<PAGE> 1
As filed with the Securities and Exchange Commission on April 20, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LINCOLN HERITAGE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 6311 36-3427454
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Code
Number)
LINCOLN HERITAGE CORPORATION
1250 CAPITOL OF TEXAS HIGHWAY
BUILDING 3, SUITE 100
AUSTIN, TEXAS 78746
(512) 328-0075
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
NICHOLAS M. POWLING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LINCOLN HERITAGE CORPORATION
1250 CAPITAL OF TEXAS HIGHWAY
BUILDING 3, SUITE 100
AUSTIN, TEXAS 78746
(512) 328-0075
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-----------------------------
Copies to:
THOMAS A. LITZ, ESQ. THOMAS W. HUGHES, ESQ.
THOMPSON COBURN CARY FERCHILL, ESQ.
ONE MERCANTILE CENTER WINSTEAD SECHREST & MINICK P.C.
ST. LOUIS, MISSOURI 63101 100 CONGRESS AVENUE, SUITE 800
(314) 552-6072 AUSTIN, TEXAS 78701
(314) 552-7000 FAX (512) 370-2844
(512) 370-2841 FAX
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<TABLE>
CALCULATION OF REGISTRATION FEE
==============================================================================================================
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED<F1> OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SHARE<F2> PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,150,000 $10.00 $11,500,000 $3,393
==============================================================================================================
<FN>
<F1> Includes 150,000 shares of Common Stock that may be purchased by the
Underwriters from the Company to cover over-allotments, if any.
<F2> Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE *
* SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR *
* MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT *
* BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR *
* THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE *
* SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE *
* UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS *
* OF ANY SUCH STATE. *
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
SUBJECT TO COMPLETION, DATED APRIL 20, 1998
PROSPECTUS
LINCOLN HERITAGE CORPORATION
1,000,000 SHARES
COMMON STOCK
Lincoln Heritage Corporation, a Texas corporation (the "Company"), is
hereby offering 1,000,000 shares of Common Stock, $0.01 par value (the
"Common Stock"). Prior to this offering, there has been no public market for
the Common Stock, and there can be no assurance that an active market will
develop. It is currently anticipated that the initial public offering price
of the shares will be between $8.00 to $10.00 per share. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price. The Company has applied to list the Common Stock on
the American Stock Exchange (the "Amex") under the symbol "LHC." There can
be no assurance that the application for listing on the Amex will be
approved.
--------------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 6 HEREOF CONCERNING THE COMMON STOCK, THE COMPANY
AND THIS OFFERING. PROSPECTIVE INVESTORS ALSO SHOULD CONSIDER THE FACT THAT
THEIR INVESTMENT WILL RESULT IN IMMEDIATE SUBSTANTIAL DILUTION. SEE
"DILUTION."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS<F1> COMPANY<F2>
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<S> <C> <C> <C>
Per Share............................. $ $ $
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Total<F2><F3>......................... $ $ $
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<FN>
<F1> In addition, the Company has agreed to pay the Representative of the
Underwriters a 2.00% non-accountable expense allowance and to sell
to the Representative warrants exercisable for four years
commencing one year from the date of this Prospectus to purchase
100,000 shares of Common Stock at an exercise price of 120% of the
public offering price (the "Underwriters' Warrants"). The Company
has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
<F2> Before deducting estimated expenses of $500,000 payable by the Company,
including the Representative's 2.00% nonaccountable expense
allowance.
<F3> The Company has granted to the Underwriters an option, exercisable
within 45 days from the date of this Prospectus, to purchase up to
150,000 shares of Common Stock, on the same terms set forth above,
solely for the purpose of covering over-allotments, if any. If the
Underwriters' over-allotment option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
</TABLE>
The shares are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to approval of
certain legal matters by counsel and subject to certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify the offering
without notice and to reject any order, in whole or in part. It is expected
that delivery of Common Stock certificates will be made against payment
therefor at the offices of the Representative in Austin, Texas on or about
, 1998.
--------------------
TEJAS SECURITIES GROUP, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (including
any amendments thereto, the "Registration Statement") under the Securities
Act with respect to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect
to the Company and the Common Stock, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus regarding the contents of any contract or document filed as an
exhibit to the Registration Statement are not necessarily complete and, in
each instance, reference is hereby made to the copy of such contract or
document so filed. Each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits and the schedules
thereto filed with the Commission may be inspected, without charge, at the
Commission's public reference facilities located at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the public
reference facilities in the Commission's regional offices located at:
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago,
Illinois 60661; and Suite 1300, Seven World Trade Center, New York, New York
10048. Copies of such materials also may be obtained at prescribed rates by
writing to the Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission at http://www.sec.gov.
As a result of this offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith will
file periodic reports, proxy statements and other information with the
Commission. The Company will furnish its shareholders with annual reports
containing audited consolidated financial statements certified by independent
public accountants following the end of each fiscal year, proxy statements
and quarterly reports containing unaudited consolidated financial information
for the first three quarters of each fiscal year following the end of such
fiscal quarter.
The Company has applied for listing of the Common Stock on the Amex.
Reports, proxy statements and other information concerning the Company will
be available for inspection at the principal office of the Amex at 86 Trinity
Place, New York, New York 10006.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING OVERALLOTMENT, ENTERING STABILIZATION BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including notes thereto)
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information herein (i) is presented on the basis that the over-allotment
option and the Underwriters' Warrants are not exercised and (ii) gives effect
to a 3.2-for-1 stock split (in the form of a stock dividend) effective April
6, 1998. The Common Stock offered hereby involves a high degree of risk.
Investors should carefully consider the information set forth under "Risk
Factors."
THE COMPANY
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
two wholly owned life insurance subsidiaries.
The Company's intended strategy is to use the increased capital
received from this 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 maximize the profitability of
the business acquired. Management of the Company also believes the Company
can achieve cost savings in acquired businesses through consolidation of the
acquired operations with those of 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 National Prearranged Services, Inc. ("NPS"), an
affiliate of the Company. Investors in this offering will not be acquiring
any equity interest in NPS. 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. By entering into a prearranged funeral contract,
customers benefit by obtaining current prices for services that may not be
needed until years later. In addition customers also have the knowledge that
a family member's funeral arrangements will be executed without having to
deal with planning and cost issues at the difficult time of death. As of
December 31, 1997, NPS had written more than 135,000 prearranged funeral
contracts.
The Company was incorporated in Texas in 1980. The Company formed
Memorial Service Life Insurance Company ("Memorial") in 1986 and acquired
Lincoln Memorial Life Insurance Company ("Lincoln") in 1992. In 1997, the
Company acquired a block of life insurance and annuity policies from Woodmen
Accident and Life Company (the "Woodmen Acquisition"). The acquisition of
the Woodmen block was the first instance of the Company's strategy of
acquiring life and annuity policies.
RECENT DEVELOPMENT
On January 28, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding capital stock of Harbourton Reassurance, Inc.
("Harbourton") for total consideration of approximately $10.8 million (the
"Harbourton Acquisition"). Harbourton's insurance operations consist of the
reinsurance of life, annuity and disability income products from various
other United States insurance companies. The acquisition is subject to
regulatory approval and will be accounted for under the purchase method of
accounting. As of December 31, 1997, Harbourton reported total assets of
$167.4 million and stockholder's equity of $41.0 million. The Company
expects that the Harbourton Acquisition will be completed in April 1998.
See "Pro Forma Consolidated Condensed Financial Information."
--------------------
Unless the context otherwise indicates, the term "Company" as used
herein refers collectively to Lincoln Heritage Corporation and its wholly
owned direct and indirect subsidiaries: Memorial, Lincoln and Wise &
Associates, Inc ("Wise"). The Company's principal executive offices are
located at 1250 Capital of Texas Highway, Building 3, Suite 100, Austin,
Texas 78746; telephone (512) 328-0075.
3
<PAGE> 5
<TABLE>
THE OFFERING
<C> <S>
Common Stock offered 1,000,000 shares<F1>
Common Stock to be outstanding
after the offering 4,200,000 shares<F2>
Use of Proceeds For possible acquisitions, working capital
and general corporate purposes. See "Use of
Proceeds" and "Business."
Risk Factors The shares offered hereby are speculative and
involve a high degree of risk and should not
be purchased by investors who cannot afford
the loss of their entire investment. See
"Risk Factors."
Proposed Amex Symbol "LHC"
<FN>
- ---------------------
<F1> Does not include an aggregate of up to 250,000 shares of Common Stock
issuable upon exercise of: (i) the over-allotment option; and (ii) the
Underwriters' Warrants.
<F2> Does not include 1,200,000 shares of Common Stock reserved for issuance
under the Lincoln Heritage Corporation 1998 Long-Term Incentive Plan (the
"Plan"). To date options to purchase 1,099,750 shares of Common Stock have
been granted under the Plan, of which options for 80,000 shares currently are
exercisable. See "Management - Long-Term Incentive Plan."
</TABLE>
4
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following historical summary consolidated financial information has
been derived from the audited consolidated balance sheet of the Company as of
December 31, 1997, audited consolidated statements of operations for each of
the three years in the period ended December 31, 1997 and unaudited
consolidated statements of operations for each of the two years in the period
ended December 31, 1994. The pro forma financial statements give effect to
the completed and pending acquisitions described under "Pro Forma
Consolidated Condensed Financial Information." This historical and pro forma
combined financial data should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto and the pro
forma financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premium income $23,154 $24,357 $27,771 $33,702 $38,044
Net investment income
and net realized gains 4,804 3,908 4,514 5,729 8,838
------- ------- ------- ------- -------
Total revenues 27,958 28,265 32,285 39,431 46,882
Benefits incurred<F1> 19,053 19,563 20,775 24,750 30,003
Other expenses 7,140 11,848 9,631 13,358 13,411
------- ------- ------- ------- -------
Income (loss) before federal taxes 1,765 (3,146) 1,879 1,323 3,468
Income taxes 340 (539) 400 283 1,004
------- ------- ------- ------- -------
Net income (loss) $ 1,425 $(2,607) $ 1,479 $ 1,040 $ 2,464
======= ======= ======= ======= =======
Weighted average
shares outstanding 3,200 3,200 3,200 3,200 3,200
Basic earnings (loss) per share $ .44 $ (.81) $ .46 $ .33 $ .77
Pro forma net income<F2> 3,221
Pro forma basic earnings per share<F2> 1.01
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
PRO FORMA
AS
BALANCE SHEET DATA: ACTUAL PRO FORMA<F2> ADJUSTED<F3>
-------- ------------- ------------
<S> <C> <C> <C>
Invested assets $118,416 $237,470 $245,070
Total assets 141,603 268,724 276,324
Total policy liabilities 130,450 247,995 247,995
Shareholder's equity 6,806 7,564 15,164
<FN>
- -----------
<F1> Benefits incurred includes death benefits, surrender benefits, increase
in future policy benefits and interest paid on policyholder deposits.
Benefits incurred in 1997 were reduced by $1,148 due to a one-time change
in the formula determining commissions payable to NPS. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 12 to the Consolidated Financial Statements of the Company.
<F2> Gives effect to the Harbourton Acquisition and the Woodmen Acquisition as
if such acquisitions had occurred on January 1, 1997. See "Pro Forma
Consolidated Condensed Financial Information."
<F3> Gives effect to the Harbourton Acquisition and the Woodmen Acquisition as
if such acquisitions had occurred on January 1, 1997. As adjusted to
reflect the sale of the shares offered by this Prospectus at an assumed
public offering price of $9.00 per share and the application of the
estimated net proceeds of $7,600,000.
</TABLE>
5
<PAGE> 7
RISK FACTORS
This Prospectus contains certain forward-looking statements concerning
the Company within the meaning of Section 27A of the Securities Act. Also,
documents subsequently filed by the Company with the Commission will contain
forward-looking statements. 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
are made. When used in this Prospectus, the words "anticipate," "believe,"
"estimate," "expect," "intends" and similar expressions, as they relate to
the Company are intended to identify forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below, the matters set
forth or incorporated in this Prospectus generally and certain economic and
business factors, some of which may be beyond the control of the Company. The
Company cautions the reader, however, that this list of factors may not be
exhaustive, particularly with respect to future filings with the Commission.
In analyzing an investment in the Common Stock offered hereby, prospective
investors should carefully consider, along with the other matters referred to
herein, the risk factors described below.
ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS; RISKS RELATING TO GROWTH
STRATEGY
A significant portion of the Company's strategy is to pursue and
complete acquisitions of companies and in force life insurance business that
meet its acquisition criteria. The Company has acquired and seeks to acquire
companies and blocks of in force insurance policies to enhance the Company's
shareholder value utilizing the Company's operations, management and access
to capital. The Company's ability to grow by acquisition is dependent upon,
and may be limited by, the availability of suitable acquisition opportunities
at values deemed advantageous and capital and regulatory constraints. To the
extent that cash generated internally is not sufficient to provide the
capital required for acquisitions, the Company will require additional debt
and/or equity financing in order to provide for such capital. Future debt
financing, if available, will result in increased interest and amortization
expenses, increased leverage and decreased income available to fund
acquisitions and expansion, and may limit the Company's ability to withstand
competitive pressures and render the Company more vulnerable to business
downturns. Future equity financings may dilute the equity interests of
existing shareholders. Growth by acquisition also involves risks that could
adversely affect the Company's operating results, including difficulties in
integrating the operations and personnel of acquired companies, eliminating
duplicative costs and reducing overhead, and the potential loss of key
employees and customers of acquired companies or lapse or surrender of
acquired insurance policies. In addition, although the Company performs a due
diligence investigation of each business that it acquires, there may
nevertheless be liabilities of an acquired business that the Company fails or
is unable to discover during its due diligence investigation and for which
the Company, as a successor owner, may be responsible.
The Harbourton Acquisition represents the Company's largest acquisition
to date and there can be no assurance that the Company will successfully
operate Harbourton's business. In addition, there can be no assurance that
the Company will be able to obtain the capital necessary to pursue its growth
strategy, consummate acquisitions on satisfactory terms or, if any such
acquisitions are consummated, successfully integrate such acquired businesses
into the Company and remedy any undiscovered liabilities of any acquired
companies. See "Business - Business Strategy."
DEPENDENCE UPON NPS
The Company has been dependent upon NPS, an affiliate under common
control with the Company, for substantially all its originations of
newly-issued life insurance polices. The Company currently does not operate a
significant internal marketing function or obtain significant amounts of
business from non-affiliated insurance agencies. In addition, the Company's
future growth will be dependent, in large part, upon NPS's ability to grow
its prearranged funeral service contract business. NPS's business is highly
regulated and future changes in existing laws and regulations or changes in
the administration of existing laws and regulations could have a material
adverse effect on NPS's business. Moreover, NPS's ability to grow will be
dependent upon (among other factors) its ability to penetrate new geographic
markets, attract and retain qualified employees and develop its resources to
fund and profitably manage its future growth. There can be no assurance that
NPS will maintain its current level of business
6
<PAGE> 8
or successfully grow its prearranged funeral volume. NPS's inability to
maintain its current level of business would have a material adverse effect on
the Company. As owner of the policies issued to fund its preneed contracts,
NPS has the contractual right to cancel such policies, which represent a
substantial majority of the Company's in force insurance. Cancellation of all
or a significant amount of such policies would have a material adverse effect
on the Company.
In addition, because NPS is under common control with the Company,
situations could arise in which NPS's interests and the Company's interests
could conflict. There can be no assurance that any such conflicts would be
resolved to the benefit of the Company. Moreover, pursuant to that certain
Exclusivity Agreement dated April 6, 1998 by and between the Company and NPS,
NPS agreed to cause all insurance arising out of its prearranged funeral
business to be issued by the Company's subsidiaries. There can be no assurance
that such agreement will not be terminated prior to its expiration or renewed at
its expiration in April 2003. See "Business - National Prearranged Services"
and "Certain Transactions."
REGULATION
Insurance companies are subject to comprehensive regulation in the
jurisdictions in which they do business by state insurance commissioners.
Such regulation relates to, among other things: prior approval of the
acquisition of a controlling interest in an insurance company; standards of
solvency which must be met and maintained; licensing of insurers and their
agents; nature and limitations of investments; deposits of securities for the
benefit of policyholders; approval of policy forms; triennial examinations of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. The
Company is subject to this type of regulation in any state in which it is
licensed to do business. Such regulation could create costs and restrict
operations. The Company is currently subject to regulation in Texas by the
Texas Department of Insurance. Intercorporate transfers of assets and
dividend payments from the Company's insurance subsidiaries are subject to
prior notice and approval if they are deemed "extraordinary" under these
statutes. The Company is required under Texas laws to file detailed annual
reports with the Texas Department of Insurance and all other states in which
it is licensed. The business and accounts of insurance subsidiaries of the
Company are subject to examination by the Texas Department of Insurance. The
most recent triennial examination of the Company's insurance subsidiaries was
for the year ended December 31, 1991. During 1998, the department will begin
an examination of the Company's insurance subsidiaries for the three-year
period ended December 31, 1997. See "Business - Regulatory Factors."
In October 1996, the Texas Department of Insurance issued an order
and letter to Memorial and Lincoln, respectively, to comply with certain
administrative and investment guidelines, including those relating to
permissible investments. Memorial and Lincoln had invested a portion of their
assets in derivative instruments in the belief that these instruments were
allowed under Texas insurance investment guidelines. The Department alleged
that these investments were not in compliance with state guidelines. The
Company complied with the Department's position, immediately ceased investing
in derivative instruments and liquidated its existing portfolio with a net gain
in excess of $1.0 million. In May 1997, Memorial and Lincoln demonstrated to
the Department that they had fully complied with all applicable guidelines and
regulations, the companies agreed to furnish quarterly compliance reports to
the Department and the Department released the companies from the order.
Subsequently, Texas investment regulations were changed to allow investments
in derivatives on a restricted basis.
PERSISTENCY
Persistency is the extent to which policies sold remain in force.
Policy lapses over those actuarially anticipated could have an adverse effect
on the financial performance of the Company. Policy acquisition costs are
deferred and recognized over the premium paying period of a policy. Excess
policy lapses, however, cause the immediate expensing or amortizing of
deferred policy acquisition costs. As long as the Company maintains lapse and
surrender rates within its pricing assumptions for its insurance policies, the
Company believes that the present lapse and surrender rate should not have a
material adverse effect on the Company's financial results. For the years ended
December 31, 1995, 1996 and 1997, the Company's lapse ratio on ordinary business
was 0.3%, 4.3% and 1.0%, respectively.
7
<PAGE> 9
COMPETITION
The life insurance business is highly competitive and consists of a
number of companies, many of which have greater financial resources, longer
business histories and more diversified lines of insurance coverage than the
Company. The Company may encounter increased competition from existing
competitors or new market entrants, some of which may be significantly larger
and have greater business resources. In addition, to the extent that
existing or future competitors seek to gain or retain market share by
reducing prices, the Company might be compelled to lower its prices, thereby
adversely affecting operating results. See "Business--Competition."
UNINSURED CASH BALANCES
The Company maintains average cash balances in two primary depositories
that are significantly in excess of Federal Deposit Insurance Corporation
coverage. If these depositories were to cease business, the Company would
likely lose a substantial amount of its cash. At December 31, 1997, the
Company had approximately $1.6 million in these depositories. However,
management continuously monitors the solvency of these depositories and does
not believe a material risk of loss exists since such institutions are
currently above the federally mandated levels of capital and liquidity.
Management utilizes short-term U.S. Treasury securities as well as investment
trade commercial paper issues as vehicles for managing temporary excess cash
balances, and expects to continue the practice in the future.
ECONOMIC STATE OF THE INSURANCE INDUSTRY
In the past decade, there have been instances where the United States
insurance industry, as a whole, has suffered substantial losses on
investments, which has reduced the financial stability of several insurance
companies. Management believes that the principal cause of industry losses
have been excessive investment in high yield bonds and real estate. The
Company has minimal holdings in high yield bonds, and has no real estate
holdings. Management believes that these factors leave the Company with a
relatively lower investment loss risk compared to that to which the industry
as a whole is exposed.
INTEREST RATE VOLATILITY; INVESTMENT SPREAD RISKS
Profitability in the insurance industry is affected by fluctuations in
interest rates. Of prime importance in achieving profitability is an
insurance company's ability to invest premiums at a higher interest rate than
the interest rate credited to existing policies. Rapid decreases or
increases in interest rates may affect an insurance company's ability to
maintain a positive spread between the yield on invested assets and the
assumed interest rate credited to policy reserves. Rapid interest rate
changes could cause increased lapses of policies in force, although
management believes the effect of such rate changes would be minimal.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance and development will depend, to a
significant extent, upon the efforts and abilities of members of senior
management, particularly Nicholas M. Powling, President and Chief Executive
Officer, and Clifton Mitchell, Executive Vice President-Actuarial.
The loss of services of one or more members of senior management could have a
material adverse effect on the Company's business. The Company's future
success also will depend on its ability to attract, train and retain skilled
personnel in all areas of its business. See "Management."
CONTROL BY EXISTING SHAREHOLDER
After the offering, RBT Trust II, of which Howard A. Wittner, a
director of the Company, is the sole trustee, will beneficially own 76.2% of
the outstanding Common Stock and the Company's executive officers and
directors will in the aggregate beneficially own or control approximately
76.6% of the outstanding Common Stock (73.6% if the Underwriters'
over-allotment option is exercised in full). Accordingly, Mr. Wittner generally
will be able to elect a majority of the directors and exercise significant
control over the business policies and affairs of the
8
<PAGE> 10
Company. Similarly, Mr. Wittner would be in a position to prevent a takeover
of the Company by one or more third parties, which could deprive the Company's
shareholders of a premium that might otherwise be realized by them in
connection with an acquisition of the Company. See "Principal Shareholders."
SEASONAL AND QUARTERLY FLUCTUATIONS
The Company's revenues and operating results have historically varied
significantly from quarter to quarter and are expected to continue to
fluctuate in the future. Those fluctuations have been due to a number of
factors, including higher mortality experience during the winter months.
These factors, among others, make it likely that in some future quarter the
Company's results of operations may be below the expectations of securities
analysts and investors, which could have a material adverse effect on the
market price of the Common Stock. Historically, operating results have been
seasonally lower during the first fiscal quarter than during the other
quarters of the fiscal year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Seasonality."
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") and Bylaws (the "Bylaws") include provisions
that may delay, defer or prevent a takeover attempt that may be in the best
interest of the Company's shareholders. These provisions include a classified
Board of Directors, pursuant to which directors are divided into three
classes with three-year staggered terms. The classified board provision could
increase the likelihood that, in the event an outside party acquired a
controlling block of the Company's stock, incumbent directors nevertheless
would retain their positions for a substantial period, which may have the
effect of discouraging, delaying or preventing a change in control of the
Company. In addition, the Articles of Incorporation provide for the ability
of the Board of Directors to issue up to 1,000,000 shares of Preferred Stock
without any further shareholder approval, a provision under which only the
Board of Directors or holders of at least two-thirds of the outstanding
shares may call meetings of shareholders, a requirement that any shareholder
action without a meeting be pursuant to unanimous written consent and certain
advance notice procedures for nominating candidates for election to the Board
of Directors and putting other proposals to a vote of shareholders. Issuance
of Preferred Stock also could discourage bids for the Common Stock at a
premium as well as create a depressive effect on the market price of the
Common Stock. In addition, under certain conditions, Section 13.03 of the
Texas Business Corporation Act, as amended (the "Texas Act"), would prohibit
the Company from engaging in a "business combination" with an "affiliated
shareholder" (in general, a shareholder owning 20% or more of the Company's
outstanding voting shares) for a period of three years. The possible impact
of these provisions on takeover attempts could adversely affect the price of
the Common Stock. See "Description of Securities."
BROAD DISCRETION TO ALLOCATE USE OF PROCEEDS
The proceeds of this offering will be allocated only generally. The
specific uses of investors' funds will depend upon the business judgment of
management, upon which the investors must rely, with only limited information
about management's specific intentions. See "Use of Proceeds" and "Business."
NO ASSURANCE OF MARKET FOR COMMON STOCK
There currently is no public market for the Common Stock being offered,
and no assurance can be given that a market will develop. The Company has
applied to list the Common Stock on the Amex. If a trading market does
develop for the Common Stock, the prices may be highly volatile. The
Underwriters are not obligated to make a market in the Common Stock upon
completion of this offering, and, even if the Underwriters make a market
following the offering, there is no assurance that it will continue to do so
in the future. In addition, if a market for the Common Stock does develop,
and the Common Stock is traded below certain prices, many brokerage firms may
not effect transactions in the Common Stock, and sales of the Common Stock
will be subject to Commission Rule 15g-9. In the event that the Company is
unable to meet the Amex's continued listing requirements, trading in the
Common Stock, if any, could be limited to the OTC Bulletin Board or the "pink
sheets" used by members of the National Association of Securities Dealers,
Inc. If a market does not develop for the Common Stock, it may be
9
<PAGE> 11
difficult or impossible for purchasers to resell the Common Stock. There can
be no assurance that any of the Common Stock can ever be sold at the offered
price or at any price.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon consummation of the offering, the Company will have outstanding an
aggregate of 4,200,000 shares of Common Stock. Future sales of substantial
amounts of Common Stock (including shares issued upon the exercise of stock
options) by the Company's current shareholders after the offering, or the
perception that such sales could occur, could adversely affect the market
price of the Common Stock. In addition, the Company has the authority to
issue additional shares of Common Stock and shares of one or more series of
Preferred Stock. The Company also intends to register on Form S-8 under the
Securities Act an aggregate of 1,200,000 shares of Common Stock for future
issuance under the Plan as soon as practicable following the consummation of
the offering. The future issuance of such shares could result in the dilution
of the voting power of the shares of Common Stock purchased in the offering
and could have a dilutive effect on earnings per share. No prediction can be
made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the
Common Stock. The Company currently has no plans to designate or issue any
shares of Preferred Stock.
The Company and its directors and executive officers have, subject to
certain exceptions in the case of the Company described in "Underwriting,"
agreed not to directly or indirectly offer, sell, contract to sell or
otherwise dispose of or transfer any capital stock of the Company, or any
security convertible into, or exercisable or exchangeable for, such capital
stock, for a period of one year after the date of this Prospectus, without
the prior written consent of the Representative. The existing shareholder of
the Company is entitled to rights to register its shares of Common Stock
under the Securities Act for resale, at the expense of the Company. Such
shares also are subject to resale pursuant to Rule 144 under the Securities
Act, depending on the holding period of such Common Stock and subject to
significant restrictions in the case of shares held by persons deemed to be
affiliates of the Company. See "Principal Shareholders," "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Underwriting."
POSSIBLE NEED FOR FUTURE FINANCING
The Company believes that the proceeds of this offering will enable it
to accomplish the purposes set forth under "Business," although there can be
no assurance that this will be the case. If the proceeds of this offering are
not sufficient, the Company would be required to seek additional financing to
enable it to conduct its business operations. There can be no assurance that
the Company will be able to obtain such financing on acceptable terms, or at
all. Any such additional financing may entail substantial dilution of the
equity of the then-existing shareholders of the Company. See
"Underwriting."
ARBITRARY DETERMINATION OF OFFERING PRICE
The public offering price for the Common Stock offered hereby was
determined by negotiation between the Company and the Representative, and
should not be assumed to bear any relationship to the Company's asset value,
net worth or other generally accepted criteria of value. Recent history
relating to the market prices of newly public companies indicates that the
market price of the Common Stock following this offering may be highly
volatile. See "Underwriting."
BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS
Current holders of Common Stock and options to purchase Common Stock
will benefit from this offering by: (i) creation of a public trading market
for the Common Stock, which is intended but for which there is no assurance;
and (ii) the substantial unrealized gain, based upon the difference between
the acquisition costs and the initial public offering price, for holders who
acquired their stock or optionees who were granted options prior to the
public offering.
10
<PAGE> 12
PAYMENT OF DIVIDENDS
The Company has never paid cash dividends on the Common Stock, and does
not anticipate that it will pay cash dividends in the foreseeable future.
The payment of dividends by the Company will depend on its earnings,
financial condition and such other factors, as the Board of Directors of the
Company may consider relevant. The Company currently plans to retain any
earnings to provide for the development and growth of the Company. See
"Dividend Policy."
IMMEDIATE SUBSTANTIAL DILUTION
The Company's current shareholder acquired its shares of Common Stock
at a cost substantially below the price at which such shares are being
offered in this offering. In addition, the initial public offering price of
the shares of Common Stock in this offering will be substantially higher than
the current book value per share of Common Stock. Consequently, investors
purchasing shares of Common Stock in this offering will incur an immediate
and substantial dilution of their investment based upon the resulting book
value of Common Stock after completion of this offering. See "Dilution."
SUBSTANTIAL SHARES OF COMMON STOCK RESERVED
The Company has reserved 1,200,000 shares of Common Stock for issuance
to key employees, officers, directors, consultants and advisors of the
Company pursuant to the Plan. To date, options to purchase 1,099,750 shares
of Common Stock have been granted under the Plan, of which options to
purchase 80,000 shares currently are exercisable. The existence of these
options and any other options and the Underwriters' Warrants may prove to be
a hindrance to future equity financings by the Company. Further, the holders
of such options may exercise them at a time when the Company would otherwise
be able to obtain additional equity capital on terms more favorable to the
Company. See "Management - Long-Term Incentive Plan."
EFFECT OF UNDERWRITERS' WARRANTS
Until the date five years following the date of this Prospectus, the
holders of the Underwriters' Warrants are given an opportunity to profit from
a rise in the market price of the Common Stock, with a resulting dilution in
the interests of the other shareholders. The shares of Common Stock
underlying the Underwriters' Warrants have certain registration rights.
Further, the terms on which the Company might obtain additional financing
during that period may be adversely affected by the existence of the
Underwriters' Warrants. The holders of the Underwriters' Warrants may
exercise them at a time when the Company might be able to obtain additional
capital through a new offering of Common Stock on terms more favorable than
those provided herein. The Company has agreed that, under certain
circumstances, it will register under federal and state securities laws the
Underwriters' Warrants and the Common Stock issuable thereunder. Exercise of
these registration rights could involve substantial expense to the Company at
a time when it could not afford such expenditures and may adversely affect
the terms upon which the Company may obtain financing. See "Description of
Securities" and "Underwriting."
A significant amount of the Common Stock offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such Common Stock through or with
the Representative. Although it has no obligation to do so, the
Representative may otherwise effect transactions in such Common Stock. Such
market making activity may be discontinued at any time. If it participates
in the market, the Representative may exert a dominating influence on the
market, if one develops, for the Common Stock. The price and the liquidity
of the Common Stock may be significantly affected by the degree, if any, of
the Representative's participation in such market.
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds of this offering to the Company are estimated to be
approximately $7,600,000 (at an assumed public offering price of $9.00 per
share). The net proceeds will be added to the Company's working capital and
used for general corporate purposes and possible acquisitions of insurance
companies and in force insurance policies consistent with the Company's
business strategies. Except for the Harbourton Acquisition and the proposed
acquisition of World Service Life Insurance Company of America ("World
Service"), the Company currently has no agreement, arrangement or
understanding with respect to any proposed acquisition. See "Business."
Pending application of the net proceeds of this offering for such
purposes the Company may invest the net proceeds in interest-bearing savings
accounts at insured institutions, U.S. Government and agency obligations,
certificates of deposit or other investment grade short-term,
interest-bearing securities.
DIVIDEND POLICY
The Company does not anticipate paying dividends on the Common Stock at
any time in the foreseeable future. The Company's Board of Directors plans
to retain earnings for the development and expansion of the Company's
business. The Board of Directors also plans to regularly review the
Company's dividend policy. The Company's ability to pay dividends will be
dependent, in large measure, on its ability to receive dividends and
management fees from its life insurance subsidiaries. The ability of these
corporations to pay dividends and management fees, in turn, is limited
pursuant to applicable insurance laws. Any future determination as to the
payment of dividends will be at the discretion of the Board of Directors of
the Company and will depend on a number of factors, including future
earnings, capital requirements, financial condition and such other factors as
the Board of Directors may deem relevant.
12
<PAGE> 14
DILUTION
As of December 31, 1997, the net tangible book value of the Company was
$6,032,510, or $1.89 per share of Common Stock (net tangible book value has not
been adjusted to exclude deferred policy acquisition costs, costs of policies
purchased and unearned profit reserves). The net tangible book value of the
Company is the aggregate amount of its tangible assets less its total
liabilities. The net tangible book value per share represents the net
tangible book value divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of 1,000,000 shares of Common
Stock at an assumed offering price of $9.00 per share and the application of
the estimated net proceeds therefrom, the pro forma net tangible book value
per share would increase from $1.89 to $3.25. This represents an
immediate increase in net tangible book value of $1.36 per share to current
shareholders and an immediate dilution of $5.75 per share to new investors,
as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Share $9.00
Net tangible book value per share before this offering $1.89
Increase per share attributable to new investors 1.36
-----
Adjusted net tangible book value per share after this offering 3.25
-----
Dilution per share to new investors $5.75
=====
</TABLE>
The following table sets forth as of December 31, 1997: (i) the number
of shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average price per share paid by the current
shareholder; and (ii) the number of shares of Common Stock to be purchased
from the Company and total consideration to be paid by new investors (before
deducting underwriting discounts and other estimated expenses) at an assumed
public offering price of $9.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current shareholder 3,200,000 76.2% $ 1,040 0.1% $ .01
New investors 1,000,000<F1><F2> 23.8 9,000,000 99.9 9.00
--------- ----- ---------- -----
Total 4,200,000<F1> 100.0% $9,001,040 100.0%
========= ===== ========== =====
<FN>
- --------
<F1> Does not include a total of 250,000 shares of Common Stock issuable
upon the exercise of (i) the Underwriters' Warrants and (ii) the
over-allotment option. Also does not include up to 1,200,000
shares of Common Stock issuable pursuant to the Plan. To the
extent that these options and the Underwriters' Warrants are
exercised, there will be further dilution to new investors in this
offering.
<F2> Upon exercise of the over-allotment option, the number of shares held by
new investors would increase to 1,150,000 or 26.4% of the total
number of shares to be outstanding after the offering and the total
consideration paid by new investors will increase to $10,350,000.
See "Principal Shareholders."
</TABLE>
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the: (i) the historical capitalization
of the Company as of December 31, 1997; (ii) the pro forma capitalization of
the Company assuming the Harbourton Acquisition had occurred as of January 1,
1997; and (iii) the pro forma capitalization as adjusted to give effect to
the sale of 1,000,000 shares of common stock at an assumed public offering
price of $9.00 per share. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA<F1> AS ADJUSTED<F2>
---------- ------------- ---------------
<S> <C> <C> <C>
LONG-TERM DEBT:
Total long-term debt $ 0 $ 0 $ 0
SHAREHOLDER'S EQUITY:
Common Stock, $0.01 par value,
10,000,000 shares authorized, 3,200,000
shares issued and outstanding,
4,200,000 as adjusted<F3><F4> 10,000 10,000 20,000
Additional paid - in capital 40 40 7,590,040
Net unrealized gains, net of tax 538,870 538,870 538,870
Retained earnings 6,257,036 7,015,090 7,015,090
---------- ---------- -----------
Total shareholder's equity 6,805,946 7,564,000 15,164,000
---------- ---------- -----------
Total capitalization $6,805,946 $7,564,000 $15,164,000
========== ========== ===========
<FN>
- -------
<F1> Pro forma to give effect to the Harbourton Acquisition as if it had
occurred as of January 1, 1997. See "Pro Forma Consolidated
Condensed Financial Information."
<F2> Gives effect to the Harbourton Acquisition and the Woodmen Acquisition as
if such acquisitions had occurred on January 1, 1997. As adjusted to
reflect the sale of the shares offered by this Prospectus at an assumed
public offering price of $9.00 per share and the application of the
estimated net proceeds of $7,600,000.
<F3> Does not include 1,200,000 shares of Common Stock reserved for issuance
under the Plan. See "Management -- Long-Term Incentive Plan."
<F4> Does not include an aggregate of up to 250,000 shares of Common Stock
issuable upon exercise of: (i) the over-allotment option; and (ii)
the Underwriters' Warrants.
</TABLE>
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following historical summary consolidated financial information has
been derived from the audited consolidated balance sheets of the Company at
December 31, 1996 and 1997, unaudited consolidated balance sheets at December
31, 1993, 1994 and 1995, audited consolidated statements of operations for
each of the three years in the period ended December 31, 1997 and unaudited
consolidated statements of operations for each of the two years in the period
ended December 31, 1994. This selected financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related notes thereto included elsewhere in this Prospectus, and the
information set forth under "Pro Forma Consolidated Condensed Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premium income $23,154 $24,357 $27,771 $33,702 $38,044
Net investment income
and net realized gains 4,804 3,908 4,514 5,729 8,838
------- ------- ------- ------- -------
Total revenues 27,958 28,265 32,285 39,431 46,882
Benefits incurred<F1> 19,053 19,563 20,775 24,750 30,003
Other expenses 7,140 11,848 9,631 13,358 13,411
------- ------- ------- ------- -------
Income (loss) before federal taxes 1,765 (3,146) 1,879 1,323 3,468
Income taxes 340 (539) 400 283 1,004
------- ------- ------- ------- -------
Net income (loss) $ 1,425 $(2,607) $ 1,479 $ 1,040 $ 2,464
======= ======= ======= ======= =======
Weighted average
shares outstanding 3,200 3,200 3,200 3,200 3,200
Basic earnings (loss) per share $ .44 $ (.81) $ .46 $ .33 $ .77
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Invested assets $46,386 $43,302 $54,939 $58,082 $118,416
Total assets 57,991 60,779 72,801 77,408 141,603
Total policy liabilities 51,286 62,391 68,432 73,067 130,450
Shareholder's equity (deficit) 4,770 (1,981) 3,568 3,047 6,806
<FN>
- ----------
<F1> Benefits incurred includes death benefits, surrender benefits, increase
in future policy benefits and interest paid on policy holder deposits.
Benefits incurred in 1997 were reduced by $1,148 due to a one-time change
in the formula determining commissions payable to NPS. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 12 to the Consolidated Financial Statements of the Company.
</TABLE>
15
<PAGE> 17
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The unaudited pro forma consolidated condensed balance sheet and
statement of operations below give effect to the Harbourton Acquisition as if
such acquisition had occurred on January 1, 1997. The unaudited consolidated
condensed statement of operations also gives effect to the Woodmen
Acquisition as if it had occurred on January 1, 1997. The pro forma
financial statements may not be indicative of the results that actually would
have occurred if the acquisitions and the adjustments described in the
accompanying notes had occurred on the dates assumed and are not intended to
project the Company's financial condition or results of operations at any
future date.
The Harbourton Acquisition is subject to final regulatory approval and
there is no assurance such regulatory approval will be obtained. The
acquired assets and liabilities of Harbourton were recorded at their
estimated fair values at the balance sheet date. Upon receipt of final
regulatory approval, the purchase price will be finalized and additional
analysis will be performed to verify the estimated fair values. As a result
of such additional analysis, additional adjustments may be necessary;
however, the Company believes that such adjustments will not be material.
The pro forma financial statements are based on the historical
financial statements of the Company and Harbourton and should be read in
connection with such consolidated financial statements and related notes
thereto of the Company and of Harbourton included elsewhere in this
Prospectus.
<TABLE>
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THE PRO FORMA PRO FORMA
COMPANY HARBOURTON ADJUSTMENTS COMBINED
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS:
Fixed maturities $ 45,120 $126,228 $(17,800)<Fa><Fb> $153,548
Reverse repurchase agreements 29,512 - - 29,512
Short-term investments 31,531 - - 31,531
Other invested assets 12,253 9,025 758 <Fl> 22,036
Investment in Harbourton - - - <Fb><Fm> -
-------- -------- -------- --------
Total investments 118,416 135,253 (17,042) 236,627
Cash 1,625 22,756 (22,000)<Fa> 2,381
Deferred acquisition costs 15,804 5,029 (1,213)<Fc> 19,620
Other assets 5,758 4,338 - 10,096
-------- -------- -------- --------
Total assets 141,603 167,376 (40,255) 268,724
======== ======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY:
Future policy benefits 87,843 9,966 - 97,809
Policyholder deposits 41,614 108,572 - 150,186
Other liabilities 5,340 7,825 - 13,165
-------- -------- -------- --------
Total liabilities 134,797 126,363 - 261,160
-------- -------- -------- --------
Total shareholder's equity 6,806 41,013 (40,255)<Fa><Fc><Fm><FN> 7,564
-------- -------- -------- --------
Total liabilities and
shareholder's equity $141,603 $167,376 $(40,255) $268,724
======== ======== ======== ========
The accompanying notes are an integral part of the Pro Forma Consolidated
Condensed Financial Information.
</TABLE>
16
<PAGE> 18
<TABLE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THE PRO FORMA PRO FORMA
COMPANY HARBOURTON ADJUSTMENTS COMBINED
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Life insurance premiums $38,044 $ 432 $ - $38,476
Investment income, net 6,171 13,990 (1,039)<Ff><Fg><Fh> 19,122
Realized investment gains 2,667 1,377 - 4,044
------- ------- ------- -------
Total revenues 46,882 15,799 (1,039) 61,642
------- ------- ------- -------
BENEFITS AND EXPENSES:
Policy benefits 13,667 8,089 (4,557)<Fi> 17,199
Increase in future policy benefits 15,285<Fj> - - 15,285
Interest paid on deposit funds 1,051 6,671 1,733 <Fk> 9,455
Commissions 11,248 19 - 11,267
General expenses 3,307 4,390 (3,290)<Fd> 4,407
Change in deferred - - - -
acquisition costs, net (1,144) 989 (300)<Fe> (455)
------- ------- ------- -------
Income (loss) before federal income tax 3,468 (4,359) 5,375 4,484
Provision for federal income tax 1,004 1,070 (811)<Fl> 1,263
------- ------- ------- -------
Net income (loss) $ 2,464 $(5,429) $ 6,186 $ 3,221
======= ======= ======= =======
Weighted average shares outstanding 3,200 - - 3,200
Pro forma basic earnings per share $ 0.77 $ - $ - $ 1.01
The accompanying notes are an integral part of the Pro Forma Consolidated
Condensed Financial Information.
17
<PAGE> 19
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<FN>
<Fa> Reflects the extraordinary dividend payment $29,000 ($22,000 from cash
and $7,000 from fixed maturities) to the former owners of Harbourton
as a part of the acquisition.
<Fb> Reflects the purchase by the Company of Harbourton for $10,800.
<Fc> The amount shown of $1,213 is the difference between Harbourton's
historical deferred acquisition costs, which have been eliminated,
and the present value of future profits (cost of policies purchased)
that has been recorded as a result of the purchase. The cost of
policies purchased of $3,816 has been amortized over the estimated
life of the insurance in force based upon future cash flows.
<Fd> General and administrative expenses have been adjusted by $3,290 to
reflect estimated cost savings of consolidating Harbourton's
administrative functions into the Company's.
<Fe> Reflects the amortization of the cost of policies purchased for one year
of $300.
<Ff> Reflects the elimination of $540 in investment income on the $10,800 in
invested assets used to acquire Harbourton.
<Fg> Reflects the elimination of $2,610 in investment income on the $29,000 in
invested assets used to pay the extraordinary dividend to the former
owners of Harbourton.
<Fh> Reflects the increase in investment income of $2,111 related to an entire
year's investment income from the acquisition of the Woodmen block of
business.
<Fi> Reflects an entire year's expenses of $1,733 associated with the
acquisition of the Woodmen block of business.
<Fj> Benefits incurred in 1997 were reduced by $1,148 due to a one-time
change in the formula determining commissions payable to NPS. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 12 to the Consolidated Financial Statements of
the Company.
<Fk> Reflects the elimination of $4,557 in Harbourton policy benefit expenses
relating to one time non-recurring charges incurred as result of the
discontinuance of a certain disability block of business.
<Fl> Reflects the income tax effect of the pro forma adjustments and the
elimination of Harbourton's change in deferred tax asset valuation
allowance, which will be recorded at the acquisition date.
<Fm> Reflects the net increase in pro forma earnings of $758.
<FN> Elimination of the Company's investment in Harbourton of $10,800.
</TABLE>
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in connection with the Company's
Consolidated Financial Statements and related notes, the financial statements
of Harbourton and the notes thereto, the information set forth under "Pro
Forma Consolidated Financial Information" and the other financial information
included elsewhere in this Prospectus.
OVERVIEW
The Company is a holding company for operating subsidiaries that
consist primarily of life insurance companies. The life insurance companies
primarily write policies sold by the Company's affiliate, NPS, in connection
with NPS's sales of prearranged funeral contracts. As a result of the growth
in the amount of pre-arranged funeral contracts sold by NPS over the past
three years, the Company's revenues have increased significantly. The
Company's growth also resulted, to a lesser extent, from the 1997 acquisition
of the Woodmen block of business (in force insurance policies and annuities).
The Company's revenues are derived primarily from premiums on insurance
policies generated by NPS. Net investment income and realized investment
gains also have contributed significantly to total revenues as the Company's
invested assets have grown.
The Company's expenses consist principally of benefits paid or accrued,
commissions on the sale of policies and general and administrative costs
associated with life insurance company operations. The Company expects that
benefit costs and commissions will continue to increase as the Company
executes its growth plans. Although general and administrative costs have
increased in accordance with the growth in the Company's business, the
Company believes its infrastructure will support increasing levels of
internal revenue growth without the need for general and administrative
expenses to increase at a similar rate.
The Company's insurance subsidiaries are subject to a high degree of
regulation from various state insurance administrators. Such regulation
governs (among other things): investment policies; financial reporting;
capital adequacy; terms of policies; and the ability of the Company's
subsidiaries to pay dividends and management fees to the Company. In
addition, NPS's activities in selling prearranged funeral contracts are
highly regulated in the states in which NPS does business. These regulatory
aspects and future changes therein could materially affect the Company's
financial condition and results of operations. See "Business - Regulatory
Factors."
The Company's strategy is to increase shareholder value by growing its
insurance business through: (i) selected acquisitions of life insurance
companies and in force life insurance policies and annuities; and (ii) increases
in life insurance policies arising out of prearranged funeral contracts sold
by NPS. The Company's ability to acquire such companies and policies will be
dependent upon (among other things) its ability to identify, negotiate and
complete transactions of favorable values, arrange necessary financing and
integrate and manage the acquisitions after completion, including preserving
customer relationships. There can be no assurance that the Company will
successfully execute its strategy.
Since the beginning of 1997, the Company has acquired the Woodmen block
of business and entered into a definitive agreement to acquire Harbourton. In
addition, the Company entered into an agreement to acquire World Service. See
"Pro Forma Consolidated Condensed Financial Information."
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997
Premium income increased $4.3 million, or 13%, from $33.7 million in
1996 to $38.0 million in 1997 due to an increase in the amount of new
business written. The increase in new business written was primarily the
result of increases in prearranged funeral contracts sold by NPS. Such sales
have increased due to an expansion of NPS's sales force.
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<PAGE> 21
Net investment income and net realized gains increased $3.1 million, or
54%, from $5.7 million in 1996 to $8.8 million in 1997. This increase was
attributable to a higher level of average invested assets (primarily resulting
from the Woodmen block of business acquisition) and a more actively managed
investment portfolio. Average invested assets increased $31.7 million, or
56%, from $56.5 million in 1996 to $88.2 million in 1997.
Benefits incurred increased $5.2 million, or 21%, from $24.8 million in
1996 to $30.0 million in 1997 primarily due to an overall increase in
business in force and interest credited to policyholder accounts related to
the acquisition of the Woodmen block of business. Effective as of January 1,
1997, the Company and NPS entered an amended agent's agreement that effected
a one-time reduction of $1.1 million of change in future policy benefits due
to increased commissions on first year of single premium policies and
suspended payments of renewal commissions on policies issued before December
31, 1995. See Note 12 to the Consolidated Financial Statements of the
Company.
Other expenses remained relatively unchanged from 1996 to 1997; however
this was a result of two offsetting factors (i) policy administration
expenses increased as a result of the acquisition of the Woodmen block of
business and (ii) general and administrative expenses decreased due to the
initiation of a cost sharing agreement between the Company and NPS, whereby
NPS reimbursed the Company for a portion of its general and administrative
expenses attributable to NPS's business.
Net income increased $1.5 million, or 140%, from $1.0 million in 1996
to $2.5 million in 1997 due to the factors discussed above.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1996
Premium income increased $5.9 million, or 21%, from $27.8 million in
1995 to $33.7 million in 1996 due to an increase in the amount of new
business written. The increase in new business written was due primarily to
increases in prearranged funeral contracts sold by NPS. Such sales have
increased due to an expansion of NPS's sales force and more aggressive
marketing.
Net investment income and net realized gains increased $1.2 million, or
26%, from $4.5 million in 1995 to $5.7 million in 1996. This increase was
attributable to an increased level of average invested assets and
improvements in portfolio management.
Benefits incurred increased $4.0 million, or 19%, from $20.8 million in
1995 to $24.8 million in 1996 primarily due to an overall increase in
business in force.
Other expenses increased $3.7 million from $9.6 million in 1995 to
$13.3 million in 1996. This increase was a result of two factors: (i)
increased commissions paid as a result of a large increase in new business
written; and (ii) the Company's growth and expansion of its operations.
Net income decreased $500,000, or 33%, from $1.5 million in 1995 to
$1.0 million in 1996 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently generates sufficient cash receipts from its
operations to fund its operating activities. Cash from operations for the
year ended December 31, 1997 was $9.2 million compared to $6.2 million for
the prior year. The increase in cash from operations was due primarily to
increased revenues.
The Company's total assets increased from $77.4 million at December 31,
1996 to $141.6 million at December 31, 1997, while total investments
increased from $58.1 million to $118.5 million at such dates. These increases
were due to the growth in life insurance written and to the Woodmen
Acquisition. Policyholder loans to related parties increased from $758,000 to
$11.5 million due to a change in investment strategy by NPS. Due to the
riskless nature of these policy loans (they are fully collateralized by the
cash value of the policies) and their contract
20
<PAGE> 22
interest rates, the Company believes they afford comparable risk-adjusted
returns to alternative categories of invested assets. Cost of policies
purchased, net of amortization, increased from zero at December 31, 1996 to
$3.2 million at December 31, 1997, reflecting the Woodmen Acquisition.
Future policy benefits increased from $69.7 million at December 31,
1996 to $87.8 million at December 31, 1997, due to the expansion of the
Company's in force insurance. Policyholder deposits increased from $2.1
million to $41.6 million at December 31, 1996 and 1997, respectively,
primarily as a result of the Woodmen Acquisition of annuity contracts.
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 this
offering, 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
acquisitions of Harbourton and World Service. In the event that the
Company's plans or assumptions change, or if its requirements to meet
unanticipated changes in business conditions or the proceeds of this offering
prove to be insufficient to fund operations, the Company could be required to
seek additional financing prior to that time.
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices. The Company's primary market risk exposures are to changes
in interest rates, although the Company also has certain exposures to changes
in equity prices. The Company has no foreign exchange risk and no direct
commodity risk. The active management of market risk is integral to the
Company's operations. To manage exposure to market risk, the Company may
rebalance its existing asset or liability portfolios, change the character of
its existing asset or liability portfolios, change the character of future
investments purchased or use derivative instruments to modify the market risk
characteristics of existing assets and liabilities or assets expected to be
purchased. The Company's market risk sensitive instruments are entered into
for purposes other than trading.
The Company has investment guidelines that define the overall framework
for managing market and other investment risks, including the
accountabilities and controls over these activities. In addition, the
Company has specific investment policies for each of its subsidiaries that
delineate the investment limits and strategies that are appropriate given
each entity's liquidity, surplus and regulatory requirements.
INTEREST RATE RISK
Interest rate risk is the risk that the Company will incur economic
losses due to adverse change in interest rates. This risk arises from many
of the Company's primary activities, as the Company invests substantial funds
in interest-sensitive assets and also has certain interest sensitive
liabilities in its life and annuity operations.
The Company seeks to invest premiums and deposits to create future cash
flows that will fund future claims, benefits and expense, and earn stable
margins across a wide variety of interest rate and economic scenarios. In
order to achieve this objective and limit its exposure to interest rate risk,
the Company adheres to a philosophy of managing the duration of assets and
related liabilities. See "Business -- Investments."
The carrying value of the Company's investment portfolio as of December
31, 1997 was $118.4 million, of which 38% was invested in fixed maturity
securities. The primary market risk to the investment portfolio is interest
rate risk associated with investments in fixed maturity securities.
EQUITY PRICE RISK
Equity price risk is the risk that the Company will incur economic
losses due to adverse changes in a particular stock or stock index. At
December 31, 1997, the Company had approximately $800,000, or less than 1% of
its investment portfolio, invested in equity securities.
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<PAGE> 23
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.
