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, 1997
[ ] 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 August 7, 1997
Common Stock, Par Value $.10 7,474
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 - June 30, 1997 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Six Months Ended
June 30, 1997 and 1996 (Unaudited) 5
Condensed Consolidated Statements
of Operations - Three Months Ended
June 30, 1997 and 1996 (Unaudited) 6
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1997 and 1996 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
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSETS
Investments:
Fixed maturities available for sale $ 29,972,807
Mortgage loans 2,518,175
Real estate 1,427,298
Policy loans 6,189,625
Short-term investments 840,912
-----------
Total investments 40,948,817
Accrued investment income 552,914
Reinsurance receivable 56,661,968
Accounts receivable (less allowance
for uncollectible accounts of $88,456) 175,888
Deferred acquisition costs 1,615,214
Property and equipment
(less accumulated depreciation of $586,849) 152,493
Costs in excess of net assets of
acquired business (less accumulated
amortization of $832,297) 1,841,479
Other assets 1,220,032
-----------
$103,168,805
===========
See accompanying notes to consolidated financial statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997
----
Liabilities:
Policy liabilities:
Future policy benefits $ 88,922,649
Contract claims 814,413
-----------
Total policy liabilities 89,737,062
Other policyholders' funds 1,915,594
Deferred tax liability 1,516,107
Deferred gain on reinsurance 2,307,485
Note payable 937,500
Other liabilities 797,378
-----------
Total liabilities 97,211,126
-----------
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
8,754 shares 876
Additional paid-in capital 6,259,189
Accumulated deficit (2,226,335)
Treasury stock, at cost, 1,348 shares (473,699)
Net unrealized investment gains, net of
taxes of $180,552 547,648
-----------
Total stockholders' equity 5,957,679
-----------
$103,168,805
===========
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Revenues:
Premiums and other considerations $ 1,247,434 1,203,478
Net investment income 615,191 740,255
Net realized investment gains (losses) (3,117) 1,942
Reinsurance expense allowance 1,013,785 899,062
Amortization of deferred gain on reinsurance 102,753 100,388
Other income 28,081 31,135
---------- ----------
Total revenues 3,004,127 2,976,260
---------- ----------
Benefits and expenses:
Death benefits 469,866 429,819
Other benefits 804,749 892,255
Commissions and general expenses 1,297,228 1,250,696
Interest expense 46,617 58,256
Amortization of deferred acquisition costs 48,939 64,475
Amortization of costs in excess of net
acquired business 119,831 52,046
---------- ----------
Total benefits and expenses 2,787,230 2,747,547
---------- ----------
Income before federal income tax expense 216,897 228,713
Federal income tax expense (benefit)
Current 50,019 19,784
Deferred (90,685) 3,750
---------- ----------
Net income $ 257,563 205,179
---------- ----------
Net income per common share $ 21.67 12.69
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Revenues:
Premiums and other considerations $ 562,162 857,589
Net investment income 293,715 440,119
Net realized investment gains (losses) (1,946) 1,428
Reinsurance expense allowance 479,852 444,273
Amortization of deferred gain on reinsurance 46,270 46,861
Other income 15,802 17,062
---------- ----------
Total revenues 1,395,855 1,807,332
---------- ----------
Benefits and expenses:
Death benefits 181,680 301,200
Other benefits 405,220 609,763
Commissions and general expenses 592,454 704,823
Interest expense 21,922 29,351
Amortization of deferred acquisition costs 24,768 37,422
Amortization of costs in excess of net
acquired business 59,915 26,025
Total benefits and expenses 1,285,959 1,708,584
---------- ----------
Income before federal income tax expense 109,896 98,748
Federal income tax expense (benefit)
Current 18,822 9,784
Deferred (39,923) 15,790
---------- ----------
Net income $ 130,997 73,174
========== ==========
Net income per common share $ 11.25 3.03
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
INCREASE (DECREASE) IN CASH (UNAUDITED)
1997 1996
---- ----
