SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
Information Statement pursuant to Section 14(c)
Of the Securities Exchange Act of 1934
(Amendment No.1)
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
[ ] Definitive Information Statement
Acap Corporation
- -------------------------------------------------------------------------
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount of which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
ACAP CORPORATION
10555 Richmond Avenue, 2nd Floor
Houston, Texas 77042
---------------------------------
INFORMATION STATEMENT
OF ACTION BY WRITTEN
CONSENT OF STOCKHOLDERS
---------------------------------
To Our Stockholders:
On March 24, 2003, the Board of Directors of Acap Corporation (the
"Company") unanimously approved an amendment to the Company's
Certificate of Incorporation to effect a reverse stock split ("Reverse
Stock Split") whereby all outstanding shares of the Company's currently
outstanding $.10 par value common stock ("Common Stock") shall be
reconstituted on the basis of one (1) new share of $.10 par value common
stock ("New Common Stock") for each currently outstanding two (2) shares
of Common Stock. On April 4, 2003, holders of a majority of the Common
Stock acted by written consent in lieu of a special meeting of
stockholders to adopt the amendment to the Company's Certificate of
Incorporation. The Reverse Stock Split will be effective as of the
beginning of the day on May 13, 2003. This Information Statement is
being mailed to all stockholders of record as of the close of business
on March 24, 2003, the "Record Date."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTION, PASSED UPON
THE MERITS OR FAIRNESS OF THE TRANSACTION, OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE REVERSE STOCK
SPLIT. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
By Order of the Board of Directors:
H. Kathleen Musselwhite
Secretary
Houston, Texas
April 14, 2003
Page 1 of 19
INTRODUCTORY STATEMENT
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On March 24, 2003, the Board of Directors of Acap Corporation (the
"Company"), a Delaware corporation, unanimously approved an amendment to
the Company's Certificate of Incorporation to effect a reverse stock
split ("Reverse Stock Split") whereby all outstanding shares of the
Company's currently outstanding $.10 par value common stock ("Common
Stock") shall be reconstituted on the basis of one (1) new share of $.10
par value common stock ("New Common Stock") for each currently
outstanding two (2) shares of Common Stock. At March 24, 2003, the
"Record Date," 7,324 shares of Common Stock were outstanding. Each
share is entitled to one vote. Controlling interest in the Company,
approximately 45% at March 24, 2003, is owned by InsCap Corporation
("InsCap"), a Delaware holding company. The consent of the holders of a
majority of the issued and outstanding Common Stock is sufficient to
approve the Reverse Stock Split. On April 4, 2003, holders of a
majority of the Common Stock acted by written consent in lieu of a
special meeting of stockholders to adopt the amendment to the Company's
Certificate of Incorporation. The Reverse Stock Split will be effective
as of the beginning of the day on May 13, 2003. The Company's executive
offices are located at 10555 Richmond Avenue, 2nd Floor, Houston, Texas
77042. The Company's telephone number is 713-974-2242.
The Company's common stock 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
("OTCBB"). The Company's stock symbol is AKAP.
The table below presents the range of closing bid quotations for the
Company's common stock during the two most recent fiscal years.
2002 2001
---------- -------------
High Low High Low
---- --- ---- ---
First quarter . . . . . . $380 355 512 460
Second quarter. . . . . . 455 360 450 400
Third quarter . . . . . . 406 370 357 350
Fourth quarter. . . . . . 372 361 380 355
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.
The Company declared no common stock dividends in 2002 or 2001 and there
are no dividends in arrears. At present, management anticipates that no
dividends will be declared or paid with respect to the Company's common
stock during 2003. The covenants of a bank loan require the advance
approval of the bank in order to pay common stock dividends.
SUMMARY TERM SHEET
---------------------------------
This summary is qualified in its entirety by the more detailed
information set forth elsewhere in this Information Statement and
therefore this Information Statement should be read in its entirety.
* The reverse stock split. Through an amendment to the Company's
Certificate of Incorporation, all outstanding shares of the
Company's Common Stock are being reconstituted on the basis of one
(1) share of New Common Stock for each currently outstanding two
(2) shares of Common Stock. See TERMS OF THE TRANSACTION -
Amendment to Certificate of Incorporation.
Page 2 of 19
* Purpose. The major reason for the Reverse Stock Split is to bring
the number of holders of Common Stock below 300 so that the Company
will no longer have the expense of filing reports with the
Securities and Exchange Commission ("SEC"). A second purpose is
to provide stockholders owning only one share of Common Stock the
opportunity to dispose of their stock easily and without having to
pay brokerage commissions. See SPECIAL FACTORS - Purposes of the
Reverse Stock Split.
* What you will receive. Holders of Common Stock who own two or more
shares of Common Stock will receive one share of New Common Stock
in exchange for every two shares of Common Stock they own. See
TERMS OF THE TRANSACTION - Amendment to Certificate of
Incorporation.
* Fractional shares. No certificates for fractional shares of New
Common Stock will be issued. Instead, holders of fractional
shares will be paid $485 per share of Common Stock that becomes a
fractional share as a result of the Reverse Stock Split. Within
certain limitations, holders of fractional shares have the option
of purchasing an additional share of Common Stock for $485 in order
to round up their stock to a full share of New Common Stock. See
TERMS OF THE TRANSACTION - Fractional Shares.
* Going Private. As noted above, a major reason for effecting the
Reverse Stock Split is to bring the number of holders of Common
Stock below 300 so that the Company will no longer have the expense
of filing reports with the SEC. Once the Reverse Stock Split is
effective, the Company will apply for termination of registration
of the Company's common stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Thereafter, there will be
less information publicly available to the Company's remaining
stockholders, the public, and to market makers, and this could
adversely affect the trading market and market value for the
remaining shares. See SPECIAL FACTORS - Effects of the Reverse
Stock Split.
* Why a Reverse Stock Split and Why Now. The Board of Directors
considered alternatives to structuring the transaction as a
reverse stock split, but decided that the reverse stock split
format insured that the number of stockholders of the Company
will be fewer than 300 following the transaction and accomplishes
the transaction with transaction-related expenses that are
reasonable relative to the size of the transaction and the
anticipated savings. Major factors in the Board of Directors'
decision to effect the reverse stock split at this time were the
rapidly growing expenses of maintaining the registration of the
Company's common stock under the Exchange Act and the recognition
that the Company's common stock was likely to be de-listed from the
OTCBB in the near future. See SPECIAL FACTORS - Reasons for the
Reverse Stock Split and SPECIAL FACTORS - Alternatives Considered.
* Fairness of the Transaction. The Board of Directors believes that
the Reverse Stock Split is fair to the Company's unaffiliated
stockholders, including both those who will receive cash in lieu
of fractional shares and those who will receive post-Reverse Stock
Split shares of the Company's common stock. The Board of Directors
considers the Reverse Stock Spit fair to the stockholders who will
remain stockholders following the Reverse Stock Split because the
Board of Directors views the savings expected to result from
termination of registration under the Exchange Act and from the
reduction in the number of stockholders as more than offsetting
the reduction in the amount of publicly-available financial
information and any other benefits of having stock registered
under the Exchange Act. In setting the price to be paid for
fractional shares, the Board of Directors gave great weight to
the price at which the Common Stock had been trading in recent
Page 3 of 19
history on the OTCBB as that market was viewed as the best
indicator of what a willing buyer would pay to a willing seller.
The Board of Directors recognized that the Company's stock is not
traded as actively as many other companies, and therefore set the
price to be paid for fractional shares based upon the ratio of the
market price and net book value per share of a group of comparable
companies. The price set by the Board of Directors, $485 per
share, is a 41% premium over the closing bid price of the Common
Stock on the trading day immediately preceding the date on which
the Board of Directors selected the price. The Board of Directors
considered but rejected various other potential measures of value.