IMPACT OF YEAR 2000
Many existing computer programs use only two digits to identify a year
in date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, this could result in a system failure or calculations of erroneous
results by or at the Year 2000.
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 customers and suppliers 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 customers and
suppliers, the Company is not aware of any material impact on their systems
relating to the transition to the Year 2000. The Company's total cost of
Year 2000 related issues is not expected to a have a material adverse effect
on the Company's consolidated results of operations.
ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
statements of financial accounting standards. In February 1997, the FASB
issued Statement of Financial Accounting Standards ("SFAS") No. 128. The new
standard replaces primary and fully diluted earnings per share with basic and
diluted earnings per share. SFAS No. 128 has been adopted by the Company in
the year ended December 31, 1997.
In June 1997, the FASB issued SFAS Nos. 130 and 131. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components. SFAS No. 131 establishes standards for reporting about
operating segments, products and services, geographic areas and major
customers. The standards become effective for fiscal years beginning after
December 15, 1997. Management plans to adopt these standards in the year
ending December 31, 1998. Management believes that provisions of SFAS Nos.
130 and 131 will not have a material effect on its consolidated financial
condition or reported results of operations.
22
<PAGE> 24
BUSINESS
BUSINESS STRATEGY
The Company is an insurance holding company. Through its subsidiaries,
the Company acquires and manages life insurance and annuity business and
issues life insurance and annuity products. Since its organization, the
Company has completed two acquisitions: Lincoln and the Woodmen block of
qualified pension plan business. In addition, the Company organized Memorial
in 1986.
One primary component of the Company's business strategy is to grow by
acquiring blocks of in force life insurance and annuity business and
insurance companies with such business. The Company believes it is well
positioned to maximize the profitability of the business it acquires. It has
invested in the computer and administrative capabilities necessary to add
additional blocks of business and life insurance companies without a
proportional increase in operating expenses. In addition, the Company has
developed management techniques for reducing the expenses of the companies it
acquires through consolidation of their operations with those of the Company.
Such techniques include reduction or elimination of overhead, including the
acquired company's management, staff and home office and the elimination of
marketing expenses where appropriate. The other component of the Company's
strategy is to grow by increasing sales of its insurance to fund prearranged
funeral contracts and annuity products issued by its subsidiary insurers. The
Company, in addition, believes its acquisitions may enhance its marketing
capabilities by providing it the opportunity to sell additional life
insurance and annuity products to the policyholders whose business it has
acquired.
Effective September 1, 1997, the Company acquired a block of life
insurance and annuity policies from Woodmen Accident and Life Company for a
purchase price of approximately $3.5 million. In connection with this
transaction, the Company assumed approximately $51 million of insurance
liabilities and received approximately $48 million in cash. The Company has
entered into definitive agreements to acquire Harbourton and World Service, as
discussed below.
The Company regularly investigates acquisition opportunities in the
life insurance industry. Any decision to acquire a block of business or an
insurance company will depend on the Company's assessment of various factors,
including those described below. No assurance can be given that the Company
will be successful in consummating any acquisition, or that any acquisition,
once completed, will ultimately enhance the Company's results of operations.
The Company seeks to acquire in force blocks of traditional life
insurance and annuity business and seeks products that do not strain the
Company's available statutory surplus. The Company seeks "seasoned" life
insurance business that has been in force for several years in order to avoid
the higher rate of policy lapses and surrenders normally experienced in the
early years after issue. The assets supporting the business to be acquired
are of special concern. The Company seeks investment portfolios that are
capable of being restructured to provide yield and quality improvements
consistent with the Company's investment philosophy and reserving
requirements.
In addition to the insurance product type, the Company considers
several other factors when evaluating an insurance company acquisition. Among
other things, the Company seeks to identify small- to medium-size insurers
that have high operating and marketing expenses in relation to assets and
premiums and thereby provide significant opportunities to reduce such
expenses through application of the Company's cost reduction techniques.
Once the Company has identified a potential acquisition candidate it
will undertake a more detailed evaluation of the business or the company it
considers acquiring. The Company prepares an actuarial valuation of the in
force business to determine if the business can produce profits that are
consistent with management's objectives. In connection with its normal
investigation, the Company will review claims experience, underwriting
standards and mortality, morbidity and other actuarial experience of the
business. In addition, the Company will assesses the quality of the records
kept and their compatibility with the Company's computer systems in order to
determine whether the business can be assimilated by the Company in a timely
and cost-effective manner.
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<PAGE> 25
The Company may effect its acquisitions through the purchase of shares,
if the acquisition candidate is an insurance company, or a reinsurance
agreement if the proposed acquisition concerns a block of business. In
executing stock acquisitions, the Company seeks to identify and manage
acquiree risks and other liabilities through seller contractual
indemnification and other techniques.
On January 28, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding capital stock of Harbourton for total
consideration of approximately $10.8 million. Harbourton's insurance
operations consist of the reinsurance of life, annuity and disability income
products from various other United States insurance companies. The
acquisition is subject to regulatory approval and will be accounted for under
the purchase method of accounting. As of December 31,1997, Harbourton
reported total assets of $167.4 million and stockholder's equity of $41.0
million. Prior to the consummation of the transaction, Harbourton will pay
an extraordinary dividend of $29.0 million to its sole shareholder. The Company
expects that the Harbourton Acquisition will be completed in April 1998. See
"Pro Forma Consolidated Condensed Financial Information."
On March 9, 1998, the Company executed a definitive stock purchase
agreement to acquire all of the outstanding capital stock of World Service
for total consideration of $5.5 million. 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 is
subject to regulatory approval and will be accounted for under the purchase
method of accounting. The Company expects that the World Service acquisition
will be completed in May 1998. This acquisition will expand the number of
states in which the Company will be licensed to conduct business. It is not
anticipated that the World Service acquisition will have a material effect on
the Company's future financial condition or results of operations.
NATIONAL PREARRANGED SERVICES
NPS, which has been engaged in business since 1979, markets preneed
products primarily in Texas and Missouri and, to a lesser extent, Illinois,
Iowa and Kansas. In addition to marketing, NPS recruits, trains and manages
an agency field force, which is dedicated to selling only the products of the
affiliated group of companies. NPS believes that the market for preneed
products is growing significantly with the aging of the U.S. population. The
market for preneed products is primarily in the 50 and older age group.
NPS's strategy is to continue to capitalize on the demand for older age
products, which management believes, will continue to present a growing
market. NPS currently is licensed in 22 additional states in which it has
targeted expansion. See "Certain Transactions."
PRODUCT PROFITABILITY
The long-term profitability of insurance products depends on the
accuracy of the actuarial assumptions that underlie the pricing of such
products. Actuarial calculations for such insurance products, and the
ultimate profitability of such products, are based on four major factors: (i)
persistency; (ii) mortality (for life insurance); (iii) return on cash
invested by the insurer during the life of the policy; and (iv) expenses of
acquiring and administering the policies.
OPERATIONS AND ADMINISTRATION
The Company emphasizes a high level of service to agents and
policyholders and strives to maintain low overhead costs. The Company's
principal administrative departments are its financial, policyholder
services, and data processing departments. The financial department provides
actuarial, accounting and budgeting services and establishes cost control
systems for the Company. The policyholder services department reviews policy
applications, issues and administers policies and authorizes disbursements
related to claims. The data processing department oversees and administers
the Company's information processing systems.
The Company has invested in data processing hardware and software and
employs its data processing capacity in all facets of its operations. All of
its Austin, Texas and St. Louis, Missouri operations are run on a network of
personal computers. The Company's administrative departments use a common
integrated system
24
<PAGE> 26
designed to permit the Company to function relatively efficiently, control
costs and maintain relatively low overhead. The Company's system currently is
servicing approximately 98,000 policies. Additional policies can be added at a
relatively low marginal cost, thereby increasing economies of scale.
As part of its acquisition strategy, the Company has developed
management techniques to reduce costs by consolidating and standardizing the
procedures and data processing systems employed in the administration of
acquired companies and blocks of business. The Company believes that such
consolidation and standardization permits the efficient combination of the
facilities and operations of the Company with those of the companies and
blocks of business that it acquires. As a result, many duplicative costs
connected with training and employing personnel and with leasing or owning
offices, marketing, data processing equipment and other facilities are
reduced or eliminated.
INVESTMENTS
The investment income of the Company's insurance subsidiaries is an
important part of its total revenues. Profitability is significantly affected
by spreads between rates credited on insurance liabilities and interest rates
earned on invested assets. As of December 31, 1997, the average, annual
interest rate credited on the Company's total reserve liability was
approximately 5.2% per annum, and the average yield of the Company's
investment portfolio was approximately 9%. Increases or decreases in interest
rates could increase or decrease the interest rate spread between investment
yields and interest rates credited on insurance liabilities, which in turn
could have a beneficial or adverse effect on the future profitability of the
Company. Sales of fixed maturity securities that result in investment gains
also may tend to decrease future interest yield from the portfolio. State
insurance laws and regulations prescribe the types of permitted investments
and limit their concentration in certain classes of investments.
The Company's investment strategy is to maintain primarily an investment
grade, fixed maturity portfolio, provide adequate liquidity for expected
liability durations and other requirements and maximize total return.
Consistent with this strategy, the Company invests primarily in securities of
the U.S. government and its agencies, and collateralized mortgage obligations
("CMO's"). At December 31, 1997, approximately 97% of the book value of the
Company's fixed maturity investments consisted of investment grade
securities. From time to time when opportunities arise, however, limited
amounts of below investment grade securities may be purchased.
The Company periodically reviews the percentage of its portfolio that
is invested in below investment grade securities and intends to maintain the
percentage holdings of such securities at or below the December 31, 1997
level of 5% of the book value of the Company's fixed maturity investments.
However, the Company's policies in this regard are affected by market and
other conditions and may change from time to time. While below investment
grade securities generally provide higher yields, they involve greater risks
than investment grade securities because their issuers typically are more
highly leveraged and more vulnerable to adverse economic conditions than
investment grade issuers. In addition, the trading markets for these
securities are often less liquid and efficient than the markets for
investment grade securities.
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<PAGE> 27
The Company's investment philosophy centers on maximizing the rate of
return on its invested assets while maintaining appropriate relationships
with the expected maturities of liabilities. Each of the Company's products
has different liability characteristics, requiring different asset mixes to
accomplish this goal. The scheduled maturities of the Company's fixed
maturity investments at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
% OF
FIXED
SCHEDULED MATURITY MATURITY
------------------ --------
<S> <C>
Due in five years or less 6.0
Due after five years through ten years 7.0
Due after ten years 22.0
Mortgage backed securities 65.0
Total fixed maturities 100.0
</TABLE>
Approximately 25% of the Company's invested assets at December 31, 1997
were comprised of mortgage backed securities. Investments in mortgage backed
securities include CMO's and mortgage backed pass-through securities.
Approximately 100% of the book value of the mortgage backed securities in the
Company's portfolio are backed by an agency of the U.S. Government (although
generally not by the full faith and credit of the U.S. Government) as to the
full amount of both principal and interest. The Company closely monitors the
market value of all investments within its mortgage backed portfolio.
Certain mortgage backed securities are subject to significant
prepayment risk, since, in periods of declining interest rates, mortgages may
be repaid more rapidly than scheduled as individuals refinance higher rate
mortgages to take advantage of the lower current rates. As a result, holders
of mortgage backed securities may receive large prepayments on their
investment which cannot be reinvested at an interest rate comparable to the
rate on the prepaying mortgages.
RESERVES
In accordance with applicable insurance laws, the Company's insurance
subsidiaries have established and carry as liabilities in their statutory
financial statements actuarially determined reserves to satisfy their annuity
contract and life insurance policy obligations. Reserves, together with
premiums to be received on outstanding policies and interest thereon at
certain assumed rates, are calculated to be sufficient to satisfy policy and
contract obligations. The actuarial factors used in determining such reserves
are based on statutorily prescribed mortality tables and interest rates.
The reserves recorded in the consolidated financial statements included
elsewhere in this Prospectus are calculated based on generally accepted
accounting principles ("GAAP") and differ from those specified by the laws of
the various states and recorded in the statutory financial statements of the
Company's insurance subsidiaries. These differences arise from the use of
different mortality tables and interest rate assumptions, the introduction of
lapse assumptions into the reserve calculation and the use of the net level
premium reserve method on all insurance business. See Note 2 of the Notes to
the Company's Consolidated Financial Statements for certain additional
information regarding reserve assumptions under GAAP.
To determine policy benefit reserves for its life insurance products,
the Company performs periodic studies to compare current experience for
mortality, interest and lapse rates with projected experience used in
calculating the reserves. Differences are reflected currently in earnings for
each period. The Company historically has not experienced significant adverse
deviations from its assumptions.
REINSURANCE
The Company enters into coinsurance funds withheld treaties and co/mod
coinsurance agreements with reinsurers to increase its statutory surplus.
The cost of the increase in statutory surplus is recognized as reinsurance
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<PAGE> 28
premiums ceded. Consistent with the general practice of the life insurance
industry, the Company has reinsured portions of the coverage provided by its
insurance products with other insurance companies under agreements of
indemnity reinsurance. Reinsurance is not maintained with respect to products
currently marketed by Memorial. The policy risk retention limit on the life
of one individual does not exceed $50,000.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a particular risk or to obtain a greater diversification of
risk. Indemnity reinsurance does not discharge the primary liability of the
original insurer to the insured.
COMPETITION
The life insurance industry is highly competitive and consists of a
large number of insurance companies, many of which have substantially greater
financial resources, broader and more diversified product lines and larger
staffs than those possessed by the Company. Competition also is encountered
from the expanding number of banks, securities brokerage firms and other
financial intermediaries that are marketing insurance products and that offer
competing products such as savings accounts and securities. Competition
within the life insurance industry occurs on the basis of, among other
things, interest rates, financial stability, policyholder service and ratings
assigned by insurance rating organizations.
REGULATORY FACTORS
The Company's insurance subsidiaries are subject to regulation by the
insurance regulatory authorities in the states in which they are domiciled
and the insurance regulatory bodies in the other jurisdictions in which they
are licensed to sell insurance. The purpose of such regulation is primarily
to provide safeguards for policyholders rather than to protect the interests
of shareholders. The insurance laws of various jurisdictions establish
regulatory agencies with broad administrative powers relating to the
licensing of insurers and their agents, the regulation of trade practices,
management agreements, investments, deposits of securities, the form and
content of financial statements, rates charged by insurance companies, sales
literature and insurance policies, accounting practices and the maintenance
of specified reserves, capital and surplus. Memorial and Lincoln are required
to file detailed periodic financial reports with supervisory agencies in each
of the jurisdictions in which they do business. The Company's life insurance
subsidiaries are licensed in 29 states and, upon the completion of the
World Service acquisition, its subsidiaries will be licensed in 43 states.
Most states have enacted legislation regulating insurance holding
companies. The insurance holding company laws and regulations vary by state,
but generally require an insurance holding company and its insurance company
subsidiaries licensed to do business in the state to register and file
certain reports with the regulatory authorities, including information
concerning capital structure, ownership, financial condition, certain
intercompany transactions and general business operations. State holding
company laws also require prior notice or regulatory agency approval of
certain material intercompany transfers of assets within the holding company
structure.
As a holding company, Company's ability to meet its financial
obligations and pay operating expenses depends on the receipt of sufficient
funds, primarily through dividends and management fees, from its
subsidiaries. As Texas domiciled insurance companies, Memorial and Lincoln
may not, without the prior approval of the Texas Department of Insurance, pay
any dividend or distribution which, together with all other dividends and
distributions paid within the preceding 12 months, exceeds the lesser of: (i)
net gain from operations; or (ii) 10% of capital and surplus, in each case as
shown in its most recent annual statutory financial statements.
Under Texas law, Memorial and Lincoln may not enter into certain
transactions, including management agreements and service contracts, with
members of its insurance holding company system, including the Company,
unless the insurance companies have notified the Texas Department of
Insurance of their intention to enter into such transactions and the Texas
Department of Insurance has not disapproved of them within the period
specified by Texas law. Among other things, such transactions are subject to
the requirement that their terms be fair and reasonable and that the charges
or fees for services performed be reasonable.
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<PAGE> 29
In some instances many states require deposits of assets for the
protection of policyholders either in those states or for all policyholders.
At December 31, 1997, securities representing approximately 3% of the book
value of the Company's invested assets were on deposit with various state
treasurers or custodians. Such deposits must consist of securities that
comply with the standards that the particular state has established.
As part of their routine regulatory oversight process, approximately
once every three to five years state insurance departments conduct periodic
detailed examinations of the books, records and accounts of insurance
companies domiciled in their states. Memorial underwent such an examination
during 1992 for the period ended December 31, 1991. Lincoln underwent such an
examination during 1992 for the period ended March 31, 1992. The final
reports on the examinations have been issued by the Texas Department of
Insurance and did not raise any significant issues. The next examinations of
the two insurance companies are due to commence during 1998 based on the
companies' financials for the period ended December 31, 1997.
In October 1996, the Texas Department of Insurance issued an order
and letter to Memorial and Lincoln, respectively, to comply with certain
administrative and investment guidelines, including those relating to
permissible investments. Memorial and Lincoln had invested a portion of their
assets in derivative instruments in the belief that these instruments were
allowed under Texas insurance investment guidelines. The Department alleged
that these investments were not in compliance with state guidelines. The
Company complied with the Department's position, immediately ceased investing
in derivative instruments and liquidated its existing portfolio with a net gain
in excess of $1.0 million. In May 1997, Memorial and Lincoln demonstrated to
the Department that they had fully complied with all applicable guidelines and
regulations, the companies agreed to furnish quarterly compliance reports to
the Department and the Department released the companies from the order.
Subsequently, Texas investment regulations were changed to allow investments
in derivatives on a restricted basis.
EMPLOYEES
At December 31, 1997, the Company had 69 employees. The Company
believes that it enjoys good relations with its employees and agents.
PROPERTIES
Memorial leases approximately 20,700 square feet in an office building
located at 10 S. Brentwood, St. Louis, Missouri under the terms of a lease
that expires in June 2002. Memorial also leases 10,300 square feet of
property at 1250 Capital of Texas Highway, Building 3, Suite 100, Austin,
Texas 78746 under the terms of a lease that expires in August 2002.
LEGAL PROCEEDINGS
NPS, an affiliate of the Company, along with Lincoln have been named
defendants in a previously dismissed class-action lawsuit that was refiled
during 1996 in St. Louis, Missouri, City Circuit Court. The suit involves a
challenge to NPS's methods of funding pre-arranged funeral contracts with
policies issued by the Company. The suit contains no specified dollar
amounts for damages. Both the Company and NPS believe that the claims are
without merit and a motion is pending to dismiss Lincoln from the case. The
Company does not believe the outcome of this lawsuit will have a material
adverse effect on its future results of operations or financial condition.
The Company also is subject to various other claims and contingencies
arising out of the normal course of business. The Company believes that the
total amounts that will ultimately be paid, if any, arising from these claims
and contingencies will have no material adverse effect on the Company's
consolidated results of operations or its financial condition.
28
<PAGE> 30
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Nicholas M. Powling 49 President, Chief Executive Officer and
Class I Director
Clifton Mitchell, FSA, MAAA 46 Executive Vice President - Actuarial
and Class I Director
Brent D. Cassity 31 Chairman of the Board and Class III
Director
Randall K. Sutton 52 Vice President and Class II Director
Howard A. Wittner 61 Class III Director
</TABLE>
Mr. Nicholas M. Powling has been a director, the President and Chief
Executive Officer of the Company since April 1996. Prior to joining the
Company, Mr. Powling was the Chief Financial Officer for Bankers Protective
Life Insurance Company ("Bankers") in Austin, Texas from April 1993 to March
1996. Prior thereto, Mr. Powling served as Vice President of Finance and
then Vice President of Mergers & Acquisitions at Associated Insurance
Companies Inc. in Indianapolis, Indiana from 1982 to 1993.
Mr. Clifton Mitchell joined the Company in February 1998. Immediately
prior to that date, Mr. Mitchell owned C. Mitchell Company, Inc. an actuarial
consulting firm, and was the Company's consulting actuary. Mr. Mitchell is a
Fellow of the Society of Actuaries, a Member of the American Academy of
Actuaries and a Fellow of the Conference of Consulting Actuaries and has been
a consulting actuary in private practice since 1983. Mr. Mitchell has been
involved in insurance acquisitions since 1978. Mr. Mitchell has been a
director of the Company since March 1998.
Mr. Brent D. Cassity has spent his business career in the pre-need
funeral insurance industry in positions of increasing responsibilities with
NPS and its affiliates. He has served as President and Chief Operating
Officer of NPS since 1997. In addition to serving as an officer and director
of NPS, Mr. Cassity has served as a director of the Company since 1996. Mr.
Cassity also serves as a member of the Board of Directors of each of Lincoln
and Memorial.
Mr. Randall K. Sutton is currently the Chief Financial Officer of NPS.
During his 18-year tenure with NPS, Mr. Sutton also has managed investments
for several affiliated companies. Mr. Sutton has been a member of the Board
of Directors since 1996 and also serves as a member of the Board of Directors
of each of Memorial, Lincoln, Lincoln Memorial Services (a corporate
investment firm) and NPS.
Mr. Howard A. Wittner's term as a director of the Company commenced in
September 1997. For more than the past five years, Mr. Wittner has been a
senior partner practicing corporate and business law through his firm
Wittner, Poger, Rosenblum, Kessler, Spewak & Maylack, P.C., St. Louis,
Missouri. Mr. Wittner also serves as the prosecuting attorney for the City of
Creve Coeur, Missouri. His professional memberships include the Bar
Association of Metropolitan St. Louis, The Association of Trial Attorneys and
the Missouri Defense Lawyers Association. Mr. Wittner has served as counsel
for the Company and its affiliates for more than the past five years.
29
<PAGE> 31
PROPOSED OUTSIDE DIRECTORS
The Company has agreed to appoint to the Board of Directors, after the
closing of the offering, a designee of the Underwriters.
The Board currently consists of five members. Prior to the consummation
of the offering, the Company expects to increase the size of the Board to
seven directors, divided into three classes. Messrs. Paul J. Gallant and Mark
A. Turken have agreed to serve as members of the Board effective as of the
consummation of the offering.
Mr. Paul J. Gallant's term as director will commence as of the
completion of the offering. Mr. Gallant has served as President of PJG &
Associates, a consulting firm specializing in forensic accounting from
September 1996. Prior thereto, Mr. Gallant was Chief Operating Officer with
International Food Products in St. Louis, Missouri from January 1993 to
September 1996. Mr. Gallant also has served as Chief Financial Officer of MC
Shoe Company and as Managing Partner of the St. Louis office of Laventhal and
Horworth. Mr. Gallant is a member of the American Institute of Certified
Public Accountants and the Missouri Society of Certified Public Accountants.
Mr. Mark A. Turken's term as director will commence as of the
completion of the offering. Mr. Turken has served as Chief Executive Officer
of Security Mortgage Company, Inc./Turco Development Company ("Security
Mortgage") since 1964. Security Mortgage specializes in the design and
construction of industrial, commercial and office facilities.
Directors of the Company are elected at each annual meeting of
shareholders and serve staggered three-year terms. The officers of the
Company are elected annually by the Board of Directors. Officers and
directors hold office until their respective successors are elected and
qualified or until their earlier resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Following the offering, the Board of Directors will
establish an audit committee (the "Audit Committee"), to be comprised of at
least two non-employee directors, to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the scope and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls.
Compensation Committee. Following the offering, the Board of Directors
will establish a compensation committee (the "Compensation Committee"), to be
comprised of at least two non-employee directors, to establish remuneration
levels for executive officers of the Company and implementation of the Plan
and any other incentive programs.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1997, the Company had no compensation committee or other committee
of the Board of Directors performing similar functions. For such period,
decisions concerning compensation of executive officers were made by the
Board of Directors.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company will not receive any
remuneration in their capacity as directors. Outside directors will receive
$500 per meeting attended and will be reimbursed for related travel expenses.
30
<PAGE> 32
INDEMNIFICATION AND LIMITATION ON LIABILITY
The Company's Articles of Incorporation provide that a director of the
Company shall not be personally liable to the Company or its shareholders for
breach of fiduciary duty as a director, except in respect of a proceeding:
(i) in which the director is found liable on the basis that personal benefit
was improperly received by him, whether or not the benefit resulted from an
action taken in such director's official capacity; or (ii) in which the
director is found liable to the Company.
The Articles of Incorporation also provide that, subject to certain
exceptions, the Company shall indemnify, to the fullest extent permitted by
law, any person who is or was a director or executive officer of the Company
or any subsidiary, and may indemnify, subject to certain exceptions and to
the extent that the Board of Directors deems appropriate and as set forth in
the Bylaws or a resolution, any person who is or was a non-executive officer,
employee or agent of the Company or any subsidiary or who is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including an employee benefit plan) against any and all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement incurred by
such person in connection with any civil, criminal, administrative or
investigative action, suit, proceeding or claim (including any action by or
in the right of the Company or a subsidiary) by reason of the fact that such
person is or was serving in such capacity. Such provisions have no effect
on any non-monetary remedies that may be available to the shareholders, nor does
it relieve the Company or its officers, directors or agents from compliance with
federal or state securities laws. The Company intends to maintain director and
officer liability insurance that insures the Company's directors and officers
against certain liabilities.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Company's
President and Chief Executive Officer, Nicholas M. Powling, and Clifton
Mitchell, Executive Vice President-Actuarial (collectively, the "Named
Executive Officers"), for services rendered to the Company in all capacities
for the year ended December 31, 1997. Mr. Powling was the only executive
officer of the Company whose aggregate annual salary and bonus exceeded
$100,000 during 1997.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS ALL OTHER COMPENSATION
- --------------------------- ----------- ------ ----- ----------------------
<S> <C> <C> <C> <C>
Nicholas M. Powling 1997 $100,000<F1> $1,951 $7,341<F2>
President and Chief Executive
Officer
Clifton Mitchell<F3> 1997 --<F4> -- --
Executive Vice President-
Actuarial
<FN>
- ---------
<F1> The base salary for Mr. Powling for 1998 is $200,000.
<F2> Includes $2,730 paid by the Company in connection with a country club
membership for Mr. Powling, $3,460 with respect to the use of a
Company leased vehicle, $1,080 in matching contributions to the
Company's Section 401(k) plan and $71 for premiums paid by the
Company on a life insurance policy for the benefit of Mr. Powling.
<F3> Mr. Mitchell joined the Company in March 1998 as Executive Vice
President-Actuarial. Prior thereto, Mr. Mitchell provided actuarial
consulting services to the Company. See "Certain Transactions."
<F4> The base salary for Mr. Mitchell for 1998 is $200,000.
</TABLE>
31
<PAGE> 33
EMPLOYMENT AGREEMENTS
The Company has no employment agreements.
OPTION GRANTS
OPTION/SAR GRANTS IN LAST YEAR
The following table sets forth information concerning stock option
grants made in 1997 to the Named Executive Officers. No SARs were granted to
such individuals in 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL
SECURITIES PERCENT OF TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS/SARs APPRECIATION FOR
OPTIONS/SARs GRANTED TO EXERCISE OR OPTION TERM<F1>
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME (#) YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ---------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas M. Powling<F2> 400,000 50% $3.75 12/31/06 $943,342 $2,390,614
Clifton Mitchell<F2> 400,000 50 3.75 12/31/06 943,342 2,390,614
<FN>
- ----------------------
<F1> The indicated 5% and 10% rates of appreciation are provided to comply
with Commission regulations and do not necessarily reflect the
views of the Company as to the likely trend in the price of the
Common Stock. The effect of 5% and 10% rates of appreciation on
Common Stock held for ten years is demonstrated by the following: a
share of Common Stock purchased on January 1, 1997 at a price per
share of $3.75 and held until December 31, 2006 would have a value
of $6.11 at a 5% rate of appreciation and a value of $9.73 at a 10%
rate of appreciation. Actual gains, if any, on stock option
exercises and Common Stock holdings will be dependent on, among other
things, the future performance of the Common Stock and overall market
conditions. There can be no assurance that the amounts reflected herein
will be achieved. Additionally, these values do not take into
consideration the provisions of the options providing for
nontransferability or delayed exercisability.
<F2> As of December 31, 1997, Messrs. Powling and Mitchell each held options
to purchase 319,968 shares of Common Stock at an exercise price of $3.75
per share. Effective April 6, 1998, each such option was replaced by a
new option granted to the recipients pursuant to the Plan. Such options
allow the recipients to acquire 400,000 shares of Common Stock at an
exercise price of $3.75 per share. The expiration date of the
original options was January 1, 2006.
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST YEAR AND YEAR-END OPTION/SAR VALUE
The following table sets forth information concerning the aggregate
dollar value realized upon exercise of options during 1997, the number of
securities underlying options outstanding at year-end 1997 and the value of
options outstanding at year-end 1997 having an exercise price lower than the
market price of the Common Stock held by the Named Executive Officers:
32
<PAGE> 34
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED
SHARES OPTIONS/SARs AT IN-THE-MONEY OPTIONS/SARs
ACQUIRED ON VALUE YEAR-END (#) AT YEAR-END ($)
EXERCISE REALIZED ---------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas M. Powling<F1> -- -- 80,000 320,000 --<F2> --<F2>
Clifton Mitchell<F1> -- -- 80,000 320,000 --<F2> --<F2>
<FN>
- ----------------------
<F1> As of December 31, 1997, Messrs. Powling and Mitchell each held options
to purchase 319,968 shares of Common Stock at an exercise price of $3.75
per share. Effective April 6, 1998, each such option was replaced by a
new option granted to the recipients pursuant to the Plan. Such options
allow the recipients to acquire 400,000 shares of Common Stock at an
exercise price of $3.75 per share. The expiration date of the
original options was January 1, 2006.
<F2> Based on the book value of a share of Common Stock on December 31, 1997
of $2.13.
</TABLE>
LONG-TERM INCENTIVE PLAN
As of April 6, 1998, the Board of Directors and sole shareholder of the
Company approved the Plan. The purpose of the Plan is to encourage certain
directors, officers, employees, advisors and consultants of the Company to
acquire shares of Common Stock or to receive payments based on the value of
Common Stock or upon achieving certain goals on a basis mutually advantageous
to such individuals and the Company and thus provide an incentive for
continuation of the efforts of such individuals for the success of the
Company and, as the case may be, for continuity of employment. The Plan is
administered by the Board or a committee appointed by the Board of Directors
(in either case, the "Committee") and provides that participants under the
Plan may be eligible to receive: (i) stock options ("Stock Options"); (ii)
stock appreciation rights ("SARs"); (iii) restricted shares of Common Stock
("Restricted Stock"); and (iv) performance awards ("Performance Awards"). The
Committee has the full authority and discretion, subject to the terms of the
Plan, to determine those individuals who are eligible to be granted awards
under the Plan and the terms of each award. A total of 1,200,000 shares of
Common Stock are reserved for issuance under the Plan, subject to adjustment
in the event of any change in the outstanding shares of the Company by reason
of stock dividend, stock split, recapitalization, sale, merger, consolidation
or other similar occurrence affecting shareholders of the Company generally.
As of April 6, 1998, options to acquire 1,099,750 shares of Common Stock were
outstanding.
Stock options granted under the Plan entitle the holder thereof to
purchase shares of Common Stock at the "Base Price" established therefor by
the Committee. The Plan provides for the granting of Stock Options that
qualify as incentive stock options, as well as the granting of non-qualified
stock options. The Base Price for incentive stock options shall not be less
than the "Fair Market Value" (as defined in the Plan) of Common Stock at the
time of the grant. Under the Plan, no individual may be awarded more than
600,000 shares in the form of Stock Options. In addition, for any employee,
the aggregate Fair Market Value of Common Stock subject to incentive stock
options pursuant to the Plan or any other stock option plan of the Company
that are exercisable for the first time in any calendar year may not exceed
$100,000.
A SAR gives to the holder thereof a right to receive, at the time of
surrender, cash or Common Stock or a combination thereof equal in value to
the difference between the Fair Market Value of Common Stock at the date of
surrender of the SAR and the "Base Price" established by the Committee
therefor at the time of grant. The Base Price established on any SAR shall
not be less than the Fair Market Value of Common Stock on the date of the
grant of the SAR. The Committee may impose any limitation that it may
determine in its discretion on the maximum amount of appreciation to be paid
pursuant thereto. The term of a SAR shall be established by the Committee,
but in no event shall its term exceed ten years from the date of grant.
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<PAGE> 35
The Committee may issue shares of Restricted Stock at a purchase price,
if any, determined by the Committee. Such Restricted Stock may be subject to
forfeiture or repurchase in the event of the termination of employment within
a specified period, or in the event any other conditions specified by the
Committee at the time of
grant are not subsequently met. During the period of restriction, holders of
Restricted Stock shall be entitled to receive and retain all dividends and
other distributions made in respect of such stock and to vote such stock
without limitations.
The Committee may grant Performance Awards that may consist of shares
of Common Stock, monetary units or a combination thereof in the event that
certain performance goals established by the Committee are achieved during
periods determined by the Committee (not to exceed five years from the date
of grant). The goals established by the Committee shall be based upon one or
more financial measures of the Company. In the event the goal is not achieved
at the conclusion of the designated performance period, no payment shall be
made to the participant.
In the event of a "Change of Control" (as defined in the Plan), the
following shall occur, unless the Board of Directors acts to waive such
provisions: (a) Stock Options, if not otherwise exercisable, become
immediately exercisable; (b) unexercised Stock Options automatically include
a SAR feature for a period of six months and seven days after the date of
Change of Control, which is in addition to any SAR separately granted in
connection with such Stock Option; (c) SARs become, if not otherwise then
surrenderable, immediately surrenderable; and (d) restrictions lapse on
Restricted Stock already earned, and such Restricted Stock becomes
immediately vested.
The Plan is to remain in effect until: (a) the Board of Directors
terminates the Plan; or (b) April 5, 2008, whichever shall first occur. The
Board of Directors at any time may terminate and, from time to time, may
amend or modify its terms; provided, however, that no such action of the
Board of Directors may, without the approval of the shareholders of the
Company: (a) increase the total amount of stock or increase the amount and
type of awards that may be issued under the Plan; (b) change the provisions
of the Plan regarding the minimum price, if any, of awards; or (c) change the
class of individuals entitled to participate in the Plan.
34
<PAGE> 36
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership as of the date hereof of the Common Stock by: (a) each
person known by the Company to be a beneficial owner of more than 5% of the
outstanding shares of Common Stock; (b) each director of the Company; (c) the
Named Executive Officer; and (d) all directors and executive officers of the
Company as a group. Unless otherwise noted, each beneficial owner named
below has sole investment and voting power with respect to the Common Stock
shown below as beneficially owned by him.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO OFFERING AFTER OFFERING
---------------------------------- ------------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED<F1> OWNED BENEFICIALLY OWNED<F1> OWNED
------------------- ---------------------- ------- ---------------------- -------
<S> <C> <C> <C> <C>
Howard A. Wittner<F2> 3,200,000 100.0% 3,200,000 76.2%
7700 Bonhomme, Suite 400
Clayton, Missouri 63105
Nicholas M. Powling<F3> 40,000 1.2% 40,000 0.9%
1250 Capital of Texas Hwy.
Building 3, Suite 100
Austin, Texas 78746
Clifton Mitchell<F3> 40,000 1.2% 40,000 0.9%
1250 Capital of Texas Hwy.
Building 3, Suite 100
Austin, Texas 78746
Brent D. Cassity<F2><F4> - - - -
10 S. Brentwood, Suite 340
Clayton, Missouri 63105
Randall K. Sutton - - - -
10 S. Brentwood, Suite 340
Clayton, Missouri 63105
All Executive Officers & Directors
(five persons)<F5> 3,280,000 100.0% 3,280,000 76.6%
<FN>
- -------------
<F1> A person is deemed as of any date to have "beneficial ownership" of any
security that such person has a right to acquire within 60 days
after such date. Shares that each identified shareholder has the
right to acquire within 60 days of the date of the table set forth
above are deemed to be outstanding in calculating the percentage
ownership of such shareholder, but are not deemed outstanding as to
any other shareholder.
<F2> Such shares are held of record by National Heritage Enterprises, Inc.
("National Heritage"), which is wholly owned by the RBT Trust II,
dated September 28, 1990, of which Mr. Wittner is the trustee and
has sole voting and investment power. Brent D. Cassity currently
serves as President of National Heritage and NPS.
<F3> Represents shares subject to options exercisable currently or within 60
days after March 31,1998.
<F4> Mr. Cassity is a one-third beneficiary of the RBT Trust II. Mr. Cassity
does not have voting or investment power with respect to such shares.
<F5> Includes 80,000 shares subject to options exercisable currently or within
60 days after March 31, 1998.
</TABLE>
35
<PAGE> 37
CERTAIN TRANSACTIONS
The substantial majority of the Company's life insurance policies are
issued to fund prearranged funeral contracts that are sold by NPS and
National Prearranged Services Agency, Inc. ("NPS Agency"). NPS and NPS
Agency are affiliated companies under common ownership with the Company that
collect all payments for prearranged funeral contracts and remit such amounts
to the Company either directly or through assumed reinsurance. During the
years ended December 31, 1995, 1996 and 1997, sales commissions of
$7,129,188, $10,043,563 and $11,247,606, respectively, were paid to NPS and
NPS Agency. The Company had receivables of $1,943,831 and $355,248 at
December 31, 1996 and 1997, respectively, from NPS and NPS Agency that
represented premiums processed but not yet paid.
As a part of issuing insurance policies to fund prearranged funeral
contracts in all states the Company conducts business, except Missouri, the
individual owner of the policy assigns the policy to NPS and NPS Agency. As
assignee, NPS and NPS Agency remit premiums to and receive policy benefits
from the Company. In accordance with the regulation of preneed funeral
contracts under the laws of the state of Missouri, a trust, of which
Mercantile Bank National Association is trustee (the "Trust"), owns the
policies, pays the premiums and receives the benefits. An independent
investment advisor to the Trust directs the monies in the Trust as to the
purchase of insurance policies. NPS is named as beneficiary of the Trust.
At December 31, 1996 and 1997, the Trust had policyholder loans outstanding
of $758,168 and $11,457,962, respectively.
At December 31, 1996, the Company's insurance subsidiaries had in force
an agent's contract with NPS and NPS Agency whereby the insurance
subsidiaries are obligated to pay first year and contingent renewal
commissions for up to five years. 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 agency contract
to provide for increased first year commissions on single premium policies
and suspend payments of renewal commissions on polices issued on or before
December 31, 1995. The effect of the amended agreement on operations for the
year ended December 31, 1997 was a reduction of future policy benefit
reserves of $1,148,000 on policies issued in 1997.
During 1997, the Company and NPS agreed to retroactively increase
premiums charged on certain policies issued by the Company. The amount of
the increased premiums collected as a result of this retroactive rate
adjustment was $1,923,000. The premiums have been recognized as income in a
constant relationship to insurance in force over the life of the policies.
Effective January 1, 1997, the Company established a cost sharing agreement
with NPS and NPS Agency whereby NPS and NPS Agency will reimburse the Company
on a monthly basis for a portion of certain general and administrative costs
paid by the Company. During the year ended December 31, 1997, $2,551,978 in
costs were reimbursed to the Company. At December 31, 1997, the Company had
$143,113 in accounts receivable, which represented December costs yet to be
reimbursed. The Company had a note payable to NPS of $22,500 plus accrued
interest of $39,804, $46,658 and $54,265 at December 31, 1995, 1996 and 1997,
respectively.
The Company also participates in a retirement savings plan with NPS and
other related parties.
The Company entered into an Exclusivity Agreement, dated April 1, 1998,
with NPS and NPS Agency, pursuant to which NPS and NPS Agency agreed to
purchase insurance policies to fund their prearranged funeral business
exclusively from the Company's subsidiaries. The Company agreed to pay, on a
monthly basis, an amount equal to 2% of the face amount of such insurance
issued during the prior month. The agreement expires in April 2003.
The firm of Wittner, Poger, Rosenblum, Kessler, Spewak & Maylack, P.C.,
of which Mr. Howard A. Wittner is a member, provided legal services to the
Company and its subsidiaries during 1995, 1996 and 1997. Such firm is
continuing to provide legal services to the Company and its subsidiaries during
1998.
During 1997, the Company utilized the services of C. Mitchell Co., Inc.
("C. Mitchell Co."), of which Mr. Clifton Mitchell, a current director and
officer of the Company, was the owner. C. Mitchell Co. provided various
actuarial consulting services to the Company and its subsidiaries. For such
services, C. Mitchell Co. was paid
36
<PAGE> 38
approximately $350,000, $220,000 and $98,000 during 1997, 1996 and 1995,
respectively. The Company believes that the payments for these services were
typical for services of this type and commensurate with those that could have
been obtained from unrelated parties.
As of February 1, 1998, the Company, through Wise, a wholly owned
subsidiary of the Company, entered into an Agreement for Purchase and Sale of
Certain Assets with C. Mitchell Co., whereby the Company purchased certain of
the assets of C. Mitchell Co., including tangible personal assets, goodwill
and customer lists, for $145,000. C. Mitchell Co. was engaged in the business
of providing actuarial consulting services to the insurance industry. In
connection with such transaction, Mr. Mitchell and the Company executed a
Non-Compete Agreement pursuant to which Mr. Mitchell was paid $60,000 in
exchange for his agreement not to compete with the Company for a specified
term. Mr. Clifton Mitchell, the sole shareholder of C. Mitchell Co., was
appointed Executive Vice President-Actuarial and a director of the Company
effective March 12, 1998.
37
<PAGE> 39
DESCRIPTION OF SECURITIES
GENERAL
The Articles of Incorporation authorizes 10,000,000 shares of Common
Stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of the date hereof, no shares of Preferred Stock
and 3,200,000 shares of Common Stock were issued and outstanding, and
1,099,750 shares of Common Stock were issuable upon exercise of outstanding
options.
The discussion below describes the capital stock of the Company as it
will exist upon the closing of the Offering. In addition, the discussion
below does not purport to be complete, and is subject to and qualified in its
entirety by reference to the Articles of Incorporation and Bylaws of the
Company, which are filed as exhibits to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
The Board of Directors of the Company, in its sole discretion, may
issue Common Stock from the authorized and unissued shares of Common Stock.
Each share of Common Stock is entitled to one vote at all meetings of
shareholders of the Company for the election of directors and all other
matters submitted to shareholder vote. There are no cumulative voting rights.
Accordingly, the holders of a majority of the outstanding shares of Common
Stock can elect all the directors if they choose to do so. The rights,
privileges and preferences of the holders of Common Stock are subject to the
rights of the holders of any shares of Preferred Stock that may be designated
and issued by the Company in the future. Subject to any restrictions
contained in Preferred Stock issued by the Company, if any, and to
restriction imposed by certain debt agreements of the Company, holders of
Common Stock are entitled to receive dividends when and if declared by the
Board of Directors out of legally available assets of the Company. The Common
Stock has no preemptive or similar rights. There are no redemption or sinking
fund provisions applicable to the Common Stock. Holders of Common Stock are
not liable to further call or assessment by the Company. Upon any
liquidation, dissolution or winding up of the Company, after payment of the
debts and other liabilities of the Company and subject to the rights of
holders of shares of Preferred Stock, if any, holders of Common Stock are
entitled to share pro rata in any distribution to the shareholders. All
outstanding shares of Common Stock are, and the shares offered hereby will
be, when issued and sold, fully paid and nonassessable.
Prior to the date of this Prospectus, there has been no public trading
market for the Common Stock. The Company has applied to list the Common Stock
offered hereby for quotation and trading on the Amex under the symbol "LHC."
PREFERRED STOCK
The Company's Board of Directors, without the approval of the holders
of the Common Stock is authorized to fix the number of shares of any series
of Preferred Stock and to designate for issuance up to 1,000,000 shares of
Preferred Stock, par value $.01 per share, in such number of series and with
such rights, preferences, privileges and restrictions (including, without
limitation, voting rights) as the Board of Directors may from time to time
determine. Issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions, may adversely affect the rights,
privileges and preferences afforded the holders of Common Stock, including a
decrease in the amount available for distribution to holders of the Common
Stock in the event of a liquidation or payment of Preferred Stock dividends.
Issuance of shares of Preferred Stock also may have the effect of preventing
or delaying a change in control of the Company without further action by the
shareholders and could make removal of present management of the Company more
difficult.
TEXAS LAW AND LIMITATIONS ON CHANGES IN CONTROL
Section 13.03 of the Texas Act prevents an "affiliated shareholder"
(defined in Section 13.03, generally, as a person owning 20% or more of a
corporation's outstanding voting shares) from engaging in a "business
combination" with a publicly-held Texas corporation for three years following
the date upon which such person
38
<PAGE> 40
became an affiliated shareholder unless: (i) before such person became an
affiliated shareholder, the board of directors of the corporation approved the
transaction in which the affiliated shareholder became an affiliated
shareholder or approved the business combination; (ii) upon consummation of
the transaction that resulted in the affiliated becoming an affiliated
shareholder, the affiliated shareholder owned at least 85% of the voting
shares of the corporation outstanding at the same time the transaction
commenced (excluding shares held by directors who are also officers of the
corporation and by employee plans that do not provide employee participants
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) on or
subsequent to the date upon which such person became an affiliated
shareholder, the business combination is approved by the board of directors of
the corporation and authorized at a special meeting of shareholders (not by
written consent) by the affirmative vote of the holders of at least 66 2/3% of
the outstanding voting shares of the corporation not owned by the affiliated
shareholder. A "business combination" includes mergers, asset sales and other
transactions resulting in financial benefit to a shareholder. Section 13.03
could prohibit or delay mergers or other takeover or change in control
attempts with respect to the Company and, accordingly, may discourage attempts
to acquire the Company.
The Company's Bylaws will generally require at least 60 days' advance
notice of any action to be proposed at a meeting of shareholders and set forth
other specific procedures that a shareholder must follow. There also are
specific procedures, including advance notice, for the nomination of a person to
the Board of Directors when such person is nominated other than at the direction
of the Board. In addition, the Company's Bylaws provide that a special
meeting of the Company's shareholders may only be called by certain officers
of the Company or by the Board of Directors; no such meeting may be called by
shareholders. These provisions could have the effect of delaying, deferring
or preventing a change in control of the Company or the removal of existing
management.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
39
<PAGE> 41
SHARES ELIGIBLE FOR FUTURE SALE
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement, dated as of April 6, 1998,
the Company has granted to the Company's shareholder prior to the offering
certain "demand" and "piggyback" registration rights with respect to Common
Stock owned by such shareholder as of such date. Pursuant to such
Registration Right Agreement, after the expiration of one year following
the completion of this offering such holder has the right, subject to certain
conditions, to require the Company to effect registration of its shares of
Common Stock under the Securities Act. Such shareholder has the right to
demand (i) two registrations of its shares of Common Stock on Form S-1 and
(ii) three registrations of its shares of Common Stock on Form S-3, provided,
the Company will not be obligated to effect any demand registration within
six months after the effective date of a previous demand registration. In
addition, subject to certain conditions, after the expiration of one year
following the completion of this offering such holder has the right to
request that the Company include its shares of Common Stock in any public
offering of shares of its capital stock under the Securities Act (other than
with respect to a registration with respect to (i) Common Stock to be offered
and sold by the Company pursuant to an employee benefit plan or (ii) Common
Stock for the purpose of consummating any acquisition by the Company). The
Company is required to use its best efforts to effect a registration of such
shares of Common Stock pursuant to such registration rights. The Company has
been advised by the Company's existing shareholder that it presently has no
intention to exercise its registration rights.
Upon the completion of this offering, there will be 3,200,000 shares of
Common Stock subject to either demand or piggyback registration rights
pursuant to the registration rights. The Company is required to bear
substantially all fees, costs and expenses of all such registrations (except
for underwriting discounts or commissions), including the reasonable fees and
disbursements of one counsel for the holder of Common Stock subject to such
registration rights.
The Company has reserved an aggregate of 1,200,000 shares of Common
Stock for issuance pursuant to the Plan. As of the date hereof, the Company
has issued options to purchase an aggregate of 1,099,750 shares of Common
Stock under the Plan. Following this offering, the Company intends to file a
registration statement on Form S-8 under the Securities Act to register
shares to be issued upon exercise of options granted pursuant to the Plan. To
the extent not held by affiliates or subject to a lock-up agreement, shares
of Common Stock issued under the Plan after the effective date of the
registration statement covering the Plan will be available for sale in the
public market without restriction. See "Management -- Long-Term Incentive
Plan."
RULE 144
Upon completion of this offering, the Company will have 4,200,000
shares of Common Stock outstanding. Of these, the 1,000,000 shares sold in
this offering (1,150,000 if the over-allotment option is exercised in full)
will be freely tradable in the public market without restriction under the
Securities Act, except shares purchased by an "affiliate" (as defined in the
Securities Act) of the Company. The remaining 3,200,000 shares (the
"Restricted Shares") will be "restricted shares" within the meaning of the
Securities Act and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided by Rule 144 under the Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated) is entitled to sell Restricted Shares if at least one year has
passed since the later of the date such shares were acquired from the Company
or any affiliate of the Company. Rule 144 provides, however, that within any
three-month period such person may only sell up to the greater of 1% of the
then outstanding shares of Common Stock (approximately 42,000 shares
following the completion of this offering) or the average weekly trading
volume in the Common Stock during the four calendar weeks immediately
preceding the date on which the notice of the sale is filed with the
Commission. Sales pursuant to Rule 144 also are subject to certain other
requirements relating to manner of sale, notice of sale and availability of
current public information. Any person who has not been an affiliate of the
Company for a period of 90 days preceding a sale of Restricted Shares is
entitled to sell such shares under Rule 144 without regard to such
limitations if at least two years have passed since the later of the date
such shares were acquired from the
40
<PAGE> 42
Company or any affiliate of the Company. Shares held by persons who are deemed
to be affiliated with the Company are subject to volume limitations regardless
of how long they have been owned or how they were acquired.
Without consideration of the contractual restrictions described below,
an aggregate of 1,000,000 shares of Common Stock, representing 23.8% of the
outstanding shares of the Common Stock, or 1,150,000 shares representing
26.4% if the over-allotment option is exercised in full, will be eligible for
sale in the public market pursuant to Rule 144 after the completion of this
offering. The Company is unable to estimate the number of shares that may be
sold from time to time under Rule 144, since such number will depend upon the
market price and trading volume for the Common Stock, the personal
circumstances of the sellers and other factors. After this offering,
executive officers, directors and senior management will own 3,200,000 shares
of the Common Stock. The Company's shareholders and directors have entered
into an agreement with the Representative providing that they will not sell
or otherwise dispose of any shares of Common Stock held by them for a period
of one year after the date of this Prospectus without the prior written
consent of the Representative, except for shares sold upon exercise of the
over-allotment option.
The Company can make no prediction as to the effect, if any, that the offer
or sale of these shares would have on the market price of the Common Stock.
Nevertheless, sales of significant amounts of restricted shares in the public
markets could adversely affect the market price of Common Stock, as well as
impair the ability of the Company to raise capital through the issuance of
additional equity securities.
41
<PAGE> 43
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell to the Underwriters
named below, and the Underwriters have agreed to purchase the number of
shares set forth opposite their names in the following table.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Tejas Securities Group, Inc.
---------
Total 1,000,000
=========
</TABLE>
The Representative has advised the Company that the Underwriters
propose to offer the Shares to the public at the initial public offering
price per share set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $ per Share, of
which $ may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers
may be reduced by the Representative. No such reduction shall change the
amount of proceeds to be received by the Company as set forth on the cover
page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase up to
150,000 additional shares to cover over-allotments, if any, at the same price
per share as the Company will receive for the 1,000,000 shares that the
Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares to be purchased by it shown in the above table represents as
a percentage of the 1,000,000 shares offered hereby. If purchased, such
additional Shares will be sold by the Underwriters on the same terms as those
on which the 1,000,000 shares are being sold.
The Company and its existing shareholder, which owns approximately
3,200,000 shares of the Common Stock, executive officers and directors
have agreed with the Representative that, until one year after the date of
this Prospectus, subject to certain limited exceptions, they will not sell,
contract to sell or otherwise dispose of any shares of Common Stock, any
options to purchase shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock, owned
directly by such holder or with respect to which it has the power of
disposition, without the prior written consent of the Representative.
Substantially all of such shares will be eligible for immediate public sale
following expiration of the lock-up periods, subject to the provisions of
Rule 144. See "Shares Eligible for Future Sale."
The Underwriters have the right to offer the shares offered hereby only
through licensed securities dealers in the United States who are members of
the National Association of Securities Dealers, Inc. and may allow such
dealers such portion of its ten (10%) percent commission as the Underwriters
may determine.
