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, 2000
[ ] 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, 2ND Floor
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, 2000
Common Stock, Par Value $.10 7,224
This Form 10-QSB contains a total of 14 pages, including any exhibits.
ACAP CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet - June 30, 2000 (Unaudited) 3
Condensed Consolidated Statements of
Operations - Six Months Ended
June 30, 2000 and 1999 (Unaudited) 5
Condensed Consolidated Statements of
Operations - Three Months Ended
June 30, 2000 and 1999 (Unaudited) 6
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 2000 and 1999 (Unaudited) 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II. Other Information:
Item 1. Legal Proceedings 14
Item 6. Exhibits 14
PART I. ITEM 1. FINANCIAL INFORMATION
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
ASSETS
Investments:
Fixed maturities available for sale $ 39,395,457
Mortgage loans 927,544
Policy loans 6,264,865
Short-term investments 1,025,774
-----------
Total investments 47,613,640
Cash 79,843
Accrued investment income 669,520
Reinsurance receivable 98,616,504
Notes receivable 4,088,295
Accounts receivable (less allowance
for uncollectible accounts of $88,319) 512,196
Deferred acquisition costs 1,640,724
Property and equipment
(less accumulated depreciation of $686,027) 824,684
Costs in excess of net assets of acquired business
(less accumulated amortization of $1,551,287) 1,122,489
Net deferred tax asset 439,732
Other assets 1,575,724
-----------
$157,183,351
===========
See accompanying notes to condensed consolidated financial statements.
continued . . .
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities:
Future policy benefits $136,894,426
Contract claims 4,205,385
-----------
Total policy liabilities 141,099,811
Other policyholders' funds 2,272,452
Deferred gain on reinsurance 2,129,870
Deferred gain on sale of real estate 253,692
Note payable 1,187,500
Other liabilities 3,855,694
-----------
Total liabilities 150,799,019
===========
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 8,759 shares 876
Additional paid-in capital 6,259,589
Accumulated deficit (600,287)
Treasury stock, at cost, 1,535 shares (507,842)
Accumulated other comprehensive loss-net unrealized
losses, net of taxes of $410,899 (618,004)
-----------
Total stockholders' equity 6,384,332
-----------
$157,183,351
===========
See accompanying notes to condensed consolidated financial statements.
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
2000 1999
Revenues:
Premiums and other considerations $7,287,212 3,187,325
Net investment income 1,086,237 980,244
Net realized investment gains 1,718 799,976
Reinsurance expense allowance 1,934,055 2,161,073
Amortization of deferred gain 134,768 145,495
Other income 171,298 49,959
---------- ----------
Total revenues 10,615,288 7,324,072
---------- ---------
Benefits and expenses:
Policy benefits 5,963,996 2,240,042
Commissions and general expenses 4,736,420 3,583,108
Interest expense 56,593 38,232
Amortization of deferred acquisition costs 129,234 170,756
Amortization of costs in excess of net
assets of acquired business 119,832 119,831
---------- ---------
Total benefits and expenses 11,006,075 6,151,969
---------- ---------
Income (loss) before federal income tax
expense (benefit) (390,787) 1,172,103
Federal income tax expense (benefit):
Current 89,319 335,015
Deferred (249,701) (143,635)
---------- --------
Net income (loss) $ (230,405) 980,723
---------- --------
Other comprehensive loss:
Net unrealized holding losses arising
during period, net of tax of $12,029 in
2000 and $588,791 in 1999 (28,134)(1,140,845)
---------- ----------
Comprehensive loss $ (258,539) (160,122)
---------- ----------
Earnings (loss) per share:
Earnings (loss) per share-basic $ (45.34) 122.86
========= ==========
Earnings (loss) per share-diluted $ (45.34) 110.73
========= ==========
See accompanying notes to condensed consolidated financial statements.
