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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 June 30, 1999
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 August 9, 1999, was 20,934,612.
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<PAGE>
ATLANTIC AMERICAN CORPORATION
INDEX
Part 1. Financial Information Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations -
Three months and six months ended June 30, 1999 3
and 1998
Consolidated Statements of Shareholders' Equity -
Six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 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 4. Submission of matters to a vote of 12
security holders
Item 6. Exhibits and report on Form 8-K 13
Signature 14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands, except share and per share data)
June 30, December
31,
1999 1998
----------------------
Cash, including short-term investments of
$ 16,366 and $ 24,068 $ 23,651 $32,385
---------------------
Investments:
Bonds (cost: $ 111,339 and $ 98,286) 109,157 99,341
Common and preferred stocks (cost: $ 31,441 57,793 61,007
and $ 33,116)
Other invested assets (cost: $ 4,982 and $ 4,921 4,822
4,982)
Mortgage loans 3,805 3,851
Policy and student loans 2,311 4,268
Real estate 46 46
---------------------
Total investments 178,033 173,335
---------------------
Receivables:
Reinsurance 26,737 22,772
Other (net of allowance for bad debts: $ 28,811 18,912
1,285 and $1,377)
Deferred acquisition costs 18,556 16,881
Other assets 4,555 4,225
Goodwill 3,937 4,339
=====================
Total assets $284,280 $272,849
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds:
Future policy benefits $ 39,305 $ 38,912
Unearned premiums 30,843 22,971
Losses and claims 91,695 86,768
Other policy liabilities 4,055 3,726
---------------------
Total policy liabilities 165,898 152,377
Accounts payable and accrued expenses 13,695 12,255
Debt payable 26,000 26,000
---------------------
Total liabilities 205,593 190,632
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Commitments and contingencies Shareholders' equity:
Preferred stock, $1 par, 4,000,000
shares authorized; Series B preferred,
134,000 shares issued and outstanding,
$13,400 redemption value 134 134
Common stock, $1 par, 30,000,000
shares authorized; 19,405,753
shares issued in 1999 and 1998
and 19,044,771 shares outstanding
in 1999 and 19,119,888 shares outstanding 19,406 19,406
in 1998
Additional paid-in capital 49,787 50,406
Accumulated deficit (13,116) (15,213)
Accumulated other comprehensive income - 24,109 28,786
unrealized investment gains, net
Treasury stock, at cost, 360,982 shares in (1,633) (1,302)
1999 and 285,865 shares in 1998
---------------------
Total shareholders' equity 78,687 82,217
=====================
Total liabilities and shareholders' equity $284,280 $272,849
=====================
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
Three Months Ended Six Months Ended
June June
30, 30,
--------------------------------------
(In thousands, except per share data)
------ ------ ------ -------
1999 1998 1999 1998
----- ----- ----- ----
Revenue:
Insurance premiums $ 24,370 $ 22,871 47,713 45,829
Investment income 2,863 2,717 5,734 5,641
Realized investment gains, net 614 394 1,479 912
Other income 132 57 390 169
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Total revenue 27,979 26,039 55,316 52,551
--------------------------------------
Benefits and expenses:
Insurance benefits and losses incurred 18,380 15,470 34,629 30,992
Commissions and underwriting expenses 6,454 6,443 13,418 13,721
Interest expense 465 547 930 1,115
Other 2,012 1,674 4,191 3,193
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Total benefits and expenses 27,311 24,134 53,168 49,021
--------------------------------------
Income before income tax expense 668 1,905 2,148 3,530
Income tax expense 17 106 44 132
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Net income $ 651 $ 1,799 $ 2,104 $ 3,398
======================================
Net income per common share (basic and $ .02 $ .08 $ .08 $ .14
diluted)
======================================
Weighted average common shares 19,071 18,879 19,091 18,894
