<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number 000-25193
ATLANTIC PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-3439366
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Summer Street 02210
Boston, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 880-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's sole class of common
stock was 100 shares, $.01 par value per share, as of May 10, 1999. No
common stock was held by non-affiliates of the registrant.
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements:
a) Balance Sheets at March 31, 1999 and December 31, 1998 1
b) Statement of Income for the Three Months Ended March 31, 1999 2
c) Statements of Changes in Stockholders' Equity for the Three Months Ended
March 31, 1999 and the Period from Inception through March 31, 1998 3
d) Statements of Cash Flows for the Three Months Ended March 31, 1999
and the Period from Inception (March 20, 1998) through March 31, 1998 4
e) Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ATLANTIC PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash account with Atlantic Bank $ - $ 146
Money market account with Atlantic Bank 23,992 10,434
--------------- --------------
Total cash and cash equivalents 23,992 10,580
--------------- --------------
Loans 166,325 163,771
Less discount (16,123) (17,274)
Less allowance for loan losses (2,516) (1,337)
--------------- --------------
Loans, net 147,686 145,160
--------------- --------------
Accrued interest receivable 892 832
Due from Atlantic Bank 1,082 -
Other assets 874 170
--------------- --------------
$174,526 $ 156,742
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to Atlantic Bank $ - $ 125
Accrued expenses and other liabilities 1,467 299
--------------- --------------
Total liabilities 1,467 424
--------------- --------------
Stockholders' equity:
Preferred stock, Series A, 9 3/4% non-cumulative, exchangeable;
$.01 par value; $10 liquidation value per share; 1,449,000
shares authorized, 1,416,130 shares issued and outstanding at
March 31, 1999; none issued, authorized and outstanding at
December 31, 1998 14 -
Preferred stock, Series B, 8% cumulative, non convertible; $.01
par value; $1,000 liquidation value per share plus accrued
dividends; 1,000 shares authorized, issued and outstanding - -
Common stock, $.01 par value, 100 shares authorized, issued
and outstanding - -
Additional paid-in capital 167,944 155,263
Retained earnings 5,101 1,055
--------------- --------------
Total stockholders' equity 173,059 156,318
--------------- --------------
$ 174,526 $ 156,742
=============== ==============
</TABLE>
See accompanying notes to financial statements.
1
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ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
MARCH 31,
1999
--------------
(IN THOUSANDS)
<S> <C>
Interest income:
Interest and fees on loans $ 3,872
Interest on money market account with Atlantic Bank 198
--------------
Total interest income 4,070
--------------
Gain on sale of other real estate owned 351
--------------
General and administrative expenses:
Loan servicing and advisory services 98
Other general and administrative 35
--------------
Total general and administrative expenses 133
--------------
Net income 4,288
Preferred stock dividends 242
--------------
Earnings available to common shareholder $ 4,046
==============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Common Stock Series A Series B Additional
---------------- ----------------- ---------------- Paid-in Retained Total
Shares Amount Shares Amount Shares Amount Capital Earnings Amount
-------- ------- -------- -------- ------- ------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at December 31, 1998 100 $ - - $ - 1,000 $ - $155,263 $ 1,055 $156,318
Issuance of preferred stock, Series A - - 1,416,130 14 - - 12,681 - 12,695
Net income - - - - - - - 4,288 4,288
Cumulative dividend on preferred stock, - - - - - - - (222) (222)
Series A
Cumulative dividend on preferred stock, - - - - - - - (20) (20)
Series B
======== ======= ======== ======== ======= ======= ============= ========= ==========
Balance at March 31, 1999 100 $ - 1,416,130 $ 14 1,000 $ - $167,944 $ 5,101 $173,059
======== ======= ======== ======== ======= ======= ============= ========= ==========
PERIOD FROM INCEPTION, MARCH 20, 1998, THROUGH MARCH 31, 1998
<CAPTION>
Preferred Stock Preferred Stock
Common Stock Series A Series B Additional
---------------- ----------------- ---------------- Paid-in Retained Total
Shares Amount Shares Amount Shares Amount Capital Earnings Amount
-------- ------- -------- -------- ------- ------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Issuance of common stock 100 $ - - $ - - $ - $ - $ - $ -
Issuance of preferred stock, Series B - - - - 1,000 - 1,000 - 1,000
Capital contribution from common - - - - - - 139,740 - 139,740
stockholder
