<PAGE>
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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, 1998
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
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 9, 1998, was 18,665,148.
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<PAGE>
ATLANTIC AMERICAN CORPORATION
INDEX
Part 1. Financial Information Page No.
- ----------------------------- --------
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 2
Consolidated Statements of Operations -
Three months and nine months ended September 30, 1998 and 1997 3
Consolidated Statements of Shareholders' Equity -
Nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. Other Information
- --------------------------------
Item 6. Exhibits and report on Form 8-K 12
Signature 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands, except per share data)
<TABLE>
September 30, December 31,
1998 1997
----------------------------
<S><C> <C> <C>
Cash, including short-term investments of $23,765 and $46,167 $ 27,480 $ 51,044
----------------------------
Investments:
Bonds (cost: $100,357 and $91,143) 102,762 92,184
Common and preferred stocks (cost: $31,308 and $18,359) 59,068 46,876
Investments in limited partnerships (cost: $4,412 and $4,001) 4,213 3,941
Mortgage loans 3,875 4,243
Policy and student loans 3,613 5,293
Real estate 46 46
----------------------------
Total investments 173,577 152,583
----------------------------
Receivables:
Reinsurance 24,246 25,164
Other (net of allowance for bad debts: $1,105 and $916) 22,761 17,470
Deferred acquisition costs 17,146 16,483
Other assets 4,576 4,510
Goodwill 3,926 4,606
============================
Total assets $273,712 $271,860
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds:
Future policy benefits $38,744 $ 39,188
Unearned premiums 25,520 24,412
Losses and claims 85,207 86,721
Other policy liabilities 4,203 3,997
----------------------------
Total policy liabilities 153,674 154,318
Accounts payable and accrued expenses 11,290 10,759
Debt payable 26,000 28,600
----------------------------
Total liabilities 190,964 193,677
----------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par, 4,000,000 shares authorized;
Series A preferred, 30,000 shares issued and outstanding,
$3,000 redemption value 30 30
Series B preferred, 134,000 shares issued and outstanding,
$13,400 redemption value 134 134
Common stock, $1 par, 30,000,000 shares authorized; 18,935,993
shares issued in 1998 and 18,920,728 shares issued in 1997;
18,719,001 shares outstanding in 1998 and 18,907,267 shares
outstanding in 1997 18,936 18,921
Additional paid-in capital 52,211 53,316
Accumulated deficit (17,498) (23,653)
Accumulated other comprehensive income - unrealized investment
gains, net 29,965 29,498
Treasury stock, at cost, 216,992 shares in 1998 and 13,461 shares
in 1997 (1,030) (63)
----------------------------
Total shareholders' equity 82,748 78,183
============================
Total liabilities and shareholders' equity $273,712 $271,860
============================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
(In thousands, except per share data)
1998 1997 1998 1997
----------------------------------------------------
<S><C> <C> <C> <C> <C>
Revenue:
Insurance premiums $ 22,848 $ 21,950 $ 68,677 $ 64,953
Investment income 2,825 2,915 8,466 8,627
Realized investment gains, net 1,093 344 2,005 630
Other income 29 40 198 69
---------------------------------------------------
Total revenue 26,795 25,249 79,346 74,279
---------------------------------------------------
Benefits and expenses:
Insurance benefits and losses incurred 15,084 14,748 46,076 44,216
Commissions and underwriting expenses 6,715 5,777 20,436 17,569
Interest expense 545 726 1,660 2,197
Other 1,597 1,580 4,790 4,435
---------------------------------------------------
Total benefits and expenses 23,941 22,831 72,962 68,417
---------------------------------------------------
Income before income tax benefit (expense) 2,854 2,418 6,384 5,862
Income tax benefit (expense) 8 (23) (124) (83)
---------------------------------------------------
Net income $ 2,862 $ 2,395 $ 6,260 $ 5,779
===================================================
Net income per common share (basic and diluted) $ .13 $ .11 $ .27 $ .25
===================================================
Weighted average common shares outstanding, basic 18,750 18,599 18,846 18,622
===================================================
Weighted average common shares outstanding, diluted 19,035 18,763 19,141 18,806
===================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
<PAGE>
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Balance, December 31, 1997 $ 164 $ 18,921 $ 53,316 $ (23,653) $ 29,498 $ (63) $ 78,183
<S><C> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income:
Net income 6,260 6,260
Increase in unrealized investment gains 467 467
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Total comprehensive income 6,727