The Underwriters will not confirm sales to any discretionary accounts
without the prior written consent of their customers.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 2.00% of the gross amount of the Shares sold ($180,000
upon the sale of the shares offered at an assumed offering price of $9.00 per
share), of which $50,000 has been paid prior to the date of this Prospectus,
and any remaining balance that will be due at the closing of the offering.
The Underwriters' expenses in excess thereof will be paid by the
Representative. To the extent that the expenses of the underwriting are less
than that amount, such excess shall be deemed to be additional compensation
to the Representative. In the event this offering is terminated before its
successful completion, the Company may be obligated to pay the Underwriters a
maximum of $25,000 on an accountable basis for expenses incurred by the
Underwriters in connection with this offering.
42
<PAGE> 44
In connection with the offering and in compliance with applicable law,
the Underwriters may overallot (i.e., sell more Common Stock than the total
amount shown on the lists of Underwriters and participations that appear
above) and may effect transactions that stabilize, maintain or otherwise
affect the market price of the Common Stock at levels above those that might
otherwise prevail in the open market. Such transactions include placing bids
for the Common Stock or effecting purchases of the Common Stock for the
purpose of pegging, fixing or maintaining the price of the Common Stock or
for the purpose of reducing a syndicate short position created in connection
with the offering. A syndicate short position may be covered by exercise of
the option described above in lieu of or in addition to open market
purchases. In addition, the contractual arrangements among the Underwriters
include a provision whereby, if an Underwriter purchases Common Stock in the
open market for the account of the underwriting syndicate and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling
group member in question to purchase the Common Stock in question at the cost
price to the syndicate or may recover from (or decline to pay) the
Underwriter or selling group member in question the selling concession
applicable to the securities in question. The Underwriters are not required
to engage in any of these activities and any such activities, if commenced,
may be discontinued at any time.
The Underwriting Agreement provides for indemnification between the
Company and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters'
Warrants provide for indemnification among the Company and the holders of the
Underwriters' Warrants and underlying shares against certain civil
liabilities, including liabilities under the Securities Act and the Exchange
Act.
UNDERWRITERS' WARRANTS
Upon the closing of this offering, the Company has agreed to sell to
the Underwriters for nominal consideration, the Underwriters' Warrants. The
Underwriters' Warrants are exercisable at 120% of the public offering price
for a four-year period commencing one year from the effective date of this
offering. The Underwriters' Warrants may not be sold, transferred, assigned
or hypothecated for a period of one year from the date of this offering
except to the officers of the Underwriters and their successors and dealers
participating in the offering and/or their partners or officers. The
Underwriters' Warrants will contain anti-dilution provisions providing for
appropriate adjustment of the number of shares subject to the Underwriters'
Warrants under certain circumstances. The holders of the Underwriters'
Warrants have no voting, dividend or other rights as shareholders of the
Company with respect to shares underlying the Underwriters' Warrants until
the Underwriters' Warrants have been exercised.
The Company has agreed, during the four-year period commencing one year
from the date of this offering, to give advance notice to the holders of the
Underwriters' Warrants or underlying securities of its intention to file a
registration statement, other than in connection with employee stock options,
mergers or acquisitions, and in such case the holders of the Underwriters'
Warrants and underlying securities shall have the right to require the
Company to include their securities in such registration statement at the
Company's expense.
For the term of the Underwriters' Warrants, the holders thereof will be
given the opportunity to profit from a rise in the market value of the
Company's shares, with a resulting dilution in the interest of other
shareholders. The holders of the Underwriters' Warrants can be expected to
exercise the Underwriters' Warrants at a time when the Company would, in all
likelihood, be able to obtain needed capital by an offering of its unissued
shares on terms more favorable to the Company than those provided by the
Underwriters' Warrants. Such facts may adversely affect the terms on which
the Company can obtain additional financing. Any profit realized by the
Underwriters on the sale of the Underwriters' Warrants or shares issuable
upon exercise of the Underwriters' Warrants may be deemed additional
underwriting compensation.
DETERMINATION OF OFFERING PRICE
The initial public offering price was determined by negotiations
between the Company and the Representative. The factors considered in
determining the public offering price include the Company's revenue growth
since its organization, the industry in which it operates, the Company's
business potential and earning
43
<PAGE> 45
prospects and the general condition of the securities markets at the time of
the offering. The offering price does not bear any relationship to the
Company's assets, book value, net worth or other recognized objective criteria
of value.
Prior to this offering, there has been no public market for the shares and
there can be no assurance than an active market will develop.
AMERICAN STOCK EXCHANGE
The Company has applied for listing of the Common Stock on the Amex
under the trading symbol "LHC." The listing is contingent upon the Company
obtaining 400 shareholders.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby will be passed upon for the Company by Wittner, Poger, Rosenblum,
Kessler, Spewak & Maylack, P.C., St. Louis, Missouri. Howard A. Wittner, a
principal of such firm, is a director of the Company and beneficially owns
all of the Common Stock outstanding prior to this offering. See "Principal
Shareholders" and "Certain Transactions." Certain legal matters in connection
with the sale of the shares of Common Stock offered hereby will be passed
upon for the Underwriters by Winstead Sechrest & Minick P.C., Austin, Texas.
EXPERTS
The financial statements and schedules of the Company as of December
31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and in the Registration
Statement of which this Prospectus is a part have been audited by Roy L.
Butler, CPA, independent auditor, as set forth in his report thereon
appearing elsewhere herein and therein, and are included in reliance upon
such report given upon the authority of said individual as an expert in
accounting and auditing.
The financial statements of Harbourton as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus of which this Registration Statement is a part
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
44
<PAGE> 46
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
Page
----
<S> <C>
THE COMPANY AND SUBSIDIARIES:
- -----------------------------
Independent Auditor's Report F-1
Consolidated Balance Sheets, December 31, 1996 and 1997 F-2
Consolidated Statements of Operations, years ended December 31, 1995, 1996 and 1997 F-3
Consolidated Statements of Shareholder's Equity, years ended
December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows, years ended December 31, 1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6
HARBOURTON:
- -----------
Independent Auditor's Report F-22
Balance Sheets, December 31, 1997 and 1996 F-23
Statements of Operations, years ended December 31, 1997, 1996 and 1995 F-24
Statements of Stockholder's Equity,
years ended December 31, 1997, 1996 and 1995 F-25
Statements of Cash Flows, years ended December 31, 1997, 1996 and 1995 F-26
Notes to Financial Statements F-28
</TABLE>
45
<PAGE> 47
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Lincoln Heritage Corporation:
I have audited the accompanying consolidated balance sheets of Lincoln
Heritage Corporation (a Texas corporation) and subsidiaries as of December
31, 1996 and 1997 and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express
an opinion on these consolidated financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. I believe
that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lincoln
Heritage Corporation and subsidiaries as of December 31, 1996 and 1997 and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Roy L. Butler
Roy L. Butler, Certified Public Accountant
Humble, Texas
March 11, 1998 (except for Note 18, as to which the date is April 20, 1998)
F-1
<PAGE> 48
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Fixed maturities available for sale at fair value
(amortized cost $53,125,236 and $44,085,520) $51,978,987 $ 45,120,485
Equity securities at fair value (cost $1,013,365) -0- 794,870
Policyholder loans to related party 758,168 11,457,962
Reverse repurchase agreements -0- 29,512,372
Short-term investments 5,344,384 31,530,513
----------- ------------
Total investments 58,081,539 118,416,202
----------- ------------
Cash 1,837,703 1,624,822
Accrued investment income 535,827 609,847
Accounts receivable from related party 1,943,831 478,362
Funds withheld by ceding company 245,820 498,512
Deferred policy acquisition costs, net 11,149,607 12,554,870
Fixed assets, net 222,960 437,989
Cost of policies purchased, net -0- 3,249,365
Goodwill, net 796,184 773,436
Deferred tax assets, net 2,313,832 2,394,970
Other assets 281,183 564,635
----------- ------------
Total assets $77,408,486 $141,603,010
=========== ============
LIABILITIES
Policy liabilities:
Future policy benefits $69,708,545 $ 87,843,239
Policyholder deposits 2,118,881 41,613,697
Funds withheld from reinsurer 245,820 -0-
Unpaid claims 781,000 689,000
Premiums received in advance 212,449 304,471
----------- ------------
Total policy liabilities 73,066,695 130,450,407
----------- ------------
Income tax liabilities 533,846 1,975,165
Accounts payable and accrued liabilities 228,311 334,776
Accounts payable to related party 69,158 93,855
Other liabilities 463,743 1,942,861
----------- ------------
Total liabilities 74,361,753 134,797,064
----------- ------------
SHAREHOLDER'S EQUITY
Common Stock (1996: $100 par, authorized, 1,000,000
shares, issued, 10 shares; 1997: $.01 par,
authorized 10,000,000 shares, issued, 1,000,000 shares) 1,000 10,000
Additional paid-in capital 40 40
Retained earnings 3,802,217 6,257,036
Net unrealized gains (losses) on
available for sale and equity securities (756,524) 538,870
----------- ------------
Total shareholder's equity 3,046,733 6,805,946
----------- ------------
Total liabilities and shareholder's equity $77,408,486 $141,603,010
=========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE> 49
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Life premiums from related party $27,770,810 $33,701,793 $38,044,470
Net investment income 3,401,506 3,710,720 6,171,215
Realized investment gains 1,113,281 2,018,362 2,666,448
----------- ----------- -----------
Total revenues 32,285,597 39,430,875 46,882,133
----------- ----------- -----------
BENEFITS AND EXPENSES
Death benefits paid to related party 10,229,026 11,747,170 13,551,459
Surrender benefits paid to related party 4,270,886 5,167,946 115,758
Increase in future policy benefits 5,998,310 7,621,130 15,284,947
Interest paid on policyholder deposits 277,276 214,054 1,051,087
Commissions paid to related party 7,129,188 10,043,563 11,247,606
General expenses 3,148,979 3,862,870 2,338,161
Taxes, licenses and fees 654,448 720,278 968,476
Amortization of cost of policies purchased -0- -0- 262,188
Change in deferred acquisition costs, net of amortization (1,301,402) (1,269,257) (1,405,263)
----------- ----------- -----------
Total benefits and expenses 30,406,711 38,107,754 43,414,419
----------- ----------- -----------
Income before federal income taxes 1,878,886 1,323,121 3,467,714
Provision for federal income taxes
Current (26,310) 789,216 1,752,358
Deferred 426,124 (506,572) (748,463)
----------- ----------- -----------
Total income taxes 399,814 282,644 1,003,895
----------- ----------- -----------
Net income $ 1,479,072 $ 1,040,477 $ 2,463,819
=========== =========== ===========
Weighted average shares outstanding 3,200,000 3,200,000 3,200,000
Basic earnings per share $ .46 $ .33 $ .77
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 50
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
ADDITIONAL NET UNREALIZED TOTAL
COMMON PAID-IN RETAINED INVESTMENT SHAREHOLDERS'
STOCK CAPITAL EARNINGS GAINS (LOSSES) EQUITY
------ ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of
December 31, 1994 $ 1,000 $40 $1,282,668 $(3,264,562) $(1,980,854)
Net income - - 1,479,072 - 1,479,072
Change in unrealized
gains (losses) on
available for sale
securities - - - 4,069,773 4,069,773
------- --- ---------- ----------- -----------
Balance as of
December 31, 1995 1,000 40 2,761,740 805,211 3,567,991
Net income - - 1,040,477 - 1,040,477
Change in unrealized
gains (losses) on
available for sale
securities - - - (1,561,735) (1,561,735)
------- --- ---------- ----------- -----------
Balance as of
December 31, 1996 1,000 40 3,802,217 (756,524) 3,046,733
Net income - - 2,463,819 - 2,463,819
Change in unrealized
gains (losses) on
available for sale and
equity securities - - - 1,295,394 1,295,394
Other 9,000 - (9,000) - -
------- --- ---------- ----------- -----------
Balance as of
December 31, 1997 $10,000 $40 $6,257,036 $ 538,870 $ 6,805,946
======= === ========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE> 51
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,479,072 $ 1,040,477 $ 2,463,819
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 5,940,090 4,842,595 5,573,366
Increase in deferred acquisition costs (1,301,402) (1,269,257) (1,405,263)
Decrease (increase) in accounts receivable (670,637) 1,282,675 1,465,469
Depreciation and amortization 83,982 87,129 368,068
Decrease (increase) in accrued investment income 291,425 (22,695) (74,020)
Increase (decrease) in unpaid claims 68,067 141,000 (92,000)
Increase (decrease) in premiums received in advance (13,926) (272,496) 92,022
Increase (decrease) in accrued expenses 23,343 (53,325) 106,465
Increase in other liabilities 350,206 43,282 1,257,995
Accretion of discount on investments (30,006) (47,604) (458,056)
Increase in provision for federal income taxes 431,303 189,652 741,800
Decrease (increase) of other assets (374,216) 194,488 (879,801)
------------ ------------ -------------
Net cash provided by operating activities 6,277,301 6,155,921 9,159,864
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments 36,042,252 43,758,136 163,710,087
Cost of investments purchased (38,944,851) (50,999,200) (162,383,038)
Decrease (increase) in other invested assets (1,106,170) 1,106,170 -0-
Decrease (increase) in policyholder loans (1,431,444) 673,276 (10,699,794)
------------ ------------ -------------
Net cash used by investing activities (5,440,213) (5,461,618) (9,372,745)
------------ ------------ -------------
Net increase (decrease) in cash 837,088 694,303 (212,881)
Cash, beginning of year 306,312 1,143,400 1,837,703
------------ ------------ -------------
Cash, end of year $ 1,143,400 $ 1,837,703 $ 1,624,822
------------ ------------ -------------
Federal income taxes paid (refunds received) $ (45,712) $ 92,990 $ 311,040
============ ============ =============
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE> 52
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS:
Lincoln Heritage Corporation (the Company, formerly known as National
Prearranged Services of Texas, Inc.) is a life insurance holding company
engaged in the ownership and operation of life insurance companies. 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.
A large part of the Company's life insurance premiums are derived from
the issuance of insurance policies to fund prearranged funeral contracts sold
by National Prearranged Services, Inc. (NPS), a related party. Funeral
prearrangement is a means through which a customer contractually agrees to
the terms of a funeral to be performed in the future. National Prearranged
Services, Inc. is the assignee and beneficiary of a substantial amount of the
policies issued directly or assumed by the Company.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts
of the Company and its direct and indirect wholly owned subsidiaries Memorial
Service Life Insurance Company (Memorial) and Lincoln Memorial Life Insurance
Company (Lincoln Memorial). These consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
(GAAP). All intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of GAAP financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and the accompanying notes. Actual results
could differ from those estimates.
INVESTMENTS
All fixed maturity and equity securities are classified as
available-for-sale and, accordingly, such securities are carried at fair
value. The Company may sell these securities prior to maturity in response to
changes in interest rates, issuer credit quality or liquidity requirements.
Realized gains and losses are included in net income based on specific
identification of investments disposed. Unrealized gains and losses, net of
tax, are recorded as a separate component of shareholders' equity. The cost of
fixed maturity securities is adjusted for amortization of premiums and
discounts.
Short-term investments consist of commercial paper, invested cash and
other investments purchased with maturities of less than three months. They
are carried at amortized cost, which approximates their estimated fair value.
Securities under reverse repurchase agreements are carried at cost, which
approximates the fair value of the underlying securities. Policyholder loans
are stated at their current unpaid principal balance, which approximates fair
value.
GOODWILL
Goodwill represents the excess of cost over the value of net assets
acquired in acquisitions accounted for by the purchase method. Such amounts
are being amortized on the straight-line basis as charges to income over 40
years. Amortization expense was $22,748 for each of the years ended December
31, 1995, 1996 and 1997. Accumulated amortization was $113,740 and $136,488
as of December 31, 1996 and 1997, respectively. The carrying value of
goodwill is periodically monitored for indications of impairment based upon
estimates of future earnings.
F-6
<PAGE> 53
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business generally consist of commissions
and other marketing expenses. Such costs vary with, and are primarily
related to, the production of new business and are capitalized and deferred
to the extent that they are recoverable from future profits. These costs are
amortized over the premium paying periods of the related policies in
proportion to the ratio of the annual premium revenue to the total
anticipated premium revenue. Anticipated premium revenue was estimated using
the same assumptions which were used for computing liabilities for future
policy benefits.
COST OF POLICIES PURCHASED
The cost of policies purchased represents the actuarially determined
present value of projected future cash flows from acquired policies. The
projected future cash flows are based on actuarially determined projections
of future premiums, mortality, surrenders, operating expenses, investment
yields and other factors. The projections take into account all known or
expected factors at the acquisition date. Actual experience may vary from
projections due to differences in premiums collected, investment spread,
mortality costs and other factors. The amounts are amortized based upon the
future cash flows using the interest rate credited to the underlying
policies.
FURNITURE AND EQUIPMENT
Furniture and equipment is carried at depreciated cost. Depreciation
is recorded using the straight-line basis over periods which range from 5 to
7 years. Depreciation expense was $47,234, $50,379 and $83,132 for 1995,
1996 and 1997, respectively. Accumulated depreciation was $191,025 and
$184,281 at December 31, 1996 and 1997, respectively.
FUTURE POLICY BENEFITS
Future policy benefits are amounts that, when accumulated with interest
and future premiums, will provide for the payment of benefits arising out of
the insurance in force. The liabilities for future policy benefits and
expenses for limited pay life policies are computed using the net-level-premium
method based upon assumptions as to investment yields, mortality and
withdrawals. Assumptions are based principally on modifications of the
ultimate tables in common usage in the industry. Net realized investment
gains and losses are included as a part of investment yield. Interest
assumptions are 8% in years one through five, graded downward to 7.5% in
years 6 through 15 and remain at 7.5% thereafter.
UNPAID CLAIMS
The liability for unpaid claims and claim adjustment expenses is based
upon the estimated amount payable on claims reported prior to the balance
sheet date which have yet to be settled, claims reported subsequent to the
balance sheet date which have been incurred during the period then ended, and
an estimate (based upon prior experience) of incurred, but not reported,
claims. Actual amounts may differ from those estimated. Any subsequent
differences are recorded in the period they are determined.
F-7
<PAGE> 54
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PREMIUMS AND EXPENSES
The Company primarily issues limited pay and single premium policies.
Accordingly, net premiums for direct and assumed policies are recorded as
revenues and the difference between the gross premium received and the net
premium is deferred and recognized in a constant relationship to insurance in
force. Deferred unearned premiums of $16,965,000 and $19,633,000 at December
31, 1996 and 1997, respectively, are included as a component of future policy
benefits liabilities in the accompanying consolidated balance sheet. The
change in the deferral is reflected as a component of the increase in future
policy benefits in the accompanying consolidated statement of operations.
Benefits and expenses are recognized as a level percentage of earned
premiums by providing for future policy benefits and amortizing deferred
acquisition costs.
Receipts for annuities are classified as deposits instead of revenues.
Accordingly, premium deposits and benefit payments are recorded as increases
or decreases in a liability account rather than revenue or expense. Revenues
are recorded for policy administration fees and surrender charges. Expenses
are recorded for interest credited to the liability account.
REINSURANCE
The Company enters into coinsurance funds withheld treaties and co/mod
coinsurance agreements with reinsurers to increase its statutory surplus.
Since no assets or liabilities (except for the amount of the increase in
statutory surplus, $3,225,000 and $6,236,000 at December 31, 1996 and 1997,
respectively) are transferred to the reinsurers, all reinsurance ceded
transactions except for the cost of the increase in statutory surplus have
been eliminated in the accompanying consolidated financial statements. The
cost of the increase in statutory surplus is recognized as reinsurance
premiums ceded. See Note 6.
Consistent with the general practice of the life insurance industry,
the Company has reinsured portions of the coverage provided by its insurance
products with other insurance companies under agreements of indemnity
reinsurance. Indemnity reinsurance agreements are intended to limit a life
insurer's maximum loss on a particular risk or to obtain a greater
diversification of risk. Indemnity reinsurance does not discharge the
primary liability of the original insurer to the insured.
PARTICIPATING POLICIES
Participating policies represented 90%, 92% and 92% of the life
insurance in force at December 31, 1995, 1996 and 1997, respectively.
Participating policies represented 97%, 93% and 93% of premium revenues for
1995, 1996 and 1997, respectively. Determination of dividends is at the
discretion of the Board of Directors of the Company. There were no dividends
paid in 1995, 1996 or 1997.
F-8
<PAGE> 55
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of assets
and liabilities, at the enacted tax rates expected to be in effect when the
temporary differences reverse. A valuation allowance is provided if some
portion of the deferred tax asset may not be realized. An increase or
decrease in valuation allowance that results from a change in circumstances
that causes a change in judgment about the realizability of the related
deferred tax asset is included in income. A change related to fluctuations
in fair value of available for sale securities is included in net unrealized
gains (losses) on securities in shareholders' equity.
In assessing the realization of deferred income taxes, consideration is
given as to whether it is more likely than not the deferred tax assets will
be realized. The ultimate realization of deferred tax assets depends upon
generating future taxable income during the periods in which the temporary
differences become deductible.
STOCK SPLIT
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 million shares of its Common Stock issued and outstanding.
NOTE 3 ACQUISITIONS:
On September 1, 1997, the Company acquired a block of life insurance
and annuity policies from Woodmen Accident and Life Company (the Woodmen
block of business) for a purchase price of $3.29 million. The block of
business acquired consisted primarily of deferred annuities. The acquisition
was accounted for using the purchase method. The transaction was completed
through a coinsurance agreement with Woodmen. In addition to the purchase
price of $3.29 million, the Company incurred other acquisition-related costs
of $218,239. These costs were capitalized and included as a part of the
total cost of policies purchased of $3.51 million.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial information
reflects the historical revenues and net income of the Company as if the
acquisition had occurred on January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenues $48,993,487
Net income 2,734,712
Basic earnings per share .85
</TABLE>
F-9
<PAGE> 56
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 INVESTMENTS:
The amortized costs and fair values of fixed maturity securities
available for sale at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U S government $22,068,978 $ 17,403 $(1,065,206) $21,021,175
Mortgage backed
securities 31,056,258 101,475 (199,921) 30,957,812
----------- -------- ----------- -----------
Total $53,125,236 $118,878 $(1,265,127) $51,978,987
=========== ======== =========== ===========
</TABLE>
The amortized costs and fair values of fixed maturity and equity
securities available for sale at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fixed maturity securities
U S government $11,530,209 $ 100,390 (17,876) $11,612,723
Mortgage backed
securities 28,769,315 919,796 (127,599) 29,561,512
Corporate bonds 3,785,996 192,783 (32,529) 3,946,250
----------- ---------- ---------- -----------
Total fixed maturity securities 44,085,520 1,212,969 (178,004) 45,120,485
Equity securities 1,013,365 42,500 (260,995) 794,870
----------- ---------- ---------- -----------
Total $45,098,885 $1,255,469 $ (438,999) $45,915,355
=========== ========== ========== ===========
</TABLE>
The amortized costs and fair value of fixed maturities available for
sale at December 31, 1997, by contractual maturity date, are shown below.
Expected maturities may differ from contractual maturities since certain
borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
In one year or less $ - $ -
In years two through five 2,315,951 2,465,999
In years six through ten 2,863,928 2,908,724
After ten years 10,136,326 10,184,250
Mortgaged backed securities 28,769,315 29,561,512
----------- -----------
Total $44,085,520 $45,120,485
=========== ===========
</TABLE>
F-10
<PAGE> 57
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 INVESTMENTS: (CONTINUED)
Investments in fixed maturities in any single entity in excess of 10
percent of shareholders' equity at December 31, 1997, other than investments
issued or guaranteed by the United States government or a United States
government agency, were as follows:
<TABLE>
<CAPTION>
ESTIMATED
INVESTMENT AMORTIZED COST FAIR VALUE
---------- -------------- ----------
<S> <C> <C>
CAI Wireless $1,507,217 $1,700,000
American Telecasting 998,376 990,000
Boston Chicken 1,280,403 1,256,250
</TABLE>
Assets with a fair value of $3,582,723 were on deposit with various
state regulatory authorities. Assets with a fair value of $45,071,777 are
restricted as to use for the acquired Woodmen block of business and other
assumed business.
Net investment income consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities $2,963,805 $3,162,390 $5,183,674
Policyholder loans 26,569 64,430 243,879
Short-term investments 477,592 587,667 857,434
---------- ---------- ----------
Gross investment income 3,467,966 3,814,487 6,284,987
Investment expenses 66,460 103,767 113,772
---------- ---------- ----------
Net investment income $3,401,506 $3,710,720 $6,171,215
========== ========== ==========
</TABLE>
Realized investment gains (losses) for the years ended December 31,
consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Gross gains $1,235,299 $2,188,649 $2,929,348
Gross (122,018) (170,287) (262,900)
---------- ---------- ----------
Net realized investment gains $1,113,281 $2,018,362 $2,666,448
========== ========== ==========
</TABLE>
Proceeds from disposals of investments in fixed maturity and equity
securities during 1995, 1996 and 1997 were $36,042,252, $43,758,136 and
$163,710,087, respectively.
F-11
<PAGE> 58
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 INVESTMENTS: (CONTINUED)
Net unrealized gains (losses) included in shareholders' equity at
December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Gross unrealized gains $1,236,257 $ 118,878 $1,255,469
Gross unrealized losses (16,240) (1,265,127) (438,999)
---------- ----------- ----------
Net unrealized investment gains (losses) 1,220,017 (1,146,249) 816,470
Deferred income taxes (benefit) (414,806) 389,725 (277,600)
---------- ----------- ----------
Net unrealized gains (losses) $ 805,211 $ (756,524) $ 538,870
========== =========== ==========
</TABLE>
NOTE 5 REVERSE REPURCHASE AGREEMENTS:
As a part of the Company's investment strategy, the Company enters into
overnight reverse repurchase agreements to increase its return on investments
and improve its liquidity. The Company purchases U.S. Treasury notes under
agreements to resell such U.S. Treasury notes on a daily basis. The Company
does not take possession of any securities and records such purchases as a
book entry only. The amount at risk on a daily basis, in the event of
default by the counterparty (Chase Bank of Texas, N.A.), is minimal as the
market value of the underlying securities approximates the fair value of such
securities. At December 31, 1997, the carrying amount of overnight reverse
repurchase agreements with Chase Bank of Texas, N.A. was $29,512,372, which
approximated market value.
NOTE 6 REINSURANCE:
During the three years in the period ended December 31, 1997, the
Company assumed business from an insurance company. Reinsurance premiums
ceded represent the cost of the increase in statutory surplus for the Company
and its subsidiaries. See Note 2.
Premiums earned for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Direct $23,380,246 $27,182,582 $34,925,424
Reinsurance assumed 4,675,326 6,703,376 3,371,830
Reinsurance ceded (284,762) (184,165) (252,784)
----------- ----------- -----------
Premiums earned $27,770,810 $33,701,793 $38,044,470
=========== =========== ===========
</TABLE>
Death benefits incurred on the business assumed were $3,320,855,
$3,616,736 and $2,257,286 for the years ended December 31, 1995, 1996 and
1997, respectively.
F-12
<PAGE> 59
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values of financial instruments are based on quoted market prices
where available. Fair values for financial instruments for which quoted
market prices are not available are based on estimates using other valuation
techniques.
The methods and assumptions used to estimate the fair value of
financial instruments are as follows:
(i) The carrying value of reverse repurchase agreements and other
short-term investments approximates fair value due to the short
maturities of these investments.
(ii) Fair values of fixed maturities with active markets are based on
quoted market prices. For investments not actively traded, fair
values were estimated using values obtained from independent
pricing services.
(iii) Fair value of policyholder loans approximates the carrying amount
of such assets.
Fair values and carrying amounts for the Company's financial
instruments at December 31 are presented as follows:
<TABLE>
<CAPTION>
1996 1997
---------------------------- -----------------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Cash and short-term
investments $7,182,087 $7,182,087 $33,155,335 $33,155,335
Reverse repurchase agreements -0- -0- 29,512,372 29,512,372
Fixed maturities 51,978,987 51,978,987 45,120,485 45,120,485
Equity securities -0- -0- 794,870 794,870
Policyholder loans 758,168 758,168 11,457,962 11,457,962
</TABLE>
NOTE 8 DEFERRED POLICY ACQUISITION COSTS AND COST OF POLICIES PURCHASED:
DEFERRED POLICY ACQUISITION COSTS (DPAC)
Deferred Policy Acquisition Costs at December 31 and the components of
the change for the years then ended were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Balance at January 1 $ 8,578,948 $ 9,880,350 $ 11,149,607
Deferrals 6,140,624 8,106,337 11,951,993
Amortization (4,839,222) (6,837,080) (10,546,730)
----------- ----------- ------------
Balance at December 31 $ 9,880,350 $11,149,607 $ 12,554,870
=========== =========== ============
</TABLE>
F-13
<PAGE> 60
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 DEFERRED POLICY ACQUISITION COSTS AND COST OF POLICIES PURCHASED:
(CONTINUED)
Cost of Policies Purchased (CPP)
- --------------------------------
Cost of Policies Purchased at December 31 and the components of the
changes for the years then ended were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Balance at January 1 $-0- $-0- $ -0-
Additions from acquisition -0- -0- 3,511,553
Amortization -0- -0- (262,188)
---- ---- ----------
Balance at December 31 $-0- $-0- $3,249,365
==== ==== ==========
</TABLE>
CPP amortization expected to be recorded in each of the next five
years is $388,290, $367,016, $336,471, $302,086 and $268,415, respectively.
NOTE 9 ACTIVITY IN CLAIMS LIABILITY:
Activity in the liability for life claims payable for the years ended
December 31 was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 $ 571,934 $ 640,000 $ 781,000
Incurred related to:
Current year 10,258,538 11,812,138 13,573,754
Prior year (29,512) (64,968) (22,295)
----------- ----------- -----------
Total incurred 10,229,026 11,747,170 13,551,459
----------- ----------- -----------
Paid related to:
Current year 9,618,538 11,031,138 12,887,754
Prior year 542,422 575,032 755,705
----------- ----------- -----------
Total paid 10,160,960 11,606,170 13,643,459
----------- ----------- -----------
Balance at December 31 $ 640,000 $ 781,000 $ 689,000
=========== =========== ===========
</TABLE>
F-14
<PAGE> 61
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 INCOME TAXES:
The provision for federal income tax gives effect to permanent
differences between income for financial reporting purposes and taxable
income. Accordingly, the effective income tax rate is less than the
statutory federal corporate rate. The reasons for the lower effective tax
rate were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ----------------------- --------------------
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $1,878,886 $1,323,121 $3,467,714
Tax at statutory rate 638,821 34.0% 449,861 34.0% 1,179,023 34.0%
Small life insurance
company deduction (249,042) (13.2) (303,913) (22.9) (185,240) (5.4)
Alternative minimum taxes -0- -0- 126,584 9.6 -0- -0-
Other 10,035 0.5 10,112 0.6 10,112 0.3
---------- ----- ---------- ----- ---------- ----
Total tax expense $ 399,814 21.3% $ 282,644 21.3% $1,003,895 28.9%
========== ===== ========== ===== ========== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net unrealized losses on available for sale securities $ 389,725 $ -0-
Policy reserves and policy funds 3,469,638 4,684,072
Other liabilities 31,878 28,301
---------- ----------
Total deferred tax assets 3,891,241 4,712,373
---------- ----------
DEFERRED TAX LIABILITIES:
Net unrealized gains on available for sale and
equity securities -0- 277,600
Deferred policy acquisition costs 1,262,525 1,934,303
Other assets 314,884 105,500
---------- ----------
Deferred tax liabilities 1,577,409 2,317,403
---------- ----------
Net deferred tax assets $2,313,832 $2,394,970
========== ==========
</TABLE>
The Company's management believes that it is more likely than not that
the deferred tax assets are recoverable.
F-15
<PAGE> 62
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 LEASE COMMITMENTS:
The Company leases office space under two noncancelable lease
agreements accounted for as operating leases. Rental expense was $544,139,
$556,929 and $234,930 (net of reimbursement of $429,405 in 1997) for the
years ended December 31, 1995, 1996 and 1997, respectively. Minimum lease
payments under the terms of these operating leases at December 31, 1997 were
as follows:
1998 $ 641,529
1999 654,134
2000 670,037
2001 675,204
2002 378,077
----------
$3,018,981
==========
NOTE 12 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 either directly or through assumed reinsurance. During the years
ended December 31, 1995, 1996 and 1997, sales commissions of $7,129,188,
$10,043,563 and $11,247,606, respectively, were paid to NPS and NPS Agency.
The Company had receivables of $1,943,831 and $335,249 at December 31, 1996
and 1997, respectively, from NPS and NPS Agency that represented premiums
processed but not yet paid.
As a part of issuing insurance policies to fund prearranged funeral
contracts in all states the Company conducts business, except Missouri, the
individual owner of the policy assigns the policy to NPS and NPS Agency. As
assignee, NPS and NPS Agency remit premiums to and receive policy benefits
from the Company. In the State of Missouri, a trust (the Trust) owns the
policies, pays the premiums and receives the benefits. An independent
investment advisor to the Trust directs the monies in the Trust as to the
purchase of insurance policies. At December 31, 1996 and 1997, policyholder
loans outstanding of $758,168 and $11,457,962, respectively, were outstanding.
The Company's insurance subsidiaries have in force an agents contract
with NPS and NPS Agency whereby the insurance subsidiaries are obligated to
pay first year and contingent renewal commissions for up to five years. 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 agency contract to provide for increased first
year commissions on single premium policies and suspend payments of renewal
commissions on polices issued on or before December 31, 1995. The effect of
the amended agreement on operations for the year ended December 31, 1997 was
a reduction of future policy benefit reserves of $1,148,000 on policies
issued in 1997.
During 1997, the Company and NPS agreed to retroactively increase
premiums charged on certain policies issued by the Company. The amount of
the increased premiums collected as a result of this retroactive rate
adjustment was $1,923,000. Premiums are recognized as income in a constant
relationship to insurance in force over the life of the policies.
Effective January 1, 1997, the Company established a cost sharing
agreement with NPS and NPS Agency whereby NPS and NPS Agency will reimburse
the Company on a monthly basis for a portion of certain general and
administrative costs paid by the Company. The agreement calls for the Board
of Directors of each company to agree annually on the basis for determining
the reimbursement method. During the year ended December 31, 1997,
$2,551,978 in costs were reimbursed to the Company. At December 31, 1997,
the Company had $143,113 in accounts receivable which represented December
costs yet to be reimbursed. The Company had a note payable to NPS of $22,500
plus accrued interest of $39,804, $46,658 and $54,265 at December 31, 1995,
1996 and 1997, respectively. The Company also participates in a retirement
savings plan with NPS and other related parties.
F-16
<PAGE> 63
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 RETIREMENT PLAN AND STOCK OPTION AWARDS:
The Company offers all of its employees who meet certain eligibility
requirements a retirement saving plan (the Retirement Plan) under Section
401(k) of the Internal Revenue Code. Each employee may elect to enter into a
written salary deferral agreement under which an employee makes contributions
to the Retirement Plan. In 1996, the Company started matching 12% of the
employees' contribution up to 6% of their salary. For the years ended
December 31 1996 and 1997, the Company contributed $5,067 and $5,170,
respectively, to the Retirement Plan.
Effective January 1, 1997, the Company awarded 800,000 stock options to
key executives. The options will vest on a cumulative basis in 10%
increments beginning on January 1, 1998. The vesting of the options is
dependent upon the key executives continued employment with the Company. The
exercise price for each option ($3.75 per share) equals the determined fair
value of the Company's stock on the date of grant and an option's maximum
term is 10 years.
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), developed a "fair value" approach in
order to value stock options. However, as permitted by SFAS 123, the Company
has elected to account for the stock options under the approach specified by
Accounting Principles Board Opinion No. 25 (APB 25), the previous accounting
standard for reporting purposes. Since the option price is equal to the
determined fair value of the Company's Common Stock on the grant date, no
compensation expense is recorded under APB 25.
If the Company had elected to recognize compensation expense as
prescribed by SFAS 123, net income and basic earnings per share would have
been reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
1997 1997
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income $2,463,819 $2,314,511
Basic earnings per share .77 .72
</TABLE>
Stock-based compensation costs reduced pro forma net income in the
above calculations by $149,308 in 1997. The fair value of each option
granted was estimated on the date of grant using the minimum value approach
for non-public companies. The expected life of the options was 7.5 years,
the risk-free interest rate used was 6 percent and there were no assumptions
as to volatility or dividend yield.
NOTE 14 CONCENTRATIONS OF CREDIT:
At December 31, 1996 and 1997, the Company had significant investments
in fixed maturity and short term securities that are either direct
obligations of the U.S. Government or an agency authorized by the
Government. The Company periodically has significant investments in
demand deposits in banks and other financial institutions that exceed
federally insured amounts. The Company had accounts receivable, which
primarily represent due premiums, from NPS and NPS Agency of $1,943,831 and
$478,362 at December 31, 1996 and 1997, respectively. In addition, at
December 31, 1996 and 1997, the Company had policyholder loans outstanding of
$758,168 and $11,457,962, respectively, on policies of which NPS is the
beneficiary.
F-17
<PAGE> 64
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 LEGAL AND OTHER PROCEEDINGS:
NPS, a related party, along with Lincoln Memorial (a subsidiary of the
Company) have been named defendants in a previously dismissed class-action
lawsuit that was refiled during 1996 in St. Louis, City Circuit Court. The
suit involves a challenge to NPS' methods of funding prearranged funeral
contracts with policies issued by the Company. The suit contains no
specified dollar amounts for damages. Both the Company and NPS believe that
the claims are without merit and a motion is pending to dismiss the Company
from the case. The Company does not believe the outcome of this lawsuit will
have a material adverse effect on its future results of operations or
financial condition.
The Company also is subject to various other claims and contingencies
arising out of the normal course of business. Management of the Company
believes that total amounts that will ultimately be paid, if any, arising
from these claims and contingencies will not have a material adverse effect
on the Company's consolidated results of operations or its financial
condition.
NOTE 16 STATUTORY ACCOUNTING INFORMATION:
The Company's life insurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on a statutory
accounting basis. Statutory accounting practices prescribed or permitted for
the Company's insurance subsidiaries differ from GAAP. Certain subsidiaries
follow permitted accounting practices which have been approved by the
insurance department of the subsidiary's state of domicile, but have not been
specifically prescribed in state laws, regulations and various National
Association of Insurance Companies (NAIC) publications. The statutory net
income and shareholders' equity reported to regulatory authorities, as of and
for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) $(1,712,218) $2,333,707 $2,634,170
Shareholders' equity 2,544,007 5,353,237 7,863,137
</TABLE>
The ability of the life insurance subsidiaries to pay dividends or make
other distributions is restricted by state insurance laws. Determining
factors include, but are not limited to, after tax income and shareholders'
equity as reported on a statutory basis. As a result of the differences
between GAAP and statutory accounting at December 31, 1997, under GAAP,
shareholders' equity of the life insurance subsidiaries was less than
statutory shareholders' equity by $981,156. At December 31, 1997, the
portion of the $6,881,981 in GAAP shareholders' equity of the life insurance
subsidiaries which was not available for transfer to the parent company by
dividend loan or advance, or available for such a transfer only with
regulatory approval as a result of insurance laws and regulations, was
$6,881,981. There were no cash dividends paid by the life insurance
subsidiaries to the parent for each of the three years in the period
ended December 31, 1997.
NOTE 17 SUBSEQUENT EVENT--PENDING ACQUISITIONS (UNAUDITED):
On January 28, 1998, subsequent to the Company's fiscal year end, the
Company executed a definitive stock purchase agreement to acquire all of the
outstanding stock of Harbourton Reassurance, Inc. (Harbourton) for a total
consideration of approximately $10,800,000. 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 acquisition will be accounted
for by the purchase method of accounting.
F-18
<PAGE> 65
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 SUBSEQUENT EVENT--PENDING ACQUISITIONS (UNAUDITED): (CONTINUED)
The following unaudited pro forma combined condensed balance sheet of
the Company and Harbourton as of December 31, 1997 gives effect to the
acquisition of Harbourton as if the acquisition had occurred on January 1,
1997 (in thousands):
<TABLE>
<S> <C>
ASSETS
Fixed maturities $153,548
Short-term investments 31,531
Reverse repurchase agreements 29,512
Other invested assets 22,036
--------
Total investments 236,627
Other assets 32,097
--------
$268,724
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits $ 97,809
Policyholder deposits 150,186
Other liabilities 13,165
--------
Total liabilities 261,160
Shareholder's equity 7,564
--------
$268,724
========
</TABLE>
The following unaudited pro forma combined statement of operations of
the Company and Harbourton, together with the other acquisition made by the
Company, for the year ended December 31, 1997 gives pro forma effect to the
acquisitions as though the acquisitions had occurred as of January 1, 1997
(in thousands):
<TABLE>
<S> <C>
REVENUES
Life insurance premiums $38,476
Investment income, net 19,122
Realized investment gains 4,044
-------
Total revenues 61,642
-------
BENEFITS AND EXPENSES
Policy benefits 17,199
Increase in future policy benefits 15,285
Interest paid on deposit funds 9,455
Commissions 11,267
Other 3,952
-------
Income before federal income tax 4,484
Provision for federal income tax 1,263
-------
Net income 3,221
=======
Weighted average shares outstanding 3,200
Pro forma basic earnings per share $ 1.01
</TABLE>
F-19
<PAGE> 66
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 SUBSEQUENT EVENT--PENDING ACQUISITIONS (UNAUDITED): (CONTINUED)
The above unaudited, pro forma combined condensed balance sheet and
statement of operations reflect the following pro forma adjustments: the
payment of the $29 million dividend to the former owners of Harbourton as a
part of the acquisition agreement, the purchase by the Company of Harbourton
for approximately $10.8 million, loss of investment income related to
invested assets used to pay the dividend and to purchase Harbourton, general
and administrative expense savings resulting from the consolidation of
administrative functions, decrease in Harbourton's policy benefit expense
relating to one-time, nonrecurring charges, establishing an asset
representing the present value of future profits (and related amortization
expense), and income tax effect of pro forma adjustments and elimination of
Harbourton's deferred tax asset valuation allowance.
The pro forma financial statements may not be indicative of the results
that actually would have occurred if the acquisition and the adjustments
described above had occurred on the dates assumed and do not project the
Company's financial position or results of operations at any future date.
The acquired assets and liabilities of Harbourton were recorded at their
estimated fair values at the balance sheet date. Once the acquisition gains
final regulatory approval, the purchase price will be finalized and
additional analysis will be performed to verify the estimated fair values.
As a result of such additional analysis, additional adjustments may be
necessary; however, the Company believes that such adjustments will not be
material.
On March 9, 1998, subsequent to the Company's fiscal year end, the
Company executed a definitive stock purchase agreement to acquire all of the
outstanding stock of World Service Life Insurance Company of America (World)
for total consideration of $5,500,000. World currently has no active
policies in force; however, World is licensed to conduct business in 42
states and the District of Columbia. The acquisition is subject to
regulatory approval and there can be no assurance such regulatory approval
will be obtained. The acquisition will be accounted for by the purchase
method of accounting.
NOTE 18 SUBSEQUENT EVENT--INITIAL PUBLIC OFFERING AND STOCK SPLIT (UNAUDITED)
On April 20, 1998, the Company filed a Registration Statement on Form
S-1 for purposes of selling 1,000,000 shares of previously unissued common
stock (plus an additional 150,000 shares to cover over-allotments). The net
proceeds from the sale of shares are intended to be used to expand the
Company's operations.
On April 6, 1998, the Company effected a 3.2 for 1 stock split (in the
form of a stock dividend). As a result of such stock split, the number of
issued and outstanding shares of Common Stock of the Company increased to
3,200,000. All share and per share data included herein have been adjusted
to reflect the stock split for all periods presented, except for the audited
balance sheet.
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 share of common stock have been reserved for issuance under the
Plan. As of April 6, 1998, the Company granted options to acquire a total
of 299,750 shares of Common Stock of the Company. As of such date, options
to acquire 1,099,750 shares of Common Stock of the Company were outstanding,
inclusive of options granted on such date.
On January 30, 1998, the Company funded an additional $1,030,000 in
policyholder loans to the Trust.
F-20
<PAGE> 67
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of unaudited quarterly results of operations
for 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Life premiums $10,245,101 $6,835,944 $7,782,390 $8,838,358
Net investment income 843,045 927,548 954,875 985,252
Realized investment gains 1,444,087 5,033 227,935 341,307
Net income (loss) 622,546 (661,897) 68,746 1,011,082
Basic earnings (loss) per share .20 (.21) .02 .32
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Life premiums $8,630,747 $8,705,537 $8,483,146 $12,225,040
Net investment income 1,263,456 1,249,141 1,857,328 1,801,290
Realized investment gains 20,748 86,343 562,781 1,996,576
Net income (loss) (22,279) 77,295 1,188,064 1,220,739
Basic earnings (loss) per share (.01) .03 .37 .38
F-21
<PAGE> 68
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholder
Harbourton Reassurance, Inc.
We have audited the accompanying balance sheets of Harbourton
Reassurance, Inc. as of December 31, 1997 and 1996, and the related
statements of operations, stockholder's equity, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harbourton
Reassurance, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 6, 1998
F-22
<PAGE> 69
</TABLE>
<TABLE>
HARBOURTON REASSURANCE, INC.
BALANCE SHEETS
<CAPTION>
DECEMBER 31
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair
values $126,228,129 $126,958,323
Mortgage loans 8,451,239 27,966,937
Other invested assets 570,374 12,265,210
Purchased claims rights 2,760 13,875,675
------------ ------------
Total investments 135,252,502 181,066,145
Cash and cash equivalents 22,756,017 7,674,241
Funds withheld by reinsurers 106,789 123,959
Accounts receivable from reinsurers 799,603 973,391
Reinsurance recoverable:
Paid benefits and losses 28,290 28,290
Unpaid benefits and losses - 304,778
Accrued investment income 1,181,663 4,298,354
Deferred acquisition costs 5,029,383 6,018,325
Income tax recoverable 1,378,757 -
Deferred tax asset - 59,395
Policy loans 843,186 950,059
------------ ------------
Total assets $167,376,190 $201,496,937
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits and unpaid claims $ 9,966,183 $ 22,201,758
Policyholders' deposits 108,572,074 128,923,636
Borrowed money - 508,734
Accounts payable to reinsurers 4,560,802 2,971,500
Accounts payable--other 350,000 473,000
Income tax payable - 194,254
Deferred tax liability 2,835,606 -
Other liabilities 78,811 1,257
------------ ------------
Total liabilities 126,363,476 155,274,139
STOCKHOLDER'S EQUITY:
Capital stock, par value $100 per share;
50,000 shares authorized, 36,000
shares issued and outstanding 3,600,000 3,600,000
Additional paid-in capital 11,400,000 11,400,000
Unrealized gains on investments 644,885 425,770
Retained earnings 25,367,829 30,797,028
------------ ------------
Total stockholder's equity 41,012,714 46,222,798
------------ ------------
Total liabilities and stockholder's equity $167,376,190 $201,496,937
============ ============
See accompanying notes.
</TABLE>
F-23
<PAGE> 70
<TABLE>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Gross premiums and policy fees
earned $ 449,191 $ 4,492,905 $ 2,077,310
Reinsurance ceded (17,562) (3,453,790) (615,819)
----------- ----------- -----------
Net premiums 431,629 1,039,115 1,461,491
Investment product surrender
charges 122,938 159,833 365,635
Net investment income 13,814,295 17,339,101 22,482,919
Net realized gains on investments 1,376,599 1,212,251 935,739
Miscellaneous revenue 53,827 33,494 48,547
----------- ----------- -----------
15,799,288 19,783,794 25,294,331
BENEFITS AND EXPENSES:
Policy benefits and claims 8,894,370 10,296,492 1,846,561
Benefits and claims ceded (804,535) (166,122) (48,785)
----------- ----------- -----------
Net benefits and claims 8,089,835 10,130,370 1,797,776
Interest credited on policyholders'
deposits 6,670,735 7,174,620 10,366,339
Amortization of deferred
acquisition costs 988,942 1,195,040 3,536,173
Commissions 18,932 - 186,108
General expenses 4,390,266 1,571,704 3,083,120
----------- ----------- -----------
20,158,710 20,071,734 18,969,516
----------- ----------- -----------
(Loss) income before federal income
tax expense (4,359,422) (287,940) 6,324,815
Provision for federal income tax
(benefit) expense:
Current (1,493,011) (357,192) 1,039,213
Deferred 2,562,788 (614,034) 614,720
----------- ----------- -----------
1,069,777 (971,226) 1,653,933
----------- ----------- -----------
Net (loss) income $(5,429,199) $ 683,286 $ 4,670,882
=========== =========== ===========
See accompanying notes.
</TABLE>
F-24
<PAGE> 71
<TABLE>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning and end of
Year $ 3,600,000 $ 3,600,000 $ 3,600,000
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning and end of
year 11,400,000 11,400,000 11,400,000
----------- ----------- -----------
NET UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Balance at beginning of year 425,770 (989,732) (6,039,725)
Net change in unrealized gains
(losses) 219,115 1,415,502 5,049,993
----------- ----------- -----------
Balance at end of year 644,885 425,770 (989,732)
----------- ----------- -----------
RETAINED EARNINGS:
Balance at beginning of year 30,797,028 30,113,742 26,147,410
Net (loss) income (5,429,199) 683,286 4,670,882
Dividends paid to stockholder - - (704,550)
----------- ----------- -----------
Balance at end of year 25,367,829 30,797,028 30,113,742
----------- ----------- -----------
Total stockholder's equity $41,012,714 $46,222,798 $44,124,010
=========== =========== ===========
See accompanying notes.
</TABLE>
F-25
<PAGE> 72
<TABLE>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (5,429,199) $ 683,286 $ 4,670,882
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization - 85,265 71,397
Loss on asset disposal - - 104,300
Realized investment gains (1,376,599) (1,212,251) (935,739)
Amortization of deferred acquisition costs 988,942 1,195,040 3,536,173
Change in deferred taxes 2,895,001 (394,635) -
(Decrease) increase in future policy benefits
and unpaid claims (12,235,575) 5,604,684 (7,270,854)
Increase (decrease) in accounts payable to
reinsurers 1,589,302 (7,587,744) 7,860,842
(Increase) decrease in accounts payable--
other (123,000) 473,000 -
Decrease in funds withheld by reinsurers 17,170 20,869 38,210
Decrease (increase) in accounts receivable 173,788 2,285,226 (810,216)
Decrease in reinsurance recoverable 304,778 633,994 5,104,289
Change in income taxes (1,573,011) (1,085,263) 1,074,237
Decrease (increase) in accrued investment
income 3,116,691 (1,102,151) 1,175,399
(Accretion) amortization of premiums and
discounts on bonds, net (694,781) 6,135,465 (2,555,416)
(Accretion) amortization of premiums and
discounts on mortgage loans, net (420) 62,381 -
Other, net (147,786) (742,880) 1,904,769
------------- ------------ -------------
Net cash (used in) provided by operating activities (12,494,699) 5,054,286 13,968,273
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of fixed-
maturity securities 255,068,714 133,648,062 98,149,444
Investment in fixed-maturity securities (251,328,306) (92,580,268) (104,839,473)
Proceeds from sale of other invested assets 11,924,531 4,093,040 2,472,081
Investment in other invested assets (1,264,635) (8,729,758) (4,533,332)
Proceeds from sales of (investment in) purchased
claims rights 13,872,915 416,772 (11,304,382)
Investment in mortgage loans (14,001,249) (19,617,662) (23,779,960)
Proceeds from repayments of mortgage loans 34,164,801 9,774,143 73,221,209
------------- ------------ -------------
Net cash provided by investing activities 48,436,771 27,004,329 29,385,587
</TABLE>
F-26
<PAGE> 73
<TABLE>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Withdrawals from investment products $(27,022,297) $(40,739,498) $(80,875,628)
Proceeds from borrowing - - 6,118,000
Repayment of borrowing (508,734) (5,609,266) -
Interest credited to investment products 6,670,735 7,174,620 10,366,339
Dividends paid to stockholder - - (704,550)
------------ ------------ ------------
Net cash used in financing activities (20,860,296) (39,174,144) (65,095,839)
------------ ------------ ------------
Net increase (decrease) in cash and cash
Equivalents 15,081,776 (7,115,529) (21,741,979)
Cash and cash equivalents, beginning of year 7,674,241 14,789,770 36,531,749
------------ ------------ ------------
Cash and cash equivalents, end of year $ 22,756,017 $ 7,674,241 $ 14,789,770
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 80,000 $ 728,071 $ 579,696
============ ============ ============
See accompanying notes.
</TABLE>
F-27
<PAGE> 74
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Harbourton Reassurance, Inc. (the Company) common stock has been
wholly-owned by NRG Acquisition Partners L.P. since February 1994. The
Company's insurance operations consist of the reinsurance of life, annuity,
and disability income products from various other U.S. insurance companies.