See SPECIAL FACTORS - Fairness of the Transaction.
* Fairness of the Process. The Board of Directors did not obtain a
report, opinion, or appraisal from an appraiser or financial
advisor with respect to the Reverse Stock Split and no
representative or advisor was retained on behalf of the
unaffiliated stockholders to review or negotiate the transaction.
The Board of Directors concluded that the expense of these steps
was not reasonable in relation to the size of the transaction being
contemplated and concluded it could adequately establish the
fairness of the Reverse Stock Split without such steps. The
Reverse Stock Split also was not structured so that approval of at
least a majority of the unaffiliated stockholders is required.
With respect to all of the above, the Board of Directors concluded
that there was sufficient representation in the decision-making at
the Board of Directors level to protect the interests of the
unaffiliated stockholders. This decision was based on the fact
that three of the four members of the Board of Directors are not
controlled by, or under common control with, the Company, and these
members of the Board of Directors are not employees of the Company.
See SPECIAL FACTORS - Fairness of the Transaction.
* Vote required. Under Delaware law, the amendment to the
Certificate of Incorporation to accomplish the Reverse Stock Split
requires the affirmative vote of a majority of the votes cast by
all holders of Common Stock. As permitted under Delaware law, the
holders of a majority of the shares entitled to vote have acted by
written consent dated April 4, 2003. Therefore, the amendment has
received sufficient votes to be effected. See TERMS OF THE
TRANSACTION - Amendment to Certificate of Incorporation.
* Effective date. The Reverse Stock Split is effective May 13, 2003.
See TERMS OF THE TRANSACTION - Amendment to Certificate of
Incorporation.
* Tax consequences. The issuance of the New Common Stock in exchange
for the Common Stock will be treated as a tax-free recapitalization
for federal income tax purposes. Accordingly, the exchange of
shares will not result in the recognition of gain or loss to a
stockholder, and the adjusted tax basis of a stockholder in the
stock will not change. Stockholders who receive cash in lieu of
fractional shares will recognize a capital gain or loss to the
extent of the difference between the stockholder's tax basis in
such shares and the amount of cash received in exchange therefore.
See SPECIAL FACTORS - Federal Income Tax Consequences.
* Dissenters' rights. Delaware law does not provide dissenters'
rights as the result of a reverse stock split. See OTHER
INFORMATION - Lack of Appraisal Rights.
TERMS OF THE TRANSACTION
-------------------------------------------
Amendment to Certificate of Incorporation. On March 24, 2003, the
Company's Board of Directors adopted a resolution to amend the Company's
capital structure to effect a 1-for-2 reverse stock split of the Common
Stock. By written consent dated April 4, 2003, stockholders
representing 3,868, 52.8%, of the
Page 4 of 19
7,324 shares of Common Stock then outstanding approved the Reverse Stock
Split. The written consents were obtained from InsCap Corporation,
William F. Guest, and John D. Cornett (see also OTHER INFORMATION -
Information Regarding Directors, Executive officers, and InsCap). No
other action or vote by the Company's stockholders is necessary under
Delaware law to effect the Reverse Stock Split. The amendment to the
Certificate of Incorporation will become effective on May 13, 2003, the
"Effective Date." The holders of New Common Stock following the Reverse
Stock Split will have the same rights under Delaware law as the holders
of Common Stock had prior to the Reverse Stock Split.
When the Reverse Stock Split is effective, approximately 339 of the 580
beneficial holders will cease to be stockholders of the Company, thus
permitting the Company to deregister its shares of common stock under
the Exchange Act, since the Company will have fewer than 300 beneficial
holders.
The text of the amendment to the Company's Certificate of Incorporation
effecting the Reverse Stock Split is attached as an exhibit to this
Information Statement.
Fractional Shares. No certificates for fractional shares of New Common
Stock will be issued. A fractional share arises in the instance of a
stockholder who holds a number of shares of Common Stock that is not
evenly divisible by two (whether a single share or some other "odd"
number) such that one share out of the stockholder's total Common Stock
holdings is equal to a half share of New Common Stock (a "fractional
share"). Such a stockholder has two options with regard to his/her
fractional share. One option is that such stockholder may tender
his/her existing share of Common Stock that represents a fractional
share of New Common Stock following the Reverse Stock Split and receive
cash in the amount of $485 for that share of Common Stock. (See SPECIAL
FACTORS - Fairness of the Transaction for information on how the price
to be paid for cash in lieu of fractional shares was determined.) The
other option is that such a stockholder may elect to forego the cash
payment and instead may pay $485 to purchase the additional share of
Common Stock needed so that his/her total holding of Common Stock (after
the purchase) is evenly divisible by two (i.e., "round up" his/her
fractional holding to a whole share of New Common Stock). Stockholders
whose tender of stock along with the payment necessary to round up their
holdings is not received by the Company prior to 5:00 P.M., Houston
time, on May 12, 2003 will be deemed to have elected to receive cash in
lieu of fractional shares, as described above.
Shares of Common Stock available to be purchased by stockholders
electing to round up their holdings (1) will be provided only from
shares of Common Stock surrendered by other stockholders who have
elected to receive cash in lieu of fractional shares, (2) will be
provided only to the extent that the number of stockholders of record
will remain under 300, (3) will therefore be of limited availability and
(4) will be available to stockholders electing to round up their
holdings on a "first-come, first-served" basis. As the Company receives
elections from stockholders desiring to round up their holdings, it will
"match up" shares of Common Stock surrendered by other stockholders with
the shares of Common Stock needed to provide whole shares of New Common
Stock to stockholders who elect to round up. To the extent the Company
limits, in order to keep the number of stockholders under 300, the
number of stockholders actually allowed to round up, those stockholders
who are not "matched up" with surrendered fractional shares will instead
receive the cash in lieu of fractional shares. However, the Board of
Directors anticipates that the Company will not need to limit the number
of stockholders electing to round up to remain under 300 stockholders of
record. The Board of Directors bases this anticipation on the fact that
over the past few years the Company has heard from a number of
stockholders owning only one or a few shares of Common Stock stating
their desire to sell such Common Stock and inquiring about the mechanics
of doing so, while the Company has not had a single inquiry from such a
stockholder stating their desire to purchase additional shares.
Page 5 of 19
Letters of transmittal containing instructions regarding the submission
of existing Common Stock certificates to exchange for New Common Stock
certificates, cash, or some combination thereof, as appropriate, are
included with this mailing to stockholders of record as of the Record
Date. No cash payment or delivery of a new certificate will be made to
a stockholder until such stockholder's outstanding certificates,
together with the properly executed letter of transmittal, are received
by the Company. Stockholders having fractional interests in shares of
New Common Stock are required to instruct the Company prior to May 13,
2003, if they elect to round up such interests and to enclose the
appropriate payment with their letters of transmittal. Stockholders
seeking to have their fractional holdings rounded up will be promptly
notified by the Company as to the amount of their resulting share
ownership and will receive a refund of any amount paid by them to the
Company for additional fractional shares in excess of the number of
fractional shares actually made available to them for rounding up. The
Company will hold cash in lieu of fractional shares for the benefit of
each applicable stockholder, without interest, until the stockholder
tenders his or her shares of Common Stock along with the letter of
transmittal. It is possible that the Company will not be able to
contact stockholders for whom the Company does not have a valid address.
In such instances, or in cases where stockholders fail to communicate
with the Company, the Company may be required, under applicable escheat
laws, to transfer the funds to be held by state authorities.
