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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
Shares Price ------ ----- Outstanding options at January 1, 1994 40,000 $ 0.01 Options exercised (40,000) $ 0.01 ----------- Outstanding options at 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.
The provisions for federal and state income taxes consist of amounts currently payable and amounts deferred which, for the period indicated, are shown below.
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.
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 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: