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, 1998
[ ] 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 11,1998
----- -----------------------
Common Stock, Par Value $.10 7,431
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, 1998 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1998 and 1997 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
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
MARCH 31, 1998
(UNAUDITED)
ASSETS
Investments:
Fixed maturities available for sale $ 32,674,254
Mortgage loans 3,384,249
Policy loans 7,182,782
Short-term investments 3,204,456
-----------
Total investments 46,445,741
Accrued investment income 599,688
Reinsurance receivable 106,839,870
Accounts receivable (less allowance
for uncollectible accounts of $88,797) 230,799
Deferred acquisition costs 1,539,301
Property and equipment
(less accumulated depreciation of $409,898) 172,535
Costs in excess of net assets of
acquired business (less accumulated
amortization of $1,012,044) 1,661,732
Other assets 994,101
-----------
$158,483,767
===========
See accompanying notes to consolidated financial statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Policy liabilities:
Future policy benefits $140,010,538
Contract claims 1,726,811
-----------
Total policy liabilities 141,737,349
Other policyholders' funds 2,695,883
Deferred tax liability 806,409
Deferred gain on reinsurance 2,554,438
Deferred gain on sale of real estate 448,749
Note payable 750,000
Other liabilities 2,004,224
-----------
Total liabilities 150,997,052
-----------
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 (1,103,528)
Treasury stock, at cost, 1,314 shares (451,921)
Accumulated other comprehensive income,
net of taxes of $375,658 932,099
-----------
Total stockholders' equity 7,486,715
-----------
$158,483,767
===========
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
REVENUES:
Premiums and other considerations $ 524,257 685,272
Net investment income 507,659 321,476
Net realized investment gains (losses) 19,291 (1,171)
Reinsurance expense allowance 1,369,684 533,933
Amortization of deferred gain on
reinsurance 49,040 56,483
Other income 9,982 12,279
--------- ---------
Total revenues 2,479,913 1,608,272
--------- ---------
BENEFITS AND EXPENSES:
Death benefits 279,501 288,186
Other benefits 278,899 399,529
Commissions and general expenses 1,657,778 704,774
Interest expense 23,557 24,171
Amortization of deferred acquisition costs 30,668 24,695
Amortization of costs in excess of net
assets of acquired business 59,916 59,916
--------- ---------
Total benefits and expenses 2,330,319 1,501,271
--------- ---------
Income before federal income tax expense 149,594 107,001
Federal income tax expense (benefit):
Current 92,430 31,197
Deferred (119,864) (50,762)
--------- ---------
NET INCOME $ 177,028 126,566
--------- ---------
Other comprehensive income:
Net unrealized holding losses arising
during period, net of tax of $5,115
in 1998 and $171,872 in 1997 (11,623) (342,933)
--------- ---------
COMPREHENSIVE INCOME (LOSS) $ 165,405 (216,367)
========= ==========
EARNINGS PER SHARE:
Net income per share-basic $ 17.26 10.42
--------- ---------
Net income per share-diluted $ 9.14 8.14
--------- ---------
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
INCREASE (DECREASE) IN CASH (UNAUDITED)
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from operations $ 177,028 126,566
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 29,285 58,005
Realized (gains) losses on investments (19,291) 1,171
Deferred federal income tax benefit (119,864) (50,762)
(Increase)decrease in reinsurance
receivables (815,188) 368,139
(Increase)decrease in accrued investment
income (47,485) 90,288
Increase in accounts receivable (4,488) (19,282)
Increase in other assets (664,162) (809,609)
Increase (decrease) in future policy
benefit liability 532,634 (429,098)
Increase (decrease) in contract claim
liability (16,891) 55,646
Increase in other policyholders' funds
liability 17,757 21,750
Increase in other liabilities 306,128 20,279
---------- ---------
Net cash used by operating activities (624,537) (566,907)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments
available for sale and principal
repayments on mortgage loans 3,197,435 207,370
Purchases of investments available for sale (24,876) (520,086)
Net decrease in policy loans 101,493 16,639
Net (increase)decrease in short-term
investments (2,324,353) 888,801
Purchase of property and equipment (4,153) (32,176)
Net cash provided by investing activities 945,546 560,548
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable (62,500) (62,500)
Deposits on policy contracts 287,813 498,906
Withdrawals from policy contracts (595,473) (418,994)
Preferred dividends paid (48,563) (47,406)
---------- ---------
Net cash used in financing activities (418,723) (29,994)
---------- ---------
Net decrease in cash (97,714) (36,353)
Cash at beginning of year 97,714 36,353
---------- ---------
Cash at end of period $ 0 0
========== =========
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 March 31, 1998 and the
condensed consolidated statements of operations and cash flows for the
three month periods ended March 31, 1998 and 1997, 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, 1998 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, 1997 Annual Report to Stockholders. The results of operations
for the three month periods ended March 31, 1998 and 1997 are not
necessarily indicative of the operating results for the full year.
2. ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income." SFAS No. 130, which must be adopted for both
interim and fiscal periods beginning after December 15, 1997, establishes
standards for reporting and displaying comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of general
purpose financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
Effective January 1, 1998, the Company adopted SFAS No. 130. The Company's
only component of other comprehensive income are unrealized gains and
losses on investments. As those items were previously presented as direct
charges or credits to the Company's stockholders' equity, the only impact
of adopting this standard is to reflect an additional presentation of those
items.
3. EARNINGS PER SHARE
Earnings per common share is computed by dividing net income (less
dividends paid on preferred stock of $48,563 and $47,406 for March 31, 1998
and 1997, respectively) by the weighted average common shares outstanding
(7,441 at March 31, 1998 and 7,596 at March 31, 1997).
Earnings per common share on a diluted basis is computed by dividing net
income (less dividends paid on preferred stock of $48,563 and $47,406 for
March 31, 1998 and 1997, respectively and less the income statement effect
of stock options as if exercised of $58,976 and $17,188 for March 31, 1998
and 1997, respectively) by the weighted average common shares outstanding
as if such stock options were exercised (7,604 at March 31, 1998 and 7,611
at March 31, 1997).
4. STOCKHOLDERS' EQUITY
During the three months ended March 31, 1998, stockholders' equity changed
for the following items: Decrease in net unrealized investment gains of
$11,623; net income of $177,028; cash dividends paid on preferred stock of
$48,563; and a net increase in treasury stock of $1,440.
5. UNIVERSAL TRANSACTION
On March 5, 1998, American Capitol Insurance Company ("American Capitol"),
a wholly-owned subsidiary of Acap Corporation, closed a coinsurance
transaction with Universal Life Insurance Company ("Universal"). Pursuant
to the coinsurance agreement (the "Coinsurance Agreement"), American
Capitol coinsured 100% of the individual life insurance policies of
Universal in force at January 1, 1998. The effective date of the
Coinsurance Agreement was January 1, 1998. American Capitol paid Universal
an initial ceding commission of approximately $13 million. Universal
transferred approximately $40 million in assets to American Capitol in
connection with the coinsurance.
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 246,011 coinsured Universal policies. American Capitol
is obligated to begin administering the policies beginning July 1, 1998.
Between January 1, 1998 and July 1, 1998, Universal will continue to
administer the policies, and American Capitol will pay Universal the
expense allowance stipulated in the Administration Agreement.
Concurrent with the coinsurance of the Universal policies, American Capitol
retroceded all of the coinsured Universal policies with an unaffiliated
reinsurer. The reinsurer paid American Capitol an initial ceding
commission of approximately $13.5 million. So, while Universal transferred
$40 million to American Capitol in connection with the coinsurance,
American Capitol transferred $39.6 million in assets to the reinsurer in
connection with the retrocession. Once the reinsurer has recovered the
initial ceding commission, the reinsurer may, at American Capitol's option,
retrocede back to American Capitol 100% of the policies. Upon this
retrocession, American Capitol then pays the reinsurer 30% of the profits
generated by the policies, retaining the other 70% of the profits. In
addition, American Capitol has the right to recapture the retrocession
under certain terms and conditions. While the retrocession is in effect,
American Capitol receives an expense allowance from the reinsurer.
6. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments of $32,677 and $21,661 for federal income taxes were made for
the three months ended March 31, 1998 and 1997, respectively.
Cash payments of $19,726 and $25,100 for interest expense were made during
the three months ended March 31, 1998 and 1997, respectively.
The following reflects assets acquired and liabilities assumed relative to
the coinsurance agreement for the policies of Universal, the consideration
given for such coinsurance and the net cash flow relative to such
coinsurance on January 1, 1998.
