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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, 1996, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 0-4366
Regan Holding Corp.
(Name of Registrant as Specified in Its Charter)
California 68-0211359
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1179 N. McDowell Blvd., Petaluma, California 94954
(Address of Principal Executive Offices) (Zip Code)
(707) 778-8638
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the issuer: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
........ ........
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant. Aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days.
No stock has been sold or traded within the past 60 days to the
Company's knowledge.
Index to Exhibits on Page 32
APPLICABLE TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 after the distribution of securities under a plan confirmed
by a court.
Yes No
......... .........
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the registrant's classes of
common stock as of March 15, 1997, including redeemable common stock, was:
Common Stock-Series A 26,379,565
Common Stock-Series B 609,574
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Description of Business
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that involve risks
and uncertainties that could cause results to differ materially.
Regan Holding Corp. (the "Company") is a California corporation,
engaged primarily in the marketing and administration of life insurance and
annuity products on behalf of unaffiliated insurance carriers.
The Company, through its wholly-owned subsidiary Legacy Marketing
Group ("LMG"), has entered into Marketing Agreements (the "Marketing
Agreements") with American National Insurance Company ("American National") and
IL Annuity and Insurance Company ("IL Annuity"), collectively referred to herein
as the "Carriers." American National is an unaffiliated company with over $1.4
billion in capital and surplus and is rated "A++" by A.M. Best. IL Annuity is
also an unaffiliated company, with over $13 million in capital and surplus and
is rated "A" by A.M. Best. The Marketing Agreements grant the Company the
exclusive right to market certain annuity and life insurance products issued by
the Carriers (the "Policies"). Under the terms of the Marketing Agreements, the
Company is responsible for the recruiting, training, managing and supervising of
producers in the sale of the Policies. For these services, the Carriers pay the
Company marketing allowances and commissions based on the volume of Policies
sold.
The Company has also entered into Insurance Processing Agreements (the
"Processing Agreements") with the Carriers pursuant to which the Company
provides clerical, administrative and accounting services with respect to the
Policies. Such services include billing, collecting and remitting cash on the
Policies. However, all cash receipts are deposited into accounts maintained by
the Carriers and all cash remitted is paid from accounts maintained by the
Carriers. For providing such services, the Company is paid on producer
appointments and on a per policy basis with the amount of the fee depending on
the type of policy.
The Marketing and Processing Agreements with American National expire
on June 1, 1998 and with IL Annuity, on December 31, 2005, but may be renewed
by mutual agreement for successive one year terms. The Agreements may be
terminated by either party upon 180 days notice without cause, and may be
terminated by either party immediately for cause. In addition, the Marketing
Agreements will terminate automatically at the end of any calendar quarter upon
failure of the Company to meet certain quarterly minimum production requirements
for two successive calendar quarters.
The Company currently markets Policies written in the District of
Columbia and in each state of the United States, except New York. The Policies
marketed by the Company during 1996 are life insurance and annuity products
which have been designed by the Company and which generally have the following
features: (i) contractually guaranteed maximum administrative fee; (ii) multiple
investment strategies; (iii) a guarantee to credit the full and complete net
earnings of outside indices; and, (iv) cost of insurance guaranteed to be no
greater than the yearly renewable term rates provided by the reinsurers of the
Policies, with changes in the cost of insurance resulting solely from changes in
the Policies' future experience factors.
During 1996, American National and IL Annuity were the only insurance
companies for which the Company marketed insurance products. Approximately 87%
and 6% of the Company's total revenue during 1996 resulted from agreements with
American National and IL Annuity, respectively. However, significant marketing
efforts with respect to Policies issued by IL Annuity did not begin until the
fourth quarter of 1996. During the first two months of 1997, 42% of the
Company's revenue resulted from agreements with IL Annuity, compared with 52%
resulting from agreements with American National.
Neither the Marketing Agreements nor the Processing Agreements prevent
the Company from entering into similar arrangements with other insurance
companies. However, under the terms of the Marketing Agreements, the Company is
obligated to give the Carriers the opportunity to participate in the marketing
of any new products developed by the Company.
The Company currently markets the Policies through a network
consisting of over 13,000 independent insurance producers that have entered into
producer agreements with LMG. These agreements provide that the services of the
producers will be provided on a non-exclusive basis and that the agreements may
be immediately terminated by either the producer or the Company.
LMG's sales organization is built on a multi-level structure, with
producer compensation based on sales volume. The pay-for-performance producer
contract contains a nine-level "open book" design, which provides financial
motivation to retail producers to build an organization, thereby contributing to
their growth and the growth of the Company. Except for the first level, each
producer level has commission and/or agency building requirements that must be
met before the producer may advance to the next level. Advancements to higher
levels can occur as often as every three months. Producers at the highest levels
are considered wholesalers.
LMG provides tools and services that assist wholesalers with
recruiting, training and support responsibilities associated with the producers
in their hierarchy. In addition, LMG assists producers with programs designed to
increase their sales and better serve their clients. Recruiting and training
programs include visual presentations, product videos and seminars, advertising
material guidelines and sales flip charts. LMG also produces sales brochures
designed to communicate product information, pre-approved advertisements and
recruiting material.
In May 1995, the Company formed Legacy Financial Services, Inc.
("LFS"), a wholly-owned broker/dealer subsidiary. In December 1995, LFS was
approved by the National Association of Securities Dealers (the "NASD") and the
Securities and Exchange Commission (the "SEC") to engage in the offering and
sale of variable annuity products, mutual funds and certain debt and equity
securities on a fully disclosed basis. LFS has entered into agreements (the
"Agreements") with various entities licensed to sell insurance products, certain
mutual funds and variable insurance contracts (collectively, the "Products").
The Agreements grant LFS the non-exclusive right to solicit sales of the
Products through its network of independent representatives and to provide
certain marketing and administrative services in order to facilitate
solicitations for and sales of the Products. Under the Agreements, the Company
is compensated based upon pre-determined percentages of production. The
Agreements may be terminated by any party upon 30 days written notice. Sales of
the Products pursuant to the Agreements began during the first quarter of 1996.
There were approximately 174 full-time equivalent employees of the
Company as of March 15, 1997.
Competitive Business Conditions
The life insurance and annuity business is highly competitive. The
Company faces competition from various companies and organizations, including
banks, which have substantially greater assets, financial resources and market
acceptance. The Company's distribution system relies on independent insurance
producers to be able to effectively market its products competitively. This
requires getting new products to the market efficiently, offering competitive
commission schedules, and providing superior marketing training and support.
Regulatory Environment
Increased national attention has forced the National Association of
Insurance Commissioners and state insurance departments to re-examine existing
laws and regulations affecting insurance companies, especially those involving
insurance company solvency, marketing practices, and investment policies. The
Company has already responded to the increased scrutiny over the marketing of
insurance products by instituting strict advertising guidelines, generating
consistent materials and testimonies addressing appropriate marketing practices,
and including this topic in its bi-annual wholesaler meetings. While the Company
itself is not an insurance company, changes in the regulatory environment which
affect the insurance companies with which it contracts can impact its
operations.
As a registered broker/dealer, LFS is subject to regulation by the
NASD and the SEC, primarily with respect to registration and supervision of its
representatives, payment of commissions, recordkeeping and financial condition.
