-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ly2an61F6R9u/ZH+nV2bRlThprl/nSYT8zex134eEsmmJrM8FKI95Nitc/2Vh3p0 IJXeZBhyKp/16AgNcpz5Rw== 0000898080-99-000120.txt : 19990413 0000898080-99-000120.hdr.sgml : 19990413 ACCESSION NUMBER: 0000898080-99-000120 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGAN HOLDING CORP CENTRAL INDEX KEY: 0000870069 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 680211359 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19704 FILM NUMBER: 99586029 BUSINESS ADDRESS: STREET 1: 1179 N MCDOWELL BLVD CITY: PETALUMA STATE: CA ZIP: 94954 BUSINESS PHONE: 7077788638 MAIL ADDRESS: STREET 1: 1179 N MCDOWELL BLVD CITY: PETALUMA STATE: CA ZIP: 94954 10-K 1 FORM 10-K 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 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
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 ---- ---- ---- ---- ---- 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
(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
December 31, 1998 December 31, 1997 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 ================= =================
See accompanying notes to consolidated financial statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Income Statements
For the Year Ended December 31, 1998 1997 1996 ---- ---- ---- 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 ============ ============ ============
See accompanying notes to consolidated financial statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Deficit)
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 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 ========== =========== =========== =========== =========== =========== =============
See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows
For the Year Ended December 31, 1998 1997 1996 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
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:
Maturity in years: 1 Year 1 to 5 Longer Than or Less Years 10 Years Other Total ------- ----- -------- ----- ----- 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
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:
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 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 ========= =========== ======== ========== ========== ===========
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:
Employee Option Plan Producer Option Plan Total Weighted-average Weighted-average Weighted-average Shares Exercise Price Shares Exercise Price Shares Exercise Price 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 ========== ======= ======== ======= ========== ========
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:
For the Year Ended December 31, 1998 1997 1996 ---- ---- ---- 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 ========== ========== ==========
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,
1998 1997 1996 ---- ---- ---- 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 ============ =========== ===========
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.
For the year ended December 31, 1998 --------------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- --------- 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 ============ ========== =========
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.
Legacy Legacy Marketing Financial Reconciling Group Services,Inc. Other Items Total ----- ------------- ----- ----- ----- 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
"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
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 ----- ----- ---- ----------- ---- ------- ------- ------------ -------- 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 =========== =========== ========== ========== ======== ======== =========== ============ ===========
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidating Income Statement For the Year Ended December 31, 1998
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 ----- ----- ---- ----------- ---- ---- ------------ ---- 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 =========== =========== ========= ======= ======= =========== ============ ===========
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 EX-10 2 AMENDMENT #5 TO MARKETING AGREEMENT 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 ---------------------------- ---------------------------- EX-10 3 AMENDMENT #6 TO MARKETING AGREEMENT 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 ---------------------------- ---------------------------- EX-10 4 AMENDMENT #4 TO PROCESSING AGREEMENT 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 ---------------------------- ---------------------------- EX-10 5 AMENDMENT #5 TO PROCESSING AGREEMENT 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 ---------------------------- ---------------------------- EX-27 6 FINANCIAL DATA SCHEDULE
5 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. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 5,916,731 16,987,628 1,704,265 0 385,616 27,006,663 6,030,296 (3,048,029) 31,286,013 5,701,935 0 11,225,431 0 3,248,874 10,446,965 31,286,013 0 47,156,196 0 30,960,066 0 0 0 16,196,130 6,425,922 0 0 0 0 9,770,208 .37 .36
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