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SCHEDULE 14A INFORMATION
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
LINCOLN HERITAGE CORPORATION
(Name of Registrant as Specified in Its Charter)
N/A
(Name of Person Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
COMMON STOCK, NO PAR VALUE
2) Aggregate number of securities to which transaction applies:
10,648 OUTSTANDING SHARES
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
$527.70 PER SHARE FOR 10,648 OUTSTANDING SHARES
4) Proposed maximum aggregate value of transaction: $5,618,949.60
5) Total fee paid: $1,123.79
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the
date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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[LINCOLN HERITAGE CORPORATION LETTERHEAD]
February 14, 2000
Dear Shareholder:
I cordially invite you to attend a special meeting of the
shareholders of Lincoln Heritage Corporation, a Texas corporation, to be
held at 10:00 a.m. Central Time on Thursday, March 9, 2000, at the law
offices of Wittner, Poger, Spewak and Maylack, P.C., 7700 Bonhomme
Avenue, Suite 400, St. Louis, Missouri 63105. At this meeting,
shareholders of record on February 10, 2000 will vote on the following
proposals:
1. To adopt a proposal to amend our Amended and Restated
Articles of Incorporation to change our corporate name to
"Forever Enterprises, Inc."
2. To approve a stock acquisition agreement, dated as of
December 20, 1999, by and between Lincoln Heritage
Corporation and National Heritage Enterprises, Inc., and the
transactions contemplated thereby. The stock acquisition
agreement provides, among other things, that National
Heritage Enterprises, Inc. will sell to Lincoln Heritage
Corporation all of the issued and outstanding shares of
common stock of Forever Enterprises, Inc. In exchange for
such stock, Lincoln Heritage will issue to National Heritage
shares of Lincoln Heritage stock with a market value of
$12,000,000 based on the closing price on the trading day
immediately preceding the day on which the acquisition is
consummated, provided that Lincoln Heritage Corporation will
not be obligated to issue more than 2.4 million shares.
For the reasons set forth in the attached proxy statement, your
board of directors has unanimously determined that the amendment to our
Amended and Restated Articles of Incorporation and the stock acquisition
agreement and transactions contemplated thereby are in the best
interests of Lincoln Heritage and our shareholders and has approved the
stock acquisition agreement and transactions contemplated thereby.
Crown Capital Corporation, financial advisor to Lincoln Heritage's board
of directors, has rendered an opinion dated February 14, 2000 to the
effect that, as of such date, the acquisition is fair from a financial
point of view to Lincoln Heritage's shareholders. The opinion is
attached to the accompanying proxy statement as Annex A.
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YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
ADOPTION OF THE AMENDMENT TO OUR AMENDED AND RESTATED ARTICLES AND "FOR"
APPROVAL OF THE STOCK ACQUISITION AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
Attached is a Notice of Special Meeting of Shareholders and a
Proxy Statement containing a discussion of the background of, reasons
for and terms of the acquisition. Please read this material carefully.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING PLEASE SIGN, DATE
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. YOUR FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE AMENDMENT TO OUR
AMENDED AND RESTATED ARTICLES OF INCORPORATION AND THE STOCK ACQUISITION
AGREEMENT AND TRANSACTIONS CONTEMPLATED THEREBY. If you attend the
special meeting, you may withdraw your proxy and vote in person if you
wish. Your vote is important regardless of the number of shares you
own.
Sincerely,
/s/ Brent D. Cassity
--------------------------
Brent D. Cassity
Chairman
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[LINCOLN HERITAGE CORPORATION LETTERHEAD]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 9, 2000
To Our Shareholders:
We are contacting you to notify you that a special meeting of
shareholders of Lincoln Heritage Corporation, a Texas corporation, will
be held on Thursday, March 9, 2000, at the law offices of Wittner,
Poger, Spewak and Maylack, P.C., 7700 Bonhomme Avenue, Suite 400,
St. Louis, Missouri 63105 for the following purposes:
1. To adopt a proposal to amend our Amended and Restated
Articles of Incorporation to change our corporate name to
"Forever Enterprises, Inc."
2. To approve a stock acquisition agreement, dated as of
December 20, 1999, by and between Lincoln Heritage
Corporation and National Heritage Enterprises, Inc., and the
transactions contemplated thereby. The stock acquisition
agreement provides, among other things, that National
Heritage Enterprises, Inc. will sell to Lincoln Heritage
Corporation all of the issued and outstanding shares of
common stock of Forever Enterprises, Inc. In exchange for
such stock, Lincoln Heritage will issue to National Heritage
shares of Lincoln Heritage stock with a market value of
$12,000,000 based on the closing price on the trading day
immediately preceding the day on which the acquisition is
consummated, provided that Lincoln Heritage Corporation will
not be obligated to issue more than 2.4 million shares.
3. To transact any other business that is properly brought
before the special meeting or any adjournment or
postponement of the special meeting.
Your board of directors has fixed the close of business on
February 10, 2000 as the record date to determine the shareholders who
are entitled to notice of, and to vote at, the special meeting. Please
read carefully the accompanying proxy statement and the copy of the
stock acquisition agreement that is attached as Annex B to the proxy
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statement. The proxy statement describes the stock acquisition
agreement and certain other transactions entered into in connection with
the acquisition. The proxy statement and its annexes are deemed
incorporated by reference in and form a part of this Notice.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON,
PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
PROXY STATEMENT AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED AT THE
SPECIAL MEETING. IF YOU SIGN AND SEND IN YOUR PROXY CARD AND DO NOT
INDICATE HOW YOU WANT TO VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE
"FOR" THE MATTERS CONSIDERED AT THE SPECIAL MEETING. IF YOU FAIL TO
RETURN THE PROXY CARD OR TO VOTE AT THE SPECIAL MEETING, THE EFFECT WILL
BE A VOTE "AGAINST" THE MATTERS CONSIDERED AT THE SPECIAL MEETING.
By Order of the Board of Directors of Lincoln
Heritage Corporation
/s/ Brent D. Cassity
--------------------------------
Brent D. Cassity
February 14, 2000 Chairman
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LINCOLN HERITAGE CORPORATION
1250 Capital of Texas Highway
Building 3, Suite 100
Austin, Texas 78716
_______________
PROXY STATEMENT
_______________
FOR A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON March 9, 2000
We are furnishing this proxy statement to the shareholders of
Lincoln Heritage Corporation, a Texas corporation, to solicit proxies
for use at a special meeting of shareholders scheduled for 10:00 a.m.,
Central Time, on Thursday, March 9, 2000, at the law offices of Wittner,
Poger, Spewak and Maylack, P.C., 7700 Bonhomme Avenue, Suite 400,
St. Louis, Missouri 63105, and at any adjournment or postponement of the
special meeting.
We are first mailing this proxy statement and the accompanying
notice, proxy card and letter on or about February 14, 2000, to
shareholders entitled to receive notice of, and to vote at, the special
meeting.
At the special meeting, shareholders will be asked to consider and
vote:
1. To adopt a proposal to amend our Amended and Restated
Articles of Incorporation to change our corporate name to
"Forever Enterprises, Inc."
2. To approve a stock acquisition agreement, dated as of
December 20, 1999, by and between Lincoln Heritage
Corporation and National Heritage Enterprises, Inc. and the
transactions contemplated thereby. The stock acquisition
agreement provides, among other things, that National
Heritage Enterprises, Inc. will sell to Lincoln Heritage
Corporation all of the issued and outstanding shares of
common stock of Forever Enterprises, Inc. In exchange for
such stock, Lincoln Heritage will issue to National Heritage
shares of Lincoln Heritage stock with a market value of
$12,000,000 based on the closing price on the trading day
immediately preceding the day on which the acquisition is
consummated, provided that Lincoln Heritage Corporation will
not be obligated to issue more than 2.4 million shares.
3. To transact any other business that is properly brought before
the special meeting or any adjournment or postponement of the
special meeting.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" ADOPTION OF THE AMENDMENT TO OUR AMENDED AND RESTATED
ARTICLES AND "FOR" APPROVAL OF THE STOCK ACQUISITION AGREEMENT AND
TRANSACTIONS CONTEMPLATED THEREBY.
All information in this proxy statement about National Heritage
Enterprises and Forever Enterprises was supplied by National Heritage
Enterprises, and Lincoln Heritage did not independently verify it.
Except as otherwise indicated, Lincoln Heritage supplied or prepared all
other information in this proxy statement.
Dated: February 14, 2000
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
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<S> <C>
Cautionary Statement Concerning Forward-Looking Information 1
Questions and Answers About The Meeting, The Amendment to our Amended and Restated
Articles of Incorporation and the Acquistion 2
Summary 5
The Companies 5
The Special Meeting 5
Record Date; Voting Power 6
Vote Required 6
Voting by our Directors and Executive Officers 6
Revocability of Proxies 6
Solicitation of Proxies 6
Proposal One - Amendment to Amended and Restated Articles of Incorporation 6
Proposal Two - The Acquisition 7
The Special Meeting 13
Proposal One - Amendment to Our Amended and Restated Articles of Incorporation to
Change Our Corporate Name to Forever Enterprises, Inc. 16
Proposal Two - The Forever Enterprises Transaction 17
The Stock Purchase Agreement 22
Pro Forma Financial Information 26
Certain Information Regarding Lincoln Heritage Corporation 34
Voting Securities and Principal Holders Thereof 44
Description of Lincoln Heritage Securities 45
Selected Consolidated Financial Data of Lincoln Heritage Corporation 48
Management's Discussion and Analysis of Financial Condition and Results of Operations
of Lincoln Heritage Corporation 50
Certain Information Regarding Forever Enterprises, Inc. 59
Selected Consolidated Financial Data of Forever Enterprises, Inc. 60
Management's Discussion and Analysis of Financial Conditions and Results of Operations
of Forever Enterprises 61
i
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Independent Auditors 64
Shareholder Proposals 64
Other Matters 65
Where You Can Find More Information 65
Index to Consolidated Financial Statements 66
Annex A - Opinion of Crown Capital Corporation A-1
Annex B - Stock Acquisition Agreement dated as of December 20, 1999, by and between
Lincoln Heritage Corporation and National Heritage Enterprises, Inc. B-1
</TABLE>
ii
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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
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 factors that are not within our control and that may have a
direct bearing on operating results include, but are not limited to:
(1) 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; (2) our ability to
achieve anticipated levels of operational efficiencies at recently
acquired companies, as well as through other cost-saving initiatives;
(3) mortality, morbidity and other factors that may affect the
profitability of our insurance products; (4) changes in the federal
income tax laws and regulations that may affect the cost of or demand
for our products; (5) increasing competition in the sale of our
products; (6) 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; (7) the availability and
terms of future acquisitions; (8) unanticipated events associated with
Year 2000 compliance relating to work on development or modification to
computer systems and to software, including work performed by suppliers
or vendors; and (9) the risk factors or uncertainties listed in our
other filings with the Securities and Exchange Commission.
When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intends" and similar expressions, as they relate
to Lincoln Heritage are intended to identify forward-looking statements,
although there may be certain forward-looking statements not accompanied
by such expressions.
1
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QUESTIONS AND ANSWERS ABOUT THE MEETING, THE AMENDMENT TO OUR
AMENDED AND RESTATED ARTICLES OF INCORPORATION AND THE ACQUISITION
Q. WHAT WILL HAPPEN IN THE ACQUISITION?
A. We propose a transaction in which Lincoln Heritage Corporation
will purchase from National Heritage Enterprises, Inc. all of the
issued and outstanding shares of Forever Enterprises, Inc. In
exchange for such shares, Lincoln Heritage Corporation will issue
to National Heritage Enterprises, common stock of Lincoln Heritage
with a market value of $12.0 million, provided that Lincoln
Heritage Corporation will not be obligated to issue more than 2.4
million shares. Based on the closing price of $4.875 per share as
reported by the Pacific Stock Exchange on February 10, 2000,
Lincoln Heritage would issue 2,400,000 shares in connection with
the acquisition.
The Amended and Restated Articles of Incorporation of Lincoln
Heritage Corporation will be further amended to change its name to
"Forever Enterprises, Inc."
Lincoln Heritage Corporation will continue to be incorporated in
Texas; however, its corporate headquarters will be relocated to 10
South Brentwood, Clayton, Missouri 63105. In addition, in
connection with the acquisition of Forever Enterprises, it
currently is anticipated that once the transaction is consummated,
the board of directors will elect the following people to serve as
the officers of the company:
Howard A. Wittner - Chairman and Secretary
Brent D. Cassity - Chief Executive Officer
J. Tyler Cassity - Co-Chief Executive Officer (Technology,
Research and Development)
Clifton Mitchell - President and Chief Financial Officer
Randall K. Sutton - Vice President
Q. WHY ARE OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION BEING
AMENDED?
A. Your board of directors believes that the name change of
Lincoln Heritage Corporation to Forever Enterprises, Inc. will
more closely reflect the strategic direction of our business and
allow the general public to more clearly associate our corporate
name with our products and services.
Q. WHY IS YOUR BOARD RECOMMENDING THAT I VOTE FOR THE STOCK
ACQUISITION AGREEMENT AND TRANSACTIONS CONTEMPLATED?
A. Your board of directors believes that the terms and conditions of
the stock acquisition agreement and transactions contemplated
thereby are fair to and in the best interests of Lincoln Heritage
and our shareholders. To review the background and reasons for
the acquisition in greater detail, see pages 17 to 18.
Q. WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE ACQUISITION TO ME?
A. Your board of directors believes that the acquisition of Forever
Enterprises will add unique products to your company in an
expanding industry. In addition, your board of directors believes
that the acquisition will expand our Internet sales through the
acquisition of Forever Memorial, a subsidiary of Forever
Enterprises. The acquisition of Forever Enterprises will result
in a dilution of
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each shareholder's respective ownership interest. In addition,
that can be no assurance that we will be able to integrate Forever
Enterprises into our existing business operations. The RBT Trust
II, dated September 28, 1990, owns all the outstanding stock of
National Heritage Enterprises, Inc. and, upon consummation of the
acquisition, its beneficial ownership of Lincoln Heritage will
increase from 88.4% to 92.3% based on the closing price of our
stock on February 10, 2000.
Q. WHAT RIGHTS DO I HAVE IF I OPPOSE THE ACQUISITION?
A. Holders of our common stock are not entitled under Texas law or
under our Amended and Restated Articles of Incorporation to any
dissenters' rights, to seek appraisal of their shares or to any
preemptive rights in connection with the acquisition.
Q: WHAT DO I NEED TO DO NOW?
A: Please vote your shares as soon as possible so that your shares
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will be represented at the special meeting. You may grant your
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proxy by signing your proxy card and mailing it in the enclosed
return envelope, or you may vote in person at the special meeting.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Send in a later-dated, signed proxy card to our Secretary before
the special meeting or attend the special meeting in person,
revoke your proxy and vote your shares.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions
on how to vote. Your broker will contact you regarding the
procedures necessary for him or her to vote your shares. Please
tell your broker how you would like him or her to vote your
shares. If you do not tell your broker how to vote, your shares
will not be voted by your broker, which will have the effect of a
vote against the amendment to our Amended and Restated Articles of
Incorporation and against the stock acquisition agreement and
transactions contemplated thereby.
Q: WHO CAN VOTE AT THE SPECIAL MEETING?
A: Holders of shares of our common stock at the close of business on
February 10, 2000 may vote at the special meeting.
Q. HOW MANY VOTES ARE REQUIRED TO ADOPT THE AMENDMENT TO OUR AMENDED
AND RESTATED ARTICLES OF INCORPORATION?
A. Holders of at least two-thirds of the outstanding shares of our
common stock must vote in favor of the amendment to our Amended
and Restated Articles of Incorporation. Howard Wittner, trustee
of the RBT Trust II, dated September 28, 1990, has advised us of
his intention to vote the Trust's shares in favor of the amendment
to our Amended and Restated Articles of Incorporation. Because
Mr. Wittner controls 88.4% of the outstanding shares of our common
stock, his vote is sufficient to adopt the amendment to our
Amended and Restated Articles of Incorporation.
Q. HOW MANY VOTES ARE REQUIRED TO APPROVE THE STOCK ACQUISITION
AGREEMENT AND TRANSACTIONS CONTEMPLATED THEREBY?
A. Holders of a majority of the outstanding shares of our common
stock must vote
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in favor of the stock acquisition agreement in order for the
acquisition to be consummated. Howard Wittner, trustee of the RBT
Trust II, dated September 28, 1990, has advised us of his
intention to vote the Trust's shares in favor of the stock
acquisition agreement and transactions contemplated thereby.
Because Mr. Wittner controls 88.4% of the outstanding shares of
our common stock, his vote is sufficient to approve the stock
acquisition agreement and transactions contemplated thereby.
Q. WHAT ARE MY TAX CONSEQUENCES AS A RESULT OF THE ACQUISITION?
A. There are no material tax consequences that will result from the
consummation of this transaction.
Q. WHEN AND WHERE IS THE SPECIAL MEETING?
A. The special meeting will take place at 10:00 a.m. Central Time on
Thursday, March 9, 2000, at the law offices of Wittner, Poger,
Spewak and Maylack, P.C., 7700 Bonhomme Avenue, Suite 400,
St. Louis, Missouri 63105.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the matters addressed in this
proxy statement or if you need additional copies of this proxy
statement, you should contact:
Lincoln Heritage Corporation
1250 Capital of Texas Highway
Building 3, Suite 100
Austin, Texas 78716
Attention: Brent D. Cassity
(314) 726-6706 (phone)
or
Clifton Mitchell
(512) 328-0075 (phone)
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SUMMARY
This summary, together with the preceding Questions and Answers
section, highlights selected information from this proxy statement and
does not contain all of the information that is important to you. To
understand the stock acquisition agreement and transactions contemplated
thereby fully and for a more complete description of the legal terms of
the stock acquisition agreement and transactions contemplated thereby,
you should carefully read this entire document and the other documents
to which we have referred you and the annexes attached to this proxy
statement. See "Where You Can Find More Information" on page 65. We
have included page references parenthetically to direct you to a more
complete description of the topics presented in this summary. A copy of
the stock acquisition agreement is attached as Annex B to this proxy
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statement. We encourage you to read the stock acquisition agreement in
full, since it is the legal document governing the transaction.
Throughout this proxy statement when we refer to the "acquisition,"
we mean the acquisition of the stock of Forever Enterprises by us as
described in the stock acquisition agreement. From and after the amendment
of our Amended and Restated Articles of Incorporation and consummation
of the acquisition, the operations of Forever Enterprises will be
wholly-owned by Lincoln Heritage, which will be renamed "Forever
Enterprises, Inc." Forever Enterprises will be renamed "Forever
Properties, Inc." upon consummation of the proposed transactions.
THE COMPANIES (pages 34 and 59)
Lincoln Heritage Corporation
1250 Capital of Texas Highway
Building 3, Suite 100
Austin, Texas 78716
(512) 328-0075
We are a life insurance holding company engaged in the ownership
and operation of life insurance companies and related services. 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. As of September 30, 1999, we reported, on a consolidated
basis, total assets of $159.5 million and shareholders' equity of $3.2
million. Lincoln Heritage Corporation is an insurance holding company
headquartered in Austin, Texas, and is not affiliated in any way with
Lincoln Heritage Life Insurance Company headquartered in Phoenix,
Arizona.
Forever Enterprises, Inc.
10 S. Brentwood, Suite 340
Clayton, Missouri 63105
(314) 726-3371
Forever Enterprises owns and operates cemetery properties in Los
Angeles, California and St. Louis and Independence, Missouri.
Currently, Forever Enterprises operates the Bellerive Cemetery in
St. Louis, the Mount Washington Cemetery in Independence, and the
Hollywood Forever Cemetery (f/k/a Hollywood Memorial Park Cemetery) in
Los Angeles. As of September 30, 1999, Forever Enterprises reported total
assets of $12.4 million and shareholder's equity of $5.6 million. All
of the issued and outstanding stock of Forever Enterprises is owned by
National Heritage Enterprises, which also owns 88.4% of the outstanding
shares of Lincoln Heritage.
THE SPECIAL MEETING (page 13)
Our special meeting of shareholders will be held at the law
offices of Wittner, Poger, Spewak and Maylack, P.C., 7700 Bonhomme
Avenue, Suite 400, St. Louis, Missouri 63105, on Thursday, March 9, 2000
at 10:00 a.m., Central Time. At the special meeting, shareholders will
consider and vote upon the proposed amendment of our Amended and
Restated Articles of Incorporation and the stock
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acquisition agreement and transactions contemplated thereby.
RECORD DATE; VOTING POWER (page 13)
Holders of shares of our common stock are entitled to receive
notice of, and vote at, the special meeting if they owned shares as of
the close of business on February 10, 2000, the record date for the
meeting.
On the record date, there were 4,533,259 shares of our common
stock entitled to vote at the special meeting. Holders of shares of our
common stock will have one vote at the special meeting for each share of
our common stock they owned on the record date.
VOTE REQUIRED (page 13)
The affirmative vote of the holders of at least two-thirds of the
outstanding shares of our common stock present in person or by proxy at
the special meeting is necessary to adopt the amendment to our Amended
and Restated Articles of Incorporation. The affirmative vote of the
holders of a majority of the outstanding shares of our common stock
present in person or by proxy at the special meeting is necessary to
approve the stock acquisition agreement and transactions contemplated
thereby.
VOTING BY OUR DIRECTORS AND EXECUTIVE OFFICERS (page 14)
On the record date, Howard A. Wittner, trustee of the RBT Trust
II, beneficially owned 4,000,500 shares of our common stock, or 88.4% of
the outstanding shares of our common stock. Mr. Wittner has advised us
that he intends to vote the Trust's shares in favor of the amendment to
our Amended and Restated Articles of Incorporation and the stock
acquisition agreement and transactions contemplated thereby.
Accordingly, this vote will be sufficient to adopt the amendment to our
Amended and Restated Articles of Incorporation and to approve the stock
acquisition agreement and transactions contemplated thereby. RBT Trust
II's beneficial ownership of Lincoln Heritage will increase from 88.4%
to 92.3% based upon the closing price of our common stock on February
10, 2000. Our other directors and executive officers also have
indicated that they intend to vote the shares of our common stock owned
by them in favor of the amendment to our Amended and Restated Articles
of Incorporation and in favor of the stock acquisition agreement and
transactions contemplated thereby.
REVOCABILITY OF PROXIES (page 15)
Our shareholders are being asked to sign and return to us the
proxy card accompanying this proxy statement as soon as possible. If
you are unable to attend the special meeting, a proxy card is attached
for use at the special meeting. You are requested to sign and return
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the enclosed proxy card as promptly as possible, whether you plan to
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attend the meeting in person or not. You may revoke your proxy at any
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time prior to the meeting or, if you do attend the meeting, you may
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revoke your proxy at that time, if you wish.
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SOLICITATION OF PROXIES (page 15)
We will bear the cost of soliciting proxies from our shareholders.
PROPOSAL ONE - AMENDMENT TO AMENDED AND RESTATED ARTICLES OF
INCORPORATION (page 16)
GENERAL
Your board of directors has approved an amendment to our Amended
and Restated Articles of Incorporation to change our corporate name to
"Forever Enterprises, Inc." Your board of directors believes that the
new corporate name will more closely reflect the strategic direction of
our business and allow the general public to more clearly associate our
corporate name with our products and services.
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BOARD OF DIRECTORS RECOMMENDATION TO SHAREHOLDERS (PAGE 16)
Your board of directors believes that the amendment to our Amended
and Restated Articles of Incorporation is in the best interests of
Lincoln Heritage and our shareholders and unanimously recommends that
you vote for the amendment to our Amended and Restated Articles of
Incorporation.
PROPOSAL TWO - THE ACQUISITION (page 17)
GENERAL
On December 20, 1999, Lincoln Heritage and National Heritage
Enterprises entered into the stock acquisition agreement. A copy of the
stock acquisition agreement is attached to this proxy statement as Annex B
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We encourage you to read the stock acquisition agreement in full,
since it is the legal document governing the transaction. The stock
acquisition agreement provides for us to acquire all of the capital
stock of Forever Enterprises in exchange for Lincoln Heritage common
stock with a market value of $12.0 million based on the closing price on
the day immediately preceding the closing date, provided that Lincoln
Heritage Corporation will not be obligated to issue more than 2.4 million
shares.
BACKGROUND OF THE TRANSACTION (page 17)
We believe we have been successful in implementing our business
strategy of building our company through increased insurance funded pre-
need sales coupled with insurance acquisition activity. The primary
source of new pre-need sales have been National Prearranged Services, a
marketing organization with which we have an exclusivity agreement, and
its affiliate, Forever Enterprises, a cemetery operator. After
assessing the current business environment in the funeral home and
cemetery industry, management identified what it believes is a unique
opportunity. With the largest companies in the industry having
difficulties from over-valuation of properties combined with their
aggressive buying strategy, management believes that there is an
opportunity to acquire cemetery properties at reasonable prices that did
not exist over the past few years, as these large companies significantly
scale back their acquisition strategies. This opportunity, together with
Forever Enterprises' proven operational program and Forever Memorial's
unique cemetery product, creates a unique opportunity to create growth
for our shareholders. In order to implement such a strategy, capital is
needed. Management believes that improved access to public capital
markets expected to be attained by this transaction will significantly
increase the likelihood of success of the business strategy. This
acquisition of Forever also brings under one corporate structure one of
the primary sources of our new sales and all of the company's operational
units.
BOARD OF DIRECTORS RECOMMENDATION TO SHAREHOLDERS (page 17)
Your board of directors has unanimously approved and adopted the
stock acquisition agreement and transactions contemplated thereby, and
has determined that the transactions are fair, from a financial point
of view to, and in the best interests of, Lincoln Heritage and our
shareholders. The board recommends that you vote for the approval
and adoption of the stock acquisition agreement and transactions
contemplated thereby.
OUR REASONS FOR THE TRANSACTION (page 17)
The following are among the factors your board of directors
considered in approving the stock acquisition agreement and transactions
contemplated thereby:
* the board's knowledge of our business, operations, properties,
assets, financial condition and operating results
* the business, operations, properties, assets, financial condition
and operating results of Forever Enterprises
- ------------------------------------------------------------------------
7
<PAGE>
<PAGE>
- ------------------------------------------------------------------------
* the opportunity to acquire unique properties
* the consistency of the stock acquisition with our long-term
business strategy
* our view that we are positioned to grow and compete successfully
in our operation of the businesses of Forever Enterprises and will
be able to achieve financial performance beyond what we would
achieve without the businesses of Forever Enterprises
* our belief that we can integrate successfully Forever Enterprises
into our existing business operations
* our belief that the acquisition of Forever Enterprises will permit
us to substantially enhance our presence in our primary markets
and in our core businesses
* the relationship between Forever Enterprises and our insurance
operations will be strengthened
* the complementary nature of our businesses
* the opinion of Crown Capital Corporation that the consideration to
be paid by Lincoln Heritage is fair to its shareholders from a
financial point of view
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE TRANSACTION
(page 18)
Some of the members of your board of directors and executive
officers have certain interests in the acquisition that are different
from or in addition to the interests of our shareholders generally.
These additional interests relate to the fact that the percentage of
beneficial ownership by the RBT Trust of Lincoln Heritage will increase.
Your board of directors was aware of these interests and considered
them, among other things, prior to approving the stock acquisition
agreement and transactions contemplated thereby. You should consider
these interests in assessing the acquisition and the recommendation of
your board that our shareholders vote to approve and adopt the stock
acquisition agreement and transactions contemplated thereby.
TRANSACTION CONSIDERATION (page 18)
In exchange for all of the issued and outstanding shares of stock
of Forever Enterprises, Lincoln Heritage will issue to National Heritage
shares of Lincoln Heritage common stock with a market value of
$12,000,000 based on the closing price on the trading day immediately
preceding the closing date of the transaction.
FAIRNESS OPINION OF FINANCIAL ADVISOR (page 19)
In deciding to approve the stock acquisition agreement and
transactions contemplated thereby, your board of directors considered
the opinion of its financial advisor, Crown Capital Corporation, as to
the fairness of the consideration to be received by our shareholders in
the acquisition from a financial point of view. This opinion is attached
as Annex A to this proxy statement. WE ENCOURAGE YOU TO READ CROWN
-------
CAPITAL CORPORATION'S OPINION CAREFULLY.
ACCOUNTING TREATMENT (page 20)
It is intended that the acquisition will be accounted for in a
manner similar to the pooling-of-interests method of accounting. See
"The Transaction - Accounting Treatment."
MATERIAL TAX CONSEQUENCES OF THE TRANSACTION (page 21)
There are no material tax consequences that will result from the
transaction.
REGULATORY MATTERS (page 21)
The acquisition is not subject to the prior approval of any
Federal or state regulatory authority.
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8
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DISSENTERS' RIGHTS (page 21)
Holders of our common stock are not entitled under Texas law or
under our Amended and Restated Articles of Incorporation to any
dissenters' rights, to seek appraisal of their shares or to any
preemptive rights in connection with the acquisition.
CONDITIONS TO THE TRANSACTION (page 23)
Our obligation to consummate the transaction depends on a number
of conditions being met (any of which may be waived in whole or in
part). These include:
* that the covenants, representations and warranties made by
National Heritage and contained in the stock acquisition agreement
are true on the closing date
* compliance by National Heritage with all covenants, agreements and
conditions contained in the stock acquisition agreement
* execution and delivery by National Heritage of instruments of
transfer that we may reasonably require to effectively carry out
the transfer of stock contemplated by the stock acquisition
agreement
* approval of the stock acquisition agreement by Lincoln Heritage
Corporation's shareholders
* receipt by us of an opinion from our financial advisor that the
consideration to be paid by Lincoln Heritage for the shares of
stock of National Heritage is fair to the shareholders of Lincoln
Heritage from a financial point of view
TERMINATION OF THE STOCK ACQUISITION AGREEMENT (page 25)
If any of the foregoing conditions are not met, we are not
obligated to close the transaction and, therefore, can terminate the
stock acquisition agreement.
The agreement also can be terminated upon mutual agreement of the
parties.
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SUMMARY OF HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA - LINCOLN
HERITAGE CORPORATION
We are providing the following summary of selected consolidated
financial data for us as of the dates and for the periods indicated, to
aid you in your analysis of the financial aspects of the acquisition.
