In March 1999, the Company purchased a building in Petaluma, California, which previously housed the Company's headquarters for $4.3 million. The building consists of approximately 53,700 total square feet of useable office and warehouse space. Approximately 13,700 square feet of the newly purchased building is currently used for LFS operations and training facilities for the Company's employees. The remaining approximate 40,000 square feet is leased to unrelated parties. The Company also leases approximately 5,700 square feet of warehouse space in Petaluma, California.
In addition, the Company leases 18,200 square feet of office space in Des Moines, Iowa, expiring in October 2004, and leases 30,500 square feet of office space in Rome, Georgia, expiring in December 2001.
Management believes that existing and planned office and warehouse space is and will continue to be adequate for the Company's operations for the foreseeable future.
(1) Inforce premium and policies are actually statistics of the Carriers but represent factors which directly affect the Company's revenue.
Except for historical information contained herein, certain of the matters discussed in this Form 10-K are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These "forward-looking statements" involve certain risks and uncertainties. All forecasts and projections in this report are "forward-looking statements" and are based on management's current expectations of the Company's near term results, based on current information available. Actual results could differ materially.
The "Other" segment above includes Regan Holding Corp. (stand-alone) and its remaining subsidiaries, LifeSurance Corporation, Legacy Advisory Services, nc., and Legacy Reinsurance Company. Such entities' operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.
The Company's principal needs for cash are for: (i) funding operating expenses; (ii) purchases of computer hardware and software, leasehold improvements, and acquisitions of furniture and fixtures to accommodate new employees and support growth in operations; (iii) funding continued product development and potential strategic acquisitions; and (iv) utilization as a reserve to cover possible redemptions of certain shares of the Company's common stock, which is redeemable at the option of the shareholders under various agreements with the Company. In 1999, 1998, and 1997, redemption requests received by the Company were not material in amount, neither individually nor in the aggregate, and the Company believes that its liquid assets are sufficient to meet anticipated requests for redemption. At December 31, 1999 and 1998, the total redemption value of all redeemable common stock outstanding was approximately $11.5 million and $9.6 million, respectively.
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. However, in the event that a shortfall were to occur, management believes that adequate financing could be obtained to meet the Company's cash flow needs.
Year 2000--For the past several years, the Company has taken corrective measures to ensure that, on January 1, 2000, its computer systems and equipment that uses embedded computer chips would be able to distinguish between the years "1900" and "2000." The Company also undertook corrective measures to avoid any business disruptions as a result of the millennium's first leap year on February 29, 2000. Due to these efforts, since December 31, 1999, the Company has not experienced any material system errors or failures as a result of Year 2000 issues. The Company will continue to monitor its computer systems and infrastructure, as well as the Year 2000 efforts of third parties with which the Company does business. Although the Company does not anticipate that any future Year 2000 issues will result in a material impact on the Company, there can be no assurance that this will be the case.
Revenue--LMG'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 are directly related to the sales volume of such products. Administrative fees are a function not only of product sales, but also of administration of policies inforce and producer appointments. Total LMG income increased approximately $3.0 million, or 6.7%, in 1999 compared to 1998, and increased approximately $23.5 million, or 109.1% in 1998, compared to 1997. The increases are attributable primarily to changes in product mix and fluctuations in premium placed inforce for the Carriers, as discussed below.
Administrative fees increased approximately $2.0 million, or 29.6%, from 1998 to 1999, and increased approximately $3.1 million, or 84.9%, in 1998 compared to 1997, due primarily to increases in the number of policies sold and administered during the respective periods and to a continued shift in policies administered to those which generate higher administrative fees.
In 1999, the Company marketed and administered insurance products for three Carriers, American National, IL Annuity, and Transamerica. However, the Company did not market or administer products for Transamerica until the third quarter of 1998. In 1999, approximately 10.5%, 73.5%, and 11.3% of the Company's total consolidated revenue resulted from LMG's agreements with American National, IL Annuity, and Transamerica, respectively, compared to approximately 12.7%, 79.9%, and 1.7% in 1998, respectively, and approximately 36.2% and 57.0% with American National and IL Annuity, respectively, in 1997. In addition, during the fourth quarter of 1999, 20.6% of the Company's total consolidated revenue resulted from LMG's Transamerica agreements. These shifts in sales mix from American National to IL Annuity in 1998 from 1997 and the shift from IL Annuity to Transamerica from 1998 to 1999 are attributable to favorable acceptance of the respective Carrier's products in the marketplace.
