UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 Commission File Number: 001-14067
FOREVER ENTERPRISES, INC. (formerly known as Lincoln Heritage Corporation)
(Exact name of registrant as specified in its charter)
TEXAS 36-3427454
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 S. Brentwood,
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 726-3371
Securities registered pursuant to
Section 12(b) of the Act: Common Stock, par value $.01
Name of exchange on which registered: Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: approximately $2,300,000 as of March 15, 2000.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date: As of
March 15, 2000, 6,933,259 shares of Common Stock, par value $.01, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following document (or parts thereof) is incorporated by reference into the
indicated Part of this Report: Certain information required in Part III of this
Form 10-K is incorporated from the Registrant's Proxy Statement for its 2000
Annual Meeting of Shareholders.
<PAGE>
PART 1
Item 1. Business
General
Forever Enterprises, Inc. (formerly known as Lincoln Heritage
Corporation) is a holding company engaged in the ownership and operation of life
insurance companies that principally issue insurance contracts to fund pre-need
funeral contracts and of companies that are involved in the multimedia
biographical business, the ownership and operation of funeral home and cemetery
properties and Internet marketing. We also acquire existing life insurance
policies, either through direct purchase or the acquisition of insurance
companies. Our life insurance operations are conducted through our wholly owned
life insurance subsidiaries.
Substantially all of our life insurance policies are issued to fund
prearranged funeral contracts that are sold by National Prearranged Services,
Inc. and National Prearranged Services Agency, Inc. National Prearranged
Services is an affiliated company that collects all payments for prearranged
funeral contracts and remits such amounts to us either directly or through
assumed reinsurance.
We were incorporated in Texas in 1980. We formed Memorial Service Life
Insurance Company in 1986, acquired New Life Insurance Company (formerly known
as Lincoln Memorial Life Insurance Company) in 1992, and acquired Lincoln
Memorial Life Insurance Company (formerly known as World Service Life Insurance
Company of America) in 1998.
On January 28, 1998 we executed a definitive stock purchase agreement
to acquire all of the outstanding stock of Harbourton Reassurance, Inc. and
subsequently filed an application to acquire control with the insurance
department in the State of Delaware. In March 1999, the application was
withdrawn by us, and a proposal to acquire Harbourton's in-force business is
pending.
Effective December 31, 1998, we reorganized our insurance company
subsidiaries. The purpose of the reorganization was to streamline and
consolidate our insurance operations and strengthen the existing capital
structure to facilitate the approval of acquisitions by regulatory authorities.
The reorganization was accounted for as a tax-free transaction and had no impact
on our consolidated financial statements. Concurrent with the reorganization,
the name of Lincoln Memorial Life Insurance Company was changed to New Life
Insurance Company and the name of World Service Life Insurance Company of
America was changed to Lincoln Memorial Life Insurance Company.
On October 15, 1999, we purchased all of the outstanding shares of
capital stock of Funeral Security Life Insurance Company for $5.0 million. As of
such date, Funeral Security Life Insurance Company had approximately $30 million
in assets and $28 million in liabilities. At acquisition, Funeral Security Life
Insurance Company was merged into Lincoln Memorial Life Insurance Company.
On October 28, 1999, we completed the sale of our insurance subsidiary,
New Life Insurance Company, for approximately $5 million. Since all of the
business of New Life Insurance Company was reinsured by another of our insurance
subsidiaries, the sale of New Life Insurance Company did not have a material
effect on our financial position, results of operations or cash flows.
On October 25, 1999, we entered into an agreement to purchase all the
outstanding shares of capital stock of Dixie National Life Insurance Company for
an estimated purchase price of approximately $10 million. Pursuant to the
agreement, the actual purchase price will be based upon, among other items, an
adjusted value of Dixie National Life Insurance Company's stockholder's equity.
Dixie National Life Insurance Company's insurance operation consists of a closed
block of life and annuity policies. Dixie National Life Insurance Company had
approximately $35.5 million in assets and $32.0 million in liabilities as of
September 30, 1999. The completion of the acquisition is subject to regulatory
approval.
On March 9, 2000, we completed the acquisition of Forever Network, Inc.
(formerly known as Forever Enterprises, Inc.). Forever Network, directly and
through its subsidiaries, Mason Securities Association, Inc., Forever Memorial,
Inc., Hollywood Forever, Inc., Dartmont Investment, Inc. and Mount Washington
Forever, Inc., owns and operates funeral homes and cemetery properties and is in
the business of selling, archiving and displaying digital interactive life
stories viewed at grave sites and on the Internet at www.forevernetwork.com. In
addition, the Internet site provides valuable information to consumers on
memorial products and services and markets related merchandise and services to
the growing population of people who visit the site. In connection with such
acquisition, we issued 2.4 million shares of our common stock in exchange for
all of the outstanding capital stock of Forever Network. As of September 30,
1999, Forever Network reported total assets of $12.4 million and total
shareholder's equity of $5.6 million. The acquisition will be accounted for in a
manner similar to the pooling-of-interests method of accounting. Upon
consummation of the transaction, we changed our corporate name from Lincoln
Heritage Corporation to Forever Enterprises, Inc.
Business Strategy
Our intended strategy is to grow our business by acquiring blocks of
in-force life insurance and annuity business and companies that have blocks of
such business. We also will seek to acquire cemetery/funeral home properties in
targeted metropolitan areas, aggressively grow the multimedia biography business
through all company properties and the Internet, and further develop our
Internet marketing business. Through this strategy, we expect to develop the
Forever brand to enhance recognition and sales. No assurance can be given that
we will be successful in consummating any acquisition, or that any acquisition,
once completed, will ultimately enhance our results of operations.
We seek to acquire in-force blocks of traditional life insurance and
annuity business and seek products that do not strain our available statutory
surplus. We seek "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. We seek investment portfolios
that are capable of being restructured to provide yield and quality improvements
consistent with our investment philosophy and reserving requirements.
In addition to the insurance product type, we consider several other
factors when evaluating an insurance company acquisition. Among other things, we
seek 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
our cost reduction strategies.
Once we have identified a potential acquisition candidate we will
undertake a more detailed evaluation of the business of the company we consider
acquiring. We prepare 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 our normal investigation, we will
review claims experience, underwriting standards and mortality, morbidity and
other actuarial experience of the business. In addition, we will assess the
quality of the records kept and their compatibility with our computer systems in
order to determine whether the business can be assimilated by us in a timely and
cost-effective manner.
We believe our acquisitions will enhance our marketing capabilities by
providing us the opportunity to sell additional life insurance and annuity
products to the policyholders whose business we have acquired. We currently
market insurance to fund pre-need products through our affiliate, National
Prearranged Services, and credit life and disability products and final expense
of burial insurance through independent agents.
We may effect our 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, we seek to identify and manage risks and other liabilities through
seller contractual indemnification and other techniques.
Another key component to our business strategy is to increase the
number of quality cemetery/funeral home combination properties we own and
operate and to expand our Forever network of families with digital biographies.
We believe that this will help allow us to quickly develop our Internet business
strategy, which will serve to display family archives, educate consumers on
memorial products, services and providers, and to sell memorial services and
merchandise over the forevernetwork.com website. Execution of this strategy
should allow us to develop further the Forever brand as the leader in providing
unique and valuable memorialization products and services.
Our plan with respect to cemetery/funeral home properties is to acquire
properties in major metropolitan areas, possibly distressed in some way, and
which are in need of an aggressive marketing approach. Properties also may be in
the form of brand new land in a current or developing population center that can
support a funeral home/mausoleum structure, and that provides a suitable supply
of saleable cemetery land. Acquiring and developing properties in major areas
will allow for more rapid expansion of the Forever biography program and
marketing of the Internet site. We believe that the current environment provides
excellent opportunities to acquire cemetery properties at attractive prices.
We believe we are well positioned to enhance the profitability of the
businesses and properties we acquire. With respect to our insurance operations,
we believe our investments in computer and administrative capabilities will
allow us to add additional blocks of business and life insurance companies
without a proportional increase in operating expenses. In addition to such
economies of scale that can be achieved through the integration of systems and
administration, we believe we can achieve other cost savings through the
elimination or reduction of management and staff and home office and marketing
expenses where appropriate. With respect to our cemetery/funeral home
operations, we believe we can apply tested and proven marketing techniques to
produce significant revenue and market share growth. Efficient property
operations management should allow for greatly enhanced profitability on newly
acquired properties. Demographics and the growing interest in organizing and
preserving family memories, use of the Internet for information gathering, and
commerce on the world wide web should provide the platform for successful
results on our Internet strategy.
National Prearranged Services
National Prearranged Services, an affiliate of our company, has been in
the business of marketing prearranged funeral contracts since 1979 for funeral
homes in Missouri, Texas and six other states, and is licensed to expand into an
additional 22 states. In addition to marketing, National Prearranged Services
recruits, trains and manages an agency field force, which is dedicated to
selling only the products of the affiliated group of companies. National
Prearranged Services 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. National Prearranged
Services's strategy is to continue to capitalize on the demand for older age
products, which management believes, will continue to present a growing market.
We entered into an Exclusivity Agreement, dated April 1, 1998, with
National Prearranged Services and National Prearranged Services Agency, pursuant
to which National Prearranged Services and National Prearranged Services Agency
agreed to purchase insurance policies to fund their prearranged funeral business
exclusively from our subsidiaries. We 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.
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. There is no affiliation between National Prearranged
Services and any funeral home for which National Prearranged Services markets
prearranged funeral contracts.
In connection with issuing insurance policies to fund prearranged
funeral contracts, except in Missouri, the individual owner of the policy
assigns the policy to National Prearranged Services and/or National Prearranged
Services Agency. As assignee, National Prearranged Services and/or National
Prearranged Services Agency remit premiums to and receive policy benefits from
us. In the State of Missouri, a 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.
National Prearranged Services elects to invest in insurance policies as
one of the methods of funding such contractual obligations. National Prearranged
Services could invest in other statutorily appropriate instruments to fund such
obligations but like most other preneed sellers today, prefers the use of
insurance to do so. National Prearranged Services determines whether to purchase
an insurance policy from us or use its own resources to satisfy its obligations
created under the prearranged funeral contract based on the individual preneed
laws in existence on the contract date and the underwriting standards as
established by us and the state in which the purchaser resides. For example, in
Missouri, the trust may choose to retain the funds from the prearranged funeral
contract instead of purchasing an insurance policy because of the underwriting
standards set by us when compared to the underwriting characteristics of the
prearranged funeral contract purchaser. The option to not purchase an insurance
policy is not available in all states.
Should National Prearranged Services elect to purchase an insurance
policy equal to the current cost of the contracted funeral, the insurance
premiums to be charged are set by us based on actuarial review and analysis of
the underwriting risks being assumed by us and the standardized rates are
provided to National Prearranged Services. In the event a particular insurance
policy has proceeds in excess of contracted-for funeral costs at the point of
death, National Prearranged Services retains such proceeds as policyholder.
National Prearranged Services is contractually obligated to provide the
contracted-for funeral service at the point of death. The death benefits
provided under the terms of the insurance policies may be greater than the cost
of the funeral services due to excess interest earnings or additional insurance
benefits provided under the terms of the participating policies or from a
decline in the funeral service costs as contracted by National Prearranged
Services from the funeral homes.
Product Profitability
The long-term profitability of insurance products depends on the
accuracy of the actuarial assumptions that underlie the pricing of such
products. Actuarial calculations for such insurance products, and the ultimate
profitability of such products, are based on four major factors: (i)
persistency; (ii) mortality (for life insurance); (iii) return on cash invested
by the insurer during the life of the policy; and (iv) expenses of acquiring and
administering the policies.
The profitability of cemetery and memorialization products and services
depends upon several factors, including controlling the costs of our facilities,
supplies and capital expenditures, maintaining competitive pricing of our
products and maximizing the utilization of our sales force. Aggressive preneed
marketing, value-added products and services, and brand advertising will also
contribute to the business profitability.
Operations and Administration
We emphasize a high level of service to agents, policyholders and
customers and strive to maintain low overhead costs. Our principal
administrative departments are our financial, policyholder services and data
processing departments. The financial department provides actuarial, accounting
and budgeting services and establishes cost control systems for us. The
policyholder services department reviews policy applications, issues and
administers policies and authorizes disbursements related to claims. The data
processing department oversees and administers our information processing
systems.
We have invested in data processing hardware and software and employ
our data processing capacity in all facets of our operations. All of our Austin,
Texas and St. Louis, Missouri operations are processed on a network of personal
computers. Our administrative departments use a common integrated system
designed to permit us to function relatively efficiently, control costs and
maintain relatively low overhead. Our system currently is servicing
approximately 100,000 policies. Additional policies can be added at a relatively
low marginal cost, thereby increasing economies of scale.
Our exclusive marketing agreement with National Prearranged Services
assures a pipeline of preneed policies for us and also plays a role in
supporting the sales efforts at our cemetery properties. Forever Network
currently owns and operates three cemetery properties in St. Louis and
Independence, Missouri and Los Angeles, California.
As part of its acquisition strategy, we have 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. We believe that such consolidation and standardization
permits the efficient combination of our facilities and operations with those of
the companies and blocks of business that we acquire. 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 our insurance subsidiaries is an important
part of our 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, 1999, the average, annual interest rate
credited on our total reserve liability was approximately 7.1% per annum, and
the average yield of our investment portfolio was approximately 8.1%. Increases
or decreases in interest rates could increase or decrease the interest rate
spread between interest rates credited on insurance liabilities and investment
yields, which in turn could have a beneficial or adverse effect on our future
profitability. Sales of fixed maturity securities that result in investment
gains also may tend to decrease future interest yields from the portfolio. State
insurance laws and regulations prescribe the types of permitted investments and
limit their concentration in certain classes of investments.
