EXHIBIT 13.1
Financial Contents
Selected Financial Data 9
Management's Discussion and Analysis 10
Consolidated Balance Sheets 15
Consolidated Statements of Operations 16
Consolidated Statements of Shareholder's Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
Market Information 38
Report of Independent Public Accountants 39
-8-
Selected Financial Data
(In Thousands, Except Per Share Data)
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Insurance premiums............ $ 43,373 $ 41,701 $ 40,944 $42,764 $ 53,726
Investment income............. 6,566 6,628 6,048 6,399 7,599
Realized investment gains
(losses), net............... 1,731 870 744 4,091 (7,092)
------- ------- ------- ------- -------
Total revenue............... 51,670 49,199 47,736 53,254 54,233
------- ------- ------- ------- -------
Insurance benefits and losses
incurred.................... 24,689 21,955 25,364 33,616 41,978
Other expenses................ 23,897 20,727 21,905 20,430 26,564
------- ------- ------- ------- -------
Total benefits and expenses. 48,586 42,682 47,269 54,046 68,542
------- ------- ------- ------- -------
3,084 6,517 467 (792) (14,309)
Debt conversion expense....... - - - (98) (5,370)
Income tax benefit............ 34 1,632 989 - -
------- ------- ------- ------- -------
Income (loss) from continuing
operations............... 3,118 8,149 1,456 (890) (19,679)
(Loss) income from discontin-
ued operations, net...... (10,094) 1,121 1,543 96 (1,265)
------- ------- ------- ------- -------
(Loss) income before extra-
ordinary gain and cumulative
effect of change in
accounting principle for
income taxes............. (6,976) 9,270 2,999 (794) (20,944)
Extraordinary gain............ - 100 897 279 688
------- ------- ------- ------- -------
(Loss) income before
cumulative effect of
change in accounting
principle for income
taxes.................... (6,976) 9,370 3,896 (515) (20,256)
Cumulative effect of change in
accounting principle for
income taxes............. - - (519) - -
------- ------- ------- ------- -------
Net (loss) income ......... $ (6,976) $ 9,370 $ 3,377 $ (515)$(20,256)
======== ======= ======= ======= ========
Net (loss) income per common
share data:
Continuing operations..... $ .15 $ .43 $ .06 $ (.07)$ (2.04)
Discontinued operations... (.54) .06 .09 .01 (.13)
Extraordinary gain........ - NIL .05 .01 .07
Cumulative effect of change
in accounting principle
for income taxes........ - - (.03) - -
------- ------- ------- ------- -------
Net (loss) income ........ $ (.39)$ .49 $ .17 $ (.05)$ (2.10)
======== ======== ======== ======== ========
Weighted average common shares
outstanding................. 18,671 18,511 18,476 17,680 9,789
Book value per share.......... $ 1.61 $ 1.47 $ 1.24 $ 1.01 $ .38
Total assets ................. $244,541 $148,740 $154,822 $159,698 $167,950
Total long-term debt.......... $ 31,569 $ 24,327 $ 21,827 $ 19,327 $ 33,370
Total shareholders' equity.... $ 46,478 $ 30,022 $ 25,806 $ 21,601 $ 6,723
-9-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
Atlantic American Corporation's net loss for 1995 was $7.0 million, or $.39 per
share, compared to net income of $9.4 million, or $.49 per share, in 1994 and
net income of $3.4 million, or $.17 per share, in 1993. The decrease in earnings
in 1995 was attributable to the unprofitable operations of the Company's
furniture division and a comparative decrease in the earnings of the Company's
insurance division due to the one time recognition of redundant reserves in
1994. The increase in earnings in 1994 was primarily due to the recognition of
redundant reserves of $4.9 million following the settlement of a significant
portion of the insurance division's workers' compensation insurance liabilities
and the settlement of $1.1 million of a business interruption insurance claim
stemming from Hurricane Andrew in 1992. In addition, improved corporate results
for 1994 included a net tax benefit of $546,000 and an extraordinary gain of
$100,000. Earnings in 1993 included an extraordinary gain of $897,000, or $.05
per share, resulting from the extinguishment of debt, and a charge of $519,000,
or $.03 per share, representing the cumulative effect of a change in accounting
principle. The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
ACQUISITION
On December 31, 1995 the Company acquired American Southern Insurance Company
("American Southern") for an aggregate of $34.0 million. American Southern, a
highly rated property and casualty insurance company which specializes in state
and municipality automobile insurance, was acquired to complement the Company's
position as a niche insurance holding company. American Southern's balance sheet
has been consolidated in the Company's December 31, 1995 balance sheet, whereas,
results of operations and cash flows will not be reflected until 1996 (see Note
7).
DISCONTINUED OPERATIONS
Subsequent to year end, the Company announced its intent to sell its furniture
operations. The furniture division, which consisted of Leath Furniture, Inc.
("Leath") and its subsidiaries, Modernage Furniture, Inc. and Jefferson Home
Furniture Company, Inc., has suffered severe losses in light of a current
industry wide downturn. Management anticipates continued losses in the future,
and therefore, has made the decision to exit the retail furniture business and
concentrate on its core insurance businesses (see Note 8). The Company has
announced that it intends to sell its approximately 88% interest in Leath during
the first half of 1996 to a related party.
Leath's total operating losses for 1995 totaled $6.7 million compared to
earnings of $1.1 million in 1994 and $1.5 million in 1993. The Company recorded
an additional charge to earnings of $3.4 million in 1995 for estimated losses to
be incurred prior to disposition, bringing the total loss for discontinued
operations in 1995 to $10.1 million. Previously separated intersegment revenues
attributable to mortgage loans from the insurance companies to Leath have been
included in investment income of the continuing operations of the insurance
segment.
RESULTS OF CONTINUING OPERATIONS
Revenue
Premiums increased to $43.4 million in 1995 from $41.7 million in 1994 and $40.9
million in 1993. This represents a 4.0% increase in 1995 from 1994 as compared
to a 1.8% increase in 1994 from 1993. Medicare supplement and workers'
compensation have historically made up the majority of insurance premium
revenue. Medicare supplement accounted for 27.4% of the premiums in 1995, 32.0%
in 1994 and 36.8% in 1993. Workers' compensation accounted for 34.5% of the
premiums in 1995, 28.7% in 1994 and 24.2% in 1993. The increase in premiums in
1995 was due to an increase of $3.7 million of casualty premiums and $186,000 of
life premiums offset by a decrease of $2.2 million of accident and health
-10-
premiums. The increase in premiums in 1994 was due to an increase of $1.8
million in casualty premiums and $1.4 million of life premiums offset by a
decrease in accident and heath premiums of $2.5 million.
The decline in accident and health premiums for the past three years has
resulted primarily from a decrease in Medicare supplement insurance premiums.
Overall, the Life and Health Division has experienced a decline in accident and
health premiums as a result of management's decision to diversify the premium
base. The increases in life premiums in 1995 and 1994 reflect the continuing
movement to a more diversified product mix with more emphasis on life insurance.
The Casualty Division (excluding American Southern) increased premiums in 1995
to $18.3 million from $14.6 million in 1994 and $12.8 million in 1993. This
division has continued to emphasize its marketing efforts in its core states of
Georgia and Mississippi.
Investment income remained constant at $6.6 million in 1995 and 1994, increasing
from $6.0 million in 1993. Investment income remained constant in 1995 primarily
due to the leveling off of interest rates. Investment income increased in 1994
due to increased yields on the Company's investment portfolio. Management has
focused on increasing the Company's investments in short and medium maturity
bonds. Exclusive of the acquired investments of American Southern, the carrying
value of funds available for investment (which include cash, short-term
investments, bonds and common and preferred stocks) at December 31, 1995
increased approximately $13.0 million from the balance at the end of 1994,
primarily due to cash provided by operations of $3.2 million, and an increase in
unrealized gain of $9.8 million.
Realized investment gains have increased to $1.7 million in 1995 from $870,000
in 1994 and $744,000 in 1993, mainly due to the increased gains from the
Company's stock portfolio.
Benefits and Expenses
Total insurance benefit and losses increased to $24.7 million in 1995 from $22.0
million in 1994 and decreased from $25.4 million in 1993. The comparative
increase in insurance benefits and losses in 1995 was primarily due to the 1994
recognition of a reserve redundancy of $4.9 million in the Casualty Division
following the settlement of a significant portion of the Company's workers'
compensation insurance liabilities, which reduced insurance benefits and losses
in 1994. This reserve redundancy caused a corresponding decrease in the
comparison of 1994 insurance benefits and losses to 1993.
Over a three-year period ending December 31, 1995, the Life and Health Division
has incurred insurance benefits and losses of $12.3 million in 1995, $15.4
million in 1994 and $15.8 million in 1993. The Life and Health Division's
decreases are due to a corresponding decline in insurance premiums and a
decrease in reserves caused by elimination of a block of funeral home business.
The Casualty Division has incurred insurance benefits and losses of $12.4
million in 1995, $6.5 million in 1994 and $9.6 million in 1993. With the
exception of the recognition of the $4.9 million reserve redundancy in 1994, the
Casualty Division's increase in insurance benefits and losses is due to
increased premiums which resulted in an increased level of losses and related
reserves.
