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 March 31, 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 May 14, 1997
Common Stock, Par Value $.10 7,429
This Form 10-QSB contains a total of 36 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, 1997 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1997 and 1996 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1997 and 1996 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 12
Exhibit 10-Employment Agreement between
John D. Cornett and American Capitol 13
Exhibit 10-Stock Purchase Agreement
between John D. Cornett and American
Capitol 19
2
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
ASSETS
Investments:
Fixed maturities available for sale $ 29,275,608
Equity securities (at market) 2,907
Mortgage loans 2,601,123
Real estate 1,440,523
Policy loans 6,166,595
Short-term investments 780,615
-----------
Total investments 40,267,371
Accrued investment income 469,317
Reinsurance receivable 57,237,055
Accounts receivable (less allowance
for uncollectible accounts of $88,468) 151,665
Deferred acquisition costs 1,639,982
Property and equipment
(less accumulated depreciation of $574,438) 160,189
Costs in excess of net assets of
acquired business (less accumulated
amortization of $772,382) 1,901,394
Other assets 1,206,338
-----------
$103,033,311
===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997
----
Liabilities:
Policy liabilities:
Future policy benefits $ 89,085,909
Contract claims 905,183
-----------
Total policy liabilities 89,991,092
Other policyholders' funds 1,920,992
Deferred tax liability 1,406,963
Deferred gain on reinsurance 2,353,755
Note payable 1,000,000
Other liabilities 732,057
-----------
Total liabilities 97,404,859
-----------
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 (2,308,926)
Treasury stock, at cost, 1,162 shares (429,059)
Net unrealized investment gains, net of
taxes of $31,485 256,372
-----------
Total stockholders' equity 5,628,452
-----------
$103,033,311
===========
See accompanying notes to consolidated financial statements.
4
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
Revenues: ---- ----
Premiums and other considerations $ 685,272 345,889
Net investment income 321,476 300,136
Net realized investment gains (losses) (1,171) 514
Reinsurance expense allowance 533,933 454,789
Amortization of deferred gain on reinsurance 56,483 53,527
Other income 12,279 14,073
---------- ----------
Total revenues 1,608,272 1,168,928
---------- ----------
Benefits and expenses:
Death benefits 288,186 128,619
Other benefits 399,529 282,492
Commissions and general expenses 704,774 545,873
Interest expense 24,695 28,905
Amortization of deferred acquisition costs 24,171 27,053
Amortization of costs in excess of net
acquired business 59,916 26,021
---------- ----------
Total benefits and expenses 1,501,271 1,038,963
---------- ----------
Income before federal income tax expense 107,001 129,965
Federal income tax expense (benefit)
Current 31,197 10,000
Deferred (50,762) (12,040)
---------- ----------
Net income $ 126,566 132,005
========== ==========
Net income per common share $ 10.42 9.66
========= ==========
See accompanying notes to consolidated financial statements.
5
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
INCREASE (DECREASE) IN CASH (UNAUDITED)
1997 1996
---- ----
Cash flows from operating activities:
Net income from operations $ 126,566 132,005
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 58,005 16,502
Realized gains (losses) on investments 1,171 (514)
Deferred federal income tax benefit (50,762) (12,044)
Decrease in reinsurance receivables 368,139 671,299
Decrease in accrued investment income 90,288 94,495
Increase in accounts receivable (19,282) (93,154)
Increase in other assets (809,609) (925,472)
Decrease in future policy
benefit liability (429,098) (336,314)
Increase in contract claim liability 55,646 22,863
Increase (decrease) in other
policyholders' funds liability 21,750 (11,456)
Increase in other liabilities 20,279 711,265
----------- ---------
Net cash provided by (used in) operating
activities (566,907) 269,475
----------- ---------
Cash flows from investing activities:
Proceeds from sales of investments
available for sale and principal
repayments on mortgage loans 207,370 581,586
Purchases of investments available for sale (520,086) (1,364,298)
Net decrease in policy loans 16,639 270,001
Net decrease in short-term investments 888,801 632,986
Purchase of property and equipment (32,176) (60,903)
----------- ----------
Net cash provided by investing activities 560,548 59,372
----------- ----------
Cash flows from financing activities:
Principal payments on note payable (62,500) (62,500)
Deposits on policy contracts 498,906 298,561
Withdrawals from policy contracts (418,994) (638,802)
Preferred dividends paid (47,406) (49,719)
----------- ----------
Net cash used in financing activities (29,994) (452,460)
----------- ----------
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.