Our 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, we invest primarily in securities of the U.S. government and its
agencies, and collateralized mortgage obligations. At December 31, 1999,
approximately 95% of the book value of our fixed maturity investments consisted
of investment grade securities.
We periodically review the existing portfolio of below investment grade
securities and intend to maintain the holdings of such securities at or below
the December 31, 1999 level. However, our ability to dispose of below investment
grade securities is affected by market and other conditions. The markets for
these securities are often less liquid and efficient than the markets for
investment grade securities.
Reserves
In accordance with applicable insurance laws, our 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 report are calculated based on generally accepted accounting
principles and differ from those specified by the laws of the various states and
recorded in the statutory financial statements of our 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.
To determine policy benefit reserves for its life insurance products,
we perform 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. We
historically have not experienced significant adverse deviations from our
assumptions.
Reinsurance
We enter into coinsurance/funds withheld treaties and co/modco
reinsurance agreements with reinsurers to increase our 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, we
have reinsured portions of the coverage provided by our insurance products with
other insurance companies under agreements of indemnity reinsurance. Reinsurance
is not maintained with respect to products currently marketed by Memorial
Service Life Insurance Company. 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 us. 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.
The cemetery/funeral industry is highly fragmented with most of the
approximately 22,000 funeral homes and 10,500 cemeteries in the United States
are owned by sole proprietors. These businesses have been passed from generation
to generation and have historically developed a loyal customer base due to
geography and/or name recognition in the community. These properties continue to
be operated much as they have in the past, offering the same services and
products and marketing to the community as they have for years and years prior.
Their treatment of death and memorialization is a result of the idea that people
want the same products and services that the industry has always offered. There
is little differentiation and, as a result, little market share change.
Four major consolidators, Service Corporation International, The Loewen
Group, Stewart Enterprises, Inc., and Carriage Services, Inc., together own
approximately 15% of the funeral homes and 10% of the commercial cemeteries in
the United States. These companies all emphasize their funeral operations as
their major business. While these companies may claim to be different from one
another in the way they operate, we believe that there is really little tangible
difference. None of these competitors has tried to develop a brand, despite
their large numbers. We believe this creates a noticeable void in the industry
and an excellent opportunity for us.
Additionally, cremation is becoming a more popular option for families
and individuals in the United States. Our properties embrace this trend and
offer a range of products and services to satisfy this segment. More unique
offerings, which are intended to focus on the need for memorialization, include
cremation benches, boulders, scattering gardens and the Forever Memorial digital
biography.
Dividends on Participating Policies
The determination of dividends on participating policies is not
dependent on any pre-determined factor and is completely at the discretion of
the boards of directors of the insurance subsidiaries. Because we and National
Prearranged Services are affiliated entities, National Prearranged Services, as
the policyholder of a significant portion of our business, may exercise
significant influence over the decision regarding the amount and timing of
policyholder dividends. Our insurance subsidiaries paid no dividends in 1999,
1998 or 1997 on their direct business. Among other items, low levels of
inflation were a factor for not paying dividends. There currently are no plans
for paying dividends on our direct business in the foreseeable future; however,
dividends could be declared should circumstances warrant. The most likely
circumstance that may warrant the declaration of policyholder dividends would be
a significant increase in the level of inflation. The declaration of
policyholder dividends would, through the provision of paid-up additions rather
than cash dividends, provide additional death benefits under the insurance
policies. The increased level of death benefits would contribute to covering the
presumed increase in the cost of funeral services to be provided in the future.
The ability to provide increased benefits under the terms of the insurance
policies issued as a response to increased levels of inflation, which, in turn,
allows us to remain competitive, is the primary reason for the utilization of
participating policies. We do pay policyholder dividends on blocks of business
that we acquired from World Insurance Company and Woodmen Accident and Life
Company. Such amounts were $108,396 and $90,335 for the years ended December 31,
1999 and 1998, respectively.
Regulatory Factors
Our 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, terms of
insurance policies, accounting practices and the maintenance of specified
reserves, capital and surplus. Our insurance subsidiaries are required to file
detailed periodic financial reports with supervisory agencies in each of the
jurisdictions in which they do business. Our life insurance subsidiaries are
licensed in 42 states and the District of Columbia. In March 1998, the National
Association of Insurance Commissioners adopted the Codification of Statutory
Accounting Principles. The codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, is proposed to
be effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices. We
have not finalized the quantification of the effects of the codification on our
statutory financial statements.
Our funeral homes are regulated by the Federal Trade Commission's
comprehensive trade regulation rule for the funeral industry. The Federal Trade
Commission's rule contains minimum guidelines for funeral industry practices,
requires price and other affirmative disclosures and imposes mandatory
itemization of funeral goods and services. Other cemetery/funeral home
regulations vary by state and are not considered detrimental to our business
plan.
In December 1992, the National Association of Insurance Commissioner's
adopted the Risk-Based Capital for Life and/or Health Insurers Model Act . The
model act provides a tool for insurance regulators to determine the levels of
capital and surplus an insurer must maintain in relation to its insurance and
investment risks and whether there is a need for possible regulatory attention.
The model act (or similar legislation or regulation) has been adopted in states
where our insurance subsidiaries are domiciled. The Texas Department of
Insurance has adopted its own risk based capital requirements, the stated
purpose of which is to require a minimum level of capital and surplus to absorb
the financial, underwriting and investment risks assumed by an insurer. At
December 31, 1999, the total adjusted capital for each of our subsidiaries met
or exceeded the required levels.
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, our ability to meet our financial obligations and
pay operating expenses depends on the receipt of sufficient funds, primarily
through dividends and management fees, from our subsidiaries. As Texas domiciled
insurance companies, Memorial Service Life Insurance Company and Lincoln
Memorial Life Insurance Company may not, without the prior approval of the Texas
Department of Insurance, pay any dividend or distribution which, together with
all other dividends and distributions paid within the preceding 12 months,
exceeds the lesser of: (i) net gain from operations; or (ii) 10% of capital and
surplus, in each case as shown in its most recent annual statutory financial
statements.
Under Texas law, Memorial Service Life Insurance Company and Lincoln
Memorial Life Insurance Company may not enter into certain transactions,
including management agreements and service contracts, with members of its
insurance holding company system, including us, unless the insurance companies
have notified the Texas Department of Insurance of their intention to enter into
such transactions and the Texas Department of Insurance has not disapproved of
them within the period specified by Texas law. Among other things, such
transactions are subject to the requirement that their terms be fair and
reasonable and that the charges or fees for services performed be reasonable.
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 Service Life Insurance Company and Lincoln
Memorial Life Insurance Company underwent such an examination during 1998 for
the five-year period ended December 31, 1997. The final reports on the
examinations issued by the Texas Department of Insurance did not raise any
significant issues.
Employees
At December 31, 1999, we had approximately 80 employees. We believe
that we enjoy good relations with our employees and agents.
Glossary
The following are definitions of certain terms used in this Annual
Report on Form 10-K. 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.
"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. 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.
"Funded preneed contract" means a preneed contract or a prearranged
funeral contract that has been fully paid for by the purchaser.
"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 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.
"Policyholder deposits" means under generally accepted accounting
practices and principles, 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.
"Preneed contract" means the same as "prearranged funeral contract."
"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.
Item 2. Properties
Memorial Service Life Insurance Company leases approximately 25,000
square feet in an office building which houses our executive offices located at
10 S. Brentwood, St. Louis, Missouri under the terms of a lease that expires in
June 2002. Memorial Service Life Insurance Company also leases approximately
10,000 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.
We believe that the properties currently leased by Memorial Service Life
Insurance Company are suitable for our current operations of the company and
will allow for the expansion of our business in the near future. As our
operation expands, the leasing of additional space in Austin, Texas and St.
Louis, Missouri may be necessary. We currently do not foresee any material
difficulties with leasing additional space that may be required in the
foreseeable future.
Forever Network owns and operates three funeral homes in St. Louis and
Independence, Missouri and Los Angeles, California and maintains sales and
administrative offices at each of those sites. Forever Network also operates
production facilities for the biography business at each location with central
operations in Hollywood, California. Our Internet development and operation is
based at the Hollywood facility.
Item 3. Legal Proceedings
National Prearranged Services, an affiliate of ours, along with New
Life Insurance Company had been named defendants in a previously dismissed
class-action lawsuit that was refiled during 1996 in St. Louis, Missouri, City
Circuit Court. The suit involved a challenge to National Prearranged Services's
methods of funding pre-arranged funeral contracts with policies issued by us.
The suit was settled in 1999 with no financial impact to New Life Insurance
Company.
We also are subject to various other claims and contingencies arising
out of the normal course of business. We believe that the total amounts that
will ultimately be paid, if any, arising from these claims and contingencies
will not have a material adverse effect on our financial condition, results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the quarter
ended December 31, 1999.
Item 4A. Executive Officers of the Registrant
See Part III, Item 10.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price of Common Stock
Our common stock is traded on the Pacific Exchange under the symbol
"FVR". The following table sets forth the reported high and low closing sales
prices of shares of our common stock on the Pacific Exchange since November 2,
1998 (the date of our initial public offering).
Price Range
Fiscal Year High Low
Year ended December 31, 1998:
Fourth Quarter (period Nov. 2, 1998 through
Dec. 31, 1998).......................... $7.500 $5.800
Year ended December 31, 1999:
First Quarter.............................. 6.500 4.125
Second Quarter............................. 7.375 5.250
Third Quarter.............................. 9.125 6.688
Fourth Quarter............................. 6.938 5.125
As of February 10, 2000, the approximate number of stockholders of
record of our common stock was 200 which included approximately 140 beneficial
holders of our common stock, representing persons whose stock is in nominee or
"street name" accounts through brokers.
Dividend Policy
We have never declared, nor have we paid, any cash dividends on our
common stock. We currently intend to retain our earnings to finance future
growth and, therefore, do not anticipate paying any cash dividends on our common
stock in the foreseeable future. Our board of directors regularly review our
dividend policy. Our ability to pay dividends will be dependent, in large
measure, on our ability to receive dividends and management fees from our 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
our board of directors 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.
Recent Sales of Unregistered Securities
We did not have any sales of unregistered securities during the quarter
ended December 31, 1999.
Item 6. Selected Financial Data
Selected Consolidated Financial and Other Data
The following historical summary consolidated financial information has
been derived from our consolidated financial statements. This selected financial
data should be read in conjunction with our accompanying consolidated financial
statements and the related notes included herein, and the information set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999(3) 1998(1)(4) 1997(1) 1996 1995
--------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
(amounts in thousands, except per share data)
Statement of operations data:
Premium income $ 45,022 $ 41,363 $ 38,044 $ 33,274 $ 27,354
Net investment income and realized gains 10,801 12,575 8,838 5,729 4,514
Other revenue 1,519 748 - - -
--------- --------- --------- --------- ---------
Total revenues 57,342 54,686 46,882 39,003 31,868
Benefits incurred 36,078 33,088 31,151 24,750 20,775
Other expenses (2) 21,634 19,142 13,404 13,351 9,625
--------- --------- --------- --------- ---------
Income (loss) before federal taxes (370) 2,456 2,327 902 1,468
Income taxes (benefits) (378) 440 672 197 317
--------- --------- --------- --------- ---------
Net income $ 8 $ 2,016 $ 1,655 $ 705 $ 1,151
========= ========= ========= ========= =========
Weighted average shares outstanding
Basic 4,526 4,087 4,000 4,000 4,000
Diluted 4,650 4,190 4,000 4,000 4,000
Earnings per share:
Basic $ - $ .49 $ .41 $ .18 $ .29
Diluted - .48 .41 .18 .29
December 31,
1999(3) 1998(1)(4) 1997(1) 1996 1995
--------- --------- --------- --------- --------
Balance sheet data:
Invested assets $ 150,728 $ 133,831 $ 120,041 $ 59,919 $ 56,082
Total assets 190,828 165,398 141,603 76,149 71,884
Total policy liabilities 185,982 153,751 130,450 73,067 68,432
Shareholders' equity 2,723 8,815 6,883 1,856 2,713
</TABLE>
(1) Comparison of selected consolidated financial data in the table is
significantly affected by the assumption through coinsurance of a block of
life and annuity business from Woodmen Accident and Life Company effective
September 1, 1997. We received $48,025 in cash in exchange for assuming
$50,857 in insurance liabilities. For the years ended December 31, 1997
amounts related to the block of business acquired from Woodmen Accident and
Life Company included premiums of approximately $58, investment income of
approximately $1,227 for interest earned on the assets purchased with the
cash received, benefits incurred of approximately $909 in interest paid on
policyholder deposits and increase in future policy benefits.
(2) Other expenses for the years ended December 31, 1999, 1998 and 1997 are net
of expense reimbursements from National Prearranged Services in the amount
of $2,685, $2,254 and $2,695, respectively.
(3) Comparison of selected consolidated financial data in the table also is
affected by the assumption through coinsurance of a block of life and
annuity business from FSLife effective on October 1, 1999. We received
$30,032 in assets in exchange for assuming $27,701 in insurance
liabilities. During 1999, we retroceded, through a coinsurance agreement,
50% of the life insurance assumed from the purchase of the block of
business that we acquired from FSLife to Alabama Reassurance Company. As of
December 31, 1999, invested and total assets included approximately $28,088
and policy liabilities included approximately $24,782 associated with the
block of business that we acquired from FSLife.
(4) Comparison of selected consolidated financial data in the table is also
affected by the assumption through coinsurance of a block of life and
annuity business from World Insurance Company effective on April 1, 1998.
We received $19,941 in assets in exchange for assuming $21,910 in insurance
liabilities. During 1998, we retroceded, through a coinsurance agreement,
50% of the life insurance assumed from the purchase of the block of
insurance acquired from World Insurance Company to Alabama Reassurance
Company.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with our consolidated
financial statements and related notes, and other financial information included
elsewhere in this report.