As a percentage of premium revenue, insurance benefits and losses have increased
to 56.9% in 1995 from 52.6% in 1994 and decreased from 61.9% in 1993. The Life
and Health Division's percentages have decreased to 49.1% in 1995 from 57.1% in
1994 and 56.2% in 1993. The Casualty Division's percentages have decreased to
67.5% in 1995 from 77.2% in 1994, excluding the decrease of $4.9 million for the
settlement of a large block of workers' compensation liabilities, and 74.7% in
1993.
Commission and underwriting expenses increased to $15.2 million in 1995 from
$13.3 million in 1994 and $14.6 million in 1993. As a percentage of premium
revenue, commission and underwriting expenses have increased to 35.2% in 1995
from 32.0% in 1994 and decreased from 35.6% in 1993. Net amortization of
deferred acquisition costs has increased to $736,000 in 1995 from $113,000 in
1994 and decreased from $1.4 million in 1993. The increase in the amortization
of deferred acquisition
-11-
costs in 1995 was due mainly to the elimination of the block of funeral home
business. The decrease in 1994 was primarily due to a decrease in policy lapses
and an increase in new life insurance sales which included the block of funeral
home business. Underwriting expenses increased to $7.8 million in 1995 from $7.0
million in 1994 and $7.2 million in 1993. Commissions have fluctuated in the
past three years from $7.4 million in 1995, $6.4 million in 1994 and $7.4
million in 1993 due to increased premiums in the Casualty Division and
increased life insurance sales.
Interest expense increased to $2.5 million in 1995 from $2.0 million in 1994 and
$1.9 million in 1993, due to increased borrowings from affiliates.
Other expense increased $786,000 in 1995 to $6.2 million, but had remained at
approximately $5.4 million in both 1994 and 1993. The increase in other expense
was due in part to an increase of $248,000 in the expenses related to claims of
the Company's self-insured employee group medical plan. The remaining portion of
the increase in other expense was due to increased Parent company corporate
expenses.
The Company's tax benefit in 1995 is composed of $9,000 of alternative minimum
taxes offset by a benefit of $43,000 resulting from overpayments of alternate
taxes in the prior year. The Company's tax benefit in 1994 of $546,000 is
composed of a state income tax provision of $270,000, an alternative minimum
federal income tax provision of $184,000 and a federal income tax benefit of
$1.0 million. The benefit of $1.0 million is due to the Company reducing its
deferred tax balance in the insurance division by $350,000 upon settlement of a
tax case with the IRS regarding tax years 1983 and 1984 and the Company reducing
its deferred tax balance by $650,000 upon expiration of a time limitation with
respect to another potential tax liability. The Company's tax provision of
$60,000 in 1993 was for alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES - CONTINUING OPERATIONS
The major cash needs for the Company are the ability to pay claims and expenses
as they come due, and to have adequate statutory capital and surplus to meet
state regulatory requirements. The Company's primary sources 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, when earnings warrant such
payment. By statute, the state regulatory authorities establish minimum
liquidity standards primarily to protect policyholders.
The Company's insurance subsidiaries (excluding American Southern) reported a
combined statutory profit of $4.5 million in 1995 compared to $7.7 million in
1994 and $3.6 million in 1993. The 1995 statutory results were due to a profit
of $1.5 million in the Casualty Division and a profit of $3.0 million in the
Life and Health Division. The 1994 statutory results are due to a profit of $5.1
million in the Casualty Division (which includes the $4.9 million redundancy
which was realized on the settlement of the workers' compensation liability
previously discussed) and a profit of $2.6 million in the Life and Health
Division. The 1993 statutory results were due to a profit of $967,000 in the
Casualty Division and a profit of $2.6 million in the Life and Health Division.
Statutory results differ from the generally accepted accounting principles
("GAAP") results of operations for the Casualty Division due to interest expense
on surplus notes being a direct charge to surplus and not an income statement
item and the deferral of acquisition costs. The Life and Health Division's
statutory results differ from GAAP results primarily due to deferral of
acquisition costs and reserving methods. Management attempts to keep the maximum
premium to surplus ratio at three to one for the Casualty Division. As of
December 31, 1995, the Casualty Division (excluding American Southern) had
annualized premiums of $18.3 million and surplus of $11.7 million. The Casualty
Division (excluding American Southern) has adequate statutory surplus due to a
statutory recapitalization which was completed in the second quarter of 1994. In
conjunction with the recapitalization, the Casualty Division no longer pays the
Company interest on the surplus notes that were subsequently converted to
equity. Correspondingly, the Company rescheduled its quarterly interest payments
in the second quarter of 1994 on its debt payable to affiliates to correspond to
the annual dividend it expects to receive from the Casualty Division. The
Casualty Division paid a dividend of approximately $2.0 million to the Company
on May 15, 1995. Using the proceeds from the dividend payment, the Company paid
a total of $1.1 million in accrued interest on rescheduled interest payments
along with $675,000 of short-term notes payable to affiliates.
-12-
On May 22, 1995, Bankers Fidelity Life Insurance paid a dividend of
approximately $896,000. A total of 93.0% or approximately $835,000 of the total
Bankers Fidelity dividend was paid to the Company. These funds have been used to
fund leasehold improvements, computer software expenditures, and to fund the
Company's stock repurchase plan for up to 500,000 shares which are being used in
the Company's various employee benefit plans. In 1995, a total of $267,000 was
spent on leasehold improvements, $489,000 on computer software, and $174,000 in
repurchasing the Company's stock. A total of $600,000 of funds was received
from the exercise of stock options in 1995, the majority of which were due to
expire in July of 1995. The primary sources of funds for the Company are
dividends from its subsidiaries and management fees and borrowings from
affiliates of the Company. The Company believes that additional funding would be
available from certain of its affiliates to meet any additional liquidity needs,
although currently there are no other arranged sources of unused borrowing.
On January 5, 1996, the Company entered into an agreement with Bankers Fidelity
and a newly formed wholly-owned subsidiary of the Company, pursuant to which the
Company will acquire the remaining publicly-held interest in Bankers Fidelity
that the Company does not own. The transaction will be completed through the
merger of the newly formed subsidiary into Bankers Fidelity, with Bankers
Fidelity being the surviving corporation in the merger. As a result of the
merger, the public shareholders of Bankers Fidelity will receive $6.25 in cash
per share, for an aggregate payout of approximately $1.3 million. The source of
funds for the payment of the merger consideration, together with an estimated
$225,000 in related expenses, will be Bankers Fidelity's surplus account. The
transaction is scheduled to be completed on April 1, 1996, following approval by
the Bankers Fidelity shareholders.
The Company provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries in
1995 increased approximately $140,000 to $5.6 million. In 1994, these amounts
increased approximately $592,000 to $5.4 million. The Company believes that the
fees and charges to its subsidiaries and, if needed, borrowings from affiliates
will enable the Company to meet liquidity requirements for the foreseeable
future. In addition, the Company has a formal tax-sharing agreement between the
Company and its insurance subsidiaries, and intends to include American
Southern. A net total of $1.4 million was paid to the Company under the tax
sharing agreement in 1995. 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 carryforward which totals
approximately $60.4 million at December 31, 1995. Approximately 93.0% of the
investment assets of the insurance subsidiaries, including American Southern,
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. At December 31, 1995, Georgia Casualty had $6.3 million of
accumulated statutory earnings, Bankers Fidelity had $6.1 million of accumulated
statutory earnings, Atlantic American Life had $1.3 million of accumulated
statutory deficit, and American Southern had $17.0 million of accumulated
statutory earnings. Management is not aware of any current recommendations by
regulatory authorities which, if implemented, would have a material adverse
effect on the Company's liquidity, capital resources or operations.
Net cash provided by operating activities totaled $3.2 million in 1995 compared
to net cash used of $9.8 million in 1994. This improvement in operating cash
flows is due mainly to the payment of $9.1 million by the Casualty Division for
the settlement of certain workers' compensation liabilities in 1994. The Company
incurred a total of $1.1 million of additions to property and equipment in 1995,
which mainly represent leasehold improvements and additions to the new computer
system. The insurance subsidiaries of the Company purchased 285,000 shares of
Leath's common stock for an aggregate $1.0 million in June and July of 1995,
which is reflected in the financial statements as the acquisition of minority
interest. This purchase gave the Company approximately 88% ownership of Leath.
Cash and short-term investments increased from $4.0 million at December 31,
1994, to $15.1 million at December 31, 1995, due to the $3.2 million of cash
provided by operations, net investment proceeds of $5.1 million and the
acquisition of American Southern's cash balance of $5.5 million at December 31,
1995. Total investments (excluding short-term investments) increased to $168.1
million at December 31, 1995 from $96.4 million at December 31, 1994 due
primarily to the purchase of American Southern.
