<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, 1998
[ ] TRANSITION REPORT under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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 $30,060,718.
As of December 31, 1998, 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 1998 of $2.563 per share was $36,557,981.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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.
In February 1998 the company added a subsidiary, a trust company, Franklin
American Trust Company ("Trust Company"), domiciled in Tennessee which will
market trust company services to funeral homes and cemeteries.
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,
Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas.
Franklin American has an A.M. Best rating of B (indicating a fair financial
strength, operating performance and market profile), Family Guaranty has an
A.M. Best rating of C++ (indicating a marginal financial strength, operating
performance and market profile), and Protective has an A.M. Best rating of B
(indicating a fair financial strength, operating performance and market
profile).
INSURANCE PRODUCTS AND ANNUITIES
The Subsidiaries market products solely in the states in which they are
licensed with the current concentration in Alabama, Kentucky, Mississippi,
North Carolina and Tennessee. The portfolio primarily consists of individually
written interest-sensitive whole life, universal life, traditional whole
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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.
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
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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.
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 1996, 1997 and 1998. 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 1998, 1997,
and 1996 were $5,490, $5,723, and $25,362, 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 1998 was between 5 and 6
percent depending on the type of policy.
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 1998 was between 4 1/2 and 5
percent.
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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 1998, 1997, and 1996 were
$901,485, $866,258, and $1,018,882, 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 1998 there were only 231 of these policies remaining in force with
reserves totaling $17,990. This total excludes the reserves on the assumed
blocks of accident and health reserves of $3,552,617, which do not affect the
consolidated statement of operations for 1998. This block was assumed under a
coinsurance agreement that does not qualify as reinsurance for generally
accepted accounting principles under FASB113.
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 direct business
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,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Universal Life $(3,989,122) $(2,000,899) $(2,421,793)
Whole Life 13,341,122 12,633,387 (286,632)
Term Life 1,327,000 (2,817,000) (1,173,000)
Industrial 772,000 622,000 7,652,000
Annuities (701,744) (622,894) 494,615
----------- ----------- -----------
Total $10,749,256 $ 7,814,594 $ 4,265,190
=========== =========== ===========
</TABLE>
The new business written by the Subsidiaries in 1998, 1997, and 1996 was
$30,513,000, $26,659,000, and $18,330,000, 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.
Below is a summary of certain individual life policy data covering the years
1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Number of life policies in force 81,993 76,361 69,817
Average size of life policies in force $ 1,943 $ 2,086 $ 2,282
Number of claims on life policies 2,758 2,459 1,122
Life policy death claims incurred $6,831,893 $ 4,531,930 $ 3,683,922
Persistency rate of life policies 97.0 95.5 93.4
Penalty charges for withdrawals $ 2,962 $ 5,193 $ 25,362
Numbers of surrenders, lapses, and other reductions 5,447 2,276 3,255
Amount of surrenders, lapses, and other reductions $13,537,000 $20,141,000 $13,926,000
Amount of policy loans outstanding at December 31 $ 235,960 $ 231,494 $ 196,893
</TABLE>
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
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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 1998,
1997, and 1996 compared to the unusual value standards:
NAIC RATIOS FOR FRANKLIN AMERICAN
<TABLE>
<CAPTION>
Unusual Values
Equal to or
--------------
1998 1997 1996
Ratio Over Under Results Results Results
- ----- --- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 -37* -9 10
1A. Gross change in capital and surplus 50 -10 -37* -5 10
2. Net gain to total income -- 0 -7* -0.8* 8
3. DISCONTINUED
4. Adequacy of investment income 900 125 176 185 205
5. Non-adm to admitted assets 10 -- .3 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 -- 2 0 1
8. Surplus relief
(over $5 million capital and
surplus) 30 -99 -55 0 0
($5 million or less capital and
surplus) 10 -10 -- -- --
9. Change in premium 50 -10 441* 76* 999*
10. Change in product mix 5 -- 2 4 N/A
11. Change in asset mix 5 -- 0 0 0.1
12. Change in reserving ratio 20 -20 21* 31* 59*
=====================================================================================================================
* Indicates unusual values.
N/A Indicates not applicable.
</TABLE>
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In 1998, all the unusual ratios were due to the assumed reinsurance transaction
made effective December 31, 1998: ratios #1, #1A and #2 were due to the loss on
the reinsurance transaction and ratios #9 and #12 were due to the increase in
premiums and reserves on the reinsurance transaction.
In 1997, the unusual ratios, #2, #9, and #12 were all due primarily to the
increase in the production of new premiums.
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.
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Set forth in the table below are Family Guaranty's ratios for the years 1998,
1997 and 1996 compared to the unusual value standards:
NAIC RATIOS FOR FAMILY GUARANTY
<TABLE>
<CAPTION>
Unusual Values
Equal to or
--------------
1998 1997 1996
---- ---- ----
Ratio Over Under Results Results Results
- ----- ---- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 33 6 11
1A. Gross change in capital and surplus 50 -10 33 6 52*
2. Net gain to total income -- 0 6 5 2
3. DISCONTINUED
4. Adequacy of investment income 900 125 151 169 168
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 0
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 27 28 20
10. Change in product mix 5 -- 0 0 0
11. Change in asset mix 5 -- .2 0 .5
12. Change in reserving ratio 20 -20 21* 2 -4
================================================================================================================
* Indicates unusual values.
</TABLE>
For 1998, ratio #21 was unusual due to the increase in reserves caused by the
increase in first year premiums in 1998 over 1997 by 129%.
For 1997, there were no unusual ratios.
For 1996, ratio #1A was unusual because of the $500,000 contributed to paid in
surplus.
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Set forth in the table below are Protective's ratios for the years 1998, 1997
and 1996 compared to the unusual value standards:
NAIC RATIOS FOR PROTECTIVE
<TABLE>
<CAPTION>
Unusual Values
Equal to or
--------------
1998 1997 1996
---- ---- ----
Ratio Over Under Results Results Results
- ----- ---- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
1. Net change in capital and surplus 50 -10 -24* 0 12
1A. Gross change in capital and surplus 50 -10 -24* 0 29
2. Net gain to total income -- 0 3 7 12
3. DISCONTINUED
4. Adequacy of investment income 900 125 162 207 185
5. Non-adm to admitted assets 10 -- .2 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 0
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 -16* 20 12
10. Change in product mix 5 -- 1 NR NR
11. Change in asset mix 5 -- .3 0 1.9
12. Change in reserving ratio 20 -20 -10 22* 4
===================================================================================================================
* Indicates unusual values.
NR Indicates no ratio.