outstanding, basic
======================================
Weighted average common shares 19,356 19,169 19,383 19,195
outstanding, diluted
======================================
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
Additional
Preferred Common Paid-in Accumulated Investment Treasury
Stock Stock Capital Defecit Gains Stock Total
<S><C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30,1999
- ------------------------ ------- ------- ------- ------- ------- ------- -------
Balance, December 31, 1998 $ 134 $ 19,406 $ 50,406 $ (15,213) $28,786 $ (1,302) $ 82,217
Comprehensive income:
Net income 2,104 2,104
Increase in unrealized
investment gains (4,677) (4,677)
Total comprehensive income (2,573)
-------
Dividends accrued on preferred stock (603) (603)
Purchase of shares for treasury (436) (436)
Issuance of shares for employee
benefit plans and stock options (16) (7) 105 82
------- -------- --------- -------- ---------- --------
Balance, June 30, 1999 $ 134 $ 19,40 $ 49,787 $(13,116) $24,109 $ (1,633) 78,687
======= ======== ========== ========== ========== ========= =======
Six Months Ended June 30, 1998
- ------------------------
Balance, December 31, 1997 $ 164 $ 18,921 $ 53,316 $ (23,653) $ 29,498 $ (63) $ 78,183
Comprehensive income:
Net income 3,398 3,398
Decrease in unrealized investment gains 2,840 2,840
-------
Total comprehensive income 6,238
-------
Cash dividends paid on preferred stock (158) (158)
Dividends accrued on preferred stock (603) (603)
Purchase of shares for treasury (587) (587)
Issuance of shares for employee benefit plans -
and stock options (2) (1) 27 24
Issuance of shares of acquisition of -
Self-Insurance Administrators, Inc. 15 51 66
------- ------- ------- ------- ------- ------ -------
Balance, June 30, 1998 $ 164 $ 18,936 $52,604 $(20,256) $32,338 $(623) $ 83,163
======= ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
</TABLE>
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
------------------
1999 1998
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,104 $ 3,398
Adjustments to reconcile net income (loss) to
net cash
provided by operating activities:
Amortization of deferred acquisition costs 5,230 5,012
Acquisition costs deferred (6,905) (5,759)
Realized investment gains (1,479) (912)
Increase in insurance reserves 13,521 5,229
Depreciation and amortization 662 683
Increase in receivables, net (13,864) (9,547)
Increase in other liabilities 799 634
Other, net (453) (405)
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Net cash used by operating activities (385) (1,667)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured 29,064 44,445
Investments purchased (36,917) (47,678)
Additions to property and equipment (350) (269)
Acquisition of American Independent 208 -
Bulk reinsurance transactions, net - 564
Nash used by investing activities (7,995) (2,938)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends - (158)
Proceeds from exercise of stock options 82 22
Purchase of treasury shares (436) (587)
Repayments of debt (25,000) (1,600)
Proceeds from issuance of debt 25,000 -
------------------
Net cash used by financing activities (354) (2,938)
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Net decrease in cash and cash equivalents (8,734) (6,928)
Cash and cash equivalents at beginning of period 32,385 51,044
------------------
Cash and cash equivalents at end of period $ 23,651 $ 44,116
==================
Supplemental cash flow information:
Cash paid for interest $ 1,044 $ 1,097
================
Cash paid for income taxes $ 85 $ 200
================
The accompanying notes are an integral part of these
consolidated 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 have been
eliminated in consolidation. Operating results for the six-month period ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. 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, 1998.
Note 2. Segment Information
The Company's three insurance subsidiaries operate with relative autonomy and
each company is evaluated on its individual performance. The following summary
sets forth each company's revenue and income (loss) for the quarter and
year-to-date periods.