Item 2. Properties
The Company's headquarters and operations are located in Petaluma,
California. The Company currently leases approximately 43,300 square feet of
office space at an annual rent of $292,000, plus required maintenance,
landscaping and related expenses. The current lease expires in October, 2006 and
includes a commitment by the Company to lease an additional 10,460 square feet
beginning August 1, 1998, which will raise the annual rent to $381,000.
Item 3. Legal Proceedings
As a professional services firm engaged in marketing and servicing
life insurance and annuity products, the Company encounters litigation in the
normal course of business. Management is not aware of any material exposure to
the Company resulting from such litigation, except as follows:
In December, 1996, LMG and American National (collectively, the
"Co-defendants") were named in a lawsuit filed in the Circuit Court of
Jefferson County, Alabama, alleging misrepresentation and price discrimination
in connection with the sale of certain annuity products issued by ANICO and
marketed by LMG. In February, 1997, the case was removed to the U. S. Federal
District Court in Birmingham, Alabama. The plaintiffs, policyholders Buddie
Watson King and Fayrene Zink, sought and received conditional class action
certification prior to service of the complaint upon the Co-defendants.
However, the conditional class action certification was vacated by the Federal
District Court. The plaintiffs have filed a motion to remand the case back to
the Alabama Circuit Court and the Co-defendants are opposing the motion. The
outcome of the lawsuit cannot be determined. However, the Company's management
believes that the suit is without merit and intends to defend vigorously. No
amounts have been recorded in the financial statements for any losses which
may result from the lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's stock.
The Company's Series A common stock is held by approximately 1,530 shareholders.
The Series B common stock is held by approximately 9,860 shareholders.
The Board of Directors of the Company may, at its sole discretion,
declare and pay dividends on common stock subject to capital and solvency
restrictions under California law. To date, the Company has not paid any
dividends on its common stock. The Company's ability to pay dividends is
dependent on the ability of Legacy Marketing Group and Legacy Financial
Services, Inc., the Company's wholly-owned subsidiaries, to pay dividends or
make other distributions to its parent company. As of December 31, 1996, the
Company had an accumulated deficit and does not anticipate paying dividends on
any of its outstanding common stock in the foreseeable future.
Item 6. Selected Consolidated Financial Data
Five Months
Year Ended Year Ended Year Ended Ended
December 31, December 31, December 31, December 31,
1996 1995 1994 1993(2)
------------- ------------- ------------- -------------
Selected Income Statement Data:
Total Income $ 18,237,528 $ 17,153,947 $ 7,683,791 $ 1,627,210
Total Expenses 13,684,870 10,392,119 4,851,186 1,090,935
Provision for (Benefit from)
Income Taxes 1,838,163 1,903,208 (2,253,261) 63,088
Extraordinary Item -- -- 522,616 --
Net Income $ 2,714,495 $ 4,858,620 $ 5,608,482 $ 473,187
Earnings Per Share $ .10 $ .18 $ .21 $ .02
Selected Balance Sheet Data:
Current Assets $ 11,455,188 $ 8,362,125 $ 2,828,452 $ 899,464
Total Assets $ 15,424,902 $ 12,304,801 $ 6,860,778 $ 2,128,057
Current Liabilities 2,203,125 1,458,367 1,157,279 1,063,364
Total Liabilities 2,519,866 1,762,924 1,287,425 2,199,685
Redeemable Common Stock 12,343,001 12,682,750 12,696,412 12,696,412
Shareholders' Equity (Deficit) $ 562,035 $ (2,140,873) $ (7,123,059) $ (12,768,040)
Selected Operating Data:
Total Premium Placed Inforce(1) $ 626,800,000 $ 620,000,000 $ 339,000,000 $ 30,000,000
Total Number of Policies Placed
Inforce (1) 11,144 12,167 6,118 313
(1) Inforce premium and policies are actually statistics of the Carriers
but represent factors which directly affect the Company's revenue.
(2) Operating statements are for the five months ended December 31, 1993.
See discussion at Note 1(a) of Notes to the Consolidated Financial
Statements at Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Summary--The Company recorded net income of $2.7 million, or $.10 per
share for the year ended December 31, 1996, compared to $4.9 million, or $.18
per share, for the year ended December 31, 1995, and $5.6 million, or $.21 per
share, for the year ended December 31, 1994. The decrease in net income in 1996
compared to 1995 was attributable primarily to increases in operating expenses
as discussed below. The decrease in net income in 1995 compared to 1994 was due
primarily to a net tax benefit in 1994 of $2.3 million, or $.08 per share, which
was largely attributable to the reversal of a valuation allowance against
federal deferred tax assets related to expected realization of net operating
loss carryforwards. Also during 1994, the Company recorded an extraordinary item
of $523,000 net of taxes, or $.02 per share, related to forgiveness of debt. The
increase in net income during 1995 from 1994, exclusive of the valuation
reversals and the extraordinary item, reflected a substantial increase in
premium volume and increases in investment income.
Revenue--The Company's major sources of revenue are marketing
allowances, commission overrides and administrative fees. Marketing allowances
and commission overrides are directly related to sales of annuities and life
insurance products. Administrative fees are a function not only of product
sales, but also producer appointments and administration of the insurance
policies inforce each month.
Total sales of insurance products by the Company's distribution system
during the years ended December 31, 1996, 1995 and 1994 resulted in premiums
placed inforce for the Carriers of approximately $626.8 million, $620.0 million,
and $339.0 million, respectively. Revenue from the Company's insurance marketing
and administrative activities increased to $17.5 million during 1996, from $16.7
million during 1995, and from $7.5 million in 1994, due primarily to increases
in premium placed inforce and to changes in the mix of Policies sold to those
which yield higher marketing allowances and commissions. During 1996, such
increases were offset by decreases in revenue which resulted from reductions in
contracted administrative fees from American National and from changes in
certain investment strategy features of the annuity policies offered by American
National.
Non-operating revenue consists primarily of investment income, which
totaled $729,000 in 1996, $353,000 in 1995 and $69,000 in 1994. Such income is
attributable to the investment during 1996, 1995 and 1994 of excess operating
cash flows primarily in government-backed and mortgage-backed securities. The
increases in 1996 from 1995 and in 1995 from 1994 are due primarily to increases
in investment balances, resulting from increased cash flows available for
investment, and to changes in investment strategy which yielded higher returns.
Expenses--As a service organization, the Company's primary expenses
are salaries and related employee benefits, which increased to $8.3 million in
1996, from $6.3 million in 1995 and $3.0 million in 1994. These increases are
attributable primarily to increases in total employment, which reached 164
full-time equivalent employees at December 31, 1996, up from 131 at December 31,
1995 and 75 at December 31, 1994. Such expenses also increased due to the
addition of personnel at higher pay levels. These increases in employment are
largely attributable to preparation for projected increases in sales of annuity,
life and variable products. However, such projected increases in sales may not
be realized if new products are not introduced as planned or if market
acceptance of such products is not as favorable as anticipated.
Sales promotion and support expense consists primarily of costs
related to the Company's annual national sales convention and to various sales
training activities. Also included in sales promotion and support expense is
the cost of designing and printing of 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 the Policies increases, and as
new products are introduced. During 1996, 1995 and 1994, this expense
represented 12.2%, 7.9% and 5.5% of revenues, respectively. The increase in
this cost in 1996 from 1995, as a percentage of revenues, is due primarily to
higher costs associated with the annual national sales convention. The increase
in 1995 from 1994, as a percentage of revenues, is due primarily to expenses
related to the Company's first annual national sales convention which were
recognized in 1995. The development of new products and the re-designing of
existing product brochures also contributed to the increases during 1996 and
1995.
