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, 1998, 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.
(Exact 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 registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 this 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. The aggregate market value shall be computed by reference to
the price at which the common equity was sold, or the average bid and asked
prices of such common equity, as of a date specified within the 60 days prior to
the date of filing.
$18,806,976
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 60 days prior to the date of filing.
Index to Exhibits on Page 28
<PAGE>
APPLICABLE ONLY 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 X No
--------- ---------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of March 15, 1999, including redeemable common stock:
Common Stock-Series A 25,992,437
Common Stock-Series B 548,633
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 21, 1999, 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, within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties that could cause actual results to differ materially.
Regan Holding Corp. (the "Company"), is a California Corporation that is
primarily engaged, through its wholly-owned subsidiary Legacy Marketing Group
("Legacy"), in the design, marketing and administration of life insurance and
annuity products. Through Legacy, the Company has entered into marketing
agreements (the "Marketing Agreements") with American National Insurance Company
("American National"), IL Annuity and Insurance Company ("IL Annuity"), and
Transamerica Life Insurance and Annuity Company ("Transamerica"), each of which
is an unaffiliated company (collectively referred to herein as the "Carriers").
American National has over $1.4 billion in capital and surplus and is rated
"A++" by A. M. Best. IL Annuity has over $13.0 million in capital and surplus
and is rated "A" by A.M. Best. Transamerica has over $560 million in capital and
surplus and is rated "A+" by A.M. Best. 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 Marketing Agreements grant Legacy the exclusive right to market certain
annuity and life insurance products issued by the Carriers (the "Policies").
Under the terms of the Marketing Agreements, Legacy is responsible for the
recruiting, appointing and training of producers who contract with Legacy to
sell the Policies. For these services, the Carriers pay Legacy marketing
allowances and commissions based on the volume of Policies sold. The Carriers
are also responsible for the payment to producers of commissions on the sale of
Policies. Legacy may, in its discretion, elect to pay commissions to producers
in addition to those paid by the Carriers.
The Company currently markets the Policies through a network consisting of
approximately 15,300 producers, of whom approximately 5,000 generated business
during 1998. Each of these producers has entered into a producer agreement with
Legacy pursuant to which the services of the producer are provided on a
non-exclusive basis. These agreements may be terminated immediately by either
the producer or Legacy, with or without cause.
Legacy's sales network is built on a multi-level structure, pursuant to
which producers may recruit other producers. Recruited producers are referred to
as "downline" producers within the recruiting producer's "downline network."
Recruited producers may also recruit other producers, creating a hierarchy under
the original recruiting producer. The producer contract contains a nine-level
"open book" design in which a producer may advance from one level to the next
based on his or her commission level and the size of his or her downline
network. As a producer advances within the system, the producer receives higher
commissions on sales made by the producer and the producer's downline network.
Legacy's multi-level structure creates a financial incentive for producers to
build a hierarchy, or downline network, of producers, thereby contributing to
their own financial growth and to the growth of the Company. Advancements to
higher levels can occur as often as every three months. Producers at the highest
levels are considered "wholesalers."
Legacy provides tools and services that assist wholesalers with recruiting,
training and support responsibilities associated with the producers in their
downline network. In addition, Legacy 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. Legacy also generates product
information, sales brochures, and recruiting material.
In addition to Policy marketing and administration, Legacy assists the
Carriers in Policy design and development. Legacy's marketing and actuarial
departments work with the Carriers to design proprietary annuity and life
insurance products to be marketed by Legacy. Most products marketed by Legacy
include certain guarantees for the benefit of policyholders, known as Legacy's
Cornerstone Guarantees, which are designed to be unique in the insurance
marketplace. Legacy's Cornerstone Guarantees generally include: (i) a
contractually guaranteed maximum administrative fee; (ii) multiple crediting
rate options; and, (iii) life insurance products providing a guarantee that
changes in the cost of insurance will result solely from changes in the
Policies' future experience factors.
Legacy has also entered into Administrative Agreements (the "Administrative
Agreements") with each of the Carriers pursuant to which Legacy 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 by the Carriers to either policyholders or Legacy
is paid from accounts maintained by the Carriers. For providing such services,
Legacy is paid on a per transaction basis with the amount of the fee depending
on the type of policy and type of service. Historically, all administrative
services with respect to Policies were performed at the Company's headquarters
in Petaluma, California. However, during 1998, Legacy began performing
administrative services with respect to certain annuity Policies at facilities
located in Rome, Georgia.
During 1997, American National and IL Annuity were the only insurance
companies for which Legacy marketed and administered 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.
During 1998, approximately 12.7%, 79.9%, and 1.7% of the Company's total revenue
resulted from agreements with American National, IL Annuity, and Transamerica,
respectively.
Neither the Marketing Agreements nor the Administrative Agreements prevent
Legacy from entering into similar arrangements with other insurance companies.
However, the Marketing Agreements prevent Legacy from marketing products which
are similar, in the case of American National and IL Annuity, or the same, in
the case of Transamerica, to those being offered under the respective Marketing
Agreements. In addition, under the terms of the Marketing Agreements with
American National and IL Annuity, Legacy is obligated to give American National
and IL Annuity the opportunity to participate in the marketing of any new
products developed by Legacy.
The Marketing and Administrative Agreements with American National and IL
Annuity expire on May 15, 1999, and December 31, 2005, respectively, but may be
renewed by mutual agreement for successive one year terms. These 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 with American National and with IL Annuity will terminated
automatically at the end of any calendar quarter upon failure of Legacy 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 Administrative Agreements. Management expects that new
agreements will be signed during the second quarter of 1999. The Marketing and
Administrative Agreements with Transamerica do not have fixed terms but may be
terminated by either party upon twelve months notice without cause, and may be
terminated by either party immediately for cause.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial
Services, Inc. ("LFS"), the Company engages in the offering and sale of variable
annuity and life insurance products, mutual funds and debt and equity securities
on a fully disclosed basis. LFS has entered into agreements (the "Agreements")
with various entities pursuant to which LFS has a non-exclusive right to solicit
sales of these investment products offered by such entities through its network
of independent representatives and to provide certain marketing and
administrative services in order to facilitate sales of such 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 products pursuant to the Agreements began during the first
quarter of 1996. During 1998, approximately 1.7% of the Company's consolidated
revenues were generated by LFS.
Through its wholly-owned subsidiary, LifeSurance Corporation, the Company
conducts estate planning seminars which provide continuing education credits for
producers at various locations throughout the United States. Producers pay fees
to attend the seminars and may also purchase educational materials which can be
used as tools in promoting life insurance and annuity policies and estate
planning concepts. The seminars and educational materials are marketed under the
business name Wealth Transfer Educational Systems.
In August 1997, Legacy Advisory Services, Inc. ("LAS"), a wholly-owned
subsidiary of the Company, was incorporated in the State of California for the
purpose of operating as an "investment advisor," as defined by and regulated
pursuant to the Investment Advisors Act of 1940. LAS is registered with the
Securities and Exchange Commission (the "SEC") and is in the process of filing
notices with several states to provide investment management services to clients
of investment advisor representatives of LAS. LAS has conducted no operations to
date.
In July 1998, Legacy Reinsurance Company ("LegacyRe"), a wholly-owned
subsidiary of the Company, was incorporated in the State of Arizona. The Company
is in the process of obtaining approval from the Arizona Department of Insurance
for LegacyRe to engage in the reinsurance business. Accordingly, LegacyRe has
conducted no business to date. Upon receipt of approval from the Arizona
Department of Insurance, LegacyRe may enter into one or more reinsurance
agreements to reinsure annuity and life products.
Competitive Business Conditions
The life insurance and annuity business is highly competitive. The Company
faces competition from various companies and organizations, including banks,
securities brokerage firms, investment advisors and other financial
intermediaries marketing insurance products, annuities, mutual funds, and other
retirement oriented investments. Some of these competitors have substantially
greater assets, financial resources and market acceptance than Legacy. The
Company's distribution system relies on independent insurance producers to
effectively market its products competitively. Maintaining relationships with
producers requires introducing new products to the market in an efficient and
timely manner, offering competitive commission schedules, and providing superior
marketing training and support.
Regulatory Environment
Legacy, or a licensed individual acting on behalf of Legacy (in the states
that do not permit the licensing of corporations), is licensed or is currently
seeking licensure as an insurance agent and/or third party administrator in all
states that require such licensure. As a result of being licensed as an
insurance agency, Legacy's operations are subject to regulation, including its
sales practices, fiduciary responsibilities and familiarity with pertinent
statutes and regulations. As a result of being licensed as a third party
administrator, Legacy is subject to regulation regarding maintenance of records,
settlement and payment of claims, underwriting services or standards, disclosure
of the administrator's capacity, payment of fees or charges and other fiduciary
duties.
Increased national attention has forced the National Association of
Insurance Commissioners and state insurance departments to examine existing laws
and regulations affecting insurance companies, especially those laws and
regulations involving insurance company solvency, marketing practices, and
investment policies. The Company has responded to this increased scrutiny by
instituting strict advertising guidelines, generating consistent marketing
materials and testimonies addressing appropriate marketing practices, and
including this topic in its bi- annual wholesaler meetings. Although the
Company, itself, is not an insurance company, changes in the regulatory
environment which affect the insurance companies with that it contracts can
impact its operations.