Stockholders tendering their shares will not be obligated to pay
brokerage fees or commissions or any transfer taxes with respect to the
sale of their fractional interests pursuant to the Reverse Stock Split.
SPECIAL FACTORS
---------------------------
Qualifications and Assumptions. Included in this section of this
Information Statement and in various other sections of this Information
Statement are statements that are based upon the assumption that no
stockholders elect to round up their fractional shares. To the extent
that some stockholders elect to round up their fractional shares, these
statements will differ from the actual events. Further, the number of
stockholders of the Company that is used in this Information Statement
is based on the number of holders of record on the Record Date. This
understates the number of beneficial stockholders of the Company to the
extent that each securities clearing agency or broker shown as a holder
of record holds the stock for a number of beneficial owners. Also, the
bid and asked prices used in this Information Statement are from the
OTCBB which reflects inter-dealer transactions and does not include
retail mark-ups and mark-downs or any commission to the parties
involved. As such, the prices may not reflect prices in actual
transactions.
Purposes of the Reverse Stock Split. The major reason for the Reverse
Stock Split is to bring the number of holders of Common Stock below 300
so that the Company will no longer have the expense of filing reports
with the SEC, while still enabling the Company to pursue its business
plans without significant change. The reasons for undertaking the
Reverse Stock Split now are described below in "Reasons for the Reverse
Stock Split." Assuming no stockholders who own fewer than two shares of
Common Stock elect to round up their fractional shares, the Reverse
Stock Split will reduce the number of the Company's stockholders from
approximately 580 to approximately 241. Once the number of stockholders
is under 300, the Company will terminate its reporting obligations under
the Exchange Act. It is estimated that the termination of the Exchange
Act reporting obligations and the reduction in the number of
stockholders will result in total annual savings of approximately
$93,500. The estimated savings are categorized as follows:
Expense Approximate amount
------- ------------------
Audit fees $24,000
Printing and postage 1,500
Page 6 of 19
Exchange agent fees 7,800
Other direct costs 2,700
Internal costs to prepare and
review filings 57,500
-------
Total $93,500
=======
In reviewing the estimated savings from the termination of the Company's
common stock under the Exchange Act, it is important to note that the
Company's insurance subsidiaries, the only significant assets of the
Company, are required by state regulatory authorities to prepare their
financial statements in accordance with statutory accounting principles
("SAP") and not generally accepted accounting principles ("GAAP").
Significant differences between SAP and GAAP are discussed in the notes
to the Company's annual financial statements. The Company's management
uses SAP financial information for managing the operations of the
Company and not GAAP financial information. Therefore, the costs of
preparing GAAP financial information are incurred only for complying
with the requirements of the Exchange Act. Stockholders may obtain SAP
financial information on the Company's insurance subsidiaries through
the Company, the state insurance departments for those states in which
the insurance subsidiaries are licensed to conduct business, and through
the National Association of Insurance Commissioners.
While Company management believes that the annual savings noted above
represent a reasonable estimate, it is possible that the actual savings
resulting from the Reverse Stock Split will be more or less than the
amount estimated. The Company cannot guarantee that the benefits of the
termination of registration under the Exchange Act will be accomplished
as rapidly as currently expected, or at all.
Another purpose of the Reverse Stock Split is to allow stockholders
owning only one share of Common Stock to dispose of their stock easily
and without having to pay brokerage commissions. Such commissions on a
sale of a single share of stock may be significant in relation to the
market value of the share involved. The Board of Directors believes
that the relatively small financial investment in the Company by those
stockholders owning a single share of Common Stock limit those
stockholders' opportunities to realize the value of their shares through
market transactions. Small lots of stock often sell poorly, with
numerous stockholders frozen into very small investment positions from
which they can extricate themselves only with the payment of a brokerage
fee that is disproportionate to the actual per share value of the stock
to the small stockholder.
The Board of Directors noted that the Company has not used the Company's
common stock to raise capital or make acquisitions for many years. The
Board of Directors does not believe that the Company will use the
Company's common stock for such purposes in the foreseeable future.
Reasons for the Reverse Stock Split. The primary reasons for the
structure of the Reverse Stock Split are that (1) it insures that the
number of stockholders of the Company will be fewer than 300 following
the transaction, (2) it has been structured to accomplish the
transaction with transaction-related expenses that are reasonable
relative to the size of the transaction and the anticipated savings, (3)
it allows stockholders owning only one share of Common Stock to dispose
of their stock easily and without having to pay brokerage commissions,
and (4) it provides a means for stockholders who would otherwise cease
to become stockholders of the Company an opportunity, subject to the
limitations of the Reverse Stock Split, to remain stockholders by
rounding up.
A significant factor in the timing of the Reverse Stock Split is the
recognition by the Company's Board of Directors that the expenses
associated with maintaining registration of the Company's common stock
under the Exchange Act have increased significantly over the past few
years, and the belief of the Company's Board of Directors that
additional significant increases to such expenses can be expected in the
near term. For example, the fees paid to KPMG in connection with the
audit of the Company's financial statements have risen from $95,000 for
the review and audit of the Company's financial
Page 7 of 19
statements for 2000 to $125,000 for the audit of the Company's financial
statements for 2002, a 32% increase in two years. The Company believes
its experience with regard to audit fees is consistent with what has
transpired in the general marketplace for audit services.
Another significant factor in the timing of the Reverse Stock Split is
the recognition by the Company's Board of Directors that a major effect
of the Reverse Stock Split, the de-listing of the Company's common stock
from the OTCBB, is likely to occur in the near future, even in the
absence of the Reverse Stock Split. As noted in the Company's Form 10-
QSB dated March 31, 2002, the OTCBB has announced plans to replace the
OTCBB with a new market, the Bulletin Board Exchange. Information
published by the Bulletin Board Exchange indicates that the new market
is scheduled to launch in the fourth quarter of 2003, pending approval
by the SEC, and that the OTCBB will be discontinued six months following
the launch of the Bulletin Board Exchange. The Company does not meet
the proposed qualifications for listing on the Bulletin Board Exchange.
Therefore, if the changes noted above come to pass, even in the absence
of the Reverse Stock Split, the Company's common stock will lose its
listing on the OTCBB.
The ratio of 1-for-2 used in the Reverse Stock Split was selected by the
Board of Directors as it was the smallest ratio that would bring the
number of stockholders of record under 300. If a larger ratio had been
used, the cost to the Company of purchasing fractional shares would have
been higher (since more fractional shares would be subject to receiving
cash in lieu of fractional shares).
Alternatives Considered. The Board of Directors considered other means
of reducing the number of stockholders below 300 while still enabling
the Company to pursue its business plans without significant change.
The Board of Directors considered and rejected making a tender offer.
The Board of Directors determined it is not sufficiently predictable
whether enough holders of small numbers of shares would make the effort
to tender their shares, and such offer would be required to be extended
to all stockholders, so the desired result of reducing the number of
stockholders below 300 would not be assured. In addition, by extending
the offer to all stockholders, the cash cost could be much greater,
which would raise financing issues deemed by the Board of Directors to
be inappropriate at this time.
The Board of Directors considered and rejected a merger in which holders
of odd lots would have had their shares converted automatically into a
right to receive a cash payment. While, like the Reverse Stock Split, a
merger would have guaranteed the success in reducing the number of
stockholders below 300, a merger transaction would have been more
complicated and costly to effect.
Effects of the Reverse Stock Split. Assuming no stockholders elect to
round up their fractional shares, the Reverse Stock Split will decrease
the number of outstanding common shares from 7,324 shares of Common
Stock to approximately 3,451 shares of New Common Stock and reduce the
number of stockholders from approximately 580 to approximately 241.