</TABLE>
For 1998, ratios #1 and #1A were unusual due to the decrease in surplus
resulting from a change in the reserve valuation basis of one plan which
created a surplus charge of $845,000. Ratio #9 was unusual due to the decrease
in premium income in 1998 compared to 1997.
For 1997, unusual ratio #12 was due to an adjustment to the statutory reserves.
For 1997, there were no unusual ratios.
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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. Family Guaranty writes policies in Mississippi, the only state in
which it holds a license. Protective is licensed in seven 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 Kentucky and Tennessee. The
Subsidiaries 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 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.
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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. 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.
Family Guaranty does not have any reinsurance agreements in force.
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.
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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 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, 1998 and 1997, the Company
did not own any common or preferred stocks. All bonds owned on December 31,
1998 were United States Government securities except for one utility bond with
a value of $19,042, a state bond with a value of $100,000 and an industrial
bond with a value of $50,000. All bonds owned on December 31, 1997 were United
States Government securities except for an $18,738 utility bond, a $100,000
state bond, and a $50,655 industrial bond. Investments of the Subsidiaries are
subject to certain restrictions imposed by state insurance laws and
regulations.
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In 1998, 1997, and 1996, net investment income represented approximately 24%,
27%, and 30%, respectively, of the Company's total revenues less realized gains
and losses. Investment results of the Company for the three years ended
December 31, 1998 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)
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998 $123,639 $1,658 $125,297 $7,252 6.24% $3,459 $(4,207)
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
</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.
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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
1998, 1997, and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 1,658 1.3 $ 1,239 1.1 $ 1,036 1.1
Short-term investments 125 .1 128 .1 175 .2
Fixed maturities 123,279 98.4 109,623 98.6 91,904 98.4
Common stocks -- -- -- -- -- --
Policy loans 236 .2 231 .2 197 .2
Mortgage Loans -- -- -- -- 68 .1
-------- ------- -------- ------ ------- ------
TOTAL $125,298 100.0% $111,221 100.0% $93,380 100.0%
======== ======= ======== ====== ======= ======
</TABLE>
The total bond portfolio, which currently consists primarily of U.S. Government
securities, contained $122,315,831 at cost and $123,427,464 at market value at
December 31, 1998. 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 $110,260 $70,549,842 $3,862,374 $19,785,399 $28,802,617 $123,110,492
States and
Territories -- -- -- 100,000 -- 100,000
Public Utilities -- 18,035 -- -- -- 18,035
Industrial &
Miscellaneous 50,206 -- -- -- -- 50,206
-------- ----------- ---------- ----------- ----------- ------------
Totals $160,466 $70,567,877 $3,862,374 $19,885,399 $28,802,617 $123,278,733
======== =========== ========== =========== =========== ============
</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:
Franklin American Trust Company
Franklin American Trust Company was formed in February 1998 by the Company in
order to market trust company services to funeral homes and cemeteries. The
Company committed $1,200,000 to the initial capital of Franklin American Trust
Company.
EMPLOYEES
As of December 31, 1998, the Company had 52 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, 1998.
<PAGE> 19
PAGE 19
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 1998 and 1997 as provided by a local securities dealer in
Nashville, Tennessee.
<TABLE>
<CAPTION>
1998 1997
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 2.875 2.250 1.375 .625
Second Quarter 2.875 2.375 2.750 1.500
Third Quarter 2.875 2.375 2.875 2.375
Fourth Quarter 2.875 2.250 2.875 2.375
</TABLE>
As of December 31, 1998 there were 1,429 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.
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 which 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.
<PAGE> 20
PAGE 20
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Company had a net income of $195,183,
compared to net income of $8,649,903 in 1997. The decrease in net income in
1998 compared to 1997 was due primarily to the decrease in net realized and
unrealized investment gains. Investment gains in 1997 of $10,890,398 decreased
to a loss of $748,255 in 1998, a difference of $11,638,653. Income tax expense
in 1997 of $1,945,762 turned favorable in the amount of $910,788 in 1998, a
favorable difference of $2,856,550. The income tax benefit in 1998 results
from taxable operating losses and timing differences.
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 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 Government securities by the reinsurer. During 1998
both agreements were restructured and the Company was released of any and all
liabilities in connection with these agreements. The effective date of this
release is the original date of the agreements, June 30, 1997. As a result,
fees will no longer be received by the Company.
Gross revenues decreased 16 percent in 1998 compared to 1997 and increased 33
percent in 1997 compared to 1996. The decreases are due to the decrease in
realized and unrealized investment gains over the increases in traditional
premiums. The 1998 and 1997 increases in traditional premiums were due to
increased sales.
Net investment income increased 9% in 1998 over 1997, and increased 19% in 1997
over 1996. The increase in 1998 and 1997 results from the increase in invested
assets. The decrease in the yield on bonds provided the opportunity for
realized capital gains in 1997 and 1996. Management actively trades United
States Government securities, taking advantage of capital gains created by
changing
<PAGE> 21
PAGE 21
interest rates. Net yields for the past three years are as follows: 6.24% in
1998, 6.62% in 1997, and 6.63% in 1996. 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 and
reinvesting in Government securities, money market accounts or certificates of
deposits. As interest rates change, the Government securities are sold and
repurchased periodically resulting in net capital gains or losses. The
realized and unrealized net losses for 1998 resulted from liquidation of the
United States Government securities at a time the market interest rates had
increased. The realized and unrealized net gains in 1997 and 1996 are the
result of decreasing interest rates on United States Government bonds occurring
throughout, but particularly in the fourth quarter of each year.
Policy benefits for traditional life, accident and health insurance increased
47% in 1998, 28% in 1997 and 4% in 1996. Most of the increase in all three
years occurred in Franklin American and Family Guaranty due to the increase in
writing traditional policies. Policy benefits for universal life and annuity
products decreased 14% in 1998 over 1997, decreased 26% in 1997 over 1996, and
decreased 17% in 1996 over 1995. Policy benefits for universal life and
annuity products represent benefits paid less fund values released. In 1998,
benefits paid decreased 6% and fund values released decreased 4%, which net to
the decrease for the year. In 1997, the benefits paid increased 8% and fund
values released increased 22%, the net of which reflected a decrease in
benefits to the policyholders. In 1996, the benefits paid decreased 15% and
fund values released decreased 24%, the net of which reflected an increase.
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 1998, 1997, and 1996. The increase in traditional policies for all three
years is due to the increase in new traditional policies written for the
three-year period. The total future policy liabilities at December 31, 1998,
1997, and 1996 were $84,678,615, $72,219,624, and $62,318,987, 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 1998, 1997 and 1996 is due primarily to the increase in
the traditional policies sold.
