The Company owns, unencumbered, the building at 4100 South Hulen Street, Fort Worth, Texas, in which its home office operation is conducted. A portion (approximately 14%) of this 128,000 square foot building is being leased to third parties. The Company owns one residential property in Fort Worth, Tarrant County, Texas, which is currently rented on a month to month basis to Raleigh Kone, Director of Training of the Company. Monthly rent is currently paid to the Company for that portion of such residence personally used by this employee. The rent paid by Raleigh Kone is $1,000 per month. The management of the Company considers the above monthly rent to be fair and reasonable in the view of the amount of personal living space rented in the residence by this individual. This residential property has traditionally been used for lodging of visiting agents, and entertainment of prospective agents and current agents. Some of these business guests remain for conferences and seminars conducted by the Company for periods from one to fourteen days. The Company also owns approximately nine motor vehicles and substantial office equipment, including printing and computer equipment.
(1) This loan balance will continue to perpetuate as long as the Company does business with these insurance companies as they have done in the past.
The overall growth in commission revenue occurred at a lower rate for insurance sales than it did for mutual fund sales. During the past fiscal year commission revenue for insurance sales increased 5.5% to $72,975,873 and commission revenue for mutual fund sales increased 11.1% to $43,656,196. The percentage increases from fiscal year 1994 to 1995 were 9.2% and 5.8%, respectively, for insurance and mutual fund sales. The larger percentage increase in mutual fund sales was due mainly to the abundance of favorable press given to mutual funds over the past couple of years and the public's increased recognition of the importance of saving for retirement. The Company does not foresee a decrease in mutual fund investing in the future unless a serious "bear market" were to occur and investors start becoming more conservative in their savings methods.
The Company's analysis of the impact of base closures and force reduction in the U.S. military indicates to the Company a minimal impact upon existing agents in the field and a market which will continue to present an opportunity for growth of the Company's business. Specifically, the Company estimates that it will still be selling, and providing service, to less than twenty-five percent of its potential overall market (Rank of E-6 and above including all warrant and commissioned officer ranks) during the forthcoming year.
Commissions, incentive commissions, and agent expenses for the years ended September 30, 1996 and 1995 increased 7.2% and 8.9%, respectively, in the aggregate. These increases are consistent with the increase in commissions revenue. Commissions, incentive commissions, and agent expenses have been 74% of commission revenues for each of the past three fiscal years. This constant relationship may not continue in the future because it is expected that a growing proportion of the future increases in commission revenue will result from trail or renewal commissions. Trail and renewal commission revenue result from sales made in prior years.
The Company receives reduced commissions for several years subsequent to the actual sale, whereas the agents are generally paid commissions for
only twelve months after a sale. Therefore, commissions and agent expenses could decrease in relation to commission revenue. This has yet to occur since part of the compensation paid by the Company to its agents is in the form of discretionary incentive commissions called "Future Incentive Commissions" and voluntary allocations to the agents' Deferred Career Commission Plan (DCCP). By utilizing these discretionary compensation methods the Company has the ability to better control its costs, as well as provide more rewards to the best producing sales agents.
General and administrative expenses for the years ended September 30, 1996 and 1995 increased $728,499 or 3.3% and $2,483,083 or 12.7%, respectively, over their prior years. The increase from 1995 to 1996 is considered a general inflationary increase. A significant component of the fiscal year 1995 increases were salaries and other employee benefit related costs resulting from hiring additional employees and providing existing employees with competitive pay increases. These new employees' salaries and other employee benefit related costs, in addition to standard pay raises, caused general and administrative expenses to increase from $11,161,606 in fiscal year 1994 to $12,073,913 in fiscal year 1995. This represents a 8.2% increase from fiscal year 1994 to 1995. The additional employees hired during fiscal year 1995 were primarily in the Financial Programs department. The remaining significant increase in general and administrative expenses from fiscal year 1994 to 1995 resulted from a major PC software project titled "WinUSPA ". This project will redesign the field automation system currently used by the Company's agents. The WinUSA project is currently in the implementation stage.
