<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 September 30, 1996
[ ] 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 NOVEMBER 11, 1996
Common Stock, Par Value $.10 7,612
This Form 10-QSB contains a total of 18 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 - September 30, 1996 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Nine Months Ended
September 30, 1996 and 1995 (Unaudited) 5
Condensed Consolidated Statements of
Operations - Three Months Ended
September 30, 1996 and 1995 (Unaudited) 6
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 1996 and 1995 (Unaudited) 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Part II. Other Information:
Item 6. Exhibit 27-Financial Data Schedule 18<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
Investments:
Fixed maturities available for sale $ 27,552,147
Equity securities (at market) 13,522
Mortgage loans 2,815,665
Real estate 1,390,300
Policy loans 6,248,815
Short-term investments 437,177
------------
Total investments 38,457,626
Cash 418,050
Accrued investment income 454,922
Reinsurance receivable 58,417,460
Accounts receivable (less allowance
for uncollectible accounts of $82,915) 206,594
Deferred acquisition costs 1,691,767
Property and equipment
(less accumulated depreciation of $572,788) 116,560
Costs in excess of net assets of
acquired business (less accumulated
amortization of $550,871) 2,122,903
Other assets 1,311,503
-----------
$103,197,385
============
See accompanying notes to consolidated financial statements.<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1996
LIABILITIES:
Policy liabilities:
Future policy benefits $ 88,907,081
Contract claims 738,043
------------
Total policy liabilities 89,645,124
Other policyholders' funds 1,874,607
Deferred tax liability 1,608,817
Deferred gain on reinsurance 2,331,489
Note payable 1,125,000
Other liabilities 776,011
------------
Total liabilities 97,361,048
------------
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 6,259,189
Accumulated deficit (2,263,507)
Treasury stock, at cost, 1,145 shares (426,419)
Net unrealized investment gains, net of
taxes of $63,941 416,198
------------
Total stockholders' equity 5,836,337
------------
$103,197,385
============
See accompanying notes to consolidated financial statements.<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
REVENUES:
Premiums and other considerations $ 2,041,019 1,284,056
Net investment income 975,118 976,225
Net realized investment gains 224,097 146,954
Reinsurance expense allowance 1,434,389 1,441,974
Amortization of deferred gain on reinsurance 152,140 347,207
Other income 43,343 75,885
---------- ----------
Total revenues 4,870,106 4,272,301
---------- ----------
BENEFITS AND EXPENSES:
Death benefits 613,554 456,355
Other benefits 1,365,870 991,115
Commissions and general expenses 1,847,035 1,928,144
Interest expense 85,332 137,822
Amortization of deferred acquisition costs 87,288 84,665
Amortization of costs in excess of net
acquired business 78,069 78,070
---------- ----------
Total benefits and expenses 4,077,148 3,676,171
---------- ----------
Income before federal income tax expense 792,958 596,130
Federal income tax expense (benefit)
Current 47,499 987,803
Deferred 10,019 (583,849)
---------- ----------
Net income 735,440 192,176
========== ==========
Net income per common share $ 70.35 4.92
========== ==========
See accompanying notes to consolidated financial statements.<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
REVENUES:
Premiums and other considerations $ 837,541 293,311
Net investment income 234,863 308,100
Net realized investment gains 222,155 141,095
Reinsurance expense allowance 535,327 470,702
Amortization of deferred gain on reinsurance 51,752 65,716
Other income 12,208 17,892
---------- ---------
Total revenues 1,893,846 1,296,816
---------- ---------
BENEFITS AND EXPENSES:
Death benefits 183,735 248,217
Other benefits 473,615 78,422
Commissions and general expenses 596,339 581,837
Interest expense 27,076 36,399
Amortization of deferred acquisition costs 22,813 27,926
Amortization of costs in excess of net
acquired business 26,023 26,022
---------- ---------
Total benefits and expenses 1,329,601 998,823
---------- ---------
Income before federal income tax expense 564,245 297,993
