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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1995
OR
|_| Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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Commission File Number 0-3722-3
ATLANTIC AMERICAN CORPORATION
Incorporated pursuant to the laws of the State of Georgia
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Internal Revenue Service-- Employer Identification No.
58-1027114
Address of Principal Executive Offices:
4370 Peachtree Road, N.E., Atlanta, Georgia 30319
(404) 266-5500
Indicate by check mark whether 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 total number of shares of the registrant's Common Stock, $1 par value,
outstanding on November 6, 1995, was 18,690,289.
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<PAGE>
ATLANTIC AMERICAN CORPORATION
INDEX
Part 1. Financial Information Page No.
- ------- --------------------- --------
Item 1. Financial Statements:
Consolidated Balance Sheets -
December 31, 1994 and September 30, 1995 2
Consolidated Statements of Operations
Three months ended and nine months ended 3
September 30, 1994 and 1995
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1994 4
and 1995
Notes to Consolidated Financial 5
Statements
Item 2. Management's Discussion and Analysis of 6 - 9
Financial Condition and Results of Operations
Part II. Other Information
- -------- -----------------
Item 5. Other information 10
Item 6. Exhibits and reports on Form 8-K 10
Signatures 11
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share ASSETS September 30, December 31,
and per share data) 1995 1994
Insurance ------------- ------------
Cash, including short-term investments of
$7,600 and $2,498 $ 8,975 $ 4,016
Investments (see Note 2) 99,453 89,660
Receivables:
Reinsurance 12,766 12,334
Other (net of allowance for bad debts: $958
and $872) 11,032 9,233
Deferred acquisition costs 13,220 13,553
Other assets 2,900 3,017
Receivables from Retail Furniture 7,243 8,908
-------- --------
Total Insurance assets 155,589 140,721
-------- --------
Retail Furniture
Cash 320 2,383
Trade Receivables (net of allowance for bad
debts: $25 and $19) 3,551 3,800
Merchandise inventory 24,844 25,008
Prepaid expenses 1,347 1,263
Deferred income taxes 644 --
-------- --------
Total current assets 30,706 32,454
Property and equipment, net 22,384 21,459
Goodwill 10,526 10,483
Other assets 301 328
-------- --------
Total Retail Furniture assets 63,917 64,724
-------- --------
Total assets $219,506 $205,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance
Insurance reserves and policy funds (see Note 3) $ 91,577 $ 88,295
Accounts payable and accrued expenses 5,735 4,458
Short-term debt payable to affiliates -- 675
Long-term debt 4,594 4,594
Long-term debt payable to affiliates 19,733 19,733
Minority interest 1,210 963
-------- --------
Total Insurance liabilities 122,849 118,718
-------- --------
Retail Furniture
Short-term borrowings and current portion of
long-term debt 287 198
Short-term borrowings and current portion of
long-term debt payable to affiliates 20,675 15,849
Accounts payable and accrued expenses 21,897 23,730
Deferred income taxes -- 247
Payable to Insurance 843 2,685
-------- --------
Total current liabilities 43,702 42,709
Long-term debt, less current maturities 831 775
Long-term debt, less current maturities payable
to affiliates 6,950 4,331
Payable to Insurance 6,400 6,223
Other liabilities 942 1,063
Deferred income taxes 523 759
Minority interest -- 845
-------- --------
Total Retail Furniture liabilities 59,348 56,705
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par, 4,000,000 shares
authorized; 30,000 shares issued,
$3,000 redemption value 30 30
Common stock, $1 par, 30,000,000 shares
authorized; 18,712,167 shares
issued in 1995 and 18,413,942 shares 18,712 18,414
issued in 1994
Additional paid-in capital 33,344 33,289
Accumulated deficit (29,707) (27,452)
Net unrealized investment gains 14,984 5,741
Treasury stock (54) --
-------- --------
Total shareholders' equity 37,309 30,022
-------- --------
Total liabilities and
shareholders' equity $219,506 $205,445
======== ========
The accompanying notes are an integral part of these financial statements.