The total of other income for the year ended September 30, 1996 decreased $481,685 to $3,719,793. The total of other income for the year ended September 30, 1995 increased $737,225 from the prior year. These fluctuations of other income are mainly due to the timing of mutual fund distributions.
The Company has operated with a working capital deficiency during all of the periods presented in the accompanying selected financial data. The Company has been able to do this because of its loans from insurance companies. As long as the Company continues to do business in this manner with these insurance companies (there are no current intentions to change) the loan balance will continue to replenish itself from first year insurance commission advances. The Company had a ratio of current assets to current liabilities of .86 to 1 and .78 to 1 at September 30, 1996 and 1995, respectively. The current ratios when excluding the loans from insurance companies balances are 1.38 to 1 and 1.43 to 1, respectively.
The Company had a net increase of $2,675,735 in cash and cash equivalents from the prior year. As reflected in the statement of cash flows, net
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
cash provided by operating activities continued to remain strong. During the year ended September 30, 1996, a significant amount of cash flows were utilized in investing activities. The two most significant investment cash flow uses in 1996 were the purchase of $4,087,976 of mutual fund shares and $523,287 of property and equipment.
During the years ended September 30, 1996 and 1995, 104,700 and 147,742 shares of Class B, non-voting common stock were issued from Treasury Stock at $26.56 and $23.44 per share, respectively. These stock offerings were accomplished using registration statement Form S-1. The primary purpose of these offerings was to provide the Company's agents with an opportunity to purchase shares of the Company. The net proceeds will be used for the continuing operation of the Company's business, for further development and expansion, and for limited contingency planning. It is not anticipated that any part of the net proceeds will be used for the purpose of retiring or reducing any indebtedness of the Company.
Presently, the Company has no debt outstanding under its $1,000,000 revolving line of credit. The Company feels that, between its current cash position and the working capital generated by operations, it can adequately meet normal financing requirements and any future expansion goals.
The selected quarterly financial data required by Item 302(a) of Regulation S-K is omitted because the Registrant does not meet both of the specified tests.
Consolidated Statements of Changes In Stockholders' Equity - Years ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . 16
November 15, 1996 (Except Note 11, as to which the date is December 2, 1996)
Board of Directors Independent Research Agency for Life Insurance, Inc. and Subsidiaries Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Independent Research Agency for Life Insurance, Inc. and Subsidiaries as of September 30, 1996, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years 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 audits.
As described in Notes 3 and 8 to the financial statements, the Company changed its method of accounting for marketable securities and income taxes during the year ended September 30, 1994 as required by the provisions of Statements of Financial Accounting Standards No. 109 and No. 115.
This summary of significant accounting policies of IRA, Inc. is presented to assist in understanding IRA, Inc.'s financial statements. The financial statements and notes are representations of IRA, Inc.'s management who are responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Nearly all of the investments of IRA, Inc. are in publicly traded mutual funds. IRA, Inc. has classified these investments as available-for-sale securities. Therefore, these securities are reported at fair value with unrealized gains and losses excluded from earnings and reported net of taxes as a separate component of stockholders' equity. Realized gains and losses, determined by using the average cost method, are included in earnings.
Financial instruments that potentially subject IRA, Inc. to concentrations of credit risk consist principally of temporary cash investments, commissions receivable and marketable securities. IRA, Inc. places its
The accompanying financial statements for the years ended September 30, 1995 and 1994 reflect certain reclassifications to conform with classifications adopted for the year ended September 30, 1996. These reclassifications have no effect on net income or retained earnings as previously reported.
