SCHEDULE 14 C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Definitive Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14c-5(d)(2)
FORTUNE NATIONAL CORPORATION
(Name of Registrant As Specified In Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14c-5(g)
[X] Fee computed on table below per Exchange Act Rules 14c-5(g)
and 0-11.
1) Title of each class of securities to which transaction
applies:
Acap Corporation Common Stock, par value $.10
2) Aggregate number of securities to which transaction
applies:
5,421
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined):
$310 (average of bid and ask price on March 21, 1996)
4) Proposed maximum aggregate value of transaction:
$1,680,510
5) Total fee paid:
$336.10
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, schedule or registration statement no.:
3) Filing party:
4) Date filed:
FORTUNE NATIONAL CORPORATION
10555 Richmond Avenue
Houston, Texas 77042
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 26, 1996
To Our Stockholders:
The Annual Meeting of Stockholders of Fortune National Corporation (the
"Company") will be held Monday, August 26, 1996, at 8:00 a.m., local time,
at the offices of the Company, 10555 Richmond Avenue, Houston, Texas.
The purposes of the meeting are:
1. To consider a proposal to adopt a plan of dissolution and liquidation;
2. To elect a Board of Directors to serve for the ensuing year; and
3. To act upon such other matters as may properly come before the meeting
or any adjournment thereof.
Holders of the Company's Common Stock of record at the close of business on
July 22, 1996, are entitled to receive notice of and to vote at the
meeting.
The accompanying Information Statement is furnished on behalf of the Board
of Directors of the Company to provide notice of the Company's Annual
Meeting of Stockholders.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
For the Board of Directors
Paul L. Clancy
Secretary
August 5, 1996
<PAGE>
TABLE OF CONTENTS
1. General Information . . . . . . . . . . . . . . . . . . . . . . . 1
2. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Proposal to Dissolve and Liquidate the Company . . . . . . . . . . 1
3.1 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3.1.1 Plan of Dissolution and Liquidation . . . . . . . . . . 1
3.1.2 Assets to be Distributed . . . . . . . . . . . . . . . 1
3.1.3 Fractional Share Interests . . . . . . . . . . . . . . 1
3.1.4 Liquidation Record Date . . . . . . . . . . . . . . . . 2
3.1.5 Tax Consequences . . . . . . . . . . . . . . . . . . . 2
3.1.6 Appraisal Rights . . . . . . . . . . . . . . . . . . . 2
3.1.7 Vote Required and Recommendation of the Board . . . . . 2
3.1.8 Principal Executive Offices . . . . . . . . . . . . . . 2
3.1.9 Qualifications and Assumptions . . . . . . . . . . . . 2
3.2 Plan of Dissolution and Liquidation . . . . . . . . . . . . . 2
3.2.1 Background . . . . . . . . . . . . . . . . . . . . . . 2
3.2.2 Terms of the Plan . . . . . . . . . . . . . . . . . . . 3
3.2.3 Odd Lot Shares . . . . . . . . . . . . . . . . . . . . 4
3.2.4 Reasons for Dissolution and Liquidation . . . . . . . . 5
3.2.5 Alternatives Considered . . . . . . . . . . . . . . . . 5
3.2.6 Effects of the Liquidation . . . . . . . . . . . . . . 6
3.2.7 The Company and Acap . . . . . . . . . . . . . . . . . 7
3.2.8 Description of the Company's Common Stock . . . . . . . 7
3.2.9 Description of Acap Common Stock . . . . . . . . . . . 8
3.2.10 Description of Acap Preferred Stock . . . . . . . . . . 8
3.2.11 Description of Acap Loan . . . . . . . . . . . . . . . 9
3.2.12 Market for the Company's Common Stock . . . . . . . . . 10
3.2.13 Market for Acap's Common Stock . . . . . . . . . . . . 10
3.2.14 Determination of the Cash Purchase/Sale Price for Odd
Lot Shares . . . . . . . . . . . . . . . . . . . . . . 11
3.2.15 Vote Required and Recommendation of the Board . . . . . 12
3.2.16 Federal Income Tax Consequences . . . . . . . . . . . . 12
3.2.17 Government Regulatory Approvals . . . . . . . . . . . . 12
3.2.18 No Appraisal or Dissenter's Rights . . . . . . . . . . 13
3.2.19 No Fairness Opinion . . . . . . . . . . . . . . . . . . 13
3.2.20 Conflict of Interest . . . . . . . . . . . . . . . . . 13
3.2.21 Approval of Liquidation is Assured . . . . . . . . . . 13
3.2.22 Legal Proceedings . . . . . . . . . . . . . . . . . . . 13
3.2.23 Legal Opinion . . . . . . . . . . . . . . . . . . . . . 13
3.2.24 Potential Liability of Stockholders Subsequent to
Liquidation . . . . . . . . . . . . . . . . . . . . . . 13
3.2.25 Incorporation of Certain Documents by Reference . . . . 14
4. Election of Directors . . . . . . . . . . . . . . . . . . . . . . 14
5. Meetings and Committees of the Board . . . . . . . . . . . . . . . 14
6. Security Ownership of Certain Owners . . . . . . . . . . . . . . . 14
7. Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . 15
8. Security Ownership of Management . . . . . . . . . . . . . . . . . 16
9. Beneficial Ownership Reporting . . . . . . . . . . . . . . . . . . 17
10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 18
11. Certain Relationships and Related Transactions . . . . . . . . . . 18
12. Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . 19
13. Quorum for Meeting . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
FORTUNE NATIONAL CORPORATION
10555 Richmond Avenue
Houston, Texas 77042
INFORMATION STATEMENT
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY
1. GENERAL INFORMATION
------------------------
This Information Statement is furnished on behalf of the Board of Directors
of Fortune National Corporation (the "Company" or "Fortune") to provide
notice of the Company's Annual Meeting of Stockholders ("Meeting") to be
held Monday, August 26, 1996, at 8:00 a.m., local time, at the offices of
the Company, 10555 Richmond Avenue, Houston, Texas. This Information
Statement is first being sent or given to stockholders of the Company on or
about August 5, 1996.
2. VOTING
----------
The common stock, $1 par value (the "Common Stock"), of the Company is the
only outstanding class of voting security of the Company. Only
stockholders of record at the close of business on July 22, 1996, the
record date, are entitled to vote at the Annual Meeting. As of the record
date, there were 2,616,984 shares of Common Stock outstanding (excluding
shares held by the Company's subsidiaries, which are not voted) and
approximately 1,494 holders of the Common Stock. Each share of the
Company's Common Stock is entitled to one vote.
3. PROPOSAL TO DISSOLVE AND LIQUIDATE THE COMPANY
--------------------------------------------------
3.1 SUMMARY
This Summary is qualified by the more detailed information set forth
elsewhere in this Information Statement which should be read in its
entirety.
3.1.1 PLAN OF DISSOLUTION AND LIQUIDATION
On March 25, 1996, the Board of Directors of the Company unanimously
approved and adopted a plan of dissolution and liquidation ("Plan of
Liquidation" or "Plan") and directed that the Plan be submitted to a vote
of the Company's stockholders ("Stockholders") at the Annual Stockholder
Meeting to be held on [to come], 1996. A copy of the Plan of Liquidation
is attached hereto as Exhibit A. As more fully set forth in the Plan, the
Plan provides that, if approved by its Stockholders, the Company will be
liquidated and dissolved ("Liquidation").
3.1.2 ASSETS TO BE DISTRIBUTED
Except for a relatively small amount of cash ($2,200 at December 31, 1995),
the Company's assets consist solely of 5,421 shares of common stock ("Acap
Common Stock") of its majority-owned subsidiary, Acap Corporation, a
Delaware corporation ("Acap"). As of the record date, there were 2,859,768
shares of the Company's common stock ("Fortune Common Stock" or "Company's
Common Stock") outstanding (including 242,784 shares held by Acap and its
subsidiary) which shares are entitled, upon Liquidation, to receive, pro
rata, the assets of the Company, namely, the 5,421 shares of Acap Common
Stock. Thus, Company stockholders will receive one share of Acap Common
Stock for each 528 shares of Company Common Stock (2,859,768 shares of
issued Company Common Stock divided by the 5,421 shares of Acap Common
Stock owned by the Company.
3.1.3 FRACTIONAL SHARE INTERESTS
As further provided in the Plan, no fractional shares of Acap Common Stock
will be issued. Within certain limitations defined in the Plan, Company
Stockholders who, as a result of the Liquidation, have odd lot shares (as
defined in the Plan), have the option of either receiving cash in the
amount of 31 cents per odd lot share or of purchasing additional shares of
the Company's Common Stock at 31 cents per share to round up to the number
of shares of Fortune Common Stock to be entitled to one share of Acap
Common Stock. See "Odd Lot Shares."
3.1.4 LIQUIDATION RECORD DATE
The record date for determining stockholders of record for purposes of the
distribution of assets pursuant to the Liquidation is July 22, 1996.
3.1.5 TAX CONSEQUENCES
The receipt by Stockholders of their distributive share of the assets of
the Company pursuant to the Plan will be a taxable transaction pursuant to
section 331 of the Internal Revenue Code of 1986, as amended, and each
Stockholder will recognize gain or loss, provided that such Stockholder has
held the Company's Common Stock as a capital asset, equal to the difference
between the value of the distribution received by such Stockholder and the
Stockholder's adjusted tax basis in the shares. See "Federal Income Tax
Consequences."
3.1.6 APPRAISAL RIGHTS
There are no appraisal, dissenter's or similar rights available to the
Company's Stockholders as a result of the Liquidation.
3.1.7 VOTE REQUIRED AND RECOMMENDATION OF THE BOARD
Under the laws of Pennsylvania, the Company's state of domicile, the
affirmative vote of the holders of a majority of the outstanding shares of
the common stock of the Company is necessary for the approval of the
proposed Liquidation. The Board of Directors recommends a vote FOR the
Liquidation. InsCap Corporation, the owner of approximately 63.4% of the
outstanding common stock of the Company, plans to vote for the approval of
the proposed Liquidation, thereby assuring the Liquidation will be
approved.
3.1.8 PRINCIPAL EXECUTIVE OFFICES
The address of the principal executive offices of both the Company and Acap
is 10555 Richmond Avenue, Houston, Texas 77042. The telephone number for
both the Company and Acap is (713) 974-2242.
3.1.9 QUALIFICATIONS AND ASSUMPTIONS
Included in this Information Statement are statements which are based upon
the assumption that no Stockholders elect to round up their odd lot shares.
This Information Statement also includes statements based upon the
assumption that no holder of Acap Preferred Stock elects to exchange such
stock for Fortune Common Stock (see "Description of Acap Preferred Stock").
To the extent that some Stockholders elect to round up their odd lot shares
or Acap Preferred Stock is exchanged for Fortune Common Stock, these
statements will differ from the actual events. Further, the number of
Stockholders of the Company reported in this Information Statement is based
on the number of holders of record. This understates the number of
beneficial Stockholders of the Company to the extent that each securities
clearing agency or broker shown as a holder of record holds the stock for a
number of beneficial owners. Also, except as otherwise noted, the bid and
asked prices for the Company's and Acap's Common Stock used in this
Information Statement are prices quoted by market makers which reflect
inter-dealer transactions and do not include retail mark-ups and mark-downs
or any commission to the parties involved. As such, the prices may not
reflect prices in actual transactions.
3.2 PLAN OF DISSOLUTION AND LIQUIDATION
3.2.1 BACKGROUND
Fortune was organized in 1971 to be a holding company for Fortune National
Life Insurance Company ("Fortune National Life"). In 1984, Fortune
acquired a majority ownership of American Capitol Insurance Company
("American Capitol"), a Texas domiciled life insurance company, the stock
of which was traded over-the-counter. Acap was formed as a holding company
in 1985 whereby American Capitol stockholders became stockholders of Acap,
American Capitol became a wholly owned subsidiary of Acap, and Acap became
a majority-owned subsidiary of Fortune. Fortune National Life was merged
into American Capitol in 1986. Neither Acap nor Fortune has had any
business purpose or activities except to hold and manage the stock it owned
in its subsidiary. Management has from time to time reviewed the
possibility of the consolidation of Acap and Fortune so that one holding
company would serve as the holding company for American Capitol, resulting
in the adoption of the Plan of Liquidation on March 25, 1996, by Fortune's
Board of Directors.
3.2.2 TERMS OF THE PLAN
The Plan provides essentially for two things: (1) the payment of all
expenses and debts of Fortune, and (2) the distribution of the only
remaining asset, the Acap Common Stock, to the Stockholders of the Fortune
Common Stock.
Fortune has no debts except as the same relate to the expenses of operating
the Company from January 1, 1996, through the period when all of its
obligations are discharged, including the process of distributing the Acap
Common Stock to its Stockholders. These expenses are estimated to be as
follows:
Stock transfer fees $ 2,800
Preparation and mailing of stockholder reports 6,000
Legal fees 7,000
Franchise taxes 300
Service fees 1,250
Miscellaneous 1,000
------
Total $19,350
At December 31, 1995, Fortune's cash asset consisted of $2,200. To obtain
additional cash in order to pay the expenses indicated above, the Plan
provides for an agreement by the Company to sell to Acap 55,323 shares of
its authorized but unissued common stock at the price of 31 cents per share
(the same price involved in the buying and selling of shares of Fortune
Common Stock in instances in which a Fortune Stockholder owns odd lot
shares of the Company's Common Stock. See "Odd Lot Shares" below). Having
as objectives (a) fixing an exact amount for the cost of operating the
Company through the liquidation process and (b) fixing an exact, and
relatively brief, timetable for completing the process so far as the
Company is concerned, Acap, upon purchasing the Fortune common stock as
aforesaid, agreed to render all of the services necessary to discharge
Fortune's obligations that would otherwise run to the end of the
liquidation process.
In order to fix an exact, and relatively brief, period for completing the
distribution of its assets, the Plan provides for an agreement between the
Company and Acap whereby Acap will assume, as Distributing Agent, the
responsibility for (a) distributing the Acap Common Stock to Fortune
Stockholders and (b) buying or selling, as the case may be, the odd lot
shares resulting from the Liquidation (see "Odd Lot Shares" below). The
distribution process is expected to take a number of months, if not a few
years, and it is not possible to predict the exact amount of time, which
will depend upon the pace at which Fortune Stockholders take the steps to
comply with the procedure for exchanging their Fortune Common Stock for
their distributive shares of Fortune's assets. By making the arrangement
with Acap to administer the distribution process, Fortune will make a
single transfer of the Acap Common Stock to Acap as Distributing Agent.
This will enable Fortune to comply with applicable Pennsylvania laws to
qualify the Company for relatively prompt dissolution, which will terminate
its existence sooner rather than later, and thereby eliminate any expenses
associated with a protracted period of administering the liquidation
process. See the copy of the Plan attached hereto as Appendix A for the
details of the agreement between the Company and Acap.
The Board of Directors considers the terms of the Plan described above to
be fair to the Company Stockholders and to the Company. In considering the
fairness of the Plan as aforesaid, the Board considered the interest of
its officers and directors (i.e., that some of the officers and directors
are also Company Stockholders or have options on Company Common Stock).
Section 3.2.4 below entitled "Reasons for Dissolution and Liquidation"
discusses the factors which were the bases for the Board's determination to
recommend the Liquidation. Based on these factors, in the Board's opinion,
the interest of the Company's officers and directors are not in conflict
with the interest of the Company and the Company Stockholders, and
therefore was not a material factor. Also, such reasons present the
factors considered by the Board in its determination that the terms of the
Plan are fair to the Company Stockholders and to the Company. The factors
considered by the Board in determining that the Plan is fair to the Company
Stockholders and to the Company can be discussed in two parts. The first
has to do with the distribution "in kind" of the assets of the Company.
The assets consist of the Acap Common Stock, the common stock of a
publicly-traded company having market characteristics that are quite
similar to the market characteristics of the Company's market (see "Market
for the Company's Common Stock" and "Market for Acap's Common Stock"
below). Company Stockholders will hold Acap Common Stock instead of the
Company Common Stock. The Board believes that the change in position as to
which stock the Company Stockholder will own is essential neutral.
Accordingly, the Board considered that the Plan is fair to the Company
Stockholders because they will have essentially the same position relative
to the business enterprise following the Liquidation that they occupied
prior to the Liquidation, except that they will own directly the Acap
Common Stock which they own indirectly prior to the Liquidation. The
second part of the fairness discussion has to do with the price established
by the Board for the odd lot shares. The Board considered various possible
ways to determine a fair price for the odd lot shares (see "Determination
of the Cash Purchase/Sale Price for Odd Lot Shares" below) and selected the
standard of the average of the closing daily bid and asked quotations from
market makers in the Company's Common Stock from January 1, 1996 to March
25, 1996. The Board also considered that the only stock that would be
involved in the odd lot sales would be small amounts, not exceeding 527
shares (and generally much less) per transaction. Finally, in determining
that the treatment of the odd lot shares in the Plan was fair to the
Company Stockholders, the Board gave much weight to the fact that no
Company Stockholder would be forced to sell his odd lot shares (whether at
the established price or otherwise) because he or she has the option of buy
or sell his/her Company Common Stock at exactly the same price, i. e.,
he/she could sell his/her odd lot shares at the quoted price or he/she
could buy the number of shares needed by him/her to "round up" to 528
shares required to receive one share of Acap Common Stock (see "Odd Lot
Shares" below"), and no brokerage or other transaction fee is involved in
either case.
3.2.3 ODD LOT SHARES
In order to distribute the 5,421 shares of Acap Common Stock to the
Stockholders, it was necessary to determine the number of shares of the
Company's Common Stock required to receive one share of Acap Common Stock
(determined by dividing the number of outstanding shares of Fortune Common
Stock by the number of shares of Acap Common Stock distributable to the
Company's Stockholders upon liquidation). The result is that for each 528
shares of Fortune Common Stock held by a Company Stockholder, such
Stockholder will receive one share of Acap Common Stock.
A Stockholder who owns 527 shares of Fortune Common Stock or less ("odd lot
shares"), or a Stockholder who has shares "left over" after dividing the
total number of shares of Fortune Common Stock owned by him/her by 528
("odd lot shares"), will have two options in respect to such odd lot
shares: to receive cash for the odd lot shares or to purchase additional
Fortune Common Stock so as to increase his or her odd lot shares so that
the total will then equal 528 shares. The record date for determining
stockholders of record for purposes of the distribution of assets pursuant
to the Liquidation and for making the election as aforesaid is July 22,
1996.
As set forth in the Plan to be voted on at the August 26, 1996 Stockholder
meeting, a Stockholder who elects to receive cash will be paid 31 cents per
share for his or her odd lot shares. Similarly, a Stockholder who elects
to "round up" his or her odd lot shares to 528 shares of Fortune Common
Stock may do so by purchasing on or prior to September 26, 1996, the
requisite number of shares of Fortune Common Stock at the same price of 31
cents per share (subject to its availability, as explained below).
The cash to purchase odd lot shares from Fortune Stockholders as aforesaid
will be provided by an arrangement with Acap whereby Acap has agreed to
purchase such shares, and in turn to sell such shares as may be needed to
meet the requests of Stockholders who elect to round up (subject to the
availability of such shares, as explained below).
The cash price of 31 cents per share is the average of the closing daily
bid and asked quotations from market makers in the Company's Common Stock
for the period from January 1, 1996 to March 25, 1996, the date upon which
the Board of Directors approved the Liquidation and such action was
publicly announced. (See "Market for the Company's Common Stock.")
A Stockholder who elects to purchase additional shares in order to "round
up" to 528 shares as aforesaid must tender his or her shares of Fortune
Common Stock, along with the payment necessary to round up his or her
holdings, to be received by the Company prior to 5:00 P.M., Houston time,
on September 26, 1996. Otherwise, such Stockholder will be deemed to have
elected to receive cash for his or her odd lot shares, as described above.
Enclosed is a transmittal letter with instructions to be used by Fortune
Stockholders to deliver their stock certificates (to be accompanied by a
check in the case of Stockholders electing to round up), to receive their
respective shares of the distribution of Fortune's assets.
Fortune Common Stock available to Stockholders who elect to round up will
be limited because such stock will be available only from odd lot shares
sold by other Stockholders who elect to receive cash in exchange for odd
lot shares. Accordingly, such stock will be available to Stockholders
desiring to round up their holdings on a "first-come, first-served" basis.
As elections are received from Stockholders desiring to round up their
holdings, odd lot shares surrendered by other Stockholders will be "matched
up" with the odd lot shares needed to provide whole shares of Acap Common
Stock to Stockholders desiring to round up. To the extent that odd lot
shares surrendered by Stockholders are not sufficient to cover the number
of odd lot shares needed to provide whole shares of Acap Common Stock to
all Stockholders desiring to round up, those Stockholders who are not
"matched up" with surrendered odd lot shares will instead receive cash in
exchange for their odd lot shares. However, it is anticipated that
adequate shares will be available for Stockholders desiring to round up.
IN CONNECTION WITH THE DECISION OF WHETHER TO TAKE CASH IN EXCHANGE FOR ODD
LOT SHARES OR TO ROUND UP ODD LOT SHARES, STOCKHOLDERS ARE ENCOURAGED TO
REVIEW THE INFORMATION CONTAINED IN THIS NOTICE, WHICH INCLUDES THE
FOLLOWING: (1) THIS INFORMATION STATEMENT, (2) BOTH THE COMPANY'S AND
ACAP'S ANNUAL REPORTS AND FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1995, AND (3) BOTH THE COMPANY'S AND ACAP'S QUARTERLY REPORTS
FOR THE QUARTER ENDING MARCH 31, 1996.
IN VIEW OF THE FACT THAT STOCKHOLDER APPROVAL OF THE PROPOSAL TO LIQUIDATE
AND DISSOLVE THE COMPANY IS ASSURED, STOCKHOLDERS SHOULD IMMEDIATELY REVIEW
THE TIMETABLE FOR MAKING THE ELECTION AS TO WHETHER TO ROUND UP OR RECEIVE
CASH FOR THEIR ODD LOT SHARES. STOCKHOLDERS WHO MAKE THE ELECTION TO
RECEIVE CASH FOR THEIR ODD LOT SHARES, OR STOCKHOLDERS WHO MAKE NO ELECTION
PRIOR TO 5:00 P.M., HOUSTON TIME, SEPTEMBER 26, 1996, WILL RECEIVE CASH FOR
THEIR ODD LOT SHARES. IN ANY CASE, TO RECEIVE THE DISTRIBUTION OF CASH
AND/OR SHARES OF ACAP COMMON STOCK TO WHICH A STOCKHOLDER IS ENTITLED, SUCH
STOCKHOLDER MUST FOLLOW THE INSTRUCTIONS ACCOMPANYING THE ENCLOSED
TRANSMITTAL LETTER AND SUBMIT HIS/HER SHARES OF FORTUNE COMMON STOCK IN
ACCORDANCE THEREWITH.
In deciding that fractional shares of the Acap Common Stock would not be
issued, the Board noted that the purchase of odd lot shares by the Company
will allow (but not require) Stockholders owning only a few shares of the
Company's Common Stock to dispose of their stock easily and without having
to pay brokerage commissions. Such commissions on a sale of a few shares
of stock trading in a range between $.06 to $.56 per share (the average
daily closing bid and asked prices during 1996 prior to March 25, 1996)
could equal or exceed the market value of the shares involved. The Board
of Directors believes that the relatively small financial investment in the
Company by those Stockholders owning fewer than 528 shares of Fortune
Common Stock limit those Stockholders' opportunities to realize the value
of their shares through market transactions. Small lots of stock often
sell poorly, with numerous Stockholders frozen into very small investment
positions from which they can extricate themselves only with the payment of
a brokerage fee that will sharply decrease or even eliminate the actual per
share value of the stock to the small stockholder. In this regard, the
Board noted that those Stockholders owning fewer than 528 shares of Fortune
Common Stock each represent over 81% of the Company's Stockholders and hold
shares with an average aggregate market value, based on the average daily
closing bid price during 1996 up to March 25, 1996, of less than $164 each.
The Board also noted that Stockholders owning "odd lots" of Fortune Common
Stock are not required to sell their stock for cash but instead may elect
to "round up" by purchasing additional Fortune Common Stock, as described
above, so that he or she may receive exclusively Acap Common Stock as
his/her distributive share of the Company's assets.
3.2.4 REASONS FOR DISSOLUTION AND LIQUIDATION
The principal reason for the Liquidation is to eliminate costs associated
with maintaining the Company. As noted below, since the ownership of the
operating company by the Stockholders is indirect and there is no separate
business reason for the Company's existence, the expense of maintaining the
Company can be viewed as an unnecessary expense. Such expense amounts to
approximately $30,000 per year, including, but not limited to, costs such
as franchise taxes, audit and accounting fees and costs of annual,
quarterly and periodic reporting requirements to the Securities and
Exchange Commission and related legal fees and costs. Further, the Company
does not have any reliable source of funds with which to pay the
maintenance expenses and would need to rely on sales of its authorized but
unissued common stock at prices that are difficult to set because the
likely potential purchasers are related parties.
The Board also considered other factors. First, the only significant asset
owned by the Company is Acap Common Stock, and the liquidation of the
Company in effect places in the hands of the Company's Stockholders a
direct ownership, pro rata, of the asset which they already own indirectly.
Second, the sole business of the Company is to hold, indirectly, operating
companies which are life insurance companies, which is also the sole
business of Acap Corporation, except that Acap Corporation holds the
operating companies directly.
3.2.5 ALTERNATIVES CONSIDERED
In lieu of a Liquidation, the Board of Directors also considered proposing
a merger of the Company with Acap Corporation but concluded that the result
would be essentially the same, i.e., placing in the hands of the Company's
Stockholders shares of Acap Corporation. Since a merger would involve
votes by both the stockholders of the Company and Acap, whereas the
Liquidation only requires the vote of the Company's stockholders, the Board
decided to pursue the Liquidation as the more efficient option. The Board
of Directors also considered whether to sell the Acap Common Stock it owns
but recognized that InsCap Corporation, the Company's majority stockholder,
does not intend to sell the shares of Fortune Common Stock it owns or to
approve the sale by the Company of the Acap Common Stock owned by the
Company. Therefore, whether or not the sale of the Acap Common Stock would
be desirable, it was not a viable alternative available to the Board of
Directors for consideration. Apart from InsCap's position, if the Company
were to offer the Acap Common Stock for sale, it is likely that the Company
could find a buyer and it is likely that the price per share would be
higher than the market price of the Acap Common Stock to be received by the
Company Stockholders as a result of the Liquidation. Such sale would
involve sufficient shares of Acap to constitute control, and also would
involve pricing considerations that are different from the factors that
determine the over-the-counter price of Acap Common Stock (see "Market for
Acap's Common Stock" below). Since no offer for the Acap Common Stock was
sought and no offer has been received, it is not possible to reliably
compare the price that would be obtained from a buyer of the Acap Common
Stock if it were offered for sale with the over-the-counter price of the
Acap Common Stock. If such sale were made, instead of receiving his or her
pro rata shares of Acap Common Stock (plus the established price for any
odd lot shares involved), a Stockholder would receive his or her pro rata
share of the cash proceeds, which might well exceed in value the market
value of the Acap Common Stock (plus the cash received for any odd lot
shares involved). Such a sale would terminate the Company Stockholder's
interest in the business enterprise, which is not the objective sought by
the Board in recommending the Liquidation of the Company. However, in any
case, as stated above, the alternative of offering the Acap Common Stock
for sale was not available to the Board of Directors for consideration
because such a sale would constitute the sale of all or substantially all
of the Company's assets, in which case under applicable (Pennsylvania) law,
the sale cannot occur without the approval by the holders of a majority of
the Company's outstanding common stock (which is held by InsCap). Each
member of InsCap's Board of Directors has expressed that he would not be in
favor of authorizing InsCap to vote in favor of the sale of the Acap Common
Stock by the Company, if the Company were to present the question to a
meeting of the Company's stockholders. For the above stated reasons, the
Company's Board of Directors concluded that putting the question of whether
or not to sell the Acap Common Stock, as an alternative to Liquidation,
would be a futile activity. The Company's Board of Directors also
considered the fact that a sale of the Acap Common Stock by the Company
would be, in effect, a cessation of the "business enterprise" which is a
corporate action that would represent a fundamental change in the position
of the Company Stockholders, compared to the Liquidation that results in
relatively little change in the Company Stockholder's position (see "Terms
of the Plan" above). Also, in like manner, the alternative of selling the
Company was not considered by the Board, based on the recognition that such
a sale would require the approval of InsCap which approval, according to
InsCap, would not be granted. Thus, none of the alternatives to the
liquidation considered by the Board represented viable options since they
would require approval by a majority of the outstanding shares and InsCap,
a controlling stockholder, would not vote in favor of any of the
alternatives to the Liquidation.
3.2.6 EFFECTS OF THE LIQUIDATION
The principal effects of the Liquidation will be to place the ownership of
the ultimate operating company more directly in the hands of the Company's
Stockholders, thus eliminating most of the expenses associated with the
maintenance of the Company while preserving for the Stockholders of the
Company a stockholder relationship with the same business enterprise.
Voting rights and other stockholder rights of the Company Stockholders who
receive cash for their odd lot shares will be terminated in respect to
those shares. Company Stockholders who receive Acap Common Stock, thereby
becoming stockholders of Acap, will have the voting rights and other rights
of the holders of Acap Common Stock (see "Description of Acap Common
Stock"). All shares of Acap Common Stock received by Company Stockholders
distributed in connection with the Liquidation will be transferrable
without restriction under the Securities Act of 1933, as amended, except
that affiliates (as defined in Rule 144 under such Act) of the Company will
be subject to restrictions on the resale of the Acap Common Stock.
The effect of the Liquidation on the market price of the Acap Common Stock,
the stock to be distributed to the Company's Stockholders, and the trading
environment for the Acap Common Stock, cannot be accurately predicted by
the Company at this time. The market price of the Acap Common Stock
following the Liquidation will depend on how the market views the
transaction and its effect upon the operations and outlook of Acap. For
instance, it is possible that (1) the firms currently acting as market
makers in the Acap Common Stock will decide not to act as market makers in
the Acap Common Stock and (2) that Acap will not be able to obtain and/or
maintain one or more market makers for the Acap Common Stock. If such
circumstances were to occur, the Acap Common Stock would no longer be
reported on the National Association of Securities Dealers, Inc. electronic
bulletin board (see "Market for Acap Common Stock" below) and the
mechanisms available to the Acap Common Stock stockholders to find buyers
for their stock would be limited. On the other hand, it is possible that
the increase in the number of Acap stockholders resulting from the
Liquidation will contribute to a more favorable trading environment with a
larger degree of liquidity and an enhanced prospect for maintaining one or
more market makers for the Acap Common Stock. Please see the enclosed 1995
Annual Report to Acap stockholders for information regarding the number of
Acap stockholders, the number of Acap shares outstanding, the high and low
prices for Acap shares for the past two years, as well as other information
regarding Acap. Assuming no stockholders elect to round up, the number of
Acap stockholders will increase approximately from 610 to 884 as a result
of the Liquidation.
While Acap currently accounts for the Fortune Common Stock owned by Acap
and its subsidiary as an invested asset, the Acap Common Stock that Acap
and its subsidiary receive in connection with the Liquidation will be
accounted for as treasury stock of Acap. Based solely on this factor,
Acap's stockholders' equity will decrease approximately $65,890. However,
its book value per common share will increase from $518.01 to approximately
$539.35 (based on December 31, 1995) and the number of shares of Acap
Common Stock outstanding will decrease from 8,516 to 8,057. Assuming that
Acap is not required to purchase any odd lot shares (i.e., the number of
odd lot shares purchased by Fortune stockholders rounding up exactly
matches the number of odd lot shares tendered for cash), the Liquidation
will have no other effect on Acap's stockholders' equity, book value per
common share or number of shares of common stock outstanding. Assuming
that no Fortune stockholders elect to round up odd lot shares and Acap is
required to purchase all of the odd lot shares, Acap will account for the
Acap Common Stock it receives related to such odd lot shares as a part of
the liquidating distribution as treasury shares. As a result, Acap's
stockholders' equity will decrease approximately $144,784. However, its
book value per common share will increase from $518.01 to approximately
$563.62 (based on December 31, 1995) and the number of shares of common
stock outstanding will decrease from 8,516 to 7,570. The decrease in the
number of outstanding shares under this scenario also means that the
percentage ownership of each remaining stockholder of Acap will increase by
approximately 12%. As a result, InsCap Corporation's ownership of Acap
will be approximately 42%. Since the Liquidation will reduce the number of
outstanding shares of Acap Common Stock, the Liquidation is anti-dilutive
to Acap.
The Liquidation gives Stockholders owning fewer than 528 shares of Common
Stock and electing to receive cash in exchange for odd lot shares the
opportunity, which cannot be predicted to re-occur, to sell their stock at
a price related to current market prices of the Fortune Common Stock
without incurring the cost of a broker's commission. However, such
Stockholders will not have the opportunity to participate in the future
growth, if any, in the business enterprise that the Company and Acap have
in common unless they subsequently acquire stock in Acap in the open market
or otherwise.
3.2.7 THE COMPANY AND ACAP
Both Acap and the Company were organized for a similar purpose, and have
pursued business plans entirely in keeping with such purpose, that is, to
act as a "holding company" of an operating insurance company. The Company
was organized in 1971 under the Business Corporate Law of the State of
Pennsylvania for the purpose of acting as a holding company for an existing
Pennsylvania domiciled life insurance company, Fortune National Life. Acap
was organized in 1985 under the General Corporation Laws of the State of
Delaware for the purpose of acting as a holding company for an existing
Texas domiciled life insurance company, American Capitol. As a result of
an acquisition of a majority interest in American Capitol in 1983, followed
by a corporate reorganization when Acap was organized, Fortune became the
holding company of Acap, which was the holding company for American
Capitol, into which Fortune National Life was merged. See "Background"
above.
Both Acap and the Company are engaged in the life, health and accident
insurance business through a commonly owned subsidiary, American Capitol,
which was organized in 1954 under the laws of the State of Texas. American
Capitol is licensed to conduct the life insurance business in 34 states and
the District of Columbia. Fortune owns 63.7% of Acap which owns 100% of
American Capitol.
3.2.8 DESCRIPTION OF THE COMPANY'S COMMON STOCK
As of the record date, there were 2,859,768 shares of the Company's Common
Stock issued and outstanding (including 242,784 shares of the Company's
Common Stock held by the Company's subsidiaries, Acap and American
Capitol), and the Company has no other classes of common stock issued or
outstanding. (The above mentioned shares of the Company's Common Stock
owned by the Company's subsidiaries will not be voted at the Meeting in
keeping with the Company's practice of not voting the subsidiary stock it
controls, but are eligible to participate in the Liquidation.) Dividends
as may be determined by the Board of Directors of the Company may be
declared and paid on the Company's Common Stock from time to time out of
any funds legally available therefor. The Company has not declared or paid
any dividend on its common stock in recent years and, if the liquidation
were not to occur, would not expect to declare or pay any dividend on its
common stock in the foreseeable future. Holders of the Company's Common
Stock are entitled to one vote for each share held at all meetings of
stockholders. In the event of the dissolution, liquidation and winding up
of the affairs of the Company, the Company's Common Stock is entitled to
receive pro rata the assets of the Company remaining after satisfaction of
corporate liabilities. The holders of the Company's Common Stock have no
preemptive rights, cumulative voting rights or subscription rights.
