SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ____________
Commission file number 0-4366
Regan Holding Corp.
(Name of Registrant as Specified in Its Charter)
California 68-0211359
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1179 N. McDowell Blvd., Petaluma, California 94954
(Address of Principal Executive Offices) (Zip Code)
(707) 778-8638
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the issuer: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. Aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days.
$11,752,931
There is currently no trading market for the registrant's stock.
Accordingly, the foregoing is based on the price at which the registrant has
repurchased its stock during the past 60 days.
Index to Exhibits on Page 28
APPLICABLE TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 after the distribution of securities under a plan confirmed
by a court.
Yes No
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the registrant's classes of
common stock as of March 15, 1998, including redeemable common stock, was:
Common Stock-Series A 26,081,540
Common Stock-Series B 600,618
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 27, 1998, is incorporated by reference into Part III
of this document.
PART I
Item 1. Description of Business
Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially.
Regan Holding Corp. (the "Company") is a California corporation, engaged
primarily in the marketing and administration of life insurance and annuity
products on behalf of unaffiliated insurance carriers.
The Company, through its wholly-owned subsidiary Legacy Marketing Group
("LMG"), has entered into Marketing Agreements (the "Marketing Agreements") with
American National Insurance Company ("American National") and IL Annuity and
Insurance Company ("IL Annuity"), collectively referred to herein as the
"Carriers." American National is an unaffiliated company with over $1.5 billion
in capital and surplus and is rated "A++" by A.M. Best. IL Annuity is also an
unaffiliated company, with over $13 million in capital and surplus and is rated
"A" by A.M. Best. The Marketing Agreements grant the Company the exclusive right
to market certain annuity and life insurance products issued by the Carriers
(the "Policies"). Under the terms of the Marketing Agreements, the Company is
responsible for the recruiting, training, managing and supervising of producers
in the sale of the Policies. For these services, the Carriers pay the Company
marketing allowances and commissions based on the volume of Policies sold.
The Company has also entered into Insurance Processing Agreements (the
"Processing Agreements") with the Carriers pursuant to which the Company
provides clerical, administrative and accounting services with respect to the
Policies. Such services include billing, collecting and remitting cash on the
Policies. However, all cash receipts are deposited into accounts maintained by
the Carriers and all cash remitted is paid from accounts maintained by the
Carriers. For providing such services, the Company is paid on a per transaction
basis with the amount of the fee depending on the type of policy.
The Marketing and Processing Agreements with American National expire on
June 1, 1998, and with IL Annuity on December 31, 2005, but may be renewed by
mutual agreement for successive one year terms. The Agreements may be terminated
by either party upon 180 days notice without cause, and may be terminated by
either party immediately for cause. In addition, the Marketing Agreements will
terminate automatically at the end of any calendar quarter upon failure of the
Company to meet certain quarterly minimum production requirements for two
successive calendar quarters. The Company is currently negotiating with American
National to renew the Marketing and Processing Agreements. Management expects
that new agreements will be signed during the second quarter of 1998.
The Company currently markets Policies written in the District of Columbia
and in each state of the United States, except Alabama and New York. The
Policies marketed by the Company during 1997 consisted of annuity and life
insurance products which have been designed by the Company and which generally
have the following features: (i) a contractually guaranteed maximum
administrative fee; (ii) multiple cash value strategies; (iii) a guarantee to
credit the full and complete net earnings of outside indices; and (iv) a
guarantee that the cost of insurance will be no greater than the yearly
renewable term rates provided by the reinsurers of the Policies, with changes in
the cost of insurance resulting solely from changes in the Policies' future
experience factors.
During 1997, American National and IL Annuity were the only insurance
companies for which the Company marketed insurance products. Approximately 36.2%
and 57.0% of the Company's total revenue during 1997 resulted from agreements
with American National and IL Annuity, respectively.
Neither the Marketing Agreements nor the Processing Agreements prevent the
Company from entering into similar arrangements with other insurance companies.
However, under the terms of the Marketing Agreements, the Company is obligated
to give the Carriers the opportunity to participate in the marketing of any new
products developed by the Company.
The Company currently markets the Policies through a network consisting of
over 12,000 independent insurance producers that have entered into producer
agreements with LMG (the "Producers"), pursuant to which, the services of the
Producers are provided on a non-exclusive basis. The agreements may be
terminated immediately by either the Producer or the Company.
LMG's sales network is built on a multi-level structure, with Producer
compensation based on sales volume. The pay-for-performance Producer contract
contains a nine-level "open book" design, which provides financial motivation to
retail Producers to build an organization of Producers constituting a hierarchy,
thereby contributing to their own financial growth and to the growth of the
Company. Except for the first level, each Producer level has commission and/or
agency building requirements that must be met before the Producer may advance to
the next level. Advancements to higher levels can occur as often as every three
months. Producers at the highest levels are considered Wholesalers.
LMG provides tools and services that assist Wholesalers with recruiting,
training and support responsibilities associated with the Producers in their
hierarchy. In addition, LMG assists Producers with programs designed to increase
their sales and better serve their clients. Recruiting and training programs
include visual presentations, product videos and seminars, advertising material
guidelines and sales flip charts. LMG also produces product information, sales
brochures, pre-approved advertisements and recruiting material.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial
Services, Inc. ("LFS"), which is registered with the National Association of
Securities Dealers (the "NASD"), the Company engages in the offering and sale of
variable annuity and life insurance products, mutual funds and debt and equity
securities (collectively, the "Products") on a fully disclosed basis. LFS has
entered into agreements (the "Agreements") with various entities licensed to
sell the Products. The Agreements grant LFS the non-exclusive right to solicit
sales of the Products through its network of independent representatives and to
provide certain marketing and administrative services in order to facilitate
sales of the Products. Under the Agreements, the Company is compensated based
upon pre-determined percentages of production. The Agreements may be terminated
by any party upon 30 days written notice. Sales of the Products pursuant to the
Agreements began during the first quarter of 1996.
There were approximately 215 full-time equivalent employees of the Company
as of March 15, 1998.
Competitive Business Conditions
The life insurance and annuity business is highly competitive. The Company
faces competition from various companies and organizations, including banks,
which have substantially greater assets, financial resources and market
acceptance. The Company's distribution system relies on independent insurance
Producers to be able to effectively market its products competitively.
Maintaining relationships with Producers requires getting new products to the
market in an efficient and timely manner, offering competitive commission
schedules, and providing superior marketing training and support.
Regulatory Environment
LMG is licensed as a third party administrator and/or an insurance agency
in several of the United States and, accordingly, is subject to regulation by
the various states' Departments of Insurance.