Overview
We are a holding company engaged in the ownership and operation of life
insurance companies that principally issue insurance contracts to fund pre-need
funeral contracts and of companies that are involved in the multimedia
biographical business and the ownership and operation of funeral home and
cemetery properties. The life insurance companies primarily write policies sold
by our affiliate, National Prearranged Services, in connection with National
Prearranged Services' sale of prearranged funeral contracts. As a result of the
growth in the amount of pre-arranged funeral contracts sold by National
Prearranged Services over the past three years, our revenues have increased
significantly. Our growth also resulted, to a lesser extent, from the
acquisition of blocks of life insurance and annuity policies in 1999, 1998, and
1997.
In connection with our acquisition of Forever Network, Inc. and its
subsidiaries on March 9, 2000, we acquired three cemetery/funeral home
properties located in Los Angeles, California and St. Louis and Independence,
Missouri, a funeral home located in Kirkwood, Missouri that is leased to Service
Corporation International, the Cremation Society of St. Louis, the Cremation
Specialists of Los Angeles and Cremation Specialists of Kansas City. In
addition, Forever Network is engaged in the business of selling, archiving and
displaying digital interactive life stories viewed at the grave sites and on the
Internet at www.forevernetwork.com. Forever Network currently maintains over
2,400 client biographies that are available for viewing on the Internet site.
The acquisition of Forever Network was accounted for in a manner that is similar
to a pooling-of-interests; however, the results of operations of Forever Network
are not contained in our results of operations for the years ended December 31,
1999, 1998 and 1997.
During 1999, 1998 and 1997 we derived revenues primarily from premiums
on insurance policies generated by National Prearranged Services. In the event
of a decline in National Prearranged Services' preneed sales, our future revenue
growth could be impacted in the event that we could not replace the National
Prearranged Services sales force with our own or another marketing entity's
sales force. Net investment income and realized investment gains also have
contributed significantly to total revenues as our invested assets have grown.
Our expenses during 1999, 1998 and 1997 consisted principally of
benefits paid or accrued, commissions on the sale of policies and general and
administrative costs associated with life insurance company operations. We
anticipate that benefit costs and commissions will continue to increase as we
execute our growth plans. Although general and administrative costs have
increased in accordance with the growth in our business, we believe our
infrastructure will support increasing levels of internal revenue growth without
the need for general and administrative expenses to increase at a similar rate.
Our 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 our subsidiaries to pay dividends and management
fees to us. In addition, National Prearranged Services's activities in selling
prearranged funeral contracts are highly regulated in the states in which
National Prearranged Services does business. These regulatory aspects and future
changes therein could materially affect our financial condition and results of
operations. See "Business - Regulatory Factors."
Our strategy is to increase shareholder value by growing our insurance
and cemetery business through: (i) selected acquisitions of life insurance
companies and in-force life insurance policies and annuities, funeral homes and
cemeteries; and (ii) increases in life insurance policies arising out of
prearranged funeral contracts sold by National Prearranged Services. Our ability
to acquire such companies, policies and properties will be dependent upon (among
other things) our 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 we will successfully execute our strategy.
Results of Operations
Comparison of the Years Ended December 31, 1999 and 1998
Premium income increased approximately $3.6 million, or 9%, in the year
ended December 31, 1999 compared to 1998. The increase for 1999 reflected higher
overall volume of policies in force and new policies issued compared to the
previous year.
Net realized investment gains decreased approximately $1.5 million, or
78%, in the year ended December 31, 1999 versus the previous year. Losses of
approximately $3.2 million were incurred for the year ended December 31, 1999
reflecting management's recognition of a decline in market value associated with
our investment in Autobond Acceptance Corporation. 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 investment in
Autobond to approximately $98,000 as of December 31, 1999.
Other revenue for the year ended December 31, 1999 of $1.2 million
represented primarily a gain on the sale of a portion of our in-force life
business.
Benefits increased $3.0 million, or 9%, in the year ended December 31,
1999 compared to 1998. The increase in 1999 was due primarily to an increase in
death claims.
Commissions increased approximately $66,000, or less than 1%, in the
year ended December 31, 1999 compared to 1998. These changes were attributable
to higher sales volumes, mix of policies sold and a reduction of commission
rates on single pay policies.
General expenses, net of expenses reimbursed, increased approximately
$1.6 million, or 32%, in the year ended December 31, 1999 compared to 1998. The
increase was attributable to higher administrative expenses as a result of
support for increased levels of regulatory reporting requirements, and
approximately $330,000 related to the forfeiture of deposits and other expenses
associated with our withdrawal of our proposal to acquire Harbourton
Reassurance, Inc.
The decrease in the change in deferred acquisition costs of
approximately $871,000 from $4.3 million for the year ended December 31, 1998 to
$3.5 million for the year ended December 31, 1999 was due to the release of
deferred acquisition costs associated with death benefits and lower levels of
capitalized costs due to the mix of new policies.
Comparison of the Years Ended December 31, 1998 and 1997
Premium income increased $3.3 million, or 9%, from $38.0 million in the
year ended December 31, 1997 to $41.4 million in the year ended December 31,
1998 due to higher sales volumes. Substantially all premium income was derived
from National Prearranged Services. The fact that premium income increased only
9%, while the face amount of insurance in-force increased 15.9 % reflected a
shift in the relative proportions of policies sold from single pay to limited
pay business.
Net investment income increased $4.4 million, or 72%, from $6.2 million
in the year ended December 31, 1997 to $10.6 million in the year ended December
31, 1998. This increase was attributable to a higher level of invested assets
(primarily resulting from the acquisitions of blocks of business from Woodmen
Accident and Life Company and World Insurance Company). Invested assets
increased by 11% in 1998 compared to 1997. There was a larger increase in
investment income due to the addition of the business from Woodmen Accident and
Life Company late in 1997.
Net realized gains decreased $730,000, or 27%, from $2.7 million in the
year ended December 31, 1997 to $1.9 million in the year ended December 31,
1998. Gains were recognized in the year ended December 31, 1998, on sales of
invested assets. However, these gains were partially offset by losses of
approximately $1.0 million realized on the sale of certain investments whose
market values declined significantly due to announcements of operating and
financial difficulties of the issuers of these securities.
Other revenue for the year ended December 31, 1998 of $748,000
represents primarily a gain on the sale of a portion of our in-force life
business.
Benefits increased $1.9 million, or 6%, from $31.2 million in the year
ended December 31, 1997 to $33.1 million in the year ended December 31, 1998,
due to increases in death benefits and surrender benefits in proportion to the
increases in overall policies in-force, increases in future policy benefits due
to higher levels of policies in-force, and interest credited to policyholder
accounts for the business acquired from Woodmen Accident and Life Company and
World Insurance Company. These increases were partially offset by decreases in
future policy benefits due to the impact of the surrenders and deaths.
Surrenders increased from the year ended December 31, 1997 to the year
ended December 31, 1998 by $3.1 million. This increase 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 we lose future
investment earnings on the business surrendered.
Commissions increased $5.7 million, or 51%, from $11.2 million in the
year ended December 31, 1997 to $16.9 million in the year ended December 31,
1998 due primarily to higher volumes of new policies when compared to the year
ended December 31, 1997.
General expenses, net of reimbursements, increased $2.5 million, or
100%, from $2.5 million in the year ended December 31, 1997 to $5.0 million in
the year ended December 31, 1998 due primarily to increased policy
administration and general and administration expenses as a result of increased
volume of business from new policies written, acquisitions of blocks of policies
such as the purchase of blocks of business from Woodmen Accident and Life
Company and World Insurance Company, support for increased levels of acquisition
activities and regulatory reporting requirements, and deferred compensation
costs associated with our 1998 Long-Term Incentive Plan.
Taxes, licenses and fees increased $166,000, or 21%, from $782,000 in
the year ended December 31, 1997 to $948,000 in the year ended December 31, 1998
due primarily to fees associated with the routine regulatory examination of our
insurance company subsidiaries which commenced in March 1998, additional fees
associated with the acquisition of World Service Life Insurance Company of
America in 1998 as well as increased taxes due to an increase in collected
premiums.
An increase in the amortization of the cost of policies purchased of
$712,000 for the year ended December 31, 1998 compared to $262,000 for the year
ended December 31, 1997 was primarily attributable to the purchase of blocks of
business from Woodmen Accident and Life Company and World Insurance Company.
The increase in the change in deferred acquisition costs of $2.9
million from $1.4 million for the year ended December 31, 1997 to $4.3 million
for the year ended December 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.
As a result of the foregoing, net income for the year ended December
31, 1998 was $2.0 million, or $0.49 and $0.48 per basic and diluted share,
respectively, an increase of 22%, 20% and 17%, respectively, over the prior
year.
<PAGE>
Liquidity and Capital Resources
Assets with a fair value of approximately $6.2 million at December 31,
1999 were on deposit with various state regulatory authorities. Assets with a
fair value of approximately $74.6 million at December 31, 1999 were restricted
as to use from the purchase of the blocks of business from Woodmen Accident and
Life Company, World Insurance Company, Funeral Security Life Insurance Company
and other assumed business. See "Business -- Regulatory Factors."
Our insurance subsidiaries are restricted by state insurance laws as to
the amount of dividends that they may pay to us 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. No amounts
are currently available for transfer to the parent company by dividend, loan, or
advance without prior regulatory approval.
Our cash requirements for 2000 and in the future will depend upon
mortality experience, acquisitions, timing of expansion plans and capital
expenditures. Our insurance subsidiaries generally generate sufficient cash
receipts from premium collections and investment income to satisfy our
obligations. We believe that the diversity of the investment portfolio of our
insurance subsidiaries provides sufficient liquidity to meet our operating cash
requirements. We believe that anticipated revenue from operations should be
adequate for the working capital requirements of our existing businesses over
the next twelve months.
We expect to secure capital required for additional new cemetery
properties and technology developments related to the digital biographies and
the Internet through equity or debt financing. With new cemetery properties, the
initial capital required for the purchase and working capital is anticipated to
be sufficient to allow the property to cash flow within 6-12 months. Our
cemetery property in St. Louis, Missouri currently generates positive cash flow
from operations. We anticipate that the two cemetery properties in Independence,
Missouri and Los Angeles, California acquired by Forever Network in the fourth
quarter of 1999 will begin to internally meet their operating cash requirements
within 6-12 months. Such operating cash requirements currently are funded by a
$4 million note from our insurance companies, as discussed below.
Capital projects at new cemetery properties for mausoleum/funeral home
combination buildings and other saleable inventory features are expected to be
funded through use of cash generated from pre-construct sales and/or debt
financing and should require little or no additional capital investment. Certain
other improvements would be funded through working capital.
Start-up capital will be required to fund the Internet/technology
business plan. The Internet/technology segment is currently running a cash
shortfall and may require some investment capital for a period of time until
revenues can be built to cash flow. Margins are expected to be high and overhead
relatively low once internet sales volumes achieve targeted levels.
In the event that our plans or assumptions change, or if the resources
available to meet unanticipated changes in business conditions prove to be
insufficient to fund operations, we could be required to seek additional
financing prior to that time, or to curtail certain proposed activities.
On October 15, 1999, we completed the acquisition of all the
outstanding shares of Funeral Security Life Insurance Company for $5 million.
The purchase was funded from existing working capital. On October 28, 1999, we
sold our insurance subsidiary, New Life Insurance Company, for approximately $5
million.
On October 25, 1999, we entered into an agreement to purchase all the
outstanding shares of Dixie Life Insurance Company for an estimated purchase
price of approximately $10 million. Pursuant to the agreement, the actual
purchase price will be based upon among other items, an adjusted value of Dixie
Life Insurance Company's stockholder's equity. Dixie Life Insurance Company's
insurance operation consists of a closed block of life and annuity policies.
Dixie Life Insurance Company had approximately $35.5 million in assets and $32.0
million in liabilities as of September 30, 1999. The completion of the purchase
is subject to regulatory approval and is expected to be accounted for using the
purchase method. The acquisition is expected to be funded from existing working
capital.
Changes in our consolidated balance sheet between December 31, 1999 and
December 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 block of business from Funeral
Security Life Insurance Company.
Total cash and investments increased approximately $16.9 million from
$133.8 million at December 31, 1998 to $150.7 million at December 31, 1999,
primarily due to investment assets acquired with the purchase of the block of
business from Funeral Security Life Insurance Company of $30 million offset by
changes in the fair value of fixed maturity and equity securities. During 1999
there was an increase in policyholder loans to related parties of $5.5 million.
Due to the low risk nature of these policy loans and their contract interest
rates, we believe 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, we would
not be adversely affected, except with respect to the future loss of revenues on
the policies cancelled. Note receivable from affiliate represents a note
receivable in the amount of $4,000,000 from Forever Network, Inc. Principal and
interest at prime (8.5% at December 31, 1999) plus 1% is due quarterly beginning
March 31, 2000. On March 9, 2000, Forever Network, Inc. was acquired by us.
Receivables from related parties increased approximately $700,000 from
$1.5 million at December 31, 1998 to $2.2 million at December 31, 1999, due
primarily to receivables for commission adjustments due from National
Prearranged Services.
Deferred policy acquisition costs increased approximately $3.5 million
from $16.8 million at December 31, 1998 to $20.3 million at December 31,1999,
due to increases in new policies issued and in-force.
Fixed assets increased approximately $400,000 from $1.2 million at
December 31, 1998 to $1.6 million at December 31, 1999, due to ongoing
development and modifications to our software systems.
Cost of policies acquired increased approximately $500,000 from $3.8
million at December 31, 1998 to $4.3 million at December 31, 1999, due to the
acquisition of the block of business from Funeral Security Life Insurance
Company offset by the amortization of costs.