Certain of the data presented here is derived from our consolidated
financial statements. The consolidated financial data as of December
31, 1998 and for the three years in the period ended December 31, 1998
have been derived from, and should be read in conjunction with, our
consolidated financial statements, which are included with this proxy
statement. The following table also sets forth consolidated financial
data as of September 30, 1999 and for the nine months ended
September 30, 1999 and 1998, which have been derived from, and should be
read in conjunction with, our unaudited condensed consolidated financial
statements, which are included with this proxy statement and which, in
the opinion of management, contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly our results of
operations for such period. You should read those financial statements
and related notes thereto and the selected consolidated financial data
for a further explanation of the financial data summarized herein. You
also should read the "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Lincoln Heritage" section which
describes a number of factors that have affected our financial results.
See "Where You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------------- ----------------------
1994 1995 1996 1997<F1> 1998<F1> 1998 1999
------- ------- ------- -------- -------- ------- -------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium income $24,001 $27,354 $33,274 $38,044 $41,363 $31,631 $33,358
Net investment income and
realized gains 3,908 4,514 5,729 8,838 12,575 9,184 7,680
Other revenue - - - - 748 213 173
------- ------- ------- ------- ------- ------- -------
Total revenues 27,909 31,868 39,003 46,882 54,686 41,028 41,211
Benefits incurred 19,563 20,775 24,750 31,151 33,088 27,753 26,206
Other expenses <F2> 11,848 9,625 13,351 13,404 19,142 13,981 16,395
------- ------- ------- ------- ------- ------- -------
Income (loss) before federal
taxes (3,502) 1,468 902 2,327 2,456 (706) (1,390)
Income taxes (benefits) (610) 317 197 672 440 (204) (331)
------- ------- ------- ------- ------- ------- -------
Net income (loss) $(2,892) $ 1,151 $ 705 $ 1,655 $ 2,016 $ (502) $(1,059)
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding
Basic 4,000 4,000 4,000 4,000 4,087 4,000 4,523
Diluted 4,000 4,000 4,000 4,000 4,190 4,000 4,523
Earnings (loss) per share:
Basic $ (.72) $ .29 $ .18 $ .41 $ .49 $ (.13) $ (.23)
Diluted (.72) .29 .18 .41 .48 (.13) (.23)
<PAGE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, 1998 ENDED SEPTEMBER 30, 1999
----------------- ------------------------
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA (UNAUDITED)<F4>:
Premium income $ 41,195 $ 33,172
Net investment income and realized gains 12,574 7,680
Cemetery revenues 2,151 2,065
Other revenue 748 173
---------- ----------
Total revenues 56,668 43,090
Benefits incurred 32,924 26,056
Other expenses 21,681 18,516
Other income 150 69
---------- ----------
Income (loss) before federal taxes 2,213 (1,413)
Income taxes (benefits) 358 (331)
---------- ----------
Net income (loss) $ 1,855 $ (1,082)
========== ==========
Weighted average shares outstanding
Basic 6,086,667 6,523,474
Diluted 6,189,804 6,523,474
Earnings (loss) per share:
Basic $ 0.30 $ (0.17)
Diluted 0.30 (0.17)
(footnotes on following page)
<CAPTION>
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10
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PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999<F5>
------------ ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA<F1><F3>:
Current assets $133,831 $123,962 $127,845
Total assets 164,073 159,496 170,339
Total policy liabilities 152,425 154,859 154,186
Shareholders' equity 8,815 3,173 7,950
<FN>
- ----------
<F1> Comparison of selected consolidated financial data in the table
above 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 year ended December 31, 1998,
amounts related to such assumption 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. As
of December 31, 1998, invested and total assets included
approximately $41,657 and policy liabilities included
approximately $42,048 associated with the assumption of the block
of life and annuity business from Woodmen Accident and Life
Company.
<F2> Other expenses for the years ended December 31, 1997 and 1998 and
the nine months ended September 30, 1998 and 1999 are net of
expense reimbursements from National Prearranged Services in the
amounts of $2,695, $2,254, $2,064 and $2,067, respectively.
<F3> Comparison of selected consolidated financial data in the table
above also is 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 World Insurance Company to Alabama
Reassurance Company. As of December 31, 1998 and September 30,
1999, invested and total assets included approximately $22,200 and
$21,700, respectively, and policy liabilities included
approximately $21,800, and $21,600, respectively, associated with
the business assumed from World Insurance Company.
<F4> Gives effect to the acquisition of Forever Enterprises as if such
acquisition had occurred as of the first day of the period
presented.
<F5> Gives effect to the acquisition of Forever Enterprises as if such
acquisition were consummated on September 30, 1999.
</TABLE>
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SUMMARY OF SELECTED FINANCIAL DATA - FOREVER ENTERPRISES
We are providing the following summary of selected consolidated
financial data for Forever Enterprises as of the dates and for the
periods indicated, to aid you in your analysis of the financial aspects
of the acquisition. The Forever Enterprises financial data as of and
for the year ended December 31, 1998 have been derived from, and should
be read in conjunction with, Forever Enterprises' audited financial
statements, which are included with this proxy statement. The Forever
Enterprises financial data for the two years in the period ended
December 31, 1997 have been derived from, and should be read in
conjunction with Forever Enterprises' unaudited financial statements
which are included with this proxy statement. The following table also
sets forth consolidated financial data as of September 30, 1999 and for
the nine months ended September 30, 1999 and 1998, which have been
derived from, and should be read in conjunction with, Forever
Enterprises' unaudited condensed financial statements included with this
proxy statement. In the opinion of management, all the unaudited
financial information presented below of Forever Enterprises, contains
all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly Forever Enterprises' financial condition as
of such dates and results of operations for such periods. You should
read the unaudited financial statements and related notes thereto and
the selected consolidated financial data for a further explanation of
the financial data summarized here. You also should read the
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of Forever Enterprises" section which describes a number
of factors that have affected Forever Enterprises' financial results.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------------------ -----------------------
1994 1995 1996<F1> 1997 1998 1998 1999
------- ------- -------- ------- ------- ------- -------
(UNAUDITED) (AUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Cemetery revenues $ 4,433 $ 5,883 $ 982 $ 1,622 $ 2,150 $ 1,364 $ 2,065
Expenses 3,059 5,431 1,081 1,295 2,539 1,610 2,121
------- ------- ------- ------- ------- ------- -------
Operating income (loss) 1,374 452 (99) 327 (389) (246) (56)
Other revenues (expenses) (151) 801 (80) (38) 150 (28) 69
------- ------- ------- ------- ------- ------- -------
Net income (loss) before
income taxes 1,223 1,253 (179) 289 (239) (274) 13
Income taxes (benefits) -- -- -- -- (82) -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,223 $ 1,253 $ (179) $ 289 $ (157) $ (274) $ 13
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding:
Basic 10,648 10,648 10,648 10,648 10,648 10,648 10,648
Diluted 10,648 10,648 10,648 10,648 10,648 10,648 10,648
Earnings (loss) per share:
Basic $114.86 $117.67 $(16.80) $ 27.15 $(14.73) $(25.73) $ 1.25
Diluted 114.86 117.67 (16.80) 27.15 (14.73) (25.73) 1.25
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:<F2>
Cemetery property, net $2,160 $ 2,133
Total assets 9,927 12,356
Notes payable 2,464 2,442
Shareholder's equity 3,001 5,619
<FN>
- ----------------
<F1> In February 1996, Forever Enterprises sold all of its funeral
homes and two of its cemetery properties.
<F2> At June 30, 1999, Forever Enterprises entered into an agreement
with its affiliated companies whereby net amounts due from Forever
Enterprises totaling approximately $2.6 million were capitalized.
In addition, Forever Enterprises' parent company, National
Heritage Enterprises, granted Forever Enterprises a 10% interest
in its common stock in exchange for approximately $2.0 million in
accounts receivable.
</TABLE>
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12
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THE SPECIAL MEETING
We are furnishing this proxy statement to our shareholders as part
of the solicitation of proxies from our shareholders by your board of
directors for use at the special meeting.
DATE, TIME AND PLACE
We will hold the special meeting at the law offices of Wittner,
Poger, Spewak and Maylack, P.C., 7700 Bonhomme Avenue, Suite 400,
St. Louis, Missouri 63105, 10:00 a.m., Central Time on Thursday,
March 9, 2000.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, we are asking holders of common stock to
approve and adopt the amendment to our Amended and Restated Articles of
Incorporation and the stock acquisition agreement and transactions
contemplated thereby. Your board of directors:
* has determined that the amendment to our Amended and
Restated Articles and the stock acquisition agreement and
transactions contemplated thereby are fair and in the best
interests of Lincoln Heritage and our shareholders;
* has unanimously approved the amendment to our Amended and
Restated Articles and the stock acquisition agreement and
transactions contemplated thereby; and
* unanimously recommends that holders of shares of Lincoln
Heritage common stock vote for the approval and adoption of
the amendment to our Amended and Restated Articles and the
stock acquisition agreement and transactions contemplated
thereby.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only record holders of shares of our common stock at the close of
business on February 10, 2000, the record date, are entitled to vote at
the special meeting. On the record date, 4,533,259 shares of our common
stock were issued and outstanding and held by approximately 67 holders
of record. Holders of record of shares of our common stock at the close
of business on the record date are entitled to one vote per share at the
special meeting.
A quorum is present at the special meeting if holders of a
majority of the outstanding shares of our common stock entitled to vote
are represented in person or by proxy. A quorum is necessary to hold
the special meeting. In the event that a quorum is not present at the
special meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. However, if a new record date
is set for the adjourned meeting, then a new quorum will have to be
established.
Once a share of our common stock is represented at the special
meeting, it will be counted for the purpose of determining a quorum at
the special meeting and any adjournment of the special meeting unless
the holder is present solely to object to the special meeting.
VOTE REQUIRED
Each share of our common stock outstanding on the record date is
entitled to one vote at the special meeting. The approval and adoption
of the amendment to our Amended and Restated Articles
13
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<PAGE>
requires the affirmative vote of the holders of at least two-thirds of
our common stock entitled to vote at the special meeting. The approval
and adoption of the stock acquisition agreement and transactions
contemplated thereby requires the affirmative vote of the holders of a
majority of the shares of common stock represented in person or by proxy
at the meeting.
VOTING BY LINCOLN HERITAGE DIRECTORS AND EXECUTIVE OFFICERS
At the close of business on the record date, our directors and
executive officers were entitled to vote 4,064,000 shares of our common
stock, or 89.6% of the shares outstanding on that date.
On the record date, Howard A. Wittner, trustee of the RBT Trust
II, was entitled to vote 4,000,500 shares of our common stock, or 88.4%
of our outstanding shares. Howard A. Wittner has advised us of his
intention to vote the Trust's shares in favor of the amendment to our
Amended and Restated Articles and in favor of the stock acquisition
agreement and the transactions contemplated thereby. Accordingly, this
vote is sufficient to approve the amendment to our Amended and Restated
Articles and the stock acquisition agreement and transactions
contemplated thereby. Our other directors and executive officers also
have indicated that they intend to vote the shares of our common stock
owned by them in favor of the stock acquisition agreement and
transactions contemplated thereby.
VOTING OF PROXIES
All shares of our common stock represented by properly submitted
proxies received in time for the special meeting will be voted at the
special meeting in the manner specified by the holders. Properly
submitted proxies that do not contain voting instructions will be voted
for the approval and adoption of the amendment to our Amended and
Restated Articles and the stock acquisition agreement and transactions
contemplated thereby.
If you are a record holder of shares of our common stock, in order
for your shares of common stock to be included in the vote, you must
vote your shares by one of the following means:
* in person; or
* by proxy by completing, signing and dating the enclosed
proxy and returning it in the enclosed postage-paid
envelope.
If you hold your shares of common stock in street name, you must follow
the instructions provided by your broker in order to vote your shares.
Shares of common stock represented at the special meeting but not
voting will be treated as present at the special meeting for determining
whether or not a quorum exists for the transaction of all business.
This includes shares of our common stock for which proxies have been
received but for which the holders of shares have abstained from voting.
If a broker or other nominee holder indicates on the proxy that it does
not have discretionary authority to vote the shares it holds of record
on a proposal, those shares will not be treated as present at the
special meeting for purposes of determining the presence of a quorum and
will not be considered as voted for purposes of determining the approval
of the shareholders on a particular proposal.
Only shares of our common stock voted for adoption and approval
of the amendment to our Amended and Restated Articles and the stock
acquisition agreement and transactions contemplated thereby, including
properly submitted proxies that do not contain voting instructions, will
be counted as
14
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favorable votes. Since the approval and adoption of the amendment
to our Amended and Restated Articles of Incorporation requires the
affirmative vote of the holders of at least two-thirds of our
outstanding shares of common stock and the approval and adoption of
the stock acquisition agreement and transactions contemplated thereby
requires the affirmative vote of the holders of a majority of our
outstanding shares, abstentions and broker non-votes will have the
effect of a vote against the amendment and the stock acquisition
agreement and transactions contemplated thereby.
REVOCABILITY OF PROXIES
Mailing the enclosed proxy card does not preclude you from voting
in person at the special meeting. You may revoke a proxy at any time
prior to the vote by:
* notifying our Secretary in writing of the revocation of your
proxy;
* submitting a duly executed proxy to our Secretary bearing a
later date; or
* appearing at the special meeting and voting in person.
Simply attending the special meeting, without voting at the
meeting, will not constitute revocation of a proxy.
SOLICITATION OF PROXIES
We will bear the cost of soliciting proxies from our shareholders.
In addition to the solicitation by mail, our directors, officers and
employees may solicit proxies in person, by telephone or by other
electronic means. These persons will not be paid for doing this.
We will have brokerage houses and other custodians, nominees and
fiduciaries forward solicitation materials to the beneficial owners
of outstanding shares of our common stock on the record date. We will
reimburse these persons for their reasonable out-of-pocket expenses in
doing so.
INDEPENDENT AUDITORS
We have been advised that representatives of Deloitte & Touche
LLP, our independent auditors, will participate by conference call
during the special meeting, and will be available to respond to
appropriate questions.
15
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<PAGE>
PROPOSAL ONE
AMENDMENT TO OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION TO
CHANGE OUR CORPORATE NAME TO "FOREVER ENTERPRISES, INC."
Your board has approved the following resolutions, subject to the
approval of our shareholders by the requisite vote at the Special
Meeting:
RESOLVED, that Article First of the Amended and
Restated Articles of Incorporation of Lincoln Heritage
Corporation (the "Corporation") be amended in its entirety
to read as follows:
FIRST: The name of the Corporation is Forever
Enterprises, Inc.; and
RESOLVED FURTHER, that the President and Chief
Executive Officer, the Vice President and Chief Financial
Officer or any Vice President of the Company shall be
authorized to execute the Certificate of Amendment to the
Corporation's Amended and Restated Articles of Incorporation
setting forth the amendment authorized in the immediately
preceding resolution and to file the same with the Secretary
of State of the State of Texas.
Your board of directors believes that the change of the corporate
name to "Forever Enterprises, Inc." will better reflect the planned
broadening of the scope of our business. The proposed transaction is
expected to expand our business into cemetery operations and related
services and strengthen our preneed life insurance business. While your
board believes that there is some goodwill associated with the "Lincoln
Heritage" name, your board believes that the new corporate name will
more closely reflect the strategic direction of our company and allow
the general public to more clearly associate our corporate name with our
products and services. If the proposed amendment to our Amended and
Restated Articles of Incorporation is approved and adopted by the
requisite vote of our shareholders at the Special Meeting, such
amendment will become effective when the Certificate of Amendment to our
Amended and Restated Articles of Incorporation is filed with the
Secretary of State of the State of Texas.
REQUIRED VOTE
Pursuant to Section 4.02(A)(3) of the Texas Business Corporation
Act, approval of the amendment to our Amended and Restated Articles of
Incorporation requires the affirmative vote of holders of at least two-
thirds of our outstanding shares of common stock.
RECOMMENDATION OF THE BOARD
THE BOARD OF DIRECTORS UNANIMOUSLY BELIEVES THE AMENDMENT TO OUR
AMENDED AND RESTATED ARTICLES OF INCORPORATION IS IN THE BEST INTERESTS
OF LINCOLN HERITAGE AND OUR SHAREHOLDERS, AND ACCORDINGLY, UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE AMENDMENT.
16
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PROPOSAL TWO
THE FOREVER ENTERPRISES TRANSACTION
BACKGROUND OF THE TRANSACTION; HISTORY OF NEGOTIATIONS AND RELATIONSHIP
BETWEEN LINCOLN HERITAGE AND FOREVER ENTERPRISES
We have sought to implement our business strategy of adding
shareholder value through increased insurance funded preneed sales
coupled with insurance acquisition activity. The primary sources of new
preneed sales have been National Prearranged Services, a marketing
organization with which we have an exclusivity agreement, and its
affiliated cemetery operator subsidiary, Forever Enterprises, Inc.
After assessing the current business environment in the funeral home and
cemetery industry, management identified what it believes is a unique
opportunity. With the largest companies in the industry having
difficulties from over-valuation of properties combined with an
aggressive buying strategy, management believes that there is an
opportunity to acquire cemetery properties at reasonable prices that did
not exist over the last few years caused by these large companies
significantly scaling back their acquisition strategy. This
opportunity, together with Forever Enterprises' proven operational
program and Forever Memorial's unique cemetery product, creates a unique
opportunity to create substantial growth for our shareholders. In order
to implement such a strategy, capital is needed. Management believes
that our access to public capital markets will be enhanced
significantly, which will increase the likelihood of success of the
business strategy. This acquisition of Forever also brings under one
corporate structure one of the primary sources of our new sales and all
of the company's operational units.
RECOMMENDATION OF YOUR BOARD; OUR REASON FOR TRANSACTION
Your board of directors has unanimously determined that the
acquisition is advisable and fair to and in the best interests of you
and your company and has approved the stock acquisition agreement and
the transactions contemplated thereby. ACCORDINGLY, YOUR BOARD
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE
STOCK ACQUISITION AGREEMENT AND TRANSACTIONS CONTEMPLATED THEREBY.
In reaching its determination that the acquisition is advisable
and fair to and in the best interests of you and your company, the board
considered a number of factors, which included (but did not consist
exclusively of) the following:
* the board's knowledge of our business, operations,
properties, assets, financial condition and operating
results
* the business, operations, properties, assets, financial
condition and operating results of Forever Enterprises
* the opportunity to acquire unique properties
* the consistency of the stock acquisition with our long-term
business strategy
* our view that we are positioned to grow and compete
successfully in our operation of the businesses of Forever
Enterprises and will be able to achieve financial
performance beyond what we would achieve without the
businesses of Forever Enterprises
17
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* our belief that we can integrate successfully Forever
Enterprises into our existing business operations
* our belief that the acquisition of Forever Enterprises will
permit us to enhance our presence in our primary markets and
in our core businesses
* the relationship between Forever Enterprises and our
insurance operations will be strengthened
* the complementary nature of our businesses
* the opinion of Crown Capital Corporation that the
consideration to be paid by Lincoln Heritage is fair to its
shareholders from a financial point of view
Your board also recognized that some members of the board and some
of our executive officers have interests in the acquisition that are
different from our other shareholders. See "--Benefits of the
Transaction to our Directors and Executive Officers."
The foregoing discussion of the information and factors discussed
by the board is not meant to be exhaustive but includes all material
factors considered by the board. In view of the complexity and wide
variety of information and factors considered, both positive and
negative, the board did not find it practical to quantify, rank or
otherwise attach any relative weight to the various factors. In
addition, the board did not reach any specific conclusion with respect
to each of the factors considered, or any aspect of any particular
factor, but conducted an overall analysis of these factors, including
thorough discussions with our management and legal and financial
advisors. As a result of its consideration of the foregoing, the board
determined that the stock acquisition agreement and transactions
contemplated thereby are advisable and fair to and in the best interests
of you and your company and approved the stock acquisition agreement and
transactions contemplated thereby.
BENEFITS OF THE TRANSACTION TO OUR DIRECTORS AND EXECUTIVE OFFICERS
When you consider your board of directors' recommendation to vote
for the acquisition agreement and transactions contemplated thereby, you
should be aware of interests which some of your directors and executive
officers have in the acquisition that are different from your and their
interests as Lincoln Heritage shareholders. These interests relate to
the fact that the percentage of beneficial ownership by the RBT Trust of
Lincoln Heritage will increase. Your board was aware of these and other
interests and specifically considered them before approving the
acquisition agreement and transactions contemplated thereby.
TRANSACTION CONSIDERATION
In exchange for all of the issued and outstanding shares of stock
of Forever Enterprises, Lincoln Heritage will issue to National Heritage
shares of Lincoln Heritage common stock with a market value of $12.0
million based on the closing price on the trading day immediately
preceding the closing date of the transaction, provided that Lincoln
Heritage Corporation shall not be obligated to issue more than 2.4
million shares.
18
<PAGE>
<PAGE>
OPINION OF THE FINANCIAL ADVISOR TO LINCOLN HERITAGE
Your board of directors retained Crown Capital Corporation as its
financial advisor in connection with the agreement with National
Heritage Enterprises and to render an opinion with respect to the
consideration to be paid by us in the acquisition. Our decision to
engage Crown Capital Corporation was based upon its experience and
expertise in reviewing merger and acquisition transactions. Crown
Capital Corporation is an investment banking firm that is regularly
engaged in the independent valuation of securities in connection with
acquisition transactions, mergers and recapitalizations.
Crown Capital was engaged to evaluate the fairness of the purchase
price proposed to be paid by us for Forever Enterprises. At a board
meeting held on December 20, 1999, our board of directors reviewed the
opinion of Crown Capital as well as the acquisition agreement and the
related analyses.
The full text of the Crown Capital opinion is attached to this
filing and describes the procedures followed, the information
considered, the limitations on the review and the opinion reached.
Crown Capital has consented to the inclusion of their opinion.
The Crown Capital opinion is directed to our board of directors.
It relates only to the fairness of the acquisition from a financial
point of view, does not address any other aspect of the acquisition and
does not constitute a recommendation to you as to how you should vote on
the proposed acquisition. The summary of the Crown Capital opinion in
this document is qualified in its entirety by reference to the full text
of that opinion.
In arriving at its opinion, Crown Capital considered the
following:
* certain publicly available information with respect to us
* financial forecasts for Forever Enterprises
* discussions with certain officers and employees of Lincoln
Heritage and Forever Enterprises regarding past and current
business operations and financial conditions
* financial studies, analyses, investigations and financial,
economic and market criteria of the companies and of other
companies in similar industries
In connection with its review, Crown Capital did not assume any
responsibility for independent verification of any of the information
provided to or otherwise reviewed by Crown Capital. Crown Capital
relied on this information being complete and accurate in all material
respects. With respect to the financial forecasts of Lincoln Heritage
and Forever Enterprises, Crown Capital assumed that they have been
reasonably prepared on bases reflecting the best currently available
estimates and judgments of the respective managements of Lincoln
Heritage or Forever Enterprises regarding future performance. Crown
Capital rendered no opinion with regard to the future forecasts. Crown
Capital also assumed that the acquisition will be consummated according
to the acquisition agreement. Crown Capital did not make an independent
evaluation or appraisal of the assets or liabilities of Lincoln Heritage
or Forever Enterprises.
The Crown Capital opinion was based on financial, economic, market
and other conditions as they existed and could be evaluated on the date
of the opinion. Crown Capital did not express any opinion as to the
actual value of our common stock when issued pursuant to the acquisition
agreement or as to the prices at which our common stock will trade after
the acquisition is complete.
19
<PAGE>
<PAGE>
In preparing its opinion, Crown Capital performed a variety of
financial analyses, including a discounted cash flow valuation. The
preparation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant
methods financial analyses and the application of those methods to the
particular circumstances. Therefore, such an opinion is not readily
susceptible to summary description. In arriving at its opinion, Crown
Capital made qualitative judgments as to the significance and relevance
of each analysis and factor considered by it. Accordingly, Crown
Capital believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, without considering
all analyses and factors, could create a misleading or incomplete view
of the processes underlying its analyses and the Crown Capital opinion.
In its analyses, Crown Capital made numerous assumptions with
respect to us and Forever Enterprises, industry performance, regulatory,
general business, economic, market and financial conditions and other
matters, many of which are beyond the control of Lincoln Heritage and
Forever Enterprises. No company, transaction or businesses used in
these analyses as a comparison is identical to Lincoln Heritage or
Forever Enterprises or the proposed acquisition. Moreover, an
evaluation of the results of these analyses is not entirely
mathematical; rather, these characteristics and other factors that could
affect the transaction, public trading or other values of the companies,
business segments or transactions being analyzed. The estimates
contained in these analyses and the ranges resulting from any particular
analysis are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less
favorable than those suggested by these analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which those businesses or
securities actually may be sold. Accordingly, these analyses and
estimates are inherently subject to substantial uncertainty.
The Crown Capital opinion and the financial analyses presented to
our board were among many factors considered by our board in its
evaluation of the acquisition and should not be viewed as determinative
of the views of our board or management with respect to the acquisition.
Pursuant to our engagement of Crown Capital, we agreed to pay
Crown Capital a cash fee of $30,000 or advisory services rendered in
connection with the transaction. We paid Crown Capital $15,000 of such
fee on commencement of their engagement and the remaining $15,000 when
they delivered their written opinion.
ACCOUNTING TREATMENT
We anticipate that we will account for the acquisition of Forever
Enterprises in a manner similar to a "pooling-of-interests" transaction
under generally accepted accounting principles. Under this method of
accounting, our shareholders and Forever Enterprises shareholders will
be deemed to have combined their existing common stock interests by
virtue of their common control by National Heritage Enterprises both
before and after the proposed transaction. Accordingly, the book value
of the assets, liabilities and shareholders' equity of Forever
Enterprises, as reported on its consolidated balance sheets, will be
carried over to our consolidated balance sheets. No goodwill will be
recognized. Upon consummation of the acquisition, our historical
consolidated financial statements will be restated to include the
financial position and results of operations of Forever Enterprises as
if the acquisition occurred at the beginning of the earliest period
presented.
We have prepared the unaudited pro forma financial information
contained in this proxy statement using an accounting method similar to
the "pooling-of-interests" to give effect to the acquisition. See "Pro
Forma Financial Information."
20
<PAGE>
<PAGE>
TAX CONSEQUENCES
There are no material tax consequences that will result from the
consummation of this transaction.
REGULATORY MATTERS
The acquisition is not subject to the prior approval of any
Federal or state regulatory authority.
DISSENTERS' RIGHTS
Holders of our common stock are not entitled under Texas law or
under our Amended and Restated Articles of Incorporation to any
dissenters' rights, to seek appraisal of their shares or to any
preemptive rights in connection with the acquisition.
RELOCATION OF HEADQUARTERS AND ELECTION OF OFFICERS
Upon consummation of the transaction, Lincoln Heritage Corporation
will continue to be incorporated in Texas; however, it currently is
anticipated that its corporate headquarters will be relocated to
10 South Brentwood, Clayton, Missouri 63105.
In connection with acquisition of Forever Enterprises, it also is
anticipated that once the transaction is consummated, the board of
directors will elect the following people to serve as the officers of
the company:
Howard A. Wittner - Chairman and Secretary
Brent D. Cassity - Chief Executive Officer
J. Tyler Cassity - Co-Chief Executive Officer (Technology,
Research and Development)
Clifton Mitchell - President and Chief Financial Officer
Randall K. Sutton - Vice President
21
<PAGE>
<PAGE>
THE STOCK ACQUISITION AGREEMENT
The following description summarizes the material provisions of
the stock acquisition agreement. You should carefully read the stock
acquisition agreement which is attached as Annex B to this proxy
-------
statement and incorporated herein by reference.
GENERAL
Subject to the terms and conditions of the stock acquisition
agreement, National Heritage will sell to Lincoln Heritage all of the
issued and outstanding shares of common stock of Forever Enterprises for
a purchase price of $12.0 million, provided Lincoln Heritage Corporation
shall not be obligated to issue more than 2.4 million shares. Forever
Enterprises has four wholly-owned subsidiaries: Forever Memorial, Inc.,
a Missouri corporation; BDC Properties, Inc., a Missouri corporation,
Dartmont Investment, Inc., a Delaware corporation, and Mount Washington
Forever, Inc., a Missouri corporation. Forever Enterprises directly and
indirectly through its subsidiary, Dartmont Investment, Inc., in the
aggregate also owns 90% of the issued and outstanding stock of Hollywood
Forever, Inc., a California corporation. Hollywood is the record owner
of real property located in Hollywood, California known as the Hollywood
Cemetery. In addition, Forever Enterprises also owns all of the
beneficial ownership units in Mason Securities Association, a Missouri
common law business trust. Mason is the record owner of real property
located in Creve Coeur, Missouri known as the Bellerive Cemetery.
TRANSACTION CONSIDERATION
In exchange for all of the issued and outstanding stock of Forever
Enterprises, Lincoln Heritage will issue to National Heritage a number
of shares of Lincoln Heritage common stock with a market value of
$12,000,000 based on the closing price on the trading day immediately
preceding the day the transaction closes.