Increased national attention has forced the National Association of
Insurance Commissioners and state insurance departments to re-examine existing
laws and regulations affecting insurance companies, especially those involving
insurance company solvency, marketing practices, and investment policies. The
Company has responded to the increased scrutiny over the marketing of insurance
products by instituting strict advertising guidelines, generating consistent
materials and testimonies addressing appropriate marketing practices, and
including this topic in its bi-annual Wholesaler meetings. While the Company
itself is not an insurance company, changes in the regulatory environment which
affect the insurance companies with which it contracts can impact its
operations.
As a registered broker-dealer, LFS is subject to regulation by the NASD and
the Securities and Exchange Commission (the "SEC"), primarily with respect to
registration and supervision of its representatives, payment of commissions,
recordkeeping and financial condition. LFS is also registered in several of the
United States as a fully disclosed broker-dealer and, as such, is subject to
regulation by the various states' Departments of Securities.
Item 2. Properties
The Company currently leases approximately 43,300 square feet of office
space in Petaluma, California. The current lease expires in October, 2006, and
includes a commitment by the Company to lease an additional 10,460 square feet
beginning August 1, 1998. Management believes that existing office space,
combined with the additional space to be leased in 1998, is adequate for the
Company's current operations.
Item 3. Legal Proceedings
As a professional services firm engaged in marketing and servicing life
insurance and annuity products, the Company encounters litigation in the normal
course of business. Management is not aware of any material exposure to the
Company resulting from such litigation, except as follows:
In December, 1996, LMG and American National (collectively, the
"Co-defendants") were named in a lawsuit filed in the Circuit Court of Jefferson
County, Alabama, alleging misrepresentation and price discrimination in
connection with the sale of certain annuity products issued by American National
and marketed by LMG. The plaintiffs, policyholders Buddie Watson King and
Feyrene Zink, sought and received conditional class action certification prior
to service of the complaint upon the Co-defendants. In February, 1997, the case
was removed to the U. S. Federal District Court in Birmingham, Alabama, and the
conditional class action certification was vacated by the federal district
court. Thereafter, the federal court remanded the case back to the Circuit Court
of Jefferson County, Alabama, where the case is currently pending. The outcome
of the lawsuit cannot be determined. However, the Company's management believes
that the suit is without merit and intends to defend vigorously. Accordingly, no
amounts have been recorded in the financial statements for any losses which may
result from the lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of security holders during the fourth
calendar quarter of 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
There is no established public trading market for the Company's stock. The
Company's Series A common stock is held by approximately 1,500 shareholders of
record. The Series B common stock is held by approximately 9,800 shareholders of
record.
The Board of Directors of the Company may, at its sole discretion, declare
and pay dividends on common stock, subject to capital and solvency restrictions
under California law. To date, the Company has not paid any dividends on its
common stock. The Company's ability to pay dividends is dependent on the ability
of Legacy Marketing Group and Legacy Financial Services, Inc., the Company's
wholly-owned subsidiaries, to pay dividends or make other distributions to its
parent company. As of December 31, 1997, the Company had an accumulated deficit
and does not anticipate paying dividends on any of its outstanding common stock
in the foreseeable future.
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Five
Year Ended Year Ended Year Ended Year Ended Months Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993 (2)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Total Income $ 22,581,075 $ 18,237,528 $ 17,153,947 $ 7,683,791 $ 1,627,210
Net Income Before
Extraordinary Item 3,150,454 2,714,495 4,858,620 5,085,866 473,187
Basic and Diluted
Earnings Per Share $ .12 $ .10 $ .18 $ .21 $ .02
Selected Balance Sheet Data:
Total Assets $ 19,280,941 $ 15,424,902 $ 12,304,801 $ 6,860,778 $ 2,128,057
Total Non Current Liabilities 281,894 316,741 304,557 130,146 1,136,321
Total Liabilities 3,621,380 2,519,866 1,762,924 1,287,425 2,199,685
Redeemable Common Stock 11,842,651 12,343,001 12,682,750 12,696,412 12,696,412
Shareholders' Equity (Deficit) 3,816,910 562,035 (2,140,873) (7,123,059) (12,768,040)
Cash Dividends Declared -- -- -- -- --
Selected Operating Data:
Total Premium Placed Inforce (1) $777,300,000 $626,800,000 $620,000,000 $339,000,000 $ 30,000,000
Total No. of Policies
Placed Inforce (1) 15,060 11,144 12,167 6,118 313
(1) Inforce premium and policies are actually statistics of the Carriers but
represent factors which directly affect the Company's revenue.
(2) Operating statements are for the five months ended December 31, 1993. See
discussion at "Item 8. Financial Statements and Supplementary Data," Notes
to the Consolidated Financial Statements, Note 1(a).
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Summary--The Company's net income increased approximately $436,000, or
16.1%, in 1997 compared to 1996. This increase is attributable primarily to
increases in income, resulting from increases in premium placed inforce for the
Carriers. From 1995 to 1996, however, net income decreased approximately $2.1
million, or 44.1%, due primarily to increases in expenses to accommodate
increases in sales, as discussed below.
Income--The Company's major sources of income are marketing allowances,
commission income and administrative fees from sales and administration of
annuity and life insurance products on behalf of the Carriers. Levels of
marketing allowances and commission income is directly related to the volume of
sales of such products. Administrative fees are a function not only of product
sales, but also administration of policies inforce and producer appointments.
Total income increased approximately $4.3 million, or 23.8%, in 1997 compared to
1996, and increased approximately $1.1 million, or 6.3%, in 1996 compared to
1995. These increases are attributable primarily to increases in sales volume,
as discussed below.
Marketing allowances and commission income, combined, increased
approximately $3.7 million, or, 25.7%, in 1997 from 1996 and increased
approximately $633,000, or 4.6%, during 1996 from 1995. These increases are due
primarily to increases in the volume of sales by the Company's distribution
network for the Carriers. Premium placed inforce for the Carriers totaled
approximately $777.3 million, $626.8 million, and $620.0 million during 1997,
1996, and 1995, respectively. This represented a 24.0% increase from 1996 to
1997 and a 1.2% increase from 1995 to 1996. Also contributing to the increases
in income were shifts in both 1997 and 1996 to sales of products which yield
higher marketing allowances and commission income.
Administrative fees increased approximately $468,000, or 14.9%, during 1997
compared to 1996, and increased approximately $104,000, or 3.4%, during 1996
compared to 1995. These increases are due primarily to increases in the number
of policies sold and administered during the respective periods and to a shift
in policies administered to those which generate higher administrative fees.
During 1997, the Company marketed and administered insurance products for
only two Carriers, American National and IL Annuity. During 1997, approximately
36.2% and 57.0% of the Company's total revenue resulted from agreements with
American National and IL Annuity, respectively, compared to approximately 87.5%
and 5.9%, respectively, during 1996. This shift in income from American National
to IL Annuity is attributable primarily to favorable market acceptance of IL
Annuity's products.