The approximate number of holders of record of the Company's Common Stock
as of the record date was 1,494. The Company declared no common stock
dividends in 1994 or 1995. At present, management anticipates that no
dividends will be declared or paid with respect to Fortune Common Stock
during 1996.
For further information concerning the Company's Common Stock, see "Market
for the Company's Common Stock" below.
3.2.9 DESCRIPTION OF ACAP COMMON STOCK
As of the record date, there were 8,516 shares of Acap Common Stock
outstanding (including 241 shares held by the Company's subsidiary,
American Capitol), and 74,000 shares of Acap Preferred Stock (see
"Description of Acap Preferred Stock" immediately following). Acap has no
other classes of stock issued or outstanding. Except for restrictions on
the payment of dividends in connection with a loan obtained by Acap, and
except for the prior rights of the holders of Acap Preferred Stock, both of
which are discussed below, such dividends as may be determined by the Board
of Directors of Acap may be declared and paid on the Acap Common Stock from
time to time out of any funds legally available therefor. Acap has not
declared or paid any dividend on its common stock since its formation in
1985 and does not expect to declare or pay any dividend on its common stock
in the foreseeable future.
Under the terms of a Loan Agreement dated January 31, 1995 between Acap and
Central National Bank (see "Description of Acap Loan" below), pursuant to
which Acap obtained a loan of $1,500,000, Acap is prohibited from paying
any dividends with respect to its outstanding common stock until the
payment in full of such loan. The proceeds of such loan were used by Acap
to purchase a Surplus Debenture in the amount of $1,500,000 from American
Capitol (which funds were used by American Capitol to replenish its surplus
following certain acquisitions of other life insurance companies in 1994).
In addition, payment of dividends with respect to Acap Common Stock is
subject to the prior rights of Acap's Cumulative Exchangeable Series A
Preferred Stock (the "Acap Preferred Stock"), 74,000 shares of which are
issued and outstanding. See "Description of Acap Preferred Stock" below.
Holders of the Acap Common Stock are entitled to one vote for each share
held at all meetings of stockholders. In the event of the dissolution,
liquidation and winding up of the affairs of Acap, the Acap Common Stock is
entitled to receive pro rata the assets of Acap remaining after
satisfaction of corporate liabilities and the prior rights of the Acap
Preferred Stock. The holders of Acap Common Stock have no preemptive
rights, cumulative voting rights or subscription rights. The Acap Common
Stock to be distributed to Fortune stockholders upon Fortune's liquidation
will be fully paid and nonassessable.
The approximate number of holders of record of Acap Common Stock as of the
record date was 610. Following the completion of the liquidation, there
will be approximately 884 holders of Acap Common Stock (assuming that no
Fortune stockholders elect to round up). Acap declared no common stock
dividends in 1994 or 1995. At present, management anticipates that no
dividends will be declared or paid with respect to Acap Common Stock during
1996.
For further information concerning the Acap Common Stock, see "Market for
Acap's Common Stock" below.
3.2.10 DESCRIPTION OF ACAP PREFERRED STOCK
As of the record date, there were 74,000 shares of Acap "Cumulative
Exchangeable Preferred Stock, Series, A, $2.50 (Adjustable)" outstanding
("Acap Preferred Stock").
Holders of Acap Preferred Stock are entitled to receive each year out of
funds legally available therefor cumulative dividends in cash of $2.50 per
share, which $2.50 amount is subject to adjustment based upon changes in
the prime rate of interest in effect at Mellon Bank, Pittsburgh,
Pennsylvania. No interest is paid in respect of any dividend which is not
paid on the date due.
All or any part of the shares of Acap Preferred Stock may be redeemed by
Acap at any time at the fixed redemption price of $27.50 per share plus
accrued and unpaid dividends. No redemption of all or any part of such
shares is allowed, however, which would reduce Acap's assets below the
amount needed to pay its debts and known liabilities. Upon the
liquidation, dissolution or winding up of Acap, holders of Acap Preferred
Stock are entitled to receive, prior to any distribution to the holders of
Acap Common Stock, $27.50 per share plus accrued and unpaid dividends, and
no more. There are no accrued and unpaid dividends in respect to the Acap
Preferred Stock at this time and, for the foreseeable future, Acap expects
to be able to pay dividends on the Acap Preferred Stock as the same become
payable, subject to declaration by Acap's Board of Directors. However, the
funds needed to be able to continue to pay dividends on the Acap Preferred
Stock are derived from dividends paid to Acap by its subsidiary, American
Capitol. The payment of dividends by American Capitol, as a life insurance
company, is subject to regulatory restrictions. Further, Acap's Loan
Agreement (see "Description of Acap Loan" below) places certain
restrictions on American Capitol regarding the dividends that it may pay to
Acap, although, in the absence of any breach of a covenant or failure to
meet applicable performance thresholds, it generally contemplates the
continuation of the payment by American Capitol of sufficient dividends to
fund Acap's cash needs, including payment of dividends on Acap Preferred
Stock.
The Acap Preferred Stock has no voting rights except, in the event of
default in the payment of dividends for six quarterly dividend periods, the
holders of such stock shall have general voting rights of one vote per
share, as well as the right to elect two directors of Acap, in addition to
the directors to be elected by holders of other shares of Acap stock. Such
voting rights and the tenure of such two directors terminate upon the
payment of dividends in arrears.
Effective May 16, 1989, the shares of Acap Preferred Stock became
exchangeable at the option of the holders thereof into fully paid and
nonassessable shares of the Company's Common Stock. The exchange of any
such Acap Preferred Stock for the Company's Common Stock would be based
upon an exchange ratio of $27.50 per share plus accrued and unpaid
dividends for the Acap Preferred Stock and $2.50 per share for the
Company's Common Stock (the per share price set for the Company's Common
Stock for the purpose of the exchange ratio). Under an exchange agreement
between Acap and the Company, the Company is obligated to provide Acap with
such shares of the Company's Common Stock as are necessary for Acap to meet
its obligation under the Acap Preferred Stock. The exchange agreement
provides that Acap's payment to Fortune for the Fortune Common Stock would
consist of shares of Acap Common Stock of equal value to the Fortune Common
Stock received. The right of exchange is provided in a "Certificate of
Designation of Preferred Stock" ("Designation") adopted by Acap's Board of
Directors prior to the issuance of the Acap Preferred Stock, which sets
forth the rights and obligations pertaining to the Acap Preferred Stock.
Among other things, the Designation provides that the exchange ratio would
be adjusted to correspond with any increase or decrease in the Company's
Common Stock resulting from stock splits, stock dividends, etc. There have
been no occasions to adjust the exchange ratio. The Designation does not
provide for adjusting the exchange right in the event the Fortune Common
Stock no longer exists because of the dissolution and liquidation of
Fortune.
Except for the fact that the exchange right will no longer exist as a
result of the consummation of the Liquidation, there will be no change in
the rights that the holders of the Acap Preferred Stock will have as a
result of the Company's Liquidation. The holders of the Acap Preferred
Stock have the right, prior to the Liquidation, to exercise their exchange
right, as stated above, but the Company's Board of Directors is of the
opinion that no holder of Acap Preferred Stock is at all likely to exercise
his or her exchange right because of the obvious financial disadvantage.
That is, considering that the Acap Preferred Stock pays a dividend that is
adjustable quarterly to equal, in effect, two (2) percentage points over
the prime rate of a major Pittsburgh bank, and that Acap is current in the
payment of dividends on Acap Preferred Stock, and that the liquidation
value of the Acap Preferred Stock is $27.50 per share, and the value of the
Fortune Common Stock (at an exchange ratio of 11 shares for one share of
Acap Preferred Stock) would need to be at least $2.50 per share to match
the liquidation value of the Acap Preferred Stock. In the opinion of the
Board of Directors, there are no circumstances of which the Board of
Directors is aware that would cause a knowledgeable holder of Acap
Preferred Stock to expect that the Fortune Common Stock would have a market
value at this time of $2.50 per share, apart from the fact that the Fortune
Common Stock has not ever paid a dividend and is not expected to pay a
dividend in the foreseeable future, and the Fortune Common Stock does not
have other protections accorded to the holders of the Acap Preferred Stock
identified above, such as a claim on the assets of Acap in the event of
Acap's liquidation that is superior to the claim available to the holders
of Fortune Common Stock. Nevertheless, if all of the holders of the Acap
Preferred Stock were to exercise their right of exchange prior to the
Effective Date of the Liquidation, the Company would be required to issue
an additional 814,000 shares of its Common Stock in exchange for the Acap
Preferred Stock, which would increase the number of issued and outstanding
shares of Common Stock from 2,859,768 shares to 3,673,768 shares, Such
increase, in turn, would change the number of shares of Acap Common Stock
distributable to Company Stockholders from one share of Acap Common Stock
for each 528 shares of Company Common Stock to one share of Acap Common
Stock for each 678 shares of Company Common Stock.
3.2.11 DESCRIPTION OF ACAP LOAN
On January 31, 1995, Acap borrowed $1.5 million from Central National Bank
of Waco, Texas. The note matured April 30, 1996. The bank granted a new
$1,187,500 note maturing April 30, 1997 under identical terms as the
original note. The note bears interest at a rate equal to the base rate of
a bank plus 1%. Principal payments on the note of $62,500 are due
quarterly. The note is secured by Acap's pledge of all the outstanding
shares of American Capitol. The loan agreement contains certain
restrictions and financial covenants. Without the written consent of the
bank, Acap may not incur any debt, pay common stock dividends or sell any
substantial amounts of assets, except for transactions in the ordinary
course of business. Also, American Capitol is subject to minimum statutory
earnings and capital and surplus requirements during the loan term. Acap
and American Capitol are in compliance with all the restrictions and
covenants of the loan.
3.2.12 MARKET FOR THE COMPANY'S COMMON STOCK
The Company's Common Stock, par value $1.00 per share, is traded in the
over-the-counter market with trades and, in certain circumstances, bid and
asked price quotations reported nationally on the National Association of
Securities Dealers, Inc. electronic bulletin board. The stock symbol is
FRNC. Continental Stock Transfer & Trust Company, 2 Broadway, New York,
New York 10004 (telephone number (212) 509-4000) acts as both Transfer
Agent and Registrar for the Company's Common Stock.
The table below presents the range of closing prices by quarter (as
explained in the next paragraph) for the Fortune Common Stock during the
two most recent fiscal years.
1995 1994
---- ----
High Low High Low
---- --- ---- ---
First quarter $.22 .22 .22 .22
Second quarter .22 .13 .22 .22
Third quarter .26 .13 .22 .22
Fourth quarter .26 .06 .22 .22
For 1994, the prices presented are bid prices reported on the National
Association of Securities Dealers, Inc. electronic bulletin board, which
reflect inter-dealer transactions and do not include retail mark-ups and
mark-downs or any commission to the parties involved. As such, the prices
may not reflect prices in actual transactions. For 1995, bid quotations
were not available from the National Association of Securities Dealers,
Inc. electronic bulletin board and the prices shown reflect the range of
trading prices reported on the National Association of Securities Dealers,
Inc. electronic bulletin board.
The bid and asked prices reported by market makers in the Company's Common
Stock on March 22, 1996, the trading day immediately preceding the public
announcement of the Liquidation, were $.06 and $.56, respectively.
3.2.13 MARKET FOR ACAP'S COMMON STOCK
The Acap Common Stock, par value $.10 per share, is traded in the over-the-
counter market and bid and asked price quotations are reported nationally
on the National Association of Securities Dealers, Inc. electronic bulletin
board. The stock symbol is AKAP. Continental Stock Transfer & Trust
Company, 2 Broadway, New York, New York 10004 (telephone number (212) 509-
4000) acts as both Transfer Agent and Registrar for the Acap Common Stock.
The table below presents the range of closing bid quotations by quarter for
the Acap Common Stock during the two most recent fiscal years.
1995 1994
---- ----
High Low High Low
---- --- ---- ---
First quarter $125 100 205 135
Second quarter 135 100 125 100
Third quarter 135 135 225 100
Fourth quarter 180 135 125 100
The prices presented are bid prices, which reflect inter-dealer
transactions and do not include retail mark-ups and mark-downs or any
commission to the parties involved. As such, the prices may not reflect
prices in actual transactions.
The bid and asked prices reported by market makers in Acap's Common Stock
on March 22, 1996, the trading day immediately preceding the public
announcement of the Liquidation, were $220 and $400, respectively.
3.2.14 DETERMINATION OF THE CASH PURCHASE/SALE PRICE FOR ODD LOT SHARES
The Company's Common Stock has traded in the over-the-counter market. That
market has represented the principal outlet for a Stockholder who wished to
dispose of his shares, or any purchaser of the Company's Common Stock. The
Board of Directors gave great weight to this factor in setting the price to
be paid for odd lot shares at the average of the closing daily bid and
asked quotations from market makers in the Company's common Stock from
January 1, 1996 to March 25, 1996. (For 1996, neither bid and asked
quotations nor trading prices were available from the National Association
of Securities Dealers, Inc. electronic bulletin board.) The cash price so
determined by the Board of Directors to be paid for odd lot shares meets or
exceeds the price a Stockholder selling his shares in the over-the-counter
market would likely receive under conditions prior to March 25, 1996
(but for the Liquidation), and the Liquidation provides a means for a small
Stockholder (i.e., a Stockholder owning less than 528 shares) wishing to
dispose of his shares to do so without brokerage costs. The Board noted
that the closing bid price of the Company's Common Stock posted by the
principal market maker had not exceeded $.06 per share at any time during
1996 (up to March 25, 1996). ("Principal market maker" as used in the
preceding sentence means one of the stock brokerage firms that makes a
market [and thus referred to as a "market maker"] in the Company's Common
Stock who has been a market maker for the longest period and was the only
market maker during the latter part of 1995 and early part of 1996, but who
has consistently posted both a bid and ask price for the Company's Common
Stock during recent years. A second brokerage firm became a market maker
during the first quarter of 1996 and also posted a bid price of $.06 per
share during the aforementioned time period, but did not post an ask
price.) The Board also considered that the Liquidation is structured to
permit those Stockholders who would otherwise receive cash in exchange for
odd lot shares to elect to remain a Stockholder in the business enterprise
and continue to participate in the equity of the business enterprise
through the ownership of Acap Common Stock.
The Board also considered the price which affiliates of the Company have
paid for Fortune Common Stock during the most recently concluded fiscal
year. The following table reflects the amount of securities purchased by
the Company, current management or affiliates since January 1, 1995 and the
prices paid for such securities, excluding transaction costs. All such
purchases were made in the open market.
Trade Date Shares Purchased Purchase Price
Per Share
---------- ---------------- ---------------
July 11, 1995 10,000 $.26
December 20,1995 46,000 $.26
The purchases reflected above were made at an average premium of 212% over
the trading price for the Company's Common Stock of the trades immediately
preceding those made by the Company's affiliates. The cash price to be
paid for odd lot shares represents a 396% premium over the average bid
price for the Company's Common Stock during 1996 (up to March 25, 1996).
The opinion of the Company's Board of Directors is that the cash price for
the odd lot shares, even though it represents a 396% premium over the
average bid price for the Company's Common Stock during the aforementioned
period, is appropriate and fair because, in the Board's opinion, the cash
price determined in reference to the over-the-counter price history (as
above set forth) is the most reasonable and relevant method of determining
a cash price to be paid for the odd lot shares. In the Board's opinion,
the bid and ask prices represent the range in which a buyer or seller of a
minority position in the Company Common Stock is likely to trade such
stock.
The Board viewed the going concern value and liquidation value of the
Company to be less appropriate measures for the purpose of evaluating the
cash price to be paid for odd lot shares. The difference between the net
book value per common share and the tangible net worth per common share is
that the latter excludes the value of goodwill, an intangible asset. In
accordance with generally accepted accounting principles, whenever a
company is no longer considered a "going concern," as in a liquidation,
goodwill is written off. The Company's majority stockholder, InsCap
Corporation, is not considering the sale of the shares of Fortune Common
Stock it owns and does not intend to approve any sale of the Acap Common
Stock owned by the Company, if proposed, and therefore the market value of
the Acap Common Stock if it were sold by the Company to an independent,
arms-length purchaser was not an alternative available to the Board for
consideration in determining the cash purchase/sale price for odd lot
shares.
Since the Company had a net loss for 1995, a comparison to industry price-
earnings multiples was inappropriate.
There have been no offers for the Company, or for the Acap Common Stock
owned by the Company, nor have any offers been solicited.
In order to minimize transaction costs, the Board did not engage an
appraiser or financial advisor with respect to the price to be paid by the
Company, or by the Stockholders electing to round up, as the case may be,
in connection with the odd lot shares. The present three-member Board of
Directors of the Company has two independent members, both of whom voted in
favor of the Liquidation. (See, however, "Conflict of Interest" below.)
No representative or advisor was retained by such members on behalf of the
unaffiliated stockholders to prepare a fairness evaluation or otherwise
appraise or negotiate the price affecting the odd lot shares.
3.2.15 VOTE REQUIRED AND RECOMMENDATION OF THE BOARD
The affirmative vote of the holders of a majority of the outstanding shares
of the common stock of the Company is necessary for the approval of the
proposed Liquidation.
The Board of Directors of the Company recommends a vote FOR the approval of
the Plan of Liquidation which will be presented at the meeting of the
Stockholders of the Company to be held on [to come], 1996. Stockholders of
the Company should note in this regard, however, the inherent conflict of
interest of the Company's Board of Directors which exists since each
member of the Company's Board of Directors also is a member of the Board of
Directors of Acap. See "Conflict of Interest" below.
InsCap Corporation holds 1,660,263 of the outstanding shares of common
stock of the Company (approximately 63.4% of such outstanding shares) and
will vote for the approval of the proposed liquidation.
3.2.16 FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Plan and proposed dissolution and liquidation of the
Company as they relate to Stockholders who are individuals residing in one
or more states and are citizens of the United States. This summary is
based upon current law, which is subject to change. Furthermore, this
summary does not purport to discuss all aspects of federal income taxation
that may be applicable to corporations, nonresident foreigners or other
stockholders that are not taxed as United States citizens who are
individuals for federal income tax purposes, nor does it address any
aspects of state, local or foreign tax laws. The Company's Stockholders
are advised to consult their own tax advisors.
The receipt by Stockholders of their distributive share of the assets of
the Company pursuant to the Plan will be a taxable transaction pursuant to
section 331 of the Internal Revenue Code of 1986, as amended, and each
Stockholder will recognize gain or loss. Such gain or loss will be a
capital gain or loss, provided that such Stockholder has held the Company's
Common Stock as a capital asset. Such capital gain or loss will be equal
to the difference between the value of the distribution received by such
Stockholder and the Stockholder's adjusted tax basis in the shares, and
will be a long-term capital gain or loss if the shares have been held for
more than one year. The value of such Stockholder's distribution will be
the sum of the cash received and/or the value of the shares of Acap Common
Stock received, as the case may be. Each Stockholder will be responsible
for determining the value of any Acap Common Stock received. The
information reporting for federal income tax purposes in respect to the
liquidation distribution made to each Stockholder will be furnished to the
Company's Stockholders for 1996 on Form 1099 in January, 1997.
3.2.17 GOVERNMENT REGULATORY APPROVALS
The Company and Acap are not subject to any federal or state regulatory
approvals required to consummate the liquidation, other than the filing of
this Information Statement with the Securities and Exchange Commission and
compliance with the securities or blue sky laws of various states, and the
applicable laws of the State of Pennsylvania governing the dissolution and
liquidation of corporations, to which the Company expects to be able to
comply in the ordinary course.
3.2.18 NO APPRAISAL OR DISSENTER'S RIGHTS
Pursuant to Pennsylvania law, there are no appraisal, dissenter's or
similar rights available to the Company's Stockholders as a result of the
liquidation. However, other rights or actions under common law may or may
not exist for stockholders who believe they may be aggrieved by the
Liquidation. If such rights or actions exist, their nature and the extent
of such rights or actions are uncertain and may vary depending upon facts
or circumstances. Stockholder challenges to corporate action in general
are related to the fiduciary responsibilities of corporate officers and
directors and to the fairness of corporate transactions.
3.2.19 NO FAIRNESS OPINION
In order to minimize transaction costs, the Board did not engage an
appraiser or financial advisor with respect to the price to be paid by the
Company, or by the Stockholders electing to round up, as the case may be,
in connection with the odd lot shares. The present three-member Board of
Directors of the Company has two independent members, both of whom voted in
favor of the Liquidation. (See, however, "Conflict of Interest" below.)
No representative or advisor was retained by such members on behalf of the
unaffiliated stockholders to prepare a fairness evaluation or otherwise
appraise or negotiate the price affecting the odd lot shares.
3.2.20 CONFLICT OF INTEREST
Stockholders of the Company should note for purposes of evaluating the
proposed Liquidation that the Board of Directors of the Company have an
inherent conflict of interest since each member of the Company's Board of
Directors also is a member of the Board of Directors of Acap. Also, two of
the members of the Company's Board are on the three-person Board of
Directors of InsCap. Accordingly, Stockholders should consider this
conflict of interest with regard to their evaluation of the proposed
Liquidation and the recommendation of the Company's Board with respect to
such proposed liquidation. It also should be noted that neither the
Company nor Acap has obtained an appraisal or other evaluation of the terms
of the proposed Liquidation from an independent third party. Accordingly,
Stockholders should note that the price per share to be paid to holders of
odd lots of Fortune Common Stock pursuant to the Plan is based solely on
the recent history of bid and ask quotations reported by market makers in
the Company's Common Stock (see "Determination of the Cash Purchase/Sale
Price for Odd Lot Shares" above) and is not based on other possible methods
of valuation, such as per share book value or any valuation by an
independent expert. Similarly, the price per share to be paid by a Company
Stockholder electing to round up his holdings of the Company's Common
Stock, as well as the price per share to be paid by Acap for shares of the
Company's authorized but unissued stock to raise cash to pay the Company's
expenses (see "Terms of the Plan" above), was determined in the same manner
as stated in the immediately preceding sentence.
3.2.21 APPROVAL OF LIQUIDATION IS ASSURED
InsCap Corporation owns 63.4% of the outstanding common stock of the
Company and plans to vote FOR the proposal to liquidate the Company. A
vote of a majority of the Company's outstanding stock is required for
approval of the Liquidation. Therefore, InsCap's vote alone will result in
the approval of the Liquidation.
3.2.22 LEGAL PROCEEDINGS
Neither Fortune nor Acap is a party to any legal proceedings. American
Capitol is a party to routine litigation incidental to its business.
3.2.23 LEGAL OPINION
Neither the Company nor Acap has obtained a legal opinion regarding the
liquidation or related transactions. Management of the two companies has
consulted with legal, accounting and tax experts regarding this Information
Statement, the Liquidation and related transactions.
3.2.24 POTENTIAL LIABILITY OF STOCKHOLDERS SUBSEQUENT TO LIQUIDATION
Following the liquidation and dissolution of the Company, it is possible
that some claims may still exist which could be asserted against the
Company. The Pennsylvania General Corporation Law provides that, if the
assets of a corporation are distributed in connection with the dissolution
of the corporation, a stockholder may be liable for a claim against the
corporation if an action, suit or proceeding on such claim is pending at
the time of the dissolution. However, a stockholder's liability for any
such claim cannot exceed the lesser of the stockholder's pro rata share of
the claim or the amount distributed to the stockholder in connection with
the dissolution of the Company. The Company's management knows of no such
claims or the basis for any such claims.
3.2.25 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Securities and Exchange
Commission are hereby incorporated by reference in this Information
Statement:
a. The Company's Annual Report on Form 10-KSB for the year ended December
31, 1995.
b. Acap's Annual Report on Form 10-KSB for the year ended December 31,
1995.
c. The Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996.
d. Acap's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1996.
The Company will provide without charge to any Stockholder a copy of any or
all of the documents referred to above which have been incorporated in this
Information Statement by reference (not including exhibits to such
documents) upon the written request of such Stockholder. Requests for
copies should be directed to Stockholder Services at the address of the
Company's principal executive office.
4. ELECTION OF DIRECTORS
-------------------------
The three directors who are presently serving have been nominated for
reelection to the Board to serve for one year and until their successors
are elected at the next Annual Meeting or until completion of the
liquidation of the Company.
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting is required to elect a director. The
shares owned by InsCap Corporation ("InsCap"), the majority stockholder of
the Company, will be voted FOR the election of directors recommended by the
Board of Directors, and therefore the election of the nominated directors
is assured.
Brief statements setting forth the age (at [to come], 1996), the business
experience during the past five years, the year in which first elected a
director and other information concerning each nominee appear below. All
such nominees also serve as directors of Acap Corporation ("Acap"), the
majority-owned subsidiary of the Company, which is subject to the reporting
provisions of the federal securities laws. The Company is a majority-owned
subsidiary of InsCap and Acap is a majority-owned subsidiary of the
Company.
R. Wellington Daniels (81): Mr. Daniels has served as a director since
1991 and is a member of the Audit Committee. Before his retirement in
1979, Mr. Daniels served as Director of National Accounts, American
Cyanamid Corporation. Mr. Daniels has also served as a director of InsCap
since 1990.
William F. Guest (64): Mr. Guest has served as a director since 1984 and
is Chairman of the Board. Mr. Guest has served as Chairman of the Board
since 1991 and President of the Company since 1984. Mr. Guest is the
Chairman of the Board and President of Acap, the Chairman of the Board and
Chief Executive Officer of each of the Company's life insurance
subsidiaries and is a director and the President of InsCap. Mr. Guest is
an attorney and prior to joining the Company and its affiliates was engaged
in the private practice of law in Houston, Texas for many years.
C. Stratton Hill, Jr., M.D. (67): Dr. Hill has served as a director since
1986 and is a member and the Chairman of the Audit Committee. Dr. Hill is
also the Medical Director of the Company's life insurance subsidiaries.
Dr. Hill is a physician and has been engaged in the practice of medicine in
Houston, Texas for many years.
5. MEETINGS AND COMMITTEES OF THE BOARD
-----------------------------------------
During 1995 the Board of Directors of the Company held four meetings. In
addition, there is one standing committee of the Board of Directors which
has the authority and responsibilities and which met during 1995 as
described below. Each incumbent director attended at least 75% of the
total number of meetings of the Board of Directors and the committee of the
Board of Directors on which he served (during the periods of such service).
Audit Committee. The Audit Committee has the authority and responsibility
to oversee the work of the independent public accountants for the Company
and to meet with such accountants from time to time to determine the
adequacy of the Company's accounting systems and controls and audit
procedures. One meeting of the Audit Committee was held in 1995.
Other Functions. There is no standing nominating committee or compensation
committee of the Board of Directors, nor is there any committee of the
Board of Directors performing similar functions. American Capitol, a
wholly-owned subsidiary of Acap, maintains a standing compensation
committee which has the responsibility of recommending the amount and form
of compensation and benefits for officers and other key employees of
American Capitol. The Company does not provide separate or additional
compensation for its officers, all of whom are also officers of American
Capitol, but is obligated to reimburse American Capitol for services
provided to the Company by such persons in accordance with the terms of an
intercompany service agreement.
Director Compensation. Directors who are also officers of the Company do
not receive directors' fees or other amounts in compensation for
participation on the Board of Directors or a committee of the Board of
Directors. All other directors are each paid a fee of $500 plus travel
expenses for each meeting of the Board of Directors attended. In addition,
each director who serves as a member of the Audit Committee of the Board of
Directors is paid a fee of $500 plus travel expenses for each meeting of
such committee attended, unless such meeting is held in conjunction with a
meeting of the Board of Directors held on the same day.
6. SECURITY OWNERSHIP OF CERTAIN OWNERS
----------------------------------------
Set forth below is information with respect to each person, entity or group
known to have been the beneficial owner of more than 5% of the Company's
Common Stock, its sole voting class of securities, as of [to come], 1996.
-------------------------------------------------------------
Name and Address Shares Beneficially Percent of
of Beneficial Owner Owned (1) Class
-------------------------------------------------------------
InsCap Corporation
10555 Richmond Avenue
Houston, Texas 77042 1,702,063 (2) 64.02%
William F. Guest
10555 Richmond Avenue
Houston, Texas 77042 1,807,263 (3) 65.39%
Frank K. Noll
R.D. No. 2, Box 331
Ligonier, Pennsylvania 15658 158,620 (4) 5.82%
(1) Except as otherwise indicated, the beneficial owner of the shares
exercises sole voting and investment powers.
(2) InsCap owns 1,660,263 shares of the Company's issued and
outstanding Common Stock, and is deemed to be the beneficial
owner of 41,800 additional shares of Company Common Stock by
virtue of 3,800 shares of Acap's Cumulative Exchangeable
Preferred Stock, Series A, $2.50 (Adjustable) (referred to herein
as "Series A Preferred Stock") owned by it which are exchangeable
for shares of Company Common Stock at the ratio of approximately
11 to one.
(3) Mr. Guest owns 380,514 shares, or 43.23%, of InsCap's issued and
outstanding Common Stock, the sole voting class of securities of
InsCap, and as the controlling stockholder of InsCap is deemed to
be the beneficial owner of shares of Company Common Stock
beneficially owned by InsCap as set forth in Note (2). In
addition to shares of Company Common Stock owned indirectly
through InsCap, Mr. Guest is deemed to be the beneficial owner of
90,200 shares of Company Common Stock issuable in exchange for
7,300 shares of Acap Series A Preferred Stock directly owned by
him and 900 shares of Acap Series A Preferred Stock indirectly
owned by him through a trust for which Mr. Guest acts as trustee.
Mr. Guest is also deemed to be the beneficial owner of 15,000
additional shares of Company Common Stock by virtue of options
granted to him to purchase same.
(4) The shares shown as owned by Mr. Noll do not include 18,713
shares owned by Mr. Noll's adult son, the beneficial ownership of
which is disclaimed by Mr. Noll. Included in these shares are
110,000 shares issuable in exchange for 10,000 shares of Acap
Series A Preferred Stock owned by Mr. Noll.
7. EXECUTIVE OFFICERS
----------------------
The By-Laws of the Company provide for the election of executive officers
annually at the meeting of the Board of Directors following the annual
meeting of stockholders. Executive officers serve until their successors
are chosen and qualified or until their death, resignation or removal.
Brief statements setting forth the age (at July 22, 1996), the offices held
and the business experience during the past five years of each executive
officer appear below.
William F. Guest (64): Chairman of the Board and President. For the
biography of Mr. Guest see "Election of Directors."
John D. Cornett (37): Mr. Cornett has served as Executive Vice President
of the Company since 1990 and as Treasurer of the Company since 1986. Mr.
Cornett is the Executive Vice President and Treasurer of Acap, a director
and the Secretary of InsCap and the President and Chief Operating Officer
of each of the Company's life insurance subsidiaries. Mr. Cornett is a
certified public accountant and prior to joining the Company and its
affiliates in 1984 held positions with American General Life Insurance
Company and Prudential Insurance Company of America.
H. Kathleen Musselwhite (39): Ms. Musselwhite has served as Assistant
Treasurer of the Company since June 1995. Ms. Musselwhite is also the
Assistant Treasurer of Acap and is the Treasurer and Controller of the
Company's life insurance subsidiaries. Ms. Musselwhite is a certified
public accountant and prior to joining the Company and its affiliates in
1995 Ms. Musselwhite served as Assistant Controller of American General
Corporation (1987-June 1995).
Paul L. Clancy (44): Mr. Clancy has served as Secretary of the Company
since 1992. Mr. Clancy is also the Secretary of Acap and is the Executive
Vice President and Secretary of each of the Company's life insurance
subsidiaries. Prior to joining the Company and its affiliates in 1991, Mr.
Clancy served as Vice President of HBJ Insurance Companies, Orlando,
Florida (1987-July 1991). Mr. Clancy has worked in the insurance industry
since 1979 in both administrative and consulting capacities.
8. SECURITY OWNERSHIP OF MANAGEMENT
------------------------------------
Set forth below is information with respect to shares of each class of
equity securities of Acap, the Company and InsCap beneficially owned by
directors of the Company, naming them, and by all directors and officers of
the Company as a group, as of July 22, 1996.
<PAGE>
Name of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership (2) Percent of Class (3)
Acap
Common Stock
-------------
William F. Guest 5,582 (4) 65.29%
John D. Cornett 178 (5) 2.08%
All Officers and Directors 5,760 (6) 67.10%
Series A Preferred Stock
------------------------
William F. Guest 12,000 (4) 16.22%
R. Wellington Daniels 2,000 (7) 2.70%
All Officers and Directors 14,000 18.92%
The Company
Common Stock
------------
William F. Guest 1,807,263 (4) 65.39%
R. Wellington Daniels 22,000 (7) *
C. Stratton Hill, Jr., M.D. 4,000 (8) *
John D. Cornett 10,000 (5) *
All Officers and Directors 1,843,263 (6) 65.93%
InsCap
Common Stock
------------
William F. Guest 380,514 (4) 43.23%
R. Wellington Daniels 37,000 4.20%
John D. Cornett 11,000 1.25%
All Officers and Directors 485,124 55.11%
(1) The address of each of the officers and directors is c/o Fortune
National Corporation, 10555 Richmond Avenue, Houston, Texas 77042.
(2) Except as otherwise indicated, the beneficial owner of the shares
exercises sole voting and investment powers.
(3) Percentages are calculated on the basis of the amount of outstanding
securities plus, for each person or group, any securities that person
or group has the right to acquire within 60 days pursuant to option,
conversion privileges or other rights. An asterisk signifies less
than 1%.
(4) The Acap Common Stock shown as owned by Mr. Guest includes 127 shares
owned indirectly by him through a trust for which he acts as trustee,
34 shares attributed to him by virtue of options granted to him to
purchase same, and 5,421 shares owned indirectly by him through
InsCap, the Company's ultimate parent, of which company Mr. Guest is
deemed to be the controlling stockholder. The Acap Series A Preferred
Stock shown as owned by Mr. Guest includes 7,300 shares owned directly
by him, 900 shares indirectly owned by him through a trust for which
Mr. Guest acts as trustee, and 3,800 shares owned indirectly by him
through InsCap. The Company Common Stock shown as owned by Mr. Guest
includes 90,200 shares issuable in exchange for 7,300 shares of the
Acap Series A Preferred Stock directly owned by him and 900 shares
indirectly owned by him through a trust for which Mr. Guest acts as
trustee, 15,000 shares attributable to him by virtue of options
granted to him to purchase same, and 1,660,263 owned indirectly by him
through InsCap, and 41,800 shares issuable to InsCap in exchange for
3,800 shares of the Acap Series A Preferred Stock owned by InsCap.
Mr. Guest has pledged 304,861 of his InsCap shares to a bank in
Houston as security for a loan.
(5) Of the shares of Acap Common Stock and Company Common Stock shown as
owned by Mr. Cornett, 34 shares of the Acap Common Stock and 10,000
shares of Company Common Stock are attributed to him by virtue of
options granted to him to purchase same.
