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 June 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 July 31, 1999
- ---------------------------------------- ----------------------------------
Common stock, $0.01 par value 4,524,700
<PAGE>
LINCOLN HERITAGE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)..............3
Condensed Consolidated Balance Sheets--June 30, 1999
(Unaudited) and December 31, 1998....................................3
Condensed Consolidated Statements of Operations (Unaudited)
--Three Months and Six Months Ended June 30, 1999 and 1998...........5
Condensed Consolidated Statements of Shareholders'Equity
and Comprehensive Income (Unaudited)--Six Months Ended
June 30, 1999 and 1998...............................................6
Condensed Consolidated Statements of Cash Flows
(Unaudited) --Six Months Ended June 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...................................9
Overview.............................................................9
Results of Operations...............................................10
Liquidity and Capital Resources.....................................11
Factors Affecting the Company's Business and Prospects..............12
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................14
Item 2. Changes in Securities and Use of Proceeds...........................14
Item 3. Defaults Upon Senior Securities.....................................14
Item 4. Submission of Matters to a Vote of Security Holders.................14
Item 5. Other Information...................................................14
Item 6. Exhibits and Reports on Form 8-K....................................14
SIGNATURES....................................................................15
EXHIBIT INDEX.................................................................16
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
LINCOLN HERITAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
--------------- ---------------
ASSETS
<S> <C> <C>
Fixed maturities available-for-sale
at fair value(amortized cost
$81,992,903 and $68,201,939) $ 77,415,954 $ 65,628,083
Equity securities at fair value
(amortized cost $6,634,426 and $7,939,451) 6,014,705 7,121,000
Policyholder loans 18,984,120 17,257,122
Cash and cash equivalents 24,482,701 43,824,537
-------------- --------------
Total cash and investments 126,897,480 133,830,742
Accrued investment income 668,378 463,616
Accounts receivable from related party 2,588,582 1,535,926
Funds withheld by ceding company 533,320 526,434
Deferred policy acquisition costs, net 17,859,876 16,881,478
Fixed assets, net 1,369,495 1,218,352
Cost of policies acquired, net 3,070,495 3,833,659
Goodwill, net 1,376,528 1,413,550
Deferred tax assets, net 4,225,388 3,364,638
Other assets 456,848 1,004,118
-------------- --------------
Total $ 159,046,390 $ 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)
June 30, December 31,
1999 1998
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Policy liabilities:
Future policy benefits $ 109,550,547 $ 104,201,323
Policyholder deposits 39,954,895 47,163,465
Claims and benefits payable 500,000 650,000
Premiums received in advance 577,232 409,937
-------------- --------------
Total policy liabilities 150,582,674 152,424,725
Income tax payable 35,800 49,800
Accounts payable and accrued expenses 314,711 656,089
Accounts payable to related party 86,591 163,292
Other liabilities 949,807 1,964,045
-------------- --------------
Total liabilities 151,969,583 155,257,951
Shareholders' equity:
Preferred stock ($.01 par value;
1,000,000 shares authorized,none
issued) - -
Common stock ($.01 par value;
10,000,000 shares authorized,
4,524,700 and 4,520,000 shares
issued and outstanding, respectively) 45,247 45,200
Additional paid-in capital 4,913,628 4,734,350
Retained earnings 5,632,245 6,273,924
Accumulated other comprehensive
loss (3,514,313) (2,238,912)
--------------- ---------------
Total shareholders' equity 7,076,807 8,814,562
--------------- ---------------
Total $ 159,046,390 $ 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 Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Life premiums $ 11,307,182 $ 13,476,192 $ 21,020,454 $ 20,732,952
Net investment income 2,355,602 2,580,793 5,154,510 4,832,949
Realized investment gains,net 1,539,818 617,289 854,695 1,068,203
Other revenue 57,222 94,702 132,508 147,866
-------------- ------------- -------------- ---------------
Total revenues 15,259,824 16,768,976 27,162,167 26,781,970
BENEFITS AND EXPENSES
Death benefits 3,905,156 4,333,168 9,556,081 8,289,937
Surrender benefits 573,103 412,454 889,516 478,585
Increase in future policy benefits 3,968,140 6,568,018 5,349,225 8,408,048
Interest paid on policyholder deposits 349,625 255,646 708,625 782,683
Commissions 3,807,030 3,979,975 7,842,414 6,936,106
General expenses 2,805,694 1,831,179 4,892,212 3,343,763
General expenses reimbursed by related party (683,294) (759,275) (1,392,740) (1,315,032)