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ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 1995 1994 1995 1994
---- ---- ---- ----
Insurance
Revenue:
Insurance premiums $11,085 $10,754 $32,000 $30,577
Investment income 1,416 1,485 4,281 4,308
Realized investment gains, net 903 51 1,441 645
------- ------- ------- -------
Total revenue 13,404 12,290 37,722 35,530
------- ------- ------- -------
Benefits and expenses:
Insurance benefits and losses incurred 6,317 7,048 19,043 20,461
Commissions and underwriting expenses 3,952 2,859 11,000 8,946
Interest expense 557 494 1,690 1,472
Other 1,555 1,369 4,380 4,007
------- ------- ------- -------
Total benefits and expenses 12,381 11,770 36,113 34,886
------- ------- ------- -------
Revenue from Retail Furniture 228 172 654 483
------- ------- ------- -------
Insurance income 1,251 692 2,263 1,127
------- ------- ------- -------
Retail Furniture
Net sales 26,450 29,647 83,674 87,234
Cost of sales 14,386 16,236 44,966 48,040
-------- ------- ------- -------
Gross profit 12,064 13,411 38,708 39,194
Selling, general and administrative
expenses 12,601 12,591 38,508 35,521
------- ------- ------- -------
Operating (loss) income (537) 820 200 3,673
------- ------- ------- -------
Other expenses:
Interest 701 495 2,093 1,300
Other, net (18) 134 160 577
Write-down for store closings -- -- 1,782 --
Expense to Insurance segment 228 172 654 483
-------- ------- ------- -------
Retail Furniture (loss) income (1,448) 19 (4,489) 1,313
-------- ------- ------- -------
Total Company
(Loss) income before income tax
(expense) benefit and
extraordinary gain (197) 711 (2,226) 2,440
Income tax (expense) benefit -- (106) (9) 862
-------- ------- ------- -------
Income before extraordinary gain (197) 605 (2,235) 3,302
Extraordinary gain on extinguishment of
long-term debt -- 100 -- 100
-------- ------- ------- -------
Net (loss) income ($ 197) $ 705 ($2,235) $ 3,402
======== ======= ======= =======
Net (loss) income per common share:
Income before extraordinary gain ($0.01) $ 0.03 ($0.13) $ 0.17
Extraordinary gain on extinguishment
of long-term debt -- NIL -- NIL
------- ------- ------- -------
Net (loss) income ($0.01) $ 0.03 ($0.13) $ 0.17
====== ======= ====== =======
Weighted average common shares
outstanding 18,732 18,500 18,627 18,513
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-----------------
1995 1994
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($2,235) $3,402
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Amortization of deferred acquisition costs 2,924 2,168
Acquisition costs deferred (2,591) (2,279)
Realized investment gains (1,441) (645)
Increase in insurance reserves 3,282 488
(Increase) decrease in merchandise
inventories (183) 3,296
Provision for write-down for store closings 1,782 --
Depreciation and amortization 1,930 1,747
Deferred income taxes 9 (862)
Extraordinary item -- (100)
Minority interest (435) 179
Increase in receivables, net (2,222) (3,520)
Decrease in other liabilities (4,635) (4,462)
Other, net 730 (404)
------- -------
Net cash used in operating activities (3,085) (992)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured 22,620 15,277
Investments purchased (19,747) (23,642)
Acquisition of minority interest (1,012) --
Acquisition of furniture stores -- (5,283)
Additions to property and equipment (2,707) (2,254)
------- ------
Net cash used in investing activities (846) (15,902)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 3,500 4,000
Net borrowings under line of credit agreement 4,500 3,000
Preferred stock dividends to affiliates (237) (237)
Proceeds from exercise of stock options 600 15
Purchase of treasury shares (124) --
Repayments of long-term debt and notes payable (1,412) (1,586)
------- -------
Net cash provided by financing activities 6,827 5,192
------- -------
Net increase (decrease) in cash and cash
equivalents 2,896 (11,702)
Cash and cash equivalents at beginning of period 6,399 24,798
------- -------
Cash and cash equivalents at end of period $ 9,295 $13,096
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Insurance - Net cash provided by (used in)
operating activities $ 4,051 ($2,415)
Furniture - Net cash (used in) provided by
operating activities (7,136) 1,423
------- -------
Net cash used in operating activities ($3,085) ($ 992)
======= =======
Cash paid for interest $ 3,847 $1,938
======= ======
Cash paid for income taxes $ 408 $ 327
======= ======
Fair value of assets acquired $ -- $5,587
Less: Cash paid -- (5,283)
------- ------
Liabilities assumed $ -- $ 304
======= ======
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Note 1. Basis of presentation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. All significant intercompany accounts and transactions within the
Insurance segment and Furniture segment have been eliminated in consolidation.