6
<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, 1997 and the
condensed consolidated statements of operations and cash flows for the
three month periods ended March 31, 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 March 31, 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 three month periods ended March 31, 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 March 31, 1997 and 1996
would have been $10.42 and $9.66, respectively. Diluted EPS at
March 31, 1997 and 1996 would have been $8.72 and $7.59, respectively.
3. EARNINGS PER SHARE
Earnings per common share is computed by dividing net income (less
dividends paid on preferred stock of $47,406 and $49,719 for March 31,
1997 and 1996, respectively) by the weighted average common shares
outstanding (7,596 at March 31, 1997 and 8,516 at March 31, 1996).
4. STOCKHOLDERS' EQUITY
During the three months ended March 31, 1997, stockholders' equity
changed for the following items: Reduction in net unrealized investment
gains of $342,933; net income of $126,566; cash dividends paid on
preferred stock of $47,406; and an increase in treasury stock of $2,640.
7
<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 $21,661 and $10,000 for federal income taxes were made
for the three months ended March 31, 1997 and 1996, respectively.
Cash payments of $25,100 and $32,320 for interest expense were made
during the three months ended March 31, 1997 and 1996, respectively.
7. SUBSEQUENT EVENT
On April 17, 1997, American Capitol executed a non-binding letter of
intent to sell the home office building to an unaffiliated third
party (the "Purchaser"). The letter of intent contemplates an earnest
money contract which grants the Purchaser a 30 day feasibility study
period. If at or prior to the end of the feasibility study period,
the Purchaser does not terminate the transaction, the earnest money
contract calls for closing of the transaction to take place within 30
days of the end of the feasibility study period. If the transaction
closes, the Company will realize a pretax capital gain of
approximately $500,000. The earnest money contract includes a
provision whereby American Capitol will lease approximately one quarter
of the net rentable area of the building (the area it currently
occupies) for five years.
8
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT TRANSACTIONS
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.
RESULTS OF OPERATIONS
Premiums and other considerations were 98% higher during the first
quarter of 1997 in comparison to the first quarter of 1996. Under the
coinsurance agreement with World Service noted above, American Capitol
reinsures 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 for the first quarter of 1997 in comparison
to the first quarter of 1996 is primarily attributable to the World
Service 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 6% higher during
the first quarter of 1997 in comparison to the first quarter of 1996.
Net investment income increased 7% in the first quarter of 1997 in
comparison to the first quarter of 1996.
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
first quarter of 1997 was 17.4% higher than the expense allowance
received during the first quarter of 1996.
9
<PAGE>
Total policy benefits (i.e., death benefits and other benefits) were 43%
of total revenue for the first quarter of 1997 compared to 35% of total
revenue for the first quarter of 1996. Mortality experience for the
first quarter of 1997 has been higher than expected.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 51% of total revenue for the first quarter of 1997
compared to 54% of total revenue for the first quarter of 1996.
Due to the adverse mortality experience noted above in the first quarter
of 1997, income before federal income taxes was $22,964 (18%) lower in
the first quarter of 1997 compared to the first quarter of 1996.
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
$1,000,000 at March 31, 1997. The note matured April 30, 1997. The
bank granted a new note maturing April 30, 1998 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 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 1997, there was a decline in net unrealized
investment gains of $342,933. 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.
SUBSEQUENT EVENT
On April 17, 1997, American Capitol executed a non-binding letter of
intent to sell the home office building to an unaffiliated third
party (the "Purchaser"). The letter of intent contemplates an earnest
money contract which grants the Purchaser a 30 day feasibility study
period. If at or prior to the end of the feasibility study period,
the Purchaser does not terminate the transaction, the earnest money
contract calls for closing of the transaction to take place within 30
days of the end of the feasibility study period. If the transaction
closes, the Company will realize a pretax capital gain of
approximately $500,000. The earnest money contract includes a
provision whereby American Capitol will lease approximately one quarter
of the net rentable area of the building (the area it currently
occupies) for five years.
10
<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 March 31, 1997 to be signed on its behalf by the
undersigned thereunto duly authorized.
