<PAGE> 1
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, 1997
[ ] 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)
Tennessee 62-1365451
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 $35,880,316.
As of December 31, 1997, 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 1997 of $2.63 per share was $37,513,652.
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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 21, 1998.
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, formerly 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 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"). Farmers and IFSLIC were sold late in 1994.
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.
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.
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Franklin American has an A.M. Best rating of B- (indicating a fair rating for
its financial size category), Family Guaranty has an A.M. Best rating of C+
(indicating a marginal rating for its financial size category), and Protective
has an A.M. Best rating of FPR-4 (indicating a fair rating 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
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 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.
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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 1995, 1996 and 1997.
Less than one percent of all policies issued were for face amounts greater than
$10,000 in each of the three years.
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. Benefits are
paid 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 before the expiration of the surrender charge provision.
The Company's annuities carry a minimum guaranteed interest rate of five percent
of the fund value except those annuities placed in force after February 1993 by
Franklin American which 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 for the twelve months immediately preceding
withdrawal. The total surrender charges incurred by Franklin American and
Protective for 1997, 1996, and 1995 were $5,723, $25,362, and $7,472,
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
loading amount is the difference between gross single premium collected and the
portion of premium applied to 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 1997 was between five and six percent depending on the type of
policy.
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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 1997 was between four and one
half and 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 and would terminate upon the
death of the insured or when surrendered by the policy owner.
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 typical policy owner is elderly and the purpose of 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 1997, 1996, and 1995 were $866,258,
$1,018,882, and $1,383,117, respectively.
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 1997 there were only 54 of these policies remaining in force with
reserves totalling $19,486.
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.
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.
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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,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Universal Life $ (2,000,899) $ (2,421,793) $ (2,504,683)
Whole Life 12,633,387 (286,632) 2,481,274
Term Life (2,817,000) (1,173,000) (244,898)
Industrial* 622,000 7,652,000 5,518
Annuities (622,894) 494,615 (28,520)
------------ ------------ ------------
Total $ 7,814,594 $ 4,265,190 $ ( 291,309)
============ ============ ============
</TABLE>
*Acquired with Family Guaranty in 1994 and Protective in 1995.
The new business written by the Subsidiaries in 1997, 1996, and 1995 was
$26,659,000, $18,330,000, and $14,555,000, 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 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
1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Number of life policies in force 76,361 69,817 69,181
Average size of life policies in force $ 2,086 $ 2,282 $ 2,262(1)
Number of claims on life policies 2,459 1,122 1,416
Life policy death claims incurred $ 4,531,930 $ 3,683,922(1) $ 2,557,532(1)
Persistency rate of life policies 95.5 93.4 91.0
Penalty charges for withdrawals $ 5,193 $ 25,362 $ 7,472
Numbers of surrenders, lapses, and
other reductions 2,276 3,255 4,352
Amount of surrenders, lapses, and
other reductions (in force) $20,141,000 $13,926,000 $27,317,000
Amount of policy loans outstanding
at December 31 $ 231,494 $ 196,893 $ 245,714
</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 includes 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 commissions 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 premiums 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 1997,
1996, and 1995 compared to the unusual value standards:
NAIC RATIOS FOR FRANKLIN AMERICAN
<TABLE>
<CAPTION>
Unusual Values
Equal to or
-----------
1997 1996 1995
---- ---- ----
Ratio Over Under Results Results Results
- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 -9 10 37
1A. Gross change in capital and surplus 50 -10 -5 10 37
2. Net gain to total income -- 0 -0.8* 8 NR
3. DISCONTINUED
4. Adequacy of investment income 900 125 185 205 N/A
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 0
7. Investments in affiliates to capital
and surplus 100 -- 0 1 0
8. Surplus relief
(over $5 million capital and
surplus) 30 -99 0 0 14
($5 million or less capital and
surplus) 10 -10 -- -- --
9. Change in premium 50 -10 76* 999* -99*
10. Change in product mix 5 -- 4 N/A NR
11. Change in asset mix 5 -- 0 0.1 6.7*
12. Change in reserving ratio 20 -20 31* 59* -81*
====================================================================================================
</TABLE>
* Indicates unusual values.
N/A Indicates not applicable.
NR Indicates no ratio.
In 1997, the unusual ratios, #2, #9, and #12, were all due primarily to
the increase in the production of new premiums.
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In 1996, the unusual ratio #9 was 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 following paragraph. The unusual #12 ratio was due to the increase
in first year premiums.
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 an unusual ratio because 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.
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Set forth in the table below are Family Guaranty's ratios for the years 1997,
1996 and 1995 compared to the unusual value standards:
NAIC RATIOS FOR FAMILY GUARANTY
<TABLE>
<CAPTION>
Unusual Values
Equal to or
-----------
1997 1996 1995
---- ---- ----
Ratio Over Under Results Results Results
- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 6 11 15
1A. Gross change in capital and surplus 50 -10 6 52* 15
2. Net gain to total income -- 0 5 2 4
3. DISCONTINUED
4. Adequacy of investment income 900 125 169 168 N/A
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 0
7. Investments in affiliates to capital
and surplus 100 -- 0 0 5
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 28 20 9
10. Change in product mix 5 -- 0 0 0
11. Change in asset mix 5 -- 0 .5 .9
12. Change in reserving ratio 20 -20 2 -4 -12
=============================================================================================
</TABLE>
* Indicates unusual values.
N/A Indicates not applicable
For 1997, there were no unusual ratios.
For 1996, ratio #1A was unusual because of the $500,000 contributed to
paid in surplus.
For 1995, there were no unusual ratios.