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
2000 1999
Revenues:
Premiums and other considerations $3,492,403 2,102,010
Net investment income 537,072 498,182
Net realized investment gains 1,412 799,976
Reinsurance expense allowance 955,641 1,054,471
Amortization of deferred gain 64,440 85,308
Other income 93,617 41,515
--------- ----------
Total revenues 5,144,585 4,581,462
--------- ----------
Benefits and expenses:
Policy benefits 3,225,995 1,246,394
Commissions and general expenses 2,199,464 2,290,297
Interest expense 27,922 29,386
Amortization of deferred acquisition costs 65,224 87,121
Amortization of costs in excess of net
assets of acquired business 59,915 59,915
--------- ----------
Total benefits and expenses 5,578,520 3,713,113
--------- ----------
Income (loss) before federal income tax
expense (benefit) (433,935) 868,349
Federal income tax expense (benefit):
Current 48,825 220,900
Deferred (239,389) (76,719)
--------- ----------
Net income (loss) $ (243,371) 724,168
--------- ----------
Other comprehensive gain (loss):
Net unrealized holding gain (loss)
arising during period, net of tax of
$1,148 in 2000 and $564,609 in 1999 3,929 (505,316)
--------- ----------
Comprehensive income (loss) $ (239,442) 218,852
--------- ----------
Earnings (loss) per share:
Earnings (loss) per share-basic $ (40.57) 93.82
========== =========
Earnings (loss) per share-diluted $ (40.57) 90.57
========== =========
See accompanying notes to condensed consolidated financial statements.
ACAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
2000 1999
Cash flows from operating activities:
Net income (loss) from operations $ (230,405) 980,723
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 216,971 184,942
Net realized investment gains on investments (1,718) (799,976)
Deferred federal income tax benefit (249,701) (143,635)
Decrease in reinsurance receivables 2,585,848 2,552,053
Increase in accrued investment income (36,700) (26,193)
Decrease (increase) in accounts receivable 122,607 (82,358)
Increase in other assets (1,246,636) (864,699)
Decrease in future policy benefit liability (3,244,112) (971,716)
Increase (decrease) in contract claim
liability 40,030 (1,134,038)
Increase (decrease) in other policyholders'
funds liability 69,785 (493,299)
Increase in other liabilities 204,524 1,714,426
--------- ----------
Net cash provided by (used by) operating activities (1,769,507) 916,230
Cash flows from investing activities:
Proceeds from sales of investments available
for sale and principal repayments on
mortgage loans 2,215,298 1,635,485
Purchases of investments available for sale (3,385,844) (4,374,078)
Net decrease in policy loans 98,378 66,025
Net decrease (increase) in short-term
investments 3,488,501 (900,019)
Purchase of property and equipment (53,256) (125,514)
Proceeds from assumption agreement -0- 2,306,481
--------- ----------
Net cash provided by (used in) investing activities 2,363,077 (1,391,620)
--------- ----------
Cash flows from financing activities:
Proceeds from issuance of note payable -0- 1,500,000
Principal payments on note payable (125,000) (625,000)
Deposits on policy contracts 506,739 644,981
Withdrawals from policy contracts (925,035) (939,119)
Preferred dividends paid (97,131) (91,344)
Treasury stock purchases (480) (960)
-------- ----------
Net cash provided by (used in) financing activities (640,907) 488,558
Net increase (decrease) in cash (47,337) 13,168
Cash at beginning of year 127,180 120,332
Cash at end of period $ 79,843 133,500
========= ==========
See accompanying notes to condensed consolidated financial statements.
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, 2000 and the
condensed consolidated statements of operations and cash flows for the
six month periods ended June 30, 2000 and 1999, 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, 2000 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, 1999 Form 10KSB. The results of operations
for the six month periods ended June 30, 2000 and 1999 are not
necessarily indicative of the operating results for the full year.
2. ACCOUNTING STANDARDS
In June, 1999, FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities"
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of
FASB Statement No. 133" (SFAS 137). SFAS 137 defers the effective date
of FASB Statement 133, "Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) for one year. SFAS 133, as amended, is now
effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS 133 establishes new accounting and reporting
standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. The Company anticipates that the adoption of
the provisions of SFAS 133 and SFAS 137 will not have a material impact
on the results of operations, financial condition or cash flow.
3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing net income
(loss) (less dividends paid on preferred stock of $97,131 and $91,344 for
the six months ended June 30, 2000 and 1999, respectively) by the
weighted average common shares outstanding (7,224 at June 30, 2000 and
7,239 at June 30, 1999).