======== ======= ======== ======== ======= ======= ============= ========= ==========
Balance at March 31, 1998 100 $ - - $ - 1,000 $ - $140,740 $ - $140,740
======== ======= ======== ======== ======= ======= ============= ========= ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
THREE INCEPTION
MONTHS THROUGH
ENDED MARCH MARCH 31,
31, 1999 1998
------------- ---------------
<S> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income $ 4,288 $ -
Adjustments to reconcile net income to net cash provided by operating
activities:
Discount accretion (437) -
Net gain on sale and disposition of other real
estate owned (351) -
Other, net (938) -
-------------- ---------------
Net cash provided by operating activities 2,562 -
-------------- ---------------
Cash flows from investing activities:
Loan repayments 13,195 -
Purchases of loans (16,359) -
Sales of other real estate owned 1,426 -
-------------- ---------------
Net cash used by investing activities (1,738) -
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, Series A 12,695 -
Payment of preferred stock dividend, Series A (107) -
-------------- ---------------
Net cash used in financing activities 12,588 -
-------------- ---------------
Net change in cash and cash equivalents 13,412 -
Cash and cash equivalents at beginning of period 10,580 -
-------------- ---------------
Cash and cash equivalents at end of period $ 23,992 $ -
============== ===============
Supplemental information:
Value of loans transferred by the Company's common stockholder in exchange
for the issuance of common stock and preferred stock, Series B $ - $ 140,740
Dividends declared, not paid on preferred stock, Series A 115 -
Dividends declared, not paid on preferred stock, Series B 20 -
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
Note 1. BASIS OF PRESENTATION
Atlantic Preferred Capital Corporation is a Massachusetts corporation
incorporated on March 20, 1998. Atlantic Bank and Trust Company created
Atlantic Preferred Capital to acquire and hold real estate mortgage assets in
a cost-effective manner and to provide Atlantic Bank with an additional means
of raising capital for federal and state regulatory purposes. Atlantic Bank
owns, indirectly, all of the outstanding common stock of Atlantic Preferred
Capital. Atlantic Preferred Capital intends to operate in a manner which will
allow it to be taxed as a real estate investment trust, or a "REIT", under
the Internal Revenue Code of 1986, as amended. As a REIT, Atlantic Preferred
Capital will generally not be required to pay federal income tax if it
distributes its earnings to its stockholders and continues to meet a number
of other requirements.
The financial information as of March 31, 1999 and the results of operations,
changes in stockholders' equity and cash flows for the periods ended March
31, 1999 and 1998 are unaudited; however, in the opinion of management, the
consolidated financial information reflects all adjustments (consisting
solely of normal recurring accruals) necessary for a fair presentation in
accordance with generally accepted accounting principles. Interim results are
not necessarily indicative of results to be expected for the entire year.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for losses on loans, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans, the allocation of
purchase discount between amortizing and non-amortizing portions, and the
amortization of discount on loans.
Note 2. PREFERRED STOCK
On February 1, 1999, Atlantic Preferred Capital closed its initial pubic
offering ("IPO") of 1,260,000 Series A preferred shares. On February 12,
1999, Atlantic Preferred Capital sold an additional 156,130 Series A
preferred shares in connection with the underwriters' exercise of their
overallotment option. The IPO was made pursuant to (i) a Registration
Statement on From S-11, originally filed with the Securities and Exchange
Commission on November 2, 1998, as amended (Commission File No. 333-66677),
which was declared effective on January 27, 1999. The IPO commenced on
January 28, 1999 and terminated shortly thereafter upon the sale into the
public market of all of the registered Series A preferred shares.
The Series A preferred shares form a series of the preferred stock of
Atlantic Preferred Capital. The Series A preferred shares are validly issued,
fully paid and nonassessable. The holders of the Series A preferred shares
have no preemptive rights with respect to any shares of the capital stock of
Atlantic Preferred Capital. The Series A preferred shares are not subject to
any sinking fund or other obligation of Atlantic Preferred Capital for their
repurchase or retirement. The Series A preferred shares are not convertible
into any other securities of Atlantic Preferred Capital. The Series A
preferred shares will be exchanged on a ten-for-one basis for preferred
shares of Atlantic Bank if directed by the FDIC under certain circumstances.