ACAP CORPORATION
(Registrant)
Date: May 11, 1997 By:/s/ William F. Guest
--------------------------------
William F. Guest, President
Date: May 11, 1997 By:/s/ John D. Cornett
--------------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 29,275,608
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,907
<MORTGAGE> 2,601,123
<REAL-ESTATE> 1,440,523
<TOTAL-INVEST> 40,267,371
<CASH> 0
<RECOVER-REINSURE> 57,237,055
<DEFERRED-ACQUISITION> 1,639,982
<TOTAL-ASSETS> 103,033,311
<POLICY-LOSSES> 89,085,909
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 905,183
<POLICY-HOLDER-FUNDS> 1,920,992
<NOTES-PAYABLE> 1,000,000
0
1,850,000
<COMMON> 876
<OTHER-SE> 3,777,576
<TOTAL-LIABILITY-AND-EQUITY> 103,033,311
685,272
<INVESTMENT-INCOME> 321,476
<INVESTMENT-GAINS> (1,171)
<OTHER-INCOME> 12,279
<BENEFITS> 687,715
<UNDERWRITING-AMORTIZATION> 24,171
<UNDERWRITING-OTHER> 704,774
<INCOME-PRETAX> 107,001
<INCOME-TAX> (19,565)
<INCOME-CONTINUING> 126,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,566
<EPS-PRIMARY> 10.42
<EPS-DILUTED> 0
<RESERVE-OPEN> 789,393
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 288,186
<PAYMENTS-PRIOR> 128,619
<RESERVE-CLOSE> 905,183
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
CORNETT EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into by
and between AMERICAN CAPITOL INSURANCE COMPANY ("Employer"), a Texas life
insurance company, and JOHN D. CORNETT ("Employee"), an individual
resident of Houston, Harris County, Texas.
1. Employment. Employer hereby employs Employee to perform the
duties and render the services hereinafter set forth and Employee hereby
accepts said employment and agrees to perform and render said duties and
services faithfully and diligently, all upon the terms and conditions and
for the term hereinafter set forth.
2. Duties. During the term of this Agreement, Employee will,
during customary working hours, devote his full time and attention and
give his best efforts and skill exclusively to the business, progress,
success, profit, advantage, benefit and interests of Employer and its
parent, subsidiary and/or affiliated corporations in the capacity of
President, Chief Operating Officer and a director of Employer, and shall
diligently perform such tasks and services as from time to time may be
assigned to him by the Board of Directors of the Employer or the Executive
Committee of such Board, or as may be specified in the Bylaws of Employer,
or other reasonable duties all of which duties, tasks, and/or services
shall be such as are usually considered to be within the scope of the
position for which he is employed or to which he may be assigned.
3. Term. The term of Employee's employment under this Agreement is
three years and six months, commencing April 1, 1997, and ending
September 30, 2000, subject, however, to termination upon the occurrence
of any of the events specified in Section 8, 9 or 10 of this Agreement.
4. Compensation. As compensation for all services to be rendered
by Employee in any capacity hereunder, including services as a director or
officer of any parent, subsidiary, or affiliate of Employer as may be
properly designated or requested by Employer, Employer shall pay to
Employee a salary in equal semimonthly installments at an annual rate of
one hundred twenty thousand dollars ($120,000.00) per year.
5. Expenses. In addition to his base salary as provided in
paragraph 4, Employee shall be reimbursed for any and all reasonable costs
and expenses incurred by Employee in performance of his services and
duties as specified in this Agreement, including, but not limited to,
business expenses incurred in connection with travel and entertainment if,
and only if, such expenses are of a type deductible, in whole or in part,
by Employer for federal income tax purposes pursuant to the Internal
Revenue Code of 1986, as amended, and are otherwise within the travel and
entertainment expense guidelines published, from time to time, by Employer
for its executive officers and employees.
6. Employee Benefit Plans and Practices. During the term of this
Agreement, Employee shall have the right to participate in each of
Employer's benefit plans available to employees of Employer on terms
commensurate with Employee's position and compensation level, and
consistent with the terms of such plans. Employee shall also be entitled
to reasonable vacations, holidays and sick leave, as provided to other
officers of Employer and commensurate with his position and length of
service with Employer.
7. Other Benefits. The compensation and other benefits agreed to
be paid to Employee by Employer in this Agreement shall not operate in any
manner as a limitation of any type upon or as a direction, express or
implied, against the exercise by the Board of Directors of Employer, of
its power, authority and discretion to grant bonuses or other additional
direct or indirect benefits or compensation to or on behalf of Employee
if, in the business judgment of such Board, such action is in the best
interest of Employer.
8. Employee's Disability or Death.
(a) (1) In the event Employee shall, during the term of this
Agreement, become physically or mentally disabled (as hereinafter
defined), and if such disability may be reasonably expected to continue
for thirty (30) days or more, or in fact does continue for such period,
two-thirds of the semi-monthly salary payment provided in Section 4 hereof
shall be paid to him so long as he shall remain disabled during the
balance of the term of this Agreement.
(2) For federal income tax purposes, all payments provided for
in this section, to the extent that they do not represent disability
benefits provided under an insurance policy premiums for which are paid by
Employee, are intended to be taxable to Employee and deductible by the
Employer.