Goodwill decreased approximately $800,000 from $1.4 million at December
31, 1998 to $612,000 at December 31, 1999, due to the sale of New Life Insurance
Company.
Future policy benefits increased approximately $20.5 million from
$126.0 million at December 31, 1998 to $105.5 million at December 31, 1999. This
increase was due to an increase in the amount of new policies issued and the
acquisition of the block of business from Funeral Security Life Insurance
Company.
Policyholder deposits increased approximately $10.3 million from $47.2
million at December 31, 1998 to $57.5 million at December 31, 1999. The increase
was due to the acquisition of the block of business from Funeral Security Life
Insurance Company offset by cancellations of policies and the absence of the
issuance of new annuity policies. Policyholder deposits are comprised primarily
of annuities acquired with the block of business from Woodmen Accident and Life,
World Insurance Company, and Funeral Security Life Insurance Company.
Deferred tax assets increased approximately $3.8 million from $3.4
million at December 31, 1998 to $7.2 million at December 31, 1999 due primarily
to deferred taxes on unrealized losses on fixed maturity and equity securities.
During 1998, we paid surrender benefits to National Prearranged
Services or the Missouri trust of approximately $2.0 million. Upon surrender,
National Prearranged Services purchased new policies for the same insureds using
a portion of the surrendered funds. National Prearranged Services has committed
to us to pay all future premiums due on the blocks of policies that were
reissued.
Impact of Year 2000
In prior years, we discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed our remediation and testing
of systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We expensed less than
$10,000 during 1999 in connection with remediating our systems. We are not aware
of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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 our management
as well as on assumptions made by and information currently available to us at
the time such statements were made. We 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, our actual
results may differ materially from those indicated by the forward-looking
statements.
The following factors that are not within our 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 our ability to sell
our products, the market value of our investments and the lapse rate and
profitability of our policies; (ii) our ability to achieve anticipated levels of
operational efficiencies for recently acquired companies, blocks of policies or
properties, as well as through other cost-saving initiatives; (iii) mortality,
morbidity, and other factors which may affect the profitability of our insurance
products; (iv) changes in the federal income tax laws and regulations which may
affect the cost of or demand our products; (v) increasing competition in the
sale of our 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 and regulation of the sale and
pricing of funeral home operations and products; (vii) the availability and
terms of future acquisitions; and (viii) the risk factors or uncertainties
listed in our other filings with the Securities and Exchange Commission.
Additionally, we may not be successful in identifying, acquiring, and
integrating other companies or their business, 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 us
are intended to identify forward-looking statements, although there may be
certain forward-looking statements not accompanied by such expressions.
Accounting Standards
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. Statement of Position 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. Statement of Position 97-3 is effective for financial
statements of fiscal years beginning after December 15, 1998. Our adoption of
Statement of Position 97-3 did not have a material effect on our financial
position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement of Financial Accounting Standards No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction, and if it is, the type of
hedge transaction. Statement of Financial Accounting Standards No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We are assessing the impact that the adoption of Statement of Financial
Accounting Statement No. 133 will have on our consolidated financial statements,
but do not expect such implementation to have a material adverse effect on our
financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market
rates and prices. Our primary market risk exposures are to changes in interest
rates, although we also has certain exposures to changes in equity prices. We
have no foreign exchange risk and no direct commodity risk. The active
management of market risk is integral to our operations. To manage exposure to
market risk, we may rebalance our existing asset or liability portfolios, change
the character of our 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. Our market risk sensitive instruments are
entered into for purposes other than trading.
We have investment guidelines that define the overall framework for
managing market and other investment risks, including the accountability and
control over these activities. In addition, we have specific investment policies
for each of our 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 we will incur economic losses due
to adverse change in interest rates. This risk arises from many of our primary
activities, as we invest substantial funds in interest-sensitive assets and also
have certain interest sensitive liabilities in our life and annuity operations.
We seek 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 our exposure to interest rate risk, we adhere
to a philosophy of managing the duration of assets and related liabilities.
The carrying value of our investment portfolio as of December 31, 1999
was $150.3 million, of which 9% 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 200 basis point decrease in
interest rates would have decreased anticipated earnings from operations for the
year ended December 31, 1999 by approximately $473,000, which amount represents
the increase of investment income on our investment portfolio. The effect on the
market value of the portfolio would be to increase the value by approximately $6
million. A 200 basis point increase in interest rates would have decreased
anticipated earnings from operations for the year ended December 31, 1999 by
approximately $1.7 million, which amount represents the decrease of investment
income on our investment portfolio. The effect on the market value of the
portfolio would be to decrease the value by approximately $7 million.
The impact of a change in interest rates to the fair value of our
policyholder deposits would be immaterial due to our ability to vary credited
interest rates on annuity policies. The liability for future policy benefits of
$124.1 million is affected by anticipated investment earnings, but such
liability has been excluded from our analysis because it is not considered to be
a financial instrument.
Equity Price Risk
Equity price risk is the risk that we will incur economic losses due to
adverse changes in a particular stock or stock index. At December 31, 1999, we
had approximately $5.5 million, or less than 3.7% of our cash and investments,
invested in equity securities. The effect of a ten percent change in equity
prices would not materially impact our financial position, results of operations
or cash flows.
Seasonality
Historically, our 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 our insureds during the winter months.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading
"(a)1. Consolidated Financial Statements" of Item 14 hereof, which financial
statements are incorporated herein by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information regarding the change of accountants by us is contained in
"Independent Public Accountants" in our Proxy Statement for the 2000 Annual
Meeting of Shareholders, which information is incorporated herein by reference.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding our directors is contained under "Election of
Directors" and "Voting Securities and Principal Holders Thereof" included in the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders, which
information is incorporated herein by reference.
The following is a list, as of March 29, 2000, of the names and ages of our
executive officers and all positions and offices with us presently held by the
person named. Messrs. Brent D. Cassity and J. Tyler Cassity are brothers.
The name, age and position with respect to each of our executive
officers are set forth below:
Brent D. Cassity, 33, joined us in 1996. Mr. Cassity spent his business
career in the pre-need funeral insurance industry in positions of increasing
responsibilities with National Prearranged Services, Inc. and its affiliates.
Mr. Cassity earned a Bachelor of Arts degree from the University of Missouri in
1989. Mr. Cassity is responsible for our cemetery operations and is responsible
for preneed marketing. As part of his responsibilities, he has overseen the
acquisition of nine funeral homes and two cemetery properties over the last five
years. He has served as president and chief operating officer of National
Prearranged Services since 1997. In addition to serving as an officer and
director and chairman of the board of National Prearranged Services, Mr. Cassity
has served as a director of our company since 1996 and served as chairman of the
board from September 1997 to March 2000. Mr. Cassity also serves as a member of
the board of directors of each of Lincoln Memorial Life Insurance Company and
Memorial Service Life Insurance Company. Mr. Cassity was elected our chief
executive officer in March 2000.
J. Tyler Cassity, 30, joined us in 1993. Immediately prior to that date,
Mr. Cassity worked in the public relations field with PEN American Center. Mr.
Cassity earned a Bachelor of Arts degree from Columbia University in 1992. Mr.
Cassity is responsible for video biography production at Forever Memorial and
for the management of Hollywood Forever, Inc. Mr. Cassity was instrumental in
the purchase of Hollywood Forever in April of 1998. Mr. Cassity has served as
president of Forever Memorial and Hollywood Forever since 1998. Mr. Cassity was
elected co-chief executive officer (technology, research and development) of our
company in March 2000.
Randall K. Sutton, 55, has been a member of our board of directors and
a vice president since 1996 and also serves as a member of the board of
directors of Memorial Service Life Insurance Company and Lincoln Memorial Life
Insurance Company, both subsidiaries of our company. In March 2000, Mr. Sutton
was elected our chief financial officer. Mr. Sutton also serves as the chief
financial officer of National Prearranged Services.
Howard A. Wittner, 63, became a director of our company in September
1997 and, in March 2000, Mr. Wittner was appointed chairman of the board and
secretary. For more than the past five years, Mr. Wittner has been a senior
partner practicing corporate and business law through his firm Wittner, Poger,
Spewak, Maylack & Spooner, 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 our company and its affiliates for more than
the past five years.
Clifton Mitchell, 48, joined us in February 1998. Immediately prior to
that date, Mr. Mitchell owned C. Mitchell Company, Inc., an actuarial consulting
firm that served as our consulting actuary since 1988. Mr. Mitchell's practice
focused primarily on mergers and acquisitions in the life and health industry,
but also provided general management consulting, product development consulting
and accounting services for his clients. In addition, over the last ten years,
Mr. Mitchell has owned, individually and with other partners, several insurance
companies and was primarily responsible for the management of those companies.
Mr. Mitchell earned a Bachelor of Arts degree and a Masters of Business
Administration from the University of Texas in 1976. 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. Mr. Mitchell has served as an executive
vice president and chief financial officer of our insurance subsidiaries since
February 1998 and as President and chief financial officer since April 1999. Mr.
Mitchell also served as a member of our board of directors and as an executive
vice president from March 1998 to March 2000 and as our president and chief
financial officer from April 1999 to March 2000.
The executive officers were appointed by and serve at the pleasure of
our board of directors.
Information regarding compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, is contained in our Proxy Statement for the
2000 Annual Meeting of Shareholders, which is incorporated herein by reference.
Item 11. Executive Compensation
Information regarding executive compensation is contained in
"Compensation of Executive Officers," included in our Proxy Statement for the
2000 Annual Meeting of Shareholders, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
and management is contained in "Voting Securities and Principal Holders
Thereof," included in our Proxy Statement for the 2000 Annual Meeting of
Shareholders, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
contained in "Certain Relationships and Related Transactions," included in our
Proxy Statement for the 2000 Annual Meeting of Shareholders, which is
incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements. See Index to Consolidated
Financial Statements for a list of financial statements included
in this Report immediately following the signature page.
2. Financial Statement Schedules. The following financial statement
schedules are part of this Report immmediately following the
Consolidated Financial Statements.
Schedule II - Condensed Financial Information of Registrant
(Parent Company)
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
All other schedules are omitted, either because they are not
applicable, not required, or because the information they contain is
included elsewhere in the consolidated financial statements or notes.
3. Exhibits. See Exhibit Index immediately preceding the Exhibits
filed with this report.
(b) Reports on Form 8-K.
We did not file any Current Report on Form 8-K during the quarter ended
December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of
March, 2000.
FOREVER ENTERPRISES, INC.
By: /s/ Brent D. Cassity
-----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March, 2000.
Signature Title Date
/s/ Brent D. Cassity Chief Executive Officer
and Director March 30, 2000
- -------------------------
Brent D. Cassity
/s/ J. Tyler Cassity Co-Chief Executive Officer March 30, 2000
- -------------------------
J. Tyler Cassity (Technology, Research and Development)
/s/ Howard A. Wittner Chairman of the Board, March 30, 2000
- -------------------------
Howard A. Wittner Director and Secretary
/s/ Randall K. Sutton Vice President, Chief Financial March 30, 2000
- -------------------------
Randall K. Sutton Officer and Director
/s/ Paul J. Gallant Director March 30, 2000
- -------------------------
Paul J. Gallant
/s/ John J. Gorman Director March 30, 2000
- -------------------------
John J. Gorman
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(including notes applicable to the unaudited periods)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and Subsidiaries:
Independent Auditors' Report-Deloitte & Touche LLP.......................... F-1
Report of Independent Certified Public Accountants--Killman,
Murrell, and Company, P.C....................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997............................................ F-5
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997....... .................................... F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997...................................... F-7
Notes to Consolidated Financial Statements ................................. F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Forever Enterprises, Inc.
St. Louis, Missouri
We have audited the accompanying consolidated balance sheets of Forever
Enterprises, Inc. and subsidiaries (formerly known as Lincoln Heritage
Corporation) (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income and of cash flows for the years then ended. Our audits also included the
financial statement schedules listed at Item 14(a)(2). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Forever Enterprises, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
March 22, 2000
Fort Worth, Texas
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Forever Enterprises, Inc.:
We have audited the accompanying consolidated statement of operations,
shareholders' equity and comprehensive income and cash flows of Forever
Enterprises, Inc. and subsidiaries (formerly known as Lincoln Heritage
Corporation) (a Texas corporation) for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Forever Enterprises, Inc. and subsidiaries for the year ended December 31, 1997,
in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedules, II, III, and IV are presented
for the purposes of additional analyses 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, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
KILLMAN, MURRELL & COMPANY, P.C.
Dallas, Texas
March 11, 1998
<PAGE>
<TABLE>
<CAPTION>
FOREVER ENTERPRISES, INC.
(FORMERLY KNOWN AS LINCOLN HERITAGE CORPORATION)
Consolidated Balance Sheets
December 31,
1999 1998
ASSETS
<S> <C> <C>
CASH AND INVESTMENTS
Fixed maturities available for sale
at fair value (amortized cost
$109,208,684 and $68,201,939) $ 98,297,844 $ 65,628,083
Equity securities available
for sale at fair value
(cost $7,456,488 and $7,939,451) 5,554,318 7,121,000
Policyholder loans 22,707,973 17,257,122
Cash and cash equivalents 20,168,260 43,824,537
Note receivable from affiliate 4,000,000 -
------------- ------------
TOTAL CASH AND INVESTMENTS 150,728,395 133,830,742
------------- ------------
Accrued investment income 698,549 463,616
Due premium 1,913,575 1,325,855
Accounts receivable from related party 2,233,043 1,535,926
Funds withheld by ceding company 334,244 526,434
Deferred policy acquisition costs, net 20,337,571 16,881,478
Fixed assets, net 1,646,965 1,218,352
Cost of policies acquired, net 4,348,375 3,833,659
Goodwill, net 611,567 1,413,550
Deferred tax assets, net 7,156,147 3,364,638
Other assets 819,610 1,004,118
------------- ------------
TOTAL $ 190,828,041 $ 165,398,368
============= ============
(Continued on next page)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOREVER ENTERPRISES, INC.
