<PAGE> 1
As filed with the Securities and Exchange Commission on June 12, 1998
Registration No. 333-50525
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
LINCOLN HERITAGE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 6311 36-3427454
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
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:
<TABLE>
<S> <C> <C>
THOMAS A. LITZ, ESQ. HOWARD A. WITTNER, ESQ. THOMAS W. HUGHES, ESQ.
THOMPSON COBURN WITTNER, POGER, ROSENBLUM, CARY FERCHILL, ESQ.
ONE MERCANTILE CENTER SPEWAK AND MAYLACK, P.C. WINSTEAD SECHREST & MINICK P.C.
ST. LOUIS, MISSOURI 63101 7700 BONHOMME AVENUE, SUITE 400 100 CONGRESS AVENUE, SUITE 800
(314) 552-6072 ST. LOUIS, MISSOURI 63105 AUSTIN, TEXAS 78701
(314) 552-7000 FAX (314) 862-3535 (512) 370-2844
(314) 862-5741 FAX (512) 370-2841 FAX
</TABLE>
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 SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED<F1> OFFERING PRICE PER SHARE<F2> AGGREGATE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,150,000 $10.00 $11,500,000 $3,393<F3>
==============================================================================================================================
<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.
<F3> The Registrant previously paid $3,393 with the original filing on April
20, 1998.
</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.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION, DATED JUNE 12, 1998
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* 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. *
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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 7 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>
- --------------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS<F1> COMPANY<F2>
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------------
Total<F2><F3> $ $ $
- --------------------------------------------------------------------------------------
<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 $700,000 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. See "Glossary" for the definition of
certain terms used 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 significantly enhance the
profitability of the business acquired. Profitability of an acquired company
can usually be enhanced in several ways, including, but not limited to,
savings by elimination of management and reduction in staff, and savings as a
result of economies of scale through the integration of systems and
administration of an acquired company into the Company. The Company expects
that its acquisition targets will be predominantly similar life insurance
companies and closed blocks of business, all of which utilize the same type of
systems, personnel and management skills as the Company.
A substantial majority of the Company's life insurance premiums has
been derived from the issuance of insurance policies to fund prearranged
funeral contracts sold by 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. A prearranged funeral contract allows customers to
purchase at current prices services that may not be needed for many years.
Under a prearrangement, family members generally are removed from the
planning that would otherwise have been completed at the difficult time of
death. However, by paying for the costs of pre-planning, the client loses
use of any cash paid that could have been invested elsewhere. As of March
31, 1998, 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 and
1998, the Company acquired blocks of life insurance and annuity policies from
Woodmen Accident and Life Company (the "Woodmen Block") and World
Insurance Company (the "World Acquisition"), respectively. 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 estimated total consideration of approximately $11.6
million (the "Harbourton Acquisition"). Pursuant to the agreement, the
actual purchase price will be based upon an adjusted value of stockholder's
equity. 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
3
<PAGE> 5
subject to regulatory approval and will be accounted for under the purchase
method of accounting. As of March 31, 1998, Harbourton reported total assets of
$161.7 million and stockholder's equity of $41.1 million. The Company expects
that the Harbourton Acquisition will be completed in July 1998. Harbourton
reported a net loss for the year ended December 31, 1997 before pro forma
adjustments of $5.4 million, and profit for the quarter ended March 31, 1998 of
$0.3 million. Consideration for the purchase of Harbourton will be paid in
cash, net of an extraordinary dividend of $29 million to be paid by Harbourton
prior to the acquisition. See "Pro Forma Combined Condensed Financial
Information."
--------------------
<TABLE>
THE OFFERING
<S> <C>
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 1,199,750 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 unaudited consolidated balance sheet of the Company as
of March 31, 1998, audited consolidated statements of operations for each of
the three years in the period ended December 31, 1997, unaudited consolidated
statements of operations for each of the two years in the period ended
December 31, 1994 and unaudited consolidated statements of operations for the
three months ended March 31, 1997 and 1998. The pro forma financial
statements give effect to the completed and pending acquisitions described
under "Pro Forma Combined 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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium income $23,154 $24,357 $27,771 $33,702 $38,044 $8,631 $ 7,257
Net investment income
and net realized gains 4,804 3,908 4,514 5,729 8,838 1,258 2,703
Other revenue - - - - - - 130
------- ------- ------- ------- ------- ------ -------
Total revenues 27,958 28,265 32,285 39,431 46,882 9,889 10,090
Benefits incurred<F1> 19,053 19,563 20,775 24,750 30,003 6,885 6,390
Other expenses 7,140 11,848 9,631 13,358 13,411 3,029 3,742
------- ------- ------- ------- ------- ------ -------
Income (loss) before
federal taxes 1,765 (3,146) 1,879 1,323 3,468 (25) (42)
Income taxes (benefit) 340 (539) 400 283 1,004 (3) 10
------- ------- ------- ------- ------- ------ -------
Net income (loss) $ 1,425 $(2,607) $ 1,479 $ 1,040 $ 2,464 $ (22) $ (32)
======= ======= ======= ======= ======= ====== =======
Weighted average
shares outstanding 3,200 3,200 3,200 3,200 3,200 3,200 3,200
Basic earnings (loss) per
share $ .44 $ (.81) $ .46 $ .33 $ .77 $ (.01) $ (.01)
Diluted earnings (loss)
per share .44 (.81) .46 .33 .67 (.01) (.01)
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, 1997 ENDED MARCH 31, 1998
----------------- --------------------
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA (UNAUDITED)<F2>:
Premium income $34,961 $ 7,198
Net investment income and
net realized gains 24,313 4,402
Other revenue 1,900 146
------- -------
Total revenues 61,174 11,746
Benefits incurred<F1> 45,001 7,665
Other expenses 20,396 4,850
------- -------
Loss before
federal taxes (4,223) (769)
Income tax (expense) benefit (1,108) 266
------- -------
Net loss $(5,331) $ (503)
======= =======
Weighted average shares
outstanding 3,200 3,200
Loss per share
Basic $ (1.67) $ (.16)
Diluted (1.67) (.16)
(footnotes on following page)
5
<PAGE> 7
<CAPTION>
MARCH 31, 1998
-------------------------------------
PRO FORMA
AS
BALANCE SHEET DATA: ACTUAL PRO FORMA<F3> ADJUSTED<F4>
------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Invested assets $109,339 $219,000 $219,000
Total assets 135,947 256,540 263,940
Total policy liabilities 128,660 241,006 241,006
Shareholder's equity 5,149 5,149 12,549
<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 World Acquisition as
if such acquisitions had occurred on January 1, 1997 and 1998,
respectively.
<F3> Gives effect to the Harbourton Acquisition and the World Acquisition as
if such acquisitions had occurred on March 31, 1998. See "Pro Forma
Combined Condensed Financial Information."
<F4> Gives effect to the Harbourton Acquisition and the World Acquisition as
if such acquisitions had occurred on March 31, 1998. 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 $7,400,000.
</TABLE>
--------------------
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.
6
<PAGE> 8
RISK FACTORS
This Prospectus contains certain forward-looking statements concerning
the Company. 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
7
<PAGE> 9
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. Cancellation of policies, which has an immediate positive or neutral
effect on the Company's financials by releasing liabilities equal to or greater
than the cash required to fund those cancellations, would have a long-term
adverse effect by depriving the Company of future income derived from premium
revenues and investment income.
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. Examples of such potential conflicts would be the following:
the amount of commissions to be paid to NPS; the determination of the premium
rates charged NPS on the policies sold by NPS; the determination of the
amount of benefit increases paid on death on policies sold by NPS; and the
determination of the reimbursement method under the cost sharing agreement.
If any of the potential conflict of interest issues were changed from
existing arrangements, the effect on the Company's operations could be
material and adverse. 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. NPS and National Prearranged
Services Agency, Inc. ("NPS Agency"), also an affiliate under common control
with the Company, were paid $11,247,606 and $2,956,131 in sales commissions
during the year ended December 31, 1997 and the three months ended March 31,
1998, respectively. See "Business -- National Prearranged Services" and
"Certain Transactions."
NPS COST SHARING ARRANGEMENT
Effective January 1, 1997, the Company executed a cost sharing
agreement with NPS (an entity controlled by the current shareholder of the
Company) whereby NPS 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 and the three months ended March 31,
1998, $2.7 million and $555,757, respectively, in costs were reimbursed to the
Company by NPS under the terms of the cost sharing agreement. The Company
would have reported an operating loss for 1997 if NPS had not reimbursed these
costs.
Under the terms of the cost sharing arrangement, the board of directors
of each party to the agreement must agree annually on the basis for
determining the reimbursement method. The current shareholder of the Company
generally will be able to elect a majority of the directors and exercise
significant control over the business policies and affairs of the Company
and, in particular, would be able to affect the terms of the cost sharing
agreement.
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
8
<PAGE> 10
December 31, 1991. Examinations of the Company's insurance subsidiaries were
begun during the second quarter of 1998 and will involve a review of the
companies' financials for the 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 limited 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 and the quarter ended March 31,
1998, the Company's lapse ratio on ordinary business was 3.0%, 4.4%, 1.1% and
0.6%, respectively.
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 one depository that are
significantly in excess of Federal Deposit Insurance Corporation coverage. If
this depository was to cease business, the Company would likely lose a
substantial amount of its cash. At March 31, 1998, the Company had
approximately $2.8 million in this depository representing primarily
uncollected deposits not available for sweep in repurchase transactions. The
cash balances of the Company on such date at such institution were maintained
awaiting clearance of the deposited funds. Upon clearance of such funds they
are transferred to a sweep account. As of March 31, 1998, there were no
deposits which served as compensating balances of the Company or any of its
affiliates. Management continuously monitors the solvency of its
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 grade 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
9
<PAGE> 11
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. The Company does not currently have employment
contracts with any of its officers or employees. Similarly, the Company does
not maintain key man insurance on its key employees. 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 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
10
<PAGE> 12
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 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 Rule 144 which sets forth significant restrictions
in the case of shares held by persons deemed to be
11
<PAGE> 13
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.
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 1,199,750 shares
of Common Stock have been granted under the Plan, of which options to
purchase 80,000 shares currently are exercisable (all such options have an
exercise price of $3.75 per share). 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
12
<PAGE> 14
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.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds of this offering to the Company are estimated to be
approximately $7,400,000 (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. None of the proceeds of this offering will be used to
fund the acquisition of Harbourton. Except for the Harbourton Acquisition,
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.
14
<PAGE> 16
DILUTION
As of March 31, 1998, the Company reported a net tangible shareholder's
deficit of $11,957,064, or $3.74 per share of Common Stock. The net tangible
shareholder's deficit of the Company is the aggregate amount of its tangible
assets less its total liabilities. The net tangible shareholder's deficit
per share represents the net tangible shareholder's deficit 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 shareholder's deficit per share would decrease
from $3.74 to $2.21. This represents an immediate decrease in net tangible
shareholder's deficit of $1.53 per share to current shareholders and an
immediate dilution of $11.21 per share to new investors, as illustrated in
the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share $ 9.00
Net tangible shareholder's deficit per share before this offering and
acquisitions $ 3.74
Increase in net tangible shareholder's deficit
per share attributable to acquisitions 1.48
Decrease in net tangible shareholder's deficit
per share attributable to new investors (3.01)
------
Adjusted net tangible shareholder's deficit per share after this offering 2.21
------
Dilution per share to new investors $11.21
======
</TABLE>
The following table sets forth as of March 31, 1998: (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% $ .00
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>
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the: (i) the historical capitalization
of the Company as of March 31, 1998; (ii) the pro forma capitalization of the
Company assuming the Harbourton Acquisition and the World Acquisition had
occurred as of January 1, 1998; 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>
March 31, 1998
-----------------------------------------------------
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> <F5> 32,000 32,000 42,000
Additional paid - in capital 40 40 7,390,040
Net unrealized losses, net of tax (1,085,434) (1,085,434) (1,085,434)
Retained earnings 6,202,646 6,202,646 6,202,646
----------- ----------- -----------
Total shareholder's equity 5,149,252 5,149,252 12,549,252
----------- ----------- -----------
Total capitalization $ 5,149,252 $ 5,149,252 $12,549,252
=========== =========== ===========
<FN>
- -------
<F1> Pro forma to give effect to the Harbourton Acquisition and the World
Acquisition as if they had occurred as of March 31, 1998. See "Pro
Forma Consolidated Condensed Financial Information."
<F2> Gives effect to the Harbourton Acquisition and the World Acquisition as
if such acquisitions had occurred on March 31, 1998. 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 $7,400,000.
<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.
<F5> Adjusted to reflect the 3.2-to-1 stock split (in the form of a stock
dividend) effected by the Company on April 6, 1998.
</TABLE>
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(dollars in thousands, except per share data)
The following historical summary consolidated financial information has
been derived from the unaudited consolidated balance sheet of the Company at
March 31, 1998, 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, unaudited
consolidated statements of operations for each of the two years in the period
ended December 31, 1994 and unaudited consolidated statements of operations
for the three months ended March 31, 1997 and 1998. 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 Combined Condensed
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Premium income $23,154 $24,357 $27,771 $33,702 $38,044<F1> $8,631 $ 7,257
Net investment income and
net realized gains 4,804 3,908 4,514 5,729 8,838<F2> 1,258 2,703
Other revenue - - - - - - 130
------- ------- ------- ------- ------- ------ -------
Total revenues 27,958 28,265 32,285 39,431 46,882 9,889 10,090
Benefits incurred <F3> 19,053 19,563 20,775 24,750 30,003<F4> 6,885 6,390
Other expenses <F5> 7,140 11,848 9,631 13,358 13,411 3,029 3,742
------- ------- ------- ------- ------- ------ -------
Income (loss) before
federal taxes 1,765 (3,146) 1,879 1,323 3,468 (25) (42)
Income taxes benefit
(expense) (340) 539 (400) (283) (1,004) 3 10
------- ------- ------- ------- ------- ------ -------
Net income (loss) $ 1,425 $(2,607) $ 1,479 $ 1,040 $ 2,464 $ (22) (32)
======= ======= ======= ======= ======= ====== =======
Weighted average
shares outstanding 3,200 3,200 3,200 3,200 3,200 3,200 3,200
Earnings (loss) per share:
Basic $ .44 $ (.81) $ .46 $ .33 $ .77 $ (.01) $ (.01)
Diluted .44 (.81) .46 .33 .67 (.01) (.01)
<CAPTION>
December 31,
-------------------------------------------------------- March 31,
1993 1994 1995 1996 1997<F6><F7> 1998
------- ------- ------- ------- ------------ ---------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Invested assets $46,386 $43,302 $54,939 $58,082 $118,416 $109,339
Total assets 57,991 60,779 72,801 77,408 141,603 135,947
Total policy liabilities 51,286 62,391 68,432 73,067 130,450 128,660
Shareholder's equity
(deficit) 4,770 (1,981) 3,568 3,047 6,806 5,149
<FN>
- ----------
<F1> The Company assumed through co-insurance a block of life and annuity
business from Woodmen Accident and Life Company effective September 1,
1997. The Company received $48,025 in cash in exchange for assuming
$50,857 in insurance liabilities. Premiums for the year ended December
31, 1997 included approximately $58 applicable to the Woodmen Block.
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<PAGE> 19
<F2> Investment income for the year ended December 31, 1997 includes
approximately $1,227 for interest earned on the assets purchased with
the cash received in the Woodmen Block.
<F3> 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.
<F4> Benefits incurred for the year ended December 31, 1997 included
approximately $909 in interest paid on policyholder deposits and
increase in future policy benefits associated with the Woodmen Block.
<F5> Financial information for the year ended December 31, 1997 and the
three months ended March 31, 1997 and 1998 are net of expense
reimbursements from NPS in the amount of $2,695, $517 and $555,
respectively.
<F6> Invested and total assets at December 31, 1997 include approximately
$41,657 in assets associated with the Woodmen Block.
<F7> Policy liabilities at December 31, 1997 include approximately $42,048
in liabilities associated with the Woodmen Block.
</TABLE>
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<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS 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 Combined Condensed 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 (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
and the World block of business and entered into a definitive agreement to
acquire Harbourton. See "Pro Forma Combined Condensed Financial
Information."
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1997 and 1998. Premium
income decreased $1.3 million, or 16%, from $8.6 million in the three-month
period ended March 31, 1997 to $7.3 million in the three-month period ended
March 31, 1998 due to higher sales of limited pay policies and fewer single
pay policies compared to the first quarter of 1997.
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<PAGE> 21
Net investment income increased $1.0 million, or 85%, from $1.2 million
in the three-month period ended March 31, 1997 to $2.3 million in the three-
month period ended March 31, 1998. This increase can be attributed to a
higher level of invested assets (primarily resulting from the Woodmen Block)
and a more actively managed investment portfolio. Average invested assets
more than doubled in such three-month period of 1998 as compared to the first
quarter of 1997.
Net realized gains increased $430,000 from $21,000 in the three-month
period ended March 31, 1997 to $451,000 in the three-month period ended March
31, 1998. Gains of $1.2 million were recognized in the three months ended
March 31, 1998 due to the higher levels of invested assets discussed above.
However, these gains were offset by losses of $745,000, including $460,000
recognized for significant declines in the fair market value of certain
investments. The declines in fair market values of these investments followed
public announcements of operating problems of the associated entity.
Benefits decreased $495,000, or 7%, from $6.9 million for the three-month
period ended March 31, 1997 to $6.4 million for the three-month period ended
March 31, 1998 due to higher levels of limited pay policies which resulted in
decreases in future policy benefits, offset by increases in benefits due to an
overall increase of policies in force and interest credited to policyholder
accounts related to the purchase of the Woodmen Block.
Commissions increased $400,000, or 16%, from $2.6 million in the three-
month period ended March 31, 1997 to $3.0 million in the three-month period
ended March 31, 1998 due primarily to an increase in new policies issued in
1998 versus 1997, particularly for limited pay policies.
General expenses net of reimbursements increased $636,000, or 198%,
from $321,000 in the three-month period ended March 31, 1997 to $957,000 in
the three-month period ended March 31, 1998 due primarily to increased policy
administration expenses and general and administration expenses as a result
of increased volume of business from new policies written and the purchase of
the Woodmen Block.
Amortization of cost of policies purchased of $298,000 for the three
months ended March 31, 1998 compared to $0 for the three months ended March
31, 1997, reflecting the purchase of the Woodmen Block.
The decrease in the change in deferred acquisition costs of $594,000
from $43,000 the three-month period ended March 31, 1997 to $637,000 the
three-month period ended March 31, 1998 was due to the capitalization of the
costs of acquiring new business at a higher rate than the amortization of
such costs due to a higher volume of new policies issued, particularly
limited pay policies.
As of December 31, 1997, the Company had recorded a note payable to NPS
in the amount of $22,500 plus $54,265 of accrued interest. Subsequently, the
Company discovered that the note had been previously repaid and reversed the
note and all accrued interest thereon, resulting in other income to the
Company in the amount of $76,765 during the three months ended March 31,
1998.
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. In addition, during
1997, the Company and NPS agreed to retroactively increase premiums charged
on certain policies issued by the Company. Premiums included in revenues for the
years ended December 31, 1996 and 1997 was $428,376 and $339,828, respectively.
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<PAGE> 22
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) 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. 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.
Surrenders decreased from 1996 to 1997 by $5.1 million. This decrease
in surrenders was offset by a corresponding change in the increase in future
policy benefits. Surrenders generally have little impact on current year
operations due to the fact that surrender benefits are fully reserved and as
surrender benefits are paid the reserve for future policy benefits is reduced
by a corresponding amount. The more significant effect on operations occurs
in future years when the Company loses future profits on the business
surrendered.
Other expenses remained relatively unchanged from 1996 to 1997; however,
this was a result of three offsetting factors (i) policy administration and
general expenses increased $1.2 million as a result of the acquisition of the
Woodmen Block, (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 $2.7 million for a portion of its general and
administrative expenses attributable to NPS's business and (iii) commissions
increased $1.2 million due to higher sales levels. The Company, NPS and NPS
Agency are affiliated companies. NPS and NPS Agency were formed earlier than
the Company and, as such, NPS and NPS Agency assisted in the development of the
Company. As the companies grew and with the anticipation of the addition of
outside shareholders, a more formal relationship among the entities became
advisable, which resulted in the development of the cost sharing arrangement.
See Note 12 to the Consolidated Financial Statements of the Company.
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.
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<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries generally generate sufficient cash
receipts from premium collections and investment income to satisfy the
Company's obligations. The Company believes that the diversity of the
investment portfolio of its insurance subsidiaries provides sufficient
liquidity to meet its operating cash requirements.
Assets with a fair value of approximately $3.4 million at March 31,
1998 were on deposit with various state regulatory authorities. Assets with
a fair value of approximately $38.8 million at March 31, 1998 were restricted
as to use for the purchase of the Woodmen Block and other assumed business.
See "Business -- Regulatory Factors."
The Company's insurance subsidiaries are restricted by state insurance
laws as to the amount of dividends that they may pay to the Company without
prior notice to, or in some cases prior approval from, their respective state
insurance departments. These restrictions on dividend distributions are
based on statutory capital and surplus and operating earnings. Statutory
surplus and statutory operating results are determined according to statutes
adopted by each state in which the subsidiaries do business. Statutory
surplus bears no direct relationship to equity as determined under generally
accepted accounting principles. There were no amounts available for
distribution to the Company at March 31, 1998.
On May 15, 1998, the Company acquired all the outstanding stock of
World Service Life Insurance Company of America ("World Service") for
approximately $5.5 million in cash. Effective April 1, 1998, the Company
acquired a block of annuity and life business through co-insurance from World
Insurance Company for approximately $2.8 million in cash. See "Business --
Business Strategy."
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
acquisition of Harbourton. 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.
Changes in the Company's consolidated balance sheet between December
31, 1996, December 31, 1997 and March 31, 1998 reflect growth through
operations, changes in the fair value of actively managed fixed maturity and
equity securities, changes in the investment portfolio mix and the purchase
of the Woodmen Block.
Total investments increased approximately $60.4 million from $58.0
million at December 31, 1996 to $118.4 million at December 31, 1997 primarily
due to investment assets acquired with the purchase of the Woodmen Block of
$45 million, and an increase in policyholder loans to related parties of
$10.7 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 interest rates, the Company
believes they afford comparable risk-adjusted returns to alternative
categories of invested assets. The policy loans are fully secured by the
nonforfeiture values of the policies so that, in the event of default, the
Company would not be adversely affected, except with respect to the future
loss of revenues on the policies cancelled.
Total investments decreased approximately $9.1 million from $118.4
million at December 31, 1997 to $109.3 million at March 31, 1998 due
primarily to increases in death benefits which are typically higher in the
first quarter due to higher mortality experience during the winter months and
increased rates of cancellations of policies associated with the Woodmen
Block. Changes in the separate components of investment assets are due to
the portfolio mix of the Company's investment assets and changes in the fair
value of balances in actively managed fixed maturity and equity securities.
See Note 4 to the Consolidated Financial Statements of the Company.
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<PAGE> 24
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), fixed maturity and equity securities are recorded at estimated fair
value. At March 31, 1998, the carrying value of such investments decreased
by $2.0 million as a result of the SFAS 115 adjustment, compared to an
increase of $800,000 at December 31, 1997.
The decrease in shareholder's equity for the first three months of 1998
reflects the increase in net unrealized appreciation on securities of $1.6
million.
During 1995 and 1996, the Company paid surrender benefits to NPS or the
Trust (as hereinafter defined, see "Certain Transactions") in the amount of
$9.4 million. Upon surrender, NPS purchased new policies for the same insureds
using a portion of the surrendered funds. The net funds received by NPS or
the Trust were used to pay Memorial and Lincoln amounts due from processed
premiums. NPS has committed to the Company to pay all future premiums due on
the blocks of policies that were reissued.
NPS funds a majority of its preneed obligations under the preneed
funeral contracts it sells by the purchase of insurance policies and U.S.
Treasury securities. Such purchase of insurance policies and/or U.S.
Treasury securities occurs immediately after receipt of a preneed contract
payment, and NPS retains only the minimal statutory sum allowed it, or
commission, dependent upon state requirements, to fund its operations. When
the purchaser of an NPS preneed contract dies, the insurance policy and/or
U.S. Treasury securities, fully funds the funeral product or services
purchased by NPS under such preneed contract. Any NPS policyholder loan is
paid off at the death of the preneed customer in question, and insurance
proceeds are remitted to NPS for its use in paying contracted for funeral
services and products.
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 March
31, 1998 was $109.3 million, of which 65.3% 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. A 100
basis point decrease in interest rates would reduce anticipated earnings from
operations for the three months ended March 31, 1998 by approximately
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<PAGE> 25
$237,000, which amount represents the loss of investment income on the
Company's investment portfolio of $109.3 million as of March 31, 1998 due to
the reinvestment of such funds at a lower rate. The effect on the market
value of the portfolio would be to increase the value by approximately
$1,000,000. The reverse effect would result if interest rates increased by
100 basis points.
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 March
31, 1998, the Company had approximately $2.5 million, or less than 3.0% of
its investment portfolio, invested in equity securities.
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
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (Statement No. 128), which is required to be adopted for financial
statements issued for annual or interim periods after December 15, 1997. The
adoption of Statement No. 128 required a change in the presentation of
earnings per share (EPS) to replace primary and fully diluted EPS with a
presentation of basic and diluted EPS and to restate EPS for all periods
presented. The adoption of Statement No. 128 did not have a material impact
on the Company's consolidated financial statements.
In February 1997, the FASB also issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" (Statement No. 129). Statement No. 129 establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. Statement No. 129 continues the previous requirements to disclose
certain information about an entity's capital structure found in APB Opinions
No. 10, "Omnibus Opinion - 1996," and 15, "Earnings per Share," and FASB
Statements of Financial Accounting Standards No. 47, "Disclosure of Long-Term
Obligations," for entities that were subject to the requirements of APB
Opinions 10 and 15 and Statement No. 47 and consolidates them for ease of
retrieval and for greater visibility to non-public entities. Statement No.
129 is effective for financial statements for periods ending after December
15, 1997. The Company experienced no material revision in its disclosures
when Statement No. 129 was adopted.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement No. 130).
Statement No. 130 establishes standards for reporting and display of
24
<PAGE> 26
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. Statement No.
130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for that
financial statement but requires that an entity display an amount
representing total comprehensive income for the period in that financial
statement. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Statement No. 130 had
no impact on the financial condition or results of operations of the Company,
but required changes in the Company's disclosure and presentation
requirements. The principal change was the disclosure of the components of
and total comprehensive income within the Consolidated Statements of
Shareholder's Equity.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (Statement No. 131), "Disclosures About Segments of an
Enterprise and Related Information." Statement No. 131 establishes standards
for disclosures related to business operating segments. The Company
anticipates that Statement No. 131 will have no significant effect on the
disclosures set forth in its consolidated financial statements.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-3 "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments" (SOP 97-3). SOP 97-3
provides guidance for determining when an insurance company or other
enterprise should recognize a liability for guaranty-fund assessments and
guidance for measuring the liability. SOP 97-3 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company
anticipates that the adoption of SOP 97-3 will not have a material effect on
the Company's financial position or results of operations.