-13-
LIQUIDITY AND CAPITAL RESOURCES - ACQUISITION
On December 31, 1995, the Company acquired all of the outstanding stock of
American Southern for an aggregate purchase price of approximately $34.0
million, consisting of $22.6 million in cash and the execution of a note in
favor of the seller of $11.4 million. In connection with the acquisition, the
Company entered into a Credit Agreement with Wachovia Bank of Georgia, N.A. The
Credit Agreement provides for aggregate borrowings of approximately $34.0
million, of which $22.6 million was immediately drawn on December 31, 1995 to
finance the cash portion of the purchase price. The remaining amount may be
borrowed at any time during 1996 to finance the repayment of the $11.4 million
in debt, which is due October 11, 1996. The Company intends to repay its
obligations under the Credit Agreement using dividend payments received from
American Southern. The Company expects to receive dividends of approximately
$300,000 per month from American Southern.
In connection with entering into the Credit Agreement, the Company agreed to
convert, effective as of December 31, 1995, approximately $13.4 million in
outstanding debt to affiliates into a new series of preferred stock, which will
accrue dividends at 9% per year. The Company does not intend to pay the
cumulative dividends on this preferred stock during 1996.
DEFERRED TAXES
At December 31, 1995, the net cumulative deferred tax liability consists of
$29.0 million of deferred tax assets, offset by $8.9 million of deferred tax
liabilities and a $20.2 million valuation allowance.
The Company's ability to generate the expected amounts of 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 meet its expectation of future taxable income. Therefore, the realization
of the deferred tax assets will be assessed periodically based on the Company's
current and anticipated results of operations.
IMPACT OF INFLATION
Insurance premiums are established before the amount of losses and loss
adjustment expenses, or the extent to which inflation may affect such losses and
expenses, are known. Consequently, the insurance segment attempts, in
establishing its premiums, to anticipate the potential impact of inflation. For
competitive reasons, however, premiums may not be able to be increased to
anticipate inflation, in which event the Company's inflation costs would be
absorbed. Inflation also affects the rate of investment return on the Company's
investment portfolio with a corresponding effect on investment income.
-14-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
ASSETS December 31,
------------
1995 1994
---- ----
Cash, including short-term investments
of $12,498 and $2,498................... $ 15,069 $ 4,016
Investments .............................. 168,117 96,416
Receivables:
Reinsurance............................. 22,467 12,334
Other (net of allowance for doubtful
accounts: $1,260 and $872)............ 18,567 11,385
Deferred acquisition costs................ 14,899 13,553
Other assets.............................. 4,125 3,017
Goodwill.................................. 2,250 -
Net (obligation to) assets of discontinued
operations.............................. (953) 8,019
--------- --------
Total assets.......................... $244,541 $148,740
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds ...... $143,847 $ 88,295
Accounts payable and accrued expenses..... 8,010 4,458
Debt payable ($6,358 and $20,408 due to
affiliates)............................. 44,921 25,002
Minority interest......................... 1,285 963
------- -------
Total liabilities..................... 198,063 118,718
------- -------
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 -
Common stock, $1 par, 30,000,000 shares
authorized; 18,712,167 shares issued
in 1995 and 18,413,942 shares issued
in 1994............................... 18,712 18,414
Additional paid-in capital.............. 46,531 33,289
Accumulated deficit..................... (34,446) (27,452)
Net unrealized investment gains......... 15,589 5,741
Treasury stock, at cost, 32,767 shares
in 1995 and 48 shares in 1994......... (72) -
------- -------
Total shareholders' equity............ 46,478 30,022
------- -------
Total liabilities and shareholders'
equity.............................. $244,541 $148,740
======== ========
The accompanying notes are an integral part of these financial statements.
-15-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Year Ended December 31,
-----------------------
Revenue: 1995 1994 1993
---- ---- ----
Insurance premiums...................... $ 43,373 $ 41,701 $ 40,944
Investment income....................... 6,566 6,628 6,048
Realized investment gains, net ......... 1,731 870 744
--------- --------- ---------
Total revenue......................... 51,670 49,199 47,736
--------- --------- ---------
Benefits and expenses:
Insurance benefits and losses incurred.. 24,689 21,955 25,364
Commissions and underwriting expenses... 15,249 13,355 14,591
Interest expense........................ 2,458 1,968 1,886
Other................................... 6,190 5,404 5,428
--------- --------- ---------
Total benefits and expenses........... 48,586 42,682 47,269
--------- --------- ---------
Income before income tax benefit,
discontinued operations,
extraordinary gain and cumulative
effect of change in accounting
principle for income taxes.......... 3,084 6,517 467
Income tax benefit........................ 34 1,632 989
--------- --------- ---------
Income from continuing operations......... 3,118 8,149 1,456
(Loss) income from discontinued
operations, net......................... (10,094) 1,121 1,543
--------- --------- ---------
(Loss) income before extraordinary
gain and cumulative effect of change
in accounting principle for income
taxes............................... (6,976) 9,270 2,999
Extraordinary gain ....................... - 100 897
--------- --------- ---------
(Loss) income before cumulative effect
of change in accounting principle
for income taxes.................... (6,976) 9,370 3,896
Cumulative effect of change in accounting
principle for income taxes.............. - - (519)
--------- --------- ---------
Net (loss) income before preferred
stock dividends..................... (6,976) 9,370 3,377
Preferred stock dividends................. (315) (315) (315)
--------- --------- ---------
Net (loss) income applicable to
common stock........................ $ (7,291) $ 9,055 $ 3,062
========= ========= =========
Weighted average common shares
outstanding............................. 18,671 18,511 18,476
========= ========= =========
Net (loss) income per common share data:
Continuing operations................... $ .15 $ .43 $ .06
Discontinued operations................. (.54) .06 .09
Extraordinary gain...................... - NIL .05
Cumulative effect of change in
accounting principle for income
taxes................................. - - (.03)
--------- --------- ---------
Net (loss) income .................... $ (.39) $ .49 $ .17
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-16-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Net
Additional Unrealized
Preferred Common Paid-In Accumulated Investment Treasury
Stock(1) Stock Capital Deficit Gains Stock
----------------------------------------------------------
(In Thousands, Except Per Share Data)
Balance, December
31, 1992...... $ 30 $ 18,399 $ 33,915 $ (40,199) $ 9,456 $ -
Net income.... - - - 3,377 - -
Cash dividends
declared on
preferred
stock....... - - (315) - - -
Effect of change
in accounting
principle for
certain invest-
ments in debt
securities... - - - - 1,253 -
Decrease in
unrealized
investment
gains........ - - - - (110) -
------- -------- -------- --------- --------- --------
Balance, December
31, 1993....... 30 18,399 33,600 (36,822) 10,599 -
Net income..... - - - 9,370 - -
Cash dividends
declared on
preferred
stock........ - - (315) - - -
Stock options
exercised.... - 15 4 - - -
Decrease in
unrealized
investment
gains........ - - - - (4,858) -
------- -------- -------- --------- --------- --------
Balance, December
31, 1994....... 30 18,414 33,289 (27,452) 5,741 -
Net loss....... - - - (6,976) - -
Cash dividends
declared on
preferred
stock........ - - (315) - - -
Purchase of 78,148
shares for
treasury..... - - - - - (174)
Issuance of 343,606
shares for employee
benefits and stock
options...... - 298 291 (18) - 102
Conversion of debt
payable to
preferred stock. 134 - 13,266 - - -
Increase in
unrealized invest-
ment gains - - - - 9,848 -
------- -------- -------- --------- --------- --------
Balance, December
31, 1995....... $ 164 $ 18,712 $ 46,531 $ (34,446) $ 15,589 $ (72)
======= ========= ======== ========== ======== =======
(1) Includes Series A and B preferred stock
The accompanying notes are an integral part of these financial statements.
