UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission file number 001-14067
LINCOLN HERITAGE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 36-3427454
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
1250 Capital of TX Hwy, Bldg. 3, Suite 100
Austin, TX 78746
(Address of principal executive offices)
(Zip Code)
(512) 328-0075
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 |_| Yes |X| No
Title of class of Number of shares
common stock outstanding as of November 30, 1998
Common stock, $0.01 par value 4,520,000
<PAGE>
LINCOLN HERITAGE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).............................3
Consolidated Balance Sheets --September 30, 1998 (Unaudited)
and December 31,1997........................................3
Consolidated Statements of Operations (Unaudited) --Three
Months and Nine Months Ended September 30, 1998 and 1997.....5
Consolidated Statement of Shareholders'Equity and
Comprehensive Income (Unaudited) --Nine Months Ended
September 30, 1998 and 1997..................................6
Consolidated Statements of Cash Flows (Unaudited) --Nine
Months Ended September 30, 1998 and 1997.....................7
Notes to Financial Statements................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................12
Overview....................................................12
Results of Operations, Liquidity and Capital Resources......13
Factors Affecting the Company's Business and Prospects......15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................18
Item 2. Changes in Securities and Use of Proceeds...................18
Item 3. Defaults Upon Senior Securities.............................18
Item 4. Submission of Matters to a Vote of Security Holders.........18
Item 5. Other Information...........................................18
Item 6. Exhibits and Reports on Form 8-K............................18
SIGNATURES....................................................................19
EXHIBIT INDEX.................................................................20
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LINCOLN HERITAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
--------------- ---------------
ASSETS
<S> <C> <C>
Fixed maturities available for sale
at fair value(amortized cost $72,168,752
and $44,085,520) $ 70,244,177 $ 45,120,485
Equity securities at fair value (amortized
cost $6,362,928 and $1,013,365) 5,000,777 794,870
Policyholder loans to related party 16,518,201 11,457,962
Reverse repurchase agreements 10,734,511 29,512,372
Deposits to support hedging transactions 533,607 -
Short-term investments 27,430,893 31,530,513
-------------- --------------
Total investments 130,462,166 118,416,202
Cash 1,645,711 1,624,822
Accrued investment income 733,191 609,847
Receivable from related party 1,750,884 478,362
Federal income tax receivable 407,569 -
Funds withheld by ceding company 498,512 498,512
Deferred policy acquisition costs, net 14,761,824 12,554,870
Fixed assets, net 1,138,881 649,546
Cost of policies purchased, net 4,832,078 3,249,365
Goodwill, net 1,424,811 773,436
Deferred tax assets, net 3,185,744 2,394,970
Other assets, net 1,298,156 353,078
-------------- --------------
Total assets $ 162,139,527 $ 141,603,010
============== ==============
<CAPTION>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
(Unaudited)
September 30, December 31,
1998 1997
-------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Policy liabilities:
Future policy benefits $ 106,063,986 $ 87,843,239
Policyholder deposits 48,580,820 41,613,697
Unpaid claims 389,000 689,000
Premiums received in advance 336,588 304,471
-------------- --------------
Total policy liabilities 155,370,394 130,450,407
Income tax liabilities - 1,975,165
Accounts payable and accrued liabilities 318,799 334,776
Accounts payable to related party 179,417 17,090
Other liabilities 1,820,291 1,942,861
-------------- --------------
Total liabilities 157,688,901 134,720,299
Shareholders' equity:
Preferred stock($.01 par value; 1,000,000
shares authorized, no shares issued
and outstanding) - -
Common stock($.01 par value; 10,000,000
shares authorized, 4,000,000 and
1,000,000 shares issued and outstanding,
respectively) 40,000 10,000
Additional paid-in capital 2,159,136 2,075,576
Retained earnings 3,756,335 4,258,265
Accumulated other comprehensive income (loss) (1,504,845) 538,870
-------------- --------------
Total shareholders' equity 4,450,626 6,882,711
------------- --------------
Total liabilities and shareholders'equity $ 162,139,527 $ 141,603,010
============== ==============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Life insurance premiums
from related party $10,897,591 $10,691,489 $31,630,543 $28,027,773
Net investment income 2,840,302 1,884,569 7,673,251 4,397,166