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Cash dividends paid on preferred stock (236) (236)
Dividends accrued on preferred stock (905) (905)
Purchase of shares for treasury (967) (967)
Issuance of shares for employee benefit plans
and stock options (15) (105) (120)
Issuance of shares for acquisition of
Self-Insurance Administrators, Inc. 15 51 66
------------ ------------ ------------ ------------ ------------- ------------ -----------
Balance, September 30, 1998 $ 164 $ 18,936 $ 52,211 $ (17,498) $ 29,965 $ (1,030) $ 82,748
============ ============ ============ ============ ============= ============ ===========
Nine Months Ended September 30, 1997
- ----------------------------------------
Balance, December 31, 1996 $ 164 $ 18,712 $ 54,062 $ (31,426) $ 17,713 $ (89) $ 59,136
Comprehensive income:
Net income 5,779 5,779
Increase in unrealized investment gains 7,649 7,649
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Total comprehensive income 13,428
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Cash dividends paid on preferred stock (236) (236)
Dividends accrued on preferred stock (905) (905)
Purchase of shares for treasury (532) (532)
Issuance of shares for employee benefit plans
and stock options (189) 297 108
------------ ------------ ------------ ------------ ------------- ------------ -----------
Balance, September 30, 1997 $ 164 $ 18,712 $ 52,921 $ (25,836) $ 25,362 $ (324) $ 70,999
============ ============ ============ ============ ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended
September 30,
------------------------
1998 1997
------------------------
<S><C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,260 $ 5,779
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of deferred acquisition costs 8,039 5,394
Acquisition costs deferred (8,797) (6,644)
Realized investment gains (2,005) (630)
Increase in insurance reserves (644) 5,524
Depreciation and amortization 1,030 959
Increase in receivables, net (4,373) (2,249)
Decrease in other liabilities (372) (2,569)
Other, net (442) (2,706)
-----------------------
Net cash (used) provided by operating activities (1,304) 2,858
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured 50,924 47,935
Investments purchased (69,479) (44,957)
Reduction in minority interest liability payable - (96)
Additions to property and equipment (333) (527)
Bulk reinsurance transactions, net 552 -
-----------------------
Net cash used by investing activities (18,336) 2,355
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CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (236) (237)
Proceeds from exercise of stock options (55) 62
Purchase of treasury shares (1,033) (532)
Proceeds from bank financing - 5,617
Repayments of debt (2,600) (8,617)
-----------------------
Net cash used by financing activities (3,924) (3,707)
-----------------------
Net decrease in cash and cash equivalents (23,564) 1,506
Cash and cash equivalents at beginning of period 51,044 45,499
-----------------------
Cash and cash equivalents at end of period $ 27,480 $ 47,005
=======================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 1,630 $ 2,491
=======================
Cash paid for income taxes $ 330 $ 71
=======================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-5-
<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 have been
eliminated in consolidation. Operating results for the nine month period ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. 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, 1997.
Note 2. Adoption of New Accounting Standards
- -------
In April 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. This statement only modifies the disclosures companies
make about their pension and nonpension benefit plans and does not alter the
accounting for these plans. The FASB's intention in modifying the disclosures
for postretirement benefits is to make the disclosures more uniform and to
provide better information to investors about the economics of these benefit
plans rather than focusing on current period costs. The provisions of the
statement are effective for years beginning after December 15, 1997. Adoption of
Statement No. 132, when implemented, will provide the required information as
well as the restatement of previous disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
Statement 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998).
The Company does not believe it has any such instruments nor does it
currently engage in hedging activities and therefore believes the adoption of
this Statement will not have a material impact on the Company.
-6-
<PAGE>
Note 3. Segment Information
- -------
The following summary sets forth information for each of the Company's
business segments by revenue and income (loss) before income tax expense
(benefit). The Company divides its operations into 3 segments: Property and
Casualty Insurance, Life Insurance, and Accident and Health Insurance.