-17-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
(In Thousands, Except per Share Data) 1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net (loss) income................... $ (6,976) $ 9,370 $ 3,377
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Amortization of deferred
acquisition costs............ 3,721 3,008 3,234
Acquisition costs deferred..... (2,985) (2,895) (1,834)
Realized investment gains...... (1,731) (870) (744)
Decrease in reserves........... (1,203) (12,939) (11,387)
Loss (income) from discontinued
operations, net.............. 10,094 (1,121) (1,543)
Depreciation and amortization.. 547 370 230
Deferred income taxes.......... - (1,000) -
Cumulative effect of change
in accounting principle...... - - 519
Minority interest.............. 285 63 59
(Increase) decrease in
receivables, net............. 997 (3,793) 3,135
Extraordinary gain from
extinguishment of debt....... - (100) (897)
Increase in other liabilities.. 177 472 645
Other, net..................... 319 (366) (869)
--------- ---------- ---------
Net cash provided by (used in)
continuing operations...... 3,245 (9,801) (6,075)
--------- ---------- ---------
Net cash (used in) provided by
discontinued operations.... (9,177) 2,291 2,469
--------- ---------- ---------
Net cash used in operating
activities................. (5,932) (7,510) (3,606)
--------- ---------- ---------
Cash flows from investing activities:
Proceeds from investments sold..... 21,027 17,805 16,686
Proceeds from investments matured,
called or redeemed............... 17,004 7,099 5,997
Investments purchased.............. (32,909) (32,514) (39,222)
Acquisition of minority interest... (1,012) - -
Acquisition of American Southern
Insurance Company, net of
$5,497 of cash acquired.......... (17,273) - -
Additions to property and
equipment........................ (1,107) (1,270) (85)
--------- ---------- ---------
Net cash used in continuing
operations................... (14,270) (8,880) (16,624)
--------- ---------- ---------
Net cash used in discontinued
operations................... (2,551) (6,691) (1,984)
--------- ---------- ---------
Net cash used in investing
activities................... (16,821) (15,571) (18,608)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes
payable ......................... - 675 1,500
Proceeds from issuance of bank
financing........................ 22,642 - -
Preferred stock dividends.......... (315) (315) (315)
Proceeds from exercise of stock
options.......................... 600 19 -
Purchase of treasury shares........ (174) - -
Repayments of long-term debt and
notes payable.................... (675) - -
--------- ---------- ---------
Net cash provided by continuing
operations................... 22,078 379 1,185
--------- ---------- ---------
Net cash provided by discontinued
operations................... 9,345 4,303 1,161
--------- ---------- ---------
Net cash provided by financing
activities................... 31,423 4,682 2,346
--------- ---------- ---------
Net increase (decrease) in cash
and cash equivalents......... 8,670 (18,399) (19,868)
--------- ---------- ---------
Cash and cash equivalents at beginning
of year:
Continuing operations.......... 4,016 22,318 43,832
Discontinued operations........ 2,383 2,480 834
--------- ---------- ---------
Total........................ 6,399 24,798 44,666
--------- ---------- ---------
Cash and cash equivalents at end
of year :
Continuing operations.......... 15,069 4,016 22,318
Discontinued operations........ - 2,383 2,480
--------- ---------- ---------
Total........................ $ 15,069 $ 6,399 $ 24,798
========= ========== =========
Supplemental cash flow information:
Cash paid for interest............. $ 3,096 $ 900 $ 2,224
========= ========== =========
Cash paid for income taxes......... $ 128 $ 115 $ -
========= ========== =========
Debt to seller for purchase of
American Southern Insurance
Company.......................... $ 11,352 $ - $ -
========= ========== =========
Long-term debt payable converted
to preferred stock............... $ 13,400 $ - $ -
========= ========== =========
The accompanying notes are an integral part of these financial statements.
-18-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). These
financial statements include the accounts of Atlantic American Corporation (the
"Company") and its majority-owned subsidiaries, including Leath Furniture, Inc.,
which has been reflected as discontinued operations in the accompanying
financial statements (see Note 8). All significant intercompany accounts and
transactions have been eliminated in consolidation and the interests of minority
shareholders have been recognized (see Note 16).
The Company has five insurance subsidiaries which include American Southern
Insurance Company and its wholly owned subsidiary American Safety Insurance
Company (collectively known as "American Southern"), Atlantic American Life
Insurance Company, Bankers Fidelity Life Insurance Company and Georgia Casualty
& Surety Company. American Southern was acquired on December 31, 1995 (see Note
7). Assets and liabilities are not classified, which is in accordance with
insurance industry practice. Certain prior year amounts have been reclassified
to conform to the 1995 presentation.
Premium Revenue and Cost Recognition
Life insurance premiums are recognized as revenues when due, whereas accident
and health premiums are recognized over the premium paying period. Benefits and
expenses are associated with earned premiums so as to result in recognition of
profits over the lives of the contracts in proportion to premiums earned. This
association is accomplished by the provision of a future policy benefits reserve
and the deferral and subsequent amortization of the costs of acquiring business
(principally commissions, advertising and certain issue expenses). Traditional
life insurance and long-duration health insurance deferred policy acquisition
costs are being amortized over the estimated premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. The deferred policy acquisition costs for property and
casualty and short-duration health insurance are amortized over the effective
period of the related insurance policies. Deferred policy acquisition costs are
expensed when such costs are deemed not to be recoverable from the related
unearned premiums and investment income.
Property and casualty insurance premiums are recognized as revenue ratably over
the contract period. The Company provides for insurance benefits and losses on
accident, health, and casualty claims based upon: (a) management's estimate of
ultimate liability and claim adjusters' evaluations for unpaid claims reported
prior to the close of the accounting period, (b) estimates of incurred but not
reported claims based on past experience, and (c) estimates of loss adjustment
expenses. The estimated liability is continually reviewed and updated, and
changes to the estimated liability are recorded in the statement of operations
in the year in which such changes are known.
-19-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill is associated with the acquisition of American Southern and will be
amortized over a 15 year period using the straight-line method. The Company will
periodically evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of goodwill may warrant revision.
When factors indicate that goodwill should be evaluated for possible impairment,
the Company will use an estimate of American Southern's undiscounted income over
the estimated remaining life of the goodwill in measuring whether the goodwill
is recoverable.
Fair Value of Financial Instruments
The fair value of cash, other receivables, short-term investments, bonds, common
and preferred stocks, and mortgage loans was $196,356 and $103,689 at December
31, 1995 and 1994, respectively. Fair values of cash, other receivables and
short-term investments approximate fair value because of the short maturity of
those instruments. Bonds and common and preferred stock fair values were
determined in accordance with methods prescribed by the National Association of
Insurance Commissioners ("NAIC"), which do not differ materially from nationally
quoted market prices. The fair value of certain municipal bonds is assumed to be
equal to amortized cost where no market quotations exist.
The fair values of mortgage loans are estimated based on quoted market prices
for those or similar investments. It is not practicable to estimate the fair
values of policy loans, student loans and investments in limited partnerships
without incurring excessive costs; therefore, no determination of the fair value
of these investments has been made.
The fair value of debt and accounts payable and accrued liabilities was $52,377
and $26,182 at December 31, 1995 and 1994, respectively, of which $6,490 and
$17,819 related to affiliates, respectively. The fair value of short-term debt
payable and accounts payable and accrued liabilities is estimated to be its
carrying value. The fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues, or on the current rates
offered for debt having the same or similar terms, and remaining maturities.
Investments
All of the Company's debt and equity securities are classified as available for
sale and are carried at market value. Mortgage loans, policy and student loans,
and real estate are carried at historical cost. In 1994, investments in limited
partnerships were carried at historical cost. If a decline in the value of a
common stock, preferred stock, or publicly traded bond below its cost or
amortized cost 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.
The cost of securities sold is based on specific identification. Unrealized
gains (losses) in the value of bonds and common and preferred stocks, are
accounted for as a direct increase (decrease) in shareholders' equity and,
accordingly, have no effect on net (loss) income.
Income Taxes
Income taxes are accounted for by the asset/liability approach in accordance
with Statement of Financial Accounting Standards 109 ("SFAS 109"), "Accounting
for Income Taxes". Deferred taxes represent the expected future tax consequences
when the reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax basis of assets
and liabilities and are adjusted for changes in tax laws and tax rates when
those changes are enacted. The provision for income taxes represents the total
of income taxes paid or payable for the current year, plus the change in
deferred taxes during the year.
-20-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net (Loss) Income Per Common Share
Net (loss) income per common share is computed on the basis of the weighted
average number of common shares and common equivalent shares outstanding during
the year applied to net (loss) income after preferred dividends. The weighted
average number of shares outstanding was 18,671,000 in 1995, 18,511,000 in 1994
and 18,476,000 in 1993. The effect of convertible subordinated notes and
convertible preferred stock was anti-dilutive in each of these years.
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
from date of purchase.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, although, in the opinion of management, such differences would not be
significant.
-21-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 2. INVESTMENTS
Investments are comprised of the following:
1995
----
Gross Gross
Carrying Unrealized Unrealized Amortized
Value Gains Losses Cost
--------------------------------------
Bonds:
U. S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies...... $ 70,553 $ 408 $ 19 $ 70,164
Obligations of states and
political subdivisions......... 21,947 6 270 22,211
Corporate securities............. 19,817 386 77 19,508
Mortgage-backed securities
(government guaranteed)........ 996 - 36 1,032
------- -------- -------- ---------
113,313 $ 800 $ 402 $ 112,915
Common and preferred stocks........ 42,116 $ 15,824 $ 633 $ 26,925
Mortgage loans (estimated fair
value of $7,291)................. 6,952
Policy and student loans .......... 5,690
Real estate........................ 46
-------
Investments..................... 168,117
Short-term investments............. 12,498
-------
Total investments............... $180,615
========
1994
----
Gross Gross
Carrying Unrealized Unrealized Amortized
Value Gains Losses Cost
--------------------------------------
Bonds:
U. S. Treasury Securities
and Obligations of U.S.
