Except as mentioned below, the Company leases its Agencies' offices. For information with respect to the Company's lease commitments see "Note G--Leases" of the Notes to Consolidated Financial Statements beginning on page.
At December 31, 1998, the Company owned buildings in Oklahoma City, Oklahoma; Fort Myers, Florida; and Victoria, Texas from which the Agencies in those cities operate. In addition, the Company owned a building in Charlottesville, Virginia.
The information set forth in the following table should be read in conjunction with "Management's discussion and Analysis of Financial Conditions and Results of Operations" and the Consolidated Financial Statements and Notes thereto.
___________________________ 1 See Note J of Notes to Consolidated Financial Statements beginning on page for information regarding business purchase transactions which impact the comparability of this information. In addition, during the years ended December 31, 1995 and 1994, the Company consummated 14 and four purchase acquisitions, respectively.
Total revenues for 1998 were $181.0 million, an increase of $7.3 million or 4.2% over 1997. For 1997, total revenues were $173.7 million, an increase of $15.5 million or 9.8% from 1996.
Investment and other income remained level in 1998 and increased by $0.9 million in 1997. These amounts include gains of $2.6 million, $2.5 million and $1.9 million in 1998, 1997 and 1996, respectively, from the sale of certain offices, insurance accounts and other assets.
Total operating expenses for 1998 were $155.7 million, an increase of $3.8 million or 2.5% from 1997. For 1997, total operating expenses were $151.9 million, an increase of $12.7 million or 9.1% from 1996.
Other operating expenses for 1998 were $47.0 million, or 3.3% higher than 1997. Increases relate primarily to purchase acquisitions and costs associated with revenue growth offset in part by the sale of
Amortization expense primarily reflects the amortization of expiration rights, an intangible asset acquired in the purchase of insurance agencies. Amortization expense decreased by $0.2 million or by 2.4% in 1998 and increased by $0.5 million or 6.8% in 1997 which is attributable to purchase acquisitions consummated during 1998, 1997 and 1996 offset by decreases from amounts which became fully amortized or were sold in those years.
The effective tax rates for the Company were 41.1% in 1998, 41.5% in 1997 and 40.1% in 1996. An analysis of the effective income tax rates is presented in "Note F--Income Taxes" of Notes to Consolidated Financial Statements.
Net cash provided by operations totaled $19.6 million, $21.0 million and $16.6 million for the years ended December 31, 1998, 1997 and 1996, respectively, and is primarily dependent upon the timing of the collection of insurance premiums from clients and payment of those premiums to the appropriate insurance underwriters.
The Company has historically generated sufficient funds internally to finance capital expenditures. Cash expenditures for the acquisition of property and equipment were $5.0 million, $2.1 million and $5.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. The timing and extent of the purchase of investments is dependent upon cash needs and yields on alternate investments and cash equivalents. In addition, during 1998 and 1997, total proceeds from maturities of investments exceeded purchases of investments by $0.4 million and $2.4 million, respectively, as the Company utilized these funds for the repurchase of Common Stock of the Company and the acquisition of insurance agencies. Cash expenditures for the purchase of insurance agencies accounted for under the purchase method of accounting amounted to $10.4 million, $9.3 million and $9.7 million in the years ended December 31, 1998, 1997 and 1996, respectively. Cash expenditures for such insurance agency acquisitions have been funded primarily through operations and from long-term borrowings. In addition, a portion of the purchase price in such acquisitions may be paid through Common Stock and deferred cash payments. Cash proceeds from the sales of certain offices, insurance accounts and other assets totaled $8.9 million, $6.5 million and $2.5 million in the years ended December 31, 1998, 1997 and 1996, respectively. The Company did not have any material capital expenditure commitments as of December 31, 1998.
Financing activities utilized cash of $16.4 million, $16.0 million and $6.0 million for the years ended December 31, 1998, 1997 and 1996, respectively, as the Company made scheduled debt payments and annually increased its dividend rate. In addition, during 1998, 1997 and 1996, the Company repurchased 1,045,280, 700,000 and 801,700, respectively, shares of its Common Stock under a stock repurchase program. The Company is currently authorized to purchase an additional 777,500 shares and anticipates that it will continue to repurchase shares in 1999 at a decreased level. The Company has a bank credit agreement
On March 29, 1999, the Company entered into a Stock Purchase Agreement with PM Holdings, Inc., Phoenix Home Life Mutual Insurance Company and Martin L. Vaughan, III to acquire all of the issued and outstanding shares of capital stock of American Phoenix Corporation. The acquisition is subject to regulatory approval and satisfaction of certain conditions to closing. Upon consummation of the acquisition, the Company expects to incur debt of approximately $49 million under a credit facility to be obtained in connection with the acquisition and to issue $32 million principal amount of 5.25% Convertible Subordinated Debentures due 2014. The Company expects repayment and servicing of the debt to be funded largely from cash flows of the combined operations. Additionally, management believes that these cash requirements will be partially offset by federal income tax benefits related to the interest expense and a portion of the goodwill amortization. Based upon the historic ability of the Company and American Phoenix Corporation to generate consistent, positive cash flows, the Company believes that the combined company will have sufficient liquidity and adequate capital resources to meet both its short- and long-term capital needs.
Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, this could result in a system failure or miscalculations causing disruption of operations, and could conceivably have a material adverse effect on the Company.
The Company is also evaluating insurance carriers, financial institutions and other third party vendors. This process is expected to be complete by mid 1999. Determining the year 2000 readiness of external parties requires the collection of compliance statements made by those parties, together with factual research. Although the Company has taken, and will continue to take, reasonable efforts to gather information to determine the readiness of external parties, often such information is not provided voluntarily, is not available or is not reliable.
In assessing the material risks to the Company's business arising from the year 2000 problem, the Company considers the year 2000 readiness of agency management system vendors, insurance carriers, financial institutions and other third parties (including public utilities and telecommunication service companies) to be the primary risk to its business. The loss of services from any one of these entities could disrupt operations and have a material adverse effect on the Company. The year 2000 readiness of third parties is substantially beyond the Company's knowledge and control, and there can be no assurances that the Company will not be adversely affected by the failure of a third party to adequately address the year 2000 problem.
The Company is scheduled to begin a comprehensive contingency planning effort in March 1999 to ensure that all critical business functions will continue on January 1, 2000. The plan will outline the procedures to follow for the most likely areas of risk. The Company expects its contingency plan to create a business continuity project work group, define triggers for activating contingency plans, assess business resumption strategies and establish alternative processes for core business functions, where commercially reasonable. The Company's contingency planning efforts will be ongoing throughout 1999.
The Company currently estimates that the total costs for addressing the year 2000 issue, including the necessary enhancements, will be approximately $3.5 million. Software and hardware replacements are being capitalized; whereas, the costs associated with preparing for the year 2000 are expensed as incurred and are being funded with cash from operations. As of December 31, 1998, the Company had spent approximately $1.8 million. The Company does not expect the total cost of addressing the year 2000 issue with respect to its internal computer systems and hardware to be material to its consolidated financial condition or results of operations.