Savings and investment income primarily represents earnings from
investments in marketable securities. Such earnings decreased approximately
$31,000, or 4.3%, in 1997 from 1996, and increased approximately $376,000, or
106.3%, in 1996 from 1995. These fluctuations are attributed primarily to
changes in the amount of assets invested.
Seminar income consists of attendance fees and sales of educational
materials related to educational seminars held by the Company. The seminars are
designed to stimulate sales of life insurance products through the training of
Producers in current estate planning concepts and were first sponsored by the
Company during 1997.
Expenses--Total expenses increased approximately $3.6 million, or 25.9%,
during 1997 compared to 1996 and increased approximately $3.3 million, or 31.7%,
during 1996 compared to 1995. These increases are attributable primarily to
increases in compensation, sales promotion and support, and occupancy expenses
as discussed below.
As a service organization, the Company's primary expenses are salaries and
related employee benefits. These expenses increased approximately $2.3 million,
or 27.4%, in 1997 from 1996, and increased approximately $2.0 million, or 31.3%,
in 1996 from 1995. These increases resulted from increases in the average number
of full-time equivalent employees, which rose to 184 during 1997, from 151
during 1996 and 108 during 1995. These increases in employment are largely
attributable to preparation for and accommodation of increases in sales of
insurance products. Salaries and benefits also increased during 1997 and 1996
due to the addition of personnel at higher pay levels and due to scheduled pay
increases for existing employees.
Sales promotion and support expense consists primarily of costs related to
the Company's annual national sales conventions and to various sales training
activities. Also included in sales promotion and support expense is the cost of
designing and printing sales brochures for use by Producers. It is expected that
these expenses will continue to be a major element of the Company's cost
structure, as attendance at the national sales conventions increases, as the
number of Producers marketing products for the Company increases, and as new
products are introduced. This expense increased approximately $333,000, or
14.9%, in 1997 from 1996, due primarily to increased Producer support costs
associated with higher sales volume, as discussed above, and increased
approximately $869,000, or 63.8%, in 1996 from 1995, due primarily to higher
costs associated with the Company's 1996 annual sales convention.
Occupancy expense increased approximately $244,000, or 37.9%, during 1997
from 1996, and increased approximately $88,000, or 15.8%, during 1996 from 1995.
These increases are due primarily to increases in facilities rent expense
resulting from the Company's leasing additional office space in November, 1996,
and to overall increases in telephone and other utilities expenses which
correspond with increases in sales volume and employment, as discussed above.
Depreciation and amortization expense increased approximately $171,000, or
36.5%, in 1997 from 1996 and increased approximately $99,000, or 26.6%, in 1996
from 1995. These increases are due primarily to acquisitions of fixed assets
during 1997 and 1996. Such acquisitions were necessary to improve newly leased
office space and to accommodate increases in employment, as discussed above.
Liquidity and Capital Resources
The Company's business is not capital intensive. Its major expenditures
consist primarily of the funding of operating expenses and the purchase of
computer upgrades and furniture acquisitions to accommodate new employees, which
is generally provided by cash from operations. The Company's future cash flows
available to fund operations will depend primarily on the level of sales of
annuity and life insurance products and upon the Company's ability to control
operating expenses in relation to demand placed upon the organization from
increased sales.
The Company's ability to mobilize its assets remained strong at December
31, 1997, with cash and investments representing 66.8% of the Company's total
assets. The Company maintains a significant portion of its assets in cash and
investments primarily to support growth in operations, to fund continued product
development and potential strategic acquisitions, and as a reserve to cover
possible redemptions of certain of the Company's common stock, which is
redeemable at the option of shareholders under various agreements with the
Company. During 1997, redemption requests received by the Company were not
material in amount, either individually or in the aggregate, and the Company
believes that its liquid assets are sufficient to meet anticipated requests for
redemption. In the unlikely event that all redeemable shares were presented for
redemption, the Company believes that such demands could be met by reserves on
hand. At December 31, 1997, the redemption value of redeemable common stock was
approximately $5.9 million (see "Item 8. Financial Statements and Supplementary
Data," Notes to Consolidated Financial Statements, Note 9).
In conjunction with the leasing of additional office space during 1998,
management anticipates that capital expenditures of approximately $420,000 will
be made during 1998 for leasehold improvements and furniture and fixtures.
In order to fund LFS during the start-up phase, the Company has committed
to make sufficient contributions to support LFS's operations and to ensure LFS's
compliance with financial regulatory requirements through December, 1998. Such
contributions totaled $330,000 during 1997.
The Company intends to continue to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. As a result, the Company anticipates that cash and investments will
continue to represent a high percentage of total assets. The Company believes
that existing cash and investment balances, together with cash flows from
operations, will provide sufficient funding for the foreseeable future.
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors
Regan Holding Corp.
We have audited the accompanying consolidated balance sheets of Regan Holding
Corp. and Subsidiaries as of December 31,1997 and 1996, and the related
consolidated statements of income, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1997. 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.