<TABLE>
Property Accident Corporate Adjustments
and and and and
Casualty Life Health Other Eliminations Consolidated
---------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1998:
Revenue 49,059 12,388 17,548 305 46 79,346
Income (loss) before income
tax expense (benefit) 6,403 2,522 260 (2,801) 0 6,384
Nine Months Ended September 30, 1997:
Revenue 51,041 10,760 12,469 47 (38) 74,279
Income (loss) before income
tax expense (benefit) 5,432 1,935 105 (1,610) 0 5,862
Three Months Ended September 30, 1998:
Revenue 16,115 4,553 6,006 49 72 26,795
Income (loss) before income
tax expense (benefit) 2,375 1,181 201 (903) 0 2,854
Three Months Ended September 30, 1997:
Revenue 17,300 3,736 4,192 34 (13) 25,249
Income (loss) before income
tax expense (benefit) 1,802 939 79 (402) 0 2,418
</TABLE>
Note 4. Reconciliation of Other Comprehensive Income
- -------
September 30,
1998 1997
-----------------------
Gain on sale of securities included in
net income 2,005 630
=======================
Other comprehensive income:
Net unrealized gain arising during year 2,472 8,279
Reclassification adjustment (2,005) (630)
-----------------------
Net unrealized gain recognized in other
comprehensive income 467 7,649
=======================
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion of financial condition and results of operations for
the nine month periods ended September 30, 1998 and 1997 analyzes the results of
operations, consolidated financial condition, liquidity and capital resources of
Atlantic American Corporation (the "Company") and its consolidated subsidiaries:
Georgia Casualty & Surety Company ("Georgia Casualty"), American Southern
Insurance Company ("American Southern") and American Safety Insurance Company
("American Safety"), at times collectively referred to as the "Casualty
Division", Bankers Fidelity Life Insurance Company ("Bankers Fidelity") and
American Independent Life Insurance Company ("American Independent"), at times
jointly referred to as the "Life and Health Division", and Self-Insurance
Administrators, Inc. ("SIA, Inc.").
RESULTS OF OPERATIONS
The Company's net income for the third quarter of 1998 was $2.9 million
($.13 per diluted share) compared to net income of $2.4 million ($.11 per
diluted share) for the third quarter of 1997. Net income for the first nine
months of 1998 was $6.3 million ($.27 per diluted share) and $5.8 million ($.25
per share) for the same period in 1997. The increase in net income for both the
third quarter of 1998 and the year-to-date period is primarily attributable to
increased premium revenue in the Life and Health Division coupled with an
increase in realized gains. These increases are mitigated somewhat by an
increase in commission expenses and insurance benefits and losses. The increase
in expense items which is attributable to the increased premium volume is
discussed below.
For the nine months ended September 30, 1998 the Life and Health Division's
pretax income increased 2.1% as an increase in insurance premiums was partially
offset by increases in both insurance benefits and losses incurred and
commission and underwriting expenses. The Casualty Division, for the first nine
months of the year, saw an increase in pretax income of 12.1%. In the Life and
Health Division, pretax income for the quarter declined 33.1% due to a moderate
increase in the ratio of insurance benefits and losses incurred to insurance
premiums (the "loss ratio") for the quarter and an increase in commission and
underwriting expenses from an intensified marketing effort. Pretax income for
the Casualty Division increased 14.6% for the quarter due principally to an
improvement in the loss ratio at American Southern in the third quarter.
Total revenue for the nine months ended September 30, 1998 was $79.3
million, up 6.8% over the first nine months of 1997. For the quarter, total
revenue increased 6.1%. The increase in both the nine month period and the
quarter is primarily attributable to an increase in insurance premiums along
with increases in both realized gains and other income. Investment income for
both the nine month period and the quarter decreased as a result of the
significant prepayment of debt made in the fourth quarter of 1997, which reduced
the cash available for investment, and a general decline in yields on high
quality investments.