LFS is registered as a broker-dealer with, and is subject to regulation by,
the SEC and the National Association of Securities Dealers (the "NASD"). LFS is
also registered as a fully disclosed broker-dealer in several states. As a
result of federal and state broker-dealer registration and self regulatory
organization ("SRO") memberships, LFS is subject to overlapping regulation which
cover many aspects of its securities business. Such regulations cover matters
including capital requirements, record-keeping and reporting requirements,
supervisory and organizational procedures intended to assure compliance with
securities laws and to prevent the improper trading on material non-public
information, employee-related matters, including qualification and licensing of
supervisory and sales personnel, and rules of the SROs designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship between
broker-dealers and their customers. As a result, many aspects of the
broker-dealer customer relationship are subject to regulation, including
"suitability" determinations as to customer transactions, limitations in the
amounts that may be charged to customers, and correspondence with customers. LFS
is currently in compliance with all applicable capital and other regulatory
requirements.
Compliance with many of the regulations applicable to the Company or its
subsidiaries involves a number of risks, particularly because applicable
regulations in a number of areas may be subject to varying interpretation.
Regulators make periodic examinations and review annual, monthly and other
reports on the Company's operations and financial condition. In the event of a
violation of or non-compliance with any applicable law or regulation,
governmental regulators and SROs may institute administrative or judicial
proceedings that may result in censure, fine, civil penalties (including treble
damages in the case of insider trading violations), criminal penalties, the
issuance of cease-and-desist orders, the deregistration or suspension of a
non-compliant broker-dealer, the suspension of disqualification of a
broker-dealer's officers or employees, and other adverse consequences. Such
violations or non-compliance could also subject the Company and/or its employees
to civil actions by private persons. Any governmental, SRO or private proceeding
alleging violation of or non-compliance with laws and regulations applicable to
the Company or its subsidiaries could have a material adverse effect upon the
Company's business, financial condition, results of operations and business
prospects.
As of March 15, 1999, the Company had approximately 380 full-time
equivalent employees. None of the employees of the Company are covered by a
collective bargaining agreement, and the Company believes that its employee
relations are satisfactory.
Information about the Company, including copies of the Company's Forms 10-K
and 10-Q may be reviewed at offices maintained by the SEC at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the regional offices of the SEC
located at Seven World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
In addition, the SEC maintains a Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
Item 2. Property
The Company currently leases approximately 43,000 square feet of office
space in Petaluma, California, at which the Company's headquarters are located.
In March, 1999, the Company entered into an agreement to purchase the building
which houses the office space currently leased for $4.3 million. The building
consists of approximately 53,700 total square feet of useable office and
warehouse space. The Company has also entered into a lease for approximately
72,000 square feet of office space at another location in Petaluma, California
into which the Company intends to move its headquarters in mid-1999. This lease
expires in April, 2009, subject to extension at the option of the Company, for
two additional terms of five years each. Once the Company's headquarters are
relocated, the newly purchased building is expected to be used for ongoing
operations and staff and producer training events. Any unused space will be
offered for lease.
The Company also currently leases approximately 30,500 square feet of
office space in Rome, Georgia. This lease expires in December, 2002, unless the
Company exercises its option to extend the lease for a period of three years.
Management believes that existing and planned office space is and will
continue to be adequate for the Company's operations for the foreseeable future.
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 currently existing as a result of such litigation. However, Legacy
recently settled a lawsuit brought in the State of Alabama. (See "Management's
Discussion and Analysis of Financial Condition and Result of Operations.")
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 1998.
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 Company's 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 the Company's wholly-owned subsidiaries to pay dividends or make other
distributions to its parent company. As of December 31, 1998, the Company does
not anticipate paying dividends on any of its outstanding common stock in the
foreseeable future.
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Total Income $47,156,196 $ 22,581,075 $ 18,237,528 $ 17,153,947 $ 7,683,791
Net Income 9,770,208 3,150,454 2,714,495 4,858,620 5,085,866
Earnings Per Share-Basic $ .37 $ .12 $ .10 $ .18 $ .21
Earnings Per Share-Diluted $ .36 $ .12 $ .10 $ .18 $ .21
Selected Balance Sheet Data:
Total Assets $31,286,013 $ 19,280,941 $ 15,424,902 $ 12,304,801 $ 6,860,778
Total Non Current Liabilities 662,808 281,894 316,741 304,557 130,146
Total Liabilities 6,364,743 3,621,380 2,519,866 1,762,924 1,287,425
Redeemable Common Stock 11,225,431 11,842,651 12,343,001 12,682,750 12,696,412
Shareholders' Equity (Deficit) 13,695,839 3,816,910 562,035 (2,140,873) (7,123,059)
Cash Dividends Declared -- -- -- -- --
Selected Operating Data:
Total Premium
Placed Inforce (1) $ 1,653,000,000 $777,300,000 $ 626,800,000 $ 620,000,000 $ 339,000,000
Total No. of Policies
Placed Inforce (1) 31,900 15,060 11,144 12,167 6,118
</TABLE>
(1) Inforce premium and policies are actually statistics of the Carriers but
represent factors which directly affect the Company's revenue.
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 $6.6 million, or
210.1%, in 1998, compared to 1997, and increased approximately $436,000, or
16.1%, in 1997 compared to 1996. These increases are attributable primarily to
increases in income resulting from increases in sales volume, 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 are directly related to the sales
volume of such products. Administrative fees are a function not only of product
sales, but also of administration of policies inforce and producer appointments.
Total income increased approximately $24.6 million, or 108.8%, in 1998 compared
to 1997, and increased approximately $4.3 million, or 23.8%, in 1997 compared to
1996. These increases are attributable primarily to increases in premium placed
inforce for the Carriers, as discussed below.
Marketing allowances and commission income, combined, increased
approximately $20.9 million, or 116.0%, in 1998 from 1997 and increased
approximately $3.7 million, or 25.7%, in 1997 from 1996. 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 $1.7 billion, $777.3 million, and $626.8 million in 1998, 1997,
and 1996, respectively. This represented a 112.6% increase from 1997 to 1998,
and a 24.0% increase from 1996 to 1997. Also contributing to the increases in
income were shifts in both 1998 and 1997 to sales of products which yield higher
marketing allowances and commission income.
Administrative fees increased approximately $3.1 million, or 84.9%, in 1998
compared to 1997 and increased approximately $468,000, or 14.9%, in 1997
compared to 1996. 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.
In 1998, the Company marketed and administered insurance products for three
Carriers, American National, IL Annuity and Transamerica. However, the Company
did not begin marketing and administering products for Transamerica until the
third quarter of 1998. In 1998, approximately 12.7%, 79.9%, and 1.7% of the
Company's total revenue resulted from agreements with American National, IL
Annuity, and Transamerica, respectively, compared to approximately 36.2% and
57.0% with American National and IL Annuity, respectively, in 1997 and
approximately 87.5% and 5.9%, respectively, in 1996. This shift in income from
American National to IL Annuity is attributable primarily to favorable market
acceptance of IL Annuity's products.
Although the Company markets and administers several annuity and life
insurance products on behalf of the Carriers, the Company's revenues are derived
primarily from sales and administration of annuity products, especially the
VisionMark annuity offered by IL Annuity. During 1998, 1997, and 1996, 79.9%,
57.0%, and 5.9% of the Company's revenue resulted from sales of the VisionMark
annuity, respectively.
Savings and investment income represents earnings primarily from
investments in marketable securities. Such earnings increased approximately
$523,000, or 75.0%, in 1998 from 1997 due primarily to an increase in the amount
of assets invested.
Expenses--Total expenses increased approximately $13.7 million, or 79.6%,
during 1998 compared to 1997 and increased approximately $3.6 million, or 25.9%,
in 1997 compared to 1996. These increases are attributable primarily to
increases in compensation, sales promotion and support, occupancy expenses and
to a one-time settlement of litigation, as discussed below.
As a service organization, the Company's primary expenses are salaries and
related employee benefits. These expenses increased approximately $6.9 million,
or 65.3%, in 1998 from 1997 and increased approximately $2.3 million, or 27.4%,
in 1997 from 1996. These increases resulted primarily from increases in the
average number of full-time equivalent employees, which rose to 291 in 1998,
from 184 in 1997, and 151 in 1996. These increases in the average number of
employees are largely attributable to preparation for and accommodation of
increases in sales of insurance products. Salaries and benefits also increased
due to increases in bonuses which are tied to net income, to the addition of
personnel at higher pay levels and to normal 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 convention increases, as the
number of producers marketing products for the Company increases, and as new
products are introduced. This expense increased approximately $3.0 million, or
115.2%, in 1998 from 1997 and 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. The increase in 1998 from 1997 is
also attributable to higher attendance at national sales conventions.
Professional fees increased approximately $1.9 million, or 267.5%, during
1998 compared to 1997 as a result of increased consulting fees related to
various information systems products and expenses associated with the settlement
of litigation described in Note eight to Part I, Item 8, "Financial Statements."
