UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x] ANNUAL REPORT under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 31, 1999
[ ] TRANSITION REPORT under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 0-14451
Acap Corporation
(Name of small business issuer 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, including area code: (713) 974-2242
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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.
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [x]
Revenues for the issuer for its most recent fiscal year were
$17,483,590.
As of March 28, 2000, 7,224 shares of the registrant's Common
Stock, excluding shares held in treasury, were issued and
outstanding, and the aggregate market value of such shares held
by non-affiliates of the registrant on such date, based on the
average of the closing bid and asked prices for such shares on
such date, was $2,242,500.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5 - 7 of Form 10-KSB
is incorporated by reference from the registrant's 1999 Annual
Report to Stockholders. The information required by Part III,
Items 9 - 12 of Form 10-KSB is incorporated by reference from the
registrant's definitive information statement to be furnished in
connection with the Annual Meeting of Stockholders to be held on
or about May 8, 2000.
The Exhibit Index, Part IV, Item 13, is located on page 8 of this
Form 10-KSB.
This Form 10-KSB contains a total of 48 pages including any
exhibits.
Transitional Small Business Disclosure Format (check one):
Yes x No
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Acap Corporation was incorporated under the laws of the State of
Delaware on March 18, 1985 by the management of American Capitol
Insurance Company ("American Capitol") to become the parent or
"holding company" of American Capitol. Acap Corporation began
operating in that capacity on October 31, 1985. American Capitol
is a Texas life insurance company licensed in 34 states and the
District of Columbia. American Capitol began operations as a
life insurance company on June 1, 1954.
Unless the context otherwise requires, the term "Acap" refers to
the consolidated group of Acap Corporation and its wholly-owned
subsidiaries.
Acap primarily engages in the acquisition and servicing of
existing blocks of insurance policies. Since September 1994, the
Company has marketed a small volume of final expense insurance
and prearranged funeral service contracts. Starting May 1999,
the Company began marketing Medicare supplement policies.
Through its life insurance subsidiaries, Acap maintains
individual Medicare supplement health policies and a broad
portfolio of individual life insurance policies and annuity
contracts.
Fortune National Corporation ("Fortune Corp"), a Pennsylvania
corporation, acquired a majority interest in American Capitol in
1984. In the 1985 reorganization that resulted in American
Capitol becoming a wholly owned subsidiary of Acap, Fortune
Corp's majority interest in American Capitol was exchanged for an
equivalent interest in Acap. Fortune Corp was liquidated during
1996, leaving Fortune Corp's majority stockholder, InsCap
Corporation ("InsCap"), a Delaware corporation, with the
controlling interest in Acap, approximately 46% at December 31,
1999.
Acquisition Strategy
Acap's strategy for achieving growth and profits is based upon
the acquisition of blocks of existing insurance policies through
the direct purchase of such blocks or indirectly through the
acquisition of life insurance companies. By acquiring blocks of
insurance directly or through the purchase of other life
insurance companies, Acap hopes to add "new" policies to its
books more economically than through marketing.
Generally, insurance companies can acquire policies in two ways;
either by "purchasing" them policy-by-policy through marketing,
or by buying an existing block of policies. Purchasing an
existing block of business has the advantage that the policies
have an established "history." That is, an existing block will
have an established pattern of mortality and lapse experience.
Also, the company selling the block of existing policies has
already absorbed the risks involved in marketing the insurance
products. In purchasing an existing block of policies, Acap's
strategy is to set the purchase price at the sum of the expected
future profits of the block of policies discounted at a rate of
return in excess of Acap's cost of funds. Acap then attempts to
improve upon the rate of return by maintaining the acquired
policies at a lower per policy cost than was used in the pricing
assumptions and by realizing a higher investment yield on the
acquired assets than was used in the pricing assumptions.
It also should be noted that the acquisition strategy has certain
risks and disadvantages. Since the marketing of insurance
products generally involves greater risks than acquiring existing
blocks of insurance, the profit margins available through
marketing may be greater than the margins available with respect
to an acquired block of insurance. Also, there are relatively
few companies or blocks of business meeting Acap's acquisition
criteria that become available for purchase each year. Acap's
acquisition strategy requires Acap to maintain the personnel,
computer systems and physical properties necessary to accommodate
large growth phases without the guarantee that such growth will
occur.
Acquisitions to Date
Acap (i.e., its predecessor, American Capitol) switched from a
traditional marketing strategy to the current acquisition
strategy in 1984 in connection with the change in control and
associated change in management resulting from Fortune Corp's
purchase of a majority of the outstanding common stock. Since
1984, Acap has acquired six companies and five blocks of
business. Primarily as a result of this acquisition activity,
Acap's assets grew from approximately $64 million at December 31,
1984 to approximately $161 million at December 31, 1999.
Products and Markets
The policies serviced by Acap are primarily traditional whole
life policies, interest-sensitive whole life policies, term life
policies, stipulated premium whole life policies, flexible
premium annuity contracts, and Medicare supplement policies.
Traditional whole life policies are generally characterized by a
uniform death benefit and a level periodic premium throughout the
insured's lifetime. These policies combine a savings element
with insurance protection. The savings element, called the cash
value, builds at a fixed rate of interest and may be borrowed
against by the policyholder and, if the policy terminates other
than through the death of the insured, may be paid to the
policyholder.
Acap's interest-sensitive whole life policies also generally have
a uniform death benefit and a level periodic premium. However,
with these policies, the interest rate credited to the savings
element of the policy may be varied at Acap's option above a
guaranteed minimum rate. The interest-sensitive policies also
provide for a surrender charge in the event that the policyholder
surrenders the policy during the first ten years following the
issue date of the policy. Further, Acap may vary below a
guaranteed maximum the amount charged against the policy for
expenses and mortality costs.
Term life policies generally offer pure insurance protection
(i.e., no savings element) for a specified period. Such policies
typically offer a conversion privilege, a renewal privilege, or
both. Premiums typically are adjusted upon the exercise of
either privilege.
Stipulated premium whole life policies are characterized by a
uniform death benefit and a level periodic premium throughout the
insured's lifetime. However, unlike traditional whole life
policies, stipulated premium whole life policies have no cash
value.
Flexible premium annuity contracts permit the annuitant to make
deposits as the annuitant chooses, and allow the annuitant to
make withdrawals at his or her option, subject to deduction of
applicable surrender charges. The annuity balance earns interest
on a tax-deferred basis at a rate that Acap may change annually.
Medicare supplement policies are health insurance policies that
cover specified benefits that are not covered by Medicare.
Premium rates may be changed on the policies within a state with
the advance approval of regulatory officials of that state.
From mid-1985 until September 1994, the Company relied
exclusively on its acquisition strategy and did not actively
market new business. Since September 1994, the Company has
marketed a small volume of final expense insurance and
prearranged funeral service contracts in the State of Texas.
These policies are primarily written through independent funeral
homes. Starting May 1999, the Company began marketing Medicare
supplement health insurance policies through independent brokers
in the States of Texas, Oklahoma, and Louisiana.
No single customer accounts for a meaningful percentage of the
Company's business in force or sales.
Competition
The life insurance industry is highly competitive. There are
over 1,700 life insurance companies in the United States.
Although Acap's acquisition strategy is not the standard strategy
employed in the industry, Acap must compete with a significant
number of companies, both inside and outside the life insurance
industry, when looking for an acquisition. Many of these
companies have substantially greater financial resources and
larger staffs than Acap.
Acap also must compete with a significant number of other life
insurance companies to retain Acap's existing block of policies.
Many of these companies have broader and more diverse product
lines together with active agency forces, and therefore, certain
of Acap's policyholders may be induced to replace their existing
policies with those provided by Acap's competitors.
Regulation
The insurance subsidiaries of the Company are subject to
regulation by the supervisory insurance agency of each state or
other jurisdiction in which the insurance subsidiaries are
licensed to do business. These supervisory agencies have broad
administrative powers relating to the granting and revocation of
licenses to transact business, the approval of policy forms, the
approval of premium rates on Medicare supplement policies, the
form and content of mandatory financial statements, capital,
surplus, reserve requirements and the types of investments that
may be made. The insurance subsidiaries are required to file
detailed reports with each supervisory agency, and its books and
records are subject to examination by each. In accordance with
the insurance laws of the State of Texas (the insurance
subsidiaries' state of domicile) and the rules and practices of
the National Association of Insurance Commissioners (the "NAIC"),
the insurance subsidiaries are examined periodically by examiners
from Texas.
Most states have enacted legislation or adopted administrative
regulations covering such matters as the acquisition of control
of insurance companies and transactions between insurance
companies and the persons controlling them. The NAIC has
recommended model legislation on these subjects that has been
adopted, with variations, by many states. The nature and extent
of the legislation and administrative regulations now in effect
vary from state to state, and in most states prior administrative
approval of the acquisition of control of an insurance company
incorporated in the state, whether by tender offer, exchange of
securities, merger or otherwise, is required, which process
involves the filing of detailed information regarding the
acquiring parties and the plan of acquisition.
The insurance subsidiaries are members of an "insurance holding
company system" and are required to register as such with the
State of Texas and file periodic reports concerning their
relationships with the insurance holding company and other
affiliates of the holding company. Material transactions between
members of the holding company system are required to be "fair
and reasonable" and in some cases are subject to administrative
approval, and the books, accounts and records of each party are
required to be so maintained as to clearly and accurately
disclose the precise nature and details of the transactions.
Notice to or approval by the State of Texas is required for
dividends paid by the insurance subsidiaries.
General
The Company does not hold any patents, trademarks, licenses,
franchises or concessions in connection with its business, except
for the insurance licenses of its insurance subsidiaries.
The Company expended no money on research and development during
the past two years.
Employees
At December 31, 1999, Acap had a total of 105 employees, of which
98 are full time employees. None of these employees is covered
by a collective bargaining agreement. Acap believes that it has
excellent relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTIES.
The principal offices of the Company are located at 10555
Richmond Avenue, Houston, Texas 77042. The Company leases 30,634
square feet of office space. The lease runs through November 20,
2002. The Company has the option to extend the lease at then-
current market rates for an additional five years. The Company's
offices are suitable for the conduct of its business and the
Company has an option to lease additional space in the same
building to provide room for future growth.
The Company's investment policy prohibits making investments in
real estate without the prior approval of the Board of Directors.
There are no plans to make any real estate investments in the
foreseeable future. If the Company were interested in making a
real estate investment, regulatory restrictions applicable to
Texas life insurance companies would prohibit the life insurance
subsidiaries from investing in real estate outside of the United
States, in residential real estate, or in any property, other
than home office property, that exceeds 5% of the insurer's
statutory assets.
The Company owns and services first mortgage loans with aggregate
principal balances at December 31, 1999 of $1,027,790. The
investment in mortgage loans was made primarily for income as
opposed to capital gain. Residential mortgages represent 83% of
the mortgage loan balances at December 31, 1999, with commercial
mortgages constituting the balance. In addition to the real
estate collateral, approximately $860,000 of the mortgage loans
at December 31, 1999 are guaranteed by an individual that the
Company has reason to believe has a net worth well in excess of
the balance of the guaranteed loans. The Company's investment
policy prohibits making new investments in mortgage loans without
the prior approval of the Board of Directors. There are no plans
to make any mortgage loan investments in the foreseeable future.
If the Company were interested in making a mortgage loan
investment, regulatory restrictions applicable to Texas life
insurance companies would prohibit the life insurance
subsidiaries from investing in mortgage loans on real estate
outside of the United States, in other than first liens, or in
any loan that exceeds 25% of the insurer's statutory capital and
surplus.
ITEM 3. 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 facts and circumstances
giving rise to the action are described below.
On December 16, 1998, Texas Imperial acquired (the "Statesman
Transaction") the stock of Statesman National Life Insurance
Company ("Statesman"). 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. 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 and wrote off its investment in
Statesman of $100.
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. 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 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, and
recorded it as a realized gain in 1999.
In the Action, 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 the Company's President in respect
to the employee benefit "Split Dollar" insurance arrangement.
The Action was filed without advance demand or notification to
the Defendants.
Although the Company believed that the claims by the Plaintiffs
were without merit, the parties have reached a settlement
agreement in principle providing for the parties to jointly
petition the Court to enter an order (1) dismissing without
prejudice all of Planitiffs' claims against all of the
Defendants, and (2) to include in the order an agreement by Acap
to have any related party transaction approved by a committee or
board of directors consisting of a majority of outside directors.
While Acap's board of directors from inception has always
consisted of a majority of outside directors, which was the case
at the time of the Statesman Transaction, Acap consented to have
this agreement by Acap included in the Court's order. Acap also
agreed to pay Plaintiffs' costs incurred in connection with the
Action. The Company expects that the settlement agreement will
be accepted by the Court and entered as its order.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The required information regarding the market for the common
equity of the Company and related stockholder matters is
incorporated herein by reference from "Stockholder Information"
on page 32 of Acap's 1999 Annual Report to Stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
Management's Discussion and Analysis of Financial Condition and
Results of Operations is incorporated herein by reference from
"Management's Financial Analysis" on pages 3 - 8 of Acap's 1999
Annual Report to Stockholders.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements and supplementary data are incorporated
herein by reference from pages 9-31 of Acap's 1999 Annual Report
to Stockholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
The information required by Items 9-12 is incorporated by
reference from Acap's definitive information statement, which is
to be filed pursuant to Regulation 14C.
ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibits Description Location or Incorporation
by Reference
3(a)(1) Certificate of Incorporation of the *Form 10 effective June 22,
Registrant dated March 12, 1985 1986, pages 58-61
3(a)(2) Certificate of Amendment to the *Form 10 effective June 22,
Certificate of Incorporation of the 1986, pages 62-65
Registrant dated October 25, 1985
3(a)(3) Certificate of Amendment to the *Form 10K dated December 31,
Certificate of Incorporation of the 1988, pages 51-53
Registrant dated August 22, 1986
3(a)(4) Certificate of Amendment to the *Form S4, Registration No. 33-
Certificate of Incorporation of the 27874
Registrant dated March 20, 1989
3(a)(5) Certificate of Amendment to the *Form 10KSB dated December 31,
Certificate of Incorporation of the 1994, pages 273- 276
Registrant dated May 9, 1994
3(b)(1) Bylaws of the Registrant,as amended *Form 10K dated December 31,
1988, pages 54-68
3(b)(2) Amendment to the Bylaws of the *Form 10Q dated March 31,
Registrant 1990, page 11
4 Certificate of Designations of the *Form 8K dated December 31,
Preferred Stock of the Registrant 1986, pages 23-31
10(a)(1) 1997 American Capitol Insurance *Form 10KSB dated
Company Key Employee Incentive Stock December 31, 1997,pages 11-19
Option Plan
10(a)(2) Form of Grant of Stock Option used *Form 10KSB dated
in 1997 American Capitol Insurance December 31, 1997 pages 20-25
Company Key Employee Incentive Stock
Option Plan
10(b)(1) Employment Contract between American *Form 10QSB dated March 31,
Capitol Insurance Company and John 1997, pages 13-26
D. Cornett
10(b)(2) Stock Purchase Agreement between *Form 10QSB dated March 31,
American Capitol Insurance Company 1997, pages 27-36
and John D. Cornett
10(c) Disability Income Agreement between *Form 10KSB dated
American Capitol Insurance Company December 31, 1997,pages 26-29
and William F. Guest
10(d)(1) Reinsurance Agreement between *Form 10KSB dated
American Capitol Insurance Company December 31,1993, pages 10-66
and Crown Life Insurance Company
effective December 31, 1992, as
amended
10(d)(2) Amendment dated June 30,1996 to *Form 10KSB dated
the Reinsurance Agreement between December 31, 1996,pages 48-50
American Capitol Insurance Company
and Crown Life Insurance Company
10(e)(1) Reinsurance Agreement effective *Form 10KSB dated
February 2, 1995 between Oakley- December 31, 1994,
Metcalf Insurance Company and pages 213-260
Alabama Reassurance Company
10(e)(2) Amendment dated January 1, 1996 *Form 10KSB dated
to the Reinsurance Agreement between December 31, 1996,
Oakley-Metcalf Insurance Company pages 69-71
and Alabama Reassurance Company
10(e)(3) Amendment dated December 31, 1996 *Form 10KSB dated
to the Reinsurance Agreement between December 31, 1996, page 72
Texas Imperial Life Insurance
Company and Alabama Reassurance
Company
10(f) Loan Agreement and related documents *Form 10KSB dated
between Acap Corporation and Central December 31, 1994,
National Bank pages 261-272
10(g) Liquidation Plan Regarding the *Form 10QSB dated June 30,
Insolvency and Liquidation of The 1999, pages 18-209
Statesman National Life Insurance
Company
10(h) Coinsurance Agreement dated *Form 10KSB dated
January 1, 1998 between Universal December 31 1997,
Life Insurance Company and American pages 75-128
Capitol Insurance Company
10(i) Amendments Letter dated February 27, *Form 10KSB dated
1998 amending the Coinsurance December 31, 1997,
Agreement between Universal Life pages 129-132
Insurance Company and American
Capitol Insurance Company
10(j) Closing Memorandum and Amendments *Form 10KSB dated
to the Coinsurance Agreement December 31, 1997,
between Universal Life Insurance pages 133-135
Company and American Capitol
Insurance Company
10(k) Coinsurance Agreement dated *Form 10KSB dated
January 1, 1998 between Republic- December 31, 1997,
Vanguard Life Insurance Company and pages 154-176
American Capitol Insurance Company
10(l) Lease Agreement dated November 21, *Form 10KSB dated
1997 between Realtycorp International December 31, 1997,
Group LC and American Capitol pages 177-227
Insurance Company
11 Statement re computation of per *1999 Annual Report to
share earnings Stockholders, page 16
13 1999 Annual Report to Stockholders Pages 11-46
22 Subsidiaries of the Registrant Page 47
27 Financial Data Schedule Page 48
_______________________________________________________
* Exhibit is incorporated by reference to the listed document.
(b)Reports on Form 8-K:
No reports on Form 8-K were filed in the last quarter of the year
ended December 31, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Acap Corporation
Date: March 28, 2000
By:
/s/ William F. Guest
---------------------
William F. Guest
Chairman of the Board
In accordance with the Exchange Act, this report has been signed
below by the
following persons on behalf of the registrant and in the
capacities and on the date
indicated.
Date: March 28, 2000
By:
/s/ William F. Guest /s/ John D. Cornett
-------------------------- ------------------------
William F. Guest John D. Cornett
Chairman of the Board, Director Executive Vice President
and President and Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
/s/ R. Wellington Daniels /s/ C. Stratton Hill, Jr.
--------------------------- ---------------------------
R. Wellington Daniels C. Stratton Hill, Jr.
Director Director
EXHIBIT 21
SUBSIDIARIES OF ACAP CORPORATION
Wholly owned subsidiary of Acap Corporation:
American Capitol Insurance Company (Texas)
Wholly owned subsidiaries of American Capitol Insurance Company:
Imperial Plan, Inc. (Texas)
Texas Imperial Life Insurance Company (Texas)
Acap Corporation
Contents
President's Report 1
Management's Financial Analysis 3
Consolidated Balance Sheet 9
Consolidated Statements of Operations and Comprehensive Income 10
Consolidated Statements of Stockholders' Equity 11
Consolidated Statements of Cash Flows 12
Notes to Consolidated Financial Statements 13
Independent Auditors' Report 31
Stockholder Information 32
Directors and Officers 33
Corporate Profile
Acap Corporation is a life insurance holding company that primarily focuses
on the acquisition of existing life insurance policies, either through
direct purchase or the acquisition of life insurance companies. Adjuncts
to the acquisition-oriented growth strategy include using financial
leverage and reinsurance to make more acquisitions and to maximize the
return to stockholders, consolidating and streamlining the operations of
acquired businesses, concentrating on a limited number of lines of
business, and providing superior customer service to improve policy
retention.
In addition to the acquisition program, Acap subsidiaries market Medicare
supplement health insurance policies, final expense life insurance
policies, and preneed funeral service contracts.
Acap was formed in 1985. Acap's life insurance operations are conducted
through its wholly owned life insurance subsidiaries. All operations are
conducted from the corporate headquarters in Houston, Texas. Acap's common
stock is quoted on the NASD Electronic Bulletin Board under the symbol
AKAP.
Front cover design: The front cover design combines the logos of Acap's
two life insurance subsidiaries: the Capitol Building logo of American
Capitol Insurance Company and the Lone Star logo of Texas Imperial Life
Insurance Company.
<PAGE>
President's Report
Corporate Developments During 1999
The Company acquired approximately 10,000 Medicare supplement policies and
a small number of life insurance policies and hospital indemnity policies
(effective June 1, 1999) from various state Guaranty Associations
represented by the National Organization of Life and Health Guaranty
Associations ("NOLHGA"). The policies were originally issued by Statesman
National Life Insurance Company ("Statesman"), which was placed in
receivership in June 1999. The transaction was structured to minimize the
risks of the acquisition to the Company, while providing the participating
Guaranty Associations with a profit participation potential. The
transaction included a credit to the Company in an amount equal to the
$800,000 investment in Statesman it had written off in 1998. The Company
began administering the acquired policies effective June 1, 1999. The
Company hired most of the employees who had been working for Statesman as
of the date of the receivership. Through these steps, the Company and
NOLHGA were able to effect a smooth and orderly transfer of the policies
from Statesman to the Company, minimizing the impact of Statesman's
insolvency to its policyholders, employees, and agents.
