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) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II. Other Information:
Item 6. Exhibit 27-Financial Data Schedule 13
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>
<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).
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
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 29,699,832
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 86,672
<MORTGAGE> 1,222,130
<REAL-ESTATE> 1,494,819
<TOTAL-INVEST> 39,945,659
<CASH> 0
<RECOVER-REINSURE> 36,063,954
<DEFERRED-ACQUISITION> 1,752,002
<TOTAL-ASSETS> 81,961,479
<POLICY-LOSSES> 66,986,045
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 801,243
<POLICY-HOLDER-FUNDS> 1,722,029
<NOTES-PAYABLE> 1,250,000
0
1,850,000
<COMMON> 876
<OTHER-SE> 3,886,121
<TOTAL-LIABILITY-AND-EQUITY> 81,961,479
345,889
<INVESTMENT-INCOME> 300,136
<INVESTMENT-GAINS> 514
<OTHER-INCOME> 14,073
<BENEFITS> 411,111
<UNDERWRITING-AMORTIZATION> 27,053
<UNDERWRITING-OTHER> 545,873
<INCOME-PRETAX> 129,965
<INCOME-TAX> (2,040)
<INCOME-CONTINUING> 132,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,005
<EPS-PRIMARY> 9.66
<EPS-DILUTED> 0
<RESERVE-OPEN> 778,380
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 128,619
<PAYMENTS-PRIOR> 141,712
<RESERVE-CLOSE> 801,243
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