(3) Upon the return to full-time employment by the Employee
with the Employer within one hundred eighty (180) days from the date of
inception of disability, the Employee shall receive his full compensation
commencing with the first calendar month following his resumption of full-
time employment. If the period of disability continues beyond one hundred
eighty (180) days after the inception of disability and Employee is, in
the opinion of Employer's Medical Director, after consultation with
Employee's personal physician, unable to resume full-time employment with
the Employer, the Employer may, by notice in writing, terminate this
Agreement and the disability benefits specified in (1) above shall be paid
through the end of the term of this Agreement.
(4) For purposes of this paragraph 13, "full-time employment"
shall mean the amount of time and attention which is commensurate and
necessary to perform the functions an duties which Employee was performing
at the inception of disability.
(5) "Disability" shall mean the inability, either mental or
physical, to perform the necessary functions of the Employee's position of
employment with the Employer, by reason of the illness or incapacity of
Employee. Employee shall be deemed to be disabled for the purpose of this
Agreement if Employer's Medical Director, after consultation with a
licensed physician or physicians of Employee's choice, shall determine
that Employee, whether by reason of accident, illness or mental or
physical infirmity, is permanently no longer able to carry on with
adequate vigor and competence the duties assigned him under this
Agreement. Such determination shall be binding on Employer and Employee.
(b) Employer and Employee understand and agree that Employer carries
group disability insurance on behalf of Employee, premiums for which are
shared by Employer and Employee. As long as Employer maintains such
insurance coverage on behalf of Employee during the term of this
Agreement, Employee agrees to pay his share of the costs thereof at the
same proportional rate at which he is presently paying for such coverage.
All salary payments by Employer to Employee under this Section 8 shall be
reduced by the amount of any disability payments made to Employee during
the same period of disability and by reason of such disability from any
Employer plan then in effect and providing disability benefits.
Notwithstanding anything in this Section 8 to the contrary, any
determination of the disability of the Employee shall be made by the
carrier providing such disability insurance under the Employer plan then
in effect, and consistent with the definition of disability set forth in
the insurance policy funding such plan, and such determination will be
binding on Employer and Employee.
(c) In the event that Employee shall die during the term of this
Agreement, the Agreement shall terminate as of the last day of the
calendar month during which his death shall occur, and Employer shall pay
to the estate of Employee the compensation which would otherwise be
payable to Employee up to the end of the month in which his death occurs,
and no further payments hereunder will be due to the estate or heirs of
Employee.
9. Termination Without Cause. This Agreement may be terminated
without cause by Employer or Employee as follows:
9.1 By Employer. Without cause, Employer may terminate this
Agreement at any time upon sixty (60) days written notice to
Employee. If the date of such termination is prior to October 1,
1999, Employee shall receive a severance allowance equal to the base
salary specified in paragraph 4 of this Agreement, which shall be
paid to him in equal semi-monthly installments for a period of
eighteen (18) months following such termination. If the date of such
termination by Employer occurs during the term of this Agreement but
on or after October 1, 1999, Employer shall be obligated to continue
to pay Employee his base salary specified in paragraph 4 of this
Agreement for the number of months remaining between the date of such
termination and the end of the term of this Agreement, or a minimum
of six (6) months, whichever is greater. Notwithstanding the
foregoing, if during such severance allowance period, Employee shall
become employed or otherwise receives any earnings (other than
investment income), Employee shall notify Employer of the same, and
Employer shall reduce the sums otherwise due Employee pursuant to
this Section 9.1 by the amount of such earnings. Beginning not later
than 30 days following such termination, Employee shall use
reasonable efforts to become gainfully employed or to be gainfully
occupied so as to mitigate Employer's obligation to Employee as set
forth in this Section 9.1, provided, however, Employee shall be under
no obligation to seek out or accept any employment or gainful
occupation that is not commensurate with his experience or
profession. Any payments made by Employer to Employee under this
Section 9.1 shall be in lieu of any accrued vacation or other
benefits otherwise due Employee.
9.2 By Employee. Without cause, Employee may terminate this
Agreement upon thirty (30) days' written notice to Employer, at any
time on and after April 1, 2000. In such event, Employee shall
continue to render his services at the option of Employer up to the
effective date of termination and if such services are continued, he
shall be paid his regular compensation up to the date of his
termination, but no severance allowance shall be paid to him. Upon
the payment of regular compensation up to the effective date of his
termination (and payment for accrued, but unused vacation, if any),
all obligations of Employer to Employee hereunder shall be satisfied.