In May 1999, the Company's subsidiary, American Capitol Insurance Company,
began marketing Medicare supplement and final expense life insurance in
Texas, Oklahoma, and Louisiana. The Company's recruiting of agents focused
initially on former Statesman agents, progressing to recruiting agents
generally. The marketing of Medicare supplement is still in its early
stage, but the initial results are encouraging. American Capitol's
subsidiary, Texas Imperial Life Insurance Company, continues to market
"preneed" life insurance in Texas on a modest scale.
The Company licensed and installed two software systems during 1999. The
installations required significant effort and were completed on schedule.
One was an advanced health claims administration system that went "live" on
December 1, 1999. It replaced a "home grown" health claims administration
system acquired from Statesman, which was not Year-2000 compliant and had
limited resourcefulness. The new system is much more automated and expands
the types of health products that the Company can administer. The other was
the installation of insurance-specific general ledger and accounts payable
systems that went "live" on November 1, 1999. They replaced general ledger
and accounts payable systems that were not Year-2000 compliant. These new
systems enhance the automation of the Company's accounting and provide
easier access to management information.
As was apparently the case with most of the world, the Company's experience
with the transition to Year 2000 on its computer systems was basically a
non-event. However, this was not because the potential for problems with
the systems did not exist. The Company had no significant Year-2000
related problems because of the planning, implementation of corrective
actions, and testing that took place prior to January 1, 2000. The Company
will continue to monitor its systems for potential issues related to the
Year 2000.
Results of Operations
The Company had net income for 1999 of $1,350,170, or $161.39 per basic
common share, compared to a net loss for 1998 of $13,989, or $28.42 per
basic common share. Obviously, a major part of the difference is
attributable to the above-noted write-off of the $800,000 investment in
Statesman in 1998 and the credit equal to that amount in 1999. Pre-tax
operating income (which excludes net realized investment gains and losses)
for 1999 was $639,401, compared to $774,436 in 1998.
A more complete analysis of the results of operations is included in the
Management's Financial Analysis section of this Annual Report.
Stockholders are urged to read the entire Annual Report to gain a better
understanding of the Company, its recent financial performance, and its
prospects.
Outlook
As mentioned in last year's President's Report, the Company's plan was to
begin in 1999 the conversion of all of its policies to the new policy
administration system acquired as part of the Statesman transaction. The
above-discussed corporate developments during 1999 pre-empted the start of
that process. We are now positioned to complete a substantial amount of
the conversion process in 2000. As stated in last year's Report, the
conversion process will be time-consuming and expensive. However, the
Company believes the new system's expanded capabilities will result in
productivity gains over time that will outweigh the conversion costs.
Also, it will enable the Company to explore acquisition and marketing
opportunities of insurance products in addition to traditional life
insurance, to which the Company's past acquisition activities have been
limited.
The Company plans to devote considerable attention to its new Medicare
supplement marketing program during 2000. While recognizing that the
Medicare supplement market is inherently more management intensive and has
higher risk than the Company's traditional "life-only" business plan, the
Company believes that the potential of the marketing program makes it
worth pursuing. The Company plans to continue its acquisition program. The
Company has completed at least one acquisition each year since 1993. Now,
with the marketing program, and a new policy administration system with
expanded capabilities to enlarge the Company's acquisition options, the
Company's potential for growth is more diversified. Also, this should add
more stability to the "growth curve," compared to the somewhat
"punctuated" growth pattern associated with an "acquisitions-only"
business plan.
Considering the projected focus during 2000 on the conversion process and
the Medicare supplement marketing program, the Company is not actively
seeking to make an acquisition during 2000. However, in addition to
developing a marketing program, we believe the Company is strengthening
its position to make acquisitions, which will continue to be an important
piece of its growth strategy.
William F. Guest
President
April 10, 2000
<PAGE>
Acap Corporation
Management's Financial Analysis
Results of Operations
As used herein, "American Capitol" is American Capitol Insurance Company, a
wholly owned subsidiary of the Company. "Texas Imperial" is Texas Imperial
Life Insurance Company, a wholly owned subsidiary of American Capitol.
Statesman Transaction
On October 19, 1998, Texas Imperial 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, Statesman's "pre-
standard" 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. American Capitol also assumed the "pre-standard"
Medicare supplement business that American Capitol had fully coinsured from
Statesman in 1998. Participating guaranty associations, represented by
NOLHGA, 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, three
years after the closing of the assumption transactions, the actual results
of the Medicare supplement policies in question will be compared to the
projected results for the three year period and, if the actual results have
been better than projected ("excess profits"), the participating 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 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 Medicare supplement policies assumed from the
guaranty associations. This system enhances the Company's policy
administration capabilities considerably and the Company expects to use it
as its primary policy administration system. In addition, the Company
recently (May, 1999) began to market Medicare supplement policies by
recruiting former agents of Statesman and, in due course, adding additional
agents. Initially this new marketing program will be relatively modest in
scope, involving the states of Texas, Louisiana, and Oklahoma. Through
these steps, the Company has expanded its business plan to include the
administration and marketing of Medicare supplement policies, and has
positioned itself to acquire additional Medicare supplement policies as
well as accident and health insurance policies in general.
Life Segment
Premiums and other considerations were 7% higher in 1999 in comparison to
1998. The increase is the result of the life business assumed in
connection with the Statesman Transaction described above.
Net investment income was 9% lower during 1999 in comparison to 1998. The
lower level of investment income in 1999 was primarily due to the smaller
average base of invested assets in 1999 in comparison to 1998.
A major source of revenue for the Company is the expense allowance the
Company receives for administering certain blocks of reinsured policies.
The expense allowance for 1999 was 17% lower than the expense allowance
received during 1998. The decrease in the expense allowance is
attributable to normal attrition of the reinsured policies.
As a result of the factors noted above, total revenue, including net
realized investment gains and losses, was 8% lower during 1999 than during
1998.
Policy benefits were 3% higher in 1999 in comparison to 1998. The
Company's mortality experience was higher in 1999 in comparison to 1998.
Total expenses were 4% lower in 1999 in comparison to 1998. Expenses for
1998 include $1.3 million paid to Universal Life Insurance Company
("Universal") for administering during the period January 1, 1998 through
June 30, 1998, the policies American Capitol acquired from Universal.
Prior to July 1, 1998, the Company incurred expenses in preparing to assume
the administration of the Universal policies. Expenses for 1998 also
include a one-time broker's fee of $227,500 associated with the Universal
coinsurance. The Company incurred significant expenses, including
approximately $300,000 in computer consulting expense, in connection with
the conversion of the Universal policies from the system acquired from
Universal to one of the Company's other policy administration systems.
The Company currently operates on three policy administration systems. The
Company plans to convert from two of the current systems onto the policy
administration system acquired as a part of the Statesman Transaction
discussed above. Once the conversions are completed, the Company expects
to experience lower per unit policy administration expenses as a result of
enhanced capabilities of the surviving policy administration system and the
efficiencies resulting from being on a single system. To accomplish the
conversions, the Company added programming and conversion resources during
1999. The conversion process is expected to take approximately two years.
Health Segment
Premiums and other considerations were $7,727,163 in 1999 in comparison to
$349,087 in 1998. The increase is the result of the business assumed in
connection with the Statesman Transaction described above. Whereas 1998
includes premiums on the "pre-standard" Medicare supplement business
acquired from Statesman for only two months, 1999 includes the premiums on
the "pre- standard" Medicare supplement business for the full year.
Premiums for 1999 include seven months of premiums on the "standard"
Medicare supplement and hospital indemnity business acquired through the
Statesman Transaction.
Net investment income was $81,593 in 1999 in comparison to $11,800 in 1998.
The higher level of investment income in 1999 was due to the larger average
base of invested assets in 1999 in comparison to 1998, primarily as a
result of the increase in assets related to the Statesman Transaction.
The Health Segment had net realized investment gains of $800,000 in 1999,
in comparison to net realized investment losses of $800,000 in 1998. As
discussed above in the description of the Statesman Transaction, the
Company realized an $800,000 loss on an investment in Statesman during
1998. During 1999, in connection with the funding of the Liquidation Plan,
the Company received credit in an amount equal to the $800,000 investment
in Statesman that was written-off during 1998.
"Other Income" for 1999 includes $176,831 in interest on the promissory
notes issued by the participating guaranty associations in connection with
the Statesman Transaction. The promissory notes are essentially credit
risk free because they are backed by the member insurers of the guaranty
associations that issued the notes. A guaranty association has the
statutory authority and obligation to assess member insurers to meet its
obligations. The promissory notes bear interest at 5.3% and mature on
December 2, 2002.
As a result of the factors noted above, total revenue, including net
realized investment gains and losses, was $8,813,532 in 1999 in comparison
to ($439,113) in 1998. Excluding net realized investment gains and losses,
total revenue was $8,013,532 in 1999 in comparison to $360,887 in 1998.
Policy benefits were $3,663,413 in 1999 in comparison to $245,037 in 1998.
The increase is the result of the business assumed in connection with the
Statesman Transaction described above.
Total expenses were $3,923,852 in 1999 in comparison to $48,153 in 1998.
The increase in expenses is attributable to the business assumed in
connection with the Statesman Transaction described above. Approximately
$1.5 million of the increased expenses for 1999 are attributable to
commissions on the business acquired in the Statesman Transaction.
Beginning June 1, 1999, general expenses include the costs associated with
administering the acquired business. General expenses for 1999 also
include expenses associated with moving personnel and records from
Statesman's offices to the Company's offices and the expenses associated
with the installation of a new health claims administration software
system.
Liquidity and Capital Resources
Liquidity of Insurance Subsidiaries
Acap's insurance subsidiaries have a significant portion of their assets
invested in debt instruments, short-term investments, or other marketable
securities. Although there is no present need or intent to dispose of such
investments, the insurance subsidiaries could liquidate portions of the
investments should the need arise. These assets should be sufficient to
meet the insurance subsidiaries' anticipated long-term and short-term
liquidity needs.
As of December 31, 1999, 100% of the insurance subsidiaries' portfolios of
publicly traded bonds are invested in securities that are rated "investment
grade" (i.e., rated BBB-/Baa3 or higher by Standard & Poor or Moody). The
Company's investment policy prohibits making any new investments in below
investment grade securities without the advance approval of the applicable
insurance subsidiary's Board of Directors. All of the Company's bonds are
classified as available-for-sale and are, accordingly, reflected in the
financial statements at fair value. The insurance subsidiaries'
liabilities are primarily long term in nature. Therefore, long-term assets
can be purchased with the general intent to hold such assets to maturity.
It has not been the Company's investment practice in the past to be an
active trader with its bond portfolios. It is not expected that the
insurance subsidiaries' investment practices will change in the future.