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 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 the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Regan Holding
Corp. and Subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
March 18, 1998
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 December 31, 1996
----------------- -----------------
ASSETS
Cash and cash equivalents $ 5,194,332 $ 2,202,596
Investments 7,692,279 7,947,207
Accounts receivable 1,239,306 511,710
Prepaid expenses 572,932 361,950
Deferred income taxes-current 488,437 --
Marketing supplies inventory 228,853 251,979
Income taxes receivable -- 179,746
-------------- --------------
Total Current Assets 15,416,139 11,455,188
-------------- --------------
Net fixed assets 2,610,324 1,741,388
Deferred income taxes-non current 783,477 1,600,150
Other assets 471,001 628,176
-------------- --------------
Total Non Current Assets 3,864,802 3,969,714
-------------- --------------
TOTAL ASSETS $ 19,280,941 $ 15,424,902
============== ==============
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 344,071 $ 170,738
Accrued liabilities 2,605,854 2,032,387
Income taxes payable 389,561 --
-------------- --------------
Total Current Liabilities 3,339,486 2,203,125
-------------- --------------
Loan payable 132,285 132,285
Deferred incentive compensation 149,609 184,456
-------------- --------------
Total Non Current Liabilities 281,894 316,741
-------------- --------------
TOTAL LIABILITIES 3,621,380 2,519,866
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 8) -- --
REDEEMABLE COMMON STOCK, Series A and B
(Note 9) 11,842,651 12,343,001
-------------- --------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 100,000,000 shares
No shares issued or outstanding -- --
Series A common stock, no par value:
Authorized: 45,000,000 shares
Issued and outstanding:
20,614,014 and 20,800,791 shares at
December 31, 1997 and 1996,
respectively 3,382,914 3,532,071
Paid-in capital from retirement of
common stock 611,559 310,110
Accumulated deficit (182,433) (3,332,887)
Net unrealized gains on investments 4,870 52,741
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 3,816,910 562,035
-------------- --------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY $ 19,280,941 $ 15,424,902
============== ==============
See accompanying notes to consolidated financial statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Marketing allowances $ 12,386,755 $ 10,039,278 $ 9,767,414
Commission income 5,609,078 4,281,032 3,920,318
Administrative fees 3,603,708 3,136,123 3,032,538
Savings and investment income 697,593 728,927 353,393
Seminar income 220,406 -- --
Other income 63,535 52,168 80,284
-------------- -------------- --------------
Total Income 22,581,075 18,237,528 17,153,947
-------------- -------------- --------------
EXPENSES
Salaries and related benefits 10,512,259 8,253,564 6,287,339
Sales promotion and support 2,565,200 2,231,978 1,362,689
Occupancy 887,608 643,726 555,679
Professional fees 712,129 652,219 766,025
Depreciation and amortization 640,614 469,255 370,651
Courier and postage 480,175 373,158 255,149
Stationery and supplies 399,140 292,695 195,541
Equipment 369,706 287,448 261,691
Travel and entertainment 329,611 239,400 196,868
Insurance 165,028 167,154 89,729
Miscellaneous 174,127 74,273 50,758
-------------- -------------- --------------
Total Expenses 17,235,597 13,684,870 10,392,119
-------------- -------------- --------------
INCOME FROM OPERATIONS 5,345,478 4,552,658 6,761,828
PROVISION FOR INCOME TAXES 2,195,024 1,838,163 1,903,208
-------------- -------------- --------------
NET INCOME $ 3,150,454 $ 2,714,495 $ 4,858,620
============== ============== ==============
EARNINGS PER SHARE
Weighted average shares outstanding 26,895,594 27,540,209 27,563,679
Basic earnings per share $ .12 $ .10 $ .18
============== ============== ==============
Diluted earnings per share $ .12 $ .10 $ .18
============== ============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Paid-in Net
Capital from Unrealized
Series A Common Stock Retirement of Accumulated Gains/
Shares Amount Common Stock Deficit (Losses) Total
------ ------ ------------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1995 20,964,126 $ 3,801,004 $ -- $(10,906,002) $ (18,061) $(7,123,059)
Issuance of stock 106,665 1,067 1,067
Net income for the
twelve months ended
December 31, 1995 4,858,620 4,858,620
Net unrealized losses on
investments 207,806 207,806
Deferred taxes on net
unrealized losses -- -- -- -- (85,307) (85,307)
---------- ----------- ----------- ------------ ---------- -----------
Balance
December 31, 1995 21,070,791 3,802,071 -- (6,047,382) 104,438 (2,140,873)
Redemptions and
retirement of
common stock (270,000) (270,000) 310,110 40,110
Net income for the
twelve months ended
December 31, 1996 2,714,495 2,714,495
Net unrealized losses on
investments (93,603) (93,603)
Deferred taxes on net
unrealized losses 41,906 41,906
---------- ----------- ----------- ------------ ---------- -----------
Balance
December 31, 1996 20,800,791 3,532,071 310,110 (3,332,887) 52,741 562,035
Redemptions and
retirement of
common stock (186,777) (149,157) 301,449 152,292
Net income for the
twelve months ended
December 31, 1997 3,150,454 3,150,454
Net unrealized losses on
investments (80,010) (80,010)
Deferred taxes on net
unrealized losses 32,139 32,139
---------- ----------- ----------- ------------ ---------- -----------
Balance
December 31, 1997 20,614,014 $ 3,382,914 $ 611,559 $ (182,433) $ 4,870 $ 3,816,910
========== =========== =========== ============ =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,150,454 $ 2,714,495 $ 4,858,620
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization of
fixed assets 632,781 465,394 354,854
Accretion/amortization of investments (68,761) (39,372) (33,903)
Net realized gain on sales of investments (13,499) (2,525) --
Realized loss on sale of fixed assets 19,603 -- --
Net change in accounts receivable (727,596) 995,418 (1,262,202)
Net change in prepaid expenses (210,982) (255,411) 15,594
Net change in marketing supplies inventory 23,126 (73,265) (104,036)
Net change in income taxes receivable and payable 569,307 (174,059) (109,792)
Net change in deferred income taxes 360,375 539,413 508,103
Net change in accounts payable 173,333 48,290 54,994
Net change in accrued liabilities 573,467 784,156 528,849
Net change in other assets and liabilities 116,734 (458,000) 228,286
------------ ------------- ------------
Net cash provided by operating activities 4,598,342 4,544,534 5,039,367
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (20,404,456) (19,087,646) (6,589,085)
Proceeds from sales and maturities of investments 20,667,228 16,156,162 3,497,115
Purchases of fixed assets (1,521,320) (519,758) (823,022)
------------ ------------- ------------
Net cash used in investing activities (1,258,548) (3,451,242) (3,914,992)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and retirement of common stock (348,058) (299,639) --
Payments on note payable -- (87,688) (280,000)
Proceeds from issuance of common stock -- -- 1,067
Net cash used in financing activities (348,058) (387,327) (278,933)
------------- ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,991,736 705,965 845,442
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,202,596 1,496,631 651,189
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,194,332 $ 2,202,596 $ 1,496,631
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 18,695 $ 18,883 $ 12,042
Income taxes paid $ 1,265,025 $ 1,472,806 $ 1,450,300
See accompanying notes to consolidated financial statements
</TABLE>
REGAN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
a. Organization
Regan Holding Corp. (the "Company") was incorporated in the State of
California on February 21, 1990, for the primary purpose of owning and
operating an insurance company. The Company conducted business through
its primary subsidiary, Old Colony Life Insurance Company ("Old
Colony"), until May 21, 1992. The Company conducted no operations and
prepared no financial statements through August 1, 1993.
The Company, through its wholly-owned subsidiary Legacy Marketing
Group ("LMG"), has entered into Marketing Agreements (the "Marketing
Agreements") with American National Insurance Company ("American
National") and IL Annuity and Insurance Company ("IL Annuity"),
collectively referred to herein as the "Carriers." American National
is an unaffiliated company with over $1.5 billion in capital and
surplus and is rated "A++" by A.M. Best. IL Annuity is also an
unaffiliated company, with over $13 million in capital and surplus and
is rated "A" by A.M. Best. The Marketing Agreements grant the Company
the exclusive right to market certain annuity and life insurance
products issued by the Carriers (the "Policies"). Under the terms of
the Marketing Agreements, the Company is responsible for the
recruiting, training, managing and supervising of Producers in the
sale of the Policies. For these services, the Carriers pay the Company
marketing allowances and commissions based on the volume of Policies
sold.