(6) The shares of Acap Common Stock and Company Common Stock shown as
owned by all officers and directors of the Company include 68 shares
of Acap Common Stock and 25,000 shares of Company Common Stock the
beneficial ownership of which is attributed to officers of the Company
by virtue of options granted to such officers to purchase such shares.
Also included are 90,200 shares of Company Common Stock attributable
to Mr. Guest which are issuable in exchange for 8,200 shares of the
Acap Preferred Stock owned by him directly and indirectly, and 22,000
shares of Company Common Stock attributable to Mr. Daniels which are
issuable in exchange for 2,000 shares of the Acap Series A Preferred
Stock owned by him indirectly, all as set forth in Notes (4) and (7).
(7) The 2,000 shares of the Acap Series A Preferred Stock and the 22,000
shares of Company Common Stock issuable in exchange for such shares
shown as owned by Mr. Daniels are owned by Mr. Daniels' wife.
(8) All such shares of Company Common Stock are owned by Dr. Hill's
children.
9. BENEFICIAL OWNERSHIP REPORTING
----------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and beneficial owners of more than 10% of a
registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than 10% stockholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely upon a review of such forms furnished to the Company during or
with respect to its fiscal year ended December 31, 1995 by the persons and
entities filing same, the Company believes that during its fiscal year
ended December 31, 1995 all beneficial ownership reports required to be
filed pursuant to Section 16(a) by directors and officers of the Company
and by beneficial owners of more than 10% of the Company's outstanding
Common Stock have been filed on a timely basis.
10. EXECUTIVE COMPENSATION
---------------------------
The compensation paid by the Company and its affiliates for each of the
last three completed fiscal years to (i) the Chief Executive Officer
("CEO") and (ii) each of the four most highly compensated executive
officers, other than the CEO, whose total annual salary and bonus exceeded
$100,000, was as follows:
---------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus All Other
---------------------------------------------------------------------------
William F. Guest, 1995 $180,000 $18,000 $-0-
CEO 1994 180,000 18,000 -0-
1993 180,000 -0- -0-
John D. Cornett, 1995 $100,000 $10,000 $17,658*
Treasurer 1994 100,000 10,000 -0-
1993 100,000 -0- -0-
*The Company advanced Mr. Cornett $17,658 during 1995 toward the payment of
the premium on life insurance on Mr. Cornett's life and for which the
Company is not the beneficiary. The advance will be repaid to the Company
out of the cash value of such policy or the death proceeds from such
policy. The advance is not compensation to Mr. Cornett to the extent that
it is subject to repayment to the Company.
The preceding table excludes club memberships and certain other benefits in
an aggregate amount of less than 10% of the officer's annual salary. The
amount listed under "All Other" for Mr. Cornett represents an advance by
the Company toward the payment of the premium on life insurance on Mr.
Cornett's life and for which the Company is not the beneficiary. The
advance will be repaid to the Company out of the cash value of such policy
or the death proceeds from such policy. At December 31, 1995, Mr. Guest
held unexpired options to purchase 34 shares of Acap's Common Stock and
15,000 shares of the Company's Common Stock and Mr. Cornett held unexpired
options to purchase 34 shares of Acap's Common Stock and 10,000 shares of
the Company's Common Stock. None of the options had fair market values
that exceeded the exercise price of the option. The options with respect
to the Company's Common Stock will automatically expire in connection with
the Liquidation of the Company.
In May 1990 American Capitol entered into a supplemental disability income
agreement with Mr. Guest which provides for supplemental cash payments to
Mr. Guest or for his benefit in the event that he becomes disabled while
employed by American Capitol. The amount of such supplemental cash
payments equals the amount of premium with respect to a "key man" life
insurance policy held by American Capitol covering Mr. Guest which would be
waived under the terms of the policy in the event of Mr. Guest's
disability.
In April 1994, American Capitol renewed for a period of three and one half
years an employment agreement with Mr. Cornett pursuant to which Mr.
Cornett serves as President and Chief Operating Officer of American
Capitol. The agreement provides for an annual compensation of $100,000.
In the event Mr. Cornett's employment is terminated prior to October 1,
1996, other than for cause, the salary payable thereunder will continue for
18 months, less any amounts earned by Mr. Cornett from other employment
during such period. In the event Mr. Cornett's employment is terminated on
or after October 1, 1996, but prior to the expiration of the agreement,
other than for cause, the salary payable thereunder will continue for the
greater of six months or the remaining term of the agreement, less any
amounts earned by Mr. Cornett from other employment during such period. In
addition, in April 1994, American Capitol renewed a stock purchase
agreement with Mr. Cornett which provides that in the event of a change of
control of American Capitol, Mr. Cornett shall have the right to sell
certain shares of Acap Common Stock or Company Common Stock owned by him to
American Capitol at a price per share determined by reference to the
consideration involved in the change of control.<PAGE>
11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
---------------------------------------------------
On March 25, 1996 the Company's Board of Directors approved a transaction
with Acap whereby the Company agreed to issue 55,323 shares of previously
unissued shares of Common Stock for Acap's commitment to pay all of the
Company's routine expenses through the liquidation of the Company.
InsCap is the immediate parent of the Company. See "Security Ownership of
Certain Owners" for the basis of control and the percentage of voting
securities owned.
12. INDEPENDENT AUDITORS
-------------------------
Financial statements of the Company and its consolidated subsidiaries are
included in the Company's Annual Report to Stockholders for 1995. KPMG
Peat Marwick has served as the independent auditors for the Company for the
fiscal year ended December 31, 1995. Representatives of KPMG Peat Marwick
are expected to be present at the Annual Meeting and will have the
opportunity to make a statement if they desire to do so and are also
expected to be available to respond to appropriate questions.
13. QUORUM FOR MEETING
-----------------------
The By-Laws of the Company require, for a quorum, the presence at the
meeting, in person or by proxy, of the holders of a majority of the shares
of capital stock of the Company entitled to vote.
By Order of the Board of Directors,
Paul L. Clancy
Secretary<PAGE>
APPENDIX A
PLAN OF DISSOLUTION AND LIQUIDATION
APPROVED AND ADOPTED BY THE STOCKHOLDERS OF
FORTUNE NATIONAL CORPORATION
AT A MEETING HELD AUGUST 26, 1996
WHEREAS, the Board of Directors of Fortune National
Corporation, a Pennsylvania corporation (the "Company"), has
approved the following Plan of Dissolution and Liquidation (the
"Plan") for the purpose of dissolving and liquidating the Company
in accordance with Section 1975 of the Pennsylvania Business
Corporation Law; and
WHEREAS, the Company's Board of Directors has recommended the
approval and adoption of such Plan by the stockholders of the
Company at its regular annual meeting held on August 26, 1996, and the
adoption of such Plan is subject to the approval of the
stockholders of the Company;
<R/>
NOW, THEREFORE, it is hereby RESOLVED by the stockholders of
Fortune National Corporation that such dissolution and liquidation
of the Company take place in accordance with Section 1975 of the
Pennsylvania Business Corporation Law pursuant to the following
terms and conditions, to be known as the Plan of Dissolution and
Liquidation (the "Plan"):
1. Effective Date of Plan. This Plan shall become effective
upon the approval hereof by the holders of a majority of the
outstanding shares of common stock of the Company (the "Plan
Effective Date").
2. Cessation of Business. After the Plan Effective Date, the
Company shall not perform business activities other than those
required to wind up and liquidate its remaining business affairs,
discharge liabilities, preserve the value of its assets, and
distribute its remaining assets to its stockholders in accordance
with this Plan. The dissolution and liquidation are to be carried
out in accordance with this Plan as promptly as possible.
3. Winding Up of Business Activities. Following the Plan
Effective Date, the officers of the Company shall wind up the
affairs of the Company and pay all debts and expenses of the
Company.
4. Payment of Debts and Distribution of Assets. For the
purposes of arranging to pay all of the Company's debts and
expenses through the completion of the Plan of Dissolution and
Liquidation, and to distribute all of the remaining assets of the
Company to its Stockholders, the Company shall enter into the
following agreements with its subsidiary, Acap Corporation
("Acap"):
A. To make adequate provision for the payment of all debts and
expenses that the Company has incurred and will incur between
January 1, 1996, and the completion of the Plan of Dissolution
and Liquidation of the Company, the Company shall sell to
Acap, and Acap shall purchase from the Company, 55,323 shares
of the Company's authorized but unissued common stock for a
total purchase price of $17,150. The Company shall deposit
with Acap such amount, together with its cash on hand (in the
amount of $2,200), to be applied by Acap in the payment of all
of the Company's expenses designated hereunder. In this
regard, Acap shall be responsible for all of such expenses so
designated, whether or not the estimated amount below
associated with the designated expense is sufficient to cover
same, and Acap shall be entitled to retain any amount of said
deposit not needed to pay all of such expenses, to-wit:
Nature of Expense Estimated Amount
Stock transfer fees $2,800
Preparation and mailing of
stockholder reports 6,000
Legal fees 7,000
Franchise taxes 300
Service fees 1,250
Miscellaneous 2,000
-------
Total $19,350
B. For the duration hereinafter set out, Acap agrees to serve as
"Distribution Agent" for the purpose of receiving from the
Company the transfer of all of the shares of Acap common stock
owned by the Company, being 5,421 shares, and distributing the
same to the Company's stockholders in accordance with the
letter of instructions and transmittal letter distributed by
the Company to its stockholders and the description of the
distribution of Acap common stock contained in the Company's
Information Statement sent to its stockholders with its notice
of the Annual Meeting of Stockholders to be held on August 26,
1996, to which reference is made for all purposes.
C. Acap agrees to purchase all of the odd lot shares (as such
term is defined in the aforesaid Information Statement) from
the Company's stockholders who elect to sell same, and the
Company's stockholders who make no election prior to 5 p.m. on
September 26, 1996 (as set forth in said Information Statement), for
the price of 31 cents per share; and to sell all or part of
such odd lot shares so purchased, at the price of 31 cents per
share, to stockholders of the Company who elect (prior to 5
p.m. on September 26, 1996) to purchase shares of the Company's
common stock in order to "round up" their respective holdings
of the Company's common stock, as set forth in said
Information Statement. Further, at the time when it becomes
necessary that the Acap stock held for the Company's
stockholders who fail to claim same as set forth below, Acap
shall purchase the odd lot shares of stock of such
stockholders and pay such purchase price to Acap as
Distributing Agent for the purpose of escheatment as set forth
below.
<R/>
D. Acap's services as Distributing Agent shall be wound up and
concluded upon the first to occur of the following: (i) when
all of the Acap stock received by Acap as Distributing Agent
from the Company as above set forth has been distributed to
the Company's stockholders entitled thereto, and Acap has made
all of the purchases and sales of the odd lot shares as
provided herein, as the case may be, in accordance with this
Plan of Dissolution and Liquidation, or (ii) when all of the
Acap stock that has not been distributed to the Company's
stockholders entitled thereto as set forth above (the
"unclaimed Acap stock") and all of the odd lot shares (not
previously purchased from the Company's stockholders) have
been purchased by Acap with funds paid to Acap as Distributing
Agent as set forth below ("unclaimed funds"), have been
escheated to the various state authorities for the benefit of
the Company's stockholders entitled to such unclaimed Acap
stock and/or unclaimed funds in accordance with the rest of
this paragraph. In reference to the escheat laws of various
states applicable to the unclaimed Acap stock and unclaimed
funds in the hands of Acap as Distributing Agent, at the times
mandated by such applicable escheat laws, Acap as Distributing
Agent shall transfer and deliver such unclaimed Acap stock and
unclaimed funds to the appropriate state authorities,
providing to such state authorities the information possessed
by Acap as Distributing Agent as to the persons or entities
entitled to receive such Acap stock and unclaimed funds, as
well as any other information required by such escheat laws.
At the time when Acap as Distributing Agent is obligated to
transfer and deliver to the appropriate state authorities the
unclaimed Acap stock and unclaimed funds as hereinabove set
forth, Acap shall purchase the odd lot shares of the Company's
stockholders who have not theretofore sold their odd lot
shares of stock to Acap, and shall pay to Acap as Distributing
Agent the funds necessary to effect the purchases of such odd
lot shares of stock as aforesaid, so that Acap as Distributing
Agent can deliver such funds to the appropriate state
authorities for the benefit of the Company's stockholders
entitled thereto pursuant to applicable escheat laws. When
Acap as Distributing Agent shall have completed the transfer
and delivery of all of the Acap stock, either directly or
pursuant to escheat laws as aforesaid, and when Acap has
purchased all of the odd lot shares as aforesaid, Acap's
duties as Distributing Agent hereunder shall be deemed to be
fully performed.
By agreeing to the above, Acap shall not be held responsible for,
shall not assume, nor be deemed to have assumed any liabilities,
expenses or obligations of Fortune not expressly set forth herein.
The Company shall indemnify and hold Acap harmless from all
expenses, claims and liabilities asserted against Acap that are not
expressly assumed by Acap in accordance with the above described
agreements.
5. Certificate of Dissolution. The officers of the Company
shall cause to be executed and filed with the Secretary of State of
the State of Pennsylvania a certificate of dissolution in
accordance with applicable Pennsylvania law. In addition to filing
the franchise tax return of the Company, the officers of the
Company shall execute and file with the Internal Revenue Service
the appropriate tax returns, certificates, documents and
information required to be filed by reason of the dissolution and
complete liquidation of the Company, as well as any other documents
and information as may in their discretion be necessary or
desirable to file with appropriate agencies or entities.
6. Indemnification. The obligation of the Company to
indemnify and reimburse its directors and officers shall survive
the liquidation and dissolution of the Company.
7. Authorization for Acts by Officers. The officers of the
Company shall execute and consummate the Plan, and each of them
shall have the power and authority to execute all documents,
including documents to evidence the above agreements with Acap, and
file all documents and to take all other actions as they or each of
them may deem necessary or desirable for the purpose of effecting
the dissolution of the Company and the complete liquidation of its
business, assets and affairs.
8. Amendment or Abandonment of Plan. The Company's Board of
Directors may modify or amend this Plan at any time without
approval of the Company's stockholders if it determines that such
action would be in the best interests of the Company and its
stockholders, provided that any such amendment which materially and
adversely affects the interests of the Company's stockholders shall
require the approval of the majority of the Company's stockholders.
The Board of Directors may abandon the Plan without approval of the
Company's stockholders at any time, if it determines that
abandonment would be in the best interests of the Company or its
stockholders.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x] ANNUAL REPORT under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended: December 31, 1995
[ ] TRANSITION REPORT under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission file number 0-6869
Fortune National Corporation
(Name of small business issuer in its charter)
State of Incorporation: IRS Employer Id.:
Pennsylvania 25-1229620
Address of Principal Executive Office:
10555 Richmond Avenue, Houston, Texas 77042
Issuer's telephone number, including area code: (713) 974-2242
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. [x] Yes [ ] No.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [x]
Revenues for the issuer for its most recent fiscal year were $5,166,842.
As of March 22, 1996, 2,616,984 shares of the registrant's Common Stock,
excluding shares held in treasury, were issued and outstanding, and the
aggregate market value of such shares held by non-affiliates of the
registrant on such date, based on the average of the closing bid and asked
prices for such shares on such date, was $296,584.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5 - 7 of Form 10-KSB is
incorporated by reference from the registrant's 1995 Annual Report to
Stockholders. The information required by Part III, Items 9 - 12 of Form 10-
KSB is incorporated by reference from the registrant's definitive information
statement to be furnished in connection with the Annual Meeting of
Stockholders to be held on or about August 26, 1996.
The Exhibit Index, Part IV, Item 13, is located on page 7 of this Form 10-
KSB. This Form 10-KSB contains a total of 47 pages including any exhibits.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [x] No
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Fortune National Corporation ("Fortune") was incorporated under the laws of
the Commonwealth of Pennsylvania on March 22, 1971. Fortune's only
significant asset is its holdings of 63.7% of the outstanding common stock of
Acap Corporation ("Acap").
Acap was incorporated under the laws of the State of Delaware on March 18,
1985 by the management of American Capitol Insurance Company ("American
Capitol") to become the parent or "holding company" of American Capitol.
Acap began operating in that capacity on October 31, 1985. Fortune acquired
a majority interest in American Capitol in 1984. In the 1985 reorganization
which resulted in American Capitol becoming a wholly-owned subsidiary of
Acap, Fortune's majority interest in American Capitol was exchanged for an
equivalent interest in Acap.
Unless the context otherwise requires, the term "Fortune" refers to the
consolidated group of Fortune National Corporation and its subsidiaries.
Fortune is primarily engaged in the acquisition and servicing of existing
blocks of life insurance policies. Since September 1994, the Company has
marketed a small volume of final expense insurance and prearranged funeral
service contracts. Through its life insurance subsidiaries, Fortune
maintains a broad portfolio of individual life insurance policies and annuity
contracts. Life insurance is the only industry segment material to the
operations of Fortune.
InsCap Corporation ("InsCap"), a Delaware holding company, acquired a
majority interest in Fortune on December 6, 1983. InsCap's only significant
asset is its holdings of 63.4% of the outstanding common stock of Fortune.
Acquisition Strategy
- --------------------
Fortune's strategy for achieving growth and profits is based upon the
acquisition of blocks of existing life insurance policies through the direct
purchase of such blocks or indirectly through the acquisition of life
insurance companies. By acquiring blocks of life insurance directly or
through the purchase of other life insurance companies, Fortune hopes to add
"new" life policies to its books more economically than through marketing.
Generally, insurance companies can acquire policies in two ways; either by
"purchasing" them policy by policy through marketing, or by buying an
existing block of policies. Purchasing an existing block of business has the
advantage that the policies have an established "history." That is, an
existing block will have an established pattern of mortality and lapse
experience. Also, the company selling the block of existing life policies
has already absorbed the risks involved in marketing the life insurance
products. In purchasing an existing block of policies, Fortune's strategy is
to set the purchase price at the sum of the expected future profits of the
block of policies discounted at a rate of return in excess of Fortune's cost
of funds. Fortune then attempts to improve upon the rate of return by
maintaining the acquired policies at a lower per policy cost than was used in
the pricing assumptions and by realizing a higher investment yield on the
acquired assets than was used in the pricing assumptions.
It also should be noted that the acquisition strategy has certain risks and
disadvantages. Since the marketing of life insurance products generally
involves greater risks than acquiring existing blocks of life insurance, the
profit margins available through marketing may be greater than the margins
available with respect to an acquired block of life insurance. Also, there
are relatively few companies or blocks of business meeting Fortune's
acquisition criteria that become available for purchase each year. Fortune's
acquisition strategy requires Fortune to maintain the personnel, computer
systems and physical properties necessary to accommodate large growth phases
without the guarantee that such growth will occur.
Acquisitions to Date
- --------------------
Prior to 1983, Fortune followed a traditional marketing strategy through its
wholly-owned life insurance subsidiary, Fortune National Life Insurance
Company. In conjunction with the change in control and associated change in
management of Fortune in 1983 (such changes resulting from InsCap's purchase
of a majority of the outstanding common stock), Fortune switched from a
traditional marketing strategy to its current acquisition strategy.
Acquisitions made since that time through December 31, 1995 include:
American Capitol Insurance Company on July 2, 1984.
Associated Companies, Inc. on January 13, 1989.
Trans-Western Life Insurance Company, acquired February 25, 1994.
Family Life Insurance Company of Texas, acquired August 31, 1994.
Texas Imperial Life Insurance Company, acquired September 29, 1994.
Oakley-Metcalf Insurance Company, acquired February 2, 1995.
Products and Markets
- --------------------
The policies serviced by Fortune are primarily traditional whole life
policies, interest-sensitive whole life policies, term life policies,
stipulated premium whole life policies and flexible premium annuity
contracts.
Traditional whole life policies are generally characterized by a uniform
death benefit and a level periodic premium throughout the insured's lifetime.
These policies combine a savings element with insurance protection. The
savings element, called the cash value, builds at a fixed rate of interest
and may be borrowed against by the policyholder and, if the policy terminates
other than through the death of the insured, may be paid to the policyholder.
Fortune's interest-sensitive whole life policies also generally have a
uniform death benefit and a level periodic premium. However, with these
policies, the interest rate credited to the savings element of the policy may
be varied at Fortune's option above a guaranteed minimum rate. The interest-
sensitive policies also provide for a surrender charge in the event that the
policyholder surrenders the policy during the first ten years following the
issue date of the policy. Further, Fortune may vary below a guaranteed
maximum the amount charged against the policy for expenses and mortality
costs.
Term life policies generally offer pure insurance protection (i.e., no
savings element) for a specified period. Such policies typically offer a
conversion privilege, a renewal privilege, or both. Premiums typically are
adjusted upon the exercise of either privilege.
Stipulated premium whole life policies are characterized by a uniform death
benefit and a level periodic premium throughout the insured's lifetime,
however, unlike traditional whole life policies, stipulated premium whole
life policies have no cash value.
Flexible premium annuity contracts permit the annuitant to make deposits as
he sees fit, and allow the annuitant to make withdrawals at his option,
subject to deduction of applicable surrender charges. The annuity balance
earns interest on a tax deferred basis at a rate that Fortune may change
annually.
From mid-1985 until September 1994, the Company relied exclusively on its
acquisition strategy and did not actively market new business. Since
September 1994, the Company has marketed a small volume of final expense
insurance and prearranged funeral service contracts. These policies are
primarily written through independent funeral homes. The Company currently
receives new business from approximately thirty funeral homes.
The following table sets forth information with respect to gross insurance in
force and net premium income of Fortune during the past three years:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
- ---------------------- ----- ---- ----
<S> <C> <C> <C>
Life insurance in force $286,803 321,859 267,722
Premium income:
Life $ 1,828 1,350 848
Annuity 547 223 166
-------- ------- -------
Total premiums $ 2,375 1,573 1,014
======== ======= =======
</TABLE>
The table below presents the direct collected premiums by major geographic
area for the last three years:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Texas $ 4,573 2,414 1,225
Ohio 550 614 682
Indiana 457 503 551
Pennsylvania 399 440 536
Michigan 352 396 448
Other U.S. 2,122 2,298 2,513
------- ------ -----
Total $ 8,453 6,665 5,955
======= ====== =====
</TABLE>
The preceding tables include certain premium amounts which under Statement of
Financial Accounting Standards No. 97 ("FAS 97") are credited to liability
accounts and are not considered revenues, and exclude surrender charges that
under FAS 97 are considered revenue. The premiums of Fortune affected by FAS
97 are the premiums on interest-sensitive whole life policies and annuity
contracts.
Competition
- ------------
The life insurance industry is highly competitive. There are approximately
1,770 legal reserve life insurance companies in the United States. Although
Fortune's acquisition strategy is not the standard strategy employed in the
industry, Fortune must compete with a significant number of companies, both
inside and outside the life insurance industry, when looking for an
acquisition. Many of these companies have substantially greater financial
resources and larger staffs than Fortune.
Fortune also must compete with a significant number of other life insurance
companies to retain Fortune's existing block of policies. Many of these
companies have broader and more diverse product lines together with active
agency forces, and therefore, certain of Fortune's policyholders may be
induced to replace their existing policies with those provided by Fortune's
competitors.
Regulation
- ----------
The insurance subsidiaries of the Company are subject to regulation by the
supervisory insurance agency of each state or other jurisdiction in which
the insurance subsidiaries are licensed to do business. These supervisory
agencies have broad administrative powers relating to the granting and
revocation of licenses to transact business, the approval of policy forms,
the form and content of mandatory financial statements, capital, surplus,
reserve requirements and the types of investments that may be made. The
insurance subsidiaries are required to file detailed reports with each
supervisory agency, and its books and records are subject to examination by
each. In accordance with the insurance laws of the State of Texas (the
insurance subsidiaries' state of domicile) and the rules and practices of the
National Association of Insurance Commissioners (the "NAIC"), the insurance
subsidiaries are examined periodically by examiners from Texas.
Most states have enacted legislation or adopted administrative regulations
covering such matters as the acquisition of control of insurance companies
and transactions between insurance companies and the persons controlling
them. The NAIC has recommended model legislation on these subjects that has
been adopted, with variations, by many states. The nature and extent of the
legislation and administrative regulations now in effect vary from state to
state, and in most states prior administrative approval of the acquisition of
control of an insurance company incorporated in the state, whether by tender
offer, exchange of securities, merger or otherwise, is required, which
process involves the filing of detailed information regarding the acquiring
parties and the plan of acquisition.
The insurance subsidiaries are members of an "insurance holding company
system" and are required to register as such with the State of Texas and file
periodic reports concerning their relationships with the insurance holding
company and other affiliates of the holding company. Material transactions
between members of the holding company system are required to be "fair and
reasonable" and in some cases are subject to administrative approval, and the
books, accounts and records of each party are required to be so maintained as
to clearly and accurately disclose the precise nature and details of the
transactions. Notice to or approval by the State of Texas is required for
dividends paid by the insurance subsidiaries.
Employees
- -----------
At December 31, 1995, Fortune had a total of 29 employees. None of these
employees is covered by a collective bargaining agreement. Fortune believes
that it has excellent relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTIES.
The principal offices of the Company are located at 10555 Richmond Avenue,
Houston, Texas 77042. The Company holds unencumbered title to a building
containing approximately 50,000 square feet and approximately 6.6 acres of
land at that location. The Company occupies approximately 20,000 square feet.
Approximately 5,300 square feet of additional space is leased by unaffiliated
tenants. The Company's offices are suitable for the conduct of its business
and provide room for future growth. Management believes that the property is
adequately covered by insurance.
The Company's investment policy prohibits making new investments in real
estate without the prior approval of the Board of Directors. There are no
plans to make any real estate investments in the foreseeable future. If the
Company were interested in making a real estate investment, regulatory
restrictions applicable to Texas life insurance companies would prohibit the
life insurance subsidiaries from investing in real estate outside of the
United States, in residential real estate, or in any property, other than
home office property, that exceeds 5% of the insurer's statutory assets.
The Company owns and services first mortgage loans with aggregate principal
balances at December 31, 1995 of $1,125,455. The Company's investment policy
prohibits making new investments in mortgage loans without the prior approval
of the Board of Directors. There are no plans to make any mortgage loan
investments in the foreseeable future. If the Company were interested in
making a mortgage loan investment, regulatory restrictions applicable to
Texas life insurance companies would prohibit the life insurance subsidiaries
from investing in mortgage loans on real estate outside of the United States,
in other than first liens, or in any loan that exceeds 25% of the insurer's
statutory capital and surplus.
ITEM 3. LEGAL PROCEEDINGS.
Fortune and its subsidiaries are involved in various lawsuits and legal
actions arising in the ordinary course of operations. Management is of the
opinion that the ultimate disposition of these matters will not have a
material adverse effect on Fortune's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The required information regarding the market for the common equity of the
Company and related stockholder matters is incorporated herein by reference
from "Stockholder Information" on page 31 of Fortune's 1995 Annual Report to
Stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference from "Management's Financial
Analysis" on pages 3 - 9 of Fortune's 1995 Annual Report to Stockholders.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements and supplementary data are incorporated herein by
reference from pages 10 - 29 of Fortune's 1995 Annual Report to Stockholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
The information required by Items 9-12 is incorporated by reference from
Fortune's definitive information statement, which is to be filed pursuant to
Regulation 14C.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibits Location or
Description Incorporation by Reference
3(a)(1)
Certificate of Incorporation of the *Form 10Q dated March 31,
Registrant dated March 22, 1971 1991, page 12
3(a)(2)
Certificate of Amendment to Articles of *Form 10Q dated March 31,
Incorporation of the Registrant dated 1991, page 15
June 16, 1977
3(b)
Bylaws of the Registrant, as amended *Form 10KSB dated
December 31, 1994, page 273
10(a)(1)
1988 American Capitol Insurance Company *Form 10K dated December 31,
Key Employee Stock Option Plan 31, 1988, page 37
10(a)(2)
Form of Grant of Stock Option used in 1988 *Form 10K dated December 31,
American Capitol Insurance Company Key 1988, page 45
Employee Stock Option Plan
10(b)(1)
Agreement dated December 18, 1986 between *Acap Corporation Form S4,
Acap Corporation and the Registrant Amendment No. 2, Registration
No. 33-27874
10(b)(2)
Amendment dated June 13, 1989 to Agreement *Acap Corporation Form S4,
dated December 18, 1986 between Acap Amendment No. 2, Registration
Corporation and the Registrant No. 33-27874
10(c)(1)
Employment Contract between American *Form 10KSB dated December 31,
Capitol Insurance Company and John D. 1994, page 275
Cornett
10(c)(2)
Stock Purchase Agreement between American *Form 10KSB dated December 31,
Capitol Insurance Company and John D. 1994, page 288
Cornett
10(d)
Supplemental Disability Income Agreement *Form 10Q dated September 30,
between American Capitol Insurance 1990, page 12
Company and William F. Guest
10(e)
Reinsurance Agreement between American *Form 10KSB dated December 31,
Capitol Insurance Company and Crown Life 1993, page 10
Insurance Company effective December 31,
1992, as amended
10(f)
Stock Purchase Agreement for Family Life *Form 8K dated August 31,
Insurance Company of Texas dated 1994, page 5
August 12, 1994
10(g)
$5,000,000 Surplus Debenture issued by *Form 8K dated August 31,
American Capitol Insurance Company to 1994, page 72
John C. Bowden
10(h)
Guaranty Agreement and Collateral Pledge *Form 8K dated August 31,
Agreement dated August 31, 1994 between 1994, page 75
Acap Corporation and John C. Bowden
10(i)
Reinsurance Agreement between Family Life *Form 8K dated August 31,
Insurance Company of Texas and Alabama 1994, page 94
Reassurance Company effective
September 1, 1994
10(j)
Stock Purchase Agreement for Texas Imperial *Form 8K dated September 28,
Life Insurance Company dated August 2, 1994 1994, page 5
10(k)
Stock Purchase Agreement for Imperial Plan, *Form 8K dated September 28,
Inc. dated August 2, 1994 1994, page 73
10(l)
Employment Agreement between Texas Imperial *Form 8K dated September 28,
Life Insurance Company and Richard M. Ridley 1994, page 82
<PAGE>
Exhibits Location or
Description Incorporation by Reference
10(m)
Stock Purchase Agreement for Trans-Western *Form 10KSB dated December 31,
Life Insurance Company 1994, page 43
10(n)
Reinsurance Agreement effective March 1, *Form 10KSB dated December 31,
1994 between Trans-Western Life Insurance 1994, page 111
Company and Alabama Reassurance Company
10(o)
Stock Purchase Agreement for Oakley-Metcalf *Form 10KSB dated December 31,
Insurance Company 1994, page 162
10(p)
Reinsurance Agreement effective February 2, *Form 10KSB dated December 31,
1995 between Oakley-Metcalf Insurance 1994, page 213
Company and Alabama Reassurance Company
10(q)
Loan Agreement and related documents *Form 10KSB dated December 31,
between Acap Corporation and Central 1994, page 261
National Bank
11
Statement re computation of per share *1995 Annual Report to
earnings Stockholders,page 17
13
1995 Annual Report to Stockholders Page 12
22
Subsidiaries of the Registrant Page 11
* Exhibit is incorporated by reference to the listed document.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Fortune National Corporation
Date: March 25, 1996
By:
/s/ William F. Guest
- ----------------------------------------
William F. Guest
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the date indicated.
Date: March 25, 1996
By:
/s/ William F. Guest /s/ John D.Cornett
- ---------------------------------------- ---------------------------------
William F. Guest John D. Cornett
Chairman of the Board, Executive Vice President and
President and Direct Treasurer
(Principal Executive Officer) ( Principal Financial and
Accounting Officer)
/s/ R. Wellington Daniels
- -----------------------------------------
R. Wellington Daniels
Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF FORTUNE NATIONAL CORPORATION
Majority-owned subsidiary of Fortune National Corporation:
- ----------------------------------------------------------
Acap Corporation (Delaware)
Wholly-owned subsidiary of Acap Corporation:
- ---------------------------------------------
American Capitol Insurance Company (Texas)
Wholly-owned subsidiaries of American Capitol Insurance Company:
- ----------------------------------------------------------------
Family Life Insurance Company of Texas (Texas)
Imperial Plan, Inc. (Texas)
Texas Imperial Life Insurance Company (Texas)
Wholly-owned subsidiary of Texas Imperial Life Insurance Company:
- ------------------------------------------------------------------
Oakley-Metcalf Insurance Company (Texas)
FORTUNE NATIONAL CORPORATION
CONTENTS
President's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Management's Financial Analysis . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 10
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . 11
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . 12
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . 13
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 14
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . 30
Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . 31
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 32
CORPORATE PROFILE
Fortune National Corporation is a life insurance holding company that focuses
on the acquisition of existing life insurance policies, either through direct
purchase or the acquisition of life insurance companies. Adjuncts to the
acquisition-oriented growth strategy include using financial leverage and
reinsurance to make more acquisitions and to maximize the return to
stockholders, consolidating and streamlining the operations of acquired
businesses, concentrating on a limited number of lines of business and
providing superior customer service to improve policy retention.
Life insurance operations are conducted through the wholly-owned life insurance
subsidiaries of Fortune's majority-owned subsidiary, Acap Corporation. All
operations are conducted from the corporate headquarters in Houston, Texas.
Fortune's common stock is quoted on the NASD Electronic Bulletin Board under
the symbol FRNC.<PAGE>
PRESIDENT'S REPORT
It is with mixed feelings that I report to you that in all likelihood this is
the final Fortune National Corporation Annual Report to Stockholders. At its
meeting on March 25, 1996, the Company's Board of Directors unanimously voted
in favor of a plan of dissolution and liquidation (the "Plan") and directed
that the Plan be submitted to a vote of the Company's stockholders at the
Annual Stockholder Meeting to be held on August 26, 1996. InsCap Corporation,
the majority stockholder of the Company, has indicated that it plans to vote in
favor of the Plan, which assures the approval of the Plan. The record date for
determining stockholders of record both for purposes of voting at the Annual
Stockholder Meeting and for the distribution of assets pursuant to the Plan is
July 22, 1996.
While the following statements will provide a summary view of the Plan, please
be sure to read this Annual Report in its entirety, along with the enclosures
discussed below, for more complete information regarding the Plan.
Except for a relatively small amount of cash (approximately $2,200 at December
31, 1995), the Company's assets consist solely of 5,421 shares of common stock
("Acap stock") of its majority-owned subsidiary, Acap Corporation, a Delaware
corporation. The Company's stockholders are entitled, upon liquidation, to
receive, pro rata, the Acap stock.
As further provided in the Plan, no fractional shares of Acap stock will be
issued. Within certain limitations defined in the Plan, Company stockholders
who, as a result of the liquidation, have "odd lot" shares (as defined in the
Plan), have the option of either receiving cash for their odd lot shares or of
purchasing additional shares of the Company's common stock to round up to the
next whole share of Acap stock.