The Series A preferred shares rank senior to Atlantic Preferred Capital's
common stock and Series B preferred stock, as to dividends and in liquidation.
Holders of Series A preferred shares are entitled to receive, if, when and as
declared by the Board of Directors of Atlantic Preferred Capital out of
assets of Atlantic Preferred Capital legally available therefor, monthly cash
dividends at the rate of 9 3/4% per annum of the liquidation preference
(equivalent to $0.975 per share per annum). If declared, dividends on the
Series A preferred shares for each monthly period are payable on the
fifteenth day of the following month, at such annual rate, to holders of
record on the last business day of the monthly dividend period. Monthly
dividend periods commence on the first day of each month. The amount of
dividends, if declared, payable for the initial period or any period shorter
than a full dividend period is computed on the basis of 30-day months, a
360-day year and the actual number of days elapsed in the period. Dividends
in each period accrue from the first day of such period, whether or not
declared or paid for the prior monthly period. During the three months ended
March 31, 1999, Atlantic Preferred Capital's Board of Directors declared
dividends in the aggregate of $222,000 on Series A preferred shares.
5
<PAGE>
Atlantic Preferred Capital has currently outstanding 1,000 Series B preferred
shares, of which 900 are held, directly or indirectly, by Atlantic Bank. The
other 100 Series B preferred shares are held by certain of Atlantic Bank's
employees (and/or the spouses of certain employees). All of the outstanding
Series B preferred shares were originally issued to Atlantic Bank in reliance
upon the exemption from registration under Section 4(2) of the Securities Act
of 1933, as amended. There is no established public trading market for the
Series B preferred shares.
The holders of Series B preferred shares are entitled to receive annual
dividends equal to eight percent (8%) of the liquidation preference of the
Series B preferred shares. Dividends on Series B preferred shares are
cumulative, and all accumulated and unpaid dividends are paid before any
dividends are paid on the common stock. During the three months ended March
31, 1999, dividends of approximately $20,000 had accrued on Series B
preferred stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements made or incorporated in this Quarterly Report on Form 10-Q include
a number of forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements include, without limitation, statements
containing the words "anticipates," "believes," "expects," "intends,"
"future" and words of similar import which express management's belief,
expectations or intentions regarding the future performance of Atlantic
Preferred Capital. Atlantic Preferred Capital's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such differences are discussed in this Form 10-Q,
Atlantic Preferred Capital's Annual Report on Form 10-K, and Atlantic
Preferred Capital's Final Prospectus as filed with the Securities and
Exchange Commission on January 27, 1999, and include, without limitation: (i)
the possible exchange of the Series A preferred shares for preferred shares
of Atlantic Bank at the direction of the FDIC if Atlantic Bank becomes or may
in the near term become undercapitalized or is placed in conservatorship or
receivership; (ii) risks associated with mortgage loans generally, and
particularly the geographic concentration of Atlantic Preferred Capital's
loan portfolio at March 31, 1999 in the Northeast and California; and (iii)
the failure by Atlantic Preferred Capital to maintain its status as a REIT
for federal income tax purposes.
RESULTS OF OPERATIONS
Atlantic Preferred Capital reported total interest income of $4.1 million for
the three months ended March 31, 1999. Interest income from loans was $3.9
million representing a total average yield of 11.35% for the same period.
After the inclusion of $198,000 in money market account interest, $351,000
realized on the gain on sale of OREO, the deduction of $98,000 in service and
advisory fees, $35,000 in general and administrative costs, and $242,000 in
preferred stock dividends, Atlantic Preferred Capital reported net income
available to the common stockholder of $4.0 million for the three months
ended March 31, 1999.
The average balance and yield on Atlantic Preferred Capital's loan portfolio
is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------------------------------------
AVERAGE
BALANCE INTEREST YIELD
------------------ -------------- --------------
<S> <C> <C> <C>
(dollars in thousands)
Loans, net $138,377 $3,872 11.35%
</TABLE>
Atlantic Preferred Capital intends to pay dividends on its preferred and
common stock in amounts necessary to continue to preserve its status as a
REIT under the Internal Revenue Code.
6
<PAGE>
LOAN PORTFOLIO
For the three months ended March 31, 1999, Atlantic Preferred Capital has
acquired loans, either through transfer or purchase from Atlantic Bank,
having gross outstanding principal balances at the time of acquisition of
$17.1 million.
