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FORM 10-QSB
SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 September 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>
<PAGE> 3
Part I. Financial Information
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($000'S OMITTED)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities -- at amortized cost
(market: 1997, $2,588; 1996, $2,531) $ 2,543 $ 2,506
Held for sale -- at market
(cost: 1997, $100,260; 1996, $89,497) 100,105 89,399
Mortgage loans on real estate:
Unaffiliated 0 68
Policy loans 221 197
Short-term investments 119 174
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TOTAL INVESTMENTS 102,988 92,344
Cash and cash equivalents 838 1,036
Accrued investment income 1,573 861
Deferred policy acquisition costs 3,239 3,100
Property and equipment 348 296
Intangible assets 8,240 8,410
Agent advances 49 24
Other assets 810 507
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TOTAL ASSETS $ 118,085 $ 106,578
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 70,107 $ 62,319
Other policy benefits 516 391
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TOTAL POLICY LIABILITIES AND ACCRUALS 70,623 62,710
Accrued expenses and other liabilities 916 747
Federal income tax payable - current 0 1,460
Federal income tax payable - deferred 606 1,108
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TOTAL LIABILITIES 72,145 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 0
Treasury stock (337) (337)
Retained earnings (deficit) 13,999 9,152
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TOTAL STOCKHOLDERS' EQUITY 45,940 40,553
============ ============
TOTAL LIABILITIES AND EQUITY $ 118,085 $ 106,578
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 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 $ 5,211 $ 2,689 12,536 7,312
Universal life and investment
product policy charges 269 364 774 1,626
Net investment income 1,704 1,454 4,702 4,106
Net realized and unrealized investment (losses) 3,075 838 5,750 3,649
Other income (net) (see note 5) 72 43 307 198
------- ------- ------- ------
$10,331 $ 5,388 24,069 16,891
BENEFITS, CLAIMS, AND EXPENSES
Policy benefits and claims:
Traditional life and accident
and health insurance $ 1,138 $ 712 3,087 2,279
Universal life and investment
products 208 119 628 795
Change in life and A&H insurance
reserves for future benefits 3,501 1,517 8,851 4,476
Amortization of deferred policy
acquisition costs 1,297 734 2,407 2,373
Commissions 68 99 288 366
Operating costs and expenses 1,107 865 3,187 2,816
------- ------- ------- -------
$ 7,319 $ 4,046 18,448 13,105
------- ------- ------- -------
NET INCOME BEFORE TAX $ 3,012 $ 1,342 5,621 3,786
Federal income tax expense (benefit) 404 113 774 500
NET INCOME $ 2,608 $ 1,229 4,847 3,286
======= ======= ======= =======
NET INCOME PER COMMON SHARE $ 0.18 $ 0.09 0.34 0.23
======= ======= ======= =======
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>
Nine Months
Ended
Sept. 30 Sept. 30
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ 4,847 $ 3,286
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in Life and A&H reserves 8,851 4,476
Revenues from policy fund charges (774) (1,626)
Depreciation 79 89
Amortization 170 170
Net change in book value of securities 277 106
Net realized (gains) losses on
investments (5,750) (3,649)
Purchase of trading securities (9,783,318) (10,833,697)
Sales of trading securities 9,778,109 10,831,028
Amortization of policy acquisition
costs 2,406 2,373
Change in unearned premiums 125 26
Change in agent advances (25) 69
(Increase) decrease in accrued
investment income (712) (1,555)
Increase (decrease) in accrued
policy benefits and claims 1 (76)
Increase (decrease) in federal income
taxes payable (1,962) 411
Change in other assets and other
liabilities (159) (415)
Capitalization of deferred policy
acquisition costs (2,545) (1,570)
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NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES $ (380) $ (554)
INVESTMENT ACTIVITIES
Purchases of investments and loans $ (1,046) $ (483)
Sales of investments 0 592
Maturities of investments 1,040 137
Receipts from repayment of loans 68 115
(Purchases) sales of property and
equipment (131) (88)
----------------- -----------------
NET CASH USED BY INVESTING $ (69) $ 273
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
Part I. Financial Information (continued)
Item 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Nine Months
Ended
Sept. 30 Sept. 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 1,827 2,207
Return of policyholder account
balances on universal life policies (2,116) (1,636)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 251 $ 571
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INCREASE (DECREASE) IN CASH (198) 290
Cash and cash equivalents at
beginning of period 1,036 1,107
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 838 $ 1,397
=================== ==================
</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
SEPTEMBER 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.
The Company is appealing a $70,000 judgement against one of it's life insurance
subsidiaries involving questionable grounds as to punitive damages. It is the
consensus of the Company's attorney that a favorable outcome for the Company is
highly probable.