Earnings per common share on a diluted basis is computed by dividing net
income (less dividends paid on preferred stock of $91,344 for the six
months ended June 30, 1999) by the weighted average common shares
outstanding as if stock options were exercised (7,499 at June 30, 1999).
Loss per share was not diluted for 2000.
4. STOCKHOLDERS' EQUITY
During the six months ended June 30, 2000, stockholders' equity changed
for the following items: Increase in net unrealized investment losses of
$28,134; net loss of $230,405; cash dividends paid on preferred stock of
$97,131;
and an increase in treasury stock of $480.
5. STATESMAN TRANSACTION
On October 19, 1998, Texas Imperial Life Insurance Company, a wholly-
owned subsidiary of American Capitol
executed an agreement to acquire the stock of Statesman National Life
Insurance Company ("Statesman"). To facilitate the Statesman
acquisition, American Capitol entered into a coinsurance agreement with
Statesman dated November 17, 1998, in which American Capitol coinsured,
on a 100% quota share basis, a portion of Statesman's Medicare supplement
business effective October 31, 1998. The acquisition transaction closed
on December 16, 1998. Statesman was owned by the brother of the majority
shareholder of Acap, and, as a result, this qualified as a related party
transaction. Texas Imperial issued a promissory note of $100 to the
sellers of the Statesman stock ("Sellers"). At the time of the
acquisition of the Statesman stock by Texas Imperial, Statesman had
approximately $1.8 million in surplus debentures issued to the Sellers.
The Sellers' debentures backed the Sellers' representations and
warranties and were to be adjusted based upon the outcome of certain
post-closing price adjustments. In connection with closing, Texas
Imperial purchased an $800,000 surplus debenture from Statesman to bring
Statesman's statutory equity to the level required by the Texas
Department of Insurance (the "Department") as a condition of the
Department's approval of Texas Imperial's acquisition of Statesman. As
used herein, the "Statesman Transaction" refers to the above-described
Texas Imperial acquisition of the stock of Statesman, Texas Imperial
purchase of the $800,000 surplus debenture from Statesman, and American
Capitol coinsurance of a portion of Statesman's Medicare supplement
business.
In January, 1999, it was discovered that Statesman's claim liabilities
were significantly understated. The liability understatement exceeded
the amount of the Sellers' debentures. Given the mutual mistake of fact
upon which the stock purchase, the surplus debenture purchase and the
Department's approval of same were based, Texas Imperial, the Sellers,
and Statesman agreed to rescind the purchase of the stock and the surplus
debenture. However, the rescission required the approval of the
Department. The Department did not grant its approval. As a result,
Texas Imperial determined that the $800,000 Statesman surplus debenture
was uncollectible and recorded the realized investment loss on the
debenture in 1998 and wrote off its investment in Statesman of $100.
Statesman was placed in receivership by the District Court of Travis
County, Texas 250th Judicial District (the "Court") on June 10, 1999.
On June 10, 1999, the Court approved a Liquidation Plan Regarding the
Insolvency and Liquidation of The Statesman National Life Insurance
Company (the "Liquidation Plan") executed by American Capitol, Texas
Imperial, Statesman, the Department and the National Organization of Life
and Health Insurance Guaranty Associations ("NOLHGA"). Pursuant to the
Liquidation Plan, American Capitol and Texas Imperial assumed all life
insurance policies issued by Statesman since September 30, 1998 as well
as all of the Medicare supplement and hospital indemnity health insurance
policies in force in Statesman. Participating NOLHGA guaranty
associations funded the transaction with a combination of cash and
promissory notes. In determining the funding amount, among other things,
the Company received credit in an amount equal to the $800,000 surplus
debenture Texas Imperial purchased from Statesman during 1998 and which
Texas Imperial wrote off at December 31, 1998. Pursuant to the
Liquidation Plan, at a prescribed point three years after the closing of
the assumption transactions, the actual results during the three year
period of the Medicare supplement policies in question will be compared
to the projected results for that same period and, if the actual results
have been better than projected ("excess profits"), the participating
NOLHGA guaranty associations will be entitled to participate in the
excess profits as a refund in an amount prescribed by a formula set out
in the Liquidation Plan. If the actual results are worse than the
projected results, the guaranty associations are not obligated to
compensate the Company for such shortfall. The assumption transactions
closed on June 18, 1999 with an effective date of June 1, 1999.