Provision for Income Taxes--The Company files consolidated income tax
returns for federal purposes. In prior years, the Company had both federal and
state net operating losses ("NOLs") which can be used to offset taxable income
in future profitable years. At December 31, 1993, the Company had recorded
valuation allowances against deferred tax assets for the full tax effect of
federal and state NOL's equal to $4.3 million, due to uncertainty as to the
Company's ability to realize such assets through generation of consolidated net
income. Because the Company had consolidated net income for the year ended
December 31, 1994 and expected to have consolidated net income in the future,
the balance of the federal valuation allowance of $3.8 million was reversed in
1994. The state valuation allowance was not reversed, as it related only to the
parent company which did not have a history of earnings. Due to tax planning
strategies implemented during 1995, the Company now expects to generate earnings
at the parent level and, accordingly, the state valuation allowance was reversed
during 1995.
During 1996, the federal NOL carryfoward was fully realized. However,
realization of the state NOL carryforwards is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards on December 31,
1997. Although realization is not assured, management believes it is more likely
than not that all of the deferred tax asset will be realized. However, the
projected amount of the deferred tax asset realized could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
The Company incurred $1.3 million, $1.4 million, and $448,000 of
estimated current federal and state income taxes due for 1996, 1995 and 1994,
respectively. The Company's effective tax rate was 40.4% for the year ended
December 31, 1996.
Extraordinary Item--During 1994, the Company recorded an extraordinary
item of $560,000 (before taxes) representing forgiveness of debt related to the
negotiated settlement of a contract for administrative services between the
Company and an insurance company who reinsured a portion of their business to
Old Colony. The Company continues to provide administrative services to this
insurance company and is compensated at market rates. A portion of the payment
for services was used as a reduction of a promissory note the Company signed as
part of the negotiated settlement.
Liquidity and Capital Resources
The Company's business is not capital intensive. Its major
expenditures consist of the funding of operating expenses and the purchase of
computer upgrades and furniture acquisitions to accommodate new employees. Since
1993, when the Company changed its focus from that of an insurance company to
that of an insurance product marketing and administration company, the Company
has funded its operations through cash flows provided by operations. Cash flows
generated from operations were $4.6 million, $5.0 million, and $2.3 million
during 1996, 1995 and 1994, respectively, which resulted in net increases in
cash and investments of $3.6 million, $4.2 million and $1.5 million during 1996,
1995 and 1994, respectively. The Company's future cash flows available to fund
operations will depend primarily on the level of premium generated through sales
of annuity and life insurance products and upon the Company's ability to control
operating expenses in relation to demands placed upon the organization from
increased sales.
As of December 31, 1996, the Company had $10.1 million in cash and
investments and $9.3 million in working capital, compared to $6.6 million and
$6.9 million at December 31, 1995 and $2.4 million and $1.7 million at December
31, 1994.
The Company maintains a significant portion of its assets in cash and
investments, primarily to support growth in operations, to fund continued
product development and potential strategic acquisitions, and as a reserve to
cover possible redemptions of certain of the Company's common stock, which is
redeemable at the option of shareholders under various agreements with the
Company. During 1996, redemption requests received by the Company were not
material in amount, either individually or in the aggregate, and the Company
believes that its liquid assets are sufficient to meet anticipated requests for
redemption. In the unlikely event that all redeemable shares were presented for
redemption, the Company believes that such demands could be met by reserves on
hand. In addition, as the shares are redeemed, the excess of carrying value over
redemption value becomes equity for the Company. At December 31, 1996, the
redemption value of redeemable common stock was $4,975,941 (see "Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements, Note 10").
In conjunction with the leasing of additional office space during
1996, management anticipates that capital expenditures of approximately $700,000
will be made during 1997 for leasehold improvements and furniture and fixtures.
In order to fund LFS during the start-up phase, the Company has
committed to make sufficient contributions to support LFS's operations and to
ensure LFS's compliance with financial regulatory requirements through December
31, 1997. Such contributions totaled $455,000 during 1996.
The Company intends to continue to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. As a result, the Company anticipates that cash and investments will
continue to represent a high percentage of total assets. The Company believes
that existing cash and investment balances, together with cash flows from
operations, will provide sufficient funding for the foreseeable future.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Regan Holding Corp.:
We have audited the accompanying consolidated balance sheets of Regan
Holding Corp. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Regan
Holding Corp. and Subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
San Francisco, California
March 17, 1997
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 December 31, 1995
ASSETS
Cash and cash equivalents $ 2,202,596 $ 1,496,631
Investments 7,947,207 5,067,426
Accounts receivable 511,710 1,507,128
Marketing supplies inventory 251,979 178,714
Prepaid expenses 361,950 106,539
Income taxes receivable 179,746 5,687
----------------- -----------------
Total Current Assets 11,455,188 8,362,125
----------------- -----------------
Net fixed assets 1,741,388 1,687,025
Organization costs-net of amortization 23,820 19,306
Deferred income taxes 1,600,150 2,097,660
Other assets 604,356 138,685
----------------- -----------------
TOTAL ASSETS $ 15,424,902 $ 12,304,801
================= =================
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Accounts payable $ 170,738 $ 122,448
Accrued liabilities 2,032,387 1,248,231
Note payable-current portion -- 87,688
----------------- -----------------
Total Current Liabilities 2,203,125 1,458,367
----------------- -----------------
Loan payable 132,285 132,285
Deferred incentive compensation 184,456 172,272
----------------- -----------------
Total Non Current Liabilities 316,741 304,557
----------------- -----------------
TOTAL LIABILITIES 2,519,866 1,762,924
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 9) -- --
REDEEMABLE COMMON STOCK, Series A and B (Note 10) 12,343,001 12,682,750
----------------- -----------------
SHAREHOLDERS' EQUITY (DEFICIT)
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: 20,800,791 and 21,070,791
shares at December 31, 1996 and 1995, respectively 3,532,071 3,802,071
Paid-in capital from retirement of common stock 310,110 --
Accumulated deficit (3,332,887) (6,047,382)
Net unrealized gains on investments 52,741 104,438
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 562,035 (2,140,873)
----------------- -----------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) $ 15,424,902 $ 12,304,801
================= =================
See accompanying notes to consolidated financial statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
For the For the For the
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
INCOME
Marketing allowances $ 10,039,278 $ 9,767,414 $ 4,477,982
Commission income 4,281,032 3,920,318 1,543,354
Administrative fees 3,136,123 3,032,538 1,480,967
Savings and investment income 728,927 353,393 68,732
Other income 52,168 80,284 112,756
----------------- ----------------- ------------------
Total Income 18,237,528 17,153,947 7,683,791
----------------- ----------------- ------------------
EXPENSES
Salaries and related benefits 8,253,564 6,287,339 2,964,583