The Company has also entered into Insurance Processing Agreements (the
"Processing Agreements") with the Carriers pursuant to which the
Company provides clerical, administrative and accounting services with
respect to the Policies. Such services include billing, collecting and
remitting cash on the Policies. However, all cash receipts are
deposited into accounts maintained by the Carriers upon receipt by the
Company and all cash remitted is paid from accounts maintained by the
Carriers. For providing such services, the Company is paid on a per
transaction basis with the amount of the fee depending on the type of
policy.
Effective March 1, 1996, the Marketing and Processing Agreements with
American National were amended to reduce certain commissions and
administrative fees earned by the Company. In addition, during April
1996, certain investment strategy features of the annuity policies
offered by American National were eliminated.
The Marketing and Processing Agreements with American National and IL
Annuity expire June 1, 1998, and December 31, 2005, respectively, but
may be renewed by mutual agreement for successive one year terms. The
Agreements may be terminated by either party upon 180 days notice
without cause, and may be terminated by either party immediately for
cause. In addition, the Marketing Agreements will terminate
automatically at the end of any calendar quarter upon failure of the
Company to meet certain quarterly minimum production requirements for
two successive calendar quarters. The Company is currently negotiating
with American National to renew the Marketing and Processing
Agreements. Management expects that new agreements will be signed
during the second quarter of 1998.
In May 1995, the Company formed Legacy Financial Services, Inc.
("LFS"), a wholly-owned broker-dealer subsidiary. LFS has been
approved by the National Association of Securities Dealers and the
Securities and Exchange Commission to engage in the offering and sale
of variable annuity and life insurance products, mutual funds and debt
and equity securities (collectively, the "Products") on a fully
disclosed basis. LFS has entered into agreements (the "Agreements")
with various entities licensed to sell the Products. The Agreements
grant LFS the non-exclusive right to solicit sales of the Products
through its network of independent representatives and to provide
certain marketing and administrative services in order to facilitate
sales of the Products. Under the Agreements, the Company is
compensated based upon pre-determined percentages of production. The
Agreements may be terminated by any party upon 30 days written notice.
Sales of the Products pursuant to the Agreements began during the
first quarter of 1996.
b. Basis of Presentation
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles and include
the accounts of Regan Holding Corp. and its wholly-owned subsidiaries,
Legacy Marketing Group, Legacy Financial Services, Inc., and
LifeSurance Corporation, a non-operating subsidiary. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
c. Revenue Recognition
Through June 30, 1995, in accordance with the terms of the Marketing
Agreement with American National, marketing allowances and commissions
were accrued when policies were submitted for acceptance. Effective
July 1, 1995, both the Marketing Agreement with American National and
the related recording of revenue were modified to provide for
recognition of marketing allowances and commissions only after
policies become inforce, which is consistent with the method of
recognition of revenue generated under the Marketing Agreement with IL
Annuity. Administrative fees are recognized on a per transaction basis
as services are performed.
d. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and
short-term investments with an original maturity of 90 days or less.
The carrying amount of cash and cash equivalents approximates market
value.
e. Investments
Investments include mortgage-backed securities, corporate bonds and
equity securities, and obligations backed by U.S. government agencies.
The Company's investments are classified as available-for-sale and are
carried at market value. Market values are determined using published
quotes as of the close of business. Unrealized gains and losses, net
of the related tax effect, are excluded from earnings and are reported
as a separate component of shareholders' equity until realized.
Premiums and discounts are amortized or accreted over the life of the
related investment as an adjustment to yield using the effective
interest method. Interest income is recognized when earned. Realized
gains and losses on sales of investments are included in earnings and
are derived using the specific identification method for determining
the cost of investments sold.
f. Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method
over the estimated useful life of each type of asset. The Company uses
an estimated useful life for computers and furniture and equipment of
5 years. Leasehold improvements are amortized over the term of the
lease or the estimated useful life, whichever is shorter. Upon
retirement or disposition of fixed assets, any gain or loss is
included in income.
g. Sales Promotion and Support Costs
Sales promotion and support costs are expensed as incurred, except for
sales brochures and other marketing materials, which are inventoried
at cost.
h. Income Taxes
The Company and its subsidiaries file consolidated tax returns for
federal purposes. For financial reporting purposes, the income tax
effects of transactions are recognized in the year in which they enter
into the determination of recorded income, regardless of when they are
recognized for income tax purposes. Accordingly, the provisions for
income taxes in the consolidated statements of income include charges
or credits for deferred income taxes relating to temporary differences
between the tax basis of assets and liabilities and their reported
amounts in the financial statements.
i. Earnings Per Share
Basic and diluted earnings per share are presented in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." Earnings per share is based on the weighted
average number of common shares outstanding, including shares of
redeemable common stock.
j. Reclassifications
Certain 1996 and 1995 balances have been reclassified to conform with
the 1997 presentation. Such reclassifications had no effect on net
income or shareholders' equity.
k. Comprehensive Income
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 in a full set of
general purpose financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period form
transactions and other events and circumstances from non-owner
sources. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company does not believe that SFAS No. 130 will
have a material impact on the Company's financial statements.
l. Segment Reporting
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
requires publicly-held companies to report financial and other
information about key revenue-producing segments of the entity for
which such information is available and is utilized by the chief
operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be
provided. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The Company does not believe that SFAS No. 131 will
have a material impact on the Company's financial statements.
2. Investments
Investment portfolios at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
Maturity in years:
1 Year 1 to 5 Longer Than
or Less Years 10 Years Other Total
------- ------ ----------- ----- -----
<S> <C> <C> <C> <C> <C>
December 31, 1997
- -----------------
Government agency
securities $ 3,588,363 $ 500,762 $ -- $ -- $ 4,089,125
Mortgage-backed
securities -- -- -- 2,336,717 2,336,717
Equity securities -- -- -- 1,252,750 1,252,750
----------- ----------- ----------- ----------- -----------
Amortized cost 3,588,363 500,762 -- 3,589,467 7,678,592
Gross unrealized gains 14,042 8,103 -- 31,745 53,890
Gross unrealized losses -- -- -- (40,203) (40,203)
----------- ----------- ----------- ----------- -----------
Market value $ 3,602,405 $ 508,865 $ -- $ 3,581,009 $ 7,692,279
=========== =========== =========== =========== ===========
December 31, 1996
- -----------------
Government agency
securities $ -- $ 1,093,183 $ 1,909,275 $ -- $ 3,002,458
U.S. Treasury notes 552,213 -- -- -- 552,213
Corporate bonds -- -- 503,496 503,496
Mortgage-backed
securities -- -- -- 3,053,187 3,053,187
Equity securities -- -- -- 747,750 747,750
----------- ----------- ----------- ----------- -----------
Amortized cost 552,213 1,093,183 2,412,771 3,800,937 7,859,104
Gross unrealized gains 26,338 43,318 65,611 14,971 150,238
Gross unrealized losses -- -- (10,214) (51,921) (62,135)
----------- ----------- ----------- ----------- -----------
Market value $ 578,551 $ 1,136,501 $ 2,468,168 $ 3,763,987 $ 7,947,207
=========== =========== =========== =========== ===========
</TABLE>
Included in operating results for the years ended December 31, 1997, 1996
and 1995 are $494,033, $501,753, and $319,490 of interest income earned on
investments, respectively.