The interests of minority shareholders have been recognized. Substantially all
intercompany accounts and transactions between Insurance and Retail Furniture
are segregated but not eliminated. In the opinion of management, this financial
statement presentation provides a comprehensive view of its two business
segments. Leath Furniture, Inc., is reported on a two month lag basis. Certain
prior year amounts have been reclassified to conform to the 1995 presentation.
Operating results for the nine month period ended September 30, 1995, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1995. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1994.
Note 2. Investments.
Investments are comprised of the following:
September 30, December 31,
1995 1994
------------- ------------
Bonds (cost: $58,359 and $52,931) $58,427 $51,475
Common and preferred stocks (cost:
$19,841 and $22,371) 35,102 29,571
Mortgage loans 576 654
Policy and student loans 4,255 6,867
Investment in limited partnership 1,047 1,047
Real estate 46 46
------- -------
Total investments $99,453 $89,660
======= =======
Note 3. Insurance reserves and policy funds.
Insurance reserves and policy funds are comprised of the following:
September 30, December 31,
1995 1994
------------- ------------
Future policy benefits $36,529 $37,641
Unearned premiums 9,352 7,740
Losses and claims 42,917 40,003
Other policy liabilities 2,779 2,911
------- -------
Total policy liabilities $91,577 $88,295
======= =======
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Atlantic American Corporation's (the "Company" or "Parent Company") net loss
for the third quarter of 1995 was $197,000 or $.01 per share compared to net
income of $705,000 or $.03 per share for the third quarter of 1994. The
Company's net loss year-to-date for 1995 was $2.2 million or $.13 per share
compared to net income of $3.4 million or $.17 per share in 1994. The Company's
third quarter and year-to-date 1994 results include a $100,000 extraordinary
gain which related to the payoff of remaining debt to a bank by the Furniture
Division. Reduced earnings in the third quarter and year-to-date are due to a
reduction in earnings in the furniture segment of $1.5 million and $5.8 million,
respectively, offset by an increase in earnings in the Insurance Segment of
$559,000 and $1.1 million, respectively.
The Company recorded no tax expense in the third quarter of 1995 due to the
loss for the quarter compared to a tax expense of $106,000 in the third quarter
of 1994. Year-to-date the Company recorded a tax expense of $9,000 in 1995 for
alternative minimum taxes compared to a net tax benefit of $862,000 in 1994. The
Company's third quarter results for 1994 include an income tax expense of
$106,000 which is made up of total Company alternative minimum taxes of $16,000
and state income taxes of $90,000 related to the Furniture segment for which
there are no offsetting loss carryforwards available. The Company's year-to-date
results for 1994 include a tax benefit of $862,000 which consists of a $1.0
million tax benefit related to the Insurance segment offset by alternative
minimum taxes of $48,000 and state taxes of $90,000. The Company reduced its
deferred tax balance in the Insurance segment by $350,000 in the first quarter
of 1994 upon settlement of a tax case with the IRS regarding tax years 1983 and
1984. In the second quarter of 1994, the Company reduced its deferred tax
balance by $650,000 upon expiration of a time limitation with respect to a
potential tax liability. The Company did not reflect a regular income tax
expense in the first nine months of 1995 due to the year-to-date loss incurred.
At September 30, 1995, the Company had a net cumulative deferred tax asset of
$121,000. The net cumulative deferred tax asset consists of $32.8 million of
deferred tax assets, offset by $7.9 million of deferred tax liabilities, and a
$24.8 million valuation allowance. The Company's ability to generate taxable
income from operations is dependent upon various factors, many of which are
beyond management's control. Accordingly, there can be no assurance that the
Company will generate future taxable income. Therefore, the realization of the
deferred tax assets is assessed periodically based on the Company's current and
anticipated results of operations.
Georgia Casualty & Surety (the "Casualty Division") earned $823,000 in the
third quarter of 1995 compared to $290,000 in the third quarter of 1994. For the
year-to-date, the Casualty Division earned $1.5 million in 1995 compared to
$646,000 in 1994. This improvement in earnings is due to improved results of
operations that are due to increased premiums and the Casualty Division no
longer paying its parent interest on surplus notes that were converted to
capital in the second quarter of 1994. In addition, realized investment gains
increased $323,000 for the quarter and $318,000 year-to-date. Interest totaling
$256,000 was paid to the Parent Company in the first quarter of 1994.