Sales promotion and support 2,231,978 1,362,689 421,515
Professional fees 652,219 766,025 582,387
Occupancy 643,726 555,679 110,336
Depreciation and amortization 469,255 370,651 255,331
Courier and postage 373,158 255,149 129,231
Stationery and supplies 292,695 195,541 53,942
Equipment 287,448 261,691 151,718
Travel and entertainment 239,400 196,868 75,958
Insurance 167,154 89,729 41,222
Miscellaneous 74,273 50,758 64,963
----------------- ----------------- ------------------
Total Expenses 13,684,870 10,392,119 4,851,186
----------------- ----------------- ------------------
INCOME FROM OPERATIONS 4,552,658 6,761,828 2,832,605
PROVISION FOR (BENEFIT FROM)
INCOME TAXES 1,838,163 1,903,208 (2,253,261)
----------------- ----------------- ------------------
INCOME BEFORE EXTRAORDINARY ITEM 2,714,495 4,858,620 5,085,866
EXTRAORDINARY ITEM, Forgiveness of debt
of $559,543, net of related tax of $36,927 -- -- 522,616
----------------- ----------------- ------------------
NET INCOME $ 2,714,495 $ 4,858,620 $ 5,608,482
================= ================= ==================
EARNINGS PER SHARE
Weighted average shares outstanding 27,540,209 27,563,679 27,271,503
Earnings per share from operations $ .17 $ .25 $ 0.11
Income tax (benefit) .07 .07 (0.08)
----------------- ----------------- -------------------
Earnings per share before extraordinary item .10 .18 0.19
Extraordinary item -- -- 0.02
----------------- ---------------- ------------------
Earnings per share $ .10 $ .18 $ 0.21
================= ================= ==================
See accompanying notes to consolidated financial statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
Paid-in
Capital
from
Retirement Net
of Unrealized
Series A Common Stock Common Accumulated Gains/ Deferred
Shares Amount Stock Deficit (Losses) Compensation Total
Balance January 1, 1994 19,980,126 $ 3,794,204 $ -- $(16,514,484) $ -- $ (47,760) $(12,768,040)
Exercise of stock options 40,000 400 400
Stock awards 944,000 6,400 6,400
Net income for the
twelve months ended
December 31, 1994 5,608,482 5,608,482
Net unrealized losses on
investments (31,853) (31,853)
Deferred taxes on net
unrealized losses 13,792 13,792
Amortization of deferred
compensation 47,760 47,760
---------- --------- --------- ------------ ----------- ---------- ------------
Balance
December 31, 1994 20,964,126 3,801,004 -- (10,906,002) (18,061) -- (7,123,059)
Issuance of stock 106,665 1,067 1,067
Net income for the
twelve months ended
December 31, 1995 4,858,620 4,858,620
Net unrealized gains on
investments 207,806 207,806
Deferred taxes on net
unrealized gains (85,307) (85,307)
---------- --------- --------- ------------ ----------- ---------- ------------
Balance
December 31, 1995 21,070,791 3,802,071 -- (6,047,382) 104,438 -- (2,140,873)
Redemptions and
retirement of common
stock (270,000) (270,000) 310,110 40,110
Net income for the
twelve months ended
December 31, 1996 2,714,495 2,714,495
Net unrealized losses on
investments (93,603) (93,603)
Deferred taxes on net
unrealized losses 41,906 41,906
---------- ----------- --------- ------------ ---------- ---------- ------------
Balance December 31, 1996 20,800,791 $ 3,532,071 $ 310,110 $ (3,332,887) $ 52,741 $ -- $ 562,035
========== =========== ========= ============ ========== ========== ============
See accompanying notes to consolidated financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the For the For the
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,714,495 $ 4,858,620 $ 5,608,482
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization of
fixed assets 465,394 354,854 236,969
Amortization of organization costs 3,861 15,797 18,362
Accretion/amortization of investments (39,372) (33,903) (15,408)
Realized gain on sale of investment (2,525) -- --
Forgiveness of debt -- -- (559,543)
Amortization of deferred compensation -- -- 47,760
Net change in accounts receivable 995,418 (1,262,202) (233,196)
Net change in marketing supplies inventory (73,265) (104,036) (74,678)
Net change in prepaid expenses (255,411) 15,594 (115,333)
Net change in income taxes receivable and payable (174,059) (109,792) (202,573)
Net change in deferred income taxes 539,413 508,103 (2,664,039)
Net change in accounts payable 48,290 54,994 (71,866)
Net change in accrued liabilities 784,156 528,849 423,727
Net change in other assets and liabilities (453,486) 212,489 (55,372)
--------------- -------------- --------------
Net cash provided by operating activities 4,552,909 5,039,367 2,343,292
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (19,087,646) (6,589,085) (3,053,971)
Proceeds from sale and maturities of investments 16,156,162 3,497,115 1,302,000
Purchases of fixed assets (519,758) (823,022) (330,739)
Payments for organization costs (8,375) -- --
--------------- -------------- --------------
Net cash used in investing activities (3,459,617) (3,914,992) (2,082,710)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and retirement of common stock (299,639) -- --
Payments on note payable (87,688) (280,000) (490,727)
Proceeds from issuance of common stock -- 1,067 400
--------------- -------------- --------------
Net cash used in financing activities (387,327) (278,933) (490,327)
--------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 705,965 845,442 (229,745)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,496,631 651,189 880,934
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,202,596 $ 1,496,631 $ 651,189
=============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 18,883 $ 12,042 $ 12,711
Income taxes paid $ 1,472,806 $ 1,450,300 $ 650,278
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 when Old Colony was placed in
formal receivership by the State of Georgia Insurance Commissioner.
Old Colony has since been liquidated. The Company conducted no
operations and prepared no financial statements through August 1,
1993.
The Company, through its wholly-owned subsidiary Legacy Marketing
Group ("LMG"), has entered into Marketing Agreements (the "Marketing
Agreements") with American National Insurance Company ("American
National") and IL Annuity and Insurance Company ("IL Annuity"),
collectively referred to herein as the "Carriers." American National
is an unaffiliated company with over $1.4 billion in capital and
surplus and is rated "A++" by A.M. Best. IL Annuity is also an
unaffiliated company, with over $13 million in capital and surplus and
is rated "A" by A.M. Best. The Marketing Agreements grant the Company
the exclusive right to market certain annuity and life insurance
products issued by the Carriers (the "Policies"). Under the terms of
the Marketing Agreements, the Company is responsible for the
recruiting, training, managing and supervising of producers in the
sale of the Policies. For these services, the Carriers pay the Company
marketing allowances and commissions based on the volume of Policies
sold.
The Company has also entered into Insurance Processing Agreements
(the "Processing Agreements") with the Carriers pursuant to which the
Company provides clerical, administrative and accounting services with
respect to the Policies. Such services include billing, collecting and
remitting cash on the Policies. However, all cash receipts are
deposited into accounts maintained by the Carriers upon receipt by the
Company and all cash remitted is paid from accounts maintained by the
Carriers. For providing such services, the Company is paid on producer
appointments and on a per policy basis with the amount of the fee
depending on the type of policy.
Effective March 1, 1996, the Marketing and Processing Agreements
with American National were amended to reduce certain commissions and
administrative fees earned by the Company. In addition, during April
1996, certain investment strategy features of the annuity policies
offered by American National were eliminated.
The Marketing and Processing Agreements with American National
and IL Annuity expire June 1, 1998 and December 31, 2005,
respectively, but may be renewed by mutual agreement for successive
one year terms. The Agreements may be terminated by either party upon
180 days notice without cause, and may be terminated by either party
immediately for cause. In addition, the Marketing Agreements will
terminate automatically at the end of any calendar quarter upon
failure of the Company to meet certain quarterly minimum production
requirements for two successive calendar quarters.
In May 1995, the Company formed Legacy Financial Services, Inc.
