UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________________________
Commission file number 001-14067
LINCOLN HERITAGE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 36-3427454
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
1250 Capital of TX Hwy, Bldg. 3, Suite 100
Austin, TX 78746
(Address of principal executive offices)
(Zip Code)
(512) 328-0075
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_|No
Title of class of Number of shares
common stock outstanding as of October 31, 1999
Common stock, $0.01 par value 4,532,134
<PAGE>
LINCOLN HERITAGE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited).. .............3
Condensed Consolidated Balance Sheets September 30, 1999 (Unaudited)
and December 31, 1998..................................................3
Condensed Consolidated Statements of Operations (Unaudited)Three Months
and Nine Months Ended September 30, 1999 and 1998......................5
Condensed Consolidated Statements of Shareholders Equity
and Comprehensive Income (Unaudited) Nine Months Ended
September 30, 1999 and 1998............................................6
Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months
Ended September 30, 1999 and 1998........ .............................7
Notes to Condensed Consolidated Financial Statements...................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation..............................................10
Overview..............................................................10
Results of Operations.................................................10
Liquidity and Capital Resources.......................................11
Factors Affecting the Company's Business and Prospects................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................16
Item 2. Changes in Securities and Use of Proceeds............................16
Item 3. Defaults Upon Senior Securities......................................16
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 5. Other Information....................................................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
SIGNATURES....................................................................17
EXHIBIT INDEX.................................................................18
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
LINCOLN HERITAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
--------------- ---------------
ASSETS
<S> <C> <C>
Fixed maturities available-for-sale
at fair value (amortized cost
$80,186,103 and $68,201,939,respectively) $ 71,076,038 $ 65,628,083
Equity securities at fair value
(amortized cost $6,687,997
and $7,939,451, respectively) 5,216,974 7,121,000
Policyholder loans 21,973,465 17,257,122
Cash and cash equivalents 25,695,254 43,824,537
-------------- --------------
Total cash and investments 123,961,731 133,830,742
Accrued investment income 658,919 463,616
Accounts receivable from related party 1,993,625 1,535,926
Funds withheld by ceding company 534,362 526,434
Deferred policy acquisition costs, net 19,750,731 16,881,478
Fixed assets, net 1,447,980 1,218,352
Cost of policies acquired, net 3,050,297 3,833,659
Goodwill, net 1,358,017 1,413,550
Deferred tax assets, net 6,037,392 3,364,638
Other assets 702,995 1,004,118
-------------- --------------
Total $ 159,496,049 $ 164,072,513
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Policy liabilities:
Future policy benefits $ 114,331,574 $ 104,201,323
Policyholder deposits 39,287,982 47,163,465
Claims and benefits payable 500,000 650,000
Premiums received in advance 739,079 409,937
-------------- --------------
Total policy liabilities 154,858,635 152,424,725
Income tax payable 35,800 49,800
Accounts payable and accrued expenses 280,624 656,089
Accounts payable to related party - 163,292
Other liabilities 1,148,322 1,964,045
-------------- --------------
Total liabilities 156,323,381 155,257,951
Shareholders' equity:
Preferred stock($.01 par value;
1,000,000 shares authorized,
none issued) - -
Common stock ($.01 par value; 10,000,000
shares authorized, 4,532,134
and 4,520,000 shares issued
and outstanding,respectively) 45,321 45,200
Additional paid-in capital 4,977,732 4,734,350
Retained earnings 5,214,474 6,273,924
Accumulated other comprehensive loss (7,064,859) (2,238,912)
--------------- ---------------
Total shareholders' equity 3,172,668 8,814,562
-------------- --------------
Total $ 159,496,049 $ 164,072,513
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> C> <C> <C>