A significant portion (19%) of the Company's bond portfolio is invested in
mortgage-backed securities, with 91% of such mortgage-backed securities
classified as collateralized mortgage obligations and 9% classified as pass-
through securities. Mortgage-backed securities are purchased to diversify
the portfolio from credit risk associated with corporate bonds. The
majority of mortgage-backed securities in the Company's investment
portfolio have minimal credit risk because the underlying collateral is
guaranteed by specified government agencies (e.g., GNMA, FNMA, FHLMC).
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks that arise from changes in the general level
of interest rates. As interest rates decline and homeowners refinance
their mortgages, mortgage-backed securities prepay more rapidly than
anticipated. Conversely, as interest rates increase, underlying mortgages
prepay more slowly, causing principal repayment of mortgage-backed
securities to be extended. In general, mortgage-backed securities provide
for higher yields than corporate debt securities of similar credit quality
and expected maturity to compensate for this greater amount of cash flow
risk. Due to the underlying structure of the individual securities, the
majority of mortgage-backed securities in the Company's investment
portfolio have relatively low cash flow variability.
The Company's investments in collateralized mortgage obligations are
primarily of the planned amortization class (67%), Z (18%) and sequential
(15%) types. A planned amortization class tranche is structured to provide
more certain cash flows and is therefore subject to less prepayment and
extension risk than other forms of mortgage-backed securities. Planned
amortization class securities derive their stability at the expense of cash
flow risk for other tranches as early repayments are applied first to other
tranches, and cash flows originally applicable to other tranches are first
applied to the planned amortization class tranche if that tranche's
originally scheduled cash flows are received later than expected. The Z
tranche defers all interest to other tranches until those tranches are paid
down, at which time accumulated interest and principal are paid to this
class. The cash flows associated with sequential tranches can vary as
interest rates fluctuate, since these tranches are not supported by other
tranches.
The Company records its fixed maturity and equity securities at fair value
with unrealized gains and losses, net of taxes, reported as a separate
component of stockholders' equity. Primarily as a result of increasing
interest rates during the year, the fair value of the Company's fixed
maturity and equity securities decreased $1,804,655 during 1999, following
a $271,063 increase during 1998. Accounting standards do not permit
the Company to revalue its liabilities for changes in interest rates.
As of December 31, 1999, the Company held 15 mortgage loans as investments.
The Company's investment policy generally prohibits making new investments
in mortgage loans (although mortgage loans may be acquired as approved
assets in connection with an acquisition). In addition to the real estate
collateral, approximately $860,000 (84%) of the mortgage loans are
guaranteed by an individual who management has reason to believe has a net
worth well in excess of the balance of the guaranteed loans. The average
yearly principal balance of the Company's mortgage loans at December 31,
1999 was approximately $41,000 and the weighted average maturity was 12
years. Mortgage loans on Tennessee properties represent 39% of the
mortgage loan balances at December 31, 1999, Alabama properties 36%, Texas
properties 16%, with Florida and Kentucky properties representing the
remainder of the mortgage loan balances. Residential mortgages represent
83% of the mortgage loan balances at December 31, 1999 with commercial
mortgages constituting the balance. In general, the performance of
commercial mortgages is more subject to changing U.S. and regional economic
conditions than residential mortgages. Mortgage loans are far less liquid
an investment than publicly traded securities.
Liquidity of the Parent Company
On March 31, 1999, Acap borrowed $1.5 million from Central National Bank of
Waco, Texas. Acap used $500,000 of the loan proceeds to repay an existing
loan at Central National Bank, with the balance of the loan proceeds used
to purchase a surplus debenture from American Capitol. At December 31,
1999, the outstanding principal balance of the loan was $1,312,500. The
loan is renewable each April 30 until fully repaid. The loan bears
interest at a rate equal to the base rate of a bank. Principal payments on
the loan are due quarterly. 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
at December 31, 1999. The principal payments on the bank loan are matched
by the principal payments on surplus debentures issued by American Capitol
to Acap.
The primary sources of funds for Acap are payments on the surplus
debentures from American Capitol and dividends from American Capitol.
American Capitol may pay dividends in any one year without the prior
approval of regulatory authorities as long as such dividends do not exceed
certain statutory limitations. As of December 31, 1999, the amount of
dividends available to the parent company from American Capitol not limited
by such restrictions is approximately $560,000. Payments on the surplus
debentures may only be made to the extent statutory capital and surplus
exceeds $2 million. At December 31, 1999, American Capitol's statutory
capital and surplus was $4,081,403.
The determination of statutory surplus is governed by accounting practices
prescribed or permitted by the State of Texas. Statutory surplus therefore
bears no direct relationship to surplus as would be determined under
generally accepted accounting principles.
Reinsurance
Reinsurance plays a significant role in the Company's operations. In
accounting for reinsurance, the Company has reported ceded reserve credits
and reinsurance claim credits as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. At December 31, 1999,
reinsurance receivables with a carrying value of $48.7 million were
associated with a single reinsurer, Canada Life Assurance Company ("Canada
Life"). At December 31, 1998, Canada Life had statutory assets in excess
of $28 billion and statutory stockholders' equity of approximately $3
billion. Canada Life is rated "Superior" by A.M. Best Company, an
insurance company rating organization. At December 31, 1999, reinsurance
receivables with a carrying value of $48.3 million were associated with
Republic-Vanguard Life Insurance Company ("Republic"). Republic is rated
"Excellent" by A.M. Best Company. At December 31, 1998, Republic had
statutory assets of approximately $811 million and statutory stockholders'
equity of approximately $39 million. At December 31, 1999, reinsurance
receivables with a carrying value of $1.9 million were associated with
Alabama Reassurance Company ("Alabama Re"). The Alabama Re reinsurance
receivables are secured by a trust account containing a $4.1 million letter
of credit granted in favor of an insurance subsidiary of the Company.
With regard to the policies not 100% reinsured with Canada Life, Republic,
or Alabama Re, the Company seeks to limit its exposure to loss on any
single insured by reinsuring the portion of risks in excess of $50,000 on
the life of any individual through various reinsurance contracts, primarily
of the coinsurance and yearly renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the
event the reinsurers are unable to meet their obligations assumed under
the reinsurance agreements. Acap evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from reinsurer insolvencies.
Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in interim financial reports issued to
stockholders. The provisions of SFAS No. 131 did not have an impact on the
Company in 1998 since the Company did not have different operating
segments. The Company acquired a material block of health business during
1999, and accordingly, the Company began disclosing information about
different operating segments in 1999.
In June 1999, the FASB issued SFAS 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 No. 137
defers the effective date of SFAS No. 133 for one year. SFAS No. 133, as
amended, is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 generally requires that
derivatives embedded in hybrid instruments be separated from their host
contracts and be accounted for separately as derivative contracts. For
instruments existing at the date of adoption, SFAS No. 133 provides an
entity the option of not applying this provision to such hybrid instruments
entered into before January 1, 1998 and not substantially modified
thereafter. Consistent with the deferral of the effective date for one
year, SFAS No. 137 provides an entity the option of not applying this
provision to hybrid instruments entered into before January 1, 1998 or 1999
and not substantially modified thereafter. Upon implementation of SFAS No.
133, hedging relationships may be redesignated and securities held-to-
maturity may be transferred to available-for-sale or trading. The Company
is evaluating the impact, if any, SFAS No. 133 may have on its future
consolidated financial statements.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued
Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." This statement provides
guidance for the recording of a liability for insurance-related
assessments. The statement requires that a liability be recorded when all
of the following conditions have been met: an assessment has been imposed
or it is probable that an assessment will be imposed; the event obligating
an entity to pay an imposed or probable assessment has occurred on or
before the date of the financial statements; and the amount of the
assessment can be reasonably estimated. The Company adopted SOP 97-3 as of
January 1, 1999. The adoption of the provisions of SOP 97-3 did not have a
material impact on results of operations, financial condition, or cash
flows.
In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement specifies
the types of costs that must be capitalized and amortized over the
software's expected useful life and the types of costs that must be
immediately recognized as expense. For purposes of this SOP, internal-use
software is software acquired, internally developed, or modified solely to
meet the entity's internal needs for which no substantive plan exists or is
being developed to market the software externally during the software's
development or modification. Certain internal and external costs incurred
to develop internal-use computer software that relate to system design,
software configuration and interfaces, coding, testing, and installation to
hardware should generally be capitalized. The Company adopted SOP 98-1 as
of January 1, 1999. The adoption of the provisions of SOP 98-1 did not
have a material impact on results of operations, financial condition, or
cash flows.
Year 2000 Status
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Uncorrected, as
the year changed from 1999 to 2000, this could have resulted in a system
failure or miscalculations causing disruptions of normal business
activities. The Company has not experienced any significant problems with
its computer systems, vendors, business partners, or physical plant as a
result of the Year 2000 issue. The Company will continue to monitor events
throughout the Year 2000 to detect potential issues arising from this
matter.
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.
