F-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K / A-1
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 14, 1999 (June
24, 1999)
ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 0-3722 58-1027114
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Identification Number) Identification Number)
4370 PEACHTREE ROAD, N.E., ATLANTA, GEORGIA 30319 (Address of
principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 266-5500
None
(Former name, former address and former fiscal year, if changed since last
report)
<PAGE>
Atlantic American Corporation, a Georgia Corporation (the "Company"),
hereby amends Item 7. "Financial Statements, Pro Forma Financial Information and
Exhibits" of the Company's Current Report on Form 8-K dated July 16, 1999 in
full to read as follows:
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The audited combined financial statements of Association Casualty
Insurance Company and Association Risk Management General Agency as
of December 31, 1998 and for the year then ended (with Report of
Independent Auditors thereon) are included at pages F-1 to F-20 of
this report.
(b) Pro Forma Financial Information
The unaudited pro forma consolidated balance sheet as of June 30,
1999 and consolidated statement of income for the six months ended
June 30, 1999, with the notes thereto are included at pages F-21 to
F-24 of this report.
Exhibits
(2.1)*Acquisition Agreement by and among Atlantic American
Corporation, and Association Casualty Insurance Corporation,
Association Risk Management General Agency, Inc., and Harold
K. Fischer, dated as of April 21, 1999.
(10.1)* Indenture of Trust, dated as of June 24, 1999, by and
between Atlantic American Corporation and The Bank of New
York, as Trustee.
(10.2)* Reimbursement and Security Agreement, dated as of June 24,
1999, between Atlantic American Corporation and Wachovia Bank
of Georgia, N.A.
(10.3)* Revolving Credit Facility, dated as of July 1, 1999 between
Atlantic American Corporation and Wachovia Bank of Georgia,
N.A.
(23.1) Consent of Ernst & Yong LLP, Independent Auditors
(99.1)* Press Release dated June 24, 1999
(99.2)* Press Release dated July 6, 1999
* Previously filed with the Company's current report on Form 8-K,
dated July 16, 1999.
<PAGE>
Combined Financial Statements
Association Casualty Insurance Company and Association Risk
Management
General Agency
Year ended December 31, 1998
with Report of Independent Auditors
<PAGE>
Association Casualty Insurance Company and
Association Risk Management General Agency
Combined Financial Statements
Year ended December 31, 1998
Contents
Report of Independent Auditors.......................................F-1
Audited Combined Financial Statements
Balance Sheet........................................................F-2
Statement of Income..................................................F-4
Statement of Changes in Shareholders' Equity.........................F-5
Statement of Cash Flows..............................................F-6
Notes to Combined Financial Statements...............................F-7
<PAGE>
Report of Independent Auditors
Board of Directors
Association Casualty Insurance Company
Association Risk Management General Agency
We have audited the accompanying combined balance sheet of Association Casualty
Insurance Company and Association Risk Management General Agency (collectively
the "Company") as of December 31, 1998, and the related combined statement of
income, changes in shareholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Association Casualty
Insurance Company and Association Risk Management General Agency as of December
31, 1998, and the combined results of their operations and their combined cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
[GRAPHIC OMITTED]
September 7, 1999
F-1
<PAGE>
Association Casualty Insurance Company and
Association Risk Management General Agency
Combined Balance Sheet
December 31, 1998
Assets
Fixed maturities (amortized cost $30,303,782) $30,730,859
Short-term investments 150,000
Cash and cash equivalents 5,538,062
Receivable for securities 24,122
-------------
Total investments 36,443,043
Premiums receivable 1,146,025
Deferred acquisition costs 414,803
Accounts receivable (net allowance for doubtful accounts 159,080
of $79,107)
Deferred tax asset 721,648
Reinsurance recoverable 9,598,722
Other assets 282,028
=============
Total assets $48,765,349
=============
F-2
<PAGE>
Liabilities and shareholders' equity Liabilities:
Unpaid losses and loss adjustment expenses $28,108,212
Unearned premiums 2,446,770
Other policy liabilities 321,000
Contingent reinsurance premium 50,000
Federal income taxes payable 150,000
Other payables 986,319
---------------
---------------
Total liabilities 32,062,301
Shareholders' equity:
Common stock, $2 par value; 700,000 shares authorized;
525,500 shares issued and outstanding 1,051,000
Paid-in capital 451,116
Retained earnings 14,919,062
Accumulated other comprehensive income 281,870
---------------
---------------
Total shareholders' equity 16,703,048
===============
Total liabilities and shareholders' equity $48,765,349
===============
See accompanying notes.