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Set forth in the table below are Protective's ratios for the years 1997, 1996
and 1995 compared to the unusual value standards:
NAIC RATIOS FOR PROTECTIVE
<TABLE>
<CAPTION>
Unusual Values
Equal to or
-----------
1997 1996 1995
---- ---- ----
Ratio Over Under Results Results Results
- ----- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 0 12 -99*
1A. Gross change in capital and surplus 50 -10 0 29 78*
2. Net gain to total income -- 0 7 12 -39*
3. DISCONTINUED
4. Adequacy of investment income 900 125 207 185 N/A
5. Non-adm to admitted assets 10 -- 0 0 2
6. Total real estate and mortgage
loans to cash and invested assets 30 -- 0 0 7
7. Investments in affiliates to capital
and surplus 100 -- 0 0 1
8. Surplus relief (over $5 million
capital and surplus) 30 -99 -- -- --
($5 million or less capital and
surplus) 10 -10 0 0 1
9. Change in premium 50 -10 20 12 -24*
10. Change in product mix 5 -- NR NR 4.3
11. Change in asset mix 5 -- 0 1.9 5.5*
12. Change in reserving ratio 20 -20 22* 4 16
=========================================================================================================
</TABLE>
* Indicates unusual values.
N/A Indicates not applicable.
NR Indicates no ratio.
For 1997, unusual ratio #12 was due to an adjustment to the statutory reserves.
For 1996, there were no unusual ratios.
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For 1995, unusual ratios #1 and #1A were 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 the statutory accounting basis.
Ratio #9 was 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 was 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 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 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 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. Family Guaranty's entire production
is derived through
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this relationship. The original agreement was signed in early 1994 for a period
of five years. During 1997, a new agreement was signed which extended the
agreement until December 31, 2002, and requires the General Agent to place all
of its insurance with Family Guaranty.
PUA serves as the Trustee for several funeral homes in Mississippi who are
grantors of the trust. As funds are received into the trust, PUA as Trustee
generally purchases annuities from Protective. However, funds may be invested in
certain securities if requested by the Trust Grantor. When claims occur on an
annuity policy, Protective pays the benefits to 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 is $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 50% coinsured
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.
<PAGE> 14
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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 application 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
<PAGE> 15
PAGE 15
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, 1997 and 1996, the
Company did not own any common or preferred stocks. All bonds owned on December
31, 1997 were United States Government securities except for one utility bond
for $18,738, one state bond for $100,000 and one industrial bond for $50,655.
All bonds owned on December 31, 1996 were United States Government securities
except for an $18,492 utility bond, a $100,000 state bond, and a $51,103
industrial bond. As of December 31, 1995 the Company owned two common stocks and
no preferred stocks. Investments of the Subsidiaries are subject to certain
restrictions imposed by state insurance laws and regulations.
In 1997, 1996, and 1995, net investment income represented approximately 27%,
30%, and 31%, respectively, of the Company's total revenues less realized gains
and losses. Investment results of the Company for the three years ended December
31, 1997 before applicable income taxes, are as follows:
<TABLE>
<CAPTION>
NET REALIZED UNREALIZED
INVESTMENT INVESTMENT GAINS GAINS (LOSSES)
INVESTMENTS CASH TOTAL INCOME YIELD(1) (LOSSES)(2) ON SECURITIES(3)
----------- ---- ----- ------ --------- ----------- ----------------
(IN THOUSANDS, EXCEPT YIELD AMOUNTS)
December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $109,982 $1,239 $111,221 $6,645 6.62% $5,626 $5,264
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)
</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.
<PAGE> 16
PAGE 16
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 1997, 1996,
and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 1,239 1.1 $ 1,036 1.1 $ 1,107 1.4
Short-term investments 128 .1 175 .2 597 .8
Fixed maturities 109,623 98.6 91,904 98.4 75,694 95.7
Common stocks -- -- -- -- 1 --
Policy loans 231 .2 197 .2 246 .3
Mortgage Loans -- -- 68 .1 1,417 1.8
-------- ----- ------- ----- ------- -----
TOTAL $111,221 100.0% $93,380 100.0% $79,062 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
The total bond portfolio, which currently consists primarily of U.S. Government
securities, contained $104,455,921 at cost and $109,699,697 at market value at
December 31, 1997. 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 $100,372 $1,936,587 $102,822 $21,042,798 $86,270,849 $109,453,428
States and
Territories -- -- -- 100,000 -- 100,000
Public Utilities -- -- 18,737 -- -- 18,737
Industrial &
Miscellaneous -- 50,654 -- -- -- 50,654
-------- ---------- -------- ----------- ----------- ------------
TOTALS $100,372 $1,987,241 $121,559 $21,142,798 $86,270,849 $109,622,819
======== ========== ======== =========== =========== ============
</TABLE>
<PAGE> 17
PAGE 17
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.
<PAGE> 18
PAGE 18
ACQUISITION AND DISPOSITION OF ASSETS
ACQUISITIONS:
National American Life Insurance Company of Pennsylvania
On January 19, 1994, Franklin American 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 the final block of approximately $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 Franklin American'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 Franklin
American 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 Franklin
American, for a net transfer of $18,052,080.59. As a result of the recision of
the coinsurance agreements, NALICO recaptured all liability for policies and
claims arising after September 1, 1995.
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 costs.
PUA's assets consist primarily of Franklin Protective Life Insurance Company,
formerly Protective Service Life Insurance Company (hereafter "Protective"). 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).
<PAGE> 19
PAGE 19
EMPLOYEES
As of December 31, 1997, the Company had 54 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company entered into a lease for office space on July 15, 1994 with an
effective date of August 1, 1994. The lease covered 12,387 square feet for a
term of five (5) years. The space is occupied by the Company and Subsidiaries.
The original lease was amended December 24, 1997, to cover a period of 10 years
ending June 1, 2008. The total square footage has been increased to 24,774
square feet. Effective June 1, 1998, the monthly payment will be increased to
$31,999.45 for the next 36 months. For the 36-month period beginning June 1,
2001, the payment will be $35,096.50 and the final 48-month period the monthly
payment will be $38,193.25. The Company anticipates this new lease arrangement
will be adequate for its current operations and for the period covered by the
lease. Should the need arise for additional space before the end of the current
lease, the Company will review its options at that time.
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, 1997.
<PAGE> 20
PAGE 20
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 1997 and 1996 as provided by a local securities dealer in
Nashville, Tennessee.
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 1.375 .625 1.375 .875
Second Quarter 2.750 1.500 1.375 .750
Third Quarter 2.875 2.375 1.375 1.125
Fourth Quarter 2.875 2.375 1.625 1.125
</TABLE>
As of December 31, 1997 there were 1,459 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.