<TABLE>
Corporate Adjustments
American Georgia Bankers and and
Southern Casualty Fidelity Other Elimination's Consolidated
<S><C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
Six Months Ended June 30, 1999:
Revenue $20,628 $11,211 $ 23,005 $2,921 $ (2,449) $ 55,316
Income (loss) before income
tax expense (benefit) 2,643 70 1,560 (2,125) - 2,148
Six Months Ended June 30, 1998:
Revenue $ 20,168 $ 12,774 $ 19,378 2,095 (1,864) $ 55,551
Income (loss) before income
tax expense (benefit) 2,463 1,565 1,401 (1,899) - 3,530
Three Months Ended June 30, 1999:
Revenue $ 10,518 $ 5,672 $ 11,579 $1,474 $ (1,264) $ 27,979
Income (loss) before income
tax expense (benefit) 1,008 (106) 714 (948) - 668
Three Months Ended June 30, 1998:
Revenue $ 9,670 $ 6,531 $ 9,750 $ 1,133 $(1,045) $ 26,039
Income (loss) before income
tax expense (benefit) 938 1,277 703 (1,013) - $ 1,905
The accompanying notes are an integral part of these consolidated
financial statements.
-6-
</TABLE>
<PAGE>
Note 3. Reconciliation of Other Comprehensive Income
June 30,
1999 1998
---------------------
Gain on sale of securities included in net income $ 1,479 $ 912
=====================
Other comprehensive income:
Net unrealized gain arising during year $ 6,156 $ 3 ,752
Reclassification adjustment (1,479) (912)
---------------------
Net unrealized gain recognized in other $ 4,677 $ 2,840
comprehensive income =====================
Note 4. Subsequent Event
On July 1, 1999, the Company acquired 100% of the outstanding stock of
Association Casualty Insurance Company and Association Risk Management General
Agency, Inc. for an aggregate purchase price of $32.5 million in cash and common
stock of Atlantic American Corporation. In conjunction with the acquisition, the
Company entered into a $30.0 million revolving credit facility with Wachovia
Bank, N.A., $25.0 million of which was drawn on for the acquisition.
The accompanying notes are an integral part of these
consolidated financial statements
-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 six-month periods ended June 30, 1999 and 1998 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 and American Safety Insurance Company (together referred to as
"American Southern"), Bankers Fidelity Life Insurance Company ("Bankers
Fidelity") and Self-Insurance Administrators, Inc. ("SIA, Inc.").
RESULTS OF OPERATIONS
The Company's net income for the second quarter of 1999 was $0.7 million
($0.02 per diluted share) compared to net income
of $1.8 million ($0.08 per diluted share) for the second quarter of 1998. Net
income for the first six months of 1999 was $2.1 million ($0.08 per diluted
share) compared to net income for the comparable period in 1998 of $3.4 million
($.14 per diluted share). The decline in net income for the quarter and
subsequently for the six-month period is principally attributable to two
underwriting programs at Georgia Casualty. The company underwrote two programs
providing liability and property insurance for short-haul truckers and poultry
houses. During the second quarter of 1999, the results for both of these
programs were adverse and caused a significant increase in the losses incurred
at Georgia Casualty. In response to these results the company has ceased writing
new business in both programs and has eliminated those insureds that fail to
meet certain loss control standards. While remedial action has been taken, it
will be several quarters before the run-off of this entire business can be
accomplished.
On a consolidated basis, total revenues for the quarter increased 7.5% from
$26.0 million in 1998 to $28.0 million in 1999. For the six months ended June
30, 1999, total revenue was up 5.3% from $52.6 million to $55.3 million. The
principal driver in the increase in revenue was an increase in insurance
premiums. Insurance premiums for the quarter increased 6.6% to $24.4 million
from $22.9 million. For the six-month period insurance premiums increased 4.1%,
increasing from $45.8 million to $47.7 million. The increase in insurance
premiums for the quarter is attributable to a 9.9% increase in insurance
premiums at American Southern and a 16.3% increase in insurance premiums at
Bankers Fidelity offset by a decline in insurance premiums of 14.0% at Georgia
Casualty.