Insurance premiums for the year-to-date period were up $3.7 million, or
5.7%, and were up 4.1% for the quarter. In the Life and Health Division premiums
for the first nine months of 1998 were up $6.3 million, and for the quarter were
up $2.2 million. This increase in insurance premiums is principally the result
of both the acquisition of American Independent in the fourth quarter of 1997,
which added $2.5 million in premiums through September 30, 1998 and strong
internal growth attributable in part to a refocused marketing campaign. Premiums
in the Casualty Division for the nine months ended September 30 were down 5.7%;
for the third quarter premiums were down 8.2%. Within this division, premiums at
Georgia Casualty were up $1.8 million for the year-to-date period and $462,000
for the third quarter. This increase in premiums reflects the impact of an
increased marketing effort, particularly in the fourth quarter of 1997, the
results of which are now being realized. In addition, premium income at American
Southern was down $4.4 million for the nine month period and down $1.7 million
for the quarter. This decline is primarily attributable to a decrease in the net
rate charged for one of the company's large block accounts. Management believes
that while this net rate has declined as a result of a heightened competitive
environment, the account will continue to be profitable. In addition, American
Southern voluntarily elected not to renew one block of business which had
profits that were below expectations.
For the nine months ended September 30, 1998, realized gains were $2.0
million, compared to $630,000 in 1997. Realized investment gains for the third
quarter of 1998 were $1.1 million, compared to $344,000 for the same period in
1997. Management is continually evaluating the composition of the Company's
investment portfolio and will periodically divest appreciated investments as
deemed appropriate.
-8-
<PAGE>
The increase in other income for the nine months ended September 30, 1998 is
a result of the inclusion of SIA, Inc., which generates income in the form of
commission and service fees from the administration of third party self-insured
workers' compensation plans. SIA, Inc. was acquired in the fourth quarter of
1997.
Total expenses increased 6.6% for the nine months ended September 30, 1998
and 4.9% when compared to the third quarter of 1997. The increase in expenses
for the first nine months of 1998 is comprised of a 4.2% increase in insurance
benefits and losses incurred, a 16.3% increase in commission and underwriting
expenses and an 8.0% increase in other operating expenses, offset in part by a
24.5% decrease in interest expense. For the quarter, insurance benefits and
losses were up 2.2%, commissions and underwriting expenses were up 16.2%, other
operating expenses were up 1.0% and interest expense was down 25.0%.
The increase in both insurance benefits and losses and commissions and
underwriting expenses is primarily a factor of the increase in insurance
premiums. The consolidated loss ratio for the first nine months of 1998 was
67.1% compared to 68.1% for the first nine months of 1997. For the third quarter
the loss ratio was 66.0% compared to a loss ratio of 67.1% in the third quarter
of 1997. The modest decline in the loss ratio for both the year-to-date period
and the quarter is a result of favorable development on past accident years in
the Casualty Division, particularly at American Southern, partially offset by a
small increase in the loss ratio in the Company's Life and Health Division.
Insurance benefits and losses at the Life and Health Division were up $4.7
million year-to-date and $1.6 million for the quarter. The increase in benefits
and losses is being driven by an increase in premiums, particularly in the
health lines.
Within the Casualty Division insurance benefits and losses at Georgia
Casualty were up $1.5 million through September 30, 1998 and were up $434,000
for the third quarter. The year-to-date loss ratio, including loss adjustment
expenses, was 74.1%, compared to 74.2% in the first nine months of 1997. In
addition, insurance benefits and losses incurred at American Southern decreased
$5.0 million for the first nine months of 1998 and $1.9 million for the quarter.
The loss ratio for the first nine months of 1998 was 62.7%, down from 70.9% in
the first nine months of 1997. The decline in the loss ratio is attributable to
a reduction in substandard auto premiums which historically have a higher loss
ratio and favorable development of anticipated losses on past years premiums.
Commission and underwriting expenses for the first nine months of 1998
increased $2.9 million to $20.4 million and for the quarter were up $938,000.
The increase for the nine months ended September 30, 1998 is primarily the
result of the increase in premium volume, particularly at Bankers Fidelity, and
increased profit commissions on American Southern's business. The increase for
the third quarter is attributable to the overall increase in premium volume.
The decline in interest expense of 24.5% is due to the reduction in total
debt compounded by a 50 basis point reduction in the interest rate charged on
the Company's credit facility to the prime rate less 50 basis points, 8.0% at
September 30, 1998. The reduction in the rate resulted from the Company meeting
certain specified financial criteria at year-end 1997 under the credit facility,
and is subject to further adjustment, based on the Company's continuing to meet
those criteria. The rate charged by the credit facility will not exceed the
prime rate of interest.