Federal income tax expense (benefit)
Current 27,715 (31,061)
Deferred 6,269 415,266
---------- ---------
Net income (loss) $ 530,261 (86,212)
========== =========
Net income (loss) per common share $ 59.09 (16.10)
========== =========
See accompanying notes to consolidated financial statements.<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
INCREASE (DECREASE) IN CASH (UNAUDITED)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from operations $ 735,440 192,176
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 95,901 (133,409)
Realized gains on investments (224,097) (146,954)
Deferred federal income tax expense
(benefit) 10,016 (583,847)
Decrease in reinsurance receivables 924,994 1,259,489
Decrease (increase) in accrued
investment income (228,940) 107,567
Increase in accounts receivable (77,280) (94,319)
Increase in other assets (996,521) (168,915)
Increase (decrease) in future policy
benefit liability 317,011 (106,367)
Increase (decrease)in contract claim
liability (221,936) 54,933
Increase (decrease) in other
policyholders' funds liability (92,375) 57,803
Decrease in other liabilities (123,898) (25,594)
----------- ----------
Net cash provided by operating activities 118,315 412,563
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments
available for sale and principal
repayments on mortgage loans 3,514,868 2,515,710
Purchases of investments available for sale(22,731,274) (5,959,178)
Net decrease in policy loans 471,800 228,914
Proceeds from sales of real estate 338,845 --
Net decrease in short-term investments 605,874 12,208,451
Purchase of property and equipment (117,336) (24,746)
Purchase of subsidiary, net of cash
acquired -- (1,952,300)
Coinsurance agreement, net of cash acquired 19,371,962 --
----------- ----------
Net cash provided by investing activities 1,454,739 7,016,851
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable -- 1,500,000
Principal payments on notes payable (187,500) (8,425,000)
Deposits on policy contracts 878,575 1,015,983
Withdrawals from policy contracts (1,825,161) (1,754,802)
Preferred dividends paid (144,531) (150,315)
----------- ----------
Net cash used in financing activities (1,278,617) (7,814,134)
----------- ----------
Net increase (decrease) in cash 294,437 (384,720)
Cash at beginning of year 123,613 384,720
----------- ----------
Cash at end of period $ 418,050 --
=========== ==========
See accompanying notes to consolidated financial statements.<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1996 and
the condensed consolidated statements of operations and cash flows for
the nine month periods ended September 30, 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 September 30, 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 to Stockholders. The
results of operations for the nine month periods ended September 30,
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 $144,531 and $150,315 for
September 30, 1996 and 1995, respectively) by the weighted average
common shares outstanding (8,400 at September 30, 1996 and 8,516 at
September 30, 1995).
3. STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1996, stockholders' equity
changed for the following items: Reduction in net unrealized
investment gains of $695,529; net income of $735,440; cash dividends
paid on preferred stock of $144,531; an increase in treasury stock of
$320,566; and an increase in additional paid in capital of $120.
4. WORLD SERVICE TRANSACTION
Effective June 1, 1996, American Capitol Insurance Company ("American
Capitol"), a wholly-owned subsidiary of Acap Corporation, entered into
Reinsurance and Assumption Agreements (the "Assumption Agreements")
with World Service Life Insurance Company of America ("World Service")
and South Texas Bankers Life Insurance Company ("South Texas Bankers"),
a wholly-owned subsidiary of World Service. Pursuant to the Assumption
Agreements, American Capitol assumed all of the insurance in force of
World Service and South Texas Bankers, approximately 24,000 policies,
for cash of approximately $1.9 million. The assets transferred to
American Capitol were $21.3 million in cash, approximately $1.9 million
of mortgage loans, a receivable of approximately $1.4 million and other
assets of approximately $2.0 million.