Portions of this assumed business have been retroceded by the Company to
other insurance companies. The Company has not entered into any new
disability income reinsurance business since August 1993. Effective January
1, 1994, the Company entered into a reinsurance contract with Hannover
Reinsurance Company to cede the Company's life block of business. The
Company is licensed in 15 states and is an approved or accepted reinsurer in
8 other states.
The Company relocated to Aurora, Colorado, effective April 1, 1996.
USE OF ESTIMATES
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known,
which could impact the amounts reported and disclosed herein.
INVESTMENTS
Fixed maturities are designated as available-for-sale and are reported
at fair value with unrealized gains and losses, net of tax, reported as a
separate component of stockholder's equity. Realized gains and losses are
reported in income based on the specific identification of securities sold.
Fair values of such securities are based on quotations at year end.
Mortgage loans are reported at unpaid principal balances.
Investments in purchased claims rights are reported at cost.
Investments in limited partnerships are included in other invested assets and
are reported at fair value with changes in the fair value reported in income
as realized investment gains or losses.
Fair values of the limited partnerships are based on the market values
of the underlying assets of the partnerships at year end. Investments in
auto loans, which are included in other invested assets, are recorded at
cost. A provision for nonperforming loans is recognized as a reduction to
the cost basis of these loans.
PREMIUMS AND POLICY FEES
Premiums on disability income contracts are reported as earned on a pro
rata basis over the contract period. The portion of premiums not earned at
the end of the period is recorded as unearned premiums and recorded in future
policy benefits. Premiums on life insurance are reported as earned when due.
Included in premiums and policy fees earned are fees earned with
respect to financial reinsurance treaties totaling $47,954, $231,352 and
$594,000 in 1997, 1996 and 1995, respectively. Such fees are primarily based
on the amount of statutory relief provided by the treaty.
F-28
<PAGE> 75
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED ACQUISITION COSTS
Certain costs of acquiring new reinsurance business, principally
commissions paid or allowed to the primary insurance company, have been
deferred. For investment products, such costs are being amortized over the
anticipated terms of the related contracts in proportion to the present value
(principally using an assumed crediting rate) of expected gross profits.
Costs deferred relating to all other insurance products are being amortized
to commissions expense in proportion to the ratio of annual premium revenues
to total anticipated premium revenues. Anticipated investment income is
included in the evaluation of the recoverability of deferred acquisition
costs.
INCOME TAXES
Deferred federal income taxes result primarily from recognizing
certain income and expense items (primarily deferred acquisition costs,
adjustments to policy liabilities and deferred discounts on bonds) for income
tax purposes in periods other than those in which they are recognized for
financial reporting purposes.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits are computed based upon assumed
investment yields, mortality, and withdrawal rates anticipated at the time
the policies were reinsured. These assumptions vary by characteristics of the
plan of insurance, year of issue, policy duration, age of insured, and other
appropriate factors. The average assumed investment yield ranges in effect
for 1997, 1996 and 1995 ranged from approximately 2.5%-6.5%, 6%-8% and 6%-8%,
respectively.
Liabilities for disability income benefit reserves are based upon
estimates provided to the Company by ceding reinsurers.
POLICYHOLDERS' DEPOSITS
With respect to investment products, the Company calculates its
liability using the account value method. The liability for policyholders'
deposits on investment products represents the funds deposited with the
primary insurer, plus accumulated interest less certain administrative
charges. Interest credited to these policies ranged from 4.4% to 5.25% in
1997 and 1996 and 5% to 5.6% in 1995.
UNPAID CLAIMS
The liability for unpaid claims is based, in part, on estimates
provided to the Company by ceding reinsurers.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, cash and cash equivalents
includes demand deposits with banks and other financial institutions and bank
repurchase agreements with a maturity of three months or less when purchased.
ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted FASB Statement No.
114, Accounting by Creditors for Impairment of a Loan, and Statement No. 118,
which amends Statement 114. Under the amended statement, the 1996 allowances
for credit losses related to loans that are identified for evaluation in
accordance with Statement 114 are based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans. Adoption of this standard resulted
in no impact to net income and stockholder's equity.
F-29
<PAGE> 76
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
2. TRANSACTIONS WITH RELATED PARTIES
The Company entered into a management services agreement with
Harbourton Enterprises, an affiliate of the Company. Under the management
services agreement, the Company is billed by Harbourton Enterprises for
certain operating expenses. For the years ended December 31, 1997, 1996 and
1995, the Company was billed $120,000 in each year, which is reflected in
general and administrative costs. In addition to the management services
fees, the Company reimburses Harbourton Enterprises for other operating
expenses comprised mostly of payroll-related costs. As of December 31, 1997
and 1996, the Company had a payable to Harbourton Enterprises of
approximately $350,000 and $473,000, respectively, for these costs.
During 1997, the Company sold 98% of its investment in Aurora Equity
Partners, LP and certain fixed maturity securities at fair values to its
parent. A gain of approximately $2,122,000 was realized on these sales.
3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed
maturities at December 31, 1997 and 1996 are as follows (in 000s):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997
- -----------------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 69,852 $ 208 $ (1) $ 70,059
Debt securities issued by
foreign governments 42 10 - 52
Corporate debt securities 740 17 (16) 741
Mortgage-backed securities 54,617 1,036 (277) 55,376
-------- ------ ----- --------
Total fixed maturities $125,251 $1,271 $(294) $126,228
======== ====== ===== ========
</TABLE>
F-30
<PAGE> 77
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
- -----------------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 3,178 $ 14 $ (12) $ 3,180
Debt securities issued by
foreign governments 41 10 - 51
Corporate debt securities 2,005 66 (20) 2,051
Mortgage-backed securities 121,428 4,841 (4,593) 121,676
-------- ------ ------- --------
Total fixed maturities $126,652 $4,931 $(4,625) $126,958
======== ====== ======= ========
</TABLE>
The amortized cost and estimated fair value of fixed maturities (in
000s) at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less $ 3,002 $ 3,009
Due after one year through five years 67,458 67,666
Due after five years through ten years 174 177
Due after ten years - -
-------- --------
70,634 70,852
Mortgage-backed securities 54,617 55,376
-------- --------
Total available for sale $125,251 $126,228
======== ========
</TABLE>
Mortgage-backed securities in the maturity schedule include
approximately $18 million in obligations of U.S. Government corporations and
agencies at amortized cost.
Changes in unrealized gains (losses) on fixed maturities
available for sale for the years ended December 31 are summarized as follows
(in 000s):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Gross unrealized gains $1,271 $ 4,931 $ 5,097
Gross unrealized losses (294) (4,625) (3,925)
------ ------- -------
Net unrealized gains 977 306 1,172
Deferred income tax expense (333) (104) (398)
------ ------- -------
Net unrealized gains after taxes 644 202 774
Less balance at beginning of year 202 774 (3,985)
------ ------- -------
Change in net unrealized gains $ 442 $ (572) $ 4,759
====== ======= =======
</TABLE>
F-31
<PAGE> 78
3. INVESTMENTS (CONTINUED)
Proceeds from sales of investments in fixed maturities during 1997,
1996 and 1995 were $214,267,630, $43,199,083 and $76,398,000, respectively.
For the years ended December 31, 1997, 1996 and 1995, gross gains of
$1,428,413, $996,000 and $761,000, respectively, and gross losses of
$405,373, $453,966 and $1,075,000, respectively, were realized on those
sales.
Major categories of investment income for the years ended
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities $ 8,324,073 $15,290,545 $18,481,393
Mortgage loans 3,440,933 1,727,185 4,468,512
Other invested assets 2,714,818 2,922,384 786,043
----------- ----------- -----------
14,479,824 19,940,114 23,735,948
Investment expenses 665,529 2,601,013 1,253,029
----------- ----------- -----------
Net investment income $13,814,295 $17,339,101 $22,482,919
=========== =========== ===========
</TABLE>
The Company had borrowings as of December 31, 1997, 1996 and 1995 of
$0, $508,734 and $6,118,000, respectively. Interest expense incurred on
these borrowings was approximately $48,000, $1,856,000 and $361,000 during
1997, 1996 and 1995, respectively.
Net realized gains (losses) on investments for the years ended
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities $1,644,211 $ (60,183) $ (217,364)
Equity securities (73,328) (27,563) 20,492
Mortgage loans 647,434 - -
Other invested assets (841,718) 1,299,997 1,132,611
---------- ---------- ----------
Net realized gains on
investments $1,376,599 $1,212,251 $ 935,739
========== ========== ==========
</TABLE>
Investments with a par value of $2,478,000 and $2,485,000 at December
31, 1997 and 1996, respectively, are on deposit with various state insurance
departments and custodians in accordance with statutory and contractual
requirements.
Other invested assets consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -----------
<S> <C> <C>
AutoBond loans $141,557 $ 6,666,311
Limited partnerships 77,795 4,894,495
Common stock 351,022 300,350
Deutsche mark swaption - 404,054
-------- -----------
Total $570,374 $12,265,210
======== ===========
</TABLE>
The Company has invested in New Jersey Market Transition Facility (MTF)
purchased claims rights. These rights represent assignments of amounts owed
on auto insurance policies issued by the MTF for accident claims. The
Company purchases the rights to the claims from the policy owners at a
discount. Payments of these claims are received by the Company from the MTF
on average 18 months from the date funded.
F-32
<PAGE> 79
3. INVESTMENTS (CONTINUED)
Activity in the purchased claims rights during 1997 and 1996 consisted of the
following:
<TABLE>
<S> <C>
Invested balance December 31, 1995 $14,292,447
1996 activity:
Purchases 7,420,918
Sales/maturities (7,837,690)
-----------
Invested balance December 31, 1996 13,875,675
1997 activity:
Purchases 6,376
Sales/maturities 13,879,291
-----------
Invested balance December 31, 1997 $ 2,760
===========
</TABLE>
The Company has purchased interests in various auto loans. These loans
are purchased at discounts and are collateralized by the vehicles. A
provision for uncollectible amounts related to these loans was recorded as a
reduction to the cost basis in the amount of $0 and $376,350 as of December
31, 1997 and 1996, respectively.
Investments in limited partnerships consist of an investment in Aurora
Equity Partners, Limited Partnership (Aurora) and an investment in Mariner
Partners Limited Partnership (Mariner). Aurora seeks opportunities for
investments that offer the possibility of long-term equity appreciation
through the purchase of existing businesses, generally with the participation
of senior management of such businesses. Mariner is engaged primarily in the
speculative trading of securities and commodities. As of December 1997, the
Company sold its investment in Mariner Partners and 98% of its investment in
Aurora Partners.
Activity in other invested assets consisted of the following:
<TABLE>
<CAPTION>
AUTO OTHER
LOANS MARINER AURORA MISCELLANEOUS TOTAL
---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Invested balance December 31, 1995 $ 787,032 $1,762,533 $ 471,935 $1,267,525 $ 4,289,025
1996 activity:
Purchases 7,228,964 - 1,009,054 491,740 8,729,758
Sales/maturities 973,335 - 201,075 3,581,331 4,755,741
Provision for uncollectible
amounts 376,350 - - - 376,350
Change in unrealized gains - 139,183 1,712,864 2,526,471 4,378,518
---------- ---------- ----------- ---------- -----------
Invested balance December 31, 1996 6,666,311 1,901,716 2,992,778 704,405 12,265,210
1997 activity:
Purchases 22,008 - 1,242,627 - 1,264,635
Sales/maturities 4,918,691 1,925,188 4,418,313 679,411 11,941,603
Write-offs 1,628,071 - - - 1,628,071
Change in unrealized gains
(losses) - (401,716) (1,717,744) (193,224) (2,312,684)
Realized gains - 425,188 1,978,447 519,252 2,922,887
---------- ---------- ----------- ---------- -----------
Invested balance December 31, 1997 $ 141,557 $ - $ 77,795 $ 351,022 $ 570,374
========== ========== =========== ========== ===========
</TABLE>
F-33
<PAGE> 80
3. INVESTMENTS (CONTINUED)
Investments in commercial and residential mortgage loans consisted of
the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Commercial loans $3,065,833 $19,432,808
Residential loans 5,385,406 8,534,129
---------- -----------
$8,451,239 $27,966,937
========== ===========
</TABLE>
During 1996, the Company entered into a German Deutsche mark swaption
with an aggregate notional amount of 50,000,000 Deutsche marks (equivalent to
$32,467,332) at December 31, 1996. At December 31, 1996, deposits of
$160,159 on these contracts are included in investments on the Company's
balance sheet. An unrealized gain of $243,894 was associated with these
contracts at December 31, 1996. In March 1997, the Company sold the Deutsche
mark swaption for $679,411 and recognized a realized gain of $519,252.
At December 31, 1997, the Company had no investments in derivative
financial instruments.
4. CONCENTRATIONS OF CREDIT RISK
At December 31, 1997, the Company's mortgage loans involved a
concentration of properties located in Colorado (24%), New York (17%),
Kentucky (13%) and Georgia (12%). The remaining loans relate to properties
located in 18 other states. The portfolio is well diversified, covering many
different types of income-producing properties on which the Company has first
mortgage liens. The maximum mortgage outstanding on any individual property
is $1,430,578. The total loan portfolio represents 5.25% of total assets
held by the Company.
5. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claims adjustment
expenses, net of subrogation, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance as of January 1 $20,102,023 $14,166,879
Incurred related to:
Current year - -
Prior years 4,557,477 8,929,527
----------- -----------
Total incurred 4,557,477 8,929,527
Paid related to:
Current year - -
Prior years 18,529,313 2,994,383
----------- -----------
Total paid 18,529,313 2,994,383
----------- -----------
Balance as of December 31 $ 6,130,187 $20,102,023
=========== ===========
</TABLE>
For 1997 and 1996, the amount incurred relating to prior years was due
to actual experience deteriorating below expected results and to the
continued refinement of the reserving methodology for certain disability
income reinsurance contracts.
F-34
<PAGE> 81
6. REINSURANCE TRANSACTIONS
The Company assumes and retrocedes reinsurance. These retrocessional
reinsurance arrangements provide for greater diversification of business,
allow management to control exposure to potential losses arising from large
risks, and provide additional capacity for growth.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policies.
The fair values of reinsurance recoverable and funds withheld by
and for reinsureds approximate the carrying values.
The Company is contingently liable for amounts deducted from unpaid
claims and future policy benefits relating to reinsurance retroceded. Such
amounts may become liabilities of the Company if reinsurers are unable to
meet their obligations assumed under the various reinsurance agreements.
As of December 31, 1997 and 1996, the Company has ceded blocks of
insurance under reinsurance treaties to provide surplus relief reinsurance
and to diversify risk. These reinsurance transactions represent financing
arrangements and, in accordance with generally accepted accounting
principles, are not reflected in the accompanying financial statements except
for the risk fees paid to or received from reinsurers. Surplus relief
assumed has the effect of reducing future statutory surplus as amounts are
recaptured from reinsurers. Surplus relief ceded has the opposite effect on
statutory surplus. During 1997, the majority of these contracts were
terminated.
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to pending or threatened lawsuits arising
from the normal conduct of its business. Due to the climate in insurance and
business litigation, suits against the Company sometimes include substantial
additional claims, consequential damages, punitive damages and other similar
types of relief. While it is not possible to forecast the outcome of such
litigation, it is the opinion of management that the disposition of such
lawsuits will not have a material adverse effect on the Company's financial
position or interfere with its operations.
F-35
<PAGE> 82
8. FEDERAL INCOME TAXES
For the current year, the Company files a separate company federal
income tax return. Valuation allowances of $2,787,942 and $626,000 have been
recognized at December 31, 1997 and 1996, respectively. The December 31,
1997 valuation allowance is related primarily to the tax benefit of deferred
acquisition costs, net operating loss carryforwards and capital loss
carryforwards which management believes may not be realized in future years.
The net operating loss will expire in 2012.
Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs $1,710,000 $2,046,000
Unrealized investment gain 305,000 905,000
Tax over book depreciation 47,000 20,000
Accrued market discount 1,576,000 200,000
---------- ----------
Total deferred tax liabilities 3,638,000 3,171,000
Deferred tax assets:
Tax-basis deferred acquisition costs 822,000 626,000
Discounted unpaid loss reserves 802,000 1,743,000
Other investments - 1,456,000
Net operating loss carryforward 921,000 -
Capital loss carryforward 1,045,000
Other - 31,000
---------- ----------
Total deferred tax assets 3,590,000 3,856,000
Valuation allowance for deferred assets 2,788,000 626,000
---------- ----------
Deferred tax asset, net of valuation
allowance 802,000 3,230,000
---------- ----------
Net deferred tax (asset) liability $2,836,000 $ (59,000)
========== ==========
For 1997, 1996 and 1995, the Company has income tax expense (benefit)
from operations as follows:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Current tax (benefit) expense $(1,493,011) $(357,192) $1,039,213
Deferred tax (benefit) expense 2,562,788 (614,034) 614,720
----------- --------- ----------
Tax (benefit) expense $ 1,069,777 $(971,226) $1,653,933
=========== ========= ==========
</TABLE>
The Company's income tax expense attributable to continuing
operations differs from the amount of income tax expense that would result
from applying the federal statutory rates to pretax income from operations
due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Tax at statutory rates $(1,482,203) $ (97,747) $ 2,150,437
Small life insurance company
deduction 1,146,559 (382,858) (547,436)
Valuation allowance change 2,162,264 (337,000) (1,352,920)
Other (756,843) 65,379 1,403,852
----------- --------- -----------
Tax expense $ 1,069,777 $(752,226) $ 1,653,933
=========== ========= ===========
</TABLE>
F-36
<PAGE> 83
9. CAPITAL STOCK
Capital stock is divided into Class A (16,000 shares) and Class B
(20,000 shares) shares outstanding at December 31, 1997 and 1996. The terms
of each class are identical to each other in every respect except that the
Board of Directors of the Company may, subject to restrictions imposed by the
Insurance Code of the State of Delaware (Note 10), declare and pay a dividend
on the shares of one class and not on the shares of the other, or declare and
pay a dividend on the shares of one class which is different in amount from
the dividends on the shares of the other class. Neither class of stock shall
have preference relative to the other class with respect to any distributions
of the Company's assets, whether by dividend or by liquidation.
10. RESTRICTIONS ON STOCKHOLDER'S EQUITY
The maximum amount of dividends which can be paid by Delaware insurance
companies to shareholders without prior approval of the Insurance
Commissioner is subject to restrictions relating to statutory capital and
surplus and operating earnings. The maximum dividend payout which may be
made without prior approval in 1998 is limited to 10% of statutory capital
and surplus at December 31, 1997. During 1995, the Company declared and paid
a dividend of $704,550.
The NAIC prescribes Risk-Based Capital (RBC) requirements for
life/health insurance companies. At December 31, 1997 and 1996, the Company
exceeded all minimum RBC requirements.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The methods and assumptions used by the Company in estimating "fair
value" disclosures for financial instruments in the accompanying financial
statements and notes thereto are disclosed in Note 3.
Because the Company holds mortgage loans over shorter terms, the
estimated fair value approximates cost.
At December 31, 1997 and 1996, the fair value of other invested assets
approximates carrying value.
12. RECONCILIATION TO STATUTORY REPORTING
The following schedule reconciles net income (loss) and
stockholder's equity determined in accordance with generally accepted
accounting principles (GAAP) to net gain (loss) from operations and capital
and statutory surplus as determined in accordance with statutory accounting
practices (SAP).
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
GAAP net (loss) income $(5,429,199) $ 683,286 $ 4,670,882
Deferred acquisition costs 988,942 1,195,040 3,536,173
Financial reinsurance (1,409,796) (2,217,498) (4,524,451)
Difference in SAP and GAAP reserves 577,872 1,007,079 (2,885,735)
Deferred federal income taxes 2,562,788 (614,034) 614,720
Other 997,973 (1,198,265) 124,268
----------- ----------- -----------
Statutory net (loss) gain from
operations $(1,711,425) $(1,144,392) $ 1,535,857
=========== =========== ===========
</TABLE>
F-37
<PAGE> 84
12. RECONCILIATION TO STATUTORY REPORTING (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
GAAP stockholder's equity $41,012,714 $46,222,798 $44,124,010
Deferred acquisition costs (5,029,383) (6,018,325) (7,213,365)
Financial reinsurance 2,212,276 3,622,076 5,839,565
Difference in SAP and GAAP reserves (1,599) (579,471) (1,586,550)
Deferred federal income tax 2,835,606 (59,395) 335,240
Unrealized loss (gain) on securities (977,098) (549,770) 989,732
Auto loans--nonadmitted (141,557) (6,666,310) (787,032)
Asset valuation reserve (266,108) (3,266,305) (3,477,226)
Interest maintenance reserve (3,015,220) (2,270,095) (2,584,452)
Other (37,778) - (179,478)
----------- ----------- -----------
Statutory capital and surplus $36,591,853 $30,435,203 $35,460,444
=========== =========== ===========
</TABLE>
13. STATUTORY ACCOUNTING INFORMATION AND PRACTICES
The Company is required to maintain a minimum total statutory capital
and surplus in the state of domicile of $550,000. The Company exceeded its
minimum statutory capital and surplus requirements at December 31, 1997 and
1996.
14. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will not
be required to modify or replace significant portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company presently believes that the Year 2000 Issue
will not pose significant operational problems for its computer systems.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 Issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems. The Company has determined it has no exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
The total cost of the Year 2000 project is not expected to be significant.
15. SUBSEQUENT EVENT
On January 26, 1998, the Company entered into a stock purchase
agreement whereby it expressed the intent to sell all outstanding stock to an
independent third party. The purchase agreement is scheduled to be effective
in April of 1998.
F-38
<PAGE> 85
================================================================================
NO PERSON HAS HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
--------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Additional Information 2
Prospectus Summary 3
The Offering 4
Summary Historical and Pro Forma Combined Financial
Information 5
Risk Factors 6
Use of Proceeds 12
Dividend Policy 12
Dilution 13
Capitalization 14
Selected Consolidated Financial Information 15
Pro Forma Consolidated Condensed Financial Information 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Business 23
Management 29
Principal Shareholders 35
Certain Transactions 36
Description of Securities 38
Shares Eligible for Future Sale 40
Underwriting 42
Legal Matters 44
Experts 44
Index to Financial Statements 45
</TABLE>
UNTIL ------------------, 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
1,000,000 SHARES
COMMON STOCK
OFFERING PRICE
$
PER SHARE
Lincoln
Heritage
Corporation
PROSPECTUS
, 1998
TEJAS SECURITIES GROUP, INC.
214-692-3544
================================================================================
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
- ----------------------------------------------------
It is expected that the following expenses, all of which will be paid
by the Company, will be incurred in connection with the registration and
distribution of the securities being offered (all such amounts are estimates
except the Securities and Exchange Commission filing fee, NASD filing fee and
American Stock Exchange listing fee):
<TABLE>
<S> <C>
Commission Registration Fee $3,393
NASD Registration Fee 1,650
American Stock Exchange listing 15,000
Blue Sky fees and expenses 5,000
Accounting fees and expenses 40,000
Legal fees and expenses 100,000
Printing and engraving expenses 125,000
Transfer Agent fees 5,000
Underwriters' nonaccountable expense allowance 180,000
Miscellaneous expenses 24,957
--------
TOTAL $500,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
- --------------------------------------------------
Section 2.02-1 of the Texas Business Corporation Act provides generally
and in pertinent part that a Texas corporation may indemnify its directors
and officers against expenses (if the person is found liable to the
corporation or on the basis that improper benefit was improperly received by
the person) or against expenses, judgments, fines and settlements (in all
other cases) actually and reasonably incurred by them in connection with any
action, suit or proceeding if, in connection with the matters in issue, they
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the corporation and, in connection with any
criminal suit or proceeding, if in connection with the matters in issue, they
had no reasonable cause to believe their conduct was unlawful. Section 2.02-1
does not permit indemnification when the person is found liable for willful
or intentional misconduct in the performance of his duty to the Corporation.
Section 2.02-1 further permits a Texas corporation to grant to its directors
and officers additional rights of indemnification not inconsistent with the
Texas Business Corporation Act through bylaw provisions, agreements, votes of
shareholders or interested directors or otherwise, to purchase indemnity
insurance on behalf of such indemnifiable persons and to advance to such
indemnifiable persons expenses incurred in defending a suit or proceeding
upon receipt of certain undertakings.
Article 11 of the Company's Amended and Restated Articles of
Incorporation provides that, subject to certain exceptions, the Company shall
indemnify, to the fullest extent permitted by law, any person who is or was a
director or executive officer of the Company or any subsidiary, and may
indemnify, subject to certain exceptions and to the extent that the Board of
Directors deems appropriate and as set forth in the Bylaws or a resolution,
any person who is or was a non-executive officer, or employee or agent of the
Company or any subsidiary or who is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including an employee
benefit plan) against any and all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred by such person in
connection with any civil, criminal, administrative or investigative action,
suit, proceeding or claim (including any action by or in the right of the
Company or a subsidiary) by reason of the fact that such person is or was
serving in such capacity. In addition, Article 11 authorizes the Company to
purchase insurance for itself or any person to whom indemnification is or may
be available against any liability asserted against such person in, or
arising out of, such person's status as director, officer, employee or agent
of the Company, any of its subsidiaries or another corporation, partnership,
joint venture, trust or other enterprise (including an employee benefit plan)
which such person is serving at the request of the Company. Article 11 also
authorizes the Company, to the extent that the Board of Directors deems
appropriate, to make advances of expenses to an indemnifiable person upon the
receipt by
II-1
<PAGE> 87
the Company of a written undertaking by such person to repay any amounts
advanced in the event that it is ultimately determined that such person is
not entitled to such indemnification.
Section 8 of the Underwriting Agreement also provides for
indemnification by the Underwriters of the Company's officers and directors
for certain liabilities under the Securities Act.
Item 15. Recent Sale of Unregistered Securities
- -----------------------------------------------
None.
Item 16. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
a. Exhibits. See Exhibit Index.
--------
b. Financial Statement Schedules.
-----------------------------
Schedule I Summary of Investments - Other than Investments in
Related Parties as of December 31, 1996 and 1997
Schedule II Condensed Financial Information of Registrant for
each of the three years in the period ended
December 31, 1997
Schedule III Supplementary Insurance Information for each of the
three years in the period ended December 31, 1997
Schedule IV Reinsurance for each of the three years in the period
ended December 31, 1997
Item 17. Undertakings
- ---------------------
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(2) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each
purchaser.
(3) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or 497(h) under the Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(b) For the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus
shall be deemed a new Registration Statement relating to the
securities offered therein, and the offering of such securities at
the time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE> 88
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company has duly caused the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Austin, State
of Texas, April 13, 1998.
LINCOLN HERITAGE CORPORATION
By: /s/ Nicholas M. Powling
----------------------------------------
Nicholas M. Powling, President and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Lincoln Heritage
Corporation, hereby severally and individually constitute and appoint
Nicholas M. Powling and Clifton Mitchell, and each of them, the true and
lawful attorneys and agents of each of us to execute in the name, place and
stead of each of us (individually and in any capacity stated below) any and
all amendments to this Registration Statement on Form S-1, registering the
issuance by Lincoln Heritage Corporation of shares of its common stock in
connection with the Offering, and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with
or without the others and to have full power and authority to do and perform
in the name and on behalf of each of the undersigned every act whatsoever
necessary or advisable to be done in the premises as fully and to all intents
and purposes as any of the undersigned might or could do in person, and we
hereby ratify and confirm our signatures as they may be signed by our said
attorneys and agents or each of them to any and all such amendments and
instruments.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nicholas M. Powling President, Chief April 13, 1997
- ------------------------------ Executive Officer and
Nicholas M. Powling Director
Principal Executive
Officer
/s/ Clifton Mitchell Executive Vice President- April 13, 1998
- ------------------------------ Actuarial and Director
Clifton Mitchell
Principal Financial and
Accounting Officer
/s/ Brent D. Cassity Chairman of the Board April 13, 1998
- ------------------------------
Brent D. Cassity
/s/ Randall K. Sutton Director April 13, 1998
- ------------------------------
Randall K. Sutton
/s/ Howard A. Wittner Director April 13, 1998
- ------------------------------
Howard A. Wittner
</TABLE>
II-3
<PAGE> 89
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
-------------------------
To the Board of Directors of Lincoln Heritage Corporation:
My report on my audits of the basic financial statements of Lincoln
Heritage Corporation for 1997 appears on page F-1. That audit was conducted
for the purpose of forming an opinion on the basic financial statements taken
as a whole. Schedules I, II, III and IV are presented for purposes of
additional analysis and are not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements, and, in my opinion,
the information is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ Roy L. Butler
Humble, Texas
March 11, 1998
II-4
<PAGE> 90
SCHEDULE I
<TABLE>
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST<F1> VALUE BALANCE SHEET
- ------------------ ------------ ------------ -------------
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and government
agencies and authorities $ 11,530,209 $ 11,612,723 $ 11,612,723
Mortgage backed securities 28,769,315 29,561,512 29,561,512
All other corporate bonds 3,785,996 3,946,250 3,946,250
------------ ------------ ------------
Total fixed maturities 44,085,520 45,120,485 45,120,485
------------ ------------ ------------
Equity securities
Common stocks
Industrial, miscellaneous and all other 1,013,365 794,870 794,870
------------ ------------ ------------
Total equity securities 1,013,365 794,870 794,870
------------ ------------ ------------
Policy loans 11,457,962 11,457,962 11,457,962
Reverse repurchase agreements 29,512,372 29,512,372 29,512,372
Short-term investments 31,530,513 31,530,513 31,530,513
------------ ------------ ------------
Total investments $117,599,732 $118,416,202 $118,416,202
------------ ------------ ------------
<FN>
<F1>Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
</TABLE>
II-5
<PAGE> 91
SCHEDULE II
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash $ 730 $ 730
Investment in life insurance subsidiaries 3,115,161 6,881,981
---------- ----------
TOTAL ASSETS $3,115,891 $6,882,711
========== ==========
LIABILITIES
Related party interest payable $ 46,658 $ 54,265
Related party note payable 22,500 22,500
---------- ----------
TOTAL LIABILITIES 69,158 76,765
---------- ----------
EQUITY
Common Stock, (1996: $100 par, authorized, 1,000,000
shares, issued, 10 shares; 1997: $.01 par,
authorized 10,000,000 shares, issued, 1,000,000 shares) 1,000 10,000
Additional paid-in capital 40 40
Retained earnings 3,802,217 6,257,036
Net unrealized gains (losses) on
available for sale and equity securities (756,524) 538,870
---------- ----------
TOTAL EQUITY 3,046,733 6,805,946
---------- ----------
TOTAL LIABILITIES AND EQUITY $3,115,891 $6,882,711
========== ==========
</TABLE>
II-6
<PAGE> 92
SCHEDULE II
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
CONDENSED STATEMENT OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES $ -0- $ -0- $ -0-
---------- ---------- ----------
EXPENSES
Interest expense 6,174 6,854 7,607
---------- ---------- ----------
TOTAL EXPENSES 6,174 6,854 7,607
---------- ---------- ----------
Income (loss) before equity in undistributed (6,174) (6,854) (7,607)
net income of subsidiaries
Equity in undistributed net
income of subsidiaries 1,485,246 1,047,331 2,471,426
---------- ---------- ----------
NET INCOME $1,479,072 $1,040,477 $2,463,819
========== ========== ==========
</TABLE>
II-7
<PAGE> 93
Schedule II
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,479,072 $ 1,040,477 $ 2,463,819
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of subsidiaries (1,485,246) (1,047,331) (2,471,426)
Increase in related party interest payable 6,174 6,854 7,607
----------- ----------- -----------
Net cash provided by operating activities -0- -0- -0-
----------- ----------- -----------
Cash, beginning of year 730 730 730
----------- ----------- -----------
Cash, end of year $ 730 $ 730 $ 730
=========== =========== ===========
</TABLE>
II-8
<PAGE> 94
Schedule III
<TABLE>
SUPPLEMENTARY INSURANCE INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SEGMENT DEFERRED POLICY FUTURE POLICY UNEARNED OTHER POLICY PREMIUM NET BENEFITS, AMORTIZATION OTHER
ACQUISITION BENEFITS PREMIUMS CLAIMS AND REVENUE INVESTMENT CLAIMS, OF DEFERRED OPERATING
COST LOSSES, CLAIMS BENEFITS INCOME LOSSES, AND POLICY EXPENSES
AND LOSS PAYABLE SETTLEMENT ACQUISITION
EXPENSES EXPENSES COSTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life Insurance
1995 $ 9,880,350 $ 67,947,256 $-0- $-0- $27,770,810 $3,401,506 $20,775,498 $ 4,839,222 $4,791,991
1996 11,149,607 72,854,246 -0- -0- 33,701,793 3,710,720 24,750,300 6,837,080 6,520,374
1997 12,554,870 130,145,936 -0- -0- 38,044,470 6,171,215 30,003,251 10,546,730 2,602,250
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-9
<PAGE> 95
SCHEDULE IV
<TABLE>
REINSURANCE
<CAPTION>
GROSS CEDED TO ASSUMED NET PERCENTAGE
AMOUNT OTHER FROM OTHER AMOUNT OF AMOUNT
COMPANIES COMPANIES ASSUMED TO NET
------------ ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1995
Life insurance in force $107,424,114 $ -0- $47,018,885 $154,442,999 30%
Premiums 23,380,246 (284,762) 4,675,326 27,770,810 17
1996
Life insurance in force $140,788,664 $ -0- $36,096,526 $176,885,190 20%
Premiums 27,182,582 (184,165) 6,703,376 33,701,793 20
1997
Life insurance in force $222,623,591 $ -0- $ 4,660,362 $227,283,953 2%
Premiums 34,925,424 (252,784) 3,371,830 38,044,470 9
</TABLE>
II-10
<PAGE> 96
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.<F*>
3.1 Amended and Restated Articles of Incorporation of the Company.
3.2 By-laws of the Company.
4.1 Form of Stock Certificate for Common Stock.
4.2 Registration Rights Agreement dated as of April 6, 1998 by and between
the Company and National Heritage Enterprises, Inc.
5.1 Legal Opinion of Wittner, Poger, Rosenblum, Kessler, Spewak & Maylack,
P.C.<F*>
10.1 Lincoln Heritage Corporation 1998 Long-Term Incentive Plan.
10.2 Exclusivity Agreement dated as of April 1, 1998 by and between the
Company and National Prearranged Services, Inc.
10.3 Stock Purchase Agreement dated January 26, 1998 by and between Lincoln
and NRG Acquisition Partners, L.P.
10.4 Amended and Restated Award Agreement dated as of April 6, 1998 by and
between the Company and Nicholas M. Powling.
10.5 Amended and Restated Award Agreement dated as of April 6, 1998 by and
between the Company and Clifton Mitchell.
10.6 Cost Sharing Agreement dated as of March 31, 1997 by and among
Memorial, Lincoln and NPS.
21.1 Subsidiaries of the Company.
23.1 Consent of Roy L. Butler, CPA
23.2 Consent of Ernst & Young LLP
23.3 Consent of Wittner, Poger, Rosenblum, Kessler, Spewak & Maylack, P.C.
(included in Exhibit No. 5.1).<F*>
24.1 Power of Attorney (included on signature page hereto).
27.1 Financial Data Schedule (December 31, 1997).
27.2 Financial Data Schedule (December 31, 1996).
99.1 Consent of Paul J. Gallant.
99.2 Consent of Mark A. Turken.
<FN>
- --------------------
<F*> To be filed by amendment.
</TABLE>
II-11
<PAGE> 1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
LINCOLN HERITAGE CORPORATION
----------------------------
Pursuant to the provisions of the Texas Business Corporation Act, the
Board of Directors and sole shareholder of Lincoln Heritage Corporation
hereby adopt the following Amended and Restated Articles of Incorporation.
Each Amendment hereto has been effected in conformity with the provisions of
the Texas Business Corporation Act. These Amended and Restated Articles of
Incorporation reflect various changes. Article IV has been amended to
reflect the authorization of one million shares of Preferred Stock, par value
$0.01. Article V has been amended to reflect the issuance of one million
shares of Common Stock. Article VI is amended to authorize the Board of
Directors to grant certain preemptive or preferential rights of subscription
to shareholders. The former Article VII regarding cumulative voting rights
is now contained in Section 4.2. Article VII increases the number of
directors and provides for their government. Article VIII changes the
registered agent and address. Article IX provides for the amendment of the
Articles of Incorporation and the By-Laws. Article X provides for the
non-liability of directors in specified circumstances. Article XI governs
the conditions of indemnification.
The Amended and Restated Articles were adopted unanimously by the Sole
Shareholder, holder of 1,000,000 shares of Common Stock, on April 6, 1998.
The Amended and Restated Articles of Incorporation have no effect on the
amount of stated capital. The Amended and Restated Articles of Incorporation
accurately copy the Articles of Incorporation and all Amendments thereto that
are in effect to date and as further amended by these Amended and Restated
Articles of Incorporation.
As amended and supplemented by all certificates of amendment previously
issued by the Secretary of State and as further amended, the Amended and
Restated Articles of Incorporation of Lincoln Heritage Corporation read:
ARTICLE I
---------
The name of the Corporation is Lincoln Heritage Corporation.
ARTICLE II
----------
The duration of the Corporation is perpetual.
ARTICLE III
-----------
The Corporation is formed for the purpose of transacting any or all
lawful business which may be conducted by corporations incorporated under The
Texas Business Corporation Act.
ARTICLE IV
----------
4.1 The Corporation shall have authority to issue the following
shares:
(1) Ten Million (10,000,000) shares of Common Stock having a par
value of One Cent
<PAGE> 2
($0.01) per share ("Common Stock"); and
(2) One Million (1,000,000) shares of Preferred Stock having a par
value of One Cent ($0.01) per share ("Preferred Stock").
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the
same dividend period. Upon any voluntary or involuntary dissolution or
liquidation of the Corporation, the rights of the holders of the Common Stock
shall be junior and subordinate to the rights of the holders of the Preferred
Stock.
(a) The Board of Directors, by adoption of an authorizing
resolution, may cause Preferred Stock to be issued from time to time in one
or more series.
(b) The Board of Directors, by adoption of an authorizing
resolution with regard to the shares of any series of Preferred Stock, may:
(1) Fix the distinctive serial designation of the shares;
(2) Fix the dividend rate, if any;
(3) Fix the date from which dividends on shares issued
before the date for payment of the first dividend shall
cumulate, if any;
(4) Fix the redemption price and terms of redemption, if
any;
(5) Fix the amount payable per share in the event of
dissolution or liquidation of the Corporation, if any;
(6) Fix the terms and amounts of any sinking fund to be
used for the purchase or redemption of shares, if any;
(7) Fix the terms and conditions under which the shares
may be converted, if any;
(8) Provide whether such shares shall be non-voting, or
shall have full or limited voting rights or voting rights
contingent upon the occurrence of specified events, and the
rights, if any, of such shares to vote as a class on some or all
matters on which such shares may be entitled to vote; and
- 2 -
<PAGE> 3
(9) Establish any other preferences, qualifications,
limitations, restrictions and special or relative rights with
respect to such series not required by law.
4.2 Except as otherwise required by the Texas Business Corporation
Act, whenever the holders of shares of stock of the Corporation shall be
entitled to vote as a class with respect to any matter, the affirmative vote
of the holders of a majority of the outstanding shares of such class shall be
required to constitute the act of such class. There shall be no right to
cumulative voting in the election of directors.
ARTICLE V
---------
5.1 The class and number of shares that the Corporation had
outstanding as of April 5, 1998, and the consideration received by the
Corporation therefor, are:
<TABLE>
<CAPTION>
Total consideration
Class Number of shares received therefor
----- ---------------- -----------------
<S> <C> <C>
Common 1,000,000 $10,000
</TABLE>
5.2 The Corporation did not commence business until it had received
for the issuance of shares consideration of the value of at least One
Thousand Dollars ($1,000).
ARTICLE VI
----------
No holder of shares of any class of stock of the Corporation, either
now or hereafter authorized or issued, shall have any preemptive or
preferential right of subscription to any shares of any class of stock of the
Corporation, either now or hereafter authorized, or to any securities
convertible into stock of any class of the Corporation, issued or sold, nor
any right of subscription to any such security, other than such, if any, as
the Board of Directors in its discretion may from time to time determine and
at such prices as the Board of Directors may from time to time fix, pursuant
to the authority conferred by these Articles of Incorporation.
ARTICLE VII
-----------
7.1 The number of directors to constitute the Board of Directors
shall be fixed, from time to time, at not less than three (3) nor more than
ten (10), by, or in the manner provided in, the By-Laws of the Corporation.
The directors shall be divided into three classes: Class I; Class II; and
Class III. The number of directors in any such class shall not exceed the
number of directors in any other class by more than one (1). The term of
office of the initial Class I directors shall expire at the annual meeting of
shareholders of the Corporation in 1999; the term of office of the initial
Class II directors shall expire at the annual meeting of shareholders of the
Corporation in 2000; and the term of office of the initial Class III
directors shall expire at the annual meeting of shareholders of the
Corporation in 2001; or in each case thereafter until their respective
successors are duly elected and qualified. At each annual meeting beginning
- 3 -
<PAGE> 4
in 1999 the directors elected to succeed those whose terms then expire shall
be identified as being of the same class as the directors they succeed and
shall be elected for a term of three (3) years expiring at the third
succeeding annual shareholder meeting or thereafter until their respective
successors are duly elected and qualified. If the number of directors is
changed, any increase or decrease in the number of directors shall be
apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible. Directors need not be residents of
the State of Texas or shareholders of the Corporation.
7.2 Any vacancy on the Board (whether such vacancy is caused by
death, resignation, or removal for cause or is the result of a newly created
directorship) shall be filled by a majority of the directors then in office.
Any director elected to fill a vacancy in any class (whether such vacancy is
caused by death, resignation, or removal with cause, or is the result of an
increase in the number of directors in such class) shall hold office for a
term which shall expire with the term of the directors in such class.
7.3 No director may be removed without cause from office during such
director's term of office. At a meeting called expressly for that purpose,
any director may be removed by the shareholders for cause by the affirmative
vote of the holders of a majority of the shares entitled to vote at an
election of directors.
7.4 The names and addresses of the present directors are:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Brent D. Cassity 10 S. Brentwood
Suite 340
Clayton, Missouri 63105
Clinton Mitchell Three Cielo Center
1250 Capital of Texas Highway South
Building 3 Suite 100
Austin, Texas 78746
Nicholas M. Powling Three Cielo Center
1250 Capital of Texas Highway South
Building 3 Suite 100
Austin, Texas 78746
Randall K. Sutton 10 S. Brentwood
Suite 340
Clayton, Missouri 63105
Howard A. Wittner 7700 Bonhomme
Suite 400
Clayton, Missouri 63105
</TABLE>
- 4 -
<PAGE> 5
ARTICLE VIII
------------
The address, including street and number, of the Corporation's
registered office in this State is Three Cielo Center, 1250 Capital of Texas
Highway South, Austin, Texas 78746, County of Travis, and the name of its
registered agent at such address is Nicholas M. Powling.
ARTICLE IX
----------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Amended and Restated Articles of
Incorporation. Amendments to the Articles of Incorporation shall be made in
the manner prescribed by the Texas Business Corporation Act, provided that
any amendment to these Amended and Restated Articles of Incorporation that
has not been approved by the Board of Directors of the Corporation shall be
effective only upon the affirmative vote of the holders of at least
two-thirds (2/3) of the outstanding shares of Common Stock and at least
two-thirds (2/3) of the outstanding shares of each other class or series of
stock entitled to vote as a class or series (if any) with respect to such
amendment. The power to make, alter, amend or repeal the By-Laws of the
Corporation shall be vested in the Board of Directors, unless otherwise
provided in such By-Laws. The Board of Directors shall have and exercise
such further powers as are provided it under present or future laws of the
State of Texas.
ARTICLE X
---------
A director shall have no personal liability to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
provided that the foregoing shall have no effect on a director's liability
(i) for any breach of the director's duty of loyalty to the Corporation or
its shareholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law or (iii) for any
transaction from which the director derived an improper personal benefit.
ARTICLE XI
----------
11.1 The Corporation shall indemnify any person who was or is a party,
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or who is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner that he or she reasonably believed to
be in or not opposed to the best interests of the
- 5 -
<PAGE> 6
Corporation or, with respect to any criminal action or proceeding, that the
person had reasonable cause to believe that his or her conduct was unlawful.
11.2 The Corporation shall indemnify any person who was or is a party,
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, if such person acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to the best interests of the Corporation,
provided that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable for
willful or intentional misconduct in the performance of his or her duty to
the Corporation, unless, and only to the extent that the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability, in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as
the court shall deem proper.
11.3 To the extent that a director, officer, employee or agent of the
Corporation has been successful, on the merits or otherwise, in the defense
of any action, suit or proceeding referred to in Section 11.1 and 11.2, or in
defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
11.4 Any indemnification under Section 11.1 and 11.2 (unless ordered
by a court) shall be made by the Corporation only as authorized in the
specific case, upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in Section 11.1 or 11.2.
Such determination shall be made (1) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) if such a quorum is not obtainable, by a majority
vote of a committee of the Board designated to act in the matter by a
majority vote of all directors, consisting solely of two or more directors
not parties to the proceeding, or (3) by special legal counsel selected by
the Board of by a Committee by vote as set forth in subsections (1) or (2) of
this section, or if such quorum cannot be obtained and such a committee is
not established, by a majority vote of all directors, or (4) by the
shareholders in a vote that excludes the shares held by the directors who are
parties to such action, suit or proceeding.
11.5 Expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding, as authorized by the Board of
Directors in the specific case, upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount,
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the Corporation as authorized in this Article.
- 6 -
<PAGE> 7
11.6 This Article is intended to provide for indemnification to the
fullest extent permitted by law, as in effect on the date hereof or as
hereafter adopted or amended. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any other By-Law, agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in
his or her official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent, and shall inure to the benefit of the
heirs, executors and administrators of such a person.
11.7 The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or who is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against such person and incurred by such person in any such capacity, or
arising out of his or her status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under
the provisions of this Article.
11.8 If the Corporation has paid indemnification or has advanced
expenses to a director, officer, employee or agent, the Corporation shall
report the indemnification or advance in writing to the shareholders with or
before the notice of the next shareholders meeting.
11.9 For purposes of this Article, references to "the Corporation"
shall include, in addition to the surviving corporation, any merging
corporation (including any corporation having merged with a merging
corporation) absorbed in a merger which, if its separate existence had
continued, would have had the power and authority to indemnify its directors,
officers, and employees or agents, so that any person who was a director,
officer, employee or agent of such merging corporation, or was serving at the
request of such merging corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article with respect to the surviving corporation as such person would have
with respect to such merging corporation if its separate existence had
continued.
11.10 For purposes of this Article, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the Corporation" shall include
any service as a director, officer, employee or agent of the Corporation
which imposes duties on, or involves services by such director, officer,
employee or agent with respect to an employee benefit plan, its participants
or beneficiaries. A person who acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to
in this Article.
* * *
- 7 -
<PAGE> 8
The undersigned President hereby executes on the behalf of the
Corporation the foregoing Amended and Restated Articles of Incorporation of
Lincoln Heritage Corporation.
Dated April 6, 1998
/s/ Nicholas M. Powling
----------------------------------------
Nicholas M. Powling, President
ATTEST:
/s/ Lennie Cappelman
- ----------------------------------
Lennie Cappelman, Secretary
- 8 -
<PAGE> 1
BY-LAWS
OF
LINCOLN HERITAGE CORPORATION
Effective As
Of: April 6, 1998.
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
ARTICLE I. OFFICES 3
ARTICLE II. SHAREHOLDERS 3
Section 2.1. Annual Meeting 3
Section 2.2. Special Meetings 3
Section 2.3. Place of Meeting 3
Section 2.4. Notice of Meeting 4
Section 2.5. Meetings, How Convened 4
Section 2.6. Fixing of Record Date 4
Section 2.7. Voting Lists 4
Section 2.8. Quorum 4
Section 2.9. Proxies 5
Section 2.10. Voting of Shares; No Cumulative Voting 5
Section 2.11. Voting of Shares by Certain Holders 5
Section 2.12. Shareholder Action Without a Meeting 6
Section 2.13. Notice of Shareholder Business and Nominations 6
Section 2.14. Inspectors 8
Section 2.15. Books and Records -- Examination by Shareholders 8
ARTICLE III. BOARD OF DIRECTORS 8
Section 3.1. General Powers 8
Section 3.2. Number, Term and Qualifications 9
Section 3.3. Regular Meetings 9
Section 3.4. Special Meetings 9
Section 3.5. Notice 9
Section 3.6. Quorum; Participation by Telephone 10
Section 3.7. Manner of Acting 10
Section 3.8. Action Without a Meeting 10
Section 3.9. Resignations 10
Section 3.10. Compensation 10
Section 3.11. Presumption of Assent 10
Section 3.12. Committees 11
ARTICLE IV. OFFICERS 11
Section 4.1. Number 11
Section 4.2. Election and Term of Office 12
Section 4.3. Removal 12
Section 4.4. Resignations 12
Section 4.5. Vacancies 12
<PAGE> 3
Page
----
Section 4.6. Chairman of the Board 12
Section 4.7. President 12
Section 4.8. The Vice Presidents 13
Section 4.9. The Secretary 13
Section 4.10. The Treasurer 13
Section 4.11. Salaries 13
ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS 14
Section 5.1. Contracts 14
Section 5.2. Loans 14
Section 5.3. Checks, Drafts, etc. 14
Section 5.4. Deposits 14
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER 14
Section 6.1. Certificates for Shares 14
Section 6.2. Transfer of Shares 15
ARTICLE VII. FISCAL YEAR 15
ARTICLE VIII. DIVIDENDS 15
ARTICLE IX. CORPORATE SEAL 15
ARTICLE X. WAIVER OF NOTICE 15
ARTICLE XI. AMENDMENTS 16
</TABLE>
<PAGE> 4
BY-LAWS
OF
LINCOLN HERITAGE CORPORATION
----------------------------
ARTICLE I. OFFICES
--------- -------
The principal office of the Corporation shall be located in Austin,
Texas. The Corporation may have such other offices, either within or without
the State of Texas, as the Board of Directors may designate or as the
business of the Corporation may require from time to time.
The registered office of the Corporation required by the Texas Business
Corporation Act to be maintained in the State of Texas may be changed from
time to time by the Board of Directors.
ARTICLE II. SHAREHOLDERS
---------- ------------
Section 2.1. Annual Meeting. The annual meeting of the
----------- --------------
shareholders shall be held on the third Thursday in the month of May, in each
year, beginning with the year 1999, at the hour of 10:00 a.m., or at such
other date and time as the Board of Directors may determine, for the purpose
of electing Directors and for the transaction of such other business as may
come before the meeting. If the day fixed for the annual meeting shall be a
legal holiday in the State of Texas, such meeting shall be held on the next
succeeding business day.
Section 2.2. Special Meetings. Special meetings of the
----------- ----------------
shareholders, for any purpose or purposes, unless otherwise prescribed by
statute, may be called by the President, by the Board of Directors, or by the
holders of not less than two-thirds of all outstanding shares of the
Corporation entitled to vote at a meeting.
Section 2.3. Place of Meeting. The Board of Directors may
----------- ----------------
designate any place, either within or without the State of Texas, as the
place of meeting for any annual meeting of the shareholders or for any
special meeting of the shareholders called by the Board of Directors, except
that a meeting called expressly for the purpose of removal of directors shall
be held at the registered office or principal business office of the
Corporation in the State of Texas or in the city or county of the State of
Texas in which the principal business office of the Corporation is located.
A waiver of notice signed by all shareholders entitled to vote at a meeting
may designate any place, either within or without the State of Texas, as the
place for the holding of such meeting unless such meeting is called expressly
for the purpose of removal of directors, in which event the place for the
holding of such meeting shall be at the registered office or principal
business office of the Corporation in the State of Texas or in the city or
county of the State of Texas in which the principal business office of the
Corporation is located. If no designation is made, or if a special meeting
be otherwise called, the place of meeting shall be the registered office of
the Corporation in the State of Texas.
3
<PAGE> 5
Section 2.4. Notice of Meeting. Written notice stating the place,
----------- -----------------
day and hour of the meeting and the purpose or purposes for which the meeting
is called, shall, unless otherwise allowed or prescribed by statute, be
delivered not less than ten nor more than sixty days before the date of the
meeting, or in the case of a merger or consolidation not less than twenty nor
more than sixty days before the date of the meeting, either personally or by
mail, by or at the direction of the President, or the Secretary, or the
officer or persons calling the meeting, to each shareholder of record
entitled to vote at such meeting.