Assets acquired. . . . . . . . . . . . . . . . . . . . . . . .$ 39,972,696
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . (53,085,774)
-----------
Cost of coinsurance. . . . . . . . . . . . . . . . . . . . . .$(13,113,078)
===========
Cash paid for coinsurance. . . . . . . . . . . . . . . . . . .$(13,113,078)
===========
Net cash from coinsurance:
Cash acquired. . . . . . . . . . . . . . . . . . . . . . . . .$ 38,597,840
Cash paid for coinsurance. . . . . . . . . . . . . . . . . . . (13,113,078)
-----------
Net cash provided from coinsurance . . . . . . . . . . . . . .$ 25,484,762
===========
The following reflects assets and liabilities transferred in connection
with a coinsurance treaty whereby all policies assumed from Universal were
100% retroceded to an unaffiliated reinsurer, the ceding commission
received and the net cash flow related to the coinsurance treaty on January
1,1998.
Assets transferred . . . . . . . . . . . . . . . . . . . . . .$(39,580,339)
Liabilities transferred. . . . . . . . . . . . . . . . . . . . 53,080,339
-----------
Net transferred. . . . . . . . . . . . . . . . . . . . . . . .$ 13,500,000
===========
Ceding commission received . . . . . . . . . . . . . . . . . .$ 13,500,000
===========
Net cash from coinsurance:
Cash paid. . . . . . . . . . . . . . . . . . . . . . . . . . . (38,984,762)
Cash received from coinsurance . . . . . . . . . . . . . . . . 13,500,000
-----------
Net cash provided from coinsurance . . . . . . . . . . . . . .$(25,484,762)
===========
Net proceeds from coinsurance agreements . . . . . . . . . . .$ 0
===========
<PAGE>
ACAP CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNIVERSAL LIFE INSURANCE COMPANY TRANSACTION
On March 5, 1998, American Capitol Insurance Company ("American Capitol"),
a wholly-owned subsidiary of Acap Corporation, closed a coinsurance
transaction with Universal Life Insurance Company ("Universal"). Pursuant
to the coinsurance agreement (the "Coinsurance Agreement"), American
Capitol coinsured 100% of the individual life insurance policies of
Universal in force at January 1, 1998. The effective date of the
Coinsurance Agreement was January 1, 1998. American Capitol paid Universal
an initial ceding commission of approximately $13 million. Universal
transferred approximately $40 million in assets to American Capitol in
connection with the coinsurance.
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 246,011 coinsured Universal policies. American Capitol
is obligated to begin administering the policies beginning July 1, 1998.
Between January 1, 1998 and July 1, 1998, Universal will continue to
administer the policies, and American Capitol will pay Universal the
expense allowance stipulated in the Administration Agreement.
Concurrent with the coinsurance of the Universal policies, American Capitol
retroceded all of the coinsured Universal policies with an unaffiliated
reinsurer. The reinsurer paid American Capitol an initial ceding
commission of approximately $13.5 million. So, while Universal transferred
$40 million to American Capitol in connection with the coinsurance,
American Capitol transferred $39.6 million in assets to the reinsurer in
connection with the retrocession. Once the reinsurer has recovered the
initial ceding commission, the reinsurer may, at American Capitol's option,
retrocede back to American Capitol 100% of the policies. Upon this
retrocession, American Capitol then pays the reinsurer 30% of the profits
generated by the policies, retaining the other 70% of the profits. In
addition, American Capitol has the right to recapture the retrocession
under certain terms and conditions. While the retrocession is in effect,
American Capitol receives an expense allowance from the reinsurer.
RESULTS OF OPERATIONS
Premiums and other considerations were 24% lower during the first quarter
of 1998 in comparison to the comparable period in 1997. From June 1, 1996
through July 31, 1997, American Capitol coinsured, and did not retrocede,
91.4% of the policies written by World Service Life Insurance Company of
America ("World Service") during that period. The policies written by
World Service during that period were mostly single premium whole life.
Therefore, premiums for the first quarter of 1997 include the premiums on
such policies while premiums for the first quarter of 1998 do not.