REPRESENTATIONS AND WARRANTIES
In the stock acquisition agreement, we make representations and
warranties to National Heritage with respect to, among other things:
* the corporate organization and existence of Lincoln Heritage
* the corporate power and authority of Lincoln Heritage
* governmental and regulatory approvals
* compliance of the stock acquisition agreement with
- the articles of incorporation and bylaws of Lincoln
Heritage
- material agreements, instruments or obligations
- any judgment, decree, order or award
- applicable law
* financial statements
* validity of common stock
In the stock acquisition agreement, National Heritage makes
representations and warranties to us with respect to, among other
things:
* the corporate organization and existence of National
Heritage
* the corporate power and authority of National Heritage
22
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<PAGE>
* ownership by National Heritage of the common stock of
Forever Enterprises
* the corporate organization and existence of Forever
Enterprises and its subsidiaries
* ownership by Forever Enterprises of 90% of the common stock
of Hollywood Forever Enterprises
* ownership by Forever Enterprises of all business units of
Mason Securities Association
* assets and liabilities of Forever Enterprises and its
subsidiaries
* the filing and accuracy of the tax returns of Forever
Enterprises and any subsidiary
* pending litigation to which Forever Enterprises or any of
its subsidiaries is a party
* violation of law by National Heritage, Forever Enterprises,
or any of its subsidiaries
* the absence of environmental liabilities of Forever
Enterprises or any of its subsidiaries
* labor and employment agreements of Forever Enterprises or
any of its subsidiaries
* the compliance of the stock acquisition agreement with:
- articles of incorporation and bylaws of National
Heritage and Forever Enterprises
- any judgment, decree, order or award
- applicable law
- material agreements, instruments and obligations
* governmental approvals required with respect to National
Heritage
* financial statements of Forever Enterprises
* the absence of undisclosed liabilities of Forever
Enterprises or any of its subsidiaries
* the absence of material changes or events with respect to
the business of Forever Enterprises or any of its
subsidiaries since December 31, 1998
* investment representations of National Heritage with respect
to stock received from Lincoln Heritage
CONDITIONS TO CLOSING
Our obligation to effect the acquisition is subject to the
satisfaction or waiver, on or prior to the closing date of the
acquisition, of the following customary closing conditions:
* that the covenants, representations and warranties of
National Heritage and Forever Enterprises are true on the
closing date of the transaction
* that National Heritage and Forever Enterprises have
performed or complied with all covenants, agreements and
conditions required by the stock acquisition agreement by
the closing date of the transaction
* that National Heritage has executed and delivered all
instruments of transfer that we may reasonably request to
effectively carry out the transfer of the Forever
Enterprises stock owned by National Heritage
* the stock acquisition agreement and the transactions it
contemplates will have been duly approved by our
shareholders
* we shall have received from our financial advisor an
opinion, dated as of the date of this proxy statement, that
the consideration to be paid by Lincoln Heritage for the
shares of National Heritage is fair to the shareholders of
Lincoln Heritage from a financial point of view
CONDUCT OF BUSINESS PENDING THE STOCK ACQUISITION
Under the stock acquisition agreement, prior to the closing date
of the transaction, National Heritage has agreed to:
23
<PAGE>
<PAGE>
* allow employees, attorneys, accountants and other authorized
representatives of Lincoln Heritage free and full access to
the offices, properties, books, records, documents and
correspondence of Forever Enterprises and all of the work
papers and other documents relating to Forever Enterprises
in the possession of its auditors or counsel, in order that
Lincoln Heritage may have full opportunity to make such
investigation as it may desire of the property, assets and
the business of Forever Enterprises
* use its best efforts to preserve the businesses and business
organizations of Forever Enterprises and its subsidiaries,
to keep available to Lincoln Heritage their present
employees and to preserve their present relationships with
their customers and others having business relations with
them
* to continue to operate the businesses of Forever Enterprises
and its subsidiaries in their normal and customary manner
and to not make any changes in their policies or methods of
operations and to maintain all of their real property and
improvements, equipment, furniture, fixtures and other
assets in good order and repair
* to not further mortgage, pledge or subject to any lien,
charge or encumbrance, any of the assets of Forever
Enterprises or any of its subsidiaries, exclusive of liens
arising as a matter of law in the ordinary course of
business as to which there is no known default
* to not sell, assign, transfer or otherwise dispose of any of
the inventory or assets of Forever Enterprises or its
subsidiaries other than in the ordinary course of business
* to not amend the articles of incorporation or bylaws of
Forever Enterprises or its subsidiaries (other than the name
change approved by Lincoln Heritage)
* to not enter into any transaction material in nature or
amount other than in the ordinary and usual course of
business of Forever Enterprises or its subsidiaries
* to maintain the books, accounts and records of Forever
Enterprises and its subsidiaries in the usual, regular and
ordinary manner on a basis consistent with that which is
currently employed
* to conduct the businesses of Forever Enterprises and its
subsidiaries in accordance with all applicable laws, rules
and regulations of relevant city, state and federal
governments
* with respect to Forever Enterprises and its subsidiaries, to
maintain in full force and effect existing insurance
policies to cover and protect against loss or damage to
their respective assets, all presently existing health
insurance, and all fidelity insurance, if any, presently
carried
* to not increase any compensation of any officer, employee or
agent of Forever Enterprises or its subsidiaries, or make
any bonus payments or arrangements with any such person
* with respect to Forever Enterprises or its subsidiaries, to
not declare, set aside, pay or make any dividend in cash,
property or stock, or redeem, purchase, issue or acquire any
of the shares, or any options or warrants or make any
distribution of any kind or make any other
24
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<PAGE>
changes in the capital structure of Forever or its
subsidiaries, or agree to do or permit any of the foregoing
to be done
TERMINATION
The obligation of Lincoln Heritage to consummate the acquisition
is subject to the satisfaction of the following conditions (any of which
may be waived in whole or in part by Lincoln Heritage):
* the covenants, representations and warranties of National
Heritage contained in the stock acquisition agreement must
be true on the closing date
* National Heritage must have performed or complied with all
covenants, agreements and conditions required by the stock
acquisition agreement by the closing date
* National Heritage must execute and deliver all instruments
of transfer as Lincoln Heritage may reasonably require to
effectively carry out the transfer of the stock contemplated
by the stock acquisition agreement
* the shareholders of Lincoln Heritage must approve the stock
acquisition agreement
* Lincoln Heritage must receive from its financial advisor an
opinion, dated as of the date of this proxy statement, that
the consideration to be paid by Lincoln Heritage for the
shares of National Heritage is fair to the shareholders of
Lincoln Heritage
If any of the foregoing conditions are not satisfied, the stock
acquisition agreement may be terminated by Lincoln Heritage.
The stock acquisition agreement may also be terminated upon mutual
agreement by the parties.
25
<PAGE>
<PAGE>
PRO FORMA FINANCIAL INFORMATION
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth for the periods indicated selected
historical per share data of Lincoln Heritage and Forever Enterprises
and the corresponding pro forma and pro forma equivalent per share
amounts giving effect to the proposed acquisition. The data presented
is based upon the consolidated financial statements and related notes of
Lincoln Heritage and Forever Enterprises included herein and the pro
forma combined consolidated balance sheet and income statements,
including the notes thereto, appearing elsewhere herein. This
information should be read in conjunction with such historical and pro
forma financial statements and related notes thereto. The assumptions
used in the preparation of this table appear in the notes to the pro
forma financial information appearing elsewhere in this proxy statement.
This data is not necessarily indicative of the results of the future
operations of the combined organization or the actual results that would
have occurred if the proposed acquisition had been consummated prior to
the periods indicated. Neither Lincoln Heritage nor Forever Enterprises
paid any dividends on its capital stock during the nine months ended
September 30, 1999 or the three years ended December 31, 1998.
<TABLE>
<CAPTION>
LINCOLN LINCOLN
HERITAGE/ HERITAGE/
FOREVER FOREVER
LINCOLN FOREVER ENTERPRISES ENTERPRISES
HERITAGE ENTERPRISES PRO FORMA PRO FORMA
REPORTED REPORTED COMBINED<F1> EQUIVALENT<F2>
-------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Book value per share:
September 30, 1999 $ .70 $527.70 $ 1.22 $263.20
December 31, 1998 2.16 281.87 1.94 364.72
Basic earnings (loss) per share:
Nine months ended September 30, 1999 $(0.23) $ (1.25) $(0.17) $(26.32)
Year ended December 31, 1998 0.49 (14.73) 0.30 56.40
Year ended December 31, 1997 0.41 27.15 0.31 58.28
Year ended December 31, 1996 0.18 (16.80) 0.07 16.92
Diluted earnings (loss) per share:
Nine months Ended September 30, 1999 $(0.23) $ (1.25) $(0.17) $(26.32)
Year ended December 31, 1998 0.48 (14.73) 0.30 56.40
Year ended December 31, 1997 0.41 27.15 0.31 58.28
Year ended December 31, 1996 0.18 (16.80) 0.07 16.92
Market price/book value per share:
At February 10, 2000<F3> $ 4.88 $527.70
<FN>
- -------------
<F1> Includes the effect of pro forma adjustments for Forever
Enterprises, as appropriate. See "Pro Forma Financial
Information--Notes to Pro Forma Combined Consolidated
Financial Statements."
<F2> Based on the pro forma combined per share amounts multiplied
by 188, the assumed exchange ratio applicable to one share
of Forever Enterprises common stock in the acquisition.
Further explanation of the assumptions used in the
preparation of the pro forma combined consolidated financial
statements is included in the notes to pro forma combined
consolidated financial statements. See "Pro Forma Financial
Information--Notes to Pro Forma Combined Condensed Financial
Statements."
<F3> The market value of our common stock disclosed as of
February 10, 2000, the last trading day preceding the public
announcement of the acquisition and the last practicable
date prior to the mailing of this proxy statement, is based
on the last sale price as reported on the Pacific Stock
Exchange. The market value of Forever Enterprises common
stock disclosed as of February 10, 2000, the last trading
day preceding the public announcement of the acquisition and
the last practicable date prior to the mailing of this proxy
statement, is based on the book value per share of common
stock as of September 30, 1999.
</TABLE>
26
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<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma combined condensed balance sheet
gives effect to the acquisition of Forever Enterprises as if it were
consummated on September 30, 1999.
The unaudited pro forma combined condensed statements of
operations for the nine months ended September 30, 1999 and for the
years ended December 31, 1998, 1997 and 1996 set forth the results of
operations of Lincoln Heritage combined with the results of operations
of Forever Enterprises as if such acquisition had occurred as of the
first day of the period presented.
The unaudited pro forma combined condensed financial statements
should be read in conjunction with the accompanying Notes to the Pro
Forma Combined Condensed Financial Statements and with the historical
financial statements of Lincoln Heritage and Forever Enterprises. These
pro forma combined condensed financial statements may not be indicative
of the results of operations that actually would have occurred if the
proposed acquisition had been consummated on the dates assumed above or
of the results of operations that may be achieved in the future.
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<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999 (UNAUDITED)
<CAPTION>
LINCOLN FOREVER PRO FORMA PRO FORMA
HERITAGE ENTERPRISES ADJUSTMENTS COMBINED
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 25,695,254 $ 16,844 $ -- $ 25,712,098
Investment in National Heritage Enterprises, Inc. -- 2,000,000 (805,502)<Ff> 1,194,498
Fixed maturity investments 71,076,038 -- -- 71,076,038
Common stocks 5,216,974 -- -- 5,216,974
Policy loans 21,973,465 -- -- 21,973,465
Trade accounts receivable, net -- 2,672,241 -- 2,672,241
------------ ----------- ----------- ------------
Current assets 123,961,731 4,689,085 (805,502)<Ff> 127,845,314
Cemetery property, net -- 2,132,990 -- 2,132,990
Property and equipment, net 1,447,980 2,857,589 -- 4,305,569
Deferred policy acquisition costs, net 19,750,731 -- -- 19,750,731
Cost of policies acquired, net 3,050,297 -- -- 3,050,297
Goodwill 1,358,017 -- -- 1,358,017
Other assets 9,927,293 2,676,924 (708,499)<Fa>,<Fe> 11,895,718
------------ ----------- ----------- ------------
Total assets $159,496,049 $12,356,588 $(1,514,001) $170,338,636
============ =========== =========== ============
LIABILITIES
Policy liabilities
Future policy benefits $114,331,574 $ -- $ (672,389)<Fa> $113,659,185
Policyholder deposits 40,527,061 -- -- 40,527,061
Deferred preneed revenues -- 3,519,329 -- 3,519,329
Notes payable -- 2,442,309 -- 2,442,309
Other 1,464,746 776,049 -- 2,240,795
------------ ----------- ----------- ------------
Total liabilities 156,323,381 6,737,687 (672,389) 162,388,679
------------ ----------- ----------- ------------
TOTAL STOCKHOLDERS' EQUITY 3,172,668 5,618,901 (841,612) 7,949,957
------------ ----------- ----------- ------------
Total liabilities and stockholders' equity $159,496,049 $12,356,588 $(1,514,001) $170,338,636
============ =========== =========== ============
See Notes to Pro Forma Combined Condensed Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<CAPTION>
LINCOLN FOREVER PRO FORMA PRO FORMA
HERITAGE ENTERPRISES ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Life insurance premiums $33,357,696 $ -- $(185,877)<Fb> $33,171,819
Investment income, net of expenses 7,526,920 -- -- 7,526,920
Realized investment gains 153,002 -- -- 153,002
Cemetery revenues -- 2,064,886 -- 2,064,886
Other 173,182 -- -- 173,182
----------- ---------- --------- -----------
Total revenue 41,210,800 2,064,886 (185,877) 43,089,809
----------- ---------- --------- -----------
BENEFITS AND EXPENSES
Policy benefits 14,513,886 -- (78,793)<Fc> 14,435,093
Increase in future policy benefits 10,130,252 -- (70,974)<Fd> 10,059,278
Interest paid on deposit funds 1,561,942 -- -- 1,561,942
Selling, general and administrative expenses 18,605,624 1,657,624 -- 20,263,248
Change in deferred acquisition costs (2,869,253) -- -- (2,869,253)
Amortization cost of policies purchased 658,362 -- -- 658,362
Other operating costs -- 462,730 -- 462,730
----------- ---------- --------- -----------
Total benefits and expenses 42,600,813 2,120,354 (149,767) 44,571,400
----------- ---------- --------- -----------
Other income -- 68,804 -- 68,804
----------- ---------- --------- -----------
Income (loss) before income taxes (1,390,013) 13,336 (36,110) (1,412,787)
----------- ---------- --------- -----------
Income tax benefit (330,563) -- -- (330,563)
----------- ---------- --------- -----------
Net income (loss) $(1,059,450) $ 13,336 $ (36,110) $(1,082,224)
=========== ========== ========= ===========
Income (loss) per share
Basic $ (0.23) $ 1.25 $ (0.17)
Diluted (0.23) 1.25 (0.17)
Weighted average shares outstanding
Basic 4,523,474 10,648 6,523,474
Diluted 4,523,474 10,648 6,523,474
See Notes to Pro Forma Combined Condensed Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<CAPTION>
LINCOLN FOREVER PRO FORMA PRO FORMA
HERITAGE ENTERPRISES ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Life insurance premiums $41,363,384 $ -- $(168,086)<Fb> $41,195,298
Investment income, net of expenses 10,638,406 -- -- 10,638,406
Realized investment gains 1,935,935 -- -- 1,935,935
Cemetery revenues -- 2,150,577 -- 2,150,577
Other 747,848 -- -- 747,848
----------- ---------- --------- -----------
Total revenue 54,685,573 2,150,577 (168,086) 56,668,064
----------- ---------- --------- -----------
BENEFITS AND EXPENSES
Policy benefits 19,572,361 -- (113,591)<Fc> 19,458,770
Increase in future policy benefits 12,019,701 -- (50,618)<Fd> 11,969,083
Interest paid on deposit funds 1,495,680 -- -- 1,495,680
Selling, general and administrative expenses 21,808,305 1,827,143 -- 23,635,448
Change in deferred acquisition costs 711,564 -- -- 711,564
Amortization cost of policies purchased (4,326,608) -- -- (4,326,608)
Other operating costs 948,452 712,238 -- 1,660,690
----------- ---------- --------- -----------
Total benefits and expenses 52,229,455 2,539,381 (164,209) 54,604,627
----------- ---------- --------- -----------
Other income -- 149,864 -- 149,864
----------- ---------- --------- -----------
Income (loss) before income taxes 2,456,118 (238,940) (3,877) 2,213,301
----------- ---------- --------- -----------
Provision for income tax 440,459 (82,120) -- 358,339
----------- ---------- --------- -----------
Net income (loss) $ 2,015,659 $ (156,820) $ (3,877) $ 1,854,962
=========== ========== ========= ===========
Earnings (loss) per share
Basic $ 0.49 $ (14.73) $ 0.30
Diluted 0.48 (14.73) 0.30
Weighted average shares outstanding
Basic 4,086,667 10,648 6,086,667
Diluted 4,189,804 10,648 6,189,804
See Notes to Pro Forma Combined Condensed Financial Statements.
</TABLE>
30
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<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
<CAPTION>
LINCOLN FOREVER PRO FORMA PRO FORMA
HERITAGE ENTERPRISES ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Life insurance premiums $38,044,470 $ -- $(188,204)<Fb> $37,856,266
Investment income, net of expenses 6,171,215 -- -- 6,171,215
Realized investment gains 2,666,448 -- -- 2,666,448
Cemetery revenues -- 1,622,356 -- 1,622,356
----------- ---------- --------- -----------
Total revenue 46,882,133 1,622,356 (188,204) 48,316,285
----------- ---------- --------- -----------
BENEFITS AND EXPENSES
Policy benefits 13,667,217 -- (133,518)<Fc> 13,533,699
Increase in future policy benefits 16,432,947 -- 463 <Fd> 16,433,410
Interest paid on deposit funds 1,051,087 -- -- 1,051,087
Selling, general and administrative expenses 14,546,636 956,112 -- 15,502,748
Change in deferred acquisition costs (1,405,263) -- -- (1,405,263)
Amortization cost of policies purchased 262,188 -- -- 262,188
Other operating costs -- 338,763 -- 338,763
----------- ---------- --------- -----------
Total benefits and expenses 44,554,812 1,294,875 (133,055) 45,716,632
----------- ---------- --------- -----------
Other income (expense) -- (38,428) -- (38,428)
----------- ---------- --------- -----------
Income before income taxes 2,327,321 289,053 (55,149) 2,561,225
----------- ---------- --------- -----------
Provision for income tax 671,895 -- -- 671,895
----------- ---------- --------- -----------
Net income $ 1,655,426 $ 289,053 $ (55,149) $ 1,889,330
=========== ========== ========= ===========
Earnings per share
Basic $ 0.41 $ 27.15 $ 0.31
Diluted 0.41 27.15 0.31
Weighted average shares outstanding
Basic 4,000,000 10,648 6,000,000
Diluted 4,000,000 10,648 6,000,000
See Notes to Pro Forma Combined Condensed Financial Statements.
</TABLE>
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<TABLE>
LINCOLN HERITAGE CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
<CAPTION>
LINCOLN FOREVER PRO FORMA PRO FORMA
HERITAGE ENTERPRISES ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Life insurance premiums $33,273,417 $ -- $(303,943)<Fb> $32,969,474
Investment income, net of expenses 3,710,720 -- -- 3,710,720
Realized investment gains 2,018,362 -- -- 2,018,362
Cemetery revenues -- 981,559 -- 981,559
----------- ---------- --------- -----------
Total revenue 39,002,499 981,559 (303,943) 39,680,115
----------- ---------- --------- -----------
BENEFITS AND EXPENSES
Policy benefits 16,915,116 -- (69,592)<Fc> 16,845,524
Increase in future policy benefits 7,621,130 -- (128,995)<Fd> 7,492,135
Interest paid on deposit funds 214,054 -- -- 214,054
Selling, general and administrative expenses 14,619,857 873,111 -- 15,492,968
Change in deferred acquisition costs (1,269,257) -- -- (1,269,257)
Amortization cost of policies purchased -- -- -- --
Other operating costs -- 207,676 -- 207,676
----------- ---------- --------- -----------
Total benefits and expenses 38,100,900 1,080,787 (198,587) 38,983,100
----------- ---------- --------- -----------
Other income (expense) -- (79,642) -- (79,642)
----------- ---------- --------- -----------
Income (loss) before income taxes 901,599 (178,870) (105,356) 617,373
----------- ---------- --------- -----------
Provision for income tax 196,969 -- -- 196,969
----------- ---------- --------- -----------
Net income (loss) $ 704,630 $ (178,870) $(105,356) $ 420,404
=========== ========== ========= ===========
Earnings (loss) per share
Basic $ 0.18 $ (16.80) $ 0.07
Diluted 0.18 (16.80) 0.07
Weighted average shares outstanding
Basic 4,000,000 10,648 6,000,000
Diluted 4,000,000 10,648 6,000,000
See Notes to Pro Forma Combined Condensed Financial Statements.
</TABLE>
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LINCOLN HERITAGE CORPORATION
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The acquisition of the capital stock of Forever Enterprises is
expected to be accounted for at historical cost in a manner similar to a
pooling-of-interests transaction. Under the stock acquisition
agreement, the number of shares of our common stock to be issued will be
based on the market price of our common stock as of the closing date.
For purposes of these pro forma combined condensed financial statements,
the number of shares of our common stock to be issued in exchange for
all of the capital stock of Forever Enterprises is based upon an assumed
fair market price for our common stock of $6.00 per share. Based on an
acquisition price of $12.0 million, the number of shares of our common
stock to be issued at an assumed fair market value of $6.00 per share
would be 2,000,000.
The following pro forma adjustments represent adjustments
necessary to eliminate intercompany transactions between entities:
[FN]
<Fa> To eliminate the value of insurance policies in trust on
preneed contracts and related policy liabilities.
<Fb> To eliminate intercompany insurance premiums.
<Fc> To eliminate intercompany policy benefits.
<Fd> To eliminate the increase in future policy benefits
resulting from the increase in the value of insurance
policies in trust on preneed contracts.
<Fe> To eliminate deferred preneed expenses resulting from the
elimination of premiums and benefits.
<Ff> To eliminate reciprocal ownership interest of Lincoln
Heritage Corporation.
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CERTAIN INFORMATION REGARDING LINCOLN HERITAGE CORPORATION
GENERAL
We are a life insurance holding company engaged in the ownership
and operation of life insurance companies and related services. We are
not affiliated in any way with Lincoln Heritage Life Insurance Company
headquartered in Phoenix, Arizona. 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 NPS 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.
Lincoln Heritage was 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 Lincoln Memorial Life Insurance Company (formerly
known as World Service Life Insurance Company of America) in 1998.
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 the 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.
Effective September 1, 1997, we acquired a block of life insurance
and annuity policies from Woodmen Accident and Life Company for a
purchase price of approximately $3.5 million. In connection with this
transaction, we assumed approximately $51 million of insurance
liabilities and received approximately $48 million in cash.
Effective April 1, 1998, we acquired a block of life insurance and
annuity policies through coinsurance from World Insurance Company for a
purchase price of approximately $2.0 million. In connection with this
transaction, we assumed approximately $21.9 million of insurance
liabilities and received approximately $19.9 million in assets.
On May 15, 1998, we acquired all of the outstanding stock of
Lincoln Memorial Life Insurance Company for total consideration of
$5.5 million. Lincoln Memorial Life Insurance Company had no active
policies in-force; however, Lincoln Memorial Life Insurance Company is
licensed to conduct business in 42 states and the District of Columbia.
This acquisition expanded the number of states in which we are licensed
to conduct business.
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 had
approximately $31 million in assets and $30 million in liabilities.
The acquisition will be accounted for using the purchase method.
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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 is reinsured by another
of our insurance subsidiaries, the sale of New Life Insurance is not
expected to have a material adverse 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's stockholder's
equity. Dixie National's insurance operation consists of a closed block
of life and annuity policies. Dixie National 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.
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. Any decision to acquire a block of business or
an insurance company will depend on our assessment of various factors.
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 believe we are well positioned to enhance the profitability of
the businesses we acquire. 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 through the
integration of systems and administration, we believe we can achieve
other cost savings through the elimination or reduction of management
and staff, home office and marketing expense where appropriate.
By contrast, the acquisition of Lincoln Memorial Life Insurance
Company was of a substantially non-operating company acquired primarily
for its state licenses. No significant savings in expense were
anticipated as a result of this transaction; however, we believe the
acquisition of Lincoln Memorial Life Insurance Company afforded access
to markets in 14 additional states more expeditiously and for a cost
lower than that which would be required if our insurance subsidiaries
had obtained licenses themselves.
Another component of our strategy is to grow by increasing sales
of our insurance to fund prearranged funeral contracts sold by National
Prearranged Services and annuity products issued by its subsidiary
insurers. In addition, we believe our acquisitions may 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 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.
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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. 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 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 acquisition
risks and other liabilities through seller contractual indemnification
and other techniques.
NATIONAL PREARRANGED SERVICES, INC.
National Prearranged Services, an affiliate, 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'
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
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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 (not us) 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: (1) persistency; (2) mortality (for life insurance); (3) return
on cash invested by the insurer during the life of the policy; and (4)
expenses of acquiring and administering the policies.
OPERATIONS AND ADMINISTRATION
We emphasize a high level of service to agents and policyholders
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.
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As part of our 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, 1998, the
average, annual interest rate credited on our total reserve liability
was approximately 7.3% per annum, and the average yield of our
investment portfolio was approximately 8.6%. 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 September 30, 1999, approximately 95% of the book value
of our fixed maturity investments consisted of investment grade
securities.
We periodically review our existing portfolio of below investment
grade securities and intend to maintain the holdings of such securities
at or below the September 30, 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 our 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 our life insurance
products, we perform periodic studies to compare current experience for
mortality, interest and lapse rates with projected experience used in
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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. 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.
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, 1997 or 1996 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 the life insurance and annuity policies that
we acquired from Woodmen Accident and Life Company and World Insurance
Company. Such amounts were $90,335 and $69,259 for the year ended
December 31, 1998 and the nine months ended September 30, 1999.
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EMPLOYEES
At September 30, 1999, we had approximately 85 employees. We
believe that we enjoy good relations with our employees and agents.
FACILITIES
Memorial Service Life Insurance Company leases approximately
25,000 square feet in an office building located at 10 S. Brentwood,
St. Louis, Missouri under the terms of a lease that expires in
June 2002. Memorial 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 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 may be necessary. We currently do not foresee
any material difficulties with leasing additional space that may be
required in the foreseeable future.
GOVERNMENT REGULATION
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 and it is uncertain when, or if, the states in which
the insurance companies are domiciled will require adoption of the
codification for the preparation of statutory financial statements.
In December 1992, the National Association of Insurance
Commissioners adopted the Risk-Based Capital for Life and/or Health
Insurers Model Act. Such 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 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, 1998 and September 30, 1999, the total adjusted capital
for each of our subsidiaries met or exceeded the required minimum
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
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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: (1) net gain from operations; or (2) 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 Texas Department of
Insurance of their intention to enter into such transactions and 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 underwent such an examination during 1998
for the period ended December 31, 1997. New Life Insurance Company
underwent such an examination during 1998 for the period ended
December 31, 1997. The final reports on the examinations issued by
Texas Department of Insurance did not raise any issues we believe to be
significant.
In October 1996, Texas Department of Insurance issued an order and
letter to Memorial Service Life Insurance Company and New Life Insurance
Company, respectively, to comply with certain administrative and
investment guidelines, including those relating to permissible
investments. Memorial Service Life Insurance Company and New Life
Insurance Company had invested a portion of their assets in derivative
instruments in the belief that these instruments were allowed under
Texas insurance investment guidelines. The Texas Department of
Insurance alleged that these investments were not in compliance with
state guidelines. We complied with the Texas Department of Insurance's
position, immediately ceased investing in derivative instruments and
liquidated our existing portfolio with a net gain in excess of $1.0
million. In May 1997, Memorial Service Life Insurance Company and New
Life Insurance Company demonstrated to the Texas Department of Insurance
that they had fully complied with all applicable guidelines and
regulations, the companies agreed to furnish quarterly compliance
reports to the Texas Department of Insurance and the department released
the companies from the order. Subsequently, Texas investment
regulations were changed to allow investments in derivatives on a
restricted basis.
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LEGAL PROCEEDINGS
National Prearranged Services and 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' methods
of funding pre-arranged funeral contracts with policies issued by us.
During 1999, the suit was settled 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.
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MARKET PRICE OF THE COMMON STOCK AND RELATED MATTERS
Our common stock trades on the Pacific Exchange under the symbol
"LHC." 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).
<TABLE>
<CAPTION>
PRICE RANGE
----------------------
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
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 6.937 5.125
Year ending December 31, 2000:
First Quarter (through February 10, 2000) 5.063 4.750
</TABLE>
On February 10, 2000, the last reported closing sale price for our
common stock on the Pacific Exchange was $4.875 per share. As of
February 10, 2000, there were approximately 67 holders of record of
shares of our common stock.
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. Your board of
directors also plans to 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 your 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 may deem relevant.
HIGH AND LOW SALE PRICES OF OUR COMMON STOCK AS OF THE DATE PRECEDING
PUBLIC ANNOUNCEMENT OF TRANSACTION
The following table sets forth the high and low prices per share
of our common stock on the Pacific Exchange on February 10, 2000, which
was the last trading day before the announcement of the proposed
acquisition.
<TABLE>
<CAPTION>
PRICE RANGE
---------------------
HIGH LOW
---- ---
<S> <C> <C>
DATE
----
February 10, 2000 $4.875 $4.875
</TABLE>
43
<PAGE>
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The table below sets forth, as of February 10, 2000, the
beneficial ownership of shares of our common stock by (1) each person
known by us to be the beneficial owner of more than five percent of our
issued and outstanding common stock on that date, (2) each of our
current directors, (3) each executive officer named in the Summary
Compensation Table set forth in our proxy statement for the 1999 annual
meeting of shareholders, individually, and (4) all executive officers
and directors as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED<F1> OWNED
------------------- ---------------------- -------
<S> <C> <C>
Howard A. Wittner, Trustee of RBT Trust II<F2>
7700 Bonhomme, Suite 400
Clayton, Missouri 63105 4,000,500 88.4%
Clifton Mitchell 5,937<F3> --
Brent D. Cassity<F2><F4>
10 S. Brentwood, Suite 340
Clayton, Missouri 63105 5,937<F3> --
Randall K. Sutton 13,000<F5> <F6>
Paul J. Gallant 200 <F6>
John J. Gorman 60,300 <F6>
All executive officers and directors
(six persons) 4,085,874 89.8%
<FN>
- ----------------
<F1> Except as otherwise indicated, each individual has sole voting and
investment power over the shares listed beside his name. The
percentage calculations for beneficial ownership are based upon
4,533,259 shares of common stock that were issued and outstanding
as of February 10, 2000. No outstanding options are currently
exercisable and none will be exercisable within 60 days of
February 10, 2000.
<F2> Such shares are held of record by National Heritage Enterprises,
Inc., which is wholly owned by the RBT Trust II, dated
September 28, 1990, of which Mr. Wittner is the trustee and has
sole voting and investment power. Brent D. Cassity currently
serves as President of National Heritage Enterprises and National
Prearranged Services. Upon consummation of the proposed
transaction, the shares of common stock held by National Heritage
Enterprises, Inc. will increase to 6,500,500, and indirectly
increase the ownership interest by the RBT Trust II.
<F3> Represents shares subject to options exercisable currently or
within 60 days after February 10, 2000.
<F4> Mr. Cassity is a one-third beneficiary of the RBT Trust II.
Mr. Cassity does not have voting or investment power with respect
to such shares.
<F5> Includes 5,000 shares subject to options exercisable currently or
within 60 days after February 10, 2000.
<F6> Less than one percent.
</TABLE>
44
<PAGE>
<PAGE>
DESCRIPTION OF LINCOLN HERITAGE SECURITIES
GENERAL
Our Amended and Restated Articles of Incorporation authorize
10,000,000 shares of common stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $.01 per share. As of the
date hereof, no shares of our preferred stock and 4,533,259 shares of
our common stock were issued and outstanding, and 1,200,000 shares of
our common stock were issuable upon exercise of outstanding options.
