$ 7,690 $ 7,507 13,738 11,503
BENEFITS, CLAIMS, AND EXPENSES
Policy benefits and claims:
Traditional life and accident
and health insurance $ 992 756 1,949 1,567
Universal life and investment
products 102 149 420 676
Change in life and A&H insurance
reserves for future benefits 3,063 1,933 5,350 2,959
Amortization of deferred policy
acquisition costs 591 1,354 1,110 1,639
Commissions 179 168 220 267
Operating costs and expenses 889 814 2,080 1,951
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$ 5,816 $ 5,174 11,129 9,059
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NET INCOME BEFORE TAX $ 1,874 $ 2,333 2,609 2,444
Federal income tax expense (benefit) 263 868 370 808
NET INCOME $ 1,611 $ 1,465 2,239 1,636
=========== ========= ======== =========
NET INCOME PER COMMON SHARE $ 0.11 0.10 0.15 0.11
=========== ========= ======== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,426 14,426 14,426 14,426
=========== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Six Months
Ended
June 30 June 30
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ 2,239 $ 1,636
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in Life and A&H reserves 5,350 2,959
Revenues from policy fund charges (505) (1,262)
Depreciation 48 60
Amortization 113 113
Net change in book value of securities 273 66
Net realized (gains) losses on
investments (2,675) (2,811)
Purchase of trading securities (8,230,438) (7,674,669)
Sales of trading securities 8,227,204 7,672,037
Amortization of policy acquisition
costs 1,110 1,639
Change in unearned premiums 93 (5)
Change in agent advances (23) 53
(Increase) decrease in accrued
investment income (47) (108)
Increase (decrease) in accrued
policy benefits and claims 32 (4)
Increase (decrease) in federal income
taxes payable (970) 773
Change in other assets and other
liabilities (337) (269)
Capitalization of deferred policy
acquisition costs (1,510) (913)
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NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES $ (43) $ (705)
INVESTMENT ACTIVITIES
Purchases of investments and loans $ (626) $ (88)
Sales of investments 0 440
Maturities of investments 1,040 13
Receipts from repayment of loans 68 104
(Purchases) sales of property and
equipment (87) (36)
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NET CASH USED BY INVESTING $ 395 $ 433
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Six Months
Ended
June 30 June 30
1997 1996
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<S> <C> <C>
FINANCING ACTIVITIES
Additional paid in capital $ 540 0
Receipts from universal life
policies credited to policyholder
account balances 1,248 1,285
Return of policyholder account
balances on universal life policies (1,560) (1,079)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 228 $ 206
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INCREASE (DECREASE) IN CASH 580 (66)
Cash and cash equivalents at
beginning of period 1,036 1,107
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,616 $ 1,041
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</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Disclosure of accounting policy:
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased as part of its daily cash management activities
to be cash equivalents.
See accompanying notes to consolidated financial statements.
5
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Item 1. Financial Information (continued)
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
Note 1.
The consolidated interim financial statements of Franklin American Corporation
and its subsidiaries ("the Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP"). Effective January 1, 1989
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from Sale of Investments". The
result of the operations for the period reported in this statement are in
conformity with the SFAS No. 97.
In the opinion of management, the attached unaudited financial statements
include all normal recurring adjustments necessary for a fair presentation of
the financial position, results of operations, and changes in financial
position of the Company. The results of operations for any interim period are
not indicative of results for the full year.
Note 2.
These consolidated interim financial statements should be read in conjunction
with the audited consolidated financial statements for December 31, 1996.
Note 3.
The Company leases space in the building formerly owned by the Company. The
lease is for a five year period effective August 1, 1994 and ending July 31,
1999. The Company also has certain short-term operating leases for various
pieces of equipment.
Note 4.
Effective January 1, 1995, the Company acquired an insurance holding company
whose primary asset was a life insurance company. Total purchase price was
$4,178,000 with $3,461,000 of the life insurance company assets used as
consideration along with $717,000 cash. The Company purchased $6,000,000 of
new issued common stock of the holding company. A portion of these funds was
used to purchase the assets from the life
6
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insurance company subsidiary which was used as consideration to the seller.
The major portion of the remaining cash was contributed by the holding company
to its life insurance subsidiary. The new company's transactions are reflected
in the consolidated financial statements of the Company. In April 1996, a
mutual final settlement of the consulting agreement and release of the
indemnification agreement was made with the majority stockholder of the
acquired insurance holding company. The settlement involved a payment by the
Company to the majority shareholder of the purchased company of $250,000. This
will have an effect on the Company's earnings in the second quarter of 1996 of
approximately one and a half cent to two cents per share outstanding.
In April 1996, a final settlement was made with the shareholder of the life
insurance company acquired January 1, 1994. The Company paid the shareholder
$147,000. As a result of this transaction, the Company will recognize a gain
of approximately $72,000 or approximately one cent per share outstanding. The
gain is due to the release of certain liabilities which were recorded in excess
of this final settlement.
Note 5.