Realized investment gains 442,905 562,781 1,511,108 669,872
Other revenue 65,065 -- 212,931 --
----------- ----------- ----------- ----------
Total revenues 14,245,863 13,138,839 41,027,833 33,094,811
BENEFITS AND EXPENSES
Death benefits paid to
related party 4,045,996 3,846,871 12,335,933 11,348,831
Surrender benefits paid to
related party 1,088,746 23,321 1,567,331 77,600
Increase in future policy
benefits 3,974,317 4,386,113 12,382,365 11,188,699
Interest paid on
policyholder deposits 685,143 249,876 1,467,826 299,671
Commissions paid to
related party 4,875,589 2,294,581 11,811,695 7,499,890
General expenses 1,814,236 1,205,296 5,158,001 3,400,615
General expenses reimbursed
by related party (751,854) (544,761) (2,066,886) (1,891,531)
Taxes, licenses and fees 243,620 307,512 661,468 689,560
Amortization of cost of
policies purchased 49,430 65,000 623,003 65,000
Change in deferred
acquisition costs, net (1,057,320) (76,152) (2,206,954) (480,484)
----------- ----------- ----------- ------------
Total benefits and expenses 14,967,903 11,757,657 41,733,782 32,197,851
Income (loss) before
federal income taxes (722,040) 1,381,182 (705,949) 896,960
Provision for income taxes
Current (407,569) 1,075,118 (407,569) 414,880
Deferred 198,826 (678,000) 203,550 (149,000)
----------- ----------- ----------- -----------
Total income taxes (208,743) 397,118 (204,019) 265,880
Net income (loss) (513,297) 984,064 (501,930) 631,080
============ =========== ============ ===========
Basic earnings (loss)
per share $ (0.13) $ 0.25 $ (0.13) $ 0.16
=========== =========== =========== ===========
Diluted earnings (loss)
per share $ (0.13) $ 0.25 $ (0.13) $ 0.16
=========== =========== =========== ===========
Weighted average shares
outstanding:
Basic 4,000,000 4,000,000 4,000,000 4,000,000
Diluted 4,000,000 4,000,000 4,000,000 4,000,000
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<CAPTION>
Net
Additional Unrealized
Common Paid-In Investment Retained
Total Stock Capital Gains(Losses) Earnings
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 $6,882,711 $10,000 $2,075,576 $ 538,870 $4,258,265
Transfer to Common
Stock in connection
with stock split
and stock dividend - 30,000 (30,000) - -
Effect of stock
option issued in
1998, net of
applicable income
tax effect of
$58,500 113,560 - 113,560 - -
Comprehensive income
(loss), net of tax:
Net loss (501,930) - - - (501,930)
Change in unrealized
losses on available
for sale and equity
securities, net of
applicable income
tax benefit of
$1,052,823 (2,043,715) - - (2,043,715) -
----------
Total comprehensive
loss (2,545,645) - - - -
----------- ------- ---------- ------------ ----------
Balance,
September 30, 1998 4,450,626 $40,000 $2,159,136 $(1,504,845) $3,756,335
========== ======= ========== ============ ==========
Balance
December 31, 1996 $1,856,355 $ 1,000 $ 40 $ (756,524) $2,611,839
Retroactive premium
increase treated as
paid-in-capital, net
of applicable income
tax effect of
$314,884 1,259,536 - 1,259,536 - -
Benefit of reduction
of future commissions
treated as additional
paid-in-capital, net
of applicable tax
effect of $249,000 612,000 - 612,000 - -
Comprehensive income,
net of tax:
Net income 631,080 - - - 631,080
Change in unrealized
gains on available
for sale and equity
securities, net of
applicable income tax
expense of $252,270 489,689 - - 489,689 -
---------
Total comprehensive
income 1,120,769 - - - -
--------- -------- ---------- ----------- ----------
Balance,
September 30, 1997 $4,848,660 $ 1,000 $1,871,576 $ (266,835) $3,242,919
========== ======== ========== ============ ==========
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (501,930) $ 631,080
Adjustments to reconcile net income to net cash
provided by operating activities:
Future policy benefits and policyholder deposits 3,333,775 9,734,821
Deferred policy acquisition costs (2,206,954) (480,484)
Accounts receivable and payable to related party (1,110,195) (2,361,085)
Depreciation and amortization 809,440 142,061
Accrued investment income (74,344) (465,091)
Unpaid claims (300,000) (156,000)
Premiums received in advance 32,117 60,731
Accrued expenses (16,223) (137,158)
Other liabilities (122,570) 1,083,595
Accretion of discount on investments (1,170,911) (255,366)
Federal income tax liabilities (2,079,761) (197,849)
Other assets (810,946) (542,644)
Realized investments gains (1,511,108) (669,872)
------------- -------------
Net cash provided (used) by operating activities (5,729,610) 6,386,739
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and redemptions of investments 223,824,091 35,203,318
Purchases of investments (230,933,520) (6,707,210)
Policyholder loans, net (3,559,578) (5,349,789)
Acquisition of World Service Life Insurance
Company (5,066,809) -