Atlantic American Life and Bankers Fidelity Life (the "Life and Health
Division") had income of $995,000 in the third quarter of 1995 compared to
income of $763,000 in the third quarter of 1994. For the year, the Life and
Health Division had income of $2.3 million in 1995 compared to income of $1.4
million in 1994. This increase in earnings is mainly due to a decrease in losses
and claims as a percentage of premiums and an increase in realized investment
gains of $509,000 for the quarter and $384,000 year-to-date.
Leath Furniture, Inc. ("Leath") which is comprised of Leath, Modernage and
Jefferson Home, had a loss of $1.4 million in the third quarter of 1995 compared
to income of $19,000 in the third quarter of 1994. Leath's third quarter 1995
and 1994 results include the time period from May through July. For the
year-to-date, Leath had a loss of $4.5 million in 1995 compared to income of
$1.3 million in 1994. Leath's year-to-date results for 1995 and 1994 include the
time period from November through July. Leath's decline in earnings is due to
slow sales and increases in the prime rate coupled with the amortization of new
store start-up costs. Slow sales prompted the Company in the second quarter of
1995 to close three unprofitable stores and record a write-down of $1.8 million,
which is included in Leath's operating results, for the store closings and the
implementation of a cost reduction plan.
RESULTS OF OPERATIONS - Insurance
Total revenue increased to $13.4 million and $37.7 million in the third
quarter and first nine months of 1995 from $12.3 million and $35.5 million for
the comparable periods in 1994. Total revenue increased in 1995 primarily due to
an increase in premiums and realized investment gains. Premiums increased in the
third quarter and first nine months of the year by $331,000 and $1.4 million,
respectively. Realized investment gains increased in the third quarter and first
nine months of the year by $852,000 and $796,000, respectively.
Insurance premiums increased in 1995 due to an increase in the Casualty
Division's premiums of $874,000 in the third quarter
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and $2.4 million in the first nine months of the year, while the Life and Health
Division's premiums declined $543,000 and $1.0 million, respectively. The
Casualty Division's increase in premiums is mainly in the worker's compensation
market and is due to the division emphasizing a renewed marketing effort in its
core states of Georgia and Mississippi. The decline in the Life and Health
Division's premiums is mainly in the accident and health line of business. The
Life and Health Division's premiums declined $794,000 in the third quarter and
$1.6 million in the first nine months of the year, but were offset by an
increase in life premiums of $251,000 and $627,000, respectively. The decline in
accident and health premiums resulted primarily from a decrease in Medicare
supplement insurance premiums. Overall, the Life and Health Division has
experienced a decline in accident and health premiums as a result of
management's decision to move premiums to a more diversified product mix with
more emphasis on life insurance.
Investment income has remained approximately the same as last year due to a
lower level of invested assets earning a higher rate of return in 1995. The
Company paid $9.1 million in cash on the settlement of certain workers'
compensation liabilities in the fourth quarter of 1994 and interest rates have
risen approximately 1% since last year. Management has focused on increasing the
Company's investment in short and medium maturity bonds. The carrying value of
funds available for investment on September 30, 1995 (which include cash and
short-term investments, bonds and common and preferred stocks) increased
approximately $17.4 million mainly due to the increase in market value of the
bond and common and preferred stock portfolio of $9.2 million, net cash received
from the sale of student loans of $2.6 million and cash provided by operations
of $4.0 million.
Insurance benefits and losses have decreased in the third quarter of 1995 to
$6.3 million from $7.0 million in 1994 and year-to-date they have decreased to
$19.0 million from $20.5 million in 1994. The decrease in insurance benefits and
losses in the third quarter of 1995 was due to an increase of $116,000 in the
Casualty Division offset by a decrease of $846,000 in the Life and Health
Division. The decrease in insurance benefits and losses for the year was due to
an increase of $914,000 in the Casualty Division offset by a decrease of $2.3
million in the Life and Health Division. The Casualty Division's increase is due
to increased premiums which led to a corresponding increase in reserves. The
Life and Health Division's decrease is due to a corresponding decline in
insurance premiums and a decrease in reserves caused by elimination of a block
of funeral home business.