<PAGE> 21
PAGE 21
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, 1997, the Company had a net income of
$8,649,903, compared to net income of $8,006,411 in 1996. There were no material
transactions in 1997 which were not in the ordinary course of business. A
significant transaction occurring in 1996 was the accruing of a $541,000 expense
for a $500,000 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 who
is also owned by the majority stockholder of the Company. In a related
transaction, the majority 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 a 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 PUA whose principal
asset is Protective which increased traditional life premiums approximately
$1,900,000 and the issuing of additional shares of common stock of the Company
for $3,000,000.
The Company became a guarantor for the reinsurer, who is owned and controlled by
the majority stockholder of the Company, through two transactions, effective
June 30, 1997 and July 1, 1997. The total amount of these two transactions was
approximately $60,000,000 of reserves on a coinsurance basis. Both agreements
are subject to substantially the same terms and conditions. Since this
reinsurance agreement is on a coinsurance basis, the reinsurer received cash
equal to the reserves of approximately $60,000,000 less ceding commissions of
approximately $4,000,000 for a net of $56,000,000. The Company receives a fee of
about $160,000 annually for serving as guarantor. As the ceded reserves decrease
in the subsequent periods, the fees and the guaranty amount will decrease. In
the opinion of management, it is highly unlikely the Company will ever be liable
as guarantor since the assets received of $56,000,000 are fully invested in
United States
<PAGE> 22
PAGE 22
Government securities by the reinsurer. No provision for this contingent
liability has been made in the consolidated financial statements as of December
31, 1997.
Gross revenues increased 33 percent in 1997 compared to 1996 and increased 24
percent in 1996 compared to 1995. The increases are 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
1997 and 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
values and recognition of the nonrefundable option of $500,000 as income for the
right to assume these fund values.
Net investment income increased 19% in 1997 over 1996, and decreased 1% in 1996
over 1995. The increase in 1997 results from the increase in invested assets as
yields remained about the same. The decrease in 1996 was the result of the
decrease in the yield on invested assets. The decrease in the yield on bonds
provided the opportunity for realized capital gains, particularly in the latter
part of 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: 6.62% in 1997, 6.63%
in 1996, and 7.45% in 1995. The changes in the yield rates over the past three
years reflect the general marketplace changes on new investments. The Company's
investment strategy involves 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 Government securities are sold and
repurchased periodically resulting in net capital gains. The realized and
unrealized net gains for 1997, 1996, and 1995 are the result of the decreasing
interest rates on United States Government bonds occurring throughout the year,
but particularly in the fourth quarter of each year.
Policy benefits for traditional life, accident and health insurance increased
28% in 1997, 4% in 1996 and 236% in 1995. Most of the increase in 1997 and 1996
occurred in Franklin American and Family Guaranty due to the increase in writing
traditional policies. The increase in 1995 was due primarily to the acquisition
of Protective whose policies in force were principally traditional policies. An
increase occurred in Family Guaranty due to the increase in the writing of new
business over the past two years. Policy benefits for universal life and annuity
products decreased 26% in 1997 over 1996, increased 17% in 1996 over 1995, and
increased less than 1% in 1995 over 1994. Policy benefits represent benefits
paid less fund values released. In 1997, benefits paid increased 8% and fund
values released increased 22% which net to the decrease for the year. In 1996,
the benefits paid decreased 15% and fund values released decreased 24%, the net
of which reflected an increase in benefits to the policyholders. In 1995, the
benefits paid decreased 18% and fund values released decreased 22%, the net of
which also reflected an increase. A portion of the 1995 activity resulted from
companies acquired during 1995 as well as from the block of annuities coinsured
held for 8 months in 1995.
<PAGE> 23
PAGE 23
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 1997, 1996, and 1995. In 1995, the increase is 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 actuarial
guidelines. The total future policy liabilities at December 31, 1997, 1996, and
1995 were $72,219,624, $62,318,987, and $56,485,831, respectively. Assets
generated by the policy fund receipts on universal life and annuities 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 1997 and 1996 is due primarily to the increase in the
traditional policies. The decrease in future policy liabilities for 1995 is
attributable primarily to the difference of the 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.
Amortization of deferred policy acquisition costs increased 290% in 1997,
decreased 80% in 1996, and increased 398% in 1995. The increase in 1997 was due
primarily to the amortization of the deferred commissions generated by the
increase in premiums on traditional policies over the last three years. In 1996,
the amortization was less than 1995 because there was less unamortized deferred
acquisition cost available than 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 rates requiring a greater amortization of the
deferred acquisition cost.
Commissions decreased 13% in 1997, decreased 11% in 1996, and increased 18% in
1995. Commissions are reported after deducting the amount being capitalized as
deferred acquisition cost. These amounts will ultimately be charged to expense
as deferred policy acquisition cost amortization. The decrease in 1997 and 1996
is due to the increase in the deferred amount. The 1995 increase is primarily
due to the acquisition of Protective.
Operating costs and expenses decreased 2% in 1997, increased 12% in 1996, and
42% in 1995. Operating costs associated with the production of new business are
capitalized as deferred acquisition cost. Therefore, the operating costs
reported in the consolidated statement of operations is net of the capitalized
amounts. The decrease in 1997 and the increase in 1996 is due to the $541,000
included in operating costs and expenses in 1996. This amount represents the
$500,000 nonrefundable option 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
Item 6. See also footnotes to the financial statements. The 1995 increase
<PAGE> 24
PAGE 24
in operating expense is due primarily to the acquisition of Protective. A
portion of the increase occurred in Franklin American.
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, 1997,
there are no net operating loss carryforwards remaining.
Family Guaranty files its federal income tax return separately. At December 31,
1997, 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 are no
net operating loss carryforwards available to offset future earnings as of
December 31, 1997.
For the year ended December 31, 1997, the consolidated GAAP income tax expense
was $1,945,762. The amount of current income tax payable as of December 31,
1997, is estimated to be $984,819 and deferred income tax payable estimated to
be $385,000 which is due to timing differences in the recognition of revenues
and expenses between GAAP and current income tax regulations.
Policy loans to policyholders increased to $231,494 in 1997 from $196,894 in
1996. The Company expects as the fund values increase, 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 $62,700 and $24,194 at December
31, 1997 and 1996, respectively. Allowances for uncollectible accounts were
$697,843 and $759,941 at December 31, 1997 and 1996, respectively.