Short-term investments, net 22,125,348 (23,173,380)
Other, net (752,593) (344,853)
------------- -------------
Net cash provided (used) by investing activities 5,636,939 (371,914)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions received 113,560 1,871,536
------------- ------------
Net cash provided by investing activities 113,560 1,871,536
------------- ------------
NET INCREASE IN CASH 20,889 7,886,361
CASH, BEGINNING OF PERIOD 1,624,822 1,837,703
------------ -----------
CASH, END OF PERIOD $ 1,645,711 $ 9,724,064
============ =============
CASH PAID FOR FEDERAL INCOME TAXES $ 1,975,165 $ 283,173
============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Lincoln Heritage Corporation ("the Company") and its direct and indirect wholly
owned subsidiaries, Memorial Service Life Insurance Company, Lincoln Memorial
Life Insurance Company, and World Service Life Insurance Company of America.
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements as of September 30, 1998 and
the three and nine months ended September 30, 1998 and 1997, are unaudited. The
unaudited interim consolidated financial statements have been prepared on the
same basis as the annual consolidated financial statements and, in the opinion
of management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of September 30, 1998 and for the three
and nine months ended September 30, 1998 and 1997. These consolidated financial
statements and notes thereto are unaudited and should be read in conjunction
with the Company's audited financial statements included in the Company's Rule
424(b)(1) Prospectus filed with the Securities and Exchange Commission on
October 28, 1998. The results for the three and nine months ended September 30,
1998 are not necessarily indicative of the expected results for the year ending
December 31, 1998. Certain prior period balances have been reclassified to
conform to the current period presentation.
NOTE 2 -- STOCK SPLITS AND EARNINGS PER SHARE
On September 19, 1997, the Company effected a 100,000-for-1 stock split in the
form of a stock dividend. Upon consummation of such stock split, the Company had
1,000,000 shares of its Common Stock issued and outstanding. On April 6, 1998,
the Company effected a 3.2-for-1 stock split, in the form of a stock dividend,
and on August 18, 1998, the Company declared and paid a 25% stock dividend. The
4,000,000 shares outstanding at August 18, 1998 have been used to compute the
basic earnings per share of the Company for all periods presented. The diluted
earnings per share is computed using the treasury stock method, unless the
effect is anti-dilutive.
NOTE 3 -- INITIAL PUBLIC OFFERING
In October 1998, the Company completed its initial public offering and issued
520,000 shares of its Common Stock at a price of $7.50 per share. The net
proceeds of the offering were approximately $2.7 million, after underwriting
discounts, commissions and other offering costs. The net proceeds were used to
make a capital contribution on December 1, 1998 to one of the Company's
subsidiaries.
NOTE 4 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is assessing the impact that the
adoption of SFAS No. 133 will have on its consolidated financial statements, but
does not expect such implementation to have a material adverse effect on its
financial position or results of operations.
NOTE 5 -- CO-INSURANCE OF LIFE INSURANCE AND ANNUITY POLICIES
On September 1, 1997, the Company co-insured a block of life insurance and
annuity policies from Woodmen Accident and Life Company (the "Woodmen Block").
The block of business consisted primarily of deferred annuities, which are
accounted for as investment contracts using deposit accounting. The Company
assumed approximately $51,311,000 of insurance and annuity reserves in exchange
for receiving $48,018,000 in cash. The net liabilities assumed, $3,293,000, plus
other costs related to the co-insurance of the Woodmen Block in the amount of
$218,000 have been shown as additions from acquisitions as the cost of policies
purchased.
Effective April 1, 1998, the Company co-insured a block of life insurance and
annuity policies from World Insurance Company (the "World Block"). The reserves
on the block of business consisted of approximately one-third deferred annuities
and one-third of interest sensitive life insurance which are accounted for as
investment contracts using deposit accounting and one-third traditional whole
life insurance. The Company assumed approximately $21,909,000 of insurance and
annuity reserves in exchange for receiving $19,941,000 in assets. The net
liabilities assumed, $2,005,716, plus other costs related to the co-insurance of
the World Block in the amount of approximately $200,000 have been shown as
additions from acquisitions as the cost of policies purchased.