COMMON STOCK
Your board of directors, in its sole discretion, may issue our
common stock from the authorized and unissued shares of common stock.
Each share of our common stock is entitled to one vote at all meetings
of our shareholders for the election of directors and all other matters
submitted to shareholder vote. There are no cumulative voting rights.
Accordingly, the holders of a majority of the outstanding shares of our
common stock can elect all the directors if they choose to do so. The
rights, privileges and preferences of the holders of our common stock
are subject to the rights of the holders of any shares of our preferred
stock that may be designated and issued in the future. Subject to any
restrictions contained in preferred stock, if any, holders of our common
stock are entitled to receive dividends when and if declared by your
board of directors out of our legally available assets. Our common
stock has no preemptive or similar rights. There are no redemption or
sinking fund provisions applicable to our common stock. Holders of our
common stock are not liable to further call or assessment by us. Upon
any liquidation, dissolution or winding up of Lincoln Heritage, after
payment of our debts and other liabilities, and subject to the rights of
holders of shares of our Preferred Stock, if any, holders of common
stock are entitled to share pro rata in any distribution to our
shareholders.
PREFERRED STOCK
Your board of directors, without the approval of the holders of
our common stock, is authorized to fix the number of shares of any
series of preferred stock and to designate for issuance up to 1,000,000
shares of our preferred stock, par value $.01 per share, in such number
of series and with such rights, preferences, privileges and restrictions
(including, without limitation, voting rights) as your board of
directors may from time to time determine. Issuance of our preferred
stock, while providing flexibility in connection with possible
acquisitions, may adversely affect the rights, privileges and
preferences afforded the holders of our common stock, including a
decrease in the amount available for distribution to holders of our
common stock in the event of a liquidation or payment of our preferred
stock dividends. Issuance of shares of our preferred stock also may have
the effect of preventing or delaying a change in control of us without
further action by our shareholders and could make removal of our present
management more difficult.
STOCK OPTIONS
We have filed a registration statement on Form S-8 registering an
aggregate of 1,200,000 shares of our common stock subject to outstanding
stock options and common stock issuable pursuant to our stock option
plan.
45
<PAGE>
<PAGE>
TEXAS LAW AND LIMITATIONS ON CHANGES IN CONTROL
Section 13.03 of the Texas Business Corporation Act prevents an
"affiliated shareholder" (defined in Section 13.03, generally, as a
person owning 20% or more of a corporation's outstanding voting
shares) from engaging in a "business combination" with a publicly-held
Texas corporation for three years following the date upon which such
person became an affiliated shareholder unless: (1) before such person
became an affiliated shareholder, the board of directors of the
corporation approved the transaction in which the affiliated shareholder
became an affiliated shareholder or approved the business combination;
(2) upon consummation of the transaction that resulted in the affiliated
becoming an affiliated shareholder, the affiliated shareholder owned at
least 85% of the voting shares of the corporation outstanding at the
same time the transaction commenced (excluding shares held by directors
who also are officers of the corporation and by employee plans that do
not provide employee participants with the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer); or (3) on or subsequent to the date upon
which such person became an affiliated shareholder, the business
combination is approved by the board of directors of the corporation and
authorized at a special meeting of shareholders (not by written consent)
by the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting shares of the corporation not owned by the affiliated
shareholder. A "business combination" includes mergers, asset sales and
other transactions resulting in financial benefit to a shareholder.
Section 13.03 could prohibit or delay mergers or other takeover or
change in control attempts with respect to us and, accordingly, may
discourage attempts to acquire us.
Our bylaws generally will require at least 60 days' advance notice
of any action to be proposed at a meeting of shareholders and set forth
other specific procedures that a shareholder must follow. There also are
specific procedures, including advance notice, for the nomination of a
person to our board of directors when such person is nominated other
than at the direction of the board. In addition, our bylaws provide that
a special meeting of our shareholders may only be called by certain of
our officers or by your board of directors; no such meeting may be
called by shareholders. These provisions could have the effect of
delaying, deferring or preventing a change in control of us or the
removal of existing management.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement, dated as of April 6,
1998, we granted to National Heritage Enterprises, Inc., prior to the
initial public offering certain "demand" and "piggyback" registration
rights with respect to common stock owned by it as of such date.
Pursuant to such agreement, National Heritage Enterprises has the right,
subject to certain conditions, to require us to effect registration of
its shares of our common stock under the Securities Act of 1933.
National Heritage Enterprises has the right to demand (1) two
registrations of its shares of our common stock on Form S-1 and (2)
three registrations of its shares of our common stock on Form S-3,
provided, we will not be obligated to effect any demand registration
within six months after the effective date of a previous demand
registration. In addition, subject to certain conditions, National
Heritage Enterprises has the right to request that we include its shares
of our common stock in any public offering of shares of our capital
stock under the Securities Act of 1933 (other than with respect to a
registration with respect to (1) common stock to be offered and sold by
us pursuant to an employee benefit plan or (2) common stock for the
purpose of consummating any acquisition by us). We are required to use
our best efforts to effect a registration of such shares of common stock
pursuant to such registration rights. We have been advised by National
Heritage that it presently has no intention to exercise its registration
rights.
46
<PAGE>
<PAGE>
There are 4,000,000 shares of our common stock subject to either
demand or piggyback registration rights pursuant to the registration
rights. We are required to bear substantially all fees, costs and
expenses of all such registrations (except for underwriting discounts or
commissions), including the reasonable fees and disbursements of one
counsel for the holder of common stock subject to such registration
rights.
We have reserved an aggregate of 1,200,000 shares of our common
stock for issuance pursuant to our 1998 Long-Term Incentive Plan. As of
the date hereof, we have issued options to purchase an aggregate of
1,200,000 shares of our common stock under the1998 Long-Term Incentive
Plan. We filed a registration statement on Form S-8 under the
Securities Act of 1933 to register shares to be issued upon exercise of
options granted pursuant to the 1998 Long-Term Incentive Plan. To the
extent not held by affiliates or subject to a lock-up agreement, shares
of our common stock issued under the 1998 Long-Term Incentive Plan are
available for sale in the public market without restriction.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
47
<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
LINCOLN HERITAGE CORPORATION
We are providing the following selected consolidated financial
data for us as of the dates and for the periods indicated, to aid you in
your analysis of the financial aspects of the acquisition. Certain of
the data presented here is derived from our consolidated financial
statements. The consolidated financial data as of December 31, 1998 and
1997 and for the three years in the period ended December 31, 1998 have
been derived from, and should be read in conjunction with, our audited
consolidated financial statements, which are included with this proxy
statement. The following table also sets forth consolidated financial
data as of September 30, 1999 and for the nine months ended
September 30, 1999 and 1998, which have been derived from, and should be
read in conjunction with, our unaudited condensed consolidated financial
statements, which are included with this proxy statement and which, in
the opinion of management, contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly our results of
operations for such period. The results of the nine months ended
September 30, 1999 are not necessarily indicative of the results
expected for the year ending December 31, 1999. You should read those
financial statements and related notes thereto and the selected
consolidated financial data for a further explanation of the financial
data summarized herein. You also should read the "Management's
Discussion and Analysis of Financial Condition and Results of Operations
of Lincoln Heritage" section which describes a number of factors that
have affected the financial results of Lincoln Heritage. See "Where You
Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------------- ----------------------
1994 1995 1996 1997<F1> 1998<F1> 1998 1999
------- ------- ------ -------- -------- ------ -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium income $24,001 $27,354 $33,274 $38,044 $41,363 $31,631 $33,358
Net investment income and
realized gains 3,908 4,514 5,729 8,838 12,575 9,184 7,680
Other revenue - - - - 748 213 173
------- ------- ------- ------- ------- ------- -------
Total revenues 27,909 31,868 39,003 46,882 54,686 41,028 41,211
Benefits incurred 19,563 20,775 24,750 31,151 33,088 27,753 26,206
Other expenses<F2> 11,848 9,625 13,351 13,404 19,142 13,981 16,395
------- ------- ------- ------- ------- ------- -------
Income (loss) before federal
taxes (3,502) 1,468 902 2,327 2,456 (706) (1,390)
Income taxes (benefits) (610) 317 197 672 440 (204) (331)
------- ------- ------- ------- ------- ------- -------
Net income (loss) $(2,892) $ 1,151 $ 705 $ 1,655 $ 2,016 $ (502) $(1,059)
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding
Basic 4,000 4,000 4,000 4,000 4,087 4,000 4,523
Diluted 4,000 4,000 4,000 4,000 4,190 4,000 4,523
Earnings (loss) per share:
Basic $ (.72) $ .29 $ .18 $ .41 $ .49 $ (.13) $ (.23)
Diluted (.72) .29 .18 .41 .48 (.13) (.23)
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997<F1> 1998<F1> 1999
------- ------- ------- -------- -------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA<F1><F3>:
Invested assets $43,608 $56,082 $59,919 $120,041 $133,831 $123,962
Total assets 60,196 71,884 76,149 141,603 164,073 159,496
Total policy liabilities 62,391 68,432 73,067 130,450 152,425 154,859
Shareholders' equity (deficit) (2,508) 2,713 1,856 6,883 8,815 3,173
<PAGE>
<FN>
- --------------
<F1> Comparison of selected consolidated financial data in the table
above 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. Lincoln
Heritage received $48,025 in cash in exchange for assuming $50,857
in insurance liabilities. For the year ended December 31, 1998,
amounts related to such assumption 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.
As of December 31, 1998, invested and total assets included
approximately $41,657 and policy liabilities included
approximately $42,048 associated with the assumption of the block
of life and annuity business from Woodmen Accident and Life
Company.
48
<PAGE>
<PAGE>
<F2> Other expenses for the years ended December 31, 1997 and 1998 and
the nine months ended September 30, 1999 and 1998 are net of
expense reimbursements from NPS in the amount of $2,695, $2,254,
$2,064, and $2,067 respectively.
<F3> Comparison of selected consolidated financial data in the table
above 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. Lincoln Heritage received $19,941 in
assets in exchange for assuming $21,910 in insurance liabilities.
During 1998, Lincoln Heritage retroceded, through a coinsurance
agreement, 50% of the life insurance assumed from World Insurance
Company to Alabama Reassurance Company. As of December 31, 1998
and September 30, 1999, invested and total assets included
approximately $22,200 and $21,700, respectively, and policy
liabilities included approximately $21,800 and $21,600,
respectively, associated with the business assumed from World
Insurance Company.
</TABLE>
49
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
LINCOLN HERITAGE CORPORATION
OVERVIEW
We are a holding company for operating subsidiaries that consist
primarily of life insurance companies. 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 a
block of life insurance and annuity policies from Woodmen Accident and
Life Company in 1997 and World Insurance Company in 1998.
Our revenues are derived primarily from premiums on insurance
policies generated by National Prearranged Services. In the event of a
decline in National Prearranged Services' pre-need sales, 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 consist 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 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 out financial condition and results of
operations. See "Business of Lincoln Heritage -- Regulatory Factors."
After assessing the current business environment in the funeral
home and cemetery industry, management identified what it believes is a
unique opportunity. With the largest companies in the industry having
difficulties from over-valuation of properties combined with an
aggressive buying strategy, management believes that there is an
opportunity to acquire cemetery properties at reasonable prices that did
not exist over the last few years caused by these large companies
significantly scaling back their acquisition strategy. Management
believes that the acquisition of Forever Enterprises will allow us to
take advantage of this opportunity, together with Forever Enterprises'
operational program and Forever Memorial's cemetery product, to create
an opportunity to cause substantial growth for our shareholders. In
order to implement such a strategy, capital is needed. Management
believes that our access to public capital markets will be enhanced
significantly which will increase the likelihood of success of the
business strategy. This acquisition of Forever also brings under one
corporate structure one of the primary sources of our new sales and all
of the company's operational units.
50
<PAGE>
<PAGE>
Our strategy is to increase shareholder value by growing our
insurance business through: (1) selected acquisitions of life insurance
companies and in-force life insurance policies and annuities;
(2) increases in life insurance policies arising out of prearranged
funeral contracts sold by National Prearranged Services; and (3)
acquisitions of cemetery properties. 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 Nine Months Ended September 30, 1999 and 1998
Premium income increased approximately and $1.7 million, or 5%, in
the nine-month period ended September 30, 1999 compared to the
corresponding period of 1998. The increase for the nine-month period
reflected higher overall volume of new policies issued for both limited
pay and single pay policies compared to the corresponding period in
1998.
Net realized investment gains decreased approximately $1.4
million, or 90%, in the nine-month period ended September 30, 1999
versus the corresponding period of 1998. Losses of approximately $3.2
million were incurred for the nine-month period ended September 30, 1999
reflecting management's recognition of a decline in market value
associated with our investment in Autobond Acceptance Corp. Management
believes that the decline was other than temporary and due to reasons
other than market fluctuations and has recognized losses sufficient to
reduce our investment in Autobond to its current market value of $98,000
as of September 30, 1999.
Benefits decreased $1.5 million, or less than 6%, in the nine-
month period ended September 30, 1999 compared to the corresponding
period of 1998. The decrease in the nine-month period was due primarily
to a decrease in the increase in future policy benefits as a result of
higher volume of new policies issued for limited pay policies which have
lower reserves per unit than single pay policies.
Commissions increased approximately $944,000, or 8%, in the nine-
month period ended September 30, 1999 compared to the corresponding
period of 1998. These changes were attributable to higher sales volumes
and mix of policies sold.
General expenses, net of expenses reimbursed, increased
approximately $2.0 million, or 66%, in the nine-month period ended
September 30, 1999 compared to the corresponding period of 1998. The
increase was attributable to higher administrative expenses as a result
of increased sales volumes, support for increased levels of acquisition
activities and regulatory reporting requirements, and approximately
$330,000 related to the forfeiture of deposits and other expenses
associated with our withdrawal of our proposal to acquire Harbourton
Reassurance, Inc.
The change in deferred acquisition costs increased approximately
$662,000 for the nine-month period ended September 30, 1999 compared to
the corresponding period of 1998. The increase for the nine-month
period was due to higher rates of capitalization of the costs of
acquiring new business due to higher volume of new business.
51
<PAGE>
<PAGE>
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
which is ultimately more profitable to us.
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 investments.
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
52
<PAGE>
<PAGE>
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.
Comparison of the Years Ended December 31, 1997 and December 31, 1996
Premium income increased $4.7 million, or 14%, from $33.3 million
in 1996 to $38.0 million in 1997 due to an increase in the amount of new
business written. The increase in new business written was primarily
the result of increases in prearranged funeral contracts sold by
National Prearranged Services. Such sales increased due to an expansion
of National Prearranged Services' sales force. In addition, during
1997, we and National Prearranged Services agreed to retroactively
increase premiums charged on certain policies issued by us. Such
additional premiums included in revenues for the year ended December 31,
1997 were $339,828.
Net investment income and net realized gains increased $3.1
million, or 54%, from $5.7 million in 1996 to $8.8 million in 1997.
This increase was attributable to a higher level of average invested
assets (primarily resulting from the acquisition of blocks of business
from Woodmen Accident and Life Company) and a more actively managed
investment portfolio. Average invested assets increased $31.7 million,
or 56%, from $56.5 million in 1996 to $88.2 million in 1997.
Benefits incurred increased $6.4 million, or 26%, from $24.8
million in 1996 to $31.2 million in 1997 primarily due to an overall
increase in business in-force and interest credited to policyholder
accounts related to the acquisition of blocks of business from Woodmen
Accident and Life Company.
Surrenders decreased from 1996 to 1997 by $5.1 million. This
decrease in surrenders was offset by a corresponding change in the
increase in future policy benefits. Surrenders generally have little
impact on current year operations due to the fact that surrender
benefits are fully reserved and as surrender benefits are paid the
reserve for future policy benefits is reduced by a corresponding amount.
The more significant effect on operations occurs in future years when we
lose future investment earnings on the business surrendered.
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<PAGE>
Our insurance subsidiaries have an agents' contract with National
Prearranged Services and NPS Agency that obligates us to pay first-year
and renewal commissions on policies written by National Prearranged
Services and NPS Agency.
Prior to January 1, 1997, the agents' 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, we, National Prearranged
Services and NPS Agency agreed to amend the agents' 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 agreement was a reduction in the increase in future policy
benefits of $1.1 million on policies issued in 1997 and this effect net
of $332,000 of income tax expense was reflected as an increase in
additional paid-in capital for the year ended December 31, 1997.
Other expenses remained relatively unchanged from 1996 to 1997;
however, this was a result of three offsetting factors: (1) policy
administration and general expenses increased $1.2 million as a result
of the acquisition of the block of business from Woodmen Accident and
Life Company, (2) general and administrative expenses decreased due to
the initiation of a cost sharing agreement between us and National
Prearranged Services, whereby National Prearranged Services reimbursed
us $2.7 million for a portion of our general and administrative expenses
attributable to National Prearranged Services' business (the $2.7
million was based on costs incurred by us in 1997 for the direct benefit
of National Prearranged Services); and (3) commissions increased
$1.2 million due to higher sales levels. We and National Prearranged
Services are affiliated companies. National Prearranged Services was
formed earlier than us and, as such, National Prearranged Services
assisted in our development. As the companies grew, and with the
anticipation of the addition of outside shareholders, a more formal
relationship among the entities became advisable, which resulted in the
development of the cost sharing arrangement. See Note 11 to our
consolidated financial statements.
Net income for the year ended December 31, 1997 was $1.7 million,
or $0.41 per basic and diluted share, an increase of 135% and 128%,
respectively, over the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our insurance subsidiaries generally generate sufficient cash
receipts from premium collections and investment income to satisfy our
obligations. We believe that the investment portfolios of our insurance
subsidiaries provide sufficient liquidity to meet our operating cash
requirements.
Our cash requirements for 1999 and in the future will depend upon
mortality experience, acquisitions, timing of expansion plans and
capital expenditures. We believe that anticipated revenue from
operations should be adequate for the working capital requirements of
our existing business over the next twelve months. 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. On October 15, 1999, we completed our 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, for
approximately $5 million and realized net proceeds of approximately
$1.4 million over the net assets sold.
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<PAGE>
Total cash and investments decreased approximately $9.9 million
from $133.8 million at December 31, 1998 to $124.0 million at September
30, 1999. Changes in the separate components of investment assets were
due to the portfolio mix of our investment assets and changes in the
fair value of actively managed fixed maturity and equity securities.
Receivables from related parties increased approximately $458,000
from $1.5 million at December 31, 1998 to $1.9 million at September 30,
1999 due primarily to premiums on new business.
Deferred policy acquisition costs, net increased approximately
$2.9 million from 16.9 million at December 31, 1998 to 19.8 million at
September 30, 1999 due primarily to increases in new policies issued and
in-force.
Cost of policies acquired, net, decreased approximately $783,000
from $3.8 million at December 31, 1998 to $3.0 million at September 30,
1999 due to amortization of costs.
Deferred taxes, net increased $2.6 million from $3.4 million at
December 31, 1998 to $6.0 million due to primarily to deferred taxes on
unrealized losses on investments.
Other assets decreased approximately $301,000 from $1.0 million
at December 31, 1998 to $703,000 at September 30, 1999 due to the
forfeiture of deposits and other deferred expenses associated with our
withdrawal of our proposal to acquire Harbourton Reassurance, Inc.
Policyholder deposits decreased approximately $7.9 million from
$47.2 million at December 31, 1998 to $39.3 million at September 30,
1999. Policyholder deposits are comprised primarily of blocks of
annuities acquired in prior years. The decrease was due primarily to
surrenders of policies and the absence of the issuance of new annuity
policies.
Other liabilities decreased approximately $816,000 from $2.0
million at December 31, 1998 to $1.1 million at September 30, 1999 due
primarily to the application of unapplied customer payments to policies.
In 1986 we formed Memorial Service Life Insurance Company, and
acquired New Life Insurance Company (formerly known as Lincoln Memorial
Life Insurance Company) in 1992. In 1998, we acquired Lincoln Memorial
Life Insurance Company (formerly known as World Service Life Insurance
Company of America) for a total consideration of $5.5 million.
Effective September 1, 1997, we acquired a block of life insurance
and annuity policies from Woodmen Accident and Life Company for a
purchase price of approximately $3.5 million. In connection with this
transaction, we assumed approximately $51 million of insurance
liabilities and received approximately $48 million in cash.
Effective April 1, 1998, we acquired a block of life insurance and
annuity policies through coinsurance from World Insurance Company for a
purchase price of approximately $2.0 million. In connection with this
transaction, we assumed approximately $21.9 million of insurance
liabilities and received approximately $19.9 million in assets.
We have recently entered into an agreement to purchase all the
outstanding shares of an 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 stockholder's equity. The acquiree's insurance operation
consists of a closed block of life and annuity
55
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<PAGE>
policies. The acquiree has 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.
QUARTERLY RESULTS OF OPERATIONS
Our quarterly unaudited results of operations for 1997, 1998 and
the nine months ended September 30, 1999 were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
1997 1998
------------------------------------------- --------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life premiums $8,631 $8,706 $8,483 $12,225 $7,257 $13,476 $10,898 $9,733
Net investment
income 1,263 1,249 1,857 1,801 2,252 2,581 2,840 2,965
Realized investment
gains (losses) 21 86 563 1,997 451 617 443 425
Net income (loss) (226) (127) 984 1,024 (109) 121 (513) 2,518
<CAPTION>
QUARTER ENDED
--------------------------------
1999
--------------------------------
MARCH 31 JUNE 30 SEPT. 30
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Life premiums $ 9,713 $11,307 $12,337
Net investment
income 2,799 2,356 2,372
Realized investment
gains (losses) (685) 1,540 (702)
Net income (loss) (1,410) 768 (418)
</TABLE>
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 have 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 September 30,
1999 was $124.0 million, of which 57% was invested in fixed maturity
securities. The primary market risk to the investment portfolio is
interest rate risk associated with investments in fixed maturity
securities. A 100 basis point decrease in interest rates would have
decreased anticipated earnings from operations for the nine months ended
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<PAGE>
September 30, 1999 by approximately $530,000, which amount represents
the decrease of investment income on our investment portfolio. The
effect on the market value of the portfolio would be to increase the
value by approximately $530,000. The reverse effect would result if
interest rates increased by 100 basis points.
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 $114.30 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
September 30, 1999, we had approximately $5.2 million, or less than 5%
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.
YEAR 2000 COMPLIANCE
Year 2000 Issues
Many current installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
reliably distinguish dates beginning on January 1, 2000 from dates prior
to the year 2000. Many companies' software and computer systems may need
to be upgraded or replaced in order to correctly process dates beginning
in 2000.
Company Readiness
Our information technology personnel has assessed our readiness to
manage Year 2000 issues. This included a review of all current computer
systems in use, as well as communications with significant vendors and
other third parties to determine the extent to which our operations are
vulnerable to third parties' failure to correct their own Year 2000
issues. Based on the overall assessment performed, we have determined
that we will not need to significantly modify or replace any of our
current systems in order to comply with Year 2000 issues. We have
obtained written representations from all significant vendors and other
third parties that their systems are currently, or will be, Year 2000
compliant. Based upon these communications with significant vendors and
other third parties, we are not aware of any material impact on their
systems relating to the transition to the Year 2000. However, we have
no means of ensuring that these entities will be Year 2000 ready. The
inability of third parties to complete their Year 2000 programs in a
timely manner could materially impact us. The effect of non-compliant
third parties is not determinable.
Year 2000 Costs
Our total costs of Year 2000 efforts to date and future
anticipated costs have not been and are not expected to be material.
Risks Associated with Our Year 2000 Issues
We expect our internal systems to be Year 2000 compliant and
believe that the worst case scenario would result from vendors or other
third parties failing to achieve Year 2000 compliance. Due
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to the general uncertainty inherent in the Year 2000 problem, we cannot
predict whether the consequence of Year 2000 failures will have a
material adverse effect on our business, financial condition or results
of operations. However, based on our assessment of our internal
systems, communications with significant vendors and other third
parties, we do not expect Year 2000 problems to result in a material
adverse effect on our financial position, results of operations or cash
flows. In the event significant vendors are not Year 2000 compliant, we
will have a backup power supply and internal resources to address Year
2000 problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accountings Standard No. 131 Disclosures About
Segments of an Enterprise and Related Information. Statement No. 131
establishes standards for disclosures related to business operating
segments. Statement No. 131 had no significant effect on the
disclosures set forth in our consolidated financial statements.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-3 Accounting by Insurance
and Other Enterprises for Insurance-related Assessments. Statement 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 97-3 became
effective for financial statements of fiscal years beginning after
December 15, 1998. The adoption of Statement 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 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
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 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.
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CERTAIN INFORMATION REGARDING FOREVER ENTERPRISES, INC.
Forever Enterprises currently owns and operates cemetery
properties in St. Louis and Independence, Missouri and Los Angeles,
California. Building its cemetery property portfolio is one of Forever
Enterprises' major strategic objectives.
Forever Enterprises, operating as Cassity Heritage Funeral Homes,
Inc., acquired its first funeral home and cemetery in 1989 and went on
to accumulate nine funeral homes and three cemeteries between 1989 and
1993. In 1996, Forever Enterprises sold its funeral homes to Service
Corporation International, but retained the Bellerive Cemetery and the
Cremation Society of St. Louis in order to help launch Forever
Enterprises' business plan. In November 1999, Forever Enterprises
acquired a cemetery property known as Mount Washington Cemetery in
Independence, Missouri. Forever Enterprises currently is negotiating
with a potential fifty percent equity partner for the Mount Washington
Cemetery property.
Bellerive Cemetery currently serves as the prototype property to
evaluate new ideas and refine operational practices. With help from
such things as a new mausoleum, which was financed with proceeds from
pre-construct sales, the Forever Memorial Biography program and a
special commission structure, the Bellerive Cemetery has substantially
grown its annual interments and its revenues since the early 1990's.
Given the current financial conditions of the industry and the
large consolidators, Forever Enterprises believes that the market and
timing is very favorable for acquisitions of cemeteries. Large
consolidators can no longer afford to pay inflated prices for
properties, and are slowing their acquisition plans considerably.
Management believes that the opportunity for expansion of Forever
Enterprises' operating segment is excellent.
While any property delivering high value to Forever Enterprises'
business plan will be considered, most candidate properties are expected
to be either mature or distressed in some way. A property might be
considered mature or distressed for any number of reasons, including:
* all or most of the ground spaces and/or mausoleum crypts
have been sold
* expansion opportunities on the property are perceived to be
limited by present ownership
* poor management and/or sales program resulting in financial
under-performance
* abuse or mismanagement of perpetual care fund, resulting in
a property that can no longer meet its obligations to its
customers or community
Management believes that Forever Enterprises' operational plan and
marketing expertise can create value from such properties. This belief
has been supported by the acquisition of the Hollywood Memorial Park
property in California. Forever Enterprises bought a 45% interest in
Hollywood Memorial Park Cemetery in April 1998. At the time of
purchase, the property, which is the resting place for such Hollywood
greats as Cecil B. De Mille, Rudolph Valentino and Douglas Fairbanks,
Sr., to name a few, was in bankruptcy, a serious state of disrepair and
had virtually no customers or visitors. Implementation of the Forever
Enterprise marketing program, along with capital and operating
improvements and the addition of a funeral home, have helped the
property achieve significant business increases. Since Forever
Enterprises began operating the newly named Hollywood Forever, it has
been featured in numerous local and national media sources including The
New York Times, The Los Angeles Times and the Entertainment Tonight
television program. In December 1999, Forever Enterprises acquired an
additional 45% interest in the Hollywood Memorial Park Cemetery, through
its acquisition of Dartmont Investment, Inc., bringing its total
ownership to 90%.
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SELECTED CONSOLIDATED FINANCIAL DATA OF
FOREVER ENTERPRISES, INC.
We are providing the following selected consolidated financial
data for Forever Enterprises as of the dates and for the periods
indicated, to aid you in your analysis of the financial aspects of the
acquisition. The Forever Enterprises financial data as of and for the
year ended December 31, 1998 have been derived from, and should be read
in conjunction with, Forever Enterprises' audited financial statements,
which are included with this proxy statement. The Forever Enterprises'
financial data for the two years in the period ended December 31, 1997
have been derived from and should be read in conjunction with, Forever
Enterprises' unaudited financial statements which also are included with
this proxy statement. The following table also sets forth consolidated
financial data as of September 30, 1999 and for the nine months ended
September 30, 1999 and 1998, which have been derived from, and should be
read in conjunction with, Forever Enterprises' unaudited financial
statements included with this proxy statement. In the opinion of
management, the unaudited financial information presented below of
Forever Enterprises, contains all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly Forever Enterprises'
financial condition as of such dates and results of operations for such
periods. The results of the nine months ended September 30, 1999 are
not necessarily indicative of the results expected for the year ending
December 31, 1999. You should read the unaudited financial statements
and related notes thereto and the selected consolidated financial data
for a further explanation of the financial data summarized here. You
also should read the "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Forever Enterprises" section
which describes a number of factors that have affected Forever
Enterprises' financial results.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------- -------------------
1994 1995 1996<F1> 1997 1998 1998 1999
------- ------- -------- ------- ------- ------- -------
(UNAUDITED) (AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Cemetery revenues $ 4,433 $ 5,883 $ 982 $ 1,622 $ 2,150 $ 1,364 $ 2,065
Expenses 3,059 5,431 1,081 1,295 2,539 1,610 2,121
------- ------- ------- ------- ------- ------- -------
Operating income (loss) 1,374 452 (99) 327 (389) (246) (56)
Other revenues (expenses) (151) 801 (80) (38) 150 (28) 69
------- ------- ------- ------- ------- ------- -------
Net income (loss) before income taxes 1,223 1,253 (179) 289 (239) (274) 13
Income taxes (benefit) -- -- -- -- (82) -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,223 $ 1,253 $ (179) $ 289 $ (157) $ (274) $ 13
======= ======= ======= ======= ======= ======= =======
Weighted average shares outstanding
Basic 10,648 10,648 10,648 10,648 10,648 10,648 10,648
Diluted 10,648 10,648 10,648 10,648 10,648 10,648 10,648
Earnings (loss) per share:
Basic $114.86 $117.67 $(16.81) $ 27.15 $(14.73) $(25.73) $1.25
Diluted 114.86 117.67 (16.81) 27.15 (14.73) (25.73) 1.25
<CAPTION>
DECEMBER 31,
------------------------------------------------------- SEPTEMBER 30,
1994 1995 1996<F1> 1997 1998 1999
------- ------- -------- ------ ------ -------
(UNAUDITED) (AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA<F2>
Cemetery property, net $ 2,324 $ 2,286 $2,116 $2,116 $2,160 $ 2,133
Total assets 10,889 10,927 4,732 8,184 9,927 12,356
Notes payable 2,570 2,581 1,456 1,322 2,464 2,442
Shareholder's equity 1,827 3,080 2,770 3,059 3,001 5,619
<FN>
- --------------
<F1> In February 1996, Forever Enterprises sold all of its funeral
homes and two of its cemetery properties.
