<PAGE> 1
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, 1998
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Commission File Number: 0-18748
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FRANKLIN AMERICAN CORPORATION
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
TENNESSEE 62-1365451
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
377 RIVERSIDE DRIVE, SUITE 400, 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 each 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, 1998, 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>
Part I Financial Information Page
<S> <C> <C>
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>
1
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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, 1998 December 31, 1997
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities - at amortized cost
(market: 1998, $2,702; 1997, $2,618) $ 2,603 2,541
Held for Sale - at market
(cost: 1998, $118,166; 1997, $101,915) 118,165 107,082
Policy loans 231 231
Short-term investments 77 128
--------- --------
TOTAL INVESTMENTS 121,076 109,982
Cash and cash equivalents 955 1,239
Accrued investment income 2,148 1,957
Deferred policy acquisition cost 2,215 2,413
Property and equipment 365 338
Intangible assets 8,070 8,183
Agent advances 34 63
Other assets 544 543
Deferred tax asset, non-current 1,324 --
--------- --------
TOTAL ASSETS $ 136,731 124,718
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 77,180 72,220
Other policy benefits 738 629
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TOTAL POLICY LIABILITIES AND ACCRUALS 77,918 72,849
Accrued expenses and other liabilities 464 756
Federal income tax payable - current 3,043 985
Federal income tax payable - deferred -- 385
--------- --------
TOTAL LIABILITIES 81,425 74,975
COMMITMENTS AND CONTINGENCIES (SEE NOTES 3,4,5)
STOCKHOLDER'S EQUITY
No par value; authorized 20,000,000 shares; issued
and outstanding 14,426,096 shares in 1998 and 1997 31,738 31,738
Additional paid in capital 540 540
Treasury stock (337) (337)
Retained earnings (deficit) 23,365 17,802
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TOTAL STOCKHOLDERS' EQUITY 55,306 49,743
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TOTAL LIABILITIES AND EQUITY $ 136,731 124,718
========= ========
</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 Ended Six Months Ended
6/30/98 6/30/97 6/30/98 6/30/97
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<S> <C> <C> <C> <C>
REVENUE:
Insurance revenue:
Traditional life and accident
and health insurance premiums $ 5,100 4,101 9,801 7,325
Universal life and investment
product policy charges 253 254 493 505
Net investment income 1,823 1,657 3,564 2,998
Net realized and unrealized
investment gains (losses) 5,593 1,580 5,544 2,675
Other income (net) 38 98 116 235
------- ------ ------ ------
$12,807 7,690 19,518 13,738
BENEFITS, CLAIMS, AND EXPENSES
Policy benefits and claims:
Traditional life and accident
and health insurance 1,593 992 3,321 1,949
Universal life and investment
products 55 102 287 420
Change in life and A&H insurance
reserves for future benefits 2,867 3,063 5,813 5,350
Amortization of deferred policy
acquisition costs 1,000 591 2,060 1,110
Commissions 110 179 213 220
Operating cost and expenses 945 889 1,637 2,080
------- ------ ------ ------
$ 6,570 5,816 13,331 11,129
------- ------ ------ ------
NET INCOME BEFORE TAX 6,237 1,874 6,187 2,609
Federal income tax expense
(benefit) 613 263 624 370
------- ------ ------ ------
NET INCOME $ 5,624 1,611 5,563 2,239
======= ====== ====== ======
NET INCOME PER COMMON SHARE $ 0.39 0.11 0.39 0.15
======= ====== ====== ======
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, 1998 June 30, 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ 5,563 $ 2,239
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in Life and A&H reserves 5,813 5,350
Revenues from policy fund charges (493) (505)
Depreciation 61 48
Amortization 113 113
Net change in book value of securities (30) 273
Net realized (gains) losses on investments (5,544) (2,675)
Purchase of trading securities (357,226) (8,230,438)
Sales of trading securities 351,727 8,227,204
Amortization of policy acquisition costs 2,060 1,110
Change in unearned premiums 141 93
Change in agent advances 28 (23)
(Increase) decrease in accrued investment income (191) (47)
Increase (decrease) in accrued policy benefits and claims (32) 32
Net increase (decrease) in unpaid federal income taxes 349 (970)
Change in other assets and other liabilities (293) (337)
Capitalization of deferred policy acquisition costs (1,861) (1,510)
--------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 185 $ (43)
INVESTMENT ACTIVITIES
Purchases of investments and loans $ (123) $ (626)
Sales of investments 1 --
Maturities of investments 100 1,040
Receipts from repayment of loans -- 68
(Purchases) sales of property and equipment (88) (87)
--------- -----------
NET CASH PROVIDED (USED) BY INVESTING $ (110) $ 395
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1997
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<S> <C> <C>
FINANCING ACTIVITIES
Additional paid in capital $ -- $ 540
Receipts from universal life policies credited to
policyholder account balances 1,030 1,248
Return of policyholder account balances on universal
life policies (1,389) (1,560)
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ (359) $ 228
------- -------
INCREASE (DECREASE) IN CASH (284) 580
Cash and cash equivalents at beginning of period 1,239 1,036
======= =======
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 955 $ 1,616
======= =======
</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 accompany notes to consolidated financial statements.