F-3
<PAGE>
Association Casualty Insurance Company and
Association Risk Management General Agency
Combined Statement of Income
Year ended December 31, 1998
Revenue:
Premiums earned $16,212,727
Net investment income, less expenses of 139,630 1,956,715
Net realized investment gains 128,589
Other income 858,981
----------------
Total revenue 19,157,012
Expenses:
Losses and loss adjustment expenses 8,597,055
Commissions and other underwriting expenses 3,994,722
Other expenses 1,895,474
----------------
Total losses and underwriting expenses 14,487,251
----------------
----------------
Income before income tax provision 4,669,761
Income tax expense:
Current 1,428,168
Deferred 51,937
----------------
Total income tax expense 1,480,105
----------------
Net income $3,189,656
================
See accompanying notes.
F-4
<PAGE>
Association Casualty Insurance Company and
Association Risk Management General Agency
Combined Statement of Changes in Shareholders' Equity
<TABLE>
Accumulated
<S><C> Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
<C> <C> <C> <C> <C>
--------------------------------------------------------------
--------------------------------------------------------------
Balance at January 1, 1998 $1,051,000 $451,116 $11,834,406 $167,292 $13,503,814
Comprehensive income:
Net income - - 3,189,656 - 3,189,656
Increase in unrealized - - - 114,578 114,578
gains
------------
Total comprehensive 3,304,234
income
Dividends paid - - (105,000) - (105,000)
--------------------------------------------------------------
Balance at December 31, 1998 $1,051,000 $451,116 $14,919,062 $281,870 $16,703,048
==============================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Association Casualty Insurance Company and
Association Risk Management General Agency
Combined Statement of Cash Flows
Year ended December 31, 1998
Cash flow from operating activities
Net income $ 3,189,656
Adjustments to reconcile net income to net cash provided
by operating activities:
Acquisition costs deferred (2,472,000)
Realized investment gains (128,589)
Increase in insurance reserves 288,738
Depreciation and amortization 2,354,095
Increase in receivables, net (1,122,874)
Decrease in deferred tax asset 134,830
Decrease in other liabilities (139,378)
Other, net 129,385
--------------
--------------
Net cash provided by operating activities 2,233,863
Cash flows from investment activities Proceeds from investment maturities or
repayments:
Proceeds from investments sold 13,308,505
Investments purchased (15,208,946)
Additions to property and equipment (57,416)
--------------
Net cash used by investing activities (1,957,857)
Cash flows from financing activities
Dividends paid to stockholders (105,000)
--------------
--------------
Net cash used in financing activity (105,000)
--------------
Net increase in cash and cash equivalents 171,006
Cash and cash equivalents at beginning of year 5,367,056
--------------
Cash and cash equivalents at end of year $ 5,538,062
==============
See accompanying notes.
F-6
<PAGE>
Association Casualty Insurance Company and
Association Risk Management General Agency
Notes to Combined Financial Statements
December 31, 1998
1. Organization and Significant Accounting Policies
Organization
Association Casualty Insurance Company ("ACIC") and Association Risk Management
General Agency ("ARMGA") are collectively know as (the "Company"). ARMGA owns
50% of the stock of ACIC. The remainder is owned by various individuals. The
financial statements of ACIC and ARMGA are presented on a combined basis due to
their significant intercompany transactions and common control that exists over
both entities. All significant intercompany accounts and transactions have been
eliminated.
ACIC is a stock insurance company formed to provide commercial casualty
insurance. ACIC received its Certificate of Authority from the Texas Department
of Insurance in March 1978, and operations began in April 1978.
ACIC is primarily involved in the sale of workers' compensation insurance which
represents approximately 95% of its premium volume. Other lines of insurance
include group accident and health. ACIC's products are marketed by an agency
throughout Texas and New Mexico.