Approximately $11 million in cash and notes were transferred to the
Company from the participating NOLHGA guaranty associations and
approximately $10 million in liabilities were transferred to the Company
in connection with the assumption transactions.
Other aspects related to the Statesman Transaction include the transfer
to the Company of policy administration system software necessary to
enable the Company to administer the Statesman Medicare supplement
policies assumed from the guaranty associations.
6. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments of $187,665 and $105,000 for federal income taxes were made
for the six months ended June 30, 2000 and 1999, respectively.
Cash payments of $27,923 and $29,601 for interest expense were made
during the six months ended June 30, 2000 and 1999, respectively.
The following reflects assets acquired and liabilities assumed relative
to the assumption agreement for the policies of Statesman, the
consideration received for such assumption and the net cash flow relative
to such assumption on June 1, 1999:
Assets acquired $ 10,893,429
Liabilities assumed (10,093,429)
Credit received (800,000)
-----------
Gain from assumption $ -0-
===========
Net cash from assumption:
Cash acquired $ 1,510,314
Credit received 800,000
Gain from assumption -0-
-----------
Net cash provided from assumption $ 2,310,314
===========
7. NOTE PAYABLE
On March 31, 1999, the Company repaid the $500,000 balance on its note
from Central National Bank ("CNB") by borrowing $1,500,000 from CNB. The
balance of the proceeds from the new loan was used to purchase a surplus
debenture from American Capitol. The note is renewable by the bank each
April 30 until fully repaid. The note bears interest at a rate equal to
the base rate of a bank. Principal payments on the note of $62,500 are
due quarterly (a six year amortization) beginning April 30, 1999. 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 is in compliance
with all of the terms of the loan as of June 30, 2000.
8. NOTES RECEIVABLE
In connection with the Statesman Transaction, seven promissory notes
totaling $8,525,608 were issued by four different state guaranty
associations. The interest rate on the notes is fixed at 5.3%. The
first payment of principal of $4,437,313 along with accrued interest of
approximately $113,000 was paid September 18, 1999. There are no other
scheduled payments until maturity at December 2, 2002 when the balance of
$4,088,295 and all accrued and unpaid interest is due.
The promissory notes are essentially credit risk free because the notes
are backed by all member insurers of an association. A guaranty
association has the statutory authority to assess solvent insurance
companies doing business in the state to meet its obligations. If the
maximum assessment allowed in any one year does not provide the necessary
funds, additional assessments are made as soon thereafter as permitted by
the guaranty association act.
9. SEGMENT INFORMATION
The Company operates in two reportable segments: Life and Health.
Financial information by industry segment is summarized as follows:
Six Months Ended June 30
2000 1999
Revenues:
Life $ 4,152,775 4,453,609
Health 6,462,513 2,870,463
----------- -----------
Revenues $ 10,615,288 7,324,072
=========== ===========
Pretax Income (Loss) from Continuing Operations:
Life $ (137,102) 225,933
Health (253,685) 946,170
----------- -----------
Pretax Income (Loss) from Continuing Operations $ (390,787) 1,172,103
=========== ===========
Identifiable Assets (as of December 31):
Life $150,163,552 157,219,198
Health 7,019,799 9,395,302
----------- -----------
Identifiable Assets $157,183,351 166,614,500
=========== ===========
Revenues include premiums, net investment income, realized investment
gains and losses, policy and contract charges, and other income.
ACAP CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Life Segment
Life premiums and other considerations were 13% lower during the six
months ended June 30, 2000 and were 42% lower during the three months
ended June 30, 2000 in comparison to the comparable periods in 1999.
Effective June 1, 1999, the Company acquired certain blocks of business
originally issued by Statesman National Life Insurance Company from
participating guaranty associations represented by the National
Organization of Life & Health Guaranty Associations (the "Statesman
Transaction"). While the business so acquired was primarily Medicare
supplement health insurance business, a portion of the acquired business
was life insurance business. As a result of entries related to the
Statesman Transaction, life premiums recorded in June 1999 were
significantly higher than normal.