Depreciation and amortization expense increased approximately $682,000, or
106.5%, in 1998 from 1997 and increased approximately $171,000, or 36.5%, in
1997 from 1996. These increases are due primarily to acquisitions of fixed
assets. Such acquisitions were necessary to improve newly leased office space
and to accommodate increases in employment, as discussed above. In addition, as
a result of the Company's plans to purchase the building which houses its
current office space in Petaluma, California (see "Business of
Company--Property"), increased depreciation expense of approximately $411,000
attributable to leasehold improvements was recognized during the fourth quarter
of 1998 and approximately $300,000 was recognized during the first quarter of
1999.
Stationery and supplies expense increased approximately $354,000, or 88.8%,
during 1998 from 1997 and increased approximately $112,000, or 38.9% from 1997
to 1996. These increases are primarily the result of additional supplies
necessary to support the increased volume of business and increased number of
employees, as described above.
Travel and entertainment increased approximately $265,000, or 80.3%, during
1998 from 1997 and $90,000, or 37.7%, from 1997 to 1996. These increases are due
to increased travel by personnel in the Company's marketing department, to
travel related to implementation of the carrier relationship with Transamerica,
as discussed above, and to travel necessary for set-up and training for an east
coast service center which became operational in July, 1998.
Equipment expense increased approximately $217,000, or 58.5%, during 1998
from 1997 and $77,000, or 26.3%, from 1997 to 1996. The increases are due to the
increased volume of business and increased number of employees as described
above.
Courier and postage expense increased approximately $222,000, or 46.3%,
during 1998 from 1997 and $107,000, or 28.70%, from 1997 to 1996. The increases
are due to an overall increase in the volume of business and the establishment
of the east coast service center.
Occupancy expense increased approximately $262,000, or 29.5%, during 1998
from 1997, and increased approximately $244,000, or 37.9%, during 1997 from
1996. 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 to increases in sales volume and employment, as discussed above.
Liquidity and Capital Resources
The Company's ability to mobilize its assets remained strong at December
31, 1998 and 1997, with cash and short-term investment grade debt securities
representing 73.2% and 66.8% of the Company's total assets, respectively.
Generally, the Company's principal needs for cash are: (i) funding operating
expenses; (ii) the purchase of computer hardware and software, leasehold
improvements, and acquisitions of furniture and fixtures to accommodate new
employees and support the growth in operations; (iii) funding continued product
development and potential strategic acquisitions; and, (iv) 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. It is contemplated that, during the first quarter of 1999,
approximately $12.0 million will be invested in the equity securities of
Indianapolis Life Insurance Group of Companies, Inc. (see discussion at "Recent
Developments" below). In addition, during the second quarter of 1999,
approximately $1.0 million will be paid as a down payment toward purchase of the
building that the Company currently occupies and approximately $1.7 million is
expected to be paid for furniture, fixtures and leasehold improvements for the
leased building into which the Company intends to move.
The Company generally utilizes cash from operations to fund its needs for
cash. The Company generated cash from operating activities of approximately
$12.1 million, $4.6 million and $4.5 million for the years ended December 31,
1998, 1997, and 1996, respectively. The Company used approximately $10.9
million, $1.3 million and $3.5 million of net cash for investment activities for
the years ended December 31, 1998, 1997, and 1996, respectively, and
approximately $475,000, $348,000, and $387,000 for redemption and retirement of
common stock for the years ended December 31, 1998, 1997, and 1996,
respectively. In 1998, 1997, and 1996, redemption requests received by the
Company were not material in amount, either individually nor in the aggregate,
and the Company believes that its liquid assets are sufficient to meet
anticipated requests for redemption. At December 31, 1998, 1997, and 1996, the
redemption value of redeemable common stock was approximately $9.6 million, $5.9
million, and $5.0 million, respectively. 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.
In May of 1998, the Company entered into a Shareholder's Agreement with
Lynda Regan, Chief Executive Officer of the Company and Chairman of the
Company's Board of Directors, and certain other individuals. Under the terms of
this agreement, in the event of the death of Ms. Regan, the Company shall
repurchase from Ms. Regan's estate all shares of common stock that were owned by
Ms. Regan at the time of her death or were transferred by her to one or more
trusts prior to her death. The purchase price to be paid by the Company shall be
equal to 125% of the fair market value of the shares. The Company has purchased
a life insurance policy with a face amount of $14.0 million for the purpose of
funding this obligation in the event of Ms. Regan's death.
In order to fund LFS during the start-up phase, the Company has committed
to make sufficient contributions to support LFS's operations to ensure LFS's
compliance with financial requirements through December, 1999. Such
contributions totaled $475,000 in 1998, $330,000 in 1997, and $455,000 in 1996.
Management 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, management anticipates that cash and investments will
continue to represent a high percentage of total assets. Management believes
that existing cash and investment balances, together with cash flows from
operations, will provide sufficient funding for the foreseeable future.
Recent Developments
The Company is currently in the process of negoiating an Investment and
Funding Agreement (the "Investment Agreement") with Indianapolis Life Insurance
Group of Companies, Inc. (the "Indianapolis Group") and other parties. Pursuant
to the Investment Agreement, the Company is expected to make a $12.0 million
investment in the equity securities of the Indianapolis Group, which is an
affiliate of IL Annuity. The purpose of this investment is to assure that IL
Annuity will continue to offer the original VisionMark annuity until the
modified version of the product is approved in all states.
In March, 1999, the Company entered into an agreement to purchase for $4.3
million the building which houses the office space currently leased.
Year 2000
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., '95 is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., '99) could be the
maximum date value these systems will be able to accurately process. Management
has developed and is implementing a plan to ensure that the Company will be year
2000 compliant. This plan consists of the following four stages: (i) conducting
an inventory of all hardware, software and support systems, (ii) assessing
whether such hardware, software and support systems are year 2000 compliant,
(iii) correcting or replacing any non-compliant hardware, software and support
systems; and (iv) testing to ensure that all corrections to replacements made
pursuant to the third phase of the plan are functioning properly. The first two
stages of this plan have been completed and management anticipates that the last
two stages will be completed by April 30, 1999. The Company is also working
closely with the Carriers and significant customers and vendors to ensure that
their systems will be fully year 2000 compliant. Based on information currently
available, Management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
system improvements to be year 2000 compliant. However, as noted, the Company
has not completed implementation of its compliance plan. Although the Company
presently believes that, with the planned modifications to existing systems and
the replacement or retirement of other systems, the year 2000 compliance issue
will be resolved in a timely manner and will not pose significant operating
problems for the Company, there can be no absolute assurance in this regard. The
Company's business operations, as well as its ability to provide products and
services to its customers without undue delay or interruption, could be at risk
in the event unanticipated year 2000 issues arise. In addition, there can be no
absolute assurances that unanticipated expenses related to the Company's ongoing
year 2000 compliance efforts will not be incurred. As previously noted, the
Company has communicated with its key suppliers and customers to determine their
year 2000 readiness and the extent to which the Company is vulnerable to any
third party year 2000 issues. There can be no guarantee that the systems of
other companies on which the Company's systems rely will be converted in a
timely manner or in a manner that is compatible with the Company's systems. A
failure by such a company to convert their systems in a timely manner or a
conversion that renders such systems incompatible with those of the Company
could have a material adverse effect on the Company and there can be no
assurance that the Company's contingency plans will adequately mitigate the
effects of any third party noncompliance. In addition, it is unrealistic to
assume that the Company could remain unaffected if the year 2000 issue results
in a widespread economic downturn. Also, it is possible that the Company's
insurance carriers could assert that its existing liability insurance programs
do not cover liabilities arising out of any operational problems associated with
the advent of the year 2000.
