<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
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 AUGUST 10, 1995
----- ------------------------------
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
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet - June 30, 1995 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Six Months Ended
June 30, 1995 and 1994 (Unaudited) 5
Condensed Consolidated Statements of
Operations - Three Months Ended
June 30, 1995 and 1994 (Unaudited) 6
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1995 and 1994 (Unaudited) 7
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 13
</TABLE>
2
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
INVESTMENTS:
Fixed maturities available for sale $28,768,144
Equity securities (at market) 216,251
Mortgage loans 927,951
Real estate 1,976,337
Policy loans 6,827,197
Short-term investments 1,696,355
-----------
Total investments 40,412,235
Accrued investment income 533,228
Reinsurance receivable 37,187,207
Accounts receivable (less allowance
for uncollectible accounts of $82,824) 188,583
Deferred policy acquisition costs 1,838,116
Property and equipment
(less accumulated depreciation of $523,170) 85,477
Costs in excess of net assets of
acquired business (less accumulated
amortization of $420,757) 2,253,019
Other assets 969,801
-----------
$83,467,666
===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
LIABILITIES:
Policy liabilities:
Future policy benefits $68,363,084
Contract claims 607,869
-----------
68,970,953
Other policyholders' funds 1,764,020
Federal income taxes payable
Current 460,004
Deferred 306,000
Deferred gain on reinsurance 3,783,241
Notes payable 1,437,500
Other liabilities 749,261
-----------
Total liabilities 77,470,979
-----------
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 (2,752,467)
Treasury stock, at cost, 241 shares (105,853)
Net unrealized investment gains, net of
taxes of $360,063 745,062
-----------
Total stockholders' equity 5,996,687
-----------
$83,467,666
===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
REVENUES:
Premiums and other considerations $ 990,745 332,078
Net investment income 724,375 554,783
Net realized investment gains 5,859 14,020
Reinsurance expense allowance 971,272 811,547
Amortization of deferred gain on reinsurance 281,491 57,422
Other income 57,993 33,693
---------- ---------
Total revenues 3,031,735 1,803,543
---------- ---------
BENEFITS AND EXPENSES:
Death benefits 208,138 43,312
Other benefits 912,693 437,255
Commissions and general expenses 1,402,557 958,273
Interest expense 101,423 --
Amortization of deferred acquisition costs 56,739 19,203
Amortization of costs in excess of net
acquired business 52,048 29,472
---------- ---------
Total benefits and expenses 2,733,598 1,487,515
---------- ---------
Income before federal income tax expense 298,137 316,028
Federal income tax expense (benefit)
Current 1,018,864 49,526
Deferred (999,115) 219,331
---------- ---------
Net income 278,388 47,171
========== =========
Net income (loss) per common share $ 21.01 (3.15)
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
REVENUES:
Premiums and other considerations $ 544,251 189,230
Net investment income 335,400 255,905
Net realized investment gains (losses) (388) 14,020
Reinsured expense allowance 497,119 429,362
Amortization of deferred gain on reinsurance 147,536 29,148
Other income 43,744 16,919
---------- -------
Total revenues 1,567,662 934,584
---------- -------
BENEFITS AND EXPENSES:
Death benefits 66,426 4,458
Other benefits 572,525 229,194
Commissions and general expenses 644,708 545,731
Interest expense 36,788 --
Amortization of deferred acquisition costs 28,998 6,483
Amortization of costs in excess of net
acquired business 26,024 14,736
---------- -------
Total benefits and expenses 1,375,469 800,602
---------- -------
Income before federal income tax expense 192,193 133,982
Federal income tax expense
Current 8,288 24,763
Deferred 216,686 91,715
---------- -------
Net income (loss) $ (32,781) 17,504
========== =======
Net loss per common share $ (9.82) (2.29)
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
INCREASE (DECREASE) IN CASH (UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from operations $ 278,388 47,171
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization (139,947) 27,434
Realized gains on sale of investments (5,859) (14,020)
Deferred income tax expense (benefit) (999,113) 219,331
Decrease in reinsurance receivable 959,504 600,681
Decrease in accrued investment income 56,221 5,775
Increase in accounts receivable (160,994) (2,404)
Decrease (increase) in other assets 3,220 (15,649)
Decrease in future policy benefits (105,235) (111,867)
Decrease in contract claims (73,718) (126,610)
Increase (decrease) in other
policyholders' funds 24,526 (9,520)
Increase (decrease) in other liabilities 307,675 (17,120)
----------- ----------
Net cash provided by operating activities 144,668 603,202
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments and
principal payments on mortgage loans 1,074,964 1,936,720
Purchase of investments (3,725,420) (1,896,020)
Net decrease in policy loans 125,416 79,353
Net decrease (increase) in short-term
investments 11,436,715 (67,402)
Purchase of property and equipment (24,746) (3,671)
Purchase of subsidiary, net of cash
acquired (1,952,300) (169,555)
----------- ----------
Net cash provided (used) by investing
activities 6,934,629 (120,575)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable 1,500,000 --
Principal payments on notes payable (8,362,500) --
Deposits on policy contracts 641,340 497,198
Withdrawals from policy contracts (1,143,417) (922,794)
Preferred dividends paid (99,440) (74,000)
----------- ----------
Net cash used in financing activities (7,464,017) (499,596)
----------- ----------
Net decrease in cash (384,720) (16,969)
Cash at beginning of period 384,720 61,998
----------- ----------
Cash at end of period $ -- 45,029
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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 June 30, 1995 and the condensed
consolidated statements of operations and cash flows for the six month periods
ended June 30, 1995 and 1994, 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 June 30, 1995 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, 1994 Annual
Report to Stockholders. The results of operations for the six month periods
ended June 30, 1995 and 1994 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 $99,440 and $74,000 for June 30, 1995 and 1994,
respectively) by the weighted average common shares outstanding (8,516 at June
30, 1995 and June 30, 1994).
3. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1995, stockholders' equity changed for the
following items: Increase in net unrealized investment gains of $1,819,771; net
income of $278,388; and cash dividends paid on preferred stock of $99,440.
4. ACQUISITIONS
On February 2, 1995, the Company acquired 100% of the common stock of Oakley-
Metcalf Insurance Company ("Oakley-Metcalf"), a Texas-domiciled life insurance
company. The consideration paid for the stock of Oakley-Metcalf was cash in the
amount of $2,559,516. Concurrent with the acquisition of Oakley-Metcalf, the
Company fully reinsured all of Oakley-Metcalf's policies (approximately 3,000
policies) with an unaffiliated life insurance company. The obligations of this
reinsurer under the related reinsurance agreement are secured by a trust
containing a $450,000 letter of credit. In connection with the reinsurance
agreement, Oakley-Metcalf transferred assets of $560,683 and liabilities of
$653,006 and recognized a deferred gain on reinsurance of $92,323.
8
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. NOTE PAYABLE
On January 31, 1995, as a source of funds to repay the $5 million surplus
debenture issued in connection with the acquisition of Family Life Insurance
Company of Texas ("Family"), the Company borrowed $1.5 million from Central
National Bank of Waco, Texas. The note matures April 30, 1996 and renews April
30 of each year thereafter. 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 beginning April 30, 1995. The note is secured by the Company's pledge
of all the outstanding shares of Acap's 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.
6. REINSURANCE
On January 4, 1995, Family increased the amount of reinsurance on each of its
life policies in force from 20% to 100%. The Company recorded a deferred gain
on reinsurance of $2,518,234 and an increase in the reinsurance receivable of
$2,809,418 on the transaction.
7. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments of $558,924 and $49,526 for federal income taxes were made for the
six months ended June 30, 1995 and 1994, respectively.
Cash payments of $348,262 for interest expense were made during the six months
ended June 30, 1995.
The following reflects assets acquired and liabilities assumed relative to the
acquisition of Oakley-Metcalf by the Company, the consideration given for such
acquisition and the net cash flow relative to such acquisition on February 2,
1995.
<TABLE>
<CAPTION>
<S> <C>
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 paid for acquisition $ 2,559,516
Cash of acquired company (607,216)
-----------
Net cash required by acquisition $ 1,952,300
===========
</TABLE>
The reinsurance agreements entered into by the Company with an unaffiliated
reinsurer covering 100% of each of Oakley-Metcalf's life policies and the
increase in the Family life policies from 20% to 100% were non cash
transactions. The Company transferred assets of $2,023,654 and liabilities of
$4,634,211 and recognized a deferred gain on the reinsurance of $2,610,557 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
---------------------------------------------
SIGNIFICANT TRANSACTIONS
- ------------------------
As noted in the 1994 Annual Report to Stockholders, the Company acquired three
life insurance companies during 1994. One of the acquisitions, which was
completed on August 31, 1994, was a material transaction.
On January 4, 1995, the Company increased the reinsurance on each of the life
policies in force in the life insurance subsidiary acquired August 31, 1994 from
20% to 100%. The Company recorded a deferred gain on reinsurance of $2,518,234
and an increase in the reinsurance receivable of $2,809,418 on the transaction.
On February 2, 1995, the Company, through one of its life insurance
subsidiaries, acquired a small life insurance company, Oakley-Metcalf Insurance
Company, for cash of approximately $2.6 million.
RESULTS OF OPERATIONS
- ---------------------
Premiums and other considerations were 198% higher in the first half of 1995 in
comparison to the first half of 1994. Premiums and other considerations were
188% higher in the second quarter of 1995 in comparison to the second quarter of
1994. The increase in premiums is primarily attributable to the life insurance
premiums, net of reinsurance, from the acquisitions noted above. In addition,
during 1995 the Company received approximately $500,000 in single premiums
related to the conversion of three trust-funded prepaid funeral service plans to
insurance-funded plans.
Net investment income increased 31% in the first half and second quarter of 1995
in comparison to the first half and second quarter of 1994, respectively. The
increase in the invested asset base resulting from the acquisitions noted above
resulted in the higher level of net investment income.