LMG is currently in discussions with two other insurance carriers to provide marketing and administrative services, similar to those performed for the Carriers. If those discussions result in LMG entering Agreements to provide services, LMG's revenue could increase beginning as early as third quarter 2000. However, there can be no assurances that such agreements will be entered into or regarding the terms of such agreements, if entered into.
As a service organization, LMG's primary expenses are salaries and related employee benefits. These expenses increased approximately $3.9 million, or 23.6%, in 1999 from 1998, and increased $6.6 million, or 65.6%, in 1998 from 1997. These increases resulted primarily from increases in the average number of full-time equivalent employees, which are largely attributable to preparation for, and accommodation of, increases in sales of insurance products, particularly in the latter half of 1998 and the first half of 1999. Salaries and benefits also increased due to increases in bonuses in 1998, which are tied to net income, to the addition of personnel at higher pay levels in both 1999 and 1998, and to normal pay increases for existing employees. During 2000, LMG management plans to hire several employees at higher pay levels, some of whom are expected to be elected as officers of LMG. Accordingly, salaries and benefits expense is expected to increase during 2000.
Occupancy expenses consist primarily of office building and equipment leasing costs. These expenses increased approximately $1.1 million, or 164.9%, in 1999 from 1998, and increased approximately $217,000, or 51.5%, in 1998 from 1997 due primarily to the leasing of new office space during 1999 and 1998 and to overall increases in telephone, utilities, and other related expenses which correspond with increases in sales and employment, as discussed above.
Depreciation and amortization expense increased approximately $237,000, or 235.4%, in 1999 from 1998 and increased approximately $97,000, or 2,434.5%, in 1998 from 1997 due primarily to acquisitions of fixed assets. Such acquisitions were necessary primarily to improve newly leased office space and to accommodate increases in employment, as discussed above.
in expenses, as discussed below. During the second half of 1999, LFS results of operations shifted from net losses to net income on a monthly basis.
Results of Operations - Other segments consist of Regan Holding Corp (stand-alone), LifeSurance Corporation, Legacy Advisory Services, Inc. and Legacy Reinsurance Company. Combined net losses from these entities increased approximately $3.3 million, or 154.8%, in 1999 from 1998 and increased approximately $533,000, or 33.5%, in 1998 from 1997 due primarily to increases in expenses.
Combined expenses for these entities increased approximately $5.5 million, or 223.6%, in 1999 from 1998 and increased approximately $880,000, or 56.1%, in 1998 from 1997.
The Company invests in marketable securities which are predominately investment grade. As a result, management believes that the Company has minimal exposure to credit risk.
All of the above risks are monitored on an ongoing basis. A combination of in-house review and consultation with external experts is used to analyze individual securities, as well as the entire portfolio.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Regan Holding Corp. and its subsidiaries (the "Company") at December 31, 1999 and 1998, and results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information on pages 34 and 35 is presented for purposes of additional analysis of the consolidated financial statements, rather than to present the financial position, and results of operations of the individual companies. Accordingly, we do not express an opinion on the financial position, and results of operations of the individual companies. However, the consolidating information on pages 34 and 35 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, through its wholly-owned subsidiary Legacy Marketing Group ("LMG"), has entered into marketing agreements (the "Marketing Agreements") with American National Insurance Company ("American National"), IL Annuity and Insurance Company ("IL Annuity") and Transamerica Life Insurance and Annuity Company ("Transamerica"), collectively referred to herein as the "Carriers." American National is an unaffiliated company with over $1.7 billion in capital and surplus and is rated "A+" by A.M. Best. IL Annuity is an unaffiliated company, with $60.0 million in capital and surplus and is rated "A" by A.M. Best. Transamerica is also an unaffiliated company, with over $830.0 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, appointing, and training 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 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 and type of service.