3. Fixed Assets
A summary of fixed assets at the dates indicated follows:
Accumulated
Depreciation/ Net
Cost Amortization Book Value
---- ------------- ----------
December 31, 1997
- -----------------
Computers $ 2,088,329 $ 981,955 $ 1,106,374
Leasehold improvements 1,227,563 429,797 797,766
Furniture and equipment 974,922 396,260 578,662
Land 127,522 -- 127,522
-------------- ------------- --------------
Totals $ 4,418,336 $ 1,808,012 $ 2,610,324
============== ============= ==============
December 31, 1996
- -----------------
Computers $ 1,614,881 $ 659,111 $ 955,770
Leasehold improvements 689,722 323,813 365,909
Furniture and equipment 671,416 251,707 419,709
-------------- ------------- --------------
Totals $ 2,976,019 $ 1,234,631 $ 1,741,388
============== ============= ==============
4. Accrued Liabilities
Accrued liabilities at December 31 consisted of the following:
1997 1996
---- ----
Annual sales convention $ 1,226,169 $ 825,556
Accrued compensation 976,428 843,301
Producer seminar expenses 39,498 151,531
Other 363,759 211,999
------------- -------------
Totals $ 2,605,854 $ 2,032,387
============= =============
5. Loan Payable
The Company has a loan payable, bearing interest at 9% annually,
representing amounts borrowed in a non-cash transaction to pay premiums
related to a split-dollar life insurance policy. The outstanding balance of
the loan was $132,285 at December 31, 1997 and 1996.
6. Deferred Incentive Compensation
Under the Company's officer incentive bonus plan (the "Plan"), each officer
of the Company is allocated 1.25% of annual net income in a given year (the
"Bonus Year"), before officer incentive bonuses, as an incentive bonus (the
"Bonus"). The payment of the Bonus occurs in equal amounts over the three
years following the Bonus Year. The first payment is automatically paid
immediately following the end of the Bonus Year. The remaining two payments
are paid in February of each of the second and third years following the
Bonus Year and are contingent upon the Company achieving targeted growth in
net income during the first and second years following the Bonus Year,
respectively. The Bonus payment is forfeited for any year during which the
specified growth is not achieved. At December 31, 1997 and 1996, $149,609
and $184,456, respectively, are reflected as deferred incentive
compensation in the accompanying balance sheets. Such amounts represent the
deferred portion of the 1997 and 1996 Bonuses, except for the second year
payment of the 1995 Bonus, which was forfeited, because net income targets
were not achieved in 1996.
7. Deferred Compensation Plan
The Company sponsors a qualified defined contribution 401(k) plan (the
"401(k) Plan"), which is available to all employees. The 401(k) Plan allows
employees to defer, on a pretax basis, a portion of their compensation as
contributions to the plan. Employees may elect to contribute up to 15% of
their annual compensation (not to exceed $9,500 annually for 1997 and 1996
and $9,240 for 1995) to the 401(k) Plan. The Company matches 50% of each
employee's contributions, up to a maximum of 6% of annual compensation. The
Company's matching contributions charged to operating expenses were
$181,443, $134,673, and $83,849 for the years ended December 31, 1997, 1996
and 1995, respectively.
8. Commitments and Contingencies
The Company leases its office premises and certain office equipment under
operating leases. Related rent expense of $335,973, $219,214, and $198,196
are included in Occupancy costs for the years ended December 31, 1997,
1996, and 1995, respectively. Total rentals for and leases of equipment
included in Equipment expenses were $146,874, $132,635, and $107,585 for
the years ended December 31, 1997, 1996 and 1995, respectively.
The Company currently leases approximately 43,300 square feet of office
space at an annual rent of approximately $292,000 plus required
maintenance, landscaping and related expenses. The current lease expires in
October, 2006, and includes a commitment by the Company to lease an
additional 10,460 square feet beginning August 1, 1998, which will raise
the annual rent by approximately $72,000 per year.
The Company's minimum annual lease commitments under all operating leases
are as follows:
1998 $ 481,191
1999 537,536
2000 525,200
2001 432,797
2002 442,030
Thereafter 1,783,529
-----------------
Total minimum lease payments $ 4,202,283
=================
In order to fund LFS during the start-up phase, the Company has committed
to make sufficient contributions to support LFS's operations and to ensure
LFS's compliance with financial regulatory requirements through December
31, 1998. Such contributions totaled $330,000, $455,000, and $215,000
during 1997, 1996 and 1995, respectively.
As part of the Company's agreements with its insurance producers (the
"Producers"), the Company may, under certain circumstances, be obligated to
purchase the business of the Producers. At December 31, 1997, there were no
outstanding commitments relating to the above by the Company.
As a professional services firm engaged in marketing and servicing life
insurance and annuity products, the Company encounters litigation in the
normal course of business, including the activities relating to its former
business of operating an insurance company. Management is not aware of any
material asserted or unasserted litigation which existed at December 31,
1997, except as follows:
In December, 1996, LMG and American National (collectively, the
"Co-defendants") were named in a lawsuit filed in the Circuit Court of
Jefferson County, Alabama, alleging misrepresentation and price
discrimination in connection with the sale of certain annuity products
issued by American National and marketed by LMG. The plaintiffs,
policyholders Buddie Watson King and Feyrene Zink, sought and received
conditional class action certification prior to service of the
complaint upon the Co-defendants. In February, 1997, the case was
removed to the U. S. Federal District Court in Birmingham, Alabama,
and the conditional class action certification was vacated by the
federal district court. Thereafter, the federal court remanded the
case back to the above Circuit Court of Jefferson County, Alabama,
where the case is currently pending. The outcome of the lawsuit cannot
be determined. However, the Company's management believes that the
suit is without merit and intends to defend vigorously. Accordingly,
no amounts have been recorded in the financial statements for any
losses which may result from the lawsuit.