10. Termination for Cause. The Employer may terminate this
Agreement at any time for cause upon giving the Employee written notice of
such termination at least thirty (30) days prior to the date on which such
termination shall take effect. As used herein, "cause" shall mean any of
the following events:
(a) The Employee's conviction of, or plea of guilty or nolo
contendere to a felony or a crime involving moral
turpitude; or
(b) Willful misconduct or a substantial neglect of duties which
in the judgment of the Employer's Board of Directors may
adversely affect the Employer; or
(c) Upon the Employee's failure to perform substantially all of
the services reasonably required of him pursuant to this
Agreement for any reason, other than Employee's sickness,
disability, or absence for vacation or personal or family
emergency circumstances.
If the Employer terminates this Agreement pursuant to the provisions
of this Section, all salary and benefits due the Employee pursuant to this
Agreement shall be paid to Employee to the date of termination, and upon
such payment all obligations of Employer to Employee hereunder shall be
satisfied.
11. Disclosure of Information. Employee recognizes and acknowledges
that he will have access to certain confidential information and data of
the Employer and of corporations affiliated with Employer, and that such
information and data constitutes valuable, special and unique property of
the Employer. The Employee will not, during or after the term of this
Agreement, without the prior approval of the Board of Directors of
Employer, voluntarily disclose any such confidential information or data
to any person or firm, corporation, association or other entity, or use
such confidential information or data for any reason or purpose, otherwise
than for the benefit of Employer. As used herein, "confidential
information and data" means information disclosed to Employee or known by
Employee as a consequence of or through his employment by the Employer,
not generally known in the life and health insurance industry in which the
Employer is engaged, about the products, processes, systems and services
of Employer and its affiliated corporations, including, but not
necessarily limited to, computer programs and software, identities of and
information concerning companies or blocks of business that may be
available for acquisition, lists of policyholders and reinsurers, copies
of insurance policies and reinsurance agreements, information contained in
accounting or actuarial studies or reports performed by or at the request
of Employer and its affiliated corporations, and internal documents
relating to company policies, procedures, methods or positions. Upon
termination of his employment with the Company, all documents, records,
notebooks, and similar collections or compilations of such confidential
information or data, including all copies thereof, then in Employee's
possession or in the possession of third parties under the control of
Employee, whether prepared by him or others, will be delivered to the
Employer by Employee. The obligations of
this Section shall not apply to confidential information and data that:
(i) at the time of Employee's employment by Employer was in the public
domain; (ii) is or becomes generally available in the public domain other
than pursuant to a breach by Employee of his obligations under this
Section; or (iii) Employee can show was acquired, or is acquired after the
date of this Agreement, from a third party and such third party did not
obtain such confidential information and data from any Employee of
Employer subject to or in violation of obligations similar to those set
forth in this Section.
12. Other Employment. During the term of this Agreement, Employee
shall not, without the prior written approval of Employer, seek out,
engage in, negotiate for or accept any employment, commercial activity or
enterprise or gainful occupation with any other employer, person or
entity. Employee shall promptly report to Employer in writing any offer
of employment or proposal that Employee enter into negotiations leading to
an offer of employment received by Employee from any other party.
Notwithstanding anything to the contrary herein contained, at any time on
or after April 1, 2000, Employee may seek out, negotiate for and accept
employment or gainful occupation with any other employer, person or
entity. If Employee accepts such alternate employment or gainful
occupation he shall provide to Employer not less than one month advance
written notice specifying the date on which his employment with Employer
shall terminate, and at the end of such time, all obligations of Employer
to Employee or Employee to Employer hereunder shall terminate. During
such period beginning on or after April 1, 2000, while making reasonable
efforts to continue to perform his responsibilities for Employer, Employee
may devote such time in the office or outside of the office of Employer,
during or after regular office hours, as may reasonably be appropriate to
pursue alternate employment or gainful occupation, and for such purpose he
may make reasonable use of Employer's facilities and secretarial
assistance.
13. Other Permissible Activities. Notwithstanding any provision
herein contained, Employee shall not be prohibited from engaging in non-
profit, charitable or community activities, investing or trading in stocks
or bonds or other forms of passive investment for Employee's account or
family account, so long as such activities do not substantially interfere
with Employee's performance hereunder.
14. Purchase of Cornett Stock. Contemporaneously with the execution
of this Agreement, and in consideration of Employee's entry into this
Agreement with Employer, Employer and Employee agree to execute and enter
into a certain "Cornett Stock Purchase Agreement," in the form attached to
this Agreement as Exhibit A and made a part hereof, which shall survive
any termination of this Agreement as provided therein and be separately
enforceable by Employee in accordance with its terms.