Taxes, licenses and fees 305,678 250,169 629,309 417,848
Amortization of cost of policies purchased 290,262 275,719 638,164 573,573
Change in deferred acquisition costs, net (1,225,308) (512,615) (978,398) (1,149,634)
--------------- -------------- -------------- ---------------
Total benefits and expenses 14,096,086 16,634,438 28,134,408 26,765,877
Income (loss) before federal income taxes 1,163,738 134,538 (972,741) 16,093
Income taxes(benefits) 395,671 14,016 (330,562) 4,724
--------------- -------------- -------------- ---------------
Net income (loss) $ 768,067 $ 120,522 $ (641,679) $ 11,369
=============== ============== ============== ===============
Basic earnings (loss) per share $ 0.17 $ 0.03 $ (0.14) $ -
=============== ============== ============== ===============
Diluted earnings (loss) per share $ 0.17 $ 0.03 $ (0.14) $ -
=============== ============== ============== ===============
Weighted average shares outstanding:
Basic 4,522,332 4,000,000 4,521,167 4,000,000
Diluted 4,571,787 4,000,000 4,521,167 4,000,000
</TABLE>
The accompaning 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)
<CAPTION>
Accumulated
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 (641,679) - - - (641,679)
Change in unrealized losses on
available for sale and equity
securities, net of applicable
income tax benefit of $657,028 (1,275,401) - - (1,275,401) -
-------------
Total comprehensive (loss) (1,917,080) - - - -
-------------
Issuance of shares for stock options 17,625 47 17,578 - -
Effect of stock options granted
under stock option plans, net of
applicable income tax effect of
$83,300 161,700 - 161,700 -
------------- ------------- ------------- ------------- -------------
Balance, June 30, 1999 $ 7,076,807 $ 45,247 $ 4,913,628 $ (3,514,313) $ 5,632,245
============= ============= ============= ============== =============
Balance December 31, 1997 $ 6,882,711 $ 10,000 $ 2,075,576 $ 538,870 $ 4,258,265
Comprehensive income, net of tax:
Net income 11,369 - - - 11,369
Change in unrealized losses on
available for sale and equity
securities, net of applicable
income tax benefit of $483,313 (938,197) - - (938,197) -
-------------
Total comprehensive (loss) (926,828) - - - -
-------------
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 $35,276 68,479 - 68,479 - -
Balance, June 30, 1998 $ 6,024,362 $ 40,000 $ 2,114,055 $ (399,327) $ 4,269,634
============= ============= ============= ============= =============
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (641,679) $ 11,369
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Realized investment gains (854,695) (1,068,203)
Accretion of discount on investments (240,255) (671,705)
Depreciation and amortization 812,685 683,513
Deferred income taxes (287,022) (1,246,303)
Stock options 245,000 103,755
Accrued investment income (204,762) (150,902)
Accounts receivable from related parties (1,052,656) (81,493)
Funds withheld by ceding company (6,886) -
Deferred acquisition costs (978,398) (1,149,634)
Other assets 672,270 (1,187,837)
Future policy benefits and deposit funds (1,859,346) (403,973)
Claims and benefits payable (150,000) (300,000)
Premiums received in advance 167,295 36,695
Federal income tax payable (14,000) (1,975,165)
Accounts payable and accrued expenses (341,378) (135,503)
Accounts payable to related party (76,701) (17,090)
Other liabilities (1,014,238) 218,596
--------------- ----------------
Net cash used in operating activities (5,824,766) (7,333,880)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale investments 44,719,113 257,160,881
Purchases of available-for-sale investments (56,238,168) (252,567,521)
Policyholder loans, net (1,726,998) (3,640,600)
Purchase of fixed assets (288,642) (67,825)
Acquisition of subsidiary - (5,041,514)
--------------- ----------------
Net cash used in investing activities (13,534,695) (4,156,579)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares for stock options 17,625 -
--------------- ----------------
Net cash provided by financing activities 17,625 -
--------------- ----------------
NET DECREASE IN CASH AND (19,341,836) (11,490,459)
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,824,537 62,667,707
-------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,482,701 $ 51,177,248
=============== ================
SUPPLEMENTAL CASH FLOW INFORMATION
FEDERAL INCOME TAXES PAID $ 14,000 $ 1,975,165
=============== ================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated fiancial 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 June 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 June
30, 1999 and for the three and six months ended June 30, 1999 and 1998
respectively. The results for the three and six months ended June 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 six month period ended June 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 $974,000 and $2.6 million for
the three and six months ended June 30, 1999, respectively. These recognized
losses bring Autobond to current market value as of June 30, 1999.
