<PAGE> 1
FORM 10 - QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 1998
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Commission File Number: 0-18748
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FRANKLIN AMERICAN CORPORATION
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(Name of Small Business issuer in Its Charter)
TENNESSEE 62-1365451
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
377 RIVERSIDE DRIVE, SUITE 400, FRANKLIN, TENNESSEE 37064
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(Address of Principal Executive Offices) (Zip Code)
(615) 790-0464
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(Issuer's Telephone Number, Including Area (Code)
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(Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Act of 1934 during the preceding
12 months (or for each shorter period that the registrant was required to file
such reports) and (2) has been subject to filing requirements for the past 90
days.
Yes X No
---- ----
As of September 30, 1998, there were outstanding 14,426,096 shares of Issuer's
common stock, no par value per share, including 162,350 shares of treasury
stock.
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<PAGE> 2
FRANKLIN AMERICAN CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
<S> <C> <C>
Item 1. Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II Other Information 10
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($000'S OMITTED)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities - at amortized cost
(market: 1998, $2,795 : 1997, $2,618) $ 2,517 2,541
Held for sale - at market
(cost: 1998, $122,166 : 1997, $101,915) 132,449 107,082
Policy loans 231 231
Short-term investments 91 128
--------- ---------
TOTAL INVESTMENTS 135,288 109,982
Cash and cash equivalents 1,217 1,239
Accrued investment income 1,726 1,957
Deferred policy acquisition cost 2,472 2,413
Property and equipment 446 338
Intangible assets 8,013 8,183
Agent advances 36 63
Other assets 649 543
--------- ---------
TOTAL ASSETS $ 149,847 124,718
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 80,912 72,220
Other policy benefits 606 629
--------- ---------
TOTAL POLICY LIABILITIES AND ACCRUALS 81,518 72,849
Accrued expenses and other liabilities 1,079 756
Federal income tax payable - current 3,443 985
Federal income tax payable - deferred 2,032 385
--------- ---------
TOTAL LIABILITIES 88,072 74,975
COMMITMENTS AND CONTINGENCIES (SEE NOTES 3,4,5)
STOCKHOLDERS EQUITY:
No par value; authorized 20,000,000 shares; issued
and outstanding 14,426,096 shares in 1998 and 1997 31,738 31,738
Additional paid in capital 540 540
Treasury stock (337) (337)
Retained earnings (deficit) 29,834 17,802
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 61,775 49,743
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 149,847 124,718
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
---------------------- -----------------------
<S> <C> <C> <C> <C>
REVENUE:
Insurance revenue:
Traditional life and accident and
health insurance premiums $ 5,853 5,211 15,654 12,536
Universal life and investment product
policy changes 242 269 735 774
Net investment income 1,907 1,704 5,471 4,702
Net realized and unrealized
Investments gains (losses) 10,332 3,075 15,876 5,750
Other income (net) 188 72 304 307
------- ------- ------- -------
$18,522 10,331 38,040 24,069
BENEFITS, CLAIMS, AND EXPENSES
Policy benefits and claims:
Traditional life and accident
and health insurance 1,447 1,138 4,768 3,087
Universal life and investment
products 208 208 495 628
Change in life and A&H insurance
reserves for future benefits 4,042 3,501 9,855 8,851
Amortization of deferred policy
acquisition costs 817 1,297 2,877 2,407
Commissions 112 68 325 288
Operating cost and expenses 1,672 1,107 3,309 3,187
------- ------- ------- -------
$ 8,298 7,319 21,629 18,448
------- ------- ------- -------
NET INCOME BEFORE TAX 10,224 3,012 16,411 5,621
Federal income tax expense (benefit) 3,755 404 4,379 774
======= ======= ======= =======
NET INCOME $ 6,469 2,608 12,032 4,847
======= ======= ======= =======
NET INCOME PER COMMON SHARE $ 0.44 0.18 0.83 0.34
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,426 14,426 14,426 14,426
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income - (Loss) $ 12,032 $ 4,847
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in Life and A&H reserves 9,855 8,851
Revenues from policy fund charges (735) (774)
Depreciation 93 79
Amortization 170 170
Net change in book value of securities (29) 277
Net realized (gains) losses on investments (15,876) (5,750)