15. Miscellaneous.
15.1 Notices. Any notice required or permitted under this
Agreement shall be in writing and shall be deemed to be delivered three
business days after deposit in the United States mail, postage prepaid,
certified or registered mail, return receipt requested, addressed as
follows:
If to Employer: American Capitol Insurance Company
10555 Richmond Avenue
Houston, Texas 77042
Attention: William F. Guest
If to Employee: John D. Cornett
10922 Burgoyne
Houston, Texas 77042
Notice given in any other manner shall be effective when received by
the addressee. The address for notice may be changed by notice given in
accordance with this provision.
15.2 Amendments. This Agreement and any attachments
incorporated by reference constitute the entire agreement between the
parties and may not be amended, supplemented, waived, or terminated except
by written instrument executed by the parties.
15.3 Waiver. No waiver of any provision of this Agreement
shall constitute a waiver of any other provision of this Agreement, nor
shall such waiver constitute a waiver of any subsequent breach of such
provision.
15.4 Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective successor
and assigns. Notwithstanding anything herein to the contrary, this
Agreement is not assignable by Employee.
15.5 Governing Law. The validity, construction, and
enforcement of this Agreement shall be governed by the laws of the State
of Texas. In the event of a dispute concerning this Agreement, the
parties agree that venue lies in a court of competent jurisdiction in
Harris County, Texas.
15.6 Severability. If any provision of this Agreement is
declared unenforceable by a court of last resort, such declaration shall
not effect the validity of any other provisions of this Agreement.
15.7 Construction. The headings contained in this Agreement
are for reference purposes only and shall not affect this Agreement in any
manner whatsoever. Whenever required by the context, any gender shall
include any other gender, the singular shall include the plural, and the
plural shall include the singular.
15.8 Time for Performance. If the time for performance of any
obligation set forth in this Agreement falls on a Saturday, Sunday, or
legal holiday, compliance with such obligation on the next business day
following such Saturday, Sunday or legal holiday shall be deemed
acceptable.
15.9 Counterparts. This Agreement may be executed in multiple
and/or separate counterparts, each of which shall be deemed an original
but all of which shall be deemed one instrument.
15.10 Expenses. Employer shall pay legal fees incurred by
Employee in connection with the preparation of this Agreement.
15.11 Authorization. The making and performance by Employer of
this Agreement have been duly authorized by all necessary corporate
actions of Employer, and the undersigned representative of Employer is
fully empowered and authorized to execute this Agreement on its behalf.
This Agreement is executed to be effective as of April 1, 1997.
EMPLOYER:
AMERICAN CAPITOL INSURANCE COMPANY
By:/s/William F. Guest
-------------------------------
William F. Guest, Chairman
EMPLOYEE:
/s/John D. Cornett
-------------------------------
John D. Cornett
CORNETT STOCK PURCHASE AGREEMENT
This Cornett Stock Purchase Agreement (the "Agreement") is made and
entered into by and between American Capitol Insurance Company ("AC"), a
Texas insurance company with its offices and principal place of business
in Houston, Harris County, Texas, and John D. Cornett ("Cornett"), an
individual resident of Houston, Harris County, Texas.
WHEREAS, AC and Cornett have, contemporaneously with the execution of
this Agreement, entered into an employment agreement (the "Employment
Agreement") pursuant to which AC has agreed to employ Cornett as its
President, Chief Operating Officer and a director of AC under the terms
and consideration set forth therein; and
WHEREAS, as an additional inducement to Cornett to enter into the
Employment Agreement, AC desires to enter into this Agreement pursuant to
which Cornett shall be granted an irrevocable option to require AC to
purchase certain shares of stock owned by Cornett described herein under
the terms and circumstances set forth in this Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
Definitions
1.1. At present there is a "control" relationship involving Guest's
ownership of 51.8% of all of the issued and outstanding stock of InsCap
Corporation ("InsCap"), InsCap's ownership of approximately 44% of Acap
Corporation ("Acap") and Acap's ownership of 100% of AC. For purposes of
this Agreement, "loss of control of AC" shall be deemed to occur whenever
Guest's ownership of InsCap or InsCap's ownership of Acap falls below
33.3% of the issued and outstanding stock of such entity, or whenever
Acap's ownership of AC falls below 51.0% of AC's issued and outstanding
stock.