Government Corporations
and Agencies................... $ 27,674 $ 88 $ 340 $ 27,926
Obligations of states and
political subdivisions......... 3,465 - 421 3,886
Corporate securities............. 18,993 99 782 19,676
Mortgage-backed securities
(government guaranteed)........ 1,343 - 100 1,443
------- -------- -------- ---------
51,475 $ 187 $ 1,643 $ 52,931
Common and preferred stocks ....... 29,571 $ 8,540 $ 1,343 $ 22,374
Mortgage loans (estimated fair
value of $7,242)................. 7,410
Policy and student loans........... 6,867
Investment in limited partnerships. 1,047
Real estate........................ 46
--------
Investments...................... 96,416
Short-term investments............. 2,498
--------
Total investments................ $ 98,914
========
Bonds having an amortized cost of $13,643 and $9,323 were on deposit with
insurance regulatory authorities at December 31, 1995 and 1994, respectively, in
accordance with statutory requirements.
The amortized cost and carrying value of bonds and short-term investments at
December 31, 1995 by contractual maturity are shown below. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
-22-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 2. INVESTMENTS (CONTINUED)
Carrying Amortized
Value Cost
-------- ---------
Due in one year or less................... $ 43,188 $ 43,083
Due after one year through five years..... 32,856 32,929
Due after five years through ten years.... 17,439 17,199
Due after ten years....................... 31,332 31,170
Varying maturities........................ 996 1,032
------- -------
Totals................................. $125,811 $125,413
======== ========
Investment income was earned from the following sources:
1995 1994 1993
---- ---- ----
Bonds....................................... $ 3,549 $ 3,267 $ 2,602
Common and preferred stocks................. 1,205 1,603 1,365
Mortgage loans.............................. 791 722 807
CD's and commercial paper................... 548 604 851
Other....................................... 473 432 423
-------- ------- --------
Total investment income................. 6,566 6,628 6,048
Less investment expenses................ (424) (465) (345)
-------- ------- --------
Net investment income....................... $ 6,142 $ 6,163 $ 5,703
======== ======= ========
A summary of realized investment gains (losses) follows:
1995 1994 1993
---------------------------------------------------------------------
Limited
Partner-
Stocks Bonds ship Total Stocks Bonds Total Stocks Bonds Total
---------------------------------------------------------------------
Gains...$1,743 $ 35 $ 363 $2,141 $1,150 $ 5 $1,155 $1,231 $ 91 $1,322
Losses. (73) (9) - (82) (260) (25) (285) (313) (213) (526)
Write-
downs . (162)(166) - (328) - - - (52) - (52)
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
Total
realized
investment
gains
(losses),
net $1,508 $(140)$ 363 $1,731 $ 890 $(20) $ 870 $ 866 $(122)$ 744
====== ===== ===== ====== ====== ==== ===== ====== ===== ======
Proceeds from the sale of common and preferred stocks, bonds and other
investments are as follows:
1995 1994 1993
---- ---- ----
Common and preferred stocks........ $10,199 $ 9,163 $ 8,197
Bonds.............................. 1,730 - 1,218
Student loans...................... 7,278 7,845 4,794
Other investments.................. 1,820 797 2,477
------- ------- -------
Total proceeds $21,027 $17,805 $16,686
======= ======= =======
The investment which exceeds 10% of shareholders' equity at December 31, 1995
was a common stock investment in the Wachovia Corporation with a carrying value
of $15,185 and a cost basis of $3,475.
The Company's bond portfolio consisted of a total of 99% investment grade
securities at December 31, 1995 as defined by the NAIC.
-23-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 3. INSURANCE RESERVES AND POLICY FUNDS
The following table presents the Company's reserves for life, accident, health
and casualty losses as well as loss adjustment expenses.
Amount of Insurance
in Force
--------
Future policy benefits 1995 1994 1995 1994
---- ---- ---- ----
Life insurance policies
Individual and group life:
Ordinary...................... $ 20,806 $ 19,868 $221,450 $217,018
Mass market................... 9,578 9,852 22,896 24,936
Individual annuities............ 887 997 - -
-------- -------- -------- --------
31,271 30,717 $244,346 $241,954
======== ========
Accident and health insurance
policies........................ 5,034 6,924
-------- --------
36,305 37,641
Unearned premiums................... 24,140 7,740
Losses and claims................... 79,514 40,730
Other policy liabilities............ 3,888 2,184
-------- --------
Total policy liabilities.......... $143,847 $ 88,295
======== ========
Annualized premiums for accident and health insurance policies were $16,595 and
$18,806 at December 31, 1995 and 1994, respectively.
Future Policy Benefits -
Liabilities for life insurance future policy benefits are based upon assumed
future investment yields, mortality rates and withdrawal rates after giving
effect to possible risks of adverse deviation. The assumed mortality and
withdrawal rates are based upon the Company's experiences. The interest rates
assumed for life, accident and health are generally: (i) 2 1/2% to 5 1/2% for
issues prior to 1977, (ii) 7% graded to 5 1/2% for 1977 through 1979 issues,
(iii) 9% for 1980 through 1987 issues, and (iv) 7% for 1988 and later issues.
Morbidity assumptions for hospital indemnity insurance are based on the 1974
hospital and surgical tables and the 1959 DBD tables, while morbidity
assumptions for Medicare supplement insurance are based on industry studies and
the Company's experience. Hospital indemnity mortality and withdrawal
assumptions are based on the Ultimate 65-70 tables and the Linton Lapse tables.
Medicare supplement mortality and withdrawal assumptions are based on Company
experience.
Losses and Claim Reserves -
Until September 30, 1991, the Company participated in the National Workers'
Compensation Reinsurance Pool, which is a national reinsurance fund for policies
allocated to insurers under various states' workers' compensation assigned risk
laws for companies that cannot otherwise obtain coverage. On December 30, 1994,
the Company satisfied its obligation with respect to all outstanding and future
claims associated with the Company's participation for a cash payment of $9,057.
The redundancy in the losses and claims reserves, as a result of its settlement,
of $4,870 reduced the 1994 provision for insurance benefits and losses incurred
by a corresponding amount.
-24-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 3. INSURANCE RESERVES AND POLICY FUNDS (CONTINUED)
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
1995 1994
---- ----
Balance at January 1............................ $40,730 $54,762
Less: Reinsurance recoverables................. (12,334) (11,063)
------- -------
Net balance at January 1...................... 28,396 43,699
------- -------
Incurred related to:
Current year.................................. 17,017 22,900
Prior years................................... 5,364 (3,289)
------- -------
Total incurred................................ 22,381 19,611
------- -------
Paid related to:
Current year.................................. 13,743 14,548
Prior years................................... 8,398 20,366
------- -------
Total paid.................................... 22,141 34,914
------- -------
Reserves acquired due to acquisition, net....... 28,411 -
------- -------
Net balance at December 31...................... 57,047 28,396
Plus: Reinsurance recoverables................. 11,893 12,334
Reinsurance recoverables acquired due
to acquisition......................... 10,574 -
------- -------
Balance at December 31........................... $79,514 $40,730
======= =======
Following is a reconciliation of total incurred claims to total insurance
benefits and losses incurred:
1995 1994
---- ----
Total incurred claims........................... $22,381 $19,611
Cash surrender value and matured endowments..... 975 849
Death benefits.................................. 1,333 1,495
------- -------
Total insurance benefits and losses
incurred................................ $24,689 $21,955
======= =======
-25-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 4. REINSURANCE
In accordance with general practice in the insurance industry, portions of the
life, property and casualty insurance written by the Company are reinsured;
however, the Company remains contingently liable with respect to reinsurance
ceded should any reinsurer be unable to meet its obligations. Approximately 83%
of the reinsurance receivables are due from six reinsurers as of December 31,
1995. In the opinion of management, the Company's reinsurers are financially
stable and allowances for uncollectible amounts are established against
reinsurance receivables, if appropriate. The following table reconciles premiums
written to premiums earned and summarizes the components of insurance benefits
and losses incurred for all of the Company's insurance subsidiaries except
American Southern.
1995 1994 1993
---- ---- ----
Premiums written............. $ 46,773 $ 45,230 $ 42,372
Less - premiums ceded........ (3,037) (2,461) (2,080)
--------- --------- ---------
Net premiums written....... 43,736 42,769 40,292
--------- --------- ---------
Change in unearned premiums (230) (826) 453
Change in unearned premiums ceded (133) (242) 199
--------- --------- ---------
Net change in unearned premiums (363) (1,068) 652
--------- --------- ---------
Net premiums earned........ $ 43,373 $ 41,701 $ 40,944
========= ========= =========
Provision for benefits and
losses incurred $ 25,999 $ 22,923 $ 26,549
Reinsurance loss recoveries... (1,310) (968) (1,185)
--------- ---------- ---------
Insurance benefits and losses
incurred................... $ 24,689 $ 21,955 $ 25,364
========= ========== =========
-26-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 5. INCOME TAXES
During the first quarter of 1993, the Company adopted SFAS 109. The Company
recorded a cumulative catch-up charge due to the adoption of SFAS 109 in the
amount of $519. Prior to the implementation of SFAS 109, the Company accounted
for income taxes using Accounting Principles Board Opinion No. 11.
The Company files a consolidated federal income tax return with its insurance
and furniture subsidiaries, excluding American Southern. Beginning in 1996,
American Southern will be incorporated into the consolidated tax return.