Section 2.5. Meetings, How Convened. Every meeting, for whatever
----------- ----------------------
purpose, of the shareholders in the Corporation shall be convened by its
President, Secretary or other officer or any of the persons calling the
meeting by notice given as herein provided.
Section 2.6. Fixing of Record Date. For the purpose of
----------- ---------------------
determining shareholders entitled to notice of or to vote at any meeting of
shareholders, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper
purpose, the Board of Directors of the Corporation may fix in advance a date
as the record date for any such determination of shareholders, such date in
any case to be not more than sixty days and, for a meeting of shareholders,
not less than ten days, or in the case of a merger, consolidation, share
exchange, dissolution or sale, lease or exchange of assets, not less than
twenty days, immediately preceding such meeting. If no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on
which the resolution of the Board of Directors declaring such dividend is
adopted, as the case may be, shall be the record date for such determination
of shareholders. When a determination of shareholders entitled to vote at
any meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment thereof.
Section 2.7. Voting Lists. The officer or agent having charge of
----------- ------------
the transfer books for shares of the Corporation shall make, within twenty
days after the record date for a meeting of shareholders or ten days before
such meeting, whichever is earlier, a complete list of the shareholders
entitled to vote at such meeting, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten days prior to such meeting, shall be kept on file at the registered
office of the Corporation and shall be subject to inspection by any
shareholder, and to copying at the shareholder's expense, at any time during
usual business hours. Such list shall also be produced and kept open at the
time and place of the meeting and shall be subject to the inspection of any
shareholder during the whole time of the meeting. The original share ledger
or transfer books, or a duplicate thereof kept in the State of Texas, shall
be prima facie evidence as to who are the shareholders entitled to examine
such list or share ledger or transfer book or to vote at any meeting of the
shareholders.
Section 2.8. Quorum. A majority of the outstanding shares of the
----------- ------
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at any meeting of shareholders. If a quorum is present,
the affirmative vote of a majority of the shares represented at the
4
<PAGE> 6
meeting shall be the act of the shareholders, unless the vote of a greater
number or voting by classes is required by law, the Articles of
Incorporation, or these By-Laws.
Section 2.9. Proxies. At all meetings of shareholders, a
----------- -------
shareholder may vote in person or by proxy executed in writing by the
shareholder or by his or her duly authorized attorney in fact. Such proxy
shall be filed with the Secretary of the Corporation before or at the time of
the meeting. No proxy shall be valid after eleven months from the date of
its execution, unless otherwise provided in the proxy. A duly executed proxy
shall be irrevocable only if it states that it is irrevocable and otherwise
complies with The Business Corporation Act of Texas. If any instrument of
proxy designates two or more persons to act as proxy, in the absence of any
provisions in the proxy to the contrary, the persons designated may represent
and vote the shares in accordance with the vote or consent of the majority of
the persons named as proxies. If only one such proxy is present, the proxy
may vote all of the shares, and all the shares standing in the name of the
principal or principals for whom such proxy acts shall be deemed represented
for the purpose of obtaining a quorum. The foregoing provisions shall apply
to the voting of shares by proxies for any two or more administrators,
executors, trustees or other fiduciaries, unless an instrument or order of
court appointing them otherwise directs.
Section 2.10. Voting of Shares; No Cumulative Voting. Each
------------ --------------------------------------
outstanding share shall be entitled to one vote upon each matter submitted to
a vote at a meeting of the shareholders. There shall be no right to
cumulative voting in the election of directors.
Section 2.11. Voting of Shares by Certain Holders. Shares standing
------------ -----------------------------------
in the name of another corporation may be voted by any officer, agent, proxy
or other legal representative authorized to vote such shares under the law of
incorporation of such corporation. The Corporation may treat the president
or other person holding the position of chief executive officer of such other
corporation as authorized to vote such shares, together with any other person
indicated and any other holder of an office indicated by the corporate
shareholder to the Corporation as a person or an office authorized to vote
such shares. Such persons and offices indicated shall be registered by the
Corporation on the transfer books for shares and included in any voting list
prepared in accordance with Section 2.7.
Shares standing in the name of a deceased person, a minor ward or a
person under legal disability, may be voted by his or her administrator,
executor or court appointed guardian, either in person or by proxy without a
transfer of such shares into the name of such administrator, executor or
court appointed guardian.
Shares standing in the name of a trustee may be voted by such trustee,
either in person or by proxy.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted
by such receiver without the transfer thereof into such receiver's name if
authority so to do is contained in an appropriate order of the court by which
such receiver was appointed.
5
<PAGE> 7
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Shares of its own stock held by the Corporation in a fiduciary capacity
may be voted and shall be counted in determining the total number of
outstanding shares entitled to vote at any given time.
Section 2.12. Shareholder Action Without a Meeting. Any action
------------ ------------------------------------
required to be taken at a meeting of the shareholders, or any action which
may be taken at a meeting of the shareholders, may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed
by all of the shareholders entitled to vote with respect to the subject
matter thereof.
If the action consented to requires the filing of a certificate under
the Texas Business Corporation Act, the certificate filed under such Act
shall state, in lieu of any statement required concerning any vote of
shareholders, that written consent has been given in accordance with the
provisions of such Act.
Section 2.13. Notice of Shareholder Business and Nominations.
------------ ----------------------------------------------
(A) Annual Meetings of Shareholders. (1) Nominations of persons for
-------------------------------
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the shareholders may be made at an annual
meeting of shareholders (a) pursuant to the Corporation's notice of meeting,
(b) by or at the direction of the Board of Directors or (c) by any
shareholder of the Corporation who was a shareholder of record at the time of
giving of notice provided for in this By-Law, who is entitled to vote at the
meeting and who has complied with the notice procedures set forth in this
By-Law.
(2) For nominations or other business to be properly brought before
an annual meeting by a shareholder pursuant to clause (c) of paragraph (A)(1)
of this Section 2.13, the shareholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than 60 days nor more than 90
days prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, notice by the shareholder to be timely must be so delivered
not earlier than the 90th day prior to such annual meeting and not later than
the close of business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public announcement of the
date of such meeting is first made by the Corporation. Such shareholder's
notice shall set forth: (a) as to each person whom the shareholder proposes
to nominate for election or reelection as a director all information relating
to such person that is required to be disclosed in solicitations of proxies
for election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the shareholder proposes to bring before
the meeting, a brief description of the business desired to be
6
<PAGE> 8
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (c)
as to the shareholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made (i) the name and address of
such shareholder, as they appear on the Corporation's books, and of such
beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such shareholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Section 2.13 of Directors of the Corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the
Corporation at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a shareholder's notice required by this Section 2.13
shall also be considered timely, but only with respect to nominees for any
new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than the close of business on the 10th day following the day on which such
public announcement is made by the Corporation.
(B) Special Meetings of Shareholders. Only such business shall be
--------------------------------
conducted at a special meeting of shareholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board of Directors may be made at
a special meeting of shareholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction of
the Board of Directors or (b) by any shareholder of the Corporation who is a
shareholder of record at the time of giving of notice provided for in this
Section 2.13, who shall be entitled to vote at the meeting and who complies
with the notice procedures set forth in this Section 2.13 Board of Directors
may be made at such a special meeting of shareholders if the shareholder's
notice required by paragraph (A)(2) of this Section 2.13 principal executive
offices of the Corporation not earlier than the 90th day prior to such
special meeting and not later than the close of business on the later of the
60th day prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special meeting
and of the nominees proposed by the Board of Directors to be elected at such
meeting.
(C) General. (1) Only such persons who are nominated in accordance
-------
with the procedures set forth in this Section 2.13 shall be eligible to serve
as directors and only such business shall be conducted at a meeting of
shareholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.13. Except as otherwise provided
by law, the Articles of Incorporation or these By-Laws, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made in accordance
with the procedures set forth in this Section 2.13 and, if any proposed
nomination or business is not in compliance with this Section 2.13, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 2.13, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national
7
<PAGE> 9
news service or in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 of 15(d) of the
Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 2.13, a
shareholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-Law. Nothing in this Section 2.13 shall be
deemed to affect any rights of shareholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
Section 2.14. Inspectors. At any meeting of the shareholders, the
------------ ----------
Chairman of the meeting may, or upon the request of any shareholder shall,
appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares
represented at the meeting, based upon their determination of the validity
and effect of proxies; count all votes and report the results; and do such
other acts as are proper to conduct the election and voting with impartiality
and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or
her or by a majority of them if there be more than one inspector at such
meeting. If there is more than one inspector, the report of a majority shall
be the report of the inspectors. The report of the inspector or inspectors
on the number of shares represented at the meeting and the results of the
voting shall be prima facie evidence thereof.
Section 2.15. Books and Records -- Examination by Shareholders.
------------ ------------------------------------------------
This Corporation shall keep correct and complete books and records of
account, as well as minutes of the proceedings of the shareholders and Board
of Directors and committees thereof. A record of the names and addresses of
the Corporation's shareholders, and the number and class of the shares held
by each shall be kept at the Corporation's registered office or principal
place of business in Texas, or at the office of a transfer agent or registrar
in Texas. Any person who is a shareholder of record shall have the right to
examine, in person or by agent, at any reasonable time or times, for any
proper purpose, the Corporation's books and records of account, minutes,
voting trust agreements filed with the Corporation and record of
shareholders, and to make extracts therefrom. Upon the written request of
any shareholder, this Corporation shall mail to such shareholder, within
fourteen days after receipt of such request, a balance sheet as of the close
of the fiscal year most recently ended and a profit and loss statement for
such fiscal year; provided that if such request is received by the
Corporation before such financial statements are available, the Corporation
shall mail such financial statements within fourteen days after they become
available, but in any event within one hundred twenty days after the close of
said fiscal year.
ARTICLE III. BOARD OF DIRECTORS
----------- ------------------
Section 3.1. General Powers. The business and affairs of the
----------- --------------
Corporation shall be managed by a Board of Directors.
8
<PAGE> 10
Section 3.2. Number, Term and Qualifications. The number of
----------- -------------------------------
directors of the Corporation shall consist of such number of directors, not
less than three (3) nor more than ten (10), as shall be fixed from time to
time by resolution of the Board of Directors. The directors shall be divided
into three classes: Class I; Class II; and Class III. The number of
directors in any such class shall not exceed the number of directors in any
other class by more than one (1). The term of office of the initial Class I
directors shall expire at the annual meeting of shareholders of the
Corporation in 1999; the term of office of the initial Class II directors
shall expire at the annual meeting of shareholders of the Corporation in
2000; and the term of office of the initial Class III directors shall expire
at the annual meeting of shareholders of the Corporation in 2001; or in each
case thereafter until their respective successors are duly elected and
qualified. At each annual election beginning in 1999 the directors elected
to succeed those whose terms then expire shall be identified as being of the
same class as the directors they succeed and shall be elected for a term of
three (3) years expiring at the third succeeding annual shareholder meeting
or thereafter until their respective successors are duly elected and
qualified. If the number of directors is changed, any increase or decrease
in the number of directors shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly as possible.
Directors need not be residents of the State of Texas or shareholders of the
Corporation.
Any vacancy on the Board (whether such vacancy is caused by death,
resignation, or removal for cause or is the result of a newly created
directorship) shall be filled by a majority of the directors then in office.
Any director elected to fill a vacancy in any class (whether such vacancy is
caused by death, resignation, or removal with cause, or is the result of an
increase in the number of directors in such class) shall hold office for a
term which shall expire with the term of the directors in such class.
No director may be removed without cause from office during such
director's term of office. At a meeting called expressly for that purpose,
any director may be removed by the shareholders for cause by the affirmative
vote of the holders of a majority of the shares entitled to vote at an
election of directors.
Section 3.3. Regular Meetings. A regular meeting of the Board of
----------- ----------------
Directors shall be held without other notice than this Section 3.3,
immediately after, and at the same place as, the annual meeting of
shareholders. The Board of Directors may provide, by resolution, the time
and place, either within or without the State of Texas, for the holding of
additional regular meetings without other notice than such resolution.
Section 3.4. Special Meetings. Special meetings of the Board of
----------- ----------------
Directors may be called by or at the request of the Chairman, the President
or any three directors. The person or persons authorized to call special
meetings of the Board of Directors may fix any place, either within or
without the State of Texas, as the place for holding any special meeting of
the Board of Directors called by them.
Section 3.5. Notice. Notice of any special meeting shall be given
----------- ------
at least two business days prior to such meeting by written notice delivered
personally or mailed to each director at
9
<PAGE> 11
his or her business address, or by telegram. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail, so
addressed, with postage thereon prepaid. If notice be given by telegram,
such notice shall be deemed to be delivered when the telegram is delivered to
the telegraph company. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting to the transaction of
any business because the meeting is not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the Board of Directors need be specified in the notice or waiver
of notice of such meeting.
Section 3.6. Quorum; Participation by Telephone. A majority of
----------- ----------------------------------
the full Board of Directors shall constitute a quorum for the transaction of
business. Members of the Board of Directors may participate in and act at
any meeting of such Board through the use of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in such a meeting shall
constitute attendance and presence in person at the meeting of the person or
persons so participating.
Section 3.7. Manner of Acting. The act of a majority of the
----------- ----------------
directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors, unless the act of a different number is required
by statute, the Articles of Incorporation or these By-Laws.
Section 3.8. Action Without a Meeting. Any action which may be
----------- ------------------------
taken at a meeting of the Board of Directors may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed
by all of the directors. Such written consent shall be filed with the
minutes of the proceedings of the Board of Directors. Such action by consent
shall have the same force and effect as a unanimous vote of such Directors.
Section 3.9. Resignations. Any director may resign at any time by
----------- ------------
giving written notice to the Board of Directors, the President or the
Secretary of the Corporation. Written notice shall be delivered by certified
or registered mail, with postage thereon prepaid and a return receipt
requested. Such resignation shall take effect at the date of the receipt of
such notice which date of receipt shall be deemed to be the date indicated
upon the registered or certified mail return receipt, or at any later time
specified therein; unless otherwise specified, acceptance of such resignation
shall not be necessary to make it effective.
Section 3.10. Compensation. By resolution of the Board of
------------ ------------
Directors, each director may be paid his or her expenses, if any, of
attendance at each meeting of the Board of Directors, and may be paid a
stated salary as director or a fixed sum for attendance at each meeting of
the Board of Directors or both. No such payment shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
Section 3.11. Presumption of Assent. A director of the Corporation
------------ ---------------------
who is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be conclusively presumed to have assented to
the action taken unless his or her dissent shall be entered in
10
<PAGE> 12
the minutes of the meeting or unless he or she shall file a written dissent
to such action with the person acting as secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
Secretary of the Corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 3.12. Committees. The Board of Directors, by resolution
------------ ----------
adopted by a majority of the directors, may create one or more committees.
Each committee shall consist of two or more directors and, to the extent
specified by the Board of Directors in the resolution establishing the
committee, shall have and exercise all of the authority of the Board of
Directors in the management of the Corporation, provided, such committee may
not authorize distributions with respect to shares of stock of the Company;
amend the Corporation's Articles of Incorporation; approve a plan of merger;
approve or recommend to the shareholders any act required by law to be
approved by them; adopt, amend or repeal the By-Laws of the Corporation;
elect or remove officers of the Corporation or fix the compensation of any
member of the committee; authorize or approve reacquisition of shares of the
Corporation, except according to a general formula or method prescribed by
the Board of Directors; authorize or approve the issuance or sale, or
contract for sale, of shares or determine the designation and relative
rights, preferences, and limitations of a series of shares, except that the
Board of Directors may direct a committee to fix the specific terms of the
issuance or sale or contract for sale or the number of shares to be allocated
to particular employees under an employee benefit plan; fill vacancies on the
Board of Directors or on any of its committees; amend, alter, repeal or take
action inconsistent with any resolution or action of the Board of Directors
which by its terms provides that it shall not be amended, altered or repealed
by action of a committee.
The Compensation Committee, if created by the Board of Directors, shall
be comprised solely of two or more independent directors of the Corporation
and shall be responsible for establishing remuneration levels for executive
officers of the Corporation, authorizing all other forms of executive
compensation and administering all executive incentive plans of the
Corporation. The Audit Committee, if created by the Board of Directors,
shall be comprised of two or more independent directors of the Corporation
and shall be responsible for making recommendations concerning the engagement
of independent public accountants, reviewing with the independent public
accountants the scope and results of the audit engagement, approving
professional services provided by the independent public accountants,
reviewing the independence of the independent public accountant, considering
the range of audit and non-audit fees and reviewing the adequacy of the
Corporation's internal accounting controls.
ARTICLE IV. OFFICERS
---------- --------
Section 4.1. Number. The officers of the Corporation shall be a
----------- ------
Chairman of the Board of Directors, President, one or more Vice Presidents
(the number thereof to be determined by the Board of Directors), a Secretary,
and a Treasurer, each of whom shall be elected by the Board of Directors.
Such other officers and assistant officers as may be deemed necessary may be
elected or appointed by the Board of Directors. Any two or more offices may
be held by the same person.
11
<PAGE> 13
Section 4.2. Election and Term of Office. The officers of the
----------- ---------------------------
Corporation to be elected by the Board of Directors shall be elected annually
by the Board of Directors at the first meeting of the Board of Directors held
after each annual meeting of the shareholders. If the election of officers
shall not be held at such meeting, such election shall be held as soon
thereafter as conveniently may be arranged. Each officer shall serve at the
pleasure of the Board of Directors and shall hold office until his or her
successor shall have been duly elected and shall have qualified or until his
or her death or until he or she shall resign or shall have been removed in
the manner hereinafter provided.
Section 4.3. Removal. Any officer or agent may be removed by the
----------- -------
Board of Directors whenever in its judgment the best interests of the
Corporation will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election
or appointment of an officer or agent shall not of itself create contract
rights.
Section 4.4. Resignations. Any officer may resign at any time by
----------- ------------
giving written notice to the Board of Directors, the President or the
Secretary of the Corporation. Written notice shall be delivered by certified
or registered mail, with postage thereon prepaid and a return receipt
requested. Such resignation shall take effect at the date of the receipt of
such notice which date of receipt shall be deemed to be the date indicated
upon the registered or certified mail return receipt, or at any later time
specified therein; unless otherwise specified herein. The acceptance of such
resignation shall not be necessary to make it effective.
Section 4.5. Vacancies. A vacancy in any office because of death,
----------- ---------
incapacity, resignation, removal, disqualification or otherwise, may be
filled by the Board of Directors for the unexpired portion of the term.
Section 4.6. Chairman of the Board. The Chairman of the Board
----------- ---------------------
shall provide overall direction and guidance to the Corporation. He or she
shall preside at all meetings of the shareholders and of the Board of
Directors. The Chairman shall in general perform all duties incident to the
office of Chairman of the Board and such other duties as may be prescribed by
the Board of Directors from time to time.
Section 4.7. President. The President shall be the chief
----------- ---------
executive officer of the Corporation and shall in general supervise and
control all of the business and affairs of the Corporation. The President
may sign, with the Secretary or any other proper officer of the Corporation
thereunto authorized by the Board of Directors, certificates for shares of
the Corporation, any deeds, mortgages, bonds, contracts, or other instruments
which the Board of Directors has authorized to be executed, except in cases
where the signing and execution thereof shall be expressly delegated by the
Board of Directors or by these By-Laws to some other officer or agent of the
Corporation, or shall be required by law to be otherwise signed or executed.
The President may vote in person or by proxy shares in other corporations
standing in the name of this Corporation. The President shall in general
perform all duties incident to the office of President and such other duties
as may be prescribed by the Board of Directors from time to time.
12
<PAGE> 14
Section 4.8. The Vice Presidents. In the absence of the
----------- -------------------
President, whether due to resignation, incapacity or any other cause, or in
the event of the President's death, inability or refusal to act, the Vice
President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated by the Board of Directors, or in the
absence of any designation, then in the order of their election) shall
perform the duties of the President, and when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the President. The
Vice President shall exercise such powers only so long as the President
remains absent or incapacitated, or until the Board of Directors elects a new
President. Any Vice President may sign, with the Secretary, an Assistant
Secretary, Treasurer or an Assistant Treasurer, certificates for shares of
the Corporation; and shall perform such other duties as from time to time may
be assigned to him or her by the President or by the Board of Directors. The
Board may affix qualifying titles in conjunction with the election or
appointment of a Vice President, such as "Executive," "Senior," "Junior" and
the like.
Section 4.9. The Secretary. The Secretary shall (a) keep the
----------- -------------
minutes of the proceedings of the shareholders and of the Board of Directors
in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these By-Laws or as required
by law; (c) be custodian of the corporate records and of the seal of the
Corporation and see that the seal of the Corporation is affixed to all
documents the execution of which on behalf of the Corporation under its seal
is duly authorized; (d) keep a register of the post office address of each
shareholder which shall be furnished to the Secretary by such shareholder;
(e) sign with the President, or a Vice President, certificates for shares of
the Corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors; (f) have general charge of the stock
transfer books of the Corporation; (g) have the authority to certify these
By-Laws, resolutions of the shareholders and Board of Directors and
committees thereof, and other documents of the Corporation as true and
correct copies thereof; and (h) in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be
assigned to the Secretary by the President or by the Board of Directors.
Section 4.10. The Treasurer. The Treasurer shall: (a) have charge
------------ -------------
and custody of and be responsible for all funds and securities of the
Corporation; (b) receive and give receipts for moneys due and payable to the
Corporation from any source whatsoever, and deposit all such moneys in the
name of the Corporation in such banks, trust companies or other depositories
as shall be selected in accordance with the provisions of Article V of these
By-Laws; and (c) in general perform all of the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to
the Treasurer by the President or by the Board of Directors. If required by
the Board of Directors, the Treasurer shall give a bond for the faithful
discharge of the Treasurer's duties in such sum and with such surety or
sureties as the Board of Directors shall determine.
Section 4.11. Salaries. The salaries of the officers shall be
------------ --------
fixed from time to time by the Board of Directors and no officer shall be
prevented from receiving such salary by reason of the fact that the officer
is also a director of the Corporation and participated in determining and
voting upon the salary.
13
<PAGE> 15
ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS
--------- -------------------------------------
Section 5.1. Contracts. The Board of Directors may authorize any
----------- ---------
officer or officers, agent or agents, to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the Corporation,
and such authority may be general or confined to specific instances.
Section 5.2. Loans. No loans shall be contracted on behalf of the
----------- -----
Corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board of Directors. Such authority
may be general or confined to specific instances.
Section 5.3. Checks, Drafts, etc. All checks, drafts or other
----------- -------------------
orders for the payment of money, notes or other evidences of indebtedness
issued in the name of the Corporation, shall be signed by such officer or
officers, agent or agents of the Corporation and in such manner as shall from
time to time be determined by resolution of the Board of Directors.
Section 5.4. Deposits. All funds of the Corporation not otherwise
----------- --------
employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
of Directors may select.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
---------- ------------------------------------------
Section 6.1. Certificates for Shares. Certificates representing
----------- -----------------------
shares of the Corporation shall be in such form as shall be determined by the
Board of Directors. The shares of the Corporation represented by
certificates shall be signed by the President or a Vice President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, and may be sealed with the seal, or a facsimile of the seal, of
the Corporation. In case the seal of the Corporation is changed after the
certificate is sealed with the seal or a facsimile of the seal of the
Corporation, but before it is issued, the certificate may be issued by the
Corporation with the same effect as if the seal had not been changed. If a
certificate is countersigned by a transfer agent or registrar, other than the
Corporation itself or its employee, any other signatures or countersignature
on the certificate may be facsimiles. If the Corporation is authorized to
issue shares of more than one class, a notice shall be set forth upon the
face or the back of each certificate representing shares issued by the
Corporation which shall state that a full summary or statement of all of the
designations, preferences, qualifications, limitations, restrictions, and
special or relative rights of the shares of each class authorized to be
issued, and, if the Corporation is authorized to issue any preferred or
special class in series, the variations in the relative rights and
preferences between the shares of each series so far as the same have been
fixed and determined and the authority of the Board of Directors to fix and
determine the relative rights and preferences of subsequent series, will be
furnished by the Corporation upon request and without charge. Each
certificate representing shares shall also state: (a) that the Corporation
is organized under the laws of Texas; (b) the name of the person to whom
issued; (c) the number and class of shares, and the designation of the
series, if any, which such certificate represents. No certificate shall be
issued for any share until such share is fully paid.
14
<PAGE> 16
All certificates surrendered to the Corporation for transfer shall be
cancelled and no new certificate shall be issued until the former certificate
for a like number of shares shall have been surrendered and canceled, except
that in case of a lost, destroyed or mutilated certificate a new one may be
issued therefor upon such terms and indemnity to the Corporation as the Board
of Directors may prescribe.
Section 6.2. Transfer of Shares. Transfer of shares of the
----------- ------------------
Corporation shall be made only on the stock transfer books of the Corporation
by the holder of record thereof or by his or her legal representative, or by
his or her attorney thereunto authorized by power of attorney duly executed
and filed with the Secretary of the Corporation, and on surrender for
cancellation of the certificate for such shares. The person in whose name
shares stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes.
ARTICLE VII. FISCAL YEAR
----------- -----------
The fiscal year of the Corporation shall be as fixed from time to time
by the Board of Directors.
ARTICLE VIII. DIVIDENDS
------------ ---------
The Board of Directors may, from time to time, declare and the
Corporation may pay dividends on its outstanding shares in the manner, and
upon the terms and conditions provided by law and the Articles of
Incorporation of the Corporation.
ARTICLE IIX. CORPORATE SEAL
----------- --------------
The Board of Directors shall provide a corporate seal in the form of a
circle with the name of the Corporation inscribed thereon.
ARTICLE X. WAIVER OF NOTICE
--------- ----------------
Whenever any notice is required to be given under the provisions of
these By-Laws or of the Articles of Incorporation or of the Texas Business
Corporation Act, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice.
15
<PAGE> 17
ARTICLE XI. AMENDMENTS
---------- ----------
These By-Laws may be altered, amended or repealed and new By-Laws
adopted by action of the shareholders or the Board of Directors.
Adopted as of April 6, 1998.
/s/ Nicholas M. Powling
------------------------------------------
Nicholas M. Powling, President
ATTEST:
/s/ Lennie Cappelman
- -----------------------------------
Lennie Cappelman, Secretary
16
<PAGE> 1
NUMBER SHARES
INCORPORATED UNDER THE LAWS OF
THE STATE OF
TEXAS
[EAGLE EMBLEM]
LINCOLN HERITAGE CORPORATION
10,000,000 SHARES COMMON STOCK, PAR VALUE $0.1
This Certifies that is the owner of
--------------------------------------------
fully paid
- ---------------------------------------------------------------------
and non-assessable Shares of the Capital Stock of the above named Corporation
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized Attorney upon surrender of this Certificate
properly endorsed.
[Corporate In Witness Whereof, the said Corporation has caused this
Seal] Certificate to be signed by its duly authorized officers
and its Corporate Seal to be hereunto affixed this
day of A.D.
---------- --------------- ----------
------------------- ------------------- -------------------
SECRETARY PRESIDENT
Lennie J. Cappelman Nicholas M. Powling
<PAGE> 1
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
April 6, 1998, by and among Lincoln Heritage Corporation, a Texas corporation
(the "Company") and National Heritage Enterprises, Inc., a Missouri
corporation ("Holder" or "Shareholder").
W I T N E S S E T H:
WHEREAS, the Shareholder is the holder of all of the issued and
outstanding shares of the Company's common stock, $0.01 par value (the
"Common Stock"); and
WHEREAS, in connection with the proposed initial public offering by the
Company of Common Stock, the parties agreed to execute and deliver this
Agreement setting forth certain rights of the Shareholder with respect to
registration under the Securities Act of 1933, as amended, of the shares of
Common Stock held by the Shareholder.
NOW, THEREFORE, in consideration of these premises, the covenants and
agreements herein contained, and other good and valuable consideration, the
receipt and sufficiency of which hereby are acknowledged, the parties hereto
agree as follows:
ARTICLE 1
Registration of Registerable Securities
---------------------------------------
1.1 Certain Definitions. For purposes of this Agreement the
-------------------
following terms shall have the following meanings:
(a) The term "Act" means the Securities Act of 1933, as
amended;
(b) The term "Common Stock" shall mean shares of the Company's
Common Stock, $.01 per value per share, and any stock or securities issued
with respect to such Common Stock by reason of a stock dividend, stock split,
combination of shares, recapitalization reclassification, merger,
consolidation, corporate reorganization or otherwise;
(c) The term "Exchange Act" means the Securities Exchange Act
of 1934, as amended;
(d) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement
in compliance with the Act and the declaration or ordering of effectiveness
of such registration statement;
(e) The term "Registerable Securities" means the shares of
Common Stock held by the Shareholder; provided, however, such shares shall
not be deemed to be Registerable Securities to the extent that the Company
shall have received an opinion of counsel reasonably acceptable to the
Company that such shares may be resold without registration under Rule 144
under the Act (or any successor rule) or an applicable exemption from
registration under the Act;
(f) The term "Rule 144" means Rule 144 under the Act (or any
similar rule then in force); and
<PAGE> 2
(g) The term "Holder" means (a) the Shareholder and (b) any
other person holding Registerable Securities to whom the registration rights
set forth in this Agreement have been transferred pursuant to Section 1.9.
1.2 Demand Registrations.
--------------------
(a) Requests for Registration. At any time on or after the
-------------------------
expiration of 180 days following the consummation of the Company's initial
public offering, as set forth in this Section 1.2, the Holder of the
Registerable Securities may request registration under the Act of all or part
of its Registerable Securities on Form S-1 or any similar long-form
registration statement ("Long-Form Registrations") or on Form S-2 or S-3 or
any similar short-form registration ("Short Form Registrations") if
available. The request for registration shall state that it is being made
pursuant to this Section 1.2 and shall specify the number of Registerable
Securities requested to be registered. All registrations requested pursuant
to Sections 1.2(b) and 1.2(c) are referred to herein as "Demand
Registrations."
(b) Long-Form Registrations. The Holder of the Registerable
-----------------------
Securities shall be entitled to request two Long-Form Registrations. A
registration will not count as a permitted Long-Form Registration until it
has become effective and unless the Holder of Registerable Securities is able
to register and sell at least 75% of the Registerable Securities requested to
be included in such registration.
(c) Short-Form Registrations. In addition to the Long-Form
------------------------
Registrations provided pursuant to Section 1.2(b), at any time after the
Company has completed a public offering of the Common Stock under the Act,
the holders of a majority of the Registerable Securities shall be entitled
to request three Short-Form Registrations. Demand Registrations will be
Short-Form Registrations whenever the Company is permitted to use any
applicable short-form. After the Company has become subject to the reporting
requirements of the Exchange Act, the Company will use commercially reasonable
efforts to make Short-Form Registrations available for the sale of Registerable
Securities.
(d) Limitations on Demand Registrations. Notwithstanding any
-----------------------------------
other provision of this Section 1.2, the Company shall not be obligated to
effect any Demand Registration within six months after the effective date of
a previous Demand Registration. The Company may postpone for no more than 90
days in any 360-day period, the filing or the effectiveness of a registration
statement of a Demand Registration if the Board of Directors, acting in good
faith, believes that such Demand Registration might reasonably be expected to
have an adverse effect on any proposal or plan to engage in any acquisition
or disposal of stock or assets or any merger, consolidation, tender offer or
similar transaction; provided that in such event, the Holder of Registerable
Securities requesting such Demand Registration will be entitled to withdraw
such request and, if such request is withdrawn, such Demand Registration will
not count as a Demand Registration; provided, however, that (i) the Company
may not exercise this right to delay a Demand Registration on more than one
occasion during any period of 12 consecutive months and (ii) the Company
shall reimburse the Holder for all expenses (including, without limitation,
fees, expenses and disbursements of counsel) incurred in connection with any
such registration prior to a delay by the Company.
(e) Underwriting Requirements. In connection with any Demand
-------------------------
Registration involving an underwriting, the Company shall (together with the
Holder proposing to
- 2 -
<PAGE> 3
distribute its securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters of recognized standing, reasonably acceptable to
the Company, selected for such underwriting by the Holder proposing to sell
Registerable Securities pursuant to such Demand Registration. If a Demand
Registration is an underwritten offering and the representative of the
underwriters advises the Holder in writing that marketing factors require a
limitation of the number of Registerable Securities to be included in the
registration and underwriting, then, the number of shares of Common Stock
that may be included in the registration and underwriting shall be allocated
to the Holder in proportion, as nearly as practicable, to the respective
aggregate amount of Registerable Securities proposed to be sold by such
Holder at the time of initial filing the Registration Statement. If in
connection with any Demand Registration involving an underwriting, the Holder
requesting registration is unable for any reason to include in such
registration all of the Registerable Securities for which registration has
been requested, then such Holder shall be entitled to one additional Demand
Registration pursuant to this Section 1.2. If the underwriter has not limited
the number of Registerable Securities to be underwritten, then the Company
may include securities for its own account or for the account of others in
such registration if the underwriter so agrees in writing and if the number
of Registerable Securities that would otherwise have been included in such
registration and underwriting will not thereby be limited for any reason,
including, but not limited to, the price for which the Registerable
Securities will be sold.
(f) Expenses of Demand Registration. All expenses incurred in
-------------------------------
connection with a Demand Registration (excluding underwriters' discounts and
commissions), including, without limitation, all registration and
qualification fees, fees and expenses of compliance with securities or blue
sky laws, printers' and accounting fees, fees and disbursements of counsel
for the Company, and the reasonable fees and disbursements of one counsel for
the selling Holder shall be borne by the Company; provided, however, that the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to this Section 1.2 if the registration request is
subsequently withdrawn, unless the Holder agrees to forfeit its right to a
demand registration pursuant to this Section 1.2.
1.3 Piggyback Registrations. If at any time after the expiration of
-----------------------
180 days after the consummation of the Company's initial public offering, the
Company proposes to register any of its Common Stock under the Act and the
registration form to be used can be used to register the resale of the Common
Stock (other than a registration statement (A) on Form S-8 or any successor
form relating to securities issuable pursuant to any benefit plan or (B) on
Form S-4, or any successor form to each such form relating to an exchange
offer or relating to a transaction pursuant to Rule 145 of the Act), the
Company shall, each such time, promptly give the Holder written notice of
such determination to effect such a registration not later than twenty (20)
days prior to the anticipated date of filing with the Securities and Exchange
Commission (the "Commission") of the registration statement. Upon the
written request of the Holder given within fifteen (15) days after mailing of
any such notice by the Company, as part of the registration to which such
notice relates, the Company shall use its best efforts to cause to be
registered under the Act all of the Registerable Securities that the Holder
has requested to be registered.
(a) Underwritten Offerings. If the registration of which the
----------------------
Company gives notice is for a registered public offering involving an
underwriting, then the Company shall so advise the Holder as a part of such
written notice. In such event, the right of the Holder to registration
pursuant to this Section shall be conditioned upon the Holder's agreeing to
participate in such underwriting upon the terms and condition as shall be
negotiated by the Company, and the inclusion of the Registerable Securities
in the underwriting to the extent provided herein. The Holder proposing to
distribute securities through such underwriting shall (together with the
Company) enter into an underwriting
- 3 -
<PAGE> 4
agreement in customary form with the underwriter or underwriters selected for
such underwriting by the Company. Notwithstanding any other provisions of
this Section, if the underwriter determines in writing, in its sole and
absolute discretion, that marketing factors require a limitation of the
number of shares to be underwritten, then the underwriter may exclude some or
all Registerable Securities from such registration and underwriting in
accordance with the provisions of this Section; provided, however, that if
any securities are being offered for the account of any holder of the
Company's securities other than the Holder, the reduction in the number of
Registerable Securities included in such registration shall not represent a
greater percentage of the amount of Registerable Securities originally
requested to be registered and sold in such registration than the lowest
percentage reduction imposed upon any holder of the Company's securities
other than the Holder. The Company shall so advise the Holder distributing
securities through such underwriting, and the number of Registerable
Securities that may be included in the registration and underwriting on
behalf of the Holder shall be allocated to the Holder in proportion, as
nearly as practicable, to the amounts of Registerable Securities that the
Holder requested to be included in the registration. If the Holder
disapproves of the terms of any such underwriting, then the Holder may elect
to withdraw therefrom by written notice to the Company and the underwriter.
Any securities so excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
(b) Expenses of Piggyback Registrations. In the case of any
-----------------------------------
registration effected pursuant to this Section, any additional registration
and qualification fees and expenses, and any additional costs (other than
underwriters discounts and commissions) that result from the inclusion of
securities held by the Holder participating in the registration shall be
borne by the Company. In addition, the reasonable fees and disbursements of
one counsel for the selling Holder shall be borne by the Company.
1.4 Obligations of the Company. If the Company is required to use
--------------------------
its best efforts to effect a registration of the Registerable Securities
under this Agreement, the Company shall:
(a) file with the Commission a registration statement on an
appropriate form of registration statement with respect to the Registerable
Securities as soon as practicable after receipt of the written request from
the Shareholder to do so and use its best efforts thereafter to cause such
registration statement to become effective;
(b) prepare and file as soon as reasonably practicable with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and such prospectus current and to comply
with the provisions of the Act with respect to the disposition of the
Registerable Securities until the earlier of: (A) such time as all of the
Registerable Securities have been disposed of in accordance with the intended
methods of disposition by the Holder; (B) the expiration of six months from
the effective date of such registration statement; or (C) such time as the
Registerable Securities are otherwise freely tradable;
(c) furnish such number of copies of the registration
statement, the preliminary prospectus, term sheet (if any) and prospectus
included in such registration statement, and each amendment and supplement
thereto, as the Holder may reasonably request;
(d) use its best efforts to register or qualify the
Registerable Securities under the applicable state securities laws as
reasonably necessary for the intended distribution of the Registerable
Securities and to keep such registration or qualification in effect for so
long as the registration statement filed with the Commission remains in
effect as provided in (b), above, provided
- 4 -
<PAGE> 5
that Company shall not for any such purpose be required to qualify generally
to do business as a foreign corporation in any jurisdiction in which it would
not otherwise be obligated to be so qualified, or to subject itself to
taxation in any such jurisdictions or to consent to general service of
process in any such jurisdiction, or to qualify as a dealer in securities;
(e) notify the Holder, at any time when a prospectus is
required to be delivered by the Holder under the Act, upon discovery by the
Company that the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which
they were made, whereupon the Holder shall suspend any offers or sales of the
Registerable Securities until such time as such prospectus, as amended or
supplemented from time to time, shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which they were made;
(f) list the Registerable Securities on any securities exchange
(and/or on any system of automated dissemination of quotations of securities
prices) on which shares of the Common Stock are at any time listed, upon
official notice of issuance, and maintain such listing, or, if not so listed,
to be listed upon The Nasdaq Stock Market and to maintain such listing; and
(g) furnish (or cause to be furnished) to the Holder, all
undertakings, agreements, certificates, opinions, financial statements and
(if reasonably requested by the Holder) "comfort letters" of the sort
customarily provided to selling shareholders in secondary distributions and
to the managing underwriters, if the transaction in question is or were an
underwritten public offering.
1.5 Obligations of the Holders. It shall be a condition precedent to
--------------------------
the obligations of the Company to take any action pursuant to this Agreement
that the Holder shall furnish to the Company such information regarding it,
the Registerable Securities held by it, and the intended method of
disposition of such securities as the Company shall reasonably request and as
shall be required in connection with the action to be taken by the Company.
1.6 Black-Out Period Agreement. In consideration for the Company
--------------------------
agreeing to its obligations under this Agreement, the Holder agrees in
connection with any registration of the Company's securities (other than
pursuant to a registration statement (A) on Form S-8 or any successor form
relating to securities issuable pursuant to any benefit plan or (B) on Form
S-4, or any successor form relating to an exchange offer or relating to a
transaction pursuant to Rule 145 under the Act) that, upon the request of the
underwriters managing any underwritten offering of the Company's securities,
not to sell, make any short sale of, loan, grant any option for the purchase
of, or otherwise dispose of any of the Common Stock (other than those
included in the registration) without the prior written consent of such
underwriters for ninety (90) days from the effective date of such
registration or such shorter period as may be agreed to by the underwriters
with regard to such dispositions of the Common Stock by executive officers
and directors of the Company.
1.7 Delay of Registration. The Holder shall not have any right to
---------------------
take any action to restrain, enjoin or otherwise delay any registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
- 5 -
<PAGE> 6
1.8 Rule 144 Reporting. With a view toward making available to the
------------------
holders of Common Stock the benefits of certain rules and regulations of the
Commission that may permit the sale of the Common Stock to the public without
registration, the Company agrees to use its best efforts to:
(a) make and keep current public information available, within
the meaning of Rule 144 or any similar or analogous rule promulgated under
the Act, at all times after it has become subject to the reporting
requirements of the Exchange Act;
(b) file with the Commission, in a timely manner, all reports
and other documents required of the Company under the Act and the Exchange
Act (after it has become subject to the reporting requirements); and
(c) so long as any party hereto owns any Registerable
Securities, furnish to such party forthwith upon request, a written statement
by the Company as to its compliance with the reporting requirements of Rule
144 (at any time commencing 90 days after the effective date of the first
registration filed by the Company for an offering of its securities to the
general public), the Act and the Exchange Act (at any time after it has
become subject to such reporting requirements); a copy of the most recent
annual or quarterly report of the Company; and such other reports and
documents as such party may reasonably request in availing itself of any rule
or regulation of the Commission allowing it to sell any such securities
without registration.
1.9 Transfer of Registration Rights. The registration rights of the
-------------------------------
Shareholder under this Agreement may not be transferred to any transferee
except a transferee who is the heir or personal representative of a
Shareholder or a revocable trust voluntarily established by him primarily for
his benefit.
ARTICLE 2
Indemnification
---------------
2.1 General Indemnification. In connection with any registration or
-----------------------
qualification of the Registerable Securities under this Agreement, (i) the
Company shall indemnify and hold harmless the Shareholder, including, but not
limited to, each person, if any, who controls the Shareholder within the
meaning of Section 15 of the Act, against all losses, claims, damages,
liabilities and expenses (including, but not limited to, reasonable expenses
incurred in investigating, preparing and defending against any claim) to
which the Shareholder or such controlling person may become subject under the
Act, the Exchange Act or otherwise, insofar as the same arise out of or are
based upon or are caused by any untrue statement or alleged untrue statement
of a material fact contained in any registration statement or prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) furnished pursuant to this Agreement or insofar as the
same arise out of or are based upon or are caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or expenses are ultimately
determined to have arisen out of or were based upon or were caused by any
untrue statement or alleged untrue statement or omission or alleged omission
based upon written information furnished to the Company by or on behalf of
the Shareholder or any such control person for inclusion in any registration
statement or prospectus (and any amendments or supplements thereto), and (ii)
the Shareholder shall indemnify the Company, its affiliates, any person who
signed any registration statement, and their respective officers, directors
and control persons against all such losses, claims, damages, liabilities and
expenses (including, but not limited to, reasonable
- 6 -
<PAGE> 7
expenses incurred in investigating, preparing and defending against any
claim) insofar as the same are ultimately determined to have arisen out of or
were based upon or were caused by any such untrue statement or alleged untrue
statement or any such omission or alleged omission based upon written
information furnished to the Company by or on behalf of the Shareholder or
any such control person for the inclusion in any registration statement or
prospectus (and any amendments or supplements thereto); provided, however,
that the liability of the Shareholder under this Section 2.1 shall be limited
to net proceeds actually received by such Shareholder pursuant to a
prospectus included in a registration statement under this Agreement.
2.2 Notice of, and Procedures for, Collecting Indemnification.
---------------------------------------------------------
Promptly upon receipt by a party indemnified under this Agreement of notice
of the commencement of any action against such indemnified party in respect
of which indemnity or reimbursement may be sought against any indemnifying
party under this Agreement, such indemnified party shall notify the
indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may have to any indemnified party otherwise than under
this Agreement unless such failure shall materially and adversely affect the
defense of such action. In case notice of commencement of any such action
shall be given to the indemnifying party as above provided, the indemnifying
party shall be entitled to participate in and, to the extent it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense of such action at its own expense, with counsel chosen by it and
reasonably satisfactory to such indemnified party. The indemnified party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
(other than reasonable expenses incurred in investigating, preparing and
defending against any claim) shall be paid by the indemnified party unless
(a) the indemnifying party agrees to pay the same, (b) the indemnifying party
fails to assume the defense of such action with counsel reasonably
satisfactory to the indemnified party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of
such indemnified party), or (c) the named parties to any such action
(including any impleaded parties) have been advised by such counsel that
representation of such indemnified party and the indemnifying party by the
same counsel would be inappropriate under applicable standards of
professional conduct (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified
party). In the event that either of the circumstances described in clauses
(b) and (c) of the sentence immediately preceding shall occur, the
indemnified party shall have the right to select a separate counsel and to
assume such legal defense and otherwise to participate in the defense of any
such action, with the expenses and fees of such separate counsel and other
expenses related to such participation to be reimbursed by the indemnifying
party as incurred. No indemnifying party shall be liable for any settlement
entered into without its consent, which consent shall not be unreasonably
withheld or delayed.
ARTICLE 3
Miscellaneous
-------------
3.1 Notices. All notices, requests and other communications to any
-------
party hereunder shall be in writing and shall be given to such party at its
address or telecopier number set forth on the signature page hereof, or such
other address or telecopier number as such party may hereinafter specify for
the purpose. Each such notice, request or other communication shall be
effective (a) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section 3.1 and the transmitting telecopier
receives confirmation of delivery, (b) if given by overnight air courier, on
the
- 7 -
<PAGE> 8
next business day after the date of shipment, or (c) if given by any other
means, when delivered at the address referred to in, or specified by such
party pursuant to, this Section 3.1.
3.2 Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended or waived only upon the prior written consent of the Company and the
Holder.
3.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which taken together shall constitute one instrument.
3.4 Binding on Successors and Assigns. This Agreement shall be
---------------------------------
binding upon, inure to the benefit of and be enforceable by and against the
parties hereto and their respective successors and permitted assigns in
accordance with the terms hereof.
3.5 Headings. The headings in the sections and subsections of this
--------
Agreement are inserted for convenience only and in no way alter, amend,
modify, limit or restrict the contractual obligations of the parties.
3.6 Severability. Whenever possible, each provision of this Agreement
-----------
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
3.7 Arbitration. Any and all disputes relating to this Agreement and
-----------
the transactions contemplated hereby (including, without limitation, that a
party hereto is entitled to indemnification and/or the amount thereof) shall
be settled by binding arbitration before a single commercial arbitrator in
Austin, Texas. The disputing parties shall jointly select a single
arbitrator from a list furnished by the American Arbitration Association, and
if such parties cannot agree on an arbitrator within ten (10) days after
either party requested the other to select a mutually agreeable arbitrator,
then an arbitrator shall be appointed by the American Arbitration
Association. The decision and/or award of any such arbitrator shall be final
and binding upon all parties having an interest in the dispute.
3.8 Entire Agreement; Law Governing. All prior negotiations and
-------------------------------
agreements between the parties hereto are superseded by this Agreement, and
there are no representations, warranties, understandings or agreements other
than those expressly set forth herein, except as modified in writing
concurrently herewith or subsequent hereto. This Agreement shall be governed
by and construed and interpreted according to the internal laws of the State
of Texas, determined without reference to conflicts of law principles.
* * *
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the day and year first
above written.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
LINCOLN HERITAGE CORPORATION
By: /s/ Nicholas M. Powling
-----------------------------------
Nicholas M. Powling, President
NATIONAL HERITAGE ENTERPRISES, INC.
By: /s/ Brent D. Cassity
-----------------------------------
Brent D. Cassity, President
- 9 -
<PAGE> 1
LINCOLN HERITAGE CORPORATION
1998 LONG-TERM INCENTIVE PLAN
1. PURPOSE. The purpose of the Lincoln Heritage Corporation 1998
Long-Term Incentive Plan (the "Plan") is to encourage certain directors,
employees, advisors and consultants of Lincoln Heritage Corporation, a Texas
corporation (the "Corporation"), and of such subsidiaries of the Corporation
as the Committee administering the Plan designates, to acquire shares of the
Corporation's common stock, $0.01 par value (the "Common Stock"), or to
receive monetary payments based on the value of such stock or based upon
achieving certain goals on a basis mutually advantageous to such employees
and the Corporation and thus provide an incentive for continuation of the
efforts of employees for the success of the Corporation and for continuity of
employment.
2. ADMINISTRATION. The Plan will be administered by the Compensation
Committee (the "Committee") of the Board of Directors of the Corporation (the
"Board") consisting of two or more directors as the Board may designate from
time to time, each of whom is an "outside director" as that term is defined
pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), and the rules and regulations promulgated thereunder, and each
of whom is qualified to administer the Plan as contemplated by Rule 16b-3
("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the
"Act").
The determinations of the Committee shall be made in accordance with
their judgment as to the best interests of the Corporation and its
shareholders and in accordance with the purpose of the Plan. Subject to the
provisions of the Plan, the Commitee shall have exclusive authority to
interpret and administer the Plan, to select persons eligible to participate
in the Plan, to grant benefits in accordance with the Plan, to establish the
timing, pricing, amount and other terms and conditions of such grants (which
need not be uniform with respect to the various participants or with respect
to different grants to the same participant), to establish appropriate rules
relating to the Plan, to delegate some or all of its authority under the Plan
and to take all such steps and make all such determinations in connection
with the Plan and the benefits granted pursuant to the Plan as it may deem
necessary or advisable. A majority of members of the Committee shall
constitute a quorum, and all determinations of the Committee shall be made by
a majority of its members. Any determination of the Committee under the Plan
may be made without notice or meeting of the Committee, by a writing signed
by a majority of the Committee members. Any act or determination that the
Committee is authorized to perform hereunder may instead be performed by the
Board of Directors of the Corporation, at its discretion, and to the extent
the Board so acts, references in the Plan to the Committee shall refer to the
Board as applicable.
3. SHARES RESERVED UNDER THE PLAN. There is hereby reserved for
issuance under the Plan an aggregate of 1,000,000 shares of Common Stock,
which may be authorized but unissued or treasury shares. As used in this
Section 3, the term "Plan Maximum" shall refer to the number of shares of
Common Stock that are available for grant of awards pursuant to the Plan.
Common Stock underlying outstanding options, stock appreciation rights or
performance awards will reduce the Plan Maximum while such options, stock
appreciation rights or performance awards are outstanding. Shares underlying
expired, canceled or forfeited options, stock appreciation rights or
performance awards shall be added back to the Plan Maximum. When the
exercise price of stock options is paid by delivery of shares of Common
Stock, the Plan Maximum shall be reduced by the net (rather than the gross)
number of shares
<PAGE> 2
issued pursuant to such exercise, regardless of the number of shares
surrendered in payment. If the Committee approves the payment of cash to an
optionee equal to the difference between the Fair Market Value (as defined in
Section 14) and the exercise price of stock subject to an option, or if a
stock appreciation right is exercised for cash or a performance award is paid
in cash the Plan Maximum shall be increased by the number of shares with
respect to which such payment is applicable. Restricted stock issued
pursuant to the Plan will reduce the Plan Maximum while outstanding even
while subject to restrictions. Shares of restricted stock shall be added back
to the Plan Maximum if such restricted stock is forfeited.
Notwithstanding the above, the maximum number of shares subject to
stock options that may be awarded in any calendar year to any individual
shall not exceed 500,000 shares (as adjusted in accordance with Section 11).
4. PARTICIPANTS. Participants will consist of such directors,
officers, employees, advisors and consultants of the Corporation or any
designated subsidiary as the Committee in its sole discretion shall
determine. Designation of a participant in any year shall not require the
Committee to designate such person to receive a benefit in any other year or
to receive the same type or amount of benefit as granted to the participant
in any other year or as granted to any other participant in any year. The
Committee shall consider such factors as it deems pertinent in selecting
participants and in determining the type and amount of their respective
benefits.
5. TYPES OF BENEFITS. The following benefits may be granted under the
Plan: (a) stock appreciation rights ("SARs"); (b) restricted stock
("Restricted Stock"); (c) performance awards ("Performance Awards"); (d)
incentive stock options ("ISOs"); and (e) nonqualified stock options
("NQSOs"), all as described below (each, an "Award").