The Company's tax provision decreased for the quarter as a result of a
reduction in taxable income at American Independent, which, per IRS rules, is
not yet a part of the Company's consolidated return and the income of which is
not subject to offset by the Company's net operating losses carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The major cash needs of the Company are for the payment of claims and
expenses as they come due and the maintenance of adequate statutory capital and
surplus to satisfy state regulatory requirements and meet debt service
requirements of the Company. The Company's primary source of cash are written
premiums and investment income. Cash payments consist of current claim payments
to insureds and operating expenses such as salaries, employee benefits,
commissions, taxes, and shareholder dividends from the subsidiaries, when
earnings warrant such dividend payments. By statute, the state regulatory
authorities establish minimum liquidity standards primarily to protect
policyholders.
The Company's insurance subsidiaries reported a combined statutory income
of $6.3 million for the first nine months of 1998 compared to statutory net
income of $5.3 million for the first nine months of 1997. Total statutory net
income for the quarter was $2.4 million compared to $2.2 million in 1997. The
-9-
<PAGE>
reasons for the increase in statutory earnings in the first nine months of 1998
are the same as those discussed in "Results of Operations" above. Statutory
results differ from the results of operations under generally accepted
accounting principles ("GAAP") for the Casualty Division due to the deferral of
acquisition costs. The Life and Health Division's statutory results differ from
GAAP primarily due to deferral of acquisition costs, as well as different
reserving methods.
The Company is a party to a Credit Agreement with Wachovia Bank of Georgia,
N.A. At September 30, 1998, the Company had outstanding borrowings under this
agreement of approximately $26.0 million, none of which is scheduled to become
due and payable during the last three months of 1998. The Company repaid $2.6
million of outstanding principal during the first nine months of 1998. The
Company intends to repay its obligations under the Credit Agreement using
dividend payments received from its subsidiaries and receipts from its tax
sharing agreement with its subsidiaries.
The Company has two series of preferred stock outstanding, substantially of
all which is held by affiliates of the Company's chairman and principal
shareholders. The outstanding shares of Series A Convertible Preferred Stock
accrue annual dividends at a rate of $10.50 per share, are convertible into
approximately 704,000 shares of common stock at a conversion price of $4.26 per
share, and are redeemable at the Company's option at $100 per share, plus
accrued dividends. The outstanding shares of Series B Preferred Stock ("Series B
Stock") have a stated value of $100 per share, accrue annual dividends at a rate
of $9.00 per share, in certain circumstances may be convertible into an
aggregate of approximately 3,358,000 shares of common stock and are redeemable
at the Company's option. The Series B Stock is not currently convertible. At
September 30, 1998, the Company had accrued, but unpaid dividends on the Series
B Stock totaling $3.3 million.
The Company provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries in
the first nine months of 1998 remained approximately the same as in the first
nine months of 1997. In addition, the Company has a formal tax-sharing agreement
between the Company and its insurance subsidiaries with the exception of
American Independent. It is anticipated that this agreement will provide the
Company with additional funds from profitable subsidiaries due to the
subsidiaries' use of the Company's tax loss carryforwards, which totaled
approximately $45.0 million at September 30, 1998.
At September 30, 1998, the Company had a net cumulative deferred tax asset of
zero. The net cumulative deferred tax asset consisted of $22.6 million of
deferred tax assets, offset by $14.1 million of deferred tax liabilities, and a
$8.5 million valuation allowance. Due to the uncertain nature of their ultimate
realization, based upon past performance and expiration dates, the Company has
established a full valuation allowance against these carryforward benefits and
recognizes the benefits only as reassessment demonstrates they are realizable.
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 based on historical performance. Therefore, the realization of
the deferred tax assets will be assessed periodically based on the Company's
current and anticipated results of operations
Approximately 93.2% 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 Company is limited by state insurance
regulations. Dividend payments to the Company by its insurance subsidiaries are
limited to the accumulated statutory earnings of the individual insurance
subsidiaries, subject to annual limitations. At September 30, 1998, Georgia
Casualty had $17.0 million of accumulated statutory earnings, American Southern
had $19.6 million of accumulated statutory earnings, and Bankers Fidelity had
$18.2 million of accumulated statutory earnings.
Net cash used by operating activities was $1.3 million in the first nine
months of 1998 compared to net cash provided by operating activities of $2.9
million in the first nine months of 1997. Cash and short-term investments
decreased from $51.0 million at December 31, 1997, to $27.5 million at September
30, 1998, mainly due to an increase in longer term investments. Total
investments (excluding short-term investments) increased to $173.6 million due
in part to the shift from short-term investments and increases in unrealized
gains on the Company's investment portfolio.