<PAGE>
Acap Corporation
Consolidated Balance Sheet
December 31, 1999
Assets
Investments:
Fixed maturities available for sale
(amortized cost of $39,153,858) $ 38,168,560
Mortgage loans 1,027,790
Policy loans 6,363,243
Short-term investments 4,514,275
------------
Total investments 50,073,868
Cash 127,180
Accrued investment income 632,820
Reinsurance receivables 101,202,352
Notes receivable 4,088,295
Accounts receivable (less allowance for
uncollectible accounts of $88,296) 697,398
Deferred acquisition costs 1,769,958
Property and equipment (less accumulated
depreciation of $591,551) 865,904
Costs in excess of net assets of acquired
business (less accumulated amortization of $1,431,455) 1,242,323
Net deferred tax asset 178,002
Other assets 266,493
-----------
Total assets $161,144,593
===========
Liabilities
Policy liabilities:
Future policy benefits $140,556,840
Contract claims 4,165,355
-----------
Total policy liabilities 144,722,195
-----------
Other policyholders' funds 2,202,667
Other liabilities 3,648,419
Note payable 1,312,500
Deferred gain on reinsurance 2,216,800
Deferred gain on sale of real estate 301,530
-----------
Total liabilities $154,404,111
-----------
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 (272,751)
Treasury stock, at cost, 1,533 common shares (507,362)
Accumulated other comprehensive loss-net unrealized
investment losses, net of taxes of $395,428 (589,870)
------------
Total stockholders' equity 6,740,482
------------
Total liabilities and stockholders' equity $161,144,593
===========
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statements of Operations
and Comprehensive Income
Years Ended December 31,
1999 1998
Revenues
Premiums and other considerations $10,121,843 2,581,834
Net investment income 2,097,714 2,026,734
Net realized investment gains (losses) 782,054 (744,123)
Reinsurance expense allowance 3,934,706 4,744,786
Amortization of deferred gain 263,570 290,275
Other income 283,703 41,969
----------------------
Total revenues 17,483,590 8,941,475
----------------------
Benefits and Expenses
Net policy benefits 6,086,799 2,590,050
Commissions and general expenses 9,314,979 5,899,627
Interest expense 93,981 72,037
Amortization of costs in excess of net
assets of acquired business 239,662 239,662
Amortization of deferred acquisition costs 326,714 109,786
----------------------
Total benefits and expenses 16,062,135 8,911,162
----------------------
Earnings
Income before federal income tax expense
(benefit) 1,421,455 30,313
Federal income tax expense (benefit):
Current 494,813 (49,481)
Deferred (423,528) 93,783
----------------------
Net income (loss) 1,350,170 (13,989)
======================
Other Comprehensive Income (Loss)
Net unrealized investment gains (losses),
net of taxes of $930,628 in 1999 and $150,985
in 1998 (1,804,655) 271,063
Net unrealized investment holding gains
(losses) arising during period, net of
taxes of $11,856 in 1999 and $10,396 in 1998 (23,016) 23,800
Less: reclassification adjustment for net
investment gains included in net income,
net of taxes of $6,102 in 1999 and $17,017
in 1998 11,844 (38,960)
----------------------
Comprehensive income (loss) $ (465,657) 241,914
======================
Earnings Per Share
Basic earnings (loss) per common share $ 161.39 (28.42)
======================
Diluted earnings (loss) per common share $ 155.79 (28.42)
======================
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statements of Stockholders' Equity
Years Ended December 31,
1999 1998
Series A Preferred Stock
(Including Additional Paid-in Capital) $ 1,850,000 1,850,000
---------------------
Common Stock 876 876
---------------------
Additional Paid-in Capital
Balance, beginning of year 6,259,589 6,259,189
Change during year -- 400
--------------------
Balance, end of year 6,259,589 6,259,589
---------------------
Accumulated Deficit
Balance, beginning of year (1,440,233)(1,231,992)
Net income (loss) 1,350,170 (13,989)
Preferred stock cash dividends (182,688) (194,252)
---------------------
Balance, end of year (272,751)(1,440,233)
----------------------
Treasury Stock
Balance, beginning of year (500,642) (450,482)
Change during year (6,720) (50,160)
----------------------
Balance, end of year (507,362) (500,642)
----------------------
Accumulated Other Comprehensive Income
Balance, beginning of year 1,214,785 943,722
Change during year (1,804,655) 271,063
----------------------
Balance, end of year (589,870)1,214,785
----------------------
Total Stockholders' Equity $ 6,740,482 7,384,375
=====================
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statements of Cash Flows
Years Ended December 31,
1999 1998
Cash Flows from Operating Activities
Net income (loss) $ 1,350,170 (13,989)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 365,560 307,124
Amortization of deferred acquisition costs 326,714 109,786
Amortization of deferred gain on reinsurance (263,570) (290,275)
Premium and discount amortization (19,294) (63,490)
Net realized investment (gains) losses (782,054) 744,123
Deferred federal income tax expense (benefit) (423,528) 93,783
Decrease in reinsurance receivables 4,370,090 1,657,076
Decease (increase) in accrued investment income (89,515) 8,898
Increase in accounts receivable (43,930) (278,117)
Decrease in other assets 41,897 1,190,157
Decrease in policy liabilities (6,615,613)(2,561,142)
Increase in other liabilities 1,375,196 34,062
-----------------------
Net cash provided by (used in) operating
activities (407,877) 937,996
-----------------------
Cash Flows from Investing Activities
Proceeds from sales of investments available for
sale and principal repayments on mortgage loans 4,264,554 9,712,958
Purchases of investments available for sale (7,292,284)(8,845,902)
Net decrease in policy loans 160,178 457,490
Net increase in short-term investments (2,944,091) (693,527)
Proceeds from assumption/coinsurance agreement 2,310,314 759,626
Purchases of property and equipment (591,673) (287,655)
Purchase of surplus debenture -- (800,000)
Principal payments received on notes receivable 4,437,313 --
-----------------------
Net cash provided by investing activities 344,311 302,990
-----------------------
Cash Flows from Financing Activities
Proceeds from issuance of note payable 1,500,000 --
Principal payments on note payable (750,000) (250,000)
Deposits on policy contracts 1,241,182 1,227,606
Withdrawals from policy contracts (1,731,360)(1,951,562)
Preferred stock dividends paid (182,688) (194,252)
Treasury stock purchases (6,720) (50,160)
-----------------------
Net cash provided by (used in) financing
activities 70,414 (1,218,368)
-----------------------
Net increase in cash 6,848 22,618
Cash at beginning of year 120,332 97,714
-----------------------
Cash at end of year $ 127,180 120,332
=======================
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of Acap Corporation ("Acap" or "the
Company") include its wholly owned subsidiaries: American Capitol Insurance
Company ("American Capitol"); Imperial Plan, Inc. ("Imperial Plan"); and
Texas Imperial Life Insurance Company ("Texas Imperial"). All significant
intercompany transactions and accounts have been eliminated in
consolidation. Controlling interest in the Company, approximately 46% at
December 31, 1999, is owned by InsCap Corporation ("InsCap").
Acap is a life insurance holding company that focuses on the acquisition of
existing life insurance policies, either through direct purchase or the
acquisition of insurance companies. In May 1999, Acap began marketing
Medicare supplement health insurance. Acap's life insurance operations are
conducted through its wholly owned life insurance subsidiaries. Operations
are conducted from the corporate headquarters in Houston, Texas.
Approximately half of the Company's direct collected premium comes from
residents of the State of Texas, with no other state generating as much as
15% of the Company's direct collected premium.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such accounting principles
differ from prescribed statutory reporting practices used by the insurance
subsidiaries in reporting to state regulatory authorities. The more
significant differences from statutory accounting principles are:
(a) acquisition costs related to acquiring new business are deferred and
amortized over the expected lives of the policies rather than being charged
to operations as incurred; (b) future policy benefits are based on
estimates of mortality, interest, and withdrawals generally representing
the Company's experience, which may differ from those based on statutory
mortality and interest requirements without consideration of withdrawals;
(c) deferred federal income taxes are provided for temporary differences
between assets and liabilities reported for financial reporting purposes
and reported for federal income tax purposes; (d) certain assets
(principally furniture and equipment, agents' debit balances and certain
other receivables) are reported as assets rather than being charged to
accumulated deficit; (e) investments in fixed maturities available for sale
are recorded at fair value rather than at amortized cost; (f) for
acquisitions accounted for as a purchase, the identified net assets of the
acquired company are valued at their fair values and the excess of the
value of the consideration over the net assets assumed is amortized over a
period not to exceed nine years, whereas, for statutory purposes, this
excess is not allowed and acquisitions are accounted for as equity
investments; (g) two investment related reserves, the Asset Valuation
Reserve and the Interest Maintenance Reserve, are recorded under the
statutory basis of accounting; (h) assets and liabilities are reported
gross of reinsurance; (i) at the time of the initial ceding of a block of
business, a deferred gain is set up and amortized over the life of the
policies ceded; and (j) the decrease in surplus relief from reinsurance
ceded agreements is amortized through net income with an offset in surplus
netting to a zero effect on surplus under the statutory basis of
accounting.
Generally, the net assets of the Company's insurance subsidiaries available
for transfer to the parent company are limited to the amounts that the
insurance subsidiaries' statutory net assets exceed minimum statutory
capital requirements; however, payment of the amounts as dividends may be
subject to approval by regulatory authorities. As of December 31, 1999,
the amount of dividends available to the parent company from subsidiaries
not limited by such restrictions is approximately $560,000. The combined
net income of the Company's insurance subsidiaries as determined using
statutory accounting practices, was $7,318,723 and $1,976,913 for the years
ended December 31, 1999 and 1998, respectively. The consolidated statutory
stockholders' equity of the Company's insurance subsidiaries amounted to
$4,081,403 and $2,202,516 at December 31, 1999 and 1998, respectively. The
total adjusted statutory stockholders' equity of the Company's insurance
subsidiaries exceeds the applicable Risk-Based Capital requirements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain prior year amounts have been reclassified to conform to the current
year presentation. Such reclassifications had no impact on net income or
stockholders' equity as previously reported.
Investments
Investments are reported on the following bases:
All of the Company's debt securities are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 and are
classified as available-for-sale securities. Accordingly, such securities
are reported at fair value, with unrealized gains and losses, net of taxes,
excluded from earnings and reported as a separate component of
stockholders' equity as accumulated other comprehensive income (loss).
Mortgage loans on real estate are carried at unpaid principal balances.
Policy loans are carried at their unpaid principal balances. Policy loans
consist primarily of automatic borrowings against a policy's cash surrender
value to pay policy premiums. Interest accrues at rates ranging from 5% to
10%.
Short-term investments, consisting primarily of commercial paper, are
carried at cost.
Write-downs and other realized gains and losses, determined on the specific
identification method, are accounted for in the consolidated statements of
operations in net realized investment gains (losses).
Deferred Acquisition Costs
Deferred acquisition costs are the costs of policies acquired through the
purchase of insurance companies and represent the actuarially determined
present value of projected future profits from policies in force at the
purchase date.
For interest-sensitive whole life contracts, deferred costs are amortized
in relation to the present value of expected future gross profits from the
contracts. For traditional contracts, deferred costs are amortized in
relation to future anticipated premiums. The deferred costs are reviewed
to determine that the unamortized portion of such costs does not exceed
recoverable amounts. Management believes such amounts are recoverable.
The deferred acquisition costs for the year ended December 31, 1999 are
summarized as follows:
Balance at December 31, 1998 $2,460,183
Insurance in force acquired (363,511)
Amortized during the year (326,714)
---------
Balance at December 31, 1999 $1,769,958
=========
The amortization of deferred acquisition costs is expected to be between
$200,000 and $300,000 over each of the next five years.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives, which range from
five to ten years. Depreciation expense was $125,896 and $67,462 for the
years ended December 31, 1999 and 1998, respectively. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gains or
losses are recognized in income for the period. The cost of maintenance
and repairs is charged to income as incurred; significant renewals and
betterments are capitalized.
Costs in Excess of Net Assets of Acquired Business
The costs in excess of net assets of acquired business are amortized on a
straight-line basis over remaining terms of three years and seven years.
Recognition of Premium Revenue and Related Expenses, Liability for Future
Policy Benefits and Contract Claims
For traditional insurance contracts, premiums are recognized as revenue
when due. Benefits and expenses are associated with earned premiums so as
to result in their recognition over the premium-paying period of the
contracts. Such recognition is accomplished by means of the provision for
future policy benefits and the amortization of deferred policy acquisition
costs.