The investment strategy used by the Company since 1991 has been successful. This
strategy consists of asset growth which has assisted in the earnings growth.
Also, the expansion of the agency force and the development of new policies have
allowed the Company to compete with the competition. Over the last seven years,
assets have increased approximately $93,249,000 which includes $18,800,000
issuance of additional common stock and $540,000 of additional paid-in-capital.
Also stockholders' equity has increased approximately $45,196,000 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.
<PAGE> 25
PAGE 25
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.
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, was 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. 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 was 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.
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.
In January 1997, the Company received $540,000 as additional paid-in-capital
from the majority stockholder of the Company. These funds were subsequently
contributed to Franklin American as reimbursement for the refund by Franklin
American to a company which had previously purchased the right to assume a block
of annuities. Franklin American had this right through a coinsurance agreement.
The refund by Franklin American was required by the Missouri Insurance
Department after the Pennsylvania Insurance Department voided the coinsurance
agreement.
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
<PAGE> 26
PAGE 26
securities. As a result of the invested capital and investment of premiums
received from policyholders, invested assets and cash equivalents at December
31, 1997 and 1996 totalled $111,220,974 and $93,380,149, respectively. The
stockholders' equity at December 31, 1997 was $49,743,637 compared to
$40,553,734 at December 31, 1996.
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 amounts of such security deposits as of December 31,
1997 are $2,741,014. 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 $11,944,505 at December
31, 1997. Tennessee insurance law requires Franklin American to maintain a
minimum capital and surplus of $2,000,000. Franklin American reported a
statutory loss of $118,264 at December 31, 1997.
Family Guaranty's statutory capital and surplus was $1,956,661 at December 31,
1997. Mississippi insurance law requires $1,000,000 minimum capital and surplus.
Family Guaranty reported a statutory gain of $383,938 at December 31, 1997.
Protective's statutory capital and surplus was $2,972,278 at December 31, 1997.
Mississippi insurance law requires $1,000,000 minimum capital and surplus.
Protective reported a statutory gain of $309,698 at December 31, 1997.
The two primary sources of cash are premiums and investment income. The primary
uses of cash are the payment of policy benefits and operating expenses. The
Company reflects a cash increase of $203,156 in 1997 and a decrease of $71,708
in 1996. In 1995, the Company showed a cash increase of $514,596 which included
$3,000,000 of proceeds from issuance of common 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 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 or a smaller increase in cash flow.
Prior approval of the Insurance Department of the Subsidiaries' domicile state
is required for the payment of dividends, loans, or other advances which exceed
certain statutory limitations.
<PAGE> 27
PAGE 27
Therefore, as of December 31, 1997 no dividends could be paid by the
Subsidiaries without prior approval.
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 1997 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 1998 Annual Meeting of Shareholders, which is herein
incorporated by reference.
<PAGE> 28
PAGE 28
ITEM 10. EXECUTIVE COMPENSATION
Reference is hereby made to the Company's Proxy Statement to be filed in
connection with its 1998 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 1998 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 1998 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.
<PAGE> 29
PAGE 29
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Report on Form 10-KSB for the fiscal year ended December 31, 1997
<TABLE>
<CAPTION>
Page
Number in
Manually
Exhibit Signed
Number Description Original
- ------ ----------- --------
<S> <C> <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>
<PAGE> 30
PAGE 30
<TABLE>
<S> <C>
Registration Statement on Form S-1, File No. 33-26453 effective August
10, 1990 and incorporated herein by reference).
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>
<PAGE> 31
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 , 1998 BY:
--- --------------------------------------
John A. Hackney, Chairman,
President and Chief Executive Officer
<PAGE> 32
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:
<TABLE>
<S> <C>
Report of Independent Auditors ....................................... F-2
Consolidated Balance Sheets-December 31, 1997 and 1996 ............... F-3
Consolidated Statements of Operations-Years Ended
December 31, 1997, 1996 and 1995 ..................................... F-4
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1997, 1996, and 1995 .................................... F-5
Consolidated Statements of Cash Flows-Years Ended
December 31, 1997, 1996, and 1995 .................................... F-6
Notes to Financial Statements ........................................ F-7
</TABLE>
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> 33
[LEUTY AND HEATH, PLLC LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
March 23, 1998
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, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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 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, 1997, and 1996 and the
consolidated results of operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Leuty and Heath, PLLC
LEUTY AND HEATH, PLLC
Certified Public Accountants
F-2
<PAGE> 34
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------
Notes 1997 1996
----- ---- ----
<S> <C> <C> <C>
ASSETS
Investments: 1,3,10
Fixed maturities-at amortized cost
(market 1997, $2,617,892; 1996, $2,530,773) 3,10 $ 2,541,014 2,505,506
Held for sale - at market
(cost: 1997, $101,914,907; 1996, $89,497,087) 3,10 107,081,805 89,399,477
Mortgage loans on real estate - unaffiliated - 67,999
Policy loans 231,494 196,894
Short term investments 10 127,906 174,674
------------ -----------
TOTAL INVESTMENTS 109,982,219 92,344,550
Cash and cash equivalents 1,238,755 1,035,599
Accrued investment income 1,957,181 860,916
Deferred policy acquisition costs 1,2 2,413,487 3,100,110
Property and equipment at cost, less accumulated
depreciation (1997, $1,284,606; 1996, $1,179,150) 1 337,741 296,422
Intangible assets 1,4 8,183,129 8,409,668
Agent advances (net of allowance for uncollectible
accounts of $697,843 in 1997 and $759,941 in 1996) 5 62,700 24,194
Other assets 4 543,016 506,719
------------ -----------
TOTAL ASSETS $124,718,228 106,578,178
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits 1,2 $ 72,219,624 62,318,987
Other policy liabilities 1 629,026 390,754
------------ -----------
TOTAL POLICY LIABILITIES 72,848,650 62,709,741
ACCRUALS
Accrued expenses and other liabilities 756,122 747,073
Income tax payable - current 7 984,819 1,459,386