A reconciliation of the differences between income taxes on income before
discontinued operations and extraordinary item, computed at the federal
statutory income tax rate is as follows:
1995 1994 1993
---- ---- ----
Federal income tax provision at statutory
rate of 35%.............................. $ 1,079 $ 2,281 $ 163
Tax exempt interest and
dividends received deductions............ (391) (431) (339)
Increase in net deferred tax assets from
1993 tax rate change..................... - - (693)
Reduction of deferred taxes................ - (1,000) -
Changes in asset valuation allowance:
Utilization of net operating loss........ (731) (2,622) (823)
Increase due to 1993 tax rate change..... - - 693
Alternative minimum tax.................... 9 140 10
-------- -------- --------
(Benefit) for income taxes from
continuing operations................ (34) (1,632) (989)
Provision for income taxes from
discontinued operations.............. - 1,086 1,049
-------- -------- --------
Total (benefit) provision for
income taxes................... $ (34) $ (546) $ 60
======== ======== ========
Deferred tax liabilities and assets at December 31, 1995 and 1994 are comprised
of the following:
Tax Effect Tax Effect
---------- ----------
1995 1994 1995 1994
---- ---- ---- ----
Deferred tax Deferred tax
liabilities: assets:
Deferred Net Operating
acquisition loss carry-
costs........ $(3,416) $(2,871) forwards....$ 21,129 $ 20,360
Net unrealized Insurance
investment reserves.... 7,466 5,204
gains........ $(5,456) $(2,009) Bad Debts..... 441 211
------- ------- ------- --------
Total deferred Total
tax deferred
liablities $(8,872) $(4,880) tax assets 29,036 25,775
======= ======= ------- --------
Asset valuation
allowance....(20,164) (20,895)
-------- --------
Net deferred
tax assets..$ - $ -
======== =========
-27-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 5. INCOME TAXES (CONTINUED)
The components of the (benefit) provision are:
1995 1994 1993
---- ---- ----
Continuing operations
Current:
Federal.................................. $ (34) $ (632) $ (989)
Deferred:
Federal.................................. - (1,000) -
Discontinued operations
Current:
Federal.................................. - 816 1,049
State.................................... - 270 -
------ ------ ------
Total.................................. $ (34) $ (546) $ 60
====== ====== ======
The Internal Revenue Service ("IRS") examined the 1983 and 1984 federal income
tax returns of the Company, and the Company entered into litigation with the IRS
regarding claims for additional taxes related primarily to intercompany
reinsurance transactions. In 1994, the Company reached a favorable settlement
with the IRS on all disputed matters, and there was an expiration of a time
limitation with respect to another potential tax liability. The settlement with
the IRS resulted in no tax payments by the Company and, accordingly, the
deferred tax reserves were reduced by $1,000. Subsequent to the settlement of
the tax case, in 1995 the Company paid interest of $202 related to the above tax
case.
At December 31, 1995, the Company has regular tax loss carryforwards of
approximately $60,369 expiring generally between 2000 and 2009.
The Company has determined, based on its earnings history, that an asset
valuation allowance of $20,164 should be established against its net deferred
tax assets at December 31, 1995. The Company's asset valuation allowance changed
by $731 during 1995, due primarily to the addition of tax net operating loss
carryforwards. The Company has a formal tax-sharing agreement with each of its
subsidiaries, excluding American Southern. Beginning in 1996, American Southern
will be incorporated into the formal tax-sharing agreement.
-28-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 6. CREDIT ARRANGEMENTS
1995 1994
---- ----
Arrangements with affiliates
9% notes payable; callable after
April 15, 1995................................ $ - $ 675
Notes payable with payment of $3,000 in
2001 and final payment of $2,300 in
2002 (weighted average interest rate of
9-1/2% and 9-1/4% at December 31,
1995 and 1994, respectively).................. 5,300 18,700
----- ------
Total affiliated arrangements.............. $ 5,300 $ 19,375
======= ========
Arrangements with non-affiliates
8% Convertible subordinated notes due
May 15, 1997 ( $1,058 and $1,033 held by
affiliates at December 31, 1995 and 1994,
respectively)................................. $ 5,627 $ 5,627
Note payable to bank at prime (8 1/2%) due
December 31, 2000............................. 22,642 -
Note payable to seller at prime (8 1/2%)
and accrued interest due October 11, 1996..... 11,352 -
------- -------
Total non-affiliated arrangements.......... $39,621 $ 5,627
======= =======
Total arrangements
Due within one year............................. $13,352 $ 675
======= =======
Long-term debt.................................. $31,569 $24,327
======= =======
The 8% convertible subordinated notes are convertible into an aggregate of
514,000 shares of common stock at a price of $10.94 per share. The notes are
redeemable at the Company's option at declining premiums until May 15, 1997.
The note payable to bank at prime rate due December 31, 2000 is payable in two
semi-annual payments of $1,000 in 1996 and four quarterly payments of $1,000 in
1997 through 2000 with the balance due at maturity. Interest is paid quarterly
in arrears.
The note payable to seller at prime due October 11, 1996 was executed upon the
acquisition of American Southern and is scheduled to be paid off with an
additional advance with the same bank as the note due December 31, 2000. The
rate on the advance will be prime plus 0.5%, but will return to prime if the
Company repays an amount equal to or greater than $4,000 on or before January
31, 1997. Currently, 50% of the interes on the note to seller is payable
quarterly in arrears and the remaining 50% is due October 11, 1996. The Company
is required t o maintain certain ratios as it relates to funded debt to
consolidated total capitalization, cash flow to debt service, as well as comply
with limitations on capital expenditures and debt obligations. The Company was
in compliance with all of the covenants associated with the debt payable to bank
at December 31, 1995.
Maturities
The Company's principal payments on credit arrangements outstanding at December
31, 1995 over the next five years are as follows:
Year Amount
---- ------
1996 $13,352
1997 9,627
1998 4,000
1999 4,000
2000 8,642
-29-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 7. ACQUISITION OF AMERICAN SOUTHERN INSURANCE COMPANY
On December 31, 1995, the Company acquired a 100% ownership interest in American
Southern for approximately $34,000 ($22,648 in cash and a note to seller of
$11,352). Accordingly, the balance sheet of American Southern has been included
in the accompanying financial statements; however, the results of operations
have been excluded. American Southern is a 59 year old company headquartered in
Atlanta, operating as a multi-line property and casualty company primarily
engaged in the sale of state and municipality automobile insurance.
The acquisition has been accounted for as a purchase transaction and,
accordingly, the purchase price was allocated to assets and liabilities based on
their estimated fair values as of the date of acquisition. The excess of the
consideration paid over the estimated fair values of net assets acquired in the
amount of $2,250 has been recorded as goodwill to be amortized on the
straight-line basis over 15 years.
The following unaudited pro forma summary combines the consolidated results of
operations of the Company and American Southern as if the acquisition had taken
place at the beginning of the following periods after giving effect to certain
adjustments. These adjustments include adjustments to increase interest expense
on funds used by the Company to purchase American Southern, the amortization of
goodwill, a reduction in American Southern's income tax expense due to the
Company's intercompany tax sharing agreement and give effect to the conversion
of $13.4 million in debt into 134,000 shares of Series B Preferred Stock (see
Note 11). This pro forma information is not necessarily indicative of the
financial position or results of operations that would have occurred had the
acquisition taken place at the beginning of the periods.
1995 1994
---- ----
Revenue........................................ $ 95,855 $ 90,040
========= ========
Net (loss) income:
Continuing operations....................... $ 6,865 $ 12,889
Discontinued operations..................... (10,094) 1,121
Extraordinary gain.......................... - 100
---------- --------
Net (loss) income........................ $ (3,229) $ 14,110
========== ========
Net (loss) income per common share data:
Continuing operations....................... $ .29 $ .62
Discontinued operations..................... (.54) .06
---------- --------
Net (loss) income........................ $ (.25) $ .68
========== ========
In connection with the acquisition of American Southern, the following assets
and liabilities where acquired:
1995
----
Cash, short-term investments and investments. $ 72,414
Receivables, net............................. 16,716
Deferred acquisition costs................... 2,082
Goodwill..................................... 2,250
Other assets................................. 901
------
Total assets.............................. 94,363
------
Unearned premiums............................ 16,170
Losses and claims............................ 38,985
Short-term debt.............................. 11,352
Other policy liabilities..................... 1,600
Other payables............................... 3,374
--------
Total liabilities......................... 71,481
--------
Net assets................................... $ 22,882
========
-30-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 8. DISCONTINUED OPERATIONS
Subsequent to year end, the Company announced its intent to sell its
approximately 88% interest in Leath Furniture, Inc. ("Leath"), a retail
furniture chain. Accordingly, the consolidated financial statements have been
adjusted to separately report the net assets and operating results of these
discontinued operations. The Company is in the process of negotiating an
agreement for the sale of such interest to a related party, and expects to
complete the sale during the first half of 1996. Any gain from this transaction
will be recorded as a direct credit to additional paid-in capital.