<F2> At June 30, 1999, Forever Enterprises entered into an agreement
with its affiliated companies whereby net amounts due from Forever
Enterprises totaling approximately $2.6 million were capitalized.
In addition, Forever Enterprises' parent company, National
Heritage Enterprises, granted Forever Enterprises a 10% interest
in its common stock in exchange for approximately $2.0 million in
accounts receivable.
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS OF
FOREVER ENTERPRISES
RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 1999 and 1998
Sales increased $700,000, or 51%, from $1.36 million in the nine-
month period ended September 30, 1998 to $2.06 million in the nine-month
period ended September 30, 1999 due to increased cemetery sales. In
addition, sales of $544,000 related to Forever Memorial biographies
contributed to the increase.
Cost of sales increased $176,000, or 53%, from $302,000 in the
nine-month period ended September 30, 1998 to $462,000 in the nine-month
period ended September 30, 1999 due to increased cemetery sales. Cost
of sales as a percentage of revenues for the period remained fairly
consistent at 22% for the nine-month period ended September 30, 1998
compared to 23% for the nine-month period ended September 30, 1999.
Selling, general and administrative expenses increased $350,000,
or 27%, from $1.31 million in the nine-month period ended September 30,
1998 to $1.66 million in the nine-month period ended September 30, 1999
due to increased variable selling expenses (as a result of increased
sales) and additional administrative costs associated with the Forever
Memorial operations.
Net loss decreased $272,000 from $274,000 in the nine-month period
ended September 30, 1998 to net income of $13,000 in the nine-month
period ended September 30, 1999 due to the factors discussed above.
Comparison of the Years Ended December 31, 1998 and December 31, 1997
Sales increased $530,000, or 33%, from $1.62 million for the year
ended December 31, 1997 to $2.15 million for the year ended December 31,
1998 due to increased cemetery sales. The increase in cemetery sales
was driven in part, by the addition of a new community mausoleum to the
Bellerive property. In addition, sales of $341,000 related to Forever
Memorial biographies contributed to the increase.
Cost of sales increased $373,000 from $339,000 for the year ended
December 31, 1997 to $712,000 for the year ended December 31, 1998 due
to increased cemetery sales and the relatively high initial cost for the
increase in Forever Memorial biographies.
Selling, general and administrative expenses increased $874,000 or
91%, from $956,000 for the year ended December 31, 1997 to $1.83 million
for the year ended December 31, 1998 due to increased variable selling
expenses (as a result of increased sales) and research and development
expenses associated with the development of software for Forever
Memorial operations.
Other income increased $162,000, or 133%, from $121,000 for the
year ended December 31, 1997 to $283,000 for the year ended December 31,
1998 due to increased interest income generated from the Hollywood
Forever, Inc. notes receivable and other interest income.
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<PAGE>
Net income decreased $132,000 from $289,000 net income for the
year ended December 31, 1997 to $157,000 net loss for the year ended
December 31, 1998 due to the factors discussed above.
Comparison of the Years Ended December 31, 1997 and December 31, 1996
Sales increased $638,000, or 65%, from $982,000 for the year ended
December 31, 1996 to $1.62 million for the year ended December 31, 1997
due to increased cemetery sales at the Bellerive property. Cemetery
sales increased due to aggressive pre-selling of a new community
mausoleum that opened during 1998.
Cost of sales increased $131,000, or 63%, from $208,000 for the
year ended December 31, 1996 to $339,000 for the year ended December 31,
1997 due to increased cemetery sales. Cost of sales as a percentage of
revenues for the period remained consistent at 21%.
Selling, general and administrative expenses increased $83,000 or
10%, from $873,000 for the year ended December 31, 1996 to $956,000 for
the year ended December 31, 1997 due to increased variable selling
expenses (as a result of increased sales) and research and development
expenses associated with the Forever Memorial operations.
Net income increased $468,000 from $179,000 net loss for the year
ended December 31, 1996 to $289,000 net income for the year ended
December 31, 1997 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Forever Enterprises generally does not generate enough cash to
satisfy all of its obligations. Forever Enterprises periodically
borrows from its parent company, National Heritage Enterprises, or
utilizes its line of credit for its operating cash needs.
Forever Enterprises has a five-year note with Allegiant Bank which
matures January 5, 2003, with a balance outstanding of $2.19 million as of
September 30, 1999 and the current principal portion due of $56,000.
Principal payments of $4,674 are paid monthly at the "Corporate market"
interest rate (rate was 8.25% per annum at September 30, 1999). The note
is renewable at maturity subject to Allegiant Bank's discretion.
Forever Enterprises also has a $250,000 revolving line of credit
from Allegiant Bank at rates similar to the primary credit agreement
discussed above. The balance outstanding was $250,000 at September 30,
1999. This line of credit is renewable on a yearly basis subject to
Allegiant Bank's discretion.
Forever Enterprises is currently constructing a new office
building at Bellerive Cemetery at total projected capital cost of
$330,000. The project is expected to be completed by January 2000.
Forever Enterprises has paid approximately $100,000 toward the total
cost of the project through September 1999 and will have capital needs
of approximately $200,000 through January 2000.
Hollywood Forever, Inc. estimated capital projects are expected to
be less than $300,000 for the remainder of 1999.
Changes in Forever Enterprises' consolidated balance sheet between
December 31, 1997, December 31, 1998 and September 30, 1999 reflect
growth through operations, increase in capital
62
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<PAGE>
expenditures, increase in investment activity and increased equity
contributions from Forever Enterprises' parent, National Heritage
Enterprises.
Property and equipment increased approximately $1.2 million from
$1.7 million at December 31, 1997 to $2.9 million at December 31, 1998
due to completion of a community mausoleum.
Accounts receivable from Hollywood Forever, Inc. increased
approximately $990,000 from $0 at December 31, 1997 to $990,000 at
December 31, 1998 due to the funding of numerous capital projects at the
cemetery location. Hollywood Forever, Inc was formed in 1998 to acquire
the Hollywood Memorial Park Cemetery that was in a serious state of
disrepair. Consistent with its acquisition plan, Forever Enterprises
has funded capital improvement projects at the cemetery. Forever
Enterprises' 45% interest in Hollywood Forever, Inc. is recorded using
the equity method of accounting.
Net deferred software production costs increased $117,000 from
$185,000 at December 31, 1997 to $302,000 at December 31, 1998 due to
the development of the software used by Forever Enterprises to capture
and store the personalized Forever Memorial biographies. The decline in
the balance at September 30, 1999 to $172,000 was due to the
amortization of such costs upon completion of the software in 1998.
Accounts payable to affiliated companies increased $1.4 million
from receivables of $1.0 million at December 31, 1997 to payables of
$398,000 at December 31, 1998 due to funds borrowed from such affiliated
companies for capital projects such as mausoleum construction and
software development, among others, at Hollywood Forever, Inc.
Note payable increased $1.1 million from $1.3 million at December
31, 1997 to $2.4 million at December 31, 1998 due to a new financing
arrangement with Allegiant Bank.
Investment in affiliate increased $2.0 million from $0 at December
31, 1998 to $2.0 million at September 30, 1999 due to forgiveness of
note receivable from Forever Enterprises' parent, National Heritage
Enterprises, in exchange for a 10% interest in the common stock of
National Heritage Enterprises.
As of June 30, 1999, Forever Enterprises entered into an agreement
with its affiliated companies whereby net amounts due from Forever
Enterprises totaling approximately $2.6 million were capitalized.
In November 1999, Forever Enterprises acquired a cemetery property
located in Independence, Missouri known as Mount Washington Cemetery for
approximately $1.2 million. Under the terms of the purchase agreement
$1.0 million of the $1.2 million purchase price was placed into an
escrow account to be used for capital improvements to the property.
Forever Enterprises currently is negotiating with a potential fifty
percent equity partner for the Mount Washington Cemetery property.
In December 1999, Forever Enterprises acquired an additional 45%
of the issued and outstanding stock of Hollywood Forever, Inc. for
approximately $2.9 million bringing the total interest in Hollywood
Forever, Inc. to 90%. Hollywood Forever, Inc. is the record owner of
real property located in Hollywood, California known as the Hollywood
Cemetery. Prior to its acquisition of an additional 45% of Hollywood
Forever, Inc., Forever Enterprises had been managing the Hollywood
Cemetery. Hollywood Forever, Inc. has total assets of approximately
$3.2 million and total liabilities of approximately $3.0 million as of
June 30, 1999.
63
<PAGE>
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements of Lincoln Heritage
Corporation as of and for the year ended December 31, 1998 included in
this proxy statement, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein.
The consolidated financial statements of Lincoln Heritage
Corporation as of December 31, 1997 and for each of the two years in the
period ended December 31, 1997 included in this proxy statement have
been audited by Killman, Murrell & Company, P.C., independent auditors,
as stated in their report appearing herein.
The consolidated financial statements of Forever Enterprises as of
and for the year ended December 31, 1998 included in this proxy
statement have been audited by Rosenthal, Packman & Co., P.C.,
independent auditors, as stated in their report appearing herein.
SHAREHOLDER PROPOSALS
Under applicable regulations of the Securities and Exchange
Commission, all proposals of shareholders to be considered for inclusion
in the proxy statement for the 2000 Annual Meeting of Shareholders must
have been received at our offices, c/o Secretary, 1250 Capital of Texas
Highway, Building 3, Suite 100, Austin, Texas 78746, by no later than
December 21, 1999. Our by-laws provide that shareholder proposals,
including nominations of directors, that do not appear in the proxy
statement may be considered at a meeting of shareholders only if written
notice of the proposal is received by our corporate secretary not less
than 60 days and not more than 90 days prior to the anniversary of the
preceding year's annual meeting; provided, however, that in the event
that the date of the annual meeting is more than 30 days before or more
than 60 days after such anniversary date, notice by the shareholder must
be delivered not earlier than the 10th day prior to such annual meeting
and not later than the 60th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such
meeting is first made by us. Under our by-laws, the date by which
written notice of a proposal must be received by us to be considered at
the 2000 annual meeting of shareholders is March 21, 2000.
Any written notice of a shareholder proposal must include the
following information: (a) as to each person whom the shareholder
proposes to nominate for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including such person's written
consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other business that the
shareholder proposes to bring before the meeting, a brief description of
the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on
whose behalf the proposal is made; and (c) as to the shareholder giving
the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, the name and address of such
shareholder, as they appear on our books, and of such beneficial owner,
and the class and number of shares of our common stock that are owned
beneficially and of record by such shareholder and such beneficial
owner.
64
<PAGE>
<PAGE>
OTHER MATTERS
As of the date of this document, our board of directors knows of
no matters that will be presented for consideration at the special
meeting other than as described in this document.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance with those requirements file
annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information that we file with
the Securities and Exchange Commission at the Commission's public
reference rooms at the following locations:
<TABLE>
<C> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street, Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. These filings with the
Commission are also available to the public from commercial document
retrieval services and at the Internet world wide web site maintained by
the Commission at "http://www.sec.gov." Reports, proxy statements and
other information concerning Lincoln Heritage are also available for
inspection at the offices of The Nasdaq Stock Market, which is located
at 1735 K Street, N.W., Washington, D.C. 20006.
You should rely only on the information contained in or included
in this proxy statement. We have not authorized anyone to provide you
with information that is different from what is contained in or included
in this proxy statement. This proxy statement is dated February 14,
2000. You should not assume that the information contained in this
document is accurate as of any date other than that date, and the
mailing of this document to you does not create any implication to the
contrary. This proxy statement does not constitute a solicitation of a
proxy in any jurisdiction where, or to or from any person to whom, it is
unlawful to make such proxy solicitation in such jurisdiction.
65
<PAGE>
<PAGE>
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Page No.
--------
<S> <C>
LINCOLN HERITAGE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................ F-1
Consolidated Balance Sheets as of December 31, 1997 and 1998............................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1997 and 1998........................................................................ F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Years Ended December 31, 1996, 1997 and 1998................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998........................................................................ F-6
Notes to Consolidated Financial Statements.............................................. F-7
LINCOLN HERITAGE CORPORATION CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 1999 (Unaudited)............... F-26
Condensed Consolidated Statements of Operations for the Three- and
Nine-Month Periods Ended September 30, 1998 and 1999 (Unaudited)..................... F-27
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Three- and Nine-Month Periods Ended September 30, 1999 (Unaudited)........... F-28
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1999 (Unaudited)........................................ F-29
Notes to Unaudited Condensed Consolidated Financial Statements.......................... F-30
FOREVER ENTERPRISES, INC. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report............................................................ F-32
Consolidated Balance Sheets as of December 31, 1998
and 1997 (Unaudited)................................................................. F-33
Consolidated Statements of Operations for the Years Ended December 31, 1998
and 1997 and 1996 (Unaudited)........................................................ F-34
Consolidated Statements of Retained Earnings for the
Years Ended December 31, 1998 and 1997 and 1996 (Unaudited).......................... F-35
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998
and 1997 and 1996 (Unaudited)........................................................ F-36
66
<PAGE>
<PAGE>
<CAPTION>
Page No.
--------
<S> <C>
Notes to Consolidated Financial Statements.............................................. F-37
FOREVER ENTERPRISES, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 1999 (Unaudited)............... F-45
Condensed Consolidated Statements of Operations for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)........................................ F-46
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)........................................ F-47
Notes to Unaudited Condensed Consolidated Financial Statements.......................... F-48
</TABLE>
67
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Lincoln Heritage Corporation
Austin, Texas
We have audited the accompanying consolidated balance sheet of Lincoln
Heritage Corporation and subsidiaries (the "Company") as of December 31,
1998, and the related consolidated statements of operations,
shareholders' equity and comprehensive income and of cash flows for the
year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our 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 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Lincoln Heritage
Corporation and subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
March 26, 1999
Fort Worth, Texas
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Lincoln Heritage Corporation:
We have audited the accompanying consolidated balance sheet of Lincoln
Heritage Corporation (a Texas corporation) and subsidiaries as of
December 31, 1997 and the related consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for each of
the two years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Lincoln Heritage Corporation and subsidiaries as of December 31, 1997,
and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KILLMAN, MURRELL & COMPANY, P.C.
Dallas, Texas
March 11, 1998
F-2
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CASH AND INVESTMENTS
Fixed maturities available for sale at fair value
(amortized cost $44,085,520 and $68,201,939) $ 45,120,485 $ 65,628,083
Equity securities available for sale at fair value
(cost $1,013,365 and $7,939,451) 794,870 7,121,000
Policyholder loans 11,457,962 17,257,122
Cash and cash equivalents 62,667,707 43,824,537
------------ -----------
TOTAL CASH AND INVESTMENTS 120,041,024 133,830,742
------------ -----------
Accrued investment income 609,847 463,616
Accounts receivable from related party 478,362 1,535,926
Funds withheld by ceding company 498,512 526,434
Deferred policy acquisition costs, net 12,554,870 16,881,478
Fixed assets, net 649,546 1,218,352
Cost of policies acquired, net 3,249,365 3,833,659
Goodwill, net 773,436 1,413,550
Deferred tax assets, net 2,394,970 3,364,638
Other assets 353,078 1,004,118
------------ ------------
TOTAL $141,603,010 $164,072,513
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Policy liabilities:
Future policy benefits $ 87,843,239 $104,201,323
Policyholder deposits 41,613,697 47,163,465
Claims and benefits payable 689,000 650,000
Premiums received in advance 304,471 409,937
------------ ------------
TOTAL POLICY LIABILITIES 130,450,407 152,424,725
------------ ------------
Income tax payable 1,975,165 49,800
Accounts payable and accrued expenses 334,776 656,089
Accounts payable to related party 17,090 163,292
Other liabilities 1,942,861 1,964,045
------------ ------------
TOTAL LIABILITIES 134,720,299 155,257,951
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
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, 1,000,000 and 4,520,000 shares
issued and outstanding, respectively) 10,000 45,200
Additional paid-in capital 2,075,576 4,734,350
Retained earnings 4,258,265 6,273,924
Accumulated other comprehensive income (loss) 538,870 (2,238,912)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,882,711 8,814,562
------------ ------------
TOTAL $141,603,010 $164,072,513
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Life premiums $33,273,417 $38,044,470 $41,363,384
Net investment income 3,710,720 6,171,215 10,638,406
Realized investment gains, net 2,018,362 2,666,448 1,935,935
Other revenue - - 747,848
----------- ----------- -----------
TOTAL REVENUES 39,002,499 46,882,133 54,685,573
----------- ----------- -----------
BENEFITS AND EXPENSES
Death benefits 11,747,170 13,551,459 16,406,422
Surrender benefits 5,167,946 115,758 3,165,939
Increase in future policy benefits 7,621,130 16,432,947 12,019,701
Interest paid on policyholder deposits 214,054 1,051,087 1,495,680
Commissions 10,043,563 11,247,606 16,850,227
General expenses 3,856,016 5,211,651 7,211,722
General expenses reimbursed by
related party - (2,695,091) (2,253,644)
Taxes, licenses and fees 720,278 782,470 948,452
Amortization of cost of policies purchased - 262,188 711,564
Change in deferred acquisition costs, net
of amortization (1,269,257) (1,405,263) (4,326,608)
----------- ----------- -----------
TOTAL BENEFITS AND EXPENSES 38,100,900 44,554,812 52,229,455
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 901,599 2,327,321 2,456,118
----------- ----------- -----------
INCOME TAXES
Current 789,216 1,752,358 49,800
Deferred (592,247) (1,080,463) 390,659
----------- ----------- -----------
TOTAL INCOME TAXES 196,969 671,895 440,459
----------- ----------- -----------
NET INCOME $ 704,630 $ 1,655,426 $ 2,015,659
=========== =========== ===========
Basic earnings per share $ 0.18 $ 0.41 $ 0.49
=========== =========== ===========
Diluted earnings per share $ 0.18 $ 0.41 $ 0.48
=========== =========== ===========
Weighted average shares outstanding:
Basic 4,000,000 4,000,000 4,086,667
Diluted 4,000,000 4,000,000 4,189,804
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<CAPTION>
Total Additional Accumulated Other
Shareholders' Common Paid-in Comprehensive Retained
Equity Stock Capital Income (Loss) Earnings
------------- ------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 2,713,460 $ 1,000 $ 40 $ 805,211 $1,907,209
Comprehensive income (loss) net of tax:
Net income 704,630 - - - 704,630
Change in unrealized gains (losses)
on available for sale securities
net of tax of $804,531 and
reclassification adjustment
of $2,018,362 (1,561,735) - - (1,561,735) -
-----------
Total comprehensive income (loss) (857,105) - - - -
----------- ------- ---------- ----------- ----------
Balance, December 31, 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 of 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, December 31, 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 granted, 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 income (762,123)
----------- ------- ---------- ----------- ----------
Balance, December 31, 1998 $ 8,814,562 $45,200 $4,734,350 $(2,238,912) $6,273,924
=========== ======= ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 704,630 $ 1,655,426 $ 2,015,659
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Realized investment gains (2,018,362) (2,666,448) (1,935,935)
Gain on sale of policies - - (590,142)
Accretion of discount on investments (47,604) (458,056) (1,990,046)
Depreciation and amortization 87,129 368,068 967,513
Deferred income taxes (238,533) (699,519) 390,659
Stock options issued - - 137,147
Changes in operating assets and liabilities (net of
effects of acquisitions)
Accrued investment income (22,695) (74,020) 195,231
Accounts receivable from related party 1,687,680 188,843 (1,057,564)
Funds withheld by ceding company 76,605 (252,692) (27,922)
Deferred policy acquisition costs (1,269,257) (1,405,263) (4,326,608)
Other assets 117,883 (627,109) (484,307)
Future policy benefits and deposit funds 4,842,595 5,573,366 1,553,757
Claims and benefits payable 141,000 (92,000) (39,000)
Premiums received in advance (272,496) 92,022 105,466
Income tax payable 428,185 1,441,319 (1,813,790)
Accounts payable and accrued expenses (53,325) 106,465 321,067
Accounts payable to related party (62,304) 17,090 146,202
Other liabilities 36,428 1,250,388 (103,816)
------------ ------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 4,137,559 4,417,880 (6,536,429)
------------ ------------- -------------
INVESTING ACTIVITIES
Proceeds from sales of available
for sale investments 37,390,456 166,376,535 342,392,212
Purchase of available for sale investments (50,999,200) (106,684,537) (365,281,067)
Purchase of fixed assets - - (762,418)
Other invested assets, net 1,106,170 - -
Acquisition of subsidiary - - (5,041,514)
Cash received from acquisition of life policies - - 18,272,718
(Increase) decrease in policyholder loans issued 673,276 (10,699,794) (4,298,499)
Other, net - - (145,000)
------------ ------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (11,829,298) 48,992,204 (14,863,568)
------------ ------------- -------------
FINANCING ACTIVITIES
Capital contributions - 2,075,536 -
Proceeds from stock offering - - 2,556,827
------------ ------------- -------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES - 2,075,536 2,556,827
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (7,691,739) 55,485,620 (18,843,170)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 14,873,826 7,182,087 62,667,707
------------ ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,182,087 $ 62,667,707 $ 43,824,537
============ ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
INCOME TAXES PAID $ 92,990 $ 311,040 $ 1,975,165
============ ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
NOTE 1. BUSINESS
Lincoln Heritage is a life insurance holding company engaged in
the ownership and operation of life insurance companies. Lincoln
Heritage also acquires existing life insurance policies either through
direct purchase or the acquisition of insurance companies. Lincoln
Heritage'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 Lincoln Heritage'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 NPS 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. NPS or NPS
Agency is the assignee and beneficiary of substantially all policies
issued directly or assumed by Lincoln Heritage in connection with
prearranged funeral contracts.
Effective December 31, 1998, Lincoln Heritage reorganized its
insurance company subsidiaries. The purpose of the reorganization was
to streamline and consolidate Lincoln Heritage'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 and the name of World Service Life
Insurance Company of America was changed to Lincoln Memorial Life
Insurance Company ("Lincoln Memorial"). The reorganization had no
effect on Memorial Service Life Insurance Company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the
accounts of Lincoln Heritage and its direct and indirect wholly owned
subsidiaries, Memorial, New Life and Lincoln. 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 years amounts have been reclassified to
conform with the 1998 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
F-7
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
deposits and claims, and benefits payable. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
Investments
- -----------
All fixed maturity and equity securities are classified as
available-for-sale and, accordingly, such securities are carried at
estimated fair value. Lincoln Heritage 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 Lincoln Heritage's return on investments and
improve its liquidity, Lincoln Heritage enters into overnight reverse
repurchase agreements. Lincoln Heritage purchases U.S. Treasury notes
under agreements to resell such U.S. Treasury notes on a daily basis.
Lincoln Heritage 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, 1998 and 1997, the carrying amount
of overnight reverse repurchase agreements was $4,274,884 and
$29,512,372, 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 25 to 40 years. Amortization expense was $62,337,
$22,748 and $22,748 for the years ended December 31, 1998, 1997 and
1996, respectively. Accumulated amortization was $198,825 and $136,488
as of December 31, 1998 and 1997, respectively. The carrying value of
goodwill is periodically evaluated for indications of impairment based
upon estimates of future earnings.
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
F-8
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
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. Depreciation expense was $193,612, $83,132, and $50,379 for the
years ended December 31, 1998, 1997, and 1996, respectively.
Accumulated depreciation was $377,893 and $184,281 at December 31, 1998,
and 1997, respectively.
Future Policy Benefits
- ----------------------
Future policy benefits are amounts that, when accumulated with
interest and future premiums, will provide for the payment of benefits
arising out of the insurance in-force. The liabilities for future
policy benefits and expenses for limited pay life policies are computed
using the net-level premium method 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.
F-9
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
Premiums and Expenses
- ---------------------
Lincoln Heritage primarily issues limited pay and single premium
policies. Accordingly, net premiums for direct and assumed policies are
recorded as revenues and the difference between the gross premium
received and the net premium is deferred and recognized in a constant
relationship to the insurance in-force. Unearned premiums of
$18,262,190 and $19,633,000 at December 31, 1998 and 1997, respectively,
are included as a component of future policy benefit liabilities in the
accompanying consolidated balance sheets. The change in unearned
premiums is reflected as a component of the increase in future policy
benefits in the accompanying consolidated statements of operations.
Benefits and expenses are recognized as a level percentage of
earned premiums by providing for future policy benefits and amortizing
deferred acquisition costs.
Receipts for annuities are classified as deposits instead of
revenues. Accordingly, 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.
Reinsurance
- -----------
Lincoln Heritage'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 Lincoln Heritage'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 Lincoln Heritage's insurance subsidiaries was $10,450,767
and $6,236,000 greater at December 31, 1998 and 1997, respectively, than
what it would have been without these agreements. Since the primary
liability of Lincoln Heritage 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, Lincoln Heritage 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.
F-10
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
Participating Policies
- ----------------------
Participating policies represented 80% and 92% of the life
insurance in-force at December 31, 1998 and 1997, 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
$90,335 were paid for the year ended December 31, 1998. No policyholder
dividends were paid during 1997 and 1996.
Income Taxes
- ------------
Income taxes are accounted for under the liability method.
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 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. Lincoln Heritage 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, Lincoln Heritage discloses the pro forma effect on net
income and earnings per share as if Lincoln Heritage had adopted SFAS
No. 123.
For all options granted to individuals that are not employees of
Lincoln Heritage, Lincoln Heritage 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 Lincoln Heritage.
Stock Splits and Earnings Per Share
- -----------------------------------
On September 19, 1997, Lincoln Heritage effected a 100,000-for-1
stock split in the form of a stock dividend. Upon consummation of such
stock split, Lincoln Heritage had 1,000,000 shares of common stock
issued and outstanding. On April 6, 1998, Lincoln Heritage effected a
3.2-for-1 stock split, in the form of a stock dividend, and on
August 18, 1998, Lincoln Heritage declared and paid a 25% stock
dividend. The earnings per share of Lincoln Heritage for all periods
presented have been computed as if these stock splits and dividends
occurred at January 1, 1996. The diluted earnings per share is computed
using the treasury stock method unless the effect is anti-dilutive. The
103,137 increase in the
F-11
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
number of shares from basic to diluted in 1998 is a result of the
options outstanding. There are no factors that affect the net income
amount in the earnings per share computations.
Initial Public Offering
- -----------------------
In October, 1998, Lincoln Heritage 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 Lincoln Heritage's insurance subsidiaries.
New Accounting Standards
- ------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 130 states that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income is defined as the total of net income and all other
non-owner changes in equity. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Restatement of financial statements
for earlier periods provided for comparative purposes is required. SFAS
No. 130 had no impact on the financial condition or results of
operations of Lincoln Heritage, but required changes in Lincoln
Heritage's disclosure and presentation requirements. The principal
change was the disclosure of the components of and total comprehensive
income within the Consolidated Statements of Shareholders' Equity.
In June 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for disclosures related to business operating
segments. SFAS No. 131 had no significant effect on the disclosures set
forth in Lincoln Heritage's consolidated financial statements.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-3, Accounting by Insurance
and Other Enterprises for Insurance-related Assessments (SOP 97-3). SOP
97-3 provides guidance for determining when an insurance company or
other enterprise should recognize a liability for guaranty-fund
assessments and guidance for measuring the liability. SOP 97-3 is
effective for financial statements of fiscal years beginning after
December 15, 1998. Lincoln Heritage anticipates that the adoption of
SOP 97-3 will not have a material effect on Lincoln Heritage'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
F-12
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
June 15, 1999. Lincoln Heritage 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.
NOTE 3. COINSURANCE OF LIFE INSURANCE AND ANNUITY POLICIES
On September 1, 1997, Lincoln Heritage 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. Lincoln Heritage 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 purchased.
Effective April 1, 1998, Lincoln Heritage 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.
Lincoln Heritage assumed approximately $21,909,000 of insurance and
annuity reserves in exchange for receiving $19,941,000 in assets. The
net liabilities assumed, $2,205,716, plus other costs related to the
coinsurance of the World Block in the amount of approximately $200,000
have been shown as additions from acquisitions to the cost of policies
acquired.
NOTE 4. INVESTMENTS
The amortized cost and estimated fair value of fixed maturity and
equity securities available for sale at December 31, 1998, were as
follows:
<TABLE>
<CAPTION>
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>
F-13
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
The amortized cost and estimated fair value of fixed maturity and
equity securities available for sale at December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Fixed maturity securities
U.S. government $11,530,209 $ 100,390 $ (17,876) $11,612,723
Mortgage backed securities 28,769,315 919,796 (127,599) 29,561,512
Corporate bonds 3,785,996 192,783 (32,529) 3,946,250
----------- ---------- --------- -----------
Total fixed maturity securities 44,085,520 1,212,969 (178,004) 45,120,485
Equity securities 1,013,365 42,500 (260,995) 794,870
----------- ---------- --------- -----------
Total $45,098,885 $1,255,469 $(438,999) $45,915,355
=========== ========== ========= ===========
</TABLE>
Unrealized gains (losses) included in accumulated other
comprehensive income (loss) are reported net of tax effect of $1,153,395
and $227,600 in 1998 and 1997, respectively.
The amortized costs and fair value of fixed maturities available
for sale at December 31, 1998, by contractual maturity date are shown
below. Expected maturities may differ from contractual maturities since
certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
In one year or less $ 124,976 $ 126,101
In years two through five 3,777,968 3,509,514
In years six through ten 9,467,032 7,337,789
After ten years 6,039,448 5,995,125
Mortgage backed securities 48,792,515 48,659,554
----------- -----------
Total $68,201,939 $65,628,083
=========== ===========
</TABLE>
Investments in fixed maturities or equity securities in any single
entity in excess of 10% of shareholders' equity at December 31, 1998
other than investments issued or guaranteed by the United States
government or a United States government agency, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
CAI Wireless Systems $1,657,191 $1,198,745
American Telecasting 1,561,754 657,380
CS Wireless Systems 1,468,151 1,100,000
Wireless One, Inc. 2,503,375 1,793,311
Autobond Acceptance Corporation 3,324,512 1,875,000
Transnational Financial 1,312,800 998,750
Westower Corporation 2,202,392 3,285,000
</TABLE>
F-14
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
Lincoln Heritage invests in both investment grade and below investment
grade fixed maturity securities. At December 31, 1998, approximately
15% of the book value of Lincoln Heritage's fixed maturity investments
consisted of below investment grade securities.