Income tax payable - deferred 7 385,000 1,108,244
------------ -----------
TOTAL LIABILITIES 74,974,591 66,024,444
COMMITMENTS AND CONTINGENCIES 8,9,15
STOCKHOLDERS' EQUITY 1
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
14,426,096 shares in 1997 and 1996 31,738,304 31,738,304
Additional paid in capital 540,000 -
Treasury stock: 162,350 shares in 1997 and 1996 (336,670) (336,670)
Retained earnings 17,802,003 9,152,100
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 49,743,637 40,553,734
------------ -----------
TOTAL LIABILITIES AND EQUITY $124,718,228 106,578,178
============ ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 35
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Notes 1997 1996 1995
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Insurance revenue: 1
Traditional life and other insurance premiums $16,915,315 10,177,779 8,206,778
Universal life and investment product policy charges 1,022,547 2,071,532 2,508,301
Net investment income 1,3 6,644,881 5,582,250 5,657,309
Net realized and unrealized investment gains 1,3,9 10,890,398 8,590,285 3,801,492
Other (net) 12 407,175 484,524 1,606,498
----------- ---------- ----------
35,880,316 26,906,370 21,780,378
BENEFITS, CLAIMS AND EXPENSES:
Policy benefits and claims: 1
Traditional life and accident and health insurance 4,324,754 3,361,776 3,239,186
Universal life and investment products 688,253 936,366 798,696
Increase in reserves for future policy benefits 11,420,022 7,265,046 5,772,084
Amortization of deferred policy acquisition costs 1 4,137,376 1,060,587 5,303,168
Commissions 390,036 449,345 506,108
Operating costs and expenses 2,12 4,324,210 4,422,430 3,963,958
----------- ---------- ----------
25,284,651 17,495,550 19,583,200
----------- ---------- ----------
NET INCOME BEFORE TAX 10,595,665 9,410,820 2,197,178
Income tax expense 7 (1,945,762) (1,404,409) (172,758)
----------- ---------- ----------
NET INCOME $ 8,649,903 8,006,411 2,024,420
=========== ========== ==========
NET INCOME PER COMMON SHARE 1 $ 0.60 0.55 0.16
=========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,426,096 14,426,096 13,028,835
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 36
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Retained Total
Common Additional Treasury Earnings Stockholders'
Stock Paid in Capital Stock (Deficit) Equity
----------- ---------------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
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
Additional paid in capital -- 540,000 -- -- 540,000
Net income -- -- -- 8,649,903 8,649,903
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $31,738,304 540,000 (336,670) 17,802,003 49,743,637
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 37
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,649,903 8,006,411 2,024,420
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Increase in reserves for future policy benefits 11,420,022 7,265,046 5,772,084
Revenues from policy fund charges (1,022,547) (2,071,532) (2,508,301)
Depreciation 111,600 128,469 196,027
Amortization 226,539 226,539 464,946
Net change in book value of securities 72,918 109,200 1,981
Net realized and unrealized (gains) losses (10,890,398) (8,590,285) (3,801,492)
Purchase of trading securities (9,784,629,494) (12,820,141,182) (14,857,545,723)
Sales of trading securities 9,778,752,757 12,813,241,793 14,841,615,091
Amortization of policy acquisition costs 4,137,376 1,060,587 5,303,168
Change in unearned premiums 155,279 (59,619) 29,241
Change in agent advances (38,506) 208,577 (213,250)
<Increase> decrease in accrued investment income (1,096,265) (189,670) (48,225)
Increase <decrease> in accrued policy benefits and claims 82,993 (126,502) (586,357)
Increase <decrease> in federal income tax payable (1,197,811) 1,395,120 274,483
Change in other assets and other liabilities (61,848) 249,394 (3,769,278)
Capitalization of deferred policy acquisition costs (3,450,753) (2,260,189) (1,545,539)
--------------- --------------- ---------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 1,221,765 (1,547,843) (14,336,724)
--------------- --------------- ---------------
INVESTING ACTIVITIES
Purchases of investments and loans (2,016,850) (916,729) (42,064,540)
Sales of investments -- 879,847 1,840,628
Maturities of investments 1,040,000 137,500 58,136,976
Proceeds from repayment of loans 67,999 841,507 493,575
Purchases of property and equipment (152,920) (105,632) (188,618)
Proceeds from sale of property & equipment -- -- 40,555
--------------- --------------- ---------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (1,061,771) 836,493 18,258,576
--------------- --------------- ---------------
</TABLE>
F-6
<PAGE> 38
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- -- 3,000,000
Additional paid in capital 540,000 -- --
Purchase of treasury stock -- -- (187,670)
Receipts from universal life policies credited
to policyholder account balances 2,359,278 2,890,678 6,564,572
Return of policyholder account balances on
universal life policies (2,856,116) (2,251,036) (23,690,093)
Traditional reserves received from acquisitions -- -- 10,905,935
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 43,162 639,642 (3,407,256)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 203,156 (71,708) 514,596
Cash and cash equivalents at beginning of year 1,035,599 1,107,307 592,711
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,238,755 1,035,599 1,107,307
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest credited to policyholders accounts $ 1,519,750 1,524,206 1,932,373
=========== =========== ===========
Income taxes paid $ 3,143,573 42,724 --
=========== =========== ===========
</TABLE>
NONCASH TRANSACTIONS:
In 1994, the Company coinsured a block of annuities with fund values of
$21,912,000 accounted for on the 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-6.1
<PAGE> 39
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 asset is Franklin Protective
Life Insurance Company (formerly Protective Service Life) 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 life insurance products. Franklin Protective Life
sells primarily traditional life 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 funds are received into the
trust, generally annuity policies are purchased from Franklin
Protective Life; however, funds received may be invested in certain
securities if requested by the trust Grantor.
INVESTMENTS: Fixed maturity investments held for investment purposes
are stated at amortized cost.
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 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.
F-7
<PAGE> 40
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INVESTMENTS - CONT.
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.
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, 1997.
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 non- cancelable
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.
F-8
<PAGE> 41
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
D. DEFERRED POLICY ACQUISITION COSTS - CONT.
Acquisition costs for universal life and annuities are amortized in
relation to the present value of estimated gross profits from surrender
charges and investment, mortality, and expense margins and actual
profits these policies generate each year including realized and
unrealized capital gains and losses. 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.