As soon as practicable after the Effective Date, the Company intends to
apply for termination of registration of the Company's common stock
under the Exchange Act. Once terminated, the Company will not be
obligated to file reports under the Exchange Act, including reports by
insiders of transactions in the Company's common stock. Thus, upon
termination of the Exchange Act registration, the amount of information
publicly available to the Company's remaining stockholders, the public,
and to market makers will be significantly reduced, and this could
adversely affect the trading market and market value for the remaining
shares. Generally, broker-dealers may give less attention to companies
that do not file reports with the SEC. As a result, the market price
for the New Common Stock may be lower than it would otherwise be. The
reduced flow of information may also cause the trading prices of the
shares that
Page 8 of 19
are not purchased to be more volatile. However, the Company is unable
to predict with certainty the effect of the termination of Exchange Act
registration on either the market price of the New Common Stock or the
volatility of such price. Further, the Company expects to save an
estimated $93,500 per year as of result of eliminating the costs of
complying with the Exchange Act.
The Company's common stock is currently traded in the over-the-counter
market, and last sales prices are reported on the OTCBB, which is a
regulated quotation service that displays real time quotes, last sales
prices, and volume information in over-the-counter equity securities.
There are currently six known market makers in the Company's common
stock. Upon termination of the Exchange Act registration, the Company's
common stock will cease to be eligible to be traded on the OTCBB. The
market makers in the Company's common stock may seek to have the
Company's common stock quoted on the Pink Sheets, a centralized
quotation service that collects and publishes market maker quotes for
over-the-counter securities. Whether or not the New Common Stock is
quoted in the Pink Sheets is not dependent of the Company taking or
failing to take some action in that regard. In order for the New Common
Stock to be quoted in the Pink Sheets, it is necessary that one or more
broker-dealers act as market makers and sponsor the New Common Stock on
the Pink Sheets. While the Company expects that one or more broker-
dealers will take the actions necessary for the New Common Stock to be
quoted in the Pink Sheets, there can be no assurance that any broker-
dealer will be willing to take such actions. It should be noted, as
discussed in more detail above (see "Reasons for the Reverse Stock
Split"), that the Company is likely to lose its market through the OTCBB
in the near future even in the absence of the Reverse Stock Split.
The Reverse Stock Split gives stockholders owning fewer than two shares
of Common Stock and electing to receive cash in lieu of fractional
shares the opportunity, which cannot be predicted to reoccur, to sell
their stock at a price related to current market prices without
incurring the cost of service fees or a broker's commission.
Stockholders who receive cash in lieu of fractional shares will have no
further interest in the Company with respect to cashed out shares and
will no longer be entitled to vote as a stockholder or share in the
Company's assets or earnings, if any, with respect to such cashed out
shares.
The Reverse Stock Split will not alter voting rights and other rights
of stockholders.
The Reverse Stock Split will reconstitute the Company's capital such
that stated capital, which consists of the par value per share of common
stock multiplied by the number of shares of common stock issued, will
decrease from $876 to approximately $415 and additional paid in surplus
will decrease from $6,241,963 to $6,037,269, all of which will occur on
the Effective Date, with the actual figures following the Reverse Stock
Split depending upon the number of stockholders who elect to receive
cash or round up. The effects of the reconstitution of the Company's
capital are due to the fact that the par value of the New Common Stock
will remain at $.10 per share following the Reverse Stock Split but the
number of shares issued will be reduced and due to the fact that
fractional shares acquired by the Company in exchange for cash (i.e.,
cash in lieu of fractional shares) that are not used to provide shares
to stockholders electing to round up their holdings will be retired.
Assuming that no stockholders elect to round up their fractional shares,
and based upon the figures at December 31, 2002, the Reverse Stock Split
will (on a pro forma basis): decrease assets by $205,155 (the amount
paid for fractional shares); have no effect on liabilities; decrease
stockholders' equity by $205,155; increase the book value per common
share from $1,032.08 per share of Common Stock to $2,131.23 per share of
New Common Stock; have no effect on the income statement; increase the
2002 basic earnings per share from $278.33 to $591.10 and the 2002
diluted earnings per share from $274.18 to $581.74; and have no effect
on the ratio of earnings to fixed charges (which ratio was 13.47 at
December 31, 2002 and negative 3.35, with a $1,530,790 deficiency, at
December 31, 2001).
Page 9 of 19
Assuming no stockholders elect to round up their fractional shares, the
Reverse Stock Split will increase the percentage ownership of each
remaining stockholder of the Company (whether affiliated or
unaffiliated) by approximately 6.1%. InsCap currently owns 45.3% of
the Company's Common Stock. William F. Guest, the Company's President,
currently owns 56.8% of InsCap and 4.8% of the Company's Common Stock,
resulting in the beneficial ownership of 50.1% of the Company's Common
Stock. Assuming no stockholders elect to round up their fractional
shares, the Reverse Stock Split will increase InsCap's ownership of the
Company from 45.3% to approximately 48.0% and will increase Mr. Guest's
beneficial ownership of the Company from 50.1% to approximately 53.1%.
Both InsCap and Mr. Guest have indicated they will not elect to round up
their fractional shares, but will instead elect to receive the cash in
lieu of fractional shares.
The federal tax consequences related to the Reverse Stock Split are
described below under "Federal Income Tax Consequences."
The Company currently has no plans to change the corporate structure or
business of the Company following the Reverse Stock Split. The Company
is not currently contemplating any extraordinary transaction, such as a
merger, reorganization or liquidation; any purchase, sale or transfer of
a material amount of assets; any material change in the present dividend
policy, indebtedness or capitalization; or any change in the present
Board of Directors or management. While the Company has no current
plans with regard to the items listed above, one should recognize that
the Company is in a dynamic environment. Given this environment and the
Company's relatively small size, as opportunities and challenges arise,
the Company might indeed pursue a material transaction from the types
listed above.
While it has not done so in the last two years, the Company has on
occasion in the past purchased shares of its common stock on the open
market as treasury stock and may continue to do so in the future. The
Company has no plans to materially increase the volume of such purchases
following the Reverse Stock Split. The termination of Exchange Act
registration will reduce the restrictions on the Company and its
affiliates related to the purchase and sale of the Company's common
stock.
Fairness of the Transaction. The Board of Directors believes that the
Reverse Stock Split is fair to the Company's unaffiliated stockholders,
including both those who will receive cash in lieu of fractional shares
and those who will receive shares of New Common Stock. The Reverse
Stock Split was unanimously approved by the Board of Directors.
Fairness of the Substance of the Transaction
--------------------------------------------
The Board of Directors considered the Reverse Stock Split fair to the
stockholders who will receive shares of New Common Stock in that the
Board of Directors viewed the savings to be generated from the
termination of registration under the Exchange Act and from the
reduction in the number of stockholders as more than offsetting the
reduction in the amount of publicly-available financial information and
any other benefits of having stock registered under the Exchange Act.
Such savings are estimated at over $93,500 per year. A significant
factor in the Board of Directors' considerations was the likelihood that
the Company's common stock would be de-listed from the OTCBB in the near
future, even in the absence of the Reverse Stock Split.
Based on the factors noted below, the Board of Directors considered
the price to be paid for fractional shares to be fair to both those
stockholders who will receive cash in lieu of fractional shares and
those stockholders who will receive shares of New Common Stock.
