Memorial 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 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. The Company believes that the properties currently leased by Memorial are suitable for the current operations of the Company and will allow for the expansion of the Company's business in the near future. As the Company's operation expands, the leasing of additional space in Austin, Texas may be necessary. The Company currently does not foresee any material difficulties with leasing additional space that may be required in the foreseeable future.
The following historical summary consolidated financial information has been derived from the consolidated financial statements of the Company. This selected financial data should be read in conjunction with the accompanying consolidated financial statements of the Company and the related notes included herein, and the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(1) 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. The Company received $48,025 in cash in exchange for assuming $50,857 in insurance liabilities. For the year ended December 31, 1998, amounts related to the Woodmen Block 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 Woodmen Block.
(2) Other expenses for the years ended December 31, 1998 and 1997 are net of expense reimbursements from NPS in the amount of $2,254 and $2,695, respectively.
(3) 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. The Company received $19,941 in assets in exchange for assuming $21,910 in insurance liabilities. During 1998, the Company retroceded, through a coinsurance agreement, 50% of the life insurance assumed from the purchase of the World Block to Alabama Reassurance Company. As of December 31, 1998, invested and total assets included approximately $22,200 and policy liabilities included approximately $21,800 associated with the World Block.
The Company is a holding company for operating subsidiaries that consist primarily of life insurance companies. The life insurance companies primarily write policies sold by the Company's affiliate, NPS, in connection with NPS's sale of prearranged funeral contracts. As a result of the growth in the amount of pre-arranged funeral contracts sold by NPS over the past three years, the Company's revenues have increased significantly. The Company's growth also resulted, to a lesser extent, from the 1997 acquisition of the Woodmen Block and the World Block (in-force insurance policies and annuities) in 1998.
The Company's expenses consist principally of benefits paid or accrued, commissions on the sale of policies and general and administrative costs associated with life insurance company operations. The Company anticipates that benefit costs and commissions will continue to increase as the Company executes its growth plans. Although general and administrative costs have increased in accordance with the growth in the Company's business, the Company believes its infrastructure will support increasing levels of internal revenue growth without the need for general and administrative expenses to increase at a similar rate.
The Company's strategy is to increase shareholder value by growing its insurance business through: (i) selected acquisitions of life insurance companies and in-force life insurance policies and annuities; and (ii) increases in life insurance policies arising out of prearranged funeral contracts sold by NPS. The Company's ability to acquire such companies and policies will be dependent upon (among other things) its ability to identify, negotiate and complete transactions of favorable values, arrange necessary financing and integrate and manage the acquisitions after completion, including preserving customer relationships. There can be no assurance that the Company will successfully execute its strategy.
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 NPS. 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 the Company.
Other revenue for the year ended December 31, 1998 of $749,000 represents primarily a gain on the sale of a portion of the Company's in-force life business.
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 the Woodmen Block and the World Block, support for increased levels of acquisition activities and regulatory reporting requirements, and deferred compensation costs associated with the Company's Long-Term Incentive Plan established in 1998.
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 the Woodmen Block and the World Block.
Surrenders decreased from 1996 to 1997 by $5.1 million. This decrease in surrenders was offset by a corresponding change in the increase in future policy benefits. Surrenders generally have little impact on current year operations due to the fact that surrender benefits are fully reserved and as surrender benefits are paid the reserve for future policy benefits is reduced by a corresponding amount. The more significant effect on operations occurs in future years when the Company loses future investment earnings on the business surrendered.
The Company's insurance subsidiaries have an agents' contract (the "Contract") with NPS and NPS Agency that obligates the Company to pay first-year and renewal commissions on policies written by NPS and NPS Agency.
Prior to January 1, 1997, the Contract called for maximum first-year commissions of up to 23% of the face amount of policies submitted and renewal commissions of up to 2% of the face amount of issued policies remaining in-force in years two though six. In order to better match the commissions paid with the profitability of the underlying polices, effective January 1, 1997, the Company, 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 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.
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.
The Company's insurance subsidiaries generally generate sufficient cash receipts from premium collections and investment income to satisfy the Company's obligations. The Company believes that the diversity of the investment portfolio of its insurance subsidiaries provides sufficient liquidity to meet its operating cash requirements.