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<PAGE> 27
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 Company believes that it will be
able to decrease significantly the administrative expenses of an acquired
business following its acquisition. For the year ended December 31, 1997,
general expenses totaled $4.4 million for the year. By contrast, the World
Service acquisition is of a substantially non-operating company acquired
primarily for its state licenses. No significant savings in expense are
anticipated as a result of this transaction, however, the Company believes
the acquisition of World Service will afford access to markets in 14 additional
states more expeditiously and for a cost lower than that which would be required
if the Company's insurance subsidiaries had obtained licenses themselves. 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.
The Company currently markets only pre-need products, and only through
its affiliate, NPS. The Company and its life insurance subsidiaries do not
directly sell nor do they maintain a separate agency force.
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.
Effective April 1, 1998, the Company acquired a block of life insurance
and annuity policies through co-insurance from World Insurance Company for a
purchase price of approximately $2.7 million. In connection with this
transaction, the Company assumed approximately $22.7 million of insurance
liabilities and received approximately $20.0 million in assets.
On May 15, 1998, the Company acquired 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 will be accounted for under the purchase method of accounting.
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.
The Company has entered into a definitive agreement to acquire
Harbourton, 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
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<PAGE> 28
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 relatively 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 assess 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.
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 estimated
total consideration of approximately $11.6 million. The actual purchase
price for the transaction will be based upon the most recent stockholder's
equity of Harbourton. 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 March 31, 1998, Harbourton reported total assets of
$161.7 million and stockholder's equity of $41.1 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 July 1998. See "Pro Forma
Combined Condensed Financial Information."
NATIONAL PREARRANGED SERVICES
NPS, which has been engaged in business since 1979 and is an affiliate
under common control with the Company, 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)
27
<PAGE> 29
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 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 March 31, 1998, 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 March 31, 1998 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
28
<PAGE> 30
investment grade issuers. In addition, the trading markets for these securities
are often less liquid and efficient than the markets for investment grade
securities.
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 March 31, 1998 were as follows:
<TABLE>
<CAPTION>
% of
Fixed
Scheduled Maturity Maturity
------------------ --------
<S> <C>
Due in five years or less 4.0
Due after five years through ten years 6.0
Due after ten years 30.0
Mortgage backed securities 60.0
-----
Total fixed maturities 100.0
=====
</TABLE>
Approximately 39% of the Company's invested assets at March 31, 1998
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.
29
<PAGE> 31
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
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 42 states and the District of Columbia.
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, the 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. See Note 16
to the Consolidated Financial Statements of the Company.
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
30
<PAGE> 32
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.
In some instances many states require deposits of assets for the
protection of policyholders either in those states or for all policyholders.
At March 31, 1998, securities representing approximately 3.1% of the fair
market 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. Examinations of the two
insurance companies were begun during the second quarter of 1998, and will
involve a review of the companies' financials for the five-year 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 March 31, 1998, the Company had 70 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 under the terms of a lease that expires in August 2002. The Company
believes that the properties currently leased by Memorial are suitable for
the current operations of the Company and will allow for the expansion of the
Company's business in the near future. As the Company's operation expands,
the leasing of additional space in Austin, Texas may be necessary. The
Company currently does not foresee any material problems with leasing any
additional space that may be required.
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
31
<PAGE> 33
and contingencies will have no material adverse effect on the Company's
consolidated results of operations or its financial condition.
32
<PAGE> 34
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 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, Spewak & Maylack, P.C., St. Louis,
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.
33
<PAGE> 35
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.
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<PAGE> 36
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 Company or its
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 $200,000.
</TABLE>
35
<PAGE> 37
EMPLOYMENT AGREEMENTS
The Company has no employment agreements.
OPTION GRANTS
OPTION/SAR GRANTS IN LAST YEAR
The following table sets forth information concerning stock option
grants made in 1997 to the Named Executive Officers. No SARs were granted to
such individuals in 1997.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------- Potential Realizable Value
Number of at Assumed Annual
Securities Percent of Total Rates of Stock Price
Underlying Options/SARs Appreciation for
Options/SARs Granted to Exercise or Option Term <F1>
Granted Employees in Base Price Expiration --------------------------
Name (#) Year ($/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 400,000 shares of Common Stock at an exercise price of
$3.75 per share. Effective April 6, 1998, each such option was
replaced by a new option granted to the recipients pursuant to the
Plan. The expiration date of the original options was January 1, 2006.
</TABLE>
36
<PAGE> 38
AGGREGATED OPTION/SAR EXERCISES IN LAST YEAR AND YEAR-END OPTION/SAR VALUE
The following table sets forth information concerning the aggregate
dollar value realized upon exercise of options during 1997, the number of
securities underlying options outstanding at year-end 1997 and the value of
options outstanding at year-end 1997 having an exercise price lower than the
market price of the Common Stock held by the Named Executive Officers:
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised
Shares Options/SARs at In-the-Money Options/SARs
Acquired On Value Year-End (#) at Year-End ($)
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 400,000 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. 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 June 14, 1998, options to acquire 1,199,750 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
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<PAGE> 39
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.
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.
38
<PAGE> 40
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 the date hereof.
<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 the date hereof.
</TABLE>
39
<PAGE> 41
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 NPS
Agency. NPS and NPS Agency are affiliated companies under common control
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 (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 of $758,168 and $11,457,962, respectively, were outstanding.
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, $2,695,091 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, 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 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.
40
<PAGE> 42
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 will be paid $60,000,
payable in 15 equal installments (the first payment of which was paid on
April 1, 1998), 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.
See Note 12 to the Consolidated Financial Statements of the Company for
information with respect to related party transactions occurring during the
three-month period ended March 31, 1998.
41
<PAGE> 43
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
1,199,750 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
42
<PAGE> 44
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.
43
<PAGE> 45
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 1,199,750 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 three months 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
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<PAGE> 46
the 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.
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<PAGE> 47
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 9.25% 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 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
46
<PAGE> 48
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 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.
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<PAGE> 49
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 at least 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,
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 Killman,
Murrell and Company, P.C., certified public accountants, as set forth in
their report thereon appearing elsewhere herein and therein, and are included
in reliance upon such report given upon the authority of said firm 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.
GLOSSARY
The following are definitions of certain terms used in this Prospectus.
Where appropriate, in using such terms, the singular includes the plural,
masculine includes feminine and/or neuter, and vice versa.
"Actuarial valuation" means the appraisal of a block of insurance
business or an insurance company using the present value of future profits.
The present value of future profits is calculated by discounting projected
earnings using various actuarial assumptions such as estimations regarding
future mortality, expenses, interest rates, morbidity, cancellation rates,
etc.
"Annuity policies" means a form of insurance under which premiums are
paid to purchase an anticipated periodic benefit payment to begin at some
date in the future.
"Blocks of in force business" means groups of insurance policies in
effect.
"Co/modco reinsurance" means a combination of coinsurance and modified
coinsurance under which only a portion of the reserves are transferred to the
reinsurer and the ceding company retains the remaining portion of reserves.
Under most co/modco agreements, the amount of reserves transferred to the
reinsurer is equal to the initial ceding allowance thereby eliminating any
initial transfer of cash.
"Coinsurance" means a form of indemnity reinsurance under which
reserves as well as the risk are transferred to the reinsurer.
48
<PAGE> 50
"Commissions" means amounts paid to agents under an agency agreement as
compensation for the sale of insurance policies.
"Deferred policy acquisition costs" means expenses that are
capitalizable under generally accepted accounting principles ("GAAP"). The
expenses must vary with the production of new business and must be primarily
related to the production of new business. Agents' first year commissions
are, by far, the largest single component of deferred policy acquisition
costs.
"Funds withheld agreements (treaties)" means reinsurance agreements
under which funds that would normally be paid to a reinsurer are withheld by
the ceding company to permit statutory credit for non-admitted reinsurance,
to reduce a potential credit risk or to retain control over investments.
Under certain conditions, the reinsurer may withhold funds from the ceding
company.
"Future policy benefits" means a liability established to provide for the
payment of policy benefits that are to be paid in the future.
"GAAP benefit reserves" means a liability established to provide for the
payment of future policy benefits. The reserves are calculated as the excess of
the present value of future policy benefits over the present value of future net
premium payments. In order to calculate the present value of benefits and net
premiums, certain actuarial assumptions are made regarding various items
(including, without limitation, mortality, expenses, interest rates, lapse and
cancellation rates).
"Indemnity reinsurance" means a form of reinsurance under which
insurance risk is transferred from the ceding company to the reinsurer.
"Lapse and surrender rates" means the rates at which policies do not
renew by paying premiums that are due or by requesting that the policy be
cancelled for its surrender value.
"Lapse of insurance policies" means the non-renewal of an insurance
policy due to not paying the premiums when they come due.
"Limited pay policies" means the ordinary life insurance policies for
which the benefit period is longer than the premium paying period.
"Modified coinsurance" means a form of coinsurance under which the
reserves are retained by the ceding company while the risk is transferred to
the reinsurer. The ceding company is required to pay interest to replace
that which would have been earned by the reinsurer if it had held the reserve
assets in its own investment portfolio.
"Morbidity" means the statistical rate at which insureds become sick or
have an accident that results in a health insurance claim.
"Mortality" means the statistical rate at which insureds die.
"Net level premium reserve method" means a reserve calculation method
whereby the net premiums used for reserving purposes bears a constant
proportional relationship to the gross premiums being charged.
"Policy acquisition costs" means expenses that vary with the production
of new business and that are primarily related to the production of new
business. Agents' first year commissions are, by far, the largest single
component of policy acquisition costs.
"Policy loan" means a loan made by an insurance company using the cash
surrender value of an insurance policy as collateral for the loan. The
maximum policy loan available will always be less than the cash value of the
underlying policy.
49
<PAGE> 51
"Policyholder deposits" means under GAAP accounting practices and
procedures, premiums for annuity policies are classified as "Policyholder
deposits" rather than "Insurance premiums."
"Prearranged funeral contract" means an agreement under which a client
purchases funeral services to be performed at death. The cost of such
funeral services are equal to the cost at the time into which the prearranged
funeral contract is entered and does not change regardless of the date of
death or increases in the cost of funeral services to be provided.
"Reinsurance" means an arrangement under which one insurance company,
referred to as the reinsurer, for consideration, agrees to indemnify another
insurance company, referred to as the ceding company, against all or part of
a loss which the ceding company may incur under certain policies of insurance
for which it has liability.
"Reinsurance agreement" means the agreement used to effect a
reinsurance arrangement.
"Reinsurance treaty" means another term for "reinsurance agreement."
"Reserves" means a liability (or allocation of surplus) established to
provide for a certain level of assurance that enough assets will be available
to pay future policy benefits.
"Reserves for unearned premiums" means a liability established to
recognize portions of premiums that have been received by the insurance
company but are for insurance coverage extending beyond the close of the
financial reporting period.
"Retrocession reinsurance" means the transfer of reinsurance risk from
an assuming reinsurer to another insurance company.
"Single premium policies" means ordinary life insurance policies for
which single, lump-sum premiums are paid.
"Statutory accounting practices" means accounting procedures and
practices prescribed for insurance companies by the National Association of
Insurance Commissioners and as adopted by the various state insurance
regulatory bodies.
"Statutory capital and surplus" means shareholders' equity under
statutory accounting practices.
"Statutory financial statements" means financial statements produced
under statutory accounting practices and filed in each state that the
insurance company is licensed to do business.
"Statutory reserves" means reserves calculated according to statutory
prescribed methods using state mandated assumptions with regard to mortality
and interest rates.
"Underwriting standards" means standards set by an insurance company
under which an insurance applicant is reviewed in order for an insurance
policy to be issued.
50
<PAGE> 52
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
Page
----
<S> <C>
The Company and Subsidiaries:
- -----------------------------
Report of Independent Certified Public Accountants - Killman, Murrell & Company, P.C. F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited) F-2
Consolidated Statements of Operations for each of the years in the three-year period ended
December 31, 1997 and the three-month periods ended March 31, 1997 and 1998 (unaudited) F-4
Consolidated Statements of Shareholder's Equity and Comprehensive Income for each of the years
in the three-year period ended December 31, 1997 and the three-month periods ended March 31,
1997 and 1998 (unaudited) F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1997 and the three-month periods ended March 31, 1997 and 1998 (unaudited) F-7
Notes to Consolidated Financial Statements F-8
Pro Forma Combined Condensed Financial Information (unaudited) F-28
Pro Forma Combined Condensed Balance Sheet as of March 31, 1998 (unaudited) F-29
Pro Forma Combined Condensed Statement of Operations for the three months ended
March 31, 1998 (unaudited) F-30
Notes to Pro Forma Combined Condensed Financial Information (unaudited) as of and for the
three months ended March 31, 1998 F-31
Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 1997
(unaudited) F-32
Notes to Pro Forma Combined Condensed Financial Information (unaudited) for the year ended
December 31, 1997 F-33
Harbourton:
- -----------
Independent Auditor's Report F-34
Balance Sheets, December 31, 1997 and 1996 F-35
Statements of Operations, years ended December 31, 1997, 1996 and 1995 F-36
Statements of Stockholder's Equity, years ended December 31, 1997, 1996 and 1995 F-37
Statements of Cash Flows, years ended December 31, 1997, 1996 and 1995 F-38
Notes to Financial Statements F-40
Balance Sheet, March 31, 1998 (unaudited) F-51
Statements of Operations, three months ended March 31, 1998 and 1997 (unaudited) F-52
Statements of Cash Flows, three months ended March 31, 1998 and 1997 (unaudited) F-53
Statement of Changes in Equity and Comprehensive Income, three months
ended March 31, 1998 and 1997 (unaudited) F-55
Note to Unaudited Financial Statements F-56
</TABLE>
51
<PAGE> 53
[letterhead of Killman, Murrell & Company, P.C.]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors of
Lincoln Heritage Corporation:
We 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 comprehensive income 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. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 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/ Killman Murrell & Company, P.C.
Killman Murrell & Company, P.C.
(Successor to Roy L. Butler,
Certified Public Accountant)
Dallas, Texas
March 11, 1998 (except for Note 18, as to
which the date is April 20, 1998)
F-1
<PAGE> 54
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
-------------------------------- March 31,
1996 1997 1998
----------- ------------ ------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Fixed maturities available for sale at fair value
(amortized cost $53,125,236, $44,085,520 and
$73,185,895) $51,978,987 $ 45,120,485 $ 71,423,989
Equity securities at fair value (cost $1,013,365 and
$2,433,526) - 794,870 2,527,762
Policyholder loans to related party 758,168 11,457,962 14,662,728
Reverse repurchase agreements - 29,512,372 8,264,878
Deposits to support hedging transactions - - 808,388
Short-term investments 5,344,384 31,530,513 11,651,176
----------- ------------ ------------
TOTAL INVESTMENTS 58,081,539 118,416,202 109,338,921
----------- ------------ ------------
Cash 1,837,703 1,624,822 3,276,978
Accrued investment income 535,827 609,847 438,666
Accounts receivable from related party 1,943,831 478,362 547,959
Funds withheld by ceding company 245,820 498,512 498,511
Deferred policy acquisition costs, net 11,149,607 12,554,870 13,191,889
Fixed assets, net 222,960 437,989 472,629
Cost of policies purchased, net - 3,249,365 2,951,511
Goodwill, net 796,184 773,436 962,916
Deferred tax assets, net 2,313,832 2,394,970 3,266,074
Other assets, net 281,183 564,635 1,001,313
----------- ------------ ------------
TOTAL ASSETS $77,408,486 $141,603,010 $135,947,367
=========== ============ ============
<CAPTION>
(Continued)
The accompanying notes are an
integral part of these consolidated financial statements.
F-2
<PAGE> 55
LINCOLN HERITAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
December 31,
-------------------------------- March 31,
1996 1997 1998
----------- ------------ ------------
(Unaudited)
LIABILITIES
<S> <C> <C> <C>
Policy liabilities:
Future policy benefits $69,708,545 $ 87,843,239 $ 90,173,511
Policyholder deposits 2,118,881 41,613,697 37,457,709
Funds withheld from reinsurer 245,820 - -
Unpaid claims 781,000 689,000 689,000
Premiums received in advance 212,449 304,471 339,905
----------- ------------ ------------
TOTAL POLICY LIABILITIES 73,066,695 130,450,407 128,660,125
----------- ------------ ------------
Income tax liabilities 533,846 1,975,165 25,000
Accounts payable and accrued liabilities 228,311 334,776 292,406
Accounts payable to related party 69,158 93,855 207,417
Other liabilities 463,743 1,942,861 1,613,167
----------- ------------ ------------
TOTAL LIABILITIES 74,361,753 134,797,064 130,798,115
----------- ------------ ------------
<CAPTION>
SHAREHOLDER'S EQUITY
<S> <C> <C> <C>
Common Stock (1996: $100 par, authorized 4,000,000
shares, issued, 10 shares; 1997 and 1998: $.01 par, authorized
10,000,000 shares, issued, 1,000,000 shares) 1,000 10,000 10,000
Additional paid-in capital 40 40 40
Retained earnings 3,802,217 6,257,036 6,224,646
Net unrealized gains (losses) on available for sale
and equity securities (756,524) 538,870 (1,085,434)
----------- ------------ ------------
TOTAL SHAREHOLDER'S EQUITY 3,046,733 6,805,946 5,149,252
----------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $77,408,486 $141,603,010 $135,947,367
=========== ============ ============
The accompanying notes are an
integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE> 56
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended
Years ended December 31, March 31,
------------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE
Life premiums from related party $27,770,810 $33,701,793 $38,044,470 $8,630,748 $ 7,256,760
Net investment income 3,401,506 3,710,720 6,171,215 1,237,555 2,252,156
Realized investment gains 1,113,281 2,018,362 2,666,448 20,748 450,914
Other revenue - - - - 129,929
----------- ----------- ----------- ---------- -----------
TOTAL REVENUES 32,285,597 39,430,875 46,882,133 9,889,051 10,089,759
----------- ----------- ----------- ---------- -----------
BENEFITS AND EXPENSES
Death benefits paid to related party 10,229,026 11,747,170 13,551,459 3,513,055 3,956,769
Surrender benefits paid to related party 4,270,886 5,167,946 115,758 12,475 66,131
Increase in future policy benefits 5,998,310 7,621,130 15,284,947 3,325,394 1,840,030
Interest paid on policyholder deposits 277,276 214,054 1,051,087 34,981 527,037
Commissions paid to related party 7,129,188 10,043,563 11,247,606 2,556,414 2,956,131
General expenses 3,148,979 3,862,870 5,033,252 838,621 1,512,586
General expenses reimbursed by
related party - - (2,695,091) (517,836) (555,757)
Taxes, licenses and fees 654,448 720,278 968,476 194,779 167,679
Amortization of cost of policies purchased - - 262,188 - 297,854
Change in deferred acquisition costs, net
of amortization (1,301,402) (1,269,257) (1,405,263) (43,351) (637,019)
----------- ----------- ----------- ---------- -----------
TOTAL BENEFITS AND
EXPENSES 30,406,711 38,107,754 43,414,419 9,914,532 10,131,441
----------- ----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES 1,878,886 1,323,121 3,467,714 (25,481) (41,682)
PROVISION FOR FEDERAL INCOME TAXES
Current (26,310) 789,216 1,752,358 (318,202) 25,000
Deferred 426,124 (506,572) (748,463) 315,000 (34,292)
----------- ----------- ----------- ---------- -----------
TOTAL INCOME TAXES 399,814 282,644 1,003,895 (3,202) (9,292)
----------- ----------- ----------- ---------- -----------
NET INCOME (LOSS) $ 1,479,072 $ 1,040,477 $ 2,463,819 $ (22,279) $ (32,390)
=========== =========== =========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING (BASIC EPS) 3,200,000 3,200,000 3,200,000 3,200,000 3,200,000
BASIC EARNINGS PER SHARE $ .46 $ .33 $ .77 $ (.01) $ (.01)
=========== =========== =========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING (DILUTED EPS) 3,200,000 3,200,000 3,666,667 3,200,000 3,200,000
DILUTED EARNINGS PER SHARE $ .46 $ .33 $ .67 $ (.01) $ (.01)
=========== =========== =========== ========== ===========
The accompanying notes are an
integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE> 57
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<CAPTION>
Total Additional Net Unrealized
Stockholders' Common Paid-in Investment Retained
Equity Stock Capital Gains (Losses) Earnings
------------- ------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $(1,980,854) $ 1,000 $40 $(3,264,562) $1,282,668
Comprehensive income, net of tax:
Net income 1,479,072 - - - 1,479,072
Change in unrealized gain on
available for sale securities
(net of applicable income
tax expense of $2,096,549) 4,069,773 - - 4,069,773 -
-----------
Total comprehensive income 5,548,845 - - - -
----------- ------- --- ----------- ----------
Balance, December 31, 1995 3,567,991 1,000 40 805,211 2,761,740
Comprehensive income, net of tax:
Net income 1,040,477 - - - 1,040,477
Change in unrealized loss on
available for sale securities
(net of applicable income
tax benefit of $804,531) (1,561,735) - - (1,561,735) -
-----------
Total comprehensive income
(loss) (521,258) - - - -
----------- ------- --- ----------- ----------
Balance, December 31, 1996 3,046,733 1,000 40 (756,524) 3,802,217
Transfer to Common Stock
in connection with
stock split (Note 2) - 9,000 - - (9,000)
Comprehensive income, net of tax:
Net income 2,463,819 - - - 2,463,819
Change in unrealized gain on
available for sale and equity
securities (net of applicable in-
come tax expense of $667,325) 1,295,394 - - 1,295,394 -
-----------
Total comprehensive income 3,759,213 - - - -
----------- ------- --- ----------- ----------
Balance, December 31, 1997 $ 6,805,946 $10,000 $40 $ 538,870 $6,257,036
=========== ======= === =========== ==========
<CAPTION>
(Continued)
The accompanying notes are an
integral part of these consolidated financial statements.
F-5
<PAGE> 58
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
Additional Net Unrealized
Common Paid-in Investment Retained
Total Stock Capital Gains (Losses) Earnings
----------- ------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 6,805,946 $10,000 $40 $ 538,870 $6,257,036
Comprehensive income, net of tax:
Net loss (32,390) - - - (32,390)
Change in unrealized losses on
available for sale and equity
securities (net of applicable in-
come tax benefit of $859,836) (1,624,304) - - (1,624,304) -
-----------
Total comprehensive income
(loss) (1,656,694) - - - -
----------- ------- --- ----------- ----------
Balance, March 31, 1998 $ 5,149,252 $10,000 $40 $(1,085,434) $6,224,646
=========== ======= === =========== ==========
Balance, December 31, 1996 $ 3,046,733 $ 1,000 $40 $ (756,524) $3,802,217
Comprehensive income, net of tax:
Net loss (22,279) - - - (22,279)
Change in unrealized losses on
available for sale securities
(net of applicable income tax
benefit of $1,354,484) (2,629,292) - - (2,629,292) -
-----------
Total comprehensive income
(loss) (2,651,571) - - - -
----------- ------- --- ----------- ----------
Balance March 31, 1997 $ 395,162 $ 1,000 $40 $(3,385,816) $3,779,938
=========== ======= === =========== ==========
The accompanying notes are an
integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE> 59
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended
Years ended December 31, March 31,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 1,479,072 $ 1,040,477 $ 2,463,819 $ (22,279) $ (32,390)
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase (decrease) in future
policy benefits and deposit funds 5,940,090 4,842,595 5,573,366 3,252,206 (1,825,716)
Increase in deferred
acquisition costs (1,301,402) (1,269,257) (1,405,263) (43,351) (637,019)
Decrease (increase) in accounts
receivable (670,637) 1,282,675 1,465,469 (340,962) (69,597)
Depreciation and amortization 83,982 87,129 368,068 26,887 350,641
Decrease (increase) in accrued
investment income 291,425 (22,695) (74,020) 3,058 171,181
Increase (decrease) in unpaid claims 68,067 141,000 (92,000) (254,120) -
Increase (decrease) in premiums
received in advance (13,926) (272,496) 92,022 38,659 35,434
Increase (decrease) in accrued expenses 23,343 (53,325) 106,465 (68,063) (42,370)
Increase (decrease) in other liabilities 350,206 43,282 1,257,995 (47,969) (216,132)
Accretion of discount on investments (30,006) (47,604) (458,056) (63,970) (149,200)
Increase (decrease) in federal
income tax liabilities 431,303 189,652 741,800 62,799 (1,888,559)
Decrease (increase) of other assets (374,216) 194,488 (879,801) (86,100) (713,584)
------------ ------------ ------------- ----------- ------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 6,277,301 6,155,921 9,159,864 2,456,795 (5,017,311)
------------ ------------ ------------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sales of investments 36,042,252 43,758,136 163,710,087 10,234,882 95,506,935
Cost of investments purchased (38,944,851) (50,999,200) (162,383,038) (7,859,475) (85,632,702)
Decrease (increase) in other invested
assets (1,106,170) 1,106,170 - - -
Decrease (increase) in policyholder loans (1,431,444) 673,276 (10,699,794) (395,528) (3,204,766)
------------ ------------ ------------- ----------- ------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (5,440,213) (5,461,618) (9,372,745) 1,979,879 6,669,467
------------ ------------ ------------- ----------- ------------
NET INCREASE (DECREASE) IN CASH 837,088 694,303 (212,881) 4,436,674 1,652,156
CASH, BEGINNING OF PERIOD 306,312 1,143,400 1,837,703 1,837,703 1,624,822
------------ ------------ ------------- ----------- ------------
CASH, END OF PERIOD $ 1,143,400 $ 1,837,703 $ 1,624,822 $ 6,274,377 $ 3,276,978
------------ ------------ ------------- ----------- ------------
FEDERAL INCOME TAXES PAID
(REFUNDS RECEIVED) $ (45,712) $ 92,990 $ 311,040 $ - $ 1,975,165
============ ============ ============= =========== ============
The accompanying notes are an
integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE> 60
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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 shareholder's 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.
(Continued)
F-8
<PAGE> 61
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, and $5,687 and $15,520 for the three months ended March
31, 1997 and 1998, respectively. Accumulated amortization was $113,740,
$136,488 and $152,008 as of December 31, 1996, December 31, 1997, and March
31, 1998, respectively. The carrying value of goodwill is periodically
monitored for indications of impairment based upon estimates of future
earnings.
DEFERRED POLICY ACQUISITION COSTS
- ---------------------------------
The costs of acquiring new business generally consist of commissions and
other costs of acquiring new business. 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, $83,132, $18,200 and
$29,100 for the years ended December 31, 1995, 1996 and 1997, and the three
months ended March 31, 1997 and 1998, respectively. Accumulated depreciation
was $191,025, $184,281 and $213,381 at December 31, 1996 and 1997 and March
31, 1998, respectively.
(Continued)
F-9
<PAGE> 62
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 have
been considered a part of investment yield for years prior to 1996. 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.
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, $19,633,000 and
$19,282,000 at December 31, 1996 and 1997 and March 31, 1998, 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.
(Continued)
F-10
<PAGE> 63
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
- -----------
The Company has coinsurance funds withheld treaties and co/mod coinsurance
agreements with reinsurers to increase its statutory surplus. The terms of
reinsurance agreements provide for all of the insurance risk, associated with
the portion of the business ceded, to be transferred to the reinsurer. A
portion of the reserve assets are retained by the Company. One effect of the
agreements is to allow the Company to take credits for reserves held by the
reinsurer which provides increases in the Company's statutory surplus. The
agreements provide for the profits of the business reinsured to decrease the
amount of the reserve credit taken and, therefore, to decrease the Company's
statutory surplus. Any losses are retained by the reinsurer for which a risk
charge is paid. The effect of these agreements is that statutory surplus was
$3,225,000, $6,236,000 and $6,000,534 greater at December 31, 1996 and 1997,
and March 31, 1998, respectively, than what it would have been without these
agreements. Since the primary liability of the Company to the insured has
not been discharged through these agreements and no assets have been
transferred, all reinsurance transactions except for the risk charge have
been eliminated in the accompanying consolidated financial statements. The
risk charge is recognized as reinsurance 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. 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%, 92% and 92% of the life
insurance in force at December 31, 1995, 1996 and 1997 and March 31, 1998,
respectively. Participating policies represented 97%, 93%, 93% and 93% of
premium revenues for the years ended December 31, 1995, 1996 and 1997 and the
three months ended March 31, 1998, respectively. Determination of dividends
on participating policies is not dependent on any factor and is completely at
the discretion of the boards of directors of the insurance subsidiaries.
There were no dividends paid in 1995, 1996, 1997 or 1998.
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 charge related to fluctuations
in fair value of available for sale and equity securities is included in net
unrealized gains (losses) on securities in shareholder's 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.
(Continued)
F-11
<PAGE> 64
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK SPLITS AND EARNINGS PER SHARE
- -----------------------------------
On September 19, 1997, the Company effected a 100,000-for-1 stock split in
the form of a stock dividend. Upon consummation of such stock split, the
Company had 1,000,000 shares of its Common Stock issued and outstanding. On
April 6, 1998, the Company effected a 3.2-for-1 stock split, in the form of a
stock dividend. The 3,200,000 shares outstanding at April 6, 1998 have been
used to compute the basic earnings per share of the Company for all periods
presented. The diluted earnings per share is computed using the treasury
stock method, unless the effect is anti-dilutive.
NEW ACCOUNTING STANDARDS
- ------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(Statement No. 128), which is required to be adopted for financial statements
issued for annual or interim periods after December 15, 1997. The adoption
of Statement No. 128 required a change in the presentation of earnings per
share (EPS) to replace primary and fully diluted EPS with a presentation of
basic and diluted EPS and to restate EPS for all periods presented. The
adoption of Statement No. 128 did not have a material impact on the Company's
financial statements.
In February 1997, the FASB also issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure"
(Statement No. 129). Statement No. 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
Statement No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
"Omnibus Opinion - 1966", and 15, "Earnings per Share", and FASB Statements
of Financial Accounting Standards No. 47, "Disclosure of Long-Term
Obligations", for entities that were subject to the requirements of APB
Opinions 10 and 15 and Statement No. 47 and consolidates them for ease of
retrieval and for greater visibility to non-public entities. Statement No.
129 is effective for financial statements for periods ending after December
15, 1997. The Company experienced no material revision in its disclosures
when Statement No. 129 was adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (Statement No. 130). Statement No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. Statement No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. It does
not require a specific format for that financial statement but requires that
an entity display an amount representing total comprehensive income for the
period in that financial statement. Statement No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. Statement No. 130 had no impact on the financial condition or
results of operations of the Company, but required changes in the Company's
disclosure and presentation requirements. The principal change was the
disclosure of the components of and total comprehensive income within the
Consolidated Statements of Shareholder's Equity.
(Continued)
F-12
<PAGE> 65
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS (CONTINUED)
- ------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 (Statement No. 131), "Disclosures About Segments of an Enterprise and
Related Information." Statement No. 131 establishes standards for
disclosures related to business operating segments. The Company anticipates
that Statement No. 131 will have no significant effect on the disclosures set
forth in its consolidated financial statements.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3 "Accounting by Insurance and Other
Enterprises for Insurance-related Assessments" (SOP 97-3). SOP 97-3 provides
guidance for determining when an insurance company or other enterprise should
recognize a liability for guaranty-fund assessments and guidance for
measuring the liability. SOP 97-3 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company anticipates that
the adoption of SOP 97-3 will not have a material effect on the Company's
financial position or results of operations.
INTERIM UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------
The accompanying consolidated balance sheet and statements of operations,
shareholder's equity and comprehensive income and cash flows as of and for
the three months ended March 31, 1997 and 1998 are unaudited and have been
prepared on the same basis as the audited consolidated financial statements
included herein. In the opinion of management, such unaudited consolidated
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. The results of operations for the interim periods presented are
not necessarily indicative of results for a full year.
NOTE 3: CO-INSURANCE OF LIFE INSURANCE AND ANNUITY POLICIES
On September 1, 1997, the Company co-insured a block of life insurance and
annuity policies from Woodmen Accident and Life Company. The block of
business consisted primarily of deferred annuities which are accounted for as
investment contracts using deposit accounting. The Company assumed
approximately $51,311,000 of insurance and annuity reserves in exchange for
receiving $48,018,000 in cash. The net liabilities assumed, $3,293,000, plus
other cost related to the co-insurance of the Woodmen Block in the amount of
$218,000 have been shown as additions from acquisitions as the cost of
policies purchased.
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>
(Continued)
F-13
<PAGE> 66
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 4: INVESTMENTS (CONTINUED)
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 values of fixed maturity and equity securities
available for sale at March 31, 1998 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 $23,632,274 $103,168 $ (419,997) $23,315,445
Mortgage backed securities 42,877,086 471,402 (1,165,193) 42,183,295
Corporate bonds 6,676,535 18,356 (769,642) 5,925,249
----------- -------- ----------- -----------
Total fixed maturity securities 73,185,895 592,926 (2,354,832) 71,423,989
Equity securities 2,433,526 238,999 (144,763) 2,527,762
----------- -------- ----------- -----------
Total $75,619,421 $831,925 $(2,499,595) $73,951,751
=========== ======== =========== ===========
</TABLE>
The amortized costs and fair value of fixed maturities available for sale at
December 31, 1997 and March 31, 1998, 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>
December 31, 1997 March 31, 1998
-------------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
In one year or less $ - $ - $ - $ -
In years two through five 2,315,951 2,465,999 3,355,368 3,075,152
In years six through ten 2,863,928 2,908,724 4,966,018 4,507,087
After ten years 10,136,326 10,184,250 21,987,423 21,658,455
Mortgaged backed securities 28,769,315 29,561,512 42,877,086 42,183,295
----------- ----------- ----------- -----------
Total $44,085,520 $45,120,485 $73,185,895 $71,423,989
=========== =========== =========== ===========
</TABLE>
(Continued)
F-14
<PAGE> 67
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 4: INVESTMENTS (CONTINUED)
Investments in fixed maturities in any single entity in excess of 10% of
shareholder's equity at December 31, 1997 and March 31, 1998, other than
investments issued or guaranteed by the United States government or a United
States government agency, were as follows:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
--------------------------------- ------------------------------
Estimated Estimated
Investment Amortized Cost Fair Value Amortized Cost Fair Value
---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
CAI Wireless $1,507,217 $1,700,000 $1,577,873 $1,250,000
American Telecasting 998,376 990,000 1,743,926 1,408,000
Boston Chicken 1,280,403 1,256,250 1,031,250 1,031,250
CS Wireless Systems - - 1,301,842 1,175,000
Grand Union - - 1,041,743 1,060,000
</TABLE>
In May 1998, the management of Boston Chicken, Inc. (BCI) filed a Form 8-K
which notified the public that BCI was having problems reorganizing its
operations, renegotiating a portion of its outstanding debt and that new
management had assumed control of BCI. In addition, the independent auditors
for BCI questioned its ability to survive as a going concern, and various
bond rating organizations downgraded BCI's bond rating. The value of BCI's
common stock and publicly traded debt instruments suffered immediate and
significant declines. The value of BCI's Liquid Yield Options Notes (LYONS)
owned by the Company had declined by approximately twenty percent (20%) in
the first quarter of 1998. Based upon the significant decrease in the market
value of the notes of BCI LYONS held by the Company, the Company will cease
the accretion of interest (interest income recognition) on the LYONS until
such time as the fair value of the LYONS can be determined with some
certainty and the Company also reduced the cost basis of the LYONS by
$282,052 as a charge against operations.
Assets with a fair value of $3,582,723 at December 31, 1997 and $3,387,344 at
March 31, 1998, were on deposit with various state regulatory authorities.
Assets with a fair value of $45,071,777 at December 31, 1997 and $38,767,220
at March 31, 1998, were restricted as to use for the acquired Woodmen Block
and other assumed business.
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------------- -----------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed maturities $2,963,805 $3,162,390 $5,183,674 $1,189,738 $1,757,868
Policyholder loans 26,569 64,430 243,879 14,358 206,883
Short-term investments 477,592 587,667 857,434 59,360 315,848
---------- ---------- ---------- ---------- ----------
Gross investment income 3,467,966 3,814,487 6,284,987 1,263,456 2,280,599
Investment expenses 66,460 103,767 113,772 25,901 28,443
---------- ---------- ---------- ---------- ----------
Net investment income $3,401,506 $3,710,720 $6,171,215 $1,237,555 $2,252,156
========== ========== ========== ========== ==========
</TABLE>
(Continued)
F-15
<PAGE> 68
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 4: INVESTMENTS (CONTINUED)
Realized investment gains (losses) for the years ended December 31, and the
three months ended March 31, consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Gross gains $1,235,299 $2,188,649 $2,929,348 $22,124 $1,195,848
Gross losses (122,018) (170,287) (262,900) (1,376) (744,934)
---------- ---------- ---------- ------- ----------
Net realized investment gains $1,113,281 $2,018,362 $2,666,448 $20,748 $ 450,914
========== ========== ========== ======= ==========
</TABLE>
Proceeds from disposals of investments in fixed maturity and equity
securities during the years ended December 31, 1995, 1996 and 1997 and the
three months ended March 31, 1997 and 1998 were $36,042,252, $43,758,136,
$163,710,087, $10,234,882 and $95,506,935, respectively.
Net unrealized gains (losses) included in shareholder's equity consisted of
the following:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------------------- -----------
1995 1996 1997 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Gross unrealized gains $1,236,257 $ 118,878 $1,255,469 $ 855,148
Gross unrealized losses (16,240) (1,265,127) (438,999) (2,522,818)
---------- ----------- ---------- -----------
Net unrealized investment gains (losses) 1,220,017 (1,146,249) 816,470 (1,667,670)
Deferred income (taxes) benefit (414,806) 389,725 (277,600) 582,236
---------- ----------- ---------- -----------
Net unrealized gains (losses) $ 805,211 $ (756,524) $ 538,870 $(1,085,434)
========== =========== ========== ===========
</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, and March 31, 1998, the carrying amount of
overnight reverse repurchase agreements with Chase Bank of Texas, N.A. was
$29,512,372 and $8,264,878, respectively, 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.
(Continued)
F-16
<PAGE> 69
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 6: REINSURANCE (CONTINUED)
Premiums earned were as follows:
<TABLE>
<CAPTION> Three Months Ended
Years Ended December 31, March 31,
----------------------------------------- -----------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Direct $23,380,246 $27,182,582 $34,925,424 $8,008,141 $7,111,683
Reinsurance assumed 4,675,326 6,703,376 3,371,830 669,211 193,830
Reinsurance ceded (284,762) (184,165) (252,784) (46,604) (48,753)
----------- ----------- ----------- ---------- ----------
Premiums earned $27,770,810 $33,701,793 $38,044,470 $8,630,748 $7,256,760
=========== =========== =========== ========== ==========
</TABLE>
Death benefits incurred on the business assumed were $3,320,855, $3,616,736,
$2,257,286, $761,574 and $47,511 for the years ended December 31, 1995, 1996
and 1997 and the three months ended March 31, 1997 and 1998, respectively.
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 are
presented as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------- March 31,
1996 1997 1998
----------------------------- ------------------------- ------------------------
Fair Carrying Fair Carrying Fair Carrying
Value Amount Value Amount Value Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and short-term investments $ 7,182,087 $ 7,182,087 $33,155,335 $33,155,335 $14,928,154 $14,928,154
Reverse repurchase agreements - - 29,512,372 29,512,372 8,264,878 8,264,878
Fixed maturities 51,978,987 51,978,987 45,120,485 45,120,485 71,423,989 71,423,989
Equity securities - - 794,870 794,870 2,527,762 2,527,762
Policyholder loans 758,168 758,168 11,457,962 11,457,962 14,662,728 14,662,728
</TABLE>
(Continued)
F-17
<PAGE> 70
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 8: DEFERRED POLICY ACQUISITION COSTS AND COSTS OF POLICIES PURCHASED
DEFERRED POLICY ACQUISITION COSTS (DPAC)
- ----------------------------------------
Deferred Policy Acquisition Costs and the components of the change in
deferred acquisition costs were as follows:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
--------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 8,578,948 $ 9,880,350 $ 11,149,607 $11,149,607 $12,554,870
Deferrals 6,140,624 8,106,337 11,951,993 2,590,850 2,385,612
Amortization (4,839,222) (6,837,080) (10,546,730) (2,547,499) (1,748,593)
----------- ----------- ------------ ----------- -----------
Balance at December 31 $ 9,880,350 $11,149,607 $ 12,554,870 $11,192,958 $13,191,889
=========== =========== ============ =========== ===========
</TABLE>
Cost of Policies Purchased (CPP)
- --------------------------------
The cost of policies purchased and the components of the changes were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
--------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ - $ - $ - $ - $ 3,249,365
Additions from acquisition - - 3,511,553 - -
Amortization - - (262,188) - (297,854)
----------- ----------- ------------ ----------- -----------
Balance at December 31 $ - $ - $ 3,249,365 $ - $ 2,951,511
=========== =========== ============ =========== ===========
</TABLE>
CPP amortization expected to be recorded in each of the next five years is
$578,312, $410,275, $314,507, $262,975 and $233,350, respectively.
(Continued)
F-18
<PAGE> 71
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 9: ACTIVITY IN CLAIMS LIABILITY
Activity in the liability for life claims payable was as follows:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
--------------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 571,934 $ 640,000 $ 781,000 $ 781,000 $ 689,000
Incurred related to:
Current year 10,258,538 11,812,138 13,573,754 3,540,853 3,929,810
Prior year (29,512) (64,968) (22,295) (27,798) 26,959
----------- ----------- ----------- ---------- ----------
Total incurred 10,229,026 11,747,170 13,551,459 3,513,055 3,956,769
----------- ----------- ----------- ---------- ----------
Paid related to:
Current year 9,618,538 11,031,138 12,887,754 3,013,973 3,240,810
Prior year 542,422 575,032 755,705 753,202 715,959
----------- ----------- ----------- ---------- ----------
Total paid 10,160,960 11,606,170 13,643,459 3,767,175 3,956,769
----------- ----------- ----------- ---------- ----------
Balance at December 31 $ 640,000 $ 781,000 $ 689,000 $ 526,880 $ 689,000
=========== =========== =========== ========== ==========
</TABLE>
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 - - 126,584 9.6 - -
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>
(Continued)
F-19
<PAGE> 72
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 10: INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net unrealized losses on available for
sale securities $ 389,725 $ -
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 - 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.
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:
<TABLE>
<S> <C>
1998 $ 641,529
1999 654,134
2000 670,037
2001 675,204
2002 378,077
----------
$3,018,981
==========
</TABLE>
(Continued)
F-20
<PAGE> 73
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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, and the three months ended March 31, 1997 and 1998,
sales commissions of $7,129,188, $10,043,563, $11,247,606, $2,556,414 and
$2,956,131, respectively, were paid to NPS and NPS Agency. The Company had
aggregate 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, and March 31, 1998,
policyholder loans of $758,168, $11,457,962 and $14,662,728, respectively,
were outstanding. The Company is not subject to any credit risk on the
policy loans, since the Company makes no policy loan which exceeds the
reserves held on the policy securing the loan and the Company has the right
to deduct the loan amount from the death benefit payment or from the cash
surrender value.
The Company's insurance subsidiaries have 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 policies 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 in the increase in future policy benefits of $1,148,000 on
policies issued in 1997 and a corresponding increase in income.
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 included in revenue for the years ended December
31, 1995, 1996 and 1997, was $417,100, $428,376 and $339,828, respectively.
Through the provision for the increase in future policy benefits, income from
these premiums is recognized in a constant relationship to insurance in force
over the life of the policies.
(Continued)
F-21
<PAGE> 74
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 12: RELATED PARTY TRANSACTIONS (CONTINUED)
Effective January 1, 1997, the Company entered into a cost sharing agreement
with NPS whereby NPS will reimburse the Company on a monthly basis for a
portion of certain general and administrative costs paid for by the Company
for the benefit of NPS. The agreement calls for costs to be shared based on
the following: "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, 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
party's 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 party's activities; or (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." The computed costs reimbursement applicable to the year ended
December 31, 1997, approximated $1,528,900; however, by mutual consent of the
officers of the Company and NPS, the actual costs reimbursement aggregated
$2,695,091, of which $143,113 was included in accounts receivable from
related parties. As of March 31, 1998, accounts receivable from related
parties included $547,959 of 1998 costs that had not yet been reimbursed.
At December 31, 1995, 1996 and 1997, the Company had recorded a note payable
to NPS of $22,500 plus accrued interest of $39,804, $46,658 and $54,265,
respectively. Subsequently, the Company discovered that the note had been
previously repaid and reversed the note and all accrued interest thereon,
resulting in other income to the Company in the amount of $76,765 during the
three months ended March 31, 1998.
For the years ended December 31, 1995, 1996, 1997 and the three months ended
March 31, 1997 and 1998, surrender benefits were paid to related parties in
the amount of $4,270,886, $5,167,946, $115,758, $12,975 and $66,131,
respectively. A portion of the surrender benefit payments to related parties
in 1995 and 1996 were used to purchase new policies on the same insureds
whose policies were surrendered.
The existing shareholder of the Company has the right (pursuant to a
Registration Rights Agreement) to cause the Company to register its shares of
common stock under the Securities Act of 1993, for resale, at the expense of
the Company.
On February 4, 1998, the Company formed Wise & Associates, Inc. (Wise).
Effective February 1, 1998, the Company purchased all of the assets of C.
Mitchell Co., Inc. for $145,000. The unpaid balance of the purchase price
bears interest at the rate of eight percent (8%) and is included as accounts
payable to related parties. In connection with the sale of the assets of C.
Mitchell Co., Inc., to Wise, Clif Mitchell, a current executive officer of
the Company, entered into a non-compete agreement with Wise in consideration
of Wise paying Clif Mitchell the sum of $60,000 payable in 15 equal
installments beginning April 1, 1998.
NOTE 13: RETIREMENT PLAN AND STOCK OPTIONS 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.
(Continued)
F-22
<PAGE> 75
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 13: RETIREMENT PLAN AND STOCK OPTIONS AWARDS (CONTINUED)
Effective January 1, 1997, the Company awarded 800,000 stock options to key
executives. These options were subsequently cancelled and reissued as a part
of the Company's 1998 Long-Term Incentive Plan (see Note 18). The options
will vest on a cumulative basis in 10% increments beginning on April 6, 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 and diluted earnings per share would have been
reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
-------------------------- ----------------------------------------------------------
1997 1997 1998
-------------------------- -------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $2,463,819 $2,314,511 $(22,279) $(59,606) $(32,390) $(69,717)
Basic earnings per share .77 .72 (.01) (.02) (.01) (.02)
Diluted earnings per share .67 .63 (.01) (.02) (.01) (.02)
</TABLE>
Stock-based compensation costs reduced pro forma net income in the above
calculations by $149,308, $37,327 and $37,327 for the year ended December 31,
1997 and the three months ended March 31, 1997 and 1998, respectively. 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% and there
were no assumptions as to volatility or dividend yield.
NOTE 14: CONCENTRATIONS OF RISK
At December 31, 1996 and 1997 and March 31, 1998, 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 U.S.
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 from NPS and NPS Agency
of $1,943,831, $478,362 and $547,959 at December 31, 1996 and 1997, and March
31, 1998, respectively. In addition, at December 31, 1996 and 1997 and March
31, 1998, the Company had policyholder loans outstanding of $758,168,
$11,457,962 and $14,662,728, respectively, on policies of which NPS is the
beneficiary.
(Continued)
F-23
<PAGE> 76
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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's 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 shareholder's equity reported to regulatory authorities, as of and
for the periods ended were as follows:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------------------------- -------------------------------
1995 1996 1997 1997 1998
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss) $(1,712,218) $2,597,707 $ 530,509 $ (293,739) $ (601,508)
Shareholder's equity 2,544,007 5,353,237 7,863,137 5,184,473 6,696,024
</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 shareholder's equity as
reported on a statutory basis. As a result of the differences between GAAP
and statutory accounting at December 31, 1997, under GAAP, shareholder's
equity of the life insurance subsidiaries was less than statutory
shareholder's equity by $981,156. At December 31, 1997, the portion of the
$6,881,981 in GAAP shareholder's 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 have been
no cash dividends paid by the life insurance subsidiaries to the parent since
the formation or acquisition or the insurance subsidiaries.
(Continued)
F-24
<PAGE> 77
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 17: SUBSEQUENT EVENT - PENDING ACQUISITIONS (UNAUDITED)
On January 28, 1998, 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 $11,550,000.
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 under the purchase method of accounting.
On March 9, 1998, the Company executed a definitive stock purchase agreement
to acquire all of the outstanding stock of World Service Life Insurance
Company of America (World) for total consideration of $5,470,000. 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
of World was consummated on May 15, 1998.
The pro forma combined condensed balance sheet and the pro forma combined
condensed statements of operations are found on pages F-28 to F-33. The
pro forma financial statements may not be indicative of the results that
actually would have occurred if the acquisition and the adjustments described
in the Notes to the Pro Forma Combined Condensed Financial Information 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 and World 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.
Effective April 1, 1998, the Company co-insured a block of life insurance and
annuity policies from World Insurance Company. The reserves on the block of
business consisted of approximately one-third deferred annuities and
one-third of universal life insurance which are accounted for as investment
contracts using deposit accounting and one-third traditional whole life
insurance. The Company assumed approximately $22,825,000 of insurance and
annuity reserves in exchange for receiving $20,050,000 in assets. The net
liabilities assumed, $2,775,000, plus other cost related to the co-insurance
of the World Insurance Company block in the amount of $200,000 will be shown
as additions from acquisitions in the cost of policies purchased account.
NOTE 18: SUBSEQUENT EVENT - INITIAL PUBLIC OFFERING AND STOCK SPLIT
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 balance sheet.
(Continued)
F-25
<PAGE> 78
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 18: SUBSEQUENT EVENT - INITIAL PUBLIC OFFERING AND STOCK SPLIT
(CONTINUED)
Effective April 6, 1998, the Company adopted the Lincoln Heritage Corporation
1998 Long-Term Incentive Plan (the Plan). The Plan allows for the issuance
of (i) stock options, (ii) stock appreciation rights, (iii) restricted
shares of common stock and (iv) performance awards. A total of 1,200,000
shares of common stock have been reserved for issuance under the Plan. On
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 a
total of 1,099,750 shares of Common Stock of the Company were outstanding,
inclusive of options granted on such date.
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
Diluted 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
Diluted earnings (loss) per share (.01) .02 .32 .33
</TABLE>
NOTE 20: 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 believes that the Year 2000 Issue will not
pose significant operational problems for its computer systems.
(Continued)
F-26
<PAGE> 79
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
NOTE 20: IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
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 insurance policies it has sold.
The total cost of the Year 2000 project is not expected to be significant.
F-27
<PAGE> 80
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
On March 11, 1998, the Company executed a definitive stock purchase agreement
to acquire all of the outstanding stock of Harbourton Reassurance, Inc.
(Harbourton) for a total cash consideration of $11,550,000 and on March 9,
1998, the Company executed a definitive stock purchase agreement to acquire
all of the outstanding stock of World Service Life Insurance Company of
America (World) for a total cash consideration of $5,470,000. The
acquisition of Harbourton and World will be accounted for as purchases
whereby the basis for accounting for Harbourton's and World's assets and
liabilities will be based upon their fair market value at the date of their
acquisition.
The unaudited Pro Forma Combined Condensed Statements of Operations (Pro Forma
Statements of Operations) for the year ended December 31, 1997, and the three
months ended March 31, 1998, gives pro forma effect to the acquisition of
Harbourton and World (and other adjustments as described in the accompanying
notes) as if they had occurred on January 1, 1997 and 1998, respectively.
The Pro Forma Statements of Operations are based on the historical results of
operations of the Company, Harbourton and World for the year ended December
31, 1997 and three months ended March 31, 1998, without giving effect to any
cost savings measures which the Company may have been able to realize for the
periods presented.
The unaudited Pro Forma Combined Condensed Balance Sheet as of March 31, 1998
(Pro Forma Balance Sheet) gives pro forma effect to the acquisition of
Harbourton and World as if they had occurred on that date. The Pro Forma
Statements of Operations and the Pro Forma Balance Sheet and the accompanying
notes (Pro Forma Financial Information) should be read in conjunction with and
are qualified by the historical financial statements of the Company and notes
thereto included elsewhere herein, and the historical financial statements of
Harbourton and notes thereto appearing elsewhere herein.
The Pro Forma Information is intended for informational purposes only and is
not necessarily indicative of the future financial position or results of
operations of the Company after the acquisitions of Harbourton and World, or
the financial position or results of operations of the Company that would
have actually occurred had the acquisition of Harbourton and World been
effected as of the date or for the periods presented.