The Company's Common Stock has traded in recent years in the over-the-
counter market. That market has represented the principal outlet for
a stockholder who wished to dispose of his or her shares. The
Page 10 of 19
Board of Directors viewed that market as the best indicator of what a
willing buyer would pay to a willing seller, neither one of whom is
under any compulsion to buy or sell, after considering such factors as
their estimate of the Company's value as a whole, its earnings and
performance history, its prospects, the prospects of the industry as a
whole, an assessment of the control parties and management of the
Company, liquidity of the market, and other factors that typically bear
on a common stock purchase or sale decision. The Board of Directors
gave great weight to this factor in setting the price to be paid for
fractional shares. The cash price determined by the Board of Directors
to be paid for fractional shares, $485, exceeds the price a stockholder
selling his or her shares in the over-the-counter market would likely
receive (but for the Reverse Stock Split), based on recent OTCBB
quotations, and the Reverse Stock Split provides a means for a small
stockholder wishing to dispose of his or her shares to do so without
brokerage costs. The Board noted that the daily closing bid price of
the Common Stock during the two years ending March 24, 2003 had at all
times been less than $485. The Board also noted that approximately 629
shares of Common Stock had traded on the OTC Bulletin Board in the three
months ended March 24, 2003, which is well in excess of the 450 shares
that represent the maximum number of shares subject to being cashed out
pursuant to the Reverse Stock Split, and that the average daily closing
bid price for that period was $366.67. The Board also considered it
significant that the Reverse Stock Split is structured to permit those
stockholders who would otherwise receive cash in lieu of fractional
shares to elect to purchase additional shares of Common Stock, subject
to the limitations stated herein, and thereby not be required to take
cash in lieu of fractional shares. By doing so, a one-share Common
Stock stockholder may elect to remain a stockholder and continue to
participate in the equity of the Company. The cash price to be paid for
fractional shares represents a 41% premium over the closing bid price of
the Common Stock on the trading day immediately preceding March 24,
2003.
The Board of Directors recognized that the Company's stock is not traded
as actively as many other companies, and that this may be a factor in
the market price of the Company's stock. As a reasonableness test of
the market price of the Company's common stock, and therefore the cash
price to be paid for fractional shares, the Board of Directors
considered the relationship between the market price and the net book
value per share of the Company as compared to such relationship for
similarly situated companies with stocks that may be more actively
traded than the Company's. The Board of Directors reviewed the
relationship between the market price and net book value of publicly-
traded companies in the same Standard Industrial Classification as the
Company with market capitalizations of less than $50 million. The Board
of Directors noted that such companies had, on average, market prices
that were 47% of such companies' net book values. The companies
included in the computation of the average were National Security Group,
Inc., Penn Treaty American Corporation, Atlantic American Corporation,
Kentucky Investors, Inc., United Trust Group, Inc., Standard Management
Corporation, and Southern Security Life Insurance Company. Given the
weight the Board of Directors assigned to the market price of the Common
Stock on the OTCBB and the results of the review of the relationship
between the market price and net book value per share of similarly
situated companies, the Board of Directors considered it fair to set the
cash price to be paid for fractional shares at $485, approximately 47%
of the Company's December 31, 2002 net book value of $1,032.08.
While, as discussed above, the Board of Directors considered the
relationship of market value to net book value important in its
deliberations, the Board of Directors did not view net book value alone
(i.e., without reference to the market value) to be a reliable measure
of fair value. The Board of Directors noted that net book value does
not state all assets and liabilities at market value nor does it take
into account the other considerations that might be part of the "willing
buyer/willing seller" evaluation discussed above. In the Company's
financial statements, certain assets are reflected at market value (such
as fixed maturities available for sale, and cash) whereas others are not
(such as property and equipment). Also, liabilities are generally not
reflected at market value. Significantly, contract reserves, which
represent over 89% of the Company's total liabilities, are not reflected
at market value but are generally reflected based on assumptions as to
investment yields, mortality, withdrawals, and dividends that were
Page 11 of 19
made at the time the contracts were issued or, for contracts acquired by
purchase, at the purchase date. So, while the Company has recognized
the unrealized gains (approximately $1,621,549 at December 31, 2002)
from the Company's fixed maturities available for sale resulting from
the current low interest rate environment, the Company's contract
reserves continue to be reflected based on interest rates in excess of
the current market interest rates. Were the Company's contract reserves
to be revalued based on current market interest rates, such liability
values would increase and thereby decrease the net book value. No study
has been performed to determine the value of the contract reserves based
on current assumptions and to restate other liabilities and assets that
are not currently so stated at fair value. Such a study would be based
on a large number of subjective assumptions and be very expensive to
perform. Given the other considerations discussed herein, the Board of
Directors decided not to pursue such a study.
The Board of Directors viewed the liquidation value of the Company to be
an inappropriate measure for the purpose of evaluating the cash price to
be paid for fractional shares. There is no present intention of
liquidating the Company or selling a substantial portion of its assets.
The Company's principal stockholder is not considering the sale of its
interest or the sale of the Company as a whole. Further, the Reverse
Stock Split will only result in the termination of an equity interest by
the stockholders reduced to fractional shares as a result of the Reverse
Stock Split who do not elect to retain such equity interest in the
Company. The total of all such shares represent only 5.8% of the total
outstanding shares of Common Stock prior to the Reverse Stock Split and
the amount applicable to any single stockholder is only one share of
Common Stock. Liquidation value is also a difficult concept to apply to
a life insurance enterprise, such as the Company. Liquidation value
involves valuing the individual assets of a company as if each asset
were to be sold and determining the resulting value of the company after
satisfying the company's liabilities. For many industries, liabilities
are neither significant nor long term. However, a life insurance
enterprise's liabilities are both significant and long term (continuing
until the last policy has terminated by death, surrender, or lapsing).
While valuing the Company's assets on a liquidation basis would be
relatively simple, since the primary assets are marketable securities,
the determination of the offsetting liability value would be difficult,
based on a large number of subjective assumptions, and would be
relatively expensive to perform. Given the other considerations
discussed herein, the Board of Directors decided not to pursue the
valuation of the liabilities to pursue the liquidation value approach.
Since the Company has had an erratic history of earnings, the Board of
Directors viewed a comparison to industry price-earnings multiples as
inappropriate. While the Company had basic earnings per share for 2002
of $278.33, the Company had losses per share of $137.04 in 2001 and
$83.00 in 2000. The Company has had a net loss in three of the last
five years and in ten of the eighteen years that the Company has been
reporting to the SEC. Price-earnings multiples are not applicable with
regard to net losses. Given the relatively small size of the Company's
insurance operations, the Company is subject to a greater degree of
volatility in mortality, morbidity, and other aspects of policy-related
performance than larger insurance operations. This volatility makes any
attempt to predict a "normal" pattern of earnings quite speculative.
An indicator of going concern value is the discounted future cash
receipts approach. Given the other considerations discussed herein, the
Board of Directors decided not to pursue this approach due to the
volatility in the Company's recent history, which makes setting
assumptions regarding future performance less reliable, and due to the
significance of the subjective assumptions that would be involved in
such an approach, as well as the expense associated with the approach.
There have been no offers for the Company, nor have any offers been
solicited.
There have been no purchases of Common Stock made by affiliates of the
Company in the most recent two years in excess of $60,000. On August
28, 2002, Mr. Guest exercised options to purchase 100 shares of Common
Stock. The options were approaching the end of their exercise period
and would have
Page 12 of 19
expired if not exercised. The exercise price was $264 per share and the
OTCBB bid price on the date of exercise was $370 per share. On May 10,
2002, Mr. Guest purchased 37,000 shares of the common stock of InsCap in
an arms'-length transaction. InsCap's primary asset is its holding of
Company Common Stock. The price Mr. Guest paid for the 37,000 shares of
InsCap common stock valued the Company Common Stock at $355 per share,
the OTCBB bid price of the Company Common Stock at the time the
transaction was negotiated.