Purchase of trading securities (1,025,673) (9,783,318)
Sales of trading securities 1,016,308 9,778,109
Amortization of policy acquisition cost 2,877 2,406
Change in unearned premiums (4) 125
Change in agent advances 26 (25)
(Increase) decrease in accrued investment income 231 (712)
Increase (decrease) in accrued policy benefits and claims (19) 1
Net increase (decrease) in unpaid federal income taxes 4,105 (1,962)
Change in other assets and other liabilities 218 (159)
Capitalization of deferred policy acquisition costs (2,935) (2,545)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 644 $ (380)
INVESTMENTS ACTIVITIES
Purchases of investments and loans $ (137) $ (1,046)
Sales of investments 1 --
Maturities of investments 100 1,040
Receipts from repayment of loans -- 68
(Purchases) sales of property and equipment (202) (131)
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING $ (238) $ (69)
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30,1998 Sept. 30, 1997
-----------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Additional paid in capital $ -- $ 540
Receipts from universal life policies credited to policyholder
account balances 1,587 1,827
Return of policy holder account balances on universal life policies (2,015) (2,116)
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ (428) $ 251
------- -------
INCREASE (DECREASE) IN CASH (22) (198)
Cash and cash equivalents at beginning of period 1,239 1,036
======= =======
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,217 $ 838
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Disclosure of accounting policy:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased as part of its daily cash management
activities to be cash equivalents.
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1.
The consolidated interim financial statements of Franklin American Corporation
and its subsidiaries ("the Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP"). Effective January 1, 1989 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from Sale of Investments." The
results of the operations for the period reported in this statement are in
conformity with the SFAS No. 97.
In the opinion of management, the attached unaudited financial statements
include all normal recurring adjustments necessary for a fair presentation of
the financial position, results of operations, and changes in financial position
of the Company. The results of operation for any interim period are not
indicative of results for the full year.
NOTE 2.
These consolidated interim financial statements should be read in conjunction
with the audited consolidated financial statements for December 31, 1997.
NOTE 3.
The Company leases its office space. The original lease was for a five-year
period effective August 1, 1994 and ending July 31, 1999. The original lease was
amended and extended on December 24, 1997 to cover a period of approximately 10
years. The revised lease is based on expanded office space and renovations.
Future rental expense payments are as follows:
<TABLE>
<C> <C>
1998 $ 296,253
1999 383,997
2000 383,997
2001 405,667
2002 421,158
Thereafter $ 2,429,911
</TABLE>
The Company also has certain short-term (less than one year) operating leases
for various pieces of equipment.
6
<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1.
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 4.
The Company is appealing an $88,000 judgment against one of its life insurance
subsidiaries involving punitive damages. It is the opinion of the Company's
attorney that a favorable outcome for the Company is highly probable.
There are several other lawsuits pending in the normal course of business
involving death benefits. It is the opinion of counsel that none have merit.
NOTE 5.
In assessing the year 2000 software issue, the Company has received written
assurance from its primary software vendors that there will not be a problem
once the year 2000 begins. Therefore, the Company should not be at risk in its
processing of transactions after the year 2000.
7
<PAGE> 9
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS, SEPTEMBER 30, 1998
The Company's total invested assets increased in the first nine months of 1998
by $25,306,000 due to the net realized investment gains on bonds and cash flow
from operations invested in bonds. The total assets increased approximately
$25,129,000 during the first nine-months of 1998 due to the increase in fixed
maturities held for sale.
Future policy benefits increased approximately $8,692,000 for the period ended
September 30, 1998 as the result of increase in premium revenue.