The following results of operations and financial position are attributable to
discontinued operations:
1995 1994 1993
---- ---- ----
Results of Operations:
Net sales...................................... $113,265 $117,554 $116,155
======== ======== ========
(Loss) income from discontinued operations..... $ (6,656) $ 1,121 $ 1,543
Provision for discontinued operations.......... (3,438) - -
-------- -------- --------
Net (loss) income from discontinued operations. $(10,094) $ 1,121 $ 1,543
======== ======== ========
(Loss) income per share from discontinued
operations................................... $ (.54) $ .06 $ .09
======== ======== ========
Financial Position:
Merchandise inventory.......................... $ 26,089 $ 25,008
Property and equipment, net.................... 21,655 21,459
Goodwill....................................... 9,304 10,483
Other assets................................... 8,447 7,774
Total liabilities.............................. (66,448) (56,705)
------- -------
Net assets of discontinued operations............ $ (953) $ 8,019
======== ========
The provision for discontinued operations of $3.4 million includes losses from
the measurement date until the anticipated disposal date.
-31-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are party to litigation occurring in the normal
course of business. In the opinion of management, such litigation will not have
a material adverse effect on the Company's financial position or results of
operations.
Operating Lease Commitments
The Company's rental expense, including common area charges, for operating
leases was $1,013, $1,080 and $1,126 in 1995, 1994 and 1993, respectively. The
Company's future minimum lease obligations under non-cancelable operating leases
are as follows:
Year Ending
December 31,
------------
1996.............. $ 878
1997.............. 874
1998.............. 864
1999.............. 848
2000.............. 672
2001 and Beyond... 1,876
------
Total............. $6,012
======
NOTE 10. EMPLOYEE BENEFIT PLANS
Stock Options At December 31, 1995, the Company has two stock-based compensation
plans. In 1992, the shareholders approved the Company's adoption of the 1992
Incentive Plan ("1992 Plan"). The 1992 Plan originally provided for a maximum of
400,000 stock options subject to issuance. The 1992 Plan was amended in 1995,
subject to Shareholder approval at the 1996 Annual Meeting, to provide for an
additional 400,000 stock options. Prior to the 1992 Plan, the shareholders had
approved the Company's 1987 Stock Option Plan ("1987 Plan") providing for a
maximum of 500,000 options subject to issuance. This plan expires in 1997. Since
the inception of the 1992 Plan, no options have been or will be granted under
the 1987 Plan. These two stock option plans provide that options of common stock
of the Company may be granted at an option price to be not less than 85% to 100%
of the fair market value of the shares on the date of grant. Options granted
under these plans expire five years from date of grant. Vesting occurs at 50%
upon issuance of an option, and the remaining portion is vested at 25% in each
of the following two years.
The following is a summary of stock option information for the Company's stock
option plans:
1995 1994
---- ----
Options outstanding, beginning of year........ 745,442 612,500
Options granted............................... 125,000 152,500
Options exercised ($1.00-$2.125).............. (309,651) (14,558)
Options canceled or expired ($1.00-$2.125).... (130,650) (5,000)
--------- --------
Options outstanding, end of year.............. 430,141 745,442
========= ========
Option price range per share.................. $1.00-$2.50 $.969-$2.125
Options exercisable........................... 333,766 664,942
Options available for grant................... 389,750 98,500
401(k) Plan
The Company initiated an employees' savings plan under Section 401(k) of the
Internal Revenue Code in May of 1995. The plan covers substantially all the
Company's employees, except employees of American Southern. The Company
previously had a profit sharing plan for its employees. The plan was
subsequently amended and restated for 401(k) provisions. Under the plan,
employees generally may elect to exclude up to 16% of their compensation from
amounts subject to income tax as a salary deferral contribution. The Company
makes a matching contribution to each employee in an amount equal to 50% of the
first 6% of such contributions. The Company's matching contribution to the plan
which is in Company stock was approximately $72 in 1995.
-32-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 11. PREFERRED STOCK
Annual dividends on the Series A Convertible Preferred Stock ("Series A
Preferred Stock") are $10.50 per share and are cumulative. The Series A
Preferred Stock is convertible into approximately 752,000 shares of the
Company's common stock at a conversion price of $3.99 per share and is
redeemable at the Company's option at declining premiums until March 15, 1997
and thereafter at $100 per share, plus unpaid dividends.
As part of the American Southern acquisition and effective December 31,
1995, the Company issued 134,000 shares of Series B Preferred Stock ("Series B
Preferred Stock") having a stated value of $100 per share. Annual dividends to
be paid are $9.00 per share and are cumulative. The Series B Preferred Stock is
not currently convertible, but may become convertible into shares of the
Company's common stock under certain circumstances. In such event, the Series B
Preferred Stock would be convertible into an aggregate of approximately
3,358,000 shares of the common stock at a conversion ratio of $3.99 per share.
The Series B Preferred Stock is redeemable at the option of the Company.
-33-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 12. STATUTORY REPORTING
The assets, liabilities and results of operations 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 SAP and GAAP are that under statutory accounting: (i)
certain assets that are nonadmitted assets are eliminated from the balance
sheet; (ii) acquisition costs for policies are expensed as incurred, while they
are deferred and amortized over the estimated life of the policies under GAAP;
(iii) no provision is made for deferred income taxes; (iv) the timing of
establishing certain reserves is different than under GAAP; (v) certain notes
are considered surplus rather than debt; (vi) valuation allowances are
established against investments; and (vii) goodwill is limited to 10% of an
insurer's surplus, subject to a ten year amortization period.
The amount of statutory net income (excluding American Southern) and surplus
(shareholders' equity) for the insurance subsidiaries (including American
Southern's surplus for 1995 only) for the years ended December 31 were as
follows:
1995 1994 1993
---- ---- ----
Life and Health............................. $ 3,021 $ 2,643 $ 2,585
Property and Casualty....................... 1,466 5,091 967
------- ------- -------
Net income................................ $ 4,487 $ 7,734 $ 3,552
======= ======= =======
Life and Health............................. $24,724 $19,858 $18,131
Property and Casualty....................... 38,995 9,663 5,740
------- ------- -------
Surplus................................... $63,719 $29,521 $23,871
======= ======= =======
Under the Insurance Code of the State of Georgia, dividend payments to the
Company by its insurance subsidiaries have certain limitations without the prior
approval of the Insurance Commissioner. In 1996, dividend payments by the
insurance companies in excess of $7.5 million would require prior approval. The
Company received dividends of $2,864 and $972 in 1995 and 1993, respectively. No
dividends were paid in 1994. As of December 31, 1995 and 1994, the life and
health insurance subsidiaries and the property and casualty subsidiaries must
individually maintain minimum statutory capital and surplus of $3,000.
For statutory purposes, in April of 1994, the property and casualty subsidiary
received permission from the Georgia Insurance Department to (1) close out its
accumulated deficit in its unassigned funds account, (2) have the Company
contribute its remaining $11.2 million in Surplus Notes to capital, and (3) in
the future to pay up to the maximum dividends allowed under the applicable
regulations. This transaction in effect was a statutory recapitalization of the
casualty subsidiary.
-34-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 13. RELATED PARTY AND OTHER TRANSACTIONS
In the normal course of business, and in management's opinion at terms
comparable to those available from unrelated parties, the Company has engaged in
transactions with its Chairman and his affiliates. These transactions include
leasing of office space, investing and financing. A brief description of each of
these is discussed below.
The Company leases approximately 65,500 square feet of office and covered garage
space from an affiliated company. In the years ended December 31, 1995, 1994 and
1993, the Company paid $960, $1,044 and $1,071, respectively, under the lease.
A majority of the financing of the Company has historically been through
affiliates of the Company or its Chairman, in the form of debt and the Series A
Preferred Stock. Effective December 31, 1995, the Company issued 134,000
shares of Series B Preferred Stock in exchange for cancellation of approximately
$13.4 million in outstanding debt to the Company's Chairman and certain of his
affiliates (see Note 11).
The Company has mortgage loans to finance properties owned by its discontinued
furniture subsidiary. At December 31, 1995 and 1994, the balance of mortgage
loans owed to various of the Company's insurance subsidiaries was $6,400 and
$6,756, respectively. For 1995, 1994, and 1993, interest on the mortgage loans
totaled $730, $650, and $644, respectively.
Certain members of management are on the Board of Directors of Bull Run
Corporation and Gray Communications Systems, Inc. At December 31, 1995 and 1994,
the Company owned 600,000 and 0, respectively, of the common shares outstanding
of Bull Run Corporation and 236,040 and 147,360, respectively of the common
shares outstanding of Gray Communications Systems, Inc.
-35-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 14. SEGMENT INFORMATION
The following summary sets forth the Company's business segments by revenue,
(loss) income before income tax benefit, discontinued operations, extraordinary
gain and cumulative effect of change in accounting principle (exclusive of
American Southern) and assets (inclusive of American Southern for 1995 only).
The Company, after discontinuation of its furniture segment, operates in three
segments: Property and Casualty Insurance, Life Insurance, and Accident and
Health Insurance.