9. Redeemable Common Stock
During the three years ended December 31, 1992, the Company issued
5,935,094 shares of Series A Common Stock (the "Redeemable Series A
Stock"), no par value, at prices ranging from $1.00 to $2.25 per share. The
Redeemable Series A Stock was issued in accordance with the terms of the
701 Asset Accumulator Program (the "701 Plan") between the Company, its
insurance Producers, and its employees, and the Confidential Private
Placement Memorandum and Subscription Agreement (the "Subscription
Agreement") between the Company and certain accredited investors. Under the
terms of the 701 Plan and the Subscription Agreement, the Redeemable Series
A Stock may be redeemed at the option of the holder after being held for
two consecutive years, subject to the Company's ability to make such
purchases under applicable corporate law.
In connection with a merger in 1991 between the Company and LifeSurance
Corporation, a wholly-owned insurance subsidiary of the Company with no
current ongoing operations, 615,242 shares of Series B Common Stock (the
"Redeemable Series B Stock"), no par value, were authorized and issued in
exchange for all of the outstanding stock of LifeSurance Corporation.
Pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), the
Redeemable Series B Stock is subject to redemption at the option of the
holder in quantities of up to 10% per year, provided that the redemption is
in accordance with applicable corporate law.
At December 31, 1994, the Company did not have sufficient current assets,
as required under California corporate law, to purchase all of the Series A
Redeemable Common Stock and Series B Redeemable Common Stock (hereafter
collectively referred to as the "Redeemable Common Stock"). However, during
1995, current assets surpassed current liabilities by an amount sufficient
to allow the Company to meet its obligations under the 701 Plan, the
Subscription Agreement, and the Merger Agreement.
Redeemable Common Stock has been recorded at the greater of the issuance
value or the redemption value as of December 31, 1997 and 1996. The 701
Plan, the Subscription Agreement, and the Merger Agreement specify that the
Redeemable Common Stock is to be redeemed at a rate per share based upon
current fair market value. These Agreements specify factors to be
considered in determining fair market value, including the net present
value of inforce insurance policy cash flows. However, since the Company no
longer operates an insurance business, this factor is not applicable.
Further, there is no active trading market for the Company's stock which
would establish market value. Accordingly, the Company's Board of Directors
has approved a redemption value of $.96 per share as of December 31, 1997,
based on management's estimate of fair market value. The total redemption
value for Series A and Series B Redeemable Common Stock was $5,287,033 and
$576,827, respectively, at December 31, 1997 and $4,499,887 and $476,054,
respectively, at December 31, 1996. Carrying value exceeded redemption
value by $5,978,791 at December 31, 1997, and $7,367,060 at December 31,
1996. As the shares are redeemed, the excess of carrying value over
redemption value will be reflected as additional paid-in capital.
Changes to Redeemable Common Stock during the years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Series A Series B Total
Redeemable Common Stock Redeemable Common Stock Redeemable Common Stock
----------------------- ----------------------- -----------------------
Carrying Carrying Carrying
(Issuance) (Issuance) (Issuance)
Shares Amount Shares Amount Shares Amount
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1995 5,935,094 $10,850,686 615,242 $1,845,726 6,550,336 $12,696,412
Adjustment to
fractional share
liability -- -- (4,554) (13,662) (4,554) (13,662)
--------- ----------- ------- ---------- --------- -----------
Balance
December 31, 1995 5,935,094 10,850,686 610,688 1,832,064 6,545,782 12,682,750
Redemptions and
retirement of
common stock (166,008) (338,663) (362) (1,086) (166,370) (339,749)
--------- ---------- ------- ---------- --------- -----------
Balance
December 31, 1996 5,769,086 10,512,023 610,326 1,830,978 6,379,412 12,343,001
Redemptions and
retirement of
common stock (261,760) (471,955) (9,465) (28,395) (271,225) (500,350)
--------- ----------- ------- ---------- --------- -----------
Balance
December 31, 1997 5,507,326 $10,040,068 600,861 $1,802,583 6,108,187 $11,842,651
========= =========== ======= ========== ========= ===========
</TABLE>
Shares of Redeemable Common Stock are excluded from total shares issued and
outstanding in the accompanying balance sheets.
10. Stock Awards and Stock Options
At December 31, 1996, the Company had outstanding warrants which granted
the holder the right to purchase 140,950 shares of its common stock at a
price of $2.25 per share. The warrants became exercisable on April 1, 1995,
and expired on March 31, 1997.
In August, 1997, the Company's shareholders voted to approve the Regan
Holding Corp. 1998 Stock Option Plan, which authorizes the Company to grant
stock options to employees and directors (the "Employee Option Plan"). The
Employee Option Plan is administered by two committees (the " Committees")
which are appointed by the Company's Board of Directors. 1,500,000 shares
of the Company's Series A Common Stock were reserved by shareholders for
granting under the Employee Option Plan. On January 1, 1998 (the "Employee
Grant Date"), 1,476,000 options were granted to employees pursuant to the
Employee Option Plan (the "Employee Options"). The Employee Options vest
evenly over four years following the Employee Grant Date. Once vested, the
Employee Options become exercisable at the estimated fair market value of
$.73 per share. Any unexercised Employee Options expire ten years after the
Employee Grant Date. The Employee Options qualify as "Incentive Stock
Options," as defined by the Internal Revenue Code. The impact of the
Employee Options on the Company's 1998 Financial Statements will be
accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and is not expected to be material.
During 1997, the Company's Board of Directors approved the Regan Holding
Corp. Producer Stock Option Plan (the "Producer Option Plan"), which
provides for the granting of stock options to LMG Producers and LFS
registered representatives. 2,700,000 shares of the Company's Series A
Common Stock were reserved for granting under the Producer Stock Option
Plan. On January 1, 1998, (the "Producer Grant Date") 795,400 options were
granted pursuant to the Producer Stock Option Plan (the "Producer Options).
The Producer Options vest evenly over five years following the Producer
Grant Date. Once vested, the Producer Options become exercisable at the
estimated fair market value of $.73 per share. Any unexercised Producer
Options expire six years after the Producer Grant Date. The impact of the
Producer Options on the Company's 1998 financial statements will be
accounted for in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," and is not
expected to be material.
11. Income Taxes
Deferred tax assets and liabilities are recognized as temporary differences
between amounts reported in the financial statements and the future tax
consequences attributable to those differences that are expected to be
recovered or settled.