Assets with a fair value of approximately $11.7 million at December 31, 1998 were on deposit with various state regulatory authorities. Assets with a fair value of approximately $55.1 million at December 31, 1998 were restricted as to use from the purchase of the Woodmen Block, the World Block and other assumed business. See "Business -- Regulatory Factors."
Total cash and investments increased approximately $13.8 million from $120.0 million at December 31, 1997 to $133.8 million at December 31, 1998, primarily due to investment assets acquired with the purchase of the World Block of $20 million. During 1998 there was an increase in policyholder loans to related parties of $5.8 million due to a change in investment strategy by NPS offset by the cancellation of policies associated with the Woodmen Block. Due to the low risk nature of these policy loans and their contract interest rates, the Company believes they afford comparable risk-adjusted returns to alternative categories of invested assets. The policy loans are fully secured by the nonforfeiture values of the policies so that, in the event of default, the Company would not be adversely affected, except with respect to the future loss of revenues on the policies cancelled. Changes in the separate components of investment assets are due to the portfolio mix of the Company's investment assets and changes in the fair value of balances in actively managed fixed maturity and equity securities. See Note 4 to the Consolidated Financial Statements of the Company.
Future policy benefits increased approximately $16.4 million from $87.8 million at December 31, 1997 to $104.2 million at December 31, 1998. This increase was due to an increase in the amount of new policies issued and the acquisition of the World Block.
Policyholder deposits increased approximately $5.6 million from $41.6 million at December 31, 1997 to $47.2 million at December 31, 1998. Policyholder deposits are comprised primarily of annuities acquired with the Woodmen Block and the World Block. The increase was due to the acquisition of the World Block on April 1, 1998, offset by cancellations of policies and the absence of the issuance of new annuity policies.
The increase in shareholders' equity reflects the net proceeds from the Company's initial public offering of $2.6 million and earnings in 1998 of $2.5 million, offset by the increase in net unrealized depreciation on securities held available-for-sale of $2.8 million.
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.
The Company's information technology personnel recently assessed the Company's readiness to manage Year 2000 issues. This included a review of all current computer systems in use, as well as communications with significant vendors and other third parties to determine the extent to which the Company's operations are vulnerable to third parties' failure to correct their own Year 2000 issues. Based on the overall assessment performed, the Company has determined that it will not need to significantly modify or replace any of its current systems in order to comply with Year 2000 issues. In addition, based upon communications with significant vendors and other third parties, the Company is not aware of any material impact from their systems relating to the transition to the Year 2000. However, the Company has no means of ensuring that these entities will be Year 2000 ready. The inability of third parties to complete their Year 2000 programs in a timely manner could materially impact the Company. The effect of non-compliant third parties is not determinable.
The Company's total costs of Year 2000 efforts to date and future anticipated costs have not and are not expected to be material.
This report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information currently available to the Company at the time such statements were made. The Company can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, the Company's actual results may differ materially from those indicated by the forward-looking statements.
The following factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to: (i) general economic conditions and other factors, including prevailing interest rate levels and stock market performance, which may affect the ability of the Company to sell its products, the market value of the Company's investments and the lapse rate and profitability of the Company's policies; (ii) the Company's ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through other cost-saving initiatives; (iii) mortality, morbidity, and other factors which may affect the profitability of the Company's insurance products; (iv) changes in the federal income tax laws and regulations which may affect the cost of or demand for the Company's products; (v) increasing competition in the sale of the Company's products; (vi) regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products, and regulation of the sale, underwriting and pricing of insurance products; (vii) the availability and terms of future acquisitions; and (viii) the risk factors or uncertainties listed in the Company's other filings with the Securities and Exchange Commission.
Additionally, the Company may not be successful in identifying, acquiring, and integrating other companies or their business, implementing improved management and accounting information systems and controls and may be dependent upon additional capital and equipment purchases for future growth. There may be other risks and uncertainties that management is not able to predict.
When used in this report, the words "anticipate," "believe," "estimate," "expect," "intends," and similar expressions, as they relate to the Company are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.
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 the Company's Consolidated Financial Statements.