(FORMERLY KNOWN AS LINCOLN HERITAGE CORPORATION)
Consolidated Balance Sheets
(CONTINUED)
December 31,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Policy liabilities:
Future policy benefits $ 125,999,312 $ 105,527,178
Policyholder deposits 57,502,868 47,163,465
Claims and benefits payable 350,000 650,000
Premiums received in advance 2,129,405 409,937
------------ ------------
TOTAL POLICY LIABILITIES 185,981,585 153,750,580
------------ ------------
Income tax payable 296,743 49,800
Accounts payable and accrued expenses 247,234 656,089
Accounts payable to related party 57,448 163,292
Other liabilities 1,522,136 1,964,045
------------ ------------
TOTAL LIABILITIES 188,105,146 156,583,806
------------ ------------
Commitments and Contingencies (Note 11)
SHAREHOLDERS' EQUITY:
Preferred stock ($0.01 par value;
1,000,000 shares authorized;
none issued) - -
Common stock ($0.01 par value;
10,000,000 shares authorized;
4,533,259 and 4,520,000 shares
issued and outstanding,
respectively) 45,333 45,200
Additional paid-in capital 4,903,844 4,734,350
Retained earnings 6,281,897 6,273,924
Accumulated other comprehensive
income (loss) (8,508,179) (2,238,912)
-------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 2,722,895 8,814,562
-------------- -----------------
TOTAL $ 190,828,041 $ 165,398,368
============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOREVER ENTERPRISES, INC.
(FORMERLY KNOWN AS LINCOLN HERITAGE CORPORATION)
Consolidated Statements of Operations
Years Ended December 31,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES
Life premiums $ 45,021,507 $ 41,363,384 $ 38,044,470
Net investment income 9,362,572 10,638,406 6,171,215
Realized investment gains, net 1,438,748 1,935,935 2,666,448
Other revenue 1,519,200 747,848 -
------------ ------------ -------------
TOTAL REVENUES 57,342,027 54,685,573 46,882,133
------------ ------------ -------------
BENEFITS AND EXPENSES
Death benefits 19,024,821 16,406,422 13,551,459
Surrender benefits 1,261,807 3,165,939 115,758
Increase in future policy benefits 13,503,823 12,019,701 16,432,947
Interest on policyholder deposits 2,287,761 1,495,680 1,051,087
Commissions 16,916,633 16,850,227 11,247,606
General expenses 9,121,230 7,211,722 5,211,651
General expenses reimbursed by related party (2,684,761) (2,253,644) (2,695,091)
Taxes, licenses and fees 1,029,160 948,452 782,470
Amortization of cost of policies purchased 707,368 711,564 262,188
Change in deferred acquisition costs, net of amortization (3,456,093) (4,326,608) (1,405,263)
------------ ------------ ------------
TOTAL BENEFITS AND EXPENSES 57,711,749 52,229,455 44,554,812
------------ ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES (369,722) 2,456,118 2,327,321
------------ ------------ ------------
INCOME TAXES
Current 296,743 49,800 1,752,358
Deferred (674,438) 390,659 (1,080,463)
---------- ------------ ------------
TOTAL INCOME TAX PROVISION (BENEFIT) (377,695) 440,459 671,895
------------ ------------ -------------
NET INCOME $ 7,973 $ 2,015,659 $ 1,655,426
============ ============ ============
Basic earnings per share $ - $ 0.49 $ 0.41
============ ============ ============
Diluted earnings per share $ - $ 0.48 $ 0.41
============ ============ ============
Weighted average shares outstanding:
Basic 4,525,812 4,086,667 4,000,000
Diluted 4,649,659 4,189,804 4,000,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOREVER ENTERPRISES, INC.
(FORMERLY KNOWN AS LINCOLN HERITAGE CORPORATION)
Consolidated Statements of Shareholders' Equity
and comprehensive income
Total Additional Accumulated Other
Shareholders' Common Paid-in Comprehensive Retained
<S> <C> <C> <C> <C> <C>
Equity Stock Capital Income (Loss) Earnings
Balance, January 1, 1996 $ 1,856,355 $ 1,000 $ 40 $ (756,524) $ 2,611,839
Transfer to common stock in connection
with stock split and stock dividend - 9,000 - - (9,000)
Retroactive premium increase treated
as paid-in capital, net income tax
expense of $314,884 1,259,536 - 1,259,536 - -
Benefit of reduction of future commissions
treated as additional paid-in capital, net
of tax expense of $332,000 816,000 - 816,000 - -
Comprehensive income (loss), net of tax:
Net income 1,655,426 - - - 1,655,426
Change in unrealized gains (losses) on
available for sale securities, net of
tax of $667,325 and reclassification
adjustment of $2,666,448 1,295,394 - - 1,295,394 -
----------- ---------- -------- ---------- ----------
Total comprehensive income 2,950,820 - - - -
----------- ---------- --------- ---------- ----------
Balance, January 1, 1997 6,882,711 10,000 2,075,576 538,870 4,258,265
Transfer to common stock in connection
with stock split and stock dividend - 30,000 (30,000)
Effect of stock options compensation
recorded for stock option plans, net
of applicable income tax effect
of $70,652 137,147 137,147
Issuance of common stock 2,556,827 5,200 2,551,627
Comprehensive income (loss), net of tax:
Net income
2,015,659 2,015,659
Change in unrealized gains (losses)
on available for sale securities,
net of tax of $1,430,978 and
reclassification adjustment of
$1,935,935 (2,777,782) (2,777,782)
------------- ---------- --------- ---------- ----------
Total comprehensive loss (762,123)
------------- ---------- --------- ---------- ----------
Balance, December 31, 1998 8,814,562 45,200 4,734,350 (2,238,912) 6,273,924
Effect of stock options compensation
recorded for stock option plans, net
of applicable income tax effect
of $120,822 119,906 119,906
Issuance of shares for stock options 49,721 133 49,588
Comprehensive income (loss), net of tax:
Net income 7,973 7,973
Change in unrealized gains (losses)
on available for sale securities,
net of tax of $3,229,622 and
reclassification adjustment of
$420,147 (6,269,267) (6,269,267)
----------- ---------- --------- ------------- ----------
Total comprehensive loss (6,261,294)
----------- ---------- --------- ------------- ---------
Balance, December 31, 1999 $ 2,722,895 $ 45,333 $4,903,844 $(8,508,179) $ 6,281,897
============ ======== ========= =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOREVER ENTERPRISES, INC.
(FORMERLY KNOWN AS LINCOLN HERITAGE CORPORATION)
Consolidated Statements of Cash Flows
Years Ended December 31,
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,973 $ 2,015,659 $ 1,655,426
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Realized investment gains, net (1,438,748) (1,935,935) (2,666,448)
Gain on sale of policies (1,177,810) (590,142) -
Accretion of discount on investments (310,104) (1,990,046) (458,056)
Depreciation and amortization 1,072,168 967,513 368,068
Deferred income taxes (674,418) 390,659 (699,519)
Deferred compensation 200,220 137,147 -
Changes in operating assets and liabilities (net of
effects of acquisitions)
Accrued investment income (112,763) 195,231 (74,020)
Due premium (587,720) (338,421) (299,497)
Accounts receivable from related party (697,117) (1,057,564) 188,843
Funds withheld by ceding company 192,190 (27,922) (252,692)
Deferred policy acquisition costs (3,456,093) (4,326,608) (1,405,263)
Other assets 150,098 (484,307) (627,109)
Future policy benefits and deposit funds 5,610,235 1,892,178 5,872,863
Claims and benefits payable (300,000) (39,000) (92,000)
Premiums received in advance 1,719,468 105,466 92,022
Income tax payable 246,943 (1,813,790) 1,441,319
Accounts payable and accrued expenses (453,264) 321,067 106,465
Accounts payable to related party (105,844) 146,202 17,090
Other liabilities (441,909) (103,816) 1,250,388
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (556,495) (6,536,429) 4,417,880
------------- ------------- -------------
INVESTING ACTIVITIES
Proceeds from sales and maturities of available
for sale investments 66,802,045 342,392,212 166,376,535
Purchase of available for sale investments (83,608,096) (365,281,067) (106,684,537)
Purchase of fixed assets (725,057) (762,418) -
Sale (acquisition) of subsidiary 3,583,919 (5,041,514) -
Net cash received (paid) for acquisition of life policies (3,533,843) 18,272,718 -
Increase in policyholder loans issued (5,445,370) (4,298,499) (10,699,794)
Other, net (223,101) (145,000) -
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (23,149,503) (14,863,568) 48,992,204
------------- ------------- -------------
FINANCING ACTIVITIES
Capital contributions - - 2,075,536
Proceeds from stock offering - 2,556,827 -
Issuance of shares for stock options 49,721 - -
------------- ------------- -------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 49,721 2,556,827 2,075,536
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (23,656,277) (18,843,170) 55,485,620
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 43,824,537 62,667,707 7,182,087
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 20,168,260 $ 43,824,537 $ 62,667,707
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 17,562 $ 1,975,165 $ 311,040
============= ============= =============
</TABLE>
<PAGE>
FOREVER ENTERPRISES, INC.
(FORMERLY KNOWN AS LINCOLN HERITAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
NOTE 1. BUSINESS
Forever Enterprises, Inc. (formerly known as Lincoln Heritage
Corporation) (the "Company") is a life insurance holding company primarily
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 which are
subject to regulation by the state insurance department where they are licensed
and undergo periodic examinations by those departments.
The majority 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, and National
Prearranged Services Agency, Inc.("NPS Agency"). 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 or National
Prearranged Services Agency is the assignee and beneficiary of substantially all
policies issued directly or assumed by the Company in connection with
prearranged funeral contracts.
Effective December 31, 1998, the Company reorganized its insurance
company subsidiaries. The purpose of the reorganization was to streamline and
consolidate the Company's insurance operations and strengthen the existing
capital structure to facilitate the acceptance of acquisitions by regulatory
authorities. The reorganization was accounted for as a tax-free transaction and
had no impact on the consolidated financial statements. Concurrent with the
reorganization, the name of Lincoln Memorial Life Insurance Company was changed
to New Life Insurance Company ("New Life") and the name of World Service Life
Insurance Company of America was changed to Lincoln Memorial Life Insurance
Company ("Lincoln"). The reorganization had no effect on Memorial Service Life
Insurance Company ("Memorial").
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
and Lincoln, and results of operations for New Life through October 28, 1999,
the date of its sale. These consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP"), which
differ from statutory accounting practices prescribed or permitted by regulatory
authorities. All intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform with
the 1999 presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Actual results could
differ significantly from those estimates.
The estimates susceptible to significant change are those used in
determining deferred policy acquisition costs, cost of policies purchased, and
the liabilities for future policy benefits, policyholder deposits and claims,
and benefits payable. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
<PAGE>
Investments
All fixed maturity and equity securities are classified as
available-for-sale and, accordingly, such securities are carried at estimated
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 on the sale of investments are determined utilizing
the specific identification method. Unrealized gains and losses, net of tax, are
recorded as a component of accumulated other comprehensive income, a separate
component of shareholders' equity. The cost of fixed maturity securities is
adjusted for amortization of premiums and discounts. If the fair value of an
investment security declines for reasons other than temporary market conditions,
the carrying value of such security is written down to fair value by a charge to
operations. Policyholder loans are stated at their current unpaid principal
balance, which approximates fair value.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents
includes investments readily convertible to cash with remaining maturities at
date of purchase of three months or less. Cash and cash equivalents include
commercial paper and reverse repurchase agreements that are carried at cost,
which approximates the fair value of the underlying securities.
In order to increase the Company's return on investments and improve
its liquidity, the Company enters into overnight reverse repurchase agreements.
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, is minimal as the
carrying value of the underlying securities approximates the fair value of such
securities. At December 31, 1999 and 1998, the carrying amount of overnight
reverse repurchase agreements was $6,506,872 and $4,274,884, respectively.
Goodwill
Goodwill represents the excess of cost over the fair 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
5 to 25 years. Amortization expense was $68,356, $62,337 and $22,748 for the
years ended December 31, 1999, 1998 and 1997, respectively. Accumulated
amortization was $267,181 and $198,825 as of December 31, 1999 and 1998,
respectively.
The Company periodically evaluates the carrying value of long lived
assets to determine if impairment exists based upon estimated undiscounted
future cash flows. The impairment, if any, is measured by the difference between
net book value and estimated discounted future cash flows, and is charged to
expense in the period identified.
Deferred Policy Acquisition Costs (DPAC)
The costs of acquiring new business generally consist of commissions,
excluding renewal commissions (approximately 90% of DPAC is commissions paid to
NPS), 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 used for estimating the liabilities for future policy benefits.
Cost of Policies Acquired
The cost of policies acquired 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 consider 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 and
any such differences are recorded in the period they are determined. The amounts
are amortized over the lives of the acquired policies in relation to the
remaining present value of the future cash flows from such policies.
Furniture and Equipment
Furniture and equipment is carried at depreciated cost. Depreciation is
recorded using the straight-line method over the estimated useful lives of the
assets which range from five to seven years.
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 which
is 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. Interest assumptions are 8% in years one (1)
through five (5), graded downward to 7.5% in years six (6) through fifteen (15)
and remain at 7.5% thereafter.
Claims and Benefits Payable
The liability for claims and benefits payable 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 but incurred during the period then ended, and an estimate (based upon
prior experience) of claims incurred, but not yet reported. Actual amounts may
differ from those estimated and any such differences are recorded in the period
they are determined.