Item 7-A. Quantitative and Qualitative Disclosure about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Shareholders of
Regan Holding Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity (deficit) and cash flows
present fairly, in all material respects, the financial position of Regan
Holding Corp. and its subsidiaries (the "Company") at December 31, 1998 and
1997, and results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standard which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information on page 30
and 31 is presented for purposes of additional analysis rather than to present
the financial position, results of operations and cash flows of the individual
companies. Accordingly, we do not express an opinion on the financial position,
results of operations and cash flows of the individual companies. However, the
consolidating information on page 30 and 31 has been subjected to the auditing
procedures applied in the audits of the consolidated financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
PricewaterhouseCoopers LLP
March 3, 1999
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,916,731 $ 5,194,332
Investments 16,987,628 7,692,279
Accounts receivable 1,704,265 1,239,306
Prepaid expenses 768,913 572,932
Income taxes receivable 884,089 --
Deferred income taxes-current 359,421 488,437
Marketing supplies inventory 385,616 228,853
----------------- -----------------
Total Current Assets 27,006,663 15,416,139
----------------- -----------------
Net fixed assets 2,982,267 2,610,324
Deferred income taxes-non current 904,974 783,477
Other assets 392,109 471,001
----------------- -----------------
Total Non-Current Assets 4,279,350 3,864,802
----------------- -----------------
TOTAL ASSETS $ 31,286,013 $ 19,280,941
================= =================
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 418,821 $ 344,071
Accrued sales convention costs 894,713 1,226,169
Accrued liabilities 4,388,401 1,379,685
Income taxes payable -- 389,561
----------------- -----------------
Total Current Liabilities 5,701,935 3,339,486
----------------- -----------------
Loan payable 132,285 132,285
Incentive compensation payable 530,523 149,609
----------------- -----------------
Total Non-Current Liabilities 662,808 281,894
----------------- -----------------
TOTAL LIABILITIES 6,364,743 3,621,380
----------------- -----------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE COMMON STOCK, Series A and B 11,225,431 11,842,651
----------------- -----------------
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: 20,530,224
and 20,614,014 shares at
December 31, 1998 and 1997, respectively 3,248,874 3,382,914
Paid-in capital from retirement of common stock 888,109 611,559
Paid-in capital from producer stock options 25,000 --
Retained earnings (accumulated deficit) 9,587,775 (182,433)
Accumulated other comprehensive income-net (53,919) 4,870
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 13,695,839 3,816,910
----------------- -----------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY $ 31,286,013 $ 19,280,941
================= =================
</TABLE>
See accompanying notes to consolidated financial statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME
Marketing allowances $ 26,229,937 $ 12,386,755 $ 10,039,278
Commission income 12,651,358 5,609,078 4,281,032
Administrative fees 6,664,224 3,603,708 3,136,123
Savings and investment income 1,221,032 697,593 728,927
Seminar income 263,785 220,406 --
Other income 125,860 63,535 52,168
------------ ------------ ------------
Total Income 47,156,196 22,581,075 18,237,528
------------ ------------ ------------
EXPENSES
Salaries and related benefits 17,371,780 10,512,259 8,253,564
Sales promotion and support 5,520,798 2,565,200 2,231,978
Occupancy 1,149,787 887,608 643,726
Professional fees 2,617,377 712,129 652,219
Depreciation and amortization 1,323,052 698,556 469,255
Courier and postage 702,612 480,175 373,158
Stationery and supplies 753,397 399,140 292,695
Equipment 586,164 369,706 287,448
Travel and entertainment 594,224 329,611 239,400
Insurance 169,524 165,028 167,154
Miscellaneous 171,351 116,185 74,273
------------ ------------ ------------
Total Expenses 30,960,066 17,235,597 13,684,870
------------ ------------ ------------
INCOME FROM OPERATIONS 16,196,130 5,345,478 4,552,658
PROVISION FOR INCOME TAXES 6,425,922 2,195,024 1,838,163
------------ ------------ ------------
NET INCOME $ 9,770,208 $ 3,150,454 $ 2,714,495
============ ============ ============
EARNINGS PER SHARE
Weighted average shares outstanding--basic 26,543,535 26,895,594 27,540,209
Basic earnings per share $ .37 $ .12 $ .10
============ ============ ============
Weighted average shares outstanding--diluted 27,187,436 26,895,594 27,540,209
Diluted earnings per share $ .36 $ .12 $ .10
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Paid-in
Paid-in Capital Retained Accumulated
Capital from from Earnings Other
Series A Common Stock Retirement of Producer (Accumulated Comprehensive
Shares Amount Common Stock Options Deficit) Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1996 21,070,791 $ 3,802,071 $ -- $ -- $(6,047,382) $ 104,438 ($2,140,873)
Comprehensive Income:
Net income for the
twelve months
ended December 31,
1996 2,714,495 2,714,495
Net realized losses
on investments (93,603) (93,603)
Deferred taxes on net
unrealized losses 41,906 41,906
---------
Total comprehensive
income 2,662,798
---------
Redemption and
retirement of
common stock (270,000) (270,000) 310,110 40,110
-------- -------- ------- ------- --------- ------- ---------
Balance
December 31, 1996 20,800,791 3,532,071 310,110 -- (3,332,887) 52,741 562,035
Comprehensive income:
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
Total comprehensive ---------
income 3,102,583
---------
Redemption and
retirement of
common stock (186,777) (149,157) 301,449 152,292
-------- -------- ------- ------- --------- ------- ---------
Balance
December 31, 1997 20,614,014 3,382,914 611,559 -- (182,433) 4,870 3,816,910
Comprehensive Income:
Net income for the
twelve months
ended December 31,
1998 9,770,208 9,770,208
Net unrealized losses
on investments (98,671) (98,671)
Deferred taxes on net
unrealized losses 39,882 39,882
---------
Total comprehensive
income 9,711,419
---------
Redemption and
retirement of
common stock (83,790) (134,040) 276,550 142,510
Producer stock option
expense 25,000 25,000
-------- -------- ------- ------- ---------- ------- ---------
Balance
December 31, 1998 20,530,224 $ 3,248,874 $ 888,109 $ 25,000 $ 9,587,775 $ (53,919) $ 13,695,839
========== =========== =========== =========== =========== =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $9,770,208 $3,150,454 $2,714,495
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization of fixed assets 1,252,116 632,781 465,394
Amortization of intangible assets 70,936 65,775 3,861
Producer stock option expense 25,000 -- --
Amortization/accretion of investments (73,118) (68,761) (39,372)
Net realized gain on sales of investments (54,633) (13,499) (2,525)
Realized loss on sale of fixed assets -- 19,603 --
Changes in assets and liabilities
Net change in accounts receivable (464,959) (727,596) 995,418
Net change in prepaid expenses (195,981) (210,982) (255,411)
Net change in income taxes receivable
and payable (1,273,650) 569,307 (174,059)
Net change in deferred tax assets 47,401 360,375 539,413
Net change in marketing supplies inventory (156,763) 23,126 (73,265)
Net change in accounts payable 74,750 173,333 48,290
Net change in accrued sales convention costs (331,456) 400,613 850,956
Net change in accrued liabilities 3,008,716 172,854 (66,800)
Net change in other assets and liabilities 406,676 50,959 (461,861)
Net cash provided by operating activities 12,105,243 4,598,342 4,544,534
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (15,396,140) (20,404,456) (19,087,646)
Proceeds from sales and maturities of investments 6,129,871 20,667,228 16,156,162
Purchases of fixed assets (1,624,059) (1,521,320) (519,758)
Payments for organization costs (17,806) -- --
Net cash used in investing activities (10,908,134) (1,258,548) (3,451,242)
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption and retirement of common stock (474,710) (348,058) (299,639)
Payments on note payable -- -- (87,688)
Net cash used in financing activities (474,710) (348,058) (387,327)
INCREASE IN CASH AND CASH EQUIVALENTS 722,399 2,991,736 705,965
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,194,332 2,202,596 1,496,631
CASH AND CASH EQUIVALENTS,
END OF PERIOD $5,916,731 $5,194,332 $2,202,596
SUPPLEMENTAL CASH FLOW INFORMATION:
Taxes Paid $7,201,000 $1,265,025 $1,472,806
Interest Paid $ 19,873 $ 18,695 $ 18,883
</TABLE>
See accompanying notes to consolidated financial statements
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"), IL Annuity and Insurance Company ("IL Annuity") and
Transamerica Life Insurance and Annuity Company ("Transamerica"),
collectively referred to herein as the "Carriers." American National
is an unaffiliated company with over $1.4 billion in capital and
surplus and is rated "A++" by A.M. Best. IL Annuity is an unaffiliated
company, with over $13.0 million in capital and surplus and is rated
"A" by A.M. Best. Transamerica is also an unaffiliated company, with
over $560 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, appointing,
and training 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 administrative agreements
(the "Administrative 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 Administrative 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 Administrative Agreements with American National and
IL Annuity expire May 15, 1999, 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 Administrative
Agreements. Management expects that new agreements will be signed
during the second quarter of 1999. The Marketing and Administrative
Agreements with Transamerica do not have a fixed term but may be
terminated by either party upon twelve months notice without cause,
and may be terminated by either party immediately for cause.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial
Services, Inc. ("LFS"), the Company engages in the offering and sale
of variable annuity and life insurance products, mutual funds and debt
and equity securities on a fully disclosed basis. LFS has entered into
agreements (the "Agreements") with various entities pursuant to which
LFS has a non-exclusive right to solicit sales of these investment
products offered by such entities through its network of independent
representatives and to provide certain marketing and administrative
services in order to facilitate sales of such 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 products pursuant to the
Agreements began during the first quarter of 1996.
Through LifeSurance Corporation, a wholly-owned subsidiary, the
Company conducts estate planning seminars which provide continuing
education credits for producers at various locations throughout the
United States. Producers pay attendance fees to attend the seminars
and may also purchase educational materials which can be used as tools
in promoting life insurance and annuity policies and estate planning
concepts. The seminars and educational materials are marketed under
the business name Wealth Transfer Educational Systems.
In August 1997, Legacy Advisory Services, Inc. ("LAS"), a wholly-owned
subsidiary of the Company, was incorporated in the state of California
for the purpose of operating as an "investment advisor," as defined by
and regulated pursuant to the Investment Advisors Act of 1940. LAS is
registered with the Securities and Exchange Commission (the "SEC") and
is in the process of filing notices with several states to provide
investment management services to clients of investment advisor
representatives of LAS. LAS has conducted no operations to date.
In July 1998, Legacy Reinsurance Company ("LegacyRe"), a wholly-owned
subsidiary of the Company, was incorporated in the State of Arizona.
The Company is in the process of obtaining approval from the Arizona
Department of Insurance for LegacyRe to engage in the reinsurance
business. Accordingly, LegacyRe has conducted no business to date.