NOTE 6 -- ACQUISITIONS AND PENDING ACQUISITIONS
On March 9, 1998, the Company executed a definitive stock purchase agreement to
acquire all of the outstanding stock of World Service Life Insurance Company of
America ("World Service") for a total consideration of $5,470,000. World Service
currently has no active policies in force; however, World Service is licensed to
conduct business in 42 states and the District of Columbia. The acquisition of
World Service was consummated on May 15, 1998.
The following is a condensed balance sheet of World Service as of May 15, 1998:
<TABLE>
<CAPTION>
Net assets acquired
and net liabilities
assumed
<S> <C>
Cash and invested assets ............................. $4,650,686
Goodwill acquired .................................... 557,451
Other assets ......................................... 262,504
----------
Total assets acquired ......................... 5,470,641
Liabilities assumed .................................. (246)
Net purchase price ............................ $5,470,395
==========
</TABLE>
On January 28, 1998, the Company executed a definitive stock purchase agreement
to acquire all of the outstanding stock of Harbourton Reassurance, Inc.
("Harbourton"). Harbourton's insurance operations consist of the reinsurance of
life, annuity and disability income products from various other U.S. insurance
companies. The acquisition is subject to final regulatory approval and there can
be no assurance that such regulatory approval will be obtained. The transaction
is expected to be completed by the end of 1998 for an estimated total
consideration of approximately $12,500,000. Each party to the transaction has
deposited $250,000 into an escrow account established for the performance under
the stock purchase agreement. Each party's deposit is subject to forfeiture if
such party defaults under the stock purchase agreement by not completing the
transaction by December 31, 1998. The acquisition will be accounted for under
the purchase method of accounting.
NOTE 7 -- RELATED PARTY TRANSACTIONS
Essentially all of the Company's life insurance policies are issued to fund
prearranged funeral contracts that are sold by National Prearranged Services,
Inc. ("NPS") and National Prearranged Services Agency, Inc. ("NPS Agency"). NPS
and NPS Agency are affiliated companies that collect all payments for
prearranged funeral contracts and remit such amounts to the Company.
The Company's insurance subsidiaries have in force an agents' contract (the
"Contract") with NPS and NPS Agency that obligates the Company to pay first-year
and renewal commissions on policies written by NPS and NPS Agency.
In order to better match the commissions paid with the profitability of the
underlying policies, effective January 1, 1997, the Company and NPS and NPS
Agency agreed to amend the Contract to provide for increased first-year
commissions of up to 31.5% of the face amount on single premium policies and
terminate payments of renewal commissions on policies issued on or before
December 31, 1995. The effect of the amended agreement was a reduction in the
increase in future policy benefits of $861,000 for the nine months ended
September 30, 1997 on policies issued in 1997 and this effect, net of $249,000
of tax expense was reflected as an increase in paid-in capital for the nine
months ended September 30, 1997.
The net effect on operations of the amendment to the Contract over the short
term (the next three years) will depend on the amount of single-pay business
written by NPS when compared to the amount of renewal commissions terminated on
business issued prior to December 31, 1995. Commissions on single-pay policies
are increased over what would have been paid under the original Contract, but
future renewal commission on policies sold prior to December 31, 1995, will not
be paid. After three years, the amount of renewal commissions terminated on
business issued prior to December 31, 1995 will be zero, so the effect on future
operations of the change in the Contract will decrease earnings by the amount of
the increase in commissions from 23% to 31.5% paid on single-pay business.
NOTE 8 -- STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation expense is based on the difference, if any, on the date of
the grant, between the fair value of the Company's stock and the exercise price.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and EITF 96-18.
Effective April 6, 1998, the Company adopted the Lincoln Heritage Corporation
1998 Long-Term Incentive Plan (the "Plan"). The Plan allows for the issuance of
(i) stock options, (ii) stock appreciation rights, (iii) restricted shares of
common stock and (iv) performance awards. A total of 1,200,000 shares of common
stock have been reserved for issuance under the Plan. During the period April 6,
1998 to September 30, 1998, the Company granted options to acquire 399,000
shares of common stock at an exercise price of $3.75 per share.