Premiums and Expenses
Receipts for annuities are classified as deposits instead of revenues.
Accordingly, annuity premium deposits and annuity benefit payments are recorded
as increases or decreases in a liability account rather than revenue or expense.
Revenues for annuity policies are recorded for policy administration fees and
surrender charges while expenses are recorded for interest credited to the
policy account balances.
For limited payment contracts, net premiums are recorded as revenue and
the difference between the gross premium received and the net premium is
deferred and recognized in a constant relationship to the insurance in-force.
Benefits and expenses are recognized as a level percentage of earned
premiums by providing for future policy benefits and amortizing deferred
acquisition costs.
Reinsurance
The Company's subsidiaries have coinsurance and modified coinsurance
agreements with reinsurers to increase their statutory surplus for regulatory
purposes. The terms of reinsurance agreements provide for all of the insurance
risk associated with the business ceded to be transferred to the reinsurer. The
purpose of the agreements is to allow the Company's insurance subsidiaries to
take credits for reserves ceded to the reinsurer which provides increases in the
insurance company's statutory surplus. The agreements provide for the profits of
the reinsured business to decrease the amount of the reserve credit taken,
thereby decreasing the insurance 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 for the Company's insurance subsidiaries
was $8,814,366 and $10,450,767 greater at December 31, 1999 and 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.
In the normal course of business, the Company has reinsured portions of
the coverage provided by its insurance products with other insurance companies
under indemnity reinsurance agreements. 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 78% and 80% of the life insurance
in-force at December 31, 1999 and 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.
Policyholder dividends of $108,396 and $90,335 were paid for the years ended
December 31, 1999 and 1998, respectively. No policyholder dividends were paid
during 1997.
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 are expected to be recovered or settled. A valuation
allowance is provided if it is more likely than not that some portion of the
deferred tax asset may not be realized. An increase or decrease in the valuation
allowance is included in income. 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 primarily upon generating future taxable income during the
periods in which the temporary differences become deductible.
Stock Based Compensation
In 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation. The Company has elected to continue following the accounting
guidance of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees for measurement and recognition of stock-based
transactions with employees. No compensation cost is recognized for options
issued when the exercise price of the options is at least equal to the fair
market value of the common stock at the date of grant. Consistent with the
provisions of SFAS No. 123, the Company discloses the proforma effect on net
income and earnings per share as if the Company had adopted SFAS No. 123
For all options granted to individuals that are not employees of the
Company, the Company follows the requirements of SFAS No. 123. Accordingly, the
option exercise price will be compared to the fair value of the option at the
date of grant and, to the extent that the fair value exceeds the option exercise
price, compensation will be recognized in the consolidated financial statements
of the Company.
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 resulting in 4,000,000 shares of common stock issued and
outstanding. 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,
1997. The diluted earnings per share are computed using the treasury stock
method unless the effect is anti-dilutive. The 103,137 increase in the number of
shares from basic to diluted in 1998 is a result of the options outstanding.
There were no factors that affected the net income amount in the earnings per
share computation.
Initial Public Offering
In October 1998, the Company completed its initial public offering and
issued 520,000 shares of its Common Stock at a price of $7.50 per share. The net
proceeds were approximately $2,500,000, after underwriting discounts,
commissions, and other offering costs. The net proceeds were used to make a
capital contribution on December 31, 1998 to one of the Company's insurance
subsidiaries.
New Accounting Standards
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 of fiscal years
beginning after December 15, 1998. The adoption of SOP 97-3 did not have a
material effect on the Company's financial position, results of operations or
cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction, and if it is, the type of
hedge transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company is assessing the impact that
the adoption of SFAS No. 133 will have on its consolidated financial statements,
but does not expect such implementation to have a material adverse effect on its
financial position, results of operations or cash flows.
NAIC Codification- In March 1998, the National Association of Insurance
Commissioners ("NAIC") adopted the Codification of Statutory Accounting
Principles (Codification). The Codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, is proposed to
be effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices. The
Company has not finalized the quantification of the effects of the Codification
on its statutory financial statements.
NOTE 3. COINSURANCE OF LIFE INSURANCE AND ANNUITY POLICIES
On September 1, 1997, the Company coinsured a block of life insurance
and annuity policies from Woodmen Accident and Life Company (the "Woodmen
Block"). The block of business consisted primarily of deferred annuities which
are accounted for as investment contracts using deposit accounting. The Company
assumed approximately $51,311,000 of insurance and annuity reserves in exchange
for receiving $48,018,000 in cash. The net liabilities assumed, $3,293,000, plus
other costs related to the coinsurance of the Woodmen Block in the amount of
$218,000 have been shown as additions from acquisitions to the cost of policies
acquired.
Effective April 1, 1998, the Company coinsured a block of life
insurance and annuity policies from World Insurance Company (the "World Block").
The reserves on the block of business consisted of approximately one-third
deferred annuities, one-third interest sensitive life insurance, which is
accounted for as investment contracts using deposit accounting, and one-third
traditional whole life insurance. The Company assumed approximately $21,909,000
of insurance and annuity reserves in exchange for receiving $19,941,000 in
assets. The net liabilities assumed, $1,968,000, plus other costs related to the
coinsurance of the World Block in the amount of approximately $38,000 have been
shown as additions from acquisitions to the cost of policies acquired.
NOTE 4. INVESTMENTS
The cost or amortized cost, gross unrealized gains and losses, and
estimated fair value of fixed maturity and equity securities available for sale
at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturity securities
U.S. government $ 15,085,267 $ 1,068 $ (2,058,234) $13,028,101
Mortgage backed securities 81,183,072 327,372 (7,869,931) 73,640,513
Corporate bonds 12,940,345 129,157 (1,440,272) 11,629,230
------------ ------------ ------------ ------------
Total fixed maturity securities 109,208,684 457,597 (11,368,437) 98,297,844
Equity securities 7,456,488 5,120 (1,907,290) 5,554,318
------------ ------------ ------------ ------------
Total $116,665,172 $ 462,717 $(13,275,727) $103,852,162
============ ============ ============ ============
</TABLE>
The cost or amortized cost, gross unrealized gains and losses, and
estimated fair value of fixed maturity and equity securities available for sale
at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturity securities
U.S. government $11,455,626 $ 468,009 $ (184,543) $11,739,092
Mortgage backed securities 48,792,515 350,168 (483,129) 48,659,554
Corporate bonds 7,953,798 - (2,724,361) 5,229,437
----------- ----------- ----------- -----------
Total fixed maturity securities 68,201,939 818,177 (3,392,033) 65,628,083
Equity securities 7,939,451 1,138,873 (1,957,324) 7,121,000
----------- ----------- ----------- -----------
Total $76,141,390 $ 1,957,050 $(5,349,357) $72,749,083
=========== =========== =========== ===========
</TABLE>
Unrealized gains (losses) included in accumulated other comprehensive
income (loss) are reported net of tax effect of $3,229,622 and $1,153,395 in
1999 and 1998, respectively.
The amortized cost and estimated fair value of fixed maturities
available for sale at December 31, 1999, 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 31,1999
Amortized Estimated
Cost Fair Value
<S> <C> <C>
In one year or less $ 1,998,822 $ 1,996,490
In years two through five 4,846,963 4,199,653
In years six through ten 8,749,272 8,220,456
After ten years 12,430,555 10,240,733
Mortgage backed securities 81,183,072 73,640,512
------------- -------------
Total $109,208,684 $ 98,297,844
============= =============
</TABLE>
<PAGE>
Investments in fixed maturities or equity securities in any single
entity with unrealized losses of more than 10% of shareholders' equity at
December 31, 1999 other than investments issued or guaranteed by the United
States government or a United States government agency, were as follows:
<TABLE>
<CAPTION>
December 31, 1999
Amortized Estimated
Cost Fair Value
<S> <C> C>
Standard Management Corporation $ 1,880,696 $ 1,588,875
Waste Management Inc. 1,485,797 1,187,550
Rite Aid Corporation 1,014,908 680,000
Transnational Financial
Network Corporation 937,800 220,000
</TABLE>
The Company invests in both investment grade and below investment grade
fixed maturity securities. At December 31, 1999, less than 1% of the book value
of the Company's fixed maturity investments consisted of below investment grade
securities.
Assets with a fair value of $6,237,811 at December 31, 1999, were on
deposit with various state regulatory authorities. Assets with a fair value of
$74,596,133 at December 31, 1999, were restricted as to use for the acquired
Woodmen Block, World Block, the FSLife Block, and other assumed business.
Major categories of investment income consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
-------------- ---------- ---------
<S> <C> <C> <C>
Fixed maturities $ 7,342,209 $ 7,700,956 $ 5,183,674
Equities 67,732 292,440 -
Policyholder loans 1,226,718 774,306 243,879
Short-term investments 954,645 2,065,800 857,434
----------- ------------ ------------
Gross investment income 9,591,304 10,833,502 6,284,987
Investment expenses 228,732 195,096 113,772
----------- ------------ -------------
Net investment income $ 9,362,572 $ 10,638,406 $ 6,171,215
============== =============== =============
</TABLE>
Gross realized investment gains consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---------- ---------------- -----------------
<S> <C> <C> <C>
Gross realized gains $ 6,367,307 $ 4,198,392 $ 2,929,348
Gross realized losses (4,928,559) (2,262,457) (262,900)
------------------ --------------- ---------------
Net realized
investment gains $ 1,438,748 $ 1,935,935 $ 2,666,448
================ =============== ================
</TABLE>
Proceeds from disposals of investments in fixed maturity and equity
securities during the years ended December 31, 1999, 1998, and 1997 were
$62,736,799, $342,392,212, and $162,383,038, respectively.
NOTE 5. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligation to
its policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. Consequently, allowances are established for amounts
due from reinsurers that are deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of credit risk
to minimize its exposure to significant losses from reinsurance insolvencies.
Reinsurance receivables were $45,000 and $11,000 at December 31, 1999 and 1998,
respectively. Reinsurance payables were $435,000 and $235,000 at December 31,
1999 and 1998, respectively.
The effect of reinsurance on premiums earned were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------- -------------- -------------
<S> <C> <C> <C>
Direct $ 44,632,539 $ 40,441,151 $ 34,925,424
Reinsurance assumed 911,890 1,212,257 3,371,830
Reinsurance ceded (522,922) (290,024) (252,784)
-------------- ------------- -----------
Life premiums earned 45,021,507 $ 41,363,384 $ 38,044,470
============ ============== ===========
</TABLE>
Death benefits incurred on the business assumed were $849,093, $818,793
and $2,257,286 for the years ended December 31, 1999, 1998 and 1997,
respectively. Recoveries of death benefits under reinsurance agreements were
$599,147 during 1999 and insignificant during 1998 and 1997.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various
financial assets, incurs various financial liabilities and enters into
agreements involving off-balance-sheet financial instruments. The following
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The methods and assumptions used to estimate the fair value of
financial instruments are as follows:
(i) The carrying value of cash and cash equivalents approximates fair value due
to the short maturities of these investments;
(ii) Fair values of fixed maturities and equity securities 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) The carrying value of accounts receivable and payable and premiums
received in advance approximates fair value due to their relatively short
maturities; and
(iv) The carrying amount of policyholder deposits approximates their fair value
due to the Company's ability to adjust the rate at which interest is credited to
the accounts.
Policyholder loans have an interest rate of 8% as of December 31, 1999 and 1998,
and have no specified maturity dates. These loans are an integral part of the
life insurance policies which the Company has in force and cannot be valued
separately.
The fair value and carrying amount of the Company's financial
instruments are presented as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------- ------------- ---------- ---------
Fair Carrying Fair Carrying
Value Amount Value Amount
<S> <C> <C> <C> <C>
Cash and cash equivalents $20,168,260 $20,168,260 $43,824,537 $43,824,537
Fixed maturity securities 98,297,844 98,297,844 65,628,083 65,628,083
Equity securities 5,554,318 5,554,318 7,121,000 7,121,000
Note receivable from affiliate 4,000,000 4,000,000 - -
Accounts receivable 2,233,043 2,233,043 1,535,926 1,535,926
Policyholder loans 22,707,973 22,707,973 17,257,122 17,257,122
Policyholder deposits 57,502,868 57,502,868 47,163,465 47,163,465
Premiums received in advance 2,129,405 2,129,405 409,937 409,937
</TABLE>
NOTE 7. DEFERRED POLICY ACQUISITION COSTS AND COSTS OF POLICIES ACQUIRED
Deferred Policy Acquisition Costs
Deferred policy acquisition costs ("DPAC") and the components of the
change in DPAC were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------- ------------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 16,881,478 $ 12,554,870 $ 11,149,607
Change in balance:
Deferrals 8,153,806 8,926,805 4,161,506
Amortization (4,697,713) (4,600,197) (2,756,243)
------------ ------------ ------------
Net change 3,456,093 4,326,608 1,405,263
------------ ------------ ------------
Balance, end of year $ 20,337,571 $ 16,881,478 $ 12,554,870
============ ============ ============
</TABLE>
Approximately 90% of deferred costs are commissions paid to NPS, a
related party, or NPS Agency. Other costs include expenses related to the
acquisition and issuance of new policies, such as the printing of policy forms
and underwriting expenses.
Cost of Policies Acquired
The cost of policies acquired ("CPA") and the components of the changes
were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
<S> <C> <C>
--------------- ----------
Balance, beginning of year $ 3,833,659 $ 3,249,365
Additions from acquisition 2,544,274 2,205,716
Gross amortization (1,041,268) (1,047,244)
Interest 333,900 335,680
CPA on policies sold (1,322,190) (909,858)
------------ -----------
Balance, end of year $ 4,348,375 $ 3,833,659
============ ===========
</TABLE>
Interest is accrued on the unamortized balance of CPA at 7.5%.