For contracts with mortality risk that permit the Company to make changes
in the contract terms (such as interest-sensitive whole life policies),
premium collections and benefit payments are accounted for as increases or
decreases to a liability account rather than as revenue and expense. In
addition, decreases to the liability account for the costs of insurance and
policy administration and for surrender penalties are recorded as revenues.
Interest credited to the liability account and benefit payments made in
excess of a contract liability account balance are charged to expense.
For investment contracts without mortality risk (such as deferred
annuities), net premium collections and benefit payments are recorded as
increases or decreases to a liability account rather than as revenue and
expense. Surrender penalties are recorded as revenues. Interest credited
to the liability account is charged to expense.
Reserves for traditional contracts are calculated using the net level
premium method and assumptions as to investment yields, mortality,
withdrawals, and dividends. The assumptions are based on past and expected
experience and include provisions for possible unfavorable deviation.
These assumptions are made at the time the contract is issued or, for
contracts acquired by purchase, at the purchase date. Interest assumptions
used to compute reserves ranged from 4% to 9% at December 31, 1999.
Reserves for interest-sensitive whole life policies and investment
contracts are based on the contract account balance if future benefit
payments in excess of the account balance are not guaranteed, or the
present value of future benefit payments when such payments are guaranteed.
The liability for contract claims represents the liability for claims
reported in excess of the related policy benefit reserve plus an estimate
of claims incurred but not reported.
Earnings per Share
Earnings per common share for 1999 were computed as follows:
Weighted
Income Average Shares Per Share
(Numerator) (Denominator) Amount
Net income $1,350,170
Preferred dividends (182,688)
Basic Earnings Per Share
Income available to common
stockholders 1,167,482 7,234 $161.39
Effect of Dilutive Securities:
Stock options -- 260
-----------------------------------------
Diluted Earnings Per Share
Income available to common
stockholders plus assumed
exercise $1,167,482 7,494 $155.79
=========================================
Earnings per common share for 1998 were computed as follows:
Weighted
Income Average Shares Per Share
(Numerator) (Denominator) Amount
Net loss $ (13,989)
Preferred dividends (194,252)
----------------
Basic and Diluted Loss Per Share
Income available to common
stockholders $ (208,241) 7,326 $(28.42)
==========================================
Participating Policies
Acap maintains both participating and nonparticipating life insurance
policies. Participating business represented approximately 11% of the life
insurance in force at December 31, 1999 and 1998, and 45% and 44% of life
insurance premium income at December 31, 1999 and 1998, respectively.
Dividends to participating policyholders are determined annually and are
payable only upon declaration of the Boards of Directors of the insurance
subsidiaries.
Federal Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
which requires that a deferred tax liability be recognized for all taxable
temporary differences and a deferred tax asset be recognized for an
enterprise's deductible temporary differences and operating loss and tax
credit carryforwards. A deferred tax asset or liability is measured using
the marginal tax rate that is expected to apply to the last dollars of
taxable income in future years. The effects of enacted changes in tax laws
or rates are recognized in the period that includes the enactment date.
Statements of Cash Flows
For purposes of reporting cash flows, cash includes cash on hand, in demand
accounts, in money market accounts, and in savings accounts.
Stock Based Compensation
The Company grants stock options to employees for a fixed number of shares
with an exercise price equal to the fair market value of the shares at the
date of grant. The Company accounts for stock options in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly recognizes no compensation expense for the stock option grants.
The pro forma disclosure required by SFAS No. 123 has not been included in
the financial statements since the effects of SFAS No. 123 are not material
to the financial statements.
Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in interim financial reports issued to
stockholders. The provisions of SFAS No. 131 did not have an impact on the
Company in 1998 since the Company did not have different operating
segments. The Company acquired a material block of health business during
1999, and accordingly, the Company began disclosing information about
different operating segments in 1999.
In June 1999, the FASB issued SFAS 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 No. 137
defers the effective date of SFAS No. 133 for one year. SFAS No. 133, as
amended, is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 generally requires that
derivatives embedded in hybrid instruments be separated from their host
contracts and be accounted for separately as derivative contracts. For
instruments existing at the date of adoption, SFAS No. 133 provides an
entity the option of not applying this provision to such hybrid instruments
entered into before January 1, 1998 and not substantially modified
thereafter. Consistent with the deferral of the effective date for one
year, SFAS No. 137 provides an entity the option of not applying this
provision to hybrid instruments entered into before January 1, 1998 or 1999
and not substantially modified thereafter. Upon implementation of SFAS No.
133, hedging relationships may be redesignated and securities held-to-
maturity may be transferred to available-for-sale or trading. The Company
is evaluating the impact, if any, SFAS No. 133 may have on its future
consolidated financial statements.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued
Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." This statement provides
guidance for the recording of a liability for insurance-related
assessments. The statement requires that a liability be recorded when all
of the following conditions have been met: an assessment has been imposed
or it is probable that an assessment will be imposed; the event obligating
an entity to pay an imposed or probable assessment has occurred on or
before the date of the financial statements; and the amount of the
assessment can be reasonably estimated. The Company adopted SOP 97-3 as of
January 1, 1999. The adoption of the provisions of SOP 97-3 did not have a
material impact on results of operations, financial condition, or cash
flows.
In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement specifies
the types of costs that must be capitalized and amortized over the
software's expected useful life and the types of costs that must be
immediately recognized as expense. For purposes of this SOP, internal-use
software is software acquired, internally developed, or modified solely to
meet the entity's internal needs for which no substantive plan exists or is
being developed to market the software externally during the software's
development or modification. Certain internal and external costs incurred
to develop internal-use computer software that relate to system design,
software configuration and interfaces, coding, testing, and installation to
hardware should generally be capitalized. The Company adopted SOP 98-1 as
of January 1, 1999. The adoption of the provisions of SOP 98-1 did not
have a material impact on results of operations, financial condition, or
cash flows.
2. Investments
Fixed Maturity Securities
The amortized cost and fair values of investments in fixed maturity
securities as of December 31, 1999 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Government securities $ 3,424,347 8,478 (27,854) 3,404,971
Corporate securities 24,551,909 43,131 (942,293) 23,652,747
Asset-backed securities 3,896,777 485 (226,838) 3,670,424
Mortgage-backed securities 7,280,825 222,347 (62,754) 7,440,418
---------- -------- ----------- -----------
$39,153,858 274,441 (1,259,739) 38,168,560
================================================
A summary of proceeds from the sales of investments in fixed maturity
securities, exclusive of proceeds from maturities, and the gross gains and
losses realized on those sales follows:
1999 1998
Proceeds on sales $970,720 5,054,569
====================
Gross realized gains on sales 275 70,668
Gross realized losses on sales (23,966) (19,186)
---------------------
Net realized gains (losses) on sales (23,691) 51,482
Realized gains on transactions other
than sales 5,745 4,495
--------------------
Net realized gains (losses) $ (17,946) 55,977
====================
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
Maturing in one year or less $ 1,071,395 1,071,836
Maturing after one year through five years 10,193,157 10,092,151
Maturing after five years through ten years 14,218,560 13,519,208
Maturing after ten years 6,389,921 6,044,947
---------- -----------
31,873,033 30,728,142
Mortgage-backed securities 7,280,825 7,440,418
---------- -----------
$39,153,858 38,168,560
======================
A summary of the fair value of mortgage-backed securities by type as of
December 31, 1999 follows:
Collateralized mortgage obligations:
Planned amortization class $4,513,298
Z 1,211,441
Sequential 1,045,353
Other 6,848
----------
6,776,940
Pass-through securities 663,478
---------
$7,440,418
=========
With a planned amortization class security, early repayments are applied
first to other tranches, and cash flows originally applicable to other
tranches are first applied to the planned amortization class tranche if
that tranche's originally scheduled cash flows are received later than
expected. The Z tranche defers all interest to other tranches until those
tranches are paid down, at which time accumulated interest and principal
are paid to this class. Sequential tranches are not supported by other
tranches.
As of December 31, 1999, 100% of the Company's fixed maturity securities
were rated "investment grade" (i.e., rated BBB-/Baa3 or higher by Standard
& Poor or Moody).
Mortgage Loans
The weighted average interest rate of mortgage loans held as of December
31, 1999 was 8.2%.
The distribution of principal balances on mortgage loans held as of
December 31, 1999 by contractual maturity follows. Actual maturities may
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without penalties.
Principal
Balance
Maturing in one year or less $ 54,046
Maturing after one year through five years 257,885
Maturing after five years through ten years 154,222
Maturing after ten years 561,637
---------
$1,027,790
=========
The distribution of mortgage loans by class of loan and geographic
distribution follows:
Principal
Balance
Commercial loans:
Texas $ 90,440
Tennessee 12,354
---------
$ 102,794
=========
Residential loans:
Tennessee $ 387,504
Alabama 370,253
Texas 70,893
Florida 61,711
Kentucky 34,635
---------
$ 924,996
=========
Investment Income
A summary of net investment income follows:
1999 1998
Interest on fixed maturities $ 1,805,248 1,676,508
Interest on mortgage loans 153,595 293,860
Interest on policy loans 43,934 42,769
Interest on cash & short-term investments 97,925 37,025
Miscellaneous investment income 109,442 40,192
--------------------
2,210,144 2,090,354
Investment expense (112,430) (63,620)
---------- -----------
$ 2,097,714 2,026,734
========== ===========
Unrealized Investment Gains (Losses)
The change between cost and fair value for fixed maturity securities, net
of taxes, follows:
Balance, January 1, 1998 $ 943,722
Change during the year 271,063
---------
Balance, December 31, 1998 1,214,785
Change during the year (1,804,655)
---------
Balance, December 31, 1999 $ (589,870)
==========
Net Realized Investment Gains (Losses)
A summary of net realized investment gains (losses) follows:
1999 1998
Fixed maturities $ (17,946) 55,977
Equity securities (including investment
in subsidiaries) -- (100)
Surplus debenture -- (800,000)
Other 800,000 --
-------------------
$782,054 (744,123)
====================
On December 16, 1998, Texas Imperial acquired (the "Statesman Transaction")
the stock of Statesman National Life Insurance Company ("Statesman").
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. 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
and wrote off its investment in Statesman of $100.
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. 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 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, and
recorded it as a realized gain in 1999.
Other Investment Disclosures
At December 31, 1999, bonds with a fair value of $5,349,309 were on deposit
with various regulatory authorities.