The following table sets forth information regarding the composition of the
loan portfolio:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- ---------------
<S> <C> <C>
(in thousands)
Mortgage loans on real estate:
Commercial $ 101,775 $ 99,695
One to four family 11,917 12,339
Multifamily 50,296 49,854
Land 1,686 1,458
----------------- ------------------
Total 165,674 163,346
----------------- ------------------
Secured commercial 246 251
Other 450 250
----------------- ------------------
Total loan portfolio 166,370 163,847
----------------- ------------------
Less discount:
Non-amortizing discount (1) (8,676) (10,737)
Amortizing discount (7,447) (6,537)
Net deferred loan income (45) (76)
Allowance for loan losses (2,516) (1,337)
----------------- ------------------
Loans, net $ 147,686 $ 145,160
================= ==================
</TABLE>
(1) Non-amortizing discount is an allocation of the total discount on
purchased loans accounted for on the cost recovery method until it is
determined that the amount and timing of collections are reasonably estimable
and collection is probable.
Atlantic Preferred Capital intends that each loan acquired from Atlantic Bank
in the future will be a whole loan, and will be originated or acquired by
Atlantic Bank in the ordinary course of its business. Atlantic Preferred
Capital also intends that all loans held by it will be serviced pursuant to
the master service agreement.
There were $3.4 million and $3.9 million of mortgage loans on non-accrual
status at March 31, 1999 and December 31, 1998, respectively. Loans are
generally placed on non-accrual status and interest is not accrued when the
collectibility of principal and interest is not probable or estimable. Unpaid
interest income previously accrued on such loans is reversed against current
period interest income and the loan is accounted for using the cost recovery
method, whereby any amounts received are applied against the recorded amount
of the loan. A loan is returned to accrual status when it becomes evident
that all principal and interest is collectible.
ALLOWANCE FOR LOAN LOSSES AND DISCOUNT
In the normal course of business, the allowance for loan losses will be
adjusted through a provision for loan losses charged to earnings and will be
maintained at a level considered adequate to provide for estimated loan
losses.
Quarterly reviews of the loan portfolio are performed to identify loans for
which specific allowances allowance allocations are considered prudent.
Specific allocations include the results of measuring impaired loans under
SFAS No. 114. General risk allocations are determined by formula whereby the
loan portfolio is stratified by loan type and by risk rating category. Loss
factors are then applied to each strata based on various considerations
including historical loss experience, delinquency trends, current economic
conditions, industry standards and regulatory guidelines. Any remaining
unallocated portion is reviewed for adequacy in relation to the overall loan
portfolio and in recognition of estimates inherent in the calculation
methodology.
Effective January 1, 1999, Atlantic Preferred Capital changed, on a
prospective basis, its method of accounting for purchased loan discounts and
the related recognition of discount loan income and provisions for loan
losses. Such accounting change accounts for discount loan income and loan
loss provisions on an individual loan basis, rather than as previously
recognized in the aggregate on a static purchased pool basis and was
accounted for as a "change in estimate" in accordance with Accounting
Principles Board Opinion
7
<PAGE>
No. 20. There was no impact on stockholders' equity on the effective date of
the accounting change. However, the timing of subsequent earnings will be
affected by changes in the amount of estimated collections on individual
loans rather than by changes in the aggregate amount of estimated collections
on purchased loan pools. Over the lives of the respective loans, management
does not anticipate that there will be any material impact on net income as a
result of this change.
In addition, during the first quarter of 1999, Atlantic Preferred transferred
$860,000 from non-amortizing discount to the allowance for loan losses.
However, effective January 1, 1999, on a prospective basis, individual loan
balances are reported net of non-amortizing and amortizing discounts, if any.
Under pool accounting such discounts were available for allocation to all
loans purchased as part of a pool; under loan-by-loan accounting all
available discount is allocated to individual loans. Accordingly, in
connection with the accounting change, the transfer of $860,000 of
non-amortizing discount to the allowance for loan losses represented general
reserve allocations on outstanding purchased loan balances. As a result, this
transfer resulted in the ratio of the allowance for loan losses to net loans
increasing from 0.91% at December 31, 1998 to 1.68% at March 31, 1999, with a
corresponding decrease in the ratio of non-amortizing discount to net loans.
Accordingly, the transfer has no effect on the amount of total loans, net.