The Company believes that the dividends, fees, and tax-sharing payments it
receives from its subsidiaries and, if needed, borrowings from banks and
affiliates of the Company will enable the Company to meet its liquidity
requirements for the foreseeable future. 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.
-10-
<PAGE>
YEAR 2000
Many existing computer systems currently in use were developed using two
digits rather than four digits to specify the year. As a result, many systems
will recognize a date code of "00" as the calendar year 1900 rather than 2000
which could cause systems to fail or cause erroneous results.
The Company has developed a program to assess the state of readiness of the
Company's internal systems and those of its vendors and customers, the
remediation measures necessary for those systems to be Year 2000 compliant, the
costs to undertake such measures, and to develop appropriate contingency plans.
The Company's program to assess its internal systems (which include both
hardware and software) is continuing. The Company has identified four critical
operating systems that require the highest level and priority of testing to
ensure that performance is not adversely affected by the Year 2000 issue. The
Company currently anticipates that each of those four systems will be Year 2000
compliant by the end of 1998. To date, the Company has been able to remediate
those systems through upgrades, rather than system replacement. The failure of
any of those systems as a result of the Year 2000 issue would inhibit the
Company's ability to conduct its business and process claims, and would likely
have a material adverse effect on the Company's results of operations. The
Company is also continuing to test less critical systems for compliance, and
expects that phase to be completed by the end of the first quarter of 1999. As
that testing process continues, the Company intends to develop contingency plans
to enable the Company to fulfill the functions performed by those systems in the
event of failure.
As part of this process, the Company is continuing its process of surveying
its service providers and customers in order to identify areas in which Year
2000-related problems with external systems could cause disruptions, delays or
failures that could impact the Company. As the results of these external surveys
are assessed, the Company expects to develop appropriate contingency plans.
During the first nine months of 1998, the Company has spent approximately
$160,000 to modify existing systems and applications to address the Year 2000
issue. The Company estimates that an additional $45,000 will be incurred in 1998
and $100,000 in 1999. The Company does not anticipate that the costs of bringing
its systems into compliance would have a material adverse effect on the results
of operations or financial condition of the Company.
FORWARD-LOOKING STATEMENTS
This report contains and references certain information that constitutes
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Those statements, to the extent they are not
historical facts, should be considered forward-looking and subject to various
risks and uncertainties. Such forward-looking statements are made based upon
management's assessments of various risks and uncertainties, as well as
assumptions made in accordance with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of such risks and uncertainties, including those
identified in the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1997 and the other filings made by the Company from time to
time with the Securities and Exchange Commission.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
- ----------------------------------------
(a) The following exhibits are filed herewith:
Exhibit 11. Computation of net income per common share.
Exhibit 27. Financial data schedule.
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the third quarter of 1998.
-12-
<PAGE>
SIGNATURE
---------
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 12, 1998 By: /s/
----------------- -----------------------------------------
Edward L. Rand, Jr.
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
-13-
EXHIBIT 11
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME PER COMMON SHARE
SUPPORTING SCHEDULE
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------
(In thousands, except per share data)
1998 1997 1998 1997
-------------------------------------
Basic Earnings Per Common Share:
Net income $ 2,862 $ 2,395 $ 6,260 $ 5,779
Less preferred dividends to
affiliates (380) (380) (1,141) (1,141)
-------------------------------------
Net income available to common
shareholders 2,482 2,015 5,119 4,638
=====================================
Weighted average common shares
outstanding 18,750 18,599 18,846 18,622
=====================================
Net income per common share .13 .11 .27 .25
=====================================
Diluted Earnings Per Common Share:
Net income available to common
shareholders 2,482 2,015 5,119 4,638
=====================================
Weighted average common shares
outstanding 18,750 18,599 18,846 18,622
Effect of dilutive stock options 285 164 295 184
-------------------------------------
Weighted average common shares
outstanding adjusted for
dilutive stock options 19,035 18,763 19,141 18,806
=====================================
Net income per common share .13 .11 .27 .25
=====================================
Common Shares Outstanding 18,719 18,907
=================
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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