Upon receipt of approval from the Arizona Department of Insurance,
LegacyRe may enter into one or more reinsurance agreements to reinsure
annuity and life products.
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., Legacy
Advisory Services, Inc., Legacy Reinsurance Company, and LifeSurance
Corporation. 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
Marketing allowances and commissions are recognized when policies
become inforce. 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, within "accumulated
other comprehensive income," 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 1997, 1996 and 1995 balances have been reclassified to conform
with the 1998 presentation. Such reclassifications had no effect on
net income or shareholders' equity (deficit).
k. Recent Accounting Pronouncements
Comprehensive Income
During 1998, the Company adopted 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 from transactions and other events and circumstances from
non-owner sources. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997.
Segment Reporting
In 1998, the Company adopted No. 131, "Disclosure 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 operations
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 is to be provided. SFAS
No. 131 is effective for fiscal years beginning after December 15,
1997. The adoption of SFAS No. 131 did not affect the consolidated
results of operations or consolidated financial position of the
Company.
l. Internal Use Software Cost
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 98-1 provides guidance on determining whether computer
software is internal use software and on accounting for the proceeds
from computer software originally developed or obtained for internal
use and then subsequently sold to the public. It also provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has not yet
determined the impact, if any, of adopting SOP 98-1, which will be
effective for the Company's year ending December 31, 1999.
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, 1998
Government agency
securities $ 2,256,704 $ 4,841,327 $ 1,788,614 $ -- $ 8,886,645
Corporate bonds 1,001,018 -- 526,307 -- 1,527,325
Mortgage-backed securities -- -- -- 1,524,500 1,524,500
Equity securities -- -- -- 5,139,732 5,139,732
----------- ----------- ------------ ----------- -----------
Amortized cost 3,257,722 4,841,327 2,314,921 6,664,232 17,078,202
Gross unrealized gains 14,132 20,059 27,369 139,217 200,777
Gross unrealized losses (22,556) -- (3,164) (265,631) (291,351)
----------- ----------- ----------- ----------- -----------
Market value $ 3,249,298 $ 4,861,386 $ 2,339,126 $ 6,537,818 $16,987,628
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
</TABLE>
Included in operating results for the years ended December 31, 1998, 1997,
and 1996 are $824,164, $494,033, and $501,753 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, 1998
Computers $ 3,406,540 $ 1,499,340 $ 1,907,200
Leasehold improvements 1,290,647 970,030 320,617
Furniture and equipment 1,202,577 578,659 623,918
Land 127,522 -- 127,522
Artwork 3,010 -- 3,010
----------- ----------- -----------
Totals $ 6,030,296 $ 3,048,029 $ 2,982,267
=========== =========== ===========
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
=========== =========== ===========
4. Accrued Liabilities
Accrued liabilities at December 31 consisted of the following:
1998 1997
Accrued compensation $ 2,595,760 $ 976,428
Commissions payable 714,926 234,836
Producer seminar expenses -- 39,498
Investment acquisition payable 500,000 --
Other 577,715 128,923
----------- -----------
Totals $ 4,388,401 $ 1,379,685
5. Incentive Compensation Payable
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, 1998 and 1997, $488,672
and $149,609, respectively, are reflected as incentive compensation payable
in the accompanying balance sheets. Such amounts primarily represent the
deferred portion of the 1998 and 1997 Bonuses. Also included in incentive
compensation payable at December 31, 1998, are bonus amounts payable to
information systems personnel in the year 2000 of $41,851.
6. Deferred Compensation Plans
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 $10,000 annually for 1998 and
$9,500 for 1997 and 1996) 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 $272,658, $181,443, and $134,673 for the years ended December
31, 1998, 1997, and 1996, respectively.
The Company also sponsors a non-qualified deferred compensation plan, which
is available to certain employees who, because of Internal Revenue Code
limitations, do not receive Company matching contributions of up to 6% of
annual compensation (the "Non-qualified Employee Plan"). Under the Non-
qualified Employee Plan, certain employees may defer, on a pre-tax basis, a
percentage of annual compensation, including bonuses. The Company matches
50% of each employee's contributions, up to a maximum of 6% of annual
compensation, less amounts already matched under the 401(k) Plan. Deferrals
under the Non-qualified Employee Plan did not begin until first quarter
1999.
The Company also sponsors a non-qualified deferred compensation plan under
which producers may defer, on a pre-tax basis, up to 50% of annual
commissions (the "Producer Deferred Plan"). Producers who earn a minimum of
$100,000 in annual commission are eligible to participate in the Producer
Deferred Plan. In addition, the Company will match producer contributions
for those producers who earn over $250,000 in annual commissions at rates
ranging from 1% to 5% of amounts deferred, depending on the level of annual
commissions earned. Assets held by the Company in the Producer Deferred
Plan are subject to the general creditors of the Company and will be
reflected as a liability in the Company's financial statements. Deferrals
under the Producer Deferred Plan will not begin until the second quarter of
1999.
7. Commitments and Contingencies
The Company leases its office premises and certain office equipment under
operating leases. Related rent expense of $369,231, $335,973, and $219,214
are included in occupancy costs for the years ended December 31, 1998,
1997, and 1996, respectively. Total rentals for and leases of equipment
included in equipment expenses were $255,078, $146,874, and $132,635 for
the years ended December 31, 1998, 1997, and 1996, respectively.
The Company currently leases approximately 43,000 square feet of office
space in Petaluma, California, at which the Company's headquarters are
located. In March, 1999, the Company entered into an agreement to purchase
the building which houses the office space currently leased for $4,300,000.
Management is currently negotiating with financial institutions and expects
to obtain financing for approximately $3,225,000 of the purchase price
during the second quarter of 1999. The building consists of approximately
53,700 total square feet of useable office and warehouse space. In
addition, as a result of the Company's plans to purchase the building which
houses its current office space in Petaluma, California (see "Business of
Company--Property"), increased depreciation expense of approximately
$411,000 attributable to leasehold improvements was recognized during the
fourth quarter of 1998 and approximately $300,000 was recognized during the
first quarter of 1999. On October 27, 1998, the Company entered into a new
lease for approximately 72,000 square feet of office space in Petaluma,
California, into which the Company intends to move its headquarters upon
vacating the space it currently leases. This lease expires in April, 2009,
and includes an option to extend the term for two five-year periods.
Pursuant to the lease, the Company, will pay monthly rent of $71,612, plus
a pro-rata share of property taxes and operating expenses based on leased
square footage.
The Company's minimum annual lease commitments under all operating leases
are as follows:
1999 $ 1,102,459
2000 1,249,408
2001 1,175,618
2002 1,034,037
2003 993,219
Thereafter 5,499,216
-----------
Total minimum lease payments $11,053,957
===========
In May of 1998, the Company entered into a Shareholder's Agreement with
Lynda Regan, Chief Executive Officer of the Company and Chairman of the
Company's Board of Directors, and certain other individuals. Under the
terms of this agreement, in the event of the death of Ms. Regan, the
Company shall repurchase from Ms. Regan's estate all shares of Common Stock
that were owned by Ms. Regan at the time of her death or were transferred
by her to one or more trusts prior to her death. The purchase price to be
paid by the Company shall be equal to 125% of the fair market value of the
shares. The Company has purchased a life insurance policy with a face
amount of $14.0 million for the purpose of funding this obligation in the
event of Ms. Regan's death.
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. In December 1996, LMG and
American National Insurance Company ("American National") 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.
American National and LMG have denied the allegations contained in the
complaint as well as any wrongdoing with respect to the sale and issuance
of annuities. However, on June 7, 1998, in order to avoid protracted
litigation, American National and LMG entered into a settlement agreement
with the plaintiffs and other class members. LMG's portion of the
settlement, net of recovery under its errors and omissions insurance
policy, was approximately $1.1 million, which was recorded as an expense
during the second quarter of 1998. Management is not aware of any material
asserted or unasserted litigation which existed at December 31, 1998.
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, 1998, there were no
outstanding commitments relating to the above by the Company.
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. All of the Series A Redeemable
Common Stock and Series B Redeemable Common Stock are hereafter
collectively referred to as the "Redeemable Common Stock."
Redeemable Common Stock has been recorded at the greater of the issuance
value or the redemption value as of December 31, 1998 and 1997. 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 $1.66 per share as of December 31, 1998,
based on management's estimate of fair market value. The total redemption
value for Series A and Series B Redeemable Common Stock was $8,584,602 and
$994,552, respectively, at December 31, 1998, and $5,287,033 and $576,827,
respectively, at December 31, 1997. Carrying value exceeded redemption
value by $1,646,277 at December 31, 1998, and $5,978,791 at December 31,
1997. As the shares are redeemed, the excess of carrying value over
redemption value is reflected as additional paid-in capital.
Changes to Redeemable Common Stock during the years ended December 31,
1998, 1997, and 1996 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>
Balance
January 1, 1996 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
Redemptions and
retirement of
common stock (335,879) (612,021) (1,733) (5,199) (337,612) (617,220)
--------- ----------- -------- ---------- ---------- -----------
Balance
December 31, 1998 5,171,447 $ 9,428,047 599,128 $1,797,384 5,770,575 11,225,431
========= =========== ======== ========== ========== ===========
</TABLE>
Shares of Redeemable Common Stock are excluded from total shares issued and
outstanding in the accompanying balance sheets.