Stockholders equity is $61,775,000 at September 30, 1998, which is a increase of
$12,032 000 since December 31, 1997, resulting from the gain from operations for
the first nine months of 1998.
Revenues for the nine months ended September 30, 1998, were $38,040,000 compared
with revenues of $24,069,000 for the same period in 1997. The net increase is
due to the increase in traditional premiums of $3,118,000 and investment gains
of $10,126,000 in 1998 over 1997.
Net investment income increased $769,000, or 16% for the nine-month period ended
September 30, 1998, as compared to the nine-month period ended September 30,
1997. This increase is primarily the result of the growth of the invested assets
over the past twelve months.
Traditional policy benefits and claims increased $1,681,000 in the nine-month
period ended September 30, 1998, over the nine-month period ended September 30,
1997. The increase was due primarily to the increase in the writing of new
traditional policies over the past forty-eight months. Universal life and
investment product claims decreased $133,000 from the previous year's nine-month
period. Paid claims were lower by $229,000 for the first nine-months of 1998 in
comparison with the first nine-months of 1997, and the release of policy account
balances in 1998 were smaller in the current period by $96,000, which accounts
for the decrease in universal life and investment product claims.
8
<PAGE> 10
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
PART.I FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (CONTINUED)
The change in life, accident and health insurance reserves for future benefits
increased $1,004,000 for the nine months ending September 30, 1998, as compared
to the nine months which ended September 30, 1997. Most of the increase was due
to the increase in traditional premiums written.
Amortization of deferred policy acquisition cost increased $470,000 for the nine
months ending September 30, 1998, compared to the nine months ended September
30, 1997. The increase in deferred expenses, which was due to increase in new
policy productions for traditional policies over the forty-five months, caused
an increase in the amortization in the deferred expenses.
Commissions increased $37,000 due to an increase in the amount of new policies
issued less the amounts being deferred and amortized as deferred policy
acquisition costs over the expected life of the policies in force.
Operating cost and expenses increased $122,000 in the nine-month period ending
September 30, 1998 over the same period which ended September 30, 1997. The
increase is primarily due to the State Department Examination fees incurred in
1998 compared to zero in 1997, less the increase in deferred expenses related to
the increase in new policy production.
The current federal income tax payable amount represents estimated calculations
for the parent and subsidiaries. The deferred federal income tax is due to the
timing differences between the financial basis and the tax basis methods of
accounting.
The comments made above for the nine-month period ending September 30, 1998, are
the same for the three-month period ending September 30, 1998, except as
otherwise discussed.
The Company formed a wholly owned subsidiary, Franklin American Trust Company
(FATC) in October 1998, to provide trust services for funeral homes and
cemeteries. It is anticipated that FATC will have its initial business
transaction before December 31, 1998. The initial capitalization of FATC is
$1,200,000.
9
<PAGE> 11
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K SEPTEMBER 30, 1998
EX 27 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
NONE
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
registrant has duly caused this report to be singed on it's behalf by the
undersigned thereunto duly authorized.
FRANKLIN AMERICAN CORPORATION
-----------------------------
(REGISTRANT)
DATE 11/09/98 /s/ JOHN A. HACKNEY
-------------------------- ----------------------------------
JOHN A. HACKNEY
PRESIDENT
DATE 11/09/98 /s/ GARY L. ATNIP
------------------------- ------------------------------
GARY L. ATNIP
CHIEF FINANCIAL OFFICER
11
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 132,449
<DEBT-CARRYING-VALUE> 2,517
<DEBT-MARKET-VALUE> 2,795
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 135,288
<CASH> 1,217
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,472
<TOTAL-ASSETS> 149,847
<POLICY-LOSSES> 80,912
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 606
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 149,847
16,389
<INVESTMENT-INCOME> 5,471
<INVESTMENT-GAINS> 15,876
<OTHER-INCOME> 304
<BENEFITS> 5,263
<UNDERWRITING-AMORTIZATION> 2,877
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 16,411
<INCOME-TAX> 4,379
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,032
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