Amortization of deferred policy acquisition costs increased 21% in 1998,
increased 290% in 1997, and decreased 80% in 1996. The increases in 1998 and
1997 were due primarily to the amortization of the deferred commissions
generated by the increase in premiums on traditional policies. 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.
<PAGE> 22
PAGE 22
Commissions increased 33% in 1998, decreased 13% in 1997, and decreased 11% in
1996. 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 increase in 1998 is due
to the increase in paid commissions over the increase in deferred commissions,
while the decrease in 1997 and 1996 is due to the increase in the deferred
amounts over the increase in paid amounts.
Operating costs and expenses increased 1% in 1998, decreased 2% in 1997, and
increased 12% in 1996. 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 are 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.
The Company files a consolidated federal income tax return Franklin American,
Trust Company, and the Agency. As of December 31, 1998, there are no net
operating loss carryforwards remaining. Family Guaranty files its federal
income tax return separately. As of December 31, 1998, Family Guaranty did not
have any net operating losses available to offset future earnings. Family
Guaranty will file a consolidated federal income tax return with the Company
beginning with the 1999 tax year.
PUA and Protective file a federal income tax return 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, 1998.
For the year ended December 31, 1998, the income tax benefit was $910,788 on
the consolidated statement of operations. Prepaid federal income tax as of
December 31, 1998 is estimated to be $1,142,684 and the deferred tax liability
is estimated to be $643,000, which is due to timing differences in the
recognition of assets and liabilities between GAAP and current income tax
regulations. The tax benefit occurred due to operating losses for 1998 and
timing differences between GAAP and tax income.
Policy loans to policyholders increased to $235,960 in 1998 from $231,494 in
1997. The Company expects as the fund values increase, policy loans will also
increase. Since the total amount of policy loans outstanding is relatively
small in comparison with the fund value liability there is no significant
effect on operations or the financial condition of the Company.
The consolidated balance sheet shows advance commissions of $51,091 and $62,700
net of allowance for uncollectible accounts at December 31, 1998 and 1997,
respectively. The allowance for uncollectible accounts was $658,880 and
$697,843 at December 31, 1998 and 1997, respectively.
<PAGE> 23
PAGE 23
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 forceand the development of new
policies have allowed the Company to be competitive. Over the last seven
years, assets have increased approximately $110,977,000, which includes
$18,800,000 of additional common stock and $540,000 of additional
paid-in-capital. Also stockholders' equity has increased approximately
$45,391,000 during the same period.
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.
The year 2000 (Y2K) system processing has been given the highest priority
regarding its effect on the Company's operations. The Company is well
positioned for the turn of the century and expects the impact to be minimal.
The Company is committed to provide the necessary financial resources needed to
address any problem with the data processing operations. Since the hardware
and software systems used are developed and maintained by third party vendors
who have already addressed the Y2K issue, the Company's expected expenditures
are minimal. Statements have been received from all major vendors that they
are Y2K compliant. Testing of hardware and software systems has been completed
by the Company to insure that they perform as certified by the vendors.
The Company formed a wholly owned subsidiary, Franklin American Trust Company
(Trust Company) in February 1998. The Trust Company was capitalized with
$1,200,000 and began operations in October 1998. The purpose of the Trust
Company is to provide pre-need, perpetual care and merchandise trust services
to the funeral home and cemetery industry. These services will complement the
Company's strategy in attracting new insurance and fee income business.
LIQUIDITY AND CAPITAL RESOURCES
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 securities. As a result of the invested
capital and investment of premiums received from policyholders, invested assets
and cash equivalents at December 31, 1998 and 1997 totaled $125,297,723 and
$111,220,974, respectively. The stockholders' equity at December 31, 1998 was
$49,938,820 compared to $49,743,637 at December 31, 1997.
<PAGE> 24
PAGE 24
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, 1998 are $2,818,988. 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 $7,574,273 at December
31, 1998. Tennessee insurance law requires Franklin American to maintain a
minimum capital and surplus of $2,000,000. Franklin American reported a
statutory loss of $4,224,327 at December 31, 1998. The loss for the year 1998
was due to the reinsurance of a block of business. Effective December 31,
1998, Franklin American Life Insurance Company, a subsidiary of the Company,
entered into two agreements ("the Agreements") with a ceding company, whereby
Franklin American Life Insurance Company assumed blocks of insurance policies
including ordinary life, individual health, credit life and credit disability
policies. The basis of assumption of one of the Agreements included
coinsurance, modified coinsurance insurance, and funds withheld. The other
Agreement included the assumption of policies on the basis of coinsurance/funds
withheld. The Agreements' initial premium total was $41,388,000. In
management's opinion this transaction does not qualify for generally accepted
accounting principles under FASB 113; and therefore, it has no effect on the
consolidated statement of operations for 1998, except for certain federal
income tax benefits provided by this transaction. However, the effect on the
1998 statutory financials filed with the Insurance Departments of the various
states in which Franklin American Life Insurance Company is licensed will be a
$4,179,000 loss in the statutory summary of operations and a decrease in
statutory surplus of the same amount. It is anticipated that future profits on
these blocks of assumed policies will offset the original loss. Franklin
American Life Insurance Company has a contingent liability. If the total
profits do not equal the original loss by January 1, 2001, the ceding company
has the right to recapture. There is an asset of $3,536,137 reflected in other
assets on the 1998 consolidated balance sheet and represents funds withheld by
the ceding company due Franklin American Life Insurance Company. There is also
a like amount reflected in other policy liabilities on the 1998 consolidated
balance sheet, representing deferred income.
Family Guaranty's statutory capital and surplus was $2,599,859 at December 31,
1998. Mississippi insurance law requires $1,000,000 minimum capital and
surplus. Family Guaranty reported a statutory gain of $595,616 at December 31,
1998.
<PAGE> 25
PAGE 25
Protective's statutory capital and surplus was $2,271,646 at December 31, 1998.
Mississippi insurance law requires $1,000,000 minimum capital and surplus.
Protective reported a statutory gain of $128,547 at December 31, 1998.
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 $419,548 in 1998 and an increase of
$203,156 in 1997. In 1996, the Company had a cash decrease of $71,708 due to
the net increase in the purchase of trading securities. 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. Therefore, as of December 31, 1998 no dividends
could be paid by the Subsidiaries without prior approval.
The risk-based capital standard for life companies was developed by the NAIC
that 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 calculation shows 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 1998 which creates a low asset 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.