The provision and the level of the allowance are evaluated on a regular basis
by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant change.
Ultimately, losses may vary from current estimates and future additions to
the allowance may be necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if
any, are credited to the allowance.
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Three Months
Ended Inception through
March 31, 1999 March 31, 1998
-------------------- ---------------------
<S> <C> <C>
(In thousands)
Balance at beginning of period $ 1,337 $ -
Transfer from Bank with loans transferred 319 1,337
Transfer from non-amortizing discount 860 -
------------------- ---------------------
Balance at end of period $ 2,516 $ 1,337
==================== =====================
</TABLE>
INTEREST RATE RISK
Atlantic Preferred Capital's income consists primarily of interest income on
mortgage assets. Atlantic Preferred Capital does not intend to use any
derivative products to manage its interest rate risk. If there is a decline
in market interest rates, Atlantic Preferred Capital may experience a
reduction in interest income on its mortgage loans and a corresponding
decrease in funds available to be distributed to its shareholders. The
reduction in interest income may result from downward adjustments of the
indices upon which the interest rates on loans are based and from prepayments
of mortgage loans with fixed interest rates, resulting in reinvestment of the
proceeds in lower yielding mortgage loans.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk generally arises with respect to Atlantic
Preferred Capital's loan portfolio when a number of borrowers engage in
similar business activities, or activities in the same geographical region.
Concentration of credit risk indicates the relative sensitivity of Atlantic
Preferred Capital's performance to both positive and negative developments
affecting a particular industry. There is no existing concentration of credit
risk with respect to Atlantic Preferred Capital's loan portfolio with respect
to borrowers engaged in similar business activities, as there is no
particular type of commercial real estate property which represents more than
10% of Atlantic Preferred Capital's total loan portfolio. Atlantic Preferred
Capital's balance sheet exposure to geographic concentrations directly
affects the credit risk of the loans within its loan portfolio. At March 31,
1999 and December 31, 1998, 80.9% and 81.2% of Atlantic Preferred Capital's
total loan portfolio consisted of loans located in New England and
California. Consequently, these loans may be subject to a greater risk of
default than other comparable loans in the event of adverse economic,
political or business developments and natural hazards in New England or
California that may affect the ability of property owners to make payments of
principal and interest on the underlying mortgages.
8
<PAGE>
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of Atlantic Preferred Capital's financial
commitments and to capitalize on opportunities for Atlantic Preferred
Capital's business expansion. In managing liquidity, Atlantic Preferred
Capital takes into account various legal limitations placed on a REIT.
Atlantic Preferred Capital's principal liquidity needs are:
(1) to maintain the current portfolio size through the acquisition of
additional mortgage assets as mortgage assets currently in the loan
portfolio mature, pay down or prepay, and
(2) to pay dividends on the Series A and B preferred shares.
The acquisition of additional mortgage assets is intended to be funded
primarily through repayment of principal balances of mortgage assets by
individual borrowers. Atlantic Preferred Capital does not have and does not
anticipate having any material capital expenditures. To the extent that the
Board of Directors determines that additional funding is required, Atlantic
Preferred Capital may raise such funds through additional equity offerings,
debt financing or retention of cash flow (after consideration of provisions
of the Internal Revenue Code requiring the distribution by a REIT of at least
95% of its REIT taxable income and taking into account taxes that would be
imposed on undistributed income), or a combination of these methods. Atlantic
Preferred Capital has no debt outstanding, and it does not currently intend
to incur any indebtedness. The organizational documents of Atlantic Preferred
Capital limit the amount of indebtedness which it is permitted to incur to no
more than 100% of the total stockholders' equity of Atlantic Preferred
Capital. Any such debt may include intercompany advances made by Atlantic
Bank to Atlantic Preferred Capital.
Atlantic Preferred Capital may also issue additional series of preferred
stock. However, Atlantic Preferred Capital may not issue additional shares of
preferred stock senior to the Series A preferred shares without the consent
of holders of at least two-thirds of the Series A preferred shares
outstanding at that time. Additional shares of preferred stock ranking on a
parity with the Series A preferred shares may not be issued without the
approval of a majority of Atlantic Preferred Capital's independent directors.