Investments, other than investments issued or guaranteed by the United
States Government or a United States Government agency or authority, in
excess of 10% of stockholders' equity at December 31, 1999 were as follows:
Balance
Sheet Amount Category
Commercial Credit $1,118,561 Fixed maturity
Merrill Lynch 1,078,691 Fixed maturity
Ingersoll Rand 932,317 Fixed maturity
Green Tree Home Equity Loan 928,260 Fixed maturity
General Motors 902,598 Fixed maturity
Conoco 878,968 Fixed maturity
La Farge Corp 873,811 Fixed maturity
AT&T 783,655 Fixed maturity
PNC Mortgage Security 679,558 Fixed maturity
3. Fair Values
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1999 are as follows:
Carrying Fair
Amount Value
Assets:
Fixed maturities $38,168,560 38,168,560
Mortgage loans 1,027,790 1,027,790
Policy loans 6,363,243 6,363,243
Short-term investments 4,514,275 4,514,275
Notes receivable 4,088,295 4,088,295
Liabilities:
Note payable 1,312,500 1,312,500
Estimated market values of publicly traded fixed maturity securities are as
reported by an independent pricing service. Estimated market values of
fixed maturity securities not actively traded in a liquid market are
estimated using a third party pricing system, which uses a matrix
calculation assuming a spread over U.S. Treasury bonds.
Policy loans have no stated maturity dates and are a part of
the related insurance contracts. Accordingly, it is not practicable for
the Company to estimate a fair value for them.
For mortgage loans, short-term investments, and notes receivable the
carrying amount is a reasonable estimate of fair value.
In that the note payable is a floating rate instrument, the principal
balance is a reasonable estimate of the note's fair value.
4. Note Payable
On March 31, 1999, Acap borrowed $1.5 million from Central National Bank of
Waco, Texas. Acap used $500,000 of the loan proceeds to repay an existing
loan at Central National Bank, with the balance of the loan proceeds used
to purchase a surplus debenture from American Capitol. At December 31,
1999, the outstanding principal balance of the loan was $1,312,500. The
loan is renewable each April 30 until fully repaid. The loan bears
interest at a rate equal to the base rate of a bank. Principal payments on
the loan are due quarterly. 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.
During 1997, American Capitol and Texas Imperial obtained revolving lines
of credit from a bank by signing unsecured promissory notes in the amount
of $200,000 and $150,000, respectively. Interest on both notes is at the
base interest rate of the bank. Both notes were renewed in 1999. As of
December 31, 1999 no funds have been borrowed on these notes.
5. Commitments and Contingencies
In conjunction with the sale of American Capitol's home office building on
November 21, 1997, American Capitol entered into a lease agreement with the
new owner of the building to lease approximately one quarter of the net
rentable area of the building, the area it then currently occupied, for
five years at an annual rental of $124,000. American Capitol has the
option to extend the lease for an additional five years at the end of the
initial term of the lease. An amendment was made to this lease agreement
in 1998 to lease an additional 8,424 square feet. The effective date of
the amendment was June 1, 1998 and runs concurrently with the original
lease agreement. The annual rental for the first year is approximately
$103,000 and the annual rental for the remaining years is approximately
$111,000. In 1999, a second amendment was made to the original lease
agreement to lease an additional 8,683 square feet. The effective date of
the amendment was September 1, 1999 and runs concurrently with the original
lease agreement. The annual rental for the first year is approximately
$108,000, with the annual rental for the remaining years of approximately
$113,000. American Capitol paid approximately $270,000 in rental payments
in 1999 in connection with this lease agreement.
Reinsurance
The Company accounts for reinsurance in accordance with Statement of
Financial Accounting Standards No. 113. In accounting for reinsurance, the
Company has reported ceded reserve credits and reinsurance claim credits as
reinsurance receivables. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
At December 31, 1999, reinsurance receivables with a carrying value of
$48.3 million were associated with Republic-Vanguard Life Insurance Company
("Republic"). Republic is rated "Excellent" by A.M. Best Company, an
insurance rating organization. At December 31, 1998, Republic had
statutory assets of approximately $811 million and statutory stockholders'
equity of approximately $39 million. At December 31, 1999, reinsurance
receivables with a carrying value of $48.7 million were associated with a
single reinsurer, Canada Life Assurance Company ("Canada Life"). At
December 31, 1998, Canada Life had statutory assets in excess of $28
billion and statutory stockholders' equity of approximately $3 billion.
Canada Life is rated "Superior" by A.M. Best Company. At December 31,
1999, reinsurance receivables with a carrying value of $1.9 million were
associated with Alabama Reassurance Company ("Alabama Re"). While Alabama
Re is currently rated "Fair" by A.M. Best Company, the Alabama Re
reinsurance receivables are secured by a trust account containing a $4.1
million letter of credit granted in favor of an insurance subsidiary of the
Company. At December 31, 1999, the remaining reinsurance receivables were
associated with various other reinsurers.
The Company is contingently liable for amounts ceded to reinsurers in the
event the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from reinsurer insolvencies. Other than its
exposure to Canada Life, Alabama Re and Republic as discussed above,
management does not believe the Company has significant concentrations of
credit risk related to reinsurance, or otherwise.
On March 5, 1998, American Capitol 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
started administering the policies beginning July 1, 1998. Between January
1, 1998 and July 1, 1998, Universal continued to administer the policies
and American Capitol paid 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 to Republic. Republic
paid American Capitol an initial ceding commission of $13.5 million.
American Capitol transferred $39.6 million in assets to Republic in
connection with the retrocession. Once Republic has recovered the initial
ceding commission, Republic must, at American Capitol's option, retrocede
back to American Capitol 100% of the policies. Upon this retrocession,
American Capitol then pays Republic 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.
The Canada Life, Republic, and Alabama Re reinsurance treaties are
representative of a key use of reinsurance by the Company. Immediately
following the purchase of a block of life insurance policies through the
Company's acquisition program, the Company may reinsure all or a portion of
the acquired policies. By doing so, the Company seeks to recover all or a
portion of the purchase price of the acquired policies and transfer the
risks associated with the policies to the reinsurer. The Company retains
the administration of the reinsured policies and seeks to profit from the
compensation the Company receives from the reinsurer for such policy
administration. The Company is entitled, but not obligated, to recapture
the policies at a price determined by a formula in the reinsurance treaty.
With regard to the policies not 100% reinsured with Canada Life, Republic,
or Alabama Re, the purpose of reinsurance is to limit the Company's
exposure to loss on any single insured. The Company reinsures the portion
of risks in excess of a maximum of $50,000 on the life of any individual
through various reinsurance contracts, primarily of the coinsurance and
yearly renewable term type.
Effective October 31, 1998, American Capitol coinsured from Statesman 100%
of its pre-standard Medicare supplement policies in force. American
Capitol paid Statesman an initial ceding commission of $1 million.
Statesman transferred approximately $800,000 in assets to American Capitol
in connection with the coinsurance.
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 guaranty associations, represented by
NOLHGA, 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, three
years after the closing of the assumption transactions, the actual results
of the Medicare supplement policies in question will be compared to the
projected results for the three year period and, if the actual results have
been better than projected ("excess profits"), the participating 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. At December 31, 1999, the excess profits owed to the guaranty
associations were approximately $1.5 million and are included in other
liabilities. 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 guaranty
associations and approximately $10 million in liabilities were transferred
to the Company in connection with the assumption transactions.
The effect of reinsurance on premiums and benefits follows:
Years ended December 31,
1999 1998
Direct premiums $16,546,293 7,917,467
Reinsurance assumed 4,396,346 9,314,872
Reinsurance ceded (10,820,796) (14,650,505)
--------------------------
Net premiums $10,121,843 2,581,834
=========================
Direct policy benefits $10,950,719 8,139,517
Reinsurance assumed 3,662,726 8,610,983
Reinsurance ceded (8,526,646) (14,160,450)
----------- --------------
Net policy benefits $ 6,086,799 2,590,050
============================
Litigation
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 (see
Note 1, "Net Realized Investment Gains (Losses)," for a description of 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 the Company's President in respect to the employee
benefit "Split Dollar" insurance arrangement. The action was filed without
advance demand or notification to the Defendants.
Although the Company believed that the claims by the Plaintiffs were
without merit, the parties have reached a settlement agreement in principle
providing for the parties to jointly petition the Court to enter an order
(1) dismissing without prejudice all of Planitiffs' claims against all of
the Defendants, and (2) to include in the order an agreement by Acap to
have any related party transaction approved by a committee or board of
directors consisting of a majority of outside directors. While Acap's
board of directors from inception has always consisted of a majority of
outside directors, which was the case at the time of the Statesman
Transaction, Acap consented to have this agreement by Acap included in the
Court's order. Acap also agreed to pay Plaintiffs' costs incurred in
connection with the Action. The Company expects that the settlement
agreement will be accepted by the Court and entered as its order.
Acap and its subsidiaries are involved in various lawsuits and legal
actions arising in the oridinary course of operations. Management is of
the opinion that the ultimate disposition of the matters will not have a
material adverse effect on Acap's results of operations or financial
position.
6. Supplemental Information Regarding Cash Flows
Cash payments for interest expense for the years ended December 31, 1999
and 1998 were $86,160 and $69,015, respectively. Net cash payments of
$144,000 and $208,143 for federal income taxes were made during the years
ended December 31, 1999 and 1998, respectively.
The following reflects assets acquired and liabilities assumed by the
Company relative to the coinsurance agreement covering the policies of
Universal, the consideration given for such reinsurance 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 agreement whereby all policies assumed from Universal
were 100% retroceded to Republic, the ceding commission received, and the
net cash flow related to the coinsurance agreement 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)
-----------
The following reflects assets acquired and liabilities assumed relative to
the coinsurance agreement covering the pre-standard Medicare supplement
policies of Statesman, the consideration given for such coinsurance, and
the net cash flow relative to such coinsurance on October 31, 1998:
Assets acquired $ 818,443
Liabilities assumed (1,818,443)
-----------
Cost of coinsurance $(1,000,000)
===========
Cash paid for coinsurance $(1,000,000)
===========
Net cash from coinsurance:
Cash acquired $ 1,759,626
Cash paid for coinsurance (1,000,000)
-----------
Net cash provided from coinsurance $ 759,626
===========
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 May 31, 1999:
Assets acquired $ 10,893,429
Liabilities assumed (10,093,429)
Credit received (800,000)
-----------
Gain from assumption --
===========
Net cash from assumption:
Cash acquired $ 1,510,314
Credit received 800,000
Gain from assumption --
----------
Net cash provided from assumption $ 2,310,314
==========
In connection with the funding amount related to the assumption agreement
for the policies of Statesman, the Company received credit in an amount
equal to the $800,000 surplus debenture Texas Imperial purchased from
Statesman during 1998.
7. Federal Income Taxes
Acap and American Capitol file a consolidated federal income tax return.
The other subsidiaries of the Company file separate federal income tax
returns. At December 31, 1999, Acap had a remaining tax net operating loss
carryforward of approximately $900,000 that will expire during the years
2002 through 2012 if not previously utilized. At December 31, 1999, the
Company had alternative minimum tax carryforwards of approximately $600,000
that are available for an indefinite period to reduce future regular
federal income taxes.