<PAGE> 26
PAGE 26
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following are the directors of the company:
<TABLE>
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- --------
<S> <C> <C> <C>
John A. Hackney 49 Chairman, President and 1991
Chief Executive Officer
Gary L. Atnip 47 Director 1991
Chief Financial Officer
John T. Bible 73 Director 1985
Judith C. Lowrey 49 Director 1995
Executive Vice President,
Treasurer
William T. Patterson 61 Director 1991
Jerry D. Poindexter 52 Director 1996
Executive Vice President
Wade A. Willis 38 Director 1995
Executive Vice President,
Secretary
</TABLE>
Directors serve for a period of one year or until their successors are
elected and qualified.
John A. Hackney became Chairman, President and Chief Executive Officer of
the Company in October 1991. From October 1990 to October 1991, Mr. Hackney
was a private consultant specializing in the acquisition of financial
institutions. Mr. Hackney served as Vice President of Marketing and Operations
for Security Information Systems, Brentwood, Tennessee, a financial data
processing firm, from March 1988 until October 1990.
Gary L. Atnip became Chief Financial Officer of the Company in October
1991. Mr. Atnip has been in private practice as a Certified Public Accountant
in Nashville and Columbia, Tennessee, since 1981.
John T. Bible has been the owner of John T. Bible Co., a private real
estate firm in Morristown, Tennessee, since 1979. Mr. Bible served as director
of National Savings Life Insurance Company, Murfreesboro, Tennessee from 1962
until 1982.
<PAGE> 27
PAGE 27
Judith C. Lowrey became Treasurer of Franklin American Corporation in
April, 1995 and has served as a Director since September, 1995. Mrs. Lowrey
has been with the Company since 1987.
William T. Patterson has been President of Stockdale-Malin Funeral Home,
Camden, Tennessee, since 1955. Mr. Patterson is a director of the Bank of
Camden, Camden, Tennessee.
Jerry D. Poindexter joined Franklin American Life Insurance Company in 1993
and has served as a Director since May, 1996.
Wade A. Willis became Secretary of the Company in August, 1995 and has
served as a Director since September, 1995. Mr. Willis has been with the
Company since November, 1989.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid or accrued by or on behalf of the Company's Chief Executive Officer for
fiscal years 1998 and 1997. The Company had no other executive officer whose
total annual salary and bonus exceeded $100,000 for fiscal year 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
- ----------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restrict-
Annual ed Stock LTIP All Other
Name and Principal Salary Bonus Compen- Award(s) Options/ Payouts Compen-
Position Year ($) ($) sation($) ($) SARs (#) ($) sation ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John A. Hackney, 1998 66,000 0 0 0 0 0 9,090(1)
CEO
John A. Hackney, 1997 123,876 15,000 0 0 0 0 5,400(1)
CEO
</TABLE>
(1) Dollar value of premiums paid by the Company on a $500,000 term life
insurance policy and a disability insurance policy for the benefit of Mr.
Hackney.
<PAGE> 28
PAGE 28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has no "parent" as that term is defined in regulations under
the Securities Exchange Act of 1934, as amended, and none of its officers or
directors own any equity securities of any of the Company's subsidiaries.
The following table sets forth information with respect to the beneficial
ownership of the Company's common stock as of January 15, 1999 by (i) each
director of the Company, (ii) each of the executive officers named under
"EXECUTIVE COMPENSATION," (iii) all directors and executive officers of the
Company as a group, and (iv) each person known to the Company to be the
beneficial owner of more than ten percent of the outstanding shares of common
stock.
SHARES BENEFICIALLY OWNED
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER (1) PERCENT
- --------------------------- ------------- -------
<S> <C> <C>
John A. Hackney 11,922,024(2) 83.6
377 Riverside Drive
Fourth Floor
Franklin, TN 37064
Thunor Trust 11,922,024 83.6
5210 Maryland Way, Ste. 202
Brentwood, TN 37027
Gary L. Atnip 0 --
9530 Crockett Road
Brentwood, TN 37027
John T. Bible 485,942(3) 3.4
400 West Main Street
Suite 309A
Morristown, TN 37814
Judith C. Lowrey 1,600 *
190 Heathersett Drive
Franklin, TN 37064
William T. Patterson 51,205(4) *
P. O. Box 246
Camden, TN 38320
</TABLE>
<PAGE> 29
PAGE 29
SHARES BENEFICIALLY OWNED
<TABLE>
<CAPTION>
Name and Address Number(1) Percent
- ----------------------------------------------------------------------
<S> <C> <C>
Jerry D. Poindexter 0 --
1609 Diamond
Franklin, TN 37064
Wade A. Willis 2,310 *
2001 Beacon Hill
Franklin, TN 37067
All Directors/Executive 12,438,431 87
Officers as a Group (7 persons)
</TABLE>
______________________
* Less than 1%.
(1) No beneficial owner listed has the right to acquire within 60 days,
through options, warrants, rights, conversion privileges or similar
obligations, any additional shares of the Company's common stock.
(2) Mr. Hackney, as sole trustee of the Thunor Trust, exercises sole
investment and voting control over the shares of common stock owned by
Thunor Trust.
(3) Includes 25,000 organizational shares held in escrow which cannot be
transferred.
(4) Includes 19,655 shares owned by Mr. Patterson's wife.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No directors, officers, or shareholders of the Company have now or in the past
2 years had any direct or indirect material interest in any transaction to
which the Company was or is a party.
<PAGE> 30
PAGE 30
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> 31
PAGE 31
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Report on Form 10-KSB for the fiscal year ended December 31, 1998
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------------------------------------
<S> <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
Registration Statement on Form S-1, File No. 33-26453
effective August 10, 1990 and incorporated herein by
reference).