ARMGA is a managing general agency which produces business on behalf of ACIC, as
well as for third-party insurance companies.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known which could impact the amounts reported and
disclosed herein.
Investments
All of the Companies' debt securities are classified as available for sale and
are carried at market value. If a decline in the value of an invested asset is
considered to be other than temporary, a realized loss is recorded to reduce the
carrying value of the investment to its estimated net realizable value, which
becomes the new cost basis.
F-7
<PAGE>
1. Organization and Significant Accounting Policies (continued)
The cost of securities sold is based upon specific identification. Unrealized
gains (losses) in the value of bonds are accounted for as a direct increase
(decrease) in accumulated other comprehensive income in shareholders' equity
and, accordingly, have no effect on net income.
The fair value of bonds generally represents quoted market value prices for
bonds traded in the public marketplace, or analytically determined values using
bid or closing prices for bonds not traded in the public marketplace.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments in short-term,
highly liquid securities which have original maturities of three months or less.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options.
Premium Revenue
Premiums are earned pro rata over the terms of the policies. The reserve for
unearned premiums is determined on a monthly pro rata basis. Accruals are made
for ultimate premiums on policies with retrospective premium adjustments.
Reinsurance
Reinsurance premiums, losses and loss adjustment expenses are accounted for on
bases consistent with those used in accounting for the original policies issued
and the terms of the reinsurance contracts.
F-8
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves represent the estimated ultimate net
cost of all reported and unreported losses incurred through December 31. The
liability is estimated using individual case-basis valuations and statistical
analyses. The estimated liability is subject to the effects of trends in loss
severity and frequency. Although considerable variability is inherent in such
estimates, management believes that the reserves for losses and loss adjustment
expenses are adequate. The estimates are continually reviewed and adjusted as
necessary as experience develops or new information becomes known; such
adjustments are included in current operations.
Deferred Acquisition Costs
The costs of acquiring business (principally commissions, premium taxes,
advertising and other expenses of issuing policies) are "deferred acquisition
costs" and are subsequently amortized over the term of the policy. Deferred
acquisition costs are expensed when such costs are deemed not to be recoverable
from the related unearned premiums and investment income.
2. Investments
The amortized cost and carrying value of the investments in fixed maturities at
December 31, 1998 are summarized as follows:
Amortized Gross Unrealized Carrying
------------------------
Type of Issuer Cost Gains Losses Value
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Certificates of deposit $ 750,000 $ - $ - $ 750,000
Government 399,559 4,441 - 404,000
Political subdivisions
of states,
territories and 4,201,461 148,039 - 4,349,500
possessions
Special revenue and
special assessment 5,165,550 112,175 - 5,277,725
Industrial 6,533,450 172,954 7,626 6,698,778
Loan-backed securities 13,253,762 87,128 90,034 13,250,856
================================================
$30,303,782 $524,737 $97,660 $30,730,859
================================================
F-9
<PAGE>
2. Investments (continued)
A summary of the amortized cost and fair value of the Company's investments in
fixed maturities at December 31, 1998, by contractual maturity, is as follows:
Amortized Carrying
Cost Value
------------------------
------------------------
Fixed maturity investments due after:
1 year through 5 years $2,449,978 $ 2,472,900
5 years through 10 years 14,029,392 14,423,703
10 years 570,650 583,400
Loan-backed securities 13,253,762 13,250,856
------------------------
$30,303,782 $30,730,859
========================
Actual maturities may differ from the contractual maturities in the foregoing
table because certain borrowers have the right to call or prepay obligations
with or without call or prepayment penalties.
The Company invests in collateralized mortgage obligations, including inverse
floaters with total amortized cost and fair value of $1,446,782 and $1,372,574,
respectively, at December 31, 1998, in part to maximize yields and in part to
hedge against a decline in interest rates. These securities provide cash flow
based on interest payments from underlying mortgages. Therefore, their return
and change in fair value are sensitive to prepayments by mortgagees, which may
result from a decline in interest rates. For example, if interest rates decline
and homeowners refinance mortgages, thereby prepaying the mortgages underlying
these securities, the cash flow from interest payments are reduced and the value
of these securities declines. Likewise, if homeowners pay on mortgages longer
than anticipated, the cash flow is greater and the return on the initial
investment would be higher than anticipated.