A portion of life insurance taxable income generated prior to 1984 is not
taxable unless it exceeds certain statutory limitations or is distributed
to stockholders, in which case it becomes taxable at ordinary corporate
rates. Such income is accumulated in a Policyholders' Surplus Account
that, at December 31, 1999, had a balance of approximately $4,800,000. No
provision has been made for income taxes related to this accumulation.
A reconciliation of income tax expense (benefit) for 1999 and 1998 computed
at the applicable federal tax rate of 34% to the amount recorded in the
consolidated financial statements is as follows:
1999 1998
Federal income tax expense at statutory rate $ 483,295 10,306
Small life insurance company special deduction (524,868) --
Change in valuation allowance 130,321 (70,780)
Tax refund (74,715) (6,238)
Tax rate differential on net operating loss
carryback -- 70,148
Other, net 57,252 40,866
---------------------
Total federal income tax expense $ 71,285 44,302
===================
The small life insurance company special deduction noted above is available
to life insurance companies with assets under $500 million. The deduction
is 60% of life insurance taxable income under $3 million. The deduction is
phased out for life insurance taxable income between $3 million and $15
million, with the deduction reduced by 15% of the life insurance taxable
income in excess of $3 million.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 are as follows:
Deferred Tax Assets:
Deferred gain on reinsurance $ 853,416
Deferred gain on sale of real estate 102,520
Net operating loss carryforwards 294,365
Alternative minimum tax credit carryforwards 618,183
Deferred policy acquisition costs 148,238
Net unrealized losses on available-for-sale securities 395,428
Other 24,547
----------
Total gross deferred tax assets 2,436,697
Less: valuation allowance (1,235,263)
----------
Deferred tax assets 1,201,434
----------
Deferred Tax Liabilities:
Policy reserves and policy funds 961,124
Other 62,308
----------
Deferred tax liabilities 1,023,432
----------
Net deferred tax asset $ 178,002
==========
A valuation allowance for the net operating loss carryforward, alternative
minimum tax credit carryforward, and a portion of other deferred tax
assets of $1,235,263 was established at December 31, 1999 against the
deferred tax asset. The net change in the total valuation allowance for
the years ended December 31, 1999 and 1998 was an increase of $130,321 and
a decrease of $70,780, respectively. Management believes that it is more
likely than not that the deferred tax assets that are not provided for in
the valuation allowance are recoverable.
8. Segment Information
The Company operates in two reportable segments: Life and Health.
Financial information by industry segment is summarized as follows:
Years Ended December 31
1999 1998
Revenues:
Life $ 8,670,058 9,380,588
Health 8,813,532 (439,113)
----------- -----------
Revenues $ 17,483,590 8,941,475
=========== ===========
Pretax Income (Loss) from Continuing
Operations:
Life $ 195,188 762,616
Health 1,226,267 (732,303)
----------- ------------
Pretax Income (Loss) from Continuing
Operations $ 1,421,455 30,313
=========== ===========
Identifiable Assets (as of December 31):
Life $153,330,325 156,580,584
Health 7,814,268 1,799,450
----------- -----------
Identifiable Assets $161,144,593 158,380,034
============ ===========
Revenues include premiums, net investment income, realized investment gains
and losses, policy and contract charges, and other income.
9. American Capitol Key Employee Stock Option Plan
On July 18, 1988, the Board of Directors of American Capitol approved a non-
qualified stock option plan (the "1988 Plan"). Under the terms of the 1988
Plan, stock options could only be granted on shares of common stock of Acap
owned by American Capitol. The options enabled the grantee to purchase the
common stock to which the options relate at the fair market value of the
common stock on the date the options were granted. During 1997, all of the
outstanding options granted under the 1988 Plan were exercised and the 1988
Plan was terminated.
Effective September 2, 1997, the Board of Directors of American Capitol
adopted an incentive stock option plan (the "1997 Plan"). The 1997 Plan
provides that the Board of Directors of American Capitol or the
Compensation Committee of the Board of Directors may grant stock options to
any employee determined to be a key employee. The stock options may only
be granted on shares of common stock of Acap owned by American Capitol.
The options enable the grantee to purchase the common stock to which the
options relate at the fair market value of the common stock on the date of
granting the options. The options vest five years from the date of grant
and must be exercised within ten years from the date of grant. As of
December 31, 1999, options to purchase 500 of the 759 shares of Acap common
stock owned by American Capitol had been granted, with a weighted average
option price of $244.80 per share.
Stock options granted for Acap Corporation common stock are summarized as
follows:
Number of Shares
Option Price 1999 1998
Outstanding at January 1 $244.80 500 500
Outstanding at December 31 $244.80 500 500
Available for future grant 259 243
10. Capital Stock
Acap has two classes of capital stock: preferred stock ($.10 par value,
authorized 80,000 shares), which may be issued in series with such
dividend, liquidation, redemption, conversion, voting, and other rights as
the Board of Directors may determine, and common stock ($.10 par value,
authorized 10,000 shares), the "Common Stock." The only series of
preferred stock outstanding is the Cumulative Exchangeable Preferred Stock,
Series A, $2.50 (Adjustable), the "Series A Preferred Stock."
Series A Preferred Stock
There are 74,000 shares of Series A Preferred Stock authorized, issued, and
outstanding. Acap pays dividends quarterly on the Series A Preferred Stock
(when and as declared by the Board of Directors). The amount of the
dividend is based on the prime rate of a Pittsburgh bank plus 2%. Acap has
the right, if elected by the Board of Directors, to redeem the Series A
Preferred Stock at the fixed redemption price of $27.50 per share. The
holders of Series A Preferred Stock are entitled to liquidating
distributions of $27.50 per share. The cumulative dividends and
liquidating distributions of the Series A Preferred Stock are payable in
preference to the Common Stock. The Series A Preferred Stock is nonvoting,
except as required by law and except that, if six quarterly dividends are
unpaid and past due, the holders of the Series A Preferred Stock may elect
two directors to Acap's Board of Directors. Prior to August 26, 1996, the
Series A Preferred Stock had been exchangeable, at the option of the
holders, into shares of common stock of Fortune National Corporation
("Fortune"). Effective August 26, 1996, Fortune adopted a plan of
dissolution and liquidation. Consequently, the exchange option of the
Series A Preferred Stock expired. There was no activity related to the
Series A Preferred Stock for the two years ended December 31, 1999 other
than payments of dividends.
Common Stock
A reconciliation of the number of shares of Common Stock issued and
outstanding follows:
1999 1998
Number of shares issued at January 1 8,759 8,759
Number of treasury shares held at January 1 (1,515) (1,306)
Treasury shares purchased during the year (18) (209)
----------------------
Number of shares outstanding at December 31 7,226 7,244
======================
<PAGE>
Acap Corporation
Independent Auditors' Report
The Board of Directors and Stockholders
Acap Corporation
We have audited the accompanying consolidated balance sheet of Acap
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for the years ended December 31, 1999
and 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Acap
Corporation and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the years ended December 31, 1999
and 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas
March 26, 2000
<PAGE>
Acap Corporation
Stockholder Information
Market Information
The common stock of Acap is traded over-the-counter with activity in the
stock reflected nationally on the OTC Bulletin Board electronic quotation
system of the National Association of Securities Dealers. The Company's
stock symbol is AKAP.
The table below presents the range of closing bid quotations for Acap's
common stock during the two most recent fiscal years.
1999 1998
High Low High Low
First quarter $530 501 400 370
Second quarter 511 511 475 396
Third quarter 511 511 450 442
Fourth quarter 511 511 480 442
The prices presented are bid prices, which reflect inter-dealer
transactions and do not include retail markups and markdowns or any
commission to the parties involved. As such, the prices may not reflect
prices in actual transactions.
Holders
The approximate number of holders of record of Acap's common stock as of
March 28, 2000 was 666.
Dividends
Acap declared no common stock dividends in 1999 or 1998. At present,
management anticipates that no dividends will be declared or paid with
respect to Acap's common stock during 2000. The covenants of a bank loan
require the advance approval of the bank in order to pay common stock
dividends.
Form 10-KSB
Stockholders may receive without charge a copy of the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission by
writing to Stockholder Services, Acap Corporation, 10555 Richmond Avenue,
2nd Floor, Houston, TX 77042.
Transfer Agent
The registrar and transfer agent for the Company's common stock is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, NY 10004.
For a change of name or address, or to replace lost stock certificates,
write to Continental at the address above or call (212) 509-4000.
Investor Relations
Requests for information should be directed by mail to Stockholder
Services, Acap Corporation, 10555 Richmond Avenue, 2nd Floor, Houston, TX
77042 or by calling (713) 974-2242.
Independent Auditors
The Company's consolidated financial statements for 1999 were audited by
the independent accounting firm of KPMG LLP, 700 Louisiana, Houston, TX
77002.
Annual Meeting
Stockholders are invited to attend the Annual Meeting of Stockholders,
which will be held on Monday, May 8, 2000 at 8:00 a.m. at the Company's
office at 10555 Richmond Avenue, Houston, Texas, on the second floor.
<PAGE>
Acap Corporation
Directors and Officers
Board of Directors of Acap
R. Wellington Daniels
Investor; Retired Director of National Accounts, American Cyanamid
William F. Guest
Chairman of the Board and President, Acap Corporation
C. Stratton Hill, Jr., M.D.
Physician
Officers of Acap
William F. Guest
Chairman of the Board and President
John D. Cornett
Executive Vice President and Treasurer
H. Kathleen Musselwhite
Secretary and Assistant Treasurer
Senior Officers of American Capitol and Texas Imperial
William F. Guest
Chairman of the Board
John D. Cornett
President
H. Kathleen Musselwhite
Secretary, Treasurer, and Controller
William A. Wood, III
Vice President
G. Michael Rambo
Vice President
Gene L. Ligon
Vice President
ACAP CORPORATION
10555 Richmond Avenue, 2nd Floor Houston, Texas 77042
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 38,168,560
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 1,027,790
<REAL-ESTATE> 0
<TOTAL-INVEST> 50,073,868
<CASH> 127,180
<RECOVER-REINSURE> 101,202,352
<DEFERRED-ACQUISITION> 1,769,958
<TOTAL-ASSETS> 161,144,593
<POLICY-LOSSES> 140,556,840
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,165,355
<POLICY-HOLDER-FUNDS> 2,202,667
<NOTES-PAYABLE> 1,312,500
0
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<TOTAL-LIABILITY-AND-EQUITY> 161,144,593
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<INVESTMENT-INCOME> 2,097,714
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<UNDERWRITING-AMORTIZATION> 326,714
<UNDERWRITING-OTHER> 9,314,979
<INCOME-PRETAX> 1,421,455
<INCOME-TAX> 71,285
<INCOME-CONTINUING> 1,350,170
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<NET-INCOME> 1,350,170
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