YEAR 2000 DISCLOSURE
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900 or not
at all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
Atlantic Preferred Capital is dependent in virtually every phase of its
operations on Atlantic Bank, including the computer and other systems of
Atlantic Bank. Accordingly, Atlantic Preferred Capital is addressing the Year
2000 issue with respect to its operations through its relationship with
Atlantic Bank under the advisory agreement and the master service agreement.
During 1997, the management of Atlantic Bank developed an action plan to
address the Year 2000 issue. Atlantic Bank uses computer systems (including
hardware and software) primarily to track deposits and loans, transfer funds,
prepare financial reports, and perform financial calculations. Atlantic
Bank's deposit and loan processing is outsourced to BISYS Systems of Houston,
Texas ("BISYS") under a service agreement.
In 1998, Atlantic Bank acquired Dolphin Capital Corporation. After the
acquisition, Dolphin initiated an action plan to address the Year 2000 issue.
Dolphin uses computer systems to receive equipment leasing applications over
the internet, track lease payments, and perform financial calculations.
Atlantic Bank's plan includes five phases as suggested by the FDIC and other
bank regulatory authorities: awareness, assessment, renovation, validation,
and testing. In 1997, Atlantic Bank substantially completed the awareness and
assessment phases of the plan with regard to its computer systems, and has
identified those areas that are considered mission critical. Atlantic Bank
began working with BISYS, reviewing their plans, and determining how to
validate the readiness of its system. Also in connection with the awareness
and assessment phases of the plan, Atlantic Bank raised the Year 2000 issue
with its vendors, service providers, and customers. All vendors listed in
Atlantic Bank's accounts payable system were sent a questionnaire on the Year
2000 issue. Some vendors provided written responses to the questionnaires and
others were sent follow up letters and/or were called regarding any follow-up
questions or issues. Most of Atlantic Bank's vendors have responded to its
questionnaires and follow-up letters. Based on these responses, most of
Atlantic Bank's vendors have indicated that they have a plan to remediate
their systems as needed or are already Year 2000 compliant. Dolphin has sent
questionnaires to its vendors inquiring about their Year 2000 plans. To date,
greater than 50% of the vendors have responded. None of the respondents
expect to encounter Year 2000 problems.
Atlantic Bank is in the process of evaluating the risk of customer failure to
prepare for the Year 2000 issue, any associated effect of the ability of
customers to repay outstanding loans, and impact on the adequacy of the level
of the allowance for loan losses. Atlantic Bank currently considers Year 2000
risks in evaluating the adequacy of the allowance for loan and lease losses.
In accordance with
9
<PAGE>
applicable FDIC regulations, Atlantic Bank has also distributed written
materials to all of its depositors (including deposit brokers) with over
$250,000 on deposit regarding the Year 2000 issue, including a description of
Atlantic Bank's plan and the status of such plan. Atlantic Bank also
distributed questionnaires to its borrowers with loans totaling $500,000 or
more. Some of these depositors and borrowers provided written responses to
the questionnaires and others were sent follow-up letters and/or were called
regarding any follow-up questions or issues. All of these depositors and
approximately 60% of these borrowers have responded to the questionnaires and
follow-up letters and have indicated that they have a plan to remediate their
systems as needed or are already Year 2000 compliant. Atlantic Bank is
continuing to follow-up with those borrowers who have not yet responded.
Dolphin has sent questionnaires to its largest lessees inquiring about their
Year 2000 plans. To date, greater than 50% of the vendors have responded.
None of the respondents expect to encounter Year 2000 problems.
The plan calls for validation and testing with respect to all mission
critical systems. Mission critical systems include loan processing, deposit
processing, general ledger and funds transfer systems. Other systems that are
non-mission critical include the local area network, the network operating
system and desktop applications. In the first half of 1998, Atlantic Bank
upgraded its local area network, including the network operating system and
desktop application software. In addition, most of Atlantic Bank's desktop
systems were similarly upgraded. The manufacturer of the network operating
system and desktop application software has certified that all of these
products are Year 2000 compliant. Atlantic Bank has also conducted internal
testing on these products and has similarly concluded that they are Year 2000
compliant. Atlantic Bank has also installed a test lab simulating a Year 2000
environment with possible date sensitive components, including computers,
operating systems, and base applications. Dolphin has successfully tested its
lease application and lease accounting systems. The manufacturers of its
network operating system and desktop application software have certified that
all of these products are Year 2000 compliant. Dolphin has also conducted
internal testing on these products and has similarly concluded that they are
Year 2000 compliant.