5
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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
results 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 operation 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, 1997.
NOTE 3.
The Company leases its office space. The original lease was for a five-year
period effective August 1, 1994 and ending July 31, 1999. The original lease was
amended and extended on December 24, 1997 to cover a period of approximately 10
years. The revised lease is based on expanded office space and renovations.
Future rental expense payments are as follows:
1998 $ 296,253
1999 383,997
2000 383,997
2001 405,667
2002 421,158
Thereafter 2,429,911
The Company also has certain short-term (less than one year) operating leases
for various pieces of equipment.
6
<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 4.
The Company is appealing an $88,000 judgment against one of its life insurance
subsidiaries involving punitive damages. It is the opinion of the Company's
attorney that a favorable outcome for the Company is highly probable.
There are several other lawsuits pending in the normal course of business
involving death benefits. It is the opinion of counsel that none have merit.
NOTE 5.
In assessing the year 2000 software issue, the Company has received written
assurance from its primary software vendors that there will not be a problem
once the year 2000 begins. Therefore, the Company should not be at risk in its
processing of transactions after the year 2000.
7
<PAGE> 9
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS, JUNE 30, 1998
The Company's total invested assets increased in the first six months of 1998 by
$11,094,000 due to the net realized investment gains on bonds and cash flow from
operations invested in bonds. The Total assets increased approximately
$12,013,000 during the first six months of 1998 due to the increase in invested
assets.
Future policy benefits increased approximately $4,960,000 for the period ended
June 30, 1998, as the result of increase in premium revenue.
Stockholders equity is $55,306,000 at June 30, 1998, which is a increase of
$5,563,000 since December 31, 1997, resulting from the gain from operations for
the first six months of 1998.
Revenues for the six months ended June 30, 1998, were $19,518,000 compared with
revenues of $13,738,000 for the same period in 1997. The net increase is due to
the increase in traditional premiums and investment gains in 199 8 over 1997.
Net investment income increased $566,000, or 19% for the six-month period ended
June 30, 1998, as compared to the six-month period ended June 30, 1997. This
increase is primarily the result of the growth of the invested assets over the
past twelve months.
Traditional policy benefits and claims increased $1,372,000 in the six-month
period which ended June 30, 1998, over the six-month period ended June 30, 1997.
The increase was due primarily to the increase in the writing of new traditional
policies over the past forty-two months. Universal life and investment product
claims decreased $133,000 from the previous year's six-month period. Paid claims
were lower by $290,000 for the first six months of 1998 in comparison with the
first six months of 1997, and the release of policy account balances in 1997
were greater than the current period by $157,000.
8
<PAGE> 10
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
Change in life, accident and health insurance reserves for future benefits
increased $463,000 for the six months ending June 30, 1998, as compared to the
six months which ended June 30, 1997. Most of the increase was due to the
increase in traditional premiums written.
Amortization of deferred policy acquisition cost increased $950,000 for the six
months ending June 30, 1998, compared to the six months which ended June 30,
1997. The increase in deferred expenses, which was due to increase in new policy
productions for traditional policies over the past forty-two months, caused an
increase in the amortization in the deferred expenses.
Commissions decreased $7,000 due to an increase in the amount of new policies
issued less the amounts being deferred and amortized as deferred policy
acquisition costs over the expected life of the policies in force.
Operating cost and expenses decreased $443,000 in the six-month period ending
June 30, 1998 over the same period which ended June 30, 1997. The decrease is
primarily due to the increase in deferred expenses related to the increase in
productions and reduction in deferred state income taxes.
The current federal income tax payable amount represents estimated calculations
for the parent and subsidiaries. The deferred tax asset amount is due to the
timing differences between the financial basis and the tax basis methods of
accounting.
The comments made above for the six month-period ending June 30, 1998, are the
same as the three-month period ending June 30, 1998, except as otherwise
discussed.
9
<PAGE> 11
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K JUNE 30, 1998
EX 27 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
NONE
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 August 13, 1998 /S/ JOHN A. HACKNEY
- --------------------------- ---------------------------------------
JOHN A. HACKNEY
PRESIDENT
DATE August 13, 1998 /S/ GARY L. ATNIP
- --------------------------- ---------------------------------------
GARY L. ATNIP
CHIEF FINANCIAL OFFICER
12
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 118,165
<DEBT-CARRYING-VALUE> 2,603
<DEBT-MARKET-VALUE> 2,702
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 121,076
<CASH> 955
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,215
<TOTAL-ASSETS> 136,731
<POLICY-LOSSES> 77,180
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 738
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 136,731
10,294
<INVESTMENT-INCOME> 3,564
<INVESTMENT-GAINS> 5,544
<OTHER-INCOME> 116
<BENEFITS> 3,608
<UNDERWRITING-AMORTIZATION> 2,060
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 6,187
<INCOME-TAX> 624
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,563
<EPS-PRIMARY> 0.39
<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>