Proceeds from the sales of investments in fixed maturity investments were
$13,308,505 during 1998. Gross realized losses on these sales were $18,974
during 1998. The Company had gross realized gains on these sales of $147,563
during 1998.
At December 31, 1998, certificates of deposit with an admitted asset value of
$900,000 were on deposit with state insurance departments to satisfy regulatory
requirements.
F-10
<PAGE>
3. Unpaid Losses and Loss Adjustment Expenses
The following table provides a reconciliation of the beginning and ending
reserves for unpaid losses and loss adjustment expenses, net of reinsurance
recoverables, for the year ended December 31, 1998 (in thousands):
Reserve for unpaid losses and loss adjustment
expenses, net of related reinsurance recoverables, $27,687
at beginning of year
Less: Reinsurance loss recoverables (8,340)
------------------
Net balance at beginning of year 19,347
Add provision for losses and loss adjustment expenses
for claims, net of related reinsurance, occurring
in:
Current year 11,127
Prior years (2,530)
------------------
Net incurred losses and loss adjustment expenses 8,597
Deduct loss and loss adjustment expense payments for claims, net of
reinsurance, occurring during:
Current year (3,558)
Prior years (5,691)
------------------
Total payments (9,249)
------------------
Net balance at end of year 18,695
Plus: Reinsurance loss recoverables 9,413
------------------
Reserve for unpaid losses and loss adjustment
expenses, net of related reinsurance recoverables, $28,108
at end of year
==================
The foregoing reconciliation shows the Company experienced favorable development
during 1998 on the 1997 reserve for unpaid losses and loss adjustment expenses,
net of reinsurance recoverables. This resulted from payments for prior year
losses being less than previously projected, due primarily to the effects of
workers' compensation reform in Texas.
F-11
<PAGE>
3. Unpaid Losses and Loss Adjustment Expenses (continued)
The following table provides a reconciliation between reinsurance loss
recoverables and reinsurance recoverable.
Reinsurance loss recoverables $9,413,510
Unearned ceded premiums 148,487
Other 36,725
============
Reinsurance recoverables $9,598,722
============
4. Reinsurance
The Company retains risk up to $300,000 depending upon the nature of the risk
underwritten. General Reinsurance, an authorized reinsurer, provides excess of
loss coverage for workers' compensation policies written by the Company. This
excess loss coverage is limited to $5,000,000 for all claims, except
propane-related claims which have a loss limit of $2,000,000. Further, the
Company has excess limits coverage for the $15,000,000 excess of the $5,000,000
layer for all claims except propane.
The Company has also entered into a reinsurance agreement with Manufacturer's
Life for accident and health policies written. The reinsurer provides excess
loss coverage up to $2,000,000 depending on the nature of the risk underwritten.
Under the provisions of the reinsurance agreement, premiums charged are based on
the retention level selected by the Company for each of its customers. The
agreement does not provide for retroactive premium adjustments based on loss
experience.
The effects of reinsurance on premiums written and earned were as follows:
1998
------------------------
Written Earned
------------------------
(in thousands)
Direct premiums $17,949 $17,754
Ceded premiums 1,469 1,541
------------------------
Net premiums $16,480 $16,213
========================
F-12
<PAGE>
4. Reinsurance (continued)
Amounts payable or recoverable for reinsurance on paid and unpaid losses are not
subject to periodic or maximum limits. Reinsurance ceded on unpaid losses is due
primarily from General Reinsurance Corporation.
The net amount of return commission recoverable at December 31, 1998, if all
assumed and ceded reinsurance was canceled as of that date, would approximate
$44,315. At December 31, 1998, the Company does not have a requirement to accrue
any premiums, return commissions or other equivalent amount pursuant to any
contractual agreements of a profit-sharing nature.
The Company remains obligated for amounts ceded in the event that the reinsurers
do not meet their obligations.