As a percentage of premium revenue, insurance benefits and losses incurred
have decreased to 57.0% in the third quarter of 1995 from 65.5% in the third
quarter of 1994, and they have decreased to 59.5% from 66.9%, respectively,
year-to-date. In the third quarter of 1995, the percentage of insurance benefits
and losses incurred to premium revenue for the Casualty Division was 64.7%
compared to 76.5% in the third quarter of 1994, and 71.3% and 79.1%,
respectively, year-to-date. For the Life and Health Division, the percentage of
insurance benefits and losses to premium revenue was 51.2% in the third quarter
of 1995 compared to 59.4% in the third quarter of 1994, and 51.2% and 60.3%
respectively, year-to-date.
Commission and underwriting expenses in the first nine months increased to
$11.0 million in 1995 from $8.9 million in 1994. The reasons for this were an
increase in commissions of $416,000, an increase in underwriting expenses of
$1.1 million and an increase in net amortization of deferred acquisition costs
of $558,000. The increases in commissions and underwriting expenses were due
mainly to increased premiums in the Casualty Division and the increase in the
net amortization of deferred acquisition costs was due mainly to the elimination
of the block of funeral home business.
Interest expense in the first nine months increased in 1995 to $1.7 million
from $1.5 million in 1994 due to an increase in the Company's debt payable to
affiliates. The Company borrowed a total of $3.2 million in the fourth quarter
of 1994 with a weighted average interest rate of 9.8%.
Revenue from Retail Furniture represents interest and dividends from Leath
Furniture. In the first nine months of 1995, $654,000 of revenue from Retail
Furniture consisted of $549,000 of interest to the Company's insurance
subsidiaries on mortgage loans and $105,000 of dividends on preferred stock owed
to the Company. In 1994, $483,000 of revenue from Retail Furniture consisted of
$477,000 of mortgage loan interest and $6,000 on a loan Leath had with its
parent which has previously been paid off.
RESULTS OF OPERATIONS - Furniture
Net sales for the third quarter of 1995 decreased to $26.4 million from $29.6
million in 1994. For the year sales decreased to $83.7 million from $87.2
million in 1994. This represents a 10.8% decrease in sales for the quarter and
4.1% for the year. While the number of stores increased from the previous year
due to acquisitions, same store sales for the third quarter were down 16.6% and
for the year were down 15.1%. Same store sales for the Florida market in which
Modernage Furniture competes were down 19.6% for the quarter and 27.4% for the
year. Same store sales for the Midwest market in which Leath Furniture competes
were down 14.9% for the quarter and 7.4% for the year. This decline in sales is
directly attributable to the industry-wide decline in
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consumer spending over the last few months. Leath opened a new store in Madison,
Wisconsin, in January 1995. In May 1995, two additional stores were opened in
Champaign and Peoria, Illinois. Each of these new locations is expected to
create economies by sharing in advertising and distribution costs with other
stores in the same advertising markets. One additional store is planned to open
in the Fall of 1995 in Rockford, Illinois. Leath operated 44 stores at the end
of July 1995.
Gross profit increased to 45.6% from 45.2% in the third quarter of 1995 and
increased to 46.3% from 44.9% for the first nine months of the year. Selling
general and administrative expenses increased from 42.5% to 47.6% of sales in
the third quarter of 1995 and from 40.7% to 46.0% for the first nine months. The
increase in selling general and administrative expenses as a percentage of sales
was due to expenses associated with the opening of new stores where their sales
have not yet reached full, normal volume. Selling expenses for the year were
$10.5 million (12.7% of sales) in 1995 compared to $11.7 million (13.4% of
sales) in 1994. General and administrative expenses were $28.0 million (33.6% of
sales) in 1995 compared to $23.8 million (27.3% of sales) in 1994. Interest
expense increased from $1.3 million to $2.1 million in 1995 due to increased
borrowings from affiliates and higher interest rates. Other expense decreased to
$160,000 from $557,000 in 1994, primarily consisting of a decrease in noncash
expense representing the minority equity interest in the Furniture Division.
Expense to Insurance is described in Results of Operations - Insurance.
As previously discussed, due to the decreased sales volume, Leath implemented
an aggressive cost reduction program. The Company closed unprofitable stores and
streamlined overhead and operating expenses. A $2.0 million annual savings is
anticipated from this program. In conjunction with these cost reductions, Leath
made provisions primarily for employee severance obligations and remaining lease
obligations of closed stores. Leath has closed its Ft. Pierce store and its two
Orlando, Florida stores.