1.2. "Cornett Stock" shall mean any shares of the capital stock of
Acap acquired by Cornett while he is a full-time employee of AC or an
affiliate, whether acquired before or after the date hereof, but shall not
include (a) any stock acquired by Cornett when he is not an employee of AC
or an affiliate; (b) any stock acquired by Cornett in excess of 67 shares
in any single year, except as provided below; (c) any stock that is not
owned solely by Cornett as hereinafter provided; or (d) any stock acquired
by Cornett that is not properly "registered" as hereinafter provided. If
Cornett acquires less than 67 shares in a year, then such shortfall amount
may be carried over as an increase in the 67 shares per year limit that is
otherwise applicable to the next succeeding two years, except that in no
event shall the 67 shares per year limit be increased in this manner by
more than 33 shares in the aggregate. To properly register such stock,
Cornett shall deliver to AC's Chairman of the Board a dated written notice
(signed by Cornett) within 30 days of the date hereof for any such stock
acquired prior to the date hereof and, within 30 days after acquiring any
such stock for any such stock acquired on or after the date hereof,
identifying the stock acquired, stating the number of shares acquired, the
date of acquisition, the cumulative total of all Cornett Stock owned by
him as of the date of the notice, and a statement that he is the sole
owner of all such Cornett Stock. To be the sole owner of Cornett Stock,
there can be no other interest in such stock except a pledge or security
interest in the event such stock is pledged as collateral for a loan made
exclusively to Cornett and his spouse and/or his spouse's community
property interest in such stock, and such sole interest by Cornett must
exist throughout the period in which such stock otherwise qualifies as
Cornett Stock. Cornett is not obligated to purchase any Acap stock, but
if he does, and if it falls within the parameters stated in this Section
1.2, it shall be deemed "Cornett Stock."
1.3. "Cornett" shall mean John D. Cornett or his heirs or estate.
1.4. Any stock acquired by Cornett as a result of a merger or other
corporate reorganization as a successor to the Acap stock shall be treated
as Cornett Stock if the predecessor Acap stock would have qualified as
Cornett Stock. Such substituted stock shall be treated, for valuation
purposes, as though the substitution had not occurred, i.e., as though
the original Acap shares were being valued under the provisions of this
Agreement.
1.5 A "sale" by Guest shall mean any transfer, sale or exchange of
any shares of InsCap stock owned by Guest for cash, other stock, or other
consideration, except that it shall not include a merger or corporate
reorganization involving only InsCap and an InsCap affiliate, whether or
not such merger or corporate reorganization results in a loss of control
of AC.
1.6. "Guest" shall mean William F. Guest or his heirs or estate.
1.7. A "sale" by InsCap shall mean any transfer, sale or exchange of
any shares of Acap stock owned by InsCap for cash, other stock, or other
consideration, except that it shall not include a merger or corporate
reorganization involving only Acap and an Acap affiliate, whether or not
such merger or corporate reorganization results in a loss of control of
AC. InsCap shall include any corporate or other entity which is the
successor of InsCap.
1.8. The "Total Value of InsCap" means the price per share paid to
Guest in any sale of any shares of his InsCap Stock multiplied by the
total number of shares of InsCap that are issued and outstanding.
1.9. The "Fair Value of InsCap's Investment in Acap" means the Total
Value of InsCap less the fair market value of any assets of InsCap other
than InsCap's investment in Acap.
1.10. The "Fair Value of Acap" means the Fair Value of InsCap's
investment in Acap divided by InsCap's percentage of ownership of the
outstanding common stock of Acap, prior to the sale of any Acap shares by
InsCap.
1.11. The "Fair Value per Share of Acap" means the Fair Value of
Acap divided by the total number of shares of Acap that are issued and
outstanding.
ARTICLE II
Grant of Sale Option
2.1. AC agrees to grant Cornett and does hereby irrevocably grant
Cornett the right, but not the obligation, to require AC to purchase all
of, or a portion of, the Cornett Stock (the "option") in the event that
(a) Guest sells all of or a portion of his InsCap stock, or InsCap sells
all of or a portion of its Acap stock, and (b) such sale or sales by Guest
and/or InsCap result in a loss of control of AC as hereinabove defined, or
which take place subsequent to a prior loss of control of AC which occurs
on or after the date of this Agreement.
2.2. In the event of a sale by Guest subsequent to or resulting in a
loss of control of AC as set forth above, the price to be paid Cornett by
AC for the Cornett stock shall be an amount equal to the Fair Value per
Share of Acap multiplied by the number of Acap shares included in the
Cornett Stock.
2.3. In the event of a sale by InsCap subsequent to or resulting in
a loss of control of AC as stated above, the price to be paid Cornett by
AC for the Cornett Stock shall be the per share price InsCap received for
each share of Acap stock sold by InsCap multiplied by the number of Acap
shares included in the Cornett Stock.
2.4. In the event of a sale by Guest or InsCap resulting in or
subsequent to a loss of control of AC as stated above, the amount to be
paid to Cornett as determined in Sections 2.2 and/or 2.3 (as applicable)
shall be paid by AC to Cornett in cash within 30 days from the date or
dates on which Cornett exercises the Option to require AC to purchase any
shares of the Cornett Stock.