</TABLE>
<PAGE> 32
PAGE 32
<TABLE>
<S> <C>
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
</TABLE>
<PAGE> 33
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 31, 1999 BY: /s/
---------------------------------------
John A. Hackney, Chairman,
President and Chief Executive Officer
<PAGE> 34
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman, President and
/s/ Chief Executive Officer
__________________________ (Principal Executive Officer) March 31, 1999
John A. Hackney
/s/ Chief Financial
__________________________ Officer and Director March 31, 1999
Gary L. Atnip
/s/
__________________________ Director March 31, 1999
John T. Bible
/s/ Treasurer and
__________________________ Director March 31, 1999
Judith C. Lowrey
/s/
__________________________ Director March 31, 1999
William T. Patterson
/s/
__________________________ Director March 31, 1999
Jerry D. Poindexter
/s/ Secretary and
__________________________ Director March 31, 1999
Wade A. Willis
</TABLE>
<PAGE> 35
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, 1998 and 1997......................... F-3
Consolidated Statements of Operations-Years Ended
December 31, 1998, 1997 and 1996............................................. F-4
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1998, 1997, and 1996............................................ F-5
Consolidated Statements of Cash Flows-Years Ended
December 31, 1998, 1997, and 1996............................................ 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:
<TABLE>
<S> <C>
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
</TABLE>
F-1
<PAGE> 36
INDEPENDENT AUDITOR'S REPORT
March 19, 1999
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, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998, and 1997 and the
consolidated results of operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
LEUTY AND HEATH, PLLC
Certified Public Accountants
F-2
<PAGE> 37
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------
Notes 1998 1997
----- ---- ----
<S> <C> <C> <C>
ASSETS
Investments: 1,3,10
Fixed maturities-at amortized cost
(market: 1998, $2,767,718; 1997, $2,617,892) 3,10 $ 2,618,988 2,541,014
Available for sale - at market
(cost: 1998, $119,696,843; 1997, $101,914,907) 3,10 120,659,746 107,081,805
Policy loans 235,960 231,494
Short term investments 10 124,726 127,906
------------- -------------
TOTAL INVESTMENTS 123,639,420 109,982,219
Cash and cash equivalents 1,658,303 1,238,755
Investment income receivable 1,329,645 1,957,181
Deferred policy acquisition costs 1,2 1,338,287 2,413,487
Property and equipment at cost, less accumulated
depreciation (1998, $1,385,181; 1997, $1,284,606) 1 624,358 337,741
Intangible assets 1,4 7,956,590 8,183,129
Agent advances (net of allowance for uncollectible
accounts of $658,880 in 1998 and $697,843 in 1997) 5 51,091 62,700
Prepaid federal income taxes 7 1,142,684 --
Other assets 2,4 3,983,684 543,016
------------- -------------
TOTAL ASSETS $ 141,724,062 124,718,228
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits 1,2 $ 84,678,615 72,219,624
Other policy liabilities 1,2,4 4,122,243 629,026
------------- -------------
TOTAL POLICY LIABILITIES 88,800,858 72,848,650
ACCRUALS
Accrued expenses and other liabilities 741,384 756,122
Notes payable - affiliates 9 1,600,000 --
Income tax payable - current 7 -- 984,819
Income tax payable - deferred 7 643,000 385,000
------------- -------------
TOTAL LIABILITIES 91,785,242 74,974,591
COMMITMENTS AND CONTINGENCIES 2,8,9,15
STOCKHOLDERS' EQUITY 1
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
14,426,096 shares in 1998 and 1997 31,738,304 31,738,304
Additional paid in capital 540,000 540,000
Treasury stock: 162,350 shares in 1998 and 1997 (336,670) (336,670)
Retained earnings 17,997,186 17,802,003
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 49,938,820 49,743,637
------------- -------------
TOTAL LIABILITIES AND EQUITY $ 141,724,062 $ 124,718,228
============= =============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 38
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Notes 1998 1997 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Insurance revenue: 1
$22,206,460 16,915,315 10,177,779
Universal life and investment product policy charges 976,649 1,022,547 2,071,532
Net investment income 1,3 7,251,563 6,644,881 5,582,250
Net realized and unrealized investment gains (losses) 1,3,9 (748,255) 10,890,398 8,590,285
Other (net) 12 374,301 407,175 484,524
----------- ---------- ----------
30,060,718 35,880,316 26,906,370
BENEFITS, CLAIMS AND EXPENSES:
Policy benefits and claims: 1
Traditional life and accident and health insurance 6,349,766 4,324,754 3,361,776
Universal life and investment products 594,471 688,253 936,366
Increase in reserves for future policy benefits 13,964,160 11,420,022 7,265,046
Amortization of deferred policy acquisition costs 1 5,003,126 4,137,376 1,060,587
Commissions 518,945 390,036 449,345
Operating costs and expenses 2,12 4,345,855 4,324,210 4,422,430
----------- ---------- ----------
30,776,323 25,284,651 17,495,550
----------- ---------- ----------
NET INCOME (LOSS) BEFORE TAX (715,605) 10,595,665 9,410,820
Income tax (expense) benefit 7 910,788 (1,945,762) (1,404,409)
----------- ---------- ----------
NET INCOME $ 195,183 8,649,903 8,006,411
=========== ========== ==========
NET INCOME PER COMMON SHARE 1 $ 0.01 0.60 0.55
=========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,426,096 14,426,096 14,426,096
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 39
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Total
Common Additional Treasury Retained Stockholders'
Stock Paid in Capital Stock Earnings Equity
------------ ---------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
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
Net income -- -- -- 195,183 195,183
------------ ------------ ----------- ----------- ------------
BALANCE, DECEMBER 31, 1998 $ 31,738,304 540,000 (336,670) 17,997,186 49,938,820
============ ============ =========== =========== ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 40
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 195,183 8,649,903 8,006,411
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Increase in reserves for future policy benefits 13,964,160 11,420,022 7,265,046
Revenues from policy fund charges (976,649) (1,022,547) (2,071,532)
Depreciation 129,837 111,600 128,469
Amortization 226,539 226,539 226,539
Net change in book value of securities 3,770 72,918 109,200
Net realized and unrealized (gains) losses 748,255 (10,890,398) (8,590,285)
Purchase of trading securities (3,402,387,260) (9,784,629,494) (12,820,141,182)
Sales of trading securities 3,388,067,459 9,778,752,757 12,813,241,793
Amortization of policy acquistion costs 5,003,126 4,137,376 1,060,587
Change in unearned premiums 14,235 155,279 (59,619)
Change in agent advances 11,609 (38,506) 208,577
<Increase> decrease in investment income receivable 627,536 (1,096,265) (189,670)
Increase <decrease> in accrued policy benefits and claims 3,478,981 82,993 (126,502)
<Increase> decrease in prepaid federal income tax (1,142,684) -- --
Increase <decrease> in federal income tax payable (726,819) (1,197,811) 1,395,120
Change in other assets and other liabilities (3,459,872) (61,848) 249,394
Capitalization of deferred policy acquisition costs (3,927,927) (3,450,753) (2,260,189)
--------------- --------------- ---------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES (150,521) 1,221,765 (1,547,843)
--------------- --------------- ---------------
INVESTING ACTIVITIES
Purchases of investments and loans (185,959) (2,016,850) (916,729)
Sales of investments 1,003 -- 879,847
Maturities of investments 100,000 1,040,000 137,500
Proceeds from repayment of loans -- 67,999 841,507
Purchases of property and equipment (416,455) (152,920) (105,632)
--------------- --------------- ---------------
NET CASH PROVIDED (USED ) BY
INVESTING ACTIVITIES (501,411) (1,061,771) 836,493
--------------- --------------- ---------------
</TABLE>
F-6
<PAGE> 41
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Additional paid in capital -- 540,000 --
Proceeds from notes payable - affiliates 1,600,000 -- --
Receipts from universal life policies credited
to policyholder account balances 2,210,961 2,359,278 2,890,678
Return of policyholder account balances on
universal life policies (2,739,481) (2,856,116) (2,251,036)
----------- ---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 1,071,480 43,162 639,642
----------- ---------- ----------
INCREASE (DECREASE) IN CASH 419,548 203,156 (71,708)
Cash and cash equivalents at beginning of year 1,238,755 1,035,599 1,107,307
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,658,303 1,238,755 1,035,599
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest credited to policyholders accounts $ 1,501,917 1,519,750 1,524,206
=========== ========== ==========
Income taxes paid $ 958,714 3,143,573 42,724
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-6.1
<PAGE> 42
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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,
Franklin American Trust Company and Protective United Assets, Inc. All
significant inter-company 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. Franklin American Trust Company provides pre-need,
perpetual care and merchandise trust services to the funeral home and
cemetery industry. Franklin American Trust Company began business in
October 1998.