Net investment income was 58% higher during the first quarter of 1998 in
comparison to the comparable period in 1997. Effective August 1, 1997,
American Capitol acquired, through assumption reinsurance, the World
Service policies. World Service transferred American Capitol approximately
$2.5 million in assets in connection with the assumption. Thus, net
investment income for the first quarter of 1998 includes the earnings on
the transferred assets while net investment income for the first quarter of
1997 does not. Also, on November 21, 1997, American Capitol sold its home
office building and adjacent land to an unrelated third party. During the
first quarter of 1997, the home office building was a negative factor in
the determination of net investment income, as the expenses associated with
the property exceeded rental income. During the first quarter of 1998, net
investment income includes the earnings from the investment of the proceeds
of the sale of the property.
The Company receives an expense allowance for administering certain blocks
of reinsured policies. The expense allowance for the first quarter of 1998
was 157% higher than the expense allowance for the comparable period in
1997. The increase in the expense allowance during 1998 is due to the
expense allowance attributable to the retrocession of the Universal
policies discussed above under "Universal Life Insurance Company
Transaction."
As a result of the above factors, total revenue was 54% higher during the
first quarter of 1998 in comparison to the comparable period in 1997.
Total policy benefits (i.e., death benefits and other benefits) were 19%
lower during the first quarter of 1998 in comparison to the comparable
period in 1997. As noted above in the discussion of premiums and other
considerations, during the first quarter of 1997, American Capitol was
coinsuring the new business written by World Service. In that these
policies were mostly single premium whole life policies, the reserve
increase associated with these policies was significant in relation to the
premiums associated with these policies. Just as premiums for the first
quarter of 1998 do not include premiums related to World Service new
business production, there is no associated increase in reserves.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 118% higher during the first quarter of 1998 in comparison
to the first quarter of 1997. As noted above under "Universal Life
Insurance Company Transaction," Universal is administering the coinsured
policies until July 1, 1998. General expenses for the first quarter of
1998 include approximately $700,000 related to payments made to Universal
for administering the coinsured policies. General expenses for the first
quarter of 1998 also include a one-time broker s fee of $227,500 associated
with the Universal coinsurance.
YEAR 2000 STATUS
The Company's policies are administered on two policy administration
systems. One of the policy administration systems was internally
developed. The Company has performed what it believes to be a reasonable
degree of testing of the system and believes that the system is year 2000
compliant. Certain of the Company's subsystems are not currently year 2000
compliant and will either be remediated or replaced. The Company believes
that all of its systems will be year 2000 compliant by the end of 1998, and
that the cost to reach such compliance will not be material.
LIQUIDITY AND CAPITAL RESOURCES
As a part of the assets transferred to American Capitol from Universal in
connection with the Coinsurance Agreement, Universal transferred
approximately $3.5 million in mortgage loans. In addition to the
underlying real estate collateral, the mortgage loans are guaranteed by
Universal. Universal has the obligation to repurchase all of the mortgage
loans by June 30, 1998. On March 27, 1998, Universal repurchased
approximately $2.2 million of the mortgage loans.
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, 1998 to be signed on its behalf by the undersigned
thereunto duly authorized.
ACAP CORPORATION
(Registrant)
Date: May 11, 1998 By:\s\William F. Guest
-------------------------------
William F. Guest, President
Date: May 11, 1998 By:\s\John D. Cornett
-------------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 32,674,254
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 3,384,249
<REAL-ESTATE> 0
<TOTAL-INVEST> 46,445,741
<CASH> 0
<RECOVER-REINSURE> 106,839,870
<DEFERRED-ACQUISITION> 1,539,301
<TOTAL-ASSETS> 158,483,767
<POLICY-LOSSES> 140,010,538
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 1,726,811
<POLICY-HOLDER-FUNDS> 2,695,883
<NOTES-PAYABLE> 750,000
0
1,850,000
<COMMON> 876
<OTHER-SE> 5,635,839
<TOTAL-LIABILITY-AND-EQUITY> 158,483,767
524,257
<INVESTMENT-INCOME> 507,659
<INVESTMENT-GAINS> 19,291
<OTHER-INCOME> 9,982
<BENEFITS> 279,501
<UNDERWRITING-AMORTIZATION> 30,668
<UNDERWRITING-OTHER> 1,657,778
<INCOME-PRETAX> 149,594
<INCOME-TAX> (27,434)
<INCOME-CONTINUING> 177,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,028
<EPS-PRIMARY> 17.26
<EPS-DILUTED> 9.14
<RESERVE-OPEN> 924,702
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 279,501
<PAYMENTS-PRIOR> 288,186
<RESERVE-CLOSE> 1,726,811
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