LIQUIDITY AND CAPITAL RESOURCES - Insurance
The Company's insurance subsidiaries reported a combined statutory gain of
$1.3 million and $2.5 million in the third quarter and first nine months of 1995
compared to $467,000 and $1.0 million, respectively, in 1994. These statutory
results are due to a gain of $444,000 in the Casualty Division and a gain of
$888,000 in the Life and Health Division for the third quarter and a gain of
$769,000 and a gain of $1.8 million year-to-date, respectively. Statutory
results for the Insurance segment approximate the previous explanations of
generally accepted accounting principles ("GAAP") results of operations, with
the exception of the amortization of deferred acquisition costs and reserves in
the Life and Health Division.
Management attempts to keep the maximum premium to surplus ratio to no more
than three to one for the Casualty Division. As of September 30, 1995, the
Casualty Division had annualized premiums of $17.6 million and capital and
surplus of $11.0 million. The Casualty Division has adequate statutory surplus
due to a statutory recapitalization which was completed in the second quarter of
1994. In conjunction with the recapitalization, the Casualty Division no longer
pays the Parent Company interest on the surplus notes previously held by the
Casualty Division. Correspondingly, the Parent Company rescheduled its quarterly
interest payments in the second quarter of 1994, on its debt payable to
affiliates to correspond to the yearly dividend it expects to receive from the
Casualty Division. The Casualty Division paid a dividend of approximately $2.0
million to the Parent Company on May 15, 1995. From the dividend funds received,
the Parent Company paid a total of $1.1 million in accrued interest on
rescheduled interest payments along with $675,000 of short-term notes payable to
affiliates.
On May 22, 1995, Bankers Fidelity Life Insurance paid a dividend of $.30 per
share, which totals approximately $896,000. A total of 93.0% or approximately
$835,000 of the total Bankers Fidelity dividend was paid to the Parent Company.
These funds have been used to fund leasehold improvements and to fund the Parent
Company's stock repurchase plan for up to 500,000 shares which are being used in
the Company's various employee benefit plans. In 1995, a total of $267,000 has
been spent on leasehold improvements and $124,000 has been spent on purchasing
the Parent Company's stock. A total of $600,000 of funds were received from the
exercise of stock options in 1995, the majority of which were due to expire in
July of 1995. The primary sources of funds for the Parent Company are dividends
from its subsidiaries and management fees and borrowings from affiliates of the
Company. The Company believes that additional funding would be available from
Gulf Capital or other affiliates to meet any additional liquidity needs,
although currently there are no other arranged sources of unused borrowing.
The Parent Company provides certain administrative and other services to each
of its insurance subsidiaries. The amounts charged to and paid by the
subsidiaries in 1995 have remained approximately the same as 1994. The Parent
Company believes that the fees and charges to its subsidiaries, dividends and,
if needed, borrowings from affiliates will enable the Parent Company to meet its
liquidity requirements for the foreseeable future. In addition, the Company has
a formal tax-sharing agreement between the Parent Company and its insurance and
furniture subsidiaries. A total of $1.1 million was paid to the Parent Company
under this agreement in the first quarter of 1995 from the Furniture Division,
funding of which was provided by additional demand notes to affiliates. It is
anticipated that this agreement will provide the Parent Company with additional
funds from profitable subsidiaries
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<PAGE>
due to the subsidiaries' use of the Parent Company's tax loss carryforward of
approximately $60.4 million. Approximately 94.5% of the investment assets of the
insurance subsidiaries are in marketable securities that can be converted into
cash, if required; however, use of such assets by the Parent Company is limited
by state insurance regulations. Dividend payments to the Parent Company by its
insurance subsidiaries are limited to the accumulated statutory earnings of the
individual insurance subsidiaries. At September 30, 1995, Georgia Casualty had
$11.0 million of statutory surplus and capital and Bankers Fidelity had $6.0
million of accumulated statutory earnings. Management is not aware of any
current recommendations by regulatory authorities which, if implemented, would
have a material adverse effect on the Company's liquidity, capital resources or
operations.