Approximately 8.1% of the balance at December 31, 1999 is expected to be
amortized during each of the next five years.
NOTE 8. CLAIMS AND BENEFITS PAYABLE
Activity in the liability for life claims and benefits payable was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1 $ 650,000 $ 689,000 $ 781,000
Incurred related to:
Current year 18,954,845 16,387,714 13,573,754
Prior year 69,976 18,708 (22,295)
----------------- --------------- -----------
Total incur 19,024,821 16,406,422 13,551,459
----------------- --------------- -----------
Paid related to:
Current year 18,070,845 15,737,714 12,887,754
Prior year 1,253,976 707,708 755,705
----------------- ----------------- -----------
Total paid 19,324,821 16,445,422 13,643,459
----------------- ----------------- ------------
Balance at December 31 $ 350,000 $ 650,000 $ 689,000
================= =============== ============
</TABLE>
The development of prior year claims reflects normal changes in
actuarial estimates.
NOTE 9. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
------------------ --------------
Furniture and equipment $ 334,632 $ 316,659
Data processing equipment 722,472 549,686
Software 1,264,197 729,901
------------------ --------------
2,321,301 1,596,246
Accumulated depreciation (674,337) (377,894)
------------------ --------------
$ 1,646,964 $ 1,218,352
================== ==============
</TABLE>
Depreciation expense was approximately $296,000, $194,000 and $83,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.
NOTE 10. INCOME TAXES
The provision for income taxes (benefits) 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. A reconciliation of the statutory income tax rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
-------------- ------------- ----------
<S> <C> <C> <C>
Tax (benefit) at statutory rate (166,213) 835,080 791,289
Small life insurance company deduction (493,401) (619,154) (126,920)
Gain on sale of affiliate 245,810 - -
Other 36,109 224,533 7,526
------------ ------------ ------------
Total tax expense (benefit) $ (377,695) $ 440,459 $ 671,895
============= ============ ==============
</TABLE>
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,
1999 1998
-------------- -------------
Deferred tax assets:
<S> <C> <C>
Non life losses $ 967,025 $ 728,753
Net unrealized losses
on available for sale securities 4,229,958 1,153,395
Policy reserves and policy funds 8,162,931 7,991,569
Other liabilities - 48,112
-------------- --------------
Subtotal 13,359,914 9,921,829
Valuation allowance (805,739) (3,320,670)
-------------- --------------
Total deferred tax assets,
net of valuation allowance 12,554,175 6,601,159
--------------- -------------
Deferred tax liabilities:
Deferred policy acquisition costs 5,241,833 2,532,571
Other assets 156,195 703,950
--------------- -------------
Deferred tax liabilities 5,398,028 3,236,521
--------------- -------------
Net deferred tax assets $ 7,156,147 $ 3,364,638
=============== =============
</TABLE>
The valuation allowance has been provided to reduce deferred tax assets
to an amount that management believes is more likely than not recoverable.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under two noncancelable lease
agreements accounted for as operating leases. Rental expense on operating leases
(exclusive of other expenses payable under the leases) was approximately
$810,000, $710,000 and $550,000 for the years ended December 31, 1999, 1998, and
1997, respectively. Future minimum lease payments under the terms of these
operating leases at December 31, 1999 are as follows:
2000 $ 843,116
2001 848,284
2002 464,614
-----------
$ 2,156,014
Legal and Other Proceedings
NPS, an affiliate of the Company, along with New Life had been named
defendants in a previously dismissed class-action lawsuit that was refiled
during 1996 in St. Louis, Missouri, City Circuit Court. The suit involved a
challenge to NPS's methods of funding pre-arranged funeral contracts with
policies issued by the Company. The suit was settled in 1999 with no financial
impact to New Life.
The Company also is subject to various other claims and contingencies
arising out of the normal course of business. The Company believes that the
total amounts that will ultimately be paid, if any, arising from these claims
and contingencies will not have a material adverse effect on its financial
condition, results of operations or cash flows.
NOTE 12. RELATED PARTY TRANSACTIONS
Substantially 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 is a wholly owned subsidiary of National Heritage Enterprises
("NHE") which owns approximately 90% of the outstanding stock of the Company.
NPS collects all payments for prearranged funeral contracts and remits such
amounts to the Company either directly or through assumed reinsurance.
In connection with issuing insurance policies to fund prearranged
funeral contracts, except in Missouri, the individual owner of the policy
assigns the policy to NPS and/or NPS Agency. As assignee, NPS and/or 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. The policy
benefits that are paid in the ordinary course of business includes death
benefits, surrender benefits and policy loans. The Company is not subject to
significant credit risk on the policy loans, since the Company makes no policy
loans which exceed 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. Substantially all premiums, death benefits and
surrender benefits during the years ended December 31, 1999, 1998 and 1997 were
received from or paid to NPS, NPS Agency or the Trust. At December 31, 1999 and
1998, the Company had policyholder loans of $21,045,984 and $15,556,437,
respectively, on policies of which NPS or the trusts is the beneficiary.
The Company's insurance subsidiaries have a contract (the "Contract")
with NPS and NPS Agency that obligates the Company to pay first-year and renewal
commissions on policies written by NPS and NPS Agency. Substantially all
commissions incurred during the years ended December 31, 1999, 1998 and 1997,
were paid to NPS or NPS Agency. Furthermore, the Company entered into an
agreement in April 1998, whereby NPS has agreed to cause all insurance arising
out of its prearranged funeral business to be issued by the Company's
subsidiaries. Such amounts were $1.2 million and $986,000 for the years ended
December 31, 1999 and 1998, respectively.
Prior to January 1, 1997, the Contract called for maximum first-year
commissions of up to 23% of the face amount of policies submitted and renewal
commissions of up to 2% of the face amount of issued policies remaining in-force
in years two though six. In order to better match the commissions paid with the
profitability of the underlying polices, effective January 1, 1997, the Company
and NPS and NPS Agency agreed to amend the Contract to provide for increased
first-year commissions of up to 31.5% of the face amount on single premium
policies and terminate payments of renewal commission on policies issued on or
before December 31, 1995. The effect of the amended contract was a reduction in
the increase in future policy benefits of $1,148,000 on policies issued in 1997
and this effect net of $332,000 of income tax expense was recorded as an
increase in additional paid-in capital for the year ended December 31, 1997.
During 1997, the Company and NPS agreed to retroactively increase
premiums charged on certain policies issued by the Company. The policies
selected for the increase in premiums were those policies that did not meet the
profitability criteria of the Company. No plans were found to have a premium
deficiency prior to 1997. The amount of the increased premiums paid by NPS as a
result of this retroactive rate adjustment was $1,923,000. Premiums in the
amount of $1,574,420, collected as a result of the retro-active rate adjustment
applicable to years prior to January 1, 1997, have been credited to additional
paid-in-capital, net of income tax effect of $314,884. Increased premiums in the
amount of $339,828 applicable to the year ended December 31, 1997, have been
included in premium revenue.
Effective January 1, 1997, the Company entered into a cost sharing
agreement with NPS whereby NPS will reimburse the Company for a portion of
certain general and administrative costs paid for by the Company for the benefit
of NPS. Costs reimbursed under the agreement were $2,684,761, $2,253,644 and
$2,695,091 for the years ended December 31, 1999, 1998, and 1997 respectively.
Amounts receivable from NPS at December 31, 1999 and 1998, were
$2,233,043 and $1,535,926, respectively. Amounts payable to NPS at December 31,
1999 and 1998, were $57,448 and $65,000, respectively.
Note receivable from affiliate represents a note receivable in the
amount of $4,000,000 from Forever Network, Inc. Principal and interest at prime
(8.5% at December 31, 1999) plus 1% is due quarterly beginning March 31, 2000.
On March 9, 2000, Forever Network, Inc. was acquired by the Company. See Note
18, Subsequent Events below.
The majority shareholder of the Company has the right to cause the
Company to register the majority shareholder's shares of common stock under the
Securities Act of 1933, for resale, at the expense of the Company.
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., Clif Mitchell, a current executive officer of Lincoln and Memorial,
entered into a non-compete agreement with the Company for the sum of $60,000
payable in 15 equal installments beginning April 1, 1998.
NOTE 13. EMPLOYEE BENEFIT PLAN
The Company offers all of its employees who meet certain eligibility
requirements a savings plan (the "401K 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 401K Plan.
The Company matches 12% of the employees' contribution up to 6% of their salary.
For the years ended December 31, 1999, 1998, and 1997 the Company contributed
$19,114, $8,683 and $5,170, respectively, to the 401K Plan.
NOTE 14. CONCENTRATIONS OF RISK
At December 31, 1999 and 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 $2,233,043 and $1,535,926 at
December 31, 1999 and 1998, respectively. In addition, at December 31, 1999 and
1998 the Company had policyholder loans outstanding of $21,045,984 and
$15,556,437, respectively, on policies of which NPS is the beneficiary. The
policy loans are collateralized by the policy cash surrender values.
NOTE 15. STATUTORY ACCOUNTING INFORMATION
The Company's life insurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on the statutory basis
of accounting. Statutory accounting practices prescribed or permitted by
insurance regulatory authorities for the Company's insurance subsidiaries differ
from GAAP. The statutory net income and shareholders' equity reported to
regulatory authorities as of and for the periods ended were as follows:
Years Ended December 31,
1999 1998 1997
--------------- ------------- ------------
Net income (loss) $ 14,831,984 $ (1,775,721) $ 530,509
Shareholders' equity 6,674,307 7,815,609 7,863,137
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, net income after tax and shareholder's equity
as reported on a statutory basis. At December 31, 1999, no amounts were
available for transfer to the parent company by dividend, loan or advance,
without prior regulatory approval. There have been no cash dividends paid by the
life insurance subsidiaries to the parent since the formation or acquisition of
the insurance subsidiaries.
NOTE 16. ACQUISITIONS AND DISPOSITIONS
On May 15, 1998, the Company purchased all of the outstanding stock of
Lincoln for approximately $5.5 million. Lincoln had no active policies in-force;
however, Lincoln is licensed to conduct business in 42 states and the District
of Columbia. The transaction was accounted for using the purchase method of
accounting, and, accordingly, the assets and liabilities were recorded at their
fair market value at the date of acquisition. The net assets, consisting
primarily of investment securities, were approximately $5.1 million at the date
of acquisition. The excess of the purchase price over the fair value of net
assets acquired was recorded as goodwill. The results of operations of Lincoln
for the period subsequent to May 15, 1998 have been included in the Company's
consolidated statements of operations.
Effective October 1, 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 $30 million in
assets and $28 million in liabilities. The excess of the purchase price over the
fair value of assets acquired was recorded as an addition to the cost of
policies acquired. The results of operations of FSLife for the period subsequent
to October 1, 1999 have been included in the Company's consolidated statements
of operations. Upon completion of the acquisition, the common stock of FSLife
was retired and FSLife was merged into the Company.
<PAGE>
The following table illustrates the unaudited proforma results of the
Company as if the acquisition was effective at January 1, 1998:
1999 1998
--------------- ----------------
Total revenues $ 58,639,213 $ 56,634,686
Net income $ 132,821 $ 2,201,590
Basic earnings per common share .03 .54
Diluted earnings per common share .03 .53
During 1999, the Company retroceded, through a coinsurance agreement,
50% of the life insurance assumed from FSLife to Alabama Reassurance Company,
which resulted in a gain of approximately $1.4 million.
On October 28, 1999, the Company completed the sale of its insurance
subsidiary, New Life Insurance Company for approximately $5 million. Since all
of the business of New Life Insurance Company is reinsured by another of the
Company's insurance subsidiaries, the sale of New Life Insurance did not have a
material effect on the Company's financial position, results of operations or
cash flows.
On October 25, 1999, the Company entered into an agreement to purchase
all the outstanding shares of Dixie National Life Insurance Company ("Dixie")
for an estimated purchase price of approximately $10 million. Pursuant to the
agreement, the actual purchase price will be based upon, among other items, an
adjusted value of stockholder's equity of the aquiree. Dixie's insurance
operations consists of a closed block of life and annuity policies. Dixie had
approximately $35.5 million in assets and $32.0 million in liabilities as of
September 30, 1999. The completion of the purchase is subject to regulatory
approval .
NOTE 17. STOCK OPTIONS
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. Options may be
exercised only if the optionholder remains continuously associated with the
Company from the date of grant to the date of exercise, subject to certain
conditions as specified in the Plan. An option granted under the Plan cannot be
exercised later than ten years from the date of the grant. Any options that
expire unexercised or that terminate upon an optionee's ceasing his or her
association with the Company become available once again for issuance. Options
vest over 4 years in 25% increments commencing one year from date of grant.
The Company recognizes compensation expense for stock options granted
to employees following the guidance of APB No. 25 and recognizes compensation
expense for stock options granted to non employees in accordance with SFAS No.
123. The Company recognized compensation expense of approximately $127,000 and
$115,000 for the years ended December 31, 1999 and 1998, respectively, related
to awards for employees, and $110,000 and $93,000 for the years ended December
31, 1999 and 1998, respectively, related to awards to non-employees. All options
were granted prior to the Company's initial public offering. Therefore, in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the fair
market value of the options granted to non-employees was estimated on the date
of grant using the minimum value approach. The expected life of the options was
7.5 years, the risk-free interest rate used was 6% and there were no assumptions
as to volatility or dividend yield. The effect of applying SFAS No. 123 is not
necessarily indicative of the effects on future years due to, among other
things, the vesting period of the stock options.