Fortune was organized in 1971 to be a holding company for Fortune National Life
Insurance Company. In 1984, Fortune acquired a majority ownership of American
Capitol Insurance Company, a Texas domiciled life insurance company. Acap was
formed as a holding company in 1985 whereby American Capitol stockholders
became stockholders of Acap, American Capitol became a wholly owned subsidiary
of Acap, and Acap became a majority owned subsidiary of Fortune. Fortune
National Life was merged into American Capitol in 1986. Neither Acap nor
Fortune has had any business purpose or activities except to hold and manage
the stock it owned in its subsidiary. Thus, for the past ten years, Fortune
stockholders have been, indirectly, stockholders of Acap. Fortune's Board has
from time to time reviewed the possibility of the consolidation of Acap and
Fortune so that one holding company would serve as the holding company for
American Capitol, ultimately resulting in the Board's adoption of the Plan on
March 25, 1996.
The principal reason for the dissolution and liquidation is to eliminate costs
associated with maintaining the Company. Since the ownership of the operating
company by the stockholders is indirect and there is no separate business
reason for the Company's existence, the expense of maintaining the Company can
be viewed as an unnecessary expense. Such expense amounts to approximately
$30,000 per year, including, but not limited to, franchise taxes, audit and
accounting fees and costs of annual, quarterly and periodic reporting
requirements to the Securities and Exchange Commission and related legal fees
and costs. Further, the Company does not have any reliable source of funds
with which to pay such expenses.
Another reason is that the dissolution and liquidation, in effect, places in
hands of the Company's stockholders a direct ownership, pro rata, of the
only significant asset which they already own indirectly, namely, the Acap
stock. Further, the sole business of the Company is to hold, indirectly,
operating companies which are life insurance companies, which is also the sole
business of Acap, except that Acap holds the operating companies directly.
Finally, the liquidation provides a mechanism for stockholders owning only a
small amount of Fortune stock to dispose of that stock, or acquire additional
stock, without brokerage commissions.
Stockholders owning an amount of Fortune common stock in excess of the "odd
lot" shares will become Acap stockholders by virtue of their entitlement to
their distributive share of the Acap stock. All Fortune stockholders owning
less than that amount will have the opportunity, if they choose, to become Acap
stockholders.
The Information Statement and Letter of Transmittal sent to all stockholders
with this Annual Report contain important details regarding the Plan and the
actions stockholders need to take. Stockholders are urged to read completely
and carefully those documents, as well as this Annual Report and the Acap
Corporation Annual Report to Stockholders in their entirety, all of which are
enclosed herewith.
During 1995 progress was made on a number of fronts, including the completion
of an acquisition in February and the consolidation of the business of four
life insurance subsidiaries into one of those subsidiaries. However, due to
disappointing mortality and investment experience, the Company had a net loss
of $96,821 ($.04 cents per common share) for the year. Please see the
Management's Financial Analysis section of this Annual Report for a more
complete analysis of the Company's 1995 results.
William F. Guest
President
April 15, 1996
<PAGE>
FORTUNE NATIONAL CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
SIGNIFICANT TRANSACTIONS
During 1994, the Company, through American Capitol Insurance Company ("American
Capitol"), the wholly-owned subsidiary of Acap Corporation ("Acap"), the
Company's majority-owned subsidiary, acquired three life insurance companies:
Trans-Western Life Insurance Company ("Trans-Western") on February 25, 1994,
Family Life Insurance Company of Texas ("Family") on August 31, 1994, and Texas
Imperial Life Insurance Company ("Texas Imperial") on September 29, 1994. The
Family acquisition met the accounting definition of a "material" transaction.
On February 2, 1995, the Company, through Texas Imperial, acquired Oakley-
Metcalf Insurance Company ("Oakley"), a Texas life insurance company, in a
$2,559,516 cash transaction. At the date of acquisition, Oakley had assets
totalling approximately $4.4 million and approximately 3,000 life policies in
force.
All of the acquisitions noted above were accounted for using the purchase
method of accounting. Accordingly, the Company's results of operations only
reflect the results of the acquired companies from their respective dates of
acquisition.
On January 4, 1995, the Company increased the reinsurance on each of the life
policies in force in Family from 20% to 100%. The Company recorded a deferred
gain on reinsurance of $1,350,036 and an increase in the reinsurance receivable
of $2,809,418 on the transaction. Whereas 1994's results of operations
included 80% of the premiums, policy benefits, etc. of Family's policies from
September 1, 1994 through December 31, 1994, 1995's results of operations do
not include those income and expense elements.
During 1995, the Company consolidated the policies in force of Family, Oakley
and Trans-Western into Texas Imperial. The Company expects to realize
operational efficiencies in 1996 as a result of the consolidation.
RESULTS OF OPERATIONS
Revenue from premiums and other considerations increased 43% during 1995 in
comparison to premiums and other considerations for 1994. As a result of the
inclusion of premiums for Texas Imperial for all of 1995, premiums increased
approximately $900,000 in 1995 in comparison to 1994. During 1994, Texas
Imperial's premiums were only included from the date Texas Imperial was
acquired, September 29, 1994. Texas Imperial's 1995 premiums included
approximately $500,000 in single premiums related to the conversion of three
trust-funded prepaid funeral service plans to insurance-funded plans.
Partially offsetting the increase in premiums resulting from the inclusion of
Texas Imperial for a full year was a decrease in the premiums of American
Capitol, Family and Trans-Western. American Capitol's premiums were
approximately $20,000 lower in 1995 in comparison to 1994 as a result of normal
policy attrition. Family's premiums were approximately $300,000 lower in 1995
in comparison to 1994. This decrease is attributable to the difference in the
reinsurance percentages on the Family policies noted above. Whereas 1994's
premiums included 80% of Family's premiums from the date Family was acquired,
August 31, 1994, 1995's premiums included none of Family's premiums since the
policies were 100% reinsured. Finally, premiums related to Trans-Western's
policies were approximately $100,000 lower in 1995 in comparison to 1994 due to
the termination at the beginning of 1995 of a reinsurance treaty whereby Trans-
Western was the assuming reinsurer.
Net investment income decreased 23% during 1995 in comparison to 1994. The
decrease in net investment income is attributable to several factors. One such
factor is the difference in the reinsurance percentages on the Family policies
noted above. Whereas 1994's net investment income included 80% of the net
investment income on Family's reserve assets from the date Family was acquired,
August 31, 1994, 1995's net investment income included none of the net
investment income on Family's reserve assets since the policies were 100%
reinsured. A second factor in the decrease was the repayment of a $2.3 million
mortgage loan on September 28, 1994. The mortgage loan in question was issued
in 1983 in connection with the sale of American Capitol's home office building.
The loan was repaid in full by (1) selling the home office building to American
Capitol for $1.1 million, (2) making a cash payment of $600,000 and (3) issuing
a note to American Capitol that was then paid off in December, 1994 with cash
of $600,000. Whereas the mortgage loan earned 10%, the cash the Company
received was reinvested at a rate lower than 10%. Also, to date the building
has not yielded a 10% return. The decreases in net investment income for 1995
noted above were somewhat offset by the inclusion of a full year's net
investment income on Texas Imperial during 1995, whereas 1994's net investment
income only included the income of Texas Imperial from the date of its
acquisition, September 29, 1994.
The Company recorded net realized investment gains of $170,003 for the year
1995 in comparison to net realized investment gains of $1,361,310 for the year
1994. Net realized investment gains for 1995 include a gain on the sale of the
stock of Trans-Western. During the third quarter of 1995, Trans-Western
transferred most of its business to Texas Imperial. The Trans-Western "shell"
was then sold to an unaffiliated third party. The Company realized a pre-tax
investment gain of $50,000 on the sale of the Trans-Western stock. The balance
of 1995's net realized investment gains were primarily the result of a
restructuring of Texas Imperial's investment portfolio. Realized investment
gains for 1994 include a $1,450,000 gain related to the mortgage loan on the
Company's home office property, discussed above. Prior to the repayment of the
loan, the Company held a valuation allowance related to the mortgage loan. The
1994 gain of $1.45 million was the release of the total valuation allowance.
During 1995, the Company entered into an earnest money contract to sell the
home office property. However, the sale was not completed and the earnest
money contract expired.
The reinsurance expense allowance increased 17% during 1995 in comparison to
1994. Whereas during 1994 the Company only received the reinsurance expense
allowance related to the companies acquired during 1994 from their respective
dates of acquisition and reinsurance, the Company received such expense
allowance for the full year during 1995. Also, the Company only received an
expense allowance on 20% of Family's policies during 1994, while the previously
noted change in the reinsurance percentage resulted in the Company receiving an
expense allowance on 100% of Family's policies during 1995.
The Company had an amortization of a deferred gain on reinsurance of $100,156
during 1995 in comparison to an amortization of a deferred loss on reinsurance
of $93,181 in 1994. Whereas during 1994 the Company only received the
amortization of the deferred gain on reinsurance related to the companies
acquired during 1994 from their respective dates of acquisition and reinsurance
(and such amortization was not enough to fully offset the amortization of a
deferred loss on reinsurance from prior years), the Company received the
amortization from the 1994 transactions for the full year during 1995. Also,
the change in the reinsurance percentage on Family's policies during 1995
increased the deferred gain on reinsurance and the related amortization of such
deferred gain into income.
Policy benefits (death and other benefits) were 37% of total revenue excluding
net realized investment gains during 1995 compared to 30% of total revenue
excluding net realized investment gains during 1994. The higher ratio of total
policy benefits to total revenue during 1995 is attributable in part to the
composition of the business of Texas Imperial. Texas Imperial is in the
insurance-funded prepaid funeral services business. Higher reserve
requirements due to higher average attained ages in this type of business
result in a higher benefit to revenue ratio. It should also be noted that
American Capitol's death claims were $346,844 in 1995 compared to $182,854 in
1994 (and $185,264 in 1993). Management is unaware of any factor that would
indicate the higher level of claims in 1995 represents a trend as opposed to an
aberration.
Total expenses (commissions, general expenses, interest expense, and the
amortization of deferred acquisitions costs and goodwill) were 61% of total
revenue excluding net realized investment gains during 1995 compared to 58% of
total revenue excluding net realized investment gains during 1994. General
expenses in both years include the costs associated with administering
reinsured policies. Given the significance of the Company's reinsurance, this
results in an expense to revenue ratio that is higher than typical for the life
insurance industry. However, the Company receives an expense allowance on
reinsurance ceded that management believes adequately compensates the Company
for the administration of the reinsured policies. The higher percentage of
total expenses to total revenue in 1995 is in part due to the change in the
reinsurance percentage on Family's policies. As noted above, the expense to
revenue ratio is higher for the Company's fully reinsured business than for
business that is not fully reinsured. Since the Family policies were fully
reinsured during 1995 but only 20% reinsured during 1994, the expense to
revenue ratio related to these policies is not comparable.
Excluding net realized investment gains, pre-tax operating income for the year
1995 was $79,042 compared to pre-tax operating income for the year 1994 of
$537,210. The decrease in operating income is primarily the result of the
adverse mortality experience in American Capitol and the decrease in investment
income resulting from the repayment of the $2.3 million mortgage loan.
The Company's current federal income tax expense for the year 1995 was
$1,004,727 compared to a current federal income tax expense for the year 1994
of $320,522. The Family reinsurance transactions, the 20% reinsurance in 1994
and the increase to 100% reinsurance in 1995, resulted in significant taxable
income, the taxes on which are the primary component of the current federal
income tax expense for 1994 and 1995, respectively.
The current federal income tax effect of the Family reinsurance transactions
was partially offset by a related deferred federal income tax benefit. The
deferred federal income tax benefit from the 1994 Family reinsurance
transaction was less than the deferred federal income tax expense in 1994
related to the repayment of the home office mortgage loan.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY OF INSURANCE SUBSIDIARIES
The Company's insurance subsidiaries have a significant portion of their assets
invested in debt instruments, short-term investments, or other marketable
securities. Although there is no present need or intent to dispose of such
investments, the insurance subsidiaries could liquidate portions of the
investments should the need arise. These assets should be sufficient to meet
the insurance subsidiaries' anticipated long-term and short-term liquidity
needs.
As of December 31, 1995, 100% of the insurance subsidiaries' portfolios of
publicly-traded bonds are invested in securities that are rated investment
grade (i.e., rated BBB-/Baa3 or higher by Standard & Poor or Moody). The
Company's investment policy prohibits making any new investment in below
investment grade securities without the advance approval of the applicable
insurance subsidiary's Board of Directors. All of the Company's bonds are
classified as available for sale and are, accordingly, reflected in the
financial statements at fair value. The insurance subsidiaries' liabilities
are primarily long term in nature. Therefore, long-term assets can be
purchased with the general intent to hold such assets to maturity. It has not
been the Company's investment practice in the past to be an active trader with
its bond portfolios. It is not expected that the insurance subsidiaries'
investment practices will change in the future.
A significant portion (35%) of the Company's bond portfolio is invested in
mortgage-backed securities, with 94% of such mortgage-backed securities
classified as collateralized mortgage obligations and 6% classified as pass-
through securities. Mortgage-backed securities are purchased to diversify the
portfolio from credit risk associated with corporate bonds. The majority of
mortgage-backed securities in the Company's investment portfolio have minimal
credit risk because the underlying collateral is guaranteed by specified
government agencies (e.g., GNMA, FNMA, FHLMC).
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks that arise from changes in the general level of
interest rates. As interest rates decline and homeowners refinance their
mortgages, mortgage-backed securities prepay more rapidly than anticipated.
Conversely, as interest rates increase, underlying mortgages prepay more
slowly, causing mortgage-backed securities principal repayment to be extended.
In general, mortgage-backed securities provide for higher yields than corporate
debt securities of similar credit quality and expected maturity to compensate
for this greater amount of cash flow risk. Due to the underlying structure of
the individual securities, the majority of mortgage-backed securities in the
Company's investment portfolio have relatively low cash flow variability.
The Company's investments in collateralized mortgage obligations are primarily
of the planned amortization class (56%), Z (23%) and sequential (19%) types. A
planned amortization class tranche is structured to provide more certain cash
flows and is therefore subject to less prepayment and extension risk than other
forms of mortgage-backed securities. Planned amortization class securities
derive their stability at the expense of cash flow risk for other tranches in a
deal, as early repayments are applied first to other tranches, and cash flows
originally applicable to other tranches are first applied to the planned
amortization class tranche if that tranche's originally scheduled cash flows
are received later than expected. The Z tranche defers all interest to other
tranches until those tranches are paid down, at which time accumulated interest
and principal are paid to this class. The cash flows associated with
sequential tranches can vary as interest rates fluctuate, since these tranches
are not supported by other tranches.
Under an accounting standard adopted in 1993, the Company records its fixed
maturity and equity securities at fair value with unrealized gains and losses,
net of taxes, reported as a separate component of stockholders' equity.
Primarily as a result of declining interest rates during the year, the fair
value of the Company's fixed maturity and equity securities increased
$1,381,019 during 1995, following a $694,088 decrease during 1994. The new
accounting standard does not permit the Company to restate its liabilities for
changes in interest rates.
As of December 31, 1995, American Capitol held 16 mortgage loans as
investments. American Capitol's investment policy generally prohibits making
new investments in mortgage loans, except in connection with the sale of
Company owned real estate. The average principal balance of the remaining
mortgage loans at December 31, 1995 was $79,094 and the weighted average
maturity was 3 years. Mortgage loans on Texas properties represent 86% of the
mortgage loan balances at December 31, 1995 with Louisiana properties
representing 14% of the balances. Commercial mortgages represent 86% of the
mortgage loan balances at December 31, 1995 with residential mortgages
constituting the balance. In general, the performance of commercial mortgages
is more subject to changing U.S. and regional economic conditions than
residential mortgages. Mortgage loans are far less liquid an investment than
publicly-traded securities.
At December 31, 1995, the only real estate owned by American Capitol is the
home office property, with a book value of $1,505,325.
At December 31, 1994, Family had a $3.3 million note payable outstanding.
Family repaid the note on January 31, 1995 out of working capital.
At December 31, 1994, American Capitol had a $5 million surplus debenture
outstanding that had been issued in connection with the acquisition of Family.
The note was repaid on January 31, 1995. Of the total $5 million payment, $3.5
million was paid from working capital of the Company and $1.5 million was
provided by a surplus debenture issued by American Capitol to Acap. As
described below, Acap's source of funds was a $1.5 million bank loan.
LIQUIDITY OF ACAP
On January 31, 1995, as a source of funds to repay the $5 million surplus
debenture issued in connection with the Company's acquisition of Family, Acap
borrowed $1.5 million from Central National Bank of Waco, Texas. The note is
renewable each April 30 until fully repaid. The note bears interest at a rate
equal to the base rate of a bank plus 1%. Principal payments on the note are
due quarterly. The note is secured by a pledge of all the outstanding shares
of American Capitol. The loan agreement contains certain restrictions and
financial covenants. Without the written consent of the bank, Acap may not
incur any debt, pay common stock dividends or sell any substantial amounts of
assets. Also, American Capitol is subject to minimum statutory earnings and
capital and surplus requirements during the loan term. The principal payments
on the bank loan are matched by the principal payments on a surplus debenture
issued by American Capitol to Acap.
Going forward, the primary source of funds for Acap are payments on the surplus
debenture and dividends from American Capitol. American Capitol may pay
dividends in any one year without the prior approval of regulatory authorities
as long as such dividends do not exceed certain statutory limitations. As of
December 31, 1995, the amount of dividends available to the parent company from
American Capitol not limited by such restrictions is approximately $260,000.
Payments on the surplus debenture may only be made to the extent statutory
capital and surplus exceeds $2 million. At December 31, 1995, American
Capitol's statutory capital and surplus was $2,716,261.
The determination of statutory surplus is governed by accounting practices
prescribed or permitted by the State of Texas. Statutory surplus therefore
bears no direct relationship to surplus as would be determined under generally
accepted accounting principles.
LIQUIDITY OF THE PARENT COMPANY
While the operating activity of Fortune takes place within Acap and the
insurance subsidiaries, Fortune, at the parent level, has liquidity needs to
cover such expenses as franchise taxes, audit and accounting fees and the costs
of annual, quarterly and periodic reporting requirements to the Securities and
Exchange Commission and related legal fees and costs. Pursuant to a 1993
transaction, Acap agreed to cover certain expenses of Fortune for the years
1994 and 1995. Pursuant to a 1996 transaction, Acap agreed to cover certain
expenses of Fortune through the expiration of the plan or dissolution and
liquidation of Fortune (discussed below under "Subsequent Events").
REINSURANCE
Reinsurance plays a significant role in the Company's operations. In
accounting for reinsurance, amounts paid or deemed to have been paid for
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies. At December 31, 1995, reinsurance
receivables with a carrying value of $26.6 million were associated with a
single reinsurer, Crown Life Insurance Company ("Crown"). At December 31,
1994, Crown had assets in excess of $7 billion and shareholders' equity of
approximately $0.4 billion. Crown is rated "Excellent" by A.M. Best Company,
an insurance company rating organization. At December 31, 1995, reinsurance
receivables with a carrying value of $4.2 million were associated with Alabama
Reassurance Company ("Alabama Re"). The Alabama Re reinsurance receivables are
secured by trust accounts containing letters of credit totalling $6.6 million
granted in favor of the applicable insurance subsidiary of the Company.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
Company seeks to limit its exposure to loss on any single insured by reinsuring
the portion of risks in excess of $50,000 on the life of any individual through
various reinsurance contracts, primarily of the coinsurance and yearly
renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the event
the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. Acap evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
ACCOUNTING STANDARDS
In December 1991, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments." SFAS No. 107 extends existing fair
value disclosure practices for some instruments by requiring all entities to
disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized in the statement of financial position, for which
it is practicable to estimate fair value. If estimating fair value is not
practicable, SFAS No. 107 requires disclosures of descriptive information
pertinent to estimating the value of a financial instrument. SFAS No. 107 was
amended by SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments." Among other things, SFAS No. 119
requires additional disclosures about derivative financial instruments. For
companies the size of Acap, SFAS No. 107 and SFAS No. 119 are effective for
financial statements issued for fiscal years ending after December 15, 1995.
Accordingly, the Company incorporated the disclosures required by these
standards in the December 31, 1995 financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires a creditor to measure impairment
of a loan based on the fair value of the collateral when the creditor
determines that foreclosure is probable. A creditor is required to recognize
impairment by creating a valuation allowance. If there is a significant change
(increase or decrease) in the fair value of the collateral, the creditor is
required to recalculate impairment and adjust the valuation allowance. In
1994, the FASB amended SFAS No. 114 through SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," to
allow a creditor to use existing methods for recognizing income on impaired
loans. The Company adopted these standards in 1995 without impact to the
financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which must be adopted by fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to (1) those assets to
be held and used in the business, and (2) for assets to be disposed of. The
Company does not anticipate a material effect of the financial statements from
this new accounting standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new fair-value-based
method of accounting for employee stock compensation plans, under which
compensation cost is measured and recognized in results of operations, or
continue to account for these plans under the current accounting standards.
Entities electing to remain with the present accounting method must make
disclosures of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. SFAS No. 123 must be
adopted in 1996. The Company has not yet selected which accounting option it
will adopt, however, the Company currently has only immaterial stock options
outstanding and therefore does not expect the adoption of SFAS No. 123 to have
a material effect on the financial statements.
SUBSEQUENT EVENTS
At its meeting on March 25, 1996, the Company's Board of Directors unanimously
voted in favor of a plan of dissolution and liquidation (the "Plan") and
directed that the Plan be submitted to a vote of the Company's stockholders at
the Annual Stockholder Meeting to be held on August 26, 1996. InsCap
Corporation, the majority stockholder of the Company, has indicated that it
plans to vote in favor of the Plan, which assures the approval of the Plan. The
record date for determining stockholders of record both for purposes of voting
at the Annual Stockholder Meeting and for the distribution of assets pursuant to
the Plan is July 22, 1996.
Except for a relatively small amount of cash (approximately $2,200 at December
31, 1995), the Company's assets consist solely of 5,421 shares of common stock
("Acap stock") of its majority-owned subsidiary, Acap. The Company's
stockholders are entitled, upon liquidation, to receive, pro rata, the Acap
stock.
As further provided in the Plan, no fractional shares of Acap stock will be
issued. Within certain limitations defined in the Plan, Company stockholders
who, as a result of the liquidation, have "odd lot" shares (as defined in the
Plan), have the option of either receiving cash for their odd lot shares or of
purchasing additional shares of the Company's common stock to round up to the
next whole share of Acap stock.
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
<CAPTION>
December 31,1995
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale (amortized cost $27,946,368)$29,815,078
Equity securities (cost $14,474) 10,938
Mortgage loans 1,125,455
Real estate 1,505,325
Policy loans 6,634,446
Short-term investments 1,710,747
-----------
Total investments 40,801,989
Cash 125,871
Accrued investment income 552,961
Reinsurance receivables 33,475,296
Accounts receivable (less allowance for uncollectible
accounts of $82,797) 119,553
Deferred acquisition costs 1,779,055
Property and equipment (less accumulated depreciation of $541,398) 64,291
Costs in excess of net assets of acquired business
(less accumulated amortization of $1,652,624) 3,131,304
Other assets 314,982
-----------
$80,365,302
===========
LIABILITIES
Policy liabilities:
Future policy benefits $64,402,642
Contract claims 778,380
-----------
Total policy liabilities 65,181,022
Other policyholders' funds 1,733,485
Deferred tax liability 2,480,487
Note payable 1,312,500
Deferred gain on reinsurance 886,356
Other liabilities 677,510
----------
Total liabilities 72,271,360
----------
Minority interest in subsidiary 1,964,040
Preferred stock of subsidiary 1,850,000
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share, authorized 4,000,000,
issued 2,804,445 shares 2,804,445
Additional paid-in capital 5,136,435
Accumulated deficit (4,374,505)
Treasury stock, at cost, 187,461 common shares (147,465)
Net unrealized investment gains, net of taxes of $317,755 860,992
-----------
Total stockholders' equity 4,279,902
-----------
$80,365,302
===========
<FN>
See accompanying notes to consolidated finacial statements.
</TABLE>
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION> YEARS ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C> <C>
REVENUES
Premiums and other considerations $1,581,864 1,105,202
Net investment income 1,331,952 1,737,698
Net realized investment gains 170,003 1,361,310
Reinsurance expense allowance 1,897,257 1,623,438
Amortization of deferred gain (loss) on reinsurance 100,156 (93,181)
Other income 85,610 26,249
----------------------
Total revenues 5,166,842 5,760,716
----------------------
BENEFITS AND EXPENSES
Death benefits 612,125 518,029
Other benefits 1,234,174 807,357
Commissions and general expenses 2,576,224 2,049,103
Interest expense 165,929 192,608
Amortization of deferred acquisition costs 115,800 111,655
Amortization of costs in excess of net
acquired business 213,545 183,444
----------------------
Total benefits and expenses 4,917,797 3,862,196
----------------------
EARNINGS (LOSSES)
Income before federal income tax expense (benefit)
and minority interest in income of subsidiary 249,045 1,898,520
Federal income tax expense (benefit):
Current 1,004,727 320,522
Deferred (865,133) 700,102
-------------------------
Income before minority interest
in income of subsidiary 109,451 877,896
Minority interest in income of subsidiary (78,908) (358,687)
Dividends on preferred stock of subsidiary (127,364) (101,598)
-------------------------
Net income (loss) $ (96,821) 417,611
========================
EARNINGS (LOSS) PER SHARE
Net income (loss) per common share $(0.04) 0.16
=========================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C> <C>
COMMON STOCK
Balance, end of year $2,804,445 2,804,445
-----------------------
ADDITIONAL PAID-IN CAPITAL
Balance, end of year 5,136,435 5,136,435
-----------------------
ACCUMULATED DEFICIT
Balance, beginning of year (4,277,684) (4,695,295)
Net income (loss) (96,821) 417,611
-----------------------
Balance, end of year (4,374,505) (4,277,684)
-----------------------
TREASURY STOCK
Balance, end of year (147,465) (147,465)
-----------------------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance, beginning of year (520,027) 174,061
Change during year 1,381,019 (694,088)
-----------------------
Balance, end of year 860,992 (520,027)
-----------------------
TOTAL STOCKHOLDERS' EQUITY $4,279,902 2,995,704
======================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (96,821) 417,611
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 300,050 233,649
Amortization of deferred acquisition costs 115,800 111,655
Premium and discount amortization (68,231) (36,003)
Realized gains on investments (170,003) (1,361,310)
Deferred federal income tax expense (benefit) (865,133) 700,102
Decrease (increase) in reinsurance receivable 1,259,515 (50,047)
Decrease (increase) in accrued investment income 36,488 (35,669)
Decrease (increase) in accounts receivable (97,448) 7,672
Decrease (increase) in other assets 652,387 (312,972)
Increase (decrease) in future policy
benefit liability (320,894) 620,965
Increase (decrease) in contract claim liability 96,793 (141,283)
Increase (decrease) in other policyholders'
funds liability 50,484 (18,832)
Increase (decrease) in other liabilities (219,433) 153,078
Increase in minority interest 6,238 300,719
Amortization of deferred loss (gain) on reinsurance (100,156) 93,181
-----------------------
Net cash provided by operating activities 579,636 682,516
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments available for
sale and principal repayments on mortgage loans 5,231,345 4,884,802
Purchases of investments available for sale (8,011,380)(11,191,659)
Net decrease in policy loans 318,167 285,897
Net decrease in short-term investments 11,422,323 5,795,928
Purchase of subsidiaries, net of cash provided by
(used in) acquisitions (1,952,300) 564,355
Purchase of property and equipment (24,746) (14,271)
Net cash provided by investing activities 6,983,409 325,052
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable 1,500,000 --
Principal payments on notes payable (8,487,500) --
Deposits on policy contracts 1,316,280 1,042,461
Withdrawals from policy contracts (2,151,240) (1,727,307)
-----------------------
Net cash used in financing activities (7,822,460) (684,846)
-----------------------
Net increase (decrease) in cash (259,415) 322,722
Cash at beginning of year 385,286 62,564
Cash at end of year $ 125,871 385,286
=======================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FORTUNE NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Fortune National Corporation
("Fortune" or "the Company"), a majority-owned subsidiary of InsCap
Corporation; Fortune's 63.7% owned subsidiary, Acap Corporation ("Acap"); and
Acap's wholly-owned life insurance subsidiaries, American Capitol Insurance
Company ("American Capitol"), Family Life Insurance Company of Texas
("Family"), Imperial Plan, Inc. ("Imperial Plan"), Texas Imperial Life
Insurance Company ("Texas Imperial"), through September 30, 1995, Trans-Western
Life Insurance Company ("Trans-Western") and, since February 2, 1995, Oakley-
Metcalf Insurance Company ("Oakley"). All significant intercompany
transactions and accounts have been eliminated in consolidation.
The Company is a life insurance holding company that focuses on the acquisition
of existing life insurance policies, either through direct purchase or the
acquisition of insurance companies. The Company's life insurance operations
are conducted through Acap's wholly-owned life insurance subsidiaries.
Operations are conducted from the corporate headquarters in Houston, Texas.
Approximately half of the Company's direct collected premium comes from
residents of the State of Texas, with no other state generating as much as 10%
of the Company's direct collected premium.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such accounting principles differ
from prescribed statutory reporting practices used by the insurance subsidiary
in reporting to state regulatory authorities. The more significant differences
from statutory accounting principles are: (a) acquisition costs related to
acquiring new business are deferred and amortized over the expected lives of
the policies rather than being charged to operations as incurred; (b) future
policy benefits are based on estimates of mortality, interest and withdrawals
generally representing the Company's experience, which may differ from those
based on statutory mortality and interest requirements without consideration of
withdrawals; (c) deferred federal income taxes are provided for temporary
differences between assets and liabilities reported for financial reporting
purposes and reported for federal income tax purposes; (d) certain assets
(principally furniture and equipment, agents' debit balances and certain other
receivables) are reported as assets rather than being charged to retained
earnings; (e) investments in fixed maturities available for sale are recorded
at fair value rather than at amortized cost; and (f) for acquisitions
accounted for as a purchase, the identified net assets of the acquired company
are valued at their fair values and the excess of the value of the
consideration over the net assets assumed is amortized over a period not to
exceed forty years; whereas, for statutory purposes, acquisitions are accounted
for as equity investments.
Generally, the net assets of the Company's insurance subsidiaries available for
transfer to the parent company are limited to the amounts that the insurance
subsidiaries' statutory net assets exceed minimum statutory capital
requirements; however, payment of the amounts as dividends may be subject to
approval by regulatory authorities. As of December 31, 1995, the amount of
dividends available to the parent company from subsidiaries not limited by such
restrictions is approximately $260,000. The combined net income of the
Company's insurance subsidiaries (where applicable, from the date such
subsidiary was acquired), as determined using statutory accounting practices,
was $7,454,344 and $2,871,495 for the years ended December 31, 1995 and 1994,
respectively. The consolidated statutory stockholders' equity of the Company's
insurance subsidiaries amounted to $2,716,261 and $2,704,711 at December 31,
1995 and 1994, respectively. The total adjusted statutory stockholders' equity
of the Company's insurance subsidiaries exceeds the applicable Risk-Based
Capital requirements.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
INVESTMENTS
Investments are reported on the following bases:
All of the Company's debt and equity securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 and are
classified as available-for-sale securities. Accordingly, such securities are
reported at fair value, with unrealized gains and losses, net of taxes,
excluded from earnings and reported in a separate component of stockholders'
equity.
Mortgage loans on real estate are carried at unpaid principal balances.
Policy loans are carried at their unpaid principal balances. Policy loans
consist primarily of automatic borrowings against a policy's cash surrender
value to pay policy premiums. Interest accrues at rates ranging from 5% to
10%.
Real estate consists of the home office property. The home office building is
carried at cost less accumulated depreciation. Depreciation is computed using
the straight-line method over twenty years. Accumulated depreciation at
December 31, 1995 was $51,250. Tenant improvements are amortized over the term
of the lease. Land is carried at the lower of cost or fair value. Foreclosed
real estate is carried at the lower of cost or fair value determined at the
date of foreclosure.
Short-term investments, consisting primarily of commercial paper, are carried
at cost.
Write-downs and other realized gains and losses, determined on the specific
identification method, are accounted for in the consolidated statements of
operations in net realized investment gains or losses.
DEFERRED ACQUISITION COSTS
Costs which vary with and are primarily related to the production of new
business have been deferred to the extent that such costs are deemed
recoverable through future revenues. These costs principally include
commissions and certain costs of policy issuance and underwriting. For
universal life-type contracts, deferred costs are amortized in relation to the
present value of expected future gross profits from the contracts. For
traditional contracts, deferred costs are amortized in relation to future
anticipated premiums. The deferred costs are reviewed to determine that the
unamortized portion of such costs does not exceed recoverable amounts.
Management believes such amounts are recoverable.
The cost of policies acquired through the purchase of insurance companies,
representing the actuarially determined present value of projected future
profits from policies in force at the purchase date, is deferred and amortized
with interest of 7% to 9% over the policies' estimated lives.
The deferred acquisition costs for the year ended December 31, 1995 are
summarized as follows:
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 3,354,237
Amortized during the year (115,800)
Insurance in force acquired 564,272
Insurance in force ceded (2,023,654)
-----------
Balance at December 31, 1995 $ 1,779,055
===========
</TABLE>
On January 4, 1995, the Company increased the amount of reinsurance on the
Family life policies from 20% to 100% which resulted in a $1,459,382 decrease
in deferred acquisition costs.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives, which range from five to
ten years. Depreciation expense was $44,907 and $50,206 for the years ended
December 31, 1995 and 1994, respectively. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gains or losses are recognized in income for the
period. The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESS
The costs in excess of net assets of acquired business are amortized on a
straight-line basis over periods of seven years, twenty years and forty years.
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES, LIABILITY FOR FUTURE
POLICY BENEFITS AND CONTRACT CLAIMS
For traditional insurance contracts, premiums are recognized as revenue when
due. Benefits and expenses are associated with earned premiums so as to result
in their recognition over the premium paying period of the contracts. Such
recognition is accomplished by means of the provision for future policy
benefits and the amortization of deferred policy acquisition costs.
For contracts with mortality risk that permit the Company to make changes in
the contract terms (such as interest-sensitive whole life policies), premium
collections and benefit payments are accounted for as increases or decreases to
a liability account rather than as revenue and expense. In addition, decreases
to the liability account for the costs of insurance and policy administration
and for surrender penalties are recorded as revenues. Interest credited to the
liability account and benefit payments made in excess of a contract liability
account balance are charged to expense.
For investment contracts without mortality risk (such as deferred annuities),
net premium collections and benefit payments are recorded as increases or
decreases in a liability account rather than as revenue and expense. Surrender
penalties are recorded as revenues. Interest credited to the liability account
is charged to expense.
Reserves for traditional contracts are calculated using the net level premium
method and assumptions as to investment yields, mortality, withdrawals and
dividends. The assumptions are based on past and expected experience and
include provisions for possible unfavorable deviation. These assumptions are
made at the time the contract is issued or, for contracts acquired by purchase,
at the purchase date. Interest assumptions used to compute reserves ranged
from 4% to 9% at December 31, 1995.
Reserves for universal life-type and investment contracts are based on the
contract account balance if future benefit payments in excess of the account
balance are not guaranteed, or the present value of future benefit payments
when such payments are guaranteed.