Estimated compensation of approximately $1.6 million in connection with the
option grants is being amortized over the four-year vesting period. Amortization
expense recognized during the nine months ended September 30, 1998 totaled
approximately $170,000. In accordance with APB Opinion No. 25, the Company
computed the estimated compensation value of the stock options issued to its
executives and employees as the difference between the exercise price of the
options ($3.75) and the market price of the stock at the date of grant ($7.50).
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
fair market value of the options granted to non-employees was estimated on the
date of grant using the minimum value approach. The expected life of the options
was 7.5 years, the risk-free interest rate used was 6% and there were no
assumptions as to volatility or dividend yield.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Overview
Lincoln Heritage Corporation is a life insurance holding company
engaged in the ownership and operation of life insurance companies and related
services. The Company also acquires existing life insurance policies, either
through direct purchase or the acquisition of insurance companies. The Company's
life insurance operations are conducted through its wholly owned life insurance
subsidiaries.
The Company was incorporated in Texas in 1980. The Company formed
Memorial Service Life Insurance Company in 1986 and acquired Lincoln Memorial
Life Insurance Company in 1992 and World Service Life Insurance Company in 1998.
In 1997 and 1998, the Company acquired blocks of life insurance and annuity
policies from Woodmen Accident and Life Company and World Insurance Company,
respectively. The acquisition of the Woodmen Block was the first instance of the
Company's strategy of acquiring life and annuity policies.
The Company's intended strategy is to use the increased capital
received from its initial public offering and other capital resources to grow
its business by acquiring blocks of in force life insurance and annuity business
and companies that have blocks of such business. Management of the Company
believes that the Company is well positioned to significantly enhance the
profitability of the business acquired. Profitability of an acquired company can
usually be enhanced in several ways, including, but not limited to, savings by
elimination of management and reduction in staff, and savings as a result of
economies of scale through the integration of systems and administration of an
acquired company into the Company. The Company expects that its acquisition
targets will be predominantly similar life insurance companies and closed blocks
of business, all of which utilize the same type of systems, personnel and
management skills as the Company.
A substantial majority of the Company's life insurance premiums has
been derived from the issuance of insurance policies to fund prearranged funeral
contracts sold by NPS, an affiliate of the Company. NPS, which was incorporated
in 1979, is engaged in the business of marketing prearranged funeral contracts
for funeral homes in Missouri, Texas and six other states, and is licensed to
expand into an additional 22 states. There is no affiliation between NPS and any
funeral home for which NPS markets prearranged funeral contracts. A prearranged
funeral contract allows customers to purchase at current prices services that
may not be needed for many years. Under a prearrangement, family members
generally are removed from the planning that would otherwise have been completed
at the difficult time of death. However, by paying for the costs of
pre-planning, the client loses use of any cash paid that could have been
invested elsewhere.
The following discussion presents specific comments on material changes
to the Company's consolidated results of operations, capital resources and
liquidity for the periods reflected in the interim financial statements filed
with this report. Many of the changes in 1998 and 1997 affecting the results of
operations were caused by the acquisition of the Woodmen Block as described in
the notes to the consolidated financial statements and in the notes to the
consolidated financial statements included in the Company's Rule 424(b)(1)
Prospectus filed with the Securities and Exchange Commission on October 28,
1998. This discussion should be read in conjunction with those consolidated
financial statements and related notes.
<PAGE>
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 1998 and
1997.
Premium income increased approximately $206,000 and $3.6 million, or 2%
and 13%, in the three-month and nine-month periods ended September 30, 1998,
respectively, over the comparable periods of 1997. The increases were
attributable to higher sales volumes. New policies issued increased
significantly for both limited pay and single pay policies with greater
increases in limited pay policies for the nine-month period ended September 30,
1998 compared to the nine-month period ended September 30, 1997.
Net investment income increased approximately $956,000 and $3.0
million, or 51% and 68%, in the three-month and nine-month periods ended
September 30, 1998, respectively, over the comparable periods of 1997. This
increase can be attributed to a higher level of invested assets (primarily
resulting from the Woodmen Block) and a more actively managed investment
portfolio.
Net realized gains decreased approximately $120,000 and increased
approximately $841,000, or 21% and 126%, in the three-month and nine-month
periods ended September 30, 1998, respectively, versus the comparable periods of
1997. Gains were recognized in the three-month and nine-month periods ended
September 30, 1998 due to the higher levels of invested assets discussed above.