10. Stock Options and Stock Awards
At December 31, 1998, the Company has two stock-based compensation plans,
which are described below. Options were first granted under both plans
during 1998. Under both plans, the exercise price of each option equals the
estimated fair market value of the Company's stock on the date of grant, as
estimated by management (see Note 9), except for options granted to 10%
shareholders where the exercise price equals 110% of the estimated fair
market value.
Under the Regan Holding Corp. 1998 Stock Option Plan (the "Employee Option
Plan"), the Company may grant to employees and directors stock options to
purchase the Company's common stock. Under the Regan Holding Corp. Producer
Stock Option Plan (the "Producer Option Plan"), the Company may grant to
LMG producers and LFS registered representatives stock options to purchase
the Company's common stock.
Effective January 1, 1998, 1,479,000 and 892,000 options were granted under
the Employee Option Plan and the Producer Option Plan, respectively, at an
exercise price of $0.73 per share. Effective July 1, 1998, 34,000 and
100,000 options were granted under the Employee Option Plan and the
Producer Option Plan, respectively, at an exercise price of $1.03 per
share. The employee options granted during 1998 expire in ten years and the
producer options granted during 1998 expire in six years. In addition,
during the first quarter of 1999, 1,477,300 and 4,913,000 options were
granted under the Employee Option Plan and the Producer Option Plan,
respectively, at an exercise price of $1.27 per share and at terms
consistent with those described above. A summary of option activity during
1998 follows:
<TABLE>
<CAPTION>
Employee Option Plan Producer Option Plan Total
Weighted-average Weighted-average Weighted-average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1998 -- $ -- -- $ -- -- $ --
Granted 1,513,000 $ 0.74 992,000 $ 0.76 2,505,000 $ 0.75
Forfeited (23,000) $ 0.73 (6,500) $ 0.73 (29,500) $ 0.73
---------- ------- -------- ------- ---------- --------
Outstanding at
December 31, 1998 1,490,000 $ 0.74 985,500 $ 0.76 2,475,500 $ 0.75
========== ======= ======== ======= ========== ========
</TABLE>
The remaining outstanding options at December 31, 1998 have a weighted
average remaining outstanding life of 7.8 years and were granted at
exercise prices ranging from $0.73 to $1.03 per share.
The Company accounts for the fair value of the Producer Option Plan in
accordance with SFAS No. 123 "Accounting for Stock-based Compensation."
Accordingly, the fair value of each option grant is estimated on the date
of grant using the "minimum value" model prescribed by SFAS No. 123, using
the following assumptions: (i) a risk free interest rate of 5.9% for both
plans; and, (ii) an estimated life of six years and ten years for options
granted under the Employee Option Plan and Producer Option Plan,
respectively. Volatility and dividend yield assumptions are not applicable,
as the Company's stock is not publicly traded nor does the Company pay
dividends. $25,000 of compensation cost has been included in sales
promotion and support expense in the accompanying financial statements for
the year ended December 31, 1998. The Company applies APB Opinion 25 and
related Interpretations in accounting for the Employee Option Plan.
Accordingly, no compensation expense has been recognized for the Employee
Option Plan. Had the Company elected to recognize compensation cost in
accordance with SFAS No. 123, the Company's net income and earnings per
share for the year ended December 31, 1998, would have been reduced for the
Employee Option Plan to the pro forma amounts indicated below:
As reported Pro forma
----------- -----------
Net Income $ 9,770,208 $ 9,727,809
Basic earnings per share $ 0.37 $ 0.37
Diluted earnings per share $ 0.36 $ 0.36
The Employee Option Plan and the Producer Option Plan are administered by
committees which are appointed by the Company's Board of Directors.
5,500,000 and 9,500,000 shares have been reserved for grant under the
Employee Option Plan and the Producer Option Plan, respectively, subject to
approval by shareholders at the Company's Annual Meeting to be held in May,
1999.
Pursuant to the Producer Option Plan, the Company may also award shares of
common stock to Producers. During 1998, no stock awards were made. However,
during the first quarter of 1999, 291,264 shares of Series A common stock
were awarded to wholesalers.
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:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current income taxes:
Federal $5,002,541 $1,262,317 $ 891,442
State 1,375,980 572,332 407,305
--------- ---------- ---------
Total current 6,378,521 1,834,649 1,298,747
--------- ---------- ---------
Deferred income taxes:
Federal 55,818 405,951 523,365
State (8,417) (45,576) 16,051
--------- ---------- ---------
Total deferred 47,401 360,375 539,416
--------- ---------- ---------
Provision for income taxes $6,425,922 $2,195,024 $1,838,163
========== ========== ==========
</TABLE>
The Company's deferred tax assets (liabilities) at December 31 consist of
the following:
1998 1997
Alternative minimum tax credit carryforward $ 373,620 $652,322
Sales incentive trip accrual 359,424 488,437
Fixed asset depreciation 130,115 (26,834)
Deferred compensation 213,122 59,596
Other 188,114 98,393
---------- ----------
Total deferred tax assets $1,264,395 $1,271,914
========== ==========
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,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income taxes due at
statutory rate (34%) $ 5,566,612 $ 1,817,462 $ 1,547,904
Increases (reductions) in
income taxes resulting from:
State franchise taxes, net of
federal income tax benefit 907,981 375,892 288,628
Other (48,671) 1,670 1,631
------------ ----------- -----------
Provision for income taxes $ 6,425,922 $ 2,195,024 $ 1,838,163
============ =========== ===========
</TABLE>
As of December 31, 1998, the Company also has, for income tax purposes,
$373,620, in alternative minimum tax credits which can be used to reduce
income taxes in subsequent years to the extent regular tax exceeds
tentative minimum tax. The credits have no expiration date.
12. Earnings per share
Following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share calculations. No potentially dilutive
securities existed prior to January 1, 1998.
<TABLE>
<CAPTION>
For the year ended December 31, 1998
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Income available to common
shareholders $ 9,770,208 26,543,535 $ 0.37
Effective of dilutive securities
Employee and producer stock options -- 643,901
------------ ---------- ---------
Diluted earnings per share $ 9,770,208 27,187,436 $ 0.36
============ ========== =========
</TABLE>
Options to purchase 134,000 shares of common stock at $1.03 per share were
outstanding during the second half of 1998, and remained outstanding at
December 31, 1998, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares. Of these options, 34,000 expire
on June 30, 2008, and 100,000 expire on June 30, 2004.
13. Segment Information
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", on January 1, 1998. SFAS No. 131
supersedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise" replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that
is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS No.
131 also requires disclosure about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the
consolidated results of operations or consolidated financial position as
previously reported.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disagregates its
business into two primary reportable segments: Legacy Marketing Group, and
Legacy Financial Services, Inc. The financial results of the Company's
operating segments are presented on an accrual basis. There are no
significant differences between the accounting policies of the segments as
compared to the Company's consolidated financial statements. In addition to
revenues and expenses recorded directly by each segment, the Company
evaluates the performance of its segments and allocates resources to them
based on estimates of salaries and other expenses attributed to each of the
segments' operations. There are no intersegment revenues.
The table below presents information about the Company's operating segments
for the years ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Legacy Legacy
Marketing Financial Reconciling
Group Services,Inc. Other Items Total
----- ------------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1998
Net income (loss) $10,482,908 $(198,498) $ 9,767,368 $(10,281,570) $ 9,770,208
Total assets $30,087,878 $ 816,741 $27,110,236 $(26,728,842) $31,286,013
1997
Net income (loss) $ 3,808,407 $(353,973) $ 3,149,557 $ (3,453,537) $ 3,150,454
Total assets $20,467,771 $ 473,129 $13,640,877 $(15,300,836) $19,280,941
1996
Net income (loss) $ 3,530,572 $(330,740) $ 2,712,395 $ (3,197,732) $ 2,714,495
Total assets $12,411,428 $ 352,138 $14,053,636 $(11,392,300) $15,424,902
</TABLE>
"Other" items above include Regan Holding Corp. (stand-alone) and its
remaining subsidiaries, LifeSurance Corporation, Legacy Advisory Services,
Inc., and Legacy Reinsurance Company. Such entities' operations do not
currently factor significantly into management decision making and,
accordingly, were not separated for purposes of this disclosure.
"Reconciling Items" consist solely of eliminations of intercompany amounts
such as investment in, and income from, subsidiaries.
14. Related Party Transactions
The Company paid Ashley A. Penney, a director until August, 1997, $173,300,
$133,113, and $140,100 for services provided as a human resource consultant
during the years ended December 31, 1998, 1997, and 1996, respectively.
15. Concentration of Risk
At December 31, 1998, the Company was contracted with over 15,300
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 1998.
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 12.7%, 36.2% and 87.5% of total
revenues to the Company during 1998, 1997 and 1996, respectively. In
December 1995, the Company contracted to provide marketing and
administrative services for IL Annuity. This arrangement generated
approximately 79.9%, 57.0% and 5.9% of the Company's revenues during 1998,
1997 and 1996, respectively. In May 1998, the Company contracted to provide
marketing and administrative services for Transamerica. These agreements
generated approximately 1.7% of the company's revenue during 1998. However,
neither the Marketing Agreements nor the Administrative Agreements prevent
the Company from entering into similar arrangements with other insurance
companies.