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 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 PER COMMON SHARE - Income per common share is computed by
dividing the net income 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-9
<PAGE> 42
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OTHER ACCOUNTING POLICIES - CONT.:
D. INTANGIBLE ASSETS - Intangible assets include goodwill from
the acquisition of subsidiaries and state business licenses,
and 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 federal income tax regulations for consolidated Returns.
Those subsidiaries who do not meet these regulations file a
separate tax return. Protective United Assets, Inc., acquired
during 1995, files a consolidated return with its wholly owned
life insurance subsidiaries. In February 1992, the Financial
Accounting Standard 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. CASH AND CASH EQUIVALENTS - 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. POST RETIREMENT BENEFITS - In December 1990, the Financial
Accounting Standards Board issued Statement No. 106,
"Employers' Accounting for Post Retirement Benefits Other Than
Pensions" which became 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 1996 financial statements
have been reclassified to conform with the 1997 presentation.
2. ACQUISITIONS
At various times during 1994, the Company acquired a block of annuity
policies totaling $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
coinsurance agreement between the Company and NALICO. Fund values
totaling $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.
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.
F-10
<PAGE> 43
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. INVESTMENTS
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 6,737,429 5,561,190 4,738,458
Equity securities -- 5 63,593
Mortgage loans on real estate 2,271 57,956 101,621
Policy loans 18,394 14,110 12,272
Short-term investments 50,176 65,423 833,871
----------- ----------- -----------
6,808,270 5,698,684 5,749,815
Investment expense (163,389) (116,434) (92,506)
----------- ----------- -----------
NET INVESTMENT INCOME $ 6,644,881 5,582,250 5,657,309
=========== =========== ===========
Net realized and unrealized investment
gains (losses):
Fixed maturities $ 5,644,668 9,085,902 3,745,482
Equity securities -- 917 118,165
Mortgage loans (18,778) (507,600) (45,804)
----------- ----------- -----------
Net realized investment gains (losses) 5,625,890 8,579,219 3,817,843
Net unrealized investment gains (losses) 5,264,508 11,066 (16,351)
----------- ----------- -----------
$10,890,398 8,590,285 3,801,492
=========== =========== ===========
</TABLE>
The value of investments in fixed maturity securities were as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------
Gross Unrealized (1)
--------------------
Carrying Amortized
Value (1) Cost (1) Gains Losses
--------- -------- ----- ------
<S> <C> <C> <C> <C>
United States Government $107,081,805 2,371,618 5,247,667 (19,171)
Corporate -- 169,396 15,293 --
------------ ------------ ------------ -------
$107,081,805 2,541,014 5,262,960 (19,171)
============ ============ ============ =======
</TABLE>
(1) Carrying value represents market value; therefore, the unrealized
gains and losses are calculated by the difference between cost of
$101,914,907 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 $2,617,892.
F-11
<PAGE> 44
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. INVESTMENTS - CONT.:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Gross Unrealized (2)
--------------------
Carrying Amortized
Value (2) Cost (2) 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>
(2) 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.
The carrying value of fixed maturity securities at December 31, 1997,
by contractual maturity, is shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or repay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Carrying Value Market Value
-------------- ------------
<S> <C> <C>
Due during next five years $ 2,087,616 2,121,995
Due after five years through ten years 121,561 127,156
Due after ten years through fifteen years - -
Due after fifteen years through twenty years 21,402,084 21,154,829
Due after twenty years 86,011,558 86,295,717
------------ -----------
Totals $109,622,819 109,699,697
============ ===========
</TABLE>
The market values of fixed maturity securities were based upon quoted
market prices for marketable bonds.
The following investments exceeded ten percent (10%) of stockholders'
equity as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
As of December 31
-----------------
1997 1996
---- ----
Carrying Estimated Carrying Estimated
Value Market Value Market
----- ------ ----- ------
<S> <C> <C> <C> <C>
Ten percent of Stockholders Equity $4,974,364 $ 4,055,373
Bonds:
U.S. Treasury Bond Series 2021,
8% due November 2021 $5,962,309 $5,962,309 $88,610,857 $88,610,857
</TABLE>
F-12
<PAGE> 45
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. INTANGIBLE ASSETS AND OTHER ASSETS
Intangible assets consist of the following at December 31 :
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Goodwill $8,244,554 8,244,554
Less accumulated amortization (684,388) (478,274)
State business licenses 817,000 817,000
Less accumulated amortization (194,037) (173,612)
---------- --------
Total $8,183,129 8,409,668
========== =========
</TABLE>
Other assets include the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Notes receivable - other $ 49,973 72,672
Insurance Guaranty Fund 227,771 269,478
All Others 265,272 164,569
-------- -------
Total $543,016 506,719
======== =======
</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, 1997 and
1996, the balance sheet reflects agents advances of $62,700 and
$24,194, 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, 1997 and 1996 is
$697,845 and $759,941, respectively. Advances were made by the Company
during 1997 and 1996 on a limited basis.
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 the estimated gross
profits or the actual profits generated by universal life and
annuity products. SAP requires these costs to be expensed as
incurred.
F-13
<PAGE> 46
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. STOCKHOLDERS' EQUITY - CONT.:
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 are filed with the various state
departments of insurance were as follows:
<TABLE>
<CAPTION>
Net Income (Loss) Capital and Surplus
----------------- -------------------
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Franklin American Life Ins. Co. $(118,264) 753,104 1,857,792 11,944,505 12,507,723
Family Guaranty Life Ins. Co. 383,938 124,757 187,397 1,956,661 1,843,136
Franklin Protective Life Ins. Co. 309,698 442,566 (1,308,516) 2,972,278 2,961,723
</TABLE>
Prior approval from the insurance department of the state of domicile
must be received for the payment of dividends by the life insurance
subsidiaries to the parent which are in excess of certain statutory
limitations. Also, prior notification of certain loans or other
advances made by the life insurance subsidiaries to the parent must be
made to the insurance department of the domicile state. At December 31,
1997 and 1996, 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, 1997. 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, 1997. The minimum
requirements for statutory capital and surplus vary for many of the 17
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 apart from its affiliates.