The Assumption Agreement was subject to certain post-closing price
adjustments. Following the calculation of certain of the post-closing
price adjustments, World Service and South Texas Bankers indicated an
unwillingness to complete the transaction as structured in the
Assumption Agreement. On August 30, 1996, the parties signed a
reinsurance agreement (the "Reinsurance Agreement"), effective June 1,
1996, which supersedes the Assumption Agreements. Under the
Reinsurance Agreement, American Capitol coinsures 91.42% of the World
Service / South Texas Bankers policies. American Capitol provides a
ceding fee of approximately $1.2 million. American Capitol retains the
assets previously transferred under the Assumption Agreements, except
that the $1.4 million receivable is no longer applicable.
Contemporaneous with the signing of the Reinsurance Agreement, the
parties executed an administrative agreement (the "Administration
Agreement") whereby American Capitol agreed to provide specified
administrative functions related to the World Service / South Texas
Bankers policies for consideration.
It is possible, although in management's opinion not likely, that upon
review by the Alabama and Texas insurance regulators, the Reinsurance
Agreement will be disallowed. If this were to happen, possible
outcomes include a rescission of the transaction or litigation.
5. REINSURANCE
Effective June 30, 1996, American Capitol reinsured the business from
World Service / South Texas Bankers on a 100% coinsurance basis by
amending an existing reinsurance agreement (the "Crown Agreement") with
an unaffiliated reinsurer. American Capitol retained the
administration of the policies, for which it receives an expense
allowance from the reinsurer. An experience refund formula in the
Crown Agreement returns to American Capitol 50% of the profits
generated by the reinsured policies above a specified threshold. Also,
at American Capitol's option, the reinsured policies may be recaptured
at a price determined by the experience formula. This transaction, at
June 30, 1996, increased reinsurance receivables by approximately $24.1
million to a carrying value of $57.1 million that were associated with
a single reinsurer, Crown Life Insurance Company ("Crown"). At
December 31, 1995, Crown had assets in excess of $6.6 billion and
stockholders' equity of approximately $.5 billion. Crown is rated
"Excellent" by A.M. Best Company, an insurance company rating
organization.
6. FORTUNE LIQUIDATION
Fortune National Corporation ("Fortune"), the owner of 63.7% of the
Company's outstanding common stock, adopted a plan of dissolution and
liquidation at its annual stockholder meeting on August 26, 1996. On
August 26, 1996, Fortune had no assets other than its holding of the
Company's common stock. Under the plan, no fractional shares of the
Company's common stock were issued. Fortune stockholders who did not
buy from the Company enough Fortune common stock on or before September
26, 1996 to round up their holdings elected to sell their "odd lot"
shares of Fortune common stock to the Company. As a result of the
Company's purchase of the "odd lot" shares and the conversion of the
Company's holding of Fortune common stock into Company common stock,
the Company added $320,566 to treasury stock, reducing the number of
outstanding shares of Company common stock to approximately 7,612.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. REAL ESTATE
LAND SALE
On September 10, 1996, American Capitol sold 50,000 square feet of
undeveloped land to an unaffiliated third party (the "Land Sale"). The
Company realized a pretax capital gain of $222,025 on the Land Sale.
LEASE OF HOME OFFICE BUILDING
Effective July 1, 1996, American Capitol signed a lease agreement (the
"Lease") whereby an unaffiliated third party agreed to lease the
remainder of the rentable space of the home office building
(approximately 34,919 square feet). The term of the Lease is five
years and the rental rate is $9.50 per square foot. The Lease provides
for a complete abatement of rent for the first three months of the
lease term and an abatement of one third of the rent for the subsequent
three months. A purchase option agreement was signed with the same
tenant. The purchase option expires on September 30, 1997. The option
purchase price of the home office building is $1.2 million. American
Capitol paid a brokerage fee of $72,000 in connection with the Lease.
The first rent payment under the Lease was due on October 1, 1996. To
date, neither the October 1 rent payment nor the November 1, 1996 rent
payment has been made and American Capitol has declared the Lease in
default.