The Marketing and Administrative Agreements with American National and IL Annuity expire April 30, 2000, 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 Administrative Agreements. The Marketing and Administrative Agreements with Transamerica do not have a fixed term but may be terminated by either party upon twelve months notice without cause, and may be terminated by either party immediately for cause. The Marketing and Administrative Agreements with American National were amended during 1999 to extend the terms. In addition, the Administrative Agreements with American National and Transamerica were amended during 1999 with respect to various policy administration matters.
determined percentages of production. The Agreements may be terminated by any party upon 30 days written notice.
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and include the accounts of Regan Holding Corp. and its wholly-owned subsidiaries, Legacy Marketing Group, Legacy Financial Services, Inc., LifeSurance Corporation, Legacy Advisory Services, Inc., and Legacy Reinsurance Company. All significant intercompany accounts and transactions have been eliminated.
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 short-term investments included in cash and cash equivalents are carried at market value.
Effective January 1, 1999, the Company adopted the AICPA Statement of Position 98-1 (SOP 98-1), Accounting for the Cost of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for the costs of the computer software developed or obtained for internal use. In accordance with SOP 98-1, the Company capitalized $1,288,886 of internal and external costs, incurred subsequent to December 31, 1998, which were directly associated with the development of internal-use software. Upon project completion, these costs are amortized over the estimated useful life of the software on a straight-line basis. Previously, these costs were expensed as incurred. Prior costs have not been restated.
Shares of Series A and B Redeemable Common Stock are redeemable at a rate per share based upon current fair market value. The contractual agreements under which the Redeemable Common Stock was issued 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 company, 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 $1.99 per share as of December 31, 1999, based on management's estimate of fair market value. Management's estimate is derived from a valuation performed at the end of each period presented. Redeemable Common Stock is recorded at the greater of the issuance value or the redemption value, with the periodic differences recorded as redeemable common stock accretion. The Company recorded redeemable common stock accretion of $787,256 for the year ended December 31, 1999. The issuance value exceeded the redemption value at December 31, 1998. Accordingly, no accretion was recorded during the year ended December 31, 1998.
The Company and its subsidiaries file consolidated income 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 consolidated financial statements.
Certain 1998 and 1997 balances have been reclassified to conform with the 1999 presentation. Such reclassifications had no effect on net income or shareholders' equity.
In March 1999, LMG entered into a license agreement with a software vendor (the "Software Agreement"), pursuant to which LMG has the non-exclusive right to use certain computer software programs in administering policies on behalf of the carriers with whom the Company contracts. For this right, LMG incurred an initial licensing fee of $800,000 exclusive of taxes, of which the unpaid portion of $537,500 has been recorded as Software Licensing Fees Payable. This balance is due in March 2000. In addition, LMG agreed to pay licensing charges of $8,333 per month, increasing each year to $22,667 per month during the eighth year, plus cost of living adjustments each year. The monthly fees are being expensed as incurred. The term of the Software Agreement extends through March 2007, but may be terminated by LMG with six months written notice after March 2004. The $800,000 initial licensing fee has been recorded as Software Licensing Fees, net of amortization, in the accompanying consolidated balance sheets.
During 1999, the Company obtained margin loan advances in the amount of $3.5 million from its investment broker. The loan bears interest at 1/2% above the Call Rate, as published in the Wall Street Journal and is collateralized by the Company's investment portfolio. As of December 31, 1999, $3,088,918 remained payable under this arrangement. The margin loan was repaid in full during the first quarter of 2000.
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 401(k) Plan. Employees may elect to contribute up to 15% of their annual compensation (not to exceed $10,000 annually for 1999 and 1998) 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 $348,132, $272,658, and $181,443 for the years ended December 31, 1999, 1998, and 1997, respectively.