Testing of the mission critical systems is being completed according to the
schedule prepared by BISYS and, with respect to the funds transfer system,
the Federal Reserve Bank of Boston. The test period ran from November 1998
through April 1999. During this period, the entire test process was performed
twice. Atlantic Bank had an opportunity to re-test any applications that
produced errors in the initial testing. No significant Year 2000 processing
problems were encountered in Atlantic's or Dolphin's testing. Atlantic Bank
believes that it and its vendors, customers, and service providers are
currently on schedule in accordance with the plan.
Atlantic Bank's new executive offices had been renovated in 1997 and early
1998, with new building systems (such as fire and security alarm systems and
HVAC system) installed at such time. All of the contractors and suppliers of
such building systems have certified that their systems are Year 2000
compliant. The building and/or Atlantic Bank have tested such systems and
have similarly concluded that they are Year 2000 compliant. Dolphin is in the
process of contacting vendors in regards to its facility and related embedded
technology.
Atlantic Bank's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business-critical system. These procedures are being expanded to include
specific procedures for potential Year 2000 issues, and contingency plans to
protect against Year 2000 related interruptions. Atlantic Bank and Dolphin
recently completed these contingency plans which include backup procedures,
identification of alternative suppliers, emergency plans to handle power
outages, telecommunication failures, etc.
Based on its review to date, Atlantic Bank believes that the primary costs of
addressing the Year 2000 issue will include internal staffing, consulting,
system testing and modification. Atlantic Bank currently expects that the
total third party expenses associated with the plan will be approximately
$150,000, and will primarily be incurred from the third quarter of 1998
through year-end 1999. The costs are not considered to have a material affect
on operating expenses or budgets. Atlantic Bank plans to account for these
costs as expense items. The costs include an independent review by an
external firm under an engagement letter signed June 29, 1998.
While Atlantic Bank believes that it is taking reasonable steps with respect
to the Year 2000 issue, if the phases of the plan are not completed on time,
the costs associated with becoming Year 2000 compliant exceed Atlantic Bank's
estimates, third party providers are not Year 2000 compliant on a timely
basis, or customers with material loan obligations are unable to meet their
repayment obligations due to Year 2000 problems, the Year 2000 issue could
have a material impact on Atlantic Preferred Capital's financial results. In
addition, Atlantic Bank's efforts to address the Year 2000 issue are being
monitored by its federal banking regulators. Failure to be Year 2000
compliant on a timely basis could subject Atlantic Bank to formal supervisory
or enforcement actions. Any of the foregoing issues could have a material
adverse impact on the ability of Atlantic Bank to service Atlantic Preferred
Capital's loan portfolio and otherwise manage its business which could have a
material adverse effect on Atlantic Preferred Capital's business, financial
condition or results of operations.
The preceding Year 2000 discussion contains various forward-looking
statements which represent Atlantic Bank's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believes,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, Atlantic Bank's expectations as to when it will complete the
phases of the plan; its estimated costs; and its belief that its internal
systems will be Year 2000 compliant in a timely manner. All forward-looking
statements involve a number of risks and uncertainties that could
10
<PAGE>
cause the actual results to differ materially from the projected results.
Factors that may cause these differences include, but are not limited to, the
availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code; and the actions of governmental agencies or other third
parties with respect to Year 2000 problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of Atlantic
Preferred Capital to attempt to control risks associated with interest rate
movements. Market risk is the risk of loss from adverse changes in market
prices and interest rates. Atlantic Preferred Capital's market risk arises
primarily from interest rate risk inherent in holding loans. To that end,
management actively monitors and manages its interest rate risk exposure.
Atlantic Preferred Capital's management reviews, among other things, the
sensitivity of Atlantic Preferred Capital's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activity, and maturities of
investments. Atlantic Bank's senior management also approves and establishes
pricing and funding decisions with respect to Atlantic Preferred Capital's
overall asset and liability composition.
Atlantic Preferred Capital's methods for evaluating interest rate risk
include an analysis of its interest rate sensitivity "gap", which is defined
as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to
result in an increase in net interest income, while a positive gap would tend
to adversely affect net interest income. Because different types of assets
and liabilities with the same or similar maturities may react differently to
changes in overall market rates or conditions, changes in interest rates may
affect net interest income positively or negatively even if an institution
were perfectly matched in each maturity category.
