Summary--The Company's net income increased approximately $436,000, or 16.1%, in 1997 compared to 1996. This increase is attributable primarily to increases in income, resulting from increases in premium placed inforce for the Carriers. From 1995 to 1996, however, net income decreased approximately $2.1 million, or 44.1%, due primarily to increases in expenses to accommodate increases in sales, as discussed below.
Income--The Company's major sources of income are marketing allowances, commission income and administrative fees from sales and administration of annuity and life insurance products on behalf of the Carriers. Levels of marketing allowances and commission income is directly related to the volume of sales of such products. Administrative fees are a function not only of product sales, but also administration of policies inforce and producer appointments. Total income increased approximately $4.3 million, or 23.8%, in 1997 compared to 1996, and increased approximately $1.1 million, or 6.3%, in 1996 compared to 1995. These increases are attributable primarily to increases in sales volume, as discussed below.
Marketing allowances and commission income, combined, increased approximately $3.7 million, or, 25.7%, in 1997 from 1996 and increased approximately $633,000, or 4.6%, during 1996 from 1995. 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 $777.3 million, $626.8 million, and $620.0 million during 1997, 1996, and 1995, respectively. This represented a 24.0% increase from 1996 to 1997 and a 1.2% increase from 1995 to 1996. Also contributing to the increases in income were shifts in both 1997 and 1996 to sales of products which yield higher marketing allowances and commission income.
Savings and investment income primarily represents earnings from investments in marketable securities. Such earnings decreased approximately $31,000, or 4.3%, in 1997 from 1996, and increased approximately $376,000, or 106.3%, in 1996 from 1995. These fluctuations are attributed primarily to changes in the amount of assets invested.
Seminar income consists of attendance fees and sales of educational materials related to educational seminars held by the Company. The seminars are designed to stimulate sales of life insurance products through the training of Producers in current estate planning concepts and were first sponsored by the Company during 1997.
Expenses--Total expenses increased approximately $3.6 million, or 25.9%, during 1997 compared to 1996 and increased approximately $3.3 million, or 31.7%, during 1996 compared to 1995. These increases are attributable primarily to increases in compensation, sales promotion and support, and occupancy expenses as discussed below.
As a service organization, the Company's primary expenses are salaries and related employee benefits. These expenses increased approximately $2.3 million, or 27.4%, in 1997 from 1996, and increased approximately $2.0 million, or 31.3%, in 1996 from 1995. These increases resulted from increases in the average number of full-time equivalent employees, which rose to 184 during 1997, from 151 during 1996 and 108 during 1995. These increases in employment are largely attributable to preparation for and accommodation of increases in sales of insurance products. Salaries and benefits also increased during 1997 and 1996 due to the addition of personnel at higher pay levels and due to scheduled pay increases for existing employees.
Sales promotion and support expense consists primarily of costs related to the Company's annual national sales conventions and to various sales training activities. Also included in sales promotion and support expense is the cost of designing and printing sales brochures for use by Producers. It is expected that these expenses will continue to be a major element of the Company's cost structure, as attendance at the national sales conventions increases, as the number of Producers marketing products for the Company increases, and as new products are introduced. This expense increased approximately $333,000, or 14.9%, in 1997 from 1996, due primarily to increased Producer support costs associated with higher sales volume, as discussed above, and increased approximately $869,000, or 63.8%, in 1996 from 1995, due primarily to higher costs associated with the Company's 1996 annual sales convention.
Depreciation and amortization expense increased approximately $171,000, or 36.5%, in 1997 from 1996 and increased approximately $99,000, or 26.6%, in 1996 from 1995. These increases are due primarily to acquisitions of fixed assets during 1997 and 1996. Such acquisitions were necessary to improve newly leased office space and to accommodate increases in employment, as discussed above.
The Company's business is not capital intensive. Its major expenditures consist primarily of the funding of operating expenses and the purchase of computer upgrades and furniture acquisitions to accommodate new employees, which is generally provided by cash from operations. The Company's future cash flows available to fund operations will depend primarily on the level of sales of annuity and life insurance products and upon the Company's ability to control operating expenses in relation to demand placed upon the organization from increased sales.
We have audited the accompanying consolidated balance sheets of Regan Holding Corp. and Subsidiaries as of December 31,1997 and 1996, 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, 1997. 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.
Net fixed assets 2,610,324 1,741,388 Deferred income taxes-non current 783,477 1,600,150 Other assets 471,001 628,176 -------------- -------------- Total Non Current Assets 3,864,802 3,969,714 -------------- -------------- TOTAL ASSETS $ 19,280,941 $ 15,424,902 ============== ==============
REDEEMABLE COMMON STOCK, Series A and B (Note 9) 11,842,651 12,343,001 -------------- -------------- SHAREHOLDERS' EQUITY Preferred stock, no par value: Authorized: 100,000,000 shares No shares issued or outstanding -- -- Series A common stock, no par value: Authorized: 45,000,000 shares Issued and outstanding: 20,614,014 and 20,800,791 shares at December 31, 1997 and 1996, respectively 3,382,914 3,532,071 Paid-in capital from retirement of common stock 611,559 310,110 Accumulated deficit (182,433) (3,332,887) Net unrealized gains on investments 4,870 52,741 -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 3,816,910 562,035 -------------- -------------- TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY $ 19,280,941 $ 15,424,902 ============== ==============
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 $1.5 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 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. The Company is currently negotiating with American National to renew the Marketing and Processing Agreements. Management expects that new agreements will be signed during the second quarter of 1998.