The liability for contract claims represents the liability for life insurance
claims reported in excess of the related policy benefit reserve plus an
estimate of claims incurred but not reported.
<TABLE>
EARNINGS PER COMMON SHARE
Earnings per common share were computed as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C> <C>
Net income (loss) $ (96,821) 417,611
Divided by weighted average common shares
outstanding 2,616,984 2,616,984
---------- ---------
Net income (loss) per share $ (0.04) 0.16
========== =========
</TABLE>
PARTICIPATING POLICIES
Fortune maintains both participating and non-participating life insurance
policies. Participating business represented approximately 11% and 10% of the
life insurance in force, and 8% of life insurance premium income at December
31, 1995 and 1994, respectively. Dividends to participating policyholders are
determined annually and are payable only upon declaration of the Boards of
Directors of the insurance subsidiaries.
FEDERAL INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109. SFAS
No. 109 requires that a deferred tax liability be recognized for all taxable
temporary differences and a deferred tax asset be recognized for an
enterprise's deductible temporary differences and operating loss and tax credit
carryforwards. A deferred tax asset or liability is measured using the
marginal tax rate that is expected to apply to the last dollars of taxable
income in future years. The effects of enacted changes in tax laws or rates
are recognized in the period that includes the enactment date.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash includes cash on hand, in demand
accounts, in money market accounts and in savings accounts.
ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires a creditor to measure impairment
of a loan based on the fair value of the collateral when the creditor
determines that foreclosure is probable. A creditor is required to recognize
impairment by creating a valuation allowance. If there is a significant change
(increase or decrease) in the fair value of the collateral, the creditor is
required to recalculate impairment and adjust the valuation allowance. In
1994, the FASB amended SFAS No. 114 through SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," to
allow a creditor to use existing methods for recognizing income on impaired
loans. The Company adopted these standards in 1995 without impact to the
financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which must be adopted for fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to (1) those assets to
be held and used in the business, and (2) for assets to be disposed of. The
Company does not anticipate a material effect of the financial statements from
this new accounting standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new fair-value-based
method of accounting for employee stock compensation plans, under which
compensation cost is measured and recognized in results of operations, or
continue to account for these plans under the current accounting standards.
Entities electing to remain with the present accounting method must make
disclosures of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. SFAS No. 123 must be
adopted in 1996. The Company has not yet selected which accounting option it
will adopt, however, the Company currently has only immaterial stock options
outstanding and therefore does not expect the adoption of SFAS No. 123 to have
a material effect on the financial statements.
2. ACQUISITIONS
On August 31, 1994, the Company, through American Capitol, acquired Family for
$6,665,886. Funding for the acquisition was provided by the working capital of
American Capitol and a $5 million surplus debenture issued to the seller. The
acquisition has been accounted for using the purchase method of accounting;
accordingly, the identified assets acquired and liabilities assumed were valued
at their fair values and the excess of the amount paid over the net assets
acquired is being amortized over seven years. The results of operations of
Family are included with the Company's from the date of purchase.
Unaudited pro forma results of operations of the Company for 1994 as if the
acquisition of Family had occurred at the beginning of the year are as follows:
<TABLE>
<CAPTION>
1994
-----
<S> <C>
Total revenue $6,019,213
Net income 729,880
Net income per common share 0.28
</TABLE>
Also during 1994, the Company, through American Capitol, acquired two other
life insurance companies, Trans-Western and Texas Imperial. In 1995, the
Company, through Texas Imperial, acquired one other life insurance company,
Oakley. On September 30, 1995, the Company transferred Trans-Western's
policies in force to Texas Imperial and sold Trans-Western to an unrelated
third party. All of these transactions were immaterial to the Company's
consolidated financial statements.
3. INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Maturing in one year or less $ 373,953 375,754
Maturing after one year through five years 7,292,141 7,384,679
Maturing after five years through ten years 6,864,727 7,275,456
Maturing after ten years 3,909,123 4,360,018
------------ ------------
18,439,944 19,395,907
Mortgage-backed securities 9,506,424 10,419,171
$ 27,946,368 $ 29,815,078
============ ============
</TABLE>
A summary of mortgage-backed securities by type as of December 31, 1995
follows:
<PAGE>
<TABLE>
<S> <C>
Collateralized mortgage obligations:
Planned amortization class $ 5,492,382
Z 2,249,531
Sequential 1,890,614
Other 160,689
------------
9,793,216
Pass-through securities 625,955
------------
$10,419,171
=============
</TABLE>
With a planned amortization class security, early repayments are applied first
to other tranches, and cash flows originally applicable to other tranches are
first applied to the planned amortization class tranche if that tranche's
originally scheduled cash flows are received later than expected. The Z
tranche defers all interest to other tranches until those tranches are paid
down, at which time accumulated interest and principal are paid to this class.
Sequential tranches are not supported by other tranches.
The amortized cost and fair values of investments in fixed maturity and equity
securities as of December 31, 1995 are as follows:
<TABLE>
<CAPTION> GROSS GROSS
AMORTIZED UNREALIZED UNREALED FAIR
COST GAINS LOSSES VALUE
--------- --------- -------- -----
<S> <C> <C> <C> <C>
Fixed maturity securities:
Government securities $ 3,318,630 120,720 (235) 3,439,115
Corporate securities 11,368,811 710,566 (23,233) 12,056,144
Asset-backed securities 3,752,505 148,954 (811) 3,900,648
Mortgage-backed securities 9,506,422 943,258 (30,509) 10,419,171
----------- --------- -------- ----------
27,946,368 1,923,498 (54,788) 29,815,078
----------- --------- -------- ----------
Equity securities 14,474 -- (3,536) 10,938
----------- --------- -------- ----------
$27,960,842 1,923,498 (58,324) 29,826,016
=========== ========= ======== ==========
</TABLE>
A summary of proceeds from the sales of investments in fixed maturity
securities, exclusive of proceeds from maturities, and the gross gains and
losses realized on those sales follows:
<PAGE>
<TABLE>
<CAPTION>
1995 1994
----- ----
<S> <C> <C>
Proceeds on sales $3,297,458 1,785,507
========== =========
Gross realized gains on sales $149,889 19,044
Gross realized losses on sales (43,226) (27,796)
---------- --------
Net realized gains (losses) on sales 106,663 (8,752)
Realized gains on transactions other than sales 3,475 62
-------- --------
Net realized gains (losses) $110,138 (8,690)
========= ========
</TABLE>
As of December 31, 1995, 100% of the Company's fixed maturity securities were
rated investment grade (i.e., rated BBB-/Baa3 or higher by Standard & Poor or
Moody).
MORTGAGE LOANS
The weighted average interest rate of mortgage loans held as of December 31,
1995 and 1994 was 9.8% and 9.7%, respectively.
The distribution of principal balances on mortgage loans held as of December
31, 1995 by contractual maturity follows. Actual maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION> PRINCIPAL
BALANCE
-------
<S> <C>
Maturing in one year or less $ 145,453
Maturing after one year through five years 838,003
Maturing after five years through ten years 141,999
----------
$1,125,455
==========
</TABLE>
The distribution of mortgage loans, net of any applicable valuation allowance,
by class of loan and geographic distribution follows:
<TABLE>
<CAPTION>
Principal
Balance
---------
<S> <C>
Commercial loans:
Texas $ 847,733
Louisiana 123,821
---------
$ 971,554
==========
Residential loans:
Texas $ 117,443
Louisiana 36,458
----------
$ 153,901
==========
<PAGE>
INVESTMENT INCOME
A summary of net investment income follows:
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Interest on fixed maturities $1,257,211 1,185,092
Interest on mortgage loans 115,895 312,219
Interest on policy loans 44,721 37,574
Interest on cash and short-term investments 114,375 221,800
Real estate income 40,600 7,554
Dividends on equity securities 5,632 4,462
Miscellaneous investment income 42,943 83,192
---------- ---------
1,621,377 1,851,893
Investment expense (289,425) (114,195)
---------- ---------
$1,331,952 1,737,698
========== =========
</TABLE>
UNREALIZED INVESTMENT GAINS (LOSSES)
The change between cost and fair value for fixed maturity and equity
securities, net of taxes, follows:
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES TOTAL
---------- ---------- -----
<S> <C> <C> <C>
Balance, January 1, 1994 $ 175,194 (1,133) 174,061
Change during the year (680,990) (13,098) (694,088)
------------ --------- ----------
Balance, December 31, 1994 (505,796) (14,231) (520,027)
Change during the year 1,362,299 18,720 1,381,019
------------ --------- ----------
Balance, December 31, 1995 $ 856,503 4,489 860,992
============ ========= ==========
</TABLE>
<PAGE>
NET REALIZED INVESTMENT GAINS
A summary of net realized investment gains follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Fixed maturities $ 110,138 (8,690)
Equity securities (including investment
in subsidiaries) 59,865 --
Mortgage loans --- 1,450,000
Real estate --- (80,000)
--------- ----------
$ 170,003 1,361,310
========== =========
</TABLE>
OTHER INVESTMENT DISCLOSURES
At December 31, 1995, bonds with a fair value of $5,386,146 and a $25,000
certificate of deposit were on deposit with various regulatory authorities.
Investments, other than investments issued or guaranteed by the United States
Government or a United States Government agency or authority, in excess of 10%
of stockholders' equity at December 31, 1995, were as follows:
<TABLE>
<CAPTION>
BALANCE
SHEET AMOUNT CATEGORY
------------ --------
<S> <C> <C>
Home office building and property $ 1,505,325 Real estate
EQCC Home Equity 1,429,025 Fixed maturity
Standard Credit Card 1,165,686 Fixed maturity
BankAmerica Corporation 982,435 Fixed maturity
Ford Motor Credit Corporation 891,905 Fixed maturity
Goldman Sachs 831,280 Fixed maturity
Commercial Credit Corporation 670,747 Fixed maturity
</TABLE>
<PAGE>
4. FAIR VALUES
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Assets:
Fixed maturities $ 29,815,078 29,815,078
Equity securities 10,938 10,938
Mortgage loans 1,125,455 1,235,658
Policy loans 6,634,336 6,634,336
Short-term investments 1,710,747 1,710,747
Liabilities:
Note payable 1,312,500 1,312,500
</TABLE>
Estimated market values of publicly-traded fixed maturity and equity securities
are as reported by an independent pricing service. Estimated market values of
fixed maturity securities not actively traded in a liquid market are estimated
using a third party pricing system, which uses a matrix calculation assuming a
spread over U.S. Treasury bonds.
Fair values of mortgage loans are estimated by discounting expected cash flows,
using market interest rates currently being offered for similar loans.
Policy loans have no stated maturity dates and are a part of the related
insurance contracts. Accordingly, it is not practicable for the Company to
estimate a fair value for them.
For short-term investments, the carrying amount is a reasonable estimate of
fair value.
In that the note payable is a floating rate instrument, the principal balance
is a reasonable estimate of the note's fair value.
5. NOTES PAYABLE
In connection with American Capitol's purchase of Family, American Capitol
issued a $5,000,000 surplus debenture. The debenture was a balloon note
maturing on January 4, 1995, bearing interest at the rate of 7.5%. The
debenture was payable only out of the statutory equity of American Capitol in
excess of $2,000,000. Acap guaranteed American Capitol's performance under the
debenture by pledging the common stock of American Capitol owned by Acap as
security. The debenture was repaid in full on January 31, 1995.
At December 31, 1994, Family had a $3.3 million balloon note payable maturing
January 4, 1995, bearing interest at the rate of 6%. The note was repaid in
full on January 31, 1995.
As a source of funds to repay the $5 million surplus debenture issued in
connection with the acquisition of Family, on January 31, 1995, Acap borrowed
$1.5 million from Central National Bank of Waco, Texas. The note is renewable
by the bank each April 30 until fully repaid. The note bears interest at a
rate equal to the base rate of a bank plus 1%. Principal payments on the note
of $62,500 (a six year amortization) are due quarterly beginning April 30,
1995. The note is secured by Acap's pledge of all the outstanding shares of
Acap's subsidiary, American Capitol. The loan agreement contains certain
restrictions and financial covenants. Without the written consent of the bank,
Acap may not incur any debt, pay common stock dividends or sell any substantial
amounts of assets. Also, American Capitol is subject to minimum statutory
earnings and capital and surplus requirements during the loan term. Acap is in
compliance with all of the terms of the loan.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company acquired its home office building on September 28, 1994, and has
had no material leases since that date. Rent expense was $10,020 for 1995 and
$85,578 for 1994.
REINSURANCE
The Company accounts for reinsurance in accordance with Statement of Financial
Account Standards No. 113. In accounting for reinsurance, amounts paid or
deemed to have been paid for reinsurance contracts are recorded as reinsurance
receivables. The cost of reinsurance related to long-duration contracts is
accounted for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies.
At December 31, 1995, reinsurance receivables with a carrying value of $26.6
million were associated with a single reinsurer, Crown Life Insurance Company
("Crown"). At December 31, 1994, Crown had assets in excess of $7 billion and
stockholders' equity of approximately $0.4 billion. Crown is rated "Excellent"
by A.M. Best Company, an insurance company rating organization. At December
31, 1995, reinsurance receivables with a carrying value of $4.2 million were
associated with Alabama Reassurance Company ("Alabama Re"). The Alabama Re
reinsurance receivables are secured by trust accounts containing letters of
credit totalling $6.6 million granted in favor of the applicable insurance
subsidiary of the Company.
The Crown and Alabama Re reinsurance treaties are representative of a key use
of reinsurance by the Company. Immediately following the purchase of a block
of life insurance policies through the Company's acquisition program, the
Company may reinsure all or a portion of the acquired policies. By doing so,
the Company seeks to recover all or a portion of the purchase price of the
acquired policies and transfer the risks associated with the policies to the
reinsurer. The Company retains the administration of the reinsured policies
and seeks to profit from the compensation the Company receives from the
reinsurer for such policy administration. The Company is entitled, but not
obligated, to recapture the policies at a price determined by a formula in the
reinsurance treaty.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
purpose of reinsurance is to limit the Company's exposure to loss on any single
insured. The Company reinsures the portion of risks in excess of a maximum of
$50,000 on the life of any individual through various reinsurance contracts,
primarily of the coinsurance and yearly renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the event
the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies. Other than its exposure to
Crown and Alabama Re as discussed above, management does not believe the
Company has significant concentrations of credit risk related to reinsurance,
or otherwise.
The effect of reinsurance on premiums and benefits follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
-------------------------
<S> <C> <C>
Direct premiums $ 7,884,105 6,197,219
Reinsurance assumed 3,655 132,883
Reinsurance ceded (6,305,896) (5,224,900)
------------ -----------
Net premiums $ 1,581,864 1,105,202
============ ===========
Direct policy benefits $ 5,059,540 7,026,411
Reinsurance assumed (26) 16,328
Reinsurance ceded (3,213,215) (5,717,353)
------------ -----------
Net policy benefits $ 1,846,299 1,325,386
============ ===========
</TABLE>
LITIGATION
Fortune and its subsidiaries are involved in various lawsuits and legal actions
arising in the ordinary course of operations. Management is of the opinion
that the ultimate disposition of the matters will not have a material adverse
effect on Fortune's results of operations or financial position.
7. FEDERAL INCOME TAXES
Fortune files a separate federal income tax return. Acap and American Capitol
file a consolidated federal income tax return. The other subsidiaries of the
Company file separate federal income tax returns.
At December 31, 1995, Fortune has a remaining tax net operating loss carryover
of approximately $1,000,000 that will expire between now and the year 2006 if
not previously utilized. At December 31, 1995, Acap has a remaining tax net
operating loss carryover of approximately $1,100,000 that will expire during
the years 2001 through 2008 if not previously utilized. At December 31, 1995,
the Company had alternative minimum tax carryforwards of approximately $349,000
that are available for an indefinite period to reduce future regular federal
income taxes and capital tax loss carryforwards of approximately $139,000 that
will expire in the year 2000 if not previously utilized.
A portion of life insurance taxable income generated prior to 1984 is not
taxable unless it exceeds certain statutory limitations or is distributed to
stockholders, in which case it becomes taxable at ordinary corporate rates.
Such income is accumulated in a Policyholders' Surplus account that, at
December 31, 1995, had a balance of approximately $4,600,000. No provision has
been made for income taxes related to this accumulation.
A reconciliation of income tax expense for the years 1995 and 1994 computed at
the applicable federal tax rate of 34% to the amount recorded in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Federal income tax expense at statutory rate $ 84,675 645,497
Small life insurance company special deduction (596,918) (336,989)
Change in valuation allowance 583,189 504,484
Tax underpayment (refund) 15,084 (57,519)
Other, net 53,564 265,151
---------- ---------
Total federal income tax expense $ 139,594 1,020,624
========== ==========
</TABLE>
The small life insurance company special deduction noted above is available to
life insurance companies with assets under $500 million. The deduction is 60%
of life insurance taxable income under $3 million. The deduction is phased out
for life insurance taxable income between $3 million and $15 million, with the
deduction reduced by 15% of the life insurance taxable income in excess of $3
million.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995
are as follows:
<PAGE>
<TABLE>
<S> <C>
Deferred Tax Assets:
Deferred gain on reinsurance $ 591,968
Allowance for investment losses 185,140
Policy reserves and policy funds 271,052
Net operating loss carryforwards 387,512
Alternative minimum tax credit carryforwards 118,753
Other 112,319
----------
Total gross deferred tax assets 1,666,744
Less: Valuation allowance (1,517,166)
----------
Deferred tax assets 149,578
----------
Deferred Tax Liabilities:
Deferred policy acquisition costs 460,396
Policy reserves and policy funds 1,349,636
Net unrealized losses on available-for-sale securities 505,497
Deferred cost of reinsurance 301,854
Other 12,682
------------
Deferred tax liabilities 2,630,065
------------
Net deferred tax liability $(2,480,487)
</TABLE>
A valuation allowance of $1,517,166 was established at December 31, 1995 against
the deferred tax asset. The net change in the total valuation allowance for
the years ended December 31, 1995 and 1994 was an increase of $426,637 and
$504,484, respectively. Management believes that it is more likely
than not that the net deferred tax asset is recoverable.
8. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments for interest expense for the years ended December 31, 1995 and
1994 were $418,876 and $0, respectively. Cash payments of $1,017,013 and
$744,291 for federal income taxes were made during the years ended December 31,
1995 and 1994, respectively.
The reinsurance agreement entered into by the Company in 1994 with an
unaffiliated reinsurer covering 20% of each of Family's life policies was a
non-cash transaction. Family transferred assets of $379,069 and liabilities of
$1,012,390 and recognized a deferred gain on reinsurance of $633,321 to be
amortized over the life of the policies. On January 4, 1995, Family increased
the amount of reinsurance on each of its life policies from 20% to 100%. The
increase in the reinsurance percentage of the Family policies and a reinsurance
agreement entered into by the Company with an unaffiliated reinsurer covering
100% of each of the life policies acquired with Oakley were non-cash
transactions. In connection with those transactions, the Company transferred
assets of $2,020,065 and liabilities of $3,259,418 and recognized a deferred
gain on reinsurance of $1,239,353 to be amortized over the life of the
policies.
In connection with the acquisition of Family in 1994, a $5,000,000 surplus
debenture was issued to the seller, which was a non-cash transaction.
In 1994, the Company reacquired its home office property in partial
satisfaction of the mortgage loan outstanding on the property, which was a non-
cash transaction.
The following reflects assets acquired and liabilities assumed relative to the
acquisitions by the Company of three life insurance companies in 1994 and one
life insurance company in 1995, the consideration given for such acquisitions
and the net cash flow relative to such acquisitions.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets of acquired subsidiaries $ 4,393,403 28,504,392
Liabilities of acquired subsidiaries (1,833,887) (20,763,913)
Excess of cost over net assets acquired -- 316,074
--------------------------
Cost of acquisition $ 2,559,516 8,056,553
==========================
Cash paid for acquisitions $ 2,559,516 3,056,553
Surplus debenture issued -- 5,000,000
--------------------------
Cost of acquisition $ 2,559,516 8,056,553
==========================
Net cash from acquisitions:
Cash of acquired companies $ 607,216 3,620,908
Cash paid for acquisitions (2,559,516) (3,056,553)
--------------------------
Net cash provided from (used by) acquisitions $(1,952,300) 564,355
==========================
</TABLE>
9. AMERICAN CAPITOL KEY EMPLOYEE STOCK OPTION PLAN
On July 18, 1988, the Board of Directors of American Capitol approved a Key
Employee Stock Option Plan ("the Plan"). Under the terms of the non-qualified
Plan, the Compensation Committee of the Board of Directors of American Capitol
is authorized to grant stock options to any employee the Compensation Committee
determines is a key employee. The stock options may only be granted on shares
of common stock of Acap or Fortune owned by American Capitol. The options
enable the grantee to purchase the common stock to which the options relate at
the fair market value of the common stock on the date the options were granted.
The options generally expire 20% annually over a five year period and are
exercisable immediately upon grant.
Stock options granted for Acap common stock are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
OPTION PRICE 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Outstanding at January 1 $131 1/4 - $187 1/2 102 102
Cancelled during the year $131 1/4 (34) --
---------------
Outstanding at December 31 $187 1/2 68 102
===============
Available for future grant 173 139
===============
</TABLE>
Stock options granted for Fortune common stock are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------
OPTION PRICE 1995 1994
---- ----
<S> <C> <C> <C>
Outstanding at January 1 $11/32 - $3/8 35,000 35,000
Cancelled during the year $3/8 (10,000) --
-------------------
Outstanding at December 31 $11/32 25,000 35,000
===================
Available for future grant 46,571 36,571
===================
</TABLE>
10. CAPITAL STOCK
Fortune has two classes of capital stock: preferred stock ($25 par value,
authorized 1,000,000 shares) and common stock ($1 par value, 4,000,000 shares
authorized).
PREFERRED STOCK
Preferred stock may be issued in series with such dividend, liquidation,
redemption, conversion, voting, and other rights as the Board of Directors may
determine. At minimum, if six quarterly dividends are unpaid and past due, the
holders of preferred stock may elect two directors to Fortune's Board. Any
dividends and liquidating distributions of the preferred stock are payable in
preference to common stock. No preferred stock has been issued and outstanding
during the two years ended December 31, 1995.
COMMON STOCK
Under an exchange agreement between Fortune and Acap, Fortune is obligated to
provide Acap with such shares of Common Stock as are necessary for Acap to meet
its obligations under a certain series of Acap preferred stock. The terms of
the Acap preferred stock permit the holders to exchange their shares of the
preferred stock, valued for such purpose at $27.50 per share, for Common Stock,
valued for such purpose at $2.50 per share. The exchange agreement between
Fortune and Acap provides for payment by Acap to Fortune for the Common Stock
to consist of shares of Acap common stock of equal value to the Common Stock
transferred to Acap.
There was no activity related to Common Stock for the years ended December 31,
1995 and 1994.
11. SUBSEQUENT EVENTS
At its meeting on March 25, 1996, the Company's Board of Directors unanimously
voted in favor of a plan of dissolution and liquidation (the "Plan") and
directed that the Plan be submitted to a vote of the Company's stockholders at
the Annual Stockholder Meeting to be held on August 26, 1996. InsCap
Corporation, the majority stockholder of the Company, has indicated that it
plans to vote in favor of the Plan, which assures the approval of the Plan. The
record date for determining stockholders of record both for purposes of voting
at the Annual Stockholder Meeting and for the distribution of assets pursuant to
the Plan is July 22, 1996.
Except for a relatively small amount of cash (approximately $2,200 at December
31, 1995), the Company's assets consist solely of 5,421 shares of common stock
("Acap stock") of its majority-owned subsidiary, Acap. The Company's
stockholders are entitled, upon liquidation, to receive, pro rata, the Acap
stock.
As further provided in the Plan, no fractional shares of Acap stock will be
issued. Within certain limitations defined in the Plan, Company stockholders
who, as a result of the liquidation, have "odd lot" shares (as defined in the
Plan), have the option of either receiving cash for their odd lot shares or of
purchasing additional shares of the Company's common stock to round up to the
next whole share of Acap stock.<PAGE>
FORTUNE NATIONAL CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fortune National Corporation
We have audited the accompanying consolidated balance sheet of Fortune National
Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1995 and 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fortune National
Corporation and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standard No. 114, "Accounting by Creditors for the
Impairment of a Loan," as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for the Impairment of a Loan:
Income Recognition and Disclosures," in 1994.
KPMG Peat Marwick LLP
Houston, Texas
March 25, 1996<PAGE>
FORTUNE NATIONAL CORPORATION
STOCKHOLDER INFORMATION
MARKET INFORMATION
The common stock of Fortune is traded over-the-counter with activity in the
stock reflected nationally on the OTC Bulletin Board electronic quotation
system of the National Association of Securities Dealers. The Company's stock
symbol is FRNC.
The table below presents the range of closing prices for Fortune's common stock
during the two most recent fiscal years.
<TABLE>
<CAPTION>
1995 1994
---- ----
High Low High Low
---- --- ---- ----
<S> <C> <C> <C> <C>
First quarter $.22 .22 .22 .22
Second quarter .22 .13 .22 .22
Third quarter .26 .13 .22 .22
Fourth quarter .26 .06 .22 .22
</TABLE>
For 1994, the prices presented are bid prices, which reflect inter-dealer
transactions and do not include retail mark-ups and mark-downs or any
commission to the parties involved. As such, the prices may not reflect prices
in actual transactions. For 1995,bid quotations were not available from the
OTC Bulletin Board and the prices reflect the range of trading prices reported
on the OTC Bulletin Board.
HOLDERS
The approximate number of holders of record of Fortune's common stock as of
July 22, 1996 was 1,494.
DIVIDENDS
Fortune declared no common stock dividends in 1995 or 1994. At present,
management anticipates that no dividends will be declared or paid with respect
to Fortune's common stock during 1996.
FORM 10-KSB
Stockholders may receive without charge a copy of the Company's Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission by writing to
Lana S. Vaughn, Fortune National Corporation, 10555 Richmond Avenue, Houston,
TX 77042.
TRANSFER AGENT
The registrar and transfer agent for the Company's common stock is Continental
Stock Transfer and Trust Company, 2 Broadway, New York, NY 10004. For a change
of name or address, or to replace lost stock certificates, write to Continental
at the address above or call (212) 509-4000.
<PAGE>
INVESTOR RELATIONS
Requests for information should be directed by mail to Lana S. Vaughn,
Stockholder Services, Fortune National Corporation, 10555 Richmond Avenue,
Houston, TX 77042 or by calling (713) 974-2242.
INDEPENDENT AUDITORS
The Company's financial statements for the year 1995 were audited by the
independent accounting firm of KPMG Peat Marwick LLP, 700 Louisiana, Houston,
TX 77002.
ANNUAL MEETING
Stockholders are invited to attend the Annual Meeting of Stockholders which
will be held on Monday, August 26, 1996 at 8:00 a.m. at the Company's office at
10555 Richmond Avenue, Houston, Texas, on the second floor.
<PAGE>
FORTUNE NATIONAL CORPORATION
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS OF FORTUNE
R. Wellington Daniels
Investor; Retired Director of National Accounts, American Cyanamid
William F. Guest
Chairman of the Board and President, Acap Corporation
C. Stratton Hill, Jr., M.D.
Physician
OFFICERS OF FORTUNE
William F. Guest
Chairman of the Board and President
John D. Cornett
Executive Vice President and Treasurer
Paul L. Clancy
Secretary
H. Kathleen Musselwhite
Assistant Treasurer
OFFICERS OF AMERICAN CAPITOL
William F. Guest
Chairman of the Board
John D. Cornett
President
Paul L. Clancy
Executive Vice President and Secretary
H. Kathleen Musselwhite
Treasurer and Controller
Carolyn M. Rawlins
Assistant Secretary
Linda G. Stark
Assistant Vice President
C. Stratton Hill, Jr., M.D.
Medical Director
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended: December 31, 1995
[ ] TRANSITION REPORT under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission file number 0-14451
Acap Corporation
(Name of small business issuer in its charter)
State of Incorporation: IRS Employer Id.:
Delaware 25-1489730
Address of Principal Executive Office:
10555 Richmond Avenue, Houston, Texas 77042
Issuer's telephone number, including area code: (713) 974-2242
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. [x] Yes [ ] No.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [x]
Revenues for the issuer for its most recent fiscal year were $5,308,709.
As of March 22, 1996, 8,516 shares of the registrant's Common Stock,
excluding shares held in treasury, were issued and outstanding, and the
aggregate market value of such shares held by non-affiliates of the
registrant on such date, based on the average of the closing bid and asked
prices for such shares on such date, was $959,450.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5 - 7 of Form 10-KSB is
incorporated by reference from the registrant's 1995 Annual Report to
Stockholders. The information required by Part III, Items 9 - 12 of Form 10-
KSB is incorporated by reference from the registrant's definitive information
statement to be furnished in connection with the Annual Meeting of
Stockholders to be held on or about August 26, 1996.
The Exhibit Index, Part IV, Item 13, is located on page 7 of this Form 10-
KSB. This Form 10-KSB contains a total of 47 pages including any exhibits.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [ x ] No
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Acap Corporation was incorporated under the laws of the State of Delaware on
March 18, 1985 by the management of American Capitol Insurance Company
("American Capitol") to become the parent or "holding company" of American
Capitol. Acap Corporation began operating in that capacity on
October 31, 1985. American Capitol is a Texas life insurance company
licensed in 33 states and the District of Columbia. American Capitol began
operations as a life insurance company on June 1, 1954.
Unless the context otherwise requires, the term "Acap" refers to the
consolidated group of Acap Corporation and its wholly-owned subsidiaries.
Acap primarily engages in the acquisition and servicing of existing blocks of
life insurance policies. Since September 1994, the Company has marketed a
small volume of final expense insurance and prearranged funeral service
contracts. Through its life insurance subsidiaries, Acap maintains a broad
portfolio of individual life insurance policies and annuity contracts. Life
insurance is the only industry segment material to the operations of Acap.
Fortune National Corporation ("Fortune Corp"), a Pennsylvania corporation,
acquired a majority interest in American Capitol in 1984. In the 1985
reorganization that resulted in American Capitol becoming a wholly-owned
subsidiary of Acap, Fortune Corp's majority interest in American Capitol was
exchanged for an equivalent interest in Acap. Fortune Corp currently owns
approximately 63.7% of the outstanding common stock of Acap.
Acquisition Strategy
- --------------------
Acap's strategy for achieving growth and profits is based upon the
acquisition of blocks of existing life insurance policies through the direct
purchase of such blocks or indirectly through the acquisition of life
insurance companies. By acquiring blocks of life insurance directly or
through the purchase of other life insurance companies, Acap hopes to add
"new" life policies to its books more economically than through marketing.
Generally, insurance companies can acquire policies in two ways; either by
"purchasing" them policy by policy through marketing, or by buying an
existing block of policies. Purchasing an existing block of business has the
advantage that the policies have an established "history." That is, an
existing block will have an established pattern of mortality and lapse
experience. Also, the company selling the block of existing life policies
has already absorbed the risks involved in marketing the life insurance
products. In purchasing an existing block of policies, Acap's strategy is to
set the purchase price at the sum of the expected future profits of the block
of policies discounted at a rate of return in excess of Acap's cost of funds.
Acap then attempts to improve upon the rate of return by maintaining the
acquired policies at a lower per policy cost than was used in the pricing
assumptions and by realizing a higher investment yield on the acquired assets
than was used in the pricing assumptions.
It also should be noted that the acquisition strategy has certain risks and
disadvantages. Since the marketing of life insurance products generally
involves greater risks than acquiring existing blocks of life insurance, the
profit margins available through marketing may be greater than the margins
available with respect to an acquired block of life insurance. Also, there
are relatively few companies or blocks of business meeting Acap's acquisition
criteria that become available for purchase each year. Acap's acquisition
strategy requires Acap to maintain the personnel, computer systems and
physical properties necessary to accommodate large growth phases without the
guarantee that such growth will occur.
Acquisitions to Date
- --------------------
Acap (i.e., its predecessor, American Capitol) switched from a traditional
marketing strategy to the current acquisition strategy in 1984 in connection
with the change in control and associated change in management resulting from
Fortune Corp's purchase of a majority of the outstanding common stock.
Acquisitions made through December 31, 1995 include:
Fortune National Life Insurance Company, acquired November 29, 1985,
which added approximately 12,447 life policies and annuity contracts to
Acap's operations.
Associated Companies, Inc., acquired January 13, 1989, which
approximately doubled the existing insurance operations of Acap.
Trans-Western Life Insurance Company, acquired February 25, 1994, which
added approximately 4,235 life policies and annuity contracts to Acap's
operations.
Family Life Insurance Company of Texas, acquired August 31, 1994, which
added approximately 46,500 life policies and annuity contracts to Acap's
operations.
Texas Imperial Life Insurance Company, acquired September 29, 1994,
which added approximately 9,750 life policies and annuity contracts to
Acap's operations.
Oakley-Metcalf Insurance Company, acquired February 2, 1995, which added
approximately 3,000 life policies to Acap's operations.
Products and Markets
- --------------------
The policies serviced by Acap are primarily traditional whole life policies,
interest-sensitive whole life policies, term life policies, stipulated
premium whole life policies and flexible premium annuity contracts.
Traditional whole life policies are generally characterized by a uniform
death benefit and a level periodic premium throughout the insured's lifetime.
These policies combine a savings element with insurance protection. The
savings element, called the cash value, builds at a fixed rate of interest
and may be borrowed against by the policyholder and, if the policy terminates
other than through the death of the insured, may be paid to the policyholder.
Acap's interest-sensitive whole life policies also generally have a uniform
death benefit and a level periodic premium. However, with these policies,
the interest rate credited to the savings element of the policy may be varied
at Acap's option above a guaranteed minimum rate. The interest-sensitive
policies also provide for a surrender charge in the event that the
policyholder surrenders the policy during the first ten years following the
issue date of the policy. Further, Acap may vary below a guaranteed maximum
the amount charged against the policy for expenses and mortality costs.
Term life policies generally offer pure insurance protection (i.e., no
savings element) for a specified period. Such policies typically offer a
conversion privilege, a renewal privilege, or both. Premiums typically are
adjusted upon the exercise of either privilege.
Stipulated premium whole life policies are characterized by a uniform death
benefit and a level periodic premium throughout the insured's lifetime,
however, unlike traditional whole life policies, stipulated premium whole
life policies have no cash value.
Flexible premium annuity contracts permit the annuitant to make deposits as
he sees fit, and allow the annuitant to make withdrawals at his option,
subject to deduction of applicable surrender charges. The annuity balance
earns interest on a tax deferred basis at a rate that Acap may change
annually.
From mid-1985 until September 1994, the Company relied exclusively on its
acquisition strategy and did not actively market new business. Since
September 1994, the Company has marketed a small volume of final expense
insurance and prearranged funeral service contracts. These policies are
primarily written through independent funeral homes. The Company currently
receives new business from approximately thirty funeral homes.