The increase in insurance premiums at American Southern is principally the
result of the new joint venture formed with the Carolina's Auto Club, American
Auto Club Insurance Agency, through which American Southern is producing
personal automobile business. American Southern holds a 50% interest in the
joint venture with the Carolina's Auto Club; an AAA affiliated automobile club.
The joint venture exclusively markets personal automobile insurance to the more
than 1 million members of the Carolina's Auto Club. Through the end of June,
American Southern had written approximately $2.0 million of this business;
however, due to the delay resulting from recognizing premium income over the
life of a policy, the full effect of this premium increase has yet to be
realized. In addition to this business, American Southern produces much of its
business through contracts with various states and municipalities, some of which
represent significant amounts of revenue for the company. These contracts are
periodically subject to competitive renewal quotes and the loss of a significant
contract could have a material adverse effect on the business or financial
condition of American Southern and the Company.
Banker's Fidelity generated increases in both its health insurance and life
insurance lines of business during the quarter. For the quarter, health
insurance premiums, which are made up predominately of Medicare supplement
insurance, rose 23.8% while life insurance premiums rose 2.5%. For the year,
insurance premiums at Bankers Fidelity have increased 17.7%.
The decline in insurance premiums at Georgia Casualty is principally the
result of terminating the two underwriting programs previously discussed. In
addition, Georgia Casualty continues to operate in a segment of the insurance
industry that is under heavy pricing pressures. Rather than reduce prices on
policies to levels that the company believes are not profitable, the company
chooses not to write this business. This conservative approach is another
contributing factor to the decline in insurance premiums at Georgia Casualty. In
addition to the other steps taken to minimize the effects of both the increased
claims activity and the two terminated underwriting programs, the company
entered into a stop-loss reinsurance agreement that caps losses between 55% and
75% for the 1999 accident year. The cost of this reinsurance protection has also
contributed to the decline in premium income for the quarter. For the six months
ended June 30, 1999, insurance premiums at Georgia Casualty were down 14.0% due
in part to an increase in ceded premiums from $1.6 million to $2.8 million.
-8-
<PAGE>
Investment income for the quarter increased 5.4% to $2.9 million from $2.7
million. For the six months ended June 30, 1999, investment income increased
1.6% from $5.6 million to $5.7 million. This increase is the result of a move
from short-term investments to longer term, higher yield investments,
particularly bonds. In addition, several of the Company's equity investments
increased their dividend rates from the prior period, resulting in an increase
in investment income. Approximately $10.0 million in additional funds has been
invested in the Company's bond portfolio. These funds have come from cash,
short-term investments, and the sale of appreciated common stock investments.
Realized gains for the second quarter were $614,000 compared $394,000 in the
second quarter of 1998. For the six-month period realized gains have totaled
$1.5 million compared to $912,000 for the first six months of 1998. Management
is continually evaluating the composition of the Company's investment portfolio
and will periodically divest appreciated investments as deemed appropriate.
On a consolidated basis, total expense increased 13.2% to $27.3 million for
the quarter from $24.1 million and increased 8.5% for the year-to-date period
from $49.0 million to $53.2 million due in large part to an increase in
insurance benefits and losses as a result of the increase in premium volume.
This increase is comprised of an 8.9% increase in expenses at American Southern,
a 10.0% increase in expenses at Georgia Casualty and a 20.1% increase in
expenses at Bankers Fidelity.
Insurance benefits and losses incurred increased 18.8% for the quarter from
$15.5 million to $18.4 million and 11.7% for the year to date period from $31.0
million to $34.6 million. The largest contributor to this increase in insurance
benefits and losses was the increase in premium volume.
Insurance benefits and losses at American Southern increased $1.0 million or
15.4% for the quarter. American Southern's loss ratio, the ratio of insurance
benefits and losses to insurance premiums, increased from 76.0% in the second
quarter of 1998 to 79.7% in the second quarter of 1999. For the six months ended
June 30, 1999, insurance benefits and losses increased 6.6% from $12.5 million
to $13.3 million. Year-to-date, American Southern's loss ratio increased to
72.4% from 69.4%.