<PAGE>
The amortized cost and estimated fair value of fixed maturity and
equity securities available-for-sale as of June 30, 1999, are 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 $ 12,590,664 $ 372,118 $ (466,925) $ 12,495,857
Mortgage backed securities 53,010,284 16,879 (3,245,313) 49,781,850
U.S. government 16,391,955 160,141 (1,413,850) 15,138,246
-------------- ------------- -------------- --------------
Total fixed maturity securities 81,992,903 549,138 (5,126,088) 77,415,954
Equity securities 6,634,426 - (619,720) 6,014,705
-------------- ------------- -------------- --------------
Total $ 88,627,329 $ 549,138 $ (5,745,808) $ 83,430,659
============== ============= ============== ==============
</TABLE>
NOTE 4 -- PROPOSED ACQUISITION; SUBSEQUENT EVENTS
On April 30, 1999,the Company entered into an agreement to purchase all the out-
standing shares of Funeral Security Life Insurance Company ("FSLife") for $5
million. FSLife has approximately $31 million in assets and $30 million in liab-
ilities. The completion of the purchase is subject to regulatory approval and
is expected to be accounted for using the purchase method.
Effective July 23, 1999, the Company entered into an agreement to sell its
insurance subsidiary, New Life Insurance Company ("New Life") for approximately
$5 million. The completion of the sale is subject to regulatory approval. 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.
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.
<PAGE>
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 values, 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 Six Months Ended June 30, 1999 and 1998
Premium income decreased approximately $2.2 million and increased
approximately $288,000, or 16% and 1%, in the three-month and six-month periods
ended June 30, 1999, respectively, compared to the corresponding periods of
1998. The decrease for the three-month period reflected a shift in the relative
proportion of policies from single pay to limited pay policies. The increase for
the six-month period reflected higher overall volume of new policies issued for
both limited pay and single pay policies for the six-month period ended June 30,
1999 compared to the six-month period ended June 30, 1998.
Net investment income decreased approximately $225,000 and increased
approximately $322,000, or 9% and 7%, in the three-month and six-month periods
ended June 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 a greater investment in convertible
bonds. The increase for the six-month period was attributable to a higher level
of invested assets over the comparable period in 1998 due to the purchase of a
block of life and annuity policies in April 1998.
Net realized gains increased approximately $923,000 and decreased
approximately $214,000, or 149% and 20%, in the three-month and six-month
periods ended June 30, 1999, respectively, versus the corresponding periods of
1998. Gains were recognized in the three-month and six-month periods ended June
30, 1999 due to the higher levels of invested assets and changes in the
portfolio mix of investments discussed above. However, these gains were offset
by losses of approximately $974,000 and $2.6 million for the three-month and
six-month periods ended June 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 current
market value as of June 30, 1999.
<PAGE>
Benefits decreased approximately $2.9 million and $1.4 million, or 25%
and 8%, in the three-month and six-month periods ended June 30, 1999,
respectively, compared to the corresponding periods of 1998. The decrease for
the three-month period reflected a return to normal mortality experience when
compared to the elevated level of death claims experienced during the first
quarter of 1999.The decrease for the six-month period was offset by higher over-
all volume of new policies issued and a greater than anticipated increase in
death claims during the first quarter of 1999.
Commissions decreased approximately $173,000 and increased $906,000, or
4% and 13%, in the three-month and six-month periods ended June 30, 1999,
respectively, compared to the corresponding periods of 1998. These changes
were attributable to higher sales volumes and changes in the mix of policies
sold.
General expenses, net of expenses reimbursed, increased approximately $1.1
million and $1.5 million, or 98% and 73%, in the three-month and six-month
periods ended June 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 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 decreased approximately
$713,000 and increased $171,000 for the three-month and six-month periods ended
June 30, 1999, respectively, compared to the corresponding periods of 1998. The
decrease for the three-month period 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 limited pay policies. The increase for the
six-month period was due to higher volume of business and higher levels of
death claims and policy lapses.
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.