As of September 30, 1996, 1995 and 1994, nearly all of the investment securities of IRA, Inc. are in publicly traded mutual funds. At September 30, 1996, 1995 and 1994, the investment securities portfolio was comprised of securities classified as available for sale in conjunction with the adoption of Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115 does not allow retroactive restatement and, therefore, the investment securities portfolio at September 30, 1993, was carried at the
The determination of classifying the marketable securities as either current or noncurrent is based upon management's intention to liquidate specific securities within one year. The aggregate cost and market values of IRA, Inc.'s marketable securities as of September 30, 1996, 1995 and 1994, are as follows:
The excess of market over cost of $16,273,021, $13,176,068 and $7,974,313 is reflected net of taxes in a separate component of stockholders' equity as of September 30, 1996, 1995 and 1994 as follows:
Loans from insurance companies represent non-interest bearing loans from four insurance companies which IRA, Inc. represents as general agent. The amounts of the loans are adjusted monthly and are calculated to be equal to the difference between the total amount of first year commissions on certain insurance policies sold by IRA, Inc. and the amount of the first year commissions earned by IRA, Inc. on the policies.
As consideration for the repurchase of stock, IRA, Inc. issued notes payable to some stockholders. As of September 30, 1996 there are notes payable outstanding to three former stockholders. These notes payable have interest rates ranging from 5.0% to 6.0% with maturity dates ranging from January 2, 1997 to January 2, 1998. These notes payable are unsecured. The principal payments on these notes payable are due as follows:
Based on borrowing rates currently available to IRA, Inc. For loans with similar terms and maturities, the book value of notes payable as of September 30, 1996 are considered to approximate fair value.
During the year ended September 30, 1993 IRA, Inc. established a $1,000,000, one year revolving line of credit. The revolving line of credit has since been renewed on an annual basis. Bank advances on the credit line are payable on or before December 31, 1996 and carry an interest rate at the Bank's prime rate. The credit line is unsecured. IRA, Inc. had not made any draws on the credit line during the years ended September 30, 1996, 1995 and 1994.
During the years ended September 30, 1996, 1995 and 1994, IRA, Inc. repurchased a total of 129,963 shares, 39,325 shares, and 85,731 shares, respectively, of its previously outstanding Class B common stock in accordance with the terms of its stock agreements with shareholders. The total cost of the stock repurchased was $3,382,449 for the year ended September 30, 1996, $916,006 for the year ended September 30, 1995, and $1,906,658 for the year ended September 30, 1994.
All shares of IRA, Inc. are subject to agreements between the shareholders and IRA, Inc. setting forth limitations of transferability and the rights of IRA, Inc. to repurchase the stock. The provisions are summarized as follows:
2. In the event of a shareholder's death, or his desire to sell or otherwise dispose of stock, the shareholder or the shareholder's executor must offer such shares to IRA, Inc. IRA, Inc. will repurchase such shares within ninety (90) days after receipt of such notice at a price to be established at least annually by IRA, Inc. IRA, Inc. will pay all cash for such shares, or may, as determined by IRA, Inc. at its sole discretion, issue a note as full or partial consideration for such repurchase.
On December 1, 1994, a cash dividend of $4.88 per share ($4,390,233) was paid by IRA, Inc. from retained earnings on its Class B common stock to its shareholders of record as of September 30, 1994.
Effective October 1, 1993, the Companies adopted SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable income or deductions in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The provisions of SFAS No. 109 did not have a significant impact on the Companies.
Certain items of income and expense are recognized in different years for financial reporting and income tax purposes. Deferred income taxes are provided in recognition of these temporary differences. The items comprising the deferred tax balances as of September 30, 1996, 1995 and 1994 are as follows:
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996, 1995 AND 1994
For federal income tax purposes, IRA, Inc. and its subsidiaries have elected to file separate income tax returns.
During the year ended September 30, 1993, IRA, Inc. established a Deferred Career Commission Plan for the benefit of its sales agents. This is a nonqualified plan under which commissions accrue for its sales agents until their business relationship with the Company terminates. The sales agents receive no paid commissions under this Plan prior to their termination date. Commissions which are accrued are determined annually based upon IRA, Inc.'s business needs. These accrued commissions payable to the sales agents do not have any superior claims to the assets of IRA, Inc. Deferred Career Commission Plan expense was $4,704,578, $4,390,805, and $2,116,577 for the years ended September 30, 1996, 1995 and 1994, respectively. This expense is included in commissions and agent expenses on the accompanying statements of income. The Deferred Career Commission Plan payable balances for each year are as follows: