<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: March 31, 1998
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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 # )
377 Riverside Drive, Franklin, Tennessee 37065
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(Address of Principal Executive Offices) (Zip Code)
(615) 790-0464
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, If changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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As of March 31, 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 Statement 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>
MARCH 31 DECEMBER 31
1998 1997
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities - at amortized cost
(market: 1998, $2,615; 1997, $2,618) $ 2,539 $ 2,541
Held for sale - at market
(cost: 1998, $104,254; 1997, $101,915) 109,395 107,082
Policy loans 232 231
Short-term investments 141 128
--------- ---------
TOTAL INVESTMENTS 112,307 109,982
Cash and cash equivalents 884 1,239
Accrued investment income 1,653 1,957
Deferred policy acquisition costs 2,315 2,413
Property and equipment 337 338
Intangible assets 8,126 8,183
Agent advances 36 63
Other assets 857 543
--------- ---------
TOTAL ASSETS $ 126,515 $ 124,718
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 74,702 $ 72,220
Other policy benefits 593 629
--------- ---------
TOTAL POLICY LIABILITIES AND ACCRUALS 75,295 72,849
Accrued expenses and other liabilities 433 756
Federal income tax payable - current 648 985
Federal income tax payable - deferred 457 385
--------- ---------
TOTAL LIABILITIES 76,833 74,975
COMMITMENTS AND CONTINGENCIES (SEE NOTES 3,4,5)
STOCKHOLDERS' 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) 17,741 17,802
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TOTAL STOCKHOLDERS' EQUITY 49,682 49,743
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TOTAL LIABILITIES AND EQUITY $ 126,515 $ 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 STATEMENT OF OPERATIONS
($000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997
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<S> <C> <C>
REVENUE:
Insurance revenue:
Traditional life and accident and health insurance premiums $ 4,701 $ 3,224
Universal life and investment product policy charges 240 251
Net investment income 1,741 1,341
Net realized and unrealized investment gains (losses) (49) 1,095
Other (net) 78 137
--------- --------
$ 6,711 $ 6,048
BENEFITS, CLAIMS AND EXPENSES
Policy benefits and claims:
Traditional life and accident and health insurance $ 1,728 $ 957
Universal life and investment products 232 318
Change in life and A&H insurance reserves for future benefits 2,946 2,287
Amortization of deferred policy acquisitions cost 1,060 519
Commissions 103 41
Operating cost and expenses 692 1,191
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$ 6,761 $ 5,313
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NET INCOME BEFORE TAX $ (50) $ 735
Federal income tax expense (benefit) 11 107
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NET INCOME $ (61) $ 628
========= ========
NET INCOME PER COMMON SHARE $ 0.00 $ 0.04
========= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 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>
THREE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ (61) $ 628
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in Life and A&H reserves 2,946 2,287
Revenues from policy fund charges (240) (252)
Depreciation 31 27
Amortization 57 57
Net change in book value of securities (31) 273
Net realized (gains) losses on investments 49 (1,095)
Purchase of trading securities (2,976) (5,328,094)
Sales of trading securities 646 5,328,128
Amortization of policy acquisition costs 1,059 519
Change in unearned premiums 12 43
Change in agent advances 27 (29)
(Increase) decrease in accrued investment income 304 (1,687)
Increase (decrease) in accrued policy benefits and claims (48) 1
Increase (decrease) in federal income taxes payable (264) (713)
Change in other assets and other liabilities (638) (196)
Capitalization of deferred policy acquisition cost (960) (727)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (87) $ (830)
INVESTMENT ACTIVITIES
Purchases of investments and loans $ (14) $ (145)
Sales of investments 2 100
Maturities of investments -- --
Receipts from repayment of loans -- --
(Purchases) sales of property and equipment (30) (20)
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NET CASH PROVIDED (USED) BY INVESTING $ (42) $ (65)
</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>
THREE MONTHS ENDED
MARCH 31 MARCH 31
1998 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 502 558
Return of policyholder account balances on
universal life policies (727) (664)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ (225) $ 434
INCREASE (DECREASE) IN CASH (354) (461)
Cash and cash equivalents at beginning of period 1,238 1,036
======= =======
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 884 $ 575
======= =======
</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
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 company's operations for the period reported in this statement
are in conformity with 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 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, 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:
<TABLE>
<S> <C>
1998 $ 296,253
1999 383,997
2000 383,997
2001 405,667
2002 421,158
Thereafter 2,429,911
</TABLE>
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
MARCH 31, 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
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
The Company's total invested assets increased in the first quarter of 1998 by
$2,325,000 over the prior quarter, due to the collection of bond interest during
the period, which interest was accrued at December 31, 1997; and the Company's
total invested assets also grew because cash flow from operations increased
during the period, and this cash flow was invested in bonds. The total assets
increased approximately $1,797,000 during the first quarter of 1998 due to the
increase in invested assets less the decrease in accrued investment income.