6. STOCK APPRECIATION RIGHTS. A SAR is the right to receive all or a
portion of the difference between the Fair Market Value of a share of Common
Stock at the time of exercise of the SAR and the exercise price of the SAR
established by the Committee, subject to such terms and conditions set forth
in a SAR agreement as may be established by the Committee in its sole
discretion. SARs may be granted which, at the discretion of the Committee,
may be exercised (1) in lieu of exercise of an option, (2) in conjunction
with the exercise of an option, (3) upon lapse of an option, (4) independent
of an option or (5) each of the above in connection with a previously awarded
option under the Plan. If the option referred to in (1), (2) or (3) above
qualified as an ISO pursuant to Section 422 of the Code, the related SAR
shall comply with the applicable provisions of the Code and the regulations
issued thereunder. At the time of grant, the Committee may establish, in its
sole discretion, a maximum amount per share which will be payable upon
exercise of a SAR, and may impose such conditions on exercise of a SAR
(including, without limitation, the right of the Committee to limit the time
of exercise to specified periods) as may be required to satisfy the
requirements of Rule 16b-3. At the discretion of the Committee, payment for
SARs may be made in cash or shares of Common Stock, or in a combination
thereof. SARs will be exercisable not earlier than six months and not later
than ten years after the date they are granted and will expire in accordance
with the terms established by the Committee. The following will apply upon
exercise of a SAR:
(a) Exercise of SARs in Lieu of Exercise of Options. SARs
-----------------------------------------------
exercisable in lieu of options may be exercised for all or part
of the shares subject to the related option upon the exercise of
the right to exercise an equivalent number of options. A SAR
may be exercised only with respect to the shares for which its
related option is then exercisable.
- 2 -
<PAGE> 3
(b) Exercise of SARs in Conjunction with Exercise of Options.
--------------------------------------------------------
SARs exercisable in conjunction with the exercise of options
shall be deemed to be exercised upon the exercise of the
related options.
(c) Exercise of SARs Upon Lapse of Options. SARs exercisable
--------------------------------------
upon lapse of options shall be deemed to have been exercised
upon the lapse of the related options as to the number of shares
subject to the options.
(d) Exercise of SARs Independent of Options. SARs exercisable
---------------------------------------
independent of options may be exercised upon whatever terms and
conditions the Committee, in its sole discretion, imposes upon
the SARs.
7. RESTRICTED STOCK. Restricted Stock shall consist of Common Stock
issued or transferred under the Plan (other than upon exercise of stock
options or as Performance Awards) at any purchase price less than the Fair
Market Value thereof on the date of issuance or transfer, or as a bonus. In
the case of any Restricted Stock:
(a) The purchase price, if any, will be determined by the
Committee.
(b) Restricted Stock may be subject to: (i) restrictions on the
sale or other disposition thereof; (ii) rights of the Corporation to
reacquire such Restricted Stock at the purchase price, if any, originally
paid therefor upon termination of the employee's employment within
specified periods; (iii) representation by the employee that he or she
intends to acquire Restricted Stock for investment and not for resale;
and (iv) such other restrictions, conditions and terms as the Committee
deems appropriate.
(c) The participant shall be entitled to all dividends paid with
respect to Restricted Stock during the period of restriction and shall
not be required to return any such dividends to the Corporation in the
event of the forfeiture of the Restricted Stock.
(d) The participant shall be entitled to vote the Restricted
Stock during the period of restriction.
(e) The Committee shall determine whether Restricted Stock is to
be delivered to the participant with an appropriate legend imprinted on
the certificate or if the shares are to be deposited in escrow pending
removal of the restrictions.
8. PERFORMANCE AWARDS.
(a) Performance Period. For each Program (as hereinafter
------------------
defined), the Committee shall set forth a performance period (which
period shall not exceed ten years) over which performance will be
measured to determine whether and in what amounts to pay Awards to
participants. Each Program must be established in writing prior to the
expiration of any prescribed time period for the pre-establishment of
performance goals under Section 162(m) of the Code. Each Program also
shall set forth those individuals the Committee believes may be or may
become Covered Employees (as defined in Section 162 (m) of the Code) for
the applicable performance period. "Program" shall mean an award program
established by the Committee which designates the participants, Covered
Employees, a performance period, performance goals and formulas or
standards for determining the amounts of Awards payable under the Plan.
- 3 -
<PAGE> 4
(b) Performance Criteria and Goals. All Awards shall be based
------------------------------
upon any one or more of the following financial measures of the
Corporation: (i) return on average assets; (ii) earnings per share;
(iii) return on shareholders' equity; and/or (iv) revenue growth. The
Committee also may provide for additional opportunities based upon the
attainment of specific business objectives and other measures of
individual, business unit or Corporation performance, and such other
goals or a combination thereof as may be established by the Committee.
For each Program and for each participant, the Committee shall designate
one or more objective performance goals based upon one or more of the
criteria listed above. No Award shall be paid if the applicable
performance goals are not satisfied; provided, however, performance goals
may include standards for partial achievement and provide for a partial
award for partial achievement.
(c) Performance Awards. Performance Awards may consist of
------------------
NQSOs, ISOs, SARs, Common Stock, Restricted Stock or a combination
thereof, to be issued with or without any payment therefor, in the event
the performance goals established by the Committee are achieved during
the performance period. For each Program, the Committee shall designate
an objective formula or standard for determining each participant's
Award. Except with respect to Awards payable to Covered Employees, and
notwithstanding the failure to satisfy the applicable performance
goal(s), the Committee shall have the discretion to increase or reduce
the amount of any participant's Award above or below the standard or
formula amount to reflect individual performance and/or unanticipated
factors; the Committee may only reduce the amount of an Award payable to
Covered Employees below the standard or formula amount to reflect
individual performance and/or unanticipated factors. Actual payment of
the Award earned shall be in Common Stock, Restricted Stock or in a
combination thereof, in a single sum or in periodic installments, all as
the Committee in its sole discretion determines. If Common Stock or
Restricted Stock is used, the participant shall not have the right to
vote and receive dividends until the goals are achieved and the actual
shares are issued. No Performance Award shall entitle any individual to
receive more than 500,000 shares of Stock.
(d) Payment of Awards. After the close of each performance
-----------------
period, the Committee shall certify in writing the achievement of the
applicable performance goal(s) and the amounts of any Awards payable to
the participants under the applicable formula(s) or standard(s). All or
part of the Awards payable to participants who are not Covered Employees
may be paid prior to the end of a performance period on an estimated
basis, subject to adjustment in the discretion of the Committee. All or
part of the Awards payable to Covered Employees may be paid prior to the
end of a performance period only if such earlier payment does not result
in such Award failing to constitute qualified performance-based
compensation under Section 162(m) of the Code (e.g., if achievement of
the applicable performance goal(s) can be certified prior to the end of
the performance period). Subject to the foregoing, the timing of payment
of all Awards to both Covered Employees and participants who are not
Covered Employees shall be within the discretion of the Committee.
9. INCENTIVE STOCK OPTIONS. ISOs shall consist of stock options to
purchase shares of Common Stock at purchase prices not less than 100% of the
Fair Market Value of the shares on the date the option is granted. Said
purchase price may be paid (i) by check or, in the discretion of the
Committee, either (ii) by the delivery of shares of Common Stock then owned
by the participant, which shares must have been owned by the participant for
at least 180 days, or (iii) by a combination of any of the foregoing, in the
manner provided in the option agreement. In lieu of exercising an option and
subject to the approval of the Committee, the optionee may request that the
Corporation pay in cash the difference between the
- 4 -
<PAGE> 5
Fair Market Value of part or all of the stock that is the subject of the
option and the exercise price thereof. Subject to the provisions of Section
12 hereof, ISOs will be exercisable not later than ten years after the date
they are granted and will terminate not later than three months after
termination of employment for any reason other than death or disability.
In the event termination of employment occurs as a result of death or
disability, such an option will be exercisable for 12 months after such
termination. If the optionee dies within 12 months after termination of
employment by disability, then the period of exercise following death shall
be the remainder of the 12-month period or three months, whichever is longer.
If the optionee dies within three months after termination of employment for
any other reason, then the period of exercise following death shall be three
months. However, in no event shall any ISO be exercised more than ten years
after its grant. Leaves of absence granted by the Corporation for military
service, illness and transfers of employment between the Corporation and any
subsidiary thereof shall not constitute termination of employment. The
aggregate Fair Market Value (determined as of the time an option is granted)
of the stock with respect to which ISOs are exercisable for the first time by
an optionee during any calendar year (under all option plans of the
Corporation and its subsidiary corporations) shall not exceed $100,000.
10. NONQUALIFIED STOCK OPTIONS. NQSOs shall consist of nonqualified
stock options to purchase shares of Common Stock at purchase prices as
determined by the Committee. Said purchase price may be paid (i) by check or,
in the discretion of the Committee, either (ii) by the delivery of shares of
Common Stock then owned by the participant, which shares must have been owned
by the participant for a least 180 days, or (iii) by a combination of any of
the foregoing, in the manner provided in the option agreement. In lieu of
exercising an option and subject to the approval of the Committee, the
optionee may request that the Corporation pay in cash the difference between
the Fair Market Value of part or all of the stock that is the subject of the
option and the exercise price thereof. Subject to the provisions of Section
12 hereof, NQSOs will be exercisable not later than ten years after the date
they are granted and will terminate not later than three months after
termination of employment for any reason other than death, retirement or
disability. In the event termination of employment occurs as a result of
death, retirement or disability, such an option will be exercisable for 12
months after such termination. If the optionee dies within 12 months after
termination of employment by retirement or disability, then the period of
exercise following death shall be the remainder of the 12-month period or
three months, whichever is longer. However, in no event shall any option be
exercised more than ten years after its grant. Leaves of absence granted by
the Corporation for military service, illness and transfers of employment
between the Corporation and any subsidiary thereof shall not constitute
termination of employment. The Committee shall have the right to determine
at the time the option is granted whether shares issued upon exercise of a
NQSO shall be subject to restrictions, and if so, the nature of the
restrictions.
11. ADJUSTMENT PROVISIONS.
(a) If the Corporation shall at any time change the number of
issued shares of Common Stock without new consideration to the
Corporation (such as by stock dividends or stock splits), the total
number of shares reserved for issuance under this Plan and the number of
shares covered by each outstanding benefit shall be adjusted so that the
aggregate consideration payable to the Corporation, if any, and the value
of each such benefit shall not be changed. Benefits may also contain
provisions for their continuation or for other equitable adjustments
after changes in the Common Stock resulting from reorganization, sale,
merger, consolidation, issuance of stock rights or warrants, or similar
occurrence.
- 5 -
<PAGE> 6
(b) Notwithstanding any other provision of this Plan, and without
affecting the number of shares reserved or available hereunder, the Board
of Directors may authorize the issuance or assumption of benefits in
connection with any merger, consolidation, acquisition of property or
stock, or reorganization upon such terms and conditions as it may deem
appropriate.
(c) The six-month holding periods in Sections 9 and 10 above shall
not apply in the event that more than 50% of the Common Stock, business
or assets are purchased or acquired by any person, firm, corporation or
group acting in concert and without agreement of the Board. In such
event, any such option or right shall be deemed exercisable upon grant
and with no waiting period.
12. CHANGE OF CONTROL. Notwithstanding any other provision of this
Plan, if the terms of an agreement under which the Committee has granted an
award under this Plan shall so provide, upon a Change of Control, outstanding
awards shall become immediately and fully exercisable or payable according to
the following terms:
(a) Any outstanding and unexercised option shall become
immediately and fully exercisable, and shall remain exercisable until it
would otherwise expire by reason of lapse of time.
(b) During the six month and seven day period from and after a
Change of Control (the "Exercise Period"), unless the Committee shall
determine otherwise at the time of grant, a participant shall have the
right, in lieu of the payment of the exercise price of the shares of
Common Stock being purchased under an option and by giving notice to the
Committee, to elect (within the Exercise Period) in lieu of exercise
thereof, to surrender all or part of the option to the Corporation and to
receive in cash, within 30 days of such notice, an amount equal to the
amount by which the Change in Control Price per share of Common Stock on
the date of such election shall exceed the exercise price per share of
Common Stock under the option multiplied by the number of shares of
Common Stock granted under the option as to which the right granted under
this subsection 12(b) shall have been exercised. Change in Control Price
shall mean the higher of (i) (A) for any period during which the Common
Stock shall be listed for trading on a national securities exchange, the
highest closing price per share of Common Stock on such exchange as of
the close of such trading day, (B) for any period during which the
Common Stock shall not be listed for trading on a national securities
exchange, but when prices for the Common Stock shall be reported by the
Nasdaq National Market, the highest price per share as quoted by the
Nasdaq National Market, (C) for any period during which the Common Stock
shall not be listed for trading on a national securities exchange or its
price reported by the Nasdaq National Market, but when prices for the
Common Stock shall be reported by the Nasdaq SmallCap Market, the highest
average of the high bid and low asked prices as reported by the Nasdaq
SmallCap Market, (D) if the Common Stock shall not be listed for trading
on a national securities exchange or quoted on the Nasdaq National Market
or the Nasdaq SmallCap Market, the closing bid price as furnished by the
OTC Bulletin Board or similar quotation medium used by members of the
National Association of Securities Dealers, Inc., or (E) the price per
share determined in good faith by the Board using any factors they may
deem relevant in the event that neither (A), (B), (C) nor (D) above shall
be applicable, in each case during the 60-day period prior to and ending
on the date of the Change of Control and (ii) if the Change of Control is
the result of a transaction or series of transactions described in
subsections 14(f)(i) or (iii) hereof, the highest price per share of the
Common Stock paid in such transaction or series of transactions (which in
the case of paragraph (i) shall be the highest price per share of the
Common Stock as
- 6 -
<PAGE> 7
reflected in a Schedule 13D by the person having made the acquisition);
provided, however, that with respect to any ISO, the Change of Control
Price shall not exceed the market price of a share of Common Stock (to
the extent required pursuant to Section 422 of the Code on the date of
surrender thereof.
(c) Any outstanding and unexercised SARs (other than such rights
which arise pursuant to subsection 12(b) hereof) shall become exercisable
as follows:
(i) Any SAR described in subsections 10(a) or (b) shall
continue to be treated as provided in those
subsections.
(ii) Any SAR described in subsection 10(c) shall be deemed
to have been exercised if and when the Participant
advises the Committee in writing that he or she
elects to have Options with respect to which the SAR
was granted treated as having lapsed.
(iii) Any SAR described in subsection 10(d) shall be
exercisable immediately, without regard to
limitations imposed upon such exercise which are
related to the passage of time.
(d) Any Restricted Stock granted pursuant to Section 7 shall
become immediately and fully transferable, and the Committee shall be
deemed to have exercised its discretion to waive any automatic
forfeitures provided with respect to such Restricted Stock. Any shares
held in escrow shall be delivered to the participant, and the share
certificates shall not contain the legend specified by subsection 7(e).
(e) Any Performance Award granted pursuant to Section 8 that has
not expired or been forfeited shall be deemed to have been earned on the
assumption that all performance goals have been achieved to the fullest
extent scheduled in the award. All payments shall be made promptly in a
lump sum, notwithstanding any other provision for installment or deferred
payment prescribed in the award.
(f) For purposes of this Plan, Change of Control shall mean a
change in control of the Corporation of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Act; provided that, for purposes of this Plan, a
Change in Control shall be deemed to have occurred if: (i) any Person
(other than the Corporation) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Act), directly or indirectly, of
securities of the Corporation that represent 50% or more of the combined
voting power of the Corporation's then outstanding securities; (ii)
during any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the election, or the
nomination for election, by the Corporation's shareholders, of each new
director is approved by a vote of at least two-thirds (2/3) of the
directors then still in office who were directors at the beginning of the
period but excluding any individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as
such term is used in Rule 14a-11 of Regulation 14A promulgated under the
Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of a person other than the Board; (iii) there is
consummated any consolidation or merger of the Corporation in which the
Corporation is not the continuing or surviving corporation or pursuant to
which shares of Common Stock are converted into cash,
- 7 -
<PAGE> 8
securities or other property, other than a merger of the Corporation in
which the holders of the Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger; (iv) there is consummated any
consolidation or merger of the Corporation in which the Corporation is
the continuing or surviving corporation in which the holders of the
Common Stock immediately prior to the merger do not own seventy percent
(70%) or more of the stock of the surviving corporation immediately
after the merger; (v) there is consummated any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions)
of all, or substantially all, of the assets of the Corporation, or (vi)
the shareholders of the Corporation approve any plan or proposal for the
liquidation or dissolution of the Corporation.
13. NONTRANSFERABILITY. Each benefit granted under the Plan to an
employee shall not be transferable otherwise than by will or the laws of
descent and distribution; provided, however, NQSOs granted under the Plan may
be transferred to a Permitted Transferee (as defined below). Benefits
granted under the Plan shall be exercisable, during the participant's
lifetime, only by the participant or a Permitted Transferee, as the case may
be. In the event of the death of a participant, exercise or payment shall be
made only:
(a) By or to the Permitted Transferee, executor or administrator
of the estate of the deceased participant or the person or persons to
whom the deceased participant's rights under the benefit shall pass by
will or the laws of descent and distribution; and
(b) To the extent that the deceased participant or the Permitted
Transferee, as the case may be, was entitled thereto at the date of his
death.
For purposes of this Section 13, "Permitted Transferee" shall include (i) one
or more members of the participant's family, (ii) one or more trusts for the
benefit of the exclusive participant and/or one or more members of the
participant's family or (iii) one or more partnerships (general or limited),
corporations, limited liability companies or other entities in which the
aggregate interests of the participant and members of the participant's
family exceed 80% of all interests. For this purpose, the participant's
family shall include only the participant's spouse, children and
grandchildren.
14. FAIR MARKET VALUE OF COMMON STOCK. For purposes of this Plan, the
Fair Market Value of the Common Stock shall mean, for any particular date (i)
for any period during which the Common Stock shall be listed for trading on a
national securities exchange, the closing price per share on such exchange,
(ii) for any period during which the Common Stock shall not be listed for
trading on a national securities exchange, but when prices for the Common
Stock shall be authorized for quotation on the Nasdaq National Market, the
last transaction price per share as quoted by the Nasdaq National Market,
(iii) for any period during which the Common Stock shall not be listed for
trading on a national securities exchange or its price reported by the Nasdaq
National Market, but when prices for the Common Stock shall be authorized for
quotation on the Nasdaq SmallCap Market, the closing bid price per share as
reported by the Nasdaq SmallCap Market, (iv) for any period during which the
Common Stock is neither listed for trading on a national securities exchange
nor its price reported by the Nasdaq National Market or the Nasdaq SmallCap
Market, but when prices of the Common Stock are quoted in the OTC Bulletin
Board or similar quotation medium used by members of the National Association
of Securities Dealers, Inc., the closing bid price as provided by the OTC
Bulletin Board or similar quotation medium, or (v) the market price per share
as determined by a nationally recognized investment banking firm selected by
the Board in the event neither (i), (ii), (iii) nor (iv) above shall be
applicable. If Fair Market Value is to be
- 8 -
<PAGE> 9
determined as of a day when the securities markets are not open, the Fair
Market Value on that day shall be the Fair Market Value on the preceding day
when the markets were open.
15. TAXES. The Corporation shall be entitled to withhold the amount
of any tax attributable to any amounts payable or shares deliverable under
the Plan after giving the person entitled to receive such payment or delivery
notice as far in advance as practicable, and the Corporation may defer making
payment or delivery as to any benefit if any such tax is payable until
indemnified to its satisfaction. The person entitled to any such delivery
may, by notice to the Corporation at the time the requirement for such
delivery is first established, elect to have such withholding satisfied by a
reduction of the number of shares otherwise so deliverable, such reduction to
be calculated based on a closing market price on the date of such notice.
16. TENURE. A participant's right, if any, to continue to serve the
Corporation and its subsidiaries as a director, officer, employee or
otherwise, shall not be enlarged or otherwise affected by his or her
designation as a participant under the Plan.
17. DURATION, INTERPRETATION, AMENDMENT AND TERMINATION. No benefit
shall be granted more than ten years after the date of adoption of this Plan;
provided, however, that the terms and conditions applicable to any benefit
granted within such period may thereafter be amended or modified by mutual
agreement between the Corporation and the participant or such other person as
may then have an interest therein. Also, by mutual agreement between the
Corporation and a participant hereunder, stock options or other benefits may
be granted to such participant in substitution and exchange for, and in
cancellation of, any benefits previously granted such participant under this
Plan. To the extent that any stock options or other benefits which may be
granted within the terms of the Plan would qualify under present or future
laws for tax treatment that is beneficial to a recipient, then any such
beneficial treatment shall be considered within the intent, purpose and
operational purview of the Plan and the discretion of the Committee, and to
the extent that any such stock options or other benefits would so qualify
within the terms of the Plan, the Committee shall have full and complete
authority to grant stock options or other benefits that so qualify (including
the authority to grant, simultaneously or otherwise, stock options or other
benefits which do not so qualify) and to prescribe the terms and conditions
(which need not be identical as among recipients) in respect to the grant or
exercise of any such stock option or other benefits under the Plan. The
Board of Directors may amend the Plan from time to time or terminate the Plan
at any time. However, no action authorized by this paragraph shall reduce
the amount of any existing benefit or change the terms and conditions thereof
without the participant's consent. No amendment of the Plan shall, without
approval of the shareholders of the Corporation: (a) increase the total
number of shares which may be issued under the Plan or increase the amount or
type of benefits that may be granted under the Plan; (b) change the minimum
purchase price, if any, of shares of Common Stock which may be made subject
to benefits under the Plan; or (c) modify the requirements as to eligibility
for benefits under the Plan.
18. MISCELLANEOUS.
(a) Governing Law. Subject to the provisions of applicable
-------------
federal law, the Plan shall be administered, construed and enforced
according to the internal laws of the State of Texas excluding its
conflict of law rules, and applicable federal law and in courts
situated in the State of Texas.
- 9 -
<PAGE> 10
(b) Severability. The invalidity of any particular clause,
------------
provision or covenant herein shall not invalidate all or any part of
the remainder of the Plan, but such remainder shall be and remain
valid in all respects as fully as the law will permit.
19. SHAREHOLDER APPROVAL. The Plan was adopted by the Board of
Directors and approved by the sole shareholder of the Corporation on April 6,
1998.
- 10 -
<PAGE> 1
Exhibit 10.2
EXCLUSIVITY AGREEMENT
---------------------
THIS AGREEMENT made and entered into this 1st day of April, 1998, by
and between NATIONAL PREARRANGED SERVICES, INC., a Missouri corporation
("NPS") and LINCOLN HERITAGE CORPORATION, a Texas corporation ("Lincoln").
WHEREAS, NPS is in the business of marketing funeral pre-need
contracts; and
WHEREAS, Lincoln wholly owns Memorial Service Life Insurance Company, a
Texas insurance company ("Memorial") and its subsidiary, Lincoln Memorial
Life Insurance company, a Texas insurance company ("Lincoln Memorial")
(Memorial and Lincoln Memorial are sometimes collectively referred to
hereinafter as the "Insurance Companies"); and
WHEREAS, directly and through its affiliate National Prearranged
Services Agency, Inc., a Texas corporation ("NPS Agency") NPS causes the
purchase from the Insurance Companies of insurance policies on the lives of
NPS pre-need contract holders; and
WHEREAS, NPS generated pre-need contract holder life insurance policies
constitute an overwhelming majority of the insurance policies issued by the
Insurance Companies; and
WHEREAS, Lincoln desires to contractually bind NPS to exclusively
continue its existing practice of causing the purchase of all life insurance
policies for NPS pre-need contract holders from the Insurance Companies; and
<PAGE> 2
WHEREAS, NPS requires a fee in return for binding itself to such
exclusive insurance purchasing arrangement which is in addition to the
commissions provided to NPS Agency under its existing General Agent Contract
with Memorial.
NOW, THEREFORE, in return for good and valuable consideration, the
sufficiency and receipt of which is hereby acknowledged, the parties do agree
as follows:
1. EXCLUSIVITY. NPS for itself and the NPS Agency agrees that during
-----------
the term of this Agreement (and any renewals thereof) that it shall
continue to use its best efforts to directly or indirectly cause the purchase
exclusively from the Insurance Companies of any life insurance policies used
to fund NPS funeral pre-need contracts.
2. EXCLUSIVITY FEE. During the term of this Agreement (and any
---------------
renewals thereof) Lincoln shall pay to NPS on the fifth (5th) day of each
month an amount equal to two percent (2%) times the face amount of life
insurance policies issued by the Insurance Companies to fund NPS prearranged
funeral contracts during the immediately preceding month.
3. TERM. This Agreement shall be for a period of five (5) years
----
commencing on the date first above written and shall be automatically renewed
for further periods of three (3) years each unless a notice in writing to
the contrary shall have been sent by either party to the other party by
postage prepaid mail at least sixty (60) days prior to the end of the term or
any
<PAGE> 3
renewals. The termination of this Agreement shall not in any way affect any
other agreements between or among the parties hereto or any of their
respective subsidiaries of affiliates, including but not limited to, any then
existing general agent contract or cost sharing agreement.
4. REMEDIES. The parties hereto recognize that irreparable injury
--------
may result to a party and its business in the event of a breach of this
Agreement by the other party. It is, therefore, agreed that in the event
either party breaches or threatens to breach this Agreement, the
non-breaching party shall be entitled in addition to any other remedies and
damages available (a) to an injunction to restrain the violation thereof by
such breaching party, its agents, officers and employees, and all persons
acting for or with it, as the case may be, and (b) to compel specific
performance of the terms and conditions of this Agreement. Nothing herein
shall be construed as prohibiting a non-breaching party from pursuing any
other remedies available to the non-breaching party for such breach including
the recovery of damages from the breaching party.
5. JURISDICTION. All actions, suits or proceedings between the
------------
parties arising from or in connection with this Agreement shall be litigated
in the United States District Court for the Eastern District of Missouri, or
the Circuit Court of St. Louis County. The parties consent to the
jurisdiction and venue of any such court.
2
<PAGE> 4
6. ATTORNEYS FEES. If any action is initiated pursuant to or to
--------------
enforce or interpret this Agreement, the prevailing party shall be entitled
to recover attorneys fees and all other costs and expenses in connection with
such action.
7. NOTICES. Whenever notice is required to be given under this
-------
Agreement, it shall be sufficient if in writing and if sent by certified
mail, return receipt requested to the following addresses:
In the case of Lincoln: Lincoln Heritage Corporation
1250 Capitol of Texas Hwy.
Bldg. 3, Suite 100
Austin, Texas 78746
Attention: President
In the case of NPS: National Prearranged Services, Inc.
10 South Brentwood, Suite 304
St. Louis, Missouri 63105
Attention: President
8. BINDING AGREEMENT. This Agreement shall be binding upon and
-----------------
shall inure to the benefit of the parties hereto and their respective
successors and assigns.
9. AMENDMENT AND CANCELLATION. This Agreement can be altered,
--------------------------
amended, revoked or cancelled only in writing with the consent of both
parties.
10. SEVERABILITY. If all or any part of any provision of this
------------
Agreement is held invalid or unenforceable, the remainder of this Agreement
shall remain in effect.
11. GOVERNING LAW. This Agreement shall be deemed to be made in
-------------
and its place of performance is Missouri. The laws of the State of Missouri
shall govern interpretation of this
3
<PAGE> 5
Agreement and the parties' rights and duties.
IN WITNESS WHEREOF the parties hereto have executed this Agreement by
officers duly authorized on their behalf.
LINCOLN HERITAGE CORPORATION
By: /s/ Nicholas Powling
-----------------------------------
Nicholas Powling, President
"Lincoln"
NATIONAL PREARRANGED SERVICES, INC.
By: /s/ Randall Sutton
-----------------------------------
Randall Sutton, Vice President and
Chief Executive Officer
"NPS"
4
<PAGE> 1
STOCK PURCHASE AGREEMENT
by and between
LINCOLN MEMORIAL LIFE INSURANCE COMPANY
and
NRG ACQUISITION PARTNERS, L.P.
for the capital stock of
HARBOURTON REASSURANCE, INC.
Dated: January 26, 1998
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
ITEM PAGE
<S> <C>
RECITALS 1
1. PURCHASE AND SALE OF SHARES 1
1.1 Agreement to Purchase and Sell 1
1.2 Closing 2
1.3 Purchase Price; Payment 3
1.4 Closing Statement and Final Purchase Price 5
2. REPRESENTATIONS AND WARRANTIES OF SELLER 8
2.1 Corporate Organization 8
2.2 Capitalization of Company 8
2.3 Inter-Affiliate Investments 9
2.4 Authority 9
2.5 No Violation 10
2.6 Consents and Approvals 11
2.7 Delaware Department of Insurance Statements 11
2.8 Basic Documents 12
2.9 Absence of Certain Changes or Events 12
2.10 Compliance with Laws 13
2.11 Tax Matters 14
2.12 Absence of Undisclosed Liabilities 16
2.13 Interests in Real Property 17
2.14 Personal Property 18
2.15 Accounts Receivable 18
2.16 Trademarks; Software; Patents; Copyrights; and Know-How 18
2.17 Licenses; Permits and Governmental Approvals 19
2.18 Title to Assets 20
2.19 Litigation 20
2.20 Contracts 21
2.21 Employees; Employee Plans 21
2.22 Insurance 22
2.23 Transactions with Related Parties 23
2.24 Books and Records 24
2.25 Accuracy of Information 24
2.26 Regulatory Filings 24
2.27 Agents 25
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER 25
3.1 Corporate Organization 25
-i-
<PAGE> 3
3.2 Corporate Authority 25
3.3 No Violation 26
3.4 Consents and Approvals 27
3.5 Accuracy of Information 27
3.6 Financial Resources 27
4. COVENANTS OF SELLER 28
4.1 Conduct of Business 28
4.2 Negative Covenants 28
4.3 Preparation of Statutory Insurance Statements 32
4.4 Access to Properties and Records 32
4.5 Consents and Approvals 32
4.6 Third Party Agreements 33
4.7 Further Assurances 33
4.8 Satisfaction of Conditions 34
5. COVENANTS OF PURCHASER 34
5.1 Conduct of Business 34
5.2 Consents and Approvals 34
5.3 Satisfaction of Conditions 35
5.4 Purchaser's Intent 35
5.5 Access to Records 35
6. CONDITIONS TO OBLIGATIONS OF PURCHASER 35
6.1 Representations and Warranties of Seller 35
6.2 Covenants of Seller 36
6.3 Consents and Approvals 36
6.4 No Violation of Orders 36
6.5 No Material Adverse Change 37
6.6 Inter-Affiliate or Related Party Debt, Agreement or Investments 37
6.7 Other Closing Documents 37
6.8 Legal Matters 37
6.9 Resignation of Directors and Officers 38
7. CONDITIONS TO OBLIGATIONS OF SELLER 38
7.1 Representations and Warranties of Purchaser 38
7.2 Performance of Purchaser's Obligations 38
7.3 No Violation of Orders 38
7.4 Other Closing Documents 39
7.5 Legal Matters 39
7.6 Consents and Approvals 39
7.7 Stock Redemption 40
7.8 Releases 40
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<PAGE> 4
8. INDEMNIFICATION 40
8.1 Indemnification by Seller 40
8.2 Indemnification by Purchaser 41
8.3 Indemnified Claims 41
8.4 Basket and Cap; Exclusivity of Remedy; Claim Procedures 46
8.5 Seller Retention 48
8.6 Mills Guaranty 49
9. TERMINATION AND ABANDONMENT 49
9.1 Methods of Termination 49
9.2 Extension by Purchaser 50
9.3 Extension by Seller 51
9.4 Effect of Termination 51
10. COVENANTS AND AGREEMENTS 52
10.1 Reserve Valuation 52
10.2 Schedule Updates 52
10.3 Delaware Approval 52
11. MISCELLANEOUS PROVISIONS 53
11.1 Survival 53
11.2 Publicity and Non-Disclosure 54
11.3 Successors and Assigns 54
11.4 Brokers and Finders 54
11.5 Expenses 55
11.6 Notices 55
11.7 Entire Agreement 56
11.8 Waivers, Amendments and Remedies 56
11.9 Section Headings 57
11.10 Counterparts 57
11.11 Litigation Assistance 57
11.12 Governing Law 57
11.13 Exhibits and Schedules 57
11.14 Miscellaneous Undertakings 58
12. TAX MATTERS 58
12.1 Certain Defined Terms 58
12.2 Existing Agreements and Other Matters 58
12.3 Transaction Taxes 58
12.4 Contests 59
12.5 Access to Records, Cooperation 60
12.6 Price Adjustment 60
12.7 Preparing and Filing of Return 60
</TABLE>
-iii-
<PAGE> 5
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement"), is made and entered into by and
between LINCOLN MEMORIAL LIFE INSURANCE COMPANY, a Texas life insurance
company ("Purchaser"), and NRG ACQUISITION PARTNERS, L.P. ("Seller") whereby
Purchaser shall acquire all of the issued and outstanding stock of HARBOURTON
REASSURANCE, INC. ("Company"), a Delaware life insurance company.
RECITALS
Seller owns 36,000 shares (hereafter "Shares") of Class A and Class B common
stock, $100.00 par value, of Company, which Shares constitute all of the
issued and outstanding shares of capital stock of Company;
Seller desires to sell to Purchaser and Purchaser desires to purchase from
Seller the Shares remaining outstanding after the Stock Redemption (defined
below) (hereafter the "Remaining Shares") on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, the parties do hereby agree as follows:
1.
PURCHASE AND SALE OF SHARES
1.1 AGREEMENT TO PURCHASE AND SELL. At the Closing (as defined in Section
1.2) and upon the terms and subject to the conditions set forth in
this Agreement, Seller shall sell, assign, transfer, convey and
deliver the Remaining Shares to Purchaser, and Purchaser shall
purchase and accept the Remaining Shares from Seller.
<PAGE> 6
1.2 CLOSING. The closing of such sale and purchase ("Closing") shall take
place at the offices of Richards, Layton & Finger, One Rodney
Square, Wilmington, Delaware 19899, or at such other location as
the parties hereto may agree upon, on April 7, 1998 or at such
other time and date as the parties hereto shall agree in writing
("Closing Date") after each of the conditions set forth in
Sections 6 and 7 has been fulfilled or waived; provided that if
all of such conditions have not been so satisfied by March 31,
1998 then if on or before the fifth calendar day after all of such
conditions have been so satisfied or waived, Purchaser and Seller
shall have failed to establish the Closing Date, the Closing Date
shall be at 10:00 a.m., Eastern time, on either (i) the first day
of the next calendar month or (ii) the tenth calendar day after
the last of such conditions has been satisfied or waived (provided
that if such day is a Saturday, Sunday or legal holiday, the
Closing shall occur on the next business day), whichever of (i) or
(ii) Seller shall select. Whether the Closing occurs on the first
day of a calendar month or on a date other than the first day of a
calendar month, the Purchase Price shall be computed as of the
last day of the immediately preceding calendar month (which last
day of the month shall be referred to as the "Computation Date").
At the Closing, Seller shall deliver to Purchaser stock
certificates representing the Remaining Shares duly endorsed in
blank for transfer or accompanied by appropriate stock powers duly
executed in blank, with all stock transfer taxes, direct or
indirect, attributable to the transfer of such Remaining Shares
paid or provided for by Purchaser. In full consideration and
exchange for the Remaining Shares, Purchaser shall pay to Seller
the Purchase Price as defined and in accordance with Section 1.3
and in accordance with Section 1.4. When the Closing is
completed, Purchaser shall thereupon take possession of Company,
all of its assets, books and records, and shall from that time
forward be responsible for the administration of Company.
1.3 PURCHASE PRICE; PAYMENT. The total purchase price for the Remaining
Shares (the "Purchase Price") shall be:
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<PAGE> 7
(a) An amount which shall be specifically calculated in the following
manner, determined at the end of the Computation Date immediately
after the Stock Redemption (defined in Section 1.3(c) below) has
taken place or is deemed to have taken place:
(i) Company's statutory capital and surplus as of the
Computation Date, plus
(ii) Asset Valuation Reserve and Interest Maintenance Reserve,
as of the Computation Date, plus
(iii) Four percent (4%) of annuity reserves, as of the
Computation Date, minus
(iv) Any outstanding surplus relief, as of the Computation Date,
minus
(v) Unrealized capital losses, as of the Computation Date,
minus
(vi) One million dollars ($1,000,000.00), plus
(vii) Unrealized capital gains, as of the Computation Date.
(b) The components of the Purchase Price shall be the amounts shown
on the most recent financial reporting form filed by Company with
the Delaware Department of Insurance immediately preceding the
Closing, updated through the Computation Date pursuant to Section
1.4. Attached as Schedule 1.3 hereto is a pro forma computation of
the Purchase Price based on the September 30, 1997, Quarterly
Statement of the Company as filed with the Delaware Department of
Insurance.
(c) The parties have agreed to the Purchase Price hereunder on the
condition that part of the consideration to be received by Seller
shall be paid in part by (and Purchaser's and Seller's agreement
hereby evidenced is conditioned upon) securing the approval of the
Delaware Insurance Department for an extraordinary dividend in the
form of a partial stock redemption (hereafter "Stock Redemption) by
the Company of part of the shares of Seller in an amount not less
than the amount of the Company's capital and surplus, as of the date
of application for approval (or
-3-
<PAGE> 8
such other date which is the date of the most recent financial
report filed with the Delaware Department), less Ten Million
Dollars ($10,000,000.00). The Stock Redemption shall occur
immediately prior to the Closing on the Closing Date and shall
result in the redemption and cancellation of a pro rata number of
Class A and Class B shares of the Company. (If the Computation
Date is other than the Closing Date, the Stock Redemption shall be
deemed to have occurred at the end of the end of the Computation
Date for purposes of computing the Purchase Price.) Purchaser
agrees to pay to Seller the Preliminary Purchase Price (defined in
Section 1.4 below) after the payment of the dollar amount of the
Stock Redemption, in cash at Closing by wire transfer in
immediately available funds.
(d) As of Closing, all assets of Company will either be cash, cash
equivalents, NAIC class one bonds, Acceptable Receivables
(defined below), and accrued tax benefits (described below),
except that Purchaser, in its discretion, may accept existing
assets of the Company. An "Acceptable Receivable" shall mean an
account receivable or note receivable (each a "Receivable") of the
Company arising in the ordinary course of business, provided,
however, that (i) the Closing Statement (defined in Section 1.4
below) shall only include as an asset such a Receivable which is
no more than 90 days outstanding on the Computation Date but (ii)
to the extent that one or more Receivables outstanding more than
90 days on the Computation Date are collected within 90 days after
the Computation Date, to the extent such collections exceed
$50,000 such excess shall be paid to Seller as additional Purchase
Price at the time of such collection. The "accrued tax benefits"
shall be any tax benefits or refunds reportable on the statutory
balance sheet of the Company. For this purpose, Purchaser
acknowledges that the Company shall elect to carryback any net
operating loss deduction of the Company. Any assets not meeting
the standard described in this subsection (d)
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<PAGE> 9
will either be replaced by assets meeting that standard or
distributed to its shareholder prior to Closing as part of the
Stock Redemption herein described. With respect to a
determination of the value to be ascribed to unrealized capital
gains and losses, if there is a failure among the parties to agree
as to the determination of value of any of such assets, Seller
agrees to sell or replace such asset with an asset meeting the
above-described standard or distribute such assets as part of the
Stock Redemption. Seller and Purchaser shall use their reasonable
best efforts to agree on the value of such assets and Purchaser
shall notify Seller of its acceptance of any existing assets not
later than fifteen (15) days prior to the Closing.
1.4 CLOSING STATEMENT AND FINAL PURCHASE PRICE.
(a) The Purchase Price paid at Closing (hereafter "Preliminary
Purchase Price") shall be based upon the most recent quarterly or
annual report filed by the Company with the Delaware Department
of Insurance immediately preceding the Closing and the provisions
of this Agreement, provided that if the Computation Date is one
month or more after such year or quarterly end, the parties shall
instead use a more recent pro forma monthly financial statement
prepared by Seller in accordance with the foregoing principles.
As soon as practical but in no event more than sixty (60) days
after the Closing Date, Seller shall deliver to the Purchaser a
statement of the Purchase Price calculated as of the Computation
Date (hereafter "Closing Statement") in the manner provided in
this Agreement. In preparing the Closing Statement and computing
the Purchase Price, the Tax liabilities of Company shall (i) be
those (A) accruable as of the Computation Date determined in a
manner consistent with Seller's past practices as if the
Computation Date were the last day of a separate tax year plus
(B) those accruable from the transfer of assets to Seller in
connection with the Stock Redemption and (ii) shall not include
any Tax
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<PAGE> 10
liabilities other than those referred to in clause (i)(B) above
arising from the business of the Company after the Computation
Date or any actions (including elections) of the Company or
Purchaser on or after the Closing or other events after the
Computation Date. In no event shall the Closing Statement
include any liability for reinsurance claims or losses not known
by Company prior to the Closing, other than reserves or claims
liabilities established in accordance and consistent with past
practices. For purposes of this Agreement Purchaser has accepted
the Company's methodology of establishing reserves and claims
liabilities, and if reserves or claims liabilities of the Company
established in accordance with the Company's current reserving
practices are insufficient, Seller shall not have any liability
to Purchaser or the Company therefor.
(b) If Purchaser reasonably believes that the Closing Statement was
not computed in accordance with the provisions of this Agreement
and on a basis consistent with the Company's most recent
financial report filed with the Delaware Department of Insurance,
Purchaser shall so notify Seller within twenty (20) days after
its receipt of the Closing Statement, which notice shall specify
the items to which its objects and the basis for such objection
(hereafter "Objection Notice"). If no Objection Notice is
received by the Seller within the time period specified above,
the Purchase Price set forth in the Closing Statement shall be
final, conclusive and binding on all of the parties. If an
Objection Notice is received by Seller within the time period
specified above, Purchaser and Seller shall promptly attempt in
good faith to reconcile the differences between the Closing
Statement and the Objection Notice and any such reconciliation
shall be final, binding and conclusive. If Purchaser and Seller
are unable to reconcile the differences between the Closing
Statement and the Objection Notice within thirty (30) days after
receipt thereof by Seller, Purchaser and Seller shall jointly
select, engage and each pay one-half of the
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<PAGE> 11
expense of an independent auditor experienced in auditing the
financial statements of insurance companies to resolve any
remaining differences and determine the Purchase Price as of the
Computation Date pursuant to such resolution and undisputed items
on the Closing Statement. If Seller and Purchaser cannot agree
on the selection of an independent auditor within forty-five (45)
days after receipt of the Objection Notice by Seller, Ernst &
Young, LLP, shall select the independent auditor not later than
sixty (60) days after Seller's receipt of the Objection Notice.
The independent auditor shall complete the resolution of the
differences within thirty (30) days after being retained and
appointed, and the resulting determination of the Purchase Price
shall be final, binding and conclusive. The preparation and
filing of the Objection Notice by Purchaser shall in no way be
construed to represent any objections of Purchaser except as to
the calculation of the Purchase Price, and the Objection Notice
shall not act to waive any other objection, right or claim for
indemnity that Purchaser may otherwise have. The purchase price
determined pursuant to this Section 1.4 shall constitute the
final "Purchase Price".
(c) If the Purchase Price exceeds the Preliminary Purchase Price,
Purchaser shall pay to Seller an amount equal to such excess,
together with simple interest thereon from the Closing Date to
the date of payment at the rate of seven and one-half percent
(7.5%) per annum. If the Preliminary Purchase Price exceeds the
Purchase Price, Seller shall pay to Purchaser an amount equal to
such excess, together with simple interest thereon from the
Closing Date to the date of payment at the rate of seven and
one-half percent (7.5%) per annum. Without limiting remedies,
if either party defaults in any payment to the other party due
under this Section 1.4(c), the other party may offset such
payment amount against amounts owed to the defaulting party.
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<PAGE> 12
(d) Any amount payable pursuant to this Section 1.4 shall be paid by
certified check or checks payable to the order of Purchaser or
Seller, as the case may be, and delivered no more than five (5)
days following final determination of the Purchase Price.
(e) For the purpose of making a final calculation of the Purchase
Price and to fulfill its obligations under Section 4.3, Seller
shall be given reasonable access to Company's premises, systems,
books and records.
2.
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents, warrants and agrees as follows:
2.1 CORPORATE ORGANIZATION. Company is duly organized, validly existing
and in good standing under the laws of Delaware and has all
requisite power and authority (corporate and other) to own its
properties and assets and to conduct its business as now
conducted. Company is duly qualified to do business in Arizona,
California, Delaware, District of Columbia, Florida, Georgia,
Illinois, Indiana, Iowa, Kansas, Louisiana, Minnesota, Missouri,
Mississippi, Nevada, New York, Ohio, Oklahoma, South Carolina,
Texas, and Washington and is in good standing therein except as
shown in Schedule 2.1.
2.2 CAPITALIZATION OF COMPANY. The authorized, issued and outstanding
capital stock of the Company is as set forth in Schedule 2.2. No
other class of capital stock or other security of Company is
authorized, issued or outstanding. All of the Shares of the
Company have been duly authorized and are validly issued, fully
paid and non-assessable. There are no outstanding options,
warrants, agreements, exchange rights, conversion rights,
preemptive rights or other rights to subscribe for, purchase or
otherwise acquire any of the Shares,
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<PAGE> 13
any other outstanding, authorized but unissued, unauthorized or
treasury shares of capital stock of the Company, or any other
security of the Company. Neither Seller nor the Company is a
party to any voting trust or other voting agreement with respect
to any of the Shares, the shares of capital stock of the Company
or any other security of the Company, or to any agreement relating
to the issuance, sale, redemption, transfer or other disposition
of any shares of capital stock or any other security of the
Company. Seller has, and will have at the Closing, good and valid
title to all of the Shares, being all of the issued and
outstanding shares of capital stock of Company, free and clear of
any liens, claims, charges, security interests, mortgages, pledges
or other legal or equitable encumbrances, limitations or
restrictions except those hereby created. Upon the sale and
transfer of the Remaining Shares to Purchaser, Seller will have
sold and transferred to Purchaser good and valid title to all of
the then outstanding Shares, free and clear of any liens, claims,
charges, security interests, mortgages, pledges or other legal or
equitable encumbrances, limitations or restrictions.
2.3 INTER-AFFILIATE INVESTMENTS. The Company does not own, and is not
obligated in any way to acquire, any capital stock, equity
interest, other securities or other ownership or similar interest
in any "affiliate" of the Company, as that term is defined in
Article 21.49-1, Section 2(a), Texas Insurance Code.
2.4 AUTHORITY. Seller has the power to enter into this Agreement and,
subject to the requisite approvals referenced in Section 4.5, to
carry out its obligations hereunder; the execution and delivery of
this Agreement and the performance by Seller of its obligations
hereunder shall be evidenced at Closing by execution of their
Closing documents and transfer of the Shares, and, except for the
necessary approvals referenced in Section 4.5, no other
proceedings on the part of Seller are necessary to authorize such
execution, delivery and performance. This Agreement has been duly
executed by Seller and is the valid and
<PAGE> 14
binding obligation of Seller, enforceable against Seller in
accordance with the terms hereof, except as such enforcement may
be limited by applicable bankruptcy, insolvency, reorganization or
similar laws relating to or affecting creditors' rights generally
or general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
2.5 NO VIOLATION. The execution, delivery and performance by Seller of
this Agreement and the consummation of the transactions
contemplated hereby do not and will not
(a) (i) violate, conflict with or result in the breach of any of the
terms or provisions of, (ii) result in or give any contracting
party the right of modification, suspension, termination,
cancellation or acceleration of the performance required by, or
(iii) constitute (or with notice or lapse of time or both,
would constitute) a default or result in the loss of any
material benefit under any permit, instrument, contract,
mortgage, indenture, lease, deed of trust, license, note, loan
agreement or other agreement to which Seller or the Company is
a party, or by or to which any of them or any of their
respective assets or properties may be bound or subject;
(b) violate any order, writ, judgment, ruling, injunction, award or
decree applicable to or binding upon Seller or the Company or
upon the assets or properties of Seller or the Company;
(c) result in the creation or imposition of any lien, mortgage,
pledge, limitation, restriction, charge, claim, security
interest or encumbrance upon any of the properties or assets of
Seller or the Company; or
(d) violate or result in the modification, revocation, termination or
suspension of any of the Licenses (as defined in Section 2.17).
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<PAGE> 15
2.6 CONSENTS AND APPROVALS. Except as contemplated in Section 4.5, no
consent, waiver, authorization or approval of, declaration or
notification to, or filing or registration with, any court,
administrative agency, or other governmental authority or
instrumentality, whether federal, state, local or foreign
("Governmental Entity") or any individual, corporation,
partnership, joint venture, trust, association or other entity
("Person"), is legally required on the part of Seller or the
Company in connection with the execution and delivery of this
Agreement by Seller, the performance by Seller of its obligations
hereunder or the compliance by Seller or the Company with the
provisions hereof.
2.7 DELAWARE DEPARTMENT OF INSURANCE STATEMENTS. Seller has furnished to
Purchaser complete and correct copies of the Annual Statements and
any Quarterly Statements of Company made to or filed with the
Commissioner of Insurance for the State of Delaware, for all
periods beginning on or after January 1, 1993, together with all
exhibits and schedules thereto. All Annual Statements and
Quarterly Statements and examinations, and annual audits required
by the Delaware Insurance Code, referred to in this Section 2.7
are hereinafter referred to as the "Statutory Insurance
Statements." Except as may be affected by (i) any adjustments
made under Section 10.1 hereof, (ii) reinsurance claims or losses
not known by the Company, or (iii) other matters disclosed on any
Schedule hereto, (a) the Quarterly Statement of the Company as at
September 30, 1997 and any financial statements hereafter filed
with the Delaware Department of Insurance accurately calculate and
report the Company's liabilities that are required to be shown or
reflected on such statement as of the applicable date by
applicable insurance accounting principles of the Delaware
Department of Insurance, and (b) all of the Statutory Insurance
Statements filed by the Company for periods ending on or after
March 1, 1994 complied in all material respects as of the
applicable date with the requirements of the Delaware Department
of Insurance concerning the submission and content of financial
statements and as of the
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<PAGE> 16
applicable date could be reconciled with the financial statements
and the financial records maintained and the accounting methods
applied by the Company for financial accounting and federal income
tax purposes. For purposes of this Agreement, references to
"reinsurance claims or losses not known by the Company" or similar
language shall refer, in the case of the Company's knowledge, to
the actual knowledge of the current officers and directors of the
Company, and with respect to "reinsurance claims or losses" shall
refer to all claims, losses or liabilities arising out of any
reinsurance treaties or agreements to which the Company is or has
been a party or to which the Company has been subject or bound,
directly or indirectly.
2.8 BASIC DOCUMENTS. The Seller will deliver to Purchaser true and
complete copies of the Articles of Incorporation and By-Laws of
Company. Such Articles of Incorporation and By-Laws are in full
force and effect. Prior to the Closing, Seller will have
delivered to Purchaser a copy of the said Articles of
Incorporation certified by the Commissioner of Insurance of the
State of Delaware, and a copy of the said By-Laws certified by the
Secretary of Company.
2.9 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as set forth in Schedule 2.9 or any other Schedule hereto,
since the last day of the period covered by the Company's most
recently filed Statutory Insurance Statements (i) there has
been no material adverse change in the assets, properties,
business, operations, or financial condition of the Company,
and (ii) the business of the Company has been operated only in
the ordinary course of business consistent with past practice
except for the transactions contemplated by this Agreement.
Neither Seller nor the Company knows of any event, condition or
circumstance which it believes will have or threatens to have a
material adverse effect on the assets, properties, operations,
or financial condition of the Company.
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<PAGE> 17
(b) Except as set forth in Schedule 2.9 or any other Schedule hereto,
between the last day of the period covered by the Company's
most recently filed Statutory Insurance Statements and the date
of this Agreement, neither Seller nor the Company has taken any
actions of a type referred to in Section 4.2 of this Agreement
that would have required the consent of Purchaser if such
action were to have been taken during the period between the
date hereof and the Closing Date.
2.10 COMPLIANCE WITH LAWS. Except as set forth in Schedule 2.10, to the
best of Seller's knowledge the business and operations of the
Company have been and are being conducted in accordance and
compliance with all laws, statutes, rules, regulations, judgments,
writs, decrees, injunctions, awards, orders and other legal
requirements of any Governmental Entity applicable thereto, except
for violations which heretofore have been duly cured and except
for violations which individually or in the aggregate would not
have a material adverse effect on the assets, properties,
operations, prospects, or financial condition of the Company taken
as a whole (hereafter, "Material Adverse Effect"). Except as set
forth in Schedule 2.10, to the best of Seller's knowledge neither
Seller nor the Company has received notice of the issuance of any
notice, violation or alleged violation of any such law, statute,
rule, regulation, judgment, writ, decree, injunction, award, order
or other legal requirement, except for violations which heretofore
have been duly cured, nor is it in default with respect to any
order, writ, judgment, award, injunction or decree of any
Governmental Entity applicable to Seller, the Company, or any of
their respective assets. Except as set forth on Schedule 2.10, to
the best of Seller's knowledge neither Seller nor the Company has
been notified by a Governmental Entity that an investigation or
review by such Governmental Entity, with respect to the violation
by
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<PAGE> 18
Seller or the Company of any applicable law, statute, rule,
regulation, judgment, writ, decree, injunction, award or order, is
pending or has been threatened.