Net cash provided by operating activities totaled $4.0 million in 1995
compared to net cash used of $2.4 million in 1994. This improvement in operating
cash flows is due mainly to an improvement in the Casualty Division's operating
cash flows which went from a use of cash of $2.0 million in 1994 to cash
provided by operations of $3.4 million in 1995. The Casualty Division's
improvement in operating cash flows is due to increased premiums and the
elimination of payments to the National Workers' Compensation Reinsurance Pool.
The Company incurred a total of $871,000 of additions to property and equipment
in the first nine months of 1995, which are mainly leasehold improvements and
additions to the new computer system. The insurance subsidiaries of the Company
purchased 285,000 shares of Leath's common stock for $1.0 million in June and
July of 1995 which is reflected in the financial statements as the acquisition
of minority interest. This purchase now gives the Company approximately 90%
ownership of Leath . Cash and short-term investments increased from $4.0 million
at December 31, 1994 , to $9.0 million at September 30, 1995, mainly due to the
$4.0 million of cash provided by operations and the net sale of $1.9 million of
bond, stock and student loan investments. Total investments (excluding
short-term investments) increased to $99.4 million at September 30, 1995, from
$89.6 million at December 31, 1994, primarily due to the increase in unrealized
gains.
Subsequent to the end of the third quarter, on October 16, 1995, the Company
announced that it had signed a definitive agreement to acquire American Southern
Insurance Company, and its subsidiaries, from Fuqua Enterprises, Inc. for $34.0
million. Funding for this transaction is being handled by a bank loan of $34.0
million. The Company anticipates the purchase transaction will close by the end
of 1995. See part II. Other Information.
LIQUIDITY AND CAPITAL RESOURCES - Furniture
Net cash used in operating activities in the first nine months of 1995 was
$7.1 million compared to cash provided by operations of $1.4 million in 1994.
This decrease in cash from operations is due mainly to decreased sales without a
corresponding decrease in general and administrative expenses. The Furniture
Division's principal sources of liquidity are cash flows from operating
activities and borrowings from affiliates. The Furniture Division's principal
uses of cash are debt service obligations, capital expenditures and working
capital needs. In February 1995, the Furniture Division paid $1.1 million of
income taxes payable to the Parent Company, funding of which was provided by
demand notes of $1.0 million to affiliates. An additional $2.5 million of demand
notes to affiliates was borrowed in the second quarter of 1995 to fund capital
expenditures and working capital requirements. The amount borrowed on the
Furniture Division's open line of credit increased by $2.0 million in the third
quarter of 1995. For fiscal year 1995 the Furniture Division has borrowed a
total of $4.5 million on its open line of credit. A total of $1.9 million was
spent by Leath in the nine-month reporting period of 1995 for capital
expenditures. As of July 29, 1995, the Furniture Division owed the Insurance
Segment $7.2 million which consisted of $6.4 million of mortgage debt and
$843,000 of income taxes. In July of 1995, Leath arranged for a twelve-month
moratorium on all debt principal payments to its affiliated note holders which
includes mortgage notes due to the Insurance Segment.
The Furniture Division maintains an open line of credit with an affiliate,
Gulf Capital Services, Ltd. This facility provides for a $20.0 million secured
revolver with interest at prime plus 2-1/4%. The revolving line is limited to
57% of the Furniture Division's eligible inventory. The line is secured by
inventory and all assets not specifically collateralized by other notes payable.
The amount available on this line of credit, as limited by the eligible
inventory, was $12.8 million, although the lender has permitted an amount
borrowed of $19.0 million at July 29, 1995. The Furniture Division reports its
results on a two-month lag basis and at September 30, 1995, the amount available
on this line of credit, as limited by the eligible inventory, was $12.1 million,
although the lender permitted an amount borrowed of $19.0 million. The Company
believes that additional funding would be available from Gulf Capital or other
affiliates to meet any additional liquidity needs of the Company, although the
Company currently has no other source of unused borrowing capacity.
-9-
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 5. Other information.
- ---------------------------
On October 16, 1995, Atlantic American Corporation announced that it had
signed a definitive agreement to acquire American Southern Insurance Company and
its subsidiaries from Fuqua Enterprises, Inc. for $34.0 million. American
Southern is a property and casualty insurance company operating predominantly in
the southeastern United States. As of December 31, 1994, American Southern had
written premiums of $44.3 million, assets of $84.7 million, and shareholders'
equity of $28.2 million. American Southern has a ten-year average return on
equity before taxes of 28.8% and a ten-year average combined loss and expense
ratio of 93%.