The following table sets forth information with respect to gross insurance in
force and net premium income of Acap during the past three years:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Life insurance in force $286,803 321,859 267,722
Premium income:
Life $1,828 1,350 848
Annuity 547 223 166
-------- -------- -------
Total premiums $ 2,375 1,573 1,014
======== ======== =======
</TABLE>
The table below presents the direct collected premiums by major geographic
area for the last three years:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Texas $ 4,573 2,414 1,225
Ohio 550 614 682
Indiana 457 503 551
Pennsylvania 399 440 536
Michigan 352 396 448
Other U.S. 2,122 2,298 2,513
------ ------ ------
Total $ 8,453 6,665 5,955
======= ======= ======
</TABLE>
The preceding tables include certain premium amounts which under Statement of
Financial Accounting Standards No. 97 ("FAS 97") are credited to liability
accounts and are not considered revenues, and exclude surrender charges that
under FAS 97 are considered revenue. The premiums of Acap affected by FAS 97
are the premiums on interest-sensitive whole life policies and annuity
contracts.
Competition
- -----------
The life insurance industry is highly competitive. There are approximately
1,770 legal reserve life insurance companies in the United States. Although
Acap's acquisition strategy is not the standard strategy employed in the
industry, Acap must compete with a significant number of companies, both
inside and outside the life insurance industry, when looking for an
acquisition. Many of these companies have substantially greater financial
resources and larger staffs than Acap.
Acap also must compete with a significant number of other life insurance
companies to retain Acap's existing block of policies. Many of these
companies have broader and more diverse product lines together with active
agency forces, and therefore, certain of Acap's policyholders may be induced
to replace their existing policies with those provided by Acap's competitors.
Regulation
- ----------
The insurance subsidiaries of the Company are subject to regulation by the
supervisory insurance agency of each state or other jurisdiction in which the
insurance subsidiaries are licensed to do business. These supervisory
agencies have broad administrative powers relating to the granting and
revocation of licenses to transact business, the approval of policy forms,
the form and content of mandatory financial statements, capital, surplus,
reserve requirements and the types of investments that may be made. The
insurance subsidiaries are required to file detailed reports with each
supervisory agency, and its books and records are subject to examination by
each. In accordance with the insurance laws of the State of Texas (the
insurance subsidiaries' state of domicile) and the rules and practices of the
National Association of Insurance Commissioners (the "NAIC"), the insurance
subsidiaries are examined periodically by examiners from Texas.
Most states have enacted legislation or adopted administrative regulations
covering such matters as the acquisition of control of insurance companies
and transactions between insurance companies and the persons controlling
them. The NAIC has recommended model legislation on these subjects that has
been adopted, with variations, by many states. The nature and extent of the
legislation and administrative regulations now in effect vary from state to
state, and in most states prior administrative approval of the acquisition of
control of an insurance company incorporated in the state, whether by tender
offer, exchange of securities, merger or otherwise, is required, which
process involves the filing of detailed information regarding the acquiring
parties and the plan of acquisition.
The insurance subsidiaries are members of an "insurance holding company
system" and are required to register as such with the State of Texas and file
periodic reports concerning their relationships with the insurance holding
company and other affiliates of the holding company. Material transactions
between members of the holding company system are required to be "fair and
reasonable" and in some cases are subject to administrative approval, and the
books, accounts and records of each party are required to be so maintained as
to clearly and accurately disclose the precise nature and details of the
transactions. Notice to or approval by the State of Texas is required for
dividends paid by the insurance subsidiaries.
Employees
- ---------
At December 31, 1995, Acap had a total of 29 employees. None of these
employees is covered by a collective bargaining agreement. Acap believes
that it has excellent relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTIES.
The principal offices of the Company are located at 10555 Richmond Avenue,
Houston, Texas 77042. The Company holds unencumbered title to a building
containing approximately 50,000 square feet and approximately 6.6 acres of
land at that location. The Company occupies approximately 20,000 square feet.
Approximately 5,300 square feet of additional space is leased by unaffiliated
tenants. The Company's offices are suitable for the conduct of its business
and provide room for future growth. Management believes that the property is
adequately covered by insurance.
The Company's investment policy prohibits making new investments in real
estate without the prior approval of the Board of Directors. There are no
plans to make any real estate investments in the foreseeable future. If the
Company were interested in making a real estate investment, regulatory
restrictions applicable to Texas life insurance companies would prohibit the
life insurance subsidiaries from investing in real estate outside of the
United States, in residential real estate, or in any property, other than
home office property, that exceeds 5% of the insurer's statutory assets.
The Company owns and services first mortgage loans with aggregate principal
balances at December 31, 1995 of $1,265,499. The Company's investment policy
prohibits making new investments in mortgage loans without the prior approval
of the Board of Directors. There are no plans to make any mortgage loan
investments in the foreseeable future. If the Company were interested in
making a mortgage loan investment, regulatory restrictions applicable to
Texas life insurance companies would prohibit the life insurance subsidiaries
from investing in mortgage loans on real estate outside of the United States,
in other than first liens, or in any loan that exceeds 25% of the insurer's
statutory capital and surplus.
ITEM 3. LEGAL PROCEEDINGS.
Acap and its subsidiary are involved in various lawsuits and legal actions
arising in the ordinary course of operations. Management is of the opinion
that the ultimate disposition of these matters will not have a material
adverse effect on Acap's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The required information regarding the market for the common equity of the
Company and related stockholder matters is incorporated herein by reference
from "Stockholder Information" on page 32 of Acap's 1995 Annual Report to
Stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference from "Management's Financial
Analysis" on pages 4 - 9 of Acap's 1995 Annual Report to Stockholders.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements and supplementary data are incorporated herein by
reference from pages 11 - 30 of Acap's 1995 Annual Report to Stockholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
The information required by Items 9-12 is incorporated by reference from
Acap's definitive information statement, which is to be filed pursuant to
Regulation 14C.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibits Location or
Description Incorporation by Reference
3(a)(1)
Certificate of Incorporation of *Form 10 effective June 22,
Registration dated March 12, 1985 1986, pages 58-61
3(a)(2)
Certificate of Amendment to the Certificate *Form 10 effective June
of Incorporation of the Registrant dated 22, 1986, pages 62-65
October 25, 1985
3(a)(3)
Certificate of Amendment to the Certificate *Form 10K dated December 31,
of Incorporation of the Registrant dated 1988, pages 51-53
August 22, 1986
3(a)(4)
Certificate of Amendment to the Certificate *Form S4, Registration
of Incorporation of the Registrant dated No. 33-27874
March 20, 1989
3(a)(5)
Certificate of Amendment to the Certificate *Form 10KSB dated
of Incorporation of the Registrant dated December 31,1994,
May 9, 1994 pages 273-276
3(b)(1)
Bylaws of the Registrant, as amended *Form 10K dated December 31,
1988, pages 54-68
3(b)(2)
Amendment to the Bylaws of the Registrant *Form 10Q dated March 31, 1990
page 11
4
Certificate of Designations of the *Form 8K dated December 31,
Preferred Stock of the Registrant 1986, pages 23-31
10(a)(1)
1988 American Capitol Insurance Company *Form 10K dated December 31,
Key Employee Stock Option Plan 1988, pages 37-44
10(a)(2)
Form of Grant of Stock Option used in 1988 *Form 10K dated December 31, 1988,
American Capitol Insurance Company Key pages 45-50
Employee Stock Option Plan
10(b)(1)
Agreement dated December 18, 1986 between *Form S4, Amendment No.2,
Acap Corporation and Fortune National Registration No. 33-27874
Corporation
<PAGE>
Exhibits Location or
Description Incorporation by Reference
10(b)(2)
Amendment dated June 13, 1989 to Agreement *Form S4, Amendment No. 2,
dated December 18, 1986 between Registration No. 33-27874
Acap Corporation and Fortune
National Corporation
10(c)(1)
Employment Contract between American *Form 10KSB dated December 31,
Capitol Insurance Company and John D. 1994, pages 278-290
Cornett
10(c)(2)
Stock Purchase Agreement between American *Form 10KSB dated December 31,
Capitol Insurance Company and John D. 1994, pages 291-300
Cornett
10(d)
Supplemental Disability Income Agreement *Form 10Q dated September 30,
between American Capitol Insurance Company 1990, pages 12-18
and William F. Guest
10(e)
Reinsurance Agreement between American *Form 10KSB dated December 31,
Capitol Insurance Company and Crown Life 1993, pages 10-66
Insurance Company effective December 31,
1992, as amended
10(f)
Stock Purchase Agreement for Family Life *Form 8K dated August 31,1994,
Insurance Company of Texas dated pages 5-71
August 12, 1994
10(g)
$5,000,000 Surplus Debenture issued by *Form 8K dated August 31, 1994,
American Capitol Insurance Company to pages 72-74
John C. Bowden
10(h)
Guaranty Agreement and Collateral Pledge *Form 8K dated August 31, 1994,
Agreement dated August 31, 1994 between pages 75-93
Acap Corporation and John C. Bowden
10(i)
Reinsurance Agreement between Family Life *Form 8K dated August 31, 1994,
Insurance Company of Texas and Alabama pages 94-158
Reassurance Company effective
September 1, 1994
10(j)
Stock Purchase Agreement for Texas Imperial *Form 8K dated September 28,
Life Insurance Company dated August 2, 1994 1994, pages 5-72
10(k)
Stock Purchase Agreement for Imperial Plan, *Form 8K dated September 28,
Inc. dated August 2, 1994 1994, pages 73-81
<PAGE>
Exhibits Location or
Description Incorporation by Reference
10(l)
Employment Agreement between Texas Imperial *Form 8K dated September 28,
Life Insurance Company and Richard M. Ridley 1994, pages 82-110
10(m)
Stock Purchase Agreement for Trans-Western *Form 10KSB dated December 31,
Life Insurance Company 1994, pages 43-110
10(n)
Reinsurance Agreement effective March 1, *Form 10KSB dated December 31,
1994 between Trans-Western Life Insurance 1994, pages 111-161
Company and Alabama Reassurance Company
10(o)
Stock Purchase Agreement for Oakley-Metcalf *Form 10KSB dated December 31,
Insurance Company 1994, pages 162-212
10(p)
Reinsurance Agreement effective *Form 10KSB dated December 31,
February 2, 1995 between Oakley-Metcalf 1994, pages 213-260
Insurance Company and Alabama Reassurance
Company
10(q)
Loan Agreement and related documents *Form 10KSB dated December 31,
between Acap Corporation and Central 1994, pages 261-272
National Bank
11
Statement re computation of per share *1995 Annual Report to
earnings Stockholders, page 18
13
1995 Annual Report to Stockholders Pages 12-47
22
Subsidiaries of the Registrant Page 11
_______________________________________________________
* Exhibit is incorporated by reference to the listed document.
(b) Reports on Form 8-K:
None.<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Acap Corporation
Date: March 25, 1996
By:
/s/ William F. Guest
- --------------------------------------------------
William F. Guest
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the date indicated.
Date: March 25, 1996
By:
/s/ William F. Guest /s/John D. Cornett
- ------------------------------- --------------------------------------
William F. Guest John D. Cornett
Chairman of the Board, Executive Vice President and Treasurer
President and Director (Principal Financial and Accounting
(Principal Executive Officer) Officer)
/s/ R. Wellington Daniels
- ----------------------------------
R. Wellington Daniels
Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ACAP CORPORATION
Wholly-owned subsidiary of Acap Corporation:
- --------------------------------------------
American Capitol Insurance Company (Texas)
Wholly-owned subsidiaries of American Capitol Insurance Company:
- ----------------------------------------------------------------
Family Life Insurance Company of Texas (Texas)
Imperial Plan, Inc. (Texas)
Texas Imperial Life Insurance Company (Texas)
Wholly-owned subsidiary of Texas Imperial Life Insurance Company:
- -----------------------------------------------------------------
Oakley-Metcalf Insurance Company (Texas)
ACAP CORPORATION
Contents
President's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Management's Financial Analysis. . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . 11
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . 12
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . 13
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . 14
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 15
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 31
Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . 32
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . 33
<PAGE>
CORPORATE PROFILE
Acap Corporation is a life insurance holding company that focuses on the
acquisition of existing life insurance policies, either through direct purchase
or the acquisition of life insurance companies. Adjuncts to the acquisition-
oriented growth strategy include using financial leverage and reinsurance to
make more acquisitions and to maximize the return to stockholders,
consolidating and streamlining the operations of acquired businesses,
concentrating on a limited number of lines of business and providing superior
customer service to improve policy retention.
Acap was formed in 1985. Acap's life insurance operations are conducted
through its wholly-owned life insurance subsidiaries. All operations are
conducted from the corporate headquarters in Houston, Texas. Acap's common
stock is quoted on the NASD Electronic Bulletin Board under the symbol AKAP.<PAGE>
PRESIDENT'S REPORT
HIGHLIGHTS
During 1995:
The Company completed the acquisition of Oakley-Metcalf Insurance Company.
The Company consolidated the business of the four recently acquired life
insurance subsidiaries into one of those subsidiaries. One of the three
resulting "shell" companies was sold and the Company hopes to sell the two
remaining "shell" companies during 1996.
The Company increased the reinsurance on the policies from a 1994 acquisition,
resulting in a deferred gain on reinsurance of $1,350,036.
The Company reduced notes payable from $8.3 million at December 31, 1994 to
$1.3 million at December 31, 1995.
The Company had earnings of $277,033, or $9.04 per common share.
Corporate Developments
On February 2, 1995, the Company acquired Oakley-Metcalf Insurance Company
("Oakley"), a Texas life insurance company, in a $2,559,516 cash transaction.
At the date of acquisition, Oakley had assets totalling approximately $4.4
million and had approximately 3,000 life insurance policies in force.
During 1995, the Company consolidated the policies in force of Oakley and two
life insurance subsidiaries acquired in 1994, Family Life Insurance Company of
Texas ("Family") and Trans-Western Life Insurance Company ("Trans-Western"),
into another subsidiary acquired during 1994, Texas Imperial Life Insurance
Company ("Texas Imperial"). The Company expects to realize operational
efficiencies as a result of the consolidation, beginning in 1996. Also, by
moving the policies out of Oakley, Family and Trans-Western and leaving those
companies with minimal assets, it positioned the Company to realize the value
of the charters of those companies through the sale of such companies. Trans-
Western was sold to an unaffiliated third party on September 30, 1995. The
Company realized a pre-tax investment gain of $50,000 on the sale of the Trans-
Western stock. The Company hopes to sell Oakley and Family during 1996.
Immediately following the acquisition of Family on August 31, 1994, the Company
reinsured with an unaffiliated life insurance company 20% of each of the life
insurance policies in force of Family. On January 4, 1995, the Company
increased the reinsurance on each of those policies from 20% to 100%. The
Company recorded a deferred gain on reinsurance of $1,350,036 and an increase
in the reinsurance receivable of $2,809,418 as a result of the increase in the
reinsurance percentage. The Company continues to administer the policies, for
which it receives compensation from the reinsuring life insurance company.
The Company reduced notes payable from $8,300,000 at December 31, 1994 to
$1,312,500 at December 31, 1995. The two notes outstanding at December 31,
1994 were repaid January 31, 1995. The sources of repayment were $6.8 million
in working capital of the Company and a new $1.5 million bank loan.
The Company is exploring the potential of the marketing operation of Texas
Imperial. Texas Imperial markets final expense life insurance and insurance-
funded prepaid funeral services contracts in the State of Texas. While the
marketing results during 1995 were below expectations, the Company did receive
approximately $500,000 in single premiums related to the conversion of three
trust-funded prepaid funeral service plans to insurance-funded plans.
RESULTS OF OPERATIONS
The Company's net income for 1995 of $277,033, or $9.04 per common share,
compares to net income for 1994 of $1,718,374, or $183.04 per common share.
The 1994 net income included $1,361,310 in realized investment gains, whereas
the 1995 net income included $170,003 in realized investment gains. Excluding
realized investment gains, pre-tax operating income for the year 1995 was
$330,359, compared to pre-tax operating income in 1994 of $817,409. As
explained in detail in the Management's Financial Analysis section of this
Annual Report, the decrease in operating income is primarily the result of
unusual mortality experience and a decrease in investment income on a
significant asset of the Company.
Largely as a result of unrealized investment gains, book value per common share
increased 105% to $518.01 at December 31, 1995 compared to $252.23 at
December 31, 1994. Under an accounting standard adopted in 1993, the Company
records its fixed maturity and equity securities at fair value, with unrealized
gains and losses, net of taxes, reported in stockholders' equity. With the
Company's sizeable investments in fixed maturity securities, changes in market
interest rates can result in significant swings in the fair value of the fixed
maturity securities. The accounting standard does not permit the Company to
make an offsetting restatement of its liabilities for changes in interest
rates. Excluding all unrealized investment gains and losses, book value per
common share increased 2% to $387.47 at December 31, 1995 compared to $378.43
at December 31, 1994.
A more complete analysis of the results of operations is included in the
Management's Financial Analysis section of this Annual Report. Stockholders
are urged to read the entire Annual Report to gain a better understanding of
the Company, its recent financial performance and its prospects.
LIQUIDATION OF FORTUNE
Fortune National Corporation ("Fortune"), the Owner of 63.7% of the Company's
outstanding common stock, expects to adopt a plan of dissolution and
liquidation at its annual stockholder meeting on August 26, 1996. Except for a
small amount of cash, Fortune's assets consist solely of 5,421 shares of the
Company's common stock. Upon liquidation, Fortune's stockholders are entitled
to receive their pro rata portion of the 5,421 shares of the Company's common
stock owned by Fortune.
Under the plan, no fractional shares of the Company's common stock will be
issued. Fortune's stockholders have the option of selling their "odd lot"
shares of Fortune common stock to the Company or buying from the Company enough
Fortune common stock to round up their holdings.
The Company has entered into an agreement with Fortune to pay for Fortune's
operating expenses through the expiration of the plan of dissolution and
liquidation of Fortune (estimated to be $19,350). In exchange for its
services, the Company will receive 55,323 shares of Fortune common stock
prior to the liquidation. The Company will account for its own common stock
received as a part of the liquidating distribution as treasury shares. The
estimated result of this accounting treatment will be a decrease in the
Company's stockholders' equity of approximately $144,784 and a decrease in
the number of shares of Company common stock outstanding from 8,516 to
approximately 7,570. Due to a higher proportional decrease in common shares
outstanding as compared to stockholders' equity, the Company's book value per
common share is estimated to increase from $518.01 to $563.62 (based on
December 31, 1995 amounts). The foregoing figures assume that no Fortune
stockholders elect to round up odd lot shares and the Company is required to
purchase all of the odd lot shares.
Fortune's liquidation will not result in a change in the management, directors,
or the ultimate control of the Company.
OUTLOOK
The Company is continually searching for, evaluating and negotiating for new
acquisitions. While the acquisition strategy is inherently characterized by
punctuated growth, the Company hopes to continue the increased pace of
acquisitions which began in 1994.
William F. Guest
President
April 15, 1996
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
SIGNIFICANT TRANSACTIONS
During 1994, the Company, through its wholly-owned subsidiary, American Capitol
Insurance Company ("American Capitol"), acquired three life insurance
companies: Trans-Western Life Insurance Company ("Trans-Western") on February
25, 1994, Family Life Insurance Company of Texas ("Family") on August 31, 1994,
and Texas Imperial Life Insurance Company ("Texas Imperial") on September 29,
1994. The Family acquisition met the accounting definition of a "material"
transaction.
On February 2, 1995, the Company, through Texas Imperial, acquired Oakley-
Metcalf Insurance Company ("Oakley"), a Texas life insurance company, in a
$2,559,516 cash transaction. At the date of acquisition, Oakley had assets
totalling approximately $4.4 million and approximately 3,000 life policies in
force.
All of the acquisitions noted above were accounted for using the purchase
method of accounting. Accordingly, the Company's results of operations only
reflect the results of the acquired companies from their respective dates of
acquisition.
On January 4, 1995, the Company increased the reinsurance on each of the life
policies in force of Family from 20% to 100%. The Company recorded a deferred
gain on reinsurance of $1,350,036 and an increase in the reinsurance receivable
of $2,809,418 on the transaction. Whereas 1994's results of operations
included 80% of the premiums, policy benefits, etc. of Family's policies from
September 1, 1994 through December 31, 1994, 1995's results of operations do
not include those income and expense elements.
During 1995, the Company consolidated the policies in force of Family, Oakley
and Trans-Western into Texas Imperial. The Company expects to realize
operational efficiencies as a result of the consolidation, beginning in 1996.
RESULTS OF OPERATIONS
Revenue from premiums and other considerations increased 43% during 1995 in
comparison to premiums and other considerations for 1994. As a result of the
inclusion of premiums for Texas Imperial for all of 1995, premiums increased
approximately $900,000 in 1995 in comparison to 1994. During 1994, Texas
Imperial's premiums were only included from the date Texas Imperial was
acquired, September 29, 1994. Texas Imperial's 1995 premiums included
approximately $500,000 in single premiums related to the conversion of three
trust-funded prepaid funeral service plans to insurance-funded plans.
Partially offsetting the increase in premiums resulting from the inclusion of
Texas Imperial for a full year was a decrease in the premiums of American
Capitol, Family and Trans-Western. American Capitol's premiums were
approximately $20,000 lower in 1995 in comparison to 1994 as a result of normal
policy attrition. Family's premiums were approximately $300,000 lower in 1995
in comparison to 1994. This decrease is attributable to the difference in the
reinsurance percentages on the Family policies noted above. Whereas 1994's
premiums included 80% of Family's premiums from the date Family was acquired
(August 31, 1994), 1995's premiums included none of Family's premiums since the
policies were 100% reinsured. Finally, premiums related to Trans-Western's
policies were approximately $100,000 lower in 1995 in comparison to 1994 due to
the termination at the beginning of 1995 of a reinsurance treaty whereby Trans-
Western was the assuming reinsurer.
Net investment income decreased 23% during 1995 in comparison to 1994. The
decrease in net investment income is attributable to several factors. One such
factor is the difference in the reinsurance percentages on the Family policies
noted above. Whereas 1994's net investment income included 80% of the net
investment income on Family's reserve assets from the date Family was acquired
(August 31, 1994), 1995's net investment income included none of the net
investment income on Family's reserve assets since the policies were 100%
reinsured (January 4, 1995). A second factor in the decrease was the repayment
of a $2.3 million mortgage loan on September 28, 1994. The mortgage loan in
question was issued in 1983 in connection with the sale of American Capitol's
home office building. The loan was repaid in full by (1) selling the home
office building to American Capitol for $1.1 million, (2) making a cash payment
of $600,000 and (3) issuing a note to American Capitol that was then paid off
in December, 1994 for cash of $600,000. Whereas the mortgage loan earned 10%,
the cash the Company received was reinvested at a rate lower than 10%. Also,
to date the building has not yielded a 10% return. The decreases in net
investment income for 1995 noted above were somewhat offset by the inclusion of
a full year's net investment income on Texas Imperial during 1995, whereas
1994's net investment income only included the income of Texas Imperial from
the date of its acquisition, September 29, 1994.
The Company recorded realized investment gains of $170,003 for the year 1995 in
comparison to realized investment gains of $1,361,310 for the year 1994.
Realized investment gains for 1995 include a gain on the sale of the stock of
Trans-Western. During the third quarter of 1995, Trans-Western transferred
most of its business to Texas Imperial. The Trans-Western "shell" was then
sold to an unaffiliated third party. The Company realized a pre-tax investment
gain of $50,000 on the sale of the Trans-Western stock. The balance of 1995's
realized investment gains were primarily the result of a restructuring of Texas
Imperial's investment portfolio. Realized investment gains for 1994 include a
$1,450,000 gain related to the mortgage loan on the Company's home office
property, discussed above. Prior to the repayment of the loan, the Company
held a valuation allowance related to the mortgage loan. The 1994 gain of
$1,450,000 was the release of the total valuation allowance. During 1995, the
Company entered into an earnest money contract to sell the home office
property. However, the sale was not completed and the earnest money contract
expired.
The reinsurance expense allowance increased 17% during 1995 in comparison to
1994. Whereas during 1994 the Company only received the reinsurance expense
allowance related to the companies acquired during 1994 from their respective
dates of acquisition and reinsurance, the Company received such expense
allowance for the full year during 1995. Also, the Company only received an
expense allowance on 20% of Family's policies during 1994, while the previously
noted change in the reinsurance percentage resulted in the Company receiving an
expense allowance on 100% of Family's policies during 1995.
The amortization of the deferred gain on reinsurance increased 116% during 1995
in comparison to 1994. Whereas during 1994 the Company only received the
amortization of the deferred gain on reinsurance related to the companies
acquired during 1994 from their respective dates of acquisition and
reinsurance, the Company received such amortization for the full year during
1995. Also, the change in the reinsurance percentage on Family's policies
during 1995 increased the deferred gain on reinsurance and the related
amortization of such deferred gain into income.
Policy benefits (death and other benefits) were 36% of total revenue excluding
realized investment gains during 1995 compared to 29% of total revenue
excluding realized investment gains during 1994. The higher ratio of total
policy benefits to total revenue during 1995 is attributable in part to the
composition of the business of Texas Imperial. Texas Imperial is in the
insurance-funded prepaid funeral services business. Higher reserve
requirements due to higher average attained ages in this type of business
result in a higher benefit to revenue ratio. It should also be noted that
American Capitol's death claims were $346,844 in 1995 compared to $182,854 in
1994 (and $185,264 in 1993). Management is unaware of any factor that would
indicate the higher level of claims in 1995 represents a trend as opposed to an
aberration.
Total expenses (commissions, general expenses, interest expense, and the
amortization of deferred acquisitions costs and goodwill) were 58% of total
revenue excluding realized investment gains during 1995 compared to 53% of
total revenue excluding realized investment gains during 1994. General
expenses in both years include the costs associated with administering
reinsured policies. Given the significance of the Company's reinsurance, this
results in an expense to revenue ratio that is higher than typical for the life
insurance industry. However, the Company receives an expense allowance on
reinsurance ceded that management believes adequately compensates the Company
for the administration of the reinsured policies. The higher percentage of
total expenses to total revenue in 1995 is in part due to the change in the
reinsurance percentage on Family's policies. As noted above, the expense to
revenue ratio is higher for the Company's fully reinsured business than for
business that is not fully reinsured. Since the Family policies were fully
reinsured during 1995 but only 20% reinsured during 1994, the expense to
revenue ratio related to these policies is not comparable.
Excluding net realized investment gains, pre-tax operating income for the year
1995 was $330,359 compared to pre-tax operating income for the year 1994 of
$817,409. The decrease in operating income is primarily the result of the
adverse mortality experience in American Capitol and the decrease in investment
income resulting from the repayment of the $2.3 million mortgage loan.
The Company's current federal income tax expense for the year 1995 was
$1,004,727 compared to a current federal income tax expense for the year 1994
of $320,522. The Family reinsurance transactions, the 20% reinsurance in 1994
and the increase to 100% reinsurance in 1995, resulted in significant taxable
income, the taxes on which are the primary component of the current federal
income tax expense for 1994 and 1995, respectively.
The current federal income tax effect of the Family reinsurance transactions
was partially offset by a related deferred federal income tax benefit. The
deferred federal income tax benefit from the 1994 Family reinsurance
transaction was less than the deferred federal income tax expense in 1994
related to the repayment of the home office mortgage loan.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY OF INSURANCE SUBSIDIARIES
Acap's insurance subsidiaries have a significant portion of their assets
invested in debt instruments, short-term investments, or other marketable
securities. Although there is no present need or intent to dispose of such
investments, the insurance subsidiaries could liquidate portions of the
investments should the need arise. These assets should be sufficient to meet
the insurance subsidiaries' anticipated long-term and short-term liquidity
needs.
As of December 31, 1995, 100% of the insurance subsidiaries' portfolios of
publicly-traded bonds are invested in securities that are rated investment
grade (i.e., rated BBB-/Baa3 or higher by Standard & Poor or Moody). The
Company's investment policy prohibits making any new investment in below
investment grade securities without the advance approval of the applicable
insurance subsidiary's Board of Directors. All of the Company's bonds are
classified as available for sale and are, accordingly, reflected in the
financial statements at fair value. The insurance subsidiaries' liabilities
are primarily long term in nature. Therefore, long-term assets can be
purchased with the general intent to hold such assets to maturity. It has not
been the Company's investment practice in the past to be an active trader with
its bond portfolios. It is not expected that the insurance subsidiaries'
investment practices will change in the future.
A significant portion (35%) of the Company's bond portfolio is invested in
mortgage-backed securities, with 94% of such mortgage-backed securities
classified as collateralized mortgage obligations and 6% classified as pass-
through securities. Mortgage-backed securities are purchased to diversify the
portfolio from credit risk associated with corporate bonds. The majority of
mortgage-backed securities in the Company's investment portfolio have minimal
credit risk because the underlying collateral is guaranteed by specified
government agencies (e.g., GNMA, FNMA, FHLMC).
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks that arise from changes in the general level of
interest rates. As interest rates decline and homeowners refinance their
mortgages, mortgage-backed securities prepay more rapidly than anticipated.
Conversely, as interest rates increase, underlying mortgages prepay more
slowly, causing mortgage-backed securities principal repayment to be extended.
In general, mortgage-backed securities provide for higher yields than corporate
debt securities of similar credit quality and expected maturity to compensate
for this greater amount of cash flow risk. Due to the underlying structure of
the individual securities, the majority of mortgage-backed securities in the
Company's investment portfolio have relatively low cash flow variability.
The Company's investments in collateralized mortgage obligations are primarily
of the planned amortization class (56%), Z (23%) and sequential (19%) types. A
planned amortization class tranche is structured to provide more certain cash
flows and is therefore subject to less prepayment and extension risk than other
forms of mortgage-backed securities. Planned amortization class securities
derive their stability at the expense of cash flow risk for other tranches in a
deal, as early repayments are applied first to other tranches, and cash flows
originally applicable to other tranches are first applied to the planned
amortization class tranche if that tranche's originally scheduled cash flows
are received later than expected. The Z tranche defers all interest to other
tranches until those tranches are paid down, at which time accumulated interest
and principal are paid to this class. The cash flows associated with
sequential tranches can vary as interest rates fluctuate, since these tranches
are not supported by other tranches.
Under an accounting standard adopted in 1993, the Company records its fixed
maturity and equity securities at fair value with unrealized gains and losses,
net of taxes, reported as a separate component of stockholders' equity.
Primarily as a result of declining interest rates during the year, the fair
value of the Company's fixed maturity and equity securities increased
$2,186,436 during 1995, following a $1,101,395 decrease during 1994. The new
accounting standard does not permit the Company to restate its liabilities for
changes in interest rates.
As of December 31, 1995, American Capitol held 16 mortgage loans as
investments. American Capitol's investment policy generally prohibits making
new investments in mortgage loans, except in connection with the sale of
Company owned real estate. The average principal balance of the remaining
mortgage loans at December 31, 1995 was $79,094 and the weighted average
maturity was 3 years. Mortgage loans on Texas properties represent 86% of the
mortgage loan balances at December 31, 1995 with Louisiana properties
representing 14% of the balances. Commercial mortgages represent 86% of the
mortgage loan balances at December 31, 1995 with residential mortgages
constituting the balance. In general, the performance of commercial mortgages
is more subject to changing U.S. and regional economic conditions than
residential mortgages. Mortgage loans are far less liquid an investment than
publicly-traded securities.
At December 31, 1995, the only real estate owned by American Capitol is the
home office property, with a book value of $1,505,325.
At December 31, 1994, Family had a $3.3 million note payable outstanding.
Family repaid the note on January 31, 1995, out of working capital.
At December 31, 1994, American Capitol had a $5 million surplus debenture
outstanding that had been issued in connection with the acquisition of Family.
The note was repaid on January 31, 1995. Of the total $5 million payment, $3.5
million was paid from working capital of the Company and $1.5 million was
provided by a surplus debenture issued by American Capitol to Acap. As
described below, Acap's source of funds was a $1.5 million bank loan.
LIQUIDITY OF THE PARENT COMPANY
On January 31, 1995, as a source of funds to repay the $5 million surplus
debenture issued in connection with the Company's acquisition of Family, Acap
borrowed $1.5 million from Central National Bank of Waco, Texas. The note is
renewable each April 30 until fully repaid. The note bears interest at a rate
equal to the base rate of a bank plus 1%. Principal payments on the note are
due quarterly. The note is secured by a pledge of all the outstanding shares
of American Capitol. The loan agreement contains certain restrictions and
financial covenants. Without the written consent of the bank, Acap may not
incur any debt, pay common stock dividends or sell any substantial amounts of
assets. Also, American Capitol is subject to minimum statutory earnings and
capital and surplus requirements during the loan term. The Company is in
compliance with all of the terms of the loan. The principal payments on the
bank loan are matched by the principal payments on a surplus debenture issued
by American Capitol to Acap.
Going forward, the primary sources of funds for Acap are payments on the
surplus debenture from American Capitol and dividends from American Capitol.
American Capitol may pay dividends in any one year without the prior approval
of regulatory authorities as long as such dividends do not exceed certain
statutory limitations. As of December 31, 1995, the amount of dividends
available to the parent company from American Capitol not limited by such
restrictions is approximately $260,000. Payments on the surplus debenture may
only be made to the extent statutory capital and surplus exceeds $2 million.
At December 31, 1995, American Capitol's statutory capital and surplus was
$2,716,261.
The determination of statutory surplus is governed by accounting practices
prescribed or permitted by the State of Texas. Statutory surplus therefore
bears no direct relationship to surplus as would be determined under generally
accepted accounting principles.
REINSURANCE
Reinsurance plays a significant role in the Company's operations. In
accounting for reinsurance, amounts paid or deemed to have been paid for
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies. At December 31, 1995, reinsurance
receivables with a carrying value of $29.8 million were associated with a
single reinsurer, Crown Life Insurance Company ("Crown"). At December 31,
1994, Crown had assets in excess of $7 billion and shareholders' equity of
approximately $0.4 billion. Crown is rated "Excellent" by A.M. Best Company,
an insurance company rating organization. At December 31, 1995, reinsurance
receivables with a carrying value of $4.2 million were associated with Alabama
Reassurance Company ("Alabama Re"). The Alabama Re reinsurance receivables are
secured by trust accounts containing letters of credit totalling $6.6 million
granted in favor of the applicable insurance subsidiary of the Company.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
Company seeks to limit its exposure to loss on any single insured by reinsuring
the portion of risks in excess of $50,000 on the life of any individual through
various reinsurance contracts, primarily of the coinsurance and yearly
renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the event
the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. Acap evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
ACCOUNTING STANDARDS
In December 1991, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments." SFAS No. 107 extends existing fair
value disclosure practices for some instruments by requiring all entities to
disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized in the statement of financial position, for which
it is practicable to estimate fair value. If estimating fair value is not
practicable, SFAS No. 107 requires disclosures of descriptive information
pertinent to estimating the value of a financial instrument. SFAS No. 107 was
amended by SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments." Among other things, SFAS No. 119
requires additional disclosures about derivative financial instruments. For
companies the size of Acap, SFAS No. 107 and SFAS No. 119 are effective for
financial statements issued for fiscal years ending after December 15, 1995.