5. Deferred Policy Acquisition Costs
A summary of acquisition costs deferred and amortized during the year ended
December 31, 1998 follows:
Balance at the beginning of the year $ 346,711
Policy acquisition costs deferred 2,472,000
Amortization (2,403,907)
============
Balance at the end of the year $ 414,804
============
6. Statutory Reporting
The assets, liabilities and results of operations for ACIC have been reported on
the basis of GAAP, which varies from statutory accounting practices ("SAP")
prescribed or permitted by insurance regulatory authorities. The principal
differences between GAAP and SAP are that under SAP: (i) acquisition costs for
policies are expensed as incurred, while they are deferred and amortized over
the estimated life of the policies under GAAP; (ii) no provision is made for
deferred income taxes; (iii) valuation allowances are established against
investments.
F-13
<PAGE>
6. Statutory Reporting (continued)
ACIC is required to maintain a minimum of $1,000,000 in capital and $1,000,000
in surplus. At December 31, 1998, ACIC had statutory capital and surplus of
$1,050,000 and $14,407,655, respectively. These amounts exceeded the NAIC's
Risk-Based Capital requirements at December 31, 1998. ACIC reported statutory
net income of $3,404,323 for the year ended December 31, 1998.
The maximum amount of dividends which can be paid in any 12 month period by
insurers domiciled in the state of Texas without the prior approval of the
Insurance Commissioner is the greater of 10% of the prior year's surplus or the
prior year's net income. ACIC declared and paid dividends of $105,000 in 1998.
Under current regulations, the maximum amount of dividends which may be declared
and paid in 1999, without prior approval of the Commissioner of the Texas
Department of Insurance, is approximately $3,404,323.
7. Federal Income Taxes
ACIC files a stand alone tax return while ARMGA, which is an S-corp, is not
required to pay federal income taxes. The combined financial statements include
the tax provision and related tax assets and liabilities of ACIC only. The
Company made income tax payments of $1,405,000 in 1998.
The components of the income tax provision for the year ended December 31, 1998,
are as follows:
Current:
Federal $1,428,168
State -
------------
1,428,168
Deferred:
Federal 51,937
State -
------------
51,937
============
Income tax provision $1,480,105
============
F-14
<PAGE>
7. Federal Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1998 are as
follows:
Deferred tax liabilities:
Deferred policy acquisition costs $(141,033)
Unrealized gain/loss on investments (145,206)
---------------
Total deferred tax liabilities (286,239)
---------------
Deferred tax assets:
Loss reserves 786,118
Unearned premiums 156,283
Capital loss carryforward 231,741
Salvage and subrogation 65,486
---------------
1,239,628
Valuation allowance (231,741)
---------------
Total deferred tax assets 1,007,887
===============
Net deferred tax assets $ 721,648
===============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods, with respect to which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences other than the $231,741 capital loss
carryforward for which a valuation allowance has been provided. This valuation
allowance decreased by $43,720 as a result of the usage of a portion of the
capital loss carryforward in 1998.
F-15
<PAGE>
7. Federal Income Taxes (continued)
A reconciliation of the 1998 income tax expense computed by applying the federal
tax rate of 34% to income before income taxes to the actual income taxes is as
follows:
Income before taxes $4,669,761
Permanent differences:
Tax exempt interest (407,142)
Proration 61,071
Capitalized costs 10,217
Change in valuation allowance (128,589)
ARGMA S-corp income 147,932
--------------
4,353,250
U.S. Federal statutory rate X 0.34
==============
Provision for income taxes $1,480,105
==============
Federal income taxes incurred of approximately $1,428,168 in 1998 would be
subject to recovery in the event that the Company incurs net operating losses
within two years of the years for which such taxes were paid.
8. Concentrations of Credit Risk
At December 31, 1998, the financial instruments, which subject the Company to
significant concentrations of credit risk, consisted principally of cash and
certificates of deposit, short-term investment balances, bonds and agent
balances. The amortized cost and market values of bonds are shown in Note 2.
Cash and certificates of deposit are maintained at several financial
institutions in amounts not in excess of federal deposit insurance levels, thus
reducing credit risk.
The Company maintains a portfolio of bonds which consists primarily of
collateralized mortgage obligations, Texas utility bonds and Texas political
subdivision bonds. These investments are generally investment grade, which
reduces market and credit risk. Short term investment balances are maintained at
levels not in excess of current operating or investing needs.