Although the Company markets and administers several annuity and life
insurance products on behalf of the Carriers, the Company's revenues are
derived primarily from sales and administration of annuity products,
especially the VisionMark annuity offered by IL Annuity. During 1998, 1997,
and 1996, 79.9%, 57.0%, and 5.9% of the Company's revenue resulted from
sales of the VisionMark annuity, respectively.
16. Subsequent Events
The Company is currently in the process of negoiating an Investment and
Funding Agreement (the "Investment Agreement") with Indianapolis Life
Insurance Group of Companies, Inc. (the "Indianapolis Group") and other
parties. Pursuant to the Investment Agreement, the Company is expected to
make a $12.0 million investment in the equity securities of the
Indianapolis Group, which is an affiliate of IL Annuity. The purpose of
this investment is to assure that IL Annuity will continue to offer the
original VisionMark annuity until the modified version of the product is
approved in all states.
In March, 1999, the Company entered into an agreement to purchase for $4.3
million the building which houses the office space currently leased.
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Legacy Legacy
Regan Legacy Financial Advisory Legacy Combined Consolidated
Holding Marketing Services, LifeSurance Services, Reinsurance December December
Corp. Group Inc. Corporation Inc. Company 31, 1998 Eliminations 31, 1998
----- ----- ---- ----------- ---- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and
cash
equiva
-lents $ 85,893 $ 4,804,009 $ 547,748 $ 269,081 $ 10,000 $200,000 $ 5,916,731 $ $ 5,916,731
Investments 16,987,628 16,987,628 16,987,628
Accounts
receivable 293 1,490,244 213,728 1,704,265 1,704,265
Prepaid
expenses 344,457 490,172 55,893 93 3,298 893,913 (125,000) 768,913
Income taxes
receivable
(payable) 4,268,676 (3,371,348) (13,584) (12) 357 884,089 884,089
Intercompany
receivable
(payable) (7,919,392) 8,185,298 (6,973) (233,056) (15,888) (9,989) -- --
Deferred
income
taxes
--current 359,421 359,421 359,421
Marketing
supplies
inventory 351,115 12,207 22,294 385,616 385,616
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
Total
Current
Assets (3,220,073) 29,296,539 809,019 58,400 (2,233) 190,011 27,131,663 (125,000) 27,006,663
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
Net fixed
assets 2,648,191 334,076 2,982,267 2,982,267
Investment
in
subsid
-iaries 26,603,842 26,603,842 (26,603,842) --
Deferred
income
taxes--
non-
current 637,883 267,091 904,974 904,974
Other
assets 190,172 7,722 184,226 9,989 392,109 392,109
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
TOTAL
ASSETS $26,669,843 $30,087,878 $ 816,741 $ 242,626 $ (2,233) $200,000 $58,014,855 $(26,728,842) $31,286,013
=========== =========== ========== ========== ======== ======== =========== ============ ===========
LIABILITIES
Accounts
payable $ 13,579 $ 345,259 $ 28,766 $ 31,217 $ $ $ 418,821 $ $ 418,821
Accrued
sales
convention
costs 894,713 894,713 894,713
Accrued
liabilities 306,458 3,914,794 262,044 30,105 4,513,401 (125,000) 4,388,401
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
Total
Current
Liabilities 320,037 5,154,766 290,810 61,322 -- -- 5,826,935 (125,000) 5,701,935
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
Loan payable 132,285 132,285 132,285
Incentive
compensation
payable 530,523 530,523 530,523
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
Total Non
-Current
Liabilities -- 662,808 -- -- -- -- 662,808 -- 662,808
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
TOTAL
LIABILITIES 320,037 5,817,574 290,810 61,322 -- -- 6,489,743 (125,000) 6,364,743
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
COMMITMENTS
AND
CONTINGENCIES
REDEEMABLE
COMMON
STOCK 11,225,431 -- -- -- -- -- 11,225,431 -- 11,225,431
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
SHAREHOLDERS'
EQUITY
Common stock 3,248,874 100,000 50,000 100,000 3,498,874 (250,000) 3,248,874
Paid-in
capital
from
retirement
of common
stock 888,109 510,753 1,425,000 7,765,544 100,000 10,689,406 (9,801,297) 888,109
Paid-in
capital
from producer
stock options 25,000 25,000 25,000
Retained
earnings
(accumulated
deficit) 10,962,392 23,713,470 (949,069) (7,584,240) (2,233) 26,140,320 (16,552,545) 9,587,775
Accumulated
other
comprehensive
income - net (53,919) (53,919) (53,919)
----------- ----------- ---------- ---------- -------- -------- ----------- ------------ -----------
TOTAL
SHAREHOLDERS'
EQUITY 15,124,375 24,270,304 525,931 181,304 (2,233) 200,000 40,299,681 (26,603,842) 13,695,839
----------- ---------- ---------- ---------- -------- -------- ----------- ------------ -----------
TOTAL
LIABILITIES,
REDEEMABLE
STOCK &
SHAREHOLDERS'
EQUITY $26,669,843 $30,087,878 $ 816,741 $ 242,626 $ (2,233) $200,000 $58,014,855 $(26,728,842) $31,286,013
=========== =========== ========== ========== ======== ======== =========== ============ ===========
</TABLE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidating Income Statement
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Legacy Legacy
Regan Legacy Financial Advisory Combined Consolidated
Holding Marketing Services, LifeSurance Services, December 31, December 31,
Corp. Group Inc. Corporation Inc. 1998 Eliminations 1998
----- ----- ---- ----------- ---- ---- ------------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME
Marketing
allowances $ $26,088,362 $ 141,575 $ $ $26,229,937 $ $26,229,937
Commission
income 12,015,010 636,348 12,651,358 12,651,358
Administrative
fees 6,664,224 6,664,224 6,664,224
Savings and
investment
income (720) 1,221,752 1,221,032 1,221,032
Intercompany
management
fee income 1,610,814 178,100 1,788,914 (1,788,914) --
Seminar income 263,785 263,785 263,785
Other income 80,834 45,026 125,860 125,860
----------- ----------- --------- ------- ------- ----------- ---------- ----------
Total Income 1,610,094 46,512,067 822,949 -- -- 48,945,110 (1,788,914) 47,156,196
----------- ----------- --------- ------- ------- ----------- ---------- ----------
EXPENSES
Salaries and
related
benefits 27,442 16,680,399 663,939 17,371,780 17,371,780
Sales promotion
and support 62,566 5,401,569 56,663 5,520,798 5,520,798
Occupancy 506,317 638,979 4,491 1,149,787 1,149,787
Professional
fees 325,542 2,247,895 42,265 135 1,540 2,617,377 2,617,377
Depreciation
and
amortization 1,218,520 100,671 3,861 1,323,052 1,323,052
Courier and
postage 7,716 656,546 38,350 702,612 702,612
Stationery and
supplies 1,045 749,465 2,887 753,397 753,397
Equipment 242,448 328,180 15,536 586,164 586,164
Travel and
entertainment 596 568,382 25,246 594,224 594,224
Insurance 43,225 122,474 3,825 169,524 169,524
Miscellaneous 12,218 154,460 4,423 250 171,351 171,351
Intercompany
management
fees 1,500,000 288,914 1,788,914 (1,788,914) --
----------- ----------- --------- ------- --------- ----------- ---------- ----------
Total Expenses 2,447,635 29,149,020 1,150,400 135 1,790 32,748,980 (1,788,914) 30,960,066
----------- ----------- --------- ------- --------- ----------- ---------- ----------
INCOME BEFORE
INCOME FROM
SUBSIDIARIES (837,541) 17,363,047 (327,451) (135) (1,790) 16,196,130 16,196,130
INCOME FROM
SUBSIDIARIES 10,281,570 10,281,570 (10,281,570) --
----------- ----------- --------- ------- ------- ----------- ---------- ----------
INCOME FROM
OPERATIONS 9,444,029 17,363,047 (327,451) (135) (1,790) 26,477,700 (10,281,570) 16,196,130
PROVISION FOR
INCOME TAXES (326,181) 6,880,139 (128,953) 474 443 6,425,922 6,425,922
----------- ----------- --------- ------- ------- ----------- ---------- ----------
NET INCOME $ 9,770,210 $10,482,908 $(198,498) $ (609) $(2,233) $20,051,778 $(10,281,570) $ 9,770,208
=========== =========== ========= ======= ======= =========== ============ ===========
</TABLE>
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 21, 1999, 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, 1998
and 1997.
(iii) Consolidated Income Statements for the years ended
December 31, 1998, 1997 and 1996.
(iv) Consolidated Statements of Shareholders' Equity
(Deficit) for the years ended December 31, 1998, 1997
and 1996.
(v) Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.
(vi) Notes to Consolidated Financial Statements.
(vii) Supplemental consolidating data.