Cash flows from operating activities:
Net income from operations $ 257,563 205,179
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 131,877 59,861
Realized gains (losses) on investments 3,117 (1,942)
Deferred federal income tax benefit (expense)(90,684) 3,753
Decrease in reinsurance receivables 943,226 1,131,972
Decrease (increase) in accrued investment
income 6,691 (332,078)
Increase in accounts receivable (43,505) (69,832)
Increase in other assets (823,304) (946,509)
Increase (decrease) in future policy
benefit liability (476,961) 40,014
Decrease in contract claim liability (35,124) (248,705)
Increase (decrease) in other
policyholders' funds liability 16,352 (134,338)
Increase in other liabilities 40,958 166,766
---------- ----------
Net cash used in operating activities (69,794) (125,859)
---------- ----------
Cash flows from investing activities:
Proceeds from sales of investments
available for sale and principal
repayments on mortgage loans 769,106 2,796,829
Purchases of investments available for sale (1,265,590) (21,927,454)
Net (increase) decrease in policy loans (6,391) 402,000
Net decrease in short-term investments 828,504 450,728
Purchase of property and equipment (36,891) (62,767)
Assumption reinsurance acquisition, net
of cash acquired -- 19,371,962
---------- -----------
Net cash provided by investing activities 288,738 1,031,298
---------- -----------
Cash flows from financing activities:
Principal payments on note payable (125,000) (125,000)
Deposits on policy contracts 861,634 573,435
Withdrawals from policy contracts (897,119) (1,380,362)
Preferred dividends paid (94,812) (97,125)
---------- -----------
Net cash used in financing activities (255,297) (1,029,052)
---------- -----------
Net decrease in cash (36,353) (123,613)
Cash at beginning of year 36,353 123,613
---------- -----------
Cash at end of period $ -- --
========== ===========
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 June 30, 1997 and the
condensed consolidated statements of operations and cash flows for the
six month periods ended June 30, 1997 and 1996, 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, 1997 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, 1996 Annual Report to Stockholders. The
results of operations for the six month periods ended June 30, 1997 and
1996 are not necessarily indicative of the operating results for the full
year.
2. ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share." SFAS No. 128, which must be adopted for both
interim and fiscal periods ending after December 15, 1997, specifies the
computation, presentation, and disclosure requirements for earnings per
share ("EPS") for entities with publicly held common stock or potential
common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with a diluted EPS.
If SFAS No. 128 had been in effect, basic EPS at June 30, 1997 and 1996
would have been $21.67 and $12.69, respectively. Basic EPS for the
quarter ended June 30, 1997 would have been $11.25 and $3.03,
respectively. Diluted EPS at June 30, 1997 and 1996 would have been
$19.83 and $10.59, respectively. Diluted EPS for the quarter ended June
30, 1997 would have been $9.49 and $1.01, respectively.
3. EARNINGS PER SHARE
Earnings per common share is computed by dividing net income (less
dividends paid on preferred stock of $94,812 and $97,125 for June 30,
1997 and 1996, respectively) by the weighted average common shares
outstanding (7,512 at June 30, 1997 and 8,516 at June 30, 1996).
4. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1997, stockholders' equity changed
for the following items: Reduction in net unrealized investment gains of
$51,657; net income of $257,563; cash dividends paid on preferred stock
of $94,812; and an increase in treasury stock of $47,280.
<PAGE>
5. SOUTH TEXAS BANKERS TRANSACTION
Effective June 1, 1996, American Capitol Insurance Company ("American
Capitol"), a wholly-owned subsidiary of Acap Corporation, entered a
coinsurance agreement and an administrative agreement with World Service
Life Insurance Company of America ("World Service"). At the same time,
American Capitol entered an administrative agreement with South Texas
Bankers Life Insurance Company ("South Texas Bankers"), a wholly-owned
subsidiary of World Service.