On a pro forma basis compared with year-end 1994, this acquisition will
increase Atlantic American's consolidated assets from $205.0 million to
approximately $300.0 million, will double the insurance division's net premiums
written from $42.8 million to approximately $86.0 million, and will increase the
division's statutory capital and surplus from $29.5 million to $63.5 million.
The transaction will close as soon as the necessary regulatory approvals are
obtained.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a)The following exhibits are filed herewith:
Exhibit 11. Computation of net (loss) income per common share.
Exhibit 99. Press release dated October 16, 1995.
(b)No reports on Form 8-K were filed with the Securities and Exchange
Commission during the third quarter of 1995.
-10-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC AMERICAN CORPORATION
-----------------------------
(Registrant)
Date: November 10, 1995 By: /s/
----------------- ------------------------------------------------
John W. Hancock
Senior Vice President-Treasurer
(Principal Financial Officer)
By: /s/
------------------------------------------------
John C. Hall, Jr.
Controller
(Principal Accounting Officer)
-11-
<PAGE>
EXHIBIT 11
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF NET (LOSS) INCOME PER COMMON SHARE
SUPPORTING SCHEDULE
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(In thousands, except per share
data) 1995 1994 1995 1994
---- ---- ---- ----
Net (loss) income ($197) $705 ($2,235) $3,402
Less preferred dividends to
affiliates (79) (79) (237) (237)
------ ----- -------- -------
Net (loss) income available to
common shareholders ($276) $626 ($2,472) $3,165
====== ===== ======== =======
Weighted average common shares
outstanding 18,732 18,500 18,627 18,513
====== ====== ====== ======
Net (loss) income per common share ($0.01) $0.03 ($0.13) $0.17
======= ======= ======= ======
NOTE: Fully diluted earnings per common share are not presented because the
effect of convertible subordinated notes and preferred stock is anti-dilutive.
<PAGE>
EXHIBIT 99
NEWS RELEASE For further information contact:
For Immediate Release Hilton Howell, President & CEO or
John W. Hancock, Sr. V. P. & Treasurer
Atlantic American Corporation
(404) 266-5500 or (800) 241-1439
ATLANTA, October 16, 1995--Atlantic American Corporation (NASDAQ--AAME) today
announced that it had signed a definitive agreement to acquire American Southern
Insurance Company, and its subsidiaries, from Fuqua Enterprises, Inc.
(NYSE--FQE) for $34.0 million. American Southern is a highly regarded property
and casualty insurance company operating predominantly in the Southeastern
United States. As of December 31, 1994 American Southern had written premiums of
$44.3 million, assets of $84.7 million and shareholder's equity of $28.2
million.
Hilton Howell, Atlantic American's President and CEO, said: "We are very
enthusiastic about American Southern joining our company. We are particularly
pleased that the senior management of American Southern--Roy Thompson, Chairman;
Calvin Wall, Vice Chairman and CEO; and Scott Thompson, President and CFO-- will
be joining Atlantic American and will continue to run the company that they have
so successfully built. Together they have created a company that consistently
earns in excess of $6.0 million on a pretax basis, resulting in a ten-year
average return on equity before taxes of 28.8%, and boasts a ten-year average
combined loss and expense ratio of 93%. There are few companies in the insurance
industry that have achieved such an outstanding record."
Roy Thompson, Chairman of American Southern, said: "We are extremely pleased
that this agreement has been reached. Mack Robinson, Chairman of Atlantic
American, and I have been friends for over forty years. He and Hilton Howell
understand the insurance industry and we look forward to working with them."
On a pro forma basis compared with year-end 1994, this acquisition will increase
Atlantic American's consolidated assets from $205.0 million to approximately
$300.0 million, will double the insurance division's net premiums written from
$42.8 million to approximately $86.0 million, and will increase the division's
statutory capital and surplus from $29.5 million to $63.5 million. The
transaction will close as soon as the necessary regulatory approvals are
obtained.
Atlantic American Corporation is a diversified holding company involved in the
life, health, property and casualty insurance and retail furniture industries.
Its subsidiaries include Atlantic American Life Insurance Company, Bankers
Fidelity Life Insurance Company, Georgia Casualty & Surety Company, Leath
Furniture, Inc., Modernage Furniture, Inc., and Jefferson
Home Furniture Company.
- END -
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