Future policy benefits increased approximately $2,500,000 for the quarter ended
March 31, 1998, as the result of increase in premium revenue.
Stockholders' equity is $49,682,000 at March 31, 1998, which is a decrease of
$61,000 since December 31, 1997, resulting from the loss from operations for the
first quarter of 1998.
Revenues for the three months ended March 31, 1998, were $6,711,000 compared
with revenues of $6,048,000 for the same period in 1997. The net increase is due
to the increase in traditional premiums less the change of investment gains in
1997 to a loss for the current period.
Net investment income increased $400,000, or 30% for the three-month period
ended March 31, 1998, as compared to the three-month period ended March 31,
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 $771,000 in the three-month
period which ended March 31, 1998, over the quarter which ended March 31, 1997.
The increase was due primarily to the increase in the writing of new traditional
policies over the past thirty-six months. Universal life and investment product
claims decreased $86,000 from the previous year's quarter. Paid claims were
lower by $30,000 for the first quarter of 1998 in comparison with the first
quarter of 1997, and the release of policy account balances were greater than
the present quarter by $56,000.
8
<PAGE> 10
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. (CONTINUED)
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Change in life, accident and health insurance reserves for future benefits
increased $659,000 for the three-months ending March 31, 1998, as compared to
the quarter which ended March 31, 1997. Most of the increase was due to the
increase in traditional premiums written.
Amortization of deferred policy acquisition costs increased $541,000 for the
three months ending March 31, 1998, compared to the quarter which ended March
31, 1997. The increase in deferred expenses, which was due to increase in new
policy productions for traditional policies over the past thirty-six months,
caused an increase in the amortization in the deferred expenses.
Commissions increased $62,000 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 costs and expenses decreased $499,000 in the three-month period ending
March 31, 1998 over the quarter which ended March 31, 1997. The decrease is the
result of a reduction in operating expenses in two of the life insurance
subsidiaries, along with a reduction in state deferred income tax.
The current federal income tax payable amount represents estimated calculations
for the parent and subsidiaries, and the deferred income tax payable amount is
due to the timing differences between the financial basis and the tax basis
methods of accounting.
9
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 6.
Ex 27 Financial Data Schedule (for SEC use only)
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
EXHIBITS AND REPORTS ON FORM 8-K
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 5/8/98 /s/ John A. Hackney
--------------------- -------------------------------------
John A. Hackney
President
Date 5/8/98 /s/ Gary L. Atnip
-------------------- -------------------------------------
Gary L. Atnip
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 109,395
<DEBT-CARRYING-VALUE> 2,539
<DEBT-MARKET-VALUE> 2,615
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 112,307
<CASH> 884
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,315
<TOTAL-ASSETS> 126,515
<POLICY-LOSSES> 74,702
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 593
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 126,515
4,941
<INVESTMENT-INCOME> 1,741
<INVESTMENT-GAINS> (49)
<OTHER-INCOME> 78
<BENEFITS> 1,960
<UNDERWRITING-AMORTIZATION> 1,060
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (50)
<INCOME-TAX> 11
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61)
<EPS-PRIMARY> 0
<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>