REVENUES
Life premiums $ 12,337,243 $ 10,897,591 $ 33,357,696 $ 31,630,543
Net investment income 2,372,410 2,840,302 7,526,920 7,673,251
Realized investment gains (losses), net (701,693) 442,905 153,002 1,511,108
Other revenue 40,674 65,065 173,182 212,931
-------------- -------------- ------------- --------------
Total revenues 14,048,634 14,245,863 41,210,800 41,027,833
BENEFITS AND EXPENSES
Death benefits 3,953,820 4,045,996 13,509,901 12,335,933
Surrender benefits 114,469 1,088,746 1,003,985 1,567,331
Increase in future policy benefits 4,781,027 3,974,317 10,130,252 12,382,365
Interest paid on policyholder deposits 853,317 685,143 1,561,942 1,467,826
Commissions 4,913,278 4,875,589 12,755,692 11,811,695
General expenses 2,290,050 1,814,236 7,182,262 5,158,001
General expenses reimbursed by related party (671,173) (751,854) (2,063,913) (2,066,886)
Taxes, licenses and fees 102,274 243,620 731,583 661,468
Amortization of cost of policies purchased 20,198 49,430 658,362 623,003
Change in deferred acquisition costs, net (1,890,855) (1,057,320) (2,869,253) (2,206,954)
--------------- --------------- -------------- ---------------
Total benefits and expenses 14,466,405 14,967,903 42,600,813 41,733,782
Loss before federal income taxes (417,771) (722,040) (1,390,013) (705,949)
Income tax benefit - (208,743) (330,563) (204,019)
-------------- --------------- -------------- ---------------
Net loss $ (417,771) $ (513,297) $ (1,059,450) $ (501,930)
=============== =============== ============== ===============
Basic loss per share $ (0.09) $ (0.13) $ (0.23) $ (0.13)
============== ================ ============== ===============
Diluted loss per share $ (0.09) $ (0.13) $ (0.23) $ (0.13)
============== ================ ============== ===============
Weighted average shares outstanding:
Basic 4,523,474 4,000,000 4,523,474 4,000,000
Diluted 4,523,474 4,000,000 4,523,474 4,000,000
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
Accumulated
<CAPTION>
Additional Other
Common Paid-In Comprehensive Retained
Total Stock Capital Loss Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 8,814,562 $ 45,200 $ 4,734,350 $ (2,238,912) $ 6,273,924
Comprehensive loss, net of tax:
Net loss (1,059,450) - - - (1,059,450)
Change in unrealized losses on
available-for-sale and equity
securities, net of applicable
income tax benefit of $2,486,094 (4,825,947) - - (4,825,947) -
Total comprehensive loss (5,885,397) - - - -
--------------
Issuance of shares for stock options 45,503 121 45,382
Effect of stock options granted under stock
option plans, net of applicable income
tax effect of $102,000 198,000 - 198,000 - -
------------- ------------- ------------ -------------- ------------
Balance, September 30, 1999 $ 3,172,668 $ 45,321 $ 4,977,732 $ (7,064,859) $5,214,474
============= ============= ============= ============== ==========
Balance, December 31, 1997 $ 6,882,711 $ 10,000 $ 2,075,576 $ 538,870 $ 4,258,265
Comprehensive income, net of tax:
Net loss (501,930) - - - (501,930)
Change in unrealized losses on
available-for-sale and equity
securities, net of applicable
income tax benefit of $1,052,823 (2,043,715) - - (2,043,715) -
------------
Total comprehensive loss (2,545,645) - - - -
-----------
Transfer to common stock in
connection with stock split and
stock dividend - 30,000 (30,000) - -
Effect of stock options granted under stock
option plan, net of applicable income
tax effect of $58,500 113,560 - 113,560 - -
------------- ------------- ------------- ------------- -------------
Balance, September 30, 1998 $ 4,450,626 $ 40,000 $ 2,159,136 $ (1,504,845) $ 3,756,335
============= ============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,059,450) $ (501,930)
Adjustments to reconcile net income to cash
used in operating activities:
Realized investment gains (153,001) (1,511,108)
Accretion of discount on investments (265,077) (1,170,911)
Depreciation and amortization 926,630 809,440
Deferred income taxes (321,060) (163,096)
Stock options 300,000 172,060
Accrued investment income (195,303) (74,344)
Accounts receivable from related parties (457,699) (1,272,522)
Funds withheld by ceding company (7,928) -
Deferred acquisition costs (2,869,253) (2,206,954)
Other assets 301,123 (810,946)
Future policy benefits and
deposit funds 2,254,768 3,333,775
Claims and benefits payable (150,000) (300,000)
Premiums received in advance 329,142 32,117
Federal income tax payable (14,000) (1,975,165)
Accounts payable and accrued expenses (375,465) (16,223)