("LFS"), a wholly-owned broker/dealer subsidiary. In December 1995,
LFS was approved by the National Association of Securities Dealers and
the Securities and Exchange Commission to engage in the offering and
sale of variable annuity and life insurance products, mutual funds and
certain debt and equity securities (collectively, the "Products") on a
fully disclosed basis. LFS has entered into agreements (the
"Agreements") with various entities licensed to sell the Products. The
Agreements grant LFS the non-exclusive right to solicit sales of the
Products through its network of independent representatives and to
provide certain marketing and administrative services in order to
facilitate solicitations for and sales of the Products. Under the
Agreements, the Company is compensated based upon pre-determined
percentages of production. The Agreements may be terminated by any
party upon 30 days written notice. Sales of the Products pursuant to
the Agreements began during the first quarter of 1996.
b. Basis of Presentation
The accompanying consolidated financial statements are prepared
in conformity with generally accepted accounting principles and
include the accounts of Regan Holding Corp. and its wholly-owned
subsidiaries, Legacy Marketing Group, Legacy Financial Services, Inc.,
and LifeSurance Corporation, a non-operating subsidiary. All
significant intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
c. Revenue Recognition
Through June 30, 1995, in accordance with the terms of the
Marketing Agreement with American National, marketing allowances and
commissions were accrued when policies were submitted for acceptance.
Effective July 1, 1995, both the Marketing Agreement with American
National and the related recording of revenue were modified to provide
for recognition of marketing allowances and commissions only after
policies become inforce, which is consistent with the method of
recognition of revenue generated under the Marketing Agreement with IL
Annuity. Administrative fees are recognized on a per policy 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 (deficit) 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. Advertising and Sales Promotion Costs
Advertising and sales promotion 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
Earnings per share is based on the weighted average number of
common shares outstanding, including shares of redeemable common
stock.
j. New Accounting Pronouncements
In February 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128").
SFAS No. 128 is designed to improve the earnings per share ("EPS")
information provided in the financial statements by simplifying the
existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of EPS data on an
international basis. SFAS No. 128 is effective for financial
statements issued for periods ending after December 31, 1997,
including interim periods. The Company will implement SFAS No. 128 in
1997. Management has not yet determined the impact that SFAS No. 128
may have on the financial statements.
k. Reclassifications
Certain 1994 and 1995 balances have been reclassified to conform
with the 1996 presentation. Such reclassifications had no effect on
net income or shareholders' equity (deficit).
2. Investments
Investment portfolios at the dates indicated consisted of the following:
Maturity in years:
1 to 5 5-10 Longer than
December 31, 1996 Years Years 10 Years Other Total
----------------- ----- ----- -------- ----- -----
Government agencies $ -- $ 1,093,183 $ 1,909,275 $ -- $ 3,002,458
U.S. Treasury notes 552,213 -- -- -- 552,213
Corporate bonds -- -- 503,496 503,496
Mortgage backed
securities -- -- -- 3,053,187 3,053,187
Equity securities -- -- -- 747,750 747,750
-------------- -------------- --------------- --------------- --------------
Amortized cost 552,213 1,093,183 2,412,771 3,800,937 7,859,104
Gross unrealized gains 26,338 43,318 65,611 14,971 150,238
Gross unrealized losses -- -- (10,214) (51,921) (62,135)
-------------- -------------- --------------- --------------- --------------
Market value $ 578,551 $ 1,136,501 $ 2,468,168 $ 3,763,987 $ 7,947,207
============== ============== =============== =============== ==============
Maturity in years:
1 to 5 5-10 Longer than
December 31, 1995 Years Years 10 Years Other Total
----------------- ----- ----- -------- ----- -----
Government agencies $ -- $ 500,000 $ 1,557,557 $ -- $ 2,057,557
U.S. Treasury notes 706,595 552,955 -- -- 1,259,550
U.S. Treasury bills 210,532 -- -- 210,532
Mortgage backed
securities -- -- -- 1,363,834 1,363,834
------------- -------------- --------------- --------------- --------------
Amortized cost 917,127 1,052,955 1,557,557 1,363,834 4,891,473
Gross unrealized gains 27,925 43,171 60,497 44,823 176,416
Gross unrealized losses (463) -- -- (463)
------------- -------------- --------------- --------------- --------------
Market value $ 944,589 $ 1,096,126 $ 1,618,054 $ 1,408,657 $ 5,067,426
============= ============== ============== =============== ==============
Included in operating results for the years ended December 31, 1996, 1995 and 1994 are $501,753, $319,490 and $50,322
of interest income earned on investments, respectively.
3. Fixed Assets
A summary of fixed assets at the dates indicated follows:
Accumulated
Depreciation/ Net
December 31, 1996 Cost Amortization Book Value
----------------- ---- ------------ ----------
Computers $ 1,614,881 $ 659,111 $ 955,770
Leasehold improvements 689,722 323,813 365,909
Furniture and equipment 671,416 251,707 419,709
-------------- ------------- --------------
Totals $ 2,976,019 $ 1,234,631 $ 1,741,388
============== ============= ==============
Accumulated
Depreciation/ Net
December 31, 1995 Cost Amortization Book Value
----------------- ---- ------------ ----------
Computers $ 1,301,206 $ 367,629 $ 933,577
Leasehold improvements 664,681 260,759 403,922
Furniture and equipment 490,374 140,848 349,526
-------------- ------------- --------------
Totals $ 2,456,261 $ 769,236 $ 1,687,025
============== ============= ==============
4. Accrued Liabilities
Accrued liabilities at December 31 consisted of the following:
1996 1995
---- ----
Accrued compensation $ 843,301 $ 947,461
Annual sales convention 825,556 --
Producer seminar expenses 151,531 --
Accrued legal expenses 12,307 131,685
Other 199,692 169,085
------------- -------------
Totals $ 2,032,387 $ 1,248,231
============= =============
5. Note Payable
The note payable at December 31, 1995 represented the Company's
obligation under a salary continuation agreement related to the former
Chief Executive Officer. The obligation had an outstanding balance of
$87,688 at December 31, 1995 and was paid in full in April, 1996.
6. Loan Payable
The Company has a loan payable, bearing interest at 9% annually,
representing amounts borrowed in a non-cash transaction to pay premiums
related to a split-dollar life insurance policy. The outstanding balance of
the loan was $132,285 at December 31, 1996 and 1995.
7. Deferred Incentive Compensation
During 1995, an officer incentive bonus plan (the "Plan") was approved
by the Company's Board of Directors. Under the Plan, 5% of annual net
income in a given year (the "Bonus Year"), before officer incentive
bonuses, is allocated equally to each officer of the Company 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,
1996 and 1995, $184,456 and $172,272, respectively, are reflected as
deferred incentive compensation in the accompanying balance sheets. Such
amounts represent the deferred portion of the 1996 and 1995 Bonuses. The
second year payment of the 1995 Bonus was forfeited, as net income targets
were not achieved in 1996.
8. Deferred Compensation Plan
Effective in July, 1994, the Company established a qualified defined
contribution 401(k) plan available to all employees. This plan allows
employees to defer, on a pretax basis, a portion of their compensation as
contributions to the plan. Employees may elect to contribute up to 15% of
their annual compensation (not to exceed $9,500 annually for 1996 and
$9,240 for 1995) to the 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 expense were $134,673, $83,849
and $30,076 for the years ended December 31, 1996, 1995 and 1994,
respectively.