Assets with a fair value of $11,648,261 at December 31, 1998, were
on deposit with various state regulatory authorities. Assets with a
fair value of $55,141,485 at December 31, 1998, were restricted as to
use for the acquired Woodmen Block, World Block and other assumed
business.
Major categories of investment income consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Fixed maturities $3,162,390 $5,183,674 $ 7,700,956
Equities - - 292,440
Policyholder loans 64,430 243,879 774,306
Short-term investments 587,667 857,434 2,065,800
---------- ---------- -----------
Gross investment income 3,814,487 6,284,987 10,833,502
Investment expenses 103,767 113,772 195,096
---------- ---------- -----------
Net investment income $3,710,720 $6,171,215 $10,638,406
========== ========== ===========
</TABLE>
Gross realized investment gains consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Gross realized gains $2,188,649 $2,929,348 $ 4,198,392
Gross realized losses (170,287) (262,900) (2,262,457)
---------- ---------- -----------
Net realized investment
gains $2,018,362 $2,666,448 $ 1,935,935
========== ========== ===========
</TABLE>
Proceeds from disposals of investments in fixed maturity and
equity securities during the years ended December 31, 1998, 1997, and
1996 were $342,392,212, $162,383,038 and $50,999,200, respectively.
NOTE 5. REINSURANCE
Reinsurance contracts do not relieve Lincoln Heritage from its
obligation to its policyholders. Failure of reinsurers to honor their
obligations could result in losses to Lincoln Heritage. Consequently,
allowances are established for amounts due from reinsurers that are
deemed uncollectible. Lincoln Heritage 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 $11,000 and $23,000 at
December 31, 1998 and 1997, respectively. Reinsurance payables were
$235,000 and $36,000 at December 31, 1998 and 1997, respectively.
F-15
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
The effect of reinsurance on premiums earned were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Direct $26,918,986 $34,925,424 $40,441,151
Reinsurance assumed 6,538,596 3,371,830 1,212,257
Reinsurance ceded (184,165) (252,784) (290,024)
----------- ----------- -----------
Premiums earned $33,273,417 $38,044,470 $41,363,384
=========== =========== ===========
</TABLE>
Death benefits incurred on the business assumed were $818,793,
$2,257,286, and $3,616,736, for the years ended December 31, 1998, 1997
and 1996, respectively. Recoveries of death benefits were not
significant during 1998, 1997 and 1996 under reinsurance agreements.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
In the normal course of business, Lincoln Heritage 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 Lincoln Heritage 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 Lincoln Heritage 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:
(ii) The carrying value of cash and cash equivalents
approximates fair value due to the short maturities of
these investments;
(iii) 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;
(iv) Fair value of policyholder loans approximates the carrying
amount of such assets because the earned rate on the
policy loans approximates Lincoln Heritage's current
portfolio yield;
(v) The carrying value of accounts receivable and payable and
premiums received in advance approximates fair value due
to their relatively short maturities; and
(vi) The carrying amount of policyholder deposits approximates
their fair value due to Lincoln Heritage's ability to
adjust the rate at which interest is credited to the
accounts.
F-16
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
Fair values and carrying amounts for Lincoln Heritage's financial
instruments are presented as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1997 1998
-------------------------- --------------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $62,667,707 $62,667,707 $43,824,537 $43,824,537
Fixed maturity securities 45,120,485 45,120,485 67,257,686 67,257,686
Equity securities 794,870 794,870 7,121,000 7,121,000
Accounts receivable 478,362 478,362 1,535,926 1,535,926
Policyholder loans 11,457,962 11,457,962 17,257,122 17,257,122
Policyholder deposits 41,613,697 41,613,697 47,163,465 47,163,465
Premiums received in advance 304,471 304,471 409,937 409,937
</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,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 9,880,350 $11,149,607 $12,554,870
Change in balance:
Deferrals 3,932,030 4,161,506 8,926,805
Amortization (2,662,773) (2,756,243) (4,600,197)
----------- ----------- -----------
Net change 1,269,257 1,405,263 4,326,608
----------- ----------- -----------
Balance, end of year $11,149,607 $12,554,870 $16,881,478
=========== =========== ===========
</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:
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
---------- -----------
Balance, beginning of year $ - $ 3,249,365
Additions from acquisition 3,511,553 2,205,716
Gross amortization (348,933) (1,047,244)
Interest 86,745 335,680
CPA on policies sold - (909,858)
---------- -----------
Balance, end of year $3,249,365 $ 3,833,659
========== ===========
F-17
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
Interest is accrued on the unamortized balance of CPA at 7.5%.
Approximately 8.2% of the balance at December 31, 1998 is expected to be
amortized during each of the next five years. Lincoln Heritage had no
policy acquisitions resulting in the recognition of CPA during or prior
to 1996.
NOTE 8. CLAIMS AND BENEFITS PAYABLE
Activity in the liability for life claims payable was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 $ 640,000 $ 781,000 $ 689,000
Incurred related to:
Current year 11,812,138 13,573,754 16,387,714
Prior year (64,968) (22,295) 18,708
----------- ----------- -----------
Total incurred 11,747,170 13,551,459 16,406,422
----------- ----------- -----------
Paid related to:
Current year 11,031,138 12,887,754 15,737,714
Prior year 575,032 755,705 707,708
----------- ----------- -----------
Total paid 11,606,170 13,643,459 16,445,422
----------- ----------- -----------
Balance at December 31 $ 781,000 $ 689,000 $ 650,000
=========== =========== ===========
</TABLE>
NOTE 9. INCOME TAXES
The provision for income taxes 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>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate 306,544 791,289 835,080
Small life insurance company deduction (243,940) (126,920) (619,154)
Alternative minimum taxes 126,584 - -
Other 7,781 7,526 224,533
--------- --------- ---------
Total tax expense $ 196,969 $ 671,895 $ 440,459
========= ========= =========
</TABLE>
F-18
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
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,
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Non life losses $ - $ 728,753
Net unrealized losses on available for sale securities - 1,153,395
Policy reserves and policy funds 4,684,072 7,991,569
Other liabilities 28,301 48,112
---------- -----------
Subtotal 4,712,373 9,921,829
Valuation allowance - (3,320,670)
---------- -----------
Total deferred tax assets, net of valuation allowance 4,712,373 6,601,159
---------- -----------
DEFERRED TAX LIABILITIES:
Net unrealized gains on available for sale fixed maturities
and equity securities 277,600 -
Deferred policy acquisition costs 1,934,303 2,532,571
Other assets 105,500 703,950
---------- -----------
Deferred tax liabilities 2,317,403 3,236,521
---------- -----------
Net deferred tax assets $2,394,970 $ 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 10. COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
Lincoln Heritage 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 $710,000, $550,000 and $550,000 for the years ended
December 31, 1998, 1997, and 1996, respectively. Future minimum lease
payments under the terms of these operating leases at December 31, 1998
are as follows:
1999 $ 795,985
2000 811,570
2001 821,269
2002 448,622
----------
$2,877,446
==========
Legal and Other Proceedings
- ---------------------------
NPS, a related party, along with New Life have been named
defendants in a previously dismissed class-action lawsuit that was
refiled during 1996 in St. Louis, Missouri, City Circuit Court. The
suit
F-19
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
involves a challenge to NPS's methods of funding prearranged funeral
contracts with policies issued by Lincoln Heritage. The suit contains
no specified dollar amounts for damages. Both Lincoln Heritage and NPS
believe that the claims are without merit and a motion is pending to
dismiss Lincoln Heritage from the case. Lincoln Heritage does not
believe the outcome of this lawsuit will have a material adverse effect
on its financial condition, results of operations or cash flows.
On December 31, 1998, a suit was filed in the U.S. District Court
in Galveston, Texas against Lincoln Heritage, along with Memorial and
New Life alleging trademark infringement regarding the use of the name
"Lincoln Heritage." The suit seeks enjoinment from the use of the name
"Lincoln Heritage." The suit contains no specified dollar amounts for
damages. Lincoln Heritage believes the claims are defensible and
without merit. Lincoln Heritage does not believe the outcome of the
lawsuit will have a material adverse effect on its financial condition,
results of operations or cash flows.
Lincoln Heritage also is subject to various other claims and
contingencies arising out of the normal course of business. Lincoln
Heritage 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 11. RELATED PARTY TRANSACTIONS
Substantially all of Lincoln Heritage's life insurance policies
are issued to fund prearranged funeral contracts that are sold by NPS,
Inc. ("NPS") and NPS Agency, Inc. ("NPS Agency"). NPS is an affiliated
company that collects all payments for prearranged funeral contracts and
remits such amounts to Lincoln Heritage 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
Lincoln Heritage. 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. Lincoln Heritage is not
subject to significant credit risk on the policy loans, since Lincoln
Heritage makes no policy loans which exceed the reserves held on the
policy securing the loan and Lincoln Heritage 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, 1998, 1997 and
1996 were received from or paid to NPS , NPS Agency or the Trust. At
December 31, 1998 and 1997, Lincoln Heritage had policyholder loans of
$15,556,437 and $11,457,962, respectively, on policies of which NPS is
the beneficiary.
Lincoln Heritage's insurance subsidiaries have a contract (the
"Contract") with NPS and NPS Agency that obligates Lincoln Heritage 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, 1998, 1997 and 1996, were paid to NPS or NPS Agency.
F-20
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
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, Lincoln Heritage 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, Lincoln Heritage and NPS agreed to retroactively
increase premiums charged on certain policies issued by Lincoln
Heritage. The policies selected for the increase in premiums were those
policies that did not meet the profitability criteria of Lincoln
Heritage. 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, Lincoln Heritage entered into a cost
sharing agreement with NPS whereby NPS will reimburse Lincoln Heritage
on a monthly basis for a portion of certain general and administrative
costs paid for by Lincoln Heritage for the benefit of NPS . Costs
reimbursed under the agreement were $2,253,644 and $2,695,091 for the
years ended December 31, 1998 and 1997, respectively.
Amounts receivable from NPS at December 31, 1998 and 1997, were
$1,535,926 and $478,362, respectively. Amounts payable to NPS at
December 31, 1998 and 1997, were $65,000 and $17,090, respectively.
The majority shareholder of Lincoln Heritage has the right to
cause Lincoln Heritage to register the majority shareholder's shares of
common stock under the Securities Act of 1993, for resale, at the
expense of Lincoln Heritage.
Effective February 1, 1998, Lincoln Heritage 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 and director of Lincoln Heritage, entered into a non-
compete agreement with Lincoln Heritage for the sum of $60,000 payable
in 15 equal installments beginning April 1, 1998.
NOTE 12. EMPLOYEE BENEFIT PLAN
Lincoln Heritage 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. In
F-21
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
1996, Lincoln Heritage began matching 12% of the employees' contribution
up to 6% of their salary. For the years ended December 31, 1998, 1997,
and 1996 Lincoln Heritage contributed $8,683, $5,170 and $5,067,
respectively, to the 401K Plan.
NOTE 13. CONCENTRATIONS OF RISK
At December 31, 1998 and 1997, Lincoln Heritage 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. Lincoln Heritage periodically has significant
investments in demand deposits in banks and other financial institutions
that exceed federally insured amounts. Lincoln Heritage had accounts
receivable from NPS and NPS Agency of $1,535,926 and $478,362 at
December 31, 1998 and 1997, respectively. In addition, at December 31,
1998 and 1997, Lincoln Heritage had policyholder loans outstanding of
$15,556,437 and $11,457,962, respectively, on policies of which NPS is
the beneficiary. The policy loans are collateralized by the policy cash
surrender values.
NOTE 14. STATUTORY ACCOUNTING INFORMATION
Lincoln Heritage'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 Lincoln
Heritage'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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net income (loss) $2,597,707 $ 530,509 $(1,775,721)
Shareholders' equity 5,353,237 7,863,137 7,815,609
</TABLE>
The ability of the life insurance subsidiaries to pay dividends or
make other distributions is restricted by state insurance laws.
Determining factors include, but are not limited to, net income after
tax and shareholder's equity as reported on a statutory basis. At
December 31, 1998, no amounts were available for transfer to the parent
company by dividend, loan or advance, or were available for such a
transfer only with 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 15. ACQUISITIONS
On May 15, 1998, Lincoln Heritage 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
F-22
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
subsequent to May 15, 1998 have been included in Lincoln Heritage's
consolidated statements of operations. The pro forma effect of the
purchase of Lincoln is immaterial.
NOTE 16. STOCK OPTIONS
Effective April 6, 1998, Lincoln Heritage adopted the Lincoln
Heritage 1998 Long-Term Incentive Plan (the Plan). The Plan allows for
the issuance of (1) stock options, (2) stock appreciation rights, (3)
restricted shares of common stock, and (4) 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 option holder
remains continuously associated with Lincoln Heritage 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 Lincoln Heritage become available once again for
issuance. Options vest over 4 years in 25% increments commencing one
year from date of grant.
Lincoln Heritage recognizes compensation expense for stock options
granted to employees following the guidance of APB No. 25. Accordingly,
Lincoln Heritage recognized compensation expense of approximately
$115,000 related to awards for employees for the year ended December 31,
1998. Had Lincoln Heritage implemented SFAS No. 123, Lincoln Heritage's
compensation expense would have increased by approximately $40,000 and
Lincoln Heritage's pro forma net income, net income per share (basic)
and net income per share (diluted), considering the effects of
implementing SFAS No. 123, net of tax effects, would have been
approximately $2,500,000, $0.61, and $0.60, respectively.
Lincoln Heritage recognizes compensation expense for stock options
granted to non employees in accordance with SFAS No. 123. Lincoln
Heritage recognized compensation expense of approximately $93,000 for
the year ended December 31, 1998, related to awards to non-employees. 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.
F-23
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
A summary of Lincoln Heritage's stock option activity is as
follows:
<TABLE>
<CAPTION>
NUMBER OPTION
OF PRICE
SHARES PER SHARE
------------ ---------------
<S> <C> <C>
Balance at January 1, 1998 - $ -
Granted 399,500 3.75
Forfeited (3,750) 3.75
Exercised - -
--------
Outstanding at December 31, 1998 395,750 3.75
========
Options exercisable at 12/31/98 -
========
Available for future grant 804,250
========
</TABLE>
The weighted average fair value of the options granted during the
year ended December 31, 1998 was $7.50 per share.
NOTE 17. SUBSEQUENT EVENTS
On January 28, 1998, Lincoln Heritage executed a definitive stock
acquisition agreement to acquire all of the outstanding stock of
Harbourton Reassurance, Inc. ("Harbourton") 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
Lincoln Heritage and a proposal to acquire Harbourton's in-force
business is pending.
Lincoln Heritage has investments in certain equity securities
whose fair values have declined significantly from the fair values at
December 31, 1998. The declines may be for reasons other than normal
market fluctuations that may require Lincoln Heritage to recognize a
loss during the first quarter of 1999. Lincoln Heritage is closely
monitoring the current activities of the issuers of such securities.
NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations for 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------
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>
F-24
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 & 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Life premiums $8,630,747 $8,705,537 $8,483,146 $12,225,040
Net investment income 1,263,456 1,249,141 1,857,328 1,801,290
Realized investment gains 20,748 86,343 562,781 1,996,576
Net income (loss) (226,279) (126,705) 984,064 1,024,346
Basic earnings (loss) per share (0.06) (0.03) 0.25 0.25
Diluted earnings (loss) per share (0.06) (0.03) 0.25 0.25
</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. From an operational
perspective, during the fourth quarter 1998, estimates from prior
periods for the reserve liabilities and the affiliated party cost
sharing agreement were calculated for the entire calendar year. 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 Lincoln Heritage's business.
F-25
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
ASSETS
Fixed maturities available-for-sale at fair value
(amortized cost $80,186,103) $ 71,076,038
Equity securities at fair value (amortized cost $6,687,997) 5,216,974
Policyholder loans 21,973,465
Cash and cash equivalents 25,695,254
------------
Total cash and investments 123,961,731
Accrued investment income 658,919
Accounts receivable from related party 1,993,625
Funds withheld by ceding company 534,362
Deferred policy acquisition costs, net 19,750,731
Fixed assets, net 1,447,980
Cost of policies acquired, net 3,050,297
Goodwill, net 1,358,017
Deferred tax assets, net 6,037,392
Other assets 702,995
------------
Total $159,496,049
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $114,331,574
Policyholder deposits 39,287,982
Claims and benefits payable 500,000
Premiums received in advance 739,079
------------
Total policy liabilities 154,858,635
Income tax payable 35,800
Accounts payable and accrued expenses 280,624
Other liabilities 1,148,322
------------
Total liabilities 156,323,381
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 1,000,000 shares authorized,
none issued) -
Common stock ($.01 par value; 10,000,000 shares authorized,
4,532,134 shares issued and outstanding) 45,321
Additional paid-in capital 4,977,732
Retained earnings 5,214,474
Accumulated other comprehensive loss (7,064,859)
------------
Total shareholders' equity 3,172,668
------------
Total $159,496,049
============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
</TABLE>
F-26
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Life premiums $10,897,591 $12,337,243 $31,630,543 $33,357,696
Net investment income 2,840,302 2,372,410 7,673,251 7,526,920
Realized investment gains (losses), net 442,905 (701,693) 1,511,108 153,002
Other revenue 65,065 40,674 212,931 173,182
----------- ----------- ----------- -----------
Total revenues 14,245,863 14,048,634 41,027,833 41,210,800
BENEFITS AND EXPENSES
Death benefits 4,045,996 3,953,820 12,335,933 13,509,901
Surrender benefits 1,088,746 114,469 1,567,331 1,003,985
Increase in future policy benefits 3,974,317 4,781,027 12,382,365 10,130,252
Interest paid on policyholder deposits 685,143 853,317 1,467,826 1,561,942
Commissions 4,875,589 4,913,278 11,811,695 12,755,692
General expenses 1,814,236 2,290,050 5,158,001 7,182,262
General expenses reimbursed by related party (751,854) (671,173) (2,066,886) (2,063,913)
Taxes, licenses and fees 243,620 102,274 661,468 731,583
Amortization of cost of policies purchased 49,430 20,198 623,003 658,362
Change in deferred acquisition costs, net (1,057,320) (1,890,855) (2,206,954) (2,869,253)
----------- ----------- ----------- -----------
Total benefits and expenses 14,966,903 14,466,405 41,733,782 42,600,813
LOSS BEFORE FEDERAL INCOME TAXES (722,044) (417,771) (705,949) (1,390,013)
Income tax benefits (208,743) - (204,019) (330,563)
----------- ----------- ----------- -----------
NET LOSS $ (513,297) $ (417,771) $ (501,930) $(1,059,450)
=========== =========== =========== ===========
Basic loss per share $ (0.13) $ (0.09) $ (0.13) $ (0.23)
=========== =========== =========== ===========
Diluted loss per share $ (0.13) $ (0.09) $ (0.13) $ (0.23)
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 4,000,000 4,523,474 4,000,000 4,523,474
Diluted 4,000,000 4,523,474 4,000,000 4,523,474
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
</TABLE>
F-27
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
TOTAL STOCK CAPITAL (LOSS) EARNINGS
----------- ------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 6,882,711 $10,000 $2,075,576 $ 538,870 $ 4,258,265
Comprehensive loss, net of tax:
Net loss (501,930) - - - (501,930)
Change in unrealized losses on
available for sale and equity
securities, net of applicable
income tax benefit of $1,052,823 (2,043,715) - - (2,043,715) -
-----------
Total comprehensive (loss) (2,545,645) - - - -
-----------
Transfer to common stock in
Connection with stock split and
Stock divided - 30,000 (30,000) - -
Effect of stock options granted under stock
option plans, net of applicable income
tax effect of $58,550 113,560 - 113,560 - -
----------- ------- ---------- ----------- -----------
Balance, September 30, 1998 $ 4,450,626 $40,000 $2,159,136 $(1,504,845) $ 3,756,335
=========== ======= ========== =========== ===========
Balance December 31, 1998 $ 8,814,562 $45,200 $4,734,350 $(2,238,912) $ 6,273,924
Comprehensive income, net of tax:
Net loss (1,059,450) - - - (1,059,450)
Change in unrealized losses on
available for sale and equity
securities, net of applicable
income tax benefit of $2,486,094 (4,825,947) - - (4,825,947) -
-----------
Total comprehensive (loss) (5,885,397) - - - -
-----------
Issuance of shares for stock options 45,503 121 45,382 - -
Effect of stock options granted under stock
option plan, net of applicable income
tax effect of $102,000 198,000 - 198,000 - -
----------- ------- ---------- ----------- -----------
Balance, September 30, 1999 $ 3,172,668 $45,321 $4,977,732 $(7,064,859) $ 5,214,474
=========== ======= ========== =========== ===========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
</TABLE>
F-28
<PAGE>
<PAGE>
<TABLE>
LINCOLN HERITAGE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (501,930) $ (1,059,450)
Adjustments to reconcile net income to cash
used in operating activities:
Realized investment gains (1,511,108) (153,001)
Accretion of discount on investments (1,170,911) (265,077)
Depreciation and amortization 809,440 926,630
Deferred income taxes (163,096) (321,060)
Stock options 172,060 300,000
Accrued investment income (74,344) (195,303)
Accounts receivable from related parties (1,272,522) (457,699)
Funds withheld by ceding company - (7,928)
Deferred acquisition costs (2,206,954) (2,869,253)
Other assets (810,946) 301,123
Future policy benefits and deposit funds 3,333,775 2,254,768
Claims and benefits payable (300,000) (150,000)
Premiums received in advance 32,117 329,142
Federal income tax payable (1,975,165) (14,000)
Accounts payable and accrued expenses (16,223) (375,465)
Accounts payable to related party 162,327 (163,292)
Other liabilities (122,570) (690,723)
------------ ------------
Net cash used in operating activities (5,616,050) (2,610,588)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale investments 223,824,091 53,429,486
Purchases of available for sale investments (230,933,520) (63,513,214)
Policyholder loans, net (3,559,578) (4,716,343)
Purchase of fixed assets (607,593) (442,363)
Acquisition of subsidiary (5,066,809) -
Other, net (897,133) (321,764)
------------ ------------
Net cash used in investing activities (17,240,542) (15,564,198)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares for stock options - 45,503
------------ ------------
Net cash provided by financing activities - 45,503
------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (22,856,592) (18,129,283)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 62,667,707 43,824,537
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 39,811,115 $ 25,695,254
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Federal income taxes paid $ 1,975,165 $ -
============ ============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
</TABLE>
F-29
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Lincoln Heritage and its direct and indirect wholly owned
subsidiaries: Memorial Service Life Insurance Company, New Life
Insurance Company, and Lincoln Memorial Life Insurance Company. These
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, which differ from statutory accounting
practices prescribed or permitted by regulatory authorities.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. All intercompany accounts and transactions have
been eliminated in consolidation. Certain prior period amounts have
been reclassified to conform with the current period presentation.
The accompanying condensed consolidated financial statements and notes
thereto as of September 30, 1999 are unaudited and should be read in
conjunction with Lincoln Heritage's audited financial statements
included in Lincoln Heritage's Annual Report filed with the Securities
and Exchange Commission for the year ended December 31, 1998. The
unaudited interim condensed consolidated financial statements have been
prepared on the same basis as the annual consolidated financial
statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to present
fairly Lincoln Heritage's financial position, results of operations and
cash flows as of September 30, 1999 and for the three and nine months
ended September 30, 1999 and 1998 respectively. The results for the
three and nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the year ending
December 31, 1999.
NOTE 2. STOCK SPLITS AND EARNINGS PER SHARE
On April 6, 1998, Lincoln Heritage effected a 3.2-for-1 stock split, in
the form of a stock dividend, and on August 18, 1998, Lincoln Heritage
declared and paid a 25% stock dividend. The earnings per share of
Lincoln Heritage for all periods presented have been computed as if
these stock splits and dividends occurred at January 1, 1998. The
diluted earnings per share is computed using the treasury stock method
unless the effect is anti-dilutive.
NOTE 3. INVESTMENTS
In the nine month period ended September 30, 1999, Lincoln Heritage
recognized losses for declines in market value associated with Lincoln
Heritage's investment in Autobond Acceptance Corporation ("Autobond").
Management believes that the decline in market value is other than
temporary and due to reasons other than market fluctuations and has
recognized losses of $578,000 and $3.2 million for the three and nine
months ended September 30, 1999, respectively. These recognized losses
reduced the Company's total investment in Autobond to $98,000 as of
September 30, 1999.
F-30
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
The amortized cost and estimated fair value of fixed maturity and
equity securities available-for-sale as of September 30, 1999, are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds $15,035,512 $191,075 $ (1,367,906) $13,858,681
Mortgage backed securities 48,755,173 72,493 (6,483,011) 42,344,655
U.S. government 16,395,418 118,653 (1,641,369) 14,872,702
----------- -------- ------------ -----------
Total fixed maturity securities 80,186,103 382,221 (9,492,286) 71,076,038
Equity securities 6,687,997 86,935 (1,557,958) 5,216,974
----------- -------- ------------ -----------
Total $86,874,100 $469,156 $(11,050,244) $76,293,012
=========== ======== ============ ===========
</TABLE>
NOTE 4. SUBSEQUENT EVENTS
On October 15, 1999, the Company purchased all of the outstanding
shares of capital stock of Funeral Security Life Insurance Company for
$5.0 million. As of such date, Funeral Security Life Insurance had
approximately $31 million in assets and $30 million in liabilities.
The acquisition will be accounted for using the purchase method.
On October 28, 1999, the Company completed the sale of its
insurance subsidiary, New Life Insurance Company 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 is not expected to have a material adverse effect
on the Company's financial position, results of operations or cash
flows.
Lincoln Heritage has recently entered into an agreement to
purchase all the outstanding shares of an insurance company for
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. The
acquiree's insurance operations consists of a closed block of life and
annuity policies. The acquiree has 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.
F-31
<PAGE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Forever Enterprises, Inc.
Saint Louis, Missouri
We have audited the accompanying balance sheet of Forever Enterprises,
Inc. (a Missouri corporation and wholly-owned subsidiary of National
Heritage Enterprises, Inc.) and subsidiaries as of December 31, 1998,
and the related statement of operations, retained earnings and cash
flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these 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 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 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 financial position of
Forever Enterprises, Inc. and subsidiaries as of December 31, 1998, and
the results of its operations and its cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ Rosenthal, Packman & Co., P.C.
Saint Louis, Missouri
December 22, 1999
F-32
<PAGE>
<PAGE>
<TABLE>
FOREVER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash $ 15,528 $ 0
Accounts receivable 2,366,232 2,116,278
Inventory 431,460 389,998
Other 30,000 0
---------- ----------
2,843,220 2,506,276
---------- ----------
Cemetery property, net 2,159,621 2,116,518
Property and equipment, net 2,881,077 1,695,971
Accounts receivable - Hollywood Forever, Inc. 992,589 0
Investment in Hollywood Forever, Inc. - equity basis 90,000 0
Accounts receivable, affiliate 0 1,024,060
Preneed CSA trust assets 601,415 550,797
Deferred preneed expenses 14,306 58,650
Deferred software development costs, net 301,980 184,523
Other 43,212 46,824
---------- ----------
7,084,200 5,677,343
---------- ----------
Total Assets $9,927,420 $8,183,619
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Liabilities:
Accounts payable $ 470,349 $ 196,048
Other current liabilities 270,694 404,858
---------- ----------
741,043 600,906
---------- ----------
Note payable 2,464,590 1,322,227
Accounts payable, affiliate 397,943 0
Deferred preneed revenues 3,294,164 3,201,371
Other liabilities 28,319 0
---------- ----------
6,185,016 4,523,598
---------- ----------
Total Liabilities 6,926,059 5,124,504
Shareholder's Equity:
Common stock 1,000 1,000
Paid in capital 2,000,000 2,000,000
Retained earnings 1,000,361 1,058,115
---------- ----------
Total Shareholder's Equity 3,001,361 3,059,115
---------- ----------
Total Liabilities and Shareholder's Equity $9,927,420 $8,183,619
========== ==========
See accountants' audit report.
The notes are an integral part of the consolidated financial statements.
</TABLE>
F-33
<PAGE>
<PAGE>
<TABLE>
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Sales $ 2,150,577 $1,622,356 $ 981,559
Cost of sales (712,238) (338,763) (207,676)
----------- ---------- ---------
Gross profit 1,438,339 1,283,593 773,883
----------- ---------- ---------
Selling, general and administrative (1,827,143) (956,112) (873,111)
Interest expense (133,346) (159,459) (173,898)
Other income 283,210 121,031 94,256
----------- ---------- ---------
Net income (loss) before income taxes $ (238,940) $ 289,053 $(178,870)
Current income tax benefit 82,120 0 0
----------- ---------- ---------
Net income (loss) $ (156,820) $ 289,053 $(178,870)
=========== ========== =========
See accountants' audit report.
The notes are an integral part of the consolidated financial statements.
</TABLE>
F-34
<PAGE>
<PAGE>
<TABLE>
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 1,000 $ 1,000 $ 1,000
---------- ---------- ----------
Additional paid-in-capital:
Balance at beginning and end of year 2,000,000 2,000,000 2,000,000
---------- ---------- ----------
Retained earnings:
Balance at beginning of year 1,058,115 769,062 947,932
Prior period adjustment 99,066 0 0
Net income (loss) (156,820) 289,053 (178,870)
---------- ---------- ----------
Balance at end of year 1,000,361 1,058,115 769,062
---------- ---------- ----------
Total shareholder's equity $3,001,361 $3,059,115 $2,770,062
========== ========== ==========
See accountants' audit report.
The notes are an integral part of these consolidated financial statements.