F-28
<PAGE> 81
<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998 (UNAUDITED)
(dollars in thousands, except per share data)
<CAPTION>
Pro forma Pro forma Pro
The World Purchase Pro forma Adjustment forma
Company Harbourton Service Adjustments Combined Stock Sale Total
------- ---------- ------- ----------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Fixed maturities $ 71,424 $122,634 $3,882 $ (9,000) <Fa> $188,940 $ - $188,940
Common stocks 2,528 - - - 2,528 - 2,528
Reverse repurchase agreements 8,265 - - (5,470) <Fc> 2,795 - 2,795
Short term investments 11,651 - - (11,550) <Fb> 101 - 101
Policy loans 14,663 - - - 14,663 - 14,663
Other invested assets 808 8,752 413 - 9,973 - 9,973
-------- -------- ------ -------- -------- ------ --------
Total 109,339 131,386 4,295 (26,020) 219,000 - 219,000
Cash 3,277 20,596 620 (20,000) <Fa> 4,493 7,400 11,893
Unamortized acquisition costs 13,192 4,805 - (4,805) <Fd> 13,192 - 13,192
PVFP of acquired business 2,952 - - 4,242 <Fe> 7,194 - 7,194
Goodwill 963 - 500 1,463 - 1,463
Other assets 6,224 4,857 117 - 11,198 - 11,198
-------- -------- ------ -------- -------- ------ --------
Total Assets $135,947 $161,644 $5,532 $(46,583) $256,540 $7,400 $263,940
======== ======== ====== ======== ======== ====== ========
LIABILITIES
Policy liabilities
Future policy benefits $ 90,174 $ 9,689 $ - $ - $ 99,863 - $ 99,863
Policyholder deposits 37,458 103,685 - - 141,143 - 141,143
Other liabilities 3,166 7,157 62 - 10,385 - 10,385
-------- -------- ------ -------- -------- ------ --------
Total 130,798 120,531 62 - 251,391 - 251,391
-------- -------- ------ -------- -------- ------ --------
Total stockholders' equity 5,149 41,113 5,470 (46,583) <Fa>,<Fd>,<Fe> 5,149 7,400 12,549
-------- -------- ------ -------- -------- ------ --------
Total liabilities and
stockholders equity $135,947 $161,644 $5,532 $(46,583) $256,540 $7,400 $263,940
======== ======== ====== ======== ======== ====== ========
</TABLE>
F-29
<PAGE> 82
<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(dollars in thousands, except per share data)
<CAPTION>
Pro forma
The World Purchase Pro forma
Company Harbourton Service Adjustments Combined
------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Life insurance premiums $ 7,257 $ (59) $ - $ - $ 7,198
Investment income, net of expenses 2,253 2,584 64 (920)<Fh>,<Fi> 3,981
Realized investment gains (losses) 450 (29) - - 421
Other 129 17 - - 146
------- ------ ----- ----- -------
Total Revenue 10,089 2,513 64 (920) 11,746
------- ------ ----- ----- -------
BENEFITS AND EXPENSES
Policy benefits 4,023 9 - - 4,032
Increase in future policy benefits 1,840 - - - 1,840
Interest paid on deposit funds 527 1,266 - - 1,793
Commissions 2,956 77 - - 3,033
General expenses 1,124 600 266 5 <Fj> 1,995
Change in deferred acquisition costs (637) 224 - (224)<Ff> (637)
Amortization cost of policies purchased 298 - - 161 <Fg> 459
------- ------ ----- ----- -------
Total Benefits and Expenses 10,131 2,176 266 (58) 12,515
------- ------ ----- ----- -------
Income (loss) before items below (42) 337 (202) (862) (769)
Provision for income tax (expense) benefit 10 (52) - 308 <Fk> 266
------- ------ ----- ----- -------
Net Income (Loss) $ (32) $ 285 $(202) $(554) $ (503)
======= ====== ===== ===== =======
Earnings (loss) per share
Basic $ (.01) $ (.16)
Diluted (.01) (.16)
</TABLE>
F-30
<PAGE> 83
LINCOLN HERITAGE CORPORATION
NOTES TO THE PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
MARCH 31, 1998
(in thousands except per share data)
<Fa> Reflects the extraordinary dividend payment of $29,000 ($20,000 from
cash and $9,000 from fixed maturities) to the former owners of
Harbourton before the acquisition of Harbourton by the Company.
<Fb> Reflects the purchase by the Company of Harbourton for $11,550 cash.
Short term investments are assumed to be used to fund the acquisition.
<Fc> Reflects the acquisition of World by the Company for $5,470 cash.
Reverse repurchase agreements are assumed to be used to fund the
acquisition.
<Fd> For purposes of this pro forma the Company has assumed that the
carrying value on Harbourton's and World's books of the acquired assets
and liabilities equals fair value with the exception of Harbourton's
deferred acquisition costs of $4,805 which has no value and has been
eliminated
<Fe> The Company recorded the cost of policies purchased (CCP) in the amount
of $4,242 calculated as follows: i) assumed termination rates were
based on historical data provided by Harbourton, ii) assumed
administration expenses equal to .2 percent of the annuity fund balance
at the beginning of the year and iii) assumed experience refunds and
expenses allowances were based on the underlying reinsurance contracts.
The stream of profits was then discounted at 8 percent. Expected
amortization of the CCP for the years ending December 31, 1998, 1999,
2000, 2001 and 2002 are $643, $590, $404, $361, and $444, respectively.
<Ff> Eliminates Harbourton's amortization of deferred acquisition costs for
the three months ended March 31, 1998, in the amount of $224.
<Fg> Records the amortization $161 of CCP on the Harbourton acquisition for
the three months ended March 31, 1998 based on the assumptions used in
(e) above.
<Fh> Reflects the loss of investment income in the amount of $230 on the
funds used to purchase Harbourton ($11,550 * 8% for 3 months - $230),
and the loss on investment income in the amount of $110 on the funds
used to purchase World ($5,470 * 8% for 3 months - $110) assuming the
acquisitions occurred on January 1, 1998.
<Fi> Reflects the loss of investment income in the amount of $580 on the
funds used to pay the $29,000 extraordinary dividend to the former
Harbourton stockholder which dividend was assumed to be paid prior to
the date of acquisition by the Company at the rate of 8 percent for 3
months.
<Fj> Reflects the amortization of goodwill on the acquisition of World of $5
($500 amortized over 25 years for three months).
<Fk> Reflects the change in the provision for federal income tax benefit of
$308 based on pro forma adjustments and net loss of World. Assumes an
effective tax rate of 29% of income before taxes.
F-31
<PAGE> 84
<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
(dollars in thousands, except per share data)
<CAPTION>
Pro forma
The World Purchase Pro forma
Company Harbourton Service Adjustments Combined
------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Life insurance premiums $38,044 432 $ 116 $(3,631)<Fc>,<Fd> $34,961
Investment income, net of expenses 6,171 13,814 284 - 20,269
Realized investment gains (losses) 2,667 1,377 - - 4,044
Other - 176 1,724 - 1,900
------- ------- ------ ------- -------
Total Revenue 46,882 15,799 2,124 (3,631) 61,174
------- ------- ------ ------- -------
BENEFITS AND EXPENSES
Policy benefits 13,667 8,089 234 - 21,990
Increase in future policy benefits 15,285 - - - 15,285
Interest paid on deposit funds 1,051 6,671 4 - 7,726
Commissions 11,248 19 - - 11,267
General expenses 3,306 4,390 1,984 20 <Fe> 9,700
Change in deferred acquisition costs (1,405) 989 - (989)<Fa> (1,405)
Amortization cost of policies purchased 262 - - 572 <Fb> 834
------- ------- ------ ------- -------
Total Benefits and Expenses 43,414 20,158 2,222 (397) 65,397
------- ------- ------ ------- -------
Income (loss) before items below 3,468 (4,359) (98) (3,234) (4,223)
Provision for income tax (expense) benefit (1,004) (1,070) - 966 <Ff> (1,108)
------- ------- ------ ------- -------
Net Income (Loss) $ 2,464 $(5,429) $ (98) $(2,268) $(5,331)
======= ======= ====== ======= =======
Earnings (loss) per share
Basic $ .77 $ (1.67)
Diluted .67 (1.67)
</TABLE>
F-32
<PAGE> 85
LINCOLN HERITAGE CORPORATION
NOTES TO THE PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
(in thousands except per share data)
<Fa> Eliminates Harbourton's amortization of deferred acquisition costs for
the year ended December 31, 1997, in the amount of $989.
<Fb> Records the amortization ($572) of CCP on the Harbourton acquisition
for the year ended December 31, 1997 based on a purchase price of
$10,800.
<Fc> Reflects the loss of investment income in the amount of $864 on the
funds used to purchase Harbourton ($10,800 * 8% for 12 months - $864)
and the loss on investment income in the amount of $447 on the funds
used to purchase World ($5,586* 8% for 12 months - $447) assuming the
acquisitions occurred on January 1, 1997.
<Fd> Reflects the loss of investment income in the amount of $2,320 on the
funds used to pay the $29,000 extraordinary dividend to the former
Harbourton shareholder's which dividend was assumed to be paid prior to
the date of acquisition by the Company at the rate of 8 percent for 12
months.
<Fe> Reflects the amortization of goodwill on the acquisition of World of
$20 ($500 amortized over 25 years).
<Ff> Reflects the change in the provision for federal income taxes of $966
based on pro forma adjustments and net loss of World. Assumes an
effective tax rate of 29% of income before taxes.
F-33
<PAGE> 86
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-34
<PAGE> 87
<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-35
<PAGE> 88
<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-36
<PAGE> 89
<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-37
<PAGE> 90
<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
F-38
<PAGE> 91
<CAPTION>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
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-39
<PAGE> 92
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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-40
<PAGE> 93
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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.
F-41
<PAGE> 94
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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-42
<PAGE> 95
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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-43
<PAGE> 96
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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>
F-44
<PAGE> 97
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
3. INVESTMENTS (CONTINUED)
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.
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-45
<PAGE> 98
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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>
F-46
<PAGE> 99
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES (CONTINUED)
For 1996, the amount incurred relating to prior years was due to actual
experience deteriorating below expected results on a large extended wait
disability product. This was a block of business that the Company purchased
prior to 1995 and since the entire block was still in the "wait" period (the
period between claim incurrence and when the Company's coverage begins), the
Company did not have actual claims experience to rely upon in formulating its
reserves. Most of these policies emerged from the "wait" period in 1996 and
the Company began experiencing claims. Based upon that experience, the
Company could more accurately estimate the reserves and the reserves were
increased. For 1997, the amount incurred relating to prior years was due to
experience deteriorating below expected results, and the continued refinement
of the reserving methodology for certain disability income reinsurance
contracts.
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 statement of operations.
F-47
<PAGE> 100
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 of $2,708,824 and capital
loss carryforwards of $3,073,529 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)
======================================
</TABLE>
For 1997, 1996 and 1995, the Company has income tax expense (benefit)
from operations as follows:
<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-48
<PAGE> 101
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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
-------------------------------------------------------------
<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-49
<PAGE> 102
HARBOURTON REASSURANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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-50
<PAGE> 103
<TABLE>
HARBOURTON REASSURANCE, INC.
BALANCE SHEET (UNAUDITED)
<CAPTION>
March 31,
1998
------------
<S> <C>
Assets
Investments:
Fixed maturities available for sale, at fair
values $122,634,283
Mortgage loans 8,242,500
Other invested assets 509,586
------------
Total investments 131,386,369
Cash and cash equivalents 20,596,471
Funds withheld by reinsurers 107,836
Accounts receivable from reinsurers 671,442
Reinsurance recoverable: paid benefits and losses 28,290
Accrued investment income 2,148,222
Deferred acquisition costs 4,805,249
Income tax recoverable 1,174,071
Policy loans 726,136
------------
Total assets $161,644,086
============
Liabilities and stockholder's equity
Future policy benefits and unpaid claims $ 9,689,427
Policyholders' deposits 103,684,715
Accounts payable to reinsurers 4,298,644
Deferred tax liability 2,768,154
Other liabilities 90,197
------------
Total liabilities 120,531,137
Stockholder's equity:
Capital stock, par value $100 per share;
50,000 shares authorized, 36,000
shares issued and outstanding 3,600,000
Additional paid-in capital 11,400,000
Accumulated other comprehensive income 459,727
Retained earnings 25,653,222
------------
Total stockholder's equity 41,112,949
------------
Total liabilities and stockholder's equity $161,644,086
============
See accompanying note.
</TABLE>
F-51
<PAGE> 104
<TABLE>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months ended March 31,
1998 1997
-----------------------------------
<S> <C> <C>
Revenue:
Gross premiums and policy fees
earned (incurred) $ (154,743) $ (196,354)
Reinsurance ceded (95,339) -
---------- -----------
Net premiums (59,404) (196,354)
Investment product surrender
charges 6,215 23,909
Net investment income 2,584,167 2,759,396
Net realized (losses) gains on investments (28,802) 627,926
Miscellaneous revenue 11,063 6,477
---------- -----------
2,513,239 3,221,354
Benefits and expenses:
Policy benefits and claims (recoveries) (57,224) 3,002,198
Benefits and claims ceded (66,654) -
---------- -----------
Net benefits and claims 9,430 3,002,198
Interest credited on policyholders'
deposits 1,265,517 1,333,894
Amortization of deferred
acquisition costs 224,134 247,235
Commissions 76,529 (392,051)
General expenses 600,330 843,583
---------- -----------
2,175,940 5,034,859
---------- -----------
Income (loss) before federal income
tax expense 337,299 (1,813,505)
Provision for federal income tax
(benefit) expense:
Current 23,973 (333,613)
Deferred 27,932 -
---------- -----------
51,905 (333,613)
---------- -----------
Net income (loss) $ 285,394 $(1,479,892)
========== ===========
See accompanying note.
</TABLE>
F-52
<PAGE> 105
<TABLE>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Three Months ended March 31,
1998 1997
-----------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 285,394 $ (1,479,892)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Realized investment losses (gains) 28,802 (627,926)
Amortization of deferred acquisition costs 224,134 247,235
Change in deferred taxes 27,932 -
Decrease in future policy benefits
and unpaid claims (276,756) (15,926,722)
Increase (decrease) in accounts payable to
reinsurers (612,160) 2,920,970
Decrease in funds withheld by reinsurers (1,047) -
Decrease (increase) in accounts receivable 128,161 (38,579,033)
Decrease in reinsurance recoverable - 304,778
Change in income taxes 204,686 (333,613)
Decrease (increase) in accrued investment
income (966,559) 1,452,878
Accretion of premiums and
discounts on bonds, net (143,786) (228,666)
Amortization of premiums and
discounts on mortgage loans, net 252 -
Other, net 128,437 904,471
---------- ------------
Net cash used in operating activities (972,510) (51,345,520)
Cash flows from investing activities
Proceeds from sales and maturities of fixed-
maturity securities 3,457,090 55,133,746
Investment in fixed-maturity securities - (421,042)
Proceeds from sale of other invested assets 31,986 3,380,770
Investment in other invested assets - (133,690)
Proceeds from sales of (investment in) purchased
claims rights 2,760 5,736,966
Investment in mortgage loans - (11,399,020)
Proceeds from repayments of mortgage loans 208,487 567,640
---------- ------------
Net cash provided by investing activities 3,700,323 52,865,370
F-53
<PAGE> 106
<CAPTION>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Three Months ended March 31,
1998 1997
------------------------------------
<S> <C> <C>
Cash flows from financing activities
Withdrawals from investment products $(6,152,876) $(7,485,613)
Proceeds from borrowing - 7,784,533
Interest credited to investment products 1,265,517 1,333,894
----------- -----------
Net cash provided by (used in) financing activities (4,887,359) 1,632,814
----------- -----------
Net (decrease) increase in cash and cash
equivalents (2,159,546) 3,152,664
Cash and cash equivalents, beginning of year 22,756,017 7,674,241
----------- -----------
Cash and cash equivalents, end of year $20,596,471 $10,826,905
=========== ===========
Supplemental disclosures of cash flow information
Income tax refunds received $ (180,713) $ -
=========== ===========
See accompanying note.
</TABLE>
F-54
<PAGE> 107
<TABLE>
HARBOURTON REASSURANCE, INC.
STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Retained earnings
Balance at beginning of year $25,367,828 $30,797,028
Net income (loss) 285,394 $ 285,394 (1,479,892) $(1,479,892)
--------- -----------
Dividends declared on common stock - -
----------- -----------
Balance at end of period 25,653,222 29,317,136
----------- -----------
Accumulated other comprehensive income
Balance at beginning of year 644,885 425,770
Unrealized gains on securities, net of
tax<F*> (185,158) 126,711
--------- -----------
Other comprehensive income (loss) (185,158) (185,158) 126,711 126,711
----------- --------- ----------- -----------
Comprehensive income (loss) $ 100,236 $(1,353,181)
========= ===========
Balance at end of period 459,727 552,481
----------- -----------
Common stock
Balance at beginning of year 3,600,000 3,600,000
Shares issued - -
----------- -----------
Balance at end of period 3,600,000 3,600,000
=========== ===========
Paid-in Capital
Balance at beginning of year 11,400,000 11,400,000
Common stock issued - -
----------- -----------
Balance at end of period 11,400,000 11,400,000
----------- -----------
Total Equity $41,112,949 $44,869,617
=========== ===========
<FN>
<F*> Net of tax: three months ended March 31, 1998, $95,384; three months
ended March 31, 1997, $0.
See accompanying note.
</TABLE>
F-55
<PAGE> 108
HARBOURTON REASSURANCE, INC.
Note to Financial Statements
Three Months ended March 31, 1998 and 1997
(Unaudited)
Note A -- Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included.
F-56
<PAGE> 109
===============================================================================
No person 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 7
Use of Proceeds 14
Dividend Policy 14
Dilution 15
Capitalization 16
Selected Consolidated Financial Information 17
Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Business 26
Management 33
Principal Shareholders 39
Certain Transactions 40
Description of Securities 42
Shares Eligible for Future Sale 44
Underwriting 46
Legal Matters 48
Experts 48
Glossary 48
Index to Financial Statements 51
</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> 110
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 240,000
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 $700,000
========
</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> 111
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, 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> 112
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Austin, State of Texas, June 5, 1998.
LINCOLN HERITAGE CORPORATION
By: /s/Nicholas M. Powling
----------------------------------------------
Nicholas M. Powling, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the 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 June 5, 1998
- --------------------------- Executive Officer and
Nicholas M. Powling Director
Principal Executive
Officer
/s/Clifton Mitchell Executive Vice President- June 5, 1998
- --------------------------- Actuarial and Director
Clifton Mitchell
Principal Financial and
Accounting Officer
<F*> Chairman of the Board June 5, 1998
- ---------------------------
Brent D. Cassity
<F*> Director June 5, 1998
- ---------------------------
Randall K. Sutton
<F*> Director June 5, 1998
- ---------------------------
Howard A. Wittner
<FN>
<F*>By: /s/Nicholas M. Powling
---------------------------------------------
Nicholas M. Powling
</TABLE>
Nicholas M. Powling, by signing his name hereto, does sign this
document on behalf of the persons named above, pursuant to a power of
attorney duly executed by such persons and previously filed.
II-3
<PAGE> 113
[letterhead of Killman, Murrell & Company, P.C.]
INDEPENDENT AUDITORS REPORT
ON ADDITIONAL INFORMATION
To the Board of Directors of Lincoln Heritage Corporation:
Our report on our 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 our opinion,
the information is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ Killman Murrell & Company, P.C.
Killman Murrell & Company, P.C.
(successor to Roy L. Butler, Certified Public Accountant)
Dallas, Texas
March 11, 1998
II-4
<PAGE> 114
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> 115
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> 116
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> 117
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> 118
SCHEDULE III
<TABLE>
SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
Segment Deferred policy Future Policy Unearned Other Premium Net Benefits, Amortization Other
acquisition benefits, premiums policy revenue investment claims, of deferred operating
cost losses, claims claims and income losses and policy expenses
and loss benefits settlement acquisition
expenses payable expenses costs
- ------- --------------- --------------- -------- ---------- ------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life Insurance
Year ended
12/31/95 $ 9,880,350 $ 67,947,256 $-0- $-0- $27,770,810 $3,401,506 $20,775,498 $ 4,839,222 $4,791,991
Year ended
12/31/96 11,149,607 72,854,246 -0- -0- 33,701,793 3,710,720 24,750,300 6,837,080 6,520,374
Year ended
12/31/97 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> 119
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> 120
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
Number Description Page
- ------ ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the Company.<F*>
3.2 By-laws of the Company.<F*>
4.1 Form of Stock Certificate for Common Stock.<F*>
4.2 Registration Rights Agreement dated as of April 6, 1998 by and between the Company and National Heritage
Enterprises, Inc.<F*>
4.3 Form of Warrant Agreement between the Company and Tejas Securities Group, Inc.
5.1 Legal Opinion of Wittner, Poger, Rosenblum, Spewak & Maylack, P.C.
10.1 Lincoln Heritage Corporation 1998 Long-Term Incentive Plan.<F*>
10.2 Exclusivity Agreement dated as of April 1, 1998 by and between the Company and National Prearranged
Services, Inc.<F*>
10.3 Stock Purchase Agreement dated January 26, 1998 by and between Lincoln and NRG Acquisition Partners, L.P.<F*>
10.4 Amended and Restated Award Agreement dated as of April 6, 1998 by and between the Company and Nicholas M.
Powling.<F*>
10.5 Amended and Restated Award Agreement dated as of April 6, 1998 by and between the Company and Clifton
Mitchell.<F*>
10.6 Cost Sharing Agreement dated as of March 31, 1997 by and among Memorial, Lincoln and NPS.<F*>
10.7 Cost Sharing Agreement dated as of June 1, 1998 by and between the Company and NPS.
10.8 Award Agreement dated as of June 1, 1998 by and between the Company and Brent D. Cassidy.
10.9 General Agent Contract dated May 12, 1992 and Addendum dated February 19, 1998 by and between the
Company and NPS.
21.1 Subsidiaries of the Company.
23.1 Consent of Killman, Murrell and Company, P.C.
23.2 Consent of Ernst & Young LLP
23.3 Consent of Wittner, Poger, Rosenblum, Spewak & Maylack, P.C. (included in Exhibit No. 5.1).
24.1 Power of Attorney.<F*>
27.1 Amended Financial Data Schedule (December 31, 1997)
27.2 Financial Data Schedule (December 31, 1996).<F*>
27.3 Financial Data Schedule (March 31, 1998).
27.4 Financial Data Schedule (March 31, 1997).
99.1 Consent of Paul J. Gallant.<F*>
99.2 Consent of Mark A. Turken.<F*>
<FN>
- --------------------
<F*>Previously filed on April 20, 1998
</TABLE>
II-11
<PAGE> 1
1,000,000 Shares
LINCOLN HERITAGE CORPORATION
Common Stock
June , 1998
UNDERWRITING AGREEMENT
----------------------
TEJAS SECURITIES GROUP, INC.
As Representative of the Several Underwriters
c/o: Tejas Securities Group, Inc.
1250 Capital of Texas Hwy. South Building Two
Suite 500
Austin, Texas 78746
Dear Sirs:
Lincoln Heritage Corporation, a Texas corporation (the "Company"),
proposes to sell to you and the other underwriters named in Schedule I hereto
(collectively, the "Underwriters"), for whom Tejas Securities Group, Inc. is
acting as managing underwriter and representative (the "Representative"), in
the respective amounts set forth opposite each Underwriter's name in Schedule
I hereto, an aggregate of 1,000,000 shares of Common Stock, $0.01 par value
(the "Common Stock"), of the Company (such shares are hereinafter
collectively referred to as the "Underwritten Securities"). The Company also
proposes to grant to the Underwriters: (i) the Underwriters' Option (as
defined in Section 2(b) hereof) to purchase up to an aggregate of 150,000
------------
additional shares of Common Stock solely to cover over-allotments in the sale
of the Underwritten Securities (such additional shares of Common Stock are
collectively referred to herein as the "Option Securities"); and (ii) the
Underwriters' Warrants (as defined in Section 7 hereof) to purchase shares of
---------
Common Stock (such Underwriters' Warrants and shares of Common Stock issuable
pursuant thereto, are collectively referred to herein as the "Warrant
Securities"). The Underwritten Securities, the Option Securities and the
Warrant Securities are collectively referred to herein as the "Securities."
The terms which follow, when used in this Agreement, shall have the
meanings indicated. The term "Effective Date" shall mean each date that the
Registration Statement (as defined below) and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean
the date and time that this Agreement is executed and delivered by the
parties hereto. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in Section 1(a) below with respect to the offering of
------------
the Securities, and any preliminary prospectus included in the Registration
Statement at the Effective Date that omits Rule 430A Information (as defined
below). Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the most recent Preliminary Prospectus which
predates or coincides with the Execution Time. "Prospectus" shall mean the
final prospectus with respect to the offering of the Securities that contains
the Rule 430A Information. "Registration Statement" shall mean (a) the
registration statement referred to in Section 1(a) below, including Exhibits
------------
and Financial Statements, in the form in which it has or shall become
effective, (b) in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as hereinafter defined) or any
settlement date pursuant to Section 3(c) hereof, such registration statement
------------
as so amended on such date and (c) in the event of the filing of any
abbreviated registration statement increasing the size of the offering (a
"Rule 462 Registration Statement"), pursuant to Rule 462(b) (as defined
below), which registration statement became effective upon filing the Rule
462 Registration Statement. Such term shall include Rule 430A Information
(as defined below) deemed to be included therein at the Effective Date as
provided by Rule 430A. "Rule 424," "Rule 462(b)" and "Rule 430A" refer to
such rules promulgated under the Securities Act of 1933, as amended (the
"Act"). "Rule 430A Information" means information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
1. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with, each
Underwriter that:
(a) The Company meets the requirements for the use of Form S-1 under
the Act and has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a related preliminary
prospectus ("Preliminary Prospectus"), on Form S-1 (Commission File No.
333-50525) (the "Registration Statement") for the registration under the Act
of the Underwritten Securities and the Option Securities. The Company may have
filed one or more amendments thereto, including related Preliminary
Prospectuses, each of which has previously been furnished to you.
<PAGE> 2
The Company will next file with the Commission either prior to effectiveness of
such Registration Statement, a further amendment thereto (including the form
of Prospectus) or, after effectiveness of such Registration Statement, a
Prospectus in accordance with Rules 430A and 424(b)(1) or (4). As filed, such
amendment and form of Prospectus, or such Prospectus, shall include all Rule
430A Information and, except to the extent the Representative shall agree in
writing to a modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not completed
at the Execution Time, shall contain only such specific additional
information and other changes (beyond that contained in the latest
Preliminary Prospectus) as the Company has advised you in writing, prior to
the Execution Time, will be included or made therein.
(b) Each of the Preliminary Prospectuses dated April 20, 1998, and June
- ----, 1998, at the time of filing thereof, conformed in all material respects
with the applicable requirements of the Act and the rules and regulations
thereunder and did not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. If the Effective Date is
prior to or simultaneous with the Execution Time, (i) on the Effective Date,
the Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations thereunder and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, and (ii) at the Execution Time, the
Registration Statement conforms, and at the time of filing of the Prospectus
pursuant to Rule 424(b), the Registration Statement and the Prospectus will
conform, in all material respects to the requirements of the Act and the
rules and regulations thereunder, and neither of such documents includes, or
will include, any untrue statement of a material fact or omits, or will omit,
to state a material fact required to be stated therein or necessary in order
to make the statements therein (and, in the case of the Prospectus, in the
light of the circumstances under which they were made) not misleading. If the
Effective Date is subsequent to the Execution Time, on the Effective Date,
the Registration Statement and the Prospectus will conform in all material
respects to the requirements of the Act and the rules and regulations
thereunder, and neither of such documents will contain any untrue statement
of any material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein (and, in the case
of the Prospectus, in the light of the circumstances under which they were
made) not misleading. The two preceding sentences do not apply to statements
in or omissions from the Registration Statement or the Prospectus (or any
supplements thereto) based upon and in conformity with information furnished
in writing to the Company by or on behalf of any Underwriter through the
Representative specifically for use in connection with the preparation of the
Registration Statement or the Prospectus (or any supplements thereto).
(c) The Company has no subsidiaries other than those listed in Exhibit
21.1 to the Registration Statement as of the Effective Date (the
"Subsidiaries").
(d) The Company and each Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full corporate power
and corporate authority to own its properties and conduct its business as
described in the Prospectus, and is duly qualified to do business as a
foreign corporation and is in good standing under the laws of each
jurisdiction in which it conducts its business or owns property and in which
the failure, individually or in the aggregate, to be so qualified would have
a material adverse effect on the properties, assets, operations, business,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries, taken as a whole ("Material Adverse Effect"). Each of the
Company and each Subsidiary has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all government
regulatory officials and bodies, to own its properties and conduct its
business as described in the Prospectus except where the absence of any such
authorization, approval, order, license, certificate or permit would not have
a Material Adverse Effect.
(e) Except as described in the Registration Statement, the Company
does not own any shares of capital stock or any other securities of any
corporation or any equity interest in any firm, partnership, association or
other entity other than the Subsidiaries.
(f) The Company's equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus; all
outstanding shares of Common Stock have been duly and validly authorized and
issued and are fully paid and nonassessable, and the certificates therefor
are in valid and sufficient form; there are, and, on the Effective Date, the
Closing Date (as defined in Section 3(a) hereof) and any settlement date
------------
pursuant to Section 3(b) hereof, there will be, no other classes of stock
------------
outstanding except Common Stock; all outstanding options to purchase shares
of Common Stock have been duly and validly authorized and issued; except as
described in the Registration Statement, there are, and, on the Closing Date
and any settlement date pursuant to Section 3(b) hereof, there will be, no
------------
options, warrant or rights to acquire, or debt instruments convertible into
or exchangeable for, or other agreements or understandings to which the
Company is a party, outstanding or in existence, entitling any person to
purchase or otherwise acquire shares of capital stock of the Company; the
issuance and sale of the Securities have been duly and validly authorized
and, when issued, delivered and paid for, the Securities will be fully paid
and nonassessable and free from preemptive rights, and will conform in all
respects to the description thereof contained in the Prospectus; the
Underwriters' Warrants will, when issued, constitute valid and binding
obligations of the Company
2
<PAGE> 3
enforceable in accordance with their terms and the Company has reserved a
sufficient number of shares of Common Stock for issuance upon exercise
thereunder; the Securities will, when issued, possess the rights, privileges and
characteristics as described in the Prospectus; and the certificates for the
Securities are in valid and sufficient form. Each offer and sale of securities
of the Company referred to in Item 15 of Part II of the Registration Statement,
if any, was effected in compliance with the Act and the rules and regulations
thereunder, and with all applicable blue sky ("Blue Sky") laws.
(g) The Securities (other than the Warrant Securities) have been
approved for listing on the American Stock Exchange ("AMEX"), upon notice of
issuance thereof; the Common Stock is registered pursuant to Section 12(b) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company has taken no action designed to, or likely to, have the effect of
terminating the registration of the Common Stock under the Exchange Act, nor
has the Company received any notification that the Commission is
contemplating terminating such registration or listing.
(h) Other than as described in the Prospectus, there is no pending or,
to the best knowledge of the Company, threatened action, suit or proceeding
before any court or governmental agency, authority or body, domestic or
foreign, or any arbitrator involving the Company or any Subsidiary of a
character required to be disclosed in the Registration Statement or the
Prospectus. There is no contract or other document of a character required to
be described in the Registration Statement or Prospectus or to be filed as an
exhibit that is not described or filed as required.
(i) This Agreement has been duly authorized, executed and delivered by
the Company and constitutes the legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
as rights of indemnity and contribution hereunder may be limited by public
policy and except as the enforceability hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and general principles of equity.
(j) The Company has full corporate power and corporate authority to
enter into and perform its obligations under this Agreement and to issue,
sell and deliver the Securities in the manner provided in this Agreement. The
Company has taken all necessary corporate action to authorize the execution
and delivery of, and the performance of its obligations under, this
Agreement.
(k) Neither the offering, issue and sale of the Securities, nor the
consummation of any other of the transactions contemplated herein, nor the
fulfillment of the terms hereof, will conflict with or result in a breach or
violation of, or constitute a default under, or result in the imposition of a
lien on any properties of the Company or any Subsidiary or an acceleration of
indebtedness pursuant to, the Articles of Incorporation, as amended, or
bylaws of the Company, or any Subsidiary, as currently in effect, or any of
the terms of any indenture or other agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or any of its
properties are bound, or any law, order, judgment, decree, rule or regulation
applicable to the Company or any Subsidiary of any court, regulatory body,
administrative agency, governmental body, stock exchange or arbitrator having
jurisdiction over the Company or any Subsidiary. None of the Company nor any
Subsidiary is in violation of its Articles of Incorporation or similar
charter document or bylaws, as each is currently in effect, or in breach of
or default under any of the terms of any indenture or other agreement or
instrument to which it is a party or by which it or its properties are bound,
which breach or default would, individually or in the aggregate, have a
Material Adverse Effect.
(l) Except as disclosed in the Prospectus, no person has the right,
contractual or otherwise, to cause the Company to issue to it any shares of
capital stock in consequence of the issue and sale of the Securities, nor
does any person have preemptive rights, or rights of first refusal or other
rights to purchase any of the Securities. Except as referred to in the
Prospectus, no person holds a right to require or participate in a
registration under the Act of Common Stock, Preferred Stock or any other
equity securities of the Company.
(m) The Company has not (i) taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result in,
under the Exchange Act, or otherwise, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities (other than those actions permitted by applicable law) or (ii)
effected any sales of shares of securities that are required to be disclosed
in response to Item 15 of Part II of the Registration Statement (other than
transactions disclosed in the Registration Statement), if any.
(n) No consent, approval, authorization or order of, or declaration or
filing with, any court or governmental agency or body is required to be
obtained or filed by or on behalf of the Company in connection with the
transactions contemplated herein, except such as may have been obtained or
made and registration of the Securities under the Act, and such as may be
required under the Blue Sky laws of any jurisdiction in connection with the
purchase and distribution of the Securities by the Underwriters.
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<PAGE> 4
(o) To the best of the Company's knowledge, the accountants who have
certified the Company's consolidated financial statements and the financial
statements of Harbourton filed with the Commission as part of the
Registration Statement are independent accountants as required by the Act.
(p) No stop order preventing or suspending the use of any Preliminary
Prospectus has been issued, and no proceedings for that purpose are pending
or, to the best knowledge of the Company, threatened or contemplated by the
Commission; no stop order suspending the sale of the Securities in any
jurisdiction has been issued and no proceedings for that purpose have been
instituted or, to the best knowledge of the Company, threatened or are
contemplated; and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or otherwise)
has been complied with.
(q) Neither the Company nor any Subsidiary has sustained since December
31, 1997, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree, and,
since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there have not been any changes in
the capital stock or long-term debt of the Company, or any material adverse
change, or a development known to the Company that could reasonably be
expected to cause or result in a material adverse change, in the general
affairs, management, financial position, shareholder's equity, results of
operations or prospects of the Company and the Subsidiaries, taken as a
whole, otherwise than as set forth in the Prospectus. Except as set forth in
the Prospectus, there exists no present condition or state of facts or
circumstances known to the Company involving its or any Subsidiary's
customers that the Company can now reasonably foresee would have a Material
Adverse Effect or that would result in a termination or cancellation of any
agreement with any customer whose purchases, individually or in the
aggregate, are material to the business of the Company and the Subsidiaries,
taken as a whole, or that would result in any material decrease in sales to
any such customer or purchases from any supplier, or that would prevent the
Company or any Subsidiary from conducting its business as described in the
Prospectus in essentially the same manner in which it has heretofore been
conducted.
(r) The Consolidated Financial Statements and the related notes of the
Company, including, without limitation, transactions with unconsolidated
Subsidiaries, if any, included in the Registration Statement and the
Prospectus present fairly the consolidated financial position, results of
operations, cash flow and changes in shareholder's equity of the Company and
the Subsidiaries at the dates and for the periods indicated, subject in the
case of the Consolidated Financial Statements for interim periods, to normal
and recurring year-end adjustments. The Consolidated Financial Statement
schedules included in the Registration Statement present fairly the
information required to be stated therein. Such Consolidated Financial
Statements and schedules were prepared in conformity with the Commission's
rules and regulations and in accordance with generally accepted accounting
principles, except as stated therein. The financial information of the
Company and the Subsidiaries set forth in the Prospectus under the captions
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" fairly present, on the basis stated in
the Prospectus, the information included therein.
(s) The Company and each Subsidiary owns or possesses, or has the right
to use pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks, service
marks, licenses and other intellectual property rights necessary to carry on
its business as described in the Prospectus, and, except as set forth in the
Prospectus, none of the Company nor any Subsidiary has received any notice of
either (i) default under any of the foregoing or (ii) infringement of or
conflict with asserted rights of others with respect to, or challenge to the
validity of, any of the foregoing which, in the aggregate, if the subject of
an unfavorable decision, ruling or finding, could reasonably be expected to
have a Material Adverse Effect, and the Company knows of no fact which could
reasonably be anticipated to serve as the basis for any such notice.
(t) Subject to such exceptions as are not reasonably likely to result
in a Material Adverse Effect, (A) the Company and each Subsidiary owns all
properties and assets described in the Registration Statement and the
Prospectus as being owned by it and (B) The Company and each Subsidiary has
good title to all properties and assets owned by it, free and clear of all
liens, charges, encumbrances and restrictions, except as otherwise disclosed
in the Prospectus and except for (i) liens for taxes not yet due, (ii)
mortgages and liens securing debt reflected on the Consolidated Financial
Statements included in the Prospectus, (iii) materialmen's, workmen's,
vendor's and other similar liens incurred in the ordinary course of business
that are not delinquent, individually or in the aggregate, and do not have a
Material Adverse Effect, or on the use of such properties or assets by the
Company or any Subsidiary, in its respective business. All leases to which
the Company or a Subsidiary is a party and which are material to the conduct
of the business of the Company and the Subsidiaries are valid and binding and
no material default by the Company or the Subsidiary a party thereto has
occurred and is continuing thereunder; and each of the Company and each
Subsidiary enjoys peaceful and undisturbed possession under all such material
leases to which it is a party as lessee.
(u) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the transactions in and dispositions of
the assets of the Company and the Subsidiaries. The system of internal
accounting controls maintained by the Company is sufficient to provide
reasonable assurances that: (i) transactions are executed in
4
<PAGE> 5
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) Except as set forth in the Prospectus, subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, none of the Company or its Subsidiaries has incurred any
liabilities or obligations, direct or contingent, or entered into any
transactions, in each case, which are likely to result in a Material Adverse
Effect, and there has not been any payment of or declaration to pay any
dividends or any other distribution with respect to the shares of the capital
stock of the Company.
(w) The Company and each Subsidiary is in compliance in all material
respects with all applicable laws, rules and regulations, including, without
limitation, employment and employment practices, immigration, terms and
conditions of employment, health and safety of workers, customs and wages and
hours, and is not engaged in any unfair labor practice. No property of the
Company or any Subsidiary has been seized by any governmental agency or
authority as a result of any violation by the Company or any Subsidiary or
any independent contractor of the Company or any Subsidiary of any provisions
of law. There is no pending unfair labor practice complaint or charge filed
with any governmental agency against the Company or any Subsidiary. There is
no labor strike, material dispute, slow down or work stoppage actually
pending or, to the best knowledge of the Company or any Subsidiary,
threatened against or affecting the Company or any Subsidiary; no grievance
or arbitration arising out of or under any collective bargaining agreements
is pending against the Company or any Subsidiary; no collective bargaining
agreement which is binding on the Company or any Subsidiary and restricts the
Company or such Subsidiary from relocating or closing any of its operations;
and none of the Company or any Subsidiary has experienced any work stoppage
or other labor dispute at any time.
(x) The Company has accurately, properly and timely (giving effect to
any valid extensions of time) filed all federal, state, local and foreign tax
returns (including all schedules thereto) that are required to be filed, and
has paid all taxes and assessments shown thereon. All tax deficiencies
asserted or assessed against the Company by the Internal Revenue Service
("IRS") or any other foreign or domestic taxing authority have been paid or
finally settled with no remaining amounts owed. Neither the IRS nor any
other foreign or domestic taxing authority has examined any tax returns of
the Company nor has the IRS or any foreign or domestic taxing authority
asserted a position which conflicts with any tax position taken by the
Company. The charges, accruals and reserves shown in the Consolidated
Financial Statements included in the Prospectus in respect of taxes for all
fiscal periods to date are adequate, and nothing has occurred subsequent to
the date of such Consolidated Financial Statements that makes such charges,
accruals or reserves inadequate. The Company is not aware of any proposal
(whether oral or written) by any taxing authority to adjust any tax return
filed by the Company.
(y) With such exceptions as are not likely to result in a Material
Adverse Effect, the Company and each Subsidiary is in compliance with all
federal, state, foreign and local laws and regulations relating to pollution
or protection of human health or the environment ("Environmental Laws"),
there are no circumstances that may prevent or interfere with such compliance
other than as set forth in the Prospectus, and neither the Company nor any
Subsidiary has received any notice or other communication alleging a
currently pending violation of any Environmental Laws. With such exceptions
as are not likely to result in a Material Adverse Effect, other than as set
forth in the Prospectus, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge or disposal of any chemicals,
pollutants, contaminants, wastes, toxic substances, petroleum and petroleum
products, that may result in the imposition of liability on the Company or
any Subsidiary or any claim against the Company or any Subsidiary or, to the
Company's best knowledge, against any person or entity whose liability for
any claim the Company or any Subsidiary has or may have assumed either
contractually or by operation of law, and neither the Company nor any
Subsidiary has received any notice or other communication concerning any such
claim against the Company or any Subsidiary or such person or entity.
(z) Except as set forth in the Prospectus, there are no outstanding
loans, advances or guaranties of indebtedness by the Company to or for the
benefit of its affiliates, or any of its officers or directors, or any of the
members of the families of any of them, which are required to be disclosed in
the Registration Statement or the Prospectus.
(aa) The Company is not an investment company subject to registration
under the Investment Company Act of 1940, as amended.
(bb) Except as set forth in the Prospectus, each of the Company and
each Subsidiary has insurance of the types and in the amounts that it
reasonably believes is adequate for its business, including, but not limited
to, casualty and general liability insurance covering all real and personal
property owned or leased by the Company or such Subsidiary, as applicable,
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against.
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<PAGE> 6
(cc) None of the Company nor any Subsidiary has at any time; (i) made
any contributions to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law; (ii) made any
payment to any state, federal or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or allowed by all applicable laws; or (iii) violated, nor
is it in violation of, any provision of the Foreign Corrupt Practices Act of
1977.
(dd) The preparation and the filing of the Registration Statement with
the Commission have been duly authorized by and on behalf of the Company, and
the Registration Statement has been duly executed pursuant to such
authorization by and on behalf of the Company.
(ee) All documents delivered or to be delivered by the Company or any
of its directors or officers to the Underwriters, the Commission or any state
securities law administrator in connection with the issuance and sale of the
Securities were, on the dates on which they were delivered, and will be, on
the dates on which they are to be delivered, true, complete and correct in
all material respects.
(ff) Except as described in the Prospectus, none of the Company or any
Subsidiary maintains, nor does any other person maintain on behalf of the
Company or any Subsidiary, any retirement, pension (whether deferred or
non-deferred, defined contribution or defined benefit) or money purchase plan
or trust. There are no unfunded liabilities of the Company or any Subsidiary
with respect to any such plans or trusts that are not accrued or otherwise
reserved for on the Consolidated Financial Statements.
(gg) Any certificates signed by an officer of the Company and delivered
to the Representative or the Underwriters or to counsel for the Underwriters
shall also be deemed a representation and warranty of the Company to the
Underwriters as to the matters covered thereby. Any certificate delivered by
the Company to its counsel for purposes of enabling such counsel to render
the opinions referred to in Section 6(b) will also be furnished to the
------------
Representative and counsel for the Underwriters and shall be deemed to be
additional representations and warranties by the Company to the Underwriters
as to the matters covered thereby.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to issue
and sell to the Underwriters an aggregate of 1,000,000 shares of Common
Stock. Each of the Underwriters agrees, severally and not jointly, to
purchase from the Company the number of Underwritten Securities set forth
opposite its name in Schedule I hereto. The purchase price per Underwritten
Security to be paid by the several Underwriters to the Company shall be $-.--
per share.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option (the "Underwriters' Option") to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 150,000 shares of Common
Stock, at the purchase price of $-.-- per share for use solely in covering
any over-allotments made by the Representative for the account of the
Underwriters in the sale and distribution of the Underwritten Securities.
Said Underwriters' Option may be exercised in whole or in part at any time on
or before the 45th day after the Effective Date upon written or telegraphic
notice by the Representative to the Company setting forth the number of
Option Securities which the several Underwriters are electing to purchase
pursuant to the Underwriters' Option and the settlement date. Delivery of
certificates for such Option Securities by the Company and payment therefor
to the Company shall be made as provided in Section 3 hereof. The number of
---------
Option Securities to be so purchased by each Underwriter pursuant to the
Underwriters' Option shall be determined by multiplying the number of Option
Securities to be sold by the Company pursuant to the Underwriters' Option, as
exercised, by a fraction, the numerator of which is the number of
Underwritten Securities to be purchased by such Underwriter as set forth
opposite its name in Schedule I and the denominator of which is the total
number of Underwritten Securities to be purchased by all of the Underwriters
as set forth on Schedule I (subject to such adjustments to eliminate any
fractional share purchases as the Representative in its discretion may make).
3. Delivery and Payment.
(a) If the Underwriters' Option is exercised on or before the third
business day prior to the Closing Date (as defined below), delivery of the
certificates for the shares of Common Stock described in Sections 2(a) and
------------
2(b) hereof shall be made by the Company through the facilities of the
- ----
Depository Trust Company ("DTC"), and payment therefor, shall be made at the
office of the Company at 9:00 a.m. Central Daylight Savings Time, on [June] --,
1998 or such later date (but not later than [45 days after effectiveness]) as
the Representative shall designate, which date and time may be postponed by
agreement among the Representative and the Company or as provided in Section 9
---------
hereof (such date, time of delivery and payment for such Securities being herein
called the ("Closing Date"). Delivery of the certificates for such Securities to
be purchased on the Closing Date shall be made as provided in the preceding
sentence for the respective accounts of the
6
<PAGE> 7
several Underwriters against payment by the several Underwriters through
Tejas Securities Group, Inc. of the aggregate purchase price of such
Securities being sold by the Company, to or upon the order of the Company, by
certified or official bank check or checks drawn on or by a Dallas Clearing
House bank. Certificates for such Securities shall be registered in such
names and in such denominations as the Representative may request not less
than one full business day in advance of the Closing Date. The Company
agrees to have the certificates for the Securities to be purchased on the
Closing Date available at the office of the DTC, not later than 9:00 a.m.
Eastern Standard Time at least one business day prior to the Closing Date.
(b) If the Underwriters' Option is exercised after the third business
day prior to the Closing Date, (i) delivery of the certificates for the
shares of Common Stock described in Section 2(a) hereof and payment therefor
------------
will be governed by the provisions of Section 3(a) hereof and (ii) the
------------
Company will deliver (at the expense of the Company) on the date specified by
the Representative (which shall not be less than one nor more than five
business days after exercise of the Underwriters' Option), certificates for
the shares of Common Stock described in Section 2(b) hereof in such names and
------------
denominations as the Representative shall have requested against payment at
the office of the Company of the purchase price therefor, to or upon the
order of the Company, by certified or official bank check or checks drawn on
or by a Dallas Clearing House bank. If settlement for such Securities occurs
after the Closing Date, the Company will deliver to the Representative on the
settlement date for such Securities, and the obligation of the Underwriters
to purchase such Securities shall be conditioned upon receipt of,
supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant
to Section 6 hereof. The Company agrees to have the certificates for the
---------
Securities to be purchased after the Closing Date available at the office of
the DTC not later than 9:00 a.m. Eastern Standard Time at least one business
day prior to the settlement date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set
forth in the Prospectus.
5. Agreements. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the Execution Time,
to become effective as promptly as possible. If the Registration Statement
has become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will file the
Prospectus, properly completed, pursuant to Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will promptly advise the
Representative (i) when the Registration Statement shall have become
effective, (ii) when any post-effective amendment thereto shall have become
effective, (iii) of any request by the Commission for any amendment or
supplement of the Registration Statement or the Prospectus or for any
additional information with respect thereto, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the receipt by the Company of any notification with respect
to the institution or threatening of any proceeding for that purpose and (v)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of any
such stop order or suspension and, if issued, to obtain as soon as possible
the withdrawal thereof. The Company will not file any amendment to the
Registration Statement or supplement to the Prospectus without the prior
consent of the Representative, which consent shall not be unreasonably
withheld or delayed. The Company will prepare and file with the Commission,
promptly upon your request, any amendment to the Registration Statement or
supplement to the Prospectus that you reasonably determine to be necessary or
advisable in connection with the distribution of the Securities by you, and
will use its best efforts to cause the same to become effective as promptly
as possible.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it otherwise shall be necessary to supplement the
Prospectus to comply with the Act or the rules or regulations thereunder, the
Company will promptly prepare and file with the Commission, subject to
Section 5(a) hereof, a supplement that will correct such statement or
- ------------
omission or a supplement that will effect such compliance.
(c) As soon as practicable (but not later than eighteen months after
the effective date of the Registration Statement), the Company will make
generally available to its security holders and to the Representative an
earning statement or statements (which need not be audited) of the Company
covering a period of at least twelve months after the Effective Date (but in
no event commencing later than 90 days after such date), which will satisfy
the provisions of Section 11(a) of the Act and Rule 158 promulgated
thereunder.
(d) The Company will furnish to each of you and counsel for the
Underwriters, without charge, one signed copy of the Registration Statement
and any amendments thereto (including exhibits thereto) and to each other
Underwriter a conformed copy of the Registration Statement and any amendments
thereto (without exhibits thereto) and, so long as delivery of a prospectus
by an Underwriter or dealer may be required by the Act, as many copies of the
Prospectus and each Preliminary Prospectus and any supplements thereto as the
Representative may reasonably request.
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<PAGE> 8
(e) The Company will take all actions necessary for the registration or
qualification of the Securities for sale under the laws of such jurisdictions
within the United States and its territories as the Representative may
designate, will maintain such qualifications in effect so long as required
for the distribution of the Securities and will pay the fee of the National
Association of Securities Dealers ("NASD") in connection with its review of
the offering, provided that the Company shall not be required to qualify as a
foreign corporation or to consent to service of process under the laws of any
such jurisdiction (except service of process with respect to the offering and
sale of the Securities).
(f) The Company will apply the net proceeds from the offering received
by it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(g) The Company will (i) cause the Securities (other than the Warrant
Securities) to be listed on AMEX and (ii) comply with all registration,
filing and reporting requirements of the Exchange Act and AMEX which may from
time to time be applicable to the Company.
(h) During the five-year period commencing on the date hereof, the
Company will furnish to its shareholders, as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and will furnish to you
and, upon request, to the other Underwriters hereunder; (i) concurrent with
furnishing such quarterly reports to its shareholders, statements of income
and other information of the Company for such quarter in the form furnished
to the Company's shareholders; (ii) concurrent with furnishing such annual
reports to its shareholders, a balance sheet of the Company as of the end of
such fiscal year, together with statements of income and of cash flow of the
Company for such fiscal year, all in reasonable detail and accompanied by a
copy of the certificate or report thereon of its independent certified public
accountants; (iii) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD,
AMEX or any other securities exchange on which any of the Company's
securities may be listed; (iv) every press release and every material news
item or article in respect of the Company or its affairs which was released
or prepared by the Company; and (v) any additional information of a public
nature concerning the Company or its business that you may reasonably
request. During such five-year period, if the Company shall have active
Subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and such Subsidiaries
are consolidated, and shall be accompanied by similar financial statements
for any significant subsidiary that is not so consolidated.
(i) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be
the same entity as the transfer agent) for the Securities.
(j) The Company has reserved and shall continue to reserve a sufficient
number of shares of Common Stock for issuance upon exercise of the
Underwriters' Warrants.
(k) If the Company elects to rely on Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 p.m., Washington D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. Conditions to the Obligations of the Underwriters. The obligations of
the Underwriters to purchase the Securities described in Sections 2(a) and
-------------
2(b) hereof shall be subject to (i) the accuracy of the representations and
- ----
warranties on the part of the Company contained herein as of the Execution
Time, the Closing Date and (in the case of any Securities delivered after the
Closing Date) any settlement date pursuant to Section 3(b) hereof, (ii) the
------------
accuracy of the statements of the Company made in any certificates delivered
pursuant to the provisions hereof, (iii) the performance by the Company of
its obligations hereunder, and (iv) the following additional conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under
the Act, such post-effective amendment shall become effective) not later than
- --- p.m. ----- time, on the execution date hereof or at such later date and
time as you may approve in writing and, at the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), no stop order suspending
------------
the effectiveness of the Registration Statement or any qualification in any
jurisdiction shall have been issued and no proceedings for that purpose shall
have been initiated or, to the best knowledge of the Company, threatened by
the Commission.
8
<PAGE> 9
(b) The Company shall have furnished to the Representative:
(A) the opinion of Wittner, Poger, Rosenblum, Kessler, Spewak
and Maylack, P.C., counsel for the Company, addressed to the Underwriters and
dated the Closing Date (and any settlement date pursuant to Section 3(b)
------------
hereof), or other evidence satisfactory to the Representative to the effect
that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full corporate
power and corporate authority to own its properties and conduct its
business as described in the Prospectus. The Company has all necessary
and material authorizations, approvals, orders, licenses, certificates
and permits of and from all government regulatory officials and bodies,
to own its properties and conduct its business as described in the
Prospectus in Texas and Missouri, except where failure to obtain such
authorizations, approvals, orders, licenses, certificates or permits
would not have a Material Adverse Effect.
(ii) To the best knowledge of such counsel, after due
inquiry, the Company does not own any shares of capital stock or any
other equity securities of any corporation or any equity interest in
any firm, partnership, association or other entity other than as
described in the Prospectus or as set forth on Exhibit 21.1 of the
Registration Statement, except for ownership interests that would not
have a Material Adverse Effect.
(iii) The Company has an authorized share capitalization as
set forth in the Prospectus; the capital stock of the Company conforms
in all material respects to the description thereof contained in the
Prospectus; all outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable and
the certificates therefor are in valid and sufficient form in
accordance with applicable state law; there are no other classes of
stock outstanding except Common Stock; all outstanding options to
purchase shares of Common Stock have been duly and validly authorized
and issued; except as described in the Prospectus, there are no
options, warrants or rights to acquire, or debt instruments convertible
into or exchangeable for, or other agreements or understandings to
which the Company is a party, outstanding or in existence, entitling
any person to purchase or otherwise acquire any shares of capital stock
of the Company; the issuance and sale of the Securities have been duly
and validly authorized and, when issued and delivered and paid for, the
Securities will be fully paid and nonassessable and free from
preemptive rights, and will conform in all respects to the description
thereof contained in the Prospectus; the Underwriters' Warrants
constitute valid and binding obligations of the Company enforceable in
accordance with their terms (except for bankruptcy, insolvency,
creditor's rights generally and to equitable principles) and the
Company has reserved a sufficient number of shares of Common Stock for
issuance upon exercise thereof; the Securities (other than the Warrant
Securities) have been approved for listing on AMEX upon notice of
issuance thereof; and the certificates for the Securities are in valid
and sufficient form. Each offer and sale of securities of the Company
described in Item 15 of Part II of the Registration Statement, if any,
was effected in compliance with the Act and the rules and regulations
thereunder.
(iv) Other than as described in the Prospectus, there is
no pending or, to the best knowledge of such counsel, threatened
action, suit or proceeding before any court or governmental agency,
authority or body, domestic or foreign, or any arbitrator involving the
Company or any Subsidiary of a character required to be disclosed in
the Registration Statement or the Prospectus that is not adequately
disclosed in the Prospectus, and, to the best knowledge of such
counsel, there is no contract or other document of a character required
to be described in the Registration Statement or the Prospectus, or to
be filed as an exhibit, which is not described or filed as required.
(v) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
agreement and obligation of the Company enforceable against it in
accordance with its terms (subject to standard bankruptcy and equitable
remedy exceptions, and limitations under the Act as to the
enforceability of indemnification provisions).
(vi) The Company has full corporate power and corporate
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities in the manner
provided in this Agreement; and the Company has taken all necessary
corporate action to authorize the execution and delivery of, and the
performance of its obligations under, this Agreement.
(vii) Neither the offering, issue and sale of the
Securities and application of the proceeds as contemplated in the
Registration Statement, nor the consummation of any other of the
transactions contemplated herein, nor the fulfillment of the terms
hereof, will conflict with or result in a breach or violation of, or
constitute a default under, or result in the imposition of a lien on
any properties of the Company or any Subsidiary, or an acceleration of
indebtedness pursuant to, the Articles of Incorporation, as amended,
(or other charter document) or bylaws of the Company or any Subsidiary, or
9
<PAGE> 10
any of the terms of any indenture or other agreement or instrument
to which the Company or any Subsidiary is a party or by which its
properties are bound, or any law, order, judgment, decree, rule or
regulation applicable to the Company or any Subsidiary of any court,
regulatory body, administrative agency or governmental body having
jurisdiction over the Company or any Subsidiary. The Company is not in
violation of its Articles of Incorporation, as amended, or bylaws. To
such counsel's actual knowledge, there are no events of default (as
defined in the applicable indenture, agreement or instrument) existing
under any of the terms of any indenture or other agreement or
instrument to which the Company is a party or by which it or its
properties are bound, which Events of Default would, individually or in
the aggregate, have a Material Adverse Effect.
(viii) Except as disclosed in the Prospectus, to the best
of such counsel's knowledge, after due inquiry, no person has the
right, contractual or otherwise, to cause the Company to issue to it
any shares of capital stock in consequence of the issue and sale of the
Securities to be sold by the Company hereunder nor does any person have
preemptive rights, or rights of first refusal or other rights to
purchase any of the Securities. Except as referred to in the
Prospectus, to the best of such counsel's knowledge, after due inquiry,
no person holds a right to require or participate in a registration
under the Act of Common Stock or any other equity securities of the
Company.
(ix) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body is
required to be obtained or filed by or on behalf of the Company in
connection with the transactions contemplated herein, except such as
may have been obtained or made and registration of the Securities under
the Act, and such as may be required under the Blue Sky laws of any
jurisdiction.
(x) To such counsel's actual knowledge, the Company is not
in violation of or default under any judgment, ruling, decree or order
or any statute, rule or regulation of any court or other United States
governmental agency or body, including any applicable laws respecting
employment, immigration and wages and hours, in each case, where such
violation or default could have a Material Adverse Effect. To such
counsel's actual knowledge, the Company is not involved in any labor
dispute nor is any labor dispute threatened.
(xi) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on
behalf of the Company, and the Registration Statement has been duly
executed pursuant to such authorization by and on behalf of the
Company.
(B) the opinion of Thompson Coburn, special securities counsel
for the Company, addressed to the Underwriters and dated the Closing Date
(and any settlement date pursuant to Section 3(b) hereof), or other evidence
------------
satisfactory to the Representative to the effect that:
(i) The Registration Statement has become effective under
the Act; any required filing of the Prospectus or any supplements
thereto pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); to the best knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or threatened; the Registration Statement and the Prospectus
(and any supplements thereto) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations thereunder.
(ii) Neither the Company nor any subsidiary of the Company
is an investment company subject to registration under the Investment
Company Act of 1940, as amended.
(C) the opinion of Roan & Autrey, special insurance regulatory
counsel for the Company, addressed to the Underwriters and dated the Closing
Date (and any settlement date pursuant to Section 3(b) hereof), or other
------------
evidence satisfactory to the Representative to the effect that:
The description of the Company's and its Subsidiaries
experiences with respect to the Texas Insurance Department's Orders of
Administrative Oversight set forth under -------- in the Prospectus, is
accurate in all material respects.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company
and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such
counsel is not passing upon and does not assume responsibility for the
accuracy, completeness or fairness of the statements
10
<PAGE> 11
contained in the Registration Statement or Prospectus (except as and to the
extent stated in subparagraphs (v) and (xiv) above), on the basis of the
foregoing and on such counsel's participation in the preparation of the
Registration Statement and the Prospectus, nothing has come to the attention of
such counsel that causes such counsel to believe that the Registration
Statement, at the Effective Date and at the Closing Date (and any settlement
date pursuant to Section 3(b) hereof), contained or contains any untrue
------------
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, at the date of such Prospectus or at the
Closing Date (or any settlement date pursuant to Section 3(b) hereof), contained
------------
or contains any untrue statement of a material fact or omitted or omits to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
comment with respect to the Consolidated Financial Statements and schedules and
other financial or statistical data included in the Registration Statement or
Prospectus).
References to the Prospectus in this Section 6(b) shall include any
supplements thereto. ------------
(c) The Representative shall have received from Winstead Sechrest &
Minick P.C., counsel for the Underwriters, an opinion dated the Closing Date
(and any settlement date pursuant to Section 3(b) hereof), with respect to
------------
the issuance and sale of the Securities, and with respect to the Registration
Statement, the Prospectus and other related matters as the Representative may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling them to
pass upon such matters.
(d) The Company shall have furnished to the Representative a
certificate of the Company, signed by its Chief Executive Officer and Chief
Financial Officer, dated the Closing Date (and any settlement date pursuant
to Section 3(b) hereof), to the effect that each has carefully examined the
------------
Registration Statement, the Prospectus (and any supplements thereto) and this
Agreement, and, after due inquiry, that:
(i) As of the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), the statements made in the Registration Statement
------------
and the Prospectus are true and correct and the Registration Statement
and the Prospectus do not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(ii) No order suspending the effectiveness of the Registration
Statement or the qualification or registration of the Securities under
the securities or Blue Sky laws of any jurisdiction is in effect and no
proceeding for such purpose is pending before or, to the knowledge of
such officers, threatened or contemplated by the Commission or the
authorities of any such jurisdiction; and any request for additional
information with respect to the Registration Statement or the
Prospectus on the part of the staff of the Commission or any such
authorities brought to the attention of such officers has been complied
with to the satisfaction of the staff of the Commission or such
authorities.
(iii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, (x) there has not
been any change in the capital stock or long-term debt of the Company,
except as set forth in or contemplated by the Registration Statement
and the Prospectus, (y) there has not been any material adverse change
in the general affairs, business, prospects, properties, management,
results of operations or condition (financial or otherwise) of the
Company and its Subsidiaries, whether or not arising from transactions
in the ordinary course of business, in each case, other than as set
forth in or contemplated by the Registration Statement and the
Prospectus, and (z) the Company has not sustained any material
interference with its business or properties from fire, explosion,
flood or other casualty, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other governmental
action, order or decree, which is not set forth in the Registration
Statement and the Prospectus.
(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has been no
litigation instituted against the Company, any of its respective
officers or directors, or, to the best knowledge of such officers, any
affiliate or promoter of the Company, and since such dates there has
been no proceeding instituted or, to the best knowledge of such
officers, threatened against the Company, any of its officers or
directors, or, to the best knowledge of such officers, any affiliate or
promoter of the Company, before any federal, state or county court,
commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding could have a
Material Adverse Effect.
11
<PAGE> 12
(v) Each of the representations and warranties of the Company in
this Agreement is true and correct in all material respects on and as
of the Execution Time and the Closing Date (and any settlement date
pursuant to Section 3(b) hereof) with the same effect as if made on and
------------
as of the Closing Date (and any settlement date pursuant to Section 3(b)
hereof). ------------
(vi) Each of the covenants required in this Agreement to be
performed by the Company on or prior to the Closing Date (and any
settlement date pursuant to Section 3(b) hereof) has been duly, timely
------------
and fully performed, and each condition required herein to be complied
with by the Company on or prior to the Closing Date (and any settlement
date pursuant to Section 3(b) hereof) has been duly, timely and fully
complied with. ------------
(e) At the Execution Time and on the Closing Date (and any settlement
date pursuant to Section 3(b) hereof), Killman, Murrell & Company, P.C., with
------------
respect to the Company, and Ernst & Young LLP, with respect to Harbourton,
shall have furnished to the Representative letters, dated as of such dates,
in form and substance satisfactory to the Representative, confirming that
they are independent accountants within the meaning of the Act and the
applicable rules and regulations thereunder and stating, with respect to the
Company or Harbourton, as the case may be, in effect that:
(i) In their opinion, the audited Consolidated Financial
Statements of the Company or Harbourton for the fiscal year ended
December 31, 1997, and the notes to the Consolidated Financial
Statements and Financial Statement schedules for those periods included
in the Registration Statement and the Prospectus, including, without
limitation, transactions with unconsolidated Subsidiaries, comply in
all material respects with generally accepted accounting principles and
the applicable accounting requirements of the Act and the applicable
rules and regulations thereunder.
(ii) On the basis of a reading of the latest unaudited
Consolidated Financial Statements made available by the Company or
Harbourton, carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards),
a reading of the minutes of the meetings of the shareholders, directors
and committees of the Company, and inquiries of certain officials of
the Company or Harbourton who have responsibility for financial and
accounting matters of the Company or Harbourton, nothing came to their
attention that caused them to believe that with respect to the period
subsequent to December 31, 1997 through a specified date not more than
five business days prior to the date of the letter, (y) there were any
changes in the long-term debt or capital stock of the Company or
Harbourton, or decreases in net current assets, net assets or
shareholder's equity of the Company or Harbourton as compared with the
amounts shown on the December 31, 1997 balance sheet included in the
Registration Statement and the Prospectus or (z) there were any
decreases in reserves, sales, net income or income from operations, of
the Company or Harbourton, as compared with the corresponding period in
the preceding year, except for changes or decreases which the
Registration Statement discloses have occurred or may occur and except
for changes or decreases, set forth in such letter, in which case (A)
the letter shall be accompanied by an explanation by the Company or
Harbourton as to the significance thereof unless said explanation is
not deemed necessary by the Representative and (B) such changes or
decreases and the explanation thereof shall be acceptable to the
Representative, in its sole discretion.
(iii) They have performed certain other specified procedures as a
result of which they determined that all information of an accounting,
financial or statistical nature (which is limited to accounting,
financial or statistical information derived from the general
accounting records of the Company) set forth in the Registration
Statement and the Prospectus and specified by you prior to the
Execution Time, agrees with the accounting records of the Company.
References to the Prospectus in this Section 6(e) shall include
any supplements thereto. ------------
(f) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall not have been
(i) any changes or decreases from that specified in the letters referred to
in Section 6(e) hereof or (ii) any change, or any development involving a
------------
prospective change, in or affecting the properties, assets, results of
operations, business, capitalization, net worth, prospects, general affairs
or condition (financial or otherwise) of the Company and the Subsidiaries,
taken as a whole, the effect of which is, in the sole judgment of the
Representative, so material and adverse as to make it impractical or
inadvisable to proceed with the public offering or delivery of the Securities
as contemplated by the Registration Statement and the Prospectus.
(g) On or prior to the Effective Date, the Securities (other than the
Warrant Securities) shall have been approved for listing on AMEX, subject to
official notice of issuance.
12
<PAGE> 13
(h) The Company shall not have sustained any uninsured substantial loss
as a result of fire, flood, accident or other calamity.
(i) The Company shall have furnished to the Representative a
certificate of the Secretary of the Company certifying as to certain
information and other matters as the Representative may reasonably request.
(j) The Company shall have furnished to the Representative such further
information, certificates and documents as the Representative may reasonably
request.
If any of the conditions specified in this Section 6 shall not have
---------
been fulfilled in any respect when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all respects reasonably satisfactory in form and
substance to the Representative and its counsel, this Agreement and all
obligations of the Underwriters hereunder may be canceled at, or at any time
prior to, the Closing Date (or any settlement date pursuant to Section 3(b)
------------
hereof), by the Representative. Notice of such cancellation shall be given
to the Company in writing or by telephone, facsimile or telegraph confirmed
in writing.
7. Fees and Expenses and Underwriters' Warrant. The Company agrees to pay
or cause to be paid the following:
(a) the fees, disbursements and expenses of its own counsel and
accountants in connection with the registration of the Securities under the
Act and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus, any
Prospectus, and any drafts thereof, and amendments and supplements thereto,
and the mailing and delivery of copies thereof to the Underwriters and
dealers;
(b) all filing and other fees in connection with filing with the NASD,
and complying with applicable review requirements thereof;
(c) the cost of preparing and printing certificates for the Securities;
(d) all expenses, taxes, fees and commissions, including, without
limitation, any and all fixed transfer duties sellers' and buyers' stamp
taxes or duties on the purchase and sale of the Securities and stock exchange
brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Securities (the latter to the extent paid and not
reimbursed) (i) incident to the sale and delivery by the Company of the
Securities to the Underwriters and (ii) incident to the sale and delivery of
the Securities by the Underwriters to the initial purchasers thereof;
(e) the costs and charges of any transfer agent and registrar;
(f) the fees and expenses in connection with qualification of the
Securities (other than the Warrant Securities) for listing on the AMEX;
(g) a nonaccountable expense allowance of 2.0% of the proceeds derived
from the offering (including the Option Securities described in Section 2(b)
------------
hereof) payable to the Representative, of which $50,000 has been paid prior
to the date hereof; and
(h) all other costs and expenses incident to the performance of the
Company's obligations hereunder which are not otherwise specifically provided
for in this Section 7.
---------
In addition to the sums payable to the Representative as provided
elsewhere herein and in addition to the Underwriters' Option, the
Underwriters shall be entitled to receive, as partial compensation for their
services, warrants (the "Underwriters' Warrants") for the purchase of an
aggregate of 100,000 shares of Common Stock of the Company. The Underwriters'
Warrants shall be issued pursuant to a Warrant Agreement in the form of
Exhibit A attached hereto and shall be exercisable, in whole or in part, for
- ---------
a period of four years commencing from the one year anniversary of the date
hereof, at 120% of the initial public offering price per share of Common
Stock. The Underwriters' Warrants, shall be non-transferable for one year
from the date of issuance of the Underwriters' Warrants, except for (i)
transfers to officers or partners of the Underwriters, (ii) in connection
with a merger, consolidation or reorganization of the Company or (iii)
transfers occurring by operation of law.
Without limiting in any respect the foregoing obligations of the
Company, which obligations shall survive any termination of this Agreement,
if the sale of the Securities provided for herein is not consummated because
any condition to the obligations of the Underwriters set forth in Section 6
---------
hereof is not satisfied, because of any termination pursuant to Section 10
hereof, or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company
agrees to
13
<PAGE> 14
reimburse the Underwriters, upon demand, for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
actually and reasonably incurred by them in connection with the proposed
purchase and sale of the Securities to the extent the amounts paid pursuant to
Section 7(g) hereof are insufficient therefor.
- ------------
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person who controls any Underwriter within the meaning of the Act or
the Exchange Act against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject under the
Act, the Exchange Act or other federal or state statutory law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained
in (i) Section 1 of this Agreement, the Registration Statement, any
---------
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or (ii) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the securities or Blue
Sky laws thereof or filed with the Commission or any securities association
or securities exchange, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any legal
or other expenses reasonably incurred by it in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter
through the Representative specifically for use in the Registration Statement
or Prospectus; provided further, that with respect to any untrue statement or
omission, or any alleged untrue statement or omission, made in any
Preliminary Prospectus, the indemnity agreement contained in this subsection
(a) shall not inure to the benefit of any Underwriter (or to the benefit of
any person controlling any such Underwriter) from whom the person asserting
any such losses, claims, damages, liabilities or expenses purchased the
Securities concerned to the extent that such untrue statement or omission, or
alleged untrue statement or omission, has been corrected in the Prospectus
and the failure to deliver the Prospectus was not a result of the Company's
failure to comply with its obligations under Section 5(d) hereof. The
------------
indemnity agreement will be in addition to any liability which the Company
may otherwise have. The Company will not, without the prior written consent
of each Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless the settlement or compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit
or proceeding, reasonably satisfactory in form and substance to the
Representative.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of the Act or the Exchange Act to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only with reference to
written information relating to such Underwriter furnished to the Company by
or on behalf of such Underwriter through the Representative specifically for
use in the Registration Statement or Prospectus. The Company acknowledges
that the corporate names of the Underwriters, the stabilization legend on
page 2 and the information under the heading "Underwriting" in the Prospectus
and in any Preliminary Prospectus constitute the only information furnished
in writing by or on behalf of the several Underwriters. The obligations of
each Underwriter under this subsection (b) shall be in addition to any
liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8
---------
of notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made against
the indemnifying party under this Section 8, notify the indemnifying party in
---------
writing of the commencement thereof and the indemnifying party shall assume
the defense thereof, including the employment of counsel reasonably
satisfactory to the indemnified party and the payment of all expenses; but
the omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party, unless such omission
results in the forfeiture of substantive rights or defenses by the
indemnifying party. All such expenses shall be paid by the indemnifying party
as incurred by an indemnified party. Any such indemnified party shall have
the right to employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at
the expense of such indemnified party unless (i) the indemnifying party has
agreed to pay such fees and expenses or (ii) the indemnifying party shall
have failed promptly after notice by such indemnified party to assume the
defense of such action or proceeding and employ counsel reasonably
satisfactory to the indemnified party in any such action, suit or proceeding
or (iii) the named parties in any such action or proceeding (including any
impleaded parties) include both such indemnified party and the indemnifying
party, and such indemnified party shall have been advised by counsel that
there may be one or more legal defenses available to such indemnified party
which are different from or additional to those available to the indemnifying
party (in which case, if
14
<PAGE> 15
such indemnified party notifies the indemnifying party in writing that it elects
to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
or proceeding on behalf of the indemnified party or parties, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for all such indemnified parties, which firm shall be
designated in writing to the indemnifying party). Any such fees and expenses
payable by the indemnifying party shall be paid to or on behalf of the
indemnified party entitled thereto as incurred. An indemnifying party shall not
be liable for any settlement of any action or claim effected without its
consent, which consent shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 8(a) or
------------
8(b) is applicable in accordance with its terms but is for any reason held by
- ----
a court to be unavailable from the indemnifying party on grounds of policy or
otherwise, the Company and the Underwriters shall contribute to the aggregate
losses, claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same) to
which the Company and one or more of the Underwriters may be subject in such
proportion so that the Underwriters are responsible in the aggregate for that
portion represented by the total underwriting compensation in respect of the
Securities bears to the public offering price appearing thereon and the
Company is responsible for the balance; provided, however, that (i) in no
case shall any Underwriter (except as may be provided in the Agreement Among
Underwriters relating to the offering of the Securities) be responsible for
any amount in excess of the total underwriting compensation applicable to the
Securities to be purchased by such Underwriter hereunder and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
---------
each person who controls an Underwriter within the meaning of the Act shall
have the same rights to contribution as such Underwriter, and each person who
controls the Company within the meaning of the Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company,
subject in each case to clause (ii) of this Section 8(d). Any party entitled
------------
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this
Section 8(d), notify such party or parties from whom contribution may be sought,
- ------------
but the omission so to notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any other obligation it
or they may have hereunder or otherwise.
9. Default by an Underwriter. If any one or more Underwriters shall fail
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under
this Agreement, the remaining Underwriters shall be obligated severally to
take up and pay for (in the respective proportions which the number of
Underwritten Securities set forth opposite their names in Schedule I hereto
bears to the aggregate number of Underwritten Securities set forth opposite
the names of all the remaining Underwriters) the Underwritten Securities
which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that if the aggregate number of Underwritten
Securities which the defaulting Underwriter or Underwriters agreed but failed
to purchase shall exceed 10% of the aggregate number of Underwritten
Securities set forth in Schedule I hereto, the remaining Underwriters shall
have the right to purchase all, but shall not be under any obligation to
purchase any, of such Underwritten Securities, and if such nondefaulting
Underwriters do not purchase all of such Underwritten Securities, this
Agreement will terminate without liability to any non-defaulting Underwriter
or the Company except as otherwise provided in Section 7. In the event of a
---------
default by any Underwriter as set forth in this Section 9, the Closing Date
---------
shall be postponed for such period, not exceeding seven days, as the
Representative shall determine in order that the required changes in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall
relieve any defaulting Underwriter of its liability, if any, to the Company
or any nondefaulting Underwriter for damages occasioned by its default
hereunder.
10. Termination. This Agreement shall be subject to termination in the
absolute discretion of the Representative, by notice given to the Company
prior to delivery of and payment for the Securities, if prior to such time
(a) a suspension or material limitation in trading in securities generally on
the New York or American Stock Exchange, the Nasdaq National Market or any
relevant over-the-counter market, the Chicago Board Options Exchange, the
Chicago Mercantile Exchange or the Chicago Board of Trade shall have
occurred, (b) a banking moratorium shall have been declared by federal, New
York or California state authorities, (c) the United States shall have
engaged in hostilities which shall have resulted in the declaration, on or
after the date hereof, of a national emergency or war, or (d) a change in
national or international political, financial or economic conditions or
national or international equity markets or currency exchange rates shall
have occurred, if the effect of any such event specified above is, in the
sole judgment of the Representative, so material and adverse as to make it
impractical or inadvisable to proceed with the public offering or delivery of
the Securities as contemplated by the Registration Statement and the
Prospectus.
15
<PAGE> 16
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the Company,
its officers and the Underwriters set forth in, referred to in, or made
pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or the Company
or any of the officers, directors or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the
- ---------
Securities. The provisions of Sections 7 and 8 hereof shall survive the
--------- -
termination or cancellation of this Agreement.
12. Notices. All communications hereunder shall be in writing and effective
only on receipt, and shall be mailed, delivered, telegraphed or sent by
facsimile transmission and confirmed:
to the Representative at:
Tejas Securities Group, Inc.
1250 Capital of Texas Hwy. South Building Two, Suite 500
Austin, Texas 78746
Attention: Robert A. Shuey, III
Facsimile No. (512) 306-1528
to the Company at:
Lincoln Heritage Corporation
1250 Capital of Texas Hwy. South Building Three, Suite 100
Austin, Texas 78746
Attention: Nicholas M. Powling
Facsimile No. (512) 508-0850
With copy to:
Wittner, Poger, Rosenblum, Kessler, Spewak and Maylack, P.C.
7700 Bonhomme Avenue, Suite 400
St. Louis, MO 63105
Attention: Howard A. Wittner
Facsimile No. (314) 862-5741
and
Thompson Coburn
One Mercantile Center
St. Louis, MO 63101
Attention: Thomas A. Litz
Facsimile No. (314) 552-7000
13. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers,
directors and controlling persons referred to in Section 8 hereof, and no
---------
other person will have any right or obligation hereunder.
14. Counterparts. This Agreement may be signed in two or more counterparts,
each of which shall be an original, with the same effect as if the signatures
thereon and hereon were on the same instrument.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas, without regard to its
conflict of law principles.
16
<PAGE> 17
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
Lincoln Heritage Corporation
By:
----------------------------------------------
Nicholas M. Powling
President and Chief Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
Tejas Securities Group, Inc.
By:
----------------------------------------
Robert A. Shuey, III
For itself and the other several Underwriters in Schedule I to the foregoing
Agreement.
17
<PAGE> 18
<TABLE>
SCHEDULE I
<CAPTION>
Number of
Underwritten Securities
Underwriters To Be Purchased
------------ ---------------
<S> <C>
Tejas Securities Group, Inc.
---------
Total 1,000,000
=========
</TABLE>
<PAGE> 1
WARRANT AGREEMENT
June ----, 1998
TEJAS SECURITIES GROUP, INC.
As the Representative of the Several Underwriters
c/o Tejas Securities Group, Inc.
1250 Capital of Texas Hwy., South Building Two
Suite 500
Austin, Texas 78746
Gentlemen:
Lincoln Heritage Corporation, a Texas corporation (the "Company"),
hereby agrees to sell to you, and you hereby agree to purchase from the
Company at an aggregate purchase price of $100, stock purchase warrants (the
"Underwriter Warrants") covering $100,000 shares of common stock, $0.01 par
value, of the Company (the "Common Stock"). The Underwriter Warrants will be
exercisable by you as to all or any lesser number of shares of Common Stock
covered thereby, at the Purchase Price per share as defined below, at any
time and from time to time on and after the first anniversary of the date
hereof and ending at 5:00 p.m. on the fifth anniversary of the date hereof.
1. Definitions
As used herein, the following terms, unless the context otherwise
requires, shall have for all purposes hereof the following meanings:
The term "Act" refers to the Securities Act of 1993, as amended.
The term "Affiliate" of any Person refers to any Person directly or
indirectly controlling, controlled by or under direct or indirect common
control with, such other Person. A Person shall be deemed to control a
Person if such Person possesses, directly or indirectly , the power to direct
or cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise.
The term "Commission" refers to the Securities and Exchange Commission.
The term "Common Stock" refers to all stock of any class or classes
(however designated) of the Company, now or hereafter authorized, the holders
of which shall have the right without limitation as to amount, either to all
or to a part of the balance of current dividends and liquidating dividends
after the payment of dividends and distributions on any shares entitled to
preference, and the holders of which shall ordinarily, in the absence of
contingency, be entitled to vote for the election of a majority of the
directors of the Company (even though the right so to vote has been suspended
by the occurrence of such a contingency).
The term "Current Market Price" on any date refers to the average of
the daily Market Price per share for the 30 consecutive Trading Days
commencing 45 Trading Days before the date in question.
The term "Exchange Act" refer to the Securities Exchange Act of 1934,
as amended.
<PAGE> 2
The term "Market Price" refers to the closing sale price on the
American Stock Exchange ("AMEX") or, if no closing sale price is reported,
the closing bid price of the Common Stock, as quoted by AMEX or Nasdaq, as
applicable, or, if the Common Stock is not quoted by Nasdaq, as reported by
the National Quotation Bureau Incorporated. If Market Price cannot be
established as described above, market price shall be the fair market value
of the Common Stock as determined in good faith by the Board of Directors of
the Company, whose determination shall be conclusive.
The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other Person (corporate or
otherwise) which the holders of the Underwriter Warrants at any time shall be
entitled to receive, or shall have received, upon the exercise of the
Underwriter Warrants, in lieu of or in addition to Common Stock, or which at
any time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 6 below
or otherwise.
The term "Person" refers to an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization and a
government or any department or agency thereof.
The term "Purchase Price" refers to the purchase price, per share, of
the shares of Common Stock subject to this Agreement. The Purchase Price
shall equal -----------, subject to adjustment as provided in Section 6
below.
The term "Registration Statement" refers to a Registration Statement
filed with the Commission pursuant to the rules and regulations of the
Commission promulgated under the Act.
The term "Trading Day" shall mean a day on which the AMEX or the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business.
The term "Underlying Stock" refers to the shares of Common Stock (or
Other Securities) issuable under this Warrant Agreement pursuant to the
exercise, in whole or in part, of the Underwriter Warrants.
The purchase and sale of the Underwriter Warrants shall take place, and
the purchase price therefore shall be paid by delivery of your check,
simultaneously with the purchase of and payment for any shares of Common
Stock as provided in that certain Underwriting Agreement dated June ----,
1998, relating to the public offering of shares of the Common Stock pursuant
to a Registration Statement.
2. Representations and Warranties.
The Company represents and warrants to you as follows:
(a) Corporate Action. The Company has all requisite corporate power
and authority, and has taken all necessary corporate action, to execute and
deliver this Agreement, to issue and deliver the Underwriter Warrants and
certificates evidencing same, and to authorize and reserve for issuance, and
upon payment from time to time of the Purchase Price to issue and delivery,
the Shares.
(b) No Violation. Neither the execution nor delivery the execution
nor delivery of this Agreement, the consummation of the actions herein
contemplated nor compliance with the terms and provisions hereof will
conflict with, or result in a breach of, or constitute a default or an event
permitting acceleration under, any of the terms, provisions or conditions of
the Articles of Incorporation, as amended, or Bylaws of the Company or any
indenture, mortgage, deed of trust note, bank loan, credit agreement
franchise, license, lease, permit, judgment decree, order, statute, rule or
regulation or any other agreement, understanding or instrument to which the
Company is a party or by which it is bound.
2
<PAGE> 3
3. Compliance with the Act.
(a) Transferability of Underwriter Warrants. You agree that the
Underwriter Warrants may not be transferred, sold, assigned or hypothecated
for a period of one (1) year from the date hereof, except to: (i) persons
who are officers of you; (ii) a successor to you in a merger or
consolidation; (iii) a purchaser of all or substantially all of your assets;
(iv) your shareholders in the event you are liquidated or dissolved, and (v)
persons who are officers of participating broker-dealers.
(b) Registration of Underlying Stock. The Underlying Stock issuable
upon the exercise of the Underwriter Warrants have not been registered under
the Act. You agree not to make any sale or other disposition of the
Underlying Stock except pursuant to a Registration Statement which has become
effective under the Act, setting forth the terms of such offering, the
underwriting discount and the commissions and any other pertinent data with
respect thereto, unless you have provided the Company with an opinion of
counsel reasonably acceptable to the Company that such registration is not
required.
(c) Demand Registration. At any time and from time to time after the
first anniversary of the effective date hereof but prior to the fifth
anniversary of the effective date hereof, the holders of Underwriter Warrants
shall have the right to make written request of the Company on one occasion
to register under the Act at least fifty percent (50%) of the Underlying
Stock which would be issuable upon exercise of the Underwriter Warrants
pursuant to the terms and conditions hereof. The Underlying Stock specified
in such request or a request pursuant to Section 3(d) hereof is referred to
herein as the "Subject Stock." Promptly upon receipt of such request, the
Company shall file with the Commission a Registration Statement on the
applicable form for the registration of the Subject Stock and use its best
efforts to cause such Registration Statement to become effective (including,
without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws and
appropriate compliance with the Act and the Rules and Regulations promulgated
thereunder) as soon as practicable to permit or facilitate the sale and
distribution of the Subject Stock. Immediately upon receipt of a request for
registration pursuant to this Section 3(c), the Company shall notify each of
the holders of Underwriter Warrants of such request.
Notwithstanding the provisions of this Section 3(c), if the Company
shall furnish to the holders of Underwriter Warrants a certificate signed by
the Chief Executive Officer of the Company stating that in the good faith
judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its shareholders for such a Registration
Statement to be filed and it is therefore essential to defer a filing of such
Registration Statement, the Company shall have the right to defer such filing
for a period of not more than one hundred twenty (120) days after receipt of
the request from the holders of Underwriter Warrants to effect such a
registration; provided, however, that the Company may not utilize the right
more than once in any twenty-four (24) month period; and, provided further,
that the holders of Underwriter Warrants may, at any time in writing,
withdraw such request for such registration and preserve the right provided
in this Section 3(c) for the holders of Underwriter Warrants to request such
registration.
(d) Inclusion in Registration of Other Securities. If at any time
after the effective date hereof but prior to the fifth anniversary of the
effective date hereof, the Company shall propose the registration on a form
under the Act of any shares of Common Stock or Other Securities (which form
is appropriate for inclusion therein of the underlying Common Stock), the
Company shall at least 30 days prior to the filing of such Registration
Statement give holders of Underwriter Warrants written notice, or telegraphic
or telephonic notice followed as soon as practicable by written
3
<PAGE> 4
confirmation thereof, of such proposed registration and, upon written notice,
or telegraphic or telephonic notice followed as soon as practicable by written
confirmation thereof, given to the Company within five business days after
the giving of such notice by the Company, shall include or cause to be
included in any such Registration Statement all or such portion of the
Underlying Stock as such holders may request, provided, however, that the
Company may at any time withdraw or cease proceeding with any such
registration if it shall at the same time withdraw or cease proceeding with
the registration of such Common Stock or other Securities originally proposed
to be registered.
Notwithstanding any provision of this Agreement to the contrary, if any
holder of Underwriter Warrants exercises such Underwriter Warrants but shall
not have included all the Underlying Stock in a Registration Statement which
complies with Section 10(a)(3) of the Act, which has been effective for at
least 30 calendar days following the exercise of the Underwriter Warrants,
the registration rights set forth in this Section 3(d) shall be extended
until such time as (i) such a Registration Statement including such
Underlying Stock has been effective for at least 30 calendar days or (ii) in
the opinion of counsel satisfactory to you and the Company, registration is
not required under the Act or under applicable state laws for resale of the
Underlying Stock in the manner proposed.
(e) Company's Obligations in Registration. In connection with any
offering of Subject Stock pursuant to Section 3(c) or 3(d) above, the Company
shall:
(i) Notify you as to the filing thereof and of all amendments
or supplements thereto filed prior to the effective date
thereof,
(ii) Comply with all applicable rules and regulations of the
Commission;
(iii) Notify you immediately, and confirm the notice in
writing, (1) when the Registration Statement becomes
effective, (2) of the issuance by the Commission of any
stop order or of the initiation, or the threatening, of
any proceedings for that purpose, (3) of the receipt by
the Company of any notification with respect to the
suspension of qualification of the Subject Stock for
sale in any jurisdiction or of the initiation, or the
threatening, of any proceedings for that purpose and (4)
of the receipt of any comments, or requests for
additional information, from the Commission or any state
regulatory authority. If the Commission or any state
regulatory authority shall enter such a stop order or
order suspending qualification at any time, the Company
will make every reasonable effort to obtain the lifting
of such order as promptly as practicable.
(iv) During the time when a Prospectus is required to be
delivered under the Act during the period required for
the distribution of the Subject Stock, comply so far as
it is able with all requirements imposed upon it by the
Act as hereafter amended, and by the rules and
regulations promulgated thereunder, as from time to time
in force, so far as necessary to permit the continuance
of sales of or dealings in the Subject Stock. If at any
time when a Prospectus relating to the Subject Stock is
required to be delivered under the Act any event shall
have occurred as a result of which, in the opinion of
counsel for the Company or your counsel, the Prospectus
relating to the Subject Stock as then amended or
supplemented includes an untrue statement of a material
fact or omits to state any material fact required to be
stated therein or necessary to make the statements
therein, in the light of the circumstances under which
they were made, not misleading, or if it is necessary at
any time to amend such Prospectus to comply with the Act
the Company will promptly prepare and file with the
Commission an appropriate amendment or supplement (in
form satisfactory to you).
4
<PAGE> 5
(v) Endeavor in good faith, in cooperation with you, at or
prior to the time the Registration Statement becomes
effective, to qualify the Subject Stock for offering and
sale under the securities laws relating to the offering
or sale of the Subject Stock of such jurisdictions as
you I may reasonably designate and to continue the
qualifications in effect so long as required for purposes
of the sale of the Subject Stock; provided that no such
qualification shall be required in any jurisdiction
where, as a result thereof, the Company would be subject
to service of general process, or to taxation as a
foreign corporation doing business in such jurisdiction.
In each jurisdiction where such qualification shall be
effected, the Company will, unless you agree that such
action is not at the time necessary or advisable, file
and make such statements or reports at such times as are
or may reasonably be required by the laws of such
jurisdiction. For the purposes of this paragraph, "good
faith" is defined as the same standard of care and
degree of effort as the Company will use to qualify its
securities other than the Subject Stock.
(vi) Make generally available to its security holders as soon
as practicable, but not later than the first day of the
eighteenth full calendar month following the effective
date of the Registration Statement, an earning statement
(which need not be certified by independent public or
independent certified public accountants unless required
by the Act or the rules and regulations promulgated
thereunder, but which shall satisfy the provisions of
Section 11(a) of the Act and Rule 158 thereunder)
covering a period of at least twelve months beginning
after the effective date of the Registration Statement.
(vii) After the effective date of such Registration Statement,
prepare, and promptly notify you of the proposed filing
of, and promptly file with the Commission, each and every
amendment or supplement thereto or to any Prospectus
forming a part thereof as may be necessary to make any
statements therein not misleading; provided that no such
amendment or supplement shall be filed if you shall
object thereto in writing promptly after being furnished
a copy thereof.
(viii) Furnish to you, as soon as available, copies of any such
Registration Statement and each preliminary or final
Prospectus, or supplement or amendment prepared pursuant
thereto, all in such quantities as you may from time to
time reasonably request.
(ix) Make such representations and warranties to any
underwriter of the Subject Stock, and use your best
efforts to cause Company counsel to render such opinions
to such underwriter, as such underwriter may reasonably
request.
(x) Pay all costs and expenses incident to the performance
of the Company's obligations under Section 3(c) or 3(d)
above and under this Section 3(e), including without
limitation the fees and disbursements of the Company's
auditors and legal counsel, of one legal counsel for the
holders of Subject Stock and of legal counsel responsible
for qualifying the Subject Stock under blue sky laws, all
filing fees and printing expenses, all expenses in
connection with the transfer and delivery of the
Underlying Stock, and all expenses in connection with the
qualification of the Subject Stock under blue sky laws;
provided, however, that the Company shall not be
responsible for compensation and reimbursement of
expenses to underwriters or selling agents for the
included Subject Stock.
5
<PAGE> 6
(xi) Notwithstanding any other provisions of the Agreement,
(1) the Company may postpone for no more than 120 days in
any 360-day period, the filing or the effectiveness of a
registration statement pursuant to 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
holders of the Subject Stock requesting such demand
registration will be entitled to withdraw such request
and, is such request is withdrawn, such demand
registration will not be counted as a demand
registration, and (2) the Company shall not be obligated
to effect any registration of the Subject Securities in
the event the holders of such securities are able to sell
or transfer such securities pursuant to the requirements
of Rule 144 under the Securities Act of 1933, as amended
(or any similar rule then in force), without limitation
as to the volume of such sales.
(f) Agreements by Warrant Holder. In connection with the filing of a
Registration Statement pursuant to Section 3(c) or 3(d) above, if you
participate in the offering of the Subject Stock by including shares owned by
you, you agree:
(i) To furnish the Company all material information requested
by the Company concerning yourself and your holdings of
securities of the Company and the proposed method of sale
or other disposition of the Subject Stock and such other
information and undertakings as shall be reasonably
required in connection with the preparation and filing of
any such Registration Statement covering all or a part of
the Subject Stock and in order to ensure fall compliance
with the Act, and
(ii) To cooperate in good faith with the Company and its
underwriters, if any, in connection with such
registration, including placing the shares of Subject
Stock to be included in such Registration Statement in
escrow or custody to facilitate the sale and
distribution thereof.
(g) Indemnification. The Company shall indemnify and hold harmless
you and any underwriter (as defined in the Act) for you, and each person, if
any, who respectively controls you or such underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss,
liability, claim, damage and expense whatsoever (including, but not limited
to, any and all expenses whatsoever reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or
any claim whatsoever), joint or several, to which any of you or such
underwriter or such controlling person becomes subject, under the Act or
otherwise, insofar as such loss, liability, claim, damage and expense (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in (i) a
Registration Statement covering the Subject Stock, in the prospectus
contained therein, or in an amendment or supplement thereto or (ii) in any
application or other document or communication (in this Section collectively
called "application") executed by or on behalf of the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Subject Stock under the securities laws
thereof or filed with the Commission, or arise out of or based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that
6
<PAGE> 7
the Company shall not be obligated to indemnify in any such case to the extent
that any such loss, claim, damage, expense or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon, and in conformity with, written
information respectively furnished by you or such underwriter or such
controlling person for use in the Registration Statement or any amendment or
supplement thereto, or any application, as the case may be.
If any action is brought against a person in respect of which indemnity
may be sought against, the Company pursuant to the foregoing paragraph, such
person shall promptly notify the Company in writing of the institution of
such action and the Company shall assume the defense of the action, including
the employment of counsel (satisfactory to the indemnified person in its
reasonable judgment) and payment of expenses. The indemnified person shall
have the right to employ its or their own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of such indemnified
person or unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of the action or the
Company shall not have employed counsel to have charge of the defense of the
action or the indemnified person shall have reasonably concluded that there
may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to direct the defense of the action on behalf of the
indemnified person), in any of which events these fees and expenses shall be
borne by the Company. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any
claim or action effected without its written consent. The Company's
indemnity agreements contained in this Section shall remain in full force and
effect regardless of any investigation made by or on behalf of any
indemnified person, and shall survive any termination of this Agreement. The
Company agrees promptly to notify you of the commencement of any litigation
or proceedings against the Company or any of its officers or directors in
connection with the Registration Statement pursuant to Section 3(c) or 3(d)
above.
If you choose to include any Subject Stock in a public offering
pursuant to Section 3(c) or 3(d) above, then you agree to indemnify and hold
harmless the Company and each of its directors and officers who have signed
any such Registration Statement and any underwriter for the Company (as
defined in the Act), and each person, if any, who controls the Company or
such underwriter within the meaning of the Act, to the same extent as the
indemnity by the Company in this Section 3(g) but only with respect to
statements or omissions, if any, made in such Registration Statement, or any
amendment or supplement thereto, or in any application in reliance upon, and
in conformity with, written information furnished by you to the Company for
use in the Registration Statement, or any amendment or supplement thereto, or
any application, as the case may be. In case any action shall be brought in
respect of which indemnity may be sought against you, you shall have the
rights and duties given to the Company, and the persons so indemnified shall
have the rights and duties given to you by the provisions of the first
paragraph of this Section.
The Company further agrees that if the indemnity provisions of the
foregoing paragraphs are held to be unenforceable, any holder of an
Underwriter Warrant or controlling person of such a holder may recover
contribution from the Company in an amount which, when added to contributions
such holder or controlling person has theretofore received or concurrently
receives from officers and directors of the Company or controlling persons of
the Company, will reimburse such holder or controlling person for all losses,
claims, damages or liabilities and legal or other expenses-, provided,
however, that if the full amount of the contribution specified in this
Section 3(g) is not permitted by law, then such holder or controlling person
shall be entitled to contribution from the Company and its officers,
directors and controlling persons to the full extent permitted by law.
7
<PAGE> 8
4. Exercise of Underwriter Warrants.
(a) Cash Exercise. Each Underwriter Warrant may be exercised in full
or in part (but not as to a fractional share of Common Stock) by the holder
thereof by surrender of the Warrant Certificate, with the form of
subscription at the end thereof duly executed by such holder, to the Company
at its principal office, accompanied by payment in cash or by certified or
bank cashiers' check payable to the order of the Company, in the respective
amount obtained by multiplying the number of shares of the Underlying Stock
to be purchased by the Purchase Price per share.
(b) Net Exercise. Notwithstanding anything to the contrary contained
in Section 4(a), any holder of an Underwriter Warrant may elect to exercise
the Underwriter Warrant and receive shares on a "net exercise" basis in an
amount equal to the value of the Underwriter Warrant by delivery of the form
of subscription attached to the Warrant Certificate and surrender of the
Underwriter Warrant at the principal office of the Company, in which event
the Company shall issue to the holder a number of shares computed using the
following formula:
X= (P)(Y)(A-B)
-----------
A
Where: X= the number of shares of Common Stock to be issued to
holder.
P= the portion of the Underwriter Warrant being
exercised (expressed as a fraction).
Y= the total number of shares of Common Stock
issuable upon exercise of the Underwriter
Warrant.
A= the Current Market Price of one share of Common
Stock.
B= Purchase Price.
(c) Partial Exercise. Prior to the expiration of the Underwriter
Warrants, upon any partial exercise, the Company at its expense will
forthwith issue and deliver to or upon the order of the purchasing holder, a
new Warrant Certificate or Certificates of like tenor, in the name of the
holder thereof or as such holder (upon payment by such holder of any
applicable transfer taxes) may request calling in the aggregate for the
purchase of the number of shares of the Underlying Stock equal to the number
of such shares called for on the face of the Warrant Certificate (after
giving effect to any adjustment therein as provided in Section 6 below) minus
the number of such shares (after giving effect to such adjustment) designated
by the holder in the aforementioned form of subscription.
(d) Company to Reaffirm Obligations. The Company will, at the time
of any exercise of any Underwriter Warrant, upon the reasonable request of
the holder thereof, acknowledge in writing its continuing obligation to
afford to such holder any rights (including, without limitation, any right to
registration of the shares of the Underlying Stock issued upon such exercise)
to which such holder shall continue to be entitled after such exercise in
accordance with the provisions of this Agreement; provided, however, that if
the holder of an Underwriter Warrant shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to
afford to such holder any such rights.
8
<PAGE> 9
5. Delivery of Certificates, etc, on Exercise.
As soon as practicable after the exercise of any Underwriter Warrant in
fall or in part, and in any event within twenty days thereafter, the Company
at its expense (including the payment by it of any applicable issue taxes)
will cause to be issued in the name of and delivered to the purchasing holder
thereof, a certificate or certificates for the number of fully paid and
nonassessable shares of the Underlying Stock to which such holder shall be
entitled upon such exercise, plus in lieu of any fractional share to which
such holder would otherwise be entitled, cash in an amount determined
pursuant to Section 7(g), together with any other stock or other securities
and property (including cash, where applicable) to which such holder is
entitled upon such exercise pursuant to Section 6 below or otherwise.
6. Anti-dilution Provisions.
The Underwriter Warrants are subject to the following terms and
conditions during the term thereof:
(a) Stock Distributions and Splits. In case (i) the outstanding
shares of Common Stock (or Other Securities) shall be subdivided into a
greater number of shares or (ii) a dividend in Common Stock (or Other
Securities) shall be paid in respect of Common Stock (or Other Securities),
the Purchase Price per share in effect immediately prior to such subdivision
or at the record date of such dividend or distribution shall simultaneously
with the effectiveness of such subdivision or immediately after the record
date of such dividend or distribution be proportionately reduced; and if
outstanding shares of Common Stock (or Other Securities) shall be combined
into a smaller number of shares thereof, the Purchase Price per share in
effect immediately prior to such combination shall simultaneously with the
effectiveness of such combination be proportionately increased. Any dividend
paid or distributed on the Common Stock (or Other Securities) in stock or any
other securities convertible into shares of Common Stock (or Other
Securities) shall be treated as a dividend paid in Common Stock (or Other
Securities) to the extent that shares of Common Stock (or Other Securities)
are issuable upon the conversion thereof.
(b) Adjustments. Whenever the Purchase Price per share is adjusted
as provided in Section 6(a) above, the number of shares of the Underlying
Stock purchasable upon exercise of the Underwriter Warrants immediately prior
to such Purchase Price adjustment shall be adjusted, effective simultaneously
with such Purchase Price adjustment, to equal the product obtained
(calculated to the nearest full share) by multiplying such number of shares
of the Underlying Stock by a fraction, the numerator of which is the Purchase
Price per share in effect immediately prior to such Purchase Price adjustment
and the denominator of which is the Purchase Price per share in effect upon
such Purchase Price adjustment, which adjusted number of shares of the
Underlying Stock shall thereupon be the number of shares of the Underlying
Stock purchasable upon exercise of the Underwriter Warrants until further
adjusted as provided herein.
(c) Reorganizations. In case the Company shall be recapitalized by
reclassifying its outstanding Common Stock (or Other Securities) into a stock
with a different par value or by changing its outstanding Common Stock (or
Other Securities) with par value to stock without par value, then, as a
condition of such reorganization, lawful and adequate provision shall be made
whereby each holder of an Underwriter Warrant shall thereafter have the right
to purchase, upon the terms and conditions specified herein, in lieu of the
shares of Common Stock (or Other Securities) theretofore purchasable upon the
exercise of the Underwriter Warrants, the kind and amount of shares of stock
and other securities receivable upon such recapitalization by a holder of the
number of shares of Common Stock (or Other Securities) which the holder of an
Underwriter Warrant might have purchased immediately prior to such
recapitalization. If any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation, shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such consolidation, merger
or sale, lawful and adequate provisions shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive upon the basis
and upon the
9
<PAGE> 10
terms and conditions specified in this Warrant Agreement and in lieu of the
shares of the Common Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby, such shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
consolidation, merger or sale not taken place, and in any such case, appropriate
provision shall be made with respect to the rights and interests of the holders
of Underwriter Warrants to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Purchase Price and of the
number of shares purchasable and receivable upon the exercise of the Underwriter
Warrants) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise hereof (including an immediate adjustment, by reason of such
consolidation or merger if the value so reflected is less than the Purchase
Price in effect immediately prior to such consolidation or merger). In the
event of a merger or consolidation of the Company with or into another
corporation as a result of which a number of shares of Common Stock of the
surviving corporation greater or lesser than the number of shares of Common
Stock of the Company outstanding immediately prior to such merger or
consolidation are issuable to holders of Common Stock of the Company, then the
Purchase Price in effect immediately prior to such merger or consolidation shall
be adjusted in the same manner as though there were a subdivision or combination
of the outstanding shares of Common Stock of the Company. The Company will not
effect any such consolidation, merger or sale, unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and mailed or delivered to the registered
holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase. If a purchase, tender or exchange offer is
made to and accepted by the holders of a majority of the outstanding shares of
Common Stock of the Company, the Company shall not effect any consolidation,
merger or sale with the Person having made such offer or with any Affiliate of
such Person, unless prior to the consummation of such consolidation, merger or
sale the holders of Underwriter Warrants shall have been given a reasonable
opportunity (which shall in any event be deemed satisfied upon receipt of at
least 30 days' notice) to then elect to receive upon the exercise of Underwriter
Warrants either the stock, securities or assets then issuable with respect to
the Common Stock of the Company or the stock, securities or assets, or the
equivalent issued to previous holders of the Common Stock in accordance with
such offer.
(d) Effect of Dissolution or Liquidation. In case the Company shall
dissolve or liquidate all or substantially all of its assets, all rights
under this Agreement shall terminate as of the date upon which a certificate
of dissolution or liquidation shall be filed with the Secretary of the State
of Texas (or, if the Company theretofore shall have been merged or
consolidated with a corporation incorporated under the laws of another state,
the date upon which action of equivalent effect shall have been taken);
provided, however, that (i) no dissolution or liquidation shall affect the
rights under Section 6(c) of any holder of an Underwriter Warrant and (ii) if
the Company's Board of Directors shall propose to dissolve or liquidate the
Company, each holder of an Underwriter Warrant shall be given written notice
of such proposal at the earlier of (x) the time when the Company's
shareholders are first given notice of the proposal or (y) the time when
notice to the Company's shareholders is first required.
(e) Notice of Change of Purchase Price. Whenever the Purchase Price
per share or the kind or amount of securities purchasable under the
Underwriter Warrants shall be adjusted pursuant to any of the provisions of
this Agreement the Company shall forthwith thereafter cause to be sent to
each holder of an Underwriter Warrant, a certificate setting forth the
adjustments in the Purchase Price per share and/or in such number of shares,
and also setting forth in detail the facts requiring, such adjustments,
including, without limitation, a statement of the consideration received or
deemed
10
<PAGE> 11
to have been received by the Company for any additional shares of stock by it
requiring such adjustment. In addition, the Company at its expense shall within
90 days following the end of each of its fiscal years during the term of this
Agreement and promptly upon the reasonable request of any holder of an
Underwriter Warrant in connection with the exercise from time to time of all or
any portion of any Underwriter Warrant, cause independent certified public
accountants of recognized standing selected by the Company to compute any such
adjustment in accordance with the terms of the Underwriter Warrants and prepare
a certificate setting forth such adjustment and showing in detail the facts upon
which such adjustment is based.
(f) Notice of a Record Date. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose
of determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend payable out of earned surplus of the Company) or
other distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right (ii) any capital reorganization of the Company,
or any reclassification or recapitalization of the capital stock of the
Company, or any transfer of all or substantially all of the assets of the
Company to, or consolidation or merger of the Company with or into, any other
person or (iii) any voluntary or involuntary dissolution or liquidation of
the Company, then and in each such event the Company will mad or cause to be
mailed to each holder of an Underwriter Warrant a notice specifying not only
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right and stating the amount and character of such
dividend, distribution or right, but also the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the
time, if any, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or
other Securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up. Such notice shall be mailed
at least 20 days prior to the proposed record date therein specified.
7. Further Covenants of the Company.
(a) Reservation of Stock. The Company shall at all times reserve and
keep available, solely for issuance and delivery upon the exercise of the
Underwriter Warrants, all shares of the Underlying Stock from time to time
issuable upon the exercise of the Underwriter Warrants and shall take all
necessary actions to ensure that the par value per share, if any, of the
Underlying Stock is, at all times equal to or less than the then effective
Purchase Price per share.
(b) Title to Shares. All shares of the Underlying Stock delivered
upon the valid exercise of the Underwriter Warrants shall be validly issued,
fully paid and nonassessable; each holder of an Underwriter Warrant shall
receive good and marketable title to the Underlying Stock, free and clear of
all voting and other trust arrangements, liens, encumbrances, equities and
claims whatsoever; and the Company shall have paid all taxes, if any, in
respect of the issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the Company at
any time shall fist any Common Stock on any national securities exchange, the
Company will, at its expense, simultaneously list on such exchange, upon
official notice of issuance upon the exercise of the Underwriter Warrants,
and maintain such listing of all shares of the Underlying Stock from time to
time issuable upon the exercise of the Underwriter Warrants; and the Company
will so list on any national securities exchange, will so register and will
maintain such listing of, any Other Securities if and at the time that any
securities of like class or similar type shall be listed on such national
securities exchange by the Company.
11
<PAGE> 12
(d) Exchange of Underwriter Warrants. Subject to Section 3(a)
hereof, upon surrender for exchange of any Warrant Certificate to the
Company, the Company at its expense will promptly issue and deliver to or
upon the order of the holder thereof a new Warrant Certificate or
certificates of like tenor, in the name of such holder or as such holder
(upon payment by such holder of any applicable transfer taxes) may direct
calling in the aggregate for the purchase of the number of shares of the
Underlying Stock called for on the face or faces of the Warrant Certificate
or Certificates so surrendered.
(e) Replacement of Underwriter Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant Certificate and, in the case of any such loss,
theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, upon surrender and cancellation of such Warrant Certificate, the
Company, at the expense of the warrant holder will execute and deliver, in
lieu thereof, a new Warrant Certificate of like tenor.
(f) Reporting by the Company. The Company agrees that if it files a
Registration Statement during the term of the Underwriter Warrants, it will
use its best efforts to keep current in the filing of all forms and other
materials which it may be required to file with the appropriate regulatory
authority pursuant to the Exchange Act, and all other forms and reports
required to be filed with any regulatory authority having jurisdiction over
the Company.
(g) Fractional Shares. No fractional shares of Underlying Stock are
to be issued upon the exercise of any Underwriter Warrant, but the Company
shall pay a cash adjustment in respect of any fraction of a share which would
otherwise be issuable in an amount equal to the same fraction of the highest
market price per share of Underlying Stock on the day of exercise, as
determined by the Company, or if no transaction reported on such day, the
price as of the Trading Day immediately preceding such date on which trades
are reported.