F-16
<PAGE>
8. Concentrations of Credit Risk (continued)
Under the terms of its Agency agreement, ARMGA remits all premium balances due
to ACIC within 60 days without regard to actual premium collections from the
insureds.
9. Commitments and Contingencies
In the normal course of business, certain claims and lawsuits are filed against
the Company. Management believes that any losses from any lawsuits, individually
or in the aggregate, will not be material to the Company's financial condition
or results of operations.
The Company purchased annuities in prior years to fund certain structured
settlement arrangements under which the claimants are payees but for which the
Company is contingently liable. At December 31, 1998, these annuities have a
present value of approximately $808,779; $581,979 of which is with Western
National Life Insurance Company and $226,800 of which is with Commonwealth Life
Insurance Company.
10. Stock Option Plan
During 1997, the Company's Board of Directors approved a stock option plan (the
"Plan") for eligible employees of the Agency, as defined in the Plan. In 1997,
1998 and 1999, the Board of Directors granted options to purchase 15,000, 7,025
and 16,810 shares of stock, respectively, at an exercise price of $2.00 per
share. These options were exercised in connection with the sale of the Company.
See Subsequent Events footnote for additional disclosure of the sale.
F-17
<PAGE>
11. Reconciliation of Other Comprehensive Income
Under Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, certain transactions and other economic events that bypass
the income statement must be displayed as other comprehensive income. Other
comprehensive income consists of net income and unrealized gains and losses on
securities available for sale, net of income taxes. Other than net income, the
other components of comprehensive income for the year ended December 31, 1998,
were as follows:
Gain on sale of securities included
in net income $128,589
=========================
Other comprehensive income:
Net unrealized gain arising during $302,192
year
Reclassification adjustment (128,589)
-------------------------
Net unrealized gain before tax 173,603
Deferred tax on realized gains 59,025
-------------------------
Net unrealized gain recognized in
other comprehensive income $114,578
=========================
12. Leases Commitments
The Company leases office space under two agreements, both of which expire in
December of 2000. The leases are accounted for as operating leases. Lease
expense for 1998 was $304,577. The approximate future lease expense, assuming no
renewals, is as follows:
1999 $308,455
2000 320,793
============
$629,248
============
13. Year 2000 Issue (Unaudited)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
F-18
<PAGE>
13. Year 2000 Issue (Unaudited) (continued)
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
Based on recent assessments, the Company determined that it will be required to
modify or replace significant portions of its software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be mitigated. However, if
such modifications and replacements are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the Company's operations.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the year 2000. The completed assessment indicated that
most of the Company's significant information technology systems could be
affected, particularly the underwriting and claims systems. However, the
assessment also indicated that the Year 2000 Issue does not present a material
exposure to the sale of the Company's products subsequent to December 31, 1999.
In addition, the Company has gathered information about the Year 2000 compliance
status of its significant subcontractors and continues to monitor their
compliance.
In addition to uncertainties related to the functioning of systems subsequent to
December 31, 1999, property/casualty insurance companies may have an
underwriting exposure related to the Year 2000 Issue. Although the Company has
not received any claims for coverage from its policyholders based on losses
resulting from Year 2000 issues, there can be no assurance that policyholders
will not suffer losses of this type and seek compensation under insurance
policies issued by the Company. If any claims are made, coverage, if any, will
depend on the facts and circumstances of the claim and the provisions of the
policy. At this time, the Company is unable to determine whether the adverse
effect, if any, in connection with the foregoing circumstances would be material
to its operations.
F-19
<PAGE>
14. Subsequent Event
On July 1, 1999, the shareholders of both ACIC and ARMGA completed a transaction
to sell 100% of their stock for an aggregate purchase price $32.5 million. In
connection with this purchase, ACIC issued a surplus note to Atlantic American
in the amount of $11,375,000.
F-20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements ("pro
forma statements") of Atlantic American Corporation and subsidiaries (the
"Company") give effect to the acquisition of Association Casualty Insurance
Company ("ACIC") and Association Risk Management General Agency ("ARMGA") as
more fully described in the accompanying notes to the pro forma statements. The
pro forma statements reflect the Company's preliminary purchase price allocation
and are subject to revision, as information becomes available. Management
believes that the preliminary allocation of the purchase price is not expected
to differ materially from the final allocation. The pro forma statements have
been prepared as if the acquisition had been consummated on January 1, 1999.