9. Commitments and Contingencies
The Company leases its office premises and certain office equipment
under operating leases. Under a settlement agreement with the State of
Georgia Insurance Regulators related to the liquidation of Old Colony,
the Company was not obligated for any rent payments on its premises until
the premises were vacated by the Insurance Regulators' representatives.
The Company assumed rent payments beginning January 1995 and related rent
expense of $219,214 and $198,196 are included in occupancy costs for the
years ended December 31, 1996 and 1995, respectively.
The Company's headquarters and operations are located in Petaluma,
California. The Company currently leases approximately 43,300 square feet
of office space at an annual rent of $292,000, plus required maintenance,
landscaping and related expenses. The current lease expires in October,
2006 and includes a commitment by the Company to lease an additional 10,460
square feet beginning August 1, 1998, which will raise the annual rent to
$381,000.
The Company's minimum annual lease commitments under all operating leases
are as follows:
1997 $ 424,964
1998 463,695
1999 518,480
2000 506,144
2001 413,741
Thereafter 2,211,679
-----------------
Total minimum lease payments $ 4,538,703
=================
Total rentals for and leases of equipment included in operating expenses
were $132,635, $107,585 and $75,607 for the years ended December 31, 1996,
1995 and 1994, respectively.
In order to fund LFS during the start-up phase, the Company has committed
to make sufficient contributions to support LFS's operations and to ensure
LFS's compliance with financial regulatory requirements through December
31, 1997. Such contributions totaled $455,000 during 1996 and $215,000
during 1995.
As part of the Company's agreements with its insurance producers, the
Company may, under certain circumstances, be obligated to purchase the
business of its insurance producers. At December 31, 1996 there were no
outstanding commitments relating to the above by the Company.
As a professional services firm engaged in marketing and servicing
life insurance and annuity products, the Company encounters litigation in
the normal course of business, including the activities relating to its
former business of operating an insurance company. Management is not aware
of any material asserted or unasserted litigation which existed at December
31, 1996, except as follows:
Some of the policyholders of Old Colony did not receive full value for
their policies under the court-approved plan of liquidation. However, the
Company believes that it has no material liability to such policyholders.
In December, 1996, LMG and American National (collectively, the
"Co-defendants") were named in a lawsuit filed in the Circuit Court of
Jefferson County, Alabama, alleging misrepresentation and price
discrimination in connection with the sale of certain annuity products
issued by ANICO and marketed by LMG. In February, 1997, the case was
removed to the U. S. Federal District Court in Birmingham, Alabama. The
plaintiffs, two ANICO policyholders, sought and received conditional class
action certification prior to service of the complaint upon the
Co-defendants. However, the conditional class action certification was
vacated by the federal district court. The plaintiffs have filed a motion
to remand the case back to the Alabama Circuit Court and the Co-defendants
are opposing the motion. The outcome of the lawsuit cannot be determined.
However, the Company's management believes that the suit is without merit
and intends to defend vigorously. No amounts have been recorded in the
financial statements for any losses which may result from the lawsuit.
10. Redeemable Common Stock
During the three years ended December 31, 1992, the Company issued
5,935,094 shares of Series A Common Stock (the "Redeemable Series A
Stock"), no par value, at prices ranging from $1.00 to $2.25 per share. The
Redeemable Series A Stock was issued in accordance with the terms of the
701 Asset Accumulator Program (the "701 Plan") between the Company, its
insurance producers, and its employees, and the Confidential Private
Placement Memorandum and Subscription Agreement (the "Subscription
Agreement") between the Company and certain accredited investors. Under the
terms of the 701 Plan and the Subscription Agreement, the Redeemable Series
A Stock may be redeemed at the option of the holder after being held for
two consecutive years, subject to the Company's ability to make such
purchases under applicable corporate law.
In connection with a merger in 1991 between the Company and
LifeSurance Corporation, a wholly-owned insurance subsidiary of the Company
with no current ongoing operations, 615,242 shares of Series B Common Stock
(the "Redeemable Series B Stock"), no par value, were authorized and issued
in exchange for all of the outstanding stock of LifeSurance Corporation.
Pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), the
Redeemable Series B Stock is subject to redemption at the option of the
holder in quantities of up to 10% per year, provided that the redemption is
in accordance with applicable corporate law.
At December 31, 1994, the Company did not have sufficient current
assets, as required under California corporate law, to purchase all of the
Series A Redeemable Common Stock and Series B Redeemable Common Stock
(hereafter collectively referred to as the "Redeemable Common Stock").
However, during 1995, current assets surpassed current liabilities by an
amount sufficient to allow the Company to meet its obligations under the
701 Plan, the Subscription Agreement, and the Merger Agreement.
Redeemable Common Stock has been recorded at the greater of the
issuance value or the redemption value as of December 31, 1996 and 1995.
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 $.78 per share as of December 31, 1996
based on management's estimate of fair value. The total redemption value
for Series A and Series B Redeemable Common Stock was $4,499,887 and
$476,054, respectively, at December 31, 1996. Carrying value exceeded
redemption value by $7,367,060 at December 31, 1996. As the shares are
redeemed, the excess of carrying value over redemption value will be
reflected as additional paid-in capital.
There were no changes in Redeemable Common Stock balances during the year
ended December 31, 1994. Changes to Redeemable Common Stock during the
years ended December 31, 1996 and 1995 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, 1995 5,935,094 $ 10,850,686 615,242 $ 1,845,726 6,550,336 $ 12,696,412
Adjustment to
fractional share
liability -- -- (4,554) (13,662) (4,554) (13,662)
------------ ------------ ----------- ------------ ------------ ------------
Balance December
31, 1995 5,935,094 10,850,686 610,688 1,832,064 6,545,782 12,682,750
Redemptions and
retirement of
common stock (166,008) (338,663) (362) (1,086) (166,370) (339,749)
------------ ------------ ----------- ------------ ------------ ------------
Balance December
31, 1996 5,769,086 $ 10,512,023 610,326 $ 1,830,978 6,379,412 $ 12,343,001
============ ============ =========== ============ ============ ============
Shares of Redeemable Common Stock are excluded from total shares issued and outstanding in the
accompanying balance sheets.
11. Stock Options and Stock Awards
During the years ended December 31, 1996 and 1995, no stock option
activity occurred. Option activity during the twelve months ended December
31, 1994 is summarized below:
Shares Price
------ -----
Outstanding options at January 1, 1994 40,000 $ 0.01
Options exercised (40,000) $ 0.01
-----------
Outstanding options at December 31, 1994 -- $ --
===========
Compensation expense relating to options outstanding was $47,760 during the
year ended December 31, 1994.
Effective January 1, 1994, the Company granted stock awards totaling
944,000 shares of common stock to two outside consultants. One consultant
is also a director of the Company while the other consultant became an
officer of the Company in October 1994, and became a director of the
Company in 1995.
In 1995, 106,665 shares of common stock were issued at $.01 per share for
options which were originally exercised during 1992. The Company was
prohibited from issuing these shares in 1992 during an informal
investigation of the Company's issuance of securities by the Securities and
Exchange Commission.
The Company has outstanding warrants which grant the holder the right to
purchase 140,950 shares of its common stock at a price of $2.25 per share.
The warrants became exercisable on April 1, 1995 and expire March 31, 1997.
12. 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 period indicated, are
shown below.