However, these gains were offset by losses of approximately $450,000 and
$1,050,000, for the three-month and nine-month periods ended September 30, 1998,
respectively, for significant declines in the fair market value of certain
investments. The declines in fair market values of certain of these investments
followed public announcements of operating problems of the entities associated
with these investments. As of November 30, 1998, these investments have been
sold and accordingly, no additional losses from these investments will be
recorded in the fourth quarter.
Benefits increased approximately $1.3 million and $4.8 million, or 15%
and 21%, in the three-month and nine-month periods ended September 30, 1998,
respectively, over the comparable periods of 1997. These increases were due to
increases in death benefits in proportion to the increases in overall policies
in force, surrender benefits associated with the Woodmen Block and the World
Block, increases in future policy benefits due to higher levels of policies in
force and an increase in reserve per unit on renewal business, and interest
credited to policyholder accounts for the Woodmen Block and the World Block.
Commissions increased approximately $2.6 million and $4.3 million, or
113% and 57%, in the three-month and nine-month periods ended September 30,
1998, respectively, over the comparable periods of 1997. These increases were
attributable to higher sales volumes and changes in the mix of policies sold.
The face amount of new policies issued increased 64% and 56% for the three-month
and nine-month periods ended September 30, 1998, respectively, compared to the
comparable periods in 1997.
General expenses, net of expenses reimbursed, increased approximately
$402,000 and $1.6 million, or 61% and 105%, in the three-month and nine-month
periods ended September 30, 1998, respectively, over the comparable periods of
1997. These increases were attributable to higher policy administration,
administrative, and accounting expenses as a result of increased sales volumes,
the acquisition of the Woodmen Block and World Block, support for increased
levels of acquisition activities and regulatory reporting requirements, and
deferred compensation costs associated with the Company's Long-Term Incentive
Plan established in August 1998.
Amortization of the cost of policies purchased of approximately
$623,000 for the nine-month period ended September 30, 1998 was primarily
attributable to the purchase of the Woodmen Block.
The decreases in the change in deferred acquisition costs of
approximately $1.0 million and $1.7 million for the three-month and nine-month
periods ended September 30, 1998, respectively, compared to approximately
$76,000 and $480,000 for the three-month and nine-month periods ended September
30, 1997, respectively, were due to the capitalization of the costs of acquiring
new business at a higher rate than the amortization of such costs due to a
higher volume of new policies issued, particularly limited pay policies.
Liquidity and Capital Resources
The Company's insurance subsidiaries generally generate sufficient cash
receipts from premium collections and investment income to satisfy the Company's
obligations. The Company believes that the diversity of the investment portfolio
of its insurance subsidiaries provides sufficient liquidity to meet its
operating cash requirements.
On May 15, 1998, the Company acquired all the outstanding stock of
World Service for approximately $5.5 million in cash (the "World Service
Acquisition"). Effective April 1, 1998, the Company acquired a block of annuity
and life business through co-insurance from World Insurance Company. The net
liabilities assumed, approximately $2.0 million, plus other costs in the amount
of $200,000, have been recorded as additions from acquisitions in the cost of
policies purchased account.
The Company's cash requirements for fiscal 1998 and in the future will
depend upon mortality experience, acquisitions, timing of expansion plans and
capital expenditures. The Company believes that the net proceeds from its
initial public offering in October 1998, interest earned on the net proceeds and
anticipated revenue from operations should be adequate for the Company's working
capital requirements of its existing business over the next twelve months and
the planned acquisition of Harbourton. In the event the Company's plans or
assumptions change, or if its requirements to meet unanticipated changes in
business conditions or the proceeds of its initial public offering prove to be
insufficient to fund operations, the Company could be required to seek
additional financing prior to that time.
Changes in the Company's consolidated balance sheet between December
31, 1997 and September 30, 1998 reflect growth through operations, changes in
the fair value of actively managed fixed maturity and equity securities, changes
in the investment portfolio mix, the purchase of the Woodmen Block and the
purchase of the World Block.
Total investments increased approximately $12.1 million from $118.4
million at December 31, 1997 to $130.5 million at September 30, 1998 due
primarily to the receipt of assets in connection with the purchase of the World
Block netted against cancellations of policies associated with the Woodmen
Block. Changes in the separate components of investment assets were due to the
portfolio mix of the Company's investment assets and changes in the fair value
of balances in actively managed fixed maturity and equity securities.