Protective United Assets files a consolidated federal income tax return
with Franklin Protective Life and Southern Heritage Life. None of the
companies have net operating losses to offset future earnings.
F-14
<PAGE> 47
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. INCOME TAXES - CONT.:
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 taxes
is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 821,438 1,148,538 40,335
Deferred 1,124,324 255,871 132,423
---------- --------- -------
Total $1,945,762 1,404,409 172,758
========== ========= =======
</TABLE>
Income taxes paid by the company totaled $3,143,573, $42,724, and $0 in
1997, 1996, and 1995, 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Corporate federal income tax rate 34% 34% 34%
Utilization of net operating losses -2% -7% -20%
Small life insurance company deduction -12% -12% -5%
Other, net -2% -% -1%
--- --- ---
18% 15% 8%
=== === ===
</TABLE>
The Company's federal income tax liability is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Current $ 984,819 $1,459,386
Deferred 385,000 1,108,244
---------- ----------
Total $1,369,819 $2,567,630
========== ==========
</TABLE>
F-15
<PAGE> 48
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. INCOME TAXES - CONT.:
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Policy reserves and policyholder funds $1,640,564 304,444
Other -- 41,503
---------- ----------
Total deferred assets 1,640,564 345,947
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs and intangibles 183,024 1,379,163
Investments 1,842,540 --
Other -- 75,028
---------- ----------
Total deferred liabilities 2,025,564 1,454,191
========== ==========
Net deferred liability $ 385,000 1,108,244
========== ==========
</TABLE>
8. LEASES:
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 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. Total rental expense under
these operating lease arrangements were $36,338, $8,715, and $9,782 in
1997, 1996, and 1995 respectively.
9. RELATED PARTY TRANSACTIONS:
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.
The Company receives management fees from companies owned by the
majority shareholder of the Company. The amounts received in 1997,
1996, and 1995 were $190,000, $328,000, and $168,000, respectively.
F-16
<PAGE> 49
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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. The total carrying value
of these investments at December 31, 1997 is $2,741,014. An amount of
$10,000 is included in the caption of "short-term investments",
$200,000 in "cash and cash equivalents" and $2,531,014 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
The life insurance subsidiaries reinsure certain of their insurance
risks with other insurers, principally under annually renewable term
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 subsidiaries on any one life is $25,000. A small amount
is reinsured under a coinsurance agreement on a 50% basis, whereby one
half of all the transactions involving these policies are shared with
the reinsurer.
A coinsurance/modified coinsurance agreement was entered into in
September 1990 and provided Franklin American Life 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
adjustments have 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, $0, and $18,107 for
1997, 1996, and 1995, respectively.
Additionally, the Company's life subsidiaries have reinsured
approximately $12,917,000, $16,598,000 and $7,279,000 in face amount of
life insurance risks with other insurers for 1997, 1996, and 1995,
respectively, representing $87,958, $169,318 and $88,808 of premiums
for 1997, 1996, and 1995, respectively. Policy and claim reserves
relating to insurance ceded of $164,208 in 1997 and $157,075 in 1996
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,
1997.
F-17
<PAGE> 50
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 resulted 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 and $41,000 of 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 purchaser.
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.
13. PENSION PLAN:
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 (6)
months are eligible to participate, at their option. During 1997, 1996,
and 1995 no contributions were made.
Effective June 1, 1996, the Company adopted a 401K plan for all
employees, except executive officers. During 1997, all employees with
one year of service and at least 21 years of age, became eligible to
participate in the plan. 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
contributions to the plan for 1997 and 1996 were $20,125 and $5,263,
respectively.
14. 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. None of the options were
exercised and all outstanding options expired during 1996.
F-18
<PAGE> 51
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
15. CONTINGENT LIABILITIES:
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 any merit.
Effective June 30, 1997 and July 1, 1997, the Company become a
guarantor for a reinsurer who is owned and controlled by the majority
stockholder of the Company in a coinsurance transaction with a ceding
company. The total amount of these two transactions involves
approximately $60,000,000 of reserves. Both agreements are subject to
substantially the same terms and conditions. The Company will receive a
fee of approximately $160,000 per year for serving as guarantor in this
transaction. As the ceded reserves decrease in the subsequent periods
the fees and the amount of the guaranty will also decrease. The
reinsuring company received cash equal to the reserves of $60,000,000,
less ceding commissions of approximately $4,000,000.
No provision for any of the contingent liabilities have been made in
the financial statements for 1997 or 1996.