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 available 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> 43
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES - CONTINUED
INVESTMENTS - CONTINUED
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. In computing realized gains and
losses on those bonds held for sale, cost is determined by
specific identification.
REVENUE, BENEFITS, CLAIMS AND EXPENSES:
A. TRADITIONAL LIFE INSURANCE PRODUCTS - Traditional life
insurance includes those products with fixed and guaranteed
premiums 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, 1998.
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> 44
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
D. DEFERRED POLICY ACQUISITION COSTS - CONTINUED
Acquisition costs for universal life and annuities are
amortized in relation to the present value of estimated gross
profits from surrender charges, investments, mortality,
expense margins, and actual profits produced 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 net income per common share.
F-9
<PAGE> 45
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OTHER ACCOUNTING POLICIES - CONTINUED
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 which do not meet these regulations
file separate tax returns. Protective United Assets,
Inc., files a consolidated return with its wholly
owned life insurance subsidiaries. Pursuant to the
Financial Accounting Standard Board (FASB) Statement
109, "Accounting for Income Taxes", requires 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. RECLASSIFICATIONS - The accompanying 1996 financial
statements have been reclassified to conform with
the 1997 presentation.
2. ACQUISITIONS AND REINSURANCE TRANSACTIONS
Effective December 31, 1998, Franklin American Life Insurance Company,
a subsidiary of the Company, entered into two agreements (The
Agreements) with a ceding company, whereby Franklin American Life
Insurance Company assumed blocks of insurance policies including
ordinary life, individual health, credit life and credit disability
policies. The basis of assumption of one of the agreements included
coinsurance, modco insurance, and funds withheld. The other agreement
included the assumption of policies on the basis of coinsurance funds
withheld. The Agreements initial premium total was $41,388,000.
It is management's opinion these transactions do not qualify for
treatment under FASB 113; and, therefore have no effect on the
statement of operations for 1998, except for any federal income tax
benefit provided by this transaction. However, the effect on the 1998
annual statement filed with the insurance departments of the various
states in which Franklin American Life Insurance Company is licensed
will be a $4,179,000 charge to statutory net income and a decrease in
statutory surplus. It is anticipated that future profits on these
blocks of assumed policies will offset the original loss. Franklin
American Life Insurance Company has a contingent liability if the
total profits do not equal the original loss by January 1, 2001, the
date the ceding company has the right to recapture upon thirty days
written notice. The Company has recorded an asset of $3,536,137 on the
consolidated balance sheet and represents funds withheld by the ceding
company owed to Franklin American Life Insurance Company. A liability
of like amount has been reflected in the consolidated balance sheet,
representing deferred income.
F-10
<PAGE> 46
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. INVESTMENTS
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 7,261,587 6,737,429 5,561,190
Equity securities -- -- 5
Mortgage loans on real estate -- 2,271 57,956
Policy loans 15,634 18,394 14,110
Short-term investments 163,656 50,176 65,423
----------- ---------- ----------
7,440,877 6,808,270 5,698,684
Investment expense (189,314) (163,389) (116,434)
=========== ========== ==========
NET INVESTMENT INCOME $ 7,251,563 6,644,881 5,582,250
=========== ========== ==========
Net realized and unrealized investment
Gains (losses):
Fixed maturities $ 3,459,020 5,644,668 9,085,902
Equity securities -- -- 917
Mortgage loans -- (18,778) (507,600)
----------- ---------- ----------
Net realized investment gains (losses) 3,459,020 5,625,890 8,579,219
Net unrealized investment gains (losses) (4,207,275) 5,264,508 11,066
----------- ----------
NET GAINS (LOSSES) $ (748,255) 10,890,398 8,590,285
=========== ========== ==========
</TABLE>
The value of investments in fixed maturity securities were as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------
Gross Unrealized
----------------
(1)
---
Carrying Amortized
Value (1) Cost (1) Gains Losses
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
United States Government $120,659,746 2,450,747 1,163,626 (66,162)
Corporate -- 168,241 14,169 --
------------ ----------- ----------- ---------
$120,659,746 2,618,988 1,177,795 (66,162)
============ =========== =========== =========
</TABLE>
(1) Carrying value represents market value; therefore the
unrealized gains and losses are calculated by the difference
between cost of $119,696,843 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 $2,767,718.
F-11
<PAGE> 47
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------
Gross Unrealized
----------------
(2)
---
Carrying Amortized
Value (2) Cost (2) 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>
(2) 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.