Accordingly, the Company incorporated the disclosures required by these
standards in the December 31, 1995, financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires a creditor to measure impairment
of a loan based on the fair value of the collateral when the creditor
determines that foreclosure is probable. A creditor is required to recognize
impairment by creating a valuation allowance. If there is a significant change
(increase or decrease) in the fair value of the collateral, the creditor is
required to recalculate impairment and adjust the valuation allowance. In
1994, the FASB amended SFAS No. 114 through SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," to
allow a creditor to use existing methods for recognizing income on impaired
loans. The Company adopted these standards in 1995 without impact to the
financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which must be adopted by fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to (1) those assets to
be held and used in the business, and (2) for assets to be disposed of. The
Company does not anticipate a material effect of the financial statements from
this new accounting standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new fair-value-based
method of accounting for employee stock compensation plans, under which
compensation cost is measured and recognized in results of operations, or
continue to account for these plans under the current accounting standards.
Entities electing to remain with the present accounting method must make
disclosures of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. SFAS No. 123 must be
adopted in 1996. The Company has not yet selected which accounting option it
will adopt, however, the Company currently has only immaterial stock options
outstanding and therefore does not expect the adoption of SFAS No. 123 to have
material effect on the financial statements.
SUBSEQUENT EVENT
Fortune National Corporation ("Fortune"), the owner of 63.7% of the Company's
outstanding common stock, expects to adopt a plan of dissolution and
liquidation at its annual stockholder meeting on August 26, 1996. Except for a
small amount of cash, Fortune's assets consist solely of 5,421 shares of Acap's
common stock. Upon liquidation, Fortune's stockholders are entitled to receive
their pro rata portion of the 5,421 shares of Acap's common stock owned by
Fortune.
Under the plan, no fractional shares of Acap's common stock will be issued.
Fortune's stockholders have the option of selling their "odd lot" shares of
Fortune common stock to Acap or buying from Acap enough Fortune common stock to
round up their holdings.
Acap has entered into an agreement with Fortune to pay for Fortune's operating
expenses through the expiration of the plan of dissolution and liquidation of
Fortune (estimated to be $19,350). In exchange for its services, Acap will
receive 55,323 shares of Fortune common stock prior to the liquidation. The
Company will account for its own common stock received as a part of the
liquidating distribution as treasury shares. The estimated result of this
accounting treatment will be a decrease in the Company's stockholders' equity
of approximately $144,784 and a decrease in the number of shares of Company
common stock outstanding from 8,516 to approximately 7,570. Due to a higher
proportional decrease in common shares outstanding as compared to stockholders'
equity, the Company's book value per common share is estimated to increase from
$518.01 to $563.62 (based on December 31, 1995 amounts). The foregoing
figures assume that no Fortune stockholders elect to round up odd lot shares
and the Company is required to purchase all of the odd lot shares.
Fortune's liquidation will not result in a change in the management, directors,
or the ultimate control of Acap.
<PAGE>
<TABLE>
ACAP CORPORATION
CONSOLIDATED BALANCE SHEET
<CAPTION>
December 31,
1995
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale
(amortized cost $28,019,620) $29,815,078
Equity securities (cost $247,856) 59,679
Mortgage loans 1,265,499
Real estate 1,505,325
Policy loans 6,634,446
Short-term investments 1,710,747
----------
Total investments 40,990,774
Cash 123,613
Accrued investment income 552,961
Reinsurance receivables 36,735,253
Accounts receivable (less allowance for uncollectible accounts
of $82,797) 119,553
Deferred acquisition costs 1,779,055
Property and equipment (less accumulated depreciation of $541,398) 64,291
Costs in excess of net assets of acquired business
(less accumulated amortization of $472,802) 2,200,972
Other assets 314,982
----------
$82,881,454
===========
LIABILITIES
Policy liabilities:
Future policy benefits $67,662,600
Contract claims 778,380
----------
Total policy liabilities 68,440,980
Other policyholders' funds 1,733,485
Other liabilities 677,510
Deferred tax liability 2,040,354
Note payable 1,312,500
Deferred gain on reinsurance 2,415,222
----------
Total liabilities 76,660,051
----------
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.10 per share, authorized,
issued and outstanding 74,000 shares (involuntary liquidation
value $2,035,000) 1,850,000
Common stock, par value $.10 per share,
authorized 10,000 shares, issued 8,757 shares 876
Additional paid-in capital 6,259,069
Accumulated deficit (2,854,416)
Treasury stock, at cost, 241 common shares (105,853)
Net unrealized investment gains, net of taxes of $505,497 1,111,727
-----------
TOTAL STOCKHOLDERS' EQUITY 6,261,403
-----------
$82,881,454
===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ACAP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S> <C> <C>
REVENUES
Premiums and other considerations $1,581,864 1,105,202
Net investment income 1,297,361 1,686,519
Net realized investment gains 170,003 1,361,310
Reinsurance expense allowance 1,897,257 1,623,438
Amortization of deferred gain on reinsurance 278,306 128,747
Other income 83,918 26,249
---------------------
Total revenues 5,308,709 5,931,465
---------------------
BENEFITS AND EXPENSES
Death benefits 612,125 518,029
Other benefits 1,234,174 807,357
Commissions and general expenses 2,576,224 2,049,103
Interest expense 165,929 192,608
Amortization of costs in excess of net acquired business 104,095 73,994
Amortization of deferred acquisition costs 115,800 111,655
--------------------
Total benefits and expenses 4,808,347 3,752,746
--------------------
EARNINGS
Income before federal income tax expense (benefit) 500,362 2,178,719
Federal income tax expense (benefit):
Current 1,004,727 320,522
Deferred (781,398) 139,823
------------------------
Net income $ 277,033 1,718,374
------------------------
EARNINGS PER SHARE
Net income per common share $ 9.04 183.04
=======================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ACAP CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S>
<C> <C>
PREFERRED STOCK (Including Additional Paid-in Capital) $1,850,000 1,850,000
COMMON STOCK 876 876
ADDITIONAL PAID-IN CAPITAL 6,259,069 6,259,069
ACCUMULATED DEFICIT
Balance, beginning of year (2,931,417)(4,490,225)
Net income 277,033 1,718,374
Preferred stock cash dividends (200,032) (159,566)
----------------------
Balance, end of year (2,854,416)(2,931,417)
---------------------
TREASURY STOCK (105,853) (105,853)
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance, beginning of year (1,074,709) 26,686
Change during year 2,186,436 (1,101,395)
---------------------
Balance, end of year 1,111,727 (1,074,709)
----------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,261,403 3,997,966
========================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ACAP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $277,033 1,718,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 190,600 124,200
Amortization of deferred acquisition costs 115,800 111,655
Premium and discount amortization (33,640) 15,177
Realized gains on investments (170,003) (1,361,310)
Deferred federal income tax expense (benefit) (781,398) 139,823
Decrease in reinsurance receivables 1,411,458 95,014
Decrease (increase) in accrued investment income 36,488 (35,669)
Decrease (increase) in accounts receivable (97,448) 7,672
Decrease (increase) in other assets 652,387 (312,971)
Increase (decrease) in future policy benefit liability(472,836) 475,905
Increase (decrease) in contract claim liability 96,793 (141,283)
Increase (decrease) in other policyholders' funds
liability 50,484 (18,832)
Increase (decrease) in other liabilities (219,436) 153,075
Amortization of deferred gain on reinsurance (278,306) (128,747)
-----------------------
Net cash provided by operating activities 777,976 842,083
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments available for sale
and principal repayments on mortgage loans 5,231,345 4,884,802
Purchases of investments available for sale (8,011,380)(11,191,659)
Net decrease in policy loans 318,167 285,897
Net decrease in short-term investments 11,422,323 5,795,927
Purchase of subsidiaries, net of cash provided by
(used in) acquisitions (1,952,300) 564,355
Purchases of property and equipment (24,746) (14,271)
------------------------
Net cash provided by investing activities 6,983,409 325,051
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable 1,500,000 --
Principal payments on notes payable (8,487,500) --
Deposits on policy contracts 1,316,280 1,042,461
Withdrawals from policy contracts (2,151,240) (1,727,307)
Preferred dividends paid (200,032) (159,566)
------------------------
Net cash used in financing activities (8,022,492) (844,412)
------------------------
Net increase (decrease) in cash (261,107) 322,722
Cash at beginning of year 384,720 61,998
Cash at end of year $ 123,613 384,720
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements of Acap Corporation ("Acap" or "the
Company"), a majority-owned subsidiary of Fortune National Corporation
("Fortune"), include its wholly-owned subsidiaries, American Capitol Insurance
Company ("American Capitol"), Family Life Insurance Company of Texas
("Family"), Imperial Plan, Inc. ("Imperial Plan"), Texas Imperial Life
Insurance Company ("Texas Imperial"), through September 30, 1995, Trans-Western
Life Insurance Company ("Trans-Western") and, since February 2, 1995, Oakley-
Metcalf Insurance Company ("Oakley"). All significant intercompany
transactions and accounts have been eliminated in consolidation.
Acap is a life insurance holding company that focuses on the acquisition of
existing life insurance policies, either through direct purchase or the
acquisition of insurance companies. Acap's life insurance operations are
conducted through its wholly-owned life insurance subsidiaries. Operations are
conducted from the corporate headquarters in Houston, Texas. Approximately
half of the Company's direct collected premium comes from residents of the
State of Texas, with no other state generating as much as 10% of the Company's
direct collected premium.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such accounting principles differ
from prescribed statutory reporting practices used by the insurance
subsidiaries in reporting to state regulatory authorities. The more
significant differences from statutory accounting principles are:
(a) acquisition costs related to acquiring new business are deferred and
amortized over the expected lives of the policies rather than being charged to
operations as incurred; (b) future policy benefits are based on estimates of
mortality, interest and withdrawals generally representing the Company's
experience, which may differ from those based on statutory mortality and
interest requirements without consideration of withdrawals; (c) deferred
federal income taxes are provided for temporary differences between assets and
liabilities reported for financial reporting purposes and reported for federal
income tax purposes; (d) certain assets (principally furniture and equipment,
agents' debit balances and certain other receivables) are reported as assets
rather than being charged to retained earnings; (e) investments in fixed
maturities available for sale are recorded at fair value rather than at
amortized cost; and (f) for acquisitions accounted for as a purchase, the
identified net assets of the acquired company are valued at their fair values
and the excess of the value of the consideration over the net assets assumed is
amortized over a period not to exceed forty years; whereas, for statutory
purposes, acquisitions are accounted for as equity investments.
Generally, the net assets of the Company's insurance subsidiaries available for
transfer to the parent company are limited to the amounts that the insurance
subsidiaries' statutory net assets exceed minimum statutory capital
requirements; however, payment of the amounts as dividends may be subject to
approval by regulatory authorities. As of December 31, 1995, the amount of
dividends available to the parent company from subsidiaries not limited by such
restrictions is approximately $260,000. The combined net income of the
Company's insurance subsidiaries (where applicable, from the date such
subsidiary was acquired), as determined using statutory accounting practices,
was $7,454,344 and $2,871,495 for the years ended December 31, 1995 and 1994,
respectively. The consolidated statutory stockholders' equity of the Company's
insurance subsidiaries amounted to $2,716,261 and $2,704,711 at December 31,
1995 and 1994, respectively. The total adjusted statutory stockholders' equity
of the Company's insurance subsidiaries exceeds the applicable Risk-Based
Capital requirements.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
INVESTMENTS
Investments are reported on the following bases:
All of the Company's debt and equity securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 and are
classified as available-for-sale securities. Accordingly, such securities are
reported at fair value, with unrealized gains and losses, net of taxes,
excluded from earnings and reported in a separate component of stockholders'
equity.
Mortgage loans on real estate are carried at unpaid principal balances.
Policy loans are carried at their unpaid principal balances. Policy loans
consist primarily of automatic borrowings against a policy's cash surrender
value to pay policy premiums. Interest accrues at rates ranging from 5% to
10%.
Real estate consists of the home office property. The home office building is
carried at cost less accumulated depreciation. Depreciation is computed using
the straight line method over twenty years. Accumulated depreciation at
December 31, 1995 was $51,250. Tenant improvements are amortized over the term
of the lease. Land is carried at the lower of cost or fair value. Foreclosed
real estate is carried at the lower of cost or fair value determined at the
date of foreclosure.
Short-term investments, consisting primarily of commercial paper, are carried
at cost.
Write-downs and other realized gains and losses, determined on the specific
identification method, are accounted for in the consolidated statements of
operations in net realized investment gains or losses.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED ACQUISITION COSTS
Costs which vary with and are primarily related to the production of new
business have been deferred to the extent that such costs are deemed
recoverable through future revenues. These costs principally include
commissions and certain costs of policy issuance and underwriting. For
universal life-type contracts, deferred costs are amortized in relation to the
present value of expected future gross profits from the contracts. For
traditional contracts, deferred costs are amortized in relation to future
anticipated premiums. The deferred costs are reviewed to determine that the
unamortized portion of such costs does not exceed recoverable amounts.
Management believes such amounts are recoverable.
The cost of policies acquired through the purchase of insurance companies,
representing the actuarially determined present value of projected future
profits from policies in force at the purchase date, is deferred and amortized
with interest of 7% to 9% over the policies' estimated lives.
The deferred acquisition costs for the year ended December 31, 1995 are
summarized as follows:
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 3,354,237
Amortized during the year (115,800)
Insurance in force acquired 564,272
Insurance in force ceded (2,023,654)
------------
Balance at December 31, 1995 $ 1,779,055
============
</TABLE>
On January 4, 1995, the Company increased the reinsurance on the Family life
policies from 20% to 100% which resulted in a $1,459,382 decrease in deferred
acquisition costs.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives, which range from five to
ten years. Depreciation expense was $44,907 and $50,206 for the years ended
December 31, 1995 and 1994, respectively. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gains or losses are recognized in income for the
period. The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESS
The costs in excess of net assets of acquired business are amortized on a
straight-line basis over seven year and forty year periods.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES, LIABILITY FOR FUTURE
POLICY BENEFITS AND CONTRACT CLAIMS
For traditional insurance contracts, premiums are recognized as revenue when
due. Benefits and expenses are associated with earned premiums so as to result
in their recognition over the premium paying period of the contracts. Such
recognition is accomplished by means of the provision for future policy
benefits and the amortization of deferred policy acquisition costs.
For contracts with mortality risk that permit the Company to make changes in
the contract terms (such as interest-sensitive whole life policies), premium
collections and benefit payments are accounted for as increases or decreases to
a liability account rather than as revenue and expense. In addition, decreases
to the liability account for the costs of insurance and policy administration
and for surrender penalties are recorded as revenues. Interest credited to the
liability account and benefit payments made in excess of a contract liability
account balance are charged to expense.
For investment contracts without mortality risk (such as deferred annuities),
net premium collections and benefit payments are recorded as increases or
decreases to a liability account rather than as revenue and expense. Surrender
penalties are recorded as revenues. Interest credited to the liability account
is charged to expense.
Reserves for traditional contracts are calculated using the net level premium
method and assumptions as to investment yields, mortality, withdrawals and
dividends. The assumptions are based on past and expected experience and
include provisions for possible unfavorable deviation. These assumptions are
made at the time the contract is issued or, for contracts acquired by purchase,
at the purchase date. Interest assumptions used to compute reserves ranged
from 4% to 9% at December 31, 1995.
Reserves for universal life-type and investment contracts are based on the
contract account balance if future benefit payments in excess of the account
balance are not guaranteed, or the present value of future benefit payments
when such payments are guaranteed.
The liability for contract claims represents the liability for life insurance
claims reported in excess of the related policy benefit reserve plus an
estimate of claims incurred but not reported.
EARNINGS PER COMMON SHARE
Earnings per common share were computed as follows:
<PAGE>
<TABLE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S> <C> <C>
Net income $ 277,033 1,718,374
Preferred dividends (200,032) (159,566)
--------------------------
77,001 1,558,808
Divided by weighted average common shares
outstanding 8,516 8,516
-------------------------
Net income per share $ 9.04 183.04
=========================
</TABLE>
PARTICIPATING POLICIES
Acap maintains both participating and non-participating life insurance
policies. Participating business represented approximately 11% and 10% of the
life insurance in force, and 8% of life insurance premium income at December
31, 1995 and 1994, respectively. Dividends to participating policyholders are
determined annually and are payable only upon declaration of the Boards of
Directors of the insurance subsidiaries.
FEDERAL INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109. SFAS
No. 109 requires that a deferred tax liability be recognized for all taxable
temporary differences and a deferred tax asset be recognized for an
enterprise's deductible temporary differences and operating loss and tax credit
carryforwards. A deferred tax asset or liability is measured using the
marginal tax rate that is expected to apply to the last dollars of taxable
income in future years. The effects of enacted changes in tax laws or rates
are recognized in the period that includes the enactment date.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash includes cash on hand, in demand
accounts, in money market accounts and in savings accounts.
ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires a creditor to measure impairment
of a loan based on the fair value of the collateral when the creditor
determines that foreclosure is probable. A creditor is required to recognize
impairment by creating a valuation allowance. If there is a significant change
(increase or decrease) in the fair value of the collateral, the creditor is
required to recalculate impairment and adjust the valuation allowance. In
1994, the FASB amended SFAS No. 114 through SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," to
allow a creditor to use existing methods for recognizing income on impaired
loans. The Company adopted these standards in 1995 without impact to the
financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which must be adopted for fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to (1) those assets to
be held and used in the business, and (2) for assets to be disposed of. The
Company does not anticipate a material effect of the financial statements from
this new accounting standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new fair-value-based
method of accounting for employee stock compensation plans, under which
compensation cost is measured and recognized in results of operations, or
continue to account for these plans under the current accounting standards.
Entities electing to remain with the present accounting method must make
disclosures of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. SFAS No. 123 must be
adopted in 1996. The Company has not yet selected which accounting option it
will adopt, however, the Company currently has only immaterial stock options
outstanding and would therefore have no material effect on the financial
statements even if the new method of accounting was elected.
2. ACQUISITIONS
On August 31, 1994, the Company, through American Capitol, acquired Family for
$6,665,886. Funding for the acquisition was provided by the working capital of
American Capitol and a $5 million surplus debenture issued to the seller. The
acquisition has been accounted for using the purchase method of accounting;
accordingly, the identified assets acquired and liabilities assumed were valued
at their fair values and the excess of the amount paid over the net assets
acquired is being amortized over seven years. The results of operations of
Family are included with the Company's from the date of purchase.
Unaudited pro forma results of operations of the Company for 1994 as if the
acquisition of Family had occurred at the beginning of the year are as follows:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Total revenue $ 6,087,673
Net income 2,208,810
Net income per common share 240.69
</TABLE>
Also during 1994, the Company, through American Capitol, acquired two other
life insurance companies, Trans-Western and Texas Imperial. In 1995, the
Company, through Texas Imperial, acquired one other life insurance company,
Oakley. On September 30, 1995, the Company transferred Trans-Western's
policies in force to Texas Imperial and sold Trans-Western to an unrelated
third party. All of these transactions were immaterial to the Company's
consolidated financial statements.
3. INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Maturing in one year or less $ 373,953 375,754
Maturing after one year through five years 7,292,141 7,384,679
Maturing after five years through ten years 6,906,084 7,275,456
Maturing after ten years 3,941,018 4,360,018
---------------------------
18,513,196 19,395,907
Mortgage-backed securities 9,506,424 10,419,171
---------------------------
$28,019,620 29,815,078
============================
</TABLE>
A summary of mortgage-backed securities by type as of December 31, 1995
follows:
<TABLE>
<S> <C>
Collateralized mortgage obligations:
Planned amortization class $ 5,492,382
Z 2,249,531
Sequential 1,890,614
Other 160,689
------------
9,793,216
Pass-through securities 625,955
------------
$10,419,171
============
</TABLE>
With a planned amortization class security, early repayments are applied first
to other tranches, and cash flows originally applicable to other tranches are
first applied to the planned amortization class tranche if that tranche's
originally scheduled cash flows are received later than expected. The Z
tranche defers all interest to other tranches until those tranches are paid
down, at which time accumulated interest and principal are paid to this class.
Sequential tranches are not supported by other tranches.
The amortized cost and fair values of investments in fixed maturity and equity
securities as of December 31, 1995 are as follows:
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ ------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Government securities $ 3,346,148 93,202 (235) 3,439,115
Corporate securities 11,414,545 664,832 (23,233) 12,056,144
Asset-backed securities 3,752,505 148,954 (811) 3,900,648
Mortgage-backed securities 9,506,422 943,258 (30,509) 10,419,171
28,019,620 1,850,246 (54,788) 29,815,078
-------------------------------------------
Equity securities $ 247,856 -- (188,177) 59,679
-------------------------------------------
$28,267,476 1,850,246 (242,965) 29,874,757
</TABLE>
A summary of proceeds from the sales of investments in fixed maturity
securities, exclusive of proceeds from maturities, and the gross gains and
losses realized on those sales follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Proceeds on sales $3,297,458 1,785,507
==========================
Gross realized gains on sales $ 149,889 19,044
Gross realized losses on sales (43,226) (27,796)
--------------------------
Net realized gains (losses) on sales 106,663 (8,752)
Realized gains on transactions other than sales 3,475 62
--------------------------
Net realized gains (losses) $ 110,138 (8,690)
==========================
</TABLE>
As of December 31, 1995, 100% of the Company's fixed maturity securities were
rated investment grade (i.e., rated BBB-/Baa3 or higher by Standard & Poor or
Moody).
<PAGE>
MORTGAGE LOANS
The weighted average interest rate of mortgage loans held as of December 31,
1995 and 1994 was 9.8% and 9.7%, respectively.
The distribution of principal balances on mortgage loans held as of December
31, 1995 by contractual maturity follows. Actual maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE
---------
<S> <C>
Maturing in one year or less $ 175,610
Maturing after one year through five years 918,448
Maturing after five years through ten years 171,441
----------
$1,265,499
==========
</TABLE>
The distribution of mortgage loans by class of loan and geographic distribution
follows:
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE
----------
<S> <C>
Commercial loans:
Texas $ 958,706
Louisiana 131,556
----------
$1,090,262
==========
Residential loans:
Texas $ 133,147
Louisiana 42,090
----------
$ 175,237
==========
</TABLE>
<PAGE>
INVESTMENT INCOME
A summary of net investment income follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Interest on fixed maturities $1,249,118 1,133,913
Interest on mortgage loans 89,397 312,219
Interest on policy loans 44,721 37,574
Interest on cash and short-term investments 114,375 221,800
Real estate income 40,600 7,554
Dividends on equity securities 5,632 4,462
Miscellaneous investment income 42,943 83,192
-------------------------
1,586,786 1,800,714
Investment expense (289,425) (114,195)
-------------------------
$1,297,361 1,686,519
=========================
</TABLE>
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNREALIZED INVESTMENT GAINS (LOSSES)
The change between cost and fair value for fixed maturity and equity
securities, net of taxes, follows:
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES TOTAL
---------- ---------- -----
<S> <C> <C> <C>
Balance, January 1, 1994 $ 211,267 (184,581) 26,686
Change during the year (1,080,197) (21,198) (1,101,395)
-----------------------------------
Balance, December 31, 1994 (868,930) (205,779) (1,074,709)
Change during the year 2,158,157 28,279 2,186,436
-----------------------------------
Balance, December 31, 1995 $ 1,289,227 (177,500) 1,111,727
===================================
</TABLE>
<PAGE>
NET REALIZED INVESTMENT GAINS
A summary of net realized investment gains follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Fixed maturities $110,138 (8,690)
Equity securities (including investment
in subsidiaries) 59,865 --
Mortgage loans -- 1,450,000
Real estate -- (80,000)
----------------------
$170,003 1,361,310
======================
</TABLE>
OTHER INVESTMENT DISCLOSURES
At December 31, 1995, bonds with a fair value of $5,386,146 and a $25,000
certificate of deposit were on deposit with various regulatory authorities.
Investments, other than investments issued or guaranteed by the United States
Government or a United States Government agency or authority, in excess of 10%
of stockholders' equity at December 31, 1995 were as follows:
<PAGE>
<TABLE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
BALANCE
SHEET AMOUNT CATEGORY
------------ --------
<S> <C> <C>
Home office building and property $1,505,325 Real estate
EQCC Home Equity 1,429,025 Fixed maturity
Standard Credit Card 1,165,686 Fixed maturity
BankAmerica Corporation 982,435 Fixed maturity
Ford Motor Credit Corporation 891,905 Fixed maturity
Goldman Sachs 831,280 Fixed maturity
Commercial Credit Corporation 670,747 Fixed maturity
</TABLE>
4. FAIR VALUES
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Assets:
Fixed maturities $29,815,078 29,815,078
Equity securities 59,678 59,678
Mortgage loans 1,265,499 1,235,658
Policy loans 6,634,336 6,634,336
Short-term investments 1,710,747 1,710,747
Liabilities:
Note payable 1,312,500 1,312,500
</TABLE>
<PAGE>
Estimated market values of publicly-traded fixed maturity and equity securities
are as reported by an independent pricing service. Estimated market values of
fixed maturity securities not actively traded in a liquid market are estimated
using a third party pricing system, which uses a matrix calculation assuming a
spread over U.S. Treasury bonds.
Fair values of mortgage loans are estimated by discounting expected cash flows,
using market interest rates currently being offered for similar loans.
Policy loans have no stated maturity dates and are a part of the related
insurance contracts. Accordingly, it is not practicable for the Company to
estimate a fair value for them.
For short-term investments, the carrying amount is a reasonable estimate of
fair value.
In that the note payable is a floating rate instrument, the principal balance
is a reasonable estimate of the note's fair value.
5. NOTES PAYABLE
In connection with American Capitol's purchase of Family, American Capitol
issued a $5,000,000 surplus debenture. The debenture was a balloon note
maturing on January 4, 1995, bearing interest at the rate of 7.5%. The
debenture was payable only out of the statutory equity of American Capitol in
excess of $2,000,000. Acap guaranteed American Capitol's performance under the
debenture by pledging the common stock of American Capitol owned by Acap as
security. The debenture was repaid in full on January 31, 1995.
At December 31, 1994, Family had a $3.3 million balloon note payable bearing 6%
interest maturing January 4, 1995. The note was repaid in full on January 31,
1995.
As a source of funds to repay the $5 million surplus debenture issued in
connection with the acquisition of Family, on January 31, 1995 the Company
borrowed $1.5 million from Central National Bank of Waco, Texas. The note is
renewable by the bank each April 30 until fully repaid. The note bears
interest at a rate equal to the base rate of a bank plus 1%. Principal
payments on the note of $62,500 (a six year amortization) are due quarterly
beginning April 30, 1995. The note is secured by the Company's pledge of all
the outstanding shares of Acap's subsidiary, American Capitol. The loan
agreement contains certain restrictions and financial covenants. Without the
written consent of the bank, Acap may not incur any debt, pay common stock
dividends or sell any substantial amounts of assets. Also, American Capitol is
subject to minimum statutory earnings and capital and surplus requirements
during the loan term. The Company is in compliance with all of the terms of
the loan.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company acquired its home office building on September 28, 1994, and has
had no material leases since that date. Rent expense was $10,020 for 1995 and
$85,578 for 1994.
REINSURANCE
The Company accounts for reinsurance in accordance with Statement of Financial
Accounting Standards No. 113. In accounting for reinsurance, amounts paid or
deemed to have been paid for reinsurance contracts are recorded as reinsurance
receivables. The cost of reinsurance related to long-duration contracts is
accounted for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies.
At December 31, 1995, reinsurance receivables with a carrying value of $29.8
million were associated with a single reinsurer, Crown Life Insurance Company
("Crown"). At December 31, 1994, Crown had assets in excess of $7 billion and
stockholders' equity of approximately $0.4 billion. Crown is rated "Excellent"
by A.M. Best Company, an insurance company rating organization. At December
31, 1995, reinsurance receivables with a carrying value of $4.2 million were
associated with Alabama Reassurance Company ("Alabama Re"). The Alabama Re
reinsurance receivables are secured by trust accounts containing letters of
credit totalling $6.6 million granted in favor of the applicable insurance
subsidiary of the Company.
The Crown and Alabama Re reinsurance treaties are representative of a key use
of reinsurance by the Company. Immediately following the purchase of a block
of life insurance policies through the Company's acquisition program, the
Company may reinsure all or a portion of the acquired policies. By doing so,
the Company seeks to recover all or a portion of the purchase price of the
acquired policies and transfer the risks associated with the policies to the
reinsurer. The Company retains the administration of the reinsured policies
and seeks to profit from the compensation the Company receives from the
reinsurer for such policy administration. The Company is entitled, but not
obligated, to recapture the policies at a price determined by a formula in the
reinsurance treaty.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
purpose of reinsurance is to limit the Company's exposure to loss on any single
insured. The Company reinsures the portion of risks in excess of a maximum of
$50,000 on the life of any individual through various reinsurance contracts,
primarily of the coinsurance and yearly renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the event
the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies. Other than its exposure to
Crown and Alabama Re as discussed above, management does not believe the
Company has significant concentrations of credit risk related to reinsurance,
or otherwise.
The effect of reinsurance on premiums and benefits follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
--------------------------
<S> <C> <C>
Direct premiums $ 7,884,105 6,197,219
Reinsurance assumed 3,655 132,883
Reinsurance ceded (6,305,896) (5,224,900)
--------------------------
Net premiums $ 1,581,864 1,105,202
===========================
Direct policy benefits $ 5,059,540 7,026,411
Reinsurance assumed (26) 16,328
Reinsurance ceded (3,213,215) (5,717,353)
----------------------------
Net policy benefits $ 1,846,299 1,325,386
=============================
</TABLE>
LITIGATION
Acap and its subsidiaries are involved in various lawsuits and legal actions
arising in the ordinary course of operations. Management is of the opinion
that the ultimate disposition of the matters will not have a material adverse
effect on Acap's results of operations or financial position.
7. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments for interest expense for the years ended December 31, 1995 and
1994 were $418,876 and $0, respectively. Cash payments of $1,017,013 and
$744,291 for federal income taxes were made during the years ended December 31,
1995 and 1994, respectively.
The reinsurance agreement entered into by the Company in 1994 with an
unaffiliated reinsurer covering 20% of each of Family's life policies was a
non-cash transaction. Family transferred assets of $379,069 and liabilities of
$1,012,390 and recognized a deferred gain on reinsurance of $633,321 to be
amortized over the life of the policies. On January 4, 1995, Family increased
the amount of reinsurance on each of its life policies from 20% to 100%. The
increase in the reinsurance percentage on the Family policies and a reinsurance
agreement entered into by the Company with an unaffiliated reinsurer covering
100% of each of the life policies acquired with Oakley were non-cash
transactions. In connection with those transactions, the Company transferred
assets of $2,020,065 and liabilities of $3,259,418 and recognized a deferred
gain on reinsurance of $1,239,353 to be amortized over the life of the
policies.
In connection with the acquisition of Family in 1994, a $5,000,000 surplus
debenture was issued to the seller, which was a non-cash transaction.
In 1994, the Company reacquired its home office property in partial
satisfaction of the mortgage loan outstanding on the property, which was a non-
cash transaction.
The following reflects assets acquired and liabilities assumed relative to the
acquisitions by the Company of three life insurance companies in 1994 and one
life insurance company in 1995, and the consideration given and the net cash
flow relative to such acquisitions.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets of acquired subsidiaries $ 4,393,403 28,504,392
Liabilities of acquired subsidiaries (1,833,887) (20,763,913)
Excess of cost over net assets acquired -- 316,074
---------------------------
Cost of acquisition $ 2,559,516 8,056,553
Cash paid for acquisitions $ 2,559,516 3,056,553
Surplus debenture issued -- 5,000,000
Cost of acquisition $ 2,559,516 8,056,553
===========================
Net cash from acquisitions:
Cash of acquired companies $ 607,216 3,620,908
Cash paid for acquisitions (2,559,516) (3,056,553)
---------------------------
Net cash provided from (used by) acquisitions $(1,952,300) 564,355
===========================
</TABLE>
8. FEDERAL INCOME TAXES
Acap and American Capitol file a consolidated federal income tax return.
The other subsidiaries of the Company file separate federal income tax returns.
At December 31, 1995, Acap has a remaining tax net operating loss carryover of
approximately $1,100,000 that will expire during the years 2001 through 2008 if
not previously utilized. At December 31, 1995, the Company had alternative
minimum tax carryforwards of approximately $349,000 that are available for an
indefinite period to reduce future regular federal income taxes and tax capital
loss carryforwards of approximately $139,000 that will expire in the year 2000
if not previously utilized.
A portion of life insurance taxable income generated prior to 1984 is not
taxable unless it exceeds certain statutory limitations or is distributed to
stockholders, in which case it becomes taxable at ordinary corporate rates.
Such income is accumulated in a Policyholders' Surplus account that, at
December 31, 1995, had a balance of approximately $4,600,000. No provision has
been made for income taxes related to this accumulation.
A reconciliation of income tax expense for the years 1995 and 1994 computed at
the applicable federal tax rate of 34% to the amount recorded in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Federal income tax expense at statutory rate $ 170,123 740,764
Small life insurance company special deduction (596,918) (336,989)
Change in valuation allowance 616,489) (73,043)
Tax underpayment (refund) 15,084 (57,519)
Other, net 18,551 187,132
-------------------------
Total federal income tax expense $ 223,329 460,345
=========================
</TABLE>
The small life insurance company special deduction noted above is available to
life insurance companies with assets under $500 million. The deduction is 60%
of life insurance taxable income under $3 million. The deduction is phased out
for life insurance taxable income between $3 million and $15 million, with the
deduction reduced by 15% of the life insurance taxable income in excess of $3
million.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995
are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Allowance for investment losses $137,525
Deferred gain on reinsurance 809,928
Net operating loss carryforwards 387,512
Alternative minimum tax credit carryforwards 118,753
Other 112,319
---------
Total gross deferred tax assets 1,566,037
Less: Valuation allowance (1,549,232)
----------
Deferred tax assets 16,805
----------
Deferred Tax Liabilities:
Net unrealized gains on available-for-sale securities 505,497
Deferred policy acquisition costs 460,396
Policy reserves and policy funds 1,078,584
Other 12,682
-----------
Deferred tax liabilities 2,057,159
-----------
Net deferred tax liability ($2,040,354)
===========
</TABLE>
A valuation allowance of $1,549,232 was established at December 31, 1995 against
the deferred tax asset. The net change in the total valuation allowance for
the years ended December 31, 1995 and 1994 was an increase of $429,666 and a
decrease of $73,043, respectively. Management believes that it is more
likely than not that the net deferred tax asset is recoverable.
9. AMERICAN CAPITOL KEY EMPLOYEE STOCK OPTION PLAN
On July 18, 1988, the Board of Directors of American Capitol approved a Key
Employee Stock Option Plan ("the Plan"). Under the terms of the non-qualified
Plan, the Compensation Committee of the Board of Directors of American Capitol
is authorized to grant stock options to any employee the Compensation Committee
determines is a key employee. The stock options may only be granted on shares
of common stock of Acap or Fortune owned by American Capitol. The options
enable the grantee to purchase the common stock to which the options relate at
the fair market value of the common stock on the date the options were granted.