POTENTIAL LAND SALE
On October 25, 1996, American Capitol signed an earnest money contract
for the sale of approximately 2.38 acres of undeveloped land to an
unaffiliated third party. The earnest money contract essentially
grants the potential purchaser an option to purchase the land on or
prior to December 31, 1996. If the transaction closes, the Company
will realize a pretax capital loss of approximately $20,000. If the
transaction closes, the Company will have no real estate holdings other
than American Capitol's home office building and the land directly
associated with that building.
8. DISPOSITION
On August 31, 1994, American Capitol acquired Family Life Insurance
Company of Texas ("Family"). During 1995, the policies in force of
Family were transferred to another subsidiary of American Capitol,
leaving Family a "shell" company. On October 14, 1996, American
Capitol signed a purchase agreement to sell Family to an unaffiliated
third party. If the transaction closes, it is anticipated to close by
December 31, 1996. If the transaction closes, the Company will realize
a pretax capital gain of approximately $50,000.
9. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments of $43,972 and $766,439 for federal income taxes were
made for the nine months ended September 30, 1996 and 1995,
respectively.
Cash payments of $88,984 and $384,662 for interest expense were made
during the nine months ended September 30, 1996 and 1995, respectively.
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.
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)
==========
The following reflects assets acquired and liabilities assumed relative
to the coinsurance agreement for the policies of World Service and
South Texas Bankers by the Company, the consideration given for such
acquisition and the net cash flow relative to such coinsurance on
June 1, 1996.
Assets acquired $ 23,834,041
Liabilities acquired (22,619,390)
-----------
Cost of acquisition $ 1,214,651
-----------
Cash paid for acquisition $ 1,214,651
===========
Net cash from acquisition:
Cash acquired $ 20,586,613
Cash paid for acquisition (1,214,651)
-----------
Net cash provided by acquisition $ 19,371,962
===========
The following reflects assets and liabilities transferred in connection
with a coinsurance treaty whereby all policies assumed from World
Service and South Texas Bankers were 100% ceded to an unaffiliated
reinsurer, the ceding commission received and the net cash flow related
to the coinsurance treaty on June 30, 1996.
Assets transferred $ 20,883,855
Liabilities transferred (22,098,506)
-----------
(1,214,651)
Ceding commission received 1,214,651
-----------
Net cash provided on the transfer of
assets and liabilities $ 0
===========
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.
Effective August 16, 1996, Fortune adopted a plan of dissolution and
liquidation (see Note 6). The cost of the shares of Fortune owned by
Acap and its subsidiaries of $320,566 was added to treasury shares in a
non-cash transaction.<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT TRANSACTIONS
World Service Transaction
Effective June 1, 1996, American Capitol Insurance Company ("American
Capitol"), a wholly-owned subsidiary of Acap Corporation, entered into
Reinsurance and Assumption Agreements (the "Assumption Agreements")
with World Service Life Insurance Company of America ("World Service")
and South Texas Bankers Life Insurance Company ("South Texas Bankers"),
a wholly-owned subsidiary of World Service. Pursuant to the Assumption
Agreements, American Capitol assumed all of the insurance in force of
World Service and South Texas Bankers, approximately 24,000 policies,
for cash of approximately $1.9 million. The assets transferred to
American Capitol were $21.3 million in cash, approximately $1.9 million
of mortgage loans, a receivable of approximately $1.4 million and other
assets of approximately $2.0 million.
The Assumption Agreement was subject to certain post-closing price
adjustments. Following the calculation of certain of the post-closing
price adjustments, World Service and South Texas Bankers indicated an
unwillingness to complete the transaction as structured in the
Assumption Agreement. On August 30, 1996, the parties signed a
reinsurance agreement (the "Reinsurance Agreement"), effective June 1,
1996, which supersedes the Assumption Agreements. Under the
Reinsurance Agreement, American Capitol coinsures 91.42% of the World
Service / South Texas Bankers policies. American Capitol provides a
ceding fee of approximately $1.2 million. American Capitol retains the
assets previously transferred under the Assumption Agreements, except
that the $1.4 million receivable is no longer applicable.
