EXHIBIT 99.1
EXHIBIT 99.1 Transcript of unscripted remarks by Darrell R. Wells, Registrant's
President, at Registrant's 2004 Annual Meeting on June 30, 2004
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Mr. Wells: I just want to go over a few brief points in review
of 2003.
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2003 was our first profitable year in a couple of
years. Last year we earned $711,822 after tax, which
is about 42 cents a share. The good news is we had a
profit -- unfortunately, we did not have an
operating profit. But because of securities gains we
were able to have a profit.
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I think that one of the new things that has
developed in recent months is we've had a new
President. Frank Jones is now serving as our
President. Frank has a long and distinguished career
in the life insurance business, having served as a
CEO of a very large and prominent pre-need company
which was part of Service Corp. International out of
Houston, the largest owner of funeral homes in the
country and perhaps in the world. And we're very
glad that Frank is helping us at this time and
giving us the wisdom and guidance that he has
accumulated over the years.
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The Company, starting last year and continuing into
this year, has created some new initiatives trying
to create an environment that will allow us to
expand our business, grow our revenues over our
costs and establish a trend of an operating profit,
which is the basic thing that we need to do. The
business continues to be more competitive and
another factor affecting all insurance companies
that we have spoken about before and continues
relatively unabated at this time is the historically
low level of interest rates Both last June, about a
year ago, and again in the first quarter of this
year interest rates hit lows approaching about 45
years. So that has made a big challenge for us. We
have been able to, by matching the duration of our
assets and liabilities, increase the interest income
that we earned on bonds extending the duration and
getting a better match of duration of assets and
liabilities. On our bonds, although not on our total
portfolio, we now have yields approaching 6%, which
is a very good yield in this current market. That
has been achieved gradually over a period of about
14 to 15 months -- from late in 2002 and continuing
into 2003 and also into 2004.
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Another major initiative to restore and enhance
profitability on an operating basis was the
engagement with a consulting firm to help us do work
flow redesign It was apparent to management that we
had some inefficiencies that had crept in over the
years -- not taking as much advantage of current
technology as we could and full utilization of our
systems. This project has been ongoing since late
last year and is about to wrap up at the end of
July.
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Some initiatives that have come out of that have been
implemented already, some are in the process of being
implemented as we speak and others will
be implemented in the months to come and into next
year. Estimated savings from this project when fully
complete are anywhere from $800,000 to $1,000,000.
But to complete all of the initiatives will take
some time.
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Another challenge is in the dental business. This
has been a growing and profitable part of our
business. And one of the problems we have with that
is that our group system, which we bought
approximately 14 years ago, is no longer supported
by the seller, which is out of business. It is being
supported internally by our in-house staff but to
keep up all the new rules and be fully compliant we
have begun a very serious investigation of a more
modern group system. We plan to do further work. We
have a meeting set up -- a field trip in July and
hopefully if we decide to proceed with that, it can
be accomplished probably in the first half of next
year.
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Part of that group system, and it is also true of
our life system, is that full implementation will
allow us to use what is called a "web front end" --
meaning that agents or clients, insureds, can come
in and look at their policy, check their coverages,
any billing questions they may have, etc. Not many
insurance companies have that today. Some do and
some don't. But if we can implement all of the
projects we are looking at, both for our individual
life system and our group system, we will be able to
offer that feature.
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One example of the benefits on the dental side. One
of the providers gave me an example of a system now
in place where a dentist or his assistant enters a
claim and if it's a standard claim that fits our
parameters, the system will adjudicate that claim
and allow a bank draft or an ACH from our bank to be
drafted into his bank account, and the whole process
could be paperless. And that, over time as more and
more people use a feature like that, could save the
insureds, the dentists and ourselves in a lot of
money.
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One other initiative that our personnel are working
on and is close to completion is a new final expense
product. We hope to have the final terms established
very shortly within the next month and then seek
approvals hopefully by this fall. And discussions
and investigations have indicated that we could have
some very good potential in that area and it's being
designed to be as paperless and as low cost in terms
of its implementation as we can make it today --
making a bank draft only as one feature. So we
wouldn't be handling individual paper.
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So those are some of the initiatives we are trying
to establish. There has been a lot going on here --
a lot of change -- and hopefully we can have some
more positive things to say next year.
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At this point I would like to open up the floor to
any questions.
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Question: What would be the hit to earnings in '04 and going
over into '05 as the results of the initiatives?
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Mr. Wells: You know, I can give you a range, but some of them
we're still analyzing as I said and depends on
whether we move forward with them and when. The cost
for just some of the initiatives so far in the first
six months I think are in the several hundreds of
thousands of dollars -- broad range. Probably an
annual rate between $400,000 and $600,000 -- what we
are incurring so far this year on an annualized rate
-- would be a reasonable range.
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To give you an illustration on the group system,
probably in terms of initial licensing costs if we
do sign a contract on that -- both the group system
and the web-based system-- the licensing fee is
around $125,000 for the basic system and the web
front-end part would be another $60,000 to $80,000.
But what is not known is the implementation cost and
we still have some work to do. I think as a general
rule very often implementation can be equal to the
licensing fee and sometimes more. We said 100% to
200% of the licensing fee would be in a reasonable
range. The web front-end part of the individual life
system -- the licensing fee is approximately
$150,000 and there would be a lot of implementation
cost with that, although a lot of the costs I've
been told will be internal -- our people design what
features and what information and what level of pass
codes to collect on a web-based system.
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Question: You have approximately 110,000 shares available for
issuance under the equity compensation plan. I
noticed in the proxy statement that, outside you and
Tom (Mueller), all the other officers own a grand
total of 50 shares. Under what circumstances would
the board consider issuing some kind of stock as
incentive compensation?
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Mr. Wells: Well as you, I think, may know, the ground has been
shifting a little bit in terms of how we may or we
have to account for stock options. Very likely in
the coming year a new system expensing the issuance
of those options will occur. Some companies, I'm on
boards of some other companies, that are looking at
just a grant of stock and vesting over a period of
time. Other companies will try to deal with it I'm
sure in various ways. We have not talked in any
detail about that recently, but one initiative that
we are seriously considering and we have not really
had in any meaningful way here is pay for
performance and the potential of pushing that
concept throughout the organization so that you
would have a base salary, but based on certain goals
that are within the control of that person, even a
person, for example, who's responding to claims or
issuing new policies, there would be a bonus
opportunity. Based on metrics that are specific to
their individual activities, we would design a score
card that would allow them, according to certain
criteria, greater
opportunity to earn bonuses. We've had discussions
about that in our redesign meetings and it will take
some further work beyond the current project to do
that. But it's under serious consideration. The
concept is there, and that would affect everyone,
including the executives, that could be potentially
supplemented by some sort of stock options.
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Question: What is the status of compliance with the bank loan
covenants?
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Mr. Wells: I've talked to our bank about it. My impression is
that we're okay for now, meaning as long as we
continue to make our interest and principal
payments. We may not make all of our covenants at
June 30 but we will get a waiver. We have adequate
liquidity to meet all known obligations at the
current time from here to year end and into next
year. In the coming months, we will be doing
whatever we can to extend the time horizon for our
liquidity into the following years.
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