8. Other Holders.
The Underwriter Warrants are issued upon the following terms, to all of
which each holder or owner thereof by the taking thereof consents and agrees
as follows: (a) any person who shall become a transferee, within the
limitations on transfer imposed by Section 3(a) hereof, of an Underwriter
War-rant properly endorsed shall take such Underwriter Warrant subject to the
provisions of Section 3(a) hereof and thereupon shall be authorized to
represent himself as absolute owner thereof and, subject to the restrictions
contained in this Agreement shall be empowered to transfer absolute title by
endorsement and delivery thereof to a permitted bona fide purchaser for
value; (b) each prior taker or owner waives and renounces all of his equities
or rights in such Underwriter Warrant in favor of each such permitted bona
fide purchaser, and each such permitted bona fide purchaser shall acquire
absolute title thereto and to all rights presented thereby; (c) until such
time as the respective Underwriter Warrant is transferred on the books of the
Company, the Company may treat the registered holder thereof as the absolute
owner thereof for all purposes, notwithstanding any notice to the contrary;
and (d) all references to the word "you" in this Warrant Agreement shall be
deemed to apply with equal effect to any person to whom a Warrant Certificate
or Certificates have been transferred in accordance with the terms hereof,
and where appropriate, to any person holding shares of the Underlying Stock.
9. Miscellaneous.
All notices, certificates and other communications from or at the
request of the Company to the holder of any Underwriter Warrant shall be
mailed by first class, registered or certified mail, postage prepaid, to such
address as may have been furnished to the Company in writing by such holder,
or, until an address is so furnished, to the address of the last holder of
such Underwriter Warrant who has so furnished an address to the Company,
except as otherwise provided herein. For
12
<PAGE> 13
purposes of this Agreement, the date of such notice shall be the date of mailing
of such notice. This Agreement and any of the terms hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Agreement shall be construed and enforced in accordance with
and governed by the laws of the State of Texas. The headings in this Agreement
are for reference only and shall not limit or otherwise affect any of the terms
hereof. This Agreement together with the forms of instruments annexed hereto as
Schedule I, constitutes the full and complete agreement of the parties hereto
with respect to the subject matter hereof.
13
<PAGE> 14
IN WITNESS WHEREOF, the Company has caused this Warrant Agreement to be
executed on this ------ day of June 1998, in Austin, Texas, by its proper
corporate officers thereunto duly authorized.
LINCOLN HERITAGE CORPORATION
By:
-----------------------------------------------
Nicholas M Powling
President and
Chief Executive Officer
The above Warrant Agreement is confirmed this ----- day of June 1998.
TEJAS SECURITIES GROUP, INC.
By:
-----------------------------------------------
Robert A. Shuey, III
14
<PAGE> 15
SCHEDULE I
LINCOLN HERITAGE CORPORATION
Stock Purchase Warrant
Certificate Evidencing Right to Purchase 100,000 Shares of Common Stock
This is to certify that Tejas Securities Group, Inc. ("TSG") or
assigns, is entitled to purchase at any time or from time to time after 9
A.M., Austin, Texas time, on June ----, 1999 and until 9 A.M., Austin, Texas
time, on May ------, 2003 up to the above referenced number of shares of
Common Stock, $.01 par value of Lincoln Heritage Corporation, a Texas
corporation (the "Company"), for the consideration specified in Section 4 of
the Warrant Agreement dated June -----, 1998 between the Company and TSG (the
"Warrant Agreement"), pursuant to which this Warrant is issued. All rights
of the holder of this Warrant Certificate are subject to the terms and
provisions of the Warrant Agreement copies of which are available for
inspection at the office of the Company.
The shares of Common Stock issuable upon the exercise of this Warrant
have not been registered under the Securities Act of 1933, as amended (the
"Act"), and no distribution of such shares maybe made until the effectiveness
of a Registration Statement under the Act covering such Shares. Transfer of
this Warrant Certificate is restricted as provided in Section 3(a) of the
Warrant Agreement.
This Warrant has been issued to the registered owner in reliance upon
written representations necessary to ensure that this Warrant was issued in
accordance with an appropriate exemption from registration under any
applicable state and federal securities laws, rules and regulations. This
Warrant may not be sold, transferred or assigned unless, in the opinion of
the Company and its legal counsel, such sale, transfer or assignment will not
be in violation of the Act, applicable rules and regulations of the
Securities and Exchange Commission, and any applicable state securities laws.
Subject to the provisions of the Act and of such Warrant Agreement,
this Warrant Certificate and all rights hereunder are transferable, in whole
or in part, at the offices of the Company, by the holder hereof in person or
by duly authorized attorney, upon surrender of this Warrant Certificate,
together with the Assignment hereof duly endorsed. Until transfer of this
Warrant Certificate on the books of the Company, the Company may treat the
registered holder hereof as the owner hereof for all purposes.
Any shares of Common Stock (or other securities) which are acquired
pursuant to the exercise of this Warrant shall be acquired in accordance with
the Warrant Agreement and certificates representing all securities so
acquired shall bear a restrictive legend reading substantially as follows:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION
OF COUNSEL (SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT
REQUIRED.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed on this ------ day of June 1998, in Austin, Texas, by its proper
corporate officers thereunto duly authorized.
15
<PAGE> 16
Lincoln Heritage Corporation
By: Attest:
------------------------------ ------------------------------
Nicholas M. Powling
President and
Chief Executive Officer
16
<PAGE> 17
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: Lincoln Heritage Corporation
The undersigned, the holder of the enclosed Warrant Certificate, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
Certificate for, and to purchase thereunder, ------------ shares of Common
Stock, $.01 par value, of Lincoln Heritage Corporation and either tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $--------------- therefor
or, if the undersigned elects pursuant to Section 4(b) of the Warrant
Agreement to convert the Warrant into Common Stock by net issuance, the
undersigned exercises the Warrant by exchange under the terms of said Section
4(b), and requests that the certificate or certificates for such shares be
issued in the name of and delivered to the undersigned.
Date:
------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant Certificate)
(Address)
Please indicate in the space below the number of shares called for on
the face of the Warrant Certificate (or, in the case of a partial exercise,
the portion thereof as to which the Warrant is being exercised), in either
case without making any adjustment for additional shares or other securities
or property or cash which, pursuant to the adjustment provisions of the
Warrant, may be deliverable upon exercise and whether the exercise is a cash
exercise pursuant to Section 4(a) of the Warrant Agreement or a net issuance
exercise pursuant to Section 4(b) of the Warrant Agreement.
Number of Shares:
--------------------
Cash:
--------------------------------
Net issuance:
------------------------
17
<PAGE> 18
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers
unto --------------------------------- the right represented by the enclosed
Warrant Certificate to purchase shares of Common Stock, $0.01 par value, of
Lincoln Heritage Corporation with full power of substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in
or in part, of such right to purchase represented by the enclosed Warrant
Certificate is permitted by the terms of the Warrant Agreement pursuant to
which the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment represents and warrants that he is familiar
with the terms of such Warrant Agreement and agrees to be bound by the terms
thereof with the same force and effect as if a signatory thereto.
Date:
------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant Certificate)
(Address)
Signed in the presence of:
------------------------------
18
<PAGE> 1
HOWARD A. WITTNER VICKI L. OWINGS
GERALD M. POGER Office Manager
N. SCOTT ROSENBLUM<F*>
DAVID S. SPEWAK
JEAN H. MAYLACK PAMELA L. MOSS
JACK B. SPOONER<F*> SHERI HUTCHENS
GARY M. SIEGEL Paralegal
-----
GREGORY NAT WITTNER<F*>
DANIEL E. DIEMER JOHN S. STEINER
Of Counsel
<F*>Admitted in MO & IL
June 12, 1998
Lincoln Heritage Corporation
1250 Capital of Texas Highway
Building 3, Suite 100
Austin, Texas 78746
RE: REGISTRATION STATEMENT ON FORM S-1
----------------------------------
Ladies and Gentlemen:
We refer you to the Registration Statement on Form S-1 (File No.
333-50525) filed by Lincoln Heritage Corporation (the "Company") on April
20, 1998, as amended on June 12, 1998 (the "Registration Statement"), with
the Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended, pertaining to the proposed issuance by the Company of
up to 1,250,000 shares of the Company's common stock. $0.01 par value (the
"Shares"), in connection with the initial public offering of the Shares as
provided in the Registration Statement. In rendering the opinions set forth
herein, we have examined such corporate records of the Company, such laws
and such other information as we have deemed relevant, including the
Company's Amended and Restated Articles of Incorporation and Bylaws, as
amended and currently in effect, the resolutions adopted by the Company's
Board of Directors relating to the initial public offering, certificates
received from state officials and statements we have received from officers
and representatives of the Company. In delivering this opinion, the
undersigned assumed the genuineness of all signatures; the authenticity of
all documents submitted to us as originals; the conformity to the originals
of all documents submitted to us as certified, photostatic or conformed
copies; the authenticity of the originals of all such latter documents; and
the correctness of statements submitted to us by officers and
representatives of the Company.
<PAGE> 2
Lincoln Heritage Corporation
June 12, 1998
PAGE TWO
We do not purport to be experts in the laws of any state or
jurisdiction other than the State of Missouri and the Federal laws of the
United States of America, to the extent applicable.
Based only on the foregoing, the undersigned is of the opinion
that:
1. The Company has been duly incorporated and is validly
existing under the laws of the State of Texas. As to the opinion contained
in this paragraph 1 relating to "existence", we rely solely on the
Certificate of the Secretary of State of Texas attached hereto.
2. The Shares to be sold by the Company, when issued, will be
validly issued, fully paid and non-assessable.
This opinion is issued only with respect to the present status
of the law and we undertake no obligation or responsibility to update or
supplement the opinion with respect to changes in the law or future events.
We consent to the filing of this opinion solely as an exhibit to
the Registration Statement and to the reference to this firm in the section
of the Prospectus entitled "Legal Matters".
Very truly yours,
/s/ WITTNER, POGER, ROSENBLUM, SPEWAK
& MAYLACK, P. C.
CASSDOPN.610
<PAGE> 3
[SEAL]
THE STATE OF TEXAS
SECRETARY OF STATE
IT IS HEREBY CERTIFIED THAT
ARTICLES OF INCORPORATION OF
LINCOLN HERITAGE CORPORATION
FILE NO. 783034-0
WERE FILED IN THIS OFFICE AND A CERTIFICATE OF INCORPORATION WAS ISSUED
TO THIS CORPORATION, AND NO CERTIFICATE OF DISSOLUTION IS IN EFFECT AND
THE CORPORATION IS CURRENTLY IN EXISTENCE.
IN TESTIMONY WHEREOF, I HAVE HEREUNTO
SIGNED MY NAME OFFICIALLY AND CAUSED
TO BE IMPRESSED HEREON THE SEAL OF
STATE AT MY OFFICE IN THE CITY OF
AUSTIN, ON JUNE 9, 1998.
[SEAL] /s/ Alberto R. Gonzales
------------------------------------
Alberto R. Gonzales
Secretary of State DAE
<PAGE> 1
COST SHARING AGREEMENT
----------------------
THIS AGREEMENT is made by and between LINCOLN HERITAGE CORPORATION, a
Texas corporation (hereinafter referred to as "Lincoln") and NATIONAL
PREARRANGED SERVICES, INC., a Missouri corporation (hereinafter referred to
as "NPS").
WHEREAS, the administrative operations of Lincoln 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.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements, hereinafter set forth, the parties hereby agree as follows:
1. Either party may agree to furnish, either directly or through
third parties engaged by such party, subject to reimbursement by the other
party as provided in paragraph 2, all or such part of the following services:
a. Marketing support services.
b. 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.
c. Office facilities, including related janitorial and utility
services.
d. Furniture, furnishings and equipment.
e. Telephone, telegraph and FAX facilities.
f. Normal mail service, including postage and normal messenger
services.
g. Record storage facilities.
h. Other services and privileges for employees and insurance
coverage such as employee group insurance, general liability and workers'
compensation.
2. The party not providing such services (the "non-contracting
party") agrees to reimburse the party providing such services (the
"contracting party") monthly for the cost of the
<PAGE> 2
services and facilities provided hereunder, the amount of such reimbursement
to be determined on one or more of the following basis:
a. The actual cost attributable to the non-contracting party's
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 party's activities; or
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 either party shall be paid within fifteen
(15) days of written notification of the amount owed.
3. Annually the board of directors of both parties 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 both parties so agree.
4. It is understood and agreed that all charges to the
non-contracting party 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.
5. This Agreement shall become effective as of April 1, 1998, and
shall continue in effect 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 to either party to the other party by postage prepaid
mail at least sixty (60) days prior to the end of the term or any 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 or affiliates, including but not limited to any then existing
general agent contact or exclusivity agreement.
2
<PAGE> 3
EXECUTED on the dates shown opposite the signatures of the duly
authorized officers of the respective parties hereto.
LINCOLN HERITAGE CORPORATION
Date: June 1, 1998 By: /s/ Nicholas Powling
------------ ---------------------------
Nicholas Powling, President
NATIONAL PREARRANGED SERVICES, INC.
Date: May 29, 1998 By: /s/ Randall K. Sutton
------------ ---------------------------
Randall K. Sutton
Chief Executive Officer and
Vice President
3
<PAGE> 1
AWARD AGREEMENT
---------------
THIS AWARD AGREEMENT (the "Agreement") is entered into as of the 1st
day of June 1998 (hereinafter referred to as the "Date of Grant"), by and
between BRENT D. CASSITY (the "Optionee") and LINCOLN HERITAGE CORPORATION, a
Texas corporation (f/k/a National Prearranged Services of Texas, Inc., the
"Company").
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,
WHEREAS, the Plan provides for the grant of options to the Optionee as
an inducement to the Optionee to serve on the Board of Directors of the
Company (the "Board").
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 confirms the grant to
---------------
the Optionee the right and option (the "Option") to purchase, on the terms
and conditions hereinafter set forth, 50,000 shares (the "Option Shares") of
common stock, $0.01 par value, of the Company (the "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 as to one-quarter of the Shares
on the first anniversary of the Date of Grant, and thereafter as to the next
one-quarter of the Shares on the second anniversary of the Date of Grant, and
as to the next one-quarter of the Shares on the third anniversary of the Date
of Grant, and as to the remaining one-quarter of the total shares specified
in Paragraph 1 hereof on the fourth anniversary of the Date of Grant, which
amounts shall accumulate from year to year for the full term hereof to the
extent not previously exercised, so long as the Optionee is continuously
serving on the Board or on the Board of Directors of any of its subsidiaries,
as of such dates. 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 serving on the Board or on the Board of
Directors of any of its subsidiaries (other than by reason of death in
which event the Option shall remain exercisable for 90 days following
the Optionee's death) or a Deemed Exercise (as defined in Section 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
<PAGE> 2
taxes or like requirements pursuant to Section 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, with the
consent of the Committee, 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.
4. Exercisability Upon Change in Control of the Company or
-------------------------------------------------------
Death, Retirement, Termination or Suspension of Employment. If the Optionee's
- ----------------------------------------------------------
service on the Board or on the Board of Directors of any of its subsidiaries
terminates for any reason, any unvested Option held by the Optionee shall be
immediately forfeited and any vested Option held by such Optionee shall
continue to be exercisable according to the provisions of Paragraph 3 hereof;
provided, however, that in the event of a Change in Control, 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
- 2 -
<PAGE> 3
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 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 Board Membership. This Option shall
--------------------------------------
not confer on the Optionee any right to continue serving on the Board or on
the Board of Directors of any of its subsidiaries 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 service on the Board or on the Board of
Directors of any of its subsidiaries.
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 June 1,
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.
- 3 -
<PAGE> 4
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 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 held
------------
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. 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]
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of
the date and year first above written.
LINCOLN HERITAGE CORPORATION
By: /s/ Nicholas M. Powling
--------------------------
Name: Nicholas M. Powling
Title: President and Chief
Executive Officer
OPTIONEE:
/s/ Brent D. Cassity
------------------------------
Brent D. Cassity
- 5 -
<PAGE> 1
MEMORIAL SERVICE LIFE INSURANCE COMPANY
110 Wild Basin Road, Suite 370
Austin, Texas 78746
GENERAL AGENT CONTRACT
THIS AGREEMENT made by and between
National Prearrange Services Agency, Inc.
- -------------------------------------------------------------------------------
Name
312 Providence Towers East 5001 Spring Valley Rd.
- -------------------------------------------------------------------------------
Street
Dallas TX 75244
- -------------------------------------------------------------------------------
City State Zip
hereinafter called the "General Agent", and Memorial Service Life Insurance
Company, hereinafter called the "Company".
In CONSIDERATION OF THE MUTUAL AGREEMENTS herein contained, it is agreed by and
between the General Agent and the Company as follows:
1. Your appointment and Relationship with Us: We hereby appoint you a
General Agent of the Memorial Service Life Insurance Company. You may
solicit directly, or through your authorized agents, applications for
Life Insurance and other such policies of Insurance subsequently agreed
upon by you and us. You hereby agree to forward all such applications to
us for approval or rejection, along with all premiums collected from each
applicant.
It is understood that as a General Agent and along with your employees
and agents, you are an independent contractor. Nothing contained in this
contract shall be construed to create an employer-employee relationship
between you and us. We will establish service for eligibility of
applicants for insurance, and you agree that you and your agents will
observe our rules in good faith. We may also establish, and you agree to
observe, rules for general transactions of business. We will give you
written notice of any changes in our rules.
2. Your Commission Compensation: You agree that you are responsible for
paying all expenses which you incur in the performance of this contract.
As full compensation for your services, we will pay your Commissions
as defined herein.
<TABLE>
<CAPTION>
Sales Commission Marketing Allowance Activity Bonus
- ---------------------------------- ----------------------------- ------------------------------------
Percent Issue Percent Total Monthly % of Total
Policy Type Of Face Age Of Face Amount Mo. Amnt.
- -------------------- ------- -------------- ------- -------------------- ----------
<S> <C> <C> <C> <C> <C>
Single Pay 8% 60 & Under 10% $100,000 or More 5%
Limited Pay 8% 61 - 80 6% $99,999 to $50,000 4%
Graded Benefit 7% 81 & Older 2% $49,999 to $30,000 3%
Annuity 7% $29,999 to $20,000 2%
$19,999 to $10,000 1%
</TABLE>
Provision is made for contingent renewal comissions payable to the
General Agent. The percentage, if any, will be determined by us prior
to January 1 of each year. It will be payable for up to five (5) years
on the anniversary of each in-force policy. The maximum renewal
commission will be two (2) percent. The amount will be based on the
initial policy face amount.
<PAGE> 2
3. Statement of Account: At the end of each month we will furnish you a
detailed statement of Account for you and for any of your agents.
Upon receipt of such statements, you should immediately examine them,
and if you are not satisfied as to its correctness, you should notify
us immediately. Failure to do so within the next thirty (30) days
shall be deemed an admission by you of the accuracy of such
statement.
4. Payment of Commission: Total Commissions including an estimated
Activity Bonus (excluding renewal commissions) will be paid in full
when policies are issued by the Company. The initial activity bonus
rate will be based on activity of the prior month and will be adjusted
at month end for actual current month activity.
5. Territory: The territory within which General Agent shall have the
right to operate under the terms of this Agreement shall be agreed to
by the Company. The Company may directly appoint any other agent in any
portion of the territory assigned to General Agent, and General Agent
shall have no claim for commissions or other remuneration for or on
account of insurance effected by such other agent, unless such other
remuneration is assigned to General Agent. The Company may, at any
time, at its option and without liability to Genral Agent, withdraw
from doing business in the state or district in which the assigned
territory lies and may withdraw, change or alter any policy issued
by it without notice to General Agent. General Agent shall not solicit
applications in any territory in which either General Agent or the
Company is not properly authorized and licensed to act.
6. Recruiting and Contracting of Agents: Within the assigned territory,
you are authorized to recruit and recommend to us soliciting agents,
herein called "agents". Agents will not be allowed to solicit insurance
for us unless they are duly licensed in their state of operation, and
not until the agent is appointed by us with the State Insurance
Department. You are responsible to us for the fidelity and honesty of
your agents and all funds collected by or entrusted to them. You hereby
agree to hold us harmless from all expenses, costs, causes, or actions
and damages resulting from knowingly and intentionally committing
unauthorized acts of you, your agents, or employees, You agree to
furnish us copies of all contracts between you and your agents
appointed by us.
7. Our Direct Appointment of your Agent: We will not directly appoint
any of your agents until ninety (90) days after the date of a written
termination notice by you or after the date of written notice of
resignation by the agent. However, upon termination of your contract,
we may directly appoint any of your agents 30 days after the written
notice of termination by us or written notice of resignation by you.
8. Limitation of Authority: Your authority shall not exceed that expressly
granted herein and no forbearance or neglect on your part or ours shall
be a waiver of any of the terms of this contract or imply the existence
of authority not expressly granted herein. You are not authorized to make
any contract or incur any debt in our name, or to make; modify, or amend
any application for insurance; nor to waive any of our rights or
privileges under our policies or applications.
9. Indebtedness: Any money you owe us shall be a first lien on any
commissions due and shall be payable in Austin, Travis County, Texas.
We may at any time offset against commissions accrued or to accrue to
you and your agents any debt under this contract. However, in the event
of termination, the commissions on accounts with credit balances would
be applied to pay off the debit balances.
<PAGE> 3
10. Refunds: It is your responsibility to make prompt refund of all money
collected on any application on which we decline to issue a policy, and
on any application on which a policy is issued by us, but not accepted by
the applicant.
11. Discontinuance of Policy Plans: We may discontinue any policy plan.
Upon not less than thirty (30) days written notice, we may change the
commission provided herein, but any such change shall not affect
commissions on policies issued resulting from applications secured by
you and received at our home office prior to the date such change
becomes effective.
12. Assignments: This contract is not transferable and is assignable only
upon our prior written consent, said consent will not be unreasonably
withheld and will be acted upon in a timely fashion.
13. Conduct: Should you, at any time, knowingly and intentionally, wrongfully
withhold funds belonging to an applicant for insurance, or a policyholder
of the Company, or should you knowingly and intentionally, induce any
policyholder to lapse, relinquish, or surrender a policy with the
Company, or should you knowingly and intentionally fail to comply with
the state insurance laws and regulations under which you are licensed,
then no commissions shall thereafter be payable under this contract.
Any such action is defined as a breach of contract.
Should any of your agents knowingly commit any of the above defined
breach of conduct, at your direction, then no commission shall thereafter
be payable for those agents.
Should a number of your agents commit any of the above defined breach
of contract, at your direction, or your agency knowingly and intentionally
encourage, participate or condone such conduct, then no commissions shall
thereafter be payable under this contract.
14. Supplies and Advertising: All printed matter or other supplies furnished
to you are our property and shall be returned to us upon termination of
this contract. No circulars, advertisements or other matter reflecting
the Company name shall be published, printed, distributed, or used in any
other way by you or your agents, until such material shall first have
been approved in writing by us.
15. Sole Agreement: This contract shall take effect on the date shown on this
page upon signature of both parties. It includes all agreements between
the parties and supersedes and previous contracts.
16. Termination of Contract: This contract may be terminated by either
party by giving a thirty (30) day written notice.
IN WITNESS WHEREOF, THIS CONTRACT HAS BEEN SIGNED BY THE PARTIES HERETO.
DATED AND EFFECTIVE AT AUSTIN, TEXAS THIS 12th DAY OF May , 19 92 .
------ ------- ----
Memorial Service Life Insurance Company
/s/ Randall K. Sutton By: /s/ James J. Fischer
- ----------------------------- ------------------------------------------
General Agent's Signature Title: President
--------------------------------------
75-2141037
- ---------------------------------------
License Number or Corporate I.D. Number
<PAGE> 4
ADDENDUM
This Addendum is provided for the purpose of revising the Commission
Compensation found in the General Agent Contract between Memorial Service
Life Insurance Company ("Company") and National Prearranged Services Agency,
Inc. ("General Agent"). The effective date of this Addendum shall be January 1,
1997.
The maximum first year commission on all Single Pay Life policies is hereby
amended to:
Sales Commission 20.5%
Marketing Allowance 6.0%
The Activity Bonus shall apply and remains unchanged. The percentage will be
determined by the Company each year and will not exceed the maximums shown
above.
Further, all renewal commissions payable on or after the effective date of
this Addendum on all policies issued on or before December 31, 1995 shall be
reduced to zero.
In witness whereof, this Addendum has been signed by the parties hereto, dated
at Austin, Texas this 19th day of February , 1998.
-------------- --------------------
NATIONAL PREARRANGED SERVICES, INC. MEMORIAL SERVICE LIFE
INSURANCE COMPANY
By: /s/ Nekol Province By: /s/ Nicholas Powling
------------------------------------ --------------------------------
Title: Vice President Title: President & CEO
--------------------------------- -----------------------------
<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
World Service Life Insurance Company of America Alabama
Wise & Associates, Inc. Missouri
</TABLE>
<PAGE> 1
KILLMAN, MURRELL & COMPANY, P.C.
Certified Public Accountants
505 N. Big Spring, Suite 603 1931 E. 37th, Suite 7 14810 Le Grande Drive
Midland, Texas 79701 Odessa, Texas 79762 Dallas, Texas 75244
915-686-9381 915-363-0067/550-4910 972-991-9324
Fax 915-684-6722 Fax 915-363-0376 Fax 972-991-9323
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to our firm under the
heading "Experts" and to the incorporation of our reports
dated March 11, 1998, which are incorporated in this
Registration Statement on Form S-1 and the related Prospectus
of Lincoln Heritage Corporation.
/s/ Killman, Murrell & Company, P.C.
Killman, Murrell & Company, P.C.
(Successor to Roy L. Butler
Certified Public Accountant)
June 12, 1998
<PAGE> 1
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
of Harbourton Reassurance, Inc. included in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-50525) 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
June 12, 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>
<RESTATED>
<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> 10,547
<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> 0.67
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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<PAYMENTS-PRIOR> 0
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</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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,528
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 109,339
<CASH> 3,277
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 13,192
<TOTAL-ASSETS> 135,947
<POLICY-LOSSES> 127,631
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 689
<POLICY-HOLDER-FUNDS> 340
<NOTES-PAYABLE> 0
0
0
<COMMON> 10
<OTHER-SE> 5,139
<TOTAL-LIABILITY-AND-EQUITY> 135,947
7,257
<INVESTMENT-INCOME> 2,252
<INVESTMENT-GAINS> 451
<OTHER-INCOME> 130
<BENEFITS> 6,390
<UNDERWRITING-AMORTIZATION> 1,749
<UNDERWRITING-OTHER> 1,992
<INCOME-PRETAX> (42)
<INCOME-TAX> (10)
<INCOME-CONTINUING> (32)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
<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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 49,329
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
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<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 52,181
<CASH> 6,274
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 11,193
<TOTAL-ASSETS> 77,251
<POLICY-LOSSES> 75,080
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 527
<POLICY-HOLDER-FUNDS> 251
<NOTES-PAYABLE> 0
0
0
<COMMON> 1
<OTHER-SE> 394
<TOTAL-LIABILITY-AND-EQUITY> 77,251
8,631
<INVESTMENT-INCOME> 1,238
<INVESTMENT-GAINS> 21
<OTHER-INCOME> 0
<BENEFITS> 6,886
<UNDERWRITING-AMORTIZATION> 2,547
<UNDERWRITING-OTHER> 482
<INCOME-PRETAX> (25)
<INCOME-TAX> (3)
<INCOME-CONTINUING> (22)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