The Company receives an expense allowance for administering certain
blocks of reinsured life insurance policies. The expense allowance for
the six months ended June 30, 2000 was 11% lower than the expense
allowance for the comparable period in 1999. The expense allowance for
the three months ended June 30, 2000 was 9% lower than the expense
allowance for the comparable period in 1999. The decrease in the expense
allowance during 2000 is due to attrition of the reinsured policies.
Primarily as a result of the above factors, total life segment revenue
(excluding realized investment gains and losses) was 7% lower during the
six months ended June 30, 2000 and 16% lower during the three months
ended June 30, 2000 in comparison to the comparable periods in 1999.
Total life segment expenses (i.e., total benefits and expenses less
policy benefits) were 3% lower during the six months ended June 30, 2000
and were 24% lower during the three months ended June 30, 2000 in
comparison to the comparable periods in 1999. The decrease in expenses
was largely attributable to lower commissions resulting from (1) the
decreased level of premium income and (2) the termination of the
obligation to pay a commission allowance on a reinsurance treaty.
The life segment reported a loss before income taxes and realized
investment gains and losses of $138,820 for the six months ended June 30,
2000 in comparison to a gain of $225,957 for the comparable period in
1999. The life segment reported a loss before income taxes and realized
investment gains and losses of $167,505 for the three months ended June
30, 2000 in comparison to a loss of $99,955 for the comparable period in
1999.
Health Segment
Total health segment revenue (excluding realized investment gains)
increased 212% during the six months ended June 30, 2000 and increased
114% during the three months ended June 30, 2000 in comparison to the
comparable periods in 1999. The increase resulted primarily from the
inclusion of the Medicare supplement health insurance and hospital
indemnity health insurance business acquired in connection with the
Statesman Transaction for all of 2000, whereas such business was included
in 1999 starting with June. Also, the Company began marketing Medicare
supplement health insurance in May 1999.
Realized investment gains for 1999 include $800,000 realized in June 1999
in connection with the Statesman Transaction. As a part of that
transaction, the Company received credit in an amount equal to an
$800,000 surplus debenture purchased from Statesman during 1998 that was
written off at December 31, 1998.
Total health segment policy benefits increased 331% during the six months
ended June 30, 2000 and increased 294% during the three months ended June
30, 2000 in comparison to the comparable periods in 1999. The increase
resulted primarily from the inclusion of the Medicare supplement health
insurance and hospital indemnity health insurance business acquired in
connection with the Statesman Transaction for all of 2000, whereas such
business was included in 1999 starting with June. Another factor in the
increased level of benefits was the fact that the Company experienced
significantly higher claims experience in the second quarter of 2000.
Total health segment policy benefits were 72% of total health segment
revenue (excluding realized investment gains) during the six months ended
June 30, 2000 in comparison to 52% of total health segment revenue during
the comparable period in 1999. Total health segment policy benefits were
77% of total health segment revenue (excluding realized investment gains)
during the three months ended June 30, 2000 in comparison to 42% of total
health segment revenue during the comparable period in 1999.
Total health segment policy expenses (i.e., total benefits and expenses
less policy benefits) increased 144% during the six months ended June 30,
2000 and increased 44% during the three months ended June 30, 2000 in
comparison to the comparable periods in 1999. The increase resulted
primarily from the inclusion of the Medicare supplement health insurance
and hospital indemnity health insurance business acquired in connection
with the Statesman Transaction for all of 2000, whereas such business was
included in 1999 starting with June. Total health segment policy expenses
were 33% of total health premiums during the six months ended June 30, 2000
in comparison to 49% of total health premiums during the comparable period
in 1999. Total health segment policy expense were 33% of total health
premiums during the the three months ended June 30, 2000 in comparison to
43% of total health premiums during the comparable period in 1999. The
primary reasons for the decrease is that the effective commission rate
decreases as premium rate increases are institured on the health policies
(commissions are not paid on rate increases.)
The health segment reported a loss before income taxes and realized
investment gains and losses of $253,685 for the six months ended June 30,
2000 in comparison to a gain of $146,170 for the comparable period in
1999. The health segment reported a loss before income taxes and
realized investment gains and losses of $267,842 for the three months
ended June 30, 2000 in comparison to income of $168,328 for the
comparable period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Primarily due to an increase in market interest rates during the six
months ended June 30, 2000, the Company reported net unrealized
investment losses that were $28,134 larger than they had been at December
31, 1999.