Fairness of the Process
-----------------------
In addition to the fairness of the substance of the transaction, the
Board of Directors believes that the process by which decisions were
made regarding the transaction is fair to the Company's unaffiliated
stockholders.
The Board of Directors decided not to engage an appraiser or financial
advisor with respect to the Reverse Stock Split, and consequently, no
report, opinion or appraisal has been received from such a person. The
Board of Directors obtained a quote for procuring a fairness opinion
from a qualified valuation and financial advisor. That quote, including
the actuarial appraisal required by the advisor, indicated a total cost
in the range of $150,000 to $225,000, plus additional amounts depending
on developments. Given the Board of Directors' knowledge of actuarial
appraisals, the Board of Directors concluded that the range quoted was
reasonable for the assignment and that it was unlikely that the Company
could obtain a fairness opinion for an amount substantially less than
the range quoted. The Board of Directors concluded, given the other
considerations discussed herein, that the expense of obtaining a
fairness opinion was not reasonable in relation to the size of the
transaction being contemplated and decided not to obtain such an
opinion. The Board of Directors concluded it could adequately establish
the fairness of the Reverse Stock Split without such an opinion by
addressing the factors and considerations described in this Information
Statement.
The present four-member Board of Directors of the Company has three
independent members (i.e., members who are not controlled by, or under
common control with, the Company and who are not employees of the
Company). All of the independent members of the Board of Directors
voted in favor of the Reverse Stock Split. No representative or advisor
was retained by such members on behalf of the unaffiliated stockholders
to prepare a fairness evaluation or otherwise appraise or negotiate the
proposed transaction. No independent committee composed of the three
independent members of the Board of Directors was formed to appraise or
negotiate the proposed transaction. The independent members considered
whether to form such a committee and concluded that they had sufficient
independence within the framework of the entire Board of Directors so as
to make such a committee unnecessary. The independent members also
concluded that they had sufficient independence to fairly represent the
interests of the unaffiliated stockholders without the expense of
retaining an external representative or advisor to negotiate the
proposed transaction.
The Reverse Stock Split was not structured so that approval of at least
a majority of unaffiliated stockholders is required. The Company has
not solicited proxies since 1992, although it regularly solicited
proxies prior to that year. The Company found that only a very small
portion of the unaffiliated stockholders ever responded to the
solicitation of proxies. With this history in mind, the Board of
Directors concluded not to structure the Reverse Stock Split to require
the approval of a majority of the unaffiliated stockholders due to the
concern that (1) the expense associated with soliciting the proxies
would be disproportionate to the number of proxies returned and (2) that
with a light return of proxies that stockholders representing few shares
could unduly influence the results of the solicitation. Given the other
considerations discussed herein, the Board of Directors concluded that
the fairness of the transaction could be determined without such a
solicitation.
Page 13 of 19
The Company and its Board of Directors and executive officers have not
made any provision for granting unaffiliated holders of Common Stock
access to the Company's records, beyond the inspection and other rights
that might be available under Delaware law, or to obtain counsel for
unaffiliated holders at the expense of the Company and its Board of
Directors and executive officers. The Board of Directors believes that
it has the experience and independence to determine the fairness of the
transaction without such provisions.
Federal Income Tax Consequences. The material federal income tax
consequences to the Company and shareholders resulting from the Reverse
Stock Split are summarized below. The summary is based on existing
United States federal income tax law, which may change, even
retroactively. This summary is not binding on the Internal Revenue
Service (the "IRS"). The applicable laws may be changed, resulting in
United States federal tax consequences different from those set forth
below. The Company has not sought, and will not seek, any ruling from
the IRS or opinion of counsel with respect to the statements made in the
following summary, and there can be no assurance that the IRS will not
take a position contrary to such statements or that any such contrary
position taken by the IRS would not be sustained by a court. There can
be no assurance and none is given that the IRS or the courts will not
adopt a position that is contrary to the statements contained in this
summary. This summary does not discuss all aspects of federal income
taxation that may be important to you in light of your individual
circumstances, and many stockholders may be subject to special tax
rules. In addition, this summary does not discuss any state, local,
foreign, or other tax considerations. This summary assumes that
stockholders have held the Common Stock as capital assets at all
relevant times.
The issuance of the New Common Stock in exchange for the Common Stock
will be treated as a tax-free recapitalization for federal income tax
purposes. Accordingly, the exchange of shares will not result in the
recognition of gain or loss to a stockholder, and the adjusted tax basis
of a stockholder in the stock will not change. The exchange of shares
should have no federal tax consequences to the Company.
Stockholders with fewer than two shares of Common Stock who receive cash
in lieu of fractional shares will recognize a capital gain or loss to
the extent of the difference between the stockholder's tax basis in such
shares and the amount of cash received in exchange therefore.
Stockholders who own more than two shares of Common Stock, who would
have a fractional interest as a result of the Reverse Stock Split, and
do not round up their fractional interest, will receive both shares of
New Common Stock and cash in lieu of fractional shares. The federal
income tax treatment of the cash received will be as described above,
unless the Reverse Stock Split has the "effect of the distribution of a
dividend." If the Reverse Stock Split has the effect of the
distribution of a dividend, the cash received in lieu of fractional
shares will be treated as a dividend to the extent of the stockholder's
ratable share of the Company's undistributed earnings and profits, and
the balance of the cash will be treated as received in exchange for
property. Taxable gain or loss will be realized on this exchange of
property equal to the difference between the portion of the cash not
treated as a dividend and the stockholder's adjusted tax basis in the
Common Stock exchanged for cash. The federal income tax rules that
determine whether the cash received will have the "effect of the
distribution of a dividend" are beyond the scope of this discussion and
should be discussed with a personal tax advisor.
Stockholders electing to round up their fractional interest will not
recognize a taxable gain or loss at the time of the round up
transaction.
THE FOREGOING DISCUSSION SUMMARIZING CERTAIN FEDERAL INCOME TAX
CONSEQUENCES DOES NOT REFER TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF
ANY SPECIFIC STOCKHOLDER. STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS FOR MORE SPECIFIC AND DEFINITIVE
Page 14 of 19
ADVICE AS TO THE FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THE
TRANSACTIONS, AS WELL AS ADVICE AS TO THE APPLICATION AND EFFECT OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
OTHER INFORMATION
-------------------------------
Information Regarding Directors, Executive Officers, and InsCap. Brief
statements setting forth the business experience during the past five
years of each of the Company's directors and executive officers and
setting forth information regarding InsCap appear below.
Roy L. Butler: Mr. Butler has served as a director of the Company since
May 2001 and is a member of the Audit Committee. Mr. Butler served as
President of Sentinel American Life Insurance Company from March 1988 to
March 1991, and prior to that served as Chief Financial Officer of an
insurance company. Mr. Butler is a certified public accountant and has
been self-employed in that profession since leaving his position with
Sentinel American Life Insurance Company. Mr. Butler's business address
is Mr. Roy L. Butler, CPA, 2626 Royal Circle, Kingwood, TX 77339.
William F. Guest: Mr. Guest has served as a director of the Company
since 1984 and is Chairman of the Board. Mr. Guest has served as
Chairman of the Board and President of the Company since 1985. Mr.
Guest is the Chairman of the Board and Chief Executive Officer of each
of the Company's life insurance subsidiaries and is a director and the
President of InsCap. Mr. Guest is an attorney and prior to joining the
Company and its affiliates was engaged in the private practice of law in
Houston, Texas for many years. Mr. Guest's business address is Acap
Corporation, Attention: Mr. William F. Guest, 10555 Richmond Avenue, 2nd
Floor, Houston, Texas 77042.