The provisions for federal and state income taxes consist of amounts
currently payable and amounts deferred which, for the periods indicated,
are shown below:
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
Current income taxes:
Federal $ 1,262,317 $ 891,442 $ 778,164
State 572,332 407,305 604,928
------------ ------------ ------------
Total current 1,834,649 1,298,747 1,383,092
------------ ------------ ------------
Deferred income taxes:
Federal 405,951 523,365 1,066,893
State (45,576) 16,051 (546,777)
------------ ------------ ------------
Total deferred 360,375 539,416 520,116
------------ ------------ ------------
Provision for income taxes $ 2,195,024 $ 1,838,163 $ 1,903,208
============ ============ ============
The Company's deferred tax assets at December 31 consist of the following:
1997 1996
---- ----
Alternative minimum tax credit carryforward $ 652,320 $ 1,387,885
Sales incentive trip accrual 488,437 --
State net operating loss carryforward -- 205,891
Fixed asset depreciation (26,834) (39,833)
Other 157,991 46,207
------------ ------------
Total deferred tax assets $ 1,271,914 $ 1,600,150
============ ============
The provisions for income taxes differ from the provisions computed by
applying the statutory federal income tax rate (34%) to income before
taxes, as follows:
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
Federal income taxes due at
statutory rate (34%) $ 1,817,462 $ 1,547,904 $ 2,299,022
Increases (reductions) in
income taxes resulting from:
State franchise taxes, net
of federal income tax
benefit 375,892 288,628 258,407
Reversal of valuation
allowance -- -- (437,310)
Adjustment to prior years'
provisions -- -- (240,695)
Other 1,670 1,631 23,784
----------- ------------ ------------
Provision for income taxes $ 2,195,024 $ 1,838,163 $ 1,903,208
============ ============ ============
As of December 31, 1997, the Company also has, for federal and state income
tax purposes, $210,775 and $441,545, respectively, in alternative minimum
tax credits which can be used to reduce income taxes in subsequent years to
the extent of tentative minimum tax. The credits have no expiration date.
12. Related Party Transactions
The Company paid Ashley A. Penney, a director until August, 1997, $133,113,
$140,100 and $107,293 for services provided as a human resource consultant
during the years ended December 31, 1997, 1996 and 1995, respectively.
Pursuant to a salary continuation agreement related to the Company's former
Chief Executive Officer, John Regan, payments totaling $87,688 and $280,000
were made to Ms. Regan during the years ended December 31, 1996 and 1995,
respectively, as an obligation of the Company to his estate. No such
payments were made during 1997.
13. Concentration of Risk
At December 31, 1997, the Company was contracted with over 12,000
independent insurance Producers to sell insurance products throughout the
country in a majority of the fifty states. Production in no one state
accounted for over 20% of insurance premiums to the Carriers nor of the
corresponding revenue of the Company during 1997.
Prior to December, 1995, American National was the only insurance company
with which the Company was contracted to market insurance products. This
arrangement generated approximately 36.2%, 87.5%, and 97.7% of total
revenues to the Company during 1997, 1996 and 1995, respectively. In
December 1995, the Company contracted to provide marketing and
administrative services for IL Annuity. This arrangement generated
approximately 57.0% and 5.9% of the Company's revenues during 1997 and
1996, respectively. However, neither the Marketing Agreements nor the
Processing Agreements prevent the Company from entering into similar
arrangements with other insurance companies.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
The Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 27, 1998, is hereby incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Exhibits and Financial Statement Schedules:
1. The following financial statements are included in Item 8:
(i) Independent Accountants Report.
(ii) Consolidated Balance Sheets as of December 31, 1997 and 1996.
(iii) Consolidated Income Statements for the years ended
December 31, 1997, 1996 and 1995.
(iv) Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1997, 1996 and 1995.
(v) Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
(vi) Notes to Consolidated Financial Statements.
2. Financial statement schedules are omitted because the information is
not required or has been included in the financial statements and
related notes.
3. The following exhibits are included in response to Item 14(c):
3(a) Restated Articles of Incorporation.***
3(b) Amended and Restated Bylaws of the Company.***
4 Certificate of Determination of Preferences of Series C
Common Stock of Regan Holding Corp.*
10(a) Administrative Services Agreement effective January 1, 1991,
as amended, between Allianz Life Insurance Company of North
America and the Company.*
10(b) Marketing Agreement effective June 1, 1993, as amended,
between American National Insurance Company and the Company.*
10(c) Insurance Processing Agreement effective June 1, 1993, as
amended, between American National Insurance Company and the
Company.*
10(d) Form of Producer Agreement.*
10(e) Lease Agreement dated September 26, 1996, for 1179 North
McDowell Blvd., Petaluma, California 94954.***
10(f) Settlement Agreement dated June 18, 1993, among the State of
Georgia as receiver for and on behalf of Old Colony Life
Insurance Company, other related parties and the Company.*
10(g) 401(K) Profit Sharing Plan & Trust dated July 1, 1994.*
10(h) Marketing Agreement effective January 1, 1996 between IL
Annuity and Insurance Company and the Company.**
10(i) Insurance Processing Agreement effective January 1, 1996
between IL Annuity and Insurance Company and the Company.**
10(j) Marketing Agreement effective January 1, 1996 between
Indianapolis Life Insurance Company and the Company.**
10(k) Insurance Processing Agreement effective January 1, 1996
between Indianapolis Life Insurance Company and the
Company.**
21 Subsidiaries of the Company.**
27 Financial Data Schedule
* Incorporated herein by reference from the Company's annual
report on Form 10-K for the year ended December 31, 1994.
** Incorporated herein by reference from the Company's annual
report on Form 10-K for the year ended December 31, 1995.
*** Incorporated herein by reference form the Company's quarterly
Form 10-Q for the three months ended September 30, 1996.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGAN HOLDING CORP.
By:.......................................... Date:
R. Preston Pitts, President
By:.......................................... Date
David A. Skup, Chief Financial Officer
Pursuant to the requirements of the securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:.......................................... Date
Lynda L. Regan, Chairman
By:.......................................... Date
Steve C. Anderson, Director
By:.......................................... Date
R. Preston Pitts, Director
By:.......................................... Date
Ute Scott-Smith, Director
INDEX TO EXHIBITS
Item No. Description Page
27 Financial Data Schedule ......................................... 9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements contained in the Company's annual report on Form 10-K for
the year ended December 31, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,194,332
<SECURITIES> 7,692,279
<RECEIVABLES> 1,239,306
<ALLOWANCES> 0
<INVENTORY> 228,853
<CURRENT-ASSETS> 15,416,139
<PP&E> 4,418,336
<DEPRECIATION> (1,808,012)
<TOTAL-ASSETS> 19,280,941
<CURRENT-LIABILITIES> 3,339,486
<BONDS> 0
11,842,651
0
<COMMON> 3,382,914
<OTHER-SE> 433,996
<TOTAL-LIABILITY-AND-EQUITY> 19,280,941
<SALES> 0
<TOTAL-REVENUES> 22,581,075
<CGS> 0
<TOTAL-COSTS> 17,235,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,345,478
<INCOME-TAX> 2,195,024
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,150,454
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
