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.
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.
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.
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.
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.
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.
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.
Item 7 - A. Quantitative and Qualitative Disclosure about Market Risk.
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.
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.
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.
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).
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.
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.
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.
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 =========== =========== ===========
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.
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 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.
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.
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 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.
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.
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.
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 ========== ==========
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.
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.
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.
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.
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.