On January 31, 1997, World Service assumed all of the policies of South
Texas with a retroactive effective date of June 1, 1996. Under the terms
of World Service's coinsurance agreement with American Capitol, World
Service's assumption of the South Texas policies automatically made the
South Texas policies subject to the coinsurance agreement. American
Capitol paid World Service an initial ceding commission of approximately
$100,000 related to the South Texas policies. American Capitol
retroceded the coinsurance to Crown Life Insurance Company ("Crown"). In
anticipation of the assumption by World Service and the resulting
coinsurance to American Capitol, South Texas had transferred $6.8 million
in assets to American Capitol in 1996.
6. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments of $57,961 and $32,071 for federal income taxes were made
for the six months ended June 30, 1997 and 1996, respectively.
Cash payments of $48,452 and $61,218 for interest expense were made
during the six months ended June 30, 1997 and 1996, respectively.
7. SUBSEQUENT EVENT
American Capitol has signed an earnest money contract to sell its home
office building to an unaffiliated third party. The closing of the
transaction is scheduled for August 15, 1997. Upon closing, the Company
will realize an after-tax capital gain of approximately $387,000. Upon
closing, American Capitol will lease approximately one quarter of the net
rentable area of the building (the area it currently occupies) for five
years at an annual rental of approximately $115,000.
<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, assumed through
reinsurance 93.6% of all of the policies of World Service Life Insurance
Company of America ("World Service") pursuant to a coinsurance agreement
(the "Coinsurance Agreement"). American Capitol paid World Service an
initial ceding commission of approximately $1.7 million. The assets
transferred to American Capitol were approximately $19.4 million in cash,
approximately $1.9 million of mortgage loans and other assets of
approximately $.1 million.
Contemporaneous with the signing of the Coinsurance Agreement, the
parties executed an administrative agreement (the "Administration
Agreement") whereby American Capitol agreed to provide specified
administrative functions for the 18,000 World Service policies as well as
approximately 8,000 policies owned by World Service's subsidiary, South
Texas Bankers Life Insurance Company ("South Texas Bankers"), and the
preneed funeral contracts associated with the South Texas policies.
Effective June 30, 1996, American Capitol retroceded all of the World
Service policies in force at June 1, 1996 on a 100% coinsurance basis by
amending an existing reinsurance agreement (the "Crown Agreement") with
an unaffiliated reinsurer. American Capitol retains the coinsurance on
all policies issued by World Service subsequent to June 1, 1996.
American Capitol also retains the administration of the policies, for
which it receives an expense allowance from the reinsurer.
On January 31, 1997, World Service assumed all of the policies of South
Texas with a retroactive effective date of June 1, 1996. Under the terms
of World Service's coinsurance agreement with American Capitol, World
Service's assumption of the South Texas policies automatically made the
South Texas policies subject to the Coinsurance Agreement and adjusted
the coinsurance percentage relative to all of the World Service policies
to 91.4%. American Capitol paid World Service an initial ceding
commission of approximately $100,000 related to the South Texas
policies. At the same time, the South Texas policies also automatically
became subject to the Crown Agreement. In anticipation of the
assumption by World Service and the resulting coinsurance to American
Capitol, South Texas had transferred $6.8 million in assets to American
Capitol in 1996.
RESULTS OF OPERATIONS
Premiums and other considerations were 4% higher during the six month
period ended June 30, 1997 in comparison to the comparable period in
1996. Premiums and other considerations were 34% lower during the three
month period ended June 30, 1997 in comparison to the comparable period
in 1996. During the month of June, 1996, American Capitol retained 100%
of the business assumed from World Service under the Coinsurance
Agreement noted above. This resulted in additional premiums in June 1996
<PAGE>
of approximately $400,000. Excluding the June 1996 World Service
premiums, premiums and other considerations were 55% higher during the
six month period ended June 30, 1997 in comparison to the comparable
period in 1996 and were 23% higher during the three month period ended
June 30, 1997 in comparison to the comparable period in 1996. Pursuant
to the Coinsurance Agreement, American Capitol assumes 91.4% of all
business produced by World Service on or after June 1, 1996. American
Capitol does not retrocede these policies. The increase in premium
income in 1997 in comparison to 1996 (after deducting the June 1996 World
Service premiums) is primarily attributable to the World Service new
business production. 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 in Texas Imperial Life Insurance Company ("Texas Imperial"), the
wholly-owned subsidiary of American Capitol through which the Company
markets final expense life insurance and insurance-funded prepaid funeral
service contracts, were approximately 15% higher during the six month
period ended June 30, 1997 in comparison to the comparable period in 1996
and were approximately 24% higher during the three month period ended
June 30, 1997 in comparison to the comparable period in 1996.