Accounts payable to related party (163,292) 162,327
Other liabilities (690,723) (122,570)
-------------- --------------
Net cash used in
operating activities (2,610,588) (5,616,050)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of
available-for-sale investments 53,429,486 223,824,091
Purchases of available
-for-sale investments (63,513,214) (230,933,520)
Policyholder loans, net (4,716,343) (3,559,578)
Purchase of fixed assets (442,363) (607,593)
Acquisition of subsidiary - (5,066,809)
Other, net (321,764) (897,133)
---------------- ----------------
Net cash used
in investing activities (15,564,198) (17,240,542)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares for
stock options 45,503 -
------------- -------------
Net cash provided by
financing activities 45,503 -
------------- -------------
NET DECREASE IN CASH AND (18,129,283) (22,856,592)
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 43,824,537 62,667,707
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,695,254 $ 39,811,115
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Federal income taxes paid $ - $ 1,975,165
============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Lincoln Heritage Corporation (the "Company") and its direct and
indirect wholly owned subsidiaries: Memorial Service Life Insurance Company, New
Life Insurance Company, and Lincoln Memorial Life Insurance Company. These
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X,
which differ from statutory accounting practices prescribed or permitted by
regulatory authorities. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. All intercompany accounts and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform with the current period presentation.
The accompanying condensed consolidated financial statements and notes
thereto as of September 30, 1999 are unaudited and should be read in conjunction
with the Company's audited financial statements included in the Company's Annual
Report filed with the Securities and Exchange Commission for the year ended
December 31, 1998. The unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly the
Company's financial position, results of operations and cash flows as of
September 30, 1999 and for the three and nine months ended September 30, 1999
and 1998, respectively. The results for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
NOTE 2 -- STOCK SPLITS AND EARNINGS PER SHARE
On April 6, 1998, the Company effected a 3.2-for-1 stock split, in the form
of a stock dividend, and on August 18, 1998, the Company declared and paid a 25%
stock dividend. The earnings per share of the Company for all periods presented
have been computed as if these stock splits and dividends occurred at January 1,
1998. The diluted earnings per share is computed using the treasury stock method
unless the effect is anti-dilutive.
NOTE 3 -- INVESTMENTS
In the nine-month period ended September 30, 1999, the Company recognized
losses for declines in market value associated with the Company's investment in
Autobond Acceptance Corporation ("Autobond"). Management believes that the
decline in market value is other than temporary and due to reasons other than
market fluctuations and has recognized losses of $578,000 and $3.2 million for
the three-month and nine-month periods ended September 30, 1999, respectively.
These recognized losses reduce the Company's total investment in Autobond to
$98,000 as of September 30, 1999.
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of fixed maturity and
equity securities available-for-sale as of September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate bonds $ 15,035,512 $ 191,075 $(1,367,906) $ 13,858,681
Mortgage backed
securities 48,755,173 72,493 (6,483,011) 42,344,655
U.S. Government 16,395,418 118,653 (1,641,369) 14,872,702
------------ --------- ------------ -------------
Total fixed maturity
securities 80,186,103 382,221 (9,492,286) 71,076,038
Equity securities 6,687,997 86,935 (1,557,958) 5,216,974
----------- ---------- ------------ ------------
Total $ 86,874,100 $ 469,156 $(11,050,244) $ 76,293,012
============ ========== ============== ============
</TABLE>
NOTE 4 --SUBSEQUENT EVENTS
On October 15, 1999, the Company purchased all of the outstanding shares of
capital stock of Funeral Security Life Insurance Company ("FSLife") for $5.0
million. As of such date, FSLife had approximately $31 million in assets and $30
million in liabilities. The acquisition will be accounted for using the purchase
method.
On October 28, 1999, the Company completed the sale of its insurance
subsidiary, New Life Insurance Company ("New Life") for approximately $5
million. Since all of the business of New Life is reinsured by another of the
Company's insurance subsidiaries, the sale of New Life is not expected to have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
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, National Prearranged Services,
Inc. ("NPS"), in connection with NPS's sale of prearranged funeral contracts.
The Company's revenues are derived primarily from premiums on insurance
policies generated by NPS. In the event of a decline in NPS's preneed sales, the
Company's future revenue growth could be impacted if the Company could not
replace the NPS sales force with its own or another marketing entity's sales
force on a cost-effective or timely basis.
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 anticipates that
benefit costs and commissions will continue to increase as the Company executes
its growth plans.
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 position, results of operations
or cash flows.
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 terms, arrange necessary financing and
integrate and manage the acquisitions, including preserving customer
relationships. There can be no assurance that the Company will successfully
execute its strategy
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 1999 and 1998
Premium income increased approximately $1.4 million and $1.7 million, or
13% and 5%, in the three-month and nine-month periods ended September 30, 1999,
respectively, compared to the corresponding periods of 1998. The increase for
the three-month and nine-month periods reflected higher overall volume of new
policies issued for both limited pay and single pay policies compared to
corresponding periods in 1998.
<PAGE>
Net investment income decreased approximately $468,000 and $146,000, or 16%
and 2%, in the three-month and nine-month periods ended September 30, 1999,
respectively, compared to the corresponding periods of 1998. The decrease in the
three-month period was due to changes in the portfolio mix of investments away
from high yield bonds to more convertible bonds.
Net realized investment gains decreased approximately $1.1 million and $1.4
million, or 258% and 90%, in the three-month and nine-month periods ended
September 30, 1999, respectively, versus the corresponding periods of 1998.
Losses of approximately $574,000 and $3.2 million were incurred for the
three-month and nine-month periods ended September 30, 1999, respectively,
reflecting management's recognition of a decline in market value associated with
the Company's investment in Autobond. Management believes that the decline was
other than temporary and due to reasons other than market fluctuations and has
recognized losses sufficient to reduce the Company's investment in Autobond to
its current market value of $98,000 as of September 30, 1999.
Benefits increased approximately $91,000 and decreased $1.5 million, or
less than 1% and 6%, in the three-month and nine-month periods ended September
30, 1999, respectively, compared to the corresponding periods of 1998. The
decrease in the nine-month period was due to higher overall volume of new
policies issued during the nine-month period ended September 30, 1999.
Commissions increased approximately $38,000 and $944,000, or 1% and 8%, in
the three-month and nine-month periods ended September 30, 1999, respectively,
compared to the corresponding periods of 1998. These changes were attributable
to higher sales volumes and mix of policies sold.
General expenses, net of expenses reimbursed, increased approximately
$556,000 and $2.0 million, or 52% and 66%, in the three-month and nine-month
periods ended September 30, 1999, respectively, compared to the corresponding
periods of 1998. These increases were attributable to higher administrative
expenses as a result of increased sales volumes, support for increased levels of
acquisition activities and regulatory reporting requirements, and approximately
$330,000 related to the forfeiture of deposits and other expenses associated
with the Company's withdrawal of its proposal to acquire Harbourton Reassurance,
Inc.
The change in deferred acquisition costs increased approximately $834,000
and $662,000 for the three-month and nine-month periods ended September 30,
1999, respectively, compared to the corresponding periods of 1998. The increase
for the three-month and nine-month periods was due to higher rates of
capitalization of the costs of acquiring new business due to higher volume of
new business.
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 investment portfolios of its
insurance subsidiaries provide sufficient liquidity to meet its operating cash
requirements.
<PAGE>
The Company's cash requirements for 1999 and in the future will depend
upon mortality experience, acquisitions, timing of expansion plans and capital
expenditures. The Company believes that anticipated revenue from operations
should be adequate for the Company's working capital requirements of its
existing business over the next twelve months. In the event that the Company's
plans or assumptions change, or if its resources available to meet unanticipated
changes in business conditions prove to be insufficient to fund operations, the
Company could be required to seek additional financing prior to that time. On
October 15, 1999, the Company completed its acquisition of all the outstanding
shares of Funeral Security Life Insurance Company ("FSLife") for $5 million. The
purchase was funded from existing working capital. On October 28, 1999 the
Company sold its insurance subsidiary, New Life, for approximately $5 million
and realized net proceeds of approximately $1.4 million over the net assets
sold.
Total cash and investments decreased approximately $9.9 million from
$133.8 million at December 31, 1998 to $124.0 million at September 30, 1999.
Changes in the separate components of investment assets were due to the
portfolio mix of the Company's investment assets and changes in the fair value
of actively managed fixed maturity and equity securities.
Receivables from related parties increased approximately $458,000 from
$1.5 million at December 31, 1998 to $1.9 million at September 30, 1999 due
primarily to premiums on new business.
Deferred policy acquisition costs, net increased approximately $2.9 million
from $16.9 million at December 31, 1998 to $19.8 million at September 30, 1999
due primarily to increases in new policies issued and in-force.
Cost of policies acquired, net, decreased approximately $783,000 from
$3.8 million at December 31, 1998 to $3.0 million at September 30, 1999 due to
amortization of costs.
Deferred taxes, net increased $2.6 million from $3.4 million at
December 31, 1998 to $6.0 million due to primarily to deferred taxes on
unrealized losses on investments.
Other assets decreased approximately $301,000 from $1.0 million at
December 31, 1998 to $703,000 at September 30, 1999 due to the forfeiture of
deposits and other expenses associated with the Company's withdrawal of it
proposal to acquire Harbourton Reassurance, Inc.
Policyholder deposits decreased approximately $7.9 million from $47.2
million at December 31, 1998 to $39.3 million at September 30, 1999.
Policyholder deposits are comprised primarily of blocks of annuities acquired in
prior years. The decrease was due primarily to surrenders of policies and the
absence of the issuance of new annuity policies.
Other liabilities decreased approximately $816,000 from $2.0 million at
December 31, 1998 to $1.1 million at September 30, 1999 due primarily to the
application of unapplied customer payments to policies.
<PAGE>
Factors Affecting the Company's Business and Prospects
Seasonality
Historically, the Company's revenues and operating results have varied
from quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including a higher
mortality rate of the Company's insureds during the winter months.
Interest Rate Changes
The Company's investment portfolio primarily consists of fixed income
investments. Available-for-sale investments are recorded at fair market value
with an offsetting adjustment for the unrealized investment gains and losses to
shareholders' equity. As a result of rising interest rates during the past year,
the Company has experienced declines in the market value of its overall
investment balances and shareholders' equity. However, the investment yields on
the Company's existing fixed income investments are not affected for changes in
market interest rates. Similarly, the capital adequacy of the Company's
insurance subsidiaries for regulatory purposes is not affected by the changes in
market values of the fixed income portfolios. Consistent with its investment
strategy, the Company holds its investments in fixed income securities until
maturity or sells such investments when deemed advantageous, including to pursue
opportunities for investment gains.
Year 2000 Issues
Many current installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000.
Company Readiness
The Company's information technology personnel recently assessed the
Company's readiness to manage Year 2000 issues. This included a review of all
current computer systems in use, as well as communications with significant
vendors and other third parties to determine the extent to which the Company's
operations are vulnerable to third parties' failure to correct their own Year
2000 issues. Based on the overall assessment performed, the Company has
determined that it will not need to significantly modify or replace any of its
current systems in order to comply with Year 2000 issues. In addition, based
upon communications with significant vendors and other third parties, the
Company is not aware of any material impact on their systems relating to the
transition to the Year 2000. However, the Company has no means of ensuring that
these entities will be Year 2000 ready. The inability of third parties to
complete their Year 2000 programs in a timely manner could materially impact the
Company. The effect of non-compliant third parties is not determinable.
Year 2000 Costs
The Company's total costs of Year 2000 efforts to date and future
anticipated costs have not been and are not expected to be material.
<PAGE>
Risks Associated with the Company's Year 2000 Issues
The Company expects its internal systems to be Year 2000 compliant and
believes that the worst case scenario would result from vendors or other third
parties failing to achieve Year 2000 compliance. Due to the general uncertainty
inherent in the Year 2000 problem, the Company cannot predict whether the
consequence of Year 2000 failures will have a material adverse effect on the
Company's business, financial condition or results of operations. However, based
on the Company's assessment of its internal systems, communications with
significant vendors and other third parties, the Company does not expect Year
2000 problems to result in a material adverse effect on the Company's financial
position, results of operations or cash flows. In the event significant vendors
are not Year 2000 compliant, the Company will have a backup power supply and
internal resources to address Year 2000 problems.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. The Company can give no
assurance that the expectations indicated by such forward-looking statements
will be realized. If any of management's assumptions should prove incorrect, or
if any of the risks and uncertainties underlying such expectations should
materialize, the Company's actual results may differ materially from those
indicated by the forward-looking statements.
The following factors that are not within the Company's control and
that may have a direct bearing on operating results include, but are not limited
to: (i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect the ability
of the Company to sell its products, the market value of the Company's
investments and the lapse rate and profitability of the Company's policies; (ii)
the Company's ability to achieve anticipated levels of operational efficiencies
at recently acquired companies, as well as through other cost-saving
initiatives; (iii) mortality, morbidity, and other factors which may affect the
profitability of the Company's insurance products; (iv) changes in the federal
income tax laws and regulations which may affect the cost of or demand for the
Company's products; (v) increasing competition in the sale of the Company's
products; (vi) regulatory changes or actions, including those relating to
regulation of financial services affecting (among other things) bank sales and
underwriting of insurance products, regulation of the sale, underwriting and
pricing of insurance products; (vii) the availability and terms of future
acquisitions; (viii) unanticipated events associated with Year 2000 compliance
relating to work on development or modification to computer systems and to
software, including work performed by suppliers or vendors; and (ix) the risk
factors or uncertainties listed in the Company's other filings with the
Securities and Exchange Commission.
Additionally, the Company may not be successful in identifying,
acquiring, and integrating possible acquisitions, implementing improved
management and accounting information systems and controls, and may be dependent
upon additional capital for future growth. There may be other risks and
uncertainties that management is not able to predict.
When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intends," and similar expressions, as they relate to the
Company are intended to identify forward-looking statements, although there may
be certain forward-looking statements not accompanied by such expressions.
Lincoln Heritage Corporation is an insurance holding company
headquartered in Austin, TX, and is not affiliated in any way with Lincoln
Heritage Life Insurance Company headquartered in Phoenix, AZ.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
There have been no material changes from the information provided in
the Company's Annual Report on Form 10-K for the year ended December 31,1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Exhibit Index attached hereto.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINCOLN HERITAGE CORPORATION
(Registrant)
November 15, 1999 By: /s/ Clifton Mitchell
President and Chief Executive Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Ex. No. Description
27.1 Financial Data Schedule for the Nine Months ended September 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The schedule below contains summary financial
information extracted from the Consolidated
Financial Statements of Lincoln Heritage
Corporation and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 71,076
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5,217
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 98,267
<CASH> 25,695
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 19,751
<TOTAL-ASSETS> 159,496
<POLICY-LOSSES> 153,620
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 500
<POLICY-HOLDER-FUNDS> 739
<NOTES-PAYABLE> 0
0
0
<COMMON> 45
<OTHER-SE> 3,127
<TOTAL-LIABILITY-AND-EQUITY> 159,496
33,358
<INVESTMENT-INCOME> 7,527
<INVESTMENT-GAINS> 153
<OTHER-INCOME> 173
<BENEFITS> 26,206
<UNDERWRITING-AMORTIZATION> 3,450
<UNDERWRITING-OTHER> 12,945
<INCOME-PRETAX> (1,390)
<INCOME-TAX> (330)
<INCOME-CONTINUING> (1,059)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,059)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
