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.
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.
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.
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.
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.
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 "
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.
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Deficit)
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 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.
Advertising and sales promotion costs are expensed as incurred, except for sales brochures and other marketing materials, which are inventoried at cost.
Earnings per share is based on the weighted average number of common shares outstanding, including shares of redeemable common stock.
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.
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.
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.
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 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.
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.
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:
Compensation expense relating to options outstanding was $47,760 during the year ended December 31, 1994.
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.
Lynn Stafford Mr. Stafford, born in 1957, has served as Vice President of the Company since 1995.
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.