For the Year Ended For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Current income taxes:
Federal $ 891,442 $ 778,164 $ 72,233
State 407,305 604,928 375,472
-------------------- ------------------- ------------------
Total current 1,298,747 1,383,092 447,705
-------------------- ------------------- ------------------
Deferred income taxes:
Federal 523,365 1,066,893 (2,668,254)
State 16,051 (546,777) 4,215
-------------------- ------------------- ------------------
Total deferred 539,416 520,116 (2,664,039)
-------------------- ------------------- ------------------
Provision for (benefit from)
income taxes $ 1,838,163 $ 1,903,208 $ (2,216,334)
==================== =================== ==================
The components of the net deferred tax assets for the periods indicated are
shown below. The Company reversed its valuation allowance related to state
net operating loss carryforwards ("NOLs") in 1995 and reversed its
valuation allowance related to federal NOLs in 1994. The federal and state
alternative minimum tax ("AMT") credit carryforward benefits were recorded
in 1995.
The Company has recorded a deferred tax asset of $1.6 million, which
consists primarily of the benefit of the AMT credit carryforwards and the
state NOLs, as follows:
December 31, 1996 December 31, 1995
----------------- -----------------
AMT credit carryforward $ 1,387,885 $ 1,245,130
NOL carryforward 205,891 935,733
Fixed asset depreciation (39,833) (21,683)
Contribution carryover -- 5,214
Excess capital loss over gains -- 3,002
Other 46,207 (69,736)
------------------- -------------------
Deferred tax asset $ 1,600,150 $ 2,097,660
=================== ===================
The NOLs expire in 1997. Realization of the NOLs is dependent on the
Company generating sufficient taxable income in 1997. Although realization
is not assured, management believes it is more likely than not that all of
the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
The provisions for (benefits from) 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 For the Year For the Year
Ended Ended Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Federal income taxes due at
statutory rate (34%) $ 1,547,904 $ 2,299,022 $ 963,086
Increases (reductions) in
income taxes resulting from:
State franchise taxes, net
of federal income tax
benefit 288,628 258,407 250,593
Reversal of valuation
allowance -- (437,310) (3,669,782)
Adjustment to prior years'
provisions -- (240,695) --
AMT taxes -- -- 72,233
Other 1,631 23,784 130,609
---------------- ---------------- ----------------
Provision for (benefit from)
income taxes $ 1,838,163 $ 1,903,208 $ (2,253,261)
================ ================ ================
The balance of NOL carryforwards as of December 31, 1996 and the respective
year of expiration are presented below:
AMT
Year Tax Tax
Expiring Reporting Reporting
-------- --------- ---------
State NOL generated 1994 1999 $ 22 $ 41
State NOL generated 1992 1997 $ 2,213,861 $ --
As of December 31, 1996, the Company also has, for federal and state income
tax purposes, $1,069,187 and $318,698, respectively, in alternative minimum
tax credits which can be used to reduce income taxes in subsequent years to
the extent of tentative minimum tax. The credits have no expiration date.
13. Related Party Transactions
During 1993, the Company entered into an agreement with Lynda Regan, its
Chief Executive Officer, related to a split-dollar life insurance policy.
The agreement required the Company to make three annual premium payments of
$44,095 commencing in December 1993 and totaling $132,285. Under a
collateral assignment by Ms. Regan, the agreement simultaneously provides
that the Company will be repaid its accumulated premium payments upon Ms.
Regan's death or upon surrender of the policy.
The Company paid Ashley A. Penney, a director, $140,100, $107,293 and
$88,233 for services provided as a human resource consultant during the
years ended December 31, 1996, 1995 and 1994, respectively. The Company
also paid Pitts Company, an accounting firm owned by R. Preston Pitts,
President and Chief Financial Officer of the Company, $301,856 for
accounting services provided during the year ended December 31, 1994.
In 1994, the Company granted Ms. Penney and Mr. Pitts stock awards of
144,000 and 800,000 shares, respectively, of the Company's common stock,
which were issued effective January 1, 1994, as retainers for services.
Pursuant to a salary continuation agreement related to the Company's former
Chief Executive Officer, John Regan, payments totaling $87,688, $280,000
and $280,000 were made to Ms. Regan during the years ended December 31,
1996, 1995 and 1994 respectively, as an obligation of the Company to his
estate.
14. Extraordinary Item--Forgiveness of Debt
During the year ended December 31, 1994, the Company recorded an
extraordinary gain of $559,543 before taxes (related taxes totaled $36,927)
representing a negotiated settlement of a contract which had previously
obligated the Company to settle issues arising from administrative services
performed in 1991 and 1992. The Company continues to provide administrative
services for the insurance company and is compensated at negotiated rates.
A portion of the payment for services was used as a reduction of a
promissory note signed by the Company at settlement which was fully paid as
of December 31, 1994.
15. Concentration of Risk
At December 31, 1996, the Company had contracted with over 13,000
independent insurance producers to sell insurance products throughout the
country in a majority of the fifty states. Production in no one state
accounted for over 20% of insurance premiums to the Carriers nor of the
corresponding revenue of the Company during 1996.
Prior to December 1995, American National was the only insurance company
with which the Company had contracted to market insurance products. This
arrangement generated approximately 87% of total revenues to the Company
during the year ended December 31, 1996 and over 95% of total revenues to
the Company during the years ended December 31, 1995 and 1994. However,
neither the Marketing Agreements nor the Processing Agreements prevent
the Company from entering into similar arrangements with other insurance
companies. In December 1995, the Company contracted to provide marketing
and administrative services for IL Annuity. This arrangement generated
approximately 6% of the Company's revenues during 1996.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors:
The Company's Board of Directors are elected annually at the Annual
Meeting of Shareholders. The Directors of the Company, each of whom was elected
at the 1996 Annual Meeting of Shareholders held on August 2, 1996, are as
follows:
Name Principal Occupation Director Since
Steve C. Anderson Mr. Anderson, born in 1948, has been a partner in Hoalst 1990
Anderson, an independent insurance agency, since 1983. He is
a member of the National Association of Life Underwriters and
CLU Society.
Ashley A. Penney Ms. Penney, born in 1951, has been a self employed consultant 1990
in the human resources field since 1986, specializing in
startup companies, and was Vice President of the Company from
1990 to 1993.
Lynda L. Regan Ms. Regan, born in 1949, has served as Chairman and Chief 1990
Executive Officer of the Company since 1992. She was Senior
Vice President and Treasurer from 1990 to 1992.
R. Preston Pitts Mr. Pitts, born in 1951, is President, Chief Financial Officer 1995
and Secretary of the Company. Prior to joining the Company,
he owned Pitts Company, a CPA firm specializing in services
for insurance companies, he served as financial officer for
United Family Life Insurance Company and American Security
Insurance Group, both Fortis-owned companies, and he was an
audit manager for Ernst & Young.
Officers
The executive officers of the Company and LMG, the Company's primary
operating subsidiary, serve at the pleasure of the Board of Directors. The
executive officers include Lynda L. Regan, Chief Executive Officer, and R.
Preston Pitts, President, Chief Financial Officer and Secretary, about whom
information is provided above, and the following persons:
Name Position
Ute Scott-Smith Ms. Scott-Smith, born in 1960, has served as Senior
Vice President of the Company since 1990. She has
been Senior Vice President of LMG since 1992.
Lynn Stafford Mr. Stafford, born in 1957, has served as Vice
President of the Company since 1995.