C. Stratton Hill, Jr., M.D.: Dr. Hill has served as a director since
1984 and is a member and the Chairman of the Audit Committee. Dr. Hill
is also the Medical Director of the Company's life insurance
subsidiaries. Dr. Hill is a physician and has been engaged in the
practice of medicine in Houston, Texas for many years. Dr. Hill's
business address is Dr. C. Stratton Hill, Jr., 2924 Ella Lee, Houston,
TX 77019.
Jarred W. Sloan: Mr. Sloan has served as a director since November 2001
and is a member of the Audit Committee. Mr. Sloan has served as the
Vice President and Treasurer for the Clayton Foundation for Research for
over five years. Mr. Sloan is a certified public accountant, and prior
to joining the Clayton Foundation for Research was engaged in the
practice of public accounting for many years. Mr. Sloan's business
address is Clayton Foundation for Research, Attention: Mr. Jarred W.
Sloan, One Riverway, Suite 1440, Houston, TX 77056.
John D. Cornett: Mr. Cornett has served as Executive Vice President of
the Company since 1989 and as Treasurer of the Company since 1985. Mr.
Cornett is a director and the Secretary of InsCap and the President and
Chief Operating Officer and a director of each of the Company's life
insurance subsidiaries. Mr. Cornett is a certified public accountant
and, prior to joining the Company and its affiliates in 1984, Mr.
Cornett held positions with American General Life Insurance Company and
Prudential Insurance Company of America. Mr. Cornett's business address
is Acap Corporation, Attention: Mr. John D. Cornett, 10555 Richmond
Avenue, 2nd Floor, Houston, Texas 77042.
H. Kathleen Musselwhite: Ms. Musselwhite has served as Assistant
Treasurer of the Company since 1995 and as Secretary of the Company
since March 1997. Ms. Musselwhite is also the Treasurer and Controller
and the Secretary of each of the Company's life insurance subsidiaries.
Ms. Musselwhite is a certified public accountant and, prior to joining
the Company and its affiliates in 1995, Ms. Musselwhite served as
Assistant Controller of American General Corporation. Ms. Musselwhite's
business address is Acap Corporation, Attention: Ms. H. Kathleen
Musselwhite, 10555 Richmond Avenue, 2nd Floor, Houston, Texas 77042.
InsCap Corporation: InsCap is a Delaware holding company with no
significant assets and no business operations other than its holdings in
the Company. InsCap's address is 10555 Richmond Avenue, 2nd Floor,
Houston, Texas 77042.
None of the above-listed directors and officers nor InsCap have been
convicted in a criminal proceeding during the past five years (excluding
traffic violations or similar misdemeanors.) None of the above-listed
directors and officers nor InsCap was a party to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree, or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state
securities laws. All of the above-listed directors and officers are
citizens of the United States of America.
Interest in Securities of the Company. Set forth below is information
with respect to each person, entity or group known to have been the
beneficial owner of more than 5% of the Company's Common Stock, its sole
voting class of securities, as of March 24, 2003.
- -----------------------------------------------------------------------
Name and Address of Shares Percent Pro Forma -
Beneficial Owner Beneficially of Class Post Reverse Stock Split
Owned (1) Shares Owned Percent
- -----------------------------------------------------------------------
InsCap Corporation 3,317 45.29% 1,658 48.04%
10555 Richmond Avenue,
2nd Floor
Houston, Texas 77042
William F. Guest 3,670(2) 50.11% 1,834 53.14%
10555 Richmond Avenue,
2nd Floor
Houston, Texas 77042
(1) Except as otherwise indicated, the beneficial owner of the shares
exercises sole voting and investment powers.
(2) Mr. Guest owns directly and indirectly 499,572 shares, or 56.75%,
of InsCap's issued and outstanding Common Stock, the sole voting class
of securities of InsCap, and as the controlling stockholder of InsCap is
deemed to be the beneficial owner of the shares of the Company owned by
InsCap. In addition to the shares of Company Common Stock owned
indirectly through InsCap, Mr. Guest directly owns 226 shares of Company
Common Stock and is the beneficial owner of 127 shares of Company Common
Stock through a trust for which he acts as trustee.
Set forth below is information with respect to shares of each class of
voting equity security of the Company and InsCap beneficially owned by
the directors and executive officers of the Company as of March 24,
2003.
Page 16 of 19
- ------------------------------------------------------------------------
Amount and Pro Forma -
Name of Nature of Post Reverse
Beneficial Beneficial Percent Stock Split
Owner (1) Ownership (1) of Class (2) Sh. Owned Percent
- ------------------------------------------------------------------------
Company Common Stock
--------------------
William F. Guest 3,670 (3) 50.11% 1,834 53.14%
John D. Cornett 298 (4) 4.01% 149 4.26%
H. Kathleen Musselwhite 100 (5) 1.35% 50 1.43%
All Officers and
Directors 4,068 (6) 54.07% 2,033 57.27%
InsCap Common Stock
-------------------
William F. Guest 499,572 (3) 56.75% 499,572 56.75%
John D. Cornett 11,000 1.25% 11,000 1.25%
All Officers and
Directors 510,572 58.00% 510,572 58.00%
(1) Except as otherwise indicated, the beneficial owner of the shares
exercises sole voting and investment powers. The address of each of the
officers and directors is c/o Acap Corporation, 10555 Richmond Avenue,
2nd Floor, Houston, Texas 77042.
(2) Percentages are calculated on the basis of the amount of
outstanding securities plus, for each person or group, any securities
that person or group has the right to acquire within 60 days pursuant to
option, conversion privileges, or other rights.
(3) The Company Common Stock shown as owned by Mr. Guest includes 226
shares he owns directly, 127 shares owned indirectly by him through a
trust for which he acts as trustee, and 3,317 shares (45% of the
Company's Common Stock) owned indirectly by him through InsCap, the
Company's parent, of which company Mr. Guest is the controlling
stockholder.
(4) The Company Common Stock shown as owned by Mr. Cornett includes
198 shares he owns directly and 100 shares for which Mr. Cornett holds a
currently exercisable option to purchase.
(5) The Company Common Stock shown as owned by Ms. Musselwhite
reflects 100 shares for which Ms. Musselwhite holds a currently
exercisable option to purchase.
(6) Includes options to purchase 200 shares that are currently
exercisable.
In addition to the foregoing, each of the directors and executive
officers of the Company holds options to purchase 45 shares of Company
Common Stock. The options were issued May 13, 2002. Except for the
option granted to Mr. Guest, the options vest five years from the date
of grant, must be exercised within ten years from the date of grant, and
have an exercise price of $400, the bid price of the Common Stock on the
OTCBB as of the date of grant. The option granted to Mr. Guest vests
four years after the date of grant, must be exercised within five years
of the date of grant, and has an exercise price of $440, 110% of the bid
price of the Common Stock on the OTCBB as of the date of grant.
Lack of Appraisal Rights. Delaware law permits appraisal rights only if
the certificate of incorporation so provides or in connection with a
merger or sale of substantially all of the assets of a company. The
Company's Certificate of Incorporation does not contain such a
provision, and, therefore, there are no appraisal rights for the
Company's stockholders in connection with the Reverse Stock Split.
However, other rights or actions under common law may or may not exist
for stockholders who believe they may be aggrieved by the Reverse Stock
Split. If such rights or actions exist, their nature and the extent of
such rights or actions are uncertain and may vary depending upon facts
or circumstances. Stockholder
Page 17 of 19
challenges to corporate action in general are related to the fiduciary
responsibilities of corporate officers and directors and to the fairness
of corporate transactions.