Effective June 30, 1997 the Company became a guarantor regarding a reinsurance
transaction involving a life insurance company owned by the majority
stockholder of the Company. For serving as a guarantor the Company received an
initial fee of $38,950 reflected in other income on the consolidated statement
of operations ended June 30, 1997. Additional fees will be paid quarterly
estimated to be $20,000 per quarter or $80,000 annually. The amount of the
quarterly fee will be based on the amount of reserves subject to the
reinsurance agreement. The guaranty covers the amount of assets received from
the ceding company increased by the ceding commissions paid (the total of these
two items equals the statutory reserves recorded on this block) plus or minus
the change in the statutory reserves after the effective date of June 30, 1997.
7
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Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
The total invested assets reflects an increase of $5,100,000 in the first six
months of 1997 due to realized and unrealized gains of $2,600,000, collection
of accrued bond interest of 3,200,000 and additional paid in capital of
$540,000. Total assets increased approximately $6,300,000 during the first six
months of 1997 due mostly to the increase in invested assets.
Policy reserves increased approximately $4,500,000 for the six months ended
June 30, 1997 as the result of increase in traditional premium revenue.
Stockholders' equity is $43,332,000 at June 30, 1997 which is an increase of
$2,779,000 since December 31, 1996, resulting from the gain from operations for
the first six months of 1997 of $2,239,000 and the additional paid in capital
of $540,000 contributed by the major stockholder of the Company. This
contribution was in connection with the refund of the nonrefundable option of
$541,000 required by the Missouri Insurance Department, the domiciled state of
the option purchaser. The $541,000 was reflected as an expense liability at
December 31, 1996 and paid in January 1997.
Revenues for the six months ended June 30, 1997, were $13,738,000 compared with
revenues of $11,503,000 for the same period in 1996. The increase is due to
the increase in traditional premiums and net investment income. The investment
income increased due to the market interest rate change during the period on
United States Government Bonds.
Net investment income increased $346,000, or 13% for the six month period ended
June 30, 1997 as compared to the six month period ended June 30, 1996. This
increase is primarily the result of the growth of the invested assets over the
past twelve months and the increase in the interest yield on United States
Government bonds.
Traditional policy benefits and claims increased $382,000 in the six month
period ended June 30, 1997 over the same period ended June 30, 1996. The
increase is due primarily to the increase in the writing of new traditional
policies over the past twenty four months. Universal life and investment
product claims decreased $256,000 between the periods ending June 30, 1997 and
June 30, 1996. Paid claims were higher by $128,000 for the 1997 period over
the 1996 period and the release of policy account balances were greater by
$384,000 resulting in the decrease.
8
<PAGE> 10
Change in life and accident and health insurance reserves for future benefits
increased $2,391,000 for the six months ended June 30, 1997 as compared to the
like period ended June 30, 1996. Most of the increase is due to the increase in
traditional premiums written.
Amortization of deferred policy acquisition costs decreased $529,000 for the
six months ended June 30, 1997 compared to the same period ended June 30, 1996.
The decrease in the amortization of the policy acquisition cost for the six
month period ended June 30, 1997 compared to the six month period ended June
30, 1996 is due to the decrease in amount available for amortization for
universal life and investment products. The amount available for amortization
for these products for the six month period in 1997 was $113,000, and the
amount available for 1996 was $1,170,000. Actuarial guidelines 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 is allocated to each issue year and the amortization is recorded by
issue year until fully amortized. Once deferred acquisition costs for a
particular issue year is fully amortized no further amortization for that year
can be recorded. Because of prior profits for this line of business generated
by capital gains only a small amount remains to be amortized. As a result
$1,085,000 of the 1997 amortization is due to traditional products while
$734,000 is due to traditional products in 1996.
Commissions decreased $47,000 due to an increase in the amount of commissions
being deferred as policy acquisition costs for traditional policies. Premiums
for traditional policies have been increasing therefore commissions have also
increased.
Operating costs and expenses increased $129,000 in the six month period ending
June 30, 1997 over the same period in 1996. The increase in operating cost is
generally due to the increase in administration, taxes and selling expense
associated with the increase in the production of new policies.
The estimated federal income tax liabilities as reflected on the balance sheet
represents amounts calculated on the consolidated financial statement amounts.
The current federal income tax payable represents amounts appearing on the life
companies financials and the deferred income tax payable is due to the timing
differences between financial and tax basis.
All comments made above for the six month period are the same for the three
month period ending June 30, 1997 and June 30, 1996 except as otherwise
discussed.
9
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27 Financial Data Schedule (for SEC use only)
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN AMERICAN CORPORATION
-----------------------------
(Registrant)
Date 8/8/97 /s/ John A. Hackney
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President
Date 8/8/97 /s/ Gary L. Atnip
------ ------------------------------
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 95,059
<DEBT-CARRYING-VALUE> 1,765
<DEBT-MARKET-VALUE> 1,776
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 97,531
<CASH> 1,616
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,500
<TOTAL-ASSETS> 112,834
<POLICY-LOSSES> 66,852
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 516
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 112,834
4,355
<INVESTMENT-INCOME> 1,657
<INVESTMENT-GAINS> 1,580
<OTHER-INCOME> 98
<BENEFITS> 1,094
<UNDERWRITING-AMORTIZATION> 591
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,874
<INCOME-TAX> 263
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,611
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