The Company's cash requirements for 1999 and in the future will depend upon
mortality experience, acquisitions, timing of expansion plans and capital
expenditures. Pursuant to its initial public offering in November 1998, the
Company issued 520,000 shares of common stock and realized net proceeds of $2.6
million. The Company believes that 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. 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 April 30, 1999, the Company entered
into an agreement to purchase all the outstanding shares of Funeral Security
Life Insurance Company ("FSLife") for $5 million. The purchase is expected to be
funded from existing working capital. Effective July 23, 1999 the Company
entered into an agreement to sell its insurance subsidiary, New Life for
approximately $5 million. The Company expects to realize net proceeds of
approximately $700,000 from the sale of New Life.
Total cash and investments decreased approximately $6.9 million from
$133.8 million at December 31, 1998 to $126.9 million at June 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.
<PAGE>
Receivables from related parties increased approximately $1.1 million
from $1.5 million at December 31, 1998 to $2.6 million at June 30, 1999 due
primarily to receivables due under the Company's cost sharing arrangement.
Cost of policies acquired, net, decreased approximately $763,000 from
$3.8 million at December 31, 1998 to $3.1 million at June 30, 1999 due to
amortization of costs.
Other assets decreased approximately $547,000 from $1.0 million at
December 31, 1998 to $457,000 at June 30, 1999 due to the forfeiture of deposits
and other expenses associated with the Company's withdrawal of its proposal to
acquire Harbourton Reassurance, Inc.
Policyholder deposits decreased approximately $7.2 million from $47.2
million at December 31, 1998 to $40.0 million at June 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 $1.0 million from $2.0
million at December 31, 1998 to 1.0 million at June 30, 1999 due primarily to
the application of unapplied customer payments to policies.
Factors Affecting the Company's Business and Prospects
Seasonality
Historically, the Company's revenues and operating results have varied
from quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including a higher
mortality rate of the Company's insureds during the winter months.
Year 2000 Issues
Many current installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000.
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.
<PAGE>
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.
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 additional start-up locations and possible
acquisitions, implementing improved management and accounting information
systems and controls and may be dependent upon additional capital and equipment
purchases for future growth. There may be other risks and uncertainties that
management is not able to predict.
When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intends," and similar expressions, as they relate to the
Company are intended to identify forward-looking statements, although there may
be certain forward-looking statements not accompanied by such expressions.
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
The annual meeting of shareholders of the Company was held on May 20,
1999. Of 4,520,200 shares issued, outstanding and eligible to be voted at the
meeting, holders of 4,502,625 shares, constituting a quorum, were represented in
person or by proxy at the meeting. One matter was submitted to a vote of the
security holders at the meeting.
Election of Class I Directors. The only matter submitted was the election
of two Class I director nominees to the Board of Directors, each to continue in
office until the year 2002. Upon tabulation of the votes cast, it was determined
that both director nominees had been elected. The voting results are set forth
below:
Against or Broker
Name For Withheld Non-votes Abstentions
Paul J. Gallant 4,502,125 500 - -
Clifton Mitchell 4,502,125 500 - -
Because the Company has a staggered Board, the term of office of the
following named Class II and Class III directors, who were not up for election
at the 1999 annual meeting, continued after the meeting:
Class II (to continue in office until 2000)
Randall K. Sutton
Mark A. Turken
Class III (to continue in office until 2001)
Brent D. Cassity
Howard A. Wittner
Effective June 28, 1999, Mark A. Turken resigned from the Board of
Directors. The Company is in the process of selecting a replacement director and
anticipates that this process will be completed by the end of August, 1999.
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)
August 16, 1999 By: /s/ Clifton Mitchell
President and Chief Executive Officer
(Principal Financial and Accounting Officer)
<PAGE>
<TABLE>
EXHIBIT INDEX
<S> <C>
Ex. No. Description
27.1 Financial Data Schedule for the six months ended June 30, 1999.
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 77,416
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,015
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 102,414
<CASH> 24,483
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 17,860
<TOTAL-ASSETS> 159,046
<POLICY-LOSSES> 149,506
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 500
<POLICY-HOLDER-FUNDS> 577
<NOTES-PAYABLE> 0
0
0
<COMMON> 45
<OTHER-SE> 7,032
<TOTAL-LIABILITY-AND-EQUITY> 159,046
21,020
<INVESTMENT-INCOME> 5,155
<INVESTMENT-GAINS> 855
<OTHER-INCOME> 132
<BENEFITS> 16,503
<UNDERWRITING-AMORTIZATION> 2,300
<UNDERWRITING-OTHER> 9,331
<INCOME-PRETAX> (972)
<INCOME-TAX> (330)
<INCOME-CONTINUING> (642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (642)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