Such pro forma statements are not necessarily indicative of the results of
future operations, nor of the results of historical operations had the
acquisition been consummated on such date.
These pro forma statements should be read in conjunction with: the
accompanying notes to the unaudited pro forma consolidated statements; the
Company's Current Report on Form 8-K dated July 16, 1999 (as amended) (the "Form
8-K"); the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998; the Company's Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1999 and June 30, 1999; and the audited
combined financial statements of Association Casualty Insurance Company and
Association Risk Management General Agency for the year ended December 31, 1998
included in the form 8-K.
F-21
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<TABLE>
Atlantic American Corporation
Pro Forma Consolidated Balance Sheet
June 30, 1999
(Unaudited)
Pro forma
Historical Adjustments Consolidated
--------------------------------- ---------------------------
<S><C>
---------------------------------------------------------------
Company ACIC ARMGA Debit Credit Pro forma
------------ ---------- --------------------- ------------ ------------
------------ ---------- --------- --------- ------------ ------------
<C> <C> <C> <C> <C> <C>
ASSETS
(In thousands, except share and per share data)
Cash, including short-term investments $ 23,651 $ 5,117 $ 1,882 $ 932 A $ 875 B $ 30,707
Investments:
Bonds 109,157 29,376 - - - 138,533
Common and preferred stocks 57,793 - - - - 57,793
Other invested assets 4,921 - - - - 4,921
Mortgage loans 3,805 - - - - 3,805
Policy and student loans 2,311 - - - 2,311
Real estate 46 - - - - 46
------------ ---------- --------- --------- ------------ ------------
------------ ---------- --------- --------- ------------ ------------
Total investments 178,033 29,376 - - - 207,409
Receivables:
Reinsurance 26,737 7,941 - - - 34,678
Other 28,811 2,532 5,666 - - 37,009
Deferred acquisition costs 18,556 448 - - - 19,004
Deferred income taxes - 710 - - 710 E -
Other assets 4,555 639 - - - 5,194
Goodwill 3,937 - - 17,674 C 221 D 21,390
------------ ---------- --------- --------- ------------ ------------
============ ========== ========= ========= ============ ============
Total assets $ 284,280 $ 46,763 $ 7,548 $ 18,606 $ 1,806 $ 355,391
============ ========== ========= ========= ============ ============
============ ========== ========= ========= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds:
Future policy benefits $ 39,305 $ 27,702 $ - $ - $ - $ 67,007
Unearned premiums 30,843 2,643 - - - 33,486
Losses and claims 91,695 - - - - 91,695
Other policy liabilities 4,055 - - - - 4,055
------------ ---------- --------- --------- ------------ ------------
------------ ---------- --------- --------- ------------ ------------
Total policy liabilities 165,898 30,345 - - - 196,243
Accounts payable and accrued expenses 13,695 743 7,397 21,835
Debt payable 26,000 - - - 25,000 F 51,000
------------ ---------- --------- --------- ------------ ------------
------------ ---------- --------- --------- ------------ ------------
Total liabilities 205,593 31,088 7,397 - 25,000 269,078
Commitments and contingencies
Shareholders' equity:
Preferred stock 134 - - - - 134
Common stock 19,406 1,050 1 1,051 G 2,012 H 21,418
Additional paid-in capital 49,787 450 450 G 6,488 H 56,275
Accumulated deficit (13,116) 14,691 150 19,683 E, G, I 3,968 I (13,990)
Accumulated other comprehensive income 24,109
unrealized investment gains, net 24,109 (516) - (516) G - 24,109
Treasury stock, at cost (1,633) - - - (1,633)
------------ ---------- --------- --------- ------------ ------------
------------ ---------- --------- --------- ------------ ------------
Total shareholders' equity 102,796 15,675 151 20,668 12,468 86,313
------------ ---------- --------- --------- ------------ ------------
============ ========== ========= ========= ============ ============
Total liab and sh equity $308,389 $ 46,763 $ 7,548 $ 20,668 $ 37,468 $ 355,391
============ ========== ========= ========= ============ ============
============ ========== ========= ========= ============ ============
See notes to the unaudited pro forma consolidated statements.