</TABLE>
F-35
<PAGE>
<PAGE>
<TABLE>
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (156,820) $ 289,053 $ (178,870)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) by operating activities:
Depreciation 140,975 91,916 117,044
Amortization 150,989 207,007 98,934
Changes in operating assets and liabilities:
Accounts receivable (199,954) 5,796 690,911
Inventories (41,462) (374,089) (25,404)
Trust assets (50,618) 463 0
Deferred expense 44,344 188,667 128,995
Other assets (26,389) 3,335 10,760
Accounts payable 324,300 42,415 (383,657)
Deferred revenues 92,793 (23,577) 0
Other liabilities (5,845) 183,354 (41,101)
----------- --------- ------------
Total cash provided by operating activities 272,313 614,340 417,612
----------- --------- ------------
Cash flows from investing activities:
Increase in fixed assets (1,279,184) (86,251) 0
Decrease in property and equipment 0 0 5,304,734
Increase in investments - Hollywood (90,000) 0 0
Increase in deferred software development costs (362,806) (184,523) 0
Proceeds from sale of funeral homes 0 0 8,383,000
----------- --------- ------------
Total cash provided by (used in) investing activities (1,731,990) (270,774) 13,687,734
----------- --------- ------------
Cash flows from financing activities:
Increase in accounts receivable (992,589) 0 0
Increase (decrease) in accounts payable from
Affiliate 1,226,365 (317,735) (4,597,157)
Proceeds from debt 2,516,000 0 0
Retirement/repayment of debt (1,373,637) (133,332) (1,125,848)
Distribution of proceeds from sale 0 0 (8,383,000)
----------- --------- ------------
Total cash provided by (used in) financing activities 1,376,139 (451,067) (14,106,005)
----------- --------- ------------
Prior period adjustment 99,066 0 0
----------- --------- ------------
Net increase (decrease) in cash 15,528 (107,501) (659)
Cash at beginning of year 0 107,501 108,160
----------- --------- ------------
Cash at end of year $ 15,528 $ 0 $ 107,501
=========== ========= ============
See accountants' audit report.
The notes are an integral part of the consolidated financial statements.
</TABLE>
F-36
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 1 - BUSINESS:
- ------------------
Forever Enterprises, Inc. (a wholly-owned subsidiary of National Heritage
Enterprises, Inc. (NHE)) owns Mason Securities Association, Inc. (Mason),
Forever Memorial, Inc. and owns 45% of Hollywood Forever, Inc. (owner of
Hollywood Forever Cemetery). Forever Enterprises, Inc. (the Company) also
owns, and leases to Service Corporation International, Incorporated,
Pfitzinger funeral home located in Kirkwood, Missouri. Mason owns and
operates Bellerive Cemetery (Bellerive) and the Cremation Society of St.
Louis.
Bellerive is a non-denominational cemetery with a mausoleum located on 45
acres of land in Creve Coeur, Missouri (west St. Louis County). The
Cremation Society is an association that provides for cremations in
conjunction with Bellerive. Hollywood Forever Cemetery is a 62 acre
cemetery located in Los Angeles, California. Forever Memorial is a company
that creates personal biographies of individuals using audio, video and
other techniques. Forever Memorial customers primarily come from several
cemeteries that work with Forever Memorial in marketing and distribution of
the personal biographies. Once a biography is created, it will be
perpetually preserved on the Company's computer network. Present loved
ones and future generations can view the personal biographies at the
Company's audio/video display kiosks installed at cemeteries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Mason Securities Association,
Inc. and Forever Memorial, Inc. The consolidated financial statements also
include the investment in Hollywood Forever, Inc. carried on the equity
basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from
those estimates.
Accounts receivable
Balance consists of receivables from cemetery customers who had pre-
purchased cemetery property and merchandise and are paying the balance in
installment payments. Customers who purchase cemetery property and
merchandise on an at-need basis must pay the entire purchase amount at the
time of sale.
F-37
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
Prior Period Adjustment
The prior period adjustment to retained earnings was the result of a
correction of an error in inventory costing for the mausoleum.
Concentrations of Credit
The Company had accounts receivable of $2,366,232 from numerous individual
customers at December 31, 1998. The largest individual balance at December
31, 1998 was $40,312 or 1.7% of the total balance. The credit risk
associated with these customers is generally considered minimal because of
the wide dispersion of the customers served. Procedures are in place to
monitor delinquent accounts.
Cemetery Property and Mausoleum
Cemetery property consists of developed and undeveloped cemetery property
and is valued at cost. Repairs and maintenance are charged to expense as
incurred whereas major improvements are capitalized. Cemetery property is
expensed as sales of cemetery plots occur. Mausoleum inventory is the cost
of unsold mausoleum crypts and niches. Mausoleum inventories are expensed
as sales of crypts and niches occur. A portion of the cost of the
mausoleum is included in buildings in the accompanying financial statements
and is being depreciated over the useful life of the mausoleum. See
additional discussion of depreciation below.
Long-lived Assets
The Company periodically reviews for the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated future cash flows attributable to the asset is
less than the asset's carrying amount. The Company has not identified any
such impairment loss.
Depreciation
Property and equipment are being depreciated using the straight-line method
over the estimated useful lives of the various classes of assets that range
from 3 to 30 years. As of December 31, 1998 and 1997, accumulated
depreciation was $395,984 and $225,321, respectively. Depreciation expense
for the years ended December 31, 1998, 1997 and 1996 was $140,975, $91,916
and $117,044, respectively. Repairs and maintenance are charged to expense
as incurred whereas major replacements are capitalized.
Preneed CSA Trust
The value of the insurance policies in trust is the actuarial present value
of the benefits to be received less the premiums to be paid (i.e., the
reserve value of the policies).
F-38
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
Deferred Preneed Expenses
Based on historical costs, a small portion of each premium paid into life
insurance is booked to deferred expenses to offset actual cost of preneed
services and are expensed at time of need.
Deferred Preneed Revenue
As each preneed contract is entered into by the Company, the face amount of
the contract is posted to deferred revenue. At the time of need
(fulfillment of the contract) the Company takes into revenue the full
amount of the contract.
Deferred Software Development Costs
The Company's Forever Memorial subsidiary has incurred $452,970 and
$184,523 in costs to develop the software used to process and display the
Forever biographies for the years ended December 31, 1998 and 1997,
respectively. Such costs have been deferred and are being amortized over
the useful life of the software. Total amortization expense for the year
ended December 31, 1998 was $150,989.
Revenue/Expense Recognition
Cemetery property and merchandise sales are recorded at the time of a
completed sales contract. Costs related to such sales are charged to
operations at the time the sale is recorded. Costs related to merchandise
are based on actual costs incurred or estimated based on future costs to
purchase the merchandise. For sales of preneed merchandise, a
corresponding liability is recorded representing the cemetery's obligation
to purchase the merchandise at the time of need. At December 31, 1998, the
liability representing such merchandise is $75,000 and is included in other
current liabilities in the accompanying financial statements.
Funds from the sale of preneed interments and cremation services are placed
in trust and are used to pay premiums on life insurance policies issued by
an affiliated life insurance company. Unperformed interment right
obligations and cremation services are not included in the accompanying
financial statements. For the year ended December 31, 1998 the Company
sold $277,262 in such preneed interment rights and cremation services.
A large portion of the insurance policies held in trust include insurance
policies on price guaranteed prearranged funeral services entered into
prior to the Company's sale of its funeral homes in 1996. The total face
amount of insurance policies purchased and held in trust approximated $3.3
million at December 31, 1998.
Other Income
For the year ended December 31, 1998 other income is primarily composed of
rents received from Pfitzinger Funeral Home of $54,000, interest income of
$71,000 generated by the perpetual care trust, interest income of $60,000
generated by Hollywood Forever, Inc. notes receivable and intercompany
commissions of $94,000 from Forever Memorial, Inc.
F-39
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
Perpetual Care
A portion of the sales from cemetery property is required by state law to
be paid into perpetual care trust funds. In accordance with state laws,
the Company remits amounts to the perpetual care trust after the sale is
paid in full. Therefore, the Company records a liability for amounts to be
remitted when contracts are to be paid in full. Such liability was
$192,628 and $111,363 for the years ended December 31, 1998 and 1997,
respectively, and was recorded in other current liabilities in the
accompanying financial statements. Interest income from such perpetual
care trust funds is recognized as other revenue in the accompanying
financial statements and is intended to defray ongoing maintenance costs.
Interest income from the trust was approximately $71,000 for the year ended
December 31, 1998. The fair value of the Company's perpetual care trust
for the years ended December 31, 1998 and 1997 was $882,145 and $845,136,
respectively. The principal of the trust cannot be withdrawn and
accordingly, is not included in the accompanying financial statements.
Comprehensive Income
The components of comprehensive income that are excluded from net income
are not significant, individually or in the aggregate, therefore, no
separate statement of comprehensive income has been prepared.
Income Taxes
The Company does not file its own tax return. The Company's income and
expenses are included as a part of the consolidated return filed by the
parent company, NHE. The current income tax benefit for the year ended
December 31, 1998 was $82,120 and has been posted as a receivable from NHE.
NOTE 3 - ACQUISITION AND DISPOSITIONS:
On April 3, 1998 the Company assisted in the formation of Hollywood
Forever, Inc. (Hollywood Forever). Hollywood Forever is a company in which
the Company has a 45% interest. On April 6, 1998 Hollywood Forever
acquired Hollywood Memorial Park Cemetery in Los Angeles, California. Upon
acquisition, the cemetery's name was changed to Hollywood Forever Cemetery.
The acquisition was accounted for using the purchase method of accounting.
The total purchase price, including acquisition costs, of Hollywood Forever
Cemetery, including the portion not owned by the Company, was $589,842.
The Company's portion of the purchase price was financed through a note
payable to NHE, the Company's parent. See Note 10 for supplemental
financial information on Hollywood Forever, Inc.
F-40
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1998 and 1997 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land $ 500,000 $ 500,000
Buildings 2,117,236 1,210,488
Automobiles 44,202 21,700
A/V Equipment 202,880 0
Computer Equipment 190,668 0
Furniture and Fixtures 56,276 14,488
Machinery and Equipment 139,141 204,616
Software 26,658 0
Accumulated Depreciation (395,984) (255,320)
---------- ----------
Total Property and Equipment, net $2,881,077 $1,695,972
========== ==========
</TABLE>
NOTE 5 - FINANCING:
In January of 1998, the Company entered into a new financing agreement with
Allegiant Bank, whereby the Company executed a five year renewable note
payable with Allegiant Bank for $2,250,000. Approximately $1,350,000 of
the note proceeds went to repay the previous note payable to the former
owners of Bellerive. The balance outstanding and the current portion due
on the note at December 31, 1998 are $2,198,590 and $56,088 respectively.
Principal payments of $4,674 are paid monthly along with interest at the
"corporate market" interest rate (rate was 8.0% per annum at December 31,
1998). The "corporate market" interest rate is based upon an index
developed by Allegiant Bank.
The Company also has a $250,000 revolving line of credit from Allegiant
Bank at rates similar to the primary credit agreement discussed above. The
current balance outstanding is $200,000 at December 31, 1998. This line of
credit is renewable on a yearly basis subject to Allegiant Bank's
discretion.
NOTE 6 - LEASE COMMITMENTS:
The Company leases certain computer and other equipment under non-
cancelable lease agreements. These agreements extend for a period of
36 to 60 months and contain purchase or renewable options. Because it is
generally the Company's intention to enter into new leases at the end of
the lease periods, such leases are recorded as operating leases in the
accompanying financial statements. In addition, the Company has also
entered into non-cancelable leases recorded as capital leases.
F-41
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 6 - LEASE COMMITMENTS: (CONTINUED)
Minimum lease payments under long-term capital and operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
<S> <C> <C>
1999 47,189 8,512
2000 39,998 5,305
2001 20,304 3,094
-------- -------
$107,491 $16,911
======== =======
</TABLE>
Rent expense under all operating leases for the years ended December 31,
1998, 1997 and 1996 were approximately $36,424, $16,455 and $22,733,
respectively.
NOTE 7 - RELATED PARTIES:
National Heritage Enterprises, Inc. (NHE) charges the Company a portion of
the rent and utility costs of the leased office space at 10 South Brentwood
Boulevard. Such costs, which are included in selling, general and
administrative expenses in the accompanying financial statements,
approximated $137,000 for the year ended December 31, 1998.
The Company's wholly-owned subsidiary Forever Memorial, Inc. engages in
intercompany sales transactions. Bellerive sells products produced by
Forever Memorial through their cemetery operations. Bellerive remits such
sales amounts to Forever Memorial in exchange for a commission payment of
35% of the net sales amount. Additionally, Forever Memorial sells products
directly at Bellerive and pays Bellerive a commission of 20% on such sales.
Sales amounts recorded by Bellerive and remitted to Forever Memorial
totaled $250,000 for the year ended December 31, 1998. Forever Memorial
sold $40,000 in products directly at Bellerive and paid total commissions
to Bellerive of $93,878 for the year ended December 31, 1998. Bellerive
records such commissions as other income and Forever Memorial records such
commissions as cost of sales in the accompanying financial statements.
All intercompany transactions have been eliminated in the accompanying
financial statements with the exception of the commissions paid from
Forever Memorial to Bellerive, reflected as other income, and the
corresponding cost of sales recorded in Forever Memorial's accounts. Such
intercompany transactions have no net effect on the financial statements.
The Company sells preneed interment rights and cremation services and funds
such obligations through the purchase of life insurance policies from
Lincoln Memorial Life Insurance Company (Lincoln), an affiliate of the
Company. Total premiums paid to Lincoln for the years ended December 31,
1998, 1997 and 1996 were $168,086, $188,204 and $303,943, respectively.
At December 31, 1998 and 1997, the Company had payables to affiliated
companies of $397,943 and receivables of $1,024,060, respectively.
F-42
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 8 - RETIREMENT PLANS:
The Company offers all of its employees who meet certain eligibility
requirements a retirement savings plan (the 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 Plan.
NOTE 9 - SUBSEQUENT EVENTS:
On April 22, 1999 the Company undertook the construction of an office
building at the Bellerive location. The building contract is for a sum of
$294,708. The building was approximately 80% complete at the end of our
field work.
On November 15, 1999 the Company purchased the assets of a Kansas City,
Missouri cemetery now known as Mount Washington Forever, Inc. The cost to
the Company was $1,200,000.
On December 9, 1999 the Company acquired all of the stock ownership
interest of Dartmont Finance Corporation's subsidiary, Dartmont Investment,
Inc., in Hollywood Forever, Inc. (45%). Total cost to the Company will be
$2,927,830.
NOTE 10 - HOLLYWOOD FOREVER FINANCIAL INFORMATION:
Forever Enterprises, Inc. - 45%, Dartmont Investment, Inc. - 45% and Odessa
Group, L.L.C. - 10%, own Hollywood Forever, Inc. The investment in
Hollywood Forever, Inc. is accounted for using the equity method on the
Company's accompanying financial statements. The following is the
Hollywood Forever balance sheet as of December 31, 1998 and the related
statement of operations for the period ending December 31, 1998. These
statements were not within the scope of our audit, and therefore, we do not
express an opinion on them.
<TABLE>
<CAPTION>
Hollywood Forever, Inc.
Balance Sheet
December 31, 1998
<S> <C> <S> <C>
Assets Liabilities and Equity
- ------ ----------------------
Cash $ 61,462 Accounts payable and
Trade accounts receivable, net 212,799 other current liabilities $ 116,087
----------
Total current assets 274,261
Developed cemetery land and
improvements 1,052,996 Obligations under capital lease 120,371
Buildings and improvements 786,792 Accounts payable to affiliates 1,982,549
Machinery and computer Other long-term liabilities 258,162
equipment 237,631 ----------
Furniture and fixtures 93,883 Total long term liabilities 2,361,082
Accumulated depreciation (21,550)
---------- Paid in capital 200,000
Total fixed assets 2,149,752 Retained deficit (253,156)
----------
Total stockholders' equity (53,156)
Total Assets $2,424,013 Total Liabilities and Equity $2,424,013
========== ==========
</TABLE>
F-43
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 10 - HOLLYWOOD FOREVER FINANCIAL INFORMATION: (CONTINUED)
<TABLE>
<CAPTION>
Hollywood Forever, Inc.
Statement of Operations
Start of Operations - April 3, 1998 through December 31, 1998
<S> <C>
Sales $1,219,062
Cost of Sales 187,425
----------
Gross Profit Margin 1,031,637
Selling, general and administrative 1,276,381
Interest expense 82,844
Other (income) expense (74,432)
----------
Net Income (Loss) $ (253,156)
==========
</TABLE>
F-44
<PAGE>
<PAGE>
<TABLE>
FOREVER ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<CAPTION>
ASSETS
SEPTEMBER 30,
1999
-------------
<S> <C>
Cash $ 16,844
Accounts receivable, net 2,672,241
Inventory 378,107
Other 30,000
-----------
3,097,192
-----------
Cemetery property, net 2,132,990
Property and equipment, net 2,857,589
Accounts receivable - Hollywood Forever, Inc. 1,164,589
Investment in Hollywood Forever, Inc. - equity basis 90,000
Investment in National Heritage Enterprises 2,000,000
Preneed CSA trust assets 672,389
Deferred preneed expenses 129,210
Deferred software development costs, net 171,813
Other 40,816
-----------
9,259,396
-----------
Total Assets $12,356,588
===========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C>
Liabilities:
Accounts payable $ 222,131
Other current liabilities 501,715
-----------
723,846
-----------
Long-term note payable 2,442,309
Deferred preneed revenues 3,519,329
Other long-term liabilities 52,203
-----------
6,013,841
-----------
Total liabilities 6,737,687
Shareholder's Equity:
Common stock ($0 par; authorized 30,000 shares; issued
14,222; outstanding 10,648 shares) 1,000
Paid-in capital 4,604,204
Retained earnings 1,013,697
-----------
Total Shareholder's Equity 5,618,901
-----------
Total Liabilities and Shareholder's Equity $12,356,588
===========
The notes are an integral part of these condensed consolidated financial statements.
</TABLE>
F-45
<PAGE>
<PAGE>
<TABLE>
FOREVER ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Sales $ 2,064,886 $ 1,363,832
Cost of sales (462,730) (301,513)
----------- -----------
Gross profit 1,602,156 1,062,319
----------- -----------
Selling, general and administrative (1,657,624) (1,308,863)
Interest expense (143,257) (138,263)
Other income 212,061 110,364
----------- -----------
Net income (loss) $ 13,336 $ (274,443)
=========== ===========
The notes are an integral part of these condensed consolidated financial statements.
</TABLE>
F-46
<PAGE>
<PAGE>
<TABLE>
FOREVER ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,336 $ (274,443)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 110,439 292,594
(Increase) decrease in:
Accounts receivable (306,009) (82,104)
Inventories 53,353 (65,517)
Trust assets (70,974) --
Deferred assets (114,904) --
Other assets 2,396 (37,718)
Increase (decrease) in:
Accounts payable (248,218) 367,208
Deferred revenue 225,165 --
Other liabilities 254,905 77,582
----------- -----------
Total cash provided by operating activities 49,656 277,602
Cash flows from investing activities:
Increase in property and equipment (60,320) (917,624)
Increase in investments - Hollywood Forever -- (90,000)
Increase in deferred software development costs -- (415,936)
----------- -----------
Total cash used in investing activities (60,320) (1,423,560)
Cash flows from financing activities:
Increase in accounts receivable-Hollywood Forever, Inc. (172,000) (449,845)
Increase in investment in NHE (2,000,000) --
Increase (decrease) in accounts payable, affiliate (397,943) 856,377
Capital contributions 2,604,204 --
Proceeds from note payable and line of credit 50,000 2,250,000
Repayment of notes payable (72,281) (1,359,616)
----------- -----------
Total cash provided by financing activities 11,980 1,296,916
----------- -----------
Net increase in cash 1,316 150,958
Cash at beginning of period 15,528 --
----------- -----------
Cash at end of period $ 16,844 $ 150,958
=========== ===========
The notes are an integral part of these condensed consolidated financial statements.
</TABLE>
F-47
<PAGE>
<PAGE>
FOREVER ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 - BUSINESS:
- ------------------
Forever Enterprises, Inc. (a wholly-owned subsidiary of National
Heritage Enterprises, Inc. (NHE), owns Mason Securities Association,
Inc. (Mason), Forever Memorial, Inc. and owns 45% of Hollywood Forever,
Inc. (owner of Hollywood Forever Cemetery). Forever Enterprises, Inc.
(the Company) also owns, and leases to Service Corporation
International, Incorporated, Pfitzinger Funeral Home located in
Kirkwood, Missouri. Mason owns and operates Bellerive Cemetery
(Bellerive) and the Cremation Society of St. Louis.
Bellerive is a non-denominational cemetery with a mausoleum located on
45 acres of land in St. Louis, Missouri. The Cremation Society is an
association that provides for cremations in conjunction with Bellerive.
Hollywood Forever Cemetery is a 62-acre cemetery located in Los Angeles,
California. Forever Memorial is a company that creates personal
biographies of individuals using audio, video and other techniques.
Forever Memorial customers primarily come from several cemeteries that
work with Forever Memorial in marketing and distribution of the personal
biographies. Once a biography is created, it will be perpetually
preserved on the Company's computer network. Present loved ones and
future generations can view the personal biographies at the Company's
audio/video display kiosks installed at cemeteries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries Mason
Securities Association, Inc. and Forever Memorial, Inc. The condensed
consolidated financial statements also include the investment in
Hollywood Forever, Inc. carried on the equity basis. These consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles. All intercompany transactions and
balances have been eliminated.
The accompanying condensed consolidated financial statements and notes
thereto as of September 30, 1999 are unaudited and should be read in
conjunction with the Company's audited financial statements. The
unaudited interim condensed consolidated financial statements have been
prepared on the same basis as the annual consolidated financial
statements, and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to present
fairly the Company's financial position, results of operations and
cash flows as of September 30, 1999 and for the nine months ended
September 30, 1999 and are not necessarily indicative of the results
to be expected for the year ending December 31, 1999.
NOTE 3 - FORGIVENESS OF NOTES
- -----------------------------
As of June 30, 1999, the Company entered into an agreement with its
affiliated companies whereby net amounts due from the Company totaling
approximately $2.6 million were capitalized. In addition, NHE granted
the Company a 10% interest in its common stock in exchange for
approximately $2 million in amounts receivable by the Company. This
amount is reflected in the balance sheet as an investment in affiliate.
F-48
<PAGE>
<PAGE>
NOTE 4 - SUBSEQUENT EVENTS
- --------------------------
In November, 1999, Forever Enterprises acquired a cemetery property
located in Independence, Missouri known as Mount Washington Cemetery for
approximately $1.2 million.
In December, 1999, Forever Enterprises acquired an additional 45% of the
issued and outstanding stock of Hollywood Forever, Inc. for
approximately $2.9 million bringing the total interest in Hollywood
Forever, Inc. to 90%.
F-49
<PAGE>
<PAGE>
ANNEX A
-------
[CROWN CAPITAL LETTERHEAD]
February 14, 2000
Board of Directors
Lincoln Heritage Corporation
1250 Capital of Texas Highway
Building 3, Suite 100
Austin, TX 78746
Members of the Board:
You have requested our opinion on the fairness, from a financial point
of view, to Lincoln Heritage Corporation ("Purchaser") of the
consideration to be paid by Purchaser in connection with the proposed
purchase by Purchaser (the "Stock Purchase") of all of the issued and
outstanding shares of capital stock of Forever Enterprises, Inc.
("FEI"), a wholly owned subsidiary of National Heritage Enterprises,
Inc. ("Seller"), pursuant to the Stock Acquisition Agreement (the
"Agreement") dated December 20, 1999. Pursuant to the terms of the
Agreement, Purchaser will pay Seller a total purchase price of twelve
million dollars ($12,000,000.00) (the "Purchase Price"). The Purchase
Price will be paid by issuance and delivery to Seller of such number of
shares of Purchaser's common stock, $0.01 par value ("Purchaser Common
Stock"), equal to the quotient of the Purchase Price divided by the
closing price of Purchaser's Common Stock on the Pacific Stock Exchange,
on the market business day immediately preceding the closing date,
provided that Purchaser shall not be obligated to issue more than
2,400,000 shares of Purchaser Common Stock.
In connection with rendering our opinion, we have reviewed certain
publicly available information with respect to Purchaser and FEI and
certain other financial information with respect to Purchaser and FEI,
including financial forecasts, that were provided to us by Purchaser and
FEI, respectively. We have discussed the past and current business
operations and financial conditions of Purchaser and FEI as well as
other matters we believe relevant to our inquiry required to consummate
the Stock Purchase with certain officers and employees of Purchaser and
FEI, respectively. We have also considered such other information,
financial studies, analyses, investigations and financial, economic and
market criteria that we deemed relevant.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of the financial
and other information reviewed by us and we have not assumed any
responsibility for independent verification of such information. With
respect to the financial forecasts of Purchaser and FEI, we have assumed
that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the respective managements
of Purchaser or FEI as to the future financial performance of Purchaser
and FEI, respectively, and we express no view with respect to such
forecasts or the assumptions on which they were based. We also have
assumed that the Stock Purchase will be consummated in accordance with
the terms of the Agreement. We have not made, obtained or assumed any
responsibility for making or obtaining any independent evaluations or
appraisals of any of the assets (including properties and facilities) or
liabilities of Purchaser or FEI.
A-1
<PAGE>
<PAGE>
Our opinion is necessarily based upon conditions as they exist and can
be evaluated on the date hereof. Our opinion as expressed below does
not imply any conclusion as to the trading range for the Purchaser
Common Stock following the consummation of the Stock Purchase, which may
vary depending upon, among other factors, changes in interest rates,
dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities. Our opinion
does not address Purchaser's underlying business decision to effect the
Stock Purchase. Our opinion is directed only to the fairness, from a
financial point of view, of the Purchase Price to Purchaser and does not
constitute a recommendation concerning how holders of Purchaser Common
Stock should vote with respect to the transactions contemplated by the
Agreement.
We have been engaged by the Board of Directors of Purchaser in
connection with the purchase to prepare this opinion of fairness and
will receive a fee for our services, which is not contingent upon
consummation of the purchase. We have not previously rendered
investment banking or financial advisory services to the Purchaser,
Seller or their affiliates.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Purchase Price is fair to Purchaser from a
financial point of view.
Very truly yours,
/s/ Crown Capital Corporation
Crown Capital Corporation
A-2
<PAGE>
<PAGE>
ANNEX B
-------
STOCK ACQUISITION AGREEMENT
---------------------------
THIS AGREEMENT ("Agreement") made and entered into this 20th day
of December, 1999, by and between LINCOLN HERITAGE CORPORATION, a Texas
corporation ("Purchaser"), and NATIONAL HERITAGE ENTERPRISES, INC., a
Missouri corporation ("Seller").
WHEREAS, Seller is the owner of 10,648 shares (the "Stock") of
FOREVER ENTERPRISES, INC., a Missouri corporation ("Corporation"),
constituting all of the issued and outstanding stock of the Corporation;
and
WHEREAS, Seller desires to sell the Stock to Purchaser as more
particularly set forth below, and Purchaser desires to purchase the
Stock upon the terms and conditions set forth herein.
NOW, THEREFORE, for and in consideration of the mutual promises
herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do
hereby agree as follows:
1. Sale of Stock. Subject to the terms and conditions
-------------
hereof, Seller shall sell, transfer, assign, convey and deliver to
Purchaser on the Closing Date (defined in paragraph 8 hereof) the Stock,
and Purchaser shall purchase from Seller the Stock free and clear and
exclusive of any and all liabilities, obligations, liens, claims or
encumbrances, whether absolute, accrued, contingent or otherwise.
B-1
<PAGE>
<PAGE>
2. Purchase Price and Method of Payment. Purchaser shall pay
------------------------------------
to Seller a total purchase price of Twelve Million Dollars
($12,000,000.00) (the "Purchase Price"). The Purchase Price will be
paid by issuance and delivery to Seller on the Closing Date of a number
of shares of Purchaser's common stock, par value $.01 per share
("Purchaser Common Stock"), equal to the lesser of (i) 2,400,000 or (ii)
the quotient of the Purchase Price divided by the closing price for
Purchaser's stock on the Pacific Stock Exchange on the market business
day immediately preceding the Closing Date.
3. Delivery of Stock. On the Closing Date, Seller shall
-----------------
endorse and deliver to Purchaser Certificate No. 30 representing all of
the Stock. Seller shall do any and all other acts and execute and
deliver any and all assignments or other documents as Purchaser may
reasonably request in order to accomplish a complete transfer of the
Stock as herein contemplated. Purchaser shall deliver a certificate
evidencing the shares of Purchaser Common Stock issuable to Seller
pursuant to paragraph 2 ("Purchaser Shares"), bearing restrictive
legends.
4. Representations and Warranties of Seller. Seller
----------------------------------------
covenants, represents and warrants to Purchaser as follows:
4.1 Valid Corporation. Seller is a corporation duly
-----------------
organized, validly existing and in good standing under the laws of the
State of Missouri.
B-2
<PAGE>
<PAGE>
4.2 Corporate Authority. Seller has full power and
-------------------
authority from its Board of Directors and sole shareholder to enter into
this Agreement and to consummate the transactions contemplated herein.
This Agreement and all other agreements herein contemplated to be
executed in connection herewith by Seller have been duly executed and
delivered by Seller, have been effectively authorized by all necessary
action, corporate or otherwise by Seller and contribute legal, valid and
binding obligations of Seller enforceable in accordance with their
respective terms.
4.3 Title to Stock. The Stock constitutes all of the
--------------
issued and outstanding stock of the Corporation. Seller is the holder
and owner of record of all of the Stock. Except for the pledge of the
Stock to Lincoln Memorial Life Insurance Company to secure a $4,000,000
loan to Corporation, all of said shares of Stock are free and clear and
exclusive of any and all options, restrictions, liabilities,
obligations, liens, claims or encumbrances, whether absolute, accrued,
contingent or otherwise, and are not subject to restrictions with
respect to transferability.
4.4 Corporate Organization. Corporation is duly
----------------------
organized, validly existing and in good standing under the laws of
Missouri and has all requisite power and authority (corporate and other)
to own its properties and assets and to conduct its business in the
manner in which such business is now
B-3
<PAGE>
<PAGE>
conducted. Corporation has an authorized capital of thirty thousand
(30,000) shares, no par value, of common stock, ten thousand six hundred
forty-eight (10,648) shares of which are validly issued and outstanding,
fully paid and non-assessable. There are no options, warrants,
contracts or other obligations outstanding for the issuance or sale of
additional shares. There are no preference shares, or other kinds or
classes of securities of Corporation outstanding, and no warrants,
options, contracts, rights of preemption or other obligations contingent
or otherwise, for the issuance thereof.
4.5 Corporate Subsidiaries. Corporation has three
----------------------
wholly owned subsidiaries, Forever Memorial, Inc., a Missouri
corporation, BDC Properties, Inc., a Missouri corporation, Mount
Washington Forever, Inc., a Missouri corporation and Dartmont
Investment, Inc., a Delaware corporation ("Dartmont") (sometimes
collectively, referred to as "Corporate Subsidiaries"). The Corporate
Subsidiaries are duly organized, validly existing and in good standing
under the laws of Missouri. The Corporate Subsidiaries have all
requisite power and authority (corporate and other) to own their
properties and assets and to conduct their respective businesses in the
manner in which such businesses are now being conducted. Forever
Memorial is qualified to do business and in good standing in the States
of California, Indiana, Kansas and New Jersey. Except as set forth
B-4
<PAGE>
<PAGE>
in this Section 4.5, Corporation does not own any capital stock in any
other corporation.