Receivables from related parties increased approximately $1.3 million
from $478,000 at December 31, 1997 to $1.8 million at September 30, 1998 due
primarily to receivables due under the Company's cost sharing arrangement.
Deferred policy acquisition costs increased approximately $2.2 million
from $12.6 million at December 31, 1997 to $14.8 million at September 30, 1998,
due to increases in policies in force.
Fixed assets, net, increased approximately $489,000 from $650,000 at
December 31, 1997 to $1.1 million at September 30, 1998 due to expenditures for
furniture and equipment due to expansion of the Company's operations and ongoing
development and modifications to the Company's software systems.
Cost of policies purchased, net, increased approximately $1.6 million
from $3.2 million at December 31, 1997 to $4.8 million at September 30, 1998 due
to the acquisition of the World Block offset by the amortization of costs.
Goodwill increased approximately $651,000 from $773,000 at December 31,
1997 to $1.4 million at September 30, 1998 due to the World Service Acquisition.
Other assets increased approximately $945,000 from $353,000 at December
31, 1997 to $1.3 million at September 30, 1998 due primarily to expenses
associated with the Company's initial public offering in October 1998 which will
be netted against the gross proceeds received in the additional paid-in capital
account. See Part II, Item 2, Changes in Securities and Use of Proceeds.
Future policy benefits increased approximately $18.2 million from $87.8
million at December 31, 1997 to $106.0 million at September 30, 1998. This
increase was due to an increase in the amount of new policies issued and the
acquisition of the World Block.
Policyholder deposits increased approximately $7.4 million from $41.6
million at December 31, 1997 to $49.0 million at September 30, 1998.
Policyholder deposits are comprised primarily of annuities acquired with the
Woodmen Block and the World Block. The increase was due to the acquisition of
the World Block on April 1, 1998 offset by cancellations of policies and the
absence of the issuance of new annuity policies.
Income tax liabilities of approximately $2.0 million at December 31,
1997 was due to operating income for the year ended December 31, 1997 compared
to operating losses for the nine-month period ended September 30, 1998.
The decrease in shareholders' equity for the first nine months of 1998
reflects the decrease in net unrealized appreciation on securities of $2.0
million.
Factors Affecting the Company's Business and Prospects
Seasonality
Historically, the Company's revenues and operating results have varied
from quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including a higher
mortality rate of the Company's insureds during the winter months.
Year 2000 Issues
Many current installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000.
<PAGE>
Company Readiness
The Company's information technology personnel recently assessed the
Company's readiness to manage Year 2000 issues. This included a review of all
current computer systems in use, as well as communications with significant
vendors and other third parties to determine the extent to which the Company's
operations are vulnerable to third parties' failure to correct their own Year
2000 issues. Based on the overall assessment performed, the Company has
determined that it will not need to significantly modify or replace any of its
current systems in order to comply with Year 2000 issues. In addition, based
upon communications with significant vendors and other third parties, the
Company is not aware of any material impact on their systems relating to the
transition to the Year 2000. However, the Company has no means of ensuring that
these entities will be Year 2000 ready. The inability of third parties to
complete their Year 2000 programs in a timely manner could materially impact the
Company. The effect of non-compliant third parties is not determinable.
Year 2000 Costs
The Company's total costs of Year 2000 efforts to date and future
anticipated costs have not and are not expected to have a material adverse
effect on the Company's financial position or results of operations.
Risks Associated with the Company's Year 2000 Issues
The Company expects its internal systems to be Year 2000 compliant and
believes that the worst case scenario would result from vendors or other third
parties failing to achieve Year 2000 compliance. Due to the general uncertainty
inherent in the Year 2000 problem, the Company cannot predict whether the
consequence of Year 2000 failures will have a material adverse effect on the
Company's business, financial condition or results of operations. However, based
on the Company's assessment of its internal systems, communications with
significant vendors and other third parties, the Company does not expect Year
2000 problems to result in a material adverse effect on the Company's financial
position or results of operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. The Company can give no
assurance that the expectations indicated by such forward-looking statements
will be realized. If any of management's assumptions should prove incorrect, or
if any of the risks and uncertainties underlying such expectations should
materialize, the Company's actual results may differ materially from those
indicated by the forward-looking statements.