Quantitative information regarding market risk has not changed significantly
since December 31, 1998.
11
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, Atlantic Preferred Capital may be involved in routine
litigation incidental to its business, including a variety of legal
proceedings with borrowers, which would contribute to Atlantic Preferred
Capital's expenses, including the costs of carrying non-performing assets.
Atlantic Preferred Capital is not currently a party to any material
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS
(a) The Company's Board of Directors and stockholders approved the Amended
and Restated Articles of Organization on January 28, 1999 affecting the
dividend and liquidation rights of the holders of the Company's common
stock and Series B preferred shares.
(b) The Company closed its initial public offering of 1,260,000 Series A
preferred shares on February 1, 1999 and sold an additional 156,130
Series A preferred shares in connection with the underwriters' exercise
of their overallotment option. The Series A preferred shares rank
senior to the common stock and Series B preferred shares as to
dividends and liquidation rights.
(c) Not applicable.
(d) On February 1, 1999, Atlantic Preferred Capital closed its IPO of
1,260,000 Series A preferred shares. On February 12, 1999, Atlantic
Preferred Capital sold an additional 156,130 Series A preferred shares
in connection with the underwriters' exercise of their overallotment
option. The IPO was made pursuant to a Registration Statement on Form
S-11, originally filed with the Securities and Exchange Commission in
November 4, 1998, as amended (Commission File No. 333-66677), which was
declared effective on January 27, 1999. The IPO commenced on January
28, 1999 and terminated shortly thereafter after the sale into the
public market of all of the registered Series A preferred shares.
The Series A preferred shares sold in the IPO were offered for sale in
by a syndicate of underwriters represented by Friedman, Billings,
Ramsey & Co., Inc., Advest, Inc and Janney Montgomery Scott Inc.
The Company sold an aggregate of 1,416,130 shares Series A preferred
stock (including 156,130 shares issued upon the exercise of the
underwriters' overallotment option) in the IPO at a per share price of
$10.00, for an aggregate offering price of $14,161,300. The Company
paid approximately $566,500 in underwriting fees and discounts and an
additional $900,000 in other expenses related to the IPO.
The Series A preferred shares are not convertible into any other
securities of the Company. The Series A preferred shares will be
exchanged on a ten-for-one basis for preferred shares of Atlantic Bank
if directed by the FDIC under certain circumstances.
After deducting the expenses set forth above, the Company received
approximately $12.7 million in net proceeds of the IPO. The Company
used the proceeds to purchase additional loans from Atlantic Bank.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The stockholders of the Company voted by written consent in lieu of a
special meeting effective January 28, 1999 (the "Consent").
(b) Not applicable.
(c) Pursuant to the Consent, the Company's stockholders approved the
Company's Amended and Restated Articles of Organization, approved the
Company's Amended and Restated By-laws, elected to opt out of the
"Regulation of Control Share Acquisitions" and "Business Combinations
with Interested Shareholders" provisions of the General Laws of the
Commonwealth of Massachusetts, and adopted and ratified all prior
actions taken by the incorporators, stockholders, directors and
officers of the Company. The votes by the common stockholders for these
proposals were unanimous, with no abstentions.
12
<PAGE>
The above described Amended and Restated Articles of Organization,
among other things, (i) authorizes issuance of 1,449,000 shares of
non-cumulative exchangeable preferred stock, Series A; (ii) authorizes
issuance of 2,000,000 shares of undesignated preferred shares; (iii)
authorizes issuance of 3,449,000 shares of excess preferred shares;
(iv) amends Article IV regarding the number, rights and preferences of
authorized stock; and (v) amends Article V regarding the limitations on
the transfer and ownership of stock.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K are set forth below.
EXHIBIT
NO. EXHIBIT
- ------ -------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the three months ended
March 31, 1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ATLANTIC PREFERRED CAPITAL CORPORATION
Date: May 13, 1999 By: /s/ Richard Wayne
---------------------
Richard Wayne
President
Date: May 13, 1999 By: /s/ John L. Champion
---------------------
John L. Champion
Treasurer
14
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<PAGE>
<ARTICLE> 9
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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0
14
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<OTHER-SE> 173,045
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<YIELD-ACTUAL> 9.96
<LOANS-NON> 3,400
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