4.6 Hollywood Forever. Corporation directly or
-----------------
indirectly through Dartmont, owns in the aggregate nine hundred (900)
shares constituting ninety percent (90%) of the issued and outstanding
stock of Hollywood Forever, Inc., a California corporation
("Hollywood"), free and clear of all liens and encumbrances other than
those imposed by the Hollywood Cemetery Shareholders Agreement dated
April 8, 1998 (a true and correct copy of which has been furnished to
Purchaser). Hollywood is the record owner of that certain real property
located in Hollywood, California known as the Hollywood Cemetery.
4.7 Mason Securities Association. Corporation owns all
----------------------------
of the beneficial ownership units in Mason Securities Association, a
Missouri common law business trust ("Mason"), free and clear of all
liens and encumbrances. Mason is the record owner of that certain
real property located in Creve Coeur, Missouri known as the Bellerive
Cemetery which is encumbered by an Allegiant Bank mortgage, the terms of
which have been provided to Purchaser. (Hollywood, Mason and the
Corporate Subsidiaries being sometimes referred to collectively herein
as the "Subsidiaries").
4.8 Assets and Liabilities of Corporation on the Closing
----------------------------------------------------
Date. Corporation and its Subsidiaries shall have no liabilities other
- ----
than those disclosed on the consolidated
B-5
<PAGE>
<PAGE>
Closing Date balance sheet to be provided to Purchaser on the Closing
Date ("Closing Date Balance Sheet"). Effective on or before the Closing
Date, all intercorporate indebtedness of Corporation (net of
intercorporate Corporation payables which shall be directly credited
against intercorporate receivables) owed to Seller, National Prearranged
Services, Inc. or any other affiliates shall be contributed to the
capital of Corporation. In addition, in full satisfaction of the
obligations of Seller to Corporation, on or before the Closing Date,
Seller shall have issued thirty-three (33) shares of its voting common
stock to Corporation, constituting ten percent (10%) of the then issued
and outstanding shares of Seller.
4.9 Tax Matters. All tax returns and tax reports
-----------
required to be filed with all appropriate governmental agencies have
been duly and timely filed by Corporation and the Subsidiaries. All
federal, state, city profits, earnings, franchise, sales, use,
occupation, property, excise, social security, withholding, unemployment
insurance or other taxes due and owing in connection with the operation
of Corporation's or the Subsidiaries' respective businesses for any
period ending on or before the Closing Date either have been i) paid by
Seller, Corporation or the Subsidiaries, ii) will be paid by Seller at
such time as the same may become due, or iii) will be properly reflected
on the Closing Date Balance Sheet. Seller shall be solely responsible
for the payment of any and all taxes,
B-6
<PAGE>
<PAGE>
including all federal, state and local income and profit taxes which
result from Corporation's and the Subsidiaries' respective businesses
attributable to any period ending on or prior to the Closing Date, to
the extent said tax liabilities have not been properly reflected on the
Closing Date Balance Sheet. Neither Corporation nor any of the
Subsidiaries have received any notice of any pending examination
pertaining to, or claims for, taxes or assessments asserted against
Corporation or any of the Subsidiaries by any taxing authority in
respect of any period prior to the date hereof.
4.10 Litigation, Compliance and Environmental Matters.
------------------------------------------------
(a) Litigation Pending or Threatened. There is no
--------------------------------
action, suit, arbitration, proceeding, or grievance or investigation,
pending or, to Seller's knowledge, threatened, before any court,
tribunal, panel, master or governmental agency, authority or body to
which Corporation or any of the Subsidiaries are subject.
(b) Violation of Law. To the knowledge of Seller,
----------------
Corporation and the Subsidiaries are not in violation of any provision
of any law, statute, decree, order or regulation. Corporation and the
Subsidiaries have all federal, state, local and foreign licenses,
permits and other governmental authorizations required in the conduct of
their respective businesses.
B-7
<PAGE>
<PAGE>
(c) Environmental Matters. To the best of
---------------------
Seller's knowledge, there are no toxic chemicals, toxic substances,
asbestos or radioactive or hazardous waste or materials or other
hazardous substances or underground storage tanks or other pollutants or
environmentally regulated substances (collectively called "Pollutants")
that have been used, generated, placed or stored on or beneath any real
property currently or formerly used by Corporation or any of the
Subsidiaries ("Property"), and has not received any notice from any
governmental authorities or any other third parties respecting
Pollutants on or beneath the surface of or emanating from any Property
or ordering the remediation of any environmental condition on or at any
Property.
4.11 Labor and Employment Agreements.
-------------------------------
(a) Neither Corporation nor any of the Subsidiaries
is (and will not be on the Closing Date) a party to: (i) any union
collective bargaining or similar agreement, (ii) any profit sharing,
pension, deferred compensation, bonus, stock option or incentive plan
for which Purchaser will have any responsibility after the Closing Date,
(iii) any plan or policy providing for "fringe benefits" to Seller's
employees for which Purchaser will have any responsibility after the
Closing Date, (iv) any plan, policy or arrangement which provides
medical or health benefits to retirees for which Purchaser will have any
responsibility after the Closing Date, or (v) any outstanding
B-8
<PAGE>
<PAGE>
contract or commitment with any officers, employees, agents, consultants
or advisors for which Purchaser will have any responsibility after the
Closing Date.
(b) Neither Corporation nor any of its Subsidiaries
are in default with respect to any term or condition of any agreement,
plan or contract, nor has any event occurred which through the passage
of time or the giving of notice, or both, would constitute a default
thereunder. Corporation and the Subsidiaries have withheld and paid to
the appropriate governmental authorities, or is withholding for payment
not yet due to such authorities, all amounts required to be withheld
from its employees and is not liable for any material arrears of wages,
taxes, penalties or other sums for failure to comply with any of the
foregoing.
(c) To the best of Seller's knowledge, there is not
pending or threatened any labor negotiation, demand, proposal, dispute,
strike, work stoppage, charge, complaint, happening or other event or
condition of a character (including an attempt by any union to represent
employees of Corporation or any of the Subsidiaries as a collective
bargaining agent) which would adversely impact Corporation or any of its
Subsidiaries.
4.12 Agreement Not in Breach of Certain Instruments.
----------------------------------------------
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will violate or
conflict with any provision of the
B-9
<PAGE>
<PAGE>
Articles of Incorporation or Bylaws of Seller or result in a breach of
any of the terms or provisions of, or constitute a violation or default
under, or conflict with, (i) any judgment, decree, order or award of any
court, governmental body or arbitrator to which Seller is a party or may
be bound, (ii) any law, rule or regulation applicable to Seller, or
(iii) except as otherwise disclosed in this Agreement, any indenture,
license, permit, contract, lease, commitment, understanding or other
agreement to which Seller is a party or may be bound.
4.13 Regulatory Approvals. To Seller's knowledge, other
--------------------
than as may be required by the Pacific Stock Exchange and the Securities
and Exchange Commission, no consent, approval or authorization of, or
declaration, failing or registration with, any federal, state, municipal
or local governmental or regulatory authority or any other person is
required of Seller in connection with the execution and delivery of this
Agreement.
4.14 Corporation Financial Statements.
--------------------------------
(a) Attached hereto as Schedule 4.14 are copies of
-------------
the following financial statements:
(i) Consolidated balance sheets as of
December 31, 1998 and 1997, related consolidated statements of
operations, changes in shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1998, together with the
notes thereto, audited by Corporation's
B-10
<PAGE>
<PAGE>
independent auditors (as of and for the year ended December 31, 1998
only); and
(ii) Unaudited condensed consolidated balance
sheet of Corporation as of September 30, 1999 (the "Interim Balance
Sheet") and related condensed consolidated statements of operations,
changes in shareholder's equity and cash flows for the three and nine
month periods ended September 30, 1999 and 1998 (collectively, the
"Interim Financial Statements").
(b) The financial statements referenced in Schedule
--------
4.14 are referred to collectively as the "Corporation Financial
- ----
Statements". The Corporation Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently
applied during the periods involved, and present fairly the consolidated
financial position of Corporation and the Subsidiaries at the dates
thereof and the consolidated results of operations, changes in
shareholder's equity and cash flows of Corporation and the Subsidiaries
for the periods stated therein.
(c) Undisclosed Liabilities. Except as set forth
-----------------------
in the Interim Balance Sheet or the Schedules to this Agreement, neither
Corporation nor any of the Subsidiaries have any liabilities or
obligations of any kind, whether existing, fixed, contingent upon future
events, vested, funded, unfunded or otherwise, except for (i) current
liabilities which were incurred
B-11
<PAGE>
<PAGE>
since the date of the Interim Balance Sheet in the ordinary course of
Corporation's or the Subsidiary's, as the case may be, business, (ii)
liabilities which will not have a Material Adverse Effect, and (iii)
liabilities disclosed in this Agreement (including the Schedules
hereto). For purposes of this Agreement, the term "Material Adverse
Effect" means (A) any adverse impact on the assets, operations,
liabilities, earnings, business or condition (financial or otherwise) of
Corporation or any Subsidiary which represents a diminution in value to
Corporation or the Subsidiary (whether immediate or as a result of
diminished future net cash flows, and taking into account available
insurance net of deductibles) of more than Fifty Thousand Dollars
($50,000), or (B) the creation of any lien, security interest, charge or
encumbrance upon any of the Shares or any of the property of Corporation
or any Subsidiary.
4.15 Absence of Certain Changes or Events. Since
------------------------------------
December 31, 1998, and except as disclosed in the Interim Financial
Statements or on Schedule 4.14 or as contemplated in this Agreement,
-------------
there has not been with respect to Corporation or any Subsidiary:
(a) any change in the operations, earnings, business
or condition (financial or otherwise) which has been or which reasonably
should expect to have, individually or in the aggregate with other
changes, a Material Adverse Effect;
B-12
<PAGE>
<PAGE>
(b) any damage, destruction or casualty loss
(whether or not covered by insurance) which has been or which reasonably
should expect to have a Material Adverse Effect;
(c) any increase in the compensation payable to any
director, officer, employee or agent other than routine increases made
in the ordinary course of business consistent with past practice, or any
bonus, incentive compensation, service award or other like benefit,
granted, made or accrued, contingently or otherwise, to or to the credit
of any of such director, officer, employee or agent, or any employee
welfare, pension, retirement or similar payment or arrangement made or
agreed to by Corporation or Subsidiary with respect to any such
director, officer, employee or agent;
(d) any addition to, or modification of, any profit
sharing, bonus, deferred compensation, insurance, pension, retirement or
other employee benefit plan, arrangement or practice, other than
accruals in accordance with the normal practices of Corporation and the
Subsidiaries;
(e) any sale, assignment or transfer (including
without limitation any collateral assignment or the granting or
permitting of any lien, charge or encumbrance) of any asset, property or
right (except any sale or disposal of worn out and obsolete fixed
assets, each in the ordinary course of business);
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<PAGE>
(f) any amendment, modification, waiver or
cancellation of any debt owned to, or claim of, Corporation or any
Subsidiary, or settlement of any dispute involving any payment or other
obligation due to or owned by Corporation or any Subsidiary to be made
or performed after the Closing Date, involving more than $50,000
(provided that all items excluded by reason of such threshold can not
exceed $150,000 in the aggregate);
(g) any borrowing of money, any increase in any
existing indebtedness, or the incurrence of any obligation or liability
(whether absolute or contingent), other than current liabilities
incurred in the ordinary course of business:
(h) any capital expenditure or commitment to make a
capital expenditure (exclusive of expenditures for repair or maintenance
of equipment in the ordinary course of business) exceeding $50,000
individually or $150,000 in the aggregate, or the execution of any lease
or similar arrangement with respect to any aspect of the business of
Corporation or any Subsidiary, or incurring of liability therefor;
(i) any cancellation, termination or amendment of
any material contract, agreement, license or other instrument to which
Corporation or any Subsidiary is a party or by which it is bound;
(j) any lending or advance of money or other
pledging of credit, by way of guaranty or otherwise, in
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<PAGE>
connection with any aspect of its business, except normal travel and
expense advanced to employees and normal equity advances incurred with
respect to residential real property, in the ordinary course of business
consistent with prior practice;
(k) any declaration or payment of any dividend or
other distribution of any kind with respect to any of the capital stock
of Corporation or any Subsidiary;
(l) any change in the methods of accounting employed
in preparing the Interim Financial Statements;
(m) any failure on the part of Corporation or any
Subsidiary to operate its business in the ordinary course;
(n) any agreement by, or commitment of, Seller,
Corporation or any Subsidiary to do or permit any of the foregoing; or
(o) any other event or condition outside the
ordinary course of business that relates specifically to Corporation or
any Subsidiary, as distinct from general economic conditions and matters
affecting the relocation industry as a whole, which in any one case or
in the aggregate will or can reasonably be expected to have a Material
Adverse Effect.
4.16 Corporate Minutes and Stock Transfer Records.
--------------------------------------------
Seller has furnished to Purchaser for review the corporate minutes of
Corporation and the Subsidiaries, which are current, complete and
correct and which contains a complete and accurate record of all
material actions taken by the Board of Directors
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<PAGE>
and shareholders of Corporation and the Subsidiaries. Seller has
furnished to Purchaser for review the stock certificate books of
Corporation and the Subsidiaries, which are current, complete and
correct and which accurately reflect all transactions involving equity
securities of Corporation and the Subsidiaries.
4.17 Investment Representations.
--------------------------
(a) This Agreement is made with Seller in reliance
upon the Seller's representation to the Purchaser, which by its
acceptance hereof Seller hereby confirms, that the Purchaser Shares to
be received by it will be acquired for investment for its own account,
not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and that it has no present intention
of selling, granting participation in, or otherwise distributing the
same. By executing this Agreement, Seller further represents that it
does not have any contract, undertaking, agreement, or arrangement with
any person to sell, transfer, or grant participation to such person, or
to any third person, with respect to any of the Purchaser Shares.
(b) Seller understands that the Purchaser Shares are
not registered under the Securities Act of 1933, as amended, on the
ground that the sale provided for in this Agreement and the issuance of
the Purchaser Shares hereunder is exempt from registration under the
Securities Act of 1933, as amended, and that Purchaser's reliance on
such exemption is predicated on
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<PAGE>
seller's representations set forth herein. Seller realizes that the
basis for the exemption may not be present if, notwithstanding such
representations, Seller has in mind merely acquiring the Purchaser
Shares for a fixed or determinable period in the future, or for a market
rise or for sale if the market does not rise. Seller hereby confirms
that it has not such intention.
(c) Seller represents that it is an "accredited
investor" within the meaning of Rule 501 under the Securities Act of
1933, as amended, and that it is experienced in evaluating and investing
in companies such as Purchaser, is able to fend for itself in the
transactions contemplated by this Agreement, has such knowledge and
experience in financial and business matters as to the capable of
evaluating the merits and risks of its investment and has the ability to
bear the economic risks of its investment. Seller further represents
that it has had access, during the course of the transaction and prior
to its purchase of the Purchaser Shares, to the same kind of information
that would be provided in a registration statement filed by the
Purchaser under the Securities Act of 1933, as amended, and that it has
had, during the course of the transaction and prior to its purchase of
the Purchaser Shares, the opportunity to as questions of, and receive
answers from, the Purchaser concerning the terms and conditions of the
offering and to obtain additional
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<PAGE>
information necessary to verify the accuracy of any information
furnished to it or to which it had access.
(d) Seller understands that the Purchaser Shares may
not be sold, transferred or otherwise disposed of without registration
under the Securities Act of 1933, as amended, or an exemption therefrom,
and that in the absence of any effective registration statement covering
the Purchaser Shares or an available exemption from registration under
the Securities act of 1933, as amended, the Purchaser Shares must be
held indefinitely. In particular, Seller is aware that the Purchaser
Shares may not be sold pursuant to Rule 144 promulgated under the
Securities Act of 1933, as amended, unless all of the conditions of that
Rule are met. Seller represents that, in the absence of an effective
registration statement covering the Purchaser Shares, it will sell,
transfer or otherwise dispose of the Purchaser Shares only in a manner
consistent with its representations set forth herein.
4.18 Legends; Stop Transfer.
----------------------
(a) All certificates for the Purchaser Shares shall
bear the following legend:
These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold,
offered for sale, pledged or hypothecated in the absence of
an effective registration statement as to the securities
under said Act of an opinion of
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<PAGE>
counsel satisfactory to the Purchaser that such registration
is not required.
(b) The certificates for the Purchaser Shares shall
also bear any legend required by any applicable state securities law.
(c) In addition, the Purchaser shall make a notation
regarding the restrictions on transfer of the Purchaser Shares in its
stock books and the Purchaser Shares shall be transferred on the books
of the Purchaser only if transferred or sold pursuant to an effective
registration statement under the Securities Act of 1933, as amended,
covering such shares or pursuant to and in compliance with the
provisions of this Section 4.18.
4.19 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties made by Seller herein shall be true and
correct in all respects on the Closing Date and shall survive the
Closing Date for a period of three (3) years.
5. Representations and Warranties of Purchaser. Purchaser
-------------------------------------------
represents and warrants to Seller as follows:
5.1 Organization. Purchaser is duly organized and
------------
validly existing as a corporation in good standing under the laws of the
State of Texas with the corporate power to own its properties and carry
on its business in the manner in which such business is now being
conducted.
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<PAGE>
5.2 Authority. Purchaser has full corporate power and on
---------
the Closing Date will have taken all corporate action necessary to
execute, deliver and perform this Agreement. This Agreement and all
other agreements herein contemplated to be executed in connection
herewith by Purchaser have been duly executed and delivered by
Purchaser, have been effectively authorized by all necessary action,
corporate or otherwise, by Purchaser and constitute legal, valid and
binding obligations of Purchaser enforceable in accordance with their
respective terms.
5.3 Regulatory Approvals. To Purchaser's knowledge,
--------------------
other than the approval of the Pacific Stock Exchange and the Securities
and Exchange Commission, no consent, approval or authorization of, or
declaration, filing or registration with, any federal, state, municipal
or local governmental or regulatory authority or any other person is
required of Purchaser in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated
hereby.
5.4 Agreement Not in Breach of Certain Instruments.
----------------------------------------------
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will violate or
conflict with any provision of the Articles of Incorporation or Bylaws
of Purchaser or result in a breach of any of the terms or provisions of,
or constitute a violation or default under, or conflict with, (i) any
mortgage, indenture, lease, agreement, contract, license, permit, trust
or
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<PAGE>
other instrument or commitment of any kind to which Purchaser is or may
be bound, (ii) any judgment, decree, order or award of any court,
governmental body or arbitrator to which Purchaser is a party or may be
bound or (iii) any law, rule or regulation applicable to Purchaser.
5.5 Purchaser Financial Statements. The consolidated
------------------------------
balance sheets of Purchaser and its subsidiaries as of December 31, 1998
and 1997 and related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998, together with the notes thereto, audited
by Purchaser's independent auditors, as filed with the Securities and
Exchange Commission on Form 10-K for the year ended December 31, 1998
(collectively, the "Purchaser Financial Statements"), have been prepared
in accordance with generally accepted accounting principles, present
fairly the consolidated financial position of Purchaser and its
subsidiaries at the dates thereof and the consolidated results of
operations, changes in shareholders' equity and cash flows of Purchaser
and its subsidiaries for the periods stated therein and are derived from
the books and records of Purchaser and its subsidiaries, which are
complete and accurate in all material respects and have been maintained
in accordance with good business practices.
5.6 Validity of Stock. The Purchaser Shares, when
-----------------
issued, sold and delivered in accordance with the terms of
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<PAGE>
this Agreement, shall be duly and validly issued, fully paid and
nonassessable and will be free of any liens or encumbrances, except for
restrictions on transfer imposed by applicable federal and state
securities laws.
5.7. Survival. The representations and warranties made
--------
by Purchaser herein shall be true and correct in all respects on the
Closing Date and shall survive the Closing Date for a period of three
(3) years.
6. Conduct of Business Pending Closing Date. From and after
----------------------------------------
the date of this Agreement and until the Closing Date, Seller covenants,
represents and warrants as follows:
6.1 Full Access. Seller shall cause Corporation to
-----------
allow, at Purchaser's expense and at all reasonable times, Purchaser's
employees, attorneys, accountants and other authorized representatives,
free and full access to the offices, properties, books, records,
documents and correspondence of Corporation relating to the business of
Corporation and all of the work papers and other documents relating to
same in the possession of Corporation's auditors or counsel, in order
that Purchaser may have full opportunity to make such investigation as
it may desire of the property, assets and the business of Corporation
and in connection therewith furnish Purchaser at Purchaser's expense
with photocopies of all such work papers and other documents as Purchase
may request.
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<PAGE>
6.2 Preservation of Organization. Seller shall use its
----------------------------
best efforts to cause Corporation and its Subsidiaries to preserve their
respective businesses and their respective business organizations
intact, to keep available to Purchaser their present employees and to
preserve for Purchaser their present relationships with their customers
and others having business relations with them.
6.3 Carry on Business in Regular Course. Seller shall
-----------------------------------
cause Corporation and its Subsidiaries to continue to operate their
respective businesses in their normal and customary manner and shall not
make any changes in their policies or methods of operations and shall
keep and maintain all of their real property and improvements,
equipment, furniture, fixtures and other assets in good order and
repair. Without limiting the generality of the foregoing, Seller shall
take all necessary steps regarding the operation of Corporation's and
the Subsidiaries' respective businesses to assure that:
(a) Neither Corporation nor any of its Subsidiaries
shall further mortgage, pledge or subject to any lien, charge or
encumbrance of any kind, any of its assets, exclusive of liens arising
as a matter of law in the ordinary course of business as to which there
is no known default.
(b) Neither Corporation nor any of its Subsidiaries
shall sell, assign, transfer or otherwise dispose of
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<PAGE>
any of its inventory or assets other than in the ordinary course of
business.
(c) Neither Corporation nor any of its Subsidiaries
shall amend its Articles of Incorporation (other than a Purchaser
approved change of Corporation's name) or Bylaws.
(d) Neither Corporation nor any of its Subsidiaries
shall enter into any transaction material in nature or amount other than
in the ordinary and usual course of business.
(e) Corporation and its Subsidiaries shall maintain
their respective books, accounts and records in the usual, regular and
ordinary manner on a basis consistent with that heretofore employed.
(f) Corporation and its Subsidiaries shall conduct
their respective businesses in accordance with all laws, rules and
regulations of the city, state and federal governments.
(g) Corporation and its Subsidiaries shall maintain
in full force and effect (i) existing insurance policies to cover and
protect against loss or damage to the assets of Corporation or its
Subsidiaries, as the case may be, (ii) all presently existing health
insurance, and (iii) all fidelity insurance, if any, presently carried.
(h) Neither Corporation nor any of its Subsidiaries
shall increase any compensation payable to any
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<PAGE>
officer, employee or agent of said corporation, and neither Corporation
nor its Subsidiaries shall make any bonus payment or arrangement with
any such person.
(i) Corporation shall not declare, set aside, pay or
make any dividend, in cash, property or stock, or redeem, purchase,
issue or acquire any of its Shares or any options, warrants or rights
therefor, make any distribution of any kind or make any other changes in
its capital structure or agree to do or cause or permit any of the
foregoing to be done.
7. Conditions Precedent to Purchaser's Obligations. All
-----------------------------------------------
obligations of the Purchaser hereunder, including its obligation to
consummate this Agreement, shall be subject to Seller's fulfillment on
the Closing Date, of each of the following express conditions precedent
(any of which may be waived in whole or in part in writing by the
Purchaser):
(a) Seller's covenants, representations and warranties
herein contained shall be true on the Closing Date;
(b) Seller shall have performed or complied with all
covenants, agreements and conditions required by this Agreement to be
performed or complied with by it on the Closing Date;
(c) Seller shall execute or deliver instruments of
transfer as Purchaser may reasonably require to effectively carry out
the transfer of the Stock contemplated by this Agreement;
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<PAGE>
(d) Purchaser shall have received shareholder
approval of the transactions contained herein; and
(e) Purchaser shall have received from its financial
advisor an opinion, dated as of the date of the proxy statement for the
special meeting of the shareholders of Purchaser to vote upon this
Agreement, that the consideration to be paid by Purchaser for the Shares
is fair to the shareholders of Purchaser from a financial point of view.
8. Closing Date. The Closing Date of the transactions,
------------
transfers and exchanges herein set forth shall be effective as of the
close of Seller's business on January 31, 2000 or such later date agreed
to by the parties.
9. Mutual Indemnification. All statements contained herein
----------------------
and in any certificate, instrument or document delivered by or on behalf
of any of the parties pursuant to this Agreement and the transactions
contemplated hereby shall be deemed representations and warranties by
the respective parties hereunder, and each party shall pay, defend,
indemnify and hold harmless the other against any and all losses,
claims, liabilities, damages or expenses of any kind (including, without
limitation, reasonable attorneys' fees and accounting fees, whether or
not litigation be commenced in aid thereof) resulting from any
misrepresentation, inaccuracy or breach of any representation, warranty
or covenant herein contained or contained in any certificate, document,
list, schedule or
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<PAGE>
instrument delivered to either party in connection with this Agreement
or the transactions contemplated herein, or other breach hereof or
failure of compliance herewith. All claims or demands for
indemnification hereunder must be asserted within the limitation periods
set forth in Sections 4.19 and 5.7 hereof.
10. Expenses of Sale; Brokers. Seller and Purchaser shall
-------------------------
bear all its own costs and expenses (including attorney's and
accountant's fees) incident to the performance by it of its obligations
under this Agreement. Each party represents that no broker is involved
and agrees to indemnify and hold the other party harmless from and
against all claims for finder's fees and commissions made by any person
allegedly arising from acts of such indemnifying party.
11. Binding Agreement. All of the terms of this Agreement
-----------------
shall be binding upon and inure to the benefit of and be enforceable by
the parties hereto, their heirs, personal representatives, successors
and assigns.
12. Entire Agreement. This Agreement embodies the entire
----------------
agreement between the parties and may not be modified or terminated
orally. This Agreement shall be construed and interpreted according to
the laws of the State of Missouri.
13. Notices. All notices required to be given or which may be
-------
given hereunder shall be deemed delivered and deposited in the United
States mail by registered or certified mail, postage prepaid, at the
addresses as set forth below:
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<PAGE>
A. If to Purchaser:
Lincoln Heritage Corporation
1250 Capital of Texas Highway
Building 3, Suite 100
Austin, Texas 78746
Attn: Clifton Mitchell, President
B. If to Seller:
National Heritage Enterprises, Inc.
10 S. Brentwood
St. Louis, Missouri 63105
Attn: Brent D. Cassity, President
C. With a copy of all such notices to be sent to:
Wittner, Poger, Spewak & Maylack, P.C.
7700 Bonhomme, Suite 400
St. Louis, Missouri 63105
Attn: Jean H. Maylack
14. Severability. In the event any one or more of the
------------
provisions contained in this Agreement or application thereof shall be
invalid, illegal or unenforceable in any respect, the validity, legality
or enforceability of the remaining provisions of this Agreement or any
other implication thereof shall not in any way be effected or impaired.
15. Counterparts. This Agreement may be executed
------------
simultaneously in two or more counterparts, each of which shall be
deemed an original but all of which together shall constitute one and
the same instrument.
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<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed this 20th day of December 1999.
LINCOLN HERITAGE CORPORATION
By: /s/ Clifton Mitchell
---------------------
Clifton Mitchell, President
"Purchaser"
NATIONAL HERITAGE ENTERPRISES, INC.
By: /s/ Brent D. Cassity
---------------------
Brent D. Cassity, President
"Seller"
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<PAGE>
<PAGE>
RESOLUTION TO AMEND THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
LINCOLN HERITAGE CORPORATION
The following amendment to the Amended and Restated Articles of
Incorporation of Lincoln Heritage Corporation shall be considered and
voted upon by the shareholders of Lincoln Heritage Corporation at the
Special Meeting of Shareholders to be held March 9, 2000:
RESOLVED, that Article First of the Amended and Restated Articles
of Incorporation of Lincoln Heritage Corporation (the "Corporation") be
amended in its entirety to read as follows:
"FIRST: The name of the Corporation is Forever Enterprises, Inc."
<PAGE>
<PAGE>
LINCOLN HERITAGE CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
MARCH 9, 2000
The undersigned hereby appoints Randall K. Sutton and Howard A.
Wittner, and each of them, with or without the other, proxies, with full
power of substitution to vote, as designated below, all shares of common
stock, $0.01 par value, of Lincoln Heritage Corporation (the "Company")
that the undersigned signatory hereof is entitled to vote at the Special
Meeting of Shareholders of the Company to be held at the law offices of
Wittner, Poger, Spewak and Maylack, P.C., 7700 Bonhomme Avenue, Suite
400, St. Louis, Missouri 63105, on Thursday, March 9, 2000, at 10:00
a.m., and all adjournments thereof, all in accordance with and as more
fully described in the Notice and accompanying Proxy Statement for such
meeting, receipt of which is hereby acknowledged.
1. A proposal to approve an amendment to the Amended and Restated
Articles of Incorporation of Lincoln Heritage Corporation to
change the name of Lincoln Heritage Corporation to "Forever
Enterprises, Inc."
/ / FOR / / AGAINST / / ABSTAIN
2. Proposal to approve the stock acquisition agreement dated as of
December 20, 1999 by and between National Heritage Enterprises,
Inc. and Lincoln Heritage Corporation pursuant to which Lincoln
Heritage Corporation will acquire Forever Enterprises, Inc. in
exchange for shares of Common Stock, $0.01 par value, of Lincoln
Heritage Corporation.
/ / FOR / / AGAINST / / ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting or any
adjournments thereof.
<PAGE>
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THE
PROXY WILL BE VOTED "FOR" THE MATTERS LISTED IN PROPOSALS 1 AND 2.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE APPROVAL OF THE
MATTERS SET FORTH IN PROPOSALS NO. 1 AND 2 ABOVE.
DATED:
--------------------------------
--------------------------------------
Signature
--------------------------------------
Signature, if held jointly
Please sign exactly as name appears on
this Proxy Card. When shares are held
by joint tenants, both should sign.
When signing as attorney-in-fact,
executor, administrator, personal
representative, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