</TABLE>
F-22
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<TABLE>
Atlantic American Corporation
Pro Forma Consolidated Income Statement
June 30, 1999
(Unaudited)
................................. Pro forma
................................. Historical Adjustment Consolidated
------------------------------ ------------
<S><C>
Company ACIC ARMGA Debit Credit Pro forma
------- ------ ------- ------- ------- -------
<C> <C> <C> <C> <C> <C>
Revenue:
Insurance premiums ........................ $47,713 $ 8,037 $ -- $ -- $ -- $55,750
Investment income ......................... 5,734 894 -- -- 76 J 6,704
Realized investment gains, net ............ 1,479 (34) -- -- -- 1,445
Other income .............................. 390 -- 3,354 3,036 J -- 708
------- ------ ------- ------- ------- -------
Total revenue ......................... 55,316 8,897 3,354 3,036 76 64,607
Benefits and expenses:
Insurance benefits and losses incurred .... 34,629 6,234 -- -- 560 J 40,303
Commissions and underwriting expenses ..... 13,418 2,503 998 -- 2,400 J 14,519
Interest expense .......................... 930 -- -- 875 K -- 1,805
Other ..................................... 4,191 14 2,862 221 L 819 M 6,469
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
Total benefits and expenses ........... 53,168 8,751 3,860 1,096 3,779 63,096
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
Income before income tax expense ............ 2,148 146 (506) 4,132 3,855 1,511
Income tax expense .......................... 44 105 -- -- 113 N 36
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
$ 2,104 $ 41 $ (506) $ 4,132 $ 3,968 $ 1,475
======= ====== ======= ======= ======= =======
======= ====== ======= ======= ======= =======
Net income per common share (basic and diluted) $ 0.08 $ 0.04
Weighted avg common shares outstanding, basic 19,091 21,103
Weighted avg common shares outstanding, diluted 19,383 21,395
See notes to the unaudited pro forma consolidated statements.
F-23
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The following pro forma adjustments have been applied to the historical
consolidated balance sheets and income statements of the Company to give effect
to the acquisition of ACIC and ARMGA as if it had occurred on January 1, 1999.
A - Cash has been increased as a result of the pro forma adjustments to
commission and underwriting expenses and income tax expense.
B - Cash has been reduced as a result of the pro forma adjustment to interest
expense.
C - To reflect the purchase accounting adjustment for the excess of the
purchase price over the net assets acquired.
D - To reflect the amortization of the excess of the purchase price over the
net assets acquired over the estimated lifeof the business acquired.
E - Establish valuation allowance for deferred tax asset.
F - The Company borrowed $25 million under a new credit facility to help fund
the acquisition of ACIC and ARMGA.
G - To eliminate the Company's investment in the net assets of ACIC and ARMGA.
H - The Company issued 2,012,835 shares of common stock valued at $8.5 million
to fund a portion of the acquisition of ACIC and ARMGA.
I - To reflect the pro forma adjustments made to the income statement.
J - To eliminate intercompany charges between ARMGA and ACIC for services
provided to ACIC by ARMGA.
K - Interest expense has been increased to reflect the $25 million borrowed to
fund the acquisition, assuming a 7.0% interest rate.
L - Amortization of the excess of net assets acquired has been estimated based
upon the life of the business acquired.
M - All non-recurring costs of the acquisition incurred by ACIC and ARMGA have
been eliminated.
N - Federal income taxes have been adjusted to reflect the net tax effect of
the pro forma adjustments and to reflect the effective tax rate of
the Company.
F-24
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Exhibit 23.1 - Consent of Ernst & Young LLP, Independent Auditors
We consent to use of our report dated September 7, 1999, with respect to the
combined financial statements of Association Casualty Insurance Company and
Association Risk Management General Agency, Inc., included in the Registration
Statement (Form S-8 No.33-56866) of Atlantic American Corporation.
Austin, Texas /s/ Ernst & Young LLP
September 13, 1999
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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: September 14, 1999 By: /s/
Edward L. Rand, Jr.
Vice President-Treasurer
(Principal Financial Officer)