At Georgia Casualty, insurance benefits and losses increased 9.7% to $3.8
million for the quarter from $3.5 million and the loss ratio increased from
62.4% in the second quarter of 1998 to 79.6% in the second quarter of 1999.
Year-to-date insurance losses at Georgia Casualty are down 3.9% from $7.6
million in the first half of 1998 to $7.3 million in the first half of 1999. The
year-to-date loss ratio for Georgia Casualty is 78.5% compared to 70.2% for the
first half of 1998. As previously discussed, Georgia Casualty was adversely
impacted by the results of two underwriting programs during the second quarter
of 1999.
Insurance benefits and losses at Bankers Fidelity increased 28.6% for the
quarter from $5.5 million to $7.1 million in 1998. Year to date insurance
benefits and losses at Bankers Fidelity has increased 28.8% from $10.9 million
to $14.0 million. The increase in claims at Bankers Fidelity is attributable to
the increase in premium volume coupled with an abnormally high number of life
claims in both the first and second quarters of 1999. Management does not
anticipate that this trend in life claims will continue and expects to see these
claims return to historical levels.
On a consolidated basis, commission and underwriting expenses were flat for
the quarter, increasing from $6.4 million to $6.5 million, an increase of less
than 1%. For the year, commission and underwriting expenses were down 2.2% from
$13.7 million to $13.4 million and down slightly, 2.2%, for the year to date
period.
At American Southern, commission and underwriting expenses for the quarter
were down 9.9% to $2.0 million from $2.2 million in the second quarter of 1998.
For the six-month period, commission and underwriting expenses were down 12.2%
from $5.1 million in the first six months of 1998 to $4.6 million in the first
six months of 1999. For the year, the expense ratio has declined to 24.9% from
28.5% in the comparable period in 1998. The resulting expense ratio, the ratio
of commission and underwriting expenses to insurance premiums, for American
Southern declined from 25.7% in the second quarter of 1998 to 21.1% in the
second quarter of 1999. Much of American Southern's commissions are structured
such that the agent is rewarded or penalized based upon the loss ratio of the
business they submit to the company. As a result of this arrangement, in periods
where losses and the loss ratio increase, the commission and underwriting
expenses and the resulting expense ratio decrease.
-9-
<PAGE>
Georgia Casualty's expense ratio for the quarter increased from 30.3% in 1998
to 40.1% in 1999 while commission and underwriting expenses increased 15.7% on a
quarter to quarter comparison. For the year, the expenses are up 14.1% with the
expense ratio increasing from 31.3% to 41.6%. The increase in the expense ratio
at Georgia Casualty is the result of the decline in premium volume and an
increase in personnel expenses. During the quarter, Georgia Casualty made
substantial additions to its underwriting and management team, adding a new
president as well as two seasoned underwriting professionals.
At Bankers Fidelity, commission and underwriting expenses for the second
quarter increased 6.9% from $3.5 million to $3.8 million; however, as a result
of the increase in insurance premiums the expense ratio declined to 37.1% from
40.3%. For the year-to date, commission and underwriting expenses at Bankers
Fidelity are up 11.2% from $7.6 million to $8.4 million while the expense ration
has declined from 44.4% to 42.0%. The decline in the expense ratio at Bankers
Fidelity is attributable to a reduction in commission rates on several of the
company's primary health products.
Interest expense for the second quarter of 1999 declined 15.0% to $465,000
due to a reduction in the level of debt compared to the second quarter of 1998,
coupled with a 50 basis point reduction in the interest rate charged on the
Company's credit facility with Wachovia Bank, N.A. As discussed below the
Company restructured its credit arrangements in June; however, this
restructuring did not have significant impact on the results for the quarter.