Source and Amount of Funds. Assuming all applicable stockholders elect
to receive cash in lieu of fractional shares, the total amount of funds
required by the Company to fund cash payments is estimated to be
approximately $218,250. In addition, the Company will pay all expenses
in connection with the Reverse Stock Split. The following table sets
forth the approximate amount of such expenses expected to be incurred in
connection with the Reverse Stock Split.
Expense Approximate Amount
------- ------------------
Legal fees $25,000
Printing and postage 1,400
-------
Total $26,400
=======
The Company will make all payments related to the Reverse Stock Split
from current cash reserves.
Financial Information and Incorporation by Reference. A copy of the
Company's Annual Report to Stockholders for the fiscal year 2002 is
incorporated herein by reference. A copy of this report accompanies
this Information Statement. Upon request to the Company's offices, the
Company will provide to any stockholder of the Company, without charge,
a copy of any and documents filed with the SEC incorporated by reference
herein that is not included with this Information Statement.
Summarized financial information is presented below:
December 31, 2002 December 31, 2001
Balance sheet information:
- -------------------------
Cash and invested assets $ 50,781,709 50,003,138
Reinsurance receivables 91,744,493 94,362,428
Other assets 4,273,667 9,539,289
Total assets 146,799,869 153,904,855
Policy liabilities and other
policyholders' funds 132,251,450 136,728,863
Note payable 562,500 812,500
Other liabilities 4,576,971 9,757,371
Total liabilities 137,390,921 147,298,734
Total stockholders' equity 9,408,948 6,606,121
Book value per common share 1,032.08 658.38
2002 2001
------ ----
Statement of operations information:
- -----------------------------------
Total revenues 18,425,144 20,248,651
Total benefits and expenses 16,088,277 21,496,604
Net income (loss) 2,149,032 (806,113)
Basic earnings (loss)
per common share 278.33 (137.04)
Diluted earnings (loss)
per common share $ 274.18 (137.04)
Ratio of earnings to
fixed charges 13.47 (3.35)
Page 18 of 19
Available Information. The Company is currently required to file
reports and other information with the SEC under the Exchange Act.
Copies of these reports and other information are available at the SEC's
public reference facilities at Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and the regional office of the SEC
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can also be obtained at
prescribed rates by writing to the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
These filings can also be viewed at the SEC's website at
http://www.sec.gov.
ESPECIALLY IN VIEW OF THE FACT THAT AFFECTED STOCKHOLDERS HAVE THE
ELECTION TO TAKE CASH IN LIEU OF FRACTIONAL SHARES OR TO ROUND UP
FRACTIONAL SHARES, STOCKHOLDERS ARE ENCOURAGED TO REVIEW THE INFORMATION
CONTAINED IN THIS INFORMATION STATEMENT AS WELL AS THE FINANCIAL
STATEMENTS AND OTHER INFORMATION IN THE COMPANY'S ANNUAL REPORT FOR THE
YEAR ENDED DECEMBER 31, 2002.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Acap Corporation (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State
of Delaware, does herby adopt the following Amendment to its Certificate
of Incorporation and hereby certifies as follows:
FIRST:
At a meeting of the Board of Directors of the Corporation called and
convened on the 24th day of March, 2003, a resolution was duly adopted
setting forth a proposed amendment to the Certificate of Incorporation,
and declaring he said amendment advisable and proposing said amendment to
a majority of the Corporations stockholders eligible to vote thereon for
consideration thereof. The resolution of the Board of Directors setting
forth the proposed amendment is as follows:
RESOLVED, that the Board of Directors of Acap Corporation (the
"Corporation"), to effectuate a reverse stock split, does hereby declare
it advisable and in the best interest of the Corporation, and does hereby
recommend to the stockholders of the Corporation, that the Certificate of
Incorporation of the Corporation as amended and in effect on the date
hereof (the "Certificate of Incorporation") be amended by changing
Article Four, Section 1 of the Certificate of Incorporation of the
Corporation to read as follows:
ARTICLE FOUR
Authorized Shares
Section 1. Authorized Shares. Upon the filing of the Certificate
of Amendment to the Certificate of Incorporation causing this
amendment to become effective in accordance with the General
Corporation Law of the State of Delaware (the "Effective Time"),
each two (2) shares of Common Stock, par value ten cents ($.10) per
share, of the Corporation issued and outstanding immediately prior
to the Effective Time ("Old Common Stock") shall be, without any
action of the holder thereof, automatically reclassified as and
converted into one (1) share of Common Stock, par value ten cents
($.10) per share ("New Common Stock"), of the Corporation.
Notwithstanding the immediately preceding paragraph, no fractional
shares of New Common Stock shall be issued to the holders of record
of Old Common Stock in connection with the foregoing
reclassification of shares of Old Common Stock, and no certificates
or scrip
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representing any such fractional shares shall be issued. In lieu of
such fraction of a share, and upon the surrender of the certificate
representing the Old Common Stock as provided below, any holder of
Old Common Stock who would otherwise be entitled to receive a
fraction of a share of New Common Stock shall be entitled to receive
an amount of cash as set by the Corporation's Board of Directors in
lieu of any fractional shares.
Each stock certificate that, immediately prior to the Effective
Time, represented shares of Old Common Stock shall, from and after
the Effective Time, automatically and without the necessity of
presenting the same for exchange, represent that number of whole
shares of New Common Stock into which the shares of Old Common Stock
represented by such certificate shall have been reclassified. A
letter of transmittal will provide the means by which each holder of
record of a certificate that represented shares of Old Common Stock
shall receive, upon surrender of such certificate, a new certificate
representing the number of whole shares of New Common Stock into
which the shares of Old Common Stock represented by such certificate
shall have been reclassified. Each stockholder who owns fewer than
two (2) shares of Old Common Stock of record will not have,
immediately following the Effective Time, any rights with respect to
the New Common Stock and will only have the right to receive cash in
lieu of the fractional shares to which the stockholder would
otherwise be entitled.
As of the Effective Time, the total number of shares which the
Corporation shall have authority to issue is:
(a) five thousand (5,000) shares of common stock of a par
value of ten cents ($.10) per share;
(b) eighty thousand (80,000) shares of preferred stock of the
par value of ten cents ($.10) per share, with such classes
or series, such voting powers, full or limited, or no
voting powers, and such designation, preferences and
relative, participating, optional or other special rights
and qualifications as set forth in the resolutions adopted
by the Board of Directors of the Corporation authorizing
issue from time to time.
SECOND:
Thereafter, pursuant to the aforesaid resolution of the Board of
Directors of the Corporation, and upon receiving written consent of
a majority of the Corporation's stockholders entitled to vote
thereon, the aforesaid amendment was duly approved by the
Corporation's stockholders, in accordance with the applicable
provisions of the General Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, said Corporation has caused this certificate to be
signed by William F. Guest, its President, and attested by H. Kathleen
Musselwhite, its Secretary, this ---- day of---------, 2003.
ATTEST: ACAP CORPORATION
- ----------------------------- -------------------------------
H. Kathleen Musselwhite William F. Guest
Secretary President
ACKNOWLEDGEMENT
BE IT REMEMBERED THAT, on the --- day of---------, 2003, there personally
appeared before me, the undersigned authority, William F. Guest and H.
Kathleen Musselwhite, President and Secretary, respectively, of ACAP
CORPORATION, a corporation of the State of Delaware, which is described
in and which executed the foregoing Certificate, known to me personally
as such, and each of them, being duly sworn by me, duly executed such
Certificate before me and acknowledged the same to be their act and deed
and the act and deed of such Corporation, and that the seal affixed to
said Certificate is the common or corporate seal of the Corporation, and
that the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my and seal of office the day and
year aforesaid.
-------------------------------------------
Notary Public in and for the State of Texas
My commission expires: --------------
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