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.1
3(b) Amended and Restated Bylaws of the Company.1
4 Certificate of Determination of Preferences of Series C
Common Stock of Regan Holding Corp.2 10(a) Administrative
Services Agreement effective January 1, 1991, as amended,
between Allianz Life Insurance Company of North America and
the Company.2
10(b)Marketing Agreement effective June 1, 1993, as amended,
between American National Insurance Company and the
Company.2 10(c) Insurance Processing Agreement effective
June 1, 1993, as amended, between American National
Insurance Company and the Company.2 10(d) Form of Producer
Agreement.2 10(e) Lease Agreement dated September 26, 1996,
for 1179 North McDowell Blvd., Petaluma, California 94954.1
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.2 10(g) 401(K) Profit Sharing Plan & Trust dated
July 1, 1994.2
10(h)Marketing Agreement effective January 1, 1996 between IL
Annuity and Insurance Company and the Company.3
10(i)Insurance Processing Agreement effective January 1, 1996
between IL Annuity and Insurance Company and the Company.3
- - --------
1 Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended September 30, 1996.
2 Incorporated herein by reference from the Company's quarterly Form 10-K for
the year ended December 31, 1994.
3 Incorporated herein by reference form the Company's annual report on Form
10-K for the year ended December 31, 1995.
10(j)Marketing Agreement effective January 1, 1996 between
Indianapolis Life Insurance Company and the Company.3
10(k)Insurance Processing Agreement effective January 1, 1996
between Indianapolis Life Insurance Company and the
Company.3
10(l)Amendment Three to Marketing Agreement with American
National Insurance Company.4
10(m)Amendment Four to Marketing Agreement with American
National Insurance Company.5
10(n)Amendment Five to Marketing Agreement with American
National Insurance Company.
10(o)Amendment Six to Marketing Agreement with American National
Insurance Company.
10(p)Amendment Two to Processing Agreement with American
National Insurance Company.4
10(q)Amendment Three to Processing Agreement with American
National Insurance Company.5
10(r)Amendment Four to Processing Agreement with American
National Insurance Company.
10(s)Amendment Five to Processing Agreement with American
National Insurance Company.
21 Subsidiaries of the Company.3
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended December 31,
1998.
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
- - --------
4 Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended June 30, 1998.
5 Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended September 30, 1998.
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: /s/ R. Preston Pitts Date: March 31, 1999
--------------------------------------
R. Preston Pitts, President and Chief Operating Officer
By: /s/ David A. Skup Date: March 31, 1999
--------------------------------------
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: /s/ Lynda L. Regan Date: March 31, 1999
------------------------------------
Lynda L. Regan, Chairman
By: /s/ Steven C. Anderson Date: March 31, 1999
------------------------------------
Steven C. Anderson, Director
By: /s/ R. Preston Pitts Date: March 31, 1999
------------------------------------
R. Preston Pitts, Director
By: /s/ Ute Scott-Smith Date: March 31, 1999
------------------------------------
Ute Scott-Smith, Director
INDEX TO EXHIBITS
Item No. Description Page
27 Financial Data Schedule 37
AMENDMENT FIVE TO MARKETING AGREEMENT
This document is Amendment Five to the Marketing Agreement made and entered into
effective June 1, 1993, (the "Agreement"), by and between American National
Insurance Company ("American National") a Texas corporation, and Legacy
Marketing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
3. Section 3.1 of the Agreement is hereby deleted in its entirety and the
following new Section 3.1 shall be substituted therefor:
"3.1 Subject to termination as hereinafter provided, this Agreement shall
remain in force and effect until the close of business on March 31, 1999,
the initial term of this Agreement. This Agreement may be renewed by mutual
agreement for successive terms of one (1) year unless terminated by either
party by prior written notice to the other at least one hundred eighty
(180) days prior to the end of the initial term or the renewal term."
4. Except as specifically amended hereby, all terms and provisions of the
Marketing Agreement shall remain in full force and effect.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ R. Preston Pitts By: /s/ James E. Pozzi
------------------------------ ------------------------------
Title: PRESIDENT Title: EXECUTIVE VICE PRESIDENT
--------------------------- ---------------------------
Witness: /s/ Stephanie Molteni Witness: /s/ Sherry Zimmerman
------------------------- -------------------------
Date: 12/18/98 Date: 12/22/98
---------------------------- ----------------------------
AMENDMENT SIX TO MARKETING AGREEMENT
This document is Amendment Six to the Marketing Agreement made and entered into
effective June 1, 1993, and amended by Amendment One to Marketing Agreement
dated September 16, 1993; Amendment Two to Marketing Agreement dated June 4,
1998; Amendment Three to Marketing Agreement dated September 25, 1998; Amendment
Four to Marketing Agreement dated October 19, 1998; and Amendment Five to
Marketing Agreement dated December 15, 1998, (the "Agreement"), by and between
American National Insurance Company ("American National") a Texas corporation,
and Legacy Marketing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
1. Section 3.1 of the Agreement is hereby deleted in its entirety and the
following new Section 3.1 shall be substituted therefor:
"3.1 Subject to termination as hereinafter provided, this Agreement shall
remain in force and effect until the close of business on May 15, 1999, the
term of this Agreement. This Agreement may be renewed by mutual agreement
for successive terms of one (1) year unless terminated by either party by
prior written notice to the other at least one hundred eighty (180) days
prior to the end of the initial term or the renewal term."
2. Except as specifically amended hereby, all items and provisions of the
Marketing Agreement shall remain in full force and effect.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ David A. Skup By: /s/ David Behrens
------------------------------ ------------------------------
Title: CFO & Treasurer Title: Exec VP of Independent Marketing
--------------------------- ---------------------------
Witness: /s/ Katie Shannon Witness: /s/ Gretchen Childress
------------------------- -------------------------
Date: 3/25/99 Date: 3/29/99
---------------------------- ----------------------------
AMENDMENT FOUR TO INSURANCE PROCESSING AGREEMENT
This document is Amendment Four to the Insurance Processing Agreement made and
entered into effective June 1, 1993 (the "Agreement"), by and between American
National Insurance Company ("American National") a Texas corporation, and Legacy
Marketing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
3. Section 6.1 of the Agreement is hereby deleted in its entirety and the
following new Section 6.1 shall be substituted therefor:
"6.1 Subject to termination as hereinafter provided, this Agreement shall
remain in force and effect until the close of business on March 31, 1999,
the initial term of this Agreement. This Agreement may be renewed by mutual
agreement for additional successive terms of one (1) year unless terminated
by either party by prior written notice to the other at least one hundred
eighty (180) days prior to the end of the initial term or the renewal
term."
4. Except as specifically amended hereby, all terms and provisions of the
Insurance Processing Agreement shall remain in full force and effect.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ R. Preston Pitts By: /s/ James E. Pozzi
------------------------------ ------------------------------
Title: PRESIDENT Title: EXECUTIVE VICE PRESIDENT
--------------------------- ---------------------------
Witness: /s/ Stephanie Molteni Witness: /s/ Sherry Zimmerman
------------------------- -------------------------
Date: 12/18/98 Date: 12/22/98
---------------------------- ----------------------------
AMENDMENT FIVE TO INSURANCE PROCESSING AGREEMENT
This document is Amendment Five to the Insurance Processing Agreement made and
entered into effective June 1, 1993, and amended by Amendment One to Insurance
Processing Agreement dated June 4, 1998; Amendment Two to Insurance Processing
Agreement dated September 25, 1998; Amendment Three to Insurance Processing
Agreement dated October 19, 1998; and Amendment Four to Insurance Processing
Agreement dated December 15, 1998 (the "Agreement"), by and between American
National Insurance Company ("American National") a Texas corporation, and Legacy
Marketing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
1. Section 6.1 of the Agreement is hereby deleted in its entirety and the
following new Section 6.1 shall be substituted therefor:
"6.1 Subject to termination as hereinafter provided, this Agreement shall
remain in force and effect until the close of business on May 15, 1999, the
term of this Agreement. This Agreement may be renewed by mutual agreement
for additional successive terms of one (1) year unless terminated by either
party by prior written notice to the other at least one hundred eighty
(180) days prior to the end of the initial term or the renewal term."
2. Except as specifically amended hereby, all items and provisions of the
Insurance Processing Agreement shall remain in full force and effect.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ David A. Skup By: /s/ David Behrens
------------------------------ ------------------------------
Title: CFO & Treasurer Title: Exec VP of Independent Marketing
--------------------------- ---------------------------
Witness: /s/ Katie Shannon Witness: /s/ Gretchen Childress
------------------------- -------------------------
Date: 3/25/99 Date: 3/29/99
---------------------------- ----------------------------
<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 YHEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,916,731
<SECURITIES> 16,987,628
<RECEIVABLES> 1,704,265
<ALLOWANCES> 0
<INVENTORY> 385,616
<CURRENT-ASSETS> 27,006,663
<PP&E> 6,030,296
<DEPRECIATION> (3,048,029)
<TOTAL-ASSETS> 31,286,013
<CURRENT-LIABILITIES> 5,701,935
<BONDS> 0
11,225,431
0
<COMMON> 3,248,874
<OTHER-SE> 10,446,965
<TOTAL-LIABILITY-AND-EQUITY> 31,286,013
<SALES> 0
<TOTAL-REVENUES> 47,156,196
<CGS> 0
<TOTAL-COSTS> 30,960,066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,196,130
<INCOME-TAX> 6,425,922
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,770,208
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