Contemporaneous with the signing of the Reinsurance Agreement, the
parties executed an administrative agreement (the "Administration
Agreement") whereby American Capitol agreed to provide specified
administrative functions related to the World Service / South Texas
Bankers policies for consideration.
It is possible, although in management's opinion not likely, that upon
review by the Alabama and Texas insurance regulators, the Reinsurance
Agreement will be disallowed. If this were to happen, possible
outcomes include a rescission of the transaction or litigation.
Effective June 30, 1996, American Capitol reinsured the business from
World Service / South Texas Bankers on a 100% coinsurance basis by
amending an existing reinsurance agreement (the "Crown Agreement") with
an unaffiliated reinsurer. American Capitol retained the
administration of the policies, for which it receives an expense
allowance from the reinsurer. An experience refund formula in the
Crown Agreement returns to American Capitol 50% of the profits
generated by the reinsured policies above a specified threshold. Also,
at American Capitol's option, the reinsured policies may be recaptured
at a price determined by the experience formula. This transaction, at
June 30, 1996, increased reinsurance receivables by approximately $24.1
million to a carrying value of $57.1 million that were associated with
a single reinsurer, Crown Life Insurance Company ("Crown"). At
December 31, 1995, Crown had assets in excess of $6.6 billion and
stockholders' equity of approximately $.5 billion. Crown is rated
"Excellent" by A.M. Best Company, an insurance company rating
organization.
Fortune Liquidation
Fortune National Corporation ("Fortune"), the owner of 63.7% of the
Company's outstanding common stock, adopted a plan of dissolution and
liquidation at its annual stockholder meeting on August 26, 1996. On
August 26, 1996, Fortune had no assets other than its holding of the
Company's common stock. Under the plan, no fractional shares of the
Company's common stock were issued. Fortune stockholders who did not
buy from the Company enough Fortune common stock on or before September
26, 1996 to round up their holdings elected to sell their "odd lot"
shares of Fortune common stock to the Company. As a result of the
Company's purchase of the "odd lot" shares and the conversion of the
Company's holding of Fortune common stock into Company common stock,
the Company added $320,566 to treasury stock, reducing the number of
outstanding shares of Company common stock to approximately 7,612.
Land Sale
On September 10, 1996, American Capitol sold 50,000 square feet of
undeveloped land to an unaffiliated third party (the "Land Sale"). The
Company realized a pretax capital gain of $222,025 on the Land Sale.
Lease of Home Office Building
Effective July 1, 1996, American Capitol signed a lease agreement (the
"Lease") whereby an unaffiliated third party agreed to lease the
remainder of the rentable space of the home office building
(approximately 34,919 square feet). The term of the Lease is five
years and the rental rate is $9.50 per square foot. The Lease provides
for a complete abatement of rent for the first three months of the
lease term and an abatement of one third of the rent for the subsequent
three months. A purchase option agreement was signed with the same
tenant. The purchase option expires on September 30, 1997. The option
purchase price of the home office building is $1.2 million. American
Capitol paid a brokerage fee of $72,000 in connection with the Lease.
The first rent payment under the Lease was due on October 1, 1996. To
date, neither the October 1 rent payment nor the November 1, 1996 rent
payment has been made and American Capitol has declared the Lease in
default.
Potential Land Sale
On October 25, 1996, American Capitol signed an earnest money contract
for the sale of approximately 2.38 acres of undeveloped land to an
unaffiliated third party. The earnest money contract essentially
grants the potential purchaser an option to purchase the land on or
prior to December 31, 1996. If the transaction closes, the Company
will realize a pretax capital loss of approximately $20,000. If the
transaction closes, the Company will have no real estate holdings other
than American Capitol's home office building and the land directly
associated with that building.