The options generally expire 20% annually over a five year period and are
exercisable immediately upon grant.
Stock options granted for Acap Corporation common stock are summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
OPTION PRICE 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Outstanding at January 1 $131 1/4 - $187 1/2 102 102
Cancelled during the year $131 1/4 (34) --
-------------------
Outstanding at December 31 $187 1/2 68 102
===================
Available for future grant 173 139
===================
</TABLE>
Stock options granted for Fortune common stock are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
OPTION PRICE 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Outstanding at January 1 $11/32 - $3/8 35,000 35,000
Cancelled during the year $3/8 (10,000) --
-----------------------
Outstanding at December 31 $11/32 25,000 35,000
=======================
Available for future grant 46,571 36,571
=======================
</TABLE>
10. CAPITAL STOCK
Acap has two classes of capital stock: preferred stock ($.10 par value,
authorized 80,000 shares), which may be issued in series with such dividend,
liquidation, redemption, conversion, voting, and other rights as the Board of
Directors may determine, and common stock ($.10 par value, authorized 10,000
shares), the "Common Stock." The only series of preferred stock outstanding is
the Cumulative Exchangeable Preferred Stock, Series A, $2.50 (Adjustable), the
"Series A Preferred Stock."
SERIES A PREFERRED STOCK
There are 74,000 shares of Series A Preferred Stock authorized, issued and
outstanding. Acap pays dividends quarterly on the Series A Preferred Stock
(when and as declared by the Board of Directors). The amount of the dividend
is based on the prime rate of a Pittsburgh bank plus 2%. Acap has the right,
if elected by the Board of Directors, to redeem the Series A Preferred Stock at
the fixed redemption price of $27.50 per share. The holders of Series A
Preferred Stock are entitled to liquidating distributions of $27.50 per share.
The cumulative dividends and liquidating distributions of the Series A
Preferred Stock are payable in preference to the Common Stock. The Series A
Preferred Stock is non-voting, except as required by law and except that, if
six quarterly dividends are unpaid and past due, the holders of the Series A
Preferred Stock may elect two directors to Acap's Board of Directors. The
shares of Series A Preferred Stock, valued for such purposes at $27.50 per
share, are exchangeable at the option of the holders into shares of common
stock of Fortune at the price of $2.50 per share of Fortune common stock.
Under an exchange agreement between Acap and Fortune, Fortune is obligated to
provide Acap with such shares of Fortune common stock as are necessary for Acap
to meet its obligation under the Series A Preferred Stock. In addition, the
exchange agreement provides for payment by Acap to Fortune for the Fortune
common stock to consist of shares of the Common Stock of equal value to the
Fortune common stock received. Therefore, exercise of the exchange right under
the Series A Preferred Stock will have the same effect upon the stockholders'
equity of Acap as a direct conversion of Series A Preferred Stock into Common
Stock. There was no activity related to the Series A Preferred Stock for the
two years ended December 31, 1995 other than payments of dividends.
COMMON STOCK
On March 21, 1994, the Company decreased the number of authorized shares of the
Common Stock from 3,300,000 shares to 10,000 shares. There was no other
activity related to the Common Stock for the two years ended December 31, 1995.
11. SUBSEQUENT EVENTS
Fortune expects to adopt a plan of dissolution and liquidation at its annual
stockholder meeting on August 26, 1996. Except for a small amount of cash,
Fortune's assets consist solely of 5,421 shares of Acap's common stock. Upon
liquidation, Fortune's stockholders are entitled to receive their pro rata
portion of the 5,421 shares of Acap's common stock owned by Fortune.
Under the plan, no fractional shares of Acap's common stock will be issued.
Fortune's stockholders have the option of selling their "odd lot" shares of
Fortune common stock to Acap or buying from Acap enough Fortune common stock to
round up their holdings.
Acap has entered into an agreement with Fortune to pay for Fortune's operating
expenses through the expiration of the plan of dissolution and liquidation of
Fortune (estimated to be $19,350). In exchange for its services, Acap will
receive 55,323 shares of Fortune common stock. The Company will account for
its own common stock received as a part of the liquidating distribution as
treasury shares. The estimated result of this accounting treatment will be a
decrease in the Company's stockholders' equity of approximately $144,784 and
a decrease in the number of shares of Company common stock outstanding from
8,516 to approximately 7,570. Due to a higher proportional decrease in
common shares outstanding as compared to stockholders' equity, the Company's
book value per common share is estimated to increase from $518.01 to $563.62
(based on December 31, 1995 amounts). The foregoing figures assume that no
Fortune stockholders elect to round up odd lot shares and Acap is required to
purchase all of the odd lot shares.
Fortune's liquidation will not result in a change in the management, directors,
or the ultimate control of Acap.
<PAGE>
ACAP CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Acap Corporation
We have audited the accompanying consolidated balance sheet of Acap Corporation
and subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1995 and 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Acap Corporation
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standard No. 114, "Accounting by Creditors for the
Impairment of a Loan," as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for the Impairment of a Loan:
Income Recognition and Disclosures," in 1994.
KPMG Peat Marwick LLP
Houston, Texas
March 25, 1996<PAGE>
ACAP CORPORATION
STOCKHOLDER INFORMATION
MARKET INFORMATION
The common stock of Acap is traded over-the-counter with activity in the stock
reflected nationally on the OTC Bulletin Board electronic quotation system of
the National Association of Securities Dealers. The Company's stock symbol is
AKAP.
The table below presents the range of closing bid quotations for Acap's common
stock during the two most recent fiscal years.
<TABLE>
<CAPTION>
1995 1994
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter $125 100 205 135
Second quarter 135 100 125 100
Third quarter 135 135 225 100
Fourth quarter 180 135 125 100
</TABLE>
The prices presented are bid prices, which reflect inter-dealer transactions
and do not include retail mark-ups and mark-downs or any commission to the
parties involved. As such, the prices may not reflect prices in actual
transactions.
HOLDERS
The approximate number of holders of record of Acap's common stock as of
July 22, 1996 was 610.
DIVIDENDS
Acap declared no common stock dividends in 1995 or 1994. At present,
management anticipates that no dividends will be declared or paid with respect
to Acap's common stock during 1996.
FORM 10-KSB
Stockholders may receive without charge a copy of the Company's Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission by writing to
Lana S. Vaughn, Stockholder Services, Acap Corporation, 10555 Richmond Avenue,
Houston, TX 77042.
TRANSFER AGENT
The registrar and transfer agent for the Company's common stock is Continental
Stock Transfer and Trust Company, 2 Broadway, New York, NY 10004. For a change
of name or address, or to replace lost stock certificates, write to Continental
at the address above or call (212) 509-4000.
ACAP CORPORATION
STOCKHOLDER INFORMATION
INVESTOR RELATIONS
Requests for information should be directed by mail to Lana S. Vaughn,
Stockholder Services, Acap Corporation, 10555 Richmond Avenue, Houston, TX
77042 or by calling (713) 974-2242.
INDEPENDENT AUDITORS
The Company's financial statements for the year 1995 were audited by the
independent accounting firm of KPMG Peat Marwick LLP, 700 Louisiana, Houston,
TX 77002.
ANNUAL MEETING
Stockholders are invited to attend the Annual Meeting of Stockholders which
will be held on Monday, August 26, 1996 at 8:00 a.m. at the Company's office at
10555 Richmond Avenue, Houston, Texas, on the second floor.
<PAGE>
ACAP CORPORATION
DIRECTORS AND OFFICERS
Board of Directors of Acap
R. Wellington Daniels
Investor; Retired Director of National Accounts, American Cyanamid
William F. Guest
Chairman of the Board and President, Acap Corporation
C. Stratton Hill, Jr., M.D.
Physician
OFFICERS OF ACAP
William F. Guest
Chairman of the Board and President
John D. Cornett
Executive Vice President and Treasurer
Paul L. Clancy
Secretary
H. Kathleen Musselwhite
Assistant Treasurer
OFFICERS OF AMERICAN CAPITOL
William F. Guest
Chairman of the Board
John D. Cornett
President
Paul L. Clancy
Executive Vice President and Secretary
H. Kathleen Musselwhite
Treasurer and Controller
Carolyn M. Rawlins
Assistant Secretary
Linda G. Stark
Assistant Vice President
C. Stratton Hill, Jr., M.D.
Medical Director
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 0-6869
FORTUNE NATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
State of Incorporation: IRS Employer Id.:
Pennsylvania 25-1229620
Address of Principal Executive Office:
10555 Richmond Avenue
Houston, Texas 77042
Issuer's telephone number: (713) 974-2242
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 10, 1996
----- ---------------------------
Common Stock, Par Value $1.00 2,616,984
This Form 10-QSB contains a total of 13 pages including any exhibits.<PAGE>
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance 3
Sheet - March 31, 1996 (Unaudited)
Condensed Consolidated Statements of 5
Operations - Three Months Ended
March 31, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of 6
Cash Flows - Three Months Ended
March 31, 1996 and 1995 (Unaudited)
Notes to Condensed Consolidated 7
Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of
Operations
Part II. Other Information:
Item 6. Exhibit 27 - Financial Data Schedule 13
<PAGE>
<TABLE>
PART I. ITEM 1. FINANCIAL INFORMATION
-------------------------------------
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<CAPTION>
ASSETS
------
1996
----
<S> <C>
Investments:
Fixed maturities available for sale $29,699,832
Equity securities (at market) 11,409
Mortgage loans 1,087,513
Real estate 1,494,819
Policy loans 6,364,445
Short-term investments 1,077,761
-----------
Total investments 39,735,779
Accrued investment income 458,466
Reinsurance receivables 33,253,764
Accounts receivable (less allowance
for uncollectible accounts of $82,918) 212,707
Deferred acquisition costs 1,752,002
Property and equipment
(less accumulated depreciation of $553,306) 113,286
Costs in excess of net assets of
acquired business (less accumulated
amortization of $1,706,008) 3,077,920
Other assets 1,240,454
-----------
$79,844,378
===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
1996
----
<S> <C>
LIABILITIES:
Policy liabilities:
Future policy benefits $64,175,844
Contract claims 801,243
-----------
Total policy liabilities 64,977,087
Other policyholders' funds 1,722,029
Deferred tax liability 2,112,319
Deferred gain on reinsurance 868,676
Note payable 1,250,000
Other liabilities 1,388,772
-----------
Total liabilities 72,318,883
-----------
Minority interest 1,768,295
-----------
Preferred stock of subsidiary 1,850,000
-----------
STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share,
authorized 4,000,000 shares,
issued 2,859,768 shares 2,859,768
Additional paid-in capital 5,098,262
Accumulated deficit (4,359,970)
Treasury stock, at cost, 242,784 shares (158,385)
Net unrealized investment gains,
net of taxes of $117,757 467,525
------------
Total stockholders' equity 3,907,200
------------
$79,844,378
============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Premiums and other considerations $ 345,889 446,494
Net investment income 307,467 368,266
Net realized investment gains 514 6,247
Reinsurance expense allowance 454,789 474,153
Amortization of deferred gain on reinsurance 17,682 77,320
Other income 14,073 14,249
---------- ----------
Total revenues 1,140,414 1,386,729
---------- ----------
BENEFITS AND EXPENSES:
Death benefits 128,619 141,712
Other benefits 282,492 340,168
Commissions and general expenses 565,282 729,724
Interest expense 28,905 64,635
Amortization of deferred acquisition costs 27,053 27,741
Amortization of costs in excess of net
acquired business 53,384 53,387
---------- ----------
Total benefits and expenses 1,085,735 1,357,367
---------- ----------
Income before federal income tax expense and
minority interest in earnings of subsidiary 54,679 29,362
Federal income tax expense (benefit)
Current 10,000 1,010,576
Deferred (54,555)(1,215,801)
--------- ----------
Income before minority interest earnings of
subsidiary 99,234 234,587
Preferred dividends of subsidiary 31,657 30,919
Minority interest in earnings of subsidiary (53,042) (95,162)
----------- ----------
Net income $ 14,535 108,506
=========== ==========
Net income per common share: $ .01 .04
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH (UNAUDITED)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,535 108,506
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 78,619 16,793
Realized gains on investments (514) (6,247)
Deferred federal income tax benefit (54,555) (1,215,801)
Decrease in reinsurance receivable 221,532 224,396
Decrease in accrued investment income 94,495 118,451
Increase in accounts receivable (93,154) (8,780)
Decrease (increase) in other assets (925,472) 8,744
Increase (decrease) in future policy
benefit liability 113,443 (52,596)
Increase in contract claim liability 22,863 79,510
Increase (decrease) in other
policyholders' funds liability (11,456) 18,311
Increase in other liabilities 711,262 853,820
Increase in minority interest 28,750 77,521
---------- ----------
Net cash provided by operating activities 200,348 222,628
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments and
principal repayments on mortgage loans 581,586 892,682
Purchases of investments available for sale (1,347,148) (3,116,259)
Net decrease in policy loans 270,001 37,885
Net decrease in short-term investments 632,986 10,540,492
Purchase of property and equipment (60,903) (2,715)
Purchase of subsidiary, net of cash acquired -- (1,952,300)
----------- -----------
Net cash provided by investing activities 76,522 6,399,785
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable -- 1,500,000
Principal payments on notes payable (62,500) (8,300,000)
Deposits on policy contracts 298,561 337,359
Withdrawals from policy contracts (638,802) (545,058)
----------- -----------
Net cash used in financing activities (402,741) (7,007,699)
----------- -----------
Net decrease in cash (125,871) (385,286)
Cash at beginning of year 125,871 385,286
----------- -----------
Cash at end of period $ -- --
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated balance sheet as of March 31, 1996 and the
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 1996 and 1995, have been prepared by Fortune
National Corporation (the "Company"), without audit. In the opinion of
management, all adjustments (which, except as may be noted below, include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and changes in cash flows at March 31, 1996
and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December
31, 1995 Annual Report on Form 10-KSB. The results of operations for the
three month periods ended March 31, 1996 and 1995 are not necessarily
indicative of the operating results for the full year.
2. EARNINGS PER SHARE
-------------------
Earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding (2,616,984 at March 31,
1996 and March 31, 1995).
3. STOCKHOLDERS' EQUITY
--------------------
During the three months ended March 31, 1996, stockholders' equity changed
for the following items: Reduction in net unrealized investment gains of
$393,467, net income of $14,535, issuance of common stock $55,323, offset by
a reduction in additional paid in capital of $38,173 and an increase in
treasury stock of $10,920.
4. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
---------------------------------------------
Cash payments of $10,000 and $0 were made for federal income taxes during
the three months ended March 31, 1996 and 1995, respectively.
Cash payments of $32,320 and $40,388 for interest expense were made during
the three months ended March 31, 1996 and 1995, respectively.
The following reflects assets acquired and liabilities assumed relative to
the acquisition of Oakley-Metcalf Insurance Company ("Oakley-Metcalf") by
the Company, the consideration given for such acquisition and the net cash
flow relative to such acquisition on February 2, 1995.
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Assets of acquired subsidiary $ 4,393,403
Liabilities of acquired subsidiary (1,833,887)
------------
Cost of acquisition $ 2,559,516
===========
Cash paid for acquisition $ 2,559 516
===========
Net cash from acquisition:
Cash of acquired company $ 607,216
Cash paid for acquisition (2,559,516)
------------
Net cash used by acquisition $(1,952,300)
============
On January 4, 1995, Family Life Insurance Company of Texas ("Family"), a
wholly-owned subsidiary of the Company increased the amount of reinsurance
on each of its life policies in force from 20% to 100%. On February 2,
1995, Oakley-Metcalf entered into a reinsurance agreement whereby Oakley-
Metcalf ceded 100% of each life policy with an unaffiliated life insurance
company. These transactions were both non-cash transactions. The Company
transferred assets of $2,020,065 and liabilities of $3,259,418 and
recognized a deferred gain on the reinsurance of $1,239,353 to be amortized
over the life of the policies.
<PAGE>
FORTUNE NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
Premiums and other considerations were 23% lower during the first quarter of
1996 in comparison to the first quarter of 1995. Premiums for the first
quarter of 1995 include approximately $202,000 in single premiums related to
the conversion of a trust-funded prepaid funeral service plan to an
insurance-funded plan. Excluding the trust conversion, premiums and other
considerations were 42% higher during the first quarter of 1996 in
comparison to the first quarter of 1995. The increase in premiums is
attributable to an expansion of the Company's marketing of final expense
life insurance and insurance-funded prepaid funeral service contracts.
Net investment income decreased 17% in the first quarter of 1996 in
comparison to the first quarter of 1995. Net investment income for the
first quarter of 1995 included approximately $35,000 in investment income
related to assets used at January 31, 1995 to repay $8.3 million in notes
payable.
The amortization of the deferred gain on reinsurance decreased by $59,638 in
the first quarter of 1996 in comparison to the first quarter of 1995. The
deferred gain on reinsurance is being amortized based upon the amount of
insurance in force under the reinsurance treaties to which the deferred gain
relates. During the first quarter of 1995, the reinsured policies
experienced an unusually high level of terminations. This resulted in a
higher than normal amortization of the deferred gain during that quarter.
The Company receives an expense allowance for administering certain blocks
of reinsured policies. The expense allowance received during the first
quarter of 1996 was 4% less than the expense allowance received during the
first quarter of 1995 due to normal policy attrition of the reinsured
policies.
Total policy benefits (i.e., death benefits and other benefits) were 36% of
total revenue for the first quarter of 1996 compared to 35% of total revenue
for the first quarter of 1995.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 59% of total revenue for the first quarter of 1996 compared
to 63% of total revenue for the first quarter of 1995. General expenses for
the first quarter of 1995 included approximately $72,000 in non-recurring
actuarial charges related to consultations on the Company's acquisition
program and approximately $35,000 in expense related to the settlement of a
policy dispute.
Due to the unusual expenses noted above in the first quarter of 1995,
operating income (i.e., income before preferred dividends, federal income
taxes and minority interest) was 86% higher in the first quarter of 1996
compared to the first quarter of 1995.
11
<PAGE>
As a result of a transaction that increased the reinsurance from 20% to 100%
on each of the life policies in force in a life insurance subsidiary
acquired August 31, 1994, the Company incurred current federal income taxes
of approximately $920,000. Offsetting the increase in the current federal
income tax expense, the reinsurance transaction noted above resulted in a
deferred federal income tax benefit. The benefit related to the reinsurance
transaction was the majority of the total deferred federal income tax
benefit recorded in the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------
In connection with an acquisition, the Company's 63.7%-owned subsidiary,
Acap Corporation ("Acap") borrowed $1.5 million from a bank on January 31,
1995. The note had a principal balance of $1.25 million at March 31, 1996.
The note matured April 30, 1996. The bank granted a new note maturing April
30, 1997 under identical terms as the original note. The note bears
interest at a rate equal to the base rate of a bank plus 1%. Principal
payments on the note of $62,500 are due quarterly. The note is secured by a
pledge of all of the outstanding shares of Acap's wholly-owned subsidiary,
American Capitol Insurance Company ("American Capitol"). The loan agreement
contains certain restrictions and financial covenants. Without the written
consent of the bank, Acap may not incur any debt, pay common stock dividends
or sell any substantial amounts of assets. Also, American Capitol is
subject to minimum statutory earnings and capital and surplus requirements
during the loan term. Acap and American Capitol are in compliance with all
the restrictions and covenants of the loan.
During the first quarter of 1996, there was a decline in net unrealized
investment gains of $393,467. The decline in invested asset values was
primarily the result of an increase in market interest rates during the
quarter. It is not anticipated that the Company will need to liquidate
investments prior to their projected maturities in order to meet its cash
flow requirements. The Company had positive cash flows from operating
activities during the first quarter of 1996.
PLAN OF DISSOLUTION AND LIQUIDATION
-----------------------------------
As discussed in the Company's Annual Report on Form 10-KSB, the Company
expects to adopt a plan of dissolution and liquidation at its annual
stockholder meeting. The date of the annual stockholder meeting has not yet
been set.
Under the plan, the Company's stockholders are entitled, upon liquidation,
to receive, pro rata, the Company's sole asset, namely, 5,421 shares of
common stock of Acap. No fractional shares of Acap's common stock will be
issued. The Company's stockholders will have the option of selling their
"odd lot" shares of the Company's common stock to Acap or buying from Acap
enough of the Company's common stock to round up their holdings.
The Company has entered into an agreement with Acap to pay for the Company's
operating expenses through the expiration of the plan of dissolution and
liquidation. In exchange for its services, Acap received 55,323 shares of
the Company's common stock during the first quarter of 1996.
ACQUISITION PROSPECT
--------------------
On April 24, 1996, American Capitol signed a Letter of Intent to acquire,
through assumption reinsurance, the insurance in force of World Service Life
Insurance Company of America and its wholly-owned subsidiary, South Texas
Bankers Life Insurance Company. If the acquisition is consummated, the
Company plans on immediately reinsuring the acquired business on a 100%
coinsurance basis with an unrelated reinsurer. The Company plans on
retaining the administration of the policies in question, for which it will
receive an expense allowance from the reinsurer. An experience refund
formula in the coinsurance agreement returns to American Capitol 50% of the
profits generated by the reinsured policies once a threshold is exceeded.
Also, at American Capitol's option, the reinsured policies may be recaptured
at a price determined by the experience formula. The acquisition involves
approximately 24,000 policies, assets of approximately $24 million and a
purchase price of approximately $2.3 million (which is also approximately
the amount of the initial ceding allowance under the coinsurance agreement).
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1996 to be signed on its behalf by the undersigned
thereunto duly authorized.
FORTUNE NATIONAL CORPORATION
----------------------------
(Registrant)
Date: May 10, 1996 By:/s/ William F. Guest
---------------------------
William F. Guest, President
Date: May 10, 1996 By:/s/ John D. Cornett
---------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF
1934
For the transition period from ____________ to ____________
Commission file number 0-14451
ACAP CORPORATION
(Exact name of small business issuer as specified in its charter)
State of Incorporation: IRS Employer Id.:
Delaware 25-1489730
Address of Principal Executive Office:
10555 Richmond Avenue
Houston Texas 77042
Issuer's telephone number: (713) 974-2242
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 10, 1996
----- ---------------------------
Common Stock, Par Value $.10 8,516
This Form 10-QSB contains a total of 13 pages including any exhibits.<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet - March 31, 1996 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1996 and 1995 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1996 and 1995 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Part II. Other Information:
Item 6. Exhibit 27-Financial Data Schedule 14
2
<PAGE>
<TABLE>
PART I. ITEM 1. FINANCIAL INFORMATION
---------------------------------------
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<CAPTION>
ASSETS 1996
------ ----
<S> <C>
INVESTMENTS:
Fixed maturities available for sale $29,699,832
Equity securities (at market) 86,672
Mortgage loans 1,222,130
Real estate 1,494,819
Policy loans 6,364,445
Short-term investments 1,077,761
-----------
Total investments 39,945,659
Accrued investment income 458,466
Reinsurance receivables 36,063,954
Accounts receivable (less allowance
for uncollectible accounts of $82,918) 212,707
Deferred acquisition costs 1,752,002
Property and equipment
(less accumulated depreciation of $553,306) 113,286
Costs in excess of net assets of
acquired business (less accumulated
amortization of $498,823) 2,174,951
Other assets 1,240,454
----------
$81,961,479
===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
1996
----
<S> <S>
LIABILITIES:
Policy liabilities:
Future policy benefits $66,986,045
Contract claims 801,243
------------
Total policy liabilities 67,787,288
Other policyholders' funds 1,722,029
Deferred tax liability 1,714,698
Deferred gain on reinsurance 2,361,695
Note payable 1,250,000
Other liabilities 1,388,772
-----------
Total liabilities 76,224,482
-----------
STOCKHOLDERS' EQUITY:
Series A preferred stock, par value
$.10 per share, authorized, issued
and outstanding 74,000 shares
(involuntary liquidation value $2,035,000) 1,850,000
Common stock, par value $.10 per share,
authorized 10,000 shares, issued 8,757 shares 876
Additional paid-in capital 6,259,069
Accumulated deficit (2,772,130)
Treasury stock, at cost, 241 shares (105,853)
Net unrealized investment gains, net of
taxes of $191,881 505,035
-----------
Total stockholders' equity 5,736,997
-----------
$81,961,479
============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Premiums and other considerations $ 345,889 446,494
Net investment income 300,136 360,850
Net realized investment gains 514 6,247
Reinsurance expense allowance 454,789 474,153
Amortization of deferred gain on reinsurance 53,527 133,955
Other income 14,073 14,249
----------------------
Total revenues 1,168,928 1,435,948
----------------------
BENEFITS AND EXPENSES:
Death benefits 128,619 141,712
Other benefits 282,492 340,168
Commissions and general expenses 545,873 729,724
Interest expense 28,905 64,635
Amortization of deferred acquisition costs 27,053 27,741
Amortization of costs in excess of net
acquired business 26,021 26,024
----------------------
Total benefits and expenses 1,038,963 1,330,004
----------------------
Income before federal income tax expense
(benefit) 129,965 105,944
Federal income tax expense (benefit)
Current 10,000 1,010,576
Deferred (12,040)(1,215,801)
----------------------
Net income $ 132,005 311,169
======================
Net income per common share $ 9.66 30.84
======================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH (UNAUDITED)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 132,005 311,169
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 16,502 (65,279)
Realized gains on investments (514) (6,247)
Deferred federal income tax benefit (12,044) (1,215,801)
Decrease in reinsurance receivables 671,299 257,360
Decrease in accrued investment income 94,495 118,451
Increase in accounts receivable (93,154) (8,780)
Decrease (increase) in other assets (925,472) 14,237
Decrease in future policy benefit liability (336,314) (85,560)
Increase in contract claim liability 22,863 79,510
Increase (decrease) in other
policyholders' funds liability (11,456) 18,311
Increase in other liabilities 711,265 854,388
----------- ----------
Net cash provided by operating activities 269,475 271,759
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments
available for sale and principal
repayments on mortgage loans 581,586 892,682
Purchases of investments available for sale (1,364,298) (3,116,259)
Net decrease in policy loans 270,001 37,885
Net decrease in short-term investments 632,986 10,540,492
Purchase of property and equipment (60,903) (2,715)
Purchase of subsidiary, net of cash acquired -- (1,952,300)
---------- -----------
Net cash provided by investing activities 59,372 6,399,785
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable -- 1,500,000
Principal payments on notes payable (62,500) (8,300,000)
Deposits on policy contracts 298,561 337,359
Withdrawals from policy contracts (638,802) (545,058)
Preferred dividends paid (49,719) (48,565)
----------- -----------
Net cash used in financing activities (452,460) (7,056,264)
----------- -----------
Net decrease in cash (123,613) (384,720)
Cash at beginning of year 123,613 384,720
----------- -----------
Cash at end of period $ -- --
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
7
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated balance sheet as of March 31, 1996 and the
condensed consolidated statement of operations and cash flows for the
three month periods ended March 31, 1996 and 1995, have been prepared by
Acap Corporation (the "Company"), without audit. In the opinion of
management, all adjustments (which, except as may be noted below, include
only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows at
March 31, 1996 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's December 31, 1995 Annual Report on Form 10-KSB. The
results of operations for the three month periods ended March 31, 1996
and 1995 are not necessarily indicative of the operating results for the
full year.
2. EARNINGS PER SHARE
------------------
The earnings per common share is computed by dividing net income (less
dividends paid on preferred stock of $49,719 and $48,565 for March 31,
1996 and 1995, respectively) by the weighted average common shares
outstanding (8,516 at March 31, 1996 and March 31, 1995).
3. STOCKHOLDERS' EQUITY
--------------------
During the three months ended March 31, 1996, stockholders' equity
changed for the following items: Reduction in net unrealized investment
gains of $606,692; net income of $132,005; and cash dividends paid on
preferred stock of $49,719.
4. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
---------------------------------------------
Cash payments of $10,000 and $0 were made for federal income taxes during
the three months ended March 31, 1996 and 1995, respectively.
Cash payments of $32,320 and $40,388 for interest expense were made
during the three months ended March 31, 1996 and 1995, respectively.
The following reflects assets acquired and liabilities assumed relative
to the acquisition of Oakley-Metcalf Insurance Company ("Oakley-Metcalf")
by the Company, the consideration given for such acquisition and the net
cash flow relative to such acquisition on February 2, 1995.
8
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Assets of acquired subsidiary $ 4,393,403
Liabilities of acquired subsidiary (1,833,887)
-----------
Cost of acquisition $ 2,559,516
===========
Cash paid for acquisition $ 2,559 516
===========
Net cash from acquisition:
Cash of acquired company $ 607,216
Cash paid for acquisition (2,559,516)
------------
Net cash used by acquisition $(1,952,300)
============
On January 4, 1995, Family Life Insurance Company of Texas ("Family"), a
wholly-owned subsidiary of the Company increased the amount of
reinsurance on each of its life policies in force from 20% to 100%. On
February 2, 1995, Oakley-Metcalf entered into a reinsurance agreement
whereby Oakley-Metcalf ceded 100% of each life policy with an
unaffiliated life insurance company. These transactions were both non-
cash transactions. The Company transferred assets of $2,020,065 and
liabilities of $3,259,418 and recognized a deferred gain on the
reinsurance of $1,239,353 to be amortized over the life of the policies.
9
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------
RESULTS OF OPERATIONS
---------------------
Premiums and other considerations were 23% lower during the first quarter
of 1996 in comparison to the first quarter of 1995. Premiums for the
first quarter of 1995 include approximately $202,000 in single premiums
related to the conversion of a trust-funded prepaid funeral service plan
to an insurance-funded plan. Excluding the trust conversion, premiums
and other considerations were 42% higher during the first quarter of 1996
in comparison to the first quarter of 1995. The increase in premiums is
attributable to an expansion of the Company's marketing of final expense
life insurance and insurance-funded prepaid funeral service contracts.
Net investment income decreased 17% in the first quarter of 1996 in
comparison to the first quarter of 1995. Net investment income for the
first quarter of 1995 included approximately $35,000 in investment income
related to assets used at January 31, 1995 to repay $8.3 million in notes
payable.
The amortization of the deferred gain on reinsurance decreased by $80,428
in the first quarter of 1996 in comparison to the first quarter of 1995.
The deferred gain on reinsurance is being amortized based upon the amount
of insurance in force under the reinsurance treaties to which the
deferred gain relates. During the first quarter of 1995, the reinsured
policies experienced an unusually high level of terminations. This
resulted in a higher than normal amortization of the deferred gain during
that quarter.
The Company receives an expense allowance for administering certain
blocks of reinsured policies. The expense allowance received during the
first quarter of 1996 was 4% less than the expense allowance received
during the first quarter of 1995 due to normal policy attrition of the
reinsured policies.
Total policy benefits (i.e., death benefits and other benefits) were 35%
of total revenue for the first quarter of 1996 compared to 34% of total
revenue for the first quarter of 1995.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 54% of total revenue for the first quarter of 1996
compared to 59% of total revenue for the first quarter of 1995. General
expenses for the first quarter of 1995 included approximately $72,000 in
non-recurring actuarial charges related to consultations on the Company's
acquisition program and approximately $35,000 in expense related to the
settlement of a policy dispute.
Due to the unusual expenses noted above in the first quarter of 1995,
income before federal income taxes was 23% higher in the first quarter of
1996 compared to the first quarter of 1995.
10<PAGE>
As a result of a transaction that increased the reinsurance from 20% to
100% on each of the life policies in force in a life insurance subsidiary
acquired August 31, 1994, the Company incurred current federal income
taxes of approximately $920,000. Offsetting the increase in the current
federal income tax expense, the reinsurance transaction noted above
resulted in a deferred federal income tax benefit. The benefit related
to the reinsurance transaction was the majority of the total deferred
federal income tax benefit recorded in the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
In connection with an acquisition, the Company borrowed $1.5 million from
a bank on January 31, 1995. The note had a principal balance of $1.25
million at March 31, 1996. The note matured April 30, 1996. The bank
granted a new note maturing April 30, 1997 under identical terms as the
original note. The note bears interest at a rate equal to the base rate
of a bank plus 1%. Principal payments on the note of $62,500 are due
quarterly. The note is secured by a pledge of all of the outstanding
shares of American Capitol Insurance Company ("American Capitol") owned
by the Company. The loan agreement contains certain restrictions and
financial covenants. Without the written consent of the bank, Acap may
not incur any debt, pay common stock dividends or sell any substantial
amounts of assets. Also, American Capitol is subject to minimum
statutory earnings and capital and surplus requirements during the loan
term. The Company and American Capitol are in compliance with all the
restrictions and covenants of the loan.
During the first quarter of 1996, there was a decline in net unrealized
investment gains of $606,692. The decline in invested asset values was
primarily the result of an increase in market interest rates during the
quarter. It is not anticipated that the Company will need to liquidate
investments prior to their projected maturities in order to meet its cash
flow requirements. The Company had positive cash flows from operating
activities during the first quarter of 1996.
FORTUNE LIQUIDATION
-------------------
As discussed in the Company's Annual Report on Form 10-KSB, Fortune
National Corporation ("Fortune"), the owner of 63.7% of the Company's
outstanding common stock, expects to adopt a plan of dissolution and
liquidation at its annual stockholder meeting. The date of Fortune's
annual stockholder meeting has not yet been set.
Under the plan, no fractional shares of the Company's common stock will
be issued. Fortune's stockholders will have the option of selling their
"odd lot" shares of Fortune common stock to the Company or buying from
the Company enough Fortune common stock to round up their holdings.
The Company has entered into an agreement with Fortune to pay for
Fortune's operating expenses through the expiration of the plan of
dissolution and liquidation. In exchange for its services, the Company
received 55,323 shares of Fortune common stock during the first quarter
of 1996.
Fortune's liquidation will not result in a change in the management,
directors, or the ultimate control of the Company.
11<PAGE>
ACQUISITION PROSPECT
--------------------
On April 24, 1996, American Capitol signed a Letter of Intent to acquire,
through assumption reinsurance, the insurance in force of World Service
Life Insurance Company of America and its wholly-owned subsidiary, South
Texas Bankers Life Insurance Company. If the acquisition is consummated,
the Company plans on immediately reinsuring the acquired business on a
100% coinsurance basis with an unrelated reinsurer. The Company plans on
retaining the administration of the policies in question, for which it
will receive an expense allowance from the reinsurer. An experience
refund formula in the coinsurance agreement returns to American Capitol
50% of the profits generated by the reinsured policies once a threshold
is exceeded. Also, at American Capitol's option, the reinsured policies
may be recaptured at a price determined by the experience formula. The
acquisition involves approximately 24,000 policies, assets of
approximately $24 million and a purchase price of approximately $2.3
million (which is also approximately the amount of the initial ceding
allowance under the coinsurance agreement).
12<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1996 to be signed on its behalf by the
undersigned thereunto duly authorized.
ACAP CORPORATION
----------------
(Registrant)
Date: May 10, 1996 By:/s/ William F. Guest
--------------------------------
William F. Guest, President
Date: May 10, 1996 By:/s/ John D. Cornett
--------------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
13<PAGE>