The carrying value of fixed maturity securities at December 31, 1998,
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 $ 70,728,342 70,808,232
Due after five years through ten years 3,862,374 3,872,919
Due after ten years through fifteen years -- --
Due after fifteen years through twenty years 16,688,825 16,701,090
Due after twenty years 31,999,193 32,045,223
-------------- ------------
$ 123,278,734 123,427,464
Totals ============== ============
</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, 1998 and 1997:
<TABLE>
<CAPTION>
As of December 31
------------------
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Value Market Value Market
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Ten percent of Stockholders Equity $ 4,993,882 $ 4,974,364
Bonds:
U.S. Treasury Bond Series 2021,
8% due November 2021 $ 5,962,309 $ 5,962,309
U.S. Treasury Note, 4.25%
due November 2003 $68,554,411 $68,554,411
</TABLE>
F-12
<PAGE> 48
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. INTANGIBLE ASSETS AND OTHER ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Goodwill $8,244,554 $8,244,554
Less accumulated amortization (890,502) (684,388)
State business licenses 817,000 817,000
Less accumulated amortization (214,462) (194,037)
---------- ----------
Total $7,956,590 $8,183,129
========== ==========
</TABLE>
Other assets include the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Notes receivable - other $ 27,272 $ 49,973
Insurance guaranty fund 185,554 227,771
Reinsurance receivable 3,536,137 --
All others 234,721 265,272
---------- ----------
Total $3,983,684 $ 543,016
========== ==========
</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, 1998 and
1997, the balance sheet reflects agents advances of $51,091 and
$62,700, 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, 1998 and 1997 is $658,880 and $697,843,
respectively. The Company made advances during 1998 and 1997 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> 49
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. STOCKHOLDERS' EQUITY - CONTINUED
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 were filed with the various
state departments of insurance as follows:
<TABLE>
<CAPTION>
Net Income (Loss) Capital and Surplus
----------------- -------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Franklin American Life $(4,224,327) (118,264) 753,104 $7,574,273 11,944,505
Family Guaranty Life 595,616 383,938 124,757 2,599,859 1,956,661
Franklin Protective Life 128,547 309,698 442,566 2,271,646 2,972,278
</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, 1998 and 1997, 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, 1998. 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, 1998. 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.
F-14
<PAGE> 50
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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 (benefit) related to income
before taxes is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $(1,116,579) 821,438 1,148,538
Deferred 205,791 1,124,324 255,871
----------- --------- ---------
Total $ (910,788) 1,945,762 1,404,409
=========== ========= =========
</TABLE>
Income taxes paid by the company totaled $958,717, $3,143,573, and
$42,724 in 1998, 1997, and 1996, 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Corporate federal income tax rate -34% 34% 34%
Utilization of net operating losses -- -2% -7%
Small life insurance company deduction -- -12% -12%
Reinsurance deductions -89% -- --
Other, net -4% -2% --%
---- ---- ----
-127% 18% 15%
===== ==== ====
</TABLE>
The Company's federal income tax liability is summarized as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997
---- ----
<S> <C> <C>
Current $ -- 984,819
Deferred 643,000 385,000
---------- ---------
Total $ 643,000 1,369,819
========== =========
</TABLE>
F-15
<PAGE> 51
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. INCOME TAXES - CONTINUED
The significant components of the Company's net deferred tax assets
and liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred policy acquisition costs $ 793,000 --
Policy reserves and policyholder funds -- 1,640,564
---------- ---------
Total deferred assets $ 793,000 1,640,564
---------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs and intangibles 333,000 183,024
Investments 330,000 1,842,540
Policy reserves and policy holder funds 773,000 --
---------- ---------
Total deferred liabilities 1,436,000 2,025,564
========== =========
Net deferred liability $ 643,000 385,000
========== =========
</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 on December 24, 1997 to cover
a period of approximately 10 years. The revised lease is based on
expanded office space and renovations. Future rental expense payments
are as follows:
<TABLE>
<S> <C>
1999 $ 383,997
2000 383,997
2001 405,667
2002 421,158
2003 421,158
Thereafter 2,008,753
</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 $26,637, $36,338 and $8,715 in
1998, 1997 and 1996, 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.
F-16
<PAGE> 52
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. RELATED PARTY TRANSACTIONS - CONTINUED
The Company receives management fees from companies owned by the
majority shareholder of the Company. The amounts received in 1998,
1997, and 1996 were $174,711, $190,000 and $328,000, respectively.
Effective October 16, 1998, the Company executed a promissory note in
the amount of $1,600,000, payable to the Company's majority
stockholder. Interest shall be paid at a rate of 6% annually on the
last day of each calendar quarter. The payment of the principal amount
and all outstanding interest will be due and payable on the fifth
anniversary.
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, 1998 is $2,818,988. An amount of
$200,000 is included in "cash and cash equivalents" and $2,618,988
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.
Additionally, the Company's life subsidiaries have reinsured
approximately $11,202,00, $12,917,000 and $16,598,000 in face amount
of life insurance risks with other insurers for 1998, 1997, and 1996,
respectively, representing $78,742, $87,958 and $169,318 of premiums
for 1998, 1997, and 1996, respectively. Policy and claim reserves
relating to insurance ceded of $181,310 in 1998 and $164,208 in 1997
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,
1998.
F-17
<PAGE> 53
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. OTHER INCOME
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. In conjunction with this transaction, 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 1998,
1997, and 1996 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 an amount equal
to one hundred 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 1998, 1997
and 1996 were $57,778, $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. All of the
outstanding options expired during 1996 and no additional shares have
been granted since 1996.
15. CONTINGENT LIABILITIES
There are 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 became 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
F-18
<PAGE> 54
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. CONTINGENT LIABILITIES - CONTINUED
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.
During 1998, both of the coinsurance agreements were restructured and
the Company was released of any and all liabilities in connection with
these agreements, effective with the original date of the agreements
of June 30, 1997. As a result, fees will no longer be received by the
Company.
The Year 2000 (Y2K) system processing has been given the highest
priority regarding its effect on the Company's operations. The Company
is well positioned for the Y2K problem. The Company provides computer
processing for other non-consolidated affiliated insurance companies
and expects the impact to be minimal. The Company is committed to
provide the necessary financial resources needed to address any
problem with the Y2K operations. However, since the hardware and
software systems used are developed and maintained by third party
vendors who have already addressed the Y2K issue, our expected
expenditures are minimal. Statements have been received from all major
vendors that they are already Y2K compliant. Testing of hardware and
software systems has been completed by the Company to insure that they
perform as certified by the vendors.
No provision for any of the contingent liabilities has been made in
the financial statements for 1998 or 1997.
F-19
<PAGE> 55
INDEPENDENT AUDITOR'S REPORT ON SCHEDULES
March 19, 1999
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 Form 10-KSB of FRANKLIN AMERICAN CORPORATION
AND SUBSIDIARIES as of December 31, 1998, 1997 and 1996 and for the years then
ended are presented for the purposes of additional analysis and are not
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.