While cash flow from operation for the six months ended June 30, 2000
is negative, it is not anticipated that the Company will need to liquidate
investments prior to their projected maturities in order to meet cash flow
requirements.
CAUTIONARY STATEMENT
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, any forward-looking statement contained herein
or in any other oral or written statement by the Company or any of its
officers, directors or employees is qualified by the fact that actual
results of the Company may differ materially from such statement due to
the following important factors, among other risks and uncertainties
inherent in the Company's business: state insurance regulations, rate
competition, adverse changes in interest rates, unforeseen losses with
respect to loss and settlement expense reserves for unreported and
reported claims, and catastrophic events.
Policy expenses were 33% of total health premiums during the six months
ended June 30, 2000 in comparison to 49% of total health premiums during
the comparable period in 1999. Total health segment policy expenses were
33% of total health premiums during the three months ended June 30, 2000
in comparison to 43% of total health premiums during the comparable
period in 1999. The primary reason for the decrease is that the effective
commission rate decreases as premium rate increases are instituted on the
health policies (commissions are not paid on rate increases.)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 5, 1999, a civil action (the "Action") was filed by Martin L.
Skeen and William F. Skeen ("Plaintiffs") in the court of Chancery of the
State of Delaware (the "Court") against Acap and Acap's directors
("Defendants"). The Plaintiffs asked the Court (1) to direct the
Defendants to pay Acap the $800,000 lost as a result of the write-off of
the surplus debenture purchased from Statesman in connection with the
Statesman Transaction, (2) to direct the Defendants to account for all of
the transactions related to the Statesman Transaction, (3) to require a
new election of directors after full disclosure with respect to the
Statesman Transaction, and (4) to award such other damages and relief as
may be appropriate, including the costs of the Action. Plaintiffs also
questioned the compensation of Acap's President in respect to the
employee benefit "Split Dollar" insurance arrangement. The action was
filed without advance demand or notice to the Defendants.
Acap has consistently denied all of the allegations in the Plaintiff's
Original Complaint and has maintained at all times that the claims by the
Plaintiffs are without merit. As previously reported, through a
transaction with the National Organization of Life and Health Guaranty
Associations in June, 1999 (see "Statesman Transaction," Note 5 of the
Financial Statements above), Acap, as a part of the transaction, received
a credit in the amount of $800,000 which was equal to the amount of the
surplus debenture that had been written off in 1998. To avoid the costs
of further litigation, the parties reached a settlement agreement. The
agreement provides for (1) dismissing without prejudice all of the
Plaintiff's claims against all of the Defendants, (2) including an
agreement by Acap to have any related party transaction approved by a
committee of outside directors, (3) allowing Plaintiffs access, if
requested, to Acap's records to determine whether there will be or is
likely to be any loss to Acap arising out of the events alleged in the
Plaintiff's Original Complaint, (4) providing for Acap's shareholders to
receive 30 days advance written notice of the terms of the settlement to
allow for any objection, if any, prior to entry by the Court of the Final
Order, and (5) providing that Acap agrees to pay Plaintiff's costs
($17,000) incurred in connection with the Action. The Court approved the
Final Order dismissing the claims on July 28, 2000.
In addition, Acap and its subsidiaries are involved in various lawsuits
and legal actions arising in the ordinary course of operations.
Management is of the opinion that the ultimate disposition of these
matters will not have a material adverse effect on Acap's results of
operations or financial position.
ITEM 6. EXHIBITS
Exhibit 10.1 Cornett Loan Forgiveness Agreement
Exhibit 10.2 Cornett Employment Agreement
Exhibit 27 Financial Data Schedule
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 June 30, 2000 to be signed on its behalf by the undersigned
thereunto duly authorized.
ACAP CORPORATION
(Registrant)
Date: August 10, 2000 By: \s\ William F. Guest
-------------------------------
William F. Guest, President
Date: August 10, 2000 By:\s\ John D. Cornett
-------------------------------
John D. Cornett, Treasurer
(Principal Accounting Officer)