The amortization of the deferred gain on reinsurance increased by $224,069 in
the first half of 1995 in comparison to the first half of 1994 and by $118,388
in the second quarter of 1995 in comparison to the second quarter of 1994. Of
the four acquisitions noted above, the Company fully reinsured the acquired life
policies of three of the acquired companies with a reinsurance company. The
reinsurance transactions resulted in total deferred gains in excess of $3
million. The amortization of these gains resulted in the increased amortization
income in 1995.
The Company retains the administration of the reinsured policies, for which it
receives an expense allowance from the reinsurance company. The reinsurance
transactions noted above resulted in a 20% increase in the reinsurance expense
allowance in the first half of 1995 compared to the first half of 1994 and a 16%
increase in the reinsurance expense allowance in the second quarter of 1995
compared to the second quarter of 1994.
Total policy benefits (i.e., death benefits and other benefits) were 37% of
total revenue for the first half of 1995 compared to 27% of total revenue for
the first half of 1994. Total policy benefits were 41% of total revenue for the
second quarter of 1995 compared to 25% of total revenue for the second quarter
of 1994. The higher ratio of total policy benefits to total revenue in 1995 is
attributable in part to increased mortality
10
<PAGE>
experience. Another significant factor in the higher ratio is the composition of
the acquired business. One of the acquired companies 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.
Total expenses (i.e., total benefits and expenses less total policy benefits)
were 53% of total revenue for the first half of 1995 compared to 56% of total
revenue for the first half of 1994. Total expenses were 47% of total revenue
for the second quarter of 1995 compared to 61% of total revenue for the second
quarter of 1994. The improved expense ratio is the result of economies of scale
from the acquisition activity noted above.
As a result of the higher revenues resulting from the acquired business and
economies of scale, income before federal income taxes was 43% higher during the
second quarter of 1995 in comparison to the same period in 1994. During the
first quarter of 1995, the Company had experienced a high level of death claims
and some significant non-recurring expenses. Consequently, income before
federal income taxes for the first half of 1995 was 6% lower than that of the
first half of 1994.
As a result of the 1995 reinsurance transaction that increased the reinsurance
on each of the life policies in force in the life insurance subsidiary acquired
August 31, 1994 from 20% to 100%, 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 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On January 31, 1995, the Company repaid a $5 million surplus debenture issued to
the seller of the life insurance company acquired by the Company on August 31,
1995. At the time it was acquired, the life insurance company had a $3.3
million note payable outstanding. This note was also repaid on January 31,
1995.
The Company borrowed $1.5 million from a bank on January 31, 1995 as a source of
funds to repay the $5 million surplus debenture noted above. The note matures
April 30, 1996 and renews April 30 of each year thereafter. 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, with the first payment made April 30,
1995. The note is secured by a pledge of all of the outstanding shares of
American Capitol Insurance Company ("American Capitol") owned by Acap
Corporation ("Acap"). 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.
During the first half of 1995, there was an improvement in net unrealized
investment losses of $1,819,771. The improvement in invested asset values was
primarily the result of a decline in market interest rates during the quarter.
While the Company reported net unrealized investment gains of $745,062 at June
30, 1995, it is not anticipated that the Company will liquidate investments
prior to their projected maturities in order to meet cash flow requirements.
The Company had positive cash flows from operating activities during the first
half of 1995.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report of Form 10-QSB for the quarter
ended June 30, 1995 to be signed on its behalf by the undersigned thereunto duly
authorized.
ACAP CORPORATION
Date: August 10, 1995
By: /s/ WILLIAM F. GUEST
--------------------------------
William F. Guest, President
By: /s/ JOHN D. CORNETT
--------------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 28,768,144
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 216,251
<MORTGAGE> 927,951
<REAL-ESTATE> 1,976,337
<TOTAL-INVEST> 40,412,235
<CASH> 0
<RECOVER-REINSURE> 37,187,207
<DEFERRED-ACQUISITION> 1,838,116
<TOTAL-ASSETS> 83,467,666
<POLICY-LOSSES> 68,970,953
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,764,020
<NOTES-PAYABLE> 1,437,500
<COMMON> 876
0
1,850,000
<OTHER-SE> 4,145,811
<TOTAL-LIABILITY-AND-EQUITY> 83,467,666
990,745
<INVESTMENT-INCOME> 724,375
<INVESTMENT-GAINS> 5,859
<OTHER-INCOME> 57,993
<BENEFITS> 1,120,831
<UNDERWRITING-AMORTIZATION> 56,739
<UNDERWRITING-OTHER> 1,402,557
<INCOME-PRETAX> 298,137
<INCOME-TAX> 19,749
<INCOME-CONTINUING> 278,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278,388
<EPS-PRIMARY> 21.01
<EPS-DILUTED> 0
<RESERVE-OPEN> 103,940
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 208,138
<PAYMENTS-PRIOR> 43,312
<RESERVE-CLOSE> 206,119
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