In October 1998, the Company entered into a new lease for approximately 72,000 square feet of office space in Petaluma, California, into which the Company moved its headquarters in July 1999. This lease expires in July 2009, and includes an option to extend the term for two five-year periods. Pursuant to the lease, the Company pays monthly base rent of $71,612, plus a pro-rata share of property taxes and operating expenses based on leased square footage. The base rent increases to $75,193 per month in July 2000 and then increases by 6% every twenty four months thereafter. Effective March 2000, the Company also entered into a lease for approximately 5,700 square feet of warehouse space in Petaluma, California, at a rate of $4,500 per month. expiring in February 2006.
The Company's future minimum annual lease commitments under all operating leases are as follows:
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. In December 1996, LMG and American National 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. American National and LMG have denied the allegations contained in the complaint as well as any wrongdoing with respect to the sale and issuance of annuities. However, on June 7, 1998, in order to avoid protracted litigation, American National and LMG entered into a settlement agreement with the plaintiffs and other class members. LMG's portion of the settlement, net of recovery under its Errors and Omissions insurance policy, was approximately $1.1 million, which was recorded as an expense in 1998. Management is not aware of any material asserted or unasserted litigation which existed at December 31, 1999.
As part of the Company's agreements with certain of its insurance producers (the "Producers"), the Company may, under certain circumstances, be obligated to purchase the business of the Producers. At December 31, 1999, there were no outstanding commitments by the Company relating to such obligations.
The following table summarizes transactions affecting redeemable common stock during the years ended December 31, 1999, 1998, and 1997:
Under the Producer Option Plan, the Company may also award shares of its common stock to Producers. During 1998, no awards were made. During 1999, 330,634 shares of Series A common stock were awarded to producers, when the estimated fair market value of the shares was $1.27 per share. As a result, the Company recorded marketing and sales promotion expense of $419,905 during the year ended December 31, 1999.
As of December 31, 1999, the Company also has, for income tax purposes, $319,236, in alternative minimum tax credits which can be used to reduce income taxes in subsequent years to the extent regular tax exceeds tentative minimum tax. The credits have no expiration date.
Options to purchase 25,500 shares of common stock at $1.39 per share were outstanding during the second half of 1999 and remained outstanding at December 31, 1999, 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 during the year.
The "Other" segment above includes Regan Holding Corp. (stand-alone) and its remaining subsidiaries, LifeSurance Corporation, Legacy Advisory Services, Inc., and Legacy Reinsurance Company. Such entities' operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.
The Company paid Ashley A. Penney, a director until August 1997, $133,113 for services provided as a human resources consultant during the year ended December 31, 1997.
At December 31, 1999, the Company was contracted with over 19,000 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 1999.
Prior to December, 1995, American National was the only insurance company with which the Company was contracted to market insurance products. This arrangement generated approximately 10.5%, 12.7%, and 36.2% of total revenues to the Company during 1999, 1998 and 1997, respectively. In December 1995, the Company contracted to provide marketing and administrative services for IL Annuity. This arrangement generated approximately 73.5% 79.9% and 57.0% of the Company's revenues during 1999, 1998 and 1997, respectively. In May 1998, the Company contracted to provide marketing and administrative services for Transamerica. These agreements generated approximately 11.3% and 1.7% of the Company's revenue during 1999 and 1998, respectively. However, neither the Marketing Agreements nor the Administrative Agreements prevent the Company from entering into similar arrangements with other insurance companies.
In February 2000, LMG entered into an Agency Agreement with Bankers United Life Assurance Company ("Bankers") pursuant to which LMG is authorized to solicit, through its network of independent insurance producers, sales of long-term care products offered by Bankers. For this solicitation, LMG will receive commissions based on the volume of premiums sold and the age of the policyholder. The Agency Agreement may be terminated by either party with 15 days notice without cause, and may be terminated by either party immediately for cause. LMG is currently working to become licensed in several states to sell long-term care products. Accordingly, no sales of long-term care products have occurred to date.
During the first quarter of 2000, the Marketing and Administrative Agreements with American National were amended to extend the terms of the agreements to April 30, 2000. LMG and American National are in the process of negotiating a five year extension for both agreements.
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidating Balance Sheet December 31, 1999