Net investment income decreased 17% during the six month period ended
June 30, 1997 in comparison to the comparable period in 1996 and
decreased approximately 33% during the three month period ended June 30,
1997 in comparison to the comparable period in 1996. Net investment
income for June 1996 included the earnings on the World Service policies
that were subsequently retroceded through the Crown Agreement. Also, net
investment income in June 1997 includes approximately $27,000 in repairs
on American Capitol's home office building made in preparing the building
for sale (see "Subsequent Events" below).
The Company receives an expense allowance for administering certain
blocks of reinsured policies. As a result of the retrocession of the
World Service coinsurance, the expense allowance received during the six
month period ended June 30, 1997 was 13% higher than the expense
allowance received during the comparable period in 1996. The expense
allowance during the three month period ended June 30, 1997 was 8% higher
than the expense allowance received during the comparable period in 1996.
Total policy benefits (i.e., death benefits and other benefits) were 42%
of total revenue for the six month period ended June 30, 1997 compared to
44% of total revenue for the comparable period in 1996. Total policy
benefits were 42% of total revenue for the three month period ended June
30, 1997 compared to 50% of total revenue for the comparable period in
1996.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 50% of total revenue for the six month period ended
June 30, 1997 compared to 48% of total revenue for the comparable period
in 1996. Total expenses were 50% of total revenue for the three month
period ended June 30, 1997 compared to 44% of total revenue for the
comparable period in 1996.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, there was a decline in net unrealized investment
gains since December 31, 1996 of $51,657. The decline in invested asset
values was primarily the result of an increase in market interest rates
during the first quarter of 1997. It is not anticipated that the Company
will need to liquidate investments prior to their projected maturities in
order to meet cash flow requirements.
SUBSEQUENT EVENT
American Capitol has signed an earnest money contract to sell its home
office building to an unaffiliated third party. The closing of the
transaction is scheduled for August 15, 1997. Upon closing, the Company
will realize an after-tax capital gain of approximately $387,000. Upon
closing, American Capitol will lease approximately one quarter of the net
rentable area of the building (the area it currently occupies) for five
years at an annual rental of approximately $115,000.
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, 1997 to be signed on its behalf by the undersigned
thereunto duly authorized.
ACAP CORPORATION
(Registrant)
Date: August 7, 1997 By:/s/ William F. Guest
William F. Guest, President
Date: August 7, 1997 By:/s/ John D. Cornett
John D. Cornett, Treasurer
(Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 29,972,807
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 2,518,175
<REAL-ESTATE> 1,427,298
<TOTAL-INVEST> 40,948,817
<CASH> 0
<RECOVER-REINSURE> 56,661,968
<DEFERRED-ACQUISITION> 1,615,214
<TOTAL-ASSETS> 103,168,805
<POLICY-LOSSES> 88,922,649
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 814,413
<POLICY-HOLDER-FUNDS> 1,915,594
<NOTES-PAYABLE> 937,500
0
1,850,000
<COMMON> 876
<OTHER-SE> 4,106,803
<TOTAL-LIABILITY-AND-EQUITY> 103,168,805
1,247,434
<INVESTMENT-INCOME> 615,191
<INVESTMENT-GAINS> (3,117)
<OTHER-INCOME> 28,081
<BENEFITS> 1,274,615
<UNDERWRITING-AMORTIZATION> 48,939
<UNDERWRITING-OTHER> 1,297,228
<INCOME-PRETAX> 216,897
<INCOME-TAX> (40,666)
<INCOME-CONTINUING> 257,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,563
<EPS-PRIMARY> 21.67
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<RESERVE-OPEN> 789,393
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 469,866
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</TABLE>