F-19
<PAGE> 52
[LEUTY AND HEATH, PLLC LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT ON SCHEDULES
March 23, 1998
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, 1997, 1996 and 1995 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
F-20
<PAGE> 53
SCHEDULE I SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- ---------------------------------------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
December 31, 1997
FIXED MATURITIES:
Bonds:
United States Government and government
agencies and authorities $104,299,144 109,515,021 109,453,426
States, municipalities and political
subdivisions 100,000 112,030 100,000
Public utilities 18,000 20,125 18,738
All other corporate bonds 52,000 52,531 50,655
Certificates of deposit - - -
------------ ----------- -----------
TOTAL FIXED MATURITIES 104,469,144 109,699,707 109,622,819
EQUITY SECURITIES:
Policy loans 231,493 xxx,xxx 231,494
Mortgage loans on real estate:
Unaffiliated - xxx,xxx -
Short term investments 127,906 xxx,xxx 127,906
============ =========== ===========
TOTAL INVESTMENTS $104,828,543 109,699,707 109,982,219
============ =========== ===========
</TABLE>
F-21
<PAGE> 54
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturities $ 259,285 788,620
Investment in subsidiaries 48,848,324 39,309,632
Cash 270,180 160,266
Property and equipment at cost, less accumulated
depreciation ($136,129 in 1997 and $121,429 in 1996) 25,764 40,463
Other assets 363,643 265,296
============ ============
$ 49,767,196 40,564,277
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other liabilities $ 23,559 10,543
------------ ------------
23,559 10,543
------------ ------------
Stockholders' Equity
Common Stock - no par value; authorized 20,000,000
shares; issued and outstanding, 14,426,096 shares in
1997 and 1996 31,738,304 31,738,304
Additional paid in capital 540,000 --
Treasury Stock: 162,350 shares in 1997 and 1996 (336,670) (336,670)
Retained earnings 17,802,003 9,152,100
------------ ------------
49,743,637 40,553,734
------------ ------------
$ 49,767,196 40,564,277
============ ============
</TABLE>
F-22
<PAGE> 55
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rental income $ 114,028 113,424 109,172
Interest income 39,258 176,078 209,257
Realized and unrealized investment
gains (losses) (2,151) (261,902) 51,515
Other income 102,055 41 5,354
----------- ----------- -----------
Total Revenue 253,190 27,641 375,298
----------- ----------- -----------
Cost and Expenses:
Rent 191,806 162,941 167,529
Accounting and legal fees 122,807 119,461 124,278
Depreciation 14,699 25,091 30,986
Other operating costs and expenses 206,667 160,686 156,648
----------- ----------- -----------
Total cost and expenses 535,979 468,179 479,441
----------- ----------- -----------
Loss Before Equity in Net Income
of Subsidiaries (282,789) (440,538) (104,143)
Equity in income of subsidiaries 8,932,692 8,446,949 2,128,563
----------- ----------- -----------
NET INCOME $ 8,649,903 8,006,411 2,024,420
=========== =========== ===========
</TABLE>
F-23
<PAGE> 56
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,649,903 8,006,411 2,024,420
Equity in income of subsidiaries (8,932,692) (8,446,949) (2,128,563)
----------- ----------- -----------
CASH USED BY OPERATING ACTIVITIES (282,789) (440,538) (104,143)
----------- ----------- -----------
INVESTING ACTIVITIES
Sale (purchase) of fixed maturities (net) 529,335 1,887,631 4,830,479
Sale (purchase) of property and equipment (net) 14,699 32,362 18,770
Purchase common stock in subsidiary -- -- (4,315,843)
Contributed paid - in surplus in subsidiaries (606,000) (1,200,000) (4,086,326)
----------- ----------- -----------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (61,966) 719,993 (3,552,920)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- -- 3,000,000
Additional paid in capital 540,000 -- --
Purchase treasury stock -- -- (187,670)
(Increase) decrease in other assets (98,347) (99,018) 689,605
Increase (decrease) in other liabilities 13,016 (63,566) 61,750
----------- ----------- -----------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 454,669 (162,584) 3,563,685
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 109,914 116,871 (93,378)
----------- ----------- -----------
Cash at beginning of year 160,266 43,395 136,773
----------- ----------- -----------
CASH AT END OF YEAR $ 270,180 160,266 43,395
=========== =========== ===========
</TABLE>
F-24
<PAGE> 57
SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -----------------------------------------------------------------------------------------------------
Segment Deferred Future Policy Unearned Other Policy Premium Revenue
Policy Benefits, Premiums Claims and
Acquisition Losses, Claims Benefits
Cost and Loss Payable
Expenses
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995 $1,900,508 $56,485,831 $258,677 $318,198 $10,715,079
Year Ended
December 31, 1996 $3,100,110 $62,318,987 $199,058 $191,696 $12,249,311
Year Ended
December 31, 1997 $2,413,487 $72,219,624 $354,337 $274,689 $17,937,862
<CAPTION>
- --------------------------------------------------------------------------------------------------
COL. A COL. G COL. H COL. I COL. J COL. K
- --------------------------------------------------------------------------------------------------
Segment Net Benefits Amortization Other Premiums
Investment Claims, losses of Deferred Operating Written
Income & Settlement Policy Expenses
Expenses Acquisition
Costs
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995 $5,657,309 $ 9,809,966 $5,303,168 $4,470,066 N/A
Year Ended
December 31, 1996 $5,582,250 $11,563,188 $1,060,587 $4,871,775 N/A
Year Ended
December 31, 1997 $6,644,881 $16,433,029 $4,137,376 $4,714,246 N/A
</TABLE>
F-25
<PAGE> 58
SCHEDULE IV REINSURANCE
FRANKLIN AMERICAN CORPORATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
------ ------ ------ ------ ------ ------
Gross Amount Ceded to Assumed Net Percentage
Other from Other Amount of Amount
Companies Companies Assumed to
Net
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
=======================================================================
Life Insurance in Force $168,989,000 $12,918,000 -- $ 156,071,000 --
=======================================================================
Premiums:
Life Insurance $ 19,722,306 $ 87,301 -- $ 19,635,005 --
Accident & Health Insurance 32,876 656 -- 32,220 --
Property & Liability Insurance -- -- -- -- --
Title Insurance -- -- -- -- --
=======================================================================
Total Premiums $ 19,755,182 $ 87,957 -- $ 19,667,225 --
=======================================================================
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 & Health Insurance 43,853 611 -- 43,242 --
Property & 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 & Health Insurance 62,649 757 -- 61,892 --
Property & Liability Insurance -- -- -- -- --
Title Insurance -- -- -- -- --
-----------------------------------------------------------------------
Total Premiums $ 10,803,887 $ 88,808 -- $ 10,715,079 --
=======================================================================
</TABLE>
F-26
<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 Life Insurance Company Mississippi
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FRANKLIN AMERICAN CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 2,541,014
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 107,081,805
<EQUITIES> 0
<MORTGAGE> 231,494
<REAL-ESTATE> 0
<TOTAL-INVEST> 109,982,219
<CASH> 1,238,755
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,957,181
<TOTAL-ASSETS> 124,718,228
<POLICY-LOSSES> 72,219,624
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 629,026
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738,304
<OTHER-SE> 18,005,333
<TOTAL-LIABILITY-AND-EQUITY> 124,718,228
17,937,862
<INVESTMENT-INCOME> 6,644,881
<INVESTMENT-GAINS> 10,890,398
<OTHER-INCOME> 407,175
<BENEFITS> 16,433,029
<UNDERWRITING-AMORTIZATION> 4,137,376
<UNDERWRITING-OTHER> 4,714,246
<INCOME-PRETAX> 10,595,665
<INCOME-TAX> 1,945,762
<INCOME-CONTINUING> 8,649,903
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,649,903
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
<RESERVE-OPEN> 62,318,987
<PROVISION-CURRENT> 14,913,644
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 5,013,007
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 72,219,624
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