Section 16(a) Beneficial Ownership Reporting
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the year ended December 31, 1996, and Forms 5
and amendments thereto furnished to the Company with respect to the year ended
December 31, 1996, no reports required by Section 16(a) of the Securities
Exchange Act of 1934 with respect to the Company were delinquent during the year
ended December 31, 1996.
Item 11. Executive Compensation
Executive Compensation
The following Summary Compensation Table sets forth the compensation
of the Company's Chief Executive Officer and all other executive officers for
services in all capacities to the Company and its subsidiaries during 1996, 1995
and 1994:
Summary Compensation Table
Annual Annual All Other
Name and Position Year Salary Bonus (1) Other Compensation
- ----------------- ---- ------ --------- ----- ------------
Lynda L. Regan, 1996 $ 408,894 $ 52,290 $ 4,750 (2) $ --
Chief Executive Officer 16,824 (5)
1995 408,067 181,534 4,620 (2) --
11,216 (5)
1994 281,909 80,000 4,620 (2) --
10,583 (5)
R. Preston Pitts, 1996 $ 300,000 $ 72,290 $ 4,750 (2) $ --
President and Chief 1995 300,000 81,534 4,620 (2) --
Financial Officer 1994 63,462 6,400 (4) -- --
Ute Scott-Smith, 1996 $ 177,318 $ 47,290 $ 4,750 (2) $ --
Senior Vice President 1995 175,000 56,534 4,620 (2) 80,313 (3)
1994 155,658 35,000 2,251 (2) 70,000 (3)
Lynn Stafford, 1996 $ 130,059 $ 31,790 $ 4,750 (2) $ --
Vice President of 1995 50,000 32,368 -- --
Operations
(1) Includes bonuses in the year in which they were earned.
(2) The Company matches contributions made to its 401(k) plan at a rate of
$.50 for every dollar deferred, up to 6% of total annual salary.
(3) Compensation related to the payment of personal income taxes due to
the exercise of stock options in 1991.
(4) Stock awards were issued effective October 15, 1993 to R. Preston Pitts
(then serving as a consultant to the Company) effective January 1,
1994. These awards had a market value at the time of issuance, as
determined for purposes of preparing the Company's financial
statements, of approximately $.008 per share.
(5) The Company pays interest on debt related to a split dollar life
insurance policy under which Lynda L. Regan is the sole beneficiary.
Director Compensation
The Company compensates outside Directors for attending board and
committee meetings at $2,000 per meeting. Currently, Steve C. Anderson and
Ashley A. Penney are the only outside Directors of the Company. The other
Directors are otherwise employed by the Company and are not compensated for
serving as Directors or attending Board or committee meetings.
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. The compensation
of executive officers is determined by the Board of Directors. Lynda Regan, who
is the Chief Executive Officer of the Company, is also Chairman of the Board of
Directors and R. Preston Pitts, the Company's President and Chief Financial
Officer, is also a Director. None of the executive officers of the Company serve
as a director or member of the Compensation Committee of an entity, one of whose
executive officers serves a Director of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The Company knows of no person who is the beneficial owner of more
than five percent of any class of the Company's outstanding common stock other
than Ms. Regan, Chairman and Chief Executive Officer of the Company, whose
ownership is listed below.
Security Ownership of Directors and Officers
The following table shows the number of shares and the percentage of
the shares of all classes of the Company's Series A common stock beneficially
owned by each of the Directors and executive officers of the Company as of
December 31, 1996. No Director or officer owns any Series B common stock.
Name Total Percent
---- ----- -------
Steve C. Anderson 69,714 *
Ashley A. Penney 145,318 *
R. Preston Pitts 800,000 3.0%
Lynda L. Regan 11,379,122 42.2% (1)
Ute Scott-Smith 441,738 1.6%
------------ -----------
Directors and officers as a group 12,835,892 47.6%
============ ===========
* Indicates that the percentage of the outstanding shares
beneficially owned is less than one percent (1%).
(1) Includes 900 shares owned as custodian for her daughter.
Item 13. Certain Relationships and Related Transactions
The Company has paid Ashley A. Penney, a Director, $140,100 for
services provided as a human resource consultant during the year ended December
31, 1996. All of the services provided by Ms. Penney were at rates prevailing at
the time for comparable services with other persons and did not present any
unfavorable features.
Pursuant to a salary continuation agreement related to the Company's
former Chief Executive Officer, John Regan, bi-weekly payments equal to Mr.
Regan's salary at the time of his death were payable by the Company to his
estate through April 6, 1996. Payments totaling $87,688 were made to his estate
during 1996 in accordance with this agreement.
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, 1996 and 1995.
(iii) Consolidated Income Statements for the years ended December 31,
1996, 1995 and 1994.
(iv) Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1996, 1995 and 1994.
(v) Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994.
(vi) Notes to Consolidated Financial Statements.
2. Financial statement schedules are omitted because the information is
not required or has been included in the financial statements and
related notes.
3. The following exhibits are included in response to Item 14(c):
3(a) Restated Articles of Incorporation.***
3(b) Amended and Restated Bylaws of the Company.***
4 Certificate of Determination of Preferences of Series C Common
Stock of Regan Holding Corp.*
10(a) Administrative Services Agreement effective January
1, 1991, as amended, between Allianz Life Insurance
Company of North America and the Company.*
10(b) Marketing Agreement effective June 1, 1993, as
amended, between American National Insurance Company
and the Company.*
10(c) Insurance Processing Agreement effective June 1,
1993, as amended, between American National Insurance
Company and the Company.*
10(d) Form of Producer Agreement.*
10(e) Lease Agreement dated September 26, 1996, for 1179 North
McDowell Blvd., Petaluma, California 94954.***
10(f) Settlement Agreement dated June 18, 1993, among the
State of Georgia as receiver for and on behalf of Old
Colony Life Insurance Company, other related parties
and the Company.*
10(g) 401(K) Profit Sharing Plan & Trust dated July 1, 1994.*
10(h) Marketing Agreement effective January 1, 1996 between IL
Annuity and Insurance Company and the Company.**
10(i) Insurance Processing Agreement effective January 1, 1996
between IL Annuity and Insurance Company and the Company.**
10(j) Marketing Agreement effective January 1, 1996 between
Indianapolis Life Insurance Company and the Company.**
10(k) Insurance Processing Agreement effective January 1, 1996
between Indianapolis Life Insurance Company and the Company.**
21 Subsidiaries of the Company.**
27 Financial Data Schedule
* Incorporated herein by reference from the Company's annual
report on Form 10-K for the year ended December 31, 1994.
** Incorporated herein by reference from the Company's annual
report on Form 10-K for the year ended December 31, 1995.
*** Incorporated herein by reference form the Company's
quarterly Form 10-Q for the three months ended September
30, 1996.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1996.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
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/ Lynda L. Regan Date: 3/28/97
Lynda L. Regan, Chief Executive Officer
By: /s/ R. Preston Pitts Date: 3/28/97
R. Preston Pitts, President and
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: 3/28/97
Lynda L. Regan, Chairman
By: /s/ Steve C. Anderson Date: 3/31/97
Steve C. Anderson, Director
By: Date:
Ashley A. Penney, Director
By: /s/ R. Preston Pitts Date: 3/28/97
R. Preston Pitts, Director
INDEX TO EXHIBITS
Item No. Description Page
- -------- ----------- ----
27 Financial Data Schedule.................................33