<PAGE>
Had the Company implemented SFAS No. 123, the Company's pro forma net
income, and earnings per share would have been as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------ ----------
<S> <C> <C>
Net income
As reported $ 7,973 $ 2,015,659
Proforma (21,865) 1,988,864
Net income per share
Basic
As reported - (.49)
Proforma - (.49)
Diluted
As reported - (.48)
Proforma - (.47)
</TABLE>
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
Number Option
of price
shares per share
<S> <C>
Balance at January 1, 1999 395,750 $ 3.75
Granted -0- $ -
Forfeited (50,875) $ 3.75
Exercised (13,259) $ 3.75
------------------- -----------------
Outstanding at December 31,1999 331,616 $ 3.75
================== ==================
Options exercisable at December 31, 1999 82,904
==================
Available for future grant 855,125
==================
</TABLE>
NOTE 18. SUBSEQUENT EVENTS
On March 9, 2000, the shareholders of the Company adopted an amendment to
the Company's Amended and Restated Articles of Incorporation to change the
Company's name from Lincoln Heritage Corporation to Forever Enterprises, Inc.
On March 9, 2000, the shareholders of the Company approved a stock
acquisition agreement to acquire all of the issued and outstanding shares of
common stock of Forever Network, Inc. ("Forever Network", formerly Forever
Enterprises, Inc.) from National Heritage Enterprises ("NHE"). Forever Network
owns and operates funeral home and cemetery properties with approximately $12.4
million in assets as of September 30, 1999 and approximately $2.1 million in
revenues and approximately $13,000 in net income for the nine months ended
September 30, 1999. In exchange for the Forever Network shares, the agreement
provided for the issuance of common stock of the Company with a market value of
$12.0 million, provided that the Company would not be obligated to issue more
than 2.4 million shares based on the closing price of the Company's stock on the
trading day immediately preceding the day on which the acquisition is
consummated. Based on the closing market price of $5.00 on the Company's stock
on March 8, 2000, the Company issued 2,400,000 shares of its common stock to
NHE. Upon consummation of the acquisition, NHE's ownership of the Company
increased from 4,000,000 shares to 6,400,000 shares or approximately 92.3% of
all the issued and outstanding shares of the Company. The acquisition will be
accounted for in a manner similar to the pooling-of-interests method of
accounting.
NOTE 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
First Second Third Fourth
<S> <C> <C> <C> <C>
Life premiums $ 9,713,272 $ 11,307,182 $ 12,337,243 $ 11,663,810
Net investment income 2,798,908 2,355,602 2,372,410 1,835,652
Realized investment gains (685,123) 1,539,818 (701,693) 1,285,746
Net income (loss) (1,409,746) 768,067 (417,771) 1,067,423
Basic earnings (loss) per share (0.31) 0.17 (0.09) 0.24
Diluted earnings (loss) per share (0.31) 0.17 (0.09) 0.23
</TABLE>
Losses of approximately $1.6 million, $1.0 million and $600,000 were recognized
and related to the Company's investment in Autobond during the first, second,
and third quarter of 1999, respectively. The third quarter 1999 included a gain
from the sale of a portion of the FSLife Block of approximately $1.2 million.
Year Ended December 31, 1998
<TABLE>
First Second Third Fourth
<S> <C> <C> <C> <C>
Life premiums $ 7,256,760 $ 13,476,192 $ 10,897,591 $ 9,732,841
Net investment income 2,252,156 2,580,793 2,840,302 2,965,155
Realized investment gains 450,914 617,289 442,905 424,827
Net income (loss) (109,155) 120,522 (513,297) 2,517,589
Basic earnings (loss) per share (0.03) 0.03 (0.13) 0.58
Diluted earnings (loss) per share (0.03) 0.03 (0.13) 0.57
</TABLE>
The improvement in earnings in the fourth quarter 1998 as compared to the third
quarter 1998 included a gain from the sale of a portion of the World Block of
approximately $590,000. Also, the change in future policy benefit liabilities
were significantly lower for the fourth quarter 1998 which reflects many factors
such as the seasonality of the Company's business.
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Condensed Financial Information of Registrant
Forever Enterprises, Inc. (Parent Company)
Condensed Balance Sheets
December 31,
1999 1998
Assets
<S> <C> <C>
Cash and cash equivalents $ 486,661 $ 508,774
Accounts receivable 35,000 40,000
Accounts receivable from related party 80,316 65,000
Investment in life insurance subsidiaries 4,939,319 9,899,154
Deferred tax assets, net 599,158 330,752
Other assets 173,806 -
--------- ----------
Total $ 6,314,260 $ 10,843,680
========= ==========
Liabilities and Shareholders' Equity
Accrued expenses $ - $ 155,949
Accounts payable to related party 3,591,365 1,873,169
------------- ------------
Total liabilities 3,591,365 2,029,118
Shareholders' Equity:
Preferred stock ($.01 par value;
1,000,000 shares authorized,
none issued) - -
Common Stock ($0.01 par value; 10,000,000
shares authorized; 4,533,259 and
4,520,000 shares issued
and outstanding, respectively 45,333 45,200
Additional paid-in capital 4,903,844 4,734,350
Retained earnings 6,281,897 6,273,924
Accumulated other comprehensive
income (loss) (8,508,179) (2,238,912)
------------ -------------
Total shareholders' equity 2,722,895 8,814,562
------------ ------------
Total $ 6,314,260 $ 10,843,680
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Condensed Financial Information of Registrant
Forever Enterprises, Inc (Parent Company)
Condensed Statements of Operations
Years Ended December 31,
1999 1998 1997
------------ ----------- -----------
Revenues
<S> <C> <C> <C>
Net investment income $ 22,865 $ 13,514 $ -
----------- ----------- -----------
Total revenues 22,865 13,514 -
----------- ----------- -----------
Expenses
General expenses 1,672,944 1,194,114 -
----------- ----------- -----------
Total expenses 1,672,944 1,194,114 -
----------- ----------- -----------
Loss before income taxes and
equity in undistributed
net income of subsidiaries (1,650,079) (1,180,600) -
Income taxes
Current - (70,652) -
Deferred (348,720) (330,752) -
------------ ------------ ------------
Total income tax benefi (348,720) (401,404)
------------ -----------
Loss before equity in undistributed
net income of subsidiaries (1,301,359) (779,196) -
Equity in undistributed net
income of subsidiaries 1,309,332 2,794,855 1,655,426
----------- ----------- -----------
Net income $ 7,973 $ 2,015,659 $ 1,655,426
=========== =========== ===========
</TABLE>
<PAGE>
Schedule II
<TABLE>
<CAPTION>
Condensed Financial Information of Registrant
Forever Enterprises, Inc (Parent Company)
Condensed Statements of Cash Flows
Years Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,973 $ 2,015,659 $ 1,655,426
Adjustments to reconcile net
income to net cash provided
by operating activities:
Deferred income taxes (348,720) (330,752) -
Stock options issued 200,220 137,147 -
Increase (decrease) in
accounts receivabl 5,000 (40,000) -
Increase in other assets (173,806) - -
Increase in accounts receivable
and payable to related party 1,702,880 1,808,169 -
Increase in accrued liabilies (155,949) 155,949 -
Equity in undistributed net
income of subsidiaries (1,309,332) (2,794,855) (1,655,426)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (71,734) 951,317 -
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributions to subsidiaries (100) (3,000,100) -
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (100) (3,000,100) -
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock offering - 2,556,827 -
Issuance of shares for stock option 49,721 - -
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 49,721 2,556,827 -
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (22,113) 508,044 -
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 508,774 730 730
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 486,661 $ 508,774 $ 730
=========== =========== ===========
</TABLE>
<PAGE>
Schedule II
Condensed Financial Information of Registrant
Forever Enterprises, Inc (Parent Company)
Note To Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Forever
Enterprises, Inc., formerly Lincoln Heritage Corporation, and subsidiaries.
<PAGE>
<TABLE>
<CAPTION>
Schedule III
Supplementary Insurance Information
Segmen Deferred policy Future policy Unearned Other policy Premium Net Benefits, Amortization Other
acquisition benefits, premiums claims and revenue investment claims, of deferred operating
costs losses, claims benefits income losses and policy expenses
and loss payable settlement acquisition
expenses expenses costs
Life Insurance:
<S> <C> <C> <C> <C> <C> <C>
Year ended
12/31/99 $ 20,337,571 $ 181,938,605 $ 2,129,405 $ -0- $ 45,021,507 $ 10,381,173 $ 36,078,212 $ 4,697,713 $16,935,824
Year ended
12/31/98 16,881,478 152,014,788 409,937 -0- 41,363,384 10,638,406 33,087,742 4,600,197 14,541,516
Year ended
12/31/97 12,554,870 130,145,936 304,471 -0- 38,044,470 6,171,215 31,151,251 2,756,243 10,647,318
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule IV
Reinsurance
Gross Ceded to Assumed Net Percentage
amount other from other amount of amount
companies companies assumed to net
1999
<S> <C> <C> <C> <C> <C>
Life insurance in-force $264,447,530 $ -0- $17,697,628 $282,145,158 6%
Premiums 44,632,539 (522,922) 911,890 45,021,507 2
1998
Life insurance in-force $ 234,294,031 $ -0- $22,403,847 $ 256,697,878 9%
Premiums 40,441,151 (290,024) 1,212,257 41,363,384 3
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>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1(a)Amended and Restated Articles of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Reg. No.
333-50525), are hereby incorporated by reference.
3.1(b)Certificate of Amendment of Amended and Restated Articles of Incorporation
of the Company, are filed herewith.
3.2 By-laws of the Company, filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-50525), are hereby incorporated by
reference. 4.1 Form of Stock Certificate for Common Stock, filed as Exhibit
4.1 to the Company's Registration Statement on Form S-1 (Reg. No.
333-50525), is hereby incorporated by reference. 4.2 Registration Rights
Agreement dated as of April 6, 1998 by and between the Company and National
Heritage Enterprises, Inc, filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-50525), is hereby
incorporated by reference.
4.3 Form of Warrant Agreement between the Company and Tejas Securities Group,
Inc, filed as Exhibit 4.3 to the Company's Registration Statement on Form
S-1 (Reg. No. 333-50525), is hereby incorporated by reference. 10.1 Lincoln
Heritage Corporation 1998 Long-Term Incentive Plan, filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1 (Reg. No. 333-50525),
is hereby incorporated by reference.
10.2 Exclusivity Agreement dated as of April 1, 1998 by and between the Company
and National Prearranged Services, Inc, filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Reg. No. 333-50525), is
hereby incorporated by reference.
10.3 Stock Purchase Agreement dated January 26, 1998 by and between Lincoln and
NRG Acquisition Partners, L.P, filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-50525), is hereby
incorporated by reference.
10.4 Award Agreement dated as of August 18, 1998 by and between the Company and
Clifton Mitchell, filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-50525), is hereby incorporated by
reference.
10.5 Cost Sharing Agreement dated as of March 31, 1997 by and among Memorial,
Lincoln and NPS, filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-50525), is hereby incorporated by
reference.
10.6 Cost Sharing Agreement dated as of June 1, 1998 by and between the Company
and NPS, filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-50525), is hereby incorporated by reference.
10.7 Award Agreement dated as of August 18, 1998 by and between the Company and
Brent D. Cassity, filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-50525), is hereby incorporated by
reference.
10.8 General Agent Contract dated May 12, 1992 and Addendum dated February 19,
1998 by and between the Company and NPS, filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (Reg. No. 333-50525), is
hereby incorporated by reference.
10.9 Form of Underwriting Agreement, filed as Exhibit 1.1 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-50525), is hereby
incorporated by reference.
10.10Stock Acquisition Agreement dated as of December 20, 1999 by and between
the Company and National Heritage Enterprises, Inc., filed as Annex B to
the Company's Proxy Statement for Special Meeting of Shareholders held on
March 9, 2000, is hereby incorporated by reference.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Killman, Murrell and Company, P.C.
27.1 Financial Data Schedule (December 31, 1999).
List of Subsidiaries
Corporation State
Memorial Service Life Insurance Company Texas
Lincoln Memorial Life Insurance Company
(formerly known as World Service Life
Insurance Company of America) Alabama
Wise & Associates, Inc. Missouri
NPS Forever , Inc. Missouri
Forever Network, Inc Missouri
Mason Securities Association, Inc Missouri
Forever Memorial, Inc Missouri
Dartmont Investment, Inc Delaware
BDC Properties, Inc Missouri
MT.Washington Forever, LLC Missouri
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-69267 on Form S-8 of our report dated March 22, 2000, appearing in the
Annual Report on Form 10-K of Forever Enterprises, Inc. (formerly known as
Lincoln Heritage Corporation) for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 30, 2000
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (File No. 333-69267) of Lincoln Heritage Corporation of our report
dated March 11, 1998, appearing in the Annual Report on Form 10-K of Forever
Enterprises, Inc. for the year ended December 31, 1999.
KILLMAN, MURRELL & COMPANY, P.C.
Dallas, Texas
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The schedule below contains summary financial
information extracted from the Consolidated
Financial Statements of Forever Enterprises, Inc.
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 98,298
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5,554
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 130,560
<CASH> 20,168
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 20,338
<TOTAL-ASSETS> 190,828
<POLICY-LOSSES> 183,503
<UNEARNED-PREMIUMS> 2,129
<POLICY-OTHER> 350
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 45
<OTHER-SE> 2,678
<TOTAL-LIABILITY-AND-EQUITY> 190,828
45,022
<INVESTMENT-INCOME> 9,362
<INVESTMENT-GAINS> 1,439
<OTHER-INCOME> 1,519
<BENEFITS> 36,078
<UNDERWRITING-AMORTIZATION> 4,698
<UNDERWRITING-OTHER> 16,936
<INCOME-PRETAX> (370)
<INCOME-TAX> (378)
<INCOME-CONTINUING> 8
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