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
6
<PAGE> 8
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
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 had an effect on
the Company's earnings in the nine months of 1996 of approximately 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 for the
nine month period of 1996. 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 of a reinsurance
agreement entered into by a life insurance company owned and controlled by the
majority stockholder of the Company. For this transaction the Company is being
paid an initial fee of $38,950 and a quarterly fee of approximately $20,000
based on the amount of reserves subject to the reinsurance agreement of about
$25,000,000. In a related transaction effective July 1, 1997, subject to
substantially the same terms and conditions, additional reserves of
approximately $35,000,000 were reinsured bringing the total of reserves subject
to the guarantee to an estimated $60,000,000 with total guaranty fees of about
$40,000 per quarter or $160,000 per year.
7
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
The total invested assets reflects an increase of $11,000,000 in the first nine
months of 1997 due to realized and unrealized gains of $5,750,000, collection of
bond interest of 4,300,000 and additional paid in capital of $540,000. Total
assets increased approximately $12,000,000 during the first nine months of 1997
due mostly to the increase in invested assets.
Policy reserves increased approximately $7,788,000 for the nine months ended
September 30, 1997 as the result of increase in traditional premium revenue and
interest on the total reserve amount.
Stockholders' equity is $45,940,000 at September 30, 1997 which is an increase
of $5,387,000 since December 31, 1996, resulting from the gain from operations
for the first nine months of 1997 of $4,847,000 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 nine months ended September 30, 1997, were $24,069,000 compared
with revenues of $16,891,000 for the same period in 1996. The increase is due to
the increase in traditional premiums, net investment gains and net investment
income. The investment income increased due to the increase in the invested
assets.
Net investment income increased $596,000, or 15% for the nine month period ended
September 30, 1997 as compared to the nine month period ended September 30,
1996. This increase is primarily the result of the growth of the invested assets
over the past twelve months.
Traditional policy benefits and claims increased $808,000 in the nine month
period ended September 30, 1997 over the same period ended September 30, 1996.
The increase is due primarily to the increase in the writing of new traditional
policies over the past two years. Universal life and investment product claims
decreased $167,000 between the periods ending September 30, 1997 and September
30, 1996. Paid claims were higher by $320,000 for the 1997 period over the 1996
period and the release of policy account balances were greater by $487,000
resulting in the decrease.
Change in life and accident and health insurance reserves for future benefits
increased $4,375,000 for the nine months ended September 30, 1997 as compared to
the like period ended September 30, 1996. Most of the increase is due to the
increase in traditional premiums written.
8
<PAGE> 10
Amortization of deferred policy acquisition costs increased 34,000 for the nine
months ended September 30, 1997 compared to the same period ended September 30,
1996. The increase in the amortization of the policy acquisition cost for the
nine month period ended September 30, 1997 compared to the nine month period
ended September 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 nine month period in 1997 was
$229,000, and the amount available for 1996 was $1,300,000. 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 $2,336,000 of the 1997 amortization is due to traditional products while
$1,321,000 is due to traditional products in 1996.
Commissions decreased $78,000 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 being
deferred have also increased.
Operating costs and expenses increased $371,000 in the nine month period ending
September 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.
Since estimated quarterly tax payments are being made, the Company has no
current federal income tax liability. The deferred income tax payable is due to
the timing differences between financial and tax basis.
The federal income tax for the nine months and three months ending September 30,
1996 have been recalculated to be consistent with the 1997 calculation.
All comments made above for the nine month period are the same for the three
month period ending September 30, 1997 and September 30, 1996 except as
otherwise discussed.
9
<PAGE> 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
27 Financial Data Schedule (for SEC use only)
A report was filed August 31, 1997 to report the Company became a guarantor of a
reinsurance agreement entered into by a life insurance company indirectly owned
and controlled by the majority stockholder of the Company.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN AMERICAN CORPORATION
--------------------------------
(Registrant)
Date 11/4/97 /s/ John A. Hackney
---------------------- -----------------------
President
Date 11/4/97 /s/ Gary L. Atnip
---------------------- -------------------------------
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 100,105
<DEBT-CARRYING-VALUE> 2,543
<DEBT-MARKET-VALUE> 2,588
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 102,988
<CASH> 838
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,239
<TOTAL-ASSETS> 118,085
<POLICY-LOSSES> 70,107
<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> 118,085
13,310
<INVESTMENT-INCOME> 4,702
<INVESTMENT-GAINS> 5,750
<OTHER-INCOME> 307
<BENEFITS> 3,715
<UNDERWRITING-AMORTIZATION> 2,407
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 5,621
<INCOME-TAX> 774
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,847
<EPS-PRIMARY> 0.34
<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>