The following factors that are not within the Company's control and
that may have a direct bearing on operating results include, but are not limited
to: (i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect the ability
of the Company to sell its products, the market value of the Company's
investments and the lapse rate and profitability of the Company's policies; (ii)
the Company's ability to achieve anticipated levels of operational efficiencies
at recently acquired companies, as well as through other cost-saving
initiatives; (iii) mortality, morbidity, and other factors which may affect the
profitability of the Company's insurance products; (iv) changes in the federal
income tax laws and regulations which may affect the cost of or demand for the
Company's products; (v) increasing competition in the sale of the Company's
products; (vi) regulatory changes or actions, including those relating to
regulation of financial services affecting (among other things) bank sales and
underwriting of insurance products, regulation of the sale, underwriting and
pricing of insurance products; (vii) the availability and terms of future
acquisitions; and (viii) the risk factors or uncertainties listed in the
Company's other filings with the Securities and Exchange Commission.
Additionally, the Company may not be successful in identifying,
acquiring, and integrating additional start-up locations and possible
acquisitions, implementing improved management and accounting information
systems and controls and may be dependent upon additional capital and equipment
purchases for future growth. There may be other risks and uncertainties that
management is not able to predict.
When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intends," and similar expressions, as they relate to the
Company are intended to identify forward-looking statements, although there may
be certain forward-looking statements not accompanied by such expressions.
<PAGE>
- 18 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
(d) The effective date of the registration statement for the Company's
initial public offering ("IPO") of its Common Stock, filed on Form S-1 under the
Securities Act of 1933 (No. 333-50525), was October 22, 1998. A total of 520,000
shares of Company's Common Stock were sold through an underwriting syndicate at
a price of $7.50 per share. The managing underwriter was Tejas Securities Group,
Inc. The offering commenced and was completed on November 2, 1998, and resulted
in gross proceeds of $3.9 million. The Company incurred expenses of
approximately $1.26 million of which approximately $360,000 represented
underwriting discounts and commissions, and approximately $900,000 represented
other expenses related to the IPO. The net IPO proceeds to the Company after
total expenses were approximately $2.7 million. The net proceeds were used to
make a capital contribution to one of the Company's insurance subsidiaries on
December 1, 1998.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Exhibit Index attached hereto.
(b) Reports on Form 8-K:
None.
<PAGE>
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
(Registrant)
December 7, 1998 By: /s/ Nick Powling
President and Chief Executive Officer
December 7, 1998 By: /s/ Clifton Mitchell
Executive Vice President- Actuarial and
Principal Financial and Accounting Officer
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Ex. No. Description
<S> <C>
27.1 Financial Data Schedule for the nine months ended September 30, 1998.
27.2 Financial Data Schedule for the nine months ended September 30, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The schedule below contains summary financial
information extracted from the Consolidated
Financial Statements of Lincoln Heritage
Corporation and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-01-1998
<DEBT-HELD-FOR-SALE> 70,244
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5,001
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 130,462
<CASH> 1,646
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 14,761
<TOTAL-ASSETS> 162,140
<POLICY-LOSSES> 154,645
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 389
<POLICY-HOLDER-FUNDS> 337
<NOTES-PAYABLE> 0
0
0
<COMMON> 40
<OTHER-SE> 4,411
<TOTAL-LIABILITY-AND-EQUITY> 162,140
31,631
<INVESTMENT-INCOME> 7,673
<INVESTMENT-GAINS> 1,511
<OTHER-INCOME> 213
<BENEFITS> 27,754
<UNDERWRITING-AMORTIZATION> 6,789
<UNDERWRITING-OTHER> 7,191
<INCOME-PRETAX> (706)
<INCOME-TAX> (204)
<INCOME-CONTINUING> (502)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (502)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The schedule below contains summary financial
information extracted from the Consolidated
Financial Statements of Lincoln Heritage
Corporation and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-01-1997
<DEBT-HELD-FOR-SALE> 72,822
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 346
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 107,794
<CASH> 9,724
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 11,630
<TOTAL-ASSETS> 140,504
<POLICY-LOSSES> 132,873
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 625
<POLICY-HOLDER-FUNDS> 519
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 4,847
<TOTAL-LIABILITY-AND-EQUITY> 140,504
28,028
<INVESTMENT-INCOME> 4,397
<INVESTMENT-GAINS> 670
<OTHER-INCOME> 0
<BENEFITS> 22,915
<UNDERWRITING-AMORTIZATION> 5,717
<UNDERWRITING-OTHER> 3,566
<INCOME-PRETAX> 897
<INCOME-TAX> 266
<INCOME-CONTINUING> 631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 631
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