LEUTY AND HEATH, PLLC
Certified Public Accountants
F-20
<PAGE> 56
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, 1998
FIXED MATURITIES:
Bonds:
United States Government and government
agencies and authorities $122,164,088 123,245,054 123,110,493
States, municipalities and political subdivisions 100,000 112,265 100,000
Public utilities 17,100 19,286 18,035
All other corporate bonds 52,000 50,859 50,206
Certificates of deposit -- -- --
------------ ------------ ------------
TOTAL FIXED MATURITIES 122,333,188 123,427,464 123,278,734
EQUITY SECURITIES:
Policy loans 235,960 xxx,xxx 235,960
Mortgage loans on real estate:
Unaffiliated -- xxx,xxx --
Short term investments 124,726 xxx,xxx 124,726
------------ ------------ ------------
TOTAL INVESTMENTS $122,693,874 123,427,464 123,639,420
============ ============ ============
</TABLE>
F-21
<PAGE> 57
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
-----------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturities $ 661,249 259,285
Investment in subsidiaries 51,388,931 48,848,324
Cash (12,119) 270,180
Property and equipment at cost, less accumulated
depreciation ($129,012 in 1998 and $136,129 in 1997) 188,955 25,764
Other assets 84,711 363,643
============ ============
$ 52,311,727 49,767,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable - affiliates 1,900,000 --
Other liabilities 472,907 23,559
------------ ------------
2,372,907 23,559
------------ ------------
Stockholders' Equity
Common stock - no par value; authorized 20,000,000
shares; issued and outstanding, 14,426,096 shares in
1998 and 1997 31,738,304 31,738,304
Additional paid in capital 540,000 540,000
Treasury stock: 162,350 shares in 1998 and 1997 (336,670) (336,670)
Retained earnings 17,997,186 17,802,003
------------ ------------
49,938,820 49,743,637
------------ ------------
$ 52,311,727 49,767,196
============ ============
</TABLE>
F-22
<PAGE> 58
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Rental income $ 155,572 114,028 113,424
Interest income 36,217 39,258 176,078
Realized and unrealized investment gains (losses) (106,151) (2,151) (261,902)
Other income 2,940 102,055 41
------------ ------------ ------------
Total revenue 88,578 253,190 27,641
------------ ------------ ------------
Cost and Expenses:
Rent 305,505 191,806 162,941
Accounting and legal fees 560,807 122,807 119,461
Depreciation 10,815 14,699 25,091
Other operating costs and expenses 356,875 206,667 160,686
------------ ------------ ------------
Total cost and expenses 1,234,002 535,979 468,179
------------ ------------ ------------
Loss Before Equity in Net Income of Subsidiaries (1,145,424) (282,789) (440,538)
Equity in income of subsidiaries 1,340,607 8,932,692 8,446,949
------------ ------------ ------------
NET INCOME $ 195,183 8,649,903 8,006,411
============ ============ ============
</TABLE>
F-23
<PAGE> 59
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRANKLIN AMERICAN CORPORATION (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 195,183 8,649,903 8,006,411
Equity in income of subsidiaries (1,340,607) (8,932,692) (8,446,949)
------------ ------------ ------------
CASH USED BY OPERATING ACTIVITIES (1,145,424) (282,789) (440,538)
------------ ------------ ------------
INVESTING ACTIVITIES
Sale (purchase) of fixed maturities (net) (401,964) 529,335 1,887,631
Sale (purchase) of property and equipment (net) (163,191) 14,699 32,362
Purchase common stock in subsidiary (1,200,000) -- --
Contributed paid - in surplus in subsidiaries -- (606,000) (1,200,000)
------------ ------------ ------------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,765,155) (61,966) 719,993
------------ ------------ ------------
FINANCING ACTIVITIES
Additional paid in capital -- 540,000 --
(Increase) decrease in other assets 278,932 (98,347) (99,018)
Increase (decrease) in other liabilities 2,349,348 13,016 (63,566)
------------ ------------ ------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,628,280 454,669 (162,584)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (282,299) 109,914 116,871
------------ ------------ ------------
Cash at beginning of year 270,180 160,266 43,395
------------ ------------ ------------
CASH AT END OF YEAR $ (12,119) 270,180 160,266
============ ============ ============
</TABLE>
F-24
<PAGE> 60
SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION
FRANKLIN AMERICAN CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H
- ------------------------------------------------------------------------------------------------------------------------------
Segment Deferred Future Policy Unearned Other Policy Premium Net Benefits
Policy Benefits, Premiums Claims and Revenue Investment Claims, losses
Acquisition Losses, Claims Benefits Income & Settlement
Cost and Loss Payable Expenses
Expenses
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1996 $3,100,110 $62,318,987 $199,058 $ 191,696 $12,249,311 $5,582,250 $11,563,188
Year Ended
December 31, 1997 $2,413,487 $72,219,624 $354,337 $ 274,689 $17,937,862 $6,644,881 $16,433,029
Year Ended
December 31, 1998 $1,338,287 $84,678,615 $368,572 $3,753,671 $23,183,109 $7,251,563 $20,908,397
<CAPTION>
- ------------------------------------------------------------
COL. A COL. I COL. J COL. K
- ------------------------------------------------------------
Segment Amortization Other Premiums
of Deferred Operating Written
Policy Expenses
Acquisition
Costs
- ------------------------------------------------------------
<S> <C> <C> <C>
Year Ended
December 31, 1996 $1,060,587 $4,871,775 N/A
Year Ended
December 31, 1997 $4,137,376 $4,714,246 N/A
Year Ended
December 31, 1998 $5,003,126 $4,864,800 N/A
</TABLE>
F-25
<PAGE> 61
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, 1998:
===========================================================================
Life Insurance in Force $183,261,000 $11,202,000 $178,877,000 $350,936,000 51%
===========================================================================
Premiums:
Life Insurance $ 25,180,650 $ 78,708 $ 36,666,229 $ 61,768,171 59%
Accident & Heath Insurance 25,339 34 4,722,314 4,747,619 99%
Property & Liability Insurance -- -- -- --
Title Insurance -- -- -- --
===========================================================================
Total Premiums $ 25,205,989 $ 78,742 $ 41,388,543 $ 66,515,790 62%
===========================================================================
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 --
===========================================================================
</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
Franklin American Trust Company Tennessee
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 120,659,746
<DEBT-CARRYING-VALUE> 2,618,988
<DEBT-MARKET-VALUE> 2,767,718
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 123,639,420
<CASH> 1,658,303
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,338,287
<TOTAL-ASSETS> 141,724,062
<POLICY-LOSSES> 84,678,615
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,122,243
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 31,738,304
<OTHER-SE> 18,200,516
<TOTAL-LIABILITY-AND-EQUITY> 49,938,820
23,183,109
<INVESTMENT-INCOME> 7,251,563
<INVESTMENT-GAINS> (748,255)
<OTHER-INCOME> 374,301
<BENEFITS> 6,944,237
<UNDERWRITING-AMORTIZATION> 5,003,126
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (715,605)
<INCOME-TAX> 910,788
<INCOME-CONTINUING> 195,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 195,183
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<RESERVE-OPEN> 72,219,624
<PROVISION-CURRENT> 13,964,160
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 84,678,615
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