The Company's tax provision decreased for the quarter as a result of the
decline in pretax earnings.
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 is 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
$2.2 million for the first six months of 1999 compared to statutory net income
of $3.9 million for the first six months of 1998. Total statutory net income for
the quarter was $0.7 million compared to $2.3 million in 1998. The reasons for
the decrease in statutory earnings in the first half of 1999 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 has one series of preferred stock outstanding, substantially all
of which is held by affiliates of the Company's chairman and principal
shareholders. 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
June 30, 1999, the Company had accrued, but unpaid dividends on the Series B
Stock totaling $3.0 million.
On June 24, 1999, the Company issued $25.0 million in Taxable Variable Rate
Demand Bonds, Series 1999 ("the Bonds") to replace the Company's existing bank
facility. The bonds will mature on July 1, 2009 and pay a variable interest rate
that approximates 30-day LIBOR. The bonds are backed by a Letter of Credit
issued by Wachovia Bank, N.A. The cost of the Letter of Credit and its
associated fees are 180 basis points, making the effective cost of the bonds
LIBOR plus 180 basis points (currently approximately 7.0%). The credit facility
that was replaced by the bonds was a term loan with an interest rate of prime
less 50 basis points and would have matured December 31, 2000.
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 six months of 1999 increased slightly over the first six months of
1998. In addition, the Company has a formal tax-sharing agreement between the
Company and its insurance subsidiaries.
-10-
<PAGE>
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 $39.0 million at June 30,
1999.
At June 30, 1999, the Company had a net cumulative deferred tax asset of
zero. The net cumulative deferred tax asset consisted of $19.0 million of
deferred tax assets, offset by $11.9 million of deferred tax liabilities, and a
$7.1 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.
Over 90.0% 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 June 30, 1999, Georgia Casualty had $12.8
million of accumulated statutory earnings, American Southern had $19.9 million
of accumulated statutory earnings, and Bankers Fidelity had $24.1 million of
accumulated statutory earnings.
Net cash used by operating activities was $385,000 in the first half of 1999
compared to net cash used by operating activities of $1.7 million in the first
six months of 1998. Cash and short-term investments decreased from $32.4 million
at December 31, 1998, to $23.7 million at June 30, 1999, mainly due to an
increase in longer-term investments. Total investments (excluding short-term
investments) increased to $159.6 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.
YEAR 2000
Many existing computer systems and equipment with embedded computer chips
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 in date sensitive systems.
The Company's operating systems, most of which depend on date sensitive data,
are integral to its business. The Company has developed a program to assess the
state of readiness of the Company's internal systems, both computer systems and
those with embedded micro-processors, 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. At the
end of 1998, the Company had completed all scheduled modifications to its
systems to appropriately address the Year 2000 issue. Initial testing of these
systems has been completed and the Company is currently running on these
modified systems. Additional testing has continued through the first half of
1999. To date, the Company has been able to remediate its 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 information systems and systems with embedded microprocessors for
compliance. As that testing process continues, the Company is developing
contingency plans to enable the Company to fulfill the functions performed by
those systems in the event of failure. The development of contingency plans is
ongoing; however, the Company expects to have in place contingency plans for its
critical operating systems, as well as for less critical systems and vendor
alternatives, by the beginning of the fourth quarter of 1999.
While the Company is taking every precaution to address the Year 2000 issue,
some uncertainty remains. The Company can not control the activities of its
third party vendors, and the Company may have failed to identify and remediate
all of its systems and other such uncertainties.
-11-
<PAGE>
As a result, management cannot determine whether or not Year 2000 related
problems that could arise would have a material impact on the Company's
financial condition or results of operations.
As part of this process, the Company is continuing its process of surveying
its vendors and 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. While unlikely, it is possible that a major service provider,
such as a utility company, may be unable to provide the Company with its needed
service for a period of time. If such an event were to happen, the Company might
not be able to provide services until the utilities are returned.