ARTICLE III
Exercise and Expiration of Option
3.1. At any time before the expiration of one (1) year from the date
of closing of any sale of InsCap stock by Guest or Acap stock by InsCap as
contemplated in Section 2.1 of this Agreement (the "Expiration Date"),
Cornett may exercise the Option granted him under this Agreement and
require AC to purchase all or a portion of the Cornett Stock upon the
terms set forth herein.
3.2. In the event that any shares of Cornett Stock are still owned
by Cornett upon the Expiration Date and Cornett has failed to exercise the
Option to require AC to purchase such shares as provided for herein, such
Option with respect to such shares of Cornett Stock shall expire and be of
no further force and effect.
3.3. The Option granted by this Agreement may be exercised by
Cornett on or before the Expiration Date in whole at any time or in part
from time to time, by delivery to AC at its principal office of a written
notice of the exercise of the Option that specifies the number of shares
of Cornett Stock as to which the Option is being exercised, and a request
for payment for such shares. Upon receipt of the written notice, AC shall
promptly pay Cornett the price for such shares of Cornett Stock as
provided in Article II of this Agreement.
ARTICLE IV
Survival of Agreement
4.1. This Agreement is made and entered into contemporaneously with
the execution by Cornett and AC of an Employment Agreement relating to
Cornett's employment by AC. Notwithstanding anything to the contrary
herein contained, AC's obligation to purchase any or all of the Cornett
Stock as herein provided shall terminate in the event Cornett is
terminated for cause under the terms of said Employment Agreement. It is
expressly agreed, however, that neither Cornett's death nor his
disability, nor the termination or expiration of the Employment Agreement
in accordance with its terms other than as set forth above will terminate
Cornett's right to require AC to purchase and AC's obligation to purchase
any or all of the Cornett Stock as herein provided, and such right and
obligation shall survive the termination of the Employment Agreement, and
be enforceable under the terms of this Agreement.
4.2. This Agreement shall be binding upon any successor or
successors of AC.
ARTICLE V
Miscellaneous
5.1. Notices. Any notice required or permitted under this Agreement
shall be in writing and shall be deemed to be delivered three business
days after deposit in the United States mail, postage prepaid, certified
or registered mail, return receipt requested, addressed as follows:
If to AC: American Capitol Insurance Company
10555 Richmond Avenue
Houston, Texas 77042
Attention: Mr. William F. Guest
If to Cornett: John D. Cornett
10922 Burgoyne
Houston, Texas 77042
Notice given in any other manner shall be effective when received by
the addressee. The address for notice may be changed by notice given in
accordance with this provision.
5.2. Amendments. This Agreement and any attachments incorporated by
reference constitute the entire agreement between the parties and may not
be amended, supplemented, waived, or terminated except by written
instrument executed by the parties.
5.3. Waiver. No waiver of any provision of this Agreement shall
constitute a waiver of any other provision of this Agreement, nor shall
such waiver constitute a waiver of any subsequent breach of such
provision.
5.4. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their respective successor and
assigns. Notwithstanding anything herein to the contrary, this Agreement
is not assignable by Employee.
5.5. Governing Law. The validity, construction, and enforcement of
this Agreement shall be governed by the laws of the State of Texas. In
the event of a dispute concerning this Agreement, the parties agree that
venue lies in a court of competent jurisdiction in Harris County, Texas.
5.6. Severability. If any provision of this Agreement is declared
unenforceable by a court of last resort, such declaration shall not effect
the validity of any other provisions of this Agreement.
5.7. Construction. The headings contained in this Agreement are for
reference purposes only and shall not affect this Agreement in any manner
whatsoever. Whenever required by the context, any gender shall include
any other gender, the singular shall include the plural, and the plural
shall include the singular.
5.8. Time for Performance. If the time for performance of any
obligation set forth in this Agreement falls on a Saturday, Sunday, or
legal holiday, compliance with such obligation on the next business day
following such Saturday, Sunday, or legal holiday shall be deemed
acceptable.
5.9. Counterparts. This Agreement may be executed in multiple
and/or separate counterparts, each of which shall be deemed an original
but all of which shall be deemed one instrument.
5.10. Expenses. AC shall pay legal fees incurred by Cornett in
connection with the preparation of this Agreement.
5.11. Authorization. The making and performance by AC of this
Agreement have been duly authorized by all necessary corporation actions
of AC, and the undersigned representative of AC is fully empowered and
authorized to execute this Agreement on its behalf.
This Agreement is executed to be effective as of April 1, 1997.
AMERICAN CAPITOL INSURANCE COMPANY
By: /s/William F. Guest
------------------------------
Name: William F. Guest
Title: Chairman of the Board
/s/John D. Cornett
------------------------------
John D. Cornett