2.11 TAX MATTERS. To the best of Seller's knowledge and belief after
thorough review and investigation:
(a) Except as set forth on Schedule 2.11, the Company, has (i) filed
in a timely manner (taking into account extensions of due
dates) with the appropriate federal, state, local, foreign or
other governmental agencies all Tax returns, estimates and
reports and combined or unitary returns, required to be filed
with respect to Taxes due prior to the date hereof and, as of
the time of filing, all such Tax returns were accurately
prepared in all material respects and (ii) paid in full all
required Taxes, which at the Closing shall include all Taxes
attributable to Pre-acquisition Periods as defined in Section
12.1, or has established reserves that are adequate therefor,
and the Closing Statement shall properly reflect in the capital
and surplus of the Company as of the close of business on the
Computation Date any such reserves as of the close of business
on the Computation Date.
(b) Except as set forth on Schedule 2.11, (i) there are no Taxes
assessed or asserted in writing in respect of any Tax returns
filed by the Company, or claimed in writing to be due by any
taxing authority that are not adequately reserved for, (ii) no
Tax return of the Company is currently being audited by the IRS
or other taxing authority (whether foreign or domestic), (iii)
the Company has not been audited by the IRS or by any state
taxing authority in respect of any tax year for which the
statute of limitations has not currently expired, (iv) all
deficiencies asserted as a result of examinations for prior tax
years have been paid, fully settled or adequately provided for,
(v) the Company has not executed or filed with the IRS or any
other taxing authority (whether foreign or domestic) any
agreement or
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<PAGE> 19
other document that is currently in effect extending, or having
the effect of extending, the period of assessment or collection
of any Taxes, (vi) the Company has not executed or entered into
a closing agreement or a compromise pursuant to Section 7121 of
the Internal Revenue Code of 1986, as amended ("Code"), or any
predecessor provision thereof or any similar provision of state,
local or foreign law which is binding on the Company for any
taxable period ending after the Closing Date, (vii) all final
adjustments made by the IRS with respect to any federal Tax
return of the Company have been reported to the relevant state,
local or foreign taxing authorities to the extent required by
law, and (viii) no requests for ruling or determination letters
are pending with any taxing authority.
(c) Except as disclosed in Schedule 2.11, the Company has timely
withheld from employee wages and paid over to the proper
governmental authorities all Taxes required to be so withheld
and paid over for all periods prior to Closing under all
applicable laws.
(d) Except as set forth in Schedule 2.11 (i) the Company is not a
party to any agreement that provides for the payment of any
amount that would constitute an "excess parachute payment"
within the meaning of Section 280G of the Code, and (ii) the
Company has not agreed to and is not required to make any
adjustment pursuant to Section 481(a) of the Code by reason of
a change in accounting method initiated by the Company and the
Company has no knowledge that the IRS has proposed any such
adjustment or change in accounting method.
(e) Except as set forth in Schedule 2.11, the Company is not a party
to, bound by, or has any obligation under any tax sharing or
similar agreement.
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<PAGE> 20
(f) The Company is not liable for the Taxes of any other Person under
Treasury Regulation Section 1.1502-6 or similar principles of
state, local, or foreign Tax laws, or other laws creating
successor or transferee liability for the Taxes of another
Person.
(g) The Company's Tax attributes (including, without limitation, net
operating losses) are not subject to any limitations under Code
Section 382 (excluding the effects of the transactions
contemplated by this Agreement).
For purposes of this Agreement, "Tax(es)" shall mean all taxes,
charges, fees, imposts, levies or other assessments, including, without
limitation, all net income, gross receipts, premium, sales, use, ad valorem,
value added, transfer, franchise, profits, inventory, capital stock, license,
withholding, payroll, employment, social security, unemployment, excise,
severance, stamp, occupation, and property taxes, customs duties, fees,
assessments and charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts imposed by any
taxing authority (domestic or foreign) upon the Company or any affiliated,
combined or unitary group for tax purposes of which any such corporation is
or was a member.
2.12 ABSENCE OF UNDISCLOSED LIABILITIES. At the close of business on the
last date of the period covered by the Company's most recently
filed Statutory Insurance Statement, and with the exception of
unknown reinsurance claims or losses or any matter disclosed on
any Schedule hereto, the Company had no indebtedness, obligation
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<PAGE> 21
or liability, absolute, accrued or contingent, known or unknown
which is not shown or provided for on such statement or in the
notes thereto which is required to be shown or provided for on
such statement by applicable statutory accounting principles of
the Delaware Department of Insurance. Except as shown on
Schedules 2.12 or 2.23, any other Schedule hereto, or in the
Company's most recently filed Statutory Insurance Statement, or
for reinsurance claims or losses not known by the Company or for
Tax liabilities with the meaning of Section 2.11 not known by
Seller, the Company is not directly or indirectly liable upon or
with respect to (by discount, repurchase agreements or otherwise),
or obligated in any other way to provide funds in respect of, or
to guarantee or assume, any debt, obligation or dividend of any
Person (except endorsements in the ordinary course of business in
connection with the deposit of items for collection), and, since
January 1, 1997, has not declared, set-aside or paid any dividend
or made any distribution on or with respect to shares of its
capital stock. Except as set forth on Schedule 2.12, any other
Schedule hereto or as contemplated by this Agreement, since the
last date of the period covered by the Company's most recently
filed Statutory Insurance Statement, the Company has not incurred
any indebtedness, obligation or liability of any kind, whether
absolute, accrued, contingent, known or unknown, which is
individually or in the aggregate material to the Company other
than those incurred since such date in the ordinary course of
business consistent with past practice.
2.13 INTERESTS IN REAL PROPERTY. Except as set forth and described in
Schedule 2.13 hereto, the Company has no interest in any owned or
leased real properties and is not in violation of any covenant,
agreement, or other obligation with respect to any such interests
in real properties.
2.14 PERSONAL PROPERTY. Set forth in Schedule 2.14 hereto is a true and
complete list and brief description of each item of machinery,
equipment, furniture, fixtures and other tangible personal
property with a per item book value in excess of One Hundred
Dollars ($100.00) owned or leased by the Company ("Personal
Property"). The Company owns outright with an unrestricted right
to transfer, free and clear of all title defects and objections,
security interests, liens, claims, pledges, mortgages, charges or
encumbrances (other than
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<PAGE> 22
the lien of current property taxes and assessments not in default, if
any), the Personal Property or holds valid and existing leaseholds in
the Personal Property.
2.15 ACCOUNTS RECEIVABLE. Except as set forth on Schedule 2.15, to the
knowledge of Seller and the Company, all notes and accounts
receivable payable to or for the benefit of the Company which will
be reflected on the Closing Statement as Acceptable Receivables
shall be in amounts not less than the aggregate amount thereof
(net of adequate reserves established in accordance with the
Company's ordinary accounting practices) carried on the books of
the Company, and the Company has not been notified or advised of
any defenses or set-offs to payment of such receivables. All such
notes and accounts receivable have arisen from bona fide
transactions in the ordinary course of business consistent with
past practice.
2.16 TRADEMARKS; SOFTWARE; PATENTS; COPYRIGHTS; AND KNOW-HOW. To the best
of Seller's and Company's knowledge, the Company possesses,
licenses or otherwise has the right to use all trademarks,
software, patents, copyrights, trade secrets (including
policyholder lists, customer lists and renewals) and proprietary
know-how ("Intangible Assets") necessary for the conduct of its
operations as conducted on the date hereof. Except as set forth
in Schedule 2.16, there is no restriction affecting the Company's
use of any of the Intangible Assets, each item of the Intangible
Assets is free and clear of all liens, security interests, claims,
mortgages, pledges, charges, encumbrances and equities and no
license has been granted with respect thereto. To the best
knowledge of Seller and Company, none of the Intangible Assets is
currently being challenged, is involved in any pending or
threatened administrative or judicial proceeding, or conflicts in
any respect material to Company with any rights of any other
Person. To the knowledge of Seller and the Company, none of the
Company's operations involves any infringement of any proprietary
right of any Person. Within the four (4) years preceding the date
of this Agreement,
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<PAGE> 23
neither Seller nor the Company has received any notice from any
Person with respect to any infringement.
2.17 LICENSES; PERMITS AND GOVERNMENTAL APPROVALS. Set forth in Schedule
2.17 hereto is a true and complete list of all licenses, permits,
franchises, authorizations and approvals issued or granted to the
Company by any Governmental Entity and all pending applications
therefor. The Company holds all licenses, permits, franchises,
authorizations and approvals of Governmental Entities required to
permit the continued lawful conduct of the Company's business in
the manner now conducted including a valid Certificate of
Authority to write insurance issued by the Delaware Department of
Insurance, ("Licenses"), and the Company's operations are not
being conducted in a manner which violates any of the terms or
conditions under which that License was granted. Each License has
been duly obtained, is valid and in full force and effect, and is
not subject to any pending or, to the knowledge of Seller or the
Company, threatened administrative or judicial proceeding to
revoke, cancel or declare such License invalid in any respect.
The Company has not received any notice to the effect that there
is lacking any such License required in connection with the
current operations of its business. No default, violation or
event, which with notice or the lapse of time or both would become
a default or violation, has occurred with respect to any such
License which has not been cured.
2.18 TITLE TO ASSETS. Except as set forth on Schedule 2.18, the Company
holds, owns and has an unrestricted right to transfer title to any
of the assets used in its business, including without limitation
all of the assets reflected in the latest Statutory Insurance
Statement and acquired since the period covered by that filing,
described in Sections 2.13, 2.14, 2.15, 2.16 or 2.17 hereof or set
forth in Schedules 2.13, 2.14, 2.15, 2.16, and 2.17. In each
case, such assets are free and clear of any lien, charge, security
interest, claim, mortgage, pledge, or encumbrance other than (i)
those specifically described in the latest Statutory
19-
<PAGE> 24
Insurance Statement or noted on any Schedule hereto; (ii) assets
leased by the Company as described in such Statutory Insurance
Statement or any Schedule hereto; (iii) assets disposed in the
ordinary course of business since the period covered by the latest
Statutory Insurance Statement; (iv) liens of current property
taxes and assessments not in default; or (v) liens or other
encumbrances of a character that do not interfere with or impair
the present and continued use thereof in the usual and normal
conduct of the business of the Company and which are disclosed on
the Schedules hereto.
2.19 LITIGATION. Except as set forth in Schedule 2.19, there are no claims,
actions, suits, proceedings, complaints, charges, labor disputes
or investigations pending or, to the knowledge of Seller or
Company, threatened before any Governmental Entity or before any
arbitrator of any nature, brought by or against Seller, or the
Company or, to the knowledge of Seller, any of their respective
officers, directors, employees, agents or affiliates involving,
affecting or relating to the Company. Except as set forth in
Schedule 2.19, neither Seller nor the Company nor any of their
respective assets or properties is subject to or, to the knowledge
of Seller or Company, overtly threatened by any order, writ,
judgment, award, injunction or decree of any Governmental Entity
or arbitrator, which affects or might affect their respective
assets, properties, operations, or financial condition or which
would or might interfere with the transactions contemplated by
this Agreement, except for claims made in the ordinary course of
insurance business other than those based upon allegations of lack
of good faith and fair dealing.
2.20 CONTRACTS. Set forth in Schedule 2.20 hereto is a true and complete
list and summary description of all material contracts, agreements
and other instruments of whatsoever nature to which the Company is a
party or otherwise relating to or affecting any of its respective
assets, properties, agents or operations (other than contracts,
agreements and instruments listed in other Schedules to this
Agreement and other than contracts which
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<PAGE> 25
shall not survive the Closing). The Company has performed in all
material respects all the obligations required to be performed by
it under all such contracts, instruments or agreements. The
Company is not in default under any of such contracts,
instruments or agreement, nor does any condition exist which, with
notice or lapse of time or both, would constitute a default by the
Company thereunder, or, to the knowledge of Seller or the Company,
by and other party thereto. True and complete originals or copies
of all documents listed or required to be listed in Schedule 2.20
or in any other Schedule have been made available, or will be made
available at Purchaser's request prior to Closing, by Seller to
Purchaser or its representatives. Each of such contracts,
instruments or agreements is valid and enforceable against the
Company and, to the knowledge of Seller and the Company, against
the other party or parties thereto, in accordance with its terms.
No previous or current party to any such contract, instrument or
agreement has given notice of or made a claim with respect to any
breach or default currently existing thereunder. With respect to
any of such contracts, instruments or agreements which were
assigned or subleased to the Company by a third party, all
necessary consents to assignments or subleases have been obtained.
2.21 EMPLOYEES; EMPLOYEE PLANS. Company employs the individuals listed on
Schedule 2.21 hereto (hereafter "Employees"). Any "employee
benefit plans" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or
any other benefit arrangement provided by Company with respect to
Employees ("Employee Benefit Plans"), are maintained by an
affiliate of Company. Company will withdraw from and terminate
any future liability to the Company for all such Employee Benefit
Plans with respect to the Employees effective as of the Closing.
Except as set forth on Schedule 2.21, since January 1, 1997 there
have not been, nor are there now, any claims, actions, suits,
proceedings, complaints, charges, labor disputes or investigations
pending, or, to the knowledge of Seller or Company, threatened by
any employee, past or present, with
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respect to any manuals, brochures or publications or similar
documents regarding office administration, personnel matters and
hiring, evaluation, supervision, training, termination and
promotion of employees of the Company, including but not limited
to an affirmative action plan, or any written communications
disseminated to employees concerning such matters (collectively
"Employee Policies and Procedures"), or with respect to any
employee arising under the Consolidated Omnibus Benefit
Reconciliation Act of 1985 ("COBRA"), or the Americans With
Disabilities Act of 1990 ("ADA") or any other similar state or
federal law or regulation pertaining to the rights of employees.
2.22 INSURANCE. Set forth in Schedule 2.22 hereto is a true and complete
list (specifying the insurer and describing any pending claims
thereunder of more than $5,000) of all insurance policies or
fidelity bonds in force on the date hereof with respect to and
insuring the directors, officers, employees, assets, properties or
operations of the Company, together with a summary description
including the premiums currently paid thereon, type of policy,
name of insured, the insurer, expiration date, the hazards insured
against and the dollar amount of coverage per occurrence and in
the aggregate and deductibles. All such policies and fidelity
bonds are in full force and effect, provided that from and after
the Closing the Company will no longer be an insured under such
policies other than the Financial Institutions Bond policy issued
by National Union listed thereon and it shall be Purchaser's
responsibility to obtain insurance from and after the Closing.
True and complete copies of all such insurance policies and
fidelity bonds have been made available for review, or will be
made available for review upon Purchaser's request prior to
Closing, to Purchaser by Seller. Except for claims set forth in
Schedule 2.22, there are no outstanding unpaid claims under any of
such policies or bonds, and the Company has received no notice of
cancellation or non-renewal thereof.
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2.23 TRANSACTIONS WITH RELATED PARTIES. Except as set forth in Schedule
2.23 or any other Schedule hereto, since January 1, 1995 there
have not been, nor are there now, any transactions between the
Company and (i) Seller, (ii) any general partner of Seller, any
director, officer or stockholder of the general partner of
Seller, or any officer, director or affiliate (as defined in Rule
405 promulgated under the Securities Act of 1933, as amended [the
"Securities Act"] and as defined by the holding company statutes
of the Delaware Insurance Code) of Seller or the Company, or
(iii) any relative or spouse (or relative of such spouse) of any
such director, officer or stockholder of the general partner of
Seller or any officer, director or affiliate of Seller or the
Company (such persons in clauses (i), (ii), and (iii) referred to
herein as a "Related Party" or collectively as the "Related
Parties"). Except as set forth in Schedule 2.23 or any other
Schedule hereto, no Related Party owns, directly or indirectly,
in whole or in part, any tangible or intangible property material
to the condition of the Company, or that the Company uses in the
conduct of its business. Except as set forth in Schedule 2.23 or
in any other Schedule hereto, no Related Party owes any money or
other amounts to, nor is any Related Party owed any money or
other amounts by, the Company. All indebtedness of the Company
to any Related Party, and all indebtedness of any Related Party
to the Company is set forth on Schedule 2.23, and all
indebtedness of the Company to any Related Party will be paid,
forgiven or otherwise satisfied on or prior to the Closing Date.
2.24 BOOKS AND RECORDS. The books and records of the Company, with the
exception of reinsurance claims or losses for which Company has
received no notice, contain in all material respects true, correct
and complete entries of all of its business transactions and have
been maintained in accordance with good business practice and
applicable statutory insurance accounting principles.
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2.25 ACCURACY OF INFORMATION. To the best knowledge and belief of Seller
and except as disclosed in any Schedule hereto, all documents,
agreements, and other papers and materials delivered by or on
behalf of Seller or the Company in connection with this Agreement
and the transactions contemplated hereby are true and correct in
all material respects. To the best knowledge and belief of Seller
and except as disclosed in any Schedule hereto, none of the
representations, warranties or statements of Seller or the
Company, as the case may be, contained in this Agreement, in the
Schedules or Exhibits hereto, or in any other agreement,
instrument or document executed or delivered in connection with
transactions contemplated by this Agreement contains or will
contain any untrue statement of a material fact or omits or will
omit to state any material fact necessary to make the
representations, warranties or statements contained herein or
therein not misleading in light of the circumstances under which
they were made.
2.26 REGULATORY FILINGS. The Seller has furnished Purchaser with true and
correct copies of the two latest reports of Delaware Department of
Insurance examinations and all independent audits of the Company.
The Seller will allow Purchaser access to complete and correct
copies of all registrations, filings, or submissions made by the
Company with any Governmental Entity and any reports of
examinations issued by any such Governmental Entity that relate to
the Company. Except as disclosed in any Schedule hereto, to the
best knowledge and belief of Seller and Company after thorough
review and investigation, Company has filed all reports,
statements, documents, registrations, filings or submissions it is
required to file with any Governmental Entity.
2.27 AGENTS. Except as provided in Schedule 2.27, no reinsurance
intermediary or broker has a contract with Company, and the
compensation arrangements with all of such intermediaries or
brokers may be changed by the Company at any time.
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3.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents, warrants and agrees as follows:
3.1 CORPORATE ORGANIZATION. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State
of Texas, and has all requisite power and authority (corporate and
other) to own its properties and assets and to conduct its business
as now conducted.
3.2 CORPORATE AUTHORITY. Purchaser has the corporate power to enter into
this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement, and the performance of
Purchaser's obligations hereunder have been duly authorized prior
to Closing by the shareholders and the Board of Directors of
Purchaser and no other corporate proceedings on the part of
Purchaser are necessary to authorize such execution, delivery and
performance. This Agreement has been duly executed by Purchaser as
the valid and binding obligation of Purchaser, enforceable against
Purchaser in accordance with the terms hereof, except as such
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws relating to or affecting creditors'
rights generally or general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity
or at law).
3.3 NO VIOLATION. The execution, delivery and performance by Purchaser of
this Agreement and the consummation of the transactions
contemplated hereby do not and will not
(a) violate, conflict with or result in the breach of any provision
of the charter documents or by-laws of Purchaser;
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(b) violate, conflict with or result in the breach of any of the
terms or provisions of, result in a modification, suspension,
termination or cancellation of, or acceleration of the
performance required by, or otherwise give any other
contracting party the right to modify, suspend, terminate or
cancel or accelerate the performance required by, or
constitute (or with notice or lapse of time or both would
constitute) a default or result in the loss of any material
benefit under any permit, instrument, contract, mortgage,
indenture, lease, deed of trust, license, note, loan agreement
or other agreement to which Purchaser is a party, or by or to
which it or its assets or properties may be bound or subject;
(c) violate any order, writ, judgment, ruling, injunction, award or
decree applicable to or binding upon Purchaser or upon the
assets or properties of Purchaser;
(d) violate any statute, law, rule or regulation of any Governmental
Entity applicable to Purchaser or any of its assets or
properties;
(e) result in the creation or imposition of any lien, mortgage,
pledge, limitation, restriction, charge, claim, security
interest or encumbrance upon any of the properties or assets
of Purchaser; or
(f) violate or result in the modification, revocation, termination or
suspension of any material license, permit, franchise,
authorization or approval of any Governmental Entity required
to permit the continued lawful conduct of Purchaser's business
in the manner now conducted.
3.4 CONSENTS AND APPROVALS. Except as contemplated in Section 5.2, no
consent, waiver, authorization or approval of, declaration or
notification to, or filing or registration with,
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any Governmental Entity or Person is legally (by law, regulation,
contract or otherwise) required on the part of Purchaser in
connection with the execution and delivery of this Agreement by
Purchaser or the performance by Purchaser of its obligations
hereunder or compliance by Purchaser with the provisions hereof.
3.5 ACCURACY OF INFORMATION. To the best knowledge and belief of
Purchaser, all documents, agreements and other papers and materials
delivered by or on behalf of Purchaser in connection with this
Agreement and the transactions contemplated hereby are true and
correct in all material respects. None of the representations,
warranties or statements of Purchaser contained in this Agreement,
or in any other agreement, instrument or document executed or
delivered by or on behalf of Purchaser in connection with the
transactions contemplated by this Agreement contains or will
contain any untrue statement of a material fact or omits or will
omit to state any material fact necessary to make the
representations, warranties or statements contained herein or
therein, in light of the circumstances under which they were made,
not misleading.
3.6 FINANCIAL RESOURCES. Purchaser has the cash or credit facilities
available to pay the Purchase Price.
4.
COVENANTS OF SELLER
Seller hereby covenants and agrees with Purchaser as follows:
4.1 CONDUCT OF BUSINESS. From the date hereof through the Closing Date,
Seller shall cause the Company not to enter, perform or agree to
enter or perform any transaction or act that would result in any of
the representations and warranties contained in Section 2 to be
untrue or incorrect in any material respect as of the Closing Date,
that would be likely to cause any condition set forth in this
Agreement to be unsatisfied or that would otherwise
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jeopardize the transactions contemplated hereby. Except as to
Company's investments and as otherwise contemplated by this
Agreement, Seller shall cause the Company to conduct its business
only in the ordinary course of business consistent with past
practice. Seller shall further use its best efforts from the date
hereof through the Closing Date to preserve the business of the
Company and to preserve its present business relationships and the
good will of those having business relationships with the Company
except as otherwise contemplated by this Agreement.
4.2 NEGATIVE COVENANTS. During the period commencing on the date of this
Agreement and ending on the Closing Date, Seller shall not cause,
permit or suffer the Company to take any action to:
(a) Amend its charter documents or by-laws;
(b) With the exception of the extra-ordinary dividend/partial stock
redemption hereby contemplated, declare, set aside or pay any
dividend or make any distribution on or with respect to shares
of its capital stock (including the Shares);
(c) Transfer, issue, sell or otherwise dispose of any shares of
capital stock or other security of the Company or grant or
enter into any options, warrants, agreements, conversion
rights, exchange rights, preemptive rights or other rights to
subscribe for, purchase or otherwise acquire, or issue
securities convertible into or exchangeable for or pledge or
encumber any shares of capital stock or other security of the
Company;
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(d) Except for the purpose of complying with Section 1.3(d), acquire
any assets or properties, other than in the ordinary course of
business and consistent with past practice;
(e) Except for the purpose of complying with Section 1.3(d), sell,
lease, transfer, dispose of, any assets or properties, other
than for fair consideration in the ordinary course of business
and consistent with past practice;
(f) Enter into or effect any merger, consolidation, reclassification,
recapitalization or other business combination or
reorganization;
(g) Assume, guarantee, endorse or otherwise become liable or
responsible (whether direct, contingent or otherwise) for the
obligations of any other Person, except endorsements in the
ordinary course of business and consistent with past practice
in connection with the deposit of items for collection;
(h) Except for the purpose of complying with Section 1.3(d), make any
loans, advances or capital contributions to or investments in
any Person (other than investments which are consistent with
the asset makeup contemplated by this Agreement);
(i) Cause or permit any of its current property and casualty
insurance policies to be cancelled or terminated or any of the
coverage thereunder to lapse or to be decreased, unless
simultaneously with such termination, cancellation or lapse,
the Company obtains replacement policies from the same or
comparable insurers providing coverage which is the same as or
comparable to that provided under the cancelled, terminated or
lapsed policies;
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(j) Sell, transfer, license or otherwise dispose of or encumber any
item of Intangible Assets other than the renewal or lapse of
software licenses not material to Company's business
operations;
(k) Cancel or compromise any debt or claim or waive, release, grant
or transfer any rights of value or modify or change in any
material respect any existing license, lease, contract or
other document, other than in the ordinary course of business
and consistent with past practice and other than a settlement
of an Indemnified Claim in a manner consistent with Section
8.3 hereof;
(l) Hire any employees or adopt any Employee Benefit Plans or
Employee Policies and Procedures;
(m) Grant any stock options, restricted stock grants or stock
appreciation rights;
(n) Enter into any contract, lease, commitment or other agreement of
any type whatsoever, unless terminable without liability to
Company on notice of thirty (30) days or less;
(o) Create, incur or assume any indebtedness except for normal trade
payables incurred in the ordinary course of business;
(p) Cause or permit its assets and properties to not be maintained in
their current condition, ordinary wear and tear excepted;
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(q) (i) not maintain its books, accounts and records in the ordinary
course of business consistent with past practices, (ii) not
continue to collect accounts receivable and pay accounts
payable utilizing normal procedures and (iii) not comply in
all material respects with all contractual and other
obligations applicable to its operations;
(r) Except for commitments pursuant to the contracts and agreements
listed on Schedule 2.20, enter into any commitment for
expenditures of the Company in excess of $1,000 for any
individual commitment and $5,000 for all commitments in the
aggregate which shall survive the Closing;
(s) Except for any settlement of an Indemnified Claim in a manner
consistent with Section 8.3 herein, for transactions required
by Section 1.3, and for transactions contemplated by any other
provision of this Agreement, enter into any transaction or
make or enter into any contract, agreement or instrument which
by reason of its size or otherwise is not in the ordinary
course of business consistent with past practice;
(t) Write any insurance policy or enter into any reinsurance
agreement, except in the ordinary course of business;
(u) Take any action or fail to take any action which would cause the
Company's Licenses to lapse; or
(v) Make any material change in the underwriting, actuarial,
financial or accounting practices customarily followed by the
Company.
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4.3 PREPARATION OF STATUTORY INSURANCE STATEMENTS. For any statutory
accounting period which ends prior to the Closing, Seller shall
prepare (or have prepared) and file, at its expense, any Statutory
Insurance Statements due after Closing, and Purchaser shall
cooperate fully with Seller in the preparation of such Statements.
4.4 ACCESS TO PROPERTIES AND RECORDS. To permit Purchaser to make such
business, accounting and legal review and examination of the
Company as Purchaser shall reasonably desire, Seller shall afford,
and shall cause the Company to afford, to Purchaser and Purchaser's
actuaries, accountants, counsel and other representatives, access
throughout the period prior to the Closing Date to the business,
operations, properties, books, contracts, commitments and records
of the Company as Purchaser or its representatives shall reasonably
request. Seller shall cause the Company to cooperate with
Purchaser and its representatives in their investigation and
examination of the assets and properties of the Company.
4.5 CONSENTS AND APPROVALS. Seller (i) shall use its best efforts to
promptly obtain all necessary consents, waivers, authorizations and
approvals of all Governmental Entities and Persons required of
Seller in connection with the execution, delivery and performance
by it in this Agreement and the transactions contemplated hereby,
including without limitation the approval of the Stock Redemption
herein contemplated, and (ii) shall reasonably assist and cooperate
with Purchaser in preparing and filing all documents required to be
submitted by Purchaser to any Governmental Entity in connection
with such transactions (which assistance and cooperation shall
include, without limitation, timely furnishing to Purchaser all
information concerning Seller or the Company which, in the
reasonable opinion of counsel to Purchaser, is required to be
included in such documents), and in obtaining any governmental, or
other third party consents, waivers, authorizations or approvals
which may be required to be obtained by Purchaser in connection
with such
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transactions, including, without limitation, the approvals
contemplated in Section 5.2 and, specifically, the filing of the
Report (defined in Section 5.2) required to be filed by Seller
under the HSR Act (defined in Section 5.2) and cooperating with and
assisting Purchaser in its filings and the early termination to be
sought under the HSR Act. With respect to the approval by the
Delaware Department of Insurance of the Stock Redemption, Seller
agrees to comply with the provisions of Section 10.3 hereof.
4.6 THIRD PARTY AGREEMENTS. Seller shall cooperate with Purchaser and use
its best efforts to assist Purchaser in obtaining any consents, or
similar assurances from third parties required under or reasonably
requested by Purchaser in connection with agreements, licenses,
permits and other documents or instruments of the Company.
4.7 FURTHER ASSURANCES. Upon the reasonable request of Purchaser at any
time on or after the Closing Date, Seller will, at its expense,
forthwith execute and deliver such further instruments of
assignment, transfer, conveyance, endorsement, direction or
authorization and other documents as Purchaser or its counsel may
reasonably request in order to perfect title of Purchaser and its
successors and assigns in and to the Shares or otherwise to effect
the purposes of this Agreement.
4.8 SATISFACTION OF CONDITIONS. Seller agrees to use its reasonable best
efforts to cause the conditions to obligations of Purchaser which
are dependent on the actions of Seller or Company and which are set
forth in Section 6 to be fulfilled.
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5.
COVENANTS OF PURCHASER
Purchaser hereby covenants and agrees with Seller as follows:
5.1 CONDUCT OF BUSINESS. From the date hereof through the Closing Date,
Purchaser shall not enter, perform or agree to enter or perform any
transaction or act which would result in any of the representations
and warranties contained in Section 3 to be untrue or incorrect in
any material respect as of the Closing Date, that would be likely
to cause any condition set forth in this Agreement to be
unsatisfied or that would otherwise jeopardize the transactions
contemplated hereby.
5.2 CONSENTS AND APPROVALS. Purchaser (i) shall use its best efforts to
promptly obtain all necessary consents, waivers, authorizations and
approvals of appropriate Governmental Entities or other Persons
required in connection with the execution, delivery and performance
by Purchaser of this Agreement, including without limitation
preparation, filing and seeking approval of a Form A Acquisition
Statement, and the preparation and filing with the Antitrust
Division of the Department of Justice (the "Antitrust Division")
and the Federal Trade Commission (the "FTC") of any notification
and report form (the "Report") required under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "HSR Act"), and
requesting early termination of the waiting period thereunder, and
(ii) shall diligently assist and cooperate with Seller in preparing
and filing all documents required to be submitted by or on behalf
of Seller to any Governmental Entity in connection with such
transactions and in obtaining any governmental or third party
consents, waivers, authorizations or approvals which may be
required to be obtained by Seller in connection with such
transactions. With respect to the approval by the Delaware
Department of Insurance of the Stock Redemption, Seller agrees to
comply with the provisions of Section 10.3 hereof.
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5.3 SATISFACTION OF CONDITIONS. Purchaser agrees to use its reasonable
best efforts to cause the conditions to obligations of Seller which
are dependent upon actions of Purchaser or its affiliates and which
are set forth in Section 7 to be fulfilled.
5.4 PURCHASER'S INTENT. Purchaser is purchasing the Remaining Shares for
its own account, for investment, and not with a view to the
distribution thereof. Purchaser acknowledges that the Remaining
Shares to be purchased under this Agreement have not been and will
not be registered under the Securities Act of 1933 or any
applicable state securities laws and therefore may not be resold
without compliance with such Act and such laws.
5.5 ACCESS TO RECORDS. After Closing, Purchaser will afford Seller and its
employees, agents, counselors and advisors reasonable access to
Company's books and records for the purpose of preparing any
Statutory Insurance Statements due for periods prior to the
Closing.
6.
CONDITIONS TO OBLIGATIONS OF PURCHASER
All obligations of Purchaser under this Agreement are subject to the
fulfillment, at or prior to the Closing Date, of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES OF SELLER. All representations and
warranties made by Seller in this Agreement shall be true and
correct in all material respects on and as of the Closing Date as
if again made by Seller on and as of such date (or on the date when
made in the case of any representation or warranty which
specifically relates to an earlier date), and Purchaser shall have
received a certification of that fact dated the Closing Date and
signed by the Seller.
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6.2 COVENANTS OF SELLER. Seller shall have performed and complied in all
material respects with all covenants and obligations required under
this Agreement to be performed by it and with which it must comply
on or prior to the Closing Date, and Purchaser shall have received
a certificate to such effect dated the Closing Date and signed by
the Seller.
6.3 CONSENTS AND APPROVALS. All consents, waivers, authorizations and
approvals of any Governmental Entity, arbitrator or Person,
required in connection with the execution, delivery and performance
of this Agreement, including, without limitation, (i) the approvals
contemplated in Sections 4.5 and 5.2, and (ii) any and all consents
required from third parties under any contracts, agreements,
licenses, leases and other instruments, relating to the business of
the Company, shall have been duly obtained and shall be in full
force and effect on the Closing Date and in form and substance
satisfactory to Purchaser.
6.4 NO VIOLATION OF ORDERS. There shall not be in effect on the Closing
Date any statute, rule, regulation, decree, writ, order,
preliminary or permanent injunction or other order issued,
promulgated or enacted by any Governmental Entity which declares
this Agreement invalid in any material respect or prevents the
consummation of the transactions contemplated hereby; and no action
or proceeding shall have been instituted or threatened by any
Governmental Entity which seeks to prevent or delay the
consummation of the transactions contemplated by this Agreement or
which challenges the validity or enforceability of this Agreement
or any material term or provision hereof or seeks damages as a
result of the transactions contemplated by this Agreement.
6.5 NO MATERIAL ADVERSE CHANGE. During the period from the date of this
Agreement to the Closing Date, there shall have been no material
adverse change in or any event or occurrence which would result in
a material adverse change in, or any litigation, which in the
reasonable opinion of Purchaser, is likely to result in a material
adverse change in the
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assets (including insurance in force), liabilities, properties,
operations, or financial condition of the Company.
6.6 INTER-AFFILIATE OR RELATED PARTY DEBT, AGREEMENT OR INVESTMENTS.
Purchaser shall have received such agreements and assurances as it
shall require evidencing the satisfaction, forgiveness and release
of all inter-affiliate or other obligations owed by the Company to
Seller or any of their respective affiliates or Related Parties,
the cancellation, satisfaction and forgiveness of any obligation
under any inter-affiliate or Related Party contracts, agreements,
arrangements or understandings of any nature; and the elimination
of any inter-affiliate or Related Party investment owned by the
Company.
6.7 OTHER CLOSING DOCUMENTS. Purchaser shall have received such other
certificates, instruments and documents in confirmation of the
representations, warranties or covenants of Seller contained in
this Agreement or in furtherance of the transactions contemplated
by this Agreement, as Purchaser or its counsel may reasonably
request.
6.8 LEGAL MATTERS. All certificates, instruments, opinions and other
documents required to be executed or delivered by or on behalf of
Seller under the provisions of this Agreement, and all other
actions and proceedings required to be taken by or on behalf of
Seller in furtherance of the transactions contemplated hereby,
shall be reasonably satisfactory in form and substance to counsel
for Purchaser.
6.9 RESIGNATION OF DIRECTORS AND OFFICERS. The individuals constituting
all of the directors and officers of the Company shall have
delivered to Purchaser their written resignations from all
positions elected to and/or held in such entity.
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7.
CONDITIONS TO OBLIGATIONS OF SELLER
All obligations of Seller under this Agreement are subject to the
fulfillment, at or prior to the Closing Date, of the following conditions:
7.1 REPRESENTATIONS AND WARRANTIES OF PURCHASER. All representations and
warranties made by Purchaser in this Agreement shall be true and
correct in all material respects as of the Closing Date as if again
made by Purchaser on and as of such date (or on the date when made
in the case of any representation or warranty which specifically
relates to an earlier date), and Seller shall have received a
certificate to such effect from Purchaser, dated the Closing Date
and signed by the Chairman of the Board, the President or any Vice
President of Purchaser.
7.2 PERFORMANCE OF PURCHASER'S OBLIGATIONS. Purchaser shall have performed
and complied in all material respects with all obligations required
under this Agreement to be performed by it on or prior to the
Closing Date, and Seller shall have received a certificate from
Purchaser to such effect dated the Closing Date and signed by the
Chairman of the Board, the President or any Vice President of
Purchaser.
7.3 NO VIOLATION OF ORDERS. There shall not be in effect on the Closing
Date any statute, rule, regulation, decree, writ, executive order,
preliminary or permanent injunction or other order issued by any
Governmental Entity which declares this Agreement invalid or
unenforceable in any material respect or which prevents the
consummation of the transactions contemplated hereby; and no action
or proceeding shall have been instituted or threatened by any
Governmental Entity which seeks to prevent or delay the
consummation of the transactions contemplated by this Agreement or
which challenges the
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validity or enforceability of this Agreement or any material
term or provision hereof or seeks damages as a result of the
transactions contemplated by this Agreement.
7.4 OTHER CLOSING DOCUMENTS. Seller shall have received such other
certificates, instruments and documents in confirmation of the
representations, warranties and covenants of Purchaser contained in
this Agreement or in furtherance of the transactions contemplated
by this Agreement as Seller or its counsel may reasonably request.
7.5 LEGAL MATTERS. All certificates, instruments, opinions and other
documents required to be executed or delivered by or on behalf of
Purchaser under the provisions of this Agreement, and all other
actions and proceedings required to be taken by or on behalf of
Purchaser in furtherance of the transactions contemplated hereby,
shall be reasonably satisfactory in form and substance to counsel
for Seller.
7.6 CONSENTS AND APPROVALS. All consents, waivers, authorizations and
approvals of any Governmental Entity, arbitrator or Person,
required in connection with the execution, delivery and performance
of this Agreement, including, without limitation, (i) the approvals
contemplated in Section 4.5 and 5.2, and (ii) any and all consents
required from third parties under any material contracts,
agreements, licenses, leases and other instruments, relating to the
business of the Company, shall have been duly obtained and shall be
in full force and effect on the Closing Date and in form and
substance satisfactory to Seller.
7.7 STOCK REDEMPTION. The Stock Redemption shall have been completed
immediately prior to the Closing.
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7.8 RELEASES. The Company shall have delivered a general release to each
of its current officers and directors in the form of Exhibit 7.8
hereto. Such releases shall in no way impair Purchaser's rights of
indemnity against Seller hereunder.
8.
INDEMNIFICATION
8.1 INDEMNIFICATION BY SELLER. Subject to the provisions of Section 8.4
and during the Survival Period (as defined in Section 11.1), Seller
shall indemnify, defend and hold harmless Purchaser and its
directors, officers, employees, agents and subsidiaries from and
against any and all losses, costs, liabilities, damages and
expenses, including, without limitation, legal fees and other
expenses incurred in the investigation and defense of claims and
actions (collectively hereafter "Damages") resulting from or
arising out of (a) any inaccuracy in or breach of any
representation, warranty, covenant or agreement of Seller contained
in this Agreement or in any Schedule, Exhibit, instrument or other
document delivered by Seller pursuant to or in connection with this
Agreement, (b) any repurchase or indemnification claim asserted by
Enterprises National Bank of Palm Beach or its successor or
assignees ("Enterprises") pursuant to a Loan Purchase Agreement
between Enterprise and the Company dated as of November 28, 1997,
and (c) any repurchase or indemnification claim asserted by
Transouth Financial Corporation or its successors or assigns
("Transouth") pursuant to a Purchase Agreement dated May 30, 1997
between Transouth and the Company. The indemnification by Seller
with respect to any claim by Enterprises is conditioned upon Seller
being, and Purchaser and the Company hereby agrees that Seller
shall be, fully subrogated to the Company with respect to the
Company's rights under the indemnification letter agreement dated
December 4, 1997 from Warren Mosler and Clifford Viner with respect
to certain of the Company's obligations to Enterprise and that
Seller shall be entitled to pursue such rights in the name of the
Company for the Seller's benefit.
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8.2 INDEMNIFICATION BY PURCHASER. Subject to the provisions of Section 8.4
and during the Survival Period (as defined in Section 11.1),
Purchaser shall indemnify, defend and hold harmless Seller and its
directors, officers, employees, agents and subsidiaries from and
against any and all Damages resulting from or arising out of any
inaccuracy in or breach of any representation, warranty, covenant
or agreement of Purchaser contained in this Agreement, or in any
Schedule, Exhibit, instrument or other document delivered by
Purchaser pursuant to or in connection with this Agreement.
8.3 INDEMNIFIED CLAIMS.
(a) Seller agrees to indemnify Purchaser as to any and all
liabilities of whatsoever nature relating to or represented by
the Reinsurance Company of Hanover block of business, the
Aviation of America reinsurance claim, and the Arizona (AMS)
claim (herein collectively "Indemnified Claims"). Such
indemnification shall be for all of such liability of
whatsoever nature without any reservation or qualification,
but Seller shall receive credit against any amounts due under
such indemnity for the applicable reserve set up in Company as
of Closing, to which shall be added interest at the rate of
seven and one-half percent (7.5%) per annum, compounded
annually, from the Closing Date to the date of any claim
payment made by Company. Purchaser shall give prompt written
notice to Seller of any claim for indemnification of an
Indemnified Claim, specifying the amount and the source from
which Purchaser will draw to satisfy the indemnity (i.e.,
Company reserves, Letter of Credit, or both), provided that
satisfaction of the indemnity shall be made by first drawing
upon reserves plus accrued interest thereon and then, to the
extent there is an indemnity amount unsatisfied, by drawing
upon the Letter of Credit.
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(b) Said indemnity shall be secured by an irrevocable letter of
credit ("Letter of Credit"), without conditions and with
protest waived, issued by a national banking association in
good standing which is acceptable to Purchaser in its
reasonable discretion and which is not affiliated in any
manner with Seller or its stockholders; the letter shall be in
the principal amount of Ten Million Dollars ($10,000,000.00),
as such amount may be reduced pursuant to this Section 8.3.
The terms of such letter of credit shall be as follows:
(i) It shall be solely in favor or Purchaser;
(ii) Purchaser shall have the unilateral, unfettered right to
draw down any portion of the principal proceeds upon
delivery of notice to the issuing bank which either (1)
certifies a claim payment of at least equal amounts to the
draw down, or (2) certifies that Company is required by
regulators to augment the posted reserves for an
Indemnified Claim by the amount of draw down, in either
case, said notice shall contain a certification that it has
been contemporaneously delivered to Seller;
(iii) The term of the initial Letter of Credit shall be one (1)
year. Thereafter, the Letter of Credit shall be at least
one (1) year, and Seller shall annually (or at any
applicable longer intervals) renew or replace the Letter of
Credit with a Letter of Credit in the principal amount of
the final balance of the immediately preceding Letter of
Credit (or such lower amount permitted under this Section
8.3) until the earlier of fifteen (15) years from Closing
or the release of the Letter of Credit as provided in this
Section 8.3. Notwithstanding the foregoing, if a two-year
term for such Letter of Credit is at any applicable time
readily available to Seller, then the Letter of Credit
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may be two years. If Seller has not delivered the
replacement Letter of Credit or satisfactory evidence of
such replacement to Purchaser at least fifteen (15) days
prior to the expiration of the Letter of Credit then in
effect, then Purchaser may draw down the entire principal
balance thereof. The proceeds of such draw down shall be
added to the reserves held by the Company for the
Indemnified Claims and thereafter earn interest at the same
rate as such reserves; and
(iv) It shall be irrevocable.
Purchaser agrees that, with respect to Section 8.3(b)(ii)(1),
it will only draw against such Letter of Credit the amount of
claims payments that exceed the amount of Company's posted
reserve for each such claim, the amount of such reserve to
include all interest accrued thereon as provided in (a)
above.
(c) If no claims payments have been made for an Indemnified Claim on
or before the eighth (8th) anniversary of Closing, Purchaser
agrees to pay Seller within ninety (90) days thereafter as an
addition to the Purchase Price an amount equal to ninety
percent (90%) of the claims reserves for such Indemnified
Claim posted as of Closing, plus any amount subsequently added
thereto under Subsection 8.3(b)(ii)(2), plus interest earnings
accrued thereon since Closing. Notwithstanding this requisite
for payment, the Letter of Credit will not be released sooner
than ten (10) years after Closing, such release then at the
reasonable discretion of Purchaser. If, at the end of that
ten (10) year period, no claims payments have been made with
respect to an Indemnified Claim, Purchaser agrees to pay
Seller the remaining ten percent (10%) of the claims reserve
posted as of Closing, as it may have been increased under
Subsection 8(b)(ii)(2), plus accrued interest.
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(d) If and when a loss or claims payment is made which is a final and
complete release of all liability for that particular block of
business or matter in dispute or such liability is otherwise
finally and fully released, Seller shall be entitled to reduce
the principal amount of the Letter of Credit by the following
amounts:
(i) for the Reinsurance Company of Hanover block,
$2,000,000.00;
(ii) for the Aviation of America claim, $4,700,000.00;
(iii) for the Arizona (AMS) claim, $3,300,000.00.
(e) Purchaser shall have the ultimate decision-making authority as to
the adjustment and payment of such Indemnified Claims.
However, David Mills, Attorney at Law, or his successors shall
be retained as a consultant by Company for the purpose of
administering and adjusting any payments or losses due and
supervising the defense of claims made pursuant to the
Engagement Letter attached as Exhibit 8.3 hereto and Seller's
indemnification obligations under this Section 8.3 and under
Sections 8.1(b) and (c) are conditioned upon Purchaser's
compliance with the provisions of the Engagement Letter.
Purchaser shall execute and deliver the Engagement Letter at
the Closing and Seller shall cause Mills to execute and
deliver the Engagement Letter at the Closing. Company will
delegate loss and claims settlement authority to Mills for the
potential losses and claims covered by Seller's indemnity as
to the Indemnified Claims under Section 8.3 up to the limit
represented by the loss and claims reserves held by Company
(including interest accrued thereon) plus the remaining
principal balance of the Letter of Credit and, following the
exhaustion of the reserves and Letter of Credit, any
additional
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amount which Seller pays or is paid on Seller's behalf.
Seller agrees that the amount of any settlement as to the
Indemnified Claims negotiated by Mills plus all consultant
fees, loss adjustment and legal expenses incurred in
connection therewith will not exceed that claims settlement
authority. Any such claims settlements or loss payments shall
be subject to the final review and approval of Company, which
approval shall not be unreasonably withheld. If Mills is able
to negotiate or otherwise obtain settlements of such an
Indemnified Claim such that, in the aggregate, there is a
balance remaining on Company's books in the reserves
established for such an Indemnified Claim (including interest
thereon), Purchaser agrees to pay Seller, as additional
purchase price, an amount equal to that remaining balance.
Such payment shall only become due upon such an Indemnified
Claim being finally and fully released, with evidence thereof
being submitted to Company. Purchaser shall have ninety (90)
days after submission of such evidence in which to make said
payment to Seller.
(f) In lieu of the indemnification provided by Seller herein and if
Seller so requests, Purchaser agrees that it will cause
Company to reinsure the Indemnified Claims or block of
business so long as the reinsurer and the reinsurance treaty
are acceptable to Purchaser in its reasonable discretion.
(g) Purchaser agrees to give Seller notice of any requirement to post
additional reserves for an Indemnified Claim, or any written
communication requesting the same from a Governmental Entity,
when Company is notified of such requirement or written
communication.
(h) This Section 8.3 shall survive the Closing indefinitely.
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(i) The amount of the Letter of Credit shall be reduced to the extent
that the reserve for an Indemnified Claim is increased by the
Company from the amount included in the Company's Statutory
Insurance Statement dated September 30, 1997, and the amount
of the Letter of Credit attributable to the Indemnified Claim
set forth in Section 8.3(d) shall be reduced to the same
extent.
8.4 BASKET AND CAP; EXCLUSIVITY OF REMEDY; CLAIMS PROCEDURES.
(a) Notwithstanding anything to the contrary in this Agreement, the
Seller shall not be liable under Section 8.1(a) unless the
aggregate of all Damages (excluding the Indemnified Claims set
forth in Section 8.3) incurred by the Purchaser and the other
Persons indemnified under such subsection exceeds Fifty
Thousand Dollars ($50,000.00) and then only to the extent of
such excess. Notwithstanding anything to the contrary herein,
Seller shall not be liable under Section 8.1 or any other
provision of this Agreement or otherwise with respect to any
Damages arising or resulting from claims or losses incurred
but not reported to Company under any reinsurance treaty or
reinsurance obligation of Company, except in any instance
involving fraud or willful misconduct on the part of Seller or
any current director or officer of Company.
(b) Except for claims relating to the Indemnified Claims, the
aggregate maximum liability of Seller for all claims of
indemnification under Section 8.1(a) and of Purchaser for all
claims of indemnification under Section 8.2 shall be one
hundred five percent (105%) of the Purchase Price paid to
Seller by Purchaser pursuant to Sections 1.3 and 1.4.
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(c) Except as to fraud or willful misconduct, the provisions of
Sections 8.1(a) and 8.4 as to Purchaser and Sections 8.2 as to
Seller shall be the sole and exclusive remedy for Damages
arising out of, resulting from or incurred in connection with
any inaccuracy, failure or breach of the respective party's
representations, warranties, covenants or agreements contained
herein or in any Schedule, Exhibit, instrument or document
delivered pursuant to or in connection with this Agreement.
(d) In the case of any claim for indemnification under Sections 8.1
or 8.2 arising from a claim of a third party (other than any
of the Indemnified Claims set forth in Section 8.3) (hereafter
"Third Party Claim"), an indemnified party shall give prompt
written notice to the indemnifying party of any claim or
demand of which such indemnified party has knowledge and as to
which it may request indemnification hereunder. The
indemnifying party shall have the right to defend and direct
the defense against any such Third Party Claim, in its name or
in the name of the indemnified party, as the case may be, at
the expense of the indemnifying party, and with counsel
selected by the indemnifying party, subject to the consent of
the indemnified party which shall not be unreasonably
withheld. Notwithstanding anything in this Agreement to the
contrary, the indemnified party shall, at the expense of the
indemnifying party, cooperate with the indemnifying party and
keep the indemnifying party fully informed in the defense of
such Third Party Claim. The indemnified party shall have the
right to participate in the defense of any Third Party Claim
with counsel employed at its own expense. If the indemnifying
party does exercise its right to assume the defense of a Third
Party Claim, then the indemnifying party shall have no
indemnification obligations with respect to any Third Party
Claim which shall be settled by the indemnified party without
the prior written consent of the indemnifying party, which
consent shall not be unreasonably withheld.
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(e) In the event that an indemnified party determines that it has a
claim for Damages against an indemnifying party under Section
8.1 or 8.2 (other than as a result of a Third Party Claim),
the indemnified party shall give prompt written notice thereof
to the indemnifying party, specifying the amount of such claim
and any relevant facts and circumstances relating thereto.
The indemnified party shall provide the indemnifying party
with reasonable access to its and its affiliates' books and
records for the purpose of allowing the indemnifying party a
reasonable opportunity to verify any such claim for Damages.
The indemnified party and the indemnifying party shall
negotiate in good faith regarding the resolution of any
disputed claims for Damages.
8.5 SELLER RETENTION. In order to provide comfort to Purchaser that Seller
will have assets available if Purchaser were to be entitled to
indemnification under Section 8.1 or with respect to the Aviation
of America claim ("AOA Claim"), Seller agrees to retain eight
million dollars ($8,000,000) of the Purchase Price or Stock
Redemption proceeds to be held pursuant to this Section 8.5 until
the later of the end of the Survival Period or the date on which
the AOA Claim is finally and completely settled or satisfied.
Seller shall be free to distribute to its partners all of its other
assets at any time and from time to time on or after the Closing
Date. Seller shall be entitled to invest the retained sum (and the
proceed thereof) in such manner as it determines in its sole
discretion The $8,000,000 amount shall be replenished to the
extent it is reduced by net investment losses or expenses and costs
associated with the continued existence of the Seller after the
Closing or Seller's defense of any claims or the exercise of its
rights hereunder. No replenishment shall be required in the case
of payments made therefrom to satisfy indemnification claims or
other claims of Purchaser or the Company. Subject to the
replenishment requirements set forth above, Seller shall be free to
distribute any net investment income or gain earned or accrued
after the Closing to any or all of its partners as it determines in
its sole
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discretion. Seller's partners shall not be obligated to return any
amount distributed to them in conformance with the provisions of
this Section 8.5.
8.6 MILLS GUARANTY. Seller shall cause Mills to execute and
deliver at the Closing a Guaranty in the form of Exhibit 8.6
hereto.
9.
TERMINATION AND ABANDONMENT
9.1 METHODS OF TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time
prior to the Closing:
(a) by the mutual written consent of Seller and Purchaser;
(b) by Purchaser, if all of the conditions set forth in Section 6 of
this Agreement shall not have been satisfied or waived on or
prior to April 30, 1998, unless extended by Seller pursuant to
Section 9.3;
(c) by Seller, if all of the conditions set forth in Section 7 of
this Agreement shall not have been satisfied or waived on or
prior to April 30, 1998, unless extended by Purchaser pursuant
to Section 9.2 hereof;
(d) in accordance with Section 11.2 hereof;
(e) by Purchaser, if any of Seller's representations, warranties or
covenants herein are materially untrue, inaccurate, not
performed, breached or failed to be performed and such breach,
failure or misrepresentation is not cured in all material
respects within five (5) days after Seller receives notice
thereof from Purchaser;
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(f) by Seller, if any of Purchaser's representations, warranties or
covenants herein are materially untrue, inaccurate, not
performed, breached or failed to be performed, and such
breach, failure or misrepresentation is not cured in all
material respects within five (5) days after Purchaser
receives notice thereof from Seller; or
(g) by Seller or Purchaser, if the Delaware Department of Insurance
does not approve the Stock Redemption as contemplated under
Section 1.3(c) and referenced in Section 4.5;
provided, that no party shall have the right to terminate this
Agreement unilaterally pursuant to Section 9.1(b), or 9.1(c),
9.1(e) or 9.1(f) if the failure to consummate the transactions
contemplated hereby shall be primarily attributable to the party
seeking such unilateral termination or to any affiliate of such
party.
9.2 EXTENSION BY PURCHASER. Purchaser shall have the unilateral right to
extend this Agreement for an additional period of time, not to
exceed thirty (30) days, if Seller exercises its right to terminate
under Section 9.1(c) hereof, on the following conditions:
(a) In the event the Closing has not occurred due to lack of approval
of this transaction by any Governmental Entity which is not
the result of any act or omission on the part of Purchaser; or
(b) In the event the Closing has not occurred due to the necessity to
complete essentially clerical, administrative, legal or other
similar functions related to the Closing which are not based
upon substantive matters pertaining to the rights of the
parties hereto and such extension shall not extend beyond the
time needed to complete such functions; but
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(c) Such extension shall not go beyond May 15, 1998.
9.3 EXTENSION BY SELLER. Seller shall have the unilateral right to extend
this Agreement for an additional period of time, not to exceed
thirty (30) days, if Purchaser exercises its right to terminate
under Section 9.1(a), on the following conditions:
(a) In the event the Closing has not occurred due to lack of approval
of this transaction by any Governmental Entity which is not
the result of any act or omission on the part of Seller; or
(b) In the event the Closing has not occurred due to the necessity to
complete essentially clerical, administrative, legal or other
similar functions related to the Closing which are not based
on substantive matters pertaining to the rights of the parties
hereto, and such an extension shall not extend beyond the time
needed to complete such functions; but
(c) Such extension shall not go beyond May 15, 1998.
9.4 EFFECT OF TERMINATION. In the event of termination and abandonment of
this Agreement pursuant to Section 9.1 hereof, written notice
thereof shall forthwith be given to the other party, and this
Agreement shall terminate and the transactions contemplated hereby
shall be abandoned without further action by Seller or Purchaser.
In the event of termination of this Agreement as provided in
Section 9.1, this Agreement shall become void and there shall be no
liability or obligation on the part of Seller or Purchaser, except
as set forth in Sections 11.1, 11.2, 11.4 and 11.5 and except to
the extent that such termination results from the willful breach or
violation by a party hereto of any of its representations,
warranties, covenants or agreements set forth herein.
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10.
COVENANTS AND AGREEMENTS
10.1 PRICE ADJUSTMENT. For purposes of computing the Purchase Price, Seller
and Purchaser hereby agree to the adjustment with respect to the
disability reserves set forth on Schedule 1.3 hereto.
10.2 SCHEDULE UPDATES. At any time prior to five (5) business days
preceding the Closing, Seller shall have the right to update or
supplement the Schedules to this Agreement without the consent or
approval of Purchaser; provided that, if the disclosure in the
updated or supplemented Schedules represents a material change from
the matters previously disclosed in such Schedules (after giving
effect to any previous updates or supplements) or represents
previously undisclosed matters that, in Purchaser's reasonable
discretion, are material to the value herein assigned to the
Company, Purchaser shall have the right to terminate this Agreement
by sending written notice to Seller of its election to terminate
within five (5) business days following receipt by Purchaser of
such updated or supplemented Schedules. If Purchaser fails to
exercise this termination right, Purchaser shall be deemed to have
waived its right to terminate as provided in this Section 10.2 or
to object to such updated or supplemented Schedules, which
thereafter shall be deemed to have cured any misrepresentation or
breach of warranty that otherwise might have existed hereunder
except for the disclosure of any development or change in such
updated or supplemented Schedules.
10.3 DELAWARE APPROVAL. With respect to the approval of the Stock
Redemption by the Delaware Department of Insurance ("Delaware
Department"), Purchaser shall prepare or cause to be prepared at
its expense the application, including the actuarial reports and
analysis contemplated to be included therewith, and any supplements
or additions thereto which may be requested by the Department,
subject to the Seller's consent to all
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submissions, which consent shall not be unreasonably withheld.
Purchaser shall make every best effort to have such application
ready for submission by February 10, 1998 and in any event shall
have such application ready by February 17, 1998. Seller and
Purchaser shall jointly contact and interact with the Department
concerning the prosecution of the application for approval of the
Stock Redemption. Seller and Purchaser will keep each other
advised of all material developments in the prosecution of such
application and each shall cause its employees, agents,
consultants, accountants, attorneys, and advisers to reasonably
assist and cooperate in securing such approval.
11.
MISCELLANEOUS PROVISIONS
11.1 SURVIVAL. The respective representations, warranties, covenants,
agreements and indemnification obligations of each of the parties
to this Agreement shall survive the Closing Date and the
consummation of the transactions contemplated by this Agreement for
a period of three (3) years from and after the Closing Date herein
the Survival Period), except for the provisions of Section 8.3
which continue after Closing as provided therein and except for
Seller's obligations for Taxes arising under Sections 2.11, 8.1 and
8.4, which obligations shall survive Closing for a period through
and including one (1) year following the expiration of the relevant
period of limitations applicable to the related Tax. In the event
of a breach of any of such representations, warranties, covenants
or agreements, the party to whom such representations, warranties,
covenants or agreements have been made shall have all rights and
remedies for such breach available to it under the provisions of
this Agreement or otherwise, whether at law or in equity,
regardless of any investigation made by or on behalf of such party
on or before the Closing Date.
11.2 PUBLICITY AND NON-DISCLOSURE. Prior to the Closing, neither party
shall issue any press release or other announcement or otherwise
solicit publicity with respect to this
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Agreement or the transactions contemplated hereby without the
consent of the other party hereto. In the event of the violation
of this Section 11.2 by a party hereto, the other party shall have
the right to immediately terminate the Agreement.
11.3 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of,
and be binding upon, the parties hereto and their respective
successors, heirs, representatives and assigns, as the case may be;
provided, however, that no party shall assign or delegate this
Agreement or any of the rights or obligations created hereunder
without the prior written consent of the other party, except that
at any time prior to the filing of the application with the
Delaware Department of Insurance, Purchaser may assign all of its
rights and obligations hereunder to Memorial Service Life Insurance
Company, an insurer affiliate, without the necessity of obtaining
Seller's approval provided that the assignee agrees to comply with
and be bound by all of the terms and conditions of this Agreement
and assume all of Purchaser's obligations and liabilities hereunder
pursuant to an agreement satisfactory to Seller. Except as set
forth in this Section 11.3, nothing in this Agreement shall confer
upon any Person not a party to this Agreement, or the legal
representatives of such Person any rights or remedies of any nature
or kind whatsoever under or by reason of this Agreement.
11.4 BROKERS AND FINDERS. Seller represents and warrants that it has not
engaged any broker or finder in connection with the transactions
contemplated by this Agreement. Purchaser represents and warrants
that Purchaser has engaged a broker or finder in connection with
the transactions contemplated by this Agreement and will pay a fee
thereto arising out of this transaction. Purchaser agrees to
indemnify and hold Seller harmless from any liability for the
payment of such fee.
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11.5 EXPENSES. Except as otherwise expressly provided in this Agreement,
the parties hereto shall bear their respective expenses incurred in
connection with the preparation, execution and performance of this
Agreement and the transactions contemplated hereby, including,
without limitation, all fees and expenses of agents,
representatives, counsel and accountants.
11.6 NOTICES. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been given
or made, if delivered personally or transmitted by telex, telecopy
or telegram, on the date so delivered or transmitted, if sent by
Federal Express or other reputable national overnight carrier, on
the next business day after the date so sent, or if mailed by
registered or certified mail (postage prepaid, return receipt
requested), on the fifth business day after the date so mailed, to
the parties at the following addresses:
(a) if to Purchaser, to: Lincoln Memorial Life Insurance Company
P.O. Box 160163
Austin, Texas 78746
Attn: Nick Powling
Fax: (512) 328-0072
with a copy to: Roan & Autrey, P.C.
710 First State Bank Building
400 West Fifteenth Street
Austin, Texas 78701-1647
Attn: Forrest Roan
Fax: (512) 469-0474
(b) if to Seller, to: NRG Acquisition Partners, L.P.
c/o David W. Mills
1205 Pacific Avenue
Suite 203, 2nd Floor
Santa Cruz, California 95060
Fax: (408) 458-1421
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with a copy to: Lowenstein Sandler, P.C.
65 Livingston Avenue
Roseland, New Jersey 07068-1791
Attn: Allen Levithan
Fax: (973) 597-2400
or to such other persons or at such other addresses as shall be
furnished by any party by like notice to the other, and such
notice or communication shall be deemed to have been given or
made as of the date so delivered or transmitted, on the next
business day after the date so sent by overnight courier or on
the fifth business day after the date so mailed.
11.7 ENTIRE AGREEMENT. This Agreement, together with the Schedules and
Exhibits attached hereto, represents the entire agreement and
understanding of the parties hereto with reference to the
transactions set forth herein, and no representations, warranties
or covenants have been made in connection with this Agreement,
either express or implied, other than those expressly set forth
herein, in the Schedules or in the certificates, agreements and
other documents delivered in connection with the transactions
contemplated hereby. This Agreement supersedes all prior
negotiations, discussions, correspondence, communications,
understandings and agreements between the parties relating to the
subject matter of this Agreement and all prior drafts of this
Agreement, all of which are merged into this Agreement.
11.8 WAIVERS, AMENDMENTS AND REMEDIES. This Agreement may be amended,
superseded, cancelled, renewed or extended, and the terms hereof
may be waived, only by a written instrument signed by Seller and
Purchaser or, in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver
thereof; nor shall any waiver on the part of any party of any such
right, power or privilege, nor any single or partial exercise of
any such right, power or privilege, preclude any further exercise
thereof or the exercise of any other such right, power or
privilege.
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11.9 SECTION HEADINGS. The Section headings contained in this Agreement are
solely for convenience of reference and shall not affect the
meaning or interpretation of this Agreement or of any term or
provision hereof.
11.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of
which together shall be considered one and the same agreement.
11.11 LITIGATION ASSISTANCE. Seller agrees from and after the Closing Date
to cooperate with Purchaser and the Company, at Company's expense
except for Indemnified Claims, with respect to any action, suit,
proceeding or investigation pending or threatened against the
Company arising out of events occurring prior to the Closing Date
and to the extent Seller has any material information concerning
such matter which is not otherwise reasonably available to the
Company or Purchaser.
11.12 GOVERNING LAW. This Agreement is made in and shall be governed by and
construed in accordance with the laws of the State of Texas without
giving effect to the principles of conflicts of law thereof.
11.13 EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached hereto are
a part of this Agreement as if fully set forth herein. All
references herein to Sections, clauses, Exhibits and Schedules
shall be deemed references to such parts of this Agreement, unless
the context shall otherwise require. Any description or disclosure
set forth in any Schedule hereto shall be deemed incorporated in
all other Schedules hereto to the extent applicable.
-57-
<PAGE> 62
11.14 MISCELLANEOUS UNDERTAKINGS. From the date of this Agreement until the
earlier of (i) the Closing or (ii) the termination of this
Agreement, the Seller agrees that it will not, directly or through
any representative, solicit, engage in any discussions relating to,
or accept any other offers for the acquisition or other disposition
of Company.
12.
TAX MATTERS
12.1 CERTAIN DEFINED TERMS. For purposes of this Agreement: (a)
"Pre-acquisition Periods" means all periods (whether or not they
conclude with the end of a taxable year or taxable period) ending
on or before the Computation Date, (b) "Post-acquisition Periods"
means all periods (whether or not they commence with the beginning
of a taxable year or taxable period) beginning the day after the
Computation Date, (c) "Period" means both a pre-acquisition period
and post-acquisition period, and (d) the "Affiliated Group" of any
corporation is the "affiliated group" of corporations (as defined
in Section 1504(a) of the Code) that includes that corporation.
12.2 EXISTING AGREEMENTS AND OTHER MATTERS. At the Closing Date, any Tax
sharing agreement to which the Company is a party (if any) shall be
terminated, and the Company shall have no further obligations under
any Tax sharing agreement.
12.3 TRANSACTION TAXES. All sales, use, transfer, real property gains,
stamp, conveyance, and value added Taxes, duties, excises or
government charges with respect to the transactions contemplated by
this Agreement shall be borne by Purchaser. Seller and Purchaser
shall cooperate with each other in order to minimize the payments
of Taxes contemplated by this Section.
-58-
<PAGE> 63
12.4 CONTESTS. For purposes of this Agreement, a "Contest" is any audit,
court proceeding or other dispute with respect to any Tax matter
that affects the Company. Unless the Purchaser has previously
received written notice from the Seller of the existence of such
Contest, the Purchaser shall give written notice to the Seller of
the existence of any Contest relating to a tax matter that is the
Seller's responsibility under Sections 8.1 and 8.4 within ten days
from the receipt by the Purchaser of any written notice of such
Contest. Unless the Seller has previously received written notice
from the Purchaser of the existence of such Contest, the Seller
shall give written notice to the Purchaser of the existence of any
Contest relating to a tax matter for which the Purchaser has
responsibility within ten days from the receipt by the Seller of
any written notice of such Contest. The Purchaser, on the one
hand, and the Seller, on the other, agree, in each case at no cost
to the other party, to cooperate with the other and the other's
representatives in a prompt and timely manner in connection with
any Contest. Such cooperation shall include, but not be limited
to, making available to the other party, during normal business
hours, all books, records, returns, documents, files, other
information (including without limitation working papers and
schedules), officers or employees (without substantial interruption
of employment) or other relevant information necessary or useful in
connection with any Contest requiring any such books, records and
files. The Seller shall, at its election, have the right to
represent the Company's interests in any Contest relating to a tax
matter arising in a taxable period ending on or before the Closing
Date for which it is responsible under Sections 8.1 and 8.4, to
employ counsel of its choice at its expense, which counsel shall be
reasonably acceptable to the Purchaser, and to control the conduct
of such Contest, including settlement or other disposition thereof;
provided, however, that the Purchaser shall have the right to
consult with the Seller regarding any such Contest that may affect
the Company for any post-acquisition periods ("Purchaser-Involved
Contest") at the Purchaser's own expense, provided further that any
settlement or other disposition of any such Purchaser-Involved
Contest may only be with the consent of Purchaser, which
-59-
<PAGE> 64
consent shall not be unreasonably withheld. With regard to
Contests relating solely to taxable periods ending on or before the
Closing Date and which could have no effect on any Taxes that are
the Purchaser's responsibility under Sections 8.2 and 8.4, the
Seller shall have the exclusive right to decide whether any consent
or waivers to extend applicable statutes of limitations shall be
granted. The Purchaser shall have the right to control the conduct
of any Contest with respect to any tax matter relating to or
arising in a taxable period ending after the Closing Date unless
Purchaser shall claim indemnification under Section 8.1 with regard
to Taxes at issue in such contest, in which event such claim shall
be subject to Section 8.4.
12.5 ACCESS TO RECORDS, COOPERATION. Seller and Purchaser hereby agree to
afford the other party access to its books and records to the
extent necessary to achieve the objectives of this Section 12. The
Seller, the Purchaser, and the Company will cooperate fully with
each other in connection with (a) the allocation of any item of
income, deduction, gain, loss or credit for the taxable year in
which the Closing occurs and (b) the preparation of any Tax return
or report for the taxable period in which the Closing occurs.
12.6 PRICE ADJUSTMENT. All amounts paid pursuant to this Section 12 by one
party to another party (other than interest payments) shall be
treated by such parties as an adjustment to the Purchase Price of
the Shares of the Company, to the extent permitted by law.
12.7 PREPARING AND FILING OF RETURNS. The Company, consistent with past
practices, shall prepare at its expense all Tax returns of the
Company for taxable periods ending on or prior to and remaining
unfiled as of the Closing Date. Company shall deliver to the
Seller for review a draft copy of such Tax returns thirty (30) days
before the due date, including extensions of such returns to the
extent such returns have not been filed as of the execution date of
this Agreement. To the extent related to matters subject to its
-60-
<PAGE> 65
indemnification under Section 8.1, Seller shall be entitled to
comment upon and request reasonable revisions to such delivered Tax
returns, so long as such comments or requests are submitted to
Company by Seller not later than ten (10) days after receipt by
Seller of the delivered Tax Returns. The Company shall prepare and
bear the expense of preparation of all other Tax returns of the
Company.
-61-
<PAGE> 66
IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to be
duly executed as of the 28th day of January, 1998.
SELLER: PURCHASER:
NRG ACQUISITION PARTNERS,
L.P. LINCOLN MEMORIAL LIFE INSURANCE CO.
By: /s/ David W. Mills By: /s/ Nicholas M. Powling
------------------------- -------------------------------
Its: General Partner Its: President
------------------------ -------------------------------
-62-
<PAGE> 1
AMENDED AND RESTATED
AWARD AGREEMENT
---------------
THIS AMENDED AND RESTATED AWARD AGREEMENT (the "Agreement") is entered
into as of the 16th day of September 1997 (hereinafter referred to as the
"Date of Grant"), as amended as of the 6th day of April 1998, by and between
NICHOLAS M. POWLING (the "Optionee") and LINCOLN HERITAGE CORPORATION, a
Texas corporation (f/k/a National Prearranged Services of Texas, Inc., the
"Company").
WHEREAS, the Company is the parent corporation of Memorial Service Life
Insurance Company, Inc., a Texas corporation ("Memorial"), which owns Lincoln
Memorial Life Insurance Company, Inc., a Texas corporation ("Lincoln"); and
WHEREAS, the Optionee's services are important to the future growth of
the Company, Memorial and Lincoln through the acquisition of other insurance
companies and blocks of policies and annuities; and
WHEREAS, pursuant to the terms of that certain Memorandum of
Understanding dated September 16, 1997, by and among the Company, Clif
Mitchell and the Optionee (the "Memorandum of Understanding"), the Company
granted to the Optionee, effective as of January 1, 1997, certain incentives
in the form of stock options to acquire shares of common stock, $0.01 par
value, of the Company (the "Common Stock"); and
WHEREAS, the Company currently is proposing to effect an initial public
offering of the Common Stock and, in connection therewith, has taken certain
corporate actions that affect the terms of the Memorandum of Understanding;
and
WHEREAS, the Company has adopted the Lincoln Heritage Corporation 1998
Long-Term Incentive Plan (the "Plan"), which Plan is incorporated by
reference and made a part of this Agreement; and
WHEREAS, based upon the foregoing, the Company believes that it is in
the best interests of each of the Company and the Optionee to amend and
restate the Memorandum of Understanding.
NOW, THEREFORE, in consideration of the mutual covenants of the parties
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Grant of Option. The Company hereby reconfirms the grant to the
---------------
Optionee the right and option (the "Option") to purchase, on the terms and
conditions hereinafter set forth, up to 400,000 shares (the "Option Shares")
of Common Stock. The purchase price of the Option Shares shall be $3.75 per
share (the "Exercise Price"), subject to adjustments as herein provided.
This Option is intended to be treated as a Non-Qualified Stock Option.
Unless otherwise provided herein, capitalized terms shall have the meanings
ascribed to such terms in the Plan.
2. Vesting. Subject to the provisions of Paragraph 4 hereof, the
-------
Option will vest and become exercisable during the period Optionee is
continuously employed by the Company or any of its subsidiaries, on a
cumulative basis with respect to the Option Shares, as follows: (i) the
Option shall become exercisable with respect to ten percent (10%) of the
Option Shares on April 6, 1998; (ii) the Option
<PAGE> 2
shall become exercisable with respect to an additional ten percent (10%) of
the Option Shares on April 6, 1999; (iii) the Option shall become exercisable
with respect to an additional ten percent (10%) of the Option Shares on April
6, 2000; (iv) the Option shall become exercisable with respect to an
additional ten percent (10%) of the Option Shares on April 6, 2001; and (v)
the Option shall become exercisable with respect to the remaining sixty
percent (60%) of the Option Shares on April 7, 2002. Notwithstanding the
foregoing, all Options granted hereunder shall vest immediately upon a
"Change in Control" of the Company.
3. Exercise of Option.
------------------
(a) Subject to the provisions of Paragraph 4 hereof, the Option
will remain exercisable until the earlier of (i) 30 days following
the termination of the Optionee's employment with the Company or its
subsidiaries by the Company for "cause" (as defined in subparagraph
3(e) hereof and other than by reason of a termination described in
Paragraph 4) or a Deemed Exercise (as defined in Paragraph 4 hereof)
or (ii) the tenth (10th) anniversary of the Date of Grant (the
"Expiration Date"); provided, however, in no event shall this Option
be exercisable after the tenth (10th) anniversary of the Date of
Grant. This Option may be exercised with respect to whole Option
Shares only.
(b) To the extent then vested as set forth in Paragraph 2
above, this Option may be exercised by delivering to the Company at
its principal executive office written notice of intent to so
exercise. Such notice shall specify the number of Option Shares for
which the Option is being exercised and shall be accompanied by
payment in full of the Exercise Price and any applicable taxes or
like requirements pursuant to Paragraph 10 hereof. Such payment
shall be made in cash or by certified check, bank draft or postal or
express money order payable to the order of the Company, or in whole
or in part in Common Stock, valued at Fair Market Value (which Common
Stock must have been owned by the Optionee for at least 180 days).
(c) Notwithstanding any other provision of the Plan or this
Agreement to the contrary, this Option may not be exercised prior to
the completion of any registration or qualification of the shares of
Common Stock to be received upon exercise of the Option under
applicable state and Federal securities or other laws, or under any
ruling or regulation of any governmental body or national securities
exchange that the Committee shall with reasonable discretion
determine to be necessary or advisable.
(d) Upon the valid exercise of the Option as to any of the
shares of Common Stock subject thereto, the Secretary of the Company
or the Company's transfer agent shall issue a certificate in the
Optionee's name for such shares of Common Stock. However, the
Company shall not be liable to the Optionee for damages relating to
any reasonable delays in issuing such certificate to the Optionee,
any loss of the certificate or any mistakes or errors in the issuance
of the certificate itself.
(e) "Cause" shall mean termination based upon: (i) the
Optionee's failure to perform substantially his duties with the
Company (other than as a result of incapacity due to physical or
mental condition) after a demand for substantial performance is
delivered to him by the Chairman of the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board"),
which specifically identifies the manner in which Optionee has not
substantially performed his duties; (ii) the Optionee's willful
commission of misconduct which is injurious to the Company,
monetarily or otherwise; or (iii) the Optionee's material breach of
any provisions of this Agreement. Notwithstanding the foregoing,
the Optionee shall not be deemed to have been
- 2 -
<PAGE> 3
terminated for cause unless and until: (i) he receives written notice
of termination from the Chairman of the Compensation Committee of the
Board; (ii) he is given the opportunity, with counsel, to be heard
before the Board; and (iii) the Board finds, in its good faith
opinion, that the Optionee was guilty of the conduct set forth in
said notice of termination.
4. Exercisability Upon Change in Control of the Company or Death,
--------------------------------------------------------------
Retirement or Termination of Employment. Notwithstanding any other provision
- ---------------------------------------
of this Agreement to the contrary, prior to full vesting, if the Optionee
dies, is permanently disabled or if the Optionee's employment with the
Company and its subsidiaries is terminated by the Company without cause (as
cause is defined in subparagraph 3(e)), the Option shall be deemed to have
become vested on January 1 of each year from January 1, 1998 through January
1, 2002 at the rate shown on the following schedule:
<TABLE>
<CAPTION>
Vesting Date Percentage of Option Shares Vested
------------ ----------------------------------
<S> <C>
January 1, 1998 20%
January 1, 1999 20%
January 1, 2000 20%
January 1, 2001 20%
January 1, 2002 20%
</TABLE>
To the extent so vested prior to the date of termination, this Option shall
continue to be exercisable according to the provisions of Paragraphs 2 and 3
hereof; provided, however, that in the event of a Change in Control during
the term hereof, any outstanding Option held by the Optionee shall become
immediately and fully exercisable or payable according to the following
terms:
(a) The Option shall become immediately and fully exercisable,
and shall remain exercisable until it would otherwise terminate in
accordance with its terms.
(b) During the six-month and seven-day period from and after a
Change in Control (the "Exercise Period"), the Optionee shall have
the right, in lieu of the payment of the Exercise Price per share of
Common Stock being purchased under the Option and by giving notice to
the Committee, to elect to receive cash, within the Exercise Period,
in lieu of exercise thereof (a "Deemed Exercise"), provided that if
the Optionee is a Reporting Person, either (i) the Option grant was
approved by the Board or the Committee or (ii) more than six (6)
months have elapsed from the grant thereof, to surrender all or part
of the Option to the Company and to receive in cash, within 30 days
of such notice, an amount equal to the amount by which the Change in
Control Price (as hereinafter defined) per share of Common Stock on
the date of such election shall exceed the Exercise Price per share
of Common Stock under the Option multiplied by the number of shares
of Common Stock granted under the Option as to which the right
granted under this subparagraph 4(b) shall have been exercised.
Change in Control Price shall mean the higher of (i) (A) for any
period during which Common Stock shall be listed for trading on a
national securities exchange, the highest closing price per share of
Common Stock on such exchange as of the close of such trading day,
(B) for any period during which Common Stock shall not be listed for
trading on a national securities exchange, but when Common Stock
shall be authorized as a Nasdaq National Market security, the highest
price per share as quoted by the Nasdaq, (C) for any period during
which Common Stock shall not be listed for trading on a national
securities exchange or authorized as a Nasdaq National Market
security, but when Common Stock shall be authorized as a Nasdaq
SmallCap Market security, the highest average of the high bid and low
asked prices as reported by the Nasdaq or (D) the highest market
price per share of Common Stock as determined by a
- 3 -
<PAGE> 4
nationally recognized investment banking firm selected by the
Committee in the event neither (A), (B) nor (C) above shall be
applicable, in each case during the 60-day period prior to and ending
on the date of the Change in Control, and (ii) if the Change in
Control is the result of a transaction or series of transactions
described in clauses (i), (iii), (iv) or (v) of the definition of
"Change in Control" in the Plan, the highest price per share of
Common Stock paid in such transaction or series of transactions
(which in the case of paragraph (i) shall be the highest price per
share of Common Stock as reflected in a Schedule 13D by the person
having made the acquisition).
5. No Right to Continued Employment. This Option shall not confer
--------------------------------
on the Optionee any right to continue serving as an employee of the Company
or any subsidiary thereof nor shall this Agreement limit in any way the
Company's or any subsidiary's right to terminate or change the terms of the
Optionee's employment.
6. Transferability. Except as required by law or for transfers to a
---------------
Permitted Transferee, this Option is not transferable or assignable by an
Optionee other than by will or the laws of descent and distribution. Unless
otherwise provided by the Board or the Committee, during the Optionee's
lifetime, the Option shall be exercisable only by the Optionee or a Permitted
Transferee, as the case may be.
7. Death of Optionee. Following the death of the Optionee, this
-----------------
Option shall be exercisable to the extent provided in Paragraph 4 by the
Optionee's executor or administrator, or a Permitted Transferee, as the case
may be, or the person or persons to whom the Optionee's rights under this
Agreement shall pass by will or by the laws of descent and distribution, as
the case may be. Any heir or legatee of the Optionee shall take rights
herein granted subject to the terms and conditions hereof. No such transfer
of this Option to heirs or legatees of the Optionee shall be effective to
bind the Company unless the Company shall have been furnished with written
notice thereof and a copy of such evidence as the Committee may deem
necessary to establish the validity of the transfer and the acceptance by the
transferee or transferees of the terms and conditions hereof.
8. Adjustments Upon Changes in Capitalization, Etc. In the event of
-----------------------------------------------
the payment of a stock dividend, a split-up or consolidation of shares, or
any like capital adjustment of the Company occurring after April 6, 1998,
then to the extent the Option hereunder remains outstanding and unexercised,
there shall be a corresponding adjustment as to the number of shares covered
under this Option, and in the Exercise Price per share, to the end that the
Optionee shall retain a proportionate interest without change in the total
Exercise Price under this Option.
9. Forfeiture of Option. The Optionee shall forfeit all unexercised
--------------------
Options if he competes with the business of the Company or any subsidiary of
the Company, engages in any activity adverse to the best interests of the
Company or any subsidiary of the Company or uses any of the trade secrets or
confidential information of the Company or any subsidiary of the Company. The
non-competition restriction contained in this Paragraph 9 may be waived by the
Company in writing as to delineated services rendered by the Optionee to
certain specified individuals and/or entities.
10. Withholding. The Optionee agrees to make appropriate
-----------
arrangements with the Company for satisfaction of any applicable Federal,
state or local income tax, withholding requirements or like requirements,
including the payment to the Company at the time of exercise of the Option of
all such taxes and requirements.
11. Securities Laws; Legend on Certificates. Upon the acquisition of
---------------------------------------
any shares of Common Stock pursuant to the exercise of this Option, the
Optionee will enter into such written
- 4 -
<PAGE> 5
representations, warranties and agreements as the Company may reasonably
request in order to comply with applicable securities laws or with this
Agreement. The certificates representing the shares of Common Stock
purchased by exercise of this Option may be stamped or otherwise imprinted
with a legend in such form as the Company or its counsel may require with
respect to any applicable restrictions on sale or transfer and the stock
transfer records of the Company may reflect stop-transfer instructions with
respect to such shares of Common Stock.
12. Notices. Any notice necessary under this Agreement shall be
-------
addressed (a) to the Company in care of its Secretary at the principal
executive office of the Company in Austin, Texas, (b) to the Optionee at the
address appearing in the personnel records of the Company for such Optionee
or (c) to either party at such other address as either party hereto may
hereafter designate in writing to the other. A notice shall be deemed to
have been given (i) as of the day when the notice is personally delivered,
(ii) three days after being deposited with the United States mail properly
addressed, (iii) the next day after being delivered during business hours to
said overnight delivery service for next day delivery, properly addressed and
prior to such delivery service's cutoff time for next day delivery, or (iv)
the day when receipt of the telecopy is confirmed, as the case may be.
13. Choice of Law. The interpretation, performance and the
-------------
enforcement of this Agreement shall be governed by the laws of the State of
Texas.
14. Amendment of Agreement. No waiver, modification or amendment of
----------------------
any provision of this Agreement shall be effective unless specifically made
in writing and duly signed by the parties hereto.
15. Severability. If any provision of this Agreement is hold by a
------------
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect to
the greatest extent possible and without being impaired or invalidated in any
way.
16. Amended and Restated Award Agreement. This Agreement shall
------------------------------------
supersede and replace the Memorandum of Understanding, which shall be of no
further force and effect, including, by way of example only and not by way of
limitation, Paragraph 2 of the Memorandum of Understanding, which paragraph
granted to the Optionee the right to "put" the Shares to the Company in
certain circumstances.
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, and each of such counterparts shall, for all purposes, be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
[remainder of this page intentionally left blank]
- 5 -
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the
date and year first above written.
LINCOLN HERITAGE CORPORATION
By:/s/ Clif Mitchell
-----------------------------------
Name: Clif Mitchell
Title: Executive Vice President
OPTIONEE:
/s/ Nicholas M. Powling
--------------------------------------
Nicholas M. Powling
- 6 -
<PAGE> 1
AMENDED AND RESTATED
AWARD AGREEMENT
---------------
THIS AMENDED AND RESTATED AWARD AGREEMENT (the "Agreement") is entered
into as of the 16th day of September 1997 (hereinafter referred to as the
"Date of Grant"), as amended as of the 6th day of April 1998, by and between
CLIF MITCHELL (the "Optionee") and LINCOLN HERITAGE CORPORATION, a Texas
corporation (f/k/a National Prearranged Services of Texas, Inc., the
"Company").
WHEREAS, the Company is the parent corporation of Memorial Service Life
Insurance Company, Inc., a Texas corporation ("Memorial"), which owns Lincoln
Memorial Life Insurance Company, Inc., a Texas corporation ("Lincoln"); and
WHEREAS, the Optionee's services are important to the future growth of
the Company, Memorial and Lincoln through the acquisition of other insurance
companies and blocks of policies and annuities; and
WHEREAS, pursuant to the terms of that certain Memorandum of
Understanding dated September 16, 1997, by and among the Company, Nicholas
Powling and the Optionee (the "Memorandum of Understanding"), the Company
granted to the Optionee, effective as of January 1, 1997, certain incentives
in the form of stock options to acquire shares of common stock, $0.01 par
value, of the Company (the "Common Stock"); and
WHEREAS, the Company currently is proposing to effect an initial public
offering of the Common Stock and, in connection therewith, has taken certain
corporate actions that affect the terms of the Memorandum of Understanding;
and
WHEREAS, the Company has adopted the Lincoln Heritage Corporation 1998
Long-Term Incentive Plan (the "Plan"), which Plan is incorporated by
reference and made a part of this Agreement; and
WHEREAS, based upon the foregoing, the Company believes that it is in
the best interests of each of the Company and the Optionee to amend and
restate the Memorandum of Understanding.
NOW, THEREFORE, in consideration of the mutual covenants of the parties
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Grant of Option. The Company hereby reconfirms the grant to the
---------------
Optionee the right and option (the "Option") to purchase, on the terms and
conditions hereinafter set forth, up to 400,000 shares (the "Option Shares")
of Common Stock. The purchase price of the Option Shares shall be $3.75 per
share (the "Exercise Price"), subject to adjustments as herein provided.
This Option is intended to be treated as a Non-Qualified Stock Option.
Unless otherwise provided herein, capitalized terms shall have the meanings
ascribed to such terms in the Plan.
2. Vesting. Subject to the provisions of Paragraph 4 hereof, the
-------
Option will vest and become exercisable during the period Optionee is
continuously employed by the Company or any of its subsidiaries, on a
cumulative basis with respect to the Option Shares, as follows: (i) the
Option shall become exercisable with respect to ten percent (10%) of the
Option Shares on April 6,
<PAGE> 2
1998; (ii) the Option shall become exercisable with respect to an additional
ten percent (10%) of the Option Shares on April 6, 1999; (iii) the Option
shall become exercisable with respect to an additional ten percent (10%) of
the Option Shares on April 6, 2000; (iv) the Option shall become exercisable
with respect to an additional ten percent (10%) of the Option Shares on April
6, 2001; and (v) the Option shall become exercisable with respect to the
remaining sixty percent (60%) of the Option Shares on April 7, 2002.
Notwithstanding the foregoing, all Options granted hereunder shall vest
immediately upon a "Change in Control" of the Company.
3. Exercise of Option.
------------------
(a) Subject to the provisions of Paragraph 4 hereof, the Option
will remain exercisable until the earlier of (i) 30 days following
the termination of the Optionee's employment with the Company or its
subsidiaries by the Company for "cause" (as defined in subparagraph
3(e) hereof and other than by reason of a termination in Paragraph
4) or a Deemed Exercise (as defined in Paragraph 4 hereof) or (ii)
the tenth (10th) anniversary of the Date of Grant (the "Expiration
Date"); provided, however, in no event shall this Option be
exercisable after the tenth (10th) anniversary of the Date of Grant.
This Option may be exercised with respect to whole Option Shares
only.
(b) To the extent then vested as set forth in Paragraph 2
above, this Option may be exercised by delivering to the Company at
its principal executive office written notice of intent to so
exercise. Such notice shall specify the number of Option Shares for
which the Option is being exercised and shall be accompanied by
payment in full of the Exercise Price and any applicable taxes or
like requirements pursuant to Paragraph 10 hereof. Such payment
shall be made in cash or by certified check, bank draft or postal or
express money order payable to the order of the Company, or in whole
or in part in Common Stock, valued at Fair Market Value (which Common
Stock must have been owned by the Optionee for at least 180 days).
(c) Notwithstanding any other provision of the Plan or this
Agreement to the contrary, this Option may not be exercised prior to
the completion of any registration or qualification of the shares of
Common Stock to be received upon exercise of the Option under
applicable state and Federal securities or other laws, or under any
ruling or regulation of any governmental body or national securities
exchange that the Committee shall with reasonable discretion
determine to be necessary or advisable.
(d) Upon the valid exercise of the Option as to any of the
shares of Common Stock subject thereto, the Secretary of the Company
or the Company's transfer agent shall issue a certificate in the
Optionee's name for such shares of Common Stock. However, the
Company shall not be liable to the Optionee for damages relating to
any reasonable delays in issuing such certificate to the Optionee,
any loss of the certificate or any mistakes or errors in the
issuance of the certificate itself.
(e) "Cause" shall mean termination based upon: (i) the
Optionee's failure to perform substantially his duties with the
Company (other than as a result of incapacity due to physical or
mental condition) after a demand for substantial performance is
delivered to him by the Chairman of the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board"),
which specifically identifies the manner in which Optionee has not
substantially performed his duties; (ii) the Optionee's willful
commission of misconduct which is injurious to the Company,
monetarily or otherwise; or (iii) the Optionee's material breach of
any provisions of this Agreement. Notwithstanding the foregoing,
the Optionee shall not be deemed to have been terminated for cause
unless and until: (i) he receives written notice of termination from
the Chairman of the Compensation Committee of the Board; (ii) he is
given the opportunity, with
- 2 -
<PAGE> 3
counsel, to be heard before the Board; and (iii) the Board finds, in
its good faith opinion, that the Optionee was guilty of the conduct
set forth in said notice of termination.
4. Exercisability Upon Change in Control of the Company or Death,
--------------------------------------------------------------
Retirement or Termination of Employment. Notwithstanding any other provision
- ---------------------------------------
of this Agreement to the contrary, prior to full vesting, if the Optionee
dies, is permanently disabled or if the Optionee's employment with the
Company and its subsidiaries is terminated by the Company without cause (as
cause is defined in subparagraph 3(e)), the Option shall be deemed to have
become vested on January 1 of each year from January 1, 1998 through January
1, 2002 at the rate shown on the following schedule:
<TABLE>
<CAPTION>
Vesting Date Percentage of Option Shares Vested
------------ ----------------------------------
<S> <C>
January 1, 1998 20%
January 1, 1999 20%
January 1, 2000 20%
January 1, 2001 20%
January 1, 2002 20%
</TABLE>
To the extent so vested prior to the date of termination, this Option shall
continue to be exercisable according to the provisions of Paragraphs 2 and 3
hereof; provided, however, that in the event of a Change in Control during
the term hereof, any outstanding Option held by the Optionee shall become
immediately and fully exercisable or payable according to the following
terms:
(a) The Option shall become immediately and fully exercisable,
and shall remain exercisable until it would otherwise terminate in
accordance with its terms.
(b) During the six-month and seven-day period from and after a
Change in Control (the "Exercise Period"), the Optionee shall have
the right, in lieu of the payment of the Exercise Price per share of
Common Stock being purchased under the Option and by giving notice to
the Committee, to elect to receive cash, within the Exercise Period,
in lieu of exercise thereof (a "Deemed Exercise"), provided that if
the Optionee is a Reporting Person, either (i) the Option grant was
approved by the Board or the Committee or (ii) more than six (6)
months have elapsed from the grant thereof, to surrender all or part
of the Option to the Company and to receive in cash, within 30 days
of such notice, an amount equal to the amount by which the Change in
Control Price (as hereinafter defined) per share of Common Stock on
the date of such election shall exceed the Exercise Price per share
of Common Stock under the Option multiplied by the number of shares
of Common Stock granted under the Option as to which the right
granted under this subparagraph 4(b) shall have been exercised.
Change in Control Price shall mean the higher of (i) (A) for any
period during which Common Stock shall be listed for trading on a
national securities exchange, the highest closing price per share of
Common Stock on such exchange as of the close of such trading day,
(B) for any period during which Common Stock shall not be listed for
trading on a national securities exchange, but when Common Stock
shall be authorized as a Nasdaq National Market security, the highest
price per share as quoted by the Nasdaq, (C) for any period during
which Common Stock shall not be listed for trading on a national
securities exchange or authorized as a Nasdaq National Market
security, but when Common Stock shall be authorized as a Nasdaq
SmallCap Market security, the highest average of the high bid and low
asked prices as reported by the Nasdaq or (D) the highest market
price per share of Common Stock as determined by a nationally
recognized investment banking firm selected by the Committee in the
event neither (A), (B) nor (C) above shall be applicable, in each
case during the 60-day period prior to and ending on
- 3 -
<PAGE> 4
the date of the Change in Control, and (ii) if the Change in Control
is the result of a transaction or series of transactions described in
clauses (i), (iii), (iv) or (v) of the definition of "Change in
Control" in the Plan, the highest price per share of Common Stock
paid in such transaction or series of transactions (which in the case
of paragraph (i) shall be the highest price per share of Common Stock
as reflected in a Schedule 13D by the person having made the
acquisition).
5. No Right to Continued Employment. This Option shall not confer
--------------------------------
on the Optionee any right to continue serving as an employee of the Company
or any subsidiary thereof nor shall this Agreement limit in any way the
Company's or any subsidiary's right to terminate or change the terms of the
Optionee's employment.
6. Transferability. Except as required by law or for transfers to a
---------------
Permitted Transferee, this Option is not transferable or assignable by an
Optionee other than by will or the laws of descent and distribution. Unless
otherwise provided by the Board or the Committee, during the Optionee's
lifetime, the Option shall be exercisable only by the Optionee or a Permitted
Transferee, as the case may be.
7. Death of Optionee. Following the death of the Optionee, this
-----------------
Option shall be exercisable to the extent provided in Paragraph 4 by the
Optionee's executor or administrator, or a Permitted Transferee, as the case
may be, or the person or persons to whom the Optionee's rights under this
Agreement shall pass by will or by the laws of descent and distribution, as
the case may be. Any heir or legatee of the Optionee shall take rights
herein granted subject to the terms and conditions hereof. No such transfer
of this Option to heirs or legatees of the Optionee shall be effective to
bind the Company unless the Company shall have been furnished with written
notice thereof and a copy of such evidence as the Committee may deem
necessary to establish the validity of the transfer and the acceptance by the
transferee or transferees of the terms and conditions hereof.
8. Adjustments Upon Changes in Capitalization, Etc. In the event of
-----------------------------------------------
the payment of a stock dividend, a split-up or consolidation of shares, or
any like capital adjustment of the Company occurring after April 6, 1998,
then to the extent the Option hereunder remains outstanding and unexercised,
there shall be a corresponding adjustment as to the number of shares covered
under this Option, and in the Exercise Price per share, to the end that the
Optionee shall retain a proportionate interest without change in the total
Exercise Price under this Option.
9. Forfeiture of Option. The Optionee shall forfeit all unexercised
--------------------
Options if he competes with the business of the Company or any subsidiary of
the Company, engages in any activity adverse to the best interests of the
Company or any subsidiary of the Company or uses any of the trade secrets or
confidential information of the Company or any subsidiary of the Company. The
non-competition restriction contained in this Paragraph 9 may be waived by the
Company in writing as to delineated services rendered by the Optionee to
certain specified individuals and/or entities.
10. Withholding. The Optionee agrees to make appropriate
-----------
arrangements with the Company for satisfaction of any applicable Federal,
state or local income tax, withholding requirements or like requirements,
including the payment to the Company at the time of exercise of the Option of
all such taxes and requirements.
11. Securities Laws; Legend on Certificates. Upon the acquisition of
---------------------------------------
any shares of Common Stock pursuant to the exercise of this Option, the
Optionee will enter into such written representations, warranties and
agreements as the Company may reasonably request in order to comply with
applicable securities laws or with this Agreement. The certificates
representing the shares of Common
- 4 -
<PAGE> 5
Stock purchased by exercise of this Option may be stamped or otherwise
imprinted with a legend in such form as the Company or its counsel may
require with respect to any applicable restrictions on sale or transfer and
the stock transfer records of the Company may reflect stop-transfer
instructions with respect to such shares of Common Stock.
12. Notices. Any notice necessary under this Agreement shall be
-------
addressed (a) to the Company in care of its Secretary at the principal
executive office of the Company in Austin, Texas, (b) to the Optionee at the
address appearing in the personnel records of the Company for such Optionee
or (c) to either party at such other address as either party hereto may
hereafter designate in writing to the other. A notice shall be deemed to
have been given (i) as of the day when the notice is personally delivered,
(ii) three days after being deposited with the United States mail properly
addressed, (iii) the next day after being delivered during business hours to
said overnight delivery service for next day delivery, properly addressed and
prior to such delivery service's cutoff time for next day delivery, or (iv)
the day when receipt of the telecopy is confirmed, as the case may be.
13. Choice of Law. The interpretation, performance and the
-------------
enforcement of this Agreement shall be governed by the laws of the State of
Texas.
14. Amendment of Agreement. No waiver, modification or amendment of
----------------------
any provision of this Agreement shall be effective unless specifically made
in writing and duly signed by the parties hereto.
15. Severability. If any provision of this Agreement is hold by a
------------
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect to
the greatest extent possible and without being impaired or invalidated in any
way.
16. Amended and Restated Award Agreement. This Agreement shall
------------------------------------
supersede and replace the Memorandum of Understanding, which shall be of no
further force and effect, including, by way of example only and not by way of
limitation, Paragraph 2 of the Memorandum of Understanding, which paragraph
granted to the Optionee the right to "put" the Shares to the Company in
certain circumstances.
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, and each of such counterparts shall, for all purposes, be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
[remainder of this page intentionally left blank]
- 5 -
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the
date and year first above written.
LINCOLN HERITAGE CORPORATION
By:/s/ Nicholas Powling
-----------------------------------------------
Name: Nicholas Powling
Title: President and Chief Executive Officer
OPTIONEE:
/s/ Clif Mitchell
--------------------------------------------------
Clif Mitchell
- 6 -
<PAGE> 1
Exhibit 10.6
COST SHARING AGREEMENT
This Agreement is made by and between Memorial Service Life Insurance Company
(hereinafter referred to as "MSLIC"), Lincoln Memorial Life Insurance Company
(hereinafter referred to as "LMLIC") and National Prearranged Services, Inc.
(hereinafter referred to as
"NPS").
WHEREAS, the administrative operations of MSLIC, LMLIC and NPS at times
include the same services, and
WHEREAS, the costs of providing such operations may be reduced by combining
efforts and jointly contracting for such services,
THEREFORE, in consideration of the mutual covenants and agreements,
hereinafter set forth, the parties hereby agree as follows:
1. MSLIC may agree to furnish, either directly or through third-parties
engaged by such party, subject to reimbursement by the other parties as
provided in paragraph 2, all or such part of the following services:
(a) Actuarial, accounting, legal, underwriting, claim and policy
administration services, comprehensive investment services (including
mortgage loan and real estate investment services and security investment
services), electronic data processing, printing and reproduction services,
and such additional services as may be required in the conduct of business;
(b) Office facilities, including related janitorial and utility services;
(c) Furniture, furnishings, and equipment;
(d) Telephone, telegraph and FAX facilities;
(e) Normal mail service, including postage, and normal messenger services;
(f) Record storage facilities; and
(g) Other services and privileges for employees, and insurance coverage
such as employee group insurance, general liability and workers'
compensation.
2. The parties not providing such services (the "non-contracting parties")
agree to reimburse the party providing such services (the "contracting
party") monthly for the cost of the services and facilities provided
hereunder, the amount of such reimbursement to be determined on one or more
of the following bases:
(a) the actual cost attributable to the non-contracting parties' use of the
services rendered; or
(b) the proportionate percentage of the cost of services provided based
upon time spent by the contracting party's personnel on the non-contracting
parties' activities; or
<PAGE> 2
(c) unit rates for specific services or functions which are developed
through combinations of one or more of the cost bases described in items (a)
and (b), above.
Settlement of any amounts owed by any party shall be paid within 15 days of
written notification of the amount owed.
3. Annually the board of directors of each party shall agree on the bases
for determining the reimbursement method and shall set such method for the
following year. Should circumstances warrant, such bases may be reviewed and
changed more frequently than annually if all parties so agree.
4. The basis for reimbursement for the calendar year 1997 is attached to
this agreement.
5. It is understood and agreed that all charges to the non-contracting
parties for services provided under this Agreement shall be based upon the
contracting party's actual costs without any allowance or margin for profit
to the contracting party.
6. This Agreement shall become effective as of January 1, 1997, and shall
continue in effect until terminated by either party upon Fifteen (15) days
prior written notice.
EXECUTED on the dates shown opposite the signatures of the duly authorized
officers of the respective parties hereto.
MEMORIAL SERVICE LIFE INSURANCE COMPANY
By: /s/ Nicholas Powling 3/31/97
--------------------------------- --------------
Nicholas Powling, President Date
NATIONAL PREARRANGED SERVICES, INC.
By: /s/ Randall Sutton 3/31/97
--------------------------------- ----------------
Randall K Sutton, President Date
LINCOLN MEMORIAL LIFE INSURANCE COMPANY
By: /s/ Nicholas Powling 3/31/97
--------------------------------- ----------------
Nicholas Powling, President Date
<PAGE> 1
Exhibit 21.1
<TABLE>
LIST OF SUBSIDIARIES
<CAPTION>
Corporation State
----------- -----
<S> <C>
Memorial Service Life Insurance Company Texas
Lincoln Memorial Life Insurance Company Texas
Wise & Associates, Inc. Missouri
</TABLE>
<PAGE> 1
Exhibit 23.1
To the Board of Directors of
Lincoln Heritage Corporation:
I consent to the use of my reports included herein and to the reference
to my firm under the heading "Experts" in the Prospectus.
/s/ Roy L. Butler, CPA
April 20, 1998
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 6, 1998, with respect to the financial
statements and schedules of Harbourton Reassurance, Inc. included in the
Registration Statement (Form S-1 No. 33-00000) and related Prospectus of
Lincoln Heritage Corporation for the registration of 1,150,000 shares of its
common stock.
/s/ Ernst & Young LLP
Denver, Colorado
April 17, 1998
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 45,120
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 795
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 118,416
<CASH> 1,625
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 12,555
<TOTAL-ASSETS> 141,603
<POLICY-LOSSES> 129,457
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 689
<POLICY-HOLDER-FUNDS> 304
<NOTES-PAYABLE> 0
0
0
<COMMON> 10
<OTHER-SE> 6,796
<TOTAL-LIABILITY-AND-EQUITY> 141,603
38,044
<INVESTMENT-INCOME> 6,171
<INVESTMENT-GAINS> 2,666
<OTHER-INCOME> 0
<BENEFITS> 30,003
<UNDERWRITING-AMORTIZATION> 10,546
<UNDERWRITING-OTHER> 2,864
<INCOME-PRETAX> 3,468
<INCOME-TAX> 1,004
<INCOME-CONTINUING> 2,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,464
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 51,979
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 58,082
<CASH> 1,838
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 11,150
<TOTAL-ASSETS> 77,408
<POLICY-LOSSES> 71,828
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 781
<POLICY-HOLDER-FUNDS> 212
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 3,046
<TOTAL-LIABILITY-AND-EQUITY> 77,408
33,702
<INVESTMENT-INCOME> 3,711
<INVESTMENT-GAINS> 2,018
<OTHER-INCOME> 0
<BENEFITS> 24,750
<UNDERWRITING-AMORTIZATION> 6,838
<UNDERWRITING-OTHER> 6,520
<INCOME-PRETAX> 1,323
<INCOME-TAX> 283
<INCOME-CONTINUING> 1,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,040
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
CONSENT
I, Paul J. Gallant, hereby consent to be named as a person about to
become a director of Lincoln Heritage Corporation in the Registration
Statement on Form S-1 to which this consent is attached as an exhibit.
/s/ Paul J. Gallant
-------------------------------------
Paul J. Gallant
April 6, 1998
<PAGE> 1
Exhibit 99.2
CONSENT
I, Mark A. Turken, hereby consent to be named as a person about to
become a director of Lincoln Heritage Corporation in the Registration
Statement on Form S-1 to which this consent is attached as an exhibit.
/s/ Mark A. Turken
-------------------------------------
Mark A. Turken
April 6, 1998