During the first half of 1999, the Company spent less than $75,000 to modify
existing systems and applications to address the Year 2000 issue. The Company
estimates that less than $100,000 will be incurred in the remainder of 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, 1998 and the other filings made by the Company from time to
time with the Securities and Exchange Commission.
-12-
<PAGE>
PART II. OTHER INFORMATION
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
Item 4. Submission of matters to a vote of security-holders.
On May 4, 1999, the shareholders of the Company cast the following votes at
the annual meeting of shareholders for the election of directors of the Company,
and the appointment of Arthur Andersen LLP as the Company's auditors.
Election of Directors Shares Voted
- ------------------------------------- ------------------------------
Director Nominee For Withheld
- ---------------- --- --------
J. Mack Robinson 17,690,577 18,594
Hilton H. Howell, Jr. 17,691,234 17,937
Samuel E. Hudgins 17,691,294 17,877
D. Raymond Riddle 17,690,004 19,167
Harriett J. Robinson 17,690,977 18,194
Scott G. Thompson 17,691,294 17,877
Mark C. West 17,691,294 17,877
William H. Whaley, M.D. 17,691,294 17,877
Dom H. Wyant 17,691,294 17,877
Edward E. Elson 17,691,294 17,877
Appointment of Independent Public Shares Voted
Accountants
- ------------------------------------- ------------------------------
For Against Abstain
Arthur Andersen LLP 17,681,953 9,010 18,208
-13-
<PAGE>
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 second quarter of 1999.
-14-
<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: August 16, 1999 By: /s/
-----------------------
Edward L. Rand, Jr.
Vice President and Treasurer
(Principal Financial and Accounting Officer)
-15-
<TABLE>
EXHIBIT 11
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME PER COMMON SHARE
SUPPORTING SCHEDULE
Three Months Ended Six Months Ended
June 30, June 30,
<S><C> <C> <C> <C> <C>
------------------------------------------
(In thousands, except per share
data) 1999 1998 1999 1998
------------------------------------------
Basic Earnings Per Common Share:
Net income $ 651 $ 1,799 $ 2,104 $ 3,398
Less preferred dividends to (301) (380) (603) (761)
affiliates
------------------------------------------
Net income available to common $ 350 $ 1,419 $ 1,501 $ 2,637
shareholders
==========================================
Weighted average common shares 19,071 18,879 19,091 18,894
outstanding
==========================================
Net income per common share $ .02 $ .08 $ .08 $ .14
==========================================
Diluted Earnings Per Common Share:
Net income available to common $ 350 $ 1,419 $ 1,501 $ 2,637
shareholders
==========================================
Weighted average common shares 19,071 18,879 19,091 18,894
outstanding
Effect of dilutive stock options 285 290 292 301
------------------------------------------
Weighted average common shares
outstanding 19,356 19,169 19,383 19,195
adjusted for dilutive stock
options for dilutive options
==========================================
Net income per common share $ .02 $ .08 $ .08 $ .14
==========================================
-16-
</TABLE>
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<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 109157
<DEBT-MARKET-VALUE> 109157
<EQUITIES> 57793
<MORTGAGE> 3805
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<TOTAL-INVEST> 178033
<CASH> 23651
<RECOVER-REINSURE> 26737
<DEFERRED-ACQUISITION> 18556
<TOTAL-ASSETS> 284280
<POLICY-LOSSES> 131000
<UNEARNED-PREMIUMS> 30843
<POLICY-OTHER> 4055
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<NOTES-PAYABLE> 26000
0
134
<COMMON> 19406
<OTHER-SE> 59147
<TOTAL-LIABILITY-AND-EQUITY> 284280
47713
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<INCOME-PRETAX> 2148
<INCOME-TAX> 44
<INCOME-CONTINUING> 2148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2148
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
<RESERVE-OPEN> 0
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<PROVISION-PRIOR> 0
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