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.
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 transaction basis as services are performed.
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 until realized.
Sales promotion and support costs are expensed as incurred, except for sales brochures and other marketing materials, which are inventoried at cost.
In June, 1997, the FASB issued 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 form transactions and other events and circumstances from non-owner sources. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company does not believe that SFAS No. 130 will have a material impact on the Company's financial statements.
Included in operating results for the years ended December 31, 1997, 1996 and 1995 are $494,033, $501,753, and $319,490 of interest income earned on investments, respectively.
Accumulated Depreciation/ Net Cost Amortization Book Value ---- ------------- ---------- 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 ============== ============= ============== December 31, 1996 - ----------------- 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 ============== ============= ==============
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, 1997 and 1996, $149,609 and $184,456, respectively, are reflected as deferred incentive compensation in the accompanying balance sheets. Such amounts represent the deferred portion of the 1997 and 1996 Bonuses, except for the second year payment of the 1995 Bonus, which was forfeited, because net income targets were not achieved in 1996.
The Company leases its office premises and certain office equipment under operating leases. Related rent expense of $335,973, $219,214, and $198,196 are included in Occupancy costs for the years ended December 31, 1997, 1996, and 1995, respectively. Total rentals for and leases of equipment included in Equipment expenses were $146,874, $132,635, and $107,585 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's minimum annual lease commitments under all operating leases are as follows:
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, 1998. Such contributions totaled $330,000, $455,000, and $215,000 during 1997, 1996 and 1995, respectively.
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, 1997, 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, 1997, 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 American National and marketed by LMG. The plaintiffs, policyholders Buddie Watson King and Feyrene Zink, sought and received conditional class action certification prior to service of the complaint upon the Co-defendants. In February, 1997, the case was removed to the U. S. Federal District Court in Birmingham, Alabama, and the conditional class action certification was vacated by the federal district court. Thereafter, the federal court remanded the case back to the above Circuit Court of Jefferson County, Alabama, where the case is currently pending. 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. Accordingly, no amounts have been recorded in the financial statements for any losses which may result from the lawsuit.
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.
Redeemable Common Stock has been recorded at the greater of the issuance value or the redemption value as of December 31, 1997 and 1996. 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 $.96 per share as of December 31, 1997, based on management's estimate of fair market value. The total redemption value for Series A and Series B Redeemable Common Stock was $5,287,033 and $576,827, respectively, at December 31, 1997 and $4,499,887 and $476,054, respectively, at December 31, 1996. Carrying value exceeded redemption value by $5,978,791 at December 31, 1997, and $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.
Shares of Redeemable Common Stock are excluded from total shares issued and outstanding in the accompanying balance sheets.
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.
For the Year Ended December 31, 1997 1996 1995 ---- ---- ---- Current income taxes: Federal $ 1,262,317 $ 891,442 $ 778,164 State 572,332 407,305 604,928 ------------ ------------ ------------ Total current 1,834,649 1,298,747 1,383,092 ------------ ------------ ------------ Deferred income taxes: Federal 405,951 523,365 1,066,893 State (45,576) 16,051 (546,777) ------------ ------------ ------------ Total deferred 360,375 539,416 520,116 ------------ ------------ ------------ Provision for income taxes $ 2,195,024 $ 1,838,163 $ 1,903,208 ============ ============ ============
Alternative minimum tax credit carryforward $ 652,320 $ 1,387,885 Sales incentive trip accrual 488,437 -- State net operating loss carryforward -- 205,891 Fixed asset depreciation (26,834) (39,833) Other 157,991 46,207 ------------ ------------ Total deferred tax assets $ 1,271,914 $ 1,600,150 ============ ============
For the Year Ended December 31, 1997 1996 1995 ---- ---- ---- Federal income taxes due at statutory rate (34%) $ 1,817,462 $ 1,547,904 $ 2,299,022 Increases (reductions) in income taxes resulting from: State franchise taxes, net of federal income tax benefit 375,892 288,628 258,407 Reversal of valuation allowance -- -- (437,310) Adjustment to prior years' provisions -- -- (240,695) Other 1,670 1,631 23,784 ----------- ------------ ------------ Provision for income taxes $ 2,195,024 $ 1,838,163 $ 1,903,208 ============ ============ ============
The Company paid Ashley A. Penney, a director until August, 1997, $133,113, $140,100 and $107,293 for services provided as a human resource consultant during the years ended December 31, 1997, 1996 and 1995, respectively.