Potential "Shell" Sale
On August 31, 1994, American Capitol acquired Family Life Insurance
Company of Texas ("Family"). During 1995, the policies in force of
Family were transferred to another subsidiary of American Capitol,
leaving Family a "shell" company. On October 14, 1996, American
Capitol signed a purchase agreement to sell Family to an unaffiliated
third party. If the transaction closes, it is anticipated to close by
December 31, 1996. If the transaction closes, the Company will realize
a pretax capital gain of approximately $50,000.
RESULTS OF OPERATIONS
Premiums and other considerations were 59% higher during the nine
months ended September 30, 1996 in comparison to the comparable period
in 1995. The Company has received approximately $1 million in premiums
during 1996 from the World Service transaction discussed under
"Significant Transactions" above. All of the premiums reinsured as a
result of the World Service transaction for the month of June 1996,
approximately $500,000, were retained by American Capitol. Further,
under the Reinsurance Agreement, American Capitol reinsures 91.42% of
all new business produced by World Service. This new business is not
reinsured under the Crown Agreement, and is therefore reflected in the
Company's financial statements. The volume of World Service's new
business has been declining and it is uncertain how long or to what
degree World Service will continue to support new business production.
Premiums for 1995 included approximately $500,000 in single premiums
related to the conversion of three trust-funded prepaid funeral service
plans to an insurance-funded plan. Excluding these conversions,
premiums from the Company's marketing of final expense life insurance
and insurance-funded prepaid funeral service contracts has risen from
approximately $400,000 during the first nine months of 1995 to
approximately $700,000 during the first nine months of 1996.
Premiums for the three months ended September 30, 1996 were 186% higher
than during the comparable period in 1995. The single premiums from
the trust conversions noted above were generated prior to the third
quarter of 1995. As a result, the World Service premiums and the
Company's increased new business production during the third quarter of
1996 represented a larger percentage increase over the premiums for the
third quarter of 1995.
Net investment income was essentially unchanged for the nine months
ended September 30, 1996 in comparison to the comparable period in
1995. Net investment income for the three months ended September 30,
1996 was $73,237 lower than net investment income during the comparable
period in 1995. During the third quarter of 1996 the Company expensed
$72,000 in real estate broker fees related to the Lease discussed under
"Significant Transactions" above.
Realized investment gains were $224,097 for the nine months ended
September 30, 1996 in comparison to $146,954 for the nine months ended
September 30, 1995. The realized investment gains for 1996 are almost
exclusively related to the Land Sale discussed under "Significant
Transactions" above. The realized investment gains for 1995 were the
result of (1) the sale of a "shell" subsidiary and (2) the
restructuring of the bond portfolio of a subsidiary.
A major source of revenue for the Company is the expense allowance the
Company receives for administering certain blocks of reinsured
policies. Through the end of the second quarter of 1996, the
reinsurance expense allowance was less than it had been during the
corresponding period in 1995 due to normal policy attrition of the
reinsured policies. The amendment to the Crown Agreement to add the
policies American Capitol coinsures from World Service / South Texas
Bankers resulted in a 14% increase in the amount of the reinsurance
expense allowance for the three months ended September 31, 1996 in
comparison to the same period in 1995. This increase in the
reinsurance expense allowance during the third quarter of 1996 largely
offset the decline in the reinsurance expense allowance during the
first two quarters of 1996 and resulted in the reinsurance expense
allowance for the nine months ended September 30, 1996, being within
$10,000 of the reinsurance expense allowance for the comparable period
in 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 half of 1995, the
reinsured polices experienced an unusually high level of terminations.
This resulted in a higher than expected amortization of the deferred
gain during that period. Consequently, the amortization of the
deferred gain on reinsurance was almost $200,000 lower during the nine
months ended September 30, 1996 in comparison to the same period in
1995. For the three months ended September 30, 1996, the amortization
of the deferred gain on reinsurance was less than $14,000 lower than
during the comparable period in 1995.
As a result of the factors noted above, total revenue was 14% higher
during the nine months ended September 30, 1996 than during the
comparable period in 1995 and total revenue was 46% higher during the
three months ended September 30, 1996 than during the comparable period
in 1995. When used below, "total revenue" excludes realized investment
gains.
Total policy benefits (i.e., death benefits and other benefits) were
43% of total revenue for the nine months ended September 30, 1996 in
comparison to 35% of total revenue for the comparable period in 1995.
Total policy benefits were 39% of total revenue for the three months
ended September 30, 1996 in comparison to 28% of total revenue for the
comparable period in 1995. The increase in total policy benefits is
primarily attributable to the increase in reserves related to the
retained portion of the business reinsured from World Service.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 45% of total revenue for the nine months ended September
30, 1996 in comparison to 54% of total revenue for the comparable
period in 1995. Total expenses were 40% of total revenue for the three
months ended September 30, 1996 in comparison to 58% of total revenue
for the comparable period in 1995. As a result of economies of scale
and stringent expense controls, the Company was able to significantly
increase revenues through the World Service / South Texas Bankers
transaction without a corresponding increase in total expenses.
Total expenses for the nine months ended September 30, 1996 include
approximately $59,000 in finder's fees related to the World Service /
South Texas Bankers transaction and a $40,000 charge related to the
settlement of a long-standing agent commission dispute. Total expenses
for the nine months ended September 30, 1995 include 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.
As a result of a 1995 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 (in
1995) federal income taxes of approximately $885,000. Partially
offsetting the increase in the current federal income tax expense, the
reinsurance transaction resulted in a deferred federal income tax
benefit. These items are the majority of the difference in federal
income tax expense between 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has made principal payments of $187,500 on its bank loan
during the nine months ended September 30, 1996. The Company and
American Capitol are in compliance with all the restrictions and
covenants of the loan.
During the nine months ended September 30, 1996, there was a decline in
net unrealized investment gains of $695,529. The decline in invested
asset values was primarily the result of an increase in market interest
rates since December 31, 1995. The Company had positive operating cash
flow for the nine months ended September 30, 1996 and 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.
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 September 30, 1996 to be signed on its behalf by the
undersigned thereunto duly authorized.
ACAP CORPORATION
(Registrant)
Date: November 11, 1996 By:/s/ William F. Guest
-------------------------------
William F. Guest, President
Date: November 11, 1996 By:/s/ John D. Cornett
-------------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 27,552,147
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,522
<MORTGAGE> 2,815,665
<REAL-ESTATE> 1,390,300
<TOTAL-INVEST> 38,457,626
<CASH> 418,050
<RECOVER-REINSURE> 58,417,460
<DEFERRED-ACQUISITION> 1,691,767
<TOTAL-ASSETS> 103,197,385
<POLICY-LOSSES> 88,907,081
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 738,043
<POLICY-HOLDER-FUNDS> 1,874,607
<NOTES-PAYABLE> 1,125,000
0
1,850,000
<COMMON> 876
<OTHER-SE> 3,985,461
<TOTAL-LIABILITY-AND-EQUITY> 103,197,385
2,041,019
<INVESTMENT-INCOME> 975,118
<INVESTMENT-GAINS> 224,097
<OTHER-INCOME> 43,343
<BENEFITS> 613,554
<UNDERWRITING-AMORTIZATION> 87,288
<UNDERWRITING-OTHER> 1,847,035
<INCOME-PRETAX> 792,958
<INCOME-TAX> 57,518
<INCOME-CONTINUING> 735,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 735,440
<EPS-PRIMARY> 70.35
<EPS-DILUTED> 0
<RESERVE-OPEN> 778,380
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 613,554
<PAYMENTS-PRIOR> 991,115
<RESERVE-CLOSE> 738,043
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
