UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 21, 1998
LINCOLN HERITAGE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 001-14067 36-3427454
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
1250 Capital of Texas Hwy, Bldg. 3, Suite 100
Austin, TX 78746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 328-0075
Not applicable
(Former name or former address, if changed since last report)
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Item 4. Changes in Registrant's Certifying Accountant
On December 21, 1998, with the approval of the Audit Committee of the
Board of Directors of Lincoln Heritage Corporation (the "Company"), the Company
approved the appointment of Deloitte & Touche LLP as its independent
accountants to audit the Company's consolidated financial statements as of
December 31, 1998, and for the year then ended. The firm of Killman, Murrell &
Company, P.C. ("Killman") was dismissed as the Company's independent accountants
as of such date. The Company effected the change in auditor because it
determined that it would benefit from the expertise and resources of a larger
auditing firm.
The report of Killman on the Company's financial statements as of
December 31, 1997 and 1996 and for the years then ended did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. Such financial statements
were the first financial statements prepared by the Company in accordance with
generally accepted accounting principles ("GAAP") and Regulation S-X, and were
necessitated by the Company's initial public offering. Prior thereto, the
Company's principal operating subsidiaries prepared financial statements under
statutory accounting principles required for filings with state insurance
administrators.
During the course of preparing the Company's consolidated financial
statements in accordance with GAAP and clearing SEC Staff accounting comments on
the Registration Statement (Reg. No. 333-50525), there were numerous discussions
between Company financial personnel and representatives of Killman regarding
various issues, some of which were unique to the Company's particular facts and
circumstances. Certain of these discussions led to material adjustments to the
Company's internally prepared statements. The Company relied on Killman in
determining the appropriate accounting treatment and, as set forth above,
Killman issued an unqualified report thereon. However, the Company does not
believe that such discussions included disagreements with Killman on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of
Killman, would have caused Killman to make reference to the subject matter of
such disagreement in its reports during the years covered by such audited
financial statements or from the period January 1, 1998, to the date of their
dismissal. Moreover, the Company does not believe there were any disagreements
that were either resolved or unresolved to Killman's satisfaction. The Company
has requested that Killman furnish it a letter addressed to the Commission
stating whether it agrees with the statements in this Item 4. A copy of that
letter, dated December 30, 1998, is filed as Exhibit 16 to this Form 8-K.
Item 7. Financial Statements and Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
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<S> <C>
16 Letter regarding change in certifying accountant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINCOLN HERITAGE CORPORATION
Dated: December 30, 1998 By: /s/ Nicholas M. Powling
--------------------------------
Name: Nicholas M. Powling
President and Chief Executive Officer
[LETTERHEAD OF KILLMAN, MURRELL & COMPANY, P.C.]
December 30, 1998
Securities and Exchange Commission 450 5th Street, N.W.
Washington, DC 20549
Ladies and Gentlemen:
We were previously the principal accountants for Lincoln Heritage Corporation
("Lincoln Heritage") and, under the date of March 11, 1998 except for Note 18
which is as of October 15, 1998, we reported on the consolidated financial
statements of Lincoln Heritage Corporation and subsidiaries as of and for the
years ended December 31, 1997 and 1996. On December 21, 1998, we were informed
by Lincoln Heritage that it is Lincoln Heritage's intention to terminate our
appointment as principal accountants. We have read Lincoln Heritage
Corporation's statement included under Item 4 of its Form 8-K dated December 30,
1998 and do not agree with such statements.
The registration statement on Form S-1 completed on October 27, 1998, included
the consolidated balance sheets of Lincoln Heritage Corporation and subsidiaries
as of December 31, 1997 and 1996 and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Numerous contentious accounting issues were
discussed with the Company's management either before the initial filing of the
registration statement or as a result of comments included in the SEC's comment
letters. These contentious accounting issues can be divided into two areas:
o Related party transactions
o General accounting issues
The related party transactions that resulted in material adjustments to the
Company's stockholders' equity and earnings were:
o Retroactive premium increase agreed to by National Prearranged
Services, Inc. (NPS), a related party (the Company and NPS are owned by
RBT Trust II).
o Change in the agent contract with NPS which reduced future commission
liabilities on policies in force and increased commissions on single
premium policies.
o Allocation of general expenses paid by the Company for the benefit of NPS and
the recognition of reimbursement by NPS.
o The accounting treatment for the receivable from NPS in connection with past
due premiums.
Other related party transactions which did not result in material adjustment but
were questioned as to the business reason why such transaction occurred:
o In excess of $10,000,000 (as set forth in the consolidated statement of
operations) of surrender benefits paid to NPS as owner of the preneed
policies and the subsequent repurchase of policies on the same lives.
o The issuing of certain policies which would not be routinely issued if it were
not for the related party relationship.
o NPS is currently involved in litigation stemming from a previously
dismissed class action lawsuit which was refiled in 1996. The suit is a
challenge to NPS's methods of funding preneed funeral contracts with
life insurance contracts issued by Lincoln Memorial Life Insurance
Company ("Lincoln Memorial", a subsidiary of the Company). Lincoln
Memorial has been named a defendant in the litigation.
o The insurance subsidiaries not paying commissions in accordance
with the agents contract.
o Whether or not the financial statements of NPS should be included in
the consolidation.
o The dependence of the surviving of the Company on NPS.
During the course of the audit and the filing of the registration statement,
discussions were held with the management of the Company regarding the Company's
attitude about its investment portfolio. The Company reported the following
purchase and sale of securities:
Year Ended
December 31, Six Months Ended
1996 1997 June 30, 1998
-------------- --------------- ------------------
Purchased $43,758,136 $163,710,087 $256,092,678
Sold 50,999,200 162,383,038 240,259,724
Due to the large increase in trading volume in 1997 and 1998, questions arose as
to whether all investments should be classified as available-for-sale or should
a portion of the portfolio be reflected as trading securities. Also, the
valuation of certain securities (i.e. Boston Chicken) were discussed at greater
length due to their decline in value.
The various accounting issues and material adjustments were agreed to by the
Company's management only after it was explained to management that the
registration statement could not be completed without an unqualified audit
opinion and appropriate clearance of the SEC comments.
We are not in a position to agree or disagree with Lincoln Heritage's statement
that the change was approved by the Audit Committee of the Board of Directors.
Very truly yours,
/s/ Michael J. Killman
Michael J. Killman, CPA
Killman, Murrell & Company, P.C.