Adjustments
Property Accident and
and and Discontinued Elimi- Consoli-
Casualty Life Health Operations Other nations dated
--------------------------------------------------------------
Revenue
1995...........$ 21,532 $12,435 $18,508 $ - $ 2 $ (807) $ 51,670
1994........... 17,808 11,225 20,745 - 2 (581) 49,199
1993........... 16,114 9,529 23,295 - (49) (1,153) 47,736
(Loss) income
before income
tax benefit,
discontinued
operations,
extraordinary
gain and
cumulative
effect of
change in
accounting
principle for
income taxes
1995........... 2,353 2,033 1,025 - (2,419) 92 3,084
1994........... 5,880 1,199 1,100 - (1,783) 121 6,517
1993........... (268) 752 1,274 - (1,291) - 467
Assets
1995........... 150,505 71,532 19,603 (953) 3,854 - 244,541
1994........... 53,462 61,703 22,339 8,019 3,217 - 148,740
1993........... 61,166 60,484 26,281 4,921 1,857 113 154,822
Capital expenditures were $1,107, $1,270, and $85 in 1995, 1994, and 1993,
respectively.
-36-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
NOTE 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth a summary of the quarterly unaudited results of
operations for the two years ended December 31, 1995:
1995 1994
--------------------------------- -----------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter(1)
--------------------------------- -----------------------------------
Revenue.. $11,911 $12,772 $13,588 $13,399 $11,474 $12,071 $12,462 $13,192
Income:
Income
before
income
tax
(expense)
benefit,
net... $ 228 $ 723 $ 1,207 $ 926 $ 16 $ 413 $ 692 $ 5,396
Income
tax
(expense)
benefit,
net.. (9) - - 43 582(2) 896(2) 165 (11)
------- ------ ------- ------- ------- ------- ------ -------
Continuing
operations 219 723 1,207 969 598 1,309 857 5,385
Discontin-
ued opera-
tions 225 (3,205) (1,404) (5,710)(3) 663 127 (252) 583
------- ------- ------- ------- ------- ------- ------- -------
Income
(loss)
before
extra-
ordinary
gain 444 (2,482) (197) (4,741) 1,261 1,436 605 5,968
Extra-
ordinary
gain - - - - - - 100 -
------- ------- ------- ------- ------- ------- ------- -------
Net
income
(loss) $ 444 $(2,482)$ (197) $(4,741) $ 1,261 $1,436 $ 705 $ 5,968
======= ======== ======= ======= ======= ======= ======== =======
Per common
share data:
Contin-
uing
Opera-
tions $ .01 $ .03 $ .06 $ .05 $ .02 $ .06 $ .04 $ .31
Discon-
tinued
Opera-
tions .01 (.17) (.07) (.30) .04 .01 (.01) .02
------- ------- ------- ------- ------- ------- ------- -------
Net
income
(loss)$ .02 $ (.14)$ (.01) $ (.25) $ .06 $ .07 $ .03 $ .33
======= ======= ======== ======== ======= ====== ======= =======
(1) The fourth quarter of 1994 includes a reserve redundancy of $4,870 for the
settlement of a block of workers' compensation insurance business.
(2) Income tax benefit net, includes $350 and $650, in the first and second
quarter of 1994, respectively for settlement of a tax case and expiration
of a time limitation with respect to another potential tax liability.
(3) Includes provision for discontinued operations of $3,438 (see Note 8).
NOTE 16. SUBSEQUENT EVENT
On January 5, 1996, the Company entered into an agreement with Bankers Fidelity
and a newly formed wholly-owned subsidiary of the Company, pursuant to which the
Company will acquire the remaining publicly-held interest in Bankers Fidelity
that the Company does not own. The transaction will be completed through the
merger of the newly formed subsidiary into Bankers Fidelity, with Bankers
Fidelity being the surviving corporation in the merger. As a result of the
merger, the shareholders of Bankers Fidelity, other than the Company, will
receive $6.25 in cash per share, for an aggregate payout of approximately $1.3
million. The transaction is scheduled to be completed on April 1, 1996,
following approval by the Bankers Fidelity shareholders.
-37-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
MARKET INFORMATION
The common stock of the Company is traded in the over-the-counter market and is
quoted on the NASDAQ National Market under the symbol "AAME". As of March 8,
1996, the Company had approximately 6,880 stockholders, including beneficial
owners holding shares in nominee or "street" name. The following tables show for
the periods indicated the range of the reported high and low prices of the
common stock on the NASDAQ National Market and the closing price of the stock
and percent of change at December 31. No common stock dividends have been paid
since 1988.
1995 1994
---- ----
High Low High Low
---------- ----------
First quarter....................... $2 3/4 $2 $2 5/8 $1 3/4
Second quarter...................... 2 1/2 2 2 7/16 1 7/8
Third quarter....................... 2 7/8 1 7/8 2 1/4 1 7/8
Fourth quarter...................... 3 2 1/8 2 1/4 1 3/4
1992 1993 1994 1995
---- ---- ---- ----
December 31, stock price close per share $1 5/8 $1 3/4 $2 1/4 $2 5/16
Stock price percentage of change.... +116% +8% +28.6% +2.8%
-38-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands, Except Per Share Data)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Atlantic American Corporation:
We have audited the accompanying consolidated balance sheets of Atlantic
American Corporation (a Georgia corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 audits. We did not audit the consolidated
balance sheet of American Southern Insurance Company, which statements reflect
total assets of 39% of the consolidated assets. That balance sheet was audited
by other auditors whose report has been furnished to us and our opinion, insofar
as it relates to the amounts included for that entity, is based solely on the
report of the other auditors.
We conducted our audits 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 audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on the audits and the report of other auditors, the
financial statements (pages 15 through 37) referred to above present fairly, in
all material respects, the financial position of Atlantic American Corporation
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 15, 1996
-39-
SUBSIDIARIES
Atlantic American Life Insurance Company
Bankers Fidelity Life Insurance Company
J. MACK ROBINSON
Chairman
EUGENE CHOATE
President
HILTON H. HOWELL, JR.
Executive Vice President
JOHN W. HANCOCK
Senior Vice President & Treasurer
ANTHONY D. CHAPMAN
Vice President & Chief Marketing Officer, Agency Division
ROBERT E. OREAN
Vice President & Actuary
SHARON A. BUSCH
Assistant Vice President
PATRICIA F. MAYNE
Assistant Treasurer
JANIE L. RYAN
Assistant Secretary
GAIL T. ARNOLD
Assistant Secretary
Georgia Casualty & Surety Company
J. MACK ROBINSON
Chairman & President
HILTON H. HOWELL, JR.
Executive Vice President
LINDA COOK
Vice President, Secretary & Treasurer
GEORGE G. CLEMENTS
Vice President, Claims
SANDRA W. DOAR
Vice President, Underwriting
JANIE L. RYAN
Assistant Secretary
American Southern Insurance Company
American Safety Insurance Company
ROY S. THOMPSON, JR.
Chairman
CALVIN L. WALL
Vice Chairman & CEO
SCOTT G. THOMPSON
President & CFO
THOMAS J. WHITTY
Senior Vice President, Claims
DAVID I. WEEKS
General Vice President
WANDA J. HULSEY
Vice President, Underwriting
BRIAN G. HAURYLAK
Vice President
JOHN R. HUOT
Vice President
GLENDA N. BATES
Treasurer
GAIL A. PARSONS
Secretary & Assistant Vice President
ERNEST E. GRANT, JR.
Assistant Vice President
WILLIAM E. LYNCH
Assistant Vice President
BRIAN C. MOSS
Assistant Vice President
MICHAEL D. WINSTON
Assistant Vice President
TERESA P. GANN
Assistant Secretary
-40-
SHAREHOLDER INFORMATION
ANNUAL MEETING
Atlantic American's annual meeting of shareholders will be held on Tuesday, May
7, 1996, at 9:00 a.m. in the Peachtree Insurance Center, 4370 Peachtree Road,
N.E., Atlanta, Georgia. Holders of common stock of record at the close of
business on March 8, 1996, are entitled to vote at the meeting. A notice of
meeting, proxy statement and proxy were mailed to shareholders with this annual
report.
Independent Accountants
Arthur Andersen LLP
Atlanta, Georgia
Legal Counsel
Jones, Day, Reavis & Pogue
Atlanta, Georgia
Stock Exchange Listing
Symbol: AAME
Traded over-the-counter market
Quoted on the NASDAQ National
Market
Transfer Agent and Registrar
Atlantic American Corporation
Attn.: Janie L. Ryan, Corporate Secretary
P. O. Box 190720
Atlanta, Georgia 31119-0720
1 (800) 241-1439 or (404) 266-5532
Form 10-K and Other Information For investors and others seeking additional data
regarding Atlantic American Corporation or copies of the Corporation's annual
report to the Securities and Exchange Commission (Form 10-K), please contact
Janie L. Ryan Corporate Secretary, 1 (800) 241-1439 or (404) 266-5532.
-41-
Atlantic
American
Corporation
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319-3000
Telephone: 404-266-5500
Telecopier: 404-266-5596
404-266-5699
-42-